INTRODUCTION

mutual fund offers investors the opportunity to pool their money with other investors in
an investment that’s managed by professional investment managers. Mutual funds invest in
stocks, bonds or other securities according to each fund’s objective.

A mutual fund is a professionally managed investment fund that pools money from many
investors to purchase securities. These investors may be retail or institutional in nature.

Mutual funds have advantages and disadvantages compared to direct investing in individual
securities. 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.

Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-
end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade
on an exchange. Mutual funds are also classified by their principal investments as money market
funds, bond or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also
be categorized as index funds, which are passively managed funds that match the performance of
an index, or actively managed funds. Hedge funds are not mutual funds; hedge funds cannot be
sold to the public and are subject to different government regulations
 MEANING OF MUTUAL FUND

A mutual fund is a type of financial vehicle made up of a pool of money collected from
many investors to investing in securities such as stocks, bonds, money market instruments, and
other assets. Mutual funds are operated by professional money managers, who allocate the fund's
assets and attempt to produce capital gains and/or income for the fund's investors. A mutual
fund's portfolio is structured and maintained to match the investment objectives stated in
its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios
of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in
the gains or losses of the fund. Mutual funds invest in a wide amount of securities, and
performance is usually tracked as the change in the total market cap of the fund, derived by the
aggregating performance of the underlying investments.

the securities it decides to buy. So when you buy a unit or share of a mutual fund, you are
actually buying the performance of its portfolio or more precisely, a part of the portfolio's value.

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. At Karvy value, selecting a scheme is a
child’s play as we guide you through this maze and make sure that your investments are backed
by our quality research. We, at Karvy help you to reach your goals by offering
 Products of 44 AMCs including Equity, Debt and Hybrid funds.
 Research Reports (Existing funds & NFOs, strategy reports, etc).
 Customized mutual fund portfolios based on your profile.
 Portfolio Re-balancing (depending on changing market outlook and evolving trends).
 State of the art Portfolio Tracker.
 THE BASIC OF MUTUAL FUND

Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds. The value of the mutual fund company depends on the
performance of That's why the price of a mutual fund share is referred to as the net asset value
(NAV) per share, sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total
value of the securities in the portfolio by the total amount of shares outstanding. Mutual fund
shares can typically be purchased or redeemed as needed at the fund's current NAV, which—
unlike a stock price—doesn't fluctuate during market hours, but is settled at the end of each
trading day.

The average mutual fund holds hundreds of different securities, which means mutual fund
shareholders gain important diversification at a very low price. Consider an investor who just
buys Google stock before the company has a bad quarter. He stands to lose a great deal of value
because all his dollars are tied to one company. On the other hand, a different investor may buy
shares of a mutual fund that happens to own some Google stock. When Google has a bad quarter,
she only loses a fraction as much because Google is just a small part of the fund's portfolio.
 DEFINATION MUTUAL FUND

A mutual fund is an investment security that enables investors to pool their money
together into one professionally managed investment. Mutual funds can invest in stocks, bonds,
cash or a combination of those assets. The underlying security types, called holdings, combine to
form one mutual fund, also called a portfolio.

In simpler terms, mutual funds are like baskets. Each basket holds certain types of stocks, bonds
or a blend of stocks and bonds to combine for one mutual fund portfolio.

For example, an investor who buys a fund called XYZ International Stock is buying one
investment security the basket that holds dozens or hundreds of stocks from all around the globe,
hence the "international" moniker.

It's also important to understand that the investor does not actually own the underlying securities
— the holdings — but rather a representation of those securities; investors own shares of the
mutual fund, not shares of the holdings. For example, if a particular mutual fund includes shares
of stock in Apple, Inc. (AAPL) among other portfolio holdings, the mutual fund investor does
not directly own Apple stock. Instead, the mutual fund investor owns shares of the mutual fund.
However, the investor can still benefit by the appreciation of shares in AAPL

Since mutual funds can hold hundreds or even thousands of stocks or bonds, they are described
as diversified investments. The concept of diversification is similar to the idea of strength in
numbers. Diversification helps the investor because it can reduce market risk compared to
buying individual securities.
 HISTORY OF MUTUAL FUND IN INDIA

