AN ANALYSIS OF THE PERFORMANCE OF MUTUAL FUNDS AND THE LAWS

AND REGULATORY BODIES THAT GOVERN THEM.

Abstract

In this research paper, the idea of mutual funds and their significance in the investing
business are critically examined. A common kind of investing, mutual funds combine the
money of many different participants to buy a variety of assets. The study gives a thorough
review of mutual funds, including its concept, structure, different kinds, and developmental
history. The importance of mutual funds to the financial business is highlighted in the study
report. It covers the main arguments for the significance of mutual funds, such as their
contribution to diversification, expert management, accessibility, liquidity, regulatory
monitoring, and economic effect. The advantages of mutual funds are further discussed in the
paper, including how they may lower risk via diversification, provide investors access to
expert management, meet a variety of investor demands, provide liquidity, and promote
economic development. The obstacles and restrictions that come with mutual funds,
including as fees and charges, possible conflicts of interest, performance fluctuation, and
regulatory concerns, are also critically examined in this essay. It talks about how important
it is to do your research and educate yourself before making a mutual fund investment.

Keywords - Mutual funds, Investment, Portfolio management, Asset allocation, Risk

Mutual funds are financial entities that combine the money of many participants and utilize
that money to invest in a variety of assets, including stocks, bonds, and money market
instruments. They are run by qualified fund managers who choose investments on the clients'
behalf. A mutual fund's fundamental structure entails the distribution of shares to investors,
each of which represents a proportional ownership interest in the underlying portfolio of
assets. A mutual fund's shares may be purchased or sold by investors at the net asset value
(NAV) price, which is determined by dividing the entire market value of the fund's assets by
its liabilities.

Investing in a diverse portfolio of assets via mutual funds is a simple and effective
approach for both individual and institutional investors to do so without having to handle
their own money personally1. They provide a number of advantages, including as
diversification, expert management, liquidity, and accessibility. It's crucial to keep in mind
that mutual funds may also have drawbacks, such as costs and risks related to the underlying
assets and the possibility for changes in the NAV depending on market circumstances. In
order to safeguard the interests of investors, regulatory agencies have the authority to regulate
and monitor mutual funds.

It is possible that the relevance of mutual funds in the field of investing is connected
to the roles that mutual funds play in offering diversity, professional management,
accessibility, liquidity, regulatory monitoring, and the economic effect that they have. They
provide liquidity, make investment feasible for a diverse group of investors, benefit from the
management experience of industry experts, and are subject to monitoring by regulatory
authorities. In addition, they allow investors to diversify the holdings of their portfolios. In
addition to this, they provide investors the chance to profit from the management of trained
specialists. In addition to this, they help raise the liquidity of the capital markets, which is an
important component in the expansion of the economy, as well as the efficiency of the capital
markets, which is also an essential component in the expansion of the economy.

1
Sitesh Sinha. “Mutual Funds.” Economic and Political Weekly, vol. 45, no. 30, 2010, pp. 5–5
HISTORICAL BACKGROUND

Mutual funds have seen significant historical development throughout the last century.
Mutual funds were first conceptualized in the 1920s, but they did not become generally
accepted until the 1930s. The Massachusetts Investors Trust, the first open-end mutual fund,
was established by MFS Investment Management in 1924 2. The Pioneer Fund, the first
closed-end fund, was established in 1928. The United States Congress approved the
Investment Company Act of 1940 in reaction to the 1929 stock market collapse and the
accompanying Great Depression. This important piece of law set rules for mutual funds, such
as those regarding transparency, registration, and fiduciary obligations. The Legislation
sought to safeguard investors and enhance openness in the mutual fund sector. After World
War II, the mutual fund business developed rapidly, with more funds being founded and a
wider range of investment possibilities than just equities and bonds. Money market funds
were first offered to investors as a new short-term investment alternative in the 1970s 3. The
1980s and 1990s retirement savings boom was spurred by the introduction of 401(k) and
individual retirement accounts (IRAs), which propelled the mutual fund sector's expansion.
Mutual funds have become popular among investors as an easy and inexpensive option to
save for retirement. The introduction of the internet and online trading platforms in the late
1990s and early 2000s completely changed the buying and selling of mutual funds. It
increased private investors' access to investing and fueled the development of exchange-
traded funds and index funds (ETFs). Following the Enron and WorldCom scandals in the
early 2000s, regulatory reforms like the Sarbanes-Oxley Act and the Dodd-Frank Wall Street
Reform and Consumer Protection Act were passed, which had an impact on mutual funds by
imposing more stringent governance and reporting requirements. The fiduciary rule issued by
the Department of Labour in 2016 also aimed to improve the requirements for financial
advisors offering retirement advice, with ramifications for the mutual fund sector 4. Historical
occurrences like the dot-com bubble bust in 2000, the global financial crisis of 2008, and
numerous geopolitical events have had an effect on mutual fund performance. Market

