Mutual Funds and Other Investment Vehicles: NAV, SIP, ETFs, REITs, InvITs and AIFs for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
Mutual funds and pooled investment vehicles sit within the Financial Markets line of the RBI Grade B Finance syllabus, and they matter because household savings in India have shifted strongly towards them. Questions ask about the three-tier structure of a mutual fund, how NAV is calculated, the difference between open-ended and close-ended funds, what REITs and InvITs are, and the categories of alternative investment funds. This chapter covers mutual funds in detail and then the other vehicles regulated by SEBI.
In one line: a mutual fund pools money from many investors and invests it in shares, bonds or money market instruments under a professional manager, with each investor owning units valued at the net asset value; REITs, InvITs and AIFs extend the same pooling idea to real estate, infrastructure and private markets.
Basic concepts
- Mutual fund: a trust that collects money from investors with a common objective and invests it in securities, distributing gains and losses in proportion to units held.
- Unit: the share of an investor in a mutual fund scheme.
- Net Asset Value (NAV): the value of one unit, calculated as (market value of assets minus liabilities) ÷ number of units outstanding.
- Asset Management Company (AMC): the company that manages the fund's investments.
- Expense ratio: the annual cost of running a scheme, as a percentage of its average assets, charged to investors through the NAV.
- Exit load: a fee charged when an investor redeems units within a set period.
Why in News?
- Monthly inflows through Systematic Investment Plans (SIPs) have stayed at record levels in 2025 and 2026, and domestic mutual funds have often bought shares when foreign investors sold.
- SEBI launched a new category, the Specialised Investment Fund (SIF), from April 2025, between mutual funds and portfolio management services, with a minimum investment of ₹10 lakh and freedom to use more complex strategies.
- SEBI continued to revise the expense ratio rules for mutual funds to lower costs for investors.
- REITs and InvITs have grown, and SEBI classified REITs as equity-related instruments for mutual fund investment from 2026, which widens their investor base.
Structure of a mutual fund in India
Mutual funds in India follow a trust structure under the SEBI (Mutual Funds) Regulations, 1996.
| Entity | Role |
|---|---|
| Sponsor | Sets up the fund and contributes at least 40% of the AMC's net worth; must meet SEBI's track record and net worth requirements. Can be likened to the promoter |
| Trust and trustees | The fund is set up as a trust under the Indian Trusts Act, 1882. Trustees (or a trustee company) hold the assets on behalf of unit holders and supervise the AMC; at least two-thirds of trustees must be independent |
| Asset Management Company (AMC) | Manages investments, appointed by trustees; must have a minimum net worth set by SEBI and at least 50% independent directors |
| Custodian | Holds the securities of the fund in safe custody |
| Registrar and Transfer Agent (RTA) | Maintains investor records and processes transactions, such as CAMS and KFintech |
The Association of Mutual Funds in India (AMFI) is the industry body. It registers mutual fund distributors and runs investor awareness campaigns such as "Mutual Funds Sahi Hai".
How NAV is calculated
NAV per unit = (Market value of investments + cash and receivables − liabilities and expenses) ÷ Number of units outstanding
Example: a scheme holds investments worth ₹105 crore and cash of ₹2 crore, with liabilities of ₹1 crore, and has 5 crore units outstanding. NAV = (105 + 2 − 1) ÷ 5 = ₹21.20 per unit.
NAV is declared every business day. Investors buy and sell at NAV, adjusted for exit load where applicable. The cut-off time for an order decides which day's NAV applies.
Types of mutual funds
By structure
| Type | Feature |
|---|---|
| Open-ended | Units can be bought and sold at any time at NAV; no fixed maturity; most schemes in India |
| Close-ended | Units issued only during the New Fund Offer (NFO), with a fixed maturity; listed on exchanges for liquidity |
| Interval | Combine both; open for purchase or redemption only at set intervals |
By asset class (SEBI categorisation of 2017)
SEBI's circular of October 2017 standardised categories, so that each AMC can have only one scheme per category (with exceptions such as index funds and sectoral funds).
