NCERT Textbook: Mutual Funds | Financial Literacy for Class 10 PDF Download

 Page 1


Unit Code: 7 Unit  Title: Mutual Fund
Session-1 : Basics of Mutual Fund
Location:
Class Room,
AMC, 
Mutual Fund
Branch
Office
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
Session-2 : Active/Passive Fund
·
·
·
·
Define MF
Benefits of MF
How to 
calculate NAV
Procedure of 
NFO
·
·
Find NAV of 
few MF 
Schemes
Study NFO
Interactive lecture:
Calculate Returns 
of the Schemes.
Activity:
Find best suited 
scheme for each 
student
·
·
Working and 
operations of 
Mutual  Fund
Distinguish 
Open – ended 
& Close ended
· Tools and 
Techniques of 
Active and 
Passive Fund
· Benefits of 
Active / 
Passive Funds
Interactive lecture:
Risk and Returns 
of MF
Activity:
Role plays 
portfolio manager
· Find Mutual 
Fund Scheme: 
less Risk and 
High Returns
What is the Regulatory Body for Mutual Funds?
What are the benefits of investing in Mutual Funds?
What is NAV?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the 
mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide 
spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money 
collected by a mutual fund. They thoroughly analyse the markets and economy to pick good 
investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus 
increasing his or her risk. However, a mutual fund will spread its risk by investing a number of 
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, 
so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. 
Mutual Funds also provide complete portfolio disclosure of the investments made by various 
schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor 
can pick up a scheme depending upon his risk/return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict 
regulation designed to protect the interests of the investor.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net 
of its liabilities. NAV per unit is simply the net value of assets divided by the number of units 
outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end 
scheme should be disclosed on a daily basis and the NAV of a close end scheme should be 
disclosed at least on a weekly basis.
MUTUAL FUNDS
Chapter 7
36
Page 2


Unit Code: 7 Unit  Title: Mutual Fund
Session-1 : Basics of Mutual Fund
Location:
Class Room,
AMC, 
Mutual Fund
Branch
Office
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
Session-2 : Active/Passive Fund
·
·
·
·
Define MF
Benefits of MF
How to 
calculate NAV
Procedure of 
NFO
·
·
Find NAV of 
few MF 
Schemes
Study NFO
Interactive lecture:
Calculate Returns 
of the Schemes.
Activity:
Find best suited 
scheme for each 
student
·
·
Working and 
operations of 
Mutual  Fund
Distinguish 
Open – ended 
& Close ended
· Tools and 
Techniques of 
Active and 
Passive Fund
· Benefits of 
Active / 
Passive Funds
Interactive lecture:
Risk and Returns 
of MF
Activity:
Role plays 
portfolio manager
· Find Mutual 
Fund Scheme: 
less Risk and 
High Returns
What is the Regulatory Body for Mutual Funds?
What are the benefits of investing in Mutual Funds?
What is NAV?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the 
mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide 
spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money 
collected by a mutual fund. They thoroughly analyse the markets and economy to pick good 
investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus 
increasing his or her risk. However, a mutual fund will spread its risk by investing a number of 
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, 
so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. 
Mutual Funds also provide complete portfolio disclosure of the investments made by various 
schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor 
can pick up a scheme depending upon his risk/return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict 
regulation designed to protect the interests of the investor.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net 
of its liabilities. NAV per unit is simply the net value of assets divided by the number of units 
outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end 
scheme should be disclosed on a daily basis and the NAV of a close end scheme should be 
disclosed at least on a weekly basis.
MUTUAL FUNDS
Chapter 7
36
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
Introduction to Financial Markets
39
Page 3


Unit Code: 7 Unit  Title: Mutual Fund
Session-1 : Basics of Mutual Fund
Location:
Class Room,
AMC, 
Mutual Fund
Branch
Office
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
Session-2 : Active/Passive Fund
·
·
·
·
Define MF
Benefits of MF
How to 
calculate NAV
Procedure of 
NFO
·
·
Find NAV of 
few MF 
Schemes
Study NFO
Interactive lecture:
Calculate Returns 
of the Schemes.
Activity:
Find best suited 
scheme for each 
student
·
·
Working and 
operations of 
Mutual  Fund
Distinguish 
Open – ended 
& Close ended
· Tools and 
Techniques of 
Active and 
Passive Fund
· Benefits of 
Active / 
Passive Funds
Interactive lecture:
Risk and Returns 
of MF
Activity:
Role plays 
portfolio manager
· Find Mutual 
Fund Scheme: 
less Risk and 
High Returns
What is the Regulatory Body for Mutual Funds?
