MUTUAL FUND

The concept of Mutual Fund

Mutual fund is a mechanism for pooling resources by issuing units in securities to the investors and
investing funds in accordance with the objectives disclosed in the offer document. A mutual fund is a
corporation, trust or partnership, which manages the collected money with the help of professional
expertise. Different persons have defined mutual funds in different ways. ‘A mutual fund is almost
like a cooperative society of investors. That is why the word ‘mutual’ is used. It collects money
from investors by issuing mutual fund units, invests it in securities and divides whatever
dividend or interest is received among its members. (A. John Halin)

The SEBI Mutual Fund Regulations, 1993 defines mutual fund as a fund established in the form of a
trust by a sponsor, to raise money by the trustee through sale of units to the public, under one or
more schemes, for investing in securities in accordance with the regulations. Mutual funds are
financial intermediaries which bring a wide variety of securities within the reach of the most modest
investors. The financial intermediary is known as Investment Company in the US and most other
countries. They are called investment trusts in the United Kingdom. In India, they are known by the
term mutual funds.

The origin of Mutual Fund

The history of mutual fund can be traced back to Europe where William I establishment a society
in Belgium for such a purpose. The foreign and colonial Government Trust of Lund in 1868 is
considered to be the forerunner of the concept of mutual fund. Massachusetts Investor’s trust was the
first mutual fund set up in the US in the year 1929. The mutual fund industry witnessed a boon in the
US market after the 1990’s and became a popular source of investment. In India, the Unit Trust of
India set up the first mutual fund in 1964.

MUTUAL FUNDS IN INDIA

Until 1987, Unit Trust of India was the sole mutual fund in the country. This was due to the
restrictive policies adopted by the Government of India with regard to the financial services industry.
The growth of the mutual fund industry has been divided into different phases.

Phase I

The mutual fund in India came into existence in 1964 when Unit Trust of India was incorporated as a
statutory corporation. The maiden scheme launched by the Unit Trust of India was the unit scheme
of 1964, an open–ended scheme, which is still in operation. At that time, public awareness about
mutual fund was limited. There was no disclosure norm. The institution was modeled along the lines
of mutual funds in the UK. The name ‘Unit Trust itself has been borrowed from the UK where
mutual funds are called investment trusts.

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The Unit Trust of India played a commendable role by launching a number of open as well as close
ended schemes, keeping in view the varied needs of the different groups of investors. The schemes
targeted everyone from a newborn child to a retired individual.

Phase II

Unit Trust of India’s monopoly came to an end in 1987. The Government of India amended the
Banking Regulations Act, permitting commercial banks in the public sector to set up mutual funds.
The first non UTI mutual fund was launched by the State Bank of Indian in November 1987 by the
name SBI mutual fund. Its first scheme, Magnum Regular Income Scheme launched in 1987, was
well received by the investors.

Canara Bank established its subsidiary, Can bank Mutual Fund in Dec 1987. It launched two
schemes, i.e., Can stock (income scheme) and Can share (growth scheme), which were both close
ended. They were also followed by open ended schemes- Cancigo and Cangilt in the succeeding
year.

Indian Bank, Bank of India and Punjab National Bank introduced mutual funds during the year 1989-
90. The Government permitted insurance corporations in the public sector to establish mutual funds.
Life Insurance Corporation of India set up LIC mutual fund in June 1989. It targeted small investors
particularly from rural and semi-urban areas. Unlike the other mutual funds, LIC offered insurance
protection to the investors. This was in addition to the benefits of liquidity, safety and return. Shortly
the General Insurance Corporation of India also entered into the mutual fund industry.

The Government of India issued comprehensive guidelines in June 1990 covering all mutual funds.
Registration of mutual funds with the SEBI was made compulsory. The guidelines covered the
norms for registration, management, investment objectives, disclosure and pricing. The Securities
Exchange Board of India (mutual funds) Regulations, 1993 came into effect on 20 January 1993. The
establishment of Asset Management Company (AMC) and the listing of close-ended schemers
became mandatory. Disclosure norms were tightened to protect the small investors.

