M.F.S. MUTUAL FUND

Mutual Funds: Chapter Objectives To understand the Concept & Structure of mutual funds, Mutual Fund development/s in India and To understand the types of Mutual fund Schemes.

Mutual Fund: Meaning A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. A fund is “mutual” as all of its returns, minus its expenses, are shared by the fund’s investors. Mutual fund is a collective savings scheme. Mutual funds play an important role in mobilizing the savings of small investors and channelising the same for productive ventures in the Indian economy.

Mutual Fund: Meaning According to the above definition, a mutual fund in India can raise resources through sale of units to the public. It can be set up in the form of a Trust under the Indian Trust Act. The definition has been further extended by allowing mutual funds to diversify their activities in the following areas: Portfolio management services Management of pension or provident funds Management of venture capital funds Management of money market funds Management of real estate funds

Mutual Fund Operation Flow Chart

Mutual Fund Orgn. Structure Mutual Fund Industry has a Four –Tier structure: The four parties that are required to be involved are: Sponsor Board of Trustees/Trust Asset Management Company (AMC) Custodian.

Mutual Fund Orgn. Structure The Sponsor of a fund is the entity that sets up the mutual fund. The fund is administered/run either by a Board of Trustees, or The Directors of A Trustees Company. The sponsor selects them. The Board of Trustee is responsible for protecting the investors’ interests. The sponsor or the trustee if so authorized by the Trust Deed appoints the Asset Management Company (AMC) for the investment and administrative functions. The AMC does the research, and manages the corpus of the fund. with the help of trustees, the AMC launches the various schemes of the fund, manages them, and then liquidates them at the end of their term. It also takes care of the other administrative work of the fund. AMC receives an annual management fees from the fund for its services. The Custodians are appointed by the sponsor for looking after the transfer and storage of the securities and co-ordinate with the brokers.

Benefits of Mutual Funds Professional management Portfolio diversification Reduction in transaction costs Liquidity Convenience Flexibility Tax benefits Transparency Equity research

History of Mutual Funds The history of mutual funds, dates back to 19th century Europe, in particular, Great Britain. Robert Fleming set up in 1868 the first investment trust called Foreign and Colonial Investment Trust which promised to manage the finances of the moneyed classes of Scotland by spreading the investment over a number of different stocks. This investment trust and other investment trusts which were subsequently set up in Britain and the US, resembled today’s close-ended mutual funds. The first mutual fund in the US, Massachusetts Investors’ Trust, was setup in March 1924. This was the first open-ended mutual fund.

Growth of Mutual Funds in India Phase I: The mutual fund concept was introduced in India with the setting up of UTI in 1963. The Unit Trust of India (UTI) was the first mutual fund set up under the UTI Act, 1963, a special act of the Parliament. It became operational in 1964 with a major objective of mobilizing savings through the sale of units and investing them in corporate securities for maximizing yield and capital appreciation. This phase commenced with the launch of Unit Scheme 1964 (US-64) the first open-ended and the most popular scheme.

Growth of Mutual Funds in India Phase II: The second phase witnessed the entry of mutual fund companies sponsored by nationalized banks and insurance companies. In 1987, SBI Mutual Fund and Canbank Mutual Fund were set up as trusts under the Indian Trust Act, 1982. In 1988, UTI floated another offshore fund, namely, The India Growth Fund which was listed on the New York Stock Exchange (NYSE). By 1990, the two nationalized insurance giants, LIC & GIC and nationalized banks, namely, Indian Bank, Bank of India, and Punjab National Bank had started operations of wholly-owned mutual fund subsidiaries.

Growth of Mutual Funds in India Phase III: The year 1993 marked a turning point in the history of mutual funds in India. Securities and Exchange Board of India (SEBI) issued the Mutual Fund Regulations in January 1993. SEBI notified regulations bringing all mutual funds except UTI under a common regulatory framework. Private domestic and foreign players were allowed entry in the mutual fund industry. Kothari group of companies, in joint venture with Pioneer, a US fund company, set up the first private mutual fund the Kothari Pioneer Mutual Fund, in 1993.

Growth of Mutual Funds in India Phase IV: During this phase, the flow of funds into the pot of mutual funds sharply increased. This significant growth was aided by a more positive sentiment in the capital market, significant tax benefits, and improvement in the quality of investor service. ENTRY OF PRIVATE PLAYERS AFTER YEAR 2000 MF MARKET SCENARIO: YEAR 2000: AUM Rs. 1,00,000 CRORE (UTI 64% SHARE) YEAR 2009: AUM Rs. 7,50,000 CRORE

RECENT MF INDUSTRY STATUS AMC/FUND HOUSE AUGUST 2009 (Rs. In Crore) SEPT 2008 (Rs. In Crore) BARODA PIONEER MF 5,414 56 LIC MF 42,646 16,168 IDFC MF 24,855 11,855 KOTAK MAHINDRA MF 36,934 18,615 TAURUS MF 799 408 TOTAL INDUSTRY AUM 7,49,738 5,28,493 Total investment in MF Rs 7,81,71,152 Lakhs (as of 28 February,2010) (Source: Association of Mutual Funds, India)

NAV: NET ASSET VALUE The NAV simply means = NET VALUE OF ASSETS Calculation of NAV: The NAV simply means = NET VALUE OF ASSETS NO. OF UNITS OUTSTANDING Here, Net Value of Assets = Sum of market value of shares/ debentures + Liquid assets/cash held, if any + Dividends/interest accrued - Expenses accrued but not paid.

EXP. of NAV Calculation Name of the scheme: AB Balanced Size of the scheme: Rs.200 Crore Face value of the Share: Rs 10 No. Of outstanding units: 20 Crore Market value of the funds investments: Rs.280 Crore Receivables: Rs.2 Crore Accrued Income: Rs.2 Crore Liability: Rs.1 Crore Accrued Expense: Rs.1 Crore NAV = 280 + 2 + 2 – 1 – 1 /20 = Rs. 14.1 per share.

