In today’s scenario, mutual funds have become extremely popular.

For the last 20 years,

which was once just another obscure financial instrument is now a part of our daily lives.

More than 80 million people, or one half of the households in America, invest in mutual

funds. That means that, in the United States alone, trillions of dollars are invested in

mutual funds.

In fact, too many people, investing means buying mutual funds. After all, its common

knowledge that investing in mutual funds is (or at least should be) better than simply

letting your cash waste away in a savings account, but, for most people, that's where the

understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange

language that is interspersed with jargon that many investors don't understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the

market. However, it's not that easy. Mutual funds are an excellent idea in theory, but, in

reality, they haven't always delivered. Not all mutual funds are created equal, and

investing in mutual’s isn't as easy as throwing your money at the first salesperson who

solicits your business.

Thus, further in this text has been explained the basics of mutual funds and cleared up

some of the myths around them. On the basis of which it can be then decided whether or

not mutual funds are at all safe & if so then which are the best among them???
DEFINITION
Following are some of the definitions of Mutual Funds:-

 Mutual funds are investment funds in which a large number of investors combine

their money to purchase securities such as stocks or bonds. These securities make up a

shared investment portfolio based on an investment strategy that is common to all fund

investors.

 Mutual funds are money-managing institutions set up to professionally invest the

money pooled in from the public. These schemes are managed by Asset Management

Companies (AMC), which are sponsored by different financial institutions or

companies.

 Accounting meaning=”An investment vehicle which is comprised of a pool of funds

collected from many investors for the purpose of investing in securities such as

stocks, bonds, money market securities and similar assets. Mutual funds are operated

by money mangers, who invest the fund's capital and attempt to produce capital gains

and income for the fund's investors. A mutual fund's portfolio is structured and

maintained to match the investment objectives stated in its prospectus”.

 Investment meaning: One of the main advantages of a mutual fund is that it gives

small investors access to a well-diversified portfolio of equities,bonds and other

securities, which would be quite difficult (if not impossible) to create with a small

amount of capital. Each shareholder participates proportionally in the gain or loss of

the fund. Mutual fund units, or shares, are issued and can typically be purchased or

redeemed as needed at the current net asset value per share (NAVPS).
FEATURES /CHARACTERISTICS OF MUTUAL
FUND:-
A Mutual Fund is a financial intermediary and works as an investment company. It has

distinct features & characteristics which differentiate it from other financial

intermediaries. Some of the features of a mutual fund are:

i. Mutual fund is a pool of financial resources. Investors bring their individual funds

together. Sometimes, the funds, which otherwise may not come for investment in the

capital market, are invested through mutual funds.

ii. Mutual funds are professionally managed. The resources collected by mutual
funds

are managed by professionals & experts in investment. These professionals can

undertake specialized investment analysis such as fundamental analysis, technical

analysis, etc., which are not otherwise expected on the part of individual

investors.

iii. Mutual fund is an indirect investing. The individual investors invest in the
mutual

fund which, in turn, invests in the shares, debentures and other securities in the capital

market. The proportionate funds given by an investor are represented by the units of

mutual fund. Investors have no direct claim on these units. The shares,

debentures are owned by the mutual fund. Investors have no direct claim on these

securities. Of course, in case of closure or liquidation of the mutual fund, all the

proceeds of these securities are proportionally distributed among the unit holders.
iv. Investment in mutual fund is not borrowing-lending relationship. Investors
do not

lend money to the mutual fund, rather they invest. In fact, the investors own mutual

fund. Consequently, the investors have to share the gain or losses of operations of

the mutual funds.

v. Mutual fund is a representative of investors. The mutual funds collect the funds
from investors under a particular investment scheme. As a representative, the

mutual fund has to invest these funds as per the designated scheme only.

In nutshell, a mutual fund mobilizes the savings of a large number of

small investors & invests the amount in a common investment. Investors get the

benefit of diversifying their portfolio and experience of professional managers to

make best investment.

