NISM Series II-B · Chapter 10: Mutual Fund Products
L1 · FoundationMutual Fund Products
Product differentiation and the 20/25 rule, open, close and interval funds, direct and regular plans, product labelling and the six-level Risk-o-meter, strategy-based classification, the product creation process and the three scheme documents, and SEBI's categorisation of equity, debt, hybrid, solution-oriented and other schemes, ending with the Specialized Investment Fund.
30 min read · Worth 8% of the paper · Written from pages 115–139 of the official NISM workbook · Updated 18 September 2026
What this chapter covers
Units 9 to 11 carry 25 marks between them — about 8 marks for this chapter.
LEARNING OBJECTIVES: After studying this chapter, you should know about: Product Differentiation concept · Types of Mutual Funds: Open-ended, Close-ended and Interval funds · Types of plans: Direct and Regular Plans · Product Labeling · Product Creation Process · Scheme related documents: SAI, SID and KIM · Mutual Fund categorization as per SEBI · Specialized Investment Fund
Scheme, plan, fund
The term 'scheme' or 'plan' usually indicates the various products a mutual fund offers. The term 'fund' is also used to refer to a mutual fund product. When we say mutual fund, we are not referring to a particular product.
For example, HDFC mutual fund is not a single product, but represents all the schemes and products under that umbrella. HDFC Liquid Fund, on the other hand, refers to a specific product of HDFC mutual fund, which is a debt scheme, investing in debt and money market securities.
The mutual fund is an umbrella entity, and there are several funds/schemes/plans with distinct objectives underneath this entity.
SEBI (MF) Regulations define a mutual fund as a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments, real estate assets and instruments as may be specified by SEBI from time to time.
10.1 Product differentiation
Investors who are willing to take higher risks for higher level of return tend to choose equity products. Investors who seek regular income and a lower level of risk tend to choose debt products.
The investing horizon also tends to influence the choice of products. Long term investors may choose equity, while investors with short to medium term horizons choose debt and debt-oriented products.
Investors also tend to take a view on the market and investment opportunities.
A mutual fund is created when investors pool their money. In practice, the product is first defined. The money is pooled later, based on this definition.
The 20/25 rule
Any scheme of a Mutual Fund must have atleast 20 investors and contribution of a single investor should not exceed 25 percent of the AUM. This is commonly referred to as the 20/25 rule. It is not applicable for Exchange Traded Funds (ETFs).
Further, no scheme shall have AUM of less than Rs. 20 crore. The minimum AUM has to be maintained on a continuous basis.
Twenty investors, 25 per cent cap, Rs. 20 crore minimum AUM.
10.1.1 Open-ended funds
An open-ended fund gets its name from the fact that it does not have a maturity date. An open-ended fund offers units to investors for the first time during the new fund offer (NFO). After the NFO, investors can buy (purchase) and sell (redeem) units... at the mutual fund offices or their investor service centres (ISCs) or through the stock exchange terminals, where applicable, on a continuous basis.
The prices at which purchase and redemption transactions take place in a mutual fund are based on the net asset value (NAV) of the fund. The unit capital of an open-ended fund is not fixed, but varies according to the purchase and redemption transactions of investors.
10.1.2 Close-ended funds
Close-ended funds run for a specific period. On the specified maturity date, all units are redeemed and the scheme comes to a close. Close-ended funds are offered in an NFO but are closed for further purchases from the mutual fund after the NFO period.
The first sample question tests this — investors buy close-ended funds from the mutual fund during the NFO.
SEBI has made it mandatory for units of all closed-end schemes to be listed on stock exchanges to provide liquidity. Investors buy and sell the units among themselves, at the price prevailing in the stock market. A purchase or sale of units of close-ended schemes on the stock exchange among the investors does not result in new units being issued or existing units being redeemed by the mutual fund. Thus there is no change in the unit capital of the fund.
The units may trade on the exchange at a discount or premium to the NAV depending upon investors' perception.
10.1.3 Interval funds
An Interval fund is a hybrid product combining the features of both an open-ended and close-ended fund. They are largely close-ended but become open-ended at pre-specified intervals. Purchase and redemption transactions from/ to the mutual fund are allowed at certain predefined dates known as Specified Transaction Period.
For instance, an interval fund might become open-ended between January 1 to 15, and July 1 to 15, each year.
However, to provide liquidity to the investors between these intervals, the units must be compulsorily listed on stock exchanges to allow investors an exit route.
The sixth sample question tests this — the scheme allowing investment only during specified intervals with compulsory listing is the interval fund.
10.2 Direct and regular plans
The direct plan is for investors who wish to invest directly in the mutual fund without routing their investment through a distributor. The direct plan will have a lower expense ratio since it eliminates the distribution expenses or commissions. The plan will have a separate NAV that will reflect the lower expenses under this plan.
Under the regular plan the investor indicates a distributor through whose services the investment was made and executed. The AMFI Registration Number (ARN) is made available by the investor in the application form and the mutual fund pays the commissions to the distributor so identified. The expenses under the Regular plan are higher because of the distribution commissions involved.
The only difference between the two plans is the fee structure. The direct plan of a mutual fund holds exactly the same assets as the regular plan but includes no expenses for distributor commissions.
Same portfolio, different NAV.
