What Is a Mutual Fund?

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like
stocks, bonds, money market instruments, and other assets. Mutual funds are operated by
professional money managers, who allocate the fund's assets and attempt to produce capital gains
or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match
the investment objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios of
equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the
gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is
usually tracked as the change in the total market cap of the fund—derived by the aggregating
performance of the underlying investments.

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other
securities.

Mutual funds give small or individual investors access to diversified, professionally managed
portfolios.

Mutual funds are divided into several kinds of categories, representing the kinds of securities they
invest in, their investment objectives, and the type of returns they seek.

Mutual funds charge annual fees, expense ratios, or commissions, which may affect their overall
returns.

Employer-sponsored retirement plans commonly invest in mutual funds.

Different Types of Mutual Funds – Mutual Fund Types Based on Asset Class, Structure, Risk &

Types of Mutual Funds

• Equity Funds
• Debt Funds
• Money Market Funds
• Hybrid Funds
• Growth Funds
• Income Funds
• Liquid Funds
• Tax-Saving Funds
• Aggressive Growth Funds
• Capital Protection Funds
• Fixed Maturity Funds
• Pension Funds

Based on Asset Class

The classification of mutual funds based on asset class is as follows:

Equity Funds

Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They
invest the money pooled in from various investors from diverse backgrounds into shares/stocks of
different companies. The gains and losses associated with these funds depend solely on how the
invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have
the potential to generate significant returns over a period. Hence, the risk associated with these
funds also tends to be comparatively higher.

Debt Funds

Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury bills.
They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt Funds,
Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since
the investments come with a fixed interest rate and maturity date, it can be a great option for
passive investors looking for regular income (interest and capital appreciation) with minimal risks.

Money Market Funds

Investors trade stocks in the stock market. In the same way, investors also invest in the money
market, also known as capital market or cash market. The government runs it in association with
banks, financial institutions and other corporations by issuing money market securities like bonds,
T-bills, dated securities and certificates of deposits, among others. The fund manager invests your
money and disburses regular dividends in return. Opting for a short-term plan (not more than 13
months) can lower the risk of investment considerably on such funds.

Hybrid Funds

As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks,
thereby bridging the gap between equity funds and debt funds. The ratio can either be variable or
fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and
the rest in bonds or vice versa. Hybrid funds are suitable for investors looking to take more risks for
‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.

Based on Investment Goals

Here are the different types of mutual funds based on investment goals:

Growth Funds

Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for
investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans
(albeit with possibly high returns) or are positive about the scheme.
Income Funds

Income funds belong to the family of debt mutual funds that distribute their money in a mix of
bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who
keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s
creditworthiness, income funds have historically earned investors better returns than deposits.
They are best suited for risk-averse investors with a 2-3 years perspective.

Liquid Funds

Like income funds, liquid funds also belong to the debt fund category as they invest in debt
instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest
is Rs 10 lakh. A highlighting feature that differentiates liquid funds from other debt funds is the way
the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days (including
Sundays) while for others, only business days are considered.

Tax-Saving Funds

ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all
categories of investors. Not only do they offer the benefit of wealth maximisation while allowing
you to save on taxes, but they also come with the lowest lock-in period of only three years.
Investing predominantly in equity (and related products), they are known to generate non-taxed
returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term
investment horizon.

Aggressive Growth Funds

Slightly on the riskier side when choosing where to invest in, the Aggressive Growth Fund is
designed to make steep monetary gains. Though susceptible to market volatility, one can decide on
the fund as per the beta (the tool to gauge the fund’s movement in comparison with the market).
Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta, say,
1.10 or above.

Capital Protection Funds

If protecting the principal is the priority, Capital Protection Funds serves the purpose while earning
relatively smaller returns (12% at best). The fund manager invests a portion of the money in bonds
or Certificates of Deposits and the rest towards equities. Though the probability of incurring any
loss is quite low, it is advised to stay invested for at least three years (closed-ended) to safeguard
your money, and also the returns are taxable.

