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HISTORY OF MUTUAL FUNDS MARKET IN
INDIA
The mutual fund industry in India started in 1963 with the formationof Unit Trust of India, at the initiative of the Government of India andReserve Bank. The history of mutual funds in India can be broadlydivided into four distinct phases
First Phase1964-87: Unit Trust of India (UTI) was established on
1963 by an Act of Parliament. It was set up by the Reserve Bank of
India and functioned under the Regulatory and administrative controlof the Reserve Bank of India. In 1978 UTI was de-linked from the
RBI and the Industrial Development Bank of India (IDBI) took over
the regulatory and administrative control in place of RBI. 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 Phase1987-1993 (Entry of Public Sector Funds): 1987
marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). 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). LIC established its mutual
fund in June 1989 while GIC had set up its mutual fund in December
1990. At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004 crores.
Third Phase1993-2003 (Entry of Private Sector Funds): With
the entry of private sector funds in 1993, a new era started in the
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Indian mutual fund industry, giving the Indian investors a wider
choice of fund families. Also, 1993 was the year in which the first
Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhileKothari Pioneer (now merged with Franklin Templeton) was the first
private sector mutual fund registered in July 1993. The 1993 SEBI
(Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The
industry now functions under the SEBI (Mutual Fund) Regulations
1996. The number of mutual fund houses went on increasing, with
many foreign mutual funds setting up funds in India and also theindustry has witnessed several mergers and acquisitions. As at the end
of January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of
assets under management was way ahead of other mutual funds
Fourth Phase
since February 2003: In February 2003, followingthe repeal of the Unit Trust of India Act 1963 UTI was bifurcated into
two separate entities. One is the Specified Undertaking of the Unit
Trust of India with assets under management of Rs.29,835 crores as at
the end of January 2003, representing broadly, the assets of US 64
scheme, assured return and certain other schemes. The Specified
Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India anddoes not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations. With the bifurcation of the erstwhile UTI
which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund,
conforming to the SEBI Mutual Fund Regulations, and with recent
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mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and
growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes.
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GROWTH OF MUTUAL FUND MARKET IN
INDIA
The Indian mutual funds industry is witnessing a rapid growth as aresult of infrastructural development, increase in personal financialassets, and rise in foreign participation. With the growing riskappetite, rising income, and increasing awareness, mutual funds inIndia are becoming a preferred investment option compared to otherinvestment vehicles like Fixed Deposits (FDs) and postal savings thatare considered safe but give comparatively low returns, according toIndian Mutual Fund Industry.
Key Findings
- The Indian mutual funds retail market, growing at a CAGR of about30%, is forecasted to reach US$ 300 Billion by 2015.- Income and growth schemes made up for majority of Assets UnderManagement (AUM) in the country.
- At about 84% (as on March 31, 2008), private sector AssetManagement Companies account for majority of mutual fund sales inIndia.- Individual investors make up for 96.86% of the total number ofinvestor accounts and contribute 36.9% of the net assets undermanagement.
Key Players
This section provides business analysis of key players in the Indianmutual fund market, including Reliance Capital, BOB and HDFC.
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SIZE OF THE MARKET
The size of Indian Mutual Fund Industry has grown and now has the
boast of having dominance in this industry. In April 2008 the total
Asset Under Management popularly known as AUM has increased
from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67, 601.98 crores.
According to the Association of Mutual Funds in India, the growth of
mutual fund industry has been exceptional. This industry has indeed
come a very long way with only 34 players in the market and more
than 480 schemes.
After two consecutive years of fall, the Indian mutual fund industrymanaged to register a smart turnover in 2012-13, with its assets basenearing Rs 8 trillion with an increase of about Rs two trillion thisyear. Due to wide-ranging reforms initiated by SEBI and thegovernment the industry is hopeful of even better days ahead in 2013.The total assets under management (AUM) of all the fund houses put
together has soared by 30 per cent on strong inflows such as fixedincome, gold schemes and liquid funds. The total industry AUMstood at Rs 6.11 lakh crore at the end of 2011, while the same wasabout Rs 6.26 lakh crore at 2010-end and Rs 6.65 lakh crore in 2009.