Phase III

The innovative promotional campaigns launched by different mutual funds created investor
awareness. Exclusion of the private sector was widely criticized. The liberalization policy and new
economic policy advocated by Doctor Manmohan Singh paved way for the entry of private sector
into the mutual fund industry. The SEBI accorded approval to a number of players in the private
sector to launch mutual funds in October 1993. Kothari group in collaboration with the Pioneer fund,
the oldest fund in U.S launched Prima fund in November 1993. The other private sector mutual funds
include Twentieth Century Mutual Fund., Taurus Mutual Fund, Morgan Stanley Mutual Fund,
HDFC Mutual Fund and Zurich Mutual Fund etc. After the entry of the private sector, the declaration
of Net Asset Value (NAV) of the schemes became regular. At present NAVs are declared weekly.
The portfolios are also disclosed periodically.

Phase IV

After 1996, the mutual fund industry witnessed a healthy growth. This is shown in Table 8.1. With
the growth of investors interest in mutual funds, the number of players operating in the industry
reached new heights. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI to set
uniform standards for all mutual funds in India and safeguard the interest of the investors. The Union
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Budget in 1999 exempted all dividend incomes of the mutual funds in the hands of investors from
income tax. The SEBI and the Association of Mutual Funds in India (AMFI) launched various
Investor Awareness Programmes to educate investors and inform them about the mutual fund
industry.

Phase V

The Unit Trust of India Act 1963 was repealed in 2003, and Unit Trust of India was bifurcated into
two separate entities. The US 64 scheme which assured return and certain other schemes were
brought under the Specified Undertaking of the Unit Trust of India with Rs 29, 835 crore of assets
under the management as on January 2003. This Specified Undertaking of Unit Trust of India does
not come under the purview of the Mutual Fund Regulations but under the rules framed by the
Government of India.

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. It was in this phase that the mutual
fund industry witnessed a consolidation phase, Mergers and acquisitions became common in the
mutual fund industry. Some examples of these are Birla Sun Life mutual fund’s acquisition of
schemes of Alliance Mutual Fund and Principal Mutual Fund’s acquisition of Sun F& C Mutual
Fund and PNB Mutual Fund. Many international mutual fund players like fidelity, Franklin
Templeton Mutual Fund etc. have entered India. There were twenty-nine funds in the end of March
2006. The growth phase is still continuing in spite of the temporary oscillations in the performance.

Types of Mutual Funds

A mutual fund scheme can be classified into an open-ended fund or a close –ended fund depending
on its maturity period. A scheme can also be classified as a Growth Fund, Income fund, or Balanced
Fund considering its investment objective.

1. Close-ended scheme: It has a prefixed maturity period, e.g., five to seven years. Both the
amount and the number of units are prefixed. The fund is open for subscription only for a
specified period after the launch of the scheme. Mutual funds are required to dispatch
certificates or statements of accounts within six weeks from the date of closure of the initial
subscriptions of the schemes. The investors can invest in the scheme during this period. After the
closure of the subscription period, investors can buy and sell the units of the scheme at the stock
exchanges where the units are listed. They would either get a demat account statement or unit
certificates as traded in the stock exchanges.
According to SEBI regulations, one or two exit routes should be provided to the investors. It may
either be in the form of regular repurchase or by listing them in stock exchanges. Some of the
close-ended mutual funds provide the option of selling back of the units to the mutual funds. The
prices are fixed on the basis of net asset value. The NAV of the schemes is disclosed on a weekly
basis.The entire corpus is disinvested after the maturity period and the proceeds are distributed
among the investors in proportion to their unit holdings.

2. Open-ended schemes: These are available for subscription and repurchase on a continues basis.
These schemes do not have a maturity period. Investors can buy and sell units at prices fixed by a
mutual fund. Prices are fixed on the basis of NAV. The NAVs of these schemes are declared
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 daily. Liquidity is the main advantage of the open-ended scheme. The main difference between
the open-ended and the close-ended schemes is that the latter is traded on stock exchanges,
whereas the former is not. Also, open ended schemes are available at all times, whereas the close
–ended schemes are available only for a prescribed period.

3. Index funds: These are equity funds that passively mimic a market index. The portfolio of the
index fund is designed to reflect the composition of some stock market index. The index funds
avoid the risk of poor stock selected by the fund manager. The aspects that are in favour of
index funds are:
a. low costs
b. Predictability
c. diversification

All the index funds, which are currently in operation, are modeled either on the Nifty or the
Sensex. Several fund houses have launched passive index funds in the past. Some of them are
Franklin Templeton India Index fund(formerly pioneer ITI Index Fund, offering both Sensex and
Nifty Plans), UTI Nifty Index Fund, UTI Master Index fund and IDBI Principal Index fund.