Fixed Maturity Funds

Many investors choose to invest towards the of the FY ends to take advantage of triple indexation,
thereby bringing down tax burden. If uncomfortable with the debt market trends and related risks,
Fixed Maturity Plans (FMP) – which invest in bonds, securities, money market etc. – present a great
opportunity. As a close-ended plan, FMP functions on a fixed maturity period, which could range
from one month to five years (like FDs). The fund manager ensures that the money is allocated to
an investment with the same tenure, to reap accrual interest at the time of FMP maturity.

Pension Funds

Putting away a portion of your income in a chosen pension fund to accrue over a long period to
secure you and your family’s financial future after retiring from regular employment can take care
of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings
to get through your golden years is not recommended as savings (no matter how big) get used up.
EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.

Based on Structure

Mutual funds are also categorised based on different attributes (like risk profile, asset class, etc.).
The structural classification – open-ended funds, close-ended funds, and interval funds – is quite
broad, and the differentiation primarily depends on the flexibility to purchase and sell the
individual mutual fund units.

Open-Ended Funds

Open-ended funds do not have any particular constraint such as a specific period or the number of
units which can be traded. These funds allow investors to trade funds at their convenience and exit
when required at the prevailing NAV (Net Asset Value). This is the sole reason why the unit capital
continually changes with new entries and exits. An open-ended fund can also decide to stop taking
in new investors if they do not want to (or cannot manage significant funds).

Closed-Ended Funds

In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund company cannot
sell more than the pre-agreed number of units. Some funds also come with a New Fund Offer (NFO)
period; wherein there is a deadline to buy units. NFOs comes with a pre-defined maturity tenure
with fund managers open to any fund size. Hence, SEBI has mandated that investors be given the
option to either repurchase option or list the funds on stock exchanges to exit the schemes.

Interval Funds

Interval funds have traits of both open-ended and closed-ended funds. These funds are open for
purchase or redemption only during specific intervals (decided by the fund house) and closed the
rest of the time. Also, no transactions will be permitted for at least two years. These funds are
suitable for investors looking to save a lump sum amount for a short-term financial goal, say, in 3-
12 months.

Based on Risk

The mutual fund types based on risk are:

Very Low-Risk Funds

Liquid funds and ultra-short-term funds (one month to one year) are known for its low risk, and
understandably their returns are also low (6% at best). Investors choose this to fulfil their short-
term financial goals and to keep their money safe through these funds.

Low-Risk Funds

In the event of rupee depreciation or unexpected national crisis, investors are unsure about
investing in riskier funds. In such cases, fund managers recommend putting money in either one or
a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the
investors are free to switch when valuations become more stable.

Medium-risk Funds

Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in
equity funds. The NAV is not that volatile, and the average returns could be 9-12%.

High-Risk Funds

Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and
dividends, high-risk mutual funds need active fund management. Regular performance reviews are
mandatory as they are susceptible to market volatility. You can expect 15% returns, though most
high-risk funds generally provide up to 20% returns.

Specialized Mutual Funds

These mutual funds are based on specific industries:

Sector Funds

Sector funds invest solely in one specific sector, theme-based mutual funds. As these funds invest
only in specific sectors with only a few stocks, the risk factor is on the higher side. Investors are
advised to keep track of the various sector-related trends. Sector funds also deliver great returns.
Some areas of banking, IT and pharma have witnessed huge and consistent growth in the recent
past and are predicted to be promising in future as well.

Index Funds

Suited best for passive investors, index funds put money in an index. A fund manager does not
manage it. An index fund identifies stocks and their corresponding ratio in the market index and
put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which
is the reason why they are not popular in India), they play it safe by mimicking the index
performance.

Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ also
known as multi-manager mutual funds are made to exploit this to the tilt – by putting their money
in diverse fund categories. In short, buying one fund that invests in many funds rather than
investing in several achieves diversification while keeping the cost down at the same time.

Emerging market Funds

To invest in developing markets is considered a risky bet, and it has undergone negative returns
too. India, in itself, is a dynamic and emerging market where investors earn high returns from the
domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a
longer-term perspective, emerging economies are expected to contribute to the majority of global
growth in the following decades.

International/ Foreign Funds

Favoured by investors looking to spread their investment to other countries, foreign mutual funds
can get investors good returns even when the Indian Stock Markets perform well. An investor can
employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a
feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation
(e.g., gold mining).

