MUTUAL FUND

CONTENTS

Meaning of Mutual Fund History of Mutual Fund Flow chart of Mutual Fund Types of Mutual Funds Advantages of Mutual Fund Name of the companies who launched various Mutual Funds

WHAT IS 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 realised are 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 the Indian 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.

The history of mutual funds in India can be broadly divided into three 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. 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)

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.

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. In 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 flow chart below describes the working of a mutual fund:

TYPES OF MUTUAL FUNDs

Mutual Funds
By Maturity Period By Investment Objective

Open ended

Close ended

Equity

Balance fund

Gilt fund

Income

Money market

Index fund

Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund
An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. These Funds do not have a fixed maturity period.

close-ended Fund
A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period.

Fund according to Investment Objective

A scheme can also be classified as growth fund, income fund, or balanced fund considering its investment objective.

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc.

Income / Debt Oriented Scheme

The aim of income funds is 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. Such funds are less risky compared to equity schemes

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth.

Money Market
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer shortterm instruments such as treasury bills, commercial paper and government securities, etc. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Funds
These funds invest exclusively in government securities. Government securities have no default risk.

Index Funds
This schemes invest in the securities in the same weightage comprising of an index.
This schemes would rise or fall in accordance with the rise or fall in the index

ADVANTAGES OF MUTUAL FUNDS

Flexibility: The investments pertaining to the Mutual Fund offers the public 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 they are 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, the investors have the option of redeeming or withdrawing money at any point of time at the current rate of net value asset.
Diversification: The risk pertaining to the Mutual Funds is quite low as the total investment is distributed in several industries and different stocks. Professional Management: The Mutual Funds are professionally managed. The experienced Fund Managers pertaining to the Mutual Funds examine all options based on research and experience.

Potential of return: The Fund Managers of the Mutual Funds gather data from leading economists and financial analysts. So they are in a better position to analyze the scopes of lucrative return from the investments.
Low Costs: The fees pertaining to the brokerage, and others is very low. Regulated for investor protection: The Mutual Funds sector is regulated by the Securities Exchange Board of India (SEBI) to safeguard the rights of the investor.

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 a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price Is the price at which open-ended schemes repurchase their units and 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. Repurchase or Back-end Load Is a charge collected by a scheme when it buys back the units from the unit holders.

NAV:NAV is nothing but the total market value of all the assets held in the mutual fund portfolio less the liabilities, divided by all the outstanding units. That amounts to nothing but the book value. The NAV measures how much each share of a mutual fund is worth. So essentially, the NAV of a mutual fund is the cost of one share of the fund.

HOW NAV IS CALCULATED?

The total assets of a mutual fund usually falls into two categories cash and securities. Securities include stocks and bonds. So the total asset will include the market value of all its cash, stocks, bonds. Liquid assets, dividends to be received, interest accrued also need to be included in the total assets. At the same time, the mutual fund will have some money that it will owe to some creditors. That is its liabilities. There will be some expenses that has accrued over time and yet to be paid, this also needs to be included.

Let us see that in a formula. Net Asset Value (NAV) = (Assets Debts) / (Number of Outstanding units) where Assets = Market value of the funds investments + Receivables + Accrued Income Debts = Liabilities + Accrued Expenses

As an example, assume there are two investors X and Y who have invested in a mutual fund which decided to issue out units at Rs 1/-. X invests Rs 100/- and Y invests Rs 200/-. The total corpus of the mutual fund will be Rs 100 + Rs 200 = Rs 300/- and X will get 100 units and Y will get 200 units. Now suppose the mutual fund manager invests smartly over a year and makes the investment grow and the corpus becomes Rs 800/-.

The NAV will be calculated as : NAV per share = (Assets Debts) / ( Number of Outstanding Units) = (Rs 800/- 0) / (300) = 2.67 The NAV is 2.67. So Xs value of investments will be 100 units * 2.67 = Rs 267/- and Ys value of investments will be 200 units * 2.67 = Rs 534/-. In reality of course, there are liabilities and expense ratios to be taken care of.

Top Mutual Funds Companies

ICICI Pru UTI SBI Mangum Emerging Fund IDFC Premier Equity Fund HDFC Reliance Equity Opportunity Fund Reliance Pharma Fund SBI FMCG Fund HDFC Balanced Fund ICICI Balanced Fund

Summary
The Mutual Fund Industry is a growth industry Mutual Funds cover a spectrum of Investment Options Start Investing Early & Systematically We invest directly or through a Professional Money Manager