Indian Financial System - Mutual Funds - Notes - Finance, Study notes of Business Administration

Download Indian Financial System - Mutual Funds - Notes - Finance and more Study notes Business Administration in PDF only on Docsity! Mutual Funds Mutual funds are financial intermediaries which collect the savings of investors and invest them in a large and well diversified portfolio of securities such as money market instruments, corporate and Government bonds and equity shares of joint stock companies. A mutual fund is a pool of commingle funds invested by different investors, who have not contract with each other. Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market.. Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary which undertakes informed investment decisions and provides the consequential benefits of professional expertise. The raison d‟etre of mutual funds is their ability to bring down transaction costs. The advantages for the investors are reduction in risk, export professional management ,diversified portfolios, liquidity of investment and tax benefits . By pooling their assets through mutual funds, investors achieve economies of scale. The interests of the investors are protected by the SEBI which acts as a watch dog. Mutual funds are governed by the SEBI (Mutual Funds) Regulations,1993. MUTUAL FUNDS IN INDIA: The first mutual fund to be set up was the Unit Trust of India in 1964 under an act of Parliament . During the years 1987-1992,even new mutual funds were established in the public sector. In 1993, the government changed the policy to allow the entry of private corporations and foreign institutional investors in to the mutual fund segment. By the end of march 2000, apart from UTI there were 36 mutual funds, 9 in the public sector and 27 in the private sector. The UTI dominated the mutual fund sector till 1994-95, accounting for 76.5% of the total mobilization. But there were large repurchases by UTI in 1995-97, which resulted in reverse flow funds. Meanwhile the number of The above all the schemes are listed on the stock exchange for dealings in the secondary market. Return form mutual funds: Investors on mutual funds can obtain the following returns . They are: 1.Dividends. 2.Capital gains. 3.Increase or decrease in NAV 1.Dividends:The dividend income of a mutual fund company form its investments in share , both equity and preference, are phased on to the unit holders. All income received by investors form mutual funds is exempt form tax. 2.Capital Gains: Mutual fund unit holders or owners also got benefits of capital gains which are realized and described to them in cash or kind. 3.Increase or Decrease in NAV: The increase or decrease in the NAV are the result of unrealized gains or losses on the portfolio holdings of the mutual fund. Although mutual funds do not earn high rates of return, they are able to reduce risk to the systematic level of market fluctuations. Most mutual funds earn in long run, an average rate of return that exceeds the return on bank tern deposits. Mutual Fund Holders Account: There are three types of accounts offered by most of the mutual funds. The investors select the type that matches their objectives. The various accounts are: Regular Account: An investor is permitted to purchase any number of shares of the mutual fund, at any time he chooses. An investor is paid the dividend either monthly, quarterly, or half as he chooses as per the scheme. This income can be reinvested to acquire additional units by the investors. Accumulation Account: An investor is allowed to open an account, with a very small initial investment and continue adding to the fund, periodically. Accumulation account may be voluntary or contractual. In the voluntary accumulation plan, an investor has flexibility to make periodic investment at his choice.But in the contractual plan, the investor has to make investment at regular intervals. Withdrawal Accounts; Under this plan, the individual investor can withdraw the amount of funds on a regular basis which suits elderly people to supplement their pension benefits. RECOMMENDATIONS OF THE STUDY GROUP: In 1991, a 10-member study group headed by Dr.S.A.Dave, chairman of the Unit Trust of India, was formed by the Government of India, to study the functioning of mutual funds, with a view to permit mutual funds in the private/ joint sectors. The major recommendat ions of the study group are: 1. Minimum amount to be raised in the closed-end scheme should be Rs.20crores and that of the open-end scheme is Rs. 50 crores. 2. The private mutual fund should enjoy tax benefits similar to the UTI. 3. No minimum return should be guaranteed. 4. Distribution of at least 80 percent earnings. 5. A limit of Rs.200 crores should be set for borrowing over two years. SEBIs DIRECTIVES FOR MUTUAL FUNDS: The Government brought mutual funds in the security market under the regulatory framework of the Securities and Exchange Board of India (SEBI) in the year 1993. constitute a significant portion of portfolio and the disclosure of the movements in unit capital. The existing asset management companies are required to increase their networth from Rs. 5 crores to Rs. 10 crores within 1 year from the date of notification of the amended guidelines. The consent of the investors has to be obtained for bringing about any change in the fundamental attributes of the scheme on the basis which the unit holders made initial investments. The regulations empower the investor. The amended guidelines require portfolio disclosure, standardization accounting policies, valuation norms for NAV and pricing. The regulations also sought to address the areas of misuse of funds by introducing prohibitions and restrictions on affiliate transactions and investment exposures to companies belonging to the group of sponsors of mutual mutual funds. The payment of early bird incentive for various schemes has been allowed provided they are viewed as interest payments for early investment with full disclosure. The various mutual funds are allowed to mention an indicative return for schemes for fixed income securities. In 1998-99 the Mutual Funds Regulations were amended to permit mutual funds to trade to derivatives for the purpose of hedging and portfolio balancing, SEBI registered mutual funds fund managers are permitted to invest in overseas markets, initially within an overall limit of US $500 million and a ceiling for an individual fund at US $50 million. SEBI made (October8,1999) investment guidelines for MFs more stringent. The new guidelines restrict MFs to invest no more than 10% of NAV of a scheme in share or share related instruments of a single company. MFs investment in rated debt instruments of a single issuer is restricted to 15% of NAV of the scheme (up to 20% with prior approval of Board of Trustees or AMC). Restrictions in unrated debt instruments and in shares of unlisted companies . The new norms also specify a maximum limit