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Index
1. The Concept and Role of Mutual Funds.
2. Funds Structure and Constituents.
3. Legal and Regulatory Framework.
4. The Offer Document.
5. Fund Distribution and Sales Practices.
6. Accounting, Valuation & Taxation.
7. Investor Services.
8. Investment Management.
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! . Measuring and Evaluating Mutual Fund Performance.
1!. Helping Investors with financial planning.
11. Recommending Financial Planning Strategies to Investors.
12. Selecting the right Investment Products for Investors.
13. Helping Investors understand Risks in Fund Investing.
14. Recommending Model Portfolios and selecting the right Fund.
15. Business Ethics in Mutual Fund.
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{ The ownership is in the hands of the investors who have pooled in
their funds so it is joint or mutual.
{ It is managed by a team of investment professionals and other
service providers.
{ The pool of funds is invested in a portfolio of marketable investments.
{ The investors share is denominated by µunits¶ 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.
{ Mutual Funds are also known as Financial Intermediaries
{ In India, Mutual Funds are constituted as TRUSTS.
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{ Portfolio diversification
{ Professional Management
{ Reduction in Risk
{ Reduction in Transaction costs
{ Liquidity
{ Convenience and Flexibility
{ Safety ± Well regulated by SEBI
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! !#%
{ No control over the costs. Regulators limit the
expenses of Mutual Funds. Fees are paid as percentage
of the value of investment.
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Evolution of Mutual Funds in India
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{ Phase 3 ± ( 1 3-1 6) ± Emergence of Private Funds
{ In 1 3, Mutual Fund Industry was open to private players.
{ SEBI's first set of regulations for the industry formulated in 1 3
{ Significant innovations, mostly initiated by private players
Phase 4 ± ( 1 6-1 ) ± Growth and SEBI Regulation
{ Implementation of new SEBI regulations led to rapid growth
{ Bank mutual funds were recast as per SEBI guidelines
{ UTI came under voluntary SEBI supervision.
{ Dividends made tax free in 1 .
{ Mutual funds assets in mid-2!!2 were app. 1,!!,!!! crore
{ During this phase, both SEBI and AMFI launched investor awareness
programmes.
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Phase 5 ± (1 -2!!4) ± Emergence of a large and
uniform industry
± UTI Act Repealed in February 2!!3.
{ | 5"; 1
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{ Rapid growth, significant increase in corpus of private players
{ Tax break offered created arbitrage opportunities
{ Bond funds and liquid funds registered highest growth
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{ UTI Act repealed in 2!!3.
{ UTI now does not have a special status. (now under
SEBI)
{ Size of industry was $);) crore in ;.
{ Merger and Acquisitions happening.
{ Fidelity, Largest MF has entered India.
{ At the end of March 2!!6, there were 2 Funds.
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Load and No Load Funds
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Tax Exempt Vs. Non Tax Exempt Funds
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2# 0#
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Predominantly invest in equity shares of the company.
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{ Aggressive Growth Funds (Targets maximum capital appreciation.)
{ Growth Funds (Capital appreciation over 3 to 5 years at above average rate.)
{ Specialty Funds
m Sector Funds (Bank, Power, Pharma, IT, Telecom)
m Foreign Securities Fund ( investment in shares of different countries
to make it more diversified)
m Mid cap or Small cap Equity funds
m Option Income Funds (Do not yet exist in India)
{ 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.)
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{ These debt funds invest only in instruments with
maturities ## ! .
{ Lowest in the order of risk level.
{ The investment portfolio is very liquid and enables
investors to hold their investments for very short
horizons of a day or more.
What are Gilt Funds?
{ It invests only in securities that are issued by the Government and
therefore do not carry any credit risk
{ 9'&! # # ! #!# #1
{ It invests in medium to long-term government papers.
{ Ideal for institutional investors who have to invest in Govt. Securities
{ Enables retail Participation
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Fixed Term Plan Series
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Commodity Funds
{ It will invest directly in commodities or through
shares of the commodity companies or through
commodity futures contract.
{ Most common example of such fund is precious-
metal fund.
{ Gold funds invest in Gold, Gold futures or shares of
gold mines.
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Exchange Traded Funds
{ It combines the best features of open end and closed
structure.
{ It tracks a market index and trades like a stock on
the stock market.
{ ETFs are not the index funds
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Real Estate Funds
It can :
{ Invest in real estate
{ Fund real estate developers
{ Buy shares of housing finance companies
{ Buy securitized assets.
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Important points
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Very Important Points to Remember
{ An Open Ended Fund offers repurchase facility unconditionally at all
times (But It is not obliged to keep selling new units at all times).
{ A Gilt Fund is a special type of Fund that invests in Dated Securities
only.
{ Units from an Open ended fund are bought through Agencies
appointed by AMC ( Distributors, Banks, Post offices, brokers etc.)
{ 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 !3 of the asset of that
Mutual fund ( he is not a creditor, not a debtor and not a trustee of
that mutual fund).
{ Units from an Open Ended fund are bought from the Fund Itself
( not from the AMFI, stock exchange, distributors or the banks).
{ The assured return schemes of the UTI have gradually been wound
up.
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{ Fund Sponsor.
{ Trust.
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{
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{ The sponsor establishes the mutual fund and registers
the same with SEBI
{ 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 of business
interest in the financial markets
{ Sponsor must have been profit making in at least 3 of the
above 5 years.
{ Sponsor must contribute at least 4! of the net worth 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.)
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{ There must be at least members in the Board of
Trustees and at least =, of the members of the board of
trustees must be !.
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{ 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
{ SEBI Regulations require that the meeting of the trustees should be held at
least '!3&! #.
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{ Only SEBI registered AMC can be appointed as investment
managers of mutual funds
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{ An AMC cannot be an AMC or Trustee, of another Mutual Fund
{ AMC¶ s cannot indulge in any other business, other than that
of asset management
{ At least half of the members of the Board of an AMC, have to
be independent
{ The 4th Schedule of SEBI regulations spells out rights and
obligations of both trustees and AMCs
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They are responsible for ##& units of
the Mutual Fund. Their other services include:
{ Process investor applications
{ Record details of Investors
{ Send information to Investors
{ Process dividend payout
{ Incorporate changes in investor information
{ eeping Investor information up to date
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{ Responsible for the securities held in the mutual fund¶s
portfolio and is required to be registered with SEBI
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{ SEBI approval is required of the change of ownership and
unit holders have to be informed of the takeover
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{ A sponsor of a mutual fund can act as the distributor of
the Mutual fund.
{ Sponsor can contribute to the initial corpus of the trust.
{ Sponsor can contribute to the capital of the AMC.
{ Sponsor can invest in his own fund¶s schemes.
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!&36
Regulating Agencies of Mutual Fund
{ SEBI ( Established in $**5|!"(&!)
{ Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1 6
{ SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign
country
{ 264# #&!"#3 ?!!5-2
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{ Subsequently it has been clarified that all MFs being primarily capital market players,
come under the regulatory umbrella of SEBI.
{ RBI regulates the money and government securities market where the mutual funds
invest but the not the MMMF.
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{ If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission
{ All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under
purview of the SEBI
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AMFI is an industry association, incorporated in 1 5, is
not an SRO, so it can just issue guidelines to members. It
cannot enforce regulations.
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{ To promote the interests of mutual funds and unit holders.
{ To set ethical, commercial and professional standards in
the industry.
{ To increase public awareness of the mutual fund industry.
{ To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from
mutual funds and is headed by a full time chairman.
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Rights of the investor
1"! # ! "&!!!5!#"! # &)
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. Unit holders have the right to inspect certain documents
1!. Unit holders have the right to receive the complete statement of the
scheme portfolio before the expiry of one month from the close of each
half year.
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{ 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 not legal remedies for to a prospective
investor. Only after his investment in the scheme he
becomes eligible for the earlier mentioned rights.
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{ 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.
{ The fund investors are neither shareholders nor depositors in the
AMC
{ 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 1 6 specifies the contents
of the Trust Deed.
{ The body to which investors may address their complaints is SEBI.
{ Investors money is not protected by the Companies Act.
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{ Offer Document is the most important source of information about a
mutual fund scheme for investors
{ OD is the !&! and describes the product
{ An 5 #&& version of the OD is ey Information
Memorandum ( IM)
{ Investors are required to read and understand the OD
{ '#!##! "&#!!! !! '! 1
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{ The cover page of OD contains details of scheme being offered, the
name of the sponsor, trustee, AMC etc.
{ Mandatory disclaimer clause of SEBI should also be on the cover
page of the OD
{ The format and contents of the OD must be as per SEBI guidelines
{ The OD is issued by the AMC on behalf of the trustees
{ | þ## #5"! "&!!
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The Content
Broadly the OD issued by MFs in India are required by
SEBI to include the following:
{ Details of the sponsor and the AMC
{ Description of the scheme and the investment
objectives/strategy
{ Terms of the issue
{ Historical statistics
{ Investor¶s right and services.
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{ Open-ended funds have to update OD and IM at least once in years
{ Copy of all the changes in the OD is to be filed with SEBI
{ Trustees approve the contents of the OD and IM
{ A #& #&'53! ' !"&
{ SEBI does not approve or certify the contents of the OD
{ Investor¶s rights are stated in the OD
{ The OD contains detailed info, while IM is the summary document
{ ""&!#!! '#!)!35"5!
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{ the OD must contain a due diligence certificate signed by a compliance
officer, an AMC employee
± The due diligence certificate states that:
- Information in the OD is according to SEBI formats
- Information is verified and is true and a fair representation of facts
- All constituents of the fund are SEBI registered
{ The following information would be available in the OD:
± Category of Investors eligible to apply, viz. Individual, HUF, FI, Trust,
Society, Corporate, Association of Persons, NRI, PIO, OCB etc
± "&!<#!# &#"#&&!5
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± If any expense incurred in a past scheme is higher than what was
stated in OD, explanations should be given
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± Investor¶s rights are stated in the OD
± 3 year track record of investor¶s complaints and redressal
should be disclosed
± Any pending cases or penalties against sponsor or AMC
± The borrowing restrictions on the mutual fund should be
disclosed, including the purpose and limit of borrowings and the
borrowing at the end of last fiscal year
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{ The name and addresses of trustee and AMC directors will be
found in IM, but the details of their role, responsibilities and duties
will be found in OD
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{ The OD and IM will not contain names of securities in which the
fund plans to invest, only broad asset allocation will be given.
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{ Fundamental attributes of a scheme are its basic
features. For eg. open or close ended, lock-in period,
fund objectives, asset allocation, loads and charges 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.
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!! &!###!5&
! ' !("! %
{ Name of the mutual fund.
{ Name of the scheme.
{ Type of scheme ( growth, income, balanced etc.)
{ Major Objective
{ Name of the AMC.
{ Classes of units offered for sale.
{ Price of units plus applicable load.
{ Name of the guarantor in case of assured return
schemes.
{ Opening , closing and earliest closing date of offer.
{ Mandatory statements.
{ !"!# 5!#1
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{ Mutual fund and securities are subject to market risk and
there is no assurance that the objective will be achieved
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{ 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 IM
{ The OD do not contain the address of the Trustees of MF
{ 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.
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Important Points
{ IM 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.
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{ Resident Individuals
{ Indian Companies
{ Indian trusts and charitable institutions
{ Banks
{ NBFC¶s
{ Insurance companies
{ Provident funds
{ Non-resident Indians / PIO
{ OCB¶s
{ SEBI registered FII¶s
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& !! !
{ Distributor should look up the offer document to see which category
of investors are allowed to invest in any particular scheme of the
fund, as it is possible that some categories are not allowed to invest
in some schemes.
{ For example, charitable trusts are not allowed to invest in some
category of schemes in some funds. So in this case distributor
should refer offer document.
{ Any investor who becomes a foreign citizen after investing in a
fund, has to compulsorily redeem the units after obtaining foreign
citizenship
{ FIIs can invest in Mutual Funds through their Non Resident Rupee
Account
{ RBI has granted a blanket permission to NRI, OCB and FIIs; every
investment does not require RBI approval.
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#!5!þ #
{ Individual Agents- A person has to sign an agreement with a fund
on non judicial stamp paper. He has to be AMFI certified also to sell
Mutual Fund products.
{ Only exemption is distributors above 5! years of age and with at
least 5 years of experience as on Sep 3!, 2!!3. Such exempted
distributors were required to complete AMFI¶s refresher course by
Sep 3!, 2!!4.
{ Distribution Companies
{ Banks and NBFCs
{ Post Offices
{ Direct Marketing
- CURRENTLY 4 ,837 are AMFI certified and 3!,!28 have
taken the ARN numbers ( as on 31/3/2!!5)
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!! | &&5#!
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1. Agents must be fully aware and informed about the features of the
products that they offer to the investors
2.Agents should be highly familiar with the profile of the investors, in terms
of return expectations, requirements and risk tolerance
3. Agents must strive to cultivate disciplined approach to investing and a
regular investment habit among clients
4. Agents must have a thorough understanding of the needs of their
investors
5. Agents must be able to help investors to choose from alterntative
investment products, and enable an appropriate asset allocation
6. Agents should seek from investors the commitment to invest to enable
which they may assist the client with the forms and procedures for
investing
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What is SEBI¶s advertising code?
he dividends dec ared or aid s ha e entioned in s nit a ong
ith the ac e va e o eac h nit and the revai ing at the ti e o
dec aration o the dividend
n co o nded ann a is ed ie d c an e advertis ed i the s c he e
has een in e is tanc e or ore than ear
er or anc e c a c ations s ha e as ed on on and the
a o ts to the nit ho ders
4.Annualised yield should be shown for 1,3,5 years and since launch of
the scheme. For funds with less than 1 year performance can be in
terms of total returns.
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What is the AMFI Code of Ethics?
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What is the commission structure for mutual fund
agents?
{
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Fundamental Attributes of a Scheme
{ Type of Scheme, Investment Objective and Terms of the issue,
change in the load structure, Investment Pattern, Asset allocation,
Fees and Expenses, Valuation norms and Investment Restrictions.
{ Any change in Fundamental Attributes, Trust, Fees and expenses
payable and other changes which affect unit holders interest have
to be informed to investors either in writing or newspaper
advertisement. One in English daily and other in a paper published
in the language of the region where the HO of a MF is situated.
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{ Load charged on sale of units is entry load. It increases the price above the NAV for
new investor.
{ Load charged on redemption is exit load. It reduces price.
{ <&&-!-<!# 7. (For Open ended Funds)
{ The "" between the repurchase price and the sale price is not permitted to
exceed 7 of the sale price.
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þ !+
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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.
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How frequently is the NAV calculated ?
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What are the initial issue expenses ?
Expenses that are incurred in the launch of the fund are
called as initial issue expenses.
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Can the Fund be launched without bearing any
initial issue expenses ?
6 Yes
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Latest changes on Initial Issue Expenses
{ 6 IIE will be permitted for closed ended schemes only and they
will not charge any Entry load
{ IN CES, IIE shall be amortized on a weekly basis over the period of
scheme
{ If an investor exiting the scheme before amortization is completed,
AMC shall redeem the units only after recovering the balance
amortization
{ Unamortized portion of initial issue expenses shall be included for
NAV calculation, considered as other asset
{ IN OES, the sales, marketing and other expenses of sales should
be met from the entry load and not IIE.
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What are the expenses incurred by a mutual fund?
{ Investment management fees to the AMC
ï Custodian¶s fees
ï Trustee fees
ï Registrar and transfer agent fees
ï Marketing and distribution expenses
ï Operating expenses
ï Audit fees
ï Legal expenses
ï Cost of mandatory advertisements & communications to
investors
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Can the AMC charge all the expenses that it
incurs, to the income of the fund ?
ï No. There are two levels of restrictions
ï At the first level only certain kinds of expenses, that are
identified as having been incurred for the conduct of the
business of the fund, can be charged to the fund.
ï The second level of regulation refers to the limit on the total
expenses, that can be charged to the fund
Y
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What are the investment management and
advisory fees charged by the AMC ?
The fees are regulated by SEBI as follows:
{ For the first Rs.1!! Cr. Of net assets: 1.25
{ For the net assets exceeding Rs. 1!! Crore: 1.!!
{ If the AMC does not charge any of the initial issue expenses to
the fund, it can charge the scheme a management fee, that is
1 higher than the above rates
AMC charges are subject to the overall ceiling for expenses
discussed in the previous slide.
p
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{ Weekly Net average asset=14!! Cr.
{ What could be the maximum ongoing expenses.
{ ! /1;þ1
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Expenses that can not be charged to the Scheme
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{ The difference between sale and purchase price is known as capital gain or
loss.
{ The sale and purchase of units in equity oriented scheme of MF is subject
to STT at the prescribed rate
{ Under Section 111 A of the IT ACT, STCG on sale of equity oriented
scheme is taxed at the rate specified by the govt. ( currently1!). LTCG
{ LTCG if equity oriented scheme of MF is exempt from tax.
{ Tax on other scheme is 1! for LTCG ( without indexation) and 2! with
indexation.
{ under section 54 of Income Tax Act, LTCG are exempt from tax if invested
in specified bonds (54EC) issued by NABARD, NHAI, REC or specified
equity (54ED) within 6 months of transfer of units
{ the bonds must be held for minimum 3 years and no loan be taken against
these bonds and the equity must be held for minimum 1 year
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! !#
{ Section 1 5 ± 2! TDS for LTCG and 3! TDS on STCG if unit
holder is a NRI.
?
&
{ Answer :
± Long term capital gain = 25!!!!/
± So Tax on LTCG = 25!!!!! 1! = Rs. 25!!!/-
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Valuation of Securities
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Valuation of Equity Securities
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Thinly traded Equity Securities
{ Equity and equity related security
{ Rs. 5 lakh or less OR less than 5!!!! shares in a month
{ For unlisted: AMC need to make its own judgment and guideline -
which need to be documented
{ Aggregate of illiquid securities - non traded, thinly traded, and
unlisted equity shares should not exceed 15 of the total assets of
open-end scheme and 2! of a closed-end scheme. Any assets in
excess of above limits will be valued zero.
{ If no Trade done during the past thirty days then has to be treated
as non traded security and the Valuation is done on basis of ³Good
Faith´.
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Valuation of Debt Security
{ A Debt Security is treated as traded if traded any day
during the previous 15 days prior to the date of
valuation
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Valuation of a Thinly Traded Security (<182 Days)
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{ 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.
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þ !/
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SIP and VAP
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Other Investment Services
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þ !
Investment Management
Types of equity Instruments
{ Ordinary shares : Ordinary shareholders are the
owners of the company.
{ Preference shares: Entitle the holders to dividends at
a fixed rate subject to availability of PAT
{ Equity Warrants: Option on stock. Long-term rights
that offer the holders right to purchase shares of a
company at a fixed price
{ Convertible Debentures: Converts into a specified
number of equity shares at the end of specified
period.
Since September 2!!5 mutual funds are allowed to
trade in derivatives.
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!4 #& # #%
Y
Y
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{ Equity stocks can be classified as large cap, mid cap and
small cap
{ The P/E ratio :
{ = Market Price Per Share / Earnings Per Share
{ Indicates the price the market is willing to pay per rupee of
company¶s potential earnings
{ Higher P/E ratio indicates growth stock; value stocks
generally have lower P/E ratio
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What is the types of equity research done in MF?
Fundamental analysis ± Future earnings and risk profile
considered (whether to buy or not) Fundamental Analysis is the
analysis of the profit potential of a company, based on numbers relating to
its products, sales, costs, profits and management of the company.
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Important
{ Debt instruments are issued by government, corporate
or banks
{ Debt instruments have fixed interest, floating interest or
zero interest or coupon i.e. on a discounted basis
{ Debt markets are wholesale markets and investors are
large institutional investors, such as banks, insurance
companies, mutual funds and corporate due to large
ticket sizes
{ More than ! of trading in debt markets is in
government securities
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± Principal or Par or Face Value ± the amount representing the
principal borrowed and the rate of interest is calculated on this
sum. This is the amount payable on redemption
± Coupon ± the interest paid periodically to the investor
± Maturity ± the date on which the bond is redeemed. Term to
maturity or tenor is the period remaining for the bond to mature
± Put option ± refers to the option given to the investor to sell
(redeem) the bond before maturity; investor may exercise the
option when interest rates go up, above coupon in the market
± Call option ± refers to the option to the borrower to buyback
(repurchase) before maturity; issuer may exercise the option
when interest rates fall below the coupon rate
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#"2B#
{ Current yield ± Coupon Rate / Current Market Price
{ Yield to Maturity( YTM) ± It is also known as bond¶s IRR.
It is annual rate of return an investor would realize if he
bought a bond at a particular price, received all the
coupon payments, reinvested the coupon at same YTM
and received the principal at maturity.
{ There is inverse relationship between price and YTM of
a bond.
{ Yield Curve ± Graph showing yields for bonds of various
maturities, using a benchmark group of bonds. Also
known as TSIR ( term structure of interest rates). The
curve is usually upward sloping because longer
maturities generally offer higher yields.
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B #
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{ It is a more accurate measure of the portfolio maturity
profile.
{ It measure the percentage change in bond¶s price with a
change in yield of 1
{ $
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& "
{ Bonds with longer maturities have longer durations.
{
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!#! !# 5!3!
! "! 5%
{ Price and Yield are inversely related.
{ Changes in interest rate impact bond values in the
opposite direction.
{ Yield also gets increased by downgrading of credit
rating of the bond.
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#!#'5! 6!%
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3('##'#!&!(
{ Minimum Number of Investors per scheme
{ Purpose of MF is sharing the risks with a large number of
investors.
{ SEBI requires each scheme to have a minimum number
of investors.
{ So now each scheme and individual plan under the
scheme should have a minimum number of 2! investors
AND no single investor should account for more than
25 of the corpus of such scheme.
{ OES are allowed three months or upto end of the
succeeding calendar quarter from the close of IPO to
ensure compliance with this requirement
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þ !*
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{ Portfolio Turnover Rate ± It measures the amount of buying and selling of securities
done by the fund. It is lesser of assets purchased or sold divided by the fund¶s net
assets.
{ A 1!! turnover implies that the manager replaced his entire portfolio during the
period in question
{ 2!! means portfolio changed in 6 months
{ A liquid fund has the highest portfolio turnover.
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&
{ Answer
- change in NAV = ( 24 -22) 1!! = .!
22
?
{ Purchase price Rs. 22 per Unit
{ NAV at year end Rs. 23 per Unit
{ Interim Div. Rs. 3
{ Ex.-Div. NAV Rs. 21
{ Total Return=?
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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
{ Portfolio Turnover rate
{ #@ &"##!& '!
5?!'#"#&3! &! #1
{ "#5"!"&&#"#3! 3< #
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{ Cash holdings
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Important Point
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23#5 !
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2 &6
{ Benchmarking should be selected by reference to ± The asset class
it invests in and the fund¶s stated investment objective.
{ ,6#"5 &6##
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& 5" !#1
{ For debt funds, the benchmark should have the same portfolio
composition and the same maturity profile
{ Main benchmark for debt funds is I-sec
{ 6- | 5"<
{ SEBI requires MF to specify Benchmark for each scheme in OD &
IM
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Criteria for peer group comparisons
?
Benchmarking Debt and MM Funds
{ I-SEC: Its I-bex index is often used to track Govt.
securities performance.
{ CRISIL: Has 8 debt indices
{ NSE: Has designed Govt. security index and T-bill
index.
{ Besides NSE, JP Morgan has also developed a T-bill
index.
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#"!6 !
("&
{ Mutual Funds Annual & periodic Reports.
{ Mutual Funds website.
{ AMFI website
{ Financial News Papers.
{ Fund Tracking Agencies ± þ,
#
{ Newsletters
{ Offer Document of the Fund
{ Analytical Articles
{ þ!
!|þ
'!#!
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þ !$
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Financial Planner
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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)
?
Qualities of a Good Financial Planner
{ Building trust with the client
{ Good knowledge of Financial products
{ Familiarity with taxation and estate planning issues
{ Understanding of stages of client¶s life and wealth cycle and asset
allocation
{ Independent judgment and balanced thinking
{ Organized way of working
{ Regular contact with clients
{ Clear Focus on Overall Financial Planning of client rather than on
individual transactions.
{ The basis of genuine advice should be Financial planning to suit the
investor¶s advice.
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{ Should set measurable financial goals.
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{ 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.
?
Important points on Financial Planning
?
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
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Wealth cycle for investors (Very Important)
! # '#!&! "#
Accumulation stage Investing for long term identified Growth options and long term
financial goals products.High risk appetite
Transition Stage Near term needs for funds as Liquid and medium term investments.
pre-specified needs draw closer Lower risk appetite
Reaping Stage Higher liquidity requirements Liquid and medium term investments.
Preference for income and debt products
?
Affluent investors ± the rich investors are of 2 types:
?
Chapter 11
?
{ ''þ(!(''')*)
{ Harness the Power of Compounding ± 1 interest per month is
better than 12 yearly return.
{ Buy and hold is most common strategy BUT most common mistake.
Ideally it should be, track your investments, discard the non
performers and keep the good performers.
{ Rupee cost averaging
{ Value Averaging.
{ Jacob¶s Rebalancing Strategy ( Combination of RCA and Value
averaging strategies- Using a aggressive growth fund and liquid
fund of the same family.) ( putting regularly money in liquid fund and
set a target value for the equity fund)
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{ Buy and hold strategy may not be a beneficial strategy because
investors may not weed out poor performing companies and invest
in better performing companies
{ Rupee Cost Averaging (RCA) is a technique that involves:
± Fixed amount invested at regular intervals
± When NAV is down, more units are bought and when price is
high, fewer units are bought
± Over a period of time, the average purchase price of the
investor¶s holdings will be lower
± Investors use the SIP or AIP to implement RCA
{ Disadvantage: RCA does not tell when to sell or switch from one
scheme to another.
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Rupee Cost Averaging (RCA)
|&! þ&!'
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'#! "!# " .
!
# |
# 5 ! !#
#
$ $ $1 $1 $1 $)1
$ $1; 1 $1 );1
, $ $1; /1$ ;1$ ,);+;1
$ $$1/; ;1$$ ,,;1 ,)*,*1;+
; $ $1; *;1 ,1; );1+
+ $ *1 $$$1$$ ;$1+, )/1+
/ $ 1; $$/1+; +;*1 ;)+,1+
$ /1+; $,1/ /*1 +),1
* $ 1 $$,1+ *,1+, /)*;$1*/
$ $ *1; $1$$ $)$$1/ *),;1+$
$$ $ $1 ,1,, $)*;1/ $,)$1*
$ $ $;1 ++1+/ $)$+$1/ $/)+1$
|'þ#! $=$$+C $1,,
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{ Value Averaging (VA) involves:
± A fixed amount is targeted as desired portfolio value at regular intervals
± If market has moved up, the units are sold and the target value is
restored
± If market moves down, additional units are bought at the lower prices
± Over a period of time, the average purchase price of the investor¶s
holding will be lower than if one tries to guess the market highs and
lows
{ VA is superior to RCA because it enables the investor to book profits and
rebalance the portfolio
{ Investors can use the systematic withdrawal and automatic withdrawal plan
to implement value averaging
{ Investors can also use an equity and a money market mutual fund to
implement value averaging.
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Value Averaging
!
" þ&!'
!
# |
# . !#!'#! "!#
$ $ $1 $1 $1 $1
$1; $);1 +1 $+1
, , $1; )1 ;1;, $1;,
$$1/; )/,1+ $*1* ,1,
; ; $1; ,);/1/ $,;1/+ /+1$*
+ + *1 );1/$ $*1 +++1+/
/ / 1; ;)+++1+/ $;+1+ ,1;,
/1+; +),1 1 $);1/;
* * 1 *)1+$ ,1 $)1/,
$ $ *1; *)+1, ;1,; $)$1
$$ $$ $1 $)*/1*/ $+1$ *$+1+/
$ $ $;1 $,)/;1 $$+1+/ 1
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Some ey concepts of Financial Planning
{ When to invest ± when they have money to invest
{ When to cash out
± When the goals have arrived and clients need the money for the
purpose for which they have invested
± IF the overall market appears overvalued in terms of
fundamentals and historic valuations
{ Start planning and investing regularly
{ Have realistic expectations
{ Invest Regularly
{ The Strategy advisable for an investor to maximise investment
return in long run is Switch from poor performers to Good
performers.
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Asset Allocation ± The Strategic Tool
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Chapter 12
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{ Physical Assets include gold and real estate and traditionally very popular
± Gold is not subject to value erosion on account of rupee depreciation
± Gold is perceived as a protection/hedge against inflation
± Gold-linked unit schemes from mutual funds in India are underway
± 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
{ 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.
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{ Products by issuer:
{
"
± Offer high liquidity and perceived safety
± Low or negligible returns after factoring inflation and tax
þ"
{ Equity
± Issued publicly and listed
± Issued privately and unlisted
± Investors may acquire shares either at the time of IPO or secondary (stock)
market
± Equity offers high growth potential and liquidity
± The challenge is to identify the right shares that are likely to appreciate
± Requires capital to build a diversified portfolio.
± #!"# #!!6-< ##. 0!#
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{ Debt
± Debentures issue a fixed rate of interest
± Debentures are secured by the assets of the borrower
± Debentures are provided rating by credit-rating agencies
± Bonds are also generally provided rating by independent
agencies if the maturity exceeds 18 months
± Creditworthiness of borrower and risk of default have to be
analyzed before investing in these bonds and debentures
± Company fixed deposits carry a higher interest rate and are
unsecured
± These would also have tax implications.
± The Rate of interest paid by a company on debentures issued by
it depends on the Company¶s Credit rating.
± The most important factor to look for when investing in a
corporate fixed deposit is the Credit Rating of the deposit.
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{ )
{ (5('!
± $;4 !
±
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± ! &!! !!
± ""#!<4"!#!"> 11!5! !
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± #!!3! 3#0!1
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{ Indira and isan 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
± IVP permits cash investment and protection of identity
± Easily transferable and liquid.
?
{ RBI Relief Bonds
± Issued by RBI on behalf of the Government of India
± |;4'#!&! !3! >!#!""
± 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.
?
{ (
± Viewed more for investment and tax purposes than a vehicle for risk protection
± Premium qualify for deduction under section 8!C
± 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 µconvergence¶ of insurance and mutual funds is the development of Unit-Linked
Insurance products ± which offers investors choice of asset allocation between debt
and equity.
{ |&!#& #!! &" #
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{ 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.
{ )''#!##!!##!
6!#!&!#1
{ 5#!'!"'#!&!9# #!
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{ Mutual Funds are more recommended option for
individual investors than direct equity.
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Evaluating the Risks of a Mutual Fund
{ !#
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± Risk means the possibility of financial loss.
± ³Risk´ is thus equated with
!!"-#
{ -0!(
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± Company Specific
± Sector Specific
± Market Level
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Volatility of an Equity mutual fund comes from:
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Evaluating the Risks of a Mutual Fund
{ 6!þ#
{
#6 ##
± Standard Deviation ± SD measures the fluctuations of a fund`s
returns around a mean level. SD gives an idea of how volatile
the earnings are. SD measures total risk.
± Disadvantage of SD is that it is based on Past Returns.
± Beta Coefficient ± Beta relates a fund`s return with a market
index and measures the sensitivity of the fund`s returns to
change in market index. A beta of 1 means the fund moves with
market. A beta of less than one means the fund will less volatile
than the market.
± Beta is based on past returns.
?
Evaluating the Risks of a Mutual Fund
?
Risk Adjusted performance
?
Evaluating the Risks of a Mutual Fund
{ |
± Risk adjusted performance calculation is called
Alpha.
± Alpha of a fund compares the fund`s actual results
with what would have been expected given the fund`s
beta and the market index performance.
?
{ 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 MAR S,
LOWER BETA AND HIGHER GROSS DIVIDEND
YIELD
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þ !$
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58# !"#&&"
'#!#!! "#!#D
{ B& "###D
± 5! in aggressive equity funds.
± 25 in high yield bond funds, growth and income funds.
± 25 in conservative money market funds.
B 3! &# D
± 1! in money market funds.
± 3! in aggressive equity funds.
± 25 in high yield bond funds and long term growth funds.
± 35 in municipal bond funds.
?
Contd:
{ #&D
± 3! in short term municipal funds
± 35 in long term municipal funds
± 25 in moderately aggressive equity
± 1! emerging growth equity
{
!! D
± 35 in conservative equity funds for capital preservation / income
± 25 in moderately aggressive equity for modest capital growth
± 4! in money market funds
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!#! && !""
'#!#&! #%
{ '#"-0!D!5"#
± 65 ± 8!
{ &!"#D
± 15 ± 3!
{ 0"#56 #!#D
± 5
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!#! && !""'#!#
#!5! #%
{ '#"-0!5"#D
± 15 ± 3!
{ &"#D
± 65 ± 8!
{ þ# "#D
± 5
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{ Investors in the Inter-Generational Transfer Phase:
± The recommended investment strategy will depend
upon the beneficiaries
?
Selecting the right equity funds
?
Most important points.
{ 0!#"'#!&!! 6!
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{ |! ##! !"5!
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{ |'#!)"3! 3! !)# 5
'#!'#!-0!93! #1
{ |'. !"'#!&!! #"0!"#
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9# 1
{ | !"'#!&!&"##05
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Very Important Points on Equity Funds portfolio
Characteristics.
{ |-0!5#!5!!
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Debt Funds ± Important points
?
{ The investors should invest in Debt Fund with a High
Portfolio and Lower Expense Ratio.
{ An Ideal money market MF has lower expense Ratio.
{ Before investing in equity fund one should look at
ExMark, Beta, Yield, Age and size of the fund, Portfolio
turnover rate.
?
Selection of Balanced fund
Balance fund is rarely a 5!/5! fund!
Equity oriented Balanced funds (up to 65 in equity)
Income oriented Balanced fund (up to 65 in debt)
?
þ !$;
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2###-! #" !2###
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Areas particularly monitored by SEBI
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