Mutual Funds — the pool, the NAV and every scheme category

Where this chapter sits

Chapter 5 carries 20% of the paper. It is the most number-heavy chapter in the syllabus — most marks come from allocation percentages and duration bands. Learn the tables.

The paper is 120 minutes, 100 marks, 60% to pass, and there is no negative marking.

Why mutual funds exist

Direct investment — buying equity shares, debentures, jewellery, gold coins or property in your own name — imposes seven responsibilities on the investor:

Not all investors may have the ability to do all that is required. Some are unwilling to take on all the activities; some find the cost and time spent on direct investing avoidable.

So investors who like to invest in the securities markets but like to engage someone else to create and manage their portfolio, choose mutual funds — which take up these tasks for a fee that the investor pays.

The basic features

• A mutual fund is a pool of investors' money that is managed by specialist investment management firms
• Funds state upfront the objectives with which the pooled money will be invested
• Investors are allotted mutual fund units which represent their proportional participation in the assets of the scheme
• The portfolio is monitored and managed on behalf of investors, without the investors having to directly transact in securities
• Details about the securities and the performance in terms of risk and return are periodically disclosed
• Investors in a mutual fund are unit holders, just as investors in equity are shareholders. The risk of the portfolio is directly borne by them, without any assurances or guarantees
• Unit holders are the sole owners of the assets of the mutual fund
• Mutual funds in India are not permitted to borrow in order to invest in a portfolio. A fund may borrow only to meet temporary liquidity needs, such as for repurchase or redemption of units, or for payment of interest or dividend to unitholders

What distinguishes one mutual fund product from another: asset allocation (the proportions in which it invests in equity, debt, gold, real estate), investment objective (growth and capital appreciation, generation of regular income, or a combination), costs and fees, and operational details (terms for subscription, redemption and ongoing transactions).

The vocabulary

Mutual fund. The common pool of funds contributed by investors. The funds and investments are held in a trust of which the investors alone are the joint beneficial owners. Trustees oversee the management of the investors' money by the investment manager. The term is also used for the fund house that manages several funds using the same investment manager.

Scheme. SEBI has broadly classified mutual funds into 5 categories: Equity, Debt, Hybrid, Life Cycle Funds, and Others. Only one scheme per category is permitted, with three exceptions:

• Index Funds / ETFs replicating or tracking different indices
• Fund of Funds having different underlying schemes
• Sectoral / thematic funds investing in different sectors or themes

Pooling and proportionate representation. The workbook's example: three investors put in ₹10,000, ₹20,000 and ₹30,000, so the pool is ₹60,000 and their holding is in the ratio 1:2:3. When the portfolio appreciates to ₹72,000, their holdings rise proportionately to ₹12,000, ₹24,000 and ₹36,000.

Units and unit capital. Each unit has a face value, typically ₹10. At face value the three investors receive 1,000, 2,000 and 3,000 units, so unit capital is ₹60,000 — the number of units multiplied by the face value. The face value is relevant from an accounting perspective.

Mark to market. A mutual fund has to calculate and declare to its investors the current market value of each unit every day by taking the current market price of the securities held in the portfolio.

Net Asset Value — the single most important calculation

The NAV is the current value of a mutual fund unit. It depends on the current MTM value of the securities held plus any income earned such as dividend and interest, from which the costs and expenses charged for managing the fund are deducted. The value remaining is the net assets, and net assets divided by the number of outstanding units gives the NAV.

Worked from the same example:

• 6,000 units of ₹10 each issued
• Current market value of the portfolio: ₹72,000
• Dividend income ₹3,000; expenses ₹600
• Net assets = 72,000 + 3,000 − 600 = ₹74,400
• NAV = 74,400 / 6,000 = ₹12.40

The NAV of a fund is calculated every business day so that the investors know the value of their investments.