WORKING OF MUTUAL FUND:-

The working of the mutual fund starts with an investors and even end with an investor. A

Mutual fund represents pooled savings/funds of different types of securities. They have to

take different decisions from time to time. The revenue returns may be distributed by the

Mutual funds among the unit holders. Capital appreciation in the Mutual funds also

belongs to the investors. The flow chart below describes broadly the working of a mutual

fund:
 Mutual Fund Operation Flow Chart

TYPES OF MUTUAL FUNDS SCHEME IN INDIA-

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. The following table gives an

overview into the existing types of schemes in the Industry.

TYPES OF MUTUAL FUND SCHEMES:-

• By Structure or life span

o Open - Ended Schemes

o Close - Ended Schemes
o Interval Schemes
 • By Investment Objective

o Growth Schemes
o Income Schemes

• By portfolio

o Balanced Schemes
o Equity schemes
o Debt schemes

• By maturity of securities

o Money Market Schemes

o Capital market schemes

• By load

o Load schemes
o No load schemes

• By special schemes

o Index schemes
o Offshore schemes & domestic schemes
o Gilt securities schemes
o Exchange traded funds
o Fund of funds
o Tax Saving Schemes

CLASSIFICATION OF MUTUAL FUNDS –

There are more mutual funds than stocks. It's important to understand that each mutual

fund has different risks and rewards. In general, the higher the potential return, the higher

the risk of loss. Although some funds are less risky than others, all funds have some level

of risk - it's never possible to diversify away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions
of investments and investment strategies’ .Mutual funds may launch different schemes to

offer the following:

 Regular & steady flow of income,

 High capital appreciation,

 Capital appreciation & regular return, and

 Return with tax benefits.

Let's go over the many different flavors of funds, starting with the safest and then work

through to the more risky.

Money Market Funds-

These funds are a great place to park one’s money. Whether one is storing money for

emergencies, saving for the short-term, or looking for a place to store cash from the sale

of an investment, money market funds are a safe place to invest. These funds invest in

short-term debt instruments and typically produce interest rates that double what a bank

can offer in a checking account or savings account and rival the returns of a CD

(Certificate of Deposit). The beauty of money market funds is that one can often write

cheques out of your account and they provide a high amount of liquidity (ability to cash

out quickly) not found in CD's. These funds are not FDIC insured, but in the history of

money market funds no money market fund has ever folded, yet many banks have failed

and many investors with over $100,000 lost out. The money market consists of short-

term debt instruments, mostly Treasury bills. This is a safe place to park your money.
You won't get great returns, but you won't have to worry about losing your principal. A

typical return is twice the amount you would earn in a regular checking/savings account

and a little less than the average certificate of deposit (CD).

Bond Funds-

Bond funds carry more risk than money market funds and are often used to produce

income (useful in retirement) or to help stabilize a portfolio (diversification). Income

funds are named appropriately: their purpose is to provide current income on a steady

basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income"

are synonymous. These terms denote funds that invest primarily in government and

corporate debt. While fund holdings may appreciate in value, the primary objective of

these funds is to provide a steady cash flow to investors. As such, the audience for these

funds consists of conservative investors and retirees. Bond funds are likely to pay higher

returns than certificates of deposit and money market investments, but bond funds aren't

without risk. Because there are many different types of bonds, bond funds can vary

dramatically depending on where they invest. For example, a fund specializing in high-

yield junk bonds is much more risky than a fund that invests in government securities.

Furthermore, nearly all bond funds are subject to interest rate risk, which means that if r

ates go up the value of the fund goes down. The primary types of bond funds are:

• Municipal Bond Funds -uses tax-exempt bonds issued by state and local
 governments (these funds are non-taxable).

• Corporate Bond Funds -uses the debt obligations of corporations.

• Mortgage-Backed Securities Funds - uses securities representing
residential mortgages.
• Government Bond Funds -uses nation’s treasury or government securities.

Another way bond funds are often classified is by maturity, or the date the borrower

(whether it be the bank, the government, a corporation or an individual) must pay back

the money borrowed. Using this classification bonds are often called:-

• Short-term bonds
• Intermediate-term bonds
• Long-term bonds

Some of the risks associated with bond funds include:

 Credit Risk — the possibility that companies or other issuers whose

bonds are

owned by the fund may fail to pay their debts (including the debt owed to

holders of their bonds). Credit risk is less of a factor for bond funds that invest

in insured bonds or Treasury bonds. By contrast, those that invest in the bonds

of companies with poor credit ratings generally will be subject to higher risk.

