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Mutual Fund Investments

  By : , CUTTACK, INDIAN       1.9.2010         Mail Now


Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. 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 funds schemes while making investment decisions. With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

About Mutual Fund

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), which pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.

Presently there are 33 Mutual Funds in India. Mutual funds are money-managing institutions set up to professionally invest the money pooled in from the public. These schemes are managed by Asset Management Companies (AMC), which are sponsored by different financial institutions or companies. Each unit of these schemes reflects the share of investor in the respective fund and its appreciation is judged by the Net Asset Value (NAV) of the scheme. The NAV is directly linked to the bullish and bearish trends of the markets as the pooled money is invested either inequity shares or in debentures or treasury bills.

How is a Mutual Fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.

History of Mutual Funds In India

In 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 (RBI) and the government of India. The objective then was to attract the small investors and introduce them to market investment. Since then, the history of mutual funds in India can be broadly divided into four distinct phases.

Phase 1: 1964-87 (Unit Trust of India)

In 1963, UTI has established by an act of parliament and given a monopoly. Operationally, UTI has set up by the Reserve Bank of India, but was later de-linked from the RBI. The first and still one of the largest schemes launched by UTI was Unit Scheme 1964. Over the year, US-64 attracted and probably still has the largest number of investor in any single investment scheme. It was also at least partially the first open-end scheme in the country, now moving towards becoming fully open-end.

Later in 1970’s and 80’s UTI started innovating and offering different scheme to suit the need of different classes of investors. The mutual fund industry in India not only started with UTI, but still counts UTI as its largest player with the largest corpus of investible funds among all mutual funds currently operating in India.

Phase 2: 1987-93 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, Public sector Mutual Funds, bringing in competition. With the opening up of the economy, many public sector banks and financial institutions were allowed to establish mutual funds. The State Bank of India established the first non-UTI mutual fund: SBI Mutual Fund in November 1987. From 1987 to 1992-93, the fund industry expanded nearly seven times in terms of assets under management

Phase 3: 1993-96 (Emergence of Private Funds)

A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993, giving the Indian investors broader choice of “fund families” and increasing competition for 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 venture with Indian promoters.
These private funds have brought in with them the latest product innovation, investment management techniques and investors Servicing technology that make the Indian Mutual Fund industry today a vibrate and growing financial intermediary. During the year 1993-94, five private sector mutual funds launched their schemes followed by six others in 1994-95.

Phase 4: 1996 (SEBI Regulation for Mutual Funds)

More investor friendly regulatory measures have been taken both by SEBI to protect the investors and by the government to enhance investor’s returns through tax benefits. A comprehensive set of regulation for all the mutual funds operating in India was introduced with SEBI (Mutual Fund) Regulations, 1996. These regulation set uniform standards for all funds. Similarly, the 1999 Union Government Budget 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 must be considered of historic importance, given in their far reaching impact on the fund industry and investors.

Types of Mutual fund :

1. Schemes according to Maturity Period:

  • Open ended

  • Close ended

2. Scheme according to Investment objective:

  • Income Fund 

  • Taxation fund

  • Growth fund

  • Balance fund

  • Gilt fund

  • Money market

  • Index fund 

1. Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. 

  • Open-ended Fund/Scheme:

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. 
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-end schemes is liquidity.

  • Close-ended Fund/ Scheme:

A close-ended fund or scheme has 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. These mutual funds schemes disclose NAV generally on weekly basis.

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:

  • Growth / Equity Oriented Scheme:

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. Such funds have comparatively high risks. These schemes provide different options to the 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. 

  • Income / Debt Oriented Scheme:

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. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. 

  • Balanced Fund:

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. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and 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. 

  • Money Market or Liquid Fund:

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 fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

  • Gilt Fund:

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. 

  • Taxation Funds:

It is basically a growth-oriented fund. But it offers tax rebates to the investors either in domestic or foreign capital market. It is suitable to salaried persons who want to enjoy the tax benefit. 

  • 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. NAV’s 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.

Mutual fund investing strategies:

  • Systematic Investment Plans (SIPs)

  • Systematic Withdrawal Plans (SWPs)

  • Systematic Transfer Plans (STPs)

Systematic Investment Plans (SIPs):

These are best suited for young people who have started their careers and need to build their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals in the Mutual fund scheme the investor has chosen. An investor commits to invest certain sum on money every month/quarter/half-year in the scheme.

Systematic Withdrawal Plans (SWPs):

These plans are best suited for people nearing retirement. In these plans, an investor invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take care of his expenses. A systematic withdrawal plan is a financial plan that allows a shareholder to withdraw money from an existing mutual fund portfolio at predetermined intervals. The money withdrawn through a systematic withdrawal plan can be reinvested in another portfolio or used to pay for something else.

Systematic Transfer Plans (STPs):

They allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family – meaning two schemes belonging to the same mutual fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made. Such redemption or investment will be at the applicable NAV. This service allows the investor to manage his investments actively to achieve his objectives. Many funds do not even charge any transaction fees for his service – an added advantage for the active investor.

Reason for investing in Mutual Fund:

For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. It reduces the risk of putting all eggs in one basket. This is because: 

1) Money is being managed by experienced and skilled professionals.
2) Investment is automatically diversified over a large number of companies and industries, thus reducing the element of risk.
3) Money is very liquid, especially in an open-end fund.
4) The potential to provide a higher return over the medium to long term is better in a wide range of securities than in any one.
5) The costs of research and investing directly in the individual securities are spread over a large corpus and thousands of investors thus minimizing individual share.
6) There is a high degree of transparency in the operation of a mutual fund, so you can take investment decisions based on more information.
7) It provides a wide range of choice to suit the need.
8) The industry is well regulated with many measures oriented towards investor protection
9) Mutual Funds provide the benefit of cheap access to expensive stocks

Net Asset Value (NAV):

The purchase price is always linked with the Net Asset Value (NAV). The NAV is nothing but of market price of each unit of a particular scheme in relation to all assets of the scheme. It can otherwise call as intrinsic value of each unit. It is the actual indicator of performance of fund. If the NAV is more than the face value of unit, then it is clear that the money which is invested is performing well. The net asset value (NAV) is the market value of the fund's underlying securities. It is calculated at the end of the trading day. Any open-end funds buy or sell order received on that day is traded based on the net asset value calculated at the end of the day. The NAV per units is such Net Asset Value divided by the number of outstanding units. Market Value of Assets - Liabilities

Major players in the field of Mutual Fund:

  • UTI Mutual Fund

  • Reliance Mutual Fund

  • SBI Mutual Fund

  • ABN AMRO Mutual Fund

  • Tata Mutual Fund

  • Birla Sun Life Mutual Fund

  • ICICI Prudential Mutual Fund

  • Kotak Mutual Fund

  • Fidelity Mutual Fund

  • Franklin Mutual Fund & Birla Sun Life Freedom Fund


No stock market related investments can be termed safe with certainty; they are inherently risky. However, different funds have different risk profile, which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund Managers, they are always safer than direct investment in the stock markets.

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