NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

In the partial fulfillment for the requirement of the project on the subject of Equity Trust and
Specific Relief of B.A., L.L.B (Hons.), Fourth Trimester

th
Submitted on August 2019

Mutual Funds in India

Submitted to:
Asso Prof. [Dr] Sanjay Yadav

Submitted by :
Hrishikesh Jaiswal

(2018BALLB126)

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 Table of Contents

Certificate….........................................................................3

Preface................................................................................4

Acknowledgement…..........................................................5

Introduction to mutual funds and its various aspects…......6

Research Methodology.......................................................8

Types of mutual fund schemes in India..............................9

Pros and Cons of mutual Funds........................................12

SEBI Guidelines………………………………………….

Conclusion……………………………………………….

Bibliography……………………………………………...

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 CERTIFICATE

This is to certify that the research project titled “ Mutual Funds In India” has been prepared by
Hrishikesh Jaiswal, who is currently pursuing B.AL.L.B (HONS) at National Law Institute
University ,Bhopal in fulfillment of Equity Trust and Specific Relief course

Date

Signature of student

Signature of faculty

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 PREFACE

I feel great pleasure in presenting the project under study. I hope that the readers will find
the project interesting and that the project in its present from shall be well received by
all. The project contains a detailed study of “Mutual Funds In India”

Every effort is made to make the project error free. I would gratefully acknowledge any
suggestions to improve the project to make it more useful

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 ACKNOWLEDGEMENT

On completion of this Project it is my present privilege to acknowledge my

profound gratitude and indebtedness towards many people for their valuable
suggestions and constructive criticism. Their precious guidance and unrelenting
support kept me on the right track throughout the project. I gratefully
acknowledge my deepest sense of gratitude to:

Prof. (Dr.) V Vijayakumar , Director, National Law Institute University, Bhopal

for providing us with the infrastructure and the means to make this project;

Our teacher Dr Sanjay Yadav who provided me this wonderful opportunity and
guided me throughout the project work.

I would also like to thank my batch mates and seniors for their constant help and
guidance which helped me in completing this project.

I’m also thankful to the library and computer staffs of the University for helping us find
and select books from the University library.

Finally, I’m thankful to my family members and friends for the affection and
encouragement with which doing this project became a pleasure.

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HRISHIKESH JAISWAL(2018BALLB126)

INTRODUCTION TO MUTUAL FUND AND ITS VARIOUS ASPECTS.

Mutual fund is a trust that pools the savings of a number of investors who share a
common financial goal. This pool of money is invested in accordance with a
stated objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund
belongs to all investors. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciations realized are shared
by its unit holders in proportion the number of units owned by them. 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. A Mutual Fund is an investment tool that allows small
investors access to a well- diversified portfolio of equities, bonds and other
securities. Each shareholder participates in the gain or loss of the fund. Units are
issued and can be redeemed as needed. The funds Net Asset value (NAV) is
determined each day.1

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. Mutual fund issues

units to the investors in accordance with quantum of money invested by them. Investors of

mutual funds are known as unit holder2

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the

1
https://www.investopedia.com/terms/m/mutualfund.asp
2
"Boston Analytics - India Watch". Archived from the original on 29 July 2012. Retrieved 4 September 2013.

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 fund in the same proportion as his contribution amount put up with the corpus (the total amount of the
fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder Any change in
the value of the investments made into capital market instruments (such as shares, debentures etc) is
reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual
Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of
scheme's assets by the total number of units issued to the investors.3

3
"MF History http://www.amfiindia.com/research-information/mf-history". Association of Mutual Funds of India

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 RESEARCH METHODOLOGY

STATEMENT OF PROBLEM

To analyze the types, guidelines and pros & cons of mutual funds in India

OBJECTIVE

 To enhance knowledge about mutual funds in India

 To analyse the SEBI guidelines for mutual funds in India

 To understand the pros and cons of investing in mutual funds

METHODOLOGY

The method used for research work in the present project is the doctrinal method of data
collection

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 TYPES OF MUTUAL FUNDS IN INDIA

Open Ended Schemes4

An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at
Net Asset Value ("NAV") related prices. The key feature of open-end schemes is
liquidity.

Close Ended Schemes5

A closed-end fund has a stipulated maturity period which generally ranging
from 3 to 15 years. The fund is open for subscription only during a specified period.
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 they are
listed. 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 investor.

Interval Schemes
Interval Schemes are that scheme, which combines the features of open-ended
and close-ended schemes. The units may be traded on the stock exchange or may be
open for sale or redemption during pre-determined intervals at NAV related prices.6

BY NATURE

Equity fund:

4
Pozen, Robert; Hamacher, Theresa (2015). The Fund Industry: How Your Money is Managed (2nd ed.). Hoboken, NJ: Wiley Finance. pp. 
5
https://www.paisabazaar.com/mutual-funds/mutual-funds-in-india/
6
"Average AUM". Association of Mutual Funds in India. Retrieved 6 April 2016.

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 These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund manager’s
outlook on different stocks. The Equity Funds are sub-classified depending upon their
investment objective, as follows:

 Diversified Equity Funds

 Mid-Cap Funds
 Sector Specific Funds
 Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank
high on the risk- return matrix.

