Mutual Funds

What is Mutual Fund?

A mutual fund pools the surplus savings of a number of investors who have common financial goal. Investments can be shares, debt securities, money-market securities or a combination of these. Mutual funds prospectus are managed by professional money managers, who monitors the fund's investments and attempt to generate capital gains and/or income for the fund's investors as per objective decided.

Income generated through these investments and the capital appreciation realized is shared by its unit holders on prorated basis to the number of units owned by them. A mutual fund is the most suitable investment option available for general people as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively lower cost.

For example, an equity mutual fund will be invested equity-related instruments, while a debt fund will be invested in bonds, debentures, etc.

  • As an investor, you keep your investment in financial assets like stocks and bonds. You can do so by either buying them directly or using investment vehicles like mutual funds.

History of mutual funds in India

Mutual funds in India came into existence in 1964 through Unit trust of India.

mutual fund history

Types of Mutual Funds Schemes

There exist various mutual fund schemes to cater to the needs such as financial position, risk tolerance and return expectations etc. The content below gives an overview of the existing types of mutual fund schemes in the industry.

By Structure

Open-Ended Schemes

Open-ended funds are open for investors to enter or exit at any time, even after the NFO. When existing investors acquire additional units or new investors acquire units from the open-ended scheme, it is called a sale transaction. It happens at a sale price, which is linked to the NAV.

When investors choose to return any of their units to the scheme and get back their equivalent value (in terms of units), it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV.

Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The on-going entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis.


Close-Ended Schemes

Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange. Since post-NFO, sale and purchase of units happen to or from counter-party in the stock exchange – and not to or from the scheme – the unit capital of the scheme remains stable or fixed.

Since the post-NFO sale and purchase transactions happen on the stock exchange between two different investors, and that the fund is not involved in the transaction, the transaction price is likely to be different from the NAV. Depending on the demand-supply situation for the units of the scheme on the stock exchange, the transaction price could be higher or lower than the prevailing NAV.

Interval Schemes

Interval funds incorporate top features of both open-ended and close-ended techniques. They are essentially close-ended, but become open-ended at pre-specified intervals. For example, an interval system might become open-ended between January 1 to 15, and July 1 to 15, every year. The power for investors is the fact, unlike in a strictly close-ended system, they aren't completely reliant on the stock market to have the ability to buy or sell devices of the period finance. However, between these intervals, the items need to be compulsorily posted on stock exchanges to permit investors an leave route.

The intervals when an period system becomes open-ended, are called 'business deal periods'; the time between your close of an business deal period, and the beginning of another transaction period is named 'interval period'. Bare minimum duration of business deal period is 2 days and nights, and minimum length of time of interval period is 15 times. No redemption/repurchase of systems is allowed except through the specified business deal period (where both membership and redemption may be produced to and from the design).


By Investment objective

The purpose of growth fund is to provide capital appreciation over medium to long- term. These strategies normally invest a significant chunk of the investment stock portfolio in equities and also have comparatively high risks. They provide different alternatives to the traders like dividend option, capital appreciation, etc. and buyers may choose one depending on the preferences. The common funds also permit the investors to improve the options at a later time. Growth strategies are best for investors possessing a long-term prospect seeking understanding over a period.

It could be further categorized into pursuing depending after goal:

  • Large-Cap Funds: These fund allocate fund on companies from different areas. However, they put a limitation in conditions of the marketplace capitalization of your company, i.e., they spend typically in BSE 100 and BSE 200 Stocks and options.
  • Mid-Cap Funds: These fund invest money on companies from different industries. However, they put a limitation in conditions of the marketplace capitalization of your company, i.e., they commit mainly in BSE Mid Cover Stocks.
  • Sector Specific Funds: They are schemes that choose particular sector, for example, IT.
  • Tax Savings Funds (ELSS): ) Investments in these funds are exempt from tax during investment, upto a limit of Rs 1.5 lakh u/s 80C.
  • Thematic: These plans invest money on various industries but limit themselves to a specific theme e.g., services, exports, consumerism, facilities etc.
  • Diversified Equity Funds: All non-theme and non-sector money can be labeled as equity varied funds.

