Introduction to mutual fund schemes


I feel great pleasure to give the credit of my term paper not only to one individual but to all those persons who are related or concerned with it. I want to owe my thanks to all those individuals who guided me to move on the track.


I sincerely express my gratitude and lot of thanks to Mrs.KAWALPREET, Lecturer of FINANCIAL INSTITUTIONS AND SERVICES for her sagacious guidance in my Term paper and giving me ideas for accomplishment of this work and give opportunity to come in this shape.

I would like to express my deep sense of gratitude to staff of "LOVELY SCHOOL OF BUSINESS "who introduced me to the subject and under whose guidance I am able to understand the subject matter.

Mutual Funds: An overview

A Mutual Fund is a trust that pools the savings of a number of investors, who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. A mutual fund is a vehicle for collective investments of funds of the investors in the securities permitted under the Regulations. A mutual fund raises resources from the investors by launching various schemes and invests the same in eligible securities and instruments. A mutual fund is to be distinguished from a bank or any other institution, which accepts the deposits from people for lending and or investment purposes. In such cases the legal relationship between the depositor and the bank happens to be that of a creditor and debtor. This is not a case of mutual fund , which collects the funds from the investors through sale of its units. The legal relationship thus is that of a trustee and beneficiary. Consequently, if the mutual fund loses money the loss is that of investors.


The offer document is most important source of information for investors. Close -ended funds have to issue the OD at the time of IPO whereas open -ended funds have to update the OD at least once in two years. The Key Information Memorandum (KIM), which is an abridged version of OD, has to be compulsorily made along with the application for SEBI has prescribed the format and contents of the OD.The OD contains preliminary information on fund structure and construction, fundamental attributes of the scheme, details of the offer, investor rights and information on income and expenses of existing schemes. The fundamental attributes of a scheme include the scheme type, objectives, investment pattern, fees and expenses, liquidity conditions, accounting and valuation, and investment restrictions. The AMC prepares the OD and KIM and is responsible for the information contained in it and the trustees approve the contents of the OD and KIM .SEBI does not approve or certify the contents of the OD or KIM.


  1. A mutual fund actually belongs to the investors who have pooled their funds. The ownership of the mutual fund is in the hand of the investor
  2. A mutual fund is managed by investment professional and other service providers who earn a fee for their services from the fund
  3. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day.
  4. The investor's share in the fund is denominated by "UNIT". The value of the unit changes with changes in the portfolio value every day the value of the unit of investment is called as the Net Assets Value or NAV.


The investments of mutual fund are subject to a set of regulations prescribed by SEBI. Presently, following restrictions apply:

  • No term loan shall be granted by a mutual fund scheme.
  • A mutual fund, under all its schemes taken together, will not own more than 10 percent of any company's paid up capital carrying voting rights.
  • A scheme may invest in another scheme under the same management company or any other mutual fund without carrying any fees.
  • A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase, redemption of units, or payment of interest or dividend to unitholders.Such borrowings shall not exceed 20 percent of net assets of the scheme and the duration of the borrowing shall not exceed 6 months.
  • A scheme shall not invest in more than 15 percent of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by an authorized credit rating agency.
  • A mutual fund will buy and sell securities on the basis of deliveries. It cannot make short sales or engage in carry forward transactions.
  • A mutual fund can enter into derivatives transactions on a recognized stock exchange for purposes of hedging and portfolio balancing in accordance with SEBI guidelines.
  • A scheme may invest in ADR's /GDRs of Indian companies listed on overseas stock exchanges to the extent and in a manner by RBI.T he fund will employ necessary measures to manage foreign exchange movements arising out of such investments.


Mutual fund schemes may be classified on the basis of its structure and its investment objective.

By Structure:

Open-ended Funds

Open-ended schemes subscription is received on a continuing basis i.e. the scheme is not closed for public subscription at any time. The amount received by mutual fund goes on rising as subscriptions are received. The investor can join the scheme any time they like. Thus there is variable corpus due to ongoing purchases and repurchases by mutual funds.

Closed-ended Funds

Close-ended schemes are open for public subscriptions for a limited period only say a month or two. The amount raised from public during such period is available for investment by fund. The corpus of the scheme is thus fixed for all times to come.

