Collective Investment Vehicles

1How a mutual fund works

A mutual fund pools investors' money into a portfolio of equity, debt, gold or real estate that matches a stated objective. The portfolio belongs only to the unitholders, in proportion to their contributions.

Constituents (all regulated by SEBI):

• Sponsor: the promoter who sets up the fund.
• Trustees: protect unitholders' interests.
• AMC: launches, markets and manages the schemes and services investors.
• Support entities: banks, R&T agents (who maintain investor records and communications), investor service centres, brokers and custodians.

The offer. The AMC designs a scheme with the approval of the trustees and SEBI, then raises money through a New Fund Offer (NFO).

• The full Scheme Information Document (SID) sets out the objective, asset allocation, strategy, costs and other required disclosures.
• The Key Information Memorandum (KIM) is the abridged version that accompanies the application form.
• Both are available on the AMC's website.

Remember

• Trustees protect investors; the AMC manages the money; the R&T agent keeps the records.
• The KIM is the abridged offer document.

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2Core terms: units, net assets, NAV, cut-off, mark to market

Investment objective. It defines the scheme: which assets it buys, how it is managed, and its risk and return. Suitability starts here.

Units. Units allotted = amount invested ÷ price per unit. For example, ₹5,000 at ₹10 gives 500 units. Units can be allotted in decimals.

Net assets = market value of the portfolio + cash and receivables − fees and expenses. They belong solely to unitholders.

• Rise with fresh investment, gains in the value of holdings, and income earned (dividends, interest).
• Fall with redemptions, losses and expenses.

NAV = net assets ÷ units outstanding. All transactions take place at NAV.

Purchases and redemptions do not change NAV, because units are created or cancelled at NAV. If the units in the last row had been allotted at ₹10 instead of ₹11.11, the NAV would have fallen to ₹11, hurting every existing investor.

The workbook's own table shows 1,000 units after the final purchase. The correct figure is 10,000 (9,000 + 1,000).

Cut-off timings decide which day's NAV applies, so that every investor is treated alike. The NAV depends on when the request is received and on clear funds reaching the fund by the cut-off.

Mark to market (MTM) means valuing the portfolio daily at current market prices, so NAV reflects what investors would get if the fund were liquidated. Securities that are untraded or have stale prices are valued by SEBI-prescribed methods.

Remember

• Transactions at NAV leave NAV unchanged.
• NAV moves only with portfolio value, income and expenses.

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3Scheme structures: open-ended, close-ended, interval, ETF

Interval fund transaction windows last at least 2 days, with at least 15 days between windows.

An ETF usually tracks an index or a commodity such as gold. It has multiple intraday prices rather than one NAV a day, and investors trade with each other rather than with the fund.

Remember

• Close-ended and interval funds must be listed.
• Interval windows: at least 2 days, at least 15 days apart.

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4Regulatory framework

• SEBI is the main regulator, under the SEBI (Mutual Funds) Regulations, 1996. These cover setting up a fund, launching schemes, managing portfolios, investor protection, investor services and the duties of each constituent.
• The RBI is involved in foreign exchange matters (overseas investment, investment by foreigners) and in banks' role in the industry.
• AMFI is the industry body. It recommends best practices and represents the industry to regulators and government.
• MF Lite regulations (from 31 December 2024) apply to mutual funds that run only passive funds.
• SEBI also sets investor service standards: turnaround times, mandatory disclosures and their frequency, NFO allotment timelines, scheme reopening and allotment confirmations.

Remember

• Mutual funds are governed by the SEBI (MF) Regulations, 1996.
• MF Lite is for passive-only funds.

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5Equity fund categories

SEBI groups open-ended schemes into equity, debt, hybrid, solution-oriented and other categories. Each fund house may offer only one scheme per category. The exceptions are index funds and ETFs on different indices, FoFs with different underlying funds, and sector or thematic funds in different sectors or themes.

Passive vs active

• Passive funds hold the index stocks in index weights. There is no stock selection, so no selection risk, and returns are in line with the index.
• Active funds pick and time stocks to beat the index. They carry higher risk if the picks do not work.

