UNIT - 3

MUTUAL FUNDS
Meaning of Mutual Fund
• Mutual fund is a financial instrument that pools money from
different investors. The pooled money is then invested in
securities like stocks of listed companies, government bonds,
corporate bonds, and money market instruments.
• As an investor, you don’t directly own the company’s stocks
that mutual funds purchases. However, you share the profit or
loss equally with the other investors of the pool. This is how
the word “mutual” is associated with a mutual fund.
Features of Mutual Fund
1. Convenience
With the popularization of online investment in mutual funds, you do not need to
visit a fund house physically. You can invest in any fund of your choice using your
phone or computer. All you need to do is visit the portal or app of the AMC and log
in here to make a purchase.
2. Flexibility of Investment
This is one of the attractive features that mutual funds have to offer. You can opt for
any mode between SIP or lumpsum to invest your money in mutual funds.
3. Liquidity
You can also withdraw or redeem your funds to meet any emergency. Depending on
your scheme, you will receive the amount within 3-4 business days. Liquid funds
transfer this amount to your account in the following business day. Hence, mutual
funds carry decent liquidity as investors can redeem them anytime.
Features of Mutual Fund
4. Income Tax Benefits
With a long-term investment in mutual funds, you can pay less taxes due to
their high tax efficiency. You can also get income tax deductions by investing
in ELSS funds while earning high returns.
5. Minimal Charges
Mutual funds are also affordable for every earning individual. You need to
pay a small amount, known as the expense ratio, to your fund houses to invest
in mutual funds. The expense ratio and other additional charges might vary
between fund houses. However, the costs are less than other managed funds.
6. Regulated by SEBI
Every fund house must register itself under SEBI before launching a mutual
fund scheme. SEBI overlooks the transparency and accountability of fund
houses and protects investors. By doing so, SEBI prevents any arbitrary use
of investors’ money. This makes mutual funds safe from fraud and
malpractices.
Features of Mutual Fund
7. Operated by Professionals
Every fund house employs professionals known as fund managers to
operate mutual funds. They study the market pattern and invest your
money in equities or debts according to the scheme’s objectives.
8. Good for Portfolio Diversification
Mutual fund schemes allow you to avoid placing all your eggs in one
basket. They uniformly invest in high and low-risk mutual investments
on your behalf to balance your profit and losses. This lets you access a
diversified portfolio, which can deliver profits even during periods of
economic downturns.
 History of Mutual Fund’s in India
• Internationally, the dawn of mutual fund industry was witnessed in 19th century in Europe. It was Robert
Fleming who set up the first ever mutual fund company called as ‘foreign and colonial investment trust’
in 1868 who promised to invest and overlook the finances of the investors. While in India, the
introduction of mutual fund came a lot later. The journey of mutual fund in India started in the 1963 with
the incorporation of ‘Unit Trust of India (UTI)’. The growth of mutual fund in India has happened in
phased manner as under:
• Phase 1
Formation and Growth of UTI (1964 to 1987) The phase 1 witnessed the incorporation and introduction of
Unit Trust of India by passing an Act by Parliament. The incorporation of UTI was done by Reserve Bank
of India. Post its incorporation, it was the only institution that accepted investments and offered mutual
fund units. The first scheme launched by UTI was the Unit Scheme in the year 1964. Later in the years of
70s and 80s, UTI introduced various schemes as per the needs of Indian investors. The first ULIP (Unit
Linked Insurance Plan) was introduced by UTI in the year 1971, while the 1st Indian Offshore Fund was
launched in the year 1986. In this phase i.e. from the date of inception to the year 1987, the growth of UTI
multiplied tremendously.
• Phase 2
Establishment of Public Sector Funds (1987 to 1992) The year 1987 witnessed the establishment
of public sector funds i.e. other public sector institutions like banks and NBFCs were allowed to
start mutual fund houses. This resulted in opening up of economy and State Bank of India was the
first bank to establish a mutual fund company in the year 1987. The footsteps of SBI were then
followed by various other institutions like Canbank, Life Insurance Corporation of India, Indian
Bank, Bank of India, General Insurance Corporation of India and Punjab National Bank
introducing their own mutual fund companies. During this period, the asset under management
under this sector increased from Rs. 6700 Crores to a whooping Rs. 47004 Crores as investors in
India showed great interest in this financial tool and started investing a large part of their salary in
Mutual funds.