Note on commissions: as per the prevailing regulatory guidelines, distributors are eligible only for Trail commission, the upfront commission or transaction charges have been discontinued.
10.3 Features of mutual fund products
Investment categories: equity funds invest in equity shares; debt funds invest in debt securities; money market funds invest in money market securities; commodity funds invest in commodity-linked securities or in approved commodities such as gold or silver; real estate funds invest in property-linked securities.
Investment Objectives: growth funds seek capital appreciation and therefore invest in equity; income funds invest with the objective of generating regular income and create a portfolio of debt securities; and monthly income plans seek to derive regular income with some growth and have a bit of equity along with debt in its portfolio.
Investment Risk: equity funds have a greater degree of risk as compared to debt funds. Liquid funds are the least risky, as they invest in very short-term securities.
10.4 Product labelling
All mutual fund schemes shall be labelled on the following parameters:
i. Nature of the scheme such as to generate wealth or provide regular income in an indicative time horizon such as short or medium or long term.
ii. A brief description of the investment objective of the scheme and the kind of product in which an investor is investing in, such as equity or debt.
iii. Level of risk to the principal invested in the mutual fund schemes depicted through a pictorial meter known as 'Risk-o-meter'. There will also be a written statement of the risk to the principal below the 'Risk-o-meter'.
The 'Risk-o-meter' categorizes risk in one of the following 6 levels: Low Risk · Low to Moderate Risk · Moderate Risk · Moderately High Risk · High Risk · Very High Risk
Six levels.
The product label should be prominently published in the scheme related documents and common application form for the scheme. Any change in the risk-o-meter of a scheme should be communicated to its respective unit holders. Mutual Funds/AMCs should evaluate the risk-o-meter of their schemes on a monthly basis and disclose the same on their respective websites and AMFI website.
Monthly evaluation and disclosure.
10.5 Strategy-based classification
Some equity funds follow a stock selection strategy... These may include investing in turn-around stocks or special situations companies. Some equity funds may be created to capture a certain theme, such as infrastructure. This may require investing across a set of sectors that benefit from that theme. These can also be called multi-sector funds or thematic funds.
Some equity funds are created with the intention of generating dividend income for the investors by investing in stocks of dividend yield companies.
Some funds are managed passively, selecting the same stocks as in a given index, in the same proportion. They do not actively choose stocks and sectors. These are index funds. They can also be issued as Exchange traded funds (ETFs) that list on the stock exchange.
On the debt side: since mutual fund products have to be 'marked to market', the NAV of the debt funds also changes. For debt funds that invest in long term securities, the interest income and NAV fluctuations are higher, while for the short term funds, both are lower.
Some debt funds have a proportion of their portfolio invested in long term securities, to get advantage of any appreciation in value. They balance the short term and long term securities depending on their view of the market. Such funds are known as flexible or dynamic debt funds.
10.6 Product creation process
The Asset Management Company (AMC) describes the portfolio. This description is then given a product name. An offer document is created with the product details. The draft offer document is approved by the trustees and filed with SEBI for their comments/ observations. Post the incorporation of all the comments and suggestions by SEBI (if any), AMC shall issue the final offer document. The product is open for subscription to investors as a New Fund Offer (NFO). Investors are allotted units against their investment at the face value of the units. After the money is collected, fund managers begin to construct the portfolio.
AMC → trustees → SEBI → final offer document → NFO → portfolio.
Portfolio features are defined in terms of: Which is the asset class the portfolio will invest in? Equities? Debt? Both? · What are the limits on investing in the chosen asset classes? · Will it invest in the entire range or choose some niche – like small cap equity or short term debt? · What will the portfolio be managed for – growth, income, both? · Will the portfolio use specific strategies? · What is the benchmark to compare the performance of the portfolio with?
Operational features: What are the types of investors eligible to buy the units? · How can the investor buy the units? · What is the price of the units? · What are the rules of entering and exiting the portfolio? · What are the income streams the investor can expect? · What will be the tax implication of these income streams?
10.6.1 Scheme related documents
Mutual Fund scheme related documents consist of:
a. Statement of Additional Information (SAI) which has statutory information about the mutual fund or AMC offering the scheme.
b. Scheme Information Document (SID) which has details of the particular scheme.
c. Key Information Memorandum (KIM) which contains all the key information that an investor must know before investing in the scheme.
The Scheme related Documents are available free of cost at any of the Investor Service Centres (ISCs) or AMC offices. The documents have to be in the format prescribed by SEBI.
10.6.2 Statement of Additional Information
The SAI contains information common to all schemes offered by a mutual fund. It is filed with SEBI as a one-time filing.
The second sample question tests this — information common to all schemes is in the SAI.
The information includes: Details of the Sponsor, trustee, AMC and other constituents · Details of key personnel of the AMC and associates such as Registrars, Custodians, Bankers, Auditors and Legal Counsel · Condensed financial information of all the schemes launched in last 3 financial years · Rights of unit holders, investor grievance redressal · Investment valuation norms · Other common information.
The SAI has to be updated every financial year. Any material changes have to be incorporated immediately and uploaded on the mutual fund and AMFI websites.
