1.1 Introduction \? )^^*/^
The Indian mutual fund industry has a five-decade history. This is one of the most attractive as well as a growing industry in India and still it is lagging behind as compared to the global market. There are very few numbers of researches done on the Indian mutual fimd industry as compared to the global market, especially on the asset- management companies. The Indian mutual fund industry has four different major milestones in its history. Since 1963, the UTI was established as a pert of joint effort by the Reserve Bank of India and Government of India. The concept of mutual fund has been shown in figure 1.1.
Figure 1.1: Working flow of mutual funds
Concept of Mi|tuii Fu||| I Many irtveslofs with common financial objectives pool their money
Investors, on a proportionate basis, get mutual fund urtts for the sum contributed to the pool I The money collected from investors is invested into shares, debentures and other securities by the fund manager 4 The fund manager realizes gains or losses, sar^ collects dividend or inter^^t income
Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them
Source: Appuonline.com A mutual fund is simply a financial intennediary that allows a group of investors to pool their money together with a predetermined investment objective. An investor's ownership of the fund is the same proportion as the contribution made by investor bears to the total amount of the fund. Alike any other investments before investing in the mutual fund, the investors must be clear about investment goals and objectives. There is certain information that investors should know before investing in the mutual funds. The investors should understand some bcisic information about the mutual funds like past performance, fiand manager, mutual fiind's performance against the index, etc. This information will not give any guarantee of the future returns but certainly, it will help the investors in the decision-making process to opt comparatively better schemes from the available schemes in the market.
The historical risk data of the schemes will facilitate in understanding the risk taken by the schemes to achieve the returns, and the returns achieved against the risk taken by the schemes. Primarily, the investor should make a financial plan before taking any investment decision. The financial planning is the milestone in the investment decision. The investor can take assistance or guidance of the financial planner or any wealth management organizations available in the market for the investment management. The financial planner or wealth management companies can provide assistance to establish investor's financial goals, to choose a fund, to decide the investor's risk appetite for investment, etc.
The Mutual fund has a fund manager, who is responsible for investing the pooled money into specific securities (usually stocks or bonds)'. The investors actually buy shares or shares with the equal values of the price of the investment amount in a mutual fund that unit is called as Net asset Value (NAV). The investor becomes a shareholder of the fund by holding these units of mutual fiind. An investor can purchase the share of the company in terms of the units of the mutual fund, only when the company sells the units in the market.
Mutual Fund Basic, (n.d.). In pticindia. Retrieved from http://www.pticindia.com/mutual-fund- investment.html The investor can purchase or sells the NAV of the closed-end fund if the company is listed on the stock exchange. A shareholder can sell the share to the company only when the company announces 'share buy back' or in another case, the investor can sell the stock to the other investor in the stock exchange. An open-ended mutual fund is different from this respect. The investor can purchase and sell the units of the mutual fiinds at any time from the market where a stock exchange will not appear.
The investors are shareholders equal to the proportion of the NAV's to their investments in the profits or loss of the mutual funds. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. A mutual fund has to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.
There is certain information provided by the mutual funds for the investor to invest in mutual fiinds. Mutual funds provide some documents to promote the funds like prospectus/offer document. Key Information Memorandum that provides the information about the fimds to the investors about the mutual funds objective, purpose, etc. in the interest of the investors. An offer document is an important document, which investor must read to obtain the fiind's prospect. It is a written statement of all relevant information about the company, such as its history, operations, financial conditions and key persormel. Mutual funds are required by law to provide offer document, as SEBI made mandatory to the funds to circulate the offer document before launching the schemes in the market. The offer document also includes a description of the general nature of the fund, a summary of the financial structure and operation, description of fund assets, the management structure, salaries of officers, the expenses of the offering, specific uses of the proceeds, and current lawsuits against the issuer.
In addition to the offer document, the fund also provides some needfiil information on the request to the investor. The fund provides the additional information document, a statement of additional infomiation (SAI). This "SAI" is a detailed document that explains the financial workings of the fund and provides disclosure about the backgrounds and expertise of individuals and companies involved in managing and marketing the fund^. The investor should go through the offer document and still investor is looking for more information then they can request for more information in terms of statement of additional information (SAI). If investors still have questions, go over the proposed investment with the broker.
