CHAPTER 1

1.1 HISTORY OF MUTUAL FUND

1.2 FINANCIAL SYSTEM
1.3 COMPONENTS OF FINANCIAL SYSTEM
1.4 INTRODUCTION OF MUTUAL FUND
1.5 DEFINITION
1.6 MEANING
1.7 FEATURES OF MUTUAL FUND
1.8 CLASSIFICATION OF MUTUAL FUND
1.9 SCHEMES OF MUTUAL FUND
1.1 HISTORY OF MUTUAL FUND

The mutual fund was born from a financial crisis that staggered Europe in the early 1770s.The
British East India Company had borrowed heavily during the preceding boom years to support its
ambitious colonial interests, particularly in North America where unrest would culminate in
revolution in a few short years.

As expenses increased and revenue from colonial adventures fell, the East India Company sought
a bailout in 1772 from the already-stressed British treasury. It was the “original too big to fail
corporation” and the repercussions were felt across the continent and indeed around the world.

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 Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases.

First Phase - 1964-1987

Unit Trust of India (UTI) was established in 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
1990.
At 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. Also, 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.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. 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 of Rs. 29,835 crores as at the end of January 2003, 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, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile
UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual fund industry
has entered its current phase of consolidation and growth.

1.2 FINANCIAL SYSTEM

A 'financial system' is a system that allows the exchange of funds between lenders, investors,
and borrowers. Financial systems operate at national and global levels. They consist of complex,
closely related services, markets, and institutions intended to provide an efficient and regular
linkage between investors and depositors.

Money, credit, and finance are used as medium of exchange in financial systems. They serve as a
medium of known value for which goods and services can be exchanged as an alternative
to bartering. A modern financial system may include banks (public sector or private
sector), financial markets, financial instruments, and financial services. Financial systems allow
funds to be allocated, invested, or moved between economic sectors. They enable individuals and
companies to share the associated risks. A financial market is a broad term describing any
marketplace where buyers and sellers participate in the trade of assets such as equities, bonds,
currencies and derivatives. Financial markets are typically defined by having transparent pricing,
basic regulations on trading, costs and fees, and market forces determining the prices of
securities that trade.

Financial markets can be found in nearly every nation in the world. Some are very small, with
only a few participants, while others - like the New York Stock Exchange (NYSE) and the forex
markets - trade trillions of dollars daily.

Investors have access to a large number of financial markets and exchanges representing a vast
array of financial products. Some of these markets have always been open to private investors;
others remained the exclusive domain of major international banks and financial professionals
until the very end of the twentieth century.
The financial system of a country is an important tool for economic development of the country
as it helps in the creation of wealth by linking savings with investments. It facilitates the flow of
funds from the households (savers) to business firms (investors) to aid in wealth creation and
development of both the parties. The institutional arrangements include all condition and
mechanism governing the production, distribution, exchange and holding of financial assets or
instruments of all kinds.

1.3COMPONENTS OF FINANCIAL SYSTEM

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1.3.1 FINANCIAL INSTRUMENT:
 Financial Instruments can be defined as a market for short-term money and
financial assets that is a substitute for money. The term short-term means generally
a period of one year substitutes for money is used to denote any financial asset
which can be quickly converted into money. Some of the important instruments are
as follows:

 Call /Notice-Money:

Money Market can be understood as the market for short term funds, wherein
lending and borrowing of funds varies from overnight to a year. It is an important
part of the financial system that helps in fulfilling the short term and very short
term requirements of the companies, banks, financial institution, government
agencies and so forth.

 Term Money:

Deposit’s with maturity period beyond 14 days is referred to as the term money.
The entry restrictions are the same as that of Call/Notice Money, the specified
entities not allowed to lend beyond 14 days.

 Treasury Bill:
 Treasury Bills are short-term (up to one year) borrowing instruments of the union
government. It’s a promise by the Government to pay the stated sum after the
expiry of the stated period from the date of issue (less than one year). They are
issued at a discount off the face value and on maturity , the face value is paid to the
holder.