Hybrid schemes

Hybrid schemes, also referred to as balanced schemes, invest in a mix of equity and debt instruments. A hybrid scheme may be equity-oriented or debt oriented or has a variable asset allocation.

By Investment Objective:-

Growth Funds

These schemes are meant for those investors who aim at earning the benefits of capital appreciation, besides regular income. Consequently, the funds are largely invested in equity shares and a small portion is kept in money market instruments.

Income Funds

These schemes aim at providing a regular income to the unit-holders. Obviously, these schemes aim at investing in fixed income securities like bonds and debentures, which carry a regular rate of interest.

Balanced Funds

The objective of balanced funds is to balance income requirements with growth of capital. The fund is therefore invested in both equity and debt with relatively moderate levels of risk.

Money Market Funds

Reserve Bank of India introduced a scheme of money market mutual fund with a view to provide additional short term avenues to investors and to bring money market instruments within their reach. Money market funds are differ from existing mutual fund in the sense that the resources mobilized by them are indented to be invested in the money market instruments with a maturity of less than a year.

Other Schemes:-

Tax Saving Schemes

These schemes offer tax rebates on investments made in equity shares, under section 88 of the Income Tax Act, 1961.Income may also be periodically distributed, depending upon distributable surplus. Subscriptions made up to Rs.10, 000 in an assessment year are eligible for tax rebate under section 88. The broad investment pattern of scheme includes investments in equities, cumulative convertible preference shares, and fully convertible debentures and bonds to the extent of 80% to 100% and the rest in money market instruments.

Special Schemes

  • Industry Specific Schemes
  • Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc.

  • Index Scheme
  • An index scheme is an equity scheme that invests its corpus in a basket of equity stocks that comprise a given stock market index such as the S & P Nifty Index or the Sensex,with each stock being assigned a weight age equal to what it has in the index.

  • Sectoral Schemes
  • These funds are a variant of the growth funds. The primary objective is the growth of capital and the second objective is income generation and the distribution of dividend. Movements in the NAV of such schemes will be more volatile as compared to the NAV of a scheme with more diversified portfolio. Such funds thus may result in high return and also entails high risks.

  • Commodities Funds
  • Commodities funds specialize are investing in different commodities directly or through commodities future contracts. Specialized funds may invest in a single commodity or a group of commodities such as edible oil or rains, while diversified commodity funds will spread their assets over many commodities

Mutual Fund Structure

The mutual fund structure consists of the following parties:

Sponsor: The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank, a financial institution, or a financial service company. It may be Indian or foreign. The sponsor has to obtain a license from SEBI for which it has to satisfy several conditions relating to capital,profits,track record, default free dealings and so on.

Trust: The Mutual Fund is formed as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust then is registered under the Indian Registration Act, 1908.

Trustees: A trust is a nominal entity that cannot contract its own name.So; the trust enters into the name of the trustees. Appointed by sponsor, the trustees can be either individuals or a corporate body. The trustees appoint the asset management company, secure necessary approvals periodically monitor how AMC functions and hold the properties of various schemes in trust for the benefit of investors.

Asset Management Company: The Asset Management Company, also referred to as the investment manager, is a separate company appointed by the trustees to run the mutual fund. The AMC handles all operational matters such as designing the schemes, launching the schemes, managing investments and interacting with investors.

Registrar and Transfer Agent: Register and Transfer Agents handle the investor related information service such as issuing units, redeeming units, sending fact sheets and annual reports and so on. Some funds handle such functions in-house, while others outsource it to SEBI -approved registrars and transfer agents like Karvy and CAMS.

Custodian: Custodian handles the investment back office operations of a mutual fund. It looks after the receipts and delivery of securities, collection of income, distribution of dividends and segregation of assets between schemes. The sponsor of mutual fund cannot act as custodian.

Structure of Mutual Fund


Net Asset Value is the best parameter on which the performance of mutual fund is studied.