Why transactions must be priced at NAV

Transactions are priced using the NAV to ensure parity among investors that buy new units, investors that stay in the fund, and investors that move out of a fund. The workbook proves this with four cases, all starting from 6,000 units and net assets of ₹74,400, NAV ₹12.40:

The conclusion: the NAV remains the same after the fresh purchase of units or redemption of existing units, if the units are priced at the current NAV.

Expenses and loads

Fund running expenses. Direct expenses incurred in managing the investment portfolio are charged to investors, and the specific types of expenses and the limits are stipulated by regulation. Expenses are calculated as a percentage of the daily average net assets managed by the fund, deducted each day from the value of the investments — so the NAV is lower to the extent of the expenses.

The crucial consequence: investors do not pay the expenses separately; it is already reflected in the NAV. Expenses are quoted as the total expense ratio (TER) as a percentage of assets under management (AUM), and rates of TER differ with the type of mutual fund — equity, debt, index funds.

Loads. Mutual funds may impose a charge on the investors at the time of exiting from a fund called the exit load, usually linked to the period of holding. It is calculated as a percentage of the NAV and reduced from the NAV to give the exit price.

Worked: a fund charges an exit load of 1 percent if redeemed within 1 year. If NAV is ₹12, the load is ₹0.12, so the investor receives ₹11.88. After one year, no exit load.

And the rule that is always tested: currently, entry loads are prohibited by SEBI.

Three more concepts

Relative performance. A mutual fund cannot assure or guarantee a rate of return. The return a fund generates will reflect the return generated by that asset class — equity funds will generate returns in line with equity markets and with the volatility that equity investments have. A fund tries to replicate or better the return of an asset class, usually represented by a market index.

Diversification. Not all prices will rise and fall together or in equal value at any point in time. If prices of banking stocks are moving up, the prices of technology stocks may be moving down, since these sectors are influenced by different factors. Diversification means creating a portfolio such that the overall portfolio is well balanced across multiple sectors and securities, so that the rise or fall in prices of the components is smoothened out.

The practical benefit: a portion of a well-diversified portfolio can be bought while investing in a mutual fund even with a small investment of say ₹5,000. It may otherwise not be feasible to replicate a diversified portfolio with such a small amount.

Pass-through entity. The same income would otherwise be accrued once in the books of the mutual fund, and again in the books of the investor. In order to prevent the same income from being taxed twice, mutual funds are classified as "pass-through" entities under the income tax laws. The income of a mutual fund registered with SEBI is completely exempt from tax — it is earned on behalf of the investors and passed through to them, and is therefore taxed only in the hands of the investors.

Three structures

Growth and IDCW options

• Growth option — the gains made in the portfolio are not distributed but retained in the fund. The gains are reflected in the rising NAV. Investors can realise the gains by selling the units
• Pay-out of Income Distribution cum Capital Withdrawal (IDCW) — the fund declares dividends from the realised profits and distributes the same to the unitholders
• Re-investment of IDCW — the dividend declared is not paid out, but is re-invested in the same scheme by buying additional units for the investor

The rename matters and explains itself: SEBI renamed the dividend options in order to clearly communicate to the investors that, under the dividend option, certain portion of his capital can be distributed as dividend. A "dividend" from a mutual fund is not like a company dividend — part of it is your own capital coming back.

How a mutual fund works

The Asset Management Company (AMC) is the specialist investment manager. The fund manager and other persons who conduct the day-to-day operations are all employees of the AMC. The AMC is the entity with whom the investors deal for all their requirements.

But the AMC is supervised twice over: by its own board of directors and by the board of trustees of the mutual fund who act in the interest of investors. All major decisions taken by the AMC are subject to trustee approval, and trustees meet at least 6 times a year to monitor and review the activities of the fund.

Money is not held by the AMC. The money mobilised from investors is not held by the AMC in its bank account, but by a specifically appointed custodian. The custodian bank holds the funds as well as the securities on behalf of the investors.