 Certificate of deposits:

Certificates of deposits is a money market instrument issued in dematerialised form

or as a promissory note for funds deposited at a bank, other eligible financial
institution for a specified period.

 Commercial paper:

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial

paper the debt is transformed into an instrument. CP is an unsecured promissory
note privately placed with investors at a discount rate of face value determined by
market forces.

1.3.2 FINANCIAL MARKET:

 A financial market is a market in which people trade financial securities and
derivatives such as futures and options at low transaction costs. Securities include
stocks and bonds, and precious metals. There are main two types of financial
market are as follow:

 CAPITAL MARKET

 MONEY MARKET

 Capital Market:

A capital market is a financial market in which long-term debt (over a year) or equity-
backed securities are bought and sold. Capital markets channel the wealth of savers to
those who can put it to long-term productive use, such as companies or governments
making long-term investments.

 Money Market:
 Money Market can be understood as the market for short term funds, wherein lending
and borrowing of funds varies from overnight to a year. It is an important part of the
financial system that helps in fulfilling the short term and very short term requirements
of the companies, banks, financial institution, government agencies and so forth.

1.3.3 FINANCIAL INTERMEDIARIES:

A financial intermediary is an institution which connects the deficit and surplus

money. The best example of an intermediary is a bank which transforms the bank
deposits to bank loans. The role of the financial intermediary is to distribute funds
from people who have an extra inflow of money to those who don’t have enough
money to fulfill the needs. Functions of Financial Intermediary are as follows:

 Depository institutions:

These are banks and credit unions that collect money from the public and use that
money to advance loans to financial customers.

 Non-Depository institutions:
 These are brokerage firms, insurance and mutual funds companies that cannot collect
money deposits but can sell financial products to financial customers.

1.3.4 FINANCIAL SERVICES:

Financial Services is concerned with the design and delivery of financial

instruments, advisory services to individuals and businesses within the area of
banking and related institutions, personal financial planning, leasing, investment,
assets, insurance etc.

o Banking Services:
Includes all the operations provided by the banks including to the simple deposit and
withdrawal of money to the issue of loans, credit cards etc.

o Foreign Exchange services:

Includes the currency exchange , foreign exchange banking or the wire transfer.

o Investment Services:
It generally includes the asset management, mutual fund, hedge fund management and
the custody services.

o Insurance Services:
 It deals with the selling of insurance policies, brokerages, insurance underwriting or the
reinsurance.

o Some of the other services include advisory services, venture capital, angel investment
etc.

1.4 INTRODUCTION OF MUTUAL FUND:

Mutual fund is an investment company that pools money from small

investors and invests in a variety of securities, such as stocks, bonds and money
market instruments. Most open-end Mutual funds stand ready to buy back
(redeem) its shares at their current net asset value, which depends on the total
market value of the fund's investment portfolio at the time of redemption.
Most open-end Mutual funds continuously offer new shares to investors. It is also
known as an open-end investment company, to differentiate it from a closed-end
investment company.

Mutual funds invest pooled cash of many investors to meet the fund's stated
investment objective. Mutual funds stand ready to sell and redeem their shares at
any time at the fund’s current net asset value: total fund assets divided by shares
outstanding. In Simple Words, 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
not all stocks may move in the same direction in the same proportion at the same
time. Mutual fund issues units t o the investors in accordance with quantum of
money invested by them. Investors of Mutual fund are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments.
The Mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time.
 In India, 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.

In Short , a Mutual fund is a common pool of money in to which

investors with common investment objective place their contributions that
are to be invested in accordance with the state d investment objective of the
scheme. The investment manager would invest the money collected from the
investor in to assets that are defined/ permitted by the stated objective of
the scheme. For example, a n equity fund would invest equity and equity
related instruments and a debt fund would invest in bonds, debentures, gilts etc.
Mutual fund is a suitable investment for the common ma n a s it offers an Oporto
unity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.

