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Analysis Of Mutual Funds And Portfolio Management In Mutual Funds

An investment trust is a trust that pools the savings of many investors who share a common financial goal. The money collected in this way is invested in capital market products such as stocks, bonds and other securities. The income generated by these investments and the increase in value realized will be divided by the unitholder in proportion to the number of units held. Therefore, investment trusts are the most appropriate investment for the general public as they offer the opportunity to invest in a relatively low cost, decentralized and professionally managed securities basket.

Definition of Mutual Fund:
The 1993 SEBI (MF) Regulation states that mutual funds are:
funds established by sponsors in the form of trusts to raise funds from trustees by selling shares to the public under one or more securities investment systems. Is defined as.

Mutual Fund in India
According to these rules, the concept of mutual funds
entered the Indian financial scene as early as 1964, and the famous unit 64, later known as US 64, has been almost monopolistic for over 20 years. I did. The fund sector, the list of fund holdings, is a breakdown of the total assets of various assets. The statement was unknown to the investor. Only through the economic liberalization process that began after 1991 did India's financial sector begin to open up. The first private sector mutual fund was created in 1993 by a major brokerage firm.

This excellent fund and the Prima fund (both equity funds) provided direct competition for Indian unit trusts. Suddenly, Indian investors gained a wide range of investment opportunities that were not available in the pre-reform era of 1997-2001. This is a phenomenal growth in the Indian mutual fund industry with an increasing number of players and balanced funds. Between 1998 and 2001, the Indian stock market boom was led by InfoTech companies. Huge project margins have led to unprecedented stock price spikes. This was the time when some AMCs launched investment trusts for the IT sector.

SEBI Regulations On Mutual Funds
The government brought investment trusts to the securities market in 1993 under the regulatory framework of the Indian Securities and Exchange Commission (SEBI). SEBI issued guidelines in 1991 and in 1993 issued comprehensive regulations on the organization and management of investment trusts.

Advantages and Disadvantage of Mutual Fund
  • Advantages of Mutual Fund:
    1. Portfolio Diversification: Mutual funds invest in a fully diversified securities portfolio (whether large or small) that allows investors to hold a diverse investment portfolio
    2. Professional Management: Fund managers have conducted a variety of research and have excellent investment management skills that guarantee higher returns than investors can manage on their own.
    3. Risk Reduction: Investors acquire a diverse securities portfolio with a small investment in an investment fund. The risk of a diversified portfolio is lower than investing in a few shares.
    4. Low transaction costs: Due to economies of scale (massive benefits), investment funds pay lower transaction costs. These benefits are returned to investors.
    5. Flexibility: Investors also benefit from the convenience and flexibility of investment trusts. Investors can convert their shares from debt plans to stock plans and vice versa. In most open systems, investors are also offered systematic (regular) investment and withdrawal options.
    6. Security: The investment trust industry is part of a well-regulated investment environment where investor interests are protected by regulatory agencies. All funds are registered with SEBI and full transparency is required
       
  • Disadvantages of Mutual Fund
    1. Cost control is not in the hands of investors: investors must pay investment management fees and fund distribution fees as a percentage of the value of their investment (provided they hold the), regardless of the fund's performance.
    2. No personalized portfolio: The portfolio of securities in which the fund invests is decided by the fund manager. Investors do not have the power to interfere in the fund manager's decision-making process, which some investors see as limiting the achievement of their financial goals.
    3. Difficulty in choosing the right fund system: Many investors find it difficult to choose one option among the many available funds/systems/plans

Types of Mutual Fund schemes
  1. Programs by Maturity:
    A Mutual fund scheme can be classified as an open program or a closed program depending on its maturity
    1. Variable capital fund/plan:
      Variable capital plan or fund is a fund that is available for subscription and redemption on an ongoing basis. These plans do not have a fixed term. Investors can easily buy and sell units at prices relative to their net asset value (NAV) published daily. The main feature of open programs is liquidity.
       
    2. Closed-end fund/plan:
      A closed-end fund or plan with a specified maturity, eg. 57 years old. The fund is only open for registration for a specified period of time when the system is launched. Investors can invest in the program at the time of its initial public offering, and they can then buy or sell units of the program on the exchanges where the units are listed. To provide an outlet for investors, some closed-end funds offer the option to resell units at a price that is linked to the net asset value of the mutual fund. SEBI regulations stipulate that at least one of two exits is provided to the investor, which is a buyback facility or a listing on a stock exchange. These mutual funds typically disclose net worth on a weekly basis.
       
  2. Models by investment objective:
    A model can also be classified as a growth model, income model or equilibrium model based on its investment objective. Such schemas can be open or closed schemes as described previously.
    These diets can be mainly classified as follows.
    1. Equity Fund
      Equity fund is considered the riskiest fund compared to other types of funds. but they also offer higher returns than other funds. An investor who wants to invest in an equity fund is advised to invest for the long term, i.e. more than 3 years or more. There are different types of equity funds, each covering a different range of risks. In order of decreasing risk.