A mutual fund is a trust or a pool of investments by investors who share a common

financial goal. This pool is invested in several financial instruments such as shares, debt
instruments, bonds etc. by the company managing that trust. This company is called an Asset
Management Company. Returns so generated are later distributed among the members of the
pool in the ratio of their investments. The AMC invests its money in a manner that while the
returns are maximized, the risks are kept to a minimum level. In India, it is mandatory for every
Asset Management Firm to be registered with the Securities and Exchange Board of India
(SEBI), a body that regulates all securities instruments.
The first company that dealt in mutual funds was the Unit Trust of India. It was set up in 1963 as
a joint venture of the Reserve Bank of India and the Government of India. The objective of the
UTI was to guide small and uninformed investors who wanted to buy shares and other financial
products in larger firms. The UTI was a monopoly in those days. One of its mutual fund products
that ran for several years was the Unit Scheme 1964.
The mutual fund industry in India has undergone at least 4 phases. Let us now look at each phase
in brief:

1) PHASE OF INCEPTION (1964-87)

The first phase was marked by the setting up of the UTI. Though it was a collaboration
between the RBI and the Indian Government, the latter was soon delinked from the day-to-day
operations of the Unit Trust of India. In this phase, the company was the sole operator in the
Indian mutual fund industry. In 1971, the UTI launched the Unit Linked Insurance Plan or the
ULIP. From that year until 1986, UTI introduced several plans and played a very big role in
introducing the concept of mutual funds in India.

When UTI was set up several years ago, the idea was to not just introduce the concept of mutual
funds in India; an associated idea was to set up a corpus for nation-building as well. Therefore, to
encourage the small Indian investor, the government built in several income-tax rebates in the
UTI schemes. Not surprisingly, the investible corpus of UTI swelled from 600 crores in 1984 to
6,700 crores in 1988. Clearly, the time had come for the Indian mutual industry to move into the
next phase.
2) ENTRY OF PUBLIC SECTOR (1987-1993)

By the end of 1988, the mutual fund industry had acquired its own identity. From 1987,
many public sector banks had begun lobbying the government for starting their own mutual fund
arms. In November 1987, the first non-UTI Asset Management Fund was set up by the State
Bank of India. This AMC was quickly followed by the creation of other AMCs by banks like
Canara Bank, Indian Bank, Life Insurance Corporation, General Insurance Corporation, and
Punjab National Bank.

This opening up of the mutual fund industry delivered the desired results. In 1993, the
cumulative corpus of all the AMCs went up to a whopping Rs. 44,000 crores. Observers of this
industry say that in the second phase, not only the base of the industry increased but also it
encouraged investors to spend a higher percentage of their savings in mutual funds. It was
evident that the mutual fund industry in India was poised for higher growth.

3) ENTRY PRIVATE SECTOR PHASE (1993-1996)

In the period 1991-1996, the Government of India had realized the importance of the
liberalization of the Indian economy. Financial sector reforms were the need of the hour. India
needed private sector participation for the rebuilding of the economy.

Keeping this in mind, the government opened up the mutual fund industry for the private players
as well. The foreign players welcomed this move and entered the Indian market in significant

numbers. In this period, 11 private players –in collaboration with foreign entities- launched their
Asset Management Funds.

Some of the top AMCs in the private sector were:

• ICICI Prudential AMC- This Company is a joint venture between ICICI Bank of India and
Prudential Plc of UK. It manages a corpus of INR 2, 93,000 crores and has an inventory of more
than 1400 schemes.
• HDFC Mutual Fund- Launched in the 1990s, the HDFC Mutual Fund manages more than 900
different kinds of funds.

• Kotak Mahindra Mutual Fund- This AMC has an asset base of more than Rs. 1,19,000 crores. It
is a joint venture of Kotak Financial Services and the Mahindra Group.

