TOPIC- MUTUAL FUND

Mutual fund is a pool of money which is collected from many investors & is invested by an
asset management company to achieve some common objective of the Investors. It is a trust
that pools the savings of a 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. The income earn through these investments are shared by its
unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the
most suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.

Concept of Mutual fund

Many investors with common financial objective

pool their Money

Investors, on a proportionate basic, get mutual fund

units for the sum contributed to the pool

The money collected from investors is invested into shares,

debentures and other securities by the fund manager

The Fund Manager realizes gains or losses and

collect dividend or interest income

Any capital gains or losses from such investments are passed on

to the investors in proportion of the number of units held by them

Porporation of the
SILENT FEATURES OF MUTUAL FUNDS-
• A mutual fund is a pool of money collected from investors and is invested according to
stated investment objectives

• The money thus collected is then invested in financial markets, both Money market
instruments like Bonds, T.Bills & Call Money etc and Capital market instruments such as
shares, debentures and other securities.
• The income earned through these investments and the capital appreciation realized are
shared by its unit holders in proportion to the number of units owned by them.
• Mutual fund investors are like shareholders and they own the fund.

• Mutual fund investors are not lenders or deposit holders in a mutual fund.

• Everybody else associated with a mutual fund is a service provider, who earns a fee.

• The money in the mutual fund belongs to the investors and nobody else.

• Mutual funds invest in marketable securities according to the investment objective.

• The value of the investments can go up or down, changing the value of the investors’
holdings.

• The market value of the investors’ funds is also called as net assets. The NAV of a
mutual fund fluctuates with market price movements.
History of Mutual fund in India

First Phase
• The idea of a first Mutual fund in India was born out of the vision of Sri.T.
Krishnamachari Finance Minister under Jawaharlal Nehru

• U.T.I Act was passed in 1963 leading to the formation of Unit Trust of India.

• Unit Trust of India (UTI) 1st Mutual Fund in India.

• The first open ended scheme was launched in 1964, popularly known as U.S. 64

• Huge mobilisation of funds through assured return schemes

• UTI was the only mutual fund during the period 1963-1988 and enjoyed monopoly status.

Second Phase
• In 1987 banks, financial institutions and insurance companies in the public sector were
permit to enter in market.

• The period 1987 – 1992 saw the birth of public sector Mutual funds, S.B.I and Canara
bank (1987), LIC (1989), Bank of India and PNB (1990] , Indian bank (1991).

• State bank of India mutual fund (1987), first non-UTI mutual fund.

• Changes in the mindset of investors pattern of investment.

Third Phase
• In 1992-1993 Private sector and foreign players were allowed to entry into market.

• The first sector Mutual fund was “Kothari Pioneer”, launched in 1993 followed by
“Morgan Stanley in 1994

• Foreign fund management companies form joint ventures with Indian promoters

• More competitive products, product innovation, investment management techniques,

investor service techniques etc. Come in vogue.

• Investor starts becoming selective.

• 1999 was the turning point for the Indian Mutual fund Industry when the government
stepped in and offered Tax benefits on equity to revive investment sentiments.
ADVANTAGES OF MUTUAL FUND

S. No. Advantage Particulars

Mutual Funds invest in a well-diversified portfolio of securities which enables

Portfolio
1. investor to hold a diversified investment portfolio (whether the amount of
Diversification
investment is big or small).

Fund manager undergoes through various research works and has better
Professional
2. investment management skills which ensure higher returns to the investor than
Management
what he can manage on his own.

Investors acquire a diversified portfolio of securities even with a small

3. Less Risk investment in a Mutual Fund. The risk in a diversified portfolio is lesser than
investing in merely 2 or 3 securities.

Low costs Due to the economies of scale (benefits of larger volumes), mutual funds pay
4.
Transaction lesser transaction costs. These benefits are passed on to the investors.

An investor may not be able to sell some of the shares held by him very easily
5. Liquidity
and quickly, whereas units of a mutual fund are far more liquid.

