UTI MUTUAL FUND

UTI Mutual Fund was carved out of the erstwhile Unit Trust of India (UTI) as a Securities and
Exchange Board of India (SEBI) registered mutual fund from 1 February 2003.[1] The Unit Trust of India
Act 1963 was repealed, paving way for the bifurcation of UTI into: Specified Undertaking of Unit Trust of
India (SUUTI) and UTI Mutual Fund (UTIMF).
T Rowe Price Group Inc (TRP Group), through its wholly owned subsidiary T. Rowe Price Global
Investment Services Ltd. (TRP), has acquired a 26% stake in UTI Asset Management Company Limited
(UTI AMC).
UTI Mutual Fund is the oldest and one of the largest mutual funds in India with over 10 million
investor accounts under its 230 domestic schemes/plans as of September 2017.
UTI Mutual Fund has a nationwide distribution network, which is spread across the length and breadth
of the country. Its distribution network comprises over 48000 AMFI/NISM certified Independent
Financial Advisors and 174 Financial Centers.[2]
UTI Mutual Fund has been the pioneer for launching various schemes viz. UTI Unit Linked Insurance Plan
(ULIP) with life and accident cover (Launched in 1971), UTI Mastershare (Launched in 1986), India's first
Offshore Fund – India fund (Launched in 1986), UTI Wealth Builder Fund, the first of its kind in the Indian
mutual fund industry combining different asset classes i.e. equity and gold which are lowly correlated.
UTI Mastershare Fund has also been rated No. 1 by Crisil, just like the IDBI India Top 100 Equity Fund. The
scheme was started way back in 1986, making it one of the oldest in the country, The assets under
management are close to Rs 10,000 crores. An investor can start a SIP with a small amount of Rs 100. The 3-
year returns from the scheme is 14% on an annualised basis, while the 5- year returns are around that 10%
mark.

WHAT ARE MUTUAL FUNDS?

A mutual fund is a collective investment vehicle that collects & pools money from a number
of investors and invests the same in equities, bonds, government securities, money market
instruments.

The money collected in mutual fund scheme is invested by professional fund managers in
stocks and bonds etc. in line with a scheme’s investment objective. The income / gains
generated from this collective investment scheme are distributed proportionately amongst
the investors, after deducting applicable expenses and levies, by calculating a scheme’s
“Net Asset Value” or NAV. In return, mutual fund charges a small fee.

In short, mutual fund is a collective pool of money contributed by several investors and
managed by a professional Fund Manager.

Mutual Funds in India are established in the form of a Trust under Indian Trust Act, 1882, in
accordance with SEBI (Mutual Funds) Regulations, 1996.

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The fees and expenses charged by the mutual funds to manage a scheme are regulated
and are subject to the limits specified by SEBI.

HOW A MUTUAL FUND WORKS?

One should avoid the temptation to review the fund's performance each time the market
falls or jumps up significantly. For an actively-managed equity scheme, one must have
patience and allow reasonable time - between 18 and 24 months - for the fund to generate
returns in the portfolio.

When you invest in a mutual fund, you are pooling your money with many other investors.
Mutual fund issues “Units” against the amount invested at the prevailing NAV. Returns from
a mutual fund may include income distributions to investors out of dividends, interest,
capital gains or other income earned by the mutual fund. You can also have capital gains
(or losses) if you sell the mutual fund units for more (or less) than the amount you invested.

Mutual funds are ideal for investors who –

a. lack the knowledge or skill / experience of investing in stock markets directly.

b. want to grow their wealth, but do not have the inclination or time to research the stock
market.

c. wish to invest only small amounts.

WHY INVEST IN MUTUAL FUNDS?

As investment goals vary from person to person – post-retirement expenses, money for
children’s education or marriage, house purchase, etc. – the investment products required
to achieve these goals too vary. Mutual funds provide certain distinct advantages over
investing in individual securities. Mutual funds offer multiple choices for investment across
equity shares, corporate bonds, government securities, and money market instruments,
providing an excellent avenue for retail investors to participate and benefit from the up
trends in capital markets. The main advantages are that you can invest in a variety of
securities for a relatively low cost and leave the investment decisions to a professional
manager.

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TYPES OF MUTUAL FUND SCHEMES

MUTUAL FUND SCHEME CLASSIFICATION
Mutual funds come in many varieties, designed to meet different investor goals. Mutual
funds can be broadly classified based on –

1. Organisation Structure – Open ended, Close ended, Interval

2. Management of Portfolio – Actively or Passively

3. Investment Objective – Growth, Income, Liquidity

4. Underlying Portfolio – Equity, Debt, Hybrid, Money market instruments, Multi Asset

5. Thematic / solution oriented – Tax saving, Retirement benefit, Child welfare, Arbitrage

6. Exchange Traded Funds

7. Overseas funds

8. Fund of funds

SCHEME CLASSIFICATION BY ORGANIZATION STRUCTURE

•Open-ended schemes are perpetual, and open for subscription and repurchase on a
continuous basis on all business days at the current NAV.

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• Close-ended schemes have a fixed maturity date. The units are issued at the time of the
initial offer and redeemed only on maturity. The units of close-ended schemes are
mandatorily listed to provide exit route before maturity and can be sold/traded on the stock
exchanges.

•Interval schemes allow purchase and redemption during specified transaction periods
(intervals). The transaction period has to be for a minimum of 2 days and there should be at
least a 15-day gap between two transaction periods. The units of interval schemes are also
mandatorily listed on the stock exchanges.

SCHEME CLASSIFICATION BY PORTFOLIO MANAGEMENT

Active Funds
In an Active Fund, the Fund Manager is ‘Active’ in deciding whether to Buy, Hold, or Sell the
underlying securities and in stock selection. Active funds adopt different strategies and
styles to create and manage the portfolio.

 The investment strategy and style are described upfront in the Scheme Information
document (offer document)
 Active funds expect to generate better returns (alpha) than the benchmark index.

 The risk and return in the fund will depend upon the strategy adopted.

 Active funds implement strategies to ‘select’ the stocks for the portfolio.
Passive Funds
Passive Funds hold a portfolio that replicates a stated Index or Benchmark e.g. –

 Index Funds

 Exchange Traded Funds (ETFs)

In a Passive Fund, the fund manager has a passive role, as the stock selection / Buy, Hold,
Sell decision is driven by the Benchmark Index and the fund manager / dealer merely needs
to replicate the same with minimal tracking error.

ACTIVE V/S PASSIVE FUNDS

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Active Fund –

 Rely on professional fund managers who manage investments.

 Aim to outperform Benchmark Index

 Suited for investors who wish to take advantage of fund managers' alpha generation
potential.
Passive Funds –

 Investment holdings mirror and closely track a benchmark index, e.g., Index Funds
or Exchange Traded Funds (ETFs)
 Suited for investors who want to allocate exactly as per market index.

 Lower Expense ratio hence lower costs to investors and better liquidity

CLASSIFICATION BY INVESTMENT OBJECTIVES

Mutual funds offer products that cater to the different investment objectives of the investors
such as –

a. Capital Appreciation (Growth)

b. Capital Preservation

c. Regular Income

d. Liquidity

e. Tax-Saving

Mutual funds also offer investment plans, such as Growth and Dividend options, to help
tailor the investment to the investors’ needs.

GROWTH FUNDS
 Growth Funds are schemes that are designed to provide capital appreciation.

 Primarily invest in growth oriented assets, such as equity

 Investment in growth-oriented funds require a medium to long-term investment

horizon.

 Historically, Equity as an asset class has outperformed most other kind of

investments held over the long term. However, returns from Growth funds tend to be

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volatile over the short-term since the prices of the underlying equity shares may
change.
 Hence investors must be able to take volatility in the returns in the short-term.

INCOME FUNDS
 The objective of Income Funds is to provide regular and steady income to investors.

 Income funds invest in fixed income securities such as Corporate Bonds,

Debentures and Government securities.

 The fund’s return is from the interest income earned on these investments as well as
capital gains from any change in the value of the securities.

 The fund will distribute the income provided the portfolio generates the required
returns. There is no guarantee of income.

 The returns will depend upon the tenor and credit quality of the securities held.

LIQUID / OVERNIGHT /MONEY MARKET MUTUAL FUNDS

 Liquid Schemes, Overnight Funds and Money market mutual fund are investment
options for investors seeking liquidity and principal protection, with commensurate
returns.
– The funds invest in money market instruments* with maturities not exceeding 91
days.
– The return from the funds will depend upon the short-term interest rate prevalent in
the market.
 These are ideal for investors who wish to park their surplus funds for short periods.
– Investors who use these funds for longer holding periods may be sacrificing better
returns possible from products suitable for a longer holding period.

* Money Market Instruments includes commercial papers, commercial bills, treasury bills, Government
securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance
bills, and any other like instruments as specified by the Reserve Bank of India from time to time.