4) SEBI INTERVENTIONS AND GROWTH, AND AMFI

As the mutual fund industry grew further in the 1990s, the AMCs and the government
felt that it was time for regulation and some control. Investors had to be protected as well as a
level playing ground had also to be laid down. A few years ago, the Indian industry had suffered
a lot because of bank scams and there was a real threat that investors might lose their monies yet
again.

Consequently, the government introduced the SEBI Regulation Act in 1996 which laid down a
set of fair and transparent rules for all the stakeholders. In 1999, the Indian government declared
that all mutual fund dividends would be exempt from income tax. The idea behind this decision
was to spur further growth in the mutual fund industry.

Meanwhile, the mutual fund industry also realized the importance of self-regulation. As a result,
it set up an industry body- the Association of Mutual Funds of India (AMFI). One of the goals of
this body is investor education.

5) PHASE OF CONSOLIDATION (FEBRUARY 2003 – APRIL 2014)

In February 2003, the Unit Trust of India was split into two separate entities, following
the repeal of the original UTI Act of 1963. The two separated entities were the UTI Mutual Fund
(which is under the SEBI regulations for MFs) and the Specified Undertaking of the Unit Trust
of India (SUUTI). Following this bifurcation of the former UTI and occurrence numerous
mergers among different private sector entities, the mutual fund industry took a step towards the
phase of consolidation.
After the global economic recession of 2009, the financial markets across the globe were at an
all-time low and Indian market was no exception to it. Majority of investors who had put in their
money during the peak time of the market had suffered great losses. This severely shook the faith
of investors in the MF products. The Indian Mutual Fund industry struggled to recover from
these hardships and remodel itself over the next two years. The situation toughened up more with
SEBI abolishing the entry load and the lasting repercussions of the global economic crisis. This
scenario is evident from the sluggish rise in the overall AUM of the Indian MF industry.

6) PHASE OF STEADY DEVELOPMENT AND GROWTH (SINCE MAY 2014)

Recognizing the lack of penetration of mutual funds in India, especially in the tier II and
tier III cities, SEBI launched numerous progressive measures in September 2012. The idea
behind these measures was to bring more transparency and security for the interest of the
stakeholders. This was SEBI’s idea to ‘re-energize’ the Indian MF Industry and boost the overall
penetration of mutual funds in India.

The measures bore fruit in the due course by countering the negative trend that was set because
of the global financial crisis. The situation improved considerably after the new government took
charge at the center.

Since May ’14, the Indian MF industry has experienced a consistent inflow and rise in the
overall AUM as well as the total number of investor accounts (portfolio).

Currently, all the Asset Management Companies in India manage a combined worth of around

Rs. 23 lac crores of assets. Though this number looks attractive, we still have to go a long way in

order to match the west.

It is estimated that Indians save approximately Rs. 20-30 lakh crore annually. The Indian mutual

fund industry can grow immensely if Indians started parking a higher percentage of their savings

in mutual funds.
 OBJECTIVE OF MUTUAL FUND

The general objective of any Mutual Fund (MF) is maximizing the returns at a certain level of
risk.
There are specific objectives as well and Funds are usually classified as per their objectives and
the investment style. Here are some of the common forms of mutual fund objectives:

GROWTH FUNDS:
The most common objective of investment is growth. The primary objective of any growth fund
is capital appreciation over the medium to long term. Growth mutual funds are generally
invested primarily in small to large cap stocks.

INCOME FUNDS:
Here the objective is current income in certain invervals as opposed to capital appreciation.
These funds are suitable for investors, who are looking for cash flow to supplement their income.
To ensure steady income, major portion of the asset is invested in income instruments viz. fixed
interest debentures, bonds, preference stocks and dividend paying stocks etc.

SECTOR/INDUSTRY FUNDS:
These funds aim at investing only in specific sectors or industries, such as real estate or
healthcare. The main objective behind these funds is to be maximizing the return by exploiting
the growth of booming sectors.

VALUE FUNDS:
This funds generally aims at investing in stocks that are deemed to be undervalued in price
because of some inherent inefficiencies of the Market. It is expected that, once the market
corrects these inefficiencies, the stock price will rise thus benefitting the investor.
These funds are sometimes further classified with different level of risks.
The investment objective of a MF is not be confused with the investment style. The fund
manager may practice a particular investing style, to meet the objective of a Fund. Two funds
with growth objective might differ in terms of investment style. One fund manager may choose
to invest in Blue chip funds while the other can choose to invest in undervalued securites or even
a blend of both.
PROFESSIONAL MANAGEMENT:

When you invest in a mutual fund, your money is managed by finance professionals. Investors
who do not have the time or skill to manage their own portfolio can invest in mutual funds. By
investing in mutual funds, you can gain the services of professional fund managers, which would
otherwise be costly for an individual investor.
 DIVERSIFICATION:

Mutual funds provide the benefit of diversification across different sectors and companies.
Mutual funds widen investments across various industries and asset classes. Thus, by investing in
a mutual fund, you can gain from the benefits of diversification and asset allocation, without
investing a large amount of money that would be required to build an individual portfolio.

LIQUIDITY:

Mutual funds are usually very liquid investments. Unless they have a pre-specified lock-in
period, your money is available to you anytime you want subject to exit load, if any. Normally
funds take a couple of days for returning your money to you. Since they are well integrated with
the banking system, most funds can transfer the money directly to your bank account.

FLEXIBILITY:

Investors can benefit from the convenience and flexibility offered by mutual funds to invest in a
wide range of schemes. The option of systematic (at regular intervals) investment and
withdrawal is also offered to investors in most open-ended schemes. Depending on one’s
inclinations and convenience one can invest or withdraw funds.

LOW TRANSACTION COST:

Due to economies of scale, mutual funds pay lower transaction costs. The benefits are passed on
to mutual fund investors, which may not be enjoyed by an individual who enters the market
directly.

TRANSPARENCY:

Funds provide investors with updated information pertaining to the markets and schemes through
factsheets, offer documents, annual reports etc.
 TYPE OF MUTUAL FUND

1. MONEY MARKET FUNDS

These funds invest in short-term fixed income securities such as government bonds, treasury
bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a
safer investment, but with a lower potential return then other types of mutual funds. Canadian
money market funds try to keep their net asset value (NAV) stable at $10 per security.

2. FIXED INCOME FUNDS

These funds buy investments that pay a fixed rate of return like government bonds, investment-
grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the
fund on a regular basis, mostly through interest that the fund earns. High-yield corporate bond
funds are generally riskier than funds that hold government and investment-grade bonds
.
3. EQUITY FUNDS

These funds invest in stocks. These funds aim to grow faster than money market or fixed income
funds, so there is usually a higher risk that you could lose money. You can choose from different
types of equity funds including those that specialize in growth stocks (which don’t usually pay
dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap
stocks, mid-cap stocks, small-cap stocks, or combinations of these.

4. BALANCED FUNDS

These funds invest in a mix of equities and fixed income securities. They try to balance the aim
of achieving higher returns against the risk of losing money. Most of these funds follow a
formula to split money among the different types of investments. They tend to have more risk
than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more
equities and fewer bonds, while conservative funds hold fewer equities relative to bonds

5. INDEX FUNDS

These funds aim to track the performance of a specific index such as the S&P/TSX Composite
Index. The value of the mutual fund will go up or down as the index goes up or down. Index
funds typically have lower costs than actively managed mutual funds because the portfolio
manager doesn’t have to do as much research or make as many investment decisions.

6. SPECIALTY FUNDS

These funds focus on specialized mandates such as real estate, commodities or socially
responsible investing. For example, a socially responsible fund may invest in companies that
support environmental stewardship, human rights and diversity, and may avoid companies
involved in alcohol, tobacco, gambling, weapons and the military
 7. BOND FUND

Bond funds invest in fixed income or debt securities. Bond funds can be sub-classified according
to:

 The specific types of bonds owned (such as high-yield or junk bonds, investment-
grade corporate bonds, government bonds or municipal bonds)

 The maturity of the bonds held (i.e., short-, intermediate- or long-term)

 The country of issuance of the bonds (such as U.S., emerging market or global)

