A Mutual Fund is a financial intermediary that pools the savings of investors for

collective investments in a diversified portfolio of securities. According to SEBI (Mutual

Funds) Regulations, 1996, a mutual fund is a fund established in the form of a trust to
raise money through the sale' of units to the public or a section of the public under one
or more schemes for investing in securities including money market instruments."
Mutual funds raise money by selling shares / units of funds to the public. Mutual
funds use this money to purchase various assets such as stocks, bonds and money
market instruments. The mutual fund industry in India has been witnessing an annual
growth rate of 9% for past five years and is expected to grow better.
B. ROLE OF MUTUAL FUNDS :Mutual funds plays an important ROLE in promoting a healthy capital market. They
provide active support to secondary market and increase liquidity of capital market and
bring stability in financial market. Role of mutual fund can be explained with the help of
following points :1. Mobilises Savings :Mutual funds play an important role in mobilising savings of millions of investors across
the country. In mutual funds, savings of small investors are mobilised, invested and
returns are distributed in the same proportion to the unit holders.
2. Instrument Of Investing Money :Now-a-days bank rates have become very low so, keeping large amount of money in
bank does not give higher returns. People can invest in stock market. But a common
investor is not well informed about the complexities involved in stock market
movements. Here mutual funds play an important role in helping common public to get
higher returns.
3. Protection To Small Investors :A small investor is not safe in share market. In mutual industry there is no such risk.
Mutual funds help to reduce the risk of investing in stocks by spreading or diversifying
investments. Small investors enjoy the benefit of diversification.
4. Tax Benefit :Investors in mutual funds enjoy tax benefits. Dividend received byinvestors is tax free.
Tax exemption is allowed on income received on units of mutual funds and UTI.
Investment in mutual funds enjoy wealth tax exemption within the overall limit of Rs. 5
lakhs.. No tax shall be charged on gifts of mutual fund unitsuptoRs. 30,000.
5. Diversification :-

Investment in mutual funds enable investors to spread out and minimise the risks upto
certain extent. Mutual fund invests in a diversified portfolio of securities. This
diversification helps to reduce risk since all the stocks do not fall at same time. Thus
investors are assured of average income which is not possible in other sources.
6. Multi - Purpose Service :Mutual funds introduces variety of innovative schemes containing various benefits.
Innovative schemes are designed to meet the needs of different types of investors in
terms of investment, dividend distribution, liquidity etc.
7. Boost To Capital Market :Mutual fund has become a capital market intermediary. It bridges the gap between retail
investors and capital market. The rapid growth of mutual fund industry leads to
increased vibrancy of capital market.
8 Arrival Of Foreign Capital :Mutual funds attract foreign capital. Indian Mutual Fund Industries open offshore funds
in various foreign countries and secure safe investment avenues abroad to domestic
savings. These funds enable NRIs and foreign investors to participate in Indian Capital
Market.
9 Savings For Retirement And Education :Various schemes of funds with their tax benefits can help the households to save for the
retirements and education of their children.
IMPORTANCE / ADVANTAGES OF MUTUAL FUNDS :Mutual fund is a single and large professionally managed investment organisation which
combines the funds of many individual investors having similar investment objectives.
They form an important part of capital market. The importance of mutual funds arises
due to its many benefits. Let us explain:1)

Professional Management:-

Investors purchase units in mutual funds because they do not have time or expertise to
manage their own portfolio. Mutual funds are managed by professional managers who
have requisite knowledge and skill to make organised investmentstrategy.Thus small
investors invest in mutualfunds to maximise their returns on investment.
2)

Economies Of Scale:-

Mutual funds buy and sell large amount of securities at a time, this reduces,
transaction cost. Investors gain on account of low transaction costs.

3)

Product Innovation :-

From time to time new products are introduced by mutual fund industry to its investors.
Schemes like children funds, commodity based funds, fixed maturity plans, exchange
tradedfunds hybrid funds (fund for funds) etc. all have attracted huge investments.
4)

Safety And Liquidity :-

Mutual funds are controlled and regulated by SEBI hence they aresafe. Further,
investors can easily encash their investments by sellingtheir units to fund if it is an openended scheme or selling them on stockexchange if it is a close-ended scheme.
5)

Convenience And Flexibility :-

Mutual funds permit flexibility. If an investor is not satisfied with one mutual fund, he can
switch over to another. There are least formalities to invest in mutual funds.
6)

Portfolio Diversification :-

Due to lack of resources an individual investor may not be able to invest in a diversified
portfolio of securities. Mutual funds invest in a number of companies acrossvarious
sectors and industries. Currently there are about 38 mutual funds offering
differentproducts. Thisdiversification reduces the risk of investment.
7)