Market-cap categories (based on AMFI's ranking by full market capitalisation)

Sector and theme funds

• Sector funds: at least 80% in one sector, such as banking or technology. They are concentrated and cyclical, so timing matters. Banks tend to do well when rates are low; autos when the economy is strong.
• Thematic funds: at least 80% in a theme spanning several sectors (for example, infrastructure covering construction, cement, banks and logistics). They are more diversified than sector funds but still concentrated.
• ESG funds sit under the thematic category and follow one strategy: exclusion, integration, best-in-class or positive screening, impact investing, sustainable objectives, or transition.

Style categories

• Value: buys stocks trading below intrinsic value, at least 65% in equity. It needs a long horizon.
• Contra: buys stocks that are out of favour or temporarily underperforming. An AMC may offer either a value fund or a contra fund, not both.
• Dividend yield: at least 65% in equity, in high-dividend, stable-earning stocks bought for income.
• Focused: a maximum of 30 stocks, so diversification is lower and risk higher.

ELSS: at least 80% in equity, with a 3-year lock-in (no redemption, transfer or pledge). Investments qualify for deduction under Section 80C up to ₹1.5 lakh, available only under the old tax regime.

Remember

• Large cap = top 100; mid cap = 101–250; small cap = 251 onwards.
• Focused fund: maximum 30 stocks. ELSS lock-in: 3 years.

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6Debt fund categories

Debt funds earn coupon income and face interest rate risk (longer tenor means more price sensitivity) and credit risk (lower ratings mean higher default risk). Fund managers balance the two.

Long-duration funds earn interest plus MTM gains. They do best when rates fall, because capital gains add to income, but their returns are more volatile.

Gilt funds carry no default risk but are highly rate-sensitive. They are popular with PF trusts that are mandated to hold G-secs.

Dynamic bond funds cut duration when they expect rates to rise, and lengthen it when they expect rates to fall.

Fixed maturity plans (FMPs) are closed-ended, with tenors from 3 months to 5 years. They hold securities that mature with the plan, so held to maturity they carry little interest rate risk. They are favoured when rates are rising, to lock in high yields.

Target maturity funds (TMFs) are open-ended but have a defined maturity date. Tenors of about 3–15 years have been launched. Both FMPs and TMFs roll down: their residual maturity falls each day.

Remember

• Liquid: up to 91 days. Credit risk: at least 65% at AA and below. Corporate bond: at least 80% at AA+ and above.
• FMP = closed-ended; TMF = open-ended.

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7Hybrid fund categories

An AMC may offer either an aggressive hybrid fund or a balanced hybrid fund, not both.

Capital protection funds are closed-ended hybrids. Part of the money goes into debt that grows back to the principal by maturity (for example, ₹90 growing to ₹100 over 3 years). The rest goes into equity derivatives for upside.

Remember

• Aggressive hybrid: 65–80% equity.
• Multi asset: at least 3 classes, 10% each.

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8Solution-oriented schemes and life cycle funds

Solution-oriented schemes: the workbook states that SEBI discontinued this category with effect from 26 February 2026.

Life cycle funds are a new open-ended category for goal-based investing. Each fund has a predetermined maturity and a glide path.

• Assets: equity, debt, InvITs, ETCDs, and gold and silver ETFs.
• Tenor: 5 to 30 years, in multiples of 5 years.
• Limit: at most 6 funds per mutual fund open for subscription at any time.
• Near maturity: when less than 1 year remains, a fund may be merged into the nearest-maturity life cycle fund, with unitholders' consent.
• Exit load: 3% within the first year, 2% within two years, 1% within three years.
• Benchmark: follows the multi asset allocation fund framework.

Remember

• Life cycle funds: 5–30 years, in multiples of 5; at most 6 open at a time.

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9Other funds: FoFs, ETFs, gold and silver ETFs, real estate, infrastructure debt

Fund of funds (FoF)

• Invests at least 95% in underlying mutual funds. A multi-manager FoF uses funds from other fund houses.
• It adds a layer of cost, because the underlying funds' expenses are already in their NAVs.
• Equity FoFs do not get equity tax treatment. Per the workbook, growth units held over 2 years are taxed at 12.5% plus surcharge and cess, since the 23 July 2024 Budget.

ETFs

• At least 95% in the securities of the index tracked. Expense ratios are similar to index funds.
• Offered first in an NFO, then traded through demat on the exchange. Prices are real-time, unlike an end-of-day NAV.

