Pooled vehicles, private capital and institutional investors

Detail

A. Mutual funds: the basic pooled vehicle

• Mutual fund (MF) = a fund that collects money from many investors. It then invests that money in shares, bonds or money-market instruments (loans that are repaid within one year, such as treasury bills). Professional managers make the choices.

• Why people use it: a small investor gets three things they cannot easily get alone:

  • diversification (money spread over many assets, so one bad asset hurts less)
  • expert management
  • liquidity (the investment can be turned back into cash easily)

• History

• UTI (Unit Trust of India), 1963 was India's first MF, set up by the state.
• Private MFs were allowed from 1993, during the 1990s capital-market reforms.
• The SEBI (Mutual Funds) Regulations, 1996 govern all MFs.

• AMFI (Association of Mutual Funds in India) is the industry body. It is not the regulator. SEBI is the regulator.

• Four-layer structure. The layers are kept separate so that no single party controls investors' money.

• Sponsor = the promoter who sets up the MF.
• Trust / trustees = hold the assets on behalf of unit-holders and supervise the AMC.
• AMC (Asset Management Company) = the company that actually invests the money.
• Custodian = safely holds the securities.

• Exam trap: the AMC manages the money, but the custodian holds it.

• Types by structure

• Open-ended fund = investors can enter and exit on any day, at NAV.

• Closed-ended fund = has a fixed term. New money comes in only at launch. Units are listed on an exchange, and investors exit by selling there.

• SEBI categorisation, 2017 = SEBI fixed standard scheme categories (equity, debt, hybrid, solution-oriented and others). The aim is to let investors compare like with like, and to stop one AMC from running many near-copy schemes.

• Latest data (SEBI Annual Report 2025-26)
• MF AUM (assets under management), the total market value of money a fund manages, rose 12.2%. It went from ₹65.7 lakh crore (March 2025) to ₹73.7 lakh crore (March 2026) [2].
• Unique investors rose 13.2% to 6.1 crore (2025-26). Investor count in Tier II cities grew 37.6%, and Tier III cities hold the largest share, 55% [2].
• The industry has 27.4 crore folios (investor accounts). Individuals hold 97.7% of these folios and 58.3% of AUM (2025-26) [2].

B. Net Asset Value (NAV)

• NAV = the value of one unit of a fund.
• Formula: NAV = (Market value of assets − Liabilities) ÷ Number of units outstanding

• NAV is worked out daily. Units are bought and redeemed (sold back to the fund) at NAV.

• Worked example

• A fund holds securities worth ₹1,050 crore. It owes ₹50 crore (fees and payables). It has issued 50 crore units.
• NAV = (1,050 − 50) ÷ 50 = ₹20 per unit.

• An investor who puts in ₹10,000 gets 10,000 ÷ 20 = 500 units.

• Trap: a low NAV does not mean a fund is "cheap". Returns depend on the percentage change in NAV, not on its level.

• AIFs also report NAV now. SEBI required AIF managers to upload the NAV of their units directly to the depositories, so that unit-holders see all their holdings in one place (2025-26) [2].

C. Systematic Investment Plan (SIP)

• SIP = putting a fixed sum into a fund at regular intervals, usually every month.
• Rupee-cost averaging
• The sum stays fixed, so the investor buys more units when NAV is low and fewer when NAV is high.

• As a result, the average cost per unit ends up below the simple average of the NAVs.

• Worked example: ₹1,000 invested each month for three months.

Month	NAV (₹)	Units bought
1	10.00	100
2	8.00	125
3	12.50	80
Total	—	305 units for ₹3,000

• Average cost per unit = 3,000 ÷ 305 = ₹9.84.
• Simple average of the three NAVs = (10 + 8 + 12.5) ÷ 3 = ₹10.17.

• So the SIP investor paid less per unit than the average price.

• Current scale (scaffold said "record levels, verify current")

• Active SIP accounts rose to 10.45 crore (2025-26) [2].
• The average net monthly SIP contribution rose 25.8% to a record ₹16,413 crore (2025-26) [2].
• Why it matters: SIP money comes in every month whatever the market is doing. This steady flow is the base of domestic institutional buying (see section G).