These funds suffer because of tracking error. This error is the percentage by which returns from
the funds deviate from the underlying index. If the error is positive, the funds generate higher
returns than that of the index. One of the reasons cited for the tracking error is the transaction
cost. Index funds have to incur brokerage and other costs to make changes in their portfolio in
line with those in the index. This results in increase in cost. Besides this, the lack of depth in the
Indian stock market also affects the index funds.

Investment management fee affects the return and recurring expenses such as advertisement,
investor communication costs and administration costs. Though these expenses form a small
portion of the returns each year, the compounding effect over the years becomes quite significant.

It is felt that if the index funds could track down broad based market indices such as S & P CNX
500 and BSE 200, it would help the investors to capture broad market trends more accurately.
However, lack of liquidity of many small mid-cap stocks would result in high transactions costs.

4. Exchange traded funds (ETFs): These are passively managed fund s that track a particular
index and have the flexibility to trade like a common stock. These types of funds combine the
attributes of mutual funds with those of the stocks. Without large investment, an average investor
can have an entire range of index stocks. It is different from the index funds where units are
issued in return for cash and redeemed as per the net asset value in cash. However, ETF issues in
lieu of shares and vice versa.
The ETFs are priced throughout the day. They can be bought and sold at any time during a
trading day just like a stock. The fund may either represent market index or a specific industry
sector or an international sector. An investor can buy it on a margin. Short selling can be carried
out. The expenses ratio is similar to the open end mutual funds. They range from 0.18 per cent of
the value of the fund to 0.84 per cent.
ETFs came into existence in the US in 1993. The first ETFs were based on the S&P 500 and
were popularly known as spiders. Presently, diamonds are the other type of ETFs representing all
thirty stocks in the Dow Jones Industrial Average and traded in American stock exchange. The
Benchmark Asset Management Company (BAMC) has launched Nifty. It was listed on the

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 capital market segment of the NSE on 8 January 2002. Nifty tracks the standard Poor (S&P)
CNX Nifty index. The minimum investment for taking the index exposure through Nifty is just
one unit (around 1/10 of the Nifty).

5. Balanced funds: These funds invest both in equity and fixed income securities. They are also
called income-cum-growth funds. They aim at regular income and capital appreciation.
They have the equity and debt portfolios to fulfill this objective. The portfolio beta is less
than one and the price of units does not rise in proportion to the aggregate stock market
price because of the debt component in the portfolio. Some of the balanced funds are:
Prudential ICICI Balanced fund, Kothari Balanced fund, Alliance 95 fund and DSP Merrill lynch
balanced fund. The performance of the balanced funds differs due to the ratio of stocks to the
fixed income securities that varies from fund to fund and their different levels of exposure to
individual sector like IT, media or telecom. The weightage of individual stock in funds differs.
Hence, an investor has to go through the portfolio before investing in the funds.
6. Money market funds or liquid funds: These funds were initiated during 1973 in the US when
interest rates on short term money market securities were high. They are also income funds and
attempt to provide current income and safety of principal by investing in short term securities
such as treasury bills, bank certificates of deposits, bank acceptances, commercial papers and
inter bank call money. Returns on these schemes fluctuate much less as compared to the other
funds. These funds are appropriate for corporate and individual investors to invest their surplus
cash for a shorter period.
7. Gilt funds: These are also known as G-Sec Funds. These invest in the Government of India
securities, and have gained popularity in the Indian market. The Securities Exchange
Board of India has issued new guidelines in 2002 with an aim to provide better checks and
balances for the mutual funds. The following are the silent features of the new
requirements.
 Mutual funds have to reconcile their balance with the monthly RBI report
 Internal audit, continuous checks by the auditors and reports to audit committees form a part
of the requirements.
 The same report must also be placed before the boards of the asset management company and
the trustee company.
 Mutual funds will have to submit a compliance certificate to the RBI on a quarterly basis,
indicating their adherence to the norms.
 Public debt offices of the RBI will issue monthly statements to mutual funds maintaining
SGL/CSGL accounts.
8. Growth funds: The main objective of these funds is to provide capital appreciation over
medium to long term. They invest a major portion of their collected money in equity.
This makes them prone to risk. As per their preference, the investors may either choose the
option of dividend or the option of capital appreciation. Investors have to specify their choice
while applying for units. However, if they want to change at a later date, they are permitted
to do so. The year 1999-2000 was one of the best periods for growth funds in the Indian
market. Fresh sales by growth schemes were about 1000 crore. Growth funds outperform
bench mark index in bull phase and underperform in bearish times. Another common
problem cited by the fund managers is that investors put more money when the NAVs are
high and sell when NAVs are low, making the managers busier in redemption than in
managing the funds.

