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What is a Mutual Fund

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A Mutual Fund is an investment scheme that collects money from people and invests those funds in various assets. The money collected from various investors is usually invested in financial securities like shares and money-market instruments like certificate of deposit and bonds. Equity, debt and money-market instruments are broad classifications of asset classes. These investments may be made for the short term, medium term or long term. The kind of asset invested in also determines the risk factor of the funds.

Structure of a Mutual Fund

Mutual Funds in India are created as trusts. The parties involved are:

  • Sponsor – This is the one who sets up the Mutual Fund or trust. A sponsor is similar to a promoter of a company. The sponsor of a Mutual Fund appoints / sets up the board of trustees, the asset management company or fund house and appoints the custodian.
  • Board of trustees - The role of the trustees is to ensure that the interests of Mutual Fund holders are protected. The board of trustees also needs to ensure that the fund house complies with all the rules laid down by the Securities Exchange Board of India (SEBI). The board needs to have at least four independent directors. The trustees act according to the Trust Deed executed by the sponsor. The board sees to it that the fund house has established the required infrastructure and ensures that processes are in place to operate and manage the fund effectively. The board appoints the main members of the fund house including the board of directors and fund managers (scheme-wise). They also devise the fund house’s internal control and audit processes including the rules for enrolling and dealing with brokers / agents.
  • Asset Management Company (AMC)/Fund house - An AMC or fund house will act as the investment manager for the trust. It will be responsible for the day to day operations. This means that it is be taking care of all the money put in by investors. The AMC or fund house is appointed by the sponsor or the board of trustees. SEBI approval is required for setting up the AMC. 40% of its net worth should be contributed by the sponsor.
  • Custodian – A custodian is one who has custody of all the shares and securities invested in by the AMC. The custodian is responsible for the investment account of a fund house.
What is a Mutual Fund

Types of Mutual Fund schemes

There are different types of Mutual Fund schemes and they are generally classified based on how they invest. However, all schemes are broadly classified as open-ended and close-ended schemes.

Open-ended - Open-ended Mutual Fund schemes are open for investment at any point of time. They offer liquidity to investors since units can be bought and sold freely.

Close-ended - Close-ended Mutual Fund schemes remain open only for a short period of time. Once the scheme is closed, fresh investments cannot be made. In order to provide liquidity, these units are listed on stock exchanges and investors can trade in them.

Interval - Interval schemes are a variation of close-ended schemes that are reopened for redemption for a limited period of time during the scheme’s tenure. Investors are given the option to sell their units back to the fund during this period.

Mutual Funds are then further categorised depending on the investment goal the fund is trying to fulfill. While some investors seek capital protection and safe returns, others have a strong risk appetite and look for high returns.

  • Growth funds or capital protection funds
  • Income funds – These schemes aim to provide income for the investors.
  • Liquid funds – These funds invest in fixed-income securities such as bonds and government securities.
  • Balanced funds – These funds invest both in equity as well as fixed-income securities to provide returns while trying to keep the risks to a minimum.

Mutual Funds based on geography

  • Domestic funds – These invest in securities traded within the country.
  • International or foreign funds
  • Global funds Examples: Emerging market funds, Regional funds

These funds are further classified based on the investments made.

Equity funds

  • Large-cap / Mid-cap / Small-cap funds
  • Aggressive / growth funds
  • Value funds
  • Dividend-yield funds
  • Index funds
  • Diversified equity funds
  • Sectoral funds

Debt funds / Fixed-income funds

  • Income funds
  • Gilt funds
  • Dynamic bond funds
  • Money market funds or liquid funds
  • Ultra short-term funds or treasury management funds
  • Floating-rate funds
  • Short-term / Medium-term income funds
  • Corporate bond funds
  • Fixed Maturity Plans (FMPs) (they are close-ended)

Hybrid funds / Balanced funds

  • Monthly Income Plans (MIPs)
  • Capital Protection Funds (these are close-ended)

Other categories include

  • Tax-saving funds
  • Pension funds
  • Fund of funds
  • Exchange Traded Funds (ETFs)
  • Leverage funds
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News About Mutual Fund

  • Sebi planning on introducing limits to investments in debt funds

    Sebi (Securities and Exchange Board of India) has said that they might introduce limits on how much can be invested in debt mutual funds. The move is being considered in order to protect the investors from massive losses if the funds fail to perform. Another motive for this move is to limit credit risks to the asset management companies. This is a move that has been prompted by the recent incident with J P Morgan. Mr. U.K. Sinha, the chairman of Sebi said that they might introduce norms that govern things like investment limits for single companies and cap on various sectors too.

    2 December 2015

  • New KYC norms to be introduced to stop money laundering

    Association of Mutual Funds in India (AMFI) has decided to introduce stringent guidelines governing know-your-customer (KYC) norms for mutual fund investments. The revised guidelines for existing and new investments, coming into effect from 2016, will make it difficult to launder money.

