1

Mutual Fund Investment in India

Introduction

In the 1980s the modern mutual fund was first introduced in Belgium in 1822. This
form of investment soon spread to Great Britain and France. Mutual funds became popular in
the United States in the 1920s and continue to be popular since the 1930s, especially open-
end mutual funds. Mutual funds experienced a period of tremendous growth after World War
II, especially and 1990s.
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 invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could range
from shares to debentures to money market instruments. The income earned through these
investments and the capital appreciation realized by the scheme is shared by its unit holders
in proportion to the number of units owned by them (pro rata). 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 portfolio at a relatively low cost. Anybody with an
inventible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each
Mutual Fund scheme has a defined investment objective and strategy.
A mutual fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full time basis. The
large pool of money collected in the fund allows it to hire such staff at a very low cost to each
investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas of
research investments and transaction processing. While the concept of individuals coming
together to invest money collectively is not new, the mutual fund in its present form is a 20th
century phenomenon.

In India, as in most In the Indian context, the sponsors promote the Asset
Management Company also, in which it holds a majority stake. In many cases a sponsor can
hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is
the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated
different mutual funds schemes and also acts as an asset manager for the funds collected
under the schemes.

OBJECTIVES OF INVESTMENT IN MUTUAL FUND:

1. Net Asset Value (NAV) of a scheme signify and the basis of this
calculation:

Net asset value on a particular date reflects the realisable value that the investor will
get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by
deducting all liabilities (except unit capital) of the fund from the realisable value of all assets
and dividing by number of units.

2. The tax benefits for investing in mutual fund units:

Dividend income from mutual fund units will be exempt from income tax with effect
from July 1,1999. Further, investors can get rebate from tax under section 88 of Income Tax
Act, 1961 by investing in Equity Linked saving schemes of mutual funds. Further benefits are
 2
also available under section 54EA and 54EB with regard to relief from long term capital
gains tax in certain specified schemes

3. Get fixed monthly income by investing in mutual fund units:

There is an umber of mutual fund schemes which give fixed monthly income. Further we
can also get monthly income by making a single investment in an open ended scheme and
redeeming fix value of units at regular intervals.

A safe investment in mutual fund:

No stock market related investments can be termed safe with certainty as they are
inherently risky. However different funds have different risk profile which is stated in its
objective. Funds which categories themselves as low risk, invest generally in debt which is
risky than equity, Anyway as mutual funds have access to services of experts fund managers,
they are always safer than direct investment in the stock.

Mutual Funds - The Logic behind Investing in Them:

Mutual funds are investment companies that pool money from investors at large and
offer to sell and buy back its shares on a continuous basis and use the capital thus raised to
invest in securities of different companies. This article helps to know in depth on. At the
beginning of this millennium, mutual funds out numbered all the listed securities in New
York Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at
lower cost in comparison to bonds and stocks. The popularity of mutual funds may be
relatively new but not their origin which dates back to 18th century.

A Brief of How Mutual Funds Work

Mutual funds can be either or both of open ended and closed ended investment
companies depending on their fund management pattern. An open-end fund offers to sell its
shares (units) continuously to investors either in retail or in bulk without a limit on the
number as opposed to a closed-end fund. Closed end funds have limited number of shares.
Mutual funds have diversified investments spread in calculated proportions amongst
securities of various economic sectors. Mutual funds get their earnings in two ways. First is
the most organic way, which is the dividend they get on the securities they hold. Second is by
the redemption of their shares by investors will be at a discount to the current net asset
values.

Performance of Mutual Funds: Current Scenario

Different Indian mutual fund companies have plans of introducing pension schemes. They
are also planning to introduce open-ended mutual funds. According to experts, if certain
restrictions are removed, the system will become more beneficial and flexible.

Following Mutual Fund Companies in India:

The number of Indians putting their money on mutual fund investments is steadily
increasing. More and more people are being lured by the prospect of handsome profits that
investments in mutual funds carry for the investors. In recent years, many mutual fund
companies have sprung up in India. Now the investors have lots of mutual fund companies in
India to choose from.

State Bank of India Mutual Fund

 3
A fully owned subsidiary of the State Bank of India, the State Bank of India Mutual Fund
offers its services to partnership firms, trusts and societies, individuals and corporate in India.
The State Bank of India Mutual Fund follows effective credit management policies to
minimize the investor's risks.

ICICI Prudential Mutual Fund

The mutual fund division of ICICI Prudential was set up in May, 1998. In a very short span
of time, ICICI Prudential Mutual Fund has been able to gain the trust of investors in India and
become one of the major mutual fund companies in India. Some of the popular schemes
launched by ICICI Prudential have been listed below.

ICICI Prudential Liquid Plan

ICICI Prudential Child Care Plan

ICICI Prudential Growth Plan

Tata Mutual Fund

Tata Mutual Fund is one of the leading mutual fund companies in India. More than 1,00,000
lakhs customers in India avail the services of Tata Mutual Fund. Some of the major mutual
fund products offered by the company have been listed below.

• Tata Tax Saving Fund

• Tata Mid Cap Fund
• Tata Infrastructure Fund

Other Popular Mutual Fund Companies in India:

Some of the other, popular mutual fund companies in India have been listed below.

