OVERVIEW OF MUTUAL FUND INDUSTRY IN INDIA Contents

1 Introduction 1 What is Mutual Fund? 1 Growth of Mutual Fund Industry 1.4 Worldwide Role of Mutual Fund 1.5 Organization tructure of Mutual fund 1.! Origin of Mutual Fund In India 1." Growth of Mutual Funds in India 1.# $y%es of Mutual Funds 1.& 'd(antages of Mutual Funds 1.1) *isad(antage of Mutual Funds 1.11 Mutual Fund + ,a%ital Mar-et 1.1. Role of ecurity /0change 1oard of India 1.12 Role of 'ssociation of Mutual Fund in India 1.14 $a0 3lanning + Mutual Fund 1.15 4ational Institute of ecurities Mar-et 1.1! 4ational Institute of ,a%ital Mar-et 1.1" Guideline of Mutual Funds 1.1# Recent $rend of Mutual Fund 1.1& ,onclusion 1..) Reference

I4$RO*5,$IO4 Mutual fund is the %ool of the 6oney7 8ased on the trust who in(ests the sa(ings of a nu68er of in(estors who shares a co66on financial goal7 li-e the ca%ital a%%reciation and di(idend earning. $he 6oney thus collect is then in(ested in ca%ital 6ar-et instru6ents such as shares7 de8enture7 and foreign 6ar-et. In(estors in(est 6oney and get the units as %er the unit (alue which we called as 4'9 :net assets (alue;. Mutual fund is the 6ost suita8le in(est6ent for the co66on 6an as it offers an o%%ortunity to in(est in di(ersified %ortfolio 6anage6ent7 good research tea67 %rofessionally 6anaged Indian stoc- as well as the foreign 6ar-et7 the 6ain ai6 of the fund 6anager is to ta-ing the scri% that ha(e under (alue and future will rising7 then fund 6anager sell out the stoc-.

GROW$< OF $</ M5$5'= F54* I4*5 $R>

$he history of 6utual funds dates su%%ort to 1&th century when it was introduced in /uro%e7 in %articular7 Great 1ritain. Ro8ert Fle6ing set u% in 1#!# the first in(est6ent trust called Foreign and colonial in(est6ent trust which %ro6ised to 6anage the finances of the 6oneyed classes of cotland 8y scattering the in(est6ent o(er a nu68er of different stoc-s. $he first 6utual fund in the 5. .7 Massachusetts in(estor?s trust7 was set u% in March 1&.4. $his was the o%en @ ended 6utual fund. $he stoc- 6ar-et crash in 1&.&7 the Great *e%ression7 and the out8rea- of the econd World War slac-ened the %ace of growth of the 6utual fund industry. Inno(ations in %roducts and ser(ices increased the %o%ularity of 6utual funds in the 1&5)s and 1&!)s. $he first international stoc- 6utual fund was introduced in the 5 in 1&4). In the 5 the 6utual fund industry registered s ten @ fold growth the eighties. ince 1&&!7 6utual fund assets ha(e e0ceeds 8an- de%osits. $he 6utual fund industry and the 8an-ing industry (irtually ri(al each other in size. ' Mutual fund is ty%e of In(est6ent ,o6%any that gathers assets for6 in(estors and collecti(ely in(ests in stoc-s7 8onds7 or 6oney 6ar-et instru6ents. $he in(est6ent co6%any conce%ts date to /uro%e in the late 1"))s7 according to A. Geert Rouwenhost in the Origins Mutual Funds7 when Ba *utch Merchant and 1ro-er In(ited su8scri%tions fro6 in(estor with li6ited 6eans.C $he 6aterialization of Bin(est6ent 3oolingB in /ngland in the 1#))s 8rought the conce%t closer to 5. . shores. $he enact6ent of two 1ritish =aws7 the Doint toc,o6%anies 'cts of 1#!. and 1#!"7 %er6itted in(estors to share in the %rofits of an in(est6ent enter%rise7 and li6ited in(estor lia8ility to the a6ount of in(est6ent ca%ital de(oted to the enter%rise. 1ecause of their e0clusi(e feature7 o%en @ ended Mutual Funds ra%idly 8eca6e (ery %o%ular. 1y 1&.&7 there were 1& o%en @ ended Mutual Funds in 5 ' with total assets of E 14) 6illions. 1ut the 1&.& toc- Mar-et crash followed 8y great de%ression of 1&2) ra(aged the 5. . Financial Mar-et as well as the Mutual Fund Industry. $his necessitated stricter regulation for 6utual funds and for Financial ectors. <ence7 to %rotect the interest of the co66on in(estors7 5. . Go(ern6ent %assed (arious 'cts7 such a ecurities 'ct 1&227 ecurities /0change 'ct 1&24 and the In(est6ent ,o6%anies 'ct 1&4). ' co66ittee called the 4ational ,o66ittee of In(est6ent ,o6%any :4ow7 In(est6ent ,o6%any Institute;7 was also for6ed to co @ o%erate with the Federal Regulatory 'gency and to -ee% infor6ed of trends in Mutual Fund =egislation. 's a result of these 6easure7 the Mutual Fund Industry 8egan to de(elo% s%eedily and the total net assets of the Mutual Funds Industry increased for6 E 44# 6illion in 1&4) to E ..5 8illion in 1&5). $he nu68er of shareholder?s accounts increased fro6 .&!)))7 to 6ore than one Million during 1&4) @ 1&51. B's a result of renewed interest in Mutual Fund Industry they grew at 1#F annual co6%ound rate reaching %ea- of their ra%id growth cur(e in the late 1&!)s.C

