Theoretical framework

Mutual fund defined

The global financial market has witnessed several dynamic developments in the past three
decades. One of such developments has been, the phenomenal growth of the capital market- both
domestic and international resulting in the advent of ‘equity cult’ among the household sector.
This has accelerated the process of disintermediation whereby industrial security are directly
issued by corporate borrowers to end investors bypassing the banking systems .However, the
household sector, being more averse to risks, necessitates the creation of institutional shields
which may act as intermediaries. One of the most significant and popular financial intermediary
has been the “mutual funds”.

Concept of mutual fund

In a mutual fund, many investors contribute to form a common pool of money. Pool of money is
invested in accordance with a stated objective. The ownership of the fund is thus joint”
mutual”; the fund belongs to all investors. A single investors Ownership of the fund is in the
same proportion as the amount of the contribution made By him bears to the total amount of the
fund.

A mutual fund uses the money collected from investors to buy those assets which are
specifically permitted by its stated investment objective. Thus, a growth fund would buy mainly
equity assets-ordinary shares, preference shares and warrants. An income fund would mainly buy
debt instruments such as debentures and bonds. The fund’s assets are owned by the investors in
the same proportion as their contribution bears to the total contributions of all investors put
together.

When a person buys “shares” of a joint stock company, the purchase makes the Investor a part
owner of the company and its assets. In the same way, when an investor Subscribes to a mutual
fund, he becomes part owner of fund’s assets. In fact, in the U.S.A. a mutual fund is constituted
as an investment company and an investor ‘buys into the fund’, meaning he buys the shares of
the fund. In India, a mutual fund is constituted As a Trust and the investor subscribes to the
‘units’ of a scheme launched by the fund, Which is where the term Unit Trust comes from.
However, whether the investor gets fund Shares or units are only a matter of legal distinction. In
any case, a mutual fund shareholder or unit-holder is a part owner of the fund’s assets. An
investor can buy the shares from a company only when the company makes a
Share issue. At other times, a share can be purchased from another investor through the
Stock exchange if the share is listed. A shareholder can sell the share to the company only
When the company announces ‘share buyback’. At other times, he can sell share to
Another Investor through a stock exchange . The price observed in a stock exchange is a
Reasonable estimate of the fair value of the share.
An open-ended mutual fund is quite different in this respect. In an open-ended
Mutual fund, investors can buy units from the fund and sell units to the fund
Continuously. The stock exchange is not in the picture. To ensure that there is fairness,
Sale and purchase has to take place at fair value of the unit. In other words, each share or
Unit that an investor holds needs to be assigned a value. Since the units held by an investor
evidence the ownership of the fund’s assets, the value of the total assets of the Value of one
unit. This is generally called the Net Asset Value (NAV) of one unit or one Share. The total
value of an investor’s part ownership is thus determined by multiplying The NAV with the
number of units held.

Origin and growth of mutual funds

The mutual fund industry in India started in 1963 with the formation of Unit Trust

Of India , at the initiative of the Reserve Bank of India and the Government of India. The

objective then was to attract the small investors and introduce them to market investments. Since
then, the history of mutual funds in India can be broadly divided into six distinct phases.

Phase 1(1964-87): Growth of Unit Trust of Indi

In 1963, UTI was established by an Act of Parliament. As it was the only entity

Offering mutual funds in India, it was a monopoly. Operationally, UTI was set up by the

Reserve Bank of India, but was later de-linked from the RBI. The first scheme, and for

Long one of the largest, launched by UTI was Unit Scheme 1964. Over the years, US-64

Attracted the largest number of investors in any single investment scheme. It was also at

least partially the first open-ended scheme in the country.

