NISM Series VA 2026 – Chapter 2: Concept and Role of a Mutual Fund | Updated Short Notes
This is Chapter 2 of the updated 2026 NISM Series VA short notes. This chapter is heavily updated to reflect the SEBI (Mutual Funds) Regulations, 2026 and the new SEBI circular on scheme categorisation issued on February 26, 2026. All fund category changes effective April 1, 2026 are covered here.
Internal Link: ← Chapter 1: Investment Landscape | Free NISM VA Mock Test 2026
⚠️ Key 2026 Updates in this chapter: Total fund categories expanded from 36 to 40. Life Cycle Funds introduced (new). Solution-Oriented Schemes (Retirement Fund, Children's Fund) discontinued. Minimum equity allocation raised to 80% for several equity categories. Sectoral and Thematic funds now separated into distinct categories. ELSS renamed to ELSS-Tax Saver Fund.
What Is a Mutual Fund?
A mutual fund is a financial vehicle that pools money from multiple investors and invests it in various securities in line with a common investment objective. Through a mutual fund, an investor gets access to equities, bonds, and money market instruments, along with professional fund management services from an Asset Management Company (AMC).
Role of Mutual Funds
- Help investors earn income or build long-term wealth
- Mobilize household savings into productive investments
- Facilitate capital infusion into the economy
- Act as a stabilizing force in financial markets
Key Concepts — Must Know for NISM VA Exam
| Concept | Explanation |
|---|---|
| Units | An investor's holding in a scheme is measured in units issued at the time of investment. |
| Face Value | Typically ₹10 per unit. Relevant primarily for accounting purposes. |
| Unit Capital | Total units issued × ₹10 = Unit Capital of the scheme |
| Recurring Expenses | Fees charged as a % of AUM, deducted while calculating NAV. Now structured as Base Expense Ratio (BER) + statutory levies under SEBI 2026 rules. |
| NAV | True market value of one unit. Rises with profits, falls with losses. Calculated daily. |
| AUM | Total value of all investments in the scheme — the scheme's overall size. |
| Mark to Market (MTM) | Valuing every security in the portfolio at its current market price daily. |
10 Advantages of Mutual Funds
1. Professional Management — Expert fund managers make investment decisions on behalf of investors.
2. Affordable Portfolio Diversification — Even ₹500 can get you exposure to a diversified portfolio.
3. Economies of Scale — Pooling reduces per-investor costs for research, brokerage, and custody.
4. Liquidity — Open-ended funds allow redemption at NAV at any time (except lock-in schemes).
5. Tax Deferral — Mutual funds themselves pay no tax on income. Investors can defer tax liability by staying invested.
6. Tax Benefits (Section 80C) — ELSS-Tax Saver Funds qualify for up to ₹1.5 lakh deduction per year under Section 80C.
7. Convenient Options — SIP, SWP, STP, partial withdrawals, and more.
8. Investment Comfort — Easy to add money after initial investment with minimal documentation.
9. Regulatory Comfort — Strong SEBI oversight with investor protection measures. Updated regulations in 2026 further enhance transparency.
10. Systematic Approach — SIP, SWP, and STP promote investment discipline.
3 Limitations of Mutual Funds
1. No Portfolio Customization — Fund manager controls all decisions; investors cannot direct individual securities.
2. Choice Overload — With 40 scheme categories (up from 36 in 2026) and 40+ fund houses, choosing the right scheme is challenging.
3. No Control Over Costs — Costs are pooled; individual investors cannot reduce or negotiate expenses.
Types of Fund Structures
| Type | Key Feature |
|---|---|
| Open-Ended | Investors can enter/exit at any time. No fixed maturity. Most popular. |
| Close-Ended | Fixed maturity. Investment only during NFO. Units listed on exchange post-NFO. |
| Interval Fund | Mostly close-ended; becomes open-ended at "transaction periods." |
Updated SEBI 2026 Equity Mutual Fund Categories (13 Categories Now)
Key 2026 change: Sectoral and Thematic funds are now separate categories (previously combined). Minimum equity for Large Cap, Sectoral, Thematic, Value, Contra, Focused, and ELSS-Tax Saver Funds raised to 80%. AMCs can now offer both Value Fund and Contra Fund simultaneously (portfolio overlap capped at 50%).