• HDFC Mutual Fund

• Birla Sun Life Mutual Fund
• Reliance Mutual Fund
• UTI Mutual Fund

Top Five Mutual Funds in India:

According to a market survey, it is can be said that the top five mutual funds in India (last 6
months) are-

• Reliance Mutual Fund

• UTI Mutual Fund
• ICICI Prudential Mutual Fund
• HDFC Mutual Fund and
• Franklin Templeton Mutual Fund

The Reliance Mutual Fund has achieved the top position in offering best mutual funds to the
Indian customers. This company is headed by famous business personality Anil Ambani. This
year Reliance Mutual Fund has retained its top position. On the second position the UTI
 4
Mutual Fund is also offering best investment plans to its clients. It has given a good challenge
to the ICICI Prudential Mutual Fund which is one of the leading mutual fund houses in India.

Present scenario of Mutual funds in India:

All of the top five mutual funds of India made record in the development of total AUM. They
have increased the AUM rate of the Indian mutual fund industry. Being the top mutual fund
organization of India, the Reliance Mutual Fund rose the AUM to Rs.80,780 crore from
Rs.77,765 crore. On the other hand, the ICICI Prudential Mutual Fund and UTI Mutual Fund
rose to Rs.56,854 crore .

Mutual fund ranking

Funds are ranked based upon their performance as a whole and performance against their
peers by such companies as Morning Star which has an industry recognized rating system for
mutual funds. They have a one-to-five star system in which five stars is the best. Usually the
higher the rank, the higher the quality of the fund. For example Morning Star rates mutual
funds from 1 to 5 stars based on how well they've performed (after adjusting for risk and
accounting for sales charges) in comparison to similar funds. Within each MorningStar
Category, the top 10% of funds receive 5 stars and the bottom 10% receives 1 star. Funds are
rated for up to three time periods: three-, five- and 10- years and these ratings are combined
to produce an overall rating. Funds with less than three years of history are not rated. Ratings
are objective, based entirely on a mathematical evaluation of past performance. The ratings
are a useful tool for identifying funds worthy of further research, but should not be
considered signals to buy or sell

Advantages of Mutual Funds

A Mutual Fund can be defined as a trust wherein the savings of the investors with the same
financial goal are pooled in. The collected money then goes for investment in capital market
instruments. These can include debentures, shares and other such securities. These
investments in turn yield an income. The income and capital appreciation are distributed
amongst its unit holders. The advantages of mutual funds are many. Some of the advantages
of mutual funds in India are listed below:

• Diversification: The top Indian mutual funds create their portfolio designs in such a
manner that the interested individuals who invest in mutual funds react differently even
under similar economic conditions. This can be explained with an example. An increase
in the rates of interest may lead to the diminishing of the asset value of securities in the
portfolios. Again, an increase in the value may result to the appreciation in value of the
other set of portfolio securities. Over time, a balance is created in the portfolio which
leads to an overall increase of the portfolio, even if some security values diminish.
•
• Professional Management: A majority of the mutual funds in India employ the
leading professionals in their investments management. These managers make decisions
on what securities, the buying and selling of the funds will take place.
•
• Liquidity: Getting your money out from the mutual fund is no difficult task. All you
have to do is just write a check, make a telephone call and you are done.
• Convenience: Mutual fund shares can be bought via phone, mail, or even over Internet.
•
 5
• Low cost: The expenses of the Mutual fund seldom cross the 1.5 % mark of the
investment you make. The Index Funds expenses are usually lesser. Instead, the company
stocks are bought by them which are found on the specific index.
•
• Ease of process: Investing in a mutual fund is easy if you are a bank account holder
and you posses a PAN card. All you will need to do is fill up the application form, attach
the PAN card (for transactions over Rs 50,000), sign the cheque and your Mutual Fund
investment is complete.

Future of Mutual Funds in India - An Overview

Financial experts believe that the future of Mutual Funds in India will be very bright. It has
been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs
40,90,000 crore, taking into account the total assets of the Indian commercial banks. The
estimation was based on the December 2004 asset value of Rs 1,50,537 crore. In the coming
10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5
years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it
can be forecasted that the mutual fund assets will be double by 2010.

Indian Mutual Funds Future - Growth Facts

• In the past 6 years, Mutual Funds in India have recorded a growth of 100 %.
• In India, the rate of saving is 23 %. In the future, there lies a big scope for the Indian
Mutual Funds industry to expand. Several asset management companies which are
foreign based are now entering the Indian markets. A number of commodity Mutual
Funds will be introduced in the future. The SEBI (Securities Exchange Board of India)
has granted the permission for the same. More emphasis is put on the effective Mutual
Funds governance. There is also enough scope for the Indian Mutual funds to enter into
the semi-urban and rural areas. Financial planners will play a major role in the Mutual
Funds market by providing people with proper financial planning.

Future of Indian Mutual Funds- Conclusion

Looking at the past developments and combining it with the current trends it can be
concluded that the future of Mutual Funds in India has lot of positive things to offer to its
investors.

Mutual Funds, like every investment, have their own share of advantages and
disadvantages. Before you venture out to make your investment in Mutual Funds, it is
advisable that you do a thorough study of the pros and cons of Mutual Funds. Just like you
can list a number of Mutual Funds advantages, you will find drawbacks of Mutual Funds as
well if you do a market research.

**********