Read this article to learn about mutual funds: its origin, management and suggestion for it’s improvement!

Global capital markets are characterized by high volatility, and more in the case of mutual funds.

Mutual Funds

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In the process of economic liberalization and reforms packages introduced by the Government of India, the private and foreign bodies have been permitted in the mutual fund business. Mutual funds, the financial intermediaries are indirectly connecting the small investors and corporate sector. The convenience, diversification, flexibility, liquidity and professional management are the key factors for the good growth of mutual funds in India.

The mutual funds have had a significant role in the capital market of India. The mutual funds, known as investment trusts in UK and investment companies in USA are professionally managed investment institutions which combine the savings of many people and invest the money in a wide variety of securities.

A mutual fund is an indirect investment of public in various shares, debentures and bonds. Public invests their saving in fund and fund uses these collected money in securities of different companies. The earnings of this process are divided among the fund owners. The main attributes of mutual funds- are as follows:

(i) Mutual funds gather scattered small savings into a common fund of sizeable amount.


(ii) Small investors’ savings collected by mutual funds are invested in companies’ securities.

(iii) Mutual funds have expertised investment and portfolio management system.

(iv) Due to diversified portfolio the risk is spread out and stable return for investor can be possible.

(v) The return earned by mutual funds is distributed among the investors after deducting the management cost.


In the Indian context, there are mainly three parties of mutual funds-the Sponsor, the Asset Management Company (AMC) and the Trustees. Sponsor is the company which sets up the mutual fund as per the provisions of securities and Exchange Board of India (SEBI). The AMC manages the funds of the different schemes. AMC appoints various professional experts for investment, research and agent servicing.

Trustees have the work to see that AMC acts in the best interest of the investors. Trustees are the persons with excellence, name and long experience. Broadly, mutual funds are divided into two categories-closed end and open end. In closed end the schemes have fixed time for their sale.

The prices of closed end mutual funds are determined by supply and demand. In open end mutual funds, there is continuous sale and purchase by the institution. The net asset value (NAV) is calculated for knowing the value. NAV is equal to the total market value of all the assets of the firm divided by the number of shares of the fund outstanding. For example, if NAV is more than the face value of Rs. 10, it means the invested money has appreciated and vice versa.

Unit trust of India:


The advent of mutual funds in world can be traced back to the year of 1822, when first investment company was formed by the king of Belgium. In India, on the pattern of Britain, first of all, on November 26, 1963, the Unit Trust of India (UTI) was set up when Parliament passed the Unit Trust Act. The sales of Units were started on July 1, 1964. Initially UTI started with capital of Rs. 5 crores, which was contributed by the following.

Exhibit 1:

Reserve Bank of India Rs. 2.50 crore
Life Insurance Corporation of India Rs. 0.75 crore
State Bank of India and its subsidiaries Rs. 0.75 crore
Scheduled Banks and other financial institutions Rs. 1.00 crore
Total Rs. 5.00 crore

The Unit Trust is managed by a Board of Trustees consist­ing eleven persons. The Central Government appoints the Chairman with the consultation from Industrial Development Bank of India (IDBI). Four members are nominated by IDBI.

The other members are nominated by the Reserve Bank of India, Life Insurance Corporation and Commercial Banks. The UTI has made significant and commendable progress in last thirty years of its operation. Its progress can be seen from the following points:


1. Units holding accounts are growing every year. It was Rs. 20.38 lakhs in 1985-86, which has gone to 233.5 lakhs in 1991-92.

2. Dividend rates have been steadily growing every year. It was 18 per cent in 1989-90, 19.5 per cent in 1990-91. 25 per cent in 1991-92 and 26 per cent in 1992-93.

3. Yield to the investor (on July, 1992 sales price) works out to 17.45 per cent in July 1993. Those who acquired units under preferential offer in July 1992 (price 11.20), the yield is whooping 23.2 per cent.

4. For a holding period of one year, the investor gets sufficient capital appreciation as well in addition to normal dividend. For example, NAV of UTI-Master- shares (10) L was 36.56 on Feb. 11, 1994 which increased to 37.11, on March 11, 1994.


