Module # 2

Mutual Funds Meaning, definition, objectives, and development of mutual funds in India
mutual fund schemes equity, debt and balanced; fund of funds; open and close-ended
schemes and other schemes ETFs Gold ETFs. establishment of mutual funds in India -
functions and responsibilities of Asset Management Schemes types of mutual fund
organizations in India - public, private and foreign; Computation of Net Asset Value (NAV) and
Pricing of Units - Meaning, computation, factors affecting NAV, Pricing of Units - Fees and
Expenses; Investment Management and Advisory Fees, -initial expenses, recurring expenses
and total expenses; management expense ratio,

Introduction to Mutual Funds

Mutual funds serve as one of the most accessible and popular investment avenues for
individuals seeking to grow their wealth. This financial instrument pools money from various
investors to invest in a diversified portfolio of stocks, bonds, or other securities. Whether you're
a seasoned investor or just starting your journey into the world of finance, understanding mutual
funds is crucial. Let's delve deeper into their meaning, definition, and objectives.

Meaning of Mutual Funds

At its core, a mutual fund is a professionally managed investment scheme that collects money
from investors and invests it in a diverse range of assets. These assets can include stocks,
bonds, money market instruments, or a combination of these. Investors buy shares in the
mutual fund, which represents their proportionate ownership of the fund's holdings.

Definition of Mutual Funds

A mutual fund can be defined as a professionally managed investment vehicle that pools funds
from numerous investors to invest in securities according to a specific investment objective.
These funds are managed by expert fund managers or management teams who make
decisions regarding asset allocation, buying and selling securities, and overall portfolio
management.

DEFINITION # 2 : The SEBI i.e. Securities and Exchange Board of India (Mutual Funds)
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.”
Objectives of Mutual Funds
​ 1.Diversification: One of the primary objectives of mutual funds is to provide investors
with a diversified investment portfolio. Diversification helps reduce risk by spreading
investments across various asset classes, sectors, and securities. This helps mitigate
the impact of poor performance from any single investment on the overall portfolio.
​ 2.Professional Management: Mutual funds are managed by experienced and
knowledgeable fund managers who analyze market trends, conduct research, and make
investment decisions on behalf of investors. This professional management aims to
maximize returns while adhering to the fund's investment objectives and risk tolerance.
​ 3.Liquidity: Mutual funds offer liquidity to investors, allowing them to buy or sell fund
shares on any business day at the fund's current net asset value (NAV). This liquidity
feature provides flexibility and convenience for investors who may need access to their
funds without significant delays or penalties.
​ 4.Capital Appreciation: Another objective of mutual funds is capital appreciation, which
involves increasing the value of the invested capital over time. Fund managers aim to
achieve this objective by investing in securities with the potential for long-term growth,
such as growth stocks or emerging markets.
​ 5.Income Generation: Some mutual funds focus on generating regular income for
investors through dividends or interest payments. These income-oriented funds may
invest in dividend-paying stocks, bonds, or other fixed-income securities to provide
investors with a steady stream of income.
​ 6.Risk Management: Mutual funds often have specific risk management objectives
tailored to the preferences and risk tolerance of investors. By diversifying investments
and actively managing the portfolio, mutual funds aim to mitigate risks and preserve
capital while seeking to achieve favorable returns.
​
In conclusion, mutual funds offer a convenient and accessible way for investors to participate in
the financial markets while benefiting from professional management, diversification, liquidity,
and various investment objectives. Understanding these fundamental aspects of mutual funds is
essential for undergraduate students pursuing a Bachelor of Commerce (BCom) degree or
anyone interested in building a solid foundation in investment management and personal
finance.

