Fundamental attributes
Also written Fundamental attributes of a scheme
The core features of a scheme — its investment objectives, policies and terms — on which investors relied when they invested. Changing them requires notice to every unit-holder and a no-load exit at NAV.
In plain language
An investor chooses a scheme for what it promises to be: a short-duration debt fund, a large-cap equity fund, a scheme with a certain objective and certain terms. If the AMC could quietly turn it into something else, the investor would be holding a product they never chose.
Fundamental attributes are the features that cannot be changed that way. The workbook defines the protection in terms of any change in "the fundamental attributes of any scheme, fees and expenses payable or any other change that would modify the scheme and affect the interest of unit holders".
The protection is simple to state. Before such a change is carried out, every unit-holder must be told, the details must be on the AMC's website, and unit-holders must be given the option to exit at the prevailing NAV without any exit load.
The investor is not asked to approve the change. They are given a free way out if they disagree with it.
How it works
The conditions, from Chapter 10 (rights of unit-holders):
| Condition | What the AMC must do |
|---|---|
| (a) | Send written communication — including digital modes such as email or SMS — about the proposed change to each unit-holder |
| (b) | Display the details, as SEBI specifies, on the AMC's website |
| (c) | Give unit-holders an option to exit at the prevailing NAV without exit load |
The document procedure, from Chapter 5 (changes under Regulation 18(15A), for open-ended and interval schemes):
- An addendum to the SID is issued and displayed on the AMC website immediately.
- A public notice appears in one English daily with nationwide circulation and one newspaper in the language of the region where the fund's head office is.
- The SID is revised immediately after the exit option period, which is not less than 30 days from the notice date.
The workbook describes the rule in three slightly different ways.
| Chapter | Wording |
|---|---|
| Chapter 5 | Exit option of not less than 30 days from the notice date |
| Chapter 10 (rights) | Exit window open "for the time stipulated by SEBI" |
| Chapter 10 (AMFI Code of Ethics, clause 6.7) | Members shall not change fundamental attributes "without the prior approval of unitholders except when such change is consequent on changes in the regulations" |
The first two are compatible — 30 days is the SEBI stipulation Chapter 5 records. The third sets a higher, industry code standard of prior approval rather than a no-load exit. A regulation question wants the exit option; a question on the AMFI Code of Ethics wants prior approval.
AMFI's code for intermediaries adds that distributors must keep abreast of such changes and deal with investors accordingly.
A worked example
Lakshmi holds 8,000 units of a large-cap equity scheme. She is still within the scheme's one-year exit load period of 1 per cent. The AMC proposes to change the scheme's investment objective to invest mainly in small-cap stocks — a change to a fundamental attribute. The NAV is Rs 62.50. Figures are illustrative.
What she receives:
- An email and SMS describing the change, and the details on the AMC's website.
- A public notice in an English national daily and in a regional-language newspaper.
- An exit window of at least 30 days at the prevailing NAV, with no exit load.
| Redeem in the exit window | Redeem normally, within load period | |
|---|---|---|
| Value (8,000 × 62.50) | Rs 5,00,000 | Rs 5,00,000 |
| Exit load | Nil | 1% = Rs 5,000 |
| Proceeds | Rs 5,00,000 | Rs 4,95,000 |
She never wanted a small-cap fund, so she uses the window and saves Rs 5,000. Capital gains tax on the redemption still applies — the protection waives the load, not tax.
If she does nothing, the change takes effect after the window closes, the SID is revised, and she remains invested in what is now effectively a different product. Silence is treated as staying, not as objecting.
Why NISM asks about it
Chapter 5 (Scheme Related Information), section 5.1.5, sets out the addendum, public notice and 30-day exit procedure under Regulation 18(15A); Chapter 10 (Legal and Regulatory Environment) lists the unit-holder right to a no-load exit and, in the AMFI Code of Ethics, the prior-approval standard. Expect a question on what an AMC must do before changing a fundamental attribute, the minimum exit window, and whether an exit load applies (it does not).
Common exam traps
- Exit at prevailing NAV without exit load. A question offering "at NAV less exit load" is wrong.
- At least 30 days from the notice date (Chapter 5). Chapter 10 says "the time stipulated by SEBI".
- Written communication to each unit-holder — email or SMS count.
- Addendum immediately; SID revised only after the exit window.
- Public notice in an English national daily and a regional-language newspaper where the head office is.
- The AMFI Code of Ethics goes further — prior approval of unit-holders, except for changes forced by regulation.
- Fees and expenses payable are covered by the same protection, as is "any other change that would modify the scheme and affect the interest of unit holders".
- The exit is voluntary. Unit-holders who stay accept the changed scheme.
Where this is taught
- Series V-A · Chapter 4: Legal and Regulatory Frameworkintroduced here
- Series V-D · Chapter 5: Scheme Related Informationintroduced here
- Series V-B · Chapter 5: Scheme Related Informationintroduced here
- Series V-A · Chapter 5: Scheme Related Information
- Series V-B · Chapter 10: Legal and Regulatory Environment
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Asset Management CompanyThe company that runs a mutual fund's schemes day to day — appointed by the sponsor or trustees with SEBI's approval, and paid a fee out of the scheme rather than a share of its profits.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Interval fundA scheme that is largely close-ended but opens for subscription and redemption during pre-specified transaction periods, with compulsory stock exchange listing to give an exit in between.
- Scheme Information DocumentThe offer document setting out everything about a particular scheme that a prospective investor ought to know before investing — prepared in SEBI's format, vetted but not approved by SEBI.
- TrusteesThe guardians of a mutual fund trust, who hold its property for the unitholders and oversee the AMC — at least two-thirds of them independent, each approved by SEBI in advance.
- Standard warningThe mandatory 14-word disclaimer in every mutual fund advertisement — "Mutual Fund investments are subject to market risks, read all scheme related documents carefully." — with no words added or removed.
- Caveat emptorLatin for "let the buyer beware" — the principle that a mutual fund investor is presumed to have read the scheme documents and cannot later claim ignorance of anything fairly disclosed in them.
- Investment policyHow a scheme will achieve its investment objective, disclosed in the SID through exactly two aspects: its asset allocation and its investment style.
- AddendumA notice issued to record an interim change to a scheme's SID, SAI or KIM before those documents are next updated. It is part of the scheme related documents and must accompany the KIM.
- AMFI Code of EthicsAMFI's code of good practice for AMCs and trustees, drawn up to supplement the SEBI code of conduct in the Fourth Schedule and set more explicit standards, from integrity to enforcement.