CHAPTER 1

INTRODUCTION

Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with the objectives as disclosed in
offer document. Investments in securities are spread across a wide cross-section of
industries and sectors and thus the risk is reduced. Diversification reduces the risk
because all stocks may not move in the same direction in the same proportion at the
same time. The mutual funds normally come out with a number of schemes with
different investment objectives which are launched from time to time. A mutual fund
is required to be registered with Securities and Exchange Board of India (SEBI)
which regulates securities markets before it can collect funds from the public. Thus
mutual funds make saving and investing simple, accessible and affordable. The
advantages of mutual funds include professional management, diversification, variety,
liquidity, affordability, convenience, ease of recordkeeping, strict government
regulation and full disclosures. In addition to this Income Tax Act 1961 provides for
100 per cent exemption on all mutual fund dividends. Further short-term capital gains
on the equity fund is taxable at the rate of 15 per cent.1

1.1 HISTORY OF INDIAN MUTUAL FUND INDUSTRY2

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The
history of mutual funds in India can be broadly divided into four distinct phases

1.1.1 First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set
up by the Reserve Bank of India and functioned under the regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from
the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched by

1
www.sebi.gov.in
2
www.amfiindia.com

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UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets
under management.

1.1.2 Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non-UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (December 1987),
Punjab National Bank Mutual Fund (August 1989), Indian Bank Mutual Fund
(November 1989), Bank of India (June 1990), Bank of Baroda Mutual Fund (October
1992 ). LIC established its mutual fund in June 1989 while GIC had set up its mutual
fund in December 1990. At the end of 1993, the mutual fund industry had assets
under management of Rs. 47,004 crores.

1.1.3 Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. 1993 was
the year in which the first mutual fund regulation came into being under which all
mutual funds except UTI were to be registered and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual
fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised mutual fund regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual
funds setting up funds in India. The industry also witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets
under management was way ahead of other mutual funds.

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1.1.4 Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit
Trust of India with assets under management of Rs. 29,835 crores as at the end of
January 2003, representing broadly, the assets of US 64 scheme, assured return and
certain other schemes. The Specified Undertaking of Unit Trust of India is
functioning under an administrator and under the rules framed by Government of
India and does not come under the purview of the mutual fund regulations.

Fig. 1.1

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the mutual fund regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000
crores of assets under management and with the setting up of a UTI Mutual Fund,
confirming to the SEBI Mutual Fund Regulations, and with recent mergers taking
place among different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth.

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1.2 TYPES OF MUTUAL FUND SCHEMES3

A wide variety of mutual fund schemes exists to cater to the needs of investors such
as risk tolerance and return expectations etc. An overview into the existing types of
schemes in the Industry is given below:

1.2.1 BY STRUCTURE
1.2.1.1 Open-Ended Schemes
1.2.1.2 Close-Ended Schemes
1.2.1.3 Interval Schemes
1.2.2 BY INVESTMENT OBJECTIVE
1.2.2.1 Growth/Equity/Diversified Schemes
1.2.2.2 Income/Debt Schemes
1.2.2.3 Balanced Schemes
1.2.2.4 Money Market Schemes
1.2.3 OTHER SCHEMES
1.2.3.1 Tax Saving Schemes (Equity Linked Saving Scheme-ELSS)
1.2.3.2 Gilt Funds
1.2.3.3 Index Funds
1.2.3.4 Sector-Based Classification
1.2.3.5 Exchange Traded Funds (ETFs)
1.2.3.6 Gold Exchange Traded Funds (GETFs)
1.2.3.7 Fund of Funds (FOFs)

1.2.1 Schemes according to Structure

1.2.1.1 Open-Ended Schemes

These schemes do not have a fixed maturity period. These schemes are available for
subscription and repurchase on a continuous basis. Investors can conveniently buy
and sell units at Net Asset Value (NAV) related prices which are declared on a daily
basis. The key feature of open-ended schemes is liquidity. These schemes have
comparatively better liquidity. The portfolio mix of such schemes has to be
investments, which are actively traded in the market. Since there is always a
possibility of withdrawals, the management of such funds becomes more tedious as

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managers have to maintain a high level of cash available every time implying thereby
idle cash and by virtue of this they may fail to grab favourable opportunities.

