Mutual Funds

1.
Introduction
An investor has two basic choices. Either he can invest directly in individual
securities or he can invest indirectly through a financial intermediary. Mutual funds are those
financial intermediaries that pools funds from the investors and invest them in a number of
financial claims such as equity shares, bonds or money market instruments. Mutual funds are
the investment vehicles that provide a means of participation in the stock market for people
who have neither the time nor money nor perhaps the expertise to undertake direct
investment.
Reduction of risk is the primary concern of an investor and so mutual funds are the
best option for an investor because the risk involved in mutual fund is comparatively less.
The risk involved in a mutual fund is comparatively less because the increase in the number
of stocks held reduces the effect that any one stock can have on the overall performance on
the equity portfolio. There is basically a scope for mutual funds to operate because it not only
assures a reasonable capital appreciation on his investment but also provides a regular
dividend at periodic intervals. There is also a facility for easy enhancement of the principal in
case of mutual funds.
Mutual funds enjoy a high degree of investment management expertise in the form of
equity research teams which gives an edge to the investment decisions. In addition it offers
capital appreciation, assurance of full allotment, benefit of proportionate allotment and
reservation in primary issues, no tax reduction at source on income to unit holders. 1 Mutual
fund investment traces its origin from to the early pioneering investments of Scottish and
English investors in the American west in the 1800s and later of the early global portfolio
investors in Japan in the 1960s. M u t u a l F u n d s are portfolio of stock market shares and
other financial instruments built with funds collected from small investors whose primary
concern is the investment security.2 These funds are run by government trusts, banks, and
now private financial institutions as well.
1.1 Research Methodology

1
N. Gopalaswamy, “ Inside Capital Markets”, 1st ed. 1996, Pg - 93
2
http://www.sharemarketbasics.com/Mutual-Funds/ assessed on 02.03.2010.
1
The project has been done using doctrinal or principle method of research. It also
involves the collection of data from secondary sources like books written by various authors
and websites. Various journals are also referred by different websites.
Research objective
The main objective of this research is to unravel the different Facets of SEBI (mutual
funds) Regulations; 1996.The researcher has tried to explain the concept of mutual funds in
detail, types of mutual funds etc. An attempt has been made to identify the obstacles and also
chart a road ahead by giving suggestions.
Research Scheme
For the purposes of research the project has been divided into nine chapters. The
project starts with introduction and research methodology
Chapter 2 deals with the concept of mutual funds. A brief history of mutual funds and the
various types of mutual funds are also dealt here.
Chapter 3 explains the working of a mutual fund, procedure of investing in a mutual fund and
the advantages of investing in a mutual fund.
Chapter 4 deals with mutual fund industry in India and various mutual fund schemes .
Chapter 5 deals with the regulatory framework of mutual funds. The SEBI regulations
relating to mutual funds are studied in detail.
Chapter 6 explains the tax benefits of investing in a mutual fund
Chapter 7 contains various court decisions on mutual funds.
Chapter 8 gives a critical appraisal of mutual funds.
Chapter 9 gives the conclusions and suggestions.
2. Concept of Mutual Funds
2
Mutual fund is defined in Clause q of Regulation 2 of Securities and Exchange Board of
India (Mutual Funds) Regulations 1996. It states that “mutual fund” means a fund established
in the form of a trust to raise monies through the sale of units to the public under one or more
schemes for investing in securities including money market instruments or gold or gold rated
instruments or real estate assets. The basis of a mutual fund is the pooling concept. In other
words, mutual funds pool money from a cross – section of investors by issuing units to them
who are known as unit holders in accordance with the quantum of money invested by them.
Mutual funds construct a diversified portfolio of stocks, bonds and other investment
instruments and invest the same in the capital market. The primary objective of mutual funds
is to provide better returns to investors by minimising the risk associated with the capital
market investment.3Mutual funds aim at achieving the following aims4:
1. Providing a steady flow of income
2. Providing high capital appreciation with income
3. Providing income or capital depreciation with tax benefits
According to Pierce, James L., “Mutual fund is a non – depository, non – banking
financial intermediary which acts as an important vehicle for bringing wealth holders and
deficit units together indirectly”.5
According to Weston J Fred & Brigham, “Mutual fund is a corporation which accepts
money from investors and uses the same to buy stocks, long term bonds, short term debt
instruments issued by the issuers”.6
Mutual fund units are investment vehicles that provide means of participation in the stock
market for people who have neither the time, nor the money, nor perhaps the expertise to
undertake direct investment in equities successfully. Mutual funds are open-ended investment
companies that pool investors' money into a fund operated by a portfolio manager. This
manager then turns around and invests this large pool of shareholder money in a portfolio of
various assets, or combinations of assets. This may include investments in stocks, bonds,
3
H.Sadhak, “Mutual funds in India”, 2nd ed. Pg – 94.
4
Ibid.
5
N Gopal Swamy, “Inside capital Market”, 1st ed. 1996 Pg – 104.
6
Ibid.
3
options, futures, currencies, treasuries and money market securities. Mutual funds also
provide a route into specialist markets where direct investment often demands both more time
and more knowledge. Here, one manager manages a pool of millions of dollars in a mutual
Fund which is cheaper than all thousands of Investor’s hiring a broker to manage their
individually. The advantage is that the investor in the mutual fund has less risk than a direct
equity investor, because increase in the number of stocks held obviously reduces the effect
that any one stock can have the overall performance of the equity portfolio.
Mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund
does not have a set number of shares. It may be considered as a fluid capital stock. On the
other hand, closed-end mutual fund has a fixed number of shares and the value of the shares
fluctuates with the market. But with close-end funds, the fund manager has less influence
because the price of the underlining owned securities has greater influence.7
Mutual fund is divided into equal portfolios called units. The price of the units is
calculated regularly by the managers rather than being determined by supply and demand in
the market.8 Mutual funds are the most convenient and efficient investment vehicles. It can be
regarded as a purest form of financial intermediary because there is almost perfect pass of
money between unit holders and the securities in which the fund invests. The basic idea of a
mutual fund is: a large number of investors pool their money in order to get a spread a
professionally managed investments in the stock exchanges which cannot get directly or
individually.
Mutual fund is a special type of investment institution that acts as an investment conduit.
It pools the savings, particularly of the relatively small investors and invests them in a well
diversified portfolio of sound investment. A mutual fund is set up in the form a trust, which
has (1) sponsor, (2) trustees (3) asset management company(AMC) and (4) custodian.
2.1 History of Mutual Funds
7
http://www.mutualfundsresource.com/ assessed on 02.03.2010.
8
Vasanth Desai, “The Indian Financial System and Development” 1st ed. 2005, Pg – 687.
4
The history of Mutual Funds has evolved over the years and it is always interesting
for all the investors of the world. In the present world, mutual funds have become a main
form of investment because of its diversified and liquid features. Mutual funds are gaining
popularity very fast in a tremendous way not only in the developed world but also in the
developing world. The history of mutual can traced back with the investing of Scottish and
English investors in the American west in the 1800s and later of the early global portfolio
investors in Japan in the 1960s. It was in 1822, that the royalty (in the form of king William 1
of the Netherlands) came up with the idea. In 1822, the concept of Investment
Diversification was properly incorporated in the mutual funds. After 1822 in Netherlands,
the Mutual Funds Concept came in Switzerland in 1849 and thereafter in Scotland in the
1880s. After gaining popularity in Great Britain and France, Mutual fund concept travelled to
U.S.A in the 1890s.9 In 1920s and 1930s, the Mutual Fund popularity reached a new high.
The first Mutual fund of the world was the Massachusetts Investor’s Trust which was
launched in Boston, USA in 1924.10 After 40 years, a mutual fund institution, namely the Unit
Trust of India, was launched in India. However the real growth of the mutual funds has only
been since the late 1980s. Still today, the funds are evolving and improving in order to offer
people much wider choices and better advantages for fulfilment of their various investment
needs and financial objectives.
Evolution of mutual funds in India
The evolution of the Indian mutual fund industry started with the formation of the
Unit trust of India (UTI) in the year 1963. The primary objective was to attract the small
investors and it was made possible through the collective efforts of the Government of India
and the Reserve Bank of India. The history of mutual fund industry in India can be better
understood divided into following phases:
Phase -1(1964-87)
9
http://www.economywatch.com/mutual-funds/definition/history-of-mutual-funds.html assessed on 02.03.2010.
10
5
The Unit Trust of India (UTI) has the distinction of laying the foundation of the
mutual fund industry in India. It was established in the year 1963 by an act of the parliament
and became operational in July 1964. It was set up by Reserve Bank of India (RBI) and it
continued to be operate under the regulatory control of the RBI until the two were delinked in
1978 and the entire control was transferred in the hands of Industrial Development Bank of
India (IDBI). UTI launched its first scheme in 1964 which was named as Unit Scheme 1964
(US-64), which attracted the largest number of investors in any single investment scheme
over the years. More innovative schemes in 1970s and 80s were launched by UTI 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, Mastershare
(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.11 UTI has been able to establish a lower cost of funds management
than its competitors and has managed to outperform the market. It is larger any mutual fund
in the country.
Phase II - 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, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual
Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of
the industry increased seven times to Rs. 47,004 crores.12 However, UTI remained to be the
leader with about 80% market share.
Phase III. Emergence of Private Sector Funds (1993-96)
The entry of private sector funds in 1993 started a new era in the Indian mutual fund industry,
giving the Indian investors a wider choice of fund families. The first Mutual Fund
Regulations came into being in 1993 under which all the 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 1993.13
11
http://finance.indiamart.com/india_business_information/mutual_funds_industry.html assessed on
02.03.2010.
12
Ibid.
13
Ibid.
6
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.
Phase IV. Growth and SEBI Regulation – 1996 - 2003
The mutual fund industry witnessed a rapid growth and stricter regulation from the
SEBI after the year 1996. The mobilisation of funds and the number of players operating in
the industry reached new heights as investors started showing more interest in mutual
funds. SEBI (Mutual Funds) Regulations 1996 was introduced by SEBI that set uniform
standards for all mutual funds in India. Various Investor Awareness Programmes were
launched during this phase, both by SEBI and the Association of Mutual Funds in India
(AMFI) with an objective to educate investors and make them informed about the mutual
fund industry.14
In February 2003, UTI was stripped of its Special legal status as a trust which was
formed by an Act of Parliament. The primary objective behind this was to bring all mutual
fund players on the same level. 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.15 However UTI Mutual Fund is still the largest player in the industry.
Phase V. Growth and Consolidation – since 2004
The industry has also witnessed several mergers and acquisitions for e.g. acquisition
of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB
Mutual Fund by Principal Mutual Fund. Many international mutual fund players have also
entered India like Fidelity, Franklin Templeton Mutual Fund etc.16 This is a continuing phase
of growth of the industry through consolidation and entry of new international and private
sector players.
2.2 Types of Mutual funds
14
http://www.appuonline.com/mf/knowledge/industry.html assessed on 02.03.2010.
15
http://finance.indiamart.com/india_business_information/mutual_funds_industry.html assessed on
02.03.2010.
16
http://www.appuonline.com/mf/knowledge/industry.html assessed on 02.03.2010.
7
An investor has to choose a mutual fund depending upon his needs and objectives. There are
different types of mutual funds to satisfy an investor needs and objectives.
Open and close ended funds
An open ended fund is a type of mutual fund that does not have restrictions on the
amount of shares the fund will issue. If the period or the target of the fund is not indefinite, it
is called an open – ended fund.17 Open-end funds also buy back shares when investors wish to
sell. A close-ended fund is a publicly traded investment company that raises a fixed amount
of capital through an initial public offering (IPO). The fund is then structured, listed and
traded like a stock on a stock exchange. In a close ended fund the period and/or target amount
of the fund is definite.
Income and growth funds
Income and growth funds are those mutual funds whose aim is to provide both
growth and income often by investing in companies which have earnings growth as well
as dividends.18 The income –oriented fund aims at distribution of income periodically
amongst Investors. On the other hand, the growth-oriented fund meets the investors need for
appreciation, high risk-bearing capacity and ability to defer liquidity.
Area, Industry and customer group funds
The funds may have, at the international level, investments in securities of specified
areas, e.g., Japan fund, Thailand Fund or South Korea Fund; etc. These funds provide access
to foreign investors into domestic securities of these countries. Similarly, certain funds may
invest their resources in specified industry or industries like Rail Road or Petroleum Industry
funds in the U.S. Certain mutual funds may be confined to a high-tech and high-growth
industry, which may attract risk taken in such cases. The fund may also aim at specific
customer target group to meet their major needs, like funds for pensioners, widow etc.19
Tax – exempt funds
17
http://www.investopedia.com/terms/o/open-endfund.asp assessed on 03.03.2010
18
http://www.investorwords.com/2259/growth_and_income_fund.html assessed on 03.03.2010.
19
8
These funds invest their funds in such investments which receive benefits and enjoy
tax – free treatment. Tax saving magnum of SBI Capital Markets Limited is an example of
the domestic type.20
Equity Funds
A mutual fund that invests principally in stocks is called an equity fund. These funds
invest only in equity shares and assume the risks associated with equity investment. They are
also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in
the stocks of public companies. Stocks represent part ownership, or equity, in companies, and
the aim of stock ownership is to see the value of the companies increase over time. Equity
mutual funds collected Rs 1,250 crore in January 2010 recording their first net inflows after
five months. Equity fund managers deploy different types of stock making when they make
investment decisions for their portfolios.
Bond funds
They invest funds only in bonds, i.e., debt instruments, debentures. Their bias is
towards providing safety growth and regularity of income.
Liquid funds
Specializes in investing in short-term money market instruments like certificate of