10.6.3 Scheme Information Document
Information about the mutual fund scheme is provided in the Scheme Information Document (SID). This includes: Name and type of scheme · Issue dates - open, close and re-issue · Names of sponsor, trustee, AMC and other constituents · All Fundamental Attributes like Investment Objective and Policies, Asset Allocation Pattern and Liquidity Provisions · Fees and expenses of the scheme · Performance, in case of an existing scheme and benchmarks · All Risk Factors in the scheme as well as risk mitigation mechanisms · Mandatory disclosures and disclaimers · Closed-end debt funds have to provide the additional information on portfolio such as the policy for evaluating the credit risk... · Fund Management Team details · General Unitholder information · Other details like list of AMC branches, Investor Service Centres, Official Points of Acceptance.
Updating: for the open ended and interval schemes, the SID has to be updated within next six months from the end of the 1st half or 2nd half of the financial year in which schemes were launched... Subsequently, SID shall be updated within one month from the end of the half-year, based on the relevant data and information as at the end of September and March respectively.
On a change of fundamental attributes: (a) an addendum to be displayed on the AMC website along with the existing SID; and (b) the existing SID has to be updated immediately after the lapse of the time period given to existing investors to exit the scheme. For other changes, an addendum which is attached to the existing SID and displayed on the AMC website.
Every Addendum has to be approved by trustees, and displayed prominently at the AMC office and Investor Service Centres (ISCs).
10.6.4 Key Information Memorandum
Key information memorandum (KIM) is a synopsis of important information contained in the SID and SAI. It also contains information that is useful for filling up the application form.
The application form is accompanied by the KIM. According to regulation, both application form and KIM have to be printed together and made available to the investor. The format for KIM is prescribed by SEBI.
KIM has to updated at least once in half-year, within one month from the end of the respective half-year, based on the relevant data and information as at the end of September and March and shall be filed with SEBI through electronic mode only.
| Document | Content | Update |
|---|---|---|
| SAI | Common to all schemes; one-time filing | Every financial year; material changes immediately |
| SID | Details of the particular scheme | Within one month from the end of the half-year |
| KIM | A synopsis of important information contained in the SID and SAI | At least once in half-year, within one month |
10.7 Types of mutual funds
10.7.1 Equity funds
Equity funds invest in equity shares issued by companies. The risk of such funds is higher than that of debt funds. However, the risk levels can differ depending upon the investment strategies adopted by the fund manager.
Diversified Equity Funds — invest in multiple sectors and companies... lower risk, compared to equity funds that invest in a specific sector.
Large Cap Funds — large sized companies... usually well established, and the shares are easy to buy and sell... lower risk, due to their long performance track record.
Mid Cap Funds — medium sized companies... the second rung companies... bought for their potential to grow... Risk of failures, especially during the turn in business cycles, can also be high.
Small Cap Funds — small companies, many of them typically new and upcoming... can be difficult to buy and sell in large quantity. The risk of selection is high.
Thematic & Sector Funds — companies in a particular theme such as infrastructure or more narrowly in a particular sector, such as banking.
The fifth sample question asks why sector funds are risky — because they hold a concentrated portfolio, the opposite of a diversified fund's spread across multiple sectors and companies.
SEBI's equity categories
| Category | Requirement |
|---|---|
| Multi Cap Fund | Investing across large cap, mid cap, small cap stocks; minimum 75 percent in equity, i.e. minimum 25 percent of total assets each in large cap, mid cap and small cap companies |
| Large Cap Fund | Minimum... 80 percent in large cap companies |
| Large and Mid Cap Fund | Minimum... 35 percent in large cap and 35 percent in mid cap |
| Mid Cap Fund | Minimum... 65 percent in mid cap |
| Small cap Fund | Minimum... 65 percent in small cap |
| Flexi Cap Fund | Dynamic... across different market capitalizations; minimum 65 percent in equity |
| Dividend Yield Fund | Predominantly investing in dividend yielding stocks; minimum 65 percent |
| Value Fund | Following a value investment strategy; minimum 65 percent |
| Contra Fund | Following contrarian investment strategy; minimum 65 percent |
| Focused Fund | Maximum 30 stocks; minimum 65 percent |
| Sectoral/ Thematic | Minimum 80 percent of total assets in that sector or theme |
| ELSS | Statutory lock in of 3 years and tax benefit; minimum 80 percent |
The seventh sample question tests the Large and Mid Cap figures — 35% in large cap and 35% in mid cap. The eighth tests an infrastructure fund — sectoral/thematic.
Mutual Funds will be permitted to offer either Value fund or Contra fund.
Market cap definitions: Large Cap companies are 1st-100th companies in term of full market capitalisation. Mid cap companies are 101th-250th companies... Small cap companies are 251st company onwards. The list is uploaded on the AMFI website and... updated every six months, available within 5 calendar days from the end of 6 months period.
ELSS tax benefit: deductions under section 80C of the Income Tax Act... The maximum limit for claiming deduction u/s 80C is Rs. 1.5 lakh per financial year. These investments are subject to a three-year lock-in period.
10.7.2 Debt funds
Debt funds invest predominantly in debt securities... If interest rates go up, the value of a debt security goes down and vice versa. This response to changes in interest rates is called interest rate risk. Higher the maturity profile, higher the interest rate risk.
