MUTUAL FUNDS-

AN OVERVIEW

Facilitated by :-
Prashant Agarwal
 MUTUAL FUNDS
• Mutual funds are financial intermediaries which
collect funds from the public and invest them in a
diversified portfolio of securities, including equity,
bonds, debentures and other instruments issued by
business or government undertakings. Mutual funds
help small investors participate in the securities
market indirectly and, thus, contribute to its spread
while reducing risk.
 IMPORTANCE OF MUTUAL FUNDS
• Mutual funds all over the world have played a very
important role in pooling the small savings of
individuals and investing them in proper portfolios.
They have been successful extensively in UK and USA.
In UK, nearly 80% of investors look to mutual funds for
their investments.

• With a large choice, the Western investor does not

have to depend on the same stereotyped schemes. The
modern mutual fund industry has achieved a
prominent position as a major supplier of investment
services to the American public and a major source of
capital for the securities market.
 Classification of Mutual Funds
The mutual funds can be classified primarily into:

• Public Sector mutual funds

• Private Sector mutual funds
• Money market mutual funds
 PUBLIC SECTOR MUTUAL FUNDS

The Unit Trust of India was the first mutual fund to

be established in India in the public sector. It was
followed by the following seven institutions:

1. State Bank of India (SBI) Mutual Fund

2. Bank of India Mutual Fund
3. Indian Bank Mutual Fund
4. Canara Bank Mutual Fund (Canbank MF)
5. Punjab National Bank (PNB) Mutual Fund
6. LIC Mutual Fund
7. General Insurance Corporation (GIC) Mutual Fund.
 PRIVATE SECTOR MUTUAL FUNDS
• Till 1991, the big eight mutual funds had monopoly in this
field. The new economic policy of liberalization
encouraged entry of many mutual funds in the private
sector. The private sector mutual funds provided a
competitive edge and a wide scope of options to the
investors. Their emergence was the result of failure of the
public sector mutual funds to live up to the expectations of
the common investors. Therefore, the Securities and
Exchange Board of India permitted a number of players in
the private sector to sponsor mutual funds.

• An important feature of the private sector mutual funds

was their collaboration with foreign investment and fund
managers. For example, the Kithara is tied up with the
Pioneer of US and the Twentieth Century with the Kemper
Corporation of US.
 MONEY MARKET MUTUAL FUNDS

The Reserve Bank of India proposed to set up Money

Market Mutual Funds (MMMFs) in order to make
available the benefits of investing in money markets
to small investors. MMMFs invest primarily in
money instruments of very high quality and of very
short maturities. They can be set up only by
commercial banks and public financial institutions.
Mutual Fund Schemes
Mainly two types of Schemes:

1. Open-ended Schemes
2. Close-ended Schemes
1. Open-ended Schemes
These schemes are available for subscription
throughout the year excluding the period of book-
closing. They may or may not have a specified
redemption period. The sale and repurchase prices are
fixed by the mutual fund from time to time. It does not
have any fixed amount of share capital. The fund can
repurchase the mutual fund units when the holders
want to sell the shares. Usually open-ended mutual
fund shares have no secondary market and are not
traded on stock exchanges. The buying and selling
prices are calculated on the basis of the net asset value.
The minimum corpus is Rs. 50 crore. The Unit Scheme
1964, Cancigo and Cangilt are examples of this scheme.
2. Close-ended Schemes
Such schemes are open for subscription only during
a specified period. It has a fixed amount of capital. The
shares are issued only by public offering and are traded
on stock exchanges. The duration of the scheme varies
between five and seven years. Repurchase during the
intervening period may or may not be allowed. Some of
the schemes have provision for repurchase facility after
a certain period. Many of these schemes are listed on
the stock exchange. The minimum corpus is Rs. 20 crore.
Canstcok, Canshare, mastershare, Magnum, Can80CC
and Dhanshree etc. are examples of close-ended
schemes.
Classification of Mutual Fund Schemes
Mutual funds can be classified on the basis of investment
objective and geography. On the basis of investment
objective, the existing schemes can be divided into four
major categories.

1. Income Schemes: These schemes provide returns in

the form of dividends. The returns may be cumulative
over non-cumulative on a monthly, quarterly, half-yearly
or yearly basis. As the flow of returns is steady and
regular, the funds are mainly invested in fixed income
securities such as debentures, bonds and government
securities. Only a lower percentage is invested in shares.
2. Growth Schemes: These are usually close-ended.
The main aim of investing in such schemes is capital
appreciation. Therefore, a major portion of the corpus is
invested in equities and convertible debentures. Such
schemes are usually listed on stock exchanges and the
capital appreciation is reflected in their market
quotations.