• Phase 3
Introduction of Private Sector Funds (1992 to 1997) After the successful introduction of Public
Sector Funds, the mutual fund industry opened up and witnessed the establishment of private
sector funds from the year 1993, giving Indian investors the extensive opportunity to choose
mutual funds from public and private sector. On the other hand, it increased the competition for
Indian mutual fund companies.
• Phase 4
Growth and introduction of SEBI regulations (1997 to 1999) As the mutual fund
sector was witnessing and achieving newer heights, it was important to create a
body that created comprehensive rules and regulation for this industry and
creating a responsible organization to overlook the working of this sector. This
gave birth to incorporation of SEBI Regulation in 1996. SEBI introduced
standardization and set uniform rules and regulations for all funds. It was during
this phase that SEBI and AMFI launched an awareness scheme for investors of
mutual funds.
• Phase 5
Emergence of a Large and Stable Industry (1999 to 2004) This phase witnessed
the integration of the entire industry with a similar set of rules and regulations.
The uniform and standardized operations and regulations made it easier for
investors to invest in various mutual fund companies resulting in increase of asset
under management from Rs. 68000 crores in previous phase to over Rs. 1.50 lakh
crores during this phase.
• Phase 6
• Amalgamation and Growth (2004 onwards) The mutual fund industry has seen immense growth
and globalization since the day of its incorporation. From the year 2004, this industry witnessed
integration as there were many mergers, demergers and acquisitions of companies and schemes
like Allianz Mutual Fund taken over by Birla Sun Life, PNB mutual fund by Principal etc. Thus,
since the year 2004, this industry is coping and integrating new players, dealing with mergers
and acquisitions and continuing its journey towards growth.
• Recent Development
• Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of
March 2022 stood at ₹ 37,70,296 crore.
• Assets Under Management (AUM) of Indian Mutual Fund Industry as on March 31, 2022 stood
at ₹37,56,683 crore.
• The AUM of the Indian MF Industry has grown from ₹ 5.87 trillion as on March 31, 2012 to
₹37.57 trillion as on March 31, 2022 more than 6 fold increase in a span of 10 years.
• The MF Industry’s AUM has grown from ₹ 17.55 trillion as on March 31, 2017 to ₹37.57
trillion as on March 31, 2022, more than 2 fold increase in a span of 5 years.
 Benefits of Investment in Mutual Fund
• The primary goal of any investor should be to outperform inflation. With
other savings instruments providing low returns, investing in mutual funds
has become necessary to keep up with the market. One can also choose to
invest in mutual funds because of the following benefits.
1. Variety
Mutual funds are of numerous types, which have been discussed above.
Investors can select a mutual fund scheme that is in line with their financial
objectives. On account of the different available options, investors can build
a diversified investment portfolio in a cost-effective manner.
2. Various Modes of Investments
You can invest in mutual funds through a one-time or lump sum investment.
Or, you can opt for other options, such as a Systematic Investment Plan
(SIP), Systematic Withdrawal plan (SWP), and Systematic Transfer Plan
(STP).
3. Disciplined Investing
A mutual fund encourages one to invest over a considerable period
of time, which is vital for significant wealth creation. Moreover,
you can opt for a Systematic Investment Plan (SIP) and invest a
specific amount at regular intervals, thereby investing in a
disciplined manner.
4. Accessibility
Many fund houses allow individuals to invest as little as Rs.1000
as a lump sum investment in mutual funds. Besides, one can opt for
an SIP and start investing with a nominal sum of Rs.10.
 Drawbacks of Investment in Mutual Fund
• Fluctuating returns: Mutual funds do not offer fixed guaranteed returns in
that you should always be prepared for any eventuality including depreciation
in the value of your mutual fund. In other words, mutual funds entail a wide
range of price fluctuations. Professional management of a fund by a team of
experts does not insulate you from bad performance of your fund.
• No Control: All types of mutual funds are managed by fund managers. In
many cases, the fund manager may be supported by a team of analysts.
Consequently, as an investor, you do not have any control over your
investment. All major decisions concerning your fund are taken by your fund
manager. However, you can examine some important parameters such as
disclosure norms, corpus and overall investment strategy followed by an Asset
Management Company (AMC).
• Diversification: Diversification is often cited as one of the main advantages
of a mutual fund. However, there is always the risk of over diversification,
which may increase the operating cost of a fund, demands greater due
diligence and dilutes the relative advantages of diversification.