The mutual fund industry seems to have lost more than 32 lakhinvestors, in the first 10 months of the current fiscal, with equityfunds accounting for most of the losses. The number of folios have
fallen to 4.32 crore at the end of January 2013 from 4.64 crore in theprevious fiscal (2011-12), translating into a decline of 32.45 lakh newinvestor accounts, as per the latest data of market regulator SEBI.Equity schemes were the biggest losers in terms of folios, losing 40.2lakh new investor accounts. The total number of folios in equity fundsplunged to 3.36 crore at the end of January 2013 from 3.76 crore inthe previous fiscal. Equity folios account for over 70% of theindustry's total new investor accounts. Mutual fund industry has been
facing consistent equity folio closures in the past few months.Besides, equity schemes have seen outflows for the last eight months,
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with January witnessing an outflow of Rs 2,501 crore. The benchmarkBSE Sensex has gained over 14% in the current fiscal ( 2012-13). Thesharp fall in the number of folios can be attributed to profit bookingand various merger schemes in the mutual fund industry. Balancedschemes, which invest in equity and debt category, followed closelyand shed 1.11 lakh folios to end at 26.07 lakh in January. Fund offunds lost 34,000 folios to end January at 1.77 lakh. In contrast,income or debt oriented schemes, gained 8.11 lakh folios and nowhave 60.61 lakh folios.
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THE ORGANIZATIONAL STRUCTURE OF
MUTUAL FUNDS
The organizational structure of a mutual fund outlines the rights and
responsibilities of each of the key components of the fund's
operations. The fund's operations include buying, selling,
underwriting and managing the fund's assets. The key components of
a mutual fund's organizational structure are the sponsors,
shareholders, board of directors, investment advisers, transfer agents,
custodians and independent accountants.Overall Organizational Structure
The organizational structure of a mutual fund is its chain ofcommand. At the top of this chain are its shareholders -- the peoplewho buy shares in the mutual fund, the mutual fund itself and theboard of directors. This means that those who work for and with thefund, such as the investment advisers, transfer agents, underwriters
and custodians of the fund, are responsible for working in the bestinterests of the mutual fund, its shareholders and board of directors.
Shareholders and Directors
Shareholders are at the top of the organizational structure. Withoutthem, the fund would not be able to operate. Shareholders also have
the right to elect a board of directors and approve or veto any materialchanges in the fund manager's contract terms. The board of directorsis also at the top of the organizational structure because it oversees theoperations of the mutual fund and ensures that the mutual fundadvisers are working in the best interests of the shareholders and ofthe fund itself.
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Reporting to Shareholders and Directors
Those who service the mutual fund share in its organizationalstructure. Fund servicers include investment advisers who manage the
fund's portfolio; underwriters sell fund shares to the public; transferagents who carry out and keep records of shareholder's transactions;and administrators who perform the clerical duties for those thatservice the fund. It also includes the people who maintain internalcontrols over fund servicers to ensure they are complying with federaland state securities regulations. All the servicers of the fund worktogether in the best interests of the mutual fund itself, shareholdersand the board of directors.
Trustees
Recall that a mutual fund is formed as a Public Trust. Trusteesmanage the trust ( trust is the Mutual Fund). Trustees are responsibleto safeguard the interests of the investors of the mutual fund. Trusteesare formed in either of the following two ways:
(i) Board of Trustees, or
(ii) Trustee Company.
The provisions of Indian Trust Act, 1882, govern board of trustees orthe Trustee Company. A trustee company is also subject to provisionsof Companies Act, 1956. Trustees ensure that the activities of themutual fund are in accordance with SEBI (mutual fund) regulations,1996.