Credit risk against default risk: credit risk refers to the change in price of a security due to change in its rating... Credit risk refers to the perception of safety. Default risk is the risk that a borrower may not honour the commitments for payment of interest and/or principal. Credit rating is an early indicator of potential default risk.
Liquid funds invest in debt and money market securities with maturity upto 91 days and Money Market funds invest in money market instruments with maturity upto 1 year.
The third sample question tests this — liquid funds invest upto 91 days.
Gilt Funds: funds that invest minimum 80 percent of its total assets in government securities... These funds do not have the risk of default since the issuer of the instruments is the government, though they have a high degree of interest rate risk.
Credit Risk Funds: seek higher interest income by investing minimum 65 percent of its total assets in below highest rated corporate debt instruments i.e. only in AA and below rated corporate bonds.
Table 10.1 — comparison of debt funds
| Debt Fund | Return | Risk | Liquidity |
|---|---|---|---|
| Liquid fund | Low | Low | High |
| Gilt fund | Medium | Low | High |
| Long Term Debt fund | Medium | Medium | High |
| Credit Risk fund | High | High | High |
The risk in a gilt fund comes from interest rate changes; there is no credit risk.
SEBI's debt categories
| Category | Requirement |
|---|---|
| Overnight Fund | Overnight securities having maturity of 1 day |
| Liquid Fund | Maturity of upto 91 days only |
| Ultra Short Duration Fund | Macaulay duration between 3 months and 6 months |
| Low Duration Fund | Between 6 months and 12 months |
| Money Market Fund | Maturity upto 1 year |
| Short Duration Fund | Between 1 year and 3 years |
| Medium Duration Fund | Between 3 years and 4 years; adverse situation 1 year to 4 years |
| Medium to Long Duration Fund | Between 4 years and 7 years; adverse situation 1 year to 7 years |
| Long Duration Fund | Greater than 7 years |
| Dynamic Bond | Investing across duration |
| Corporate Bond Fund | 80 percent... only in AA+ and above rated corporate bonds |
| Credit Risk Fund | 65 percent... only in AA (excludes AA+...) and below |
| Banking and PSU Fund | 80 percent in debt of banks, PSUs, PFIs and municipal bonds |
| Gilt Fund | 80 percent in G-secs across maturity |
| Gilt Fund with 10 year constant duration | 80 percent with Macaulay duration equal to 10 years |
| Floater Fund | 65 percent in floating rate instruments |
And a liquidity floor: all open ended debt schemes (except Overnight Fund, Liquid Fund, Gilt Fund and Gilt Fund with 10 year constant duration) shall hold at least 10 percent of their net assets in liquid assets, that include Cash, Government Securities, T-bills and Repo on Government Securities.
10.7.3 Hybrid funds
There are three broad types of hybrid funds: Predominantly debt-oriented hybrids · Predominantly equity-oriented hybrids · Dynamic asset allocation hybrids
Debt-oriented hybrids invest mostly in the debt market, but invest 5 percent to 25 percent in equity. Equity-oriented hybrids invest in the equity market, but invest up to 35 percent in debt; those investing between 40 percent and 60 percent in equity are balanced funds. Dynamic Asset Allocation Funds have the flexibility to invest in a 0-100 percent range in equity or debt markets.
SEBI's hybrid categories
| Category | Requirement |
|---|---|
| Conservative Hybrid Fund | Debt between 75 percent and 90 percent; equity between 10 percent and 25 percent |
| Balanced Hybrid Fund | Equity between 40 percent and 60 percent; debt between 40 percent and 60 percent; no arbitrage is permitted |
| Aggressive Hybrid Fund | Equity between 65 percent and 80 percent; debt between 20 percent and 35 percent |
| Dynamic Asset Allocation or Balanced Advantage | Investment in equity/debt that is managed dynamically |
| Multi Asset Allocation | At least three asset classes with a minimum allocation of at least 10 percent each; foreign securities are not treated as a separate asset class |
| Arbitrage Fund | Minimum 65 percent in equity and equity related instruments |
| Equity Savings | Minimum 65 percent equity and minimum 10 percent debt |
Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or Balanced Fund.
10.7.4 Solution oriented schemes
The solution oriented mutual fund schemes help in attaining goals such as retirement, children's higher education.
Retirement Fund: lock-in of 5 years or till retirement age (whichever is earlier).
Children's Fund: lock-in for at least 5 years or till the child attains age of majority (whichever is earlier).
On pension schemes: the initial investments enjoy tax benefits under section 80C... On obtaining the age of 60, the investor will be able to withdraw a part of the corpus as a lump sum amount and use the balance to purchase an annuity (pension).
10.7.5 Other types
Fixed Maturity Plans (FMPs) — closed-end funds that invest in debt instruments whose maturities are closely aligned to the maturity of the scheme... An FMP structure eliminates the interest rate risk for investors if the fund is held by them until maturity. These funds may have tenors ranging from 90 days to as much as 5 years.
Real Estate Mutual Funds (REMFs) — only issued as close ended funds, and currently, there are no Real Estate Mutual Funds in India.
Exchange Traded Funds (ETFs) — linked to an underlying index or commodity such as gold, but listed and traded on a stock exchange. A Gold ETF buys physical gold which is preserved safely by the custodian... each unit approximately represents the value of 1 gm of gold. Silver ETFs invest minimum 95 percent of the net assets of the scheme in silver and silver related instruments.
