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Growth and Development in India

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Mutual Fund as an Investment Vehicle -Introduction

Table of Contents - Part: 1 - Introduction & Definition of Concepts

  1. Mutual Fund as an Investment Vehicle -Introduction

  2. Mutual Funds - Origin in USA & Popularity

  3. Growth & Development of Mutual Fund Industry in India

  4. Mutual Funds - Frequently Asked Questions (FAQs)

  5. Mutual Funds - Frequently Asked Questions (FAQs)(Contd.)

  6. Mutual Funds - Frequently Asked Questions (FAQs)(Contd.)


  1. Gilt Funds Facilities Extended by RBI [

Other Modules under Mutual Funds

  1. PART: II - Regulatory Measures by SEBI (five articles)

  2. PART: III - Report of PK Kaul Committee (3 articles)>

  3. PART: IV - UTI Crisis & After (four articles)

To Move to Articles on Venture Capital Fund

"A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC). An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. The invested money in a particular scheme of a Mutual Fund is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. Each Mutual Fund is managed by qualified professional man, who use this money to create a portfolio which includes stock and shares, bonds, gilt, money-market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money.

"Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's.

"Mutual Funds offers several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund.1

1Source: Website of "eastindiavyapaar.com"

Mutual Funds - Scope for Growth and Development in India

Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitive functioning with the dedicated goal of service to the investors can be said to have settled in India only in 1993. However the industry took its roots much earlier with the setting up of the Unit Trust In India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs.72,333.43 Crores as of March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.

Growth of Mutual Fund Business in India

The Indian Mutual fund business has passed through three phases. The first phase was between 1964 and 1987, when the only player was the Unit Trust of India, which had a total asset of Rs. 6,700/- crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to Rs. 61,028/- crores at the end of 1994 and the number of schemes were 167. The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund. The share of the private players has risen rapidly since then.

Within a short period of seven years after 1993 the growth statistics of the business of Mutual Funds in India is given in the table below:

Net Assets of Mutual Funds as at 3l.03.2000
[Source: Website of SEBI]

The net assets of all domestic schemes of mutual funds were Rs.1,07,946.10 crores as on March 31, 2000 as against Rs. 68,193.08 crores as on March 31, 1999 . The details are given below :

    Amount
(Rs Crs)
Percentage
(%)
UTI 72,333.43 67.00
Public Sector 10,444.78 9.68
Private Sector 25,167.89 23.32
Total 1,07,946.10 100.00

During the year 1999-2000, the share of UTI in the total assets of the mutual funds industry has declined to 67% from 77.9% in 1998-99. Net assets of other public sector mutual funds have also shown a decline from 12.09% in 1998-99 to 9.68% in 1999-2000. However, net assets of private sector mutual funds have increased from 9.97% in 1998-99 to 23.32% in the year 1999-2000.

There are 34 private Mutual Funds in the fray and they have seized about 25% of the market share in the brief period of 7 years, mobilising above Rs.25000 Crores from the public

Scope for Development of Mutual Fund Business in India

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. India has a burgeoning population of middle class now estimated around 300 million. A typical Indian middle class family can have liquid savings ranging from Rs.2 to Rs.10 Lacs today. Investments in Banks are liquid and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer attractive. At best a part can be saved in bank deposits, but what is the other sources of investment for the common man? Mutual Fund is the ready answer. Viewed in this sense globally India is one of the best markets for Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies compete with one another in setting up insurance and mutual fund business units in India. The sheer magnitude of the population of educated white collar employees provides unlimited scope for development of Mutual Fund Business in India.

The alternative to mutual fund is direct investment by the investor in equities and bonds or corporate deposits. All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and maximises returns.

The Advantages of Investing in a Mutual Fund

The advantages of investing in a Mutual Fund are:

  1. Professional Management
    The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

  2. Diversification
    Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

  3. Convenient Administration
    Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

  4. Return Potential
    Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

  5. Low Costs
    Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

  6. Liquidity
    In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.

  7. Transparency
    You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

  8. Flexibility
    Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

  9. Choice of Schemes
    Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

  10. Well Regulated
    All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

In the following chapters we propose to discuss all relevant information about Mutual Funds in India, the regulatory and legal structure governing them that a common investor ought to know. The literature is mostly drawn from the website of SEB, but suitably tabulated to provide ready information.


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