HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases

First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700
crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990.
At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other
mutual funds.

Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile
UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual fund industry
has entered its current phase of consolidation and growth.
FINANCIAL SYSTEM

A 'financial system' is a system that allows the exchange of funds between lenders, investors,
and borrowers. Financial systems operate at national and global levels. They consist of complex,
closely related services, markets, and institutions intended to provide an efficient and regular
linkage between investors and depositors.

Money, credit, and finance are used as medium of exchange in financial systems. They serve as a
medium of known value for which goods and services can be exchanged as an alternative
to bartering. A modern financial system may include banks (public sector or private
sector), financial markets, financial instruments, and financial services. Financial systems allow
funds to be allocated, invested, or moved between economic sectors. They enable individuals and
companies to share the associated risks. A financial market is a broad term describing any
marketplace where buyers and sellers participate in the trade of assets such as equities, bonds,
currencies and derivatives. Financial markets are typically defined by having transparent pricing,
basic regulations on trading, costs and fees, and market forces determining the prices of
securities that trade.

Financial markets can be found in nearly every nation in the world. Some are very small, with
only a few participants, while others - like the New York Stock Exchange (NYSE) and the forex
markets - trade trillions of dollars daily.

Investors have access to a large number of financial markets and exchanges representing a vast
array of financial products. Some of these markets have always been open to private investors;
others remained the exclusive domain of major international banks and financial professionals
until the very end of the twentieth century.

The financial system of a country is an important tool for economic development of the country
as it helps in the creation of wealth by linking savings with investments. It facilitates the flow of
funds from the households (savers) to business firms (investors) to aid in wealth creation and
development of both the parties. The institutional arrangements include all condition and
mechanism governing the production, distribution, exchange and holding of financial assets or
instruments of all kinds.

TYPES OF FINANCIAL SYSTEM

FINANCIAL
INSTRUMENT

FINANCIAL FINANCIAL FINANCIAL

INTER
MEDIARIES
SYSTEM MARKET

FINANCIAL
SERVICES

1. FINANCIAL INSTRUMENT:

Financial Instruments can be defined as a market for short-term money and

financial assets that is a substitute for money. The term short-term means generally
a period of one year substitutes for money is used to denote any financial asset
which can be quickly converted into money. Some of the important instruments are
as follows:
 Call /Notice-Money:
Money Market can be understood as the market for short term funds, wherein
lending and borrowing of funds varies from overnight to a year. It is an important
part of the financial system that helps in fulfilling the short term and very short
term requirements of the companies, banks, financial institution, government
agencies and so forth.

 Term Money:
Deposit’s with maturity period beyond 14 days is referred to as the term money.
The entry restrictions are the same as that of Call/Notice Money, the specified
entities not allowed to lend beyond 14 days.

 Treasury Bill:
Treasury Bills are short-term (up to one year) borrowing instruments of the union
government. It’s a promise by the Government to pay the stated sum after the
expiry of the stated period from the date of issue (less than one year). They are
issued at a discount off the face value and on maturity , the face value is paid to the
holder.

 Certificate of deposits:
Certificates of deposits is a money market instrument issued in dematerialised form
or as a promissory note for funds deposited at a bank, other eligible financial
institution for a specified period.

 Commercial paper:
CP is a note in evidence of the debt obligation of the issuer. On issuing
commercial paper the debt is transformed into an instrument. CP is an unsecured
promissory note privately placed with investors at a discount rate of face value
determined by market forces.
 2. FINANCIAL MARKET:

A financial market is a market in which people trade financial securities and

derivatives such as futures and options at low transaction costs. Securities include
stocks and bonds, and precious metals. There are main two types of financial
market are as follow:

 CAPITAL MARKET
 MONEY MARKET

 Capital Market:
A capital market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold. Capital markets channel the wealth of savers to
those who can put it to long-term productive use, such as companies or governments
making long-term investments.

 Money Market:
Money Market can be understood as the market for short term funds, wherein lending
and borrowing of funds varies from overnight to a year. It is an important part of the
financial system that helps in fulfilling the short term and very short term requirements
of the companies, banks, financial institution, government agencies and so forth.

3. FINANCIAL INTERMEDIARIES:
A financial intermediary is an institution which connects the deficit and surplus
money. The best example of an intermediary is a bank which transforms the bank
deposits to bank loans. The role of the financial intermediary is to distribute funds
from people who have an extra inflow of money to those who don’t have enough
money to fulfill the needs. Functions of Financial Intermediary are as follows:
 Depository institutions:
These are banks and credit unions that collect money from the public and use that
money to advance loans to financial customers.

 Non-Depository institutions:
These are brokerage firms, insurance and mutual funds companies that cannot collect
money deposits but can sell financial products to financial customers.

4. FINANCIAL SERVICES:

Financial Services is concerned with the design and delivery of financial

instruments, advisory services to individuals and businesses within the area of
banking and related institutions, personal financial planning, leasing, investment,
assets, insurance etc.

o Banking Services:
Includes all the operations provided by the banks including to the simple deposit and
withdrawal of money to the issue of loans, credit cards etc.

o Foreign Exchange services:

Includes the currency exchange , foreign exchange banking or the wire transfer.

o Investment Services:
It generally includes the asset management, mutual fund, hedge fund management and
the custody services.

o Insurance Services:
It deals with the selling of insurance policies, brokerages, insurance underwriting or the
reinsurance.
o Some of the other services include advisory services, venture capital, angel investment
etc.

INTRODUCTION OF MUTUAL FUND:

Mutual fund is an investment company that pools money from small

investors and invests in a variety of securities, such as stocks, bonds and money
market instruments. Most open-end Mutual funds stand ready to buy back
(redeem) its shares at their current net asset value, which depends on the total
market value of the fund's investment portfolio at the time of redemption.
Most open-end Mutual funds continuously offer new shares to investors. It is also
known as an open-end investment company, to differentiate it from a closed-end
investment company.

Mutual funds invest pooled cash of many investors to meet the fund's stated
investment objective. Mutual funds stand ready to sell and redeem their shares at
any time at the fund’s current net asset value: total fund assets divided by shares
outstanding. In Simple Words, Mutual fund is a mechanism for pooling the
resources by issuing units to the investors and investing funds in securities
in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries

and sectors and thus the risk is reduced. Diversification reduces the risk because
not all stocks may move in the same direction in the same proportion at the same
time. Mutual fund issues units t o the investors in accordance with quantum of
money invested by them. Investors of Mutual fund are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments.
The Mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time.
In India, A Mutual fund is required to be registered with Securities and
Exchange Board of India (SEBI) which regulates securities markets before it can
collect funds from the public.

In Short , a Mutual fund is a common pool of money in to which

investors with common investment objective place their contributions that
are to be invested in accordance with the state d investment objective of the
scheme. The investment manager would invest the money collected from the
investor in to assets that are defined/ permitted by the stated objective of
the scheme. For example, a n equity fund would invest equity and equity
related instruments and a debt fund would invest in bonds, debentures, gilts etc.
Mutual fund is a suitable investment for the common ma n a s it offers an Oporto
unity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.
FEATURE OF MUTUAL FUND:

Modilizing small saving

Investment avenue

Professional management

Diversification Investment

Better Liquidity

Reduied risks

Low transaction cost

Invesment protection

Switching facility

Tax benefit