INTRODUCTION TO MUTUAL

FUNDS
PROF. PUSHKAR KALYANKAR
LEARNING OBJECTIVES :
➢What is a Mutual Fund ?
➢History of Mutual Fund
➢Structure of Mutual Fund
➢What is an Asset Management Company (AMC)?
➢How does a Mutual Fund Work?
➢Classification of Mutual Funds
➢Based on Structure
➢Based on Investment Objective
➢Investment Portfolio
➢Risk vs Return
➢Categorization of Mutual Funds
WHAT IS A MUTUAL FUND (MF)?

A mutual fund is a pool of money collected from investors with a common goal.

The company invests this pool of money in several financial instruments such as
bonds, stocks, etc.

This company is the Asset Management Company (AMC), managing all

investments. It aims to maximise returns while keeping the risk at a minimum
level.

However, it is mandatory for the AMC to be registered with SEBI, which regulates
all security investments.
HISTORY OF MUTUAL FUND
➢ The history of mutual funds started way back in 1963.
➢The Unit Trust of India (UTI) was the first company to start mutual funds.
➢It was a joint initiative between the Reserve Bank of India (RBI) and the
Government of India.
➢The objective of UTI was to let small, uninformed investors invest in equity
and other financial instruments of larger companies.
➢The 1964 Unit Scheme was the first mutual fund product available for
several years.
HISTORY OF MUTUAL FUND
1st Phase (1964 – 1987)
➢ The mutual fund industry started with the Unit Trust of India (UTI)
formation in 1963 by the Parliament Act.
➢It functioned under the regulatory and administrative control of the Reserve
Bank of India (RBI).
➢ Also, Unit Scheme 1964 was the first scheme launched by UTI.
➢ Later on, UTI was delinked from RBI in 1978.
➢ Industrial Development Bank of India (IDBI) took over the administrative
and regulatory control in place of RBI.
➢ By the end of the year 1988, UTI had Rs.6700 crores assets under
management (AUM).
HISTORY OF MUTUAL FUND
2nd Phase (1987 – 1993)
➢ It marked the entry of public sector banks.
➢ In 1987, public sector mutual funds were set up by public sector banks, Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC).
➢ SBI Mutual Fund was the first non-UTI MF started in June 1987.
➢Subsequently, Canara Bank came into existence as Canara Bank Mutual Fund in December
1987.
➢Similarly, some other bank’s mutual funds came into existence, such as –
▪ Punjab National Bank Mutual Fund in August 1989
▪ Indian Bank Mutual Fund in November 1989
▪ Bank of India Mutual Fund in June 1990
▪ Baroda Mutual Fund in October 1992
▪ LIC Mutual Fund in June 1989
▪ GIC Mutual Fund in December 1990
➢By the end of 1993, the total asset under management of the mutual fund industry was
Rs.47,007 crores.
HISTORY OF MUTUAL FUND
3rd Phase (1993 – 2003)
➢ The new era of the mutual fund industry began with the introduction of private
sector funds in 1993. This gave investors a wide choice of funds.
➢ With the establishment of SEBI in April 1992, the Indian Securities Market gained
importance.
➢ Also, in 1993, the first set of SEBI Mutual Fund regulations came into existence for
all mutual funds except UTI.
➢ The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund
was the first private sector mutual fund company registered in July 1993.
➢ Later in 1996, the SEBI regulations were replaced and revised with more
comprehensive rules. Therefore, the mutual fund industry currently functions under
SEBI Regulations 1996.
HISTORY OF MUTUAL FUND
4th Phase (February 2003 – April 2014)
➢ In February 2003, UTI was divided into two distinct organizations following
the abolishment of the Unit Trust of India Act 1963.

▪ The first is the Specified Undertaking of Unit Trust of India (SUUTI), which operates
under an administrator and regulations set by the Indian government. It does not fall
under the authority of Mutual Fund Regulations.
▪ The second is the UTI Mutual fund carved out of Unit Trust of India, which functions
under SEBI MF regulations from February 1, 2003.

