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CONCEPT ?A Mutual Fund 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 incom


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Title: CONCEPT ?A Mutual Fund 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 incom

Mutual Fund
Rahul shami Amit chhari Gaurav sharma

CONCEPT?A Mutual Fund is a trust that pools
the savings of number of investors who share a
common financial goal.?The money collected is
then invested in capital market instruments such
as shares, debentures and other securities. ?
Mutual funds can thus be considered as financial
intermediaries who collect funds from the public
and invest on behalf of the investors. ?The
income earned through these investments are
shared by its unit holders in proportion to the
number of units owned by them. ?A mutual fund
is required to be registered with SEBI which
regulates securities market before it can collect
funds from the public. ?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.
Mutual Fund Operation Flow Chart
History of Mutual Funds in India and role of
SEBI in mutual funds industry
?In the year 1963 -Unit Trust of India was the
first mutual fund set up in India ? In early
1990 -Government allowed public sector banks and
institutions to set up mutual funds. ? In the
year 1992- Securities and exchange Board of India
(SEBI) Act was passed. The objectives of SEBI are
to protect the interest of investors in
securities and to promote the development of and
to regulate the securities market. ? SEBI
issues guidelines to the mutual funds from time
to time to protect the interests of investors ?
All mutual funds whether promoted by public
sector, private sector or by foreign entities are
governed by the same set of Regulations and all
are subject to monitoring and inspections by
Issuers of Mutual funds in India?Unit Trust of
India was the first mutual fund which began
operations in 1964. ? Public sector banks
SBI, Canara Bank, Bank of India,
Institutions ? IDBI, ICICI, GIC, LIC? Foreign
Institutions Alliance, Morgan Stanley,
Templeton, Principal, JM financial, Deutsche etc.
Private financial companies ? Kothari
Pioneer, DSP Merrill Lynch, JM financial,
Sundaram, Kotak Mahindra, Cholamandalam,
Reliance, Birla, Tata, ABN Amro, Sahara, Escorts,
ING Vysya, HSBC, Standard Chartered etc.
Set up of Mutual fund
A mutual fund is set up in the form of a trust,
which has sponsor, trustees, asset management
company (AMC) and custodian. ? The trust is
established by a sponsor or more than one sponsor
who is like promoter of a company. ? The
trustees of the mutual fund hold its property for
the benefit of the unit-holders. ? Asset
Management Company (AMC) approved by SEBI manages
the funds by making investments in various types
of securities. ? Custodian, who is registered
with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees
are vested with the general power of
superintendence and direction over AMC. They
monitor the performance and compliance of SEBI
Regulations by the mutual fund.
Organization of a Mutual Fund
? At least two thirds of the directors of
trustee company or board of trustees must be
independent i.e. they should not be associated
with the sponsors. ? 50 of the directors of
AMC must be independent. ? All mutual funds are
required to be registered with SEBI before they
launch any scheme.
Advantages of Mutual Funds
? Professional Management ? Diversification ?
Convenient Administration ? Return Potential ?
Low Costs ? Liquidity ? Transparency ?
Flexibility ? Choice of schemes ? Tax benefits
? Well regulated
Types of mutual fund
  • ? On the basis of Objective
  • Growth / Equity Oriented SchemeThe aim of
    growth funds/schemes is to provide capital
    appreciation over the medium to long- term. Such
    schemes normally invest a major part of their
    corpus in equities. Such funds have
    comparatively high risks.These schemes provide
    different options to the investors like dividend
    option, capital appreciation, etc. and the
    investors may choose an option depending on their
    preferences. Growth schemes are good for
    investors having a long-term outlook seeking
    appreciation over a period of time.
  • There are different types of equity funds such as
    Diversified funds, Sector specific funds and
    Index based funds.

