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INTRODUCTION
Mutual funds have become a hot favorite of millions of people all over the world.
The driving force of mutual funds is the safety of the principal guaranteed plus the
added advantage of capital appreciation together with the income earned in the
form of interest or dividend. People prefer mutual funds to bank deposits, the
insurance and even bonds because with a little money, they can get into the
investment game. One can own a string of blue chips like ITC, TISCO, Reliance
etc., through mutual funds. Thus, mutual funds act as a gateway to enter into big
companies hitherto inaccessible to an ordinary investor with his small investment.
Mutual Funds refer to a fund, managed by an investment company with the
financial objective of generating high Rate of Returns. These asset
management or investment management companies collects money from the
investors and invests those money in different Stocks, Bonds and other
financial securities in a diversified manner. Before investing they carry out
thorough research and detailed analysis on the market conditions and market
trends of stock and bond prices. These things help the fund managers to
speculate properly in the right direction.
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WHAT IS MUTUAL FUND
To in simple words, a mutual fund collects the saving from small investors, invest
them in government and other corporate securities and earn income through
interest and dividends, besides capital gains, Its works on the principle of small
drop of water makes a big ocean. For instance, if one has Rs1000 to invest, it may
not fetch very much on its own. But, when it is pooled with Rs.1000 each from a
lot of other people, then, one could create a big fund large enough to invest in a
wide varieties of share and debentures on a commanding scales thus, to enjoy the
economics of large scale on operations. Hence a mutual fund is nothing but a form
of collective investment. It is formed by the coming together of a number of
investors who transfer their surplus fund to professionally qualified organization to
manage it. Each fund is divided into a small fraction called unites of equal value.
Each investor is allocated unites in portions to the size of his investment. Thus,
every investor, whether big or small, will have stake in fund. Hence, mutual funds
enable millions of small and large investors who emerge to participate in and
derive the benefit of the capital market growth. It has emerged as a popular vehicle
of creation of wealth due to high return, lower cost and diversified risk.
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DEFINITION
According to Weston J. Ferd and Brigham, Eugene, F., Unit trusts are
Corporationswhich accept dollars from savers and then use these dollars to buy
stocks, long term bonds, and short term debt instruments issued by business or
governments units, these corporationspool funds and thus reduce risk by
diversification. Thus mutual funds are corporations which pool funds by selling
their own shares and reduce risk by diversification.
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HISTORY
The first mutual funds were established in Europe. One researcher credits a Dutch
merchant with creating the first mutual fund in 1774. The first mutual fund outside
the Netherlands was the Foreign & Colonial Government Trust, which was
established in London in 1868. It is now theForeign & Colonial Investment
Trust and trades on the London stock exchange.
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.
The first open-end mutual fund with redeemable shares was established on March
21, 1924. This fund, the Massachusetts Investors Trust, is now part of the MFS
family of funds.However, closed-end funds remained more popular than open-end
funds throughout the 1920s. By 1929, open-end funds accounted for only 5% of
the industry's $27 billion in total assets.
After thestock market crash of 1929,Congresspassed a series of acts regulating
securities markets in general and mutual funds in particular. The Securities Act of
1933 requires that all investments sold to the public, including mutual funds, be
registered with the Securities and Exchange Commission and that they provide
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fast-growing retirement plans, specifically in401(k) and otherdefined contribution
plans and inindividual retirement accounts (IRAs), all of which surged in
popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of
thecredit crisis of 2008.
In 2003, the mutual fund industry was involved in ascandal involving unequal
treatment of fund shareholders. Some fund management companies allowed
favored investors to engage inlate trading, which is illegal, ormarket timing,
which is a practice prohibited by fund policy. The scandal was initially discovered
by then-New York State Attorney GeneralEliot Spitzer and resulted in
significantly increased regulation of the industry.
At the end of 2011, there were over 14,000 mutual funds in the United States with
combined assets of $13 trillion, according to theInvestment Company
Institute (ICI), a trade association of investment companies in the United States.