Sponsor
In simple words, a sponsor is an entity that sets up the mutual fund.Sponsor sets up a mutual fund to earn money by doing fundmanagement. Largely, a sponsor can be compared with a promoter of
a company. Sponsor creates a Public Trust under Indian Trust Act,1882 and appoints trustees to manage the trust with the approval of
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SEBI. It establishes the Mutual Fund, along with any individual/bodycorporate. The Sponsor''s liability is restricted to his contribution.Sponsor must contribute a minimum 40% to the net worth ofAMC.Sponsor is a person who has a continuing interest in the MutualFund and whose credibility is significantly responsible for mobilizingthe savings of the public for the Mutual Fund
Mutual fund distributors
A new set of mutual fund (MF) distributors are getting ready to hit thestreet armed with a select set of MF schemes that they will be allowedto sell. Asset management companies (AMC) in the Rs.8.17 trillionIndian MF industry have started notifying MF schemes that the newcadre of distributors can sell
Mutual funds are essentially vehicles of investments for variouscategories of investors like individuals, corporates, banks, societiesetc. Spreading the awareness of mutual funds and its schemes amonginvestors across India is not possible for the AMC alone. AMC
depends on distributors for this purpose. The function of distributorsis to sell the scheme to various investors by making them aware of thevarious schemes of Mutual Fund Houses. They enable investors tounderstand the effectiveness of Mutual Fund schemes for investmentsas compared to other competitive products like Bank Fixed Deposits,ULIPs, Equity Shares, and Bonds etc. They help investors in carryingout their transactions relating to investment, switching, redemption,etc. and guide them periodically on the performance of their
investments. Many distributors help their clients in tax related matterstoo.
A distributor earns a commission for bringing in investors into themutual fund schemes. The commission, normally, is in two forms upfront commission and trail commission. Upfront commission is anincentive to distributor to bring an investor into the scheme and isexpressed as a percentage of the net investment by the investor. An
upfront commission is not related to the tenure of the investment.
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Trail commission on the other hand is the incentive to keep theinvestor remains invested in the scheme over a long period of timeand the norm is to pay it on a quarterly basis to the distributor. Before2009, the upfront commissions used to be paid from the investorsinvestments in to the scheme, by applying a charge called entry
load. The trail commission was and, is still charged as an expense to
the scheme and has the effect of reducing the NAV of the scheme(reducing the return or increasing the loss). Certain schemes, in somecases, give incentives relatively higher incentives to the distributors orto certain categories of investors. As SEBI regulations limit theexpenses to be charged to the scheme, the excess commissions areborne by the Asset Management Companies.
Mutual fund investors
A mutual fund is an entity that pools the money of many investors --
its unit-holders -- to invest in different securities. Investments may be
in shares, debt securities, money market securities or a combination of
these. Those securities are professionally managed on behalf of the
unit-holders, and each investor holds a pro-rata share of the portfolio
i.e. entitled to any profits when the securities are sold, but subject to
any losses in value as well.
First, investors buy funds with strong past performance; over half ofall fund purchases occur in funds ranked in the top quintile of pastannual returns. Second, investors sell funds with strong pastperformance and are reluctant to sell their losing fund investments;they are twice as likely to sell a winning mutual fund rather than alosing mutual fund and, thus, nearly 40 percent of fund sales occur infunds ranked in the top quintile of past annual returns. Third,investors are sensitive to the form in whichfund expenses are charged; though investors are less likely to buyfunds with high transaction fees (e.g., broker commissions or front-end load fees), their purchases are relatively insensitive to a fundsoperating expense is calculated.
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SEBIS ROLE TO REGULATE MUTUAL FUNDS
The role of SEBI can be understood from the following points:1 Securities Market Awareness Campaign
SEBI believes that An Educated Investor is a Protected Investor. A
comprehensive Securities Market Awareness Campaign was launched
on January 17, 2003. The campaign includes workshops, audio-visual
clippings, distribution of educative materials in English, Hindi and
local languages, a dedicated investor website with inventory of
booklets/pamphlets/FAQs and periodic advertisements in All India
Radio (AIR) and print media. Till Mar12, 3217 workshops were
conducted covering around 493 cities/towns in India.
2 Recognition to Investor Associations:
SEBI recognises investor associations, extends financial support for
conducting investor education programmes, and also addresses
various issues raised by them to protect the interest of the investors.
SEBI has so far recognised 10 Investors Associations.