What are the benefits of investing in Mutual Funds?
What is NAV?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the 
mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide 
spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money 
collected by a mutual fund. They thoroughly analyse the markets and economy to pick good 
investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus 
increasing his or her risk. However, a mutual fund will spread its risk by investing a number of 
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, 
so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. 
Mutual Funds also provide complete portfolio disclosure of the investments made by various 
schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor 
can pick up a scheme depending upon his risk/return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict 
regulation designed to protect the interests of the investor.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net 
of its liabilities. NAV per unit is simply the net value of assets divided by the number of units 
outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end 
scheme should be disclosed on a daily basis and the NAV of a close end scheme should be 
disclosed at least on a weekly basis.
MUTUAL FUNDS
Chapter 7
36
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
Introduction to Financial Markets
39
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
38
Page 4


Unit Code: 7 Unit  Title: Mutual Fund
Session-1 : Basics of Mutual Fund
Location:
Class Room,
AMC, 
Mutual Fund
Branch
Office
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
Session-2 : Active/Passive Fund
·
·
·
·
Define MF
Benefits of MF
How to 
calculate NAV
Procedure of 
NFO
·
·
Find NAV of 
few MF 
Schemes
Study NFO
Interactive lecture:
Calculate Returns 
of the Schemes.
Activity:
Find best suited 
scheme for each 
student
·
·
Working and 
operations of 
Mutual  Fund
Distinguish 
Open – ended 
& Close ended
· Tools and 
Techniques of 
Active and 
Passive Fund
· Benefits of 
Active / 
Passive Funds
Interactive lecture:
Risk and Returns 
of MF
Activity:
Role plays 
portfolio manager
· Find Mutual 
Fund Scheme: 
less Risk and 
High Returns
What is the Regulatory Body for Mutual Funds?
What are the benefits of investing in Mutual Funds?
What is NAV?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the 
mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide 
spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money 
collected by a mutual fund. They thoroughly analyse the markets and economy to pick good 
investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus 
increasing his or her risk. However, a mutual fund will spread its risk by investing a number of 
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, 
so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. 
Mutual Funds also provide complete portfolio disclosure of the investments made by various 
schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor 
can pick up a scheme depending upon his risk/return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict 
regulation designed to protect the interests of the investor.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net 
of its liabilities. NAV per unit is simply the net value of assets divided by the number of units 
outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end 
scheme should be disclosed on a daily basis and the NAV of a close end scheme should be 
disclosed at least on a weekly basis.
MUTUAL FUNDS
Chapter 7
36
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
Introduction to Financial Markets
39
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
38
subscription only once and can be redeemed only on the fixed date of redemption. The 
units of these funds are listed on stock exchanges (with certain exceptions), are tradable 
and the subscribers to the fund would be able to exit from the fund at any time through the 
secondary market.
The term ‘investment plans’ generally refers to the services that the funds provide to investors 
offering different ways to invest or reinvest. The different investment plans are an important 
consideration in the investment decision, because they determine the flexibility available to the 
investor. Some of the investment plans offered by mutual funds in India are:
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are reinvested 
and very few income distributions, if any, are made. The investor thus only realizes capital 
appreciation on the investment. Under the dividend plan, income is distributed from time to 
time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income distribution. 
This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a 
fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units 
held by the investors.
As per SEBI Regulations on Mutual Funds, an investor is entitled to:
1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks 
from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial 
position and general affairs of the scheme.
3. Receive dividend within 30 days of their declaration and receive the redemption or 
repurchase proceeds within 10 days from the date of redemption or repurchase.
4. The trustees shall be bound to make such disclosures to the unit holders as are essential in 
order to keep them informed about any information, which may have an adverse bearing 
on their investments.
5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund.
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the concerned 
Mutual Funds and follow up with them till they are resolved.
A Fund Offer Document is a document that offers you all the information you could possibly 
need about a particular scheme and the fund launching that scheme. That way, before you put in 
your money, you’re well aware of the risks etc involved. This has to be designed in accordance 
with the guidelines stipulated by SEBI and the prospectus must disclose details about:
What are the different investment plans that Mutual Funds offer?
What are the rights that are available to a Mutual Fund holder in India?
What is a Fund Offer Document?