The constituents — specialist agencies that do non-core functions for an AMC. They must be registered with SEBI and appointed only with the approval of the trustees, and are paid a fee for their services by the mutual fund:

Distributors are empanelled by mutual funds to sell their schemes and receive a commission from the fund called "trail" commission, which is paid periodically as a percentage of net assets brought in by the distributor for as long as the investor's money is held in the fund. Investors can also choose to invest directly in a fund without involving a distributor.

The NFO price is usually the face value, typically ₹10 per unit. Minimum investment amounts vary from ₹500 for a few schemes, ₹5,000 for most schemes, and ₹10,000 for a few others. Details of holdings and transactions are maintained under unique folio numbers created for each investor.

Equity schemes — learn the percentages

First, the market-cap definitions, which underpin everything:

• Large cap companies are the 1st to 100th companies in terms of full market capitalisation
• Mid cap companies are the 101st to 250th
• Small cap companies are the 251st company onwards

The list is uploaded on the AMFI website and updated every six months based on the data as on the end of June and December of each year, available within 5 calendar days from the end of the 6-month period.

Sectoral versus thematic: a sectoral fund invests in a specific sector such as bank, power; a thematic fund invests in line with an investment theme such as housing or infrastructure — an infrastructure thematic fund might invest in shares of companies into infrastructure, construction, cement, steel, telecom, power.

ESG investing. To increase the quantum of and facilitate green financing, SEBI introduced a separate sub-category for ESG investments under the thematic category of Equity schemes, with six permitted strategies: Exclusion · Integration · Best-in-class & Positive Screening · Impact investing · Sustainable objectives · Transition or transition related investments.

ELSS tax treatment. It provides tax benefits in the form of deductions under section 80C of the Income Tax Act. The maximum limit for claiming deduction u/s 80C is ₹1.5 lakh per financial year. But note the qualifier: this tax benefit is available only under the old income tax regime. Taxpayers who opt for the new tax regime are not eligible to claim this deduction. These investments are subject to a three-year lock-in period to get the tax benefit.

Debt schemes — learn the duration bands

First, the interest-rate mechanics that explain the whole category:

The market value of a debt security changes inversely to changes in market interest rates. Higher the tenor of the security, greater is the impact of change in interest rates on the price.

• If interest rates increase, value of debt instruments fall. Higher the tenor, greater the fall in mark-to-market value
• If interest rates fall, value of debt instruments rise. Higher the tenor, greater the rise

So a short-term fund earns primarily coupon income, with very low gains or losses from MTM risk; a long-term fund earns higher coupon income and also higher capital gains or losses from MTM due to the long tenor. And a fund holding bonds with credit risk earns higher coupon income since the issuers have to pay higher interest rates to compensate the investors for default risk — the credit risk is indicated by the credit rating of the securities held.

One naming rule worth knowing: words or phrases that highlight or emphasize only the return aspect of the scheme shall not be used in the name of the scheme — for instance Credit Opportunities Fund, High Yield Fund, Credit Advantage.

Hybrid schemes

A hybrid fund is a debt and an equity fund, rolled into one. The risk will primarily depend upon the allocation between equity and debt — the higher the equity component in the portfolio, the greater will be the overall risk.

Mutual funds in India are permitted to offer either an Aggressive Hybrid Fund or a Balanced Fund — not both.

How arbitrage funds work. They aim at taking advantage of the price differential between the cash and the derivatives markets. Arbitrage is the simultaneous purchase and sale of an asset to take advantage of difference in prices in different markets. The difference between the future and the spot price of the same underlying is an interest element, representing the interest on the amount invested in spot, which can be realised on a future date when the future is sold. The price differential is locked in if positions are held until expiry of the derivative cycle — on settlement date both positions are closed at the same price, to realize the difference.

The result: a completely hedged position makes these funds a low-risk investment proposition. They feature lower volatility in NAV, similar to that of a liquid fund.