2. Debt funds:

The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers of
debt papers. By investing in debt instruments, these funds ensure low risk and provide
stable income to the investors. Debt funds are further classified as:

 Gilt Funds: Invest their corpus in securities issued by Government, popularly

known as Government of India debt papers. These Funds carry zero Default
risk but are associated with Interest Rate risk. These schemes are safer as they
invest in papers backed by Government.

 Income Funds: Invest a major portion into various debt instruments such as
bonds, corporate debentures and Government securities.

 MIPs: Invests maximum of their total corpus in debt instruments while they
take minimum exposure in equities. It gets benefit of both equity and debt

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 market. These scheme ranks slightly high on the risk-return matrix when
compared with other debt schemes.

 Short Term Plans (STPs): Meant for investment horizon for three to six
months. These funds primarily invest in short term papers like Certificate of
Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is
also invested in corporate debentures.

 Liquid Funds: Also known as Money Market Schemes, These funds provides
easy liquidity and preservation of capital. These schemes invest in short-term
instruments like Treasury

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PROS AND CONS OF INVESTING MUTUAL FUND
Advantages of Investing Mutual Funds7:

1. Professional Management - The basic advantage of funds is that, they are

professional managed, by well qualified professional. Investors purchase funds
because they do not have the time or the expertise to manage their own portfolio. A
mutual fund is considered to be relatively less expensive way to make and monitor
their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual

stocks or bonds, the investors risk is spread out and minimized up to certain extent.
The idea behind diversification is to invest in a large number of assets so that a loss
in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a
time, thus help to reducing transaction costs, and help to bring down the average
cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors
to liquidate their holdings as and when they want.

Simplicity - Investments in mutual fund is considered to be easy, compare to other available

instruments in the market, and the minimum investment is small. Most AMC also have automatic
purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basi

Disadvantages of Investing Mutual Funds8:

7
https://groww.in/blog/advantages-disadvantages-mutual-funds-india/
8
https://cleartax.in/s/advantages-disadvantages-mutual-funds

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 1. Professional Management- Some funds doesn’t perform in neither the market,
as their management is not dynamic enough to explore the available opportunity in
the market, thus many investors debate over whether or not the so-called
professionals are any better than mutual fund or investor himself, for picking up
stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit
load which they charge from an investors, at the time of purchase. The mutual fund
industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high
returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When money
pours into funds that have had strong success, the manager often has trouble finding
a good investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from the
sale. It might have been more advantageous for the individual to defer the capital
gains liability9.

9
https://www.fidelity.com/tax-information/tax-topics/mutual-funds

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GUIDELINES OF THE SBI FOR MUTUAL FUNDS FOR COMPANIES 10

To protect the interest of the investors, SEBI formulates policies and regulates the mutual
funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to
time.
SEBI approved Asset Management Company (AMC) manages the funds by
making investments in various types of securities. Custodian, registered with
SEBI, holds the securities of various schemes of the
fund in its custody. According to SEBI
Regulations, two thirds of the directors of Trustee Company or board of trustees
must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in
units of mutual funds that the mutual funds function within the strict regulatory
framework. Its objective is to increase public awareness of the mutual fund
industry. AMFI also is engaged in upgrading professional standards and in
promoting best industry practices in diverse areas such as valuation, disclosure,
transparency etc.11

Documents required (PAN mandatory):

Proof of identity :

1. Photo PAN card

2. In case of non-photo PAN card in addition to copy of PAN card any one of
the following: driving license/passport copy/ voter id/ bank photo pass book.
Proof of address (any of the following ) :latest telephone bill, latest electricity
bill, Passport, latest bank passbook/bank account statement, latest Demat
account statement, voter id, driving license, ration card, rent agreement.

10
sebi.gov.in/sebiweb/home/HomeAction.do?doListingAll=yes&search=Mutual Funds
11
"Financial Supervisory Commission".

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Offer document: An offer document is issued when the AMCs make New
Fund Offer(NFO). Its advisable to every investor to ask for the offer document
and read it before investing. An offer document consists of the following:
Standard Offer Document for Mutual Funds (SEBI Format)

 Summary Information

 Glossary of Defined Terms

 Risk Disclosures

 Legal and Regulatory Compliance

 Expenses

 Condensed Financial Information of Schemes

 Constitution of the Mutual Fund

 Investment Objectives and Policies

 Management of the Fund

 Offer Related Information.

Key Information Memorandum: a key information memorandum, popularly

known as KIM, is attached along with the mutual fund form. And thus every
investor get to read it. Its contents are:
1 Name of the fund.

