Mutual Fund – Institutional Managed Allocation
Equity investments give ownership in companies and offer capital appreciation potential over time
Snapshot
Overview
Types
Metrics
Taxation
Glossary
Snapshot
| Aspect | Description |
|---|---|
| Instrument | Unit of pooled fund |
| Returns | NAV based (capital appreciation and/or IDCW) |
| Accessibility | Low investment threshold |
| Liquidity | High (for open-ended), Limited (for close-ended) |
| Regulator | SEBI, AMFI |
| Taxation | Based on fund type and holding period |
Overview
What is Mutual Fund?
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors and invests in diversified asset classes such as equity, debt, money market instruments, gold, or a mix thereof.
These funds are managed by a fund manager who makes decisions aligned with the fund’s objective. Mutual funds provide retail investors with easy access to diversified portfolios, even with modest investment amounts.
How Mutual Fund Work?
- Pooling of Funds: Investors deposit money into a fund.
- Fund Management: The AMC (Asset Management Company) appoints a SEBI-registered fund manager.
- Investing: The pooled amount is deployed as per the scheme’s investment mandate (e.g., large-cap equities, debt instruments).
- NAV Calculation: The fund’s performance is tracked via NAV (Net Asset Value), which is updated daily.
- Earnings Distribution: Returns are passed to investors through growth in NAV or distributions (IDCW).
Market Structure & Regulatory Oversight
1. Regulator: SEBI (Securities and Exchange Board of India)
- Regulates mutual funds.
- Mandates disclosures, performance benchmarks, risk-o-meters, expense caps.
2. Industry Body: AMFI
- Oversees ethical practices, distributor registration (ARN), and awareness campaigns.
3. KYC Compliance
- Mandatory before investment.
- Includes PAN, Aadhaar, FATCA declaration.
Key Intermediaries in the Mutual Fund Market
- Sponsor: Promotes and sets up the mutual fund
- Trustee: Safeguards investor interests; oversees AMC
- AMC (Asset Management Company): Manages the investment portfolio
- Custodian: Holds and safeguards the scheme's assets
- RTA (Registrar & Transfer Agent): Handles investor services and transactions
Types
In October 2017, SEBI introduced a uniform classification for mutual fund schemes to promote transparency and comparability. Mutual funds are now categorized based on structure, asset class, investment strategy, and risk level.
Investment Asset Class Based Classification
| Category | Description |
|---|---|
| Equity Funds | Invest ≥65% in equity instruments; aim for capital appreciation |
| Debt Funds | Invest primarily in fixed-income securities like bonds, T-Bills, and G-Secs |
| Hybrid Funds | Combine equity and debt in varying ratios; suitable for moderate risk takers |
| Solution-Oriented Funds | Targeted at goals like retirement or children’s education; come with lock-in |
| Other Funds | Include Index Funds, ETFs, Fund of Funds, Arbitrage Funds |
Equity Mutual Fund - Sub Types
| Type | Description |
|---|---|
| Large Cap Fund | Invests min 80% in top 100 listed companies |
| Mid Cap Fund | Min 65% in 101st–250th ranked companies |
| Small Cap Fund | Min 65% in companies ranked 251st onwards |
| Multi Cap Fund | ≥25% each in large, mid, and small cap |
| Flexi Cap Fund | Dynamic allocation across market caps |
| ELSS (Tax Saver) | Equity-linked saving scheme, 3-year lock-in under 80C |
| Thematic/Sectoral | Focus on a specific industry/theme like pharma, infra, ESG |
Debt Mutual Fund - Sub Types
| Type | Description |
|---|---|
| Liquid Fund | Invests in instruments with ≤91-day maturity |
| Ultra Short Duration | Macaulay duration 3–6 months |
| Low Duration Fund | Duration 6–12 months |
| Short/Medium/Long Duration Funds | Defined by respective Macaulay durations |
| Corporate Bond Fund | ≥80% in high-rated corporate bonds |
| Gilt Fund | Invests in government securities only |
| Credit Risk Fund | ≥65% in below highest-rated papers |
Hybrid Mutual Fund - Sub Type
| Type | Description |
|---|---|
| Aggressive Hybrid | 65–80% equity; balance in debt |
