Mutual Funds & ETFs

1. What you'll learn and why it matters

Most of what you have learned so far is about picking and trading individual stocks. Most Indian savers, though, meet the market through mutual funds: pooled investments run by professionals, bought in rupee amounts rather than in shares. Money coming in through SIPs (systematic investment plans: a fixed sum invested every month, part 12) now runs into tens of thousands of crores a month. Funds are also the simplest way to build the core bucket of the three-bucket plan in Chapter 17: the long-term money that should keep compounding while you learn to trade with a small satellite.

Funds are simple to buy and easy to misunderstand. Two investors can hold "the same" fund and end up ₹1.4 lakh apart after ten years because one chose the regular plan. A "safe" debt fund can freeze your money for years. An ETF can cost you 20% more than its holdings are worth. This chapter shows each of these on real data.

By the end you will be able to:

• explain how a fund is structured (sponsor, trustees, AMC, custodian, RTA) and who regulates it;
• calculate a NAV, know which day's NAV you will get, and see why "₹10 NFO units are cheap" is a myth;
• measure what costs (TER, exit load, stamp duty, STT) and the regular-plan commission take, in rupees;
• place any scheme on SEBI's category map, including the 2026 changes (life cycle funds, SIFs);
• read a factsheet: portfolio, turnover, standard deviation, Sharpe, beta, YTM and duration;
• estimate how much a debt fund falls when yields rise, and recognise credit and liquidity risk;
• judge active against passive funds with rolling returns and a survivorship-aware scorecard;
• choose between an index fund and an ETF, check an ETF's premium to NAV, and separate tracking difference from tracking error;
• run a SIP, compute its XIRR, and know when a lump sum beats it;
• avoid owning the same stocks five times, and keep your paperwork in order.

2. How a mutual fund works, and who runs it

A mutual fund collects money from many investors and invests it in one portfolio with a stated objective: "large-cap Indian stocks", "government bonds of about 10 years' maturity", "the Nifty 50 index". Each investor owns a share of the pot in proportion to their money. Varsity's analogy is a family pot: everyone puts money in, the pot is invested together, and everyone's share grows or shrinks by the same percentage. You get professional management, diversification across dozens of securities with as little as ₹100–₹500, daily liquidity, and strong regulation. You give up control over what is bought, pay a yearly fee, and accept the manager's decisions.

India uses a trust structure that separates the people who manage the money from the people who hold it:

• Sponsor: the promoter (often a bank or financial group) that applies to SEBI, sets up the fund, and must meet net-worth and track-record tests.
• Trustees: a board, with a majority independent of the sponsor, that holds the assets in trust for unitholders and supervises the AMC.
• AMC (asset management company): the investment manager. Its fund managers and analysts run each scheme (a single fund such as "HDFC Flexi Cap Fund"). A fund house runs dozens of schemes.
• Custodian: a separate regulated entity (often a bank) that holds the securities. The AMC cannot simply walk off with them.
• RTA (Registrar and Transfer Agent): keeps the register of unitholders, issues folio numbers and statements, and processes purchases, redemptions and payouts. In India almost every fund uses one of two RTAs: CAMS or KFintech.

Above them sit SEBI (Securities and Exchange Board of India), which licenses fund houses and writes the rules on categories, expenses and disclosure, and AMFI (Association of Mutual Funds in India), the industry body that publishes daily NAVs, registers distributors (each gets an ARN, AMFI Registration Number) and runs investor-education campaigns. The market ecosystem around them (exchanges, depositories, brokers) is in Chapter 1.

Open-ended vs closed-ended. Almost all funds you will meet are open-ended: you can buy or redeem units from the fund on any business day at that day's NAV, and the fund has no end date. Closed-ended funds (some fixed-maturity plans, some older ELSS) take money only during the launch and then lock it until a maturity date; their units may trade on the exchange, often at a discount. Interval funds open for redemptions only at set intervals.

3. Units and NAV: what you actually buy

When you invest you receive units, not shares of the companies. The price of one unit is the NAV (net asset value): the fund's net assets divided by the number of units. The AMC computes it at the end of every business day from closing prices.

Which NAV do you get? Cut-off times

Mutual-fund orders are not priced like share trades. You do not know the price when you place the order: you get the NAV of the day your order (and your money) reaches the fund in time.

Because the money must reach the fund by the cut-off, a UPI or net-banking payment at 2:58 pm can still miss it. For a long-term SIP this does not matter. It matters when you switch large amounts during a volatile day. ETFs (part 10) are different: they trade on the exchange at live prices and settle T+1 like shares.

AMFI publishes every scheme's NAV on its website each business evening (by 11 pm), and the RTA updates your statement. That NAV already reflects the day's expenses: there is no separate fee bill.

The NFO myth: "₹10 units are cheap"

An NFO (new fund offer) is the launch of a new scheme, usually at ₹10 per unit. Distributors sometimes pitch it as "buying at ₹10 instead of ₹150". That is the same mistake as thinking a low-priced share is cheaper than a high-priced one. A unit's NAV tells you nothing about value: it only reflects when the fund started and how it has done since. What matters is the percentage change.