CLASSIFICATION BY INVESTMENT PORTFOLIO

 Mutual fund products can be classified based on their underlying portfolio
composition
– The first level of categorization will be on the basis of the asset class
the fund

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invests in, such as equity / debt / money market instruments or gold.

– The second level of categorization is on the basis of strategies and styles used to
create the portfolio, such as, Income fund, Dynamic Bond Fund, Infrastructure fund,
Large-cap/Mid-cap/Small-cap Equity fund, Value fund, etc.
– The portfolio composition flows out of the investment objectives of the scheme.

RISK FACTORS
STANDARD RISK FACTORS
 Mutual Fund Schemes are not guaranteed or assured return products.

 Investment in Mutual Fund Units involves investment risks such as trading volumes,
settlement risk, liquidity risk, default risk including the possible loss of principal.

 As the price / value / interest rates of the securities in which the Scheme invests
fluctuates, the value of investment in a mutual fund Scheme may go up or down.

 In addition to the factors that affect the value of individual investments in the
Scheme, the NAV of the Scheme may fluctuate with movements in the broader
equity and bond markets and may be influenced by factors affecting capital and
money markets in general, such as, but not limited to, changes in interest
rates, currency exchange rates, changes in Government policies, taxation,
political, economic or other developments and increased volatility in the stock
and bond markets.

 Past performance does not guarantee future performance of any Mutual Fund
Scheme.

SPECIFIC RISK FACTORS

RISKS ASSOCIATED WITH INVESTMENTS IN EQUITIES
Risk of losing money:
Investments in equity and equity related instruments involve a degree of risk and investors
should not invest in the equity schemes unless they can afford to take the risk of possible
loss of principal.

Price Risk:
Equity shares and equity related instruments are volatile and prone to price fluctuations on
a daily basis.

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Liquidity Risk for listed securities:

The liquidity of investments made in the equities may be restricted by trading volumes and
settlement periods. Settlement periods may be extended significantly by unforeseen
circumstances. While securities that are listed on the stock exchange carry lower liquidity
risk, the ability to sell these investments is limited by the overall trading volume on the stock
exchanges. The inability of a mutual fund to sell securities held in the portfolio could result
in potential losses to the scheme, should there be a subsequent decline in the value of
securities held in the scheme portfolio and may thus lead to the fund incurring losses till the
security is finally sold.

Event Risk:
Price risk due to company or sector specific event.

RISKS ASSOCIATED WITH INVESTMENT IN DEBT SECURITIES AND

MONEY MARKET INSTRUMENTS
Debt Securities are subject to the risk of an issuer’s inability to meet principal and interest
payments on the obligation (Credit Risk) on the due date(s) and may also be subject to
price volatility due to such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (Market Risk).

The timing of transactions in debt obligations, which will often depend on the timing of the
Purchases and Redemptions in the Scheme, may result in capital appreciation or
depreciation because the value of debt obligations generally varies inversely with the
prevailing interest rates.

Interest Rate Risk

Market value of fixed income securities is generally inversely related to interest rate
movement. Generally, when interest rates rise, prices of existing fixed income securities fall
and when interest rates drop, such prices increase. Accordingly, value of a scheme portfolio
may fall if the market interest rate rise and may appreciate when the market interest rate
comes down. The extent of fall or rise in the prices depends upon the coupon and maturity
of the security. It also depends upon the yield level at which the security is being traded.

Credit Risk
This is risk associated with default on interest and /or principal amounts by issuers of fixed
income securities. In case of a default, scheme may not fully receive the due amounts and
NAV of the scheme may fall to the extent of default. Even when there is no default, the price
of a security may change with expected changes in the credit rating of the issuer. It may be

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mentioned here that a government security is a sovereign security and is safer. Corporate
bonds carry a higher amount of credit risk than government securities. Within corporate
bonds also there are different levels of safety and a bond rated higher by a rating agency is
safer than a bond rated lower by the same rating agency.

Spread Risk
Credit spreads on corporate bonds may change with varying market conditions. Market
value of debt securities in portfolio may depreciate if the credit spreads widen and vice
versa. Similarly, in case of floating rate securities, if the spreads over the benchmark
security / index widen, then the value of such securities may depreciate.

Liquidity Risk
Liquidity risk refers to the ease with which securities can be sold at or near its valuation
yield-to-maturity (YTM) or true value. Liquidity condition in market varies from time to time.
The liquidity of a bond may change, depending on market conditions leading to changes in
the liquidity premium attached to the price of the bond. In an environment of tight liquidity,
necessity to sell securities may have higher than usual impact cost. Further, liquidity of any
particular security in portfolio may lessen depending on market condition, requiring higher
discount at the time of selling.

The primary measure of liquidity risk is the spread between the bid price and the offer price
quoted by a dealer. Trading volumes, settlement periods and transfer procedures may
restrict the liquidity of some of these investments. Different segments of the Indian financial
markets have different settlement periods, and such periods may be extended significantly
by unforeseen circumstances. Further, delays in settlement could result in temporary
periods when a portion of the assets of the Scheme are not invested and no return is
earned thereon or the Scheme may miss attractive investment opportunities.

At the time of selling the security, the security may become illiquid, leading to loss in value
of the portfolio. The purchase price and subsequent valuation of restricted and illiquid
securities may reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.

Counterparty Risk
This is the risk of failure of the counterparty to a transaction to deliver securities against
consideration received or to pay consideration against securities delivered, in full or in part
or as per the agreed specification. There could be losses to the fund in case of a
counterparty default.

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Prepayment Risk
This arises when the borrower pays off the loan sooner than the due date. This may result
in a change in the yield and tenor for the mutual fund scheme. When interest rates decline,
borrowers tend to pay off high interest loans with money borrowed at a lower interest rate,
which shortens the average maturity of Asset-backed securities (ABS). However, there is
some prepayment risk even if interest rates rise, such as when an owner pays off a
mortgage when the house is sold or an auto loan is paid off when the car is sold. Since
prepayment risk increases when interest rates decline, this also introduces reinvestment
risk, which is the risk that the principal may only be reinvested at a lower rate.

Re-investment Risk
Investments in fixed income securities carry re-investment risk as the interest rates
prevailing on the coupon payment or maturity dates may differ from the original coupon of
the bond (the purchase yield of the security). This may result in final realized yield to be
lower than that expected at the time

The additional income from reinvestment is the "interest on interest" component. There may
be a risk that the rate at which interim cash flows can be reinvested are lower than that
originally assumed.

ADVANTAGES OF INVESTING IN MUTUAL FUNDS

1. Professional Management — Investors may not have the time or the required
knowledge and resources to conduct their research and purchase individual stocks or
bonds. A mutual fund is managed by full-time, professional money managers who have the
expertise, experience and resources to actively buy, sell, and monitor investments. A fund
manager continuously monitors investments and rebalances the portfolio accordingly to
meet the scheme’s objectives. Portfolio management by professional fund managers is one
of the most important advantages of a mutual fund.

2. Risk Diversification — Buying shares in a mutual fund is an easy way to diversify your
investments across many securities and asset categories such as equity, debt and gold,
which helps in spreading the risk - so you won't have all your eggs in one basket. This
proves to be beneficial when an underlying security of a given mutual fund scheme
experiences market headwinds. With diversification, the risk associated with one asset
class is countered by the others. Even if one investment in the portfolio decreases in value,

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other investments may not be impacted and may even increase in value. In other words,
you don’t lose out on the entire value of your investment if a particular component of your
portfolio goes through a turbulent period. Thus, risk diversification is one of the most
prominent advantages of investing in mutual funds.

3. Affordability & Convenience (Invest Small Amounts) — For many investors, it could
be more costly to directly purchase all of the individual securities held by a single mutual
fund. By contrast, the minimum initial investments for most mutual funds are more
affordable.

4.Liquidity — You can easily redeem (liquidate) units of open ended mutual fund schemes
to meet your financial needs on any business day (when the stock markets and/or banks
are open), so you have easy access to your money. Upon redemption, the redemption
amount is credited in your bank account within one day to 3-4 days, depending upon the
type of scheme e.g., in respect of Liquid Funds and Overnight Funds, the redemption
amount is paid out the next business day.

However, please note that units of close-ended mutual fund schemes can be redeemed
only on maturity. Likewise, units of ELSS have a 3-year lock-in period and can be liquidated
only thereafter.

5.Low Cost — An important advantage of mutual funds is their low cost. Due to huge
economies of scale, mutual funds schemes have a low expense ratio. Expense ratio
represents the annual fund operating expenses of a scheme, expressed as a percentage of
the fund’s daily net assets. Operating expenses of a scheme are administration,
management, advertising related expenses, etc. The limits of expense ratio for various
types of schemes has been specified under Regulation 52 of SEBI Mutual Fund
Regulations, 1996.

6.Well-Regulated — Mutual Funds are regulated by the capital markets regulator,

Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations,
1996. SEBI has laid down stringent rules and regulations keeping investor protection,
transparency with appropriate risk mitigation framework and fair valuation principles.

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7.Tax Benefits —Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under section
80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are
tax efficient.