5. Number of schemes was 20 in 1985-86 attracting 891.75 crores sale of units. It has increased number of schemes 39 in 1991-92 attracting 11685.5 crores sale of units.

UTI Investor Services Ltd:

In the month of May, 1994 Unit Trust of India Investor services Ltd. (UTI-ISL), a fully owned subsidiary of UTI marked the normal start of its operations. It distributed membership advices (certificates) to 100 UTI’s most recent investors-those who had participated in the Growing Corpus Growing Income Scheme 1994, which closed on May 5.

The ISL is basically a data processing company, which will take over all the investor services being performed by five outside agencies: Tata Consultancy Services, Datamatics, M N Dastur and Co., Mafatlal and MCS. ISL was formed in May 1993, with an authorized capital of Rs. 15 crore. ISL has five UTI directors and two external directors on its board.

UTI Chairman will work as Chairman of ISL. At present the only office of ISL is in Bombay. But within one year the offices will start working in Calcutta, Delhi, Madras, Ahmedabad, Bangalore, Hyderabad and Luck-now. The primary objective of ISL is to ensure the membership advices (certificates) are sent out to the investors within a month of joining the scheme.

1987 and Afterwards:

UTI enjoyed a monopoly status in the scheme of mutual funds. In 1987 the Banking Regulation Act was amended by Government of India for permitting the commercial banks and insurance companies to launch the mutual funds. In 1994, only 8 public sector mutual funds are in operation attracting Rs. 45,000 crores from more than 3 crores investor accounts. In 1990-91 the cumulative number of investors participating in mutual funds were as follow.


Exhibit 2:

Mutual Funds No. of Investors (in Lakhs) Percentage
1. Unit Trust of India 233.50 82.8
2. Canara Bank 14.23 5.1
3. State Bank of India 10.15 3.6
4. Punjab National Bank 10.00 3.5
5. Bank of India 4.97 1.8
6. Life Insurance Corporation 4.75 1.7
7. Indian Bank 3.00 1.0
8. General Insurance Corporation 1.10 0.5
Total 281.70 100.0

Commercial banks’ entry:

The State Bank of India was the first commercial bank which started in July 1987 the ‘Magnum Regular Income Scheme’ and collected Rs. 131 crore. Canara Bank was the second commercial bank which entered in late December 1987 in mutual fund business. It simultaneously launched ‘Can-stock’ an income scheme and ‘Can-share’ a growth scheme on 21 December, 1987.

Then other three commercial banks and two insurance companies (as mentioned in Exhibit 2) also launched the mutual fund schemes. But after UTI, Can-bank mutual funds are more popular. According to the above table Can-bank was the highest attracting bank in the sphere of mutual funds. The following exhibit shows the remarkable comparative progress of Canara Bank.

Exhibit 3:

Particulars For the year ended 31.3.94 (Rs. in crores) For the year ended 31.3.94 (Rs. in crores) Per cent Charge
1. Unit Capital 2992.32 3002.70 —0.35
2. Reserves and Supplies 747.26 432.00 + 72.97
3. Current Assets (Book Value) 4138.05 3774.63 +9.63
4. Current Assets (Market value) 5441.75 3665.59 +48.45
5. Appreciation of Assets 2449.43 662.89 + 269.51
6. Gross Income 519.58 407.73 +27.43
7. Net Surplus 517.78 191.12 + 170.91
8. Income Distribution 162.11 75.72 + 114.09

Non-banking sector:

Life Insurance Corporation of India, a non-banking institutions setup the LIC mutual fund as a separate trust on June 19, 1989. LIC offered a unique opportunity of insurance protection in their mutual fund schemes.


LIC’s schemes- Dhanshree, Dhanlakshmi, Dhanvridhi, Dhanvarsha, and 80 cc have become very popular among small ‘investors.

Dhanvidya, an unique scheme offers educational scholarship along with insurance protection and tax benefits.

In the year of 1991 LIC collected Rs. 574 crores from its 12 schemes. General Insurance Corporation of India is the last public sector organization which scheme was started in 1992. GIC schemes-Rise and Safe are aimed to provide general insurance benefits to the investors.

