Meaning • A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities • A diversified portfolio of securities invested on behalf of a group of investors and professionally managed. Individual investors own a percentage of the value of the fund represented by the number of units they purchased and thus share in any gains or losses of the fund • An investment company that pools the money of a large group of investors and purchases a variety of securities to achieve a specific investment objective.
Meaning • Mutual funds are investment companies whose job it is to handle their investors’ money by reinvesting it into stocks, bonds, or a combination of both. Mutual funds are divided into shares and can be bought much like stocks, allowing mutual funds to have a high liquidity
History of mutual funds • In 1774, a Dutch merchant invited subscriptions from investors to set up an investment trust by the name Eendragt Maakt Magt. • This means “unity creates strength” with the objective of providing diversification at low cost to small investors.
History of mutual funds • The Foreign and Colonial Government Trust formed in London in 1868 promised “the investor of modest means the same advantages as the large capitalist by spreading the investment over a number of stocks. • The formation of Massachusetts investors Trust in the US. In 1924 started a chain of events that brought mutual funds to the American homes.
History of mutual funds • From 80 schemes in 1940 with $500 million in assets the mutual fund industry has multiplied to 160 schemes with $ 17 billion in 1960. • 70’s saw introduction of various schemes. • By the end of 70,s there were 524 schemes $ 95 billions in assets in the US.
Mutual funds - concept • A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. • The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.
Mutual funds - concept • The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. • Thus 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.
History of mutual funds the Indian perspective • 1963 UTI is India's first mutual fund. • 1964 UTI launches US-64. • 1971 UTI’s ULIP (Unit Linked Insurance Plan) is second scheme to be launched. • 1986 UTI Mastershare, India’s first true mutual fund scheme launched. • 1987 PSU banks and insurers allowed to float mutual funds., SBI the first of the block
History of mutual funds the Indian perspective • 1987 PSU banks and insurers allowed to float mutual funds., SBI the first of the block. • 1992 the Harshad Mehta fuelled bull market arouses middle-class interest in shares and mutual funds. • 1993 Private sector and foreign players allowed • Kothari Pioneer first private fund house to start. • SEBI set up to regulate industry.
History of mutual funds the Indian perspective • 1994 Morgan Stanley is the first foreign player. • 1996 Sebi’s mutual fund rules and regulations came into force. • 1998 UTI Master Index Fund is the country’s first index fund. • 1999 the takeover of Century AMC by Zurich Mutual Fund is the first acquisition in the mutual fund industry.
History of mutual funds the Indian perspective • 2000 The industry’s assets under management crosses Rs.1,00,000 crore. • 2001 US-64 scam leads to UTI overhaul. • 2002 UTI bifurcated, comes under SEBI purview.
History of mutual funds the Indian perspective . Mutual fund distributors banned from giving commissions to investors. • Debut of floating rate funds and foreign debt funds. • AMFI certification made compulsory for new agents.
History of mutual funds the Indian perspective • March, 2004, 31 fund houses were managing Rs. 1,40,000 crore of investor money in India. • Of this 80% was being managed by private funds. • The US figures indicate that 91 million individuals have invested $ 7.4 trillion in mutual funds.
History of mutual funds the Indian perspective • Every second household has entrusted some savings to mutual funds than in banks. • By comparison mutual funds acceptance in India is very poor. • According to Sebi-NCAER survey in 2000-01, just 11.8 million households, 13.7% urban 3.8% of rural had invested in mutual funds
History of mutual funds the Indian perspective • Retail investors in India held nine times more money in bank deposits than in mutual funds.
Agencies behind the mutual fundsponsor • What a promoter is to a company, a sponsor is to a mutual fund. • The sponsor initiates the idea to set up a mutual fund. • It could be a financial services company, a bank or a financial institution. • It could be Indian or foreign.
Agencies behind the mutual fundsponsor • It could do it alone or through joint venture. • To open a mutual fund in India sponsor needs to take license from sebi. • For this it has to satisfy certain conditions on: • capital and profits, • track record at least for last five years, • Default free dealings and • A general reputation for fairness.