SEBI CATEGORIZATION OF MUTUAL FUND

SCHEMES
As per SEBI guidelines on Categorization and Rationalization of schemes issued in October
2017, mutual fund schemes are classified as –

1. Equity Schemes

2. Debt Schemes

3. Hybrid Schemes

4. Solution Oriented Schemes – For Retirement and Children

5. Other Schemes – Index Funds & ETFs and Fund of Funds

– Under Equity category, Large, Mid and Small cap stocks have now been defined.

–Naming convention of the schemes, especially debt schemes, as per the risk level of
underlying portfolio (e.g., the erstwhile ‘Credit Opportunity Fund’ is now called “Credit Risk
Fund”)

–Balanced / Hybrid funds are further categorised into conservative hybrid fund, balanced
hybrid fund and aggressive hybrid fund.

EQUITY SCHEMES
An equity Scheme is a fund that –

– Primarily invests in equities and equity related instruments.

– Seeks long term growth but could be volatile in the short term.

– Suitable for investors with higher risk appetite and longer investment horizon.

The objective of an equity fund is generally to seek long-term capital appreciation. Equity
funds may focus on certain sectors of the market or may have a specific investment style,
such as investing in value or growth stocks.

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Equity Fund Categories as per SEBI guidelines on Categorization and Rationalization

of schemes

Multi Cap Fund* At least 65% investment in equity & equity related instruments

Large Cap Fund At least 80% investment in large cap stocks

Large & Mid Cap Fund At least 35% investment in large cap stocks and 35% in mid cap stocks

Mid Cap Fund At least 65% investment in mid cap stocks

Small cap Fund At least 65% investment in small cap stocks

Dividend Yield Fund Predominantly invest in dividend yielding stocks, with at least 65% in stocks

Value Fund Value investment strategy, with at least 65% in stocks

Contra Fund Scheme follows contrarian investment strategy with at least 65% in stocks

Focused on the number of stocks (maximum 30) with at least 65% in equity &
Focused Fund equity related instruments

Sectoral/ Thematic
Fund At least 80% investment in stocks of a particular sector/ theme

At least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005,
ELSS notified by Ministry of Finance

*Also referred to as Diversified Equity Funds – as they invest across stocks of different
sectors and segments of the market. Diversification minimizes the risk of high exposure to a
few stocks, sectors or segment.

SECTOR SPECIFIC FUNDS

Sectoral funds invest in a particular sector of the economy such as infrastructure, banking,
technology or pharmaceuticals etc.

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–Since these funds focus on just one sector of the economy, they limit diversification, and
are thus riskier.

–Timing of investment into such funds are important, because the performance of the
sectors tend to be cyclical.

Examples of Sector Specific Funds - Equity Mutual Funds with an investment objective to
invest in

 Pharma & Healthcare Sector

 Banking & Finance Sector:

 FMCG (fast moving consumer goods) and related sectors.

 Technology and related sectors

THEMATIC FUNDS
 Thematic funds select stocks of companies in industries that belong to a particular
theme - For example, Infrastructure, Service industries, PSUs or MNCs.

 They are more diversified than Sectoral Funds and hence have lower risk than
Sectoral funds.

VALUE FUNDS (STRATEGY AND STYLE BASED FUNDS)

 Equity funds may be categorized based on the valuation parameters adopted in
stock selection, such as

– Growth funds identify momentum stocks that are expected to perform better than
the market

– Value funds identify stocks that are currently undervalued but are expected to
perform well over time as the value is unlocked

 Equity funds may hold a concentrated portfolio to benefit from stock selection.

– These funds will have a higher risk since the effect of a wrong selection can be
substantial on the portfolio’s return

CONTRA FUNDS
 Contra funds are equity mutual funds that take a contrarian view on the market.

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 Underperforming stocks and sectors are picked at low price points with a view that
they will perform in the long run.

 The portfolios of contra funds have defensive and beaten down stocks that have
given negative returns during bear markets.

 These funds carry the risk of getting calls wrong as catching a trend before the herd
is not possible in every market cycle and these funds typically underperform in a bull
market.

 As per the SEBI guidelines on Scheme categorisation of mutual funds, a fund house
can either offer a Contra Fund or a Value Fund, not both.

EQUITY LINKED SAVINGS SCHEME (ELSS)

ELSS invests at least 80% in stocks in accordance with Equity Linked Saving Scheme,
2005, notified by Ministry of Finance.

 Has lock-in period of 3 years (which is shortest amongst all other tax saving
options)

 Currently eligible for deduction under Sec 80C of the Income Tax Act upto
₹1,50,000

DEBT SCHEMES
 A debt fund (also known as income fund) is a fund that invests primarily in bonds or
other debt securities.

 Debt funds invest in short and long-term securities issued by government, public
financial institutions, companies

– Treasury bills, Government Securities, Debentures, Commercial paper, Certificates

of Deposit and others

 Debt funds can be categorized based on the tenor of the securities held in the
portfolio and/or on the basis of the issuers of the securities or their fund
management strategies, such as

– Short-term funds, Medium-term funds, Long-term funds

– Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund

 Floating rate funds, Dynamic Bond funds, Fixed Maturity Plans

 Debt funds have potential for income generation and capital preservation.

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Debt Fund Categories as per SEBI guidelines on Categorization and Rationalization

of schemes

Overnight Fund Overnight securities having maturity of 1 day

Liquid Fund Debt and money market securities with maturity of upto 91 days only

Ultra Short Duration Debt & Money Market instruments with Macaulay duration of the portfolio
Fund between 3 months - 6 months

Investment in Debt & Money Market instruments with Macaulay duration

Low Duration Fund portfolio between 6 months- 12 months

Money Market Fund Investment in Money Market instruments having maturity upto 1 Year

Investment in Debt & Money Market instruments with Macaulay duration of

Short Duration Fund the portfolio between 1 year - 3 years

Investment in Debt & Money Market instruments with Macaulay duration of

Medium Duration Fund portfolio between 3 years - 4 years

Medium to Long Investment in Debt & Money Market instruments with Macaulay duration of
Duration Fund the portfolio between 4 - 7 years

Investment in Debt & Money Market Instruments with Macaulay duration of

Long Duration Fund the portfolio greater than 7 years

Dynamic Bond Investment across duration

Minimum 80% investment in corporate bonds only in AA+ and above rated
Corporate Bond Fund corporate bonds

Minimum 65% investment in corporate bonds, only in AA and below rated

Credit Risk Fund corporate bonds

Minimum 80% in Debt instruments of banks, Public Sector Undertakings,

Banking and PSU Fund Public Financial Institutions and Municipal Bonds

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Gilt Fund Minimum 80% in G-secs, across maturity

Gilt Fund with 10 year Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is
constant Duration equal to 10 years

Minimum 65% in floating rate instruments (including fixed rate instruments

Floater Fund converted to floating rate exposures using swaps/ derivatives)

Dynamic Bond funds alter the tenor of the securities in the portfolio in line with expectation
on interest rates. The tenor is increased if interest rates are expected to go down and vice
versa

Floating rate funds invest in bonds whose interest are reset periodically so that the fund
earns coupon income that is in line with current rates in the market, and eliminates interest
rate risk to a large extent

Short-Term Debt Funds

The primary focus of short-term debt funds is coupon income. Short term debt funds have to
also be evaluated for the credit risk they may take to earn higher coupon income. The tenor
of the securities will define the return and risk of the fund.

– Funds holding securities with lower tenors have lower risk and lower return.

 Liquid funds invest in securities with not more than 91 days to maturity.

 Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn
higher coupon income.

Short-Term Fund combine coupon income earned from a pre-dominantly short-term debt
portfolio with some exposure to longer term securities to benefit from appreciation in price.

Fixed Maturity Plans (FMPs)

–FMPs are closed-ended funds which eliminate interest rate risk and lock-in a yield by
investing only in securities whose maturity matches the maturity of the fund.

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– FMPs create an investment portfolio whose maturity profile match that of the FMP tenor.

–Potential to provide better returns than liquid funds and Ultra Short Term Funds since
investments are locked in

– Low mark to market risk as investments are liquidated at maturity.

– Investors commit money for a fixed period.

– Investors cannot prematurely redeem the units from the fund

–FMPs, being closed-end schemes are mandatorily listed - investors can buy or sell units
of FMPs only on the stock exchange after the NFO.

–Only Units held in dematerialized mode can be traded; therefore investors seeking
liquidity in such schemes need to have a demat account.

Capital Protection Oriented Funds

Capital Protection Oriented Funds are close-ended hybrid funds that create a portfolio of
debt instruments and equity derivatives

–The portfolio is structured to provide capital protection and is rated by a credit rating
agency on its ability to do so. The rating is reviewed every quarter.

–The debt component of the portfolio has to be invested in instruments with the highest
investment grade rating.

–A portion of the amount brought in by the investors is invested in debt instruments that is
expected to mature to the par value of the capital invested by investors into the fund. The
capital is thus protected.

