WHAT ARE MUTUAL FUNDS?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in
accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.
Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the
same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them.
Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come
out with a number of schemes with different investment objectives which are launched from time to time. A mutual
fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
HISTORY OF MUTUAL FUNDS IN INDIA
FIRST PHASE (1964 1987)
The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an initiative
of the Government of India and the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6700 crores of assets
under management.
SECOND PHASE (1987 1993)
1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first nonUTI Mutual Fund established in June 1987 followed by 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.
Third Phase - 1993-2003
The Mutual Fund market was made open to private players in 1993, as a result of the historic constitutional
amendments brought forward by the then Congress-led government under the existing regime
of Liberalization, Privatization and Globalization (LPG).Also, 1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The
erstwhile 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. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As
at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of
India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate
entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29,835
crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain
other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the
rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

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. With the bifurcation of the erstwhile UTI which had in March 2000
more than Rs. 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming
to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth.

ADVANTAGES:

1) Convenience
Mutual funds are an ideal investment option when you are looking at convenience and timesaving opportunity. With
low investment amount alternatives, the ability to buy or sell them on any business day and a multitude of choices
based on an individual's goal and investment need, investors are free to pursue their course of life while their
investments earn for them.

2) Low Cost
The biggest advantage for any investor is the low cost of investment that mutual funds offer, as compared to
investing directly in capital markets. Most stock options require significant capital, which may not be possible for
young investors who are just starting out.
Mutual funds, on the other hand, are relatively less expensive. The benefit of scale in brokerage and fees translates
to lower costs for investors. One can start with as low as Rs. 500 and get the advantage of long term equity
investment.

3) Diversification
Going by the adage, 'Do not put all your eggs in one basket', mutual funds help mitigate risks to a large extent by
distributing your investment across a diverse range of assets. Mutual funds offer a great investment opportunity to
investors who have a limited investment capital.

4) Liquidity
Investors have the advantage of getting their money back promptly, in case of open-ended schemes based on the Net
Asset Value (NAV) at that time. In case your investment is close-ended, it can be traded in the stock exchange, as
offered by some schemes.

5) Safety &Transparency
Fund managers provide regular information about the current value of the investment, along with their strategy and
outlook, to give a clear picture of how your investments are doing.
Moreover, since every mutual fund is regulated by SEBI, you can be assured that your investments are managed in a
disciplined and regulated manner and are in safe hands.
Every form of investment involves risk. However, skilful management, selection of fundamentally sound securities
and diversification can help reduce the risk, while increasing the chances of higher returns over time.

6) Rupee-cost averaging.

With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's
unit price. As a result, your money buys more units when the price is low and fewer units when the price is high,
which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by
investing every month or quarter rather than making sporadic investments.

TAXATION
Income received in respect of units of a mutual fund would be exempt from tax under Section 10(35) of the Incometax Act, 1961.

Long-term capital gains on sale of Units, held for a period of more than twelve months, would be taxed at the rate of
10% (plus applicable surcharge, education cess and secondary and higher education cess) under Section 115AD of
the Income-tax Act, 1961.

Short-term capital gains would be taxed at 30% (plus applicable surcharge, education cess and secondary and higher
education cess) subject to the concessional rate of tax provided for in Section 111A of the Income-tax Act, 1961.

As per Section 10(38) of the Income-tax Act, 1961, any long-term capital gains arising from the sale of units of an
equity-oriented fund where such transaction of sale is chargeable to Securities Transaction Tax, shall be exempt
from Income tax.

Factors that determine the type of Fund

1. Current Scenario - Your age, financial dependents, assets and liabilities, sources of income, level of engagement
(active or passive investor) and investible capital
2. Past Experience - Knowledge about investment products, inclination to learn, nature and composition of the last
held portfolio and its performance
3. Future Outlook - Time horizon available to fulfill the investment objectives, liquidity requirements in the near
future, importance of tax savings vis-a-vis return on investment
4. Investment Attitude - Willingness towards risk taking, ability to withstand short-term notional losses in return for
long-term high returns
Based on the responses to above questions, an experienced MF advisor can determine your risk appetite and classify
you as a conservative, assertive or an aggressive investor.

