NISM - Series -

MUTUAL FUND Distributors Certification

Examination – Nov 2011
 Index

Day 1

Part 1

1. Concept and Role of Mutual Funds

2. Fund Structure and Constituents
3. Legal and Regulatory Environment

Part 2

4. Offer Document
5. Fund Distribution and Channel Management Practices
7. Investor Services
8. Return,Risk & Performance of Funds
 Chapter 1

CONCEPT AND ROLE

OF MUTUAL FUNDS
 What is a Mutual Fund ?

It is a pool of money, collected from

investors, and is invested according to
certain investment objectives
The ownership of the fund is thus joint
or mutual, the fund belongs to all
investors.
A mutual funds business is to invest
the funds collected, according to the
wishes of the investors who created
the pool.
 Role Of Mutual Fund

Primary Role is to assist investor in earning an income or

building their wealth by participating in opportunities available
in various security market.

Money that is raised from investors ultimately benefits

Governments, companies or other entities directly or indirectly.

It is possible for mutual funds to structure a scheme for any k

of investment objective.

Mutual Funds are therefore viewed as a key participant in the

capital Market of any economy.
 Why Mutual Fund

• Mutual Fund seek to mobilize money from all possible investors

as per their investment preferences.

• In order to accommodate different preferences mutual fund mo

Different pool of money.

• Each pool is called mutual Fund scheme.

• Every Scheme has a pre-announced investment objective.

When investor invest in mutual Fund they are effectively buying
into its investment objective.
 Important characteristics of a Mutual Fund
 The ownership is in the hands of the investors (Unit holders)who have
pooled in their funds so ownership is joint or mutual.
 It is managed by a team of investment professionals & service providers.
• The investors share is denominated by ‘units’ whose value is called as Net
Asset Value (NAV) which changes everyday.
• The investment portfolio is created according to the stated investment
objectives of the fund.
• In India, Mutual Funds are constituted as TRUST.
• Standard Risk factors are common for all Mutual Funds.
• Unaudited accounts must be published every 3 months.
• Mutual Funds are not allowed to invest in Art in india.
 Advantages & Limitations of Mutual Funds

Advantage of a Mutual Funds Limitation of a Mutual Funds

Portfolio diversification Lack of Customisation
Professional Management Choice Overload
Economies of Scale Issue relating to management
Reduction in Risk of portfolio of Mutual Funds
Liquidity No control over costs
Tax Deferral
Tax benefits
Convenience and Flexibility
Regulatory Comfort
Systematic Approach to
investment
 Basic Classifications Mutual Funds

Mutual Funds in India are basically classified according to Investment

objective & structure
 Basic Classifications Mutual Funds

Interval Funds

 Combine features of both open-ended and close ended schemes.

 They are largely close-ended, becomes open ended at pre- specified

intervals.

 If it is half yearly interval fund then it will open between 1 to 15th Jan,
& 1 to15 July,each year.

 The benefit for investors is they are not completely dependent on the
exchange.
Mutual Fund Classifications – As Fund Management
 Types of Funds - By Investment Objective

• Equity : E.g. Diversifed equity fund, Index fund,

Sector fund, Arbitrage fund, ELSS, Dividend yield
Schemes.

• Debt: E.g. GILT fund, FMP, Junk bond fund, Liquid

schemes

• Hybrid: E.g. MIP, Capital Protection Fund.

 Types of Equity Funds (A Risky asset class)

 Aggressive Growth Funds (Targets maximum capital

appreciation.)
 Growth Funds (Capital appreciation over 3 to 5 years at above
average rate.)

 Speciality Funds
Sector Funds (Bank, Power, Pharma, IT, Telecom)
Foreign Securities Fund
Mid cap or Small cap Equity funds

 Diversified Equity Funds (Do not focus on any one or few sectors
or shares)
 Equity Index Funds (These funds take only the overall market risk)
 Value Funds (Invests in the companies whose shares are
under-priced)
 Equity Income or Dividend yield funds
(Invests in the shares of the companies with high dividend yield.)
 ELSS ( Equity Linked Saving Scheme )

• 3 year lock in period

• Minimum investment of 90% in equity markets at all times

• So ELSS investment automatically leads to investment in equity shares.

• Eligible under Section 80 C up to Rs.1 lakh allowed

• Dividends are tax free.

• Benefit of Long term Capital gain taxation.

 Arbitrage Funds

Take contrary positions in different markets / securities, such that

the risk is neutralized, but a return is earned.

For instance, by buying a share in BSE, and simultaneously selling

the same share in the NSE at a higher price.

Most arbitrage funds take contrary positions between the equity

market and the futures and options market.
Comparison of Equity Funds
 Debt Funds

Schemes with an objective that limits them to investments in debt

securities like Government Securities, Bonds and Debentures are called
debt funds.

By investing in such instruments, these funds ensure low risk and provide
stable income to the investors. They are classified as :-

Gilt funds
Invest in only government securities, with Zero credit risk.

Diversified debt funds

Invest in a mix of government & non-government debt securities.

Junk bond Schemes or High yield schemes

Invest in companies with poor credit.
 Debt Funds

Fixed maturity plans (FMP)

In such debt funds where the investment portfolio is closely aligned to
the maturity of the scheme.

Floating rate funds

Invests in floating rate debt securities where the interest rate payable
by issuer changes in line with the market.
NAV`s of such schemes fluctuate lesser than debt funds that invest
more in debt securities offering a fixed rate of interest.

Liquid schemes ormoney market schemes

Invest only in money market securities that matures within 91-days.
They are the lowest in risk among all kinds of mutual fund schemes.
 Hybrid funds

Monthly Income Plan

 Seeks to declare a dividend every month.

 invests largely in debt securities. & Small percentage in equity shares to

improve the scheme’s yield.

Capital Protected Schemes

 They are close-ended schemes,

 They are structured to ensure that investors get their principal back,

irrespective of market conditions.

 Mainly invests in Zero coupon govt securities whose maturity is aligned

with scheme's maturity & part amount will be invested in equity

instruments.
Comparison of Debt Funds
 Other types of funds

Gold Exchange Traded Fund,

 They are like an index fund that invests in gold.

 NAV of such funds moves in line with gold prices in the market.

Gold Sector Funds

 They are like an equity sectors funds which invests mainly in Gold mining
companies. The prices of these shares are more closely linked to the
profitability and gold reserves of the companies.
 NAV of these funds do not closely mirror gold prices.

Real Estate Funds

 These funds make it possible for small investors to take exposure to real
estate as an asset class.
 Although permitted by law, such mf are yet to hit the market in India.
 Other types of Funds

Commodities Funds
 Such funds Invest in shares of Companies that are in to commodities

Like Gold sector funds, Commodity Sector Funds etc.

International funds
 Invest outside the country the Common practice is tie up with a foreign
fund.
 In such case a feeder fund will be launched & will subsequently invest
into the host fund of the foreign fund house.
 There is an element of foreign currency risk.

Fund of funds (FOF)

 Such funds invest in various other funds, whether in India or abroad.
 They are designed to help investors get over the trouble of choosing
between Multiple schemes and their variants in the market.
 Expense Ratio of the fund of fund is usually higher then normal mutual
fund scheme.
 International Fund

These are the funds that invests outside the country. For Ex. MF may offer
scheme to investor in India with an investment Objective to invest abroad.

One way for the fund to manage the investment is to hire the requisite
People who will manage the fund. Their salaries would add to the
fixed costs of managing the fund.

Alternative Route would be to tie up with a foreign fund (Host Fund)

For Ex. If an MF sees potential in china it will tie up with Chinese fund
Investors in India will invest in feeder fund. The money collected in such
Fund would invest in the host fund.

Thus when Chinese market does well host fund do well & Feeder Fund in
India will follow suit.
 Exchange Traded Funds

An open ended Index funds that are traded on stock exchange.
A feature of open ended funds which allows investor to buy & sell units
from MF scheme. Such feature is allowed only to very large investors in
an ETF.
Other investor have to buy & sell on Exchange platform.
A baskets of securities that are traded, like individual stocks, on an
exchange.
ETF`s can be bought and sold throughout the trading day like any stock.
One must pay a brokerage to stock broker to buy & sell ETF units.
ETF is exempted from wealth Tax
ETF is eligible for LTCG after 1 year as compare 3 yr in physical gold.
 Very Important Points

An Open Ended Fund offers repurchase facility unconditionally at all times
(But It is not obliged to keep selling new units at all times). Unit capital is
variable.

The Unit Capital of a closed Ended Fund is fixed. Also the number of units
are also fixed.

Each unit holder of a mutual Fund is part owner of the AUM of that Mutual
fund ( he is not a creditor, not a debtor and not a trustee of that mutual
fund).
Transfer of Security from one scheme to another scheme is allowed at
Market price.

Units from an Open Ended fund are bought from the Fund Itself ( not from
the stock exchange, distributors or the banks)
 Very Important Points
The Liquidity needs of an investor are met through Money Market Funds.
A retired person generally needs a greater proportion of Debt Funds.
A young investor, for growth and wealth creation, should be advised to
invest in Equity Growth Funds.
An Equity Fund can be said to be concentrated when Top 10 holdings
account for more than 50% of net assets invested.
A steady holdings of investments in an equity fund’s portfolio indicates
both Long Term orientation and Lower Transaction Costs.
Unit is always issued at 10Rs at NFO ( New Fund Offer )
 Very Important Points – Debt Funds

 Debt Schemes are popular because the returns are more predictable.
Equity returns are volatile and very less predictable.
 Gilt fund invests only in treasury bills and government securities
 Junk Bond funds / High yield debt funds invests in companies with poor
credit.
Money market funds/liquid funds invests only in the securities with
maturity lesser than 91 days.
 Longer the average duration of debt fund portfolio, greater the interest rate
risk.
 Running a Money Market Mutual Fund requires more of Trading Skills.

 The investors should invest in Debt Fund with a Higher Rated Portfolio and
Lower Expense Ratio.

 An Ideal money market MF has lower expense Ratio.

 Question for Revision

Q-1 Mutual fund is exempted from Wealth Tax

(a) True
(b) False

Q-2 Mutual fund are constituted in India as…

(a) Companies (b) Trust

(c) Partnership Firm (d) NGO.

Q-3 Gold funds can invest in

(a)Gold (b)Gold futures (c) Shares of gold mines (d) All of the above.

Q-4 Which of the following fund would fall under passive management ?
(a) Diversified Equity Fund (b) Index Fund
(c) Equity Growth Fund (d) all of Above.
 Question for Revision

Q-5 Which one of the following funds does not qualify as a speciality fund?
(a)Pharma Fund (b) Balanced Fund
(c) Small-Cap Fund (d) Emerging Markets Fund

Q-6 After NFO in Open Ended fund transactions can be done by ?

(a) Existing Investors (b) Existing & New Investors
(b) New Investors (d) None of the Above.

Q-7 Compare to Sector Funds Thematic Fund would have a wider choice
for investment ?
(a) True (b) False
Q-8 Close ended fund allows investors to sale their units
(a) By allowing fixed number of Units to sale
(b)By selling number of units in a fixed interval
( c) by listing MF in stock exchange
(d ) Can not sale
Q-9 One of the advantage of ETF is..
(a) Investor can see where his money is invested
(b) These schemes can generate higher returns than mutual fund.
(c) Investors can buy of sell units on stock exchanges at price that
closely track valuation at that time
(d) ETF offer tax benefits.
Q-10 Whats is true about the FMP

(a) NAV does fluctuate

(b) No default Involved
(c ) Returns can be reasonably predicted before the maturity
(d) All of the above
 Answers

Answers:
Q-1 : ( True) , Q-2 : (b), Q-3 : (d),
Q-4 : (b), Q-5 : (b) , Q-6 : (b),
Q-7 : (True) , Q-8 : (c) Q-9 : (c)
Q-10 : (c)
 Chapter 2

FUND STRUCTURE AND

CONSTITUENTS
 Structural Frame Work of Mutual Funds

Sponsor Contributes

(Reliance capital Limited) at least 40%

in the capital

Trustee AMC

Appoints
Rel. Cap. Trustee Co. Ltd. Rel. Cap. Asset. Mgmt. Ltd

Responsible for investors

Fund Marketing &
Management Development
money (Primary Guardian)
Registrar & Custodian*
Banks
*Custodians are appointed by Trustees

Karvy & CAMS

 Regulatory structure of MF in India

The structure of mutual funds in India is governed by SEBI(Mutual Fund)

Regulations, 1996.

It is mandatory to have a three tier structure of Sponsor-

Trustee-Asset Management Company.
Mutual funds are constituted as Trusts.

Operations of the mutual funds are governed by Trust Deed which is

executed by Sponsers.

The Sponsor is the promoter and he appoints the Trustees who are
responsible to the investors of the fund.

AMC is the business face of the mutual fund as it manages all the affairs
of the fund
 How are Mutual Funds Structured
 In India Mutual fund is the form of a Public Trust created under the Indian
trust Act 1882.

 The fund sponsor acts as the Settler of trust, contributes the initial capital
and appoints the trustees to hold the trust for the benefit of the unit
holders.

 Mutual fund is just a “pass-through vehicle”

 In India, Mutual funds are organized as trusts. The trust is either managed
by a Board of Trustees, or by a trustee company.

 The trustees hold the unit holders money in a fiduciary capacity. (Money
belongs to unit holders)

 In legal sense, the investors are the beneficial owners of investments.

 Sponsor

 The sponsor is a promoter of the mutual fund.

 Sponsor appoints the Trustees, the AMC and custodians with prior.
approval of SEBI and in accordance with SEBI Regulations.

 Sponsor must have a 5-year track record in the financial Services business.

 Must have positive Networth for each of above 5 years.

 Sponsor must have been profit making in at least 3 of the above 5 years
including latest year.

 Sponsor must contribute at least 40% of the share holding of the AMC.

 Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution

(Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)
 Trustee

Independent Trustees are appointed by the sponsor with prior approval of

SEBI.

The role of the trustee is to safeguard the interest of the investor of the fund.

The trustee make sure that the fund are invested as per the investment
objective.

There must be at least 4 members in the Board of Trustees and at least 2/3
of the members of the board of trustees must be independent.

Trustee of one mutual fund can not be a trustee of another mutual fund.

All major decisions are taken by trustee.

