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CONCEPT AND ROLE

OF A MUTUAL FUND CHAPTER 2:
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• A mutual fund is a vehicle (in the form

of a “trust”) to mobilize money from
CONCEPT OF
investors to invest in different markets
MUTUAL
and securities in line with stated
FUND
investment objectives.
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Primary Role - To assist investors in earning an income or

building their wealth, by participating in the opportunities
available in various securities & markets.

ROLE OF The mutual fund industry itself, offers livelihood to many

MUTUAL employees of mutual funds, distributors, registrars and
various other service providers.
FUNDS

Mutual funds can also act as a market stabilizer, in

countering large inflows or outflows from foreign investors.
Mutual funds are therefore viewed as a key participant in
the capital market of any economy.
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• Mutual Funds mobilize money from investors.

Investors have different investment
preferences. So, Mutual Funds mobilize
different pools of money.
INVESTMENT
• Every scheme has a pre-announced investment
OBJECTIVES
objective. Investors invest in a mutual fund
OF MUTUAL
scheme whose investment objective reflects
FUNDS
their own needs and preferences.
• The primary objective of various schemes stems
from the basic needs of an investor, i.e., safety,
liquidity, and returns.
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• A mutual fund scheme with an objective of providing

liquidity would invest in money market instruments or
in debt papers of very short-term maturity.
INVESTMENT • At the same time, a mutual fund scheme that aims to
POLICY OF generate capital appreciation over long periods, would
MUTUAL invest in equity shares. This would reflect in the
scheme’s asset allocation, which would be disclosed in
FUNDS the Scheme Information Document (SID).
• However, even within the same asset category, the
fund manager may adopt different styles, e.g., growth
style or value style; or different levels of portfolio
concentration, e.g., focused fund or diversified fund.
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• Units- The investment that an investor makes in a

scheme is translated into a certain number of 'Units' in
the scheme. Thus, an investor in a scheme is issued
units of the scheme.
IMPORTANT
• Face Value- Every unit has a face value of Rs. 10. The
CONCEPTS IN face value is relevant from an accounting perspective.
MUTUAL • Unit Capital - The number of units issued by a scheme
FUNDS multiplied by its face value (Rs. 10) is the capital of the
scheme-its Unit Capital.
• No. of units x Face Value (10) = Unit Capital of the
Scheme
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• The fees or commissions paid to various mutual fund

constituents come out of the expenses charged to
the mutual fund scheme. These are known as
recurring expenses.
• These expenses are charged as a percentage to the
RECURRING scheme’s asset under management (AUM).
EXPENSES
• The scheme expenses are deducted while calculating
the NAV. This means that higher the expenses, lower
the NAV, and hence lower the investor returns.
• Given this, SEBI has imposed strict limits on how
much expenses could be charged to the scheme.
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• The true worth of a unit of the mutual fund

scheme is otherwise called Net Asset Value
(NAV) of the scheme.
• Profit- NAV increase
NET ASSET • Loss- NAV decrease
VALUE (NAV)
• NAV is also the net realizable value per unit in
case the scheme is to be liquidated–how
much money could be generated if all the
holdings of the scheme are sold and
converted into cash
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• The sum of all investments made by investors

in the mutual fund scheme is the entire
ASSETS
mutual fund scheme’s size, which is also
UNDER known as the scheme’s Assets Under
MANAGEME Management (AUM).
NT • This can also be obtained by multiplying the
current NAV with the total units outstanding.
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1. Portfolio Management
2. Affordable portfolio diversification
3. Economies of scale
ADVANTAGES 4. Transparency
OF MUTUAL 5. Liquidity
FUNDS FOR 6. Tax deferral
INVESTORS 7. Tax benefits
8. Convenient option
9. Investment comfort
10.Regulatory comfort
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• Mutual funds also offer facilities that help

investors invest amounts regularly through a
Systematic Investment Plan (SIP); or
SYSTEMATIC
withdraw amounts regularly through a
APPROACH Systematic Withdrawal Plan (SWP); or move
TO money between different kinds of schemes
INVESTMEN through a Systematic Transfer Plan (STP).
TS • Such systematic approaches promote
investment discipline, which is useful in long-
term wealth creation and protection.
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1. Lack of Portfolio Customization

LIMITATIONS 2. Choice Overload
OF MUTUAL 3. No Control Over Costs
FUND 4. No Guaranteed Returns
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• By the Structure of the Fund

CLASSIFICAT
1. Open - Ended Funds
ION OF
2. Closed - Ended Funds
MUTUAL
FUNDS 3. Interval Funds
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• Actively Managed Funds

