Mutual Fund
Presented By:
Ramit Bansal(55)
What is a Mutual Fund?
• Mutual fund is a mechanism for pooling the resources by
issuing units to the investors and investing funds in securities
in accordance with objectives as disclosed in offer document.
• Investments in securities are spread across a wide cross-
section of industries and sectors and thus the risk is reduced.
Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the
same time
• A mutual fund is required to be registered with Securities and
Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
History of Mutual Funds in India
• The mutual fund industry in India started in
1963 with the formation of Unit Trust of India,
at the initiative of the Government of India
and The Reserve Bank of India.
• The history of mutual funds in India can be
broadly divided into four distinct phases.
First Phase – 1964-87
• Unit Trust of India (UTI) was established on 1963 by an Act
of Parliament. It was set up by the Reserve Bank of India
and functioned under the Regulatory and administrative
control of the Reserve Bank of India.
• In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory
and administrative control in place of RBI.
• The first scheme launched by UTI was Unit Scheme 1964.
At the end of 1988 UTI had Rs.6,700 crores of assets under
management.
Second Phase – 1987-1993 (Entry of Public
Sector Funds)
• 1987 marked the entry of non- UTI, public sector mutual funds
set up by public sector banks and Life Insurance Corporation of
India (LIC) and General Insurance Corporation of India (GIC).
• SBI Mutual Fund was the first non- UTI Mutual Fund established
in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund
(Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund
(Oct 92).
• LIC established its mutual fund in June 1989 while GIC had set up
its mutual fund in December [Link] the end of 1993, the mutual
fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private
Sector Funds)
• With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice of
fund families.
• 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 1993.
• The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.
• As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets
under management was way ahead of other mutual funds.
Fourth Phase – since February 2003
• In February 2003, following the repeal of the Unit Trust of
India Act 1963 UTI was bifurcated into two separate entities.
– One is the Specified Undertaking of the Unit Trust of India with
assets under management representing broadly, the assets of US
64 scheme, assured return and certain other schemes. The
Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India
and does not come under the purview of the Mutual Fund
Regulations.
– The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations.
How is a mutual fund set up?
• 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.
Different types of mutual fund schemes
• On the basis of
– Maturity
– Investment Objective
– Tax Saving
Schemes Based on Maturity
• Schemes according to Maturity Period:
– A mutual fund scheme can be classified into open-ended
scheme or close-ended scheme depending on its maturity
period.
• Open-ended Fund/ Scheme
– 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 period. 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.
Contd..
• Close-ended Fund/ Scheme
– A 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 prices.
– SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor i.e. either repurchase facility or through listing
on stock exchanges. These mutual funds schemes disclose NAV
generally on weekly basis.
Schemes according to Investment Objective
• Growth / Equity Oriented Scheme
– The aim of growth funds 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. Growth schemes are good for investors having a long-
term outlook seeking appreciation over a period of time.
• Income / Debt Oriented Scheme
– 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, Government
securities and money market instruments. Such funds are less
risky compared to equity schemes.
Contd…
• Balanced Fund
– The aim of balanced funds is to provide both growth and regular income as 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
• Money Market or Liquid Fund
– These 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.
• Gilt Fund
– These funds invest exclusively in government securities.
• Index Funds
– Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,
S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same
weightage comprising of an index.
Tax Saving Schemes
• These 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.
How to invest in a scheme of a mutual
fund ?
• Mutual funds normally come out with an advertisement in
newspapers publishing the date of launch of the new schemes.
• Investors can also contact the agents and distributors of mutual
funds who are spread all over the country for necessary
information and application forms.
• Forms can be deposited with mutual funds through the agents and
distributors who provide such services. Now a days, the post
offices and banks also distribute the units of mutual funds..
• Investors should not be carried away by commission/gifts given by
agents/distributors for investing in a particular scheme. On the
other hand they must consider the track record of the mutual fund
and should take objective decisions.
What should an investor look into an offer
document?
• An abridged offer document, which contains very useful
information, is required to be given to the prospective investor
by the mutual fund.
• An investor, before investing in a scheme, should carefully read
the offer document.
• Due care must be given to portions relating to main features of
the scheme, risk factors, initial issue expenses and recurring
expenses to be charged to the scheme, entry or exit loads,
sponsor’s track record, educational qualification and work
experience of key personnel including fund managers,
performance of other schemes launched by the mutual fund in
the past, pending litigations and penalties imposed, etc.
Thank You
