International Journal of Management (IJM) Volume 8, Issue 3, May June 2017, pp.213 219, Article ID: IJM_08_03_024 Available online at http://www.iaeme.com/ijm/issues.asp?jtype=ijm&vtype=8&itype=3 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 IAEME Publication A STUDY OF MUTUAL FUNDS Reepu USB, Chandigarh University, Gharuan, India ABSTRACT Three Boston executives in 1924 pooled their money with no idea of how popular the assemblage would become. The formation of Unit Trust of India, 1963 along with the inventiveness of Government of India and Reserve Bank, led to the dawn of new industry i.e. mutual fund industry in India. Its huge corpus enables diversification, thereby minimizing the risks and maximizing the returns. In order to become customer s preference now-a-days, numerous specialised plans in specific to retirement, children etc have also been fabricated. The present paper is an attempt to know about Mutual Fund, it s various schemes and analyse the different risk factors involved. Key words: Diversification, Mutual Fund, Return, Risk, Schemes etc. Cite this Article: A Study of Mutual Funds, Reepu. International Journal of Management, 8 (3), 2017, pp. 213 219. http://www.iaeme.com/ijm/issues.asp?jtype=ijm&vtype=8&itype=3 1. INTRODUCTION Mutual fund is an investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end Mutual funds (also known as an open-end investment company, to differentiate it from a closedend investment company) continuously offer new shares to investors. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value i.e. total fund assets divided by shares outstanding. http://www.iaeme.com/ijm/index.asp 213 editor@iaeme.com
A Study of Mutual Funds In other words, Mutual Funds coalesces different resources through the issuance of units to investors and enables investment of pooled funds in varied securities in lieu of disclosed objectives of offer documents. Security investments are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Different units are issued to the investors (who are also called as unit holders) by the Mutual Funds as per the money invested by them and hence as per the investment, profits as well as losses are shared amongst them. Now-a-days Mutual Funds offer different schemes with diverse objectives. Before moving towards the market, the Mutual Fund has to be registered with SEBI which scrutinizes it across different facets. Hence, Mutual Fund is an optimum alternative where investors with comparable investment objectives could pool in the money, Investment Manager therefore would invest money in accordance to the scheme objectives. Characteristics: Investors purchase mutual fund shares from the fund itself (or through a broker for the fund) instead of from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market. The price that investors pay for mutual fund shares is the fund s per share net asset value (NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads). Shares are redeemable. Usually Mutual Funds generate new shares in order to house fresh investors. Investment advisors tend to manage the portfolio s of Mutual Funds. 2. REVIEW OF LITERATURE Dr. Singh B K (2012) detailed about the mutual fund operation, NAV calculation and further several demographic factors of investors towards their attitude of investment have also been considered. Chi-square test has been deployed in order to gain conclusions. Dr. Vyas R. (2012) prospected that although financial markets have turned to be expensive but different financial instruments which are introduced, require unification. Author researched about factors affecting investors for investing in mutual fund. Research highlighted that mostly investors choose bank and post office deposits as one of the investment avenues, in comparison to Mutual Fund. Equity and SIP are among the priority list. Prabhavathi Y. et al (2013) focussed on understanding about the attitude, awareness and preferences of mutual fund investors. They found that mostly SIPs have been preferred and moreover, Mutual Fund is a choice of several http://www.iaeme.com/ijm/index.asp 214 editor@iaeme.com
Reepu because of better returns as well as professional fund management. Solanki A. (2016) compared the performance of selected Reliance equity schemes from the time period of 1 st April 2007 to 31 st March 2016 with BSE National 100 and SENSEX returns. The study concluded that the selected schemes had higher returns than the Benchmark Index. But the study considered only the open ended schemes with only growth options undertaken. Prof Prabhu G. et al (2016) believed that Mutual Fund Industry in India is at rapid growth rate. It is considered that Mutual Fund investments are less risky in comparison to investments in other securities. But it has been inferred from the study that still several investors have not been aware about the benefits of investing in Mutual Funds. 3. MUTUAL FUND STRUCTURE Figure 2 Mutual Fund Structure Different parties involved are: Sponsor: Sponsor is an entity who in arrangement with other corporate led towards the creation of a Mutual Fund. He needs to comply with the criterion set under Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and must have to throw in at least 40% of the net worth. But the sponsor could never be held accountable for any type of loss as a consequence of scheme operation. Trust: Sponsor forms Mutual Fund as a trust as per the provisions of Indian Trusts Act, 1882. Deed is registered under the Indian Registration Act, 1908. http://www.iaeme.com/ijm/index.asp 215 editor@iaeme.com
