Mutual Funds

As per Regulation 16 of the SEBI (Mutual Funds) Regulations, 1996 a person shall not be eligible to be appointed as a trustee unless -

(i)he is a person of ability, integrity and standing; and

(ii)has not been found guilty of moral turpitude; and

(iii)has not been convicted of any economic offence or violation of any securities laws, and

(iv)has furnished particulars as specified in Form C.

This Regulation further states that,

(a)No asset management company and no director (including independent director), officer or employee of an asset management company shall be eligible to be appointed as a trustee of any mutual fund.

(b)No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as a trustee of any other mutual fund.

(c)Two-thirds of the trustees shall be independent persons and shall not be associated with the sponsors or be associated with them in any manner whatsoever.

(d)In case a company is appointed as a trustee then its directors can act as trustees of any other trust provided that the object of the trust is not in conflict with the object of the mutual fund.

(e)In case a company is appointed as the trustee of a mutual funds, the chairperson of the Board of directors of that trustee company shall be independent director.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 6(d) (Syllabus 2022).

Implications of the two options are given below:

Option : 1: Invest the cash not required within 15 days in bank deposits

Mr. X can invest a total of Rs.65 crores only, since the balance Rs.35 crores required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by him works out to Rs. 38 lakhs approximately.

Option : 2 : Invest in Treasury Bills of various maturities depending on the fund requirements.

Mr. X can invest the entire Rs. 100 crores in treasury bills as treasury bills of even less than 15 days maturity are available. The return to Mr. X by this deal works out to around Rs. 62.5 lakhs, assuming returns on treasury bills in the range of 8% to 9% for the above periods.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(b) (Old syllabus).

Structure of a Mutual Fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company and a custodian. The SEBI prescribes comprehensive set of guidelines in the functioning of a mutual fund through the SEBI (Mutual Funds) Regulations, 1996. These regulations stipulate that a mutual fund consist of five important entities, they are:

i)Sponsor – Sponsor is the principal body, who brings the capital as per the guideline issued SEBI to start a mutual fund.

ii)Trust & Trustee – Trust is created by sponsor and trustees are appointed to manage the operations of a trust. The trustees’ job is to ensure that all the funds are managed as per the defined objective and investors’ interest is protected.

iii)Asset Management Company (AMC) - The trustee appoints AMC to manage the funds of the investors and, in return, get the fee to manage the fund.

iv)Custodian – Custodian job is to the safekeeping of the investors’ fund and securities and to ensure that it would be used for intended purpose only.

v)Registrar and Transfer Agent (RTA) – RTAs job is to manage the backend operations of the mutual fund and managing investors’ transaction request and other related services.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 6(e) (Syllabus 2022).

Advertisement Code for Mutual Funds

The Advertisement Code for Mutual Funds in accordance with the SEBI (Mutual Funds) Regulations, 1996 are as under:

(i)Advertisement shall be accurate, true, fair, clear, complete, unambiguous and concise.

(ii)Advertisement shall not contain statements which are false, misleading, biased or deceptive, based on assumptions and shall not contain any testimonials or any ranking based on any criteria.

(iii)No celebrities shall form part of advertisement,

(iv)No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.

(v)Advertisements shall be accompanied by a standard warning in legible fonts which states “Mutual fund investments are subject to market risks, read all schemes related document carefully.” No addition or deletion of words shall be made to the standard warning. Advertisements in vernacular language(s) shall contain this standard warning in the vernacular language.

(vi)In audio-visual media based advertisements, the standard warning in visual and accompanying voice over reiteration shall be audible in a clear and understandable manner. For example, in standard warning both the visual and the voice over reiteration containing 14 words running for at least 5 seconds may be considered as clear and understandable.

(vii)Advertisement shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements which directly or by implication or by omission may mislead the investor.

(viii)Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product.

(ix)Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided.

(x)Advertisements shall contain information which is timely and consistent with the disclosures made in the Scheme Information Document, Statement of Additional Information and the Key Information Memorandum.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 6(d) (Syllabus 2022).

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur / charge certain operating expenses for managing a mutual fund scheme such as sales & marketing/ advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees as a percentage of the fund’s daily net assets. This is commonly referred to as ‘Expense Ratio’.

This covers the following expense items:

a)Fees paid to service providers like trustees, Registrar & Transfer Agents, Custodian, Auditor, etc.

b)Asset management expenses,

c)Commissions paid to distributors,

d)Other selling expenses including advertising expenses,

e)Expenses on investor communication, account statements, dividend/ redemption cheques/ warrants,

f)Listing fees and Depository fees, or

g)Goods & Service tax.

Expense ratio is the cost of running and managing a mutual fund which is charged to the scheme. All expenses incurred by a Mutual Fund and Asset Management Company will have to be managed within the limits specified under Regulation 52(6) & (6A) of the SEBI (Mutual Funds) Regulations, 1996.

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the expense ratio has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 6A(ii) (Syllabus 2022).

Mutual Funds are a vehicle that collects money from investors to buy securities. These investors have a common objective, and this pool of money is advised by the fund manager who decides how to invest the money. With good fund management, the Mutual Fund Manager (or Portfolio Manager) generates returns for the investors, which are passed back to investor. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with SEBI before it can collect funds from public. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions.