In the hybrid category, mutual funds may invest the residual portion in InvITs (except for arbitrage funds), ETCDs, Gold ETFs and Silver ETFs.

Life Cycle Funds

Open-ended schemes with a target maturity date, following a glide path strategy. They invest across multiple asset classes such as equity, debt, InvITs, ETCDs, and gold and silver ETFs, with asset allocation gradually becoming more conservative as the fund approaches maturity.

Tenures range from 5 to 30 years, in multiples of 5 years, and a maximum of six Life Cycle Funds can be open for subscription at any given time.

Other schemes

Index Funds / ETFs — replicating or tracking a specific index, with minimum 95% of total assets in the securities of that index.

ETFs combine features of an open-ended fund and a stock. Units are issued directly to investors when the scheme is launched, then listed on a stock exchange like a stock and traded. Investors need a broking account and a demat account to invest in ETFs, and transactions are done through brokers. Prices are linked to the NAV, but are available on a real-time basis depending on trading volume.

Gold ETFs — provide a way to hold gold in electronic form rather than in physical form; typically, each unit represents one gram of gold; the fund holds physical gold and gold receipts representing the units issued; and the price of the units will move in line with the price of gold.

Silver ETFs were introduced by amendment to the SEBI (Mutual Funds) Regulations. Commodity based funds such as Gold ETFs and Silver ETFs are to be managed by a dedicated fund manager with relevant skill and experience in the commodities market including commodity derivatives, and the NAV of these ETFs is to be disclosed on a daily basis on the website of the AMC.

Fund of Funds — investing in an underlying fund, with minimum 95% of total assets in the underlying fund. Its portfolio is not made up of securities, but is a portfolio of other funds. Most FoFs invest in schemes of the same mutual fund; some consider schemes across fund houses.

Closed-ended schemes

Fixed Maturity Plans (FMP) — closed-ended funds that invest in securities whose maturity matches the term of the scheme. The scheme and the securities mature together, and the fund pays out the maturity proceeds on the closing date.

The attraction: investors who hold to maturity benefit from the returns of the FMP that are locked in when the portfolio is created, and there is no risk of the value of the securities being lower at the time when the fund matures (unless there is a default), since the instruments will be redeemed at their face value. So the primary risk in FMPs is credit risk from a possible default by the issuer, and the time for which the investor is willing to invest must match the term of the fund.

Infrastructure Debt Funds (IDF) — closed-ended schemes with a tenor of at least five years investing in debt securities and securitised debt of infrastructure companies.

• 90 percent of the fund's portfolio should be invested in the specified securities; the remainder in equity shares of infrastructure companies and money market instruments
• The NAV will be disclosed at least once each quarter
• Minimum investment ₹1 crore
• Minimum face value of each unit ₹10 lakh
• The sponsor and key personnel must have adequate experience in the infrastructure sector

Real Estate Mutual Funds — invest in real estate either as physical property or as securities of companies engaged in the real estate business. These are closed-end funds and have to be listed on a stock exchange.

Active versus passive

Active mutual funds aim to generate returns that are higher than the benchmark and thus outperform it. The team actively researches different sectors and selects stocks based on certain defined parameters, and continuously monitors the portfolio. Since in-depth research is expensive, active mutual funds charge high fees, and frequent buying and selling can add substantially to the costs. The honest caveat: it has been observed that in developed markets such as the United States, actively managed funds find it difficult to beat the returns of their benchmark.

Passive mutual funds do not seek to beat the benchmark but aim at generating returns in line with benchmark returns, by "mimicking" or replicating the index — buying all the stocks that are constituents of the index in the same proportion of their weights, and selling any stock removed from the index and replacing it with the new one included. So a passively managed fund does not have a fund management team for making investment decisions, and management fees are lower.

The difference between a passive fund's return and its benchmark is known as the "tracking error" and ideally should be as close to zero as possible.

