CHAPTER I INTRODUCTION OF MUTUAL FUND

Transcription

1 1 CHAPTER I INTRODUCTION OF MUTUAL FUND Introduction: Financial institutions, Banks and other Agencies setup of financial intermediaries is required to mobilize the savings of the society, and investing rationally for economic development. In our country, India firstly Unit Trust of India was set-up by the Central Govt. under the UTI Act, 1963 with an objective of mobilizing savings of middle and lower income groups and providing those opportunities to acquire property in the form of Equity shares. As growth of UTI took place during the period when the economy was under a control regime and securities markets were irrelevant to industrial growth as the financial intuitions were the major purveyors of long-term finance. Private sector mutual funds have benefited the investors by providing them more options and better services. There are 42 mutual funds operating with a wide branch network in our country. The present state of mutual funds, their performance, profitability and decline of NAVs below issue prices have been causing concern to the investors. As result of the liberalization and globalization created a fervent environment in our country and several small investors participated in the equity of the corporate sector. The investors who subscribed to equity shares issued at high premium, after abolition of the office of the Controller of the Capital Issues, have lost their investments as the market prices of such shares are prevailing at very low rates or not quoted at all. SEBI has raised the amount of minimum subscription in public issues and shifted to compulsory trading of securities in dematerialized form through depositories. Due to the changing present scenario for the investment in various sectors the one of the sectors i.e., investment in the new vista mutual funds. In respect of mutual

2 2 funds how alternate opportunity of gain in income through investment and to study the increase in the net asset value. Also there are so many problems of mutual funds such as problems of structure, problems of investors. Problems of return on investment, risk, liquidity, low cost, investors have not getting sufficient information about investment, investor are not aware about the right, there is no proper legal frame work for the function of mutual fund, in the liberalization, privatization, globalization era there is need to study the problems of mutual fund etc. Hence, the topic entitled, A Critical Study of Financial Performance of Mutual Funds is selected Meaning of Mutual funds. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as a a fund established in the form of a trust to raise money 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. According to the above definition, a mutual fund in India can raise resources through sale of units to the public. It can be set up in the form of a Trust under the Indian Trust Act. Mutual Fund is a trust that pools together the resources of investors to make a foray into investments in the capital market thereby making the investor to be a part owner of the assets of the mutual fund. If the value of the mutual fund investments goes up, the return on them increases and vice versa. The net income earned on the funds, along with capital appreciation of the investment, is shared amongst the unit holders in proportion to the units owned by them. Mutual Fund is therefore an indirect vehicle for the investor investing in capital markets. A Mutual fund is an organization (in India this organization must be in the form of a trust) that pools the savings of a number of investors called as unit holders who share common goal. The money thus collected is invested by the professional fund manager s indifferent types of securities depending upon the objectives of the scheme. The return/ loss on investment are shared by the unit holders in proportion to the number of units owned by them.

3 3 Simply, a mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has defined investment objective and strategy. The money thus collected is then invested by the fund manager in the different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme s stated objectives. The income earned through these investments and the capital appreciation realised by the scheme 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. Mutual funds are open-ended investment funds, meaning that new investors can contribute money to the fund at any time, and existing investors can return their units or shares to the fund for redemption at any time, and existing investors can return their units or shares to the fund for redemption at any time. When you redeem your units or shares of a mutual fund you will receive a cheque based on the current market value of the fund s portfolio. Characteristics of a mutual fund Mutual fund belongs to the investors have pooled their fund. Ownership mutual fund in the hand of the investors. Mutual fund is managed by professionals manager and other service provider, who earns or charge fee for their services from the fun. Pool of fund invested in a portfolio of marketable investments or instrument. The value of the portfolio is updated every day as per market trend. Investor s share in the fund us denominated by the unit.

