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Macro-Economic Factors Affecting Mutual Funds In India

Essay by   •  January 3, 2011  •  5,558 Words (23 Pages)  •  1,601 Views

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Abstract

A mutual fund is a form of collective investment that pools money from investors and invests the money in stocks, bonds, short-term money-market instruments, and/or other securities. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed on to the individual investors.

The rationale behind a mutual fund is that there are large number of investors who lack the time and or the skills to manage their money. Hence professional fund managers, acting on behalf of the Mutual Fund, manage the investments (investor's money) for their benefit in return for a management fee. The organization that manages the investment is called the Asset Management Company (AMC). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

There are certain criteria on the basis of which the performance of a mutual fund can be assessed such as NAV, portfolio turnover, risk and return as well as various expense ratios like Sharpe ratio, Beta Ratio, etc. This article also aims to give an insight on the futuristic outlook of the Mutual Funds in India. New Funds are coming in the market such as Gold Funds, Real Estate Funds etc. The various new trends in the field are explored to understand diversified growth and opportunities that are prevalent and that could be the probable future of Mutual Funds.

Introduction

The most important factor shaping in today's global economy is the process of globalization. Indian companies are moving in search of low-cast markets, technology is driving growth in production and competition is becoming more intense. A second factor is the fastest growth in private capital flows, mainly short-term flows by banks and financial institutions, portfolio flows by mutual funds and pension funds and foreign direct investment into India. A third factor is the increasing share of India and other emerging market economies in world trade.

The outburst in communication technology has led to greater integration of Indian financial markets across the world. The impact of these changes could be felt from the extremely buoyant activity in Indian stock markets. A number of foreign financial service providers have entered into the Indian financial market like Morgan Stanley, Templeton, and Goldman Sachs. Currently FII investment is at $ 6.5 Billion compared to $ 2 Billion in 2001. The stock market is booming with Sensex hovering around 16000-17000. SEBI has put in place appropriate guidelines and controls to regulate the markets in tune with the changing environment and attendant risks. All this is happening because of large amounts of investment in the country

People often invest in various asset classes to:

* To beat Inflation

* To fund future needs

* To meet contingencies

* To maintain same standard of living after retirement

All these factors matters a lot to the investors and the mutual fund route is one way through which people can meet these needs.

What Is a Mutual Fund?

SEBI (Mutual Fund) Regulations 1993 defines Mutual Fund as "a fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing securities in accordance with these regulations".

In common terms, a mutual fund is a portfolio of stocks, bonds, or other securities that is collectively owned by hundreds or thousands of investors and managed by a professional investment company. The unit holders are people who have similar investment goals. Each fund has specific investment criteria, which are spelt out in its prospectus, the official booklet that describes the mutual fund. Investors then know what they are getting and can match their objective to that of a fund. The pooled money has more buying power than one investor alone, so that a fund can own hundreds of different securities. Thus, its success is not dependent on how just one or two companies perform but on performance of several stocks which fund is holding.

A mutual fund makes money in several ways:

* By earning dividends or interest on the investments it owns

* By selling securities that have appreciated in value.

Investors make money in the form of dividends and interest that are passed on to them and the increase (or decrease) in the fund's value. The mutual fund manager keeps constant watch on financial markets and adjusts the portfolio to achieve the highest returns. By owning part of a fund, the hard work of selecting and monitoring stocks and bonds is done for investors. The majority of mutual funds available are open-ended funds. Open-ended funds can have an unlimited number of investors or money in the fund. These funds are always open to accept money from investors and to return the money back to investors. This gives the investor the flexibility to enter into the scheme or to exit from the scheme or to exit from the scheme as and when required as per their needs. Managers of closed-end funds, on the other hand, decide upfront how many shares they will issue and when they will sell them. The only way to purchase shares in a closed-end fund, once the original shares have been sold, is to buy them from a current investor. Occasionally, open-end funds can and do close to new investors, often because of high cash inflows that cannot be invested in a timely manner. They do not become closed-end funds, however, because current shareholders can still buy additional shares from the fund company. When investors purchase a mutual fund, they own a piece of an investment portfolio. They share in the gains, losses, and expenses in proportion to the amount they have invested in the fund. At the close of every trading day, a mutual fund company tallies the value of all the securities in its portfolio and deducts its expenses (e.g., management fees, administrative expenses, and advertising costs). The balance is divided by the number of shares owned by shareholders to arrive at the value of one unit of the mutual fund. The net asset value or NAV is the price that fund pays you per unit when you sell. For a majority of people, mutual funds are a major part of their investment portfolio-unless they have a lot of money and ample time to devote to investing

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