MUTUAL FUNDS

Investor Perspective
Basics of Investments:

Risk Aversion Risk Management

Bank Deposits, PPF,

NSC, Insurance, Mutual Funds
Kisan Vikas Patra etc.

Low Risk/Low Return Managed Risk/High Return

 Myths about Mutual Funds
1. Mutual Funds invest only in shares.
2. Mutual Funds are prone to very high
risks/actively traded.
3. Mutual Funds are very new in the financial
market.
4. Mutual Funds are not reliable and people rarely
invest in them.
5. The good thing about Mutual Funds is that you
don’t have to pay attention to them.
 Funds
1. Equity Instruments like shares form only a part of the
securities held by mutual funds. Mutual funds also
invest in debt securities which are relatively much
safer.
2. The biggest advantage of Mutual Funds is their ability to
diversify the risk.
3. Mutual Funds are their in India since 1964. Mutual
Funds market is very evolved in U.S.A and is there for
the last 60 years.
4. Mutual Funds are the best solution for people who want
to manage risks and get good returns.
5. The truth is as an investor you should always pay
attention to your mutual funds and continuously
monitor them. There are various funds to suit investor
needs, both as a long term investment vehicle or as a
very short- term cash management vehicle.
6. US-64 is very much a part of the market and is not
immune to its vagaries. The crisis has risen due to
mismanagement of the fund.
 Mutual Funds
A mutual fund is a common pool of money into which
investors place their contributions that are to be invested
in different types of securities in accordance with the
stated objective.
Invest in diversified securities so as to reduce
investment risk.
Portfolio is managed by mutual funds and returns are
distributed to the mutual fund investors as dividends.
Mutual funds address two issues:
1. Investor may not be able to choose the securities
for portfolio.
2. Due to limited funds, investor may not derive
benefits of diversification.
Mutual Fund shareholder or a unit holder is a part
owner of the fund’s asset.
 Mutual Funds
Operations Flow Chart

(Reference: amfiindia.com)
  Mutual fund is a collective investment
vehicle
 Mutual fund is an institutional investor
FEATURE  Mutual funds are trusts
S OF  Regulated by SEBI
MUTUAL  Mutual fund are subject to market risk
FUNDS  Investment decisions are taken by
AMCs
 Returns from mutual funds are not
guaranteed.

Mutual funds/ Mba(FM)/ DIAS 7

 History of Mutual Funds
First Phase: In 1978, UTI was de-linked from the RBI and IDBI took
over the regulatory and administrative control of UTI.US-64 was
the first scheme launched by UTI which was the best scheme of
UTI for a long period of time.
Second Phase: SBI Mutual Fund was the first non-UTI mutual
fund set up in June 1987, followed by Can bank Mutual Fund (Dec.
1987), PNB Mutual Fund (Aug. 1989), Indian Bank (Nov. 1989),
Bank of India (Jun. 1990) and Bank of Baroda Mutual Fund (Oct.
1992).
Third Phase: The Former Kothari Pioneer (now merged with
Franklin Templeton MF) was the first private sector MF registered
in July 1993. A new era started in the Indian MF industry in 1993
when private sector mutual funds entered the fray, providing
Indian investors a diverse choice of MF products.
Fourth Phase: In February 2003, the UTI Act, 1963 was repealed
and UTI was bifurcated into two separate entities e.g. the
Specified Undertaking of the Unit Trust of India (SUUTI) and UTI
Mutual Fund which functions under the SEBI MF Regulations,
1996.
Fifth Phase since 2012: Taking note of the lack of penetration of
Mutual Funds, especially in tier II and tier III cities, and keeping in
view of the interest of various stakeholders, SEBI initiated several
positive measures in September 2012 to revive the sluggish
Indian Mutual Fund industry and to increase MFs’ penetration in
the remote corners of the country.
Constituents
of Mutual
Fund