The ICI reports that worldwide mutual fund assets were $23.8 trillion on the same
date. Mutual funds play an important role in U.S. household finances and
retirement planning. At the end of 2011, funds accounted for 23% of household
financial assets. Their role in retirement planning is particularly significant.
Roughly half of assets in 401(k) plans and individual retirement accounts were
invested in mutual funds.
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SCOPE OF MUTUAL FUND
As stated earlier, a mutual fund is nothing but a pool of the investor funds. The
special feature of a mutual fund is that the contributors and the beneficiaries of the
fund are one and the same class of people i.e. investors. Nobody else can claim that
fund. Since the investors themselves contribute to the pool of fund and enjoy it and
its fruits, the term mutualhas been employed.
The important features of mutual funds are the following:
(1) A mutual fund belongs to those who have contributed to that fund and thus, the
ownership of the fund lies in the hands of the investor.
(2) Since all investors cannot take part in the management of the fund, it is left in
the hands of investment professionals who earn a fee for their services.
(3) The pool of funds collected is invested in a portfolio of marketable securities.
(4) The investors share in the fund is represented by units just like shares in the
case of share capital of a company. The unit value depends upon the value of the
portfolio held by the fund. Hence, the value changes almost every day and it is
called Net Asset Value.
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STRUCTURE
In the US, a mutual fund is registered with theSecurities and Exchange
Commission (SEC) and is overseen by a board of directors (if organized as a
corporation) orboard of trustees (if organized as a trust). The board is charged with
ensuring that the fund is managed in the best interests of the fund's investors and
with hiring the fund manager and other service providers to the fund.
Thefund manager, also known as the fund sponsor or fund management
company,trades (buys and sells) the fund's investments in accordance with the
fund's investment objective. A fund manager must be aregistered investment
advisor.Funds that are managed by the same fund manager and that have the same
brand name are known as a "fund family" or "fund complex".
Mutual funds are not taxed on their income and profits as long as they comply with
requirements established in the U.S. Internal Revenue Code. Specifically, they
must diversify their investments, limit ownership of voting securities, distribute a
high percentage of their income and capital gains (net of capital losses) to their
investors annually, and earn most of the income by investing in securities and
currencies.
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Mutual funds pass taxable income on to their investors by paying out dividends
and capital gains at least annually. The characterization of that income is
unchanged as it passes through to the shareholders. For example, mutual fund
distributions of dividend income are reported as dividend income by the investor.
There is an exception: net losses incurred by a mutual fund are not distributed or
passed through to fund investors but are retained by the fund to be able to offset
future gains.Mutual funds may invest in many kinds ofsecurities. The types of
securities that a particular fund may invest in are set forth in the fund's prospectus,
which describes the fund's investment objective, investment approach and
permitted investments. The investment objective describes the type of income that
the fund seeks. For example, a "capital appreciation" fund generally looks to earn
most of its returns from increases in the prices of the securities it holds, rather than
from dividend or interest income. The investment approach describes the criteria
that the fund manager uses to select investments for the fund.
A mutual fund's investmentportfolio is continually monitored by the
fund'sportfolio manager or managers.Hedge funds are not considered a type of
(unregistered) mutual fund. While they are another type of collective investment
vehicle, they are not governed by the Investment Company Act of 1940 and are not
required to register with the Securities and Exchange Commission (though many
hedge fund managers must register as investment advisers)
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INVESTMENT
Mutual Funds Investment has become a subject of great importance in the
present context, especially when all the investors are keen to diversify their
investment to maintain a balance between Investment Return and Investment
Risk. For gaining the Diversified Investment Solution and the liquidity
advantage, any person needs to invest in Mutual Funds. But, before investing
their hard earned money one needs to carry out sincere research on the
performance of those mutual funds, he is considering to invest in.