1.2.1.2 Close-Ended Schemes

The close-ended schemes have a stipulated maturity period e.g. 5-7 years. The fund is
open for subscription only during a specified period at the time of launch of the
scheme. 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
the units are listed. The market price at the stock exchange could vary from the
scheme’s NAV on account of demand and supply situation, unit holders’ expectations
and other market factors. 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 investors i.e. either repurchase facility or
through listing on stock exchanges.

1.2.1.3 Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be
traded on the stock exchange or may open for sale or redemption during
predetermined intervals at NAV related prices.

1.2.2 Schemes according to Investment Objective

A scheme can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly as
follows:

1.2.2.1 Growth/ Equity/Diversified Schemes

The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities and are
willing to bear short term decline in value for possible future appreciation. Such funds
have comparatively high risk. These schemes provide different options to the

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investors like dividend option, capital appreciation, etc. and the investors may choose
an option depending on their preferences. The investors must indicate the option in
the application form. The mutual funds also allow the investors to change the options
at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.

1.2.2.2 Income/ Debt Schemes

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, Government securities and money market instruments. Such funds are
less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation are also
limited in such funds. Debt oriented schemes are good for retired people and others
with a need for capital stability and regular income and for those investors who need
some income to supplement their earning.

1.2.2.3 Balanced Schemes

The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion indicated
in their offer documents. They generally invest 40 per cent in equity and 60 per cent
in debt instruments. These funds are also affected because of fluctuations in share
prices in the stock markets. However, NAVs of such funds are likely to be less
volatile compared to pure equity funds. These are appropriate for investors looking
for moderate growth.

1.2.2.4 Money Market Schemes

These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these
schemes may fluctuate, depending upon the interest rates prevailing in the market.

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These funds are appropriate for corporate and individual investors as a means to park
their surplus funds for short periods.

1.2.3 Other Schemes

1.2.3.1 Tax Saving Schemes (Equity Linked Saving Schemes-ELSS) These

schemes offer tax incentives to the investors under tax law as prescribed from time to
time and promote long term investments in equities through mutual funds. These
schemes are good for investors seeking tax incentives.

1.2.3.2 Gilt Funds

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 other economic factors as is the case with income or debt oriented schemes.

1.2.3.3 Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the
same weightage comprising of an index. NAVs 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 disclosures in this regard are made in the offer document of the mutual
fund scheme.

1.2.3.4 Sector-Based Classification

These are the schemes that invest in the securities of only those sectors or industries
as specified in the offer documents e.g. Pharmaceuticals, Software, Fast Moving
Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds depend
on the performance of the respective sectors/industries. While these funds may give
higher returns, they are more risky as compared to diversified funds. Investors need to
keep a watch on the performance of those sectors/industries and must exit at an
appropriate time.

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1.2.3.5 Exchange Traded Funds (ETFs)

An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX
Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETFs trading
value is based on the net asset value of the underlying stocks that it represents. It can
be compared to a stock that can be bought or sold on real time basis during the market
hours. The first ETF in India, Benchmark Nifty Bees, opened for subscription on
December 12, 2001 and was listed on the NSE on January 8, 2002.

1.2.3.6 Gold Exchange Traded Funds (GETFs)

Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secure
way to access the gold market. Gold ETFs are intended to offer investors a means of
participating in the gold bullion market by buying and selling units on the Stock
Exchanges, without taking physical delivery of gold. The first Gold ETF in India
Benchmark GETF opened for subscription on February 15, 2007 and was listed on the
NSE on April 17, 2007.

1.2.3.7 Fund of Funds (FOFs)

Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of
these schemes comprise only of units of other mutual fund schemes and cash/money
market securities/short term deposits pending deployment. The first FOF was
launched by Franklin Templeton Mutual Fund on October 17, 2003. Fund of Funds
can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs,
Objective specific e.g. Life stages FOFs or Style specific e.g. Aggressive/Cautious
FOFs etc.

1.3 STRUCTURE OF MUTUAL FUNDS

Mutual Fund is set-up in the form of a trust, which has
I. Sponsor
II. Trustees
III. Asset Management Company (AMC)
IV. Custodian

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The trust is established by sponsor(s), who is like the promoter of a company. The
trustees of the mutual funds hold its property for the benefit of the unit-holders. The
AMC manages the funds by making investments in various types of securities. The
custodian holds the securities of various schemes of the fund in the custody. The
trustees are vested with the general power of supervision and direction over AMC and
they monitor the performance and compliance of the SEBI regulations by the mutual
funds.

