Chapter: Business Science : Merchant Banking and Financial Services : Other Fee Based Management Introduction

Mutual Funds

A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager, also known as portfolio manager, invests and trades the fund’s underlying securities, realizing capi individual investors.





A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager, also known as portfolio manager, invests and trades the fund’s underlying securities, realizing capi individual investors.



Mutual funds


a. A mutual fund is a fund exchanged between the public and the capital market through a corporate body.


b. The Securities and Exchange Board of India Regulations, 1993 defines a mutual fund as a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations’.


c. Kamm, J.O. defines an open end investment company or Mutual fund company in U.S.A as an organization formed for the investment of funds obtained from individuals and institutional investors who in exchange for the funds receive shares which can be redeemed at any time at their underlying asset values’.


d According to Weston j. Fred and Brigham, Eugene, F. Unit Trusts in U.K. are Corporations Thus mutual fund is nothing but a form of collective investment. It is formed by the coming together of a number of investors who transfer their surplus funds to a professionally qualified organization to manage it. To get the surplus funds from investors, the fund adopts a simple technique. Each fund is divided in to a small is allocated units in proportion to the size of his investment. Thus, every investor, whether big or small, will have a stake in the fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual funds enable millions of small and large investors to participate in and derive the benefit of the capital market growth. It has emerged as a popular vehicle of creation of wealth due to high return, lower cost and diversified risk.




Mutual funds came into existence in order to attract the savings of lower and middle income group people and give them the benefit of corporate profits by distributing attractive dividends at the end of the year. Mutual funds cater the different types of customers who are interested in


(a)Fixed income or


(b) A higher return for investment or


(c) Who is growth oriented.



1 Mutual Funds Set Up In India


The structure of mutual fund operations in India envisages a three tier establishment namely: (II) A Sponsor institution to promote the fund (III)A team of Trustees to oversee the operations and to provide checks for the efficient, profitable and transparent operations of the fund and (IV)An Asset  Management Company  to  actually deal  with  the  funds.  Sponsoring  Institution  The Company which sets up the Mutual Fund is call criteria to be met by the sponsor. These criteria mainly deal with adequate experience, good past tract record, net worth etc.

Trustees: Trustees are people with long experience and good integrity in their respective fields. They carry the crucial responsibility of safeguarding the interest of investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss Asset Management Companies with the approval of the SEBI.


Asset Management Company (AMC) The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research and to do agent and investor servicing. Infact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning of the mutual fund to the trustees who will guide and control the AMC.



2 Types of Mutual Funds


1 Close Ended Funds Close ended funds are funds which have definite period or target amount. Once the period is over and or the target is reached, the door is closed for the investors. They cannot purchase any more units. These units are publicly traded through stock exchange and generally, there is no repurchase facility by the fund. The main objective of this fund is capital appreciation. Thus after the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus the fund ceases to be a fund, after the final distribution. E.g. UTI Master Share, 1986.


2 Open Ended Funds Open ended funds are those which have no fixed maturity periods. Open ended scheme consists of mutual funds which sell the units to the public. These mutual funds can also repurchase the units. Initial Public Offer (IPO) is open for a period of 30 days and then reopens as an open-ended scheme after a period not exceeding 30 days from the date of closure of the IPO. Investors can buy or repurchase units at net asset value or net value related prices, as decided by the mutual fund. Example: Unit Trust of India‗s Growth sector funds.

Classification of Mutual Funds


On The Basis Of Yield and Investment



1.  Income Fund Income funds are those which generate regular income to the members on a periodical basis. It concentrates more on the distribution of regular income and it also sees that the average return is higher than that of the income from bank deposits. a. The investor is assured of regular income at periodical intervals b. The main objective is to declare regular dividends and not capital appreciation. c. The investment pattern is towards high and fixed income yielding securities d. It is concerned with short run gains only.

