Introduction:
Mutual fund creates an important investment opportunity for small investors who do not have knowledge about market and face a lot of problems in taking investment decision because of volatile market. This is one of top solution for the problems of small investors and the history of mutual fund industry started in 1963 with the formation of Unit Trust of India in 1963 by an Act of Parliament under the control of RBI. In 1978 it came under the control of the Industrial Development Bank of India and Unit Scheme 64 was the first scheme of UTI in 1964.
In 1987 public sector mutual funds came into existence and these funds set up by public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). Private sector mutual funds came in 1993. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund under the SEBI (Mutual Fund) Regulations 1996. In 2003, UTI converted into two different entities.
Meaning:-
Mutual fund is a financial intermediary that pools money from investors for collectively investment in stocks, bonds and other securities.
Mutual Fund Operation Flow Chart
- Investors invest the amount in mutual fund.
- Fund manager of mutual fund invest in securities (shares, debentures).
- Earn returns redistributed to investors.
Organizational Structure of Mutual Fund in India
- Sponsor– is the entity who creates a mutual fund. According to SEBI(Mutual Fund) Regulations, 1996 the sponsor contributes at least 40% of net worth of AMC.
- Trust– The Mutual Fund is a trust under the Indian Trusts Act, 1882.
- Trustees– The Board of Trustees manage the trust and safeguard the interest of the unit holders. The fund sponsor appoints trustees and trust is created through a document called the Trust Deed executed by the fund sponsor in favour of trustees. Trustees are primary guardian of the unit holders.
- Asset Management Company (AMC)- Trustee appoints the AMC manages the funds ,operations and investments of the MF and provide advisory services.
- Custodian-safekeeping of the investors’ fund and securities.
Types of Mutual Funds
On the basis of Structure-
- Open Ended Funds (Schemes)- Most of the funds are open ended as there is no defined maturity date. The key feature is liquidity round the year. Investors can buy and sell (redeem) at any time. An open ended fund comes into existence through the New Fund Offer.
- Closed Ended Funds- have a defined maturity date. Close ended funds are listed on the stock Exchange.
Types of Mutual Fund Schemes:-
Equity Schemes:- Small Cap Fund, Mid Cap Fund, Large & Mid Cap Fund, Large Cap Fund, Multi Cap Fund, Sectoral / Thematic and ELSS.
Debt Schemes:- Liquid Fund, Gilt Fund, Money market Fund, Duration Fund.
Hybrid Schemes:- Conservative/Aggressive/Balanced Hybrid fund, Arbitrage Fund.
Other Schemes:- Index Funds / ETFs.
Net Asset Value
Net asset value is the market value of the securities. Market value of securities changes every day.
The NAV is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.
Formula:-
Net Asset of the Scheme/Number of units outstanding
Net Asset of the Scheme- Market Value of Investments held by the Fund+ Value of Current Assets-Value of Current Liabilities and other payables.
Mutual Fund Terminology:-
- NFO- New Fund Offer
- SID- Scheme Information Document
- SAI- Statement of Additional Information
- KIM- Key Information Memorandum
- AUM- Assets under Management
- KYC Know Your Client
- FATCA- Foreign Account Tax Compliance Act
- SIP- Systematic Investment Plan
- NAV- NET ASSET VALUE