Mutual funds

Presented by IRRFAN BHAT AND NADEEMULLAH.

SCOPE:

* Scope of Mutual Fund Automatic diversification at various levels. Access to financial markets worldwide. Access to all major asset classes. A broad selection of fund types. A diversity of investing styles. Professional management. Elimination of the need for individuals to perform detailed and ongoing securities analysis. The option of making automatic investments and withdrawals. Many funds can be purchased with small initial and subsequent investments. No transaction fees, if you pick the right place to open your account.

OVERVIEW OF MUTUAL FUND• A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. The money thus

collected is then invested in capital market instruments such as

shares, debentures and other securities.

• The income earned through these investments and the capital

appreciation realized is shared by its unit holders in proportion

to the number of units owned by them. Thus a Mutual Fund is

the most suitable investment for the common man as it offers an

opportunity to invest in a diversified, professionally managed

basket of securities at a relatively low cost.

HISTORY OF MUTUAL FUND

• First Phase – 1964-87 -Unit Trust of India (UTI) was established on 1963 by an

Act of Parliament. . The first scheme launched by UTI was Unit Scheme 1964.

At the end of 1988 UTI had Rs.6, 700 crores of assets under management.  

• Second Phase – 1987-1993 (Entry of Public Sector Funds) -SBI Mutual Fund

was the first non- UTI Mutual Fund established in June 1987 followed by

Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),

Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92

CONT….

• Third Phase – 1993-2003 (Entry of Private

Sector Funds) Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector mutual fund registered in

July 1993. As at the end of January 2003, there were 33 mutual

funds with total assets of Rs. 1, 21,805 crores.

• Fourth Phase – since February 2003 -In February 2003,

following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities.

ADVANTAGES OF INVESTING IN A MUTUAL FUND

• Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares,

etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.5000/-.

• Diversification We must spread our investment across different securities

(stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.).

• Variety Mutual funds offer a tremendous variety of schemes.• Professional Management Qualified investment professionals who seek to maximize

returns and minimize risk monitor investor's money.

• Transparency

Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. SEBI acts as a watchdog and safeguards investors’ interests

• Liquidity

A distinct advantage of a mutual fund over other investments is that there is always a market for its unit/ shares. It's easy to get one’s money out of a mutual fund. Redemptions can be made by filling a form attached with the account statement of an investor.

RISKS ASSOCIATED WITH MUTUAL FUNDS

Professional Management- Some funds don’t perform in the market, as their management is not dynamic enough to explore the available opportunity in the market.

Costs – The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return.

Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale.

TAXING IN MUTUAL FUND

• Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor. A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared by the fund. Long-term debt funds, government securities funds (G-sec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds.

• Section 2(42A):

Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months.

• Section 10(38):

Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. Short-term capital gains on equity-oriented funds are chargeable to tax @10%, Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.

• Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:

• Resident Individual & HUF -- 20% plus surcharge, education cess.

• Partnership firms & Indian companies -- 20% plus surcharge.

• Foreign companies -- 20% (no surcharge). Capital gains will be computed after taking

into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the central government.

Banking institutions form an indispensable part of modern country. They perform varied

functions to meet the demands in various sections of the society.

BANKING INSTITUTIONS:

TYPES OF BANKING INSTITUTIONS:

01.Commercial banks02.Investmet banks 03.Exchange banks04.Cooperative banks05.Land development bank06.Saving bank07.Central bank

1. Commercial Banks:The banks, which perform all kinds of banking business and generally finance trade and commerce, are called commercial banks. Since their deposits are for a short period, these banks normally advance short-term loans to the businessmen and traders and avoid medium-term and long-term lending.

2. Industrial Banks:Industrial banks, also known as investment banks, mainly meet the medium-term and long-term financial needs of the industries. Such long-term needs cannot be met by the commercial banks, which generally deal with short-term lending.The main functions of the industrial banks are:(a) They accept long-term deposits.(b) They grant long-term loans to the industrialists to enable them to purchase land, construct factory building, purchase heavy machines

4. Exchange Banks:Exchange banks deal in foreign exchange and specialise in financing foreign trade. They facilitate international payments through the sale, purchase of bills of exchange, and thus play an important role in promoting foreign trade.

05. Cooperative Banks:Cooperative banks are operated on the cooperative lines. In India, coopera tive credit institutions are organised under the cooperative societies law and play an important role in meeting financial needs in the rural areas.

06. Saving Banks:The main purpose of saving banks is to promote saving habits among the general public and mobilise their small savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates.

6. Central Bank:

Central bank is the apex institution, which controls, regulates and supervises the monetary and credit system of the country. Important functions of the central bank are:

(a) It has the monopoly of note issue;

(b) It acts as the banker, agent and financial adviser to the state;

(c) It functions as the bank of central clearance, settlement and transfer; and

(d) It acts as the controller of credit. Besides these functions, India's central bank, i.e., the Reserve Bank of India, also performs many developmental functions to promote economic development in the country.

NON BANKING SECTOR

Non banking Financial company(NBFC)

Residuary Non-banking company(RNBC

Non-banking Non-financial company

Insurance, Stock broking Housing Finance

01.Equipment leasing.02.Hire-purchase.03.Loan company.04.Mutual benefit company i.e. Nidhi company05.Miscellaneous06.Non-banking company, i.e. chit fund company

NON BANKING FINANCIAL

INSTITUTIONSA non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency..

NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.

CONTENTS:1 Role in Financial System1 Growth2.Stability2. Types of Non-Bank Financial Institutions1. Risk Pooling Institutions2. Contractual Savings Institutions3. Market Makers4. Specialized Sectoral Financiers

CONT:NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits. Additionally, NBFIs also introduces competition in the provision of financial services. While banks may offer a set of financial services as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific clients. Additionally, individual NBFIs may specialize in one particular sector and develop an informational advantage. Through the process of unbundling, targeting, and specializing, NBFIs enhances competition within the financial services industry.