CS Executive · Capital Market and Securities Laws

Mutual Funds: formula sheet

Full chapter guide

Key formulas

Three-tier structure: Sponsor → Trust (Trustees) → Asset Management Company; Custodian holds securities; Learn this order. The sponsor creates, trustees hold and supervise, the AMC manages, the custodian safekeeps.
Legal form of a mutual fund: Mutual fund = a trust, not a company; Unitholders are beneficiaries of the trust. The AMC is a company, but the fund itself is the trust.
Registration requirement (SEBI Act, section 12(1B)): No person shall sponsor or carry on a venture capital fund or collective investment scheme, including mutual funds, without a SEBI certificate of registration; Quote this when asked about the legal basis for registration.
Penalty for AMC failure (SEBI Act, section 15E): Penalty not less than ₹1 lakh, up to ₹1 lakh per day of continuing failure, maximum ₹1 crore; Applies where an AMC fails to comply with regulations restricting its activities.
Penalty for running a mutual fund without registration (section 15D(a)): Penalty not less than ₹1 lakh, up to ₹1 lakh per day, maximum ₹1 crore; The same range applies to the other defaults listed in section 15D.
Registration requirement: Sponsor or carry on a mutual fund → certificate of registration from SEBI is compulsory (SEBI Act, s. 12(1B)); Applies to sponsoring and to carrying on, including causing it to be done.
Application: Application in the manner and with the fees set by regulations (s. 12(2)); Manner and fees are not fixed in the Act; they come from regulations.
Suspension or cancellation: SEBI order + reasonable opportunity of being heard (s. 12(3)); No order without a hearing. This is a favourite point in answers.
Penalty for carrying on without registration: Not less than ₹1,00,000, may extend to ₹1,00,000 for each day of the default, maximum ₹1,00,00,000 (s. 15D(a)); Use the text of the section as it stands; the same ceiling applies to the other defaults in s. 15D(b) to (f).
Penalty for AMC: Not less than ₹1,00,000, may extend to ₹1,00,000 for each day of failure, maximum ₹1,00,00,000 (s. 15E); Applies where an AMC fails to comply with regulations restricting its activities.
Mutual fund and CIS: Contributions in the nature of subscription to a mutual fund → not a CIS (s. 11AA(3)(viii)); Keeps the two regimes separate.
ULIP exclusion: A unit linked insurance policy is not a collective investment scheme or mutual fund (Explanation to s. 12); Applies to instruments with an investment component alongside insurance.
Net Asset Value per unit: NAV = (Market value of investments + Other assets − Liabilities and accrued expenses) ÷ Number of units outstanding; Use the same date for assets and units. Deduct expenses before dividing.
Number of units allotted: Units = Amount invested ÷ Applicable NAV (or issue price); Check whether any entry load or charge applies under the offer document, and use the price stated for the scheme.
Open-ended vs close-ended: Open-ended: no fixed maturity, continuous sale and repurchase. Close-ended: fixed tenure, exit via listing or maturity.; State this contrast in every classification answer.
Portfolio-based types: Equity: mainly shares. Debt: mainly fixed income. Hybrid: mix of both.; Classification follows the stated investment objective.
SEBI Act section 11A power: SEBI may specify disclosure by regulations and, by orders, prohibit or condition a prospectus, offer document or advertisement.; Applies for protection of investors.
Mutual fund and CIS: Section 11AA(3)(viii): contributions in the nature of subscription to a mutual fund are not a collective investment scheme.; Useful to separate mutual funds from CIS.
Net Asset Value (NAV) per unit: NAV = (Market value of scheme's investments + Other assets − Liabilities and accrued expenses) ÷ Number of units outstanding; Use this for any numerical or conceptual NAV question. Always deduct liabilities and accrued expenses before dividing.
Total Expense Ratio (TER): TER = (Total annual scheme expenses ÷ Average net assets of the scheme) × 100; Expressed as a percentage per annum. Compare it with the permitted cap for the scheme type.
Penalty under section 15D (defaults by mutual funds): Not less than ₹1,00,000, extending to ₹1,00,000 per day while the default continues, subject to a maximum of ₹1,00,00,000; Applies to running a mutual fund without registration, breaching registration conditions, failing to list, despatch unit certificates, refund application money or invest money as the regulations require.
Penalty under section 15E (AMC restrictions): Not less than ₹1,00,000, extending to ₹1,00,000 per day while the failure continues, subject to a maximum of ₹1,00,00,000; Applies where an AMC fails to comply with regulations restricting its activities.
Registration requirement (section 12(1B)): No person shall sponsor or carry on a mutual fund or collective investment scheme without a certificate of registration from SEBI; The base rule behind many penalty questions.
Penalty under section 15D (all clauses): Penalty ≥ ₹1,00,000; may extend to ₹1,00,000 per day of default; maximum ₹1,00,00,000; The same range applies to each of clauses (a) to (f). It is a range, not a fixed amount. The authority decides the amount within it.
Defaults under section 15D: (a) no registration; (b) breach of registration terms; (c) no listing application; (d) no despatch of unit certificates; (e) no refund of application money; (f) no investment as specified; Remember the six as: register, comply, list, despatch, refund, invest.
Section 15E: asset management company: Breach of regulations restricting AMC activities: ≥ ₹1,00,000; up to ₹1,00,000 per day; maximum ₹1,00,00,000; Applies to an asset management company of a registered mutual fund, not to the fund as such.
Section 12(3) and section 15JA: SEBI may suspend or cancel registration after a hearing; penalties go to the Consolidated Fund of India; A hearing is mandatory before suspension or cancellation.

