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Capital Market and Securities Laws · Mutual Funds

Schemes of Mutual Funds and Offer Documents

Updated 11 October 2026 · Fact-checked

A mutual fund scheme pools investor money and invests it under a stated objective. Schemes are classed by structure (open-ended, close-ended) and by portfolio (equity, debt, hybrid). Each is launched through an offer document that discloses its terms. NAV = (market value of assets − liabilities) ÷ units outstanding.

Understand Schemes of Mutual Funds and Offer Documents

A mutual fund collects money from many investors and invests it in securities. Each investor gets units. The money is managed by an asset management company (AMC) on behalf of the unit holders. One mutual fund can run many schemes, each with its own objective and portfolio.

Schemes are classified in two main ways. By structure: an open-ended scheme accepts purchases and redemptions on an ongoing basis, so units can be bought and sold at NAV-based prices and there is no fixed maturity. A close-ended scheme has a fixed tenure, units are offered during the new fund offer period, and investors normally exit through the stock exchange listing or on maturity.

By portfolio: an equity scheme invests mainly in shares, a debt scheme mainly in bonds and money market instruments, and a hybrid scheme in a mix of both. The scheme's investment objective decides which category it falls in and what risk the investor takes.

Before a scheme is launched, the AMC must issue an offer document. Under SEBI's framework, the scheme information must be disclosed to investors so they can decide with full facts. The offer document describes the objective, investment pattern, risk factors, fees and expenses, how units are bought and redeemed, and how NAV is computed. Advertisements for schemes must follow SEBI's advertisement code and must not mislead.

The Net Asset Value (NAV) is the per-unit value of the scheme. It is the price base for sale and repurchase of units. Under the SEBI Act, section 11A lets SEBI specify by regulations how matters of capital issue are disclosed and prohibit or condition any offer document or advertisement soliciting money. Mutual fund subscriptions are excluded from the definition of a collective investment scheme under section 11AA(3)(viii).

Key rules to remember

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.

How to solve Schemes of Mutual Funds and Offer Documents questions

Use this order for any descriptive question on mutual fund schemes, offer documents or NAV.

  1. 1Read the question and identify whether it asks for classification, offer document content, advertising, or NAV.
  2. 2Define the term in one or two lines, such as mutual fund scheme, open-ended or NAV.
  3. 3For classification, state the basis first (structure or portfolio) and then each type with its feature.
  4. 4For offer documents, list what must be disclosed and state that it protects investors by giving full information.
  5. 5For NAV, write the formula, substitute figures, and show each subtraction and the final division.
  6. 6Cite the SEBI Act section where relevant, such as section 11A for offer documents and advertisements.
  7. 7End with a one-line conclusion that answers the exact question asked.

Quickest way: Basis, type, feature, conclusion

When to use it: Use for theory questions on scheme types when time is short.

  1. Write the basis of classification in one line.
  2. List each type with one defining feature.
  3. Add one contrast line, such as open-ended versus close-ended exit route.
  4. For NAV, write the formula and compute in three lines: net assets, units, division.
  5. Close with the investor-protection purpose of the offer document.

Common mistakes in Schemes of Mutual Funds and Offer Documents

  • Saying close-ended units can be redeemed any time at NAV.

    Students mix up the two structures.

    Fix: Remember close-ended means fixed tenure; exit is through listing or at maturity.

  • Forgetting to deduct liabilities and expenses when computing NAV.

    Students divide total investments by units directly.

    Fix: Always compute net assets first: assets minus liabilities, then divide.

  • Using total units at an old date or the wrong date.

    Figures are given for different dates in the question.

    Fix: Use units outstanding on the NAV date and note it in your working.

  • Treating mutual funds as collective investment schemes.

    Both pool investor money.

    Fix: Cite section 11AA(3)(viii): mutual fund subscriptions are excluded from CIS.

  • Classifying a scheme by its name rather than its objective.

    Names can suggest a category.

    Fix: Classify using the stated investment pattern in the offer document.

Worked examples

Example 1

A mutual fund scheme has investments with market value ₹52,00,000, other assets of ₹3,00,000 and liabilities with accrued expenses of ₹1,00,000. It has 5,00,000 units outstanding. Compute the NAV per unit.

Show the solution
  1. Total assets = ₹52,00,000 + ₹3,00,000 = ₹55,00,000.
  2. Net assets = ₹55,00,000 − ₹1,00,000 = ₹54,00,000.
  3. NAV = ₹54,00,000 ÷ 5,00,000 units = ₹10.80.

Answer: NAV per unit is ₹10.80.

Example 2

Distinguish between open-ended and close-ended mutual fund schemes, and state why an offer document is required before launch.

Show the solution
  1. Provision: an open-ended scheme is available for sale and repurchase on an ongoing basis with no fixed maturity. A close-ended scheme has a fixed tenure.
  2. Analysis: in open-ended schemes investors transact with the fund at NAV-based prices, so the unit count changes. In close-ended schemes units are offered during the new fund offer and investors normally exit through the stock exchange or at maturity.
  3. Offer document: it discloses the objective, investment pattern, risks, expenses, and NAV method so investors decide with full facts. Under section 11A of the SEBI Act, SEBI may specify disclosure by regulations and prohibit or condition any offer document or advertisement soliciting money.
  4. Conclusion: the schemes differ in liquidity and tenure, and the offer document protects investors in both.

Answer: Open-ended schemes offer continuous entry and exit with no fixed maturity; close-ended schemes have fixed tenure and exit via listing or maturity. The offer document ensures investor protection through disclosure under SEBI's powers including section 11A.

Exam tips

  • Write the classification basis first; examiners reward structured answers.
  • For NAV problems, show net assets and units separately so you earn method marks even if arithmetic slips.
  • Cite section 11A for offer documents and advertisements, and section 11AA(3)(viii) when contrasting CIS.
  • Keep a one-line contrast of open-ended and close-ended ready; it is a common short question.
  • State your conclusion in the last line in the ICSI style.

Practice questions from Mutual Funds

Schemes of Mutual Funds and Offer Documents in other exams

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

Schemes of Mutual Funds and Offer Documents: frequently asked questions

What is the difference between open-ended and close-ended schemes?

An open-ended scheme allows purchase and redemption on an ongoing basis and has no fixed maturity. A close-ended scheme has a fixed tenure, and investors normally exit through the stock exchange or at maturity.

What is NAV and how is it calculated?

NAV is the value of one unit of a scheme. Add market value of investments and other assets, subtract liabilities and accrued expenses, and divide by the units outstanding.

Why is an offer document needed?

It gives investors the scheme's objective, investment pattern, risks, costs and NAV method. This lets them decide with full information, which is the investor-protection aim behind SEBI's disclosure powers.

Is a mutual fund a collective investment scheme?

No. Section 11AA(3)(viii) of the SEBI Act says a scheme where contributions are in the nature of subscription to a mutual fund is not a collective investment scheme.