Global Funds

Aside from the same lexical meaning, global funds are quite different from International Funds.
While a global fund chiefly invests in markets worldwide, it also includes investment in your home
country. The International Funds concentrate solely on foreign markets. Diverse and universal in
approach, global funds can be quite risky to owing to different policies, market and currency
variations, though it does work as a break against inflation and long-term returns have been
historically high.

Real Estate Funds

Despite the real estate boom in India, many investors are still hesitant to invest in such projects due
to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect
participant by putting their money in established real estate companies/trusts rather than projects.
A long-term investment negates risks and legal hassles when it comes to purchasing a property as
well as provide liquidity to some extent.

Commodity-focused Stock Funds

These funds are ideal for investors with sufficient risk-appetite and looking to diversify their
portfolio. Commodity-focused stock funds give a chance to dabble in multiple and diverse trades.
Returns, however, may not be periodic and are either based on the performance of the stock
company or the commodity itself. Gold is the only commodity in which mutual funds can invest
directly in India. The rest purchase fund units or shares from commodity businesses.

Market Neutral Funds

For investors seeking protection from unfavourable market tendencies while sustaining good
returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability,
these funds give high returns where even small investors can outstrip the market without
stretching the portfolio limits.

Inverse/Leveraged Funds

While a regular index fund moves in tandem with the benchmark index, the returns of an inverse
index fund shift in the opposite direction. It is nothing but selling your shares when the stock goes
down, only to repurchase them at an even lesser cost (to hold until the price goes up again).

Asset Allocation Funds

Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a
pre-set formula or fund manager’s inferences based on the current market trends, asset allocation
funds can regulate the equity-debt distribution. It is almost like hybrid funds but requires great
expertise in choosing and allocation of the bonds and stocks from the fund manager.

Gift Funds

Yes, you can also gift a mutual fund or a SIP to your loved ones to secure their financial future.

Exchange-traded Funds

It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded Funds
have unlocked a new world of investment prospects, enabling investors to gain extensive exposure
to stock markets abroad as well as specialised sectors. An ETF is like a mutual fund that can be
traded in real-time at a price that may rise or fall many times in a day.

As a tax-paying citizen, Section-80C of the Indian Tax Act allows you some breather – a deduction of
up to 150,000 from your total annual income.

Advantages and Benefits of Investing in Mutual Funds in India

The following are explain about the advantages of mutual funds.

Liquidity

The most important benefit of investing in a Mutual Fund is that the investor can redeem the units
at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal but factors like
the pre-exit penalty and exit load should be taken into consideration.

Diversification

The value of an investment may not rise or fall in tandem. When the value of one investment is on
the rise the value of another may be in decline. As a result, the portfolio’s overall performance has a
lesser chance of being volatile.

Diversification reduces the risk involved in building a portfolio thereby further reducing the risk for
an investor. As Mutual Funds consist of many securities, investor’s interests are safeguarded if
there is a downfall in other securities so purchased.

Expert Management

A novice investor may not have much knowledge or information on how and where to invest. The
experts manage and operate mutual funds. The experts pool in money from investors and allocates
this money in different securities thereby helping the investors incur a profit.

The expert keeps a watch on timely exit and entry and takes care of all the challenges. One only
needs to invest and be least assured that rest will be taken care of by the experts who excel in this
field. This is one of the most important advantages of mutual funds

Flexibility to invest in Smaller Amounts

Among other benefits of Mutual Funds the most important benefit is its flexible nature. Investors
need not put in a huge amount of money to invest in a Mutual Fund. Investment can be as per the
cash flow position.

If You draw a monthly salary then you can go for a Systematic Investment Plan (SIP). Through SIP a
fixed amount is invested either monthly or quarterly as per your budget and convenience.

Accessibility – Mutual Funds are Easy to Buy

Mutual Funds are easily accessible and you can start investing and buy mutual funds from
anywhere in the world. An Asset Management Companies (AMC) offers the funds and distributes
through channels like :

Brokerage Firms

Registrars like Karvy and CAMS

AMC’S Themselves
Online Mutual Fund Investment Platforms

Agents and Banks

This factor makes mutual funds universally available and easily accessible. More so, you do not
require a Demat Account to invest in Mutual Funds. Mutual funds are easy to buy, track
performance and one-click investment with Scripbox.