The development of mutual funds in India

The development of mutual funds in India has been a fascinating journey, marked by significant
milestones and regulatory changes. Here's an overview of the key stages in the evolution of
mutual funds in India:
1. Introduction Stage (1963-1987):
● The concept of mutual funds was first introduced in India with the establishment of the
Unit Trust of India (UTI) in 1963. UTI was established under the UTI Act, 1963, and was
sponsored by the Reserve Bank of India (RBI) and the Government of India.
 ● UTI initially operated as a close-ended fund, offering schemes with fixed tenures and
limited liquidity.
● In 1987, UTI launched its first open-ended scheme, the UTI Mastershare, marking the
beginning of open-ended mutual funds in India.
2. Regulatory Framework (1987-1993):
● The Securities and Exchange Board of India (SEBI) Act was enacted in 1992, leading to
the establishment of the Securities and Exchange Board of India (SEBI) as the
regulatory authority for the securities market in India.
● SEBI issued regulations governing mutual funds, including the SEBI (Mutual Funds)
Regulations, 1993, which laid down guidelines for the formation, registration, and
operation of mutual funds in India.
● Private sector players entered the mutual fund industry, diversifying the market and
introducing new investment options to investors.
3. Growth and Expansion (1993-2000):
● The mutual fund industry witnessed rapid growth during this period, with the entry of
several private sector mutual fund companies such as HDFC Mutual Fund, ICICI
Prudential Mutual Fund, and Reliance Mutual Fund.
● The introduction of Systematic Investment Plans (SIPs) provided investors with a
disciplined approach to investing and contributed to the increasing participation of retail
investors in mutual funds.
● SEBI introduced reforms aimed at enhancing transparency, investor protection, and
governance standards in the mutual fund industry.
4. Consolidation and Innovation (2000-2010):
● The mutual fund industry witnessed consolidation through mergers and acquisitions,
leading to the emergence of larger fund houses with diversified product offerings.
● Mutual fund companies introduced innovative products such as sectoral funds, index
funds, exchange-traded funds (ETFs), and hybrid funds to cater to the evolving needs
and preferences of investors.
● SEBI continued to introduce regulatory reforms to strengthen the regulatory framework
for mutual funds and enhance market integrity.
5. Modernization and Digitization (2010-Present):
● The advent of technology and digitization revolutionized the mutual fund industry, making
it more accessible and convenient for investors to invest and manage their portfolios.
● Online platforms and mobile apps offered investors the ability to invest, monitor, and
redeem mutual fund units seamlessly.
● SEBI introduced initiatives such as direct plans, which allow investors to invest in mutual
funds directly without involving intermediaries, thereby reducing costs and enhancing
returns.
● The mutual fund industry continued to witness robust growth, with increasing investor
awareness, participation, and assets under management (AUM).
Overall, the development of mutual funds in India has been characterized by regulatory reforms,
technological advancements, product innovation, and increasing investor participation,
contributing to the growth and maturity of the mutual fund industry in the country.
Mutual Fund Schemes Overview:
Mutual funds offer a variety of schemes tailored to different investor needs, risk appetites, and
investment goals. These schemes typically fall into categories such as equity, debt, balanced
(hybrid), fund of funds, open-ended, close-ended, and other specialized schemes. Let's explore
each of these in detail:
1. Equity Funds:
● Objective: Equity funds primarily invest in stocks or equities of companies across
various sectors and market capitalizations.
● Risk Profile: These funds are generally considered to have higher risk due to market
fluctuations but also offer the potential for higher returns over the long term.
● Types: They can be further categorized based on market capitalization (large-cap,
mid-cap, small-cap), investment style (value, growth), or thematic (sector-specific,
international).
2. Debt Funds:
● Objective: Debt funds invest in fixed-income securities such as government bonds,
corporate bonds, debentures, and money market instruments.
● Risk Profile: Debt funds are generally considered less risky compared to equity funds
as they provide stable returns, but they still carry credit risk, interest rate risk, and
liquidity risk.
● Types: Debt funds can be categorized based on the duration of the underlying securities
(ultra-short-term, short-term, long-term), credit quality (high credit, medium credit, low
credit), and interest rate sensitivity (dynamic bond funds, gilt funds).
3. Balanced (Hybrid) Funds:
● Objective: Balanced funds, also known as hybrid funds, invest in a mix of both equities
and debt instruments to provide a balanced portfolio.
● Risk Profile: These funds aim to balance risk and return by diversifying across asset
classes, offering moderate risk compared to pure equity funds.
● Types: Balanced funds can vary in their equity-debt allocation ratios, with some funds
having higher equity exposure (aggressive balanced funds) and others having higher
debt exposure (conservative balanced funds).
4. Fund of Funds (FoFs):
● Objective: Fund of Funds invest in other mutual funds rather than directly holding
individual securities. They provide diversification across multiple mutual fund schemes
managed by different asset management companies (AMCs).
● Risk Profile: The risk profile of FoFs depends on the underlying mutual fund schemes
they invest in, which can range from equity to debt to international funds.
● Types: FoFs can be diversified across different asset classes or geographic regions,
offering investors exposure to a broader range of investment opportunities.
5. Open-Ended Schemes:
● Objective: Open-ended schemes do not have a fixed maturity date and allow investors
to buy or sell units at any time based on the prevailing Net Asset Value (NAV).
● Flexibility: Investors have the flexibility to enter or exit the scheme as per their
convenience, and the fund size can fluctuate based on investor inflows and outflows.
 ● Liquidity: Open-ended schemes offer high liquidity, making them suitable for investors
who require frequent access to their investments.
6. Close-Ended Schemes:
● Objective: Close-ended schemes have a fixed maturity period, typically ranging from 3
to 7 years, during which investors cannot redeem their units directly with the fund house.
● Limited Liquidity: Investors can buy units of close-ended schemes only during the New
Fund Offer (NFO) period, and liquidity is limited as units can only be traded on stock
exchanges at prevailing market prices.
● Features: These schemes often have a specific investment objective or theme and may
trade at a premium or discount to their Net Asset Value (NAV) based on market demand.
7. Other Specialized Schemes:
● Index Funds and Exchange-Traded Funds (ETFs): These schemes passively track a
specific market index (e.g., Nifty 50, S&P 500) and aim to replicate its performance.
● Gold Exchange-Traded Funds (Gold ETFs) are investment funds that track the price of
gold and trade on stock exchanges. They provide investors with exposure to gold
without the need for physical ownership. Gold ETFs offer liquidity, cost efficiency, tax
benefits, and diversification. Investors can buy and sell Gold ETFs like stocks, making
them accessible and convenient investment options.

