INTRODUCTION

A mutual fund is a financial intermediary that pools the savings of investors for collective
investment in a diversified portfolio of securities. A fund is mutual as all of its returns, minus
its expenses, are shared by the funds investors.
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.
According to the above definition, a mutual fund in India can raise resources through sale of
units to the public. It can be set up in the form of a Trust under the Indian Trust Act. 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 mobilizing
savings from the investors and investing them in the securities market to generate returns. Thus,
a mutual fund is akin to portfolio management services (PMS). Although, both are conceptually
same, they are different from each other. Portfolio management services are offered to high net
worth individuals; taking into account their risk profile, their investments are managed
separately. In the case of mutual funds, savings of small investors are pooled under a scheme and
the returns are distributed in the same proportion in which the investments are made by the
investors/unit-holders. Mutual fund is a collective savings scheme. Mutual funds play an
important role in mobilizing the savings of small investors and channelizing the same for
productive ventures in the Indian economy.
DEFINATION
SEBI

Mutual fund means a fund established in the form of a trust to raise monies 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 or gold or gold related instruments or real estate assets.

History of Mutual Funds

The history of mutual funds, dates back to 19th century Europe, in particular, Great Britain.
Robert Fleming set up in 1868 the first investment trust called Foreign and Colonial Investment
Trust which promised to manage the finances of the moneyed classes of Scotland by spreading
the investment over a number of different stocks. This investment trust and other investment
trusts which were subsequently set up in Britain and the US, resembled todays close-ended
mutual funds. The first mutual fund in the US, Massachusetts Investors Trust, was setup in
March 1924. This was the first open-ended mutual fund.
The stock market crash in 1929, the Great Depression, and the outbreak of the Second World
War slackened the pace of growth of the mutual fund industry. Innovations in products and
services increased the popularity of mutual funds in the 1950s and 1960s. The first international
stock mutual fund was introduced in the US in 1940. In 1976, the first tax-exempt municipal
bond funds emerged and in 1979, the first money market mutual funds were created. The latest
additions are the international bond fund in 1986 and arm funds in 1990. This industry witnessed
substantial growth in the eighties and nineties when there was a significant increase in the
number of mutual funds, schemes, assets, and shareholders. In the US, the mutual fund industry
registered a ten fold growth in the eighties (1980-89) only, with 25% of the household sectors
investment in financial assets made through them. Fund assets increased from less than $150
billion in 1980 to over $4 trillion by the end of 1997. Since 1996, mutual fund assets have
exceeded bank deposits. The mutual fund industry and the banking industry virtually rival each
other in size.
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.
The Unit Trust of India (UTI) was the first mutual fund set up under the UTI Act, 1963, a special
act of the Parliament. It became operational in 1964 with a major objective of mobilising savings
through the sale of units and investing them in corporate securities for maximising yield and
capital appreciation. This phase commenced with the launch of Unit Scheme 1964 (US-64) the
first open-ended and the most popular scheme. UTIs investible funds, at market value (and
including the book value of fixed assets) grew from Rs 49 crore in1965 to Rs 219 crore in 1970-

71 to Rs 1,126 crore in 1980-81 and further to Rs 5,068 crore by June 1987. Its investor base had
also grown to about 2 million investors. It launched innovative schemes during this phase. Its
fund family included five income-oriented, open-ended schemes, which were sold largely
through its agent network built up over the years. Master share, the equity growth fund launched
in 1986, proved to be a grand marketing success. Master share was the first real close-ended
scheme floated by UTI. It launched India Fund in 1986-the first Indian offshore fund for
overseas investors, which was listed on the London Stock Exchange (LSE). UTI maintained its
monopoly and experienced a consistent growth till 1987.
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). By 1990, the two nationalised insurance giants, LIC and GIC, and
nationalised banks, namely, Indian Bank, Bank of India, and Punjab National Bank had started
operations of wholly-owned mutual fund subsidiaries. The assured return type of schemes floated
by the mutual funds during this phase were perceived to be another banking product offered by
the arms of sponsor banks. In October 1989, the first regulatory guidelines were issued by the
Reserve Bank of India, but they were applicable only to the mutual funds sponsored by FIIs.
Subsequently, the Government of India issued comprehensive guidelines in June 1990 covering
all mutual funds. These guidelines emphasised compulsory registration with SEBI and an arms
length relationship be maintained between the sponsor and asset management company (AMC).
With the entry of public sector funds, there was a tremendous growth in the size of the mutual
fund industry with investible funds, at market value, increasing to Rs 53,462 crore and the
number of investors increasing to over 23 million. The buoyant equity markets in 1991-92 and
tax benefits under equity-linked savings schemes enhanced the attractiveness of equity funds.
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. Kothari Pioneer
introduced the first open-ended fund Prima in 1993. Several other private sector mutual funds
were set up during this phase. UTI launched a new scheme, Master-gain, in May 1992, which
was a phenomenal success with a subscription of Rs 4,700 crore from 631akh applicants. The
industrys investible funds at market value increased to Rs 78,655 crore and the number of
investor accounts increased to 50 million. However, the year 1995 was the beginning of the
sluggish phase of the mutual fund industry. During 1995 and 1996, unit holders saw an erosion in
the value of their investments due to a decline in the NA V s of the equity funds. Moreover, the
service quality of mutual funds declined due to a rapid growth in the number of investor

accounts, and the inadequacy of service infrastructure. A lack of performance of the public sector
funds and miserable failure of foreign funds like Morgan Stanley eroded the confidence of
investors in fund managers. Investors perception about mutual funds, gradually turned negative.
Mutual funds found it increasingly difficult to raise money. The average annual sales declined
from about Rs 13,000 . crore in 1991-94 to about Rs 9,000 crore in 1995 and 1996.
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 Copy Right: Rai University 11.671.3 189
MANAGEMENT OF FINANCIAL SERVICES investor service. Investible funds, at market
value, of the industry rose by June 2000 to over Rs 1,10,000 crore with UTI having 68% of the
market share. During 1999-2000 sales mobilisation reached a record level of Rs 73,000 crore as
against Rs 31,420 crore in the preceding year. This trend was, however, sharply reversed in
2000-01. The UTI dropped a bombshell on the investing public by disclosing the NAV of US-64its flagship scheme as on December 28,2000, just at Rs 5.81 as against the face value of Rs 10
and the last sale price of Rs 14.50. The disclosure of NAV of the countrys largest mutual fund
scheme was the biggest shock of the year to investors. Crumbling global equity markets, a
sluggish economy coupled with bad investment decisions made life tough for big funds across
the world in 2001-02. The effect of these problems was felt strongly in India also. Pioneer m, JP
Morgan and Newton Investment Management pulled out from the Indian market. Bank of India
MF liquidated all its schemes in 2002. The Indian mutual fund industry has stagnated at around
Rs 1,00,000 crore assets since 2000-01. This stagnation is partly a result of stagnated equity
markets and the indifferent performance by players. As against this, the aggregate deposits of
Scheduled Commercial Banks (SCBs) as on May 3, 2002, stood at Rs 11,86,468 crore. Mutual
funds assets under management (AUM) form just around 10% of deposits of SCBs. The Unit
Trust of India is losing out to other private sector players. While there has been an increase in
AUM by around 11% during the year 2002, UTI on the contrary has lost more than 11% in
AUM. The private sector mutual funds have benefited the most from the debacle ofUS-64 of
UTI. The AUM of this sector grew by around- 60% for the year ending March 2002.
ADVANTAGES
Advantage #1: Mutual funds can reduce the anxiety of investing. Most investors constantly live
with a certain amount of anxiety and fear about their investments because they feel they lack one
or more of the following essentials: (1) market knowledge, (2) investing experience, (3) selfdiscipline, (4) a proven game plan, or (5) time. As a result, they often invest on impulse or
emotion. Because of their inherent design that taps professional expertise and spreads risk,
mutual funds can go a long way toward relieving the anxiety associated with investing.
Advantage #2: Mutual fund shares can be purchased in such small amounts, so it's easy to get
started. If you have been putting off starting your investing program because you don't know
which stocks to invest in (and you can't afford your own personal investment consultant!),

mutual funds will get you on your way. Investing in a mutual fund usually doesnt require a large
sum of money. Most fund organizations do have minimum amounts needed to open an account
(usually $1,000 to $3,000), but minimums are often dramatically lower for IRAs and for
"automatic deposit accounts" (where you agree to make regular monthly deposits to build your
account).
Advantage #3: Mutual fund accounts can be added to whenever you want (often or seldom)
and in small amounts. After meeting the initial minimum to open your account, you can add just
about any amount you want. To make your purchase work out evenly, mutual funds sell
"fractional" shares. For example, if you invest $100 in a fund selling at $7.42 a share, the fund
organization will credit your account with 13.477 shares ($100.00 divided by $7.42 = 13.477).
Advantage #4: Mutual funds reduce risk through diversification. Stock funds typically hold from
50 to 500 stocks in their portfolios; the average is around 100. They do this so that any loss
caused by the unexpected collapse of any one stock will have only a relatively minor effect on
the pool as a whole. Without the availability of mutual funds, the investor with just $2,000 to
invest would likely put it all in just one or two stocks (a risky way to go). But by using a mutual
fund, that same $2,000 can make the investor a part owner in a large, professionally researched
and managed portfolio of stocks.
Advantage #5: Price movements of mutual funds are more predictable than those of individual
stocks. Their extensive diversification, coupled with outstanding stock selection, makes it highly
unlikely that the overall market will move up without carrying almost all stock mutual funds up
with it. For example, on Sept. 8, 2008, a day when the Dow jumped 290 points, more than 95%
of stock mutual funds were up for the day. Yet, of the more than 3,200 individual stocks that
traded on the New York Stock Exchange, only 63% ended the day with a gain. The rest ended the
day unchanged (2%) or actually fell in price (35%).
Advantage #6: The past performance of mutual funds is a matter of public record. Advisory
services, financial planners, and stockbrokers have records of past performance, but how public
are they? And how were they computed? Did they include every recommendation made for every
account? Mutual funds have fully disclosed performance histories, which are computed
according to set standards. With a little research, you can learn exactly how various mutual funds
fared in relation to inflation or other investment alternatives.
Advantage #7: Mutual funds provide full-time professional management.
Highly trained investment specialists are hired to make the decisions as to which stocks to buy.
The person with the ultimate decision-making authority is called the portfolio manager. The
manager possesses expertise in many financial areas, and hopefully has learned through
experience to avoid the common mistakes of the amateur investor. Most important, the
manager is expected to have the self-discipline necessary to doggedly stick with the mutual
funds strategy even when events move against him for a time.

