A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money collected & 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 its unit holders in proportion to the number of units owned by them shares the capital appreciation realized by the scheme. Thus, a Mutual Fund is the most suitable investment for the common person as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible 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 – 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 fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.
THE SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds) REGULATIONS,1996 defines a mutual fund as a ” a fund establishment in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments.”
Mutual Funds have been a significant source of investment in both government and corporate securities. It has been for the decades the monopoly of the state with UTI being the key player with invested funds exceeding Rs.300 bn. (US $ 10 bn.). The state owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks – mainly state owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies permitted on a case-by-case basis.
TYPES OF MUTUAL FUNDS:
Mutual funds may be classified on the basis of structure and its investment objectives:
Based on structure:
• Open-Ended Funds: These are funds in which units are open for purchase or redemption through the year. All purchases/redemption of these fund units are done at prevailing NAVs. Basically these funds will allow investors to keep invest as long as they want. There are no limits on how much can be invested in the fund. They also tend to be actively managed which means that there is a fund manager who picks the places where investments will be made. These funds also charge a fee which can be higher than passively managed funds because of the active management. THey are an ideal investment for those who want investment along with liquidity because they are not bound to any specific maturity periods. Which means that investors can withdraw their funds at any time they want thus giving them the liquidity they need.
• Close-Ended Funds: These are funds in which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes are often listed for trade on a stock exchange. Unlike open ended mutual funds, once the units or stocks are bought, they cannot be sold back to the mutual fund, instead they need to be sold through the stock market at the prevailing price of the shares.
• Interval Funds: These are funds that have the features of open-ended and close-ended funds in that they are opened for repurchase of shares at different intervals during the fund tenure. The fund management company offers to repurchase units from existing unitholders during these intervals. If unitholders wish to they can offload shares in favour of the fund.
Based on asset class:
• Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns. Equity funds can include specialty funds like infrastructure, fast moving consumer goods and banking to name a few. THey are linked to the markets and tend to
• Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns. These funds do not deduct tax at source so if the earning from the investment is more than Rs. 10,000 then the investor is liable to pay the tax on it himself.
• Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns. Money markets are also referred to as cash markets and come with risks in terms of interest risk, reinvestment risk and credit risks.
• Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way. An example of a hybrid fund would be Franklin India Balanced Fund-DP (G) because in this fund, 65% to 80% of the investment is made in equities and the remaining 20% to 35% is invested in the debt market. This is so because the debt markets offer a lower risk than the equity market.
Based on investment objective:
• Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose of providing capital appreciation. They are considered to be risky funds ideal for investors with a long-term investment timeline. Since they are risky funds they are also ideal for those who are looking for higher returns on their investments.
• Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.
• Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.
• Tax-Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
• Capital Protection Funds: These are funds where funds are are split between investment in fixed income instruments and equity markets. This is done to ensure protection of the principal that has been invested.
• Fixed Maturity Funds: Fixed maturity funds are those in which the assets are invested in debt and money market instruments where the maturity date is either the same as that of the fund or earlier than it.
• Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in mind. They are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, as a pension or a combination of the two.
BENEFITS OF MUTUAL FUNDS:
Mutual Funds offer diversification in your investment portfolio
Investing in the stock market through Mutual Funds is a safer bet because Mutual Fund investments minimise your risk exposure. Without Mutual Funds, you will need to buy individual securities to diversify your investments. This leaves you exposed to higher volatility.
Mutual Funds have lower investment thresholds
Contrary to the popular myth that’s floating around, you don’t need to have a lot of money to begin investing in Mutual Funds. You heard that right. Many Mutual Fund companies allow investors to begin investing with as little as Rs. 1,000. Some even permit investments as low as Rs. 500 per month.
Mutual Funds encourage systematic investing and withdrawals
Mutual Funds promote disciplined investing and give investors several options to make investing a regular habit. With a Systematic Investment Plan, you can invest a certain fixed sum of money in Mutual Funds on a monthly basis for a specific tenure.
Mutual Funds allow automatic reinvestment
Mutual Funds offer investors dividend pay outs depending on the fund’s performance and gains. With Mutual Fund investments, investors can very easily opt to have their capital gains and dividends reinvested. These reinvested gains accumulate, eventually adding value to the investor’s total investment corpus. The reinvestment of capital gains or dividends is generally processed without a sales load or any extra fees.
If you are not looking for a regular source of income from the investment, it is advisable to choose to reinvest any profits paid to you by the Mutual Funds. This allows you to benefit from the power of compounding
Mutual Funds are transparent
There are no hidden charges in Mutual Fund investments. All the required information about the fund’s holdings, performance and assets are available to all investors. This allows for transparency in the operation of Mutual Funds, which encourages investors to make informed investing decisions.
