Mutual Fund Industry Growth in India

M.D COLLEGE T.Y.F.
M MUTUAL FUND INDUSTRY IN INDIA
MUTUAL FUND INDUSTRY IN INDIA
INDEX:- PAGE
NO:-
1. Introduction of Mutual Fund 2
2. Origin of Mutual Fund Industry in India 4
3. Growth of Mutual Fund Industry in India 6
4. Saving and Alternative Investment Objective 7
5. Types of Mutual Fund 19
6. Classification of Mutual fund 22
7. Advantages and Disadvantages of Mutual Fund 28
8. SEBI Guidelines for Mutual Fund 34
9. Recent Trend of Mutual Fund 37
10.Conclusion 39
11.Reference 40
B.COM(FINANCIAL MARKET)_1
M.D COLLEGE T.Y.F.M MUTUAL FUND INDUSTRY IN INDIA
CHAPTER .1
1. Introduction of Mutual Fund
Mutual Fund are very popular all the world and they play a important role in financial
system of many countries. Mutual funds are the ideal medium for investment by
small investor in stock market. Mutual fund pool together the investment of small
investor for participation in stock market. Being institutional investor, mutual fund
can afford market analysis generally not available to individual investor. Futher
more, mutual fund can diversify the portfolio in better way as compared with
individual investor due to the expertise and availability of funds.
A Mutual fund is a type of professionally managed investment fund that pools

