MUTUAL FUNDS: ISSUES, CHALLENGES AND OPPORTUNITIES IN INDIA

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1 MUTUAL FUNDS: ISSUES, CHALLENGES AND OPPORTUNITIES IN INDIA Ritu, Assistant Professor, S.A.Jain College, Ambala City, India. ABSTRACT Mutual fund sectors are one of the fastest growing sectors in Indian economy that have potential for sustained future growth. Mutual funds make saving and investing simple and affordable. Anybody with an investible surplus of as little as a few hundred rupees can invest in mutual funds. The innovative marketing strategies of mutual fund companies in India are influencing the retail investors to invest their surplus funds in different types of securities. The advantages of mutual funds include professional management, diversification, variety, liquidity, convenience as well as strict government regulations and full disclosure. For investors who risk adverse it is better to invest in mutual funds and for those who are risk taker it is better to invest in stock market. SEBI is the regulatory body to control and regulate the securities market and mutual funds industry in India. KEYWORDS: Mutual fund, NPV, AMC, Liquidity, risk, AMFI INTRODUCTION: Mutual funds in India are financial instruments; each mutual fund has a specific stated objective. Its objective is stated in fund s prospectus, which is the legal document, containing information about fund s history, officers and its performance. SEBI (Mutual funds) regulations, 1996 defines a mutual fund as a fund established in the form of a trust to raise money through the sale of units to the public under one or more schemes for investing in securities, including money market instruments. Investment is the allocation of funds to assets and securities after considering their return and risk factors. A mutual fund is a trust that pools the savings of a number of investors, invests the fund in capital market instruments such as Page 50

2 shares, debentures and other securities. Investors plan for long time period after considering the fundamental factors and moderate risk. Their main objectives are minimizing risk, maximizing returns, safety of principal amount and liquidity. Mutual fund valuation: The share value of the mutual fund in India is known as net asset value per unit. It is calculated on the total amount of the mutual funds by dividing it with the number of units. The net asset value is the market value of asset minus liabilities on the day of valuation. NAV is the amount that the shareholders would collectively own. If the fund is dissolved. The company that puts together the mutual fund is called AMC (Asset Management Company). SEBI of India has specified the authority and responsibilities of AMC. AMC hires a professional money manager, who buys and sells the securities in line with fund s stated objective. MUTUAL FUND FLOW CHART OBJECTIVES AND METHODOLOGY: Data used in the study is secondary in nature, mostly collected from the journals, reports of mutual funds by AMFI and PWC. The objectives are: (1) To introduce concept of mutual funds, its various schemes (2) To analyses the growth of mutual fund industry in India (3) To study opportunities and challenges for investors Page 51

3 (4) To present some suggestions for future growth GROWTH OF MUTUAL FUND IN INDIA: The Indian mutual fund industry is one of the faster growing sectors in the Indian capital and financial markets. Its growth can be divided in following four phases: FIRST PHASE ( ): The concept of mutual funds was introduced in India with the formation of unit trust of India in It was set up by reserve bank of India, in 1978 UTI was delinked from RBI and Industrial Development Bank of India (IDBI) took over its regulatory and administrative control. Investment funds of UTI grew from Rs. 49 crore in 1965 to Rs. 219 crore in In 1987 it grew to Rs. 5,608 crore. At the end of 1988 UTI had Rs. 6,700 crore of assets under management. SECOND PHASE ( ): In 1987 public sector mutual funds were set up by public sector banks and Life Insurance Corporation (LIC) and General Insurance corporation of India (GIC). SBI mutual fund was the first mutual fund established in 1987 followed by canbank mutual fund. Punjab National Bank mutual fund, Indian Bank mutual fund, Bank of India mutual fund. With their entry investable funds, increased to Rs. 53,462 crore and number of mutual investors increased to over 23 million. THIRD PHASE ( ): In 1993, a new era started in the Indian mutual fund industry. Private sector and foreign players were allowed entry in the mutual fund industry. Kothari pioneer was the first private sector mutual fund registered in With the miserable failure of foreign funds like Morgan Stanley eroded the confidence of investors and resulted in decline in average annual sales from about Rs crore in The 1993 SEBI (mutual fund) Regulations were substituted by revised mutual fund regulations At the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,085 crores. FOURTH PHASE (since 2003): In feb. 2003, UTI was bifurcated into 2 separate entities one is specified undertaking of UTI with AUM(Asset under management) of Rs. 29,835 crore at the end of January This undertaking, functioning under the rules framed by government of India and does not come under the purview of mutual fund regulations. Page 52