3 Portfolio Disclosure
Transparency is essential for corporate governance and portfolio
disclosure is an important means of keeping the investors informed
about the way their moneys are being used to create financial assets.
Therefore, SEBI has made it mandatory for mutual funds to disclose
the entire portfolio of any scheme.
4 Transparency in Investment Decisions
SEBI has taken a far-reaching step towards ensuring due diligence
and transparency in all investment decisions by advising all mutual
funds to maintain records in support of each investment decision
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which will indicate the date, facts and opinion leading to that
decision.
5 Screening of mutual funds at the entry level:
Every mutual fund shall be registered with SEBI and the registration
is granted on the fulfillment of certain conditions laid down in the
regulations for efficient and orderly conduct of the affairs of a mutual
fund.
6 SEBI has outlined the advertisement code too:
All mutual funds are bound to publish a scheme-wise annual report oran abridged summary through an advertisement within six months of
the closure of the financial year. The trustees of a mutual fund are
bound to convey to the investors any information that has an adverse
impact. A mutual fund is also to publish half-yearly unaudited
financial results through an advertisement.
7 Prescribed Norms for Investment
SEBI has prescribed norms for investment management with a view
to minimising/reducing undue investment risks. There are also certain
restrictions, which are aimed at ensuring transparency and prohibiting
mutual funds from excessive risk exposure. These restrictions and
limitations have strong similarities with those imposed in the US and
the UK.
8 Inspection & Penalties
SEBI inspects the books of accounts, records and documents of a
mutual fund, the trustees, AMC and custodian. SEBI also imposes a
monetary penalty in case of violations of regulations specified. The
regulatory framework indicates that SEBI is a highly powerful
regulator. There is strong emphasis on ex-post investigation and
disciplining of mutual funds through financial penalties.
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ASSOCIATION OF MUTUAL FUNDS IN INDIA
(AMFI)
With the increase in mutual fund players in India, a need for mutualfund association in India was generated to function as a non-profitorganisation. Association of Mutual Funds in India (AMFI) wasincorporated on 22nd August,1995.
AMFI is an apex body of all Asset Management Companies (AMC)which has been registered with SEBI. Till date all the AMCs are thathave launched mutual fund schemes are its members. It functionsunder the supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the IndianMutual Fund Industry to a professional and healthy market withethical lines enhancing and maintaining standards. It follows theprinciple of both protecting and promoting the interests of mutualfunds as well as their unit holders.
The objectives of Association of Mutual Funds in India
The Association of Mutual Funds of India works with 30 registeredAMCs of the country. It has certain defined objectives whichjuxtaposes the guidelines of its Board of Directors. The objectives areas follows:
This mutual fund association of India maintains a highprofessional and ethical standards in all areas of operation of theindustry.
It also recommends and promotes the top class businesspractices and code of conduct which is followed by membersand related people engaged in the activities of mutual fund andasset management. The agencies who are by any meansconnected or involved in the field of capital markets and
financial services also involved in this code of conduct of theassociation.
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AMFI interacts with SEBI and works according to SEBIsguidelines in the mutual fund industry.
Association of Mutual Fund of India do represent theGovernment of India, the Reserve Bank of India and otherrelated bodies on matters relating to the Mutual Fund Industry.
It develops a team of well qualified and trained Agentdistributors. It implements a programme of training andcertification for all intermediaries and other engaged in themutual fund industry.
AMFI undertakes all India awarness programme for investorsinorder to promote proper understanding of the concept andworking of mutual funds.
At last but not the least association of mutual fund of India alsodisseminate informations on Mutual Fund Industry andundertakes studies and research either directly or in associationwith other bodies.
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TYPES OF MUTUAL FUNDS
BY STRUCTURE
Open Ended
These are schemes that do not have a fixed maturity. The mutual fund
ensures liquidity by announcing sale and repurchase price for the unitof an open-ended fund.
Closed Ended
These are schemes that have a fixed maturity. The money of theinvestor is locked in for the period. Occasionally, closed-end schemesprovide a re-purchase option to the investors, either for a specifiedperiod or after a specified period. Liquidity in these schemes is
provided through listing in a stock market; however this option is notyet available in India.
