MUTUAL FUNDS

WHAT ARE THEY AND THEIR FUTURE

 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
 HOW MUTUAL FUND WORKS ?
• IT POOLS FUNDS COLLECTED FROM MANY INVESTORS FOR THE PURPOSE
OF INVESTING.
• THIS MONEY IS THEN COLLECTIVELY INVESTED IN SECURITIES SUCH AS
STOCKS, BONDS, MONEY MARKET INSTRUMENTS AND SIMILAR ASSETS.
• THE MONEY IS MANAGED IN THEIS POOL ACCOUNT BY PROFESSIONAL
FUND MANAGERS.
• THEY INVEST FUND CAPITAL AND ATTEMPT TO PRODUCE CAPITAL GAINS
AND INCOME FOR THE FUND’S INVESTORS.
 HISTORY OF MUTUAL FUNDS

• PHASE I – IN 1963, UTI WAS SET UP BY PARLIAMENT UNDER UTI ACT AND GIVEN A
MONOPOLY. THE FIRST EQUITY FUND WAS LAUNCHED IN 1986.
• PHASE II – 1987 – 93 : NON UTI, PUBLIC SECTOR MUTUAL FUNDS LIKE – SBI MUTUAL FUND,
CANBANK MUTUAL FUND, LIC MUTUAL FUND, INDIAN BANK MUTUAL FUND, GIC MUTUAL
FUND, PNB MUTUAL FUND
• PAHSE III – 1993 – 96 : INTRODUCING PRIVATE SECTOR FUNDS. AS WELL AS OPEN-END FUNDS.
• PHASE IV – SINCE 1996 : INVESTOR FRIENDLY REGULATORY MEASURES ACTION TAKEN
BYSEBI TO PROTECT THE INVESTOR, AND TO ENHANCE INVESTOR’S RETURNS THROUGH
TAX BENEFITS.
TYPES OF MUTUAL FUNDS
 OPEN ENDED
SCHEME
 IN OPEN-ENDED MUTUAL FUND SHEMES, YOU CAN
INVEST AND REDEEM YOUR INVESTMENTS
WHENEVER YOU WANT.

 THERE IS NO MATURITY TENURE OR A SPECIFIC

TIME FOR INVESTMENT ONTO THE SCHEME.
 OPEN-ENDED MUTUAL FUNDS ARE, THEREFORE,
LIQUID IN NATURE. MOST TYPE OF MUTUAL FUND
SCHEMES ARE OPEN-ENDED IN NATURE.

 HOWEVER, ELSS SHEMES AND SOMETIMES

SOLUTION-ORIENTED AND SCHEMES ARE
EXCEPTIONS WITH LOCK-IN. REDEMPTION IS NOT
ALLOWED WHILE SOLUTION-ORIENTED FUNDS CAN
HAVE LOCK-IN PERIODS OD UP TO 5 YEARS.
 CLOSE ENDED SCHEME
 CLOSE-ENDED MUTUAL FUNDS SCHEMES, HAVE A STIPULATED
INVESTMENT PERIOD AND A SPECIFIED MATURITY PERIOD.
 THESE SCHEMES ARE OFFERED FOR INVESTMENTS WHEN THEY ARE
LAUNCHED. NEW FUND OFFER [NFO] WHEREIN THE MUTUAL FUND
HOUSE LAUNCHES THESE CLOSE-ENDED SCHEMES. INVESTMENT IN
SUCH SCHEMES CAN ONLY BE DURING THE NFO PERIOD.
 MOREVER, THERE IS ALSO A FIXED MATURITY DATE BEFORE WHICH
YOU CANNOT REDEEM THE SCHEMES.
 SOME CLOSE-ENDED SCHEMES ARE LISTED ON THE STOCK
EXCHANGE AFTER NFO.
 INVETORS CAN BUY OR SELL ON THE STOCK EXCHANGE WHERE
THEY ARE LISTED. IN SOME CLOSE-ENDED SCHEMES, INVESTORS
ARE GIVEN THE OPTION TO SELL BACK THEIR UNITS TO THE MUTUAL
FUND HOUSE PERIODICALLY WHEN THE MUTUAL FUND COMPANY
REPURCHASES THE UNITS THROUGH PERIODIC PURCHASING.
BASED ON INVESTMENT OBJECTIVES
 BASED ON INVETMENT OBJECTIVES
GROWTH FUNDS
• GROWTH FUNDS ARE SCHEMES THAT ARE DESIGNED TO PROVIDE CAPITAL APPRECIATION.
• PRIMARILY INVEST IN GROWTH ORIENTED ASSETS, SUCH AS EQUITY
• INVESTMENT IN GROWTH-ORIENTED FUNDS REQUIRE A MEDIUM TO LONG-TERM
INVESTMENT HORIZON.
• HISTORICALLY, EQUITY AS AN ASSET CLASS HAS OUTPERFORMED MOST OTHER KIND OF
INVESTMENTS HELD OVER THE LONG TERM. HOWEVER, RETURNS FROM GROWTH FUNDS
TEND TO BE VOLATILE OVER THE SHORT-TERM SINCE THE PRICES OF THE UNDERLYING
EQUITY SHARES MAY CHANGE.
• HENCE INVESTORS MUST BE ABLE TO TAKE VOLATILITY IN THE RETURNS IN THE SHORT-
TERM.
INCOME FUNDS
•The objective of Income Funds is to provide regular and steady
income to investors.
•Income funds invest in fixed income securities such as Corporate
Bonds, Debentures and Government securities.
•The fund’s return is from the interest income earned on these
investments as well as capital gains from any change in the value of
the securities.
•The fund will distribute the income provided the portfolio generates
the required returns. There is no guarantee of income.
•The returns will depend upon the tenor and credit quality of the
securities held.
LIQUID / OVERNIGHT /MONEY MARKET MUTUAL FUNDS
•Liquid Schemes, Overnight Funds and Money market mutual fund
are investment options for investors seeking liquidity and principal
protection, with commensurate returns.
– The funds invest in money market instruments* with maturities not
exceeding 91 days.
– The return from the funds will depend upon the short-term interest
rate prevalent in the market.
•These are ideal for investors who wish to park their surplus funds for
short periods.
– Investors who use these funds for longer holding periods may be
sacrificing better returns possible from products suitable for a longer
holding period
BALANCED FUNDS
• A balanced fund combines equity stock component, a bond component and
sometimes a money market component in a single portfolio.
• Generally, these hybrid funds stick to a relatively fixed mix of stocks and
bonds that reflects either a moderate, or higher equity, component, or
conservative, or higher fixed-income, component orientation
• These funds invest in a mix of equities and debt, giving the investor the best
of both worlds. Balanced funds gain from a healthy dose of equities but the
debt portion fortifies them against any downturn.
• Balanced funds are suitable for a medium-term horizon and are ideal for
investors who are looking for a mixture of safety, income and modest capital
appreciation
 ADVANTAGES OF MUTUAL FUNDS