Mutual Funds offer liquidity
Some Mutual Funds allow investors to withdraw money from their investment in the fund. A few Mutual Fund schemes, such as Equity Linked Savings Schemes (ELSS) have mandatory lock-in periods. Equity Linked Savings Schemes have a lock-in period of 3 years.
Some other Mutual Funds also have exit loads, which are payable on making withdrawals.
Mutual Fund performance is tracked and recorded
It is important for Mutual Fund houses to maintain regular performance records of all the Mutual Funds they operate. These records are carefully analysed and audited. This ensures a degree of trust between the Mutual Fund and the investors.
NET ASSET VALUE (NAV) OF A SCHEME:
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value(NAV). Mutual funds invest the money collected from the investors in securities market. In simple terms, Net Asset Value is the market value of securities held by the scheme, since market value of securities changes everyday. NAV of scheme also varies from day to day.
The NAV per unit is the market value of securities of a scheme divided by total no. of units of that scheme on any particular date.
For example, if the market value of securities of mutual fund scheme is Rs. 200 lakhs and mutual fund is issued at 10 lakh units of Rs. 10 each to the investor , then NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis – daily or weekly – depending on type of scheme.
THE MUTUAL FUND INDUSTRY IN INDIA:
The mutual fund industry in India ongoing in 1963 with the formation 0f Unit Trust of India (UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The objective then was to attract small investors and introduce them to market investments. Since then, the history of mutual funds in India can be broadly divided into six distinct phases.
Phase I (1964-87): Growth Of UTI:
In 1963, UTI was established by an Act of Parliament. As it was the only entity offering mutual funds in India, it had a monopoly. Operationally, UTI was set up by the Reserve Bank of India (RBI), but was later delinked from the RBI. The first scheme, and for long one of the largest launched by UTI, was Unit Scheme 1964. Later in the 1970s and 80s, UTI started innovating and offering different schemes to suit the needs of different classes of investors. Unit Linked Insurance Plan (ULIP) was launched in 1971. The first Indian offshore fund, India Fund was launched in August 1986. In absolute terms, the investible funds corpus of UTI was about Rs.600 crores in 1984. By 1987-88, the assets under management (AUM) of UTI had grown 10 times to Rs.6700 crores.
Phase II (1987-93): Entry of Public Sector Funds:
The year 1987 marked the entry of other public sector mutual funds. With the opening up of the economy, many public sector banks and institutions were allowed to establish mutual funds. The State Bank of India established the first non-UTI Mutual Fund, SBI Mutual Fund in November 1987. This was followed by Canbank Mutual Fund,LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. From 1987-88 to 1992-93, the AUM increased from Rs 6,700 crores to Rs 47,004 crores, nearly seven times. During this period, investors showed a marked interest in mutual funds, allocating a larger part of their savings to investments in the funds.
Phase III (1993-96): Emergence of Private Funds:
A new era in the mutual fund industry began in 1993 with the permission granted for the entry of private sector funds. This gave the Indian investors a broader choice of ‘fund families’ and increasing competition to the existing public sector funds. Quite significantly foreign fund management companies were also allowed to operate mutual funds, most of them coming into India through their joint ventures with Indian promoters. The private funds have brought in with them latest product innovations, investment management techniques and investor-servicing technologies. During the year 1993-94, five private sector fund houses launched their schemes followed by six others in 1994-95.
Phase IV (1996-99): Growth And SEBI Regulation:
Since 1996, the mutual fund industry scaled newer heights in terms of mobilization of funds and number of players. Deregulation and liberalization of the Indian economy had introduced competition and provided impetus to the growth of the industry.
A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform standards for all funds. Erstwhile UTI voluntarily adopted SEBI guidelines for its new schemes. Similarly, the budget of the Union government in 1999 took a big step in exempting all mutual fund dividends from income tax in the hands of the investors. During this phase, both SEBI and Association of Mutual Funds of India (AMFI) launched Investor Awareness Programme aimed at educating the investors about investing through MFs.
Phase V (1999-2004): Emergence of a Large and Uniform Industry:
The year 1999 marked the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amount mobilized from investors and assets under management. In February 2003, the UTI Act was repealed. UTI no longer has a special legal status as a trust established by an act of Parliament. Instead it has adopted the same structure as any other fund in India – a trust and an AMC.