4 The second is UTI Mutual fund sponsored by SBI, PNB, BOB and LIC, functioning under the mutual fund regulations. With the mergers taking place among private sector funds, mutual fund industry has entered in the phase of consolidation and growth. The graph indicating the growth of assets during different phases: Source: AMFI AVERAGE ASSETS UNDER MANAGEMENT: As per the data released by the Association of mutual funds in India (AMFI), the average assets managed by mutual industry increased by 4.2% during Jan-Mar The industry has grown at a compound annual growth rate (CAGR) of 18% from The growth of average assets reported in March 2012 was 12% and increased to a growth of 23% for the year ended march Page 53

5 Growth in A.U.M. INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT AND COMMERCE CAGR = 18% Years SOURCE:AMFI DATA VARIOUS SCHEMES OF MUTUAL FUNDS: The schemes of mutual funds can be classified into following two: Government securities and Industrial securities. The government securities are fixed income securities backed by government and there is no risk of default. The industrial securities include debentures, preference shares and equity shares. It means industrial securities are about stock market and mutual funds. GOVERNMENT SECURITIES(G-SEC): In India G-SEC are issued by central government, state government and semi government authorities such as municipalities, port trusts, state electricity boards and public sector corporations. Through these securities central and state government raise money to finance new infrastructure as well as meet their current cash needs. These have maturities ranging from five to twenty years, pay interest every six months and the risk of default is minimal. The RBI manages the issue of securities through auction mechanism. CALL MONEY MARKET: The loan made in this market is of short term nature overnight to fortnight. Those banks which are facing short term cash deficit, Page 54

6 borrow funds from the cash surplus banks. The rate of interest depends on liquidity position in the banking system. COMMERCIAL PAPER (CP) AND CERTIFICATE OF DEPOSITS(CD): These are issued for short term maturities. These are issued at discount and redeemed at face value. These are unsecured and rate of interest is market driven and depends on current liquidity position and creditworthiness of issuing company. CPs are issued by corporate to finance their working capital needs while CDs are issued by commercial banks. INDUSTRIAL SECURITIES: These are mainly issued by corporate sector to finance their long term and working capital requirements. These include: DEBENTURES: These have a fixed maturity, fixed or floating rate of interest during lifetime. The company has to pay interest and principal amount on due dates regardless of profitability position. PREFERENCE SHARE: These carry fixed rate of dividends. They have a preferential right to dividend over equity shareholders. On winding up of company they get back their capital before equity shareholders. Now all the preference shares in India are redeemable that is they have a fixed maturity period. EQUITY SHARES: These are regarded as high return high risk instruments. These do not carry fixed rate of return and there is no maturity period. The company may or may not declare dividend on equity shares. These are traded on the stock exchanges. The major component of return to equity shares usually consist of market appreciation. OPPORTUNITIES OF MUTUAL FUND INDUESTRY IN INDIA: Mutual funds makes saving and investment simple, accessible and affordable. The opportunities for investors in mutual fund industry are; Page 55

7 PROFESSTIONAL MANAGEMENT: Investors in mutual fund allow a qualified professional with advanced training and expertise to manage their money. Through this organized investment strategy, fund manager can undergo various research works, which will ensure high returns to investors. DIVERSIFICATION: It will provide an opportunity to the investors to reduce their risk as mutual funds invest not in single scrip rather in a number of companies across various industries and sectors. Through mutual funds investors designs their portfolio in such a way so that their investment will react differently to same economic situation. LIQUIDITY: In case of mutual funds, investors can easily get money by selling their units to the fund or on a stock exchange. LOW COST OF TRANSACTION: Investing in mutual funds involves low transaction cost due to the economies of large scale. Generally mutual fund expenses are 1.5% of the investment. CONVENIENCE: Mutual funds are common and easy to buy. Investors can buy mutual fund shares by mail. Phone or over the internet which reduces paper work, saves time and makes investment easy. VARIOUS SCHEMES: Various schemes of mutual funds provide investors with different investment objectives. Investors have option to invest in securities by comparing objectives of investment and their own financial goals. FLEXIBILITY: Mutual funds investments are flexible. Investors can easily switch from debt scheme to equity scheme or vice- versa. TRANSPARENCY: Mutual funds transparently declare their portfolio every month. All material facts are disclosed to investors by the regulators. Page 56

