The document provides an overview of mutual funds in India. It discusses the key entities involved in a mutual fund structure - sponsors initiate the fund, trustees oversee its operations and appoint the asset management company to manage investments. AMCs appoint other service providers like custodians, registrars, and accountants. The document also categorizes different types of mutual fund schemes based on their operations, returns, and investments. Overall it summarizes the basic concepts, participants, and classifications of mutual funds in India.

1. UNIT - V
MUTUAL FUNDSMUTUAL FUNDS

2. MUTUAL FUNDS
A mutual fund is a professionally-managed investment
scheme, usually run by an asset management company
that brings together a group of people and invests their
money in stocks, bonds and other securities.
As an investor, you can buy mutual fund 'units', which
basically represent your share of holdings in a
particular scheme. These units can be purchased or
redeemed as needed at the fund's current net asset
value (NAV).

3. MUTUAL FUNDS
These NAVs keep fluctuating. So, each investor
participates proportionally in the gain or loss of the fund.
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.

4. MUTUAL FUNDS
Investment in securities are spread over a wide cross
section of industries and sectors reducing the risk of the
portfolio.
Mutual funds are mobilisers 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

5. HOW MUTUAL FUND WORKS?HOW MUTUAL FUND WORKS?
A VEHICLE FOR INVESTING IN PORTFOLIO OF STOCKS AND BONDSA VEHICLE FOR INVESTING IN PORTFOLIO OF STOCKS AND BONDS

6. TYPES OF MUTUAL FUNDS
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b)
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Investors have the option of choosing from a wide
variety of schemes in a mutual fund depending upon
their requirements.
MF’s are classified as follows:
Operational classification:
Open ended scheme
Close ended scheme
Interval scheme
Return based classification:
Income fund scheme
Growth scheme
Conservative fund scheme

7. TYPES OF MUTUAL FUNDS
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b)
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Investment based classification:
Equity funds
Debt funds
Balanced funds
Sectorial funds
Funds of fund
Leverage fund
Gilt funds
Indexed funds
Tax saving scheme

8. OPERATIONAL CLASSIFICATION
OPEN ENDED SCHEME: When a fund is accepted and
liquidated on a continuous basis by a MF manager, it
is called as open ended scheme. The fund manager
sells and redeemed units constantly as demanded by
the investors.
The scheme provides excellent liquidity facility to the
investors. The buying and selling of units takes place
at a declared NAV(Net Asset Value)

9. OPERATIONAL CLASSIFICATION
CLOSE ENDED SCHEME: When a units of a scheme
liquidated only after the expiry of a specified period it
is known as close ended fund.
Such funds have fixed capitalization and remain with
the mutual fund manager, units of close ended
schemes are traded on stock exchange in the
secondary market.

10. OPERATIONAL CLASSIFICATION
CLOSE ENDED SCHEME: The price is determined on
the basis of supply and demand. There are 2 prices
for such funds, one that is market determined and the
other is NAV based the market price may be above or
below NAV.
Managing a close ended scheme is comparatively
easy for the fund Manager. The fund can be liquidated
after a specified period.

11. OPERATIONAL CLASSIFICATION
INTERVAL SCHEME: 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.

12. 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.
There are 2 types of such schemes, one that earns a
target constant income at relatively low risk while the

13. RETURN BASED CLASSIFICATION
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.

14. RETURN BASED CLASSIFICATION
CONVERTIBLE 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.

15. INVESTMENT BASED CLASSIFICATION
EQUITY FUND : Such fund invest in equity shares they carry a
high degree of risk such fund do well in favourable market
conditions. Investments are made in equity shares in diverse
industries and sectors.
DEBT FUND : 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.

16. INVESTMENT BASED CLASSIFICATION
BALANCED FUND : 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.
SECTORIAL 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

17. INVESTMENT BASED CLASSIFICATION
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.
GILT FUND : These funds seek to generate returns through
investment in govt. securities. Such funds invest only in central
and state govt. securities and REPO/ reverse REPO securities.
A portion of the corpus may be invested in call money markets
to meet liquidity requirements. Such funds carry very less risk.
Their prices are influenced only by moment in interest rates.