 Interest Rate Risk — the risk that the market value of the bonds will go
down

when interest rates go up. Because of this, you can lose money in any bond

fund, including those that invest only in insured bonds or Treasury bonds.

Funds that invest in longer-term bonds tend to have higher interest rate risk.
  Prepayment Risk — the chance that a bond will be paid off early. For
example,

if interest rates fall, a bond issuer may decide to pay off (or "retire") its debt and

issue new bonds that pay a lower rate. When this happens, the fund may not be

able to reinvest the proceeds in an investment with as high a return or yield.

Stock Funds-

Stocks funds are considered riskier than bond funds (although certain bond funds can be

very risky) and are used for growing your money. Money market funds and bond funds

typically provide returns just a percentage or two above inflation, but stock funds should

do much better over long periods of time.

There are many types of stock funds (also referred to as equity funds). As one can

imagine, stock funds are more popular than bond funds and money market funds,

especially for younger investors. There is a break down of the most common types of

stock funds below:

1) Strategy Types:

#Growth Funds - These funds invest in stocks believed to be the fastest growing

companies in the market. Growth funds rarely provide dividend income and are

considered risky investments.

#Value Funds - These funds invest in large and mid-sized companies that appear to be
overlooked or out of favor. These undervalued stocks tend to pay dividends.

#Blend Funds - These funds are a "blend" of both growth and value funds.

2) By size:

#Large-Cap Funds - These funds invest in companies whose market value (# shares

outstanding X current market price) is large. These "blue-chip" funds tend to be well-

established corporations and tend to pay dividends.

#Mid-Cap Funds - These funds invest in mid-sized companies.

#Small-Cap Funds - These funds invest in emerging companies. These companies tend to

use profits to grow rather than pay dividends.

Balanced Funds-

The objective of these funds is to provide a balanced mixture of safety, income and

capital appreciation. The strategy of balanced funds is to invest in a combination of fixed

income and equities. A typical balanced fund might have a weighting of 60% equity and

40% fixed income. The weighting might also be restricted to a specified maximum or
minimum for each asset class. A similar type of fund is known as an asset allocation

fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically

do not have to hold a specified percentage of any asset class. The portfolio manager is

therefore given freedom to switch the ratio of asset classes as the economy moves

through the business cycle.

Equity Funds --

Funds that invest in stocks represent the largest category of mutual funds. Generally, the

investment objective of this class of funds is long-term capital growth with some income.

There are, however, many different types of equity funds because there are many

different types of equities. A great way to understand the universe of equity funds is to

use a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in and the

investment style of the manager. The term value refers to a style of investing that looks

for high quality companies that are out of favor with the market.

These companies are characterized by low P/E and price-to-book ratios and high dividend

yields. The opposite of value is growth, which refers to companies that have had (and are

expected to continue to have) strong growth in earnings, sales and cash flow. A

compromise between value and growth is blend, which simply refers to companies that

are neither value nor growth stocks and are classified as being somewhere in the middle.
For example, a mutual fund that invests in large-cap companies that are in strong

financial shape but have recently seen their share prices fall would be placed in the upper

left quadrant of the style box (large and value). The opposite of this would be a fund that

invests in startup technology companies with excellent growth prospects. Such a mutual

fund would reside in the bottom right quadrant (small and growth).

Global/International Funds -

An international fund (or foreign fund) invests only outside your home country. Global

funds invest anywhere around the world, including your home country. It's tough to

classify these funds as either riskier or safer than domestic investments. They do tend to

be more volatile and have unique country and/or political risks. But, on the flip side, they

can, as part of a well-balanced portfolio, actually reduce risk by increasing

diversification. Although the world's economies are becoming more inter-related, it is

likely that another economy somewhere is outperforming the economy of your home

country.

Specialty Funds -

This classification of mutual funds is more of an all-encompassing category that consists

of funds that have proved to be popular but don't necessarily belong to the categories

we've described so far. This type of mutual fund forgoes broad diversification to

concentrate on a certain segment of the economy.

6) Sector funds are targeted at specific sectors of the economy such as financial,

technology, health, etc. Sector funds are extremely volatile. There is a greater possibility

of big gains, but you have to accept that your sector may tank.

7) Regional funds make it easier to focus on a specific area of the world. This may mean

focusing on a region (say Latin America) or an individual country (for example, only

Brazil). An advantage of these funds is that they make it easier to buy stock in foreign

countries, which is otherwise difficult and expensive. Just like for sector funds, you have

to accept the high risk of loss, which occurs if the region goes into a bad recession.

8) Socially-responsible funds (or ethical funds) invest only in companies that meet the

criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in

industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to

get a competitive performance while still maintaining a healthy conscience.

Index Funds-

These funds try to mimic a chosen index. Examples of indices include the S&P 500, NSE

and the Russell 2000. An index is simply a group of stocks chosen to represent a

particular segment of the market. Usually this is accomplished by purchasing small

amounts of each stock in a market. Index funds are a hands-off approach to investing.
The manager is not trying to find the hot stocks or great deals. Instead, the manager is

simply trying to match a chosen index. The results are funds that are very cost efficient,

meaning the operating costs are very low, and often beat most actively managed funds.

The last but certainly not the least important are index funds. This type of mutual fund

replicates the performance of a broad market index such as the S&P 500 or Dow Jones

Industrial Average (DJIA). An investor in an index fund figures that most managers can't

beat the market. An index fund merely replicates the market return and benefits investors

in the form of low fees.

Each of the above mentioned mutual funds may have a different investment objective and

strategy and a different investment portfolio. Different mutual funds may also be subject

to different risks, volatility, and fees and expenses.

Organizational structure of Mutual Funds in

India:-

There are many entities involved and the diagram below illustrates the organizational set
up of a mutual fund:
 Organizational structure of a Mutual
Fund

Protecting Investors—Who Oversees Mutual

Funds?
Most experts agree that a primary reason for the mutual fund industry’s popularity and
success is its reputation for honesty, fairness, and integrity. That reputation is built on a

system of fund regulation specifically designed to ensure that funds are operated in the

best interests of fund shareholders. Funds are also governed by a board of directors, 40

percent of whom must be independent from the fund and who are required to act as

shareholder advocates. In practice, many funds go beyond the legal requirement and

maintain a majority of independent directors on their boards.

The following are the various authorities or bodies that look after the mutual funds so as

to protect the interest of the investors and other interested or associated parties.

The System of Fund Regulation

Mutual funds must comply with an extensive set of strict federal laws and regulations.

These laws are vigorously enforced and actively monitored by regulators to ensure

compliance.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is the main federal agency responsible

for regulating mutual fund activities by performing the following stated functions:-

#The SEC monitors fund compliance with the chief federal statute governing mutual

funds: the Investment Company Act of 1940. The 1940 Act imposes restrictions not only

on mutual funds but also on the investment advisers, directors, principal underwriters,

officers, and employees that carry out the business of the fund.

#The SEC also monitors how funds comply with other federal statutes, including the

Investment Advisers Act, the Securities Exchange Act of 1934, and the Securities Act of
1933.

#The SEC Division of Investment Management oversees and regulates funds specifically,

and also considers changes to the securities laws affecting funds and other investment

companies.

#Working within the guidelines of the 1940 Act, the SEC Division of Investment

Management, it works to prohibit conflicts of interest to ensure that funds serve only the

interests of their shareholders.

#It enforces rules requiring independent custodians to ensure funds invest as they disclose

in their prospectuses and other fund documents.

#It maintains strict standards on leveraging so that funds do not take undue risks with

fund assets.

#It ensures that funds maintain an effective system of self –governance.

#Requires understandable and full disclosure to investors and works to eliminate fraud
and abuse.

#Interprets laws and regulations for the public and for SEC inspection and enforcement

purposes.

#Reviews funds’ required filings with the SEC.

#Reviews enforcement matters involving funds.

#Develops new rules and amendments to adapt regulation to new circumstances.
Office of Compliance Inspections and Examinations

The SEC Office of Compliance Inspections and Examinations (OCIE) administers a

nationwide examination and inspection program for mutual funds and other investment

companies. OCIE inspects funds to foster compliance with the 1940 Act and other

securities laws, detects possible law violations, and keeps the SEC informed of

developments in the fund industry.