4 4 The value of the units changes with change in the portfolio s value every day as per stock market trend. The value of one unit of investment is called Net Asset Value of (NAV) 01.03Types of Mutual Funds. As mutual fund industry of India is continuously changing as impact of emerging trend, several industry bodies are also investing. Yet, according to a report by Boston Analytics, less than 10% of our households consider mutual funds as an investment avenue. As assumption of the investors that make investment in mutual fund as considered as a high-risk option. However, as it is one of the best options to the investors to make investment in mutual fund. As investment of mutual funds shows that investment in mutual fund is one of the most suitable and flexible, comprehensive modes of investments that can accommodate various types of investor needs. Now day s different types of mutual funds and categories are designed to allow investors to choose a scheme based on the risk. They are willing to take investments amount, their desire goals, as investment term, etc. The different Scheme of mutual fund (Sources:

5 5 As important mutual fund schemes under the under mentioned three categories based on their tenure on maturity period of mutual fund investment: I. Open-Ended - As this is scheme has allows investors to buy or sell units at any time. So, such fund does not have fixed maturity date. 1. Debt/ Income Under this schemes fund have to investments in the fixed income instrument or schemes like debentures or bond, government securities or other debt instruments. Such schemes, a major part of the investable fund are channelized towards debentures, government securities, and other debt instruments. Further, such fund has got fixed income and such funds have low risk as compared investment in equity fund. 2. Money Market/ Liquid Some investors have thing to grab opportunity in the short period. Such investors have surplus funds they have to make investment in the money market to get opportunity looking to utilize their surplus funds in short term instruments. It is possible that to get maximum return in short period. 3. Equity/ Growth As proverb in English like that high risk high return. Those investors to think in respect to maximize return. They offered risky investment like equities mutual fund. As possible appreciation capital and also get more return in coming future. 3. i. Index Scheme Now new engineering in the capital market various schemes have to come in market it is one of the index schemes. However, most schemes of mutual firstly come in the foreign capital market and same concepts in Indian capital market apply for the grab various opportunity indices like Nifty, Sensex, etc. 3. ii. Sectoral Scheme As diversification fund has to investment in different sector. As result sectors funds investment it may possible risk averse and get more return.

6 6 This scheme provides a relatively high risk-high return opportunity within the equity space. Sectors are such as invested in a specific sector like pharmaceuticals, infrastructure, IT., or other, etc. or money market segments of the capital market like large caps, mid caps, etc. 3. iii. Tax Saving Some investors turn towards investments in mutual fund as a twice object like one is tax saving and another to earn some return on investment. As result of these investors has got good opportunity to earn income. Such fund has lock in period 3 years. Tax saving mutual funds called Equity Linked Savings Schemes (ELS). 4. Balanced - Under This scheme the fund s investment in equity growth fund as well as debt fund. So, the both opportunity of market can be avail by the investor s. While funds offer such schemes at that time all information well in advance given in the offers documents. II. Closed-Ended - In India, this type of scheme has contrary of open ended fund. In these schemes investors has buy or made investment in the initial period and has maturing period. As initial launch period known as the NFO (New Fund Offer) period 1. Capital Protection Under this schemes prime objective to protect principal amount of investment. So, the funds have to be investment in less risky funds. As result of that return should be get very minimum or fixed income as specified. 2. Fixed Maturity Plans (FMPs) As FMPs, name suggests that specified maturity period in offered documents. Such schemes like debt an instrument, so the return has got earning through the interest components like coupons of the scrip s or instruments. Moreover, such fund does not have any trading. Similar, such funds have charges minimum cost by professionals. III. Interval The combination of open and closed ended schemes, such schemes permit investors to trade units at specified intervals pre-defined intervals.

7 Benefits of Mutual Funds An investor can invest directly in individual securities or indirectly through a financial intermediary or professional expert. Globally, mutual funds have established themselves as the means of investment for the retail investor. 01. Professional management: Generally, the process of investment in capital market is very critical. Hence, need of expert or to hire the services of expert. A further inventor does not have the knowledge at stock market. They need assist expert or hire the expert. However, while investor have to make investment under mutual fund, at such time the expert of professional to take care while to make investment. Moreover, to hire the services of an expert but it is more difficult to identify a real expert. Professional managers have requisite skills and experience to analyse the performance and potential growth of companies. 02. Portfolio diversification: As minimise of risk of the fund, that funds have to be make diversification of various sectors. As result of these investors has get more return and fund become safe. Diversification reduces the riskiness of the investments. 03. Reduction in transaction costs: While investors have to make directly investments in shares market at that time they have to requires paying more cost. As compared to make an investment in the mutual fund. 04. Liquidity: When investors to sell or redemption the mutual fund unit.they can easily encase their investment. As compared to direct investment in share market. 05. Convenience: Investing in mutual fund reduces paperwork, saves time and makes investment easy. 06. Flexibility: Under Mutual funds investment various schemes that funds have transferred one funds to another as desired by investor. So, as get more benefits to the share holders.

