MUTUAL FUND OPERATIONAL FLOW CHART

Mutual funds may be structured either as a company in which investors hold shares or
as a trust in which investors are the beneficiaries. In the USA, where mutual funds first began,
they are set up as investment companies. In the UK, open-ended funds are created in the form
of unit trusts while closed-end funds are set up as investment trusts or companies.
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 then invested in capital market instruments such as
shares debentures and other securities. The income earned though these investments and the
capital appreciation realized are shared by its unit holders in proportion to the numbers of
units owned by them. Thus a mutual Fund is the most suitable investment for the common
man as it offers an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost
.

A mutual fund is an investment option, where investors contribute small amounts of

money. These contributions are pooled together to make it a large sum. This sum is then
invested in various securities.
A Mutual Fund is body corporate registered with the Securities and Exchange Board of
India (SEBI) that pools up the Money from individual/corporate investors and invest the same
on behalf of the investors/unit holders, in equity shares ,Government securities, bonds, call
money markets etc, and distributes the profits. In the other words, a Mutual Fund allows
investors to indirectly take a position in a basket of assets.

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 Mutual Fund is a mechanism for pooling the resources by Issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread among a wide cross-section of industries and sectors thus
risk is reduced. Diversification reduces the risk because all stocks may not move in the same
direction in the same proportion at same time. Investors of mutual funds are known as unit
holders.
The investors in proportion to their investments share the profits of losses. The
mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A Mutual Fund is required to be registered
with securities Exchange Board of India (SEBI) which regulates securities markets before it
can collect funds from public.
Structure of Mutual fund

In India, mutual funds are created as trusts. The investors are the beneficial owners of
the investments held by the trust. The structure to be followed by mutual funds in India is laid
down in SEBI (Mutual Fund) Regulations; 1996.Mutual funds in India follow a three-tier
structure of sponsor, trust and asset management company (AMC).
The sponsor promotes the fund and sets up the AMC. The mutual fund itself is
structured as a trust. It is managed by trustees in the beneficial interest of the unit holders.
Trustees appoint an asset management company (AMC) to manage the funds.
Sponsor

The sponsor is the promoter of a mutual fund, who sets up the trust and the AMC,
appoints the custodian, board of trustees and the board of directors of the AMC. The sponsor
seeks regulatory approval for the mutual fund.
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SEBI has laid down the eligibility criteria for a sponsor. A sponsor should:
- have at least five years experience in the financial services industry.
- have a good financial track record for at least three years prior to registration of the fund.
(Positive net worth is essential).

- contribute at least 40% of the capital of the asset management company (AMC).
Sponsors can be Indian companies, banks or financial institutions, foreign entities or a joint
venture between the two.
Trustees
The mutual fund itself is set up as a trust. Trustees are appointed by the sponsor with
SEBI approval, to act on behalf of the investors. Trustees act as the protectors of the unit
holders’ interests and are the primary guardians of the unit holders’ funds and assets.
The trust deed is executed by the sponsor in favor of the trustees and it deals with the
Establishment of the trust, the authority and responsibility of the trustees towards the unit
holders and the AMC.
Trustees can be appointed as a Board of trustees, or formed as a trustee company by
the sponsor. The board of such trustee company oversees the mutual fund. The trustees have
the fiduciary responsibility of protecting the beneficiaries of the trust, namely the investors in
the mutual fund. At least two-thirds of the members of the board of trustees have to be
independent of the sponsor. The board of trustees has to meet at least six times in a year.
Trustees are paid a fee for their services.
SEBI regulations for trustees govern the appointment and functions of the trustees.
There are aspects of general and specific due diligence to be exercised by trustees, to oversee
the working of the AMC and the management of the mutual fund.
Asset Management Company (AMC)
Asset Management Company (AMC) is the investment manager of the mutual fund.
The AMC is set up by the sponsor, and registered with SEBI. AMCs can be structured as
public or private limited companies. Most AMCs in India are private limited companies. The
capital of the AMC is contributed by the sponsor and its associates. AMCs specialize in
investment management. They manage money for a fee, usually determined as a percentage of
the assets under management (AUM).
AMCs are appointed by trustees to manage the mutual fund. But AMCs do not have
any access to the investors' money.

