An Overview Of Indian Mutual Funds

Introduction

Mutual Funds have gained a lot of popularity over the last few years. People favor MFs to bank deposits, life insurance and even bonds for the reason that with a little money, they can get into the investment game. Moreover, the generally accepted goals of the small investors – the protection of principal, the maintenance of income and appreciation of principal are achieved when their savings are invested in MFs. One can possess a string of blue chips like ITC, TISCO, Reliance etc., through them.

MFs basically act as an intermediary between the investor and capital markets. The business of MF is to re-invest in any scrip in the market, and prove their performance through returns to investors. Hence, they are useful in spreading risks and optimizing returns.

History of Mutual Funds

The formal origin of MFs can be traced to Belgium where Society Generale de Belgique, was established in 1822 as an investment company to finance investments in national industries with high associated risks. But the real credit of introducing the modern day concept of MFs goes to the Foreign and Colonial Government Trust of London established in 1868.

The idea of MFs in India was born out of the far-sighted vision of Sri T. Krishnamachari, the then Finance Minister. MFs began to take shape in India with the establishment of Unit Trust of India (UTI) in the year 1963. UTI had twin objectives of mobilizing household savings and investing the funds in the capital market for industrial growth. The first scheme launched by UTI was Unit-64.

The year 1987 marked the entry of non-UTI, public sector MFs. SBI MF was the first non-UTI MF established in 1987.

In the year 1993, the MF industry was opened to the private domestic and foreign players. The Modis, Birlas, Mahindras, Tatas, among others jumped on to the fund wagon. Other players like Jardine Fleming, George Soros, and Capital International also joined the party and the number of MF houses went on increasing. The Kothari Pioneer MF (now merged with Franklin Templeton) was the first private sector MF registered in July 1993.

The second half of the 1990s saw the commencement of numerous new types of schemes in India, particularly by the private sector funds. UTI In 1994 launched the First retirement benefit plan, and Kothari Pioneer MF (KMPF) launched the first pension plan in 1996. During 1997-2000, several gilt funds, government securities funds and liquid funds were launched.

SEBI notified regulations for the MFs in 1993 under which all MFs (except UTI) were to be registered and governed. The regulations were fully revised in 1996 and have been amended thereafter from time to time to protect the interests of investors.

What is Mutual Fund?

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 define ‘mutual fund’ as “a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments”.

A MF is an entity that consolidates the savings of a number of investors who share a common investment objective by issuing ‘units’ to them and then professionally managing investments on their behalf.

The collected funds are invested in capital market instruments such as shares, debentures, bonds and other securities in accordance with the objectives as disclosed in the offer document. This diversified investment pattern ensures investors a triple benefit of steady return and capital appreciation along with low risk.

The ‘unit-holder’ gets a proportional share of the fund’s gains, losses, income and expenses. Thus, a MF is the most suitable investment for the small and middle-income groups as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

At this point in time, one should not confuse a MF investment on units with that of an investment on equity shares. Investment on equity shares represents investment in a particular company alone. On the other hand, investment on a unit of a fund represents investment in the parts of shares of a large number of companies.

Mutual Fund Selection

Following must be taken into consideration before the final selection of any fund:

• Investor should make sure that the fund matches his objectives and budget
Investor should read through the offer documents and check to see whether the MFs identified meet his budget and investment needs (in terms of equity share and bond weightings, tax benefits offered, dividend payout policy, sector focus, etc.)

• Evaluation of past performance to look for consistency
Past performance is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives. The investor should measure the performance of a fund over a period of at least three years. Consistency of a fund indicates its investment expertise.

• Surety regarding credentials
Investment in funds should be made only after they have established a track record. It is in accordance with the maxim “A known devil is better than an unknown angel”.

• Consideration of the Fund Costs
Management fees, annual expenses of the fund and sales loads can take away a significant portion of the returns. Hence, the prospective investor should carefully examine the expense ratio of the fund and compare it with others. Higher the ratio, lower will be the actual returns.

• Transparency of the Fund Management
Transparency is reflected in the quality and frequency of fund’s communications with the investors. It is very important that the fund should reveal the complete details regarding the operation of the fund.

• Investor Servicing
Investor should look at the customer services on offer and evaluate how prompt and efficient they are. Customer services include response to investor queries, dispatch of unit certificates, transfer of units, encashment of units, etc. It is the quality of services which becomes the deciding factor.

• Prevailing Market Trends
Market trends involve stock market index, interest rate and the inflation rate. A prudent investor must keep an eye on these as they indicate investors when to enter into the funds and when to come out of it.

Mutual Funds Market in India

MFs market in India is mainly comprised of individuals with a service, business or professional background. Investors here are generally risk-averse. They have a major preference for assured income schemes, plus schemes with insurance as a secondary benefit.

The popularity of equity schemes in India is on a rise but still income-cum-growth funds are quite popular among investors. Investors give past performance a lot of weightage while making an investment decision. Other factors like reputation of the fund manager, swiftness in servicing, and agents’ view also have a significant influence on the investors’ decision-making.

There is a great prospect for the expansion of MFs industry in India since the up-and-coming domestic savings market is huge and also it is going to be supported by the inflow of overseas savings. However, boosting confidence among investor through improved investment performance, appropriate communication, investors’ education, quality servicing, etc. is a must from funds’ point of view. Also MFs need to promote new intermediaries as well as new products to take the full advantage of the market potential.

Making Mutual Funds better

• The reasons for poor performance of a scheme must be brought to the notice of the investors.

• MF regulations must also cover the fund managers as well as the management activities.

• SEBI should make it compulsory for MFs to disclose all information pertaining to the technical knowledge and related experience of the fund managers.

• There should be some penalties for negligence, motivated stock selection and fraudulent practices on the part of the fund managers.

• SEBI should introduce a system of certification for fund managers. The certificate should also impose certain obligations and prohibit malpractices like personal holdings, trading related to insider information, etc.

• SEBI must make it mandatory for all funds to incorporate information such as investment strategies, asset allocation, stock selection, and turnover strategies in their offer documents.