Systematic Investments in Exchange Traded Funds

Equity markets have delivered 15.9%* compounded annual returns in the last 15 years. Investments in good companies held for long term has helped in savings and creation of wealth for retail investors.

Benefits of Equity SIP (SEP):

 Start investment with small amount

 Rupee cost averaging

 Diversification

Nifty ETF- Retail Investors have option to start investing directly in top companies in India or buy Nifty which is an index of top 50 companies in India basis market capitalization through an Exchange traded Fund (ETF).

Up-to Free Brokerage of Rs 1000 for your account, if you start doing systematic Investments in ETFs:  

1. Rs.500 as free brokerage will be credited to your account if you start investing within 7 days of account opening. If you only login but do not trade within 7 days of account opening then you will get Rs 250 as free brokerage.

2. Additional Rs.500 as free brokerage will be credited in your account if you start a Systematic Equity Plan in ETFs within subsequent 1 month of account opening i.e. T+1 month of account opening where T is the month of account opening.

Terms & Conditions for free brokerage:

 Free brokerage cannot be liquidated or claimed for refund

 ICICI group employees are not eligible for free brokerage offer

 Validity for free brokerage will be 6 months from account opening

 Free brokerage would be credited on next working day of 1st Login, 1st Trade and SEP request date.

*Period of Stock Market (NSE) returns (CAGR) is from June 07, 2002 to June 06, 2017.

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Customer Acknowledgement:

Please find details of your Systematic Investments

Monthly Investment value (Rs)

Total Months (SIP Period)

ETF Code

 Monthly investment amount or period can vary as per your choice

 Maximum Monthly Investment value to be Rs.2500

 Quantity of ETF credited to your demat account will be in whole numbers & decided as per the market price & Monthly investment value & not exceeding monthly investment value amount

 For accounts opened from 1st of the current month to 20th of the current month, the SEP order will be placed in customers account on the next day of account opening date and if it is a holiday then SEP order will be placed on next working day. SEP shall trigger on T+2 day after SEP order placement.

For accounts opened from 21st of the current month to 31st of the current month, the SEP order will be placed in customers account on 1st of next month and if it is a holiday then SEP order will be placed on next working day.

Start your Systematic Investments now:

Please define details of your Systematic Investments

Monthly Investment value (Rs)

Total Months (SEP Period)

ETF Code/Name

For example : Rs.2000

For example : 24 month

ICINIF

ICICI Prudential Nifty ETF

 Monthly investment amount or period can vary as per your choice.

 Maximum Monthly Investment value to be Rs.2500 & maximum SEP period to be 24 months.

 Quantity of ETF credited to your demat account will be in whole numbers & decided as per the market price & Monthly investment value & not exceeding monthly investment value amount.

 For accounts opened from 1st of the current month to 20th of the current month, the SEP order will be placed in customers account on the next day of account opening date and if it is a holiday then SEP order will be placed on next working day. SEP shall trigger on T+2 day after SEP order placement.

For accounts opened from 21st of the current month to 31st of the current month, the SEP order will be placed in customers account on 1st of next month and if it is a holiday then SEP order will be placed on next working day

This is an SIP/SEP form which will debit your bank account every month for the above amount mentioned.

(Please tick box) I am aware & have understood the scheme/offer & want to start SEP as per above details.

Objective/purpose of investing: _________________________________________________________

Customer Signature: ________________________________

Version

Key Segments of a Mutual Fund

1) Sponsors

The application to SEBI for registration of a mutual fund is made by the sponsor/s. Thereafter, the sponsor invests in the capital of the AMC.

Since sponsors are the main people behind the mutual fund operation, eligibility criteria has been specified as follows:

 The sponsor should have a sound track record and reputation of fairness and integrity in all business transactions. The requirements are:

o Sponsor should be carrying on business in financial services for not less than 5 years.

o Sponsor should have positive net worth (share capital plus reserves minus accumulated losses) in all the immediately preceding 5 years

o Net worth in the immediately preceding year should be more than the amount that the sponsor contributes to the capital of the AMC

o The sponsor should have earned profits, after providing for depreciation and interest and tax, in three of the previous five years, including the latest year.

