Meaning, introduction, features & types of mutual fund

1. Mutual funds
A Mutual Fund is formed by the
coming together of a number of
investors who hand over their surplus
funds to a professional organization
to manage it through investments in
capital market.

2. Meaning of Mutual Funds
• A trust that pools the savings of investors who
share a common financial goal is known as
mutual fund.
• The money collected is then invested in
financial instruments such as shares, debentures
and other securities the income and capital
appreciation realized are shared by its unit
holders in proportion to the number of units
owned by them.

3. • Investment in securities are spread over a wide cross
section of industries and sectors reducing the risk of
the portfolio.
• Mutual funds are mobilizers of saving of the small
investors in instruments like stock and money
market instruments.
• Mutual funds are corporation that accept
money from investors and use this money to
buy stocks, long term bonds, short term debt
instruments issued by businesses or Govt.

5. Features of mutual funds
• Mobilizing small savings: mutual funds mobilize funds by
selling their own shares known as units. This gives the benefit of
convenience and satisfaction of owning shares in many industries.
Mutual fund invest in various securities and pass on the returns to
the investors.
• Investment Avenue: the basic characteristic of a mutual fund is
that it provides an ideal avenue for investment for investors and
enables them to earn a reasonable return with better liquidity. It
offers investors a proportionate claim on the portfolio of assets that
fluctuate in value.
• Professional management: mutual fund provides investors with
the benefit of professional and expert management of their funds.
Mutual fund employees professionals/experts who manage the
investment portfolios efficiently and profitably. Investors are
relieved from the responsibility of following the markets on a
regular basis.

6. • Diversified investment: mutual fund have the advantage of
diversified investment of funds in various industries and sectors.
This is beneficial to small investors who cannot afford to buy shares
of established companies at high prices. Mutual fund allow millions
of investors who have investments in variety of securities of
different companies.
• Better liquidity: mutual fund have the distinct advantage of better
liquidity of investment. There is always a market available for
mutual funds. In case of mutual funds it is obligatory that units are
listed and traded thus offering our secondary markets for the funds.
A high level of liquidity is possible for the fund holders because of
more liquid securities in the mutual fund portfolio.
• Reduced risks: the risk on mutual fund is minimum. This is
because of expert management diversification , liquidity and
economies of scale in transaction cost.

7. • Investment protection: mutual funds are regulated by
guidelines and legislative provisions put in place by regulatory
agencies such as SEBI in order protect the investor interest
the mutual funds are obligated to follow the provisions laid
down by the regulators.
• Switching facility: mutual funds provide investors with
the flexibility to switch from one scheme to another, this
flexibility enables investors to switch from income scheme to
growth scheme and from close ended scheme to open ended
scheme.
• Tax benefits: mutual funds offer tax shelter to the investors
by investing in various tax saving schemes under the
provisions provided by the income tax act.
• Low transaction cost: the cost of purchase and sale of
MF’s is relatively low

8. • Economic development: MF’s contribute to economic
development by mobilizing savings and channelizing them to
more productive sectors of the economy.
• Convenience: MF units can be traded easily with little or no
transaction cost.

9. Origin and growth of mutual funds
• The mutual fund industry in India started in
1963 with the formation of Unit Trust of India
(UTI) at the initiative of the Reserve Bank of
India (RBI) and the Government of India. The
objective then was to attract small investors and
introduce them to market investments.

10. • First Phase – 1964-87 -Unit Trust of India (UTI) was established
on 1963 by an Act of Parliament. .
• The first scheme launched by UTI was Unit Scheme 1964.
• Unit Linked Insurance Plan (ULIP) was launched in 1971.
• The first Indian offshore fund, India Fund was launched
in August 1986.
• In absolute terms, the investible funds corpus of UTI was about Rs
600 crores in 1984. AT the end of 1988 UTI had Rs.6, 700 crores of
assets under management.
• Second Phase – 1987-1993 (Entry of Public Sector Funds) -
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 .
• From 1987-88 to 1992-93, the AUM increased from Rs 6,700 crores
to Rs 47,004 crores, nearly seven times.

