Asian Research Journal of Business Management

Transcription

1 Asian Research Journal of Business Management Investing in Mutual Fund: An Overview Rashmi Sharma* 1 and N. K. Pandya 2 1. Research Scholar, Faculty of Commerce, J.R.N. Rajasnthan Vidhyapeeth University, Udaipur, India. 2. Formerly Professor, Principal and Dean, of Commerce, J.R.N. Rajasnthan Vidhyapeeth University, Udaipur, India. Received: 8 July 2013; Revised: 20 July 2013; Accepted: 26 July 2013 Abstract: In this paper, structure of mutual fund, comparison between investments in mutual fund and other investment options and calculation of NAV etc. have been considered. In this paper, the impacts of various demographic factors on investors attitude towards mutual fund have been studied. For measuring various phenomena and analyzing the collected data effectively and efficiently for drawing sound conclusions, drawing pie charts has been used and for analyzing the various factors responsible for investment in mutual funds. Keywords: Mutual Fund, Investment period, Investment option. INTRODUCTION A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. 9 Mutual fund is an investment vehicle that is made by pooling funds from investment in securities such as stocks, bonds, money market instruments and other similar assets. Mutual funds are operated by fund managers, who invest the fund's capital in attempt to produce capital gains. As the investment is made across a wide industries and sectors, the associated risk is reduced to minimum. Mutual fund is issued to an individual based on the capital invested. Investors of mutual funds are referred as unitholders. 10 The flow chart below describes broadly the working of a mutual fund 44

2 Fig. 1.0 Working of Mutual Fund Mutual funds collect funds from public and invest on behalf of the investors and thus can be considered as financial intermediaries in the investment business. The losses and profits accrue to the investors only. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gather money into specific securities (stocks or bonds). Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not

3 Concept of Mutual Fund Many investors with common financial objectives pool their money. Investors, on a proportionate basis, get mutual fund units for the sum contributed to the pool. The money collected from the investors is invested into shares, debentures and other securities by the fund manager. The fund manager realizes gains or losses, and collects dividend or interest income Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them. STRUCTURE OF MUTUAL FUND A Mutual Fund is set up in the form of a Trust which has the following constituents:- a. Fund Sponsor b. Mutual Fund as Trust c. Asset Management Company d. Other Fund Constituents i. Custodian and Depositors ii. Brokers iii. Transfer Agent iv. Distributors a. FUND SPONSOR What a promoter is to a company, a sponsor is to a mutual fund. The sponsor initiates the idea to set up a mutual fund. It could be a financial services company, a bank or a financial institution. It could be Indian or foreign. It could do it alone or through a joint venture. In order to run a mutual fund in India, the sponsor has to obtain a license from SEBI. For this, it has to satisfy certain conditions, such as on capital and profits, track record (at least five years in financial services), default-free dealings and a general reputation for fairness. The sponsor must have been profit making in at least 3 years of the above 5 years. The Sponsor appoints the Trustees, Custodian and the AMC with the prior approval of SEBI and in accordance with SEBI Regulations. The sponsor should inspire confidence as a money manager and, preferably, be profitable. 46

4 In the days of assured return schemes, sponsors also had to fulfill return promises made to the unit holders. All things considered, choose sponsors who are good money managers, who have a reputation for fair business practices and who have deep pockets. b. TRUST The Mutual Fund is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, The Trust appoints the Trustees who are responsible to the investors of the fund. TRUSTEES-Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of the unit holders. Trustees are appointed by the sponsors, and can be either individuals or corporate bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least two-thirds of the trustees be independent, i.e., not have any association with the sponsor. Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and reports periodically to them on how the business being run. Trustees float and market schemes, and secure necessary approvals. They check if the AMCs investments are within defined limits and whether the fund s assets are protected. Trustees can be held accountable for financial irregularities in the mutual fund. c. ASSET MANAGEMENT COMPANY (AMC) An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a private limited company in which the sponsors and their associates or joint venture partners are the shareholders. The trustees sign an investment agreement with the AMC, which spells out the functions of the AMC. It is the AMC that employs, fund managers and analysts, and other personnel. It is the AMC that handles all operational matters of a mutual fund from launching schemes to managing them to interacting with investors. The people in the AMC who should matter the most, are those who take investment decisions. There is the head of the fund house, generally referred to as the Chief Executive Officer (CEO). Under him comes the Chief Investment Officer (CIO), who shapes the fund s investment philosophy, and fund managers, who manages its schemes. They are assisted by a team of analysts, who track markets, sectors and companies. If an AMCs expenses for the year exceed what it earns as fund management fee from its schemes, the balance has to be met by the sponsor. Again, financial strength comes into play: a cash-rich sponsor can easily pump in money to meet short falls, while a sponsor with less financial clout might force the AMC to trim costs, which could well turn into an exercise in cutting corners. 47

