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Capital Market and Securities Laws · Mutual Funds

Mutual Fund Investment Restrictions, Valuation and Disclosures

Updated 11 October 2026 · Fact-checked

Mutual funds must invest only within limits set by the SEBI (Mutual Funds) Regulations, value their holdings fairly and regularly, charge expenses within prescribed caps, and publish scheme information. Answer exam questions by stating the rule, applying it to the facts, and concluding. Breaches attract penalties under the SEBI Act, 1992.

Understand Investment Restrictions, Valuation and Disclosures

A mutual fund pools money from many investors and invests it in securities. Because investors do not control the money day to day, SEBI controls how the fund behaves. That control rests on four ideas: restrict, value, cap, and disclose.

Investment restrictions protect investors from concentration and risk. They limit how much a scheme can put in one issuer, one sector or one group, and they bar certain activities. The investment must also match the objective stated in the scheme's offer document. Treat the exact percentages as items to learn from your ICSI study material and the latest SEBI Regulations. This page teaches the structure so you can recall them.

Valuation decides the Net Asset Value (NAV) of a unit. NAV is what investors buy and redeem at. If holdings are valued wrongly, some investors gain at the expense of others. So SEBI requires fair, consistent valuation, usually through a prescribed valuation framework and agencies that supply prices, and requires the fund to declare NAV regularly.

Expenses are charged to the scheme and reduce investor returns. SEBI therefore caps the Total Expense Ratio (TER), the annual expenses as a percentage of the scheme's average net assets. The cap depends on the type and size of the scheme. Expenses beyond the cap must be borne by the asset management company (AMC) and not the investors.

Accounting, reporting and disclosure keep investors informed. Funds maintain separate books for each scheme, get accounts audited, and publish periodic results, portfolio details and NAV. They must also follow the offer document and report to SEBI and the trustees.

Enforcement matters in exams. Under the SEBI Act, 1992, a mutual fund that fails to comply with its registration conditions faces penalty under section 15D. An AMC that breaches regulations restricting its activities faces penalty under section 15E.

Key rules to remember

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.

How to solve Investment Restrictions, Valuation and Disclosures questions

Use this method for any question on restrictions, valuation, expenses or disclosures. It keeps your answer in the provision, facts, conclusion format.

  1. 1Identify which area the question tests: investment limits, valuation or NAV, expense limits, accounting and reporting, or disclosure.
  2. 2State the rule in plain words, naming the SEBI (Mutual Funds) Regulations and, where relevant, the SEBI Act section.
  3. 3Pick out the key facts: scheme type, amount invested, issuer, expense charged, or what was or was not disclosed.
  4. 4Apply the rule to the facts. For numbers, write the formula first, then substitute.
  5. 5Check who bears the consequence: expenses above the cap fall on the AMC, and breaches may attract penalty under section 15D or 15E.
  6. 6Write a one-line conclusion that answers exactly what was asked, such as whether the investment is permitted or whether penalty applies.

Quickest way: Four-word recall: Restrict, Value, Cap, Disclose

When to use it: Use it when you have little time or cannot recall exact limits. It builds a complete answer skeleton in under a minute.

  1. Write the four headings: Restrict, Value, Cap, Disclose.
  2. Under Restrict, note limits on issuer, sector and group exposure and that investment must match the scheme objective.
  3. Under Value, write the NAV formula and note fair, consistent valuation.
  4. Under Cap, write TER formula and state that excess expenses are borne by the AMC.
  5. Under Disclose, list NAV, portfolio, financial results and offer-document compliance.
  6. Close with the penalty link: section 15D for fund defaults and 15E for AMC restrictions.

Common mistakes in Investment Restrictions, Valuation and Disclosures

  • Quoting exact percentage limits from memory and getting them wrong

    The limits differ by scheme type and are revised by SEBI, so older notes may be outdated.

    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

    Students divide only the market value of investments by units.

    Fix: Always write the full NAV formula and subtract liabilities and accrued expenses first.