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 AMCs are the face of mutual funds. They set up offices, employ staff, create and
market products, mobilize funds through distributors, manage the money and report the
portfolio performance to trustees and investors.
AMC is appointed to manage a mutual fund by the trustees of the fund, in consultation
with the sponsor and with the approval of SEBI. The rights and obligations of the AMC are
specified in the Investment Management agreement signed between the trustees and the
AMC.
SEBI regulations for AMCs require that:
- AMCs should have a net worth of at least Rs 10 Crores at all times.
- At least 50% of members of the board of an AMC have to be independent.
- The AMC of one mutual fund cannot be an AMC or trustee of another fund.
AMCs cannot engage in any business other than that of financial advisory and investment
Management. Statutory disclosures regarding AMC operations should be periodically
submitted to SEBI.
Custodians
Custodians hold the cash and securities of the mutual fund and are responsible for their
safekeeping. They hold actual custody of the assets of the mutual fund.
Custodians are appointed by the sponsor. They represent the only constituent not directly
appointed by the AMC. Custodians should be independent of the sponsor. That is, a sponsor
cannot be a custodian of the fund as well.
ICICI Bank is a sponsor of ICICI Prudential Mutual Fund. It is also a custodian bank. But it
cannot offer its custody services to ICICI Prudential Mutual fund, because it is also the
Sponsor of the fund.
Registrar and Transfer Agents

Registrar and transfer agents (R&T agents) are primarily responsible for providing
services to the investors. They accept and process investor transactions. R&T agents are paid
a fee for their services. They also operate investor service centers (ISCs) which act as the
official points for accepting investor transactions with a fund .

MUTUAL FUND INDUSTRY

The mutual fund industry is a lot like the film star of the finance business. Though it is
perhaps the smallest segment of the industry, it is also the most glamorous – in that it is a
young industry where there are changes in the rules of the game every day, and there are
constant shifts and upheavals.

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 The mutual fund is structured around a fairly simple concept, the mitigation of risk
through the spreading of investments across multiple entities, which is achieved by the
pooling of a number of small investments into a large bucket. Yet it has been the subject of
perhaps the most elaborate and prolonged regulatory effort in the history of the country.
A little history:
The mutual fund industry started in India in a small way with the UTI Act creating what
was effectively a small savings division within the RBI. Over a period of 25 years this grew
fairly successfully and gave investors a good return, and therefore in 1989, as the next logical

step, public sector banks and financial institutions were allowed to float mutual funds and
their success emboldened the government to allow the private sector to foray into this area.
The initial years of the industry also saw the emerging years of the Indian equity market,
when a number of mistakes were made and hence the mutual fund schemes, which invested in
lesser-known stocks and at very high levels, became loss leaders for retail investors. From
those days to today the retail investor, for whom the mutual fund is actually intended, has not
yet returned to the industry in a big way. But to be fair, the industry too has focused on
brining in the large investor, so that it can create a significant base corpus, which can make
the retail investor feel more secure.
The Indian MF industry has Rs 5.67 lakh crore of assets under management. As per
data released by Association of Mutual Funds in India, the asset base of all mutual fund
combined has risen by 7.32% in April, the first month of the current fiscal. As of now, there
are 33 fund houses in the country including 16 joint ventures and 3 wholly owned foreign
asset managers.
According to a recent McKinsey report, the total AUM of the Indian mutual fund
industry could grow to $350-440 billion by 2012, expanding 33% annually. While the
revenue and profit (PAT) pools of Indian AMCs are pegged at $542 million and $220 million
respectively, it is at par with fund houses in developed economies. Operating profits for
AMCs in India, as a percentage of average assets under management, were at 32 basis points
in 2006-07, while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in
the same time frame.

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The Landmarks
1963: UTI is India’s first mutual fund.
1964: UTI launches US-64.
1971: UTI’s ULIP (Unit-Linked Insurance Plan) is second scheme to be launched.
1986: UTI Master share, India’s first true ‘mutual fund’ scheme, launched.
1987: PSU banks and insurers allowed floating mutual funds; State Bank of India (SBI) first
off the blocks.
1992: The Harshad Mehta-fuelled bull market arouses middle-class interest in shares and
mutual funds.
1993: Private sector and foreign players allowed; Kothari Pioneer first private fund house to
start operations; SEBI set up to regulate industry.
1994: Morgan Stanley is the first foreign player.
1996: Sebi’s mutual fund rules and regulations, which form the basis of most current laws,
come into force.
1998: UTI Master Index Fund is the country’s first index fund.
1999: The takeover of 20th Century AMC by Zurich Mutual Fund is the first acquisition in
the mutual fund industry.
2000: The industry’s assets under management crosses Rs 1, 00,000 crore.
2001: US-64 scam leads to UTI overhaul.
2002: UTI bifurcated, comes under SEBI purview; mutual fund distributors banned from
giving commissions to investors; floating rate funds and Foreign debt funds debut.
2003: AMFI certification made compulsory for new agents; fund of funds launched.
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. The history of mutual funds in
India can be broadly divided into four distinct phases.

