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Contents
Introduction
Extended Definition of Mutual Fund
Characteristics of Mutual Fund
Benefits of Mutual Fund
History of Mutual Fund
Growth of Mutual Fund in India
Types / Classification of Mutual Fund
Net Asset Value (NAV)
1.Introduction
A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. A fund is “mutual” as all of its returns, minus its expenses, are shared by the fund’s investors. SEBI defines mutual fund, is a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. The mutual fund in India can raise resources through sale of units to the public. It can be set up in the form of a Trust under the Indian Trust Act.
2.Extended Definition of Mutual Fund
The definition has been further extended by allowing mutual funds to diversify their activities in the following areas...
Portfolio management services
Management of offshore funds
Providing advice to offshore funds
Management of pension or provident funds
Management of venture capital funds
Management of money market funds
Management of real estate funds
3.Characteristics of Mutual Fund
It serves as a link between the investor and the securities market by mobilising savings from the investors and investing them in the securities market to generate returns. Savings of small investors are pooled under a scheme and the returns are distributed in the same proportion in which the investments are made by the investors/unit-holders. Mutual fund is a collective savings scheme. Mutual funds play an important role in mobilising the savings of small investors and channelising the same for productive ventures in the Indian economy.
4.Benefits of Mutual Funds
Professional Management
Portfolio Management
Reduction in Investment Costs
Liquidity
Convenience and Flexibility
Tax Benefits
Transparency
Stability to Stock Market
Equity Research
5.History of Mutual Funds
The history of mutual funds, dates back to 19th century Europe, in particular, Great Britain. Robert Fleming set up in 1868 the first investment trust called Foreign and Colonial Investment Trust which promised to manage the finances of the moneyed classes of Scotland by spreading the investment over a number of different stocks. This investment trust and other investment trusts which were subsequently set up in Britain and the US, resembled today’s close-ended mutual funds. The first mutual fund in the US, Massachusetts Investors’ Trust, was setup in March 1924. This was the first open-ended mutual fund. The stock market crash in 1929, the Great Depression, and the outbreak of the Second World War slackened the pace of growth of the mutual fund industry. Innovations in products and services increased the popularity of mutual funds in the 1950s and 1960s. The first international stock mutual fund was introduced in the US in 1940. In 1976, the first tax-exempt municipal bond funds emerged and in 1979, the first money market mutual funds were created. This industry witnessed substantial growth in the eighties and nineties when there was a significant increase in the number of mutual funds, schemes, assets, and shareholders.
6.Growth of Mutual Funds in India
The Indian mutual fund industry has evolved over distinct stages.
The growth of the mutual fund industry in India can be divided into four phases
Phase I (1964-87)
Phase II (1987-92),
Phase III (1992-97) and
Phase IV (beyond 1997)
7.Types/Classification of Mutual Fund
The objectives of mutual funds are to provide continuous liquidity and higher yields with high degree of safety to investors.
Based on these objectives, four classification of mutual fund schemes have evolved.
a)Functional Mutual Fund
Theses are basically three types of mutual fund
Open-Ended Mutual Fund
Close-Ended Mutual Fund
Interval Scheme
b)Portfolio Classification
Income Fund
Growth Fund
Balanced Fund
Money Market Fund
c) Geographical Classification
Domestic Funds
Offshore Funds
d) Other Classification
Sectoral Fund
Tax Saving Schemes
Equity Linked Saving Schemes (ELSS)
Special Schemes
Gilt Fund
Loan Funds
Index Funds
PIE Ratio Funds
Exchange Traded Funds
8. Net Asset Value (NAV)
The net asset value of a fund is the market value of the assets minus the liabilities on the day of valuation. It is the amount which the units holders / shareholders will collectively get if the fund is dissolved or liquidated. The net asset value of a unit is the net asset value of fund divided by the number of outstanding units. Mutual funds are required to declare their NAVs and sale repurchase prices of all schemes updated daily on regular basis on the AMFI website by 8.00 p.m. And declare NAVs of their close-ended schemes on every Wednesday.