Capital Protection Funds — closed-end funds that combine debt and equity investments... The debt component is invested in such a manner so that it grows over the fund's tenor to the principal invested and thereby provides protection of capital.
ESG Funds — mandated to invest at least 65% of the AUM in companies which have comprehensive Business Responsibility and Sustainability Reporting (BRSR).
Infrastructure Debt Funds (IDFs) — investment in debt securities or securitised debt instruments of infrastructure companies... The aim is to provide liquidity and refinance to Infrastructure Companies and Banks that have lent to such companies.
SEBI's "other" categories: Index Funds/ Exchange Traded Funds: An open ended scheme replicating/ tracking a specific index. This minimum investment in securities of a particular index... shall be 95 percent of total assets. And Fund of Funds (Overseas/ Domestic): The minimum investment in the underlying fund shall be 95 percent of total assets.
The fourth sample question tests the first of these — 95 percent.
Box 10.1 on passive funds: Passive Funds provide various advantages such as transparency, lower costs, diversification etc... Mutual Funds can launch Equity Linked Savings Scheme (ELSS) as: (a) Active ELSS under 'Equity Schemes' category or (b) Passive ELSS under 'Other Schemes' category. The passive ELSS scheme shall be based on one of the indices comprising of equity shares from top 250 companies in terms of market capitalization.
10.8 Specialized Investment Fund
To bridge the gap between Mutual Funds and Portfolio Management Services in terms of flexibility, SEBI has introduced a new investment product called the Specialized Investment Fund (SIF), which can be offered by mutual funds that have been operating for at least three years with an average AUM of Rs. 10,000 crore over the past three years, or by their sponsors/AMCs with SEBI's approval.
The AMC shall ensure that the SIF has distinct identification, separate from that of the Mutual Fund... The AMC shall maintain a separate website or dedicated webpage exclusively for the SIF.
Strategies: Equity Oriented Strategies · Debt Oriented Strategies · Hybrid Strategies, with long and short Strategies... allowed under each broad category. Thus, the product has a higher risk than a traditional Mutual Fund.
Safeguards
| Measure | Requirement |
|---|---|
| Minimum Investment Threshold | Rs. 10 Lakhs — so that small investors with low risk appetite do not invest in a higher risk product |
| Certification of Sales and Distribution Team | NISM VA (Mutual Fund Distributor) and NISM XIII (Common Derivatives) |
| Listing | Compulsory Listing of Close and Interval Schemes |
| Debt exposure to a single issuer | 20% for AAA, 16% for AA and 12% for A and below |
| Derivatives exposure | 25% of Net Assets; exchange traded derivatives only |
| Portfolio Disclosure | Every Alternate Month |
| Disclaimer | Every advertisement carries the warning on relatively higher risk including potential loss of capital, liquidity risk and market volatility |
| Role of RTA | Similar to its role in Mutual Funds |
The chapter's sample questions confirm that close-ended funds are bought from the fund during the NFO; that information common to all schemes is in the SAI; that liquid funds invest upto 91 days; that an index fund must invest 95 percent in the index securities; that sector funds are risky because they hold a concentrated portfolio; that the scheme allowing investment only in specified intervals with compulsory listing is the interval fund; that a Large and Mid Cap fund needs 35% in large cap and 35% in mid cap; and that an infrastructure fund is a sectoral/thematic fund.
Think of it like this
Open, close and interval: three doors
The three structures differ in one thing only — when you may transact with the fund itself.
Open-ended: always. An open-ended fund gets its name from the fact that it does not have a maturity date... After the NFO, investors can buy (purchase) and sell (redeem) units of an open-ended fund... on a continuous basis, at prices based on the net asset value (NAV) of the fund. So the unit capital of an open-ended fund is not fixed, but varies according to the purchase and redemption transactions of investors.
Close-ended: only at the NFO, and again at maturity. Close-ended funds run for a specific period. On the specified maturity date, all units are redeemed and the scheme comes to a close. Close-ended funds are offered in an NFO but are closed for further purchases from the mutual fund after the NFO period.
In between, the exchange substitutes. SEBI has made it mandatory for units of all closed-end schemes to be listed on stock exchanges to provide liquidity. Investors buy and sell the units among themselves, at the price prevailing in the stock market, and such trades do not result in new units being issued or existing units being redeemed by the mutual fund. Thus there is no change in the unit capital of the fund.
With a consequence for price: the units may trade on the exchange at a discount or premium to the NAV depending upon investors' perception.
Interval: at pre-set windows. They are largely close-ended but become open-ended at pre-specified intervals. Purchase and redemption transactions from/ to the mutual fund are allowed at certain predefined dates known as Specified Transaction Period.
The workbook's example: an interval fund might become open-ended between January 1 to 15, and July 1 to 15, each year.
And it still lists: to provide liquidity to the investors between these intervals, the units must be compulsorily listed on stock exchanges to allow investors an exit route.
Which is exactly the sixth sample question — specified intervals plus compulsory listing.
SAI, SID, KIM: one fund, one scheme, one summary
Three documents, three scopes, three update cycles — and the second sample question turns on the first distinction.