 The sponsor should be a fit and proper person for this kind of operation.

 The sponsor needs to contribute a minimum 40 percent of the net worth of the AMC. Further, anyone who holds 40 percent or more of the net worth of share-holding in the AMC is considered to be a sponsor, and should therefore fulfill the eligibility criteria mentioned above.

 Sponsors have to contribute a minimum of Rs.1,00,000 as initial contribution to the corpus of the mutual fund.

In the example of SBI Mutual Fund cited above, the sponsor is State Bank of India, an Indian public sector bank. Sponsorship may be institutional (LIC Nomura Mutual Fund), entirely foreign (like Franklin Templeton Mutual Fund and Goldman Sachs Mutual Fund), predominantly foreign joint venture (like JP Morgan Mutual Fund & HSBC Mutual Fund) or predominantly Indian joint venture (like Birla Sun Life Mutual Fund & ICICI Prudential Mutual Fund).

2) Trustee

The trustees have a critical role in ensuring that the mutual fund complies with all the regulations, and protects the interests of the unit-holders.

Legal Structure of Mutual Funds in India

SEBI (Mutual Fund) Regulations, 1996 as amended till date define “mutual fund” as “a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold-related instruments or real estate assets.”

Key features of a mutual fund that flows from the definition above are:

 It is established as a trust

 It raises money through sale of units to the public or a section of the public

 The units are sold under one or more schemes

 The schemes invest in securities (including money market instruments) or gold or gold-related instruments or real estate assets.

SEBI has stipulated the legal structure under which mutual funds in India need to be constituted. The structure, which has inherent checks and balances to protect the interests of the investors, can be briefly described as follows:

 Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian Trusts Act, 1882.

 The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.

 Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund.

 The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the sponsors and the trustees. SEBI has laid down various clauses that need to be part of the Trust Deed.

The Trust acts through its trustees. Therefore, the role of protecting the interests of the beneficiaries (investors) is that of the Trustees. The first trustees are named in the Trust Deed, which also prescribes the procedure for change in Trustees.

 In order to perform the trusteeship role, either individuals may be appointed as trustees or a Trustee company may be appointed. When individuals are appointed trustees, they are jointly referred to as ‘Board of Trustees’. A trustee company functions through its Board of Directors.

 Day to day management of the schemes is handled by an Asset Management Company (AMC). The AMC is appointed by the sponsor or the Trustees.

 The trustees execute an investment management agreement with the AMC, setting out its responsibilities.

 Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related instruments & real estate assets) is with a Custodian, who is appointed by the Trustees.

 Investors invest in various schemes of the mutual fund. The record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).

Let us understand the various agencies, by taking the example of the constitution of SBI Mutual Fund.

International funds, ETFs and Infrastructure Debt Schemes

International funds invest in markets outside India, by holding certain foreign securities in their portfolio. The eligible securities in Indian international funds include equity shares of companies listed abroad, ADRs and GDRs of Indian companies, debt of companies listed abroad, ETFs of other countries, units of index funds in other countries, units of actively managed mutual funds in other countries. International equity funds may also hold some of their portfolios in Indian equity or debt. They can also hold some portion of the portfolio in money market instruments to manage liquidity.

One way for the fund to manage the investment is to hire the requisite people who will manage the fund. Since their salaries would add to the fixed costs of managing the fund, it can be justified only if a large corpus of funds is available for such investment.

An alternative route would be to tie up with a foreign fund (called the host fund). If an Indian mutual fund sees potential in China, it will tie up with a Chinese fund. In India, it will launch what is called a feeder fund. Investors in India will invest in the feeder fund. The money collected in the feeder fund would be invested in the Chinese host fund. Thus, when the Chinese market does well, the Chinese host fund would do well, and the feeder fund in India will follow suit.

