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Off shore funds bring funds to the capital market.
Mutual funds_Financial Services
Faculty of Management Studies and Research
Aligarh Muslim University, Aligarh
• Introduction & Concept of Mutual funds
Working of Mutual funds
History & Phases of Mutual funds
Structure & Composition of Mutual funds
Working & Regulations for Mutual Funds
• Types of Mutual Funds
• Recent Innovations In Mutual Funds
• Mutual Fund Players In India
• Top Mutual Fund Schemes & Fund Managers
What is a Mutual Fund ?
It is a trust that pools the savings of a number of investors
who share a common financial goal.
Professional fund managers then invest these funds in a
way that helps investors achieve their goal.
How Mutual Fund works?
OBJECTIVES OF MUTUAL FUNDS
Adjusting the denomination of securities to suit the requirement of
Small investors can obtain better diversification through mutual funds
than by directly purchasing securities.
Benefit of trained, experienced & specialized management
Low cost due to economies of scale:
Able to exploit economies of scale in investing
Advantages of Mutual Funds
• Professional expertise
• Low cost of asset management
• Ease of process
• Well regulated
• Convenient Administration
• Return Potential
• Choice of schemes
• Tax benefits
Disadvantages of Mutual Funds
Costs: The investor pays fees as long as he remains with the fund.
No tailor-made portfolios: High net-worth individuals may find this to be a
constraint as they will not be able to build their own portfolio of shares.
Managing a portfolio of funds: large number of funds can provide too
much choice for the investor. He may need advice on how to select a fund.
Delay in redemption: It takes 3-6 days for redemption of the units and the
money to flow back into the investor’s account.
Lower-than-market performance: Consistently beating the market is
difficult. Many mutual funds just keep even with overall stock market index
History of mutual fund
The Boston Personal Property Trust, formed in 1893 was the first close
ended mutual fund in U.S.
The creation of Alexander fund in Philadelphia in 1907 was an important
step in the evolution toward what we know as the modern mutual fund
History of MF’s can be discussed in two parts :
1) Emergence through public players
2) Emergence through private players
Phases Of Mutual Fund Emergence
History of mutual funds in India can be divided into 5 important phases:
Phase I . 1963-1987
UTI sole market player, created by an Act of parliament in 1963.
US 64 even today the single largest mutual fund scheme.
UTI created a number of products e.g. monthly income plans,
Equity oriented schemes and offshore funds during this period .
UTI managed assets of Rs.6700 cr. at the end of this phase.
Phases of mutual fund emergence
Phase II. 1987-1993 (Entry of Public Sector Funds)
Public sector banks and financial institutions entered the mutual funds
SBI mutual fund was the first non-UTI MF to be set up in 1987.
Significant shift from deposits to MF.
Most funds were growth oriented ,closed-ended funds.
AUM of UTI grew to Rs.38,247cr. and public sector funds Rs.8750cr.
Phases of mutual fund emergence
Phase III 1993-1996. (Entry of Private Sector Funds)
In 1993,the mutual funds industry was open to private sector players
both Indian and foreign.
SEBI’s first set of regulations were formulated.
Regulation revised in 1996.
Significant innovation in servicing, product design and information
Phases of mutual fund emergence
Phase IV 1996-1999 (Entry of Private Sector Funds)
Implementation of new SEBI regulation.
Rapid asset growth .
Bank mutual funds were recast according to the SEBI recommended
UTI came under voluntary SEBI supervision.
Phases of mutual fund emergence
Phase V 1999-2003
Marked by very rapid growth in MF industry.
Increase in market share of private players.
AUM crossed Rs.100,000cr.
Bond funds and liquid funds registered the highest growth(nearly 60%
UTI share dropped to nearly 50%.
Constitution of MF in India
• The constitution are designed to safeguard investors, check speculative
activities of mutual funds & ensuring financial discipline through
transparency & fair play.
• SEBI ( Mutual Fund ) regulation require a four tier system to organize
Mutual Fund. i.e.
- Asset Management Company
• One who thinks of starting a mutual fund. The Sponsor approaches the
Securities & Exchange Board of India (SEBI), which is the market regulator
and also the regulator for mutual funds.
