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Mutual Fund Industry in India: Investor's Perception

mutual fund, inverstors view

Indian financial sector has undergone significant expansion during the last decade. A well developed infrastructure has been promoted to cater the needs of growing saving and expanding capital market of India. Of late, mutual funds have become a hot favorite of millions of people all over the world. The driving force of mutual funds is the ‘safety of the principal’ guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. Thus mutual funds act as a gateway to enter into big companies hitherto inaccessible to an ordinary investor with his small investment.

A mutual fund collects the savings from small investors, invest them in Government and other corporate securities and earn income through interest and dividends, besides capital gains. It works on the principle of ‘small drops of water make a big ocean’. Hence, a mutual fund is nothing but a form of collective investment. It is a group of various investors the coming together who transfer their surplus funds to a professionally qualified organization to manage it. To get the surplus funds from the investors, the fund adopts a simple technique. Each fund is divided into a small fraction called “units” of equal value. Each investor is allocated units in the proportion to the size of his investment. Thus, every investor, whether big or small, will have a stake in the fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual funds enable millions of small and large investors to participate in and derive the benefit of the capital market growth. It has emerged as a popular vehicle of creation of wealth due to high return, lower cost and diversified risk. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 defines a mutual fund as “a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations”.

The origin of the concept of mutual fund dates back to the very dawn of commercial history. It is said that Egyptians and Phoenicians sold their shares in vessels and caravans with a view to spreading the risk attached with these risky ventures. However, the real credit of introducing the modern concept of mutual fund goes to the Foreign and Colonial Government Trust of London Established in 1868. Thereafter, a large number of close-ended mutual funds were formed in the U.S.A. in 1930’s followed by many countries in Europe, the Far East and Latin America. In most of the countries, both open and close-ended types were popular. In India, it gained momentum only in 1980, though it began in the year 1964 with the Unit Trust of India launching its first fund, the Unit Scheme 1964. Although the UTI has operated a number of schemes linked to insurance and gifts, and some tax benefits, income declared by it to unit holders is not subject to any tax deduction at source and is exempted from income tax up to a limit. UTI was the monopoly player in the field until 1987. Since 1995-96, there is a TDS, if the annual income is more than Rs. 10,000. Various Mutual Funds have been set up since 1987 by the public sector banks following an amendment to the Banking Regulation Act in 1983, which empowered the RBI to permit the banks to carry on non-banking business such as leasing, mutual funds, etc. under section 6 of this act. Since then, the SBI, Canara Bank, Punjab National Bank and some other nationalized banks have set up their own mutual funds. The business of mutual funds has caught the imagination of the financial community and is growing at a rapid pace in India.
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases
 First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and Administrative control of the Reserve Bank of India. In 1978, UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964.
 Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) to set up their mutual funds. SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by LIC, which established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
 Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions.

 Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of u/s 64 schemes. (Assured return and certain other schemes). The Specified Undertaking of Unit Trust of India, functioning under an administrator and governed by the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations. Recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.
Apparently MFIs in India has undergone significant structural changes during the last four decades. After growing slowly for most of the times since its inception, the industry underwent significant growth rate since 1993. The entry of private players has galvanized the sector as increased competition has forced industry players to focus on product innovation, market penetration identifying new channels of distribution and last but not the least improving investors’ service. Entry of private players meant that not only the market share but also the mind share of investors was captured. These players went on high marketing pitch to create awareness among the investors about the advantages of investing in mutual funds. All these measures helped the industry grow significantly. At the end of December 2006, there were 32 funds which mange assts of Rs. 323597 crores under 475 schemes as compared to assets worth Rs. 47,000 crores under management in March 1993. Besides low interest rate era, tax holidays on some schemes, excellent performance of the stock market in the last couple of years have contributed to the growth of MFIs.

But the penetration of mutual fund in the retail investors segment is still low at 6 per cent of GDP against 70 per cent in US. Active participation of the retail investor will further boost the mutual fund industry in India. Furthermore, today the industry is predominantly urban and to some extent semi urban. Its reach is unimpressive among high net worth individuals In order to improve the investors’ base we have to go to the middle class people – a real challenge. Industry must achieve the prominence that mutual fund have in a developed nation. No doubt India has developed in terms of standards and services, mutual fund industry must tap the huge untapped potential of the country.