The best part of the Mutual Fund is the minimum amount of investment can be Rs. 500. And the
maximum can go up to whatever an investor wishes to invest.

The only point one should consider before investing in the Mutual Funds is their income, expenses,
risk-taking ability, and investment goals. Therefore, every individual from all walks of life is free to
invest in a Mutual Fund irrespective of their income.

Safety and Transparency

With the introduction of SEBI guidelines, all products of a Mutual Fund have been labeled. This
means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain
the risk level of his investment, thus making the entire process of investment transparent and safe.

This color-coding uses 3 colors indicating different levels of risk-

Blue indicates low risk

Yellow indicates medium risk, and

Brown indicates a high risk.

Investors are also free to verify the credentials of the fund manager, his qualifications, years of
experience, and AUM, solvency details of the fund house.

Lower cost

In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase
securities. These funds are however invested in assets which therefore helps one save on
transaction and other costs as compared to a single transaction. The savings are passed on to the
investors as lower costs of investing in Mutual Funds.

Besides, the Asset Management Services fee cost is lowered and the same is divided between all the
investors of the fund.

Best Tax Saving Option

Mutual Funds provide the best tax saving options. ELSS Mutual Funds have a tax exemption of Rs.
1.5 lakh a year under section 80C of the Income Tax Act. You can use Scripbox’s income tax
calculator to ensure tax plan requirement
All other Mutual Funds in India are taxed based on the type of investment and the tenure of
investment.

ELSS Tax Saving Mutual Funds has the potential to deliver higher returns than other tax-saving
instruments like PPF, NPS, and Tax Saving FDs.

Lowest Lock-in Period

Tax Saving Mutual Funds have the lowest lock-in periods of only 3 years. This is lower as compared
to a maximum of 5 years for other tax saving options like FD, ULIPs, and PPF.

On top of that one has the option to stay invested even after the completion of the lock-in period.

Lower Tax on the Gains

With Equity linked saving scheme you can save tax up to Rs. 1.5 Lakh a year under section 80C of
Income Tax (IT) Act. All other types of Mutual Funds are taxable depending on the type of fund and
tenure.

Before making an investment one should keep in mind the various advantages Mutual Fund
provides. Thorough knowledge of the benefits of Mutual Funds would lead to better gains in the
future.

Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the
number of shares outstanding. Most commonly used in the context of a mutual fund or an exchange-
traded fund (ETF), NAV is the price at which the shares of the funds registered with the U.S.
Securities and Exchange Commission (SEC) are traded.

Net asset value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities. The
term “net asset value” is commonly used in relation to mutual funds and is used to determine the
value of the assets held. According to the SEC, mutual funds and Unit Investment Trusts (UITs) are
required to calculate their NAV at least once every business day.

Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the
number of shares outstanding.

NAV is commonly used as a per-share value calculated for a mutual fund or ETF.

NAV is calculated at the end of each trading day based on the closing market prices of the portfolio's
securities.

Understanding Net Asset Value (NAV)

For companies and business entities, the difference between the assets and the liabilities is known
as the net assets or the net worth or the capital of the company. The term NAV is applied to the fund
valuation and pricing, which is arrived at by dividing the difference between assets and liabilities by
the number of shares held by the investors.
The fund’s NAV represents a “per-share” value of the fund, which makes it easier to be used for
valuing and transacting the fund shares.

NAV Formula

NAV = (Assets - Liabilities) / Total number of outstanding shares

NAV is often close to or equal to the book value of a business. Companies considered to have high
growth prospects are traditionally valued more than NAV might suggest. NAV is most frequently
compared to market capitalization to find undervalued or overvalued investments.

Mutual Funds and NAV

Mutual funds collect money from a large number of investors, then use that money to invest in
securities, such as stocks, bonds, and money market instruments. Each investor gets a specified
number of shares in proportion to their invested amount. The pricing of each share is based on
NAV.

