Mutual Fund

Origin of Mutual Fund

The concept of pooling money for investment purposes started in the mid 1800s in Europe. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University. On March 21st 1924 three securities executives from Boston pooled their money to create the first mutual fund in the world known as the Massachusets Investors Trust.

Unit Trust of India was the first mutual fund to be set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money is invested by a professional mutual fund manager into capital/share market in different securities. Mutual fund helps an investor to invest money reducing the risk of investing directly into the stock market. Mutual Funds in India are regulated by Securities and Exchange Board of India (SEBI).

There are several advantages of investing through Mutual Funds such as professional management, diversification, good return potential, low costs, liquidity, transparency, flexibility, choice of schemes and also tax efficiency. People generally have a misconception about the mutual funds. They feel that the mutual funds only invest into equities. On the contrary mutual funds also invest into debts such as government securities, bonds, commercial papers and certificate of deposits.

There are two types of mutual funds:

Open ended Funds

Investors can invest any time. The fund house continuously buys or sells units. The open ended funds do not have any maturity date.

Close ended Funds

Investments can be made only at the time of new fund offer (NFO). The scheme has a fixed duration. Once the subscription date is over, one cannot invest into these funds. No redemption is allowed before maturity. However, investors are allowed to redeem the units every six months on the dates declared by the mutual fund. Moreover, these close ended schemes may be traded in the stock exchanges.

Net Asset Value (NAV) Is the value of the assets minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price.

Repurchase Price Is the price at which units under open-ended schemes are repurchased by the Mutual Fund.

Redemption Price Is the price at which close-ended schemes redeem their units on maturity.

Entry Load Is a charge collected by the mutual fund scheme when it sells the units. However, there is no entry load charged for buying units of mutual funds in India.

Exit Load Is a charge collected by a scheme when it buys back the units from the unitholders.

How Mutual Funds Work

Mutual funds are a mechanism for pooling the resources of different investors and investing the collected funds in accordance with specific objectives, in securities so as to realise the investment objective. The investment objective is based largely upon the investors’ capacity to take risk.The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time.

Investment Objective

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth/Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Income/Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

Sector specific funds/schemes?

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities.


Mutual funds and securities are subject to market risks and there is no assurance and no guarantee that the objectives of the mutual fund will be achieved.

  • The NAV of the units issued under the scheme may go up or down depending on the movement in capital markets.
  • Past performance of the scheme does not indicate the future performance of the scheme.
  • There are no assured/guaranteed returns.

ULIP – Mutual Fund

Unit Linked Insurance Plan is an open ended tax saving cum insurance scheme.
Investment objectives of the scheme is primarily to provide return through growth in the NAV or through dividend distribution and reinvestment thereof. Amounts collected under the scheme shall generally be invested as follows:
(a) Not less than 60% of the funds in debt instruments with low to medium risk profile.
(b) Not more than 40% of the funds in equities and equity related instruments.

The minimum and maximum target amount of investment under the scheme is Rs. 15,000/- and Rs. 15,00,000/- respectively. The maximum target amount of 15 lacs is the combined target amount available for the Declining term Insurance cover and Fixed Term Insurance Cover together. The chosen target amount is required to be contributed in yearly or half yearly instalments or through Systematic Investment Plan over 10/15 years as indicated at the time of entry. Renewal contributions can also be paid in advance. At present, payment of renewal contributions (RCs) (through salary saving scheme) are accepted only under the 10 year plan from unit holders working with select organisations. An option to pay renewal contribution every month through Pay Roll may be introduced later in association with employers subject to such terms as may be decided. An investor can invest more than the maximum target amount of Rs. 15 lacs in one or more instalments, the life insurance cover will, however, be limited to Rs.15 lacs.

Life Insurance Cover Declining Term Cover: Life Insurance Cover to the extent of the unpaid but not due amount of the chosen target amount and

Fixed Term Cover: Life Insurance Cover to the extent of the target amount.

Life insurance cover for female investors having no regular and independent income is restricted to a maximum of Rs. 5,00,000/- even where the target amount selected by the investor is for more than Rs. 5,00,000/-. Minor children above the age of 12 years are allowed to join the scheme. However, such children having regular and independent income only will be eligible for the life insurance cover.

Personal accident insurance cover up to Rs. 50,000/-, irrespective of the target amount chosen is also provided.