Structure and Agencies involved in Mutual Fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company and a custodian. SEBI prescribes comprehensive set of guidelines in the functioning of a mutual fund through the SEBI (Mutual Funds) Regulations, 1996. These regulations stipulate that a mutual fund must consist of five important entities:

1.Sponsor - Sponsor is the principal body, who brings the capital as per the guideline issued by SEBI to start a mutual fund.

2.Trust & Trustee - Trust is created by sponsor and trustees are appointed to manage the operations of a trust. The trustees’ job is to ensure that all the funds are managed as per the defined objective and investors’ interest is protected.

3.Asset Management Company (AMC) - Trustee appoints AMC to manage the funds of the investors and, in return, get the fee to manage the fund.

4.Custodian - Custodian job is to the safekeeping of the investors’ fund and securities and to ensure that it would be used for intended purpose only.

5.Registrar and Transfer Agent (RTA)- RTAs job is to manage the backend operation of the mutual fund and managing investors’ transaction request and other related services.

Difference Between Open Ended and Close Ended Schemes of Mutual Funds

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2017).

(a)Asset Management Company

An asset management company (AMC) is a company that invests its clients’ pooled funds into securities that match declared financial objectives. Asset management companies provide investors with more diversification and investing options. AMCs manage mutual funds, hedge funds and pension plans, these companies earn income by charging service fees or commissions to their clients.

The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset management company, which has been approved by the SEBI. The appointment of an asset management company can be terminated by majority of the trustees or by seventy-five per cent of the unit holders of the scheme. Any change in the appointment of the asset management company shall be subject to prior approval of the SEBI and the unitholders.

(b)Frequently Traded shares

Regulation 2(1)(j) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 defines that terms Frequently Traded Shares which means shares of a target company, in which the traded turnover on any stock exchange during the twelve (12) calendar months preceding the calendar month in which the public announcement is required to be made under these regulations, is at least ten percent of the total number of shares of such class of the target company.

However, where the share capital of a particular class of shares of the target company is not identical throughout such period, the weighted average number of total shares of such class of the target company shall represent the total number of shares.

(c)Trust Deed

Under the SEBI (Issue and Listing of Non-Convertible Securities) Regulation, 2021, trust deed means a deed executed between the issuer and the debenture trustee for the benefit of the holders of the debt securities. The Regulations requires that the issuer and the debenture trustee shall execute the trust deed within such timelines as may be specified by the SEBI. Where an issuer fails to execute the trust deed within the specified period, the issuer shall also pay interest of at least 2 percent per annum or such other rate, as specified by the SEBI to the holder of debt securities, over and above the agreed coupon rate, till the execution of the trust deed.

Every debenture trustee shall amongst other matters, accept the trust deeds which shall contain the matters as provided under Section 71 of the Companies Act, 2013 and Form No. SH.12 of the Companies (Share Capital and Debentures) Rules, 2014. Such trust deed shall consist of two parts:

a.Part A containing statutory/standard information pertaining to the debt issue.

b.Part B containing details specific to the particular debt issue

The trust deed shall not contain any clause which has the effect of:

•Limiting or extinguishing the obligations and liabilities of the debenture trustees or the issuer in relation to any rights or interests of the holders of the debt securities.

•Limiting or restricting or waiving the provisions of the Act, these regulations and circulars or guidelines issued by the SEBI.

•Indemnifying the debenture trustees or the issuer for loss or damage caused by their act of negligence or commission or omission.

The trust deed shall contain the issuer’s bank details from which it proposes to pay the interest and redemption amount of the debt securities and the issuer shall pre-authorise the debenture trustee at the time of executing the trust deed to allow the debenture trustee to seek information about interest payment and redemption payment from such bank.

The trust deed shall contain a provision, mandating the issuer to appoint the person nominated by the debenture trustee(s) in terms of the SEBI (Debenture Trustees) Regulations, 1993, as a director on its Board of Directors at the earliest and not later than one month from the date of receipt of nomination from the debenture trustee(s).

The trust deed shall also contain such other particulars as may be specified by SEBI.

(d)Code of Conduct of Mutual Fund

The Code of Conduct of Mutual Fund are as follow:

(i)The schemes should not be organized, operated and managed in the interest of sponsors or the directors of AMC or special class of unit holders;

(ii)It shall ensure the adequate dissemination of adequate, fair, accurate and timely information of all the stake holders;

(iii)The excessive concentration of business with the broking firm or associates should be avoided;

(iv)The scheme-wise segregation of bank accounts and securities accounts must be ensured;

(v)The investment should be made in accordance with the investment objectives stated on the offer documents;

(vi)It must not use any unethical means to sell, market or induce any investor to buy their schemes;

(vii)The high standards of integrity and fairness in all the dealings should be maintained by the trustees and AMCs;

(viii)The AMCs shall not make any exaggerated statements.

(e)Continual Disclosures under the SEBI (Prohibition of Insider Trading) Regulation, 2015

Under Regulation 7(2) of the SEBI (Prohibition of Insider Trading) Regulation, 2015:

(a)Every promoter, member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.

(b)Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

Explanation. — It is clarified for the avoidance of doubts that the disclosure of the incremental transactions after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub-regulation (2).

