CONTENTS 1

CHAPTER 1 – INTRODUCTION TO INDUSTRY 1

1.1 Background & Origin 1

1.2 History of its origin in India 2
1.3 Nature of Business 4
1.4 Categories or groups of product & services 6

2. Fixed income funds 7

3. Equity funds 7
1.5 Turnover & net worth of the Industry 9
1.6 Input Materials & process 9

CHAPTER 1 – INTRODUCTION TO INDUSTRY

1.1 Background & Origin

The mutual fund was born from a financial crisis that staggered Europe in the early 1770s.
The British East India Company had borrowed heavily during the preceding boom years to
support its ambitious colonial interests, particularly in North America where unrest would
culminate in revolution in a few short years.
As expenses increased and revenue from colonial adventures fell, the East India Company
sought a bailout in 1772 from the already-stressed British treasury. It was the “original too
big to fail corporation” and the repercussions were felt across the continent and indeed
around the world.
At the same time, the Dutch were facing their own challenges, expanding and exploring like
the British and taking “copy-cat risks” in a pattern that has drawn parallels to the banking
crisis of 2008.

Historians are uncertain of the origins of investment funds. Some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William I as the first
mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose
 earlier investment trust created in 1774 may have given the king the idea. Van Ketwich
probably theorized that diversification would increase the appeal of investments to smaller
investors with minimal capital. The name of van Ketwich's fund, Eendragt Maakt Magt,
translates to "unity creates strength." The next wave of near-mutual funds included an
investment trust launched in Switzerland in 1849, followed by similar vehicles created in
Scotland in the 1880s.

The idea of pooling resources and spreading risk using closed-end investments soon took
root in Great Britain and France, making its way to the United States in the 1890s. The
Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S.
The creation of the Alexander Fund in Philadelphia in 1907 was an important step in the
evolution toward what we know as the modern mutual fund. The Alexander Fund featured
semiannual issues and allowed investors to make withdrawals on demand.

1.2 History of its origin in India

THE MUTUAL FUND INDUSTRY IN INDIA:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India
(UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The
objective then was to attract small investors and introduce them to market investments. Since
then, the history of mutual funds in India can be broadly divided into six distinct phases.
Phase I (1964-87): Growth Of UTI:

In 1963, UTI was established by an Act of Parliament. As it was the only entity offering mutual
funds in India, it had a monopoly. Operationally, UTI was set up by the Reserve Bank of India
(RBI), but was later delinked from the RBI. The first scheme, and for long one of the largest
launched by UTI, was Unit Scheme 1964.

Later in the 1970s and 80s, UTI started innovating and offering different schemes to suit the
needs of different classes of investors. Unit Linked Insurance Plan (ULIP) was launched in 1971
The first Indian offshore fund, India Fund was launched in August 1986. In absolute terms, the
investible funds corpus of UTI was about Rs 600 crores in 1984. By 1987-88, the assets under
management (AUM) of UTI had grown 10 times to Rs 6,700 crores.

Phase II (1987-93): Entry of Public Sector Funds:

The year 1987 marked the entry of other public sector mutual funds. With the opening up of the
economy, many public sector banks and institutions were allowed to establish mutual funds. The
State Bank of India established the first non-UTI Mutual Fund, SBI Mutual Fund in November
1987. This was followed by Canbank Mutual Fund,LIC Mutual Fund, Indian Bank Mutual Fund,
Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. From 1987-88 to 1992-
93, the AUM increased from Rs 6,700 crores to Rs 47,004 crores, nearly seven times. During
this period, investors showed a marked interest in mutual funds, allocating a larger part of their
savings to investments in the funds.

Phase III (1993-96): Emergence of Private Funds:

A new era in the mutual fund industry began in 1993 with the permission granted for the entry of
private sector funds. This gave the Indian investors a broader choice of 'fund families' and
increasing competition to the existing public sector funds. Quite significantly foreign fund
management companies were also allowed to operate mutual funds, most of them coming into
India through their joint ventures with Indian promoters.
The private funds have brought in with them latest product innovations, investment management
techniques and investor-servicing technologies. During the year 1993-94, five private sector fund
houses launched their schemes followed by six others in 1994-95.

Phase IV (1996-99): Growth And SEBI Regulation:

Since 1996, the mutual fund industry scaled newer heights in terms of mobilization of funds and
number of players. Deregulation and liberalization of the Indian economy had introduced
competition and provided impetus to the growth of the industry.
A comprehensive set of regulations for all mutual funds operating in India was introduced with
SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform standards for all funds.
Erstwhile UTI voluntarily adopted SEBI guidelines for its new schemes. Similarly, the budget of
the Union government in 1999 took a big step in exempting all mutual fund dividends from
income tax in the hands of the investors. During this phase, both SEBI and Association of
Mutual Funds of India (AMFI) launched Investor Awareness Programme aimed at educating the
investors about investing through MFs.

