A COMPARATIVE STUDY OF MUTUAL

FUND VS EXCHANGE TRADED FUND

PREFERENCE OF CUSTOMER.

Introduction

INDIAN Mutual Fund

Mutual funds have become one of the most sought-after investment options today. They
serve as investment vehicles that pool funds from investors and allocate them across
various financial assets, such as equities, bonds, government securities, and gold.
Companies authorized to establish mutual funds create Asset Management Companies
(AMCs) or Fund Houses to collect investor funds, manage investments, market mutual fund
schemes, and facilitate transactions for investors.

These funds are overseen by skilled financial professionals known as fund managers. Fund
managers are responsible for analyzing and managing investments in alignment with the
mutual fund's stated investment objectives. The pooled funds are invested in diversified
financial assets, and the income or gains generated are distributed proportionally among
investors after deducting applicable expenses. This is determined by the fund’s "Net Asset
Value" (NAV).Mutual funds charge an expense ratio as a fee for managing the investments,
which varies between funds but is capped by the Securities and Exchange Board of India
(SEBI) based on the fund's total assets. By investing in mutual funds, even small investors
gain access to professionally managed, well-diversified portfolios of equities, bonds, and
other securities—something that might be challenging to achieve individually with limited
capital. Fund managers handle critical decisions, such as where and when to invest,
ensuring convenience and expertise for investors.

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The income or gains generated are distributed proportionally among investors after
deducting applicable expenses. This is determined by the fund’s "Net Asset Value"
(NAV).Mutual funds charge an expense ratio as a fee for managing the investments, which
varies between funds but is capped by the Securities and Exchange Board of India (SEBI)
based on the fund's total assets. By investing in mutual funds, even small investors gain
access to professionally managed, well-diversified portfolios of equities, bonds, and other
securities—something that might be challenging to achieve individually with limited capital.
Fund managers handle critical decisions, such as where and when to invest, ensuring
convenience and expertise for investors.

1s the phase of entry of public sector mutual funds. Public sector banks, Life
Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC)
established mutual funds in the public sector, and they began operating in 1987. The first

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"non-UTI" mutual fund was created in June 1987 by SBI Mutual Fund, which was followed
by
Canada bank Mutual Fund in December 1987, Punjab National Bank Mutual Fund in August
1989, Indian Bank Mutual Fund in November 1989, Bank of India in June 1990, and Bank of
Baroda Mutual Fund in Oct. 1992.

The growth and progress of any economy rely heavily on the strength and efficiency of its
financial system. A well-structured financial system works like a backbone, channeling
savings and investments into the production of goods and services, ultimately improving
people’s standard of living. By mobilizing surplus funds and using them wisely, it contributes
to the nation’s overall development.

Mutual funds act as a bridge between individual investors and the financial markets. They
pool m

MEANING AND DEFINITION:

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines
mutual fund as a "a fund established in the form of a trust to raise money through the sale of
a unit to the public or a section of public under one or more schemes for investing in
securities, including money market instruments.

According to the above definition, a mutual fund in India can raise resources through sale of
units to the public. It can be set up in the form of a Trust under the Indian Trust Act

A mutual fund is a professionally managed investment vehicle that pools money from
multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. The
fund is managed by a professional fund manager or a team of managers, and the investors,
known as unit holders, own shares representing a portion of the holdings in the fund. Mutual
funds provide an opportunity for individual investors to access a diversified and
professionally managed investment portfolio without directly managing the securities
themselves. The fund manager makes investment decisions on behalf of the investors,
aiming to achieve the fund's stated objectives, whether it be capital appreciation, income
generation, or a combination of both.

Investors buy shares or units in the mutual fund, and the value of these shares is
determined by the net asset value (NAV) of the fund. NAV is calculated by dividing the total
value of the fund's assets minus liabilities by the number of outstanding shares. Mutual
funds offer various types, such as equity funds, bond funds, hybrid funds, and money
market funds, catering to different risk appetites and investment goals.

Key features of mutual funds include diversification, liquidity, and professional management.
Diversification helps spread risk across various assets, reducing the impact of poor
performance in any single investment. Liquidity is provided through the ability to buy or sell
fund shares at the end of each trading day at the NAV. Professional management involves

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experienced fund managers making investment decisions based on the fund's objectives
and market conditions. Investors often choose mutual funds based on their financial goals,
risk tolerance, and investment preferences, making them a popular investment choice for a
wide range of individuals seeking exposure to the financial markets,

1.3 HISTORICAL BACKGROUND:

A strong Financial market with broad participation is essential for a developed economy.
With this broad collective India's first mutual fund was establishment initiative of the
Government 1963, namely, Unit Trust of India (UT at the of India and Reserve Bank of India
with a view to encouraging saving and investment and participation in the income, profits
and gains accruing to the Corporation Thom the acquisition. holding, management and
disposal of securities

In the last few years the MF Industry has grown significantly. The history of Mutual Funds in
India can be broadly divided into five distinct phases as follows

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FIRST PHASE OF MF-1964-1987: Establishment of the Unit Trust of India (UTI)

The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of
Parliament and functioned under the Regulatory and administrative control of the Reserve
Bank of India (RBI). 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. Unit Scheme 1964 (US '64) was the first scheme launched by UTI. At the end
of 1988, UTI had ₹ 6,700 cores of Assets Under Management (AUM).