5 d. OTHER CONSTITUTIONS i. Custodian 48 A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt and delivery of securities, collection of income, distribution of dividends and segregation of assets between the schemes. It also track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition. The sponsor of a mutual fund cannot act as a custodian to the fund. This condition, formulated in the interest of investors, ensures that the assets of a mutual fund are not in the hands of its sponsor. For example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual Fund, its mutual fund arm. ii. Brokers Role of Brokers in a Mutual Fund: They enable the investment managers to buy and sell securities. Brokers are the registered members of the stock exchange. They charge a commission for their services. In some cases, provide investment managers with research reports. Act as an important source of market information. iii. Registrar Or Transfer Agents Registrars, also known as the transfer agents, are responsible for the investor servicing functions. This includes issuing and redeeming units, sending fact sheets and annual reports. Some fund houses handle such functions in-house. Others outsource it to the Registrars; Karvy and CAMS are the more popular ones. It doesn t really matter which model your mutual fund opt for, as long as it is prompt and efficient in servicing you. Most mutual funds, in addition to registrars, also have investor service centers of their own in some cities. Some of the investor related services are: iv. Distributors Processing investor applications. Recording details of the investors. Sending information to the investors. Processing dividend payout. Incorporating changes in the investor information. Keeping investor information up to date. Role of Selling and Distribution Agents: Selling agents bring investor s funds for a commission. Distributors appoint agents and other mechanisms to mobilize funds from the investors. Banks and post offices also act as distributors.

6 The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund. NET ASSET VALUE The net asset value or NAV, is the current market value of a fund's holdings, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so process orders only after the NAV are determined. Closed-end funds (the shares of which are traded by investors ) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes. Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus. CALCULATION OF NAV The most important of the calculation is the valuation of the assets owed by the funds. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Net Asset value =Sum of market value of shares/debentures + Liquid assets/cash held (if any) +Dividends/interest accrued-amount due on unpaid assets -Expenses accrued but not paid. HYPOTHESIS The proposed hypotheses for our study are: 1. Mutual Funds are used as a source of earning for short term period. 2. Investors are less interested going with private sector investment option. 3. Mutual Funds is the most opted option for investment. RESEARCH METHODOLOGY The study is basically an analytical study based on primary research as well as also related to the analysis of the attitude of investors towards mutual funds. In order to conduct this study, 49

7 100 investors in Udaipur region have been selected by sampling method and mainly questionnaire has been used for collecting the data. The data collection method used to obtain the desired information from primary sources has been through direct interview and questionnaire has been used as an instrument. Basically, targeted populations belong to the Udaipur region and considering an individual investor as a sampling unit. For measuring various phenomena and analyzing the collected data effectively and efficiently to draw sound conclusions, a pie charts method of statistical techniques basically used for testing of hypothesis and for analyzing the various factors responsible for investment in mutual funds. LITERATURE REVIEW 1. Arnold L. Redman, N.S. Gullett and Herman Manakyan (2000) find that there are potential diversification benefits to adding global funds to portfolios of domestic mutual funds. Mutual funds that invest solely in foreign securities or in combinations of U. S. stocks outperformed the U. S. market over the past ten years. A portfolio of funds investing in Pacific Rim issued stocks tended to have greater risk-adjusted returns compared to a portfolio of funds investing in European stocks and only a small relationship to returns in the U.S. stock market. It is also interesting to note that the relative risk-adjusted performance of U.S. and international equity funds may differ substantially depending on the period examined. 2. JIN Xue-jun and YANG Xiao-lan(2003) from this study revealed that different fund groups were not really distinct from each other on the whole. Therefore, stated investment objectives of mutual funds fail to completely capture attributes. In addition, we conclude that the optimized exponential fund group showed some investment characters in some degree is different from funds in other groups. 3. Christopher W. Smith, (2007) concluded that t he age and size of the fund are other mitigating factors when it comes to the decision making process. New funds may post heavy gains in the beginning but are often unable to stay the course once the test of time steps in. It is best, particularly for conservative investors to adopt a more cautious approach when dealing with new funds unless those managing the funds have a sterling reputation from previous work. 4. P. Hanumantha Rao and Vijay Kr. Mishra (2007) states that Mutual Funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that is aimed for at the time of making investments. 50