ORG'4I '$IO4 $R5,$5R/ OF M5$5'= F54* Mutual funds ha(e organization structure as %er the ecurity /0change 1oard of India guideline. $he o8Gecti(e is to control7 to %ro6ote7 to regulate7 and to %rotect the in(estors? rights and efficient trading of units. $he o%eration of Mutual fund start with in(estors sa(ing their 6oney on 6utual fund7 followed 8y Mutual Fund 6anagers handling the funds and carrying out strategic in(est6ent on scri% 8ased on their sche6es. 5nit return de%ends on fund return and efficient ca%ital 6ar-et. $his also affects the international ca%ital 6ar-et7 liHuidity and at last7 the econo6ic %olicy. 1elow the gra%h indicates the %rocess. Mutual Fund 6anager is res%onsi8le to strategise u%on 6a0i6ising return with 6ini6u6 ris-. When fund %ro(ide high return with high ris-7 in(estors get attracted to in(est 6ore funds for sa6e sche6e.

' Mutual Fund Organisation is for6ed under the guidelines of /1I. $ransfer agent and custodian %lay (ital role for de6aterialization of the fund. 5nit holders hold the account state6ent7 8ut the custody of the units is on a %articular 'sset Manage6ent ,o6%any. ,ustodian holds all the fund units on de6aterialization for6. '%%lication for6s7 transaction sli% and other reHuests are recei(ed 8y transfer agent7 which act as 6iddle 6en 8etween in(estors and 'sset Manage6ent ,o6%anies.

GROW$< OF M5$5'= F54* I4 I4*I' 1y the year 1&")7 the industry had 2!1 Funds with co68ined total assets of 4".! 8illion dollars in 1)." 6illion shareholder?s account. <owe(er7 fro6 1&") and on wards rising interest rates7 stoc- 6ar-et stagnation7 inflation and in(estors so6e other reser(ations a8out the %rofita8ility of Mutual Funds7 'd(ersely affected the growth of 6utual funds. <ence Mutual Funds realized the need to introduce new ty%es of Mutual Funds7 which were in tune with changing reHuire6ents and interests of the in(estors. $he 1&")?s saw a new -ind of fund inno(ationI Funds with no sales co66issions called B no load B funds. $he largest and 6ost successful no load fa6ily of funds is the 9anguard Funds7 created 8y Dohn 1ogle in 1&"". In the series of new %roduct7 the First Money Mar-et Mutual Fund :MMMF; i.g. $he Reser(e FundC was started in 4o(e68er 1&"1. $his new conce%t signaled a dra6atic change in Mutual Fund Industry. Most i6%ortantly7 it attracted new s6all and indi(idual in(estors to 6utual fund conce%t and s%ar-ed a surge of creati(ity in the industry.