2
René Stulz. M. “Hedge Funds: Past, Present, and Future.” The Journal of Economic Perspectives, vol. 21, no.
2, 2007, pp. 175–94.
3
Vikas Agarwal. et al. “Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds.” The
Journal of Financial and Quantitative Analysis, vol. 44, no. 2, 2009, pp. 273–305.
4
J. Sean Griffith. and Dorothy S. Lund. “A Mission Statement for Mutual Funds in Shareholder Litigation.” The
University of Chicago Law Review, vol. 87, no. 5, 2020, pp.
turbulence and economic volatility may impact the value of mutual fund assets as well as the
attitudes and actions of investors.

MUTUAL FUND TYPES AND THEIR FEATURES

Mutual funds are financial instruments that combine the capital of many investors and use it
to buy a variety of assets. Mutual funds come in a variety of forms, each with unique features,
investing goals, and risk tolerance. Typical mutual fund types include.

1. Equity funds: Aiming for long-term capital growth, these funds invest mostly in company
equities. Market size (e.g., large-cap, mid-cap, small-cap), investing philosophy (e.g., value,
growth), and geographic area are other criteria that may be used to further classify equity
funds (e.g., domestic, international, global)5.

2. Bond funds: With the aim of producing income and protecting capital, these funds invest in
fixed-income assets such government bonds, corporate bonds, and municipal bonds. Bond
funds come in a variety of durations (short-, intermediate-, and long-term), credit qualities
(investment-grade, high-yield), and sector concentrations (e.g., corporate, municipal,
government).

3. Money market funds: With the aim of protecting capital and providing liquidity, these
funds invest in short-term, low-risk assets including Treasury bills and commercial paper.
The general consensus is that money market funds are low-risk, low-return investments that
are appropriate for investors looking for security and liquidity6.

4. Hybrid funds, often referred to as balanced funds, invest in a combination of equities and
bonds in an effort to strike a balance between capital growth and income creation. Depending
on the investment strategy and risk profile of the fund, hybrid funds may have various
proportions of equities and bonds7.

The investment aim, risk level, fees, cost ratio, turnover rate, historical performance, and
minimal investment criteria of a mutual fund are only a few examples of its characteristics.

5
David K. Musto. “The Economics of Mutual Funds.” Annual Review of Financial Economics, vol. 3, 2011, pp.
6
R. Christopher Blake. et al. “The Performance of Bond Mutual Funds.” The Journal of Business, vol. 66, no. 3, 1993,
pp. 371–403.
7
L. CHRISTOPHER PLANTIER. “Commodity Markets and Commodity Mutual Funds.” Business Economics,
vol. 48, no. 4, 2013, pp. 231–45.
Investors should be aware of the features of various mutual fund types in order to make
educated investing selections based on their financial objectives and risk tolerance.

PERFORMANCE EVALUATION OF MUTUAL FUNDS

When determining whether or not mutual funds are suitable investment alternatives, one of
the most important things to do is do a performance analysis on the funds. Performance
assessment often makes use of a variety of approaches, including the following:

1. Risk-adjusted returns: This technique evaluates the performance of the fund in relation to
the total amount of risk it has assumed. The Sharpe ratio and the Sortino ratio are two
examples of common risk-adjusted metrics8. The Sharpe ratio calculates the risk-adjusted
return of a fund by comparing the fund's return to its volatility, while the Sortino ratio focuses
on the chance of experiencing a loss.

2. Comparison to a relevant benchmark: This approach compares the performance of the fund
to a relevant benchmark, such as a market index or a peer group of funds with investing goals
that are comparable9. It is helpful in determining if the fund is doing better than its
benchmark or performing worse than its benchmark.

3. Ratings of funds: Several organizations provide ratings and rankings for mutual funds
based on a variety of characteristics, including the funds' past performance, the level of risk
they take, and other considerations. Investors may find these ratings to be helpful as a
reference, but it is important to keep in mind that they have some limits and should only be
used in combination with other techniques of performance assessment.