The above disclosures shall be made in such form and such manner as may be specified by SEBI from time to time.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6 (Syllabus 2022).

The Advertisement Code as specified under Sixth Schedule of the SEBI (Mutual Funds) Regulations, 1996, states that celebrities shall not form part of the advertisement.

In view of above, the engagement of celebrity for a particular scheme like Multi Cap Fund is not permissible.

In case the asset management company desires to disseminate the awareness in general about the mutual fund industry, then it is allowed subject the conditions explained hereunder:

SEBI vide its Circular No. CIR/IMD/DF/23/2017 dated 15/03/2017 reviewed advertisement guidelines for mutual funds. In this respect, it has been decided by SEBI to permit celebrity endorsements at industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category. However, such celebrity endorsements of Mutual Funds at industry level, shall be subject to the following conditions:

i.Celebrity endorsement shall be allowed only at industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category. Such celebrity endorsements should not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house / AMC.

ii.Expenses towards such celebrity endorsements for increasing awareness of Mutual Funds shall be limited to the amounts that are aggregated by Mutual Funds at industry level for the purpose of conducting investor education and awareness initiatives, in terms of clause F of SEBI circular dated September 13, 2012.

iii.Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 4(a) (Syllabus 2022).

The distinguish between Regular and Direct Plan of a mutual fund scheme is given below:

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 6A(iii) (Syllabus 2022).

Asset Management Company

Asset management company means a company formed and registered under the Companies Act, 2013 and approved by the SEBI after fulfilling the eligibility criteria for appointment of asset management company.

An asset management company (AMC) is a company that invests its clients’ pooled funds into securities that match declared financial objectives. Asset management companies provide investors with more diversification and investing options. AMCs manage mutual funds, hedge funds and pension plans, these companies earn income by charging service fees or commissions to their clients.

The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset management company, which has been approved by the SEBI. The appointment of an asset management company can be terminated by majority of the trustees or by seventy-five per cent of the unit holders of the scheme. Any change in the appointment of the asset management company shall be subject to prior approval of the SEBI and the unitholders.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 6(d) (Syllabus 2022).

Role of Audit Committee of Asset Management Companies (AMCs)

The Audit Committee of the AMC shall be responsible for oversight of financial reporting process, audit process, company's system of internal controls, compliance to laws and regulations and other related process, with specific reference to operation of its Mutual Fund business.

Composition of Audit Committee of Asset Management Companies (AMCs)

(1)The Audit Committee of AMC shall have minimum 3 directors as members.

(2)At least two-third members of the Audit Committee shall be independent directors of AMC. If two-third of the total strength results into fraction, then higher number after rounding up shall be considered.

(3)The members of the Audit Committee will be appointed by the Board of Directors of AMC.

(4)All members of Audit Committee shall be persons with ability to read and understand the financial statement and at least one member shall have experience and background in finance and accounts.

(5)The Chairperson of the Committee shall be an independent director, with adequate experience in the areas of finance and financial services.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 3(a) (Syllabus 2017).

The trustees shall exercise specific due diligence as under:

1.Obtain internal audit reports at regular intervals from independent auditors appointed by the trustees

2.Obtain compliance certificate at regular intervals from the asset management company

3.Hold meeting of trustees more frequently

4.Consider the reports of the independent auditor and compliance reports of asset management company at the meetings of trustees for appropriate action

5.Maintain records of the decisions of the trustees at their meetings and of the minutes of the meetings

6.Prescribe and adhere to a code of ethics by the trustees, Asset Management Company and its personnel

7.Communicate in writing to the asset management company of the deficiencies and checking on the rectification of deficiencies.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(c) (Old syllabus).

(i)Infrastructure Debt Fund Scheme

As per the Regulation 49L of the SEBI (Mutual Funds) Regulations, 1996 “Infrastructure debt fund scheme” means a mutual fund scheme that invests primarily (minimum 90% of scheme assets) in the debt securities or securitized debt instrument of infrastructure companies or infrastructure capital companies or infrastructure projects or special purpose vehicles which are created for the purpose of facilitating or promoting investment in infrastructure, and other permissible assets in accordance with these regulations or bank loans in respect of completed and revenue generating projects of infrastructure companies or projects or special purpose vehicles.

(ii)Conditions for issue of infrastructure debt fund scheme

1.An infrastructure debt fund scheme shall be launched either as close-ended scheme maturing after more than five years or interval scheme with lock-in of five years and specified transaction period of not more than forty five days as may be specified in the scheme information document.

However, the tenure of the scheme may be extended to two years subject to approval of two-thirds of the unit holders by value of their investment in the schedule.

2.Units of infrastructure debt fund schemes shall be listed on a recognized stock exchange provided that such units shall be listed only after being fully paid up.

3.Mutual Funds may disclose indicative portfolio of infrastructure debt fund scheme to its potential investors disclosing the type of assets the mutual fund will be investing.

4.An infrastructure debt fund scheme shall have minimum five investors and no single investor shall hold more than fifty percent of net assets of the scheme.

5.No infrastructure debt fund scheme shall accept any investment from any investor which is less than Rs. 1 crore.

6.The minimum size of the unit shall be Rs. 10 lakhs.