• PORTFOLIO DIVERSIFICATION : IT ENABLES HIM TO HOLD A DIVERSIFIED

INVESTMENTNPORTFOLIO EVEN A SMALL AMOUNT OF INVESTMENT LIKE
RS.2000/-
• PROFESSINAL MANAGEMENT : THE INVESTMENT MANAGEMENT SKILL, ALONG
WITH THE NEEDED RESEARCH INTO AVAILABLE INVESTMENT OPTIONS,
ENSURE A MUCH BETTER RETURN AS COMPARED TO WHAT AN INVESTOR CAN
MANAGE ON HIS OWN.
• REDUCTION/DIVERSIFICATION OF RISKS : THE POTENTIAL LOSSES ARE SHARED
WITH OTHER INVESTORS
• REDUCTION OF TRANSACTION COSTS : THE INVESTOR HAS THE BENEFIT OF
ECONOMIES OF SCALE; THE FUNDS PAY LESSER COSTS BECAUSE OF
LARGER VOLUMES AND IT IS PASSED ON TO THE INVESTORS.

• WIDE CHOICE TO SUIT RISK-RETURN PROFILE : INVESTORS CAN CHOSE THE

FUND BASED ON THEIR RISK TOLERENCE AND EXPECTED RETURNS.

• LIQUIDITY : INVESTORS MAY BE UNABLE TO SELL SHARES DIRECTLY,

EASILY AND QUICKLY.

• CONVENEINCE AND FLEXIBILITY : INVESTORS CAN EASILY TRANSFER THEIR

HOLDINGS FROM ONE SCHEME TO OTHER, GET UPDATED MARKET
INFORMATION AND SO ON. FUNDS ALSO OFFER ADDITIONAL BENEFITS
LIKE REGULAR INVESTMENTS AND REGULAR WITHDRAWL OPTIONS.

• TRANSPARENCY : FUND GIVES REGULAR INFORMATION TO ITS INVESTORS

ON THE VALUE OF THE INVESTMENTS IN ADDITION TO DISCLOSURE OF
PORTFOLIO HELD BY THEIR SCHEME.
 DISADVANTAGES OF MUTUAL FUNDS

• NO CONTROL OVER COSTS : THE INVESTOR PAYS INVESTMENT MANAGEMENT FEES

AS LONG AS HE REMAINS WITH THE FUND, EVEN WHILE THE VALUE OF HIS
INVESTMENTS ARE DECLINING. HE ALSO PAYS FOR FUNDS DISTRIBUTION
CHARGES WHICH HE WOULD NOT INCCUR IN DIRECT INVESTMENTS.
• MANAGING A PORTFOLIO OF FUNDS : AVAILABILITY OF A LARGE NUMBER OF FUNDS
CAN ACTAULLY MEAN TOO MUCH CHOICE FOR THE INVESTORS. SO, HE MAY
AGAIN NEED ADVICE ON HOW TO SELECT A FUND TO ACHIEVE HIS OBJECTIVES.
• DELAY IN REDEMPTION : IT TAKES 3-6 DAYS FOR REDEMPTION OF THE UNITS AND
THE MONEY TO FLOW BACK INTO THE INVESTOR’S ACCOUNT.
 HOW TO CHOOSE RIGHT MUTUAL FUNDS ?