Agencies behind the mutual fundsponsor • Like the company promoter, the sponsor takes major strategic decision leaving money management and other nitty gritty to the other constituents whom it appoints. • The sponsor should inspire confidence in your and preferably be profitable. • Financial muscle complimented by good fund management schemes helps because money then in not an impediment.
Agencies behind the mutual fundsponsor • This facilitates hiring of best talent , invest in technology and continuously offer high service standards to investors. • In the days of assured return schemes, sponsors also had to fulfill return promises made to unit holders. • This sometimes meant meeting shortfalls from their own pockets, as the government did for UTI>
Agencies behind the mutual fundsponsor • All things being equal one needs to choose sponsors who are good money managers, who have a reputation for fair business practices and who have deep pockets.
Agencies behind the mutual fundAsset management company • An AMC is a legal entity formed by the sponsor to run a mutual fund. • It is the AMC that employs fund managers and analysts and other personnel. • It is the AMC that handles all operational matters of a mutual fund – from launching schemes to managing them to interacting with the investors.
Agencies behind the mutual fundAsset management company • The people in the AMC who should matter the most to the investors are those who take investment decisions. • There is the head of the fund house, generally referred to as the chief executive officer (CEO). • Under him comes the chief investment officer (CIO) who shapes the funds investment philosophy.
Agencies behind the mutual fundAsset management company • Under him also work fund managers who manage the scheme. • The fund managers are assisted by a team of analysts who track markets, sectors and companies.
Agencies behind the mutual fundAsset management company • Although these people are employed by AMC, it is the unit holder who pays their salaries partly or wholly. • Each scheme pays the AMC an annual “fund management fee” which is resulted to the scheme size and results in corresponding drop in your return
Agencies behind the mutual fundAsset management company • For example if a schemes corpus is Rs.100 crores. • It pays 1.25% of the corpus a year. • Above 100 crores it pay 1% of corpus.. • So if a fund house has two schemes with a corpus of Rs.100 crores and Rs.200 crores respectively, • The AMC will earn Rs.3.25 croes as fund management fee for that year.
Agencies behind the mutual fundAsset management company • If an AMC’s expenses for the year exceed what it earns as fund management fee from its schemes, the balance has to be met by the sponsor. • A cash rich sponsor can easily pump in money to meet shortfalls, while a sponsor with less financial clout might force the AMC to cut costs. • This may result into an exercise in cutting corners.
Agencies behind the mutual fundTrustees • Trustees are like internal regulators in a mutual fund. • Their job is to protect the interests of unit holders. • Trustees are appointed by sponsors. • They can be either individuals or corporate bodies. • In order to ensure they are impartial and fair, Sebi rules mandate that at least two thirds of the trustees are independent.
Agencies behind the mutual fundTrustees • In order to ensure they are impartial and fair, Sebi rules mandate that at least two thirds of the trustees are independent. • That is they do not have any association with the sponsor. • Trustees appoint the AMC, which subsequently seeks their approval for the work it does.
Agencies behind the mutual fundTrustees • The AMC periodically reports to the trustees about the state of affairs. • Trustees float and market schemes and obtain necessary approvals. • They check if AMC’s investments are within defined limits and whether the funds assets are protected. • Trustees can be held accountable for financial irregularities in the mutual fund.
Agencies behind the mutual fundCustodian • A custodian handles the investment back office of the mutual fund. • Its responsibilities include: • Receipt and delivery of securities, • Collection of income, • Distribution of dividends and • Segregation of assets between schemes.
Agencies behind the mutual fundCustodian • The sponsor of the mutual fund cannot act as custodian of the mutual fund. • This condition, formulated in the interests of the investors, ensures that the assets of the mutual funds are not in the hands of the sponsor.
Agencies behind the mutual fundRegistrar • Registrars also known as transfer agents, handle all investor related services. • This includes issuing and redeeming units, sending fact sheets and annual reports. • This service can either be in house or can be outsourced.