7.Each scheme launched as infrastructure debt fund scheme shall have firm commitment from the strategic investors for contribution of an amount of at least Rs. 25 crores before the allotment of units of the scheme are marketed to other potential investors.

8.Mutual funds launching infrastructure debt fund scheme may issue partly paid units to the investors subject to following conditions:

(a)The assets management company shall call for the unpaid portions, depending upon the deployment opportunities.

(b)The offer document of the scheme shall disclose the interest or penalty which may be deducted in case of non-payment of call money by the investors within stipulated time; and

(c)The amount of interest or penalty shall be retained in the scheme.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 4(b) (Old syllabus).

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the Total Expense Ratio (TER) has a direct bearing on a scheme’s NAV- the lower the expense ratio of a scheme, the higher the NAV.

According to the SEBI Circular No. SEBI/ HO/IMD/DF2/CIR/P/2018/91 dated June 05, 2018, the Asset Management Companies (AMCs) shall predominantly disclose on a daily basis, the TER (Scheme-wise, date-wise) of all schemes under a separate head – “Total Expense Ratio of Mutual Fund Schemes” on their website and on the website of Association of Mutual Funds of India (AMFI).

Any change in the base TER (i.e. TER excluding additional expenses provided in SEBI (Mutual Funds) Regulations, 1996 and Goods and Services Tax on investment and advisory fees) in comparison to previous base TER charged to any scheme/plan shall be communicated to investors of the scheme/plan through notice via email or SMS at least three working days prior to effecting such change. Further, the notice of change in base TER shall be updated in the aforesaid section of website at least three working days prior to effecting such change. However, any decrease in TER in a mutual fund scheme due to various regulatory requirements, would not require issuance of any prior notice to the investors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(b) (Syllabus 2017).

As per SEBI (Mutual Funds) Regulations, 1996, Fund of Funds (FoFs) is a mutual fund scheme which invests in the schemes of same mutual funds of other Mutual Funds. These funds can invest in equity oriented, debt oriented and liquid schemes or sector specific schemes depending on the investment style of the fund managers.

Benefits of Fund of Funds scheme

•Diversification : As a fund of funds invest in the schemes of other funds, it provides a greater degree of diversification.

•Uncomplicated : Instead of investing in different stock/unit of mutual funds and keeping a track record of all of them, it is much easier to invest in and track only one fund, which in turn invest in other mutual funds.

•Cheap : While entering into the capital market it is difficult to diversify because of limited funds. Fund of funds provide an opportunity to go for diversification with comparatively Limited amount.

•Risk : Investors can trim down the risk by choosing this route. Because of diversification, even if one stock/scheme is not performing well risk level comes down.

•Expertise of various Managers : As in the case of schemes of mutual funds, fund of funds scheme also work under the due diligence of a fund manager. This gives the scheme additional expertise as compared to other mutual fund schemes. These schemes also provide access to information which may be difficult to obtain for an investor on a case by case basis.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2A(ii) (Old syllabus).

Yes, Mutual Funds are permitted to make overseas investments in:

i.ADRs/GDRs issued by Indian or Foreign Companies;

ii.equity of overseas companies listed on recognised stock exchanges overseas;

iii.Initial and follow-on public offering listing at recognised stock exchanges overseas;

iv.foreign debt securities in the countries with fully convertible currencies, short-term as well as long-term debt instruments with rating not below investment grade by accredited/registered credit rating Agencies;

v.Money market instruments rated not below investment grade;

vi.Repose in the form of investment, where the counterparty is rated not below investment grade; repose should not however, involve any borrowing of funds by mutual funds;

vii.Government securities where the countries are rated not below investment grade;

viii.Derivatives trading on recognised stock exchanges Overseas only for hedging and portfolio balancing with underline as securities;

ix.Short term deposits with banks Overseas where the issue is rated not below investment grade;

x.Units/securities issued by Overseas Mutual Funds or unit trusts registered with Overseas regulator and investing in (a) aforesaid securities, (b) real estate investment trust (REITs) listed in recognized stock exchanges overseas or (c) unlisted Overseas securities (not exceeding 10% of their net assets).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 3(a) (Old syllabus).

SEBI vide its Circular No. CIR/lMD/DF/23/2017 dated 15/03/2017 reviewed the advertisement guidelines for mutual funds.

In this respect, it has been decided to permit celebrity endorsements at industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category. However, such celebrity endorsements of Mutual Funds at industry level, shall be subject to the following conditions:

i.Celebrity endorsement shall be allowed only at the industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category. Such celebrity endorsements should not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house.

ii.Expenses towards such celebrity endorsements for increasing awareness of Mutual Funds shall be limited to the amounts that are aggregated by Mutual Funds at industry level for the purpose of conducting investor education and awareness initiatives, in terms of clause F of SEBI circular dated September 13, 2012.

iii.Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(e) (Syllabus 2017).

(i)The cut-off time determines the Net Asset Value (NAV) on which an investor buy or sell the units of a mutual fund scheme. Simply, the allotment and redemption of NAV depends on the time of submitting application and/or money with the fund house for purchase or sale. This time is called cut-off time in the mutual fund world.

