Abstract
A mutual fund is a form of collective investment that pools money from investors and
invests the money in stocks, bonds, short-term money-market instruments, and/or other
securities. The portfolio manager trades the funds underlying securities, realizing a gain or
loss, and collects the dividend or interest income. The investment proceeds are then passed
on to the individual investors.
The rationale behind a mutual fund is that there are large number of investors who lack the
time and or the skills to manage their money. Hence professional fund managers, acting on
behalf of the Mutual Fund, manage the investments (investors money) for their benefit in
return for a management fee. The organization that manages the investment is called the
Asset Management Company (AMC). 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.
There are certain criteria on the basis of which the performance of a mutual fund can be
assessed such as NAV, portfolio turnover, risk and return as well as various expense ratios
like Sharpe ratio, Beta Ratio, etc. This article also aims to give an insight on the futuristic
outlook of the Mutual Funds in India. New Funds are coming in the market such as Gold
Funds, Real Estate Funds etc. The various new trends in the field are explored to
understand diversified growth and opportunities that are prevalent and that could be the
probable future of Mutual Funds.
Introduction
The most important factor shaping in todays global economy is the process of
globalization. Indian companies are moving in search of low-cast markets, technology is
driving growth in production and competition is becoming more intense. A second factor is
the fastest growth in private capital flows, mainly short-term flows by banks and financial
institutions, portfolio flows by mutual funds and pension funds and foreign direct
investment into India. A third factor is the increasing share of India and other emerging
market economies in world trade.
The outburst in communication technology has led to greater integration of Indian
financial markets across the world. The impact of these changes could be felt from the
extremely buoyant activity in Indian stock markets. A number of foreign financial service
providers have entered into the Indian financial market like Morgan Stanley, Templeton,
and Goldman Sachs. Currently FII investment is at $ 6.5 Billion compared to $ 2 Billion in
2001. The stock market is booming with Sensex hovering around 16000-17000. SEBI has
put in place appropriate guidelines and controls to regulate the markets in tune with the
changing environment and attendant risks. All this is happening because of large amounts
of investment in the country
People often invest in various asset classes to:
* To beat Inflation
* To fund future needs
* To meet contingencies
* To maintain same standard of living after retirement
All these factors matters a lot to the investors and the mutual fund route is one way
through which people can meet these needs.
What Is a Mutual Fund?
SEBI (Mutual Fund) Regulations 1993 defines Mutual Fund as “a fund established in the
form of a trust by a sponsor to raise money by the trustees through the sale of units to the
public under one or more schemes for investing securities in accordance with these
regulations”.
In common terms, a mutual fund is a portfolio of stocks, bonds, or other securities that is
collectively owned by hundreds or thousands of investors and managed by a professional
investment company. The unit holders are people who have similar investment goals. Each
fund has specific investment criteria, which are spelt out in its prospectus, the official
booklet that describes the mutual fund. Investors then know what they are getting and can
match their objective to that of a fund. The pooled money has more buying power than one
investor alone, so that a fund can own hundreds of different securities. Thus, its success is
not dependent on how just one or two companies perform but on performance of several
stocks which fund is holding.
A mutual fund makes money in several ways:
* By earning dividends or interest on the investments it owns
* By selling securities that have appreciated in value.
Investors make money in the form of dividends and interest that are passed on to them and
the increase (or decrease) in the funds value. The mutual fund manager keeps constant
watch on financial markets and adjusts the portfolio to achieve the highest returns. By
owning part of a fund, the hard work of selecting and monitoring stocks and bonds is done
for investors. The majority of mutual funds available are open-ended funds. Open-ended
funds can have an unlimited number of investors or money in the fund. These funds are
always open to accept money from investors and to return the money back to investors.
This gives the investor the flexibility to enter into the scheme or to exit from the scheme or
to exit from the scheme as and when required as per their needs. Managers of closed-end
funds, on the other hand, decide upfront how many shares they will issue and when they
will sell them. The only way to purchase shares in a closed-end fund, once the original
shares have been sold, is to buy them from a current investor. Occasionally, open-end
funds can and do close to new investors, often because of high cash inflows that cannot be
invested in a timely manner. They do not become closed-end funds, however, because
current shareholders can still buy additional shares from the fund company. When
investors purchase a mutual fund, they own a piece of an investment portfolio. They share
in the gains, losses, and expenses in proportion to the amount they have invested in the
fund. At the close of every trading day, a mutual fund company tallies the value of all the
securities in its portfolio and deducts its expenses (e.g., management fees, administrative
expenses, and advertising costs). The balance is divided by the number of shares owned by
shareholders to arrive at the value of one unit of the mutual fund. The net asset value or
NAV is the price that fund pays you per unit when you sell. For a majority of people,
mutual funds are a major part of their investment portfolio-unless they have a lot of money
and ample time to devote to investing in individual securities.
Why Mutual Funds not Individual Securities?
People prefer mutual fund and not individual securities because first, a great deal of time
and expertise is required to analyze a companyits prospects for earnings growth, its
performance over the short and long term in comparison to its competitors, its debt level
and creditworthiness, its new products in the pipeline, and technological changes looming
that might harm or improve business. Second, purchasing individual securities involves
higher transaction costs. Even when you use a discount broker, the commissions you pay
to buy and sell are not cheap. Third, owning individual stocks means you are less likely to
have proper diversification. To diversify a stock portfolio, you need to own at least 10 to
20 different companies in different industries, which could cost very much. For the same
price you might pay for 100 shares of one security, you can buy units in a fund that owns
100 securities. Diversification lowers your investment riskif one or two stocks plunge,
others may gain in value, offsetting the loss.
How Mutual Fund Works
In India, SEBI (Mutual Fund) Regulations, 1996 regulates the structure of mutual funds.
Mutual funds in India are constituted in the form of a Public Trust created under The
Indian Trusts Act, 1882. As per these regulations, mutual funds should have the following
three-tier structure:
* Sponsor
* Trust / Trustee
* Asset Management Company
Types of mutual fund schemes
By Structure By Investment Objective
Open-end Funds Growth Funds
Closed-end Funds Income Funds
Interval Funds Balanced Funds
Macroeconomic Factors Affecting Mutual Fund Industry in India
The macroeconomic factors are the major determinant of the growth of an economy.
Analyzing the macroeconomic factors gives an idea of the current economy position and a
projection of the future of the economy based on which we decide the future of a particular
industry. The various macroeconomic factors responsible for mutual fund industry in India
are as follow:
Population
Indias population is young, with 54% under the age of 25 and 80% under 45 and the
percentage of working population is rising rapidly.
Source: UN, CLSA Global Growth in Working-Age Population (15-64) over next 5 Yrs
(bn)
A younger and working age population means
* Income levels to rise
* Higher savings and consequent flows into equity markets
* Increased household consumption
* Significant increase of labor supply
* Large population and favourable demographics
Movement in Global Markets
If we see the position of BSE Senex as compared to other major indexes in the world then
we find that BSE has been the best performer.
Source: www.Bloomberg.com
This is the major factor which has contributed to mutual fund emerging as a great
investment vehicle for every category of investors and made mutual fund one of the most
preferable way to generate return. Mutual fund invest in equity of various companies for
long time and long investment in equities can help investors in generating good returns If