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Investment objectives
Risk factors and special considerations
Summary of expenses
Constitution of the fund
Guidelines on how to invest
Organization and capital structure
Tax provisions related to transactions
Financial information
When investment decisions of the fund are at the discretion of a fund manager(s) and he or she 
decides which company, instrument or class of assets the fund should invest in based on 
research, analysis, market news etc. such a fund is called as an actively managed fund. The fund 
buys and sells securities actively based on changed perceptions of investment from time to time. 
Based on the classifications of shares with different characteristics, ‘active’ investment managers 
construct different portfolio. T wo basic investment styles prevalent among the mutual funds are 
Growth Investing and Value Investing:
Growth Investing Style
The primary objective of equity investment is to obtain capital appreciation. A growth 
manager looks for companies that are expected to give above average earnings growth, 
where the manager feels that the earning prospects and therefore the stock prices in future 
will be even higher. Identifying such growth sectors is the challenge before the growth 
investment manager.
Value Investment Style
A Value Manager looks to buy companies that they believe are currently undervalued in 
the market, but whose worth they estimate will be recognized in the market valuations 
eventually.
When an investor invests in an actively managed mutual fund, he or she leaves the decision of 
investing to the fund manager. The fund manager is the decision-maker as to which company or 
instrument to invest in. Sometimes such decisions may be right, rewarding the investor 
handsomely. However, chances are that the decisions might go wrong or may not be right all the 
time which can lead to substantial losses for the investor. There are mutual funds that offer 
Index funds whose objective is to equal the return given by a select market index. Such funds 
follow a passive investment style. They do not analyse companies, markets, economic factors 
and then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of stocks 
that reflect a market index, such as the Nifty index. The returns generated by the index are the 
returns given by the fund. No attempt is made to try and beat the index. Research has shown 
that most fund managers are unable to constantly beat the market index year after year. Also it is 
not possible to identify which fund will beat the market index. Therefore, there is an element of 
going wrong in selecting a fund to invest in. This has lead to a huge interest in passively 
What is Active Fund Management?
What is Passive Fund Management?
Introduction to Financial Markets
41
Page 5


Unit Code: 7 Unit  Title: Mutual Fund
Session-1 : Basics of Mutual Fund
Location:
Class Room,
AMC, 
Mutual Fund
Branch
Office
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
Session-2 : Active/Passive Fund
·
·
·
·
Define MF
Benefits of MF
How to 
calculate NAV
Procedure of 
NFO
·
·
Find NAV of 
few MF 
Schemes
Study NFO
Interactive lecture:
Calculate Returns 
of the Schemes.
Activity:
Find best suited 
scheme for each 
student
·
·
Working and 
operations of 
Mutual  Fund
Distinguish 
Open – ended 
& Close ended
· Tools and 
Techniques of 
Active and 
Passive Fund
· Benefits of 
Active / 
Passive Funds
Interactive lecture:
Risk and Returns 
of MF
Activity:
Role plays 
portfolio manager
· Find Mutual 
Fund Scheme: 
less Risk and 
High Returns
What is the Regulatory Body for Mutual Funds?
What are the benefits of investing in Mutual Funds?
What is NAV?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the 
mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide 
spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money 
collected by a mutual fund. They thoroughly analyse the markets and economy to pick good 
investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus 
increasing his or her risk. However, a mutual fund will spread its risk by investing a number of 
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, 
so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. 
Mutual Funds also provide complete portfolio disclosure of the investments made by various 
schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor 
can pick up a scheme depending upon his risk/return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict 
regulation designed to protect the interests of the investor.
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net 
of its liabilities. NAV per unit is simply the net value of assets divided by the number of units 
outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end 
scheme should be disclosed on a daily basis and the NAV of a close end scheme should be 
disclosed at least on a weekly basis.
MUTUAL FUNDS
Chapter 7
36
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
Introduction to Financial Markets
39
Are there any risks involved in investing in Mutual Funds?
What are the different types of Mutual funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. 
They invest in shares, debentures, bonds etc. All these investments involve an element of risk. 
The unit value may vary depending upon the performance of the company and if a company 
defaults in payment of interest/principal on their debentures/bonds the performance of the fund 
may get affected. Besides incase there is a sudden downturn in an industry or the government 
comes up with new a regulation which affects a particular industry or company the fund can 
again be adversely affected. All these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock 
or bond holdings in the fund’s portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively 
affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a 
wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices 
fall and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the 
corporate defaulting on their interest and principal payment obligations and when that risk 
crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a 
beating.
Mutual funds are classified in the following manner:
(a) On the basis of Objective
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal 
objective of capital appreciation of the investment over the medium to long-term. They are 
best suited for investors who are seeking capital appreciation. There are different types of 
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified Funds
These funds invest in companies spread across sectors. These funds are generally meant 
for risk-averse investors who want a diversified portfolio across sectors.
