NISM Series X-A · Chapter 11: Mutual Fund

L1 · Foundation

Foundation — What a mutual fund is, its key concepts and its structures

The entities in a mutual fund and the NFO process, units, net assets, NAV with the chapter worked table, cut-off timings and mark to market, the four structures from open-ended to ETFs, and the regulatory framework.

14 min read · Worth 5% of the paper · Written from pages 199–224 of the official NISM workbook · Updated 18 September 2026

11.1 Meaning and features

"Mutual funds are investment products through which investors can invest in AN ASSET CLASS OF THEIR CHOICE such as EQUITY, DEBT, GOLD OR REAL ESTATE. Investors who MAY NOT WANT TO INVEST DIRECTLY in financial markets may instead GET EXPOSURE TO THE SAME SECURITIES THROUGH A MUTUAL FUND".

The entities

"All these entities are REGULATED BY SEBI for their ELIGIBILITY in terms of EXPERIENCE AND FINANCIAL SOUNDNESS, RANGE OF RESPONSIBILITIES AND ACCOUNTABILITY".

Entity	Role
Sponsor	"A mutual fund is SET UP BY A SPONSOR, WHO IS ITS PROMOTER"
Trustees	"appointed to TAKE CARE OF THE INTERESTS OF THE INVESTORS in the various schemes"
Asset Management Company	"appointed to manage LAUNCHING A SCHEME, MARKETING IT, COLLECTING FUNDS, INVESTING THE FUNDS according to the scheme's investment objectives and ENABLING INVESTOR TRANSACTIONS"
Others	"BANKS, REGISTRARS TO AN ISSUE AND TRANSFER AGENTS, INVESTOR SERVICE CENTRES (ISC), BROKERS OR MEMBERS OF STOCK EXCHANGES, CUSTODIANS"

The NFO process

"The AMC creates a product WITH THE APPROVAL OF THE TRUSTEES AND SEBI. The mutual fund invites subscription by issuing an OFFER DOCUMENT that gives all details — "INVESTMENT OBJECTIVE, INVESTMENT PATTERN in different asset classes, the STRATEGY of the fund manager, the COSTS AND FEES and all other information prescribed by SEBI. This is the NEW FUND OFFER (NFO)".

"The application form along with the ABRIDGED offer document called the KEY INFORMATION MEMORANDUM (KIM) is available with the AMC, investor service centres and other distribution points... The documents i.e. SCHEME INFORMATION DOCUMENT (SID) AND KEY INFORMATION MEMORANDUM (KIM) are available on the WEBSITE OF THE AMC".

"The activities related to MAINTAINING INVESTOR RECORDS AND INVESTMENT DETAILS and COMMUNICATING with the investors is done by the R&T AGENT".

11.2 The key concepts

Investment objective

"A mutual fund scheme is DEFINED BY ITS INVESTMENT OBJECTIVE. The investment objective STATES WHAT THE SCHEME INTENDS TO ACHIEVE. The ASSET CLASS, the TYPE OF SECURITIES selected and the WAY THE FUND WILL BE MANAGED will depend upon it".

Units

"each investor's holding is represented in terms of UNITS that is DERIVED FROM THE AMOUNT INVESTED. EACH UNIT REPRESENTS ONE SHARE OF THE FUND".

The chapter's example, at Rs 10 per unit:

A invests Rs 5,000 → 5,000 ÷ 10 = 500 units.
B invests Rs 10,000 → 10,000 ÷ 10 = 1,000 units.

"Units can be allotted IN DECIMALS too which ensures that the investor GETS VALUE FOR THEIR ENTIRE INVESTMENT".

Net assets

"the CURRENT VALUE OF THE PORTFOLIO of securities held, plus some CURRENT ASSETS SUCH AS CASH AND RECEIVABLES. Together they form the TOTAL ASSETS. From this, the FEES AND EXPENSES — FUND MANAGER'S FEES, CHARGES PAID TO CONSTITUENTS, REGULATORY EXPENSES ON ADVERTISEMENTS — are DEDUCTED to arrive at the NET ASSETS".