Unlike a stock whose price changes are posted throughout the day, mutual fund pricing is based on
the end-of-the-day methodology based on the activity of the securities in the fund.

At the end of the trading day, managers of a mutual fund compute the closing price of all the
securities within its portfolio, adds the value of any additional assets, accounts for liabilities, and
calculate NAV based on the number of outstanding shares.

NAV in Closed-End Funds vs. Open-End Funds

An open-end fund can issue an unlimited number of shares, does not trade on exchanges, and is
priced each day at the close of trading at their NAV price. Most mutual funds, such as those in 401k
plans, are open-end funds.

Closed-end funds are listed on a stock exchange, trade similarly to securities, and can trade at a
price that's not equal to their NAV. ETFs trade like stocks and their market value can differ from
their actual NAV.

This allows for profitable trading opportunities for active ETF traders who can spot timely
opportunities. Similar to mutual funds, ETFs also calculate their NAV daily at the close of the market
for reporting purposes but also calculate and disseminate intra-day NAV multiple times per minute
in real-time.

NAV and Fund Performance

Fund investors often try to assess the performance of a mutual fund based on their NAV
differentials between two dates. An investor may compare the NAV on January 1 to the NAV on
December 31, and see the difference in the two values as a gauge of the fund’s performance.
However, changes in NAV between two dates aren’t the best representation of mutual fund
performance.
Mutual funds commonly pay out all of their income like dividends and interest earned to their
shareholders. Additionally, mutual funds are also obligated to distribute the accumulated realized
capital gains to the shareholders.

As these two components, income, and gains, are regularly paid out, the NAV decreases accordingly.
Therefore, though a mutual fund investor earns income and returns, individual earnings are not
reflected in the absolute NAV values when compared between two dates.

A reliable measure of mutual fund performance is the annual total return, which is the actual rate of
return of an investment or a pool of investments over a given evaluation period. Investors and
analysts also look at compounded annual growth rate (CAGR), which represents the mean annual
growth rate of an investment over a specified period longer than one year.

Interpreting the Net Asset Value

The net asset value represents a fund’s market value. When expressed at a per-share value, it
represents a fund’s per unit market value. The per-share value is the price at which investors can
buy or sell fund units.

When the value of the securities in the fund goes up, the net asset value goes up. Conversely, when
the value of the securities in the fund goes down, the NAV goes down:

If the value of securities in the fund increases, then the NAV of the fund increases. If the value of the

securities in the fund decreases, then the NAV of the fund decreases.

Evolution and growth of mutual funds

In India, the history of mutual funds can be split into four phases.

Phase I (1964 – 1987)

The Unit Trust of India began its operations in July 1964, making it the first ever mutual fund in
India

UTI’s first product launched was Unit64, which initially held capital of ₹5 crores – attracting the
attention of countless investors unlike any other investment scheme since

1978 marked the introduction of open-ended growth funds since UTI was taken over by the
Industrial Development Bank of India (IDBI) from the RBI

By the end of 1988, UTI had over ₹6,700 crores worth of Assets Under Management (AUM)

Phase II (1987 – 1993)

This phase marked the entry of the Public Sector into the mutual fund industry. Analysts claim that
the expansion of the industry in this phase encouraged more investors to invest in mutual funds.

Public sector banks like LIC and GIC set up non-UTI public sector mutual funds to enter the market
in 1987

The SBI Mutual Fund was launched in 1987 as the first non-UTI mutual fund
Shortly after, the Canara Bank Mutual Fund was launched in the December of 1987

The mutual fund industry had over ₹47 crores of AUM by the end of 1993

Phase III (1993 – 2003)

Between 1991 to 1996, the government realised the urgency to liberalise the Indian economy. They
introduced the private sector into the mutual fund Industry, allowing international companies to
flood the Indian market.

From 1993 to 1994, various mutual funds launched their schemes like the ICICI Mutual Fund, 20th
Century Mutual Fund, Morgan Stanley Mutual Fund, etc

The poor performance of PSU funds and the failure of foreign funds caused a decline in the industry
during 1995-96

33 mutual funds remained standing with total assets worth 1,21,805 crores in 2003

Phase IV (2003 – 2014)

This period witnessed the most acquisitions and mergers in the mutual fund industry.