➢ After the global economic recession in 2009, the global financial markets
were at an all-time low, and so was India.
HISTORY OF MUTUAL FUND
Existing Growth of Mutual Funds (Since May 2014)
➢ Recognizing the lack of penetration of mutual funds in India, especially in
Tier II and Tier III cities, SEBI introduced several progressive measures in
September 2012.
➢ SEBI’s idea was to ‘re-energize’ the Indian mutual fund industry and boost
the overall penetration of mutual funds.
STRUCTURE OF MUTUAL FUND
STRUCTURE OF MUTUAL FUNDS
➢ The structure of mutual funds in India is a three-tier one with few other
significant components.
➢ The three-tier structure comprises the Fund Sponsor, Trustees and the
Asset Management Company.
➢ The structure of mutual funds came into existence under SEBI Mutual Fund
Regulations,1996.

➢Structure of Mutual Funds in India : 3-Tiered Organisational Structure

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WHAT IS AN ASSET MANAGEMENT COMPANY(AMC)?
➢ Investment manager of the mutual fund
➢ Appointed by the trustees, with SEBI approval
➢ Trustees and AMC enter into an investment management agreement.
➢ Required to invest seed capital of 1% of amount raised subject to a
maximum of Rs.50 lakh in all open-ended schemes
➢ Should have a net worth of at least Rs.50 crore at all times.
➢ At least 50% of members of the board of an AMC have to be independent.
➢ AMC of one mutual fund cannot be an AMC or trustee of another fund.
➢ AMCs cannot engage in any business other than that of financial advisory
and investment management
WHAT IS AN ASSET MANAGEMENT COMPANY(AMC)?
➢ Investment manager of the mutual fund
➢ Appointed by the trustees, with SEBI approval
➢ Trustees and AMC enter into an investment management agreement.
➢ Required to invest seed capital of 1% of amount raised subject to a
maximum of Rs.50 lakh in all open-ended schemes
➢ Should have a net worth of at least Rs.50 crore at all times.
➢ At least 50% of members of the board of an AMC have to be independent.
➢ AMC of one mutual fund cannot be an AMC or trustee of another fund.
➢ AMCs cannot engage in any business other than that of financial advisory
and investment management
HOW DOES MUTUAL FUND WORK?

➢ Pool of investors money

➢ Invested according to
pre-specified investment
objectives
➢ Benefits accrue to those
that contribute to this
pool
➢ There is thus mutuality in
the contribution and the
benefit
➢ Hence the name
‘mutual’fund.
 CLASSIFICATION OF MUTUAL FUNDS

Based on Structure Based on Investment Based on Investment

Objective Style
• Open Ended • Debt Funds • Passive Funds
Funds • Equity Funds • Active Funds
• Closed Ended • Hybrid Funds
Funds
• Interval Funds
CLASSIFICATION - BASED ON STRUCTURE

Open •
•
No fixed maturity date.
Accept continuous sale and re-purchase requests.

Ended Funds •
•
Transactions are NAV-based.
Unit capital is not fixed

Closed • Run for a specific period.

• Offered in an NFO but are closed for further
Ended Funds purchases after NFO.
• Unit capital is kept constant

Interval • Variant of closed-ended funds.

• Becomes open-ended at specific intervals.
Funds • Have to be mandatorily listed.
CLASSIFICATION - BASED ON INVESTMENT OBJECTIVE

Debt • Invest in short and long term debt instruments.

Funds • Aim to provide regular income.

Equity • Invest in equity securities.

• Aim to provide growth and capital appreciation
Funds over long term.

Hybrid • Invest in a combination of equity and debt securities.

• Proportion of equity and debt may vary.

Funds • Aim to provide for both income and capital

appreciation.
CLASSIFICATION - BASED ON INVESTMENT STYLE

Passive •
•
•
Replicate a market index.
Invest in same securities and in same proportion as that of index.
No active selection of any stock / sector.
Funds •
•
Expenses are lower.
Portfolio is modified every time index composition changes

Active • Invests in securities and sectors that may offer a better return
than the index.
• Actively manage the allocation to market securities and cash.