• Fund Evaluation: Many investors may find it difficult to extensively
research and evaluate the value of different funds. A mutual fund's net asset
value (NAV) provides investors the value of a fund's portfolio. However,
investors have to study various parameters such as sharpe ratio and standard
deviation among others to ascertain how one fund has fared compared to
another which can be complicated to some extent.
• Past performance: Ratings and advertisements issued by companies are only
an indicator of the past performance of a fund. It is important to note that
robust past performance of a fund is not a guarantee of a similar performance
in the future. As an investor, you should analyze the investment philosophy,
transparency, ethics, compliance and overall performance of a fund house
across different phases in the market over a period of time. Ratings can be
taken as a reference point.
• Costs: The value of a mutual fund may fluctuate depending on the changing market
conditions. Furthermore, there are fees and expenses involved towards professional
management of a mutual fund which is not the case for buying stocks or securities
directly in the market. There is an entry load which has to be borne by an investor
when buying a mutual fund. Furthermore, some companies charge an exit cost as well
when an investor chooses to exit from a mutual fund.
• CAGR: The performance of a mutual fund vis-a-vis the compounded annualized
growth rate (CAGR) neither provides investors adequate information about the amount
of risk facing a mutual fund nor the process of investment involved. It is therefore,
only one of the indicators to gauge the performance of a fund but is far from being
comprehensive.
• Fund managers: According to experts, as an investor, you would do well not to be
carried away by the so-called 'star fund managers'. Even a highly skilled manager can
make a positive difference in the short-term but cannot dramatically change the
performance of a fund in the long-term. Also, there is always the likelihood of a star
fund manager joining another company. It is, therefore, more prudent to examine the
processes which are followed by a fund house rather than the star appeal of just one
individual.
SBI Mutual Fund
• SBI Mutual Fund is a joint venture between the State Bank of India (SBI), the largest public
sector bank in India, and Amundi, a leading French asset management company. The fund house
was established in 1987 and currently manages different mutual fund schemes across various
categories. SBI Mutual Fund has a wide distribution network of over 270 branches, as well as
tie-ups with over 30,000 IFAs (independent financial advisors).

• Some of the popular mutual fund schemes offered by SBI Mutual Fund include SBI Bluechip
Fund, SBI Magnum Equity ESG Fund, SBI Magnum Medium Duration Fund, etc. The fund
house has also introduced innovative products such as SBI Equity Minimum Variance Fund and
SBI Debt Hybrid Fund, which offer unique investment opportunities to investors.
• SBI Mutual Fund has a strong focus on investor education and regularly conducts awareness
programs and seminars to educate investors about the benefits and risks of investing in mutual
funds. This fund house has also won several awards for its performance and customer service,
including the Best Fund House (Large) award at the Morningstar Awards 2020.
ICICI Prudential Mutual Fund

• This well-known fund house was established in 1993 between ICICI Bank and Prudential
Corporation Holdings Limited, a UK-based financial services company. ICICI Prudential
Mutual Fund offers various types of mutual fund schemes and specialised funds, such as index
funds, exchange-traded funds (ETFs), and international funds.

• The company's investment philosophy is based on the principles of risk management, research-
driven investment decisions, and long-term wealth creation for investors. ICICI Prudential
Mutual Fund's investment process involves a rigorous research process, which includes a
bottom-up analysis of companies, macroeconomic analysis, and identification of investment
opportunities across various sectors and asset classes.

• ICICI Prudential Mutual Fund has a strong distribution network with a presence in over 200
cities in India. The company has won several awards for its performance and customer service,
including the Best Mutual Fund Company of the Year award at the CNBC-TV18 Mutual Fund
Awards 2021.
HDFC Mutual Fund

• Established in 1999, HDFC Mutual Fund is considered among the top mutual fund houses in
India. Presently, the fund manages assets worth over Rs. 4,23,716 crore. It offers several
schemes across various categories, including equity, debt, hybrid, and international funds.
HDFC Mutual Fund has a strong investment team comprising experienced fund managers and
research analysts who follow a rigorous investment process to select stocks and bonds for the
fund's portfolio.

• The company also has a robust risk management framework. Additionally, HDFC Mutual Fund
has received several awards for its performance, including the Best Fund House - Equity at the
Morningstar Fund Awards 2021 and the Best Debt Fund House at the CNBC-TV18 Mutual
Fund Awards 2021.
Types of Mutual Fund
1. Structure of Mutual Funds
Based on the ease of investment, mutual funds can be:
• Open-ended funds - These funds do not limit when or how many units can be
purchased. Investors can enter or exit throughout the year at the current net asset
value. Open-ended funds are ideal for investors seeking liquidity.