Advantage #8: Mutual funds allow you to efficiently reinvest your dividends. If you were to
spread $5,000 among five different stocks, your quarterly dividend checks might amount to $10
from each one. It's not possible to use such a small amount to buy more shares without paying
very high relative commissions. Your mutual fund, however, will gladly reinvest any size
dividends for you automatically. This can add significantly to your profits over several years.
Advantage #9: Mutual funds offer you automatic withdrawal plans.
Most funds let you sell your shares automatically in an amount and frequency of your choosing.
This pre-planned selling enables the fund to mail you a check for a specified amount monthly or
quarterly. This allows investors in stock funds that pay little or no dividends to receive periodic
cash flow.
Advantage #10: Mutual funds provide you with individual attention.
It has been estimated that the average broker needs 400 accounts to make a living. How does he
spread his time among those accounts? The commonsense way would be to start with the largest
accounts and work his way down. Where would that leave your $2,000 account? But in a mutual
fund, the smallest member of the pool gets exactly the same attention as the largest because
everybody is in it together.
Advantage #11: Mutual funds can be used for your IRA and other retirement plans. Mutual funds
offer accounts that can be used for IRAs and 401(k) plans. Theyre especially useful for rollovers
(which is when you take a lump sum payment from an employer's pension plan because of your
retirement or termination of employment and must deposit it into an IRA investment plan
account within 60 days). The new IRA rollover account can be opened at a bank, mutual fund, or
brokerage house and the money then invested in stocks, bonds, or money market securities.
These rollover accounts make it possible for you to transfer your pension benefits to an account
under your control while protecting their tax-deferred status. They are also useful for combining
several small IRAs into one large one.
Advantage #12: Mutual funds allow you to sell part or all of your shares at any time and get your
money quickly. By regulation, all open-end mutual funds must redeem (buy back) their shares at
their net asset value whenever you wish. It's usually as simple as a toll-free phone call. Of
course, the amount you get back will be more or less than you initially put in, depending on how
well the stocks in the portfolio have done during the time you were a part owner of the pool.
Advantage #13: Mutual funds enable you to instantly reduce the risk in your portfolio with just a
phone call. Most large fund organizations (usually referred to as "families") allow investors to
switch from one of their funds to another via a phone call or over the Web and at no cost. One
practical use of this feature is that is makes it easy to reallocate your capital between funds that
invest in different types of asset classes (large-company growth, large-company value, small-

company growth, small-company value, foreign stocks, and fixed-income securities) as your
goals and market expectations evolve.
Advantage #14: Mutual funds pay minimum commissions when buying and selling for the pool.
They buy stocks in such large quantities that they always qualify for the lowest brokerage
commissions available. An average purchase of stock can easily cost the small investor 2%-4%
in commissions to buy and sell (depending on broker, dollar size of order, and number of shares).
On the other hand, the cost is a mere fraction of 1% on a large purchase like $100,000. Many
investors would show gains rather than losses if they could save almost 3% on every trade! The
mutual-fund pool enjoys the savings from these massive volume discounts, enhancing the
profitability of the pool. Eventually, then, part of that savings is yours. (These commission
savings, however, should not be confused with the annual operating expenses that every
shareholder pays.)
Advantage #15: Mutual funds provide a safe place for your investment money. Mutual funds are
required to hire an independent bank or trust company to hold and account for all the cash and
securities in the pool. This custodian has a legally binding responsibility to protect the interests
of every shareholder. No mutual fund shareholder has ever lost money due to a mutual fund
bankruptcy.
Advantage #16: Mutual funds handle your paperwork for you. Capital gains and losses from the
sale of stocks, as well as dividend- and interest-income earnings, are summarized into a report
for each shareholder at the end of the year for tax purposes. Funds also manage the day-to-day
chores such as dealing with transfer agents, handling stock certificates, reviewing brokerage
confirmations, and more.
Advantage #17: Mutual funds can be borrowed against in case of an emergency. Although you
hope it will never be necessary, you can use the value of your mutual fund holdings as collateral
for a loan. If the need is short-term and you would rather not sell your funds because of tax or
investment reasons, you can borrow against them rather than sell them.
Advantage #18: Mutual funds involve no personal liability beyond the investment risk in the
portfolio. Many investments, primarily partnerships and futures, require investors to sign papers
wherein they agree to accept personal responsibility for certain liabilities generated by the
undertaking. Thus, it is possible for investors to actually lose more money than they invest. This
arrangement is generally indicative of speculative endeavors; I encourage you to avoid such
arrangements. In contrast, mutual funds incur no personal risk.
Advantage #19: Mutual fund advisory services are available that can greatly ease the research
burden. Due to the tremendous growth in the popularity of mutual fund investing, there has been
a big jump in the number of investment newsletters that specialize in researching and writing
about mutual funds. My Sound Mind Investing newsletter, for example, offers model portfolios