Later in 1970s and 80s, UTI started innovating and offering different schemes to

suit the needs of different classes of investors. Unit Linked Insurance Plan (ULIP) was

launched in 1971. Six new schemes were introduced between 1981 and 1984. During

1984-87, new schemes such as Children’s Gift Growth Fund (1986) and Mastershare

(1987) were launched. Mastershare could be termed as the first diversified equity

Investment scheme in India. The first Indian offshore fund, India Fund, was launched in
August 1986. During 1990s, UTI catered to the demand for income-oriented schemes by

launching Monthly Income Schemes, a somewhat unusual mutual fund product offering

“assured returns”. In absolute terms, the investible funds corpus of UTI was about Rs.600

crores in 1984. By 1987-88, assets under management of UTI had grown ten times to

Phase 2 (1987-1993): Entry of Public Sector Funds

The year 1987 marked the entry of other public sector mutual funds. With the

opening up of the economy, many public sector banks and financial institutions were

Allowed to establish mutual funds. State Bank of India established the first non-UTI

Mutual fund - SBI Mutual Fund - in November 1987. This was followed by Canbank

Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund,

GIC Mutual Fund and PNB Mutual Fund. These funds helped in enlarging the investor

Community and the investible funds. From 1987 to 1992-93, the assets under management

Increased from Rs. 6,700 cores. to Rs. 47,004 crores nearly seven times.

g this period, investors showed a marked interest in mutual funds, allocating a

larger part of their savings to investments in the funds (3.1% in 1988 and 5.2% in 1992).

UTI was still the largest segment of the industry, with about 80% market share.

Phase 3 (1993-1996): Emergence of Private Funds

A new era in the mutual fund industry began in 1993 with the permission granted

For the entry of private sector funds. This gave the Indian investors a broader choice of

fund families and increasing competition to the existing public sector funds.

Quite significantly, foreign fund management companies were also allowed to operate

mutual funds, most of them coming into India through their joint ventures with Indian
promoters. These private funds have brought in with them the latest product innovations,

investment management techniques and investor - servicing technology that make the

Indian mutual fund industry today a vibrant and growing financial intermediary.

During the year 1993-94, five private sector mutual funds launched their schemes,

Followed by six others in 1994-95. Initially, mobilisation of funds by the private mutual

funds was slow. But, this segment of the fund industry began to witness much greater

investor confidence in due course. One influencing factor was the development of SEBI’s

Regulatory framework for the Indian mutual fund industry. Yet another important factor

Has been the steadily improving performance of several fund houses. Investors in India

now clearly saw the benefits of investing through mutual funds and became discerning

and selective

Phase 4 (1996-99): Growth and SEBI Regulation

Since 1996, the mutual fund industry in India saw tighter regulation and higher

Growth. It scaled new heights in terms of mobilisation of funds and number of players.

Deregulation and liberalization of the Indian economy had introduced competition and

Provided impetus to the growth of the industry. Finally, most investors- small or large-

started showing interest in mutual funds.

Measures were taken both by SEBI to protect the investor, and by the

Government to enhance investors’ returns through tax benefits. A comprehensive set of

regulations for all mutual funds operating in India was introduced with SEBI (Mutual

Fund) Regulations, 1996. These regulations set uniform standards for all funds.

The erstwhile UTI voluntarily adopted SEBI guidelines for its new schemes. Similarly,

the budget of Union Government in 1999 took a big step in exempting all mutual fund

dividends from income tax in the hands of investors. Both the 1996 regulations and the
1999 Budget have been considered of historic importance, given their far-reaching impact

on the fund industry.During this phase, both Securities and Exchange Board of India and

Association of Mutual Funds in India (AMFI) launched Investor Awareness Programmes

Aimed at educating the investors about investing through mutual funds. AMFI published

its booklet titled “Making Mutual Funds Work for you- the Investors’ guide”.

Phase 5 (1999-2004): Emergence of a Large and Uniform Industry

The other major development in the fund industry has been the creation of a level

playing field for all mutual funds operating in India. This happened in February 2003,

when the UTI act was repealed. Unit Trust of India no longer has a special legal status as

a trust established by an Act of Parliament. Instead, it has also adopted the same structure

as any other fund in India - a Trust and an Asset Management Company. UTI Mutual

Fund is the present name of the erstwhile Unit Trust of India. While UTI functioned

under a separate law of Indian parliament earlier, UTI Mutual Fund is now under the

SEBI’s (Mutual Funds) Regulations, 1996 like all other mutual funds in India. UTI

Mutual Fund is still largest player in the Indian fund industry. All SEBI compliant

schemes of the erstwhile UTI are under its charge. All new schemes offered by UTI

Mutual Fund are SEBI approved. Other schemes (US 64, Assured Return Schemes) of

Erstwhile UTI have been placed with a special undertaking administered by the

Government of India. These schemes are being gradually wound up.

