Everything You Need to Know About Mutual Funds in India: SEBI Guidelines, Types, NAV, Risks & Returns.

 

Mutual funds have become one of the most popular investment options for Indian investors looking to diversify their portfolios and access professional fund management. Governed by the Securities and Exchange Board of India (SEBI), mutual funds offer a range of schemes catering to different financial goals, risk appetites, and investment horizons.

In this article, we cover the regulatory framework, structure, types of funds, Net Asset Value (NAV), risk-return factors, taxation, and key considerations before investing in mutual funds.

 

SEBI Regulation of Mutual Funds in India

SEBI plays a crucial role in regulating mutual funds to safeguard investor interests. Mutual fund regulations were first introduced by SEBI in 1993, allowing private sector participation in the market. These regulations were revised in 1996 and have been updated since to align with market needs.

Key regulatory guidelines by SEBI include:

Mandatory registration of mutual funds (except UTI till Jan 2002)

Transparency in fund structure and performance

Minimum composition of independent directors on boards of AMCs and trustees

NAV disclosure norms

Grievance redressal mechanisms

 

Structure of a Mutual Fund

A mutual fund operates as a trust, comprising the following key entities:

Sponsor: Acts like a company promoter and establishes the fund.

Trustees: Custodians of investor assets, ensuring the fund operates in compliance with SEBI regulations.

Asset Management Company (AMC): Registered with SEBI, responsible for investing fund assets.

Custodian: Holds fund securities and is also registered with SEBI.

Trustees oversee the performance of the AMC and safeguard investor interests.

 

What is NAV (Net Asset Value)?

The NAV is the per-unit market value of all securities held by a mutual fund scheme, calculated daily for open-ended schemes. It is determined by:

NAV = (Market value of securities – liabilities) / Total outstanding units

Since market values fluctuate daily, the NAV of a scheme also changes accordingly.

 

Types of Mutual Fund Schemes

Mutual fund schemes in India are classified based on their structure, investment objective, and asset allocation.

1. Open-Ended Schemes

No maturity period

Available for continuous subscription/redemption

Daily NAV calculation ensures high liquidity

 

2. Close-Ended Schemes

Fixed maturity (5–7 years)

Can be traded on stock exchanges post-launch

Offer either repurchase or stock listing for exit

 

Investment Objective-Based Fund Categories

1. Growth- or Equity-Oriented Funds

Invest mainly in equities

Aim for capital appreciation

Suitable for long-term investors

Risk: High

 

2. Income- or Debt-Oriented Funds

Invest in government bonds, debentures, and money market instruments

Provide regular income

Suitable for conservative investors

Risk: Low to moderate

 

3. Balanced Funds

Mix of equity and debt (typically 40–60%)

Offers both growth and income

Ideal for moderate-risk investors

 

4. Money Market or Liquid Funds

Invest in short-term instruments (T-Bills, CDs, CPs)

Low volatility and high liquidity

Suitable for short-term parking of funds

 

5. Gilt Funds

Invest exclusively in government securities

No default risk but sensitive to interest rate changes

 

6. Index Funds

Mimic benchmark indices like Nifty or Sensex

Passive investing with low costs

Returns reflect index performance, adjusted for tracking errors

 

7. Sector/Thematic Funds

Invest in specific sectors like FMCG, IT, Pharma, etc.

Higher potential returns but also higher risk

 

8. Tax-Saving Funds (ELSS)

Equity Linked Savings Schemes (ELSS) offer tax deductions under Section 80C

Lock-in period: 3 years

Ideal for long-term wealth creation with tax benefits

 

Load vs. No-Load Mutual Funds

Load Fund: Charges entry/exit fees (typically 1–2%) for transactions

No-Load Fund: No transaction charges; more investor-friendly

SEBI mandates that any change in load structure must be applied prospectively.

NAV-Based Pricing: Buy, Sell, and Repurchase

Sale Price: Price to purchase mutual fund units (NAV + entry load)

Repurchase Price: Price at which units are redeemed (NAV – exit load)

 

Assured Return Schemes

These schemes guarantee a specific return, only if backed by the sponsor/AMC. SEBI mandates full disclosure of the guarantee in the offer document.

 

Asset Allocation Flexibility

Fund managers can temporarily change asset allocation due to market conditions. Permanent changes, however, require informing unitholders and offering an exit option at the current NAV without load.

 

How to Invest in a Mutual Fund

Through agents, banks, post offices, AMC websites, or online platforms

Read the Scheme Information Document (SID) and Key Information Memorandum (KIM)

Avoid being influenced by promotional gifts or commissions

Focus on fund track record, NAV trends, and fund manager credibility

 

Can NRIs Invest?

Yes, NRIs can invest in Indian mutual funds. Specific terms and conditions are mentioned in the offer documents.

 

Earning from Mutual Funds: 3 Ways

Dividends: Periodic payments from fund income

Capital Gains: Profits from sale of securities in the fund’s portfolio

NAV Growth: Increase in value of your units as NAV rises

Investors can choose to reinvest dividends or receive payouts.

 

Risks of Investing in Mutual Funds

Mutual funds are not insured or guaranteed

Market volatility can affect NAVs

Equity funds are riskier than debt funds

Past performance is not indicative of future results

Diversification reduces risk but doesn’t eliminate it

 

Costs Involved in Mutual Fund Investing

Expense Ratio: Annual fee for managing the fund (lower is better)

Transaction Fees: Entry and exit loads

Use tools like FINRA Fund Analyzer to assess long-term impact of fees

 

Mutual Fund Investing Strategies

Index Investing: Passive, low-cost, and tax-efficient. Fund managers aim to outperform markets. Choose based on your risk profile, goals, and confidence in fund managers

 

Factors to Consider Before Investing

Investment objective (capital growth, income, or both)

Risk appetite and financial goals

Fund manager’s experience and past performance

Expense ratio and fund size

Exit load, lock-in period, and liquidity needs

Portfolio diversification

Ratings, consistency, and benchmark comparison

 

Where to Check Mutual Fund Information

AMFI (https://www.amfiindia.com/)

SEBI (https://www.sebi.gov.in/)

Fund house websites and platforms

Financial newspapers and online portals

 

What Happens if a Scheme Closes?

Upon winding up, the AMC returns investor funds at the prevailing NAV after deducting expenses. A winding-up report is issued to all unitholders.

 

Complaint Redressal

Contact the designated grievance officer in the offer document

Approach SEBI with complaints via SCORES (https://scores.gov.in/)

Trustees also monitor investor grievances

 

Final Word: Choose Wisely

Don’t be swayed by low NAVs or high returns alone. Instead, evaluate a fund’s consistency, AMC reputation, service quality, and alignment with your financial goals. Consult certified financial advisors when in doubt.