On 14th Feb. 1992, Government has issued guidelines for setting up Mutual Funds in the private sector and joint sector. In the budget for 1991-92, the Government has allowed private sector Mutual Funds but the comprehensive guidelines are issued recently.
Highlights of the Guidelines:
Mutual Funds are to be established in the form of trust under Indian Trust Act and are to be operated by separate Asset Management Company (AMC)
(a) No Mutual Fund under all its schemes should own more than 5% of any company’s paid up capital.
ADVERTISEMENTS:
(b) No Mutual Fund under its entire scheme should invest more than 10% of its funds in the shares or debentures or other instruments of a single company.
(c) No Mutual Fund under all its schemes should invest more than 15% of its funds in the shares and debentures of a specified industry.
(d) No individual schemes of Mutual Fund should invest more than 5% of its corpus in any one company’s shares.
(e) Mutual Funds can invest only in transferable securities either in Money Market or Capital Market.
ADVERTISEMENTS:
(f) Holding of privately placed debentures and other unquoted debt instruments should not exceed 10% in case of growth funds and 40% in case of income funds.
(g) Mutual Funds will be required to buy and sell only on a delivery basis and will not engage in continuo transactions.
(h) Mutual Funds shall be authorized for business by SEBI and should have a minimum net worth of Rs. 5 crore.
(i) SEBI will oversee the operation and annual account of mutual funds.
ADVERTISEMENTS:
(j) A minimum corpus of Rs.20 crore is required for growth ended schemes kind a minimum of Rs. 50 crore in open ended schemes.
(k) At least 90% of the Mutual Funds booked profits shall have to be distributed annually.
The oldest and biggest mutual fund in India is the Unit Trust of India. What is known as the mutual fund in United States is known as Unit Trust in U.K. Since earlier mutual funds were not allowed to be set up under private sector, and we have been adopting U.K. system in various areas, the first mutual fund started in Public Sector bore the name of U.T.I.
However, after the government permitted setting up of mutual funds under private sector in 1993, numbers of private sector mutual funds including foreign funds have set up shops in India. Their performance till 1997 was very poor because of poor capital market conditions.
ADVERTISEMENTS:
It is reported in press that during 1998-99 (April-March) mutual funds in India have collected nearly Rs.22,000 crore for investment in units. In 1999-2000, nearly Rs.40, 000 crore is expected to be invested in mutual funds. Thus, as capital market activity picks up, confidence in mutual fund industry is also gaining ground while SEBI stands guard for investors.
The USA mutual fund industry is the largest in the world. A fund named ‘Fidelity Mutual Fund’ in USA is the largest, and it has assets over 800 billion US Dollars under its management. You know a billion dollar is around Rs.4700 crore at the exchange rate of Rs.47.09 per dollar in April 2003.
Imagine the size of one single mutual fund in USA. The Mutual Fund Industry may grow faster in the coming years. Because of the tax exemption benefits on dividend received from Mutual Funds, soon investors may shift their funds from banks to Mutual Funds particularly in a growing market situation. Indian banks may face stiff competition from Mutual Funds for investor’s savings in the immediate future.
Reserve Bank of India has recently permitted the Indian Mutual Fund Organizations to issue units to Foreign Institutional Investors (FIIs) on repatriation basis. This may further help the Mutual Fund industry to mobilize funds from overseas investors.