The emergence of a uniform industry with the same structure, operations and

regulations makes it easier for distributors and investors to deal with any fund house in

India. 1999 marked the beginning of a new phase in the history of the mutual fund

industry in India, a phase of significant growth in terms of both amounts mobilised from

investors and assets under management.

UTI was re-organised into two parts; one, The Specified Undertaking; two, the UTI Mutual

Fund. In the above tables, UTI Mutual Fund’s data is included under ‘public sector’.

Between 1999 and 2005, the size of the industry has doubled in terms of assets

under management which have gone from about Rs. 68,000 cores to over Rs. 1,50,000 crores.

Within the growing industry, the relative market shares of different players in terms of

amount mobilised and assets under management have also undergone changes.

Phase 6 (From 2004 onwards): Consolidation and Growth

The industry has lately witnessed a spate of mergers and acquisitions, most recent

ones being the acquisition of schemes of Alliance Mutual Fund by Birla Sun Life Mutual

Fund, Sun F & C Mutual Fund by Principal Mutual Fund and PNB Mutual Fund by

Principal Mutual Fund. At the same time, more international players continue to enter

India, including Fidelity, one of the largest funds in the world. The stage is set now for

Growth through consolidation and entry of new international and private sector players.

As at the end of March 2006, there were 29 funds.

Types of Mutual Funds

As mutual fund industry of India is continuously changing as impact of emerging trend,
several industry bodies are also investing. Yet, according to a report by Boston Analytics, less
than 10% of our households consider mutual funds as an investment avenue. As assumption of
the investors that make investment in mutual fund as considered as a high-risk option. However,
as it is one of the best options to the investors to make investment in mutual fund. As investment
of mutual funds shows that investment in mutual fund is one of the most suitable and flexible,
comprehensive modes of investments that can accommodate various types of investor needs.
Now days different types of mutual funds and categories are designed to allow investors to
choose a scheme based on the risk. They are willing to take investments amount, their desire
goals, as investment term, etc.

As important mutual fund schemes under the under mentioned three categories based on their
tenure on maturity period of mutual fund investment:
I. Open-Ended - As this is scheme has allows investors to buy or sell units at any time. So, such
fund does not have fixed maturity date.

1. Debt/ Income – Under this schemes fund have to investments in the fixed income instrument
or schemes like debentures or bond, government securities or other debt instruments. Such
schemes, a major part of the investable fund are channelized towards debentures, government
securities, and other debt instruments. Further, such fund has got fixed income and such funds
have low risk as compared investment in equity fund.

2. Money Market/ Liquid – Some investors have thing to grab opportunity in the short period.
Such investors have surplus funds they have to make investment in the money market to get
opportunity looking to utilize their surplus funds in short term instruments. It is possible that to
get maximum return in short period.

3. Equity/ Growth – As proverb in English like that high risk high return. Those investors to
think in respect to maximize return. They offered risky investment like equities mutual fund.
As possible appreciation capital and also get more return in coming future.

3. i. Index Scheme – Now new engineering in the capital market various schemes have to come
in market it is one of the index schemes. However, most schemes of mutual firstly come in the
foreign capital market and same concepts in Indian capital market apply for the grab various
opportunity indices like Nifty, Sensex, etc.

3. ii. Sectoral Scheme – As diversification fund has to investment in different sector. As result
sectors funds investment it may possible risk averse and get more return.

This scheme provides a relatively high risk-high return opportunity within the equity space.

Sectors are such as invested in a specific sector like pharmaceuticals, infrastructure, IT., or other,
etc. or money market segments of the capital market like large caps, mid caps, etc.

3. iii. Tax Saving – Some investors turn towards investments in mutual fund as a twice object
like one is tax saving and another to earn some return on investment. As result of these investors
has got good opportunity to earn income. Such fund has lock in period 3 years. Tax saving
mutual funds called Equity Linked Savings Schemes (ELS).

4. Balanced - Under This scheme the fund‟s investment in equity growth fund as well as debt
fund. So, the both opportunity of market can be avail by the investor‟s. While funds offer
such schemes at that time all information well in advance given in the offers documents.

