Why Should We Invest In Mutual Funds Finance Essay

A Common Fund is a trust that pools the nest eggs of a figure of investors who portion a common fiscal end. The money therefore collected is so invested in capital market instruments such as portions, unsecured bonds and other securities. The income earned through these investings and the capital grasp realised are shared by its unit holders in proportion to the figure of units owned by them. Thus a Common Fund is the most suited investing for the common adult male as it offers an chance to put in a diversified, professionally managed basket of securities at a comparatively low cost. The flow chart below describes loosely the working of a common fund:

Common Fund Operation Flow Chart

( www.amfiindia.com ) [ online ]

Anybody with an investible excess of every bit small as a few thousand rupees can put in common financess by purchasing units of a peculiar common fund strategy that has a defined investing aim and scheme. The money collected from the investors is invested by a fund director in different types of securities. These could run from portions and unsecured bonds to money market instruments depending upon the strategy ‘s stated aims.

Why should we put in common financess?

The benefits of puting in common financess can be detailed as under:

Low-cost: Common financess can be bought by anyone and everyone. An investor can originate his investing with Rs. 1,000/- as good. There is no specific minimal investing sum required.

Professional Management: For retail investor, to make up one’s mind which securities to purchase and the needed investing sum, is really hard. Investing in a common fund gives the investor an border, as it is managed by professional fund director, who makes the necessary determinations as to which security to purchase, how much to put, when to purchase and sell. These determinations are made after making an in-depth market research about the economic system, industries and companies.

Diversification: Spreading the investings across the sectors, industries and securities reduces the hazard ; this is the basic of finance theory. A common fund is able to diversify more easy than an mean investor across several companies, which an ordinary investor may non be able to make. With an investing of Rs 5000, you can purchase stocks in some of the top Indian companies through a common fund, which may non be possible to make as an single investor.

Convenient disposal: There are no administrative hazards of portion transportation, as many of the common financess offer services in a demat signifier which saves investor ‘s clip and hold.

Higher returns: Over a medium to long-run investing, investors ever acquire higher returns in common financess as compared to other options of investing. This is already seen from first-class returns, common financess have provided in the last few old ages.

Low cost direction: No common fund can increase the cost beyond prescribed bounds of 2.5 % maximal and any excess cost of direction is to be borne by the AMC.

Liquid: Unlike several other signifiers of nest eggs like the public provident fund or National Savings Scheme, you can retreat your money from a common fund on immediate footing.

Transparency: The Securities Exchange Board of India ( SEBI ) ordinances now compel all the common financess to unwrap their portfolios on a semiannual footing. However, many common financess unwrap this on a quarterly or monthly footing to their investors. The Net Asset Values ( NAV ) are calculated on a day-to-day footing in instance of clear ended financess and are now published through Association of Mutual financess in India ( AMFI ) in the newspapers.

Tax benefits: Common financess have historically been more efficient from the revenue enhancement point of position. A debt fund pays a dividend distribution revenue enhancement of 12.5 per cent before administering dividend to an single investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend revenue enhancement on dividends from an equity fund for single investor.

Highly regulated: Common financess all over the universe are extremely regulated and in India all common financess are registered with SEBI and are purely regulated as per the Mutual Fund Regulations which provide first-class investor protection.

Other benefits: Common Fundss provide regular backdown and systematic investing programs harmonizing to the demand of the investors. The investors can besides exchange from one strategy to another without any burden.

( Strategic Financial Management, 2008 ; www.valueresearchonline.com )

Types of Mutual Fundss

Balanced financess: As the name suggests, balanced financess are the financess with strategic allotment in debt every bit good as equities. The chief premiss behind the acceptance of balanced financess is that the debt portfolio provides stableness while the equity portfolio provides growing. This type of fund is more suited for investors who prefer significant exposure to equity instead than entire exposure to equity.

Equity Diversified financess: A diversified fund is a fund that contains broad array of stocks. There is a high degree of variegation in the retentions which allows the fund director to cut down the hazard of the fund. There are assorted types of diversified financess as under:

Flexicap/ Multicap fund: These are by definition, diversified financess. The lone difference is that unlike a normal diversified fund, the offer papers by and large spells out the bounds for lower limit and maximal exposure to each of the market caps.

Contra fund: A Contra fund invests in those out-of-favour companies that have unrecognised value. It is ideally suited for investors who want to put in a fund that has the possible to execute in all types of market environments as it blends together both growing and value oppurtunities.