8 CHALLENGES OF MUTUAL FUND INDUSTRY IN INDIA: Mutual fund investment provides various opportunities to investors but they have to face some challenges as it is not possible that fund managers always make profits; NO GURANTEES: Portfolio management provides diversification benefits but no investment is risk free. If the entire stock market declines in value, the value of mutual fund shares also go down and it is possible that investors may lose their entire investment. MANAGEMENT RISK: Mutual funds are managed through fund s manager, it means investors depend on fund s manager to make the right decision regarding fund s portfolio. But if manager does not perform well, there is risk of investment made. FEES AND COMMISSION: All funds charge fee for day to day expenses. Investors have to pay fees as a percentage of value of his investments, irrespective of performance of the fund. Some funds also charge sales commissions to compensate brokers, financial consultants and planners. DILUTION: Although diversification reduces the amount of risk involved in investing in mutual funds, it can be also a disadvantage due to dilution. For example: if a single security doubles in value then mutual fund itself would not double in value as that security is only a part of fund s holding. INVESTOR EDUCATION: The efforts taken by the industry are showing the results. The media is also making a fair share of contribution. Today we have news channels running shows for mutual funds, wherein fundamentals of investing in mutual funds are explained. Still there is need of professional help. TECHNOLOGY BACKBONE: Funds have introduced technological innovations such as transactions through the internet. The internet revolution in our country is yet to penetrate to the grass root levels. Usage of internet in our country is low compared to developed countries. Page 57

9 TRADING LIMITATIONS: Although mutual funds are highly liquid in nature, most of mutual funds cannot be bought or sold in the middle of the trading day. They can be sold by the investor only at the end of the day, after calculation of current value of their holdings. LOSS OF CONTROL: The managers of mutual funds make all of the decisions about which securities are to buy and sell and what to do so. This makes it difficult for the investor who tries to manage their portfolio. They loss their control as they are dependent on fund managers when invest in a mutual fund. FUTURE SUGGESTIONS FOR MUTAL FUND INDUSTRY: To overcome the challenges some of future recommendations are: INCREASE THE DISTRIBUTION STRENGTH: Compared to the sales force, the strength of mutual fund network appears to be dismal. The investors are likely to meet insurance agents much frequently than mutual fund distributors hence park their surplus funds in insurance policies rather than mutual funds. Thus there is need to increase the strength of distribution for mutual fund industry. ALTERNATIVE DISTRIBUTION MODEL: The mutual fund industry need to explore alternative model of distribution for the expansion and growth. Fund houses can look at the possibility of investing in an active sales force. The online channel of distribution also exists, although its full potential has not been exploited as yet. NEED TO UPGRADE DISTRIBUTION NETWORK: Industry need willingness from AMCs to invest more in distributor community. The smallest asset management companies due to lack of funds, find it more difficult to invest in the distribution channel. Training and educating the distributors are integral to increasing penetration of mutual fund products. Page 58

10 TECHNOLOGY MIX: To overcome operational challenges, there is a need to improve infrastructure and to bring in more efficiency while increasing the scale of operations. INVESTORS AWARENESS INITIATIVES: National awareness campaigns for mutual funds continue to remain a focus area for fund houses and distributors. The AMCs are trying to think of innovative ways of reaching the investors in smaller towns and cities and mobilize savings. Investors should be aware of the sectors in which they are investing and outlook of their investments, with the risk explained. Servicing the customers and guiding them to achieve financial goals over a period of time will lead the industry towards sustainability and asset retention. GROWTH OF INVESTMENT PLANS; Fund managers need to enhance the growth of their systematic investment plan books. These plans have the capacity to deal with volatility over a long time period and generate steady returns. FOCUS ON SERVICE INITIATIVES: Fund houses should focus on service initiatives to increase distribution needs to be matched with service quality to investors and distributors. CONCLUSION: Mutual funds are most preferred investment instruments. For middle income individuals, investing in mutual funds yield higher interest and comes with good principal amount. Another fact is that mutual funds are safe, with close to zero risk. It is important to gain good understanding of mutual fund investments, as customers can easily be misguided by the advertisements and offers promoted by financial institutions. The mutual fund is run by a fund manager who is responsible for sale and purchase of investments in accordance of fund s objectives. In India there is lot of scope for growth of mutual fund companies provided fund satisfies everybody s needs and improvements in service standards and disclosure. Most of the Page 59

11 investors are not fully aware about various functions of mutual funds. Some steps should be taken to give information to the public about mutual funds. REFERENCES: (1)Murlidhar donna, MUTUAL FUNDS IN INDIA- ISSUES, OPPORTUNITIES AND CHALLENGES, Vol.1 no.2 (2012) (2)Sarish, A STUDY OF OPPORTUNITIES AND CHALLENGES FOR MUTUAL FUNDS IN INDIA: VISION 2020 (3)Prasanna Chandra, Investment Analysis and Portfolio Management sixth reprint 2007, Tata McGraw- hill Publication Company limited, New Delhi (4)Riter, Jay R1998, The buying and selling behavior of individual investors at turn of the year, journal of finance (5) Subash chander and Japal Singh, Performance of mutual funds in India: An Empirical evidence The ICFAI JOURNAL OF Applied finance (6)The world of mutual funds, periodic research, vol.2, issue 4, 2014 (7) JOURNAL OF COMMERCE AND TRADE, vol 1(2007) (8)MUTUAL FUND SUMMIT 2013, CII, PWC REPORT (9) AMFI DATA Page 60