2.  Growth Fund Growth are those which concentrate mainly on long term gains i.e., capital appreciation. Hence they are termed as “Nest investmentsEggs”. a. It aims at meeting the investors need for capital appreciation. b. The investor‗s strategy conforms to investing the funds on equities with high growth potential. c. The Investment tries to get capital appreciation by taking much risks and investing on risk bearing equities and high growth equity shares. d. The fund declares dividends. e. It is best suited to salaried and business people.


3.  Balanced Fund It is a balance between income and growth fund. This is called as Income cum growth. It aims at distributing regular income as well as capital appreciation. Thus the investments are made in high growth equity shares and also the fixed income earning securities.


4.  Specialized Funds These are special funds to meet specific needs of specific categories of people like pensioners, widows etc.


Money Market Mutual Funds The funds are invested in money market instruments. These funds basically have all the features of open ended funds but they invest in highly liquid and safe securities like commercial paper, banker‘s acceptances, and certificates of deposits treasury bills. These funds are called money funds in the U.S.A. The RBI has fixed the minimum amount of investment as Rs.1 Lakh; it is out of the reach of many small investors. However, the private sector funds have been permitted to deal in money market mutual funds. It is best suited to institutional investors like banks and other financial institutions.


6. Taxation Funds It is a fund which offers tax rebated to the investors either in the domestic or foreign capital market. It is suitable to salaried people who want to enjoy tax rebates particularly during the month of February and March. An investor is entitled to get 20% rebated in Income Tax for investments made under this fund subject to a maximum investment of Rs.10,000 per annum. E.g. Tax Saving Magnum of SBI Capital Market Limited.


7. Other Classification


i.  Leveraged Funds: Also called as borrowed funds as they are used primarily to increase the size of the value of portfolio of a mutual fund. When the value increases, the earning capacity of the fund also increases.


ii.  Dual Funds: It is a fund which gives a single investment opportunity for two different types of investors. It sells income shares and capital. Those investors who seek current investment income can purchase incomes shares. The capital shares receive all the capital gains earned on those shares and they are not entitled to receive any dividend of any type.


iii.   Index Fund: It is a fund based the some broad market index. This is done by holding securities in the same proportion as the index itself. The value of these index linked funds will automatically go up whenever the market index goes up and vice versa.


iv.  Bond Funds: The funds have portfolios consisting mainly of fixed income securities like bonds. The main thrust is income rather than capital gains.


v.  Aggressive Growth Funds: These funds are capital gains oriented and thus the thrust area of these funds is capital gains. Hence, these funds are generally invested in speculative stocks They may also use specialized investment techniques like short term trading, option writing etc.,


vi.   Off shore Mutual Funds: These funds are meant for nonresident investors. These funds facilitate flow of funds across different countries, with free and efficient movement of capital for investment and repatriation.


vii.   Property Fund: These funds are real estate mutual funds. Its investment also includes shares/bonds of companies involved in real estate and mortgage backed companies.


viii.  Fund of Funds: It is a fund that invests in other mutual fund schemes. The concept in prevalent in abroad.



3 History of Mutual Funds In India


The Mutual fund concept in India was launched by Unit Trust of India (UTI) in the year 1964 by a special Act of Parliament. The first scheme offered was the ―US-64. A host of other fund schemes were subsequently introduced by the UTI. The basic objective behind the setting up of the Trust was to mobilize small savings and to allow channeling of those savings into productive sectors of the economy, so as to accelerate the industrial and economic development of the country. In 1987, the Government of India permitted commercial banks in the public sector to set up subsidiaries operating as trusts to perform the functions of mutual funds by amending the Banking Regulation Act. SBI set its first mutual fund, followed by Canara Bank. Later many large financial institutions under government control also came out with mutual funds subsidiaries. Recently, with the beginning of the economic reforms and liberalization of the economy, based on the recommendations of the Abid Hussain committee, foreign companies were also permitted to start mutual funds in India. The government introduced a number of regulatory measures, through various agencies such as the SEBI, to the benefit the investors, esp. the small investors.

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