The net asset value (NAV) is the actual value of a share/unit on any business day.It is computed as follows:

Market value of the fund's investment +Receivables Accrued

NAV=Income-Liabilities-Accrued Expenses/Number of shares or units outstanding

The calculation of NAV may be illustrated with the help of a simple example, as follows:

Name of the scheme : XYZ

Size of the scheme : Rs 300 crore

Factor value of share : Rs 10

Number of outstanding shares : 10 crore

Market value of fund : Rs 180 crore

Receivables : Rs 1 crore

Accrued income : Rs 1 crore

Liabilities : Rs 0.5 crore

Accrued expenses : Rs 0.5 crore

NAV :( 180+1+1-0.5-0.5)/10=Rs 18.1

Rate of return: The periodic rate of return on mutual fund scheme is calculated as follows:

To understand the calculation of rate of return ,consider the following example.

NAV (beginning) =Rs 16

NAV (ending) =Rs18

Dividend paid =Rs 1

Rate of return = (18-16) +1/16 = 20.6%

The compounded annual total return on a mutual fund scheme represents the return to investors from a scheme, since the date of issue. It includes the reinvestment of dividends and makes adjustments for bonus and rights. It is calculated on NAV basis or price basis. On NAV basis, it reflects the return generated by fund manager on NAV. In this calculation, it is assumed that dividend is reinvested at the NAV prevailing on the day it is paid. On price basis, it reflects the return to investors by way of market or repurchase price. In this calculation, it is assumed that dividend is reinvested at the prevailing market or reissue price.


  • As like other securities, mutual fund also does not come without risk. It is true that risk and reward are directly correlated. It means higher the risk, higher is the return.
  • Market risk of mutual fund relates to market value of security in the future. It changes due to demand and supply and some other factors which cannot be controlled.
  • Government rules and regulations and tax laws creates political risk.
  • Interest Rate Risk relates to future changes in interest rates. Due to this, if an investor invests in a long -term debt mutual fund scheme and interest rate increases then the NAV of scheme fall because the scheme will end up holding debt offering lowest interest rates.


  • Reliance Mutual Fund is the India's leading Mutual Funds , with Average Assets Under Management (AAUM) of Rs. 1,16,782 CRORES .Reliance Mutual Fund is part of the Reliance - Anil Dhirubhai Ambani Group, which is one of the fastest growing mutual funds in the country.
  • RMF offers investors a professionally-managed portfolio of products to meet different investor needs and it has presence in 118 cities across the country.
  • Reliance Mutual Fund constantly endeavours to launch innovative and new products and customer service initiatives to increase value to investors.
  • Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited, which is a subsidiary of Reliance Capital Limited and holds 93.37% of the paid-up capital of RCAM and the balance paid up capital being held by minority shareholders.
  • Reliance Capital Ltd. is India's main private sector which provides financial services has interests in asset management, life and general insurance, private equity and proprietary investments, stock broking and other financial services.


Equity/Growth Schemes:-An equity oriented hybrid scheme is tilted in favour of equities which may account for about 60 percent of portfolio, the balance being invested in debt instruments. These schemes are meant for those investors who aim at earning the benefits of capital appreciation, besides regular income. Consequently, the funds are largely invested in equity shares and a small portion is kept in money market instruments.

Debt/Income Schemes:-Debt schemes invest in debt instruments i.e. bond and cash. The wide range of debt schemes currently offered by mutual fund in India may be divided into sub-categories: gilt schemes ,mixed debt schemes , floating rate schemes ,cash schemes and fixed maturity plans.

Sector Specific Schemes:-These are the funds or schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns and they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors or industries and must exit at an appropriate time. They may also seek advice of an expert in order to invest in these mutual funds.

Exchange Traded Funds (ETFs) :-As exchange trade fund is a hybrid of a close-ended index fund and an open-ended index fund. Like a close-ended index it is listed on the stock exchange and like an open-ended fund it creates and redeems units in line with rise and fall in demand. Benchmark Mutual Fund's Nifty Benchmark Exchange Fund's, SPICE (Sensex Prudential ICICI ETF) which tracks the BSE Sensex are examples of exchange traded funds.

Fixed Maturity Plans(FMPs):-An important recent innovation in the area of debt schemes, a fixed maturity plan (FMP) is a close-ended debt scheme that has a fixed maturity.Presently,FMPs come with tenures ranging from three months to three years and have an indicative but a guaranteed return. The corpus of an FMP is invested primarily in corporate bonds.