8 8 07. Tax benefits: Under the mutual funds it is income earn though dividend and interest it is exempt from income tax and also TDS of the Income Tax Act. 08. Transparency: As provided in the SEBI guidelines to provide all information and declare all information. All the concern has to get clear information for investment decision and so on. 09. Stability to the stock market: Amount investment in mutual fund that investment in stock market and money market. It is fluctuation continues in stock market it is effect of some extent on invested mutual fund but it is result both positive and negative. Moreover, the funds have handle by professional expert they can absorb any losses in the stock market and continue investment. In addition they get more liquidity. 10. Equity research: As more professionals expert have to continue doing work in mutual fund industry. They continue probe in era of investment. They actual have research information and those benefits had to get AMC Mutual Fund Drawbacks (1) No guarantee of Return There are three issues involved: (a) All Mutual Funds cannot be winners, as continuously fluctuation in stock market simultaneously international impact on capital market. Some investment funds underperform the benchmark index i.e. it may not even perform well. (b) Even stock market perform better but if the fund s investment risk averse fund or risk free investments. Then it is not possibility to get good return or gain to the investors. (c) If, mutual fund investment not take care and investors also not interested to return. On contrary the principal amount of mutual would be decrease in value.

9 9 (2) Diversification A mutual fund helps to create a diversified portfolio. Though diversification minimises risk, it does not ensure maximizing returns. The return that mutual funds offer is less than what an investor can achieve. (3) Selection of Proper Fund It may be easier to select the right share rather than the right fund. For stocks, one can base his selection on the parameters of economic, industry and company analysis. In case of mutual funds, past performance are the only criteria to fall back upon. But past cannot predict the future. (4) Cost Factor Mutual Funds carry a price tag. Fund Managers are the highest paid executives. As investing in mutual fund, as required to pay entry load and while leaving or redemption fund to pay for exit load. Such costs reduce the return or gain from mutual fund. Such fees paid to the AMC are in no way related to performance. (5) Unethical Practices Even though Laws regulation and Act some unfair practice is going on it actual suffer by the common man i.e., investors of mutual funds and substantially decrease value or lessen return or gain Need and Significance of the Study: Financial market of India there is number of investment avenues available today in the financial market for investors. Moreover, it is option to the investor where they invest their money to get return. But, the tendency of people is not bear the risk and investment risk averse fund. As a result they don t get handsome return. It may happen because majority people of our country yet not know more avenues for make investment and got more return than traditional investment. Further, it is noticed that people in a country 120 crore people or 1.2 billion people. However, there are only 4 crore or 40 million or 3.5. % people have made investment in mutual fund. On contrary, in US, every second citizen has investment in mutual fund. The main objective of the study the problems of mutual funds in our State and particularly Nanded District. An extensive field work was undertaken by visiting UTI Mutual Fund, HDFC Mutual Fund, Birla Sun Life Mutual Fund, Reliance Equity