      There are the following types of equity funds:
      • Growth funds:
        Growth funds also invest to raise capital (with a period of 3 to 5 years) but they differ from active growth funds in that they invest invest in companies that are expected to outperform the market in the future. Without adequate speculative strategies, a growth fund invests in companies that are expected to have above-average earnings in the future.
         
      • Sector funds:
        Funds that invest in a particular sector/sector of the market are called sector funds. The exposure of these funds is limited to a specific sector (e.g. information technology, automotive, banking, pharmaceutical or FMCG), which is why they are riskier. compared to funds that invest in some sectors.
         
      • Mid-Cap or Small-Cap Funds:
        Funds that invest in companies with a lower market capitalization than large cap companies are called Mid-Cap or Small-Cap funds. The market capitalization of Mid-Cap companies is lower than that of large blue chip companies (less than Rs 2,500. 500 crore but more than Rs 500) and Small-Cap companies with a market capitalization of less than 500 Rs. The market capitalization of a company can be calculated by multiplying the market price of the company's shares by the total number of shares of that company outstanding. Stocks of mid-cap or small-cap companies are not as liquid as stocks of large-cap companies, leading to volatility in the stock prices of 18 of these companies, and as a result, investment becomes risky.
         
      • Equity Linked Savings Plans
        These funds are diversified and reduce risk specific to the sector or company. However, like all funds, a diversified equity fund is subject to equity market risk. An important type of diversified investment fund in India is the Equity Linked Savings Scheme (ELSS). As mandated by the mandate, a minimum of 90% of ELSS investments must always be in stocks. ELSS investors can claim a deduction from taxable income (up to Rs 1 lakh) in the past.
         
      • Dividend Income Funds
        The objective of a dividend income fund or dividend yield fund is to generate high recurring income and ongoing capital appreciation for investors by investing in The company pays high dividends. Equity funds with income or dividend yields generally have the lowest level of risk compared to other equity funds.
         
      • Gold Fund
        The objective of this fund is to accumulate money in the ratio of gold according to the units held by savers. This is one of the newly introduced funds. Here all investors will invest in mutual fund mutual account and this money is invested in gold. And according to the fluctuations of the gold rate in the market, the fund manager invests when the exchange rate is good because the profit from this gold fund is distributed according to the units that the investor holds.
         
    2. Debt funds
      Funds that invest in medium and long-term debt securities are issued by private companies, banks, financial institutions, governments, and other entities in a variety of sectors (such as infrastructure companies. strata, etc) is called a debt/income fund. Debt funds are low-risk funds intended to generate fixed current income (not capital gains) for investors. To ensure regular income for investors, debt (or income) funds distribute a large portion of their surplus to investors. Although debt securities are generally less risky than stocks, they are subject to the credit risk (risk of default) of the issuer when interest or principal is paid. To minimize the risk of default, debt funds often invest in securities of issuers that are rated by credit rating agencies and are considered investment grade. Debt funds that target high yields are riskier.

      Depending on different investment objectives, the following types of debt funds are possible:
      • Diversified debt funds:
        Debt funds invest in all securities issued by entities in all sectors of the market. called a diversified debt fund. The best feature of debt fund diversification is that the investments are diversified appropriately across all sectors, resulting in reduced risk. Any losses incurred, as a result of a debt issuer's default, are shared by all investors, further reducing risk for an individual investor.
         
      • High Yield Debt Funds:
        Understand that default risk exists in all debt funds, and therefore, debt funds typically attempt to minimize default risk by investing only in issued securities of borrowers are considered caste". But high-yield debt funds adopt a different strategy and prefer securities issued by issuers that are considered underinvestment. The motive behind adopting this type of risk strategy is to earn a higher return from these issuers. These funds are more volatile and carry a higher risk of default, although they can sometimes generate higher returns for investors.
         
      • Guaranteed Return Fund:
        While the fund is not required to meet its goals or provide a guaranteed return to investors, there may be lock-in time funds that provide a guarantee. profits for investors during the lockdown. Any shortfall is borne by the sponsors or the Asset Management Company (SGA). These funds are generally debt funds and provide investors with low-risk investment opportunities.
         
      • Long Term Plan Series:
        Long Term Plan Series are generally self-contained plans with short term maturities (less than one year) that offer a wide range of plans and unit issuances to investors periodically. Unlike closed-end funds, fixed-term plans are not listed on the stock exchange. The long-term plan chain typically invests in the debt/income plan and the target 3. Short-term balanced fund investors. The purpose of long-term plans is to please investors by generating expected returns in a short period of time.
         