Net assets go UP when	Net assets go DOWN when
"investors BUY ADDITIONAL UNITS and bring in funds"	"investors REDEEM their units"
"the VALUE of the investments GOES UP"	"the securities FALL IN VALUE"
"the securities EARN INCOME such as DIVIDENDS or INTEREST"	"EXPENSES related to the scheme are accounted for"

Net Asset Value

"All investor transactions are conducted AT THE CURRENT NAV of the scheme".

The chapter's worked table — NUM Equity Fund collects Rs 1,00,000 and allots 10,000 units:

Event	Net assets	Units	NAV	Comment
Start	1,00,000	10,000	10	—
Value of portfolio goes up	1,20,000	10,000	12	"An increase in net assets has LED TO A RISE IN NAV"
Investor redeems 1,000 units at Rs 12	1,08,000	9,000	12	"NO CHANGE IN NAV. A decrease in net assets is OFFSET BY A DECREASE IN THE OUTSTANDING UNITS"
Value of portfolio falls	1,00,000	9,000	11.11	"A decrease in net assets has LED TO A FALL IN NAV"
Investor buys 1,000 units at Rs 11.11	1,11,110	10,000	11.11	"NO CHANGE IN NAV since the addition is OFFSET BY AN INCREASE IN UNITS"

The counter-illustration: if an investor buying 1,000 units at an NAV of Rs 11.11 were "allotted units at the FACE VALUE OF RS 10", net assets would rise by Rs 10,000 and units by 1,000, giving an NAV of Rs 11 — "The NAV of the scheme has COME DOWN because the units were allotted AT A PRICE DIFFERENT FROM THE NAV and will have an IMPACT ON ALL THE INVESTORS".

"The NAV of a scheme (other than LIQUID schemes where NAV is calculated on a DAILY basis) is CALCULATED EVERY BUSINESS DAY".

Cut off timings

"The TIME WHEN A REQUEST for a purchase or redemption or switch is RECEIVED by a mutual fund WILL DETERMINE WHEN IT IS PROCESSED. This is a standard followed across all mutual funds SO THAT THERE IS EQUITY AND FAIRNESS IN ALLOCATION and that NO INVESTOR GETS A PREFERENTIAL TREATMENT".

"The NAV that will be applicable would thus be determined by the time when the request is received, PROVIDED CLEAR FUNDS HIT THE ACCOUNT OF THE FUND BY CUT-OFF TIME".

Mark to market

"if the portfolio WAS TO BE LIQUIDATED, then this would be the value that would be REALISED AND DISTRIBUTED to the investors. Therefore, the portfolio has to reflect the CURRENT MARKET PRICE. This process of VALUING THE PORTFOLIO ON A DAILY BASIS AT CURRENT VALUE is called MARKING TO MARKET".

"The price is taken from THE MARKET WHERE THE SECURITY IS TRADED. IF THE SECURITY IS NOT TRADED OR THE PRICE AVAILABLE IS STALE, THEN SEBI HAS LAID DOWN THE METHOD for valuing such securities".

11.3 The four structures

Structure	Features
Open-ended	"allows investors to INVEST IN ADDITIONAL UNITS AND REDEEM INVESTMENT CONTINUOUSLY AT CURRENT NAV. The scheme is FOR PERPETUITY unless the investors decide to WIND UP. The UNIT CAPITAL IS NOT FIXED but changes with every investment or redemption"
Closed-end	"for a FIXED PERIOD OR TENOR. It offers units ONLY DURING THE NFO... units are REDEEMED AT THE PREVALENT NAV WHEN THE TERM IS OVER and the fund CEASES TO EXIST. In the interim, investors can exit by SELLING THE UNITS TO OTHER INVESTORS ON A STOCK EXCHANGE WHERE THEY ARE MANDATORILY LISTED. The UNIT CAPITAL DOES NOT CHANGE over the life of the scheme since transactions between investors DO NOT AFFECT THE FUND. AUM AT MTM WILL CHANGE"
Interval	"a VARIANT OF CLOSED END FUNDS WHICH BECOME OPEN-ENDED DURING SPECIFIED PERIODS. The specified transaction periods are for a MINIMUM PERIOD OF TWO DAYS and there must be a MINIMUM GAP OF 15 DAYS BETWEEN TWO TRANSACTION PERIODS. Like closed-ended funds, these funds HAVE TO BE LISTED"
Exchange Traded Funds	"have the features of a mutual fund BUT CAN BE TRADED. Like a stock they are LISTED... SO THEY CAN BE TRADED ALL DAY LONG... Instead of a SINGLE NAV for a day... there are MULTIPLE PRICES they can get. In an ETF it is actually INVESTORS TRADING WITH EACH OTHER while in an open-ended fund it is THE INVESTOR ON ONE SIDE AND THE MUTUAL FUND ON THE OTHER"