  • Treating TER as a one-time charge

    It is confused with entry or exit load.

    Fix: Remember TER is an annual percentage of average net assets, charged to the scheme on an ongoing basis.

  • Mixing up sections 15D and 15E

    Both carry the same penalty range and both concern mutual funds.

    Fix: Link 15D to the fund's defaults such as registration, listing and refunds, and 15E to the AMC breaching activity restrictions.

  • Misstating the section 15D penalty as a flat amount

    Students recall only the ₹1,00,00,000 ceiling.

    Fix: Say it is not less than ₹1,00,000 and may extend to ₹1,00,000 per day while the default continues, up to ₹1,00,00,000.

  • Ending without a conclusion

    Students list rules but do not answer the question.

    Fix: Finish with a clear statement such as 'the investment is not permitted' or 'the AMC must bear the excess'.

Worked examples

Example 1

A scheme of a mutual fund has investments with a market value of ₹52,00,000 and other assets of ₹3,00,000. Its liabilities and accrued expenses are ₹5,00,000. It has 2,00,000 units outstanding. Calculate the NAV per unit.

Show the solution
  1. Write the formula: NAV = (Market value of investments + Other assets − Liabilities and accrued expenses) ÷ Units outstanding.
  2. Compute net assets: ₹52,00,000 + ₹3,00,000 − ₹5,00,000 = ₹50,00,000.
  3. Divide by units: ₹50,00,000 ÷ 2,00,000 = ₹25.

Answer: The NAV per unit is ₹25.

Example 2

An AMC of a registered mutual fund fails to comply with the regulations that restrict the activities of asset management companies, and the failure continues for several days. State the consequence under the SEBI Act, 1992.

Show the solution
  1. Provision: Section 15E applies where an AMC of a registered mutual fund fails to comply with regulations providing for restrictions on the activities of AMCs.
  2. Facts: the AMC is of a registered mutual fund and the failure continues over a period of days.
  3. Analysis: the AMC is liable to a penalty of not less than ₹1,00,000, which may extend to ₹1,00,000 for each day the failure continues, subject to a maximum of ₹1,00,00,000.
  4. Conclusion: the AMC is liable to penalty under section 15E within this range.

Answer: The AMC is liable to penalty under section 15E: at least ₹1,00,000, up to ₹1,00,000 per day of continuing failure, capped at ₹1,00,00,000.

Exam tips

  • Structure answers as provision, facts, conclusion, and cite the SEBI Act section for penalty questions.
  • Learn the NAV and TER formulas by heart, since short numerical questions are easy marks.
  • Present investment restrictions as grouped points: issuer, sector, group and objective limits. Verify the exact figures in the latest material.
  • Link every default to the correct penalty section, 15D for the fund and 15E for the AMC.
  • This is a written paper, so use short headings and bullets to make your answer easy for the examiner to scan.

Practice questions from Mutual Funds

Investment Restrictions, Valuation and Disclosures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investment Restrictions, Valuation and Disclosures: frequently asked questions

What are the investment restrictions on mutual funds?

SEBI's Mutual Funds Regulations limit how much a scheme can invest in a single issuer, sector or group, bar certain activities, and require investments to match the scheme's stated objective. Learn the exact limits from the latest ICSI material and SEBI regulations, as they vary by scheme type.

What is the total expense ratio of a mutual fund?

It is the annual expenses of a scheme as a percentage of its average net assets. SEBI caps it based on scheme type and size. Any expenses above the cap are borne by the AMC, not the investors.

How is NAV of a mutual fund calculated?

NAV per unit is the value of the scheme's investments plus other assets, less liabilities and accrued expenses, divided by the number of units outstanding. Investments are valued under SEBI's fair valuation norms.

What is the penalty if a mutual fund breaches its registration conditions?

Section 15D of the SEBI Act, 1992 provides a penalty of not less than ₹1,00,000, extending to ₹1,00,000 per day while the failure continues, with a maximum of ₹1,00,00,000.