Concept and Role of a Mutual Fund: formula sheet

Key formulas

Units allotted

Units = Amount invested ÷ NAV applicable

Ignore loads and charges unless the question states them. Check whether the amount is net of any charge.

Value of holding

Value = Units held × Current NAV

Your value changes only because NAV changes, unless you buy or sell units.

Investor's share of the scheme

Share % = (Units held ÷ Total units outstanding) × 100

Income, gains and expenses are shared in this proportion.

Net Asset Value per unit

NAV = (Market value of assets − Liabilities) ÷ Units outstanding

Liabilities include accrued expenses. This is the unit price basis.

Structure rule

Sponsor sets up → Trust (trustees) → AMC manages → Custodian and RTA support

The AMC manages the schemes. The trustees hold the trust property for unit holders.

Units held

Units = Amount invested ÷ NAV per unit

Ownership in a fund is expressed in units. This links the advantage of small-ticket entry to proportional ownership.

Core advantages checklist

Diversification + Professional management + Liquidity + Affordability + Transparency + Regulation

Use this list to test whether an option is a genuine advantage.

Core limitations checklist

No guaranteed returns + Costs not controlled by investor + No control over portfolio choices + Market risk remains

Diversification does not remove market risk. Funds can lose value.

Core idea of a mutual fund

Pooled savings → professional investment in securities → units to investors

Investors share profits, losses and expenses in proportion to their units.

Market roles to remember

Mobilise savings + provide capital to issuers + add liquidity and depth to markets

Use this trio to test whether an option describes a market role.

Life cycle matching

Longer time horizon → more growth assets (equity); shorter horizon or income need → more stable assets (debt, liquid)

This is a general guide, not a rule. Individual risk capacity and risk appetite also matter.

Return guarantee

Mutual fund returns are not guaranteed

Any option promising assured returns is a trap.

Mutual fund vs bank FD (return)

Mutual fund: market-linked, not assured | Bank FD: stated rate, promised by the bank

Mutual fund schemes carry market risk. Never describe a mutual fund return as assured.

Mutual fund vs direct equity (diversification)

Mutual fund = many securities in one pooled unit | Direct equity = one company per share

Pooling gives diversification and professional management even for small amounts.

Mutual fund vs PMS

Mutual fund = pooled, units held | PMS = individual portfolio, securities in client's own account

PMS is for larger investors and is customised. SEBI prescribes a minimum investment for PMS.

General risk-return order

Bank deposits < debt instruments < equity (usual long-term pattern)

A rule of thumb on risk and expected return, not a guarantee for any single instrument.

UTI timeline

1963 Act → 1964 operations → 1987 public sector funds → 1993 private sector funds → 2003 UTI Act repealed

Remember the order and the first fund of each phase. Dates are the usual exam hooks.

First funds

First fund: UTI | First non-UTI public sector fund: SBI MF (1987) | First private sector fund: Kothari Pioneer (1993)

Questions often ask 'which was first' and offer the other two as traps.

Regulation vs self-regulation

SEBI = regulator | AMFI = industry body (not a regulator)

SEBI frames rules and registers funds. AMFI sets industry standards and issues ARN.

Legal base

SEBI (Mutual Funds) Regulations, 1996 | UTI Act repealed in 2003

The 1993 regulations were replaced by the 1996 regulations.

AMFI facts

Formed 1995 | Non-profit | All AMCs are members | Issues ARN

AMFI is not a SEBI body and does not register mutual funds.

Quick revision

• A mutual fund pools money from many investors and invests it in securities.
• Investors hold units in proportion to the money they put in.
• Professional fund managers run the portfolio on behalf of unit holders.
• Mutual funds offer diversification, professional management and convenience.
• A mutual fund does not guarantee returns; market risk stays with the investor.
• Costs such as fund expenses reduce the returns investors receive.
• Investors cannot control which securities the fund buys or sells.
• Compare options on risk, return, liquidity, cost and transparency.
• Know the parties in the fund structure and what each one does.
• SEBI regulates mutual funds; read the workbook for how other bodies support the industry.
• Match the product to the investor's needs, not the other way round.
• V-A has no negative marking, so attempt every question.

Common mistakes

• Thinking the AMC owns the pooled money Fix: The trust property is held by trustees for unit holders. The AMC only manages schemes.
• Believing mutual funds guarantee returns Fix: Returns depend on market values. The investor bears the risk. Treat any guarantee option as wrong.
• Believing diversification removes all risk Fix: Diversification reduces risk specific to a security or sector. Market risk remains and the fund can still lose value.
• Treating mutual fund returns as guaranteed or assured Fix: Mutual funds carry market risk. Returns are not guaranteed and capital can fall.
• Believing mutual funds guarantee returns or protect capital. Fix: Remember that investors bear market risk. Management and diversification reduce risk but do not remove it.
• Thinking diversification removes all risk. Fix: Diversification lowers risk from individual securities but market-wide risk remains.
• Saying a mutual fund gives assured returns like an FD. Fix: All mutual fund schemes carry market risk. Only the bank or issuer promises a stated return.
• Treating mutual funds and PMS as the same. Fix: Remember pooled units versus an individual portfolio in the client's own account, and PMS is for larger investors.
• Calling AMFI a regulator of mutual funds. Fix: Remember that SEBI is the regulator. AMFI is a non-profit industry body whose members are the AMCs.
• Naming SBI Mutual Fund as the first mutual fund in India. Fix: UTI came first (1964). SBI MF was the first non-UTI public sector fund.

Exam tips

• Expect plain definition questions: pooling, units, trust structure and no guaranteed return. Know them word for word.
• Questions often ask which party performs a function. Learn one function per party.
• In NAV and unit calculations, divide for units and multiply for value. V-A has no negative marking, so always attempt every question.
• Watch for options that give investors unequal rights per unit. All units of a scheme carry equal rights.
• Watch for absolute words such as guaranteed, assured, eliminates and always. They usually signal a wrong option.
• In EXCEPT questions, list the advantages first. The odd one out is usually a limitation or a false claim.
• Know that diversification lowers specific risk but not market risk.
• Remember that liquidity depends on the scheme type, so check open-ended versus close-ended.