• SEBI checks a persons integrity ,experience in the financial sector, his net
• Sponsor is to contribute 40 per cent of the net worth of AMC.
• Mutual fund is created by sponsor as a trust under Indian Trust act 1982.
• Sponsor appoints a trustee.
• A trustee is a person who holds the property of Mutual Fund in trust for the
benefit of unit holders.
• A company is appointed as trustee to manage the mutual fund with
approval of SEBI.
• To ensure fair dealing at least 75 per cent of trustees are to be independent
of the sponsors.
• The trustee role is not to manage money. Their job is only to see , whether
the money is being managed as per stated objectives.
• It is duty of trustee is to provide information to unit holders as well as to
SEBI about mutual fund schemes.
Asset Management Company (AMC)
• The sponsor or trustees appoint an AMC, also known as ‘Investment Manager’,
to manage the affair of mutual fund.
• The AMC has to be approved by SEBI. The AMC functions under the
supervision of it’s Board of Directors, and also under the direction of the
Trustees and SEBI.
• It is the AMC, which in the name of the Trust, floats new schemes and manage
these schemes by buying and selling securities.
• Whenever the fund intends to launch a new scheme, the AMC has to submit a
Draft Offer Document to SEBI. This draft, after getting SEBI approval becomes
the offer document (OD) of the scheme.
• A custodian’s role is safe keeping of securities and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by the companies
in which the fund has invested.
• The Custodian is appointed by the Board of Trustees.
• SEBI requires that each mutual fund shall have a custodian who is not in any
way associated with AMC.
Working Mechanism Of AMC
• Fund Manager:
To decide when , where & how much & at what rate securities are to be
bought & sold.
• Committees in mutual fund:
In bank sponsored funds , committees are created to handle investments:
Investment committee- broad committee deciding about primary
Market Operations Committee- having the assignment of
divestments & interaction with secondary market .
• Research & Planning cell
Created by AMC for the requirement of sensitive & technical information
The research can be with respect to securities as well as prospective
To execute the sale/purchase transactions in capital or money market , a
separate section may be created under the charge of a person called
dealer having deep understanding of stock market operations
Functions of Asset Management Company
Receiving & processing the application form of investors
Issuing unit certificates
Sending refund orders
Recording all transfer of units
Repurchasing the units
redemption of units
Issuing dividend or income warrants
May hire the service of registrars & transfer agents if quantum of
work is huge & need specialized services
Computing net asset value per unit of the scheme
Maintaining its books & records
Maintaining compliance with the scheme investment limitations and
Lead mangers are appointed to coordinate the activities of ad agency,
printers , collection centers & marketing of their services. They get fees
on the basis of funds mobilized. They are normally engaged by AMCs for
extensive campaign of the scheme to attract the investors
During the planning & execution of scheme , a lot of legal exercise is
undertaken for which a group of advocates & solicitors may be appointed
as legal advisors.
• Governed by SEBI (Mutual Fund) Regulation 1996
– All MFs registered with it, constituted as trusts ( under Indian Trusts
• Bank operated MFs supervised by RBI too
• AMC registered as Companies registered under Companies Act, 1956
• SEBI- Very detailed guidelines for disclosures in offer document, offer
period, investment guidelines etc.
– NAV to be declared everyday for open-ended, every week for closed
– Disclose on website, AMFI, newspapers
– Half-yearly results, annual reports
– Select Benchmark depending on scheme and compare
Operations of Mutual Funds : Regulatory
Registration of mutual fund with SEBI
Constitution & management of mutual funds & operation of trust
Constitution & management of AMC & custodian
Schemes of mutual funds
Investment objectives & valuation policies
Real state mutual fund schemes
VII. General obligations
VIII. Inspection& audit
Procedure for action in case of default
Registration of mutual funds
• To carry on business , mutual funds must be registered with SEBI . The
application for registration , with a non- refundable fees of Rs. 25,000
should be made in the prescribed form
Eligibility criteria for registration of sponsors
• Should have a sound track record, reputation of fairness & integrity in all
his business transactions
• Should contribute at least 40% of net worth of AMC
• Should not have been guilty of any fraud or economic offence
• Appointment of trustees or trustee company
• Appointment of AMC set up under the provisions of Cos act
• Appointment of custodian
• Should meet the criteria specified in SEBI intermediaries regulations ,
Terms & conditions of registration
Trustee/ sponsor/ AMC / custodian would have to comply with SEBI
MF would immediately inform SEBI about any change in info having
material impact on registration of SEBI
Registration fee of 25 lacs
application fee of 1 lac
Annual fee based on net assets
SEBI may not permit a MF who has not paid the annual fee to launch
Constitution and Management of an Asset
Management Company (AMC) and custodian
The sponsors of MF or trustees would appoint the AMC with the prior
approval of SEBI. Its appointment can be terminated by majority of
trustees or by 75% unit holders of the scheme. Any change in its
appointment would also require prior approval of SEBI as well as
the unit holders.