Index fund: An index fund seeks to track the public presentation of a benchmark market index like the Bombay Stock Exchange ( BSE ) Sensex or Standard & A ; Poor ‘s ( S & A ; P ) CNX Nifty. The fund maintains the portfolio of all the securities in the same proportion as stated in the benchmark index.

Dividend output fund: A dividend output fund invests in portions of companies holding high dividend outputs. Dividend output is defined as dividend per portion divided by the portion ‘s market monetary value. The monetary values of dividend giving stocks are by and large less volatile than growing stocks. They besides possess the possible to appreciate.

Among the diversified equity financess, dividend output financess are considered to be a medium-risk proposition. However, it is of import to observe that dividend output financess have non ever proved resilient in short-run disciplinary stages.

( three ) Equity Linked Tax Savings Scheme ( ELSS ) : Elevation is one of the options for investors to salvage revenue enhancements under Section 80 C of the Indian Income Tax Act, 1961. They besides offer the perfect manner to take part in the growing of the capital market, holding a lock-in-period of three old ages. ELSS besides has the possible to give better returns than any traditional revenue enhancement nest eggs instrument. Furthermore, by puting in an ELSS through a Systematic Investing Plan ( SIP ) , one can non merely avoid the job of puting a ball amount towards the terminal of the twelvemonth but besides take advantage of ‘averaging ‘ .

( four ) Sector financess: These financess are extremely focused on a peculiar industry. The basic aim is to enable investors to take advantage of industry rhythms. Since sector financess ride on market rhythms, they have the possible to offer good returns if the timing is perfect. However, they are bereft of downside hazard protection as available in diversified financess. Sector financess should represent merely a limited part of one ‘s portfolio, as they are much riskier than a diversified fund. Besides, merely those who have an bing portfolio should see puting in these financess.

( V ) Thematic financess: A thematic fund focuses on tendencies that are likely to ensue in the out-performance by certain sectors or companies. In other words, the cardinal factors are those that can do a difference to concern profitableness and market values. However, the downside is that the market may take a longer clip to acknowledge positions of the fund house with respects to a peculiar subject, which forms the footing of establishing a fund.

( six ) Arbitrage financess: These financess promise safety of sedimentations, but better returns, revenue enhancement benefits and greater liquidness. The open-ended equity strategy aims to bring forth low volatility returns by inverting a mix of hard currency equities, equity derived functions and debt markets. The fund seeks to supply better returns than typical debt instruments and lower volatility in comparing to equity. This fund is aimed at an investor who seeks the return of little nest eggs instruments, safety of bank sedimentations, revenue enhancement benefits of Reserve Bank of India ( RBI ) alleviation bonds and liquidness of a common fund. This fund seeks to capitalize on the monetary value derived functions between the topographic point and the hereafters market.

( seven ) Hedge fund: A hedge fund ( there are no hedge financess in India ) is a lightly regulated investing fund that escapes most ordinances by being a kind of a private investing vehicle being offered to selected clients. The large difference between a hedge fund and a common fund is that the former does non uncover anything about its operations publically and charges a public presentation fee. If it out-performs a benchmark, it takes a cut off the net incomes. It is a one-way street ; any losingss are borne by the investors themselves.

( eight ) Cash fund: Cash fund is an unfastened ended liquid strategy that aims to bring forth returns with lower volatility and higher liquidness through a portfolio of debt and money market instrument. The fund will hold retail institutional and ace institutional programs. Each program will offer growing and dividend options. The minimal initial investing for the institutional program is Rs.1 crore and the ace institutional is Rs.25 crore. For the retail program, the minimal initial investing is Rs.5,000/- . The fund has no entry or issue tonss. Investors can put even through the Systematic Investment Planning ( SIP ) path with a minimal sum of Rs.500 per episode with the sum of all episodes non being less than Rs.5,000/- .

( nine ) Exchange-traded financess ( ETF ) : An ETF is a intercrossed merchandise that combines the characteristics of an index fund. These financess are listed on the stock exchanges and their monetary values are linked to the underlying index. The authorized participants can move as market shapers for ETFs.

Categorization of common financess

Common financess can be classified into three types and each is reciprocally sole. They are as under:

Functional Categorization: Based on the map financess can be classified as unfastened ended and near ended. In an unfastened ended strategy, an investor can do entry and issue at any clip. The capital of the fund is limitless and the salvation period is indefinite. In a stopping point ended strategy, the investor can do an entry during the public offer or can purchase from the stock market after the units are listed. The salvation period is definite at the terminal of which the principal fund is liquidated. The investor can do his issue by selling the units in the stock market, or at the termination of the strategy or during the repurchase period at his option.

