Module 7: Mutual Funds & Collective Investment Schemes

The SEBI (Mutual Funds) Regulations, 1996 form the comprehensive regulatory framework for mutual funds in India, replacing the earlier 1993 regulations.

Under Regulation 7, the sponsor must contribute at least 40% of the net worth of the Asset Management Company.

At least two-thirds of the trustees must be independent, i.e., not associated with the sponsor or its associates.

An AMC must have a minimum net worth of Rs. 50 crore (including seed capital commitment).

A sponsor must have a track record in financial services for at least 5 years to establish a mutual fund.

At least 50% of the AMC directors must be independent directors not associated with the sponsor.

Trustees must review AMC activities at least once every quarter as part of their oversight responsibilities.

Every mutual fund has the tripartite structure of Sponsor, Trustee, and AMC as the three key entities.

The annual fee payable to SEBI is Rs. 2,50,000, due by April 30 each year.

The Trustee holds the property of the mutual fund in trust for the benefit of unitholders.

As per SEBI categorization, large cap stocks are companies ranked 1st to 100th by full market capitalization.

ELSS has a mandatory 3-year lock-in period, which is the shortest among Section 80C investments.

Post-September 2020 amendment, Multi Cap Funds must have minimum 25% each in large, mid, and small cap stocks.

SEBI's October 2017 circular established 36 categories for mutual fund schemes.

SEBI introduced the side pocketing framework in December 2018 to protect investors from credit events in debt funds.

Aggressive Hybrid Funds must maintain equity allocation of 65-80% with the balance in debt.

A fund must have at least 65% in equity and equity-related instruments to qualify for equity fund taxation.

Liquid funds invest in money market and debt securities with maturity up to 91 days.

A Focused Fund can hold a maximum of 30 stocks with minimum 65% in equity.

Key Information Memorandum (KIM) is a summary document derived from SID containing key scheme information.

Maximum investment in a single company's equity is 10% of NAV under Regulation 44.

Maximum exposure to a single group of companies in debt instruments is 20% of NAV.

SCORES (SEBI Complaints Redress System) is SEBI's online platform for investor complaint resolution.

Mutual fund distributors must pass NISM Series-V-A: Mutual Fund Distributors Certification Examination.

All exit loads collected must be credited back to the scheme, benefiting remaining investors.

SEBI mandated the shift from upfront to trail commission from October 2018.

The risk-o-meter has 6 levels: Low, Low to Moderate, Moderate, Moderately High, High, Very High.

Maximum TER for Index Funds and ETFs is capped at 1.00%.

Passive investment breaches (due to market movement) must be rectified within 30 days.

Investors get 30 days exit option without exit load if they disagree with fundamental attribute changes.

SEBI (Alternative Investment Funds) Regulations were enacted in 2012.

Minimum investment per investor in an AIF is Rs. 1 crore (Rs. 25 lakh for Angel Funds).

Venture Capital Funds fall under Category I AIFs, along with SME Funds, Social Venture Funds, and Infrastructure Funds.

Only Category III AIFs (hedge funds) can employ leverage. Category I and II cannot borrow except for operational needs.

Category I and II AIFs can invest maximum 25% of investable funds in a single investee company.

Private Equity Funds fall under Category II AIFs, which is the residual category for funds without leverage or specific incentives.

For Category I and II AIFs, minimum sponsor commitment is 2.5% of corpus or Rs. 5 crore, whichever is lower.

Maximum 1000 investors are permitted per AIF scheme (200 for Angel Funds).

Minimum corpus requirement for AIFs is Rs. 20 crore (Rs. 10 crore for Angel Funds).

Category III AIF registration fee is Rs. 15 lakh (compared to Rs. 5 lakh for Category I and II).

The definition of Collective Investment Scheme is contained in Section 11AA of the SEBI Act.

A CIS must meet 4 essential elements: pooling, profit motive, third-party management, and no day-to-day control by contributors.

SEBI (Collective Investment Schemes) Regulations were enacted in 1999.

The Supreme Court held that SEBI has jurisdiction over all securities issuances, whether listed or unlisted.

Sahara companies collected approximately Rs. 24,000 crore from nearly 3 crore investors.

PACL collected over Rs. 49,000 crore from approximately 5.5 crore investors - the largest CIS fraud in India.

Section 24 of SEBI Act provides for imprisonment up to 10 years for contravention of SEBI Act/Regulations.

The Banning of Unregulated Deposit Schemes Act was enacted in 2019 to address illegal deposit schemes.

The Supreme Court appointed Justice R.M. Lodha Committee to oversee PACL refund process.

Land purchase schemes (like PACL operated) are NOT excluded from CIS definition if they meet the four elements. Mutual funds, chit funds, and insurance are specifically excluded.