10 10 Opportunities Fund, Axis Mutual Fund, SBI Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mutual Fund, LIC Mutual Fund etc to study the problems of mutual funds. Further, know in details about mutual fund industry growth, future prospects. Similarly know the different scheme of mutual fund. Moreover, to know what are the problem faced by mutual fund industry and also problem faced by investor? However, as for the development of any country it is depend upon how they mobilization of their saving in the manufacturing and service industry. So, whatever saving has made from the mutual fund it has been made investment in capital market. So, it is very important role of mutual fund for development various industry in our country and so on. A Mutual fund is nothing more than a collection of stocks and / or bonds. Mutual fund is beneficiary for the investors. It is essential to study the investment according to the market trends. One can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. Mutual funds are an excellent idea in theory, but, in reality, they haven t always delivered. Primarily, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you d be set on your way to financial freedom. As you might have guessed, it s not that easy. Not all mutual funds are created equal, and investing in mutual isn t as easy as throwing your money at the first salesperson who solicits your business. A mutual fund is a type of professionally-managed collective investment scheme that pools moneys from many investors to purchase securities. While there is no legal definition of mutual funds, the term is most commonly applied only to that collective investment scheme that is regulated, available to the general public and open ended in

11 11 nature. Hedge funds are not considered a type of mutual funds. As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. In fact, too many people, investing means buying mutual funds. After all it s common knowledge that investing in mutual funds is better than simply letting your cash waste away in a savings account, but, for most people, that s where the understanding of funds ends. It doesn t help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don t understand- Mutual funds have become an important and dynamic sector in India s capital market 1, one of the fastest growing sectors in the country s capital and financial markets with an average compound growth rate of 20 percent. SEBI regulations 1993 put it as a fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with these regulations. 2 It was on this note that Premchand Royal hand at Bombay established investment trust in almost all the large industrial concern established investment trust and transferred their surplus funds to them. They were formed under company act providing opportunities for greater diversification of investment and risk was minimized because of vigilance of management. However, these investment companies failed to mobilize household saving and small investors and high proportion of capital belonged to industrial group companies and their families that promoted the Investment Trust / Company. The Committee of finance for private sector in India (1954) the Shroff committee reiterated the desirability of introducing unit trusts in the Indian capital 1 Opinion As Given By Milan Based Moodys Analyst, Enrico Bucalossi, Times of Indias, 16May Rose Joel, Mutual Funds, Taking Worry Out Investing, Prentice Hall, 1998,Pp Verma J.C. Mutual Funds New Delhi Bharat Law House Pvt.1992.

12 12 market 4 they observed that in order to increase capital availability for small industries, small savings had to be drawn into the investment market. This made unit trusts a suitable choice. Thus the committee suggested on introduction of unit trusts both the private and public sectors. In 1963, in an effort to provide an opportunity for middle and lower group to participate in capital markets, the government of India took initiative by passing the UTI Act under which the Unit Trust of India was set up as statutory board. The designed role was to act a mutual funds and the government announced exemptions under the provision of income tax as incentives to investors. In , Indian stock markets witness a boom, which attracted a large number of small investors. The boom was short lived and many companies which mobilized huge resources from small investors disappeared making them in the stock market. The observers of the market felt the need of an institution that mobilized funds from the household sector and provide the benefit of diversification to investors. Moreover, as in the world level has increased investment in mutual fund. As in India 27% as investment from household saving in the mutual fund it is the largest one in the world. Further, the investment whatever made is investment in mutual fund that directly made investments in capital market and it is boost our economy Objectives of the study 01. To know the origin, growth and development of mutual funds. 02. To understand the legal framework of the mutual funds. 03. To understand the behaviour of investors. 04. To study the rate of return on investment in mutual funds. 05. To study the increase in net asset value. 06. To evaluate the performance of mutual funds. 07. To understand the problems of mutual funds industries. 08. To suggest the measures for smooth functioning of mutual funds Hypothesis. 4.Renu Jatana and Kerosi Josephat Bosire Mutual Funds Their hemes and Price Management.