Reduction In Risk :-

Mutual funds help to reduce risk through diversification and professional management.
All funds are not invested in same investment avenue. Holding a portfolio that is
diversified across investment avenues is a wise way to manage risk.
8)

Transparency:-

There is greater transparency in investment in mutual funds. They declare their portfolio
of investment every month. The investors can know where their funds are invested. In
case they are not happy with the portfolio, of fund they can withdraw their money at a
short notice.
9)

Services To Investors :-

Mutual funds offer systematic withdrawal plans which are convenient to retired people.
The dividend and capital gains are reinvested automatically. Automatic reinvestment is a
type of forced savings which brings cumulative benefits to investors.
10) Stability to stock Market :Mutual funds invest in huge amounts in securities. They can easily absorbcertainlosses
in stock market. They regularly invest in stock market, which provides stability to stock
market.

11) Equity Research :Mutual funds also invest in equity research. This gives a lot of information and data for
investments. They also helps them to get a good portfolio.
12) Ancilliary Services :Mutual funds also provides ancilliary services such as :a)

Saving schemes for regular monthly investments in units.

b)

Life Insurance Schemes.

c)

Automatic reinvestment of dividend.

TYPES OF MUTUAL FUNDS:To cater the needs, expectations and objectives of investors variety of mutual fund
schemes are there. Following are some of the categories of mutual funds :-

I.

Geographical Classification:1)

Domestic Funds:-

They mobilise resources from within the country. The market is limited to the boundaries
of a nation in which fund operates. Mutual funds can invest only in securities which are
issued and traded in domestic financial markets.
2)

Offshore Funds:-

They facilitate cross-border flow of funds. They open domestic- capital market to
international investors. Such mutual funds can invest in securities of foreign companies.
II.

Classification By Structure:1)

Open - Ended Scheme :-

An open-ended fund is that which is available for subscription all through the year. The
investors can enter and exit the scheme any time during the life of the fund. This
scheme has high liquidity. It does not have fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV). The buying and selling of this
mutual fund can be only done through the mutual fund.
2)

Close - Ended Scheme :-

These schemes have a fixed maturity period. Investors can invest directly at the time of
initial issue. After the closing of subscription, the units are listed on stock exchange.
Trading in the scheme can be done through stock exchanges. The market price on
stock exchange could differ from the Net Asset Value (NAV) on account of demand and
supply situation. The fund has no interaction with investors till redemption except for
paying dividends / bonus.

3)

Interval Schemes:-

These schemes combine the features of open-ended and close-ended schemes. They
are open for sale or redemption during pre-determined intervals at NAV related prices.
III.

Classification By Nature :1)

Equity Funds:-

Equity funds are those funds which invest pre-dominantly in equity shares of
companies. Following are variety of ways in which equity portfolio can be created for
investors :a)

Simple Equity Funds :-

These funds invest 80 to 90% of their investment in equity shares. They can invest in
primary as well as secondary market.
b)

Primary Market Funds :-

Here funds are invested in primary market only, either through a public offer or through
a private investment.
c)

SectoralFunds:-

Here funds are invested in one chosen sector of equity markets.Sectors may vary due
to investors preference and the return-riskattributes of the sector.
2)

Debt Funds :-

Debt funds are those that predominantly invest in debt securities. Government
authorities, corporate firms, banks and financial institutions are the major issuers of debt
instrument. Since most debt securities payperiodic interest to investors, these funds are
also known as Income funds. Debt funds are further classified as follows :a)

Gilt Funds :-

These funds invest their funds in Securities issued by Government and thus they do not
carry any credit risk. These funds invest in short and long term securities issued by
Central / State Governments.
b)

Short Term Plans :-

These schemes invest for a short period of 3 to 6 months. They invest in Securities like
Certificate of Deposits and Commercial Papers.
c)

Monthly Income Plans :-

These funds invest maximum of their funds in debt instruments and minimum in equity
holdings. Due to equity these funds have risk-return matrix.

d)

Liquid Funds :-

These funds provide easy liquidity. These schemes invest in short term instruments like
treasury bills, call money market, commercial papers and certificate of deposits. Thus
they are also known as Money Market Schemes. These schemes rank low on riskreturn matrix.
e)

Income Funds :-

These mutual funds invest in bonds, corporate debentures and Government Securities.
IV. Classification By Investment Objectives:1. Balanced Schemes :-

Their aim is to provide both growth and income. They divide their investment between
equity shares and fixed income earning instruments. Their exposure to risk is moderate.
2.

Income Schemes :Their aim is to provide regular and steady income to investors. They invest inbonds,
debentures, government securities and commercial papers. The capital appreciation is
limited.