Such feeder funds can be used for any kind of international investment, subject to the scheme objective. The investment could be specific to a country (like the China fund) or diversified across countries. A feeder fund can be aligned to any host fund with any investment objective in any part of the world, subject to legal restrictions of India and the other country.

In such schemes, the local investors invest in rupees for buying the Units. The rupees are converted into foreign currency for investing abroad. They need to be re-converted into rupees when the money are to be paid back to the local investors. Since the future foreign currency rates cannot be predicted today, there is an element of foreign currency risk.

Investor's total return in such schemes will depend on how the international investment performs, as well as how the foreign currency performs. Weakness in the foreign currency can pull down the investors' overall return. Similarly, appreciation in the respective currency will boost the portfolio performance.

Exchange Traded funds (ETF) are open-ended funds, whose units are traded in a stock exchange. Investors buy units directly from the mutual fund only during the NFO of the scheme. All further purchase and sale transactions in the units are conducted on the stock exchange where the units are listed. The mutual fund issues further units and redeems units directly only in large lots defined as creation units.

Transactions in ETF units on the stock exchange happen at market-determined prices. In order to facilitate such transactions in the stock market, the mutual fund appoints intermediaries called authorized dealers as market makers, whose job is to offer a price quote for buying and selling units at all times.

Commodity Funds, Gold Funds and Funds of Funds

Commodity Funds

Commodities, as an asset class, include:

 food crops like wheat and gram

 spices like pepper and turmeric

 fibres like cotton

 industrial metals like copper and aluminium

 energy products like oil and natural gas

 precious metals (bullion) like gold and silver

The investment objective of commodity funds would specify which of these commodities it proposes to invest in.

Gold Funds

These funds invest in gold and gold-related securities. They can be structured in either of the following formats:

Exchange Traded Gold fund, which is like an index fund that invests in gold, gold receipts or gold deposit schemes of banks. Each ETF unit typically represents one gram of gold. For every unit of ETF issued, the fund holds gold in the form of physical gold of 99.5 percent purity or gold receipts. They are also allowed to invest in the gold deposit schemes of banks to a limit of 20 percent of the net assets of the scheme. The NAV of such funds moves in line with gold prices in the market.

Gold funds invest in the units of Gold Exchange Traded Funds. They operate just like other mutual funds as far as the investor is concerned.

Gold Sector fund will invest in shares of companies engaged in gold mining and processing. Though gold prices influence these shares, the prices of these shares are more closely linked to the profitability and gold reserves of the companies. Therefore, NAV of these funds do not closely mirror gold prices.

As with gold, such funds can be structured as Commodity ETF or Commodity Sector Funds. In India, mutual fund schemes are not permitted to invest in commodities, other than Gold (which was discussed earlier). Therefore, the commodity funds in the market are in the nature of Commodity Sector Funds, i.e. funds that invest in shares of companies that are into commodities. Like Gold Sector Funds, Commodity Sector Funds too are a kind of equity fund.

Fund of Funds

A Fund of Funds (FoF) is a mutual fund that invests in other mutual funds. It does not hold securities in its portfolio, but other funds that have been chosen to match its investment objective. These funds can be either debt or equity, depending on the objective of the FoF. A Fund of Funds either invests in other mutual funds belonging to the same fund house or belonging to other fund houses. FoFs belonging to various mutual fund houses are called multi-manager FoFs, because the AMCs that manage the funds are different. Fund of Funds looks for funds that fit into its investment objective. It specialises in analyzing funds, their performance and strategy and adds or removes funds based on such analysis. A FoF imposes additional cost on the investor, as the expenses of the underlying funds are built into their NAV.

Types of Hybrid Funds in Mutual Funds

Hybrid funds invest in a combination of asset classes such as equity, debt and gold. The combination of asset classes used will depend upon the investment objective of the fund. The risk and return in the scheme will depend upon the allocation to each asset class and the type of securities in each asset class that are included in the portfolio. The risk is higher if the equity component is higher. Similarly, the risk is higher if the debt component is invested in longer-term debt securities or lower rated instruments.