    These changes, which are part of a global campaign on information-sharing to prevent tax evasion and money laundering, will be putting more onus on financial intermediaries to know their customers.

    While all new investors enrolling from November 1, 2015 have to mandatorily provide such information, existing investors have to provide all necessary details by January 1, 2016.

    30 November 2015

  • Three Schemes from Canara Robeco to feature Dividends

    Canara Robeco Mutual Fund has announced dividends under three schemes and requires interested investors to declare their dividends, if being exercised in these schemes, by 27th November 2015.

    These three schemes from Canara Robeco are tailored with different dividend values aiming to provide flexibility of investment choices to interested customers. Canara Robeco Emerging Equities Fund has the highest rate among the three, being INR 2.20 per unit. Canara Robeco Large Cap+ Fund has a dividend option of INR 1.25 per unit and offers the mediocre option among the three schemes. Canara Robeco Medium Term Opportunities Fund has the lowest dividend cost at INR 0.30 per unit.

    All the dividend values are as per the face value of INR 10 per nit. All the three schemes will be regular plans from Canara Robeco.

    26 November 2015

  • Birla Sun Life Mutual Fund introduces Birla Sun Life Capital Protection Oriented Fund-Series 29.

    Birla Sun Life Mutual Fund Company, one of the leading mutual fund investment companies in India, has recently launched a new close ended income scheme called Birla Sun Life Capital Protection Oriented Fund-Series 29. The scheme would require a minimum subscription of Rs. 5,000 and multiple of Rs. 10 afterward. For this scheme, there will no entry load and exit load.

    The subscription for this new fund offer (NFO) starts on November 23, 2015. The subscription will be closed on December 07, 2015. The performance of this new scheme will be benchmarked against CRISIL MIP Blended Index. The fund managers of this new fund are Prasad Dhonde and Vineet Maloo.

    The main objective behind the launch of this new scheme is to strive for capital protection by investing in fixed income securities, equity and equity related instruments.

    25 November 2015

  • Deutsche Mutual Fund introduces Fixed Maturity Plan-Series 95

    Deutsche Mutual Funds have introduced a new plan called the Fixed Maturity Plan-Series 95. It is a money market instrument that aims to provide returns by investing in market instruments that mature before or by the time this scheme matures. To that end, the maturity period for this scheme has been set to 1100 days. The benchmark selected for this fund is CRISIL’s Composite Bond Fund Index and it is marked as a close ended scheme. The minimum amount that can be invested has been set at Rs. 5,000 and the scheme will charge no entry or exit loads.

    24 November 2015

  • SIPs bring more cash inflow than FPIs

    With Indian households making consistent investments in equities through systematic investment plans (SIPs) there is a lot of cash inflow, than foreign portfolio investors (FPIs).

    According the Association of Mutual Funds of India’s ( AMFI) data, around a billion dollars or Rs. 6,638 crores have been invested every month in domestic mutual funds since May 2014. On the other hand the investment in FPIs amounted to around $787 million every month since May 2014. This has enhanced the total inflow of domestic mutual funds as compared to FPIs. In total, around $20.5 billion have been invested in SIPs as against the $14.9 billion by FPIs.

    The average flows into SIP schemes have increased two-fold to Rs 2,200-2,500 crore a month in the past six months in comparison to Rs 1,000 crore about two years ago.

    23 November 2015

  • ETF launched by LIC Nomura Mutual Fund

    LIC Nomura Mutual fund has launched an open ended other ETF scheme by the name of LIC Nomura MF Exchange Traded Fund – CNX Nifty. The NFO opens for subscription by customers on November 2nd, 2015 and will close for the same on 16th November 2015. The scheme carried no entry or exit load since both these are nil.

    The minimum amount to avail the scheme is Rs.5000 and thereafter in multiples of Re.1. The scheme will see its performance benchmarked against CNX Nifty and has Sachin Relekar as its fund manager. Mutual funds are quite a popular investment tool in the country owing to the higher returns they offer as compared to other financial instruments.

    3 November 2015

  • Mutual Funds to be distributed through e-commerce platforms

    Sebi has planned to distribute mutual fund schemes using e-commerce platforms, in a move to boost the penetration of mutual funds across the country. A committee, working under Nandan Nilekani, co-founder, Infosys, has been formed in order to look at the possibilities of using e-commerce platforms for mutual fund distributions.

    According to U K Sinha, Sebi chief, once the committee generates the report, Sebi will work on the current rules in order to allow e-commerce portals to sell mutual fund products. It will also help bring in better disclosure in the ratings industry. The new set of regulations is expected to be out in a couple of months.

    2 November, 2015

GST rate of 18% applicable for all financial services effective July 1, 2017.

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