Chapter -

3.1.INTRODUCTION
There are a lot of investment avenues available today in the financial market for an investor with an investable
surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return.
He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent
trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People
began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had
wealth management services provided by many institutions. However they proved too costly for a small investor.
These investors have found a good shelter with the mutual funds. Mutual fund industry has seen a lot of changes in
past few years with multinational companies coming into the country, bringing in their professional expertise in
managing funds worldwide.In the past few months there has been a consolidation phase going on in the mutual fund
industry in India. Now investors have a wide range of Schemes to choose from depending on their individual
profiles.

3.2.INTRODUCTION TO THE INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, 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

3.2.1 FIRST PHASE - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the Reserve Bank of
India and functioned under the Regulatory and administrative control of 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. 6,700 crores of assets under management.

3.2.2 SECOND PHASE - 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS)

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 non-

UTI 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.
 3.2.3 THIRD PHASE - 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS)
The entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the
Indian investors a wider choice of fund families. 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.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds In
India and also the industry has witnessed several mergers and acquisitions. 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.
3.2.4 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, viz., the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund which
functions under the SEBI MF Regulations. With the bifurcation of the erstwhile UTI and several mergers taking
place among different private sector funds, the MF industry entered its fourth phase of consolidation.
Following the global melt-down in the year 2009, securities markets all over the world had tanked and so was
the case in India. Most investors who had entered the capital market during the peak, had lost money and their
faith in MF products was shaken greatly. The abolition of Entry Load by SEBI, coupled with the after-effects of
the global financial crisis, deepened the adverse impact on the Indian MF Industry, which struggled to recover and
remodel itself for over two years, in an attempt to maintain its economic viability which is evident from the
sluggish growth in MF Industry AUM between 2010 to 2013.
3.2.5 FIFTH CURRENT PHASE (CURRENT ) SINCE MSY 2014
Taking cognisance of the lack of penetration of MFs, especially in tier II and tier III cities, and the need for
greater alignment of the interest of various stakeholders, SEBI introduced several progressive measures in September
2012 to “re-energize” the Indian Mutual Fund industry and increase MFs’ penetration.
In due course, the measures did succeed in reversing the negative trend that had set in after the global melt-
down and improved significantly after the new Government was formed at the Center.
Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well as the number of
investor folios (accounts).
 The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the first time as on 31 st
May 2014 and in a short span of about three years the AUM size had increased more than two folds and
crossed ₹ 20 trillion (₹20 Lakh Crore) for the first time in August 2017. The AUM size crossed ₹ 30
trillion (₹30 Lakh Crore) for the first time in November 2020.
  The overall size of the Indian MF Industry has grown from ₹ 12.02 trillion as on 28 th February 2015 to ₹
64.53 trillion as on 28th February 2025, more than 5 fold increase in a span of 10 years.
 The MF Industry’s AUM has grown from ₹ 27.23 trillion as on February 29, 2020 to ₹64.53 trillion as
on February 28, 2025, more than 2 fold increase in a span of 5 years.
 The no. of investor folios has gone up from 8.88 crore folios as on 29-February-2020 to 23.23 crore as
on 28-February-2025, more than 2fold increase in a span of 5 years.
 On an average 23.91 lakh new folios are added every month in the last 5 years since February 2020.

The growth in the size of the industry has been possible due to the twin effects of the regulatory measures taken
by SEBI in re-energising the MF Industry in September 2012 and the support from mutual fund distributors in
expanding the retail base.
MF Distributors have been providing the much needed last mile connect with investors, particularly in smaller
towns and this is not limited to just enabling investors to invest in appropriate schemes, but also in helping investors
stay on course through bouts of market volatility and thus experience the benefit of investing in mutual funds.
3.2.TYPES OF MUTUAL FUND

1. Money market funds

These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’
acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower
potential return then other types of mutual funds. Canadian money market funds try to keep their net asset value
(NAV) stable at $10 per security.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government bonds, investment- grade corporate
bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis, mostly
through interest that the fund earns. High-yield corporate bond funds are generally riskier than funds that hold
government and investmentgrade bonds.

3. Equity funds
These funds invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is
usually a higher risk that you could lose money. You can choose from different types of equity funds including
those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that
pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.

4. Balanced funds

These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher
returns against the risk of losing money. Most of these funds follow a formula to split money among the different
types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds.
Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to
bonds.

5. Index funds

These funds aim to track the performance of a specific index such as the S&P/TSX Composite Index. The value
of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than
actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as
many investment decisions.

6. Specialty funds

These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For
example, a socially responsible fund may invest in companies that support environmental stewardship, human
rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

7. Fund-of-funds

These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification

easier for the investor. The MER for fund-of- funds tend to be higher than stand-alone mutual funds.

WHY SELECT MUTUAL FUNDS?

The risk return trade-off indicates that if investor is willing to take higher risk, then correspondingly,
he can expect higher returns and vice versa if he pertains to lower risk instruments, which would be
satisfied by lower returns. For example, if investors opt for bank FD, which provide moderate return with
minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out
more return which is slightly higher as compared to the bank deposits but the risk involved also increases in
the same proportion. Thus, investors choose mutual funds as their primary means of investing, as Mutual
funds provide professional management, diversification, convenience and liquidity.That doesn’t mean
mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts
funds which are less risky but are also invested in the stock markets which involves a higher risk but can
expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives
market which is considered very volatile.

ADVANTAGES MUTUAL FUNDS:

  Diversification: Mutual funds help the investors to diversify their portfolio across a large number of
securities so as to minimize the risk. This allows the investors to add a substantial number of securities to
their portfolio for a much lower price than purchasing each security individually.

 Liquidity: Investors can sell their holdings back to the fund at the price equal to the closing net asset v
value of the fund’s holdings.
 Professional Management: Each fund’s investment are carefully chosen and closely monitored by

qualified professionals. Hence mutual funds are ideal for those investors who lack financial know- how to

manage their own portfolio.

 Convenience: Mutual fund investments are much convenient to that of individual investments.

Choosing a mutual fund is ideal for those people who don’t have time to micro manage their portfolios.

 Reinvestment of Income: Mutual funds allows to reinvest dividends and interest in additional fund shares.

This has the advantage of the opportunity to grow portfolio without paying regular transaction fees for
purchasing additional mutual fund shares

 Range of Investment Options and Objectives: There are various funds for the investors customized
according to their risk taking level like emerging market funds, investment grade bond funds and balanced
funds etc. there are different funds to suit varied investment style of the investors.

 Affordability: Mutual funds are designed in such a way so as to pool money from various investors
thereby making it accessible for even the middle income and lower income group.

DISADVANTAGES OF MUTUAL FUNDS:

 Capital Gains: Whenever the fund distributes gains it made from selling individual holdings, it is taxable
even if the investors retain the shares.

 Fees and Expenses: Mutual funds assess a sales charge on all purchases which includes annual expenses
of the funds also. It is called as “Load”.
The average expense ratio for managed funds is always greater than index funds.
 Over diversification: Over diversification reduces not only the risk but also the returns. Too much
diversification can negate the reason of market exposure in first place.

 Cash Drag: Mutual Funds need to maintain assets in cash to satisfy investor redemptions and to maintain
liquidity for purchases and annual expenses are paid on all fund assets regardless whether they are invested
or not. This causes liquidity costs for the investor.

TYPES OF MUTUAL FUNDS SCHEMES

 Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance
and return expectations etc. thus mutual funds has Variety of flavors, being a collection of many stocks, an
investor can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme
to choose from.

A). BY STRUCTURE

. Open - ended schemes:

An open-end fund is one that is available for subscription all through the year. These do not have a fixed
maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices.

The key feature of open-end schemes is liquidity.

. Close - ended schemes:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years.
The fund is open for subscription only during a specified period. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. In order to provide an exit route to the
investors, some close- ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. .

. Interval schemes:
Interval Schemes are that scheme, which 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

predetermined intervals at NAV related prices. B) BY NATURE

1. Equity Fund:
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. 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)

Equity investments are meant for a longer time horizon; thus, Equity funds rank high on the risk-
return matrix.
 2. Debt funds:
The objective of these Funds is 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.

• MIPs: 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 scheme

• Short Term Plans (STPs): Meant for investment horizon for three to six monthsThese funds

primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).

• Liquid Funds: Also known as Money Market Schemes, these funds provide 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.

2. BALANCED FUNDS:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and
fixed income securities, which are in line with pre-defined investment objective of the scheme.
These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and
the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter Each
category of funds is backed by an investment philosophy, which is pre-defined in the objectives
of the fund. The investor can align his own investment needs with the funds objective and
invest accordingly.
C) INVESTMENT OBJECTIVE:

Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide 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.

Income Schemes:
Income Schemes are also known as debt schemes. The aim of these schemes is to provide
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.

Balanced schemes:
Balanced Schemes aim to provide 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 aim to provide easy liquidity, preservation of capital and moderate
income. These schemes generally invest in safer, short-term instruments, such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money.

Load funds:

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell
units in the fund, a commission will be payable. Typically, entry and exit loads range from 1% to
2%. It could be worth paying the load, if the fund has a good performance history.

NO-load funds:

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no-load fund is
that the entire corpus is put to work.

O:THER SCHEMES:

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 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), Petroleum
stocks, 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 riskier compared to diversified funds. Investors need to
keep a watch on the performance of those sectors/industries and must exit at an appropriate time.