The Scheme: The Thing an Investor Actually Buys Into

A scheme is the individual pool a holder's money is actually inside. One asset manager may run many of them, and each carries a portfolio of its own, books of its own, a value per unit of its own and a charge of its own. The holdings of one scheme cannot be reached to settle what another scheme owes. So the thing bought is a written objective, and a manager working inside it.

One ordinary sentence hides the whole of the problem. Somebody mentions that their savings sit with one particular fund houseLoose everyday speech for the asset management company, which is one firm standing behind a whole range of separate pools., and the sentence sounds like a complete description of where those savings are. The description is not close. A fund house is a company: it signs leases, pays salaries, files accounts and holds a registration. Nobody's savings sit inside a company like that. Savings sit inside a pool the company runs, and the company may be running a great many such pools at the same moment. The name of the firm settles who is at the wheel, and only the name of the scheme settles which vehicle the holder is sitting in.

One manager and two of its pools carry every example below. Girnar Asset Management Limited, an invented asset manager, operates the Girnar Large Cap Equity Fund. The equity scheme is open ended, it holds equities, and it carries net assetsWhat one pool holds after everything it has to pay, which is the figure that gets divided by the units in issue. of Rs 4,200 crore against 120.00 crore units in issue. Divide the first by the second and one unit comes to Rs 35.00 exactly. The equity scheme is held across 3,80,000 foliosThe account number under which one holder's units in one scheme are recorded and transacted.. The average folio is therefore roughly Rs 1,10,526/-, and the scheme carries an expense ratioThe yearly running charge struck against a single pool's own assets, quoted as a percentage of those assets. of 1.65 per cent. The same firm also operates the Girnar Broad Market Index Fund. The second pool follows a broad index and charges 0.20 per cent a year. Kalyani Bhagat manages the equity scheme; Sohail Merchant heads operations.

Three matters are settled elsewhere. The nature of a mutual fund covers what a mutual fund is, along with the reason a pool of this kind sits on nobody's balance sheet at all. The unit, the division that produces the value per unit, and what one buyer's money does to everybody already holding, are covered under the unit and its valuation, so the Rs 35.00 above travels forward as a settled result rather than being derived again. The three companies behind the arrangement are covered under the sponsor, the trustee company and the asset manager. One level sits between all of that and the holder: the scheme itself, the container those units belong to, and the reason a scheme rather than a firm is what anybody genuinely buys into.

What is a scheme, and what exactly is the fund house?

A fund house is a firm and a schemeOne pool of money run to a single written aim, with a portfolio, a set of books and a value per unit belonging to it alone. is a pool, and almost everything here follows from refusing to let those two nouns blur together. Girnar Asset Management Limited is the firm. The firm holds a registration, employs Kalyani Bhagat and Sohail Merchant, rents an office, keeps accounts of its own and is paid a fee for the work. The Girnar Large Cap Equity Fund is a pool. The pool holds securities, carries a value that moves on every working day, and is cut into 120.00 crore units belonging to other people entirely. Not one rupee of any holder's money is inside the firm, and every rupee of it is inside one specific pool the firm runs.

Take an ordinary picture first. A caterer during wedding season may be running four weddings in one week. Each wedding has its own guest list, its own menu, its own budget and its own final bill, and food left over at one is not carried across to another. So when a cousin says the wedding is being done by a well known caterer, that names who is cooking and absolutely nothing about what is being served, what it costs, or who is on the list. Swap the nouns and the structure appears: the caterer is the asset manager, the wedding is the scheme, and the guest is the holder. Naming the caterer names the operator and never names the event.

Four things attach to the scheme instead of attaching to the firm. A reader who can list those four already has the idea, so they are worth counting out one at a time. First, a portfolio of its own: securities held for the equity scheme are held for the equity scheme and for nothing else. Second, a set of books of its own, in which income, expenses, assets and obligations are recorded for that pool alone and audited for that pool alone. Third, a value per unit of its own. For the equity scheme that figure is Rs 35.00, and any other pool would show a different figure entirely, out of a different division. Fourth, a charge of its own, struck against that pool's assets at a rate the pool sets in its own document.

Now put the four beside the questions a holder genuinely has. The point lands there. Where is my money allowed to be put? How much is holding it costing me? How much is one unit worth today? Which aim is this pool actually run to? And what happens to me if that aim is changed? Every one of those five is a scheme question, and not a single one of them can be answered at the level of the firm. The firm's registration, its office, its head of operations and its reputation are all real things, and none of them settles what may be held in the pool a holder's money is in.

What do two schemes under one manager share, and what do they not?

Running several pools at once is the ordinary case rather than an odd one. Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund and the Girnar Broad Market Index Fund side by side, and somebody holding units of the first holds no interest whatsoever in the second. Not a small one. None at all. If the index scheme trebles in size next quarter, nothing whatever happens to a unit of the equity scheme. If the index scheme were wound up tomorrow, an equity scheme holder would receive nothing out of it and would lose nothing to it either. Two schemes run by one manager are neighbours in a building, never members of one household.

Look first at what the two genuinely share. The shared list is long, and it is precisely what misleads people. The same firm runs both. The trustee company holds both in trust. The custodian holds the securities of both. The registrar and transfer agent keeps the folio records of both. The auditor may audit both. The letterhead is identical, the website is identical, and the voice on the telephone belongs to the same operations team under Sohail Merchant. Every item on that list is a shared service. Not one item on it turns two pools into a single pool.

Now the list that differs. The aims differ: one pool runs an equity portfolio to its own stated objectiveThe one written sentence a pool exists to pursue, which fences in everything the manager is afterwards allowed to do., and the other follows a broad index. The charges differ, and by a wide margin: 1.65 per cent a year against 0.20 per cent a year. The value per unit differs. Each comes out of its own division of its own assets by its own units. And then the figures simply stop. Net assets of Rs 4,200 crore and 120.00 crore units are stated for the equity scheme, and neither figure is stated for the index scheme, so no value per unit for the index scheme can be worked out at all. A value per unit has exactly two ingredients, and a pool that supplies neither of them supplies no value per unit.

What does a single expense ratio look like read three ways?

A percentage is a rate, and a rate is not a thing anybody feels. Take the equity scheme's 1.65 per cent and refuse to leave it sitting there as a percentage. Every ratio needs its base spoken aloud in the same breath, and the base here is that one pool's net assets of Rs 4,200 crore. So work it: 1.65 per cent of Rs 4,200 crore comes to Rs 69.30 crore across the year. Written out in whole rupees, that is Rs 69,30,00,000/- leaving that single pool over twelve months. The base is one scheme's assets and the charge is struck against one scheme's assets, so Rs 69.30 crore is a fact about the pool and never about Girnar Asset Management Limited.

The two middle rows land on the identical figure, and the reason for that matters more than the coincidence does. Dividing the yearly charge by the units gives 1.65 per cent of net assets, all divided by units. Taking 1.65 per cent of the value per unit gives 1.65 per cent of net assets divided by units. Both routes are one expression with the multiplying and the dividing swapped round. The two rows are a single identity written out twice rather than two independent confirmations, and treating the match as a confirmation would be learning the wrong lesson. The genuine check is the final row: Rs 0.5775 multiplied back by 120.00 crore units returns Rs 69.30 crore, exactly where the chain began.

Now the third reading, and it is the one that makes the number stop being abstract. A household with Rs 1,00,000/- inside the equity scheme is carrying Rs 1,650/- of that charge across a year. The identical Rs 1,00,000/- inside the index scheme carries Rs 200/-. The difference is Rs 1,450/- a year of daylight on money of identical size, and the two rates stand to each other in a ratio of exactly 8.25 to one. Whether the larger charge buys anything worth having, and how a yearly rate is turned into a daily accrual against the pool, are covered separately. The charge earns its place here for one reason only: it is set at the scheme, it differs between two pools of one firm, and so it cannot possibly be a fact about the firm.

Can one scheme's obligation reach another scheme's property?

No, and the reason is structural rather than a matter of goodwill or house policy. SegregationThe arrangement under which what one pool holds can never be reached to settle what a different pool has to pay. is the rule that whatever one scheme holds cannot be turned to settling what a different scheme has fallen due to pay, and it is worth noticing that the rule runs in both directions at once. The equity scheme cannot reach the index scheme, and the index scheme cannot reach the equity scheme. Segregation is a wall, not a queue, so there is no order of priority in which one pool eventually gets at another. The wall also holds against the firm's own creditors, for a reason already settled under the nature of a mutual fund: the pool does not sit on the firm's balance sheet in the first place, so there is nothing there for a creditor of the firm to take.

The plain version is a building with two tenants. One landlord, one address, one watchman, one electricity meter room. Tenant A falls behind on rent and eventually has to be pursued for it. Nobody pursues tenant B, and nobody dips into tenant B's security deposit to make tenant A's arrears good, however convenient that would be for the landlord. B's deposit is B's. The deposit rule is the whole of segregation, transplanted into a pooled vehicle: one operator, one letterhead, one telephone line, and property that stays firmly attached to the pool it belongs to.

Segregation is easy to hear as something far larger than it is, so the limits of the rule need saying clearly. Segregation walls one pool off from another. The wall is not a statement about what any pool's holdings will do next, and it is not a promise about the value of a unit. A pool whose securities fall in price has lost value inside its own wall, and the wall neither stops that nor was ever built to. The wall makes one question answerable: when a holder asks where the money is exposed, the honest answer is the contents of one pool, never the contents of a whole range. How this separation is enforced, and what a manager and the trustee company must do to keep it intact, is set by the Securities and Exchange Board of India (SEBI) at sebi.gov.in.

What is actually written inside a scheme document?

Every scheme carries a written document of its own, and the first useful thing to understand about it is that it is a contract rather than a brochure. A scheme documentThe written terms of a single pool: what it is for, what it may hold, what it charges, and who does what. is where the pool's terms are set out, and it is the only place where several of them exist at all. Knowing the headings turns a long document into something searchable, and a scheme document is read that way rather than end to end. Seven of those headings do most of the work, and each one exists to settle a question somebody will eventually ask in an unhappy tone of voice.

Here they are with the question attached to each. The objective, settling what one pool exists to do. The list of what may and may not be held, settling whether a particular kind of asset is inside the fence or outside it. How the value per unit is computed, settling where the published figure comes from. The charges and who bears them, settling what comes out of the pool and for what work. How a holder enters and leaves, settling what happens when money goes in or comes out. Who the parties are, settling who does what and who is watching whom. And the route by which the document itself may be altered, settling what it would take to move the fence.

SEBI sets what a scheme document has to contain, in what form and with what disclosure, and requirements of that kind are revised. A requirement copied out and left alone does not merely become dated. It goes on stating a rule that has been replaced, and it looks exactly as confident as it did on the day it was written. The headings are the durable part, and the contents are read at sebi.gov.in on the day they are needed.

What is deliberately missing from a scheme document?

Three things a reader expects to find in there are simply absent, and the absence surprises people every time. The document does not say which securities the pool will buy next month. The document does not say what return the pool will produce. And it does not undertake that Kalyani Bhagat, or anybody in particular, will still be running the pool a year from now. Readers meet that list and conclude the document is thin. The absence is the opposite of thinness: a document that stated any of those three would be stating something nobody could be held to, and a term nobody can be held to is worse than no term at all.

Compare it with a builder's agreement for a flat. The agreement names the carpet area, the specification of the fittings, the completion terms and what happens if the builder misses them. The agreement does not name what the flat will fetch in five years. Everyone understands which parts a builder can be held to and which parts belong to the world, so nobody reads the silence as a gap in the agreement. A scheme document works the same way. Boundaries are testable on any day: the pool's holdings can be set against what the document permits, and the answer comes out clean. A forecast is testable only once, far too late, and against nobody.

There is a second reason the boundaries matter more. The boundaries are what was actually bought. A holder did not buy Kalyani Bhagat, who may move on. The marketing on the cover was not bought either, and wording on a cover can be reworded at will. The holder bought a written aim and a written fence, with a manager working inside both, and those two survive every change of person and every change of mood in the market. When someone asks what they hold, the accurate answer is the objective and the policy of one named scheme.

Does the name of a scheme settle what qualifies?

A name does not, and the point is the one most likely to be got wrong confidently. The words in the Girnar Large Cap Equity Fund are a marketing nameThe label a manager picks for a pool, which is a name on a cover and not a test that anything has to pass.. Girnar Asset Management Limited chose them and printed them on the cover. A name chosen by the party being described is a label, and a label is not a test. The words on the cover were written by the manager, and the meaning of the category word inside them was decided by somebody else entirely.

So where is the meaning decided? SEBI sets what a category label means and what has to be true of a pool before it may wear that label, and the industry classification the label sits inside is published by the Association of Mutual Funds in India (AMFI) at amfiindia.com. A classification of that kind is reviewed and reworded over time. The meaning of the category word in a scheme's name is found at SEBI at sebi.gov.in and in the classification at amfiindia.com, and never in the name itself.

There is a smaller, more useful habit hiding here as well. Where the real question is what a pool may hold, the category word is a detour anyway. The scheme document settles it, at the heading covering what may and may not be held, and that heading is the fence itself rather than the shorthand for it. The name is a signpost written by the party that put the signpost up. The fence is written into the contract.

What moves over a scheme's life, and what barely moves at all?

Four things about a scheme can move, and they move at three completely different speeds. The portfolio moves fastest: holdings can change on any working day the manager decides they should, provided the changes stay inside the objective and inside what the document permits. The size of the pool moves next, and it moves without anybody at the manager deciding anything. The size responds to what holders put in and take out. The manager moves rarely. Kalyani Bhagat runs the equity scheme on this record, and if she were replaced tomorrow, every unit would still be a unit of the same pool with the same aim. The objective and the stated policy barely move at all, and that is not an accident of practice, it is the design.

When the aim of a pool is changed, the change does not happen the way a portfolio change happens. The change goes through a defined processA route laid down by the regulator for altering a stated term, rather than one the manager can design for itself., laid down by the regulator rather than invented by the manager, and part of what that route provides for is holders who did not sign up for the new aim and want to leave rather than stay. The structural point worth carrying away is this: the fence can be moved, but not quietly, not unilaterally, and not without the people inside it being dealt with. SEBI sets what the route requires, what holders are offered and over what period, at sebi.gov.in.

One last figure, handled with the care its basis demands. Across one stated year the Girnar Large Cap Equity Fund returned 13.4 per cent measured value per unit to value per unit, and that is a net figure: the 1.65 per cent had already been taken out of the values the calculation was built on, so nothing is deducted from it afterwards. The attachment of that figure matters. The 13.4 per cent belongs to one pool over one year. The figure says nothing about the index scheme, nothing about Girnar Asset Management Limited, and nothing about any other pool the firm runs. The two pools are measured against different sticks, and one year on one pool settles nothing whatsoever, so the equity scheme's result is set beside no other. Even performance, the figure readers most want to pin on a fund house, turns out on inspection to be a figure that belongs to a scheme.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.