Meaning & features, key terms, scheme types, regulatory framework, products, investment options, systematic transactions, investment process & modes
A mutual fund pools money from investors and invests in a portfolio matching a stated objective; investors get exposure to markets without investing directly. Activities are SEBI-regulated.
The AMC creates a scheme (with trustee & SEBI approval) and invites subscriptions via a New Fund Offer (NFO) using an offer document. Investors apply with the abridged Key Information Memorandum (KIM); full details are in the Scheme Information Document (SID). The R&T agent maintains investor records.
| Term | Meaning |
|---|---|
| Investment Objective | Defines the scheme's asset class, security selection & management style, hence its risk-return profile |
| Units | Represent an investor's proportional holding (= amount invested ÷ price per unit); allotted in decimals too |
| Net Assets | Total assets (portfolio value + cash/receivables) minus fees/expenses; belongs solely to unit-holders |
| NAV | Net Asset Value per unit = Net Assets ÷ Units Outstanding; all transactions occur at the prevailing NAV |
| Cut-off Timing | Time of receipt of request (with cleared funds) determines the applicable NAV — ensures fairness |
| Mark to Market | Daily valuation of the portfolio at current market prices to determine net assets/NAV |
GTX Equity Fund NAV = ₹10. A invests ₹5,000 → 500 units; B invests ₹10,000 → 1,000 units.
| Event | Net Assets (₹) | Units | NAV (₹) | Comment |
|---|---|---|---|---|
| Portfolio value rises | 1,20,000 | 10,000 | 12.00 | Rise in net assets → rise in NAV |
| Investor redeems 1,000 units @ NAV 12 | 1,08,000 | 9,000 | 12.00 | No change — fall in assets offset by fall in units |
| Portfolio value falls | 1,00,000 | 9,000 | 11.11 | Fall in net assets → fall in NAV |
| Investor buys 1,000 units @ NAV 11.11 | 1,11,110 | 10,000 | 11.11 | No change — addition offset by new units |
If 1,000 units were (hypothetically) allotted at face value ₹10 instead of NAV ₹11.11, net assets rise by ₹10,000 to ₹1,10,000 with units at 10,000 → new NAV = ₹11 — diluting existing investors. This is why all transactions must occur at the current NAV.
| Type | Key Feature |
|---|---|
| Open-ended | Continuous purchase/redemption at current NAV; perpetual; unit capital varies |
| Closed-end | Fixed tenor; units offered only during NFO; must be listed for secondary-market exit; unit capital fixed (AUM at MTM changes) |
| Interval Funds | Closed-end variant that opens for transactions periodically (min 2-day window, ≥15-day gap between windows); must be listed |
| ETFs | Mutual fund listed & traded on exchange like a stock; multiple intra-day prices (vs single daily NAV); investors trade with each other, not with the fund |
SEBI prescribes investor service standards — turnaround times, mandatory disclosures, NFO allotment timelines, etc.
SEBI classifies open-ended schemes into Equity, Debt, Hybrid, Solution-Oriented and Other categories — generally one scheme per category per AMC (exceptions: Index/ETFs tracking different indices, FoFs with different underlying schemes, sectoral/thematic funds).