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 9. Income/ Debt Oriented Funds/Schemes: The aim of income funds is to provide regular and
steady income to investors. Such schemes generally invest in fixed income securities such as
bonds, corporate debentures, government securities and money market instruments. Such
funds are less risky compared to equity schemes. These funds are not affected by fluctuations
in equity markets.

Opportunity of capital appreciation, however, is also limited in such funds. The NAVs of
such funds are affected because of change in interest rates in the country. If the interest rates
fall, NAVs of such funds are likely to increase in the short run and vice-versa.

Sector Specific Funds: These are the funds/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, they are more risky compared to the diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and must exit at
an appropriate time. They may also seek the advice of an expert.

10. Tax Saving Schemes: These schemes offer tax rebates to the investors under specific
provisions of the Income Tax, 1961, as the Government offers tax incentives for investment
in specified avenues, e.g. Equity Linked Savings Scheme (ELSS). Pension schemes, launched
by the mutual funds also offer tax benefits. These schemes are growth oriented and invest
predominantly in equities. Their growth opportunities and the risks associated are like any
equity oriented scheme.

Load and no load funds: In load funds, a fee is charged for the entry and exit. The charge is a
percentage of NAV. Whenever an investor buys or sells units in the fund; he has to pay a
charge. If the entry as well as exit load is one per cent to buy a unit worth Rs 10, he has to
pay Rs 10.10. Likewise if he sells a unit, he will get Rs 9.90 per unit. The load factor affects
the return and the investor has to consider the load factor before investing in a mutual fund.

No load funds do not charge a fee for entry or exit. No additional charges are levied on the
purchase or sale of units. However, SEBI regulations allow no load funds to hike the
investment management fees by up to one per cent per annum until they recover their initial
expenses.

ADVANTAGES OF INVESTING IN MUTUAL FUNDS

The mutual funds offer the following advantages to the investors:

1. Professional management: The mutual fund institutions provide experienced and skilled
professionals who have knowledge in security analysis and portfolio management and analyze
the performance and prospects of companies. They also help to select suitable investments to
achieve the objectives of the mutual fund schemes.
2. Diversifications: Mutual funds invest in a number of companies across a broad cross-section of
industries and sectors. The diversification reduces the risk because seldom do all stocks decline
at the same time and in the same proportion. Thus, the investor gets a proportion of the average
market. This specific characteristic of mutual fund is not seen in case of any other type of
alternative investment instruments.

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3. Convenience: Investing in a mutual fund reduces paper work and helps to avoid many problems
such as bad deliveries, delayed payments, and unnecessary follow-up with brokers and
companies. Mutual funds save time and make investing easy and convenient.
4. Return potential: Over a medium to long-term, mutual funds have the potential to provide
higher returns as they invest in a diversified basket of selected securities.
5. Low costs: Mutual funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because their benefits of scale in brokerage, custodial and other
fees translate into lower costs for investors.
6. Liquidity: The mutual funds provide easy liquidity to those who want to dispose of their units
after a stipulated period of time. The open-ended mutual funds offer instantaneous liquidity
through repurchase facility. Closed –end schemes also offer the facility of repurchase after a
specified period in addition to listing on the stock exchanges.
7. Transparency: Mutual funds provide regular information on the value of their investment in
addition to disclosure on the specific investment made by the scheme, the proportion invested in
each type of security, and the fund manager’s investment strategy and outlook.
8. Flexibility: Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans , investors can systematically invest or withdraw funds according to
their needs and convenience.
9. Choice of schemes: Mutual funds offer a variety of schemes to enable investors to take
advantage of opportunities not only in the equity, debt, and money markets but also in specific
industries and sectors.
10. Tax benefits: Many of the mutual funds offer the benefits of tax exemption to the investors. In
India for equity linked schemes of mutual funds under section 88, tax rebate up to 20% of
investment is available. Under section 80L income from mutual funds dividends along with other
specified incomes up to Rs. 15,000 is exempted from tax. But it is now no longer applicable in
accordance to the annual budget of 1999. Dividend income from mutual funds is totally tax free.
11. Government Regulations: 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.
12. Shareholders services: Mutual funds also offer many useful shareholder services. One important
service is the automatic reinvestment of distributions for people who want it. Owners of
individual stocks are often more inclined to take their cash dividends and spend them. Many
funds have systematic withdrawal plans, which are handy for retired individuals. Other important
services include automatic investment plans, retirement plans, and record keeping for tax
purposes.
13. Safety from loss due to unethical practices: The probability of loss stemming from fraud,
scandal, or bankruptcy involving the fund’s management company is very small. By transferring
investment risk to share-holders, mutual fund companies side-step the problems that have been
especially painful for people dealings with certain thrifts banks and insurance companies among
others.
14. Product structure: Mutual funds are now taking their customers very seriously. They have
started designing products to suit the needs of the common investors. A good example is the Tata
children’s Fund which helps plan the education expenses of a child.

