A Study On Mutual Funds As Investment Options: Chapter - 1 Introduction To Indian Financial System

A STUDY ON MUTUAL FUNDS AS INVESTMENT OPTIONS
Chapter – 1
Introduction to Indian Financial System
1.1 INTRODUCTION:
A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges, that permit the exchange of funds. Financial systems exist on firm, regional, and
global levels. Borrowers, lenders, and investors exchange current funds to finance projects,
either for consumption or productive investments, and to pursue a return on their financial
assets. The financial system also includes sets of rules and practices that borrowers and
lenders use to decide which projects get financed, who finances projects, and terms of
financial deals.
1.2 MEANING AND DEFINITIONS OF FINANCIAL SYSTEM:

Every country aiming at its progress depends on the efficiency of this economic system
which depends upon financial system. The economic development of a nation is reflected by
the progress of the various economic units. These units are broadly classified into corporate
sector, government, and household sector. While performing their activities these units will
be placed in a surplus /deficit / balanced budgetary situations.
There are organisations or people with surplus funds and there are those with a
deficit. A financial system or financial sector functions as an intermediary and facilitates the
flow of funds from the areas of surplus to the areas of deficit. A Financial System is a
composition of various institutions, markets, regulations and laws, practices, money
manager, analysts, transactions and claims and liabilities. The financial system is the
network of institutions and individuals who deal in financial claims to various instruments.
Financial System of any country consists of financial markets, financial intermediation and
financial instruments or financial products.
1.3 DEFINITION OF FINANCIAL SYSTEM:

“It is a set of institutions instruments and markets which fosters saving and channels them
to their most efficient use”- H.R. Machiraju.
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“Financial system allocates savings efficiently in an economy to ultimate users either for
investment in real assets or for consumption”. - Van Horne.
“Financial system consists of a variety of institutions, markets and instruments related in a
systematic manner and provides the principal means by which savings are transformed into
investments”. - Prasanna Chandra.
1.4 STRUCTURE OF INDIAN FINANCIAL SYSTEM:

A financial system (within the scope of finance) is a system that allows the exchange
of funds between lenders, investors, and borrowers. Financial systems operate at national,
global, and firm-specific levels. They consist of complex, closely related services, markets,
and institutions intended to provide an efficient and regular linkage between investors and
depositors. Money, credit, and finance are used as media of exchange in financial systems.
They serve as a medium of known value for which goods and services can be exchanged as
an alternative to bartering. A modern financial system may include banks (operated by the
government or private sector), financial markets, financial instruments, and financial
services. Financial systems allow funds to be allocated, invested, or moved between
economic sectors. They enable individuals and companies to share the associated risks.
The formal financial system consists of four components:
 Financial Market
 Financial Institution
 Financial Instruments and
 Financial Services.
The financial system acts as a connecting link between savers of money and users of
money and thereby promotes faster economic and industrial growth. Thus, financial system
may be defined as “a set of markets and institutions to facilitate the exchange of assets and
risks.” Efficient functioning of the financial system enables proper flow of funds from
investors to productive activities which in turn facilitates investment.
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1.5 ROLE AND IMPORTANCE OF FINANCIAL SYSTEM IN ECONOMIC DEVELOPMENT:

1. It links the savers and investors. It helps in mobilizing and allocating the savings efficiently
and effectively. It plays a crucial role in economic development through saving-investment
process. This savings – investment process is called capital formation.
2. It helps to monitor corporate performance.
3. It provides a mechanism for managing uncertainty and controlling risk.
4. It provides a mechanism for the transfer of resources across geographical boundaries.
5. It offers portfolio adjustment facilities (provided by financial markets and financial
intermediaries).
6. It helps in lowering the transaction costs and increase returns. This will motivate people
to save more.
7. It promotes the process of capital formation.
8. It helps in promoting the process of financial deepening and broadening.
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Chapter – 2
Investment options available in India
2.1 INTRODUCTION
Investment refers to a commitment of funds to one or more assets that will be held over
some future time period. The two important elements of investments are current
sacrifice and future benefits. There are many ways through people can save money one
is controlling the extra expenses. Everyone wants to increase their personnel freedom,
sense of security and ability to afford the things they want in life. Investment is
important because it help in financial interdependence, growth of income, fulfilling
personal goals and reduce future risks.
As the blood is necessary for the survival same the saving and investment is necessary
for the fulfilling the future needs and risks. Future is always have uncertain and
unpredictable events which must be covered with the proper saving and investment. In
India there is vast scope of saving and investment because of presence of a large
numbers of industrialists, businessman, government and private organizations and
circulation of money is also very high. Investors are sensitive about their safety of their
investment made. They need reliability of their investment. The government and other
agencies come up with innovative schemes to mobilize the savings of the people which
can be fruitfully used in the development of the economy. It is necessary for the
investors to have adequate awareness and knowledge about the various investment
avenues so as to take rational decisions regarding the investment of their savings.
Investment refers to commitment of funds for future periods against a return which is
adequate to induce to part with money. Generally, it refers to pay off by putting the
money in productive avenues. All the investment decisions arise from trade off between
current and future consumption. Investment is the process of utilization of resources in
order to increase income and production output in the future.
Investment attracts all the people irrespective of their occupation, education, age, sex
etc. additional income or growth in valve can be achieved by investment. While selecting
a investment option care has to be taken that investment should not result in increase in
taxable income. All investment always involves some kind of risk. The risk degree also
varies according the investment mode, instrument and duration. Investment is beneficial
for individual, economy as well as for the society.
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2.2 MAIN REASONS FOR INVESTMENT

(a) Security of family: Security and safety of the family is essential objective of the
investment. Investment fulfills the main objectives of the family file provision for
children education and marriage.
(b) High Returns: Investors always invest their saving to earn regular and high returns.
The return on investments is the reward to the investors. To earn capital appreciation
investment can be made in both financial and non-financial assets.
(c) Tax benefits: while selecting an investment option, care has to be taken that
investment should not result in increase in taxable income. Most of the investors make
investments for getting the tax benefit in the form of exemptions under the Income Tax
Act, 1961.Tax benefits is important consideration for an investor as proper tax will help
to improve the efficiency of investor’s investments
(d) Liquidity: Investors generally prefer those investments which offer higher liquidity. It
is considered as one of the important factor which is to be considered before making an
investment. Liquidity means an ability of an investment to be converted into cash as and
when required.
(e) Retirement plans: Investors, while investing their earned money consider those
investment plans which help them after retirement to meets their future needs like
provision for old age and sickness, provision for house construction and provision for
dependents.
2.3 Difference on the basis of following features of investor and speculator

(a) Planning period: An investor always kept his holding for the longer period whereas
the speculator prefers to invest for a very short period.
(b) Owned funds: Investors always used his own fund whereas a speculator generally
resorts to borrowing.
(c) Expectation of return: An investor seeks moderate rate of return with limited risk
whereas a speculator always looks for a high rate of return.
(d) Risk: An investor is willing to take moderate risk whereas speculator willing to
assume high risk.
Factors affecting investments
(a) Safety of money
(b) Children marriage and education
(c) Security of life after retirement
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(d) Tax saving

(e) Regular and best returns
(f) Educational level
2.4 REVIEW OF LITERATURE

C.Sathiyamoorthy, (2015) examined that investment is undertaken with an expectation of
return. While taking the investment decisions various factors must be considered like age,
education level, income of the investors etc.
Rajeshwari Jain, (2014) conducted the survey in the city of Ahmadabad to know the income
& investment pattern awareness amongst the working women. The sample size was 250
respondents and finding reveal that high returns, tax benefits, retirement plans, security for
family, children education& marriage are the most important objectives of the women
behind the investing their saving in different investment avenues.
Varsha Virani, (2014) analyzed the various avenues of investment & concluded during the
study that teachers have been saving for the future in spite of them having a low level of
income. They save and make investment in most profit options in which low risk is involved.
Most of the respondents prefer to invest in bank deposits as it involves low risk and provide
regular return. High rate of return & tax benefit has influence the investment decision of the
respondents.
P.Bhanu Sireesha and Sree Laxmi, (2013) studied that investors were more interested in the
safety of their investment than other benefits arising from the investments. Most of the
investors prefer those investment options which had medium risk factor.
P. K. Bandgar and Mahesh Arun Mahajan, (2012) explained in their study the management
of portfolio which investors in Mumbai city followed to invest their saving for their secure
life and for bright future. Their study will help the investors to choose the proper
investment avenue and to create profitable investment portfolio.
Dhiraj Jain & Parul Jain, (2012) analyzed that demographic factors plays an important role &
have a great impact on the investment decisions of the investors. Income level, age, marital
status, education level, occupation etc affects the decision & market knowledge of the
investors in Rajasthan. It is concluded from study that most of the teachers are saving for
their children education, marriage and their family future needs.
A.Lalitha and M.Surekha, (2008) concluded in their study that investors are more stay with
the traditional investment avenues than latest options like LIC and bank/ post office
deposits. Investors believe that traditional options are more secure and free from risks as
compared to the modern investment options. They also observed in their study that the
retail investors don’t have proper investment awareness and knowledge.
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2.5 INVESTMENT OPTIONS AVAILABLE IN INDIA

There are large numbers of investment avenues are available in the market of India.
(a) Post office saving schemes: All the post office schemes is purely safe and no risk
investment option. Recurring deposits, kisan vikas patra, senior citizen saving schemes are
some of the best post office saving schemes.
(b) Insurance policies: Insurance policies include life insurance with investment portion,
pension scheme, and tax savings scheme. It provides moderate risk and return.
(c) Public provident fund and provident fund: One can open its PPF account with any
nationalized bank .PPF fixed tenure is 15 years and one can withdraw half of the amount
after seven years. The interest income is not taxable and there is tax benefit under section
80C of the Income Tax Act.
(d) Bank deposits: It is one of the most largely safe and secures type of investment option.
Rate of interest is depends on the period of deposit. Current account, saving account,
recurring account, fixed deposit account are the main types of bank deposits.
(e) Share capital: Investment in share is highly risky investment but earn high rate of return.
Knowledge of share market is essential requirement on the part of investors.
(f) Bonds and debentures: Bond and debentures are the types of debt instruments which
are issued by the companies. Investment in bonds/debentures provides regular interval
return.
(g) Real estate: As the investment in real estate provides benefits in the near future over a
period of time. It is one of the long term investments option and include huge amount of
money. Risk and return on the real estate depends on factor associated with markets. It is
subjected to capital gain tax also.
(h) Mutual funds: Mutual funds are subject to market risk. It is scheme that pools the
money from a number of investors and invests money in a different numbers of financial
securities. Equity, debt, and balances fund, Index fund, fixed income funds etc. are the types
of mutual funds.
(i) Pension funds: This is one of the latest and important option of investment in India.
Under this scheme the investor can invest in both equity and debt. Investor has a choice
about the percentage which he has to invest in debt and equity. Till the age of 35 years
exposure to equity and debt is 50%. The contribution is decided according to the age of the
investor.
(j) Gold/Silver and precious articles: Investment in metals gold/silver and precious article
like painting, sculptures, coins, stamps etc are the common form of investment. It provides
social status and liquidity. Investment in precious article and metals are less risky and for the
long term. It provides liquidity at any time as they can be converting into cash on demand.
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There are some investment options and schemes which provide the tax befits to the
investors. Such types of schemes must be promoted by the Government to encourage the
investors to invest in these schemes which provides maximum tax benefits to them. In some
schemes, the entire investment is made tax free also. There are many risk associated with
investment types. Risk may be low, medium and high risk. The investment avenues
according the risk associated are classified:
Table 1: Investment avenues according to risk
Low Risk Investment avenues Medium Risk Investment High Risk Investment avenues
avenues
(a) Public Provident funds (a) Mutual Funds (a) Real estate
(b) Fixed bank deposit (b) Gold/Silver & Precious (b) Chit funds
articles
(c) Post office saving schemes (c) Share market
(c) Bonds & Debentures
(d) Life insurances
Table 2: Investment benefits to different sectors
Benefits of investment to Benefits of Investment to Benefits of Investment to the