Sector specific funds/schemeThese are the
funds/schemes which invest in the securities of
only those sectors or industries as specified in
the offer documents. e.g. Pharmaceuticals,
Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc. The returns in these
funds are dependent on the performance of the
respective sectors/industries.Generally these
funds give higher returns.They are more risky
compared to diversified funds.
Index Funds/Scheme Index Funds replicate the
portfolio of a particular index such as the BSE
Sensitive index, SP NSE 50 index (Nifty), etc
These schemes invest in the securities in the
same weightage comprising of an index.NAVs of
such schemes would rise or fall in accordance
with the rise or fall in the index, though not
exactly by the same percentage due to some
factors known as "tracking error" in technical
terms. Diversified funds/scheme These funds
invest in companies spread across sectors. These
funds are generally meant for risk-taking
investors who are not bullish about any
particular sector.
Income / Debt fundsThe aim of income
funds/schemes is to provide regular and steady
income to investors.Such schemes generally
invest in fixed income securities such as bonds,
corporate debentures, Government securities and
money market instruments. Such funds are less
risky compared to equity schemes. These funds
are not affected because of fluctuations in
equity markets. The NAVs of such funds are
affected because of change in interest rates, if
the interest rates fall, NAVs of such funds are
likely to increase in the short run and vice
Tax Saving funds/schemeThese schemes offer tax
rebates to the investors under specific
provisions of the Income Tax Act, 1961 as the
Government offers tax incentives for investment
in specified avenues. e.g. Equity Linked Savings
Schemes (ELSS). Pension schemes launched by the
mutual funds also offer tax benefits. These
schemes are growth oriented and invest
pre-dominantly in equities. Their growth
opportunities and risks associated are like any
equity-oriented scheme.
Gilt Fund/schemeThese funds invest in Central
and State Government securities. They give a
secured return and also ensure safety of the
principal amount. They are best suited for the
medium to long-term investors who are averse to
risk. NAVs of these schemes also fluctuate due
to change in interest rates and other economic
factors as is the case with income or debt
oriented schemes.Hedge Funds/schemeThese
funds adopt highly speculative trading
strategies. They hedge risks in order to increase
the value of the portfolio.
Balanced Fund/scheme The aim of balanced funds
is to provide both growth and regular income to
investors. Such schemes invest both in equities
and fixed income securities in the proportion
indicated in their offer documents. These are
appropriate for investors looking for moderate
growth.These funds are also affected because of
fluctuations in share prices in the stock markets
and NAVs of such funds are likely to be less
volatile compared to pure equity funds.
Money Market or Liquid Fund/schemeThese funds
are also income funds 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, certificates of deposit,
commercial paper and inter-bank call money,
government securities, etc. Returns on these
schemes fluctuate much less compared to other
funds. These funds are appropriate for
corporate and individual investors as a means to
park their surplus funds for short periods.
  • ? On the basis of FlexibilityOpen-ended Fund/
  • An open-ended fund or scheme is one that is
    available for subscription and repurchase on a
    continuous basis.
  • These schemes do not have a fixed maturity
  • Investors can conveniently buy and sell units at
    Net Asset Value (NAV) related prices which are
    declared on a daily basis.
  • The key feature of open-end schemes is liquidity.

Close-ended Fund/ SchemeA close-ended fund or
scheme has a stipulated maturity period e.g. 5-7
years. The fund is open for subscription only
during a specified period at the time of launch
of the scheme.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 the units
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
Interval funds/scheme These funds combine the
features of both openended and close-ended funds
wherein the fund is close-ended for the first
couple of years and open-ended thereafter. Some
funds allow fresh subscriptions and redemption at
fixed times every year (say every six months) in
order to reduce the administrative aspects of
daily entry or exit, yet providing reasonable
On the basis of geographic location Domestic
funds/schemeThese funds mobilize the savings of
nationals within the country.Offshore
Funds/schemeThese funds facilitate cross border
fund flow. They invest in securities of foreign
companies. They attract foreign capital for