 Rights & Obligations of trustees

Rights :-

Trustees appoint the AMC, consultation with the sponsor according to SEBI.
All Schemes floated by the AMC have to be approved by the Trustees.
Trustees can seek remedial actions from AMC & in cases dismiss the AMC
Obligations :-
Trustees must ensure due diligence on the part of AMC in the appointment
of constituents and business associates
Trustees must furnish to the SEBI, on half yearly basis a report on the
activities of the AMC
Trustees must ensure compliance with SEBI regulations

The meeting of the trustees should be held at least once in every 2 months.
 Asset Management Company

Carries out Day to day operations of asset management

Must be registered with SEBI
Prior approval of SEBI is required before any person is appointed as
Director on the board of the company.
AMC gets fees for fund management.
AMC must have a minimum net worth of Rs. 10 Cr., at all times
AMC can not invest in its own scheme unless intention is disclosed in the
Offer document. Can not charge any fees for such investments.
At least 50% of the members of the Board of an AMC, have to be
independent

The agreement between the Trustees and the AMC is known as

“Investment Management Agreement”.
 AMC key Persons
Chief Investment Officer is responsible for overall investments of the
fund. Fund manager reports to CIO
Securities Dealers help in putting transactions through in the market
Chief marketing officer is responsible for mobilizing money under the
various scheme.
Chief Operations officer handles all operational issues.
Compliance Officer needs to ensure all legal compliance. He signs
Due–Diligence certificate to the effect that all regulations have been
complied with.
 Functions of the Custodians

Custodian has custody of the assets of the fund. Custodian is required to

be registered with SEBI

Custodian is appointed by the Board of Trustees

Collect dividends and investment payments due on the mutual funds

investment

The custodian and sponsor cannot be the same entity

 The custodian is the guardian of the funds and assets of investors

 Registrar and Transfer Agents

They are responsible for issuing and redeeming units of the Mutual Fund.
Their other services include.

Process investor applications, Record details of Investors

Send information to Investors, Process dividend payouts.

Incorporate changes in investor information

RTA is appointed by AMC

AMC can do RTA operations IN HOUSE

Also do the collection & payments on behalf of fund.

Example Karvy and CAMS

 Other's important authorities

Auditors : -
 Auditors are responsible for the audit of accounts.
 The auditor appointed to audit the scheme accounts needs to be
different from the auditor of the AMC.
 While the scheme auditor is appointed by the Trustees AMC auditors
appointed by AMC.
Fund Accountants : -
 Fund accountants calculate the NAV

 AMC can either handle this activity in house or can hire the agency.
 Other's important authorities

Distributors :-
They play a key role in selling suitable types of units to their clients.

Distributors needs to PASS necessary certification and get registered with

AMFI.
Collecting Bankers :-

The Investors Money go into bank account of the scheme they have invested
in. These banks accounts are maintained with collection bankers who are
appointed by AMC.
 Important Points

The appointment of AMC can be terminated by Majority of directors or

trustees.
A sponsor of a mutual fund can act as the distributor of the Mutual fund.
The sponsor can be compared as promoter of a company
Sponsor can contribute to the initial corpus of the trust.
Sponsor can not act as Trustee , Custodian of the Mutual Fund.
Securities of the fund are handled by custodian
 Questions for Revision

Q-1 The appointments of fund distributors are made by

(a)Transfer Agents (b)Fund Sponsor (c)Trustees (d) AMC

Q-2 ______ has been appointed by Trustee

(a) custodian (b) R&T

(c) distributor (d) None of the above
Q-3 Between whom the Trust deed is executed.
(a) Trustee & Sponser (b) Trustee and custodian
(c) trustee and AMC (d) AMC & Sponser
Q-4 Minimum Net worth needed by AMC ?
(a) 10Cr (b) 15 Cr (c) 20Cr (d) 5Cr.
Q-5 Approval of SEBI is needed to appoint a person as Trustee
(a) True (b) False
Q-6 Mutual Fund sponsor can be compared to
(a) Depositor of a company (b) Company director
(c) Promoter of Company (d) CEO of a company
Q-7 SEBI regulates
(a) Mutual funds (b) RTA
(c) Depositories (d) All of the above
Q-8 The asset management company shall confirm that a due diligence
certificate is signed by the Compliance Officer
(a) True (b) False
Q-9 Which function AMC can't do in house
(a) Custodian (b) accounting
(c) fund management (d) distribution
Q-10 Who Appoints the AMC
(a) Custodian (b) R& T
(c) Trustee (d) Distributors
 Answers

Answers:
Q-1 : (d), Q-2 : (a), Q-3 : (a), Q-4 : (a) Q-5 : (a)
Q-6 : (c), Q-7 : (d), Q-8 : (a), Q-9 : (a) Q-10 : (c)
 Chapter 3

LEGAL AND REGULATORY ENVIRONMENT

 Regulating Agencies of Mutual Fund

Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996

SEBI regulates all funds, except offshore funds i.e. those schemes
offered in a foreign country

Bank-sponsored mutual funds were jointly regulated by SEBI and RBI

Subsequently it has been clarified that all MFs being primarily capital
market players,regulatory come under the umbrella of SEBI.

Mutual funds need to comply with regulations of exchange and RBI but
regulated only by SEBI.

RBI regulates the money and government securities market where the
mutual funds invest. But not the MMMF.
 Regulating Agencies of Mutual Fund

 Liquid funds which invest in money market instruments are now governed
by SEBI alone. ( MMMF are now regulated by SEBI). But they need to
comply with RBI's regulations.

 The finance ministry is the supervisor of both the RBI and SEBI.

 Aggrieved parties can make appeals to the Ministry of finance on the SEBI
rulings relating to mutual funds.
 Self regulatory organizations (SRO’s)

 In developed Countries it is common for market players to Create

SRO, Whose prime responsibility is to regulate the their own
members

 Where ever SRO exits statutory regulatory bodies lays down the broad
policy framework and leave micro regulation to the SRO.

 SRO are the second-tier in the regulatory structure & gets their powers
from the apex regulating agency and act on their instructions

 SRO facilitate decentralization in the regulatory structure.

 For Instance – BSE , NSE

 What are the objectives of AMFI ?

 AMFI is an industry association, incorporated in 1995, is not an SRO,

so it can just issue guidelines to members. It cannot enforce regulations.
 To Define & Maintain high professional , ethical standards in all areas of
operation in MF Industry.
 To recommend best business practice and code of conduct to be
followed by the members and other engaged in various activities.
 To interact with the Securities and Exchange Board of India (SEBI) and
represent to SEBI on all matters concerning the mutual fund industry.
 To represent to the Government, Reserve Bank of India and other
bodies on all matters relating to the Mutual Fund Industry.
 To develop a cadre of well trained agent distributors.
 To Undertake nationwide investor awareness programme to promote
better understanding of the concept & working of mutual funds
 AMFI code of ethics (ACE)

 AMFI Code of Ethics sets out the standards of

 Good practices to be followed by the AMC in their operations and in

their dealings with investors , intermediaries and the public.

 SEBI Regulation 1996 requires all the AMC and trustees to abide by
the code of conduct.
 AMFI code of ethics (ACE)

Integrity

Members in business shall observe the high standard of integrity and

fairness in all the dealing done by them.

Mutual Fund Scheme shall be organized & Managed and their

portfolios of securities selection should be in the interest of all classes of
unit holder and not in the interest of any associates.
 AMFI code of ethics (ACE)

Due Diligence
 Members in the conduct of their Asset Management Business shall
at all times Render high standard of service, Exercise due diligence,
Exercise independent professional judgement.

Member shall have and employ effectively adequately resources and

procedures which are needed for the conduct of Asset Management
activity

Disclosures
Member shall ensure timely dissemination to all unit holder of adequate,
accurate, and explicit information presented in a simple language about
the investment objectives, investment policies, financial positions and
general affairs of the scheme.
 AMFI code of ethics (ACE)

Professional Selling Practice

Member shall not use any unethical means to sell,market or induce any
investors to buy their products and scheme.

Investment Practice
Members shall manage all the schemes in accordance with the
Fundamental investment objectives and investment policies stated
In the offer documents and take investment decisions solely in the
Interest of the unit holders.

Members shall not knowingly buy or sell securities for any of their
schemes from or to Any director, officer, or employee of the member.
 AMFI code of ethics (ACE)

Operations
 Members shall avoid conflicts of interest in managing the affairs of the
schemes and shall keep the interest of all unit holders.
 Members or any of their directors, officers or employees shall not indulge
in front running.

Reporting Practices
 Members shall follow comparable and standardized valuation policies in
accordance with the SEBI Mutual Fund Regulations.

Unfair Competition
 Members shall not make any statement or become privy to any act,
practice or competition, which is likely to be harmful to the interests of
other Members or is likely to place other Members in a disadvantageous
position in relation to a market player or investors.
 AMFI code of ethics (ACE)

Observance Of Statutes, Rules And Regulations

 Members shall abide by the letter and spirit of the provisions of the
Statutes, Rules and Regulations which may be applicable & relevant to
the activities carried on by the Members.

Enforcement
Members shall:
 Widely circulate the AMFI Code to all persons and entities covered by it
 Make observance of the Code a condition of employment
 Require that each officer and employee of the Member sign a statement
that he/she has received and read a copy of the Code
 Establish internal controls and compliance mechanisms, including
assigning supervisory responsibility.
 AMFI code of ethics (ACE) - Summary

AMFI code of ethics broadly deals with:

 Integrity
 Due diligence
 Disclosures
 Professional selling practices
 Investment practices
 Operations
 Reporting practices
 Unfair competition
 Observation of statutes, rules and regulations
 Enforcement
 Definitions like AMFI, Member, Trustee, Trustee company
etc.
 AMFI guidelines & norms for intermediaries (AGNI)

 Take necessary steps to ensure that the clients’ interest is protected.

 Adhere to SEBI Mutual Fund Regulations and guidelines issued from time
to time related to selling, distribution and advertising practices.
 Be fully conversant with the key provisions of the Scheme Information
Document (SID), Statement of Additional Information (SAI) and Key
Information Memorandum (KIM) as well as the operational requirements
of various schemes
 Highlight risk factors of each scheme, avoid misrepresentation and
exaggeration and urge investors to go through SID/KIM before deciding to
make investments.
 Disclose to the investors all material information including all the
commissions (in the form of trail or any other mode) received for the
different competing schemes of various Mutual Funds from amongst
which the scheme is being recommended to the investors.
 AMFI guidelines & norms for intermediaries (AGNI)

Abstain from indicating or assuring returns in any type of scheme, unless

the SID is explicit in this regard.
Maintain confidentiality of all investor deals and transactions.
When marketing various schemes, remember that a client’s interest and
suitability to their financial needs is paramount.
Intermediaries will not rebate commissions back to investors and avoid
attracting clients through temptation of rebates / gifts etc.
A focus on financial planning and advisory services ensure correct selling,
and also reduces the trend towards investors asking for pass back of
commission.
All employees engaged in sales and marketing should obtain AMFI (NISM
Series-V-A: Mutual Fund Distributors Certification Examination)
 Investment Objective

This defines the broad investment charter of scheme.

For Ex :
The objective of a diversified equity scheme might read as

“ To generate Capital appreciation from a portfolio of predominantly

equity related securities.”

The objective of a diversified the debt scheme could be :

“ To generate income by investing predominantly in a wide range of

debt & money market securities.
 Investment Policy

The Policy describes in a greater details, kind of portfolio that will

be maintained. Such as below.

“The portfolio will generally comprise of equity & equity related

instruments of around 30 companies, which may go upto 30
Companies.”

OR

“More than 50% will be invested in equity & equity related

securities. The rest would be in debt & money market securities.”
 Investment Strategy

Investment Strategy goes into much details of a MF Scheme

such as

Should we increase the liquidity component in a scheme.

Should we go overweight on the steel sector.

Investment objective & investment policy are part of the OD. But
investment strategy is decided more frequently.

Many AMC have a practice where every morning the senior

management discuss the need for a change in their strategy.
 Investors Rights & Obligations

Service Standards Mandated for a Mutual Fund towards its Investors:

 Schemes, other than ELSS, need to allot units or refund moneys within 5
business days of closure of the NFO.
 Open-ended schemes, other than ELSS, have to re-open for ongoing

sale / re-purchase within 5 business days of allotment.

 Statement of accounts are to be sent to investors as follows:

 NFO - within 5 business days of closure of the NFO.

 Post-NFO investment – within 10 working days of the investment.

 Ongoing Investments – Once in quarter end of calender year with in 10

working days.
 Request by investor - With in 5 working days with out charges.
 Investors Rights & Obligations

Investor can ask for a Unit Certificate for his Unit Holding. AMC is bound
to issue unit certificates within 30 days of receipts of request.
NAV has to be published daily, in at least 2 newspapers
NAV, Sale Price and Re-purchase Price is to be updated in the website of
AMFI and the mutual fund by 9 pm.
In case of Fund of Funds, by 10 am the following day
The investor/s can appoint up to 3 nominees, .
The investor has a right to pledge the units held.
Dividend warrants have to be dispatched to investors within 30 days of
declaration of the dividend
Redemption / re-purchase cheque would need to be dispatched to
investors within 10 working days from the date of receipt of transaction
request.
 Investors Rights & Obligations

Unit-holders have proportionate right to the beneficial ownership of the

assets of the scheme.

Investors can choose to change their distributor or go direct. In such cases,

AMCs will need to comply, without insisting on any kind of NOC from the
existing distributor.

Investors can choose to hold the Units in dematerialized form.

In the case of unit-holding in demat form, the demat statement given by
the Depository Participant would be treated as compliance with the
requirement of Statement of Account.
 Investors Rights & Obligations

 The mutual fund has to publish a complete statement of the scheme

portfolio and the unaudited financial results, within 1 month from the
close of each half year.
Advertisement need to publish in one National English & regional
language of the region where the HQ of the mutual fund is situated.
Debt-oriented, close-ended / interval, schemes /plans need to disclose
their portfolio in their website every month, by the 3rd working day of
the succeeding month.
Unit-holders can inspect key documents such as the Trust Deed,
Investment Management Agreement, Custodial Services Agreement,
R&T agent agreement and Memorandum & Articles of Association of
the AMC.
 Investors Rights & Obligations

Scheme-wise Annual Report, or an abridged summary has to be mailed to

all unit- holders within 6 months of the close of the financial year.

The offer document has details of the number of complaints received and
their disposal. Pending investor complaints can be a ground for SEBI to
refuse permission to the AMC to launch new schemes.

The trustees / AMC cannot make any change in the fundamental attributes
of a scheme, unless a written communication is sent to each Unit-holder,
and an advertisement should be published in news papers (english &
regional).

An option of exit would be give to unit holders with out any exit load.
with in 30 days.
 Investors Rights & Obligations

Appointment / Termination of an AMC -

A majority of the trustees or by 75% of the Unit-holders (in practice, Unit-
holding) of the Scheme.

