Department of BBA
Kristu Jayanti College
What is a Mutual Fund?
• A mutual fund is a trust that pools the savings of a number of investors
(unit holders) who share a common financial goal
• The money pooled is invested in shares, debt securities, money-market
securities or a combination of these.
• Income earned through these investments and the capital appreciation
realized is shared by its unit holders in proportion to the number of units
owned by them.
• A mutual fund is the most suitable investment scope for common people
as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively lower cost.
Benefits of investing in a Mutual Fund
• Access to professional money managers
• Tax efficiency
• Low transaction costs
• Well-regulated industry
• Convenience of small investments
• Sponsor – A person or the corporate body which initiates the launch
of a mutual fund. As per SEBI, the sponsor should have at least 5 yrs
of experience in the financial services Industry and should contribute
40% of the AMC net worth.
• Trustee - The sponsor appoints the trustees who look after the trust
and they are the owners of the mutual fund property and assets.
They take responsibility of investors' funds and their interests.
Trustees oversee the functioning of the fund and ensure that the unit
holders' interests are protected and they get their due returns.
• Asset Management Company (AMC) - The AMC is appointed by Trustees.
Company which actually manages the investors money and takes the decision
of investing the money. AMC does the fund management and charges a fee
for their services which is borne out of the investors. The AMC has to be
approved by the SEBI
• Custodian - This entity has the responsibility of holding investors' physical
and financial assets on their behalf and to perform the transactions initiated
by the AMC. These transactions can be receipt and delivery of securities,
income collection, dividend distribution, etc.
• Registrar and transfer agents (RTA) – They carry out all the clerical work
like processing of applications, processing KYC of investors, issuing units
certificates, sending refunds, etc. E.g.: Reliance, UTI, Axis mutual funds
have chosen Karvy as their RTA.
Types of Mutual Funds – By Structure
• Open-ended Schemes - These funds buy and sell units on a continuous
basis and, hence, allow investors to enter and exit as per their
convenience. Do not have a fixed maturity. The key feature is liquidity.
• Closed-ended Schemes - Unlike in open-ended funds, investors cannot
buy the units of a closed-ended fund after NFO period is over. This means
that new investors cannot enter, nor can existing investors exit till the term
of the scheme ends.
• Interval Schemes - combines the features of open-ended and close-ended
Types of Mutual Funds – Investment Objective
• Growth or Equity Schemes are high risk funds and their returns are linked
to the stock markets. They are best suited for investors who are seeking
long term growth.
• Debt / Fixed Income Schemes These Funds invest in fixed income
securities like corporate bonds, debentures. They are best suited for the
medium to long-term investors who are averse to risk and seeking regular
and steady income.
• Balanced Schemes - These funds invest both in equity shares and
debt (fixed income) instruments and strive to provide both growth
and regular income. They are ideal for medium- to long-term
investors willing to take moderate risks.
• Liquid / Money Market Schemes - These funds invest in highly
liquid money market instruments and provide easy liquidity. They
are ideal for Corporates, institutional investors and business houses
who invest their funds for very short periods.
• Tax Saving Funds - These funds offer tax benefits to investors. Opportunities
provided under this scheme are in the form of tax rebates under section 80 C of the
Income Tax Act, 1961. They are best suited for investors seeking tax rebate and
looking for long term growth
• Sector Funds - These funds invest primarily in equity shares of companies in a
particular business sector or industry. While these funds may give higher returns,
they are riskier as compared to diversified funds
• Index Funds - These funds invest in the same pattern as popular stock market
indices like CNX Nifty Index and S&P BSE Sensex. NAV of such schemes rise and
fall in accordance with the rise and fall in the index.
• Fund of Funds Schemes - Fund of Funds invests in other mutual fund schemes. A
traditional mutual fund comprises a portfolio of shares, but a Fund of Funds
comprises a portfolio of different mutual fund schemes.
The History of Mutual Funds
• Historians are uncertain of the origins of investment funds; some
cite the closed-end investment companies launched in the
Netherlands in 1822 by King William I as the first mutual funds,
while others point to a Dutch merchant named Adriaan van
Ketwich whose investment trust created in 1774 may have given
the king the idea.
• Ketwich probably theorized that diversification would increase the
appeal of investments to smaller investors with minimal capital.
• The name of Ketwich's fund, Eendragt Maakt Magt, translates to
"unity creates strength".