Mutual funds provide investors with various schemes with different investment
Choice of objectives. Investors have the option of investing in a scheme having a
6.
Schemes correlation between its investment objectives and their own financial goals.
These schemes further have different plans/options

Funds provide investors with updated information pertaining to the markets

7. Transparency and the schemes. All material facts are disclosed to investors as required by the
regulator.

Investors also benefit from the convenience and flexibility offered by Mutual
Funds. Investors can switch their holdings from a debt scheme to an equity
8. Flexibility
scheme and vice-versa. Option of systematic (at regular intervals) investment
and withdrawal is also offered to the investors in most open-end schemes.

Mutual Fund industry is part of a well-regulated investment environment

9. Safety where the interests of the investors are protected by the regulator. All funds are
registered with SEBI and complete transparency is forced.
DISADVANTAGES OF MUTUAL FUND

S.
Disadvantage Particulars
No.

Costs Control Not Investor has to pay investment management fees and fund distribution
1. in the Hands of an costs as a percentage of the value of his investments (as long as he
Investor holds the units), irrespective of the performance of the fund.

The portfolio of securities in which a fund invests is a decision taken

No Customized by the fund manager. Investors have no right to interfere in the decision
2.
Portfolios making process of a fund manager, which some investors find as a
constraint in achieving their financial objectives.

Difficulty in Many investors find it difficult to select one option from the plethora of
Selecting a funds/schemes/plans available. For this, they may have to take advice
3.
Suitable Fund from financial planners in order to invest in the right fund to achieve
Scheme their objectives.

TYPES OF MUTUAL FUND

I. By Structure: -
a) Open Ended Fund: - 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. The
key feature of open-end schemes is liquidity.

b) Close Ended Fund: - A closed-end fund has a stipulated maturity period which
generally ranging from 3 to 15 years. The fund is open for subscription only
during a specified period. 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 they are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the
Mutual Fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided to the
investor.
c) Interval Fund: - Interval funds combine the features of open-ended and close-
ended schemes. They are open for sale or redemption during pre-determined
intervals at NAV related prices.
 II. By Investment:-
a) Growth Fund: - The aim of growth funds is to provide capital appreciation
over the medium to long- term. Such schemes normally invest a majority of
their corpus in equities. It has been proven that returns from stocks, have
outperformed most other kind of investments held over the long term. Growth
schemes are ideal for investors having a long-term outlook seeking growth
over a period of time.

b) Income Fund: - The aim of income funds is to provide regular and steady
income to investors. Such schemes generally invest in fixed income securities
such as bonds, corporate debentures and Government securities (gilt). Income
Funds are ideal for capital stability and regular income.

c) Balanced Fund: - The aim of balanced funds is to provide both growth and
regular income. Such schemes periodically distribute a part of their earning
and invest both in equities and fixed income securities in the proportion
indicated in their offer documents. In a rising stock market, the NAV of these
schemes may not normally keep pace, or fall equally when the market falls.
These are ideal for investors looking for a combination of income and
moderate growth.

d) Money Market Fund: - The aim of money market funds is to provide easy
liquidity, preservation of capital and moderate income. These schemes
generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money. Returns
on these schemes may fluctuate depending upon the interest rates prevailing in
the market. These are ideal for Corporate and individual investors as a means
to park their surplus funds for short periods.

III. Other Schemes:-

a) Tax Saving Schemes: - These schemes offer tax rebates to the investors under
specific provisions of the Indian Income Tax laws as the Government offers tax
incentives for investment in specified avenues. Investments made in Equity Linked
Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of
the Income Tax Act, 1961. The Act also provides opportunities to investors to save
capital gains u/s 54EA and 54EB by investing in Mutual Funds
b) Special Schemes:-

 Index Schemes:- Index Funds attempt to replicate the performance of a

particular index such as the BSE Sensex or the NSE 50

 Industry Specific Schemes:-Industry Specific Schemes invest only in the

industries specified in the offer document. The investment of these funds is
limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc.

 Sectoral Schemes: - Sectoral Funds are those, which invest exclusively in a

specified industry or a group of industries or various segments such as 'A'
Group shares or initial public offerings.