Index funds versus ETFs. Index funds are bought and sold like mutual funds, at the NAV determined according to the cut-off timings. ETFs are traded on an exchange just like stocks — investors can buy or sell at traded prices at any time during the day, which makes it possible to time purchases and sales by placing limit orders.

SEBI's passive fund guidelines:

• Direct transaction with AMCs is facilitated for investors only for transactions above a specified threshold of ₹25 crore, to enhance liquidity in units of ETFs on the stock exchange platform
• Indicative NAV (iNAV) — the per unit NAV based on the current market value of its portfolio during the trading hours of the ETF — is disclosed on a continuous basis on the Stock Exchanges
• ELSS may be launched as Active ELSS under "Equity Schemes" or Passive ELSS under "Other Schemes". The passive ELSS scheme shall be based on one of the indices comprising equity shares from the top 250 companies in terms of market capitalization
• The closing price of ETF units on the Stock Exchange is used for valuation by Fund of Funds investing in such ETFs

Investing in a mutual fund

Modes. Offline — through a representative of the AMC, its approved distributor, or the RTA, submitting an application form and cheque, after which a folio number is allotted and an Account Statement follows. Online — through the website of the AMC or the RTA, with KYC completed online. Also through the stock exchanges — NSE MFSS and BSE StAR MF, after a one-time registration; and through Mutual Fund Utilities (MFU), a shared service platform promoted by the mutual fund industry, available both online and offline.

PAN. All investors in mutual funds must have a Permanent Account Number. The only exception is where investments made by an individual investor, either as lumpsum or systematic investment plans, do not exceed ₹50,000 per annum per mutual fund.

Who may invest: resident individuals, Non Resident Indians (NRIs), Persons of Indian Origin (PIOs), foreign nationals, Institutions and Trusts.

KYC. It needs to be done only once at the time of the first mutual fund or other capital market transaction, and is valid across mutual funds and other capital market intermediaries. It involves collecting information in the specified format and conducting an In-Person Verification (IPV). SEBI has allowed Aadhaar based KYC (eKYC), which completely eliminates paperwork and IPV. CAMS and KfinTech, as KYC User Agencies (KUA), are approved by UIDAI to accept the investor's Aadhaar number and complete KYC verification with a one-time password.

FATCA and CRS. Mutual funds must undertake due diligence to identify foreign reportable accounts and report to the US Internal Revenue Service, any other foreign government, or the Indian Tax Authorities for onward transmission. The form asks whether citizenship, nationality, place of birth or tax residency are places other than India. Once covered, the entire investment value of all the folios held will be reported, along with the identity of the investors and their direct and indirect beneficiaries and controlling persons. A change in status must be reported to the mutual fund within 30 days.

The NFO. The NFO (except ELSS) will be open for a period of 15 days. Payment may be by cheque and online payment facilities like internet banking (NEFT and RTGS) and Application Supported by Blocked Amount (ASBA) — ASBA being a facility where the application is accompanied by an authorization to the bank to block the amount of the application money in the investor's bank account, originally envisaged for public issues and now extended to mutual fund NFOs. Units (except ELSS) will be allotted within 5 business days from the NFO closing date.

The continuous offer. Sale of units on an ongoing basis by an open-ended fund is called continuous offer, priced on the NAV declared for every business day. New investors use the application form; existing investors use a transaction slip which requires only the folio number. These are submitted at an Official Point of Acceptance (OPoA) — the office of the AMC or an Investor Service Centre (ISC) — and holdings are communicated through a Statement of Account (SoA).

Scheme related documents, available free of cost and in the format prescribed by SEBI:

• Statement of Additional Information (SAI) — statutory information about the mutual fund or AMC offering the scheme
• Scheme Information Document (SID) — details of the particular scheme
• Key Information Memorandum (KIM) — all the key information that an investor must know before investing

The Riskometer — a pictorial meter depicting the level of risk — appears on the front pages of the New Fund Offer Application Form, the SID and the KIM, and on advertisements.

