MUTUAL FUNDS

WHAT ARE
MUTUAL FUNDS?
A mutual fund is a professionally-managed
investment scheme, usually run by an asset
management company that brings together a group
of people and invests their money in stocks, bonds
and other securities.

In simple terms, mutual funds is a trust that pools the

savings from the 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.
HOW DOES A MUTUAL FUND WORK?
 ADVANTAGES OF MUTUAL FUNDS
Built-In Diversification
Investing in a diversified portfolio
can be very expensive. The nice
thing about mutual funds is that
they allow anyone to hold a
diversified portfolio. The reason
why investors invest in a
diversified portfolio is because it
increases the expected returns
while minimizing the
risk. Therefore, many see mutual
funds as a cost effective way to
achieve this.
Liquidity
Professional Management
Mutual funds are liquid in
nature. In financial jargon, Mutual funds do not require a
liquidity basically refers to
great deal of time or
converting your assets to cash knowledge from the investor
with relative ease. Mutual funds
because they are managed
are considered liquid assets by professional fund
since there is high demand for
managers. This can be a big
many of the funds in the
help to an inexperienced
marketplace. Since this is the
case, an investor can convert
investor who is looking to
the asset to cash by quickly maximize their financial goals.
selling it to another investor.
DISADVANTAGES OF MUTUAL FUNDS

NO CONTROL OVER COST No Control Over Portfolio No Guarantees

All the investor's money It is the sole As Mutual funds

is pooled together in a responsibility of the invest in debt as
scheme. Costs incurred fund manager to
for managing the allocate the money of
well equities ,
scheme are shared by
the investors in an there are no
all the Unit-holders in
proportion to their
investment grade sure returns .
holding of Units in the instrument. So the Returns
scheme. Therefore, an investor has no control
individual investor has over the portfolio in depends on the
no control over the which his money is market
costs in a scheme. being invested. conditions .
STRUCTURE OF MUTUAL FUNDS IN INDIA
According to the SEBI Regulations Act, 1996, Mutual
Funds follow a three tier structure. Since mutual funds
deals in investors money, therefore, a clear structure is
laid to ensure proper governance.

SPONSOR
SPONSOR ((TIER
TIER 1)1)

There is a Sponsor (the First tier), who thinks of starting

a mutual fund. The Sponsor approaches the Securities
& Exchange Board of India (SEBI), which is the market
regulator and also the regulator for mutual funds. The
sponsor should have sound track record and general
reputation of fairness and integrity in all his business
transactions.
 TRUST AND TRUSTEES ( TIER 2)

On the approval of SEBI, the sponsor creates a Public Trust (the Second tier) as
per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot
enter into contracts, hence the Trustees are the people authorized to act on
behalf of the Trust. Contracts are entered into in the name of the Trustees. Once
the Trust is created, it is registered with SEBI after which this trust is known as the
mutual fund.

ASSET MANAGEMENT COMPANY

( TIER 3)

Managing the investors money is the responsibility of Asset Management

Company ( third tier). The AMC has to be approved by SEBI. Trustees appoint
the Asset Management Company (AMC), to manage investors money. The
AMC in return charges a fee for the services provided and this fee is borne by
the investors as it is deducted from the money collected from them.
 OTHER SERVICE PROVIDERS IN MUTUAL FUNDS

CUSTODIAN
The custodian has custody of the assets of the fund. As part of
this role, the custodian needs to accept and give delivery of
securities for the purchase and sale transactions of the various
schemes of the fund. Thus, the custodian settles all the
transactions on behalf of the mutual fund schemes. All
custodians need to register with SEBI. The Custodian is
appointed by the trustees.
-RTA (REGISTRAR AND TRANSFER AGENTS)
The RTA maintains investor records. The appointment of RTA is done
by the AMC. Their offices in various centres serve as Investor Service
Centres (ISCs), which perform a useful role in handling the
documentation of investors. The functions of the RTA includes
processing of purchase and redemption transactions of the investor
and dealing with the financial transactions of receiving funds for
purchases and making payments for redemptions, updating the
information in the individual records of the investor, called folios,
keeping the investor updated about the status of their investment
account and information related to the investment.
TYPE OF MUTUAL FUNDS
ON THE BASIS OF CONSTITUTION-

OPEN ENDED FUNDS

An open-end fund is a type of mutual fund that does not have
restrictions on the amount of shares the fund can issue. Open-ended
funds are open for investors to enter or exit at any time, even after
the NFO.

CLOSED ENDED FUNDS

Close-ended funds have a fixed maturity. Investors can buy units of a
close-ended scheme, from the fund, only during its NFO. Once the
NFO closes, new investors cannot enter, nor can existing investors
exit, till the term of the scheme comes to an end.
INTERVAL FUNDS

Interval funds combine features of both open-

ended and close-ended schemes. They are largely
close-ended, but become open-ended at pre-
specified intervals. The periods when an interval
scheme becomes open-ended, are called
transaction periods; the period between the close
of a transaction period, and the opening of the next
transaction period is called interval period.
ON THE BASIS OF INVESTMENT OBJECTIVE-

EQUITY FUNDS
An equity fund is a mutual fund that invests
principally in stocks. Equity oriented Funds invest the
investors money in equity and related instruments
of companies. The investment objective of such
funds is to seek capital appreciation through
investment in this growth asset.
DEBT FUNDS
Debt funds are mutual funds that invest in fixed income securities like bonds
and treasury bills. Debt funds are preferred by individuals who are not willing
to invest in a highly volatile equity market. A debt fund provides a steady
but low income relative to equity. It is comparatively less volatile.

HYBRID FUNDS
Hybrid Funds are mutual funds that provide a
combination of more than one underlying investment
asset class, such as stocks, bonds or cash. They are
also known as balanced funds.
MONEY MARKET FUNDS
A money market mutual fund invests in low risk securities. The
purpose of this fund is to conserve the capital of the fund. It is
meant for people who wish to maintain their capital and park
their short term cash into a safety that gives stable but low
returns. A money market mutual fund in India usually invests in
banks deposits, commercial paper, etc.