deposits. The emphasis is on liquidity with low rate of return.
Special Funds
These funds invest in specialised channels like gold and silver, in a specific country
(Japan, Korea, India Fund etc.) and a specific category of companies like the technology
fund.
Index Funds
These funds invest only in those shares which are included in the market indices and
in exactly the same proportion, whenever the market index goes up, The value of such index
funds also goes up. Conversely, when the market index comes down, the value of such index
20
9
funds also comes down. The most popular index of stock index funds is the standard &
poor’s 500.
Leverage Funds
They are also known as borrowed funds; these are used to increase the value of portfolio
and benefit to members by gains arising out of the excess of gains over cost of borrowed
funds. Such mutual funds invest in risky investments and indulge in speculative trading.
Hedge Funds
Mutual funds which employ their funds by speculative trading i.e., buying shares whose
prices are likely to rise and selling shares whose prices are likely to dip, are called Hedge
funds.
3. Working of a Mutual Fund
Mutual fund has been of great importance for all the Investors. A Mutual Fund is a
trust that pools the savings of a number of investors who share a common financial goal. The
money thus collected is then invested in capital market instruments such as shares, debentures
10
and other securities. The income earned through these investments and the capital
appreciation realised are shared by its unit holders in proportion to the number of units owned
by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers
variety an opportunity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.
A flow chart would explain as to how a mutual fund is operated.21
Mutual Fund Operation Flow Chart
3.1. Investing in a mutual fund and advantages of investing in a mutual fund
Mutual funds normally come out with an advertisement in newspapers publishing the
date of launch of the new schemes. Investors can also contact the agents and distributers of
mutual funds who are spread all over the country for necessary information and application
forms. Forms can be deposited with mutual funds through the distributers and agents which
provide such services. Now, a days the post offices and banks also distribute the units of the
mutual fund. However, the investors may please note that the mutual fund schemes being
marketed by banks and post offices should not be taken as their own schemes and no
assurance of returns is given by them. The only role of banks and post offices is to help in
distribution of mutual funds schemes to the investors. The investors should not be carried
away by the commission/gifts given by agents/distributers for investing in a particular
scheme. On the other hand they must consider the track record of their mutual fund and
should take objective decisions.
Mutual funds have been a popular investment vehicle for investors since their
creation. Their simplicity along with other attributes provides great benefit to investors who
21
www.kotakmutual.com/kmw/mf_school/BegiBasic.ppt assessed on 03.03.2010.
11
have limited knowledge, time or money. Some of the advantages of mutual fund are as
follows:
Economies of Scale
Mutual funds are able to take advantage of their buying and selling size and thereby
reduce transaction costs for investors.22 With mutual funds an investor can make transactions
on a much larger scale for less money.
Professional Management
When an investor purchases a mutual fund he chooses a professional money manager.
This manager will use the money that the investor invests to buy and sell stocks that he or she
has carefully researched. Therefore, rather than having to thoroughly research every
investment there is a mutual fund's money manager to handle it for the investor. 23 First issue
is that of expertise. While investing directly into capital market one has to be analytical
enough to judge the valuation of the stock and understand the complex undertones of the
stock. One needs to judge the right valuation for exiting the stock too. It is very difficult for a
small investor to keep track of the movements of the market. Entrusting the job to experts,
who watch the trends of the market and analyze the valuations of the stocks will solve this
problem for an investor. Mutual funds specialize in identification of stocks through dedicated
experts in the field and this enables them to pick stocks at the right moment. Sector funds
provide an edge and generate good returns if the particular sector is doing well.
Portfolio Diversification
Mutual Funds invest in a well-diversified portfolio of securities which enables
investor to hold a diversified investment portfolio (whether the amount of investment is big
or small).24 This diversification reduces the risk because seldom do all stocks decline at the
same time and in the same proportion.
Convenient Administration
22
http://www.investopedia.com/articles/basics/03/040403.asp assessed on 04.03.2010.
23
http://www.investopedia.com/university/mutualfunds/mutualfunds.asp assessed on 04.03.2010.
24
http://www.appuonline.com/mf/knowledge/concept.html assessed on 04.03.2010.
12
Investing in a mutual fund reduces Paperwork and helps in avoiding many problems
such as bias deliveries, delayed payments and unnecessary follow up with brokers and
companies. It saves your time and makes investing easy and convenient.
Return potential
Over a medium to a long-term mutual funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
Low costs
Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser
transaction costs. These benefits are passed on to the investors.25
Liquidity
An investor may not be able to sell some of the shares held by him very easily and
quickly, whereas in case of a mutual fund the units are far more liquid.
Transparency
Funds provide investors with updated information pertaining to the markets and the
schemes. All material facts are disclosed to investors as required by the regulator.
Flexibility
Investors also benefit from the convenience and flexibility offered by Mutual Funds.
Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa.
Option of systematic investment and withdrawal is also offered to the investors in most open-
end schemes.26
Choice of schemes
Mutual funds provide investors with various schemes with different investment
objectives. Investors have the option of investing in a scheme having a correlation between
its investment objectives and their own financial goals. These schemes further have different
plans/options.27
25
Ibid.
26
http://www.appuonline.com/mf/knowledge/concept.html assessed on 04.03.2010.
27
Ibid.
13
Well regulated
All mutual funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of mutual funds are
regularly monitored by SEBI.
Multiple Investments
A single person can’t invest in multiple high-priced stocks for the sole reason that his
pockets are not likely to be deep enough. This limits him from diversifying his portfolio as
well as benefiting from multiple investments. Here again, investing through MF route enables
an investor to invest in many good stocks and reap benefits even through a small investment.
This not only diversifies the portfolio and helps in generating returns from a number of
sectors but reduces the risk as well. Though identification of the right fund might not be an
easy task, availability of good investment consultants and counsellors will help investors take
informed decision.
4. Mutual funds in India
The concept of mutual funds in India dates back to the year 1963. The Association
of Mutual Funds in India (AMFI) is dedicated to developing the Indian Mutual Fund
Industry on professional, healthy and ethical lines and to enhance and maintain
standards in all areas with a view to protecting and promoting the interests of
mutual funds and their unit holders.28 Some of the mutual funds which can be highlighted
are as follows:
Unit Trust of India
28
http://www.amfiindia.com/ assessed on 05.03.2010.
14
The UTI (Unit trust of India) has the distinction of laying the foundation of mutual
fund Industry in India. The Unit Trust of India was established by an act of Parliament in
1963 in India. It became operational in July 1964. UTI is larger than any mutual fund in the
industry. Recently, a growth-cum-income fund, called the ‘master share’ was launched by the
trust which was followed by two India funds: the first trade in the London stock exchange
(India fund unit scheme 1986) and the second in New York stock exchange (India fund unit
scheme 1988).
LIC Mutual Fund
This fund is in operation to offer investment options with a fourth dimension, i.e., the
insurance protection .most of the specific products offered by the LIC will offer some life
cover. Here, the investor can set a goal to build a corpus of savings within a certain time-
frame. but if there is an unforeseen happening, and the investor dies during the specified
period then it has a different procedure.
SBI Mutual fund
SBI Mutual Fund (SBI MF) is one of the largest mutual funds in the country with an
investor base of over 5.8 million. With over 20 years of rich experience in fund management,
SBI MF brings forward its expertise in consistently delivering value to its investors.29
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, 2003.30 Deutsche Bank A G 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 organisation evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from
29
http://www.sbimf.com/ assessed on 05.03.2010.
30
http://finance.indiamart.com/india_business_information/abn_amro.html assessed on 06.03. 2010
15
India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment.
Recently it crossed AUM of Rs. 10,000 crores.31
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 sponsorers namely Housing
Development Finance Corporation Limited and Standard Life Investments Limited. The
Trustee Company of HDFC Mutual Fund is HDFC Trustee Company Limited and AMC is
HDFC Asset Management Company Limited, incorporated with the SEBI on December 10,
1999.32 The products of HDFC Mutual Fund are equity funds, balance funds and debt funds.
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. The AMC is HSBC Asset Management
(India) Private Ltd., incorporated on December 12, 2001.The products of HSBC Mutual Fund
are Equity Fund, Cash Fund, Gilt Fund, Income Fund, India Opportunities Fund, MIP
Floating Rate Fund.33
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 on April 6, 1998. ING Vysya Mutual Fund
aims to provide investors with the most practical and secure investment opportunities to
invest their valuable savings. This is combined with a range of innovative options to deliver
31
http://finance.indiamart.com/india_business_information/birla_sunlife.html assessed on 06.03.2010.
32
http://finance.indiamart.com/india_business_information/hdfc.html assessed on 06.03.2010.
33
http://finance.indiamart.com/india_business_information/hsbc.html assessed on 05.03.2010.
16
healthy returns combined with a high degree of security.34 Currently, the fund offers four
equity, five debt and two hybrid schemes to its investors.
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 sponsorers, Prudential Plc. and ICICI Ltd. 35 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. The Prudential ICICI
Mutual Fund is the second largest mutual fund player in the private sector with assets in
excess of Rs. 40 bn.
Sahara Mutual Fund
Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial
Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited
incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up
capital of the AMC stands at Rs 25.8 crore.36
Tata Mutual Fund
Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers
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.37
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
34
http://finance.indiamart.com/india_business_information/ing_vysya.html assessed on 05.03.2010.
35
http://finance.indiamart.com/india_business_information/prudential_icici.html assessed on 05.03.2010
36
http://finance.indiamart.com/india_business_information/sahara.html assessed on 05.03.2010.
37
http://finance.indiamart.com/india_business_information/tata.html assessed on 05.03.2010.
17
investors with varying risk - return profiles. It was the first company to launch dedicated gilt
scheme investing only in government securities.
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, 2004.38 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, 1999.39
Franklin Templeton India Mutual Fund
The group, Franklin Templeton Investments is a California (USA) based company

