INTRODUCTION

A mutual fund is just the connecting bridge or a financial intermediary that

allows a group of investors to pool their money together with a predetermined
investment objective. The mutual fund will have a fund manager who is responsible
for investing the gathered money into specific securities (stocks or bonds). When you
invest in a mutual fund, you are buying units or portions of the mutual fund and thus
on investing becomes a unit holder of the fund.
Mutual funds are considered as one of the best available investments as
compare to others they are very cost efficient and also easy to invest in, thus by
pooling money together in a mutual fund, investors can purchase stocks or bonds with
much lower trading costs than if they tried to do it on their own. But the biggest
advantage to mutual funds is diversification, by minimizing risk & maximizing
returns.

HISTORY OF MUTUAL FUNDS

Prof K Geert Rouwenhorst in 'The Origins of Mutual Funds, states that the
origin of pooled investing concept dates back to the late 1700s in Europe, when "a
Dutch merchant and broker invited subscriptions from investors to form a trust to
provide an opportunity to diversify for small investors with limited means." The
emergence of "investment pooling" in England in the 1800s brought the concept
closer to the US shores.

CONCEPT OF MUTUAL FUNDS

Mutual fund is a vehicle to mobilize moneys from investors, to invest in

different markets and securities, in line with the investment objectives agreed upon,
between the mutual fund and the investors. In other words, through investment in a
mutual fund, a small investor can avail of professional fund management services
offered by an asset management company.

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Role of Mutual Funds
Mutual funds perform different roles for different constituencies. Their
primary role is to assist investors in earning an income or building their wealth, by
participating in the opportunities available in various securities and markets. It is
possible for mutual funds to structure a scheme for any kind of investment objective.
Mutual funds can also act as a market stabilizer, in countering large inflows or
outflows from foreign investors. Mutual funds are therefore viewed as a key
participant in the capital market of any economy.
THE MUTUAL FUND INDUSTRY IN INDIA :
The mutual fund industry in India started in 1963 with the formation of
UnitTrust of India (UTI)at the initiative of the Reserve Bank of India (RBI) and the
Government of India.The objective then was to attract small investors and introduce
them to market investments.

Mutual Fund Schemes:

Mutual funds seek to mobilize money from all possible investors. Various
investors have different investment preferences. In order to accommodate these
preferences, mutual funds mobilize different pools of money. Each such pool of money is
called a mutual fund scheme. Every scheme has a pre-announced investment objective.
When investors invest in a mutual fund scheme, they are effectively buying into its
investment objective.

Operation of mutual fund schemes:

Mutual fund schemes announce their investment objective and seek investments
from the public. Depending on how the scheme is structured, it may be open to accept
money from investors, either during a limited period only, or at any time. The investment
that an investor mak
scheme.

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 Thus, an investor in a scheme is issued units of the scheme. Under the law,
every unit has a face value of Rs. 10. (However, older schemes in the market may
have a different face value). The face value is relevant from an accounting
perspective. The number of units multiplied by its face value (Rs. 10) is the capital of
the scheme its UnitCapital.

Investments can be said to have been handled profitably, if the

following profitability metric is positive:
(A) + Interest income
(B) + Dividend income

(C) Realized capitallosses

(D) Valuationlosses

(E) Schemeexpenses

Net Asset Value:

When the investment activity is profitable, the true worth of a unit goes up when there are
losses, the true worth of a unit goes down. The true worth of a unit of the scheme is otherwise
called Net Asset Value (NAV) of the scheme. In the market, when people talk of NAV, they
refer to the value of each unit of the fund
Types of Funds:
The mutual funds are mainly classified into following types.
Open-endedFunds
Close- endedFunds
IntervalFund
Open-ended funds:

These are open for investors to enter or exit at any time, even after the NFO. When existing
investors buy additional units or new investors buy units of the open ended scheme, it is
called a sale transaction. It happens at a sale price, which is equal to the NAV. When
investors choose to return any of their units to the scheme and get back their equivalent
value, it is called a re-purchase transaction.This happens at a re- purchase price that is linked
to theNAV.

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 Although some unit-holders may exit from the scheme, wholly or partly, the scheme
continues operations with the remaining investors. The scheme does not have any kind of
time frame in which it is to be closed..
Close-ended funds:
These Funds have a fixed maturity. Investors can buy units of a close- ended scheme, from
the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-
NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange.
Such listing is compulsory for close-ended schemes.
Therefore, after the NFO, investors who want to buy Units will have to find a seller for
those units in the stock exchange. Similarly, investors who want to sell Units will have to
find a buyer for those units in thestockexchange.
Interval funds:
These funds combines features of both open-ended and closed-ended schemes.They are largely
Closely ended,but become open ended at pre specified intervals.
Debt, Equity and Hybrid Funds:

These schemes might have an investment objective to invest largely in equity shares and
equity-related investments like convertible debentures. Such schemes are called equity
schemes. Schemes with an investment objective that limits them to investments in debt
securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt
funds. Hybrid Funds have an investment charter that provides for a reasonable level of
investment in both debt and equity.

