INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW

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1 INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW MUTUAL FUND IN INDIA DikshaTripathi* 1, Dr. Ashok Shukla 2 1 Research Scholar, Ram Monohar Lohiya Avadh University, Faizabad (U.P), India. ABSTRACT 2 Reader, Ram Monohar Lohiya Avadh University, Faizabad (U.P), India. 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. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. (Source: amfi) Mutual funds are dynamic financial institutions (FIs) which play a crucial role in an economy by mobilising savings and investing them in the stock-market, thus establishing a direct link between savings and the capital market. Therefore, the activities of mutual funds have both short-and long-term impact on the savings pattern, growth of capital markets and the economy. The Mutual fund is a basket of securities, which contains variety of financial products in various combinations and these various combinations of financial securities are individually called Portfolio's. In a Mutual fund company the Fund Managers make Portfolios of different combinations they continuously analyse the market risk and expected returns so that a positive return can be provided to the Mutual fund Investors. This paper focuses on evolution and growth of mutual fund in India. INTRODUCTION India has emerged as safe economy in the global market despite having big problems like political uncertainty, corruption, inefficiency of infrastructure and good governance. Despite of all problems and financial uncertainty the financial markets of India has grown to high levels, in the uncertain global market Indian markets were able to keep the faith of its investors and attract foreign investors. The capital markets acts as an mean of stabilising the economic growth and strengthening the industrial performance. Among the various investment avenues floated in the market Mutual Funds appear to give minimum risk and maximum returns to the investors. They mobilise funds from savings market to deploy the same in the capital market. The concept of MF was coined for channelizing savings of small investors, the idea was to collect funds from these investors and invest in capital market instruments such as shares, debentures and other securities. Mutual Fund invests in more exotic instrument to like future, forward, swaps etc. Investors having small amounts cannot diversify their investments which increases their risk., whereas MF helps such investors.the funds from such investors will be collected and invested by specialists in various capital market instruments which will help the investor in reducing the risk born by him/her. The *Corresponding Author

2 income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Today mutual fund is positioned as instrument that is safe and promises active returns, Mutual Funds are supposed to be the retail investors best bet. WORLD PANORMA At the very dawn of commercial history, Egyptians& Phoenicians were selling shares in vessels and caravans in order to spread the risk of these perilous venture. The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in In 1822 a group of people started a company to finance investment in national industry under the name of 'SocieteGenerale de Belgique' considering the concept of risk sharing. In 1822, King William I, of Netherlands came up with a close end fund. In 1860 this idea was seen in England. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in It is now the Foreign & Colonial Investment Trustand trades on the London stock exchange. In 1873 'The ScottishAmerican trust' was established. Mutual funds were introduced into the United States in the 1890s. They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford University Press p 9.The first American investment trust was close end BOSTON Personal Property Trust created in After World War II, Mutual Funds grew throughout world. In Japan it is known as Investment Trusts, it dates back to In India it was introduced in the later part of the twentieth century in the year 1964 with its roots embedded into Unit Trust of India(UTI). Since 1964 there was only 25 corers Asset Under Management but since than it has grown as banyan tree with assets of Rs. 1,13,005 crore by the end of the year 31st March Till the end of year 31st March 2012 it grew uptors. 5,87,217. While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies." CHRONOLOGICAL DEVELOPMENT OF MUTUAL FUND IN INDIA The Presence felt in Indian market of these Mutual Funds is not very long, although UTI launched its first Mutual Fund in 1964 but till 2000 UTI was enjoying the status of monopoly. Unit Trust of India(UT1) which was formed by the Government of India under an Act of Parliament. UTI commenced operations in July 1964, 'with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the corporation from the acquisition, holding management and disposal of securities'. FIRST PHASE : 1-July ESTABLISHMENT & GROWTH OF UTI SEC0ND PHASE:` ENTRY OF PUBLIC SECTOR FUNDS THIRD PHASE: EMERGENCE OF PRIVATE SECTOR FUNDS FOURTH PHASE: GROWTH & SEBI REGULATION FIFTH PHASE: 2004 ONWARDS GROWTH AND CONSOLIDATION Copyright 2012 Published by IJMRR. All rights reserved 3766

