A mutual fund is essentially an investment vehicle where the investor can invest in multiple shares, bonds, or other securities that a designated fund manager manages professionally. In India, the Association of Mutual Funds in India (AMFI) is developing the Indian Mutual Fund Industry on professional, healthy, and ethical lines. It tries to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders. Incorporated on August 22, 1995, as a non-profit organisation, AMFI has 44 Asset Management Companies, registered with Securities Exchange Board of India (SEBI), the regulatory authority, as its members.
Historical Perspective – The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. Historically, the growth of mutual funds in India has four distinct phases. You can clearly understand them from the diagrammatic representation below:
Structure of Mutual fund Industry – in India, SEBI has prepared a 3-tier structure of mutual funds and all mutual funds operate under its guidelines. They are the Sponsor or Promoters, Trustees and Asset Management Company (AMC).
The sponsor conceptualises the business and seeks certificate of registration from SEBI. Once registered, the sponsors form a trust consisting of a board of trustees who protect the interest of the unit holders and ensure that the mutual fund operates as per SEBI regulations. Then comes the AMC, which is the manager of the mutual fund, and it must register with the government under the Companies Act 1956. The AMC can be a private limited company, a wholly owned subsidiary of an existing public limited company, or a joint venture of Indian and oversees companies.
Once the AMC starts functioning, it purchases various financial assets like shares, bonds, company deposits etc., which the depository holds and acts as a custodian. There are two main depositories in India – The National Securities Depository Limited (NSDL), and The Central Depository Services Limited (CDSL). The AMC appoints transfer agents and registrars that take care of communication with investors, maintain investor data, and process all transactions. These days generally the same company performs the role of Transfer Agent and Registrar. In India the most common registrar utilised by mutual fund companies are Computer Age Management Services (CAMS) and Karvy.
Categorization of Mutual Funds – In 2017, SEBI decided to bring uniformity in across mutual funds and to standardize the scheme categories and characteristics of each category. Accordingly, it classified the schemes in the following five groups: Equity Schemes, Debt Schemes, Hybrid Schemes, Solution Oriented Schemes, and Other Schemes. Furthermore, to ensure uniformity in respect of the investment universe for equity schemes, it defined large cap, mid cap, and small cap in terms of full market capitalization as follows: Large Cap are first 100 companies; Mid Cap will be from 101st to 250th company; Small Cap from 251st company onwards. The details of the same are available in SEBI circular No SEBI/HO/IMD/DF3/CIR/P/2017/114 dated 06 October 2017.
|Main Category||Number of Sub Categories||Details of Sub Categories of Funds|
|Equity Schemes||10||Multi Cap, Large Cap, Large and Mid-Cap, Mid Cap, Small Cap, Dividend Yield, Value, Contra, Focused, Sectoral/Thematic and ELSS|
|Debt Schemes||16||Overnight, Liquid, Ultra Short Duration, Low Duration, Money Market, Short Duration, Medium Duration, Medium to Long Duration, Long Duration, Dynamic Bond, Corporate Bond, Credit Risk, Banking and PSU, Gilt, Gilt with 10 Year Constant Duration and Floater|
|Hybrid Schemes||6||Conservative Hybrid, Balanced Hybrid, Aggressive Hybrid, Dynamic Asset Allocation or Balanced Advantage, Multi Asset Allocation, Arbitrage and Equity Savings
|Solution Oriented Schemes||2||Retirement and Children|
|Others Schemes||2||Index/ETFs and Fund of Funds (Overseas and Domestic)|
Investment in Mutual Funds –
an investor can invest in mutual funds either systematically through SIP/STP or lumpsum. The minimum investment can start from ₹ 100 onwards and thereafter maximum amount is unlimited. An investor tends to make some common mistakes when investing in mutual funds. He invests without a financial goal or a plan, tries to time the market, invests in too many schemes that become unmanageable, frequently shuffles his money between funds, and resorts to panic exit when markets start falling. To correctly understand how his mutual fund investments generates returns, he must look at the diagram alongside.