11.4 The regulatory framework

"SEBI is the PRIMARY REGULATOR of mutual funds in India. SEBI (MUTUAL FUNDS) REGULATIONS, 1996, along with amendments, govern SETTING UP a mutual fund and its STRUCTURE, LAUNCHING A SCHEME, CREATING AND MANAGING THE PORTFOLIO, INVESTOR PROTECTION, INVESTOR SERVICES and ROLES AND RESPONSIBILITIES of the constituents".

"Apart from SEBI, the RBI is also involved for specific areas which involve FOREIGN EXCHANGE TRANSACTIONS such as INVESTMENTS IN INTERNATIONAL MARKETS and INVESTMENTS BY FOREIGN NATIONALS, and the role of the BANKING SYSTEM".

"The ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) is the INDUSTRY BODY that OVERSEES THE FUNCTIONING of the industry and RECOMMENDS BEST PRACTICES. It also REPRESENTS THE INDUSTRY'S REQUIREMENTS TO THE REGULATOR, GOVERNMENT AND OTHER STAKEHOLDERS".

Investor service standards: "SEBI has PRESCRIBED THE TURNAROUND TIME for the services given to investors. The regulations also define the TYPE OF INFORMATION that mutual funds MUST MANDATORILY PROVIDE and THEIR PERIODICITY. TIMELINES for ALLOTMENT OF UNITS IN NFOs, SCHEME OPENING for continuous transactions, CONFIRMATION OF UNIT ALLOTMENT have been defined".

The one-scheme-per-category rule

"SEBI has defined the process of categorizing open-end mutual fund products broadly as EQUITY SCHEMES, DEBT SCHEMES, HYBRID SCHEMES, SOLUTION-ORIENTED SCHEMES AND OTHER SCHEMES".

Think of it like this

The portfolio belongs to the unitholders, not the AMC

A point worth stating plainly to any client: "THIS PORTFOLIO IS OWNED ONLY BY THE INVESTORS WHO HAVE CONTRIBUTED THE FUNDS, IN PROPORTION TO THEIR CONTRIBUTION." And on net assets: "This belongs to the investors in the fund who have been allotted units and NO OTHER ENTITY HAS A CLAIM TO IT." The AMC manages the money and is paid a fee for doing so; the trustees exist precisely to "take care of the interests of the investors." If an AMC fails, the portfolio is not part of its estate.

Buying and redeeming units does not move the NAV

The chapter's five-row table exists to establish one counter-intuitive point: "A REDEMPTION OR ADDITIONAL INVESTMENT WILL NOT DIRECTLY AFFECT THE NAV SINCE THE TRANSACTIONS ARE CONDUCTED AT THE NAV." When a redemption shrinks net assets, the unit count shrinks in exactly the same proportion. Only portfolio value and expenses move the NAV. The one exception is the hypothetical case where units are allotted at a price other than NAV — and then, as the chapter warns, it "will have an IMPACT ON ALL THE INVESTORS in the scheme."

Closed-end unit capital never changes; only the market value does

A closed-end fund sells units once, in the NFO, and then shuts the door. "The UNIT CAPITAL OF A CLOSED END FUND DOES NOT CHANGE over the life of the scheme since transactions between investors on the stock exchange DO NOT AFFECT THE FUND. AUM AT MTM WILL CHANGE." When you buy such a unit on the exchange, the fund is not a party — your money goes to the seller, not into the portfolio. This is exactly why closed-end units must be mandatorily listed: it is the only exit before maturity.

Interval funds: two days open, fifteen days shut

The rules are precise and examinable. Interval funds "become OPEN-ENDED DURING SPECIFIED PERIODS", and those periods are "for a MINIMUM PERIOD OF TWO DAYS", with "a MINIMUM GAP OF 15 DAYS BETWEEN TWO TRANSACTION PERIODS." They are closed-end funds with scheduled windows — and like closed-end funds, they must be listed.