| Scheme Type | 2026 Minimum Equity Allocation | Change from Before |
|---|---|---|
| Multi Cap Fund | Min 25% each in Large, Mid, and Small cap | Updated allocation norms |
| Large Cap Fund | 80% in large-cap stocks | Raised from 65% (for large-cap portion) |
| Large & Mid Cap Fund | 35% in large-cap + 35% in mid-cap | No change |
| Mid Cap Fund | 65% in mid-cap stocks | No change |
| Small Cap Fund | 65% in small-cap stocks | No change |
| Dividend Yield Fund | 80% in dividend-yielding stocks | Raised from 65% |
| Value Fund | 80% in equity (value strategy) | Raised from 65%; both Value & Contra now allowed |
| Contra Fund | 80% in equity (contrarian strategy) | Raised from 65%; AMCs can now have both Value & Contra |
| Focused Fund | 80% in equity (max 30 stocks) | Raised from 65% |
| Flexi Cap Fund | 65% in equity across market caps | No change |
| Sectoral Fund | 80% in a specific sector | New separate category (previously combined with Thematic) |
| Thematic Fund | 80% in a particular theme (can be multiple sectors) | New separate category (previously combined with Sectoral) |
| ELSS-Tax Saver Fund | 80% in equity + 3-year lock-in + Section 80C benefit | Renamed from "ELSS"; equity min raised to 80% |
🆕 Life Cycle Funds — New Category Introduced in 2026
This is the most important new product in the SEBI 2026 mutual fund overhaul. Life Cycle Funds replace the discontinued Solution-Oriented category.
| Feature | Detail |
|---|---|
| Structure | Open-ended scheme with a pre-determined target maturity date |
| Tenure | 5 to 30 years (in multiples of 5 years) |
| Strategy | Glide Path — starts with higher equity, automatically shifts to debt as maturity approaches |
| Asset Classes | Equity, Debt, InvITs, ETCDs (Exchange Traded Commodity Derivatives), Gold and Silver ETFs |
| Precious Metal exposure | Up to 10% in Gold/Silver ETFs and InvITs |
| Max per AMC | Up to 6 Life Cycle Funds per AMC |
| Exit Load | Graded exit loads to discourage early withdrawal (up to 3% in Year 1, tapering to 0% after Year 3) |
| Debt quality | Debt portion must be in AA-rated and above instruments |
| Purpose | Goal-based investing — retirement, child's education, etc. |
| Effective date | April 1, 2026 |
❌ Solution-Oriented Schemes — Discontinued 2026
SEBI's circular of February 26, 2026 discontinued the Solution-Oriented Schemes category, which previously included:
- Retirement Fund
- Children's Fund
What happens to existing schemes?
- All existing solution-oriented schemes immediately stopped accepting fresh subscriptions
- Existing investments are safe and will eventually be merged into similar schemes (equity/hybrid) after SEBI approval
- AMCs will communicate merger details to unit-holders
Why discontinued? SEBI found that these schemes had portfolios nearly identical to regular equity or hybrid funds, making the category confusing and less meaningful. Life Cycle Funds now provide a more structured, scientifically designed goal-based alternative.
Updated Debt Mutual Fund Scheme Categories
| Scheme Type | Maturity / Duration |
|---|---|
| Overnight Fund | 1-day maturity only |
| Liquid Fund | Up to 91 days |
| Ultra Short Duration Fund | Macaulay duration: 3–6 months |
| Low Duration Fund | Macaulay duration: 6–12 months |
| Money Market Fund | Up to 1-year maturity |
| Short Duration Fund | Macaulay duration: 1–3 years |
| Medium Duration Fund | Macaulay duration: 3–4 years |
| Medium to Long Duration Fund | Macaulay duration: 4–7 years |
| Long Duration Fund | Macaulay duration: >7 years |
| Dynamic Bond Fund | Invests across all durations dynamically |
| Corporate Bond Fund | Min 80% in AA+ and above rated bonds |
| Credit Risk Fund | Min 65% in AA and below rated bonds |
| Banking and PSU Fund | Debt instruments of banks, PSUs, PFIs, Municipal Bonds |
| Gilt Fund | Only government securities across all maturities |
| Floater Fund | Min 65% in floating rate instruments |
| Sectoral Debt Fund (🆕 2026) | New category — debt instruments of a specific sector (e.g., banking, infrastructure) |
Updated Hybrid Schemes
| Scheme | Equity Allocation | Debt Allocation | 2026 Note |
|---|---|---|---|
| Conservative Hybrid Fund | 10%–25% | 75%–90% | No change |
| Balanced Hybrid Fund | 40%–60% | 40%–60% | Arbitrage NOT allowed (explicitly clarified 2026) |
| Aggressive Hybrid Fund | 65%–80% | 20%–35% | No change |
| Dynamic Asset Allocation / Balanced Advantage | Managed dynamically | No change | |
| Multi Asset Allocation | Min 3 asset classes, min 10% each | Can now include Gold/Silver ETFs as asset classes | |
| Arbitrage Fund | Min 65% | Remainder | No change |
| Equity Savings | Min 65% + arbitrage | Min 10% | No change |
2026 Portfolio Overlap Rules — Important for Exam
Under SEBI's February 26, 2026 circular, portfolio overlap is now regulated to prevent "closet indexing" (different funds holding almost identical securities under different names):
- Overlap between Value Fund and Contra Fund from the same AMC: capped at 50%
- Overlap between Thematic/Sectoral funds and other equity categories: capped at 50%
- AMCs must publish monthly portfolio overlap reports on their websites (Equity vs Equity, Debt vs Debt, Hybrid vs Hybrid)
- Compliance timeline for sectoral/thematic overlap norms: 3 years
- Schemes failing to meet overlap norms after 3 years must be mandatorily merged
Quick Revision: 2026 Key Changes Summary
| Topic | 2026 Update |
|---|---|
| Total MF categories | Expanded from 36 to 40 |
| New category introduced | Life Cycle Funds |
| New debt category | Sectoral Debt Fund |
| Discontinued category | Solution-Oriented Schemes (Retirement + Children's Fund) |
| Minimum equity for large cap, ELSS, sectoral, thematic | Raised to 80% |
| Value + Contra Fund | AMC can now offer both (max 50% overlap) |
| Sectoral vs Thematic | Now separate categories (previously combined) |
| ELSS renamed | Now called "ELSS-Tax Saver Fund" |
| ELSS lock-in period | Still 3 years; still qualifies for Section 80C (up to ₹1.5 lakh) |
| Gold/Silver in equity funds | Allowed in residual portfolio via ETFs/ETCDs |
| Regulations effective date | April 1, 2026 |
FAQs — Chapter 2 (2026 Updated) What is a Life Cycle Fund in mutual funds?
A Life Cycle Fund is a new category introduced by SEBI in 2026. It follows a glide path strategy — starting with high equity exposure and gradually shifting to safer assets (debt, gold) as the fund approaches its target maturity date. Tenures range from 5 to 30 years. One AMC can launch up to 6 such funds. They are designed for goal-based investing (retirement, children's education) and replace the discontinued Solution-Oriented Schemes.
Why were Solution-Oriented Schemes discontinued in 2026?
SEBI found that Retirement Funds and Children's Funds had portfolios nearly identical to regular equity or hybrid funds. This made the category confusing and less meaningful for investors. SEBI replaced them with more structured and scientifically designed Life Cycle Funds that automatically adjust asset allocation over time via a glide path.
What changed in equity fund minimum allocation in 2026?
SEBI raised the mandatory minimum equity allocation from 65% to 80% for Large Cap Funds, Dividend Yield Funds, Value Funds, Contra Funds, Focused Funds, Sectoral Funds, Thematic Funds, and ELSS-Tax Saver Funds. This ensures these schemes remain truly equity-oriented and "true to label."
What is the NISM VA exam fee in 2026?
The NISM Series VA exam fee is ₹1,500 plus payment gateway charges. The exam has 100 questions, a 2-hour time limit, and requires 50% marks to pass (50 out of 100). There is no negative marking. Registration is open throughout the year.
Practice: Free NISM VA Mock Test 2026
NISM Series VA 2026 – Chapter 3: Legal Structure of Mutual Funds in India | Updated Short Notes
This is Chapter 3 of the updated 2026 NISM Series VA short notes. This chapter now reflects the SEBI (Mutual Funds) Regulations, 2026, which replaced the 1996 framework. The new regulations are significantly streamlined — reduced from 162 pages to 88 pages (down by about 44%) and from ~67,000 to ~31,000 words (down by ~54%). The structure, however, remains intact.
Internal Link: ← Chapter 2: Concept and Role of a Mutual Fund | Free NISM VA Mock Test
⚠️ 2026 Update: The SEBI (Mutual Funds) Regulations, 2026, approved December 17, 2025, effective April 1, 2026, replaced the SEBI (Mutual Funds) Regulations, 1996. The trustee and AMC governance framework has been strengthened. Trustees' responsibilities are broader, with tightened oversight and reinforced governance standards. The TER structure now separates the Base Expense Ratio (BER) from statutory levies.
How Is a Mutual Fund Legally Structured in India?
Under the new SEBI (Mutual Funds) Regulations, 2026, a mutual fund in India continues to be structured as a Trust. It is established to raise monies through the sale of units to the public and invest them in securities including money market instruments, gold, gold-related instruments, and real estate assets.
Key Constituents of a Mutual Fund 1. Sponsor
- The founding entity that makes the application to SEBI for mutual fund registration
- After registration, invests in the capital of the AMC
- Must meet SEBI's eligibility criteria
- Sponsors are categorized as: Banks, Institutions, or Private Sector entities (Indian, Foreign, or Joint Venture)
2. Board of Trustees / Trustee Company
- Ensure the mutual fund complies with all SEBI regulations and protects unit-holders' interests
- Sponsor must appoint at least 4 trustees
- Trustee company must have at least 4 directors on its Board
- 2026 Update: SEBI 2026 regulations broaden the responsibilities of trustees, tightening oversight and reinforcing governance standards across AMCs
3. Asset Management Company (AMC)
- Handles all day-to-day operations of the mutual fund
- Appointed by the sponsor (or trustees if authorized) with SEBI's approval
- Minimum net worth: ₹50 crore
- Responsibilities: fund management, infrastructure, staffing, technology, marketing, regulatory interaction
- 2026 Update: SEBI 2026 expanded the responsibilities of Key Managerial Personnel within AMCs
4. Custodian
- Holds custody of the fund's assets (physical or electronic)
- Accepts and delivers securities for purchase/sale transactions
- Settles all transactions on behalf of scheme
- Tracks corporate actions (dividends, bonus, rights) in investee companies
Organization Structure of an AMC
| Department | Key Function |
|---|---|
| Compliance Function | Ensures all legal requirements are met. Signs due-diligence certificate for new scheme offers. |
| Fund Management Team | Most critical function. Invests and manages investors' money per scheme objective. |
| Operations / Customer Services (incl. RTA) | Maintains investor records, processes transactions, issues statements, settles trades, calculates NAV daily. |
| Sales and Marketing Team | Handles branding, advertising, events, and distribution through various channels. |
| Accounts Team | Manages AMC's own finances (distinct from fund accounting). |
| Administration | Manages offices, facilities, and infrastructure. |
| HR Department | Attracts, trains, and retains talent. |
| IT / Technology Team | Manages IT infrastructure, AMC website, investor and distributor tech facilities. |
Key Service Providers
| Service Provider | Role | 2026 Note |
|---|---|---|
| Fund Accountants | Calculate NAV by collecting asset and liability data of each scheme | No change |
| RTA (Registrar and Transfer Agent) | Maintain investor records; process transactions; operate ISCs. Appointed by AMC. | No change |
| Auditors | Audit scheme accounts separately from AMC accounts. Must be a different firm from AMC's auditor. | No change |
| Distributors | Sell suitable mutual fund units to investors. Individuals (IFAs) or institutions (banks, brokers). | No change |
| Collecting Bankers | Maintain scheme bank accounts for investor money. Appointed by AMC. | No change |
| KYC Registration Agencies (KRAs) | Maintain KYC records for all investors under PMLA. | No change |
| Valuation Agencies | Fair valuation matrix for non-traded/thinly traded debt. AMFI has appointed CRISIL Ltd. and ICRA Ltd. | No change |
| Credit Rating Agencies | Rate debt securities; key input for fund managers, especially for corporate bond and credit risk funds. | No change |
| Depositories / DPs | Hold securities in electronic (dematerialized) form. Mutual fund units can also be held in demat. | No change |
| Stock Exchanges | Close-ended funds and ETFs are compulsorily listed. Open-ended funds available via special segments. | No change |
Quick Revision: 2026 Legal Structure Key Facts
| Topic | Key Fact |
|---|---|
| Legal form of MF in India | Trust |
| Current regulations | SEBI (Mutual Funds) Regulations, 2026 (replaced 1996 framework) |
| Regulations effective date | April 1, 2026 |
| Minimum trustees to appoint | 4 |
| AMC minimum net worth | ₹50 crore |
| Valuation agencies (AMFI appointed) | CRISIL Ltd. and ICRA Ltd. |
| NAV calculation frequency | Daily |
| Regulation page reduction | From 162 pages (1996) to 88 pages (2026) — ~44% reduction |
FAQs — Chapter 3 (2026 Updated) Are the SEBI Mutual Fund Regulations 1996 still applicable?
No. The SEBI (Mutual Funds) Regulations, 1996 have been replaced by the SEBI (Mutual Funds) Regulations, 2026, approved on December 17, 2025 and effective from April 1, 2026. The new regulations are significantly more streamlined — about 44% shorter in length and 54% shorter in word count — while enhancing transparency and governance.
What changed in the AMC governance under SEBI 2026 regulations?
The 2026 regulations broaden the responsibilities of trustees and key managerial personnel within AMCs, tightening oversight and reinforcing governance standards. The framework also separates the Base Expense Ratio (BER) from statutory levies for greater transparency.
What is the minimum net worth required for an AMC in 2026?
An AMC must still maintain a minimum net worth of ₹50 crore. This requirement has not changed in the 2026 regulations.
← Previous Chapter: Chapter 2 – Concept and Role of a Mutual Fund
Next Chapter → Chapter 4 – Legal and Regulatory Environment
Practice: Free NISM VA Mock Test 2026