• INVESTMENT HORIZON: IT WILL DEPEND ON HOW LONG YOU HAVE TO REACH YOUR
FINANCIAL GOAL. IF YOU KNOW HOW TO CHOOSE THE RIGHT MUTUAL FUND, YOU WILL
KNOW THAT EQUITY FUNDS ARE BEST SUITED FOR MEETING YOUR GOALS WITH LONG
INVESTMENT HORIZON AND DEBT FUNDS ARE BEST SUITED FOR SHORT TO MEDIUM
TERM GOALS. FOR VERY SHORT INVESTMENT TENURES (LESS THAN 1 YEAR), FUNDS LIKE
OVERNIGHT FUNDS, LIQUID FUNDS, ULTRA-SHORT DURATION FUNDS ETC ARE SUITABLE.
• INVESTMENT OBJECTIVE: BEFORE YOU TRY TO KNOW HOW TO SELECT THE RIGHT
MUTUAL FUND YOU MUST KNOW YOUR INVESTMENT OBJECTIVE! DO YOU WANT GROWTH
OR REGULAR INCOME? EQUITY FUNDS ARE BEST SUITED FOR CAPITAL APPRECIATION IN
THE LONG TERM WHILE DEBT FUNDS ARE SUITABLE IF YOU WANT REGULAR INCOME.
•Risk profile: If you know your risk profile, you will easily know how to choose the right
mutual fund! You should know the risk profile of a scheme to ensure that you are taking the
right amount of risk. Equity funds are suitable for investors with moderately high to high risk
appetites while bond funds or debt funds are suitable for those with low to moderate risk
appetites.
•Taxation: In your pursuit of how to choose a good mutual fund, taxation is one of the most
important criteria as you must know the tax consequences of your investments before you start.
For example - Short term capital gains (held for less than 12 months) in equity funds are taxed
at 15% and long term capital gains (held for more than 12 months) are tax exempt up to Rs 1
lakh and taxed at 10% thereafter (in excess of Rs 1 lakh of capital gains). Short term capital
gains (held for less than 36 months) in non equity funds are taxed at as per your income tax rate
and long term capital gains (held for more than 36 months) are taxed at 20% after indexation
benefit is allowed.
•Lump sum or SIP: If you have known how to select the right mutual fund then you should
figure out if you can invest in lump sum or through SIP. By investing through SIPs, you can
benefit from rupee cost averaging and power of compounding. In case you have ready funds,
you can invest in lump sum according to your optimal asset allocation.
 FUTURE AND GRWOTH OF MUTUAL FUNDS

• THERE IS A HUGE SCOPE IN THE FUTURE FOR THE EXPANSION OF THE

MUTUAL FUNDS INDUSTRY. A NUMBER OF FOREIGN BASED ASSETS
MANAGEMENT COMPANIES ARE VENTURING INTO INDIAN MARKETS. THE
SECURITIES EXCHANGE BOARD OF INDIA HAS ALLOWED THE INTRODUCTION
OF COMMODITY MUTUAL FUNDS. THE EMPHASIS IS BEING GIVEN ON THE
EFFECTIVE CORPORATE GOVERNANCE OF MUTUAL FUNDS. THE MUTUAL
FUNDS IN INDIA HAS THE SCOPE OF PENETRATING INTO THE RURAL AND SEMI
URBAN AREAS. FINANCIAL PLANNERS ARE INTRODUCED INTO THE MARKET,
WHICH WOULD PROVIDE THE PEOPLE WITH BETTER FINANCIAL PLANNING.
 OPPORTUNITIES OF MUTUAL FUND

• IN ANY INDUSTRY, INNOVATION AND IMPROVEMENTS HAPPEN WHEN THE RULES ARE
CHANGED. LARGE-SCALE ENVIRONMENTAL CHANGES SUCH AS THOSE THAT HAVE
TAKEN PLACE IN THE LAST FEW YEARS MUST LEAD TO INNOVATION AND EVOLUTION.
• NEWER LEANER OPERATING STRUCTURES WILL HAVE TO EVOLVE WHICH WILL ENTAIL
THE USE OF TECHNOLOGY THAT HELPS AN AMC (ASSET MANAGEMENT COMPANY)
REACH THE RETAIL END USER WITH SOLUTIONS THAT ENABLE TRANSACTIONS VIA
PLATFORMS SUCH AS MOBILE OR ONLINE PLATFORMS. THIS WILL NOT ONLY GIVE
GREATER DIRECT ACCESS BUT WILL ALSO HELP AMCS TO BETTER UNDERSTAND
INVESTOR BEHAVIOUR AND CREATE THE APPROPRIATE ENVIRONMENT AND PRODUCTS
TO MOVE TOWARDS LONG AND HEALTHY RELATIONSHIPS WITH THE INVESTORS.