Debt-oriented Hybrid funds invest primarily in debt with a small allocation to equity. The equity allocation can range from 5 percent to 30 percent and is stated in the offer document. The debt component is conservatively managed to earn coupon income, while the equity component provides the booster to the returns.

Monthly Income Plan is a type of debt-oriented hybrid fund that seeks to declare a dividend every month. There is no guarantee that a dividend will be paid each month.

Multiple Yield Funds generate returns over the medium term with exposure to multiple asset classes, such as equity and debt.

Equity-oriented Hybrid funds invest primarily in equity, with a portion of the portfolio invested in debt to bring stability to the returns. A very popular category among the equity-oriented hybrid funds is the Balanced Fund. These schemes provide investors simultaneous exposure to both equity and debt in one portfolio. The objective of these schemes is to provide growth and stability (or regular income), where investments in equity instruments are made to meet the objective of growth while debt investments are made to achieve the objective of stability. The balanced funds can have fixed or flexible allocation between equity and debt. One can get the information about the allocation and investment style from the Scheme Information Document.

Types of Equity Funds in Mutual Funds

Equity funds invest in equity instruments issued by companies. The funds target long-term appreciation in the value of the portfolio from the gains in the value of the securities held and the dividends earned on it. The securities in the portfolio are typically listed on the stock exchange, and the changes in the price of the securities are reflected in the volatile returns from the portfolio. These funds can be categorized based on the type of equity shares that are included in the portfolio and the strategy or style adopted by the fund manager to pick the securities and manage the portfolio.

Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors and market capitalization. The risk of the fund’s performance being significantly affected by the poor performance of one sector or segment is low.

Market Segment based funds invest in companies of a particular market size. Equity stocks may be segmented based on market capitalization as large- cap, mid-cap and small-cap stocks.

• Large- cap funds invest in stocks of large, liquid blue-chip companies with stable performance and returns.

• Mid-cap funds invest in mid-cap companies that have the potential for faster growth and higher returns. These companies are more susceptible to economic downturns. Therefore, evaluating and selecting the right companies becomes important. Funds that invest in such companies have a higher risk, since the selected e companies may not being able to withstand the slowdown in revenues and profits. Similarly, the price of the stocks also fall more when markets fall.

• Small-cap funds invest in companies with small market capitalisation with intent of benefitting from the higher gains in the price of stocks. The risks are also higher.

Sector funds invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold-related companies. The performance of such funds can see periods of under-performance and out-performance as it is linked to the performance of the sector, which tends to be cyclical. Entry and exit into these funds need to be timed well so that the investor does not invest when the sector has peaked and exit when the sector performance falls. This makes the scheme more risky than a diversified equity scheme.

Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus more broad-based than a sector fund; but narrower than a diversified equity fund and still has the risk of concentration.

Strategy-based Schemes have portfolios that are created and managed according to a stated style or strategy. Equity Income/Dividend Yield Schemes invest in securities whose shares fluctuate less, and the dividend represents a larger proportion of the returns on those shares. They represent companies with stable earnings but not many opportunities for growth or expansion. The NAV of such equity schemes are expected to fluctuate lesser than other categories of equity schemes. Value fund invest in shares of fundamentally strong companies that are currently under-valued in the market with the expectation of benefiting from an increase in price as the market recognizes the true value. Such funds have lower risk. They require a longer investment horizon for the strategy to play out.

 Growth Funds portfolios feature companies whose earnings are expected to grow at a rate higher than the average rate. These funds aim at providing capital appreciation to the investors and provide above average returns in bullish markets. The volatility in returns is higher in such funds. Focused funds hold portfolios concentrated in a limited number of stocks. Selection risks are high in such funds. If the fund manager selects the right stocks then the strategy pays off. If even a few of the stocks do not perform as expected the impact on the scheme’s returns can be significant as they constitute a large part of the portfolio.