2. Iestment objective

3. Aset allocation pattern of the scheme.

4. Risk profile of the scheme

5. Plans & options

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 6. Minimum application amount/ no. of units

7. Benchmark index

8. Dividend policy

9. Name of the fund manager(s)

10 . Expenses of the scheme: load structure, recurring expenses

11. Performance of the scheme (scheme return v/s. benchmark return)

PERFORMANCE MEASURES OF MUTUAL FUNDS 12

Equity funds: the performance of equity funds can be measured on the basis of:
NAV Growth, Total Return; Total Return with Reinvestment at NAV,
Annualized Returns and Distributions, Computing Total Return (Per Share
Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding),
the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash
Flow, Leverage.13

Debt fund: likewise the performance of debt funds can be measured on the
basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and
Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be
measured on the basis of: Fund Yield, besides NAV Growth, Total Return and
Expense Ratio.

Concept of benchmarking for performance evaluation:14

Every fund sets its benchmark according to its investment objective. The funds
performance is measured in comparison with the benchmark. If the fund

12
https://www.moneycrashers.com/mutual-fund-performance-measures-ratings/
13
https://www.5paisa.com/mutual-funds
14
Investment products | Securities and Futures Commission"

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 generates a greater return than the benchmark then it is said that the fund has
outperformed benchmark , if it is equal to benchmark then the correlation
between them is exactly 1. And if in case the return is lower than the benchmark
then the fund is said to be underperformed.

Some of the benchmarks are :

1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200,
BSE-PSU, BSE 500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-
Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank
Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments’ Interest Rates as
Benchmarks, JPM T- Bill Index

To measure the fund’s performance, the comparisons are usually done with: 15

I)with a market index.

ii) Funds from the same peer group.

iii) Other similar products in which investors invest their funds.

Financial planning for investors( ref. to mutual funds):

Investors are required to go for financial planning before making investments in

any mutual fund. The objective of financial planning is to ensure that the right
amount of money is available at the right time to the investor to be able to meet
his financial goals. It is more than mere tax planning. Steps in financial
planning are16:

 Asset allocation

 Selection of fund

 Studying the features of a scheme.

15
"MPFA".
16
Indian Mutual Funds Handbook (5th Edition): A Guide for Industry Professionals and Intelligent Investors

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 In case of mutual funds, financial planning is concerned only with broad asset
allocation, leaving the actual allocation of securities and their management to
fund managers. A fund manager has to closely follow the objectives stated in
the offer document, because financial plans of users are chosen using these
objectives.17

Why has it become one of the largest financial instruments?

If we take a look at the recent scenario in the Indian financial market then we can find the market
flooded with a variety of investment options which includes mutual funds, equities, fixed income
bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold,
real estate etc. all these investment options could be judged on the basis of various parameters
such as- return, safety convenience, volatility and liquidity. measuring these investment options
on the basis of the mentioned parameters, we get this in a tabular form18

Return Safety Volatility Liquidity Convenience

Equity High Low High High Moderate
Bonds Low High Moderate Low Low
Debentures Moderate High Low Low Moderate
Bank Low High Low High High
LIC Low High Moderate Low Moderate
Real Estate High Moderate HIgh Low Low
MutualFunds High High Moderate High High

We can very well see that mutual funds outperform every other investment option. On three
parameters it scores high whereas it’s moderate at one. comparing it with the other options, we
find that equities gives us high returns with high liquidity but its volatility too is high with low
safety which doesn’t makes it favourite among persons who have low risk- appetite

17
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor
18
"2017 Investment Company Factbook". Investment Company Institute. 2017

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.
Even the convenience involved with investing in equities is just moderateNow looking at bank
deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost
important ie; it scores low on return , so it’s not an happening option for person who can afford
to take risks for higher return. The other option offering high return is real estate but that even
comes with high volatility and moderate safety level, even the liquidity and convenience
involved are too low. Gold have always been a favourite among Indians but when we look at it as
an investment option then it definitely doesn’t gives a very bright picture. Although it ensures
high safety but the returns generated and liquidity are moderate. Similarly the other investment
options are not at par with mutual funds and serve the needs of only a specific customer group.
Straightforward, we can say that mutual fund emerges as a clear winner among all the
options available.
The reasons for this being:

I)Mutual funds combine the advantage of each of the investment products:

mutual fund is one such option which can invest in all other investment options.
Its principle of diversification allows the investors to taste all the fruits in one
plate. just by investing in it, the investor can enjoy the best investment option as
per the investment objective.19

II)dispense the shortcomings of the other options: every other investment

option has more or les some shortcomings. Such as if some are good at return
then they are not safe, if some are safe then either they have low liquidity or low
safety or both….likewise, there exists no single option which can fit to the need
of everybody. But mutual funds have definitely sorted out this problem. Now
everybody can choose their fund according to their investment objectives.

III) Returns get adjusted for the market movements: as the mutual funds

19
Pozen and Hamacher (2015),

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 are managed by experts so they are ready to switch to the profitable option
along with the market movement. Suppose they predict that market is going to
fall then they can sell some of their shares and book profit and can reinvest the
amount again in money market instruments

IV) Flexibility of invested amount: Other then the above mentioned reasons,
there exists one more reason which has established mutual funds as one of the
largest financial intermediary and that is the flexibility that mutual funds offer
regarding the investment amount. One can start investing in mutual funds with
amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.20

20
"SEC.gov | The Laws That Govern the Securities Industry". www.sec.gov. Retrieved 2018-01-20.

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