Portfolio Categorization: On the footing of portfolio, financess are classified into three, viz. , Equity financess, Debt financess and Particular financess.

Equity financess: Equity financess are invested in equity stocks. There are four types of equity financess. ( a ) Growth financess seek to supply long term capital grasp to the investor. This is best suited for long-run investor ( B ) Aggressive financess look for super normal returns for which investing is made in start-ups, IPOs and bad portions, for risk-taking investors. ( degree Celsius ) Income financess seek to maximize present income of the investors by puting in safe stocks paying high hard currency dividends and put in high output money market instruments. This is best suited for investors seeking current income. ( vitamin D ) Balanced financess are a mix of growing and income financess. They buy portions for growing and bonds for income and best for investors seeking to strike aureate mean.

Debt financess: ( a ) Chemical bond financess invest in fixed income securities e.g. authorities bonds, corporate unsecured bonds, exchangeable unsecured bonds, money market. Investors seeking revenue enhancement free income go in for authorities bonds while those looking for safe, steady income purchase authorities bonds or high grade corporate bonds. ( B ) Gilt financess are chiefly invested in Government securities.

Particular financess: ( a ) Index financess are low cost financess and influence the stock market. The investor will have whatever the market delivers. ( B ) International financess raise money in India for puting globally. ( hundred ) Offshore financess are located in India to raise money globally for puting in India. ( vitamin D ) Sector financess invest their full fund in a peculiar industry e.g. public-service corporation fund for public-service corporation industry like power, gas, and public plants.

Ownership Categorization: Fundss are classified into Public Sector Mutual Funds, Private Sector Mutual Funds, and Foreign Mutual Funds. Public Sector Mutual Funds are sponsored by a company of the public sector. Private Sector Mutual Fund is sponsored by a company of the private sector. Foreign Common Fundss are sponsored by companies for raising financess in India, operate from India and invest in India.

Key participants in Common financess

Common Fund is formed by a trust organic structure. The concern is set up by the patron, the money invested by the plus direction company and the operations monitored by the legal guardian. There are five chief components and three market mediators in the formation and operation of common fund.

The five components are:

( 1 ) Patron: A company established under the Companies Act forms a common fund.

( 2 ) Asset Management Company: An entity registered under the Companies Act to pull off the money invested in the common fund and to run the strategies of the common fund as per ordinances. It carries the duty of puting and pull offing the investors ‘ money.

( 3 ) Trustee: The trust is headed by Board of Trustees. The legal guardian holds the belongings of the common fund in trust for the benefit of unit holders and looks into the legal demands of operating and operation of the common fund. The legal guardian may besides organize a limited company under the Companies Act in some state of affairss.

( 4 ) Unit of measurement Holder: A person/entity keeping an undivided portion in the assets of a common fund strategy.

( 5 ) Common Fund: A common fund established under the Indian Trust Act to raise money

through the sale of units to the populace for puting in the capital market. The financess therefore collected are passed on to the Asset Management Company for investing. The common fund has to be registered with SEBI.

The three market mediators are:

Custodian: A keeper is a individual who has been granted a Certificate of

Registration to carry on the concern of tutelary services under the SEBI ( Custodian of Securities ) Regulations 1996. Custodial services include safeguarding clients ‘ securities along with incidental services provided. Maintenance of histories of clients ‘ securities together with the aggregation of benefits / rights accruing to a client falls within the horizon of tutelary service. Common financess require keepers so that AMC can concentrate on countries such as investing and direction of money.

Transportation Agents: A transportation agent is a individual who has been granted a Certificate of

Registration to carry on the concern of transportation agent under SEBI ( Registrars to an Issue and Share Transfer Agents ) Regulations Act 1993. Transfer agents ‘ services include issue and salvation of common fund units, readying of transportation paperss and care of updated investing records. They besides record transportation of units between investors where depositary does non work.

Depository: Under the Depositories 1996, a depositary is body corporate who carries out the transportation of units to the unit holder in dematerialised signifier and maintains records thereof.

Regulation of Common Fundss

SEBI, Reserve Bank of India ( RBI ) , Ministry of Finance, Stock Exchanges, Registrar of Companies, Company Law Board, Department of Company Affairs are the bureaus that govern the common financess in India. The guidelines range from the initial procedure of make fulling up the relevant applications for puting up a common fund to imposing punishments for non-confirmation to the ordinances as ballads down by the SEBI. There are certain points associating to proper maintaining of histories so as to guarantee transparence, thereby assisting to protect the investors.

