MUTUAL FUNDS

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Concept
A Mutual Fund is a trust that pools the
savings of a number of investors who
share a common financial goal.

The money thus collected is then invested

in capital market instruments such as
shares, debentures and other securities.

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 The income earned through these
investments and the capital appreciation
realised are shared by its unit holders in
proportion to the number of units owned
by them.

Thus a Mutual Fund is the most suitable

investment for the common man as it
offers an opportunity to invest in a
diversified, professionally managed basket
of securities at a relatively low cost

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Mutual Fund Operation
Flow Chart

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Organisation of a Mutual Fund

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 A sponsor is any person who, acting alone or
in combination with another body corporate,
establishes a MF.
It obtains the certificate of registration as a MF
from SEBI.
The sponsor of a fund is similar to the
promoter of a company.
In accordance with SEBI Regulations, the
sponsor forms a trust and appoints a Board of
Trustees, and also generally appoints an AMC as
fund manager.
In addition, the sponsor also appoints a
custodian to hold the fund assets.
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 The custodian is appointed for a safe keeping of
securities and participating in the clearing
system through approved depository.
The bankers handle the financial dealings of the
fund.
Transfer agents are responsible for issue and
redemption of units of MF.
AMCs appoint distributors or brokers who sell
units on behalf of the Fund, and also serve as
investment advisers.
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Regulation of Mutual Funds
The first ever MF in India, the Unit Trust
of India (UTI) was set up in 1964.
The MF industry in India is governed by
SEBI (Mutual Fund) Regulations,1996,
which lay the norms for the MF and its
Asset Management Company(AMC).
SEBI requires all MFs to be registered
with it. All MFs in India are constituted as
trusts.
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 The SEBI (Mutual Fund) Regulations, 1996 lay
down detailed procedure for launching of
schemes, disclosures in the offer document,
advertisement material, listing and repurchase of
closed-ended schemes, offer period, transfer of
units, investments, etc.
SEBI Regulations also specify the qualifications
for being the sponsor of a fund; the contents of
Trust Deed; rights and obligations of Trustees;
appointment, eligibility criteria, and restrictions
on business activities and obligations of the
AMC and its Directors.
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 The AMCs, members of Board of trustees
or directors of Trustee Company and
other associated company have to follow
certain code of conduct.
They should ensure that the information
disseminated to the unit holders is
adequate, accurate, and explicit.

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S.Visalakshmi,VIT
Frequently Used Terms
Net Asset Value (NAV)
Net Asset Value is the market value of the
assets of the scheme minus its liabilities.
The per unit NAV is the net asset value
(Total assets Total Liabilities)of the
scheme divided by the number of units
outstanding on the Valuation Date.

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Sale Price
Is the price you pay when you invest in a
scheme. Also called Offer Price. It may
include a sales load.
Sales Load
Is a charge collected by a scheme when it
sells the units. Also called, Front-end load.
Schemes that do not charge a load are
called No Load schemes.
Repurchase Price
Is the price at which a close-ended
scheme repurchases its units and it may
include a back-end load. This is also called
Bid Price.

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 Repurchase or Back-end Load
Is a charge collected by a scheme when it
buys back the units from the unit holders.

Redemption Price
Is the price at which open-ended schemes
repurchase their units and close-ended
schemes redeem their units on maturity.
Such prices are NAV related.

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Types of Mutual funds
Based on Maturity period
Open Ended Schemes
Close Ended Schemes

Based on Investment Objectives

Growth Schemes
Income Schemes
Balance Schemes
Money Market Schemes
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 Gilt Schemes
Index Schemes

Special Schemes
Tax Saving Schemes
Sector Specific Schemes

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Open-ended Funds

These funds do not have a fixed date of

redemption.
Generally they are open for subscription
and redemption throughout the year.
Their prices are linked to the daily net
asset value (NAV).
From the investors' perspective, they are
much more liquid than closed-ended
funds.
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Close-ended Funds
These funds are open initially for entry
during the Initial Public Offering (IPO) and
thereafter closed for entry as well as exit.
These funds have a fixed date of
redemption.
One of the characteristics of the close-
ended schemes is that they are generally
traded at a discount to NAV; but the
discount narrows as maturity nears.
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Equity Funds/ Growth Funds
Funds that invest in equity shares are
called equity funds.
They carry the principal objective of
capital appreciation of the investment
over the medium to long-term.
They are best suited for investors who
are seeking capital appreciation.

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Debt/Income Funds
These funds invest predominantly in high-
rated fixed-income-bearing instruments
like bonds, debentures, government
securities, commercial paper and other
money market instruments.
They are best suited for the medium to
long-term investors who are averse to
risk and seek capital preservation.
They provide a regular income to the
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Balanced Funds
These funds invest both in equity shares
and fixed-income-bearing instruments
(debt) in some proportion.
They provide a steady return and reduce
the volatility of the fund while providing
some upside for capital appreciation.
They are ideal for medium to long-term
investors who are willing to take
moderate risks.
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Liquid Funds/Money Market
Funds
These funds invest in highly liquid money
market instruments.
The period of investment could be as
short as a day.
They provide easy liquidity.
They have emerged as an alternative for
savings and short term fixed deposit
accounts with comparatively higher
returns.
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 These funds are ideal for corporates,
institutional investors and business houses
that invest their funds for very short
periods.

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Gilt Funds
These funds invest in Central and State
Government securities.
Since they are Government backed bonds
they give a secured return and also
ensure safety of the principal amount.
They are best suited for the medium to
long-term investors who are averse to
risk.

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Index funds
These funds invest in the same pattern as
popular market indices like S&P CNX
Nifty or CNX Midcap 200.
The money collected from the investors
is invested only in the stocks, which
represent the index.

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 For e.g. a Nifty index fund will invest only
in the Nifty 50 stocks.
The objective of such funds is not to beat
the market but to give a return equivalent
to the market returns.

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Tax Saving Funds
These funds offer tax benefits to
investors under the Income Tax Act.
Opportunities provided under this
scheme are in the form of tax rebates
under the Income Tax act.

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Sector funds
These funds invest primarily in equity
shares of companies in a particular
business sector or industry.
These funds are targeted at investors
who are bullish or fancy the prospects of
a particular sector.

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