Basic principlesopen/closed-ended schemes • Based on the accessibility they provide investors, mutual fund schemes can be classified into ‘open ended’ and ‘closed ended’. • Open-ended schemes, as their name suggests, don’t have a fixed tenure and are always open for investment. • One can invest in them any time and also withdraw at any time.
Basic principlesopen/closed-ended schemes • This ease of entry and exit makes it a popular choice among both mutual funds and investors. • Closed-end schemes, on the other hand, are of fixed tenure, which is stated at the time of their birth itself. • Such schemes invite subscriptions only once during their lifetime, at the time of launch.
Basic principlesopen/closed-ended schemes • Further you can sell your units in the market. • Most closed ended schemes are listed on the stock exchanges. • But it is unlikely that one will realize a fair price.
Basic principlesopen/closed-ended schemes • It is due to the reason that most closed-end schemes trade at prices below their true value and have low liquidity. • That is why closed ended schemes are dying .
Basic principlescorpus • Investing in a scheme is a simple process. • Just walk into any office of the mutual fund or that of its representative, fill up a short and simple form and hand over a cheque. • Your money gets added to the pool already with the scheme, given to it by numerous other investors.
Basic principlescorpus • The total money available with the scheme at any point of time is referred to as ‘corpus’. • The mutual fund on the investors and other investors invests this corpus in various securities, in line with its stated objectives.
Basic principlesunit • The mutual fund issues the investor ‘units’. • A unit is the currency of a fund. • What a share is to a company, a unit is to a fund.
Basic principlesnet asset value (NAV) • The investor is allotted units on the basis of the scientific pricing mechanism. • This price, measure per unit, is called the net asset value (NAV) of the unit. • Just as a share or a bond is bought at a price, the unit is bought and sold at NAV.
Basic principlesnet asset value (NAV) • For example one is to invest Rs.10,000 in a scheme when its NAV is Rs.10. • The investor would be allotted 1000 units roughly. • It is said roughly because the fund charges a nominal processing fee. • The NAV of any scheme tells how much each unit of it is worth any point in time, and is therefore the simplest measure of how it is performing.
Basic principlesnet asset value (NAV) • A schemes NAV is its net assets. • Net assets is the market value of the securities it owns minus whatever it owes. • The net assets divided by the no. of units gives the NAV. • A schemes NAV is a dynamic figure.
Basic principlesnet asset value (NAV) • The market value of a scheme’s portfolio changes from day to day, as prices of shares and bonds move up or down. • The number of units outstanding also changes, as new investors come into the scheme and old ones leave. • If the NAV of your scheme rises from Rs.10 to Rs.11 over a period of time, your scheme is said to be have generated a return of 10%
Basic principlesnet asset value (NAV) • Similarly, if its NAV falls from Rs.10 to Rs.9, it is said to have lost 10%. • Fund houses have to calculate and disclose the NAVs of their schemes daily. • Fund NAVs can be easily looked up. • While the general dialies give a random listing of schemes, the financial papers are more exhaustive in their coverage.
Basic principlesnet asset value (NAV) • NAV information is also available on websites, of the mutual fund concerned and of independent data providers. • When invested in a scheme, its NAV is the figure to track, as it quantifies its returns, and your purchase price and sales price will be based on it.
Basic principlesLoad • Although the NAV represents a scheme’s current market value, it is not the exact price at which the investor enters or exits the scheme. • Fund houses levy a nominal charge, on most of their schemes to meet their processing costs and to discourage investors from leaving.
Basic principlesLoad • This charge is referred to as ‘Load’ and it is the price one pays over and above the funds NAV when you buy or sell units. • One pays ‘entry load’ at the time of buying and ‘exit load’ at the time of selling. • Loads are always expressed as a percentage of the NAV, which places fewer units in your hands.
Basic principlesLoad • An exit load decreases your NAV which reduces your sales proceeds. • For example, a scheme has a NAV of Rs.10 and it levies an entry and exit load of 1%(10 paisa) each. • Hence when one buys units, he will pay Rs.10.1 (10+0.10) per unit and not Rs.10.