money from many investors to purchase securities.[1] While there is no legal
definition of the term "mutual fund", it is most commonly applied only to those
collective investment vehicles that are regulated and sold to the general public. They
are sometimes referred to as "investment companies" or "registered investment
companies". Hedge funds are not mutual funds, primarily because they cannot be
sold to the general public.
In the United States, mutual funds must be registered with the U.S. Securities and
Exchange Commission, overseen by a board of directors or board of trustees, and
managed by a Registered Investment Advisor. Mutual funds are also subject to an
extensive and detailed regulatory regime set forth in the Investment Company Act
of 1940. Mutual funds are not taxed on their income and profits if they comply with
certain requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing
in individual securities. Today they play an important role in household finances,
most notably in retirement planning.
There are three types of U.S. mutual funds—open-end funds, unit investment trusts,
and closed-end funds. The most common type, open-end funds, must be willing to
buy back shares from investors every business day. Exchange-traded funds (ETFs)
are open-end funds or unit investment trusts that trade on an exchange. Non-
exchange traded open-end funds are most common, but ETFs have been gaining in
popularity.
Mutual funds are generally classified by their principal investments. The four main
categories of funds are money market funds, bond or fixed income funds, stock or
equity funds, and hybrid funds. Funds may also be categorized as index (or passively
managed) or actively managed.
Investors in a mutual fund pay the fund’s expenses, which reduce the fund's returns
and performance. There is controversy about the level of these expenses.
CHAPTER .2
2.Origin of Mutual Fund Industry 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 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. .
CHAPTER .3
3.Growth of Mutual Fund Industry in India
By the year 1970, the industry had 631 funds with combined total assets of 47.6
billion dollars in 10.7 million shareholder’s account. However from 1970 and
onwards rising interest rates, stock market stagnation, inflation and investors some
other reservation about the profitability of mutual funds, Adversely effected the
growth of mutual fund. Hence Mutual fund realized the need to introduce new types
of Mutual fund, which were in tune with changing requirements and interest of the
investor. The 1970’s saw a new kind of fund innovation funds with no commission
called “no load” funds. The largest and most successful no load family of funds is
the vanguard funds, created by John Bogle in 1977.
In the series of new product the first Money Market fund (MMMF) i.e “ The Reserve
Fund” was started in November 1971. This new concept signaled a dramatic change
in the Mutual fund Industry and sparked a surge of creativity in the industry.
The History of mutual funds dates support to 19th century when it was introduced
in Europe in particular, Great Britain. Robert Fleming set up in 1868 the first
investment trust called Foreign and colonial investment which promises to manage
the finances of the moneyed class of Scotland by scattering the investment over a
number of different stocks. This investment trust and other investment trust which
were afterward set up in Britain and the U.S resembled todays closes-ended mutual
funds. The first mutual fund in the U.S Massachusetts investor’s trust was set in
march 1924. This was the open-ended mutual fund.
Chapter .4
4.Saving and Alternative Investment Objective
 DEFINATION
An investment that is not one of the three traditional asset types (stocks, bonds and
cash). Most alternative investment assets are held by institutional investors or
accredited, high-net-worth individuals because of their complex nature, limited
regulations and relative lack of liquidity. Alternative investments contracts.
Funds can be excellent vehicles for both long-term investment objectives and short-
term goals. Mutual funds pool the resources of many small investors, providing
those investors with the ability to buy dozens--or even hundreds—of different stocks
and bonds. This serves to spread the risk inherent in the stock and bond markets,
protecting investors from specific stock risk and increasing their odds of a good
return over time. There are a number of mutual funds on their own financial needs
the market, and it is important for investors to choose the ones that best meet their
own financial needs.
 Objective Of Saving
 Term Growth :-
Long-term growth is important for many reasons, and stock market mutual funds
generally have long-term appreciation of capital as a major goal. The stock market
can be quite volatile over the short-term, but over longer periods of time the growth
rate can be quite dramatic. When choosing a mutual fund for long-term growth, it is
important to look for one that is widely-diversified across many different industries.
An index fund that tracks the total stock market or a broad index like the Standard
and Poors 500 is a particularly good choice.
 Current Income:-
There are many investors who need current income as well as the prospect for long-
term growth. Retirees often use mutual funds that hold dividend paying stocks and
high interest bonds to supplement their pension and Social Security checks. Other
investors might use current income funds to stretch their savings or pay current
expenses.
There are a number of mutual funds that provide current income, including bond
funds and funds that hold dividend paying stocks. When choosing a fund it is
important to consider safety as well as yield. For instance, high-yield bond funds
generally pay more than government bond funds, but they are also riskier.
 Safety:-
Investors who want rock solid safety and predictable returns should choose a money
market fund. These funds invest in a variety of short-term instruments designed to
provide safe, predictable interest income. Money market funds are a good place to
hold money between investments, as well as a good place to put money aside for
emergencies. When choosing a money market mutual fund, it is important to look
for one with extremely low costs, under 0.10% if possible. Since these funds are
designed for safety, the yields can be quite low, although they are still often higher
than comparable bank money markets. Keeping your costs low means you keep
more of the money you earn
 Diversification:-
Investors are often advised that they shouldn't "put all their eggs in one basket."
Investors who have too high of a percentage of their assets in one or two stocks can
be severely affected if one of the companies goes belly-up. Most financial experts
say investors should have at least 15 stocks in their portfolios. It takes a lot of time
and effort to keep up with that many companies. Conversely, mutual funds hold a
number of stocks, which gives investors instant diversification and protects them
from a sharp decline in any one holding.
 Growth:-
Some mutual fund investors are looking for rapid growth in the value of their funds.
Stocks have historically offered the best long-term returns of any asset class, though
it can be an up-and-down ride. Stock funds that are labeled "growth" typically invest
in companies with bright prospects, while "value" funds target stocks that seem
inexpensive compared with the company's earnings.
 Income:-
Other fund investors care more about receiving income from their investments.
Numerous stock funds invest in companies with high dividend payouts. Bond funds
also can provide steady income, as can funds that invest in real estate investment
trusts, or REITs. All these income-focused funds pass the yields along to their
investors, usually on a monthly or quarterly basis. Yields of 3 percent to 7 percent
are often available with income-oriented mutual funds.
 International Exposure:-
Some large international firms offer their shares on U.S. markets, but others don't.
For example, individual investors can have a hard time getting access to shares in
the fast-growing Chinese market. But international-focused mutual funds have an
easier time investing in these shares. Because half the world's corporate value is
outside the U.S., it's important to have some exposure to overseas stocks, and mutual
funds are the easiest way to get this
 Low Fees:-
Stock picking can be expensive thanks to broker commissions, but many "no-load"
mutual funds are available that don't charge investors anything. Many other funds
charge investors less than 1 percent a year for operational fees.
Investors looking for especially inexpensive funds might consider index funds,
which charge fees as low as 0.1 percent per year. These funds usually hold every
stock or bond in a given asset class, which offers tremendous diversification at a low
cost.
MUTUAL FUND INVESTMENT OBJECTIVES DEFINED
 INVESTMENT OBJECTIVE
There are many ways to try to make money from investments. An investor might
take on additional risk to try to profit from potential growth in the value of the shares
of a stock. A retiree might prefer an investment whose chief benefit is the periodic
income payments it offers. Someone else's priority might be to preserve the value of
the original investment, even if that means the investment doesn't increase much in
value over time.
Like all mutual funds, stock funds are managed based on a specific investment
objective. That objective will determine the role a specific fund will play in your
portfolio, and how well it might fit with your overall investing strategy. The
investment objective determines what types of stocks the fund's manager may decide
to purchase. A fund may be broadly based, investing in both large- and small-cap
companies in many different industries. Or it may have a much narrower focus,
concentrating only on blue chips, for example, or stocks in a single industry.
Typically, a stock mutual fund's objective will be either capital appreciation, income
from equities, or both. For example, a stock fund might have both growth and income
as objectives, or its primary objective might be capital appreciation, with income as
a secondary objective.
A mutual fund's investment objective is not necessarily the same thing as its
investing style, though the two may overlap. In addition to pursuing a fund's
investment objective, a fund manager may adhere to a particular investing style. For
example, a growth fund focuses on stocks that are growing quickly and that seem to
have greater than average potential for appreciation in share price. By contrast, a
value-oriented fund buys stocks that appear to be undervalued by the market relative
to the company's intrinsic worth. Each may have growth as its investment objective,
but they pursue growth in different ways. Some managers even blend the two
approaches.
Like most mutual funds, a stock fund may be either passively managed, as an index
fund is, or actively managed. It also may be an open-end or closed-end fund. Before
investing in any fund, carefully consider its investment objectives, risks, fees, and
expenses, which can be found in the prospectus available from the fund. Read it
carefully before investing.
Many mutual funds combine an investment objective with a specific category of
stocks. For example, a fund might be an international fund whose objective is
growth, or a growth fund that specializes in small-cap stocks. Here are some
common stock fund types based on their investment objectives:
 INVESTMENT:-
Investment refers to current commitment of funds for a specified time period to

