Page 266 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 13: Mutual Funds and Insurance Services

Accordingly, investors in the shares of mutual funds are assured of low risk, steady return, Notes
liquidity and capital appreciation. By taking upon themselves the problems which confront the
small savers in investing their savings and dealing with them effectively, mutual funds help
mobilize savings of the people and promote thrift.
Mutual funds also provide benefits of flexibility in as much as investors can systematically
invest or withdraw funds, or switch to other schemes according to their needs, through features
provided under their different schemes, such as regular investment, withdrawal plans and
dividend reinvestment options.
Tax benefits to investors in certain schemes constitute any added attraction for mutual funds.
Dividends paid by mutual funds to unitholders are taxed only at the time of distribution of
dividends. These dividends after this deduction are tax-free in the hands of investors. On the
contrary, investment in bonds or other deposits that earns interest (over and above ` 12,000 that
is eligible for exemption under Section 80L) is taxed at 30 percent.
Savings pooled by mutual funds are invested largely in industrial securities. They usually
finance long-term business requirements largely by way of direct subscription to share capital
of industrial enterprise. Mutual funds, while themselves raising resources from a large number
of small savers, make funds available to industrial concerns in relatively bigger lots and thus
reduce their burden and botheration involved in raising finance directly from individual savers.

Thus, by playing the role of financial intermediation, mutual funds provide a convenient and
effective link between savings and investment. Well-managed mutual funds would be mutually
beneficial arrangement. While, on the one hand, they help the investing community by offering
share of corporate growth, on the other, they have a salutary impact on the stock markets. By
blending caution with aggression and analysis with intuition, the funds can successfully convert
market opportunities into lucrative of the investors.

Task Discuss the main limitations as you analyse in the functioning of the companies
involving mutual funds.

13.4 Performance Evaluation

Let us start the discussion of the performance of mutual funds in India from the day the concept
of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or
rather to those who believed in savings, to park their money in UTI Mutual Fund. For 30 years
it goaled without a single second player. Though the 1988 year saw some new mutual fund
companies, but UTI remained in a monopoly position. The performance of mutual funds in
India in the initial phase was not even closer to satisfactory level. People rarely understood, and
of course investing was out of question. But yes, some 24 million shareholders were accustomed
with guaranteed high returns by the beginning of liberalization of the industry in 1992. This
good record of UTI became marketing tool for new entrants. The expectations of investors
touched the sky in profitability factor. However, people were miles away from the preparedness
of risks factor after the liberalization.
The Assets Under Management of UTI was ` 67bn. by the end of 1987. Let me concentrate about
the performance of mutual funds in India through figures. From ` 67bn. the Assets Under
Management rose to ` 470 bn. in March 1993 and the figure had a three times higher performance
by April 2004. It rose as high as ` 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started falling in
the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative

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