| Group | Categories (examples) |
|---|---|
| Equity schemes | Large cap (at least 80% in the top 100 companies), mid cap (101st to 250th), small cap (251st onwards), large and mid cap, multi cap, flexi cap, focused, value, contra, dividend yield, sectoral and thematic, Equity Linked Savings Scheme (ELSS) |
| Debt schemes | Overnight, liquid, ultra short duration, low duration, money market, short, medium and long duration, dynamic bond, corporate bond, credit risk, banking and PSU, gilt, floater |
| Hybrid schemes | Conservative hybrid, balanced or aggressive hybrid, dynamic asset allocation, multi-asset allocation, arbitrage, equity savings |
| Solution-oriented schemes | Retirement funds, children's funds (with a lock-in) |
| Other schemes | Index funds, exchange traded funds, fund of funds |
By investment objective
- Growth funds: aim for capital appreciation over the long term, usually equity.
- Income funds: aim for regular income, usually debt.
- Balanced funds: a mix of growth and income.
- Tax-saving funds: ELSS, with a three-year lock-in, offering a deduction under the old tax regime.
Active and passive funds
| Active | Passive |
|---|---|
| A fund manager chooses securities to beat a benchmark | Tracks an index such as the Nifty 50 |
| Higher expense ratio | Lower expense ratio |
| Performance depends on the manager's skill | Return close to the index, minus tracking error |
Ways to invest
| Method | Meaning |
|---|---|
| Lump sum | A one-time investment |
| Systematic Investment Plan (SIP) | A fixed amount invested at regular intervals, usually monthly; gives rupee cost averaging, buying more units when prices are low and fewer when high |
| Systematic Withdrawal Plan (SWP) | Regular withdrawals of a fixed amount from a scheme, useful for retirees |
| Systematic Transfer Plan (STP) | Regular transfer from one scheme (often a liquid fund) to another (often equity) |
| Direct plan | Bought directly from the AMC, without distributor commission, so the expense ratio is lower |
| Regular plan | Bought through a distributor, who earns a commission |
Offer documents and disclosures
- New Fund Offer (NFO): the first offer of units of a new scheme, usually open for up to 15 days.
- Scheme Information Document (SID): details of the scheme's objective, asset allocation, risks and costs.
- Statement of Additional Information (SAI): information about the fund house common to all schemes.
- Key Information Memorandum (KIM): a short summary that accompanies the application form.
- Riskometer: a dial with six levels from low to very high risk, shown for every scheme and reviewed monthly.
- Portfolio disclosure: monthly for all schemes, and fortnightly for debt schemes.
Benefits and risks of mutual funds
| Benefits | Risks |
|---|---|
| Professional management | Market risk: NAV falls with the market |
| Diversification across many securities | Credit risk in debt funds, as seen in the closure of six Franklin Templeton debt schemes in April 2020 |
| Low minimum investment, often ₹100 to ₹500 for SIPs | Interest rate risk in long-duration debt funds |
| Liquidity in open-ended schemes | Liquidity risk if many investors redeem at once |
| Transparency and regulation by SEBI | Manager risk in active funds |
| Tax efficiency compared with some other options | Costs reduce returns |
Protections introduced by SEBI
- Side pocketing (2018), which separates a defaulted bond from the rest of the portfolio so that new investors are not affected.
- Swing pricing for debt funds, which charges redeeming investors more in times of stress.
- Stress testing of debt funds and limits on exposure to a single issuer or sector.
- Total expense ratio limits linked to the size of the scheme.
- The Corporate Debt Market Development Fund (2023), a backstop that can buy bonds from debt funds during stress.
Exchange Traded Funds and index funds
An Exchange Traded Fund (ETF) is a fund that tracks an index, a commodity such as gold or silver, or a basket of bonds, and whose units trade on a stock exchange like shares throughout the day. It combines the diversification of a mutual fund with the trading flexibility of a share.
| ETF | Index fund |
|---|---|
| Traded on exchanges at market price during the day | Bought and sold with the AMC at end-of-day NAV |
| Needs a demat account | Does not need a demat account |
| May trade at a small premium or discount to NAV | Always at NAV |
The government has used ETFs for disinvestment, such as CPSE ETF (2014) and Bharat 22 ETF (2017). Bharat Bond ETF (2019) was India's first corporate bond ETF, investing in AAA-rated bonds of public sector firms.