–The remaining portion of the funds is used to invest in equity derivatives to generate
higher returns

HYBRID FUNDS
Hybrid funds Invest in a mix of equities and debt securities.

SEBI has classified Hybrid funds into 7 sub-categories as follows:

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10% to 25% investment in equity & equity related instruments; and

Conservative Hybrid Fund 75% to 90% in Debt instruments

40% to 60% investment in equity & equity related instruments; and

Balanced Hybrid Fund 40% to 60% in Debt instruments

65% to 80% investment in equity & equity related instruments; and

Aggressive Hybrid Fund 20% to 35% in Debt instruments

Investment in equity/ debt that is managed dynamically (0% to

Dynamic Asset Allocation or 100% in equity & equity related instruments; and
Balanced Advantage Fund
0% to 100% in Debt instruments)

Investment in at least 3 asset classes with a minimum allocation of

Multi Asset Allocation Fund at least 10% in each asset class

Scheme following arbitrage strategy, with minimum 65%

Arbitrage Fund investment in equity & equity related instruments

Equity and equity related instruments (min.65%);

Equity Savings debt instruments (min.10%) and
derivatives (min. for hedging to be specified in
the SID)

Solution-oriented & Other funds

Retirement Fund Lock-in for at least 5 years or till retirement age whichever is earlier

Lock-in for at least 5 years or till the child attains age of majority
Children’s Fund whichever is earlier

Index Funds/ ETFs Minimum 95% investment in securities of a particular index

Fund of Funds (Overseas/

Domestic) Minimum 95% investment in the underlying fund(s)

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Hybrid funds
Invest in a mix of equities and debt securities. They seek to find a ‘balance’ between growth
and income by investing in both equity and debt.

– The regular income earned from the debt instruments provide greater stability to the
returns from such funds.

– The proportion of equity and debt that will be held in the portfolio is indicated in the
Scheme Information Document

– Equity oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for
growth in their investment with some stability.

– Debt-oriented hybrid funds (Conservative Hybrid Fund) are suitable for conservative
investors looking for a boost in returns with a small exposure to equity.

– The risk and return of the fund will depend upon the equity exposure taken by the
portfolio
- Higher the allocation to equity, greater is the risk

Multi Asset Funds

 A multi-asset fund offers exposure to a broad number of asset classes, often offering
a level of diversification typically associated with institutional investing.

 Multi-asset funds may invest in a number of traditional equity and fixed income
strategies, index-tracking funds, financial derivatives as well as commodity like gold.

 This diversity allows portfolio managers to potentially balance risk with reward and
deliver steady, long-term returns for investors, particularly in volatile markets.

Arbitrage Funds
“Arbitrage” is the simultaneous purchase and sale of an asset to take advantage of the price
differential in the two markets and profit from price difference of the asset on different
markets or in different forms.

 – Arbitrage fund buys a stock in the cash market and simultaneously sells it in the Futures
market at a higher price to generate returns from the difference in the price of the security in
the two markets.

 – The fund takes equal but opposite positions in both the markets, thereby locking in the
difference.
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 – The positions have to be held until expiry of the derivative cycle and both positions need
to be closed at the same price to realize the difference.

 – The cash market price converges with the Futures market price at the end of the contract
period. Thus it delivers risk-free profit for the investor/trader.

 – Price movements do not affect initial price differential because the profit in one market is
set-off by the loss in the other market.

 – Since mutual funds invest own funds, the difference is fully the return.

Hence, Arbitrage funds are considered to be a good choice for cautious investors who want
to benefit from a volatile market without taking on too much risk.

Index Funds
Index funds create a portfolio that mirrors a market index.

 – The securities included in the portfolio and their weights are the same as that in the index

 – The fund manager does not rebalance the portfolio based on their view of the market or
sector

 – Index funds are passively managed, which means that the fund manager makes only
minor, periodic adjustments to keep the fund in line with its index. Hence, Index fund offers
the same return and risk represented by the index it tracks.

 – The fees that an index fund can charge is capped at 1.5%

Investors have the comfort of knowing the stocks that will form part of the portfolio, since the
composition of the index is known.

Exchange Traded Funds (ETFs)

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of
assets like an index fund.

 ETFs are listed on stock exchanges.

 Unlike regular mutual funds, an ETF trades like a common stock on a stock
exchange. The traded price of an ETF changes throughout the day like any other
stock, as it is bought and sold on the stock exchange.

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 ETF Units are compulsorily held in Demat mode

 ETFs are passively managed, which means that the fund manager makes only
minor, periodic adjustments to keep the fund in line with its index

 Because an ETF tracks an index without trying to outperform it, it incurs lower
administrative costs than actively managed portfolios.

 Rather than investing in an ‘active’ fund managed by a fund manager, when one buy
units of an ETF one is harnessing the power of the market itself.

 Suitable for investors seeking returns similar to index and liquidity similar to stocks

Fund of Funds (FoF)

 Fund of funds are mutual fund schemes that invest in the units of other schemes of
the same mutual fund or other mutual funds.

 The schemes selected for investment will be based on the investment objective of
the FoF

 The FoF have two levels of expenses: that of the scheme whose units the FoF
invests in and the expense of the FoF itself. Regulations limit the total expenses that
can be charged across both levels as follows:

– TER in respect of FoF investing liquid schemes, index funds & ETFs has been
capped @ 1%

– TER of FoF investing in equity-oriented schemes has been capped @ 2.25%

– TER of FoF investing in other schemes than mentioned above has been capped
@2%.

Gold Exchange Traded Funds (FoF)

 Gold ETFs are ETFs with gold as the underlying asset

– The scheme will issue units against gold held. Each unit will represent a defined
weight in gold, typically one gram.

– The scheme will hold gold in form of physical gold or gold related instruments
approved by SEBI.

– Schemes can invest up to 20% of net assets in Gold Deposit Scheme of

banks

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 The price of ETF units moves in line with the price of gold on metal exchange.

 After the NFO, units are issued to intermediaries called authorized participants
against gold or funds submitted. They can also redeem the units for the underlying
gold
Benefits of Gold ETFs

 Convenience --> option of holding gold electronically instead of physical gold.

– Safer option to hold gold since there are no risks of theft or purity.

– Provides easy liquidity and ease of transaction.

 Gold ETFs are treated as non-equity oriented mutual funds for the purpose of
taxation.

– Eligible for long-term capital gains benefits if held for three years.

– No wealth tax is applicable on Gold ETFs

International Funds

 International funds enable investments in markets outside India, by holding in their portfolio
one or more of the following:

 – Equity of companies listed abroad.

 – ADRs and GDRs of Indian companies.

 – Debt of companies listed abroad.

 – ETFs of other countries.

 – Units of passive index funds in other countries.

 – Units of actively managed mutual funds in other countries.

 International equity funds may also hold some of their portfolios in Indian equity or debt.

 – They can hold some portion of the portfolio in money market instruments to manage
liquidity.

 International funds gives the investor additional benefits of

 – Diversification, since global markets may have a low correlation with domestic
markets.
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 – Investment options that may not be available domestically.

 – Access to companies that are global leaders in their field.

 There are risks associated with investing in such funds, such as –

 – Political events and macro economic factors that are less familiar and therefore difficult to
interpret

 – Movements in foreign exchange rate may affect the return on redemption

 – Countries may change their investment policy towards global investors.

 For the purpose of taxation, these funds are considered as non-equity oriented mutual fund
schemes.
NET ASSET VALUE (NAV)
WHAT IS NAV?

NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by
its NAV per unit.

NAV per unit is the market value of securities of a scheme divided by the total number of
units of the scheme on a given date. For example, if the market value of securities of a
mutual fund scheme is ₹200 lakh and the mutual fund has issued 10 lakh units of ₹ 10 each
to the investors, then the NAV per unit of the fund is ₹ 20 (i.e., ₹200 lakh/10 lakh).

Since market value of securities changes every day, NAV of a scheme also varies on day-
to-day basis.

NAVs of mutual fund schemes are published on respective mutual funds’ websites as well
as AMFI’s website daily.

Unlike stocks, where the price is driven by the stock market and changes from minute-to-
minute, NAVs of mutual fund schemes are declared at the end of each trading day after
markets are closed, in accordance with SEBI Mutual Fund Regulations. Further, Units of
mutual fund schemes under all scheme (except Liquid & Overnight funds) are allotted only
at prospective NAV, i.e., the NAV that would be declared at the end of the day, based on
the closing market value of the securities held in the respective schemes.

A mutual fund may accept applications even after the cut-off time, but you will get the NAV
of the next business day. Further, the cut-off time rules apply for redemptions too.

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MYTHS & FACTS ABOUT MUTUAL FUNDS

MYTH : MUTUAL FUNDS ARE FOR EXPERTS

Fact : In fact, Mutual funds are meant for of common investors who may lack the
knowledge or skill set to invest in securities market. Mutual Funds are professionally
managed by expert Fund Managers after extensive market research for the benefit of
investors. A mutual fund is an inexpensive way for investors to get a full-time professional
fund manager to manage their money.

