Mutual funds

Almost every PMS client also holds mutual funds, and the first question many ask is why they should pay PMS fees instead of buying a fund. You cannot answer that without knowing how a fund is built, priced and charged. The exam also draws comparison questions from this chapter, so learn the fund rules precisely.

How a mutual fund is structured

A mutual fund pools money from many investors and invests it according to a stated objective. The structure under the SEBI (Mutual Funds) Regulations, 1996 has four legs: the sponsor sets up the fund, the trust and its trustees hold the assets for investors and supervise, the asset management company (AMC) manages the money, and the custodian keeps the securities. A registrar and transfer agent keeps investor records. AMFI is the industry body that registers distributors (ARN) and publishes NAVs and size classifications.

Investors own units, not the securities. That single fact drives everything that differs from a PMS: pooled ownership, fund-level taxation, and SEBI's scheme-level diversification limits.

Types of schemes

Open-ended schemes buy back and sell units every business day at NAV; closed-ended schemes have a fixed term and list on an exchange; interval schemes open at set windows. SEBI's categorisation allows one scheme per category per AMC across equity (large, mid, small, flexi, multi cap, ELSS and others), debt (overnight to long duration, credit risk, gilt), hybrid (aggressive, conservative, balanced advantage, arbitrage), solution-oriented and other (index funds, ETFs, fund of funds). Each scheme shows a riskometer with six levels from Low to Very High, and the benchmark's riskometer is also disclosed.

Every scheme offers a direct plan (no distributor commission, lower expense ratio) and a regular plan, each with growth and IDCW (income distribution cum capital withdrawal) options. IDCW payouts are taxed at the investor's slab, with 10% TDS above ₹10,000 a year.

NAV, loads and expenses

NAV is computed daily and published by 11 pm on AMFI and AMC sites. Purchases and redemptions get the NAV of the day the request and the money are received before the cut-off: 3 pm for most schemes, 1:30 pm for liquid and overnight funds. There has been no entry load since August 2009. An exit load may apply on early redemption and is credited back to the scheme, not kept by the AMC. Stamp duty of 0.005% is deducted on purchases. The total expense ratio (TER) is capped by SEBI in slabs by assets: for equity schemes the first ₹500 crore may be charged up to 2.25% a year, falling in later slabs; for other schemes the first slab is 2.00%. Direct plans exclude distribution commission.

Expenses compound against the investor just as returns compound for her. A regular plan at 2.0% versus a direct plan at 1.0% on ₹1 crore growing at 12% before costs leaves roughly ₹2.59 crore against ₹2.84 crore after ten years, a gap of about ₹24.6 lakh. Keep this arithmetic in mind when comparing PMS fee structures later.

Ways to invest and the tax summary

A systematic investment plan (SIP) invests a fixed sum at fixed intervals and averages the purchase cost. A systematic transfer plan (STP) moves money from one scheme to another in instalments, typically from a liquid fund into equity. A systematic withdrawal plan (SWP) redeems a fixed sum periodically, useful for retirees. Switches between schemes are treated as a redemption and a fresh purchase.

Tax follows the fund, not the investor's trades. Equity-oriented funds (65% or more in domestic equity): short-term gains at 20% if held 12 months or less; long-term gains at 12.5% on the amount above ₹1.25 lakh a year. Debt funds bought on or after 1 April 2023: gains taxed at slab rate whatever the holding period. ELSS gives a deduction of up to ₹1.5 lakh under Section 123 of the Income-tax Act, 2025 (the old Section 80C), old regime only, with a three-year lock-in. The investor is not taxed when the fund manager churns inside the scheme; only her own redemption triggers tax.

Specialised investment funds and the PMS comparison

SEBI's 2025 framework for specialised investment funds (SIFs) lets AMCs run strategies between mutual funds and PMS: a minimum of ₹10 lakh per investor at PAN level across an AMC's SIF strategies (accredited investors exempt), long-short strategies with up to 25% of net assets in unhedged short exposure through derivatives, and separate branding from the AMC's mutual fund. Distributors of SIFs need the NISM-Series-V-D certificate.

Against this backdrop a PMS offers direct ownership of securities, a ₹50 lakh minimum, customisation, and taxation in the client's hands on every transaction. A mutual fund offers pooled ownership, no minimum of note, strict diversification limits, TER caps and tax deferral until redemption. The next chapter builds the full comparison; this one gives you the fund side of it.

Know the NAV formula, the cut-off times, the load rules and the TER caps cold. They are easy marks, and they are the facts a PMS client will test you on when weighing the alternatives.