Net Asset Value (NAV) Cut-off Timelines

(ii)In the given case, since application is submitted before 3 pm so same day NAV (i.e. the NAV on which application for redemption has been submitted) will be applicable. Thus,

In case of equity oriented scheme = ₹46 will be applicable NAV

In case of debt scheme = ₹34 will be applicable NAV

(iii)If application for redemption is submitted at 3:15 pm after 3 pm then next day NAV will be applicable. Thus,

In case of equity oriented scheme = ₹47 will be applicable NAV

In case of debt scheme = ₹33 will be applicable NAV

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(a) (Syllabus 2017).

SEBI, vide its circular No. SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/654 dated October 28, 2021, came out with modified provisions for investment and trading in securities by employees of Asset Management Companies (AMCs) and trustees of mutual funds. To ensure that the employees of AMC(s), Board members of AMC(s) and Board members of Trustees, including Access Persons shall not take undue advantage of any sensitive information that they may have about any company or its securities or about the AMC’s schemes or its units, a category of "access persons" has been created.

Access person shall mean the Head of the AMC (designated as CEO/Managing Director/ President or by any other name). Executive Director, Chief Investment Officer, Chief Risk Officer, Chief Operation Officer, Chief Information Security Officer, Fund managers, Dealers, Research Analysts, all employees in the Fund Operations Department, Compliance officer and Heads of all divisions and/or departments or any other employees as decided by the AMC(s) and/or Trustees. Non-executive Directors of the AMC/trustee company or trustees who are in possession of/have access to any non-public information which could materially impact the price of the securities, NAV of the schemes or interest of the unit holders, shall also be deemed as Access Person.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 3(c) (Syllabus 2017).

SEBI vide its circular dated 5th November, 2020 enhanced the investment limits per Mutual found as under:

1.Mutual Funds can make overseas investments subject to a maximum of US $ 600 million per Mutual fund within overall Industry limit of US $ 7 billion.

2.Mutual Funds can make investments in overseas Exchange Traded Fund subject to a maximum of US $ 200 million per Mutual Fund, within the overall industry limit of US $ 1 billion.

The allocation methodology of the aforementioned limits shall be as follows:

1.In case of above overseas investments, US $ 50 million would be reserved for each Mutual Fund individually, within the overall industry limit of US $ 7 billion.

2.A mutual fund launching a New Fund Offer (NFO) and intending to invest overseas will be required to specify the amount it will invest outside India and use the limit specified within six months.

3.For existing schemes, SEBI specified a headroom of 20% of the average assets under management (AUM) in the previous three months in overseas securities, for investment in foreign securities subject to maximum limits as specified.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(c) (Old syllabus).

Flexi Cap Fund

SEBI introduced a new Category named Flexi cap fund under Equity Schemes so as to give more flexibility to the mutual funds and considered the recommendations of Mutual find Advisory Committee. Accordingly-

(i)The AMC shall ensure that a suitable benchmark is adopted for the Flexi cap fund.

(ii)Mutual funds have the option to convert an existing scheme into a Flexi Cap fund subject to Compliance with the requirement for change in fundamental attributes of the scheme.

(iii)The Minimum investment in equity and equity related instruments is 65% of total assets.

(iv)As open ended dynamic equity scheme can invest across large cap, midcap and small cap stocks.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2(b) (Old syllabus).

Fund of Funds Scheme and its classification

Fund of Funds is a mutual fund scheme, which invests in the schemes of same mutual funds or other mutual funds, instead of investing in securities. These funds can invest in equity oriented, debt oriented and liquid schemes or sector specific schemes.

Depending on the investment style of the fund managers, fund of funds schemes can be broadly classified into:

Sector specific funds : Such type of funds invest in different sectors of the economy and thus hedge themselves against the underperformance of any sector by taking the advantage from the rise in another sector.

Asset allocation funds : These funds diversify investment by holding several different asset classes at the same time. By verifying the stocks to bonds proportion, the fund endeavours to endow the investors, with an appropriate asset allocation in different stages of their lives. They are also known as life cycle funds.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(d) (Old syllabus).

(i)Large Cap, Mid Cap and Small Cap fund universe

In order to ensure uniformity in respect of the investment universe for equity schemes, SEBI has defined large cap, mid cap and small cap as under:

a.Larger Cap : 1st - 100th company in terms of full market capitalization

b.Mid Cap : 101st - 250th company in terms of full market capitalization

c.Small Cap : 251st company onwards in terms of full market capitalization.

(ii)Computation of Net Asset Value and rate of return

NAV per unit = 5962.50/250=23.85 per unit

Return = [D₁ + CG + (NAV₁ - NAV₀)] / NAV₀ x 100

Where,

Return = [3 + 0 + (23.85 - 22.5)] / 22.5 x 100

= 4.35 x 100/22.5

= 19.333%

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(a) (Old syllabus).

While looking at a mutual fund scheme's performance, one must not be led by the scheme's return in isolation. A scheme may have generated 10% annualised return in the last couple of years. But then, even the market indices would have gone up in similar way during the same period. Under-performance in a falling market, i.e. when the NAV of the scheme falls more than its benchmark (or the market), is the time when one must review his/her investment.

One must compare the scheme's return as against its benchmark return. It is better to be rid of investment in a scheme that consistently under-performs as compared to its benchmark over a period of time, from one's portfolio. It is important to identify under-performers over the longer time horizon (as also out-performers).

