MODULE 3: MUTUAL FUNDS AND FINANCIAL

PLANNING ESSENTIALS
MUTUAL FUNDS
A mutual fund is a company that pools money from many investors and invests the money in
securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual
fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents
an investor’s part ownership in the fund and the income it generates.

A mutual fund is a professionally-managed investment scheme, usually run by an asset

management company that brings together a group of people and invests their money in
stocks, bonds and other securities

All the mutual funds are registered with SEBI. They function within the provisions of strict
regulation created to protect the interests of the investor.​
​
The biggest advantage of investing through a mutual fund is that it gives small investors
access to professionally-managed, diversified portfolios of equities, bonds and other
securities, which would be quite difficult to create with a small amount of capital.

HISTORY OF MUTUAL FUNDS IN INDIA

Phase 1 (1964-1987) – Establishment

The naissance of mutual funds in India can be traced back to 1963 when the Government of
India established the Unit Trust of India (UTI) through an Act of Parliament. The objective
was to encourage and facilitate wider participation in the financial market by investors (and
institutions?) with the eventual goal of strengthening the economy of the country. The Unit
Scheme, launched in 1964, was the first scheme that was launched by the UTI. UTI initially
worked under the administrative and regulatory control of the Reserve Bank of India (RBI),
but was delinked from the RBI in 1978, following which the Industrial Development Bank of
India (IDBI) took over its administration and regulation.

Phase 2 (1987-1993) - Launch of Public Sector Mutual Funds

In 1987, the first public sector mutual funds entered the market. These were mutual funds
set up and managed by Insurance Corporation of India (LIC), General Insurance Corporation
of India (GIC) and various public sector banks. For example, SBI Mutual Fund was the first
non-UTI mutual fund established in June 1987. This was subsequently followed by Canbank
Mutual Fund in December 1987, Punjab National Bank Mutual Fund in August 1989, Indian
Bank Mutual Fund in November 1989, Bank of India Mutual Fund in June 1990, Bank of
Baroda Mutual Fund October 1992. LIC also established its mutual fund in June 1989 and
GIC set up its mutual fund in December 1990. At the end of 1993, the Mutual Fund industry
had assets under management of ฀47,004 crores.

Phase 3 (1993-2003) – Launch of Private Sector Mutual Funds

In April 1992, the Securities and Exchange Board of India was set up to regulate the
securities market and protect the interests of investors, also promote the development of
the industry. The first set of SEBI Mutual Fund Regulations came into effect in 1993 and
applied to all funds except UTI. The first private mutual fund was Kothari Pioneer (now
merged with Franklin Templeton MF), which was registered in July 1993. As at the end of
January 2003, there were 33 MFs with a total AUM of ฀1,21,805 crores, out of which UTI
alone had AUM of Rs.44,541 crores.

Phase 4 (2003 – 2014) – Consolidation and slowdown

In February 2003, the Unit Trust of India Act, 1963 was repealed and UTI was bifurcated into
two separate entities – the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI
Mutual Fund, which functions under the SEBI MF Regulations. During this time, several
private sector funds also underwent mergers, and the industry entered into a consolidation
phase. The global meltdown of 2009 had an impact on financial markets around the world as
well as in India. Investors who entered the market during the peak saw steep falls in their
portfolio values and consequently lost faith in investments in financial markets, which
included mutual funds. The abolition of Entry Load by SEBI, along with the after-effects of
the global financial crisis, hurt the Indian mutual fund industry, which struggled to recover
for over two years, in an attempt to maintain its economic viability, which is evident from
the sluggish growth the industry's AUM between 2010 to 2013.

Phase 5 (since 2014)

To correct and rejuvenate the mutual fund industry after years of sluggish growth, SEBI
introduced several new measures to enhance the image of and trust in mutual funds among
investors. There was also a specific objective to penetrate more Tier II and Tier III cities to
increase the pool of investors within the country and thus revitalise the market. These were
successful in general, and the industry stabilised and moved towards growth. Since May
2014, the Industry has had a consistent growth in inflows and an increase in the AUM as well
as the number of investor folios.

Some of the important milestones and information are listed below:

• May 2014: The industry’s AUM crossed ฀10 trillion (฀10 Lakh Crore) for the first time.

• August 2017: The industry’s AUM crossed ฀ 20 trillion (฀20 Lakh Crore)

• November 2020: The industry’s AUM crossed ฀ 30 trillion (฀30 Lakh Crore)

• Between 2012 and 2022 the Indian MF Industry has grown from ฀ 6.99 trillion to ฀37.22
trillion
• Between 2017 and 2022, the number of investor folios went up from 5.72 crore folios to
13.33 crore.

• On average, 12.69 lakh new folios are added every month in the last 5 years since May
2017.

Mutual fund distributors have played an important role in the achievement of these
milestones by providing a connection with investors, particularly in Tier II and Tier III cities,
which helped expand the retail base. Mutual fund distributors not only enable investments
by providing consultations on the various types of funds available for investment based on
investors’ objectives, but also play a role in helping them navigate market volatility and thus
experience the benefit of investing in mutual funds.

Mutual fund distributors have especially had a big role in popularising Systematic Investment
Plans (SIP) among investors. As on May 31 2022, there were 5.48 crore SIP accounts. 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.

MF distributors have also had a major role in popularising Systematic Investment Plans (SIPs)
over the years. In April 2016, the no. of SIP accounts has crossed 1 crore mark and as on 31st
May 2022, the total no. of SIP Accounts are 5.48 crore.

KEY PARTICIPANTS IN THE MUTUAL FUND INDUSTRY

The key participants in the mutual fund industry are:

• Sponsor: A sponsor is a person or an entity that sets up a mutual fund. The sponsor or
sponsors are like the promoters of a company. They set up a trust for the management of
the fund.

• Trustee: The trustees of the mutual fund hold the property of the fund for the benefit of
the unitholders. The trustees hold general power of superintendence and direction over the
AMC and monitor its performance and compliance with SEBI Regulations. SEBI Regulations
require that at least two-thirds of the directors of the trustee company or board of trustees
must be independent and not affiliated with the sponsors.

• Asset Management Company: An Asset Management Company, or AMC manages the

funds by making investments in various types of securities. This must be approved by SEBI.
SEBI also required that 50% of the directors of AMC must be independent.

• Custodian: The Custodian holds the securities of the various schemes of the fund in its
custody. The custodian must be registered with SEBI.

• Subscribers: Are the investors who commit to investing in a financial instrument before the
actual closing of the purchase.
• Registrar & Transfer Agents: A registrar and transfer agent (RTA) acts as a mediator or
agent between investors and mutual fund houses.

• Fund Manager: A fund manager is a person who oversees the activities of the mutual
fund. In other words, the fund manager is responsible for implementing a fund’s investment
strategy and managing its trading activities. They also manage analysts, conduct research,
and make investment decisions.

• Fund Accountant: A fund accountant is responsible the day-to-day aspects of accounting

for one or more assigned mutual funds. They also prepare Net Assets Values, yields,
distributions, and other fund accounting outputs for subsequent review.

Features of mutual funds

​ Liquidity

​ Professional Management

​ Portfolio Diversification

​ Flexibility

​ Income Tax Benefits

​ Low Cost

​ Properly Regulated

​ Ease Purchasing

MAJOR FUND HOUSES IN INDIA

Some of the major Fund Houses in India include :
• Axis AMC
• Aditya Birla SunLife AMC
• Franklin Templeton Asset Management (India)
• HDFC AMC
• Invesco Asset Management (India)
• Kotak Mahindra AMC
• LIC Mutual Fund AMC
• Motilal Oswal AMC
 • Nippon Life India Asset Management
• SBI Funds AMC
• UTI AMC

MUTUAL FUND SCHEMES

There is a wide range of mutual fund structures for different investor goals. Mutual funds
can be broadly classified based on the following criteria:

●​ By Organisation Structure

Open-ended schemes: These are perpetual, and open for subscription and repurchase on a
continuous basis on all business days at the current NAV.

Close-ended schemes: They have a fixed maturity date. The units are issued at the time of
the initial offer and redeemed only on maturity. The units of close-ended schemes are
mandatorily listed to provide exit route before maturity and can be sold/traded on the stock
exchanges.

Interval schemes: These allow purchase and redemption during specified transaction
periods (intervals). The transaction period has to be for a minimum of 2 days and there
should be at least a 15-day gap between two transaction periods. The units of interval
schemes are also mandatorily listed on the stock exchanges.

●​ By Portfolio Management Strategy

Active Funds: In an active fund, the fund manager is ‘Active’ in deciding whether to Buy,
Hold, or Sell the underlying securities and in stock selection.

Passive Funds: In a passive fund the fund manager has a passive role, as the stock selection /
Buy, Hold, Sell decision is driven by a Benchmark Index (Index Funds or Exchange Traded
Funds) and the fund manager just replicates a stated index.

●​ By Investment Objective

Growth Funds: Growth Funds are typically designed to provide capital appreciation. They
mainly invest in growth-oriented assets, like equity. Investment in growth-oriented funds
require a medium to long-term investment horizon.

Income Funds: The objective of Income Funds is to provide regular and steady income to
investors. Income funds invest in fixed income securities like corporate Bonds, debentures
and government securities. The fund’s return comes from the interest income earned on
these investments as well as capital gains from any change in the value of the securities.
Liquidity: Liquid Schemes, Overnight Funds and Money market mutual fund are investment
options for investors seeking liquidity and principal protection, with commensurate returns.
The funds invest in money market instruments like commercial papers, commercial bills,
treasury bills, Government securities having an unexpired maturity up to one year, call or
notice money, certificate of deposit, usance bills, and any other instruments as specified by
the Reserve Bank of India with maturities not exceeding 91 days. The return from the funds
will depend upon the short-term interest rate prevalent in the market.

●​ By Underlying Portfolio

These are schemes which are based on the type of instruments in which the funds are
invested. These are classified as Equity, Debt, Money market, multi-asset schemes.

Equity scheme primarily invests in equity instruments, where as debt scheme invests in
fixed income securities.

Money market/liquid schemes are those that invest in short-term money market
instruments.

Multi-asset schemes are also called as hybrid schemes, as these invests in more than one
asset class and combines equity, debt and money market instruments

●​ Based on the investment objectives.

By Sector: Sectoral funds invest in a particular sector of the economy such as infrastructure,
banking, technology or pharmaceuticals etc. Since these funds focus on just one sector of
the economy, they limit diversification, and are thus riskier. Timing of investment into such
funds are important, because the performance of the sectors tend to be cyclical.

Examples of Sector Specific Funds - Equity Mutual Funds with an investment objective to
invest in

• Pharma & Healthcare Sector

• Banking & Finance Sector

• FMCG (fast moving consumer goods) and related sectors.

• Technology and related sector

NET ASSET VALUE

Net Asset value or NAV refers to the value of each unit of the scheme. NAV is one of the
most important concept to understand in a mutual fund.

All subscriptions into the fund and all redemptions out of the fund are based on the NAV of
the units on the date of subscription/ redemption.

This is calculated as follows:

NAV = Unit-holders’ Funds in the Scheme (a.k.a. Net Assets) ÷ No. of outstanding Units

For example, if unit-holders’ funds in the scheme are taken as Rs 365 crore and the number
of outstanding units are 42 crore,

then the NAV will be:

Rs 365 crore ÷ 42 crore = Rs. 8.69 per unit

Alternate formula for calculating NAV:

NAV = (Total Assets – Liabilities/Expenses other than to Unit holders) ÷ No. of outstanding
Units

RISK-O-METER
It is used to measure the level of risk of a mutual fund scheme.

LEVELS OF RISK:

❖​ Low Risk

❖​ Low to Moderate Risk

❖​ Moderate Risk

❖​ Moderately High Risk

❖​ High Risk

❖​ Very High Risk

CRITERIA FOR SELECTION OF MUTUAL FUNDS

❖​ Return Expectation

❖​ Risk Tolerance

❖​ Investment Horizon

Mutual Fund Risk Measures

A successful mutual fund is one that delivers higher returns for a given level of risk
compared to its peers. To evaluate mutual funds, analysts and investors use statistical risk
measures that help compare performance and assess volatility.

These include:

1. Alpha (α)

Measures the excess return of a mutual fund compared to its benchmark index, adjusted for
risk.

o​ Positive Alpha (> 0): Fund outperformed its benchmark.

o​ Negative Alpha (< 0): Fund underperformed.

2. Beta (β)

Measures the fund’s volatility relative to the market/index.

●​ Interpretation:

o​ β=1\beta = 1β=1: Same volatility as the market.

o​ β>1\beta > 1β>1: More volatile (higher risk).

o​ β<1\beta < 1β<1: Less volatile (lower risk).

●​ Example: A beta of 1.2 means the fund is expected to move 20% more than the
market.

3. Standard Deviation

Measures the total volatility or total risk of a mutual fund’s returns. Indicates how
widely the returns vary from the average return over time.

●​ Interpretation:

o​ Higher standard deviation = More fluctuations in returns = Higher risk.

4. Treynor Ratio

Measures returns earned in excess of the risk-free rate per unit of market risk (beta).

●​ Interpretation: A higher Treynor ratio indicates better risk-adjusted performance,

considering only systematic risk.
5. Sharpe Ratio

Measures returns in excess of the risk-free rate per unit of total risk (standard deviation).

●​ Interpretation: A higher Sharpe ratio indicates better overall risk-adjusted

performance.

FINANCIAL PLANNING

It is the long term approach of carefully managing your fund to help you reach your goals
and dreams while overcoming the financial obstacle. It is a step by step process for achieving
one’s life objectives. It serves as a guide as you navigate through life. It essentially assists
you in gaining control of your income, expenses and investments allowing you to manage
your money and reach your goals.

STEPS INVOLVED IN FINANCIAL PLANNING

The following is the six-step process that is used in the practice of financial planning:

1. Establish and define the client-planner relationship: The planning process begins when
the client engages a financial planner and describes the scope of work to be done and the
terms on which it would be done.

2. Gather client data, including goals: The future needs of a client require clear definition in
terms of how much money will be needed and when. This is the process of defining a
financial goal.

3. Analyse and evaluate financial status: The current financial position of a client needs to
be understood to make an assessment of income, expenses, assets and liabilities. The ability
to save for a goal and choose appropriate investment vehicles depends on the current
financial status.

4. Develop and present financial planning recommendations: The planner makes an

assessment of what is already there, and what is needed in the future and recommends a
plan of action. This may include augmenting income, controlling expenses, reallocating
assets, managing liabilities and following a saving and investment plan for the future.

5. Implement the financial planning recommendations: This involves executing the plan
and completing the necessary procedure and paperwork for implementing the decisions
taken with the client.

6. Monitor the financial planning recommendations: The financial situation of a client can
change over time and the performance of the chosen investments may require review. A
planner monitors the plan to ensure it remains aligned to the goals and is working as
planned and makes revisions as may be required.

PERSONAL BUDGET
It is a document that keeps track of your money you have coming in from various sources as
well as the money you have going out to cover your expenses.

NEED AND IMPORTANCE OF PERSONAL BUDGET

Control your spending

Achieve your financial goals

Prepare for emergencies

Prevent debt traps

Financial well being

PROFORMA OF PERSONAL BUDGET

Profession Age Marital Dependents Location Budget type

Status

Teacher 24 Single Nil Bangalore Monthly

PROFORMA OF PERSONAL BUDGET

Sl.no Expenses Amount Sl.No Incomes Amount

1 House rent 9,000 1 Salary 35,000

2 Groceries 1,500 2 Tution fee 25,000

3 Electricity and Water 1,200 3 Online Classes 10,000

4 Mobile Phone and 1,500 4 Interest form 1,000

broadband fixed deposit

5 Petrol and Gas 2,500

6 Personal Groom 1,000

7 Entertainment 2,000

8 Health and Fitness 1,500

 9 Vehicle Maintenance 1,000

Total Expenses 21,200 Total Income 71,000

Net Monthly income(excess of income over expenses)+ Surplus 49,800

Less: Non-essential purchases(Approx) 3,800

Savings 46,000

FAMILY BUDGET

It is the amount of money needed by a family to maintain a modest and satisfactory level of
living

PROFORMA OF FAMILY BUDGET

Family Adults Children Earners Dependents Budget type

Size

6 4 2 2 4 Monthly

Sl.no Expenses Amount Sl.No Incomes Amount

1 Housing 25,000 1 Father’s Salary 55,000

2 Groceries 10,000 2 Mother’s Salary 25,000

3 Telephone/Mobile 2,000 3 Interest on Savings 3,000

4 Electricity/ Gas 2,000

5 Water/ Sewer 2,000

6 Cable/Internet 500

7 Maintenance 2,000

8 Childcare 5,000

9 Tuition/pets 7,000
 Total Expenses 55,500 Total Income 83,000

Net Monthly income(excess of income over expenses)+ Surplus 27,500

Less: Non-essential purchases(Approx)(unplanned expenses) 3,000

Savings 24,500