Mutual Funds plansGrowth Plan and Dividend
PlanA growth plan is a plan under a scheme
wherein the returns from investments are
reinvested and very few income distributions, if
any, are made. The investor thus only realises
capital appreciation on the investment. This plan
appeals to investors in the high income bracket.
Under the dividend plan, income is distributed
from time to time. This plan is ideal to those
investors requiring regular income.Dividend
Reinvestment PlanDividend plans of schemes
carry an additional option for reinvestment of
income distribution. This is referred to as the
dividend reinvestment plan. Under this plan,
dividends declared by a fund are reinvested on
behalf of the investor, thus increasing the
number of units held by the investors.
Automatic Investment PlanUnder the Automatic
Investment Plan (AIP) also called Systematic
Investment Plan (SIP), the investor is given the
option for investing in a specified frequency of
months in a specified scheme of the Mutual Fund
for a constant sum of investment. AIP allows
the investors to plan their savings through a
structured regular monthly savings
program.Automatic Withdrawal Plan Under the
Automatic Withdrawal Plan (AWP) also called
Systematic Withdrawal Plan (SWP), a facility is
provided to the investor to withdraw a
pre-determined amount from his fund at a
pre-determined interval.
Factors that influence the performance of
Mutual Funds? Stock market? Equity funds?
Performance of company ? Sector funds? Interest
rate and Credit quality ? Bond funds
As interest rates rise, bond prices fall, and
vice versa. Bond funds with higher
credit ratings are less influenced by changes
in the economy. ? Economy
restrictions? Mutual fund will be allowed to
invest in transferable securities in the money
market or in the capital market including any
privately place debentures or security debt. ?
MF are not allow to give term loan for any
purpose ? No MF under all its schemes taken
together should invest more than 10 of its fund
in share or debentures or other securities of a
single company. ? No MF under all its schemes
taken together should invest more than 15 of its
fund in share and debentures of any specific
industry (cotton, textile, tea, tires etc.)
? No scheme should invest in or lend to another
scheme under the same AMC? MF must take and
give delivery of script when purchased and
sold.? Transfer of script from one scheme to
another in the same MF shall be allowed at the
prevailing market price for quoted instrument and
in case of unquoted instrument transfer should be
done with the approval of board of trustee.
Frequently Used Terms
Net Asset Value (NAV) of a scheme The
performance of a particular scheme of a mutual
fund is denoted by Net Asset Value (NAV). Net
Asset Value is the market value of the securities
held by the scheme. NAV per unit
Market value of securities of a scheme
total number of units of
the scheme on any particular date.
Market value of the funds
investments Receivables
Accrued Income - Liabilities - Accrued
Number of Outstanding units Market value of
securities changes every day, NAV of a scheme
also varies on day to day basis.
Sale PriceIs the price you pay when you invest
in a scheme. Also called Offer Price. It may
include a sales load.Repurchase PriceIs the
price at which a close-ended scheme repurchases
its units and it may include a back-end load.
This is also called Bid Price.Redemption
PriceIs the price at which open-ended schemes
repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are
NAV related.  
Sales Load or Front-end load Is a charge
(commission) collected by a scheme when it sells
the units(1 to 2 of current NAV). Schemes that
do not charge a load are called No Load
schemes.Repurchase or Back-end Load Is a
charge collected by a scheme when it buys back
the units from the unit holders units(0.5 to 2
of current NAV).Asset Management CompanyAn
Asset Management Company (AMC) is a highly
regulated organization that pools money from
investors and invests the same in a portfolio.
They charge a small management fee, which is
normally 1.5 per cent of the total funds managed.
SwitchSome Mutual Funds provide the investor
with an option to shift his investment from one
scheme to another within that fund. For this
option the fund may levy a switching fee.
Switching allows the Investor to alter the
allocation of their investment among the schemes
in order to meet their changed investment needs,
risk profiles or changing circumstances during
their lifetime.