Phase V (1999-2004): Emergence of a Large and Uniform Industry:

The year 1999 marked the beginning of a new phase in the history of the mutual fund industry in
India, a phase of significant growth in terms of both amount mobilized from investors and assets
under management. In February 2003, the UTI Act was repealed. UTI no longer has a special
legal status as a trust established by an act of Parliament. Instead it has adopted the same
structure as any other fund in India - a trust and an AMC.
UTI Mutual Fund is the present name of the erstwhile Unit Trust of India (UTI). While UTI
functioned under a separate law of the Indian Parliament earlier, UTI Mutual Fund is now
under the SEBI's (Mutual Funds) Regulations, 1996 like all other mutual funds in India.

The emergence of a uniform industry with the same structure, operations and regulations make it
easier for distributors and investors to deal with any fund house. Between 1999 and 2005 the size
of the industry has doubled in terms of AUM which have gone from above Rs 68,000 crores to
over Rs 1,50,000 crores.

1.3 Nature of Business

1. An outstanding long term return for the past 5, 10, and 20 years. We are investing for the
long term, or you should be if you are considering mutual funds.  So look at a fund’s long term
record.  Do not get wrapped up in this year’s or even last year’s rates of return.  What has the
mutual fund done over the past several years?  Are they consistent?

2. Low expenses / Low turn over rate. A fund that buys and sells the stocks rapidly racks up
brokerage commissions just like we would when we buy individual stocks.  All of those $7 per
trade commissions add up for us, just imagine selling millions of shares everyday.  Low
expenses mean that you keep more of the mutual funds profits in your pocket instead of paying
salaries, commissions, administrative fees, etc.

3. A specific and published investment strategy. 

Mutual funds and their managers have a specific game plan when it comes to their investing style
and strategy.  They should always state what that plan is and stick to it.  Be leery of funds that
change styles or strategies without a good reason.  The fund you invest in should fit into your
overall diversification strategy.  If the fund manager changes his investment style, it could throw
your own diversification off.

4. No loads. In most cases, you should stick to no load mutual funds.  Unless the mutual fund is
simply outstanding, fees paid to the mutual fund company that runs the fund, either up front or in
the end when you sell your shares, will just eat into your profits.

5. Fund managers with outstanding record. When you find a good mutual fund with an
excellent 10 and 20 year historic returns, you want to make sure that the current fund managers
are the ones who were actually responsible for those great returns and not just a new guy taking
over where a great manager left off.

6. High ethical standards and reputation. In 2003, several mutual funds were charged in
scandals involving late trading, market timing, and other unethical behavior.  There is no excuse
for a company to behave poorly, and I refuse to invest in one that does.  I would even go so far as
to transfer all of my investments away from an unethical company.

7. Not too big. Be careful of investing in popular mutual funds that manage a large pool of
assets.  The better a mutual fund performs in the short term usually brings the quasi-curse of
more money to invest.  As more investors pump money into mutual funds with high recent
returns, it is hard for the fund’s managers to find bargains to invest in.  It isn’t always something
to totally sweat over, but it is definitely something to consider.

8. A member of Money Magazine’s Top 70 or Kiplinger’s Top 25 Mutual Funds. These

funds have been pre-screened by financial professionals to meet certain investment criteria.

There are so many different mutual funds that investors can choose from now when deciding
where to invest their hard-earned retirement, college, or other savings.  According to Smart
Money magazine and the Lipper database, there are 21,597 mutual funds to choose from to be
exact.

So, just starting your selection process can be daunting, but it does not have to be.  Using these
fundamentals can make a great starting point which will quickly help you whittle your choices
down to something very manageable. While there are no guarantees for success, using these
eight characteristics and doing your own research about the mutual funds you choose will help to
ensure that your money will be well taken care of in the future and allow you can sleep well at
night.

1.4 Categories or groups of product & services

1. Money market funds

These funds invest in short-term fixed income securities such as government bonds, treasury
bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a
safer investment, but with a lower potential return then other types of mutual funds. Canadian
money market funds try to keep their net asset value (NAV) stable at $10 per security.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government bonds, investment-
grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the
fund on a regular basis, mostly through interest that the fund earns. High-yield corporate bond
funds are generally riskier than funds that hold government and investment-grade bonds.

3. Equity funds

These funds invest in stocks. These funds aim to grow faster than money market or fixed income
funds, so there is usually a higher risk that you could lose money. You can choose from different
types of equity funds including those that specialize in growth stocks (which don’t usually pay
dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap
stocks, mid-cap stocks, small-cap stocks, or combinations of these.
4. Balanced funds
These funds invest in a mix of equities and fixed income securities. They try to balance the aim
of achieving higher returns against the risk of losing money. Most of these funds follow a
formula to split money among the different types of investments. They tend to have more risk
than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more
equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.