FIRST PHASE: 1964 – 87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set
up by the Reserve Bank of India and functioned under the regulatory and administrative
control of the Reserve Bank of India. In 1978, UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end
of 1988 UTI had Rs.6, 700 crores of assets under the management.

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 SECOND PHASE: 1987 – 1993 (Entry of Public Sector Funds)
1987 marked the entry of non – UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of
India (GIC). SBI Mutual Fund was the first non – UTI Mutual Fund established in June1987
followed by Can Bank Mutual Fund (Dec ‘87), Punjab National Bank Mutual Fund (Aug
‘89), Indian Bank Mutual Fund (Nov ‘89), Bank of India (Jun ‘90), Bank of Baroda Mutual
Fund (Oct ‘92). LIC established its mutual fund in June 1989 while GIC had set up its mutual
fund in December 1990. At the end of 1993, the mutual fund industry had assets under
management of Rs.47, 004 crores.
THIRD PHASE: 1993 – 2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund came into being, under which all mutual funds, except
UTI, were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996.
The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The
number of mutual fund houses went on increasing, with many foreign mutual funds setting up
funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs.1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.
FOURTH PHASE: since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes.
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. With the bifurcation
of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth As at the

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end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under
421 schemes.

Regulation and Distribution

The while Unit Trust of India (UTI) was set up by the Reserve Bank of India in 1963
and functioned under its regulatory and administrative control. In 1978, the Industrial
Development Bank of India (IDBI) took over regulatory and administrative control of the
UTI. The Government of India enacted the Securities and Exchange Board of India Act, 1992
on 4 April 1992 which created the Securities and Exchange Board of India (SEBI). SEBI
issued a comprehensive set of regulations in 1993 and revised them again in 1996. These
included regulations covering the Indian mutual fund industry. All mutual funds in India
today are regulated by SEBI. The Association of Mutual Funds of India (AMFI) is a self-
governing association of Indian Mutual Funds that regulates its members' sales, distribution
and communication practices. Investors can invest in Indian mutual funds directly or through
distributors under codes of practice developed by AMFI.

Mutual funds are under tapped market in India (section appears subjective
and requires review)

Despite being available in the market for over two decades now with assets under
management equaling Rs 7,81,71,152 Lakhs (as of 28 February 2010),less than 10% of Indian
households have invested in mutual funds. A recent report on Mutual Fund Investments in
India published by research and analytics firm, Boston Analytics, suggests investors are
holding back from putting their money into mutual funds due to their perceived high risk and
a lack of information on how mutual funds work. This report is based on a survey of
approximately 10,000 respondents in 15 Indian cities and towns as of March 2010. There are
46 Mutual Funds as of June 2013.

The primary reason for not investing appears to be correlated with city size. Among
respondents with a high savings rate, close to 40% of those who live in metros and Tier I
cities considered such investments to be very risky, whereas 33% of those in Tier II cities said
they did not know how or where to invest in such assets.

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 On the other hand, among those who invested, close to nine out of ten respondents did
so because they felt these assets were more professionally managed than other asset classes.
Exhibit 2 lists some of the influencing factors for investing in mutual funds. Interestingly,
while non-investors cite "risk" as one of the primary reasons they do not invest in mutual
funds, those who do invest consider that they are "professionally managed" and "more
diverse" most often as their reasons to invest in mutual funds versus other investments.

A mutual fund is a type of professionally managed collective investment vehicle that

pools money from many investors to purchase securities. While there is no legal definition of
the term "mutual fund", it is most commonly applied only to those collective investment
vehicles that are regulated and sold to the general public. They are sometimes referred to as

"investment companies" or "registered investment companies." Most mutual funds are "open-
ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not
considered a type of mutual fund.

