Mutual Funds: formula sheet

Key formulas

Three-tier structure

Sponsor → Trustees → AMC

The sponsor sets up the trust. The trustees hold the assets for unit holders and supervise. The AMC manages the schemes and is appointed with SEBI approval.

Governing regulation

SEBI (Mutual Funds) Regulations, 1996

A mutual fund must be registered with SEBI and constituted as a trust.

Legal form

Mutual fund = trust under the Indian Trusts Act, 1882, with a registered trust deed; unit holders = beneficiaries

A mutual fund is not a company. The trustees hold the trust property for unit holders, who share in it in proportion to their units.

Role split

AMC manages | Custodian safekeeps | RTA records

Use this as a quick filter in any question on who performs a function.

Separation rule

AMC, its officers and employees cannot act as trustee of any mutual fund

This keeps management and oversight separate.

Large Cap Fund

At least 80% of assets in large-cap stocks

Large cap = 1st to 100th company by market capitalisation as per the AMFI half-yearly list.

Mid Cap Fund

At least 65% of assets in mid-cap stocks

Mid cap = companies ranked 101 to 250.

Small Cap Fund

At least 65% of assets in small-cap stocks

Small cap = companies ranked 251 and below.

Large & Mid Cap Fund

At least 35% in large caps and at least 35% in mid caps

Both limits apply together.

Multi Cap Fund

At least 75% in equity, with at least 25% each in large, mid and small caps

The total equity floor is 75%.

Focused Fund

At least 65% in equity and equity-related instruments, in a maximum of 30 stocks

The cap of 30 stocks is the key feature of this category.

Value and Contra Funds

At least 65% in equity and equity-related instruments, following a value or contrarian investment strategy

A fund house can offer either a Value or a Contra fund, not both.

Dividend Yield Fund

At least 65% in equity and equity-related instruments, predominantly in dividend-yielding stocks

The portfolio focus on dividend-yielding stocks is what sets this category apart.

Sectoral/Thematic Fund

At least 80% in stocks of the chosen sector or theme

This is the least diversified equity category.

ELSS

At least 80% in equity; 3-year lock-in

The lock-in applies to each instalment, including each SIP instalment.

Overnight and Liquid Funds

Overnight: securities maturing in 1 day. Liquid: maturity up to 91 days

Money Market funds hold instruments up to 1 year.

Debt duration bands

Ultra Short 3-6 months; Low Duration 6-12 months; Short 1-3 years; Medium 3-4 years; Medium to Long 4-7 years; Long above 7 years

These are Macaulay durations of the portfolio, not simple maturity.

Debt type-based categories

Corporate Bond: at least 80% in AA+ and above. Credit Risk: at least 65% in AA and below. Banking and PSU: at least 80% in banks, PSUs and public financial institutions. Gilt: at least 80% in government securities. Floater: at least 65% in floating rate instruments

Gilt Fund with 10-year constant duration is a separate category from the Gilt Fund. It needs at least 80% in government securities, such that the portfolio Macaulay duration equals 10 years.

Hybrid equity ranges

Conservative: 10-25% equity, 75-90% debt. Balanced: 40-60% equity, 40-60% debt, no arbitrage. Aggressive: 65-80% equity, 20-35% debt

Dynamic Asset Allocation (Balanced Advantage) funds switch between equity and debt with no fixed range.

Other hybrid categories

Multi Asset: at least 10% each in at least three asset classes. Arbitrage: at least 65% in equity and equity-related instruments, under an arbitrage strategy. Equity Savings: at least 65% in equity and equity-related instruments and at least 10% in debt

Arbitrage uses hedging with derivatives. In Equity Savings, the equity may be hedged or unhedged, and the scheme must state the minimum hedged and unhedged portions in its asset allocation.

Index Funds and ETFs

At least 95% in securities of the underlying index (ETFs: the index or ETF securities)

These are passive schemes. They aim to track an index and not beat it.

Retirement Fund

Lock-in of 5 years or until retirement age, whichever is earlier

This is a solution-oriented scheme for retirement planning.

Children's Fund

Lock-in of 5 years or until the child attains majority, whichever is earlier

This is a solution-oriented scheme for a child's future needs.

Net assets

Net assets = Market value of investments + Cash and receivables + Accrued income − Liabilities − Accrued expenses

Use market value, not cost. Subtract all liabilities and accrued expenses.

NAV per unit

NAV = Net assets ÷ Number of units outstanding

Units outstanding is the number on the valuation date, before new units are allotted.

Units allotted

Units = Amount invested ÷ Applicable NAV

Where a scheme allows entry load, the net amount after load is used. Entry load is not permitted now.

Redemption proceeds

Proceeds = Units × NAV × (1 − Exit load %)

Exit load applies on the redemption NAV and only if the redemption falls within the load period.

Exit load amount

Exit load = Units redeemed × NAV × Exit load %

It is charged only on the units that fall within the load period.

Entry load

Entry load = 0

SEBI banned entry load for mutual fund schemes from 1 August 2009.

Total expense ratio

TER (%) = (Total expenses charged to the scheme ÷ Average net assets) × 100

Charged to the scheme daily and already reflected in NAV. It is an annual percentage.

Direct vs regular TER

Regular TER = Direct TER + distribution commission and related expenses

Both plans share one portfolio. Direct NAV is higher than regular NAV.

Approximate net return

Net return ≈ Gross return − TER

A quick estimate for one year. Over many years, compounding makes the gap larger.

Expense amount in rupees

Annual expenses (₹) = Average net assets × TER ÷ 100

Use average assets, not year-end assets.

Exit load

Exit load amount = Redemption value × Exit load %

Paid by the investor on redemption within the stated period. It is not part of TER.