$>3/ OF M5$5'= F54*

'*9'4$'G/ OF M5$5'= F54*

Mutual funds ha(e 8een designed to %ro(ide 6a0i6u6 8enefits to in(estors. Fund 6anager ha(e research tea6s to achie(e sche6e o8Gecti(es. 'ssets Manage6ent ,o6%any has different ty%e of sector funds7 which need %ro%er %lanning for strategic in(est6ent and to achie(e the 6ar-et return. Portfolio Diversification Mutual Funds in(est in a wellJdi(ersified %ortfolio of securities which ena8les in(estor to hold a di(ersified in(est6ent %ortfolio :whether the a6ount of in(est6ent is 8ig or s6all;. Professional Management Fund 6anager goes through (arious research wor-s and has 8etter in(est6ent 6anage6ent s-ills which ensure higher returns to the in(estor than what he can 6anage on his own. Less Risk In(estors acHuire a di(ersified %ortfolio of securities e(en with a s6all in(est6ent in a Mutual Fund. $he ris- in a di(ersified %ortfolio is lesser than in(esting in 6erely . or 2 securities. Low Transaction Costs *ue to the econo6ies of scale :8enefits of larger (olu6es;7 6utual funds %ay lesser transaction costs. $hese 8enefits are %assed on to the in(estors. Liquidity 'n in(estor 6ay not 8e a8le to sell so6e of the shares held 8y hi6 (ery easily and Huic-ly7 whereas units of a 6utual fund are far 6ore liHuid. Choice of Schemes Mutual funds %ro(ide in(estors with (arious sche6es with different in(est6ent o8Gecti(es. In(estors ha(e the o%tion of in(esting in a sche6e ha(ing a correlation 8etween its in(est6ent o8Gecti(es and their own financial goals. $hese sche6es further ha(e different %lansKo%tions Transparency Funds %ro(ide in(estors with u%dated infor6ation %ertaining to the 6ar-ets and the sche6es. 'll 6aterial facts are disclosed to in(estors as reHuired 8y the regulator. le!i"ility

In(estors also 8enefit fro6 the con(enience and fle0i8ility offered 8y Mutual Funds. In(estors can switch their holdings fro6 a de8t sche6e to an eHuity sche6e and (iceJ(ersa. O%tion of syste6atic :at regular inter(als; in(est6ent and withdrawal is also offered to the in(estors in 6ost o%enJend sche6es. Safety Mutual Fund industry is %art of a wellJregulated in(est6ent en(iron6ent where the interests of the in(estors are %rotected 8y the regulator. 'll funds are registered with /1I and co6%lete trans%arency is forced.

*I '*9'4$'G/ OF M5$5'= F54*

$he fund 6anager does not always 6a-e %rofits 8ut 6ight create loss. $he fund 6anagers has his own strategy for in(est6ent to hold7 to sell7 to %urchase unit at %articular ti6e %eriod. Costs Control #ot in the $ands of an %nvestor In(estor has to %ay in(est6ent 6anage6ent fees and fund distri8ution costs as a %ercentage of the (alue of his in(est6ents :as long as he holds the units;7 irres%ecti(e of the %erfor6ance of the fund #o Customi&ed Portfolios $he %ortfolio of securities in which a fund in(ests is a decision ta-en 8y the fund 6anager. In(estors ha(e no right to interfere in the decision 6a-ing %rocess of a fund 6anager7 which so6e in(estors find as a constraint in achie(ing their financial o8Gecti(es. Difficulty in Selecting a Suita"le und Scheme Many in(estors find it difficult to select one o%tion fro6 the %lethora of fundsKsche6esK%lans a(aila8le. For this7 they 6ay ha(e to ta-e ad(ice fro6 financial %lanners in order to in(est in the right fund to achie(e their o8Gecti(es.

