Mutual funds
How a fund is put together, what it charges, how to compare two schemes honestly, and a SIP calculator with step-up.
How a fund is structured
A mutual fund in India is a trust. The sponsor sets it up, a board of trustees holds the assets on behalf of unit holders, the asset management company runs the investments for a fee, a custodian holds the securities, and a registrar and transfer agent maintains the unit holder records.
The separation matters. Your money is not on the AMC's balance sheet. If the AMC gets into trouble, the scheme's assets belong to the unit holders.
Scheme categories
SEBI standardised scheme categories so that two funds with the same label invest in comparable universes. Before this, a fund could call itself anything.
- Large cap must hold at least 80 per cent in the top 100 companies by market cap.
- Mid cap at least 65 per cent in companies ranked 101 to 250.
- Small cap at least 65 per cent in companies ranked 251 and below.
- Flexi cap at least 65 per cent in equity, with no size constraint.
- Multi cap at least 25 per cent in each of large, mid and small.
An AMC may run only one scheme per category, with defined exceptions. That is why fund houses do not have six large cap schemes any more.
What it costs
The total expense ratio is charged against the scheme's assets daily. The NAV you see is already net of it, which is why the cost is easy to ignore and expensive to ignore.
The direct plan difference
A regular plan includes distributor commission in its expense ratio. A direct plan does not. The same portfolio, the same manager, a different NAV. Over a long holding period the gap compounds into a meaningful amount.
What you give up in a direct plan is the distributor's service: scheme selection, paperwork, rebalancing discipline and someone to talk to in a drawdown. Whether that is worth the difference depends entirely on whether you would otherwise make worse decisions on your own.
Exit load is a separate charge, applied if you redeem within a defined period. Check it before you assume a fund is liquid.
Comparing two schemes
- Rolling returns rather than point-to-point. A five-year return quoted from a market bottom flatters every fund equally and distinguishes none of them.
- Downside capture. How much of the index's fall the fund took. Two funds with identical returns can have very different paths.
- Portfolio overlap. Three funds holding the same twenty stocks is one fund with three expense ratios.
- Fund size against category. A small cap scheme that has grown very large faces liquidity constraints its earlier record did not reflect.
- Manager tenure. A ten-year track record under a manager who left last year is a historical document.
SIP calculator
Systematic investment, with optional annual step-up
- Total invested
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- Projected value
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- Gain
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- Multiple
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An arithmetic illustration at a constant assumed rate, not a projection. Real returns arrive unevenly, and the sequence in which they arrive changes the outcome. Figures are before tax and before any exit load.
Taxation, in outline
The tax treatment of a redemption depends on what the scheme holds, how long you held it, and the rules in force for that financial year.
- Equity-oriented schemes carry one holding period threshold separating short term from long term, with an annual exemption on long-term gains.
- Debt-oriented schemes are treated differently, and the treatment changed for units purchased after a specified date.
- Each SIP instalment is a separate purchase with its own holding period. A SIP running three years does not make the whole corpus long term.
- Switching between schemes is a redemption and a fresh purchase. It is a taxable event even though no money reached your bank account.