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The things that one needs to consider before deciding on any particular mutual
fund are the following:
Performance of the Fund and the Rate of Returns Investment Psychology of the Mutual FundRisk AdjustmentFund Management
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be significantly different from net asset value. It may be at a "premium" to net
asset value (meaning that it is higher than net asset value) or, more commonly, at a
"discount" to net asset value (meaning that it is lower than net asset value). A
professional investment manager oversees the portfolio, buying and selling
securities as appropriate.
At the end of 2011, there were 634 closed-end funds in the United States with
combined assets of $239 billion.
INCOME FUNDSAs the name suggest,these funds aims at generating and distributing regular
income to the members on a periodical basis. It concentrates more on the
distributing regular income and it also sees that the average return is higher than
that of the income from bank deposits.
The investors are assured of regular income at periodic intervals,say half-yearly or
yearly or so on.
The main objective of this type of fund is to declare regular dividends and not
capital appreciation.
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SPECIALISED FUNDSBesides the above, a larger number of specialized funds are in existence in abroad.
They offer special schemes so as to meet the specific needs of specific catagories
of people like pensioners, widows etc. There are also fund for investment in
securities of specified areas. For instance, Japan Fund, South Korea Fund, and etc.
In fact these funds open door for foreign investors to invest on domestic securities
of these countries.
Again some certain Funds may be confined to one particular sector or industry like
fertilizer, automobiles, petroleum, etc. These Funds carry heavy risk since the
entire investment is in one industry. But, there are high risk taking investors who
preferthis type of Fund. Of course, in such cases the reward may commensurate
with the risk taken. At times, it may be erratic. The best example of this type is the
petroleum industry funds in the USA.
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RISKS IN MUTUAL FUNDS
Mutual funds are not free from risks. It is so because basically the mutual funds
also invest their funds in the stock market on shares which are volatile in nature
and are not free from risk. Hence, the following are risk inherent in their dealings:
(i) Market RisksIn general, there are certain risks associated with every kind of investment in
shares. They are called market risks. These market risks can be reduced, but not
eliminated even by a good investment management. The prices of shares are
subject to wide price fluctuations depending upon market condition over which
nobody has control.
(ii) Scheme RisksThere are certain risks inherent in the scheme itself. It all depends upon the nature
of the scheme. For instance, in a pure growth funds scheme, risks are greater
because if one expects more returns as in the case of growth scheme, one has to
take more risks.
(iii) InvestmentRisksWhether the Mutual Funds makes money in shares or loses depends upon the
investment expertise of the ASSET MANAGEMENT COMPANY (AMC). If the
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RISKS VS RETURN
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SEMI GUIDELINES ON MUTUAL FUND
The SEBI has laid down the following conditions for the use of Mutual funds:
(i) Mutual funds should use only those mutual funds that reflect the assetallocation of the fund.
(ii) The period of comparison of returns should be identical for the fund and themutual fund.
(iii) If the schemes offer document indicial a benchmark for returncomparisons,the same should be the scheme.
(iv) Growth funds with more than 60% in equity should always use any of thestandard indices like Sensex, NSE Nifty, BSE 100 and Crisil 500. These indices
should be used consistently throughout. Changes can happen only when asset
allocation of the fund has changed significant, and trustees approve the change.
(v) Income funds with more than 60% in the debt should use a bond marketindex on bench mark.
(vi) Balanced Funds can make use of tailor benchmarks that combine equity andbond index returns in the same proportion as in the asset allocation of the fund.
(vii) Money market funds can made use of a money market funds(viii)Can made use of a money market instrument or the combination of suchinstruments as benchmarks.
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CONTROVERSY
Critics of the fund industry argue that fund expenses are too high. They believe
that the market for mutual funds is not competitive and that there are many hidden
fees, so that it is difficult for investors to reduce the fees that they pay. They argue
that the most effective way for investors to raise the returns they earn from mutual
funds is to invest in funds with low expense ratios.
