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A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as a ‘a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments’. The definition has been further extended by allowing mutual funds to diversify their activities in the following areas:
· Portfolio management services
· Management of offshore funds
· Providing advice to offshore funds
· Management of pension or provident funds
· Management of venture capital funds
· Management of money market funds
· Management of real estate funds
A mutual fund serves as a link between the investor and the securities market by mobilising savings from the investors and investing them in the securities market to generate returns.
Benefits of Mutual Funds
An investor can invest directly in individual securities or indirectly through a financial intermediary. Globally, mutual
funds have established themselves as the means of investment for the retail investor.
1. Professional management:
2. Portfolio diversification:
3. Reduction in transaction costs:
7. Tax benefits
9. Stability to the stock market
10. Equity research
Growth of Mutual Funds in India
The Indian mutual fund industry has evolved over distinct stages. The growth of the mutual fund industry in India can be divided into four phases: Phase I (1964-87), Phase II (1987-92),Phase III (1992-97), and Phase IV (beyond 1997).
Phase I: The mutual fund concept was introduced in India with the setting up of UTI in 1963.
Phase II: The second phase witnessed the entry of mutual fund companies sponsored by nationalised banks and insurance companies. In 1987, SBI Mutual Fund and Canbank Mutual Fund were set up as trusts under the Indian Trust Act, 1882. In 1988, UTI floated another offshore fund, namely, The India Growth Fund which was listed on the New York Stock Exchange (NYSB).
Phase III: The year 1993 marked a turning point in the history of mutual funds in India. Tile Securities and Exchange Board of India (SEBI) issued the Mutual Fund Regulations in January 1993. SEBI notified regulations bringing all mutual funds except UTI under a common regulatory framework. Private domestic and foreign players were allowed entry in the mutual fund industry. Kothari group of companies, in joint venture with Pioneer, a US fund company, set up the first private mutual fund the Kothari Pioneer Mutual Fund, in 1993.
Phase IV: During this phase, the flow of funds into the kitty of mutual funds sharply increased. This significant growth was aided by a more positive sentiment in the capital market, significant tax benefits, and improvement in the quality of investor service.
Types of Mutual Fund Schemes
The objectives of mutual funds are to provide continuous liquidity and higher yields with high degree of safety to
investors. Based on these objectives, different types of mutual fund schemes have evolved.
Functional Portfolio Geographical Other
Open-Ended Event Income Funds Domestic Sectoral Specific
Close-Ended Scheme Growth Funds Off-shore Tax Saving
Interval Scheme Balanced Funds ELSS
Money Market Special
PIE Ratio Fund
1. Open-ended schemes: In case of open-ended schemes, the mutual fund continuously offers to sell and repurchase its units at net asset value (NAV) or NAV-related prices. Such funds announce sale and repurchase prices from time-to-time. UTI’s US-64 scheme is an example of such a fund. The key feature of open-ended funds is liquidity.
2. Close-ended schemes: Close-ended schemes have a fixed corpus and a stipulated maturity period ranging between 2 to 5 years. Investors can invest in the scheme when it is launched. The scheme remains open for a period not exceeding 45 days. Investors in close-ended schemes can buy units only from the market, once initial subscriptions are over and thereafter the units are listed on the stock exchanges where they dm be bought and sold.
3. Interval scheme: Interval scheme combines the features of open-ended and close-ended schemes. They are open for sale or redemption during predetermined intervals at Nonrelated prices.
1. Income funds:
2. Growth funds:
3. Balanced funds:
4. Money market mutual funds:
5. Gilt funds:
6. Load funds:
7. Index funds:
8. PIE ratio fund:
9. Exchange traded funds:
Mutual Fund Investors
Mutual funds in India are open to investment by
a. Residents including
· Resident Indian Individuals, including high net worth
individuals and the retail or small investors. Indian
· Indian Trusts/Charitable Institutions
· Non-Banking Finance Companies
· Insurance Companies
· Provident Funds
b. Non-Residents, including
· Non-Resident Indians
· Other Corporate Bodies (OCBs)
c. Foreign entities, namely, Foreign Institutional Investors
(FIIs) registered with SEBI. Foreign citizens/ entities are
however not allowed to invest in mutual funds in India
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