Sector Funds
These funds invest primarily in equity shares of companies in a particular business sector 
or industry. These funds are targeted at investors who are bullish or fancy the prospects of 
a particular sector.
Index Funds
These funds invest in the same pattern as popular market indices like S&P CNX Nifty or 
S&P CNX 500. The money collected from the investors is invested only in the stocks, 
which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 
stocks. The objective of such funds is not to beat the market but to give a return equivalent 
to the market returns.
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act. Opportunities 
provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing instruments like 
bonds, debentures, government securities, commercial paper and other money market 
instruments. They are best suited for the medium to long-term investors who are averse to 
risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment 
could be as short as a day. They provide easy liquidity. They have emerged as an 
alternative for savings and short-term fixed deposit accounts with comparatively higher 
returns. These funds are ideal for corporates, institutional investors and business houses 
that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government 
backed bonds they give a secured return and also ensure safety of the principal amount. 
They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income-bearing instruments (debt) in 
some proportion. They provide a steady return and reduce the volatility of the fund while 
providing some upside for capital appreciation. They are ideal for medium to long-term 
investors who are willing to take moderate risks.
(b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for 
subscription and redemption throughout the year. Their prices are linked to the daily net 
asset value (NAV). From the investors’ perspective, they are much more liquid than closed-
ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO) and 
thereafter closed for entry as well as exit. These funds have a fixed date of redemption. 
One of the characteristics of the close-ended schemes is that they are generally traded at a 
discount to NAV; but the discount narrows as maturity nears. These funds are open for 
38
subscription only once and can be redeemed only on the fixed date of redemption. The 
units of these funds are listed on stock exchanges (with certain exceptions), are tradable 
and the subscribers to the fund would be able to exit from the fund at any time through the 
secondary market.
The term ‘investment plans’ generally refers to the services that the funds provide to investors 
offering different ways to invest or reinvest. The different investment plans are an important 
consideration in the investment decision, because they determine the flexibility available to the 
investor. Some of the investment plans offered by mutual funds in India are:
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are reinvested 
and very few income distributions, if any, are made. The investor thus only realizes capital 
appreciation on the investment. Under the dividend plan, income is distributed from time to 
time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income distribution. 
This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a 
fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units 
held by the investors.
As per SEBI Regulations on Mutual Funds, an investor is entitled to:
1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks 
from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial 
position and general affairs of the scheme.
3. Receive dividend within 30 days of their declaration and receive the redemption or 
repurchase proceeds within 10 days from the date of redemption or repurchase.
4. The trustees shall be bound to make such disclosures to the unit holders as are essential in 
order to keep them informed about any information, which may have an adverse bearing 
on their investments.
5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund.
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the concerned 
Mutual Funds and follow up with them till they are resolved.
A Fund Offer Document is a document that offers you all the information you could possibly 
need about a particular scheme and the fund launching that scheme. That way, before you put in 
your money, you’re well aware of the risks etc involved. This has to be designed in accordance 
with the guidelines stipulated by SEBI and the prospectus must disclose details about:
What are the different investment plans that Mutual Funds offer?
What are the rights that are available to a Mutual Fund holder in India?
What is a Fund Offer Document?
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Investment objectives
Risk factors and special considerations
Summary of expenses
Constitution of the fund
Guidelines on how to invest
Organization and capital structure
Tax provisions related to transactions
Financial information
When investment decisions of the fund are at the discretion of a fund manager(s) and he or she 
decides which company, instrument or class of assets the fund should invest in based on 
research, analysis, market news etc. such a fund is called as an actively managed fund. The fund 
buys and sells securities actively based on changed perceptions of investment from time to time. 
Based on the classifications of shares with different characteristics, ‘active’ investment managers 
construct different portfolio. T wo basic investment styles prevalent among the mutual funds are 
Growth Investing and Value Investing:
Growth Investing Style
The primary objective of equity investment is to obtain capital appreciation. A growth 
manager looks for companies that are expected to give above average earnings growth, 
where the manager feels that the earning prospects and therefore the stock prices in future 
will be even higher. Identifying such growth sectors is the challenge before the growth 
investment manager.
Value Investment Style
A Value Manager looks to buy companies that they believe are currently undervalued in 
the market, but whose worth they estimate will be recognized in the market valuations 
eventually.
