NISM Series II B Short Notes – Part 3: SEBI Role & Regulations, Mutual Fund Structure & Mutual Fund Products
This is Part 3 of our 6-part NISM Series II B short notes series for the Registrars to an Issue & Share Transfer Agent (Mutual Funds) exam. In this post, we cover the Role of SEBI, important SEBI regulations relevant to R&T Agents, the three-tier structure of mutual funds in India, mutual fund products, open-ended vs. closed-ended funds, offer documents, and categorization of mutual fund schemes — all high-weightage topics for the NISM mutual fund exam.
Quick Answer: What is the three-tier structure of mutual funds in India? Mutual funds in India follow a three-tier structure consisting of (1) Sponsor – the promoter who sets up the fund, (2) Trust – the legal entity holding investor assets with Trustees, and (3) Asset Management Company (AMC) – the investment manager that manages the fund's portfolio.
Chapter 6 – Role of SEBI & Regulations India's Financial Regulators
India has multiple financial market regulators, each with a specific role:
| Regulator | Full Form | Primary Role |
|---|---|---|
| SEBI | Securities and Exchange Board of India | Apex regulator of securities markets; investor protection; orderly market growth |
| RBI | Reserve Bank of India | Manager of public debt; primary issue of government securities; money market instruments |
| MCA | Ministry of Corporate Affairs | Corporate governance and company law |
| DEA | Department of Economic Affairs | Economic policy and financial sector coordination |
| IRDAI | Insurance Regulatory & Development Authority of India | Regulation and development of the insurance industry |
| PFRDA | Pension Fund Regulatory & Development Authority | Regulation of pension funds |
Role of SEBI
SEBI was established on April 12, 1992 under the SEBI Act, 1992. It is the apex regulator of India's securities markets. SEBI's key responsibilities include:
- Inspection & Investigation — Inspects and investigates securities market intermediaries and enforces compliance.
- Stock Exchange Regulation — Grants recognition to stock exchanges under the Securities Contracts Regulation Act (SCRA). Requires SEBI representation on exchange boards. Exchanges must get SEBI approval before changing rules.
- Surveillance — Operates an integrated surveillance system tracking stock exchanges, brokers, depositories, R&T agents, custodians, and clearing agents to detect fraudulent activities.
- Registration of Intermediaries — Registers and regulates market intermediaries. Specifies net worth, experience, and infrastructure requirements for registration.
- Routine Inspections — Conducts routine inspections of intermediaries to ensure compliance.
- Enforcement Powers — Can call for information, summon persons for interrogation, examine witnesses, conduct search and seizure, and penalize violators.
- Primary Market Regulation — Sets eligibility conditions, disclosure norms, minimum public holding requirements, and promoter lock-in rules for public issues of securities.
Investor Education and Protection Fund (IEPF)
The IEPF is a fund created by the Ministry of Corporate Affairs to promote investor awareness and protect investor interests.
- Funded by contributions from the central government, state governments, companies, and institutions.
- Also includes unpaid/unclaimed dividends, matured debentures, deposits, application money, and call money that have remained unclaimed for seven or more years.
- Used to conduct investor education programs through media, seminars, and institutional partnerships.
SEBI Regulations Relevant to R&T Agents 1. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
This is the primary regulation governing R&T Agents. It covers:
- Application for Registration — Must apply to SEBI in prescribed format.
- Capital Adequacy:
- Category I R&T Agent: Net worth requirement = Rs. 50 Lakhs
- Category II R&T Agent: Net worth requirement = Rs. 25 Lakhs
- Obligations and Responsibilities — Specific conduct standards R&T Agents must follow.
- Inspection — SEBI may inspect R&T operations on receiving investor complaints or suo motu.
- Cancellation/Suspension — SEBI can suspend or cancel registration for non-compliance.
2. SEBI (Intermediaries) Regulations, 2008
This regulation consolidates common requirements for all SEBI-regulated intermediaries including brokers, R&T Agents, Merchant Bankers, Depository Participants, and Bankers:
- Comprehensive framework applicable to all intermediaries
- Registration is permanent subject to ongoing compliance, disclosure updates, and fee payment
- SEBI can inspect books and records after giving due notice
- Intermediary-specific requirements continue to be governed by their individual regulations
3. SEBI (Depositories and Participants) Regulations, 1996
R&T Agents can also act as Depository Participants (DPs) under this regulation. Registration as DP requires approval from both the concerned Depository and SEBI, based on eligibility and competence.
Chapter 7 – Mutual Fund Structure & Constituents Legal Structure of Mutual Funds in India
In India, mutual funds are structured as trusts under the Indian Trusts Act. Investors are the beneficial owners of the trust's assets. The structure is governed by SEBI (Mutual Fund) Regulations, 1996.
Three-Tier Structure of Indian Mutual Funds
| Tier | Entity | Role |
|---|---|---|
| 1st Tier | Sponsor | Promoter of the mutual fund. Sets up the Trust and AMC. Appoints custodian, trustees, and AMC directors. Obtains regulatory approval. |
| 2nd Tier | Trust / Trustees | Mutual fund is set up as a Trust. Trustees are the primary guardians of unit holders' funds and assets. They protect investor interests. |
| 3rd Tier | Asset Management Company (AMC) | Investment manager of the mutual fund. Registered with SEBI. Manages the fund portfolio for a management fee (% of AUM). The core function of fund management cannot be outsourced. |
Key Constituents of a Mutual Fund
| Constituent | Role |
|---|---|
| Custodian | Holds cash and securities of the fund. Responsible for safekeeping. Appointed by trustees. |
| R&T Agent (Registrar & Transfer Agent) | Keeps and services investor records. Accepts and processes investor transactions. Paid a fee for services. |
| Banks | Enable collection of investment money and payment of redemptions. |
| Auditor | Audits scheme accounts to ensure accuracy and compliance. |
| Distributor | Sells mutual fund units to investors on behalf of the AMC. Can work for multiple AMCs. May appoint sub-brokers. No exclusivity. |
| Brokers | Execute buy and sell transactions of securities for the fund's portfolio. |
Regulation of Mutual Funds
Mutual funds in India are regulated by SEBI (Mutual Fund) Regulations, 1996. These regulations cover registration, management, products, investments, accounting, valuation, investor services, and investor protection.
For grievance redressal, mutual fund investors should approach: Trustees → AMC → SEBI (in that order).
Chapter 8 – Mutual Fund Products Open-Ended Funds
An open-ended fund has no fixed maturity date. Key features:
- First offered to investors during the New Fund Offer (NFO).
- After the NFO, investors can buy and sell units on a continuous basis at NAV-linked prices through AMC offices, Investor Service Centres (ISCs), or stock exchange terminals.
- The number of outstanding units changes with every purchase and redemption.
Close-Ended Funds
A close-ended fund runs for a fixed period with a defined maturity date. Key features:
- Offered during a NFO; closed for further purchases after the NFO.
- On maturity date, all units are redeemed and the scheme terminates.
- SEBI mandates listing of all closed-end scheme units on a stock exchange to provide liquidity to investors.
Offer Document, Addendum and KIM
SEBI requires AMCs to provide complete information to help investors make informed decisions:
- Offer Document (OD) — Available free of cost at ISCs and AMC offices. Must follow SEBI-prescribed format.
- From June 1, 2008, information is split into two parts:
- SAI (Statement of Additional Information) — Information common to all schemes of an AMC. One-time filing with SEBI.
- SID (Scheme Information Document) — Scheme-specific information. Updated every financial year if no material change. Revised immediately if fundamental attributes change.
- KIM (Key Information Memorandum) — A synopsis of the SID with essential information needed for completing the application form.
Categorization of Mutual Fund Products
Mutual fund schemes can be classified on multiple dimensions:
By Investment Category (Asset Class)
- Equity Funds → invest in equity shares
- Debt Funds → invest in debt securities
- Money Market Funds → invest in short-term money market instruments
- Commodity Funds → invest in commodity-linked securities or physical gold
- Real Estate Funds → invest in property-linked securities
By Investment Objective
- Growth Funds → capital appreciation; invest in equity
- Income Funds → regular income; invest in debt
- Monthly Income Plans (MIP) → income + some growth; invest in debt + small equity component
By Risk Level
- Equity Funds → highest risk
- Debt Funds → moderate risk
- Liquid Funds → least risk (very short-term instruments)
Product Labeling & Riskometer
All mutual fund schemes must carry a product label showing:
- Investment objective (wealth creation or regular income)
- Indicative time horizon (short / medium / long term)
- Type of product (equity / debt / hybrid)
Risk levels are depicted using a visual tool called the "Riskometer" (a pictorial meter). There are five risk levels:
| Risk Level | What it Means |
|---|---|
| Low | Principal at low risk |
| Moderately Low | Principal at moderately low risk |
| Moderate | Principal at moderate risk |
| Moderately High | Principal at moderately high risk |
| High | Principal at high risk |
Types of Debt Funds
| Fund Type | Key Feature |
|---|---|
| Liquid Fund / Money Market Fund | Invests in instruments with <91 days to maturity. Least risky debt fund. |
| Short-Term Debt Fund | Invests in slightly longer-term instruments than liquid funds. Returns primarily from coupon accrual. |
| Income Fund | Invests in medium and long-term debt instruments of government, companies, banks, and FIs. |
| Gilt Fund | Invests only in government securities of medium to long-term maturity. No default risk as issuer is the government. |
| Floating Rate Debt Fund | Invests in instruments where interest rate changes with a market benchmark. |
| High-Yield Debt Fund | Invests in lower-rated debt instruments for higher interest income. Higher default risk. |
| Fixed Maturity Plan (FMP) | Closed-end debt fund. Invests in instruments maturing on or before the scheme maturity date. |
Types of Equity Funds
| Fund Type | Key Feature |
|---|---|
| Diversified Equity Fund | Invests across the broad equity market without restrictions. |
| Large Cap Fund | Focuses on shares of large, well-established companies. High liquidity. |
| Mid Cap Fund | Focuses on medium-sized companies. Higher growth potential than large cap. |
| Small Cap Fund | Focuses on small/emerging companies. Highest growth potential but also highest risk and lower liquidity. |
| Thematic / Sector Fund | Focused on a specific theme (e.g., infrastructure) or sector (e.g., banking). |
| Index Fund | Passively managed; replicates a market index (e.g., Nifty 50) by holding the same stocks in the same proportion. |
| ELSS (Equity Linked Saving Scheme) | Tax-saving fund. Investments up to Rs. 1,50,000/year eligible for deduction under Section 80C of Income Tax Act. Holds minimum 80% in equity. 3-year lock-in period. |
Hybrid Funds
Hybrid funds invest in a combination of equity and debt, offering benefits of both asset classes in a single product:
| Type | Equity Allocation | Debt Allocation |
|---|---|---|
| Predominantly Debt-Oriented Hybrid | 5% to 35% | 65% to 95% |
| Predominantly Equity-Oriented Hybrid (Balanced Fund) | 65% to 95% | Up to 35% |
| Dynamic Asset Allocation Fund | 0–100% (flexible) | 0–100% (flexible) |
| Dual Advantage Fund | 25% to 35% | 60% to 70% |
Note: Dual Advantage Funds have equity <65%, so they are treated as debt funds for taxation purposes.
Other Special Types of Mutual Fund Schemes
- Fund of Funds (FoF) — Invests in other mutual fund schemes. Treated as a debt fund for taxation regardless of underlying asset class.
- Real Estate Fund — Invests in real estate directly or in housing/property company securities.
- Gold ETF — Buys physical gold. Each unit = approximately 1 gram of gold in demat form. Listed and traded on stock exchange in real time.
- Capital Protection Fund — Closed-end fund. Debt portion invested to grow back to original principal by maturity (capital protection). Balance in equity for growth.
- Infrastructure Debt Fund — Invests in debt securities of infrastructure companies, infrastructure projects, or Special Purpose Vehicles (SPVs).
Quick Revision – Key Points for NISM II B Exam Part 3
- SEBI established: April 12, 1992 under SEBI Act, 1992
- R&T Agent Net Worth: Category I = Rs. 50 Lakh; Category II = Rs. 25 Lakh
- IEPF unclaimed funds: 7 years or more before transfer to IEPF
- Mutual fund structure: Sponsor → Trust/Trustees → AMC
- Regulatory framework: SEBI (Mutual Fund) Regulations, 1996
- Grievance redressal order: Trustees → AMC → SEBI
- SAI: Common information for all schemes; one-time SEBI filing
- SID: Scheme-specific document; updated annually or on material change
- KIM: Key Information Memorandum; synopsis of SID
- Riskometer: 5 levels from Low to High
- ELSS lock-in: 3 years; 80C deduction up to Rs. 1.5 lakh
- Gold ETF: 1 unit ≈ 1 gram of physical gold; demat form
- FoF taxation: Treated as debt fund for tax purposes
Continue Your NISM II B Preparation
- Part 2 – Other Securities, Debt Instruments & Mutual Fund Basics
- Part 4 – Tax Aspects of Mutual Funds & Operational Concepts (NFO, NAV, SIP)
- NISM Series II B Mock Test – Practice Now
- NISM Exam Fees & Registration Process
- NISM Study Material PDF
This is Part 3 of 6 of our NISM Series II B Short Notes. For mock tests, question banks and more study resources to help you pass the NISM Series II B exam, visit PassNISM.in.