In an ETF you trade with another investor, not with the fund

The chapter draws the structural distinction sharply: "In an ETF it is actually INVESTORS TRADING WITH EACH OTHER while in case of an open-ended fund it is THE INVESTOR ON ONE SIDE OF THE TRANSACTION AND THE MUTUAL FUND ON THE OTHER." The consequence is the price: an open-ended fund gives you one NAV for the day, while in an ETF "there are MULTIPLE PRICES they can get", because it trades "all day long" like a stock.

Marking to market answers one question: what if we sold today?

The chapter justifies daily valuation by its purpose: "if the portfolio WAS TO BE LIQUIDATED, then this would be the value that would be REALISED AND DISTRIBUTED to the investors." Hence "the portfolio has to reflect the CURRENT MARKET PRICE." And it anticipates the hard case — "IF THE SECURITY IS NOT TRADED OR THE PRICE AVAILABLE IS STALE, THEN SEBI HAS LAID DOWN THE METHOD", which matters enormously for thinly traded corporate bonds.

Cut-off timing exists to stop queue-jumping

The rule has a stated purpose that is worth quoting to a client who has missed a deadline: the standard is followed "SO THAT THERE IS EQUITY AND FAIRNESS IN ALLOCATION AND THAT NO INVESTOR GETS A PREFERENTIAL TREATMENT OVER OTHERS." And there is a condition people routinely miss — the applicable NAV depends on receipt provided CLEAR FUNDS HIT THE ACCOUNT OF THE FUND BY CUT-OFF TIME. Submitting the form on time is not enough if the money has not arrived.

One scheme per category, with three exceptions

SEBI's categorisation exists to stop fund houses from running a dozen near-identical schemes. "ONLY ONE SCHEME PER CATEGORY IS PERMITTED FOR EACH MUTUAL FUND." The three exceptions are all cases where genuine difference exists: index funds and ETFs tracking different indices, fund of funds with different underlying schemes, and sectoral or thematic funds investing in different sectors or themes. A fund house may have a banking fund and a pharma fund, but not two large-cap funds.