The Winding of a Scheme -

Only after 75% of the Unit-holders (in practice, Unit-holding) pass a
resolution to wind-up a scheme.

The Trustees are bound to obtain consent of the Unit-holders:

Whenever required to do so by SEBI, in the interest of the Unit-holders
Whenever required to do so by 75% of the Unit-holders
(in practice, Unit-holding) of the scheme.
When the trustees decide to wind-up or prematurely redeem the scheme
If an investor feels that the trustees have not fulfilled their obligations,
then he can file a suit against the trustees for breach of trust.
 Limitations to Investors right

Investors cannot sue the trust as they are not distinct from the trust

Investors cannot lodge complaints against the trustees

(with the Registrar of Public Trusts) or the AMC (with the CLB).

Investors can lodge complaints with SEBI for non-compliance.

Investors cannot be compensated if the performance of the fund is

below expectations.

There are no legal remedies available for a prospective investor.

The principle ofcaveat emptor (let the buyer beware) applies to mutual
fund investments. So, the unit-holder cannot seek legal protection on the
grounds of not being aware.
 Unclaimed Amounts

 The mutual fund has to deploy unclaimed dividend & redemption amounts
in the money market.
 AMC can recover investment management and advisory fees at maximum

rate of 0.50% p.a.

 Recovery of such unclaimed amounts by the investors is as follows:

 If the investor claims the money within 3 years, then payment is based on

prevailing NAV i.e. after adding the income earned on the unclaimed money.
 If the investor claims the money after 3 years, then payment is based on

the NAV at the end of 3 years

 AMC is expected to make a continuous effort to remind the investors

through letters to claim their dues.

 The Annual Report has to mention the unclaimed amount and the number

of such investors for each scheme.

 Proceeds of liquid Securities

It is possible that any security was treated as wholly or partly non-

recoverable at the time of maturity or winding up of a scheme.

The security may subsequently yield a higher amount to the scheme.

In such cases treatment of excess is as follows :-

 If amounts are substantial & recovered within 2 years, then the amount
is to be paid to old investors.

 In other cases the amount is to transferred to the investor education

funds maintained by each mutual fund.
 Can mutual Fund Scheme go burst ?

 The structural requirements ensures that the investor is fully protected

from most of the contingencies that can be envisaged.

 While AMC Manages the investments of the scheme, the assets of the
scheme are held by the custodian.

 AMC & Custodian operates under the overall control of the trustees.

 Such arrangement of checks & balances protects the investors from

misappropriation of funds, fraud etc.

 If sponsor wishes to move out of business they needs to bring in some

other sponsor acceptable to SEBI.
 Important Points

SEBI entertains the complaints against MF and intervenes with fund

managements to help the investor.
SEBI requires that sponsors of a new scheme should appoint a compliance
officer who must issue a Due Diligence Certificate to the effect that all
regulations have been complied with by the fund and sponsors.
Mutual fund has to deploy unclaimed dividend and redemption amount in
money market, where they can charge .50% as investment management
and advisory fees.
Unit holders have right to timely service, right to information, right to
approve changes in fundamental attributes, right to wind up a scheme,
right to terminate the AMC.
3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of the
Trust Deed.
Investors money is not protected by the Companies Act.
PAN and KYC are compulsory for mutual funds investments except
Micro-SIPs.
 Questions for Revision

Q-1. Bank owned mutual funds are regulated by

(a) RBI and SEBI (b) Respective parent banks (c) RBI (d) SEBI
Q-2. AGNI IS

(a) Code of Conduct For Intermediaries (b) Terms &

Conditions (c) Rules & Regulations (d) Non of the above
Q-3 Payment of redemption is delayed then what % Interest has to be paid by
AMC ?
(a) 10% (b)20% (c)9% (d) 15%

Q-4 Although AGNI is mandated. there are no penalties for

breach of code of conduct.
(a) True (b) False
Q-5 The distributor can charge fees from the Investor
(a) True (b) False
Q-6 In case of breach of Code of conduct license is canceled by-
(a) AMFI (b) SEBI (c) Sponsor (d) AMC
Q-7 Which is prohibited in AMC's Code of ethics
(a) Inter scheme transfer (b) Front Running
(c) Security transaction through associated broker
(d) Distributor of MF through AMC
Q-8 Which of the following are self regulatory organization(SRO)
(a) BSE (b) SEBI (c) RBI (d) AMFI
Q-9 Which of the following is not government saving scheme?
(a) Infrastructure bonds (b) RBI bonds (c) KVP (d) POST
Q-10 If complaint of an investor is not solved by AMC, investor has to
complain to
(a) SEBI (b) Trustees (c) Sponser (d) R & T
 Answers

Answers: Q-1 : (d), Q-2 : (a), Q-3 : (d), Q-4 : (a) Q-5 : (a)
Q-6 : (a), Q-7 : (b), Q-8 : (a), Q-9 : (a) Q-10 : (a)
 Chapter 4

OFFER DOCUMENT
 New Fund Offer

• Units of mutual fund are offered to investors for the first time through a NFO.
• AMC decide the scheme to take to the market.
• AMC prepares offer Document for the NFO. This needs to be approved by the
trustees.
• The documents are to be filed with SEBI.
• SEBI does not approve / Disapprove the OD it given only the observation.
• Any observation made by SEBI needs to be incorporated in OD.
• AMC decides the suitable time for launch.
 New Fund Offer

AMC holds events for intermediaries and press to make them

familiar with the scheme.

Finally offer documents and Application forms are distributed to

market intermediaries for investor to apply.

There are 3 Relevant dates related to NFO

NFO Open date

NFO Close Date
Scheme Reopening Date
Under SEBI guidelines, NFOs other ELSS can remain open for
maximum 15 days.
 The Offer Document

 Offer Document is the most important source of information about

mutual fund scheme for investors
 OD is the Operating Document and describes the product.
 Mutual fund offer document is divided into 2 parts,
 Scheme information document (SID) & Statement of additional
information (SAI).
 SID comprises of details of the scheme while SAI deals with statutory
information about the mutual fund that is offering scheme.
 Both documents are prepared in the format as prescribed by SEBI.
 The Offer Document

 Investors are required to read and understand the OD.

 Investors sign the form stating that they have read the OD.

 No recourse is available to investors for not reading the OD or KIM

 The OD is issued by the AMC on behalf of the trustees

 The AMC is responsible for the information in the OD

 Contents of SID

Cover Page has the name of the scheme followed by its type

 Open-ended / Close ended / Interval

 Equity / Balanced / Income / Debt / Liquid / ETF
Finally the cover page has the following standard clauses.
 Table of Contents
 Highlights
 Introduction - Risk Factors
 Standard
 Scheme-specific - Minimum no. of investors in scheme, Definitions,
Due
Diligence Certificate (issued by the AMC)
 Information about the scheme - Units & Offer, Fees & Expenses ,Rights
&
Penalties Unit-holders, Litigation etc.
 Updation of SID

 If a scheme is launched in the first 6 months of the financial year (say,

April 2010), then the first update of the SID is due within 3 months of the
end of the financial year (i.e. by June 2011).

 If a scheme is launched in the second 6 months of the financial year (say,

October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).

 Thereafter, SID is to be updated every year.

 Contents of SID – Other changes

In case of change in fundamental attributes SID has to be updated

immediately after the lapse of time period given to existing investors to exit
the scheme.

It will be printed on a separate piece of paper (addendum) and

distributed along with the SID, until the SID is updated.

If a change is superseded by a further change (for instance, change in

load), then addenda is not required for the superseded change i.e.
addenda is only required to disclose the latest position.

The change is to be advertised in an English newspaper having nation-

wide circulation, and in a newspaper of the language of the region where
the head office of the mutual fund is located.

The change is to be mentioned in the website of the mutual Fund.

 Contents of SAI

 Information about Sponsors, AMC & Trustee ,shareholding pattern,

responsibilities, names of directors and their contact information.

 profiles of key personnel, and contact information of service providers

(Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant
(if outsourced) and Collecting Bankers)

 Condensed financial information (for schemes launched in last 3 financial

years)
 How to apply
 Rights of Unit-holders
 Investment Valuation Norms

 Tax,Legal & General Information (including investor grievance Redressal

mechanism of past 3 years.)
 Update of SAI

 Regular update is to be done by the end of 3 months of every financial

year.

 Material changes have to be updated on an ongoing basis and

uploaded on the websites of the mutual fund and AMFI.
 Contents of KIM
KIM is a summary of the SID and SAI. As per SEBI regulations, every
application form is to be accompanied by the KIM.

 Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
 Dates of Opening /Closing Issue & Re-opening for Sale & Re-purchase
 Plans and Options under the scheme
 Risk Profile of Scheme
 Price at which Units are being issued and minimum amount / units for
initial purchase, additional purchase and re-purchase
 Bench Mark , Dividend Policy
 Performance of scheme and benchmark over last 1 year, 3 years, 5 years
and since inception.
 Loads and expenses and Tax Treatment for the investors
 Contact information of Registrar for taking up investor grievances
 Update of KIM

KIM is to be updated at least once a year.

As in the case of SID, KIM is to be revised in the case of change in

fundamental attributes. Other changes can be disclosed through
addenda attached to the KIM.
 Standard risk factors

Mutual fund and securities are subject to market risk and there is no
assurance that the objective will be achieved

NAV of units issued under the scheme can go up or down depending on

factors and forces affecting capital markets.

Past performance of the sponsor/AMC/ Mutual fund does not indicate

the future performance of the scheme.

The name of the scheme does not in any manner indicate any either the
quality of the scheme or the future performance of the scheme

Standard risk factors are same (common) for all the MF Schemes.
 Fundamental attributes

Fundamental attributes of a scheme are its basic features.

For eg. Type of a scheme, Investment Objective, Terms of issue etc.

For any change in fundamental attributes, SEBI and Trustee approval is

required.

Investor approval is not needed. However, each investor must be

informed through a communication and given the option to exit without
exit load.
 Scheme specific risks

Risk arising from investment objective, investment strategy and asset

allocation of the scheme

Risk arising from non –diversification , if any

If a scheme offers assured returns, the scheme must state that the
assurance is on the basis of the guarantees provided by the sponsor/
AMC.

If the AMC has no previous experience in managing a mutual fund, a

disclosure to the at effect should be made
 Requirement of minimum investors in the sheme

20 :25 Rule……
• Scheme must have min 20 investors
• Single investor can not hold more than 25 % of the corpus.
 Important Points regarding OD and KIM

In USA, the OD is known as prospectus

The first time investor should read detailed offer document, once he has
gained familiarity with the AMC, he can just refer to KIM
The offer document is issued by the AMC / Trustees
OD is a legal document.
OD issued for launching of a new schemes is valid for a period of six
months and if the scheme is not launched within this period a fresh OD
is required to be filed.
OD contains the accounting policies to be followed. Such policies should
be in accordance with the SEBI regulations.
OD must disclose the names and background of fund managers, key
personnel, investor relation officer, AMC and its directors, custodian,
registrar, transfer agent and the statutory auditor.
 Important Points

KIM is available at various distribution points such as banks, distributors

and brokers
AMC must confirm that a due diligence certificate signed by Compliance
officer / CEO / MD has been submitted to SEBI.
If a scheme’s name implies that it will invest primarily in a particular type
of security or in certain industry, then it will invest at least 65% of the
value of its assets in the indicated type of security/ industry.
OD must contain brief description of investors’ complaint history for the
last 3 Fiscal years of existing schemes.
In practice, SID and SAI are two separate documents, though the legal
technicality is that SAI is part of the SID. Both documents need to be
updated regularly.
 Questions for Revision

Q-1 Which of the following is the operating document for a mutual fund?
(a) Offer Document (b) KIM
(c) Trust deed (d) None of the above.

Q-2 The OD may not disclose the names and background of

(a) Fund manager (b) Key personnel (c) Investor relation officer
(d) Statutory auditor (e) None of the above.

Q-3 Offer Document issued on launch of the new scheme is valid for ?
(a) 1 month (b) 3 months (c) 6 months (d) 1 year.
 Questions for Revision

Q-4 Which of the following is not the scheme specific risk factor?
(a) Risk arising from the schemes objective
(b) Risk arising from the non-diversification
(c) No previous experience in managing a fund
(d) Movement in NAV because of the market movements.

Q-5 SEBI directs that certain information must appear on the cover page of
the offer document of any scheme. This includes the following except
(a) A statement to the effect that the document contains information
that a prospective investor should know before investing
(b) A description of the investment policies for the scheme on offer
(c) Opening, closing and earliest closing date for the offer
(d) Type of scheme and price of units on offer
 Questions for Revision

Q-6 There is no need for educational qualification to be MF

advisor.
(a) True
(b) False

Q-7 Only one of the following statements is correct as regards the

required frequency of updating the contents of the Offer Document of an
existing mutual fund scheme. Which one?
(a) Once issued, the OD of an existing scheme can`t be updated
(b) The OD must be updated whenever there is a material change
in its contents
(c) The OD must be updated on a half-yearly basis
(d) The OD must be updated on a yearly basis.
Q-8 A disclosure should be made in the offer document if an AMC has
invested more than the following percentage of its net assets in
group companies
(A) 5 (B) 25 (c) 40 (d) 10
Q-9 KIM is attached with ?
(A) Transaction slip (B) Application form (c) Either or (d) Neither nor
Q-10 NFO other than ELSS is open for a maximum of
(A) 7 (B) 10 (C )15 (D) 30
 Answers

Answers:
Q-1 : (a), Q-2 : (e), Q-3 : (c), Q-4 : (d), Q-5 : (B),
Q-6 : (b), Q-7 : (b) Q-8 (b ) Q-9 (b) Q-10 (c)
 Chapter 5

FUND DISTRIBUTION AND

CHANNEL MANAGEMENT
PRACTICES
 Traditional Distribution Channels

Individual Agents (Individual Financial Advisors )

 Those agents who facilitates the investment individually for Insurance co`s
or Govt. Savings schemes etc.
 IFAs do not have huge branch network.

Institutional Channels
The changing competitive context led to the emergence of the institutional
distributors for a wide spectrum of financial products such as
Private Distribution Companies (Brokerage firms, National Distributors)
Banks ( Private and Foreign ) and NBFC`s
Post Offices
 Newer distribution Channels

Technologies has opened the doors to newer ways with help of such
technologies there is a emergence of newer distribution channels
which would play an important role in the years to come.

