 Trust that pools the savings of a number of investors

who share a common financial goal.

 Money collected is invested in capital market
instruments -shares, debentures and other securities.
 Income earned through these investments & the capital
appreciation realized are shared by its unit holders in
proportion to the number of units owned by them.
 MF is the most suitable investment for the common man
-offers an opportunity to invest in a diversified,
professionally managed basket of securities at a
relatively low cost.
 Primary role is to assist investors in earning
an income or building their wealth

 The overall economic development is

promoted.

 The MF industry offers livelihood to a large

number of employees of MF, distributors,
registrars & various other service providers.
 Higher employment, income & output in the
economy boost the revenue collection of the
government through taxes and other means.

 MF can also act as a market stabilizer,

 MF are viewed as a key participant in the

capital market of any economy

 MF keep a check on the operations of the

investee company, & their corporate
governance and ethical standards
 Various investors have different investment
preferences and needs.

 In order to accommodate these preferences,

mutual funds mobilize different pools of money.

 Each such pool of money is called a MF scheme.

 Every scheme has a pre-announced investment

objective.

 Investors invest in a MF scheme whose investment

objective reflects their own needs and preference.
 MF schemes announce their investment objective
and seek investments from the public.

 Investment that an investor makes in a scheme is

translated into a certain number of ‘Units’ in the
scheme.

 Every unit has a face value of Rs10.

 The number of units multiplied by its face value

(Rs10) is the capital of the scheme – its Unit
Capital.
 The scheme earns interest income or dividend
income on the investments it holds.
 Further, when it purchases and sells investments,
it leads to realized capital gains or realized
capital losses as the case may be.
 Investments owned by the scheme may be
quoted in the market at higher than the cost
paid. Such gains in values on securities held are
called valuation gains.
 Similarly, there can be valuation losses.
 When the investment activity is profitable, the true
worth of a unit increases

 when there are losses, the true worth of a unit decreases.

 The true worth of a unit of the scheme is otherwise

called Net Asset Value (NAV) of the scheme

 When a scheme is first made available for investment-

‘New Fund Offer’ (NFO).During the NFO, investors get
the chance of buying the units at their face value.

 Post-NFO, when they buy into a scheme, they need to

pay a price that is linked to its NAV
 Money mobilized is invested as per stated objective

 Profits & Losses belong to investor or unit holders

 No other entity participates in profits or losses

 All other participants are paid a fee or commission

for the contributions they make to launching and
operating the schemes.

 Investor does not bear a loss higher than the amount

invested by him.
 Investors have different expectations of how profits
are to be handled.

 MF addresses this by offering various options

 Dividend Payout Option

 Dividend Re-Investment Option

 Growth Option
 The relative size of MF companies is assessed by their
assets under management (AUM). When a scheme is
first launched, AUM is the amount mobilized from
investors .
 Further, if the scheme is open to receiving money
from investors even post-NFO, then such
contributions from investors boost the AUM.
 Conversely, if the scheme pays any money to the
investors, either as dividend or as consideration for
buying back the units of investors, the AUM falls.
 AUM captures the impact of the profitability metric &
the flow of unit-holder money to or from the scheme
 Professional Management
 Affordable Portfolio Diversification
 Liquidity
 Economies of scale
 Tax Deferral
 Tax Benefits
 Convenient Options
 Investment Comfort
 Regulatory Comfort
 Systematic Approach to Investments
 Low Costs
 Transparency
 Flexibility
 Well regulated(systematic approach)
 Tax Benefits
 ELSS
 RGESS offers a rebate to first time retail
investors (in direct equity) with annual income
upto Rs. 12 lakhs
 RGESS Investment limit is 50,000
 Rebate of 50% on amount invested can be
claimed as deduction from taxable income
 Dividends received from mutual fund
schemes are tax-free in the hands of the
investors.
 Lack of portfolio customization
 Choice overload
 No control over costs
 NAV:- Net Asset Value =market value of the assets
of the scheme -liabilities.

 NAV = net asset value of the scheme/ no. of units

outstanding on the valuation date.

 Sale Price/Offer Price:- Price you pay when you

invest in a scheme. It may include a sales load.

