UNIT IV – FINANCIAL SERVICES – II
LESSON 4.1 – MUTUAL FUNDS
MUTUAL FUNDS
According to AMFI: “A mutual fund is a trust that pools the savings of investors sharing a common financial goal, and invests the collected money in securities such as shares, bonds, etc.”
Key Features
· Mutual fund = trust
· Pools money from unit holders
· Managed by professionals
· Offers diversification and liquidity
· Returns distributed in proportion to units held
ORIGIN & EVOLUTION
· 1774: Adriaan van Ketwich (Netherlands) launched the first investment trust.
· 1822: First closed-end investment company in the Netherlands.
· 1924: Modern mutual fund — Massachusetts Investors’ Trust (USA).
· 1950–1990: Industry grew rapidly in the USA and globally.
· 1971: First index fund (Wells Fargo Bank).
· India: Mutual funds introduced by Unit Trust of India (UTI) in 1964.
TYPES OF MUTUAL FUNDS
A. Based on Structure
1. Open-Ended Funds
o Continuous buying/selling; no fixed maturity.
o Priced at NAV; highly liquid.
2. Closed-Ended Funds
o Fixed maturity (5–7 years); listed on stock exchange.
o NAV disclosed weekly.
o May offer repurchase or buyback options.
B. Based on Investment Objective
1. Equity Funds – High return, high risk
o Aggressive Growth Funds
o Growth Funds
o Dividend Yield Funds
o Index Funds (e.g., NIFTY 50, SENSEX)
o Sector / Specialty Funds
o Mid-Cap & Small-Cap Funds
2. Debt / Income Funds – Fixed returns, low risk
o Gilt Funds (Govt. securities)
o High Yield Debt Funds
o Assured Return Funds
o Fixed Term Plans
3. Hybrid Funds – Mix of equity and debt
o Balanced Funds
o Growth & Income Funds
o Asset Allocation Funds
4. Money Market / Liquid Funds – Short-term, highly liquid (T-Bills, CPs, CDs).
5. Commodity Funds – Investments in commodities (gold, silver, oil, etc.).
6. Real Estate Funds – Invest in real estate and housing finance companies.
7. Exchange Traded Funds (ETFs) – Traded like shares; track an index.
8. Fund of Funds (FoF) – Invests in other mutual funds.
IMPORTANCE / BENEFITS
· Mobilizes small savings
· Diversified and professionally managed
· High liquidity and lower risk
· Tax benefits under Income Tax Act
· Regulated by SEBI
· Promotes economic growth
MUTUAL FUNDS VS INSURANCE
Criteria | Mutual Funds | Insurance |
Objective | Investment & Wealth Creation | Risk Protection |
Returns | Higher | Moderate |
Risk | Moderate to High | Low |
Liquidity | High | Low |
Tax Benefit | Yes (ELSS) | Yes (Life policies) |
MUTUAL FUND INDUSTRY IN INDIA – FOUR PHASES
1. 1964–1987:
o UTI monopoly; launched Unit Scheme 1964 (US-64).
2. 1987–1993:
o Entry of public sector funds (SBI MF, LIC MF, GIC MF).
3. 1993–2003:
o Private and foreign funds allowed; SEBI (Mutual Fund) Regulations, 1996.
o Entry of Kothari Pioneer, Franklin Templeton, HDFC, ICICI, etc.
4. Post 2003:
o UTI split into UTI Mutual Fund and Specified Undertaking of UTI.
o SEBI reforms and consolidation of AMC structure.
CONSTITUTION & MANAGEMENT
A mutual fund is structured as a trust having:
· Sponsor – Promoter of the fund (minimum 5 years in finance).
· Trustees – Hold assets for the benefit of investors.
· Asset Management Company (AMC) – Manages investments.
· Custodian – Holds securities of the fund.
SEBI Regulations
· AMC must have ₹10 crore minimum net worth.
· 50% of AMC and 2/3 of trustee board must be independent.
· 90% of annual profits distributed to investors.
· Auditing & disclosure to SEBI is mandatory.
· Penalties for violation of SEBI norms.
RECENT SEBI GUIDELINES (2024–2025 Updates)
· NFOs open only for 15 days (ELSS: 90 days).
· Dividends can be paid only from realized profits.
· Mandatory voting disclosures for AMCs in company governance.
· Ban on entry loads and extra management fee.
· Transparency in commissions to distributors.
· Conflict of interest restrictions for Fund-of-Fund investments.
· Introduction of Direct Plans and Expense Ratio Caps.
· Increased investor education and digital access (e-KYC, UPI-based MF purchases).
