Chapter 26: How to Invest in Mutual Funds?

Under SEBI regulations, every open-ended mutual fund scheme must provide investors with two distinct investment plans: a Direct Plan and a Regular Plan. Both plans invest in the identical underlying portfolio of securities and are managed by the exact same fund manager, but they differ significantly in distribution costs.

Regular Plan

• Purchased through a registered intermediary, such as a Mutual Fund Distributor (MFD), broker, or bank.
• The AMC pays recurring trail commissions to the distributor out of the scheme's assets.
• Because distributor commissions are factored into the Total Expense Ratio, the Regular Plan carries a higher TER (typically 0.50% to 1.50% higher annually).
• Higher expenses mean the Regular Plan has a lower daily NAV and lower compounded net returns over time.

Direct Plan

• Purchased directly from the AMC without involving an intermediary (via the AMC portal, MF Central, CAMS/KFintech, or registered SEBI Investment Advisers).
• Incurs zero distributor commissions, resulting in a lower TER.
• A lower expense ratio allows more of the investor's money to compound, resulting in a higher daily NAV and higher long-term returns. Over a 20-year horizon, this difference can lead to a 15% to 25% larger terminal portfolio.

Mutual funds provide structured operational facilities to align capital inflows and outflows with an investor's cash flow requirements:

1. Systematic Investment Plan (SIP)

Enables an investor to invest a predetermined fixed sum of money at specified regular intervals (weekly, monthly, or quarterly).

• Rupee Cost Averaging: Purchases more units when market prices drop and fewer units when prices rise, smoothing volatility and reducing average acquisition cost over market cycles.
• Financial Discipline: Automates long-term savings through automated bank e-mandates (NACH) without requiring active market timing.

2. Systematic Withdrawal Plan (SWP)

Allows an investor to withdraw a predetermined sum from their mutual fund corpus at regular intervals.

• Ideal for retirees seeking regular monthly cash flows.
• Highly tax-efficient compared to interest income: each withdrawal represents a combination of capital return and capital gains, reducing the effective immediate tax liability.

3. Systematic Transfer Plan (STP)

Allows an investor to systematically transfer a fixed sum from one scheme (e.g., a low-volatility Liquid Fund where a lump-sum windfall is parked) into another scheme (e.g., an Equity Fund) at regular intervals, staggering market entry over time.

To ensure fairness and prevent market timing, SEBI enforces strict Cut-off Timings for mutual fund purchases and redemptions:

Equity and Debt Schemes (Other than Liquid and Overnight Funds)

• Cut-off Time: 3:00 PM on business days.
• Realization of Funds Rule: Under current SEBI regulations, the applicable NAV for purchase of units—irrespective of investment amount—is based on the business day on which funds are actually credited to the scheme's bank account before 3:00 PM, regardless of when the application was submitted.
• Redemptions: If a redemption application is received before 3:00 PM, the closing NAV of the same day applies. If received after 3:00 PM, the closing NAV of the next business day applies.

Liquid and Overnight Schemes

• Designed for short-term corporate and treasury cash management.
• If purchase funds are available in the scheme account before 1:30 PM, the investor receives the NAV of the preceding calendar day (including Sunday's NAV for funds credited on Monday morning).