The SAI is about the fund house. Statement of Additional Information (SAI) which has statutory information about the mutual fund or AMC offering the scheme, and the SAI contains information common to all schemes offered by a mutual fund. It is filed with SEBI as a one-time filing.
Its contents are all house-level: details of the Sponsor, trustee, AMC and other constituents · key personnel and associates such as Registrars, Custodians, Bankers, Auditors and Legal Counsel · condensed financial information of all the schemes launched in last 3 financial years · rights of unit holders, investor grievance redressal · and investment valuation norms.
**Updated every financial year, with material changes incorporated immediately.
The SID is about one scheme. Scheme Information Document (SID) which has details of the particular scheme — name and type of scheme · issue dates · all Fundamental Attributes like Investment Objective and Policies, Asset Allocation Pattern and Liquidity Provisions · fees and expenses · performance... and benchmarks · all Risk Factors... as well as risk mitigation mechanisms.
**Updated within one month from the end of the half-year, on data as at September and March.
The KIM is the summary you actually receive. Key information memorandum (KIM) is a synopsis of important information contained in the SID and SAI. It also contains information that is useful for filling up the application form.
And it never travels alone: the application form is accompanied by the KIM. According to regulation, both application form and KIM have to be printed together and made available to the investor.
All three are free: available free of cost at any of the Investor Service Centres (ISCs) or AMC offices, in the format prescribed by SEBI.
The percentages that define an equity category
SEBI's categorisation turns almost entirely on minimum allocations, and the numbers repay memorising as a pattern.
Eighty per cent — the concentrated ones. Large Cap Fund... shall be 80 percent of total assets · Sectoral/ Thematic... 80 percent of total assets · ELSS... 80 percent of total assets.
Sixty-five per cent — the general equity floor. Mid Cap Fund... 65 percent · Small cap Fund... 65 percent · Flexi Cap Fund... 65 percent · Dividend Yield Fund... 65 percent · Value Fund... 65 percent · Contra Fund... 65 percent · Focused Fund... 65 percent.
Two categories break the pattern, and both are examinable.
Multi Cap Fund: minimum 75 percent of total assets i.e. minimum 25 percent of total assets each in large cap, mid cap and small cap companies. Three equal thirds of a 75 per cent minimum.
Large and Mid Cap Fund: minimum investment in equity and equity related instruments of large cap companies shall be 35 percent of total assets. The minimum investment in equity and equity related instruments of mid cap stocks shall be 35 percent of total assets.
Thirty-five and thirty-five — the seventh sample question, whose distractors offer 65+65 (impossible, exceeding 100 with nothing left) and 80 combined.
Two caps are on the count, not the percentage. Focused Fund: An open ended equity scheme investing in maximum 30 stocks, and the fund needs to mention where it intends to focus, viz, multi cap, large cap, mid cap, small cap.
And who is large, mid or small is fixed centrally. Large Cap companies are 1st-100th companies in term of full market capitalisation. Mid cap companies are 101th-250th... Small cap companies are 251st company onwards — a list uploaded on the AMFI website and... updated every six months, published within 5 calendar days from the end of 6 months period.
One pairing is forbidden: Mutual Funds will be permitted to offer either Value fund or Contra fund.
Macaulay duration ladders the debt categories
The debt categories are almost all defined by one measure, arranged in a ladder.
Two are defined by plain maturity. Overnight Fund... investment is in overnight securities having maturity of 1 day, and Liquid Fund... investment is into debt and money market securities with maturity of upto 91 days only — the figure the third sample question tests. So is the Money Market Fund, at maturity upto 1 year.
Then the duration ladder. Ultra Short Duration Fund... between 3 months and 6 months → Low Duration Fund... between 6 months and 12 months → Short Duration Fund... between 1 year and 3 years → Medium Duration Fund... between 3 years and 4 years → Medium to Long Duration Fund... between 4 years and 7 years → Long Duration Fund... greater than 7 years.
Two of them carry an escape clause for bad markets. For the Medium Duration Fund, portfolio Macaulay duration under anticipated adverse situation is 1 year to 4 years; for Medium to Long, 1 year to 7 years.
Then the credit-defined ones. Corporate Bond Fund... 80 percent of total assets (only in AA+ and above rated corporate bonds) against Credit Risk Fund... 65 percent of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds).
Note the exclusion in brackets — AA+ belongs to the safer category, not the riskier one.
Then the issuer-defined ones. Banking and PSU Fund... 80 percent in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds; Gilt Fund... 80 percent of total assets (across maturity); and Gilt Fund with 10 year constant duration... such that the Macaulay duration of the portfolio is equal to 10 years.
Why duration matters at all: if interest rates go up, the value of a debt security goes down and vice versa... Higher the maturity profile, higher the interest rate risk.
And a liquidity floor applies to most of them — at least 10 percent of their net assets in liquid assets, except Overnight Fund, Liquid Fund, Gilt Fund and Gilt Fund with 10 year constant duration.
The Specialized Investment Fund sits between two worlds
SEBI's newest product was created to fill a gap, and every one of its features follows from the risk that gap involves.
To bridge the gap between Mutual Funds and Portfolio Management Services in terms of flexibility, SEBI has introduced a new investment product called the Specialized Investment Fund (SIF).
