MUTUAL
FUNDS
SHARDENDU
PRAKASH
NATIONAL
INSTITUTE OF SECURITIES MARKETS (NISM)
B.COM,
M.A (ECONOMICS) , PGPSM
28-10-2018
The mutual fund is an investment vehicle that
allows a large number of investors to pool their resources in order to purchase
stocks, bonds and other securities.
Mutual funds, the collective funds which is referred to
as Assets Under Management (AUM) are managed by professional fund managers (appointed
by a mutual fund company or Asset Management Company), who are responsible for
making intelligent investments as per the market trend and movement. The
combined underlying holding of the fund called as portfolio, and each investor
in the mutual fund scheme owns the units as a portion of this portfolio.
Mutual funds help in investing the savings across a
variety of securities and diversify your assets - acts as a basket of
securities - as per the investment objectives and risk appetite. Mutual fund
provides an additional benefit to the people to earn on their personal savings.
Investments in the mutual funds are very less and can be as less as Rs.500.
Mutual funds also offer relatively high liquidity than other options such as
bank fixed deposits.
Various mutual funds investments are tax efficient and can get deduction under Income Tax as per section 80C to 80U.
Various mutual funds investments are tax efficient and can get deduction under Income Tax as per section 80C to 80U.
Mutual Funds in India:-
Unit Scheme was the 1st scheme launched by UTI in 1964. At the end of 1988 UTI had Rs.6,700 crores of AUM (Assets Under Management).1987 was the year of the entry of non-UTI, public sector mutual funds set up by PSU banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).The first non-UTI Mutual Fund established by SBI Mutual Fund in June 1987.
Later on, Canara bank Mutual Fund - Dec 1987, Punjab National Bank Mutual Fund - Aug 1989, Indian Bank Mutual Fund - Nov 1989, Bank of India - Jun 1990, and Bank of Baroda Mutual Fund - Oct 1992 was launched. LIC and GIC also set up its mutual fund in June 1989 and December 1990 respectively.
The year 1993 was the new era in the Indian mutual fund industry as it marked by the entry of private sector in mutual fund industry and giving the large range of choices to Indian investors. The first private sector mutual fund was the Erstwhile Kothari Pioneer, which now merged with Franklin Templeton, was registered in July 1993.
The first Mutual Fund Regulations also came into existence in 1993, under which all mutual funds, except UTI, were to be registered and governed. After the SEBI (Securities and Exchange Board of India) Act was passed in 1992, this SEBI Mutual Fund Regulations came into picture. Later on SEBI (Mutual Fund) Regulations, 1996 had replaced the mutual fund regulations 1993.
As the
industry expanded, a non-profit organization, the Association of Mutual Funds
in India (AMFI), was established on 1995 with the objective to promote healthy
and ethical marketing practices in the Indian mutual fund Industry. As per AMFI
and SEBI, NISM certification is mandatory for all those engaged in selling or
marketing mutual fund products.
ASSETS
UNDER MANAGEMENT AS ON APRIL 30, 2018
|
|||||
CATEGORY
|
Open
End
|
Close
End
|
Interval
Fund
|
TOTAL
|
%
to Total
|
Income
|
646955
|
139019
|
4042
|
790016
|
33.97%
|
Equity Schemes (Excluding
Arbitrage Funds)
|
626442
|
31819
|
0
|
658261
|
28.31%
|
Liquid/ Money Market
|
456717
|
0
|
0
|
456717
|
19.64%
|
Balanced
|
181306
|
0
|
0
|
181306
|
7.80%
|
ELSS – Equity
|
81157
|
4647
|
0
|
85804
|
3.69%
|
Other ETFs
|
77501
|
0
|
0
|
77501
|
3.33%
|
Arbitrage Funds
|
56085
|
133
|
56218
|
2.42%
|
|
Gilt, Gold ETF, Infrastructure
Debt Fund, Fund of Funds investing overseas
|
17201
|
2481
|
0
|
19682
|
0.85%
|
TOTAL
|
2143364
|
178099
|
4042
|
2325505
|
100
|
As per the above table
and its graphical presentation in the form pie chart, the majority of AUM
(Assets Under Management) of the whole Indian Mutual Funds industry falls under
the Income Funds with 33.97%, Equity funds with 28.31% and Liquid or Money
Market funds with 19.64%.
Rest other funds plays
18.09% in total AUM as on 30th April 2018, i.e. Balanced Fund with
7.80%, ELSS-Equity Fund with 3.69%, Other ETFs with 3.33%, Arbitrage fund with
2.42% and Gilt funds, Gold ETF, Infrastructure Debt Fund, Fund of funds
investing overseas with 0.85%.
Investors Account Growth
As it is given in the
above chart, since December 2014, there is an increase in investor accounts
from 4.03 crore to 7.13 crore in March 2018.
Recent
reforms of SEBI regarding re-categorisation of mutual fund schemes in India:-
SEBI regulates the whole mutual
fund industry of India as well as makes the policies for it time to time. It
lays various guidelines for the mutual funds to protect the interest of
investors. Recently,SEBI came up with new norm regarding re-categorisation for equity
mutual funds by defining 10 categories of schemesas per how and where these
schemes will investtoo facilitate the standardization and bringing about
uniformity in the similar schemes that will make compliance work easier for the
asset managers.
This normwill help in the reduction of the
number of schemes on offer and thereby make it comparatively easier for general
public to choose where to invest their funds. It may also reduce the expense
ratio due to the higher AUM per scheme. The re-categorisation of these funds
are as following:-
I.
Multi
Cap Funds
Under these funds, there is no major
changes is done. A minimum of 65% should be allocated to equities.These schemes
will continue to invest across market capitalisations, i.e. these funds can
invest in bluechip, small-cap as well as mid-cap stocks. The minimum of 65%
should be allocated to equities.