with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial
services groups in the world. Investors can buy or sell the Mutual Fund through their
financial advisor or through mail or through their website. They have Open end Diversified
Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax
Saving schemes, Open end Income and Liquid schemes, closed end Income schemes and
Open end Fund of Funds schemes to offer.40
Morgan Stanley Mutual Fund India
38
http://finance.indiamart.com/india_business_information/mutual_fund_companies.html assessed on
05.03.2010.
39
Ibid.
40
http://finance.indiamart.com/india_business_information/mutual_fund_companies.html assessed on
05.03.2010.
18
Morgan Stanley is a worldwide financial services company and its leading in the
market in securities, investment management and credit services. Morgan Stanley Investment
Management (MISM) was established in the year 1975. It provides customized asset
management services and products to governments, corporations, pension funds and non-
profit organisations. Its services are also extended to high net worth individuals and retail
investors. In India it is known as Morgan Stanley Investment Management Private Limited
(MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). 41 This is the first close
end diversified equity scheme serving the needs of Indian retail investors focussing on a long-
term capital appreciation.
Alliance Capital Mutual Fund
Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company
Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the
corporate office in Mumbai.42
Recent updates in the mutual fund industry in India
Floating Rate Mutual funds -These are the Debt mutual fund which invests about 75%
to 100% in securities which pay a floating rate interest (bank loans, bonds and other debt
securities) while the rest is in fixed income securities.43There are two kinds of floating rate
funds – long term and short term. The portfolio of the short-term plan is normally skewed
towards short-term maturities with higher liquidity, and the portfolio of the long-term plan is
skewed towards longer-term maturities. However, even the longer-term funds are positioned
more on the lines of short-term funds and are not very aggressive.
Advantages of floating rate funds
41
Ibid.
42
Ibid.
43
http://www.jagoinvestor.com/2010/03/floating-rate-mutual-funds-–-how-when-and-why.html assessed on
05.03.2010.
19
 The primary advantage of these funds is that they are less volatile than other types of
debt funds. In case of fixed rate bonds when interest rates in the economy change, the
price of the bond adjusts to make up for the fixed coupon of the bond.
 Looking at the performance table over different time frames, floating rate funds have
delivered outstanding performance over the years and more importantly, with
considerable consistency.
 A look at the performance table also reveals a better consistency in delivering higher
returns when compared to other type of funds.
 Credit quality of floating rate funds’ category is more or less similar to liquid funds
and ultra short-term funds. Average maturity doesn’t play a very important role in case of
floating rate funds as they invest in instruments, which have a variable coupon rate.
Selection of floating rate funds

 Long term floating rate funds are better than short term considering performance, less
expense ratio.
 Select a fund which has proved its performance over a period. (This shows the
effectiveness of the fund house in mobilizing the assets under management).
 Select the fund which invests significant % of asset in companies/securities with
highest credit rating.
 Select the fund with low expense ratio.
4.1. Mutual fund Schemes
A wide variety of Mutual Fund Schemes exist to cater to the needs of the investor
such as financial position, risk tolerance and return expectations etc. The stipulations of the
SEBI regulations pertaining to mutual fund schemes are outlined below.
An AMC can launch a scheme after its approval by the trustees and filing of the offer
document with the SEBI, together with the filing fee of Rs 25,000. The mutual fund shall
pay the minimum filing fee specified in the second schedule to the board while filing the
offer document and it should pay the balance filing fee calculated in accordance with the
second schedule to the board within such time as maybe specified by the board.44
Schemes according of maturity period
44
Regulation 28(1)(2)(3) of the SEBI(Mutual Fund Regulations)1996.
20
A mutual fund schemes can be classified into open-ended scheme or close-ended
scheme depending on its maturity period.
Open ended scheme- An open ended scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed maturity period.
Investors can conveniently buy and sell units at NAV related prices which are declared on a
regular basis. The key feature of this scheme is liquidity.
Close-ended scheme- this scheme has a stipulated maturity period, e.g., 5-7 years. The fund
is open for subscription only during a specified period at the time of launch of the scheme.
Investors can invest in the scheme at the time of the initial public issue and thereafter they
can buy or sell the units of the scheme on the stock exchanges where the units are listed .In
order to provide an exit route to the investors, some close-ended funds give an option of
selling back the units to the mutual fund through periodic repurchase at NAV related prices.
SEBI regulations stipulate that at least one of the two exit routes is provided to the investor,
i.e., either repurchase facility or through listing on stock exchanges. These mutual funds
schemes disclose NAV generally on weekly basis.
Schemes according to investment objective
A scheme can be classified as growth scheme, income scheme, or balanced scheme

considering its investment objective. They are as follows:
• Growth/equity oriented scheme

The aim of growth funds is to provide capital appreciation over the medium to long-term.
Such schemes normally invest a major part of their corpus in equities. Such funds have
comparatively high risks. They provide different options to the investors like dividend
option, capital appreciation, etc., and the investors may choose an option depending on their
preferences. The investors must indicate the option in the application form. The mutual funds
allow the investors to change the options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of time.
• Income debt oriented scheme
21
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
government securities and money market instruments. Such funds are less risky compared to
equity schemes. These funds are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also limited in such funds. The NAVS of
such funds are affected because of change in interest rates in the country. If the interest rates
fall, NAVS of such funds are likely to increase in the short-run and vice versa. However,
long term investors may not bother about these fluctuations.
• Balanced fund
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their offer
documents. These are appropriate for investors looking for moderate growth. They generally
invest 40-60 per cent in equity and debt instruments. These funds are also affected because
of fluctuations in share prices in the stock markets .However, NAVS of such funds are likely
to be less volatile compared to pure equity funds.
• Money market or liquid fund

These funds are also income funds and their aim is to provide liquidity, preservation of
capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificated of deposit, commercial paper and inter-bank
call money, government securities, etc. Returns on these schemes fluctuate much less
compared to other funds. These funds are appropriate for corporate and individual investors
as a means to park their surplus funds for short periods.
• Gilt fund
These funds invest exclusively in government securities. Government securities have no
default risk. NAVS of these schemes also fluctuate due to change in interest rates and other
economic factors as he is the case with income or debt oriented schemes.
• Index funds
Index funds replicate the portfolio of a particular index such as the BSE sensitive index.
S &P NSE 50 index (Nifty), etc. These schemes invest in the securities in the dame weight
age comprising of an index. NAVS of such schemes would rise or fall I accordance with the
rise or fall in the Index, though not exactly by the same percentage due to some factors
22
known as ‘tracking error’ in technical terms .Necessary disclosures in this Regard are made
in the offer document of the mutual fund scheme. There are also exchange traded index
funds launched by the mutual funds which are traded on the stock exchanges.
• Private sector mutual funds

The opening up of mutual funds to the private sector in early 1992 can be regarded as
one of the key developments of the capital market. The first private sector mutual fund was
launched by the Madras based HC Kothari group, which in collaboration with the pioneer
group of the U.S. The Kothari pioneer mutual fund has been registered as a trust and is
sponsored by the Investment Trust of India Ltd. (ITI) .Pioneer is one of America’s oldest and
most successful mutual funds with an outstanding track record of performance since its
establishment in 1928. It offered two schemes called Kothari pioneer prima fund which is an
open-end instant liquidity growth fund and Kothari pioneer Blue chip fund which is a close-
ended 3 year growth fund.
Both the funds have been appreciated by more than 80 % in the first months of operation.
it is also exempt from Income tax under the section 10(23D) of the income tax act,1961.this
is followed by a number of other funds-ICICI Premier, Taurus and Morgan Stanley ‘s growth
fund. Kothari pioneer seems to have established a record for itself, with its NAV standing at
Rs 12.50, giving a 30%return in a three month period.
Kothari pioneer prima fund is an open-ended scheme and the fund declares the NAV
related repurchase/selling quotes on a daily basis, as is the case internationally for open-
ended funds.
• Off –shore mutual funds

Investors residing outside India invest in Off-shore mutual funds, which help to bring
foreign exchange to the country. Such inflows are free of risk which is inherent with
loans/direct foreign investment; the money is invested in secondary market securities or new
projects, which offer a high return. the Unit of trust of India and the Merrill Lynch launched
the first off-shore mutual fund in July 1980.The 75 million pounds India fund has proved to
be most successful.45The second off shore fund, ‘India growth fund’ was launched in August
1988 with corpus of $60 million. It was promoted by Merrill lynch and mammon securities.
45
N Gopalaswami, ‘Inside Capital market’ 1st ed.1996, Pg 96.
24
23
In 1989, SBI Capital markets launched India magnum fund where $157 million with Morgan
Stanley.
• Money market mutual funds

The money Markey mutual funds were intended to be invested in money market
instruments for the benefit of the individual investors and the corporate clients were therefore
kept out. Investment in MMMF are considered highly safe, as the portfolio is to consist of
highly liquid, self liquidating asset having a low risk like treasury bills, government of India
gilt edged securities, money at call and short notice, certificates of deposits of a commercial
banks and financial institutions, derivative usance bills of commercial banks, commercial
papers and securitised debts of banks and blue chip companies. The liquidity is also sound ,
as the lock in period is only 46 days.
• Open –ended schemes

Mutual funds may have open –ended schemes under which an investor is free to join the
fund or withdraw from the fund at any time after an initial Lock in period. Such fund’s
announce sale and repurchase prices from time to time. Unit’s Trust of India’s 1964 unit
scheme is an example of such fund. .In the open ended mutual fund , the holders can resell
the shares in the fund to the issuing fund company and receive in turn the net asset
value(NAV) of the shares; they place their funds in the secondary market and do not
participate in new issues, they can buy and sell their own shares.
• Close-ended schemes
Such mutual funds do not issue shares or repurchase or redeem on a periodic basis. Units
of such schemes can be redeemed only on termination or through dealing in secondary
market. Canshore, Canstock, Can growth, SBI Magnum, master share etc. are examples of
such mutual funds.
“Close –ended scheme” means any scheme of a mutual fund in which the period of
maturity of the scheme is specified.46.they have a definite target amount for the funds and can
see more after initial offering; are not redeemable at their NAV as open ended fund prices are
determined by demand and supply and not by NAV; their objectives differ as compared to
open –ended funds.
• Tax saving scheme

46
Regulation 2(f) of the SEBI (Mutual Fund) Regulations 1996.
24
These schemes offer tax rebates to the investors under specific provisions of the Income-
tax Act,1961 as the government offers tax incentives for investment in specified avenues,
e.g., equity linked savings schemes (‘ELSS’).47Pension schemes launched by the mutual
funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly
in equities. Their growth opportunities and risks associated are like any equity-oriented
scheme.
According to regulation 29,the disclosures should be made in the offer document .T he

offer document should contain adequate disclosures to enable the investors to make an
informed investment decision, including disclosure regarding the maximum investment
proposed to be made by the scheme in the listed securities of the group companies of the
sponsor. The SEBI can suggest modifications in the offer document, in the interest of the
investors, which would be binding on the AMC. If, however no modifications are suggested
within 21 working days from the date of filing, it may issue the offer document to the
public.48No one should issue any form of application for units of a mutual fund unless the
form is accompanied by the memorandum containing such information as specified by the
SEBI. The AMC should provide an option to unit-holders to nominate a person in whom the
units held by him would vest in the event of his death of all joint unit holder.
A mutual fund can change the nature of the scheme from the one specified in the offer
document. however, no change in the nature of the terms of the scheme, known as
fundamental attributes of the scheme, e.g., structure, investment pattern, etc., can be carried
out unless a written communication is sent to each unit holder and an advertisement is given
in one English daily having nationwide circulation and in a newspaper published in the
language of the region where the head office of the mutual fund is situated. The unit holders
have the right to exit the scheme at the prevailing NAV without any exit load if they do not
want to continue with the scheme. The mutual funds are also required to follow similar
procedure while converting the scheme from close- ended to open-ended scheme in case of
change in sponsor.
As per regulation 30, the advertisements in respect of every scheme shall be in

conformity with the Advertisement code as specified in the sixth schedule and shall b
47
SEBI guidance notes, “All that you need to know about mutual funds” [2002] 46 CLA (mag.) 80.
48
Inserted by the SEBI (mutual funds) Amendment Regulations,1998,w.e.f.12-1-1998.
25
submitted to the board within 7 days from the date of issue. The advertisement for each
scheme shall disclose the investment objective of each scheme.49
• Listing of close ended schemes