4. What a fund costs you: TER, exit load, stamp duty, STT

The total expense ratio (TER)

A fund's yearly running cost, as a percentage of its assets, is its TER (total expense ratio). It pays the AMC's management fee, the RTA, custodian, auditors, marketing and, in regular plans, the distributor's commission. You never see a bill. The fund deducts a slice every day before declaring the NAV, so a 1% TER means the NAV grows about 1% a year slower than the portfolio does.

New from 1 Apr 2026. The SEBI (Mutual Funds) Regulations, 2026 replaced the 1996 regulations. They split the old TER into a base expense ratio (BER), which is the AMC's own fee and is capped, plus brokerage and transaction costs (separately capped, and cut sharply) plus statutory and regulatory levies (GST, STT, stamp duty, exchange and SEBI fees) charged at actuals. The caps on the AMC's fee were also lowered, and the extra 0.05% that funds with exit loads were allowed to charge was removed. Fund pages and factsheets now show the BER and the TER separately.

These are ceilings, applied slab by slab to the fund's assets (AUM, assets under management). Large funds charge far less. On 1 Oct 2026, Groww's scheme pages listed these direct-plan figures: UTI Nifty 50 Index Fund TER 0.25% (BER 0.18%); Parag Parikh Flexi Cap 0.69% (BER 0.53%) on ₹1,47,405 crore of AUM; HDFC Large Cap 1.03% (BER 0.84%). Always check the AMC's own TER page, which is updated whenever the TER changes.

Exit loads

An exit load is a fee for redeeming early, deducted from your redemption value and paid back into the scheme (it protects remaining investors from the cost of short-term money). Typical: 1% if redeemed within 12 months for equity funds; nil for index funds and ETFs in many cases; liquid funds have a tiny graded load for the first six days (0.0070% on day 1 down to 0.0045% on day 6, nil from day 7). Redeeming ₹2,50,000 from an equity fund in month 11 costs 1% = ₹2,500. The load applies per unit, by purchase date (first in, first out), so each SIP instalment has its own 12-month clock.

Stamp duty and STT

• Stamp duty: 0.005% of every purchase, SIP instalment, switch-in and STP-in (since 1 Jul 2020; an STP is a systematic transfer from another scheme, part 12). ₹5 per ₹1 lakh. Nothing on redemptions. Transfers of units between demat accounts pay the general 0.015% transfer rate instead.
• STT (Securities Transaction Tax, explained in Chapter 13): 0.001% of the value when you redeem units of an equity-oriented fund with the fund; none on debt-fund redemptions. On an exchange, sales of equity ETFs pay 0.001% STT on the sell side and none on the buy side; gold, silver, debt and international ETFs pay no STT. All ETF trades also pay exchange charges, buy-side stamp duty and, on sell days, the DP charge.
• Brokerage: zero for direct mutual-fund plans on most platforms. ETFs are shares for this purpose: at a discount broker delivery brokerage is ₹0, but the depository (DP) charge, ₹15.34 per stock per sell day at Zerodha, applies.

5. Direct vs regular plans, on real NAVs

Since 2013 every scheme comes in two versions with the same portfolio:

• Regular plan: bought through a distributor (a bank relationship manager, an agent, many apps). The TER includes a yearly trail commission paid to the distributor for as long as you stay invested.
• Direct plan: bought directly from the AMC, through MF Central, or through a platform that does not take commission (many brokers, the RTA portals). No commission, so a lower TER.

Because the regular plan pays more every day, its NAV falls a little further behind the direct plan every day. The gap shows up only in the NAV, which is why many investors never notice it. The half-yearly Consolidated Account Statement (part 15) does show, in rupees, the commission paid on each regular-plan holding.

6. SEBI's category map (and the 2025–26 changes)

Before 2017, fund names meant little: two "bluechip" funds could hold completely different things. SEBI's October 2017 circular forced every fund house to fit each scheme into one of about 36 defined categories, with one scheme per category (index funds, ETFs and FoFs excepted). The definitions are about what the fund must hold. Market-cap buckets use AMFI's half-yearly list: large cap = the 100 largest listed companies by full market cap, mid cap = 101st–250th, small cap = 251st onwards (Chapter 1).

Equity schemes

Debt schemes (16 categories)

Debt funds are defined either by duration (how sensitive they are to interest rates, part 8) or by what they hold (credit quality, issuer type). Overnight (1-day securities), liquid (maturity up to 91 days), ultra-short (Macaulay duration 3–6 months), low duration (6–12 months), money market (maturity up to 1 year), short (1–3 years), medium (3–4 years), medium to long (4–7 years), long (over 7 years) and dynamic bond (any) are duration categories. By holdings: corporate bond (≥ 80% in AA+ and above), credit risk (≥ 65% below AA+, i.e. riskier borrowers), banking & PSU (≥ 80% in banks, PSUs and public financial institutions), gilt (≥ 80% government securities), gilt with 10-year constant duration, and floater (≥ 65% floating-rate bonds).

