Types of Mutual Funds, REITs, InvITs and AIFs

Mutual funds are pooled investment vehicles where a professional fund manager collects money from retail and institutional investors to invest in a diversified portfolio of securities as per a defined investment objective.

In the Indian context, mutual funds are registered under the SEBI (Mutual Funds) Regulations, 1996 and are required to disclose a Scheme Information Document (SID) that outlines the fund’s objective, asset allocation, risk factors and expense ratios. The SID is a frequent source of exam questions.

For the NISM exam, you must know the difference between open‑ended and close‑ended schemes, the concept of Net Asset Value (NAV), and how expense ratios affect investor returns. A common trap is to confuse the NAV of a fund with its market price – they are the same for mutual funds but differ for exchange‑traded products.

• Mutual funds provide liquidity, professional management and diversification.
• They are subject to SEBI’s strict disclosure and compliance regime, which is tested in scenario‑based questions.

The NISM syllabus classifies mutual funds primarily by the nature of the underlying assets and the investment horizon. The major categories are Equity Funds, Debt Funds, Hybrid Funds, Liquid Funds, Equity‑Linked Savings Scheme (ELSS) and Fund of Funds (FoF).

Equity funds invest at least 65% of their assets in equities and are suitable for long‑term growth, but they carry higher market risk. Debt funds invest predominantly in fixed‑income securities and are preferred for stable income and lower volatility. Hybrid funds blend equity and debt in a pre‑defined ratio, offering a balanced risk‑return profile.

Liquid funds invest in money‑market instruments with maturities up to 91 days, providing high liquidity and modest returns. ELSS are a subset of equity funds that offer tax deduction under Section 80C with a mandatory three‑year lock‑in. Fund of Funds invest in other mutual fund schemes, giving investors indirect exposure to multiple asset classes.

• Remember: ELSS = tax‑saving equity fund with 3‑year lock‑in.
• Hybrid funds are further split into aggressive, conservative and balanced based on equity exposure.

A Real Estate Investment Trust (REIT) is a trust that owns, operates or finances income‑generating real estate assets such as commercial buildings, shopping malls, and office spaces. REITs must distribute at least 90% of their net cash earnings to unitholders as dividends.

SEBI introduced REIT regulations in 2014, requiring a minimum of 25% of the trust’s assets to be held by public investors and a minimum net worth of INR 500 crore for listed REITs. The trust issues units that trade on stock exchanges, offering investors liquidity similar to equities but with exposure to real‑estate returns.

For the NISM exam, focus on the eligibility criteria, dividend distribution requirement, and the distinction between listed and unlisted REITs. A frequent mistake is to treat REIT dividend yields as guaranteed; they fluctuate with rental income and property valuations.

• REITs provide an avenue for retail investors to access commercial real estate.
• Regulatory caps on leverage (maximum 50% of total assets) are often asked.

Infrastructure Investment Trusts (InvITs) are similar to REITs but focus on infrastructure assets such as roads, power transmission lines, and ports. InvITs generate income mainly from usage‑based fees, tolls or tariffs.

SEBI’s InvIT framework (effective from 2014) mandates a minimum public shareholding of 25% and a net worth of INR 500 crore for listed InvITs. Like REITs, InvITs must distribute at least 90% of their net cash earnings to unit holders, making them attractive for income‑seeking investors.

Exam‑relevant differences: InvITs are taxed on a ‘deemed dividend’ basis, and the underlying assets are typically long‑term contracts with regulated tariffs. Confusing the asset class (real‑estate vs. infrastructure) is a common error in scenario questions.

• InvITs often have longer lock‑in periods for the sponsor’s contribution (up to 3 years).
• Leverage limits are similar to REITs – maximum 50% of total assets.

Alternative Investment Funds (AIFs) are privately pooled investment vehicles registered with SEBI under the AIF Regulations, 2012. They cater to sophisticated investors and can invest in a wide range of assets, including private equity, hedge funds, real estate, and commodities.

AIFs are classified into three categories: Category I (socially or economically desirable investments such as venture capital, SME funds, infrastructure); Category II (private equity, debt funds, fund‑of‑funds that do not employ leverage or complex strategies); and Category III (hedge funds, strategy‑based funds that may use leverage, derivatives, or short‑selling).

Key exam points include the minimum investment limits (INR 1 crore for Category I & II, INR 25 lakh for Category III), the requirement of a self‑regulatory organization (SRO) for each category, and the lock‑in periods (typically 3 years for Category I, 1 year for Category II, and none for Category III). Mistaking AIF categories for mutual fund types is a frequent pitfall.

• Category I AIFs enjoy certain tax incentives under the Income Tax Act.
• Category III AIFs can employ sophisticated trading strategies, making them higher risk.