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Mutual Funds
What are Mutual Funds?
A mutual fund is a trust that pools the savings of a number of investors who share a common investment objective. The money thus collected is invested in capital market instruments such as shares, debentures, and other securities. The combined holdings the mutual fund owns are known as its portfolio. Each unit represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.
History of Mutual Funds in India
Phase I (1964-87)
Growth Of UTI
In 1963, UTI was established by an Act of Parliament and was the only entity offering mutual funds in India. The first scheme was Unit Scheme 1964 followed by many others. The first Indian offshore fund, India Fund was launched in August 1986.
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.
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 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.
Different Types of Funds
1. Growth / Equity Oriented Scheme
Equity funds invest in stocks. Furthermore, there are different types of equity funds such as funds that specialize in growth stocks, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or a combination of these stocks.
2. Income / Debt Oriented Scheme
Income / Debt funds buy investments that pay a fixed rate of return. This type of mutual fund focuses on getting returns coming into the fund primarily through interest.
3. Money Market or Liquid Fund
Money market funds invest in short-term fixed-income securities. Examples of short-term fixed-income securities would be government bonds, Treasury bills, commercial paper, and certificates of deposit. These types of funds are generally a safer investment but with a lower potential return than other mutual funds.
4. Hybrid / Balanced Funds
Balanced funds invest in a mix of equities and fixed-income securities – typically in a 40% equity 60% fixed income ratio. The aim of these funds is to generate higher returns but also mitigate risk through fixed-income securities.
Advantages of Mutual Funds
Professional Management
Portfolio Diversification
Low Transaction Costs
Liquidity
Flexibility
Choice of products & assets
Tax Benefits
Well Regulated & Transparent
Convenience
Open To Everyone
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