Types of Mutual Fund Schemes FUNCTIONAL PORTFOLIO GEOGRAPHICAL OTHER OPEN ENDED INCOME SCHEME DOMESTIC SECTOR SPECIFIC CLOSE ENDED GROWTH SCHEME OFF-SHORE TAX SAVINGS BALANCED SCHEME ELSS SPECIAL INDEX FUNDS GILT FUNDS GOLD FUND

Types of Mutual Fund Schemes OPEN-ENDED SCHEMES: KEY FEATURES: Most mutual funds are open-ended. What does it mean by OPEN – ENDED? - THE NUMBER OF UNITS/CORPUS ARE NOT FIXED - ENJOY PERPETUAL LIFE - FREE ENTRY AND EXIT Unlike close-ended schemes, open-ended schemes are listed on the stock exchange and can be purchased directly from company or broker. The investor can purchase the MF schemes by paying “NAV” form MF CO’ The corpus of fund increases or decreases, depending on the purchase or redemption of units by investors. There is no fixed redemption period in open-ended schemes. The key feature of open-ended funds is LIQUIDITY. FOR EXP. UTI’s US-64

Types of Mutual Fund Schemes CLOSE-ENDED SCHEMES: KEY FEATURES: Close ended Funds are just like Eq. Share/IPOs What does it mean by COSED – ENDED? - Fixed corpus means total units to be issued - Fixed maturity period ranging between 2 to 5 years. - The scheme remains open for a period not exceeding 45 days. Investors in close-ended schemes can buy units only from the market, once initial IPO is over and thereafter the units are listed on the stock exchanges where they can be bought and sold. The price of a share in a closed-end fund is determined entirely by market demand, so UNITS can either trade below their net asset value ("at a discount") or above it ("at a premium").

Types of Mutual Fund Schemes INCOME FUNDS: KEY FEATURES: The aim of income funds is to provide safety of investments and regular income to investors. Such schemes invest predominantly in income-bearing instruments like bonds, debentures, government securities, and commercial paper. The return as well as the risk is lower in income funds as compared to growth funds. Corpus invested in Bonds of Govt./Blue Chip Co’s/Money Mkt.

Types of Mutual Fund Schemes GROWTH FUNDS: KEY FEATURES: The main objective of growth funds is capital appreciation through investment into equity share. They invest most of the corpus in equity shares with significant growth potential and they offer higher return to investors in the long-term. They assume the risks associated with equity investments. There is no guarantee or assurance of returns. Threat of “CAP. DEPRECIATION”

Types of Mutual Fund Schemes BALANCED FUNDS: KEY FEATURES: The aim of balanced scheme is to provide both capital appreciation and regular income. They divide their investment between equity shares and debt instruments in such a proportion that, the portfolio is balanced. The portfolio of such funds usually comprises of companies with good profit and dividend track records and Govt. Bonds. RISK – RETURN IS MODERATE as compared to Growth Funds.

Types of Mutual Fund Schemes MONEY MARKET MUTUAL FUNDS: KEY FEATURES: The corpus of MF is invested in short-term money market instruments like treasury bills, CP and certificate of deposits. The objective of such funds is high liquidity with low rate of return. This is a safe place to park your money. “CAP. PROTECTION” DOMESTIC FUNDS: KEY FEATURES: Funds which mobilize resources from a particular geographical locality like a country or region are domestic funds. The market is limited and confined to the boundaries of a nation in which the fund operates.

Types of Mutual Fund Schemes OFFSHORE FUNDS: KEY FEATURES: Funds that invest mainly in the foreign markets are referred to as international funds (also called offshore funds). They facilitate cross-border fund flow which leads to an increase in foreign currency and foreign exchange reserves. Such mutual funds can invest in securities of foreign co’s. They open international market to domestic investors. The first offshore fund, the India Fund, was launched by UTI in July 1986 in collaboration with the US fund manager, MERRIL LYNCH.

Types of Mutual Fund Schemes SECTORAL: KEY FEATURES: These funds invest in specific core sectors like energy, power, telecommunications, IT, construction, transportation, and financial services. Some of these newly opened-up sectors offer good investment potential. Market Niche Strategy TAX SAVING SCHEMES: Tax-saving schemes are designed on the basis of tax policy with special tax incentives to investors. Mutual funds have introduced a number of tax-saving schemes. These are close--ended schemes and investments are made for 3 to 10 years, although investors can avail of encashment facilities after 3 years. These schemes contain various options like income, growth or balanced.

Types of Mutual Fund Schemes Equity-linked savings scheme (ELSS): KEY FEATURES: In order to encourage investors to invest in equity market, the government has given TAX-CONCESSIONS through special schemes. Investment in these schemes entitles the investor to claim an income tax rebate, but these schemes carry a lock-in period before the end of which funds cannot be withdrawn.

Types of Mutual Fund Schemes Index funds: KEY FEATURES: An index fund is a mutual fund which invests in in those shares which comprise the market index Viz. NIFTY AND BSE SENSEX. Fund Manager’s job becomes EASIER in such fund.

Mutual funds in India are open to investment by: Mutual Fund Investors Mutual funds in India are open to investment by: Residents including Resident Indian Individuals, including high net worth individuals and the retail or small investors. Indian Companies Indian Trusts/Charitable Institutions Banks Non-Banking Finance Companies Insurance Companies Provident Funds Non-Residents, including Non-Resident Indians Other Corporate Bodies (OCBs) Foreign entities, namely, Foreign Institutional Investors (FIIs) registered with SEBI.