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-D · Chapter 2: Types of Investmentsintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series II-A · Chapter 5: Basics of Mutual Fundsintroduced here
- Series II-B · Chapter 8: Basics of Mutual Fundsintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series XXI-A · Chapter 6: Collective Investment Vehiclesintroduced here
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series XIX-E · Chapter 2: Types of Investmentsintroduced here
- Series V-D · Chapter 3: Legal Structure of Mutual Funds in India
- Series V-B · Chapter 3: Legal Structure of mutual funds
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.
- Traditional investmentInvestment in financial securities — listed stocks and bonds, general mutual fund units and ETFs — whose shared feature is liquidity; distinct from savings such as bank deposits or ornamental gold.
- Registered Investment AdviserA SEBI-licensed professional who charges investors a fee for investment advice; since 2013 only an RIA may use the word "adviser" — distributors, brokers and insurance agents may not.
- 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.
- 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.
- Short term deposits by a schemeA capped exception letting a mutual fund scheme place cash in a bank deposit — up to 20% of its net assets, for at most 91 days — only to pay redemptions or dividends.
- Securities under the SCRAThe statutory list in Section 2(h) of the SCRA, 1956 that decides what counts as a "security" in India — shares and debentures, but also derivatives, mutual fund units and zero coupon zero principal instruments.
- Three-tier structureThe legal architecture of an Indian mutual fund: a sponsor that establishes it, a trust whose trustees hold the assets for unit holders, and an asset management company appointed to manage the money.
- Cash investment limitMutual funds accept cash only up to Rs 50,000 per investor per mutual fund per financial year, from KYC-compliant resident individuals, sole proprietorships and minors through guardians.
- Custodian independence testThe SEBI rule barring a custodian from serving a mutual fund if its sponsor or associates control 50% or more of the custodian's voting shares, or 50% or more of its directors.
- International equity fundA mutual fund scheme investing in shares listed outside India, giving an investor both an equity-market exposure and a currency exposure to the rupee's movement against the foreign currency.
- Mutual fund distributorThe intermediary who assesses an investor's goals and resources and matches them to suitable schemes — distinct from the fund manager, who builds the portfolio from market analysis, not from the investor's situation.
- Right to beneficial ownershipA unit-holder's proportionate right to the beneficial ownership of a scheme's assets, evidenced by a unit certificate or demat holding, with units in demat form freely transferable.
- Scheme auditorThe auditor appointed by the trustees to audit a mutual fund scheme's accounts, independently of the separate auditor the AMC appoints for its own corporate accounts.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Specified Mutual FundA mutual fund caught by section 50AA — gains on it are short-term no matter how long it was held, and are taxed at the investor's slab rate.
- Equity Linked Saving SchemeAn equity mutual fund category that carries a section 80C deduction of up to Rs 1.5 lakh with a compulsory three-year lock-in — the shortest lock-in of any tax-saving instrument.
- Market timingTrying to pick the exact best moment to buy or sell. The booklet calls it a "complex or even impossible duty" and offers regular investing (SIP, rupee cost averaging) instead.
- Solution oriented schemesOne of the five broad categories of mutual fund schemes: schemes that invest according to a personal goal such as retirement or a child's education.
- Financial productsInvestment options such as a bank fixed deposit, shares or a mutual fund — as opposed to non-financial products like land, gold or silver — that the booklet asks investors to judge on safety, liquidity and return.
- 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.
- Other Mutual FundsThe residual, fourth category in the post-2023 mutual fund tax classification: funds that are neither equity-oriented nor a Specified Mutual Fund, taxed under the ordinary period-of-holding rules.
- Asset classA grouping of investments with similar characteristics. The workbook names four broad asset classes — real estate, commodities, equity and fixed income — each with its own sub-categories.
- Trust deedThe registered instrument, executed by the sponsor in favour of the trustees, that constitutes a mutual fund as a trust, names its first trustees and governs its operations under clauses SEBI prescribes.
- 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.
- Life Cycle FundAn open-ended scheme with a target maturity date between 5 and 30 years, which follows a glide path across equity, debt and other assets — shifting away from equity as maturity approaches.
- 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.
- 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.
- Know Your DistributorAMFI's verification process for mutual fund distributors — document verification plus a biometric impression of the right index finger, traditionally at a CAMS Point of Service — completed before ARN registration.
- Ultimate Beneficial OwnerThe natural person who ultimately owns or controls a non-individual investor — over 25% of a company, over 15% of a partnership, or 15% or more of a trust's benefits — whose identity a mutual fund must verify.
- Multi Cap FundAn open-ended equity scheme investing across large, mid and small caps, with at least 75% of total assets in equity and at least 25% each in large-cap, mid-cap and small-cap companies.
- Ticket sizeThe minimum amount an investment requires — from as little as Rs 50 or Rs 100 in some avenues to more than Rs 1 lakh or even Rs 1 crore in others.
- Flexi Cap FundAn open-ended equity scheme that must keep at least 65 percent in equity and may move that money freely across large, mid and small cap stocks, with no fixed split.
- Arbitrage fundA mutual fund that buys in the cash market and simultaneously sells in the futures market to lock in the price difference, giving low NAV volatility similar to a liquid fund.
- Common Account NumberA single number allotted by MF Utilities under which an investor's mutual fund holdings across multiple AMCs are consolidated, so one form and one payment can cover several schemes.
- MFCentralA unified digital portal built by CAMS and KFintech under SEBI mandate, giving investors a single-window, consolidated view of all their mutual fund holdings and letting them place service requests across AMCs.
- DivisibilityWhether an investment can be liquidated in part, or only sold as a whole — real estate is the workbook's example of a non-divisible asset, in contrast to mutual fund units.
- Glide pathThe pre-set schedule by which a Life Cycle Fund shifts its mix of equity, debt and gold ETFs as the fund approaches its target maturity date — equity down, debt up, over the fund's life.
- Equity mutual fundA mutual fund that invests in shares to pursue growth, professionally managed and diversified across large, mid or small caps, sectors and investment styles.
- InvITAn Infrastructure Investment Trust: a SEBI-regulated trust that pools investor money into infrastructure assets such as roads, power transmission lines and renewable energy projects.
- Collective investment vehicleA structure that pools money from many investors and invests it together — in India, mutual funds, REITs, InvITs and AIFs, each following a trust-based model governed by SEBI.
- MF LiteA lighter SEBI regulatory framework, introduced in December 2024, for mutual funds that hold only passively managed products — index funds, ETFs, fund of funds or other schemes SEBI specifies.
- Quant FundA mutual fund scheme whose security selection is driven by pre-built, data-based models run through machines rather than by a fund manager's discretionary judgement.
- SecuritiesFinancial instruments — shares, bonds, derivatives, mutual fund units, government securities and more — issued to raise funds, as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956.