MUTUAL FUND

Concept, Organisation Structure,

Advantages and Types.
 Topics Covered
• Concept
• Organisation of a Mutual Fund
• Advantages of Mutual Funds
• Types of Mutual Fund Schemes
• Frequently Used Terms
 Concept
• A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal.

• 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

appreciation realised are shared by its unit holders in proportion to
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.
Mutual Fund Operation
Flow Chart
 Advantages of Mutual Funds
• Professional Management
• Diversification
• Convenient Administration
• Return Potential
• Low Costs
• Liquidity
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits
• Well regulated
Types of Mutual Fund Schemes
• Wide variety of Mutual Fund Schemes
exist to cater to the needs such as
financial position, risk tolerance and return
expectations etc.
• The figure in the next slide gives an
overview into the existing types of
schemes in the Industry.
 Types of Schemes
• By Structure
– Open Ended Schemes
– Close Ended Schemes
– Interval Schemes
• By Investment Objectives
– Growth Schemes
– Income Schemes
– Balance Schemes
– Money Market Schemes
• Other Schemes
– Tax Saving Schemes
• Special Schemes
– Index Schemes
– Sector Specific Schemes
 Frequently Used Terms
• Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the Valuation Date.
 
• Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It
may include a sales load.

• Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may
include a back-end load. This is also called Bid Price.
» Contd…
 Frequently Used Terms
• Redemption Price
Is the price at which open-ended schemes repurchase their units
and close-ended schemes redeem their units on maturity. Such
prices are NAV related.  
• Sales Load
Is a charge collected by a scheme when it sells the units. Also
called, ‘Front-end’ load. Schemes that do not charge a load are
called ‘No Load’ schemes.

• Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from
the unit holders.
Organisation of a Mutual Fund
How is it formed?
• The mutual fund itself is a trust registered
under the Indian Trust Act, and is initiated
by a sponsor. The sponsor then appoints an
asset management company (AMC) to
manage the investment, marketing,
accounting and other functions pertaining to
the fund. It also appoints another entity to
be the custodian to the assets of the fund,
and often a registrar to handle the registry
work.
• Various schemes or individual funds with
different objectives can be floated under
the umbrella of one parent. For example,
Alliance95 and Alliance Equity are both
independent schemes of Alliance Capital
Mutual Fund, and are managed by Alliance
Capital Asset Management, the AMC to all
the Alliance funds.
How are the investments
selected?
• A team of professionals within the AMC will be
appointed with the task of studying and analysing
all investments within an asset class. This
investment analysts' team obtains reports from
external researchers, meets the top management
and employees, vendors, customers and
competitors of each company in order to
understand the business, and also takes the
industry / sector and the overall economy into
account before recommending an investment in
that company.
• The fund or portfolio manager, who heads
the investment activity of a particular
scheme, will then decide whether to actually
invest, and how much to invest. The dealer
will then execute the transaction. This whole
team continues to monitor the investment to
see if it is time to sell, if the company is no
longer capable of achieving expected results,
or if better opportunities for investment
exist.
Equity fund

• An equity mutual fund would try to

achieve a higher long-term
appreciation or growth of your
capital
• An equity mutual fund identifies and invests in
shares of high quality companies whose
businesses are sound and have good, steady
growth. The share price of such companies should
show an increase over a period of time, although
it can fluctuate substantially in the short term.
Thus, one can achieve higher growth if one were
to invest for a long term (usually 2-3 years at
least). In the short term, the prices may come
down, causing a temporary reduction in value of
the investment.
 Debt fund

• This one would aim to achieve steady

income at low risk to the invested
principal. To achieve this the mutual fund
would invest in what are called fixed-
income instruments. These are similar to
the fixed deposits of banks, but are
usually issued by private and public sector
companies as well as by the Indian
government as a means to borrow money.
• Some of the money with the fund may be lent to
various banks and other institutions for a very
short term (call money and money market
instruments). The value of these securities
increases steadily as the interest associated with
them accrues to the fund. Further fluctuations
may also come about due to a change in the
government or RBI interest rates, which may
affect the value of your investments, or if one of
the debtors is faced with an inability to return the
money borrowed.
• Therefore, although the actual
returns cannot be guaranteed due to
such fluctuations, debt funds usually
are a very safe way to invest money
and achieve superior returns to
conventional bank deposits.
 Balanced fund

• A balanced fund seeks a mix of the two

classes, debt and equity, to achieve a
higher return than debt without forsaking
completely its safety and stability. The
offer document of the fund would specify
the percentage range that would be
allocated to equity and to debt. Usually,
the range is between 50 per cent and 75
per cent in equity, and the rest in debt.