A Study on the Performance of Indian Mutual Funds in Recent Years

Introduction

The Indian mutual industry values INR 28.23 trillion as of 2020 which is almost 4 times of 2010 and more than double of 2016, that is INR12.74 trillion. This shows that the industry has potential to grow further. The entire concept of mutual funds (MF) in India has evolved from the establishment of Unit Trust of India as an institution for savings in the early 1960's. The entry of public sector funds in second phase in 1987 -1993 to entry of private sector funds in 1993-2003 made the industry grow significantly. In December 2015, investors in India had an option to choose from more than a thousand Mutual Fund schemes spread across 44 Mutual Funds with a total AUM (Asset Under Management) value of Rs. 13.46 lakh Cr. Afterwards there was a sluggish growth due the financial crisis of 2009. Mutual Fund industry has been seeing double digit growth since 2012. The AUM for Mutual Fund industry in India has seen a year-on-year growth since then. The growth hasn't been at the pace as the Indian economy would like, but there has been a slow and steady growth over the past two decades.

To know how the industry has grown we need to first understand what a mutual fund is and how it works. A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. They are managed by an authorised person called as a professional fund manager appointed by the entity called Trust. The money managers, or a firm manages the portfolios of the investors. These managers select the schemes, monitor the market and decide when to sell the assets if need be. These managers usually make money according to the percentage of assets under management. When an investor participates in a mutual fund they lose or gain money proportionally according to the profits of the funds. The mutual funds derive its value from its underlying assets. The performance is tracked using the market capital of the fund, which is by aggregating the performance of its underlying assets. Investors make money from the dividends and interest earned by the mutual fund schemes. The distribution of profits is done according to the NAV. The Net Asset Value is the market value of the securities of scheme. It is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—does not fluctuate during market hours, but it is settled at the end of each trading day. Since these funds contain a variety of securities, investors can easily diversify their portfolios. Suppose an investor A holds stocks of a company and another investor B buys a mutual fund which holds a part of the company’s shares. When the company has a bad quarter and makes losses, investor A loses more money than Investor B. An investor can sell the mutual funds in market if they wish to provided, they are close end.

There are two major categories of mutual fund investments: open-ended and closed-ended funds. In an open-end mutual fund, investors pool capital together and are issued shares based on the amount of capital pooled. Investors can provide capital to fund managers who then issue them new shares. They can also sell their shares at any time to the fund manager, who then redeems the shares and decreases the number of shares outstanding in the mutual fund. In a closed-end mutual fund, the fund manager initiates an initial public offering (IPO) and determines the amount of capital required for the fund and the resulting shares that are to be issued to investors who provide capital through the initial issue. Afterward, a closed-end mutual fund trades on a stock exchange where shares of the closed-end mutual fund would trade based on supply and demand. Such a method of buying and selling shares in a closed-end mutual fund results in the share price of the fund to trade at a premium or discount to the net asset value per share.