10.7 Financial Transactions with Mutual Funds

NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

10.7 Financial Transactions with Mutual Funds

Key Takeaways Explain This Topic AI

The financial transactions are purchase, additional purchase, redemption and switch.

A switch is a redemption from one scheme and a purchase into another, so it is a taxable event.

Redemption may be requested by amount or by number of units, and follows first-in, first-out.

Minimum amounts for purchase, additional purchase and redemption are stated in the scheme documents.

Units under lock-in, lien or pledge cannot be redeemed until the restriction is released.

Last updated: August 2026

The Four Financial Transactions

Transaction Effect
Purchase First investment in a scheme, creating a folio or adding a scheme to one
Additional purchase Further investment into a scheme already held
Redemption Units surrendered to the fund for cash
Switch Redemption from one scheme and simultaneous purchase into another

A transaction is financial when it changes the value of the holding. Changes of address, bank mandate or nomination are non-financial and are covered in section 10.11.

Purchase and Additional Purchase

Minimum amounts are stated in the scheme documents and vary by scheme, typically with a lower minimum for additional purchases than for the first investment, and a lower one still for systematic instalments.

Processing requires:

Application received at an Official Point of Acceptance within the cut-off time
Funds realised and available for utilisation
KYC complete and PAN valid

Units are then allotted at the applicable NAV, net of stamp duty.

Redemption

A redemption request may be made in either of two ways:

Basis How it works
By amount "Redeem INR 2,00,000" — the RTA computes the units needed at the applicable NAV
By units "Redeem 3,000 units" — the amount depends on the applicable NAV
All units Full redemption of the holding in that scheme

Requesting by amount carries a subtlety worth knowing: because the applicable NAV is not known when the request is submitted, the exact number of units redeemed is determined afterwards. An investor who needs a precise sum should redeem by amount; one who wants to retain a precise unit holding should redeem by units.

First-in, first-out

Units are redeemed on a FIFO basis, oldest first. This determines:

Whether exit load applies, since load depends on each parcel's holding period
Whether gains are short-term or long-term , since holding period is measured per parcel
The cost of acquisition used in computing the gain

For a long-running SIP this works in the investor's favour, because the oldest instalments — most likely to qualify as long-term and to be free of exit load — are redeemed first.

Units that cannot be redeemed
Units under statutory lock-in , such as ELSS within three years of each instalment
Units under lien or pledge , until the lender releases them
Units in a folio frozen for documentation, such as a minor attaining majority
Units in a segregated portfolio , which are not redeemable from the fund at all
Units where KYC is on hold
Switch
A switch is a single instruction executing two transactions: Switch out of Scheme A = Redemption from Scheme A
Switch into Scheme B = Purchase into Scheme B

The consequences follow from that, and every one of them surprises investors:

Consequence Detail
Capital gains tax Arises on the switch-out leg, exactly as on a redemption
Exit load Applies to the switch-out leg if within the load period
Stamp duty 0.005% on the switch-in leg, since units are issued
Fresh holding period Begins for the new units, affecting future long-term treatment
Cut-off timing Applies to both legs

Switching is available between schemes of the same fund house . Moving between fund houses requires a redemption and a separate fresh purchase, during which the money is out of the market.

Common switch scenarios:

Regular plan to direct plan — a taxable redemption, which must be stated before executing
Growth to IDCW or the reverse — also a taxable redemption

Equity to debt as a goal approaches — the correct use of a switch, and the tax cost is simply part of the decision

Between schemes for performance reasons — legitimate occasionally, and the pattern AMC due diligence examines when it becomes habitual

Suspension of Transactions

A scheme may restrict or suspend redemption only in exceptional circumstances and subject to strict conditions — market-wide closure, a systemic crisis or operational events beyond control. Restrictions may be imposed only for a limited period with trustee approval and disclosure to SEBI, and small redemption requests up to a prescribed threshold must continue to be honoured. Suspension is not available to manage ordinary redemption pressure.

What a Distributor Should Confirm Before Any Redemption or Switch

Is any part of the holding under lock-in, lien or pledge ?

Will exit load apply, and on how much of the holding?

What are the capital gains consequences, and would waiting change the treatment?

Are the bank details in the folio current?

For a switch, has the investor understood it is a taxable redemption ?

Asking these five questions takes two minutes and prevents most post-transaction complaints.