MYTH : MUTUAL FUND INVESTMENTS ARE ONLY FOR THE LONG TERM

Fact : Mutual funds can be for the short term or for longer term based on one’s investment
horizon and objective.
There are different types of mutual fund schemes – which invest in different types of
securities – in equity as well as debt securities that are suitable for different investor needs.
In fact, there are various short-term schemes where you can invest for a few days to a few
weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of
less than 91 days, while Ultra short-Term Bond Funds are low duration funds, with portfolio
maturity of less than a year. There are Short-Term Bond Funds which are medium duration
funds where the underlying portfolio maturity ranges from one year – three years. Then,
there are Long-Term Income Funds which are medium to long duration funds with portfolio
maturity between 3 and 10 years.
While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable
for investors with short term (less than 5 years) investment horizon.

MYTH : INVESTING IN MUTUAL FUNDS IS THE SAME AS INVESTING IN STOCK

MARKET / MUTUAL FUND IS AN EQUITY PRODUCT

Fact : Mutual Funds invest in stock market (i.e., equities), bond market (corporate bonds as
well as govt. bonds) and Money Market instruments such as Treasury Bills, Commercial
Papers, Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many
of these instruments are not available to retail investors due to large ticket size of minimum
order quantity (such as G-Secs) and hence, retail investors could participate in such
investments through mutual fund schemes.

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MYTH : MUTUAL FUND SCHEME WITH A NAV IS ₹10 PER UNIT BETTER THAN
MUTUAL FUND SCHEME WHOSE NAV IS ₹25 PER UNIT (OR A MUTUAL FUND
SCHEME WITH LOWER NAV IS BETTER OR INVESTING IN NFOS ARE PREFERABLE
THAN INVESTING IN EXISTING SCHEMES).

Fact :This is a common misconception. A mutual fund's NAV represents the market value
of all its underlying investments. NAV of a fund is irrelevant, because it represents
the market value of the fund’s investments and not the market price. Any capital
appreciation will depend on the price movement of its underlying securities. Let us
understand this through an illustration.
Suppose, you invest ₹10,000 each in scheme A whose NAV is ₹20 and scheme B (whose
NAV is say, ₹100. You will be allotted 500 units of scheme A and 100 units of scheme B.
Assuming that both schemes have invested their entire corpus in exactly same stocks and
in the same proportions, if the underlying stocks collectively appreciate by 10%, the NAV of
the two schemes should also rise by 10%, to ₹22 and ₹110, respectively. Thus, in both the
scenarios, the value of your investment increases to ₹ 11,000.
Thus, the current NAV of a fund does not have any impact on the returns.

MYTH :ONE NEEDS A LARGE AMOUNT OF MONEY TO INVEST IN MUTUAL FUNDS

Fact : Absolutely incorrect. One could start investing mutual funds with just ₹5000 for a
lump-sum / one-time investment with no upper limit and ₹1000 towards subsequent /
additional subscription in most of the mutual fund schemes. And for Equity linked Savings
Schemes (ELSS), the minimum amount is as low as ₹ 500.
In fact, one could invest via Systematic Investment Plan ( SIP) with as little as ₹500 per
month for as long as one wishes to.

MYTH : ONE NEEDS TO HAVE A DEMAT ACCOUNT TO INVEST IN MUTUAL

FUNDS

Fact : Holding mutual fund Units in Demat mode is absolutely optional, except in respect of
Exchange Traded Funds. For all other schemes, including the close-ended listed schemes
like Fixed Maturity Plans (FMPs), it is entirely upto the investor whether to hold the units in a
Demat mode or in conventional physical accountant statement mode.

MYTH : BUYING A TOP-RATED MUTUAL FUND SCHEME ENSURES BETTER

RETURNS.

Fact : Mutual fund ratings are dynamic and based on performance of the scheme
over time
– which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on
top of the rating chart currently, may not necessarily maintain the same rating month after
month or at a later date . However, a top rated fund is a good first step to short list a
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scheme to invest in (although past performance does not necessarily guarantee better
returns in future). Investment in a mutual fund scheme needs to be tracked with respect to
the scheme’s benchmark to evaluate its performance periodically to decide whether to stay
invested or to exit.

HISTORY OF MUTUAL FUNDS IN INDIA

A strong financial market with broad participation is essential for a developed economy.
With this broad objective India’s first mutual fund was establishment in 1963, namely, Unit
Trust of India (UTI), at the initiative of the Government of India and Reserve Bank of
India ‘with a view to encouraging saving and investment and participation in the
income, profits and gains accruing to the Corporation from the acquisition,
holding, management and disposal of securities’.

In the last few years the MF Industry has grown significantly. The history of Mutual Funds in
India can be broadly divided into five distinct phases as follows:

FIRST PHASE - 1964-1987

The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of
Parliament and functioned under the Regulatory and administrative control of the Reserve
Bank of India (RBI). In 1978, UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. Unit Scheme 1964 (US ’64) was the first scheme launched by UTI. At the end
of 1988, UTI had ₹ 6,700 crores of Assets Under Management (AUM).

SECOND PHASE - 1987-1993 - ENTRY OF PUBLIC SECTOR MUTUAL FUNDS

The year 1987 marked the entry of public sector mutual funds set up by Public Sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first ‘non-UTI’ mutual fund established in June 1987,
followed by Canbank Mutual Fund (Dec. 1987), Punjab National Bank Mutual Fund (Aug.
1989), Indian Bank Mutual Fund (Nov 1989), Bank of India (Jun 1990), Bank of Baroda
Mutual Fund (Oct. 1992). LIC established its mutual fund in June 1989, while GIC had set
up its mutual fund in December 1990. At the end of 1993, the MF industry had assets under
management of ₹47,004 crores.

THIRD PHASE - 1993-2003 - ENTRY OF PRIVATE SECTOR MUTUAL FUNDS

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The Indian securities market gained greater importance with the establishment of SEBI in
April 1992 to protect the interests of the investors in securities market and to promote the
development of, and to regulate, the securities market.

In the year 1993, the first set of SEBI Mutual Fund Regulations came into being for all
mutual funds, except UTI. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton MF) was the first private sector MF registered in July 1993. With the entry of
private sector funds in 1993, a new era began in the Indian MF industry, giving the Indian
investors a wider choice of MF products. The initial SEBI MF Regulations were revised and
replaced in 1996 with a comprehensive set of regulations, viz., SEBI (Mutual Fund)
Regulations, 1996 which is currently applicable.

The number of MFs increased over the years, with many foreign sponsors setting up mutual
funds in India. Also the MF industry witnessed several mergers and acquisitions during this
phase. As at the end of January 2003, there were 33 MFs with total AUM of ₹1,21,805
crores, out of which UTI alone had AUM of ₹44,541 crores.

FOURTH PHASE - SINCE FEBRUARY 2003 – APRIL 2014

In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was
bifurcated into two separate entities, viz., the Specified Undertaking of the Unit Trust of
India (SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations. With
the bifurcation of the erstwhile UTI and several mergers taking place among different private
sector funds, the MF industry entered its fourth phase of consolidation.

Following the global melt-down in the year 2009, securities markets all over the world had
tanked and so was the case in India. Most investors who had entered the capital market
during the peak, had lost money and their faith in MF products was shaken greatly. The
abolition of Entry Load by SEBI, coupled with the after-effects of the global financial crisis,
deepened the adverse impact on the Indian MF Industry, which struggled to recover and
remodel itself for over two years, in an attempt to maintain its economic viability which is
evident from the sluggish growth in MF Industry AUM between 2010 to 2013.

FIFTH (CURRENT) PHASE – SINCE MAY 2014

Taking cognisance of the lack of penetration of MFs, especially in tier II and tier III cities,
and the need for greater alignment of the interest of various stakeholders, SEBI introduced
several progressive measures in September 2012 to "re-energize" the Indian Mutual Fund
industry and increase MFs’ penetration.

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In due course, the measures did succeed in reversing the negative trend that had set in
after the global melt-down and improved significantly after the new Government was formed
at the Center.

Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well
as the number of investor folios (accounts).

 The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the
first time as on 31st May 2014 and in a short span of about three years the AUM size
had increased more than two folds and crossed ₹ 20 trillion (₹20 Lakh Crore) for the
first time in August 2017. The AUM size crossed ₹ 30 trillion (₹30 Lakh Crore) for the
first time in November 2020.

 The overall size of the Indian MF Industry has grown from ₹ 6.80 trillion as on 30th
April 2012 to ₹ 38.04 trillion as on 30th April 2022, more than 5½ fold increase in a
span of 10 years.

 The MF Industry’s AUM has grown from ₹ 19.26 trillion as on April 30, 2017 to ₹38.04
trillion as on April 30, 2022, around 2 fold increase in a span of 5 years.

 The no. of investor folios has gone up from 5.61 crore folios as on 30-Apr-2017 to
13.13 crore as on 30-April-2022, more than 2 fold increase in a span of 5 years.