derive benefits in future.
The future benefits derived from an investment are known as ‘ returns ’
: with an expectation to get the principal back along with the interest
at a future date
/or in case of
an eventuality
As the reward would accrue only in future, it involves ‘risk’ (of realized return
being lower than that expected)
Maximization of return
Minimization
Hedge against inflation (if the investment cannot earn as much as the rise in price
level, the ‘real’ rate of return will be negative)
 INVESTMENT ALTERNATIVES
o FINANCIAL ASSETS
- marketable financial assets
REAL ASSETS
EQUITY SHARES
o Represents ownership capital
placed before the company
ownership
o Risk: residual claim over income
o Reward: partners in progress
o The amount of capital that a company can issue as per its memorandum represents
authorized capital
o The amount offered by the company to the investors is called issued capital
o The part of issued capital that is subscribed to by the investors is called subscribed
capital / paid up capital
EQUITY SHARES
o Blue chip shares
record of earnings and dividend
o Growth shares
having an above average rate of growth and profitability
o Income shares
and high dividend payouts
o Cyclical shares
o Defensive shares
economic conditions
o Speculative shares
BONDS
o They are long term debt instruments issued for a fixed time period
o Bonds are debt securities issued by the government or PSUs
o Debentures are debt securities issued by private sector companies
o They comprise of periodic interest payments over the life of the instrument and the
principal repayment at the time of redemption
o Debt securities issued by the central government , state government and quasi
government agencies are referred to as gilt-edged securities
o Callable bonds are the ones that can be called for redemption earlier than their date
of maturity. This right to call is available with the company
o Convertible bonds are the ones that can be converted into equity shares at a later
date either fully or partly. This option is available with the bond holder
o Coupon rate is the nominal rate of interest fixed and printed on the bond certificate.
It is calculated on the face value and is payable by the company till maturity
PREFERENCE SHARES
o Represents a hybrid security that has attributes of both equity shares and
debentures.
o They carry a fixed rate of dividend . However it is payable only out of distributable
profits
o Dividend on preference shares is generally cumulative . Dividend skipped in one

year has to be paid subsequently before equity dividend can be paid
o Only redeemable preference shares can be issued
NON-MARKETABLE SECURITIES
o These represent personal transactions between the investor and the issuer.
o Bank deposits
– current, savings and fixed deposit
others earn an interest
features of the
bank deposits
NON-MARKETABLE SECURITIES
o Company deposits
of Companies Act, 1956
t investors
would normally get from the banks
12.5%.
o Post Office Monthly Income Scheme
interest on a monthly basis.
MONEY MARKET INSTRUMENTS
o Certificate of deposits
ranging from 3 months to 1 year
mutual
funds
of the investors
o Commercial papers
rity
an investment grade from credit rating agencies
ize is Rs 25 lacs
MUTUAL FUNDS
o Also known as an instrument for collective investment
o Investment is done in three broad categories of financial assets i.e. stocks, bonds
and cash
o Depending on the asset mix , mutual fund schemes are classified as: Equity
schemes, hybrid schemes and debt schemes
o On the basis of flexibility , Mutual fund schemes may be: Open ended or Close
ended
year
or subscription only for a specified period and can

be redeemed only on a fixed date of redemption
o On the basis of objective , mutual funds may be growth funds, income funds, or
balanced funds
o NAV of a fund is the cumulative market value of the assets of the fund net of its
liabilitie
FINANCIAL DERIVATIVES
o Futures is a transferable contract between two parties to buy or sell an asset at a

certain date in the future at a specified price
and quality of underlying instrument and a standard timing of settlement
transaction
t requires margin payments and follow daily movements
o Options are of two types:
given quantity of the underlying asset, at a given price, on or before a given future
date
Put option gives the buyer of the option a right but not an obligation to sell a given
quantity of the underlying asset, at a given price, on or before a given future date
Opportunities of Mutual Funds are tremendous specially when investment is