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Average Assets under Management

Assets under management (AUM) is a financial term denoting the market value of all
the funds being managed by a financial institution (a mutual fund, hedge fund, private equity
firm, venture capital firm, or brokerage house) on behalf of its clients, investors, partners,
depositors etc. The average Assets under management of all Mutual funds in India for the
quarter Jul-13 to Sep-13 (in INR billion) is given below:

Mutual Fund Name

Sr No Average AUM %

1 1,034.42 12.70%
HDFC Mutual Fund
2 0952.28 11.69%
Reliance Mutual Fund
3 0853.03 10.48%
ICICI Prudential Mutual Fund
4 0773.44 09.50%
Birla Sun Life Mutual Fund
5 0700.57 08.60%
UTI Mutual Fund
6 0595.58 07.31%
SBI Mutual Fund
7 0448.12 05.50%
Franklin Templeton Mutual Fund
IDFC Mutual Fund
8 0396.65 04.87%
Kotak Mahindra Mutual Fund
9 0352.99 04.34%
10 DSP BlackRock Mutual Fund 0304.86 03.74%
Tata Mutual Fund
11 0179.66 02.21%
Deutsche Mutual Fund
12 0170.59 02.10%

13 0150.79 01.85%
L&T Mutual Fund
Sundaram Mutual Fund
14 0139.47 01.71%
JPMorgan Mutual Fund
15 0132.57 01.63%
Religare Invesco Mutual Fund
16 0125.12 01.54%
Axis Mutual Fund
17 0123.18 01.51%
18 LIC NOMURA Mutual Fund 0079.76 00.98%
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 Canara Robeco Mutual Fund
19 0076.16 00.94%
HSBC Mutual Fund
20 0067.18 00.83%
JM Financial Mutual Fund
21 0062.44 00.77%
Baroda Pioneer Mutual Fund
22 0052.63 00.65%

23 IDBI Mutual Fund 00.59%

0047.71
24 PRINCIPAL Mutual Fund 00.53%
0043.00
25 Goldman Sachs Mutual Fund 00.51%
0041.49
26 BNP Paribas Mutual Fund 00.43%
0035.38
27 Morgan Stanley Mutual Fund 00.40%
0032.90
28 Peerless Mutual Fund 00.35%
0028.35
29 Taurus Mutual Fund 00.34%
0027.32
30 Pramerica Mutual Fund 00.27%
0021.66
31 Union KBC Mutual Fund 00.24%
0019.80
32 Indiabulls Mutual Fund 00.20%
0016.06
33 ING Mutual Fund 00.14%
0011.05
34 PineBridge Mutual Fund 00.14%
0011.03
35 BOI AXA Mutual Fund 00.13%
0010.82
36 Mirae Asset Mutual Fund 0005.08 00.06%
37 Motilal Oswal Mutual Fund 00.05%
0004.37
38 Quantum Mutual Fund 00.04%
0003.15
39 PPFAS Mutual Fund 00.03%
0002.67
40 Escorts Mutual Fund 00.03%
0002.52
41 Sahara Mutual Fund 00.03%
0002.33
42 IIFL Mutual Fund 00.03%
0002.07
43 Edelweiss Mutual Fund 00.02%
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 0001.94
44 Daiwa Mutual Fund 00.01%
0000.51
45 IL&FS Mutual Fund (IDF) 00.00%
000-
46 Shriram Mutual Fund 00.00%
000-
47 SREI Mutual Fund (IDF) 00.00%
000-
Grand Total 100.0%
8,142.68

TECHNOLOGICAL ENVIRONMENT
IMPACT OF TECHNOLOGY
Mutual fund, during the last one decade brought out several innovations in their
products and is offering value added services to their investors. Some of the value added
services that are being offered are:

 Electronic fund transfer facility.

 Investment and re-purchase facility through internet.
 Added features like accident insurance cover, mediclaim etc.
 Holding the investment in electronic form, doing away with the traditional form of
unit certificates.
 Cheque writing facilities.
 Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more easily
accessible to an ever increasing number of investors across the country. For the first time in
India the mutual fund start using the automated trading, clearing and settlement system of
stock exchanges for sale and repurchase of open-ended de-materialized mutual fund units.
Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options
introduced which have come in very handy for the investor to maximize their returns from
their investments. SIP ensures that there is a regular investment that the investor makes on
specified dates making his purchases to spread out reducing the effect of the short term
volatility of markets. SWP was designed to ensure that investors who wanted a regular
income or cash flow from their investments were able to do so with a pre-defined automated
form. Today the SW facility has come in handy for the investors to reduce their taxes.

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