Performance Of A Mutual Fund Scheme example essay topic

Scope of Mutual Funds in India "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 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.

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: 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.

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. 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. 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.

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

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.

Organisation Structure of the Unit Trust of India "Unit Trust of India (UTI), which has a structure different from the three tiered structure of other mutual funds in India was established by the Government of India to encourage private savings and investment. It was formed under a special Act of Parliament, viz. The Unit Trust of India Act, 1963 as a corporate body. The promoter-sponsor of UTI is the Government of India through the Reserve Bank and Financial institutions. In the true sense however they were the only owners of the initial units of the UTI. The UTI Act provides that the general superintendence, direction and management of the affairs and business of the Trust shall vest in a Board of Trustees which may exercise all 'powers and do all acts and things which may be exercised or done by the Trust".

The Board of Trustees comprises nominees of the Central Government, RBI, IDBI, LIC SBI, participating financial institutions and an Executive Trustee to be appointed by IDBI. The UTI Act stipulates that there shall be an Executive Committee which shall consist of The Chairman of the Board, Executive Trustee and two other Trustees. Subject to such general or special directions as the Board may from time to time give, the Executive Committee shall be competent to deal with any matter within the competence of the Board of Trustees. The Executive Committee in effect, performs the asset management functions. Thus, the activities of the Executive Committee which itself comprises members of the Board of Trustees, are overseen by the Board of Trustees themselves. In matters involving public interest, the Central Government and the Reserve Bank of India have powers to give directions.

"The management structure of UTI is thus distinct from the remaining mutual funds in more than one way. First, unlike other mutual funds, it is a statutory body corporate and not a Trust under the Indian Trusts Act. Second, there is no separate asset management company with a separate Board of directors of AMC to manage the schemes. The functions of the Board of directors of AMC, and Trustees are combined in the Executive Committee and Board of UTI. The Sponsors exist in the form of Government and IDBI, though they do not hold any equity in the Trustee company or AMC for none exists.

SEBI at present regulates UTI through a special regulatory dispensation effective from July 1, 1994 which inter alia requires UTI to file offer documents in accordance with the SEBI (Mutual Funds) Regulations and allows SEBI to inspect UTI. This arrangement in SEBI's view is only an intermediate step and according to SEBI, it would be desirable to amend or repeal the UTI Act to bring UTI and other mutual funds under a common regulatory framework. In the meanwhile UTI has set up three separate asset management Committees as directed by SEBI"2. Recent changes in UTI set-up are discussed in a subsequent article Organisation Structure of Mutual Funds of Public Sector Banks "When the public sector banks were allowed to set up mutual funds, the first mutual fund was set up by the State Bank of India in 1987 prior to the establishment of SEBI. State Bank of India preferred to adopt the Trust route and set up the mutual fund as a Trust under the Indian Trust Act 1882. Other mutual funds followed suit and thus Trusts set up under the Indian Trusts Act came to be the adopted legal form of mutual funds in India.

The author or Settlor of the Trust came to be principal Trustee and also functioned as the fund manager. "These mutual funds combined the role of Trustee, fund manager and custodian in the sponsoring bank. There was little demarcation in the role and responsibilities and the structure was open to conflict of interests. "Other mutual funds that were set up later adopted the same pattern and thus, over time, Trusts set up under the Indian Trusts Act became the accepted legal form for establishment of Mutual Funds in India. The author or Settlor of the Trust became the principal Trustee and also functioned as the fund manager. With the establishment of SEBI under the SEBI Act, 1992, mutual funds other than the UTI, were for the first time brought under the regulatory purview of SEBI.

At that time, no special legislation similar to the UTI Act existed under which the mutual funds could be incorporated. Historically, SEBI found that mutual funds had been set up by public sector banks adopting the trust route because using the route of the Companies Act appeared to be more complex as it could have also led to multiple regulatory jurisdiction. Sufficient information is not available as to whether, at this stage, a rigorous examination of the advantages and disadvantages of the two alternative routes were undertaken or not. Nonetheless, the SEBI (Mutual Funds) Regulations provided for setting up of mutual funds as Trusts under the Indian Trusts Act of 1882. It may not be out of place to mention that the Indian Trusts Act of 1882 was enacted to govern private Trusts and envisaged a different manner of conduct and supervision of operations. Quite clearly, it did not at that time take into account the nature of activities that will be involved in the functioning of mutual funds.

"SEBI, while framing the Mutual Fund Regulations, gave a lot of consideration to two major factors, one, that mutual funds garner large moneys from the pubic for investment in a dynamic market place which require specialisation on the part of persons performing these functions. Secondly, there could arise potential conflicts of interest which were to be avoided by ensuring arm's length relationship between various functionaries. Such stipulation of arm's length relationship ensures that the person who performs a function is answerable to another and does not assess or judge his own performance. The Regulations stipulated a three tiered structure of entities for carrying out different functions of a mutual fund, but placed the primary responsibility on the trustees. Internationally, irrespective of the route adopted, a three tiered structure exists and there is a segregation between the responsibility of fund management and the trustee or supervisory responsibility.