BY INVESTMENT OBJECTIVE
Equity Schemes
Equity schemes primarily invest in shares. Based on the objective
investments could be in growth stocks where earnings growth isexpected to be high or value stocks where the view of the fundmanager is that current valuations in the markets do not reflect theintrinsic value. Various kinds of equity schemes are:
Equity diversified:All non-theme and non-sector funds can be classified as equitydiversified funds.
Mid Cap:These funds invest in companies from different sectors. However they
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put a restriction in terms of the market capitalization of a company, ie,they invest largely in BSE Mid Cap Stocks.
ELSS:ELSS is an open-ended equity growth scheme that is offered bymutual funds in line with existing ELSS guidelines. The investmentsunder this type of scheme are subject to a lock-in period of 3 yearsand, as per the Finance Act 2005, are allowed the benefit of incomededuction up to Rs 1, 00,000.
Thematic:These schemes invest in various sectors but restrict themselves to aparticular theme eg, services, exports, consumerism etc.
Sector Specific:These are schemes that invest in a particular sector for example IT.They have a high degree of risk associated with them as if thatparticular sectors does not perform then their returns will suffer.
Flexicap:These kinds of schemes invest across market caps.
Debt or Income Schemes
Such a fund invests in interest bearing securities mainly governmentsecurities and corporate bonds. This fund earns returns for itsinvestors from interest income on its investments and profits ontrading securities. In terms of risk, this type of fund is the least risky.
Money Market Schemes
These schemes invest in short term debt instruments issued by thegovernment, corporate or banks. These are typically investments in
short term papers like the CPs and CDs etc.Hybrid Schemes
Balanced Schemes:Balanced schemes invest in a mix of equity and debt. The debtinvestments ensure a basic interest income, which the fund managerhopes to top with a capital gain from the investment in equities.However loses can eat into basic interest income and capital.
Monthly Income Plans:MIPs are suitable for conservative investors who along with anexposure to debt do not mind a small exposure to equities. These
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funds aim to provide consistency in returns by investing a major partof their portfolio in debt market instruments with a small exposure toequities. Thus an MIP would be suitable for conservative investorswho along with protection of capital seek some capital appreciation asMIPs have an exposure to equities. However the monthly income isnot assured.
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FEATURE OF MUTUAL FUND
Investment
Invest as low as Rs 100/- in Mutual Fund CompaniesTop Mutual Fund Companies offer its investors an option to invest
extremely small amounts such as Rs 100/-, Rs 500/-, Rs 1000/- each
month depending on individuals capacity into many of its mutual
fund schemes.
Flexibility of Dates
Ease of investing on convenient dates
Investor can invest in top Mutual Fund Scheme on their choice of
dates. Many large Mutual Fund companies offer multiple dates for
investing into its top performing mutual fund schemes. E.g Few dates
would be 1st, 5th, 10th, 15th, 25th of each month. This makes regular
investments on salary dates possible.
Timely Payments through ECS
Hassle free, Regular Payments to allow you to concentrate on otherimportant things in life
Investors in Mutual Funds need not worry about making timely
payments each month through opting for ECS Payment Method. This
ensures regular, hassle free, timely and correct monthly payments.
Investing Through POA (Power of Attorney)
Investing without physical presence
Investments in Mutual Funds can be done through Assignment of aPower of Attorney for effective financial planning. Army Personnel,
Officers posted on-duty at far off places, owners/directors of limited
companies, Non-Resident Indians, Resident Indian posted
onsite/outside India can invest through the convenience of POA.
Top-up Facility for Mutual Funds
Happy with your fund performance, increase your payment amount
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Apart from regular payments investors can also invest via top-up
facility. The amount of SIP can be increased at fixed intervals. The
Top-up amount has to be in multiples of Rs 500/- depending upon
fund. The frequency is fixed at Yearly and Half-Yearly Basis.
Direct Credit of Dividend Payments
No need to rush to bank to deposit the Dividend Cheque
Asset Management Companies offer direct credit of dividend
payment proceeds to investors bank accounts in orderto ensure faster
processing and timely credits of dividend amount.