11. • Third Phase – 1993-1996 (Entry of Private
Sector Funds) Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector
mutual fund registered in July 1993.
• During the year 1993-94, five private sector fund
houses launched their schemes followed by six
others in 1994-95.
• As the industry expanded, a non-profit
organization, the Association of Mutual Funds in
India (AMFI), was established on 1995. Its
objective is to promote healthy and ethical marketing
practices in the Indian mutual fund Industry. SEBI has
made AMFI certification mandatory for all those
engaged in selling or marketing mutual fund products

12. • Fourth Phase – (1996-1999)Growth And SEBI
Regulation:A comprehensive set of regulations for all
mutual funds operating in India was introduced with
SEBI (Mutual Fund) Regulations, 1996. These
regulations set uniform standards for all funds.
Erstwhile UTI voluntarily adopted SEBI guidelines for
its new schemes.
• Similarly, the budget of the Union government in 1999
took a big step in exempting all mutual fund dividends
from income tax in the hands of the investors.
• During this phase, both SEBI and Association of Mutual
Funds of India (AMFI) launched Investor Awareness
Programme aimed at educating the investors about
investing through MFs.

13. • Phase V (1999-2004): Emergence of a Large
and Uniform Industry: In February 2003, the
UTI Act was repealed. UTI no longer has a special
legal status as a trust established by an act of
Parliament.
• Instead it has adopted the same structure as any
other fund in India - a trust and an AMC. UTI
Mutual Fund is the present name of the erstwhile
Unit Trust of India (UTI). While UTI functioned
under a separate law of the Indian Parliament
earlier, UTI Mutual Fund is now under the SEBI's
(Mutual Funds) Regulations, 1996 like all other
mutual funds in India.
• Between 1999 and 2005 the size of the industry has
doubled in terms of AUM which have gone from
above Rs 68,000 crores to over Rs 1,50,000 crores.

14. • Phase VI (From 2004
Onwards)Consolidation and Growth:
The industry has lately witnessed a spate of mergers
and acquisitions, most recent ones being the
acquisition of schemes of Allianz Mutual Fund by
Birla Sun Life, PNB Mutual Fund by Principal,
among others. At the same time, more international
players continue to enter India including Fidelity,
one of the largest funds in the world.

15. Advantages of Mutual Funds
Portfolio diversification: It enables him to hold a diversified investment
portfolio even with a small amount of investment .
 Professional management: The investment management skills, along with
the needed research into available investment options, ensure a much better
return as compared to what an investor can manage on his own.
Reduction/Diversification of Risks: The potential losses are also shared
with other investors.
Reduction of transaction costs: The investor has the benefit of economies
of scale; the funds pay lesser costs because of larger volumes and it is
passed on to the investors.
Wide Choice to suit risk-return profile: Investors can chose the fund based
on their risk tolerance and expected returns.

16. Disadvantages of Mutual Funds
No control over costs: The investor pays investment management fees as
long as he remains with the fund, even while the value of his investments
are declining. He also pays for funds distribution charges which he would
not incur in direct investments.
No tailor-made portfolios: The very high net-worth individuals or large
corporate investors may find this to be a constraint as they will not be able
to build their own portfolio of shares, bonds and other securities.
Managing a portfolio of funds: Availability of a large number of funds can
actually mean too much choice for the investor. So, he may again need
advice on how to select a fund to achieve his objectives.
Delay in redemption: It takes 3-6 days for redemption of the units and the
money to flow back into the investor’s account.

17. Constitution of Mutual Funds in India
• The constitution are designed to safeguard
investors, check speculative activities of mutual
funds & ensuring financial discipline through
transparency & fair play.
• SEBI ( Mutual Fund ) regulation require a four
tier system to organize Mutual Fund. i.e.
- Sponsor
- Trustee
- Asset Management Company
- Custodian

18. Sponsors
• The sponsor is akin to a promoter of a company
as he gets the mutual fund registered with Sebi.
The sponsor is defined under Sebi regulations as
a person who, acting alone or in combination
with another body corporate, establishes a
mutual fund. The sponsor forms a trust,
appoints the board of trustees, and has the right
to appoint the asset management company
(AMC) or fund manager.

