Part III · Investing · M06B · week 4 · 16 h
Funds: mutual funds, ETFs and the asset-management business
How an Indian mutual fund is built (the trust, the AMC, the custodian), how a unit is priced (NAV, cut-offs, stale-price transfers, swing pricing), what it costs under the 2026 regulations and how fee drag compounds, how fund houses make money, SIP arithmetic, measuring skill against luck (Berk–Green), index-fund tracking, ETF creation units and premiums, debt funds and runs, fund taxation, and how to build a fund portfolio.
Builds on M00 On-rampM01 Market structureM02 Statistics of returnsM06 Valuation
Prerequisites M00 · 0.4 (the instrument map, SIP arithmetic (0.2) and XIRR (0.3)), M01 (order books, transaction costs, the clearing cycle), M02 (returns, volatility, regression), M06 · 6.11 (the index baseline). Section 6B.10 uses duration and convexity, derived in M11 · 11.2–11.3 and restated here; 6B.11 uses the cash-and-carry price of M07 · 7.1. Maths: geometric series, Taylor expansion, the AM–HM inequality, conditional expectation of the normal distribution, OLS. Time: ~16 hours (week 4): notes 8 h, problems 5 h, code 3 h. Primary texts: the SEBI (Mutual Funds) Regulations, 2026 and SEBI's Master Circular for Mutual Funds; the NISM Series V-A workbook for the vocabulary; Sharpe (1966), Jensen (1968), Carhart (1997), Berk and Green (2004), Fama and French (2010) on performance; Zitzewitz (2003) and Chen, Goldstein and Jiang (2010) on dealing at NAV; Petajisto (2017) on ETF pricing.
Most Indian savers own the stock market through a fund. A fund is a legal structure that pools money, a pricing rule that decides what each rupee buys, a cost schedule fixed by regulation, and a business that earns a percentage of the pool. Each of those four pieces has exact arithmetic, and most of the expensive mistakes investors make (paying a distributor 1% a year for twenty years, buying an ETF at a 20% premium, staying in a debt fund while better-informed money leaves) come from not doing it. This module does the arithmetic, proves the results that matter, and checks them against the record of the Indian industry.
Labels: [V] means checked against a primary source (the regulations as printed in the Gazette of India, SEBI and AMFI documents, exchange circulars, company filings, journal pages) on or near 6 Nov 2026. [S] means secondary only (law-firm, trade-press and newspaper summaries of a primary document). Regulations change often; every rule below carries the date at which it was checked, and the Facts that change section at the end collects them. No fund, AMC or intermediary is recommended anywhere in this module; schemes named in case studies are named because they are part of the record.
Learning outcomes
- Explain the Indian trust structure of a mutual fund and why an AMC's failure does not take investors' assets
- Compute a NAV with accrued fees, apply the cut-off and realisation rules, and derive the wealth transfer from dealing at a stale NAV and why swing pricing removes it
- Read the 2026 expense structure and derive the terminal-wealth cost of a fee gap for a lump sum and a SIP
- Read a SID, KIM, factsheet and riskometer, and place a scheme in SEBI's categories
- Build an AMC's P&L from AUM and fee yields, derive the beta of AMC profits to the market, and value a SIP customer as an annuity of fees
- Prove that a SIP's average cost is the harmonic mean of prices and that averaging is not an edge over a lump sum
- Measure fund performance, count the significant alphas luck produces, and derive the Berk–Green result
- Decompose tracking difference, derive the ETF premium band, explain the Indian episodes in which it broke, and choose between an ETF and an index fund
- Compute a debt fund's NAV response to yields and derive the first-mover advantage in a fund run
- State the current tax treatment of fund types and build a low-cost fund portfolio by an explicit decision rule
Sections ≈ 4 h 10 min of study
- Foundation 7 sections · ≈ 1 h 35 min
- Core 9 sections · ≈ 2 h 15 min
- Advanced 1 section · ≈ 20 min
- Learning outcomes Foundation 5′
- 6B.1 What a fund is: the Indian trust structure Foundation 15′
- 6B.2 NAV: how a unit is priced Core 25′
- 6B.3 What it costs: TER, loads, direct versus regular Foundation 20′
- Figure Fee drag: direct against regular plans
- 6B.4 Scheme categories and reading the documents Foundation 15′
- 6B.5 How fund houses make money Core 20′
- Figure Operating leverage: AMC profit against the market
- 6B.6 SIPs and rupee-cost averaging Core 10′
- 6B.7 Is the manager any good: performance and luck Advanced 20′
- 6B.8 Index funds and ETFs: tracking Core 10′
- 6B.9 How ETFs trade: market makers, creation units, iNAV, premiums Core 25′
- Figure ETF premium and the creation–redemption band
- 6B.10 Debt funds Core 20′
- 6B.11 Hybrid, arbitrage, FoF, gold, silver and international funds; tax Foundation 15′
- 6B.12 Case studies Core 15′
- 6B.13 Building a fund portfolio Foundation 10′
- Summary of key results Foundation 15′
- Readings and resources Core 5′
- Facts that change Core 5′