Mutual Funds, ETFs, AIFs
Intuition
Most individual investors lack the time, expertise, or capital to build diversified portfolios of individual securities. Pooled investment vehicles solve this by aggregating money from many investors and deploying it professionally according to a defined mandate. The three most important categories in India are Mutual Funds, Exchange-Traded Funds (ETFs), and Alternative Investment Funds (AIFs).
Mutual funds are the most accessible, available to retail investors with as little as ₹500 per month via SIP. ETFs offer the lowest costs for passive investors who want market returns without active management. AIFs are restricted to high-net-worth investors (minimum ₹1 Cr) and include private equity, hedge funds, and venture capital.
Understanding costs, tax treatment, and liquidity differences between these vehicles is essential for making informed investment decisions, and for building financial models for asset management companies.
Mechanics
Mutual Funds (SEBI MF Regulations):
- Open-end: Buy/sell at NAV any business day. Most Indian MFs are open-end.
- Close-end: Fixed units issued at NFO; listed on exchange; trade at discount/premium to NAV
- Categories (SEBI categorisation circular): Large-cap, mid-cap, small-cap, flexi-cap, ELSS, liquid, overnight, gilt, credit risk, hybrid, each with defined investment universe and limits
- Expense Ratio (TER): Annual fee charged as % of AUM. Capped by SEBI (e.g., active equity: up to ~2.25% for smaller funds). Directly reduces investor returns.
- Exit Load: Penalty for early redemption (e.g., 1% if redeemed within 1 year for equity funds)
ETFs (Exchange-Traded Funds):
- Listed on NSE/BSE; bought/sold intraday at market price (not NAV)
- Creation/redemption mechanism by Authorised Participants (APs) keeps price close to NAV
- Much lower TER than active funds (e.g., Nifty 50 ETF: 0.05–0.20%)
- Tracking error: Difference between ETF returns and index returns, lower is better
- Key Indian ETFs: Nifty 50 ETFs, gold ETFs, Bharat Bond ETFs (G-sec based), sectoral ETFs
Alternative Investment Funds (SEBI AIF Regulations):
- Category I AIF: Infrastructure funds, VCFs, SME funds, social impact funds
- Category II AIF: Private equity, real estate funds, debt funds, no leverage
- Category III AIF: Hedge funds, long/short equity, can use leverage
- Min investment: ₹1 Cr. Open only to accredited/HNI investors
From the research
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