 On an average 12.53 lakh new folios are added every month in the last 5 years since
April 2017.

The growth in the size of the industry has been possible due to the twin effects of the
regulatory measures taken by SEBI in re-energising the MF Industry in September 2012
and the support from mutual fund distributors in expanding the retail base.

MF Distributors have been providing the much needed last mile connect with investors,
particularly in smaller towns and this is not limited to just enabling investors to invest in
appropriate schemes, but also in helping investors stay on course through bouts of market
volatility and thus experience the benefit of investing in mutual funds.

MF distributors have also had a major role in popularising Systematic Investment Plans
(SIP) over the years. In April 2016, the no. of SIP accounts has crossed 1 crore mark and
as on 30th April 2022 the total no. of SIP Accounts are 5.39 crore.

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WHAT IS A DIRECT PLAN?

One may invest in mutual funds DIRECTLY i.e., without involving or routing the investment
through any distributor/agent in a ‘Direct Plan’.

OR one may choose to invest in mutual funds with the help of a Mutual Fund
distributor/agent in what is termed as a ‘Regular Plan’.

'Direct Plan' and 'Regular Plan’ are both part of the same mutual fund scheme, have the
same / common portfolio and are managed by the same fund manager, but have different
expense ratios (recurring expenses that is incurred by the mutual fund scheme).

Direct Plan has lower expense ratio than the Regular Plan, as there is no distributor/agent
involved, and hence there is saving in terms of distribution cost/commissions paid out to the
distributor/agent, which is added back to the returns of the scheme. Hence, a Direct Plan
has a separate NAV, which is higher than the “Regular” Plan’s NAV.

In due course, the lower expense ratio of Direct Plan translates to higher returns on the
investments which keeps compounding over the years. Thus, the investment in Direct Plan
would be worth more over a period, in comparison to investment in Regular Plan of the
same scheme. It should be however borne in mind that the difference between NAV of
Direct Plan and Regular Plan tends to be marginal.

Direct Plans are for those who prefer to invest DIRECTLY in a mutual fund scheme without
the help of any distributor/agent. Investing in a Direct Plan is like buying a product from the
manufacturer directly, whereby the cost to customer would be lower. Except that, investing
in a mutual fund scheme directly is not as simple as buying some item from a factory outlet,
because choosing a mutual fund scheme requires adequate knowledge and awareness of
the mutual fund product, especially the risks that are associated with the potential rewards.
Choosing a Direct Plan means making your own decisions about fund/scheme selection
(and the related execution work) which not everyone may be capable of.

In short, Direct Plan is suited for those who understand what kind of mutual funds are
needed for different kinds of investment needs, are capable of researching these
independently and able to identify/shortlist the funds to invest in, and then go through the
process of actually investing without the help of an intermediary.

However, when the markets fall and investment values come under pressure, independent
advice from a professional advisor can help one stay the course. Thus, Direct Plan makes

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sense only if you have adequate knowledge and capability to select good funds yourself; or,
are willing to seek professional advice of a registered investment adviser for a fee.

While the Direct Plan makes sense for knowledgeable, Do-it-Yourself (DIY) investors, it may
not be suited for all investors, especially new and inexperienced investors. So, if you are
new and inexperienced investor or unsure in which scheme to invest and need
guidance/assistance in investing, you may be better off seeking help of a mutual fund
distributor and invest in Regular Plan.

HOW TO INVEST IN A DIRECT PLAN?

You could invest in a Direct Plan online through the websites of the respective mutual
funds or via online platforms of stock exchanges platform or Mutual Funds Utility (MFU) or
other various digital channel.

There are also a few online portals which offer a facility to invest in Direct Plans. However,
such online portals are run by private firms that offer robo-advisory financial planning
services, usually for a fee – which could be per year or per transaction.

Please also note that, not all online portals offer Direct Plans, even though one may invest
in mutual fund schemes on such portals.

Many banks offer an option to invest in MF schemes on their Internet banking portal.
Financial intermediaries, including banks are mutual fund distributors, and hence do not
/cannot offer you Direct Plans on their web portals.

You may also invest in Direct Plan using a physical application form, which can be
submitted at the investor service centre/branch of the concerned mutual fund or its registrar
and transfer agent (RTA) along with the cheque or demand draft.

While filling up a mutual fund application form – whether online via the website of a mutual
fund or in physical mode, please ensure that you tick / select the ‘Direct Plan’ box. If you are
choosing the physical mode, it is advisable to strike out the box for distributor code on the
top of the application form or write the word “Direct” in the box.

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NEW RULE ON APPLICABLE NAV EFFECTIVE

FROM 1ST FEB. 2021
CUT-OFF TIMINGS FOR MUTUAL FUND TRANSACTIONS
For determining applicable Net Asset Value (NAV) for subscription and redemption
transactions

Type of Schemes Transaction type Cut-off timings

Subscription (including Switch-in from other schemes) 1:30 p.m.

Liquid Funds &
Overnight Funds
Redemption (including Switch-in from other schemes) 3:00 p.m.

All other schemes Subscription (including Switch-in from other schemes) 3:00 p.m.
(other than Liquid Funds
/ Overnight
Funds) Redemption (including Switch-in from other schemes) 3:00 p.m.

WHAT IS THE NEW RULE ON APPLICABLE NAV?

As per SEBI circular no. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020
read with circular no. SEBI/HO/IMD/DF2/CIR/P/2020/253 dated December 31, 2020,
effective from February 1, 2021, the applicable NAV in respect of purchase of units of
mutual fund scheme shall be subject to realization & availability of the funds in the bank
account of mutual fund before the applicable cut off timings for purchase
transactions, irrespective of the amount of investment, under ALL mutual fund schemes.
(The above rule is already applicable for purchase transactions under Liquid funds and
Overnight Funds).

WHEN WILL THE NEW RULE COME INTO EFFECT?

The revised rule is applicable for all purchase transactions received from 1st Feb.
2021.

TO WHICH TRANSACTIONS IS THE NAV BASED ON REALIZATION OF

FUNDS APPLICABLE ?

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i. All purchase transactions – whether Initial purchase or additional purchase of units; whether
lump-sum investment or under Systematic Investment Plan (SIP); irrespective of the amount
of investment.

ii. Purchase of units through Inter-scheme switching of investments, including switch

transactions under Systematic Transfer Plan (STP) or trigger events irrespective of the
amount of investment.

HOW IS THE APPLICABLE NAV DETERMINED?

The Applicable NAV for purchase transactions (including Switch-In transactions) under all
mutual fund schemes (other than Liquid funds and Overnight Funds) irrespective of the
amount of investment, shall be determined as follows:

Time of receipt of Transaction and Money Applicable NAV

Where the purchase transaction is received upto cut-off time of 3.00

p.m. on a business day at the official point(s) of acceptance and funds NAV of the same Business Day
for the entire amount of subscription/purchase are available for shall be applicable
utilization upto 3.00 p.m. on the same Business Day.

Where the transaction is received upto cut-off time of 3.00 p.m. on a NAV of the subsequent Business
business day at the official point(s) of acceptance, but the funds for Day on which the funds are
purchase of units are available for utilization after 3.00 p.m. on that available for utilization prior to
Business Day or on a subsequent Business Day 3.00 p.m. shall be applicable.

Where the transaction is received AFTER the cut-off time of 3.00 p.m.
on a business day at the official point(s) of acceptance and funds for NAV of subsequent Business
the entire amount of subscription/purchase are available for Day shall be applicable.
utilization upto 3.00 p.m. on the same Business Day.

Where the application is received after cut-off time of 3.00 p.m. on a

business day at the official point(s) of acceptance and funds for the NAV of subsequent Business
Day on which fund realized prior
entire amount of subscription/purchase are available for utilization
to 3.00 p.m. shall be applicable
after 3.00 p.m. on the same Business Day or subsequent Business Day.

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ILLUSTRATIONS TO EXPLAIN THE NEW APPLICABLE NAV RULE

(EFFECTIVE FROM 01-FEB-2021)
 a) Lump Sum purchase transaction for say, ₹50,000 received (time stamped)
before cut-off time of 3.00 p.m. on Thursday 11-Feb-2021

 If the funds are received in the mutual fund’s account before cut-off time of 3.00 p.m.
on 11th February 2021, the investor will be allotted closing NAV of 11-Feb-2021.
However, if the funds are received in the mutual fund’s bank account at say 5.00
p.m. on 11th February 2021, i.e., after the cut-off time of 3.00 p.m., the allotment of
units will be done at the NAV of Friday 12-Feb-2021. However, if the funds are
received in the mutual fund’s bank account at say 4.00 p.m. on Friday 12-Feb-2021,
the units will be allotted at the closing NAV of Monday 15-Feb-2021 (Feb. 13 & 14
being Saturday & Sunday i.e., non-business days).