Mutual funds/ Mba(FM)/ DIAS 9

Fund Structure
Fund Sponsor

Trustees

Asset Management
Company

Depository Agent

Custodian
 Fund Sponsor
The Fund Sponsor
• Any person or corporate body that establishes the
Fund and registers it with SEBI.
• Form a Trust and appoint a Board of Trustees.
• Appoints Custodian and Asset Management
Company either directly or through Trust, in
accordance with SEBI regulations.
SEBI regulations also define that a sponsor must
contribute at least 40% to the net worth of the
asset management company.
 Trustees
Trustees
• Created through a document called the Trust Deed that is executed
by the Fund Sponsor and registered with SEBI.
• The Trust-the mutual fund may be managed by a Board of
Trustees- a body of individuals or a Trust Company- a corporate
body.
• Protector of unit holders interests.
• 2/3 of the trustees shall be independent persons and shall not
be associated with the sponsors.
Rights of Trustees:
1.Approve each of the schemes floated by the AMC.
2.The right to request any necessary information from the AMC.
3.May take corrective action if they believe that the conduct of the
fund's business is not in accordance with SEBI Regulations.
4.Have the right to dismiss the AMC,
5.Ensure that, any shortfall in net worth of the AMC is made up.
 Trustees
Obligations of the Trustees:
• Enter into an investment management agreement
with the AMC.
• Ensure that the fund's transactions are in
accordance with the Trust Deed.
• Furnish to SEBI on a half-yearly basis, a report
on the fund's activities
• Ensure that no change in the fundamental attributes
of any scheme or the trust or any other change
which would affect the interest of unit holders is
happens without informing the unit holders.
• Review the investor complaints received and the
redressal of the same by the AMC.
 Asset Management Company

• Acts as an invest manager of the Trust under the

Board Supervision and direction of the Trustees.
• Has to be approved and registered with SEBI.
• Will float and manage the different investment
schemes in the name of Trust and in accordance
with SEBI regulations.
• Acts in interest of the unit-holders and reports to the
trustees.
• At least 50% of directors on the board are
independent of the sponsor or the trustees.
 Company
Obligation of Asset Management Company:

 Float investment schemes only after receiving prior

approval from the Trustees and SEBI.
 Send quarterly reports to Trustees.
 Make the required disclosures to the investors in
areas such as calculation of NAV and repurchase
price.
 Must maintain a net worth of at least Rs. 10 crores at
all times.
 Will not purchase or sell securities through any
broker, which is average of 5% or more of the
aggregate purchases and sale of securities made by
the mutual fund in all its schemes.
 AMC cannot act as a trustee of any other mutual
fund.
 Do not undertake any other activity conflicting with
managing the fund.
 Funds
Custodian
• Has the responsibility of physical handling and safe
keeping of the securities.
• Should be independent of the sponsors and registered
with SEBI.

Depositories
• Indian capital markets are moving away from physical
certificates for securities to ‘dematerialized’ form with a
Depository.
• Will hold the dematerialized security holdings of the
Mutual Fund.
 Load Vs. No-load Funds
Marketing a new mutual fund scheme involves initial expenses.
These expenses are charged to the investors through loads
and are recovered from the investors in different ways:
• Front-end or entry load is charged to the investor at the time
of his entry into the scheme.
• Back-end or exit load is charged to the investor at the time
of his exit from the scheme.
• Deferred load is charged to the investor over a period of time.
• Contingent deferred sales charge: Different amount of
loads are charged to the investor depending upon the time
period the investor has stayed with the fund. The longer he
stays with the fund, lesser the amount of exit fund he is
charged.
Very often, AMC’s do not charge any initial expenses to the
investor in the IPO. These are hence are no-load funds. In no-
load funds, the investors get units for the complete amount
invested.
Broad Types of Mutual Funds

Mutual funds/ Mba(FM)/ DIAS 18

Mutual funds/ Mba(FM)/ DIAS 19
 Open-end Vs. Closed-end Funds
(1)Open-ended schemes: In case of open-ended schemes,
investors can sell and buy its units at net asset value (NAV) or NAV
based prices at any point of time. Investors can enter and exit the
scheme any time during the life of the open-ended fund. The key
nature of open-ended funds is liquidity. Since there is no lock in
period these funds increase liquidity of the investors as the units
can be bought and sold anytime.
(2) Close-ended schemes: Close-ended schemes have a fixed
corpus and a defined maturity period ranging between 2 to 10
years. Investors can invest in the scheme when it is opened for
subscription for few days as new fund offer (NFO). The scheme
remains open for a limited time period not exceeding 45 days. The
fund has no interaction with investors till redemption except for
paying dividend or bonus. There is a restriction on buying period in
these schemes in form of buying lock in. These schemes are listed
on stock market for trading.
(3) Interval Schemes: Interval schemes provide the features of both
open-ended and close-ended schemes. They are open for sale or
redemption during predetermined intervals at NAV related prices.
They are also called partial open ended schemes.
  (1) Growth Funds (Equity oriented funds): The main objective of growth
funds is capital appreciation over the medium-to-long- term. They invest
most of the corpus in equity shares with significant growth potential and
they offer higher return to investors in the long-term at average risk. The
risks associated with equity investments and no surety or assurance of
returns are the features of these equity schemes. Growth funds can be
further categorised into various schemes like large cap fund, mid cap
fund and small cap fund, multi/diversified equity fund, equity linked saving
scheme (ELSS), sectoral funds and index funds.
 (2) Income Funds (Debt oriented funds): The purpose of income funds is
BY to provide safety of investments along with regular income to investors.
These schemes invest largely in income-bearing instruments like bonds,
INVESTMENT debentures, government securities, and commercial papers. The returns
as well as the risks both are lower in income funds as compared to
OBJECTIVE growth funds. Debt funds, liquid funds, Monthly income plans, fixed
maturity plans and floating rate funds are different types of income fund
schemes under the banner of income funds. These funds are also called
fixed income or money funds. These funds too have some risk in case the
corporate bond defaults.
 (3) Balanced funds: The aim of balanced scheme is to provide both
capital appreciation and regular income. They divide their investment
between equity shares and fixed interest Debt instruments in such a ratio
that the portfolios are balanced. These funds usually comprise of
companies with good profit and dividend track records. The risk as well
as rate of return is moderate.