Income or Debt oriented Schemes

The purpose of income funds is to provide steady and regular income to investor. These investment Strategies generally invest funds on fixed-income securities such as bonds, mutual bonds, commercial debentures, Federal government Securities and money-market devices and are less risky compared to Equity plans. However, opportunities of capital growth/appreciation are limited in such cash. The NAVs of such fund are impacted because of change in interest levels throughout the market. If the interest levels comes down, NAVs of such cash will probably upsurge in the brief run and vice versa. However, long-term buyers do not be concerned about these fluctuations.

The purpose of the balanced fund is to provide both progress and regular income therefore schemes make investments both in equities and fixed income tools in the percentage suggested in their offer documents. They are appropriate for buyers looking for modest growth. They often commit between 65% and 75% in equity and the others in debt instruments. They are really impacted because of fluctuation in stock market but NAVs of such money are less volatile in comparison to pure equity money.

These funds are also income fund and their target is to provide easy liquidity, preservation of capital and modest income. These plans invest specifically in safer short-term investment plans such as Treasury Bills, Certificates of Deposit, Commercial paper and inter-bank call money, Government sponsor Securities, etc. Earnings of these funds fluctuate significantly less than other fund. These are befitting for investors as a way of short-term investment funds.

These funds make investment exclusively in Government sponsored Securities. NAVs of these funds also fluctuate anticipated to improve in interest levels and other monetary factors as is the truth with income or debt-oriented strategies.

It is an open-ended Exchange Traded fund. The investment target of the scheme is to create dividends based on investment in physical Gold, subject to monitoring error.

Fund of Funds invests in other Mutual fund schemes. A normal mutual fund includes a collection of stocks, but a Fund of Funds includes a stock portfolio of different Mutual funds. A Fund of Funds helps the investor to lessen the chance of selecting the incorrect mutual fund quotes

They are open-ended income strategies seeking to create reasonable earnings with commensurate risk from a profile which includes floating rate debt instruments and fixed rate debt tools swapped for floating rate comes back. The scheme could also invest in fixed rate money market and debt instruments.

Other Schemes:

Tax-Saving Schemes

These schemes offer tax rebates to the traders under specific procedures of the Income tax act, 1961 as the Government offers tax bonuses for investment in specified avenues like Equity Linked Savings Schemes (ELSS). ELSS is a type of diversified equity mutual account, which is qualified for taxes exemption under Section 80C of the Income Tax Act, and offers the twin-advantage of capital Appreciations and tax benefits. It comes with a lock-in period of three years.

The Rajiv Gandhi Equity Savings plan (RGESS), which was revised in the Union Budget 2013-14, would provide a 50% duty deduction on purchases up to Rs. 50,000 to first-time investors in equity whose total annual taxable income is below Rs. 12 lakh.

Sector Specific schemes

They are the best investment funds which spend money on the securities of only those sectors or market sectors as specified in the offer documents like Pharmaceuticals, Software, FMCG, Petroleum shares etc. The profits of these funds are dependent on the performance of the respected areas/industries. While these Fund can provide higher returns, they are simply riskier in comparison to diversified funds. Shareholders need to keep a watch on the performance of those areas/industries and must exit at an appropriate time.

Dividend Reinvestment Schemes

This option is similar to the first option except that the dividend announced is re-invested in the same fund on the same day's NAV.

Dividend Payout Schemes

Mutual Fund companies as when they continue making profit, deliver a part of the money to the investors through dividends. If one would like to continue engaging of profit regularly, he might select this option.

Index Schemes

Index cash replicate the stock portfolio of a specific index including the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. NAVs of such schemes would grow or fall in accordance with the rise or fall in the index, though nearly by the same ratio due for some factors known as "tracking error". Necessary disclosures in this respect are created in the offer report of the structure.

There are also exchange traded index funds launched by the Mutual funds which are traded on the stock exchanges.

Exit Load or No-Exit Load Funds

A load account is the one which charges a percentage of NAV for exit. Every time investors sell unit in mutual fund, a demand will be payable. (That amount is generaly called as exit load) This charge is used by the Mutual Fund for marketing and syndication expenses.

A no-load fund is the account which does not demand for exit. This means the traders can leave the account at no additional or extra charges for sales of units. In accordance with the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30, 2009 , no entry load will be costed for purchase / additional purchase / switch-in accepted by the account with impact from August 1, 2009. In the same way, no entry load will be incurred with respect to applications for registration under Systematic Investment Plan/ Systematic Transfer Plan / Systematic Investment Plan Plus accepted by the fund with impact from August 1, 2009.