Equity Linked Savings Schemes (ELSS) are diversified equity funds that offer tax benefits to investors under section 80 C of the Income Tax Act up to an investment limit of Rs. 150,000 a year. ELSS are required to hold at least 80 percent of its portfolio in equity instruments. The investment is subject to lock-in for a period of 3 years during which it cannot be redeemed, transferred or pledged. However, this is subject to change in case there are any amendments in the ELSS Guidelines with respect to the lock-in period.

Rajiv Gandhi Equity Savings Schemes (RGESS) too, as seen earlier, offer tax benefits to first-time investors (direct equity). Investments are subject to a fixed lock-in period of 1 year, and flexible lock-in period of 2 years.

Types of Debt Funds in Mutual Funds

Debt funds can be categorized on the basis of the type of debt securities they invest in. The distinction can be primarily on the basis of the tenor of the securities—short term or long term, and the issuer: government, corporate, PSUs and others. The risk and return of the securities will vary based on the tenor and issuer. The strategy adopted by the fund manager to create and manage the portfolio can also be a factor for categorizing debt funds.

On the basis of Issuer

Gilt funds invest in only treasury bills and government securities, which do not have a credit risk (i.e. the risk that the issuer of the security defaults). These securities pay a lower coupon or interest to reflect the low risk of default associated with them. Long-term gilt funds invest in government securities of medium and long-term maturities. There is no risk of default and liquidity is considerably higher in case of government securities. However, prices of long-term government securities are very sensitive to interest rate changes.

Corporate bond funds invest in debt securities issued by companies, including PSUs. There is a credit risk associated with the issuer that is denoted by the credit rating assigned to the security. Such bonds pay a higher coupon income to compensate for the credit risk associated with them. The price of corporate bonds are also sensitive to interest rate changes depending upon the tenor of the securities held.

On the basis of Tenor

Liquid schemes or money market schemes are a variant of debt schemes that invest only in short term debt securities. They can invest in debt securities of upto 91 days maturity. However, securities in the portfolio having maturity of more than 60-days need to be valued at market prices [“marked to market” (MTM)]. Since MTM contributes to volatility of NAV, fund managers of liquid schemes prefer to keep most of their portfolio in debt securities of less than 60-day maturity. As will be seen later in this workbook, this helps in positioning liquid schemes as the lowest in price risk among all kinds of mutual fund schemes. Therefore, these schemes are ideal for investors seeking high liquidity with safety of capital.

Short term debt schemes invest in securities with short tenors that have low interest rate risk of significant changes in the value of the securities. Ultra-short term debt funds, short-term debt funds, short-term gilt funds are some of the funds in this category. The contribution of interest income and the gain/loss in the value of the securities and the volatility in the returns from the fund will vary depending upon the tenor of the securities included in the portfolio.

Types of Mutual Funds for Investment

Mutual Funds are categorized broadly into following types:

1) Open-ended funds are open for investors to enter or exit at any time, even after the NFO.

When existing investors acquire additional units or new investors acquire units from the open-ended scheme, it is called a sale transaction. It happens at a sale price, which is linked to the NAV.

When investors choose to return any of their units to the scheme and get back their equivalent value (in terms of units), it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV.

Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The on-going entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis.

2) Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. 

Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange. Since post-NFO, sale and purchase of units happen to or from counter-party in the stock exchange – and not to or from the scheme – the unit capital of the scheme remains stable or fixed.

Since the post-NFO sale and purchase transactions happen on the stock exchange between two different investors, and that the fund is not involved in the transaction, the transaction price is likely to be different from the NAV. Depending on the demand-supply situation for the units of the scheme on the stock exchange, the transaction price could be higher or lower than the prevailing NAV.

Advantages and Limitations of Mutual Funds for Investors

1) Advantages of Mutual Fund

A) Professional Management

Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. There are several aspects to such professional management viz. investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.

Investing in the securities markets will require the investor to open and manage multiple accounts and relationships such as broking account, demat account and others. Mutual fund investment simplifies the process of investing and holding securities.