In February 2003, UTI was split into two different organisations after the abolition of the Unit Trust
of India Act (1963)

The Specified Unit Trust of India operated out of the jurisdiction of the Mutual Fund Regulations,
managed solely by the government

The UTI Mutual Fund was sponsored by SBI, LIC, PNB and BOB

The mutual fund industry began working towards its consolidation phase to confirm with SEBI
regulations and the ongoing string of mergers

Growth of mutual fund industry in India

Internationally, the dawn of mutual fund industry was witnessed in 19th century in Europe. It was
Robert Fleming who set up the first ever mutual fund company called as ‘foreign and colonial
investment trust’ in 1868 who promised to invest and overlook the finances of the investors. While
in India, the introduction of mutual fund came a lot later. The journey of mutual fund in India
started in the 1963 with the incorporation of ‘Unit Trust of India (UTI)’. The growth of mutual fund
in India has happened in phased manner as under:

Phase 1

Formation and Growth of UTI (1964 to 1987) The phase 1 witnessed the incorporation and
introduction of Unit Trust of India by passing an Act by Parliament. The incorporation of UTI was
done by Reserve Bank of India. Post its incorporation, it was the only institution that accepted
investments and offered mutual fund units. The first scheme launched by UTI was the Unit Scheme
in the year 1964. Later in the years of 70s and 80s, UTI introduced various schemes as per the
needs of Indian investors. The first ULIP (Unit Linked Insurance Plan) was introduced by UTI in the
year 1971, while the 1st Indian Offshore Fund was launched in the year 1986. In this phase i.e. from
the date of inception to the year 1987, the growth of UTI multiplied tremendously.
Phase 2

Establishment of Public Sector Funds (1987 to 1992) The year 1987 witnessed the establishment of
public sector funds i.e. other public sector institutions like banks and NBFCs were allowed to start
mutual fund houses. This resulted in opening up of economy and State Bank of India was the first
bank to establish a mutual fund company in the year 1987. The footsteps of SBI were then followed
by various other institutions like Canbank, Life Insurance Corporation of India, Indian Bank, Bank of
India, General Insurance Corporation of India and Punjab National Bank introducing their own
mutual fund companies. During this period, the asset under management under this sector
increased from Rs. 6700 Crores to a whooping Rs. 47004 Crores as investors in India showed great
interest in this financial tool and started investing a large part of their salary in Mutual funds.

Phase 3

Introduction of Private Sector Funds (1992 to 1997) After the successful introduction of Public
Sector Funds, the mutual fund industry opened up and witnessed the establishment of private
sector funds from the year 1993, giving Indian investors the extensive opportunity to choose
mutual funds from public and private sector. On the other hand, it increased the competition for
Indian mutual fund companies.

Phase 4

Growth and introduction of SEBI regulations (1997 to 1999) As the mutual fund sector was
witnessing and achieving newer heights, it was important to create a body that created
comprehensive rules and regulation for this industry and creating a responsible organisation to
overlook the working of this sector. This gave birth to incorporation of SEBI Regulation in 1996.
SEBI introduced standardization and set uniform rules and regulations for all funds. It was during
this phase that SEBI and AMFI launched an awareness scheme for investors of mutual funds.

Phase 5

Emergence of a Large and Stable Industry (1999 to 2004) This phase witnessed the integration of
the entire industry with a similar set of rules and regulations. The uniform and standardized
operations and regulations made it easier for investors to invest in various mutual fund companies
resulting in increase of asset under management from Rs. 68000 crores in previous phase to over
Rs. 1.50 lakh crores during this phase.

Phase 6

Amalgamation and Growth (2004 onwards) The mutual fund industry has seen immense growth
and globalisation since the day of its incorporation. From the year 2004, this industry witnessed
integration as there were many mergers, demergers and acquisitions of companies and schemes
like Allianz Mutual Fund taken over by Birla Sun Life, PNB mutual fund by Principal etc. Thus, since
the year 2004, this industry is coping and integrating new players, dealing with mergers and
acquisitions and continuing its journey towards growth.