Types of Debt Funds:

Gilt funds:

The invest in only treasury bills and government securities, which do not have a credit risk
(i.e. the risk that the issuer of the security defaults).

Diversified debt funds:

On the other hand, invest in a mix of government and non-government debt securities.

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Junk bond schemes:

These are high yield bond schemes invest in companies that are of poor credit quality. Such
schemes operate on the premise that the attractive returns offered by the investee
companies makes up for the losses arising out of a few companies defaulting.

Types of Equity Funds:

Diversified equity fund:
It is a category of funds that invest in a diverse mix of securities that cut across sectors
Sector funds:
However invest in only a specific sector. For example, a banking sector fund will invest in
only shares of banking companies. Gold sector fund will invest in only shares of gold-
related companies.

Thematic funds:

These Funds invest in line with an investment theme. For example, an infrastructure
thematic fund might invest in shares of companies that are into infrastructure construction,
infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus
more broad-based than a sector fund; but narrower than a diversified equityfund.

Equity Linked Savings Schemes:

ELSS as seen earlier, offer tax benefits to investors. However, the investor is
expected to retain the Units for at least 3 years.

Equity Income / Dividend Yield Schemes:

The invest in securities whose shares fluctuate less, and therefore, dividend represents a
larger proportion of the returns on those shares. The NAV of such equity schemes are
expected to fluctuate lesser than other categories of equity schemes

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Capital Protected Schemes:
These are close-ended schemes, which are structured to ensure that investors get their
principal back, irrespective of what happens to the market.

This is ideally done by investing in Zero Coupon Government Securities whose maturity is
upon securities are securities that do not pay a
regular interest, but accumulate the interest, and pay it along with the principal when the
security matures).

Even if the risky investment becomes completely worthless (a rare possibility), the investor
is assured of getting back the principal invested, out of the maturity moneys received on the
government security. Some of these schemes are structured with a minor difference the
investment is made in good quality debt securities issued by companies, rather than Central
GovernmentSecurities.

Gold Funds:

These funds invest in gold and gold-related securities.They can be structured in

either of the following formats.

Gold Exchange Traded Fund:

The Fund In which is like an index fund that invests in gold.

The NAV of such funds moves in line with gold prices in the market. Gold Sector Funds
i.e. the fund will invest in shares of companies engaged in gold mining and processing.

Though gold prices influence these shares, the prices of these shares are more closely
linked to the profitability and gold reserves of the companies.

Real Estate Funds:

They take exposure to real estate. Such funds make it possible for small investors to take
exposure to real estate as an asset class. Although permitted by law, real estate mutual
funds are yet to hit the market in India.

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Commodity Funds:

Commodities, as an asset class, include:

Food crops like wheat andpaddy

Industrial metals like copper andaluminium

Energy products like oil and naturalgas

Precious metals (bullion) like gold andsilver

The investment objective of commodity funds would specify us commodities it proposes to

invest in. As with gold, such funds can be structured as Commodity ETF or Commodity
SectorFunds.

International Funds:
These are funds that invest outside the country. For instance, a mutual fund may offer a
scheme to investors in India, with an investment objective to invest abroad.

One way for the fund to manage the investment is to hire the requisite people who will
manage thefund.

Fund of Funds:

Alternative route would be to tie up with a foreign fund (called the host fund). If an Indian mutual
fund sees potential in China, it will tie up with a Chinese fund. In India, it will launch what is called
a feeder fund. Investors in India will invest in the feederfund.

-specify the mutual funds whose schemes they will buy and or the kind of
schemes they will invest in. They are designed to help investors get over the trouble of choosing
between multiple schemes and their variants in the market.

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Exchange Traded Funds:
Exchange Traded funds (ETF) are open-ended index funds that are traded in a stock
exchange.

A feature of open-ended funds, which allows investors to buy and sell units from the
mutual fund, is made available only to very large investors in an ETF.

Other investors will have to buy and sell units of the ETF in the stock exchange. In order to
facilitate such transactions in the stock market, the mutual fund appoints some
intermediaries as market makers, whose job is to offer a price quote for buying and selling
units at all times.

Legal Structure of Mutual Funds in India:

SEBI (Mutual Fund) Regulations, 1996 as amended till date
fund established in the form of a trust to raise moneys 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 or gold or gold related
instruments or real estateassets.

Key features of a mutual fund that flow from the definition is:

It is established as atrust.

It raises money through sale of units to the public or a section of the public

The units are sold under one or moreschemes