Mutual Fund

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A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The collected money is then invested in capital market instruments such as shares, debentures and other securities. Each mutual fund has a pre-defined objective, so you can choose a fund that is more suitable to your requirements.

The 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. Thus a Mutual Fund is the most appropriate investment option for the common man as it offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively low cost.


In India, the mutual fund industry started with the setting up of the erstwhile Unit Trust of India in 1963 at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases:

Phase 1 : 1964 - 1987

  • Established on 1963 by an Act of Parliament.
  • Set up by the RBI and functioned under the Regulatory i.e. SEBI and administrative control of the RBI.
  • In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the control.
  • The first scheme launched by UTI was Unit Scheme 1964.
  • At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Phase 2 : 1987 - 1993

  • Entry of Public Sector Funds i.e. non-UTIs like public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
  • SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987.
  • Then followed Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).
  • LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
  • At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Phase 3 : 1993 - 2003

  • Entry of Private Sector Funds in 1993.
  • Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
  • The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996.
  • Many foreign mutual funds also set up funds in India.
  • At the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Phase 4 : February 2003 onwards

  • UTI was bifurcated into two separate entities.
  • One is the Specified Undertaking of the Unit Trust of India representing broadly, the assets of US 64 scheme, assured return and certain other schemes. It functions under an administrator and under the rules framed by Government of India.
  • The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.
  • The mutual fund industry has entered its current phase of consolidation and growth. In 2011, the mutual fund industry had assets under management of Rs. 5,92,250 crores.

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Mutual funds have many advantages compared to direct investing in individual securities. These include:


  • An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investor’s portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio.


  • In mutual fund you can invest or redeem any time, there is no restriction. But this happens only in open ended funds not in close ended.

Professional investment management

  • Mutual Funds are managed by professional investment managers, along with the needed research into available investment options, which ensure a much better return as they are in a better position to understand the markets than individual investor.

Service and convenience

  • It becomes very convenient to invest in Mutual Funds as it is managed by the expert and you get to choose the schemes available. Funds also offer additional benefits like regular investment and regular withdrawal options.

Large Investments

  • Here you are able to participate in investments that may be available only to larger investors.

Minimization of risk

  • The potential losses are also shared with other investors.

Reduction of transaction costs

  • You get the benefit of economies of scale; because of larger volumes the funds pay lesser costs and it is passed on to the investors.


  • Fund gives regular information to its investors on the value of the investments in addition to disclosure of portfolio held by their scheme, the proportion invested in each class of assets and the fund manager's investment strategy.

Choice of schemes

  • You can choose the fund based on their risk tolerance and expected returns.


  • You can easily transfer you holdings from one scheme to other and get updated market information.

Government oversight

  • Mutual funds are subject to government regulations.

Tax Benefits

  • Dividend income from mutual fund units is exempted from income tax with effect from July 1, 1999. Investors can get rebate from tax under section 88 of Income Tax Act, 1961 by investing in Equity Linked Saving Schemes of mutual funds. Further benefits are also available under section 54EA and 54EB with regard to relief from long term capital gains tax in certain specified schemes.



Open-Ended Schemes

An open-ended scheme is available for subscription all through the year. It does not have a fixed maturity. You can conveniently buy and sell units at Net Asset Value (NAV) related prices.The key feature of the Open-ended schemes is liquidity.

Close-Ended Schemes

Close-end fund has a pre-specified maturity period. You can invest directly in the scheme at the time of the initial issue. After the initial offer period closes, there are two exit options available to an investor depending on the structure of the scheme.

Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. On account of demand and supply situation, expectations of unit holder and other market factors, the market price at the stock exchanges could vary from the net asset value (NAV) of the scheme. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however you can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.

Interval Schemes

Interval Schemes combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

Equity Funds

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. Equity investments are meant for a longer time horizon. The Equity Funds are sub-classified depending upon their investment objective, as follows:

  • Diversified Equity Funds
  • Mid-Cap Funds
  • Sector Specific Funds
  • Tax Savings Funds (ELSS)

Debt Funds

Debt fund aims to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds:

  • Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds:

  • Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.


  • Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short term Plans (STPs):

  • Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds:

  • Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.


Balanced Funds invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. The main objective is to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Income Schemes

Income Schemes, also known as debt schemes aims at providing regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Growth Schemes

Growth Schemes, also known as equity schemes aims at providing capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Balanced Schemes

Balanced Schemes as the name suggest aims at providing both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes

Money Market Schemes aims at providing easy liquidity, preservation of capital and moderate income to the investors. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Tax-Saving Schemes

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Sector Specific Schemes

These funds invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds will depend on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.