3 First Phase : 1-July : Establishment & Growth Of UTI Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. At the end of 1988 UTI had Rs.6,700crores of assets under management. Various schemes launched by UTI were: The first scheme launched by UTI was Unit Scheme ULIP in 1971 & 6 more schemes were launched between Children Growth Fund & India Fund were launched in 1986 it was India's first Off shore fund. In 1987 Master share scheme was launched as India's first equity diversified scheme. Second Phase: : Entry Of Public Sector Funds In the year 1987, the commercial banks and the Insurance companies were also permitted to launch schemes. Among the public sector Banks first to enter were: 1987: SBI Mutual Fund(SBIMF) Canara Bank Mutual Fund (CANBANKMF) 1989: LIC Mutual Fund (LICMF) (Aug ) Punjab National Bank Mutual Fund (PNBMF) (Nov ) Indian Bank Mutual Fund (InbBankMF) 1990: (Jun) Bank of India (BOIMF) (Dec.) General Insurance Corporation Mutual Fund(GICMF) (Oct ) Bank of Baroda Mutual Fund (BOBMF) At the end of 1993, the mutual fund industry had assets under management of Rs.47,004crores. But UTI remained to be the leader with about 80% market share. Amount Mobilised And Assets Under Management Amount Mobilised Assets Under Management Mobilisation as % of gross Domestic Savings UTI 11,057 38, % Public Sector 1,964 8, % Total 13,021 47, % Third Phase: : Emergence Of Private Sector Funds 1992 was the year when Mutual Fund industry experienced its first setback and annual gross mobilisation of funds fell to Rs. 9,500 crores government came into action and market was further liberalised as Foreign Institutional Investors were permitted portfolio investments. Copyright 2012 Published by IJMRR. All rights reserved 3767

4 The permission was given to private sector funds including fund management companies (most of them entering through joint Venture with Indian promoters). With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in The industry now functions under the SEBI (Mutual Fund) Regulations The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805crores. The Unit Trust of India with Rs.44,541crores of assets under management was way ahead of other mutual funds. Fourth Phase: :Growth& SEBI Regulations During this phase SEBI(MF) reg introduced set uniform standards for all Mutual Fund companies in India. Government was willing to safeguard the interest of its investors, in this process the Union Budget in 1999 offered exemption of all dividend incomes in the hands of investors from income tax. Various awareness programmes were launched by SEBI &AMFI for investors. In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. Its past schemes like US64, Assured Return Schemes were gradually wounded up. SOURCE: AMFI Copyright 2012 Published by IJMRR. All rights reserved 3768

5 GROSS FUND MOBILISATION (RS. CRORES) FROM TO UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL 01-April March-99 11,679 1,732 7,966 21, April March-00 13,536 4,039 42,173 59, April March-01 12,413 6,192 74,352 92, April March-02 4,643 13,613 1,46,267 1,64, April Jan-03 5,505 22,923 2,20,551 2,48, Feb March-03 * 7,259* 58,435 65, April March-04-68,558 5,21,632 5,90, April March-05-1,03,246 7,36,416 8,39, April March-06-1,83,446 9,14,712 10,98,158 Fifth Phase: 2004 Onwards: Growth And Consolidation The industry witnessed several merger's and Acquisitions Ex. Acquisition of schemes like Alliance Mutual Fund by Birla Sunlife, sun F&C MF & PNBMF by Principal Mutual Fund. More international players entered the market like Fidility, Fanklintempleton etc. Various steps of investor protection is taken by SEBI, inorder to build confidence of investors into MutualFund. Booming stock markets and innovative marketing strategies of Mutual Fund Companies in India are influencing the retail investors to invest their surplus funds with different schemes of Mutual Funds. ASSET UNDER MANAGEMENT RS IN CRORESYEAR PUBLIC PRIVATE YEAR From the year ending 31st March and consistent growth can be seen in the assets managed by public sector and private sector companies of India. The Average asset managed by public sector companies in the year was Rs. 4,491 crores which grew up to Rs. 58,999 crores by the end of year by the year ending on 31st march 2012 the total average AUM by public sector firms was Rs. 1,19,677 crores. Whereas similar growth was seen in private sector too. By the year ending on 31st march 2004 the Average Total AUM of private sector was Rs. 1,04,992crores. Which grew uptors. 1,81,514crores by the end of year. Copyright 2012 Published by IJMRR. All rights reserved 3769