 Repurchase Price :-Price at which units under

open-ended schemes are repurchased by the MF.
Such prices are NAV related.
 Redemption Price:- Price at which close-ended
schemes redeem their units on maturity. Such
prices are NAV related.
 Sales Load/Front End Load :- Charge collected
by a scheme when it sells the units. Schemes
that do not charge a load are called ‘No Load’
schemes.
 Repurchase or ‘Back-end’Load:- Is a charge
collected by a scheme when it buys back the
units from the unit holders.
TYPES OF FUNDS
Classification by Structure
 Open-Ended
 Close Ended
 Interval

Classification by Nature
 Debt
 Equity
 Hybrid/Balanced Fund

Classification by Others
 Actively Managed Funds
 Passive Funds
 Exchange Traded Funds
Open-Ended Funds
 enter or exit at any time
 does not have any kind of time frame in which it is to be
closed
 Sale transaction-at sales price linked to NAV
 Re-purchase transaction-re-purchase price that is linked
to the NAV
 Some may exit wholly or partly, still the scheme
continues with remaining investors
 on-going entry & exit of investors implies that the unit
capital in an open-ended fund would keep changing on a
regular basis
Close-Ended Funds
 Have a fixed maturity
 Investors can buy units only during its NFO
 Post NFO it is traded on SE-done through listing of
scheme in SE
 Listing is compulsory for close-ended schemes
 After NFO, investors who want to buy units will have to
find a seller for those units in the SE and vice versa
 Sale & purchase of units happen to or from counter-
party in the SE– and not to or from the scheme.
Transaction price is likely different from
NAV(higher/lower based on demand & supply)
 Unit capital of the scheme remains stable or fixed.
Interval Funds
 Combination of open-ended & close-ended schemes

 Largely close-ended, but become open-ended at pre-

specified intervals.Ex:an interval scheme might
become open-ended between January 1 to 15, and
July 1 to 15, each year.

 Investors are not completely dependent on the SE to

be able to buy or sell units

 Compulsorily listed on stock exchanges to allow

investors an exit route
Interval Funds
 Periods when an interval scheme becomes open-ended,
are called ‘transaction periods’

 Period between the close of a transaction period, and

the opening of the next transaction period is called
‘interval period’

 Minimum duration of transaction period is 2 days, &

minimum duration of interval period is 15 days

 No redemption/repurchase of units is allowed except

during the specified transaction period (during which
both subscription and redemption may be made to and
from the scheme).
 Actively Managed Funds
 Fund manager has the flexibility to choose the
investment portfolio, within the broad
parameters of the investment objective of the
scheme
 this increases the role of the fund manager
 Expenses for running the fund turn out to be
higher
 Investors expect actively managed funds to
perform better than the market
 Passive Funds/Index Funds
 invest on the basis of a specified index,whose performance it
seeks to track
 buy only the shares that are part of the composition of the
S&P BSE Sensex.
 Proportion of each share in the scheme’s portfolio would also
be the same as the weightage assigned to the share in the
computation of the S&P BSE Sensex
 performance of these funds tends to mirror the concerned
index
 not designed to perform better than the market
 fund manager has no role in deciding on investments & have
low running costs
 Exchange Traded Funds
 passive funds whose portfolio replicates an index or
benchmark -equity market index or a commodity index.
 Units are issued in NFO after which they are available for sale
and purchase on a SE
 Transactions post-NFO is done through the trading and
settlement platforms of the stock exchange
 traded at real time prices that are linked to the changes in the
underlying index
 http://www.moneycontrol.com/mf/etf/
 Equity Funds
 equity shares and equity-related investments such
as convertible debentures
 objective of is to seek capital appreciation through
investment in these growth assets
 Debt Funds
 Objective that limits them to investments in debt
securities such as Treasury Bills, Government
Securities, Bonds and Debentures
 Hybrid Funds
 investment in both debt and equity
 Gold funds, Real estate funds, Commodity funds
and International funds, create portfolios that
reflect their investment objectives
 Can be classified based on
 Based on type of debt securities they invest in
 Tenor of the securities-short term and long term
 The issuer-government, corporate, PSUs and
others.
 On Basis of investment strategy
 On the basis of Issuer
 Gilt Funds
 Corporate Bond Funds
 On the basis of Tenor
 Liquid Schemes
 Short Term Debt Schemes
 Ultra Short Term Plans
 Short Term Plans
 Long Term Debt Schemes
 On the basis of Investment Strategy
 Diversified Debt Funds or Income Fund
 Junk Bond Schemes
 Dynamic Debt Funds
 Fixed Maturity Plans
 Floating Rate Funds
 On the basis of Issuer
 Gilt Funds
 invest in only treasury bills & government
securities
 do not have a credit risk
 lower coupon or interest to reflect the low risk
of default associated with them
 no risk of default and liquidity is considerably
higher
 Long-term gilt funds invest in government
securities of medium and long-term maturities
 prices of long-term government securities are
very sensitive to interest rate changes.
 On the basis of Issuer
 Corporate Bond Funds
 invest in debt securities issued by companies,
including PSUs
 credit risk associated with the issuer that is
denoted by the credit rating assigned to the
security
 Pay a higher coupon income to compensate for
the credit risk associated with them
 sensitive to interest rate changes depending
upon the tenor of the securities held
 On the basis of Tenor
 Liquid Schemes
 Invest only in short term debt securities(upto 91
days maturity)
 Maturity of more than 60-days need to be valued
at market prices [“marked to market” (MTM)]
which contributes to volatility of NAV
 Fund managers keep most of their portfolio in
debt securities of less than 60 day maturity
 Helps in positioning liquid schemes as the lowest
in price risk
 High liquidity with safety of capital.
 On the basis of Tenor
 Short Term Debt Schemes
 Invest only in securities with short tenors and low
interest rate risk
 Ultra-short term debt funds, short-term debt funds,
short-term gilt funds
 Interest income, gain/loss & returns will depend on
tenor of securities held in portfolio
 Ultra Short Term Plans
 treasury management funds/ cash management funds
 invest in money market & other short term securities
of maturity upto 365 days.
 Generate a steady return from interest income with
minimal NAV volatility
 On the basis of Tenor
 Short Term Plans
 Combines short term debt securities with a small
allocation to longer term debt securities
 Short term plans earn interest from short term
securities and interest and capital gains from long
term securities
 Long Term Debt Schemes
 Invest in longer-term securities issued by the
government and other corporate issuers
 Returns are significantly impacted by changes in the
value of the securities & see greater volatility in the
returns
 Ex:GILT Funds & Income Funds
 On the basis of Investment Strategy
 Diversified Debt Funds or Income Fund
 Mix of government and non-government debt
securities such as corporate bonds, debentures and
commercial paper.
 Higher Income Higher risk
 Junk Bond Schemes
 Invest in securities that have a lower credit rating
indicating poor credit quality
 Dynamic Debt Funds
 Flexible in terms of the type of debt securities held
and their tenors
 Duration of these portfolios are not fixed, but are
dynamically managed
 look for opportunities to earn income and capital
gains across segments of the debt market
 On the basis of Investment Strategy
 Fixed Maturity Plans
 Debt fund where the duration of the investment
portfolio is closely aligned to the maturity of the
scheme
 Close-ended schemes, do not accept money post-NFO,
 Fund manager has little ongoing role in deciding on
the investment options
 Floating Rate Funds
 invest largely in floating rate debt securities
 debt securities where the interest rate payable by the
issuer changes in line with the market
 EX:5-year Government Security yield plus 1 percent’,
 NAV less fluctuation
 Invest in equity instruments
 target long-term appreciation –gains in value
of securities & dividends earned
 Types of Equity Funds
 Types Of Equity Shares
 Diversified Equity Fund
 Market Segment Based Fund
 Sector Funds
 Thematic Funds
 Strategy Based Funds
 Equity Income/Dividend Yield Schemes
 Value fund
 Growth Funds
 Focused funds
 Equity Linked Savings Schemes
 Rajiv Gandhi Equity Savings Schemes
 Diversified Equity Fund
 diverse mix of securities that cut across sectors and
market capitalization
 risk of the fund’s performance affected by the poor
performance of one sector/segment is low.
 Market Segment Based Fund
 Invest in companies of a particular market size
 Market capitalization as large-cap, mid-cap and
small-cap stocks
 Large- cap funds-large, liquid blue-chip companies
with stable performance and returns
 Mid-cap funds-invest in mid-cap companies ,potential
for faster growth & higher returns. Are more
susceptible to economic downturns .Higher risk & fall
more when markets fall
 Small-cap funds-small market capitalisation ,higher
risk & high gains
 Sector Fund
 invest in only a specific sector.
 see periods of under-performance and out-
performance-cyclical
 Entry & exit need to timed well,hence risky
 Thematic Fund
 In line with an investment theme
 broad-based than a sector fund; but narrower
than a diversified equity fund & still has the risk
of concentration
 Strategy Based Schemes
 created and managed according to a stated style
or strategy
 Strategy Based Schemes
 Equity Income/Dividend Yield Schemes
 Securitiesshares fluctuate less, & the dividend is a
larger proportion of the returns
 companies with stable earnings but not many
opportunities for growth or expansion
 NAV of such equity schemes are expected to fluctuate
lesser
 Value fund
 shares of fundamentally strong companies,currently
under-valued with the expectation of benefiting from
an increase in price as the market recognizes the true
value.
 Such funds have lower risk. They require a longer
investment horizon for the strategy to play out
 StrategyBased Schemes
 Growth Funds
 earnings are expected to grow at a rate higher
than the average rate
 capital appreciation to the investors ,above
average returns in bullish markets.
 The volatility in returns is higher in such funds
 Focused funds
 in a limited number of stocks.
 Selection risks are high in such funds.
 ELSS
 Tax benefits to investors under section 80 C of IT
Act
 Limit of Rs. 150,000 a year
 Required to hold at least 80% in equity
instruments.
 Lock in period for 3 years,subject to changes in
ELSS guidelines
 RGESS
 Tax benefit for first time investors
 Hybrid Funds
 invest in a combination of asset classes such as
equity, debt and gold
 Debt-oriented Hybrid funds
 primarily in debt with a small allocation to equity
 The equity allocation can range from 5 percent to 30
percent and is stated in the offer document
 Debt component -earn coupon income, & equity
component provides the booster to the returns.
 Monthly Income Plan
 debt-oriented hybrid fund that seeks to declare a
dividend every month.
 There is no guarantee that a dividend will be paid
each month
 Multiple Yield Funds
 exposure to multiple asset classes
 Balanced Fund
 simultaneous exposure to both equity and debt in
one portfolio
 Capital Protected Schemes
 close-ended schemes, which ensure that investors
get their principal back, irrespective of what
happens to the market
 investing in Zero Coupon Government Securities
 Asset Allocation Funds
 based on the expected performance of each asset
class
 Arbitrage funds
 opposite positions in different markets / securities,
such that the risk is neutralized, but a return is
earned
 Real Estate Mutual Fund Schemes
 directly or indirectly in real estate assets
 35% of the portfolio should be held in physical
assets (SEBI)
 These funds are closed-end funds
 Real Estate Investment Trusts (REIT)
 invest in commercial real estate assets
 Commodity Funds
 Invest in commodities
 Gold Funds
 gold and gold-related securities
 Gold Exchange Traded fund
 index fund that invests in gold, gold receipts or
gold deposit schemes of banks
 Each ETF unit typically represents one gram of
gold
 For every unit of ETF issued, the fund holds gold
in the form of physical gold of 99.5 percent
purity or gold receipts
 invest in the gold deposit schemes of banks to a
limit of 20 percent of the net assets of the
scheme.
 Gold Sector fund
 shares of companies engaged in gold mining and
processing.
 International Funds
 invest in markets outside India, equity shares of
companies listed abroad, ADRs and GDRs
 Fund of Funds
 a mutual fund that invests in other mutual funds.
 Exchange Traded Funds
 open-ended funds, whose units are traded in a
stock exchange
 Infrastructure Debt Schemes
 closed-ended schemes with a tenor of at least 5
years that invest in debt securities & securitized
debt of infrastructure companies
 MF industry has come a long way
 Significant spurts in size were noticed in late
80’s when public sector mf were first
permitted
 in the mid-90s, when private sector mutual
funds commenced operations
 In the last few years, institutional
distributors increased their focus on mutual
funds.
 AUM of the industry, as of January 2017 has
touched Rs. 17,37,087 crore from 2244
schemes offered by 41 mutual funds. These
were distributed as follows
1. Units’ of_____________ must be listed on
the stock exchange.
a. Sector funds
b. Arbitrage funds
c. Close ended funds
d. Liquid funds
2. Open-ended schemes generally offer exit
option to investors through a stock exchange.
a. True
b. False
3. Sector funds invest in a diverse range of
sectors.
a. True
b. False
4. High yield bond schemes invest in junk
bonds.
a. True
b. False
5. Investment objective is closely linked to
________.
a. Scheme
b. Option
c. Plan
d. SIP
 THE MUTUAL FUND INDUSTRY IN INDIA:
 Started in 1963 with the formation of Unit
Trust Of India(UTI) at the initiative of the
RBI and GOI.
 Objective was to attract small investors &
introduce them to market investments.
 Since then, the history of MF’s in India can be
broadly divided into six distinct phases.
 Phase I (1964-87): Growth Of UTI