3. Equity-linked Saving Schemes: These are tax-

planning schemes. They are close ended growth schemes.
Its important features are:
(a) Tax rebate of 20% (25% in case of artists, writers, actors, and such
others is allowed under the Section 88 of the Income Tax Act.
(b) Duration is generally ten years.
(c) Repurchase is allowed after a specified period, usually three years.
(d) They are listed on stock exchanges after three years.
(e) During this lock-in period of three years, the units cannot be traded,
pledged of transferred.
Classification of Mutual Fund Schemes

4. Miscellaneous Schemes: There are also some

other schemes designed to serve specific purposes such as
children’s education and hospitalization expenses for
senior citizens the Unit Linked Insurance Plan, the
Children’s Gift Grwoth Plan, the Fut.’s Senior Citizen’s
Unit Plan, the Children’s College and Career Fund and
the LIC Mutual Fund’s Dhanvidya are examples of such
schemes. These are generally open-ended.
 Usually, investments are made by Indian nationals
resident in India, those residing outside India and the
foreigners. On the basis of geographical location, the mutual
funds are classified into:
1. Domestic Mutual Funds: The funds are the saving
schemes opened for mobilising investment of the
nationals within the country. All the schemes of the
existing mutual funds are meant for this purpose.

2. Offshore Mutual Funds: The basic objective of this

scheme is to attract foreign capital for investment purpose
in the country. These schemes open up domestic capital
markets to international investors. Like domestic mutual
funds, the offshore mutual funds could also be classified
into close-ended or open-ended funds.
 Organisation of Mutual Funds
Mutual fund is a fund established in the form of a
trust by a sponsor to raise money through the sale of
units to the public. A mutual fund organisation consists
of:
 Sponsor
 Mutual Fund Trust
 Asset Management Company(AMC)
 Custodian
 Organisation of Mutual Funds
Sponsor : The sponsor of a mutual fund could be a
company registered under the Companies Act 1956. The
company can be either a public limited or a private
limited. One or more of these companies can join to
sponsor a mutual fund. The sponsors should satisfy
certain conditions such as track record, experience in the
relevant field of financial services (minimum period of 5
years), and financial soundness. In addition, the
sponsor(s) should be able to contribute not less than 40%
of the net worth of the worth of the asset management
company.
The sponsors play an important role in the
Establishment of mutual fund trust. They appoint the
fund managers or the asset management company. After
Obtaining permission from SEBI, the role of sponsor
diminishes as the dealings are taken over by the trust.
 Mutual Fund Trust : The Mutual Fund Trust is created
by the sponsors under the Indian Trust Act 1882. The
trust performs the following functions:

1. Planning and formulating the mutual fund schemes.

2. Obtaining SEBI’s approval for these schemes.
3. Marketing the schemes for public subscription.
4. Ensuring that the asset management company complies with
the guidelines, and report periodically to the unit-holders of
the mutual fund.
5. Making certain that the securities are safely kept in custody
with approval custodian.
6. Ensuring that the income on investment is properly
accounted.
[Link] an annual report to the unit-holders or members of
the fund.
8. Ensuring that the investments made by the asset management
 OMF
 Asset Management Company : The asset
management company is responsible for the investing of
the collected funds. It takes investment decisions and
makes investment either directly in the primary market
or through brokers in the secondary market. It is its duty
to maintain proper accounts and give necessary
information regarding investments and fund
management operations to the trustees.
 OMF

Custodian : The custodians takes the custody of

investments. It is their duty to check and verify the
securities. They deal with transfer of shares, settlement
etc. and act as transfer agents by attending to transfer ,
exchange, redemption, receipt of dividends, maintenance
of detailed records of transactions.
Working of the Mutual Fund
A mutual fund combines the capital of many investors and
invests collectively in a portfolio of investments. It is managed
by professionals. Its operations involve the following steps:

1. Collecting money from the investors under different

schemes.
2. Investing the money so collected in various instruments
such as stocks and bonds of different corporate and
government units.
3. Distribution of profits to the investors or members of the
mutual fund. According to the SEBI guidelines, the
mutual funds have to distribute 90% of their earnings.
Benefits of Mutual Fund Investments
The following benefits are derived from investment in mutual
funds:

1. Small investors can get diversification of their investments

as the fund invests the money collected from them in
various securities.
2. They arte managed by experts.
3. They provide liquidity as their units or shares traded in
the secondary market or repurchased by the funds
themselves.
4. All mutual fund schemes get tax relief under the Section
80L of the Income Tax Act.
5. Allotment is assured to the investors except under tax-
saving schemes for which there are limits.
 SEBI Guidelines for Mutual Funds
All mutual funds are regulated by the Securities and
Exchanges Board of India(SEBI). It issued detailed
guidelines for their setting up and operation on 20th
January, 1993. The following are the highlights of SEBI
regulations:
1. Mutual funds are to be established in the form of a trust
under the Indian Trusts Act, 1882 and operated by
separate asset management companies (AMC)
2. They have to set up a Board of Trustees and Trustee
Companies and constitute their Board of Directors.
3. The minimum net worth of AMC’s is stipulated at Rs. 5
crore(later increased to Rs. 10 crore).
4. The AMC’s and trustees are to be two separate legal
entities and an arm’s length relationship must be
maintained between the two.
 SEBI Guidelines for Mutual Funds

5. An AMC or its affiliate cannot act as a manager in any

other fund.
6. The AMC’s are required to furnish SEBI their respective
Memorandum and Articles of Association for approval.
7. Mutual funds dealing exclusively with money market
instruments(Such as CDs, CPs and bill discounting) are to
be regulated by the Reserve Bank of India.
8. All schemes floated by mutual funds are to be registered
with SEBI.