Mutual funds/ Mba(FM)/ DIAS 21

(4) Money Market Funds/Cash Funds
• Invest in securities of short term nature I.e. less than one year
maturity.
• Invest in Treasury bills issued by government, Certificates of
deposit issued by banks, Commercial Paper issued companies and
inter-bank call money.
• Aim to provide easy liquidity, preservation of capital and moderate
income.
Gilt Funds
• Invest in Gilts which are government securities with medium to
long term maturities, typically over one year.
• Gilt funds invest in government paper called dated securities.
• Virtually zero risk of default as it is backed by the Government.
• It is most sensitive to market interest rates. The price falls when
the interest rates goes up and vice-versa.
  (1) Domestic funds: Funds which mobilise
funds from particular geographical locality
like a country or a region are called domestic
funds. The market is limited and restricted to
the boundaries of a country in which the fund
Geographica operates. They can invest only in the
l instruments which are issued and traded in
the domestic financial markets. Indian Mutual
Classificatio fund investing in Indian securities is a
n domestic fund.
 (2) Offshore funds: Offshore funds are funds
which facilitate cross-border investment.
Such mutual funds can invest in instruments
of foreign companies and therefore provide
investors the benefit of international
diversification.

Mutual funds/ Mba(FM)/ DIAS 23

  Debt Funds/Income Funds
• .A bond fund would buy debt instruments such
as debenture bonds, or government
securities/money market securities.
• Target low risk and stable income for the investor.
BY  A balanced fund will have a mix of equity assets
NATURE and debt instruments. It allows investors to
OF derive the benefit of growth from equity and
stability of return from debt portion.
PORTFOLI • Objective is to gain income, moderate capital
O appreciation and preservation of capital.
• Ideal for investors with a conservative and long-
term orientation.

Mutual funds/ Mba(FM)/ DIAS 24

  An equity fund would buy equity assets – ordinary
shares, preference shares, warrants etc.
• Invest a major portion of their corpus in equity
shares issued by companies, acquired directly in
initial public offering or through secondary market
and keep a part in cash to take care of
redemptions.

Mutual • Risk is higher than debt funds but offer very high
growth potential for the capital.
Funds • Equity funds can be further categorized based on
their investment strategy.
• Equity funds must have a long-term objective.

Mutual funds/ Mba(FM)/ DIAS 25

 (1) Sectoral Funds: These funds invest in particular core
sectors like energy, telecommunications, IT, Banking,
construction, transportation, Steel, FMCG and financial
services etc.
 (2) Tax Saving schemes: Tax-saving schemes provide
special tax benefits to investors. Mutual funds have
launched variety of tax saving schemes. These are close-
ended funds and investments have lock-in period of at
least 3 years. These schemes have various choices like
dividend, growth or capital appreciation.
 (3) ELSS: In order to boost investors to invest in equity
market, the government has allowed tax benefits through
special funds. Investment in these funds ensures the
investor to claim an income tax deduction under section
80C, but these funds carry a 3 year lock-in period.
 (4) Gilt funds: Mutual funds which deal only in gilts or
government securities are called gilt funds. With a view to
create a larger investor base for government securities,
the RBI encourages setting up of gilt schemes.

