Mutual Funds – Types, NAV, SIP, SWP, STP & Taxation – NISM Series XA Short Notes (Part 7)
Welcome to Part 7 of the PassNISM short notes series for NISM Series XA – Investment Adviser (Level 1). Mutual funds are the single most important topic in this exam — expect 15 to 25 questions. This post covers everything: structure, categories, NAV, SIP/SWP/STP, expense ratios, taxation, and SEBI regulations.
← Back to Part 6: Debt Products
What is a Mutual Fund?
A mutual fund is a professionally managed, SEBI-regulated investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of securities (equity, debt, or a mix). Each investor owns units proportional to their investment, and the return/risk is shared equally.
Governing regulation: SEBI (Mutual Funds) Regulations, 1996
Structure of a Mutual Fund in India
| Entity | Role |
|---|---|
| Sponsor | Promotes and establishes the mutual fund; must have a track record and meet SEBI's financial criteria |
| Trust / Board of Trustees | Legal owner of the fund's assets; protects investors' interests; must include 2/3 independent trustees |
| AMC (Asset Management Company) | Day-to-day management of the fund's investments; must be registered with SEBI; minimum net worth ₹50 crore |
| Custodian | Holds and safeguards the securities in the fund's portfolio; must be SEBI-registered |
| RTA (Registrar & Transfer Agent) | Maintains investor records, processes transactions; major RTAs: CAMS and KFintech (formerly Karvy) |
| Auditors and Compliance Officers | Ensure regulatory compliance and financial accuracy |
Types of Mutual Funds Based on Structure
- Open-Ended Funds – No fixed maturity; units can be bought/sold at NAV on any business day; most common type
- Close-Ended Funds – Fixed maturity (3–5 years); units available only during NFO (New Fund Offer); traded on exchange after listing; cannot redeem before maturity except through exchange
- Interval Funds – Hybrid of open and close-ended; can be transacted only during specified intervals
Based on Asset Class – SEBI's Official Categorisation (2017) Equity Funds
| Category | Investment Mandate |
|---|---|
| Large Cap Fund | Minimum 80% in top 100 companies by market cap |
| Mid Cap Fund | Minimum 65% in 101st–250th companies by market cap |
| Small Cap Fund | Minimum 65% in 251st company onwards by market cap |
| Large & Mid Cap Fund | Minimum 35% each in large cap and mid cap |
| Multi Cap Fund | Minimum 25% each in large, mid, and small cap |
| Flexi Cap Fund | Minimum 65% in equity; no cap-size restriction; fund manager's discretion |
| ELSS (Tax Saver Fund) | Min 80% in equity; 3-year lock-in; eligible for Section 80C deduction up to ₹1.5 lakh |
| Focused Fund | Maximum 30 stocks; concentrated portfolio |
| Dividend Yield Fund | Min 65% in high-dividend-yield stocks |
| Sectoral / Thematic Fund | Min 80% in a specific sector (banking, IT, pharma) or theme; high concentration risk |
| Index Fund | Passively replicates an index (Nifty 50, Sensex); tracking error should be minimised |
| ETF (Exchange Traded Fund) | Like index fund but traded on exchange throughout the day at market price |
Debt Funds
| Category | Macaulay Duration / Mandate |
|---|---|
| Overnight Fund | Invests in overnight securities (1 day maturity) |
| Liquid Fund | Up to 91 days maturity; very low risk; best for emergency/parking funds |
| Ultra Short Duration | Macaulay Duration: 3–6 months |
| Low Duration | Macaulay Duration: 6–12 months |
| Money Market Fund | Invests in money market instruments with maturity 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; highest interest rate sensitivity |
| Dynamic Bond Fund | Duration changes based on fund manager's interest rate view |
| Corporate Bond Fund | Min 80% in AA+ and above rated corporate bonds |
| Credit Risk Fund | Min 65% in AA and below rated bonds; higher yield, higher credit risk |
| Banking & PSU Fund | Min 80% in bank and PSU bonds; relatively safer |
| Gilt Fund | Min 80% in G-Secs; zero credit risk; high interest rate risk |
| Gilt Fund with 10 Yr Constant Duration | Maintained at Macaulay Duration ~10 years |
| Floater Fund | Min 65% in floating rate instruments |
Hybrid Funds
| Category | Equity % | Debt % |
|---|---|---|
| Conservative Hybrid Fund | 10–25% | 75–90% |
| Balanced Hybrid Fund | 40–60% | 40–60% |
| Aggressive Hybrid Fund | 65–80% | 20–35% |
| Dynamic Asset Allocation (BAF) | Flexible; managed dynamically | Flexible |
| Multi Asset Allocation | Min 10% in at least 3 asset classes | — |
| Arbitrage Fund | Min 65% (arbitrage positions) | Remainder in debt |
| Equity Savings Fund | Min 65% (incl. hedged equity); min 10% in debt | At least 10% |
NAV – Net Asset Value
NAV is the per-unit value of a mutual fund scheme, calculated daily after market close.