| Conservative Hybrid | 10–25% equity; major allocation in debt |
| Balanced Hybrid | 40–60% in both (no arbitrage) |
| Dynamic Asset Allocation | Varies asset mix based on market conditions |
| Arbitrage Fund | Uses price inefficiencies in equity & derivatives markets |
Solution-Oriented & Other Mutual Fund
| Type | Description |
|---|---|
| Children’s Fund | Lock-in of 5 years or until child turns 18 |
| Retirement Fund | Lock-in of 5 years or retirement age (whichever earlier) |
| Index Fund | Mimics benchmark indices (e.g., Nifty 50) |
| ETF (Exchange-Traded Fund) | Traded on exchanges like stocks |
| FoF (Fund of Funds) | Invests in other mutual fund schemes (domestic or overseas) |
Plan & Mode Based Classification
| Type | Description |
|---|---|
| Plan | Direct (no distributor commission) / Regular (through intermediary) |
| Payout | Growth (compounding returns) / IDCW (Income Distribution cum Capital Withdrawal) |
| Investment Mode | SIP, STP, Lumpsum, SWP |
Risk-O-Meter Based Classification
Each fund is labeled with a Risk-O-Meter rating to help match investor profile to scheme's risk:
Low → Moderately Low → Moderate → Moderately High → High → Very High
Metrics
Evaluating a mutual fund involves analyzing key metrics that reflect the fund’s performance, cost-efficiency, volatility, and alignment with investor goals. These indicators help investors compare schemes within and across categories.
Fundamental Metrics
| Metric | What It Indicates |
|---|---|
| Net Asset Value (NAV) | The per-unit market value of a mutual fund scheme reflecting daily portfolio value. |
| Total Expense Ratio (TER) | Annual cost (as % of AUM) charged by the fund for managing investments. This includes fund management fee, registrar costs, distribution, legal, and audit charges. |
| Benchmark Comparison | Every mutual fund scheme is benchmarked against an index (e.g., Nifty 50, CRISIL Composite Bond Fund Index). This helps in evaluating fund returns relative to its benchmark over 1Y, 3Y, 5Y periods. |
| Asset Under Management (AUM) | Reflects scheme size and popularity. High AUM implies higher liquidity but may be hard to manage in small-cap funds |
| Exit Load | The fee that is deducted if units are redeemed before a specified period (e.g., 1% if exited within 1 year). This affects the net returns. |
Fund Returns Metrics
| Metric | What It Indicates |
|---|---|
| Absolute Return | Total % gain/loss over a period without annualizing |
| CAGR (Compounded Annual Growth Rate) | Annualized return over multiple years |
| Rolling Returns | Return measured over fixed intervals (e.g., 3Y rolling over 10Y) for consistency |
| XIRR | Return accounting for irregular SIP inflows/outflows |
Risk-Adjusted Return Metrics
Used to evaluate how well a fund compensates for the risks taken.
| Metric | What It Indicates |
|---|---|
| Standard Deviation | Volatility of returns over time |
| Sharpe Ratio | Excess return per unit of total risk (vs risk-free rate) |
| Sortino Ratio | Similar to Sharpe but focuses only on downside volatility |
| Alpha | Extra return delivered over benchmark index |
| Beta | Fund’s sensitivity to overall market (Beta = 1 means market-level risk) |
| R-squared | Correlation between fund returns and benchmark |
Portfolio Metrics
| Metric | What It Indicates |
|---|---|
| Top Holdings | Stock/bond concentration risk |
| Sector Allocation | Exposure to cyclical or defensive sectors |
| Modified Duration (in debt funds) | Interest rate sensitivity |
| Credit Quality (Debt Funds) | % allocation in AAA, AA, A, etc. |
Qualitative Factors
| Metric | What It Indicates |
|---|---|
| Fund Manager Tenure | Longer manager tenure indicates stability |
| AMC Track Record | Consistency across fund schemes shows AMC quality |
Taxation
Tax treatment of mutual funds in India depends on:
- Fund category: Equity-oriented vs. Non-equity (debt, hybrid, gold, etc.)
- Holding period: Short-term vs Long-term
- Nature of income: Capital gains vs. dividend payouts (IDCW)
Understanding tax implications is essential for optimizing post-tax returns.