13 13 H1 investments. The mutual funds have failed to provide safety, liquidity and return on H2 H3 The investment in mutual funds is continuously flow of income and NAV. There is increasing trend in the investment in mutual funds Methodology of data collection. The data and information for the study was collected through two main sources i.e., Primary and Secondary sources Primary data Primary data is original data from which the researcher was directly collect data that have not been previously collected. Primary data was first hand information collected through by the way of various methods such as observation, interview & questionnaire Secondary data Secondary data is collected through reference books, RBI Reports & Guideline, SEBI Report, Capital market report, Fact Sheet & fund card of mutual fund industries, AMFI records, Value research records, circulars, financial reports of various banks, publication, journals, newspapers, other Published information, Internet, websites etc. was thoroughly studied in the said research Tools and Techniques of Analysis of data The data collected is analyzed and interpreted through the various statistical and accounting tools and techniques. Such as simple count tables, percentages, growth rates, graphs and pie charts etc Limitation and Scope: There are so many constraints in the research work such as individual researcher, time money, response of the respondent collection of data etc., also there are large number of mutual funds in the India and is it not possible to

14 14 cover the all type of funds and its schemes in India, again there are some other obstacles like The mostly study was based on secondary data. As secondary data shortcoming these data available in graph and table and fact sheet as disclosed by AMC in website. As collection of primary data was collected through questionnaires from Broker, Agent, Manager and Investor were not disclosed whole information and may weakness of the study. As data of sources was considered data may be possibility not disclosed actual fact. Considering the above limitations the area of the study is under taken only Nanded District, and study is conducted of two mutual funds namely 01.Equity fund 02.Debt fund and nine AMC are selected. 1. Unit Trust of India. 2. State Bank of India Mutual Fund 3. Reliance Mutual Fund. 4. Prudential ICICI Mutual Fund. 5. Kotak Mutual Fund. 6. Birla Sun Life Mutual Fund. 7. HDFC Mutual Fund. 8. LIC Mutual Fund. 9. Axis Mutual fund. In this context researcher conducted study of NAV, rate of return, liquidity, risk in investments of the mutual fund.

15 Study Periods. The period for the study was considered of the research as 11 years from to Selection of Nanded District. The research study has been undertaken of Nanded District, as it is the one of backward District in Marathwada. But, as it is one of the faster development districts after Aurangabad District in Marathwada Region. As the result impact of globalization continuously increases industrial area, financial institution, Mutual fund industries and other area and so on. Nanded city is the district headquarters, as commercial town with facilities of communication and transportation, is situated on the left bank of river Godavari. The broad gauge track of the south central railways passes through the town. As ever-changing environment and education their impacts on behaviour of peoples search to new avenues for investment and growth of income Sample Size The random sampling method was used by the researcher from probability sampling. Researcher has been selected the sample as random sampling from different Broker, Agent, Assets Management Company (AMC), Computer Age Information Centre (CAMS) and investors. Researcher contacted them personally to collect the data through questionnaire. It was observed while collecting the primary data and secondary data population size of investors in Nanded District, approximately 7,585. However, the researcher has selected 405 (5.34%) populations for the purpose of research. However, 382 (5.00%) population has been given response towards research.

16 16 Table No. 01 Compilation of Sample Size Sr No. Particular No. of % Respondent 01 Broker % 02 Agent % 03 Asst. Manager/Officer(AMC) CAMS % 05 Investors % 06 Total % (Source: Primary Data)

17 Chapter Scheme of the Study. Research study is divided in eight chapter detailed as under: Chapter I Introduction: Highlights the need and significance of the study, statement of the problem, objectives of the study, hypothesis, methodology, sample size, limitations and scope of the study. Chapter II History of mutual funds: Highlights, Recent development, recent reforms to Money Market Funds. Chapter III Profile of the study area: Presents information study area, history, economy of the research area. Chapter IV Review of literature: Deals with the comprehensive study of review of literature comprising of studies of text books, articles, journal, and thesis. Chapter V Legal frame work of mutual funds: Highlight on regulatory frame work of Mutual funds, SEBI requirement, and structure, right of mutual fund investors, taxation, and audit report. Chapter VI Performance analysis of mutual fund: Studies of data analysis and interpretation of risk of mutual fund, objectives of investment, factor of selection of mutual fund and also analysis of financial performance of mutual fund industries equity fund and debt fund, NAV, rate of return and risk etc. Chapter VII Problems of mutual funds: Studies the Problems faced by mutual fund industries. Chapter VIII Conclusion and suggestion: deals with the major findings consisting justification drawback in the functioning of mutual fund and suggestions to remove the drawback.

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