Hybrid schemes

Others, and what changed in 2025–26

• Index funds and ETFs (≥ 95% in the index's constituents) and fund of funds (FoF: ≥ 95% in other funds, domestic or overseas).
• Life cycle funds (new, Feb 2026). SEBI's 26 Feb 2026 circular on categorisation (which superseded drafts of Oct and Nov 2025) created life cycle funds: target-date funds with a stated maturity year (5 to 30 years, in 5-year steps, the year in the name, e.g. "…2045"), following a glide path that moves from mostly equity (65–95% when far away) to mostly debt near the end. They carry a steep exit load (3% in year 1, 2% in year 2, 1% in year 3) to discourage early exits. The same circular stopped fresh money into solution-oriented (retirement and children's) funds; on 20 Mar 2026 SEBI allowed fund houses to keep those schemes, with limits on which life cycle tenures they may then launch. If you hold such a scheme, check its latest notice.
• Residual money in equity schemes may now go into gold, silver and InvITs as well as debt, and REITs count as equity for mutual funds from 1 Jan 2026 (InvITs remain hybrid).
• Specialised Investment Funds (SIF), from 1 Apr 2025: a new product inside the mutual-fund structure that can run long-short equity, long-short debt and similar strategies (unhedged shorts up to 25% of assets). Minimum ₹10 lakh per investor (PAN) across a fund house's SIF strategies. Not a beginner product.

7. Reading a factsheet and the riskometer

Every fund house publishes a monthly factsheet per scheme (and the full portfolio by the 10th of the next month). Varsity spends several chapters on it; here is what each item tells you, and the formula behind the risk numbers.

Riskometer. Each scheme carries a SEBI-prescribed riskometer with six levels: Low, Low to Moderate, Moderate, Moderately High, High, Very High. The AMC assesses it monthly from the portfolio (volatility, market cap, liquidity, credit and duration) and must also show the benchmark's level. Almost every equity fund, index funds included, sits at High or Very High. It is a useful sanity check, not a forecast. Debt funds also show a Potential Risk Class (PRC) matrix: credit risk A (lowest) to C, against interest-rate risk I (lowest) to III. A fund in cell A-I is the most conservative; C-III can lose money from both defaults and rate rises.

8. Debt funds: interest-rate, credit and liquidity risk

A debt fund owns loans: government securities (G-secs; T-bills if under a year), state development loans, corporate bonds, commercial paper (short-term company IOUs) and bank certificates of deposit. Its NAV moves for three reasons: interest accrues every day (the steady part), bond prices change when market yields change, and borrowers can default. The YTM (yield to maturity) is the return the portfolio would earn if every bond were held to maturity and paid in full; after costs, it is the best rough guide to a debt fund's future return over its duration.

Interest-rate risk and duration

When market yields rise, existing bonds with lower coupons become less attractive, so their prices fall until their yield matches the market. The longer the bond, the bigger the fall. Macaulay duration is the weighted average time (in years) until you receive the bond's cash flows. Modified duration converts that into price sensitivity: roughly the percentage fall in price for a 1 percentage point rise in yield.

Rule of thumb: hold a debt fund for at least as long as its Macaulay duration; Varsity's stricter version is its average maturity. Over that period, the higher yield earned after a rise roughly makes up for the price fall. Money you need in 6 months belongs in a liquid or overnight fund, not a gilt fund.

Credit risk and liquidity risk: the Franklin Templeton wind-up

Credit risk is the chance that a borrower pays late or not at all. Liquidity risk is the chance that the fund cannot sell bonds quickly enough at a fair price to pay redemptions. In India's corporate-bond market, where many bonds rarely trade, the two often arrive together.

After this, SEBI tightened liquidity rules: most open-ended debt funds must now keep a minimum share of their assets in liquid securities. SEBI had already allowed segregated portfolios ("side-pockets") since late 2018: when a bond defaults, the fund can split it off into a separate portfolio so that new money does not subsidise old losses and existing holders keep their claim on any recovery. You can see such units in the Franklin scheme list ("Segregated Portfolio 1 – 8.25% Vodafone Idea"). Lessons: in debt funds, chase quality and liquidity, not the highest YTM; avoid credit-risk funds unless you understand every large holding; check concentration (a single issuer above 5–10% is a red flag); prefer large, plain categories (liquid, money market, short duration, corporate bond, banking & PSU, gilt) for core money.

9. Active vs passive: what the data says

An active fund pays a manager to pick securities and try to beat the benchmark. A passive fund (index fund or ETF) simply buys the benchmark's stocks in the benchmark's weights and accepts the index return minus a small cost. The question is not "can a manager beat the index?" (some do) but "can you pick, in advance, the ones that will, after fees?"