When an investor invests in an actively managed mutual fund, he or she leaves the decision of 
investing to the fund manager. The fund manager is the decision-maker as to which company or 
instrument to invest in. Sometimes such decisions may be right, rewarding the investor 
handsomely. However, chances are that the decisions might go wrong or may not be right all the 
time which can lead to substantial losses for the investor. There are mutual funds that offer 
Index funds whose objective is to equal the return given by a select market index. Such funds 
follow a passive investment style. They do not analyse companies, markets, economic factors 
and then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of stocks 
that reflect a market index, such as the Nifty index. The returns generated by the index are the 
returns given by the fund. No attempt is made to try and beat the index. Research has shown 
that most fund managers are unable to constantly beat the market index year after year. Also it is 
not possible to identify which fund will beat the market index. Therefore, there is an element of 
going wrong in selecting a fund to invest in. This has lead to a huge interest in passively 
What is Active Fund Management?
What is Passive Fund Management?
Introduction to Financial Markets
41
subscription only once and can be redeemed only on the fixed date of redemption. The 
units of these funds are listed on stock exchanges (with certain exceptions), are tradable 
and the subscribers to the fund would be able to exit from the fund at any time through the 
secondary market.
The term ‘investment plans’ generally refers to the services that the funds provide to investors 
offering different ways to invest or reinvest. The different investment plans are an important 
consideration in the investment decision, because they determine the flexibility available to the 
investor. Some of the investment plans offered by mutual funds in India are:
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are reinvested 
and very few income distributions, if any, are made. The investor thus only realizes capital 
appreciation on the investment. Under the dividend plan, income is distributed from time to 
time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income distribution. 
This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a 
fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units 
held by the investors.
As per SEBI Regulations on Mutual Funds, an investor is entitled to:
1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks 
from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial 
position and general affairs of the scheme.
3. Receive dividend within 30 days of their declaration and receive the redemption or 
repurchase proceeds within 10 days from the date of redemption or repurchase.
4. The trustees shall be bound to make such disclosures to the unit holders as are essential in 
order to keep them informed about any information, which may have an adverse bearing 
on their investments.
5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund.
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with the concerned 
Mutual Funds and follow up with them till they are resolved.
A Fund Offer Document is a document that offers you all the information you could possibly 
need about a particular scheme and the fund launching that scheme. That way, before you put in 
your money, you’re well aware of the risks etc involved. This has to be designed in accordance 
with the guidelines stipulated by SEBI and the prospectus must disclose details about:
What are the different investment plans that Mutual Funds offer?
What are the rights that are available to a Mutual Fund holder in India?
What is a Fund Offer Document?
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Investment objectives
Risk factors and special considerations
Summary of expenses
Constitution of the fund
Guidelines on how to invest
Organization and capital structure
Tax provisions related to transactions
Financial information
When investment decisions of the fund are at the discretion of a fund manager(s) and he or she 
decides which company, instrument or class of assets the fund should invest in based on 
research, analysis, market news etc. such a fund is called as an actively managed fund. The fund 
buys and sells securities actively based on changed perceptions of investment from time to time. 
Based on the classifications of shares with different characteristics, ‘active’ investment managers 
construct different portfolio. T wo basic investment styles prevalent among the mutual funds are 
Growth Investing and Value Investing:
Growth Investing Style
The primary objective of equity investment is to obtain capital appreciation. A growth 
manager looks for companies that are expected to give above average earnings growth, 
where the manager feels that the earning prospects and therefore the stock prices in future 
will be even higher. Identifying such growth sectors is the challenge before the growth 
investment manager.
Value Investment Style
A Value Manager looks to buy companies that they believe are currently undervalued in 
the market, but whose worth they estimate will be recognized in the market valuations 
eventually.
When an investor invests in an actively managed mutual fund, he or she leaves the decision of 
investing to the fund manager. The fund manager is the decision-maker as to which company or 
instrument to invest in. Sometimes such decisions may be right, rewarding the investor 
handsomely. However, chances are that the decisions might go wrong or may not be right all the 
time which can lead to substantial losses for the investor. There are mutual funds that offer 
Index funds whose objective is to equal the return given by a select market index. Such funds 
follow a passive investment style. They do not analyse companies, markets, economic factors 
and then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of stocks 
that reflect a market index, such as the Nifty index. The returns generated by the index are the 
returns given by the fund. No attempt is made to try and beat the index. Research has shown 
that most fund managers are unable to constantly beat the market index year after year. Also it is 
not possible to identify which fund will beat the market index. Therefore, there is an element of 
going wrong in selecting a fund to invest in. This has lead to a huge interest in passively 
What is Active Fund Management?
What is Passive Fund Management?
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