1.5 Definition of mutual fund:

“Mutual funds are collective savings and investment vehicles where savings of
small(or sometimes big) investors are pooled together to invest for their mutual
benefits and returns distributed proportionately.”

1.6 Meaning of mutual fund:

 Mutual fund is a unique investment pooling entity which enables investors to invest
in a wide range of securities through a single platform. Mutual Funds are excellent
for long-term wealth creation. However, with more and more funds flooding the
market, the task of selecting the most suitable scheme for you gets even more
complicated.

1.7 FEATURES OF MUTUAL FUND:

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1. Mobilizing small saving :

Mutual funds mobilze funds by selling their own shares known as units. This gives
the benefits of convenience and satisfaction of owning shares in many industries .
mutual fund invest in various securities and pass on the returns to the investors.
2. Investment Avenue :

The basic characteristics of a mutual fund is that it provides an idea avenue for
investment for investors and enables them to earn a reasonable return with
better liquidity. It offers investors a proportionate claim on the assets that
fluctuate in value.

3. Professional management:

Mutual fund provides investors with the benefits of professional and expert
management of their funds . mutual fund employees professional \experts who
manage the investment portfolios efficiently and profitably . investor are
relieved from the responsibility of following the markets on a regular basis .

4. Diversified investment :

Mutual fund have the advantage of diversified investment of funds in various

industries and sectors .this is beneficial to small investors who cannot afford to
buy shares of established companies at high prices mutual funds allow millions
of investors who have investments variety of securities of different companies .
5. Better liquidity:

Mutual fund have the distinct advantage of better liquidity of investment.

There is always a market available for mutual funds. In case of mutual fund it is
obligatory that units are listed and traded thus offering our secondary markets
for the funds. A high level of liquidity is possible for the fund holders because
of more liquid securities in the mutual fund portfolio.

6. Reduced risk :

The risk on mutual fund is minimum. This is because of expert management

diversification , liquidity and economics of scale in transaction cost.

7. Low transaction cost :

The cost of purchase and sale of mutual funds is relatively lower.

8. Investment protection cost:

Mutual funds are regulated by guidelines and legislative provisions put in place
of regulatory agencies such as SEBI in order protect the investors interest the
mutual funds are obligated to follow the provisions laid down by the regulators.

9. Switching facility:

Mutual funds provide investors with the flexibility to switch from one scheme
to another , this flexibility enables investors to switch from income scheme to
growth scheme and from close ended scheme to open ended scheme.

10.Tax benefits:

Mutual funds offer tax shelter to the investors by investing in various tax saving
schemes under the provisions provided by the income tax act.

1.8 CLASSIFICATION OF MUTUAL FUND:

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A. MUTUAL FUND ON THE BASIS OF FUNCTIONAL :
  Closed ended funds :

A closed-end fund is a pooled investment fund with a manager

overseeing the portfolio; it raises a fixed amount of capital through
an initial public offering (IPO). The fund is then structured, listed
and traded like a stock on a stock exchange.

 Open ended funds:

An open-end fund is a type of mutual fund that does not have

restrictions on the amount of shares the fund can issue. The
majority of mutual funds are open-end, providing investors with a
useful and convenient investing vehicle. When a fund's investment
manager(s) determine that a fund's total assets have become too
large to effectively execute its stated objective, the fund will
be closed to new investors, and in extreme cases, will be closed to

new investment by existing fund investors.

B. MUTUAL FUND ON THE BASIS OF PORTFOLIO:

 Equity funds :
 An equity fund is a mutual fund that invests principally in stocks. It
can be actively or passively (index fund) managed. Equity funds are
also known as stock funds. Stock mutual funds are principally
categorized according to company size, the investment style of the
holdings in the portfolio and geography.

 Debt funds :

Buying a debt instrument is similar to giving a loan to the issuing

entity. A debt fund invests in fixed-interest generating securities like
corporate bonds, government securities, treasury bills, commercial
paper and other money market instruments. The basic reason behind
investing in debt fund is to earn interest income and capital
appreciation. The issuer pre-decides the interest rate you will earn as
well as maturity period. That’s why they are called ‘fixed-income’
securities because you know what you’re going to get out of them.

