This document is an assignment submitted by Nikhil Kumar Tyagi to Ms. Monika Yadav on the topic of mutual funds. It contains an introduction to mutual funds, defining them as a pool of money collected from investors to invest in stocks, bonds and other securities. It discusses the historical background of mutual funds originating in the late 1800s in the US and UK and establishing in India in 1963 with the formation of UTI. It also outlines the various types of mutual funds such as equity funds, debt funds, index funds and more; and categorizes them based on objectives and flexibility as open-ended or close-ended funds.

1. AMITY UNIVERSITY HARYANA
LAWS ON SECURITIES AND FINANCIAL MARKETS
ASSIGNMENT
ON THE TOPIC
“MUTUAL FUNDS”
SUBMITTED TO:
Ms. Monika Yadav
Faculty, Amity Law School
SUBMITTED BY:
Nikhil Kumar Tyagi
Student LL.M (2014-15)
Amity Law School

2. Table of Contents
S.No. Particulars Page No.
1. List of Abbreviations used 1
2. Introduction 2
3. Definition and meaning of Mutual Funds 2
4. Historical Background 3
5. Types of Mutual Funds 3
6. Investment Plans of Mutual Funds 5
7. Advantages and disadvantages of Mutual Funds 5
8. Regulatory Framework 6
9. Risk in Mutual Funds 9
10. Growth of Mutual Funds in India (Conclusion) 10
11. References 11

3. List of Abbreviations Used 1
Abbreviations Full Forms
AuM Asset under Management
AMFI The Association of Mutual Funds in India
GIC General Insurance Corporation
LIC Life Insurance Corporation of India
IDBI Industrial Development Bank of India
IPO Initial Public Offer
SEBI Securities Exchange Board of India
RBI Reserve Bank of India
UTI Unit Trust of India
SBI State Bank of India
PNB Punjab National Bank
NSE National Stock Exchange
ICSI The Institute of Company Secretaries of India
CII Confederation of Indian Industry

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Introduction
Mutual fund is the pool of the money, based on the trust who invests the savings of a number of
investors who shares a common financial goal, like the capital appreciation and dividend earning.
The money thus collect is then invested in capital market instruments such as shares, debenture,
and foreign market. Investors invest money and get the units as per the unit value which we called
as NAV (net assets value).
India is undoubtedly emerging as the next big investment destination, riding on a high savings and
investment rate, as compared to other Asian economies. Among many of the financial instruments
mutual fund is one of the most attractive financial investment instrument that plays a vital role in
the economy of a country. Mutual fund schemes provide new opportunities for investors. Mutual
fund Industry was introduced in India 1963 with the formation of Unit Trust of India and since the
1990’s when the mutual fund space opened up to the private sector, the industry has traversed a
long path, adapting itself continuously, to the changes that have come along Mutual funds as an
investment vehicle have gained immense popularity in the current scenario, which is clearly
reflected in the robust growth levels of assets under management. Mutual funds are restructuring
their business models to provide for increased efficiencies and investor satisfaction. The industry
also faces a number of issues which are characterized by lack of investor awareness, low
penetration levels, high dependence on corporate sector and spiraling cost of operations.
In this assignment work we will look into the historical background, meaning, working, advantages,
disadvantages, types and regulatory framework of Mutual Funds in India.
1. Definition and Meaning of Mutual Funds
As per the Regulation 2(q) of the SEBI (Mutual Funds) Regulations, 1996, “mutual fund” means a
fund established in the form of a trust to raise monies through the sale of units to the public or a
section of the public under one or more schemes for investing in securities including money market
instruments or gold or gold related instruments or real estate assets.
Provided that infrastructure debt fund schemes may raise monies through private placement of
units, subject to conditions specified in the regulations.
Mutual funds can be term as a company that pools money from many investors and invests the
money in stocks, bonds, short-term money-market instruments, other securities or assets, or some
combination of these investments. The combined holdings the mutual fund owns are known as its
portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and
the income those holdings generate. The fund most often consists of a mixture of stocks, bonds,
cash, and other securities, and is managed by a professional. Buying into a mutual fund is a simple
way for people interested in investing to develop a diverse portfolio that is carefully watched over