individual corporate sector Government
(a) More income (a) Permanent capital (a) Leads capital formation
(b) Tax benefits (b) Credit worthiness (b) More employment
(c) Safety and security (c) No fixed burden (c) More revenue for
development of the economy as
(d) Liquidity
a whole
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Chapter – 4
A Brief study on Mutual funds
4.1 INTRODUCTION OF MUTUAL FUNDS
Mutual funds have become a very popular way to take some of the risk out of investing in
individual stocks by investors. Mutual funds are a collection of stocks selected by mutual
fund seller and sold to investors as shares in a fund. There are several types of funds that
you can invest in. Some of the more popular types are technology funds, growth funds,
security funds, and income funds. Mutual funds are very popular because they allow you to
invest in a number of stocks therefore greatly reducing the risks associated with putting
your money in an individual stock. Mutual funds have become one of the most attractive
ways for the average person to invest their money. A mutual fund pools resources from
thousands of investors and then diversifies its investment into many different holdings such
as stocks, bonds, or government securities in order to provide high relative safety and
returns. Mutual Funds now represents perhaps the most appropriate opportunity for most
investors. It is no wonder that birthplace of mutual funds - the U.S.A.- the fund industry has
already overtaken the banking industry. The Indian industry has already started opening up
many of the exciting investment opportunities to Indian investors. Though not insured like
banks, mutual funds generally provide more return than the current one to two percent
obtainable through banks while still being one of the safest ways to grow your money. There
are an endless variety of mutual fund investment choices depending on the degree of risk
you feel comfortable with. Mutual Funds have emerged as professional intermediaries.
Besides providing the expertise in stock market investing, these funds allow investing in
small amounts and yet holding a diversified portfolio to a limit
4.2 HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India,
at the initiative of the Government of India and Reserve Bank and started its operations in
1964 with the issue of units under the scheme US-64. The history of mutual funds in India
can be broadly divided into four distinct phases: - First Phase- 1964-87 Unit Trust of India
(UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of
India and functioned under the Regulatory and administrative control of the Reserve Bank
of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of
India (IDBI) took over the regulatory and administrative control in place of RBI The first
scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores
of assets under management. Second Phase- 1987-1993 (Entry of Public Sector Funds) 1987
marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
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SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990. At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004 crores. Third Phase- 1993-2003 (Entry of Private Sector Funds With the entry of
private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the
Indian investors a wider choice of fund families. Also, 1993 was the year in which the first
Mutual Fund Regulations came into being, under which all mutual funds, except LTI were to
be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 1993 Fourth Phase -
since February 2003. In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the
Unit Trust of India with assets under management of Rs.29,835 crores as at the end of
January 2003, representing broadly., the assets of US 64 scheme, assured return, and
certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under
an administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd,
sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs. 76,000 crores of assets under management and with the setting up of a
UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers
taking place among different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of October 31, 2003, there were
31 funds, which manage assets of Rs. 126726 crores under 386 schemes. Erstwhile UTI was
bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India
effective from February 2003. The Assets under management of the Specified Undertaking
of the Unit Trust of India has therefore been excluded from the total assets of the industry
as a whole from February 2003 onwards. Currently Public Sector Banks like SBI, Canara
Bank, Bank of India, institutions like IDBI, GIC, LIC Foreign Institutions like Alliance, Morgan
Stanley, Templeton and Private financial companies like HDFC, Prudential ICICI, DSP Merrill
Lynch, Sundaram, Kotak Mahindra etc. have floated their own mutual funds.
4.3 WHAT IS MUTUAL FUND?

A Mutual Fund is a vehicle for investing in stocks and bonds. It is not an alternative
investment option to stocks and bonds; rather it pools the money of several investors and
invests this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund
unit gets a proportional share of the fund's gains, losses, income and expenses. A Mutual
Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI),
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that pools up the money from individual/ corporate investors and invests the same on
behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call
money markets etc., and distributes the profits. In other words, a mutual fund allows an
investor to indirectly take a position in a basket of assets. A mutual fund pools together
sums from individual investors and invests it in various financial instruments. Each mutual
fund has its own investment objective. Mutual funds have become one of the most
attractive ways for the average person to invest their money. A mutual fund pools resources
from thousand of investors and then diversifies its investment into many different holdings
such as stock, bonds, and securities in order to provide highly relative safety and returns.
Each Mutual Fund with different type of schemes is managed by respective Asset
Management Company (AMC). An investor can invest his money in one or more schemes of
Mutual Fund according to his choice and becomes the unit holder of the scheme. The
invested money in a particular scheme of a Mutual Fund is then invested by fund manager
in different types of suitable stock and securities, bonds and money market instruments.
Each Mutual Fund is managed by qualified professional man, who use this money to create
a portfolio which includes stock and shares, bonds, gilt, money-market instruments or
combination of all.
4.4 HOW IS THE MUTUAL FUND SET UP?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset
Management Company (AMC) and custodian. The trust is established by a sponsor or more
than one sponsor who is like promoter of a company. The trustees of the mutual fund hold
its property for the benefit of the unitholders. AMC approved by SEBI manages the funds by
making investments in various types of securities. Custodian, who is required to be
registered with SEBI, holds the securities of various schemes of the fund in its custody. The
trustees are vested with the general power of superintendence and direction over AMC.
They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI
Regulations require that at least two-thirds of the directors of trustee company or board of
trustees must be independent i.e. they should not be associated with the sponsors. Also,
50% of the directors of AMC must be independent. All mutual funds are required to be
registered with SEBI before they launch any scheme.
4.5 WHAT IS THE NET ASSET VALUE (NAV) OF THE SCHEME ?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value
(NAV). Mutual funds invest the money collected from investors in securities markets. In
simple words, NAV is the market value of the securities held by the scheme. Since market
value of securities changes every day, NAV of a scheme also varies on day to day basis. The
NAV per unit is the market value of securities of a scheme divided by the total number of
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units of the scheme on any particular date. For example, if the market value of securities of
a mutual fund scheme is INR 200 lakh and the mutual fund has issued 10 lakh units of INR 10
each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV
is required to be disclosed by the mutual funds on a daily basis. The NAV per unit of all
mutual fund schemes have to be updated on AMFI‟s website and the Mutual Funds‟
website by 9 p.m. of the same day. Fund of Funds are allowed time till 10 a.m. the following
business day to update the information.
4.6 DISTINGUISHING CHARACTERISTICS OF MUTUAL FUND

The traditional, distinguishing characteristics of the mutual fund may include the following:
#> Investors purchase mutual fund shares from the fund itself (or through a broker for the
fund) instead of from other investors on a secondary market
#> The price that investors pay for mutual fund shares is the fund's per share net asset value
(NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as sales
loads).
#> Mutual fund shares are "redeemable," meaning investors can sell their shares back to the
fund (or to a broker acting for the fund).
#> Mutual funds generally create and sell new shares to accommodate new investors. In
other words, they sell their shares on a continuous basis, although some funds stop selling
when, for example, they become too large.
#> The investment portfolios of mutual funds typically are managed by separate entities
known as "investment advisers" that are registered with the SEBI.
3.7 MAJOR RIGHTS AS A UNIT HOLDER IN A MUTUAL FUND

Some important rights are mentioned below:
• Unit holders have a proportionate right in the beneficial ownership of the assets of the
scheme and to the dividend declared.
• They are entitled to receive dividend warrants within 42 days of the date of declaration of
the dividend.
• They are entitled to receive redemption cheques within 10 working days from the date of
redemption.
• 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
• 75% of the unit holders can pass a resolution to wind-up the scheme
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4.8 REGULATORY BODY FOR MUTUAL FUNDS

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds
mentioned above. All the mutual funds must get registered with SEBl. The only exception is
the UTI, since it is a corporation formed under a separate Act of Parliament.
Broad Guidelines Issued by SEBI for a MF: -
SEBI is the regulatory authority of Mutual Funds. SEBl has the following broad guidelines
pertaining to mutual funds:
• Mutual Funds should be formed as a Trust under Indian Trust Act and should be operated
by Asset Management Companies (AMCs).
• Mutual Funds need to set up a Board of Trustees and Trustee Companies. They should also
have their Board of Directors.
• The net worth of the AMCs should be at least Rs.5 crore.
• AMCs and Trustees of a Mutual Fund should be two separate and distinct legal entities
• The AMC or any of its companies cannot act as managers for any other fund
• AMCs have to get the approval of SEBI for its Articles and Memorandum of Association
• All Mutual Funds schemes should be registered with SEBI.
• Mutual Funds should distribute minimum of 90% of their profits among the investors
There are other guidelines also that govern investment strategy, disclosure norms and
advertising code for mutual funds.
3.9 REGULATIONS OF MUTUAL FUNDS IN INDIA