Units purchased

Units = Amount invested ÷ NAV on that date

Use the NAV applicable on each instalment date. Units are usually allotted to three decimal places.

Average cost per unit (SIP)

Average cost = Total amount invested ÷ Total units bought

This is the true average cost. It is the harmonic mean of the NAVs when instalments are equal.

Simple average NAV

Simple average NAV = Sum of NAVs ÷ Number of instalments

Compare this with the average cost. For equal instalments and varying NAVs, average cost is lower.

Value after payout (IDCW)

NAV after payout ≈ NAV before payout − IDCW per unit

Total wealth is unchanged before tax. The payout is not extra return.

SWP units redeemed

Units redeemed = Withdrawal amount ÷ NAV on that date

The same rupee amount redeems fewer units when NAV is high.

Plan summary

SIP: bank → scheme | SWP: scheme → bank | STP: scheme A → scheme B

Direction of money is the quickest way to separate the three.

Absolute return

(End value − Start value) ÷ Start value × 100

Ignores time. Add dividends received if any.

CAGR

CAGR = (End value ÷ Start value)^(1/n) − 1

n is years. Only for a single investment with no interim flows.

Sharpe ratio

(Rp − Rf) ÷ σp

Rp is portfolio return, Rf risk-free return, σp standard deviation of the portfolio. Higher is better.

Treynor ratio

(Rp − Rf) ÷ β

Uses beta (market risk) instead of total risk.

Alpha (Jensen)

α = Rp − [Rf + β × (Rm − Rf)]

Rm is market or benchmark return. Positive means outperformance after adjusting for risk.

Beta

β = Covariance(Rp, Rm) ÷ Variance(Rm)

Market beta is 1. Measures systematic risk only.

SID

SID = scheme-specific details

Covers objective, asset allocation, risk factors, fees and expenses of one scheme. Must be filed with SEBI.

SAI

SAI = details about the mutual fund as a whole

Covers sponsor, trustees, AMC, constitution and legal matters. It is not scheme specific.

KIM

KIM = abridged summary of key SID/SAI points

Issued with the application form so the investor sees essentials before investing.

Fund structure

Sponsor → Trust (trustees) → AMC; custodian and RTA are separate service providers

Trustees hold assets for unit holders and oversee the AMC.

Complaint route

AMC/distributor → SEBI SCORES → online dispute resolution

Escalate only after the first level has been tried or has failed.

Quick revision

• A mutual fund is set up as a trust: the sponsor creates it, trustees oversee it and the AMC manages the money.
• The custodian holds securities and the registrar handles unit records and transactions.
• NAV per unit = (market value of assets − liabilities) ÷ number of units outstanding.
• Expenses are charged to the scheme and reduce NAV; the expense ratio is shown as a percentage of average net assets.
• Direct plans have lower expenses than regular plans because there is no distribution commission.
• In a SIP you buy more units when NAV is low and fewer when it is high.
• SWP is a regular withdrawal from a scheme; STP moves money from one scheme to another.
• Growth and IDCW options differ in how returns reach you; IDCW is not guaranteed.
• CAGR shows annualised growth; absolute return ignores time.
• Standard deviation measures volatility; beta measures sensitivity to the market; Sharpe ratio measures return per unit of total risk.
• Tax treatment depends on scheme type and holding period; confirm current rates in your study material.
• SEBI regulates mutual funds, and investor protection relies on disclosures, trustee oversight and a grievance process.

Common mistakes

• Saying the sponsor manages the investments. Fix: The sponsor only sets up the trust and the AMC. Investment management is the AMC's job.
• Treating the AMC as the one that holds investors' assets. Fix: The trust holds the assets, and trustees act for unit holders. Securities are physically safekept by the custodian.
• Treating all equity categories as needing the same minimum equity Fix: Remember the exceptions: Large Cap and Sectoral/Thematic 80%, ELSS 80%, Multi Cap 75%, Large & Mid 35% each.
• Mixing up large, mid and small cap definitions Fix: Fix the boundaries 100 and 250. Anything ranked 251 or lower is small cap.
• Using the cost of investments instead of market value Fix: NAV always uses current market value of holdings. Ignore purchase cost unless asked about gains.
• Forgetting to subtract accrued expenses and liabilities Fix: Underline every liability and expense in the question and subtract all of them before dividing.
• Thinking the direct plan has a better portfolio or a different manager. Fix: Both plans hold the same portfolio. The only difference is that direct has no distributor commission.
• Treating exit load as part of TER. Fix: TER is charged to the scheme continuously. Exit load is charged to the investor at redemption within the stated period.
• Treating IDCW as guaranteed regular income. Fix: Remember that IDCW depends on distributable surplus and the fund's decision. It can be zero, and it can include capital.
• Thinking an IDCW payout is a gain on top of the investment. Fix: NAV drops by about the payout per unit. Total value is unchanged before tax.

Exam tips

• Expect match-the-role questions. Learn the five roles as one chain and answer from that.
• Negative-marking applies in this exam, so eliminate the clearly wrong role first and answer only when one option remains.
• Watch for options that call the mutual fund a company or promise assured returns. Both are traps.
• Questions about the sponsor and trustee are common. Remember: the sponsor sets up, the trustees supervise.
• Read the verb carefully. Safekeep, record, manage and oversee each point to a different constituent.
• Learn the numbers as a table in your head: 80 for large cap and sectoral, 75 for multi cap, 65 for most other equity, 95 for index, 35 and 35 for large & mid.
• Expect scenario questions that describe a portfolio and ask you to name the category, not only recall questions.
• Watch the words "open-ended", "closed-ended" and "interval". Options often swap them.