MUTUAL FUNDS IN INDIA

The money market mutual fund segment has a total corpus of $ 7.58 trillion in the U.S. against a corpus of $34.3 billion in India.
• Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital are non-bank mutual funds in this group.
• In the U.S. the total number of schemes (over 8000) is higher than that of the listed companies while in India we have just 592 schemes.
• Internationally, mutual funds are allowed to go short. In India fund managers do not have such leeway.
• In the U.S. about 9.7 million households will manage their assets on-line by the year 2003, such a facility is not yet of avail in India.
• On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about 0.75 % of the total assets.

Internationally, on- line investing continues its meteoric rise. Many have debated about the success of e- commerce and its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectors function. However, mutual funds cannot be left far behind. They have realized the potential of the Internet and are equipping themselves to perform better. In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have already begun on the Net, while in India the Net is used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency that specializes in internet technology estimates that over the next four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion to $ 1,227 billion; whereas equity assets traded on-line will increase during the period from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from 34% to 40% during the period.

Such increases in volumes are expected to bring about large changes in the way Mutual Funds conduct their business.
Here are some of the basic changes that have taken place since the advent of the Net.

• Lower Costs: Distribution cost of funds will fall in the online trading regime by 2003. Mutual funds could bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI regulations, bond funds can charge a maximum of 2.25% and equity funds can charge 2.5% as administrative fees. Therefore if the administrative costs are low, the benefits are passed down and hence Mutual Funds are able to attract mire investors and increase their asset base.

• Better advice: Mutual funds could provide better advice to their investors through the Net rather than through the traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with the fund could help the investor with their financial planning.

• In India, brokers could get more Net savvy than investors and could help the investors with the knowledge through get from the Net.

• New investors would prefer online: Mutual funds can target investors who are young individuals and who are Net savvy, since servicing them would be easier on the Net.

India has around 1.6 million net users who are prime target for these funds and this could just be the beginning. The Internet users are going to increase dramatically and mutual funds are going to be the best beneficiary. would be mobilized .



RECENT TRENDS IN MUTUAL FUND INDUSTRY
The most important trend in the mutual fund industry is the aggressive expansion of the private owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on.
The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.

RECENT DEVELOPMENTS
Systematic Investment Plan

Systematic Investment Plan is available for planned and regular investments. Under this plan unit holders can benefit by investing specified rupee amounts periodically or a continuous period. This concept is called Rupee Cost Averaging (RCA). This program allows Unit holders to save a fixed amount of rupees every month / quarter by purchasing additional units of the Scheme (S). Rupee cost averaging does not guarantee a profit or project against a loss. Rupee cost averaging can smooth out the market’s ups and downs and reduce the risk of investing in volatile markets.

For as little as Rs/ ‘50’ each month for 12 months or Rs. 500 every month for 6 months, one can purchase mutual fund units and avoid larger minimum investment amount of over Rs. 1000 fixed amounts can be invested in /mutual Funds each month using funds drawn automatically from you savings account regularly.


Under these plan investors invests a specific amount for a continuous period, at regular intervals. By doing this, the investor gets the advantage of rupee cost averaging, which means that by investing the same amount at regular intervals, the average cost per unit remains lower than the average market price, irrespective of how the market is rising, falling or fluctuating i.e. with every fluctuation in the market the units are purchased systematically, thus resulting in averaging the purchase price. Whereas this is not true for a one-time investment. This is the reason why a SIP investor gets phenomenal rate of return compared to a one – time investor.

Features of a Systematic investment plan
1. Entry at various market levels (averaging the risk)
2. Disciplined habit of investing
3. Hassle – free mechanism (one time arrangement).
4. The benefit of compounding.
5. Saving and wealth accumulation.

How to start an SIP?
1. Start with an initial investment
2. Invest a fixed sum every month.
3. Minimum investment – Rs. 1000 per month.
4. Post – dated cheques/standing instructions to the bank
5. Investment happens on the preset date in the specified scheme every month.

Advantages of Systematic investment plan
• An SIP reduces these risks by spreading the investments over a longer period o time, at various levels of the market.
• An SIP reduces the average cost of investment in fluctuating markets.
• SIP gives the advantage by allowing one to buy fewer units when the market is up and more units when the market moves down, thus an investor buys at an average price.
• Tax free returns after on year of investments.

Systematic Transfer Plan
Advantages
• Saving and wealth accumulation
• Entry at various market levels (averages out the possible risk associated with the equity market)
• Hassle free mechanism (one time arrangement – instructions are given at the time of initial transaction)
• Power of Compounding
• Lump sum amount not sitting idle (you are getting better – than bank return on the initial amount)

Investing in Systematic Investment Plan (SIP) offer the benefit “Rupee – Cost averaging” i.e. by purchasing Mutual Fund units over a period of time, you automatically buy more units when prices are low and fewer units when prices are high, resulting in lower “per unit acquiring cost” as a result of averaging.




Systematic Withdrawal Plan

Systematic Withdrawal Plan (SWP) lets you automatically redeem a prearranged amount of mutual fund holdings each month. SWPs are an ideal way to supplement your monthly cash flow, meet minimum withdrawal requirements or move assets between the funds.

SWP is a no-charge service, when you set up your SWP, cash proceeds from each redemption) minimum balance maintained @ 25% of the holding at any given point of tie) are given to you in the form of post – dated cheques (six monthly cheques at par, which enables you to get the funds lodged)

Equity Linked Saving Schemes (ELSS)

Taxpayers have now been allowed a consolidated limit of Rs. 1 lakh for savings as deduction from the income before tax. This Rs. 1 lakh will include the provisions of pension U/S 80 CCC, the tax mutual funds (ELSS), Government Bonds, Pension funds, provident funds and insurance policies etc. without any specified demarcation. The important point here is the inclusion of the words ‘tax mutual funds’, which are also known as “Equity Linked Savings Schemes (ELSS)”.
Equity Linked Savings Schemes (ELSS) is an ideal way to save on tax as well as staying invested in equity mutual funds. ELSS schemes have been introduced in India to promote investments in equity markets by giving tax concessions to the investors. ELSS is basically equity diversified scheme and has a lock in period of three-years. ELSS invests more than 80 percent of their money in equity and related instrument.
As the stock market is volatile at high levels the need today is to adopt long-term investment approach. If we invest money for long term, it will give more returns. That’s what ELSS does as it has lock in period of three years.


Why should one invest in ELSS?
• A perfect investment option to fight against rising inflation.
• Now one can save up to Rs. 1 lakh in ELSS.
• Save tax as well as get high returns.
• As ELSS invests money for 3 years.

Fixed Monthly Plans
Like fixed deposits in Bank, Fixed Maturity Plans of one month, three months, one year, three years and five years duration’s are also launched by Mutual Funds. They provide an easy route to invest in different types of bonds – government securities, corporate bonds and money market instruments through mutual funds. Since saving in a fixed maturity plans is allowed only during initial public offering (IPO) period and the saving are returned on the maturity date, these schemes are also called ‘closed ended schemes’. In contrast throughout the existence of the schemes options available for withdrawal before the maturity date vary from schemes to scheme. These are specified in the offer document of the scheme. Usually short term fixed maturity plans (dividend plan) are preferred for less than one year and thirteen months fixed maturity plans are better alternative for one year bank deposits. Another way to perk up regular income is to invest a portion of investment in equity based dividend yield schemes, which invest in high dividend paying stock and are less risky. The dividend paid is tax – free.