Who may offer one. Mutual funds that have been operating for at least three years with an average AUM of Rs. 10,000 crore over the past three years, or by their sponsors/AMCs with SEBI's approval.
Three years and Rs. 10,000 crore — only established houses.
Why it is riskier. The strategies are Equity Oriented Strategies · Debt Oriented Strategies · Hybrid Strategies, and long and short Strategies are allowed under each broad category. Thus, the product has a higher risk than a traditional Mutual Fund.
Short positions are the key difference from an ordinary scheme.
So the safeguards work on two fronts — keeping the wrong investor out, and capping the risk taken.
Keeping investors out: a Minimum Investment Threshold of Rs. 10 Lakhs, expressly so that small investors with low risk appetite do not invest in a higher risk product; a sales team holding NISM VA (Mutual Fund Distributor) and NISM XIII (Common Derivatives); and a warning on every advertisement about relatively higher risk including potential loss of capital, liquidity risk and market volatility.
Capping the risk: single-issuer debt limits of 20% for AAA, 16% for AA and 12% for A and below — against concentration risk from a single issuer in case of a credit event — and 25% of Net Assets in derivatives, exchange traded derivatives only.
Plus transparency and liquidity: portfolio disclosure... every alternate month, and compulsory listing of Close and Interval Schemes.
And separation from the parent: distinct identification, separate from that of the Mutual Fund, with a separate website or dedicated webpage exclusively for the SIF.
One thing does not change: the role of RTA shall be similar to its role in Mutual Funds.
Key terms in this chapter
- 20/25 rule
- Every scheme must have at least 20 investors, and no single investor may contribute more than 25 per cent of the AUM. It does not apply to exchange traded funds. Separately, no scheme may have AUM below Rs. 20 crore, which must be maintained on a continuous basis.
- Addendum
- Where fundamental attributes change, an addendum is displayed on the AMC website with the existing SID and the SID is updated immediately after the exit window given to existing investors lapses; for other changes an addendum is attached to the SID and displayed on the website. Every addendum must be approved by trustees and displayed prominently at the AMC office and investor service centres.
- Close-ended fund
- A fund running for a specific period, offered in an NFO and closed for further purchases from the fund thereafter, all units being redeemed at maturity. Listing is mandatory, investors trade among themselves at market prices which may be at a discount or premium to NAV, and such trades leave unit capital unchanged.
- Credit risk and default risk
- Credit risk refers to the change in a security's price due to a change in its rating — the perception of safety. Default risk is the risk that a borrower will not honour payment of interest or principal. Credit rating is an early indicator of potential default risk.
- Debt fund categories by credit and issuer
- Corporate Bond funds hold 80 per cent only in AA+ and above rated corporate bonds; Credit Risk funds 65 per cent only in AA — excluding AA+ — and below; Banking and PSU funds 80 per cent in debt of banks, PSUs, public financial institutions and municipal bonds; Gilt funds 80 per cent in government securities across maturity, or with Macaulay duration equal to 10 years for the constant duration variant; and Floater funds 65 per cent in floating rate instruments.
- Debt fund categories by duration
- Overnight funds hold securities maturing in one day, liquid funds up to 91 days and money market funds up to one year. By Macaulay duration: ultra short 3 to 6 months, low duration 6 to 12 months, short 1 to 3 years, medium 3 to 4 years, medium to long 4 to 7 years, and long above 7 years, with dynamic bond funds investing across duration.
- Direct and regular plans
- The direct plan allows investment without a distributor and carries a lower expense ratio and separate NAV; the regular plan identifies a distributor by AMFI Registration Number and carries higher expenses because of commission. The only difference is the fee structure — the portfolios are identical. Distributors are now eligible only for trail commission.
- ELSS
- An open ended equity linked savings scheme with a statutory three-year lock-in and at least 80 per cent in equity, offering deductions under section 80C of the Income Tax Act up to Rs. 1.5 lakh per financial year. It may also be launched as a passive ELSS under other schemes, based on an index of the top 250 companies by market capitalisation.
- Equity fund categories
- Multi Cap needs 75 per cent equity with 25 per cent each in large, mid and small caps; Large Cap 80 per cent; Large and Mid Cap 35 per cent each in large and mid; Mid Cap and Small Cap 65 per cent; Flexi Cap 65 per cent across capitalisations; Dividend Yield, Value, Contra and Focused 65 per cent, Focused being capped at 30 stocks; Sectoral or Thematic 80 per cent in the sector or theme; and ELSS 80 per cent with a three-year statutory lock-in.
- Exchange Traded Funds
- Mutual fund products linked to an underlying index or commodity but listed and traded on a stock exchange, with NAV and price changing in real time. A gold ETF buys physical gold preserved by the custodian, each unit representing roughly one gram; silver ETFs invest at least 95 per cent of net assets in silver and silver related instruments.
- Fixed Maturity Plans
- Closed-end funds holding debt instruments whose maturities are closely aligned to the scheme's, redeemed at maturity and paid to investors. The structure eliminates interest rate risk for an investor who holds to maturity, and tenors range from 90 days to as much as five years.
