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MUTUAL FUNDS
There are small investors who invest in public issues. At a time when the stock markets
crumbles, investors were looking for other avenues of investment when the concept of
Mutual funds came to their rescue.
The concept of mutual funds was conceived to mobilize savings from people and invest them
in a mix or corporate and government securities and earn income through dividends, interest
and capital gains which is eventually passed to mutual funds shareholders.
We can thus say that Mutual funds are a non depository or non banking financial
intermediary which acts as an important vehicle for brining wealth holders and deficit units
together indirectly.
SEBI defines mutual funds as Mutual funds means a fund established in the form of a trust
by a sponsor to raise money by the Trustee through the sale of units to the public under one
or more schemes for investing in securities in accordance with these regulations.

There are 3 entities operating in a mutual fund . They are :

1) An agency which mobilizes savings and gets a commission
2) An investment agency which gets a prescribed rate of commission
3) A trustee institution, which is normally a Bank which holds the stock of securities of the
Mutual fund.

In India the Investment trusts are established under the Companies Act.

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There are difference between Mutual funds and investment companies which can be as follows
In terms of objective : In case of mutual funds the mobilization of savings is from the investors, mostly
household whereas in case of investment companies it is savings of household , corporate sector. Highest
investments belongs to the promoters of the company.
In terms of organisation : In case of Mutual funds it is as per SEBI regulations 1993 and in case of UTI as
per UTI Act 1963 whereas in case of investment companies it is as per Companies Act 1956
In terms of Capital structure : For Mutual funds initial capital would be provided by the sponsor. Scheme
wise capital is decided based on the nature of scheme . Units are offered out of the scheme capital . No
debt capital. Whereas, investment companies, on par with industrial companies . No scheme wise capital
out of the equity capital. Capital may be debt capital also and has the advantage of gearing.
In terms of Liquidity : In Mutual funds it is close ended scheme units are traded on the organized stock
exchange . Open ended schemes offer repurchase of facility and some ended schemes may also offer
repurchase or premature encashment. Whereas, in case of investment companies. The company share is
traded on stock exchange. No repurchase of shares.
In terms of Name of the schemes Mutual funds Either open ended or close ended with a wide variety
of investment objectives whereas in case investment companies it is neither open ended or close ended.
Thus we have seen the difference between the mutual funds and the investment companies.

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Classification of Mutual Funds

1.
Operational classification
2.
Portfolio classification
3.
Geographical classification
4.
Structural classification
Operational classification
1) Open ended 2) Close ended 3) Interval funds
Open ended A scheme which offers units for sale or has any outstanding redeemable units and
one that does not specify any duration for redemption or repurchase of units SEBI definition.
They are open throughout the year for investment and redemption.
Units are directly bought and sold by the fund.
There is thus more transparency and certainty
Corpus gradually increases to allow investment and is redeemable at that days NAV with the money
being returned immediately.
Each open ended scheme should raise at lease Rs. 50 crore as minimum corpus. At least 60 % of
the targeted amount should be raised. The entire subscription has then to be refunded to the
investors.
The first 45 days of subscription period should be considered for determining the target figure or
the minimum size of the scheme.
When individual investors redeem , these open ended funds offer a fair price related to funds NAV
or the true worth of the fund. This eliminates the speculative nature .
They have been able to offer tailored solutions to meet the requirements of a wide cross section of
investors.

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Close ended MF :
They have a definite period after which their shares / units are redeemed.
Units are offered through public issues and after the date of closure the entry of investors will be
closed.
They are generally traded among the investors in the secondary market since they are quoted in
the stock exchanges.
Their price is determined on the basis of demand and supply in the market.
Each scheme is required to raise at least Rs. 20 cores of corpus fund.
If the minimum of Rs. 20 crores or 60 % of the targeted amount is not raised the entire subscription
is refunded to the investors.
The scheme is permitted to be kept open for subscription for more than 45 days.
Generally redemption period would be 5 to 10 years.
Fund may provide premature encashment by offering repurchase after 2 or 3 years.
Interval funds
These combine the features of open ended and close ended schemes. Thy are open for sale or
redemption during pre determined intervals at NAV related prices.
Balanced funds or Income and growth oriented funds.
Aim at distributing both income and capital appreciation to their investors.
Corpus is invested in high growth equity shares and in fixed income earning debentures.
These funds are also affected because of fluctuations in share prices of the stock market. However,
NAVS of such funds are likely to be less volatile compared to pure equity funds.

