About Mutual Funds

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Mutual Funds - At a Glance

Mutual funds are financial instruments offered to the public by the finance corporations. These funds are resourcefully managed collective investments, which pools money from a number of investors and use that money as investment in various stocks, short-term money market financial instruments, bonds, and other securities to earn interest and distribute it as dividends.

About Mutual Funds - Functioning

The Fund Manager pertaining to the Mutual Funds, also referred as the portfolio manager trades, realizes the capital losses and gains, and collects the income in form of interest. The proceeds from the investments are then distributed to the individual investors. The share value of the mutual funds is known as net asset value per share (NAV). It is calculated on a day-to-day basis on the total worth of the mutual fund, which is divided by the total sum of issued and outstanding shares.

Constituents of Mutual Funds

Awareness of the fundamental architecture of mutual fund assits investors in understanding their rights as well as the responsibilities. The legal structure of Indian mutual fund is unique and quite differs from that in the US and the UK. In India, all type of funds (open-ended or closed-ended) have been established as unit trusts. The structure has been defined by SEBI (Mutual Fund) Regulations, 1996. The key constituents of Indian mutual funds are as follows -


The sponsor is affiliated to the promoter group of a company as he gets the mutual fund registered with SEBI. The sponsor forms a trust, appoints the board of trust, and has the right to appoint the Asset Management Company (AMC).

The sponsor as defined under SEBI Regulations, 1996 as "A person who, acting alone or in combination with another body corporate, establishes a mutual fund."


The mutual fund can be managed by either a Board of Trustees, if registered under Indian Trust Act, or a Trust Company, if registered under Companies Act, 1956. Trustees ensure the full compliance of SEBI's guidelines and regulations. The portfolio of securities is not directly managed by trustees and appoint an AMC (with approval of SEBI) for fund management. If an AMC wishes to float different schemes, it will need to be approved by the trustees.


The AMC is established for managing fund schemes and different corpus of funds. An AMC has its own Board of Directors (BoD) and it also works under the directions of trustees and supervision of SEBI.

The primary obligations of an AMC include: furnishing necessary information to unit holders on matters that significantly affect their interests, timely disclosures to unit holders on sale and repurchase, abide by risk management guidelines as given by the Association of Mutual Funds in India (AMFI) and SEBI, ensuring investments in accordance with the trust deed, NAV, portfolio management etc.


The custodian and depositories work under the instructions of the AMC. Executing fund management transactions is a technician's job, which include buying and selling of securities in large volumes. The dematerialised securities holdings are held in a depository through a depository participant while custodians are appointed by trustees for safekeeping of physical securities.


Thier prime obligations are to handle day to day transactions. They are responsible for issuance and redeemption of mutual fund units as well as providing other related services, like preparation of transfer documents and updating records of investor.

Overview of Mutual Funds in India

  • In India, the largest mutual fund is UTI, which was established in the year 1964 in order to encourage the small investors to invest in the equity market.
  • The Unit Trust of India has nearly 35, 000 agents in the country.
  • The Securities Exchange Board of India (SEBI) regulates the functioning of the mutual funds.
  • The Mutual funds should be set up as trusts under the guidelines of the Indian Trusts Act.
  • Activity pertaining to the management of fund should be directed by an asset management company.
  • The money market dealings of the mutual funds are to be registered with the Reserve Bank of India.
  • Various schemes floated by the mutual funds have to be registered under Securities Exchange Board of India (SEBI).
  • The RBI, in the year 1995, allowed the private players to establish Money Market Mutual Funds.

Types of Mutual Funds

  • Open-end fund
  • Exchange-traded funds
  • Equity funds
  • Bond funds
  • Money market funds
  • Funds of funds
  • Hedge funds
Last Updated on 1/16/2012

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