📙 Module 3: Mutual Funds and Merchant Banking
Total Duration: 9 Hours
CLO Alignment: CLO3 – Understand the roles of mutual funds and merchant bankers in India’s financial
system.
Topic 1: Mutual Funds
Concept and Structure
A mutual fund is a financial intermediary that pools money from investors to purchase a diversified
portfolio of securities.
Managed by Asset Management Companies (AMCs) under the regulation of SEBI.
Investors own units in proportion to their contribution.
Structure of Mutual Fund in India
Investors
↓
Trust (Mutual Fund)
↓
Sponsor → Trustee → Asset Management Company (AMC) → Custodian
Key Roles
Sponsor: Sets up the mutual fund.
Trustee: Ensures legal and regulatory compliance.
AMC: Makes investment decisions.
Custodian: Holds securities in safe custody.
Types of Mutual Funds
Type Description Example
Open-ended Units can be bought/sold anytime SBI Bluechip Fund
Close-ended Fixed maturity; traded on stock exchanges ICICI Prudential Bharat 22 FOF
Equity Funds Invest in shares; higher risk/return HDFC Equity Fund
Debt Funds Invest in bonds; lower risk/return Axis Treasury Advantage Fund
Hybrid Funds Mix of equity & debt ICICI Balanced Advantage Fund
Role in Mobilizing Savings and Market Stability
Channel retail savings into productive investments.
Offer risk diversification for small investors.
Enhance liquidity and reduce volatility by participating in secondary markets.
Enable financial inclusion through SIPs (Systematic Investment Plans).
Example:
As of 2024, India’s mutual fund industry manages assets over ₹50 lakh crore, with SIPs accounting for
₹15,000 crore monthly inflows.
Key Takeaways
Mutual funds offer low-cost, diversified investment options.
They promote capital market participation and financial stability.
SEBI ensures transparency and investor protection in mutual fund operations.
Practice Questions
1. MCQ: In a mutual fund structure, who is responsible for making investment decisions?
a) Sponsor
b) Trustee
c) Custodian
d) AMC
Answer: d) AMC
2. Short Answer: Distinguish between open-ended and close-ended mutual funds.
3. Discussion Prompt: How do SIPs promote a disciplined investment culture in India?
Topic 2: Merchant Banking
Definition and Historical Evolution
Merchant banking involves financial services like issue management, underwriting, and corporate
advisory.
Originated in Europe, brought to India in 1960s by foreign banks (e.g., Grindlays).
Grew rapidly post-1991 due to capital market liberalization.
SEBI Definition (1992):
A merchant banker is “any person engaged in issue management, either by making arrangements regarding
selling, buying, or subscribing to securities.”
Functions of Merchant Bankers
Function Description
Issue Management Handling IPO/FPO – pricing, prospectus, roadshows
Underwriting Guaranteeing subscription for public issues
Corporate Advisory M&A, restructuring, project financing
Portfolio Management Wealth management for HNIs and institutions
Loan Syndication Arranging large loans through a group of lenders
Example:
Kotak Mahindra Capital was the lead manager for Zomato’s IPO in 2021.
Government Policies and Future Prospects
SEBI regulates merchant bankers under SEBI (Merchant Bankers) Regulations, 1992.
Merchant bankers must be registered with SEBI and follow disclosure norms.
Growing importance in start-up funding, ESG investing, and cross-border M&A.
Indian government’s Make in India and Startup India initiatives boost demand for merchant
banking services.
Key Takeaways
Merchant banking bridges companies and capital markets.
SEBI ensures ethical practices and investor protection.
Digitalization and fintech offer new growth avenues.
Practice Questions
1. MCQ: Which of the following is NOT a function of merchant banking?
a) Underwriting
b) Portfolio Management
c) Issuing insurance policies
d) Corporate Advisory
Answer: c)
2. Short Answer: What is the role of merchant bankers in IPOs?
3. Discussion Prompt: How can merchant bankers support India's start-up ecosystem?
Summary Box: Module 3
Element Description
Mutual Funds Investment pooling vehicles regulated by SEBI
Types of Funds Open-ended, close-ended, equity, debt, hybrid
Benefits Diversification, liquidity, retail participation
Merchant Banking Financial services for capital raising and advisory
Key Services Issue management, underwriting, M&A advisory
Regulatory Body SEBI (1992 Regulations)
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