SECOND PHASE OF MF-1987-1993: The Introduction of Public Sector Mutual Funds

This was the phase of entry of public sector mutual funds. Public sector banks, Life
Insurance Corporation of India (LIC), and General Insurance Corporation of India (GIC)
established mutual funds in the public sector, and they began operating in 1987. The first
"non-UTI" mutual fund was created in June 1987 by SBI Mutual Fund, which was followed
by Canada bank Mutual Fund in December 1987, Punjab National Bank Mutual Fund in
August 1989, Indian Bank Mutual Fund in November 1989, Bank of India in June 1990, and
Bank of Baroda Mutual Fund in Oct. 1992.

While LIC launched its mutual fund in June 1989, GIC formed its mutual fund nearly a year
and a half later in December 1990. Assets under management (AUM) in the Mutual Fund
sector installed Rs. 47,004 cores at the end of 1991. It was discovered that the second
stage not only provided the framework for industry growth but also impaired investors to put
more of their money into mutual funds. As a result, India's mutual fund market was
anticipated to grow more rapidly.

THIRD PHASE OF MF-1993-2003: The entry of Private-Sector Mutual Funds

This was the phase in which the Private sector entered the Mutual Funds market. The
foundation of SEBI in April 1992 to protect the interests of investors in the securities market
and to support the development and regulation of the securities market increased the
prominence of the Indian securities industry. The first set of SEBI Mutual Fund Regulations,
which apply to all mutual funds except for UTI, came into effect in 1993. The first private
sector Mutual Fund registered in July 1993 was the former Kothari Pioneer, which was later
amalgamated with Franklin Templeton Mutual Fund. A new era in the Indian Mutual Fund
business began with the arrival of private sector funds in 1993, providing Indian investors
with a greater selection of Mutual Fund products.

The original SEBI Mutual Fund regulations were updated in 1996 and replaced with a
comprehensive set of regulations known as the SEBI (Mutual Fund) Regulations, 1996,
which are still in effect today. Over the years, more and more international sponsors
established mutual funds in India, increasing the number of Mutual Funds. During this
decade, the Mutual Fund business also saw several mergers and acquisitions. There were
33 Mutual Funds as of the end of January 2003, with a combined Assets under
management (AUM) of Rs. 1,21,805 cores, of which UTI alone had an ALUM of Rs. 44.541
cores.

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FOURTH PHASE OF MF-2003-2014: Consolidation and Slackening Growth

After the Unit Trust of India Act of 1963 was repealed in February 2003, UTI was split into
two distinct organizations: the Specified Undertaking of the Unit Trust of India (SUUTI) and
UTI Mutual Fund, which operates in accordance with the SEBI Mutual Fund Regulations.
The Mutual Fund business entered its fourth phase of consolidation with the division of the
former UTI and several mergers among various private sector funds. Securities markets all
around the world collapsed after the global financial crisis in 2009, and India's market also
suffered.

Majority of investors who had entered the capital market at its peak had lost money, and
their confidence in Mutual Fund products had been severely undermined. As a result of the
global financial crisis' aftermath and SEBI's elimination of Entry Load, the Indian Mutual
Fund Industry suffered more harm than it already had. The industry spent more than two
years trying to rebuild and transform itself in order to maintain its economic viability, as
evidenced by the slow growth in Mutual Fund Industry Assets under management (AUM)
from 2010 TO 2013.

FIFTH (CURRENT) PHASE OF MF (May 2014 Onward): Transformation and Improved

Penetration

The fifth phase in the history of mutual funds in India, began in May 2014, marked a
transformative period for the industry. Recognizing the need to expand the reach of mutual
funds, especially into Tier II and Tier
ill cities, SEBI had earlier laid down progressive measures since September 2012. These
reforms, combined with a supportive central government, set the stage for a resurgence in
the MF landscape

The growth trajectory was exponential. The industry's AUM grew from 210 trillion in May
2014 to cross the staggering 230 trillion mark by November 2020. By the close of August
2023, this figure stood at 246.63 trillion, marking a six-fold growth within a decade.