Capital appreciation in mutual funds:

The mutual funds are suitable for small investors who have less risk capacity. For them, generally there is capital apprecia­tion which can be observed by seeing NAV. The return rates may be less, but capital appreciation is satisfactory as revealed by the exhibit.

Exhibit 4:

Scheme name Face Value NAV (Jan. 1994) Capital Appreciation % since inception
1 2 3 4
Canbank-Canpep 91 10 17 70
PNB-EL55 91 100 188 88
SBI-MELS 91 100 288 188
UTI-MEP 91 10 35 250
BOI-BOI 80 CCB 10 13 30
SBI-Magnum gifts 100 147 47
Canbank-conpep 92 10 13 30
Indbank-Ind Shelter 100 70 30
PNB-ELSS 92 100 155 55
UTI-MEP 92 10 21 110
BOI-Best 93 10 15 50
GIC-Growth Plus 10 15 50
Indbank-Ind Tax shield 10 14 40
UTI-MEP 93 10 17 70
Canbank-Canpep 93 10 17 70
PNB-Equity Growth Fund 10 17 70

Private mutual funds:

Ever since 1987, when non UTI mutual funds came into- existence, there was discussion about private sector and foreign bodies entry in mutual fund pipeline. Ultimately in the budget speech Dr. Manmohan Singh, the Finance Minister announced the entry of private sector. He stated, ‘For many investors, mutual fund are a more suitable investment vehicle than direct ownership of shares.


The government has now decided to promote the development of mutual funds by throwing the field open to the private sector and joint sector.’ Then a ten member study group headed by Dr. S.A. Dave, chairman of the UTI was appointed in June 1991 for evolving a comprehensive plan of private sector mutual funds.

Kothari Pioneer Mutual fund is the first private organization which started its scheme in, collaboration with Pioneering Managements Corporation USA. Then, ‘Taurus Mutual Fund in collaboration with Lazard Brothers of UK promoted mutual funds. Now there is complete competition between public and private sector mutual funds and let us, hope for successful mutual funds’ operation.

Morgan Stanley’s historical event:

The private sector’s Morgan Stanley growth fund, as every­one knows, opened of January 6, 1994. Morgan Stanley made a history when it collected Rs. 1,000 crore from 14.2 lakh investors against the target of Rs. 300 crore i.e., more than three times.

On the other hand other mutual funds were struggling to touch the finishing line of subscription target. Margon Stanley assured allotment on a ‘first-come-first served’ basis in fact this was the basic cause for long ques when the issue opened. The following table clearly shows of minimum discount to NAV and better comparative success.

Exhibit 5:

Scheme NAV (in Rs.) Market Quotation (in Rs.) Discount to NAV (%)
UTI mastergain 92 17.08 11.10 —35.02
SBI Magnum Multiplier Plus 93 13.74 10.10 —35.84
Magnum Stanley Fund 9.13 9.13 —5.26

According to Mr. K.N. Vidyanathan, the Country Manager of Morgan Stanley Asset Management company, they have adopted the latest investment strategy to purchase the master- gain units of UTI for Rs. 150 crore. If we compare the performance the NAV which was Rs. 9.13 on 21 May 1994, has gone up to Rs. 10.11 on 10 June 1994.


Following Exhibit clearly reveals the overall present profile of mutual funds in India.

Exhibit 6:

A. Mutual Funds registered with SEBI:

1. Kothari Pioneer Mutual Fund

2. Taurus Mutual Fund

3. ICTCI Mutual Fund


4. Can-bank Mutual Fund

5. Morgan Stanley Mutual Fund

6. 20th Century Mutual Fund

7. GIC Mutual Fund

8. SBI Mutual Fund

9. CRB Mutual Fund


B. Mutual Funds yet to be registered with SEBI:

1. BOI Mutual Fund

2. LIC Mutual Fund

3. BOB Mutual Fund

4. PNB Mutual Fund

5. Indian Bank Mutual Fund

C. Mutual Funds given approval by SEBI:

1. Tata Sons


3. Apple Industries

4. Ceat Financial Services

5. Gujarat Lease Financing

6. Overseas Sanmar financial services

7. Nagarjuna Finance

8. SRF Finance

9. Vysya Bank

10. Classic Financial Services

11. First Leasing Co. of India

12. J.M. Financial Serv. and Investment Consultancy

13. World link Finance

14. Kotak Mahindra Finance

15. Shriram Group Companies

Tax saving schemes:

Equity linked savings schemes (ELSS) of various mutual funds provide a tax rebate of 20 per cent under section 88 of the invested amounts, subject to maximum investment of Rs. 10,000. If any individual invests more than 10,000 indifferent ELSS units, then also only a tax deduction of 2,000 would be available.

Apart from it under section 80L of the Income Tax Act, interest and dividends received from mutual funds are eligible for a deduction of maximum Rs. 10,000. In 1994, four tax saving schemes are open:

1. Can-bank: – Canpep-94

2. GIC: – Taxsaver’s growth plan

3. SBI: – Magnum Tax profit

4. UTI: – Master equity plan 94

Offshore mutual funds:

In case of offshore mutual funds (OMFs) the subscriptions are mobilized from international financial markets and invested in domestic markets. Salient features of OMFs are:

(a) The funds for OMFs are raised from overseas investors.

(b) OMFs presuppose free and efficient global movement of capital.

(c) OMFs provide cross-border investment opportunities and global diversification of risk.

(d) In some cases, the funds of OMFs are invested in domestic and global both markets.

The top ten performing in 1986, international OMFs have been listed in following table.

Exhibit 7:

OMFs Total Return per cent
1. Merill Lynch Pecific 76.2
2. Financial Strategic Pacific Basin 72.1
3. Nomura Pacific Basin 71.3
4. GT Pacific Growth fund 70.0
5. Fidelity Overseas 69.2
6. Warburg International 61.5
7. T. Rowe Price International 59.3
8. F T. International 54.9
9. USAA Gold Fund 53.8
10. IDS International 53.3

For channelizing the investments into Indian Capital Market, OMFs have been established after 1986 in India. UTI floated first OMF in 1986, in collaboration with Merill Lynch Pacific of UK for attracting the investment of Non Resident Indians and other foreigners. It has been listed in International stock Exchange, London and registered in Guernsey. After that, Indian Growth Fund 1988, Indian Magnum Fund 1989, Indo- Suez Himalayan Fund 1990, Asian Convertibles and Income Fund 1990, Commonwealth Equity Fund 1990 and others were started in India.

The performance of Indian OMFs during 1986-89 was quite satisfactory and enthusiastic response of the global investors was achieved. In 1990, the credit worthiness of India was downgraded by International agencies and at the same time Gulf War started.

This factor badly affected the Indian OMFs. The devaluation of rupee, stock scam, Ayodhya crisis and communal disturbances also affected offshore funds. NRIS and other foreign investors also feel lack of confidence in Indian Offshore funds due to poor post-issue services.

Despite the negative performance, it is expected to have a brighter future of Indian offshore funds and quoting at premiums would be possible. James Wilman, trustee of the Commonwealth Equity fund stated ‘I personally believe that the future of country funds is bright.’ Some new OMFs have started working, while within the framework of liberalization the situation will necessarily improve.

SEBI purview:

In 1991, the Government of India handed over the function of regulating the mutual funds to securities and Exchange Board of India (SEBI). SEBI passes various guidelines for the funds’ operation. For example SEBI issued a code of advertise­ment that every mutual funds advertisement it should be mentioned that, ‘past performance is no guarantee for future results.’

The recent controversy is very interesting. On June 16, 1994 the Company Law Board (CLB) has declared that UTI is a mutual fund that is governed by its own regulations. The guidelines of SEBI are not applicable to UTI because, UTI is not under SEBI purview. In fact, UTI bought 30,000 shares of Kinetic Engineering, Pune and lodged the instruments of transfer with the Company for registration.

The company refused to register the transfer in favour of UTI on the ground that UTI already had purchased 4.9 per cent of company’s shares. The provision of SEBI guidelines is that any mutual fund could not purchase more than 5 per cent of any company paid up capital.