concerned. For any individual who intends to allocate his assets into proper forms
of investment and want to diversify his Investment Portfolio as well as the risks,
Mutual Funds can be proved as the biggest opportunity. Investors gets a lot of
advantages with the Mutual Fund Investment. Firstly, they are not required to carry
on intensive research and detailed analysis on Stock Market and Bond Market. This
work is done by the Fund Mangers of the Investment Management Company on
behalf of the investors. In fact, the professional Fund Managers who handle the
mutual funds of any particular company, are able to speculate the market trend more
correctly than any common individual. Good Speculation about the trends of stock
prices and bond prices leads to right allocation of funds in the right stocks and bonds
resulting in good rate of return.
Investors also get the advantage of high Liquidity of the mutual funds. This means
the investors can enjoy easy access to the funds invested in the mutual funds
whenever they require the money. When the investors invest in any mutual fund,
they are given some equity position in that fund. The investors can any time sell their
mutual fund shares to get back the money invested in mutual funds. The only thing
is that the Rate of Return that they will get may not be favorable as the return depends
on the present market condition. The greatest opportunity that the mutual funds offer
is the opportunity of diversifying their investments. Investment Diversification
actually diversifies the Risk associated with investment. This is because, if at a time,
if prices of some stocks are declining, deceasing the Value of Investment, prices of
some other stocks and bonds may tend to rise and in this way the loss of the mutual
fund is offset by the strength of the stocks whose prices are rising. As all the mutual
funds diversify their investments in various common stocks, preferred stocks and
different bonds, the risk to be borne by the investors are well diversified and in other
terms lowered.
CHAPTER .5
5. Types of Mutual Fund
 General Classification of Mutual Funds

Open-end Funds | Closed-end Funds
 Open-end Funds Funds that can sell and purchase units at any point in
time are classified as Open-end Funds. The fund size (corpus) of an open-end
fund is variable (keeps changing) because of continuous selling (to investors)
and repurchases (from the investors) by the fund. An open-end fund is not
required to keep selling new units to the investors at all times but is required
to always repurchase, when an investor wants to sell his units. The NAV of
an open-end fund is calculated every day.
 Closed-end Funds Funds that can sell a fixed number of units only during
the New Fund Offer (NFO) period are known as Closed-end Funds. The
corpus of a Closed-end Fund remains unchanged at all times. After the closure
of the offer, buying and redemption of units by the investors directly from the
Funds is not allowed. However, to protect the interests of the investors, SEBI
provides investors with two avenues to liquidate their positions:
1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell
units from/to each other. The trading is generally done at a discount to the NAV of
the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated
every Thursday)..
2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this
case, the corpus of the Fund and its outstanding units do get changed.
 Load Funds | No-load Funds
Load Funds Mutual Funds incur various expenses on marketing, distribution,

advertising, portfolio churning, fund manager's salary etc. Many funds recover these
expenses from the investors in the form of load. These funds are known as Load
Funds. A load fund may impose following types of loads on the investors:
1. Entry Load - Also known as Front-end load, it refers to the load charged to an
investor at the time of his entry into a scheme. Entry load is deducted from the
investor's contribution amount to the fund.
2. Exit Load - Also known as Back-end load, these charges are imposed on an
investor when he redeems his units (exits from the scheme). Exit load is deducted
from the redemption proceeds to an outgoing investor.
3. Deferred Load - Deferred load is charged to the scheme over a period of time.
4. Contingent Deferred Sales Charge (CDSC) - In some schemes, the

percentage of exit load reduces as the investor stays longer with the fund.
This type of load is known as Contingent Deferred Sales Charge

 No-load Funds All those funds that do not charge any of the above
mentioned loads are known as No-load Funds.
 Tax-exempt Funds | Non-Tax-exempt Funds
Tax-exempt Funds Funds that invest in securities free from tax are known as
Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution
tax (tax for distributing income to investors). Long term capital gains and dividend
income in the hands of investors are tax-free.
Non-Tax-exempt Funds Funds that invest in taxable securities are known as

Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds
are liable to pay tax on distribution income. Profits arising out of sale of units by an
investor within 12 months of purchase are categorized as short-term capital gains,
which are taxable. Sale of units of an equity oriented fund is subject to Securities
Transaction Tax (STT). STT is deducted from the redemption proceeds to an
investor.
CHAPTER .6
6.Classification of Mutual fund
Classification of Mutual Funds in India is done on the basis of their objective

and structure. Classification of Mutual Funds in India has helped to categorize
them into major types such as Funds of Funds, Regional Mutual Funds,
Closed- End Funds, Large Cap Funds, and Interval Funds.
 A glance at Mutual fund in India:

