Mutual fund
Also written Mutual fund scheme · MF · Fund · Mutual fund (statutory definition)
A trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
In plain language
The workbook opens Chapter 2 with a correction most people never hear: you do not invest in a mutual fund, you invest through one.
A mutual fund is a vehicle, set up as a trust, that collects money from thousands of small investors, pools it, and buys equities, bonds, money market instruments, gold or silver with it. What comes back to you is not a new asset class. It is the same shares and the same bonds you could have bought yourself — held professionally, in a diversified portfolio, inside a regulated structure, for a fee.
That is the whole idea. The investor does not get a different product; the investor gets a different way of investing.
How it works
Your money is translated into units. Every unit typically carries a face value of Rs 10, and the units issued multiplied by that face value is the scheme's unit capital. What the unit is actually worth on any day is the NAV — the portfolio valued at market prices, divided by units outstanding.
Profits and losses belong entirely to the unit-holders. Not one of the other parties — sponsor, trustees, AMC, custodian, registrar, distributor — shares in them. Every one of them is paid a fee or a commission instead, and those fees are the scheme's recurring expenses, charged as a percentage of assets and deducted before the NAV is struck. Higher expenses therefore mean a lower NAV and a lower investor return, which is why SEBI caps them.
The scale this has reached in India is the other examinable fact. Industry AUM went from Rs 11.89 lakh crore in March 2015 to Rs 66.70 lakh crore in March 2025, and Rs 73.73 lakh crore as on March 2026. Monthly SIP contributions went from Rs 8,055 crore in March 2019 to Rs 32,087 crore in March 2026 (source: AMFI).
A worked example
Anita, a schoolteacher in Nashik, has Rs 500 a month to invest and wants equity exposure.
Buying a genuinely diversified equity portfolio herself would mean several lakhs of rupees, a broking account, a demat account, tracking dividends and bonus issues, and valuing the lot herself. The workbook is explicit about the gap: to match the diversification of one scheme she would need to set apart several lakhs, where a mutual fund gives her the same spread for less than a thousand rupees.
So she buys units instead. At an NAV of Rs 62.50, her Rs 500 buys 8 units. Those 8 units give her a proportionate slice of every one of the 55 companies the scheme holds — a few rupees of each, which no broker would sell her directly.
Two years later the scheme's NAV is Rs 78.10 and she holds 192.4 units from 24 instalments of Rs 500 (Rs 12,000 invested). Her holding is worth 192.4 × 78.10 = Rs 15,026. The fund manager, the registrar, the custodian and the auditor have all been paid out of the expense ratio before that NAV was calculated — and the entire Rs 3,026 of gain is hers.
Why NISM asks about it
Chapter 2 (Concept and Role of a Mutual Fund) is the foundation of the whole paper, and Chapter 3 supplies the legal definition: under SEBI (Mutual Fund) Regulations, a mutual fund is a fund established in the form of a trust, registered with SEBI, which raises money by selling units to the public under one or more schemes. Expect the classic Chapter 2 sample question — what indicates how much money can be generated per unit if the scheme is liquidated (NAV) — and questions listing the advantages: professional management, affordable portfolio diversification, economies of scale, transparency, liquidity, tax deferral and a systematic approach. The limitations are examined just as often: lack of portfolio customisation, choice overload, no control over costs, and no guaranteed returns.
Common exam traps
- A mutual fund is not an asset class. It is a wrapper around asset classes. A question asking you to compare "mutual funds versus equity" is testing exactly this confusion.
- "Fund" and "scheme" are used interchangeably in the industry and in the workbook. Where the distinction matters, the entity offering the schemes is the mutual fund; the pool of money is the scheme.
- There are no guaranteed returns. A mutual fund is a pass-through vehicle: it hands the risk and the return straight to the investor. The only exception the regulations allow is an assured returns scheme, which must name a guarantor in the SID.
- The mutual fund itself pays no tax on its income — the investor does, when income is distributed or units are sold.
- Investors have no say in what the scheme buys. That is what a Portfolio Management Service offers, and it is why the workbook lists lack of customisation as a limitation, not a feature.
Where this is taught
- Series XIX-E · Chapter 2: Types of Investmentsintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series II-B · Chapter 8: Basics of Mutual Fundsintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series XIX-D · Chapter 2: Types of Investmentsintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series II-A · Chapter 5: Basics of Mutual Fundsintroduced here
- Series V-B · Chapter 3: Legal Structure of mutual funds
- Series V-D · Chapter 3: Legal Structure of Mutual Funds in India
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.
- Assets under ManagementThe total value of the money a scheme or a fund house manages — the current NAV multiplied by units outstanding — and the base on which the expense ratio is charged.
- New Fund OfferThe period in which a mutual fund scheme's units are offered to the public for the first time, at a fixed NFO price rather than at NAV, and during which the registrar builds the scheme's first register of investors.
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- UnitThe share of a mutual fund scheme that an investor's money is translated into — typically carrying a face value of Rs 10, and worth whatever the scheme's NAV is on the day.
- Obligations of trusteesThe duties SEBI places on a mutual fund's trustees: hold scheme property in trust, review every AMC-associate transaction quarterly, and certify to SEBI half-yearly that nothing improper happened.
- Change in control of the AMCWhen ownership of a mutual fund's AMC changes hands, SEBI and the trustees must approve it first and every unit holder must be offered at least 30 calendar days to exit at NAV with no exit load.
- Norms for shareholding in mutual fundsA rule that stops one fund house owning a piece of another: no sponsor, associate or 10% shareholder of one AMC or trustee company may hold 10% or more of, or sit on the board of, another mutual fund's.
- Specialized Investment FundsA SEBI vehicle sitting between mutual funds and PMS: run by an eligible AMC under the Mutual Funds Regulations, with a minimum of Rs 10 lakh per investor across all of that AMC's SIF strategies.
- Infrastructure debt fund schemesA mutual fund scheme that must put at least 90% of its assets into the debt of infrastructure companies, projects and SPVs, with a 30% cap on any single infrastructure borrower.
- Real estate mutual fund schemesA mutual fund scheme holding actual property: at least 35% of net assets directly in completed, unencumbered Indian real estate, and at least 75% in real estate assets and related securities.
- Unit Linked Insurance PlanA life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.