6 by the year ending on 31st March 2012 total Average AUM by private sector Rs. 5,39,316 crore. WHAT IS MUTUAL FUND Among the various investment avenues mutual fund is one which has shown positive response from the market. Mutual Funds are basket of securities, where funds are collected from small investors and invested in various financial securities by the fund managers collectively and returns are paid to the investors, for this work asset management companies charge fees from investors. An mutual fund is professionally managed, It helps the small investors to invested their hard earned money in much more diversified way than being invested individually. Mutual funds can also be called as collective investment vehicle. It helps small investors to diversify their risk born and multiply returns on their investment. In India since its inception in 1964 it has grown as banyan tree it had asset under management of Rs. 25 corers which grew up to Rs.1,13,005 crore by the end of year 31st march 2000, which further grew up to Rs. 5,87,217 by the end of year 31st March According to Global Asset Management 2006 Report from Boston Consultancy Group, India managed assets will exceed more than $1trillion by As per SEBI Regulations, 1996, a mutual fund is to be formed by the sponsor and registered with SEBI. 'A mutual fund shall be constituted In the form of a trust and instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registrations Act, 1908 (16 of 1908), executed by the sponsor in favour of trustees named in such an instrument. Sri T.T. Krishnamachari, the Finance Minister in 1964 considering recommendations of Central Banking Enquiry Committee and ShroffCommittee, launched India's first mutual fund the Unit Trust Of India(UTI) with the first scheme naming Unit Scheme It worked solely in market till the year 1987 when commercial Banks and Insurance companies were permitted to launch schemes in the market. Among public sector SBI was the first to enter with its Regular Income Scheme(RIS). After SBI,Canara Bank, LIC, Punjab National Bank, Bank Of India etc entered into mutual fund business. Considering the recommendations of Dave panel Report in 1991, the new guidelines to set up public, private as well as joint sectors were given. On February 19, 1993 first batch of 12 private sector mutual funds were launched. SEBI is the governing body of Mutual Funds in India. It keeps on regulating, consolidating and protecting investor's. The growth of Mutual Fund in India has gone hand in hand with Private and public sector players. The gross resource mobilisation of funds by public sector in year was Rs. 5,535 crore, private sector with Rs. 75,009 crore and UTI with Rs. 12,413 corers. In year there were 38 SEBI registered Market intermediaries. Mutual fund is a tool to mobilise funds to much broader market. It is set up by the sponsor, sponsor could be a financial service company, a bank or a financial institution. A legal entity of sponsor to run business is Asset Management Company (AMC), under this AMC fund managers or analysts are employed who take care of investors funds. To internally regulate and protect the interest of unit holders, an independent of trustees is made. As per SEBI regulation at least 50% of the trustees shall be independent trustees. Then comes the Copyright 2012 Published by IJMRR. All rights reserved 3770

7 Custodians, who holds the physical custody of the financial of the financial securities owned by a client. For example the Stock Holding Corporation of India(SCHIL) is the custodian for most of the fund houses in India. A Registrar is appointed by the AMC to serve the unitholder for purchase, sales or switching of units. The Asset Management Company pools funds from the investor, fund managers continuously analyse risk and return in the market and invest the fund in order to give maximum returns to the investor.investment can be done in variety of financial instruments by creating portfolio's. Portfoli's are various combination of financial instruments of capital market which helps to make an trade-off between risk and return. The Asset Management companies ask investors to invest via different schemes offered by them which gives freedom to investors for decide how their fund should be invested.variety of scheme options are given to investors. Copyright 2012 Published by IJMRR. All rights reserved 3771

8 Mutual Fund Schemes Open-end Scheme Open-end scheme offers units for sale without specifying any duration of redemption. Liquidity is the key feature here, buying and selling of the units becomes convenient at the related prices of the NAV (net asset value). It does not have restrictions on amount of shares a fund will issue, it also buy back shares when investors wish to sell. Close-end Scheme Closed-end scheme offers limited period subscription, which generally ranges from 2-15 years. It raises a fixed amount of through an Initial Public Offering(IPO). Close-ended schemes are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Investment scheme Growth Scheme Growth Schemes aim to cater investors seeking growth over long term. It invests majority of its funds in equity and a small part in money market. It aims to provide capital appreciation over a long term. Income Scheme Income Schemes are monthly income scheme. It generally invests in fixed income securities such as bond, corporate debenture, money market instruments and government securities. The capital appreciation in such schemes are limited. Balanced scheme Balanced schemes provide twin benefits of growth and regular income. These schemes invets in both equity market and debt market in a relative equal proportion. These are considered less riskier. Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. It is more appropriate for conservative investors. Money Market Scheme Money Market Schemes are short-term and less risky. It provides easy liquidity, preservation of capital and moderate income. It invests in short-term instruments such as treasury bills, commercial paper, certificates of depositand inter-bank call money, government securities etc. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Best for corporate and individual who want to invest their surplus for short-term till they get more favourable option. Other Schemes Tax Saving scheme Tax Saving scheme offers tax savings under provisions of Income tax Act. Individual investor's companies, partnership firms etc. are some parties to enjoy benefits of tax savings. Copyright 2012 Published by IJMRR. All rights reserved 3772

