NISM Chapter 1 Summary

• Mutual fund is a vehicle (in the form of a “trust”) to mobilize

money from investors, to invest in different markets and
securities, in line with the common investment objectives agreed
upon, between the mutual fund and the investors.
• Their primary role is to assist investors in earning an income or
building their wealth, by participating in the opportunities
available in various securities and markets.
• Thus, the mutual fund structure, through its various schemes,
makes it possible to tap a large corpus of money from investors
with diverse goals/objectives.
• The investment that an investor makes in a scheme is translated
into a certain number of ‘Units’ in the scheme. Thus, an investor
in a scheme is issued units of the scheme.
• Typically, every unit has a face value of Rs. 10. (However, older
schemes in the market may have a different face value). The face
value is relevant from an accounting perspective. The number of
units issued by a scheme multiplied by its face value (Rs. 10) is the
capital of the scheme – its Unit Capital.
• The true worth of a unit of the scheme is otherwise called Net
Asset Value (NAV) of the scheme.
• When a scheme is first made available for investment, it is called a
‘New Fund Offer’ (NFO).
• The relative size of mutual fund companies is assessed by their
assets under management (AUM).
Advantages of Mutual Funds for Investors
▪ Professional Management
▪ Portfolio Diversification
▪ Economies of Scale
▪ Liquidity
▪ Tax Deferral
▪ Tax benefits
▪ Convenient Options
▪ Investment Comfort
▪ Regulatory Comfort
▪ Systematic Approach to Investments
o Systematic Investment Plan (SIP)
o Systematic Withdrawal Plan (SWP)
o Systematic Transfer Plan (STP)

Types of Funds

o Open-Ended Funds
o Close-Ended Funds
o Interval Funds

• Open-ended funds are open for investors to enter or exit at any time, even
after the NFO.
• Close-ended funds have a fixed maturity. Investors can buy units of a close-
ended scheme, from the fund, only during its NFO. The fund makes
arrangements for the units to be traded, post-NFO in a stock exchange.
• Interval funds combine features of both open-ended and close-ended
schemes. They are largely close-ended, but become open-ended at pre-
specified intervals.
Actively managed funds are funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the investment
objective of the scheme.

Passive funds invest on the basis of a specified index, whose performance it seeks
to track. Thus, a passive fund tracking the S&P BSE Sensex would buy only the
shares that are part of the composition of the S&P BSE Sensex.

Exchange Traded Funds (ETFs) are also passive funds whose portfolio replicates
an index or benchmark such as an equity market index or a commodity index.

Types of Equity Schemes

• Diversified equity fund

• Market Segment based funds
o Large Cap
o Small Cap
o Medium Cap
• Sector funds
• Thematic funds
• Strategy-based Schemes
• Equity Income/Dividend Yield Schemes
• Value fund
• Growth funds
• Focused funds
• Equity Linked Savings Schemes (ELSS)

Equity Linked Savings Schemes (ELSS) are diversified equity funds that
offer tax benefits to investors under section 80 C of the Income Tax Act up to
an investment limit of Rs. 150,000 a year
Types of Debt Funds
o Gilt funds invest in only treasury bills and government securities, which do not have a
credit risk (i.e. the risk that the issuer of the security defaults).
o Corporate bond funds invest in debt securities issued by companies, including PSUs.
o Liquid schemes are a variant of debt schemes that invest only in short term debt
securities. They can invest in debt securities of upto 91 days maturity.
o Short term debt schemes invest in securities with short tenors that have low interest
rate risk of significant changes in the value of the securities.
o Ultra short-term plans are also known as treasury management funds, or cash
management funds. They invest in money market and other short term securities
o Diversified debt funds or Income fund, invest in a mix of government and non-
government debt securities such as corporate bonds, debentures and commercial
paper.
o Junk bond schemes or high yield bond schemes invest in securities that have a lower
credit rating indicating poor credit quality.
o Dynamic debt funds are flexible in terms of the type of debt securities held and their
tenors.
o Fixed maturity plans are a kind of debt fund where the duration of the investment
portfolio is closely aligned to the maturity of the scheme.
o Floating rate funds invest largely in floating rate debt securities i.e. debt securities
where the interest rate payable by the issuer changes in line with the market.

Hybrid funds invest in a combination of asset classes such as equity, debt and
gold. The combination of asset classes used will depend upon the investment
objective of the fund.