Mutual funds/ Mba(FM)/ DIAS 26

 (5) Index funds: An index fund is a mutual fund which
invests in portfolio exactly following same ratio of
securities in the index on which it is based e.g. S&P BSE
Sensex or Nifty. It invests only in those shares which are
part of the market index and in exactly the same ratio as
the weightage in the index so that the value of such
index schemes varies exactly with the market index. An
index fund adopts a passive investment strategy as fund
manager need not analyse stocks for investment or
redemption in these schemes.
 (6) Exchange traded funds (ETF): Exchange Traded
Funds (ETFs) are a hybrid of open-ended mutual funds
and stocks traded on stock exchanges. These funds can
be purchased and sold like shares on stock exchanges
at their changing current NAV on exchange. They are
open-ended Mutual funds listed on stock exchanges.
 (7) Fund-of-funds: Invest primarily in other schemes of
the same mutual fund or other mutual funds. FoF holds
units of different mutual fund schemes. They have the
advantage of greater diversification and ease of
selection.

Mutual funds/ Mba(FM)/ DIAS 27

 Advantages of Mutual
Funds
• Portfolio diversification: It enables him to hold a diversified
investment portfolio even with a small amount of investment
like Rs. 2000/-.
• Professional management: The investment management
skills, along with the needed research into available
investment options, ensure a much better return as compared
to what an investor can manage on his own.
• Reduction/Diversification of Risks: The potential losses
are also shared with other investors.
• Reduction of transaction costs: The investor has the
benefit of economies of scale; the funds pay lesser costs
because of larger volumes and it is passed on to the
investors.
• Wide Choice to suit risk-return profile: Investors can
chose the fund based on their risk tolerance and expected
returns.
 Advantages of Mutual
Funds
• Liquidity: Investors may be unable to sell shares
directly, easily and quickly. When they invest in mutual
funds, they can cash their investment any time by
selling the units to the fund if it is open-ended and get
the intrinsic value. Investors can sell the units in the
market if it is closed-ended fund.
• Convenience and Flexibility: Investors can easily
transfer their holdings from one scheme to other, get
updated market information and so on. Funds also offer
additional benefits like regular investment and regular
withdrawal options.
•Transparency: Fund gives regular information to its
investors on the value of the investments in addition to
disclosure of portfolio held by their scheme, the
proportion invested in each class of assets and the fund
manager's investment strategy and outlook
 Disadvantages of Mutual
Funds
• No control over costs: The investor pays
investment management fees as long as he remains
with the fund, even while the value of his investments
are declining. He also pays for funds distribution
charges which he would not incur in direct
investments.
• No tailor-made portfolios: The very high net-worth
individuals or large corporate investors may find this to
be a constraint as they will not be able to build their
own portfolio of shares, bonds and other securities
• Managing a portfolio of funds: Availability of a large
number of funds can actually mean too much choice
for the investor. So, he may again need advice on how
to select a fund to achieve his objectives.
• Delay in redemption: It takes 3-6 days for
redemption of the units and the money to flow back
into the investor’s account.
Net Asset
value

Mutual funds/ Mba(FM)/ DIAS 31

 Annual report is send to the unit holders at the
end of year.
 Research agencies publish reports on the
performance of mutual funds including ranking
of schemes.
 Investors can compare the performance of MF
with other MFs against benchmark to make buy
or sell decisions.

Mutual funds/ Mba(FM)/ DIAS 32

  Sharp increase in AUM
 Dominance of debt funds
Reasons for  Increased level of
development
of mutual disclosure
fund industry  Strong regulatory
framework
 Innovative products

Mutual funds/ Mba(FM)/ DIAS 33

 Options Available to the
Investor

Mutual funds/ Mba(FM)/ DIAS 34

Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
Bank Low High High No High
Deposit
Equity High Low High or No Moderate
Instrument Low
s
Debenture Moderate Moderate Low No Low
s
Fixed Moderate Low Low No Moderate
Deposits
by
Companie
s
Bonds Moderate Moderate Moderate Yes Moderate

Mutual funds/ Mba(FM)/ DIAS 35

 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
RBI Relief Moderate High Low Yes Moderate
Bonds
PPF Moderate High Low Yes Moderate
National Moderate High Low Yes Moderate
Saving
Certificate

National Moderate High Low Yes Moderate

Saving
Scheme

Monthly Moderate High Low Yes Moderate

Income
Scheme
Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
Life Moderate High Low Yes Moderate
Insurance
Mutual Moderate Moderate High No High
Funds
(Open-end)
Mutual Moderate Moderate High Yes High
Funds
(Closed-
end)

Mutual funds/ Mba(FM)/ DIAS 37

Thank You!

Mutual funds/ Mba(FM)/ DIAS 38