19. Sponsors
• The Sponsor approaches the Securities & Exchange
Board of India (SEBI), which is the market regulator
and also the regulator for mutual funds.
• SEBI checks a persons integrity ,experience in the
financial sector, his net worth etc.
• Sponsor is to contribute 40 per cent of the net worth
of AMC.
• Mutual fund is created by sponsor as a trust under
Indian Trust act 1982.
• Sponsor appoints a trustee.

20. Trustees
• The mutual fund can be managed by a board of trustees
or a trust company.
• The board of trustees is governed by the Indian Trust
Act whereas a trust company is governed by the
Companies Act, 1956.
• The trustees act as a protector of unit holders' interests.
They do not directly manage the portfolio of securities
and appoint an AMC (with approval of Sebi) for fund
management.
• If an AMC wishes to float additional or different
schemes, it will need to be approved by the trustees.
• Trustees play a critical role in ensuring full compliance
with Sebi's requirements.

21. Trustees
• A trustee is a person who holds the property of
Mutual Fund in trust for the benefit of unit holders.
• A company is appointed as trustee to manage the
mutual fund with approval of SEBI.
• To ensure fair dealing at least 75 per cent of trustees
are to be independent of the sponsors.
• The trustee role is not to manage money. Their job is
only to see , whether the money is being managed as
per stated objectives.

22. • It is duty of trustee is to provide information to unit
holders as well as to SEBI about mutual fund
schemes.
• Trustees are to appoint AMC to float the schemes.
• It is trustees duty to observe & ensures that AMC is
managing schemes in accordance with the trust deed.

23. Asset Management Company (AMC)
• The sponsor or trustees appoint an AMC, also known as
‘Investment Manager’, to manage the affair of mutual
fund.
• The AMC’s Board of Directors must have at least
50% of Directors who are independent directors.
• The AMC has to be approved by SEBI.
• The AMC functions under the supervision of it’s
Board of Directors, and also under the direction of
the Trustees and SEBI.
• It is the AMC, which in the name of the Trust, floats
new schemes and manage these schemes by buying
and selling securities

24. • In order to do this the AMC needs to follow all
rules and regulations prescribed by SEBI.
• Whenever the fund intends to launch a new scheme,
the AMC has to submit a Draft Offer Document to
SEBI. This draft offer document, after getting SEBI
approval becomes the offer document (OD) of the
scheme.
• The Compliance Officer has to sign the Due
Diligence Certificate in the offer document.

25. Custodian and depositories
• A custodian’s role is safe keeping of securities
and also keeping a tab on the corporate actions
like rights, bonus and dividends declared by the
companies in which the fund has invested.
• The Custodian is appointed by the Board of
Trustees.
• SEBI requires that each mutual fund shall
have a custodian who is not in any way
associated with AMC.

26. • The custodian is appointed by trustees for
safekeeping of physical securities while
dematerialised securities holdings are held in a
depository through a depository participant.
• The custodian and depositories work under the
instructions of the AMC, although under the
overall direction of trustees.

27. Registrar and transfer agents
• These are responsible for issuing and redeeming
units of the mutual fund as well as providing
other related services, such as preparation of
transfer documents and updating investor
records. A fund can carry out these activities in-
house or can outsource them. If it is done
internally, the fund may charge the scheme for
the service at a competitive market rate.

28. TYPES OF MUTUAL FUNDS
1.)BY STUCTURE
2.)BY NATURE
3.)BY INVETSMENT OBJECTIVE
4.)OTHERS SCHEMES AND PLANS

29. BY STUCTURE
1. Open-ended Funds
 An open-end fund is one that is available for
subscription all through the year. These do not
have a fixed maturity. Investors can
conveniently buy and sell units at Net Asset
Value ("NAV") related prices.
 Free entry and exit of investors .No time limit
.Main objective of this fund is income
generation The key feature of open-end schemes
is liquidity.