9 Equity linked savings schemes (ELSS) and pension schemes are the two schemes that offer tax rebates or tax benefits. Index Scheme Index scheme asses the performance of a particular index like BSE Sensex, NIFTY. Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.under this scheme, the performance of the market as a whole, or a specific sector is assessed. This helps investor to decide on whether to invest on the market as a whole or in any specific fund. Sector Specific Schemes Sector specific schemes invest in specific sectors such as Technology, Infrastructure, Banking, Pharma etc. Sectoral schemes pose high risk as compared to equity schemes.it has a less diversified portfolio. LOAD Load is a sales charge added to the purchase and sales of some mutual funds. It is a sales commission which can be front-ended, back-ended or both. This money goes to compensate financial broker for introducing the mutual fund to investor. Load is primarily used to meet the expenses related to sale and distribution of units. Entry Load Entry load or Front-end load is charged on sale of units. It is expressed as a percentage of the total amount invested or the "public offering price," which equals the net asset value plus the front-end load per share. Exit Load Exit load or back-end load is charged on redemption of units. It is also called contingent deferred sales charges (or CDSC). It can be a flat percentage or it may decline the longer the shares are held. It reduces the returns of investor's. No Load Mutual funds which can be bought without paying any sales commissions is a No load fund.the total amount invested will purchase shares, minimizing fees helps in maximising returns. Advantages Of Mutual Fund Mutual funds provide various benefits to the investors. For an investor its not easy to understand the complexities of capital market thus the service of Professional Management is provided by mutual fund companies. Fund managers or analysts know the market better than individual investors and most importantly having pool of funds the have better chance of risk return trade-off. It provides benefits of experienced and skilled professionals. Simplicity is the facility provided where buying, selling and other market related task is done on investors behalf. The most important advantage to investor is Diversification, keeping all eggs in one Copyright 2012 Published by IJMRR. All rights reserved 3773

10 basket is not wise mutual funds provide facility of investing small amount of investors fund in a diversified manner which reduces the risk born and increases the return earned. Low Cost is achieved by benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Convenient Administration reduces paperwork, avoids bad deliveries, delayed payments. Return Potential over a medium and long term tenure mutual funds are capable of giving higher returns. Liquidity is the benefit availed by open ended, closed-end and other schemes. Flexibility is provided through regular investment plans, regular withdrawal plans and dividend reinvestment plans. Choice of schemes and Tax Benefits are the other benefits of mutual fund. Evaluation of Mutual funds A central problem of finance is to evaluate the performance of mutual funds. Some fund managers & analysts opt for passive portfolio management in which they invest according to market like index funds. While some fund managers & analysts opt for active portfolio management, they think they can do better than market. Two main tasks has to catered by these fund managers: Analysing the systematic and unsystematic risk Analysing the returns earned Return are the yield that an asset generates over a period of time. It is a percentage increase or decrease in the value of investment over a period of time. Risk Return Analysis is useful tool to ascertain the probability that expected return from the security will materialize or not. Risk is the uncertainty of a future outcome. Total risk is a combination of systematic risk and unsystematic risk. Systematic risk is commonly faced by all securities like interest rate risk, inflation risk etc. Unsystematic risk is unique to a particular security. A fund's investment objective and its holdings are influential factors in determining How risky a fund is. Risk-return analysis is useful for evaluating mutual fund performance as well as comparing and contrasting various mutual funds with similar investment objectives. Net Asset Value (NAV) Mutual funds sell their shares to public and redeem them to current net asset value (NAV) which is calculated as under- Total market value of all MF holdings - All MF liabilities NAV of MF = No. of MF units or shares For evaluation of Mutual Fund generally used methods are: Beta Sharpe Ratio Treynors Ratio Standard Deviation R-Square Copyright 2012 Published by IJMRR. All rights reserved 3774