FMPs offer a higher post-tax return compared to competing instruments like bank fixed deposits and various kinds of bonds because of their tax advantage. Investors in FMPs can choose the dividend option or the growth option. Under the dividend option, the mutual fund pays the dividend distribution tax (DDT) and the dividend income is tax-free in the hands of the investors. Under growth option, the profits are taxed as capital gains in the hands of the investors. Capital gains on FMPs held for less than 12 months are taxed at the rate of income tax applicable to the investors. Capital gains on FMPs held for more than 12 months are taxed at a rate of 10 percent without indexation benefit or at the rate of 20 percent with indexation benefit at the option of the assessee.


  • Reliance Portfolio Management Services provides innovative and exclusive products through discretionary and advisory services.
  • Its expertise has earned the trust of thousands of high net-worth individual/ institutional investors and created a family that is constantly growing.
  • Reliance Portfolio Management Services can conduct investments with with passion and innovation.
  • Reliance Portfolio Management Services is a part of Reliance Capital Asset Management Ltd. It is a wholly owned subsidiary of Reliance Capital Ltd.
  • Reliance Capital Ltd. has make judgement on the quality of fund on the basis of many ratios.


Sponsor: Reliance Capital Limited

Trustee: Reliance Capital Trustee Co. Limited

Investment Manager: Reliance Capital Asset Management Limited

Custodian-The trustees has appointed Deutsche Bank, AG located at KODAK House, Ground Floor, and 222 Dr.D.N.Road, Mumbai-400001.As the custodian of the securities that bought and sold under the scheme.

Registrar-Reliance Capital Asset Management Limited has appointed Karvy Computershare Private Limited to act as the Registrar and Transfer Agent to the schemes of Reliance Mutual Fund.


The asset management company is a separate company appointed by the trustees to run mutual fund. In return for its services, the AMC is compensated in the form of investment management and advisory fees. Each scheme of the mutual fund pays the AMC an annual investment management and advisory fees which is linked to the size of the scheme. Currently this fee is subject to the following limits: 1.25 percent on the first Rs.100 crores of the weekly average net assets and 1.00 percent on the balance of assets. The head of AMC is generally referred to as the chief executive officer (CEO), next to him is the chief investment officer (CIO) who shapes the fund's investment philosophy and who is supported by fund managers responsible for managing various schemes. The fund managers are assisted by a team of analysis who track markets, sectors and companies.


In the last few years, a number of institutional investors in developed countries have taken interest in socially responsible investing (SRI).For example, the Government Pension Fund of Norway recently decided to exclude Wal- Mart from its portfolio citing that the company has committed "serious and systematic violations of human rights and labour rights." Climate change, environment, bio-diversity, human rights, social development and governance (ESG) matter in SRI. While the evidence is not conclusive, it appears the ESG -complaint companies are managed, have lesser risk and achieve higher long term growth.ABM Amro sustainable development fund launched in March 2007, is the first SRI fund in India. Though the fund received lukewarm response it is hoped that SRI investing will catch up in India. In globalized economy .Indian companies will have to be ESG complaint to meet global standards. Global Reporting Initiative, ILO labour and employment convention, and Kyoto protocol would further raise ESG compliance levels in Indian companies. This will popularize ethical investing in India.


Established as a private sector company in 1955 ICICI limited was a leading development bank in india.On march 30,2002 a landmark event took place when ICICI Ltd. was merged with its subsidiary ICICI Bank Ltd. which is a private sector new bank in India.

Prudential ICICI Mutual Fund is the India's largest private sector fund with assets of over Rs.34,119 crore under management as of Aug 2006.

Prudential ICICI Asset Management Company Limited, of ICICI mutual fund is a joint venture between Prudential Plc, Europe's leading insurance company and ICICI Bank, India's premier financial institution. Prudential Plc holds 55 per cent of the asset management company and the balance by ICICI Bank. In a span of just over six years, Prudential ICICI Asset Management Company has emerged as one of the largest asset management companies in the country. The Company manages a comprehensive range of schemes to meet the varying investment needs of its investors spread across 68 cities in the country.