1.2 Investments in Mutual Fund
Mutual Fimds over the years have gained immensely in their popularity. Apart from the many advantages, that investing in mutual funds provides as diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds now days have a lot to offer to its investors. With the introduction of diverse options, an investor needs to choose a mutual fund that meets investor's risk acceptance and risk appetite. The investor should check the parameters of the scheme like investment objectives, investment tenor, etc. which should match the investor's requirement.
With the plethora of schemes available in the Indian markets, an investor needs to evaluate and consider various factors before making an investment decision. Since not everyone has the time or inclination to invest and do the self-analysis, the job is best left to a professional. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors, which are complex in nature, affect us too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening in Asian market have a deep impact on the Indian stock market. Although it is impossible for an individual investor to understand Indian companies and invest in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset Memagement Company invests in research) provide an option of investing without getting lost in the complexities.
" Mutual Fund Beginner Guide: Investigate Before You Invest, (n.d.). In stason. Retrieved from http://stason.org/TULARC/investing/mutual-funds/Mutual-Fund-Beginner-Guide-Investigate-Before-You- Invest.html Most importantly, mutual funds provide risk diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder. Mostly the investors are not necessarily well qualified to apply the theories of portfolio structuring to our holdings, hence would be better off leaving that to a professional. Mutual funds represent one such option. Lastly, past performances are evaluated and look for stability, though past performance does not give a guarantee of future performance. It is a useful way to assess how well or badly a fund has perfomied in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within the investor's selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Funds are shortlisted appear in the top five in each of these time horizons, as they would have thus demonstrated their ability to be not only good but also, consistent performers.
An investor can choose the fund on various criteria according to his investment objective. To some of such criteria are as follows^:
1. Thorough analysis of ftind performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market 2. The fund house should be professional, with efficient management and administration. 3. The corpus constituted by the scheme is spread over the period. 4. Proper adequacies of disclosures have to be seen and make a note of any hidden charges carried by them is made is considered. 5. The price at which investor can enter/exit (i.e. entry load / exit load) the scheme and its impact on the overall return.
3 Investments in Mutual Funds, (n.d.). In mutualfundsindia. Retrieved from http://www.mutualfundsindia.com/investment.asp 1.3 History of Mutual Funds in India
Unit Trust of India was the first mutual fund set up in India in the year 1963 with the initiative of Reserve Bank of India and Government of India. In early 1990s, Government allowed public sector banks and institutions to set up mutual fiands. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are - to protect the interest of investors in securities and to regulate the security market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by the public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.
1.4 Evolution of Mutual funds in India
The mutual funds in India started back in 1963 with the formation of Unit Trust of India, by the initiative of the Reserve Bank and the Government of India. The objective was to attract the small investors and introduce to the market investments. The growth of the mutual fund industry in India can be divided into four phases viz. (a) Phase I (1964- 1987), Phase II (1987-1993), Phase III (1993-1997), Phase IV (1997-2003), and Beyond (2003). The growth of the Assets under Management is depicted in figure 1.2 Figure 1.2: Growth of AUM
GROWTH IN ASSETS UNDER MANAGEMENT
j0 400QD9 O a
Years i'i*»te w since F«b-03
Source: Association of Mutual Funds in India (AMFI)
The mutual fiind industry was started with the launch of UTI in 1963 by passing an act in the Parliament. The UTI was the first mutual fund started with the scheme US-64. This time the launch of the scheme US-64 was very popular among the investors as they found it a better alternative to the saving bank deposits.
There are five phases of growing of Indian mutual fiind industry growth. The first phase was between the 1964 -1987. The first phase was the monopoly by the UTI. In this phase the UTI established grow 10 times at the end of 1987. It progressively grew fi-om Rs.49 crore in 1965 to Rs.219 crore in 1970-71, to Rs.ll26 crore in 1980-81 and fiarther to Rs.5, 068 crore by June 1987 and UTI grew to Rs. 6700 cr. at the end of 1987^ The UTI
Report of the malegam committee, (n.d.). In capital market. Retrieved from http://www.capitalmarket.com/mutual/utireport.htm launched Mastershare equity growth fund in the year 1986. It was the first product for smaller investors to take entry into the equity markets. This fund obtains grand marketing success and it was the first offshore Indian fund for overseas investor that was listed on the London Stock Exchange.