Eligibility criteria for AMC
An existing AMC should have a sound track record / general
reputation & fairness in transactions and should be a fit and proper
The directors of AMC should have adequate professional experience
in finance & financial service related fields
Key personnel of the AMC have not been found guilty of moral
turpitude or been convicted of any economic offence or violation of
securities law or worked for any AMC during the period when its
registration has been suspended
The AMC has net worth capital of not less than Rs. 10 crore
Appointment of Custodian
The MF should appoint a custodian to carry out the custodial services for
the scheme & send intimation of the same to SEBI within 15 days of
the appointment .
In case of gold ETF the asset may be kept in the custody of the bank
registered as custodian with the SEBI
In case of real estate MF scheme the title deed of the assets held by it
may be kept in the custody of SEBI registered custodian
Net Asset value (NAV)
(NAV) represents a fund's per share market value. This is the price at which
investors buy ("bid price") fund shares from a fund company and sell them
("redemption price") to a fund company.
It is derived by dividing the total value of all the cash and securities in a
fund's portfolio, less any liabilities, by the number of shares outstanding.
An NAV computation is undertaken once at the end of each trading day
based on the closing market prices of the portfolio's securities.
The valuation shall be documented and the supporting data in respect of
each security so valued shall be preserved at least for a period of five years
after the expiry of the scheme.
TYPES OF MUTUAL FUNDS
Types of Mutual Fund Schemes
• By Structure
Open-Ended – anytime enter/exit
Close-Ended Schemes – listed on exchange, redemption after period of scheme
• By Investment Objective
Equity (Growth) – only in Stocks – Long Term (3 years or more)
Debt (Income) – only in Fixed Income Securities (3-10 months)
Liquid/Money Market (including gilt) – Short-term Money Market (Govt.)
Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)
• Other Schemes
Tax Saving Schemes
Open-ended Mutual funds
• These are the schemes which offers units for sale without specifying any
duration for redemption.
• Sells and repurchase the units of mutual fund on a continuous basis at a
price called Net Assets Value.
• Essential feature of open ended schemes is the liquidity.
• Example- The Unit Scheme-1964.
Close-ended Mutual funds
• These are the schemes in which period of redemption is specified.
• Limited number of units are sold to investors during a specified period only.
• Market price is determined by the market forces of demand and supply.
• Liquidity to the investor is provided by the market.
• These are the schemes which offer capital appreciation as well as dividend
• Objective is to seek capital appreciation by making investment in securities.
• Good and suitable for those investors who invest for long term perspective.
• Example- UTI Growth and Value Fund.
• Also known as Dividend schemes
• Promise a guaranteed return in the form of dividends to the investors.
• Portfolio of these schemes consist of fixed income investments i.e.
Bonds, Debentures etc.
• Ideal for those investors who seek intermediate cash flow.
• Balanced Schemes aim to provide both growth and income by
periodically distributing a part of the income and capital gains they
• These schemes invest in both shares and fixed income securities.
Money Market Mutual Fund
• The fund collected by these mutual funds are invested in money market
instruments such as commercial papers, commercial bill, t bills etc.
• Open ended funds.
• These funds are very liquid and risk free.
• Provide better return than short term bank deposits.
Tax saving schemes
• Design to avail tax exemption and concession (under section 88 of
Income tax act) to the investors.