    3. Balanced fund:
      Balanced fund is a fund whose portfolio includes debt securities, convertible securities and preferred shares. Their assets are usually held in roughly equal proportions between debt/money market securities and equities. By investing this property, balanced funds seek to achieve their goals of moderate income, capital appreciation, and capital preservation, and are ideal for conservative and long-term investors. term.

Mutual fund Structure in India:
  • Sponsor:
    The sponsor is basically the promoter of the fund. For example, Baroda Bank, Punjab National Bank, State Bank of India and Life Insurance Corporation of India (LIC) are sponsors of UTI mutual funds. Housing Development Finance Corporation (HDFC) and Standard Life Investments Limited are sponsors of the HDFC mutual fund. Fund sponsors collect money from the public, who become shareholders of the fund. The compounded amount will be invested in securities. The promoter appoints the trustees.
     
  • Trustees:
    Two-thirds of the trustees are independent professionals who own the funds and oversee AMC's activities. He has the power to fire an AMC employee for not complying with the regulations of the regulator. It protects the interests of investors. They are legally appointed, that is, approved by SEBI.
     
  • AMC:
    Asset Management Company (AMC) is a group of financial professionals who manage funds. He decides when and where to invest the money. He has no money. AMC is just a paid service provider.
    The three-tier structure of the Indian mutual fund is very solid and there is almost no possibility of fraud.
     
  • Custodian:
    Custodian ensures safe keeping of investments (documents related to invested securities). The guardian must be a registered legal entity with SEBI. If the promoter holds 50% of the voting rights in the custodian company, he cannot be appointed as a fund custodian. This is to avoid the influence of the promoter on the depositary. It can also provide fund accounting services and transfer agency services. JP Morgan Chase is one of the main custodians.
     
  • Transfer agent:
    The transfer agent company communicates with customers, issues fund units, and assists investors in repurchasing units. Provide balance sheets and fund performance dashboards to investors.

Cash Flows from Operations:
A mutual fund is a trust that shares the savings of several investors with similar financial goals. The money collected this way is then invested in capital market instruments such as stocks, bonds, and other securities. The income from these investments and the realized capital gains are divided among its largest companies in proportion to the number of units they own. Thus, a mutual fund is the most suitable investment for the average person as it offers the possibility to invest in a diversified and professionally managed basket of securities at a relatively low cost. The org chart below provides a general description of how a mutual fund works.

Mutual funds schemes can be classified on the basis of:
  • By Term and
  • By investment objective

By Term:

Open-ended fund:
An open-ended fund is a fund that is open to subscription throughout the year. They do not have a fixed expiration date. Investors can easily buy and sell apartments at prices linked to Net Asset Value (prime NAV prime). The main feature of open programs is liquidity.

Closed-end funds:
Closed-end funds have specified maturities that typically range from 3 to 15 years. The fund is only open for registration for a certain period of time. Investors can invest in the system at the time of its initial public offering, and they can then buy or sell shares of the system on the exchanges where they are listed.

As an outlet for investors, some closed-end funds offer the option to resell units to the mutual fund through periodic repurchases at a price related to net asset value. SEBI regulations stipulate that at least one of the two exits is provided to the investor.

Midterm funds:
Midterm funds combine features of both open and closed plans. They are opened for sale or redemption at predetermined intervals at a price linked to the NAV.

By investment objective:
Growth fund:
Growth fund's objective is to provide capital appreciation in the medium and long term. These plans typically invest most of the company in stocks. Return on equity has proven to be better than most other types of investments held for the long term. Growth programs are ideal for investors with a long-term perspective who are looking for growth over a period of time.

Income Fund:
The goal of a balanced fund is to provide both growth and regular income. These plans periodically distribute a portion of their income and invest in both stocks and fixed-income securities at the rates outlined in their offering documents. In a rising stock market, the net asset value of these plans often can't keep up or fall uniformly because of the market

Balanced Funds:
The goal of a balanced fund is to provide both growth. and regular income. These plans periodically distribute a portion of their income and invest in both stocks and fixed-income securities at the rates outlined in their offering documents. In a rising stock market, the net worth of these plans can often not keep up or fall as evenly as market returns. fall. These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds:
The goal of money market funds is to provide easy liquidity, preserve capital, and moderate income. These systems typically invest in safer, shorter-term instruments such as Treasury bills, certificates of deposit, commercial paper, and interbank calls. The returns on these programs can fluctuate based on prevailing market interest rates. This is ideal for businesses and individual investors as a way to use their excess funds in the short term.

