Mutual Funds Overview
A mutual fund is a common pool of money into which
investors place their contributions that are to be
invested in different types of securities in accordance
with the stated objective.
An equity fund would buy equity assets – ordinary
shares, preference shares, warrants etc.
A bond fund would buy debt instruments such as
debenture bonds, or government securities/money
A balanced fund will have a mix of equity assets and
Mutual Fund shareholder or a unit holder is a part
owner of the fund’s asset.
History of Mutual Funds
Phase I – 1964 – 87: In 1963, UTI was set up by
Parliament under UTI act and given a monopoly. The
first equity fund was launched in 1986.
Phase II – 1987 – 93: Non-UTI, Public Sector mutual
Like-SBI Mutual Fund,
Canara bank Mutual Fund,
LIC Mutual Fund,
Indian Bank Mutual Fund,
GIC Mutual Fund and
PNB Mutual Fund.
Phase III – 1993 – 96: Introducing private
sector funds. As well as open-end funds.
Phase IV – 1996: Investor friendly regulatory
measures Action taken by SEBI to protect the
investor, and enhance investor’s returns
through tax benefits.
Mutual Funds invest only in shares.
Mutual Funds are prone to very high
Mutual Funds are very new in the financial
Mutual Funds are not reliable and people
rarely invest in them.
The good thing about Mutual Funds is that
you don’t have to pay attention to them.
Equity Instruments like shares are not only
a part of the securities held by mutual
funds. It also also invest in debt securities
which are relatively much safer.
Mutual Funds are there in India since 1964.
Mutual Funds market has evolved in U.S.A
and is there for the last 60 years.
Mutual Funds are the best solution for
people who want to manage risks and get
Types of Mutual Funds
1. Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or
close-ended scheme depending on its maturity period.
Open-ended Fund/ Scheme
Open-ended schemes are those schemes where investors can redeem
and buy new units all throughout the year as per their convenience at
NAV related prices.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7
years. The fund is open for subscription only during a specified period at
the time of launch of the scheme. Investors can invest in the scheme at
the time of the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where the units are listed.
2. Schemes according to
Growth / Equity Oriented Scheme
Income / Debt Oriented Scheme
Sector specific funds/schemes
3. Load or no-load Fund
Mutual funds incur certain expenses such as brokerage,
marketing expenses, and communication expenses. These
expenses are known as ‘load’.
A Load Fund is one that charges a percentage of NAV for entry or exit.
That is, each time one buys or sells units in the fund, a charge will be
payable. This charge is used by the mutual fund for marketing and
distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as
well as exit load charged is 1%, then the investors who buy would be
required to pay Rs.10.10 The investors should take the loads into
consideration while making investment as these affect their yields/returns.
A no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NAV and no additional charges are
payable on purchase or sale of units.
Calculation of NAV
NAV = Total market value of assets under management - liabilities
Number of mutual fund units outstanding
Suppose there are 10 investors investing 1,00,000Rs each
Total Investment- 10 L
Unit value of Scheme 10/unit
No of units allotted to each investor – 10,000
Investment of each Investor- 10,000*10=1,00,000
Total Units- 10,00,000/10 = 1,00,000
Now lets say that after 1 year the invested values grows to 14,00,000
NAV = 14,00,000/1,00,000 = 14
NAV has become 14 now from 10
Any new Investor wanting to invest in this scheme will get each unit
at 14 not at 10
Advantages of MF
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.
depending upon the investment objective of the scheme. An investor can
buy in to a portfolio of equities, which would otherwise be extremely
expensive. Each unit holder thus gets an exposure to such portfolios with
an investment as modest as Rs.5000/-.
We must spread our investment across different securities (stocks, bonds,
money market instruments, real estate, fixed deposits etc.) and different
sectors (auto, textile, information technology etc.).
Mutual funds offer a tremendous variety of schemes.
Qualified investment professionals who seek to maximize returns and
minimize risk monitor investor's money.
Being under a regulatory framework, mutual funds have to disclose
their holdings, investment pattern and all the information that can
be considered as material, before all investors. SEBI acts as a
watchdog and safeguards investors’ interests
A distinct advantage of a mutual fund over other investments is
that there is always a market for its unit/ shares. It's easy to get
one’s money out of a mutual fund. Redemptions can be made by
filling a form attached with the account statement of an investor.
Costs – The biggest source of AMC income is
generally from the entry & exit load which they charge
from investors, at the time of purchase. The mutual
fund industries are thus charging extra cost under
layers of jargon.
Dilution - Because funds have small holdings
across different companies, high returns from a few
investments often don't make much difference on the
Taxes - when making decisions about your money,
fund managers don't consider your personal tax
situation. For example, when a fund manager sells a
security, a capital-gain tax is triggered, which affects
how profitable the individual is from the sale.
Any person or corporate body that establishes
the Fund and registers it with SEBI.
Form a Trust and appoint a Board of Trustees.
Appoints Custodian and Asset Management
Company either directly or through Trustee ,
in accordance with SEBI regulations.
Created through a document called the Trust
Deed that is executed by the Fund Sponsor
and registered with SEBI.
The Trust- may be managed by a Board of
Trustees- a body of individuals or a Trust
Company- a corporate body.
Protector of unit holders interests.
2/3 of the trustees shall be independent
persons and shall not be associated with
Rights of Trustees:
• Approve each of the schemes floated by the
• The right to request any necessary information
from the AMC.
• May take corrective action if they believe that
the conduct of the fund's business is not in
accordance with SEBI Regulations.
• Have the right to dismiss the AMC,
• Ensure that, any shortfall in net worth of the
AMC is made up.
Obligations of the Trustees:
Enter into an investment management agreement with
Ensure that the fund's transactions are in accordance
with the Trust Deed.
Furnish to SEBI on a half-yearly basis, a report on
the fund's activities
Review the investor complaints received and the
redressal of the same by the AMC.
Asset Management Company
• Acts as an investment manager of the Trust
under the Board Supervision and direction of
• Has to be approved and registered with SEBI.
• Will float and manage the different investment
schemes in the name of Trust and in
accordance with SEBI regulations.
• Acts in interest of the unit-holders and reports
to the trustees.
• At least 50% of directors on the board are
independent of the sponsor or the trustees.
• Has the responsibility of physical handling and safe
keeping of the securities.
• Should be independent of the sponsors and
registered with SEBI.
• Indian capital markets are moving away from physical
certificates for securities to ‘dematerialized’ form with
• Will hold the dematerialized security holdings of the