5.1 Mutual Fund Products in Detail

5.1 Mutual Fund Products in Detail

Quick Answer: A mutual fund is a trust that pools money from many investors and invests in a managed portfolio of securities, regulated by SEBI under the SEBI (Mutual Funds) Regulations, 2026 (in force from April 1, 2026, replacing the 1996 Regulations). SEBI's October 2017 categorisation circular (and subsequent amendments) fixes minimum exposures for each scheme type, so a candidate can read a scheme's mandate from its category label. For the NISM Series XXV-B exam, know the category taxonomy, the ELSS 80C lock-in, and the direct/regular and growth/IDCW economics cold.

What Makes a Mutual Fund

A mutual fund is set up as a trust under the Indian Trusts Act, 1882, with a sponsor, trustee (typically an independent corporate trustee company), Asset Management Company (AMC) that manages the portfolio, and a custodian that holds securities. SEBI must approve the scheme, and every scheme files a Scheme Information Document (SID) and Key Information Memorandum (KIM). Units are bought and redeemed at NAV, computed daily after market close. The minimum ticket is low (often ₹500 for SIPs, ₹5,000 for lumpsum in many schemes), which is why MFs are the default vehicle for retail.

Equity Schemes

SEBI classifies equity-oriented schemes by market-cap allocation. The reference is the AMFI list (top 100 = large-cap, 101–250 = mid-cap, 251+ = small-cap, reclassified every six months):

• Large-Cap Fund — at least 80% of total assets in top-100 large-cap stocks. Lower volatility, more stable returns over a 5+ year horizon.
• Mid-Cap Fund — at least 65% in mid-cap stocks. Higher growth potential, higher drawdowns.
• Small-Cap Fund — at least 65% in small-cap stocks. Highest risk-return; illiquidity in down cycles.
• Multi-Cap Fund — minimum 25% each in large-, mid-, and small-cap (75% total equity minimum). A reweighting by SEBI in September 2020 fixed the 25/25/25 floor.
• Flexi-Cap Fund — minimum 65% in equity with free choice across large/mid/small; introduced November 2020 as a more flexible alternative to multi-cap.
• Large & Mid-Cap Fund — at least 35% each in large-cap and mid-cap.
• ELSS (Tax Saver) — at least 80% equity, 3-year lock-in from each unit's date of allotment, qualifies for deduction under Section 80C of the Income-Tax Act up to ₹1.5 lakh per financial year. Shortest lock-in among all 80C instruments.
• Sectoral / Thematic Funds — at least 80% in a chosen sector or theme (banking, pharma, tech, ESG); high concentration risk.
• Focused Fund — maximum 30 stocks across any cap; concentrated portfolio.

Debt Schemes

Debt schemes lend to governments and corporates. Their risk is interest-rate risk (duration) and credit risk (default). SEBI's 2017 categorisation defines 16 debt sub-categories by duration profile:

• Overnight Fund — overnight securities, near-zero interest-rate risk.
• Liquid Fund — maturity up to 91 days; used for parking cash.
• Ultra-Short / Short / Low / Medium / Long Duration — increasing modified duration, increasing rate sensitivity.
• Corporate Bond Fund — at least 80% in highest-rated (AA+ and above) corporate paper.
• Gilt Fund — at least 80% in government securities (G-Secs); no credit risk, only rate risk.
• Credit Risk Fund — at least 65% in below-highest-rated corporate paper (AA and below); higher yield for higher default risk.

Hybrid Schemes

Hybrid funds blend equity and debt to suit risk profiles:

• Aggressive Hybrid — 65–80% equity, 20–35% debt. Equity taxation if ≥65% equity.
• Balanced Advantage / Dynamic Asset Allocation — shifts between equity and debt based on a model (e.g., P/E, P/B); tax status depends on equity holding.
• Conservative Hybrid — 10–25% equity, 75–90% debt.
• Arbitrage Fund — ≥65% equity but takes offsetting futures positions to lock spreads; taxed as equity, returns like liquid-plus.

Solution-Oriented Schemes

• Retirement Fund — minimum 5-year lock-in (or till retirement age), ≥65% equity for equity taxation.
• Children's Fund — minimum 5-year lock-in (or till child turns 18), equity-orientation typical.

ETFs and Index Funds (Passive Route)

Exchange-Traded Funds (ETFs) are listed units that track an index (Nifty 50, Bank Nifty, gold, G-Sec). They trade like shares on the exchange, have low expense ratios (0.05–0.40%) because the manager only replicates the index, and require a demat account. Index Funds are the unlisted, NAV-priced version — slightly higher expense ratio (0.20–0.80%) but no demat needed. Passive funds suit investors who want market returns at minimal cost without active stock-picking risk.

SIP vs Lumpsum

A Systematic Investment Plan (SIP) commits a fixed sum (commonly ₹500–₹10,000/month) at regular intervals, automatically buying more units when NAV is low and fewer when high — rupee-cost averaging. SIPs enforce discipline and reduce timing risk. A lumpsum deploys the entire amount at one NAV; outperforms in rising markets but exposes the investor to entry-timing risk. Most Indian retail investors use SIPs for equity schemes and lumpsums for debt schemes.

Direct vs Regular Plan

A Regular Plan is bought through a distributor; the AMC pays a trail commission (typically 0.50–1.00% p.a. for equity) that is embedded inside the expense ratio. A Direct Plan is bought from the AMC directly with no distributor — the same portfolio, same fund manager, lower expense ratio. On ₹10 lakh compounded at 12% over 20 years, a 1% annual cost gap is roughly ₹7–8 lakh of extra returns in the direct plan. Direct plans suit investors who can choose their own scheme.

IDCW vs Growth

IDCW (Income Distribution cum Capital Withdrawal) — formerly called dividend — is a payout the AMC can declare from realised gains; it is not a guaranteed return and reduces NAV by the amount paid. Taxed in the investor's hands at the applicable equity/debt slab (per the 2020 amendment). Growth option retains all gains inside the portfolio, compounding NAV — almost always preferred for long-horizon wealth creation.

Why MFs Suit Most Retail Investors

Low ticket, regulated, professionally managed, liquid, SEBI-mandated disclosures, tax-efficient equity taxation (≥65% equity schemes), and SIP discipline make mutual funds the natural default for salaried and self-employed retail investors — the gap above is filled by PMS (for HNIs) and AIFs (for sophisticated investors).

MF Category Comparison Table

Exam tip: LTCG on equity/equity-MFs is 12.5% on gains above ₹1.25 lakh per financial year (post-Budget 2024, no indexation). STCG on equity MFs is 20%.

Debt taxation note: For units of a specified mutual fund (broadly, schemes that invest less than 35% in domestic equity) bought on or after 1 April 2023, the gain is treated as short-term irrespective of holding period and taxed at the investor's slab rate — there is no 12.5% long-term rate and no indexation. The 12.5%/₹1.25 lakh treatment in the table applies only to equity-oriented schemes.