- Hybrid fund categories
- Conservative Hybrid holds 75 to 90 per cent debt and 10 to 25 per cent equity; Balanced Hybrid 40 to 60 per cent each with no arbitrage permitted; Aggressive Hybrid 65 to 80 per cent equity and 20 to 35 per cent debt; Dynamic Asset Allocation or Balanced Advantage is managed dynamically; Multi Asset Allocation holds at least three asset classes with at least 10 per cent each, foreign securities not counting as a separate class; Arbitrage funds 65 per cent equity; and Equity Savings 65 per cent equity with at least 10 per cent debt.
- Interval fund
- A hybrid of the open and close ended structures — largely close-ended but becoming open-ended at pre-specified dates known as the Specified Transaction Period, with compulsory listing to provide an exit route between intervals.
- Key Information Memorandum
- A synopsis of the important information in the SID and SAI, together with information useful for filling the application form. Regulation requires the application form and KIM to be printed together, in SEBI's prescribed format, updated at least half-yearly within one month of the half-year end and filed with SEBI electronically only.
- Liquid assets requirement
- All open ended debt schemes except overnight, liquid, gilt and 10-year constant duration gilt funds must hold at least 10 per cent of net assets in liquid assets — cash, government securities, treasury bills and repo on government securities.
- Market capitalisation definitions
- Large cap companies are the 1st to 100th by full market capitalisation, mid cap the 101st to 250th and small cap the 251st onwards. Where a stock is listed on more than one exchange an average is taken, and AMFI publishes the consolidated list every six months on June and December data, within five calendar days of the period end.
- Open-ended fund
- A fund with no maturity date, offering units first in an NFO and thereafter allowing continuous purchases and redemptions at NAV-based prices at fund offices, investor service centres or stock exchange terminals. Its unit capital varies with investor transactions.
- Other fund types
- Capital protection funds are closed-end, growing the debt component to the principal invested while the equity component, typically in derivatives, generates extra return. ESG funds invest at least 65 per cent of AUM in companies with comprehensive BRSR reporting. Infrastructure debt funds invest in debt of infrastructure companies, capital companies, projects and SPVs to provide liquidity and refinance. Real estate mutual funds are only close-ended, and none currently exist in India.
- Product creation process
- The AMC describes the portfolio and names the product; an offer document is created, approved by the trustees and filed with SEBI for comments; the final offer document issues after incorporating them; the product opens as a New Fund Offer with units allotted at face value; and the fund manager then constructs the portfolio.
- Product labelling
- Every scheme must be labelled with the nature of the scheme and its indicative horizon, a brief description of its investment objective and product type, and the level of risk to principal shown on a pictorial Risk-o-meter with a written statement below it.
- Risk-o-meter
- A pictorial meter categorising risk in six levels — low, low to moderate, moderate, moderately high, high and very high. It must appear in scheme documents and the application form, changes must be communicated to unit holders, and it must be evaluated monthly and disclosed on the AMC and AMFI websites.
- Scheme Information Document
- The document giving details of a particular scheme — name and type, issue dates, constituents, fundamental attributes including investment objective, asset allocation pattern and liquidity provisions, fees and expenses, performance and benchmarks, risk factors and mitigation, disclosures, fund management team and unitholder information. New schemes update it within six months of the relevant half-year end, and thereafter within one month of each half-year based on September and March data.
- Scheme, plan and fund
- The terms scheme, plan and fund all indicate the products a mutual fund offers. The mutual fund itself is an umbrella entity with several schemes of distinct objectives beneath it — HDFC Mutual Fund is the umbrella, HDFC Liquid Fund a product under it.
- SIF safeguards
- A minimum investment of Rs. 10 lakh; a sales team certified under NISM VA and NISM XIII; compulsory listing of close and interval schemes; single-issuer debt limits of 20 per cent for AAA, 16 for AA and 12 for A and below; derivatives limited to 25 per cent of net assets in exchange traded instruments only; portfolio disclosure every alternate month; a risk warning on all advertisements; and an RTA role similar to that in mutual funds.
- Solution oriented schemes
- Schemes helping investors attain goals such as retirement or children's education. A Retirement Fund has a lock-in of five years or until retirement age, whichever is earlier; a Children's Fund a lock-in of at least five years or until the child attains majority, whichever is earlier.
- Specialized Investment Fund
- A product bridging mutual funds and portfolio management services, offered by fund houses of at least three years' standing with average AUM of Rs. 10,000 crore over three years, or their sponsors or AMCs with SEBI's approval. It permits long and short strategies across equity, debt and hybrid categories and so carries higher risk than a traditional mutual fund, and must be separately identified with its own website or webpage.
- Statement of Additional Information
- The document containing statutory information common to all schemes of a mutual fund — sponsor, trustee, AMC and constituents, key personnel and associates, condensed financial information of schemes launched in the last three financial years, unit holders' rights and grievance redressal, and investment valuation norms. It is a one-time filing, updated every financial year with material changes incorporated immediately.
Check you have understood it
The L1 test for this chapter has 8 questions. Score 60% to unlock L2 Application (worked numericals and scenarios) and then L3 Exam-Ready (NISM-style traps, timed, with this paper's real marking). Tests, the higher levels and full mock exams need a free account so we can track your progress.
Create a free accountOriginal explanatory writing based on the official NISM workbook for Series II-B, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.