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 Disadvantages of Mutual Funds
1. Professional Management: Many investors debate whether or not the so-called professionals are
any better at picking stocks. Management is by no means infallible and even if the fund loses
money; the manager still takes his/her cut. So although managed professionally, managers
investing in loss making securities for their personal interests cannot be ruled out as had
happened in case of US-64.
2. Costs: Mutual funds don’t simply invest investor’s money without earning any profit. They have
charges in form of annual fees along with the cost of entering and exit from the fund, called load
3. Dilution: It’s possible to have too much diversification. Because funds have small holdings in so
many different companies, high returns from a few investments often don’t make much
difference on the overall return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager often has trouble
finding a good investment for all the new money.
4. Taxes: When making decisions about investor’s money fund managers don’t consider investor’s
personal tax situation. For example, when a fund manager sells a security, a capital gains tax is
triggered, which affects how profitable the individual is from the sale. It might have been more
advantageous for the individual to defer the capital gains liability.

Difference between Mutual Funds vs. Investment companies

DIFFERENCE MUTUAL FUNDS INVESTMENT COMPANIES
Objectives Mobilization of savings from the Mobilization of savings of the
investors, mostly household. investors of household and
corporate sector. Highest belongs to
the promoters of the company.
Organization Organized and managed according Incorporated under the Companies
to SEBI regulations 1993 and UTI Act, 1956 and manage according to
act 1963 in case of Unit Trust of the provisions of the Act.
India.

Capital structure Initial capital would be provided by Capital structure shall be at par with
the sponsor. Scheme-wise capital is any other industrial company. No
decided based on the nature of the scheme-wise capital shares are
scheme. Units are offered out of the offered out of the company’s equity
scheme capital. No debt capital. capital. Capital may be debt capital
also and has the advantage of
gearing .
Name of the Either open-ended or close-end
schemes with a wide variety of investment Neither open-ended nor closed-end.
objectives.

Liquidity Closed-end scheme units are traded The company’s shares are traded on
on the organized stock exchanges. the stock exchange. No repurchase
Open-ended schemes offer of shares.
repurchase facility and some
closed-end schemes may also offer
repurchase or premature

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 encashment.

Choosing a Mutual Fund

Investors should note the following points while choosing a mutual fund:

1. Investment objective: The schemes offered by mutual funds should be chosen based on
investment objectives such as:
 Regular Income
 Pure growth oriented
 Balanced fund
 Tax savings
 Period of scheme
 Liquidity/ Open-ended schemes/listing.
2. Past performance: The past performance of fund managers should be checked even though it
does not assure about or indicate the future performance. The risks are however lower if the fund
manager’s capability is superior.
3. Equity research: Equity research capability and other fund management techniques are
important factors in deciding about a fund.
4. Global linkages: The fund manager’s understanding of Indian capital markets and the global
linkages is critical to the process of investment decision making.
5. Transparency in funding accounting: Choose a mutual fund which assures full transparency of
the investments made and discloses NAV periodically to assist the investor in understanding the
value of investment, and the area where investments have been/ are to be made.
6. Investor service: Funds which pay emphasis to investor sewrvicing help in sorting out
procedural grievances, if any .