11 Beta: Beta, also known as the 'Beta Coefficient'. Beta is a measure of systematic risk or market risk of a portfolio a.k.a. market risk or systematic risk, is another measure of risk that is covered in depth elsewhere on this site. Beta is a measure of variability but it's variability is relative to the benchmark rather than a fund's own mean. Beta will give you a good idea of how much a fund is likely to move with movements of the benchmark. As beta is a measure of systematic risk, a portfolio's beta is simply the weighted average of the betas of the assets held in the portfolio, thus providing a measure of the systematic risk of the portfolio. As noted above, in a well-diversified portfolio, total risk is equal to systematic risk, as the specific risk has presumably been diversified away. Sharpe Ratio: Sharpe Ratio was developed by Nobel laureate William F. Sharpe to measure risk adjusted performance. This ratio is also known as the Sharpe index, the Sharpe Measure and the reward- to variablity ratio. His work on performance evaluation was widely acknowledge. His study attempts to statistically calculate whether a portfolio's success was due to good management or the taking of excessive risk. The model measures a company's or portfolio's performance against a series indices. He developed a composite measure of performance evaluation that considers both risk and return. The Sharpe ratio observes both systematic and idiosyncratic risks. Sharpe's Ratio evaluates the return that a fund has generated relative to the risk taken. Sharpe (1966) uses the Sharpe ratio to measure fund performance. He ranks the funds over two periods and , and finds a positive relationship between these two ranking periods. Sharpe Ratio is calculated from any observed series of returns it does not requires any additioanlinformations surrounding the source of profitability. It clearly indicates that risk-less assets would perform better than the security being analysed. The Sharpe ratio is expressed mathematically as S = R - Rf / s. In words, the Sharpe ratio for a particular portfolio is the actual rate of return minus the risk free rate of return, divided by the standard deviation. R is the rate of return for the investment, or the amount of money the option actually made. Rf is the risk-free rate of return, or the profit that can be achieved with little to no risk. Standard deviation is a statistical term which quantifies how much the population varies over a specific period of time. His study stated that a mutual fund with higher Sharpe ratio indicates that it has generated higher returns for every unit of risk that was taken thus it is better. A negative Sharpe ratio indicates that a risk-free asset would perform better than the fund being analyzed. In other words it can be said that Iffund s Sharpe ratio is greater than the benchmark, the fund s performance is superior over the market. If it is less than the benchmark, the fund s performance is not good in the market. Treynors Ratio: Treynor Ratio was developed by Jack l. Treynor. Treynor developed this ratio as a methodology for evaluating mutual fund performances. It is also called 'reward to volatility Copyright 2012 Published by IJMRR. All rights reserved 3775

12 ratio' or 'Treynormeasure'. It is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk, per each unit of market risk assumed. Treynor used characteristic line for relating expected rate of return of a fund to the rate of return of a suitable market average. His fund performance measure considers investment risk as a major factor. To deal with a portfolio 'portfoliopossibility line' was used to relate expected return to the portfolio owner's risk preference. Treynor evaluated performance of 57 fund managers market timing abilities and result found that fund managers were not able to successfully outguess the market, study suggested that investors were fully dependent on fluctutations in the market. Improvement in the rates of return was due to the fund managers ability to identify under-priced industries and companies. Standard deviation Standard Deviation is a tool which measures the variability of the data set. It is the square root of the square of mean deviations from arithmetic mean of data series. It is calculated to measure the riskiness of funds or represents the volatility of funds. R-squared Statistic should be reported along with beta. R-squared is one of the statistics generated by the regression analysis used to derive a mutual fund's beta. It is the coefficient of determination, which tells you what percent of the movement in the fund is explained by movement in the benchmark used in the regression analysis. The S&P 500 is the benchmark most commonly used for this purpose. The higher the R-squared, the more reliable beta is as a measure of probable variation. R-squared is also the square of the correlation coefficient, as such it will give you some idea of the degree of correlation between a fund and the benchmark but, as the square root of a number is an absolute value, you won't know whether R is positive or negative. It also won't tell you how a fund behaves relative to other funds in your portfolio. But R-squared is still useful for screening, as low values indicate that a fund may have good diversification potential and therefore warrants a closer look. REFFERENCES Somashekar TS. Performance and Regulation of Mutual Funds in India: An Economic Analysis; December Copyright 2012 Published by IJMRR. All rights reserved 3776