Types of Returns:

Following will be the ways by which returns can be realized in a mutual fund:


Product holders earn dividends on Mutual Fund. These dividends are allocated from the income made through dividends on securities and interest on other equipment.

Capital Gains

Buyers get capital gains on Mutual funds. In case the fund sell securities which may have increased in value, it earns capital gains. Most funds send out these capital gains also to investors.

Benefit from higher NAV

Any increase in value of fund's asset increases the NAV of the fund. Buyers can make gain by selling back their units to fund house.

Advantages of investing in Mutual Funds

Professional Management

Mutual funds employ experienced and skilled professionals who make investment research and examine the performance and potential customers of various instruments before selecting a particular investment. Thus, by buying mutual funds, one can avail the services of professional professionals, which would otherwise be expensive for an individual investor.


Diversification involves positioning a wide variety of Investment opportunities in a portfolio so as to mitigate risks. Mutual funds usually spread investment across various companies/sectors and property classes, constrained only by the explained investment purpose. Thus, by investing in mutual funds, you can avail the benefits of diversification and advantage allocation without investing a large sum of money that would be required to create an individual portfolio.


In an open-ended scheme, Unit holders can redeem their products from the Fund house anytime. Even with close-ended schemes, you can sell the units on a stock exchange at the prevailing market price. Besides, some close-ended and interval schemes allow direct repurchase of items at NAV related prices every once in a while. Thus investors don't need to stress about finding potential buyers for their investment funds.


Mutual funds give a variety of strategies, such as regular investment, regular withdrawal and dividend reinvestment plans. Depending upon one's choices and convenience, you can make investments or withdraw cash, accordingly.

Cost Effective

Since Mutual Funds have a number of shareholders, the fund's transection costs, commissions and other fees get reduced to a significant extent. Thus, due to the benefits associated with larger scale, shared funds are relatively less expensive than immediate investment in the capital markets.

Professionally Regulated

Mutual cash in India are regulated and checked by the Securities and Exchange Board of India (SEBI), which strives to safeguard the pursuits of investors. Shared funds must provide shareholders with regular information about their investment funds, in addition to other disclosures like specific investments created by the structure and the proportion of investment in each advantage classes.

Convenient Administration

The facility of making assets through service centers as well as through internet ensures convenience.

Return Potential

By allocating right asset mix, mutual funds offer a potential for higher potential of profits. The high concentration of risky property would lead to higher return and vice-versa.


Information available through fact sheets, offer documents, gross annual reports and promotional materials help traders gather knowledge about their investments.

Choice of Scheme

The traders can select from various sorts of scheme available to them. The risk-seeker investors can go for more competitive schemes while risk-averse buyers can go for income scheme funds and so forth.

Disadvantages of investing in Mutual Funds


Mutual fund rating provide traders with professional management; however, it comes at a cost. Funds will routinely have a variety of different fees that reduce the overall payout. In Mutual Funds, the fees are categorized into two categories: shareholder fees and annual fund-operating fees. The shareholder fees, in the form of loads and redemption charges, are paid directly by shareholders while purchasing or reselling the mutual fund. The annual fund operating fees are priced as an gross annual ratio - usually which range from 1-3%. These fees are paid by mutual fund investors, regardless of the mutual fund performance. As one can see right now, in years when the account doesn't make money, these fees only magnify loss.

Inefficiency of Cash Reserves

Mutual cash usually maintain large cash reserves as cover against a huge volume of simultaneous withdrawals. Although this provides shareholders with liquidity, this means that some of the fund's money is committed to cash instead of assets, which tends to lower the shareholders' potential return.


Although diversification is one of the keys to successful investment, many mutual fund investors have a tendency to over diversify. The idea of diversification is to reduce the risks associated with having a single security. Over diversification occurs when traders buy many money that are highly related therefore don't get the advantages of diversification.


Diversification reduces the quantity of risk involved with investing in common cash but it can even be disadvantageous anticipated to dilution. For instance, if an individual security held by a mutual account doubles in value, the common fund itself would not double in value because that security is only one small part of the fund's holdings. By keeping a large amount of different assets, mutual funds have a tendency to do neither exceptionally well nor very inadequately either.

Trading Limitations

Although mutual fund are highly liquid generally, most mutual funds (called open-ended cash) can't be bought or sold in the middle of the trading day. You can only buy and sell them at the end of your day.