Mutual Funds
Mutual Funds pool money from investors and invest in equities, debt or hybrids. The exam tests NAV, scheme types, loads, expenses and the difference between direct and regular plans.
Core rules
- SEBI regulates mutual funds under the SEBI (Mutual Funds) Regulations, 1996.
- NAV = (total assets − liabilities) ÷ number of outstanding units; it is declared daily for open-ended schemes.
- Open-ended schemes allow continuous purchase and redemption; close-ended schemes have a fixed tenure and units may be listed.
- Direct plans have no distributor commission and usually a lower expense ratio than regular plans.
- Exit loads are charged on redemption within a specified period; they are not a purchase charge.
- The riskometer indicates the scheme's risk level; it is not a return guarantee.
Worked example
You invest ₹20,000 at NAV ₹20, so you get 1,000 units. After six months NAV is ₹22; value = 1,000 × 22 = ₹22,000. If an exit load of 1% applies to redemptions within 12 months, proceeds = ₹22,000 − ₹220 = ₹21,780. The reasoning: the load is applied to redemption proceeds, so the realised gain is ₹1,780, not ₹2,000.
Traps that cost marks
- Treating NAV as a market-determined share price for an open-ended scheme.
- Comparing regular and direct plan returns without adjusting for expenses.
- Assuming IDCW (dividend) is guaranteed or extra return.
- Ignoring exit load when calculating short-horizon returns.