• Fund manager has the flexibility to choose
Investment portfolio.
• Role of Fund Manager is high, so high expenses,
these funds are expected to perform better than the
BY THE market.
MANAGEME • Passive Funds
NT OF THE • Invest based on Specified Index.
PORTFOLIO
• Buy only the shares which are on Index.
• Not expected to perform better than the market.
• Funds manager has no role in deciding the
investments, as it is decided as per Index. So, lower
running costs.
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1. Equity Schemes (11 sub-categories)

2. Debt Schemes (16 sub-categories)
BY THE
3. Hybrid Schemes (6 sub-categories)
INVESTMEN
4. Solution Oriented Schemes (2 sub-categories)
T UNIVERSE
5. Other Schemes (2 sub-categories)
(Read from PDF 2 times)
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CERTAIN 1. Fixed Maturity Plans

OTHER 2. Capital protection Funds
CATEGORIE 3. Infrastructure Debt Funds
S 4. Real Estate Mutual Fund
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• Closed-ended debt funds with an investment

portfolio duration aligned to the scheme's maturity.
AMC’s structure FMPs around pre-identified
investments, and they do not accept investments
after the new fund offer (NFO). As a result, the fund
FIXED
manager has limited involvement in selecting
MATURITY investment options. This portfolio construction
PLANS provides clarity to investors regarding potential
returns if they stay invested until maturity, aiding
them in comparing risk and returns with other
investment options. However, there are no
guarantees or assurances of achieving those
returns.
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• Capital Protection Funds are closed-end hybrids

funds. In these types of funds, the exposure to
equity is typically taken through the equity
derivatives market.
• The portfolio is structured such that a portion of
CAPITAL the principal amount is invested in debt
instruments so that it grows to the principal
PROTECTIO amount over the term of the fund.
N FUNDS • For example, Rs.90 may be invested for 3 years to
grow into Rs.100 at maturity. This provides the
protection to the capital invested.
• The remaining portion of the original amount is
invested in equity derivatives to earn higher
returns.
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• Infrastructure Debt Funds are investment vehicles

which can be sponsored by commercial banks and
NBFCs in India in which domestic/offshore
institutional investors, especially insurance and
pension funds can invest through units and bonds
issued by the IDFs.
INFRASTRUCTURE
• Infrastructure Debt Funds (IDFs), can be set up
DEBT FUNDS
either as a Trust or as a Company. A trust based IDF
would normally be a Mutual Fund (MF), regulated
by SEBI, while a company based IDF would
normally be a NBFC regulated by the Reserve Bank.
• Only banks and Infrastructure Finance companies
can sponsor IDF-NBFCs.
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• Real Estate Mutual Funds invest in real estate assets or

other permissible assets according to SEBI (Mutual
Funds) Regulations, 1996. The regulations require at
least 35% of the portfolio to be held in physical assets.
Additionally, a minimum of 75% of the scheme's net
assets must be in real estate assets, mortgage-backed
REAL securities (excluding mortgages), equity shares, or
ESTATE debentures of companies involved in real estate assets
or development projects.
MUTUAL • These funds are closed-end and must be listed on a stock
FUND exchange. Asset valuation occurs every 90 days by two
valuers accredited by a credit rating agency, with the
lower value used to calculate the Net Asset Value (NAV).
SEBI also allows other real estate and infrastructure
investment instruments such as Real Estate Investment
Trusts (REITs) and Infrastructure Investment Trusts
(InvITs).
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• Real Estate Investment Trusts (REIT) are trusts

registered with SEBI that invest in commercial real
estate assets. The REIT will raise funds through an
REAL initial offer and subsequently through follow-on
offers, rights issue and institutional placements.
ESTATE
• The value of the assets owned or proposed to be
INVESTMEN
owned by a REIT coming out with an initial offer
T TRUSTS will not be less than Rs. 500 crore and the
(REIT) minimum offer size will not be less than Rs.250
crore. The minimum subscription amount in an
initial offer shall be Rs. 50,000/-.
• The units are listed on the stock exchange.
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• Infrastructure Investment Trusts (InvIT) are

trusts registered with SEBI that invest in the
infrastructure sector.

INFRASTRUCTURE • The InvIT will raise funds from the public

through an initial offer of units. The offer
INVESTMENT
shall be for not less than Rs. 250 crores and
TRUSTS (INVIT) the value of the proposed assets of the InvIT
shall not be less than Rs. 500 crores.
• The minimum subscription size will be Rs.1
lakh. The units are listed on a stock exchange.
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• SEBI has introduced a separate sub-category for ESG

investments under the thematic category of Equity
schemes. Any scheme under the ESG category can be
launched with one of the following strategies:
ENVIRONMENTAL, a. Exclusion
SOCIAL AND b. Integration
GOVERNANCE
c. Best-in-class & Positive Screening
(“ESG”) INVESTING
d. Impact investing
e. Sustainable objectives
f. Transition or transition-related investments
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• Smart Beta Fund

NEW TYPES OF • Quant Funds
FUNDS • International REITS
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