Mutual Fund Series - II

History of Mutual Fund:

The mutual fund industry in India started in 1963 with the formation of Unit Trust India, at the initiative of the Government of India and Reserve Bank. 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, 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 followed by the following. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.

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 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. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 cores. 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, 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, 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 and does 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.

Structure of Mutual Funds:

All mutual funds comprise four constituents – Sponsors, Trustees, Asset Management Company (AMC) and Custodians.

1. SPONSORS

The sponsors initiate the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. A sponsor has to satisfy certain conditions, such as capital, record (at least five years ‘operation in financial services), and default free dealings and general reputation of fairness. The sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder.

2. TRUST/ BOARD OF TRUSTEES

Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unit holders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unit holders’ consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets – 0.5 percent of the weekly net asset value

3. FUND MANAGERS/ AMC

They are the ones who manage money of the investors. An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.

4. CUSTODIAN:

Often an independent organization, it takes custody of securities and other assets of mutual fund. Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range between 0.15-0.2 percent of the net value of the holding. Custodians can service more than one fund.

ORGANIZATION OF MUTUAL FUNDS

Next Post: Types of Scheme, Terminology, Performance Measurement of Schemes

Mutual Fund Series-I

There are number of investment options available in market today, mostly they all confuse investors instead of helping them. Right from traditional insurance to risky and volatile stocks, fixed deposit, post office savings deposit schemes, debentures (this alone has so many forms) and so on and so forth.

So how one can decide where to put his hard earned money?

Investment decision of individual depends on many factors. One should have fair knowledge of product beforehand he has decided to invest in that one. In this post we are going to discuss one popular form of investment that is Mutual funds.

What is a Mutual fund:

In simple terms mutual fund is an investment vehicle where many investors with similar interest come together and pool their money for a common investment objective. Then this fund is managed by professionals on their behalf. But this definition is very general and over-simplified in nature. Next one is a bit technical.

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other securities. (The combined holdings of stocks, bonds, or other securities and assets the fund owns are known as its portfolio.) Each investor owns units, which represent a part of these holdings.

Advantages of Mutual Fund investing-

Portfolio Diversification: Mutual funds invest in different kind of instruments viz. stocks, bonds, money market instrument etc. investment in such a wide variety of instruments provides diversification which may not be case in a normal investment.

Suppose as an investor you think ONGC, ACC, Infosys, Wipro or RIL share quite rewarding. These shares are currently trading between 1000 Rs. to 2500 Rs. So how many retail investors can buy these shares and what happens if prices go down after investing in them?

Suppose one is willing to invest 5000 Rs. in that case he will not able to invest in blue-chip companies share without taking high risk. Mutual fund comes handy at this time. You invest in any scheme that invests in large cap and your money will be invested in these large cap companies.

Professional Management: one of the main reasons behind existence of Mutual fund is lack of time and expertise which is not available for common investors. In a mutual fund, your money is managed by professionals who have good understanding of market. This professionally managed fund hence provides better return to investors.

Reduction of Risk: Diversification is a key characteristic of mutual funds. Diversification reduces risk.

Transaction Costs and Taxes: Investing in stock market have transaction cost. Whenever you buy or sell some stock you have to primarily pay brokerage charges. In case of mutual funds generally you are required to pay two kind of fee; entry and exit load. Mutual fund also provides tax benefit for some particular schemes.

Liquidity and Convenience: Mutual funds are highly liquid and marketable. Open ended funds can be redeemed right back to issuing AMC. Close ended funds are traded in secondary market.

Disadvantage of mutual fund investing:

Cost: There are two types of cost which is associated with mutual funds; one is usual entry and exit charges other is charges to cover expenses of fund. Sometime times these cost overweight returns.

Fluctuating returns: Over the time mutual funds have started to build portfolio in such a way that there returns are highly correlated with market. This results in returns that largely vary with market. Returns of mutual funds so fluctuates some times like market.

No guaranteed return: there is no guarantee that a scheme will provide you your expected return.

In next post: History, how mutual funds works, Structure, Types of Scheme