M5$5'= F54* '4* ,'3I$'= M'RA/$

,a%ital 6ar-et %lays (ital role for the growth of Mutual fund in India. $he ,a%ital 6ar-et is di(ided into two %artsJ one is the %ri6ary 6ar-et and another is secondary 6ar-et. 3ri6ary 6ar-et is concerned with issue 6anage6ent7 as %er the 6utual fund concern the %ri6ary is called as the 4FO or 4ew Fund Offer. 'll the 'M, :'ssets Manage6ent ,o6%any; issue the funds through the 4FO. /(ery 4FO has a %articular in(est6ent o8Gecti(e7 style of in(est6ent and allocation of the funds de%ending on the fund 6anagers? style of in(est6ent. $he other %ortion of the ca%ital 6ar-et is secondary 6ar-et7 as we ha(e a discussion with reference with 6utual fund secondary 6ar-et 6eans when the 6ar-et reaches the 8ull stage the in(estor sells the units. When the 6ar-et is 8earish7 the in(estor 8uys or so6e of the in(estors wait to sell in future.

RO=/ OF /1I

' inde0 fund sche6e? 6eans a 6utual fund sche6e that in(ests in securities in the sa6e %ro%ortion as an inde0 of securitiesIC ' 6utual fund 6ay lend and 8orrow securities in accordance with the fra6ewor- relating to short selling and securities lending and 8orrowing s%ecified 8y the 1oard.C' 6utual fund 6ay enter into short selling transactions on a recognized stoc- e0change7 su8Gect to the fra6ewor- relating to short selling and securities lending and 8orrowing s%ecified 8y the 1oard.C B3ro(ided that in case of an inde0 fund sche6e7 the in(est6ent and ad(isory fees shall not e0ceed three fourths of one %ercent :)."5F; of the wee-ly a(erage net assets.B B3ro(ided further that in case of an inde0 fund sche6e7 the total e0%enses of the sche6e including the in(est6ent and ad(isory fees shall not e0ceed one and one half %ercent :1.5F; of the wee-ly a(erage net assets.C /(ery 6utual fund shall 8uy and sell securities on the 8asis of deli(eries and shall in all cases of %urchases7 ta-e deli(ery of rele(ant securities and in all cases of sale7 deli(er the securitiesL 3ro(ided that a 6utual fund 6ay engage in short selling of securities in accordance with the fra6ewor- relating to short selling and securities lending and 8orrowing s%ecified 8y the 1oardL 3ro(ided further that a 6utual fund 6ay enter into deri(ati(es transactions in a recognized stoc- e0change7 su8Gect to the fra6ewor- s%ecified 8y the 1oard.C

Association Mutual Fund in India

The Association of Mutual Funds in India :'MFI; is dedicated to de(elo%ing the Indian Mutual Fund Industry on %rofessional7 healthy and ethical lines and to enhance and 6aintain standards in all areas with a (iew to %rotecting and %ro6oting the interests of 6utual funds and their unit holders. 'MFI wor-ing grou% on 1est 3ractices for sales and 6ar-eting of Mutual Funds under the ,hair6anshi% of hri 1. G. *aga7 For6er /0ecuti(e *irector of 5nit $rust of India with hri 9i(e- Reddy of 3ioneer I$I7 hri 'lo- 9aG%eyi of * 3 Merrill =ynch7 hri 4i-hil Ahattau of un F + , and hri ,handrashe-har athe7 For6erly of Aota- Mahindra Mutual Fund has suggested for6ulation of guidelines and code of conduct for inter6ediaries and this wor- has 8een a8ly done 8y a su8Jgrou% consisting of hri 1. G. *aga and hri 9i(e- Reddy.