The Fund Fact Sheet is a monthly report disclosing the objective of the fund, its category, plan options, Assets under Management, benchmark, minimum investment amount and exit load, the Riskometer, the fund manager's experience, educational qualifications and performance of other funds, portfolio allocation, the top 10 holdings and sector-wise and company-wise allocation, and historical performance along with key ratios.

Payment rules. Payments must be made from a bank account in which the first holder of the folio is an account holder. Cash payment is permitted up to ₹50,000 per mutual fund house for purchases, and a demand draft is accepted only in specific situations as specified by the mutual fund.

Joint holders. A folio can have up to three holders. The requirements of PAN and KYC formalities have to be undergone by all the holders. The mode may be "joint" — all the holders sign for all transactions — or "either or survivor" — any of the holders can sign.

The stock exchange channel requires the broker to have an AMFI Registration Number (ARN) and be a certified mutual fund distributor with permission from the exchange, and the units need to be held in dematerialised form.

Redemption

Redemption refers to encashing or withdrawing the investment by selling the units back to the mutual fund. Open-ended fund investments can be redeemed at any time at the current applicable NAV. Units of a closed-ended fund can be redeemed only when the fund matures.

The signing rule follows the mode of holding: if "joint", all the holders have to sign; if "either or survivor", any one holder can sign.

Worked: 500 units redeemed, applicable NAV ₹24, exit load 1 percent. Price per unit = 24 × (1 − 0.01) = ₹23.76. Redemption amount = 500 × 23.76 = ₹11,880.

Bank details are mandatory. SEBI has made it mandatory for investors to provide bank account details at the time of buying the units, and redemptions are made directly into the bank account, or by cheque on which the bank account details are pre-printed — to avoid fraudulent encashment of redemption cheques in case they are intercepted before they reach the investor. Investors can register up to 5 bank accounts, one designated as the default account.

Statement of account. The SoA is the proof of the investment. R&T agents dispatch a SoA after every transaction. A consolidated account statement (CAS) across mutual fund holdings is sent for each calendar month where there have been transactions in a folio, while folios where no transactions have taken place during a six-month period will receive a statement at the end of that six-month period.

For subsequent transactions the SoA shows, beyond amount, price and units, the balance units in the folio, their NAV, their current market value, average Total Expense Ratio and gross commission paid to distributors.

Distributor commission. SEBI has allowed mutual funds to adopt a full trail model of commission in all schemes, without payment of any upfront commission or upfronting of any trail commission. However, upfronting of trail commission is allowed only in case of inflows through Systematic Investment Plans (SIPs), subject to conditions.

Systematic transactions

Transactions with mutual funds can be automated. The investor specifies the type of transaction (purchases, redemptions, transfers), the period, the periodicity, the day of the month, and the amount.

Systematic Investment Plan (SIP) — invest a fixed sum periodically. In the workbook's example, ₹5,000 monthly on the 5th for a year means ₹60,000 invested over 12 months, with the number of units bought depending on the NAV on each date, and a statement of accounts sent on a quarterly basis.

The reason it works: the investment is staggered over time, reducing the risk of investing a lump sum at a specific time. Since a fixed amount is being invested, a larger number of units is bought when the price is low and a smaller number when the price is high. Systematic investment thus lowers the average cost of purchase. This strategy is called rupee cost averaging.

Systematic Withdrawal Plan (SWP) — periodic redemptions at the prevailing NAV related price. Withdrawing ₹5,000 monthly when NAV is ₹20 with no exit load redeems 250 units. The number of units redeemed each month will be different depending upon the NAV. Two rules to remember: if on any redemption date the balance units are insufficient to generate the amount, the entire units will be redeemed and the folio will be closed; and at the end of the specified period the withdrawal stops and the remaining units stay in the folio. SWP enables investors to periodically book their profits and generate a regular income.