In addition, one may also consider evaluating the category average returns as well. Even if a scheme has outperformed its benchmark by a decent margin, there could be better performers in the peer group. The category average returns will reveal how good (or bad) is one's investment is against its peers which help in deciding whether it is time to shift the investment to better performers.

One may be holding a too little or too much-diversified portfolio. Even the expense ratio of some of the schemes that one could be holding may be high compared to others within the same category.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(iii) (Syllabus 2017).

The fundamental reason which makes mutual fund risky lies in the fact that it puts money in a variety of investment instruments – debt, equity and corporate bonds, among others. Since the prices of these investment instruments tend to fluctuate in response to several factors, investors may be subjected to loss. In a broader sense, mutual fund risk can be categorized as– systematic risk and unsystematic risk. Following are the various risks the Mutual Fund business may have:

Also, Mutual funds may face the following risks, leading to non-satisfactory performance:

1.Excessive diversification of portfolio, losing focus on the securities of the key segments.

2.Too much concentration on blue-chip securities.

3.Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission.

4.Poor planning of investment returns.

5.Unresearched forecast on income, profits and Government policies.

6.Fund managers being unaccountable for poor results.

7.Failure to identify clearly the risk of the scheme as distinct from risk of the market.

8.Under performance in comparison to peers.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 6A(iii) (Syllabus 2022).

Risks Involved in Mutual Funds

The following events may result into non- satisfactory performance of Mutual Funds:

–Excessive diversifications of portfolio, losing focus on the securities of the key segments;

–Too much connection on blue-chip securities;

–Poor planning of investment returns;

–Un-researched forecast on income, profits and government policies;

–Fund managers being unaccountable for poor results;

–Failure to identify clearly the risk of the scheme as distinct from risk of the market;

–Under performance in comparison to peers;

–Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2A(i) (Syllabus 2017).

Net Asset of the Scheme (i) Net Asset Value (NAV) = Number of units outstanding

Where Net Asset of the Scheme = Market Value of Investments + Receivables+ Accrued Income+ Other Assets – Accrued Expenses- Other Payables- Other Liabilities

Net Assets of the Scheme = ₹ 720 crores + ₹ 9 crores + ₹ 8 crores - ₹ 5 crores - ₹ 3 crores

= ₹ 729 crores

Number of units outstanding= ₹ 600 crores / ₹ 10 = 60 crores

Therefore, NAV per unit = NAV / number of units

₹ 729 crores NAV = 60 crores units

NAV = ₹ 12.15 per unit

Net Asset Value (NAV) (ii) Public Offer Price (POP) = 1 - Front-end Load

Thus, POP of unit of Grow More Fund = ₹ 12.15 / (1- 0.02)

= ₹ 12.15/(l─0.02) = ₹ l2.3979 per unit or ₹ 12.40 per unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(a) (Syllabus 2017).

Average Price = Total Amount/Total No. of Unit = ₹ 80,000/2108.5955 = ₹ 37.9399 or ₹ 37.94

(ii)No. of Unit - 5000, Purchase Cost ₹ 50,000; NAV on the date of sale ₹ 20.60.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 1(a) (Syllabus 2017).

(i)Computation of Back End Load (BEL)

Let the Back end load be x

NAV=Re demption price * [1+BEL]

14=13.50 * (1+x)

14=13.50 +13.50x

13.50x = 0.50

x = 0.50/13.5 = 3.70%

(ii)Computation of Front End Load (FEL)

Let the Front end load be x

NAV=Public offer price * (1-FEL)

14 = 14.75 * (1-x)

14 = 14.75 - 14.75x

14.75x = 0.75

x = 0.75/14.75 = 5.08%

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(a) (Syllabus 2017).

Step - 1

Let NAV of 1 unit = X

Therefore, purchase Price of 1 unit = NAV + Entry Load (1%)

= X+ (.01X) = 1.01 X

Step - 2

Amount Investment - ₹20,000; No. of unit purchased – 100

Purchase price of 1 unit= Amount invested/No of unit purchased

= 20,000/100 = 200

From Step 1 and 2

1.01X=200

X = 200/1.01= Rs. 198.02

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(a)(i) (Syllabus 2017).

Given- NAV=Rs. 120

Exit Load – 1%

Total Amount Received = ₹52,000

Now Selling Price of 1 unit = NAV – Exit Load

= 120 - {(1/100) x 120} = 118.80

No. of unit Sold = 52,000/118.80 = 437.71 unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(a)(ii) (Syllabus 2017).

(i)Front end load

Public offer price = NAV/(1-frontend load)

12.50 =12/1-x

12.50-12.50x =12

X = 0.50/12.50

= 0.4 per unit

Front end load = 4%= Rs. 0.48/- per unit

(ii)Back end load

Redemption Price = NAV /(1+back end load)

11.65 = 12/1+X

X = 0.35/11.65 = 0.03

Back-end load = 3% = Rs.0.36/- per unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(c) (Old syllabus).

(i)Redemption Price = NAV / (1 + back end load)

(ii)Public Offer Price = NAV/(1 - Front end load)

= NAV/ (1 - 0.02)

= 55.62 / 0.98

Public Offer Price = ₹56.755 per unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(b) (Old syllabus).

