NISM Series II B Short Notes – Part 4: Tax Aspects of Mutual Funds & Operational Concepts (NFO, NAV, Time Stamping, SIP)
Welcome to Part 4 of the 6-part NISM Series II B short notes series for the Registrars to an Issue & Share Transfer Agent (Mutual Funds) certification exam. This post covers two important chapters — Tax Aspects of Mutual Funds and Operational Concepts including New Fund Offer (NFO), transaction cycle, time stamping, applicable NAV, and investing through stock exchanges. These chapters frequently appear in NISM II B exam questions.
Quick Answer: What is the applicable NAV in mutual funds? The applicable NAV for a mutual fund transaction depends on: (1) the day of the transaction, (2) the time of receipt at the official point of acceptance, (3) the type of scheme (liquid or non-liquid), and (4) availability of clear funds — particularly for liquid fund purchases and non-liquid fund purchases of Rs. 2 lakh or more.
Chapter 9 – Tax Aspects of Mutual Funds Two Forms of Returns from Mutual Funds
Mutual funds provide returns to investors in two forms:
- Dividends — When the fund distributes a portion of its earnings to unit holders.
- Capital Gains — When an investor sells (redeems) their units at a price higher than the purchase price.
The tax treatment for both is different and depends on the type of fund (equity-oriented or non-equity-oriented).
Equity-Oriented Fund – Definition
An equity-oriented fund is a fund that has invested at least 65% of its total corpus in equity shares. Any fund with less than 65% in equity is not an equity-oriented fund and is taxed differently (like a debt fund).
Examples of non-equity-oriented (debt-taxed) funds:
- Liquid funds
- Pure debt funds
- Debt-oriented hybrid funds
- Fund of Funds (FoF) — treated as debt fund regardless of underlying assets
- Dual Advantage Funds (equity <65%)
Three Investment Options in Mutual Funds
When investing in a mutual fund scheme, investors can choose from three options:
| Option | What Happens | Tax Event |
|---|---|---|
| Growth Option | No dividends paid. Returns are realized through capital appreciation when units are sold (redeemed). | Capital Gains Tax when units are redeemed |
| Dividend Option | Fund pays out dividends periodically from profits to investors. | Dividend income taxed in hands of investor |
| Dividend Reinvestment Option | Dividend is not paid out to the investor. Instead, it is reinvested by buying additional units in the same scheme. | Dividend reinvested; units increase; capital gains tax applies on redemption |
Important: Capital gains are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on the holding period of the units. Tax rates differ for equity-oriented and non-equity-oriented funds. Candidates should refer to the NISM official workbook for current applicable tax rates.
Chapter 10 – Operational Concepts New Fund Offer (NFO)
A New Fund Offer (NFO) is how a new mutual fund scheme is first launched and offered to the public.
- The fund's life begins from the NFO start date. Investors can invest from this date.
- The NFO close date is defined in the offer document. During the NFO period, units are purchased at the NFO price (typically Rs. 10 per unit).
- Use of NFO proceeds: The mutual fund can make investments only on or after the NFO closure date — not during the NFO collection period.
Allotment After NFO
Once the NFO closes, a "no transaction period" begins where:
- Investor account folio details are created
- Cheques are banked
- Bounced cheques are returned
- Final list of unit holders (register of investors) is created
After allotment is completed, investors receive their Statement of Account (SoA) showing the number of units allotted.
Inception Date
The inception date of a mutual fund is the date of allotment. From the next day after allotment, the fund begins declaring its NAV. On the inception date, NAV is set at face value (Rs. 10).
Ongoing (Continuous) Offer
After allotment is complete, the fund enters the ongoing offer period where:
- NAV is declared every day
- For open-ended funds: fresh purchases and redemptions can happen continuously at NAV-linked prices
- For closed-end funds: no new purchases after NFO; redemption happens only at maturity
Transaction Cycle of a Mutual Fund
The operational cycle of a mutual fund follows these steps:
- Investor submits a transaction request at an ISC or AMC office
- Transaction is recorded and forwarded to the R&T back office
- NAV is applied to the transaction
- Units are added (purchase) or cancelled (redemption) in the investor's folio
- Fund inflows and outflows are reported to the AMC Treasury
- Daily unit issuance and redemption figures are consolidated
- Unit capital is updated
- Updated unit capital is communicated to the AMC's fund accounts department
- Portfolio is valued by the fund accounts team or custodian
- NAV is computed using portfolio value and updated unit capital
- Computed NAV is communicated back to R&T for applying to future transactions
Time Stamping
Time stamping is the process of recording the exact date and time at which a transaction request is received at the official point of acceptance (ISC or AMC office). It is critical because the applicable NAV depends on the time of receipt of the transaction.
How Time Stamping Works
- A time stamping machine at the ISC captures the time of receipt and prints (usually three) impressions.
- For purchase transactions: The time stamp is affixed on the application form/transaction slip AND on the back of the payment instrument (cheque/DD).
- For electronic fund transfers: The fax copy of the form and transfer instruction are time-stamped.
- For redemption/switch/transfer requests (no payment instrument involved): All time stamp impressions are affixed on the transaction request itself.
Risk Controls in Time Stamping
- The time stamp must be affixed on a blank space in the document — it must not overwrite existing content.
- The impression must be clear, legible, and readable because it is used to determine the applicable NAV.
- Purchase applications must always be accompanied by the payment instrument. The time stamp on both (application + instrument) must match, so both should be received together.
Applicable NAV
The applicable NAV is the NAV at which a mutual fund transaction is processed. It is determined based on the time stamp (date and time of receipt).
Factors Affecting Applicable NAV
| Factor | Explanation |
|---|---|
| Day of transaction | Business day or non-business day (holiday) |
| Time of receipt at ISC/AMC | Whether received before or after the cut-off time |
| Type of scheme | Liquid fund vs. non-liquid fund have different cut-off rules |
| Clear funds availability | For all liquid fund purchases and for non-liquid fund purchases of Rs. 2 lakh or more, the applicable NAV is the NAV of the day on which the funds are available (realised) — not the day the application was submitted |
Using time stamping eliminates ambiguity and ensures uniform treatment of all investor transactions.
Investing in Mutual Funds Through Stock Exchanges
Investors can buy and sell mutual fund units through stock exchange terminals, not just through AMC offices or ISCs.
| Exchange | Platform Name |
|---|---|
| NSE (National Stock Exchange) | MFSS – Mutual Fund Service System |
| BSE (Bombay Stock Exchange) | BSE StAR (BSE StAr MF) |
These platforms are available to Independent Financial Advisors (IFAs) and retail investors. Benefits of investing through stock exchanges:
- Single view of the investor's entire portfolio across all mutual funds
- Reduction of paperwork and errors
- Reduced redundancy and data duplication at RTA and distributor levels
- Safer settlement through Delivery vs. Payment (DVP) mechanism of stock exchanges
- Extension of secondary market convenience to mutual fund investors
- Service charges levied at the point of service delivery
Quick Revision – Key Points for NISM II B Exam Part 4
- Equity-oriented fund: Minimum 65% in equity shares
- Three mutual fund options: Growth / Dividend / Dividend Reinvestment
- NFO price: Usually Rs. 10 per unit
- Inception date: Date of allotment (NAV starts from next day at face value)
- NFO proceeds investment: Only on or after NFO closure
- Time stamping machine impressions: Usually 3 impressions
- Applicable NAV factor: Depends on day, time, scheme type, and clear fund availability
- Liquid fund & Rs. 2 lakh+ purchases: NAV of the day funds are realized (not application date)
- NSE mutual fund platform: MFSS
- BSE mutual fund platform: BSE StAR (BSE StAr MF)
- FoF tax treatment: Treated as debt fund regardless of underlying assets
Continue Your NISM Series II B Preparation
- Part 3 – SEBI Regulations, Mutual Fund Structure & Products
- Part 5 – Investors in Mutual Funds: KYC, PAN, NRI, Institutional Investors & Banking Operations
- NISM Series II B Mock Test
- NISM Series II B Exam Syllabus
- NISM Series II B Study Material PDF
This is Part 4 of 6 of our NISM Series II B Short Notes. For additional practice questions and a comprehensive question bank, visit PassNISM.in — India's trusted platform for NISM exam preparation.