It contains the meaning, structure as well as types of mutual funds in which an investor can invest catering to his needs.

1. MUTUAL FUNDS

2. WHAT ARE
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.
In simple terms, mutual funds is a trust that pools the savings
from the number of investors who share a common financial
goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities.

3. HOW DOES A MUTUAL FUND WORK?

4. ADVANTAGES OF MUTUAL FUNDS
Built-In Diversification
Investing in a diversified portfolio
can be very expensive. The nice
thing about mutual funds is that
they allow anyone to hold a
diversified portfolio. The reason
why investors invest in a diversified
portfolio is because it increases the
expected returns while minimizing
the risk. Therefore, many see
mutual funds as a cost effective way
to achieve this.
Liquidity
Mutual funds are liquid in nature.
In financial jargon, liquidity
basically refers to converting your
assets to cash with relative ease.
Mutual funds are considered liquid
assets since there is high demand
for many of the funds in the
marketplace. Since this is the case,
an investor can convert the asset
to cash by quickly selling it to
another investor.
Professional Management
Mutual funds do not require a
great deal of time or knowledge
from the investor because they
are managed by professional
fund managers. This can be a big
help to an inexperienced investor
who is looking to maximize their
financial goals.

5. DISADVANTAGES OF MUTUAL FUNDS
NO CONTROL OVER COST
All the investor's money is
pooled together in a scheme.
Costs incurred for managing the
scheme are shared by all the
Unit-holders in proportion to
their holding of Units in the
scheme. Therefore, an individual
investor has no control over the
costs in a scheme.
No Control Over
Portfolio
It is the sole responsibility
of the fund manager to
allocate the money of the
investors in an investment
grade instrument. So the
investor has no control over
the portfolio in which his
money is being invested.
No Guarantees
As Mutual funds
invest in debt as well
equities , there are no
sure returns . Returns
depends on the
market conditions .

6. STRUCTURE OF MUTUAL FUNDS IN INDIA

7. According to the SEBI Regulations Act, 1996, Mutual Funds follow a three
tier structure. Since mutual funds deals in investors money, therefore, a
clear structure is laid to ensure proper governance.
SPONSOR (TIER 1)
There is a Sponsor (the First tier), who thinks of starting a mutual fund. The
Sponsor approaches the Securities & Exchange Board of India (SEBI), which
is the market regulator and also the regulator for mutual funds. The
sponsor should have sound track record and general reputation of fairness
and integrity in all his business transactions.
SPONSOR ( TIER 1)

8. On the approval of SEBI, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act,
1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the
people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees.
Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund.
Managing the investors money is the responsibility of Asset Management Company ( third tier). The AMC has
to be approved by SEBI. 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.
TRUST AND TRUSTEES ( TIER 2)
ASSET MANAGEMENT COMPANY (
TIER 3)

9. OTHER SERVICE PROVIDERS IN MUTUAL FUNDS
CUSTODIAN
The custodian has custody of the assets of the fund. As part of this
role, the custodian needs to accept and give delivery of securities for
the purchase and sale transactions of the various schemes of the
fund. Thus, the custodian settles all the transactions on behalf of the
mutual fund schemes. All custodians need to register with SEBI. The
Custodian is appointed by the trustees.

10. -RTA (REGISTRAR AND TRANSFER AGENTS)
The RTA maintains investor records. The appointment of RTA is done by the AMC.
Their offices in various centres serve as Investor Service Centres (ISCs), which perform a
useful role in handling the documentation of investors. The functions of the RTA
includes processing of purchase and redemption transactions of the investor and
dealing with the financial transactions of receiving funds for purchases and making
payments for redemptions, updating the information in the individual records of the
investor, called folios, keeping the investor updated about the status of their
investment account and information related to the investment.

11. TYPE OF MUTUAL FUNDS

12. ON THE BASIS OF CONSTITUTION-
OPEN ENDED FUNDS
An open-end fund is a type of mutual fund that does not have restrictions on the amount of
shares the fund can issue. Open-ended funds are open for investors to enter or exit at any
time, even after the NFO.
CLOSED ENDED FUNDS
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme,
from the fund, only during its NFO. Once the NFO closes, new investors cannot enter, nor can
existing investors exit, till the term of the scheme comes to an end.

13. INTERVAL FUNDS
Interval funds combine features of both open-ended and close-
ended schemes. They are largely close-ended, but become open-
ended at pre-specified intervals. The periods when an interval
scheme becomes open-ended, are called ‘transaction periods’; the
period between the close of a transaction period, and the opening
of the next transaction period is called ‘interval period’.

14. ON THE BASIS OF INVESTMENT OBJECTIVE-
EQUITY FUNDS
An equity fund is a mutual fund that invests principally in stocks. Equity
oriented Funds invest the investor’s money in equity and related
instruments of companies. The investment objective of such funds is to
seek capital appreciation through investment in this growth asset.

15. DEBT FUNDS
Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills. Debt
funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt
fund provides a steady but low income relative to equity. It is comparatively less volatile.
HYBRID FUNDS
Hybrid Funds are mutual funds that provide a combination of more than
one underlying investment asset class, such as stocks, bonds or cash. They
are also known as balanced funds.

16. MONEY MARKET FUNDS
A money market mutual fund invests in low risk securities. The
purpose of this fund is to conserve the capital of the fund. It is meant
for people who wish to maintain their capital and park their short term
cash into a safety that gives stable but low returns. A money market
mutual fund in India usually invests in bank’s deposits, commercial
paper, etc.