 Special funds :

The Special Funds are those kinds of mutual funds that can neither
be categorized as equity funds nor as the debt funds. These funds are
 unique and work well for those investors who have specific financial
objectives.

C. MUTUAL FUND ON THE BASIS OF OWNERSHIP:

 Public sector mutual funds :

A new era in the mutual fund industry began with the permission
granted for the entry of Private Sector Funds in 1993, giving the
Indian investors a broader choice of fund families and increasing
competition for the existing public sector funds.

 Private sector mutual funds:

Private sector entered mutual fund industry only in 1993 with

Kothari Pioneer getting the license in July 1993 to operate 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.
  Foreign mutual funds :

A foreign mutual fund invests in firms in countries other than the

ones they reside. It is also called overseas or foreign funds. Investing
in them may mean more risk exposure, but also chances of higher
returns.

1.9 ADVANTAGES OF MUTUAL FUND

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1. Professional management:

Professional money management is the management of assets by a mutual

fund manager. The fund manager will research, purchase and sell securities—
as outlined in the prospectus—in order to benefit the mutual fund's
shareholders.

2. Diversification :

Mutual funds can also invest in other assets, such as bonds, cash, or
commodities like gold and other precious metals. This diversification allows
investors to reduce the risk of one particular stock or sector. It also opens you
up for more potential rewards by offering a broader exposure to various stocks
and sectors.

3. Convenient administration:

The fund provides shareholders with professional investment management,

diversification, liquidity and investing convenience. This means that it
continually issues (sells) shares on demand to new investors and existing
shareholders who are buying. It redeems (buys back) shares from shareholders
who are selling.
4. Higher returns:

A mutual fund is formed when capital collected from different investors is

invested in company shares, stocks or bonds. Shared by thousands of investors
(including you), a mutual fund is managed collectively to earn
the highest possible returns. The person driving this investment vehicle is a
professional fund manager.

5. Low cost of management:

The primary advantages of mutual funds are that they provide economies of
scale, a higher level of diversification, they provide liquidity, and they are
managed by professional investors. On the negative side, investors in a mutual
fund must pay various fees and expenses.

6. Liquidity :

A mutual fund liquidity ratio is a ratio that compares the amount of cash in
a fund relative to its total assets. Mutual fund liquidity ratios can vary and
may include cash or all cash and cash equivalents.

7. Transparency :
 A strong indicator of future growth is how a business invests its money. ...
Investors should be aware of the underlying investments that compose their
portfolios. For example, owning a single stock means investing in one
company while owning a mutual fund means investing in multiple companies.

8. Highly regulated :

The term Mutual Funds refers to a pool of money accumulated by several

investors who aim at saving and making money through their investment.
Mutual Funds are registered with SEBI (Securities and Exchange Board of
India) that regulates security markets prior to the collection of the funds from
the investors.
CHAPTER 2
 HISTORY OF STATE BANK OF INDIA

The mutual fund industry in India originally began in 1963 with the Unit Trust of India (UTI) as
a Government of India and the Reserve Bank of India initiative. Launched in 1987, SBI Mutual
Fund became the first non-UTI mutual fund in India. In July 2004, State Bank of India decided
to divest 37 per cent of its holding in its mutual fund arm, SBI Funds Management Pvt Ltd, to
Society General Asset Management, for an amount in excess of $35 million. Post-divestment,
State Bank of India's stake in the mutual fund arm came down to 67%. In May 2011, Amundi
picked up 37% stake in SBI Funds Management, that was held by Society General Asset
Management, as part of a global move to merge its asset management business with Credit
Agricola.

As of Sept 2015, the fund house claims to serve around 5.8 million investors through 130 points
of acceptance, 29 investor service centers, 59 investor service desks and 6 Investor Service
Points. As of August 2018, assets under management of SBI Mutual Fund are valued at Rs.
2,33,114 crore ($32.1 billion).