1.4 CONCEPT OF MUTUAL FUND:

Many investors with common financial objectives pool their money.

Investors, on a proportionate basis, get mutual fund units for the sum contributed to the
pool.

The money collected from investors is invested into shares, debentures and other securities
by the fund manager.

The fund manager realized gains or losses, and collects dividend or interest income.

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Any capital gains or losses from such investments are passed on to the investors in
proportion of the number of units held by them.

The income earned through these investments and the capital appreciation realized are
shared by its unit holders in proportion to the number of units owned by them.

Structure of mutual funds.

A mutual fund operates on a three-tiered structure, commencing with the establishment of a

trust that comprises a sponsor, trustees, and an AMC (Asset Management Company). The
sponsor acts as a promoter, akin to that of a company. The trustees, integral to the trust,
hold the mutual fund's assets on behalf of the unit holders, under the approval and oversight
of SEBI (Securities and Exchange Board of India).

To begin, a mutual fund collects funds from various investors, which are then invested in
securities according to the predefined objectives of the fund. The returns or benefits earned
from these investments are subsequently distributed to each investor after deducting
expenses by the AMC. Let’s take a look at the structure of mutual funds in a detailed
manner.

The mutual fund operates within a three-tiered structure, consisting of the sponsor, trustees,
and AMC. All mutual funds are established as trusts under "The Indian Trust Act, 1882," and
their activities are governed by the "SEBI (Mutual Funds) Regulations 1996." Among the
three entities, the trustees play the most critical role, followed by the sponsor, who initiates
the fund, and the AMC, who assumes the role of the investment manager.

Tier 1: Fund Sponsor

In the three-tier mutual fund structure in India, the fund sponsor occupies the first layer. A
sponsor can be an individual or entity with the authority to establish a mutual fund, aiming to
generate income through fund management. This fund management may be executed
through an associate company responsible for handling the fund's investments. Moreover,
the sponsor can act as a promoter for the associate company.

To establish a mutual fund, the sponsor must seek approval from SEBI. However, the
sponsor cannot operate independently; it must create a Public Trust under the Indian Trust
Act, 1882, and subsequently register it with SEBI. As the primary entity driving the
promotion of the mutual fund company and overseeing public funds, the sponsor plays a
crucial role in the entire process.

Tier 2: Trust and Trustees

The second layer in the structure of Mutual Funds in India consists of the Trust and the
trustees. The trustees, also known as the protectors of the fund, are typically appointed by
the fund sponsor. As the name suggests, they play a crucial role in upholding investors' trust
and monitoring the fund's growth. A trust is established by the fund sponsor in favor of the

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trustees through a document called a trust deed. The trustees manage the trust and are
accountable to the investors, serving as the primary guardians of the fund and its assets.

Tier 3: Asset Management Companies (AMCs)

The Asset Management Company (AMC) or the Fund Management Firm serves as the
operational investment manager of the trust, but it must first undergo registration with the
Government of India.

The roles of AMCs encompass various responsibilities, such as introducing and initiating
mutual fund schemes. They collaborate with founders and trustees to oversee the progress
of these schemes. Additionally, AMCs are tasked with managing funds and engaging
associate services from brokers, registrars, bankers, lawyers, and other relevant entities.

Other Participants in The Structure of Mutual Funds

The other participants in the structure of mutual funds in India are as follows:

Custodian
A Custodian is an entity entrusted with the secure storage of securities. These Custodians
are registered with SEBI and hold the responsibility for facilitating the transfer and delivery
of units and securities. Additionally, they play a crucial role in helping investors update their
holdings at specific intervals and keep track of their investments. Apart from their primary
task of safekeeping, Custodians also manage the collection of corporate benefits, including
bonus issues, interest, dividends, and other related matters.

Registrar And Transfer Agent

RTAs (Registrar and Transfer Agents) serve as intermediaries connecting Fund Managers
and Investors. These SEBI-registered entities are responsible for handling various tasks,
including processing mutual fund applications, assisting with investor KYC (Know Your
Customer), managing and providing periodic investment statements or reports, updating
investor records, and processing investor requests.

Auditor
The auditor verifies AMC records to ensure proper use of collected funds and certifies the
absence of fraud. The AMC can choose its auditor and determine their compensation, but it
must adhere to appointment rules, publish the auditor's report, and fulfill other obligations
under the Companies Act.

Broker
Brokers, authorized by SEBI and licensed to manage trading accounts, act as intermediaries
connecting investors to the stock market. AMCs rely on brokers to execute trades, and
some brokers also provide research reports that AMCs use for due diligence purposes.