Selection of Mutual Funds Based on Risk Profile

The risk appetite is an important factor while choosing the mutual funds scheme/s that fits your goals of growth,
stability and timeframe.
1. A conservative investor's primary objective is to preserve the capital and receive regular income. They have a low
tolerance for risk and hence a major chunk of their investment should be allocated to debt or money market mutual
funds like income schemes, FMPs, etc.
2. A moderately aggressive investor is the one who is willing to take controlled risk for moderate returns. Such
investors are generally recommended a mix of balanced, income, and index schemes so that they can benefit from a
balanced portfolio.
3. Aggressive investors consider risk as an opportunity and leverage their experience and knowledge to take
intelligent financial decisions. The major share of their investment, therefore, goes to growth and equity schemes.
For most investment schemes, risk and returns are directly proportional. It is important to create the right balance
between the two based on your objectives and risk appetite.

DIFFERENT TYPES OF MUTUAL FUNDS:

1) Equity Funds:
These funds invest in shares of companies that are listed on the stock exchanges. Depending upon the sub-category
of equity class, we may define them as:

Large-cap funds: Large-cap funds are, typically, the least risky funds. These companies are among the least volatile
companies as they are mostly in mature businesses. You must allocate highest to this category of investment.

Mid- and small-cap funds: These funds are riskier than large-cap funds. They invest in small-sized companies that
are in their growing stages. Since these companies are in their growing stages, they can get volatile in an uncertain
market. These are high-risk companies; they typically rise more than large-cap funds in rising markets, but fall more
than large-cap companies in falling markets.

ELSS Funds:These Funds are aimed at enabling investors to avail tax rebates under Section 80-C of the Income Tax
Act. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks
associated are like any equity-oriented scheme.

Diversified Funds: Diversified Equity funds are those that spread their investments across various sectors. For e.g
IT, Pharma, Banking, Oil & Gas, Real estate, Telecom, etc. So they are not restricted to one specific sector. They
diversify their allocations across sectors and thus minimise the risk of over-concentration in any one particular
sector. Over the long term, diversified equity funds have had the best track records.

2) Debt Funds:

These funds invest in fixed income bearing instruments like corporate bonds, debentures, government securities,
commercial paper and other money market instruments. These funds are relatively low-risk-low-return schemes.
These funds are not affected because of fluctuations in equity markets. However, opportunities of capital
appreciation are also limited in such funds. The NAVs (Net Asset Value) of such funds are affected because of
change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these fluctuations. If a person desires
relatively stable performance, these schemes are right for him.
Debt funds can be further categorized into
1.

2.

3.

4.

5.

Money market or liquid income schemes: Liquid or money market funds invest in highly liquid money
market instruments for very short investment periods such as a few days. These funds are suitable for parking
surplus money for a very short period of time.
Gilt funds: Gilt funds invest in sovereign securities like central and state government bonds. These carry
no credit risk but are subject to interest rate risks. The prices of these securities fluctuate with interest rate
movements. These funds have varying investment periods to suit investor needs.
Income funds: These funds invest in government securities, corporate bonds and debentures apart from
money market instruments. These funds carry a slightly higher risk than gilt funds as they are exposed to credit
risk. Income funds come with various investment horizons like ultra-short term, short term, medium term and
long term funds to suit varying investor needs.
G-Secs: Another type of debt funds is government securities (G-sec) funds. These come in long-term and
short-term variety. These are mostly seasonal funds as they invest only in government securities; scrips issued by
the Reserve Bank of India. Though government securities are the safest debt instruments because they are issued
by the government of India and hence come guaranteed, they are also the most volatile because they are the most
liquid debt instruments in the debt market. Allocate to these funds when you expect interest rates to fall.

Fixed Maturity Plans (FMP): These have a fixed tenure like deposits, though no return is promised or
guaranteed. These funds invest in securities that mature in line with the funds maturity.