Tax Savings Programs:
These schemes provide tax reliefs to investors as per the specific provisions of Indian income tax law as the government offers tax incentives when investing on specific routes. Investments made in Equity Linked Savings Plans (ELSS) and pension plans are allowed as a deduction u/s 88 of the Income Tax Act 1961. The law also provides gives investors the opportunity to save 54EA and 54EB capital gains by investing in mutual funds.

index funds:
index funds invest their data warehouse in specific index like BSE Sensex, NSE index etc. as mentioned in the documentation provided. They try to mimic the composition of the index in their portfolio. Not only stocks, even their weight age is replicated. An index fund is a passive investment strategy and the fund manager has a limited role here. The NAVs of these funds move according to the index they are trying to simulate, except for a few spots here and there. This difference is called a tracking error.

Special plans:

These plans invest only in the sectors specified in the offering document. For example InfoTech fund, FMCG fund, pharmacy fund, etc. These programs are intended for active and savvy investors.

Risk Vs. Reward
Volatility in market activity can be considered a risk when investing in mutual funds. The sudden ups and downs of emotions in the market and individual problems can be attributed to a number of key factors. These factors include:

Inflation
  • Changes in interest rates
  • General Economic Scenario
The above factors are the main cause for concern among investors. Most investors fear that the value of the stocks they have invested in will drop significantly. However, this is where one can notice its bonus angle. This very volatility factor can also give them a substantial long-term return compared to a savings account.
  • An overview of the development of the mutual fund industry in India:
    1. 100% growth in the last 6 years.
    2. More foreign AMCs are preparing to enter the Indian market such as US-based Fidelity Investments with over $1 trillion in assets under management worldwide.
    3. Our savings rate is over 23%, the highest in the industry of claimed mutual funds.
    4. We have about 37 mutual funds, much less than the US's 800+. There's a lot of room for expansion.
    5. B and C cities are growing rapidly. Today, most mutual funds focus on Class "A" cities. Soon they will find their place in the growing cities.
    6. Mutual funds can penetrate rural areas like the Indian insurance industry with simple and limited products
    7. SEBI allows microfinance institutions to set up commodity mutual funds.
    8. Focus on better corporate governance.
    9. Try to limit late transaction behaviour.

Role of mutual fund in stock exchange:
Mutual funds are an ideal vehicle for retail investors to invest in the stock market for a number of reasons.
  1. It pools the investments of small investors together to increase participation in the stock market.
  2. Since mutual funds are institutional investors, they can invest in market analysis that is generally unavailable or inaccessible to individual investors, thus providing Smart decisions for small investors.
  3. Mutual funds can diversify portfolios better than individual investors due to the expertise and availability of funds.

Portfolio
Portfolio is a collection of investment instruments such as stocks, stocks, mutual funds, bonds, cash, etc., depending on a home's income, budget, and timing. investment.

These are two types of portfolios:
  • Market Portfolio
  • Zero Portfolio

What is Portfolio Management?
The art of choosing the right investment policy for an individual in terms of minimum risk and maximum return is called portfolio management.

Portfolio management refers to the management of an individual's investments in the form of bonds, stocks, cash, mutual funds, etc. so that it achieves maximum profit within the time limit.

Portfolio management refers to the management of an individual's money under the expert guidance of portfolio managers.

In layman's terms, the art of managing an individual's investments is called portfolio management.

Need to Manage Portfolio:
  • Portfolio Manager presents the best investment plan for individuals according to their income, budget, age and risk tolerance
  • Portfolio management reduces the risk of investing and also increases the chances of making a profit.
  • Portfolio managers understand their clients' financial needs and offer the best and unique investment policy with minimal risk.
  • Portfolio Management enables portfolio managers to deliver personalized investment solutions to clients based on their needs and requirements.
Types of Portfolio Management:
Portfolio Managers are of the following types:
  • Active Portfolio Management:
    As the name suggests, in an active portfolio management service, Portfolio managers are actively involved in the 'buying and selling of securities to ensure maximum returns for the people.
  • Passive Portfolio Management:
    In passive portfolio management, the portfolio manager handles a fixed portfolio designed to fit the current market scenario.

Discretionary Portfolio Management Services:
In discretionary portfolio management services, an individual authorizes a portfolio manager to take care of the financial needs of the investor on his behalf. me. The individual issues funds to the portfolio manager who will take care of all his investment needs, paperwork, documentation, filing, etc. In discretionary portfolio management, the portfolio manager has full authority to make decisions on behalf of his or her clients.

Non-discretionary portfolio management services:
In non-discretionary portfolio management services, the portfolio manager may simply advise clients on the good and the bad for the portfolio. with him, but the client has the right to make his own decisions.

Who is a Portfolio Manager?
People who understand a client's financial needs and design an investment plan that match their income and risk tolerance are called portfolio managers. A portfolio manager is someone who invests on behalf of a client.

Portfolio managers advise clients and advise them on the best investment plan that can ensure maximum returns for individuals.

Portfolio managers must understand the client's financial goals and objectives and provide the right investment solution. Two customers cannot have the same financial needs

Written by: Vrunda Parekh dedicated student of Unitedworld School of law, Karnavati University

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