In short, the units are allotted at the NAV of the business day on which the funds are
received into the mutual fund account before applicable cut-off time.

 b) SIP Transaction

Assuming an investor has signed up for SIP transaction of say, ₹5,000 to be debited
on 10th of every month. Hitherto, the investor would have been allotted SIP units at
the NAV for 10th the month (assuming the same is a Business day) irrespective of
the date on which the money was received / credited to the Mutual Fund’s bank
account. As per the new Rule, the investor would be allotted the SIP units at the
NAV for 10th only if the money is received/credited to the Mutual Fund’s bank
account before 3.00 p.m. on 10th. Else, the SIP units will be allotted units at the NAV
of the next business day on which funds are received before the cut-off time.

 In view of the above, investors are encouraged to avail electronic payment modes
for remittance of funds to the mutual fund bank account to facilitate speedy fund
transfers.

WHAT IS THE APPLICABLE NAV FOR SWITCHING OF UNITS?

Valid applications for Inter-scheme switching of investments will be considered for
processing on the earliest day which is a Business Day for both the ‘Switch out’ scheme
and the ‘Switch in’ scheme. Applications for ‘Switch In’ shall be treated as purchase
applications and the Applicable NAV based on the cut off time for purchase shall be applied.

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Applications for Switch Out shall be treated as redemption applications and the Applicable
NAV based on the cut off time for redemption shall be applied. Please see Table 2 below.

TABLE 2
TRANSACTION WISE NAV APPLICABILITY MATRIX (APPLICABLE
FROM 01-FEB-2021)
Transaction Money Received
Transaction received before by MF before cut- Applicable NAV
Type cut-off timing off timing

Y Y Same Business Day

Next business day on which Time Stamping

Purchase / SIP N Y done before cut-off time
Installment

Next business day on which money received

Y N by the fund before cut-off time

Inter scheme Switch Transaction

Transaction Money Received

Transaction received before by MF before cut- Applicable NAV
Type cut-off timing off timing

Switch out Y N/A Same Business Day

Business Day on which funds are received (in

line with redemption pay out of Switch Out
Switch in N/A Y scheme) in Switch-in scheme before cut-off
time

HOW THE NAV WILL BE DETERMINED, IF THE SUBSCRIPTION MONEY

IS TRANSFERRED / CREDITED TO MUTUAL FUND ACCOUNT FIRST AND
THE APPLICATION / TRANSACTION IS RECEIVED SUBSEQUENTLY?

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In such a scenario, the date & time stamped on the application/transaction will be
considered for determining Applicable NAV.

IS THERE ANY CHANGE IN CUT-OFF TIMINGS FOR PURCHASE

TRANSACTIONS?
No. There is no change in the existing cut off timings purchase transactions.

DOES THE NEW RULE ON APPLICABLE NAV APPLY TO ALL MODES OF

TRANSACTIONS?
Yes. The new NAV Rule is uniformly applicable for all mode of transactions (whether
physical or through online platforms such as exchange platforms/online channel
partners/MFU etc) In short, the allotment of units will be subject to realization of subscription
money irrespective of the mode of transaction.

WHAT WILL THE APPLICABLE NAV ON UNITS ALLOTTED ON

REINVESTMENT OF DIVIDEND?
The allotment of units upon reinvestment of dividend will be at ex-dividend
NAV.

WHAT ABOUT NFO PURCHASE AND NFO SWITCH-IN TRANSACTIONS?

In case of NFO subscriptions, the Units are allotted in respect all valid applications received
till the close of business hours on NFO closure date provided the funds are realised
(credited to the mutual fund collection account) prior to allotment of units.

In case of switch transactions from an existing scheme into NFO scheme, the Switch-Out
requests received & time stamped before the cut off timing applicable to the source
schemes shall be processed, and the units in the NFO scheme will be allotted on Allotment
date.

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NFO Units are allotted at face value of the Units as specified in the Scheme Information
Document.

WHAT IS THE APPLICABLE NAV FOR REDEMPTION OF UNITS

(INCLUDING SWITCH-OUTS)?
The Applicable NAV for redemptions continues to be as follows:

Where the redemption transaction is received on any Business Day at NAV of the same Business Day
the official points of acceptance of transactions upto 3.00 p.m. shall be applicable.

Where the transaction is received after 3.00 p.m. NAV of the next Business Day.

TAX REGIME SPECIFIC TO MUTUAL FUND

INVESTORS IN INDIA
Applicable for the Financial Year 2022-23 subject to enactment of the Finance Bill, 2022

I. TAX RATES FOR MUTUAL FUND INVESTORS

EQUITY ORIENTED FUNDS (Subject to STT ) 3

Capital Gains
Tax 10
TDS on TDS on Income
6,7

Tax Status of Tax on Distributed Income Distributed Income

Investor under IDCW Option
@
Capital under IDCW Option@

Short Long
Gains 6,7

Term Term

Resident
Individual /
HUF / AOP / 15% 10%$12 At the applicable Tax slab rate NIL 10% 9

BOI /
Domestic

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EQUITY ORIENTED FUNDS (Subject to STT ) 3

Companies

STCG - 15%
NRIs 4 LTCG - 20% 2

10%$12

*
With indexation $Without indexation@IDCW = Income Distribution cum Capital Withdrawal

OTHER THAN EQUITY ORIENTED FUNDS

Capital Gains Tax 11

TDS on 6,7

Tax on Distributed
Tax Status Income under TDS on Capital Distributed
of Investor Short IDCW Option
@
Gains 6,7
Income under
Long Term
IDCW @

Term Option
Resident
At the
Individual applicable
/ Tax slab
HUF / AOP rate
/ BOI / At the applicable Tax slab
20% * NIL 10% 9
rate
15% /
13

Domestic
22% /
14

Companies
25% /
15

/ Firms
30%

STCG – 30%
• 20 (Listed
*

At the Units) LTCG –

applicable At the applicable Tax slab
NRIs 4
Tax slab rate 20% 2

• 10% • 20*(Liste
rate
$5
(Unlisted d Units)
Units)
•
10%$5(Unlisted

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OTHER THAN EQUITY ORIENTED FUNDS

Units)5

* With indexation $Without indexation@IDCW = Income Distribution cum Capital Withdrawal

Tax & TDS are subject to applicable Surcharge and Health & Education Cess at the rate of
4%. Please see the Notes below

NOTES:

1. Provided that the mutual fund units are held as capital assets.

2. Tax to be deducted at source as per section 196A of the Income tax Act, 1961 (‘the Act’)
[plus applicable surcharge, if any, and Health and Education Cess @ 4% on income-tax and
surcharge].

3. Securities Transaction Tax ('STT') is applicable only in respect of sale of units of Equity-
oriented funds (EOFs) on a recognised stock exchange and on repurchase (redemption) of
units of EOFs by the mutual fund. STT in not applicable in respect of purchase/ sale/
redemption of units of other schemes (other than EOFs).

4. Non-resident individuals (NRI) shall be entitled to be governed by provisions of the

applicable Tax Treaty, which India has entered with the country of residence of the NRI, if
that is more beneficial than the provisions of the Act , subject to certain conditions. As per
section 90(4) of the Act, a non-resident shall not be entitled to claim treaty benefits, unless
the non-resident obtains a Tax Residency Certificate of being a resident of home country.
Furthermore, as per section 90(5) of the Act, non-resident is also required to provide such
other documents and information, as prescribed by CBDT, as applicable.

5. As per section 112 of the Act, long-term capital gains in case of NRIs would be taxable @
10% on transfer of capital assets, being unlisted securities, computed without giving effect to
first and second proviso to section 48 i.e., without taking benefit of foreign currency
fluctuation and indexation benefit.

6. Relaxation to NRIs from deduction of tax at higher rate (except income distributed by mutual
fund) in the absence of Permanent Account Number (PAN) is subject to the NRI providing

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specified information and documents. As per provisions of Section 206AA of the Act, if there
is default on the part of a NRI (entitled to receive redemption proceeds from the Mutual Fund
on which tax is deductible under Chapter XVII of the Act) to provide its PAN, the tax shall be
deducted at higher of the following rates: i) rates specified in relevant provisions of the Act;
or ii) rate or rates in force; or iii) rate of 20%. However, the provisions of section 206AA of the
Act shall not apply, if the requirements as stated in Rule 37BC of the Income-tax Rules,
1962, are met.

7. Section 206AB of the Act provides for higher rate for TDS for the non-filers of income-tax
return. The TDS rate in this section is higher of the followings rates: i) twice the rate specified
in the relevant provision of the Act; or ii) twice the rate or rates in force; or iii) the rate of five
per cent. However, the said provision does not apply to a non-resident who does not have a
permanent establishment in India.