1.4 GROWTH OF MUTUAL FUNDS INDUSTRY IN INDIA

The following paragraphs depict the growth of mutual funds in India. This has been
done through the study of total number of schemes under mutual funds, category-wise
total number of open-ended schemes under mutual funds, category-wise total number
of close-ended schemes under mutual funds, nature-wise total resources mobilised by
mutual funds, resources mobilised by open-ended schemes, resources mobilised by
close-ended schemes and category-wise resources mobilised by mutual funds.

1.4.1 Total Number of Schemes under Mutual Funds

Table 1.1 indicates that total number of mutual fund schemes increased from 406 in
March 2003 to 1309 in March 2012 registering an overall growth rate of 222.41 per
cent. Among the schemes, income schemes showed highest growth rate (457.55%)
followed by growth schemes (150.41%). It is worth mentioning here that ELSS
schemes showed a meager growth rate of 4.26 per cent. Further, balanced schemes
had a negative growth rate of 16.67 per cent. Income schemes which had highest
share of 34.24 per cent in March 2003 maintained their position with 59.21 per cent
share in March 2012. Similarly growth schemes which were occupying second place
with 29.80 per cent share in March 2003 maintained their second place in March 2012
with a 23.15 per cent share. However, the share of gilt funds and Liq/MM funds
declined from 7 per cent in March 2003 to 3-4 per cent in a span of ten years. Even
the share of ELSS schemes declined from 11.58 per cent in March 2003 to 3.74 per
cent in March 2012. Newly introduced Gold ETFs/Other ETFs/Fund of Funds
investing oversea gained popularity in a short span of time.

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1.4.2 Category-Wise Total Number of Open-Ended Schemes under Mutual
Funds

Table 1.2 depicts that total number of open-ended mutual fund schemes increased
from 337 in March 2003 to 745 in March 2012 registering an overall growth rate of
121.07 per cent. It is visible from the table that growth schemes showed the highest
growth rate (160%) followed by income schemes (118.10%), ELSS schemes (80%)
and Liquid/Money Market Schemes (71.88%) during the study period. In terms of
percentage of share, growth schemes continued to enjoy the first rank followed by
income schemes. All other categories showed a decline in their percentage share.

1.4.3 Category-Wise Total Number of Close-Ended Schemes under Mutual Funds

Table 1.3 shows that total number of close-ended mutual fund schemes increased
from 69 in March 2003 to 530 in March 2012 registering an overall growth rate of
668.12 per cent. Total number of close-ended schemes under all the categories except
income schemes showed declining trend. Highest negative growth rate was shown by
ELSS schemes (51.85%) followed by balanced schemes (50%) and growth schemes
(33.34%). However income schemes showed an overall growth rate of 1405.88 per
cent and number of such schemes jumped from 34 in March 2003 to 512 in March
2012. ELSS schemes which were having largest share (39.13%) in March 2003 had a
meager share of 2.45 per cent in March 2012. It is worth noticing that 96.6 per cent of
the close ended schemes offered were income schemes.

1.4.4 Nature-Wise Total Resources Mobilised by Mutual Funds

Nature-wise the mutual funds can be classified as open-ended, close-ended and

interval funds. It is evident from Table 1.4 that in March 2012, open ended schemes
generated 75.2 per cent of the resources followed by close ended schemes (23.44%)
and interval funds (1.36%). However, close-ended schemes had a growth rate of
594.49 per cent during the period of study followed by open-ended schemes
(393.52%). Further in terms of resources generated, the share of open-ended schemes
declined while the share of close ended schemes increased during the period under
study.