In India SEBI and RBI act as regulators of mutual fund.
#> SEBI (Mutual Fund) REGULATIONS,1996 The provisions of this regulations pertaining to
AMC are:
• All the schemes to be launched by the AMC need to be approved by the trustees and
copies of offer document of such schemes are to be filed with SEBI.
• The offer document shall contain adequate disclosure to enables the investor to make
informed decision.
• Advertisement in respect of schemes should be in conformity with the SEBI prescribed
advertisement code, and discloses the method and periodicity of the valuation of
investment sales and repurchase in addition to the investment objectives.
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• The listing of close ended schemes is mandatory and every close ended scheme should be
listed on a recognized stock exchange within six months from the closure of subscription.
However, listing is not mandatory in case the scheme provides for monthly income or caters
to the special classes of persons like senior citizen, women, children, and physically
handicapped. If the scheme discloses detail of repurchase in the offer document: if the
schemes opens for repurchase within six months of closure of subscription.
• Units of a close ended scheme can be opened for sale or redemption at a predetermined
fixed interval if the minimum and maximum amount of sale, redemption, and periodicity is
disclosed in the offer document.
• Units of a close ended scheme can also be converted into open ended scheme with the
consent of majority of the unit holder and disclosure is made in the offer document about
the option and period of conversion.
• Units of a close ended scheme may be rolled over on passing resolution by a majority of
the shareholders.
• No scheme other than unit linked schemes can be opened for more than 45 days.
• The AMC must specify in the offer document about the minimum subscription and the
extent of over subscription, which is intended to be retained. In the case of over
subscription, all applicants applying up to 500 units must be given full allotment subjected
to over subscription.
• The AMC must refund the application money if minimum subscription is not received and
also the excess over subscription with in the six weeks of closure of subscription.
• Guaranteed returns can be provided in a scheme if such returns are fully guaranteed by
the AMC or sponsor. In such cases, there should be a statement indicating the name of the
person, and the manner in which the guarantee is to be made must be stated in the offer
document.
• A close ended scheme shall be wound up on redemption date, unless it is rolled over, or if
75% of the unit holders of a scheme pass a resolution of winding up of the scheme: if the
trustee on happening of any event, requires the scheme to be wound up: or if SEBI, so
directed in the interest of investors.
#> Investment objectives and valuation policies :-
The price at which the units may be subscribed or sold and the price at which such units
may at any time repurchase by mutual fund shall be made available to the investor.
#> General obligation
• Every asset management company for each scheme shall keep and maintain proper books
of account, records and document, for each scheme so as to explain its transaction and to
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disclose at any point of time the financial position of each scheme and in particular give true
and fair view of state of affairs of the fund and intimate to board the place where such
books of account, record, and document are maintained.
• The financial year for all the schemes shall end as on march 31 of each year. Every mutual
fund or the asset management company shall prepare in respect of scheme and the fund as
specific in eleventh schedule.
• Every mutual fund shall have the annual statement of account audited by an auditor who
is nor in any way associated with the auditor of the asset management company.
#> Procedure in case of default
On and from the date of suspension of the certificate or the approval as the may be, the
mutual fund trustees or asset management company, shall cease to carry on any activity as
a mutual fund, trustee or asset management company , during the period of suspension,
and shall be subjected to the directions of the board with regard to any records, documents,
or securities that may be in its custody or control, relating to its activities as mutual fund,
trustee, or asset management company.
#> SEBI Guidelines (2001-02) Relating to Mutual Fund: -
• A common format is prescribed for all mutual fund schemes to disclose their entire
portfolio of half yearly basis so that the investors can get meaningful information on the
deployment of funds. Mutual funds are also required to disclose the investment in various
types of instruments and percentage of in each script to the total NAV illiquid and non-
performing assets, investments in derivatives and in ADRs and GDR’s.
• To enable the investor to make informed investment decision, mutual funds have been
directed to fully revise and update offer document and memorandum at least once in two
years.
#> Mutual funds are also required to: -
i. Bring uniformity in disclosure of various categories of advertisements, with a
view to ensuring consistency and comparability across schemes of various
mutual funds.
ii. Reduce initial offer period from a maximum of 45 days to 30 days.
iii. Dispatch statement of account once the minimum subscription amount specified
in offer document is received even before the closure of the issue.
iv. Invest in mortgaged backed securities of investment grade given by credit rating
agency.
v. Identify and make a provision for non-performing asset (NPAs) according to
criteria for classification of n NPAs and treatment of income accrued on NPAs to
disclose NPAs in half yearly portfolio reports.
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vi. Disclose information in a revised format on unit capital, reserves, performance in

terms of dividend and rise/fall in NAV during the half year period annualized
yield over the last 1, 3, 5 years in addition to percentage of management fee,
percentage of recurring expenses to net asset, investment made in associate
companies, payment made to associate companies, payment made to associate
companies for their services, and detail of large holding, since their operation.
vii. Declare their NAVs and sale/repurchase prices of all schemes updated on regular
basis on the AMFI website by 8.00 PM and declare NAVs of their close ended
schemes on every Wednesday.
• The format for unaudited half yearly results for the mutual funds has been
revised by SEBI. These results are to be published before the expiry of one month
from the close of each half-year as against two-month period provided earlier.
These results shall also be put in their websites by mutual fund.
• All the schemes by mutual fund shall be launched within six months from the
date of the letter containing observation from SEBI on the scheme offer
document. Otherwise, a fresh offer document along with filing fee shall be filled
with SEBI.
• Mutual funds are required to disclose large unit-holding in the scheme, which
are over 25% of the NAV. #> RBI as supervisor of bank owned Mutual Funds
#> RBI as supervisor of bank owned Mutual Funds
The first non-UTI mutual funds were started by public sector banks. Banks come
under the regulatory jurisdiction of RBI. So, Bank owned mutual funds are
regulated by RBI, but it has been clarified that all the mutual funds, being
primarily capital market players come under the regulatory framework of SEBI.
Thus, the bank owned fund continues to be under the joint supervision of both
RBI and SEBI. It is generally understood that all market related, and investor
related activities of the fund are to be supervised by SEBI, while any issue
concerning the ownership of the AMC by bank fall under the regulatory ambit of
RBI. But RBI on bank fund should not conflict with SEBI guidelines.
#> RBI as supervisor of money market mutual funds
RBI is the only Government agency that is charged with the sole responsibility of
overall entities that operates in money market. So, money market mutual funds
were regulated by RBI guidelines till 23.11.1995. Recently it has been decided
that money market mutual funds of registered mutual fund will be regulated by
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SEBI through the same guidelines issued for other mutual funds, i.e., SEBI (MF)
regulations, 1996. However, RBI does retain the right to decide whether mutual
funds will be allowed to access inter-call money market. Accordingly, RBI has
placed certain restrictions through latest credit policy, with the intention of
moving toward a pure interbank money market.
4.10 TYPES OF MUTUAL FUNDS

Mutual fund schemes may be classified on the basis of its structure and its investment
objective.
ON THE BASIS OF STRUCTURE.
On the basis of structure mutual fund can be either open-ended or close-ended. Most
mutual funds are open-end funds, which means the fund sells and redeems its shares. As
more shares are sold, the fund grows. Sometimes open-end funds are closed to new
investors when the funds become too large to be managed effectively-though current
shareholders can continue to invest money. When a fund is closed this way, the investment
company offering the fund often creates a similar fund to capitalize on investor interest.
Closed-end fund are traded on the major exchanges, as stocks are. There are a fixed number
of shares available because a closed-end fund raises its money all at once and does not buy
back shares investors want to sell. Closed-end fund shares often trade at a discount, or less
than their net asset value, but you may pay a premium, or more than the NAV, if the fund is
in demand. Their prices change constantly throughout the trading day, unlike open-end
funds whose prices are set only once, at the end of the day.
4.11 DIFFERENCE BETWEEN THE TWO

The difference between the two is in the way each operates after the initial public offering.
A closeended scheme operates like any other public entity whose shares are traded on the
stock market. Thus, to buy or sell the shares of a close-ended scheme, you have to transact
on the BSE or on the NSE. That's why the market price of its shares is also determined by >
supply and demand for its shares (apart from quality and performance of its portfolio). On
the contrary, open-ended funds continue to price, sell and repurchase shares after the initial
offer on the basis of the NAV. The mutual fund is ready to sell additional shares of the fund
at the NAV (at par or adjusted for expenses), or buy back (redeem) shares of the fund at the
NAV (at par or adjusted for expenses). That's why the unit capital of open-ended funds can
fluctuate on daily basis. But a close-ended fund may or may not offer more shares after its
listing. It may or may not also repurchase its shares. That is up to the issuing company to
decide.
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So, we can say that in an open-ended mutual fund there are no limits on the total size of the
corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point
of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds,
the total size of the corpus is limited by the size of the initial offer.
4.12 OTHER SCHEMES:

TAX SAVING SCHEME Equity Linked Savings Schemes (ELSS): Equity Linked Saving Schemes
(ELSS) are open-ended funds investing predominantly in equity-oriented instruments. Under
Section 88 of the Income Tax Act, 1961 investments up to Rs. 10000 in equity linked savings
schemes (ELSS) qualifies for the tax rebate of 20% or 15%. (Investors with gross total income
of up to Rs.1.50 Lacs can claim a rebate of 20% while investors with gross total income of Rs.
1.5 Lacs to Rs.5 Lacs can claim a rebate of 15%). The funds launched under this plan are
largely diversified equity funds. The investment strategy for most of the funds is similar to
investment strategy followed by the fund under diversified equity funds.
ON THE BASIS OF INVESTMENT OBJECTIVE:
When it comes to investing in mutual funds, investors have literally thousands of choices.
Before investing in any given fund, decide whether the investment strategy and risks of the
fund are a good fit for you. The first step to successful investing is figuring out financial goals
and risk tolerance. Once you know what you're saving for, when you'll need the money, and
how much risk one can tolerate, one can more easily narrow your choices.
Most mutual funds fall into one of three main categories —equity funds (also called "stock"
funds), debt funds (also called "bond" funds) and balanced funds (also called "hybrid"
funds). Each type has different features and different risks and rewards. Generally, the
higher the potential return, the higher the risk of loss. The schemes or funds (often used
synonymously) can be classified as:
SCHEMES
#> EQUITY FUNDS:
They are also known as growth funds. They focus on stocks that may not pay a regular
dividend but have potential for large capital gains. They promise pure capital appreciation
with equity shares. They buy shares in companies with high potential for growth (some of
which might not pay dividends). The NAV of such a fund will tend to be erratic since these
so-called growth shares experience high price volatility. They also make quick profits by
investing in small cap shares and by investing in initial public offerings of small companies.
However, growth strategy may differ from one fund to another. Not all growth funds
operate similarly. Some of the common equity funds are:
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#> Sector funds: The goal is once again pure capita! appreciation, but the strategy is to buy
into shares of only one industry. And not diversify like a growth fund. Such funds forgo the
principle of asset allocation for high returns. That's why they are also the riskiest.
#> Tax planning funds: Also known as equity linked savings schemes, they operate like any
other growth fund (and that's why are as risky). However, an investor in these schemes gets
an income-tax rebate of 20 per cent (for a maximum of Rs 10,000) under Section 88 of the
Income Tax Act. Essentially an incentive for the investor (who is otherwise investing in fixed-
income instruments like the Public Provident Fund primarily for saving tax on his or her
annual salary or business income) a chance to participate in capital appreciation that can be
delivered by investing in equity shares. That's also why these schemes also come with a
three-year lock-in period. Also, while other tax planning schemes guarantee returns, an ELSS
offers no such assurance.
#> Index fund: Their goal is to match the performance of the markets. They do not involve
stock picking by so called professional fund managers. An index fund essentially buys into
the stock market in a way determined by some market index (BSE Sensex or S&P CNX Nifty)
and does almost no further trading. Index funds are optimally diversified portfolios and only
carry along with it the due to economywide factors.
#> DEBT FUNDS:
They aim to provide safety of principal and regular (monthly, quarterly or semi annually)
income by investing in bonds, corporate debentures and other fixed income instruments.
The AMC in this case will also be guided by ratings given to the issuer of debt by credit rating
agencies. Wherever a debt instrument is not rated, specific approval of the board of the
AMC is required. Since most of corporate debt is illiquid, the fund tries to provide liquidity
by investing in debt of varying maturity. Some of the common debt funds are:
#> Money market funds: Also known as liquid plans, these funds are a play on volatility in
interest rates. Most of their investment is in fixed-income instruments with maturity period
of less than a year. Since they accept money even for a few days, they are best used to park
short-term money, which otherwise earns a lower return in a savings bank account.
#> Gilt funds: They are aimed at generating returns commensurate with zero credit risk,
which is by investing securities created and issued by the central and/or the state
government securities and/or other instruments permitted by the Reserve Bank of India.
Since they ensure zero risk, instant liquidity, tax-free income, their return is lower than an
income fund.
#> BALANCED FUNDS: The idea is to get the best of both the world's equity shares and debt.
These are also known as hybrid funds. Investing in equities is supposed to bring home
capital appreciation, while that in fixed income is to impart stability and assure income for
distribution. The proportion of the two asset classes depends on the fund managers'
preference for risk against return. But because the investments are highly diversified,
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investors reduce their market risk. Normally about 50 to 65 per cent of a portfolio's assets
are invested in equity shares.
TYPES OF LOADS
The AMC that manages your mutual fund must bear several expenses. So, it recovers part of
these expenses from its investors, for whom it is doing the favour of managing funds. It is
broken into two parts: annual management fee (up to 1.25 per cent for funds less than Rs 1
billion and one per cent for funds above Rs. 1 billion) and entry & exit loads.
ENTRY LOAD:
Loads normally apply to only open-ended schemes. An entry load is also called the sales
load. which is mainly to help the AMC recover expenses relating to sales literature,
distribution, advertising, and agent/broker commissions. The price at which an investor buys
into the fund is a function of both the NAV and sales load. An entry load is an additional cost
that an investor pays at the point of entry. Assume that your proposed investment is Rs. 10,
OOO/-. Also assume that the current NAV of the fund is Rs. 12.00 and that the entry load is
Rs.0.50. Then you will receive 10000/12.50 = 800 units. The entry load could be different for
each scheme; it would also depend on the amount of investment and the time period of
investment.
EXIT LOAD:
On the other hand, exit load (if you withdraw within a specified period) is charged while
redeeming your units. The latter is for more logical reasons, especially with income or
money market funds, where a quick withdrawal by too many investors can put pressure on
the fund's asset maturity profile. So to ensure that longer-term investors are not penalized,
short-term investors are charged an exit load. An exit load is levy that an investor pays at
the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the
current NAV of the fund is Rs. 12.00 and that the exit load is Rs.0.50. Now if you sell 800
units then you stand to receive 800X11.5 = Rs. 9200. The exit load could be different for
each scheme. It would also depend on the amount of investment and the time period of
investment.
4.13 VARIOUS PLANS OF MUTUAL FUNDS