Following are the 'MFI in India

$a0 3lanning and Mutual Fund

In(estors in India o%t for the ta0Jsa(ing 6utual fund sche6es for the si6%le reason that it hel%s the6 to sa(e 6oney. $he ta0Jsa(ing 6utual funds or the eHuityJlin-ed sa(ings sche6es :/= ; recei(e certain ta0 e0e6%tions under ection ## of the Inco6e $a0 'ct. $hat is one of the reasons why the in(estors in India add the ta0Jsa(ing 6utual fund sche6es to their %ortfolio. $he ta0Jsa(ing 6utual fund sche6es are one of the i6%ortant ty%es of 6utual funds in India that in(estors can o%tion for. $here are se(eral co6%anies in India that offer @ ta0 @ sa(ing 6utual fund sche6es in the country.

SE I !uideline of Mutual Fund

/1I Regulation 'ct 1&&! /sta8lish6ent of a Mutual FundL In India 6utual fund %lay the role as in(est6ent with trust7 so6e of the for6alities laid down 8y the /1I to 8e esta8lish6ent for setting u% a 6utual fund. 's the %art of trustee s%onsor the 6utual fund7 under the Indian $rust 'ct7 1##.7 under the trustee co6%any are re%resented 8y a 8oard of directors. 1oard of *irectors is a%%oints the 'M, and custodians. $he 8oard of trustees 6ade rele(ant agree6ent with 'M, and custodian. $he launch of each sche6e in(ol(es in(iting the %u8lic to in(est in it7 through an offer docu6ents. *e%ending on the %articular o8Gecti(e of sche6e7 it 6ay o%en for further sale and re%urchase of units7 again in accordance with the %articular of the sche6e7 the sche6e 6ay 8e wound u% after the %articular ti6e %eriod. 1. $he s%onsor has to register the 6utual fund with /1I .. $o 8e eligi8le to 8e a s%onsor7 the 8ody cor%orate should ha(e a sound trac- record and a general re%utation of fairness and integrity in all his 8usiness transactions. Means of ound $rac- Records $he 8ody cor%orate 8eing in the financial ser(ices 8usiness for at least fi(e years <a(ing a %ositi(e net worth in the fi(e years i66ediately %receding the a%%lication of registration. 4et worth in the i66ediately %receding year 6ore than its contri8ution to the ca%ital of the 'M,. /arning a %rofit in the three out of the fi(e %receding years7 including the fifth year.

2. $he s%onsor should hold at least 4)F of the net worth of the 'M,. 4. ' %arty which is not eligi8le to 8e a s%onsor shall not hold 4)F or 6ore of the net worth of the 'M,. 5. $he s%onsor has to a%%oint the trustees7 the 'M, and the custodian. !. $he trust deed and the a%%oint6ent of the trustees ha(e to 8e a%%ro(ed 8y /1I. ". 'n 'M, or its officers or e6%loyees can not 8e a%%ointed as trustees of the 6utual fund. #. 't least two thirds of the 8usiness should 8e inde%endent of the s%onsor. &. Only an inde%endent trustee can 8e a%%ointed as a trustee of 6ore than one 6utual fund7 such a%%oint6ent can 8e 6ade only with the %rior a%%ro(al of the fund of which the %erson is already acting as a trustees.