• The first mutual fund outside the Netherlands was the Foreign &
Colonial Government Trust, which was established in London in
• MFs were introduced in U.S. in the 1890s
• The early funds were generally closed – end type with a fixed
number of shares
• The first open-end mutual fund was established on 1924 by the
Massachusetts investors trust
Evolution of Mutual Fund in India
• The history of mutual funds in India can be broadly
divided into four distinct phases
– First Phase - 1964-1987
– Second Phase - 1987-1993 (Entry of Public Sector Funds)
– Third Phase - 1993-2003 (Entry of Private Sector Funds)
– Fourth Phase - since February 2003
First Phase - 1964-1987
• Unit Trust of India (UTI) was established in 1963 by an Act of
• It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India.
• In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI.
• The first scheme launched by UTI was Unit Scheme 1964.
• At the end of 1988 UTI had Rs. 6,700 crores of assets under
Second Phase - 1987-1993
(Entry of Public Sector Funds)
• 1987 marked the entry of non-UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC).
• SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual
Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank
of Baroda Mutual Fund (Oct 92).
• LIC established its mutual fund in June 1989 while GIC had set up its mutual
fund in December 1990.
• At the end of 1993, the mutual fund industry had assets under management
of Rs. 47,004 crores.
Third Phase - 1993-2003
(Entry of Private Sector Funds)
• With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice of
funds. Also, 1993 was the year in which the first Mutual Fund Regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed.
• The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was
the first private sector mutual fund registered in July 1993.
• The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996.
• The industry now functions under the SEBI (Mutual Fund) Regulations
• The number of mutual fund houses went on increasing,
with many foreign mutual funds setting up funds in
India and also the industry has witnessed several
mergers and acquisitions.
• As at the end of January 2003, there were 33 mutual
funds with total assets of Rs. 1,21,805 crores. The Unit
Trust of India with Rs. 44,541 crores of assets under
management was way ahead of other mutual funds.
Fourth Phase - since February 2003
• In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities.
• One is the “Specified Undertaking of the Unit Trust of India” with assets
under management of Rs. 29,835 crores as at the end of January 2003,
• The Specified Undertaking of Unit Trust of India, functioned under an
administrator appointed by GOI, outside of SEBI’s purview, until it was
eventually liquidated in 2008
• The Government asked the SBI, PNB, BOB and LIC to step in as sponsors
of the second part, now called UTI Mutual Fund under SEBI’s
• Currently, 44 AMCs are operating in India and
these comprise private sector companies, joint
ventures (including those with foreign entities),
• The industry has a tiered structure with the top 7
AMCs having 70% of the industry Asset under
• The Association of Mutual Funds in India (AMFI) is dedicated to
developing the Indian Mutual Fund Industry on professional, healthy and
ethical lines and to enhance and maintain standards in all areas with a
view to protecting and promoting the interests of mutual funds and their
• AMFI, the association of SEBI registered mutual funds in India of all the
registered Asset Management Companies, was incorporated on August 22,
1995, as a non-profit organisation.
• As of now, all the 44 Asset Management Companies that are registered
with SEBI, are its members.
Objectives of AMFI
1. To define and maintain high professional and ethical standards in all
areas of operation of mutual fund industry.
2. To recommend and promote best business practices and code of
conduct to be followed by members and others engaged in the activities
of mutual fund and asset management including agencies connected or
involved in the field of capital markets and financial services.
3. To interact with the Securities and Exchange Board of India (SEBI) and to
represent SEBI on all matters concerning the mutual fund industry.
4. To represent the Government, Reserve Bank of India and other bodies
on all matters relating to the Mutual Fund Industry.
5. To undertake nation wide investor awareness programme so as to
promote proper understanding of the concept and working of
6. To disseminate information on Mutual Fund Industry and to
undertake studies and research directly and/or in association with
7. To take disciplinary actions (cancellation of ARN) for violations of
Code of Conduct.
8. To protect the interest of investors/unit holders
Scope of Mutual Fund
• Maintain strict financial discipline and look for quality investments
• Maintaining total fund to expense ratio
• Market behaviour of the scrips they hold
• Their strength in taking calculated risk to hold certain category of
• Their balancing capacity to have diversified mix of scrips in their basket
• The capacity of fund managers to hold liquid assets to meet the investors
claims on time
• Clean and transparent operations
• Courage to handle the situation in times of turbulence
Mutual Fund & Economy
• Since 2004, India has been amongst the fastest growing
market for mutual fund. The growth pattern of mutual
fund industry grew at 29 per cent CAGR as against the
global average 4 per cent.
• Mutual funds have become a very popular channel of
investment for the salaried middle class Indian