Fund managers counter that fees are determined by a highly competitive market
and, therefore, reflect the value that investors attribute to the service provided. In
+addition, they note that fees are clearly disclosed.
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Rendering Expertise Investment Service At a Low CostThe management of the fund is generally assigned to professionals who are well
trained and have adequate experience in the field of investment. The investment
decisions of these professionals are always backed by informed judgement and
experience.
Providing Better Service
A mutual fund is able to command vast resources and hence it is possible for it to
have an in depth study and carry out research on corporate securities. Each fund
maintains a large research team which constantly analyses the companies and the
industries and recommends the funds to buy or sell a particular share. Thus,
investments are made purely on the basis of a research.
Offering Tax BenefitsCertain funds offer tax benefits to its customer. Thus, apart from dividends, interest
and capital appreciation, investors also stand to get the benefit of tax concession.
Introducing Flexible Investment ScheduleSome mutual funds have permitted the investors to exchange their units from one
scheme to another & this flexibility is a great boon to investors. Income Units can
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be exchanged for growth units depending upon the performance of the funds. One
cannot derive such flexibility in any other investments.
Providing Greater Affordability and LiquidityEven very small investors can afford to invest in mutual funds. They provide an
attractive and cost effective alternative to direct purchase of shares. Units can be
sold to the fund at any time at the NAV and thus quick access to liquid cash is
assured.
Supporting Capital MarketMutual Funds play a vital role in supporting the development of capital markets.
The Mutual funds make the capital market active by means of providing a
sustainable domestic source of demand for capital market instrument. In other
words the savings of the people are directed towards investment in capital markets
through these mutual funds. Thus, funds serve as a conduit for dis-intermediating
bank deposits into stocks, shares and bonds. Mutual funds also provide a valuable
liquidity to the capital market, and thus, the capital is made very active and stable.
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Promoting Industrial DevelopmentThe economic development of any country or nation depends upon its industrial
advancement and agricultural development. All industrial development units have
to raise their funds by resorting to the capital market by the issue of shares and
debentures. The mutual funds not only create a demand for these capital market
instruments but also supply a large source of funds to the market, and thus, the
industries are assured for capital requirement.
Reducing Market Cost Of New IssuesThe mutual fund helps to reduce the marketing cost of the new issues. The
promoters used to allot a major share of the initial public offering to the mutual
funds and thus they are saved from the marketing cost of such issue.
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THE ADVANTAGES OF INVESTING IN A MUTUAL FUND
The advantages of investing in a Mutual Fund are:
1. Professional ManagementThe investor avails of the services of experienced and skilled professionals who are
backed by a dedicated investment research team which analyses the performance
and prospects of companies and selects suitable investments to achieve the
objectives of the scheme.
2.DiversificationMutual Funds invest in a number of companies across a broad cross-section of
industries and sectors. This diversification reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on your
own.
3. Convenient AdministrationInvesting in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and unnecessary follow up with
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brokers and companies. Mutual Funds save your time and make investing easy and
convenient.
4. Return PotentialOver a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
5. Low CostsMutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage,
custodial and other fees translate into lower costs for investors.
6. LiquidityIn open-ended schemes, you can get your money back promptly at net asset value
related prices from the Mutual Fund itself. With close-ended schemes, you can sell
your units on a stock exchange at the prevailing market price or avail of the facility
of direct repurchase at NAV related prices which some close-ended and interval
schemes offer you periodically.
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7. TransparencyYou get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.
8. FlexibilityThrough features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds
according to your needs and convenience.
9. Choice of SchemesMutual Funds offer a family of schemes to suit your varying needs over a lifetime.
10.Well RegulatedAll Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI.
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DISADVANTAGES /LIMITATIONS OF MUTUAL FUNDS
The main limitations or disadvantages of mutual funds are as follows:
Mutual funds are subject to market risk.No guarantee of returns.Diversification of portfolio doesn't maximize returns.Selecting right financial securities is not easy.Cost management not proportional to performance.Unethical practices may creep in.