LAUNC"IN! OF A SC"EMES

1efore its launch7 a sche6e has to 8e a%%ro(ed 8y the trustees and a co%y of its offer docu6ents filed with the /1I. 1. /(ery a%%lication for6 for units of a sche6e is to 8e acco6%anies 8y a 6e6orandu6 containing -ey infor6ation a8out the sche6e. .. $he offer docu6ent needs to contain adeHuate infor6ation to ena8le the in(estors to 6a-e infor6ed in(est6ents decisions. 2. 'll ad(ertise6ents for a sche6e ha(e to 8e su86itted to /1I within se(en days fro6 the issue date. 4. $he ad(ertise6ents for a sche6e ha(e to disclose its in(est6ent o8Gecti(e. 5. $he offer docu6ents and ad(ertise6ents should not contain any 6isleading infor6ation or any incorrect state6ent or o%inion. !. $he initial offering %eriod for any 6utual fund sche6es should not e0ceed 45 days7 the only e0ce%tion 8eing the eHuity lin-ed sa(ing sche6es. ". 4o ad(ertise6ents can contain infor6ation whose accuracy is de%endent on assu6%tion. #. 'n ad(ertise6ent cannot carry a co6%arison 8etween two sche6es unless the sche6es are co6%ara8le and all the rele(ant infor6ation a8out the sche6es is gi(en. &. 'll ad(ertise6ents need to carry the na6e of the s%onsor7 the trustees7 the 'M, of the fund. 1). 'll ad(ertise6ents need to disclose the ris- factors. 11. 'll ad(ertise6ents shall clarify that in(est6ent in 6utual funds is su8Gect to 6ar-et risand the achie(e6ent of the fund?s o8Gecti(es cannot 8e assured. 1.. When a sche6e is o%en for su8scri%tion7 no ad(ertise6ent can 8e issued stating that the sche6e has 8een su8scri8ed or o(er su8scri%tion.

CONCLUSION

Mutual funds are a6ong the 6ost %referred in(est6ent instru6ents. For 6iddle inco6e indi(iduals7 in(esting in 6utual funds yields higher interest and co6es with good %rinci%al a6ount at the end of the 6aturity %eriod of the 6utual fund in(est6ent. 'nother i6%ortant fact is that 6utual funds are safe7 with close to zero ris-7 offering an o%ti6ized return on earnings and %rotecting the interest of in(estors. It is i6%ortant to gain good understanding of 6utual fund in(est6ents7 co6%anies in the field7 and 6utual fund e0%erts7 as custo6ers are easily 6isguided 8y the ad(ertise6ents and offers %ro6oted 8y (arious financial institutions. 's a %rofessionally 6anaged ty%e of in(est6ent 6echanis67 the 6utual fund wor-s 8y %ooling 6oney fro6 6any indi(iduals7 in(esting in a di(erse %ortfolio of securities such as shortJter6 6oney 6ar-et instru6ents7 8onds7 stoc-s7 and other financial instru6ents and co66odities7 for instance7 %recious 6etals. $he 6utual fund is run 8y a fund 6anager who is res%onsi8le for the 8uying and selling of in(est6ents in accord with the in(est6ent o8Gecti(es of the fund. Funds registered with the ecurities and /0change ,o66ission7 should distri8ute al6ost all of their net realized gains and net inco6e fro6 the sale of securities and no less than once a year. Most of the funds are organized in the for6 of trusts and o(erseen 8y trustees or 8oards of directors. $hese are charged with the 6anage6ent of the fund7 as to ser(e in the 8est interest of in(estors.

Refe#ence$ 1; ,handra 3rasanna7 The Investment Game $ata McJ Graw <ill 3u8lishing7 4ew *elhi.

.; *a(e7 . '. 7CMutual FundsL Growth and *e(elo%6entC $he Dournal of the Indian Institute of 1an-ers7 Dan @ March7 1&&..

2; *esai 9asant 7 BIndian Financial yste6C <i6alaya 3u8lishing <ouse7 4ew *elhi.

4; Fisher *onald /. and Dordan Ronald D.7 B ecurity 'nalysis and 3ortfolio Manage6entC 3rntice <all of India7 3(t. =td. i0th /dition7 4ew *elhi.

5; 3atha- 1harati 9.7 BIndian Financial yste6C 3earson /ducation 3u8lishing7 4ew *elhi.

!; Ra6ola A. .7 BMutual Fund and the Indian ,a%ital Mar-et? >oGana7 9ol. 2!7 4o.117 Dune 2)7 1&&..

"; 9yas 71.'.CMutual FundsJ 1oon to the ,o66on In(estorsC Fortune India7 Duly 1!7 1&&).