Funds • May perform better or worse than the market index.

• Incur a higher cost than passive funds.
CATEGORIZATION OF MUTUAL FUND SCHEMES
➢ Categorization of open-ended mutual funds:
- To ensure uniformity in characteristics of similar type of schemes launched by
different mutual funds.
- Helps investors to evaluate different options available before making informed
decision to invest.
HOW TO INVEST IN MUTUAL FUNDS?
CENTRALIZED KYC (C-KYC) IN SECURITIES MARKET
➢ KYC registration is centralized through KYC Registration Agencies (KRAs)
registered with SEBI.
➢ Each investor to undergo KYC process only once in securities market and
details would be shared with other intermediaries by the KRAs.
➢ Standard Account Opening form (AOF) has 2 parts:
- Part I : Basic and uniform KYC details of the investor
- Part II : Additional KYC information as may be sought
separately by the Mutual Fund
MUTUAL FUNDS INVESTMENT PROCEDURE

Indicate whether you are a First Time Investor/ Existing Investor

Visit official website of KRA and check whether you are KYC compliant or not.
You must submit this KYC status.

Provide your details like name, address, etc.

Submit Bank account details and copy of “Cancelled Cheque”.

Once documents are accepted by Mutual Fund Company, you may start making
investment.
INVESTMENT MODES IN MUTUAL FUND

Lump-sum • One time investment.

• Usually, large sum of money is invested in one go.
Investment • Investor faces risk of volatility in markets.

Systematic •
•
Staggered Investment.
Period of commitment - 6 months, 1 / 3 / 5 years.
Investment •
•
Specific intervals - monthly, quarterly, half-yearly.
Made on specific dates e.g. 1st, 5th, 10th, 15th of
Plan every month.
INVESTMENT MODES IN MUTUAL FUND

Direct •
•
Directly offered by fund house.
No involvement of third party agents – brokers or distributors.

Mutual •
•
•
No commissions and brokerage.
Have low Expense ratio (because of no commissions).
Have high NAV.
Fund • Return is higher due to a lower expense ratio

Regular •
•
Bought through an intermediary.
Intermediaries can be brokers, advisors or distributors.

Mutual •
•
Commissions and brokerage paid.
High Expense ratio as there are commissions to pay.

Fund
• Low NAV.
• Return is lower due to a higher expense ratio
MUTUAL FUND PLANS – GROWTH VS DIVIDEND OPTIONS

Growth • Gains made in portfolio are retained and reflected in NAV.

• Realized profit/loss is treated as capital gains or loss.
Option • No increase or decrease in number of units, except if units are
purchased or sold, by the investor.

• Fund declares dividend from realized profits.

Dividend • Amount and frequency varies and depends upon distributable
surplus.
Payout Option • NAV falls after dividend payout to the extent of dividend
paid.

Dividend • Dividend is re-invested in same scheme by buying additional

units at ex-dividend NAV.
Reinvestment • Number of units standing to the credit of the investor,
increases each time a dividend is declared, and reinvested
Option back into the scheme
HOW TO CHECK INFORMATION ABOUT THE MUTUAL
FUNDS (OFFER DOCUMENT)?

Statement of
Additional •
•
Contains generic and statutory information of mutual fund.
Contains financial information of mutual fund.

Information •
•
Lays down rights of investor.
Other additional information

(SAI)
Scheme •
•
Scheme type (open or closed end).
Investment objective.
Information •
•
Asset allocation.
Investment strategies.
Document •
•
Terms with regard to liquidity.
Fees and expenses.
(SID) • Other information relating to the scheme
RISK-O-METER AND ITS IMPORTANCE

Six levels of risk for mutual fund Importance of Risk-o-meter :

schemes: - Helps align risk that a fund carries
i. Low Risk with the risk profile of the investor.
ii. Low to Moderate Risk - Equity as asset class: Volatile: High
iii. Moderate Risk risk
iv. Moderately High Risk - Debt as asset class: Stable: Low risk
v. High Risk and - Hybrid: Moderate: Depends on
vi. Very High Risk allocation and concentration