Direct Credit of Redemption PaymentsGet back your money quicker when you sell mutual fund units
When a mutual fund is sold the money is directly credited to
investors bank account to facilitate quick withdrawal of funds.
Trigger/SWP/AEP Plans
Can fund book my profits for me?Sure
In case price of investment goes up, investors can set automatic
triggers to sell or transfer the portion of the increased value. This is to
ensure that the profits are booked from increased valuation on their
Mutual Fund Investment. E.g Trigger can be set to Sell/Transfer if the
NAV appreciates by 12%, 20%, 50% and 100%.
Register Multiple Bank Accounts
Can I have more than one registered bank account linked to my Fund
Folio?
Yes, you can.As a Mutual Fund investor you can register upto 5 different bank
accounts in your folio. So in case if you have to close or transfer any
one of the accounts the other can be utilised.
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ADVANTAGES OF MUTUAL FUNDS
The Mutual Funds are one of the best financial instruments offered tothe public by the finance corporations. The Mutual Funds arecollective investments, and use that money as investment in variousstocks, bonds, and other securities to earn interest and disbursedividends. Advantages of Mutual Funds are the primary reason for thepopularity of the mutual funds.
The Mutual Funds offers easy access to invest in the complexfinancial market. Major advantages of Mutual Funds are professionalmanagement, diversification and liquidity.
Flexibility: The investments pertaining to the Mutual Fund offers thepublic a lot of flexibility by means of dividend reinvestment,systematic investment plans and systematic withdrawal plans.
Affordability: The Mutual funds are available in units. Hence theyare highly affordable and due to the very large principal sum, even the
small investors are benefited by the investment scheme.
Liquidity: In case of Open Ended Mutual Fund schemes, theinvestors have the option of redeeming or withdrawing money at anypoint of time at the current rate of net value asset.
Diversification: The risk pertaining to the Mutual Funds is quite lowas the total investment is distributed in several industries and differentstocks.
Professional Management: The Mutual Funds are professionallymanaged. The experienced Fund Managers pertaining to the MutualFunds examine all options based on research and experience. Whenyou buy a mutual fund, you are also choosing a professional moneymanager. This manager will use the money that you invest to buy andsell stocks that he or she has carefully researched. Therefore, ratherthan having to thoroughly research every investment before you
decide to buy or sell, you have a mutual fund's money manager to
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handle it for you.
Potential of return: The Fund Managers of the Mutual Funds gather
data from leading economists and financial analysts. So they are in abetter position to analyze the scopes of lucrative return from theinvestments.
Low Costs: The fees pertaining to the custodial, brokerage, andothers is very low.
Regulated for investor protection: The Mutual Funds sector is
regulated by the Securities Exchange Board of India (SEBI) tosafeguard the rights of the invest the bottom line as with anyinvestment, there are risks involved in buying mutual funds. Theseinvestment vehicles can experience market fluctuations andsometimes provide returns below the overall market. Also, theadvantages gained from mutual funds are not free: many of themcarry loads, annual expense fees and penalties for early withdrawal
Ease of process: If you have a bank account and a PAN card, you
are ready to invest in a mutual fund: it is as simple as that! You needto fill in the application form, attach your PAN (typically fortransactions of greater than Rs 50,000) and sign your cheque and youinvestment in a fund is made.In the top 8-10 cities, mutual funds havemany distributors and collection points, which make it easy for themto collect and you to send your application to.
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DISADVANTAGES OF MUTUAL FUNDS
No Insurance: Mutual funds, although regulated by the government,are not insured against losses. The Federal Deposit InsuranceCorporation (FDIC) only insures against certain losses at banks, creditunions, and savings and loans, not mutual funds. That means thatdespite the risk-reducing diversification benefits provided by mutualfunds, losses can occur, and it is possible (although extremelyunlikely) that you could even lose your entire investment.
Dilution: Although diversification reduces the amount of riskinvolved in investing in mutual funds, it can also be a disadvantagedue to dilution. For example, if a single security held by a mutualfund doubles in value, the mutual fund itself would not double invalue because that security is only one small part of the fundsholdings. By holding a large number of different investments, mutualfunds tend to do neither exceptionally well nor exceptionally poorly.