To examine the investors’ perception, a sample of 300 investors of Jalandhar investing in mutual fund was selected. 34 per cent of the target population included business class, 50 per cent service class and the remaining 16 per cent were professionals who have invested in mutual funds. Nearly three-fourth of the target population was in the age group of 25 to 50 years of age. One fourth of the target population was above 50 years of age and the balance 6 per cent below 25 years of age. Furthermore, one-fourth of the investors fall between the income group of Rs. 40,000 to 50,000; 16 per cent in above 50,000 income class. Majority of the investors (58 per cent) fall between the income group of Rs.10, 000 to 40,000 per month. None of the respondent earns less than Rs.10 thousand per month.
Nearly 60 per cent of the investors have knowledge about the mutual funds scheme. Furthermore seven-tenth of the investors has invested both in mutual funds as well as stock market directly. It implies that investors have retained their numero-uno-position by investing directly in stock market too. The confidence level of the investors in the stock market and mutual funds is almost the same. Nearly two-third of the investors demonstrated moderate confidence level in the stock market investment. On the other hand, nearly seven-tenth of the investors demonstrated moderate confidence level in mutual funds. Nearly one-fifth of the investors demonstrated high level of the confidence in opting both the stock market as well as mutual funds. It implies that investors are ready to park their money which promise high returns. Further the survey undertaken reveals that 60 per cent of the investors invested 20 to 40 per cent of the total investment in mutual funds. Nearly 0ne-tenth of the investors invested more than 50 per cent as well as less than 10 per cent of the total investment in mutual funds.

Analysis of time horizon to keep investment in mutual fund reveals that nearly one-half of the investors prefer to keep their investment in mutual funds from one to three years. Investors do not want long term investment due to delayed realization of returns. Likewise, investors did not invest in one year mutual funds because of greater risk involved in them. Hence investors are interested to keep investment for an average period in mutual funds.
Analysis of micro factors influencing mutual funds reveals that one –third(highest) of the investors prefer to invest on the recommendations of their friends and relatives while one-fourth of the investors depends upon the recommendation of their financial advisors. Nearly one-fifth on the investors give more importance to their own analysis and perception and equal proportion thought that mutual fund managers image has got a major role to play while making mutual fund investment. Attempt is also made to examine the macro factors influencing mutual fund investment. Different investors have different reasons as per their judgment and assessment. Safety of investment is the major factor (27 per cent) which influences their investment and other thinks return or tax benefits as major factors for their investment. Liquidity and conscience is the least factor for mutual fund investment.
Analysis of most popular scheme of mutual fund investment reveals that investors like to invest more in Growth shares because they wanted to get maximum returns by taking benefit of share market boom. Income share and monthly income plan are very popular among the old age investors and risk averters. On the other hand, balanced share is least popular among the investors. The frequency of monitoring the investment in funds is representative of the awareness level of the investors. Nearly one-third of the investors monitor their investment on weekly basis; one-fourth on fortnightly and one-tenth on daily basis. Investors take the information about various mutual fund schemes from the electronic as well as print media such as magazines, journals newspapers etc because experts give such types of information only. Investors do not want to rely on Hoarding and pamphlets being not easily available and that too at uneven time horizon. On the other hands, print media comes in the markets on weekly or monthly basis while electronic media is available 24 Hrs a day like CNBC Channels. Eight-tenth of the mutual fund investors feel consented with their decision of investing in mutual funds. On the other hand, one-fifth of the respondents are not satisfied with their investment due to poor service after sales (9 per cent), other better paying avenues in the market (6 per cent) and longer redemption period (21 per cent).
Further investors believed that mutual fund fetch more returns as compared to investment in stock market directly. But investment is slightly risky. Mutual funds also ensure sufficient liquidity as most of the schemene are open ended. A lion’s share of the present investors (three-fourth) is willing to reinvest in mutual funds. One half of the investors believe bright future of mutual fund industry. Only 5 per cent believe to be dark and 9 per cent it is a risky avenue. One-tenth of the investors believe that most of the people are not aware about the functioning of the mutual fund industry. Some steps must be taken to make the people more aware so that it can have a bright future.
Generally people have a traditional mind set of investing in banks, post offices and government securities. In the era of decling interest rates, investors are looking foe at other avenues and mutual funds is the foremost avenue. Awareness of the industry is the major factor for pushing the growth of industry. There is, therefore, a strong need foe improving the awareness in a big way. Income funds are still a good option in which investors can have the benefit of regular income. But investors should remember the old maxim that one should not put all the eggs in one basket. Investors must diversify their investment across different mutual fund schemes considering their own investment needs, both short and long terms and their investment horizon. A fund past performance is no guarantee of its future performance. Investors should always take into consideration the fund’s investment objectives as well as its styles. Investors should not compare Apples with oranges. That fund must be compared within the same category. For example an equity diversified fund should compare with equity diversified and not with debt or balanced funds. Investor’s seven rules, namely, know the risk profile, identify investment horizon, read the offer documents carefully, go through the fund fact sheet diversify across fund houses, don’t chase incentives and track your investment, will go a long way in helping investors meet his investment objectives.

Dr Gursharan Singh Kainth and Manpinder Kaur
Director and Research Scholar
GAD Institute of Development Studies
14- Preet Avenue, Majitha Road
PO Naushera, Amritsar 143 008
Published: 2008-01-01
Author: Dr Gursharan Singh Kainth

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