II. Closed-Ended - In India, this type of scheme has contrary of open ended fund. In these
schemes investors has buy or made investment in the initial period and has maturing period. As
initial launch period known as the NFO (New Fund Offer) period
1. Capital Protection – Under this schemes prime objective to protect principal amount of
investment. So, the funds have to be investment in less risky funds. As result of that return
should be get very minimum or fixed income as specified.

2. Fixed Maturity Plans (FMPs) – As FMPs, name suggests that specified maturity period in
offered documents. Such schemes like debt an instrument, so the return has got earning through
the interest components like coupons of the scrip‟s or instruments. Moreover, such fund does not
have any trading. Similar, such funds have charges minimum cost by professionals.

III. Interval – The combination of open and closed ended schemes, such schemes permit
investors to trade units at specified intervals pre-defined intervals.

Benefits of Mutual Funds

An investor can invest directly in individual securities or indirectly through a financial

intermediary or professional expert. Globally, mutual funds have established themselves as the
means of investment for the retail investor.

01. Professional management: Generally, the process of investment in capital market is very
critical. Hence, need of expert or to hire the services of expert. A further inventor does not have
the knowledge at stock market. They need assist expert or hire the expert. However, while
investor have to make investment under mutual fund, at such time the expert of professional to
take care while to make investment. Moreover, to „hire the services‟ of an expert but it is more
difficult to identify a real expert. Professional managers have requisite skills and experience to
analyse the performance and potential growth of companies.

02. Portfolio diversification: As minimize of risk of the fund, that funds have to be make
diversification of various sectors. As result of these investors has get more return and fund
become safe. Diversification reduces the riskiness of the investments.

03. Reduction in transaction costs: While investors have to make directly investments in
shares market at that time they have to requires paying more cost. As compared to make an
investment in the mutual fund.

04. Liquidity: When investors to sell or redemption the mutual fund unit .They can easily
encase their investment. As compared to direct investment in share market.

05. Convenience: Investing in mutual fund reduces paperwork, saves time and makes
investment easy.

06. Flexibility: Under Mutual funds investment various schemes that funds have transferred one
funds to another as desired by investor. So, as get more benefits to the share holders.
07. Tax benefits: Under the mutual funds it is income earn though dividend and interest it is
exempt from income tax and also TDS of the Income Tax Act.

08. Transparency: As provided in the SEBI guidelines to provide all information and declare
all information. All the concern has to get clear information for investment decision and so on.

09. Stability to the stock market: Amount investment in mutual fund that investment in stock
market and money market. It is fluctuation continues in stock market it is effect of some extent
on invested mutual fund but it is result both positive and negative. Moreover, the funds have
handle by professional expert they can absorb any losses in the stock market and continue
investment. In addition they get more liquidity.

10. Equity research: As more professionals expert have to continue doing work in mutual fund
industry. They continue probe in era of investment. They actual have research information and
those benefits had to get AMC.

Mutual Fund Drawbacks

(1) No guarantee of Return – There are three issues involved:

(a) All Mutual Funds cannot be winners, as continuously fluctuation in stock market
simultaneously international impact on capital market. Some investment funds underperform the
benchmark index i.e. it may not even perform well.

(b) Even stock market perform better but if the fund ‟s investment risk averse fund or risk free
investments. Then it is not possibility to get good return or gain to the investors.

(c) If, mutual fund investment not take care and investors also not interested to return. On
contrary the principal amount of mutual would be decrease in value.

(2) Diversification – A mutual fund helps to create a diversified portfolio. Though

diversification minimises risk, it does not ensure maximizing returns. The return that mutual
funds offer is less than what an investor can achieve.

(3) Selection of Proper Fund – It may be easier to select the right share rather than the right
fund. For stocks, one can base his selection on the parameters of economic, industry and
company analysis. In case of mutual funds, past performance are the only criteria to fall back
upon. But past cannot predict the future.
(4) Cost Factor – Mutual Funds carry a price tag. Fund Managers are the highest paid
executives. As investing in mutual fund, as required to pay entry load and while leaving or
redemption fund to pay for exit load. Such costs reduce the return or gain from mutual fund.
Such fees paid to the AMC are in no way related to performance.

