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 equities, debentures and other securities. The income earned through these investments and the capital appreciation realized (after deducting the expenses and profits of mutual fund managers) is shared by its unit holders in proportion to the number of units owned by them. Thus, a mutual fund strives to meet the investment needs of the common man by offering him or her opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an surplus of as little as hundred rupees can invest in Mutual Funds.
Mutual funds play vital role in resource mobilization and their efficient allocation in a transitional economy like India. Economic transition is usually marked by changes in the financial mechanism, institutional integration, market regulation, re-allocation of savings and investments, and changes in the inter-sector relationships. These changes often imply negativity which shakes investor’s confidence in the capital market.
Advantages of Investment through Mutual Funds
The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. The concept of mutual funds was introduced in India with the formation of Unit Trust of India in 1963. The first scheme launched by UTI was the now infamous Unit Scheme 64 in 1964. UTI continued to be the sole mutual fund until 1987, when some public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India set up mutual funds. It was only in 1993 that private players were allowed to open shops in the country. Today, 32 mutual funds collectively manage Rs 6713575.19 crore under hundreds of schemes. The industry has steadily grown over the decade. For example, before the public sector mutual funds entry, UTI was managing around Rs 6,700 crore on its own. Public sector mutual funds also helped accelerate the growth of Assets Under Management. UTI and its public sector counterparts were managing around Rs 47,000 crore when Kothari Pioneer, the first private sector mutual fund, set up shop in 1993. Before the US 64 fiasco, there were 33 mutual funds with total assets of Rs 1, 21,805 crore as on January 2003. The UTI was way ahead of other mutual funds with Rs 44,541 crore assets under management. The industry overall has performed well over the years. Of course, there were a few funds houses, which disappointed investors. However, overall performance has been good. However, lack of awareness still impedes the growth of the mutual fund industry. Unlike developed countries, most of the household savings still go to bank deposits in India. In the year 2004, the mutual fund industry in India was worth Rs 1,50,537 crores. The mutual fund industry is expected to grow at a rate of 13.4% over the next 10 years. Mutual funds assets under management grew by 96% between the end of 1997 and June 2003 and as a result it rose from 8% of GDP to 15%. The industry has grown in size and manages total assets of more than $30351 million. Of the various sectors, the private sector accounts for nearly 91% of the resources mobilized showing their overwhelming dominance. in the market. Individuals constitute 98.04% of the total number of investors and contribute US $12062 million, which is 55.16% of the net assets under management.
There is a huge scope in the future for the expansion of the mutual funds industry. A number of foreign based assets management companies are venturing into Indian markets. The Securities Exchange Board of India has allowed the introduction of commodity mutual funds. The emphasis is being given on the effective corporate governance of Mutual Funds. The Mutual funds in India has the scope of penetrating into the rural and semi urban areas. Financial planners are introduced into the market, which would provide the people with better financial planning.
In any industry, innovation and improvements happen when the rules are changed. Large-scale environmental changes such as those that have taken place in the last few years must lead to innovation and evolution.
Newer leaner operating structures will have to evolve which will entail the use of technology that helps an AMC (Asset Management Company) reach the retail end user with solutions that enable transactions via platforms such as mobile or online platforms. This will not only give greater direct access but will also help AMCs to better understand investor behaviour and create the appropriate environment and products to move towards long and healthy relationships with the investors.
At Lloyd Business School (LBS) Greater Noida, we have PGDM and MBA program with specialization of Business Analytics, Supply Chain Management, HR, Marketing and Finance. In finance specialization at LBS, specifically in PGDM program we introduced Personal Financial Planning and Wealth Management as a subject which motivates young graduates to start early investment so that they can get the benefit of compounding. This knowledge about personal finance will help the students at the time of joining corporates and to bring businesses for their companies. The founder President of Lloyd Group of Institutions Manohar Thairani is Chartered Accountant by profession and motivator to young executives to participate in capital market through mutual funds. Number of faculty members and students are regularly participating through mutual funds and serving to heighten the economy of India.