Mutual fund in India is a kind of collective investment that is managed
professionally. In Mutual fund in India, the money is collected from a large
number of investors and then it is invested in bonds, stocks, and various other
securities. The fund manager of Mutual fund in India collects the interest
income which is then distributed among the individual investors on the basis
of the number of units that they hold. Mutual fund's value of a share is
calculated on a daily basis and is known as per share Net Asset Value (NAV)
 Various kinds of Mutual funds in India:
Classification of Mutual Funds in India has been done on the basis of their
investment objective and structure. Classification of Mutual Funds in India
has be done into main types such as Income Funds, Sector- Specific Funds,
Large Cap Funds, Fixed- Income Funds, Interval Funds, Closed- End Funds,
and Tax Saving Funds. Income Funds in India are a kind of mutual fund whose
aim is to provide to the investors with steady and regular income. They usually
invest their principal in securities such as corporate debentures, bonds, and
government securities.
Sector- Specific Funds in India are funds that make investments in specified
sectors only. They give importance to one sector only such as
pharmaceuticals, software, infrastructure, and health care. Large Cap Funds
in India are a kind of mutual fund that makes investment in the shares of large
blue chip companies. Fixed- Income Funds in India makes investment in debt
securities that have been issued either by the banks, government, or
companies. They are also known as income funds and debt funds. Interval
Funds in India are a combination of both the open and close ended funds. They
offer the investors flexibility for they can be sold and repurchased at the period
of time that has been predetermined. Closed- End Funds in India are a kind of
mutual fund that has a maturity period that has been specified and which
usually varies from three to fifteen years. Tax Saving Funds in India offer tax
rebates to the investor under the Section 88, Income Tax Act. They are also
known as equity- linked savings scheme.
 Share
There are different types of mutual funds in India available in the market
which an investor can choose depending on his profile, risk taking capacity
and time horizon.
The classification of mutual funds can be done on either the investment
objective or on structure of the mutual fund.
Let’s go through each one of these classifications by looking at the chart
below and understand what they mean.
 Miscellaneous Classification
1.Open and Close Ended Mutual Funds:
A mutual fund can be either Open ended or Close ended. Open ended funds
can buy and sell its units at any time – so an an investor, you can purchase and
sell your holdings in such funds at any time.
Given this, its corpus keeps changing. On the contrary, close ended funds can
only be bought by investors buying the period they are up for sale – called the
New Fund Offer (NFO) period. Investors can sell them either on the stock
exchanges where it is listed or during special buy back periods which the
AMC (Asset Management Company) schedules.
2.Growth and Dividend Mutual Funds :

Funds that make your capital grow over a period of time without giving out
profits/dividends to you are called growth funds.
In case you received dividends from them, its called a dividend fund.
Obviously, in the latter case, since the profits are paid out from the fund
corpus, the NAV of the fund will be less.
3.Debt Mutual Funds

These invest in commercial papers, certificates of deposits, treasury bills,
corporate bonds, debentures and government bonds among others.
There are other classification of such funds, depending on the maturity of the
paper held, for eg, short-term and medium-term to long-term funds So these
invest in predominantly debt securities and their agenda is to generate stable
income for investors with less amount of risk. These shall be covered in a later
lesson in more detail.
4.Equity Mutual Funds

These invest primarily in stocks of companies – in a sense, you own up ending
a part of the company when you buy into these. These are meant for long term
investments and carry a great deal of risk. Their purpose is capital appreciation
over a long period of time.
a).Diversified Equity funds

invest in a wide selection of stocks across different companies and market
capitalizations so as to reduce the risk for the investor.
b.)Index funds
invest in companies that comprise the benchmark index (say NSE or BSE)
and in the same proportion as the index itself. So the returns of these are in
line with the index.
c.)ELSS (equity linked savings schemes)

or tax saving mutual funds provide tax benefit to investors under section 80(C)
and also have a lock-in period of 3 years – this means that as an investor, you
cannot redeem(sell) your holdings before three years of buying the mutual
fund.
d.)Sector or Thematic funds

invest in a particular sector eg, there could be a fund investing in only the
banking sector. Similarly, there could be thematic funds investing in a
particular theme, example, infrastructure.
e.)Large-cap mutual funds

invest in large market capitalization companies. There is no clear definition
of what large capitalization means, many AMCs pick the top 100 companies
(based on market cap) on the Sensex and call them large-cap.
Similarly, there exists mid-cap and small-cap mutual funds – those which
invest in medium market capitalization companies and small market
capitalization companies respectively. Among these, large-cap carries the
lowest risk while the small cap carries the most risk.
 Hybrid Mutual Funds
Balanced Mutual Funds invest in at least 65% equities and the rest 35% in debt.
The debt portion provides stability while the equity portion provides capital
appreciation.
Monthly Income Plans (MIPs) are plans which invest around 15%-25% in
equities and the rest in debt and money market instruments.
Other Types
Gold Mutual Funds are those that invest in gold as the underlying assets.
International Funds invest in companies outside India.
Exchange Traded Funds(ETFs) are those that are traded on the stock exchange
on a real time basis.
Socially responsible mutual funds invest in companies that have social,

