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Lecturrete Topic 129 - Mutual Funds


A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are "the largest proportion of equity of U.S. corporations.". 2 Mutual fund investors may be retail or institutional in nature. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe ('investment company with variable capital') and open-ended investment company (OEIC) in the UK.

Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include economies of scale, diversification, liquidity, and professional management. However, these come with mutual fund fees and expenses. Primary structures of mutual funds are open-end funds, unit investment trusts, closed-end funds and exchange-traded funds (ETFs).

Mutual funds are often classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds, or other. Funds may also be categorized as index funds, which are passively-managed funds that match the performance of an index, or actively- managed funds. Hedge funds are not mutual funds as hedge funds cannot be sold to the general public.


The first modern investment funds (the precursor of today's mutual funds) were established in the Dutch Republic. In response to the financial crisis, of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt ("unity creates strength"). His aim was to provide small investors with an opportunity to diversify.

Mutual funds were introduced to the United States in the 1890s. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value. The first open-end mutual fund with redeemable shares was established on March 21, 1924, as the Massachusetts Investors Trust (which still in existence today and managed by MFS Investment Management). In the United States, closed-end funds remained more popular than open-end funds throughout the 1920s. In 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets.

Mutual funds today

At the end of 2019, mutual fund assets worldwide were $54.9 trillion, according to the Investment Company Institute. The countries with the largest mutual fund industries are:

  • United States: $26.7 trillion

  • Australia: $5.3 trillion

  • Ireland: $3.4 trillion

  • Germany: $2.5 trillion

  • Luxembourg: $2.2 trillion

  • France: $2.2 trillion

  • Japan: $2.1 trillion

  • Canada: $1.9 trillion

  • United Kingdom: $1.9 trillion

  • China: $1.4 trillion

In the United States, mutual funds play an important role in U.S. household finances. At the end of 2019, 23% of household financial assets were held in mutual funds. Their role in retirement savings was even more significant since mutual funds accounted for roughly half of the assets in individual retirement accounts, 401(k)s and other similar retirement plans.In total, mutual funds are large investors in stocks and bonds.

Mutual funds have advantages and disadvantages compared to alternative structures or investing directly in individual securities. According to Robert Pozen and Theresa Hamacher, these are:


  • Increased diversification: A fund diversifies holding many securities. This diversification decreases risk.

  • Daily liquidity: In the United States, mutual fund shares can be redeemed for their net asset value within seven days, but in practice the redemption is often much quicker. This liquidity can create asset–liability mismatch which poses challenges, which in part motivated an SEC liquidity management rule in 2016.

  • Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund's investments.

  • Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.

  • Service and convenience: Funds often provide services such as check writing.

  • Government oversight: Mutual funds are regulated by a governmental body

  • Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.


Mutual funds have disadvantages as well, which include:

  • Fees

  • Less control over the timing of recognition of gains

  • Less predictable income

  • No opportunity to customize

Mutual funds in india

The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India (UTI). UTI enjoyed a monopoly in the Indian mutual fund market until 1987, when a host of other government -controlled Indian financial companies established their own funds, including State Bank of India, Canara Bank and by Punjab National Bank.

Despite being available in the market,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.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. In 2019, Asset under management (AUM) of the mutual fund industry rose by 13% to 24 trillion in 2018 by November


Mutual funds in India are distributed mainly in 2 ways:-


Customers can buy mutual funds online via the corresponding asset management company's website or via brokers. There are a number of new platforms that have come which offer direct mutual funds in their platform. Subscribers can buy mutual funds from these platforms. Direct mutual funds provide better returns, generally between .5% to 1.5% more than their regular counterparts. This is due to the fact that brokers charges are excluded from the returns. A 1% deduction from a return of 12% from mutual funds, leads to a 8.33% lesser return to the investor, which is a huge amount.


Most of the asset management company have an offline distribution network. These distributors mainly sell regular mutual funds which carry some commission on it. FundsIndia, NJ, Prudent, Qfund are some of the popular distributors in India.

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