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SONAL MAHAJAN
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EXECUTIVE SUMMARY
Project work is a part of our curriculum that gives us the knowledge about the practical work in any organization and makes are stand in an organization. This also helps to understand & correlate the theoretical concepts better which remains uncovered in the classrooms. I have prepared this report in the process of my postgraduate diploma in business management.
The topic that has been taken for the project is " ANALYSIS OF INVSTMENT IN MUTUAL FUNDS ”.
A mutual fund is uniquely a democratic institution. It is an investment vehicle ideally suited for small and unsophisticated investors. These funds are financial intermediaries, which bring a wider variety of securities within the reach of small and medium investors. These investors by subscribing to mutual fund units can share the capital appreciation in the giant blue chip companies like MNC stocks. It is essentially a mechanism of pooling togther the saving of a large number of investors for collective investment portfolio and expert investment management and advice to a large number of investors through institutionalized risk pooling mechanism. It ensures a reasonable return , liquidity, safety and security to investors besides proving growth prospects and tax advantage in certain cases.
As the mutual fund industry is at a very progression stage from the last decade. It needs a through probe to this fast growing industry term of growth rate, risk and return, portfolio composition etc.
In order to achieve the various stated objectives both primary data and secondary data available on the subject is used and other necessary information is collected from mutual fund houses, newspaper , journals, magazines etc. Data collected is used for knowing the awareness of mutual funds and sources from which the investors get the information about mutual funds .
CHAPTER - I
INTRODUCTION
Mutual fund is the most suitable investment (or the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio relatively at a low cost. Anybody with an inventible surplus of as little as a few thousand rupees can be invested in mutual funds. Change in the economic scenario, falling interest rates of bank deposits, volatile nature of capital market and recent hitter experience of investors in making direct investment emphasis the increasing importance of the intermediaries like mutual funds.
Mutual funds help the small and medium size investors to participate in today's complex and modern financial scenario. Investors can participate in the mutual fund by buying the units of the fund. The income earned through these investments and capital appreciation realized by the schemes is shared by its unit holders in proportion to the number of units owned by them. Mutual funds play vital role in mobilization of resources and their efficient al1ocation. These funds played a significant role in financial inter-mediation, development of capital markets and growth of the financial sector as a whole. The active involvement of mutual funds in economic development can be seen by their dominant presence in the money and capital market. In early 19th century, mutual funds have proved to be an important institutional arrangement of risk pooling. These institutions have come to assume so much of significance them they now completely dominate the entire financial market.
1.1 MUTUAL FUND
Mutual Fund is an investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end mutual funds continuously offer new shares to investors.
Also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets divided by shares outstanding.
In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. In India , A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
In Short, a mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
1.2 THE CONCEPT OF A MUTUAL FUND:
A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual”; the fund belongs to all investors. A single investor’s ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the6 total amount of the fund.
A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Thus, an equity fund would buy mainly equity assets-ordinary shares, preference shares, warrants etc. a bond fund would mainly buy debt instruments such as debentures, bonds, or government securities. It is these assets which are owned by the investors in the same proportion as their contribution bears to the total contribution of all investors put together.
When investors subscribes to a mutual fund, he or she buys a part of the assets or the pool of funds that are outstanding at that time. It is no different from buying “shares” of a joint stock company, in which case the purchase makes the investors a part owner of the company and its assets. In fact, in the U.S.A., a mutual fund is constituted as an investor “buys into the fund”, meaning he buys the shares of the fund. In India, a mutual fund is constituted as a trust and the investor subscribes to the “units” issued by the fund, which is where the term Unit Trust comes from. However, whether the investors get fund shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder or unit-holder is a part owner of the fund’s assets. In this project, used the term unit-holder includes the mutual fund account-holder or close-end fund shareholder. A unit-holder in unit trust of India US-64scheme is the same as a UTI Master share-holder or investors in an Alliance or DSP Merrill Lynch or Prudential-ICICI or Tata or Templeton or SBI or any other fund manager’s open-end or close-end scheme.
Since each owner is a part owner of a mutual fund, it is necessary to establish the value of his part. In other words, each share or unit that investors hold needs to be assigned a value. Since the units held by-an investor’s evidence the ownership of the fund’s assets the value of the total assets of the fund when divided by the total number of units issued by the mutual fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or share. The value of an investor’s part ownership is thus determined by NAV of the number of units held number of units held
1.3 HISTORY OF INDIAN MUTUAL FUND INDUSTRY
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds):
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.
As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.