3. Growth Schemes :Their aim is to provide capital appreciation over medium to long term. These schemes
invest a major part of their corpus (collected) fund in equities. They offer higher returns
to investors in long run.
4. Money Market Schemes :Their aim is to provide easy liquidity, preservation of capital and moderate income.
These schemes invest in treasury bills, call money market, certificate of deposits,
commercial papers.
Other Schemes:1.

Sector Specific Schemes

These schemes invest in securities of only those sectors or industries as specified in
offer documents. They invest in specific core sector like energy, telecommunication, IT,
financial services etc. The diversification is less.

2.

Tax Saving Schemes

They are close-ended schemes. They are designed on the basis of tax policy with
special tax incentives to investors.
3.

Index Schemes :-

Index schemes attempt to replicate the performance of a particular index such as BSE
Sensex or NSE. Returns from these schemes would be more or less equivalent to those
of index.
GROWTH AND PERFORMANCE OF MUTUAL FUNDS IN INDIA:-

In India mutual funds came into existence in 1963. RBI set upthefirst mutual fund
named Unit Trust of India (UTI) through UTI Act 1963.The primary objective was to
attract small investors. Over the years,there has been good growth of mutual funds in
India. The assets under management of mutual fundshave increased to Rs. 6,31,979
crore inMarch 2010.
The history of mutual funds can be divided into following phases:1)

Phase I (1964-1987) Dominance Of UTI :-

UTI was established in 1963. It launched its first scheme in 1964 called US 64, and it
attracted largest number of investors. UTI enjoyed monopoly in mutual funds upto 1987.
It launched more innovative schemes to suit the needs of different investors. By the end
of 1987, UTIs assets under management grew to Rs. 6,700 crore.
2)

Phase II (1987-1993) Entry Of Public Sector Funds :-

In 1987 government permitted public sector banks and financial institutions to set up
mutual funds. In November 1987, SBI Mutual Fund launched, which was followed by
Canara Bank Mutual Fund, LIC Mutual Fund etc. By 1993 Mutual fund assets rose to
overRs. 47,000 crore. However, UTI continued to be the leader with about 80% market
share.
3)

Phase III (1993 1996) Emergence Of private sector Funds:-

In

1993,

government

allowed

private

sector

funds

including

foreign

fund

management companies to enter the mutual fund industry. This provided a wide range
of choice to investors and more competition to industry. Assets under mutual fund
management rose to about Rs. 86,000 crore by March 1997.
4)

Phase IV (1996-2004) SEBI Regulation And Growth :-

In 1996 SEBI introduced Mutual Funds Regulations. The regulations brought about
uniform standards in mutual funds industry. Investors interest were safeguarded by
SEBI and government tax benefits to investors in mutual funds. The number of players
increased considerably At the end of March 2004, the assets under management of
mutual funds stood at Rs1,39,615 crore.

5)

Phase V (2004 Onwards) Growth And Consolidation:-

After 2004 the industry witnessed several mergers and takeovers. For e.g. : Birla Sun
Life took over the scheme of Alliance Mutual Fund. Also number of foreign players
entered Indian mutual funds industry like Fidelity, Franklin, Templeton Mutual Fund etc.
The assets under management of mutual funds was Rs. 4,17,300 crore.
At present there are 38 mutual funds in India offering about 3,780 schemes. In 2009 the
net resource mobilisation by mutual funds amounted to Rs. 1,43,775 crores. Out of this
80% of funds are mobilised by private sector mutual funds.

EQUITY MARKET:Equity Market is the market in which shares are issued and traded, either through
exchanges or over the counter markets. Equity market is also known as Stock Market.
There are two types of equity market Primary and Secondary.
The primary market is a market for new issues. It deals with raising of fresh capital in
the form of equities. Secondary market deals with equities already issued.
A

TYPES OF EQUITY CAPITAL :Companies raise capital through equities, which can be classified into Ordinary Shares
and Preference Shares.

I.

Equity / Ordinary Shares :Equity shares are also known as Ordinary Shares, Every company hastoissue
equity shares. Equity capital is also known as owned Capital or Risk Capital or Venture
Capital.
Indian Companies Act, 1956 defines equity shares as those shares which are not
preference shares. Ordinary shares have a face value in terms of price of each
share.The price at which the equity shares are issued is the issued price. The rice at
which equity shares are traded in stock market is their market value.

1.