The second phase was for the period 1987-1993. This period was in the entry of the public sectors into the mutual ftmd industry. This duration was the advent of the competition in the mutual fimd industry due to the entry of various public sectors. During the period 1987-1993, other sectors were also keen to make entry into the mutual fund industry for which the subsidiaries of the nationalized banks and the two insurance corporations' viz. Life Insurance Corporation of India and the General Insurance Corporation of India launched their funds into the market. In the year 1987, the State Bank of India launched its first fund. The SBI was the first non-UTI fund. There are some other funds, launched after SBI like CanBank Mutual Fimd, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. At the end of the second phase that is in 1993, the assets under management of the industry increased seven times to Rs. 47,004 cr. However, UTI remained to be the leader with about 80 percent market share.
The third phase was for the period 1993-1996. This period was in the private sector mutual fund entry into the market. There were many private companies, looking to enter into the mutual fund industry still UTI was the priority choice for the investors. UTI launched its Mastergain fund in the year 1992 was getting phenomenal success with subscription of Rs. 4,700 crore from 63 lakh applicants. There were some of foreign companies, also launched their funds through a joint venture with Indian companies in the same period. In the year 1994-95 there were 11 private funds, was launched into the mutual fund industry. The mutual fimd industry faces the first slow down in this period. During the year, 1995 and 1996 the market conditions were not good and first time equity mutual funds showed decline in the NAV and closed fimd traded at a discount to the NAV. The fast growth of the investors and decreasing the service industry like postal services, banking networks, etc. led investors to switch the mutual fund industry, which causes to decline the average sales of 13000 cr. in 1991-94 to 9000 cr in the period 1995- 1996.
The fourth phase was during the period 1996-2003. The mutual fund industry had grown tremendously by the end 1996. Therefore, it was the need to handle this tremendous growing industry very carefully. There was an urgent need for new policies, rules, launching to protect the interest of investors, etc. The fourth phase was specifically dedicated to increasing the regulation and awareness of the investment in India. The Association of Mutual Fund in India was launched in 1995 to increase the awareness and training of mutual fiinds in India. The mutual llind industry rose from June 2000 to over Rs. 110,000 cr. with UTI has 68 percent of the market share. The year 1999-2000 was one of the major milestones in the mutual fund industry where it reaches to the highest level of 73000 cr. as against the 31,420 during the preceding year. The industry could not survive for this growth and again in the year 1999-2000 the market sharply declined.
The fifth is the latest or current phase, which started from 2003. This phase is well known for growth and consolidation. There are many mergers and acquisitions happen in the mutual funds in India which proven advantageous to the investors. The Indian mutual fiind industry has grown at a very good pace but still it is very less or fraction of the world market due to less knowledge about the mutual fund. There is a lot of scope of growth in the mutual fiind industry including research work on Indian mutual funds.
1.5 Mutual Funds in Abroad
A mutual fund is the one of the biggest industry in developed countries. The USA is one of the countries that influence the Indian market very quickly. The downfall in USA market downfall or upward trend can cause down and up in the Indian market. There are almost 400 companies managing the 6500 funds. The USA is considered as a stable market as compared to the Indian market. The Indian market is one of the fastest growing a market in the worid. In the USA, mutual funds are garnering more than $1 billion a day. Since 1990, the funds could top $4 trillion by the end of the millennium. The estimated savings in the mutual fund assets exceed $1.5 trillion compared to the 1977's less than $50 billion and $600 billion annually.
Other countries of the world also have funds but comparatively less creative, dynamic, and grown like USA. The mutual funds have grown faster in the USA as well as in the fast growing markets. The country like India and China are considered as the greatest threat to the world market. The increasing power of the funds is also increasing is one of the threat like handing over the control of large money to the fewer hands; the funds can make markets more volatile. In the USA, the mutual funds manage assets over $4.7 trillion accounts which are none than half of the world's mutual fund assets.
