Unit - 5

                                                                  MUTUAL FUND 

Introduction

The India asset management industry is still at the nascent stages of growth when compared to developed countries. Mutual fund is unique financial service of great importance. In the last eight years between June 2000 and June 2008, the mutual fund industry has been growing at a healthy rate of more than 30 per cent. 

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1933 defines a mutual fund as “a fund established in the form of a trust by a sponsor to raise monies 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.”

What is Mutual Fund?

Mutual fund are defined by the different authors in different words meaning one and same thing, i.e., it is a non-banking financial intermediary which acts as an important vehicle for bringing wealth holders and deficit units together indirectly. Mutual funds are pooling funds together and then investing that fund to different securities, thus reduce risk by diversification. 

Mutual fund units are investment vehicle that provide a means of participation in the stock market for people who have neither the time, nor the money, nor perhaps the expertise to undertake direct investment in equities successfully

Mutual fund set up 

 A mutual fund is set up in the form of a trust, which has a sponsor, trustees, an asset management company (AMC) and a custodian. The trust is established by one or more sponsors, akin to the promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders.

 The AMC (approved by SEBI) manages the fund by making investment in various securities. The custodian, who is registered with SEBI, holds the securities of the various schemes of the fund in its custody.

Types of Mutual Fund 

a)      Open & Close-ended Funds 

If the period and/or target amount of the fund is definite, the fund is called close-ended. If indefinite, it is called open-ended. For instance, the Unit Scheme (1964) of the Unit Trust of India (UTI) is an open-ended fund, both in terms of period as well as target amount.

A close-ended fund or scheme has a stipulated maturity period, for example 5-7 years. The fund is open for subscription only during a specified period at a time of launch of the scheme.

b)      Income & Growth-Oriented Fund

The income-oriented fund aims at distribution of income periodically amongst investors. Consequently, its Investment strategy conforms to the fund objective by deployment of investors’ monies into fixed income yielding securities. On the other hand, the growth oriented fund meets the investors’ need for appreciation, high risk-bearing capacity and ability to differ liquidity. As such, the investments by growth-oriented funds are predominantly made in equities. The fund which partially meets the needs for income and growth are called ‘balanced’ or ‘income-cum-growth’ fund.

 

c)      Sectrorial, industry, Customer Group Funds 

The funds may have, at the international level, investments in securities of specified areas, e.g., Japan Fund, Thailand Fund or South Korea Fund, etc. These funds provide access to foreign investors into domestic securities of these countries. Similarly, certain funds may invest their resources in specified industry or industries like Rail Road or Petroleum Industry funds in the US. Certain mutual funds may be confined to a high-tech and high-growth industry, which may attract risk taken in such cases. The fund may also aim at a specific customer target group to meet their major needs, like funds for pensioners, windows, etc.

 

d)      Taxation Funds

Certain funds are designed to avail certain tax-exemptions, whether in the domestic or foreign capital markets. Tax Saving Magnum of SBI Capital Markets Limited is an example of the domestic type. UTI’s US $60 million India Fund, based in the US, is an example of the latter type off-shore mutual fund to avail the tax exempt status in tax havens.

 

 e)      Income/Debt Oriented Scheme

The aim of income fund is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities like bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets.

However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of a change in interest rates in the country. If the interest rates fall, the NAVs ate likely to increase in the short term and vice versa. However, long-term investors may not bother about these fluctuations.

f)       Balanced Fund 

The aim of balance is to provide growth and regular income, as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40 to 60 per cent in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

g)      Gold Exchange-trade Funds

 (Gold ETFs) have made an entry into the Indian mutual fund market in 2005. Only five fund houses have offered this product and going by the assets under management (AUM) of these fund houses in terms of absolute values, these products are not yet popular. But there can be little doubt these products are destined to come into their own. 

h)      Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short term instruments like treasury bills, certificates of deposit, commercial paper, inter-bank call money and government securities. The returns on these schemes fluctuate mush less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

i)        Index Fund

 Index funds replicate the portfolio of a particular index like the BSE sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in securities in the same weightage comprising of an index. The NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to factors known as ‘tracking error’. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

 There are also exchange traded index funds launched by the mutual funds, which are traded in the stock exchanges. 

 

)        Commodity Funds

Commodity funds that invest in a single commodity or a group of commodities are called specialized commodity funds. Funds that invest in all commodities are called diversified commodity funds; these bear less risk than specialized commodity funds. Precious metal funds, gold funds, and gold exchange traded funds are examples of commodity funds.