8 5. Bhagaban Das, Sangeeta Mohanty, Nikhil Chandra Shil (2008) has tried to sketch the behavioral pattern of retail investors towards two important investment opportunities, i. e., mutual fund and life insurance. It is found that, the different investment pattern do not provide the same level of services with respect to age of the retail investors in India. Although the investment patterns provide more or less the same service, there exist differences depending on the education level of the investors. It is observed that investors with the graduate & postgraduate level of academic qualification are investing more in life insurance and the professionals are investing more in mutual fund. 6. Mutual fund as an investment avenue is preferred by those investors who don t want to take complete risk of capital market volatility or those investors who want to rely on professional knowledge of mutual funds AMCs. Nidhi Walia and Ravi Kiran (2009) analyzed that Information and Communication Technology enabled software programs are making it easier for fund managers to concentrate on individual needs of investors and come up with newly fangled financial innovations every time. Behind every financial innovation the two dominating forces where a trade off is required are minimizing the risk and maximizing the returns. 7. P. Laga, (2009) has compared to other types of popular investments, mutual funds do have a distinct advantage i.e. diversification. A wide range of investments can be had with a single investment. There is the added benefit of professional supervision as well from the fund manager. Individuals who have neither the time nor the means to invest on their own reap the rewards in this case. Mutual funds are still a great form of investment for those without investment knowledge. 8. According to M. Agarwal and T. K. Nayak (2009) there is no difference male and female investors, no difference among the investors of different age groups, no difference between government and private sector investors. There is little awareness regarding equity and mutual funds among the Indian investors. 51

9 COMPARISON BETWEEN DIFFERENT INVESTMENT OPTIONS Investment Objective Returns Risk Tolerance Investment Horizon Liquidity Equity Capital appreciation High High Long term High FI Bonds Income Moderate Low Med-long Moderate Corporate Debentures Corporate FDs Income Moderate High Med Low Income Moderate High Med Low Bank Deposits Income Low Generally low Flexible High PPF Income Moderate Low Long term Moderate Life Insurance Risk cover Low Low Long term Low Gold Real Estate Mutual Funds Inflation hedge Inflation hedge Capital growth & Income Moderate Low Long term Moderate High Low Long term Low High High Flexible High Ha: 1 Ha: 2 TESTING OF HYPOTHESES Mutual Funds are used as a source of earning for short term period. Investors are less interested going with private sector investment option. Rejected Accepted Ha: 3 Mutual Funds is the most opted option for investment Rejected Ha:1 Mutual Funds are used as a source of earning for short term period. The above alternative hypothesis has been rejected on the basis of the study that about 69% investors invest for more than 2 years. It is seen that investment in mutual fund is a long term plan. The money which is pooled for mutual fund is invested in different companies at 52

10 lower NAV when market crashes and also at higher NAV when market is at its peak which average down the NAV and gets good return. Ha:2 Investors are less interested going with private sector investment option. The above alternative hypothesis has been accepted on the basis of the study that about 58% investors prefer to invest in public sector investment option and 42% investors prefer to invest in private sector investment option Ha:3 Mutual Funds is the most opted option for investment. The above alternative hypothesis has been rejected on the basis of the study that when preference was taken for investment option it is observed that 20% of respondents preferred mutual fund while 29% of respondents opted bank F.D. and gold for 23%. 1. What is your Average investment period? A Less than 6 months B 6mths-1 year C 1 year-2 years D More than 2 years Investment Period 4% 6% 69% 21% A B C D Fig. 2.0 From the above chart we can see that from 100 respondents, 4% people having average investment period less than 6 months, 6% people having average investment period from 6 months to 1 year, 21% people having average investment period from 1 year to 2 years, 69% people having average investment period more than 2 years. 53

