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MUTUAL FUNDS
A mutual fund is a company that pools money from many investors and invests in securities
such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are
known as its portfolio. Investors buy shares in mutual funds. Each share represents an
investor’s part ownership in the fund and the income it generates. There is professional
management and diversification of assets in mutual funds. The professional do market
research for the investors and they keep it high return investments. Mutual funds are a
popular choice for lots of investors because they also provide expert management, liquidity,
and convenience.

Simply, mutual fund is a collective pool of money contributed by several investors and
managed by a professional Fund Manager.

MFs in INDIA

There are as many as 44 AMFI (Association of Mutual Funds in India) registered fund houses
in India which together offer more than 2,500 mutual fund schemes. SEBI is India's major
regulatory agency for mutual funds. SEBI is responsible for regulating all elements of mutual
funds, including the establishment of mutual funds, their operations, the administration of
mutual funds, fees charged by mutual funds, and their performance.

HISTORY OF MFs

FIRST PHASE Of MF - 1964-1987

In India, the first mutual fund company, UTI, was established in 1963 by a parliamentary
act, and it operated under the administrative and regulatory oversight of the Reserve Bank
of India. (RBI). UTI was cut off from the RBI in 1978, and the Industrial Development Bank of
India (IDBI) replaced the RBI as the body in charge of regulation and administration. UTI had
Rs.6,700crores in assets under management by the end of 1988.

SECOND PHASE of MF - 1987-1993

Public sector banks, Life Insurance Corporation of India (LIC), and General Insurance
Corporation of India (GIC) established mutual funds in the public sector, and they began
operating in 1987. The first "non-UTI" mutual fund was created in June 1987 by SBI Mutual
Fund, which was followed by Canara bank Mutual Fund in December 1987, Punjab National
Bank Mutual Fund in August 1989, Indian Bank Mutual Fund in November 1989, Bank of
India in June 1990, and Bank of Baroda Mutual Fund in Oct. 1992.While LIC launched its
mutual fund in June 1989, GIC formed its mutual fund nearly a year and a half later in
December 1990. It was discovered that the second stage not only provided the framework
for industry growth but also inspired investors to put more of their money into mutual
funds. As a result, India's mutual fund market was anticipated to grow more rapidly.
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THIRD PHASE of MF - 1993-2003

This was the phase in which the Private sector entered the Mutual Funds market. The
foundation of SEBI in April 1992 to protect the interests of investors in the securities market
and to support the development and regulation of the securities market increased the
prominence of the Indian securities industry. The first private sector Mutual Fund registered
in July 1993. A new era in the Indian Mutual Fund business began with the arrival of private
sector funds in 1993, providing Indian investors with a greater selection of Mutual Fund
products.

FOURTH PHASE of MF - 2003 – APRIL 2014.

After the Unit Trust of India Act of 1963 was repealed in February 2003, UTI was split into
two distinct organizations: the Specified Undertaking of the Unit Trust of India (SUUTI) and
UTI Mutual Fund. The Mutual Fund business entered its fourth phase of consolidation with
the division of the former UTI and several mergers among various private sector funds.
Securities markets all around the world collapsed after the global financial crisis in 2009, and
India's market also suffered. The industry spent more than two years trying to rebuild and
transform itself in order to maintain its economic viability, as evidenced by the slow growth
in Mutual Fund Industry Assets under management (AUM) from 2010 to 2013.

FIFTH PHASE of MF - SINCE MAY 2014 emergence of uniform industry

To "re-energize" the Indian mutual fund industry and increase MFs' penetration, SEBI
introduced a number of ambitious initiatives in September 2012. This was done in
awareness of the low penetration of Mutual Fund, particularly in tier II and tier III cities, and
the need for a better alignment of the interests of various stakeholders. Things dramatically
got better once the new government was established in the centre. AUM and the number of
investor folios have both increased steadily since May 2014, and the industry has seen
sustained inflows.

CLASSIFICATION OF MFs

1. Open-end Mutual Funds

Open-ended schemes are perpetual, and open for subscription and repurchase on a
continuous basis on all business days at the current Net Asset Value. No fixed
maturity period. They are more liquid in nature.