5. 3
and tended to by a fund manager. A mutual fund is not an alternative investment option to stocks
and bonds; rather it pools the money of several investors and invests this in stocks, bonds, money
market instruments and other types of securities. The owner of a mutual fund unit gets a
proportional share of the fund’s gains, losses, income and expenses Each Mutual fund has a specific
stated objective. The fund’s objective is laid out in the fund's prospectus, which is the legal
document that contains information about the fund, its history, its officers and its performance.
Mutual Funds provide small investors with opportunities of investment in the capital market. Small
investors generally do not have adequate time, knowledge, experience and resources for directly
accessing the capital market and as such, they can rely on an investment intermediary who
undertakes judicious investment decision and provide the consequential benefit of professional
expertise.
2. Historical Background
The idea of pooling resources and spreading risk using closed-end investments soon took root in
Great Britain and France, making its way to the United States in the 1890s. The Boston Personal
Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the
Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual
fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today
as MFS Investment Management. State Street Investors' Trust was the custodian of the
Massachusetts Investors' Trust.(1) In India the mutual fund industry started in 1963 with the
formation of UTI, at the initiative of the Government of India and RBI. UTI functioned under the
Regulatory and administrative control of the RBI. In 1978 UTI was de-linked from the RBI and the
IDBI took over the regulatory and administrative control in place of RBI. In 1987, non-UTI , public
sector mutual funds were setup by LIC, GIC, SBI, PNB and other public sector enterprises. In 1993,
private sector mutual funds were allowed by the Government of India. Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
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 . In February
2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate
entities.(2)
3. Types of Mutual Funds
Mutual Funds are classified in the following manner:
(a) On the basis of Objectives
Equity Funds/Growth Funds: Funds that invest in equity shares are called equity funds. They
carry the principal objective of capital appreciation of the investment over the medium to
long-term. They are best suited for investors who are seeking capital appreciation.
(1) A Brief History Of The Mutual Fund, by James E. McWhinney
(2) The Association of Mutual Fund in India.

6. 4
Diversified Funds: These funds invest in companies spread across sectors. These funds are
generally meant for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds: These funds invest primarily in equity shares of companies in particular business
sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of
a particular sector.
Index Funds: These Funds invest in the same pattern as popular market indices like S&P CNX
Nifty. The money collected from the investors is invested only in the stocks, which represent the
index.
Tax Saving Funds: These Funds offer tax benefits to investors under the Income Tax Act.
Opportunities provided under this scheme are in the form of tax rebates under the Income Tax
Act.
Debt/Income Funds: These funds invest predominantly in high rated fixed income bearing
instruments like bonds, debentures, government securities, commercial paper and other money
market instruments. They are best suited for the medium to long term investors who are ready
to take risk and seek capital preservation.
Liquid Funds/Money Market Funds: These funds invest in highly liquid money market
instruments. The period of investment could be as short as a day. They provide easy liquidity.
They have emerged as an alternative for saving s and short-term fixed deposit accounts with
comparatively higher returns.
Gilt Funds: These funds invest in Central and state Government securities. Since they are
government backed bonds they give a secured return and also ensure safety of the principal
amount.
Balanced Funds: These funds invest both in equity shares and fixed income bearing instruments
(debt) in some proportion. They provide a steady return and return the volatility of the fund
while providing some upside for capital appreciation.
(b) On the basis of Flexibility
Open-ended Funds: These funds do not have a fixed date of redemption. Generally, they are
open for subscription and redemption throughout the year. Their prices are linked to the daily
net asset value (NAV) which is calculated on a periodical basis.
Close-ended Funds: As per the SEBI (Mutual Funds) Regulations, 1996 “close-ended scheme”
“close-ended scheme” means any scheme of a mutual fund in which the period of maturity of the
scheme is specified. These funds are open initially for entry during the IPO and thereafter closed

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for entry as well exit. These funds have a fixed date of redemption. One of the characteristics of
the close-ended schemes is that they are generally traded at a discount to NAV; but the discount
narrows as maturity nears. The units of these funds are listed on stock exchanges, are traded and
the subscribers to the fund would be able to exit from the fund at any time through the
secondary market.
4. Investment Plans of Mutual Funds
The term investment plans here refers to the services that the Mutual funds provide to investors
offering different ways to invest or re-invest.
(a) Growth Plan and Dividend Plan
Under this plan a scheme wherein the return from investments are re-invested and very little
income distributed, if any, are made. The investor thus only realizes capital appreciation on the
investment. Under the dividend plan, income is distributed from time to time. This plan is ideal
for those investors who require regular income.
(b) Dividend Re-investment Plan
Dividend plans of schemes carry an additional option for re-investment of income distributed.
This is referred to as the dividend re-investment plan. Under this plan, dividends declared by a
fund are re-invested in the scheme on behalf of the investors, thus increasing the number of
units held by the investors.
5. Advantages and Disadvantages of Mutual Funds
Everything has got some advantages along with some disadvantages; same is true for mutual
funds also.
(a) Advantages
Portfolio Diversification: Mutual Funds invest in a well-diversified portfolio of securities which
enables investor to hold a diversified investment portfolio (whether the amount of investment is
big or small).
Professional Management: Fund manager undergoes through various research works and has
better investment management skills which ensure higher returns to the investor than what he
can manage on his own.
Less Risk: Investors acquire a diversified portfolio of securities even with a small investment in a
Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.
Low Transaction Costs: Due to the economies of scale (benefits of larger volumes), mutual funds
pay lesser transaction costs. These benefits are passed on to the investors.

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Liquidity: An investor may not be able to sell some of the shares held by him very easily and
quickly, whereas units of a mutual fund are far more liquid.
Choice of Schemes: Mutual funds provide investors with various schemes with different
investment objectives. Investors have the option of investing in a scheme having a correlation
between its investment objectives and their own financial goals. These schemes further have
different plans/options
Transparency: Funds provide investors with updated information pertaining to the markets and
the schemes. All material facts are disclosed to investors as required by the regulator.
Flexibility: Investors also benefit from the convenience and flexibility offered by Mutual Funds.
Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa.
Option of systematic (at regular intervals) investment and withdrawal is also offered to the
investors in most open-end schemes.
Safety: Mutual Fund industry is part of a well-regulated investment environment where the
interests of the investors are protected by the regulator. All funds are registered with SEBI and
complete transparency is forced.
(b) Disadvantages
Costs Control Not in the Hands of an Investor: Investor has to pay investment management fees
and fund distribution costs as a percentage of the value of his investments (as long as he holds
the units), irrespective of the performance of the fund
No Customized Portfolios: The portfolio of securities in which a fund invests is a decision taken
by the fund manager. Investors have no right to interfere in the decision making process of a
fund manager, which some investors find as a constraint in achieving their financial objectives.
Difficulty in Selecting a Suitable Fund Scheme: Many investors find it difficult to select one
option from the plethora of funds/schemes/plans available. For this, they may have to take
advice from financial planners in order to invest in the right fund to achieve their objectives.
6. Regulatory Framework
SEBI is the regulatory body for all the mutual funds in India. All the mutual funds must get
registered with SEBI.
SEBI formulated, SEBI (Mutual Funds) Regulations, 1996, which are amended from time to time
to regulated the Indian mutual funds market. Chapter II of the regulations deals with the
registration of mutual funds within which eligibility criteria is also given in regulation 7. Chapter
III regulations deals with the constitution and management of mutual funds and operation of
trustees, whereas chapter V of the said regulations deals with the schemes of mutual funds.

9. 7
Provisions of chapter II of the regulations are mentioned below, as they deal with registration of
mutual funds with SEBI.
Application for registration
Reg.3. An application for registration of a mutual fund shall be made to the Board in Form A by the
sponsor.
Application fee to accompany the application
Reg.4. Every application for registration under regulation 3 shall be accompanied by nonrefundable
application fee as specified in the Second Schedule.
Application to conform to the requirements
Reg.5. An application, which is not complete in all respects shall be liable to be rejected:
Provided that, before rejecting any such application, the applicant shall be given an opportunity to
complete such formalities within such time as may be specified by the Board.
Furnishing information
Reg.6. The Board may require the sponsor to furnish such further information or clarification as may
be required by it.
Eligibility criteria
Reg.7. For the purpose of grant of a certificate of registration, the applicant has to fulfill the
following, namely—
(a) the sponsor should have a sound track record and general reputation of fairness and
integrity in all his business transactions.
Explanation: For the purposes of this clause “sound track record” shall mean the sponsor
should—
(i) be carrying on business in financial services for a period of not less than five years; and
(ii) the networth is positive in all the immediately preceding five years ; and
(iii) the networth in the immediately preceding year is more than the capital contribution of
the sponsor in the asset management company; and
(iv) the sponsor has profits after providing for depreciation, interest and tax in three out of
the immediately preceding five years, including the fifth year;
(aa) the applicant is a fit and proper person;
(b) in the case of an existing mutual fund, such fund is in the form of a trust and the

10. 8
trust deed has been approved by the Board;
(c) the sponsor has contributed or contributes at least 40% to the net worth of the asset
management company:
Provided that any person who holds 40% or more of the net worth of an asset management
company shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria
specified in these regulations;
(d) the sponsor or any of its directors or the principal officer to be employed by the mutual fund
should not have been guilty of fraud or has not been convicted of an offence involving moral
turpitude or has not been found guilty of any economic offence;
(e) appointment of trustees to act as trustees for the mutual fund in accordance with the provisions
of the regulations;
(f) appointment of asset management company to manage the mutual fund and operate the
scheme of such funds in accordance with the provisions of these regulations;
(g) appointment of custodian in order to keep custody of the securities or gold and gold related
instrument or other assets of the mutual fund held in terms of these regulations, and provide such
other custodial services as may be authorised by the trustees.
Criteria for fit and proper person
Reg.7A. For the purpose of determining whether an applicant or the mutual funds is fit and proper
person the Board may take into account the criteria specified in schedule II of the Securities and
Exchange Board of India (Intermediaries) Regulations,2008.
Consideration of application
Reg.8. The Board, may on receipt of all information decide the application. Grant of Certificate of
Registration
Reg.9. The Board may register the mutual fund and grant a certificate in Form B on the applicant
paying the registration fee as specified in Second Schedule.
Terms and conditions of registration
Reg.10. The registration granted to a mutual fund under regulation 9, shall be subject to the
following terms and conditions—
(a) the trustees, the sponsor, the asset management company and the custodian shall comply with
the provisions of these regulations;

11. 9
(b) the mutual fund shall forthwith inform the Board, if any information or particulars previously
submitted to the Board was misleading or false in any material respect;
(c) the mutual fund shall forthwith inform the Board, of any material change in the information or
particulars previously furnished, which have a bearing on the registration granted by it;
(d) payment of fees as specified in the regulations and the Second Schedule.
Rejection of application
Reg.11. Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7, the
Board may reject the application and inform the applicant of the same. Payment of 17[annual]
service fee12. A mutual fund shall pay before the 15th April each year a service fee as specified in
the Second Schedule for every financial year from the year following the year of registration:
Provided that the Board may, on being satisfied with the reasons for the delay permit the mutual
fund to pay the service fee at any time before the expiry of two months from the commencement of
the financial year to which such fee relates.
Failure to pay annual service fee
Reg.13. The Board may not permit a mutual fund who has not paid service fee to launch any
scheme.
7. Risk in Mutual Funds
Mutual Funds do not provide assured returns. Their returns are linked to their performance. They
invest in shares, debentures, bonds etc. All these investments involve an element of risk.
Market Risk: If the overall stock or bond market fall on account of overall economic factors, the
value of the stock or bond holdings in the fund’s portfolio can drop, therefore impacting the fund
performance.
Non-Market Risk: Bad/negative news about an individual company can pull down its stock price,
which can negatively affect fund holdings. The risk can be reduced by having a diversified
portfolio that consists of a wide variety of stocks drawn from different industries.
Interest rate Risk: Bond prices and interest rates move in opposite directions. When interest
rates rise, bond prices fall and this decline in underlying securities affects the fund negatively.
Credit Risk: Bonds are debts obligations. So when the funds invest in corporate bonds, they run
risk of the corporate defaulting on their interest and principal payment, obligations and when
that risk crystallizes, it leads to a fall in value of the bond causing the NAV of the fund to take a
beating.

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8. Growth of Mutual Funds in India (Conclusion)
Over half of the AuM of the global asset management industry is in areas other than traditional
mutual funds. Mandated and alternative assets comprise almost 60% of the total industry AuM
and the latter segment is growing rapidly. The asset management industry is growing to a stature
comparable to banking and insurance. It is estimated that 17 to 20% of Indian market
capitalisation is held by foreign funds. However, a remarkably small fraction of these funds are
advised and managed by Indian asset managers.
The growth in the mutual fund industry is by and large governed by the macroeconomic factors
affecting the country. In the present day situation given the high inflation rates with a slowdown
in the economic output of the nation, it is not surprising to see a slowdown in the rate of growth
in the mutual fund industry as well. While the industry has grown significantly and there is much
to be satisfied about, there are opportunities for improvement too. While the AuM has grown
from approximately 470 billion INR as on 31 March 1993 to approximately 8,250 billion INR as on
31 March 2014 (reflecting a CAGR of 14.6% over the last 21 years), the Sensex has grown from
approximately 2280.52 as on 31 March 1993 to 22,386.27 as on 31 March 2014. Quite naturally,
the growth of the Sensex and the AuM feed off one another and thus a portion of the AuM
growth can be attributed to the growth of underlying stocks and indices. Mutual fund
penetration in India is low as compared to global and peer benchmarks. The AuM to GDP ratio
stands at 7 to 8% as compared to a global average of 37%. Even the SAAAME economy of Brazil,
considered a peer emerging economy, is significantly ahead, with an AuM to GDP ratio of 45%
(Source – AMFI, ICI FactBook 2013). Increasing mutual fund penetration will largely depend on
increasing investor awareness at grass-roots level and providing access to financial services to the
still largely unbanked population. Mutual Funds today need to stay focused on a few aspects in
order to ensure that the industry meets its growth objectives. Along with SEBI, AMFI has a major
role to play in Indian mutual fund industry. The followings points may be under taken by the SEBI
and the Indian mutual fund industry together:
• Reaching out to new consumers in rural areas
• Conduct consumer education programs to develop markets
• Creation of employment opportunities
• Establish a sustainable business model Increase transparency for mutual fund houses,
particularly at the retail level

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References
 SEBI (Mutual Funds) Regulations, 1996
 Growth of Mutual Funds in India, Acme Journal of Multidisciplinary Research, Vol.II issue
IV, April 2014
 Muralidhar Dunna, Asia Pacific Journal of Marketing and Management Review, Vol. 2,
October 2012
 Indian Mutual Fund Industry at a glance (Document), CII Mutual Fund Summit 2014
 Study Module of ICSI Executive programme
 Beginner’s module of NSE’s Certificate in Financial Markets
 Websites referred:
i) www.sebi.gov.in
ii) www.nseindia.com
iii) www.economicstimes.com
iv) www.moneycontrol.com