That depends on the strategy of the concerned scheme. But generally, there are 3 broad
categories that any Mutual Fund scheme offers: -
#> A Dividend Plan entails a regular payment of dividend to the investors.
#> A Reinvestment Plan is a plan where these dividends are reinvested in the scheme itself.
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#> A Growth Plan is one where no dividends are declared, and the investor only gains
through capital appreciation in the NAV of the fund.
The term 'growth' is often used in a very generic sense to denote every equity mutual fund.
Also 'growth' in fixed income funds, comes from reinvesting dividends. That's why in such
fixed income funds, investors have an option, and they can choose either growth through
reinvestment of dividends, or regular income by ticking on the income option.
HOW TO CHOOSE A PLAN It depends on investment object of the investor, which again
depends on his income, age, financial responsibilities, risk taking capacity and tax status. For
example, a retired government employee is most likely to opt for monthly income plan
while a high-income youngster is most likely to opt for growth plan. SYSTEMATIC
INVESTMENT PLAN Besides these three plans there is one another plan which is becoming
popular that is systematic investment plan. A systematic investment plan is one where an
investor contributes a fixed amount every month and at the prevailing NAV the units are
credited to his account. Today many funds are offering this facility. A systematic investment
plan (SIP) offers 2 major benefits to an investor: #> It avoids lump sum investment at one
point of time #> In a scenario of falling prices, it reduces your overall cost of acquisition by a
process of rupee cost averaging. This means that at lower prices you end up getting more
units for the same investment.
4.14 HOW MUTUAL FUND WORKS

For retail investor who does not have the time and expertise to analyze and invest in stocks
and bonds, mutual funds offer a viable investment alternative. One can purchase shares in
some mutual funds by contacting the fund directly or other mutual fund shares are sold
mainly through brokers, banks, financial planners, or insurance agents. All mutual funds will
redeem (buy back) the shares on any business day and must send the payment within seven
days. One can invest by approaching a registered broker of Mutual funds or the respective
offices of the Mutual funds in that particular town/city. An application form must be filled
up giving all the particulars along with the cheque or Demand Draft for the amount to be
invested. The mutual fund issues share of stock and bonds (just like any other corporation)
to investors in exchange for cash. It is interesting to note that funds do not issue a pre-
determined amount of stock, as do most corporations; new shares are issued as each new
investment is made. Investors thus become part owners of the fund itself, and thereby the
assets of the fund. The fund, in turn, uses investors' cash to purchase securities, such as
stocks and bonds. The primary assets of a fund are the securities it invests in (other assets,
such as equipment, are a relatively small part of the total assets of a fund). Following are the
various descriptions needed for the working of mutual fund:
How mutual funds work
Buy shares - Receive income in a fund
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Invest in securities
Returns increase fund value
STOCKS BONDS
PRICING AND VALUATION DESCRIPTION.
The value of the shares of an open-end mutual fund is readily determined Each day, the
accounting staff of a fund simply adds up the value of all the securities in the portfolio, adds
in other assets, deducts liabilities, and comes up with a net overall value. It is then a simple
matter to divide the net assets by the number of shares outstanding. This is called the net
asset value, and is the price at which investors buy and sell shares from the fund. The net
asset value is listed in the financial section of many major newspapers.'
LOAD AND NO-LOAD FUNDS DESCRIPTION
A load, or loaded, fund is one that has a sales charge. A no-load fund has no sales charge. As
noted above, not all funds have sales charges. Those that do simply add them on to the net
asset value of the fund, thus coming up with a new, higher offering price per share It is
important to note that the underlying value of the fund's shares do not change, and further,
that an investor selling shares will still receive only the net asset value A no-load fund is
simpler. The net asset value is used for both the purchase price and the selling price.
Therefore, the two prices are always identical. In the case of a load fund, the broker usually
takes care of the details for you. In the case of a no-load fund, investors usually deal directly
with the fund in question.
BUYING AND SELLING FUND SHARES DESCRIPTION.
When you buy shares, you pay the current NAV per share plus any fee the fund assesses at
the time of purchase, such as a purchase sales load or other type of purchase fee. When you
sell your shares, the fund will pay you the NAV minus any fee the fund assesses at the time
of redemption, such as a deferred (or back-end) sales load or redemption fee. A fund's NAV
goes up or down daily as its holdings change in value.
BUYING AND SELLING FUND SHARES DESCRIPTION.
When you buy shares, you pay the current NAV per share plus any fee the fund assesses at
the time of purchase, such as a purchase sales load or other type of purchase fee. When you
sell your shares, the fund will pay you the NAV minus any fee the fund assesses at the time
of redemption, such as a deferred (or back-end) sales load or redemption fee. A fund's NAV
goes up or down daily as its holdings change in value.
4.15 HOW MUTUAL FUNDS CAN EARN MONEY
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A mutual fund can earn money in three different ways.

