Basics of Mutual Fund
Mutual Fund is an investment vehicle that pools money from large number of investors and then invests it in different securities. The collective funds are referred to as Assets Under Management (AUM) and are then invested by expert fund managers appointed by the Asset Management Company (AMC).
History of mutual funds in India
Mutual Funds in India started with the formation of Unit Trust of India in 1963, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly classified into four distinct phases:
First phase (1964-1987)
The Unit Trust of India (UTI) was established in 1963, by the Reserve Bank of India and functioned under the regulatory and administrative control of the RBI. Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market. In 1987, Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI, after RBI was delinked from RBI. The very first scheme launched by UTI was the Unit Scheme 1964.
Second Phase (1987-1993)
This phase marked the entry of public sector funds set up by public sector banks, Life Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC). Post that, several banks started to venture into the mutual fund industry such as Bank of India (Jun 90), SBI (Jun 87), Punjab National Bank (Aug 89) etc.
Third Phase (2003-present)
The year 1999 marked the onset of a growth period in terms of both money mobilized from investors and assets under management. The UTI Act was repealed and it adopted a structure similar to fellow funds in India – a trust and an AMC.
The emergence of an industry with uniform structure, operations and regulations made it easier for investors and distributors to deal with fund houses. During the phase, the industry also witnessed various mergers and acquisitions – some of the big ones being Allianz Mutual Fund by Birla Sun Life, PNB Mutual Fund by Principal, amongst others.
An investor invests his money in financial instruments for it to grow enough to fulfil a goal, after a certain period of time. Having made the decision to invest, the first challenge that almost all investors face is choosing the correct investment/combination of investments that could work best for him, keeping in mind his desired objective.
There are a plethora of investment avenues for the investor to choose from, that cater to one or more of his goals given his time frame. One such investment avenue is a 'Mutual Fund'.
As the name suggests, a mutual fund is an investment vehicle that pools money from customers and invests in across asset classes such as equity, debt and money market instruments, in order to provide benefits such as diversification and long term growth.
However, some unique features set mutual funds apart from other investment avenues. Here are some:
- Professional Management
Mutual fund's pool of money is invested by experts called fund managers who come with years of experience is fields such as equity, and debt and invests the fund's money on behalf of the investor.
As an individual investor, one might often find it difficult to invest in equity or debt markets directly, due to reasons such as lack of expertise and time. But through a mutual fund, the pool of money is invested across asset classes thereby diversifying the risk that arises from investing in one asset class alone.
- Tax Benefits
Investments held in mutual funds for more than a period of 12 months would qualify for tax exemption on capital gains.
Mutual funds offer complete transparency and disclosure of information through statutory documents like Scheme Information Document and Key Information Memorandum, which are regularly updated. Fund managers also provide regular information about their investment strategy and the fund’s holdings.
Mutual funds are an ideal investment option when looking for ease of transacting and tracking. As mutual funds are managed by expert fund managers, the investors need not be worried about how and where the money is getting invested. You can also buy or sell units of the fund on any business day, thereby adding liquidity to the investment.