Internet Stock Exchanges (BSE,NSE)

• Direct Interactions • High penetration
• Reduction in Cost • High volume of transactions
• Convenience • Cost effectiveness.
• Less paper work
• High standards in Servicing the clients
 Pre-requisites to become MF Advisor

The Individual needs to pass the certification Examination conducted

by NISM. And get the ARN registration from AMFI.

With out Certification / ARN one can not advise or sell any
Mutual fund schemes.

In case of corporates employee involved in sales & Marketing has to

Pass the certification examination.

Once the passing certification one can advise all the AMC`s
Mutual Fund After completing the empanelment process with each
AMC separately
 KYD Requirement
AMFI has introduced the KYD process to verify the correctness of
information provided in the registration documents and to have
verification of the ARN holders.
 Commission structure for mutual fund agents

Initial ( Upfront )commission

Paid on the amount mobilised by agents. The scheme application forms
carry a suitable disclosure to the effect that the upfront commission to
distributors will be paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered by the
distributor.

Trail commission
it is paid normally on quarterly basis for the funds that remain invested in
the scheme. Trail is an effective way to restrict the practice of
rebating, and link commissions.

Investors do not get commission on their own investments

 Example

Suppose an investor has bought 1000 units at Rs 10 each.

The distributor who procured the investment may have been paid an initial
commission calculated as a percentage on 1000 units X Rs 10 i.e. Rs 10,000.

Later, suppose the NAV of the scheme goes up to Rs 15.

Trail commission is payable on 1000 units X Rs 15 i.e. Rs 15,000 & not on the
Rs 10,000 mobilised.

The rates of commission are decided by the mutual fund themselves and are
not subject to regulation by either AMFI or SEBI.
 SEBI’s advertising code
• Standard measures to compare such as Compounded Annualized Yield,
CAGR etc. for scheme in existence for more than 1 year.
• Annualized yields for at least 1, 3, 5 years & since launch
• For less than 1 year performance, Absolute Return ( Total Returns )
without annualisation except for liquid schemes
• For liquid schemes performance can be advertised by Simple Annulisation.
• “MF investments are subject to market risks read OD carefully before
investing” disclosure should be made atleast for 5 seconds in any audio-
visual media.
• for more than 1 year CAGR should be used.
• Dividend declared to be mentioned in rupees per unit with face value of
each unit and the prevailing NAV at the time of declaration
 SEBI’s advertising code

• Risk factors prominently stated

• For comparing performance against benchmarks,appropriate
benchmark to be used and identical time periods to be used
• Any ranking of fund to be explained appropriately
 Loads

Load is charged to investor when the investor redeems units. It is

primarily used to meet the expenses related to sale and distribution of
units

Load charged on redemption is exit load. It reduces price.

Maximum Exit load is 7%. (For Open ended Funds)

Exit load should be charged equally for all types of investors. AMC should
not discriminate on the basis of Investment Value.

Load is an amount which is recovered from the investor.

 Questions for Revision
Q-1 Which one of the following statements is correct?
(a) An individual agent can distribute/sell only one mutual fund's products
(b) Any category of distributors/agents can distribute as many of the
mutual funds' products as allowed by the concerned AMCs
(c) Banks are not allowed to sell mutual fund products,
except their own funds'
(d) A distribution company can distribute/sell only one mutual fund's
products
Q-2 Which of the following can invest in Indian Mutual fund?
(a) SEBI (b) RBI (c) Foreign Banks (d) AMFI.
Q-3 Which of the following categories of distributors will be exempt from
passing the AMFI Mutual Fund Test?
(a) All the existing agents of UTI mutual fund and other funds
(b) New applicants for distributorship, if the AMC approves their applications
(c) Employees of banks who distribute the funds
(d) None of the above.
Q-4 A distributor needs different ARN for each AMC
(a) True (b) False
Q-5 A mutual fund distributor is paid commission for
(a) First 5 years (b) First 10 years (c) First 3 years
(d) As long as investor held the investment
Q-6 For a distribution channel, 60% of the employees should have AMFI
Registration Number
(a) True (b) False
Q-7 Institutional Distributors Build Reach through
(a) Employees ( b) Agents (c ) Sub brokers (d) any of the above
Q-8 Distributors do not get commission on self business
(a) True (b) False
Q-9 In India one can invest in MF only through distributor
(a) True (b) False
Q-10 The following would not affect the trail commission to the advisor
in mutual Fund
(a) Portfolio value going up with the increase in the market
(b) Investor making fresh purchase during the period
(c) Change in the unit capital of the the scheme
(d) Investor redeeming the money during the period
 Questions for Revision

Q-1 : (b), Q-2 : (c), Q-3 : (d), Q-4 : (b), Q-5 : (d), Q-6 : (b),
Q-7 : (d) Q-8 (a ) Q-9 (b) Q-10 (c)
 Chapter 7

INVESTOR SERVICES
 Categories of investors eligible to buy MF units

Resident Individuals
HUFs
Indian Companies
Indian trusts and charitable institutions
Banks
NBFC’s
Insurance companies
Provident funds
Non-resident Indians / PIO
OCB’s
SEBI registered FII’s
Advisor should refer to the OD to know the eligible investors.
 Investors not eligible to buy MF units

• An individual who is a foreign national ( unless of course the person is

an NRI or PIO/OCI card holder.)

• Any entity that is not an Indian resident as per FEMA (Except when
the entity is registered as FII with SEBI, or has a sub account with
SEBI registered FII.

• Overseas corporate bodies (OCBs) i.e. societies / trusts held, directly

or indirectly, to the extent of over 60% by NRI

• Trust where more than 60% of beneficial interests is held by such

OCBs.

• Details of eligible investors is available in the Offer Document

 KYC Requirement for MF investors

 It is compulsory from 1st jan 2011 that all investments done in mutual
funds has to be compliant with the regulatory requirements.

 Broadly, mutual fund investors need the following Documents.

 Proof of Identity
 Proof of Address
 PAN Card
 Photograph
 KYC Requirement for MF investors

MF have made an arrangement with CVL ( CDSL venture Ltd) to

comply with the documentation requirement.
Select branches / offices of mutual funds, registrars and large
distributors serve as Points of Service (POS) for the KYC
documentation, listed in AMFI website – .www.amfiindia.com
Investors will need to provide the Original, along with a copy of the
relevant documents, to any of the POS (The Original will be returned
after verification). Alternatively, the investor can provide a True Copy
attested by a Notary Public, Gazetted Officer or Manager of a
Scheduled Commercial Bank.
CVL provides a facility where the POS, from their own office, can
access CVL’s system, enter the requisite data and generate an
acknowledgment with a Mutual Fund Identification Number (MIN).
 KYC Requirement for MF investors

• KYC documentation has to be done only ONCE, with CVL acting through
the POS.

• Based on this acknowledgment, the mutual fund investor can invest in

any mutual fund.

• In case of any change in address or any other information, investor can

get it updated at any POS and the same will be changed with all the
AMC where the investor has invested.

• Where investment is made by a minor, KYC requirements have to be

complied with by the Guardian.

• In the case of investments by a Power of Attorney holder on behalf of

an investor, KYC requirements have to be complied with, by both,
investor and POA holder.
 PAN Requirements for Micro-SIPs

• PAN requirement is compulsory for all investments except for MICRO-

SIPS.
• MICRO-SIPs are SIPs where annual investment doesn’t exceed Rs
50000.
• Investor have to give declaration that aggregate investment doesn’t
exceed Rs 50000 in a financial year.
• This relaxation is not available to HUFs, Non individuals and PIOs.
• It is available for NRIs.
 Documentation for Institutional investor

• In case of institution Memorandum of Association ,

Articles of association or Trust deeds.
• Company cannot invest if its incorparation documents
do not provide for investments.( Even if the board
resolution is there)

• Authorization for the investing institution to invest. This

is typically in the form of board resolution.

• Authorization for the official to sign the documents on

behalf of the investing institution.
 Demat Account - Benefits

 De materialization is a process whereby an investor’s holding of

investments in physical form (paper) is converted into a digital record.
 Investors purchase & sale of investments get automatically added or
subtracted from their investment demat account, without having to
execute cumbersome paperwork.
 Less paperwork in buying or selling the Units, and correspondingly,
accepting or giving delivery of the Units.
 Direct credit of bonus and rights units that the investor is entitled to, into
the investor’s demat account.
 Change of address or other details need to be given only to the Depository
Participant, instead of separately to every company / mutual fund where
the investor has invested.
 NSE’s platform is called NEAT MFSS. BSE’s platform is BSE STAR Mutual
Funds Platform.
 Transaction with Mutual Funds

Fresh Purchase
Is a instance where the Investor does not have an investment account with
specific Mutual Fund.
Additional Purchase
Once the Investor has the folio and he again transact new purchase
transaction in the same folio with the help of transaction slip.
Additional purchase can be done in amounts only
Online Transaction
Are transaction done through Internet. AMC issues a personal PIN number
through which investor can transact except the SIP.
It is not mandatory for AMC to provide online facility to investors
 Payment mechanism for purchase

Mutual funds do not accept cash.

 Application moneys need to come through normal banking channels like-

Cheque ,DD
 NRI / PIO applications need to be accompanied by cheque drawn on an

NRO account (for non-repatriable investment) or NRE account (for

repatriable investment).
 If payment from NRI is by DD, and investment is on repatriable basis, a

banker’s certificate will be required to the effect that the DD has come
out of moneys remitted from abroad.
 When the NRI receives money in his bank account in India, the banker

would issue a Foreign Inward Remittance Certificate (FIRC), which is

evidence that the money was remitted from abroad.
 Payment mechanism for purchase & additional purchase

Application Supported by Blocked Amount (ASBA) –

This is a facility where the investment application is accompanied by an

authorization to the bank to block the amount of the application money in
the investor’s bank account. (Facility available only for NFO)

The benefit of ASBA is that the money goes out of the investor’s bank
account only on allotment. Until then, it keeps earning interest for the
investor.

M-Banking is nascent in India. RBI has permitted banks to offer the facility
of transferring up to Rs 50,000 per customer per day, through the mobile
connection. Once people are comfortable with M-banking, this will become a
convenient way to invest.

ASBA cannot be used for the purchase of ongoing scheme

 Allotment of units to investor

• NFO are sold at the face value of Rs.10/- so

Investment Amount / Face value = Units investor bought.

• Price at which units are sold to an investor as part of ongoing sales in

an open-end scheme is the sale price.

• For Ex. An investor invested Rs.12000/- in a scheme where the

applicable sale prices is Rs.12, will be allotted Rs.12000 / Rs.12 = 1,
000 units.
 Right & Bonus issue

Right Issue :-
• The price at which units are offered
• Right price is clear at the time of investment.
• For Ex. Investment Amount / Right price = No of units bought by
investor.

Bonus Issue :-
The investor does not have to pay anything.
The fund allots units free.
For Ex. In a 1:3 bonus issue the investor is alloted 1 unit free for
every 3 units already held by investor.
As net assets of the scheme remain the same only number of units
increases the NAV will be reduced proportionately.
 Repurchase of units
The investor in an open ended scheme can offer the units for
repurchase to the mutual fund.

Re-purchase price is the applicable NAV less exit load.

Investor has a right to decide on repurchase amount. &

if investor has specified the re-purchase amount then

(Amount / Repurchase price = units to be reduced.

If an investor specified re-purchase units then

(Units specified X Repurchase price = Amount to be paid.

If the repurchase of folio goes below minimum limit set by MF

for scheme then all the units may be repurchased.

Repurchase can be done in units as well as amount.

 Payment mechanism for repurchase of units

• The investor has various options for receiving the moneys

due to him from the scheme on repurchase.

• Traditional approach – Via Cross cheque favoring investor.

• Modern Approach – Investor can give instructions of direct

transfer of proceeds to his bank account.

• For NRI`s Payment is made by the AMC in Rupees.

• If an investment made on repartiable basis, the cost

involved for converting in to foreign currency would be to
the account of investor.
Transactions cut off time
 Time Stamping
• Mutual funds disclose official POA`s & all transactions needs to be
submitted at the POA`s.

• These POA`s have time stamping machines with tamper-proof seal.

(Opening / repairing or maintenance is permitted only to vendors or
nominated persons of mutual Fund. & has to be documented & informed to
trustees)

• Application are stamped with automatically generated location Code,

machine identifier, Serial number, date & time.

• Acknowledgment issued to investor are stamped with the same

information.

• Acknowledgment for non financial transactions like change of address are

stamped.
• For online transactions time as per the web server to which instruction
goes is used in determining the NAV.
 Transaction through Exchange

• Both NSE & BSE have extended their trading platform to help the brokers
become a channel for investor to transact in mutual Fund.

• NSE platform is called – NEAT MFSS

BSE platform is called – BSE Star

• Both platforms are open from 9 am to 3 pm on every working day.

• Fresh & additional purchase and redemption are pemitted.

• The exchange do not offer settlement guarantee responsibility is that of

AMC.
 Investment plans

Most mutual fund schemes offer three options –

• Dividend and
• Growth.
• Dividend reinvestment Option.
These are different options within a scheme; they share the same
portfolio. Therefore the portfolio returns are the same for all three options.
However, they differ in the structure of cash flows and income accruals
for the unit-holder, and therefore, the Unit-holder’s tax ability, number of
units held and value of those units.
 Investment plans

• When a dividend is paid, the NAV of the units falls to that extent.
• Reduced NAV after dividend payout is called Ex-Dividend
• After dividend is announced NAV is called Cum-Dividend.
• E.g. NAV is 12 dividend is declared Rs 2 per unit on record date of
30.11.2011.
• Rs 12 is Cum-Dividend
• NAV is reduced by Rs 2 new NAV will be Rs 10 i.e. called Ex-Dividend
NAV.
 Investment plans and services

Systematic Investment Plan

SIP is investing a fixed sum periodically in a disciplined manner for long
term. It gives benefit of Rupee Cost averaging ( Discussed in later half of
presentation).
Voluntary Accumulation Plan
VAP is modified version of SIP. It is Voluntary Accumulation Plan. It allows
the investor flexibility with respect to the amount and frequency of
investment.
In VAP, investor has to impose voluntary self discipline.
Systematic Withdrawal Plan
In cases where an investor does not want to withdraw all the amount
invested at one time he can opt for facility called SWP which would enable
investor to withdraw a specific amount at specific period.
Systematic Transfer Plan
It is a systematic way of investing an amount at pre-specified frequency
from a pool of money available or from any debt scheme to equity.
 Investment services

Triggers

It is type of an standing instruction given to particular fund for

purchase or sell at desired market level.

Statement of account & investment certificate

The statement of account shows for each transaction & value of

transaction, relevant NAV & balance no of units held in that folio.

Nomination

Nomination is only an authorization for mutual fund to transfer the

units to the nominee in the event of demise of the unit holder.

Maximum 3 people can be nominated

 Investment services

Pledge
Mutual funds units can be pledged by unit holders. Same can be
affected by pledge form executed by unit holders.

Form has provision to specify name of party on who's units are

pledged.

Once the units are pledged the units can not be sell or transfer until
the pledgee gives no-objection to release the pledge.
 Investment services

Other Services

• Online Access to information on investments including consolidated

view of various folios that related to different family members.

• Daily NAV and other key developments transmitted through SMS/e-

mail.

• Sharing of information on the portfolio valuation income booked,

returns earned,capital gains working for income tax purpose etc.
 Important points

• If investment amount is above 1 crore NAV will be applicable of the

day when funds are realized and available with AMC for utilisation
• In case of outstation cheques NAV applicable will be when funds are
realized and available with AMC for utilization
• RTGS means Real time gross settlement
• NEFT means National Electronic funds transfer
• SWIFT used for international transfer
• ASBA is Application supported by blocked amount
 Questions for Revision

Q-1 Investor A has opted for a systematic transfer plan. This means
(a) The investor is allowed to transfer on a periodic basis a specified
amount from one to another scheme within the fund family.
(b) A specified amount is automatically transferred from his bank account
to his fund account
(c) The investor can withdraw specified amounts at periodic intervals.
(d) The investor can invest any amount in the scheme at periodic
intervals
Q-2 Which of the following is not true with respect to the SWP?
(a) Allows the investor to make systematic withdrawals on a regular
intervals
(b) Here the amount withdrawn is treated as the redemption of units
(c) SWP is same as the Monthly Income Plan
(d) None of the above.
 Questions for Revision

Q-3 Which of the following is not true with respect to the voluntary
accumulation plan?
(a) It give the flexibility to the investor regarding the amount to be
invested
(b) It give the flexibility to the investor regarding the frequency of
investment
(c) VAP follower is obliged to keep investing
(d) None of the above.

Q-4 Mutual funds transaction on stock exchange are governed

by stock exchange redressal system
(a) True (b) False
Q-5 An investor is doing a liquid investment, fund is available and time is
12.30. NAV would be applicable for the ________
(a) Next working day (b) Same Day
(c ) Closing NAV of Day immediately preceding the date of application
(d) Closing NAV of Day immediately preceding next business day
Q-6 Cut-off time for NAV
(a) Decided by AMC ( b ) same for all schemes ( c) By Trustee
(d) Prescribed by SEBI
Q-7 For a customer holding units in demat , the AMC also requires to do
his KYC .
(a) True (b) False
Q-8 Foreign exchange can be remitted through
(a) NEFT (b) RTGS (c ) SWIFT (d) All of the above.
Q-9 NRI can not make repartition investment in MF using demand draft.
(a) True (b) FALSE
Q-10 Which is the fastest way of remitting funds on real time basis?
(a) NEFT (b) Demand Draft (c) SWIFT (d) RTGS
 Answers

Q-1 : (a), Q-2 : (c), Q-3 : (c), Q-4 : (b),Q-5 : (d),

Q-6 : (d), Q-7 : (b) Q-8 (c ) Q-9 (a) Q-10 (d)
 Chapter 8

RETURN, RISK & PERFORMANCE

OF FUND
 Drivers of Returns in a scheme

The portfolio is the main driver of returns in a mutual fund scheme.

The underlying factors are different for each asset class.
 Equity scheme

 Fundamental analysis & Technical analysis. These are quantitative

approach for security analysis.
 Passive fund manager does not need to go through this process as
portfolio would be maintained in line with the index.
 Securities analysis is an important aspect of actively managed
scheme.
 Securities Analysis Disciplines

Earnings per Share (EPS):

 Net profit after tax ÷ No. of equity shares
This tells investors how much profit the company earned for each equity
share that they own.

Price to Earnings Ratio (P/E Ratio):

 Market Price ÷ EPS
P/E ratio indicates how much investors in the share market are prepared
to pay (to become owners of the company), in relation to the
company’s earnings.
 P/E may be high because the company’s prospects are indeed
good, while another company’s P/E may be low because it is
unlikely to replicate its past performance
 Securities Analysis Disciplines

Book Value per Share:

Net Worth ÷ No. of equity shares
This is an indicator of how much each share is worth, as per the
company’s own books of accounts.

Price to Book Value:

Market Price ÷ Book Value per Share
An indicator of how much the share market is prepared to pay for each
share of the company, as compared to its book value.
Note :
Most financial indicators cannot be viewed as stand-alone numbers.
They need to be viewed in the context of unique factors underlying each
company.
 Technical Analysis

The discipline of Technical Analysis has a completely different

approach.
Technical Analysts believe that price behavior of a share, and the
volumes traded are a reflection of investor sentiment, which in turn
will influence future price of the share.
Technical annalists are also called chartists.
 Investment Styles

Growth investment style

 Potentials investing in high growth stocks i.e. stocks of
companies that are likely to grow much faster than the economy.
 Valuation of these stocks tends to be on the higher side.
 In the event of a market correction, these stocks tend to decline
more.

Value investment style

 Is an approach of picking up stocks which are valued lower,
based on fundamental analysis.
 The belief is that the market has not appreciated some aspect of
the
 Value in a company’s share – and hence it is cheap.
 When the market recognizes the intrinsic value, then the price
would
shoot up. Such stocks are also calledvalue stocks.
 valuation of these stocks tends to be on the lower side.
 Investment Styles

Portfolio building approach – Top down and Bottom up:

A top down approach,
the portfolio manager decides how to distribute the investable
corpus between countries (if it invests in multiple geographies) &
sectors. Thereafter, the good stocks within the identified sectors are
selected for investment. Thus sector allocation is a key decision.
Abottom-up approach
on the other hand give emphasis on good stock picking. If a stock is
good, it is picked for investment. The approach is therefore also
stock picking. Stock selection is the key decision in this
called
approach; sector allocation is a result of the stock selection
decisions.
Therefore, it can be said that equity returns are a function of sector
and stock selection.
 Debt

Investment in a debt security, as in the case of a loan, entails a return in the

form of interest (at a pre-specified frequency for a pre-specified period),
and refund of a pre-specified amount at the end of the pre-specified
period.

The pre-specified period is also calledtenor.

At the end of the tenor, the securities are said tomature .
The process of repaying the amounts due on maturity is called
redemption.
Debt securities that are to mature within a year are called money market
securities.
The return that an investor earns or is likely to earn on a debt security is
called its yield.
Yield is a combination of interest paid by the issuer and capital gain.
Debt securities are issued by Central / State Governments, Banks,
Financial Institutions, PSU, Private Companies, Municipalities etc.
 Debt
Securities issued by the Government are calledGovernment Securities or
G-Sec orGilt .
Treasury Bills are short term debt instruments issued by the Reserve
Bank of India on behalf of the Government of India.
Certificates of Deposit are issued by Banks (for 91 days to 1 year) or
Financial Institutions (for 1 to 3 years)
Commercial Papers are short term securities (upto 1 year) issued by
companies.
Bonds / Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue bonds, while
private sector companies issue debentures.
The difference between the yield on Gilt and the yield on a non-
Government Debt security is called itsyield spread.
 Interest Rates Risk

The interest rate payable on a debt security are specified as afixed rate,
say 6% orfloating rate.

Interest rates on floating rate securities (also calledfloaters) are specified

as a “Base + Spread”. For example, 5-year G-Sec + 2%.

Interest rates and Market price of debt security are inversely related to
each other.

Interest rate sensitivity of the debt security is measured bymodified

duration of the debt security.
 Interest Rates Risk

Yield Spreads:

Suppose an investor has invested in the debt security of a

company. Subsequently, its credit rating improves. The market will
now be prepared to accept a lower yield spread. Correspondingly, the
value of the debt security will increase in the market.

A debt portfolio manager explores opportunities to earn gains by

anticipating changes in credit quality, and changes in yield spreads
between different market benchmarks in the market place.

For Ex - The difference between the yield on gilt and the yield on a
non government debt security is called its yield spread.
 Gold

The value of gold in India depends on the international price of gold (quoted
in foreign currency)Therefore, returns in gold as an asset class depends
on
Global price of gold

 Gold is seen as a safe haven asset class. Therefore, whenever there is

political or economic turmoil, gold prices shoot up.
 Most countries hold a part of their foreign currency reserves in gold.
Similarly, institutions like the International Monetary Fund have large
reserves of gold.
 When they come to the market to sell, gold prices weaken.
 Purchases of gold by large countries tend to push up the price of gold.
 Gold

Strength of the Rupee

Economic research into inflation and foreign currency flows helps
analysts anticipate the likely trend of foreign currency rates.
When the rupee becomes stronger, the same foreign currency can
be bought for fewer rupees.
Therefore, the same gold price (denominated in foreign currency),
translates into a lower rupee value for the gold portfolio.
This pushes down the returns in the gold fund. A weaker rupee, on
the other hand, pushes up the rupee value of the gold portfolio, and
consequently the returns in gold would be higher.

Weaker Rupee = high return in gold portfolio

Stronger Rupee = Low return in gold portfolio.
 Real Estate

It cannot be transported and its value is driven by local factors. Some of

these factors are:
Economic scenario
In the recent past, when there was uncertainty about the economy, people
preferred to postpone real estate purchases.
Consequently, real estate prices weakened. As the economy improves, real
estate prices also tend to keep pace.
Infrastructure development
Whenever infrastructure in an area improves, real estate values go up.
Interest Rates
When money is cheap and easily available, more people buy real estate.
This pushes up real estate values. Rise in interest rates therefore softens
the real estate market.
 Measures of Returns

Simple Return:

(End Value – Initial Value) X 100

Initial value
Suppose you invested in a scheme, when its NAV was Rs 12. Later,
you found that the NAV has grown to Rs 15. How much is your return?

= (15 – 12) / 12 = 25%

 Measures of Returns
Annualized Return:
Annualized helps us compare the returns of two different time
periods.

Simple Return X 12
Period of simple return (in months)

Suppose Two investment options have indicated their returns since

inception as 5% and 3% respectively. If the first investment was in
existence for 6 months, and the second for 4 months, then the two
returns are obviously not comparable.
1) 5% *12 / 6 = 10%
2) 3% * 12 / 4 = 9%
 Measures of Returns
Compounded Return:
[ (Later Value / Initial Value )^(1/n) - 1 ]*100

For Ex :- if Rs 1,000 grew to Rs 4,000 in 2 years,

LV = Rs 4,000; IV = Rs 1,000; n = 2 years,

then the compounded return is given by such investment;

[ ((4000 / 1000) ^ ½ ) - 1 ] *100 = 100%

Logically for a return of 100% the initial value of Rs.1000 should

have grown by 100% i.e. doubled to Rs.2000 in 1st year & further
doubled to Rs.4000/- in second year.
 Compounded annual growth Rate

It is possible to do the above calculations by using the cincerned NAV

of a scheme. So if we want to calculate return from a scheme over
a specific period of time then

• NAV at beginning of the period is “ Intial Value”

• NAV at the end of the period is “Later Value” and

• Exact number of days during the period, divided by 365 is “N”

The above 3 formula are applicable only for growth schemes only

For dividend paying scheme CAGR technique prescribed by SEBI is

used.
 Compounded annual growth Rate
Calculation on CAGR

You Invested Rs.10,000 in a scheme @ Rs.10. On 30th June 08.

On 1st Jan 2009 Scheme paid out dividend of Rs.1 per unit ex-
dividend NAV was 12.50.

On 1st Jan 2010 scheme paid out another dividend of Rs1 per unit.
The ex-dividend NAV was Rs.15 Calculate CAGR.
Solution
Initial Investment Value – Rs.10000/-
No of units – (10000 / 10 ) - 1000 units.
1st dividend – 1000 X 1 – Rs.1000
 Compounded annual growth Rate

If amount re-invested = Rs.1000 / 12.50 = 80 additional Units

Total unit holding = 1000 + 80 = 1080

2nd dividend of Rs.1 per unit on revised unit holding of 1080.

If amount re-invested = Rs.1080 / 15 = 72 units
Total units holding would be =1080 + 72 = 1152.

Later Value = 1152 X 15 = 17280.

Calculate CAGR
[ (Later Value / Initial Value )^(1/n) - 1 ]*100

((17280 / 10000)^(1/1.51))-1)*100 = 43.65%

 Compounded annual growth Rate
• In earlier example the CAGR was calculated with the closing NAV
as Rs.15.

• If an exit load of 1% was applicable, then you will receive only 99%
of Rs.15 i.e. 14.85 on repurchase.

• Thus your return as investor would be lower than the scheme

returns.

• While calculating investor return one must ensure if entry load is

levied then it has to be added in NAV & Exit load should be
deducted from NAV to be calculated.
 Drivers of risk in a scheme

Risk in Mutual Fund Schemes

Portfolio Risk
It is basically a risk of investment allocated by the Fund manager in to
different assets classes. As there is no certainty regarding the
performance of the selected assets classes by the fund manager.
Portfolio Liquidity
It is a risk of investment made by the fund manager in to assets which
are not liquid. Especially in case of open ended schemes where investor
can ask for redemption at any time.
SEBI has therefore laid down criteria to identify illiquid investments and
also set a ceiling to the proportion of such illiquid investments in the net
assets of a scheme.
 Drivers of risk in a scheme

Liquid assets in the scheme

Scheme maintains a certain proportion of their assets in liquid form.

This could be of two reasons.

 They believe that the market is over heated and therefore prefer to sell
their investment and hold the proceeds in liquid form until the next
buying opportunity.

 They want to provide for contingencies such as impending dividend

payment or re-purchase.

Since liquid assets generally yield a lower return they can be a drag on
the scheme returns.
 Drivers of risk in a scheme

Liabilities in the Scheme

As known NAV is calculated as (Net assets – outside liabilities) hence it

affects the performance of the fund.

• The outside liabilities need to be paid by a scheme, irrespective of the

performance of the assets.

• Some outside liabilities are part of the business. For example, when a
scheme purchases an investment, it is liable to pay for it to the stock
exchanges.

• The practice of taking liabilities beyond what is inherent to the normal

business of a mutual fund scheme is calledleveraging. Internationally,
such leveraged funds are commonly found.
 Drivers of risk in a scheme

Liabilities in the scheme

Recognizing the risks involved in such leveraging, SEBI regulations

stipulate that :

• A mutual fund scheme cannot borrow more than 20% of its net assets

• The borrowing cannot be for more than 6 months.

• The borrowing is permitted only to meet the cash flow needs of

investor servicing and not for leveraging viz. dividend payments or re-
purchase payments.
 Drivers of risk in a scheme
Use of derivative
Derivatives are instruments whose value is derived from the value
of one or more underlying exposures
Mutual funds are permitted to use derivatives for hedging against
risk or re-balancing the portfolio, but not for leveraging.

Unit holders churn

Frequent churning by unit holders keeps the fund under redemption
pressure therefore maintaining the higher liquidity.
It may sometime force to further liquidate the portfolio in order to
meet the redemption. This is generally happen due to FIIs where
retail investors suffers for no fault.
As a measure to protect the investor, SEBI has stipulated the 20 :25
rule viz. every scheme should have at least 20 investors; no investor
should represent more than 25% of net assets of a scheme.
 Risks in equity Mutual Fund

Equity Markets seek to reflect the value in the real economy.

In Log run equity markets are a good barometer of the real economy.

In short run markets can get over- optimistic or over – pessimistic to
spell of greed & fear.

Equity market there for tend to be volatile.

 Risks in equity Mutual Fund

Portfolio Specific.
The nature of the portfolio influences scheme risk as follows.

Sector funds suffer from concentration risk – the entire exposure is

to a single sector. If that sector does not perform then scheme
returns are serious affected.

Diversified Equity Funds have exposure to multiple sectors. Even if a

few sectors perform poorly other better performing sectors can
make up.

Thematic Fund are a variation of sector funds. Here the investment

is as per the theme. Thematic fund have a wider exposure then a
sector fund but narrower then diversified fund.
 Risks in equity Mutual Fund

Portfolio Specific

Contra Funds take positions that are contrary to the market. Such an
investment style has high risk of misjudgments

Dividend Yield Funds Invest in shares whose prices fluctuate less

but offer attractive returns in the form of dividend such funds offer
equity exposure with lower downside.

Arbitrage Funds are categorized as equity funds because they invest

in equity. in reality the risk are arbitraged (canceled out)
Normally between the cash market & the F&O market.
 Risks in Debt Funds

Portfolio Specific

Liquid schemes with 91 days maturity has lowest risk because

short maturity securities suffer lesser fluctuation in value as
compared to the one with longer tenor.

Gilt scheme which invest in only government securities have

higher risk because NAV can fluctuate a lot more.

Fixed Maturity plans align the maturity of their portfolio to the

maturity of the scheme the yield is relatively predictable but only
on the maturity.
 Risks in Debt Funds

Balance Funds invest in a mix of debt & equity. It is rare for both debt
& equity markets to fare poorly at the same time. As performance of
scheme is linked to the performance of two asset classes the risk in
the scheme is reduced.

Monthly Income Plan is a balance fund that seeks to combine a large

debt portfolio with an yield kicker as a equity component. It is
possible that loss in equity component eat profit in debt component
of a portfolio hence dividend will not be announced.

Shorter maturity securities fluctuate lesser than longer maturity

securities
GILT does nt have credit risk but has interest rate risk. Fluctuate
more when yield changes.
 Risks in Gold Funds

• As an international commodity gold prices are lot more difficult to

manipulate.

• Further gold does well when the other financial markets are in turmoil.

• When a country goes into war and its currency weakens gold funds
gives excellent returns.

• This twin benefit make gold very attractive risk proposition. But investor
in a golf fund needs to be sure what kind of gold fund it is Gold sector
fund or ETF Gold.
 Risks in Real Estate Funds

• Every real estate asset is different valuation of real estate

assets is therefore highly subjective

• Real estate transactions suffer the curse of black money

transparency is therefore an issue.

• Real estate is a less liquid asset class the intermediation chain

of real estate agents is largely unorganized.

• Transaction cost in the form of stamp duty, registration fees

etc are high.

• Regulatory risk is high in real estate as is the risk of litigation

and other encumbrances.
 Measures of Risks

Variance

It measures the fluctuation in periodic returns of a scheme. This helps

determine the risks an investor may take on when purchasing a
specific security.

Higher the variance = Higher Volatility or return.

The Example clearly suggests

that monthly returns of
scheme 2 are more volatile.

Excel Formula is = var(range of cell where periodic returns are calculated.)

 Measures of Risks

Standard Deviation

• Similar to variance, standard deviation too measures the fluctuation in

periodic returns of a scheme in relation to its own average return.

• Mathematically standard deviation is equal to the square root of

variance.

• Formula of Excel = stdev(range of cells where the periodic returns are

calculated)

• Is a measure of a risk is relevant for both debt & equity scheme.

 Measures of Risks
Beta
• It is based on the capital asset pricing model which states that there
are two kind of risk in investing in equities – systematic & non
systematic.

• Non systematic risk can be reduced by diversification

• Systematic risk is integral to investing in the market. It can not be

avoided hence Investor needs to be compensated only for systematic
risk measured by beta.

• Beta measures the fluctuation in periodic returns in a scheme as

compared to fluctuation of a index over same period.

• By definition stock index beta would be always 1. So companies whose

beta is >1 are seen as more risky then market and vice versa.

• Beta as a measure of risk is relevant only for equity scheme.

 Measures of Risks

Modified Duration

•Measures the sensitivity of value of a debt securities to changes in

interest rates.
•Higher the modified duration higher the interest sensitivity.

Weighted Average Maturity

Weighted average maturity of debt securities in a scheme's portfolio is

indicative of interest rate sensitivity of a scheme.

Longer the weighted average maturity higher will be the interest rate
sensitivity

professional debt fund manager would rely on modified duration as a

better measure of interest rate sensitivity.
 Benchmarks & Performance

Mutual Fund schemes invest in the market for the benefit of unit holders.
How well did a scheme perform this job ?

• An approach to assess the performance is to pre-define a comparable

– a benchmark – against which scheme can be compared.

• A creditable benchmark should meet following requirements.

• It should be in synch with the investment objective of the scheme

The benchmark should be calculated by an independent agency.

• For Ex – Choice of benchmark is simplest for an index fund. As

investment objective is clear on index that scheme would mirror

• Gaps between scheme performance & that of the benchmark is called

Tracking errors.
Benchmarks
 Quantitative measure of Fund Manager Performance

Relative Return

• Relative return comparisons means scheme performance visa vis

benchmark or peer group.

• If a comparison of relative returns indicates that a scheme

earned a higher return than the benchmark then that indicates
the out performance by the fund manager and vice versa.

Risk Adjusted Return

Evaluate performance on the relative basis with a consideration of

a amount of risk taken by the fund manager.
 Quantitative measure of Fund Manager Performance

Sharp Ratio

Risk free return – Return earned (Risk Premium)

------------------------------------------------------------
Standard Deviation

• Sharp ratio is effectively the risk premium per unit of risk.

• Higher the sharp ratio better the scheme is considered to be.

• Comparison should be done only between comparable schemes only.

(for Ex Sharp ratio of equity scheme should not be compared with
debt scheme.)
 Quantitative measure of Fund Manager Performance

Treynor Ratio

Risk free return – Return earned (Risk Premium)

------------------------------------------------------------
Beta

• Higher the Treynor ratio better the scheme is considered to be.

• Concept of beta is more relevant for diversified equity scheme.

Treynor ratio comparison should ideally be restricted to such scheme
only.
 Evaluating the Risks of a Mutual Fund

Alpha
• Difference between a scheme's actual return and its optimal return is its
ALPHA – a measure of a fund manager's performance.
• Positive alpha is indicative of out performance by fund manage and vice
versa.
• Since the concept of beta is more relevant for diversified equity schemes,
Alpha should be ideally be evaluated only for such schemes.
• ALPHA = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market
Return − Risk Free Rate)]
 Other performance measures

 The expense ratio ( Ratio of total expenses to average net assets of the
fund)- Funds with small corpus size will have a higher expense ratio
affecting investor returns. It is indicator of the Fund’s Efficiency and Cost
Effectiveness.

 The income ratio ( It is the net investment income divided by its net
assets for the period) – useful for debt fund

 Fund size – Small funds are easy to manage and can achieve their
objectives in a focused manner with limited holdings.

 Large funds benefit from economies of scale with lower expense ratios
and superior fund management skills.

 Cash holdings
 Sources for tracking Mutual Fund Performance

• Mutual Funds Annual & periodic Reports.

• Mutual Funds website.
• AMFI website
• Financial News Papers.
• Fund Tracking Agencies – Credence, Value Research
• Newsletters
• Offer Document of the Fund
• Analytical Articles
The Credit Rating Agency CRISIL evaluates the Fund Performance and
Ranks the Scheme by Performance.
 Important Points

Money Market Funds are low risk fund.

Sectoral Fund are high risk fund.

Risk is equated with Volatility of Earnings.

Diversification reduces Company specific risk but it does not reduce

Market Risk.

Short Term investment in Equity market is most risky.

BEST FUND WILL HAVE HIGHER EX MARKS, LOWER BETA AND HIGHER
GROSS DIVIDEND YIELD.
 Important Points

The returns should be computed on an annualized average compound

rate of return from cumulative figure.
If the fund performance data relates to a period of less than one year,
it should not be annualized, except for liquid mutual funds which have
a short investment horizon.
Borrowings by Mutual Fund
A mutual fund can borrow for a maximum of 20% of net assets.
For Maximum period of 6 months.
Purpose should be to meet liquidity requirements for paying dividend
or meeting redemptions.
It is not a permanent source of funds for the scheme.
Q-1 A five star rating in MF schemes indicates that
(a) Lowest Expense Ratio (b) Lowest Load
(c) Demonstrate superior performance (d) Best Portfolio
Q-2 Accepted standard for return calculation in financial market is
(a) Absolute Return (b) CAGR (c ) Total Return (d) Simple annulised
return
Q-3 CRISIL's indicator for highest safety in a debenture is
(a) AAA (b) High ( c) Good (d) P1+
Q-4 Difference between scheme's actual return and optimal return for
it's risk is
(a) Sharpe (b) Treynor (c) Alpha (d) Spread
Q-5 Funds pay dividend in
(a) Dividend payout option (b) Dividend reinvest (c) both of the above
(d) Growth option
Q-6 If beta of a scheme is less than one the fund is
(a) More risky compare to market (b) less risky compare to market
(c) neither risky nor profitable (d) beta doesn't make any impact on
scheme performance
Q-7 Index against which performance of a fund is measured, is called
(a) Tracking error (b) benchmark (c ) investment objective (d) Ex-mark
Q-8 Index funds are safer because their NAV does not go down
(a) True (b) False
Q-9 Returns in international fund is dependent on
(a) Exchange Rates ( b) asset class performance ( c) Both of the above
(d) None of the above
Q-10 Risk adjusted return is measured by
(a) sharpe ratio (b) standard deviation (c ) treynor ratio (d) both A n C
Q-1 : (c), Q-2 : (b), Q-3 : (a), Q-4 : (a),Q-5 : (c),
Q-6 : (b), Q-7 : (b) Q-8 (b ) Q-9 (c) Q-10 (d)
 Index

Day 2

Part 3

6. Accounting, Valuation and Taxation

10. Selecting the Right Investment products for Investors

Part 4

11.Helping investors with Financial Planning

12.Recommending Model Portfolios and Selecting the Right Fund
 Chapter 6

ACCOUNTING VALUATION
AND TAXATION
 What are net assets of a mutual fund ?

The net assets represent the market value of assets which belong to the
investors, on a given date.

Net assets are calculated as: Market value of investments

Plus(+): Current assets and other assets
Plus(+): Accrued income
Less(-): Current liabilities and other liabilities
Less(-): Accrued expenses
Net Assets/Total no. of Units Issued = NAV per unit.
A fund’s NAV is affected by four sets of factors
 Purchase and sale of investment securities
 Valuation of all investment securities held
 Other assets and liabilities
 Units sold and redeemed.
 Details related to NAV

• Net assets includes the amount originally invested, the profits booked
in the scheme, as well as appreciation in the investment portfolio.

• Net assets go up when the market price of securities held in the

portfolio go up, even if the investments have not been sold.

• A scheme can not show better profits by delaying payments.

• while calculating profits, all the expenses that relate to a period needs
to be considered irrespective of whether or not the expense has been
paid.

• Similarly any income that relates to the period will boost profits,
irrespective of whether or not it has been actually received in the bank
account.
 How frequently is the NAV calculated ?

All mutual funds have to disclose their NAVs daily, by posting it on the AMFI
web site by 9.00 p.m. In case of any other scheme except FOF where it is to
be published by 10 a.m. Of the following day.

Open –ended funds have to compute and disclose NAVs everyday; closed
end funds can compute NAVs every week, but disclosures have to be made
everyday.

Closed end schemes not mandate listed on the stock exchange can publish
NAV according to the periodicity of 1 month or 3 months, as permitted by
SEBI.
 Mark to market

• The process of valuing each security in the investment portfolio

of the scheme at its market value is called “ MARK TO MARKET “

• Marking to market helps investor buy & sell units of a scheme at

a fair price.

• Mark to market based NAV helps in assessing the performance

of the scheme / Fund manager.
 Latest changes since August 1, 2009

SEBI has abolished entry loads. So, the Sale Price needs to be the same
as NAV.
Exit loads in excess of 1% of the redemption proceeds have to be
credited back to the scheme immediately i.e. they are not available for
the AMC to bear selling expenses.
Exit load structure needs to be the same for all unit-holders
representing a portfolio.
New SEBI guidelines for Dividend Distribution :-
All profit earned (including accrual income) are available for distribution.
Valuation gain are ignored but valuation losses needs to be adjusted
against profit.
The proportion of sale price on new units which is attributable to the
valuation gains is not available as a distributable reserve.
 Initial issue expenses

Expenses that are incurred in the launch(NFO) of the fund are called as
initial issue expenses. These needs to be borne by the AMC.
 Recurring expenses

These can be charged to the scheme. Since the recurring expenses drag
down the NAV, SEBI has laid down the expenses, which can be charged to
the scheme.
An indicative list is as follows:
 Fees of various service providers, such as Trustees, AMC, Registrar &
Transfer Agents, Custodian, & Auditor
 Selling expenses including scheme advertising and commission to the
distributors
 Expenses on investor communication, account statements, dividend /
redemption cheques / warrants
 Listing fees and Depository fees
 Service tax
 Recurring expenses

Recurring expense limit: SEBI has stipulated the following annual

limits on recurring expenses (including management fees) for
schemes other than index schemes.

The above percentages are to be calculated on the average net

asset of the scheme.
 Recurring expenses
The management fees can not exceed:
 1.25% on the first Rs 100 crore of net assets of a scheme
 1.00% on the balance net assets.
 Management fees cannot be charged by liquid & other debt
schemes on funds parked in short term deposits of commercial
banks.
The expense limits for index schemes
(including Exchange Traded Funds) is as follows:
 Recurring expense limit (including management fees 1.50%
 Management fees 0.75%
 As regards Fund of Funds, the recurring expense limit
(including management fees) is 0.75%.
 Expenses that can not be charged to the Scheme

• Penalties and fines for infraction of law

• Interest on delayed payment to unit holders
• Legal, marketing, publication and other general expenses not
attributable to any scheme
• Fund accounting fees
• Expenses on investment management / General Management.
• Expenses on general administration, corporate advertising &
infrastructure costs.
• Depreciation on fixed assets & software development
expenses.
 Key Accounting & Reporting Requirements

• The accounts of the scheme need to be maintained distinct from

account of AMC. The Auditor of the AMC has to be different from the
scheme.

• Norms are prescribed on when interest,dividend, bonus issues, right

issues etc should be reflected in the accounts.

• NAV is to be calculated up to 4 decimal places in case of Index Funds,

liquid funds & other debt funds.

• NAV of equity & balanced funds is to be calculated up to at least 2

decimal places.

• Investor can hold their units even in a fraction of 1 units however

current stock exchange trading systems may restrict transacting on
the exchange to whole units.
 Valuation
• Whenever a security is traded in the market on the date of valuation,
its closing price is taken as the valuation of the security in the
portfolio.
• When equity shares are not traded in the market or thinly traded, a
formula is used for the valuation.
• Debt securities not traded on the valuation date are valued on the
basis of yield matrix of prepared by an authorised valuation agency.
• When an individual security is not traded or thinly traded represents
5% of the net assets of the scheme, An independent valuer has to be
appointed.
 Taxability of mutual fund

• The mutual Fund Trust is Exempt from tax.

• Trustee company will however pay tax in the normal

course on its profits.
 Securities Transaction Tax (STT)

This is a tax on the value of transactions in equity shares,

derivatives and equity mutual fund units. Applicability is as
follows.

• Equity shares on buy and sell 0.125%

• Equity MF on stock Exchange sale and repurchase 0.125%
• Equity MF Repurchase by AMC 0.250%
• Derivatives transaction 0.017%
 Additional Tax on Income distributed

Tax is a tax on dividend distributed by debt oriented mutual

fund schemes applicability is as follows.

Money Market Mutual Funds / Liquid Schemes.

25% + Surcharge + Education Cess

Other Debt funds (Investors who are individual / HUF

12.5% + Surcharge + Education cess

Other Debt funds (other investors)

20% +surcharge + Education cess
 Capital Gain on Equity Schemes

Equity >65%

Dividends Capital Gains

Within 12 m After 12 m

Short Long
Investors DDT
Terms Terms

Tax Free NIL 15% Tax Free

 Capital gain for Debt Mutual Funds

Debt Mutual Fund

Dividend Capital Gain

Within 12 m After 12 m

Investor DDT Short term Long term

As per slab Two options

Tax free Paid by the Fund
20% after
10%

indexation
 Capital Gain Calculation

• An investor purchased units in an approved debt Mutual Fund on Jan. 1,

1998 for Rs.500000/-. He sold the units on December 1, 2001 for Rs.
750000/-. Calculate the capital gain taxes paid by him. ( Ignore indexation)
.

• Answer :

• Long term capital gain = 250000/

• So Tax on LTCG = 250000* 10% = Rs. 25000/-
 Other points

 Section 80 C – Individual and HUF are entitled to deduction up to Rs.1

lakh

 Dividend Stripping – Section 94(7) – As per the finance Act 2001, If

investor buy units within 3 months prior to record date of dividend and
sells those units within 9 months of record date, then the loss if any,
shall be ignored.

 Limitation on set off in case of bonus units – NAV of the scheme is get
adjusted after bonus units are issued therefore any capital loss arising
out of such transaction is not allowed to set off if such transaction has
happened within 3 months prior to record date of bonus issue and sold
off within 9 months after the record date.
 Other points

Units are not considered under wealth tax

Section 195 – 20% TDS for LTCG and 30% TDS on STCG if unit
holder is a NRI.

48% TDS if unit holder is foreign company.

STT is not charged on Debt schemes
DDT not charged on Equity schemes
 Non Performing Assets (NPA)

An asset shall be classified as an NPA, if the interest and/or principal

amount have not been received or have remained outstanding for one
quarter, from the day such income/instalment has fallen due.
Such assets will be classified as NPA`s, soon after the lapse of a quarter
from the date on which payments were due.
 Important Points

• Investors’ subscriptions are accounted for by the fund not as

liabilities or deposits but as Unit Capital.
• Unit Capital is found in the Liability side of scheme’s balance sheet.
• Investment made by Mutual fund on behalf of investors are
accounted as Assets.
• Liabilities in Balance sheet of mutual fund are strictly short term in
nature.
• The Day on which NAV is calculated is known as Valuation Date.
• The day on trustee approves the dividend is called CUM – Dividend -
NAV.
 Questions for Revision
Q-1 An equity fund has weekly average net assets of Rs. 1400. crore
outstanding in the year. The maximum ongoing expenses (excluding
issue/redemption expenses) that may be charged to the fund amount to:
(a) Rs. 26.75 crore (b) Rs. 35.00 crore
(c) Rs. 19.75 crore (d) Rs. 27.5 crore
Q-2 The STT paid on th equity mutual fund purchased on the
stock exchange is
(a) 0.125% (b) 0.250%
(c) Nil (d) 0.02%

Q-3 A fund's portfolio includes an equity security which is listed at the

NSE. Its last quoted closing prices were: Rs. 27 on July 10, Rs. 35 on July
13 and Rs. 28 on July 16. On July 28, using SEBI norms, the fund should
value this security at:
(a) 35 (b) 28 (c) 30 (d) 31.50.
 Question for Revision
Q-4 A mutual fund holds a debenture redeemable after two years and with
next quarterly interest receivable on 31/12/2001. The debenture issuing
company failed to pay the interest on that date. Is this debenture a Non
Performing Asset? If yes, from what date?

(a) Yes, it would be considered an NPA from 1/4/2002, if interest is not

received for the quarter ending 30/3/2002 as well
(b) No, it is not an NPA, as the principal amount is not yet due
(c) No, it would not be considered an NPA until both principal and interest
amounts become overdue
(d) Yes, it would be considered an NPA from 1/1/2002.
Q-5 Which of the following is the most liquid type of shares?
(a) Large cap shares (b) Mid cap shares
(c) Small cap shares (d) All of the above.
Q-6 Expenses in fund of funds?
(a) Less then direct Investment in scheme
(b) More than direct investment in scheme
(c) Equal to direct investment in scheme
(d) None
Q-7 Initial issue expense that can be charged to fund
(a) Nil (b) 1.00% (c) 2.00% (d ) 1.75%
Q-8 Liquid funds can not charge management fees of funds parked in a
short term bank deposits.
(a) True (b) False
Q-9 Mr A holds 1200 units , scheme declares 1:3 bonus. How many units
will Mr A gets
(a) 300 (b) 400 (c ) 3600 (d) Depends on NAV
Q-10 The arbitrage funds are taxed like debt funds
(a) True (b) False
 Answers

Answer:
Q-1 : (d),Q-2 : (a), Q-3: (b),Q-4:(a), Q-5 : (a)
Q-6: (b) Q-7: (a) Q-8: (a) Q-9: (b) Q-10: (b)
 Chapter 09

SCHEME SELECTION
 How to choose between schemes

• It is always a good practice to first understand the risk exposure that is

appropriate for an investor.

• Based on that decide how the investor's investment should be

distributed between different asset classes

• Mutual fund is a great vehicle that helps an investor to take exposure to

assets classes such as equity, debt and real estate etc.

• As a structured approach the sequence of decision making is as follows

• Step 1 – Deciding on the scheme category

• Step 2 – Selecting a scheme within the category
• Step 3 – Selecting the right option within the scheme.
How to choose between schemes
 Factors to be considered
Before deciding between schemes to invest a few principles to keep in
mind they are

Equity Funds

• Active or Passive Fund management

• Open Ended or Close Ended
• Diversified , Sector or Thematic
• Large cap, Mid cap, Small cap funds
• Growth or Value Funds
• Fund Size
• Portfolio Turnover
• Arbitrage funds
• Domestic or international
 Portfolio Turnover

If a funds does sale and purchase transactions of Rs 10000 cr and the

Avg net assets of the funds are 5000 cr then the portfolio turnover
ratio is

10000cr/5000cr*100 i.e. 200%.

 Factors to be considered

Debt Funds

• Regular Debt funds or MIP

• Open Ended or FMP
• Gilt funds or Diversified debt funds
• Long term or short term debt funds
• Money market or liquid funds
• Regular Debt funds or Floaters

Balance Funds

• Client can invest in mix of equity schemes and debt schemes

• Client can invest in a balance scheme which in turn invests in a mix of
equity & debt securities.
 Factors to be considered

GOLD FUNDS

Investor needs to differentiate between

• Gold ETF
• Gold Sector
• Equity of Gold Mining companies.
• Investor also needs to understand the structure of the gold
schemes more closely.
 Selecting scheme with in the category

Parameters that are considered while selecting schemes with in a

category are.

 Fund Age

 Scheme running expenses

 Tracking error

 Regular income yield

 Risk, return and risk adjusted returns

 Investor objective

 Experts view
Q-1: The balance funds based on flexible Asset Allocation is lower riskier
than high yield debt fund
(a) True (b) False
Q-2 In case of equity fund, if fund has higher allocation to cash in bullish
market the performance is likely to.
(a) Be comparable to that of benchmark index
(b) Be worse than benchmark return
(c) Better than benchmark return
(d) cant say
Q-3 How to compare index fund
(a) Performance (b) expense (c) Tracking error (d ) benchmark
Q-4 Probabilities of losing money in equity is negligible if investment
horizon is for at least
(a) 6 months (b) 1 year (c) 5 years (d) 3years
Q-5 A better performance than the return on index is given by
(a) Passive fund (b) Active fund (c) All fund manager (d) no fund
managers
Q-6 If market crashes after bull run which fund is more safer
(a) Growth (b) Value ( c) sector (d) theme
Q-7 Avg net asset of scheme is 3000,total transaction of a scheme 10,
000 what is portfolio turnover ratio
(a) 0.3 % (b) 4% (c)3.33 % (d) 5%
Q-8 Fund management cost is more in-
(a) Passive fund (b) gilt fund (c )liquid fund (d ) active fund
Q-9 The investment grow faster in dividend re investment options as
compared to the growth option because more units are added on
dividend reinvest
(a) True (b) False
Q-10 Performance of the fund is most sensitive to the expense ratio in
which of the following Fund
(a) Liquid funds (b) Diversify Equity fund (c ) ETF (d) Sector fund
Answer:
Q-1 : (b),Q-2 : (b), Q-3: (c),Q-4:(c), Q-5 : (b)
Q-6: (b) Q-7: (c) Q-8: (d) Q-9: (b) Q-10: (a)
 Chapter 10

SELECTING THE RIGHT INVESTMENT

PRODUCTS FOR INVESTORS
 Physical or Financial

Physical Assets include gold, land, real estate which one can touch and feel.

Financial assets includes shares, bonds, mutual funds, Fixed Deposit etc. it
gives ownership but can not be touched or felt.

Physical has can get destroyed or stolen so insurance is very important.

Investment in GOLD , land doesn’t benefit economy on the other had

investment in financial assets can be productive for the economy.
 GOLD – Physical or financial??
Gold is not subject to value erosion on account of rupee depreciation
Gold is perceived as a protection/hedge against inflation
Gold ETF, Gold Sector fund , gold futures, gold deposit scheme (offered
by bank).
Gold in physical form attract wealth tax, however gold deposit scheme
and gold MF are free from it.
Gold futures are traded in commodity exchanges and the value of these
contracts go up and down in line with increase and decrease in gold
prices
Real estate requires a high capital investment and may not be easy to
liquidate at the appropriate price
Some fund houses are preparing to launch Real estate mutual funds in
the near future
 Physical or Financial

Financial assets include equity, debt and money-market Instruments

 Equity, debt and money market instruments are direct investments
with the borrower/ issuer of securities
 Mutual funds represent an indirect investment through an intermediary.

Bank deposits
 Offer high liquidity and perceived safety
 Low or negligible returns after factoring inflation and tax
 Deposit Insurance is available upto Rs 100000 per depositor.
 Financial Assets
Public Provident Fund
 15-year product
 Risk-free government obligation
 Open to individuals and HUFs
 Only one account permitted per entity
 Offers tax-free interest of 8% p.a. and contribution up to Rs. 70,000 (min
Rs. 500) are eligible for deduction under section 80C
 Option to withdraw 50% of 4th year balance in the 7th year
 Restriction on withdrawal reduces liquidity.
Kisan Vikas Patra
 Introduced as post office scheme to tap savings in rural India
 Very popular with urban investors also
 Current yield is 8% over 6 years, fully taxable
 Easily transferable and liquid.
 Financial Assets

RBI Relief Bonds

 Issued by RBI on behalf of the Government of India
 A 5-year investment product with 8% interest offering
 Interest is currently taxable (used to be tax-free earlier)
 Free of risk of default
Government Securities
 Long-term government paper
 Risk-free government obligation
 Low-return and define the benchmark rate of return on the yield curve
 Specially appointed Primary dealers deal in G-Secs
 Generally high ticket investments
 Best accessible to small investors through mutual funds.
 New Pension Scheme

Pension Funds Regulatory and Development Authority (PFRDA) is the

regulator for the New Pension Scheme. Two kinds of pension accounts are
envisaged
• Tier I (Pension account), is non-withdraw able

• Tier II (Savings account) is withdraw able to meet financial contingencies.

An active Tier I account is a pre-requisite for opening a Tier II account.
 New Pension Scheme
Investors can invest through Points of Presence (POP).
They can allocate their investment between 3 kinds of portfolios:
• Asset Class E: Investment in predominantly equity market instruments
• Asset Class C: Investment in Debt securities other than Government
Securities
• Asset Class G: Investments in Government Securities.
Investors can also opt for life-cycle fund. With this option, the system will
decide on a mix of investments between the 3 asset classes, based on age
of the investor.
The 3 asset class options are managed by 6 Pension Fund Managers (PFMs).
The investors’ moneys can thus be distributed between 3 portfolios X 6
PFMs = 18 alternatives.
NPS provides single Personal Retirement Account Number ( PRAN ) which is
applicable across all PFMs where money is invested.
 Life insurance

Premium qualify for deduction under section 80C

Important to assess need for life insurance with respect to earning
potential
A Without Profits policy offers the Sum Assured in the event of death only
A With Profit policy pays not only the Sum Assured but also bonus
declared from time to time
In case a policy is discontinued during its tenure, the policy’s surrender
value is paid which is a proportionate value based on premiums paid so
far
A ‘convergence’ of insurance and mutual funds is the development of
Unit-Linked Insurance products – which offers investors choice of asset
allocation between debt and equity.
The Amount an insurance company pays to the nominee if a policyholder
dies is known as the SUM ASSURED.
 Points of Comparison

A comparison of investment products can be done on risk, return, volatility

and liquidity
Mutual funds combine the advantages of all investment vehicles while
doing away with their shortcomings
The returns in a mutual fund are adjusted for market movements.
In India, Individual Investors does not direct access to Money Market
Instruments.
The biggest advantage of Investment in Gold is hedge against inflation.
The biggest disadvantage of investment in Real estate is High Purchase
Price. You have to invest huge amount.
The advantage of bank deposits is liquidity, high perceived safety and low
entry price. ITS disadvantage is low Yield after TAX.
 Important Points

 Mutual Funds are more recommended option for individual investors

than direct equity.
 Direct Investment in stock market can be a better option than investing
in Mutual Funds if the investor has large capital, knowledge and
resources for research.
Q-1 RBI relief bonds have the maturity of
(a) 3 years (b) 5 years (c) 7 years (d) 10 years
Q-2 Which of the following is not the advantage of bank fixed deposits?
(a) Safety (b) Liquidity (c) Lower entry price (d) High yield
Q-3 In new pension scheme(NPS) Tier I account new pension scheme is
called pension account
• True (b) False
Q-4 New Pension Scheme is regulated by
(a) PFRDA (b) IRDA (c) PFRDA + IRDA (d) None of these
Q-5 Real Estate mutual fund is
(a) Beyond means of retail investor's
(b) Provided benefits of real estate & MF investing
( C)Are popular investment options
(d) Are not easy to liquidate
Q-6 STCG in GOLD is applicable if the holding period is less than
(a) 12months (b) 36 months (c) 6 months (d) 9 months
Q-7 In NPS class-C predominantly invests in
(a) Equity (b) Debt (c) Gold (d) Real Estate
Q-8 What is the current PPF Rate ?
(a) 8% (b) 8.50% (c ) 7.75% (d ) 7.5%
Q-9 Which of the following is a financial asset ?
(a) Govt Security (b) Gold (c) Real Estate (d) None of the above
Q-10NCDEX refers to
(a) National Contract Exchange (b) National Currency Exchange
(c ) National Commodity Exchange ( d ) National Conversion Exchange
 Answers

Answers: Q-1 : (b), Q-2 : (d)

 Chapter 11

HELPING INVESTORS WITH

FINANCIAL PLANNING
 Definition and objective of FP

It is identifying all the financial needs of an individual

Translating needs to monetarily measurable goals

Planning financial investments that will allow individual to provide for and
satisfy his future financial needs and achieve his life’s goals.

The objective is to ensure that right amount of money is available in the

right hands at the right point in future to achieve an individual’s financial
goals.
 Assessment of financial goals

The financial goals are different for each individual. For Ex. An estimate of
these future expenses requires to me assessed to achieve defined goals.

• For father making the son a doctor, call for commitments over a 6 years.
• 2 yr of under graduate studies, coaching class expenses. for medical
entrance exams
• followed by the medical education & hostel expense
 Assessment of financial goals

How much would be the expense if it were incurred today ?

How many years down the line expenses will be incurred ?

During this period how much will the expense rise on account of inflation.

If any of there expenses are to be incurred in foreign currency then hoe

would changes in exchange rate affect the financial commitment ?

Formula is
A = P*(1+i)^n
 Investment Horizon

• The year wise financial goals statements throws up the investment

horizon.

• It would be risky to expect the first 3 years expenses to be met out

of equity investment being made today.

• But equity is viable option for expenses starting from 4th year.

• In most cases the investor would have some regular income out of
which part of expenses can be met.

• Investment being considered now need to fund only the balance of

the financial goals.
 Assessing the fund requirement

Suppose the investor is comfortable about meeting

Rs.100000 of these expenses each year. The balance
would need to be provided out of investment being made
today.

Suppose requirement of years 1 to 3 are met out of debt

investments that would yield a return of 6% p.a. The
requirements of 4th year are met out of equity investment
that estimated to yield a return of 9% p.a.

The amount that would need to be invested today is as

follows
 Assessing the fund requirement

Thus a total amount of Rs. 2209106 needs to be invested

right now – Rs.984487 in debt with a 3year horizon and
Rs.1224619 in equity with 4 - 6 year horizon to meet the
financial goals. This would help the investor realize the
aspiration of seeing his son become doctor.
 Financial Planner

• A person who uses the financial planning process to help another

person determine how to meet his or her life goals.

• Possesses detailed knowledge of wide range of products and

financial planning tools and help clients in choosing the best products.

• He looks at all of client’s needs including budgeting and saving, taxes,

investments, insurance and retirement planning.
 Benefits of Financial Planner

Benefits of Financial Planning

 Financial Plans are tax efficient.
 It provides direction and meaning to financial decisions.
 It allows one to understand how each financial decision one
makes affects other areas of one’s finances.
Benefits to Financial Planner
 Ability to establish long term relationships (Multiple products
to one client)
 Financial Planner should ideally link his rewards and fees to
the clients financial success and achievement of the financial
goals.
 Ability to build a profitable business (NO rebating)
 Steps of Financial Planning

It is used to prepare a comprehensive financial plan where all

financial goals are taken together and the investment strategies are
worked out on that basis.

Steps :-
 Establish and define client-Planner Relationship
 Gather client data, Define client Goal
 Analyse and evaluate clients financial Status
 Develop and present financial planning recommendations
 Implement the financial planning recommendation
 Monitor the financial planning recommendations
 Alternative Financial planning approaches

“Goal Oriented Financial Plan” is a plan for a specific Goal

E.g. Goal for providing Son’s Education
“ Comprehensive financial plan” is a approach where all financial goals of
a persons are taken together.
 Need for Financial Planners
• Lack of ability of investor understanding calculations as described.

• Even if the investor knows the calculation the knowledge of how &
where to invest may be lacking.

• Transactions such as purchase of car,house or even education

necessitate a borrowing the financial planner can help the investor
decide on the optimal source of borrowing.

• Taxation is another area that most investors are unclear about

• Financial Planner can also help investors in planning for

contingencies.
 Stages of Life Cycle

• Childhood Stage

• Young Unmarried Stage

• Young Married Stage

• Young Married with Children Stage

• Married with Older Children Stage

• Pre-retirement Stage

• Retirement Stage
 Wealth cycle for investors (Very Important)

Stage Financial needs Investment preferences

Accumulation stage Investing for long term identified
  financial goals
Transition Stage Near term needs for funds as
  pre-specified needs draw closer
Reaping Stage Higher liquidity requirements
   
Growth options and long term
products.High risk appetite
Liquid and medium term investments.
Lower risk appetite
Liquid and medium term investments.
Preference for income and debt products

Inter Generational Long term investment of inheritance Low liquidity needs.

Ability to take risk and invest for the long

transfer  
term
     
Sudden wealth surge Medium to long term Wealth preservation.
    Preference for low risk products
 Very important points on financial planning

• The planner can look at all the clients need including budgeting, saving,
taxes, investments, insurance and retirement planning.
• A financial planner can link his own rewards and fees to the client’s
financial success and the achievement of their financial goals
• MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR FINANCIAL
PLANNING.( CORE PRODUCT)
• Financial is not only investing. It comes before investing.
• It is relevant for all category of clients.
• It is not as same as retirement planning.
• It is not only Tax Planning.
• Financial planning is important at younger stage of life.
 Very important points on financial planning

The basis of genuine investment advice should be financial planning to

suit the investor’s situation. It should not be current market condition.

Financial Planning allows a person to achieve financial goals through

proper management of finances.

Financial planners and their clients should focus on allocating funds to

different asset classes.

Financial planning is relevant not only to HNIs

Financial planning works better for younger/ middle aged client

 Questions for Revision

Q-1 The stage at which the goals and purpose towards which the clients
have been investing have arrived, is known as
(a) Accumulation (b) Transition (c) Reaping (d) Transfer.

Q-2 As a good financial planner, you should avoid applying the normal Life
Cycle Model to your client who is

(a) 25-year-old unemployed (b) 60-year-old person who has just retired
(c) Well-known 32 years old cricketer (d) A 35-year-old unmarried person.

Q-3 A salaried executive in late fifties who is planning to retire at 60 years of

age, his wealth cycle stage is.

(a) Accumulation (b) Transition (c) Reaping (d) Transfer.

 Questions for Revision

Q-4 For older investors who want to transfer their wealth

(a) No financial planning is required
(b) The right investment strategy depends upon who the beneficiaries
(c) The right investment strategy depends upon the state of the stock
market
(d) All the funds can be invested in aggressive equity funds.

Q-5 A high amount of equity investment is suggested to the investor if he

is in which stage ?

(a) Accumulation phase (b) Transition phase

(c) Distribution phase (d) No such relation with any phase of life.
Q-6 According to the Certified Financial Planner - Board of Standards
(USA), the third stage in Financial Planning is
(a) Establish and Define the client planner relationship
(b) Gather client data
(c) Define client goals
(d) Analyse and Evaluate Client's Financial Status
Q-7 preparation of WILL is pessimistic exercise, so it is better to avoid
(a) True (b) False
Q-8 Financial Planner defines that client does not have resources to
meet goals. He should
(a) Inform the Client (b) Avoid telling as client will be dishearted
(c) Avoid telling as he may lose the client
(d) Increase risk to generate higher return
Q-9 Tax consultant should not advice financial planning to his client
(a) True (b) False
Q-10 Mother want to set apart Rs 25 lakhs in 3 years time
(a ) Financial Goal (b) Asset Allocation ( c) Financial Planning (d)
Financial Desire
 Answers

Answers:
Q-1 : (c) Q-2 : (c) Q-3 : (b) Q-4 : (b) Q-5 : (a)
Q-6 (d) Q-7 (b) Q-8 (a) Q-9(a) Q-10(a)
 Chapter 12

RECOMMENDING MODEL
PORTFOLIO
FINANCIAL PLANS &
 Strategies

Risk Profiling

Risk will not remain same throughout the age of the person.

It will differ at the different age and as well as the different stages of the
life so risk profiling is very important in the financial planning process.

At the same time two person's risk taking capacity will not be same. So a It
is duty of a Financial Planner to identify individual's risk Appetite.
 Factors influence the investor's risk profile

There are various ways by which risk appetite can be reasonably

measure. And few factors which affects this
 Asset Allocation

Strategic Asset Allocation

• Deduct your current age from 100 what ever the no come this is the
percentage of the debt in your portfolio and remaining will get invested in
the equity.
• As per this type younger age group person will have more exposer to
equity compare to the person in the higher age group
• As the age advances the exposure of equity will also get reduce.

Tactical Asset Allocation

• Asset class proportions can vary when prices change.
• If equity returns are higher than debt returns, equity allocation will go up at
a faster rate.
• Depth knowledge of the market require at planners end as he needs to
know in which direction the market is moving to follow this strategy.
 Model Portfolio

Since investors risk appetites vary, a single portfolio cannot be

suggested for all.

Financial planners often work with model portfolios – the asset

allocation mix that is most appropriate for different risk appetite
levels. for example, might read something like this:
 Questions for Revision
Q-1 A criticism of rupee-cost averaging is
(a) Investment is for the same amount at regular intervals
(b) Over a period of time, the average purchase price will work out higher
than if one tries to guess the market highs and lows
(c) It does not inform an investor when to buy, sell or switch from one
scheme to another
(d) Rupee cost averaging has no serious shortcomings.
Q-2 Fixed ratio of asset allocation means
(a) It is a relatively aggressive approach for managing investments
(b) Investing the same amount every month
(c) Not doing any re-balancing
(d) Balance is maintained by liquidating a part of the position in the asset
class with higher return and reinvesting in the other asset with lower return
Q-3 Asset allocation for any investor generally depends on
(a) Age (b) Financial status (c)Investment objective (d) All of the above.
Q-4 ------is the decision outcome based on the market behaviour
(a) Tactical Asset Allocation
(b) Strategic Asset Allocation
( c) Flexible Asset Allocation
(d) Fixed Asset Allocation
Q-5 Asset allocation means
(a) Putting all eggs in Same basket
(b) Investing according to Market
(c) Investing in different assets
(d) investing only in Equity Gold and Silver
Q-6 Model portfolio should be determined based on commission income
possibility for distributor
(a) True (b) False
Q-7 A Retired couple with Zero income should invest all the money in
Liquid Fund
(a) True (b) False
Q-8 Last step in the process of designing model portfolio
(a) Sector selection (b) Asset allocation ( c) Scheme selection
(d) Client selection
 Questions for Revision

Q-9 Which of the following is true for model portfolio

(a) Stipulated by SEBI (b) Guaranteed by AMC
(c) Decided by financial planner
(d) Common across industry
Q-10 75% investment in debt is suggested to
(a) Aged couple with no immediate family support
(b) 40 year old man with a family with grown up children
(c) Young call centre executive
(d) Yound couple with 2 school going kinds
 Answers

Answers: Q-1 : (c), Q-2 : (c), Q-3 : (d), Q-4 : (d) Q-5

Q-6 : (b) Q-7: (b) Q-8: ( c) Q-9: (c) Q-10:(a)

 Exam related points to consider

• Exam is of 100 Marks with 100 question of 1 mark each.

• Pl. attempt mock test available on www.njgurukul.com
• IF you have not received your id & pwd call customer care - 18002000155
• Duration of test is 2 hours. No body can force u to submit test earlier.
• Attempt first only those questions which you feel confident & 100 % Correct.
• Many students fail because they try to attempt all questions
• Then attempt those questions which you feel & think are 70 to 80% correct.
• There is no compulsion of attempting all question.
• Don't attempt question which u feel less then 50% confidence if n't required.
• Pl. do revise from text book before appearing for Exam.
 Thanks
Target should be to Pass the exam – Do not try to attempt
all the questions.

'Best of Luck'