NISM-Series-V-A: Mutual Fund Distributors · Legal and Regulatory Framework

Mutual Fund Scheme Regulations and Investment Restrictions

Updated 11 October 2026

Scheme regulations are the SEBI rules on how a mutual fund launches and runs a scheme: filing the offer document, running the NFO, listing, and obeying investment limits. To solve questions, identify the rule type, recall its exact limit or timeline, and reject options that change the number.

Understand Scheme Related Regulations and Investment Restrictions

A mutual fund cannot simply launch a scheme and invest as it likes. SEBI (Mutual Funds) Regulations, 1996 set the process and the limits. The aim is to protect unit holders from concentration risk, conflicts of interest and unclear products.

The process starts with the offer document. The AMC prepares the Scheme Information Document (SID) and files it with SEBI, along with the trustees' due diligence certificate. SEBI gives observations, and the AMC fixes them before launch. A scheme should be launched within six months of SEBI's observation letter, or the document must be filed again. Once launched, the New Fund Offer (NFO) is the first period in which units are sold at face value. An NFO period should not exceed 15 days. After it closes, units are allotted within five business days.

Listing depends on the scheme type. Open-ended schemes buy and sell units with the fund, so listing is not needed. Closed-end schemes must be listed on a recognised stock exchange, within 10 working days of allotment, so investors can exit through the market. This listing timeline applies only to closed-end schemes. It is not a general NFO timeline for every scheme.

Investment restrictions sit mainly in the Seventh Schedule of the Regulations. They limit exposure to one company, one issuer and one group. They also bar risky or conflicted practices. Examples: no loans, no short selling, no investing in unlisted or privately placed securities of an associate or group company of the sponsor, and investment in listed securities of group companies of the sponsor capped at 25% of the net assets of all the schemes of the mutual fund taken together (not of a single scheme).

Scheme categorisation and rationalisation (SEBI, 2017) sorts schemes into groups: equity, debt, hybrid, solution oriented and other. Each category has a defined meaning, such as a minimum equity share. An AMC can generally offer only one scheme per category, with exceptions for index funds, fund of funds and sector or thematic schemes. This makes schemes comparable and cuts duplication.

Key formulas to remember

NFO period: NFO subscription period ≤ 15 days; The maximum open period for a new fund offer. Some special schemes can differ, so stay with the general rule.
Allotment after NFO: Allotment / refund within 5 business days of NFO closure; Do not mix this up with the older, longer timelines that appear in outdated notes.
Launch after SEBI observations: Launch within 6 months of SEBI's observation letter; Otherwise the offer document must be filed afresh.
Listing of closed-end schemes: Closed-end schemes only: listed on a recognised stock exchange within 10 working days of allotment; Open-ended schemes need not be listed. The 10 working days listing rule applies only to closed-end schemes. It is not a general NFO timeline.
Single company equity limit: Equity and equity-related investment in one company ≤ 10% of scheme NAV; This limit does not apply to index funds or sector/industry specific schemes.
Ownership of a company: All schemes of a fund together ≤ 10% of a company's paid-up voting capital; This limit is on the fund house as a whole, not per scheme.
Single issuer rated debt limit: Rated debt securities of one issuer ≤ 10% of scheme NAV (up to 12% with trustee and AMC board approval); The cap applies to rated debt instruments of a single issuer. Unrated debt instruments have separate, stricter limits, so do not apply this 10% / 12% limit to them. Government securities, treasury bills and similar sovereign instruments are exempt from it. Do not stretch the exemption beyond these.
Borrowing: Borrowing only for temporary liquidity needs (redemptions, repurchases, interest/dividend payments); ≤ 20% of net assets; ≤ 6 months; Borrowing cannot be used to buy more securities.
Category equity minimums: Large cap 80% in large cap stocks (ranked 1-100 by full market capitalisation); Mid cap 65% in mid cap stocks (ranked 101-250); Small cap 65% in small cap stocks (ranked 251st onwards); Multi cap 75% in equity (at least 25% each in large, mid and small cap); ELSS 80% in equity; These are minimum allocations under SEBI's categorisation rules. Large, mid and small cap refer to the market-capitalisation rank of the stock, not the size of the scheme.
Group company exposure: No unlisted or privately placed securities of an associate or group company of the sponsor; listed securities of group companies of the sponsor ≤ 25% of the net assets of all the mutual fund's schemes taken together; Learn both parts: the bar on unlisted and privately placed securities, and the 25% cap on listed ones. The 25% base is the net assets of all schemes together, not of one scheme.

How to solve Scheme Related Regulations and Investment Restrictions questions

Most questions test one rule with one number. Use the same method each time so you do not mix up limits.

1Read the question and name the stage: filing, NFO, listing, or running the scheme.
2Underline the key word: 'maximum', 'minimum', 'not allowed', 'closed-end' or 'index fund'.
3Recall the exact rule and its number from your list, along with any exception.
4For calculation questions, convert the percentage to rupees using NAV or net assets, then subtract existing holdings.
5Check for the exception: index fund, sector fund, or trustee approval can change the answer.
6Eliminate options with the wrong number, the wrong time unit (days vs working days vs months) or the wrong base (NAV vs paid-up capital).
7Choose the remaining option. If two seem right, re-read the scheme type.