Gold and silver ETFs

• Units track domestic metal prices. The fund holds 99.5% purity gold or gold receipts, or 99.9% purity silver bars and silver commodity derivatives.
• Gold ETFs may put up to 20% in bank gold deposit schemes. A custodian keeps the metal safe.
• Returns are slightly lower than the metal price because of expenses and cash holdings.

Real estate mutual funds

• At least 35% in physical property, and at least 75% in physical assets plus real-estate securities.
• Closed-ended and listed. None has been launched yet.

Infrastructure debt schemes

• Closed-ended, tenor of at least 5 years, at least 90% in infrastructure debt.
• NAV disclosed at least quarterly. Minimum investment ₹1 crore; minimum unit face value ₹10 lakh. Listed.

Remember

• FoF and ETF: at least 95% in the underlying.
• Infrastructure debt scheme: ₹1 crore minimum.

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10Specialised investment funds and investment options

Specialised investment funds (SIFs) are a new SEBI asset class with a minimum investment of ₹10 lakh. They sit between mutual funds (small tickets) and PMS (₹50 lakh minimum) and allow strategies that mutual funds cannot run: long-short, derivatives used beyond hedging, and curated high-yield credit.

Investment options

• IDCW (income distribution cum capital withdrawal), formerly the dividend option, pays out periodically. NAV falls by the amount paid, and the payout may include the investor's own capital.
• IDCW reinvestment uses the payout to buy more units.
• Growth keeps returns in the scheme, so NAV rises. The investor realises gains by redeeming.

Remember

• An IDCW payout can be a return of capital.
• SIF minimum: ₹10 lakh.

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11Triggers

Triggers set off an automatic redemption or switch when a preset condition is met:

• a percentage return over cost, or a target value;
• a NAV level;
• a date;
• an index level.

The investor reaches the goal without having to track the investment constantly.

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12Transactions: purchase, redemption, switch, reinvestment

Fresh purchase

• In the NFO or later when the scheme is open. The application needs the first holder's name, date of birth, status, occupation, PAN, address, contact details, signature and bank details.
• A folio can have up to 3 holders. Nomination is optional. All holders sign, whatever the mode of holding; digital authentication now replaces physical signatures.
• The R&T agent creates the folio. Allotment is at the applicable NAV, which depends on the type of scheme, the day, the time and the availability of clear funds.

Additional purchase: quote the folio number. KYC, PAN and personal details are already on record.

Redemption

• For all or part of the holding, in units or rupees, signed as per the mode of holding.
• Paid at the day's NAV less any exit load. Proceeds go to the first holder's registered bank account by NEFT, ECS or direct credit (using the IFSC), or by a cheque with pre-printed details.
• Instant Access Facility (IAF): for liquid funds, resident individuals only. The limit is ₹50,000 or 90% of the investment value, whichever is lower, per day per scheme per investor.
• NRIs: investments made from non-repatriable (NRO) funds are paid back to a similar account. Investments made from repatriable funds can be paid to NRE or NRO, as the investor specifies.
• Funds set minimum redemption amounts and minimum balances. If a redemption would take the balance below the minimum, the fund may redeem the whole folio.
• Redemptions may be restricted during systemic crises: market-wide illiquidity, market failures or closures, or unexpected operational problems.
• SEBI (May 2020): schemes being wound up must be listed, to give investors an interim exit.

Switch

• Inter-scheme: to another scheme of the same fund house. Intra-scheme: between options of the same scheme.
• It is a redemption plus a purchase, so exit loads and taxes apply.

IDCW (dividend) reinvestment: the declared payout automatically buys units at the ex-dividend NAV, so returns compound.

Remember

• IAF: ₹50,000 or 90%, whichever is lower; liquid funds; resident individuals only.
• A switch is a redemption for tax purposes.

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13Systematic plans: SIP, SWP, STP, DTP, value averaging

Systematic plans automate transactions. The investor fixes the amount, frequency, date and tenor in advance. Each transaction is done at the NAV on that date, and the plan can be cancelled with notice.

SIP (systematic investment plan)

• A fixed amount at regular intervals. It buys more units when NAV is low and fewer when it is high, so the average cost per unit falls over time: rupee cost averaging.
• Choices: scheme, plan and option; instalment amount (usually lower than the lump-sum minimum); frequency; date; tenor (minimum set by the fund); payment mode (post-dated cheques, NACH, standing instructions).
• Electronic mandates need the signatures of all bank account holders.
• A SIP can be cancelled by written notice to the fund (and the bank, for electronic mandates). It may be cancelled by the fund if instalments bounce. The fund prompts the investor to renew near the end of the term.