Some of the mutual funds from ICICI Prudential Asset Management Company :-

Equity Funds:

  • ICICI Prudential Discovery Fund
  • ICICI Prudential Power Fund
  • ICICI Prudential Dynamic Plan
  • ICICI Prudential Emerging Star Fund
  • ICICI Prudential Tax Plan
  • ICICI Prudential Growth Plan

Thematic & Sectoral Funds:

  • ICICI Prudential Infrastructure Fund
  • ICICI Prudential Services Industries Fund
  • ICICI Prudential FMGC Fund
  • ICICI Prudential Real Estate Securities Fund
  • ICICI Prudential Technology Fund

High Return Plans & Funds:

  • ICICI Prudential Child Care Plus
  • ICICI Prudential Balanced Fund
  • ICICI Prudential Monthly Income Multiplier
  • ICICI Prudential Monthly Income Plan

Investment Funds:

  • ICICI Prudential GILT Fund (Investment)
  • ICICI Prudential Income Plan
  • ICICI Prudential Flexible Income Plan

Minimum Risk Plans:

  • ICICI Prudential Long Term Floater
  • ICICI Prudential Blended Plan
  • ICICI Prudential Short Term Plan
  • ICICI Prudential Short Term Floater
  • ICICI Prudential GILT Fund (Treasury)
  • ICICI Prudential Liquid Plan

ICICI Prudential Mutual Funds are the good investment opportunities because it involves low risks and high returns as they indicated in the past investments with the company by the customers. Funds like ICICI Prudential Infrastructure Fund, Power Fund, Discovery Fund that is long-term diversified equity investment schemes have gained unexpected support from the investors.


  • First step of portfolio management process of ICICI consists of preparing a universe stock that is quoting at a low valuation.
  • Then conducting a fundamental research for understanding the nature of business.
  • After this find the reasons behind the undervaluation of stock.
  • To know the potential drivers of the companies that could lead to value the stock.
  • It is done, because there are a large number of companies whose valuations are justified by weak fundamentals.


Executive Director Shahzad of ICICI Prudential AMC, joined the ICICI Bank's Asset Management Business in August 1993, which subsequently partnered with Prudential Plc in the year 1998 to become ICICI Prudential AMC. Shahzad is Masters in Management Studies .He has more than 22 years of industry experience across the banking & financial services sector. At ICICI Prudential AMC his responsibilities include leading the PMS business with an aim towards ensuring further robust growth of the business. He is also responsible for overseeing International Business & Marketing & Brand building.

ICICI Prudential Asset Management does not take any other business activity except in the nature of management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, management of insurance funds, financial consultancy and exchange of research on commercial basis, if any of such activities are in conflict with activities of mutual fund. The asset management company may itself or through its subsidiaries undertake such activities.


  1. There is medium to long-term investment of 3 years.
  2. Investment Abroad-exposures to overseas markets appeals to both sophisticated and unsophisticated investors.
  3. Retirement Income-Investment while employed-take income in retirement/use capital as a net safety.
  4. Achievement of long term goals i.e. housing and education.
  5. Investment for children-Parents and Grandparents set up investment account on the behalf of their children and grandchildren.


From the comparative study of Reliance and ICICI Mutual Fund, we come to know that:

  • Prudential ICICI is the best performing funds.
  • Among the existing infrastructure funds, ICICI Prudential Infrastructure fund has a good performance from August 2005.
  • The infrastructure fund is currently heavy with over Rs.3, 800 crore in assets.
  • It is a high beta fund and it outperforms its benchmark index Nifty, with good margins, over the one year to three year periods.
  • Basically both the funds perform well. Due to customer's loyalty performance of fund depends.
  • At present Prudential ICICI also provides online services to their customers.
  • It provides all the information to customers which are beneficiary for them.
  • Its portfolio management services are also very fine which gives clear picture to their about their investments.
  • Reliance diversified power sector fund is also performed well.
  • Both the mutual funds are good in their performance. People prefer the funds which fulfil their needs and which are up to their approach.
  • People mostly depend on their financial advisors .According to their choice , sometimes they invest in different mutual fund schemes.

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!