Every close-ended scheme has to be listed on a recognised stock exchange within six
months from the closure of the subscription. However, listing of a close –ended scheme is
not mandatory if:50
(a) It provides for periodic repurchase facility to all the unit holders, with restriction ,if any,
on the extent of such repurchase
(b) It provides for monthly income or caters to special classes of persons like senior citizens,
women, children, widows or physically handicapped or any special class of persons,
providing for repurchase of units at regular intervals.
(c) The details of such repurchase facility are clearly disclosed in the offer document and
(d) It opens for repurchase within a period of six months from the closure of subscription.
(e) If the said scheme is a capital protection oriented scheme.51
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV
after adjustment of expenses. Unit holders are entitled to receive a report on winding up from
the mutual funds which gives all necessary details
When the investors want to redress their complaints, they would find the name of the
contact person in the offer document. Of the mutual fund scheme whom they may approach
in case of any query, complaints or grievances. Trustees of mutual fund monitor the activities
of the mutual fund. The names of the directors of the AMC and trustees are also given in the
offer documents. Investors can also approach SEBI for redressal of their complaints. On
receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows
up with them till the matter is resolved.
Real Estate Mutual fund schemes
REMF is a scheme which has investment objective to invest directly or directly in real
estate property according to the SEBI press release. It shall be governed by the provisions
49
Substituted FOR “in addition the investment objectives, the method and periodicity of valuation of
investment, the method and periodicity of sales and purchases by the SEBI (mutual funds) Amendment
Regulations,1998,w.e.f.12-1.1998.
50
Regulation 30 of the SEBI(Mutual Funds) Regulations 1996.
51
Inserted by the SEBI (mutual funds) (third amendment) regulations,2006,w.e.f.3-8-2006.
26
and guidelines under SEBI (Mutual Funds) regulations. The structure of mutual funds shall
be close ended and the units of the REMFs shall be compulsorily listed on the stock
exchanges; also the NAV of the scheme shall be declared daily.52 The REMFs shall appoint
a custodian who has been granted a certificate of registration to carry on the business of the
custodian of securities by the board. The custodian of the securities shall safe keep the title
of real estate properties held by the REMFs. These schemes can invest (1) directly in real
estate properties within India (2) mortgage (housing lease) backed securities (3) equity
shares/bonds/ debentures of listed/ unlisted companies which deal in properties and also
undertake property development and in (4) other securities.
Advantages of investing in a REMF route:53
• The transactions are transparent and the returns are passed on to the investor with
regularity, as opposed to direct investment, where a builder may or may not pass the
returns to the investor or delay it for maintaining liquidity or diverting the funds to
other ongoing projects.
• It takes the cumbersome effort out of investing in a large and diversified real estate
portfolio, with the right product mix to ensure greater returns.
• The investor need not worry about his lack of knowledge about local property and can
invest in real estate across cities.
• With this corporate model of real estate investment ,the foreign/non resident investor’
s fear of investing in an alien unorganized market will be allayed
• It also helps to reduce the volatility of the market in general
• Investments are relatively high yielding when compared to other forms of real estate
investment.
There are various risks envisaged in investing in REMFs. If the REMF does not invest in
a sufficiently diversified range of real estate, the risks are naturally greater. Another reason is
over-building, fire, earthquake or other natural calamities. The government may change real
estate tax laws, making it expensive to own property even on paper. Real estate is a cyclical
market; today’s boom may sustain for a few more years, but a downswing is more or less
52
Ketan Madia, “Real Estate Mutual Funds” SCL MAGAZINE,VOL.72, 2006, Pg 87.
53
Ibid.
27
inevitable. This means returns will not always be high or even predictable. And like any
mutual fund, the fund managers may make wrong calls, and leave the fund holding
financially unviable properties.
Disclosure practises in mutual fund schemes of India
The mutual funds like other business firms prepare their accounts to disclose their
financial results. mutual fund in our country are registered as a ‘trust’, thus they are not
required to sent, to their subscribers a copy of balance sheet and profit and loss account. But,
under requirement of SEBI (MF) regulations, mutual funds are required to keep proper
accounts. These accounts should be such as to explain its transactions and to disclose it at any
point of time the financial position of mutual fund, the records and statements should give a
true and fair view of the state of affairs of the mutual fund. The regulations also require that
mutual fund shall follow such accounting policy and standard so as to give appropriate details
of the scheme-wise disposition of the assets of the fund at the relevant accounting date. The
such accounting policies are also to be followed to depict the performance during the period,
together with information regarding distribution and accumulation of such income which are
payable to unit holders
According to the Act, accounting year for all the schemes shall end on 31st March of
every year. Thus, every mutual fund is required to prepare a revenue account and a balance
sheet for every mutual fund schemes on 31st March of every year.54
Revenue Account
It is an account of expenses, income and surplus of mutual fund:
(1) Initial issue expenses

When a scheme is first launched, the mutual fund will incur significant expenses, whose
benefit will accrue over many years. Whole the amount of expenses cannot be debited in the
first year. The SEBI, permits, amortization of initial expenses as under:
(a) For a closed-ended scheme floated on a ‘load’ basis, the initial issue expenses shall be
amortized on a weekly basis over the period of the scheme.
54
Dr. Nand Kishore Sharma, “Disclosure practices in mutual fund schemes of India”, SCL, September
17,2006,Pg - 156.
28
(b) For a open-ended scheme floated on a ‘load’ basis, initial issue expenses may be
amortised over a period not more than five years. Issue expenses incurred during the
life of an open –ended scheme cannot be amortized.
(c) Un-amortized portion of initial issue expenses shall be included foe NAV calculation
considered as ‘other assets’. The Investment advisory fee cannot be changed on this
asset. Thus, it is excluded at the time of calculation of investment advisory fee.
(2) Recurring expenses
It includes expenses like marketing and selling expenses including agent commission
subsequent to initial issue. It also includes ongoing administrative cost, including fee
payable for custodian service, registrar service for transfer of shares, shareholder service
for transfer of shares, shareholder service centre cost, legal fees, auditing interest
expenses, directors, and fee. Etc. and brokerage and transaction expense incurred on sales
and purchases of securities.
(3) Investment Advisory fee

This fee is payable for the compensation paid to AMC for handling the investment of
mutual fund.
(4) Other Expenses

Some expenses has to be debited declaring any dividend in any scheme like the
depreciation on investment, provision for bad and doubtful debts or doubtful incomes,
and doubtful deposits and current assets, loss or sale other than inter-scheme transfer or
sales, loss on inter-scheme transfer or sale of investment, deferred revenue expenses
written off.
Balance Sheet
The Balance sheet of a mutual fund contains the following:
(a) Assets- It includes current assets, assets and deferred revenue expenditure.
(b) Liabilities- This side discloses Unit capital. For open ended scheme of mutual fund
this capital may on changing due to sales or purchases of Units. But for close-ended
schemes reduction in capital is only possible when scheme allow buy back of units.
For reserve and surplus, there is no limit which reserve a mutual fund can create. The
only point is that if any reserve other than specified reserves are created, its nature is
to be disclosed.
29
Disclosures
Every mutual fund furnishes the following periodic reports:
i. Copy of audited balance sheet and profit and loss account of each scheme once a
year.
ii. A copy of six monthly un-audited results
iii. A quarterly statement of changes in Net assets for each of the schemes in the fund.
iv. A quarterly portfolio statement, including change from the previous periods, for
each scheme of the mutual fund.
v. Mutual funds shall prepare, for each financial year, annual report and annual
statement of accounts of the schemes and the fund duly audited by an independent
vi. auditor within 6 months from the close of the scheme and send the report to the
unit holder and to the SEBI.
vii. Disclosure of accounting policies
viii. Disclosure of open-end sells and repurchase of units on the basis of NAV.
ix. Net asset value
x. Disclosure pricing of units.
Valuation
Mutual funds value their investments on a ‘mark-to-market’ basis with reference to

the date on which they are valued. , i.e., the valuation date
(a) valuation of trade securities- Where a security is traded on a stock exchange, it is

valued a the last quoted closing price on the stock exchange .If a security is not traded
on a stock exchange on a particular valuation day ,the value are which it was traded
on the selected stock exchange on the earliest previous day may be used, provided
such date is not more than 60 days prior to the valuation date
(b) Valuation of non-traded securities- None. traded securities shall be valued in ‘Good
Faith’ by the AMC on the basis of appropriate valuation method ,which shall be
periodically reviewed by the trustees and reported by the auditors as fair and
reasonable
Income received in respect of units of a mutual fund, including units under the respective
plans would be exempt from tax under section 10(35) of the Act to all the unit holders.
30
Measuring the performance of a mutual fund scheme
The performance of a mutual fund scheme is reflected in its net asset value (NAV)
which is disclosed on daily basis in case of open – ended scheme and on weekly basis in
case od close – ended schemes. The NAVs of mutual funds are required to be published
in newspapers. The NAVs are also available in the websites of mutual funds. All mutual
funds are also required to put their NAVs on the website of association of mutual funds in
India (AMFI) and thus the investors can access NAVs of all mutual funds at one place.
The mutual funds are also required to publish their performance in the form of half
yearly results which also include their returns/yields over a period of time i.e. last six
months, 1year, 3 year and 5 years and since inception of schemes.55 Investors can also
look into other details like percentage of expenses of total assets as these have an effect
on the yield and other useful information in the same half – yearly format. The mutual
funds are also required to send annual report or abridged annual report to the unit holders
at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are
being published by the financial newspaper on a weekly basis. Apart from these, many
research agencies also publish research reports on performance of mutual funds including
the ranking of various schemes in terms of their performance. Investors should study
these reports and keep themselves informed about the performance of various schemes of
mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds
under the same category. They can also compare the performance of equity oriented
schemes with the benchmark. On the basis of the performance of the mutual funds, the
investors should decide when to enter or exit a mutual fund scheme.
55
Ketan Madia, “Real Estate Mutual Funds” SCL MAGAZINE,VOL.72, 2006, Pg 87.
31
5. Regulatory Framework of Mutual Funds
SEBI Regulations on Mutual Funds
On April 11, 1988, the Government of India by an administrative circular constituted

