History of mutual funds

·         The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The first pooled fund in the United States was created in 1893 for the faculty and staff of Harvard University.

·         On March 21st, 1924 the first official mutual fund was born when three Boston securities officers pooled their money together. It was called the Massachusetts Investors Trust. In one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with around 200 shareholders).


A mutual fund


·         A mutual fund in simple terms is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in stocks and/or bonds.

·         These investors buy the units of a fund that best suits their needs.

·         The fund then invests the pool of money (called a corpus) in securities - this could be shares, debentures, money market instruments, etc.- depending on the constitution and objective of the scheme.

·         The income earned through the investments, as well as the capital appreciation realized by the investments, is allocated amongst the investors in proportion to the number of units they own.

·         These gains are distributed to investors either by way of dividends or through an increase in the value of their units, or through an allocation of additional units or a combination of the three.


Role of mutual funds

·         Mutual funds are a financial intermediary. They intermediate between the source of the saving and the user of those savings and help to mobilize capital.

·         Mutual funds also impart liquidity to the capital markets, since collectively they trade much more actively than individual investors. The frequent buying and selling of mutual funds, based on specific information, provides the price signals that make capital markets more efficient.

·         Mutual funds help move companies towards higher corporate governance standards, because their large holdings give them voting clout.

Major government institutions that manage mutual funds

·         Unit Trust of India.

·         Insurance Companies: General Insurance Corporation of India (GIC), Life Insurance Corporation of India (LIC).

·         Banks: State Bank of India, Bank of India, Bank of Baroda, Canara Bank.

·         Financial Institutions: IDBI, ICICI, IL&FS.

The major private sector mutual funds

Some of the prominent private sector mutual fund organizations are: ING Barings, Alliance Capital, Birla Mutual, ING Barings, Kothari Pioneer, Morgan Stanley, Templeton Mutual, Sun F&C Mutual, Zurich India Mutual, DSP Merrill Lynch, Prudential ICICI Mutual, Jardine Fleming, Reliance Mutual, Tata Mutual & Kotak Mahindra Mutual.

Those eligible to invest in mutual funds

·         Adult individuals (or minor, holding through their parents or guardians) holding singly or jointly.

·         Hindu undivided families (HUF).

·         Companies, corporate bodies, public sector undertakings, financial institutions, banks, partnerships, associations of persons or bodies of individuals, religious and charitable trusts and other societies registered under Societies Registration Act, 1860. 

·         Non-resident Indians or Person of Indian Origin (PIO) residing abroad on a full repatriation basis or non-repatriation basis.

·         Overseas corporate bodies (OCBs) firm or societies which are held directly or indirectly but ultimately to the extent of at least 60% by NRIs and trusts in which at least 60% of the beneficial interest is similarly held irrevocably by such persons on a full repatriation or non-repatriation basis.

·         Foreign institutional investors (FIIs) registered with Securities Exchange Board of India (SEBI) and the Reserve Bank of India, on full repatriation basis.


·         Mutual funds provide investment products that cater to the needs of different classes of investors, whereas banks, for instance, offer only a few standardized products. Mutual Funds occupy the middle ground - between large financial institutions, which offer standardized financial products, and the very small private banks that offer extremely customized products and services.

·         Mutual funds reduce or largely eliminate the burden, paperwork and hassles small investors experience in managing a diverse portfolio on their own.

·         Mutual funds also provide the investment know-how and trading capabilities that small or novice investors cannot be expected to possess.  

·         Mutual funds give an investor a high degree of liquidity as it can be purchased and sold quickly. 

·         Mutual funds make it easy for small retail investors to invest in instruments that are otherwise not available to them. For example, small investors may not be offered high quality debentures directly. The issuers choose to place these with large institutions, including mutual funds. For the borrower, this kind of a bulk placement lowers the cost of raising funds. When the investor invests in the mutual fund he/she, in effect, gets access to investments in these debentures. The same is the case with Government securities. As of now, this is a wholesale market. However, an investor can invest in Government securities through a Gilt fund.

·         The Government also provides a range of tax benefits to those who invest in mutual funds.


·         Unlike saving instruments offered by banks, dividend payouts can vary and sometimes there may be no dividend declared for a particular period.

·         An investor managing his own portfolio can separately sell those shares that have gone up and buy those whose price has decreased but when he buys or sells a unit in a mutual fund he, in effect, buys or sells every share/security in his fund’s portfolio whether he is making a profit or a loss by trading at that time. Thus individual discrimination is not available to investors in mutual funds - it is either all or none trading the fund's portfolio.