SWP (systematic withdrawal plan)

• Regular redemptions to create a payout, which also spreads the timing of exit. Fewer units are sold when NAV is high.
• Every withdrawal is a redemption, so exit load and capital gains tax apply.
• It stops when the folio balance falls below a minimum. Variants include withdrawing appreciation only.

STP (systematic transfer plan)

• Periodic switches from a source scheme to a target scheme of the same fund, in the same folio.
• Example: moving an equity corpus gradually into a short-term debt fund as a goal approaches, avoiding the risk of a single bad exit date.

DTP (dividend or IDCW transfer plan)

• IDCW payouts from one scheme are invested in another, and the original investment stays intact.
• Equity to debt books profits regularly. Debt to equity averages into equity.

Value averaging

• Invest more when markets are down and less when they are up, so the portfolio tracks a target growth path.

Example ₹10,000 a month with a 1% monthly growth target. The target value after month 1 is ₹10,100. If the investment is worth ₹9,900, the next instalment is ₹10,000 + ₹200 = ₹10,200. If it is worth ₹10,400, the instalment is ₹10,000 − ₹300 = ₹9,700.

Drawbacks: the calculations get complex, and standard SIPs do not allow amounts to vary, so the investor has to manage the differences. Some AMCs offer SIPs that adjust with market levels.

Remember

• SIP → rupee cost averaging.
• SWP withdrawals attract exit load and tax.
• STP stays within one fund house and one folio.

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14Direct vs regular plans

• Direct plan: the investor buys directly from the AMC or its R&T agent. No distributor commission, so a lower expense ratio and a higher net return. Every scheme must offer one.
• Regular plan: bought through a distributor, whose commission is part of the expense ratio. The distributor helps with paperwork, problems and regulatory changes.
• The portfolio is identical in both plans; only the expense ratio differs.

Explaining the choice to an investor

• Cost is only one consideration. A direct plan is do-it-yourself: the investor completes the process, monitors the investment and resolves problems alone.
• Judge whether the investor has the knowledge and the time to handle it, and show how direct transactions work, including login and other technical issues.
• If the investor gets advice and uses a distributor for execution, a regular plan covers the whole process. A capable self-directed investor may prefer to save cost through a direct plan.

Exam trap Direct and regular plans of a scheme hold the same portfolio. The return difference comes only from the expense ratio.

Remember

• Direct plan: lower cost, no distributor support.

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15What alternative investments are

Alternative investments are anything outside traditional investments. Traditional investments are listed stocks and bonds, ordinary mutual funds and ETFs; bank deposits, government schemes, jewellery and a home to live in are separate again.

• Traditional investments are liquid: they can be sold on the market or redeemed from an open-ended fund at any time.
• Alternatives are mostly illiquid: they are off-market or complex, with no ready buyers.

Alternatives aim for higher returns at higher risk and are meant to complement traditional holdings and improve long-term risk-adjusted returns. They suit sophisticated investors: pension funds, insurers, endowments, investment banks, family offices, HNIs, funds of funds and AIF managers themselves.

Remember

• The defining feature of alternatives is illiquidity.

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16Evolution of AIFs in India

• 1980s: venture capital from state industrial development corporations, FIs and PSU banks.
• 1996: the SEBI (Venture Capital Funds) Regulations widened the scope beyond "untried technologies" to institutional investment in unlisted companies.
• 2000: tax reforms followed the K.B. Chandrasekhar Committee recommendations.
• 1997–2001: the dotcom boom brought tech-focused, Silicon Valley-style VC funds.
• After 2001: private equity spread to manufacturing, real estate, infrastructure and services. By 2007 it reached banking, logistics, e-commerce and project finance.
• 2008: the global financial crisis hurt fundraising and exits. Macroeconomic problems and concerns about tax followed.

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17SEBI rules for AIFs

Under the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF is a privately pooled investment vehicle that raises money from Indian or foreign investors under a defined investment policy. "Privately pooled" means money from selected investors, not the public.