5. Index funds

These funds aim to track the performance of a specific index such as the S&P/TSX Composite
Index. The value of the mutual fund will go up or down as the index goes up or down. Index
funds typically have lower costs than actively managed mutual funds because the portfolio
manager doesn’t have to do as much research or make as many investment decisions.

6. Specialty funds
These funds focus on specialized mandates such as real estate, commodities or socially
responsible investing. For example, a socially responsible fund may invest in companies that
support environmental stewardship, human rights and diversity, and may avoid companies
involved in alcohol, tobacco, gambling, weapons and the military.

7. Fund-of-funds

These funds invest in other funds. Similar to balanced funds, they try to make asset allocation
and diversification easier for the investor. The MER for fund-of-funds tend to be higher than
stand-alone mutual funds.

Investing in mutual funds is normally a long term commitment of funds. Hence you need
to follow the due process to invest. When you invest in mutual funds, there are two levels
of process flow that you must go through. First there is the normal regulatory process and
the second is a more managerial approach, which is to protect the value of your own
portfolio. Let us look at the statutory procedures first.
 1.5 Turnover & net worth of the Industry
Mutual fund turnover is calculated as the value of all transactions (buying, selling) divided by
two, then divided by a fund's total holdings. Essentially, mutual fund turnover typically measures
the replacement of holdings in a mutual fund and is commonly presented to investors as a
percentage  over a one year period. If a fund has 100% turnover, the fund replaces all of its
holdings over a 12-month period.

You may discover that your mutual fund turnover rate is much higher than you expected.
According to Michael Laske, research manager at Morningstar, the average turnover ratio for
managed domestic stock funds is 63%, as of Feb. 28, 2019.

1.6 Input Materials & process

Basic Process to Follow for Investing in Mutual Funds

 The first step before investing in mutual funds is to get your KYC completed. The
Know Your Client (KYC) is meant to ensure that you understand the risks and rewards of
investing in mutual funds as also to keep a tab on the colour of the money coming into
the fund.
 There are two ways to do you KYC. You can either do a physical KYC at the
branch office of the fund or at the registrar office. Alternatively, you can also do e-KYC
with your Aadhar card that is mapped to your PAN number. Mutual funds also insist on
an In Person Verification (IPV) before completing your KYC.
 Once your KYC is completed, you are good to invest. You can either go through a
broker or you can go to the office of the mutual fund and give a Direct Application. When
you give a Direct Application, you pay lower Total Expense Ratio (TER) and hence your
NAV will be higher. However, when you go through the broker, you have the added
 advantage of getting advisory services on fund selection. You must opt for the Direct
Plan only if you are confident of managing your entire mutual fund investments on your
own without any expert assistance.
 If you do not want to go through physical mode, you can also opt for the online
purchase of mutual funds. You can either purchase these funds at the website of the
mutual fund or from the registrars or from other fund aggregators. Here funds are
allocated an ISIN number and you can hold mutual funds in your demat account along
with your equity shares and other similar assets.
Secondary Process to Follow for Investing in Mutual Funds
 The primary process for mutual fund investments is more to facilitate the process
and help you become a mutual fund investor. The second step is to apply more
customized filters so that you are able to invest in the right fund.
 Ensure that the fund suits your risk appetite. The best way is to start off with a
long term financial plan and then work backwards to see how much you need to allocate
to each specific asset class. That is how your portfolio should be built.
 The second step is to take a call between lump-sum investment and SIP. When it
comes to long term wealth creation, Systematic Investment Plans (SIP) is a lot more
useful. In fact, even if you have a lump-sum available with you, you can convert that into
a SIP via a systematic transfer plan.
 You need to zero down very carefully on the specific fund house and the funds that
you want to invest in. It predicates on the performance of the fund, the risk of the fund
and the stability of the fund management team. All these factors need to be considered.
 Finally, do a complete review of the fund factsheet before the final investment in
the fund. What should you look for in the factsheet? There are five basic things you need
to look at. Firstly, in case of equity and debt funds look at the consistency of the returns
generated over time. More than the quantum of returns, it is consistency that matters.
Secondly, look at risk adjusted returns. A return of 14% with 10% volatility is far better
than 16% returns with 30% volatility. Thirdly, check the portfolio mix. Be it an equity
fund or a debt fund; watch out for portfolio concentration risk and asset quality risks as
they are the key to long term performance. Fourthly, look at the Total Expense Ratio
(TER). In a competitive market, it is tough to generate alpha. The basic thing you want is
for funds to save costs for you. Lastly, you invest in equity funds to beat the index.
Benchmark the fund performance to the Total Returns Index (TRI) of the index. That is a
better measure of outperformance as TRI also factors dividends.
Your mutual fund investment process must be a combination of the regulatory process
and the analytical process. That is a good start to your investment journey.