Underwriter according to SEBI guidelines

Underwriting is an act of guarantee by an organization for the sale of certain minimum amount of
shares and debentures issued by a Public Limited company.
According to the Companies Act, when a person agrees to take up shares specified in the
underwriting agreement when the public or others failed to subscribe for them, it is called
underwriting agreement. For this purpose, the underwriter who guarantees for the sale of shares, is
given a commission.

When the public to whom the shares of issue fails to subscribe, it is the underwriter who has to
subscribe up to the limit he has agreed. Later on, when the market improves he may off load the
shares by selling them to the public. Thus, the underwriter makes a promise to get the
underwritten issue subscribed either by him or by others.

According to Indian Companies Act every public limited company must raise minimum capital and
if it fails to raise within 60 days from the date of issue of prospectus, the directors should return the
money to the public. If the return is delayed by more than 78 days, the company has to pay interest
on the refund amount.

Importance of Underwriting

The persons responsible for issuing shares in the company, known as issuers, have the option of
deciding for the underwriting of shares. If the issue is not underwritten, there is a possibility of the
issue eiting under subscribed and even if 90% of minimum subscription is not received, the money
has to be refunded in full. Hence, there is an urgent need on the part of the issuer, to seek the
assistance of underwriters for a successful completion of issue of shares.

SEBI’s Guidelines for Underwriting

According to SEBI, the number of underwriters should be decided well in advance by the issuer and
he must obtain prior permission from SEBI. Permission will be granted by SEBI only after finding
out the net worth of the underwriters and their outstanding commitments.

The Stock Exchange, where the security is going to be listed must also be informed about the
arrangements made with the underwriters.

25% of each class of securities must be offered to the public and in the remaining 75%, the
following method of firm allotment could be adopted.

SEBI has instructed companies to allot to three major categories of allotees, namely,

QIB

HNI

Retailers

QIB refers to qualified institutional bidders ( Mutual Funds, banks, etc.).

HNI refers to high net worth individuals, investing more than Rs. 1 lakh in a single company
security.

Retailers are individuals who are investing less than Rs. one lakh.

Types of Underwriters

There are two types of underwriters. They are

Institutional underwriters – IDBI, IFCI, UTI, SBI Capital Market

Non-Institutional underwriters – Any NBFC.

Institutional underwriting in India helps companies to raise capital in their early stages. In fact,
many companies which may not come to the notice of the public were promoted due to the support
given by institutional underwriters.

Many institutional underwriters were responsible for the promotion of infrastructure companies in
the area of steel, chemicals, fertilizer, etc.

Responsibilities of Underwriters

1. An underwriter, not only has to underwrite the securities but has to subscribe within 45 days
that part of shares which remain unsubscribed by the public.

2. His underwriting obligations should not exceed, at any time, 20 times of his net worth.

3. The underwriter cannot derive any other benefit except the underwriting commission which is
5% for shares and 2½% for debentures.

Merits of Underwriting

1. Underwriting ensures success of the proposed issue of shares since it provides an insurance
against the risk.

2. Underwriting enables a company to get the required minimum subscription. Even if the public
fail to subscribe, the underwriters will fulfill their commitments.

3. The reputation of the underwriter acts as a confidence to investors. The underwriters who are
called the lead managers provide financial recognition to the company, whose shares are issued to
the public. Thus, the reputation of the issuing company also improves because of the reputation of
underwriters.

What is Syndicate underwriting

Whenever an investment house in charge of the particular company’s issue, is unable to handle the
issue of shares, it may enter into an agreement with other underwriting concerns or investment
house. Such a kind of underwriting is known as Syndicate underwriting. By Syndicate underwriting,
the risk involved in underwriting the shares is reduced and the collective reputation of
underwriters is also capitalized.

Benefits due to professional underwriters

1. Large issues could be undertaken successfully.

2. Companies with a long gestation period cannot raise capital without support of professional
underwriters.

3. Technocrats could promote companies with their poor financial knowledge.

4. New projects in the market could be taken boldly.

5. Companies could be promoted in backward areas.

6. Certain projects which are not financially viable in the initial stages, especially in priority sector
(agriculture, small scale industry, export oriented units) could be promoted with the support of
institutional underwriters.