• Close-ended funds - Close-ended funds have a pre-decided unit capital amount
and also allow purchase only during a specified period. Here, redemption is bound
by the maturity date. However, to facilitate liquidity, schemes trade on stock
exchanges.
• Interval funds - A cross between open-ended and close-ended funds, interval
mutual funds permit transactions at specific periods. Investors can choose to
purchase or redeem their units when the trading window opens up.
2. Mutual Fund Asset Class
Depending on the assets they invest in, mutual funds are categorized
under:
• Equity funds - Equity funds invest money in company shares, and their
returns depend on how the stock market performs. Though these funds can
give high returns, they are also considered risky. They can be categorized
further based on their features, like Large-Cap Funds, Mid-Cap Funds,
Small-Cap Funds, Focused Funds, or ELSS, among others. Invest in equity
funds if you have a long-term horizon and a high-risk appetite.
• Debt funds - Debt funds invest money into fixed-income securities such
as corporate bonds, government securities, and treasury bills. Debt funds
can offer stability and a regular income with relatively minimum risk.
These schemes can be split further into categories based on duration, like
low-duration funds, liquid funds, overnight funds, credit risk funds, gilt
funds, among others.
• Hybrid funds - Hybrid funds invest in both debt and equity instruments so as to
balance out debt and equity. The ratio of investment can be fixed or varied,
depending on the fund house. The broad types of hybrid funds are balanced or
aggressive funds. There are multi asset allocation funds which invest in at least 3
asset classes.
• Solution-oriented funds - These mutual fund schemes are for specific goals like
building funds for children’s education or marriage, or for your own retirement.
They come with a lock-in period of at least five years.
• Other funds:
• Index funds invest based on certain stock indices and fund of funds are
categorized under this head.
3. Mutual Funds based on Investment Goals
• You can also choose a fund based on your financial objective:
• Growth funds - Funds that invest primarily in high-performing stocks with
the aim of capital appreciation are considered growth funds. These funds can
be an attractive option for investors seeking high returns over a long period.
• Income funds: Under these schemes, money is invested primarily in fixed-
income instruments e.g. bonds, debentures etc. with the purpose of providing
capital protection and regular income to investors.
• Tax-saving Funds (ELSS) - Equity-linked saving schemes are mutual funds
that invest mostly in company securities. However, they qualify for tax
deductions under Section 80C of the Income Tax Act. They have a minimum
investment horizon of three years.
• Liquidity-based funds - Some funds can be categorized based on how
liquid the investments are. Ultra-short-term and liquid funds, are ideal for
short-term goals, while schemes like retirement funds have longer lock-in
periods.
• Capital protection funds - These funds invest partially in fixed income
instruments and the rest into equities. This could ensure capital protection,
i.e., minimal loss, if any. However, returns are taxable.
• Fixed-maturity funds (FMF) - These funds route money into debt market
instruments, which have either the same or a similar maturity period as the
fund itself. For instance, a three-year FMF will invest in securities with a
maturity of three years or lower.
• Pension Funds - Pension funds invest with the idea of providing regular
returns after a long period of investment. They are usually hybrid funds that
give low but have potential to provide steady returns in future.
4. Mutual Funds based on specialty
• Sector Funds: These are funds that invest in a particular sector of the market e.g.
Infrastructure funds invest only in those instruments or companies that relate to
the infrastructure sector. Returns are tied to the performance of the chosen sector.
The risk involved in these schemes depends on the nature of the sector.
• Index Funds: These are funds that invest in instruments that represent a particular
index on an exchange so as to mirror the movement and returns of the index e.g.
buying shares representative of the BSE Sensex.
• Fund of funds: These are funds that invest in other mutual funds and returns
depend on the performance of the target fund. These funds can also be referred to
as multi manager funds. These investments can be considered relatively safe
because the funds that investors invest in actually hold other funds under them
thereby adjusting for risk from any one fund.
• Emerging market funds: These are funds where investments are made in
developing countries that show good prospects for the future. They do come with
higher risks as a result of the dynamic political and economic situations prevailing
in the country.
• International funds: These are also known as foreign funds and offer
investments in companies located in other parts of the world. These
companies could also be located in emerging economies. The only
companies that won’t be invested in will be those located in the
investor’s own country.
• Global funds: These are funds where the investment made by the fund
can be in a company in any part of the world. They are different from
international/foreign funds because in global funds, investments can be
made even the investor's own country.