II.
Large
Cap Funds
Under these funds, at least 80% of their
assets should be invested in the large-sized companies. The scheme haveless
risk and will provide moderate returns if we compare it to the mid-capor small-cap
funds.
III. Large and Mid Cap Funds
Under these funds, minimum of 35% in midcap
stocks and 35% in largecap stocks will be invested. These schemes are little
bit riskier than largecap schemes as investment in midcap stocks also but can
provide higher returns as well.
IV.
Mid
Cap Funds
Under these funds, the minimum of 65% of
assets should be invested in midcap stocks. Since investment is in the
mid-sized companies, it have a little higher risk but have the ability to
provide good returns.
V.
Small
Cap Funds
Under these funds, the 65% of its assets should
be invested in small-cap stocks. These schemes will invest in small-sized
companies. These are very risky but can provide extra ordinary returns.
VI.
Dividend
Yield Funds
Under these funds, the minimum of 65% of
assets should be invested in stocks that it can be able to provide the periodic
dividends to investors.
VII.
Value
Funds and Contra Funds
On a broad basis, mutual funds can offer
only one out of these two categories, i.e. Value funds and Contra funds. Value
funds follows the value investment strategy where the fund manager who is
managing that mutual fund will pick stocks which he believes are undervalued
and on the other hand, contra funds are the funds which follows a contrarian
investment strategy.
VIII.
Focused
Funds
Under these funds, it is mandatory to
invest in a maximum of 30 stocks. The mutual fund schemes have to mention which
market cap it aims to invest as it is focused on limited stocks.
IX.
Sectoral
or Thematic Funds
Under these funds, 80% of the assets should
be invested in a particular sector or theme. These funds are generally not
recommended to retail investors as the performance of these fundsonly depends
on the performance of a specific sector or theme.
X.
ELSS
(Equity Linked Savings Scheme)
Under these scheme,the invest 80% of the
asset should be invested in equities as per the notification of 2005 of Finance
Ministry on ELSS (Equity Linked Savings Schemes). These schemes or funds will continue
have the lock-in period of 3 years.As these funds are tax saving funds, they
provide tax benefit under Section 80C of the Income Tax Act upto maximum of
Rs.1, 50,000.
On the basis of maturity of the funds, the SEBI
had categorized the debt funds. SEBI
has now revised the norms to focus on the maturity of the underlying security. In
addition, for medium and long term debt funds, the fund managers are now permitted
to reduce the fund duration by 1 year in case there are unfavourable interest
rate movements.
Banking funds as well as PSU funds are now
allowed to invest in municipal bonds in addition to debt instruments issued by
the banks and public sector banks. As per the circular, thecorporate bond funds
can be able to invest only in AA+ and higher-rated instruments. On the other
hand, the credit risk fund can be able to invest in AA and lower rated
securities.
On this major step of SEBI Mr. Manoj Nagpal, CEO
- Outlook Asia Capital, a Mumbai-based mutual fund advisory firm said that “These
are operational changes - that will help the mutual fund companies in complying
with the SEBI requirements, without compromising the spirit of the original circular
that insists on reducing duplication and similar schemes.”
However, the revised circular by SEBI, did not explain
on the industry demand of making allowances for mutual funds that have a decent
track record.
Negative impact of re-categorisation norms:-
SEBI’s new re-categorisation guidelines regarding the mutual
funds schemes will have an adverse
impact on the investors, as per some mutual fund advisors. As per these advisors, even this re-categorisation is going to help
investors to understand mutual funds easily, change in elements of some
schemes, lack of performance record, merger of some schemes, and other reasons may make it difficult
for new investors to select the schemes for their investment.
With 16 new debt fund categories, 10 new equity categories and six hybrid categories, investors have a vast universe to choose from. Major problems like lack of performance record in many schemes will make the evaluation of it very difficult. As investors are advised to look at the past 5 to 10 years of performance to evaluate and make the forecast of the fund. In absence of data of past performance it is going to be a major issue
Apart from schemes that
will get launched by AMCs as per new categorisation norms, various existing mutual
funds have also changed. Names and other fundamental features of some funds
will change as mutual fund companies make them to comply with the new guidelines
of SEBI. Various schemes are also going to merge with others as per the new
guidelines and these new funds wouldn’t have any past performance record.
Mutual fund advisors believe that investors need to look at the other aspects in the absence of the performance record while choosing a scheme. As Nisreen Mamaji, the CEO of Money-Works Financial Advisors said that “There are ways by which we can evaluate if the particular fund is good for the investor but we don’t expect all retail investors to evaluate the portfolios like we do. We never go for NFOs for the same reason.”
The mutual fund advisors also believe that in absence of the past performance, investors can be able to rely on the past record of the fund managers and the AMC.
Nisreen Mamaji also said
that “A mutual fund scheme is only as good as it is managed. If the fund
manager has a good record of managing similar schemes, you are half way there
and a good AMC will be a plus point.”
Karthik Swanminathan also made a point in this
matter and said that “If investors can, they should look at the themes a
particular scheme is investing and whether there is value in those themes. For
example, like rural development, infrastructure and government divestment
schemes can be a good bet at this point.”
Sources:-
A. Securities and Exchange Board of
India (SEBI) - https://www.sebi.gov.in
B. Association of Mutual Funds in India (AMFI)
- https://www.amfiindia.com
C. Value Research -
https://www.valueresearchonline.com
D. Morning Star - www.morningstar.in
E. Bloomberg - https://www.bloomberg.com
F. Business Line - https://www.thehindubusinessline.com
G. Live mint - https://www.livemint.com/
H. Economic Times - https://economictimes.indiatimes.com/
I. Funds India - https://www.fundsindia.com
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