30. . Closed-ended Funds
These schemes have a pre-specified maturity period. One
can invest directly in the scheme at the time of the initial
issue. The market price at the stock exchanges could vary
from the net asset value (NAV) of the scheme on account
of demand and supply situation, expectations of unit
holder and other market factors.
3. Interval Funds
 Interval Schemes are that scheme, which combines the
features of open-ended and close-ended schemes. it is
kind of close ended scheme with a feature that it remains
open during a particular part of the year for the benefit of
investors, to either off load or to undertake purchase of
units at a NAV.

31. Return based classification
• Income fund scheme: this scheme is customised to
suit the needs of investors who are particular about
regular returns. The scheme offers maximum
current income where by the income earned by the
units is distributed periodically
• Growth scheme: it is a MF scheme that offers the
advantage of capital appreciation of the underlying
investment such funds invest in growth oriented
securities that are capable of appreciating in the
long run. The risk attached with such funds is
relatively higher.

32. • Conservative fund Scheme: a scheme that aims
at providing a reasonable rate of return,
protecting the value of investment and achieving
capital appreciation is called a conservative fund
scheme. It is also known as middle of road funds
as it offers a blend of the above features. Such
funds divide their portfolio in stocks and bonds
in such a way that it achieves the desired
objective.

33. Investment based classification
• Equity fund: such fund invest in equity shares they carry
a high degree of risk such fund do well in favorable
market conditions. Investments are made in equity
shares in diverse industries and sectors.
• Debt funds: Such fund invest in debt instruments like
bonds and debentures. These funds carry the advantage
of secure and steady income there is little chance of
capital appreciation. Such funds carry no risk. A variant
of this type of fund is called liquid fund which specializes
in investing in short term money market instruments.
• Balanced funds: such scheme have a mix of debt and
equity in their portfolio of investments. The portfolio is
often shifted between debt and equity depending upon
the prevailing market conditions.

34. • Sectoral fund: Such fund invest in specific sectors of the
economy. The specialized sectors may include real estate
infrastructure, oil and gas etc, offshore investments,
commodities like gold and silver.
• Fund of Funds: such funds invest in units of other mutual
funds there are a number of funds that direct investments into
specified sectors of economy. This makes diversified and
intensive investments possible.
• Leverage funds: the funds that are created out of investments
with not only the amount mobilized from investors but also
from borrowed money from the capital markets are known as
leveraged funds. Fund managers pass on the benefit of
leverage to the mutual fund investors. Additional provisions
must be made for such funds to operate. Leveraged funds use
short sale to take advantage of declining markets in order to
realize gains. Derivative instruments like options are used by
such funds.

35. • Gilt fund : These funds seek to generate returns
through investment in govt. securities. Such funds
invest only in central and state govt. securities. Such
funds carry very less risk.
• Tax saving schemes: certain MF schemes offer tax
rebate on investments made in equity shares under
section 88 of income tax act. Income may be
periodically distributed depending on surplus.
Subscriptions made Upto Rs.10000 are eligible for
tax rebate under section 88 for such scheme. The
investment of the scheme includes investment in
equity, preference shares and convertible
debentures and bonds to the extent 80-100% and
rest in money market instruments.

36. Money Market
• These funds are also income funds and open
ended and their aim is to provide easy liquidity,
preservation of capital and moderate income.
• These schemes invest exclusively in safer short-
term instruments such as treasury bills,
commercial paper and government securities,
etc.
• These funds are appropriate for corporate and
individual investors as a means to park their
surplus funds for short periods.

37. • Net Asset Value: It is market price of each unit of
a particular scheme in relation to all the assets of
the scheme.it is true indicator of performance of
fund .
• If the NAV is more than face value of the unit it
clearly indicates that money invested in the unit
is appreciated and the fund has performed well

38. References
• All the content in this PPT is taken from
different sources available on internet.