8. Surcharge Rate as a percentage of Income-tax

Income > ₹50 Income > ₹1 Income > ₹2

Income < lakh but < /= crore but < /= crore but < /= Income >
Tax Status
₹50 lakh ₹1 crore ₹2 crore ₹5 crore ₹5 crore

Individual / HUF/
AOP (resident & NIL 10% 15% 25% 37%
foreign)***

Income < Income > ₹1

crore, but < /= Income > ₹10
Tax Status /= ₹1 - -
crore
₹10 crore
crore

Partnership Firm
(Domestic / foreign) NIL 12% 12% - -

Domestic company NIL 7% 12% - -

Domestic company
(opting for new NIL 10% 10% - -
tax regime)

Foreign company NIL 2% 5% - -

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9.
In addition, “Health and Education Cess” @ 4% shall be applicable on aggregate of base tax
and surcharge.
* The surcharge rate applicable to capital gains taxable under section 112A and 111A of the
Act i.e. capital gains earned on sale of units of equity oriented mutual fund (which are subject
to Securities Transaction Tax) is capped to 15%. The Finance Bill, 2022 has further
proposed to cap the surcharge rate on long-term capital gains taxable under section 112 of
the Act to 15%.
**The Finance Bill, 2022 has proposed to rationalise the surcharge rates in the case of an
association of persons consisting of only companies as its members as under —

Particulars Rate

Income > ₹50 lakh but <= ₹1 crore 10%

Income > ₹1 crore 15%

10.

11. There shall be no TDS deductible if IDCW income paid / credited in respect of units of a
mutual fund is below ₹ 5,000 in a financial year.

12. Capital gains arising on the transfer or redemption of equity-oriented units held for a period
of more than 12 months, immediately preceding the date of transfer, should be regarded as
'long-term capital gains'.

13. Capital gains arising on transfer or redemption of Units of schemes other than EOF shall be
regarded as long-term capital gains, if such units are held for a period of more than 36
months immediately preceding the date of such transfer.

14. As per section 112A of the Act, long-term capital gains on transfer of units of EOFs
exceeding ₹ 100,000 shall be taxable @10% provided transfer of such units is subject to
STT, without giving effect to first and second proviso to section 48 i.e., without taking benefit
of foreign currency fluctuation and indexation benefit. Further, cost of acquisition to compute
long-term capital gains is to be higher of (a) Actual cost of acquisition; and (b) Lower of (i)
fair market value as on 31 January 2018; and (ii) full value of consideration received upon
transfer.

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15. The lower rate @ 15% is optional for companies engaged in manufacturing business (set-up
& registered on or after 1 October 2019) subject to fulfilment of certain conditions as
provided in the section 115BAB.

16. If a company decides to opt for the new taxation regime as per the Taxation Law
Amendment Act, 2019, then tax shall be levied at the rate of 22%. i.e., the lower rate of 22%
is optional and subject to fulfilment of certain conditions as provided in section 115BAA.

17. Tax shall be levied @ 25%, if the total turnover or gross receipts of the financial year does
not exceed ₹ 400 crores. Further, the domestic companies are subject to minimum alternate
tax (except for those who opt for lower rate of tax of 22%/15%) not specified in above tax
rates.

18. 16. Securities Transaction Tax (STT) in respect of Units equity-oriented mutual fund
Schemes

Transaction Rates Payable by

Purchase of units of equity-oriented mutual fund Nil Not Appliable

Sale of units of equity-oriented mutual fund (delivery based) 0.001% Seller

Sale of units of equity-oriented mutual fund (non-delivery based) 0.025% Seller

Sale of units of an equity-oriented fund to the Mutual Fund 0.001% Seller

19. Various Categories of MF Schemes which fall under "Other than Equity Oriented
Funds”:

o Liquid Funds /Overnight Funds / Money Market Funds / Income Funds (Debt
Funds) / Gilt Funds
o Hybrid Fund (Equity exposure < 65%)
o Gold ETFs / Bond ETF / Liquid ETF
o Fund of Funds (Domestic) other than Fund of funds as defined under the
“Equity Oriented Fund” definition under section 112A of the Act.
o Fund of Funds Investing Overseas
o Infrastructure Debt Funds

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II. OTHER TAX PROVISIONS

a. Capital gains arising on Transfer of units upon consolidation of mutual fund schemes of two
or more schemes of EOFs or two or more schemes of a Scheme other than EOF in
accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains tax.

b. Likewise, Capital gains arising on Transfer of units upon consolidation of Plans within a
mutual fund scheme in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt
from capital gains tax.

c. Currently, switching units of mutual fund within the same scheme from Growth Plan to IDCW
Plan (erstwhile Dividend Plan) and vice-versa is subject to capital gains tax.

d. Creation of segregated portfolio: SEBI has permitted creation of segregated portfolio of debt
and money market instruments by mutual fund schemes in certain situations. As per the said
SEBI circular, all existing unit holders in the affected mutual fund scheme as on the date of
the credit event shall be allotted equal number of units in the segregated portfolio as held in
the main portfolio. As per sub-sections (2AG) and (2AH) to Section 49 of the Act, cost of
acquisition of a unit or units in a segregated portfolio shall be the amount which bears to the
cost of acquisition of a unit or units held by the assessee in the total portfolio in the same
proportion as the net asset value of the asset transferred to the segregated portfolio bears to
the net asset value of the total portfolio immediately before the segregation of portfolios.
Further, the cost of acquisition of the original units held by the unit holder in the main
portfolio shall be reduced by the amount as so arrived for the units of segregated portfolio.

e. An Equity Oriented Mutual Fund has been defined in section 112A of the Act. As per the said
definition, a fund of fund scheme structure shall be treated as an Equity Oriented Fund if:

o a minimum of ninety per cent of the total proceeds of such fund is invested in
the units of such other fund; and
o such other fund also invests a minimum of ninety per cent of its total
proceeds in the equity shares of domestic companies listed on a recognised
stock exchange

Thus, if a fund invests in units of other funds and fulfils the aforementioned criteria, then it
shall be regarded as Equity Oriented Fund. However, if the aforementioned conditions are
not fulfilled, then the same shall be regarded as other than Equity Oriented Fund and
subjected to the same tax treatment as applicable to a non-equity-oriented fund.

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f. Bonus Stripping: As per Section 94(8), the loss due to sale of original units in the schemes,
where bonus units are issued, will not be available for set off; if original units are: (A) bought
within three months prior to the record date fixed for allotment of bonus units; and (B) sold
within nine months after the record date fixed for allotment of bonus units. However, the
amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such
unsold bonus units held on the date of transfer of original units. The Finance Bill, 2022 has
proposed to amend the provisions of the said sub-section such that it shall also be applicable
to securities. Further, the definitions of the terms “unit” and “record date” are proposed to be
expanded to also include the units of business trusts (i.e. Real Estate Investment Trusts
[REITs]/ Infrastructure Investment Trusts [InvITs]) and units of Alternate Investment Funds in
the ambit of the said section.

INCOME TAX RATES FOR INDIVIDUAL / HUF / AOP/ BOI - Existing tax rates

Total Up to ₹2,50,000(a) (b) ₹2,50,001 to ₹5,00,001 to ₹10,00,001 and

Income (d)
₹500,000 ₹10,00,000 above

Tax Rates(c) NIL 5% 20% 30%

(a)In the case of a resident individual of the age of 60 years or more but less than 80 years,
the basic exemption limit is INR 300,000.

(b)In the case of a resident individual of the age of 80 years or more, the basic exemption
limit is INR 500,000.

INCOME TAX RATES FOR INDIVIDUAL / HUF - New Tax Regimee

₹2,50,001 ₹5,00,001 ₹7,50,001 ₹10,00,001 ₹12,50,001

Total Up to ₹15,00,000
to to to to to
Income ₹2,50,000(a) & above
₹500,000 ₹7,50,000 ₹10,00,000 ₹12,50,000 ₹15,00,000

Tax
Rates(c) NIL 5% 10% 15% 20% 25% 30%

(c) Plus, surcharge on income-tax, as applicable (Health and Education cess is applicable
at the rate of 4% on income-tax and surcharge.)

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(d)Rebate of upto ₹ 12,500 available for resident individuals whose total income does not
exceed ₹ 500,000.

(e)Under section 115BAC, an option has been provided to pay tax at the above tax rates
subject to the condition that certain exemptions/ losses/ deductions cannot be claimed. In
case, the taxpayer intends to claim deductions / exemptions, the existing tax rates and
slabs will continue to apply.

(f)Individuals having total income not exceeding ₹ 500,000 can avail rebate of lower of
actual tax liability or ₹12,500.

DISCLAIMER
The above information is provided for basic guidance for investments in mutual funds and is based on
provisions of the Income-tax Act, 1961, as sought to be amended by the Finance Bill, 2022. The tax
implications may vary for each assessee based on the details of his income. All rates and figures
appearing are for illustrative purposes only. Tax benefits are subject to change in tax laws. Contents of
this note have been drawn for informative purpose only and it is neither a complete disclosure of
every
material fact of Income-tax Act, 1961 nor does it constitute tax or legal advice. The AMC/Trustee/
Sponsor accept no liability whatsoever for any direct or consequential loss arising from any information
provided in this note. Investors are advised to consult their tax advisor before taking any investment
decision.

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