18. INVESTMENT BASED CLASSIFICATION
LEVERAGE FUND : 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.

19. INVESTMENT BASED CLASSIFICATION
INDEXED FUND : These funds are linked to specific index. Funds
mobilized under such schemes are invested in securities of
companies included in the index of any exchange. The fund
performance is linked to the growth in concerned index.
TAX SAVING SCHEME : 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 Rs.10000 are eligible for tax rebate under
section 88 for such scheme.

20. FEATURES OF MUTUAL FUNDS
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The various features of mutual funds are :
Mobilising Small Savings
Investment Avenue
Professional Management
Diversified Investment
Better Liquidity
Reduced Risk
Investment Protection
Switching facility
Tax Benefit
Low Transaction Cost
Economic Development
Convenience

21. 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.

22. FEATURES OF MUTUAL FUNDS
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.
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.

23. FEATURES OF MUTUAL FUNDS
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.

24. FEATURES OF MUTUAL FUNDS
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.

25. FEATURES OF MUTUAL FUNDS
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 lower.
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

26. STRUCTURE OF MUTUAL FUNDS
Mutual Funds in India follow a 3-tier structure.
The first tier is the sponsor who thinks of
starting the fund.
The second tier is the trustee.
Trustees appoint the Asset
Management Company (AMC)
who form the third tier, to
manage investor’s money.

27. SPONSOR
Any corporate body which initiates the launching of a mutual
fund is referred to as “The sponsor”.
The sponsor is expected to have a sound track record and
experience in financial services for a minimum period of 5
years and should ensure various formalities required in
establishing a mutual fund.
According to SEBI, the sponsor should have professional
competence, financial soundness and reputation for fairness
and integrity. The sponsor contributes 40% of the net worth of
the AMC. The sponsor appoints the trustee, The AMC and

28. TRUSTEE
Sponsor creates a public trust and appoints trustees. Trustees
are the people authorized to act on behalf of the Trust. They
hold the property of mutual fund.
Once the Trust is created, it is registered with SEBI after which
this trust is known as the mutual fund. The Trustees role is not
to manage the money but their job is only to see, whether the
money is being managed as per stated objectives. Trustees
may be seen as the internal regulators of a mutual fund.
A minimum of 75% of the trustees must be independent of the
sponsor to ensure fair dealings.

29. SPONSOR
Any corporate body which initiates the launching of a mutual
fund is referred to as “The sponsor”.
The sponsor is expected to have a sound track record and
experience in financial services for a minimum period of 5
years and should ensure various formalities required in
establishing a mutual fund.
According to SEBI, the sponsor should have professional
competence, financial soundness and reputation for fairness
and integrity. The sponsor contributes 40% of the net worth of
the AMC. The sponsor appoints the trustee, The AMC and

30. CUSTODIAN
A custodian’s role is keeping custody of the securities that
are bought by the fund manager 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. The
custodian also participates in a clearing and settlement
system through approved depository companies on behalf
of mutual funds, in case of dematerialized securities.
Only the physical securities are held by the Custodian. The
deliveries and receipt of units of a mutual fund are done by
the custodian or a depository participant at the instruction
of the AMC and under the overall direction and
responsibility of the Trustees. Regulations provide that the
Sponsor and the Custodian must be separate entities.

31. ASSET MANAGEMENT COMPANY
(AMC)Trustees appoint the Asset Management Company (AMC),
to manage investor’s money. The AMC in return charges a
fee for the services provided and this fee is borne by the
investors as it is deducted from the money collected from
them.
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. In order to do this the AMC needs to follow all
rules and regulations prescribed by SEBI and as per the
Investment Management Agreement it signs with the
Trustees.

32. REGISTRAR AND TRANSFER
AGENTS
The registrar and transfer agents are appointed by the AMC.
AMC pay compensation to these agents for their services.
They carry out the following functions
Receiving and processing the application forms of investors
• Issuing unit certificates
• Sending refund orders
• Giving approval for all transfers of units and maintaining
records
• Repurchasing the units and redemption of units

33. Fund Accountants
Fund accountants are appointed by the AMC. The are
in charge of maintaining proper books of accounts
relating to the fund transactions and management.
The perform the following functions
Computing the net asset value per unit of the scheme
on a daily basis
Maintaining its books and records
Monitoring compliance with the schemes, investment
limitations as well as SEBI regulations
Preparing and distributing reports of the schemes for
the unit holders and SEBI and monitoring the
performance of mutual funds custodians and other
service providers.