UTI Mutual Fund is the present name of the erstwhile Unit Trust of India (UTI). While UTI functioned under a separate law of the Indian Parliament earlier, UTI Mutual Fund is now under the SEBI’s (Mutual Funds) Regulations, 1996 like all other mutual funds in India.
The emergence of a uniform industry with the same structure, operations and regulations make it easier for distributors and investors to deal with any fund house. Between 1999 and 2005 the size of the industry has doubled in terms of AUM which have gone from above Rs 68,000 crores to over Rs 1,50,000 crores.
Phase VI (From 2004 Onwards): Consolidation and Growth:
The industry has lately witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of schemes of Allianz Mutual Fund by Birla Sun Life, PNB Mutual Fund by Principal, among others. At the same time, more international players continue to enter India including Fidelity, one of the largest funds in the world.
STRUCTURE OF INDIAN MUTUAL FUND INDUTRY:
The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. Most of its investors believe that the UTI is government owned and controlled, which, while legally incorrect, is true for all practical purposes.
The second largest category of mutual funds is the ones floated by nationalized banks. Can bank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones.
SOME OF THE AMCs OPERATING ARE:
Name of the AMC Nature of ownership
Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Can bank Investment Management Services Limited Banks
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private Limited Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company Limited Private Indian
Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Limited Institutions
Morgan Stanley Asset Management Company Private Limited Private foreign
Punjab National Bank Asset Management Company Limited Banks
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Shriram Asset Management Company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
Zurich Asset Management Company (I) Limited Private foreign
RECENT TRENDS OF MUTUAL FUND INDUSTRY:
The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players.
Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way.
The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on.
They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.
Research design is a process that showcase the project analysis and data interpretation based on research tools and techniques in a particular format. This helps in explaining the structure: objectives, need, scope, limitation and expectation of the study
STATEMENT OF PROBLEM
The present study aims at answering a few questions in this aspect. What is the performance of mutual funds in context to their risk and return incurred during the study period?
What is the position of mutual funds across different schemes? Which type of funds are performing well and which are under performing? What is the attitude of investors towards different mutual fund scheme or investment?
The above are some of the questions or challenges which need to be analysed.
NEED OF THE STUDY
Mutual fund is considered as to be the best investment vehicle for small investors. There is a need to study the investor’s perception and performance of mutual fund in order to influence in decision making process for that particular scheme. It is essential to ensure transparency and safety in portfolio selection by mutual funds. Therefore the study need to be initiated.
OBJECTIVES OF THE STUDY
The basic objective of study is to:
Performance evaluation of mutual fund in india.
Examine trends in growth, volume and size of mutual funds in india.
Analyze and interpreting the NAV(net asset value), amount per share and aggregate of proportionate profit according to monthly and yearly basis.
To study profile, attitude, preference and investment objectives of the mutual fund investor.
To suggest measures in the lieu of investment in mutual funds.
SCOPE OF STUDY
Performance of mutual fund is evaluated from the returns incurred and comparison according to NAV. The study is even focused on comparative analysis of various mutual fund schemes based on :
The present study is based on both primary and secondary data.
The financial performance of certain mutual funds have been examined through secondary data which were collected from roots of association of mutual funds of India(AMFI), value research website, money control website, journals, magazines and other authenticated published data.
To examine performance of mutual funds from the view of investors perception, primary data is been collected based on questionnaire.
LIMITATION OF STUDY
The study is limited only for the top 5 performing funds in each sector.
Funds are selected based on crisil ranking and NAV.
Funds covered under equity, debt, hybrid and money market which is followed by its sub-sections.
TOP RATED EQUITY MUTUAL FUNDS:
Equity funds that invest > 75% in CRISIL-defined Large Cap Stocks for a minimum of six out of nine months in each period over the past 3 years.
Scheme Name NAV(Rs/unit) Amount Annually Compounded Returns %
1 Month 3 Month 1 Year 3 Year 5 Year
Large Cap Funds:-
SBI Bluechip Fund – Growth 37.08 10,099.40 79 61 78 19 7
Kotak Select Focus Fund Regular – Growth 32.36 8,040.18 42 56 17 7 3
HDFC Growth Fund – Growth 173.78 1,033.92 98 114 43 76 75
ABSL Frontline Equity – Growth 213.49 11,116.39 97 43 65 31 10
Franklin India Bluechip 438.73 6,159.46 124 124 109 68 42
Small & Mid Cap
Funds that invest < 45% in CRISIL-defined Large Cap Stocks for a minimum of six out of nine months in each period over the past 3 years.
Scheme Name NAV(Rs/unit) Amount Annually Compounded Returns %
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