| Category | Allocation Rule |
|---|---|
| Large Cap | ≥80% in top-100 companies (by market cap, AMFI list) |
| Mid Cap | ≥65% in companies ranked 101–250 |
| Large & Mid Cap | ≥35% large cap + ≥35% mid cap |
| Small Cap | ≥65% in companies ranked 251+ |
| Multi Cap | ≥75% in equity with min 25% each in large/mid/small cap |
| Flexi Cap | ≥65% in equity, no market-cap restriction |
| Sector Fund | ≥80% in a specific sector (e.g., banking, technology) |
| Thematic Fund | ≥80% in a theme spanning multiple sectors (e.g., infrastructure, ESG) |
| Value Fund | ≥65% in undervalued stocks; longer horizon, lower risk |
| Contra Fund | ≥65%; contrarian strategy on under-performing/undervalued stocks (AMC: Value OR Contra, not both) |
| Dividend Yield Fund | ≥65% in high dividend-paying stocks |
| Focused Fund | Concentrated portfolio — max 30 stocks |
| ELSS | ≥80% in equity; 80C tax benefit up to ₹1,50,000; 3-year lock-in |
| Category | Definition |
|---|---|
| Overnight Fund | Securities maturing in 1 day |
| Liquid Fund | Debt securities < 91 days to maturity |
| Ultra Short Duration | Macaulay duration 3–6 months |
| Low Duration | Macaulay duration 6–12 months |
| Money Market Fund | Instruments maturing up to 1 year |
| Short Duration | Macaulay duration 1–3 years |
| Medium Duration | Macaulay duration 3–4 years |
| Medium to Long Duration | Macaulay duration 4–7 years |
| Long Duration | Macaulay duration > 7 years |
| Corporate Bond Fund | ≥80% in AA+ and above corporate debt |
| Credit Risk Fund | ≥65% in AA and below rated corporate debt |
| Banking & PSU Fund | ≥80% in debt of banks/PFIs/PSUs/municipal bonds |
| Gilt Fund | ≥80% in G-Secs across maturities (no default risk, high interest-rate sensitivity) |
| Gilt Fund (10-yr constant duration) | ≥80% in G-Secs with portfolio Macaulay duration = 10 years |
| Dynamic Bond Fund | No restriction on maturity/security type; duration actively managed per rate view |
| Floating Rate Fund | ≥65% in floating-rate instruments (low interest-rate risk) |
| Fixed Maturity Plans (FMP) | Closed-end; maturity matches scheme term (3 months–5 years); eliminates interest-rate risk if held to maturity |
| Target Maturity Funds (TMF) | Open-ended with defined maturity date (3–15 years); maturity roll-down like FMPs |
| Type | Allocation |
|---|---|
| Conservative Hybrid | 75–90% debt, 10–25% equity (taxed as debt fund) |
| Balanced Hybrid | 40–60% debt, 40–60% equity |
| Aggressive Hybrid | 65–80% equity, 20–35% debt (AMC: Aggressive OR Balanced Hybrid, not both) |
| Dynamic Asset Allocation / BAF | Dynamically shifts equity-debt mix; maintains >65% gross equity for tax purposes |
| Multi Asset Allocation | ≥3 asset classes, min 10% each |
| Arbitrage Fund | Buys spot, sells futures — captures cash-futures price differential (interest element) |
| Equity Savings Fund | ≥65% equity (incl. arbitrage), ≥10% debt |
| Capital Protection Fund (closed-end) | Debt portion grows to protect principal; remaining invested in equity derivatives for upside |
Invest ₹90 in debt for 3 years to grow to ₹100 (principal protected); remaining ₹10 deployed in equity derivatives for potential extra return.
| Category | Notes |
|---|---|
| Life Cycle Funds | Open-ended; predetermined maturity & glide path; tenure 5–30 yrs (multiples of 5); max 6 funds active at a time; exit load 3%/2%/1% in years 1/2/3 |
| Fund of Funds (FoF) | Invests ≥95% in other MF schemes; multi-manager FoFs span fund houses; equity FoFs taxed at 12.5% + surcharge/cess (post 23-Jul-2024 budget) over 2-yr horizon, growth option |
| ETFs | ≥95% in index securities; real-time pricing; demat settlement like a stock trade |
| Gold/Silver ETFs | Backed by physical gold (99.5% purity)/silver (99.9%); up to 20% may be in bank gold-deposit schemes |
| Real Estate MFs | ≥75% in physical assets/related securities (min 35% physical); closed-end, listed (not yet launched in India) |
| Infrastructure Debt Schemes | Closed-end (≥5 yrs); ≥90% in infra debt; min investment ₹1 crore, unit face value ₹10 lakh |
Specialized Investment Funds (new asset class): min investment ₹10 lakh — positioned between Mutual Funds (low ticket) and PMS (min ₹50 lakh); allows strategies like long-short funds, derivatives beyond hedging, high-yield credit funds.