Dividend Payments — A fund may earn income in the form of dividends and interest on the
securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus
disclosed expenses) it has earned in the form of dividends.
Capital Gains Distributions — They are paid from any profits the fund realizes from selling
investments. The price of the securities a fund owns may , increase. When a fund sells a
security that has increased in price, the fund has a capital gain. At the end of the year, most
funds distribute these capital gains DISTRIBUTIONS (minus any capital losses) to investors.
Increased NAV — If the market value of a fund's portfolio increases after deduction of
expenses and liabilities, then the value (NAV) of the fund and its shares increases. The
higher NAV reflects the higher value of your investment. With respect to dividend payments
and capital gains distributions, funds usually will give a choice: the fund can send a check or
other form of payment, or the dividends or distributions reinvested in the fund to buy more
shares (often without paying an additional sales load. A fund may sell investments for a
number of reasons: > To capitalize on an investment's increased value > To achieve
performance targets > To free up money to make new investments > To prevent additional
losses in a security that is losing value > To have enough cash to redeem shares its investors
want to sell back to the fund
4.16 INFORMATION NEEDS TO EVALUATE MUTUAL FUNDS
There are three key pieces of information that help to evaluate a mutual fund.
» PAST PERFORMANCE: It measures the fund's historical returns, whether the returns are
consistent, and how they stack up against the returns of comparable funds. While there's no
guarantee that a fund's future performance will equal its current or past record.
» RISK: It measures how likely you are to earn money or lose it. Risk isn't bad if you're
investing for the long term and you can tolerate some setbacks without selling in a panic if
the fund drops in value. But if you're investing to meet short-term goals or preserve capital,
you may want a fund that poses less risk to principal.
» COST: It measures how much you pay in sales charges or commissions, fees, and annual
asset-based expenses. Since these costs directly affect your return, you may want to
compare the expense ratios and sales charges of various funds as part of your evaluation
process. Higher fees may correlate with higher risk if the fund manager takes added risk to
help reduce the impact of fees on return
FACTORS TO CONSIDER
Thinking about long-term investment strategies and tolerance for risk can help to decide
what type of fund is best suited. But one should also consider the effect that fees and taxes
will have on the returns over time.
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DEGREES OF RISK
Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains
the same risk as investing in the markets, the only difference being that due to professional
management of funds the controllable risks are substantially reduced. A very important risk
involved in mutual fund investments is the market risk. When the market is in doldrums,
most of the equity funds will also experience a downturn. However, the company specific
risks are largely eliminated due to professional fund management All funds carry some level
of risk. One can lose some or all of the money invests principal -because the securities held
by a fund go up and down in value. Dividend or interest payments may also fluctuate as
market conditions change.
Before investing, be sure to read a fund's prospectus and shareholder reports to learn about
its investment strategy and the potential risks. Funds with higher rates of return may take
risks that are beyond your comfort level and are inconsistent with your financial goals.
Financial theory-states that an investor can reduce his total risk by holding a portfolio of
assets instead of only one asset. This is because by holding all your money in just one asset,
the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a
variety of assets, this risk is substantially reduced.
4.17 HOW SAFE ARE MUTUAL FUNDS:
As financial intermediaries, they do not come without risk. Also when defined in terms of
losing money, the risk in mutual funds is not dramatically different than that present in
other financial instruments. Still, they are relatively safer and offer a more convenient way
on investing. With mutual funds you can control risk by choosing a fund that given your risk
profile., you believe is the best. On the other hand, picking stocks individually that will both
meet your objectives and match your profile can be tough. A mutual fund portfolio is also
easier to monitor than individual shares. They also come without systemic risks (like bad
deliveries). They offer quick liquidity Most private mutual funds can be redeemed in three to
four working days, unlike a fixed deposit that is more likely to be received a month after its
maturity, or an equity share after the end of its settlement period (or depending up on your
broker). This too cuts the overall risk associated with investing, often not so visible and
hence not accounted by many investors.
TAX CONSEQUENCES
When an individual stock or bond is bought and hold, income tax has to be paid each year
on the dividends or interest received.
Mutual funds are different. When you buy and hold mutual fund shares, you will owe
income tax on any ordinary dividends in the year you receive or reinvest them. And, in
addition to owing taxes on any personal capital gains when you sell your shares, you may
also have to pay taxes each year on the fund's capital gains. That's because the law requires
24
mutual funds to distribute capital gains to shareholders if they sell securities for a profit that
can't be offset by a loss.
Tax Exempt Funds
If you invest in a tax-exempt fund - such as a municipal bond fund - - some or all of your
dividends will be exempt from federal (and sometimes state and local) income tax.
But if you receive a capital gains distribution, you will likely owe taxes — even if the fund
has had a negative return from the point during the year when you purchased your shares.
SEC rules require mutual funds to disclose in their prospectuses after-tax returns. In
calculating after-tax returns, mutual funds must use standardized formulas similar to the
ones used to calculate before-tax average annual total returns. When comparing funds, be
sure to take taxes into account.
RETURNS
As per SEBI Regulations, mutual funds are not allowed to assure returns. However, funds
floated by AMCs of public sector banks and financial institutions were permitted to assure
returns to the unit holders provided the parent sponsor was willing to give an explicit
guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed
returns to their investors.
Investors need to be clear that mutual funds are essentially medium to long-term
investments Hence, short-term abnormal profits will not be sustainable in the long run. But
in the medium to long run the mutual funds tend to outperform most other avenues of
investments at the same time avoiding the risk of direct investment accompanied with
professional fund management.
4.17 ADVANTAGES AND DISADVANTAGES
Every investment has advantages and disadvantages. But it's important to remember that
features that matter to one investor may not be important to you. Whether any particular
feature is an advantage for you will depend on your unique circumstances. For some
investors, mutual funds provide an attractive investment choice because they generally
offer the following advantages:
Professional Management — Professional money managers research, select, and monitor
the performance of the securities the fund purchases.
Diversification - - Diversification is an investing strategy that can be neatly summed up as
"Don't put all your eggs in one basket." Spreading your investments across a wide range of
companies and industry sectors can help lower your risk if a company or sector fails. Some
investors find it easier to achieve diversification through ownership of mutual funds rather
than through ownership of individual stocks or bonds.
25
Affordability - - Some mutual funds accommodate investors who don't have a lot of money
to invest by setting relatively low amounts for initial purchases, subsequent monthly
purchases or both.
Liquidity & flexibility— Mutual fund investors can readily redeem their shares at the current
NAV plus any fees and charges assessed on redemption at any time Through features such
as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you
can systematically invest or withdraw funds according to your needs and convenience.
Easy entry and exit -- Filling a mutual fund application or a redemption form is all that it
takes while entering or exiting a mutual fund. But with equity shares, you need to have an
account with a stockbroker (for buying & selling) and another with a depository participant.
Some investors may find this cumbersome.
Tax benefits— Section 88 for Equity Linked Saving Schemes, ability to reinvest your proceeds
from capital gains into mutual funds under section 54EA & 54EB and tax-free status for
equity oriented funds for three years starting from April 1, 1999 are popular benefits that
investors in mutual funds can avail of.
Transparency—One get regular information on the value of the investment in addition to
disclosure on the specific investments made by ones scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.
Well Regulated—All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The operations
of Mutual Funds are regularly monitored by SEBI.
But mutual funds also have features that some investors might view as Disadvantages, such
as:
#> Costs Despite Negative Returns -- Investors must pay sales charges, annual fees, and
other expenses regardless of how the fund performs. And, depending on the timing of their
investment, investors may also have to pay taxes on any capital gains distribution they
receive even if the fund went on to perform poorly after they bought shares.
#> Lack of Control - - Investors typically cannot ascertain the exact make-up of a fund's
portfolio at any given time, nor can they directly influence which securities the fund
manager buys and sells or the timing of those trades.
#> Price Uncertainty - - With an individual stock, you can obtain real-time (or close to real
¬time) pricing information with relative ease by checking financial websites or by calling
your broker. You can also monitor how a stock's price changes from hour to hour — or even
second to second. By contrast, with a mutual fund, the price at which you purchase or
redeem shares will typically depend on the fund's NAV, which the fund might not calculate
until many hours after you've placed your order. In general, mutual funds must calculate
their NAV at least once every business day.
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Chapter - 1
OFFER DOCUMENT FOR SCHEMES
Filing of Offer Document with the Board
The Offer Document shall have two parts i.e. Scheme Information Document (SID) and Statement of
Additional Information (SAI). SID shall incorporate all information pertaining to a particular scheme.
SAI shall incorporate all statutory information on Mutual Fund.
The Mutual Funds shall prepare SID and SAI in the prescribed formats. Contents of SID and SAI shall
follow the same sequence as prescribed in the format. The Board of the AMC and the Trustee(s)
shall exercise necessary due diligence, ensuring that the SID/SAI and the fees paid are in conformity
with the Mutual Funds Regulations
All offer documents (ODs) of Mutual Fund schemes shall be filed with SEBI in terms of the
Regulations
Filing of Draft SID:
a. Draft SID of schemes of Mutual Funds filed with the Board shall also be available on SEBI’s website
– www.sebi.gov.in for 21 working days from the date of filing.
b. AMC shall submit a soft copy of draft SID to the Board in HTML or PDF format. For this purpose,
AMC shall be fully responsible for the contents of soft copies of the SID. AMC shall also submit an
undertaking to the Board while filing the soft copy of draft SID certifying that the information
contained in the soft copy matches exactly with the contents of the hard copy filed with the Board.
c. In case of any inaccurate filing, the SID will be returned and refiling will be required. 21 working
days6 shall be calculated from the date of refiling;
d. If any changes to the SID are made after filing, the 21 working day(s) period will recommence from
the date of submission of the last additional statement(s)
Filing of SAI
a. A single SAI (common for all the schemes) can be filed with Board along with first
draft of SID or can be filed separately. After incorporating the
comments/observations, if any, from the Board, AMC shall file a soft copy of SAI
with the Board in PDF format along with printed copy of the same, upload the SAI on
its website and on AMFI website.
Filing of Final SID
a. Final SID (after incorporating comments of the Board) must reach the Board before it is issued for
circulation. Soft copy of the final SID in PDF format along with a printed copy should be filed with
Board two working days prior to the launch of the scheme. AMC shall also submit an undertaking to
the Board while filing the soft copy that information contained in the soft copy of SID to be uploaded
27
on SEBI website is current and relevant and matches exactly with the contents of the hard copy and
that the AMC is fully responsible for the contents of the soft copy of SID. The soft copy of SID should
also be uploaded on AMFI website two working days prior to launch of the scheme. Failure to submit
the printed SID to the Board before it is issued for circulation shall invite penalties under the Mutual
Funds Regulations.
b. In case of any difference, in nature of material alteration of the suggestions made by the Board
between the printed SID and the SID filed with the Board, immediate withdrawal of the SID from
circulation will be ordered and such withdrawal shall be publicized by the Board.
Updation of SID & SAI
For the schemes launched in the first half of a financial year, the SID shall be updated within 3
months from the end of the financial year. However, for the schemes launched in the second half of
a financial year, SID shall be updated within 3 months of the end of the subsequent financial year.
(For example, for a scheme launched in May, 2008 the SID shall be updated by June 30, 2009 and for
a scheme launched in December 2008, the SID shall be updated by June 30, 2010) Thereafter, the
SID shall be updated once every year.
The procedure to be followed in case of changes to the scheme shall be as under:
a. In case of change in fundamental attributes in terms of Regulation, SID shall be revised and
updated immediately after completion of duration of the exit option.
b. In case of other changes:
1. The AMC shall be required to issue an addendum and display it on its website.
2. The addendum shall be circulated to the entire distributors/brokers/Investor Service Centre (ISC)
so that the same can be attached to copies of SID already in stock, till the SID is updated.
3. In case any information in SID is amended more than once, the latest applicable addendum shall
be a part of SID. (For example, in case of changes in load structure the addendum carrying the latest
applicable load structure shall be attached to all KIM and SID already in stock till it is updated).
4. A public notice shall be given in respect of such changes in one English daily newspaper having
nationwide circulation as well as in a newspaper published in the language of region where the Head
Office of the Mutual Fund is situated.
5. The account statements issued to investors shall indicate the applicable load structure.
A copy of all changes made to the scheme shall be filed with Board within 7 days of the change. A
soft copy of updated SID shall be filed with Board in PDF Format along with printed copy of the
same. AMC shall also submit an undertaking to the Board while filing the soft copy that information
contained in the soft copy of SID to be uploaded on SEBI website is current and relevant and
matches exactly with the contents of the hard copy and that the AMC is fully responsible for the
contents of the soft copy of the SID.
Updation of SAI
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A printed copy of SAI shall be made available to the investor(s) on request. SAI shall be updated
within 3 months from end of financial year and filed with SEBI.
Any material changes in the SAI shall be made on an ongoing basis by way of updation on the Mutual
Fund and AMFI website. SEBI shall be intimated of the changes made in the SAI within 7 days. The
effective date for such changes shall be mentioned in the updated SAI.
A soft copy of updated SAI shall be filed with SEBI in PDF format along with printed copy of the same.
AMC shall also submit an undertaking to SEBI while filing the soft copy that information contained in
the soft copy of SAI to be uploaded on SEBI website is current and relevant and matches exactly with
the contents of the hard copy and that the AMC shall be fully responsible for the contents of soft
copy of SAI.
Validity of SEBI Observations on SID
The AMCs shall file their replies to the modifications suggested by SEBI on SID as required under
Regulation 29 (2), if any, within six months from the date of the letter. In case of lapse of six-month
period, the AMC shall be required to refile the SID alongwith filing fees.
The scheme shall be launched within six months from the date of the issuance of final observations
from SEBI. If the AMC intends to launch the scheme at a date later than six months, it shall refile the
SID with SEBI under Regulation 28 (1) along with filing fees.
Undertaking from Trustees for new Scheme
In the certificate submitted by Trustees with regard to compliance of AMC with Regulations,the
Trustees are required to certify as follows:
“The Trustees have ensured that the (name of the scheme/Fund) approved by them is a new
product offered by (name of the Mutual Fund) and is not a minor modification of any existing
scheme/fund/product.”
This certification shall be disclosed in the SID along with the date of approval of the scheme by the
Trustees.
This certification is not applicable to close ended schemes except for those close ended schemes
which have the option of conversion into open ended schemes on maturity.
Standard Observations
Standard Observations have been prescribed to ensure minimum level of disclosures in the SID and
SAI
SEBI may revise the Standard Observations from time to time and in that case the date of revision
shall also be mentioned.
While filing the SID and SAI, AMC shall highlight and clearly mention the page number of the SAI and
SID on which each standard observation has been incorporated.
KIM
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Application forms for schemes of mutual funds shall be accompanied by the KIM in terms of
Regulation 29 (4). KIM shall be printed at least in 7 point font size with proper spacing for easy
readability.
Format of KIM
Mutual Funds shall prepare KIM in the prescribed format20. The contents of KIM shall follow the
same sequence as prescribed in the format.
Frequency of updation
KIM shall be updated at least once a year and shall be filed with SEBI.
In case of changes in the SID other than changes in fundamental attribute in terms of Reg 18 (15A),
the addendum circulated to all the distributors/brokers/investor Service Centre (ISC) shall be
attached to KIM till the KIM is updated.
In case any information in SID is amended more than once, the latest applicable addendum shall be
a part of KIM (For example, in case of changes in load structure the addendum carrying the latest
applicable load structure shall be attached to all KIM and SID already in stock till it is updated).
Easy Availability of Offer Document
Trustees and AMCs shall ensure that the SID of the schemes and SAI are readily available with all the
distributors/ISCs and confirm the same to SEBI in the half yearly trustee report.
Selection of Benchmarks
In case of equity oriented schemes, mutual funds may appropriately select any of the indices
available, (e.g. BSE (Sensitive) Index, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX 500 etc.) as a
benchmark index depending on the investment objective and portfolio.
Benchmarks for debt oriented and balanced fund schemes developed by research and rating
agencies recommended by the AMFI on a regular basis shall be used by the Mutual Funds.
In case of sector or industry specific schemes, Mutual Funds may select any sectoral indices as
published by the Stock Exchanges and other reputed agencies.
These benchmark indices may be decided by the AMC(s) and Trustees. Any change at a later date in
the benchmark index shall be recorded and reasonably justified.
Examples of benchmarks are illustrated below :
Growth funds maintaining minimum 65% of their investments in equities shall always be compared
against The Bombay Stock Exchange Ltd. (BSE) Sensex or The National Stock Exchange Ltd. (NSE)
Nifty or BSE 100 or CRISIL 500 or similar standard indices.
Income funds maintaining 65% or more of investments in debt instruments shall be compared with a
suitable index that is a representative of the fund’s portfolio.
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Balanced funds with equity investments of 40%-60% shall be compared with a tailored index having
50% of its weight selected from any equity index as above and the other 50% from an appropriate
bond return index.
Money Market funds or liquid plans can be compared against a suitable Money Market Instrument
or a combination of such instruments.
New Fund Offer (NFO) Period
 In case of open ended and close ended schemes (except ELSS schemes), the NFO should be
open for 15 days (from 30 days in case of Open ended schemes and 45 days of close ended
scheme).
 The NFO period in case of ELSS schemes shall continue to be governed by guidelines issued
by Government of India.
 Mutual Funds/AMCs shall make investment out of the NFO proceeds only on or after the
closure of the NFO period.
 The mutual fund should allot units/refund of money and dispatch statements of accounts
within five business days from the closure of the NFO and all the schemes (except ELSS) shall
be available for ongoing repurchase/sale/trading within five business days of allotment”
Discontinuation of the nomenclature – ‘Liquid Plus Scheme(s)’
The nomenclature “Liquid Plus Scheme(s)” has been discontinued from January 2009 since it gives a
wrong impression of added liquidity. Mutual funds have been advised to carry out appropriate
change(s) in the nomenclature of their scheme(s) designated as “Liquid Plus Scheme(s)”.
Fundamental Attributes
The words "fundamental attributes"28 are elaborated below:
Type of a scheme
a. Open ended/Close ended/Interval scheme
b. Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Debt Fund/Index Fund/Any other type of

