Mutual funds: basics, structure and scheme types

A Specialized Investment Fund sits inside the same legal shell as a mutual fund: the same sponsor, the same trustee, the same AMC. So before the exam tests you on SIFs, it tests whether you understand the mutual fund machine they are bolted onto. Module 1 carries roughly 45 marks of 150, and a good share of those come from this chapter.

What a mutual fund is, and how NAV works

A mutual fund pools money from many investors and invests it in a portfolio of securities according to a stated objective. Each investor owns units. The value of one unit is the Net Asset Value (NAV), computed daily after the market closes and published on the AMC and AMFI websites by 11 pm.

Assets are marked to market every day, so NAV moves with prices and with accrued income, not with the number of investors. Your transactions are priced at the NAV of the day you are allotted, which depends on the cut-off time (3 pm for most schemes, 1:30 pm for liquid and overnight) and on when the money actually reaches the scheme.

Note that stamp duty is deducted from the amount before units are allotted. There is no entry load; it was abolished in August 2009. An exit load may apply if the investor redeems early, and that load is credited back to the scheme, not kept by the AMC.

The four-tier structure

Mutual funds in India run under the SEBI (Mutual Funds) Regulations, 1996. The structure has four main players:

• Sponsor. The promoter who sets up the fund. Must have a five-year track record in financial services, positive net worth in all five years, profits in at least three of them, and must contribute at least 40% of the AMC's net worth.
• Trustee. Holds the fund's property for the benefit of unitholders. At least two-thirds of trustees must be independent of the sponsor. The trustees are the first line of supervision over the AMC.
• Asset Management Company (AMC). Manages the money. Needs SEBI approval, a minimum net worth of ₹50 crore, and at least 50% independent directors. The AMC earns a fee from the scheme, within the TER cap.
• Custodian. SEBI-registered, holds the securities. Must be independent of the sponsor.

Around them sit the Registrar and Transfer Agent (unitholder records, statements), the fund accountant, auditors, bankers and distributors. AMFI is the industry body: it issues ARNs, maintains the distributor code of conduct, and publishes NAVs.

Open-ended, close-ended and interval

An open-ended scheme sells and repurchases units at NAV on every business day; the fund size changes with flows. A close-ended scheme raises money once during the New Fund Offer (NFO), has a fixed maturity, and must list its units on a stock exchange so investors have an exit. An interval scheme opens for transactions only during specified windows. Exchange Traded Funds (ETFs) are open-ended but trade on the exchange like a share; large investors can create or redeem units in creation-unit size directly with the AMC. Fund of Funds (FoF) invest in other schemes.

SEBI scheme categories

SEBI's 2017 categorisation rules force every scheme into a defined box so that "large cap" means the same thing at every AMC. An AMC may run only one scheme per category, except index funds, ETFs, FoFs and sectoral or thematic funds. Learn the definitions; the exam asks them directly.

Equity

• Large cap: at least 80% in the top 100 companies by full market capitalisation. Mid cap: at least 65% in companies ranked 101 to 250. Small cap: at least 65% in companies ranked 251 onwards. AMFI publishes the ranked list every six months.
• Large and mid cap: at least 35% in each. Multi cap: at least 25% each in large, mid and small cap. Flexi cap: at least 65% in equity, any market cap.
• ELSS: at least 80% in equity, three-year lock-in, deduction under Section 123 of the Income-tax Act, 2025 (the old Section 80C) up to ₹1.5 lakh, old regime only.
• Focused: maximum 30 stocks. Sectoral or thematic: at least 80% in the sector or theme. Value and contra: an AMC may offer one of the two, not both. Dividend yield.

Debt

Categories are defined by portfolio maturity or duration, or by credit quality. Overnight (one-day securities), liquid (up to 91 days), ultra short (3 to 6 months), low duration (6 to 12 months), money market (up to 1 year), short duration (1 to 3 years), medium (3 to 4), medium to long (4 to 7), long duration (over 7 years), dynamic bond (any). By credit: corporate bond (at least 80% in AA+ and above), credit risk (at least 65% in AA and below), banking and PSU (at least 80% in those issuers), gilt (at least 80% in government securities), floater (at least 65% floating rate).

Hybrid, solution-oriented and other

Conservative hybrid holds 10 to 25% equity; balanced hybrid 40 to 60%; aggressive hybrid 65 to 80%. Dynamic asset allocation (balanced advantage) can move freely. Multi asset allocation needs at least three asset classes with at least 10% in each. Arbitrage funds hold at least 65% in equity and hedge it with futures. Solution-oriented schemes (retirement, children's) carry a five-year lock-in or until retirement age or majority. "Other" covers index funds, ETFs and FoFs.

Plans, options and costs

Every scheme offers a Direct Plan (no distributor commission, lower expense ratio) and a Regular Plan (commission built into the TER). Within a plan, the investor picks Growth (gains stay in NAV) or IDCW (Income Distribution cum Capital Withdrawal, paid out and taxed at slab). The Total Expense Ratio is capped by SEBI in slabs of daily net assets: for equity schemes the first ₹500 crore may charge up to 2.25%, falling in later slabs; for other schemes the cap starts at 2.00%. Risk is communicated through the Riskometer with six levels from Low to Very High, with the benchmark's riskometer disclosed beside it.