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 Table 1.1
Total Number of Schemes under Mutual Funds
Fund of
Category Gold Other Funds
Growth ELSS Income Balanced Gilt Liq./MM Total
Month & Year ETFs ETFs Investing
Overseas
Mar-03 121 47 139 36 31 32 - - - 406
% age 29.80 11.58 34.24 8.87 7.64 7.87 - - - 100
Mar-04 126 43 131 37 30 36 - - - 403
% age 31.27 10.67 32.51 9.18 7.44 8.93 - - - 100
Mar-05 151 37 158 35 30 39 - - - 450
% age 33.56 8.22 35.11 7.77 6.67 8.67 - - - 100
Mar-06 194 37 251 36 29 45 - - - 592
% age 32.77 6.25 42.40 6.08 4.90 7.60 - - - 100
Mar-07 227 40 367 38 28 55 - - - 755
% age 30.07 5.30 48.61 5.03 3.71 7.28 - - - 100
Mar-08 270 43 505 37 30 58 5 8 - 956
% age 28.24 4.50 52.82 3.87 3.14 6.07 0.52 0.84 - 100
Mar-09 293 47 509 35 34 56 5 12 10 1001
% age 29.27 4.70 50.85 3.50 3.40 5.59 0.50 1.20 1.00 100
Mar-10 307 48 367 33 35 56 7 14 15 882
% age 34.81 5.44 41.61 3.74 3.97 6.35 0.79 1.59 1.70 100
Mar-11 328 48 591 32 37 51 10 18 16 1131
% age 29.00 4.24 52.25 2.83 3.27 4.51 0.88 1.59 1.41 100
Mar-12 303 49 775 30 42 55 14 21 20 1309
% age 23.15 3.74 59.21 2.29 3.21 4.20 1.07 1.6 1.53 100
Overall Growth Rate
(%) 150.41 4.26 457.55 -16.67 35.48 71.88 180 162.50 100.00 222.41
Source :www.sebi.gov.in

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 Table 1.2
Category-Wise Total Number of Open-Ended Schemes under Mutual Funds
Fund of
Category
Gold Other Funds
Growth ELSS Income Balanced Gilt Liq./MM Total
ETFs ETFs Investing
Month & Year
Overseas
Mar-03 115 20 105 34 31 32 - - - 337
% age 34.12 5.93 31.16 10.09 9.20 9.50 - - - 100
Mar-04 124 19 120 34 30 36 - - - 363
% age 34.16 5.23 33.06 9.37 8.26 9.92 - - - 100
Mar-05 149 20 131 34 30 39 - - - 403
% age 36.97 4.96 32.51 8.44 7.44 9.68 - - - 100
Mar-06 190 26 139 34 29 45 - - - 463
% age 41.04 5.62 30.02 7.34 6.26 9.72 - - - 100
Mar-07 206 29 133 34 28 55 - - - 485
% age 42.47 5.98 27.42 7.01 5.77 11.35 - - - 100
Mar-08 221 30 209 31 30 58 5 8 - 592
% age 37.33 5.07 35.30 5.24 5.07 9.80 0.84 1.35 - 100
Mar-09 244 35 163 30 34 56 5 12 10 589
% age 41.43 5.94 27.67 5.09 5.77 9.51 0.85 2.04 1.70 100
Mar-10 267 36 182 29 35 56 7 14 15 641
% age 41.65 5.62 28.39 4.52 5.46 8.74 1.09 2.18 2.34 100
Mar-11 318 36 210 31 37 51 10 18 16 727
% age 43.74 4.95 28.89 4.26 5.09 7.02 1.38 2.48 2.20 100
Mar-12 299 36 229 29 42 55 14 21 20 745
% age 40.13 4.83 30.74 3.89 5.64 7.38 1.88 2.82 2.68 100
Overall Growth Rate (%) 160.00 80.00 118.10 -14.71 35.48 71.88 180 162.50 100.00 121.07
Source : www.sebi.gov.in

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 Table 1.3
Category-Wise Total Number of Close-Ended Schemes under Mutual Funds

Category Growth ELSS Income Balanced Total

Month & Year
Mar-03 6 27 34 2 69
% age 8.70 39.13 49.28 2.90 100
Mar-04 2 24 11 3 40
% age 5.00 60.00 27.50 7.50 100
Mar-05 2 17 27 1 47
% age 4.26 36.17 57.45 2.13 100
Mar-06 4 11 112 2 129
% age 3.10 8.53 86.82 1.55 100
Mar-07 21 11 234 4 270
% age 7.78 4.07 86.67 1.48 100
Mar-08 49 13 296 6 364
% age 13.46 3.57 81.32 1.65 100
Mar-09 47 12 280 5 344
% age 13.66 3.49 81.40 1.45 100
Mar-10 38 12 148 4 202
% age 18.81 5.94 73.27 1.98 100
Mar-11 9 12 346 1 368
% age 2.45 3.26 94.02 0.27 100
Mar-12 4 13 512 1 530
% age 0.76 2.45 96.60 0.19 100
Overall Growth Rate
(%) -33.34 -51.85 1405.88 -50.00 668.12
Source: www.sebi.gov.in