 Phase II (1987-93): Entry of Public Sector Funds

 Phase III (1993-96): Emergence of Private Funds

 Phase IV (1996-99): Growth And SEBI Regulation

 Phase V (1999-2004): Emergence of a Large and

Uniform Industry

 Phase VI (From 2004 Onwards): Consolidation and

Growth
 Phase I (1964-87): Growth Of UTI
 In 1963, UTI was setup by an Act of Parliament,
 Only entity offering MF’s in India(monopoly)
 UTI was set up by the RBI,later delinked from RBI.
 First scheme & long one launched by UTI, US 1964.
 1970s:80s, started innovating & offering different
schemes to suit needs of different classes of investors.
 Unit Linked Insurance Plan (ULIP) was launched in 1971.
 First Indian offshore fund,India Fund - in Aug 86.
 Investible funds corpus of UTI was Rs 600 crores in 1984.
 By 1987-88, the assets under management (AUM) of UTI
had grown 10 times to Rs 6,700 crores
 Phase II(1987-93):Entry of Public Sector Funds
 1987 marked the entry of other public sector MF’s.
 With LPG, many public sector banks & institutions were
allowed to establish MF’s
 SBI established the first non-UTI MF, SBI MF in Nov 1987.
 Followed by Canbank MF, LIC MF, Indian Bank MF, Bank of
India MF, GIC MF and PNB MF.
 From 1987-88 to 1992-93, the AUM increased from Rs
6,700 crores to Rs 47,004 crores, nearly seven times.
 During this period, investors showed a marked interest in
mutual funds, allocating a larger part of their savings to
investments in the funds
 Phase III (1993-96):Emergence of Private Funds
 New era began in 1993 -permission granted for the entry
of private sector funds.
 Indian investors got a broader choice of 'fund families' &
increasing competition to existing funds(PS)
 foreign fund management companies were also allowed
to operate MF’s,(entered into India through their joint
ventures with Indian promoters)
 Private funds brought in with them latest product
innovations, investment management techniques and
investor-servicing technologies. During the year 1993-
94, five private sector fund houses launched their
schemes followed by six others in 1994-95.
 Phase IV (1996-99): Growth & SEBI Regulation
 MF industry scaled newer heights -mobilization & no.of players.
 Deregulation & liberalization of Indian economy introduced
competition & provided impetus to the growth of industry.
 Comprehensive set of regulations for all MF’s was introduced -
SEBI (MF) Regulations, 1996 which set uniform standards for all
funds.
 UTI voluntarily adopted SEBI guidelines for its new schemes.
 Budget of Union government in 1999 took a big step in
exempting all MF dividends from income tax in the hands of the
investors.
 During this phase, both SEBI & AMFI launched Investor Awareness
Programme (educating the investors about MFs)
 Phase V (1999-2004): Emergence of a Large & Uniform
Industry
 1999 marked beginning of a new phase in the history of the MF
industry in India,
 Significant growth :amount mobilized from investors & AUM
 February 2003, the UTI Act was repealed. UTI no longer has a special
legal status as a trust established by an act of Parliament. It has
adopted the same structure as any other fund in India:a trust & AMC.
 UTI MF is the present name of the erstwhile UTI. While UTI
functioned under a separate law of the Indian Parliament earlier, UTI
MF is now under the SEBI's (MF’s) Regulations, 1996 like all MF in
India.
 Emergence of a uniform industry make it easier for distributors and
investors to deal with any fund house.
 Between 1999 and 2005 the size of the industry has doubled in terms
of AUM which have gone from above Rs 68,000 crores to over Rs
1,50,000 crores
 Phase VI (From 2004 Onwards): Consolidation
& Growth
 Industry has lately witnessed a spate of M & A’s,
most recent ones being the acquisition of schemes
of Allianz Mutual Fund by Birla Sun Life, PNB
Mutual Fund by Principal, among others.

 At the same time, more international players

continue to enter India including Fidelity, one of
the largest funds in the world.
 Mutual funds in India have a 3-tier structure of
Sponsor-Trustee-AMC.
 Sponsor is the promoter of the fund.
 Sponsor creates the AMC & the trustee company. It
appoints the boards of both these companies, with
SEBI approval.
 The mutual fund is formed as trust in India, and
not as a company.(In US are formed as investment
companies.)-Indian Trusts Act 1882
 The AMC’s capital is contributed by the sponsor.
 Investors’ money is held in the Trust (the MF).

 The AMC gets a fee for managing the funds

 The trustees make sure that the funds are

managed according to the investors’ mandate.

 Sponsor should have at least a 5-year track record

in the financial services business and should have
made profit in at least 3 out of the 5 years.

 Sponsor should contribute at least 40% of the

capital of the AMC.
 At least 4 Trustees are appointed by the sponsor
with SEBI approval.

 At least 2/3 of trustees should be independent.

 At least ½ of the AMC’s Board should be of

independent members

 An AMC cannot engage in any business other than

portfolio advisory and management.

 An AMC of one fund cannot be Trustee of another

fund.

 AMC should be registered with SEBI.

 AMC should have a net worth of at least Rs.50 Cr

 AMC signs an investment management agreement

with the trustees.

 Trustee company and AMC are usually private

limited companies.

 Trustees are required to meet at least 4 times a

year to review the AMC.

 The investors’ funds and the investments are held

by the custodian, who is the guardian of the funds
and assets of investors.
 Sponsor and the custodian cannot be the same
entity.

 R&T agents manage the sale and repurchase of

units and keep the unit holder accounts.

 If the schemes of one fund are taken over by

another fund, it is called as scheme takeover. This
requires SEBI and trustee approval.

 If two AMCs merge, the stakes of sponsors changes

and the schemes of both funds come together. High
court, SEBI & Trustee approval needed
 If one AMC or sponsor buys out the entire stake of
another sponsor in an AMC, there is a take over of
AMC. The sponsor who has sold out, exits the AMC.
This needs high court approval as well as SEBI and
Trustee approval.

 Investors can choose to exit at NAV if they do not

approve of the transfer. They have a right to be
informed. No approval is required, in the case of
open-ended funds.
 For closed-end funds, investor approval is required
for all cases of merger and takeover (as per the
curriculum).

 Closed end fund investors also do not have exit

option

 Let us understand the various agencies, by taking

the example of the constitution of SBI Mutual
Fund
 AMC can be terminated
 By a majority of trustees or
 75% of unit holders
 Subject to prior approval of SEBI & Unit Holders

 Other Constituents are

 Auditors-Audit of accounts
 Fund Accountants-role of calculating NAV
 Distributors-selling units of MF to clients
 Collecting Bankers-Collection bankers
 KYC Registration Agencies-KYC formalities
 Payment Aggregators-payment providers in online
market place
 https://www.youtube.com/watch?v=9kUCF7_Cn
hA
 https://www.youtube.com/watch?v=K7GK6o5FC
4w
 https://www.youtube.com/watch?v=o8IwoNYW2
5M
 https://www.youtube.com/watch?v=lDEDr6e9Te
w
 https://www.youtube.com/watch?v=P7Y6JLIrr7E
 https://www.youtube.com/watch?v=zURPsvQRt0
c
 https://www.youtube.com/watch?v=ArZbVSGTjq
A