Understanding these mutual fund schemes empowers investors to make informed decisions
aligned with their investment objectives, risk tolerance, and time horizon. It's essential to
conduct thorough research and seek advice from financial professionals before investing in
mutual funds to build a diversified portfolio that suits your financial goals.

Establishment of Mutual Funds in India:

Mutual funds were first established in India with the introduction of the Unit Trust of India
(UTI) in 1963. UTI was formed by an Act of Parliament and operated as a government-owned
entity, aiming to mobilize small savings and channel them into the capital markets. UTI
pioneered the concept of mutual funds in India and played a significant role in popularizing
investment in securities among retail investors.
In 1987, the Indian government allowed public sector banks and financial institutions to
set up mutual funds, leading to the establishment of several mutual fund companies. The
Securities and Exchange Board of India (SEBI), established in 1992, played a crucial role in
regulating and supervising the mutual fund industry, ensuring investor protection, transparency,
and market integrity.
Functions and Responsibilities of Asset Management Companies (AMCs):
Asset Management Companies (AMCs) are the key players in the mutual fund industry
responsible for managing investors' funds and operating mutual fund schemes. Their functions
and responsibilities include:
​ 1.Fund Management: AMCs are responsible for formulating investment strategies,
asset allocation, and portfolio management for each mutual fund scheme. They aim to
maximize returns while managing risks in line with the scheme's investment objectives.
Example: HDFC Asset Management Company Limited manages various mutual fund
 schemes, including HDFC Equity Fund and HDFC Balanced Advantage Fund, by
making strategic investment decisions to achieve desired investment outcomes.
​ 2.Investment Research: AMCs conduct in-depth research and analysis of financial
markets, economic trends, and individual securities to identify investment opportunities
and make informed investment decisions.
Example: ICICI Prudential Asset Management Company conducts extensive research to
assess market conditions and select high-quality stocks for its mutual fund schemes like
ICICI Prudential Bluechip Fund.
​ 3.Investor Servicing: AMCs provide various services to investors, including account
opening, transaction processing, investor education, and grievance redressal. They
ensure transparency and communication with investors regarding scheme performance
and updates.
Example: SBI Funds Management Private Limited offers online transaction facilities and
customer service support to investors, ensuring a seamless investing experience for its
mutual fund schemes such as SBI Bluechip Fund and SBI Magnum Midcap Fund.
​ 4.Compliance and Regulatory Oversight: AMCs must comply with SEBI regulations
and guidelines governing mutual funds. They are responsible for ensuring that mutual
fund operations adhere to regulatory requirements and maintain transparency and
integrity in their dealings.
Example: Aditya Birla Sun Life Asset Management Company Limited adheres to SEBI
regulations and guidelines in managing mutual fund schemes like Aditya Birla Sun Life
Equity Fund and Aditya Birla Sun Life Tax Relief 96.
​ 5.Distribution and Marketing: AMCs engage in distribution and marketing activities to
promote mutual fund schemes and attract investors. They collaborate with distribution
channels such as banks, financial advisors, and online platforms to reach out to potential
investors.
Example: Axis Asset Management Company Limited utilizes various distribution
channels to market mutual fund schemes such as Axis Bluechip Fund and Axis Long
Term Equity Fund, aiming to expand its investor base and market presence.
In summary, AMCs play a vital role in the mutual fund industry by managing funds, conducting
research, servicing investors, ensuring compliance, and marketing mutual fund schemes.
Through their functions and responsibilities, AMCs contribute to the growth and development of
the mutual fund sector in India, offering investors access to diversified investment opportunities
and professional fund management services.