(i)Calculation of the Total Net Assets of the Scheme:

Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income + other assets – Accrued Expenses- Other Payables- Other Liabilities

Net Asset of the Scheme = ₹ 52,00,000 + ₹ 18,00,000 + ₹ 10,00,000 + ₹ 3,20,000 + ₹2,50,000 + ₹ 1,80,000 - ₹ 1,50,000 - ₹1,20,000 - ₹ 70,000 - ₹ 1,60,000

Total Net Asset of the Scheme = ₹ 82,50,000

(ii)Calculation of the Net Asset Value of the Scheme:

Units Outstanding at end of the year

Beginning units = 8,00,000 Units issued = 15,000

Units outstanding = 8,00,000 + 15,000 = 8,15,000 units

Net Asset Value (NAV)

NAV = Net Assets of the Scheme ÷ Number of Units Outstanding

NAV = ₹ 82,50,000 ÷ 8,15,000

NAV = ₹ 10.12 per unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 5(b) (Syllabus 2022).

(i)Holding Period Return for Zebra=

Income + (end of period value-original value) x 100 Original value

= ₹0.60 + (₹12.25 – ₹12.65) ₹12.65

= 0.0158 or 1.58%

(ii)Annualized return for Zebra = Holding Period Returns x 365 / 60 (assuming 365 days in a year)

= 1.58% x 365 / 60 = 9.61%

Alternate Answer to 5(c) (ii) as per the Applied Mathematics

Annualized return for Zebra = (1 + Absolute Rate of Return) ^(365 / Number of Days) - 1

Therefore, Annualized Return for Zebra = (1+0.0158)^6.0833 -1

= (1.0158)^6.0833 – 1

= 0.10006 or 10.01%

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 5(c) (Syllabus 2022).

Net Asset Value per unit = Net Asset value of the Scheme/ Number of outstanding units

Net Asset Value of the Scheme = Market value of investments + Receivables + Accrued income + Other Assets — Accrued Expenses - Other Payables - Other Liabilities

Putting these values into the formula:

NAV = (₹7.5 + ₹1.5 + ₹2.3- (₹ 0.1 + ₹1.2 + ₹0.05))/2

NAV = (₹11.3 - ₹1.35)/2

NAV = ₹ 4.975 per unit

Since, X is holding 50,000 units, hence total value of his holding;

=₹ 4.975 x 50,000 units

=₹ 2,48,750/-

As Y proposed an offer @ 110%, therefore value of transaction that Y will pay to X will be:

= ₹ 2,48,750/- x 110%

= ₹ 2,73,625/-

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 5(a) (Syllabus 2022).

Holding Period Return is the total return received from holding an asset or portfolio of assets over a period of time, generally expressed as a percentage.

Holding period return is calculated on the basis of total returns from the asset or portfolio i.e. income plus changes in value of asset. It is particularly useful for comparing returns between investments held for different periods of time.

Calculation of Holding Period Return:

Income + (Current Unit Price — Original Value) x 100 Holding Period Return = Original Value

[₹ 3 +(₹ 28.69- ₹ 24.60)] x 100 = ₹ 24.60

= ₹ 7.09 x 100/₹ 24.6

= 28.82%

=Therefore, the holding period return for the unit holder is 28.82%.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6A(i) (Syllabus 2022).

Net Asset Value

Net Asset of the Scheme = Number of units outstanding

Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income+ other assets – Accrued Expenses- Other Payables- Other Liabilities

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 1(a) (Syllabus 2017).

Calculation of total number of units with Nirav at the end of 5th Month:

Present value of holding = No of units x closing NAV

= 2,336.18 x ₹12.10

= ₹ 28,267.78

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 5(b) (Syllabus 2022).

NAV per unit = (Investment + Recoverable + Accrued Income – Liabilities – Accrued expenses) / No. of units

NAV= (₹ 1,07,72,38,050 - ₹ 25, 00,000) / 8,65,63,000

= ₹ 1,07,47,38,050 / 8,65,63,000

NAV = ₹ 12.415 per unit

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 1(a) (Syllabus 2017).

(i)The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme.

Mutual funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis.

(ii)The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

Net Asset Value = Net Asset of the Scheme/ Number of units outstanding

Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income+ other assets – Accrued Expenses- Other Payables- Other Liabilities

(iii)Net Asset Value= ₹240 million - ₹8 million - ₹2 million / 5 million Shares

= ₹230 million / 5 million Shares

= ₹46

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(b) (Syllabus 2022).

Return on Investment (ROI) = Net Return / Cost of Investment ×100

= [(₹468.80 + ₹11.20) – ₹400] / ₹400 ×100

= ₹80 / ₹400 ×100

Return on Investment = 20%

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 5(a) (Syllabus 2022).

(i)Net Asset Value

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

In simple words, NAV is the market value of the securities held by the scheme. Mutual funds invest the money collected from investors in securities markets. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

(ii)Net Asset Value = (Market value of investments + Receivables+ accrued income+ other assets – Accrued Expenses- Other Payables- Other Liabilities) / No. of units (mutual fund)

NAV in the given case-

= (₹360 lakh + ₹2 lakh + ₹2 lakh - ₹1 lakh - ₹1 lakh)/20 Lakh

NAV = ₹18.10 per unit

(iii)Expense Ratio contains:

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(a) (Syllabus 2017).