The SPIVA scorecard

S&P Dow Jones Indices publishes the SPIVA India scorecard twice a year. It counts every fund that existed at the start of each period, including those that were merged or closed, and compares their returns with a benchmark. In the Year-End 2025 report (the latest available on 2 Oct 2026), active Indian large-cap funds underperformed their benchmark at rates of 75.0% over 1 year, 74.2% over 3, 84.4% over 5 and 76.3% over 10 years. In 2025 alone, 69.2% of ELSS funds lagged their benchmark. Active mid- and small-cap funds had their best relative year since 2014 in 2025, with a majority beating their benchmark, but over 10 years a majority in every category lagged.

Our own mini-scorecard, from NAVs

We repeated the exercise with data anyone can download: every large-cap direct-plan scheme in AMFI's list (via mfapi), alive or dead, against the Nifty 100 TRI (the benchmark most of them use) and against a real index fund (UTI Nifty 50 Index Fund, Direct). A fund that was merged away during the period counts as "did not survive".

This is an honest, mixed picture, and kinder to active funds than SPIVA's. Three reasons. First, the recent period was unusually good for active large-cap funds against the Nifty 50 and Nifty 100: the very largest stocks lagged, and funds holding more mid-sized companies benefited. Second, SPIVA measures against S&P's own India indices and uses its own fund database, and the choice of benchmark alone can swing the answer (quiz Q6 shows how much). Third, we used direct plans, the cheapest version; most investors held regular plans, which are 0.6–0.9% a year more expensive, so with regular plans fewer funds would clear the bar. The longer the period, the worse active funds look: over 10 years the median surviving fund (11.78%) only matched the benchmark, while the index fund (11.18%) lost just its cost.

Rolling returns: judging four big names

A single start and end date ("point-to-point") can flatter or damn any fund. Rolling returns compute the CAGR for every possible start date: the 5-year return from every trading day to the day five years later. Varsity recommends looking at the average, minimum, maximum and how often the fund beat its benchmark.

10. Index funds vs ETFs: plumbing, premiums and tracking

Both track an index. The difference is how you buy and sell.

• An index fund is an ordinary open-ended mutual fund: you buy from the AMC at the day's NAV, any rupee amount, SIP-friendly, no demat account needed.
• An ETF (exchange-traded fund) is a fund whose units are listed on the exchange: you buy from other investors through your broker at the live market price, in whole units, into your demat account, like a share. NIFTYBEES, GOLDBEES, LIQUIDBEES and SILVERBEES are ETFs.

How an ETF stays near its NAV: creation and redemption

New ETF units are not created by the exchange. Big players called authorised participants or market makers deliver a basket of the index stocks (or cash) to the AMC in large blocks called creation units and receive new ETF units, or do the reverse to redeem. If the ETF trades above the value of its basket, they create units and sell them; if below, they buy units and redeem them. This arbitrage keeps the market price close to NAV, as long as the market makers can do it cheaply. SEBI allows direct creation or redemption with the AMC only for market makers and for orders above about ₹25 crore; ordinary investors trade on the exchange. If an ETF trades at a significant discount or has no quotes for several days, the AMC must let ordinary investors redeem directly at NAV (the triggers are in each SID).

During market hours the AMC and exchange publish an iNAV (indicative NAV): an estimate of the current value of one unit, updated through the day. Before you place an ETF order, compare the price with the iNAV, and use a limit order rather than a market order.

When the plumbing breaks: real premiums

Tracking difference and tracking error

These two are often confused. Tracking difference is how much return you actually lost (or, rarely, gained) against the index over a period: mostly the TER plus cash drag and trading costs. Tracking error is how unevenly the fund follows the index day to day: the standard deviation of the daily return gap. A fund can have a tiny tracking error and still a large tracking difference (it follows the index closely but leaks a fixed fee). For a long-term investor, tracking difference is what costs money; tracking error tells you about the quality of execution.

Remember that an ETF investor's real return is based on the prices paid and received, not the NAV, so add half the bid-ask spread (the gap between the best price buyers are bidding and the best price sellers are asking) on each side, any premium you paid, brokerage, the DP charge and STT. For a liquid ETF like NIFTYBEES these are tiny; for an illiquid sector or international ETF they can exceed a year's TER.

Index fund or ETF?

A simple rule: for a monthly SIP and no wish to watch prices, use a direct index fund. For larger lump sums, tax harvesting (Chapter 13 used NIFTYBEES) or collateral, a large, liquid ETF is cheaper, provided you check the iNAV and use limit orders.

11. Gold, silver, international, REITs and cash parking

Gold and silver

• Gold ETFs (e.g. GOLDBEES) hold physical gold of 99.5% purity in a vault, valued off the international price converted to rupees plus import costs. Each unit is a fraction of a gram. GOLDBEES's NAV grew 27.16% in the year to 30 Sep 2026 and 24.98% a year over five years. Chapter 1 showed gold beating the Nifty over the last decade; that is not a promise for the next.
• Gold FoFs hold units of a gold ETF, so you can SIP any amount without a demat account, for an extra layer of TER. HDFC Gold ETF FoF (Direct) returned 26.46% (1 year) and 25.08% (5 years a year), close to the ETF.
• Sovereign Gold Bonds (SGBs), government bonds linked to the gold price plus 2.5% interest, are no longer issued: the last tranche was in February 2024 and none has been announced for 2025-26 or 2026-27. Existing bonds can be bought on the exchange or redeemed early with the RBI after five years. Budget 2026 limited the capital-gains exemption at redemption to original subscribers who hold until maturity (Chapter 15).
• Silver ETFs and FoFs (launched from 2022) work the same way and are far more volatile: SILVERBEES's NAV rose 53.72% in the year to Sep 2026, yet fell by about a third between 29 Jan and 2 Feb 2026. Treat silver as a small satellite holding, if at all.

International funds

You can get foreign exposure through international FoFs and ETFs (US, Nasdaq, global) or directly through the Liberalised Remittance Scheme (Chapter 13). Domestic funds' overseas investment is capped industry-wide (part 10), so many international funds stop taking lump sums or SIPs from time to time, and ETFs can trade at large premiums. Your return includes the rupee's fall against the dollar, which has helped Indian investors historically.

REITs and InvITs, briefly

REITs (real estate investment trusts, mainly office parks and malls) and InvITs (infrastructure trusts: roads, power lines, pipelines) are listed trusts that must pay out most of their cash flow. They trade like shares, now in lots of one unit. Distributions come in parts (interest, dividend, rent, repayment of debt) that are taxed differently: interest and rent at your slab rate, the dividend part often tax-free, depending on the trust. The trust's yearly tax statement shows the split. This course does not cover REIT tax further; ask a CA if you hold them. Since 1 Jan 2026 mutual funds treat REITs as equity for their portfolio rules; this does not change your own tax rules.

Cash parking: liquid funds, liquid ETFs and arbitrage funds

Money you need soon, or trading cash waiting for a setup, should not sit in an equity fund. Three choices:

The liquid fund and the overnight liquid ETF lend for different terms (up to 91 days versus overnight), so their yields differ; neither is a bank deposit. As Varsity puts it, a liquid fund is not a savings account: it carries a small credit risk, which is why the category's quality matters.

Which of the three wins after tax depends on your slab and how long you hold. Chapter 15, part 14 works it out on real NAVs.

12. SIPs, rupee-cost averaging, XIRR, STP and SWP

A SIP (systematic investment plan) is a standing instruction to invest a fixed amount on a fixed date every month (or week, or quarter). The amount is debited by auto-debit (NACH/UPI mandate) and units are bought at that day's NAV. A SIP is a habit-making device: it turns investing into a bill you pay yourself first, and it removes the temptation to time the market.

Rupee-cost averaging: what is true

Because you invest the same rupees each month, you automatically buy more units when the NAV is low and fewer when it is high. Your average cost per unit is therefore the harmonic mean of the NAVs you paid, which is always at or below their simple average.

XIRR: the right return measure for a SIP

"67% in ten years" is misleading for a SIP: the first ₹10,000 was invested for ten years, the last for one month. Varsity's rule: for anything under a year use the absolute return; for a single lump sum over a year use CAGR (Chapter 1); for many cash flows at different dates use XIRR, the annual rate that makes the present value of all flows zero. (For a single lump sum, XIRR and CAGR are the same number.)

The myth: "SIPs give better returns than lump sums"

A SIP smooths your entry price; it does not raise the expected return. Markets rise more often than they fall, so money invested earlier usually has more time to grow. The honest comparison is only for someone who already has a lump sum: invest it all now, or drip it in over 12 months through an STP (systematic transfer plan: park the money in a liquid fund and transfer a fixed amount into the equity fund each month)?

Step-up SIP, STP and SWP

• Step-up (top-up) SIP: the instalment rises by a fixed percentage or amount each year, in line with income. The 10% step-up version of our SIP invested ₹19,12,490.95 (the last instalment ₹23,579.48) and was worth ₹28,92,664.62, XIRR 9.35%. It ends with more money because more was invested, and its XIRR is a little lower here only because more of the money went in during the expensive later years.
• STP: a transfer from one scheme to another in the same fund house each month, as above. Each transfer is a redemption from the source fund (a taxable event) and a purchase in the target.
• SWP (systematic withdrawal plan): the reverse of a SIP, redeeming a fixed amount each month, used in retirement. Each withdrawal redeems units, part capital and part gain, and only the gain is taxed. That is usually far more tax-efficient than an IDCW payout (part 13, Chapter 15). Withdraw more than the portfolio earns and you will run out; Chapter 16 covers safe withdrawal rates.

13. Growth vs IDCW, and a first look at fund tax

Each plan comes in two options:

• Growth: all income is reinvested and shows up as a rising NAV. You decide when to take money out (by redeeming units).
• IDCW (income distribution cum capital withdrawal, previously called the "dividend option"): the fund pays out cash from time to time and the NAV drops by the amount paid. SEBI renamed it in 2021 because the payout comes out of your own capital: it is not extra income.

For most investors growth is better: payouts are taxed at your slab rate as income from other sources, with 10% TDS (tax deducted at source) once a fund's payouts to you exceed ₹10,000 in a tax year (old s.194K; under the Income-tax Act, 2025 the TDS rules sit in s.393, as for share dividends in Chapter 13), and you lose control of timing. If you need regular cash, an SWP from the growth option usually costs far less tax, because only the gain portion of each withdrawal is taxed, and possibly at the lower capital-gains rates.

14. How many funds? Portfolio overlap

Diversification reduces risk only if the holdings are different (Chapter 11). Five large-cap funds are mostly the same 40 stocks, five times, with five fees. Portfolio overlap measures how much two funds hold in common.

A practical structure for most learners: three to five funds in total. For example, one broad equity index fund (or one flexi-cap fund), optionally one mid/small-cap or international fund as a small satellite, one debt fund (short duration, corporate bond or gilt, matched to your horizon) and a liquid fund for the emergency reserve. Varsity's portfolio chapter reaches the same conclusion: build by elimination, avoid two funds in the same sub-category, and review once a year rather than every month. How much goes into each, and how to rebalance, is Chapter 16.

15. Paperwork: KYC, CAS, MF Central, nomination, demat

• KYC (know your customer): one-time identity and address verification, recorded with a KYC Registration Agency (KRA) and shared across the industry. Since 2024 your status can be Validated (verified against official records such as Aadhaar or income-tax data; works everywhere), Registered (works with existing fund houses, may need re-verification for new ones) or On hold (fix it before investing). Link your PAN and Aadhaar, and keep mobile and email up to date.
• Folio: your account number with a fund house. One folio can hold all that AMC's schemes.
• CAS (Consolidated Account Statement): one statement of all your fund holdings across fund houses, sent by the depositories (if you have a demat account) or by CAMS/KFintech, every month in which you transact and every six months otherwise. The half-yearly CAS shows the commission paid on any regular-plan holdings, in rupees, and the scheme's TER. You can also request one any time from the RTAs' websites.
• MF Central: a joint platform of CAMS and KFintech where you can see all folios and make changes (bank account, nominee, contact details) and transact, across fund houses, in one place.
• Nomination: since SEBI's January 2025 circular (effective 1 Mar 2025), you may name up to 10 nominees per folio or demat account, with percentage shares. Without a nominee your family faces a long transmission process. (SEBI proposed further operational changes in March 2026; check the current form.)
• Demat or statement of account (SoA) mode? Funds can be held either way. SoA mode (the RTA's register) needs no demat account and lets you transact through MF Central or the AMC. Demat mode shows funds next to your shares, makes pledging easier and lets units be transferred, but ties transactions to your broker. ETFs are always held in demat.

16. Choosing a fund, step by step

Varsity's equity-fund analysis follows four checks: hygiene, rolling returns, risk-return and capture ratios. Here is a version for a beginner, in order.

1. Start from the goal and horizon, not the fund. Money needed within 3 years does not belong in equity. Set the asset mix first (Chapter 16), then fill each slot.
2. Pick the category for the slot. Core equity: a broad index fund or a flexi-cap fund. Debt matched to the horizon: liquid (under 6 months), money market or short duration (1–3 years), gilt or corporate bond (longer, if you accept rate swings).
3. Passive first. If an index fund fits the slot, compare index funds on tracking difference over 1–3 years (part 10), then TER, then AUM. Choose an ETF instead only if you will check its iNAV and spread.
4. For an active fund, run the hygiene check: direct plan; AUM neither tiny nor (for small-caps) enormous; the current manager's tenure; benchmark is a TRI; exit load; TER.
5. Judge performance on rolling returns: 3- and 5-year rolling returns against the benchmark TRI and an index fund. How often did it beat it, by how much, and what was its worst period?
6. Check the risk: standard deviation, beta and the worst drawdown against the benchmark. Excess return from much higher risk is not skill. Varsity also uses capture ratios: the share of the benchmark's up-months return the fund captured, and the share of its down-months losses. Upside above 100% and downside below 100% is the ideal.
7. Check overlap with what you already hold (part 14). Below about 40% is genuinely different.
8. For debt funds: YTM, Macaulay/modified duration against your horizon, credit quality (share of AAA and sovereign), concentration in any one issuer, and the PRC cell.
9. Write down why you chose it and what would make you exit (a manager change, a style change, 3+ years of lagging its TRI on rolling returns). Review once a year, not every month.

17. In your framework, and try it yourself

Run each snippet from the repository's root folder with .venv/bin/python snippet.py (setup in framework/README.md). Snippets 1 and 2 need only pandas and scipy and the CSVs saved in data/extra/; snippet 3 uses the framework.

1. A SIP and its XIRR, from a NAV file (reproduces part 12):

import pandas as pd
from scipy.optimize import brentq

nav = pd.read_csv("data/extra/ch14_mf_120716.csv", parse_dates=["date"]).set_index("date")["nav"]
nav = nav[~nav.index.duplicated()].sort_index()          # UTI Nifty 50 Index Fund - Direct - Growth

def xirr(flows):
    d0 = flows[0][0]
    f = lambda r: sum(a / (1 + r) ** ((d - d0).days / 365) for d, a in flows)
    return brentq(f, -0.99, 10)

lots = []
for d in pd.date_range("2016-10-01", "2026-09-01", freq="MS"):
    day = nav.index[nav.index.searchsorted(d)]           # next NAV date if the 1st is a holiday
    amt = 10_000 * (1 - 0.00005) if day >= pd.Timestamp("2020-07-01") else 10_000   # stamp duty
    lots.append((day, 10_000, amt / nav[day]))
units = sum(u for _, _, u in lots)
value = units * nav[:"2026-09-30"].iloc[-1]
flows = [(d, -a) for d, a, _ in lots] + [(pd.Timestamp("2026-09-30"), value)]
print(f"invested {sum(a for _, a, _ in lots):,.0f}  value {value:,.2f}  XIRR {xirr(flows):.2%}")
print(f"average cost {sum(a for _, a, _ in lots) / units:.4f}")
# -> invested 1,200,000  value 2,007,460.22  XIRR 9.93%  average cost 95.2183

2. Tracking difference, tracking error and an ETF's premium (reproduces part 10):

import numpy as np, pandas as pd

def nav(code):
    s = pd.read_csv(f"data/extra/ch14_mf_{code}.csv", parse_dates=["date"]).set_index("date")["nav"]
    return s[~s.index.duplicated()].sort_index()

tri = pd.read_csv("data/extra/ch14_nifty50_tri.csv", parse_dates=["Date"]).set_index("Date")["TRI"]
df = pd.concat([nav(140084), tri], axis=1, keys=["fund", "index"], join="inner")   # NIFTYBEES NAV vs TRI
d = df.loc["2021-09-30":"2026-09-30"]
yrs = 5
td = (d.fund.iloc[-1] / d.fund.iloc[0]) ** (1 / yrs) - (d["index"].iloc[-1] / d["index"].iloc[0]) ** (1 / yrs)
te = d.pct_change().dropna().pipe(lambda r: (r.fund - r["index"]).std() * np.sqrt(252))
print(f"NIFTYBEES 5-yr tracking difference {td:.3%}, tracking error {te:.3%}")   # -0.044%, 0.031%

price = pd.read_csv("data/extra/ch14_MON100_yf.csv", index_col=0, parse_dates=True)["Close"]
m = pd.concat([price, nav(114984)], axis=1, keys=["p", "n"], join="inner").dropna().loc["2022":]
m["premium"] = m.p / m.n - 1
print(m.premium.describe().round(4))
print("MON100 premium on 30 Sep 2026:", round(m.premium.iloc[-1] * 100, 2), "%")    # 12.73 %

3. The same with the framework (downloads NAVs into data/mf/ the first time):

import sys; sys.path.insert(0, ".")      # run from the repository root, so framework/ is importable
from framework.funds import search_schemes, load_nav, sip_simulate, rolling_returns, direct_vs_regular

print(search_schemes("hdfc flexi cap direct growth").head())
r = sip_simulate(load_nav(120716), 10_000, "2016-10-01", end="2026-09-30")
print(r["invested"], r["value"], round(r["xirr"] * 100, 2))
# -> 1200000.0 2007460.22 9.93  (stamp duty only from 1 Jul 2020, matching part 5)
roll = rolling_returns(load_nav(118955), 5)            # HDFC Flexi Cap Direct, rolling 5-yr CAGR
print(roll.describe())
d = direct_vs_regular(10_00_000, 20, 0.12, 0.0077, 0.0155)  # Rs 10 lakh, 20 yrs, 12% gross
print(d["direct"], d["regular"], d["difference"])     # -> 8403084.76 7299857.87 1103226.9

Exercise: pick one fund you own (or want to own). Find its direct and regular codes with search_schemes, compute the 5-year CAGR gap between the plans, its 3-year rolling returns against the right TRI, and its tracking difference if it is an index fund. Would you still choose it?

The full chapter calculation, with every number quoted above, is course/scripts/ch14_figures.py; its output is saved to data/extra/ch14_numbers.json.

18. Practical checklist

• KYC status "Validated"; PAN–Aadhaar linked; mobile, email and bank account current; nominees added on every folio and demat account.
• Every fund you hold is a direct plan, unless you knowingly pay a distributor for advice you use.
• Every equity fund is judged against its TRI, on 3- and 5-year rolling returns, not last year's return.
• For each index fund or ETF: tracking difference over 1 and 3 years, TER, and (ETF) average spread and volume checked.
• Before any ETF order: compare the price with the iNAV; use a limit order; avoid the first and last 15 minutes of the session.
• Debt funds chosen by horizon: Macaulay duration no longer than the time until you need the money; credit quality mostly AAA/sovereign; no single issuer above about 10%.
• Emergency money in a liquid or overnight fund (or a bank deposit), not in a gilt, credit-risk or equity fund.
• No more than 3–5 funds; overlap between equity funds checked once a year.
• Growth option chosen; if you need income, an SWP rather than IDCW.
• Exit loads and 12/24-month tax dates checked before any redemption or switch (Chapter 15).
• SIPs keep running through falls; a large windfall is invested at once or through a short STP, by a written rule.
• The half-yearly CAS reviewed: holdings, commissions, TERs, nominees.
• After each SEBI change (TER, categories) and each Budget, re-check your funds' notices and framework/config.py.

19. Key takeaways

20. Quiz and exercises

21. Sources

Zerodha Varsity, Module 11, Personal Finance – Mutual Funds (concepts; explained here in our own words and updated to 2026 rules): 6. Mutual Funds Introduction · 7. Concept of Fund NAV · 8. The Mutual Fund Fact Sheet · 9. Equity Scheme (Part 1) · 10. Equity Scheme (Part 2) · 11–14. Debt Funds (Parts 1–4): 2, 3, 4 · 17. Arbitrage Funds · 18. Measuring Mutual Fund Returns · 19. Rolling Returns · 20. Expense Ratio, Direct and Regular Plans · 21. Mutual Fund Benchmarking · 22. Risk Metrics · 23. Sortino and Capture Ratios · 24. How to Analyse an Equity Fund · 25. How to Analyse a Debt Fund · 26. The Mutual Fund Portfolio · 27. Smart-Beta Funds · 28. Index Funds · 29. Exchange Traded Funds · 33. Know Your Fund.

Regulation and rules (checked 2 Oct 2026): Kotak MF: SEBI (Mutual Funds) Regulations 2026 BER slab limits · INDmoney: SEBI MF Regulations 2026 (board approval 17 Dec 2025; index/ETF 1.00%→0.90%; exit-load 0.05% removed; brokerage caps) · Cafemutual: the new expense framework from 1 Apr 2026 · Upstox: fund houses revise expense ratios as the 2026 rules start · Taxmann: SEBI circular of 26 Feb 2026 on categorisation · Angel One: life cycle funds, 50% overlap caps, residual in gold/silver/InvITs · Finnovate: life cycle fund glide paths and exit loads · 5paisa: SEBI allows retirement and children's funds to continue (20 Mar 2026) · Upstox: REITs as equity for mutual funds from 1 Jan 2026 · Value Research: Specialised Investment Funds (₹10 lakh minimum) · PwC: SEBI's 2017 categorisation circular explained · Bajaj Finserv AMC: cut-off times and NAV applicability · A scheme information document on AMFI's portal (redemption within 3 working days; AMFI letter of 16 Jan 2023) · SEBI-filed ETF document: direct dealing with the AMC above ₹25 crore; market makers · Moneylife: up to 10 nominees (SEBI circular, 10 Jan 2025) · Vested: SEBI limits on overseas investment by mutual funds · ClearTax: Sovereign Gold Bonds, no new issues; Budget 2026 change to the redemption exemption · Taxguru: TDS threshold on fund income raised to ₹10,000 from 1 Apr 2025 · Income Tax Department: section 50AA (specified mutual funds) · TaxTMI: amended definition of specified mutual fund (more than 65% debt).

Evidence and episodes: S&P Dow Jones Indices: SPIVA India Scorecard, Year-End 2025 · Angel One: SPIVA India Mid-Year 2025 summary · Franklin Templeton India: winding up of six schemes (₹27,548.21 crore, 109.25% of AUM distributed) · Business Standard: silver ETFs at steep premiums (Oct 2025) · Moneylife: fund houses pause silver FoF subscriptions.

Data: mutual-fund NAVs from AMFI via api.mfapi.in (saved as data/extra/ch14_mf_<code>.csv; every large-cap direct plan, live and closed, in data/extra/ch14_largecap_direct_navs.csv); Nifty 50 and Nifty 100 Total Return Index from niftyindices.com (data/extra/ch14_nifty50_tri.csv, ch14_nifty100_tri.csv); ETF prices from NSE via Yahoo Finance (data/extra/ch14_*_yf.csv, NIFTYBEES/GOLDBEES from data/extra/); portfolios as of 31 Aug 2026 and TER/AUM figures from Groww's public scheme pages, 1 Oct 2026 (data/extra/ch14_holdings_groww.csv, ch14_fund_facts_groww.csv); 10-year G-sec yields from countryeconomy.com (data/extra/ch08_india_10y_gsec_monthend_countryeconomy.csv). All calculations and figures: course/scripts/ch14_figures.py (numbers in data/extra/ch14_numbers.json). Examples are historical and educational, not recommendations.