environmental or moral beliefs and promote the same.
Fund of Funds do not invest in any companies – instead they put in their money
into other AMC’s mutual funds.
 Funds: Evaluating Performance
Perhaps you've noticed all those mutual fund ads that quote their amazingly high
one-year rates of return. Your first thought is "wow, that mutual fund did great!"
Well, yes it did great last year, but then you look at the three-year performance,
which is lower, and the five year, which is yet even lower. What's the underlying
story here? Let's look at a real example from a large mutual fund's performance:
Last year, the fund had excellent performance at 53%. But, in the past three years,
the average annual return was 20%. What did it do in years 1 and 2 to bring the
average return down to 20%? Some simple math shows us that the fund made an
average return of 3.5% over those first two years: 20% = (53% + 3.5% + 3.5%)/3.
Because that is only an average, it is very possible that the fund lost money in one
of those years. It gets worse when we look at the five-year performance. We know
that in the last year the fund returned 53% and in years 2 and 3 we are guessing it
returned around 3.5%. So what happened in years 4 and 5 to bring the average return
down to 11%? Again, by doing some simple calculations we find that the fund must
have lost money, an average of -2.5% each year of those two years: 11% = (53% +
3.5% + 3.5% - 2.5% - 2.5%)/5. Now the fund's performance doesn't look so good! It
should be mentioned that, for the sake of simplicity, this example, besides making
some big assumptions, doesn't include calculating compound interest. Still, the point
wasn't to be technically accurate but to demonstrate the importance of taking a closer
look at performance numbers. A fund that loses money for a few years can bump the
average up significantly with one or two strong years.
It's All Relative Of course, knowing how a fund performed is only one third
of the battle. Performance is a relative issue, literally. If the fund we looked
at above is judged against its appropriate benchmark index, a whole new
layer of information is added to the evaluation. If the index returned 75% for
the 1 year time period, that 53% from the fund doesn't look quite so good. On
the other hand, if the index delivered results of 25%, 5%, and -5% for the
respective one, three, and five-year periods, then the fund's results look rather
fine indeed. To add another layer of information to the evaluation, one can
consider a fund's performance against its peer group as well as against its
index. If other funds that invest with a similar mandate had similar
performance, this data point tells us that the fund is in line with its peers. If
the fund bested its peers and its benchmark, its results would be quite
impressive indeed. Looking at any one piece of information in isolation only
tells a small portion of the story. Consider the comparison of a fund against
its peers. If the fund sits in the top slot over each of the comparison periods,
it is likely to be a solid performer. If it sits at the bottom, it may be even worse
than perceived, as peer group comparisons only capture the results from
existing funds.
CHAPTER.7
7. Advantages and Disadvantages of Mutual Fund
 Advantages of Mutual Funds
The Mutual Funds are one of the best financial instruments offered to the
public by the finance corporations. The Mutual Funds are collective
investments, and use that money as investment in various stocks, bonds, and
other securities to earn interest and disburse dividends.Advantages of Mutual
Funds are the primary reason for the popularity of the mutual funds. The
Mutual Funds offers easy access to invest in the complex financial market.
Major advantages of Mutual Funds are professional management,
diversification and liquidity.
 Advantages of Mutual Funds-Overview


 1.Flexibility:
The investments pertaining to the Mutual Fund offers the public a lot of
flexibility by means of dividend reinvestment, systematic investment plans
and systematic withdrawal plans.
2. Affordability:
The Mutual funds are available in units. Hence they are highly affordable and
due to the very large principal sum, even the small investors are benefited by
the investment scheme.
3. Liquidity:
In case of Open Ended Mutual Fund schemes, the investors have the option
of redeeming or withdrawing money at any point of time at the current rate
of net value asset.
4. Diversification:
The risk pertaining to the Mutual Funds is quite low as the total investment
is distributed in several industries and different stocks.
5. Professional Management:
The Mutual Funds are professionally managed. The experienced Fund
Managers pertaining to the Mutual Funds examine all options based on
research and experience.
6. Potential of return:
The Fund Managers of the Mutual Funds gather data from leading
economists and financial analysts. So they are in a better position to analyze
the scopes of lucrative return from the investments.
7. Low Costs:
The fees pertaining to the custodial, brokerage, and others is very low.
8. Regulated for investor protection:

The Mutual Funds sector is regulated by the Securities Exchange Board of
India (SEBI) to safeguard the rights
Mutual funds are currently the most popular investment vehicle and provide
several advantages to investors, including the following:
a.)Advanced Portfolio Management you pay a management fee as part

of your expense ratio, which is used to
hire a professional portfolio manager who buys and sells stocks, bonds, etc.
This is a relatively small price to pay for help in the management of an
investment portfolio
b). Dividend Reinvestment As dividends and other interest income is declared

for the fund, it can be used to purchase additional shares in the mutual fund, thus
helping your investment grow.
c). Risk Reduction (Safety) A reduced portfolio risk is achieved through the
use of diversification, as most mutual funds will invest in anywhere from 50 to 200
different securities - depending on their focus. Several index stock mutual funds own
1,000 or more individual stock positions.
d.) Convenience and Fair Pricing Mutual funds are common and easy to buy.
They typically have low minimum investments (some around $2,500) and they are
traded only once per day at the closing net asset value (NAV). This eliminates price
fluctuation throughout the day and various arbitrage opportunities that day traders
practice.
 Disadvantage Mutual Funds
 So-Called Disadvantages of Mutual Funds?


 Disadvantage Mutual Funds Have Hidden Fees

If fees were hidden, those hidden fees would certainly be on the list of disadvantages
of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1
fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is
disclosed in the mutual fund prospectus and can be found on the mutual funds’ web
sites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee
onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot
make the list of disadvantages of mutual funds because they are not hidden and there
are thousands of mutual funds that do not charge 12b-1 fees.
 Disadvantage 2: Mutual Funds Lack Liquidity

How fast can you get your money if you sell a mutual fund as compared to ETFs,
stocks and closed-end funds? If you sell a mutual fund, you have access to your cash
the day after the sale. ETFs, stocks and closed-end funds require you to wait three
days after you sell the investment. I would call the “lack of liquidity” disadvantage
of mutual funds a myth. You can only find more liquidity if you invest in your
mattress.
Disadvantage 3: Mutual Funds Have High Sales

Charges
Should a sales charge be included in the disadvantages of mutual funds list? It’s
difficult to justify paying a sales charge when you have a plethora of no-load mutual
funds. But, then again, it’s difficult to say that a sales charge is a disadvantage of
mutual funds when you have thousands of mutual fund options that do not have sales
charges. Sales charges are too broad to be
included on my list of disadvantages of mutual funds.