 The tax treatment of the interest received (taxable or tax-exempt)

8. STOCK FUNDS
Stock, or equity, funds invest in common stocks. Stock funds may focus on a particular area of
the stock market, such as

 Stocks from only a certain industry

 Stocks from a specified country or region

 Stocks of companies experiencing strong growth

 Stocks that the portfolio managers deem to be a good value relative to the value of the
company's business

 Stocks paying high dividends that provide income

 Stocks within a certain market capitalization range

9. HYBRID FUNDS
Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset
allocation funds, target date or target risk funds, and lifecycle or lifestyle funds are all types of
hybrid funds.
Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in
other mutual funds that invest in securities. Many funds of funds invest in affiliated funds
(meaning mutual funds managed by the same fund sponsor), although some invest in unaffiliated
funds (i.e., managed by other fund sponsors) or some combination of the two.

10. FUND-OF-FUNDS
These funds invest in other funds. Similar to balanced funds, they try to make asset allocation
and diversification easier for the investor. The MER for fund-of-funds tend to be higher than
stand-alone mutual funds.

STRUCTURE OF MUTUAL FUND

 There are hundreds of mutual fund schemes to choose from. Hence, they have been categorized
by structure, nature and investment objective.

CLOSE ENDED FUND/SCHEME: A close ended fund or scheme has a predetermined

maturity period (eg. 5-7 years). The fund is open for subscription during the launch of the
scheme for a specified period of time. Investors can invest in the scheme at the time of the initial
public issue and thereafter they can buy or sell the units on the stock exchanges where they 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 or
they are listed in secondary market.

OPEN ENDED FUND/SCHEME: The most common type of mutual fund available for
investment is an open-ended mutual fund. Investors can choose to invest or transact in these
schemes as per their convenience. In an open-ended mutual fund, there is no limit to the number
of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund
to new investors in order to keep it manageable. The value or share price of an open-ended
mutual fund is determined at the market close every day and is called the Net Asset Value
(NAV).

INTERVAL SCHEMES: Interval schemes combine the features of open-ended and close-ended
schemes. The units may be traded on the stock exchange or may be open for sale or redemption
during pre-determined intervals at NAV related prices. FMPs or Fixed maturity plans are
examples of these types of schemes.

TYPES OF MUTUAL FUNDS BY NATURE

EQUITY MUTUAL FUNDS: These funds invest maximum part of their corpus into equity
holdings. The structure of the fund may vary for different schemes and the fund manager’s
outlook on different stocks. The Equity funds are sub-classified depending upon their investment
objective, as follows:
 Diversified equity funds
 Mid-cap funds
 Small cap funds
 Sector specific funds
 Tax savings funds (ELSS)
Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.
 DEBT MUTUAL FUNDS: These funds invest in debt instruments to ensure low risk and
provide a stable income to the investors. Government authorities, private companies, banks and
financial institutions are some of the major issuers of debt papers. Debt fundscan be further
classified as:
 Gilt funds
 Income funds
 MIPs
 Short term plans
 Liquid funds
BALANCED FUNDS: They invest in both equities and fixed income securities which are in
line with pre-defined investment objective of the scheme. The equity portion provides growth
while debt provides stability in returns. This way, investors get to taste the best of both worlds.

TYPES OF MUTUAL FUNDS BY INVESTMENT OBJECTIVE

GROWTH SCHEMES
Also known as equity schemes, these schemes aim at providing capital appreciation over
medium to long term. These schemes normally invest a major portion of their fund in equities
and are willing to withstand short-term decline in value for possible future appreciation.

INCOME SCHEMES
Also known as debt schemes, they generally invest in fixed income securities such as bonds and
corporate debentures. These schemes aim at providing regular and steady income to investors.
However, capital appreciation in such schemes may be limited.

INDEX SCHEMES
These schemes attempt to reproduce the performance of a particular index such as the BSE
Sensex or the NSE 50. Their portfolios will consist of only those stocks that constitute the index.
The percentage of each stock to the total holding will be identical to the stocks index weight age.
And hence, the returns from such schemes would be more or less equivalent to those of the
Index.