Mutual Funds: Introduction: A mutual fund is a corporation, trust or partnership that combines theassets of all its shareholders or partners

into one common investment account for the purpose of providing diversification and professional management. A mutual fund means pooling the investments of a number of investors by way of investment in units of equal size. The concept of Mutual funds was started with unit schemes of Unit Trust of India in 1964 in India. The term mutual funds came into prominence only in 1987 when leading public sector banks like SBI, Canara bank set up their mutual funds, followed by LIC of India in 1989. From the year 1993 the mutual funds were allowed to start under private sector also. At present in India there are 40 mutual fund companies in India.

History of Mutual Fund Industry: The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 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 control of 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.6,700crores of assets under management. Second Phase 1987-1993 (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.47,004crores. Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the 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 1|P ag e

UTI were to be registered and governed. The erstwhile Kothari 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 the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805crores. The Unit Trust of India with Rs.44,541crores of assets under management was way ahead of other mutual funds. 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. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835crores 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 and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, 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.76,000crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years.

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit 2|P ag e

Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards. ADVANTAGES OF MUTUAL FUNDS The advantages of investing in a Mutual Fund are: y Professional Management y Diversification y Convenient Administration y Return Potential y Low Costs y Liquidity y Transparency y Flexibility y Choice of schemes y Tax benefits y Well regulated FREQUENTLY USED TERMS Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related. Redemption Price Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes. ORGANISATION OF MUTUAL FUND COMPANIES IN INDIA: The organization of mutual funds involves five constituents or special bodies. They are: a) The sponsor/s b) The board or trustees c) The asset management company (AMC) d) The custodian and e) The unit holders.

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A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company and custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. AMC approved by SEBI manages the fund by making investments in various types of securities. Custodian who is registered with SEBI holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance andcompliance of SEBI regulations by the mutual fund. CLASSIFICATION OF MUTUAL FUNDS: A Mutual fund scheme can be classified into open-ended orclosed ended schemes depending on its maturity period. y An open-ended scheme is one that is available for subscriptionand repurchase on a continuous basis. These schemes do not have a fixed maturity period. y A closed ended scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. y The schemes can also be classified as Growth funds, income funds and balanced funds. y Growth funds: The growth funds aim to provide capital appreciation over the medium to long term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend; capital appreciation etc. and the investors canchoose an option depending on their preferences. y Income funds: These funds aim to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. These funds are not affected by the market fluctuations. y Balanced funds: These funds provide both growth and regular income as such schemes invest both in equities and fixed income securities. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected by fluctuations in share prices in the stock market. y The other schemes are as follows: Money market mutual funds, Indexed funds, Sector schemes, Tax saving schemes, load funds, no load funds etc. y Money market mutual funds: These are income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short term instruments such as treasury bills, certificates of deposit, commercial paper and inter bank call money, government securities etc. 4|P ag e

Indexed funds: These funds invest exclusively in the government securities. Government securities have no default risk. Net asset values of these schemes also fluctuate due to change in interest rates and other economic factors as in the case of income or debt oriented schemes. Sector schemes:These are the funds, which invest in the securities of only those sectors or industries as specified in the offer documents. Eg. Soft ware industries, pharmaceuticals, FMCGS etc. The returns in these funds are dependent on the performance of the respective sector. While these funds may give higher returns, they are more risky as compared to diversified funds. Investors need to keep a watch on the performance of these sectors and must exit at an appropriate time besides seeking expert advice. Tax saving schemes: These schemes offer tax rebates to the investors under specific provisions of the income tax act of 1961, as the government offers tax incentives for investment in specified avenues. Load fund: A load fund is one that charges a percentage of Net asset value for entry or exit. Each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distributing expenses. No-load fund:This fund is one that does not charge for entry or exit. It means the investors can enter the fund at Net asset value and no additional charges are payable on purchase or sale of units. The price a unit holder is charged while investing in an open-ended scheme is called sales price.

FUNCTIONS OF MUTUAL FUNDS: y The basic function of mutual fund companies is buying and selling securities on behalf of its unit holders, y It enables small investors to hold a share in a large and diversified portfolio of assets, which reduces the risks of investment. y The savings so mobilized are pooled in a large, diversified and sound portfolio of equity, bonds, securities etc. y Investors in the mutual funds are given the share in its total funds, which is evidenced by the unit certificates. y Mutual funds assure professional management, which helps in earning higher rate of return. y It helps the small investors who do not have adequate time and knowledge, expertise, experience and resources for directly accessing profitable avenues in capital and money markets. .

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