Disadvantage 4: Mutual Funds and Poor Trade

Execution
If you buy or sell a mutual fund, the transaction will take place at the close of the
market regardless of the time you entered the order to buy or sell the mutual fund. I
find the trading of mutual funds to be a simple, stress-free feature of the investment
structure. However, many advocates and purveyors of ETFs will point out that you
can trade throughout the day with ETFs. If you decide to invest in ETFs over mutual
funds because your order can be filled at 3:50 pm EST with ETFs rather than receive
prices as of 4:00 pm EST with mutual funds, I recommend that you sign up for the
Stress Management Weekly Newsletter at About.com.
Disadvantage 5: All Mutual Funds Have High

Capital Gains Distributions
If all mutual funds sell holdings and pass the capital gains on to investors as a
taxable event, then we have a found a winner for the list of disadvantages of mutual
funds list. Oh well, not all mutual funds make annual capital gains distributions.
Index mutual funds and tax-efficient mutual funds do not make these distributions
every year. Yes, if they have the gains, they must distribute the gains to shareholders.
However, many mutual funds (including index mutual funds and tax-efficient
mutual funds) are low-turnover funds and do not make capital gains distributions on
an annual basis. In addition, retirement plans (IRAs, 401ks, etc.) are not impacted
by capital gains distributions. There are also strategies to avoid the capital gains
distributions including tax-loss harvesting and selling a mutual fund prior to the
distribution .
However, there are also disadvantages of mutual funds, such as the following:
a.)High Expense Ratios and Sales Charges
If you're not paying attention to mutual fund expense ratios and sales charges, they
can get out of hand. Be very cautious when investing in funds with expense ratios
higher than 1.20%, as they will be considered on the higher cost end. Be weary of
12b-1 advertising fees and sales charges in general. There are several good fund
companies out there that have no sales charges. Fees reduce overall investment
returns.
b.)Management Abuses
Churning, turnover and window dressing may happen if your manager is abusing
his or her authority. This includes unnecessary trading, excessive replacement and
selling the losers prior to quarter-end to fix the books.
c.)Tax Inefficiency
Like it or not, investors do not have a choice when it comes to capital gain payouts
in mutual funds. Due to the turnover, redemptions, gains and losses in security
holdings throughout the year, investors typically receive distributions from the fund
that are an uncontrollable tax event.
d.)Poor Trade Execution
If you place your mutual fund trade anytime before the cut-off time for same-day
NAV, you'll receive the same closing price NAV for your buy .
CHAPTER .8
8. SEBI Guidelines for Mutual Fund
SEBI Regulation Act 1996
Establishment of a Mutual Fund:
In India mutual fund play the role as investment with trust, some of the formalities
laid down by the SEBI to be establishment for setting up a mutual fund. As the part
of trustee sponsor the mutual fund, under the Indian Trust Act, 1882, under the
trustee company are represented by a board of directors. Board of Directors is
appoints the AMC and custodians. The board of trustees made relevant agreement
with AMC and custodian. The launch of each scheme involves inviting the public to
invest in it, through an offer documents.
Depending on the particular objective of scheme, it may open for further sale and
repurchase of units, again in accordance with the particular of the scheme, the
scheme may be wound up after the particular time period.
1. The sponsor has to register the mutual fund with SEBI
2.To be eligible to be a sponsor, the body corporate should have a sound track record
and a general reputation of fairness and integrity in all his business transactions
Means of Sound Track Records
The body corporate being in the financial services business for at least five years
application of registration.
capital of the AMC.
year.
3. The sponsor should hold at least 40% of the net worth of the AMC.
4. A party which is not eligible to be a sponsor shall not hold 40% or more of the net
worth
of the AMC.
5. The sponsor has to appoint the trustees, the AMC and the custodian.
6. The trust deed and the appointment of the trustees have to be approved by SEBI.
7. An AMC or its officers or employees can not be appointed as trustees of the
mutual fund.
8. At least two thirds of the business should be independent of the sponsor.
9. Only an independent trustee can be appointed as a trustee of more than one mutual
fund, such appointment can be made only with the prior approval of the fund of
which the person is already acting as a trustees.
LAUNCHING OF A SCHEMES
Before its launch, a scheme has to be approved by the trustees and a copy of its offer
documents filed with the SEBI.
1. Every application form for units of a scheme is to be accompanies by a

memorandum containing key information about the scheme.
2. The offer document needs to contain adequate information to enable the investors
to make informed investments decisions.
3. All advertisements for a scheme have to be submitted to SEBI within seven days
from the issue date.
4. The advertisements for a scheme have to disclose its investment objective.
5. The offer documents and advertisements should not contain any misleading
information or any incorrect statement or opinion.
6. The initial offering period for any mutual fund schemes should not exceed 45
days, the only exception being the equity linked saving schemes.
7. No advertisements can contain information whose accuracy is dependent on

