Concept and Role of Mutual Fund

NISM-Series- V-A :
Mutual Fund Distributors

Certification
Chapter 1. Concept and role of Mutual Fund
List of Topics covered
• Introduction
• Types of Funds
• Key Developments over the year
Learning Objectives
• Concept and role of mutual funds
• Advantages and disadvantages of mutual funds for investors
• Types of mutual fund schemes
• Key developments in the mutual fund industry over the year
Concept of Mutual Fund
• Vehicle ( in form of trust) to mobilize money from investors, to invest
in different markets and securities, in line with the common
investment objectives agreed upon, between the mutual fund and
the investors.
• investor can get access to equities, bonds, money market instruments
and/or other securities.
Role of Mutual Funds
• to assist investors in earning an income or building their wealth

• to structure a scheme for different kinds of investment objectives
• to tap a large corpus of money from investors with diverse
goals/objectives.
• to cater to the need of diverse investors
• The money that is raised from investors, ultimately benefits
governments, companies and other entities, directly or indirectly.
• overall economic development is promoted
• mutual funds can keep a check on the operations of the investee
company, and their corporate governance and ethical standards
• offers livelihood to a large number of employees of mutual funds,
distributors, registrars and various other service providers
• Higher employment, income and output in the economy boosts the
revenue collection of the government through taxes and other
means.
• act as a market stabilizer, in countering large inflows or outflows from
foreign investors.
Why are there different kinds of Mutual Fund
Schemes?
• seek to mobilize money from all possible investors
• Various investors have different investment preferences and needs.
• to accommodate these preferences, mutual funds mobilize different
pools of money
• Each such pool of money is called a mutual fund scheme.
• Every scheme has a pre-announced investment objective.
• Investors invest in a mutual fund scheme whose investment objective
reflects their own needs and preference.
How do Mutual Fund Schemes Operate?
• Announce their investment objective and seek investments from the

investor.
• Depending on how the scheme is structured, it may be open to
accept money from investors, either during a limited period only, or
at any time.
• Investor makes in a scheme is translated into a certain number of
‘Units’ in the scheme. Thus, an investor in a scheme is issued units of
the scheme.
• Typically, every unit has a face value of Rs. 10
• The number of units issued by a scheme multiplied by its face value
(Rs. 10) is the capital of the scheme – its Unit Capital.
• The scheme earns interest income or dividend income on the
investments it holds.
• The scheme earns interest income or dividend income on the
investments it holds.
• These are called realized capital gains or realized capital losses.
• Investments owned by the scheme may be quoted in the market at
higher than the cost paid. Such gains in values on securities held are
called valuation gains. If securities are quoted in the market at a price
below the cost at which the scheme acquired them.
Investments can be said to have been handled profitably, if the
following metric is positive:
A) +Interest income
B) + Dividend income
C) + Realized capital gains
D) + Valuation gains
E) – Realized capital losses
F) – Valuation losses
G) – Scheme expenses
• The true worth of a unit of the scheme is otherwise called Net Asset
Value (NAV) of the scheme.
• When a scheme is first made available for investment, it is called a
‘New Fund Offer’ (NFO)
• investors get the chance of buying the units at their face value.
• Post-NFO, when they buy into a scheme, they need to pay a price
that is linked to its NAV.
• Money mobilized from investors is invested by the scheme in a
portfolio of securities as per the stated investment objective.
• Profits or losses, as the case might be, belong to the investors or
unitholders.
• They are all paid a fee or commission for the contributions they make
to launching and operating the schemes
• The investor does not however bear a loss higher than the amount
invested by him.
• Investors subscribing to an investment objective might have different
expectations on how the profits are to be handled.
• Some may like it to be paid off regularly as dividends. Others might
like the money to grow in the scheme.
• It address expectations between investors within a scheme, by
offering various options, such as dividend payout option, dividend
reinvestment option and growth option. An investor buying into a
scheme gets to select the preferred option.
• When a scheme is first launched, assets under management is the
amount mobilized from investors. Thereafter, if the scheme has a
positive profitability metric, its AUM goes up; a negative profitability
metric will pull it down
• if the scheme is open to receiving money from investors even post-
NFO, then such contributions from investors boost the AUM.
Conversely, if the scheme pays any money to the investors, either as
dividend or as consideration for buying back the units of investors,
the AUM falls.
Advantages of Mutual Funds for Investors
• Professional Management
• Affordable Portfolio Diversification
• Economies of Scale
• Liquidity
• Tax Deferral
• Tax benefits
• Convenient Options
• Investment Comfort
• Regulatory Comfort
• Systematic Approach to Investments
Limitations of a Mutual Fund
• Lack of portfolio customization.
• Choice overload
• Choice overload
Types of Funds
1.Open-Ended Funds, Close-Ended Funds and Interval Funds

2. Actively Managed Funds and Passive Funds
3. Equity, Debt, Hybrid, Solution Oriented and Other Schemes
4. Types of Equity Schemes
1. Diversified equity fund
2. Market Segment based funds
3. Thematic funds
4. Strategy-based Schemes
5. Equity Income/Dividend Yield Schemes
6. Value fund
7. Growth funds
8. Focused funds
9. Equity Linked Savings Schemes (ELSS)
open-end equity mutual fund schemes\
• Multi Cap Fund
• Large Cap Fund
• Large and Mid Cap Fund
• Mid Cap Fund
• Small cap Fund
• Dividend Yield Fund
• Value Fund or Contra Fund
• Sectoral/ Thematic
5. Types of Debt Funds
On the basis of issuer
• Gilt funds
• Corporate bond funds
On the basis of Tenor
• Liquid schemes
• Short term debt schemes
• Ultra short-term plans
• Short Term Plans
• Long-term debt scheme
On the basis of Investment Strategy
• Diversified debt funds or Income fund
• Junk bond schemes
• Dynamic debt funds
• Fixed maturity plans
• Floating rate funds
• Liquid Fund
• Overnight Fund
• Ultra Short Duration Fund
• Low Duration Fund
• Money Market Fund
• Short Duration Fund
• Medium Duration Fund
• Medium to Long Duration Fund
• Long Duration Fund
• Dynamic Bond
• Corporate Bond Fund
• Credit Risk Fund
• Banking and PSU Fund
• Gilt Fund
• Floater Fund\
6. Types of Hybrid Funds
• Hybrid funds
• Debt-oriented Hybrid funds
• Monthly Income Plan
• Multiple Yield Funds
• Equity-oriented Hybrid funds
• Capital Protected Schemes
• Arbitrage funds
• Conservative Hybrid Fund
• Conservative Hybrid Fund
• Aggressive Hybrid Fund
• Dynamic Asset Allocation or Balanced Advantage
• Multi Asset Allocation
• Arbitrage Fund
• Equity Savings
7. Solution Oriented Schemes
• Retirement Fund:
• Children’s Fund
8. Other Schemes
• Index Funds/ Exchange Traded Fund:
• Fund of Funds (Overseas/ Domestic)
Real Estate Mutual Fund Schemes / Real Estate Investment Trusts

• Real Estate Mutual Fund
• Real Estate Investment Trusts (REIT)
• Infrastructure Investment Trusts (InvIT)

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NISM-Series- V-A :

Mutual Fund Distributors

• to assist investors in earning an income or building their wealth

• Announce their investment objective and seek investments from the

1.Open-Ended Funds, Close-Ended Funds and Interval Funds

Real Estate Mutual Fund Schemes / Real Estate Investment Trusts

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