CONCLUSION
Mutual funds channelize savings into productive investments, deepen the capital market, and promote financial inclusion. With digital platforms and SEBI reforms, Indian mutual funds are becoming a key driver of retail investment growth.
LESSON 4.2 – UNIT TRUST OF INDIA (UTI)
· Established: 1964 by UTI Act, 1963
· Initial capital: ₹5 crore (contributed by RBI, SBI, LIC, etc.)
· Objective: Mobilize small savings and promote industrial growth.
· Present Status: UTI Mutual Fund (since 2003), managing ₹3.5 lakh+ crore (as of 2025).
Major UTI Schemes (Examples)
· Equity: Mastershare, Opportunities Fund
· Debt: G-Sec Fund, Bond Fund
· Balanced: UTI Balanced Fund, Mahila Unit Scheme
· Children/Pension: UTI Children’s Career Plan, UTI Retirement Fund
· Gold / Index Funds: UTI Gold ETF, UTI Nifty Index Fund
LESSON 4.3 – MONEY MARKET MUTUAL FUNDS (MMMFs)
· Introduced in India: 1991 (RBI guidelines)
· Objective: Short-term investment avenue for individuals and institutions.
· Investments: Treasury Bills, Certificates of Deposit, Commercial Papers.
· Types:
o Institutional MMMFs
o Retail MMMFs
Key Features
· Safe, short-term, and liquid
· Accessible to small investors
· Regulated by SEBI and RBI jointly
RBI / SEBI UPDATES
· No minimum corpus requirement
· Investment in T-Bills, CPs, CDs up to 1-year maturity
· Lock-in period reduced to 7 days (2024)
· Mandatory credit rating of instruments
· Digital redemption within T+1 day
LESSON 4.3 – VENTURE CAPITAL
1. INTRODUCTION
· Venture Capital (VC) means “risk capital” invested in innovative or high-growth potential businesses that involve uncertainty.
· It is usually invested in the form of equity, not loans, since repayment cannot be guaranteed until success.
· The investor expects a high rate of return to compensate for risk.
Venture Capital = High risk, high return funding for new ideas.