assumption.
8. An advertisement cannot carry a comparison between two schemes unless the

schemes are comparable and all the relevant information about the schemes is given.
9. All advertisements need to carry the name of the sponsor, the trustees, the AMC
of the fund.
10. All advertisements need to disclose the risk factors.
11. All advertisements shall clarify that investment in mutual funds is subject to
market risk and the achievement of the fund’s objectives can not be assured.
CHAPTER .9
9. Recent Trend of Mutual Fund
India is at the first stage of a revolution that has already peaked in the U.S. The U.S.
boasts of an Asset base that is much higher than its bank deposits. In India, mutual
fund assets are not even 10% of the bank deposits, but this trend is beginning to
change. Recent figures indicate that in the first quarter of the current fiscal year
mutual fund assets went up by 115% whereas bank deposits rose by only 17%.
(Source: Thinktank, the Financial Express September, 99) This is forcing a large
number of banks to adopt the concept of narrow banking wherein the deposits are
kept in Gilts and some other assets which improves liquidity and reduces risk. The
basic fact lies that banks cannot be ignored and they will not close down completely.
Their role as intermediaries cannot be ignored. It is just that Mutual Funds are going
to change the way banks do business in the future.
Comparison of investment in Banks V/S Mutual

Funds
PARTICULAR BANKS MUTUAL

FUNDS
Returns Low Better

Administrative High Low
exp.
Risk Low Moderate
Investment options Less More
Network High penetration Low but

improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest Minimum balance Everyday

between 10th.
& 30th. Of every
calculation month
CHAPTER.10
10. Conclusion
The Indian economy is second largest economy in the world, but on 2008 and first
quart of 2009 was international financial liquidity and global fund crisis. USA
economy affect by sub- prime crisis that creates problem of international financial
market, commodity market and foreign exchange market. But Indian economy less
affects due to fast moving for consumer durable, growth of capital expenditure
projects and service sector, Indian government easily attract foreign investors.
Foreign Institutional Investors invest on Indian capital market, it is continuous
growing.
CHAPTER .11
11. bibology
 www.investopedia.com
 www.rbi.com
 www.sebi.com

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M.D COLLEGE T.Y.F.

M MUTUAL FUND INDUSTRY IN INDIA

MUTUAL FUND INDUSTRY IN INDIA

1. Introduction of Mutual Fund 2

2. Origin of Mutual Fund Industry in India 4

3. Growth of Mutual Fund Industry in India 6

4. Saving and Alternative Investment Objective 7

5. Types of Mutual Fund 19

6. Classification of Mutual fund 22

7. Advantages and Disadvantages of Mutual Fund 28

8. SEBI Guidelines for Mutual Fund 34

9. Recent Trend of Mutual Fund 37

1. Introduction of Mutual Fund

A Mutual fund is a type of professionally managed investment fund that pools

2.Origin of Mutual Fund Industry in India

 First Phase - 1964-1987

 Second Phase - 1987-1993 (Entry of Public Sector Funds)

 Third Phase - 1993-2003 (Entry of Private Sector Funds)

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

 Fourth Phase - since February 2003

3.Growth of Mutual Fund Industry in India

4.Saving and Alternative Investment Objective

MUTUAL FUND INVESTMENT OBJECTIVES DEFINED

Investment refers to current commitment of funds for a specified time period to

- marketable financial assets

o Represents ownership capital

placed before the company

o Blue chip shares

record of earnings and dividend

having an above average rate of growth and profitability

and high dividend payouts

o Bonds are debt securities issued by the government or PSUs

o Debentures are debt securities issued by private sector companies

o Dividend on preference shares is generally cumulative . Dividend skipped in one

o Only redeemable preference shares can be issued

others earn an interest

of Companies Act, 1956

o Post Office Monthly Income Scheme

interest on a monthly basis.

MONEY MARKET INSTRUMENTS

ranging from 3 months to 1 year

an investment grade from credit rating agencies

o Also known as an instrument for collective investment

or subscription only for a specified period and can

o Futures is a transferable contract between two parties to buy or sell an asset at a

and quality of underlying instrument and a standard timing of settlement

t requires margin payments and follow daily movements

o Options are of two types:

Opportunities of Mutual Funds are tremendous specially when investment is

5. Types of Mutual Fund

 General Classification of Mutual Funds

Open-end Funds | Closed-end Funds

 Load Funds | No-load Funds

Load Funds Mutual Funds incur various expenses on marketing, distribution,

4. Contingent Deferred Sales Charge (CDSC) - In some schemes, the

 Tax-exempt Funds | Non-Tax-exempt Funds

Non-Tax-exempt Funds Funds that invest in taxable securities are known as

6.Classification of Mutual fund

Classification of Mutual Funds in India is done on the basis of their objective

 A glance at Mutual fund in India:

2.Growth and Dividend Mutual Funds :

3.Debt Mutual Funds

4.Equity Mutual Funds