NAV Formula:
NAV = (Market Value of Investments – Liabilities) / Number of Units Outstanding
💡 Common Misconception: A fund with a lower NAV is NOT cheaper or better. NAV only tells you the current unit price, not fund quality or future performance. Always evaluate funds by their past performance, risk metrics, and fund manager quality.
SIP, SWP, and STP – Explained Simply SIP (Systematic Investment Plan)
A method of investing a fixed amount at regular intervals (daily, weekly, monthly, quarterly) regardless of market levels.
- Rupee Cost Averaging: More units are purchased when NAV is low and fewer when NAV is high, reducing average cost
- Power of Compounding: Returns earned on previously earned returns over time
- Minimum SIP: As low as ₹100/month
- Best for salaried individuals with regular income
Example: ₹5,000/month SIP at 12% CAGR for 20 years grows to approx ₹49.96 lakh (invested ₹12 lakh; wealth created ₹37.96 lakh).
SWP (Systematic Withdrawal Plan)
Withdrawing a fixed amount at regular intervals from an existing mutual fund investment. Ideal for retirees needing a regular income stream without selling the entire corpus.
- Only the gain component (not the full withdrawal amount) is taxed
- Remaining corpus continues to earn market returns
- More tax-efficient than a fixed deposit for regular income
STP (Systematic Transfer Plan)
Auto-transferring a fixed amount from one mutual fund scheme to another within the same AMC, at regular intervals.
- Common use: Park a lump sum in a liquid/debt fund, then STP into equity fund monthly to manage market timing risk
- Each transfer is treated as a redemption (and may attract capital gains tax and exit load)
Mutual Fund Expenses Total Expense Ratio (TER)
Annual fees charged by the AMC as a percentage of AUM. Includes fund management fees, administrative costs, and distributor commissions.
- SEBI caps: Active equity funds – max 2.25%; Debt funds – max 2%; Index funds/ETFs – max 1%
- Larger the AUM, lower the permissible TER (SEBI's declining TER structure)
- NAV is declared after deducting the daily pro-rated TER, so you never pay it explicitly
Exit Load
A charge levied when you redeem within a specified period. Example: Most equity funds charge 1% exit load if redeemed within 1 year. After 1 year, no exit load. Liquid funds have a graded exit load for redemptions within 7 days (SEBI's swing pricing mechanism).
Direct vs Regular Plans
- Direct Plan – No distributor commission; lower TER; higher NAV growth over time
- Regular Plan – Distributor receives trail commission; slightly higher TER; same portfolio as direct
Mutual Fund Taxation (FY 2024–25 onwards)
| Fund Type | Holding Period | Gain Type | Tax Rate |
|---|---|---|---|
| Equity-oriented (65%+ in equity) | < 12 months | STCG | 20% |
| Equity-oriented | ≥ 12 months | LTCG | 12.5% on gains above ₹1.25 lakh/year (no indexation) |
| Debt-oriented (less than 65% equity) | Any period | Added to income | Slab rate (no indexation benefit post Apr 2023) |
| Arbitrage Fund | ≥ 12 months | LTCG | Equity taxation (12.5% above ₹1.25L) |
| Dividend / IDCW | Any | Income | Slab rate (TDS 10% if dividend > ₹5,000/year) |
💡 ELSS (Equity Linked Savings Scheme): 3-year mandatory lock-in; gains after 3 years taxed as LTCG at 12.5% (above ₹1.25 lakh); Section 80C deduction up to ₹1.5 lakh on investment. Best tax-saving equity investment option.
Important SEBI Rules for Mutual Funds
- Each AMC can operate only one scheme per category (except index funds, ETFs, FOFs, and sectoral funds)
- AMFI (Association of Mutual Funds in India) is the self-regulatory body; assigns ARN (AMFI Registration Number) to distributors
- Mutual fund distributors must pass NISM Series V-A exam to get ARN
- Investment advisers (SEBI RIA) must pass NISM Series XA (and XB for individuals)
- KYC is mandatory for all investors; managed through KRA (KYC Registration Agency)
- Mutual funds must disclose portfolio holdings monthly (within 10 days of month end)
- SID (Scheme Information Document), SAI (Statement of Additional Information), and KIM (Key Information Memorandum) are the key offering documents
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