the Securities and Exchange Board of India for protection of Investors.56However its power to
regulate the capital markets was very limited. The great Indian Scam on 1991-1992 prompted
the government and the Indian parliament to tighten its regulation over the market. 57 On
January 30,1992, an ordinance known as SEBI ordinance was promulgated .On February
21,1992, a bill was introduced ,namely the SEBI Bill, 1992 which became an act on
April4,1992. It came into force on January 30, 1992. This securities and exchange Board of
India Act, 1992 is pivotal to the regulatory framework of the Indian capital markets today.
This administrative law provides for the establishment of the securities and Exchange Board
of India ,commonly known as SEBI, to protect the interests of the investors in securities and
to promote development of and to regulate the securities market and for matters connected
with or incidental to them.
Section 11(1) of the SEBI Act says that ‘It shall be the duty of the Board to protect the
Interests of the Investors in Securities and to promote the development of, and to regulate the
securities market, by such measure as it thinks fit. With its main source of power to regulate
the market in section 11, the SEBI comes out with regulations for the same under Section 30
of the Act. Mutual funds are becoming the vehicle of securities investments mostly favoured
56
Tadashi Endo, The Indian securities market 76(2006)
57
S.K Barua & J.R. Varma, The Great Indian Scam{1993}
32
by the general public worldwide. Though in India, the mutual funds form a comparatively
small segment of the securities markets, they have grown phenomenally over the last few
years.
In recognition of their increasing importance as an investment vehicle, the securities

and Exchange board of India (SEBI) does have a set of regulations which govern mutual
funds functioning in the Indian Capital market.58 SEBI solely regulates the formation and
operation of mutual funds in India.
A segregated collection of assets, a ‘fund’ cannot be freestanding, meaning that it

cannot in and of itself be a legal person or entity. Thus, the legal title to a fund’s underlying
assets has to be somewhere extrinsic to the fund itself. It can be a human being in his own
right or as trustee. It can be in a corporation in its own fright or as trustee. In any case it has
to be somewhere and cannot be in the fund itself.59The Legal title to the underlying assets of a
mutual fund is either in its trustees or in a corporation. In the case of the board of trustees,
title is held jointly by the individuals themselves who comprise the board, a trustee ‘board’
generally not being a Juristic person.60In the case of a mutual fund packaged as a corporation,
legal title to the underlying assets is in the corporate entity itself. It is not in its directors,
either individually or as a board nor is it in the sponsor. In India, the mutual funds are based
on its Trust form.
A general procedure has been laid down apart from complying with the SEBI regulations,
in the case of bank’s seeking to sponsor mutual funds, approval of RBI is required under the
Banking regulations act, 1949. In the case of public financial institutions or investment
institutions, clearance from central government is needed for setting up of mutual funds.
Thereafter making out a prima facie case followed by application to SEBI furnishing
information about sponsor, trustee, AMC, and custodians should be complied with; after
approval of SEBI, trust deed between the sponsor and the trustees should be executed. AMC
is floated as a new company. The agreement between the AMC and the custodian is executed.
This is followed by a formal application for authorization by SEBI and fee as specified is
58
Securities &Exchange Board of India (mutual funds )Regulations, 1996.
59
Henry Hansmann, Reiner Kraakman & Richard Squire, “Law and the Rise of the Firm”,119
Harv.L.Rev.1335,1358 (2006).
60
Charles E ,Rounds, Jr. and Andreas Dehio, Publically-Traded open end mutual funds in comm0on Law and
civil Jurisdiction: A comparison of Legal structures 3 NYUJL &BUS.473,490 (2007).
33
paid. When there is formal authorization, schemes are formulated. In the case of
Banks/financial institutions, the schemes will have to be approved by the RBI/Central
government. A detailed procedure has been laid down below:
1. Information is furnished to SEBI giving sponsor’s name and address, its principal line
of business activity, its operational performances for past five or more years (gross
profits, net profits, increase in reserves, net worth, gross and net blocks, structure,
dividend payout ratio, contribution to the corpus of the fund. Paid up capital of the
assets management company, promoters of the sponsor, their background and market
standing, financial stake; and management pattern of the sponsor.
2. Drafts of the trust deed, memorandum and articles of association of assets
management Co., names of the trustees and the Board of Director’s of AMC and the
custodians are to be furnished for SEBI’S preliminary scrutiny for establishing prima
facie the eligibility of the sponsors, AMC, Trustees and custodians. In the second
phase SEBI is to be approached for formal authorization of mutual fund for business.
3. On receipt of the four formats-sponsor, trustee, AMC and custodian, the sponsor
should fill in the same carefully and comply with the prescribed guidelines and send
two copies to SEBI with all the enclosures; on receipt of SEBIs decision the sponsor
takes steps to finalise and execute the trust, deed, incorporate the AMC and also
complete formalities as required under SEBI’s approval letter setting out the terms
and conditions.
4. The completion of formalities, which is the second stage of formalities involves final
authorization of mutual fund for business (Application Form for authorization) and
authorization to market its scheme for public subscription (approval of draft scheme
by the SEBI).The mutual fund trust should be authorized to float one or more schemes
under which units are to be issued to the investors.
5. In the existing mutual; funds formulated and marketed in the schemes; in the new set
up, it is the role to be discharged by the AMC.
5.1 Registration of Mutual Fund
The following statutes/guidelines regulate the registration and operation of mutual funds:
1. Unit Trust of India Act,1963 and Unit Trust of India guidelines, which are applicable
to UTI only;
2. RBI Guidelines for mutual funds
34
3. Central government Guidelines for mutual funds dated 28-6-1990 and revised central
government guidelines for mutual funds dated 14-2-1992
4. The securities and Exchange Board of India9mutual fund)Regulations,1993
5. The Indian Trust Act,1882 and relevant provisions of the companies Act,1956
The Unit Trust of India Act 1963 and its guidelines are applicable to various schemes
sponsored by it and the guidelines regulate constitution and management of mutual fund as
trusts, investment objectives and policies, investment limits, pricing and income distribution,
in addition to disclosure obligations.
Registration of mutual fund is mandatory. All the mutual funds in India as also the
asset management companies and the custodians of the mutual funds assets are required to be
registered with the SEBI. No Mutual fund can approach the market with the scheme unless
scheme has been fully approved by the SEBI which is then sole authority for granting
approval to such funds. It examines the scheme and suggests modifications, if any, and
allows the scheme to be advertised and published. An Application for registration of a mutual
fund shall be made to the board in Form A by the sponsor. The application for registration,
together with a non - refundable fee of Rs 25,000 should be made in the prescribed form.
The registration is intended to provide adequate and accurate disclosure of material

concerning the mutual fund. The SEBI Regulation has laid down an eligibility criterion under
regulation 7 for the registration of a mutual fund.
For the purpose of grant of a certificate of registration, the applicant has to fulfil the
following namely: -
(a) The sponsor should have a sound track record and general reputation of fairness and
integrity in all his business transactions.
Sound track record shall mean, the sponsor should mean that the sponsor should be
(i) carrying on business in financial business in financial services foe a period of not
less than five years; and
(ii) the net worth is positive in all the immediately preceding five years; and
(iii) the net worth in the immediately preceding year is more than the capital
contribution of the sponsor in the Asset management company: and
35
(iv) the sponsor has profits after providing for depreciation, interest and tax in three
out of the immediately preceding five years, including the fifth year
[(aa) the applicant is a fit and proper person61]
For the purpose of determining whether an applicant or the mutual find is a fit and proper
person the Board may take into account the criteria specified II of the Securities and
Exchange Board of India (Intermediaries) Regulations, 2008.
(b) In the case of the existing mutual fund, such fund is in the form of a trust and the trust
deed has been approved by the board;
(c) the sponsor has contributed or contributes at least 40% to the net worth of the Asset
management company: provided that any person who holds 40% or more of the net worth
of an asset management company shall be deemed to be a sponsor and will be required to
fulfil the eligibility criteria specified in these regulations;
(d) The sponsor or any of its directors or the principal officer to be employed by the
mutual fund should not have been guilty of fraud or has not been convicted of an offence
involving moral turpitude or is not guilty of any economic offence.
(e) Appointment of trustees to act as trustees for the mutual fund in accordance with the
provisions of the regulations;
(f) Appointment of asset Management Company to manage the mutual fund and operate
the scheme of such funds in accordance with the provisions of these regulations;
(g) Appointment of custodian in order to keep custody of the securities or gold and gold
related instrument or other assets of the mutual fund held in terms of these regulations
and to provide such other custodial services as may be authorised by the trustees.62
The board may on receipt of all information decide the application.63 It may register the
mutual fund and grant a certificate in Form B on the applicant paying the Registration Fee as
specified in second Schedule, the registration is subject to the compliance with the procedure
mentioned above.
61
Inserted by the SEBI (mutual fund) Amendment Regulations,1998,w.e.f.12-1-1998.
62
Substituted by the SEBI (mutual funds) Amendment Regulations,2008,w.e.f. 16-4-2008
63
Regulation 8 of the SEBI (Mutual fund)Regulations 1996.
36
Terms and Conditions of Registration
The registration granted to a mutual fund under regulation 9, shall be subject to the following
terms and conditions:
(a) The trustees, the sponsor, the asset management company and the custodian will comply
with the provisions of the regulations;
(b) The mutual fund will inform the board ,if any information or particulars previously
submitted to the board was misleading or false in any material respect;
(c) The mutual fund will inform the board, of any material change in the information or
particular previously furnished, which have a bearing on the registration granted by it.
(d) The fees should be paid as specified in the regulations and the second schedule. Any fees
specified in Regulations 12 and 13 and the second schedule64.
The application may be rejected if it does not meet the criteria mentioned in regulation
765.
Rejection of application
Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7, the board
may reject the application and inform the applicant of the same.66
Payment of annual fee
A mutual fund shall pay before the 15th April each year annual fee67as specified in the second
schedule for every financial year from the year following the year of registration; provided
that the Board on being satisfied with the reasons for the delay permit the mutual fund to pay
the annual fee at any time before the expiry of two months from the commencement of the
financial year to which such fee relates.68The board does not permit a mutual fund which has
not paid annual fee to launch any scheme.69
5.2 Constitution of a Mutual Fund