Fund-raising conditions

• Investors may be Indian, foreign or NRI. AIFs issue units.
• Each scheme needs a minimum corpus of ₹20 crore.
• Minimum investment per investor: ₹1 crore (₹25 lakh for employees or directors of the AIF or its manager).
• The manager or sponsor must keep a continuing interest of at least 2.5% of the corpus or ₹5 crore, whichever is lower. For Category III it is 5% or ₹10 crore, whichever is lower. This cannot be met by waiving management fees, and it must be disclosed to investors.
• Maximum 1,000 investors per scheme.
• Money may be raised only by private placement.

Accredited investors can invest in large value funds (minimum ₹25 crore per investor since November 2025, lowered from ₹70 crore) and in schemes open only to accredited investors, which have lighter rules. Eligibility:

• individuals, HUFs, family trusts and sole proprietors with:
  • annual income ≥ ₹2 crore, or
  • net worth ≥ ₹7.5 crore (at least ₹3.75 crore in financial assets), or
  • income ≥ ₹1 crore and net worth ≥ ₹5 crore (at least ₹2.5 crore financial);
• partnership firms in which each partner qualifies;
• trusts (other than family trusts) and body corporates with net worth ≥ ₹50 crore.

Listing: units of close-ended AIFs may be listed, with a minimum tradable lot of ₹1 crore, and only after the final close.

Investment conditions

• Overseas investment is allowed, subject to RBI and SEBI conditions.
• Co-investment by the manager, sponsor or co-investors may not be on better terms than the AIF's.
• Category I and II: at most 25% of investable funds in one investee company.
• Category III: at most 10% in one investee company.
• Investment in associates needs approval from 75% of investors by value.
• Money not yet invested may be parked in liquid funds, bank deposits, T-bills, CPs, CDs and similar instruments.

Remember

• Minimum ₹1 crore, maximum 1,000 investors, minimum corpus ₹20 crore.
• Sponsor stake: 2.5% or ₹5 crore (Category III: 5% or ₹10 crore), whichever is lower.

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18The three categories

Exam trap Hedge funds are Category III. PE and debt AIFs are Category II. Angel funds are Category I funds.

Remember

• Category III = complex strategies plus leverage.

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19Types of AIFs

• Venture capital fund: invests mainly in unlisted start-ups and early-stage firms with new products, services, technology, IP or business models. It is usually the first institutional money after angels, and suits asset-light businesses.
• Angel fund: a Category I fund that pools money to invest small amounts in start-ups. Under SEBI's revised framework of September 2025, angel funds may raise money only from accredited investors (the earlier experience-based definition of "angel investor" was replaced), and each investment is made with the consent of the participating investors.
• Private equity fund: invests mainly in equity or equity-linked instruments or partnership interests. Equity-linked instruments include convertibles, warrants, preference shares and compulsorily or optionally convertible debentures. PE funds back later-stage businesses with proven models that need capital to scale.
• Debt fund: invests mainly in debt of listed or unlisted companies, such as privately placed NCDs. Variants:
  • venture debt / mezzanine: debt with equity kickers such as warrants;
  • subordinated debt to already-indebted companies, called leveraged loans;
  • distressed debt: refinancing settlements with banks and IBC insolvency resolution.
• Infrastructure fund: invests in unlisted securities, partnership interests, or listed or securitised debt of companies or SPVs that develop, operate or hold infrastructure. The space is dominated by sovereign wealth funds, multilateral funds and sector specialists because of illiquidity and long gestation.
• SME fund: invests in unlisted SMEs, or those listed or to be listed on an SME exchange or platform, as defined under the MSMED Act, 2006.
• Hedge fund: uses diverse or complex trading strategies in securities and complex products, including derivatives.
• Social impact fund: invests in social ventures that meet the fund's social performance norms, such as charitable trusts and societies, Section 8 companies and microfinance institutions.
• Special situations fund: invests in special situation assets and may act as a resolution applicant under the IBC, 2016.

Remember

• Angel funds: accredited investors only (since September 2025).
• A special situations fund can be an IBC resolution applicant.

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20Role of alternatives in a portfolio

Established business models face pressure from technology, environmental concerns, regulation, economic volatility and geopolitics. Ultra-low and even negative policy rates in developed economies have cut returns there and pushed capital towards emerging markets. Investors use alternatives for more than return: they also want diversification and access to opportunities that public markets do not offer.