A STUDY OF MUTUAL FUNDS

By Jatin Gupta and Gurmukh Singh

Institute of Information Technology and Management

1. REVIEW OF LITERATURE

Dr. Singh B K (2012) detailed about the mutual fund operation, NAV calculation and further
several demographic factors of investors towards their attitude of investment have also been
considered. Chi-square test has been deployed in order to gain conclusions. Dr. Vyas R. (2012)
prospected that although financial markets have turned to be expensive but different financial
instruments which are introduced, require unification. Author researched about factors affecting
investors for investing in mutual fund. Research highlighted that mostly investors choose bank
and post office deposits as one of the investment avenues, in comparison to Mutual Fund. Equity
and SIP are among the priority list. Prabhavathi Y. et al (2013) focussed on understanding about
the attitude, awareness and preferences of mutual fund investors. They found that mostly SIPs
have been preferred and moreover, Mutual Fund is a choice of several because of better returns
as well as professional fund management. Solanki A. (2016) compared the performance of
selected Reliance equity schemes from the time period of 1st April 2007 to 31st
March 2016 with BSE National 100 and SENSEX returns. The study concluded that the selected
schemes had higher returns than the Benchmark Index. But the study considered only the open
ended schemes with only growth options undertaken. Prof Prabhu G. et al (2016) believed that
Mutual Fund Industry in India is at rapid growth rate. It is considered that Mutual Fund
investments are less risky in comparison to investments in other securities. But it has been
inferred from the study that still several investors have not been aware about the benefits of
investing in Mutual Funds.

2. Mutual Funds

Mutual Fund is a means for pooling the resourced and investing funds in securities in accordance
with the objectives of the scheme.

They operate as Collective Investment Vehicles that pool resources by issuing units to investors
and collectively invests those resources in a diversified portfolio comprising of stocks, bonds or
money market instruments in accordance with the objectives disclosed in the offer document
issued for purpose of pooling resources. The profits or losses are shared by the investors in
proportion to their investments.

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.
Fig. 1: Mutual fund operation flow chart.

A Mutual Fund can fit well into the long or short term strategy of an investor. However the
success of the plan depends upon the type of fund chosen. As all the funds invest in securities
market, it is crucial to maintain realistic expectations about the performance of the markets and
choose the funds accordingly, which best suits the investor’s needs.
Fig. 2 Structure of Mutual Funds

Mutual Fund Structure

A mutual fund is set up in the form of a trust, which has sponsor, trustees and an asset
management company (AMC).

Sponsor

Sponsor is the person who acting alone or in combination with another corporate body
establishes a mutual fund. He acts like a promoter of a company. Sponsor must contribute at least
40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed
under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. The
sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the
schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts
Act, 1882 by the sponsor. The trust deed us registered under the Indian Registration Act, 1908.
The trust is established by a sponsor, who acts like a promoter of a company.

Trustee

Trustee is usually a corporate body or a board of Trustees. The main responsibility of the Trustee
is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest
of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996.

At least 2/3rd directors of the Trustee are independent directors who are not associated with the
Sponsor in any manner.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. It
manages the funds by making investments in various types of securities. AMC floats and
manages different investment ‘Schemes’ as per SEBI regulations. At least 50% of the directors
of the AMC are independent directors who are not associated with the Sponsor in any manner.
The AMC must have a net worth of at least Rs 10 Crore at all times.

Apart from these, MF also has some other fund constituents, such as custodians and depositories,
banks, transfer agents and distributors.

Custodians: Is approved for the safe keeping of securities and participating in the clearing
system through approved depository.

Bankers handle financial dealings of the fund.

Transfer Agents are responsible for issue and redemption of units of MF.
3. DIFFERENT TYPES OF MUTUAL FUNDS
The different types of Mutual Funds can be diagrammatically represented as:

Fig. 3 Mutual Fund Types

4. INDICATORS OF INVESTMENT RISK

Measure Description Ideal Range

Standard Standard Deviation evaluates fund’s volatility. Should be near to its mean
return
Deviation The standard deviation of a
Fund measures this risk by measuring the
degree to which the fund fluctuates in relation
to its mean return.

Beta A common measure of risk is Beta. It signifies Beta>1 = high risky

the volatility of the fund in comparison to the Beta = 1 = Avg
Beta<1 = Low Risky
benchmark.

R-square R-square connotes the correlation of a fund’s R-square values range

between 0 and 1, where 0re
movement to an index. It describes the relation
presents no correlation
 between the fund's volatility and market risk. and1 represents full
correlation.

Alpha Alpha is the difference between the returns one Alpha is positive
= returns of stock are
would expect from a fund, given its beta and
better than market
the return it actually produces. It also measures returns.
the unsystematic risk. Alpha is negative
= returns of stock are
worst then market.
Alpha is zero = returns are
same as market.
Sharpe Sharpe Ratio= Fund return in excess of risk Higher Sharpe ratio
better funds returns
Ratio free return/ Standard deviation of Fund. Sharpe
relative to amount of
ratios are ideal for comparing funds that have a risk taken.
mixed asset classes.