Office of Investor Education and Assistance

The SEC Office of Investor Education and Assistance (OIEA) serves individual investors

directly, ensuring that their problems and concerns are known throughout the SEC and

considered when the agency takes action. OIEA investor assistance specialists answer

questions, analyze complaints, and seek informal resolutions. This office also publishes

free brochures and other educational materials on numerous investing topics. These

brochures and other resources are available by contacting the SEC.

Association of Mutual Funds in India (AMFI):-

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organization. Association of Mutual

Funds in India (AMFI) was incorporated on 22nd August; 1995.AMFI is an apex body of

all Asset Management Companies (AMC) which has been registered with SEBI. Till date

all the AMCs that have launched mutual fund schemes are its members. It functions

under the supervision and guidelines of its Board of Directors.Association of Mutual

Funds in India have brought down the Indian Mutual Fund Industry to a professional and

healthy market with ethical lines enhancing and maintaining standards. It follows the

principle of both protecting and promoting the interests of mutual funds as well as their

unitholders.

Objectives of “Association of Mutual Funds in India”:

The Association of Mutual Funds of India works with 30 registered AMCs of the

country. It has certain defined objectives which juxtaposes the guidelines of its Board of

Directors. The objectives are as follows:

• This mutual fund association of India maintains high professional and ethical

standards in all areas of operation of the industry.

• It also recommends and promotes the top class business practices and code of

conduct which is followed by members and related people engaged in the

activities of mutual fund and asset management. The agencies who are by any

means connected or involved in the field of capital markets and financial services

also involved in this code of conduct of the association.

 • AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual

fund industry.

• Association of Mutual Fund of India does represent the Government of India, the

Reserve Bank of India and other related bodies on matters relating to the Mutual

Fund Industry.

• It develops a team of well qualified and trained Agent distributors. It implements

a programmer of training and certification for all intermediaries and other

engaged in the mutual fund industry.

• AMFI undertakes all India awareness programmers for investors in order to

promote proper understanding of the concept and working of mutual funds.

• At last but not the least association of mutual fund of India also disseminate

information on Mutual Fund Industry and undertakes studies and research either

directly or in association with other bodies.

Mutual Funds Industry in India

The origin of mutual fund industry in India is with the introduction of the concept of
mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated

from the year 1987 when non-UTI players entered the industry.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is

less than the deposits of SBI alone, constitute less than 11% of the total deposits held by

the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the

country. Large sections of Indian investors are yet to be introduced to the concept. Hence,

it is the prime responsibility of all mutual fund companies, to market the product

correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the

development of the sector. Each phase is briefly described as under-

 First Phase –Establishment and Growth of UTI

(1964-87):-
Unit Trust of India (UTI) enjoyed complete monopoly when it was established in the year

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, which attracted the largest number of investors

in any single investment scheme over the years.

UTI launched more innovative schemes in 1970s and 80s to suit the needs of different

investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift
Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (India's

first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured

returns) during 1990s. By the end of 1987, UTI's assets under management grew ten

times to Rs 6700 crores.

 Second Phase - Entry of Public Sector Funds (1987-

1993):-
The Indian mutual fund industry witnessed a number of public sector players entering the

market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of

India became the first non-UTI mutual fund in India. SBI Mutual Fund was later

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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as

assets under management. However, UTI remained to be the leader with about 80%

market share.

Mobiliz
ation as
Amo Assets
% of
1992- unt Under
gross
93 Mobi Manage
Domesti
lized ment
c
Savings

11,0
UTI 38,247 5.2%
57

Public 1,96
8,757 0.9%
Sector 4

13,0
Total 47,004 6.1%
21
 Third Phase – Emergence of Private Sector Funds
(1993-1996):-
With 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 by introducing

innovative products, investment techniques and investor-servicing technology. 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. By 1994-95, about 11 private sector funds had launched their

schemes.

 Fourth Phase – Growth and SEBI Regulations (1996

– 2004):-
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI

after the year 1996. The mobilization of funds and the number of players operating in the

industry reached new heights as investors started showing more interest in mutual funds.