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 Table 1.4
Nature-Wise Total Resources Mobilised by Mutual Funds
(Rs. In Crores)

Category Interval
Month & Year Open Ended Close Ended Total
funds

Mar-03 89481.00 19818.00 - 109299

% age 81.87 18.13 - 100
Mar-04 134523.00 5093.00 - 139616.00
% age 96.35 3.65 - 100
Mar-05 138029 11571.00 - 149600
% age 92.27 7.73 - 100
Mar-06 193713.00 38149.00 - 231862.00
% age 83.55 16.45 - 100
Mar-07 217321.00 108971.00 - 326292.00
% age 66.60 33.40 - 100
Mar-08 369239.00 135913.00 - 505152.00
% age 73.09 26.91 - 100
Mar-09 325161.00 89249.00 2890.00 417300.00
% age 77.92 21.39 0.69 100.00
Mar-10 532886.00 65519.00 15574.00 613979.00
% age 86.79 10.67 2.54 100
Mar-11 447196.00 126897.00 18157.00 592250.00
% age 75.51 21.43 3.07 100
Mar-12 441610 137634 7973 587217
% age 75.2 23.44 1.36 100
Overall Growth Rate (%) 393.52 594.49 175.88 437.26
Source: www.sebi.gov.in

1.4.5 Resources Mobilised by Open-Ended Schemes

Table 1.5 reveals that total resources mobilised by open-ended mutual funds increased
from 89,481 crore in March 2003 to 4,41,610 crore in March 2012 registering an
overall growth rate of 393.52 per cent. ELSS schemes had the highest growth rate
(5942.57%) followed by growth schemes (1869.94%), Liq/MM fund (485.07%),
income schemes (193.15%) and balanced schemes (24.64%), whereas gilt fund
showed a negative growth rate (6.42%) during the period. It is worth mentioning here
that income schemes had the largest share (56.33%) in March 2003 moved to second
position in March 2012 with 33.46 per cent share.

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 Table 1.5
Resources Mobilised by Open-Ended Schemes
(Rs. In Crores)
Fund of
Category Gold Other Funds
Growth ELSS Income Balanced Gilt Liq./MM Total
Month & Year ETFs ETFs Investing
Overseas
Mar-03 8041 350 50408 13038 3910 13734 - - - 89481
% age 8.99 0.39 56.33 14.57 4.37 15.35 - - - 100
Mar-04 22154 489 60854 3296 6026 41704 - - - 134523
% age 16.47 0.36 45.24 2.45 4.48 31.00 - - - 100
Mar-05 35106 708 39408 4163 4576 54068 - - - 138029
% age 25.43 0.51 28.55 3.02 3.32 39.17 - - - 100
Mar-06 86407 5091 30879 6701 3135 61500 - - - 193713
% age 44.61 2.63 15.94 3.46 1.62 31.75 - - - 100
Mar-07 96357 8398 30894 7409 2257 72006 - - - 217321
% age 44.34 3.86 14.22 3.41 1.04 33.13 - - - 100
Mar-08 123058 13327 123898 13591 2833 89402 483 2647 - 369239
% age 33.33 3.61 33.55 3.68 0.77 24.21 0.13 0.72 - 100
Mar-09 79162 10570 125212 9133 6413 90594 736 660 2681 325161
% age 24.35 3.25 38.51 2.81 1.97 27.86 0.23 0.20 0.82 100
Mar-10 154667 20911 254792 15618 3395 78094 1590 957 2862 532886
% age 29.02 3.92 47.81 2.93 0.64 14.65 0.30 0.18 0.54 100
Mar-11 167620 22488 153221 17360 3409 73666 4400 2516 2516 447196
% age 37.48 5.03 34.26 3.88 0.76 16.47 0.98 0.56 0.56 100
Mar-12 158403 21149 147772 16250 3659 80354 9886 1607 2530 441610
% age 35.87 4.79 33.46 3.68 0.83 18.20 2.24 0.36 0.57 100
Overall Growth Rate
(%) 1869.942 5942.571 193.15 24.64 -6.41944 485.0735 1946.79 -39.2898 -5.63223 393.52
Source: www.sebi.gov.in

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1.4.6 Resources Mobilised by Close-Ended Schemes

As shown in Table 1.6, total resources mobilised by close-ended mutual funds

increased from 19818 crore in March 2003 to 137634 crore in March 2012 registering
an overall growth rate of 594.49 per cent. Income schemes had the highest growth rate
(950.54) followed by ELSS schemes (174.78%) whereas growth schemes and
balanced schemes showed a negative growth rate of 99.42 and 98.94 per cent
respectively during the period

Table 1.6
Resources Mobilised by Close-Ended Schemes
(Rs. In Crores)

Category Growth ELSS Income Balanced Total

Month & Year
Mar-03 5017 908 12860 1033 19818
% age 25.32 4.58 64.89 5.21 100
Mar-04 1459 1180 1670 784 5093
% age 28.65 23.17 32.79 15.39 100
Mar-05 1651 1019 8197 704 11571
% age 14.27 8.81 70.84 6.08 100
Mar-06 6460 1498 29399 792 38149
% age 16.93 3.93 77.06 2.08 100
Mar-07 17029 1813 88428 1701 108971
% age 15.63 1.66 81.15 1.56 100
Mar-08 33664 2693 96864 2692 135913
% age 24.77 1.98 71.27 1.98 100
Mar-09 16549 1857 69347 1496 89249
% age 18.54 2.08 77.70 1.68 100
Mar-10 19157 3155 41579 1628 65519
% age 29.24 4.82 63.46 2.48 100
Mar-11 2121 3081 120610 1085 126897
% age 1.67 2.43 95.05 0.86 100
Mar-12 29 2495 135099 11 137634
% age 0.02 1.81 98.16 0.008 100
Overall Growth Rate
(%) -99.42 174.78 950.54 -98.94 594.49
Source : www.sebi.gov.in

Growth schemes which were having second largest share (25.32%) in March 2003
had a very meager share (0.02%) in March 2012.

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1.4.7 Category-Wise Resources Mobilised by Mutual Funds

Table 1.7 shows that total resource mobilised by mutual funds increased from 109299
crore in March 2003 to 587217 crore in March 2012 registering an overall growth rate
of 437.26 per cent. ELSS schemes showed the highest growth rate of 1779.49 per cent
followed by growth schemes (1113.29%), Liq/MM fund (485.07%), income schemes
(359.71%) and balanced schemes (15.56%) It is worth mentioning here that gilt fund
showed a negative growth rate of 6.42 per cent during the period. Income schemes
continued to have the largest share. However, it decreased from 57.88 per cent in
March 2003 to 49.53 per cent in March 2012.

1.5 NEED OF THE STUDY

Personal financial discipline demands every individual to plan for expenditure and
saving against current income. While moving up the hierarchy of needs one must
simultaneously save money for future. As one goes on in life, the standard of living
rises, needs increase and the expenditure to meet those needs increases. Without
proper financial planning, the future can be a miserable struggle to meet these
demands.

Several investment options available today include bank deposits, postal savings,
corporate bonds, gold, real estate, stocks etc. Mutual fund is an investment option that
has become very attractive for retail investors who are interested in financial markets
but do not have the time, expertise and experience in good stock picking. Problems
faced by the small investors in the share market have been offset by the emergence of
mutual funds. Like all investments, they also carry certain risks. The investors should
compare the risks and expected yields after adjustment of tax on various instruments
while taking investment decisions. The investors may seek advice from experts and
consultants including agents and distributors of mutual fund schemes while making
investment decisions.