(5) Unethical Practices – Even though Laws regulation and Act some unfair practice is going on
it actual suffer by the common man i.e., investors of mutual funds and substantially decrease
value or lessen return or gain

Advantages of Mutual Funds

If mutual fund is emerging as the favourite investment vehicle, it is because of the

Many advantages it has over other forms 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 advantages offered

by mutual funds to all investors.

Portfolio Diversification
Mutual Funds normally invest in a well-diversified portfolio of securities.

Each investor in a fund is a part owner of all of the fund’s assets. This enables him to

hold a diversified investment portfolio even with a small amount of investment, which

would otherwise require big capital.

Professional Management
Even if an investor has a big amount of capital available to him, he benefits from

the professional management skills brought in by the fund in the management of the

investor’s portfolio. The investment management skills, along with the needed research

into available investment options, ensure a much better return than what an investor can
manage on his own. Few investors have the skills and resources of their own to succeed

in today’s fast-moving, global and sophisticated markets

Reduction/Diversification of Risk
An investor in a mutual fund acquires a diversified portfolio, no matter how small

his investment. Diversification reduces the risk of loss, as compared to investing directly

in one or two shares or debentures or other instruments. When an investor invests

directly, all the risk of potential loss is his own. While investing in the pool of funds with

other investors, any loss on one or two securities is also shared with other investors.

This risk reduction is one of the most important benefits of a collective investment

vehicle like the mutual fund

Reduction of Transaction Costs

What is true of risk is also true of the transaction costs. A direct investor bears all

the costs of investing such as brokerage or custody of securities. When going through a

fund, he has the benefit of economies of scale; the funds pay lesser costs because of

larger volumes, a benefit passed on to its investors.

Liquidity
Often, investors hold shares or bonds they cannot directly, easily and quickly sell.

Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate

the investment by selling the units to the fund if it is an open-ended fund, or by selling

the units in the stock market if the fund is a close-ended fund, since close - ended funds

have to be listed on a stock exchange. In any case, the investor in a close - ended fund
receives the sale proceeds at the end of a period specified by the mutual fund or the stock

exchange.

Safety
Mutual Fund industry is well-regulated and all funds are registered with SEBI

which lays down rules to protect the investors. Thus, investors also benefit from the

safety of a regulated investment environment

Convenience and Flexibility

Mutual fund management companies offer many investor services that a direct

market investor cannot get. Within the same fund family, investors can easily

transfer/switch their holdings from one scheme to another. They can also invest or

withdraw their money at regular intervals in most open - ended schemes. Mutual fund

investment process has been made further more convenient with the facility offered by

funds for investors to buy or sell their units through the internet or email or using other

communication means. The investors also get updated market information from the

funds. The information about the schemes is also shared by the fund managers in a

transparent manner, with all material facts required by regulators to be disclosed to the

investors.
Disadvantages of Investing through 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 a few shortcomings

of using the mutual fund as an investment vehicle.

No Control over Costs

An investor in a mutual fund has no control over the overall cost of investing. He pays

investment management fees as long as he remains with the fund, albeit in return for the

professional management and research. Fees are usually payable as a percentage of the value of

his investments, whether the fund value is rising or declining. A mutual fund investor also pays

fund distribution costs, which he would not incur in direct investing. However, this

shortcoming only means that there is a cost to obtain the benefits of mutual fund services, and

this cost is often less than the cost of direct investing by the investors. Besides, the regulators

have prescribed a ceiling on the maximum expenses that the fund managers can charge to the

schemes, thus limiting the investor’s expense of investing through mutual funds.
No Tailor-made Portfolio
Investors who invest on their own can build their own portfolio of shares, bonds

And other securities. Investing through funds means he delegates this decision to the fund

Managers. High -net-worth individuals or large corporate investors may find this to be a

constraint in achieving their objectives. However, most mutual funds help investors

overcome this constraint by offering families of schemes- a large number of different

schemes within the same fund. In each scheme there are various plans and options. An

investor can choose from different investment schemes/plans/options and construct an

investment portfolio that meets his investment objectives.

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, quite similar to the situation when he has to select individual shares or bonds to

invest in. Fortunately, India now has a large number of AMFI registered and tested fund

distributors and financial planners who are capable of guiding the investors