Dr N Balakumar

Mutual fund investment forms a major part of personal investment portfolio of any investor. It also helps small individual investors who cannot invest in capital markets to participate in the securities market in order to reap the gains. A mutual fund pools the savings of the community and invests in various securities and offers the individual investor advantages of reasonable dividends and capital appreciation, coupled with safety and liquidity.

Mutual funds are of several types. Broad classifications can be open-end and close-end mutual funds; and tailor-made funds.

Open-end and close-end Mutual Funds

A mutual fund, which is open at all time, is called as an open-end mutual fund. That is, the participants can join the fund any time they like; and the fund has no limit as to size.

In the event of close-end mutual fund, investment amount and number of investors are limited. That is, investors can join the fund when the fund makes a public issue of its units.

Tailor-made Mutual Funds

When a mutual fund functions with certain well carved out objectives with respect to the portfolio selection, they are called as tailor-made funds.

· Growth Fund : Investors in this category look for a steady, long-term capital appreciation than any immediate take-off.

In this category, a mutual fund invests with an objective of long-term capital growth.

· Income Fund: A regular income is expected by the investors. Thus, funds are invested in defensive shares.

· Growth-cum-income Fund : While long-term growth is expected by the investors, regular income is also expected.

· Specialied Fund : Also called as sectoral fund. These funds cater to investors interested in particular industries; that is

funds are invested in certain industry stocks.

· Regional Fund: Funds are invested in securities of a region; that is, the fund specialises in companies of a particular

region.

· Index Fund: Money is invested in the scrip’s, which form the stock market index. Thus, returns of the investment are

directly correlated to the index.

Mutual Funds in India - Some Pointers

Performance of public sector mutual funds in the recent past has not been up to investors expectations.

With the entry of private sector mutual funds, the investor’s perceptions about; and the expectations from the mutual funds have undergone a tremendous change.

The market price of all mutual funds is at a discount over Net Asset Value (NAV). A new mutual fund with at least six per cent issue expenses is expected to start with a NAV of Rs 9.40 and therefore a listing price below par. Thus, if investors perceive mutual funds as a new issue allotment available at par, they can also purchase it below face value after listing. However, Reliance Capital has launched no-load fund; that is, the issue and pre-issue expenditure was borne by the Asset Management Company. In such cases, the listing price will not be less than the par value.

In developed markets world-wide, mutual funds are the primary vehicle for individual investors interested in the stock market. but in India, they continue to be still largely a preserve of the Unit Trust of India (UTI). UTI accounts for nearly 10 per cent of the country market capitalisation.

The private mutual funds permitted since 1993 are still to make their mark. While the ones floated by public sector banks continue to be shunned by investors, who would rather put their money into new issues. However, there is no doubt that like elsewhere in the world, mutual funds will have to eventually become the mainstay of the stock market in India as well.

Reasons for Poor Performance of Indian Mutual Funds

Comparatively, international capital markets are (i) informationally, (ii) allocationally and (iii) operationally more efficient than Indian markets. Many research studies have found that the Indian stock market is not efficient even in its weak form. Thus, in an informationally inefficient market like India, the analytical tools and forecasting models of west may yield expected results. Therefore, a different approach has to be adopted in the Indian environment in portfolio selection.

There are more number of mutual fund products available in the international markets as compared to India. thus, there is a scope for hybrid schemes in India.

In US alone, there are around 3500 schemes against 250 schemes in India. Further, US mutual fund industry is over 75 years old.

Compared to well developed stock markets, scientific research is negligible in India, especially, in the area of modelling financial time series 9 forecasting models) to suit Indian environment.

However, a mutual fund having a good product, scientific research wing coupled with professional market timing skills, good investor service and excellent positioning in the correct perspective will succeed in the Indian market.