Real Estate Investment Trusts (REITs)
A REIT owns and manages income-generating real estate, such as office parks and malls, and passes most of the rental income to unit holders.
| Feature | Detail |
|---|---|
| Regulation | SEBI (REIT) Regulations, 2014 |
| Structure | Sponsor, manager, trustee, like a mutual fund |
| Assets | At least 80% in completed, income-generating properties |
| Distribution | At least 90% of net distributable cash flow to unit holders, at least twice a year |
| Listing | Units are listed and traded on stock exchanges |
| Minimum investment | Reduced to one unit (a few hundred rupees) after changes in 2021 |
| Small and Medium REITs | A category for smaller assets, allowed from 2024 |
India's first REIT, Embassy Office Parks, listed in 2019.
Infrastructure Investment Trusts (InvITs)
An InvIT owns infrastructure assets such as roads, power transmission lines, pipelines and telecom towers, and distributes cash flows to unit holders. It is regulated under the SEBI (InvIT) Regulations, 2014. At least 80% of assets must be in completed, revenue-generating projects, and at least 90% of net distributable cash flows must be paid out. The National Highways Authority of India and Power Grid Corporation have used InvITs to recycle capital, which supports the National Monetisation Pipeline.
Alternative Investment Funds (AIFs)
AIFs are privately pooled funds regulated under the SEBI (AIF) Regulations, 2012. The minimum investment is ₹1 crore for most investors.
| Category | Investment | Examples |
|---|---|---|
| Category I | Sectors that the government considers socially or economically desirable | Venture capital funds (including angel funds), SME funds, social impact funds, infrastructure funds |
| Category II | Funds that do not fall in Category I or III and do not borrow except for short-term needs | Private equity funds, debt funds, fund of funds |
| Category III | Funds that use complex trading strategies and may use leverage | Hedge funds, long-short funds |
The Fund of Funds for Startups, managed by SIDBI, invests in Category I and II AIFs. Accredited investors, assessed on income and net worth, can invest in some AIFs with lower minimum amounts.
Other vehicles
| Vehicle | Detail |
|---|---|
| Portfolio Management Services (PMS) | A manager runs an individual portfolio for a client; minimum investment of ₹50 lakh; regulated by SEBI (Portfolio Managers) Regulations, 2020 |
| Specialised Investment Fund (SIF) | A SEBI category launched in 2025 for investors with at least ₹10 lakh, run by mutual fund houses, allowing strategies such as long-short equity |
| National Pension System | A pension vehicle regulated by PFRDA, with fund managers investing in equity, corporate bonds and government securities |
| Unit Linked Insurance Plans (ULIPs) | Insurance products with an investment component, regulated by IRDAI |
| Collective Investment Schemes | Schemes pooling money for returns from activities such as plantations; regulated by SEBI to stop fraudulent schemes |
Role of mutual funds in the capital market
- They channel household savings into shares and bonds, deepening the market.
- They provide stability, as SIP flows are steady and often offset FPI selling.
- They are big lenders in the money market through liquid and overnight funds.
- They improve corporate governance through voting at shareholder meetings, with a stewardship code since 2020.
- They widen participation in tier 2 and smaller cities.
Challenges
- Mutual fund penetration is still low in relation to GDP compared with developed markets.
- Mis-selling and the chasing of past returns by investors.
- Debt fund credit events and liquidity stress.
- Concentration of flows in mid-cap and small-cap funds, raising valuation concerns.
- Changes in taxation of debt funds from 2023, which removed indexation benefits and reduced their appeal.
Way forward
- Expand investor education beyond large cities, especially among women.
- Lower costs through direct plans and passive funds.
- Develop the debt fund market and the corporate bond market together.
- Strengthen risk management and stress testing.
- Encourage long-term investing through retirement and children's funds.
Possible exam and interview questions
- Explain the three-tier structure of mutual funds in India. How does SEBI protect mutual fund investors? (620 words)
- What are REITs and InvITs? How do they help in financing real estate and infrastructure? (420 words)
- Calculate the NAV of a scheme with assets of ₹210 crore, liabilities of ₹10 crore and 10 crore units.
- Distinguish between an ETF and an index fund.
- Interview: Are SIPs making Indian markets more stable?
Related reading: equity market, financial regulators, and public-private partnership.
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