Features Of Equity Shares :-

a)

Permanent Capital :-

'

Equity share capital represents the permanent capital of the company. They are
irredeemable. There is no obligation on the part of the company to repay the capital
during the life time of company.
b)

Fluctuatinq Dividend :-

Equity shares get fluctuating dividend as the rate of dividend depends upon the
earnings of the company. There is no guarantee of minimum dividend.
c)

Limited Liability :Even though the equity holders share the ownership risk their liability is limited to the
extent oftheir investment in the share capital of the company.

d)

Voting Rights :Equity shareholders enjoy normal voting rights. They can vote on all resolutions passed
at the shareholders meetings.

e)

Residual Share :Ordinary Shareholder's ciaim on assets of the company is residual. Their claim would
rank after the claims of creditors and preference shareholders in the event of liquidation.
If the liquidation value of assets is insufficient, their claims may remain unpaid.

f)

Right To Control :As owners of the company equity holders have the right to control the operations of the
company. However their control is indirect as major policies and decisions are approved
by Board of directors. In actual practice their control is weak and ineffective.

g)

Pre - Emotive Rights

Ordinary shareholders have a legal right to be offered by the company, the first
opportunity to purchase additional issues of equity capital in proportion to their current
holdings.

h)

Increases Shareholders Wealth

Equity shares increases shareholders wealth. This is due to regular dividend and issue
of bonus shares. When share market is at boom, the share prices also increases
considerably.

Preference Shares
Preference share capital is a type of long-term capital. It combines the features of equity
shares and debentures. It is an ownership security like an ordinary share, but it carries
fixed rate of dividend likedebentures.The holders of preference shares are entitled to
income after the claims of creditors of the company have been met, but before ordinary
shareholders receiveanyincome.

1)

Features Of Preference Shares :a)

Fixed Dividend :-

Preference shares are also called a fixed income security. Preference share dividends
are fixed and expressed as a percentage of par value.
b)

Voting Rights :-

Ordinarily a preference share holder does not carry voting rights.

c)

Convertibility :-

Sometimes preference shares may be convertible partly or fully into equity shares or
debentures at a certain ratio during a specified period.
d)

Redeemability:-

Preference share has a limited life after which it rriust be retired.

e)

Cumulative Dividends:-

Preference share is cumulative. All unpaid dividends are carried forward and payable
before any ordinary dividend is paid.
f)

Prior Claim On Income Assets :Preference shares have a prior claim (preference) over equity share both on the income
and assets of the company.

2)
a.

Types Of Preference Shares :Cumulative And Non -Cumulative:Cumulative preference shares are those in which if dividend isskipped (not given) in any
period, it has to be paid subsequently. Thisisnot required in case of non-cumulative
preference shares.

b.

Redeemable And Non -Redeemable:A redeemable preference share matures in a fixed period of time. For non-redeemable
preference shares there is no fixed time limit.

c.

Participating And Non -Participating :If the company makes good profits, the participating preference shareholders can earn
a higher dividend than the fixed one. This is not in case of non-participating preference
shareholders.

d.

Convertible And Non- Convertible :Convertible preference shares can be converted into equity shares on terms and
conditions fixed at the time of such issue. Non-convertible preference shares are not
converted into equity shares.

The importance of preference shares have declined in recent years. The market for
them is narrow and less active. Now-a-days they are mostly held by institutional
investors.

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 unitholders. 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.
SEBI Regulations require that 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. Also, 50% of the directors of AMC must be independent. All mutual funds are
required to be registered with SEBI before they launch any scheme. However, Unit Trust
of India (UTI) is not registered with SEBI (as on January 15, 2002).
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value
(NAV). Mutual funds invest the money collected from the investors in securities markets.
In simple words, Net Asset Value is the market value of the securities held by the
scheme. Since market value of securities changes every day, NAV of a scheme also
varies on day to day basis. The NAV per unit is the market value of securities of a
scheme divided by the total number of units of the scheme on any particular date. For
example, if the market value of securities of a mutual fund scheme is Rs. 200 lakhs and
the mutual fund has issued 10 lakhs units of Rs.10 each to the investors, then the NAV
per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a
regular basis - daily or weekly - depending on the type of scheme.

Schemes according

to

MaturityPeriod:

A mutual fund scheme can be classified into open-ended scheme or close-ended

scheme depending on its maturity period.

Open-endedFund/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-ended schemes is liquidity.
Close-endedFund/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:

A scheme can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly as
follows:
Growth/EquityOrientedScheme
The aim of growth funds is to provide capital appreciation over the medium to longterm. 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. The investors must indicate the option in theapplication
form. The mutual funds also allow the investors to change the options at a later date.
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. These funds are not affected because of fluctuations
in equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these
fluctuations.
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. They generally invest 40-60% in equity and debt instruments. These funds are
also affected because of fluctuations in share prices in the stock markets. However,
NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquiditypreservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and interbank 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.
Gilt Fund
These funds invest exclusively in government securities. Government securities have
no default 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.
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. 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. Necessary disclosures

in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are
traded on the stock exchanges.