·         But again, these disadvantages matter only to investors who are extremely well informed and experienced in the market. Most investors are better off investing through a mutual fund.

Different types of mutual fund schemes.

Mutual funds are classified into the following types of schemes:

·         Open-ended schemes;

·         Close-ended schemes;

·         Equity schemes;

·         Income schemes;

·         Balanced funds;

·         Sector funds;

·         Money market funds;

·         Gilt funds;

·         Bond funds;

·         Index Funds.

Open-ended scheme

·         In an open-ended scheme, subscriptions to and redemptions from the mutual fund scheme are open at all through the year excepting the period of book closing.

·         The number of units outstanding in an open-ended scheme vary, as investors buy and sell units.

·         In an open-ended fund, there is no fixed number of units issued.

·         Open-ended schemes are not listed on the stock exchanges. Units are purchased and sold directly through the mutual fund.

·         Open-ended schemes can be purchased and sold at close to their Net Asset Value (plus or minus an entry or exit load).

·         They may or may not have a specified redemption period.

Closed-ended scheme

·         These are open only during a specified period.

·         The units of a closed-ended scheme have a fixed maturity period. This can vary from 3 to 15 years. An individual investor can move into and out of the investment, but the unit remains outstanding.

·         After the initial offer, a closed-ended fund is listed on a stock exchange and, thereafter, investors can purchase and sell these units only through the stock exchange.

·         Close-ended schemes generally trade at a discount to the NAV, but the discount narrows as the date of maturity approaches.

Growth or equity fund

·         A growth fund's objective is to provide the maximum returns through capital appreciation, over the medium to long term, by investing in equities. An equity fund may be of a diversified nature, or may be sector-oriented. Equity funds have often given excellent dividends when stock markets have risen sharply.

Income scheme

·         This is aimed at maximizing current income (interest and dividend) of investors. It is a scheme that is typically debt-oriented, which provides interest at regular intervals and has limited downside. Capital appreciation in such a scheme is generally less than in a pure equity fund. Income schemes normally provide higher returns than bank fixed deposits. Many income schemes invest about 15% of the corpus in equities, as a result of which they have the potential to provide much higher returns than a pure bond fund.

Balanced fund

·         Balanced funds are funds that invest both in shares and fixed income securities in the proportion indicated in their offer document. The returns to investors provided by these schemes are moderate and at a moderate risk. A typical equity/debt mix in a balanced fund could be 40:60.

Sector fund

·         A sector fund is one whose portfolio is built around a particular sector or theme. It could be appropriate for an investor who lacks expertise or knowledge about a particular sector. Some of the recent sector funds floated have included those focusing on the information technology and fast moving consumer goods (FMCG) sectors. A sector fund is inherently riskier than a diversified fund because the portfolio is concentrated in one sector only. However, in good markets, sector funds can provide above average returns.


Money market fund

·         Money market funds provide easy liquidity, preservation of capital and moderate income. They are low risk as they invest in safer, short-term money market instruments such as treasury bills, certificates of deposit, commercial paper and Inter-bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

Gilt fund

·         Gilt funds invest much of their corpus in sovereign securities issued by the Central Government, with a very small portion invested in the inter-bank call money market. All these instruments carry the highest credit rating, thus providing the highest level of safety. The default risk in these instruments is virtually zero. Regulations in force now, permit non-government provident funds, superannuation funds and gratuity funds to invest in 100% gilt schemes floated by mutual funds.

Bond fund

·         A bond fund is a different form of an income fund, with the only difference being that the entire corpus is invested in bonds. Unlike some income funds, no portion of the corpus is invested in equities. Thus, the returns on a bond fund will generally be less than the returns on an income fund that may have a 10-15% equity component.


Index fund

·         An index fund is a fund that has the objective of tracking one of the popular stock market indices. Thus, the returns on an index fund will approximate the changes in the index that is used as the base. Of all the investment options, an index fund is one of the more passive avenues.


·         When units are purchased in an initial offer, they are priced at par value─ normally Rs. 10 per unit.  A load factor is usually incorporated if it is an equity fund or the bulk of investments are in equity.

·         When units are purchased at a time other than the initial issue, the purchase price is the Net Asset Value (NAV) plus (wherever applicable) a front-end load.

·         In the case of a closed-ended fund, the purchase is based on the price that is being quoted on the stock exchange where it is listed. The quoted price would usually be at a discount to the NAV.

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