2. Close-end Mutual Funds

Close-ended schemes have a fixed maturity date like 5-7 years. The units are issued
at the time of the initial offer and redeemed only on maturity. The units of close-
ended schemes are mandatorily listed to provide exit route before maturity and can
be sold/traded on the stock exchanges.
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3. Growth funds
These are invests in well-established, blue chip companies. Growth Funds are
schemes that are designed to provide capital appreciation. Investment in growth
oriented funds requires a medium to long-term investment horizon.

4. Growth and income funds

These type of MFs are focused on both income and capital growth. Less volatile than
other growth funds.

5. 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. There is no guarantee of income. The returns will
depend upon the tenor and credit quality of the securities held.

6. Balanced Mutual funds

It include mix of bonds, stocks etc. It aims to protect investors’ initial investment and
income. It also beneficial for the principal amount too.

7. Liquid / Overnight /Money Market Mutual Funds

These funds 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. 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.
8. Index Funds
It is the investment made in BSE Sensex or NSE 50 Index etc. It is also known as ETF
or exchange traded funds.

ADVANTAGES /NEED OF MFs

•Professional Management: A mutual fund is managed by full-time, professional money

managers who have the expertise, experience and resources to actively buy, sell, and
monitor investments.

•Risk Diversification: Buying shares in a mutual fund is an easy way to diversify investments
across many securities and asset categories such as equity, debt and gold, which helps in
spreading the risk. With diversification, the risk associated with one asset class is countered
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by the others. Even if one investment in the portfolio decreases in value, other investments
may not be impacted and may even increase in value.

•Affordability & Convenience (Invest Small Amounts): For many investors, it could be more
costly to directly purchase all of the individual securities held by a single mutual fund. By
contrast, the minimum initial investments for most mutual funds are more affordable.

•Liquidity: investor can easily redeem (liquidate) units of open ended mutual fund schemes
to meet your financial needs on any business day (when the stock markets and/or banks are
open). Upon redemption, the redemption amount is credited in bank account within one
day to 3-4 days, depending upon the type of scheme e.g., in respect of Liquid Funds and
Overnight Funds, the redemption amount is paid out the next business day.

•Low Cost: An important advantage of mutual funds is their low cost. Due to huge
economies of scale, mutual funds schemes have a low expense ratio. Expense ratio
represents the annual fund operating expenses of a scheme, expressed as a percentage of
the fund’s daily net assets. Operating expenses of a scheme are administration,
management, advertising related expenses, etc.

•Well-Regulated: Mutual Funds are regulated by the capital markets regulator, SEBI under
SEBI (MFs) Regulations, 1996. SEBI has laid down stringent rules and regulations keeping
investor protection, transparency with appropriate risk mitigation framework and fair
valuation principles.

•Tax Benefits: Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under section 80C
of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax
efficient.

DISADVANTAGES OF MFs

•Entry or Exit Load: Some mutual funds may charge either entry or exit load or both. They
levy this charge primarily to maintain their operations and pay staff salaries. Sometimes, the
charge may go up to a high 3% of the net investment amount. However, it mostly remains
around 1%.

•Diversification Might Cause Lower Profits: While diversification might significantly reduce
your risks, it may also reduce your profit margin. This may become more prominent if you
invest in balanced or hybrid mutual funds. Since these funds invest a part of your capital in
equity and the other part in debt, any profit in one might be muted due to a loss in the
other.

•Difficult Phases: Although long-term investors seldom endure losses, you may have to
suffer a capital loss if you accidentally invest before a bad phase. Mutual fund returns are
never guaranteed. Hence, it is wise to know a little about the economy and the fund
performance before investing.
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•Liquidity: Fixed maturity schemes come with a lock-in period. Usually has a lock-in period
of three (3) years. And a fixed maturity plan’s lock-in period depends on the instrument it
invests in.

•Capital Gains Tax: Both short-term and long-term capital gains from mutual funds are
taxable.