"Considering the inherent fiduciary nature of the functions, arm's length relationships were sought to be built into the various constituents of a mutual fund, primarily through separate entities and delineating the role and responsibility of the asset management companies and the Trustees and regulations on affiliate transactions. Arm's length relationships were also expected to be achieved by requiring a certain proportion of Trustees to be independent of the sponsor, requiring independent directors on the board of the AMC and requiring an independent custodian to be appointed". What is an asset management company (AMC)? The trustee delegates the task of floating schemes and managing the collected money to a company of professionals, usually experts who are known for smart stock picks. This is an asset management company (AMC). AMC charges a fee for the services it renders to the MF trust.

Thus the AMC acts as the investment manager of the trust under the broad supervision and direction of the trustees. The AMC must have a net worth of at least Rs 10 crores at all times and it can not act as a trustee of any other mutual fund. Who is a custodian? The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd. (S CHIL) is the custodian for most fund houses in the country.

What is the difference between mutual funds and portfolio management services (PMS)? While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high net worth investors, while in the case of mutual funds the target investors include the retail investors. Further, in case of PMS the investments of each investor are managed separately, while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in which the investments are made by the investors / unit holders. Moreover, the investments of the PMS are managed taking the risk profile of individuals into account.

In mutual fund, the risk is pooled depending on the objective of a scheme. How to know the performance of a mutual fund scheme? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers.

The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) web and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns / yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unit-holders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance.

Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

How to know where the mutual fund scheme has invested money mobilised from the investors? The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unit-holders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV.

These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NP As), etc. Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes. Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company? Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment.

A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed. If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV? Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs.

Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below. Suppose scheme A is available at a NAV of Rs. 15 and another scheme B at Rs. 90.

Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs.

NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs.

9,900 (600 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100 99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision.

Likewise, if a new equity oriented scheme is being offered at Rs. 10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weight age to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently. How to choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision.

In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts. Are the companies having names like mutual benefit the same as mutual funds schemes? Investors should not assume some companies having the name "mutual benefit" as mutual funds.

These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds. Is the higher net worth of the sponsor a guarantee for better returns? In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund.

However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls. Where can an investor look out for information on mutual funds? Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) web AMFI has also published useful literature for the investors.

Investors can log on to the web site of SEBI web and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested? In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unit-holders are entitled to receive a report on winding up from the mutual funds which gives all necessary details. Your Rights as a Mutual Fund Unit-holder As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, you are entitled to: Receive unit certificates or statements of accounts confirming your title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund; Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme; Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase; Vote in accordance with the Regulations to: either approve or disapprove any change in the fundamental investment policies of the scheme which are likely to modify the scheme or affect your interest in the Mutual Fund; (as a dissenting unitholder, you would have a right to redeem your investments); change the asset management company; wind up the schemes. Inspect the documents of the Mutual Funds specified in the scheme's offer document. In addition to your rights, you can expect the following from Mutual Funds: To publish their NAV, in accordance with the regulations: daily, in case of most open ended schemes and periodically, in case of close-ended schemes; To disclose your schemes' portfolio holdings, expenses, policy on asset allocation, the Report of the Trustees on the operations of your schemes and their future outlook through periodic newsletters, half- yearly and annual accounts; To adhere to a Code of Ethics which require that investment decisions are taken in the best interests of the unitholders.

How to Invest in Mutual Funds Step One - Identify your investment needs Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions: What are my investment objectives and needs? Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs. How much risk am I willing to take?

Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short-term loss in order to achieve a long-term potential gain. What are my cash flow requirements? Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don't require a current cash flow but I want to build my assets for the future. By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund investment strategy. Step Two - Choose the right Mutual Fund. Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in.

The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are: the track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category. how well the Mutual Fund is organised to provide efficient, prompt and personalised service. degree of transparency as reflected in frequency and quality of their communications. Step Three - Select the ideal mix of Schemes. Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. The charts could prove useful in selecting a combination of schemes that satisfy your needs.

Step Four - Invest regularly For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you.

Step Five - Keep your taxes in mind If you are in a high tax bracket and have utilised fully the exemptions under Section 80 L of the Income Tax Act, investing in growth funds that do not pay dividends might be more tax efficient and improve your post-tax return. If you are in a low tax bracket and have not utilised fully the exemption available under Section 80 L, selecting funds paying regular income could be more tax efficient. Further, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant for specific advice.

Step Six - Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return. Step Seven - The final step All you need to do now is to get in touch with a Mutual Fund or your agent / broker and start investing.

Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor-whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking. a look at the emerging trends in the mutual funds market in india.