The CLB has ordered kinetic Engineering to register the transfers in favour of UTI within 10 days because UTI, being born under a special act, is out of the purview of SEBI. But now UTI has come under SEBI supervision w.e.f. July 1, 1994.

Some suggestions for improvement:

Despite good growth, there is need for some reforms in the mutual funds working. Some shortcomings and suggestions for corrective action are being summarized in following points:

1. Transparency, an important area, has been neglected by most of the mutual funds. The growth of mutual funds largely depends upon investors confidence which is the result of transparency. Mutual funds are collect­ing crores of rupees without stating the investment objective and portfolio Mutual Funds should issue detailed prospects for the investors’ knowledge.

The investors the real owner, has the right to know where and how their money has been invested. SEBI has prescribed a set of formats for reporting but most of the mutual funds are trying to meet the ‘Statutory require­ments. GIC and Kothari Pioneer for the first time, have stated that they will disclose investment portfolio and composition in the annual report.

2. Mutual funds’ operation need lot of professionalism and expertise. Collecting the funds are easy task but the prudent and professional management should be paid more attention.

The bank and financial institu­tions employees should be properly trained for developing more professionalism. The State Bank and Canara Bank have sent their officials abroad for studying the investment techniques. All mutual funds need conduct training programmes and study tours for expertise knowledge of their employees.

3. There is the situation of ‘advertisement war’ in various mutual funds. Ads and counter ads are full of misrepresentations in many cases. Mutual funds are- befooling by their ads to the general public only by stating the merits not the risks. According to prof. N. Vinayakam ‘mutual funds should be compelled to highlight the risk by inserting a statutory warning regarding the fate of the funds in the manner of cigarette advertisements.’ SEBI has formulated the policy and instructed to the mutual funds to mention in ads to write-past performance is not necessarily indicative of future results.

4. Mutual funds are required to maintain proper records and accounts of their transactions so that regulating authorities can monitor the operations. According to SEBI investigation report, the records of SBI mutual funds maintained by SB! Main Branch of Bombay have not been reconciled and no physical verification has ever been made of the fund assets.

In the case of BOI Mutual fund, the SEBI inspectors discovered that the pages of investment registers recording transactions of this fund in Reliance Industries were torn out. When this matter was asked the BOI officials replied that pages were eaten up by rats. Systematic books of accounts and the statutory audit by chartered account­ants must be made compulsory for mutual funds.

5. There is some serious flaw on the part of regulatory framework for mutual funds. The guidelines issued by regulating bodies including SEBI are contradictory and confusing in some cases. The formulation and implementation of various provisions should be done in more better way.

6. According to Ms. Seema Sharma, Mutual Funds have been working hand to glove with some powerful brokers. They have been found to have lent out funds to these brokers, structuring them obstensibly as short term deployment of funds. Mutual funds have been found to have actively participated in securities scam. Canbank Mutual Fund accepted Banker’s Receipts from the Bank of Karad exposing itself to a loss of Rs. 102 crores. Such type of mismanagement and corruption should be avoided for gaining the public confidence.

7. Generally, the subscribers of mutual funds are of high income and education group and urban area. So the lower and middle income group subscribers of rural areas remain in-tapped. The awareness about mutual funds is quite low in rural and semi-urban areas. To popularize mutual funds in rural areas, some special promotional efforts should be done.

8. The investor services of mutual funds are not upto the mark. Delay in the dispatch of certificates and dividend warrants, completing transfer formalities, repurchases and attending to inquire are very common. Private sector mutual funds are introducing most modern computer based investor servicing for improving the efficiency.

Kothari Pioneer Mutual Fund will now redeem for shares and units and NAV (upto Rs. 10 lakhs) in a single account on a single day. UTI has established a subsidiary company Investor services Ltd. for this purpose. Mutual funds should try to make their investor services more effective and efficient.

Mutual funds have been made by investors so investors’ interest must be safeguarded by implementing above suggestions. Mutual fund can be more purposeful for common investors if it makes qualitative improvement by setting standard of behaviour, professionalism and self regulation.

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