5. RISKS ASSOCIATED WITH MUTUAL FUND

It is well said that Higher the Risk, Higher the Returns. Tolerance for risk varies from one
individual to another. Hence individual disposition can be
 Conservative
 Aggressive
 Moderate
Following are the techniques which would enable investor to manage the investment risk and
attain the financial goals:
 Diversification
Investors must tend to diversify the portfolio i.e. a blend of equity shares, bonds and money
market securities would definitely procure more returns rather than investing the entire amount
of money into one basket. Moreover, making investments into high growth rate equity along with
the high income bonds as well as stable money market would augment returns and moderate risk.
Figure 4 Risk Return Profile

 Systematic Investment Plan

Unit Holders in order to diminish the risk, can also choose to invest specific amount periodically
for some continuous interval. SIP lets investor to invest fixed amount every month in order to
buy additional units at NAV prices.

Consider the following hypothetical example where investor tends to invest Rs. 1000 quarterly:

Hypothetical Example (Source: icici)

Average unit cost Rs 12,000/1,435.9 = Rs 8.36
Average unit price 109.6/12 = Rs 9.13
Unit price at beginning of next quarter Rs 14.90
Market value of investment 1435.9 * 14.90= Rs 21,395/-
The investor liquidates his units and gets back Rs 21,395/-
Using the SIP strategy the investor can reduce his average cost per unit. The investor gets
the advantage of getting more units when the market is turned down.

6. COMPARISION BETWEEN INVESTMENT IN BANK AND MUTUAL

FUND

Factors Banks Mutual funds

Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment Less More
Network High Penetration Low but Improving

Liquidity At a cost Better

Quality of Assest Not transparent Transparent
Interest calculation Minimum balance between Every day
10th & 30th of every month

Guarantee Maximum 10,00,000 None

ADVANTAGES OF MUTUAL FUND
Following are some of the advantages:
1. Professional Management
2. Diversification
3. Convenient Administration
4. Tax Benefits
5. Liquidity
6. Transparency
7. Affordability

DISADVANTAGES OF MUTUAL FUND

The disadvantages include:
1. Dilution
2. Cost

7. CONCLUSION
Investment in today’s era is enveloped with risks like business, credit, default, currency, interest
rate, market etc. Mutual Fund allows investor to pool their money with which the investment
manager would instigate investments and hence attempt to attain results as per the investor’s
objectives. Diversification and SIP allows investor to manage the risks. Sponsor, Trust, Trustee,
Transfer Agent, Asset Management Company etc. forms key element Mutual Fund structure.
Moreover, with the investment in Mutual Fund the investor can avail tax benefits too. I have also
find that it’s also giving better return than banks.

REFERENCES

[1] Dr. Singh BK, A Study of Investors’ attitude towards Mutual Funds as an Investment Option,
International Journal of Research in Management, Issue 2, Vol. 2, March 2012.

[2] Dr. Vyas R, Mutual Fund Investor’s Behaviour and Perception in Indore City, Journal of Arts, Science
& Commerce, Vol.3, Issue 3(1), July, 2012[67]

[3] Prabhavathi Y. et al, Investor’s Preferences towards Mutual Fund and Future Investments: A Case
Study of India, International Journal of Scientific and Research Publications, Vol. 3, Issue 11, November
2013.

[4] Solanki A., A Study of Performance Evaluation of Mutual Fund and Reliance Mutual Fund, Abhinav
National Monthly Refereed Journal of Research in Commerce and Management, Vol. 5, Issue 5 May,
2016.
[5] Sindhu. K.P and dr. S. Rajitha Kumar, Influence of Characteristics of Mutual Funds On Investment
Decisions –A Study, Volume 4, Issue 5, September - October (2013), pp. 103-108, International Journal
of Management (IJM).

[6] Dr. K. Rakesh, Mr. V S M Srinivas, Understanding Individual Investors Investment Behavior In
Mutual Funds (A Study On Investors of North Coastal Andhra Pradesh) Volume 4, Issue 3, (May – June
2013), pp. 185-198, International Journal of Management (IJM)
[7] Dr. M. Kalaiselvi and Tmt. K. Hemalatha. A Comparative Study on Investment Attitude between
Government and Private Employees towards Mutual Funds in Pudukkottai District. International Journal
of Management, 7(2), 2016, pp. 307-313

[8] Prof Prabhu G. et al, Perception of Indian Investor towards Investment in Mutual Funds with special
reference to MIP Funds, IOSR Journal of Economics and Finance, 7th International Business Research
Conference, PP 66-74, 2016.

Websites
http://commerceforias.com/financial-services-mutual-funds/
http://mutualstocks.blogspot.com/2008/08/m-utual-f-unds-mutual-fund-is-means-for.html