Mutual Funds

Title

Page no`s

Meaning & back ground

02

Definition of Mutual Fund

05

Types of Mutual Funds

06

Advantages of Mutual Funds

17

Disadvantages of Mutual Funds

18

Functions of Mutual Funds

19

Mutual Fund: A Mutual Fund is an institution which accepts deposits from people for investment or lending purpose.

Background: Mutual Fund was first introduced in India by Unit Trust of India in 1964. Till 1987 UTI was only Mutual Fund in India later on SBI and Canara Bank established their Mutual Funds and followed by others. 2

Till 1993 there were & Mutual Funds in India which were horded by all public sector companies. In past decade a significance of Mutual Funds has witnessed a huge development. After the rules passed by SEBI, private players were also allowed to perform Mutual Fund activities. Today Mutual Funds have started playing a positive role in saving revolution . The growth of Mutual Funds business can be witnessed from the following table: Year

Bought

Redeemed

1999-00

13313

9189

2000-01

20208

18224

2001-02

35766

34206

2002-03

68414

67502

2003-04

128302

118126

Figures In us $ in million 3

Before knowing Mutual Funds, we importantly need to know what are bonds. Bonds are certain liquid instruments that are repayable after certain period of time. Bonds carry certain rate of interest which is payable at the time of redemption. Bonds are clearly described as negotiable instruments in Negotiable Instruments Act. This bonds have paved way to a idea of Mutual Funds in India. The securities market of India is the major source of investment for these Mutual Funds. 4

Definition by SEBI(Mutual Funds) regulations,1986:

“A fund established in the form of a trust by a sponsor to raise money by the trustee through the sale of units to the public under one or more schemes for investing in securities in accordance with regulations.”

Definition by Weston J. Fred & Eugene:

“corporations which accept money from savers & then use this money to buy stock, long term bonds, short term debt instruments issued by business or government units, these corporations pool funds & thus reduce risks by diversifications.” Definition by English dictionary: “ A organization that collects savings from people & uses them as a investment for corporate sector undertakings for a specific revenue called interest.” 5

Classification of Mutual Funds 1.Ownership

2.Schemes Basis

a) Public Sector Mutual Fund b)Private sector Mutual Fund

a) Open ended funds b) Close ended funds c) Interval funds

3.Portfolio Basis

4.Location Basis

5.others

a) Income funds

a) Domestic funds

b) Growth funds c) Balanced funds

b) Off shore funds

a) Fund to funds

d) Equity funds e) Bond funds f) Specialized funds g) Leverage funds h) Taxation funds i) Money market funds j) Index funds 6

a) Public sector Mutual Funds :

These are the Mutual Funds established by public sector undertakings. Unit Trust of India (UTI) has been functioning in the area of Mutual Fund business in India since 1963-64. Other public sector units are SBI-MF, Can-Ban MF, LIC-MF, GIC-MF etc.

b) Private sector Mutual Funds :

Mutual Funds issued by private sector corporations to public is known as private sector Mutual Funds. Seeing the success and growth of Mutual Funds in the Indian capital market, the government of India allowed the private sector corporate to join the Mutual Fund industry on February 14, 1992. These private sectors are registered and governed by SEBI(Mutual Funds) Regulations Act,1996. 7

a) Open-ended Funds :

Under this scheme, the size of the fund and the period of fund is not predetermined. The investors are free to buy and sell any number of units at any point of time.

Features:

i.The fund is always ready to repurchase and sell at any time. ii. The fund provides liquidity by repurchasing the units at specified price which is linked with its Net Assets Value iii.There is a free entry and exit of investors in an openended fund. There is no time limit. iv.The main objective of this fund is income generation. v.For open-ended schemes there is no fixed period of maturity. They continue over time. 8

b) Close-ended scheme : The size of fund and the number of units are determined in advance. Once the subscription reaches the predetermined level the entry of investors is closed. After the expiry of the fixed period the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding.

Features:

i.Close ended schemes are open for public subscription for a limited period only, say a month or two. ii.The close ended schemes are transacted at the stock exchanges and provide liquidity to the investors at market prices. iii.Close ended schemes have a definite period of life for eg. 5 or 7 years. iv.The close ended schemes are terminated at the end of the specified period unless the period is extended or the scheme is rolled over. v.The main objective of this fund is capital appreciation. vi.Generally the prices of close ended units are quoted at a discount of up to 40% below their Net Assets Value .

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c) Interval Funds : An interval scheme is a scheme of Mutual Fund

which is kept open for a specific interval and after that it operates as close scheme. Thus it combines the features of both open-ended as well as close-ended scheme. Interval scheme have been permitted by the SEBI in recent year only. The scheme is open for sale or repurchase a fixed predetermined intervals which are disclosed in the offer document. The units of the scheme are also traded in the stock exchanges.

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a) Income funds : These scheme aim at providing a regular income to the unit holders. Investment is made in the bonds, debentures which carry a fixed, regular rate of interest.

b) Growth funds :

These scheme is meant for those investors who aim at earning the benefits of capital appreciation, besides regular income. funds are largely invested in the equity shares and a small portion is kept in money market instrument.

c) Balanced funds:

These funds are the combination of income & growth funds. About 60% of these funds is invested in equities and remaining in debt & money market instruments. 11

d) Index funds: These funds are basically growth funds which are linked to specific index of share prices. These funds are relatively dependant on the various indices of different securities of a definite class.

e) Bond funds/Liquid funds:

These funds employ their resources in bonds. These investments ensure fixed & regular income. Any person taking for these shares will have to take up bonds also.

f) Equity/Stock funds:

These funds mainly invest in stock exchanges, equity in particular . The risk of change in prices of various equities is left to the organization than that of the individual investor.

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g) Specialised fund: These funds are mobilized with a motto of investment in a particular company. These funds are classified as specialized funds as they work on the behalf of some specialized companies.

h) Leverage funds:

These funds are also called as borrowed funds. These funds are firstly collected with an obligation of strengthening the Mutual Fund then they are put to use in a smarter way to enhance the profits of investors.

i) Taxation funds:

These funds are basically tax benefit funds which offers a rebate on investment made in such equity, under section88 of Income Tax Act,1961. 13

j) Money Market funds: These funds are collected for investments to be made in money market. These funds are invested in money market instruments for a short period of time such as treasury bills, commercial papers, call money & notice money etc.

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a) Domestic funds:

These funds are mobilized in the domestic market(local market). These funds are allocated to the entrepreneurs of the same domestic market. These funds do not go beyond the borders of the country.

b) Off-shore funds:

These funds are opposite to that of a domestic funds. These funds are collected from international market and are utilized some where in other parts of the world.

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a) Fund to funds: These funds are allocated from the public and are invested in other Mutual Funds. These funds are called as intermediary funds. Their function is to collect funds & mobilize the same to a bigger Mutual Fund. These funds are directing the public investment in the right place. These funds are rather could be called as the branches of those big Mutual Funds.

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              

Mobilizing savings for investment. Liquidity. Wider flexibility. Higher returns. Reduced risks. Transparency. Low operating cost. Diversification. Tax benefit. Investor protection. Stability. Management. Reducing the marketing cost of new issue. Expert supervision & management. Money market active. 17

× × × × × ×

Market risks. Scheme risks. Investment risks. Business risks. Political risks. Unsuitable.

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Promote savings & investments. Gateway to stock exchange. Introducing systematic investment plan(sip). Tapping off-shore funds. Rendering professional service. High returns with lower costs. Providing flexible investment opportunities. Supporting the capital market. Sectorial development. Accounting the transaction. Bringing awareness about benefits of Mutual Funds. 19