Investors' interests were safeguarded by SEBI and the Government offered tax benefits to
the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was

introduced by SEBI that set uniform standards for all mutual funds in India.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal

status as a trust formed by an Act of Parliament. The primary objective behind this was to

bring all mutual fund players on the same level. UTI was re-organized into two parts: 1.

the Specified Undertaking, 2. The UTI Mutual Fund 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.

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past

schemes (like US-64, Assured Return Schemes) are being gradually wound up. In 1999,

there was a significant growth in mobilization of funds from investor’s and assets under

management which is supported by the following data

 Fifth Phase – Growth and Consolidation (since

February 2004):-

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One

is the Specified undertaking of the Unit Trust of India with AUM of Rs.29, 835 crores (as

on January 2003). 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 Ltd, 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

AUM 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.

As at the end of September, 2004, there were 29 funds, which manage assets of

Rs.153108 crores under 421 schemes.

The industry has also witnessed several mergers and acquisitions recently, examples of

which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C

Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more

international mutual fund players have entered India like Fidelity, Franklin Templeton

Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing

phase of growth of the industry through consolidation and entry of new international and

private sector players.

GROWTH IN ASSETS UNDER MANAGEMENT

Some /Major Mutual Fund Companies of

India:

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee

(India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management

(India) Ltd. was incorporated on November 4, 2003. Deutsche Bank AG is the custodian

of ABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being

represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from

India. Birla Sun Life Mutual Fund follows a conservative long-term approach to

investment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under

the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the

AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank

AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing

Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital

Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund,

acts as the Trustee Company of HSBC Mutual Fund.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the

largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup

on 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee

Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset
Management Company Limited incorporated on 22nd of June, 1993.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch

offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today

it is the largest Bank sponsored Mutual Fund in India. They have already launched 35

Schemes out of which 15 have already yielded handsome returns to investors. State Bank

of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor

base of over 8 Lakhs spread over 18 schemes.

ING Vysya Mutual Fund---

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee

Company. It is a joint venture of Vysya and ING. The AMC, ING Investment

Management (India) Pvt. Ltd. was incorporated onApril6, 1998.

Tata Mutual Fund---

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for

Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The

investment manager is Tata Asset Management Limited and its Tata Trustee Company

Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with

more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund---

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is

presently having more than 1, 99,818 investors in its various schemes. KMAMC started
its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering

to investors with varying risk - return profiles. It was the first company to launch

dedicated gilt scheme investing only in government-securities.

Unit Trust of India Mutual Fund--

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages

the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI

Asset Management Company presently manages a corpus of over Rs.20000 Crore. The

sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB),

State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of

UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index

Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund--

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The

sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is

the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which

was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of

various schemes under which units are issued to the Public with a view to contribute to

the capital market and to provide investors the opportunities to make investments in

diversified securities.

Standard Chartered Mutual Fund--

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard

Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard

Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated

with SEBI on December 20,1999.

Apart from the mutual funds mentioned above, there are many other important Mutual

fund companies as well in India like Franklin Templeton India Mutual Fund, Morgan

Stanley Mutual Fund India, Escorts Mutual Fund, Alliance Capital Mutual Fund,

Canbank Mutual Fund, Chola Mutual Fund etc

MERITS OF MUTUAL FUND-

The advantages of investing in a Mutual Fund are:

Diversification: By pooling money together in a mutual fund, investors can

purchase

stocks or bonds with much lower trading costs than if they tried to do it on their own. But

the biggest advantage to mutual funds is diversification. The best mutual funds design

their portfolios so individual investments will react differently to the same economic

conditions. For example, economic conditions like a rise in interest rates may cause

certain securities in a diversified portfolio to decrease in value. Other securities in the

portfolio will respond to the same economic conditions by increasing in value. When a

portfolio is balanced in this way, the value of the overall portfolio should gradually

increase over time, even if some securities lose value. The best mutual funds design their

portfolios so individual investments will react differently to the same economic

conditions. For example, economic conditions like a rise in interest rates may cause

certain securities in a diversified portfolio to decrease in value. Other securities in the

portfolio will respond to the same economic conditions by increasing in value. When a

portfolio is balanced in this way, the value of the overall portfolio should gradually

increase over time, even if some securities lose value.

