Mutual Funds Industry Profile

INDUSTRY PROFILE

CONCEPT
          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 then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. 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 basket of securities at a relatively low cost.

THE FLOW CHART BELOW DESCRIBES BROADLY THE WORKING OF A       MUTUALFUND

 MUTUAL FUND INDUSTRY IN INDIA

The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in Indiacan be better understood divided into following phases:

Phase 1. Establishment of Unit Trust of India- 1964-87:

               Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 cores.

Phase II. Entry of Public Sector Funds - 1987-1993:

            The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of Indiabecame the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canara bank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 cores. However, UTI remained to be the leader with about 80% market share.

1992-93	AMOUNT MOBILIZED	AUM	MOBILIZATION AS % OF GROSS DOMESTIC   SAVINGS
UTI	11,057	38,247	5.2%
PUBLIC SECTOR	1,964	8,757	0.9%
OTHERS	13,021	47,004	6.1%

Phase III. Emergence of Private Sector Funds - 1993-96:

                    The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004:

               The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.
           

                   In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organized into two parts: 1. The SpecifiedUndertaking, 2.The UTI Mutual fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilization of funds from investors and assets under management which is supported by the following data:

GROSS FUND MOBILIZATION (Rs. Cr.)

From	To	UTI	Public sector	Private sector	Total
01-April-98	31-March-99	11,679	1,732	7,966	21,377
01-April-99	31-March-00	13,536	4,039	42,173	59,748
01-April-00	31-March-01	12,413	6,192	74,352	92,957
01-April-01	31-March-02	4,643	13,613	1,46,267	1,64,523
01-April-02	31-Jan-03	5,505	22,923	2,20,551	2,48,979
01-Feb.-03	31-March-03	*	7,259*	58,435	65,694
01-April-03	31-March-04	-	68,558	5,21,632	5,90,190
01-April-04	31-March-05	-	1,03,246	7,36,416	8,39,662
01-April-05	31-March-06	-	1,83,446	9,14,712	10,98,158

ASSETS UNDER MANAGEMENT (Rs. Cr.)          

AS ON	UTI	PRIVATE SECTOR	PUBLIC SECTOR	TOTAL
31-March-99	53,320	8,292	6,860	68,472

Phase V. Growth and Consolidation - 2004 Onwards:

            The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

PERFORMANCE OF MUTUAL FUNDS IN INDIA

                   The performance of mutual funds in Indiain the initial phase was not even closer to satisfactory level. People rarely understood and of course investing was out of question. But some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks after the liberalization.

                    The Net Asset Value of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choices apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.

                     The performance of mutual funds in Indiasuffered qualitatively. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds.

                     Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered, the quantitative will be investors.

             

ORGANISATION OF A MUTUAL FUND:

                    There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

                      Mutual Funds diversify their risk by holding a portfolio of instead of only one asset.  This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

                    Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn.  However, the company specific risks are largely eliminated due to professional fund management.

All mutual funds comprise four constituents, Sponsor, Trustees, Assets Management Company (AMC) and Custodians.

Sponsors

         The sponsors initiate the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. A sponsor has to satisfy certain conditions, such as capital, record (at least five years’ operation in financial services), default free dealings and general reputation of fairness. The sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder.

Trust/ Board of Trustees

         Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unit holders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unit holders consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets - 0.5 percent of the weekly net asset value.

Fund Managers/ AMC

          They are the ones who manage money of the investors. An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below RS.10 crore. And, its fee should not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.

Custodian

            Often an independent organization, it takes custody of securities and other assets of mutual fund. Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range between 0.15-0.2 percent of the net value of the holding. Custodians can service more than one fund.

