Concept of a Mutual fund:
- A mutual fund is a professionally managed investment vehicle.
- It allows investors to access different markets and securities through professional fund management services offered by an asset management company.
- Investors invest through mutual funds, not in mutual funds directly.
- Mutual funds offer portfolio diversification and a regulated investment vehicle.
Role of Mutual Funds:
- Mutual funds help investors earn income or build wealth by investing in securities markets.
- They offer different types of schemes to cater to diverse investment objectives.
- Mutual funds mobilize money from investors, which benefits governments, companies, and promotes economic development.
- Mutual funds can act as a market stabilizer in countering large inflows or outflows from foreign investors.
Investment Objectives of Mutual Funds:
- Mutual funds mobilize different pools of money called schemes, each with a pre-announced investment objective.
- Investment objectives can include safety, liquidity, and returns, such as income or capital appreciation.
- Different schemes invest in various asset classes based on their investment objectives.
Investment Policy of Mutual Funds:
- The investment policy of a mutual fund scheme determines how it achieves its investment objective.
- It includes asset allocation and investment style, which may vary based on the scheme's objective.
- Asset allocation determines the types of securities the scheme invests in, such as equities or debt instruments.
- Investment style may be growth or value-oriented, and portfolio concentration can be focused or diversified.
Important Concepts in Mutual Funds:
- Units: Investors are issued units of a mutual fund scheme, representing their investment.
- Face Value: Units typically have a face value of Rs. 10, relevant for accounting purposes.
- Unit Capital: The capital of a scheme is calculated by multiplying the number of units by their face value.
- Recurring Expenses: Fees or commissions paid to mutual fund constituents are recurring expenses charged to the scheme.
- Net Asset Value (NAV): NAV represents the true worth of a unit and is calculated based on the scheme's underlying investments.
- Assets Under Management (AUM): AUM is the sum of investments made by all investors in the scheme and reflects its size.
- Mark to Market (MTM): Valuing each security in the scheme's portfolio at its current market value on a daily basis.
Advantages of Mutual Funds for Investors:
- Professional Management: Mutual funds provide professional fund management services, research, and investment expertise.
- Affordable Portfolio Diversification: Investors can access a diversified portfolio even with small investments.
- Economies of Scale: Pooling large sums of money allows for professional management and cost-sharing benefits.
- Transparency: Mutual funds provide relevant information, transparency about investments, and regular NAV updates.
- Liquidity: Investors can easily recover the market value of their investments from the mutual fund.
- Tax Deferral and Tax Benefits: Mutual funds offer options to defer taxes and certain schemes provide tax deductions.
- Convenient Options: Mutual funds offer various options for investing, withdrawing, and structuring returns.
- Investment Comfort and Regulatory Comfort: Mutual funds simplify investing and benefit from SEBI's regulations.
- Systematic Approach: Investors can use systematic plans to invest regularly or withdraw funds systematically.
Limitations of Mutual Funds:
- Lack of Portfolio Customization: Investors cannot influence the securities or investments chosen by the mutual fund scheme.
- Choice Overload: Multiple schemes and options can make it challenging for investors to choose the right mutual fund.
- No Control Over Costs: Investors have no control over the costs incurred by the scheme, which are shared proportionally.
- No Guaranteed Returns: Mutual funds are subject to market fluctuations, and returns are not guaranteed.
Classification of Mutual Funds:
- Based on investment objective:
- Growth funds
- Income funds
- Liquid funds
- By the structure of the fund:
- Open-ended funds: Investors can enter or exit at any time.
- Close-ended funds: Have a fixed maturity date and cease to exist thereafter.
- Interval funds: Combine features of both open-ended and close-ended schemes, becoming open-ended at pre-specified intervals.
- By the management of the portfolio:
- Actively managed funds: Fund manager chooses the investment portfolio.
- Passive funds: Invest based on a specified index.
- By the investment universe:
- Equity funds
- Fixed income funds
- Money market funds
- Gold funds
- International funds
- Sectoral/Thematic funds
- Mutual fund scheme categorization and SEBI regulation:
- Equity Schemes (11 sub-categories)
- Debt Schemes (16 sub-categories)
- Hybrid Schemes (6 sub-categories)
- Solution Oriented Schemes (2 sub-categories)
- Other Schemes (2 sub-categories)
Additional types of funds:
- Fixed Maturity Plans (close-ended debt funds with a duration aligned to maturity)
- Capital Protection Funds (closed-end hybrid funds providing principal protection)
- Infrastructure Debt Funds (investment vehicles for institutional investors)
- Real Estate Mutual Funds (investing in real estate assets)
- Smart Beta Funds (index funds using alternative strategies)
- Quant Funds (data-driven selection of securities)
- International REITs Funds (investing in Real Estate Investment Trusts abroad)
Growth of the Mutual Fund Industry in India:
- Mutual fund assets under management (AUM) in India have witnessed significant growth from Rs. 6.99 lakh crores in May 2012 to Rs. 37.37 lakh crore in May 2022.
- The 10-year growth rate stands at 18.25 percent per annum compounded annually.
- The number of folios (investor accounts) has increased from 4.80 crore in March 2010 to 13.33 crore in May 2022.
- Mutual funds' share in overall financial investments in India has risen from 10 percent in March 2016 to 14 percent in March 2018.
- In comparison, the share of bank deposits has decreased from 71 percent to 65 percent during the same period.
- The Indian mutual fund industry's global market share has increased from 0.33 percent in 2008 to 0.60 percent in 2018.
Table: Growth of Mutual Fund Industry in India
|Year||AUM (in Rs. lakh crore)||Folios (in crores)||Mutual Fund Share in Financial Investments (%)|