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Bond funds
These are more liquid funds and diversified and conservative investment with modest capital
gains.
Very secure with steady income.
Carry low risk and provide fixed return for those who desire saftey
Stock Funds
These are established for those who are willing to accept significant risk in the hope of a very
high return.
Called common stock funds
Assets held in the fund are entirely in the common stocks of diversified list of industrial
corporations .
Stock funds are best suited for risk takers who are interested in capital growth rather than
regular income.
Index funds
These funds invest only in those shares, which are included in the market indices and in
exactly the same proportion . Whenever the market index goes up, the value of such index
funds also goes up.
Conversely , when the market index comes down, the value of such index funds goes down.
Necessary disclosures in this regard are made in the offer document and mutual fund scheme
.
These are also exchange traded index funds launched by MF which are traded on the stock
exchanges.

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Industry funds
The fund invests its resources particularly in industries with growth potential like cement,
steel, jute, power, real estate etc.
These funds carry high risk and gains as the performance of these funds is directly exposed to
a specific sector.
While these funds may deliver high returns, they are more risky compared to diversified
funds.
Investors need to keep a watch on the performance of these sectors/industries and must exit
at an appropriate time.
They may also seek the advice of an expert.
Tax Relief funds
Popularly known as Equity linked saving schemes. Essentially close ended schemes.
Investment would be high in equity shares . Investors can claim deduction or rebate in the
income tax to the extent of his investment in the fund
These are listed in stock exchanges.
Minimum lock in period of 3 years is there and scheme shall not provide any liquidity during
this period

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Leveraged funds
Also called borrowed funds are used in order to increase the size of the value of the portfolio and benefit
the share holders through gains exceeding the cost of borrowed funds.
Funds are generally unused in speculative and risky investments.
Real Estate funds
These are close end type. The fund is named so because the investments are primarily in real estate
ventures.
Such funds are of various types depending upon real estate transactions.
Money market Mutual funds
Funds here are usually invested in money market instruments such as T. Bills, CD, DP , Bill discounting.
Regulated on the basis of RBI guidelines.
Returns here fluctuate to a much lesser extent compared to other funds.
Funds are appropriate for corporate and individuals to park their surplus funds for short periods.
Asset Management Mutual funds
Also called as Asset Management companies.
These funds have special characteristics of dealing with Assets other than securities.
These funds can acquire various assets and give them on lease basis to needy leasees.
Liquid funds
These funds invest in short term debt securities with high liquidity.
Here profitability is secondary. Since liquidity assumes importance
Gilt funds
These funds invest exclusively in govt. securities since there is no default risk.
NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as in the
case of income or debt oriented schemes

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Load or No Load fund
The load fund is one that charges a percentage of NAV for entry or exit. That is each time one buys
or sells units of the funds, a charge is payable.
This charge is used by the mutual fun for marketing and distribution expenses.
The investors should take into consideration the loads while making investments as these may
affect their yield .
However, the investors should also consider the performance track record and service standards of
the MF, which are more important.
Efficient funds may yield higher returns inspite of loads.
A non load fund is one that does not charge for entry and exit.
If there was no load investors would be able to buy and sell at NAV. However, if entry load is there,
new investors would price higher than NAV and similarly investor who exit will take away a sum
that is lower than the NAV.
Systematic investment plan (SIP)
Here an investor is given an option of preparing a predetermined number of post dated cheques in
favour of the fund. He will receive units on the date of cheque at the existing NAV.
Systematic Withdrawal Plan (SWP)
Here the scheme allows facility to withdraw predetermined amount / units from his fund at pre
determined intervals. The units will be redeemed at the existing NAV as on that day.
Retirement Pension plans
Some schemes are linked with retirement pension. Individuals participate in these plans for
themselves while corporate entities do so for their employees.
Insurance Plan
Some schemes are launched by UTI and LIC offer insurance cover to investors.

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Merchant Banking

A set of financial institutions that are engaged in providing specialist services which generally include acceptance
of bills of exchange, corporate finance, portfolio management and other banking services are known as Merchant
Banker.
Functions of Merchant Banker
1. Corporate counselling
2. Project Counselling
3. Pre investment studies
4. Capital restructuring
5. Credit syndication and project finance
6. Issue management and underwriting
7.Portfolio management
8. Working capital finance
9. Acceptance credit and bill financing
10. Mergers, amalgamations and takeovers
11. Venture capital
12. Lease financing
13. Foreign currency financing
14. Fixed deposit broking
15. Mutual funds
16. Relief to sick industries
17. Project appraisal
Regulatory Framework
SEBI has issued guidelines in this regard
Submission of offer document- The offer document of issue size upto Rs. 20 crore shall be filed by the lead
merchant banker
The Lead merchant banker shall supply 10 copies of offer document to board and 25 copies to stock exchange.
Despatch of issue material whenever there is reservation of NRI quota 10 copies of prospects is despatched in
advance to the Advisor NRI