A Study of Mutual Funds Trustee: They are accountable to uphold the investor s interests as well as ensure that AMC works as per the guidelines of SEBI. Among the constituent members of the trustee, at least 2/3 are independent directors, since they do not relate to trustee in any form. Asset Management Company: AMC is appointed by the Trustee, which requires approval by SEBI to operate as Asset Management Company of Mutual Fund. Such formation too involves 50% independent directors and net worth of at least 10 cr. all the time. Registrar or Transfer Agent: AMC assigns Registrar in order to perform functionaries related to application form, redemption requests etc. 4. DIFFERENT TYPES OF MUTUAL FUNDS The different types of Mutual Funds can be diagrammatically represented as: Figure 3 Mutual Fund Types http://www.iaeme.com/ijm/index.asp 216 editor@iaeme.com
Reepu 5. INDICATORS OF INVESTMENT RISK MEASURES DESCRIPTION IDEAL RANGE STANDARD DEVIATION BETA R-SQUARE ALPHA SHARPE RATIO Standard Deviation evaluates fund s volatility. The standard deviation of a Fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return. A common measure of risk is Beta. It signifies the volatility of the fund in comparison to the benchmark. R-square connotes the correlation of a fund s movement to an index. It describes the relation between the fund's volatility and market risk. Alpha is the difference between the returns one would expect from a fund, given its beta and the return it actually produces. It also measures the unsystematic risk. Sharpe Ratio= Fund return in excess of risk free return/ Standard deviation of Fund. Sharpe ratios are ideal for comparing funds that have a mixed asset classes. Should be near to its mean return. Beta>1 = high risky Beta = 1 = Avg Beta<1 = Low Risky R-square values range between 0 and 1, where 0re presents no correlation and1 represents full correlation. Alpha is positive = returns of stock are better than market returns. Alpha is negative = returns of stock are worst then market. Alpha is zero = returns are same as market. Higher Sharpe ratio better funds returns relative to amount of risk taken. 6. RISKS ASSOCIATED WITH MUTUAL FUND It is well said that Higher the Risk, Higher the Returns. Tolerance for risk varies from one individual to another. Hence individual disposition can be Conservative Aggressive Moderate Following are the techniques which would enable investor to manage the investment risk and attain the financial goals: Diversification Investors must tend to diversify the portfolio i.e. a blend of equity shares, bonds and money market securities would definitely procure more returns rather than investing the entire amount of money into one basket. Moreover, making investments into high growth rate equity along with the high income bonds as well as stable money market would augment returns and moderate risk. http://www.iaeme.com/ijm/index.asp 217 editor@iaeme.com
A Study of Mutual Funds Figure 4 Risk Return Profile Systematic Investment Plan Unit Holders in order to diminish the risk, can also choose to invest specific amount periodically for some continuous interval. SIP lets investor to invest fixed amount every month in order to buy additional units at NAV prices. Consider the following hypothetical example where investor tends to invest Rs. 1000 quarterly: Table 1 Hypothetical Example (Source: icici) Average unit cost Rs 12,000/1,435.9 = Rs 8.36 Average unit price 109.6/12 = Rs 9.13 Unit price at beginning of next quarter Rs 14.90 Market value of investment 1435.9 * 14.90= Rs 21,395/- The investor liquidates his units and gets back Rs 21,395/- Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market is turned down. http://www.iaeme.com/ijm/index.asp 218 editor@iaeme.com
Reepu 7. ADVANTAGES OF MUTUAL FUND Following are some of the advantages: 1. Professional Management 2. Diversification 3. Convenient Administration 4. Tax Benefits 5. Liquidity 6. Transparency 7. Affordability 8. DISADVANTAGES OF MUTUAL FUND The disadvantages include: 1. Dilution 2. Cost 9. CONCLUSION Investment in today s era is enveloped with risks like business, credit, default, currency, interest rate, market etc. Mutual Fund allows investor to pool their money with which the investment manager would instigate investments and hence attempt to attain results as per the investor s objectives. Diversification and SIP allows investor to manage the risks. Sponsor, Trust, Trustee, Transfer Agent, Asset Management Company etc. forms key element Mutual Fund structure. Moreover, with the investment in Mutual Fund the investor can avail tax benefits too. REFERENCES [1] Dr. Singh BK, A Study of Investors attitude towards Mutual Funds as an Investment Option, International Journal of Research in Management, Issue 2, Vol. 2, March 2012. [1] Dr. Vyas R, Mutual Fund Investor s Behaviour and Perception in Indore City, Journal of Arts, Science & Commerce, Vol.3, Issue 3(1), July, 2012[67] [2] Prabhavathi Y. et al, Investor s Preferences towards Mutual Fund and Future Investments: A Case Study of India, International Journal of Scientific and Research Publications, Vol. 3, Issue 11, November 2013. [3] Solanki A., A Study of Performance Evaluation of Mutual Fund and Reliance Mutual Fund, Abhinav National Monthly Refereed Journal of Research in Commerce and Management, Vol. 5, Issue 5 May, 2016. [4] Sindhu. K.P and dr. S. Rajitha Kumar, Influence of Characteristics of Mutual Funds On Investment Decisions A Study, Volume 4, Issue 5, September - October (2013), pp. 103-108, International Journal of Management (IJM). [5] Dr. K. Rakesh, Mr. V S M Srinivas, Understanding Individual Investors Investment Behavior In Mutual Funds (A Study On Investors of North Coastal Andhra Pradesh) Volume 4, Issue 3, (May - June 2013), pp. 185-198, International Journal of Management (IJM) [6] Dr. M. Kalaiselvi and Tmt. K. Hemalatha. A Comparative Study on Investment Attitude between Government and Private Employees towards Mutual Funds in Pudukkottai District. International Journal of Management, 7(2), 2016, pp. 307-313 [7] Prof Prabhu G. et al, Perception of Indian Investor towards Investment in Mutual Funds with special reference to MIP Funds, IOSR Journal of Economics and Finance, 7 th International Business Research Conference, PP 66-74, 2016. http://www.iaeme.com/ijm/index.asp 219 editor@iaeme.com