11 2. Which sector would you prefer for investment? A B Private Sector Public Sector Preference for sector 58% 42% A B Fig. 3.0 From the above chart we can conclude that from 100 respondents, 42% of respondents prefer private sector for investment and 58% prefer public sector. 54

12 3. Rank investments options according to your preference of investment A B C D E Bank F. D Gold Mutual Fund Equities Real Estate Preference in investment option 10% 20% 18% 23% 29% A B C D E Fig. 4.0 From the above chart we can see that from 100 respondents, 29% people gives first preference to bank fixed deposit, 23% people gives first preference to Gold, 20% people gives first preference to Mutual Fund, 10% people gives first preference to Equities, 18% people gives first preference to Real Estate. FINDINGS Maximum no. of respondents invest for the period of more than 2 years for investment purpose. Less than 6 months and period of 6 months 1 year is for speculation purpose. The investment period selected by all the categories is more than 2 years as the fact that more the longer period, gives more return with less risk. Followed by 1 year 2 year period, than 6 moths 1 year and lastly less than 6 months. It was found that from 100 respondents, 42% people prefer private sector for investment and 58% prefer public sector, which shows that people prefer public sector in comparison to private sector. 55

13 Nowadays also, many of the respondents give preference to bank F.D. as it is safe, with no risk and a good interest rate. People also invest in gold as the gold prices are going high and can get good return. Slowly, mutual fund is also getting recognized by the common man. Mutual Fund is having a wide range to invest. People with different investment objective can invest in mutual fund according to his priority. Very less invest in equities who do speculation and are willing to get easy and early profits but also suffer heavy losses when market goes down. Last but not the least, people also invest in Real Estate which is also a good way for investment. CONCLUSION The study shows that most of respondents are still confused about the mutual funds and have not formed any attitude towards the mutual fund for investment purpose. It has been observed that most of the respondents having lack of awareness about the various function of mutual funds. As far as the benefits provided by mutual funds are concerned, return potential and liquidity have been perceived to be most attractive by the invertors followed by flexibility, transparency and affordability. Apart from the above, in India there is a lot of scope for the growth of mutual fund, people should not invest considering the sector i.e. private or public but should study the option and invest in the best. The fund or scheme which is better should be selected whether it is from private sector or public. Many investors gave first preference to bank F.D. Investors should be given awareness about different schemes of mutual fund. Mutual funds not only invest in equity but also invest in government securities. Investors should invest for the long run so that they can earn the profit. REFERENCES 1. A. L. Redman, N. S. Gullett and H. Manakyan, The performance of Global and International mutual funds, Journal of Financial and Strategic Decisions, 2000, Vol. 13 (Issue 1), pp J. Xue-jun and Y. Xiao-lan, Empirical study on mutual fund objective classification, Journal of Zhejiang University SCIENCE, 2004, Vol. 5 (Issue 5) pp C. W. Smith, "What You Should Know Before You Invest in Mutual Funds" Funds&id= P. H. Rao and V. K. Mishra, Mutual Fund: A Resource Mobilizer In Financial Market, Vidyasagar University Journal of Commerce, 2007, Vol. 12, pp B. Das, S. Mohanty and N. C. Shil, Mutual Fund vs. Life Insurance: Behavioral Analysis of Retail Investors, International Journal of business and management, 2008, Vol. 3 (Issue 10), pp N. Walia and R. Kiran, An Analysis of Investor s Risk Perceptiontowards Mutual Funds Services, International Journal of business and management, 2009, Vol 4 (Issue 5), pp

14 7. P. Laga, Mutual Funds - Overview of Mutual Funds As a Viable Investment, Investment&id= M. Agarwal and T. K. Nayak, A Study of Investrors Expected Rate of Return on their investment, Oorja Journal of Management & IT, 2009, Vol. 7 (Issue 2), pp Corresponding Author: Rashmi Sharma,. Research Scholar, Faculty of Commerce, J.R.N. Rajasnthan Vidhyapeeth University, Udaipur, India. 57