II. CONCEPT AND ROLE OF A MUTUAL FUND

Concept of a Mutual fund:

• A mutual fund is a professionally managed investment vehicle.
• It allows investors to access different markets and securities through professional fund management services offered by an asset management company.
• Investors invest through mutual funds, not in mutual funds directly.
• Mutual funds offer portfolio diversification and a regulated investment vehicle.

Role of Mutual Funds:

• Mutual funds help investors earn income or build wealth by investing in securities markets.
• They offer different types of schemes to cater to diverse investment objectives.
• Mutual funds mobilize money from investors, which benefits governments, companies, and promotes economic development.
• Mutual funds can act as a market stabilizer in countering large inflows or outflows from foreign investors.

Investment Objectives of Mutual Funds:

• Mutual funds mobilize different pools of money called schemes, each with a pre-announced investment objective.
• Investment objectives can include safety, liquidity, and returns, such as income or capital appreciation.
• Different schemes invest in various asset classes based on their investment objectives.

Investment Policy of Mutual Funds:

• The investment policy of a mutual fund scheme determines how it achieves its investment objective.
• It includes asset allocation and investment style, which may vary based on the scheme's objective.
• Asset allocation determines the types of securities the scheme invests in, such as equities or debt instruments.
• Investment style may be growth or value-oriented, and portfolio concentration can be focused or diversified.

Important Concepts in Mutual Funds:

• Units: Investors are issued units of a mutual fund scheme, representing their investment.
• Face Value: Units typically have a face value of Rs. 10, relevant for accounting purposes.
• Unit Capital: The capital of a scheme is calculated by multiplying the number of units by their face value.
• Recurring Expenses: Fees or commissions paid to mutual fund constituents are recurring expenses charged to the scheme.
• Net Asset Value (NAV): NAV represents the true worth of a unit and is calculated based on the scheme's underlying investments.
• Assets Under Management (AUM): AUM is the sum of investments made by all investors in the scheme and reflects its size.
• Mark to Market (MTM): Valuing each security in the scheme's portfolio at its current market value on a daily basis.

Advantages of Mutual Funds for Investors:

• Professional Management: Mutual funds provide professional fund management services, research, and investment expertise.
• Affordable Portfolio Diversification: Investors can access a diversified portfolio even with small investments.
• Economies of Scale: Pooling large sums of money allows for professional management and cost-sharing benefits.
• Transparency: Mutual funds provide relevant information, transparency about investments, and regular NAV updates.
• Liquidity: Investors can easily recover the market value of their investments from the mutual fund.
• Tax Deferral and Tax Benefits: Mutual funds offer options to defer taxes and certain schemes provide tax deductions.
• Convenient Options: Mutual funds offer various options for investing, withdrawing, and structuring returns.
• Investment Comfort and Regulatory Comfort: Mutual funds simplify investing and benefit from SEBI's regulations.
• Systematic Approach: Investors can use systematic plans to invest regularly or withdraw funds systematically.

Limitations of Mutual Funds:

• Lack of Portfolio Customization: Investors cannot influence the securities or investments chosen by the mutual fund scheme.
• Choice Overload: Multiple schemes and options can make it challenging for investors to choose the right mutual fund.
• No Control Over Costs: Investors have no control over the costs incurred by the scheme, which are shared proportionally.
• No Guaranteed Returns: Mutual funds are subject to market fluctuations, and returns are not guaranteed.

Classification of Mutual Funds:

1. Based on investment objective:
   • Growth funds
   • Income funds
   • Liquid funds
2. By the structure of the fund:
   • Open-ended funds: Investors can enter or exit at any time.
   • Close-ended funds: Have a fixed maturity date and cease to exist thereafter.
   • Interval funds: Combine features of both open-ended and close-ended schemes, becoming open-ended at pre-specified intervals.
3. By the management of the portfolio:
   • Actively managed funds: Fund manager chooses the investment portfolio.
   • Passive funds: Invest based on a specified index.
4. By the investment universe:
   • Equity funds
   • Fixed income funds
   • Money market funds
   • Gold funds
   • International funds
   • Sectoral/Thematic funds
5. Mutual fund scheme categorization and SEBI regulation:
   • Equity Schemes (11 sub-categories)
   • Debt Schemes (16 sub-categories)
   • Hybrid Schemes (6 sub-categories)
   • Solution Oriented Schemes (2 sub-categories)
   • Other Schemes (2 sub-categories)

Additional types of funds:

• Fixed Maturity Plans (close-ended debt funds with a duration aligned to maturity)
• Capital Protection Funds (closed-end hybrid funds providing principal protection)
• Infrastructure Debt Funds (investment vehicles for institutional investors)
• Real Estate Mutual Funds (investing in real estate assets)
• Smart Beta Funds (index funds using alternative strategies)
• Quant Funds (data-driven selection of securities)
• International REITs Funds (investing in Real Estate Investment Trusts abroad)

Growth of the Mutual Fund Industry in India:

• Mutual fund assets under management (AUM) in India have witnessed significant growth from Rs. 6.99 lakh crores in May 2012 to Rs. 37.37 lakh crore in May 2022.
• The 10-year growth rate stands at 18.25 percent per annum compounded annually.
• The number of folios (investor accounts) has increased from 4.80 crore in March 2010 to 13.33 crore in May 2022.
• Mutual funds' share in overall financial investments in India has risen from 10 percent in March 2016 to 14 percent in March 2018.
• In comparison, the share of bank deposits has decreased from 71 percent to 65 percent during the same period.
• The Indian mutual fund industry's global market share has increased from 0.33 percent in 2008 to 0.60 percent in 2018.

Table: Growth of Mutual Fund Industry in India