Now let's discuss above limitations of mutual funds one by one.
1. Subject to market risk
Mutual fund investments are subject to market risk involved. This caution
(warning) can be checked with the offer document where it is clearly mentioned as
follows:
"Mutual Fund investments are subject to market risks. Please read the offer
document carefully before investing."
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2. No guarantee of returns
Mutual funds do not give any guarantee of the returns for the investments made in
its various schemes.
3. Diversification of portfolio doesn't maximize returns
Mutual fund helps to diversify the portfolio. However, though the diversification of
portfolio helps in minimization of risk, these do not results in maximization of
returns to the investors.
4. Selecting right financial securities is not easy
It's difficult task for a mutual fund manager to select appropriate and suitable
financial securities for investment to generate higher returns.
5. Cost management not proportional to performance
Mutual fund managers are one of the highest-paid executives in the finance
domain. Furthermore, the fee paid to the Asset Management Company (AMC) is
no way related to the performance of these funds.
6. Unethical practices may creep in
Mutual fund managers may follow unethical (corrupt) practices to boost the
performance of the various fund-related schemes.
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FUTURE OF MUTUAL FUNDS IN INDIA
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. TheSEBI (Securities Exchange Board of India) has granted the permission for
the same.
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The SEBI is lending its full support for the promotion of the mutual fundsindustry directly or indirectly.
More emphasis is put on the effective Mutual Funds governance. Mutual funds provide wide range of products so as to meet the diverse needs
of the investing public. The investors have a good choice to meet their
different expectations like security, growth and liquidity.
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 byproviding people with proper financial planning.
A three year dividend tax exemption from UTI and equity dominated Openended Mutual Funds.
A full Income tax exemption for all income from the UTI and mutual fundsin the hands of the investors.
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CONCLUSION
Amutual fundbrings together a group of people and invests their money instocks, bonds, and other securities.
The advantages of mutual are professionalmanagement,diversification,economies of scale,simplicity and liquidity.
The disadvantages of mutual fund are high costs, over-diversification,possible tax consequences, and the inability of management to guarantee a
superior return.
There are many, many types of mutual funds. You can classify funds basedon asset class, investing strategy, region, etc.
Mutual funds have lots of costs.
Costs can be broken down into ongoing fees (represented by theexpense
ratio) and transaction fees (loads).
The biggest problems with mutual funds are their costs and fees. Mutual funds are easy to buy and sell. You can either buy them directly from
the fund company or through a third party.
Mutual fund ads can be very deceiving.
http://www.investopedia.com/terms/m/mutualfund.asphttp://www.investopedia.com/terms/d/diversification.asphttp://www.investopedia.com/terms/e/economiesofscale.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/l/loadfund.asphttp://www.investopedia.com/terms/l/loadfund.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/e/economiesofscale.asphttp://www.investopedia.com/terms/d/diversification.asphttp://www.investopedia.com/terms/m/mutualfund.asp8/12/2019 Financial Services Mutual Funds (1)
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ABBREVATIONS
MFS- Mutual Funds
MMMFS-Money Market Mutual FundsAMC - Asset Management CompanySEBI- Securities Exchange Board of IndiaUSAUnited States of America.IRA- Individual Retirement AccountsSEC-Securities and Exchange CommissionIPO- Initial Public Offering.
http://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commission8/12/2019 Financial Services Mutual Funds (1)
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REFERENCES
Books Referred:
1. Book-Financial Markets and Services.Author- Gordon &Natrajan
Edition- Fifth revised Edition 2009
Publisher- Himalaya publishing house.
2. Book-Indian EconomyAuthor-Misra S.K Puri V.K
Edition- 28thEdition (October 2010)
Publisher-Himalaya publishing house.
Websites
www.google.com www.wikipedia.com www.mutualfunds.in
http://www.google.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.google.com/