UNIT - 3

MUTUAL FUNDS
 MUTUAL FUND
• A mutual fund is a trust that pools the savings of a number of
investors (unit holders) who share a common financial goal
• The money pooled is invested in shares, debt securities, money-
market securities or a combination of these.
• Income earned through these investments and the capital
appreciation realized is shared by its unit holders in proportion to
the number of units owned by them.
• A mutual fund is the most suitable investment scope for common
people as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively lower
cast.
MUTUAL FUND OPERATION
Mutual fund By Structure

Open – Ended Schemes Closed Ended Schemes

Interval Schemes

By investment objective

Growth Schemes Income Schemes

Balanced Schemes Money Market Schemes

Others

Sector Specific Schemes Tax Saving Schemes

Special Scheme Index Schemes

 BY STRUCTURE
• Open-ended Schemes - These funds buy and sell units on a
continuous basis and, hence, allow investors to enter and
exit as per their convenience. Do not have a fixed maturity.
The key feature is liquidity.
• Closed-ended Schemes - Unlike in open-ended funds,
investors cannot buy the units of a closed-ended fund after
NFO(New Fund offer) period is over. This means that new
investors cannot enter, nor can existing investors exit till the
term of the scheme ends.
• Interval Schemes - combines the features of open-ended
and close-ended schemes
 BY INVESTMENT OBJECTIVE
• Growth or Equity Schemes: - These are high risk funds and their returns are
linked to the stock markets. They are best suited for investors who are seeking
long term growth.
• Debt/ Fixed Income Schemes: - These Funds invest in fixed income securities
like corporate bonds, debentures. They are best suited for the medium to long-
term investors who are averse to risk and seeking regular and steady income.
• Balanced Schemes - These funds invest both in equity shares and debt (fixed
income) instruments and strive to provide both growth and regular income.
They are ideal for medium- to long-term investors willing to take moderate
risks.
• Liquid / Money Market Schemes - These funds invest in highly liquid money
market instruments and provide easy liquidity. They are ideal for Corporates,
institutional investors and business houses who invest their funds for very short
periods.
 OTHERS
• Tax Saving Funds: - These funds offer tax benefits to investors.
Opportunities provided under this scheme are in the form of tax rebates
under section 80 C of the Income Tax Act, 1961. They are best suited for
investors seeking tax rebate and looking for long term growth.
• Sector Funds:- These funds invest primarily in equity shares of companies
in a particular business sector or industry. While these funds may give
higher returns, they are riskier as compared to diversified funds
• Index Funds:- These funds invest in the same pattern as popular stock
market indices like CNX Nifty Index and S&P BSE Sensex. Net Asset
value of such schemes rise and fall in accordance with the rise and fall in
the index.
• Fund of Funds Schemes - Fund of Funds invests in other mutual fund
schemes. A traditional mutual fund comprises a portfolio of shares, but a
Fund of Funds comprises a portfolio of different mutual fund schemes’.
 PERFORMANCE MEASURE OF A MUTUAL FUND
1. ALPHA
A market benchmark is a set standard used to measure mutual fund
performance. Alpha is a financial ratio that reflects the returns generated
by the fund over and above the returns generated by the benchmark index.
The Alpha value of 0 would indicate that the fund has performed in line
with the benchmark. While a negative value would mean it has
underperformed as compared to its benchmark index, a figure above 0
would mean that the fund has outperformed.
For instance, if a mutual fund generates a return of 15% in a year, whereas
the benchmark grows at 12%, the Alpha value, in this case, would be 3. It is
generally considered as a measure that represents the value that a fund
manager adds or subtracts to a portfolio’s returns.
2. Beta
Beta is another statistical measure calculated using regression
analysis, reflecting the volatility of a portfolio compared to the market. It
shows the tendency of a portfolio's return to fluctuate as per the market
movements. Beta value of 1 indicates that the mutual fund is as volatile as
its benchmark. While a value above 1 indicates that the fund is more
volatile, a value below represents that the fund reacts lesser than its
benchmark.
3. Expense Ratio
The expense ratio is the ratio of the total fund’s expenses to its assets
and reflects the per-unit cost of managing a fund. Subtracted from the
funds' total earnings before it is distributed to the investors, the expense
ratio is inversely proportional to the AUM (Asset Under Management) of the
fund. It is an essential factor to be considered while selecting a fund since
the higher the expense ratio, the lower is the return and vice versa.
4. Allocations in the Fund’s Portfolio
One of the benefits of investing in mutual funds is the diversification
of assets in the portfolio. A well-diversified portfolio is expected to
generate better returns since volatile assets are balanced out with stable
ones. The fund fact sheet can provide you with the details of the allocated
assets in your fund’s portfolio.
5. Rolling Returns
Rolling returns are average annual returns for a specified
timeframe with returns taken into account till the last day of the duration. It
reflects the relative and absolute performance of the fund at regular
intervals. It is sometimes a better measure than CAGR (compounded annual
growth rate) because a CAGR reflects the fund's performance at the time of
calculation but not how it performed during the entire period. Rolling
returns can be more effective, accurate, and unbiased as they show how
the fund performed during the entire duration.
 SEBI GUIDELINES FOR MUTUAL FUNDS
1. SEBI regulation Act – 1996
2. Mutual Fund under the Indian Trust Act – 1882
3. Establishment of a Mutual Fund:
The sponsor has to register the mutual fund with SEBI
To be eligible to be a sponsor, the body corporate should have sound track
record and a general reputation of fairness and integrity in all his business
transactions.
The sponsor should have at least 40% of the net worth of the AMC(Asset
Management Company)
A party which is not eligible to be a sponsor shall not hold 40%or more of
the net worth of the AMC.
The sponsor has to appoint the trustees, the AMC and the custodian.
The trust deed and the appointment of the trustees have to be approved by
SEBI.
An AMC or its officers of employees can not be appointed as trustees of
the mutual fund.
At least two-thirds of the business should be independent of the sponsor.
Only an independent trustee can be appointed as a trustee of more than one
mutual fund, such appointment can be made only with the prior approval
of the fund of which the person is already acting as a trustees.
4. Launching of a schemes :
Every application form for units of a scheme is to be accompanies by a
memorandum containing key information about the scheme.
The offer document needs to contain adequate information to enable the
investors to make informed investments decisions.
All advertisements for a scheme have to be submitted to SEBI within
seven days from the issue date.
The advertisement for a scheme have to disclose its investment
objective.
The offer documents and advertisements should not contain any
misleading information or any incorrect statement or opinion.
The initial offering period for any mutual fund schemes should not
exceed 45 days, the only exception being the linked saving schemes.
No advertisement can contain information whose accuracy is
dependent on assumption.
An advertisement cannot carry a comparison between two schemes
unless the schemes are not comparable and all the relevant
information about the schemes is given.
The advertisement need to carry the name of the
sponsor, the trustees, the AMC of the fund.
All advertisement shall clarify that investment, in
mutual funds is subject to market risk and the
advertisement of the fund’s objectives can not be
assured.
All advertisement need to disclose the risk factors.
When an scheme is open for subscription, no
advertisement can be issued stating that the scheme
had been subscribed or over subscription.