geared to your risk tolerance and stage of life. We provide specific buy/sell recommendations
that are updated each month. (To learn more, go to
Advantage #20: Mutual funds are heavily regulated by the federal government. The fund
industry is regulated by the Securities and Exchange Commission and is subject to the provisions
of the Investment Company Act of 1940. The act requires that all mutual funds register with the
SEC and that investors be given a prospectus, which must contain full information concerning
the funds history, operating policies, cost structure, and so on. Additionally, all funds use a bank
that serves as the custodian of all the pool assets. This safeguard means the securities in the fund
are protected from theft, fraud, and even the bankruptcy of the fund management organization
itself. Of course, money can still be lost if poor investment decisions cause the value of the pool's
investments to fall in value.
www.SoundMindInvesting.com.)
DISADVANTAGES
Fluctuating Returns
Mutual funds are like many other investments without a guaranteed return. There is always the
possibility that the value of your mutual fund will depreciate. Unlike fixed-income products,
such as bonds and Treasury bills, mutual funds experience price fluctuations along with the
stocks that make up the fund. When deciding on a particular fund to buy, you need to research
the risks involved - just because a professional manager is looking after the fund, that doesn't
mean the performance will be stellar.
Another important thing to know is that mutual funds are not guaranteed by the U.S.
government, so in the case of dissolution, you won't get anything back. This is especially
important for investors in money market funds. Unlike a bank deposit, a mutual fund will not be
FDIC insured.
Diversification?
Although diversification is one of the keys to successful investing, many mutual fund investors
tend to overdiversify. The idea of diversification is to reduce the risks associated with holding a
single security; overdiversification (also known as diworsification) occurs when investors
acquire many funds that are highly related and so don't get the risk reducing benefits of
diversification. To read more on this subject, see this article.
At the other extreme, just because you own mutual funds doesn't mean you are automatically
diversified. For example, a fund that invests only in a particular industry or region is still
relatively risky.
Cash, Cash and More Cash
As you know already, mutual funds pool money from thousands of investors, so everyday

investors are putting money into the fund as well as withdrawing investments. To maintain
liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large
portion of their portfolio as cash. Having ample cash is great for liquidity, but money sitting
around as cash is not working for you and thus is not very advantageous.
Costs
Mutual funds provide investors with professional management; however, it comes at a cost.
Funds will typically have a range of different fees that reduce the overall payout. In mutual funds
the fees are classified into two categories: shareholder fees and annual fund-operating fees.
The shareholder fees, in the forms of loads and redemption fees, are paid directly by
shareholders purchasing or selling the funds. The annual fund operating fees are charged as an
annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors
regardless of the performance of the fund. As you can imagine, in years when the fund doesn't
make money these fees only magnify losses.
Misleading Advertisements
The misleading advertisements of different funds can guide investors down the wrong path.
Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap
or income. The SEC requires funds to have at least 80% of assets in the particular type of
investment implied in their names. The remaining assets are under the discretion solely of the
fund manager.
The different categories that qualify for the required 80% of the assets, however, may be vague
and wide-ranging. A fund can therefore manipulate prospective investors by using names that are
attractive and misleading. Instead of labeling itself a small cap, a fund may be sold under the
heading growth fund. Or, the "Congo High-Tech Fund" could be sold with the title "International
High-Tech Fund".
Evaluating Funds
Another disadvantage of mutual funds is the difficulty they pose for investors interested in
researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors
the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's
net asset value gives investors the total value of the fund's portfolio less liabilities, but how do
you know if one fund is better than another?
Furthermore, advertisements, rankings and ratings issued by fund companies only describe past
performance. Always note that mutual fund descriptions/advertisements always include the
tagline "past results are not indicative of future returns". Be sure not to pick funds only because
they have performed well in the past - yesterday's big winners may be today's big losers

Different Types and Kinds of Mutual Funds

The mutual fund industry of India is continuously evolving. Along the way, several industry
bodies are also investing towards investor education. Yet, according to a report by Boston
Analytics, less than 10% of our households consider mutual funds as an investment avenue. It is
still considered as a high-risk option.
In fact, a basic inquiry about the types of mutual funds reveals that these are perhaps one of the
most flexible, comprehensive and hassle free modes of investments that can accommodate
various types of investor needs.
Various types of mutual funds categories are designed to allow investors to choose a scheme
based on the risk they are willing to take, the investable amount, their goals, the investment term,
etc.

Let us have a look at some important mutual fund schemes under the following three categories
based on maturity period of investment:
I. Open-Ended - This scheme allows investors to buy or sell units at any point in time. This does
not have a fixed maturity date.
1. Debt/ Income - In a debt/income scheme, a major part of the investable fund are channelized
towards debentures, government securities, and other debt instruments. Although capital
appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return
investment avenue which is ideal for investors seeing a steady income.
2. Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in

short term instruments while awaiting better options. These schemes invest in short-term debt
instruments and seek to provide reasonable returns for the investors.
3. Equity/ Growth - Equities are a popular mutual fund category amongst retail investors.
Although it could be a high-risk investment in the short term, investors can expect capital
appreciation in the long run. If you are at your prime earning stage and looking for long-term
benefits, growth schemes could be an ideal investment.
3.i. Index Scheme - Index schemes is a widely popular concept in the west. These follow a
passive investment strategy where your investments replicate the movements of benchmark
indices like Nifty, Sensex, etc.
3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT,
pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This
scheme provides a relatively high risk-high return opportunity within the equity space.
3. iii. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The
funds are invested in equities thereby offering long-term growth opportunities. Tax saving
mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period.
4. Balanced - This scheme allows investors to enjoy growth and income at regular intervals.
Funds are invested in both equities and fixed income securities; the proportion is pre-determined
and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive
investors.
II. Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors
can invest only during the initial launch period known as the NFO (New Fund Offer) period.
1. Capital Protection - The primary objective of this scheme is to safeguard the principal amount
while trying to deliver reasonable returns. These invest in high-quality fixed income securities
with marginal exposure to equities and mature along with the maturity period of the scheme.
2. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a
defined maturity period. These schemes normally comprise of debt instruments which mature in
line with the maturity of the scheme, thereby earning through the interest component (also called
coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no
active trading of debt instruments in the portfolio. The expenses which are charged to the
scheme, are hence, generally lower than actively managed schemes.
III. Interval - Operating as a combination of open and closed ended schemes, it allows investors
to trade units at pre-defined intervals.
FRAMEWORK OF MUTUAL FUND

The Regulatory frame work was designed to ensure that the Mutual funds are managed for the
benefit of their investors. The Mutual fund must not become instrument for benefiting the
promoters or the government and the privileged public sector institutions. Another objective of
the regulatory system was to ensure that Mutual funds do not exploit their privileged position to
gain an unfair advantage over individual investor's who choose to manage their portfolio
themselves^^ The ministry of finance, Govt, of India issued guidelines on June 28 (1990) which
required approval of Mutual funds by controller of capital issues and their regulation with
securities and exchange board of India. However SEBI role was minimized under these
guidelines and it was only required to prescribe the accounting and disclosures requirements.
Mutual funds focused the problems of compliance and monitoring due to the very existence of
two set of guidelines. Thus in the year 1992, Securities and exchange Board of India (SEBI) Act
was passed, which provided the regulations for all the mutual funds except UTI and became
operational on January 1993. Regulatory framework of Mutual funds
Basic Guidelines of SEBi Regulation 1996 The fast growing industry is regulaied by the
Securities and Exchange Board of India (SEBI) since inception of SEBi as a statutory body.
SEBI initially formulated SEBI regulation "1993" Providing detailed procedure for
establishment, registration, constitution, management of Trustees, Asset Management Company,
about schemes/products to be designed, about investment of funds collected, general obligation
of MFs, about Inspection, audit etc. Based on experience gained and feedback received from the
market SEBI revised the guidelines of 1993 and issued fresh Guidelines in 1996 titled "Securities
and Exchange Board of India (mutual funds) regulations, 1996". The said regulations as
amended from time to time are in force even today. The SEBI Mutual Fund Regulations contain
ten chapters and twelve schedules. These guidelines are applicable to all the mutual funds that
invest in the capital market.
(a) Establishment of mutual funds:- To develop Mutual funds, sponsorship is required. An
application for registration of a mutual fund shall be made to the Board in Form A by the
sponsor. The Board may require the sponsor to furnish such further information or clarification
as may be required by it. ^An applicant proposing to sponsor a mutual fund in India must submit
an application in Form A along with a fee of Rs.25, OOO.^^he application form is examined and
once the sponsor satisfies the prescribed eligibility criteria the registration certificate is issued in
for B subject to the payment of registration fees of Rs.25.00 lakh.
(b) Constitution of the Mutual Fund^' A mutual fund shall be constituted in the form of a trust
and the instrument of trust shall be in the form of a deed, duly registered under the provisions of
the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favour of the trustees
named in such an instrument. 83 Chapter 2 Conceptual and Regulatory framework of Mutual
funds in India
(c) Appointment of Trustee "The mutual fund is required to have an independent Board of
Trustees, i.e. two thirds of the trustees should be independent persons who are not associated
with the sponsors in any manner whatsoever. An AMC or any of its officers or employees is not
eligible to act as a trustee of any mutual fund. In case a company is appointed as a trustee, then

its directors can act as trustees of any other trust provided that the object of such other trust is not
in conflict with the object of the mutual fund. Additionally, no person who is appointed as a
trustee of a mutual fund can be appointed as a trustee of any other mutual fund unless he is an
independent trustee and prior approval of the mutual fund of which he is a trustee has been
obtained for such an appointment^. Rights and Obligations of the Trustees: As per the regulation
1996, trustees are made more responsible for the action of AMC .The provisions given in
Annexurel highlight their responsibilities.
(d) Appointment of an Asset Management Company "The sponsor or the trustees are required to
appoint an AMC to manage the assets of the mutual fund. Under the Mutual Fund Regulations,
the applicant must satisfy certain eligibility criteria in order to qualify to register with SEBI as an
AMC:
a. The sponsor must have at least 40% stake in the AMC;
b. The directors of the AMC should be persons having adequate professional experience in
finance and financial services related field and not found guilty of moral turpitude or convicted
of any economic offence or violation of any securities laws;
c. The AMC should have and must at all times maintain, a minimum net worth of Rs. 100
million; 84 Chapter 2 Conceptual and Regulatory framework of Mutual funds in India
d. The board of directors of such AMC has at least 50% directors, who are not associate of, or
associated iri any manner with, the sponsor or any of its subsidiaries or the trustees;
e. The Chalnnan of the AMC is not a trustee of any mutual fund.
f. In addition to the above eligibility criteria and other ongoing compliance requirements laid
down in the Mutual Fund Regulations, the AMC is required to observe the following restrictions
in its normal course of business:
i. Any director of the AMC cannot hold office of a director in another AMC unless such person
is an independent director and the approval of the board of the AMC of which such person is a
director, has been obtained;
ii. The AMC shall not act as a trustee of any mutual fund;
iii. The AMC cannot undertake any other business activities except activities in the nature of
portfolio management services, management and advisory services to offshore funds, pension
funds, provident funds, venture capital funds, management of insurance funds, financial
consultancy and exchange of research on commercial basis if any of such activities are not in
conflict with the activities of the mutual fund;. However, the AMC may, itself or through its
subsidiaries, undertake such activities if it satisfies the Board that the key personnel of the asset
management company, the systems, back office, bank and securities accounts are segregated
activity wise and there exist systems to prohibit access to inside information of various activities.

iv. The AMC shall not invest in any of its schemes unless full disclosure of its intention to invest
has been made in the offer. However, an AMC shall not be entitled to charge any fees on its
investment in that scheme.
The AMC is required to take all reasonable steps and exercise due diligence to ensure that the
investment of funds pertaining to any scheme are not contrary to the provisions of the Mutual
Fund Regulations and the trust deed. An AMC cannot, through any broker associated with the
sponsor, purchase or sell Conasptual and Regulatory framework of Mutual furwis in India
securities, which is an average of 5% or more of the aggregate purchases and sale of securities
made by the mutual fund in all its schemes. However, the aggregate purchase and sale of
securities excludes the sale and distribution of units issued by the mutual fund and the limit of
5% shall apply only for a block of any three months. The duties and Obligation of AMC is given
in Annexure 2
(e) Appointment of Custodian
(1) The mutual fund shall appoint a custodian to carry out the custodial services for the schemes
of the fund and sent Intimation of the same to the Board within fifteen days of the appointment
of the custodian.
(2) No custodian in which the sponsor or its associates hold 50% or more of the voting rights of
the share capital of the custodian or where 50% or more of the directors of the custodian
represent the interest of the sponsor or its associates shall act as custodian for a mutual fund
constituted by the same sponsor or any of its associate or subsidiary company.
(f) Schemes of {Mutual funds Under the Mutual Fund Regulations, a mutual fund is allowed to
float different schemes. Each scheme has to be approved by the trustees and the offer document
is required to be filed with the SEBI. Launch of different schemes depend on capital adequacy.
Fund house are required to raise 50 Crores in open ended schemes and Rs 20 Crores in close
ended schemes. It is mandatory that close ended schemes should be listed in some recognized
stock exchange.
(g) Disclosures in the Offer Document The offer document shall contain disclosures which are
adequate in order to enable the investors to make informed investment decision including the
disclosure on maximum investments proposed to be made by the scheme in the listed securities
of the group companies of the sponsor. The trustees shall be bound to make such disclosures to
the unit holders as are essential in order to 86 Chapter2 Conceptual and Regulatory framework of
Mutual funds in India keep them informed about any information, which may have an adverse
earrings on their investments. The current guidelines on portfolio disclosures make it mandatory
for the funds to disclose their top ten holdings in the portfolio on a monthly basis. The SEBI
Mutual funds regulation 1996 mandate completes portfolio disclosure once in a quarter. Going
beyond the regulatory stipulation all AMC's is disclosing the complete portfolio every month.

(h) Advertisement Material Advertisements in respect of every scheme shall be in conformity

with the Advertisement Code as specified in the Sixth Schedule and shall be submitted to the
Board within 7 days from the date of issue.
(I) Investment and borrowing restrictions The Mutual Fund Regulations has set down certain
investment criteria that the mutual funds are required to observe. The money collected by a
mutual fund under any scheme shall be invested only in transferable securities in the money
market or in the capital market or in privately placed debentures or securitized debts. However,
in the case of securitized debts, such fund may invest in asset backed securities and mortgaged
backed securities. In addition to this, the mutual fund having an aggregate of securities which are
worth Rs.100 million (approximately USD 2.15 million) or more shall be required to clear up
their transactions through dematerialized securities. Furthemiore, mutual funds are not pinnate to
borrow money from the market except to meet provisional liquidity needs of the mutual funds
for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit
holders. Still such borrowing cannot exceed 20% of the net asset of a scheme and the duration of
such a borrowing cannot exceed a period of six months. Likewise, a mutual fund is not allowed
to advance any loans for any purpose. A mutual fund is permitted to lend securities in accordance
with the Stock Lending Scheme of SEBI. The funds of a scheme are prohibited from being used
in option trading or in short selling or carry forward transactions. However, SEBI has 87 Chapter
2 Conceptual and Regulatory framework of Mutual funds in India allowed mutual funds to go
Into derivative transactions on a recognized stock exchange for the reason of hedging and
portfolio balancing and such investments in derivative instruments have to be made in
accordance with SEBI Guidelines6 issued in this regard^^.
(j) Pricing of Units
The price at which the units may be subscribed or sold and the price at which such units may at
any time be repurchased by the mutual fund shall be made available to the investors.
I. The mutual fund, in case of open ended scheme, shall at least once a week publish in a daily
newspaper of all India circulation, the sale and repurchase price of units.
II. While determining the prices of the units, the mutual fund shall ensure that the repurchase
price is not lower than 93% of the Net Asset Value and the sale price is not higher than 107% of
the Net Asset Value.
a. Provided that the repurchase price of the units of a close ended scheme shall not be lower
than 95% of the Net Asset Value.
b. Provided further that the difference between the repurchase price and the sale price of the
unit shall not exceed 7% calculated on the sale price.
III. The price of units shall be determined with reference to the last determined Net Asset Value
as mentioned Insub-regulation (3) unless,
a. The scheme announces the Net Asset Value on a daily basis; and

b. The sale price Is determined with or without a fixed premium added to the future net asset
value which is declared in advance.'" 88 Chapter 2 Conceptual and Regulatory framework of
Mutual funds in India
(k) Investor protection and educating investor Although several corrective reforms have been
taken by the SEBI, it needs to be noted that both the regulator and maricet participants find it
very difficult to restore the faith of the investors in the market. This is manifest from the fact that
less than 5% of the total household savings is channelised into the securities market.
Astonishingly, even well-qualified professionals like medical practitioners and engineers
consider the equity market a 'legalised Casino'.
Due to this backdrop, as a part of budgetary provisions SEBI has decided to set up an Investor
Protection and Education Fund (IPEF). The regulator has recently issued a draft Securities and
Exchange Board of India (Investor Protection and Education Fund) Regulation, 2008.
SEBI has clearly stated the main aim of the fund is to protect the interest of the investors and
create awareness among them. It is not the lone advocate of investor education. The Association
of Mutual Funds in India (AMFI), the Financial Planning Standards Board, India (FPSB) and
market participants have also started embarking on investor education programmes. The need of
the hour is to make investors awake about the functioning of the equity market. They must be
explained the basics of both fundamental and technical issues. The influencing global and
domestic factors like inflation and interest rate movements on the market should also be
explained to the investors clearly. Investor safety is very important for the restoration of their
faith in the market. A proper utilization of the IPEF will help in creating awareness among
investors, which, in turn, can create a win-win situation not only for investors but also for the
markets and the regulator.

ASSET MANAGEMENT COMPANY

Asset management, broadly defined, refers to any system that monitors and maintains things of
value to an entity or group. It may apply to both tangible assets such as buildings and to
intangible assets such as human capital, intellectual property, and goodwill and financial assets.
Asset management is a systematic process of deploying, operating, maintaining, upgrading, and
disposing of assets cost-effectively.
The term is most commonly used in the financial world to describe people and companies that
manage investments on behalf of others. These include, for example, investment managers that
manage the assets of a pension fund.
Alternative views of asset management in the engineering environment are: the practice of
managing assets to achieve the greatest return (particularly useful for productive assets such as

plant and equipment), and the process of monitoring and maintaining facilities systems, with the
objective of providing the best possible service to users (appropriate for public
infrastructure assets.

Financial asset management

The most common usage of the term "asset manager" refers to investment management, the
sector of the financial services industry that manages investment funds and segregated client
accounts. An asset management is a part of a financial company which comprises experts who
manage money and handle the investments of clients. From studying the client's assets to
planning and looking after the investments, all things are looked after by the asset managers and
recommendations are provided based on the financial health of each client....
Infrastructure asset management
Infrastructure asset management is the combination of management, financial, economic,
engineering, and other practices applied to physical assets with the objective of providing the
required level of service in the most cost-effective manner. It includes the management of the
entire lifecycleincluding design, construction, commissioning, operating, maintaining,
repairing, modifying, replacing and decommissioning/disposalof physical and infrastructure
assets.[1] Operating and sustainment of assets in a constrained budget environment require a
prioritization scheme. As a way of illustration, the recent development of renewable energy has
seen the rise of effective asset managers involved in the management of solar systems (solar
park, rooftops and windmills). These teams are actually more and more teaming-up with
financial asset managers in order to offer turn key solutions to investors. Infrastructure asset
management became very important in most of the developed countries in the 21st century, since
their infrastructure network became almost complete in the 20th century and they have to
manage to operate and maintain them cost effectively.[2] Software asset management is one kind
of infrastructure asset management.
Enterprise asset management
Enterprise asset management is the business of processing and enabling information systems that
support management of an organization's assets, both physical assets, called "tangible", and nonphysical, "intangible" assets.

Physical asset management: the practice of managing the entire lifecycle (design,
construction, commissioning, operating, maintaining, repairing, modifying, replacing and
decommissioning/disposal) of physical and infrastructure assets such as structures,

production and service plant, power, water and waste treatment facilities, distribution
networks, transport systems, buildings and other physical assets. It is related to asset health
management.

Infrastructure asset management expands on this theme in relation primarily to public

sector, utilities, property and transport systems. Additionally, Asset Management can refer to
shaping the future interfaces amongst the human, built, and natural environments through
collaborative and evidence-based decision processes

Fixed assets management: an accounting process that seeks to track fixed assets for the
purposes of financial accounting

IT asset management: the set of business practices that join financial, contractual and
inventory functions to support life cycle management and strategic decision making for the
IT environment. This is also one of the processes defined within IT service management

Digital asset management: a form of electronic media content management that includes
digital assets
Public asset management
Public asset management, also called corporate asset management, expands the definition of
enterprise asset management (EAM) by incorporating the management of all things of value to a
municipal jurisdiction and its citizens' expectations. An example in which public asset
management is used is land-use development and planning.
An EAM requires an asset registry (inventory of assets and their attributes) combined with
a computerized maintenance management system (CMMS). All public assets are interconnected
and share proximity, possible through the use of geographic information systems (GIS).
A GIS-centric public asset management standardizes data and allows interoperability, providing
users the capability to reuse, coordinate, and share information in an efficient and effective
manner by making the GIS geo-database the asset registry. A GIS platform combined with
information of both the "hard" and "soft" assets helps to remove the traditional silos of structured
municipal functions. While the hard assets are the typical physical assets or infrastructure assets,
the soft assets of a municipality includes permits, license, code enforcement, right-of-ways and
other land-focused work activities.
Mutual fund companies

Axis Asset Management Company Ltd.