| Option | Description |
|---|---|
| Income Distribution cum Capital Withdrawal (IDCW, earlier "Dividend") | Periodic pay-outs from net assets; NAV falls by the distributed amount; reinvestment variant available |
| Growth Option | Returns retained & reflected in rising NAV; investor realizes gains only on redemption |
Triggers automatically initiate redemption/transfer upon a pre-set condition — e.g., a target NAV level, specific date, or index level — helping investors act without continuous tracking.
| Transaction | Key Points |
|---|---|
| Redemption | NAV adjusted for exit load; Instant Access Facility (IAF) for liquid funds — same-day credit, capped at lower of ₹50,000 or 90% of investment value, per day per scheme per investor |
| Switch | Redemption from one scheme/option + simultaneous investment in another (inter-scheme or intra-scheme); attracts exit load & tax |
| Dividend Reinvestment | Declared dividend automatically buys new units at post-declaration NAV — compounding effect |
SEBI (May 2020): schemes being wound up must list on stock exchanges to provide investors an interim exit route.
Fixed sum invested at regular intervals — benefits from rupee cost averaging (more units bought when price is low, fewer when high, lowering average acquisition cost over time).
Investor decisions: scheme/plan/option, instalment amount, periodicity, date, tenor, and payment mode (post-dated cheques, NACH, standing instruction). SIP can be discontinued by giving notice; cheque dishonour/insufficient funds can also cause cancellation.
Recurring redemptions at applicable NAV provide a defined pay-out; benefits from NAV volatility (fewer units redeemed when NAV is high). Exit loads & capital gains tax apply on each instalment; SWP stops automatically if folio balance falls below a specified level.
Combines redemption from a source scheme with investment into a target scheme of the same fund — e.g., gradually moving an equity corpus into a debt fund as a goal date nears, avoiding lump-sum NAV-timing risk.
Declared dividend from a source scheme is automatically transferred & invested into a different target scheme (vs reinvestment which stays in the same scheme) — e.g., booking equity gains into a debt scheme.
Month 1: invest ₹10,000 (target value becomes ₹10,100). Month 2: if actual value = ₹9,900 (shortfall ₹200), invest ₹10,200; if actual value = ₹10,400 (excess ₹300), invest only ₹9,700. This invests more when markets are down and less when up — but is computationally complex and not offered as a flexible standard SIP by most AMCs (though some AMC products auto-adjust SIP amounts).
| Aspect | Direct Plan | Regular Plan |
|---|---|---|
| Intermediary | None — invest directly with AMC/RTA | Through distributor/broker |
| Expense Ratio | Lower (no distribution commission) | Higher |
| Net Returns | Higher (lower costs) | Lower |
| Support | "Do-it-yourself" — investor manages everything | Distributor assists with transactions, queries, guideline changes |
Both plans hold an identical underlying portfolio — the only difference is cost (expense ratio) and access to intermediary support. The Investment Adviser's role is to clarify this trade-off, assess whether the investor has the time/knowledge to self-manage a direct plan, and guide on suitability — ultimately helping the investor choose the route (and PMS-style discretionary/non-discretionary/advisory mode where relevant) that maximizes net benefit.
1. NAV of a scheme is calculated as:
2. To be classified as a Large Cap fund under SEBI categorization, a scheme must invest at least what percentage of assets in large-cap companies?
3. The primary advantage that a Systematic Investment Plan (SIP) offers an investor is:
4. A Systematic Transfer Plan (STP) involves:
5. Compared to a Regular Plan, a Direct Plan in a mutual fund scheme offers the investor: