MUTUAL FUNDS

DEFINITION
A trust that pools the savings of investors who shares a
common financial goal is known as Mutual Funds. The money
collected is then invested in financial instruments like such as
shares, debentures and other securities.
Investment in securities are spread over a wide cross section of
industries and sectors reducing the risk of the portfolio.
Mutual funds are mobilizers of saving of the small investors in
instruments like stock and money market instruments.

MYTHS ABOUT MUTUAL FUNDS

Mutual funds invest only in share
Mutual funds are prone to very high risk
Mutual funds are very new in the financial market
Mutual funds are not reliable and people rarely invest in them
The good thing about mutual funds is that you dont have to pay attention to
them.

FACTS ABOUT MUTUAL FUNDS

Equity instruments like shares are only a part of the securities held by
mutual funds also invest in debt securities which are relatively much safer.
Mutual funds are there in India since 1964.Mutual funds market had
evolved in U.S.A and is there for the last 60 years.
Mutual funds are the best solution for people who want to manage risk and
get good returns.

INVESTOR
S
pool their
money
with..

RETURNS:
Passed back
to..

A CYCLE
PROCES
S

SECURITY
Generates..

FUND
MANAGER:
Invest in..

FEATURES
Mobilizing small savings
Investment avenue
Professional Management
Better Liquidity
Reduced Risk
Investment protection

TYPES OF MUTUAL FUNDS

FUNDS ON INVESTMENT
PERIOD

FUNDS BY MATURITY PERIOD

Equity

Income

Open Ended

Balance Fund

Close Ended

Money Market

Gilt Fund

Index Fund

SCHEME ACCORDING TO MATURITY

PERIOD
A mutual fund scheme can be classified by open-ended scheme or closeended scheme depending on its maturity period.
1.

open ended scheme

2.

Close ended scheme

FUND ACCORDING TO INVESTMENT

OBJECTIVE
Equity
Income
Balance Fund
Money Market
Gilt Fund
Index Fund

ADVANTAGES
Diversification
Economies of scale
Divisibility
Liquidity
Professional management

DISADVANTAGES
High expense ratios and sales charges
Management abuses
Tax inefficiency
Poor trade execution
Misleading advertisement

SYSTEMATIC
INVESTMENT PLAN

WHAT IS SIP.?
Systematic investment plan is an effective way to do financial planning that
allows you to invest a fixed amount regularly at a specified frequency say,
weekly, monthly or quarterly according to convenience.
Sip work best for investors who are seeking for long term goals such as
children higher education or for their retirement plans.

FEATURES OF SIP..

Periodic investing
Minimum and maximum duration
Amount
Multiple sip
Auto debit

BENEFITS
Habit of saving
Timing the market
Tax free long term gains
Flexible
Goal planning

DISADVANTAGE OF SIP
Limited option of dates
Fixed amount
Stopping intermediate payment
Lot of delay between actual application & start/stop of SIP
Does not suit people with unpredictable cash flow

HOW DOES SIP WORK

SIP is a flexible and easy investment plan . Your money is auto debited from
your bank account and invested into a specific mutual fund scheme.
You are allocated certain number of units based on the on going market rate
called NAV(net asset value) for the day.
Every time you invest money, additional unit of the scheme are purchase at
the market rate and added to your account.

POWER OF COMPOUNDING
Once ram approach to shyam with a business idea for start a new business
and ask for investment. Shyam also like his idea but gives option to ram .
1st option he would give him 1 lakh every day for 31 days .
2nd option- starting with 1 paisa he would double the money every day for
next 31 days

DAY 1

Option 1 RS

Option 2 Paisa

100000

0.01

100000

0.02

100000

0.04

100000

0.08

100000

0.16

100000

0.32

100000

0.64

100000

1.28

100000

2.56

10

100000

5.12

11

100000

10.24

12

100000

20.48

13

100000

40.96

14

100000

81.92

 Ram with out a thought goes for the first option as he clearly sees Rs 31lakhs
at the end of the month.
He does not even consider the second option.
As promised shyam gives him 1lakh per day but still ask to ram to think twice
and closely Analyses the second option.
The curious ram goes back to his room and works out the figure on excel sheet
.

FUND STRUCTURE
Fund Sponsor

Trustees

Asset Management Company

Depository

Agent

Custodian

FUND SPONSOR
Any person or corporate body that establishes the fund and register it with
SEBI.
Form a trust and appoint a Board of Directors.
Appoints Custodian and Asset Management Company either directly or
through Trust, in accordance with SEBI regulations.
SEBI regulations also define that sponsor must contribute at least 40% to the
net worth of the AMC.

TRUSTEES
Created through a document called the Trust Deed that is executed by the
Fund Sponsor and registered with SEBI.
The trust the mutual fund may be managed by a Board Of Trustees a body
of individuals or a Trust Company a corporate body.
Protector of unit holders interests.
2/3 of the trustees shall be independent persons and shall not be
associated with the sponsors.

ASSET MANAGEMENT COMPANY

AMC acts as an invest manager of the Trust under the Board Supervision and
direction of the Trustees.
It has to be approved and registered with SEBI.
Will float and manage the different investment schemes in the name of Trust
and in accordance with SEBI regulations.
Acts in interest of the unit holders and reports to the trustees.
At least 50% of directors on the board are independent of the
sponsor or the trustees.

STRUCTURE OF MUTUAL FUNDS

CUSTODIAN :
Has the responsibility of physical handling and safe keeping of the securities.
Should be independent of the sponsors and registered with SEBI.
DEPOSITORIES :
Indian capital markets are moving away from physical certificates for
securities to Dematerialized form with a Depository.
Will hold the Dematerialized security holdings of the Mutual Fund.

SALES PRACTICES
AGENT COMMISSIONS
No rules prescribed for governing the maximum or minimum commissions
payable by a fund to its agents.
As per SEBI regulations, 1996 all initial expenses including brokerage charges
paid to agents cannot exceed 6% of resources raised under the scheme.
Excess distribution charges have to be borne by the AMC.
A no load fund is authorized to charge the schemes with the commissions
paid to agents as part of the regular management and marketing expenses
allowed by SEBI.