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Mmf Industries

Over view of Mutual Fund Industry in India

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Over view of Mutual Fund Industry in India

Introduction-

The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit loadual earnings) and may also levy other fees and sales commission (called 'load') if units are bought from a financial advisor. The term 'mutual fund' has no legal bearing, and may be referred to as unit investment trust in the US and unit trust in the UK and other British Commonwealth countries.

History of mutual fund in India-

The concept of mutual funds was introduced in India with the formation of Unit Trust of India in 1963. The first scheme launched by UTI was the now infamous Unit Scheme 64 in 1964. UTI continued to be the sole mutual fund until 1987, when some public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India set up mutual funds. It was only in 1993 that private players were allowed to open shops in the country. Today, 32 mutual funds collectively manage Rs 6713575.19 cr under hundreds of schemes.

Elements of mutual funds-

A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. All mutual funds except UTI functions under Sebi (Mutual Fund) regulations 1996.

The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme.

Classification of mutual funds in India-

1. Open-ended funds: Investors can buy and sell units of open-ended funds at NAV-related price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Open-end funds also offer liquidity to investments, as one can sell units whenever there is a need for money.

2. Close-ended funds: These funds have a stipulated maturity period, which may vary from three to 15 years. They are open for subscription only during a specified period. Investors have the option of investing in the scheme during initial public offer period or buy or sell units of the scheme on the stock exchanges. Some close-ended funds repurchase the units at NAV-related prices periodically to provide an exit route to the investors.

3. Interval Funds: These funds combine the features of both open and close-ended funds. They are open for sale and repurchase at a predetermined period.

4. Growth funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Growth schemes are ideal for investors with risk appetite.

5. Income funds: As the name suggests, the aim of these funds is to provide regular and steady income to investors. They generally invest their corpus in fixed income securities like bonds, corporate debentures, and government securities. Income funds are ideal for those looking for capital stability and regular income.

6. Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest their corpus in both equities and fixed income securities as indicated in the offer documents. Balanced funds are ideal for those looking for income and moderate growth.

7. Money market funds: These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes hinges on the interest rates prevailing in the market. MMFs are ideal for corporate and individual investors looking to park funds for short period.

8. Tax saving schemes: Tax saving schemes or equity-linked savings schemes offer tax rebates to investors under section 88 of the Income Tax Act. They generally have a lock-in period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments.

9. Special schemes: These schemes invest only in the industries specified in the offer document. Examples are InfoTech funds, FMCG funds, pharma funds, etc. These schemes are meant for aggressive and well-informed investors.

10. Index funds: Index Funds invest their corpus on the specified index such as BSE Sensex, NSE index, etc. as mentioned in the offer document. They try to mimic the composition of the index in their portfolio. Not only are the shares, even their weight age replicated. Index funds are a passive investment strategy and the fund manager has a limited role to play here. The NAVs of these funds move along with the index they are trying to mimic save for a few points here and there. This difference is called tracking error.

11. Sector specific schemes: These funds invest only specified sectors like an industry or a group of industries or various segments like ‘A' Group shares or initial public offerings.

Features of mutual funds in India-

Affordability: Mutual funds allow you to start with small investments. For example, if you want to buy a portfolio of blue chips of modest size, you should at least have a few lakhs of rupees. A mutual fund gives you the same portfolio for meagre investment of Rs 1,000-5,000. A mutual fund can do that because it collects money from many people and it has a large corpus.

Professional management: The major advantage of investing in a mutual fund is that you get a professional money manager for a small fee. You can leave the investment decisions to him and only have to monitor the performance of the fund at regular intervals.

Diversification: Considered the essential tool in risk management, mutual funds makes it possible for even small investors to diversify their portfolio. A mutual fund can effectively diversify its portfolio because of the large corpus. However, a small investor cannot have a well-diversified portfolio because it calls for large investment. For example, a modest portfolio of 10 blue-chip stocks calls for a few a few thousands.

Convenience: Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about the investment decisions or they do not have to deal with their brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plan, children's plan, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work.

Cost effectiveness: A small investor will find that a mutual fund route is a cost effective method. AMC fee is normally 2.5% and they also save a lot of transaction costs as they get concession from brokerages. Also, they get the service of a financial professional for a very small fee. If they were to seek a financial advisor's help directly, they may end up pay more. Also, the size of the corpus should be large to get the service of investment experts, who offer portfolio management.

Liquidity: You can liquidate your investments anytime you want. Most mutual funds dispatch checks for redemption proceeds within two or three working days. You also do not have to pay any penal interest in most cases. However, some schemes charge an exit load.

Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. You also have the advantage of capital gains taxation. Tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. Investments up to Rs 10,000 in them qualify for tax rebate.

Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and Sebi monitors their actions closely.

Conclusion-

We can now conclude on the above said discussion that the mutual fund pool money from investors and invest in shares and income earn from the shares distributed between the account holders according to their share of holdings. Indian mutual fund industry is sound and effective in case of investor's point of view.

References-

1. Business dictinery.com
2. AMFI
3. SEBI
4. RBI

Chinmoy ghosh.

About the Author

Chinmoy ghosh
Lecturer-accounting

Breaking open a safe with strength?

I bought a cheap lock w/key fireproof safe not too long ago (it was around $20) and I was testing it out by unlocking and locking it repeatedly because I'm paranoid and there are very important documents in there. Then I tried one more thing: attempting to break it open with strength to see if someone can actually get into it that way without the key. I broke it open with fair effort. Now that I know my documents won't be safe, please recommend some good, strong safes that are under $80 and can be bought in stores, not online or ebay.

That sort of safe would work fine, just attach it firmly to the floor or a wall in at the back of a cupboard or somewhere where you cannot get enough leverage to force it open.

But it sounds like it is just to stop whatever you put in it from being burnt in a fire, get a heavy duty safe and it is unlikely that anyone would be able to force it open with their bare hands.

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