Fund
Investment Objective(s)
a. Main Objective - Growth/Income/Both.
b. Investment pattern - The tentative Equity/Debt/Money Market portfolio break-up with minimum
and maximum asset allocation, while retaining the option to alter the asset allocation for a short
term period on defensive considerations.
Terms of Issue
a. Liquidity provisions such as listing, repurchase, redemption.
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b. Aggregate fees and expenses charged to the scheme.
c. Any safety net or guarantee provided.
CHAPTER 2
CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH OF ADDITIONAL PLAN
PART I - CONVERSION OF SCHEMES
Conversion of Close Ended Scheme(s) to Open Ended Scheme(s)
Although the procedure for conversion of close ended scheme(s) to open ended scheme(s) has been
clearly enumerated in the Mutual Funds Regulations, following requirements are clarified again in
the interests of investors:
Since the scheme(s) would reopen for fresh subscriptions, disclosures contained in the SID shall be
revised and updated. A copy of the draft SID shall be filed with the Board as required under
Regulation 28(1) of the Mutual Funds Regulations along with filing fees prescribed under Regulation
28(2) of the Mutual Funds Regulations. Instructions issued by the Board31 for filing of the SID shall
also be followed.
A draft of the communication to be sent to unit holders shall be submitted to the Board which shall
include the following:
a) Latest portfolio of the scheme(s) in the prescribed format32

b) Details of the financial performance of the scheme(s) since inception in the format
prescribed in SID33 along with comparisons with appropriate benchmark(s)
c) The addendum to the SID detailing the modifications (if any) made to the scheme(s).
The letter to unit holders and revised SID (if any) shall be issued only after the final observations as
communicated by the Board in terms of Regulation 29(3) of the Mutual Funds Regulations have been
incorporated therein and final copies of the same have been filed with the Board.
Unit holders shall be given at least 30 days to exercise exit option. During this period, the unit
holders who opt to redeem their holdings in part or in full shall be allowed to exit at the NAV
applicable for the day on which the request is received, without charging exit load.
PART II – CONSOLIDATION OF SCHEMES
Consolidation of Schemes
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Any consolidation or merger of Mutual Fund schemes will be treated as a change in the fundamental
attributes of the related schemes and Mutual Funds shall be required to comply with the Mutual
Funds Regulations in this regard.
Further, in order to ensure that all important disclosures are made to the investors of the schemes
sought to be consolidated or merged and their interests are protected; Mutual Funds shall take the
following steps:
Approval by the Board of the AMC and Trustee(s):
a. The proposal and modalities of the consolidation or merger shall be approved by the Board of the
AMC and Trustee(s), after they ensure that the interest of unit holders under all the concerned
schemes have been protected in the said proposal.
Disclosures:
a) Subsequent to approval from the Board of the AMC and Trustee(s), Mutual Funds shall file
the proposal with the Board, along with the draft SID, requisite fees (if a new scheme
emerges after such consolidation or merger) and draft of the letter to be issued to the unit
holders of all the concerned schemes.
b) The letter addressed to the unit holders, giving them the option to exit at prevailing NAV
without charging exit load, shall disclose all relevant information enabling them to take well
informed decisions. This information will include, inter alia:
1. Latest portfolio of the concerned schemes37.
2. Details of the financial performance of the concerned schemes since inception in the
format prescribed in SID38 along with comparisons with appropriate benchmarks.
3. Information on the investment objective, asset allocation and the main features of
the new consolidated scheme.
4. Basis of allocation of new units by way of a numerical illustration
5. Percentage of total NPAs and percentage of total illiquid assets to net assets of each
individual scheme(s) as well the consolidated scheme.
6. Tax impact of the consolidation on the unit holders.
7. Any other disclosure as specified by the Trustees.
8. Any other disclosure as directed by the Board.
Updation of SID shall be as per the requirements for change in fundamental attribute of the scheme
Maintenance of Records:
a) AMC(s) shall maintain records of dispatch of the letters to the unit holders and the
responses received from them. A report giving information on total number of unit holders
in the schemes and their net assets, number of unit holders who opted to exit and net assets
held by them and number of unit holders and net assets in the consolidated scheme shall be
filed with the Board within 21 days from the date of closure of the exit option.
Merger or consolidation shall not be seen as change in fundamental attribute of the surviving
scheme if the following conditions are met:
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a. Fundamental attributes42 of the surviving scheme do not change. The ‘surviving scheme’
means the scheme which remains in existence after the merger.
b. Mutual Funds are able to demonstrate that the circumstances merit merger or consolidation
of schemes and the interest of the unitholders of surviving scheme is not adversely affected.
c. After approval by the Boards of AMCs and Trustees, the mutual funds shall file such proposal
with SEBI. SEBI would communicate its observations on the proposal within the time period
prescribed43.
d. The letter to unitholders shall be issued only after the final observations communicated by
SEBI have been incorporated and final copies of the same have been filed with SEBI.
PART III – LAUNCH OF ADDITIONAL PLANS
Launch of Additional Plans
Additional plans sought to be launched under existing open ended schemes which differ
substantially from that scheme in terms of portfolio or other characteristics shall be launched as
separate schemes in accordance with the regulatory provisions.
However, plan(s) which are consistent with the characteristics of the scheme may be launched as
additional plans as part of existing schemes by issuing an addendum. Such proposal should be
approved by the Board(s) of AMC and Trustees. In this regard please note that:
The addendum shall contain information pertaining to salient features like applicable entry/exit
loads, expenses or such other details which in the opinion of the AMC/ Trustees is material. The
addendum shall be filed with SEBI 21 days in advance of opening of plan(s).
AMC(s) shall publish an advertisement or issue a press release at the time of launch of such
additional plan(s).
CHAPTER 3
NEW PRODUCTS
Fund of Funds Scheme
The SID and the advertisements pertaining to Fund of Funds Scheme46 shall disclose that the
investors are bearing the recurring expenses of the scheme, in addition to the expenses of other
schemes in which the Fund of Funds Scheme makes investments.
AMCs shall not enter into any revenue sharing arrangement with the underlying funds in any
manner and shall not receive any revenue by whatever means/head from the underlying fund. Any
commission or brokerage received from the underlying fund shall be credited into concerned
scheme’s account
Fund of funds mutual fund schemes shall adopt either of the total expense structures laid out in
Regulations, which Asset Management Companies shall clearly indicate in the SIDs.
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Fund of Fund schemes, shall, with the approval of trustees, adopt either of the total expense
structures laid out in Regulation50 and change the total expense structure after giving the unit
holders an option to exit in accordance with Regulation.
Gold Exchange Traded Fund Scheme
A Gold Exchange Traded Fund (GETF) Scheme53 shall invest primarily in:
Gold and Gold related instruments. However investments in gold related instruments shall be done
only after such instruments are specified by the Board.
Valuation:
Gold shall be valued based on the methodology provided in Clause 3A of, Schedule Eight of the
Mutual Funds Regulations.
Determination of Net Asset Value
The NAV of units under the GETF Scheme shall be calculated up to four decimal points as shown
below:
Market or Fair Value of Scheme's investments + Current Assets
- Current Liabilities and Provision
NAV (in ` terms) = ______________________________________________
Number of Units outstanding under Scheme on the Valuation Date
Recurring Expenses
The recurring expenses limits applicable to equity schemes shall be applicable to GETF Scheme(s).
Benchmarks for GETF Scheme
GETF Scheme(s) shall be benchmarked against the price of gold.
Half yearly report by Trustees
Physical verification of gold underlying the Gold ETF units shall be carried out by statutory auditors
of mutual fund schemes and reported to trustees on half yearly basis.
The confirmation on physical verification of gold as above shall also form part of half yearly report by
trustees to SEBI.
Capital Protection Oriented Scheme
The SID, KIM and advertisements pertaining to Capital Protection Oriented Scheme64 shall disclose
that the scheme is “oriented towards protection of capital” and not “with guaranteed returns.” It
35
shall also be indicated that the orientation towards protection of capital originates from the
portfolio structure of the scheme and not from any bank guarantee, insurance cover etc.
The proposed portfolio structure indicated in the SID and KIM shall be rated by a Credit Rating
Agency registered with the Board from the view point of assessing the degree of certainty for
achieving the objective of capital protection and the rating shall be reviewed on a quarterly basis.
The Trustees shall continuously monitor the portfolio structure of the scheme and report the same
in the Half Yearly Trustee Reports to the Board. The AMC(s) shall also report on the same in its
bimonthly (CTR(s) to the Board.
It shall also be ensured that the debt component of the portfolio structure has the highest
investment grade rating.
Real Estate Mutual Funds :
A real estate mutual fund scheme68 can invest in real estate assets in the cities mentioned in:
List of Million Plus Urban Agglomerations/Cities; or
List of Million Plus Cities
Such list appears in Census Statistics of India (2001) at www.censusindia.gov.in. A printout of cities
which appear in the foresaid categories taken from the said website is attached for ready reference
at Annexure 4.
CHAPTER 4
RISK MANAGEMENT SYSTEM
An Operating Manual70 for Risk Management has been developed to ensure minimum standards of
due diligence and Risk Management Systems for all the Mutual Funds in various operational areas
(for e.g. Fund Management, Operations, Customer Service, Marketing and Distribution, Disaster
Recovery and Business Contingency, etc.) and is enclosed herewith as Annexure 2.
The Risk Management practices covered in the Operating Manual are under three categories as
detailed below:
Existing Industry Practices:
Under each head of risk, the Manual covers the exemplary practices followed by some / most of
Mutual Funds in India. However, the extent and degree of observance of these practices differs
among the Mutual Funds. Mutual Funds shall accordingly develop their systems and follow these
practices.
Practices to be followed on Mandatory Basis:
Mutual Funds shall follow the practices which have been indicated as mandatory in the operating
manual. These are Risk Management function that shall be assigned to Compliance Officer or
Internal Risk Management Committee or to an external agency
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a. Disaster Recovery and Business Contingency plans, and
b. Insurance cover against certain risks.
Best Practices to be followed by Mutual Funds:
Mutual Funds shall adopt these practices as a part of their due diligence exercise after considering
the size of their operations.
Implementation of the Risk Management System
Mutual Funds shall adopt the following approach to implement the Risk Management System:
Identification of observance of each recommendation:
Mutual Funds shall identify areas of current adherence as well as non-adherence of various Risk
Management practices under each of the aforesaid three categories. They shall examine the areas
where development or improvement of systems is required.
After identifying the same, Mutual Funds shall review the progress made on implementation of the
systems on a monthly basis and place the progress report in periodical meetings of the Board of the
AMC and Trustees.
Review of Progress of implementation by Board of AMC and Trustee(s):
The Board of the AMC and Trustee(s) shall review the progress made by the Mutual Funds with
regard to Risk Management practices and the same shall be reported to the Board at the time of
sending CTR(s) and Half Yearly Trustee Reports.
Review by Internal Auditors:
The review of Risk Management Systems shall be a part of internal audit and the auditors shall check
their adequacy on a continuing basis. Their reports shall be placed before the Board of the AMC and
Trustee(s) who shall comment on the adequacy of systems in the CTRs and Half Yearly Reports filed
with the Board.
Chapter - 6
ROLE OF MUTUAL FUNDS IN CORPORATE GOVERNANCE OF PUBLIC LISTED COMPANIES
 Mutual Funds should play an active role in ensuring better corporate governance of listed
companies.
 AMCs shall disclose their general policies and procedures for exercising the voting rights in
respect of shares held by them on the website of the respective AMC as well as in the annual
report distributed to the unit holders from the financial year 2010-11.
 AMCs are required to disclose on the website of the respective AMC as well as in the annual
report distributed to the unit holders from the financial year 2010-11, the actual exercise of
their proxy votes in the AGMs/EGMs of the investee companies in respect of the following
matters.
a) Corporate governance matters, including changes in the state of incorporation, merger and
other corporate restructuring, and anti takeover provisions.
37
b) Changes to capital structure, including increases and decreases of capital and preferred
stock issuances.
c) Stock option plans and other management compensation issues;
d) Social and corporate responsibility issues.
e) Appointment and Removal of Directors.
f) Any other issue that may affect the interest of the shareholders in general and interest of
the unit-holders in particular.
g) The format for disclosure of voting by mutual funds in general meetings of listed companies
is provided.
Chapter 7
SECONDARY MARKET ISSUES
Non Applicability of Listing Deposit
 The requirement of collecting listing deposit as specified under Circular Letter No. SE/12936
dated April 6, 1992 shall not be applicable to Mutual Fund schemes seeking listing on the
Stock Exchanges.
Payment of Margins
 The applicable margins shall be paid as per the guidelines issued by SEBI and as directed by
stock exchanges from time to time.
Unique Client Codes
 Mutual Funds are not permitted to operate in the securities market without furnishing a
valid Unique Client Code (UCC). Mutual Funds are required to obtain UCC from the Bombay
Stock Exchange Ltd. (BSE) or The National Stock Exchange Ltd. (NSE) whenever a new
scheme(s) or plan(s) (wherever the portfolio of the plans is different) is launched. Such UCC
should be obtained before commencing the trading on behalf of the scheme(s)/plan(s). At
the time of entering an order, the UCC pertaining to the parent Mutual Fund shall be
provided and the allocation to individual schemes shall be done in the post closing session.
The UCC can be shared with the unit holders to facilitate tax benefits linked to payment of
Securities Transaction Tax (STT).
Trading in Exchange Traded Derivatives Contracts
 For trading in Exchange Traded Derivatives Contracts, following should be observed:

 Mutual Fund schemes can participate in derivatives market as per the guidelines issued by
SEBI in this regard from time to time.
 The Mutual Funds shall be treated at par with a registered FII in respect of position limits in
index futures, index options, stock options and stock futures contracts. The Mutual Funds
will be considered as trading members like registered FIIs and the schemes of Mutual Funds
will be treated as clients like subaccounts of FIIs.
 Appropriate disclosures shall be made in the offer document regarding the extent and
manner of participation of the schemes of the Mutual Funds in derivatives and the risk
factors, which should be explained by suitable numerical examples.
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 The participation of existing schemes of the Mutual Funds in the derivatives market shall be
subject to the following conditions:
a. The extent and the manner of the proposed participation in derivatives shall be disclosed
to the unit holders.
b. The risks associated with such participation shall be disclosed and explained by suitable
numerical examples.
c. Positive consent shall be obtained from majority of the unit holders.
d. An exit option shall be provided to the dissenting unit holders. Such option shall be kept
open for a period of one month prior to the scheme commencing trading in derivatives.
e. No exit load shall be charged to the unit holders exercising such exit options.
 Positions limits as specified by SEBI for Mutual Funds and its schemes from time to time shall
be applicable
Trading in Interest Rate Derivatives
Mutual Fund schemes are permitted to undertake transactions in Forward Rate Agreements and
Interest Rate Swaps with banks, PDs & FIs as per applicable RBI Guidelines, mutual funds can
also trade in interest rate derivatives through the Stock Exchanges subject to requisite
disclosures in the SID
Transactions of mutual funds in Government Securities in dematerialised form
According to Regulation, the Mutual Funds having an aggregate of securities worth `10 crore or
more are required to settle their transactions only through dematerialised securities. All Mutual
Funds should enter into transactions relating to government securities only in dematerialised
form.
CHAPTER 9
VALUATION
Definitions
Non Traded Securities : When a security (other than Government Securities) is not traded on any
Stock Exchange for a period of thirty days prior to the valuation date, the scrip shall be treated
as a non traded security.
Thinly Traded Securities
Thinly traded equity/ equity related securities:
a. When trading in an equity and/or equity related security (such as convertible debentures,
equity warrants etc.) in a month is both less than `5 lacs and the total volume is less than 50,000
shares, the security shall be considered as thinly traded security and valued accordingly.
b. In order to determine whether a security is thinly traded or not, the volumes traded in all
recognized Stock Exchanges in India may be taken into account.
39
c. For example, if the volume of trade is 1,00,000 and value is `4,00,000, the shares do not
qualify as thinly traded. Also if the volume traded is 40,000, but the value of trades is `6, 00,000,
the shares do not qualify as thinly traded.
d. Where a Stock Exchange identifies the thinly traded securities by applying the above
parameters for the preceding calendar month and publishes or provides the required
information along with the daily quotations, the same can be used by the Mutual Funds.
e. If the shares are not listed on the Stock Exchanges which provide such information, then
Mutual Funds shall make their own analysis in line with the above criteria to check whether such
securities are thinly traded or not and then value them accordingly.
Thinly traded Debt Securities
A debt security (other than Government Securities) shall be considered as a thinly traded
security if, on the valuation date, there are no individual trades in that security in marketable
lots (currently applicable) on the principal Stock Exchange or any other Stock Exchange.
Valuation of Securities
Traded Securities :
 When a security (other than debt securities) is not traded on any Stock Exchange on a
particular valuation day, the value at which it was traded on the selected Stock Exchange, as
the case may be, on the earliest previous day may be used provided such date is not more
than thirty days prior to valuation date.
 When a debt security (other than Government Securities) is not traded on any Stock
Exchange on any particular valuation day, the value at which it was traded on the principal
Stock Exchange or any other Stock Exchange, as the case may be, on the earliest previous
day may be used provided such date is not more than fifteen days prior to valuation date.
When a debt security (other than Government Securities) is purchased by way of private
placement, the value at which it was bought may be used for a period of fifteen days
beginning from the date of purchase.
Non-Traded /and/or Thinly Traded Securities:
AMCs shall value non traded and/or thinly traded securities “in good faith” based on the
Valuation norms prescribed below:
Non-traded/ and/or thinly traded equity securities:
Based on the latest available Balance Sheet, Net Worth shall be calculated as follows:
a. Net Worth per share = [Share Capital+ Reserves (excluding Revaluation Reserves) –
Miscellaneous expenditure and Debit Balance in Profit and Loss Account] / Number of Paid up
Shares.
b. Average Capitalization rate (P/E ratio) for the industry based upon either BSE or NSE data
(which shall be followed consistently and changes, if any, noted with proper justification thereof)
shall be taken and discounted by 75 per cent i.e. only 25 per cent. Of the industry average P/E
40
shall be taken as Capitalization rate (P/E ratio). Earnings per share (EPS) of the latest audited
annual accounts shall be considered for this purpose.
c. The value as per the Net Worth value per share and the capital earning value calculated as
above shall be averaged and further discounted by 10 per cent. for illiquidity so as to arrive at
the fair value per share.
d. In case the EPS is negative, EPS value for that year shall be taken as zero for arriving at
capitalised earning.
e. In case where the latest Balance Sheet of the company is not available within nine months
from the close of the year, unless the accounting year is changed, the shares of such companies
shall be valued at zero.
f. In case an individual security accounts for more than 5 per cent. of the total assets of the
scheme, an independent valuer shall be appointed for the valuation of the said security. To
determine if a security accounts for more than 5 per cent. of the total assets of the scheme, it
shall be valued by the procedure above and the proportion which it bears to the total net assets
of the scheme to which it belongs will be compared on the date of valuation.
g. In case trading in an equity security is suspended up to thirty days, then the last traded price
shall be considered for valuation of that security. If an equity security is suspended for more
than thirty days, then the AMC(s) or Trustees shall decide the valuation norms to be followed
and such norms shall be documented and recorded.
Non traded/thinly Traded Debt security
A thinly traded debt security as defined above shall be valued as per the norms for non traded
debt security.
a. Valuation of money market and debt securities with residual maturity of upto 60 days:
1. All money market and debt securities, including floating rate securities, with residual maturity
of upto 60 days shall be valued at the weighted average price at which they are traded on the
particular valuation day. When such securities are not traded on a particular valuation day they
shall be valued on amortization basis. It is further clarified that in case of floating rate securities
with floor and caps on coupon rate and residual maturity of upto 60 days then those shall be
valued on amortization basis taking the coupon rate as floor.
b. Valuation of money market and debt securities with residual maturity of over 60 days:
1. All money market and debt securities, including floating rate securities, with residual maturity
of over 60 days shall be valued at weighted average price at which they are traded on the
particular valuation day. When such securities are not traded on a particular valuation day they
shall be valued at benchmark yield/ matrix of spread over risk free benchmark yield obtained
from agency(ies) entrusted for the said purpose by AMFI.
2. The approach in valuation of non traded debt securities is based on the concept of using
spreads over the benchmark rate to arrive at the yields for pricing the non traded security.
41
3. The Yields for pricing the non traded debt security would be arrived at using the process as
defined below.
Step 1: A Risk Free Benchmark Yield is built using the government securities as the base.
Government securities are used as the benchmarks as they are traded regularly; free of credit
risk; and traded across different maturity spectrums every week.
Step 2: A Matrix of spreads (based on the credit risk) are built for marking up the benchmark
yields. The matrix is built based on traded corporate paper on the wholesale debt segment of an
appropriate stock exchange and the primary market issuances. The matrix is restricted only to
investment grade corporate paper.
Step 3: The yields as calculated above are Marked-up/Markeddown for ill-liquidity risk
Step 4: The Yields so arrived are used to price the portfolio.
Methodology:
Construction of Risk Free Benchmark : Using Government of India dated securities; the
Benchmark shall be constructed as below
a. Government of India dated securities will be grouped into various duration buckets such as
0.164-0.25 yrs192, 0.25- 0.5 yrs, 0.5-1 year, 1-2 years, 2-3 years, 4-5 years, 5-6 years and 6 years
and the volume weighted yield would be computed for each bucket. These duration buckets
may be changed to reflect the market value more closely by any agency suggested by AMFI
giving benchmark yield/ matrix of spreads over benchmark yield.
b. The benchmark as calculated above will be set at least weekly, and in the event of any
significant movement in prices of Government Securities on account of any event impacting
interest rated on any day such as a change in the Reserve Bank of India (RBI) policies, the
benchmark will be reset to reflect any change in the market conditions.
Building a Matrix of Spreads for Marking-up the Benchmark Yield : Mark up for credit risk over
the risk free benchmark YTM as calculated in 9.3.1 above, will be determined using the trades of
corporate debentures/bonds of different ratings. All trades on appropriate stock exchange
during the fortnight prior to the benchmark date will be used in building the corporate YTM and
spread matrices. Initially these matrices will be built only for corporate securities of investment
grade. The matrices are dynamic and the spreads will be computed every week. The matrix will
be built for all duration buckets for which the benchmark GOI matrix is built to effectively link
the corporate matrix with the GOI securities matrix. Accordingly:
a. All traded paper (with minimum traded value of `1 crore) will be classified by their ratings and
grouped into 7 duration buckets; for rated securities, the most conservative publicly available
rating will be used;
b. For each rating category, average volume weighted yield will be obtained both from trades on
the appropriate stock exchange and from the primary market issuances
c. Where there are no secondary trades on the appropriate stock exchange in a particular rating
category and no primary market issuances during the fortnight under consideration, then trades
42
on appropriate stock exchange during the 30 day period prior to the benchmark date will be
considered for computing the average YTM for such rating category;
d. If the matrix cannot be populated using any or all of the above steps, then credit spreads from
trades on appropriate stock exchange of the relevant rating category over the AAA trades will be
used to populate the matrix;
e. In each rating category, all outliers will be removed for smoothening the YTM matrix;
f. Spreads will be obtained by deducting the YTM in each duration category from the respective
YTM of the GOI securities;
g. In the event of lack of trades in the secondary market and the primary market the gaps in the
matrix would be filled by extrapolation. If the spreads cannot be extrapolated for the reason of
practicality, the gaps in the matrix will be filled by carrying the spreads from the last matrix.
h. Accordingly, all Mutual Funds shall provide transaction details of various types of debt
securities like NCDs, Mibor linked floaters and CPs on daily basis in the prescribed format
enclosed at Annexure 3 to the agency recommended by AMFI. Submission of data would help in
daily matrix generation, would improve uniformity and accuracy of valuation in the Mutual
Funds industry.
Mark-up/Mark-down Yield :
 The Yields calculated would be marked-up/marked-down to account for the illiquidity

