Concept and Role of a Mutual Fund

NISM Series V-D | 4 marks | Official workbook pages 40-66

What this chapter is about

Understand how a mutual fund pools investor money, creates units, calculates NAV and offers professionally managed access to different asset classes.

Core concepts

• A mutual fund pools money from many investors and invests it according to a stated objective. Investors own units of the scheme, not the underlying securities directly.
• NAV is the per-unit value of the scheme's net assets. It represents the amount attributable to one unit after liabilities and expenses.
• Open-ended schemes allow ongoing purchase and redemption. Close-ended schemes have a fixed maturity. Interval schemes open for transactions only during specified windows.
• Equity, debt, hybrid, solution-oriented and other scheme categories differ by permitted asset allocation and investment objective.
• Passive funds track an index. Active funds allow the fund manager to choose securities and take positions relative to a benchmark.
• Mutual funds provide professional management, diversification, liquidity, convenience, transparency and economies of scale, but they do not guarantee returns.
• A life-cycle fund generally reduces equity and increases debt as it approaches maturity or the target date.

Formula and calculation sheet

NAV per unit = (market value of investments + receivables + other assets - liabilities - accrued expenses) / units outstanding.

Exam focus

• NAV indicates the net asset value available per unit if scheme assets are realised and liabilities are settled.
• Economies of scale are a core advantage of pooled investing.
• Close-ended funds have a fixed maturity date.
• Scheme classification questions test structure, asset class, management style and investment objective separately.

Quick revision - 60 second scan

• Investor owns units; the scheme owns the portfolio.
• Open-ended means continuous entry and exit.
• Close-ended means fixed maturity.
• Passive tracks; active selects.