3) HYBRID FUNDS:
These funds invest in equities and debt investments in varying proportions. Balanced funds invest predominantly
(more than 65% of the corpus) in equities with the rest in debt. These are relatively more stable than pure equity
funds.
Monthly Income Plans (MIPs) invest about 75 to 80% of their corpus in debt and the rest in equities. The objective
is to aim for steady returns offered by debt with possible capital appreciation offered by equity to provide a kicker to
the returns.
And there are also funds called Asset Allocation funds that vary their equity exposure widely from 0% to 90% based
on the market outlook. These funds do not have a fixed asset allocation.

4) Gold ETFs
Gold ETFs are funds that are based on gold. You can bet on gold without buying physical gold by investing in these
gold ETFs. With these funds, you are not only relieved of the hassles of safekeeping your gold but are also assured
of purity since these funds invest in certified gold bars. You are also spared of the wastage and making charges that
you would typically incur when you buy gold from jewellers. With certain forms of paper gold, you also get the
option of converting it to physical gold with select jewellers.

5) Sector Specific Funds:

These are the funds/schemes which 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), Natural Resources Funds,
Real Estate Funds, Banking, etc. The returns in these funds are dependent 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.
They may also seek advice of an expert.
6) Fund of Funds (FoF)
FoFs invest in other mutual funds either of the same fund house or others. There are funds that invest in mutual
funds abroad. There are multi asset funds too that invest in units of debt, equity and gold too. It is easy to achieve
diversification and lower risk through FoF. However, you will have to bear higher management expenses.
7) Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index
(Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in
the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

BIBLIOGRAPHY
http://www.sebi.gov.in/faq/mf_faq.html
https://www.amfiindia.com/research-information/mf-history
http://www.hdfcfund.com/InvestorCorner/ContentDisplay.aspx?ReportID=C54F64AD-DFB9-4A70-BD2098509F2107FA
http://www.allbankingsolutions.com/Banking-Tutor/Mutual-funds-in-India.htm

http://www.moneycontrol.com/news/mf-experts/whatdifferent-typesmutual-funds_1095865.html?
utm_source=ref_article

1) 100% Income Tax exemption on all Mutual Fund dividends in case of residents.

2) Equity Funds - Short term capital gains is taxed at 15%. Taxes on Long term capital gains are not applicable.
Debt Funds - Short term capital gains are taxed as per the slab rates applicable to you. Long term capital gains taxes
to be lower of 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after
factoring indexation benefit.

3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt
from the payment of dividend tax for a period of 3 years from 1999-2000.

Average assets under management[edit]

Assets under management (AUM) is a financial term denoting the market value of all the funds being managed by a
financial institution (a mutual fund, hedge fund, private equity firm, venture capital firm, or brokerage house) on
behalf of its clients, investors, partners, depositors, etc.
The average assets under management of all mutual funds in India for the quarter Dec 2015 to Mar 2016 (in Lakh)
is given below:

Sr
No

10

11

Mutual Fund Name

Shriram Asset
Management Company

Sahara Asset
Management Company

Deutsche Asset
Management Company

Escorts Asset
Management Company

IIFCL Asset
Management Asset

IIFL Asset Management

Company

PPFAS Asset
Management Company

Quantum Asset
Management Company

IL & FS Infra Asset

Management Company

Peerless Asset
Management Company

Edelweiss Asset
Management Company

BOI AXA Asset

Total

QAAUM AUM

Prev QAAUM

Inc/Dec

Schemes

( Lakh.)

( Lakh.)

( Lakh.)

Percentage

3716.98

3711.53

0%

68

9929.16

11002.32

-758

-7%

27698

17194

10504

61%

60

28559.18

29222.27

-663

-2%

35797.56

34293.89

1504

4%

18

48543.76

42203.84

6340

15%

61357.1

62931.88

-1575

-3%

15

66093.04

65531.63

561

1%

12

92296.34

90029.5

2267

3%

57

98524.1

102441.7

-3917

-4%

70

167774.29

163236.28

4538

3%