D. Passive funds and ETFs

• Index fund = a passive fund. It does not pick stocks. It simply copies an index such as the Nifty 50, so its costs (expense ratio, the yearly fee charged as a share of assets) stay low.
• Exchange-Traded Fund (ETF) = a fund that tracks an index, a commodity or a basket of assets. It trades on a stock exchange like a share, and its price changes during the day.
• Index fund vs ETF: an index fund is bought from the AMC at the day-end NAV. An ETF is bought on the exchange at the live market price and needs a demat account (an electronic account that holds securities).

• Total demat accounts reached 22.5 crore (2025-26) [2].

• Milestones

• Nifty BeES (2001) was India's first ETF.
• CPSE ETF (2014) and Bharat 22 ETF (2017) were used for disinvestment (the government selling part of its stake in public-sector companies). The government sold its PSU shares through these ETFs.

• Bharat Bond ETF (2019) invests in PSU bonds. It was India's first corporate-bond ETF.

• Gold ETF (from 2007) = holds physical gold, so the investor owns gold in electronic form.

Feature	Gold ETF	Sovereign Gold Bond (SGB)	Physical gold
Interest	None	Yes, fixed interest	None
Liquidity	High (traded on exchange)	Lower (lock-in; thin trading)	Medium
Storage/purity risk	None	None	Yes
Making charges	None	None	Yes

• Fund of funds (FoF) = a fund that invests in other funds instead of directly in securities. Example: SIDBI's Fund of Funds for Startups (see section J).

E. REITs and InvITs: owning property and infrastructure through units

• Common rules
• Both come under the SEBI regulations of 2014.
• Both work as trusts and are listed on exchanges.

• Both must pass on at least 90% of net distributable cash flow to unit-holders. This makes them income products, close to bonds.

• Real Estate Investment Trust (REIT) = owns property that earns income, such as offices and malls.

• At least 80% of assets must be completed, rent-yielding property. This limits the risk from projects still under construction.

• The first was Embassy Office Parks REIT (2019).

• Small and Medium REITs (SM REITs)

• SEBI notified the REIT (Amendment) Regulations on 8 March 2024. They added a new Chapter VIB for SM REITs [4].
• SM REITs can have assets starting from ₹50 crore and need at least 200 investors [4].

• Purpose: to bring the unregulated fractional-ownership platforms under SEBI. These platforms let many people jointly own one building through a special purpose vehicle (SPV), a company set up only to hold that asset [4].

• Infrastructure Investment Trust (InvIT) = holds infrastructure assets that produce steady income, such as toll roads and power lines.

• The first was IRB InvIT (2017).
• The PowerGrid InvIT and NHAI InvIT (2021) are tools of asset monetisation under the National Monetisation Pipeline (see infrastructure).

• How asset monetisation works:

  • The government puts a finished asset into an InvIT.
  • It gets cash upfront from investors.
  • It uses that cash to build new assets.

• Scale (2025-26) [2]

• Fresh money raised: InvITs ₹21,026 crore; REITs ₹9,300 crore from three issues.
• Net AUM at end-March 2026: REITs ₹2.4 lakh crore; InvITs ₹6.4 lakh crore.

F. Domestic institutional investors (DIIs) vs foreign investors

• DIIs = Indian institutions that invest in the market: MFs, insurers (above all LIC), banks, DFIs (development finance institutions) and pension funds (EPFO, NPS). SEBI's DII group covers banks, DFIs, insurance, MFs and NPS [2].
• FPI (Foreign Portfolio Investor) = a foreigner who buys Indian shares or bonds as a financial investment, without taking control of the company.
• Structural shift ("DIIs have overtaken FPIs, verify current")
• Step 1: FPIs kept selling in 2025-26.
• Step 2: DIIs absorbed that selling with a record cumulative net inflow of ₹8.5 lakh crore, supported mainly by steady MF SIPs [2].
• Step 3: By March 2026, DII equity holdings reached an all-time high of 17%. FPI ownership fell to a 15-year low of 15.8% [2].

• Result: Indian markets depend less on "hot" foreign money. When FPIs pull out, prices fall less sharply.

• Market size: total market capitalisation was ₹411.6 lakh crore (end-March 2026). India remained the world's fifth-largest stock market [2].

• The Nifty 50 hit a record 26,328.6 in early January 2026. It then fell 15.2% from that peak because of Middle East tensions, and ended 2025-26 down 5.1% [2].
• NCERT outdated
• The Class 11 chapter Liberalisation, Privatisation and Globalisation: An Appraisal says "Foreign Institutional Investors (FIIs)", MFs and pension funds were allowed into Indian markets.
• In 2014, FIIs and QFIs (Qualified Foreign Investors) were merged into one FPI regime.
• In current answers, write FPI, not FII.

G. Participatory notes (P-notes / ODIs)

• P-note / ODI (Offshore Derivative Instrument)
• A registered FPI issues this instrument abroad.
• A foreign investor who buys it gets exposure to Indian securities without registering in India.

• The FPI holds the actual Indian shares. The P-note holder gets their returns.

• Concerns

• Round-tripping: Indian black money goes abroad and comes back looking like foreign investment.
• Hidden beneficial owner: the real person who owns and profits from the money cannot be seen.

• The Special Investigation Team (SIT) on black money flagged P-notes.

• SEBI's response

• SEBI curbed P-notes in 2007 and 2017.

• For example, it charged a fee on each instrument and banned P-notes used only for speculation (bets on price changes) in derivatives.

• Trend: P-notes fell from about half of FPI assets (2007) to low single digits (verify current).

H. Alternative Investment Funds (AIFs)

• AIF = a privately pooled fund for sophisticated (rich, experienced) investors, under the SEBI (AIF) Regulations, 2012. It is not a mutual fund.
• Minimum investment: ₹1 crore per investor.

Category	What it does	Examples
Cat I	Invests in areas that are socially or economically desirable; gets some incentives	Venture capital, SME, social impact, infrastructure and angel funds
Cat II	Everything that is not Cat I or III; no borrowing except for day-to-day needs	Private equity, debt funds
Cat III	Complex trading strategies	Hedge-fund strategies using leverage (borrowed money) and derivatives

• Scale
• AIFs grew to 1,829 by March 2026 [2].
• Commitments (money investors have promised) rose 25.6% to ₹16.9 lakh crore, mostly in Category II [2].

• Cumulative net investments reached ₹6.8 lakh crore (March 2026) [2].

• Evergreening curb

• What evergreening means:
  • A bank puts money into an AIF.
  • The AIF lends to or invests in a company that already owes the bank.
  • The company uses this money to repay its old bank loan.
  • The bad loan looks healthy on paper.
• RBI circular, 19 December 2023 [3]:
  • Regulated entities (banks and NBFCs) may not invest in an AIF scheme that has invested, directly or indirectly, in a debtor company of that entity.
  • If the AIF makes such an investment later, the entity must sell its units within 30 days. If it fails, it must make a 100% provision (set aside money equal to the full investment) [3].
  • An investment in subordinated units (units that are paid last) of an AIF scheme with a "priority distribution model" is fully deducted from the entity's capital [3].
• Clarifications followed on 27 March 2024 [3].

I. Hedge funds, private equity, venture capital and angels

• Hedge fund = a lightly regulated pool for rich investors. It uses leverage, short selling (selling borrowed shares, hoping to buy them back cheaper) and derivatives. In India, such strategies fall under Cat III AIFs.
• Private equity (PE) = investment in unlisted firms, or buyouts of listed firms.

• PE cycle: buy a stake → restructure and improve the firm → exit after about 4–7 years through an IPO (initial public offering, the first sale of shares to the public) or a strategic sale to another company.

• Venture capital (VC) = equity money for early-stage, high-risk start-ups.

• Money comes in rounds: seed → Series A → B → C. Each round usually comes at a higher valuation.

• Angel investor = a rich individual who invests their own money in start-ups, often before VCs come in.

• "Angel tax" under s.56(2)(viib)
• Under the Income Tax Act, 1961, if an unlisted start-up raised shares at a price above fair value, the extra amount was taxed as the company's income.

• Budget 2024-25 abolished the angel tax for all classes of investors (announced 23 July 2024) [5].

• Unicorn = a private start-up valued above US$1 billion.

• Decacorn = valued above US$10 billion.
• Soonicorn = close to unicorn status.
• India has the third-largest start-up ecosystem (verify current count).
• SIDBI runs the Fund of Funds for Startups (2016). It does not fund start-ups directly. It invests in SEBI-registered AIFs, which then invest in start-ups. Start-up policy is covered in factors-of-production.

J. Sovereign wealth funds (SWFs)

• SWF = a fund owned by a government. It invests national surpluses (extra money), such as oil income or foreign-exchange reserves, in assets around the world.

• Examples: Norway's GPFG (Government Pension Fund Global), ADIA (Abu Dhabi), GIC (Singapore), PIF (Saudi Arabia).

• Why India has no classic SWF

• A classic SWF needs surplus money to invest.
• India runs a fiscal deficit (the government spends more than it earns) and a current account deficit (India pays the world more than it earns from it).
• India's forex reserves come partly from capital inflows, which are borrowed or invested money, not earned surplus.

• So India has no true surplus to put into an SWF.

• NIIF (National Investment and Infrastructure Fund, 2015) is a quasi-SWF.

• The Government of India holds 49%. Foreign SWFs and pension funds hold the rest.

• It invests in Indian infrastructure.

• Foreign SWFs and pension funds get tax exemptions on their investments in Indian infrastructure.

K. ESG investing

• ESG investing = choosing investments by looking at a company's environmental, social and governance record, as well as its financial returns.
• BRSR (Business Responsibility and Sustainability Report)
• Mandatory for the top 1,000 listed companies from FY23.

• BRSR Core adds a smaller set of key metrics that must be assured (checked by an outside party).

• ESG rating providers are regulated by SEBI since 2023.

• ESG MF schemes exist.
• Risk: greenwashing, which means a fund or company claims to be "green" without real action behind it.

Prelims Hooks

• MF structure: Sponsor → Trust → AMC → Custodian. The AMC manages the money. The custodian holds the securities. AMFI is the industry body, and SEBI is the regulator (MF Regulations 1996).
• NAV = (Assets − Liabilities) ÷ Units outstanding. It is computed daily.
• SIP → rupee-cost averaging. A fixed amount buys more units when NAV is low.
• First ETF: Nifty BeES (2001). Disinvestment ETFs: CPSE ETF (2014) and Bharat 22 (2017). Bharat Bond ETF (2019): PSU bonds. Gold ETF: from 2007.
• REIT/InvIT: SEBI regulations 2014; at least 90% of net distributable cash flow must be paid out. REITs need at least 80% in completed, rent-yielding assets. First REIT: Embassy (2019). First InvIT: IRB (2017). SM REITs: notified March 2024, from ₹50 crore, at least 200 investors [4].
• AIF categories: Cat I = VC, angel, SME, social impact, infrastructure. Cat II = PE, debt. Cat III = hedge funds. Minimum ticket ₹1 crore. Regulations 2012.
• DII holding 17% vs FPI 15.8% (March 2026). FPI ownership is at a 15-year low [2].
• Angel tax was s.56(2)(viib) of the Income Tax Act, 1961. It was abolished for all investor classes in Budget 2024-25 [5].
• Trap: India's NIIF is only a quasi-SWF (GoI holds 49%). India has no classic SWF because of its twin deficits.
• Trap: "FII" is an outdated term. Since 2014 the correct term is FPI. P-notes are ODIs issued by registered FPIs.

Mains Points

• Financialisation of household savings and market stability
• Savings have moved from gold and property into MFs and SIPs. There are now 10.45 crore active SIP accounts, and monthly net SIP flows average ₹16,413 crore (2025-26) [2].
• This steady domestic money let DIIs absorb foreign selling of ₹8.5 lakh crore [2].
• Result: Indian markets are less exposed to "hot money" leaving the country.

• Risk: many first-time retail investors may not be ready for a long period of falling prices. The need for investor education and suitability norms (rules to match a product to the investor's needs) rises.

• REITs/InvITs and asset monetisation

• The government sells completed infrastructure to investors through InvITs, then uses the money for new projects. InvIT AUM stood at ₹6.4 lakh crore (March 2026) [2].

• Trade-offs:

  • The state gives up future toll and transmission income.
  • Valuation must be fair and transparent.
  • Users may face higher user charges (tolls).

• Private capital vs financial stability

• AIFs, PE and VC fund innovation and start-ups. Abolishing the angel tax removed a known irritant [5].

• But AIFs can also be used to hide bad loans. RBI's December 2023 curb (sell within 30 days, or make 100% provision) shows why the RBI (banks) and SEBI (markets) must work together [3].

• Transparency vs capital inflow

• P-notes bring in foreign money but hide the beneficial owner, which creates black-money and round-tripping risks.
• SEBI has tightened disclosure step by step (2007, 2017), trying to keep money flowing in while stopping misuse.
• ESG and BRSR disclosure raise similar questions about greenwashing.