Capital Gain Taxation
| Fund Type | Short-Term Holding Period | STCG Tax (Short-Term) | LTCG Tax (Long-Term) |
|---|---|---|---|
| Equity-Oriented Funds (≥65% equity) | ≤12 months | 20% | 12.50% (on gains over ₹1.25 lakh) |
| Hybrid Equity-Oriented Funds (≥65% equity) | ≤12 months | 20% | 12.50% (on gains over ₹1.25 lakh) |
| Non-Equity Funds (Debt, Gold, FoFs) | Any duration | Taxed at investor’s slab rate | Taxed at investor's slab rate (if purchased on or after 1/Apr/2023) |
| Arbitrage Funds | ≤12 months | 20% | 12.50% (on gains over ₹1.25 lakh) |
Dividend Taxation (IDCW)
All mutual fund dividends (now called Income Distribution cum Capital Withdrawal - IDCW) are taxable in the hands of investors.
- No DDT (Dividend Distribution Tax).
- Taxed at investor's applicable income slab.
- TDS at 10% is applicable on IDCW payouts if they exceed ₹5,000 per year.
Special Cases
- SIP (Systematic Investment Plan): Each installment is considered a fresh investment, and its holding period is counted individually.
- STP (Systematic Transfer Plan): Each transfer triggers taxation on source scheme, applicable tax apply
- Switching from one scheme to another: Treated as redemption from one and fresh purchase into another, applicable tax apply
Tax Filing Requirements
- Schedule CG (Capital Gain) in ITR should capture capital gains from Mutual Funds.
- Schedule OS (Other Sources) in ITR should capture IDCW income from Mutual Funds.
- Use AIS for validating reported sale proceeds, and dividend income.
Glossary
- AMC (Asset Management Company): A SEBI-registered entity that manages mutual fund schemes. Appoints fund managers and executes investments.
- AUM (Assets Under Management): Total market value of the assets managed by a mutual fund scheme or AMC at a given point.
- Arbitrage Fund: A type of hybrid fund that takes advantage of price differences between cash and derivatives markets to generate low-risk returns.
- Asset Allocation: Distribution of investments across equity, debt, cash, etc., to match risk appetite and goals.
- Benchmark: A market index (e.g., Nifty 50, CRISIL Composite Bond Fund Index) used to compare a fund’s performance.
- Custodian: An entity that holds securities (underlying assets) on behalf of the mutual fund.
- CAGR (Compounded Annual Growth Rate): Annualized rate of return assuming investment grows at a steady rate.
- Gilt Fund: A debt fund that invests exclusively in government securities, with minimal credit risk.
- Growth Option: A mutual fund plan where earnings are reinvested and reflected in NAV; no periodic payouts.
- IDCW (Income Distribution cum Capital Withdrawal): Previously called “Dividend” option; distributes earnings periodically. Taxable in the investor’s hands.
- Index Fund: A passively managed fund that mirrors a specific index’s composition and performance.
- NAV (Net Asset Value): The per-unit value of a mutual fund scheme.
- NFO (New Fund Offer): The initial offering period when a new mutual fund scheme is open for subscription.
- Modified Duration: A measure of a debt fund’s sensitivity to interest rate changes.
- Multi Cap Fund: An equity fund investing across large, mid, and small-cap stocks. SEBI mandates ≥25% in each.
- Open-Ended Fund: Mutual fund scheme that allows buying and selling of units on any business day.
- Passive Fund: A fund that mimics a benchmark index (e.g., Nifty 50) and does not actively manage holdings.
- Portfolio Turnover Ratio: Indicates how frequently the fund manager changes securities in the portfolio.
- RTA (Registrar & Transfer Agent): Entity that handles investor servicing (e.g., KFintech, CAMS), transactions, and records.
- SIP (Systematic Investment Plan): An investment mode allowing fixed, recurring investments into mutual funds at regular intervals (e.g., monthly).
- STP (Systematic Transfer Plan): Periodic transfer of a fixed amount from one fund to another within the same AMC.
- SWP (Systematic Withdrawal Plan): Allows regular withdrawals (monthly/quarterly) from a fund while remaining invested.
- Sharpe Ratio: Measures risk-adjusted return — how much excess return a fund delivers per unit of total risk.
- TER (Total Expense Ratio): Annual fee (as % of AUM) charged by the AMC for managing the fund. Direct plans have lower TER than regular plans.
- Underwater Period: The time a scheme remains below its last peak NAV before recovering.