B) Affordable Portfolio Diversification

Investing in the units of a scheme provide investors the exposure to a range of securities held in the investment portfolio of the scheme in proportion to their holding in the scheme. Thus, even a small investment of Rs. 500 in a mutual fund scheme can give investors proportionate ownership in a diversified investment portfolio.

An investor ensures that “all the eggs are not in the same basket”. Consequently, the investor is less likely to lose money on all the investments at the same time. Thus, diversification helps reduce the risk in investment. In order to achieve the same level of diversification as a mutual fund scheme, investors will need to set apart several lakhs of rupees. Instead, they can achieve the diversification through an investment of less than thousand rupees in a mutual fund scheme.

C) Economies of Scale

Pooling of large sum of money from many investors makes it possible for the mutual fund to engage professional managers for managing investments. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.

How do Mutual Fund Schemes Operate?

Mutual funds seek to mobilize money from all possible investors. Various investors have different investment preferences and needs. In order 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.

Mutual fund schemes 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.

The investment that an 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. (However, older schemes in the market may have a different face value). The face value is relevant from an accounting perspective. 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. Further, when it purchases and sells investments, it earns capital gains or incurs capital losses. These are called realized capital gains or realized capital losses as the case may be.

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. Similarly, there can be valuation losses when securities are quoted in the market at a price below the cost at which the scheme acquired them.

For running the scheme of mutual funds, operating expenses are incurred. 

Investments can be said to have been handled profitably, with the following metric:

A) +Interest income (B) + Dividend income

(C) + Realized capital gains

(D) + Valuation gains

(E) – Realized capital losses

(F) – Valuation losses

(G) – Scheme expenses

When the investment activity is profitable, the true worth of a unit increases; when there are losses, the true worth of a unit decreases. 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). During the 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.

The 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. No other entity involved in the mutual fund in any capacity participates in the scheme’s profits or losses. 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.

Various 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. Mutual funds address such differential expectations between investors within a scheme, by offering various options, such as dividend payout option, dividend re-investment option and growth option. An investor buying into a scheme gets to select the preferred option also.

The relative size of mutual fund companies is assessed by their assets under management (AUM). 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.

Further, 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.

The AUM thus captures the impact of the profitability metric and the flow of unit-holder money to or from the scheme.

Concept and Role of Mutual Funds

Concept of Mutual Fund

Mutual fund is a vehicle to mobilize money from investors, to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, an investor can get access to markets that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company.

Role of Mutual Funds

Mutual funds perform different roles for the different constituents that participate in it.

Their primary role is to assist investors in earning an income or building their wealth, by participating in the opportunities available in various securities and markets. It is possible for mutual funds to structure a scheme for different kinds of investment objectives. Thus, the mutual fund structure, through its various schemes, makes it possible to tap a large corpus of money from investors with diverse goals/objectives.

Therefore, mutual funds offer different kinds of schemes to cater to the need of diverse investors. In the industry, the words ‘fund’ and ‘scheme’ are used inter-changeably. Various categories of schemes are called “funds”. In order to ensure consistency with what is experienced in the market, this workbook goes by the industry practice. However, wherever a difference is required to be drawn, the scheme offering entity is referred to as “mutual fund” or “the fund”.

The money that is raised from investors, ultimately benefits governments, companies and other entities, directly or indirectly, to raise money for investing in various projects or paying for various expenses.

The projects that are facilitated through such financing, offer employment to people; the income they earn helps the employees buy goods and services offered by other companies, thus supporting projects of these goods and services companies. Thus, overall economic development is promoted.

As a large investor, the mutual funds can keep a check on the operations of the investee company, and their corporate governance and ethical standards.

The mutual fund industry itself, 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. When these are spent prudently, it promotes further economic development and nation building.

Mutual funds can also act as a market stabilizer, in countering large inflows or outflows from foreign investors. Mutual funds are therefore viewed as a key participant in the capital market of any economy