INTRODUCTION

WHAT ARE MUTUAL FUNDS?

A mutual fund pools the money of people with similar investment goals. The money in turn is
invested in various securities depending on the objectives of the mutual fund schemes, the profits
(or loss) are shared among investors in proportion to their investments. These pooled funds provide
thousands of investors with proportional ownership of diversified portfolio managed by professional
investment managers. The term ‘mutual’ is used in sense that all its returns, minus its expenses,
are shared by the fund’s unit holders. Indian mutual funds industry is as old as four decades but its
growth and awareness has reached the present level only since last five years. It is most suitable
investment for the common man who invests his savings at regular intervals. It is an investment
tool where the return on investment is high compared with some other investments available in the
market. It is a mature, well developed & regulated investment vehicle. However, like any other
investment, this, too, caries a certain degree of risk. An investor therefore has to take care of
his\her risk taking ability, tax issues, investment period etc. They are the mobilizers of savings
particularly from small & house hold sector for investment in stock & money market. Broadly mutual
funds are basically in 3 types of asset classes such as stocks, bonds & money market instruments.
They are non-depositary or non banking financial intermediary. They are an important segment of
the financial system. Mutual funds are not for:
Ø Getting rich quick investments.
Ø Risk free investments.
Ø Assured return investments.
Ø A universal solution to all investment needs.

MUTUAL FUND SCHEMES

*OPERATIONAL CLASSIFICATION:
1. OPEN-ENDED SCHEME: When a fund is accepted and liquidated on a continuous basis by a
mutual fund manager, it is called ’open-ended scheme.’ The fund manager buys & sells units
constantly on demand by the investors. Under this scheme, the capitalization of the fund will
constantly change, since it is always open for the investors to sell or buy their share units. The
scheme provides an excellent liquidity facility to investors. No intermediaries are required in this
scheme.
MERITS:
Ø It provides liquidity facility.
Ø No intermediaries required.
Ø Provide long term capital appreciation
Ø No maturity period.
DEMERITS:
Ø Not traded in stock exchange.
Ø Capitalization of fund is constantly changing.

2. CLOSE-ENDED SCHEME: When units of a scheme are liquidated (repurchase) only after the
expiry of a specified period, it is known as a close-ended scheme. Accordingly such funds have fixed
capitalization & remain as a corpus with the mutual fund manager. Units of close-ended are to be
traded on the floors of stock exchange in the secondary market. The price is determined on the
basis of demand & supply. Therefore there will be, two prices, one that is market determined & the
other which is Net Asset Value based. The market price may be either above or below NAV.
Managing a close-ended scheme is comparatively easy as it gives fund managers ample opportunity
to evolve & adopt long term investment strategies depending on the life of the scheme. Need for
liquidity arises after a comparatively longer period i.e. normally at the time of redemption.

MERITS:
Ø The prices are determined on the basis of market price & NAV.
Ø Gives fund manager ample opportunity to evolve & adopt long term investment strategies
depending on the life of the scheme.
Ø Invests in listed stock exchange & traded securities.
DEMERITS:
Ø Open for subscription only for a limited period.
Ø Exit is possible only at the end of specified period.
Ø Fixed capitalization.

*RETURN BASED CLASSIFICATION:

1. INCOME FUND SCHEME: The scheme that is tailored to suit the needs of investors who are
particular about regular returns is known as ‘income fund scheme.’ The scheme offers the maximum
current income, whereby the income earned by units is distributed periodically. Such funds are
offered in two forms, the first scheme earns a target constant income at relatively low risk, while
the second scheme offers the maximum possible income. This obviously implies that the higher
expected return comes with a higher potential risk of the investment.

2. GROWTH FUND SCHEME: it is a mutual fund scheme that offers the advantage of capital
appreciation of the underlying investment. For such funds, investment is made in growth oriented
securities that are capable of appreciating in the long run. Growth funds are also known as nest
eggs or long haul investment. In proportion to such capital appreciation, the amount of risk to be
assumed would be far greater.

*INVESTMENT BASED CLASSIFICATION:

1. EQUITY FUND SCHEME: A kind of mutual fund whose strength is derived from equity based
investments is called ‘equity fund scheme.’ They carry a high degree of risk. Such funds do well in
periods of favorable capital market trends. A variation of the equity fund schemes is the ‘index fund’
or ‘never beat market fund’ which are involved in transacting only those scripts which are included
in any specific index e.g. the scripts which constituted the BSE-30 Sensex or 100 shares National
index. These funds involve low transaction cost.
2. BOND FUND SCHEME: it is a type of mutual fund whose strength is derived from bond based
investments. The portfolio of such funds comprises bonds, debenture etc. this type of fund carries
the advantage of secured & steady income. However, such funds have little or no chance of capital
appreciation, & carry low risk. A variant of this type of fund is called ‘Liquid Funds.’ This specializes
in investing in short term money market instruments. This focus on liquidity delivers the twin
features of lower risks & low returns.
3. BALANCED FUND SCHEME: a scheme of mutual fund that has a mix of debt & equity in the
portfolio of investment may be referred to as a ‘Balanced Fund Scheme.’ The portfolio of such funds
will be often shifted between debt & equity, depending upon the prevailing market trends.
4. SECTORAL FUND SCHEMES: when the managers of mutual fund invest the collected from a wide
variety of small investors directly in various specific sectors may include gold & silver, real estate,
specific industry such as oil & gas companies, offshore investments, etc.
5. FUND-OF-FUND SCHEME: There can also be funds of funds, where funds of one mutual funds are
invested in the units of other mutual funds. There are a number of funds that direct investment into
a specified sector of the economy. This makes diversified & yet intensive investment of funds
possible.

GROWTH TREND OF MUTUAL FUND

The mutual fund industry in India has grown fast in the recent period. The performance is
encouraging especially because the emphasis in India has been on individual investors rather in
contrast to advanced countries where mutual funds depend largely on institutional investors. In
general, it appears that the mutual funds in India have given a good account of themselves so far.
Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity Investments, US
based assets under management worldwide. Opening of the mutual fund industry to the public
sector banks and insurance companies, led to the launching of more and more of new schemes. For
example, LICMF has concentrated on funds which includes life and accident cover. GICMF provide
home insurance policy. The bank sponsored mutual fund floated regular income, growth and tax
incentives schemes. Especially since early 1991 there has been a steady increase in the number of
equity oriented growth funds. With the boom of June 1990 and then again 1991 due to the
implementation of new economic policies to-wards structure of change the price of securities in
stock market appreciated considerably. The finance ministry notified that ELSS is eligible for tax
exemption up to Rs. 10,000. This exemption was increased to Rs. 1, 00,000 after introduction of
section 80 C in the year 2006. This was done to encourage new as well as existing small investors
to invest their hard earned money in stock market through mutual funds. All this shows that there is
growth in Mutual Fund Industry.
But there are some short comings in its growth like the most important & noticeable shortcoming is
there are approximately 29 mutual funds which are much less than US having more than 800. At
present, the investors in India prefer to invest in mutual fund as a substitute of fixed deposits in
Banks, About 75 percent of the investors are not willing to invest in mutual funds unless there was
a promise of minimum return. Unlimited fund raised by schemes can create severe imbalance in the
market. Hence there is a huge scope for expansion.

SUGGESTIONS

The followings are some of the suggestions which the Mutual Fund Industry should follow in order to
project its image successfully:
The investors are not willing to invest in mutual fund unless a minimum return is assured, it is very
essential to create in the mind of the investors that mutual funds are market instruments which are
associated with market risk & hence mutual fund could not offer guaranteed income.
All the mutual funds are operated only in the public sector, hence private sector must be allowed to
float mutual funds, intensifying competition in this industry.
Steps should be taken for funds to make fair and truthful disclosures of information to the investors,
so that subscribers know what risk they are taking by investing in fund.
Uniform coordinated regulations by a single agency would be formed to provide the shelter to the
investors.
Mutual fund can penetrate rural areas like the Indian insurance industry with simple and limited
products.
Mutual funds need to take advantage of modern technology like computer and tele-communications
to provide service to the investors.

BIBLIOGRAPHY
v Financial markets & services by Dr. S Gurusamy
v Mutual fund industry in India by E. Mrudula & Priya Raju
v Mutual fund industry-Products & Services by Indian Institute of Banking & Finance
v DNA News paper of 15th Feb 2007.