Various Impacts of Changes and Markets on Mutual Fund

There various impacts of the markets on the mutual funds. They are mainly categories into four different category:

1. External Factors 
2. Internal Factors 
3. General Factors
4. Other Factors

The External Factors are subdivided into :

1. Elections / Change in government
2. Budget forecast
3. FII investment
4. Foreign Currency weakness
5. Government policy
6. WAR situation
7. Terrorist attacks
8. International issue like Sub prime lending rate issues

The Internal Factors are subdivided into :

1. Fund manager replacement / movement
2. Fund management strategy ( like Investment in mid-cap / large-cap / small strategy)
3. Index
4. New SEBI regulations
5. ELSS - policy change

The General Factors are subdivided into :

1. Capital gain tax
2. Tax policy on Dividends
3. Tax policy on ELSS and other redemption in government bonds
4. Inflation
5. Interest rate fluctuations
6. International trade agreements

The Other Factors are :

1. Forced Measure (any natural calamities like Earth quake, Tsunami)

Impact of Various Changes

Mutual funds have been a significant source of investment in both government and corporate securities. It has been for decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies.

The total wealth created by the top 100 corporates this year is about Rs 16 lakh crore between 2002 and 2007. The biggest wealth creator is  Reliance Industries, which has created about Rs 185,000 crore net wealth between 2002 and 2007. The fastest wealth creating company is BF Utilities, which is up at the rate of 270% per annum. It has grown about 660 times in the last five years. The most successful of the wealth creating companies, there is literally no destruction of wealth in the last five years. Total wealth destruction is just about Rs 14,000 crore on the back of the Rs 16 lakh crore of wealth creation. There is no destruction, and that is the biggest finding.

UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small investors in the equity market. UTI has an extensive marketing network of over 35,000 agents spread over the country. The UTI scripts have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds. But Indian households seem uncomfortable with the concept of market-related returns which is clear from Table-1 which shows the composition of financial savings among Indian household.

From Table-1 it is clear that Indian households save 4.9% of their financial savings on shares, debentures and mutual fund. If we find saving on mutual fund then it will come around 2% which is very less as compared to mutual fund investors in USA who save around 30% of their financial savings on mutual fund. This is because of their less risk appetite nature.

In parallel if we see Figure-1 above then it shows that mutual fund business is growing tremendously in India. This is only because some AMCs have done very well in the market. So it is clear that if AMCs do well in the market then the mindset of Indian investors could be change who think stock market investment very risky and who are still saving around 47% of their financial savings on fixed deposit.

Table-1

Area of Investment	Rs. Crs.	% to Financial Saving
Deposits (banks & others)	278985	47.4
Shares, debentures & mutual funds	29008	4.9
Investments in small savings	72364	12.3
Insurance	83340	14.2
Others (Investments in Government Securities (2.4%), Currency (8.8%), Provident and Pension Funds – 10%)	124959	21.23
Source: www.rbi.org.in

Source: RBI, 2005-06Annual Report

There are four phases of mutual fund industry in India, first from 1964-1987, second from 1987 to 1993 when public sector companies entered into the business and the fourth phase is 2003 onwards. The graph shows that there is a tremendous increase in the amount of assets managed through mutual fund and with the entry of more and more foreign AMCs in India; this industry has a bright future in India. In fourth phase of the mutual fund industry there is a sharp increase in the business of AMCs Now investors have so many schemes with different objective and thus getting schemes according to their investment objective.

The total net assets of mutual fund has grown by 366.85% in India between 1998-2005 as compared to 85.22% growth in worldwide, 66.42% in America, 118.85% in Europe and 99.525% in Asia and pacific total net assets of mutual fund in same time period. Although the total figure is very less as compared to other developed countries but the growth rate if high. This is because of less knowledge about mutual fund among Indian investors. Similarly from Table-3 it is clear that total number of mutual funds has increased by 358.76% in India from 1998-2005.