It is essential to keep in mind that assessing the performance of mutual funds is a complicated
endeavour that is susceptible to a wide range of restrictions, such as survivorship bias, style
drift, and changing market circumstances10. The results of empirical research on the
performance of mutual funds have been inconsistent. Although some studies imply that the

8
Mark Grinblatt. and Sheridan Titman. “A Study of Monthly Mutual Fund Returns and Performance Evaluation
Techniques.” The Journal of Financial and Quantitative Analysis, vol. 29, no. 3, 1994, pp. 419–44.
9
S. Panigrahi Madhu. “Mutual Funds: Growth, Performance and Prospects.” Economic and Political Weekly,
vol. 31, no. 12, 1996, pp. 765–75.
10
R. Christopher Blake. “The Performance of Bond Mutual Funds.” The Journal of Business, vol. 66, no. 3, 1993,
pp. 371–403.
bulk of actively managed funds underperform their benchmarks over the long run, other
studies claim that select fund managers have the ability to generate alpha11.

THE REGULATORY FRAMEWORK FOR MUTUAL FUNDS

The regulatory framework for mutual funds is meant to safeguard investors and to promote
the industry's integrity, transparency, and stability. This is accomplished by ensuring that
investors are protected by the framework. This framework typically includes regulations that
are issued by government agencies, such as the Securities and Exchange Commission (SEC)
in the United States, which establish rules for the registration, operation, and disclosure
requirements of mutual funds12. Other examples of such agencies include the European
Central Bank and the Financial Stability Board. These rules often address topics such as the
investing goals and strategies, portfolio composition, valuation of fund assets, fees and
expenditures, disclosure of risk and performance, and governance of mutual fund
organizations. In addition, the regulatory framework includes requirements that fund
managers, custodians, and other service providers operate in the best interests of the investors
in the fund and execute their duty of fiduciary responsibility 13. It is vital for mutual funds to
be in compliance with the regulatory framework in order for them to operate legally and
ethically, as well as to offer investors with confidence and trust in the mutual fund business.

The overarching goals of the regulatory framework for mutual funds are to protect the
interests of investors, promote openness and accountability within the industry of mutual
funds, and ensure that mutual funds comply with applicable laws. While the specifics may
change from one nation to the next, the underlying objective is to guard investors' money and
keep the credibility of the mutual fund business intact 14. In order for mutual funds to operate
in a compliant way and offer investors with a dependable investment vehicle, it is essential
for mutual fund companies to properly comply with the regulatory framework. Before
making any investments in mutual funds, potential investors should always make sure they
11
S. P. Kothari. and Jerold B. Warner. “Evaluating Mutual Fund Performance.” The Journal of Finance, vol. 56,
no. 5, 2001, pp. 1985–2010.
12
K. Barua Sami., et al. “A Regulatory Framework for Mutual Funds.” Economic and Political Weekly, vol. 26,
no. 21, 1991, pp. M55–59.
13
S. Panigrahi Madhu. “Mutual Funds: Growth, Performance and Prospects.” Economic and Political Weekly,
vol. 31, no. 12, 1996, pp. 765–75.
14
Weiping Wu. “Understanding Institutional Investors.” Institutional Investment in China’s Infrastructure,
Lincoln Institute of Land Policy, 2019, pp. 8–13.
are acquainted with the regulatory framework and, if necessary, seek the guidance of a
specialist. In addition, companies that manage mutual funds and those that run the funds are
accountable for ensuring that they are in compliance with the regulatory framework by
monitoring any changes to the applicable regulations and adhering to the requirements that
have been outlined by the relevant regulatory authorities. The regulatory structure that is in
place for mutual funds is an extremely important factor in ensuring that investors continue to
have faith and reliance on the sector. It contributes to the protection of the interests of
investors, the promotion of transparency, and the guarantee that mutual funds are handled in a
responsible and compliant way.

As a result, it is essential for all parties involved in the mutual fund sector to be
familiar with the regulatory framework that is relevant in their various countries and to act in
accordance with that framework. In the long run, this serves to promote trust among investors
while also contributing to the upkeep of the integrity of the mutual fund sector. Overall, the
regulatory framework for mutual funds is a comprehensive system of rules and regulations
that govern the operation and conduct of mutual funds, with the ultimate goal of protecting
investors and promoting market integrity15. These rules and regulations govern the operation
and conduct of mutual funds. It is essential for mutual funds to maintain compliance with the
regulatory framework in order to fulfill their legal and ethical commitments to investors, as
well as to conduct themselves in a responsible and transparent way. It is vital for investors,
mutual fund firms, and fund managers to be educated about the regulatory standards and to
comply to them in order to guarantee the effective operation of the mutual fund business and
to maintain its integrity. In this way, investors' interests may be protected, and investors' faith
and confidence in mutual funds as a legitimate investment alternative can be preserved. It is
essential to have a thorough understanding of the unique rules that are in effect in the location
where the mutual fund is being marketed or run16.