JPMorgan Asset Management India Pvt. Ltd.

Baroda Pioneer Asset Management

Company Ltd

Kotak Mahindra Asset Management Company Ltd.

Birla Sun Life Asset Management

Company Ltd

L&T Investment Management Ltd.

BNP Paribas Asset Management India Pvt

Ltd

LIC NOMURA Mutual Fund Asset Management

Company Ltd.

BOI AXA Investment Managers Pvt Ltd

Mirae Asset Global Investments (India) Pvt. Ltd.

Canara Robeco Asset Management

Company Ltd

Morgan Stanley Investment Management Pvt.Ltd.

Daiwa Asset Management (India) Pvt Ltd

Motilal Oswal Asset Management Company Ltd.

Deutsche Asset Management (India) Pvt.

Ltd.

Peerless Funds Management Co. Ltd.

DSP BlackRock Investment Managers Pvt.

Ltd.

Pine Bridge Investments Asset Management Company

(India) Pvt. Ltd.

Edelweiss Asset Management Ltd

Pramerica Asset Managers Private Ltd

Escorts Asset Management Ltd

Principal PNB Asset Management Co. Pvt. Ltd.

FIL Fund Management Private Ltd

Quantum Asset Management Company Private Ltd.

Franklin Templeton Asset Management

(India) Pvt Ltd.

Reliance Capital Asset Management Ltd.

Goldman Sachs Asset Management (India)

Pvt Ltd.

Religare Asset Management Company Private Ltd.

HDFC Asset Management Company Ltd

Sahara Asset Management Company Private Ltd

HSBC Asset Management (India) Pvt. Ltd.

SBI Funds Management Private Ltd.

ICICI Prudential Asset Management

Company Ltd

Sundaram Asset Management Company Ltd

IDBI Asset Management Ltd.

Tata Asset Management Ltd

IDFC Asset Management Company Ltd

Taurus Asset Management Company Ltd

India Infoline Asset Management Co. Ltd.

Union KBC Asset Management Company Pvt Ltd

Indiabulls Asset Management Company

Ltd.

UTI Asset Management Company Ltd

ING Investment Management (India) Pvt.

Ltd.

JM Financial Asset Management Pvt Limited

Birla Sun Life Asset Management Company Ltd

Established in 1994, Birla Sun Life Asset Management Company Limited (BSLAMC),
investment manager for Birla Sun Life Mutual Fund, is a joint venture between the Aditya Birla
Group and Sun Life Financial Inc, a leading international financial services organisation from
Canada.
Birla Sun Life Mutual Fund is the fourth largest Fund house in India based on domestic average
assets under management as published by AMFI for the quarter ended March 31, 2014. An
impressive mix of reach, a wide range of product offerings across equity, debt, balanced as well
as structured asset classes and strong investment performance has helped the company garner
close to 2 million investor scheme accounts (as of March 31, 2014). BSLAMC offers investors a
range of comprehensive investment options, which includes diversified and sector specific equity
schemes, hybrid funds and a wide range of debt and treasury products. Its offerings also include
Portfolio Advisory Services for High Net worth Individuals as well as offshore funds for NonResident Indians.

CHAPTER 2
INTERODUCTION TO COMPANY
BIRLA SUN LIFE ASSET MANAGEMENT COMPANY
MUMBAI: Private sector mutual fund house Birla Sun Life Asset Management Company is
expecting a 13-14 percent growth in its average assets under management (AUM) by the end of
the current fiscal.
The company, which recorded an average AUM of Rs 1,25,000 crore at the end of the last fiscal
2014-15, is also looking to launch a pension fund product in the current fiscal.
"We closed the fiscal 2014-15 with an average AUM at around Rs 1,25,000 crore which includes
Rs 27,000 crore assets in equity alone, showing a growth by 11.5 percent over previous fiscal.

"We do see 13-14 percent growth in AUM during the current fiscal. This growth will come from
both the segments which include equity and fixed income," Birla Sun Life Asset Management
Company CEO A Balasubramanian told PTI on the sidelines of an event here today.
"More growth is likely to come from the hybrid asset class, comprising a mix of both debt and
equity products, during the current fiscal," he said.
Balasubramanian said that the AMC has filed for a pension product with the market regulator
Sebi and it is waiting for the approval for the launch.
"In the longer term the potential for growth for the pension products was very high in the country
because of large under-penetration in the country," he added.
Currently, three fund houses, out of a total of 45, have products in the pension segment. These
include UTI MF, Franklin Templeton and Reliance Mutual Fund, which recently launched a
retirement product.
While Franklin is working on another retirement solution, Kotak Mutual Fund is also keen to
come up with a retirement product, according to market sources.
Balasubramanian also said that withdrawals by Foreign Institutional Investors (FIIs) from the
domestic capital market in recent past is a temporary phenomenon.
"I believe that the FIIs withdrawing from the country's capital market as a temporary
phenomenon. We will probably see more FII inflows to come during the second half of the
current fiscal," he said.
He further said that RBI may go for a cut in key policy rates by 50 basis points over next six
months.