• Real estate funds: These are the funds that invest in companies that
operate in the real estate sectors. These funds can invest in realtors,
builders, property management companies and even in companies
providing loans. The investment in the real estate can be made at any
stage, including projects that are in the planning phase, partially
completed and are actually completed.
• Commodity focused stock funds: These funds don’t invest directly in
the commodities. They invest in companies that are working in the
commodities market, such as mining companies or producers of
commodities. These funds can, at times, perform the same way the
commodity is as a result of their association with their production.
• Market neutral funds: The reason that these funds are called market
neutral is that they don’t invest in the markets directly. They invest in
treasury bills, ETFs and securities and try to target a fixed and steady
growth.
• Inverse/leveraged funds: These are funds that operate unlike traditional
mutual funds. The earnings from these funds happen when the markets
fall and when markets do well these funds tend to go into loss. These are
generally meant only for those who are willing to incur massive losses
but at the same time can provide huge returns as well, as a result of the
higher risk they carry.
• Asset allocation funds: The asset allocation fund comes in two variants, the
target date fund and the target allocation funds. In these funds, the portfolio
managers can adjust the allocated assets to achieve results. These funds split
the invested amounts and invest it in various instruments like bonds and
equity.
• Gilt Funds: Gilt funds are mutual funds where the funds are invested in
government securities for a long term. Since they are invested in government
securities, they are virtually risk free and can be the ideal investment to
those who don’t want to take risks.
• Exchange traded funds: These are funds that are a mix of both open and
close ended mutual funds and are traded on the stock markets. These funds
are not actively managed, they are managed passively and can offer a lot of
liquidity. As a result of their being managed passively, they tend to have
lower service charges (entry/exit load) associated with them.
MUTUAL FUNDS PLAN
• Systematic Investment Plan - SIP is a mode of periodically investing small
amounts in mutual funds to form a corpus in the long run. Since this mode
allows the spreading of investment over a certain period, it helps investors
in averaging out the cost of investment. It also prevents committing large
sums into a single investment, especially during market peaks, thereby
maximizing returns. SIPs are preferred by investors since it instils an
investment discipline in them. SIPs can be monthly, weekly or even daily.
• Systematic transfer plan - STP is an option that allows mutual fund
investors to transfer a fixed amount from one fund investment or scheme
to another. This is mostly used in debt schemes where investors would
have made a lump sum investment. The main usage of STP is to invest a
lump sum amount in a debt scheme and transfer a fixed portion
periodically to another scheme, such as equity funds.
STP allows investors to earn additional returns on the lump sum
investment while they can transfer a portion of it into debt funds. An
investor can choose the period over which he/she plans to transfer the
money to another fund. STP can also be done from an equity to a debt
fund, depending on individual financial goals. If opting for an STP to
meet goals such as children’s education, retirement, etc., and the goal is
nearing, investors should start the STP well in advance instead of waiting
till the target date.
• Systematic withdrawal plan - SWP is an investor can periodically
withdraw a certain amount of investment from a mutual fund. This
mechanism benefits retirees who want a fixed or regular income flow.
SWP offers protection from market fluctuations and avoids the necessity
to time the market while redeeming an investment.
NET ASSETS VALUE
• NAV stands for ‘Net Asset Value.’ NAV represents the price at which a
mutual fund may be bought by an investor or sold back to a fund house. A
mutual fund’s NAV is an indicator of its market value. Therefore, NAV can
be viewed to assess the current performance of a mutual fund. By
determining the percentage increase or decrease in the NAV of a mutual
fund, an investor can calculate the increase or decrease in its value over
time. A mutual fund’s NAV is usually calculated by a fund accounting firm
hired by the mutual fund or the mutual fund house itself. It is mandatory, as
per SEBI guidelines, that all mutual funds publicly display their NAV by
updating it on the AMC & AMFI website on every business day.
• Net Asset Value = (Fund Assets – Fund Liabilities) / Total number of Outstanding
Shares
NET ASSETS VALUE - PROBLEM
1.If at the close of trading, a mutual fund has Rs.8,000,000
worth of assets, Rs. 200,000 of cash, and Rs.500,000 of
liabilities. The fund has 350,000 shares outstanding. What is
the mutual fund net asset value calculation?
Solution
NAV = (Rs.80,00,000 + Rs.2,00,000) – Rs.5,00,000 /
3,50,000
= Rs. 22