It is vital to keep in mind that regulatory frameworks might differ from one
jurisdiction to another. In order to guarantee compliance with the regulatory framework for
mutual funds, it is essential to seek the counsel of qualified professionals and to remain
current on any regulatory amendments. In general, the regulatory framework for mutual funds
serves as a basis for the protection of investors and the integrity of the industry. It also

15
T. Ronald Wilcox. “Bargain Hunting or Star Gazing? Investors’ Preferences for Stock Mutual Funds.” The
Journal of Business, vol. 76, no. 4, 2003, pp. 645–63.
16
Prachi Deuskar. “The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?” The Review of
Financial Studies, vol. 24, no. 9, 2011, pp. 3008–24.
provides a structure for mutual fund firms, managers, and other stakeholders to do business in
a responsible and legal way. It contributes to the growth of investor trust and confidence in
the mutual fund business, which in turn serves to promote a robust and thriving market for
investment possibilities. In conclusion, the regulatory framework for mutual funds is an
essential part of the overall regulatory landscape for the financial industry 17. This framework
provides a set of rules and regulations that govern the operation and conduct of mutual funds
in order to safeguard investors and preserve the credibility of the industry as a whole.

LAWS AND REGULATIONS RELATED TO MUTUAL FUNDS.

1. Rules of the Securities and Exchange Board of India (Mutual Funds), 1996 - This is the
basic regulatory framework that governs mutual funds in India. The regulation establishes the
guidelines for the formation, management, and operation of mutual funds in India. The rule
specifies the criteria for mutual fund registration, investment goals and limits, disclosure
standards, and investor protection measures. The rule also addresses the trustees' and asset
management organizations' obligations, the function of the custodian, and asset valuation18.

2. Rules of the Securities and Exchange Board of India (Portfolio Managers), 2020 - This rule
controls how portfolio managers handle the investments of high-net-worth individuals and
institutional investors. The rule establishes portfolio managers' qualifying criteria, duties,
investment limitations, transparency obligations, and investor protection measures. The rule
also addresses reporting duties, compliance standards, and disciplinary procedures in the
event of a violation.

3. Rules of the Securities and Exchange Board of India (Investment Advisers), 2013 - This
regulation establishes the regulations for the registration and operation of investment advisors
who offer investors with investment advice. The rule addresses investment advisor eligibility
criteria, duties, a code of conduct, disclosure standards, and investor protection measures.
The rule also addresses reporting duties, compliance standards, and disciplinary procedures in
the event of a violation.

17
Rohan Chinchwadkar. and Vidhu Shekhar. “Evolution of Private Equity Regulations in Emerging Markets: A
Case of India.” The Journal of Private Equity, vol. 20, no. 1, 2016, pp. 38–44.
18
Gokarn Subir. “Indian Capital Market Reforms, 1992-96: An Assessment.” Economic and Political Weekly,
vol. 31, no. 15, 1996, pp. 956–61.
4. Income Tax Act of 1961 - This Act establishes the tax regulations applicable to mutual
funds. It discusses the taxation of mutual fund capital gains and dividends, the tax
consequences of transferring from one mutual fund scheme to another, and the tax liabilities
of non-residents investing in Indian mutual funds. The Act also applies to tax-advantaged
mutual fund schemes including Equity Linked Savings Schemes (ELSS) and tax-free bonds.

5. Goods and Services Tax (GST) - GST is a consumption tax applied on goods and services.
It refers to the fees imposed by fund managers and distributor in the case of mutual funds.
The GST rate for mutual fund services is 18%. The sale and redemption of mutual fund units
is also subject to GST.

6. FEMA (Foreign Exchange Management Act) of 1999 - This Act governs foreign currency
transactions in India, including non-residents' interests in mutual funds. The Act governs non-
residents' participation in mutual funds, repatriation of investments and profits, and other
relevant concerns. The Act also addresses reporting obligations, compliance standards, and
disciplinary sanctions in the event of a violation.

7. Money Laundering Prevention Act (PMLA) of 2002 - The purpose of this Act is to combat
money laundering and terrorist funding. Mutual funds must follow Know Your Customer
(KYC) guidelines and keep transaction records in accordance with PMLA regulations. They
must also report any questionable transactions to the authorities 19. The Act addresses the need
for reporting, acceptable levels of compliance, and sanctions for infractions.