Intermediaries
The intermediary can be anyone, such as agents, bankers, distributors, and more. They play
a role as a bridge connecting retail investors and AMCs. These intermediaries recommend
mutual funds to investors and receive commissions from the AMC as compensation. They
shall be registered intermediaries only.

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The structure of mutual funds in India is well-defined, with checks and balances for
investors' safety. However, as an investor, due diligence is crucial. Not all mutual fund
schemes are the same, so study past performance, fees, and the fund manager's track
record. If needed, open an account with a reputable broker offering educational resources
for investors. Making informed decisions is vital to effectively build wealth through mutual
fund investments.

CHARACTERISTICA OF MUTUAL FUND

 Operated by Professionals

Every fund house employs professionals known as fund managers to operate mutual
funds. They study the market pattern and invest your money in equities or debts
according to the scheme's objectives.

 . Convenience

With the of online investment in mutual funds, you do not need to visit a fund house
physically. You can invest in any fund of your choice using your phone or computer.
All you need to do is visit the portal or app of the AMC and log in here to make a
purchase.

 Minimal Charges

Mutual funds are also affordable for every earning individual. You need to pay a
small amount, known as the expense ratio, to your fund houses to invest in mutual
funds. The expense ratio and other additional charges might vary between fund
houses. However, the costs are less than other managed funds.

 . Good for Portfolio Diversification

Mutual fund schemes allow you to avoid placing all your eggs in one basket. They
uniformly invest in high and low-risk mutual investments on your behalf to balance
your profit and losses. This lets you access a diversified portfolio, which can deliver
profits even during periods of economic downturns.

 . Liquidity

You can also withdraw or redeem your funds to meet any emergency. Depending on
your scheme, you will receive the amount within 3-4 business days. Liquid funds
transfer this amount to your account in the following business day. Hence, mutual
funds carry decent liquidity as investors can redeem them anytime.

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  Income Tax Benefits

With Additionally, if you wish to save with mutual funds, you can invest in ELSS
(Equity-Linked Savings Scheme) funds that offer tax benefits under Section 80C of
the Income Tax Act, 1961. You can claim tax benefits of Rs. 1.5 on your ELSS
investments. However, note that BUSS funds come with a lock-in period of 3 years

 . Flexibility of Investment

This is one of the attractive characteristics that mutual funds have to offer. You can
opt for any mode between SIP or lumpsun to invest your money in mutual funds

Regulated a long-term investment in mutual funds, you can pay has taken to their
high . You can also get deductions by investing in Equity Savings Schemes
(ELAS) while earning high ret

 by SEBI

Every fund house must register itself under SEBI before launching a mutual fund
scheme. SEBI overlooks the transparency and accountability of fund houses and
protects investors. By doing so, SEBI prevents any arbitrary use of investors' money.
This makes mutual funds safe from fraud and malpractices.

ADVANTAG OF MUTUAL FUND

An investor can invest directly in individual securities or indirectly though

a financial intermediary. Globally, mutual funds have established
themselves as the means of investment for the retail investor.

 Mutual Funds are Managed by Asset Managers Professionally

The fund house appoints asset managers, also known as fund managers, to manage
the mutual funds in India. These managers understand how to identify the best
stocks that can generate maximum profits.

 The Risk Gets Reduced through Diversification

The money in mutual funds is invested in multiple sector stocks. Hence, the loss
incurred in one asset class is managed by profit made in another sector or asset
class.

 Liquidity

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One advantage of mutual funds that is often overlooked is liquidity. Mutual funds
can be easily bought and sold in the short term during market hours and, hence, are
considered highly liquid. Some funds like ELSS are an exception as they have a
specified lock-in period and cannot be easily liquidated.

 Mutual Funds are Low Cost

Mutual funds in India also have low costs. The fund management fees charged by
mutual funds are 1%-2.50%. Mutual funds, though low in cost, provide you with
higher returns. Returns are calculated based on the amount grown within the given
time frame.

 Mutual Funds also Offer Tax Benefits

Investing in mutual funds in India via the equity market can offer you tax benefits.
The investments made in ELSS are exempted under Section 80C of the Income
Tax Act, up to Rs. 1.5 laths.

 Mutual Funds are Affordable

You can start investing in mutual funds from a minimal amount, such as Rs. 500.
As per your budget, you can opt for SIP or lump sum investment.

 Safe and Transparent

Investments in mutual funds are very transparent. All mutual fund companies
come under the purview of SEBI and they need to make necessary disclosures.

Value of stocks, the historical performance of the fund, fund manager’s

qualification, and track records are known. The NAV (net asset value) of the fund
is updated every day. On any mutual fund page like Grow – you can look at the de
https://www.angelone.in/knowledge-center/mutual-funds/advantages-
disadvantages-of-mutual- mutual fund.

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