64
Regulation 10 of the SEBI mutual fund regulations 1996.
65
Regulation 9 of SEBI Mutual fund regulations 1996.
66
Regulation 11 of the SEBI mutual fund regulations 1996.
67
Substituted for ‘service’ but the SEBI (mutual funds)(third amendment) Regualtions,2006,w.e.f.21-12-
2006,w,e,f 3-8-2006.
68
Regulation 12 of the SEBI of the mutual fund regulation 1996.
69
Regulation 13 of the SEBI of the mutual fund regulation 1996.
37
The SEBI Regulations make it mandatory for a mutual Fund to have a three tier
structure of ‘sponsor’, ‘Trustee’ and ‘Asset management company’ These three entities are
inter-linked and catalyst in formation and functioning of the fund.
1. Sponsor
A sponsor is a person who, while acting alone or in combination with another body
corporate, establishes a mutual fund.70 The role of a sponsor is primarily to establish a mutual
fund. A company can be a sponsor and act alone or in combination with any other person.
(Including company).The registration of a mutual fund with SEBI (Board) is a mandatory
requirement.71The fund is registered by the sponsor. It is the sponsor who makes the
Application in Form A for Registration of the Fund to the Board.72
2. Trustee
According to the Regulation 2(y) of the SEBI (Mutual funds) Regulations, 1996,
“Trustees mean the Board of Trustees or the trustee company who holds the property of the
mutual fund in trust for the benefit of the unit holders.73
A mutual fund must be constituted in the form of a trust. The trust is established by a sponsor
who is like the promoter of a company. In a trust structure, the beneficial owner has no power
to challenge the bonafide actions of the trustee. The effectiveness of the trust structure
depends on hoe trustworthy the trustees are. The trustees of the mutual fund hold its property
for the benefit of the unit-holders. The Instrument of trust must be in the form of a Deed,
Duly Registered under the Provisions of the Indian Registration Act, 1908 executed by the
sponsor in favour of the trustees named in such an instrument as per the regulation 74. In the
case of mutual funds established by the public sector banks and Insurance corporations, the
funds have been established under the Indian Trust Act, 1882, as trust for the benefit of
Investors. It also provides that the trust deed mu must contain such clauses as are mentioned
in the third schedule and such other clauses which are necessary for safeguarding the interest
of the Unit Holders .and no other clauses.75The trustees are vested with the general power of
superintendence and direction over the AMCS.
70
Regulation 2(x) of the SEBI of the mutual fund regulation 1996.
71
Regulation 3,4,5 and 6 of the SEBI of the mutual fund regulation 1996.
72
Regulation 3 of SEBI mutual fund regulation 1996
73
Substituted by the SEBI (Mutual funds)Amendment Regualtions,1999,w.e.f.8-12-1999
74
Regulation 14 of SEBI of the mutual fund regulation 1996
75
Regulation 15(1) of SEBI of the mutual fund regulation 1996.
38
No trust deed should contain clauses that has the effect of 76
(i) Limiting or extinguishing the obligations and liabilities of the trust in relation to any
mutual fund or the unit holders;
(ii) Indemnifying the trustees or the asset management company for loss or damage caused to
the unit holders by their acts of negligence or acts of commission or omission.
Contents of a Trust Deed
Schedule III details the clauses which are to be contained in the trust instrument for
safeguarding the interest of the unit holder. No trust deed shall contain a clause which has the
effect of –
(i) Limiting or extinguishing the obligations and liabilities of the trust in relation
to any mutual fund or the unit holders; or
(ii) Indemnifying the trustees or the asset management company for loss or
damage caused to the unit holders by their acts of negligence or acts of
commission or omission.
The trustees should take reasonable care to ensure that the funds under the schemes
floated and managed by the AMCS are in accordance with the trust deed and SEBI
regulations. They have power to dismiss the AMC under specific events only with the
approval of the SEBI, in accordance with the regulations. a meeting of the trustees would be
held at least once in every two calendar months and at least six meetings should be held every
year. The quorum for a meeting should be specified with at least one independent trustee
/director present. The SEBI (mutual fund) regulations provide stringent qualifications for the
appointment of trustees. The regulation has spelled out the rights and obligations of the
trustees, the disqualifications etc., to ensure that they carry out their fiduciary responsibilities
in the best interest of the unit-holders. The regulation has also delineated a code of conduct to
be abided by the trustees.77
Appointment of Trustees
76
Regulation 15(2) of the SEBI of the mutual fund regulation 1996.
77
5th schedule, regulations.
39
A mutual fund shall appoint trustees in accordance with these regulations. 78Any
person can be appointed as a trustee 79if he
(i) is a person of ability, integrity and standing;
(ii) has not been guilty of moral turpitude
(iii) has not been convicted of any offence /violation of any securities laws such as the SEBI
Act,1992,the securities contracts(regulation)Act,1956,the depositories Act,1996 and such
other laws as may be enacted from time to time and
(iv) has furnished particulars as specified in Form C
No asset management company and no director (including independent director), officer

or employee of an asset management company shall be eligible to be appointed as a trustee of
any mutual fund.80. No person who is appointed as a trustee of a mutual fund shall be eligible
to be appointed as a trustee of any other mutual fund. But a trustee of one mutual fund is
eligible to be appointed as trustee of another mutual fund only if
(1) Such a person is an independent trustee that is; he is not an associate/subsidiary or

associated with the sponsor in any other manner.
(2) The mutual fund of which is a trustee gives prior approval for such an appointment.
As per regulation 16(5) two-thirds of the trustees shall be independent persons and shall
nor be associated with the sponsors or be associated with them in any manner what so ever.
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 the trust is not in conflict with the object of the mutual
fund. The appointment of the trustees requires prior approval of the SEBI.
Rights and obligations of the trustees
1. The trustees and the AMC shall with the prior approval of the SEBI enter into an
investment management agreement
78
Regulation 16 (1) of the SEBI mutual fund regulation 1996.
79
Regulation 16(2) of the SEBI mutual fund regulation 1996.
80
Substituted by the SEBI (mutual funds) (Fifth Amendment) Regulations, 2006, w.e.f 21-12-2006.
40
2. The investment management agreement should contain such clauses as mentioned in
the fourth schedule and such other clauses as are necessary for the purpose of making
investments.
3. The trustees have the right to obtain from the AMC concerning the operations of the
various schemes of the mutual fund managed by it at such intervals and in such
manner as required by them to ensure that the AMC is complying with the provisions
of the trust deed and the SEBI Regulations.81
Contents of the investment management agreement
The AMC appointed by the trustees, with the prior approval of the SEBI, would be
responsible for floating schemes for the mutual fund after approval for the same but eh
trustees, and for managing the funds mobilised under various schemes. In accordance with
the provisions of the trust deed and the SEBI regulations. It would not undertake ant other
business activity other than the management of mutual funds and such other activities as
financial service consultancy, exchange of research and
Analysis on a commercial basis as long, as these is not in conflict with the fund
management activity itself, without the prior approval of the trustees and the SEBI.
The funds raised under various schemes would be invested by it in accordance with
the provisions of the trust deed and the SEBI regulations. The AMC would not (i) acquire any
of the assets out of the scheme property that involves the assumption of any unlimited
liability or which may result in encumbrance of the scheme property in any way or;(ii) take
up any activity in contravention of the SEBI regulations.
No loss or damage or expenses incurred by the AMC, its officers or any person
delegated by it should be met out of the trust property. The AMC should ensure that no offer
document of a scheme, key information memorandum, abridged half-yearly and annual result
is issued or published without the trustees’ prior approval in writing.
That it does not and contain any statement or matter extraneous to the trust deed or the
offer document scheme particulars approved by the trustees and the SEBI and that it should
provide an option of nomination to the unit-holders in the prescribed form. It should also
disclose the basis of calculating the repurchase price and NAV of the various schemes of the
81
Regulation 18 (1)(2)(3) of the SEBI mutual fund regulations 1996.
41
mutual fund in the scheme particulars and the investors of the same, at such intervals as may
be specified by the trustees and the SEBI.
The trustees shall ensure before the launch of any scheme that the asset management
company has;82
(a) Systems in place for its back office, dealing room and accounting
(b) Appointed all key personnel, including fund managers for the schemes and submitted
their bio-data, containing their educational qualifications and past experience in the securities
market, to the trustees, within 15 days of their appointment.
(c) Appointed auditors to audit its accounts
(d) Appointed a compliance officer who shall be responsible for monitoring the compliance
of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the
board or the central Government and for redressal of investors’ grievances.83
(e) Appointed registrars and laid down parameters for their supervision
(f) Prepared a compliance manual and designed internal control mechanisms, including
internal audit systems
(G) specified norms for empanelment of brokers and marketing agents.
The compliance officer appointed under clause (d) of sub-regulation (4) shall immediately
and independently report to the Board any non-compliance observed by him84
The trustees shall ensure that that an AMC has been diligent in empanelling the
brokers, in monitoring securities transactions with brokers and avoiding undue concentration
of business with any broker .They have to ensure that the AMC has not given any undue or
unfair advantage to any associates or dealt with any of the associates of the AMC in any
manner detrimental to the interest of the unit holders.85They must also ensure that the
transactions entered into by the AMC are in accordance with these regulations and the
82
Regulation 18(4) of the SEBI(mutual fund regulation) 1996.
83
Substituted by the SEBI(Investment Advice by Intermediaries)(Amendment) Regulations,2001,w.e.f.29-5-
2001
84
Inserted by the SEBI (Investment Advice by Intermediaries) (Amendment) Regulation,2001,w.e.f.29-5-2001.
85
Regulation 18(6) of SEBI
42
scheme. Further, as per Regulation 18(8),they have to ensure that the AMC has been
managing the mutual fund schemes independently of other activities and have taken adequate
steps to ensure that the interest of investors of one scheme are not being compromised with
those of any other scheme or of other activities of the AMC. , and that all the activities of the
AMC are in accordance with the provisions of these regulations.[regulation 18(9)]
They are also requires to quarterly review
A) All transactions carried out between mutual funds, AMC and its associates.[regulation
18(17)]
B) The net worth of the AMC and in case of any shortfall, ensure that the AMC make up
for the shortfall as per clause (f) of sub-regulation (1) of regulation 21.[regulation
18(18)].
The trustees must periodically review all service contracts such as custody
arrangements, transfer agency of the securities and satisfy itself that such contracts are
executed in the interest of the unit holders.[regulation 18(19).
The trustees are required to exercise a general due diligence in respect of matters specified in
the regulation and specific due diligence in certain matters. According to regulation 18(26),
notwithstanding anything contained in sub-regulations (1) to
(25), The trustees shall not be held liable for acts done in good faith if they have exercised
adequate due diligence honestly. The trustees are bound to make such disclosures to the unit
holders as are essential in order to keep them informed about any information which may
have an adverse bearing on their investments.86
Asset management company (AMC)
For constituting a mutual Fund an asset management company has to be appointed for
which the approval of the board is mandatory. AMC is a company formed and registered
under the companies Act, 1956(1 of 1956) and approved as such by the board under sub
regulation (2) of regulation 21.87It has to be appointed by the sponsor or, if it is authorised by
the Trust Deed, by the Trustee, the appointment has to be approved by the board.88.
86
Regulation 60 of the SEBI.
87
Regulation 2(d) of SEBI.
88
Regulation 20(1) of the SEBI.
43
Eligibility Criteria
According to regulation 21 of the SEBI (mutual fund) regulation 1996, for grant of
approval of the AMC by the SEBI, the applicant has to fulfil the following criteria:
The existing AMC should have a sound track record/general reputation and fairness in
transactions and should be a fit and proper person .It must have a net worth of not less than
rupees ten crore.89 And its chairman must not be a Trustee of any mutual Fund. Further, the
Board of directors of such AMC must have at least fifty per cent directors, who are not
associate of, nor associated in any manner with, the sponsor or any of its subsidiaries or the
Trustees.90 The Directors must have adequate professional experience in finance and financial
services related field and not found guilty of moral turpitude or convicted of economic
offence or violation of any securities Law.91
The Asset management company manages the funds by making investments in

various types of securities.
The application for the approval of the asset management company shall be made in
Form D. and with regard to the appointment of the AMC; the sponsors of mutual funds or
trustees would appoint the AMC with the prior approval of the SEBI. Its appointment can be
terminated but a majority of trustees or by 75 per cent of the unit-holders of the scheme. Any
change in its appointment also requires prior approval of the SEBI as well as the unit-
holders.92
Obligations of the Asset Management Company
The regulations cast the duty on AMC to take all reasonable steps and exercise due
diligence to ensure that the investment of funds pertaining to any scheme is not contrary to
the provisions of these regulations and the trust deed.93It must exercise due diligence and care
in all its investment decisions as would be exercised by other persons engaged in the same
business. It is responsible for the acts of commissions and omissions by its employees or the
persons whose services have been procured by the AMC, and shall submit to the trustees’
quarterly reports of each year on its activities and the compliance with these regulations. The
89
Regulation 21(1)(f) of the SEBI.
90
Regulation 21(1)(d) of the SEBI.
91
Regulation 21(1)(b) of the SEBI.
92
Regulation 20 of the SEBI.
93
Regulation 25(1).
44
regulations cast special duties on the chief executive officer of the AMC the duty ensure that
the mutual fund complies with all the provisions of these regulations and the guidelines or
circulars issued in relation thereto from time to time and that the investments made by the
fund managers are in the interest of the unit holders and shall also be responsible for the
overall risk management function of he mutual fund. The AMC must also file with the
trustees the details of transaction in securities by the key personnel of the AMC in their own
name or on behalf of the AMC and shall also report to the Board, as and when required by the
board. In case it enters into any securities transactions with any of its associates a report to
that effect shall be sent to the trustees at its next meeting.
The AMCs should not take investors for granted. Their temptation to recover fee and
other expenses, from mutual fund, targeting the highest limits prescribed by the SEBI is not
desirable. They have to check this practise failing which they will have to face retaliation of
investors.94They should be made to incorporate some criterion in their agreement with MF
linking their fee with some performance parameters. It will be too much to see to SEBI for its
solution.
Appointment of a Custodian
The SEBI Regulations also mandate the appointment of a Custodian.95 As per the
Regulation 2(h) of the SEBI (custodian of securities) Regulations, 1996, “Custodian” means
a person who has been granted a certificate of registration to carry on the business of
custodian of securities”. He has to keep custody of the securities of Gold and gold related
instruments and carry out the custodian activities as may be authorised by the trustees. He
holds the securities of various schemes of the fund in its custody. The mutual fund should
appoint a custodian to carry out the custodial services for the scheme and send intimation of
the same to the SEBI within fifteen days of the appointment.. A custodian in which the
sponsor or its associates hold 50 per cent or more of the voting rights or the share capital or
where 50 per cent or more of the directors of the custodian represent the interest of the
94
DR.L.K.BANSAL, “Mutual fund investors taken for granted by AMCs” chartered secretary, April 1996,pg
365
95
Regulation 7(g) of the SEBI (mutual fund) regulations 1996.
45
sponsor or its associates, cannot act as custodian for mutual fund constituted by the same
sponsor or any of its associates or subsidiary company.
The mutual fund should enter into a custodian agreement, which should contain the
clauses that are necessary for the efficient and orderly conduct of the affairs of the custodian.
The agreement, the service contract, terms and appointment of the custodian can be entered
into only with the prior approval of the trustees.96
The storm that wrecked financial market s worldwide in 2008-09 did not spare the
mutual fund industry in India either. Only nine of the 33 AMC have seen an increase in their
assets under management in the last one year. While the steep drop in valuations across asset
classes is the main reason for shrinking assets under management (AUMS), heavy
redemptions towards the end of the year further compounded the woes of fund houses. Of
the top largest fund houses in the country today, only four have reported a growth in their
AUM since last year. These include LIC, Birla sun Life, HDFC, and Kotak Mahindra. While
LIC’S assets have grown by over 64% in last one year, Birla sun life and HDFC have
reported an increase of 31% and 295 respectively in their AUM since the previous year.
What is interesting to note is that two of the relatively small fund houses in term of AUM
have also seen a significant growth in their assets in last one year. These include Baroda
Pioneer and Canara Robeco. Both these fund house have seen strong inflows in their liquid
schemes. The public sector AMCs have seen better inflows vis-à-vis their private sector
counterparts during 08-09.
96
Regulation 26 of the SEBI(mutual fund) regulations 1996.
46
6. Tax Benefits of Investing in a mutual fund
The Income –Tax Act 1961 specifically provides for treatment of mutual funds
registered under the Securities and Exchange Board of India Act, 1992 or regulations made
there under and those set up by the public sector bank or a financial institution or authorised
by the reserve bank of India.97.Taxation of income of mutual funds has to be examined at two
stages .first, at the level of the mutual fund itself and second, at the level of the investors, As
regards the taxation of mutual funds as separate entities, their income, whether dividend or
capital gain is not subject to any tax unlike a corporate. This benefit is granted to it under
clause (23D) of section 10 of the Income tax act by virtue of its status of a pass through
vehicle.98Clause (23D) of section 10 excludes any income of a mutual fund for the purpose of
computation of total income. Thus, it is clear that income from mutual funds is not included
97
Section 10(23D) of the Income-Tax Act, 1961.
98
K Chaturvedi & SM Pithisaria, “Income tax Law, pg 874.
47
in taxable income under the Income-Tax Act under any circumstance. Therefore, taxation of
income from mutual funds is carried out differently from the other forms of Income.
The imposition of capital gains tax is a crucial issue concerning taxation of the
investor from mutual funds, capital gains is the value computed by deducting the expenditure
incurred in connection with the transfer and the cost of acquisition of the asset and the cost of
improvement of the asset from the full value of consideration received as a result of transfer
of capital asset.99
Prior to the finance act,2004, the tax levied on unit holders of equity oriented mutual
fund holders for long –term capital gains was governed by section 112 of the income tax act.
This tax was levied at the rate of 20 percent.100.Recently inserted by finance act, 2004, clause
(38) of section 10 of the Income Tax Act lays down that any income arising from the transfer
of a long-term capital asset being an equity share or a unit of an equity oriented fund on
which securities transaction tax is levied shall not be included for the purpose of computing
total income. It is very important to note that long term capital gains tax is still leviable on
gains from debt oriented mutual funds.
With respect to short term capital gains, prior to finance act, 2004, tax was levied at
the same rate as rest of the income. Section 111A inserted by the finance act ,2004 in the
Income-tax Act provides for short term capital gains tax on capital gains arising from the
transfer of a unit of an equity oriented fund at the rate of ten percent.. As in the case of long-
term capital gains, the privilege under section 111A has not been extended to short-term
gains from debt-oriented mutual funds which are still taxed at the same rate as the rest of the
Income. Capital gain tax induces a phenomenon commonly known as the ‘Lock-in’ effect.
This occurs due to the fact that capital gains tax hinges on the transfer of the asset, which is
entirely with the discretion of the Investor. Hence, Payment of the tax is entirely
discretionary.
A significant incentive exists for tax payers never to sell capital assets foe a gain as
upon selling a capital asset profitably, the tax due upon the gain would partially consume the
profit.101There are contrasting views regarding the impact of this phenomenon. On the other
99
Section 48 of the Income Tax Act 1961.
100
Section 112(1) of the Income Tax Act, 1961.
101
C Thomas Paschall, “US Capital gains taxes: Arbitrary holding periods debatable tax rates”, 73 Cal.L
Rev.843.
48
hand, the lock-in effect is taken to be a positive consequence as it reduces speculative trading.
It is also harmful because it ties up investment funds with established firms and denies funds
to new ventures.102It is submitted at this stage that the Government of India has clearly
favoured the second argument as it has withdrawn capital gains tax on equity oriented mutual
funds.
The recent and much talked about tax introduced by the Finance Act, 2004 is the
securities transaction tax. As stated in sub-section (11) of section 97 of the finance Act, 2004,
‘securities transaction tax’ means tax leviable on the taxable securities transactions. Section
98 of the Finance Act, 2004 lays down the charge of securities transaction tax. Securities
transaction tax is levied on the value of the transaction and is payable by the purchaser or
seller or both. In the case of transactions in units of equity oriented funds .075 percent tax is
payable by the purchaser and .075 per cent tax is payable by the seller. In case where the
transfer of a share or unit is not settled by actual delivery or transfer of such share.01 per cent
is imposed on the seller. Where a unit of an equity oriented fund is sold to the mutual fund
0.15 per cent tax is levied on the seller.103
At this stage, mention must be made that as per clause (38) of section 10 of the
income-tax act the imposition of transaction tax excludes the capital gains from equity
oriented mutual funds from being included in the total income. However, this benefit is not
conferred on income from debt oriented mutual funds. Tax is deducted at source for all
income payable by a mutual fund to the investors by virtue of section 194K of income-tax
act. Section 194K states that Income-tax at the rate of 10 per cent shall be deducted on any
income payable to a resident in respect of units of mutual funds by the person responsible for
making such payment at the time of payment. An additional income-tax is payable by
investors in debt oriented mutual funds which is provided for under sub-section (2) of section
115R of the Income-Tax Act. This additional tax is levied at the rate of twelve and one-half
percent on income distributed to an individual or a Hindu undivided family and twenty per
cent on income distributed to any other person .Further, no deduction is allowed on any
income received from a debt-oriented fund, which is charged in the above manner.
102
Brian Van Vleck, “A comparison of Japanese and American taxation of capital gains”, 14 Hastings Int’l &
comp. Rev.719.
103
Table appended to diction 98 of the finance Act (No.2 )Act,2004.
49
Dividend stripping or cherry picking(as known in united states)is a transaction by
which taxpayers purchase securities before the dividends are distributed and after getting the
Income, the securities are sold at loss and the loss so incurred is set-off against the other
taxable income thereby reducing the incidence of tax on the income other wise incurred.
104
The objective is to get dividend income, which is free from tax and also claim set-off the
capital gain, or other income.105
Sub-section (7) of section 94 of the Income Tax act seeks t prevent such tax
avoidance. sub-section (7) lays down that when any person buys or acquires securities or
units within a period of three months before the entitlement to the dividend and sells or
transfers within a period of three months after such date, then any loss arising from the
transaction, to the extent such loss does not exceed the amount of dividend or income
received on such units shall be ignored for the purpose of calculating the Income chargeable
to tax.. In other word’s, the loss incurred by the assesses would be denied the right of set-off
and thereby the other income would continue to b be taxed. The finance Act, 2004 has
substituted a new clause (b) for the earlier one to secure that in cases where any person sells
or transfers units within a period of nine months after the date of entitlement of tax, the loss
incurred on the transfer will be denied set-off to the extent of the dividend or income
received.
This substitution by the Finance Act,2004 is criticised on the ground that it treats units
unfavourably as it requires holders to hold on to the units for at least nine months as against
three months for securities ,It is further argued that the Lock-in period of nine months is
totally arbitrary and unwarranted.106
An analysis of the various provisions dealing with taxation of mutual funds clearly
reflects the underlying legislative policy, which is to encourage investment in mutual funds.
The mutual fund itself is not taxed at all because of its pass through status considering that it
has no income of its own. Taxation of income from mutual funds is only taxable at the level
of the investors. The Income tax provides for exemption of income from dividends from total
Income. Prior to the Finance Act, 2004, Capital gains were taxed at a lower rate than normal
104
Michelle Arnopol Cecil, “Toward adding further complexity to the Internal revenue code: A Paradigm for the
deductibility of capital losses”, 99U III.L Rev, 1083.
105
V.Ramaswami, “New Problems of Dividend stripping transactions” {2001} 191 CTR (Articles) 71.
106
V.Ramaswami, “New Problems of Dividend stripping transactions” {2001} 191 CTR (Articles) 71.
50
Income. With the introduction of the finance act, 2004, capital gains were taxed at a lower
rate than the normal income. With the introduction of the finance Act, 2004, long term capital
gains have been totally exempted in the case of equity oriented mutual funds. Short –term
capital gains, prior to the finance act, 2004, were taxed at the rest of the rest of the taxable
income. However ,under the present Law ,short-term capital gains is taxed at 10 per cent
.Additionally,section88 of the Income-tax Act grants rebate to individuals of Hindu
undivided families contributing to mutual funds .these provisions are obvious examples of the
favourable attitude of the law of taxation toward investment in mutual funds.
7. Courts on Mutual Funds
The law relating to mutual funds has not been subjected to litigation before the
securities appellate tribunal established under the SEBI act. Consequently the Supreme Court
too has not had many occasions to look into cases. However the following three decisions
throw light on the attitude of courts towards mutual funds in India.
In Chairman, SEBI v. Shriram Mutual fund [2006] 68 SCL 216 (SC), an appeal was
filed against the final judgement and order passed by the securities Appellate tribunal,
Mumbai raising an important question of law as to whether once it is conclusively established
that the mutual fund has violated the terms of the certificate of registration and the SEBI
(mutual funds) Regulations, 1996, The imposition of penalty becomes a sine qua non of the
violation. Shriram mutual fund conducted business through brokers associated with its
sponsor in excess of the permissible limits prescribed under regulation 25(7) (a) of the
regulations on 12 occasions. It failed to comply with the terms and conditions attached to the
certificate of registration which are statutory in nature, as prescribed by regulation 15(D) (b)
51
of the SEBI Act 1992.when the penalty was imposed and the case reached the tribunal, it set
aside the order of the adjudicating officer on the purported ground that the penalty to be
imposed for failure to perform a statutory obligation is a matter of discretion. The Supreme
Court held that a penalty is attracted as soon as the contravention of the statutory obligation
as contemplated by the regulation is established and hence, the intention of the parties
committing such violation becomes wholly irrelevant.
In Indian Bank mutual fund v. Securities and Exchange board of India

[MANU/DE/2648/2006], the Delhi High court was hearing a writ petition filed by the Indian
mutual fund against an order passed by the SEBI which directed the fund to pay up the
returns they had assured to the investors in the offer document. The petitioners however
maintained that the returns mentioned under the scheme were only indicative returns and
could not be construed as assured or guaranteed returns. On the other hand, it was the
contention of the respondents that the investors were given an impression that returns as
mentioned in the offer document were assured. The Delhi High court on finding that the offer
document used the ‘Indicative returns’ held that there was nothing to suggest that any
member of the public was misled into investing in the scheme on the belief that he or she was
assured of minimum returns and allowed the petition.
In Morgan Stanley Mutual Fund v. Kartick Das [1994]1 SCL 19 (SC), when a
potential investor filed a case before a consumer forum for preventing the mutual fund from
going public on the ground that it was misleading the public, in the litigation that ensued, the
supreme court was called upon to decide whether a prospective investor is a consumer under
the consumer protection act. The Supreme Court held that the till the allotment of shares
takes place, ‘the shares do not exist’ and, hence, a potential investor in a mutual fund is not a
consumer for the purposes of the act.
52
8. Critical appraisal
We can say that the schemes are fairly comprehensive but it is not free from
shortcomings. The regulations have been amended from time to time to meet challenges, in
particular after the UTI scam. Yet they do not deal fairly with prominent issues that have
arisen in the United States after the 2003 Scam namely:
• Independent trustees and mutual funds

Regulation 16(5) provides that two-thirds of the trustees shall be independent persons and
shall not be associated with the sponsors or be associated with them in any manner.
This is a measure of corporate governance similar to the provisions in the US to

protect interests of small investors. Such provisions have been subject to vast criticism there
after the collapse of Enron and WorldCom, as they had a large number of independent
directors on their Boards and yet fraud was committed by these companies. Thus, in the US
there was very little empirical support for the corporate governance reforms that were added
after the Enron and the WorldCom Scandals.107
107
Roberta Romano, The Sarbanes-oxley Act and the meaning of Quack Corporate governance,114 Yale LJ
1521,1528-29(2005)
53
This measure of corporate governance can be criticised on the basic question ‘whether
108
independent directors improve economic performance’, Black and Bhagat conclude that
‘studies of overall firm performance have found no convincing evidence that firms with
majority independent Boards perform better than firms without such Boards’., In addition
most of the outside directors are not selected by the shareholders. Rather, their nomination
comes from the chief executive officer who often chooses them because they are golfing
buddies or have some other social relationship with that officer.109 Further, in the US the
requirement for a majority of outside directors has proved to be ineffective as it did nothing
to prevent the late trading or market timing Scandals involving mutual funds.
(2)Within the mutual funds industry in India, there is a lack of awareness about the unique
role of mutual funds in the financial markets. The social, .Psychological and economic
fundamentals which have a strong bearing on the success of mutual funds are often missing
in the marketing strategies and investment techniques of the funds.
(3) Adding more outside directors to mutual fund Boards as a way of stopping future
Scandals in that Industry has even shakier foundation. Merely providing for independent
directors will not provide an effective solution. A mere effective mechanism is required to
protect the interest of small investor’s.110.In my opinion an effective solution would be to
involve shareholders in appointment of independent trustees to a mutual fund.
(4) The greater power than the power to give comments on the report received from the
AMC regarding the investments by the mutual fund in the securities of group companies of
the sponsor must be vested with independent directors.
(5) There should be a mechanism that must be devised s that they directly report to the board
about the functioning of the trustees and the AMC including the power to recommend to the
board removal of either of them.
(6) The Regulation 1836) that absolves trustees from liabilities of acts are in good faith must
be amended .some criteria must be laid down so as to clarify the amplitude of the clause.
108
Sabjai Bhagat and Bernard Black, “The uncertain relationship between Board composition and firm
performance,54 Bus.Law.921,922-24,(1999)
109
Landan Thomas, Jr,Apath to a seat on the board? Try the Fairway, NY Times, 11 th March, 2006, at A1
(describing several such relationships).
110
Shashank Jain, “Critical Appraisal of mutual funds in India”[2007] 77 CLA(Mag.)27
54
(7) Late trading and pricing arbitrage
Late trading was the root of the 2003 fraud in the US, and the regulations do not
contain any provisions for protecting investors from the perils of such transaction. Late
trading is one form of fund arbitrage. It occurs when an investor purchases fund shares ‘late’.
That is, after the time as of which the fund is priced, which enables the arbitrageur to base
his decision on market events that occur after the time that the fund’s price was calculated. If
the information is positive, the late trader is effectively purchasing of the fund’s shares at a
discount.
The regulations at hand do not address to the risks that may be generated by such a
transaction. These transactions on paper seem to be absolutely legal, as they are not
prohibited or regulated, but nevertheless are fraudulent as they wean a small investor from
the chance of deciding after the markets shuts, but on the contrary allow an intermediary to
take advantage of these market imperfections. thus according to me, the best solution to do
away with these risks is to remove intermediaries .removing intermediaries will ensure that
no arbitrageurs are able to take advantage f such imperfections and on the other hand protect
investors.
55
9. Conclusions and suggestions
We can say that the mutual fund market in India has grown exponentially over the
past few years. New AMCs are entering into the mutual fund industry and there is increasing
completion in the market. The role of SEBI as a regulator of mutual funds becomes more
important with the increase of investments in the mutual fund industry. In 1993 the SEBI
along with the implementing agency for the technical assistance wing of the Asian
Development Bank had formulated a comprehensive regulatory framework to govern all
mutual funds except the unit trust of India (UTI) which paved the way for the entry of private
sector mutual funds. SEBI must ensure that mutual fund industry continues to grow and
contribute more to the development of the Indian economy.
SEBI on 31st December 2007 by way of a circular had decided that no entry load shall
be charged for direct applications received by the AMC i.e. applications received through
internet, submitted to AMC or collection centre/investor service centre that are not routed
through any distributor/agent/broker. This move has attracted a lot of investors to mutual
funds. However in the absence of intermediaries with expertise in financial markets, the
investors now need to be protected more rigorously. SEBI has done a commendable job in the
regulation of mutual funds by issuing circulars and notifications from time to time. It needs to
continue to do it for the effective protection of mutual funds.
To make mutual funds competent to meet their guarantees to the reasonable extent, following
suggestions should be considered:
56
1. All regulatory agencies like the RBI, Finance ministry, controller of capital issues, SEBI
etc and multiple guidelines and rules should be consolidated and there should be one
monitoring authority. RBI has recently turned down the Union Finance Ministry’s suggestion
to allow steepening powers to SEBI to control and monitor mutual funds.
2. Mushroom growth of mutual funds and their schemes should be strictly checked; otherwise
tax collected will not meet the expected target.111
3. Minimum and maximum limits for each mutual fund and each scheme there under should
be checked are fixed to check adverse effect in the capital market.
4. Half-yearly disclosures by mutual funds as to the funds deposited with the, manner of
deployment, value of assets, earning an operating cost in respect of each scheme should be
made in newspapers with a statement specifying how far the guarantees made have since
been fulfilled.
5. Every announcement of new schemes should also specify the working results of the
existing schemes.
6. Operations of mutual funds and each scheme there under should be scrutinised by an
independent professional expert periodically preferably before Half-yearly disclosures.
7. To keep the moral of mutual fund employees, high incentives should be allowed on the
salary drawn by them during the previous year.112
8. There are lot of instances of the violations of the SEBI regulations in the matter like
exceeding the prescribed ceiling of six per cent pre operative expenses, offer of incentives
when remittances are made by demand drafts, allegations of front-running by some of the
managers etc. ,As the mutual funds are highly specialised business and the entry of private-
sector players has brought with them a lot more sophistication, thus a separate investment
management regulatory organization as in some of the foreign countries.
111
G.D Agarwal, “Mutual funds and investors interest”, chartered secretary Jan 1992,pg 22-24
112
G.D Agarwal, “Mutual funds and investors interest”, chartered secretary Jan 1992,pg 22-24.
57
It is unfortunate that the Fund managers are not taking due care for minimising the
risk and are in a race to post higher and higher returns during the phase of bull-run. They
should understand that the Investors forget the High returns posted in any specific period very
soon but they take hell lot of time to forget the burns they get during period of losses. Hence,
for maintaining the confidence of the retail investors it is very important to control wild
fluctuations in the NAVS.
Worldwide, good mutual fund companies over are known by their AMCs and this fame is
directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must
be held accountable for their selection of stocks. In other words, there must be some
performance indicator that will reveal the quality of stock selection of various AMCs.
58

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1.

1.1 Research Methodology

Chapter 6 explains the tax benefits of investing in a mutual fund

Chapter 7 contains various court decisions on mutual funds.

Chapter 8 gives a critical appraisal of mutual funds.

Chapter 9 gives the conclusions and suggestions.

2. Concept of Mutual Funds

1. Providing a steady flow of income

2. Providing high capital appreciation with income

3. Providing income or capital depreciation with tax benefits

2.1 History of Mutual Funds

Evolution of mutual funds in India

Phase II - Entry of Public Sector Funds - 1987-1993

Phase III. Emergence of Private Sector Funds (1993-96)

Phase IV. Growth and SEBI Regulation – 1996 - 2003

Phase V. Growth and Consolidation – since 2004

2.2 Types of Mutual funds

Open and close ended funds

Income and growth funds

Area, Industry and customer group funds

Tax – exempt funds

Specializes in investing in short-term money market instruments like certificate of

3. Working of a Mutual Fund

A flow chart would explain as to how a mutual fund is operated.21

Mutual Fund Operation Flow Chart

3.1. Investing in a mutual fund and advantages of investing in a mutual fund

4. Mutual funds in India

Unit Trust of India

LIC Mutual Fund

SBI Mutual fund

ABN AMRO Mutual Fund

Birla Sun Life Mutual fund

Bank of Baroda Mutual Fund (BOB Mutual Fund)

HDFC Mutual Fund

HSBC Mutual Fund

ING Vysya Mutual Fund

Prudential ICICI Mutual Fund

Sahara Mutual Fund

Tata Mutual Fund

Kotak Mahindra Mutual Fund

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

Reliance Mutual Fund

Standard Chartered Mutual Fund

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company

Morgan Stanley Mutual Fund India

Alliance Capital Mutual Fund

Recent updates in the mutual fund industry in India

Advantages of floating rate funds

Selection of floating rate funds

Schemes according of maturity period

Schemes according to investment objective

A scheme can be classified as growth scheme, income scheme, or balanced scheme

• Growth/equity oriented scheme

• Income debt oriented scheme

• Money market or liquid fund

• Private sector mutual funds

• Off –shore mutual funds

• Money market mutual funds

• Open –ended schemes

• Tax saving scheme

According to regulation 29,the disclosures should be made in the offer document .T he

As per regulation 30, the advertisements in respect of every scheme shall be in