Quick revision

A mutual fund pools investors' money and invests it in securities through a registered structure.
Constituents: sponsor, trust and trustees, asset management company, custodian and investors.
Section 12(1B) of the SEBI Act: no person may sponsor or carry on a mutual fund without a SEBI certificate of registration.
Under Section 12(3), SEBI may suspend or cancel registration, but only after giving the person a reasonable opportunity of being heard.
Section 11AA(3)(viii): contributions that are subscriptions to a mutual fund are not a collective investment scheme under that section.
Section 15D lists defaults by mutual funds: no registration, breach of registration terms, no listing application, no dispatch of unit certificates, no refund of application money, and wrong investment of money.
Section 15D and Section 15E penalty: not less than ₹1,00,000 but up to ₹1,00,000 per day of default, subject to a maximum of ₹1,00,00,000.
Section 15E applies when an asset management company breaches regulations restricting its activities.
Section 15JA: penalties realised under the Act are credited to the Consolidated Fund of India.
Written answers: state the provision, apply it to the facts, then give a clear conclusion.

Common mistakes

Saying a mutual fund is a company Fix: Write that the fund is a trust and the AMC is only its manager, appointed to run the schemes.
Treating sponsor and trustee as the same Fix: The sponsor sets up the fund and settles the trust. The trustees hold the trust property for unitholders and supervise. Different roles, different persons.
Saying a mutual fund is a collective investment scheme. Fix: Quote s. 11AA(3)(viii): a subscription to a mutual fund is excluded from CIS. Mutual funds are governed by their own regulations.
Saying SEBI can cancel registration straight away. Fix: Always add the proviso to s. 12(3): no order without a reasonable opportunity of being heard.
Saying close-ended units can be redeemed any time at NAV. Fix: Remember close-ended means fixed tenure; exit is through listing or at maturity.
Forgetting to deduct liabilities and expenses when computing NAV. Fix: Always compute net assets first: assets minus liabilities, then divide.
Quoting exact percentage limits from memory and getting them wrong Fix: Revise limits from the latest study material. If unsure, state the principle clearly rather than a wrong figure.
Forgetting to deduct liabilities when computing NAV Fix: Always write the full NAV formula and subtract liabilities and accrued expenses first.
Treating the penalty as a fixed ₹1 lakh per day. Fix: Write it as a range: at least ₹1 lakh, up to ₹1 lakh per day, capped at ₹1 crore.
Ignoring the ₹1 crore maximum when many days are given. Fix: Always compare the product with ₹1 crore and state the lower figure as the upper limit.

Exam tips

Begin every answer with the definition and the trust form. Examiners look for it.
Draw a small flow of sponsor, trust, AMC and custodian. It makes the answer clear and quick to read.
For a distinction question, write role, function and relationship to unitholders for sponsor and trustee side by side in sentences.
Cite section 12(1B) for registration and sections 15D and 15E for penalties, with the exact amounts and cap.
Always finish with a short conclusion that answers the question asked.
Begin every answer with section 12(1B) of the SEBI Act; it earns the provision marks.
Draw the three-tier structure in one line: sponsor, trustees, AMC.
Use the current penalty figures of s. 15D and s. 15E, not older ones.