Systematic Transfer Plan (STP) — periodically transfer a specified sum from one scheme to another within the same fund house. The transfer is considered as redemption from the source scheme and investment into the destination scheme — in effect it is an SWP from the source scheme and an SIP into the destination scheme. The number of units redeemed and bought will not be the same each month but will depend upon the NAV prevailing in each scheme.

Switch — a redemption and purchase transaction rolled into one, which can be done for any amount and on any date. The key distinction: a switch is a single transaction executed on a given date and is not a series of transactions. It can also be done from one option to another — for example from a growth option to a dividend option.

Benefits and costs

The benefits:

• Diversification — invest in a diversified portfolio with small amounts, sometimes as low as ₹500
• Professional management — fund managers have the expertise, information and knowledge to make better decisions than what a typical individual investor may be able to make
• Liquidity — withdraw at any time by redeeming units or selling on the stock exchange
• Flexibility — lump-sum or periodic small investments; dividends or growth
• Tax efficiency — the mutual fund itself is exempt from paying taxes; taxes may apply on income earned or capital gains realised by the investor
• Accessibility — instruments such as wholesale debt instruments, privately placed and unlisted securities may not be accessible to the retail investor. Mutual funds can invest in them on behalf of the investor

The costs:

• Costs and fees — the fee for fund management and the costs associated with the operations of the fund
• Limited control — the investors do not approve or authorize any investment decision made by the fund manager
• Indirect ownership — the investments are held in the name of the mutual fund trust and not directly in the name of the investors. The investors are only the beneficial owners

Regulation

SEBI is the primary regulator of mutual funds in India. Only entities registered with SEBI under the SEBI (Mutual Funds) Regulations, 1996 can conduct the business of a mutual fund.

Its features:

• A mutual fund is created as a trust, with trustees responsible for ensuring that the fund's managers manage the funds in the investors' interest. Crucially, investor's money is held independently and not in the AMC's balance sheet
• The track record and capital that the promoters of AMCs should have and the role and responsibilities of the trustees and AMC are defined
• Schemes cannot be offered to the public before the approval of the trustees and SEBI
• The portfolio has to adhere to the scheme objectives and be well diversified, with limits on investments so that the risk to the investor is managed. Valuation and accounting for income and expenses are defined by SEBI regulations
• The types of expenses that a mutual fund can charge and the limits on these expenses are subject to SEBI regulations, so investors do not pay an unreasonably high fee
• Periodic reporting of the fund's performance and investment details in a content and format specified by SEBI — for example, an equity fund has to publish its returns along with the return of the benchmark indices
• A detailed Risk Management Framework, under which mutual funds are required to identify the major risks faced, measure and manage such risks and report the same to SEBI

Investor service standards

And the penalty for delay: in the event of delays in dispatching dividend warrants or redemption/repurchase cheques, the AMC has to pay the unitholder interest at the rate of 15 percent per annum. This expense has to be borne by the AMC — it cannot be charged to the scheme.

The Investor Charter for Mutual Funds is issued by SEBI, detailing the types of services provided along with timelines, and is to be displayed on the websites of the AMCs.

AMFI — the Association of Mutual Funds in India — is the industry body that recommends best practices and code of conduct to be followed by the AMCs and distributors in the interests of the investors.

Compulsory voting. To ensure that mutual funds exercise their voting rights at company general meetings in the interest of their unit holders, SEBI has made it compulsory for mutual funds to vote on specified resolutions — covering corporate governance, changes to the company's capital structure, management compensation, social and corporate responsibility issues, appointment and removal of directors, related party transactions, and other issues which could affect the interest of the unitholders.

Specialized Investment Fund

By recent amendment to the SEBI (Mutual Funds) Regulations, SEBI introduced a new product line under mutual funds known as Specialized Investment Fund (SIF). SIFs are sophisticated mutual funds where the minimum required investment amount is ₹10 lakhs from the investors across all investment strategies.