Macro-Economic Factors Affecting Mutual Funds in India

Macro-Economic Factors Affecting Mutual Funds in India

Macro-Economic Factors affecting Mutual funds in India

&

Basis for Evaluating Mutual fund Performance

By

Amit Gera

PGDM 2006-2008 Batch

Alliance Business School

Bangalore

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