Quickest way: Number, base, exception

When to use it: Use this when you have under a minute for a rule-recall question.

Say the rule as: number + base + exception, for example '10% of NAV, one company, not for index funds'.
Match that sentence to the options and drop any with a different number or base.
For two-step sums, find the limit in rupees first, then subtract what is already held.
If still unsure and the question has negative marking, skip and return later.

Common mistakes in Scheme Related Regulations and Investment Restrictions

Applying the 10% single company equity limit to an index fund or sector fund.
Students memorise the limit but forget the exception.
Fix: Always add 'except index and sector/industry specific schemes' when you learn the 10% rule.
Confusing the 10% of NAV limit on one company with the 10% of paid-up capital limit.
Both use 10% but have different bases.
Fix: Ask what the percentage is of: scheme NAV or the company's voting capital across all the fund's schemes.
Treating the 25% cap on listed securities of sponsor group companies as a per-scheme limit.
Most other limits are stated as a share of one scheme's NAV, so students assume the same base here.
Fix: Remember the base is the net assets of all the mutual fund's schemes taken together. Unlisted and privately placed securities of group companies are barred altogether.
Thinking all schemes must be listed.
Students link 'scheme' with 'stock exchange'.
Fix: Closed-end schemes must be listed. Open-ended schemes deal directly with the fund, so listing is not required.
Treating borrowing as a way to raise investible money.
Students think a fund borrows like a company.
Fix: A fund may borrow only to meet temporary liquidity needs, such as redemptions, repurchases or interest/dividend payments, up to 20% of net assets and for no more than 6 months.
Mixing days, working days and months in timelines.
The NFO period, allotment, listing and launch timelines all differ.
Fix: Keep a one-line list: NFO 15 days, allotment 5 business days, launch within 6 months. Add that listing within 10 working days of allotment applies only to closed-end schemes.
Assuming an AMC can launch any number of similar schemes.
Students ignore categorisation and rationalisation.
Fix: Remember the one scheme per category idea, along with its exceptions such as index funds, fund of funds and sector or thematic schemes.

Worked examples

Example 1

An equity diversified scheme has a NAV of ₹600 crore and already holds shares of Company X worth ₹48 crore. What is the maximum additional amount it can invest in Company X? (a) ₹6 crore (b) ₹12 crore (c) ₹48 crore (d) ₹60 crore

Show the solution

The single company limit is 10% of scheme NAV, as this is not an index or sector fund.
10% of ₹600 crore = ₹60 crore.
Existing holding is ₹48 crore.
Additional room = ₹60 crore − ₹48 crore = ₹12 crore.
Option (d) is the total limit, not the additional amount. Option (c) is the existing holding.

Answer: (b) ₹12 crore

Example 2

A scheme has net assets of ₹250 crore. It needs cash to meet redemptions. What is the maximum it may borrow, and for how long? (a) ₹12.5 crore for 1 month (b) ₹25 crore for 3 months (c) ₹50 crore for 6 months (d) ₹250 crore for 12 months

Show the solution

Borrowing is allowed for temporary liquidity needs, and meeting redemptions is one of them.
The cap is 20% of net assets.
20% of ₹250 crore = ₹50 crore.
The maximum period is 6 months.
Only option (c) has both the correct amount and period.

Answer: (c) ₹50 crore for 6 months

Exam tips

Build a one-page list of numbers: 15 days, 5 business days, 6 months, 10% of NAV for one issuer's rated debt (up to 12% with trustee and AMC board approval), 20% borrowing, and 25% of the net assets of all schemes together for listed group company securities. Add 10 working days for listing, which applies only to closed-end schemes. Revise daily.
Expect questions with a trap option that uses a correct number on the wrong base, such as NAV vs paid-up capital, or one scheme vs all schemes together.
For categorisation, learn the minimum equity percentages for large cap, mid cap, small cap, multi cap and ELSS.
Calculation questions are usually one or two steps. Compute the limit in rupees first, then subtract the existing holding.
Check whether the question says open-ended or closed-end before choosing any listing answer.

Practice questions from Legal and Regulatory Framework

Scheme Related Regulations and Investment Restrictions: frequently asked questions

Which scheme types must be listed on a stock exchange?

Closed-end schemes must be listed on a recognised stock exchange, within 10 working days of allotment. Open-ended schemes are not required to list because investors can buy and redeem units with the fund.

What is the single company investment limit for a mutual fund scheme?

A scheme cannot invest more than 10% of its NAV in equity and equity-related instruments of a single company. This limit does not apply to index funds or sector/industry specific schemes.

What does SEBI scheme categorisation mean for the exam?

It groups schemes into equity, debt, hybrid, solution oriented and other categories, each with a defined meaning, such as minimum equity allocation. An AMC can generally offer only one scheme per category, with some exceptions. Learn the minimum percentages for the main equity categories.

Can a mutual fund borrow money?

Yes, but only to meet temporary liquidity needs, such as redemptions, repurchases or interest/dividend payments. The borrowing cannot exceed 20% of net assets and cannot last more than 6 months.

How should I prepare for investment restriction questions in NISM V-A?

Make a short list of each limit with its base and exception. Practise converting percentages into rupees. V-A has no negative marking, so attempt every question.