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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. 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. The flow chart below describes broadly the
working of a mutual fund

Mutual Fund Operation Flow Chart

There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund

Advantages of Mutual Funds

If mutual funds are emerging as the favorite investment vehicle, it is because of
the many advantages they have over other forma and avenues of investing,
particularly for the investor who has limited resources available in terms of capital
and ability to carry out detailed research and market monitoring. The following
are the major benefits offered by mutual funds to all investors:

i) Portfolio Diversification

Mutual Funds spread the investment across different securities (stocks, bonds,
money market instruments, real estate, fixed deposits etc.) by investing in a
number of companies across a broad cross-section of industries and sectors
(auto, textile, information technology etc.). This kind of a diversification may add
to the stability of your returns and reduces the risk with far less money than you
can do on your own.
ii) Convenient and flexibility

Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holdings from one
scheme to the other ,get updated market information

iii) Professional Management

Qualified investment professionals who seek to maximize returns and minimize
risk monitor investor's money. The investment professional has experience in
making investment decisions. It is the Fund Manager's job to (a) find the best
securities for the fund, given the fund's stated investment objectives; and (b)
keep track of investments and changes in market conditions and adjust the mix
of the portfolio, as and when required.
iv) Liquidity

Investor hold share or bonds they cannot directly ,easily and quickly
sell.Investment in mutual fund on the other hand,is more liquid. An investor can
liquidate the investment by selling the units to the fund if open ended, or selling

v) Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy.

vi) Variety

Mutual funds offer a tremendous variety of schemes. This variety is beneficial in
two ways: first, it offers different types of schemes to investors with different
needs and risk appetites; secondly, it offers an opportunity to an investor to
invest sums across a variety of schemes, both debt and equity.

vii) Tax Benefits

In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000
from the Total Income will be admissible in respect of income from investments
specified in Section 80L, including income from Units of the Mutual Fund. Units of
the schemes are not subject to Wealth-Tax and Gift-Tax.

Disadvantages of Mutual Funds

While the benefits of investing through mutual funds far outweigh the
disadvantages, an investor and his advisor will do well to be aware of few
shortcomings of using the mutual fund as an investment vehicle.

i) No Tailor-made-Portfolios

Investors who invest on their own can build their own portfolios of shares, bonds
and other securities.Investing through funds means, the investor delegates the
decision of investing through which securities to fund manager. The very high-
net-worth individuals or large corporates may find this as a constraint in
achieving their objectives. However this constraint can be overcome to some
extent by offering families of schemes to investor, within the same fund.

ii) No control over costs

Investor pays the investment management fees as long as he remains within the
fund. Fees are usually payable as a percentage of the value of his investments,
whether the fund value is rising or declining. The investor also pays the fund
distribution cost, which he would not incur in direct investment.
iii) Managing a Portfolio of Funds

Availability of a large number of options from mutual funds can actually mean too
much choice for the investor. He may again need advice on how to select a fund
to achieve his objectives


• Open –ended funds
• Close ended fund
• Interval funds


• Growth Funds
• Income funds
• Balance Funds
• Money Market Funds
• Gilt Funds
• Index Funds


• Load Funds
• No Load Funds


• Tax Saving schemes
• Industry Specific schemes
• Sector schemes
By Structure

i) Open-ended Funds

An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units
at Net Asset Value (NAV) related prices. Hence, the unit capital of the schemes
keeps changing each day. Such schemes thus offer very high liquidity to
investors and are becoming increasingly popular in India.

ii) Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges
where they are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate
that at least one of the two exit routes is provided to the investor.
Closed-ended schemes are usually more illiquid as compared to open-ended
schemes .

iii) Interval Funds

Interval funds combine the features of open-ended and close-ended schemes.
They may be traded on the stock exchange or may be open for sale or
redemption during pre-determined intervals at NAV based prices.
By Investment Objective

i) Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities. It
has been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors
having a long-term outlook seeking growth over a period of time. Growth funds
are less volatile.

ii) Income Funds
The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds,
corporate debentures and Government securities. Income Funds are ideal for
capital stability and regular income.

iii) Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in equities
and fixed income securities in the proportion indicated in their offer documents. In
a rising stock market, the NAV of these schemes may not normally keep pace, or
fall equally when the market falls. These are ideal for investors looking for a
combination of income and moderate growth.

iv) Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer short-
term instruments such as treasury bills, certificates of deposit, commercial paper
and inter-bank call money. Returns on these schemes may fluctuate depending
upon the interest rates prevailing in the market.
v) Gilt Fund
These funds invest exclusively in government securities. Government securities
have no default risk. NAVs of these schemes also fluctuate due to change in
interest rates and economic factors as is the case with income or debt oriented

vi) Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE sensitive
index, S&P NSE 50 index(Nifty).These schemes invest in the securities in the
same weight age comprising of an index. NAV’s of such schemes would rise or
fall in accordance with the rise or fall in the index, though not exactly by the same
percentage due to some factors known as “Tracking Error” in technical terms.
Necessary disclosure in this regard is made in the offer document of the mutual
fund scheme. There are also exchange traded index funds launched by the
mutual funds which are traded on the stock exchanges.

On the basis of Load

i) Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically
entry and exit loads range from 1% to 2.5%. It could be worth paying the load, if
the fund has a good performance history.

ii) No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The
advantage of a no load fund is that the entire corpus is put to work.
Other Schemes

i) Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment
in specified avenues. Investments made in Equity Linked Savings Schemes
(ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income
Tax Act, 1961.

ii) Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.

iii) Sectoral Schemes

Funds are those, which invest exclusively in a specified industry or a group of
industries or initial public offerings. In these funds or schemes the investor
invests in the securities of only those sectors or industries which are specified in
the offer documents. E.g. Pharmaceuticals, software, Fast Moving Consumers
goods (FMCG), petroleum stocks, etc. the return on these funds is dependent on
the performance of the respective sector/industries. While these funds may give
higher returns, they are more risky compared to the diversified funds. Investors
need to keep awatch on the performance of these sectors and must exit at an
appropriate time.
Investors have to bear expenses for availing of the services (professional
management) of the mutual fund. The first expense that an investor has to incur
is by way of Entry Load. This is charged to meet the selling and distribution
expenses of the scheme. A major portion of the Entry Load is used for paying
commissions to the distributor. The distributor (also called a mutual fund advisor)
could be an Independent Financial Advisor, a bank or a large national distributor
or a regional distributor etc. They are the intermediaries who help an investor
with choosing the right scheme, financial planning and investing in scheme s
from time to time to meet one’s requirements.


As there are Entry Loads, there exist Exit Loads as well. As Entry Loads
increase the cost of buying, similarly Exit Loads reduce the amount received
by the investor. Not all schemes have an Exit Load, and not all schemes have
similar exit loads as well. Some schemes have Contingent Deferred Sales
Charge (CDSC). This is nothing but a modified form of Exit Load, wherein the
investor has to pay different Exit Loads depending upon his investment
If the investor exits early, he will have to bear more Exit Load and if he
remains invested for a longer period of time, his Exit Load will reduce. Thus
the longer the investor remains invested, lesser is the Exit Load. After some
time the Exit Load reduces to nil; i.e. if the investor exits after a specified
time period, he will not have to bear any Exit Load.