Diversification is the idea of spreading out the money across many different types of

investments. When one investment is down another might be up. Choosing to diversify

the investment holdings reduces the attached risk tremendously.

The most basic level of diversification is to buy multiple stocks rather than just one stock.

Mutual funds are set up to buy many stocks (even hundreds or thousands). Beyond that,

one can diversify even more by purchasing different kinds of stocks, then adding bonds,

then international, and so on. It could take an investor, weeks to buy all these

investments, but if he purchases a few mutual funds he could be done in a few hours

because mutual funds automatically diversify in a predetermined category of investments

(i.e. - growth companies, low-grade corporate bonds, international small companies).

Diversification works on the basis on “Mutual Fund Wheel of Fortune” which has been

explained earlier.
Professional Management: Even under the best of market conditions, it
takes an

astute, experienced investor to choose investments correctly, and a further commitment

of time to continually monitor those investments. With mutual funds, experienced

professionals manage a portfolio of securities for investors full-time, and decide which

securities to buy and sell based on extensive research. A fund is usually managed by an

individual or a team choosing investments that best match the fund’s objectives. As

economic conditions change, the managers often adjust the mix of the fund’s investments

to ensure it continues to meet the fund’s objectives. Most mutual funds pay topflight

professionals to manage their investments. Most mutual funds pay topflight professionals

to manage their investments. These managers decide what securities the fund will buy

and sell.

Affordability: Some mutual funds accommodate investors who don't have a lot of

money to invest by setting relatively low money amounts for initial purchases,

subsequent monthly purchases, or both.

Regulatory oversight: Mutual funds are subject to many government

regulations that

protect investors from fraud. Mutual funds are subject to many government regulations

that protect investors from fraud.

Liquidity: Liquidity is the ability to readily access one’s money in an investment.

Mutual fund shares are liquid investments that can be sold on any business day. Mutual
funds are required by law to buy, or redeem, shares each business day.

The price per share at which one can redeem shares is known as the fund’s net asset value

(NAV). NAV is the current market value of all the fund’s assets, minus liabilities,

divided by the total number of outstanding shares. It's easy for investors to get their

money out of a mutual fund. Along with NAV investors also have to pay any fees and

charges assessed on redemption — at any time. Write a check, make a call, and one will

have got the cash. It's easy to get your money out of a mutual fund. Write a check, make

a call, and you've got the cash.

Convenience: One can purchase or sell fund shares directly from a fund or
through a

broker, financial planner, bank or insurance agent, by mail, over the telephone, and

increasingly by personal computer. One can also arrange for automatic reinvestment or

periodic distribution of the dividends and capital gains paid by the fund. Funds may offer

a wide variety of other services, including monthly or quarterly account statements, tax

information, and 24-hour phone and computer access to fund and account information.

You can usually buy mutual fund shares by mail, phone, or over the Internet.

Low cost: Mutual funds usually hold dozens or even hundreds of securities like
stocks

and bonds. The primary way one pays for this service is through a fee that is based on the

total value of account. Because the fund industry consists of hundreds of competing firms

and thousands of funds, the actual level of fees can vary. But for most investors, mutual

funds provide professional management and diversification at a fraction of the cost of

making such investments independently. Mutual fund expenses are often no more than

1.5 percent of one’s total investment. Expenses for Index Funds are less than that,

because index funds are not actively managed. Instead, they automatically buy stock in

companies that are listed on a specific index. Mutual fund expenses are often no more

than 1.5 percent of your investment. Expenses for Index Funds are less than that, because

index funds are not actively managed. Instead, they automatically buy stock in companies

that are listed on a specific index

Transparency: One can always inquire about the various aspects like
diversification,

working etc. from the fund. Thus, there is always a transparency in the mutual funds

Flexibility: An investor has a flexibility to opt out or to switch to other mutual

funds

and even to retrieve back his investments. This serves as an important advantage in favor

of investors.

Tax benefits: By investing in mutual funds one can enjoy certain tax benefits as
well,

as per the terms and conditions of fund and authority.

Well regulated: Mutual funds are well regulated and managed. Regulation is
done by

the government in order to protect the investors whereas management is done by the

company so as to provide better service and satisfaction to its customers.

Protecting Investors: Not only are mutual funds subject to exacting internal
standards, they are also highly regulated by the federal government through the U.S.