Barron's Top 20 Global Wealth Managers 2009 ^
1. Bank of America Global Wealth and Investment Management $685.0 2. Morgan Stanley Smith Barney 482.0 3. Wells Fai-go and Co. 374.9 4. J.P. Morgan 350.0 5. Goldman Sachs (Global total, U.S. total not available) 215.0 6. UBS Wealth Management 219.6 7. BNY Mellon Wealth Management 113.7 8. Northern Trust 111.3 9. Fidelity 109.0 10. Charles Schwab 82.3 11. Credit Suisse Private Banking U.S.A. 63.0 12. RBC Wealth Management 55.5 13. Bessemer Trust 53.0 14. Deutsche Bank Private Wealth Management 52.0 15. SunTrust Banks 45.1 16. Raymond James Financial 28.7
5 Barron's Top 20 Global Wealth Managers 2009. (2 October 2009). In Wealth-Bulletin. Retrieved from http://www.wealth-bulletin.com/archive/tag/Morgan_Stanley/content/1055325238
10 17. HSBC Private Bank 26.9 18. The Private Client Reserve at U.S. Bank 20.0 19. Harris Private Bank 19.7 20. Hirtle, Callaghan, & Co. 17.15
Source: wealth-bulletin.com
1.6 Basics of Mutual Funds
The information provided in this research study will help not only to the investors who have not yet started investing in mutual funds but also willing to explore the opportunity also for those who want to clear their basics of mutual funds such as what is mutual fund. Investments needs vary from person to person. While someone might want to plan for children's education, life after retirement, buying a property etc., someone might be saving for a vacation abroad or buying a luxury car etc. With objectives defying any range, it is obvious that the products required for investments to meet these objectives will vary as well. Investors saving for the proverbial rainy day may warrant for more secured avenues of investment while others may give more weightage to just returns.
Mutual Funds though still at a nascent stage in India offer a plethora of schemes'" and serve broadly all types of investors. The range of products covers all kinds of risk classes - the high risk - high return class, the medium risk - medium return class and the low risk - low return class. There are also funds meant exclusively for investor and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard the investors' interest, ensures that the investors are not cheated out of their hard-earned money. Overall, the benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal. The following shows the risk ladder for the mutual fimd category wise.
* Mutual Funds: Universal Appeal, (n.d.). In mutualfundsindia. Retrieved from http://www.mutualfundsindia.com/mufu.asp
11 Figure 1.3: Risk v/s Returns of Mutual funds
ector
Income tort Term Debt
Expected Return
Source: mutualfundsindia.com
Risk takers by their very nature, would not be averse to investing in high-risk avenues. Capital markets find their fancy more often^. Though the risk associated is generally on the higher side spectrum, the return-potential compensates for the risk attached. However, a single person would not be able to invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits the investor from diversifying portfolio as well as benefiting from multiple investments. Stock picking requires great skills including a thorough understanding of the corporate world and the economy. Further, investing through the Mutual Fund route enables an investor to invest in many good stocks and reap benefits even through a small investment. This not only diversifies the portfolio and helps in generating returns from a number of sectors but also reduces the risk as well. The investors also get the benefits of professional fund management. Even within the equity fund category, exiting various types of funds have been catering to the varying risk appetite of the investor. Starting from lowest spectrum, one can go in for index funds, large cap funds, multicap funds and sector funds.
Mutual Funds: Universal Appeal, (n.d.). In mutualfundsindia. Retrieved from http://www.mutualfundsindia.com/mufu.asp
12 The industry would soon be able to offer Commodity funds. Moving down the risk spectrum, there are people who would like to take some risk and invest in equity fiinds/capital market. However, since their appetite for risk is also limited, they would rather have some exposure to debt as well. For these investors, balanced fiinds and Monthly Income Plan (MIP) provide an easy route of investment. Armed with the expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle, their portfolio can be reshuffled as per market conditions, moderate returns are likely to be generated even in pessimistic market conditions. The low risk - low return products are well suited to the investors who are not willing to take any risks with their investments. The industry offers a host of products in the form of Liquid schemes. Floaters and Debt fiinds. However, debt ftinds may give negative returns in the case of the rising interest rate regime, floaters and liquid funds are zero-risk investments. Banks and Corporate world find these funds highly usefiil for parking their funds for a short-term.
This risk of default by any company that one has chosen to invest can be minimized by investing in mutual fiinds as the fund managers analyze the companies' financial position more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt fiinds provide enough liquidity.
Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities because of interest rate variation and one can harvest benefits from any such price movement. Other than, the classification based on the risk - return framework, mutual fiinds also offer funds focused on a particular section of the society. The mutual fund has also been catering schemes for those who are seeking for specific goals such as career planning for children, retirement plans, etc. Children funds have found their way in a big way with many of the fiind houses already having launched a children's fiind. Essentially debt oriented schemes invite investments, which are locked until the child become an adult and requires money for different purposes like marriage, higher
13 education , etc. Besides this, if the objective was to save taxes, the industry offers equity linked savings schemes as well. Investing in such schemes, they can take a long-term call on stocks and market conditions without having to worry about redemption pressure as the money is locked in for three years and provide good returns. Some of the ELSS has been exceptional performers in the past and cater to equity investor with good performances. The appeal of mutual fund cuts across investor classes. It is time that investors assess their risk appetite and make intelligent decisions to generate better returns and mutual funds are definitely one of the ways to go about it.
The Government of India is also timely participating to study and improve the functioning of the mutual funds. In the year 1991, The Government of India formed a group headed by Dr. S. A Dave, Chairman, Unit Trust of India. The objective to form the group was to set up to evolve the framework for the legislation to regulate the mutual funds and offshore funds to be set up by private/joint sectors. The committee was also responsible to review the existing regulatory guidelines for establishing funds promoted by non-corporate bodies' institutions.
The major recommendations of the group are:
1. No minimum guaranteed returns. 2. Limit of Rs 200 crore should be set for borrowing over 2 years. 3. The committee was not in favor of mushrooming new mutual funds. 4. The mandatory credit rating for existing schemes desire to mobilize fiirther funds. 5. The private mutual funds should enjoy the tax exemption benefits like a UTI. 6. SEBI should give emphasis on the monitoring of the mutual funds 7. The minimum amount to be raised Rs 50 crores for the open-ended scheme and Rs. 20 crore for closed-ended scheme. 8. Code of ethics should be evolved by the players themselves.
Recommendations of the NAV Committee are:
Mutual Funds: Universal Appeal, (n.d.). In mutualfundsindia. Retrieved from http://wwvv.mutualfundsindia.com/mufu.asp
14 1. Standardization of the valuation norms, computation of NAV, accounting practices, £ind fee structures 2. For strict entry, A maximum net worth of 10 crore for the AMC is provided 3. Mutual funds have been allowed to borrow 20 percent of the scheme for six months for the purpose of meeting redemptions 4. Mutual funds can invest upto 10 percent of the capital of a single company. 5. Mutual funds are allowed to invest in asset-backed securities, securitized debt instruments and money markets. 6. AMC is allowed to diversify into the management of other funds like offshore fimds, pension funds, etc. with additions to disclosure requirements.
1.7 Objectives
The following are the Objectives of the research:
• To evaluate the perfonnance of sample mutual funds during the Apr-2002 to Apr- 2011 • To examine the competitive growth, development and the performance of the equity, balanced and debt mutual funds against the respective benchmark.
1.8 Hypothesis
1. Mutual funds outperform their benchmark though it does not guarantee their growth. 2. hivestors have misconceptions about the mutual fund investments.
1.9 Limitations of the Study
• The purpose of the study is to evaluate the performance of the Asset Management Companies (AMC). The study tried to find out the performance of the AMC through the study of major category scheme caters by the AMC such as equity, balanced, and debt funds. The unavailability of the AMC, which cater all
15 categories for the study period 2002-2011, is one of the major concerns of the research. The study has selected the mutual funds on the historical data. Due to the unavailability of the historical data gets limitation, as the data of the funds are live data which changing dynamically with the changes in the NAV. Further, because of the unavailability of historical data and fiind composition, it was difficult to ascertain the performance of the fund properties. The study is based on the mutual fund's performance. The skill availability for this area is very less as this is very new concept for the research area. The study has limited scope of the primary skills i.e. experts of mutual funds. The availability of the literature on the Indian mutual funds is very less. Few researchers tried to find and enhance the historical researches based on availability of data but it is not sufficient for the research. The study has limited scope of available stuffs on the Indian markets like books, experts, etc.
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