Key terms in this chapter

AMFI: The Association of Mutual Funds in India, the industry body that oversees industry functioning, recommends best practices and represents the industry to the regulator and government.
Arbitrage fund: A hybrid fund buying in the spot market and selling in the derivatives market to earn the interest rate differential embedded in the spot-futures spread.
Balanced Advantage fund: A dynamic asset allocation fund that manages equity and debt actively, usually taking short positions to reduce net equity exposure while maintaining more than 65 per cent long equity for taxation purposes.
Capital Protection Fund: A closed-end hybrid where part of the principal is invested in debt to grow back to the original amount, with the rest in equity derivatives. Rs 90 invested for three years to become Rs 100 is the chapter's example.
Closed-end scheme: A scheme for a fixed tenor offering units only during the NFO, mandatorily listed so investors can exit by selling to others. Its unit capital never changes, though AUM at mark to market does.
Credit risk fund: A debt fund investing a minimum of 65 per cent of total assets in corporate debt rated AA and below, unlike a corporate bond fund which holds at least 80 per cent in AA+ and above.
Cut off timing: The rule that the time a request is received determines which NAV applies, provided clear funds hit the fund's account by cut-off. It exists to ensure equity and fairness in allocation.
Direct plan: A plan bought directly from the fund house or its R&T agent with no distributor, carrying a lower expense ratio. Every scheme must offer one, and the portfolio is identical to the regular plan.
Dividend Transfer Plan: A plan where the dividend declared on one scheme is transferred to a different target scheme, leaving the original investment intact. It differs from dividend reinvestment, where the money returns to the same scheme.
Dynamic bond fund: A fund with no restrictions on security type or maturity, moving across the yield curve and investing across durations. Duration is cut if rates are expected to rise.
ELSS: Equity Linked Savings Scheme, an open-end equity fund holding at least 80 per cent equity, offering Section 80C deduction up to Rs 1.5 lakh under the old tax regime, with a three-year lock-in during which units cannot be redeemed, transferred or pledged.
Exchange Traded Fund: A listed mutual fund tracking an index or commodity, traded all day at real-time prices between investors, holding at least 95 per cent of assets in the tracked index securities.
Fixed Maturity Plan: A closed-end debt fund investing in securities matching the scheme term, issued for 3 months to 5 years. Held passively to maturity it eliminates price risk, making it preferred in a rising rate environment.
Focussed fund: A fund holding a concentrated portfolio limited by SEBI regulation to 30 stocks, carrying higher risk because diversification is lower.
Fund of Funds: A mutual fund investing in other mutual funds rather than securities, holding 95 per cent of assets in the underlying fund and imposing additional cost since underlying expenses are built into the NAV.
Income Distribution cum Capital Withdrawal (IDCW): The option formerly called dividend. The NAV falls to the extent of the distribution, and the amount paid may include a part of the investor's own capital.
Instant Access Facility: Same-day credit of redemption proceeds from liquid funds for resident individual investors, limited to Rs 50,000 or 90 per cent of the latest investment value, whichever is lower, per day per scheme per investor.
Interval fund: A closed-end variant that becomes open-ended during specified periods of at least two days, with a minimum gap of 15 days between transaction periods. Must be listed.
Key Information Memorandum (KIM): The abridged offer document accompanying the application form, available with the AMC, investor service centres and on the AMC website along with the Scheme Information Document.
Life Cycle Fund: An open-ended goal-based fund with predetermined maturity and glide path, of 5 to 30 years in multiples of 5, with a maximum of 6 active for subscription and exit loads of 3, 2 and 1 per cent in the first three years.
Liquid fund: A debt fund investing in securities with less than 91 days to maturity. Its NAV is computed daily rather than every business day.
Marking to market: Valuing the portfolio daily at current market value, so the NAV reflects what would be realised if the portfolio were liquidated. SEBI prescribes the method where a security is untraded or the price is stale.
MF Lite regulations: Regulations rolled out by SEBI on 31 December 2024, applicable to mutual funds running only passive funds.
Multi cap fund: A fund investing at least 75 per cent in equity with a minimum of 25 per cent each in large, mid and small caps. A flexicap, by contrast, has no bucket minimums and only a 65 per cent equity floor.
Net assets: Total assets of a scheme, being the current value of the portfolio plus current assets, less fees and expenses. They belong to the unitholders alone.
Net Asset Value (NAV): Net assets divided by the number of outstanding units. All investor transactions are conducted at the current NAV, so purchases and redemptions do not by themselves change it.
New Fund Offer (NFO): The offer through which a mutual fund first invites subscription, accompanied by an offer document giving the investment objective, pattern, strategy, costs and fees.
One scheme per category rule: SEBI permits only one scheme per category per fund house, except index funds and ETFs tracking different indices, fund of funds with different underlyings, and sectoral or thematic funds on different sectors.
Open-ended scheme: A scheme allowing continuous investment and redemption at current NAV, running in perpetuity, with unit capital changing at every transaction.
Rupee cost averaging: The primary advantage of an SIP: because the same amount is invested each time, more units are bought when prices are low and fewer when high, bringing down the average cost of acquisition.
Specialized Investment Fund: A new SEBI asset class with a minimum investment of Rs 10 lakh, positioned between mutual funds and PMS, offering ideas such as non-hedging derivative positions, long-short funds and high-yield curated credit funds.
Sponsor: The promoter who sets up a mutual fund. Trustees are appointed to take care of investor interests and an AMC is appointed to manage the schemes.
Switch: A single transfer between schemes or options. An inter-scheme switch moves between schemes of the same fund; an intra-scheme switch between options of one scheme. Exit loads and taxes apply because a redemption occurs.
Systematic Transfer Plan: A combination of redemption from a source scheme and investment into a target scheme of the same fund, within the same folio, over a defined period.
Systematic Withdrawal Plan: Recurring redemptions at the applicable NAV on each date, eliminating the price risk of redeeming everything at one point. Exit loads and capital gains tax apply, and it ceases if the folio falls below a specified balance.
Target Maturity Fund: An open-ended fund with a defined maturity date and a wider maturity range than an FMP, with TMFs of 3 to 15 years floated. Both share maturity roll-down.
Units: The representation of each investor's holding in a mutual fund, derived from the amount invested. Each unit represents one share of the fund, and units may be allotted in decimals.
Value averaging: A plan that invests more when markets are down and less when they are up, by topping up or reducing to a target value path. Its challenges are calculation complexity and that funds do not permit monthly changes in a normal SIP.

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Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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