Securities and Exchange Commission (SEC). As part of this government regulation, all

funds must meet certain operating standards, observe strict antifraud rules, and disclose

complete information to current and potential investors. These laws are strictly enforced

and designed to protect investors from fraud and abuse. But these laws obviously cannot

help you pick the fund that is right for you or prevent a fund from losing money. You can

still lose money by investing in a mutual fund. A mutual fund is not guaranteed or

insured by the FDIC or SIPC, even if fund shares are purchased through a bank.

Time saving: Integrating the mutual fund data into one’s applications can be done
in

minutes. Also mutual funds trading can be done over the internet.

Easy access: Mutual funds provide the service of displaying the financial data

wherever one need it.

DRAWBACKS OF MUTUAL FUND:-

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock market declines in

value, the value of mutual fund shares will go down as well, no matter how balanced the

portfolio. Investors encounter fewer risks when they invest in mutual funds than when

they buy and sell stocks on their own. However, anyone who invests through a mutual

fund runs the risk of losing money.

Fees and commissions: All funds charge administrative fees to cover their
day-to-day

expenses. Some funds also charge sales commissions or "loads" to compensate brokers,

financial consultants, or financial planners. Even if a person doesn’t use a broker or other

financial adviser, he will pay a sales commission if he buys shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere
from

20 to 70 percent of the securities in their portfolios. If someone’s fund makes a profit on

its sales, he will pay taxes on the income he receive, even if he reinvests the money he

made.

Management risk: When one invests in a mutual fund, he depends on the

fund's

manager to make the right decisions regarding the fund's portfolio. If the manager does

not perform as well as one has hoped, investor might not make as much money on his

investment as he expected. Of course, if he invests in Index Funds, he will forego

management risk, because these funds do not employ managers.

Costs despite Negative Returns — Investors must pay sales charges,

annual fees,

and other expenses regardless of how the fund performs. And, depending on the timing of

their investment, investors may also have to pay taxes on any capital gains distribution

they receive — even if the fund went on to perform poorly after they bought shares.

Lack of Control — Investors typically cannot ascertain the exact make-up of a

fund's

portfolio at any given time, nor can they directly influence which securities the fund
manager buys and sells or the timing of those trades.

Price Uncertainty — with an individual stock, one can obtain real-time (or
close to

real-time) pricing information with relative ease by checking financial websites or by

calling his broker. He can also monitor how a stock's price changes from hour to hour —

or even second to second. By contrast, with a mutual fund, the price at which an investor

purchase or redeem shares will typically depend on the fund's NAV, which the fund

might not calculate until many hours after one has placed his order. In general, mutual

funds must calculate their NAV at least once every business day, typically after the major

exchanges close.
CONCLUSION:
Summing up the points earlier mentioned:

a) A mutual fund brings together a group of people and invests their money in stocks,

bonds, and other securities.

b) The advantages of mutuals are professional management, diversification, and

economies of scale, simplicity and liquidity.

c) The disadvantages of mutuals are high costs, over-diversification, possible tax

consequences, and the inability of management to guarantee a superior return.

d) There are many, many types of mutual funds. Which can be classified as asset class,

investing strategy, region, etc?

e) Mutual funds have lots of costs. Costs can be broken down into ongoing fees

(represented by the expense ratio) and transaction fees (loads).

f) The biggest problems with mutual funds are their costs and fees.

g) Mutual funds are easy to buy and sell. You can either buy them directly from the fund

company or through a third party.

h) Mutual fund ads can be very deceiving.

i) Various authorities or bodies that look after the mutual funds so as to protect the

interest of the investors and other interested or associated parties.

j) Objectives, working & structure of Mutual funds.
Sources/Bibliography:
Finding Funds

The Mutual Fund Education Alliance™ is the not-for-profit trade association of the no-

load mutual fund industry. They have a tool for searching for no-load funds at

http://www.mfea.com/FundSelector Morningstar is an investment research firm that is

particularly well known for its fund information:

http://www.morningstar.com

R.P.RUSTAGI-Investment & management (theory & practice);part IV, chapter 8

www.mutual funds.com;

www.google.com;

www.enclyclopedia.com;

www.investment & management info.com;