risk, promoter background, finance company risk and the issuer class risk. As the level of
illiquidity risk would be higher for non rated securities the marking process for rated and
non rated securities would be differentiated as follows:
a. Adjustments for Securities rated by external rating agencies
Category Discretionary mark up/mark down
+ -
Rated instruments with duration upto 2 years 100 bps 50 bps
Rated instruments with duration over 2 years 75 bps 25 bps
1. The rationale for the above discount structure is to take cognizance of the differential interest
rate risk of the securities. This structure will be reviewed periodically.
b. Adjustments for Internally Rated Securities197
1. To value an un-rated security, the fund manager shall assign an internal credit rating, which
will be used for valuation. Since un-rated instruments tend to be more illiquid than rated
securities, the yields would be marked up by adding discretionary discount as under:
Category Discretionary discount
Unrated instruments with duration upto 2 Discretionary discount of upto +50 bps over
43
years and above mandatory discount of +50 bps
Unrated instruments with duration over 2 Discretionary discount of upto +50 bps over
years and above mandatory discount of +25 bps
2. The benchmark yield/ matrix of spreads over risk free benchmark yield obtained from any agency
suggested by AMFI, must be applied for valuation of securities on the day of release of such bench
mark yield/ matrix of spreads by the aforesaid agency.
 Chief Executive Officer (whatever his designation may be) of the AMC shall give prior
approval to the use of discretionary mark up or down limit
Valuation of securities with Put/Call Options:
The option embedded securities would be valued as follows:
Securities with call option
a. The securities with call option shall be valued at the lower of the value as obtained by valuing the
security to final maturity and valuing the security to call option. In case there are multiple call
options, the lowest value obtained by valuing to the various call dates and valuing to the maturity
date is to be taken as the value of the instrument.
Securities with Put option
a. The securities with put option shall be valued at the higher of the value as obtained by valuing the
security to final maturity and valuing the security to put option. In case there are multiple put
options, the highest value obtained by valuing to the various put dates and valuing to the maturity
date is to be taken as the value of the instruments.
Securities with both Put and Call option on the same day
a. The securities with both Put and Call option on the same day would be deemed to mature on the
Put/Call day and would be valued accordingly.
44
Chapter – 5
MUTUAL FUNDS AS INVESTMENT OPTION
Mutual Funds investment may seem complicated for first-time investors as it can be
confusing at times. Understanding how mutual funds work is the first step in your
investment journey.
You can invest as low as Rs 500 in a mutual fund through SIP, which may not be possible
with most other investment options. There are several mutual funds available, and you may
invest in funds whose investment objectives and risk levels are in sync with your risk profile.
Why should you invest in Mutual Funds

Convenience
Investing in Mutual Funds is a paperless and straightforward process. Investors can monitor
the market and make investments as per their requirements. Moreover, switching between
mutual fund schemes and portfolio rebalancing helps to keep returns in line with
expectations.
Low initial investment
You can build a diversified mutual fund portfolio by investing as low as Rs 500 a month
through SIP in mutual fund schemes of your choice. You also have the option to invest either
as a lump sum or a systematic investment plan (SIP). However, when compared to lump sum
investments, a SIP is capable of lowering the overall cost of investment while unleashing the
power of compounding benefit.
Tax-saving
You get tax deductions under Section 80C of the IT, Act up to a maximum of Rs 1.5 lakh per
financial year, for specific financial instruments, and tax-saving mutual funds are one of
45
them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for
Indians in the last few years, owing to its higher returns and the shortest lock-in period of
three years among all Section 80C options.
Professional fund management

Your mutual fund investments are managed by a professional fund manager who is backed
by a team of researchers. The fund manager formulates the investment strategy for your
asset allocation. The team of researchers picks suitable securities as per the fund’s
investment objectives.
Things to Consider as a First Time Investor

Fix an investment goal
Defining your financial goals, budget, and time horizon plays a significant role in your
investments. Doing this will help you decide how much you can set aside towards investing
and you must also invest based on your risk profile. Investment always works best when
done with a purpose.
Choose the right fund type
It takes more than reading about different mutual fund types to decide on the right
category. Experts typically recommend a balanced or debt fund for first-time investors as it
comes with minimal risks while offering steady returns.
Shortlist and choose one mutual fund
With a plethora of mutual fund schemes in each category, you need to analyse and compare
them to pick the right investment. Investors should not ignore factors such as the fund
manager’s credentials, expense ratio, portfolio components, and assets under management.
Diversify your portfolio
Consider investing in more than one mutual fund to diversify your portfolio and earn risk-
adjusted returns. A portfolio of funds will help you diversify across asset classes and
investment styles. It will also even out risks – when one mutual fund underperforms, as the
other funds makes up for the loss maintaining the value of your portfolio. Read here to
know more about building a portfolio.
Go for SIPs instead of lump-sum investments
Investing via systematic investment plans (SIP) is advisable for those investing in equity
instruments for the first time. While a lump sum investment can put you at the risk of
catching a stock market peak, SIP allows you to spread your investments over time and
46
invest across market levels. The benefit of rupee cost averaging that comes with SIPs also
helps you average out the cost of your investment and earn higher returns over the long-
term.
Keep KYC documents updated
You cannot invest in a mutual fund if you have not completed the Know Your Customer
(KYC) process. KYC is a government regulation for most financial transactions in India to
identify the source of funds and prevent money laundering. To become KYC-compliant, you
need a PAN card and valid address proof. ClearTax helps you there.
Open a Net Banking Account

To invest in mutual funds, you must activate internet banking on your bank account. Mutual
funds also allow investments to be made through debit cards and cheques, but doing it via
net banking is a more straightforward, fast and secure process to make investments.
47

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A STUDY ON MUTUAL FUNDS AS INVESTMENT OPTIONS

1.2 MEANING AND DEFINITIONS OF FINANCIAL SYSTEM:

1.3 DEFINITION OF FINANCIAL SYSTEM:

1.4 STRUCTURE OF INDIAN FINANCIAL SYSTEM:

1.5 ROLE AND IMPORTANCE OF FINANCIAL SYSTEM IN ECONOMIC DEVELOPMENT:

2.2 MAIN REASONS FOR INVESTMENT

2.3 Difference on the basis of following features of investor and speculator

(d) Tax saving

2.4 REVIEW OF LITERATURE

2.5 INVESTMENT OPTIONS AVAILABLE IN INDIA

Table 2: Investment benefits to different sectors

Benefits of investment to Benefits of Investment to Benefits of Investment to the

4.2 HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

4.3 WHAT IS MUTUAL FUND?

4.5 WHAT IS THE NET ASSET VALUE (NAV) OF THE SCHEME ?

4.6 DISTINGUISHING CHARACTERISTICS OF MUTUAL FUND

3.7 MAJOR RIGHTS AS A UNIT HOLDER IN A MUTUAL FUND

4.8 REGULATORY BODY FOR MUTUAL FUNDS

3.9 REGULATIONS OF MUTUAL FUNDS IN INDIA

vi. Disclose information in a revised format on unit capital, reserves, performance in

#> RBI as supervisor of bank owned Mutual Funds

#> RBI as supervisor of money market mutual funds

4.10 TYPES OF MUTUAL FUNDS

4.11 DIFFERENCE BETWEEN THE TWO

4.12 OTHER SCHEMES:

4.13 VARIOUS PLANS OF MUTUAL FUNDS

4.14 HOW MUTUAL FUND WORKS

4.15 HOW MUTUAL FUNDS CAN EARN MONEY

A mutual fund can earn money in three different ways.

Filing of Offer Document with the Board

Filing of Draft SID:

Filing of Final SID

Updation of SID & SAI

The procedure to be followed in case of changes to the scheme shall be as under:

b. In case of other changes:

Validity of SEBI Observations on SID

Undertaking from Trustees for new Scheme

Easy Availability of Offer Document

Examples of benchmarks are illustrated below :

New Fund Offer (NFO) Period

Discontinuation of the nomenclature – ‘Liquid Plus Scheme(s)’

The words "fundamental attributes"28 are elaborated below:

a. Open ended/Close ended/Interval scheme

b. Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Debt Fund/Index Fund/Any other type of

a. Main Objective - Growth/Income/Both.

a. Liquidity provisions such as listing, repurchase, redemption.

b. Aggregate fees and expenses charged to the scheme.

c. Any safety net or guarantee provided.

CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH OF ADDITIONAL PLAN

PART I - CONVERSION OF SCHEMES

Conversion of Close Ended Scheme(s) to Open Ended Scheme(s)

a) Latest portfolio of the scheme(s) in the prescribed format32

PART II – CONSOLIDATION OF SCHEMES

Approval by the Board of the AMC and Trustee(s):

PART III – LAUNCH OF ADDITIONAL PLANS

Launch of Additional Plans

Fund of Funds Scheme

Gold Exchange Traded Fund Scheme

Determination of Net Asset Value