2. FEATURES OF VENTURE CAPITAL
1. Equity Participation: VC invests in ownership capital (shares).
2. High Risk: Invests in innovative or untested ideas.
3. Active Involvement: VC firms offer managerial, technical, and strategic guidance.
4. Long-term Investment: Returns expected after 5–10 years.
5. Exit Options: Through IPO, mergers, or buyback.
6. Innovation Focus: Targets startups in tech, biotech, AI, fintech, etc.
3. STAGES OF VENTURE CAPITAL FINANCING
Stage | Description | Example |
1. Seed Capital | Funding to test idea/prototype | Prototype or market survey funding |
2. Start-up Capital | To develop product and begin operations | Angel round for early-stage startup |
3. Early-Stage Financing | For commercial production and marketing | Series A funding |
4. Expansion Financing | For scaling up production or entering new markets | Series B or C funding |
5. Bridge / Pre-IPO Financing | Short-term funds before going public | Funds raised before IPO |
4. FORMS OF VENTURE CAPITAL ASSISTANCE
1. Equity Participation – Purchase of shares directly.
2. Conditional Loans – No fixed interest; instead, royalty on sales (2–15%).
3. Income Notes – Hybrid form with fixed interest + royalty.
4. Participating Debentures – Convertible after a period depending on profits.
5. Direct Investment in Convertible Preference Shares – Later converted to equity.
5. PARTICIPANTS IN VENTURE CAPITAL INDUSTRY
1. Promoters / Entrepreneurs – Originators of business ideas.
2. Venture Capitalists / Firms – Provide financial and technical support.
3. Financial Institutions / Banks – Provide support and co-invest.
4. Government Bodies – Set up funds (e.g., SIDBI, IFCI).
6. EXIT STRATEGIES
1. IPO (Initial Public Offer): Listing company shares in the stock market.
2. Trade Sale: Selling to another company.
3. Buyback: Founder repurchases VC stake.
4. Secondary Sale: Selling to another investor or PE firm.
5. Liquidation: Closure of venture if unsuccessful.
7. VENTURE CAPITAL IN INDIA – EVOLUTION
Phase | Period | Key Developments |
Phase I: 1980–1990 | Govt. initiated VC funds through IDBI, ICICI, IFCI. |
|
Phase II: 1990–2000 | Private & foreign VC firms entered (GVFL, TDICI). |
|
Phase III: 2000–2010 | Dotcom boom; emergence of IT & biotech startups. |
|
Phase IV: 2010–2020 | Startup India initiative; global VC inflows. |
|
Phase V: 2020–2025 | ESG, AI, DeepTech, ClimateTech & FinTech VCs dominate. |
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8. GOVERNMENT INITIATIVES
1. SIDBI Venture Capital Ltd (SVCL) – Supports MSME innovation.
2. IFCI Venture Capital Funds Ltd – Provides funding to new industries.
3. Technology Development & Information Company of India (TDICI) – First Indian VC firm by ICICI & UTI.
4. Startup India Fund (2021) – ₹10,000 crore fund managed by SIDBI.
5. Fund of Funds for Startups (FFS) – Government co-invests with private VC firms.
9. REGULATORY FRAMEWORK
· Governed under SEBI (Alternative Investment Funds) Regulations, 2012
(latest amendments: 2024).
Categories of AIFs (Alternative Investment Funds)
Category | Description | Examples |
Category I | Invests in startups, SMEs, social ventures | Venture Capital Funds, Angel Funds, Infrastructure Funds |
Category II | Private equity funds, debt funds (no leverage) | Kotak PE, ChrysCapital |
Category III | Hedge funds (short selling, derivatives) | IIFL Opportunities Fund |
Update (2025):
· SEBI allows Angel Funds to invest up to ₹25 crore per startup.
· Green/Impact Funds under AIF Category I promote SDG-aligned investing.
· Mandatory ESG disclosure norms for AIFs from FY 2024–25.
10. ADVANTAGES OF VENTURE CAPITAL
For Entrepreneurs
· No collateral needed.
· Expert mentorship and networking.
· Financial and operational guidance.
For Investors
· High potential returns.
· Equity stake in innovative firms.
· Portfolio diversification.
11. LIMITATIONS / CHALLENGES
· High risk of failure
· Long gestation period
· Difficult valuation in early stage
· Limited exit options during market downturns
· Complex regulatory approval process
12. MAJOR VENTURE CAPITAL FIRMS IN INDIA (2025)
Indian VC Firms | Global / Foreign VC Firms (Active in India) |
Nexus Venture Partners | Sequoia Capital (now Peak XV Partners) |
Kalaari Capital | Accel India |
Blume Ventures | Tiger Global |
Chiratae Ventures | SoftBank Vision Fund |
3one4 Capital | Lightspeed Venture Partners |
India Quotient | Matrix Partners |
Aavishkaar Capital (Impact VC) | Omidyar Network, Elevation Capital |
13. EMERGING TRENDS (2025)
1. Impact & ESG Investing: VCs prefer startups aligned with sustainability goals (SDGs 8, 9, 12, 13).
2. AI, DeepTech, & ClimateTech Funds: New VC focus areas.
3. Corporate Venture Capital (CVC): Large companies (Reliance, Tata, Infosys) running their own VC arms.
4. Cross-border VC Flows: Startups in India attracting Middle East, Singapore, and US funds.
5. Exit Surge via IPOs: Startups like Zomato, Nykaa, Mamaearth, and Zepto inspiring new IPOs.
14. CONCLUSION
Venture Capital is the fuel of the innovation economy — turning ideas into enterprises.
India’s ecosystem, backed by SEBI reforms, digital finance, and Startup India, positions VC as a powerful financial service supporting inclusive and sustainable growth.
QUICK REVISION SUMMARY
Concept | Key Point |
Meaning | Equity investment in high-risk innovative firms |
Main Stages | Seed, Start-up, Expansion, Bridge |
Instruments | Equity, Conditional Loan, Income Note |
Exit Routes | IPO, Buyback, Trade Sale |
Regulator | SEBI under AIF Regulations, 2012 |
Latest Trend | ESG and Impact VC |
Example | Blume Ventures investing in fintech startup slice |
2025 Real-World Example:
· Peak XV Partners (formerly Sequoia India) launched a Climate & AgriTech fund (2024) investing ₹2,000 crore in sustainable startups.
· SIDBI’s “Swavalamban Fund” (2025) targets women-led startups under AIF Category I.
With Regards.,
Dr Anthony Rahul Golden S
M.Com., M.Phil., NET., Ph.D., MBA.,SET., NET., M.A., M.Sc. (Psy)., M.A., PGDBA.,
Asst. Professor of Commerce., Loyola College (Autonomous), Chennai - 34
Mobile No- 91+9176313545
https://yesrahul.blogspot.com/
https://orcid.org/0000-0001-
8071-4801 https://vidwan.inflibnet.ac.
in/profile/339311 https://www.researchgate.net/
https://scholar.google.com/profile/Anthony-Golden-S citations?hl=en&user=faw7X- UAAAAJ
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