General duties: These are as under ( 1 ) To keep proper books of histories and records, etc ; ( 2 ) Restriction on fees and disbursals on issue of strategies ; ( 3 ) Dispatch of warrants and returns ; ( 4 ) Annual Report ; ( 5 ) Auditor ‘s Report ; ( 6 ) Mailing of Annual Report and drumhead thereof ; ( 7 ) Annual Report to be forwarded to the Board ; ( 8 ) Periodic and continual revelations ; ( 9 ) Half annual revelations ; ( 10 ) Disclosures to the investors. The concluding duty sing revelations to the investors requires that the legal guardians shall be bound to do such revelations to the unit holders as are indispensable in order to maintain them informed about any information which may hold an inauspicious bearing on their investings.

Inspection and Audited account: The commissariats under this are: ( 1 ) Board ‘s right to inspect and probe ; ( 2 ) Notice before review and probe ; ( 3 ) Duty on review and probe ; Submission of study to the Board ; ( 5 ) Communications of findings etc. ; ( 6 ) Appointment of Auditor ; ( 7 ) Payment of review fees to the Board.

Procedure for action in instance of default: The SEBI is empowered to set about the undermentioned processs in the event of default:

( 1 ) Suspension of certification ; ( 2 ) Cancellation of certification ; ( 3 ) Manner of doing order of cancellation or suspension ; ( 4 ) Show cause notice and order ; ( 5 ) Consequence of suspension or cancellation of certification and enrollment ; ( 6 ) Publication of order of suspension or cancellation ; ( 7 ) Action against mediators.

Common financess are besides regulated in their investings in the primary market by the Securities and Exchange Board of India ( SEBI ) Mutual Funds Regulations, 1996. Broadly prescribes the of import investing parametric quantities under the ordinances which are as follows:

Not more than 5 % of the principal as reflected by the NAV can be invested in unlisted portions or convertibles.

Not more than 10 % of the NAV can be invested in portions or convertibles of a individual company.

The entire investing in unrated debt instruments shall non transcend 25 % of the NAV.

No common fund under all its strategies can keep more than 10 % of a company ‘s portion capital or vote rights.

Common financess can now put overseas upto US $ 3 billion up from US $ 2 billion antecedently.

Operationss of Mutual financess

The operations of common financess by and large include the followers:

Investing rating norms

Pricing of units

Dividend distribution

Allotment of disbursals

Ad of strategies

Investing attacks

Offer papers

( Strategic Financial Management, 2008 )

History of the Indian Mutual fund history

The common fund industry in India started in 1963 with the formation of Unit Trust of India, at the enterprise of the Government of India and Reserve Bank of India. The history of common financess in India can be loosely divided into four distinguishable stages.

First Phase 1964 – 1987:

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 regulative and administrative control in topographic point of RBI. The first strategy launched by UTI was Unit Scheme 1964. At the terminal of 1988 UTI had Rs.6,700 crores of assets under direction.

Second Phase 1987 – 1993 ( Entry of Public Sector Funds ) :

1987 marked the entry of non- UTI, public sector common financess set up by public sector Bankss 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 common fund in June 1989 while GIC had set up its common fund in December 1990. At the terminal of 1993, the common fund industry had assets under direction of Rs.47,004 crores.

Third Phase 1993 – 2003 ( Entry of Private Sector Funds ) :

With the entry of private sector financess in 1993, a new epoch started in the Indian common fund industry, giving the Indian investors a wider pick of fund households. Besides, 1993 was the twelvemonth in which the first Mutual Fund Regulations came into being, under which all common financess, except UTI were to be registered and governed. The former Kothari Pioneer ( now merged with Franklin Templeton ) was the first private sector common 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 figure of common fund houses went on increasing, with many foreign common financess puting up financess in India and besides the industry has witnessed several amalgamations and acquisitions. As at the terminal of January 2003, there were 33 common financess with entire assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under direction was manner in front of other common financess.

Fourth Phase – since February 2003:

In February 2003, following the abrogation 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 direction of Rs.29,835 crores as at the terminal of January 2003, stand foring loosely, the assets of US 64 strategy, assured return and certain other strategies. The Specified Undertaking of Unit Trust of India, working under an decision maker and under the regulations framed by Government of India and does non come under the horizon of the Mutual Fund Regulations. The 2nd is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and maps under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under direction and with the puting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent amalgamations taking topographic point among different private sector financess, the common fund industry has entered its current stage of consolidation and growing.

The graph indicates the growing of assets over the old ages.


Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effectual from February 2003. The Assets under direction of the Specified Undertaking of the Unit Trust of India has hence been excluded from the entire assets of the industry as a whole from February 2003 onwards. ( www.amfiindia.com ) [ online ]