Net Asset Value: Market or Fair value of Investments + Current Assets - Current Liabilities and Provisions/No. of units outstanding under scheme on the valuation date.

NAV= (Total Current Assets including value of investments – Total Current Liabilities)/ Number of outstanding units

= [2,757+ (221+643) - (390+87)]/155 = Rs.20.2838

Public Offering Price = NAV/1-Sales Charge

= 20.2838/1-0.022

= 20.2838/0.978

= Rs.20.74

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(b) (Old syllabus).

Earning of Navodit on his investment on Equity Shares = R₁

Mutual fund earning = R₂

R₂ = [ l / (1-initial expenses) x R₁] + recurring expenses

The rate of return the mutual fund should earn = [1/(1-.06) x 0.1] +0.02

= 0.1264 or 12.64%

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(b) (Old syllabus).

(i)Calculation of NAV of Mutual Fund Scheme

(ii)In case, the Equity Oriented Mutual Fund is purchased before 3:00 PM on a trading day, the NAV of same day is applicable.

Here, Ramesh invested on January 02, 20219 at 2:00 PM so the NAV of the same day is applicable. Number of mutual fund units allotted to him will be calculated using the NAV of same day i.e January 02, 2019.

Number of Units to be allotted = Amount invested /applicable NAV per unit

Hence, the number of units allotted to Ramesh will be ₹1,95,000/ ₹39 = 5000

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 1(a) (Syllabus 2017).

Change in NAV price (₹12.50 - ₹11.60) = ₹0.90

Increase in price ₹0.90 + Dividend received ₹0.75 + Capital gain distributed ₹0.85 = ₹2.50

(i)Holding period return = ₹2.50/₹11.60 =21.55 %

(ii)When dividend and capital gains are reinvested into additional units of the Fund :

Return per unit : dividend + capital gain = ₹0.75 + ₹0.85 = ₹1.60

Hence, total return received for 400 units = ₹1.60 x 400 = ₹640

Additional units that can be purchased = ₹640/12.20 = 52.46 units

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(a) (Syllabus 2017).

Basic data for Computation

Option I: Returns are distributed to Mutual Fund Holders

Total Fund Assets:

Returns : (Rs. 3, 240- Rs.2,625)/Rs. 2,625 = 23.43 %

OR

Alternate Answer

Option I: When Dividend and Capital Gain are paid:

Calculation of monthly return on the mutual funds:

r = (NAV₁ - NAVₜ₋₁ + lₜ + Gₜ) / NAVₜ₋₁

Or, r = [Rs. 9.45 - Rs. 8.75 + (Rs.0.75 + Rs. 0.60)] / Rs. 8.75

= (0.70 + 1.35) / 8.75 = 23.43 %

Option II: The distributions are reinvested at an average NAV of Rs. 8.65 per unit

(i)Distribution reinvested

No. of units [Total distributions ÷ Average NAV per unit= Rs. 405 ÷ Rs. 8.65] 46.82

(ii)Preparation of fund position

NAV on closing date fund assets

Returns: (3,277.45-2,625)/ 2625 = 24.85 %

OR

Alternate Answer

Option II: When Dividend and Capital Gain are reinvested:

If all dividends and capital gain are reinvested into additional units at Rs. 8.65 per unit the position would be.

Total amount reinvested = Rs. 1.35 x 300 = Rs.405

Additional units added = Rs. 405/8.65 = 46.82 units or 47 units

Value of units at the end = 346.82 units x Rs. 9.45 = Rs. 3, 277.45

Or = 347 units x Rs. 9.45 = Rs.3, 279.15

Price paid for 300 units as at the beginning = (300 x Rs. 8.75) = Rs. 2,625

Return = (Rs. 3, 277.45 – Rs. 2, 625)/ Rs. 2, 625 = 24.86%

Or Return = (Rs. 3, 279.15 - Rs. 2, 625) / Rs. 2,625 = Rs. 654.15 / Rs. 2,625 = 24.92%

Conclusion: From the above, it can be said that reinvestment option is better as it yield higher return by 1.49%.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(a) (Syllabus 2017).

(i)Return for the year (all changes on a per unit basis)

Change in price (₹12.10 - ₹11.50)= ₹0.60

Dividends Received ₹0.80

Capital gains distributions ₹0.70

Total return = ₹2.10

Holding period return = ₹2.10/₹11.50 = ₹18.26

(ii)When all dividends and capital gains distributions are reinvested into additional units of the fund (₹11.80/unit) :

Dividends and capital gains per unit: ₹0.80 + ₹0.70 = ₹1.50

Total received from 200 units: ₹1.50 x 200 = ₹300.00

Additional units acquired: ₹300/ ₹11.80 = 25.42 units

Value of 225.42 units held at theend of year = 225.42 units x ₹12.10 = ₹2727.

Price paid for 200 units at beginning of year 200 units x ₹11.50 = ₹2,300

The holding period return would be = (₹2727.58 - ₹2300)/₹2300 = ₹18.59

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(a) (Syllabus 2017).