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 Table 1.7
Category-Wise Resources Mobilised by Mutual Funds
(Rs. In Crores)
Fund of
Category Gold Other Funds
Growth ELSS Income Balanced Gilt Liq./MM Total
Month & Year ETFs ETFs Investing
Overseas
Mar-03 13058 1258 63268 14071 3910 13734 - - - 109299
% age 11.95 1.15 57.88 12.87 3.58 12.57 - - - 100
Mar-04 23613 1669 62524 4080 6026 41704 - - - 139616
% age 16.91 1.20 44.78 2.92 4.32 29.87 - - - 100
Mar-05 36757 1727 47605 4867 4576 54068 - - - 149600
% age 24.57 1.15 31.82 3.25 3.06 36.15 - - - 100
Mar-06 92867 6589 60278 7493 3135 61500 - - - 231862
% age 40.05 2.84 26.00 3.23 1.35 26.52 - - - 100
Mar-07 113386 10211 119322 9110 2257 72006 - - - 326292
% age 34.74 3.13 36.57 2.79 0.69 22.06 - - - 100
Mar-08 156722 16020 220762 16283 2833 89402 483 2647 - 505152
% age 31.02 3.17 43.70 3.22 0.56 17.70 0.10 0.52 - 100
Mar-09 95817 12427 197343 10629 6413 90594 736 660 2681 417300
% age 22.96 2.98 47.29 2.55 1.54 21.71 0.18 0.16 0.64 100
Mar-10 174054 24066 311715 17246 3395 78094 1590 957 2862 613979
% age 28.35 3.92 50.77 2.81 0.55 12.72 0.26 0.16 0.47 100
Mar-11 169754 25569 291975 18445 3409 73666 4400 2516 2516 592250
% age 28.66 4.32 49.30 3.11 0.58 12.44 0.74 0.42 0.42 100
Mar-12 158432 23644 290844 16261 3659 80354 9886 1607 2530 587217
% age 26.98 4.03 49.53 2.77 0.62 13.68 1.68 0.27 0.43 100
Overall Growth Rate
(%) 1113.29 1779.49 359.71 15.56 -6.41944 485.0735 1946.79 -39.289 -5.63223 437.26
Source: www.sebi.gov.in

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Today, there is a greater emphasis on the role of the regulator (SEBI and AMFI) on
creating awareness among investors and improving investors' services. The mutual fund
industry in the country has so far been focusing on urban markets and corporate investors.
The time has come for the industry to penetrate into rural markets which have been
hitherto lying untapped. The industry also needs to emphasize more on corporate
governance and disclosure practices. The issues related to choice among public and
private sector schemes on one hand and amongst growth, income, balanced, liquid/money
market and gilt schemes on the other, have become highly important because even a
single wrong decision may put the investors in financial crisis sometimes leading to their
bankruptcy. There is a greater need for an analysis whether the mutual funds are carrying
out the objectives for which they have been started and are performing according to the
expectation of the ordinary investors. So performance appraisal of these funds is expected
to help the investors in taking respective investment decisions. Moreover, there is a need
to examine the perceptions of investors so that mutual funds are able to provide proper
schemes suitable to investors. It is with this fact in mind that the present study
Performance Evaluation of Mutual Funds in India- A Study of Equity and Hybrid
Schemes has been undertaken.

1.6 OBJECTIVES OF THE STUDY

The core objective of the study is to study the performance evaluation of mutual funds in
India. The additional objectives are as follows:

1. To measure the growth of mutual funds;

2. To study the regulatory framework governing mutual fund industry;
3. To evaluate the performance of mutual fund schemes in terms of risk-return
relationship;
4. To compare the performance of mutual fund schemes on the basis of benchmark
Index;
5. To examine Investors’ perceptions regarding mutual funds and
6. To make appropriate recommendations for improving the working and
performance of mutual funds.

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1.7 CHAPTER SCHEME

The study has been divided into eight chapters:

Chapter I is introductory in nature. It briefly explains the history of Indian mutual funds
industry, types of mutual fund schemes, structure of mutual fund, growth of Indian
mutual fund industry, need and objectives of the study.

Chapter II reviews the various research studies conducted on mutual funds in India and
abroad. In total 40 studies have been reviewed which include 6 Ph.D. dissertations and 34
research papers.

Chapter III explains the research methodology used for the present study. It includes
sampling design, data collection, analysis of data, research tools used and limitations of
the study.

Chapter IV explains the regulatory framework governing the mutual funds in India.

Chapter V studies the risk pattern of various mutual fund schemes and compares the
public and private sector mutual funds. It also makes a risk comparison of various mutual
funds schemes with benchmark indices. Based on Returns on mutual funds, the chapter
provides period-wise and scheme-wise details of outperformance and underperformance.

Chapter VI evaluates the performance of mutual funds schemes by using Sharpe,

Treynor and Jensen measures and comparing performance with benchmark indices S&P
CNX Nifty, BSE Sensex, BSE 100, BSE 200.

Chapter VII studies the behaviour and perception of mutual fund investors on various
aspects.

Chapter VIII summarises the whole study and suggests measures to improve the
performance of mutual funds. It also highlights few suggestions for the future researchers.

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