Judged the efficiency

The test of efficiency of a good mutual fund shall comprise of evaluation of mutual fund on the basis
of its:

1. Stability Whether a mutual fund is stable or not so far as its scheme

are concerned.
2. Liquidity Whether the schemes offer liquidity by way of their listing
on stock exchanges.
3. Growth Whether the mutual funds are offering increase in net asset
value and there is consistent growth in dividend and capital
appreciation.
4. Credibility of issuer Previous track record of issuer should be checked.

5. Returns Assured or otherwise

6. Management approach Risk taking, portfolio, diversification, return maximization,

bonus, etc.

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 MUTUAL FUND GUIDELINES ON ADVERTISEMENT
SEBI has prescribed an advertisement code for mutual funds, the important features of which are as
follows:

1. Advertisement should not be published unless approved by the designated person.

2. Advertisement should be true, fair, and clear. It should not contain a statement, assurance,
promise, or forecast which is false or misleading.
3. The sale offer should contain only information, substance of which is included in the fund/s
current prospectus.
4. The advertisement should not be so framed as to exploit the lack of experience or knowledge of
the investors.
5. It should not contain any information, the accuracy of which is dependent on an assumption.
6. It should not compare on fund with another unless comparison is fair.
7. The mutual funds, which advertise yield must use standardized computations such as tax/value,
annual yield, etc.
8. If the advertisement guarantees a minimum return, it should also indicate the resources available
to back such guarantee.
9. Mutual funds shall indicate in their advertisements- the settlers, trustees, managers, and financial
advisors to the fund.
10. Mutual funds which advertise past performance should state that these are not indicative of future
returns.

SHORTCOMINGS IN OPERATION OF MUTUAL FUNDS

The mutual funds have been operating for the last twelve years in India. Thus, it is too early to
evaluate their operation. However, one should not lose sight of the fact that in the formatory years of
any institution, evaluation is very important as this reveals the real character of the systems.
Following are some of the shortcomings in operation of mutual funds.

1. The mutual funds are all externally managed. They do not have employees of their own. Also
there is no specific law to suppervise the mutual funds in India. There are multiple regulations
while UTI is goiverned by its own regulations, the banks are supervised by Reserve Bank of
India and the central govbernment . The insurance company mutual funds are regulated under the
central government regulations.
2. Many of the investors are not willing to invest in mutual funds unless there is a promise of a
minimum return.
3. Unrestrained fund raising by schemes without adequate supply of scrips creates severe imblances
in the market.
4. Many small companies did very well but mutual funds cannot reap their benefits because they are
not allowed to invest in smaller companies. Not only this, mutual fund is allowed to hold only a
fixed maximum percentage of shares in aparticular industry.

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5. The mutual funds in India are formed as trusts. As there is no distinction made between sponsors,
trustee and fund managers. The trustee play the role of fund managers.
6. The increase in the number of mutual funds under various scvhemes has increased competition.
As a result the funds lose their stabilizing factor in the markets.
7. While UTI publishes details of accounts nabout their investments, mutual funds are still not
publishing the profit and loss accounts and balance sheets after their operations.
8. Investors relations play a vital role in mobilizing the resource. Most of the Indian companies and
mutual funds have ignored this and failed to communicate to the investors about their
organisation and operation.
9. Unlike banks, mutual funds do not have a strong distributiion network. Apart from few, most
MFs have to depend on the broker networks.
10. Mutual funds have not yet developed product structuring to tap target customers.
11. Fund managers invest in unlisted securities, sometimes in private limited companies to get beter
returns which leads to new risk profile.
12. There is a lack of access to call money market. As a result, redemption risk which is the second
most important risk of open-ended schemes arises could not be mitigrated.
13. The most important aspect for success of a mutual fund is the ability to outsource certain critical
activities. This concept is already prevalent manufacturing but has not been introduced in fund
management.

POSSIBLE CAUSES FOR NON-SATISFACTORY PERFORMANCE OF MUTUAL FUNDS

The following can be stated as the possible causes of the non-satisfactory performance of mutual
funds:
1. Excessive diversification of portfolio.
2. Blue chip or hot securities do not result in more than average return.
3. High turnover of portfolio may lead to huge payment of brokerage/commission.
4. Poor investment planning.
5. Poor use of forecasts such as income, profitability and poor interpretation of the
government’s policies etc.

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