Fees and Expenses: Most mutual funds charge management andoperating fees that pay for the funds management expenses (usuallyaround 1.0% to 1.5% per year for actively managed funds). Inaddition, some mutual funds charge high sales commissions, 12b-1fees, and redemption fees. And some funds buy and trade shares sooften that the transaction costs add up significantly. Some of theseexpenses are charged on an ongoing basis, unlike stock investments,for which a commission is paid only when you buy and sell .
Poor Performance: Returns on a mutual fund are by no meansguaranteed. In fact, on average, around 75% of all mutual funds fail tobeat the major market indexes, like the S&P 500, and a growingnumber of critics now question whether or not professional moneymanagers have better stock-picking capabilities than the averageinvestor.
Loss of Control: The managers of mutual funds make all of the
decisions about which securities to buy and sell and when to do so.
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This can make it difficult for you when trying to manage yourportfolio. For example, the tax consequences of a decision by themanager to buy or sell an asset at a certain time might not be optimalfor you. You also should remember that you are trusting someone elsewith your money when you invest in a mutual fund.
Trading Limitations: Although mutual funds are highly liquid ingeneral, most mutual funds (called open-ended funds) cannot bebought or sold in the middle of the trading day. You can only buy andsell them at the end of the day, after theyve calculated the currentvalue of their holdings.
Size: Some mutual funds are too big to find enough good investments.This is especially true of funds that focus on small companies, giventhat there are strict rules about how much of a single company a fundmay own. If a mutual fund has $5 billion to invest and is only able toinvest an average of $50 million in each, then it needs to find at least100 such companies to invest in; as a result, the fund might be forcedto lower its standards when selecting companies to invest in.
Inefficiency of Cash Reserves: Mutual funds usually maintain largecash reserves as protection against a large number of simultaneouswithdrawals. Although this provides investors with liquidity, it meansthat some of the funds money is invested in cash instead of assets,
which tends to lower the investors potential return.
Too Many Choices: The advantages and disadvantages listed aboveapply to mutual funds in general. However, there are over 10,000mutual funds in operation, and these funds vary greatly according to
investment objective, size, strategy, and style. Mutual funds areavailable for virtually every investment strategy (e.g. value, growth),every sector (e.g. biotech, internet), and every country or region of theworld. So eventhe process of selecting a fund can be tedious.
OPPORTUNITIES OF MUTUAL FUND
INDUSTRY
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In any industry , innovation and improvements happen when therules are changed. Large-scale environmental changes such as thosethat have taken place in the last three years must lead to innovationand evolution.
Newer leaner operating structures will have to evolve which willentail the use of technology that helps an AMC (Asset
Management Company) reach the retail end user with solutions
that enable transactions via platforms such as mobile or online
platforms. This will not only give greater direct access but will
also help AMCs to better understand investor behaviour and
create the appropriate environment and products to movetowards long and healthy relationships with the investors.
As the industry evolves, outsourcing an increasing number offunctions to reduce the head-count and increase efficiency might
be the norm. All aspects of operating costs must be examined
for efficiencies.
A rational look at schemes of an AMC by their managementteams is needed to better understand the mix, the cost and the
benefitsto the investors as well as to the AMCs.
Agile product design, re-positioning of ETFs (Exchange TradedFunds) and SIPs (Systematic Investment Plans)
Better communication of scheme returns on a relative basis toinvestors is required. The alpha achieved is insufficiently
communicated or understood.
The new AIF (Alternative Investment Fund) guidelines will
create opportunities to broaden the revenue base without
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commensurate cost increases.
CONCLUSION
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The Indian economy is second largest economy in the world, but on
2008 and first quart of 2009 was international financial liquidity and
global fund crisis. USA economy affect by sub- prime crisis that
creates problem of international financial market, commodity market
and foreign exchange market. But Indian economy less affects due to
fast moving for consumer durable, growth of capital expenditure
projects and service sector, Indian government easily attract foreign
investors. Foreign Institutional Investors invest on Indian capital
market, it is continuous growing.