8. Company Act of 2013 - This Act specifies the procedures for establishing and running
businesses, including mutual fund firms. The Act addresses concerns pertaining to corporate
governance, shareholder rights, the duties of the board of directors, and other relevant topics.
Transparency, accountability, and good governance are goals of the Act for mutual fund
businesses. The Act also addresses the need for reporting, acceptable levels of compliance,
and sanctions for infractions. In accordance with the Act, mutual fund firms must choose
independent directors and form audit and compensation committees.

TRENDS IN MUTUAL FUNDS

19
VIKAS AGARWAL. “Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance.” The
Journal of Finance, vol. 70, no. 6, 2015, pp.
One of the most well-liked investing options in recent years has been mutual funds, which
provide a number of advantages including ease, expert administration, and diversification.
The growth of digital platforms that make investing in mutual funds more accessible and
practical, the increase of retail investors, greater knowledge of mutual funds as an investment
choice, and other reasons have all contributed to their appeal20.

The introduction of new investment topics like ESG funds and sectoral and thematic
funds is one of the current trends in mutual funds. ESG funds concentrate their investments
on businesses that adhere to environmental, social, and governance standards, reflecting the
rising demand for sustainable investing. Sectoral and thematic funds, which concentrate on
certain industries or topics like technology or healthcare, may provide investors exposure to
niche markets.

In recent years, passive investment, commonly referred to as index investing, has

Investors may now customise their investments to match their unique aims and risk
profiles thanks to the personalized investment solutions that mutual fund institutions have
begun to provide21. For instance, some fund companies provide risk-based solutions like
conservative or aggressive portfolios, while others offer goal-based solutions like retirement
planning or child education planning.

The popularity of mutual funds is anticipated to increase in the future due to factors
including growing salaries, shifting demographics, and greater financial literacy. It's also
possible that the business will consolidate, with smaller firms joining up with bigger ones to
increase scale and raise their level of competition. In the next years, it is anticipated that
technology advancements like artificial intelligence and machine learning would significantly
change the mutual fund sector.

20
S. M. Aamir Shah. “Performance Evaluation of Mutual Funds in Pakistan [with Comments].” The Pakistan
Development Review, vol. 44, no. 4, 2005, pp. 863–76.
21
S. Roy Manjesh. “Money Market Mutual Funds: A Macro Perspective.” Economic and Political Weekly, vol.
40, no. 12, 2005, pp. 1254–63.
CONCLUSION

Investors who want to obtain exposure to a diverse range of asset classes but don't want the
hassle of purchasing and managing individual stocks and bonds may benefit greatly from
investing in mutual funds. Mutual funds are an excellent investment alternative. Mutual
funds, in addition to providing investors with the advantages of diversification and competent
management, are also very appealing to investors of all experience levels.

Investors are given access to a wide variety of asset classes via the use of mutual
funds, which is one of the key benefits of these investment vehicles. Mutual funds have the
ability to invest in a diverse set of assets, including equities, fixed income instruments,
property investment, and commodities. This spreading of risk over a number of assets is what
diversity does, and it's one of the reasons why it may help lower the potential losses of an
investor's portfolio. In addition, mutual funds are handled by skilled experts who have the
experience as well as the information necessary to make well-informed judgments about
investments. Managers of mutual funds are responsible for choosing and managing the fund's
investments. They use their experience to examine market trends, evaluate investment
possibilities, and develop a portfolio that is in line with the investment goals of the fund.

In addition, investors of any level may easily access mutual funds because to their
widespread availability. As a result of the fact that investors may begin with a little
contribution and progressively build up their portfolio over time, mutual funds are an
appropriate investment choice for beginning investors or investors who are just beginning to
grow their investment portfolio. Nonetheless, there is a possibility of loss while investing in
mutual funds. The volatility of the market is one of the key dangers that come with investing
in mutual funds. Alterations in the circumstances of the market may have a substantial impact
on the outcomes of mutual funds, which can result in financial losses for investors. In
addition, mutual funds are sometimes exposed to management fees in addition to other
hidden charges, both of which might lower the returns that are produced by the fund.

In conclusion, mutual funds are an investment strategy that might be beneficial for
individuals who wish to broaden their investment choices and acquire exposure to a wide
variety of asset classes. This can be accomplished by investing in mutual funds. Before
making any choices on investments, however, investors should give serious consideration to
the dangers that are involved with mutual funds, along with the volatility of the market and
the fees. Investors are able to make educated judgments that are congruent with their long-
term financial targets and objectives if they first do exhaustive study and analysis.