LIST OF MUTUAL FUND COMPANIES 01.AIG Global Investment Group Mutual Fund 02. Axis Mutual Fund 03. Aegon mutual Fund 04. Alliance Mutual fund 05. Baroda Pioneer Mutual Fund 06. Benchmark Mutual Fund 07. Bharti AXA Mutual Fund 08. Birla Sun Life Mutual Fund 09. Canara Robeco Mutual Fund 10.. L & T Mutual Fund 11. Deutsche Mutual Fund 12. DSP Blackrock Mutual Fund 13. Edelweiss Mutual Fund 14. Escorts Mutual Fund 15. Fidelity Mutual Fund 16. Fortis Mutual Fund 17. Franklin Templeton Mutual Fund 18.   GIC Mutual fund 19. Goldman Sachs Mutual Fund 20. HDFC Mutual Fund 21. HSBC Mutual Fund 22. ICICI Prudential Mutual Fund 23.  IDBI Mutual Fund 24. IDFC Mutual Fund 25.   IL&F S Mutual Fund 26. ING Mutual Fund 27. JM Financial Mutual Fund 28. JPMorgan Mutual Fund 29. Kotak Mahindra Mutual Fund 30.. LIC Mutual Fund 31. Mirae Asset Mutual Fund 32. Morgan Stanley Mutual Fund 33.  Motilal oswal Mutual Fund 34.. Principal Mutual Fund 35. Peerless Mutual Fund 36.  Pramerica Mutual Fund 37. Quantum Mutual Fund 38. Reliance Mutual Fund 39. Religare Mutual Fund 40. Sahara Mutual Fund 41. SBI Mutual Fund 42. Shinsei Mutual Fund 43.Standard Chartered Mutual Fund 44.Sun F&C Mutual Fund 45. Sundaram BNP Paribas Mutual Fund 46. Tata Mutual Fund 47. Taurus Mutual Fund 48.UTI Mutual Fund     Mutual Fund Investment Based On Constitution: 1.      OPEN-ENDED SCHEMES                         Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units al NAV-related prices from and to the mutual fund, on any business day. These schemes have unlimited capitalization, do not have a fixed maturity date, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange.               Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life time of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis, I he advantages of open-ended funds over close-ended are as follows: Any time exit option, the issuing company directly1 takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. Any time entry option, an open-ended fund allow one to enter the fund at any time and even to invest at regular intervals. 2.      CLOSE-ENDED SCHEMES Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that, such schemes cannot issue new units except in case of bonus or right issue. However,- after the initial issue, you can buy or sell units of the scheme on the stock exchange where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investor’s expectations and other market factors. 3. INTERVAL SCHEMES These schemes combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals al NAV based price. SWOT ANALYSIS OF RELIANCE MUTUAL FUND A type of fundamental analysis of the health of a company by examining its strengths(S), weakness (W), business opportunity (O), and any threat (T) or dangers it might be exposed to. I. STRENGTHS ·         Brand strategy: As opposed to some of its competitors (e.g. HSBC), Reliance ADAG operates a multi-brand strategy. The company operates under numerous well-known brand names, which allows the company to appeal to many different segments of the market. ·         Distribution channel strategy: Reliance is continuously improving the distribution of its products. Its online and Internet-based access offers a combination of excellent growth prospects and its retail direct business also saw growth of 27% in 2002 and 15% in 2003. ·         Various sources of income: Reliance has many sources of income throughout the group, and this diversity within the group makes the company more flexible and resistant to economic and environmental changes. ·         Large pool of installed capacities. ·         Experienced managers for large number of Generics. ·         Large pool of skilled and knowledgeable manpower. ·         à Increasing liberalization of government policies. II. WEAKNESS ·         Emerging markets: Since there is more investment demand in the United States, Japan and the rest of Asia, Reliance should concentrate on these markets, especially in view of low global interest rates. ·         Mutual funds are like many other investments without a guaranteed return: There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved – just because a professional manager is looking after the fund, that doesn’t mean the performance will be stellar. ·         Fees: In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees. The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage – usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn’t make money, these fees only magnify losses. III. OPPORTUNITIES ·         Potential markets: The Indian rural market has great potential. All the major market leaders consider the segments and real markets for their products. A senior official in a one of the leading company says foray into rural India already started and there has been realization that the rural market is both price and quantity conscious. ·         Entry of MNCs: Due to multinationals are entering into market job opportunities are increasing day by day. Also India Mutual Fund majors are tie up with other financial institutions. IV. THREATS ·         Increased Competition: With intense competition by so many local players causing headache to the current marketers. In addition to this though multinational brands are not yet established but still they will soon hit the mark. Almost 60 to 70% of the revenue is spending on the management and services. ·         Hedge funds: Sometimes referred to as ‘hot money ’, are also causing a threat for mutual funds .A have gained worldwide notoriety for bringing the markets down. Be it a crash in the currency, A stock or  bond market, A usually a hedge fund prominently figures somewhere in the picture.