• Also known as Equity-linked saving schemes.
• Example- HDFC tax plan, PNB-ELSS etc.
• These are the schemes which are open for subscription by the
investors of the country of origin only.
• Most of the mutual funds launched in India are domestic funds.
• These are the funds which are to be subscribed abroad.
Example- Ind bank off-shore mutual fund, common wealth equity
Unit-Linked Plan (ULIP)
Unit-linked plan offers the interesting option of combining protection
as well as tax advantages with the attractive prospects of investing
It works on a minimum premium basis and not on a sum assured one.
Investor decide the amount contributed at regular intervals.
ULIP offers cover till needs are fulfilled, beyond that it becomes an
Fixed Maturity Plans (FMPs)
The primary objective of a FMP is to generate income while protecting
the capital by investing in a portfolio of debt and money market
The tenure can be of different maturities, ranging from one month to
FMPs can be compared to Fixed Deposits of a bank. While a Fixed
Deposit offers a 'guaranteed' return, returns in FMPs are only
The fund house fixes a 'target amount' for a scheme.
Monthly Income Plans (MIPs)
MIPs, as they are more popularly known, are a category of mutual
funds that invest mainly in debt instruments.
MIPs are launched with the objective of giving a monthly income to
investors, but the periodicity depends upon the option chosen by the
These are generally monthly, quarterly, half-yearly and annual
SPECIALIZED SECTOR FUNDS
Under this scheme funds are planned to be invest in a particular region,
industry or sector like:-
Fast Moving Consumer Goods (FMCG)
Petroleum stocks, etc.
Funds of these schemes are invested in government Securities.
These funds are low return and low risk and suitable for risk averse
Example- Gilt plus, FT Gilt, Gilt treasury etc.
Electronic Traded Funds (ETFs)
A security that tracks an index, a commodity or a basket of assets like an
index fund, but trades like a stock on an exchange.
ETFs experience price changes throughout the day as they are bought and
Because it trades like a stock, an ETF does not have its net asset value
(NAV) calculated every day like a mutual fund does.
Buying Gold ETF is purchasing gold in
You buy them just like you buy stock of any company from your broker.
Gold ETF makes it easier for you to invest in gold.
The investment objective of Gold ETFs is to provide you with returns
that closely correspond with the domestic price of real gold. Each Gold
ETF unit that you buy is roughly equal to the price of 1 gm of gold.
Benefits of gold ETF
• With GOLD ETF, you don't have to pay any premium, making or delivery
• With Gold ETF, since your gold is now in demat form there are no worries
of theft and you also save on locker charges.
• Gold ETFs can be sold anytime through your broker at transparent prices
available for view at NSE's website.
On Gold ETF, you pay no sales tax, securities transaction tax, VAT or wealth tax.
They are easy to buy since you can even buy just one gram at a time.
Over time, you can build up your gold portfolio to the level you want, just as
you would with your bank or jeweler, only this is easier.
• Mutual Funds are primary vehicles for large collective
investments, working on the principle of pooling funds.
• Agents and distributors are a vital link between the mutual funds
Is a broker between the fund and the investor and acts on behalf
of the principal.
He is not exclusive to the fund and also sells other financial
services. This in a way helps him to act as a financial advisor.
Is a company which sells mutual funds on behalf of the fund.
It has several employees or sub-broker under it.
It manages distribution for several funds and receives
commission for its services.
Banks and NBFCs
Several banks, particularly private and foreign banks are involved in a fund
distribution by providing similar services like that of distribution
They work on commission basis
Mutual funds sell their own products through their sales officers and
employees of the AMC.
This channel is normally used to mobilize funds from high net worth
individuals and institutional investors.
List of Mutual Fund Companies in India
Some of the popular firms that deal
in mutual funds in India are:
Reliance Mutual Funds
Birla Sun Life
• JP Morgan
• Kotak Mahindra
• JM Financial
• State Bank of India (SBI)
• Sahara Mutual Funds
• Standard Chartered
Top mutual funds in India
• Reliance Mutual Fund
• HDFC Equity Fund
• ICICI Prudential Fund
• SBI Mutual Fund