of 25% of NAV of any scheme for investment in listed group companies as against an umbrella limit of 25% of NAV of any scheme for investment in listed group companies as against an umbrella limit of 25% of NAV for all schemes taken together earlier. SEBI increased (June 7, 2000) the maximum investment limit for MFs in listed companies form 5% to 10% of NAV in respect of open-ended funds. Changes in fundamental attributes of a scheme was also allowed without the consent of three fourths of unit holders provided the unit holders are given the exit options at NAV without any exit load. MFs are also not to make assurance or claim that is likely to mislead investors. They are also banned from making claims in advertisement based on past performance.. PRIVATE MUTUAL FUNDS: Another key development in the Financial sector was the opening of mutual funds to private sectors in early 1992. Though quite a few industrial groups and financial majors evinced a keen interest in the setting up of mutual funds, it took nearly two years for the first private mutual fund to be launched. The first private sector mutual fund was launched by the Madras based H.C.Kothari group which, in collaboration with the Pioneer group of the US offered two schemes in 1994. This was followed by several mutual funds having foreign tie-ups with renowned asset management companies-20th century has a collaboration with Kemper Financial Services the Tata with Kleinwort Bonson and ICICI with J.P.Morgan. The competition becomes intense when investors switch over form one fund to another, based on their decisions on the performance of the funds. And that should begin sooner than latter, with as many as 32 mutual funds in the field. The trend world over especially in the Minister,T.,T.Krishnamachari, set up the idea of a Unit Trust n which would mobilize savings of the community and invest these savings in the Capital market. His ideas took the form of the Unit Trust of India, which commenced operations form likely 1964, with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the Corporation form the acquisition, holding, management and disposals of securities. The regulation passed by the Ministry of Finance (MOF) and the Parliament form time to time regulated the functioning of UTI. Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures, and regulatory requirements, for the Trust. UTI was set up as a trust without ownership capital and with an independent Board of Trustees. The Board of Trustees manages the affairs and business of UTI . The Board performs its functions, keeping in view the interest of the Unit-holders under various schemes. UTI was set up as a trust without ownership capital and with an independent Board of Trustees. The Board of Trustees manages the affairs and business of UTI. The Board performs its functions, keeping in view the interest of the unit-holders under various schemes. UTI has a wide distribution network of 54 branch offices, 266 chief representatives and about 67,000 agents. These Chief representatives supervise agents. UTI manages 72 schemes and has an investors base of 20.02 million investors. UTI has set up 183 collection centres to serve to serve investors. It has 57 franchisee offices which accept applications and distribute certificates to unit-holders. UTIs mission statement is to meet the investors diverse income and liquidity needs by creation of appropriate schemes, to offer best possible returns on his investment, and render him prompt and efficient service, baying normal customer expectations. UTI was the first mutual fund to launch India Fund, an offshore mutual fund in 1986. The India Fund was launched as a close-ended fund but became a multi-class , open –ended fund in 1994. Thereafter, UTI floated the India Growth Fund in 1988, the Columbus India Fund in 1994, and the India Access Fund in 1996. The India Growth Fund is listed on the New York Stock Exchange. The India Access Fund is an Indian Index Fund, tracking the NSE 50 index. UTI’s Associates: UTI has set up associate companies in the field of banking, securities trading , investor servicing, investment advice and training, towards creating a diversified financial conglomerate and meeting investors varying needs under a common umbrella. UTI BANK Limited: UTI Bank was the first private sector bank to be set up in 1994. The Bank has a network of 121 fully computerized branches spread across the country. The Bank offers a wide range of retail, corporate and forex services. UTI Securities Exchange Limited: UTI Securities Exchange Limited was the first institutionally sponsored corporate stock broking firm incorporated on June28,1994, with a paid-up capital of Rs.300 million. It is wholly owned by UTI and promoted to provide secondary market trading facilities, investment banking, and other related services. It has acquired membership of NSE,BSE,OTCEI and Ahmedabad Stock Exchange (ASE) UTI Investors Services Limited: UTI Investor Services Limited was the first Institutionally sponsored Registrar and Transfer agency set up in 1993. It helps UTI in rendering prompt and efficient services to the investors. UTI Institute of Capital Markets: UTI Institute of Capital Market was set up in 1989 as a non-profit educational society to promote professional development of capital market participants. It provides specialized professional development programmes for the varied constituents of the capital market and is engaged in research and consultancy services. It also serve as a forum to discuss ideas and issues relevant to the capital market. UTI Investment Advisory Services Limited: UTI Investment Advisory Services Limited the first Indian Investment advisor registered with SEC,US, was set up in 1988 to provide investment research and back office support to other offshore funds of UTI. UTI International Limited: UTI International Limited is a 100 percent subsidiary of UTI, registered in the island of Guernsey, Channel Islands. It was set up with the objective of helping in the UTI offshore funds in marketing their products and managing funds. UTI International Limited has an office in London, which is responsible for developing new products, new business opportunities, maintaining relations with foreign investors, and improving communication between UTI and its clients and distributors abroad. UTI has a branch office at Dubai, which caters to the needs of NRI investors based in Six Gulf countries, namely, UAE, Oman, Kuwait, Saudi Arabia, Qatar, and Bahrain. This branch office acts as a liaison office between NRI investors in the Gulf and UTI offices in India. UTI has extended its support to the development of unit trusts in Sri Lanka and Egypt. It has participated in the equity capital of the Unit Trust Management Company of Sri Lanka. Promotion of Institutions: The Unit Trust of India has helped in promoting/co-promoting many institutions for the healthy development of financial sector. These institutions are: