4 MUTUAL FUNDDS

THEORY AND ILLUSTRATIONS

OUTLINE
Page
No. Topic
204
1. Introduction
1.
1.1 Definition
1.2 Features
1.3 Advantages of Mutual Funds
1.4 Disadvantages of Mutual Funds 205
Historical Background 206
2.
SEBI Guidelines 206
3.
4. Organisation
4.1 Overview

4.2 Registration
AMC [Reg. 18(1)-(4)]
Trustees and
4.3 18]
Due Diligence by Trustees [Reg. 209
4.4
Fund/ NAV
of Mutual 212
Evaluation
. Fund
Schemes
Mutual
Types of Period
6. According to Maturity
Schemes
6.1 Investment Objective
Schemes
According to
Circular
6.2 Categorisation
vide SEBI
Latest
6.3 Options Dividend v. Growth
Scheme Distributor
6.4 Plans
-
Direct v.
220
Scheme
6.5
Funds
Scheme 220
Fund of
7. No Load
Scheme
220
or
Load
Investments
Investment
Policies For
9. Accounting
9.1
9.2 Valuation Norms
Portfolio
Valuation of
Market
9.3
9.4 Mark-To-Market

9.5 Dividend Equalisation 223

Pricing of Units

10.
1 0 . 1 10.1 Regulations Repurchase
Price
Calculation of Sale and
10.2 Uniformity in
 11. Contents of Balance Sheet [Sch. 11-3]
12. Contents of Revenue Account [Sch. 11-4] 224
13. Accounting Entries 225
13.1 Accounting Treatment of Sale/ Repurchase of Units 226
13.2 Accounting Entries for Sale of Units and Distribution of
Dividen
14. Financial Statements
15. llustrations 229
15.1 NAVV 232
15.2 Movement of Unit Capital
15.3 Accounting Entries

1. INTRODUCTION

1.1 DEFINITION
According to Reg. 2q) of SEBI Regulations, 1996 mutual fund means
a fund established in the
-

form ofa trust to raise monies through the sale units to the
of public or a section
of the public under
one or more
schemes for investing in securities including money market instruments or gold or
related instruments or real estate gold
assets
Provided that infrastructure debt fund schemes
may raise monies through private placement
subject to conditions specified
in these of units
regulations.
1.2 FEATURESS
Key features of a mutual fund that flows from the definition
above are:
I t is established as a trust.
I t raises moneys
through sale of units to the public or a section of the
The units sold under one or more schemes.
are
public.
The schenmes invest in securities
instruments or real estate assets.
(including money market instruments) or gold or gold- related
Thus. how a Mutual Fund works can be
shown as below

EXHIBIT1:
Passed back to
Pool their money with
Investors

Returns
Fund Manager

Securities
Generates
Invest in
How Does a Mutual Fund Work ?
 whoare
nal
Management:
profehacked MUTUALFUNDS
by dedicatedlnvestors
avestors avail
205

ts of the
companies
proication: and investment research
selects
suitable
services ofof
team experienced
exper and skilled
Mutual Funds
pives and sectors. which analyses
ich sionals
invest in investments achieveanalyses
,

industri the performance and to

Investors number of a the
obyeeli
ctives of the scheme
money and than
they can do achieve this
risk
compani es
their own.diversification through
across
acrons broad a l
Convenience: Inves on cross- sect
Co sSuch Investing
:
in
Mutual a
Fund reduces
Mutual
Mutual Fund with far a

proies, MutualbadFunds
as
deliveries, delayed paper work and
helps investors to avoid man
of the investors.provide regular payments
in
eed of tl and
to the need
Ihe withdrawal unnecessary follow
and
any
low up with brokers and
any load. investors can also systematic investment plans according
switch from onescheme
. ential:
turn Poteni Over sche to another without
a
medium to
long term, Mutual Fund
higher they invest in a
return as

Costs due to economies of diversified basket of selected has the pot potential to provide a
that mutual funds enjoy economies scale: The securities.
"pooled" money from a number
of scale: the
other fees translate into lower benefits of scale in of investors ensures
costs for brokerage.
Liquidity: In open ended schemes investors investors. custodial and
related prices from the Mutual Fund can get their
money back promptly at net asset
itself.
schemes, investors can sell value
units on a stock exchange at the With close-ended
at NAV related prices which some prevailing market price avail
their
close ended and interval of the facility of direct repurchase
or

. Transparency: Investors schemes offer periodically.

get regular information on the value
disclosure on the specitic investments made of their investment in addition to
assets and the fund manager 's investment by scheme, the
proportion invested in each class of
strategy and outlook.
8. Highly Regulated: All Mutual Funds
the Mutual Fund
are
registered with SEBl and are strictly regulated as per
Regulations which provide excellent investor protection.
1.4 DISADVANTAGESs OF MUTUAL FUNDS
.No Guarantee of Returns: There is no guarantee of return as some Mutual Funds may
underperform and Mutual Fund Investment may depreciate in value which may even efecterosion
Depletion ofprincipal anmount. Diversification may minimize risk but does not guarantee higher
return. Mutual fund performance is judged on the basis of past performance record of various
COmpanies. But this cannot take care of or guarantee future performance.

LOst: Mutual Fund cost involves exit load. fees paid to Asset Management Company etc. At
hidden costs.
CS, the in vestments are subject to different kind of
Practices e.g. diversion of Mutual Fund amounts
nethical Practices: There may be unethical
for making gains for them. 1Fs, systems do not maintain
by Mutual Fund/ to their sister concerns

main tain. Redressal

ot grievances,if any, is not easy,
the kind should
nd
oftransparency, they therefore, deny the market
in period, the
at times, subject tolock
Liquidation:Many MFscheme are, fund managers
not consider investors' personal
do not in
drawn benefits.When selling
Denetits.
investments,
a mutual
rtfolio
fund portfo may increase risk, increas
liabilit for capitalggain tax etc.
Liquidating
taxes.
gains
d Commissions, and create capital

HISTORICA BACKGROUND

India started in
19633 vwith fornmatie 1ot
in
Fund industry fministrative control of the Reserv
w Phase The Mutual Regulatoryand admin
6 4 - 1 9 8 7 (UTI): dustrial elopmaent
under the RBI and the Indu
from the
control in place of RBI
Parliament

by an Act de-linked

of India (RB). 1978, UTI

was
UTLIha
a d m i n i s t r a t i v e

(RB). In 19
In and
the end ofl1988,
hadR 6,700
nk of India DB) took the
regulatory
by
Ul1. AI

(IDBI launched
over

eme (US '64) the first

was
scheme

(AUM).
"Of nagement
ets Under
206 F'inaciul Accounting - VI
VIl (T.
(T.Y.Y.BB.A.F.
Second Phase 1987-1993 (Entry of Public Sector Funds): The year 1987 t
: SEM-V
public sector mutual funds. SBI Mutual Fund was the first 'non-UTT mulual itn e Cnt
June 1987, followed by C'anbank Mutual Fund (Dec. 1987), Punjab National Bantli h
(Aug. 1989), Indian Bank Mutual Fund (Nov. 1989), Bank of India (Jun. 199(0 u. l hel
Mutual Fund (Oct. 1992). LIC established its mutual fund in June 1989, while Gil
mutual fund in December 1990. Atthe end of 1993, the MF industry had assets under et
of 7 47,004 crores. nder maagera
Third Phase 1993-2003 (SEBl and Entry of Private Sector Funds): SEBI
Was etL
April 1992 to protect the interests of the investors in securities market and to promote the d
promote the developm
of, and to regulate, the securities market. In the year 1993, the first set of SERL
Regulations came into being for all mutual funds, except UTI. Kothari Pioneer NastheMutual
sector MF registered in July 1993. Revised SEBI (Mutual Fund) Regulations, 1996 ar a
applicable. As at the end of January 2003, there were 33 MEs with total AUM ofT 1.21 Ks
out of which UTI alone had AUM of7 44,541 crores. 805 Crores
Fourth Phase Feb. 2003 Apr. 2014: In February 2003, following the repeal
of the Unit Tm..
India Act 1963, UTI was bifurcated into two separate entities, Viz., the Specified Undertaking
Unit Trust of India (SUUTI) and UTI Mutual Fund which functions under the SEBI ME
Regulat
Following the global melt-down in the year 2009, most investors lost money and theirfaith nr
products. The abolition of Entry Load by SEBI, coupled with the after-effets of the globalfinan
erisis, led to the sluggish growth in MF Industry AUM between 2010 to 2013. nancial
Fifth (Current) Phase since May 2014: Since May 2014, the Industry has witnessed steadvindu
and increase in the AUM as well as the number of investor folios (accounts).
A s per AMFI, the Industry's AUM had crossed the milestone of R 10 Trillion (R 10 Lakh Crore
for the first time in May 2014 and in a short span of about three years, the AUM size had increas
more than two folds and erossed 20trillion R 20 Lakh Crore) for the first time in August 201
it is21.36 trillion (Lakh Crore) as on 31st March 2018, a more than three-fold inereaseinfie
years.
The no. ofinvestor folios has gone up from 3.95 crore folios as on 31-03-2014 to 7.13 crorea
on 31-03-2018.

3. SEBI GUIDELINES
As far as mutual funds are concerned, SEBI formulates policies. regulates and supervIses mutul
funds to protect the interest of the investors. SEBI notified regulations for mutual funds in 1993.The
regulations were fully revised in 1996 and have been amended thereafier from time to time. SE
has also issued guidelines through circulars to mutual funds from time to time to protect theintr
of investors.

4. ORGANISATION

4.1 OVERVIEW
(1) Trust: A mutual fund shallbe constituted in theform ofa trust and theinstrumento
be in the form of a deed. duly registered nder the provisions of the Indian Regis
1908 (16 of 1908), executed by the sponsor in favour ofthe trustees named in suchd
|Reg. 14]. A mutual fund is set up in the form of a trust, which has sponsor, tru tees
Management Company (AMC) and custodian.
(2) Sponsor: Sponsor means any person who, acting alone or in combination wih u a spoms

corporate, establishes a mutual fund [Reg. 2(x) of SEBI]. The trust is establisheu h
or more than one sponsor who is like promoter of a company. The trustees are ve e
general power ofsuperintendence and direction over AMc. They monitor the per et
: the"

compliance of SEBIRegulations by the mutual fund. SEBI Regulations require t n t ic

thirds of the directors of trustee company or board of trustees must be indepei
should not be associated with the sponsors.
 ne
fund hold its benejil Cs Or The 207
utureafter be property for the
of the unit Irustee Company who hold the
appointed Without benefit of the holders
[Reg. 2(y) of
fund may form SEBI. proper
any.
m u t u a l

a
trustee prior unitholders. of
company toapproval
No
Aurd.Keg I/). of the StClec shall
act as trusteeBoard. The existing initially
or
a
ent
Asset managemen. with the
MC:,

t .1956(1 of 1956) and

conpany means a prOr approval of the

d) of SEBIJ. AM as such approved conmpanyformed and egistered

by the Board rgi mder the ( ompanies
nder
7/Rula

arious types of securities. approved by

50% SEBI sub- regulatiom (2) of
of the manages
of AMC must be by making investregular
ns the lunds
peratio

and
of asset
management is handleddirectors independent. Day
otices infrastructure,
and sales
sing and:
dvertising
engages
by the
employees, provides
AMC. Iu therefore arranges
to day
1for the requisite

all
promotion, and interacts with requisiteVIce providers. The for the
software. handles
MC has to take reasonable steps and exercise regulators and various
a
service provid
s nertaining to any Scheme due
tinds is not diligence to enst
nsure that the investment of
contrary to the provisions of the SEBI
ct deed. Further, it has to exercise due
rust o

MC needs to have a diligence and care in all its regulations and Ithe
minimum net worth of
F 50
investment decisions. he
hemes, unless the intention to invest
is disclosed
crore.
in the Offer Document.
An AMC cannot invest in its OWn

Custodian: Custodian meanS a person who has been granted

certificate of registration o
arr on the business of custodian of securities under the Securities a

and Exchange
India (Custodian of Securities) Regulations, 1996 [Reg. 2(h) of SEBIJ. Custodian, who is Board of
required
to be registered with SEBI, holds the securities of various schemes of the fund in its custody. As
part of this role, the custodian needs to accept and give delivery of securities for the purchase and
sale transactions ofthe various schemes ofthe fund. Thus, the custodian settles all the transactions
on behalf of the mutual fund schemes. The custodian also tracks corporate actions such as
dividends, bonus and rights in companies where the fund has invested.
investor records. Their offices in various
RTA: The Registrar and Transfer Agent (RTA) maintains
which perform a useful role in handling the
centres serve as Investor Service Centres (ISCs),
is done by the AMC. It is not compulsory
dOCumentation of investors. The appointment ofRTA RTAs need to register
choose to handle this activity in-house. All
0appoint a RTA. The AMC can

with SEBI.

2 REGISTRATION launch any scheme. SEB

with SEBI before they
to be registered
aafunds are required
below :
are summed up
registration fund shall be made to
l o n s 3-10 dealing with registrationof
a mutual
for
An application
Apg
Cation for r e g i s t r a t i o n :
for registration under
BOard in Form A by the sponsor.
application
Every
in ithe Second
the application: fee as
as specified
specified
Applicatation fee to
accompany

a c c o m p a n i e d by
non-refundable
application

shall be is not complete in ali

ladn which
hedule. requirements:
An applicaion,
rejecting any such
application. the
conform to the Provided
that, betore within s
ho n to rejected: such
formalities

be liable to be to
complete

pi all opportunity
uch firther information
licant: ailbe given a n to
furnish such furt.
Cifie
eCified by the Board. require
the
sponsor

Board may
urnilarishing ion information:

be
The
required
by it. of'a
c e r t i f i c a t e

of
tion.
registratio the applicant has to

as may
ofgrant of farness and mtegrity
gibility
bili eriteria:
the following, namely
eria:
For the
purpose

record
record
a n d genera
and
gencral
reputatio

track k ean the sponsor

the ponsor should have
a
sound

track
sOund tra
sound
record shall

n all i s business transactions clause

this
of

xplanation
should
For the
purposes
 business in financial services for a period of not less than fivn
(i) be carrying on years, and
in all the immediately preceding five ycars; and
(ii) the networth is positive
year is more than the capital cont
(iii) the networth in the immediately preceding
the sponsor in the asset management company; and ibuton of
(iv) thesponsor has profits
after providing for deprecation, interest and tax in thr
of the
immediately preceding five years, including the fifth ycar:

(aa) the applicant is a fit and proper person;

(b) in the case ofan existing mutual fund, such fund is in the form of a trust and the trut eed..ha
di.

been approved by the Board:

(c) the sponsor has contributed or contributes at least 40% to the net worth ofthe asset manao
ement
company:
Provided that any person who holds 40% or more of the net worth of an asset managon
company shall be deemed to be a sponsor and will be required to fulfill the eligibility eri
specified in these regulations:
(d) the sponsor or any of its directors or the principal officer to be employed by the mutual t
fund
should not have been guilty of fraud or has not been convicted of an offence involving mordl
a
turpitude or has not been found guilty of any economic offence:
(e)appointment oftrustees to act as trustees for the mutual fund in accordance with the provisions
ofthe regulations;
() appointment ofasset management company to manage the mutual fund and operate the scheme
ofsuch funds in accordance with the provisions ofthese regulations;
(g) appointment of custodian in order to keep custody of the securities or gold and gold related
instrument or other assets ofthe mutual fund held in terms ofthese regulations. and provide
such other custodial services as may be authorised by the trustees.
(6) Criteria for fit and proper person: For the purpose of determining whether an applicantor he
mutual funds is fit an proper person the Board may take into account the criteria specified in
schedule II ofthe Securities and Exchange Board of India (Intermediaries) Regulations.2008
(7) Consideration of application: The Board, may on receipt of all information decide tie
application.
(8) Grant of Certificate of Registration: The Board may register the mutual fund and grant a
certificate in Form B on the applicant paying the registration fee as specified in Second Schedle
(9) Terms and conditions of registration: The registration granted to a mutual fund under regulain
9. shall be subject to the following terms and conditions
th
(a) the trustees, the sponsor, the asset management company and the custodian shall comply
the provisions of these regulations;
(b) the mutual fund shall forthwith inform the Board, ifany information or particulars previ Ously
submitted to the Board was misleading or false in any material respect
ation
(c) the mutual fund shall forthwith inform the Board, ofany material change in the inforn
or particulars previously furnished, which have a bearing on the registration granted uy

(d) payment of fees as specified in the regulations and the Second Schedule.

4.3 TRUSTEES AND AMC [REG. 18(1)-(4)] shall

(1) Investment Management Agreement: The trustees and the asset management comp
with the prior approval of the Board enter into an investment management
ag
investment management agreement shall contain such clauses as are mentioned ine
Fu
Schedule and such other clauses as are necessary for thepurpose making invest
of
nents

e m e n tcompa
(2) Info from AMC: The trustees shall havea right to obtain from the asset managemenl
such information as is considered necessary by the trustees O anysehem

(3) Pre-Launch Obligations of AMC: The trustees shall ensure before the launeh ofm
that the asset management company, has,
 in place
place for its back ollice,
in
Systems

209
(a) ted all key personnel dealing room and

hio-data ich shall contaninchiding fund managertS)acceounting

the lor the
within educational
ith the trustees. scheme( ) and sub their
market

15 qualifications.
days of their past experience the
c
auditors to audit its appointnment
in
se
accounts
) a p p o i n t e

nted a
compliance otlicer who shall be
aPt. rules and reguaions, responsible for
hor the Central notilications, guidelines. monitoring the
compi
Government and for
redressal of instructions, ete.. sucd by the Board
issue
nted registrars and investors
parameters for their grievances
(e) P p o i n t e
laid down
0ared a compiiance manual and supervision:
audit systems; designed internal control mechanisms al
including inc
aecified norms for
empanelment of brokers and
(h) ob abtained, required wherever
under these marketing agents:
tock exchange(s) where
recognised sto regulations. prior in principle approval from the
units are
proposed to be listed.
4.4 DUE DILIGENCE BYTRUSTEES [REG.
18]
44.1 General Due Diligence
The Trustees shall be discerning in the
management company.
appointment of the directors on the Board of the asset

Trustees shall review the desirability or continuance of the asset management company iT
Substantial irregularities are observed in any of the schemes and shall not allow the asset
management company to float new schemes.
The Trustee shall ensure that the trust property is properly protected, held and administered by
proper persons and by a proper number of such persons.
4TheTrustee shall ensure that all service providers are holding appropriate registrations from the
Board or concerned regulatory authority.
5. The Trustees shall arrange for test checks of service contracts.
Trustees shall immediately report to the Board ofany special developments in the mutual fund.
4.4.2 Specific Due Diligence
TheTrustees shall:
obtain internal audit reports at regular intervals from independent auditors appointed by the
Trustees
obtain compliance certificates at regular intervals from the asset management company,
. hold meeting
oftrustees more frequently.
Consider the reports of the independent auditor and compliance reports of asset management
pany at the of trustees for appropriate action,
meetings
maintain records of the decisions of the Trustees at their meetings and of the minutes of the

metings
prescribe and adhere to a code of ethics by the Trustees, asset management company and its

personnel,
nmunicate
comm in writing to the asset management company ot the deticiencies and checking on
ne
rectification of deficiencies.
5. OF MUTUAL FUND/ NAV
EVALUATION
NAVV ofof Scheme:
S Net Asset Value (NAV) is the total assetvalue (net of expenses) per unit ofthhe
Tundd calculated by the Asset Management Companyn atne end ofevery business day. Net
Asset Value on
Value on a particular date reflects the reanzabie Value that the investor will oet
 Financial Accounltng - Vl
VI (1.
(1 Y.B..I
210
Y.B.A. F. SLM-v :

he day of
unit that he is holding if the secheme is liquidated on that date. The ol valuat
day
called the valuation day.
valuation of NA

The performance of a particular scheme ol a mutual fund is denoted by Nct Asset Vai
Net Asset Value may also be delined as the value at which new inves
,nay apply
fund for joining a particular scheme. The investors subscription is Ireated as the ca10 a ut
balancesheet ofthe fund. andthe investments on their behalf are trealed asasc,
calculated for every scheme ofthe ME individually. The value ol portlolio is the AV
apereo
cale value
ofditlerent investments
NAV is equal to [A] Value of Assets [B] +/- Net Profit / (Loss)
|C](-) Value of Liabilite
Since these components are constantly changing, the NAV of a scheme also
varies on cau.
basis da,
A Valuation of Assets is summed up in the following Exhibit.

EXHIBIT 2:VALUATION OF ASSETS

Assets Values Valuation Rule

Nature of Asset Valuation Rule

Liquid Assets e.g. Cash held As per books
All listed and traded securities (other than Closing Market Price
those held as not for sale).
Debentures and Bonds Closing traded price or yield
Illiquid Shares or Debentures Last available price or book value
whichever is lower. Estimated market
price approach to be adopted if suitable
benchmark is available.
Fixed Income Securities Current Yield
Netting the Asset Values
The asset values oblained from above have to be adjusted as follows

Additionss Deductions for Liabilities

Dividends and Interest Accrued Expenses Accrued
Other receivables considered good Liabilities towards Unpaid Assets
-

Other Assets (Owned Assets) Other Short-term or Long-term Liabilities

Valuation of Investments is explained in detail in Para 9.
B Net Profit / Loss is equal to
Interest income
Dividendincome
Realized capital gains
Valuation gains
Realized capital losses
Valuation losses
Scheme expenses.
The following recurring expenses can be charged to the scheme:
.Investment and advisory fees (i.e. management fees that the AMC charges the
tne scheme
MC charges
Marketing and selling expenses, including agents' commission
.Brokerage and transaction cost
Fees and expenses oftrustees
 astrars charges for transter of
Audit fees units sold 211
Custodian fees:
or
redeemed
FxDenses on investor
and warrants: communication,
Expenses on fund
account
statements, dividend
Insurance premium paid by the transfers redemption cheques
Winding up costs fund
for
Costs of statutory advertisements:
terminating a fund or a
scheme;
Listing fees. in case of schemes listed
on a
Such other costs as may be recognised stock exchange: and
approved by SEBI.
Expenses charged to a scheme on this basis,
Expense Ratio (TER) of the scheme. divided by its net assets gives the base Total
Following expenses will have to be borne by the AMC or
charged to the scheme: trustee or
sponsors. but cannot he

Penalties and fines for infraction of laws:

Interest on delayed payment to the unit
holders
. Legal, marketing. publication and other general expenses not attributable to any schemet s):
. Expenses on investment management/ general management;
Expenses on general administration, corporate advertising and infrastructure costs: and
Depreciation on fixed assets and software development expenses.
C Liabilities of a Scheme cover its Unit Capital and other dues. The nunber of units of a
scheme outstanding at any point of time multiplied by their par value (face value) is the unit

capital of the scheme.

securities of a scheme divided by the
(2) NAV per Unit: The NAV per unit is the market value of
date. For example, if the market value of
total number of units of the scheme on any particular
mutual fund has issued 10 lakh units
Securities fund scheme is INR 200 lakh and the
of a mutual lakh/10
of INR 10 each to the investors, then
the NAV per unit of the fund is INR 20 (i.e.200
or to exit a MF scheme. Analyst
decisions to enter
lakh). NAV play an important part investors
in
the schemes.
the NAV to determine the yield
on
use
on a daily basis. The NAV per
disclosed by the mutual funds
) Disclosure: NAV is required to be AMFI s website and the Mutual Funds
have to be updated on
unit of all mutual fund schemes allowed time till 10 a.m. the following
same day.
Fund of Funds are
website by 9 p.m. of the
information.
business day to update the redeem them at Current Net
Mutual funds sell
their shares of public and
(4) Computation of NAV: as under:
is calculated
Assets Value (NAV) which
Liabilities
MF Holdings
-

All MF
Total Market Value of All
Unit Size
scheme is dasically the per
unit market value of all the assets
The net asset value ofa
mutual fund
of the scheme. will help.
10 illustrate this better, a simple example
Scheme Name : XYZ crores)
(Rupees Fifty
cheme Size : 7 50,00,00,000
Face value of units: 7 10
No. of units: 5,00,00,000
Scheme
Size
of Units
Face Value
Investments : In shares
212 Tinaneial tccounting - I1YB. A..: SEM-
Market value of shares: 75.00,00.000(Rupees Seventy I ive (roTes)
Market aluc ol lnvestment 500 00 00
No of its s00 00 O00

Thus. cach unit with face valuc of R 10 has a market value of ?15
5) NAV and Par \alue: W hen nvestors buy new units or ofler their exstng
the unit capital is ncreased or reduced by the number of units
unit, lur te Du
multiplicd by the par l
differenee hetwcen the par value NAV. and muluplied by the number
of units
is adjusted
. ln the Fqualisation Reserve. to the entent it IS
represented by real1zcd gains
(Distrius
TCSeTeSs).
The balance is adjusted in the Unit Premium Reserv
The adjustment is as
explained in the following table:
EXHIBIT 3: NAV AND PAR VALUE
Transaction At Higher than Par Value At Lower than Par
Sale Value
Added to reserve Reduced from reserve
Re-purchase Reduced from reserve Added to reserve
Such an accounting treatment ensures that sale
and redemption of units does not
as will be clear from the change the NA
example that follows. The Equalisation account captures the full value
of realised income earned
during the year. At the end of the year. the balance in the
account is transferred to the revenue account.
equalization
As seen above. there are
basically four different types of reserves that get created in the books of
the scheme through investment activities and sale
and repurchase of units. The
reserve VIs-a-vis dividend distribution is as position of each
follows:

EXHIBIT4: GAINS, RESERVES AND DIVIDENDS

Realised gains Available for dividend distribution
Unrealised gains Not available for dividend distribution
Equalisation reserve Written back to revenue account and available for
distribution
Unit premium reserve Not available for dividend distribution

6. TYPES OF MUTUAL FUND sCHEMES

6.1
SCHEMES ACCORDING TO MATURITY PERIOD
A mutual fund scheme can be classified into
scheme
open-ended scheme or close-ended scheme or tera

depending on its maturity period.

1 Open-ended Fund/Scheme
Open-ended scheme means a scheme ofa mutual fund which offers units for sale withoul syi
any duration for redemption |Reg. 2(s)). An
open-ended fund or scheme is one that a
subscription and repurchase on a continuous basis. These schemes do not have aisfixed matur
period. Investors can conveniently buy and sell units at Net Asset Value (NAV) per unit h

declared on a daily basis. The key feature of open-end schemes is

liquidity.
2. Close-ended Fund/Scheme
(1) Meaning: Close-ended scheme means any scheme of a mutual fund in which the
pTIN
of the scheme is spccilied |Reg. 201. A close-ended fund or scheme has a stipula the u
period e.g. 3-5 yearS. The fund is open for subseription only during a specitied pet
of launch of the scheme. Investors can invest in the scheme at the time of the new e
 f u t u a

thereafter they
v car
can buy or sell the
listed.
units of the
Listed: Every clos
ended scheme. scheme the on 213
, slock excha
stock exehange
a recognised other than an where the unitS
hythe Board |Reg. 32| within such time equity linked are

No Repu urchase:Units of period and subjectsavinggs scheme, shall bec istedd on

tosuch t

launched on or alter close

a

the
ended seheme. conditons specitie as

futual Fundnds) other than

rity period of(Amendment) commencement of the those of an equity linked savings an
maturi
Regulations,
such scheme [Reg. 2009 shallSecurities and1Exchange
Exchan Board of India
C rsion:
4 ) Conve The units oft
close ended
33(1)1. not be
repurchased before the ena
r of document
such scheme scheme may be
ders are discloses converted into
the unitholde
expenses ofthe sscheme
provided
with an
the
option and the
option to redeem their period of such
open-ended scheme :ta

ndia launched prior to units in full:: and conv

(Mutual Funds) (Amendment) commencement of the (c) the initial issue
Securities
33(3)1. Regulations, 2008 have been amortised fully
ies and
with the Tenth Schedule [Reg. Exchange Board &

in
5)Full Redemption: A close ended
all
scheme
accordae
period [Reg. 33(4)]. shall be fully
redeemed at the end of the
maturity
ARoll-over: A close-ended scheme
may be
ather terms of the roll over and all allowed to be rolled
other overif the purpose. period and
material details of the scheme
composition
of assets
immediately before the roll including the likely
scheme, are disclosed to the unitholders and a over, the net assets and net asset value of the
However, such roll Over will be permitted copy of the same has been filed with the Board.
only
consent in writing and the unitholders who do
in the case of
those unitholders who express their
not opt for the roll over or
consent shall be allowed to redeem their have not given written
holdings in full at net asset value based price. [Reg.
33(4)-Prov.]
3. Interval Schemes
) Certain MF Schemes provide that the
subscription to the scheme can be made during a specific
period (known as specified transaction period) and the repurchase of units is permitted on all
business days subject to applicable loads (except for redemption during specified transaction
period when no load is charged). These schemes are generally referred to as 'interval schemes.
(2) For all interval schemes/plans:
The units shall be mandatorilylisted.
N o redemption/repurchase of units shall be allowed except during the specified transaction
and redemption may be made to and from
period (the period during which both subscription
the scheme). The specified transaction period shall be of minimum 2 working days.

period in an interval scheme/plan shall be 15 days.

inimum duration ofan interval
mature on or before the opening of
4)vestments
In such securities which
shall be permitted only in
transaction period.
ne
immediately following specified
INVESTMENT OBJECTIVE
SCHEMES ACCORDING TO
6.2 balancedi scheme considering scheme or s
Asche scheme, income
e

e can also be classified as growth

be open-ended
ended schemes
or close-end as described
schemes may
investment o. objective. Such
as follows:
tarlier uch schemes may be
classified mainly
ds is to provide capital
funds appreciation
The aim ofgrowth
Growth/EquityOriented

Over medium to long- term. Such

invest aa major
Scheme:
schemes normally invest
schemes
major|part of their corpus in
de different options to
provid
high risks. These
CquitiSuch funds have comparatively may choose e an option depending
etc. andthe investors
option, growth, option n
in the
thea application form. The mutual
estors like dividendinvestors must indicatethe laterr date. Growth schemes are good for
their
undePreterences.
The the options
at a

allow the in vestors to change appreciation

over a period oftime.
nvest outlook seeking ds is to provide regular and steady
long-term funds
"s
having a of income
The aim fixed income securities such as bonds.
come/
hCom ebt
Oriented
Scheme:

Such
schemes
in vest in
generally
in vestors.
 Government securities and money market instruments.
.-)
Such .
corporate debentures,
schemes. However, opportunities of capital appreciationt
funds are les
riskycompared to equity
in such funds. The NAVs of such funds are allected because of change in interest ra le
country. Ifthe interest rates fall. NAVs of such funds are likely to increase
se in
m the
the short short run and
vice versa. However, long term investors may not bother about these luctuatione
3. Balanced/Hybrid Scheme: The aim ofbalanced schemes is to provide both growth and s..
income as such schemes invest both in equilies and fixed income securities in the Dr egular
indicated in their oftfer documents. These are appropriate for investors looking for
growth. They generally invest 40-60% in equity and debt instruments. These funds are alsmoderar
all
allecte
because of tluctuations in share prices in the stock markets. However, NAVs of such liund
ds are
likely to be less volatile compared to pure equity funds.
4. Money Market Or Liquid Scheme: These schemes are also income schemes and theiraumi
provide easy liquidity. preservation of capital and moderate income. Is to
These schemes invest exclusively in short-term instruments such as treasury bills, certificatesof
deposit. commereial paper and inter-bank call money, government securities, etc. Returns on
these schemes tluctuate much less compared with other funds. These funds are
appropriate for
corporate and individual investors as a means to park their surplus funds for short periods
5. Gilt Funds: These funds invest exclusively in government securities. Government
securities
have no default risk. NAVs of these schemes also fluctuate due to
change in interest rates and
other economic factors as is the case with income or debt oriented
schemes
6. Index Funds: Index fund scheme means a mutual fund scheme that invests in.
irities in the
same proportion as an index of securities [Reg. 2(mn]. Index Funds replicate the portfolio ofa
particular index such as the BSE Sensitive index (Sensex). NSE 50 index (Nifty). etc. These
schemes invest in the securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index.
the same percentage due to some factors known as
though not exactly by
"tracking error" in technical terms. Necessary
disclosures in this regard are made in the offer document of the mutual fund scheme.
7. Sector Specific Funds: These are the funds/schemes which invest in the securities of only those
sectors orindustriesas specified in the offer documents. e.g. Pharmaceuticals. Sofiware. Fast
Moving Consumer Goods (FMCG). Petroleum stocks, Information Technology (IT), Banks, etc.
The returns in these funds are dependent on the
performance of the respective sectors/industries.
While these funds may give higher returns, they are more risky compared with diversified funds.
investors need to keep a watch on the per formance of those sectors/industries and must exit atan
appropriate ime. They may also seek advice of an expert.
8. Tax Saving Schemes: These schemes offer tax rebates to the
investors under specific provisi
of the Income Tax Act, 1961 as the Government offers tax incentives for investment in spe
avenues, for example. Equity Linked
Savings Schemes (ELSS) under section 80C and Kaj
Gandhi Equity Saving Scheme (RGESS) under section 80CCG
of the Income Tax Act, 1owth
Pension schemes launched by mutual funds also offer tax benefits.
These schemes are d
oriented and invest pre-dom1nantly in equities. Their leu

growth opportunities and riSKS aS

are like any equity-oriented scheme.
sell at
9. Exchange Traded Funds (ETFs): ETFs aremutual fund units that investors can buy or s
the stock exchange. This is in contrast to a normal mutual fund sells

unit that an investor Duydeal

from the AMC (directly or through a
distributor). In the ETF structure, the AMC does ant
directly with investors or distributors. Units are issued to a few designated
large part he
called Authorised Participants (APs). The APs provide buy and sell
quotes for the El wher he
stock exchange. which enable investors to buy and sell the ETFs at
any given point of u
the stock markets are open for trading.
ETFs theretore trade like stocks and experience price changes
throughout the day a
bought and sold. Buying and selling ETFs requires the investor to have demat and trading ts
10. Capital Protection-Oriented Secheme:
Whichn
(i) Definition: Capital protection oricnted scheme means a mutual fund sehenie
thro

designated as such and. which endeavours to protect the capital invested therem
suitable orientation of its portfolio structure | Reg. 2(ea).
u f t u a lF u n a d s

215
'anditions: A capital protection oriented scheme may be launched.
subject to the following:
ol
(a the
units of the scheme are rated by a
registered credit rating agency from the viewpoint
of
the ability of its portlolio structure to attain
protection of the invested therein; capital
(b) the scheme is close ended; and
c) there s compliance with such other requirements as may be specificd by the Board in this
behalf. [Reg. 38A].
i Protection, not Guarantee: The advertisements pertaining to Capital Protcction (Oriented
Scheme shall disclose that the scheme is "oriented towards protection of capital" and not
with guaranteed returns." It shall also be indicated that the orientation towards protection of
capital originates from the portfolio structure of the scheme and not from any bank guaranle,
insurance cover, etc.
(iv) Credit Rating: The proposed portfolio structure shall be rated by a Credit Rating Agency
registered with the Board
from the view point of assessing the degree of certainty for achieving
reviewed on a quarterly basis.
the objective of capital protection and the rating shall be
structure ofthe scheme
The Trustees shall continuously monitor the portfolio
(v) Monitoring: to the Board. The AMC(S) shall also
and report the same in the Half Yearly Trustee Reports
same in its Board.
report on the bimonthly Reports to the
structure
debt component ofthe portfolio
High-Rated Debt: It shall also be ensured that the
(vi)
and
has the highest investment grade rating. fixed-income securities
invests INR 80 in that the
fund collects INR 100, it a
(vii) Example: lfthe instruments. The money
is invested in such way
related that the
INR 20 in equities or equity three years (assuming
become INR 100 in
is expected to grow to the INR 100 capital
INR 80 portion preserve
Thus, the aim is to years).
scheme has a maturity period ofthree
shall invest
the scheme. (GETF) Scheme
till maturity of Traded Fund
Fund: A Gold
Exchange related instruments
Traded However
i n v e s t m e n t s in gold
instruments. Scheme
11. Gold Exchange related Board. Gold Deposit
Gold and Gold the related
instruments are specified by
primarily in designated as such gold
after such 2015 (GMS) are 20% of
shall be done
only Monetisation
Scheme, not exceed
GMS will
/Gold Gold ETF in GDS and
lnvestment by
(GDS) of banks cumulative

instruments.
The
schemes.

of such
total AUM
CATEGORISATION
VIDE SEBI CIRCULAROctober 06, 2017 relating to
LATEST I M D / D F 3 / C I R / P / 2 0 1 7 / 1 1 4
dated
summarised
below-
S E B / H O / I M D
6.3 is
No. Characteristics
and Type of Schemes
C i r c u l a r
Scheme C
SEBI schemes,
ategories of
cate groups:
classified in the following
6.3.1 Groups
be
be bbroadly would
would
Schemes

i
The E q u i t yS c h e m e s

i . D e b t S c h e m e s

i . H y b r i d Schemes

Schemes

Oriented

Solution

V . O t h e r
S c h e m e s
Small Cap
iv. schemes, it has been
Large Cap, Mid Cap and universe
for equity
ition of vestment
6 . 3 . 2 D e f i n i t i o in
in respect of the follows:
uniformity as
small cap
ensure mid cap and capitalization
to market
decided t odefi
large cap, terms
In orde define -100th company in
of full capitalization
1st market
Cap: terms
in capitalization
r g e
company
-250th
of full market
101st terms regard.
aD:
Mid Ca
in offull AMFI in this
25Ist company onwards prepared by
Cap: the list ofstocks
MutualFundsw o u l d be
would
required to adopt
Funds
216 Financial Accounting -

VIl (I.
Y.B.A.. .

6.3.3 Only One Scheme Per Category EM-,

Only one scheme per category would be permitted, except:
.Index Funds/ ETEs replicating/ tracking diflerent indices;
Fund of Funds having dillerent underlying schemes: and
.Sectoral/ thematic funds investing in different sectors/ themes.
6.3.4 Equity Schemes

Sr. Category Scheme Characteristics Type of Scheme (Uniform

No. of Schemes Description of Scheme)
1. Multi Cap Minimum investment in equity and An open ended equity scheme
Fund equity related instruments 65% of investing across large cap
total assets. mid cap, small cap stocks
2. Large Cap |Minimum investment in equity and An open ended equity scheme
Fund equity related instruments of large cap predominantly investing in
Companies 80% oftotal assets. large cap stocks.
3. Large and Minimum investment in equity and An open ended equity scheme
Mid Cap equity related instruments of large investing in both large cap and
Fund companies 35% of total assets. mid cap stocks.
Minimum investment in equity and
equity related instruments of mid cap
stocks 35% of total assets.
An open ended equity scheme
4. Mid Cap Minimum investment in equity and predominantly investing in mid
Fund equity related instruments of mid cap
cap stocks.
companies 65% oftotal assets.
5. Small Cap |Minimum investment in equity and An open ended equity scheme
in
equityrelated instruments of small cap predominantly investing
Fund small cap stocks.
companies 65% of total assets.
invest |An open ended equity scheme
6. Dividend Scheme should predominantly predominantly investing in
stocks.
Yield Fund in dividend yielding
Minimum investment in equity 65%
of | dividend yielding stocks.
-

total assets.
|An open ended equity
scheme
Scheme should follow a value
7. Value investment strategy. following
investment
a value
Fund*
Minimum investment in equity and strategy.
related instruments
-

65% of
equity
total assets.
ended equity schene
Scheme should follow a contrarian An open
Contra following contrarian
Fund* investment strategy.
Minimum investment in equity
and investment strategy
related instruments 65%
of
equity
total assets. number of |An open
ended equity sche
scheme focused on the maximum 30
8. Focused |A investing in the
stocks (maximum 30). where
Fund investment equity and
in stocks (mention focus, viZ
| Minimum instruments 65% of
-
Scheme
intends to
mid cap
related
equity multi cap, large cap,
total assets.
small cap)
Setic Minimum
Sectoral /
investment in equity and
equity related
Thematic
and
217

particular instruments of
sector
An open ended a
equity sche
80% of total assets.particular theme investing in
ular thenie sector
(mention the
-

ended equity sector)/ An

scheme open
theme (mentionfollowingl
the
10. ELSS Minimum investment in equity and theme).
equity related An open ended equity
total assets instruments- 80% of
(in accordance with saving scheme with a statutory
linked
Linked Saving Scheme, 2005 Equity lock in of 3 years and tax
|by Ministry of notified benefit.
Finance).
1Mutual Funds will be permitted to offer either
Value fund or Contra fund.
6.3.5 Debt Schemes
Sr. Category Scheme Characteristics Type of Scheme (Uniform
No. of Schemes Description of Scheme)
1. Overnight Investment in overnight securities An open ended debt scheme
Fund having maturity of 1 day. investing in overnight securities
2. Liquid Fund Investment in debt and money An open ended liquid scheme
market securities with maturity of
upto 91 days only.
3. Ultra Short Investment in Debt and Money An open ended ultra-short term
Duration Market instruments such that the debt scheme investing in
Macaulay duration of the portfolio instruments with Macaulay
Fund i s between 3 months - 6 months. duration between 3 months and

6 months.
Investment in debt and money An open ended low duration debt
4. Low in instruments
market instruments such that the | scheme investing
Duration Macaulay duration of
the portfolio | with Macaulay duration between
Fund is between 6 months
12 months. S months and 12 months.
Market An open ended debt scheme
|Investment in Money
5. Money in money market
instruments having maturity upto|investing
Market | instruments.
1 year.
Fund Investment in debt and money |An open ended short term debt
such that the scheme investing in instruments
6. Short market instruments duration between
Duration Macaulay of
duration the portfolio |with Macaulay
year-3 years. |1 year and 3 years.
Fund
is between 1
and
in debt money An open ended medium term debt|
Investment
7. Medium market instrumentSofSUcn
that
the |scheme investing in instruments
duration between
Duration AMacaulay duration the portfolio | with Macaulay
years |3years and 4 years.
Fund is between 3 years-4
debt and |An open ended medium term debt|
money
Investment in
Medium t o
rmarket instruments such that the |scheme investing in instruments
3.
Macaulay duration of the portfolio | with Macaulay duration between
Long |4 years and 7 years.
7 years.
is between 4
|Duration

An open ended debt scheme

Fund Investment in debt and money
market Instruments
such that the |investing in instruments with
9. Lo
D nag
ur tion
Macaulay duration of the portfolio | Macaulay duration greater than
Fund
is greater than 7 years. 7 years.
Investment across duration. An open ended dynamic debt

1 0 .D y n a m i c Scheme investing across duration.

B o n d
 218 Financial Accounting - VIl (TT.Y.B.A.F
SEM-VI
11. Corporate Minimum investment in corporate|An oper enided deht cherne
Bond Fund bonds 80%% of total assets (orily
in highest rated instrurnents). predominantly investinig in
highest rated corporate
12. Credit Risk Minimum investment in corporate | open ended debt bonds
Fund bonds 65% of total assets An scherme
(investment in below highest investing in below
iighest rated
Corporate honds.
rated instruments).
| 13. Banking and| Minimum investment in debt
PSU Fund instruments of banks, Public |Arn open ;rded debt ochere
Sector Undertakings, Public predonirantly investing in dett
instrurnents of banks, Putlir,
Financial Institutions 80%, of Sector Undertakirgs, Publirc
total assets.
14. Gilt Fund Financial Institutions.
Minimum investmnent in Gsecs-
|80% of total assets (across An open ended deht scherne
investing in gover1rment
maturity). securities acrosS rmaturity.
15. Gilt Fund Minimum investment in Gsecs
with 10 year |80% of total assets such that the An open ended debt scheme
constant | Macaulay duration of the portfolio investing in government
duration is equal to 10 years. securities having a constant
16. Floater maturity of 10 years
Fund Minimum investment in floating An open ended debt scherme
rateinstruments 65% of total
-

assets. predominantly investing in

floating rate instrunents.
6.3.6 Hybrid Schemes

Sr. Category Scheme Characteristics

No. of Schemes Type of Scheme (Uniform
1.
Conservative |Investment in equity and equity related Description of Scheme)
Hybrid Fund instruments- between 10% and |An open ended hybrid
25% of
total assets; |scheme investing
Investment Debt instruments
in predominantly in debt
between 75% and 90% of total assets.
instruments.
2. Balanced
Equity and equity related instruments
Hybrid Fund® between 40% and 60% of total |An open ended balanced
-

assets; | scheme investing in equity

Debt instruments between 40% and
-

60% of total assets; and debt instruments.

No Arbitrage would be permitted in
scheme. this
Aggressive Equity and equity related
Hybrid Fund" between 65% and 80% of instruments |An open ended hybrid
total assets; scheme investing
-

Debt instruments between 20% -

and 35% of total assets. predominantly in equity and

3. Dynamic equity related instruments.
Investment in equity/ debt that is
Asset managed dynamically. |An open ended dynamic
Allocation or asset allocation fund
Balanced
Advantage
4. Multi Asset
Allocation"
|Invests in at least three asset classes An open ended scheme
with a minimum allocation
of at least investing in .
10% each in all three
asset classes. (mention the three different
asset classes).
 Scheme
Minimum following
Arbitrage 219
Fund
investmentarbitrage
in strategy.
equity related instrumentsequity and |An open ended scheme
total assets. 65% of investing in arbitrage
Minimum investment in opportunities
Equity

equity related equity and

total assets andinstruments
/Savings

|An open ended scheme

indebt 10% of minimum 65% of
investment
investing in equity,
total
Minimumin hedged and assets. arbitrage and debt.
stated the SID. unhedged to be
Asset Allocation under
defensive
considerations may also be stated in
the Offer Document.
yptual
Funds will be permitted to offer either an Aggressive
coC urities will not be treated as a
Hybrid fund
fu or Balanced fund.
irelgns

separate asset class.

1Solution Oriented Schemes
Category Scheme Characteristics Type of Scheme (Uniform
aof Schemes
Description of Scheme)
Retirement Scheme having a lock-in for at |An open ended retirement solution
Fund least 5 years or till retirement oriented scheme having a lock-in
age whichever is earlier. of 5 years or till retirement age
(whichever is earlier
Children's Scheme having a lock-in for An open ended fund for investment
lock-in for at
Fund at least 5 years or till the child for children having a
attains
attains age of majority | least 5 years or till the childis
whichever is earlier. age of majority (whichever earlier).|

38 Other Schemes

S c h e m e Characteristics Type of Scheme (Uniform

Category Description of Scheme)
a, of Schemes ended scheme
Minimum
investment in securities An open
replicating/tracking index.
Index index (which is
Funds/ETFs of a particular tracked) 95%
being replicated/
of total assets. fund of fund
An open ended
i n v e s t m e n t in
the fund
FoFs Minimum of total
scheme investing in
fund- 95% the underlying fund).
(mention
(Overseas/ underlying

Domestic) assets.

OPTIONS-DIVIDEND V.GROWTH regular flow e

w ofincome (dividend
SCHEME some mightprefer
a
thesc
in the scheme itself(growth
scheme, scheme to grow
to a lend to be paid out to
ng ihe in who
subscribe
from the like the dividen.
Estors their
income
some may
to be re-invested
, while others might prefer
Ouhers option, e adividend
like the
Dividend others may
for
those who opt option); Dividend option).
o
g Dividend
the
APayo sub-option under the
e s t m e n t
sub-option
under

Scheme (Re-inves DISTRIBUTOR

with the
PLANS-DIRECT
V. i.e. they invest directly
are charged only
distributor,

y
HEME
EME PLA services
ofa
Distributor
Dist
commissions.
beine alower than
not
use
the
to
them
Plan NAV being
tor Plan
NAV
Direct Plan do
D i s t r i b u t o r

charged
he are
not
cost
results
in

stributor
Commissions

The higher
stors theDistril
ributor
Plan.
 220 Financial Accounting -

VIl (T. Y. B.A. F. ; SEM

the Direct Plan NAV. Although Direct Plan NAV is higher in absolute value, since, -Vl)
commissions will not be charged, the future growth/income in Direct Plan
lan will
will be
be higher thDuo
higher
distri
case of Distributor Plan. than in
the

7. FUND OF FUNDS SCHEME

. Fund of funds scheme means a mutual fund scheme that invests primar1ly in other schemesa
same mutual fund or other mutual funds [Reg. 2(ma)]. e

2. The Scheme Information Document (SID) and the advertisements pertaining to Fund
of Fn
Scheme shall disclose that the investors are bearing the recurring expenses of the scheme
addition to the expensesof other schemes in which the Fund of Funds Scheme makesinvestm
ts.
3. AMCs shall not enter into any sharing arrangement with the underlying funds in
revenue
ans

manner and shall not receive any revenue by whatever means/head from the underlying fimd
Any commission or brokerage received from the underlying fund shall be credited intoconcer
d
scheme's account 57.
4 Fund of funds mutual fund schemes shall adopt the total expense structures laid in
out
Regulations
S8, which Asset Management Companies shall clearly indicate in the SIDs.

8. LOAD OR NO LOAD SCHEME

(1) Load Scheme:
Meaning: A Load Scheme is one that charges a percentage of NAV for exit and the load
structure in a scheme has to be disclosed in its offer documents. (MFs can no longer charge
any other load such as entry load etc.).
. Exit Load: An open-end scheme may pay investors an amount less than NAV for the open-
end units that they offer for re-purchase. This shortfall. borne by exiting investors. is called
the exit load" or "back end load". Exit load is charged to discourage the investors from
exiting the scheme early.
Repurchase Price: Thus, ifa scheme has NAV of |1 and exit load of3%. the investor receives
only 10.67 for each unit redeemed. So, Re-purchase Price = NAV minus Exit Load.

Plough Back:Earlierthe exit load (0.33 in this case) would go into a separate account from
which the AMC would meet part of its selling and distribution expenses. Under current
regulations, the entire exit load amount needs to be ploughed back into the scheme immediately
Thus, it benefits the unit holders who continue in the scheme.
Subscription: While charging the load, the scheme cannot differentiate between unit holders
on the basis of amount of subscription.
No Load Units: Load cannot be charged on bonus units, and units allotted on re-investment
of dividend.
(2) No Load Scheme: A no-load scheme is one that does not charge for entry or exit. It mea
investorscan enter the fund/scheme at NAV and no additional charges are payable on purchase
or sale of units.
SEBI has mandated that no entry load can be charged for any mutual fund scheme in Inala.

9 INVESTMENTS
9.1 ACCoUNTING POLICIES FOR INVESTMENT
tor
Following accounting policies shall be followed by Mutual Funds for investments in secur
the preparation
of accounts, vide Schedule 11-2(a) to SEBI Regulations:
fuftual
F u n s

221
pate of Transactions
)
Market Transactions: Purchase
Stock M a r k e

or Sale
Transactions
ed as of the trade date and not as of the settlement in the Stock Market should be
date, so that the effect of all investments
rdduring tmanCal year arC recorded and reflected in the financial
a
statements for that year.
) Transactions: Purchase Sale Transactions outside the Stock Market
Other or
Privale
ment) should be recorded in thhe (say
the event of a Purchase,
ans in enlorceabie obligation to pay the price or, in the event of date on which the scheme on

cheme obtains an enforceable right to collect the proceeds of saleaorSale,

thes
on the date on which
an enforceable obligation
todeliver the instruments sold.

91.
.42 Recognition of lnvestment Income
Dividend Income earned from Quoted Investments should be recognized, on the date the share
quoted on an ex-dividend basis
Dividend Income earned from Unquoted Investments should be recognized. on the date or
declaration.

Where inconme receivable on investments has accrued but has not heen received for the period
specified in the SEBI guidelines. the income accrued should be debited to Revenue Alc as
provision.
4 Bonus Shares to which the scheme becomes entitled should be recognized only when the original
shares on which the bonus entitlement accrues, are traded on the stock exchange on an ex-bonus
basis.
5. Righis Entitlemenis should be recognized only when the original shares on which the right
entitlement accrues, are traded on the stock exchange on an ex-rights basis.

9.1.3 Cost of Investments and

include brokerage, stamp charges any
I. Cost of investments acquired or purchased should
charge customarily included in the broker's bought
note.

instruments any front-end discount offered

should be deducted
2. In respect ofprivatelyplaced debt
from the cost of the investment.
for the period
of interest bearing investments, interest paid
3. In respect of Cunm-Interest Purchase
-

be treated as a cost of purchase

the date of purchase shall not
from the last interest due date upto
Recoverable Account.
but must be debited to Interest
Interest received at the time of
Sale of interest bearing investments,
4. In respect of Cum-Interest the date of sale must not be treated as an
last interest due date upto
sale for the period from the Interest Recoverable Account.
must be credited to
addition to sale value but the
and the gains or loss on sale of investments,
cost of investments
5. In determining the holding followed.
"Average Cost" Method must be

9.1.4 Disposal ofInvestments

investment is
thedijference between
the Selling Price
arising on the disposal of
1. The profit/loss
and the Cost. Account
investment is recognised fully in the Revenue
on disposal of
2. The profit arising the Kevenue Account, ifthe investments
uyin
investment is are purchased.
disposal of
recognised
3 The loss on
in which they
s a m e year
are sold
in the bsequent to year of purchase, loss on disposal is charged
year subs
is sold in any balance available, and the balance of
Depreciation to the extent of
investment
4. Ifan Drovision for for Deprec Provision
to the Revenue Account.
first against be charged directly should
loss, if any
9.2 VALUATION NORMS

and carries out valuation

thatthe asset management company computes
t
in accordance with the investment valuation norms specified
ensure

shall
fund
iby
ts its scheme(s)
scheme(s)
Every mutual
made the same. [Reg. 471
and publishes
i n v e s t m e n t s

of
Schedule,
in Eighth
 Financiul Accounting - Vll (T. Y.B.A.
222

The Principles
The valuation of
(a) be
of Fair Valuation vide Sehedule

investments shall be based

8 are sunmed up

the jprnciples of fair valuation

on
below

1.e.
Y.B.A.F.:SEM-VI,
rellective of the nalizable vale of the securities/assets. The valuation shall lIon
Jaith and in true and fair manner through appropr iate valuation policies and ne one
Board ol the asset managcment procedures
(b) The policies and procedures approved by the
identify the methodologics that will be used for valung cach Iypeol securities/assets
gement company shal,
s/assets
s/assets by
mutual fund schemes. Investment in new type of securities/assets mutual held by the
by the mutual
shall be made only after establishment ofthe valuation methodologies for such fund schen
the approval of the Board of the asset management company with
(c)The assets held by the mutual funds shall beeomsistently valued according to the pol.
proccdures. The policies and procedures shall describe the prOcess to deal with eve
events where market quotations are no longer reliable tora particular security ceptional
(d) The asset management company shall provide for the periodic review of the valuation
n polices
and procedures to ensure the appropriateness and accuracy ol the methodologies used
effective implementation in valuing the securities/assets. The valuation policies and proc
shall be regularly reviewed (at least once in a Financial Year) by an independent auditorto
to seek
to ensure their continued appropriateness.
(e) The valuation policies and procedures approved by the Board ol asset management compans
should seek to address conflict of interest.
() Disclosure of the valuation policy and procedures approved by the Board of the asset management
company shall be made in Statement of Additional Information, on the website of the ase
management company /mutual fund and at any other place where the Board may specif
(g) The responsibility of true and fairness of valuation and correct NAV shall be of the asset
management company. i.e. the asset management company shall even deviate from the established
policies and procedures in order to value the assets/ securities at lair value with appropriate
reporting to Board ofTrustees and the Board of the asset management company and appropriate
disclosures to in vestors.
(h) The asset management company shall have policies and procedures to detect and prevent incorrect
valuation.
) Documentation ofrationale for valuation including inter scheme transfers shall be maintained
and preserved by the asset management company as per regulation 50 of these regulations to
enable audit trail.
G) In order to have fairness in the valuation of debt and money market securities, the asset management
company shall take in to consideration prices of trades of same security or similar secui
reported at all available public platform.

9.3 MARKET VALUATION OF PORTFOLIO

(1) Meaning: The Market Valueof Portfolio is the aggregate market value of diflerentinvestments
(2) Objective: The Objective of determining the Market Value of Portfolio is to ascertain NAV and
consequently Portfolio Performance
(3) Market Value of a Traded Security: Market Value of a Traded Security is the Last Closing
Price quoted in a stock exchange (where the security is mostly traded) immediately before the
valuation day.
(4) Non-traded Securities: Non-traded Securities, (i.e. securities not traded in a period of 30 days
prior to the valuation day), shall be valued in goodfaith in accordance with the norms specified
in
Seventh Schedule. For example, a non- traded debt instrument can be valued by
cash flows by YTM of a comparable debt instrument as increased for lack of liquidity. 1ue
discounting
discounting rate for non-traded government securities should be the prevailing market rate.
(5) Basis: The Market Value of in vestments should be determined on an individual investment basi
or by category of investment basis, but not on an overall (or global) basis for the entire investme
portfolio.
otmal
Fumds

M A R K - T O - M A R K E T

94

FFor
o r th
the purposes o the linanCial statements, Mutual Funds shall mark all investments
M e a n i n g :

)
ket and carry in vestm
1 0m a r k e
in the Balance Sheet at Market Valuc.
eciation: While marking investments to market on Balance Sheet Date, the veess of Cost
Depreciation:

of.Ae"quisitio.
ition over Market Valie ol Securities on valuation day is treated as Depreciation which
ealized lo
is unrealized loSs. The PrOViSIOn J0r Depreciation in the value of investments is crcated in the
books by debiting the Revenue Account. The provision so created is shown as a deduction from
value ofInvestments in the Balance Sheet.
thevalue
the
reciation: While marking investments to market on balance sheet date, the ercess of Marke
Lalue of Securilies on valuation day over Cost of Acquisition is treated as Appreciation, which is

1realized gain.
unrea
Unrealised Appreciations
are transferred to the
directly Unrealised ApprecialnOn
Reserve. (1.e., winout routing it through the Revenue Account) with the corresponding debit to

the Investments AccOunt. Ihe Unrealised Appreciation Reserve is to be reversed at the beginning
of the next accounting year.
No Set-Off: The gross value of depreciation on investments should be reflected in the Revenue
Account rather than the same being netted off with the appreciation in the value of other
investments.

(5) Basis: Depreciation/Appreciation on investments should be worked out on an individual

investment basis or by category ofinvestment basis, but not on an overall (or global) basis for
the entire investment portfolio.
9.5 DIVIDEND EQUALISATION
New investors are not entitled to any share of the income of a mutual fund scheme which arose
before they bought their units. However, at the end of each distribution period the fund management
allocates the same amount from the income of the fund to each unit. To compensate for this, an
equalisation payment is added to the cost of new units. This is the amount of income that has arisen
up to the date of purchase ofthe unit. Because these payments are included in the amount available
for distribution they are eftectively repaid to the purchaser. The purchaser's dividend voucher at thee
end of the first distribution period should show the amount of the returned equalisation payment.
This payment is not income. It should not be treated as capital distribution. It is a return ofthe initial
price paid and it should, therefore, be deducted from the price paid when computing the chargeable
gain on eventual disposal.
 Sale Price = Applicable NAV

Repurchase Price = Applicable NAV (1 Exit Load, if any)

11. CONTENTS OF BALANCE SHEET (SCH. 11-3]

(1) Assets, Liabilities and Policies: The Balance Sheet shall give scheme wISe particulars of s
of its
assets and liabilities. These particulars shall contain information cnumerated in Annexures t
and 1B hereto. It shall also disclose, inter alia, accounting policies relating to valuation ré
IA
of
investments including real estate investment asset and other important areas.
(2) Market Value of Investments: If investments in securities carried at costs or written down
are
cOst. their aggregate market value shall be stated separately in respect ofeach type of investment
Such as equity shares, preference shares, convertible debentures listed on recognised stork
exchange, non-convertible debentures or bonds further differentiat1ng between those listed on
recognised stock exchange and those privately placed.
(3) Disclosure of Investments: The balance-sheet shall disclose under each
type of investment(s) in
securities the aggregate carrying value and market value of
investment shall be regarded as
non-performing investments. An
non-performing if it has provided no returns in the form of
dividend or interest for a period
specified in the guidelines issued by the Board.
(4) NPA: The Balance Sheet shall indicate the extent of
the
provision made in the Revenue Account for
depreciation/loss
in the value of
non-performing in vestments in securities. However, if the
investments in securities are valued at marked to
market, provisions for depreciation shall not be
necessary.
(5) NAV: The Balance Sheet shall disclose the per-unit net asset value (NAV) as at the end of the
accounting year.
(6) Previous Year Figures: As in case of companies, the Balance Sheet shall
the corresponding figures as at the end
give against each item.
of the preceding accounting year.
(7) Notes on Investments: The notes to the balance sheet should disclose the
regarding investments
following information
(a) all investments shall be grouped under the major classification
given in the balance sheet:
(b) under each major classification, the total value of investments falling
under each major industry
group (which constitutes not less than 5% of the total investment in the major classification)
shall be disclosed together with the percentage thereof in relation to the total investment
within the classification;
(c) a full list of in vestments of the scheme shall be made available for inspection with the Asset
Management Company;
(d) the basis on which management fees have been paid to the Asset Management Company and
the computation thereof;
 (a) provision for aggregate value of doubilul deposils, dcbts and outstandino and accrUued.incon

loss in sale and redemption

oI investment may be shown on a net Dasis
(b) profit or

(c) custodian and registrar lees

(d) total income and expenditure exPresscd
aS a percenlage of average nct asscts

(e) calculated on a weekly basis

13. ACCoUNTING ENTRIESue

EXHIBIT 6:

Sr. Transaction Journal Entries

No.
1. For Sale of Units during Bank A/c Dr.
NFO (New Fund Offer) To Unit Capital A/c (No. of units x Face value)
Period for the first time
|[Being the sale of units during NFO at par)
2. For Purchase of Shares for Investment in Shares A/c Dr.
Investment [Cost(including Brokerage, etc.)]
To Bank Ac
[Being the purchase of shares]
3. For Receipt of Dividend on Bank A/c Dr.
Shares To Investment in Shares A/c
(Pre-acquisition Dividend)
To Dividend on Shares A/c
(Post-Acquisition Dividend)
[Being the dividend received]
For Purchase of Debentures Investment in Debentures A/c Dr.
for Investment (Ex-Interest Proceeds + Brokerage, etc.)
Interest on Debentures A/c Dr.
(AccruedInterest)
To Bank A/c (Total)
[Being the purchase of debentures]
5. For Receipt of Interest on Bank A/c Dr.
Debentures To Interest on Debentures A/c
[Being theinterestreceived
 Terest on
bDebentures and Dividend
Debentures and Dividend Interest on
erer
on Shares to
onDebentures Alc
227
Revenue Alc vidend
Dividend
To Revenue Shares
Alc Alc Dr.
For Increase in
Being the transfer Dr.
7.
Market dividend on
shares
of
interest on
of
Investment at the Value| (a) At to debentures and
Revenue Alc)
the Accounting Year end of the End of
the
Investment
To
A/c Accounting Year
[Being
Unrealised Appreciation Dr
(b) At the increase in market Resenve Ac
value of
Year Beginning of the Next investment
Accountin9
Unrealised Appreciation
To Investment A/c Reserve Alc Dr.
Being increase in market value of
8. For Decrease in Market reversed investment
Value of Investment at the Revenue Alc
To Investment A/c Dr.
End of the
Accounting Year [Being decrease in market
9. For Sale of Debentures (a) To Record Sale
value of
investmentj
Bank A/c Dr.
Sale Proceeds (excluding Brokerage, etc.)]
To Interest on Debentures A/c
(Accrued Interest)
To Investment A/c
(Ex-Interest Proceeds-Brokerage, etc.)
Being the investments sold]
(b) To Record Profit on Sale
Investment A/c (Profit) Dr.
To Revenue Alc
[Being the profit on sale]
Note: Profit on Sale = Ex-Interest Proceeds

(excludingBrokerage, etc.) Average Cost of

-

Debentures
(c) To Record Loss on Sale
Revenue Ac (Loss) Dr.
To Investment A/c
Being the loss on sale] Cost of
Note Loss on Sale =Average
Debentures- Ex-Interest Proceeds (excluding
Brokerage, etc.)
(a) To Record Sale
Dr.
10. For Sale of Shares Bank A/c
etc.)]
[Sale Proceeds (excluding Brokerage,
To Investment A/c
[Being the
investments sold]
Record Profit on Sale
To
(b) Investment Dr.
A/c (Profit)
To Revenue A/c

[Being the profit

on sale]
Sale Proceeds
Note: Profit on Sale =

Cost of
(excluding Brokerage, etc.)-
Average
Shares
 Thhun l 1ccounting - TI (TY.. A.:SEM
(c) To Record Loss on
Sale
Revenue A/c (Loss)
To Investment A/c
(Being the loss on
salol
Note oss on Sale
Sale Avorago Cost of Sharo
Proceeds (excluding
13.1 Brokoraqo
ACcoUNTING TREATMENT OF otr,
Sale of Units under an SALE/REPURCHASE OF UNITS
1. Bank
Open-ended Scheme account is debited with
2. Face value is to be credited sale proceeds of units
3. An to Unit solt
Equilisation Payment [i.e. No. of Capital Account
Equalisation per unit] is credited to DividendDividend
units x

Account. Equalisation
4 Balance is credited to
Repurchase of Units reserves.
1 Face value is debited to Unit
under an
Scheme Open-ended 2. An
Equilisation Payment [i.e. Capital Account
No. of units x
Equalisation per unit] is debited to Dividend Dividend
Account. Equalisation
3. Balance is to
be debited/credited
4. Bank to reserves.
Account is credited with
repurchased. payment made for units
Note The net balance on the
debited or credited to the Equalisation Account
Revenue Account should not
decrease or increase the net
income of the fund
but is
only an adjustment to the Distributable
therefore, be reflected in the Revenue Surplus. It should
the net income of the fund Account only after
is determined.
Repurchase of Units In addition to
under a Close-ended A
previous four points
Scheme proportionate part of the unamortised initial issue expenses
should also be transferred to the
reserves so that the balance
carried forward on that account is
of units remaining proportional to the number
outstanding.
Treatment of 1 Where there is no devolvement on the scheme
Underwriting underwriting commission should be recognised as
Commission revenue.
2. Where there is devolvement on the scheme, the full
underwriting commission received and not merely the
portion applicable to the devolvement should be reduced
from the cost of the investment.

13.2 ACCOUNTING ENTRIES FOR SALE OF UNITSAND

DISTRIBUTION OF DIVIDEND