AMFI EXAM Training Module

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.

Index

09. Measuring and Evaluating Mutual Fund Performance. 10. 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.

Index

Chapter 1 Concept and Role Of Mutual Funds .

g. money market mutual fund seeks investors to invest predominantly in Money Market Instruments ‡ ‡ ‡ Index .What is a Mutual Fund ? ‡ It is a pool of money. A mutual funds business is to invest the funds thus collected. and is invested according to certain investment objectives The ownership of the fund is thus joint or mutual. according to the the wishes of the investors who created the pool e. collected from investors. the fund belongs to all investors.

The investors share is denominated by µunits¶ whose value is called as Net Asset Value (NAV) which changes everyday. The pool of funds is invested in a portfolio of marketable investments. The investment portfolio is created according to the stated investment objectives of the fund. Index .Important characteristics of a Mutual Fund? ‡ ‡ ‡ ‡ ‡ The ownership is in the hands of the investors who have pooled in their funds. It is managed by a team of investment professionals and other service providers.

Advantages of Mutual Funds to Investors? ‡ ‡ ‡ ‡ ‡ ‡ ‡ Portfolio diversification Professional Management Reduction in Risk Reduction in Transaction costs Liquidity Convenience and Flexibility Safety ± Well regulated by SEBI Index .

Managing a portfolio of funds. ‡ ‡ Index . Regulators limit the expenses of Mutual Funds. ( Investor has to hold a portfolio for funds for different objectives ).What are the disadvantages of investing through Mutual Funds? ‡ No control over the costs. Fees are paid as percentage of the value of investment. No tailor made portfolios.

‡ Phase 2 ± ( 1987 ± 1993). INDIA Fund ± Ist indian offshore fund lauched in August 1996. created by an Act of Parliament . SBI mutual fund was the first non -UTI mutual fund In 1993.Entry of Public Sector Funds In 1987 Public Sector Banks and FI's got permission to set up MF.Growth of UTI UTI sole player in the industry. Index . children plans . Mutual Fund Industry was open to private players.Evolution of Mutual Funds in India ‡ Phase I ± ( 1964 ± 1987).offshore funds etc MASTERSHARE ± Ist Diversified Equity Investment Scheme in India.1963 UTI launches first product Unit Scheme 1964 UTI creates products such as MIP's.

Dividends made tax free in 1999. AMFI also pubished a a booklet titled ³ Making Mutual Funds work for you ± The investors¶ Guide´ Index . mostly initiated by private players ‡ Phase 4 ± ( 1996-1999) ± 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. Mutual Fund Industry was open to private players. both SEBI and AMFI launched investor awareness programmes. During this phase.‡ Phase 3 ± ( 1993-1996) ± Emergence of Private Funds In 1993. SEBI's first set of regulations for the industry formulated in 1993 Significant innovations.

± UTI mutual fund came under SEBI¶s regulations 1996. significant increase in corpus of private players Tax break offered created arbitrage opportunities Bond funds and liquid funds registered highest growth Phase 6 ± From 2004 onwards : Consolidation and Growth Mergers and Acquisitions witnessed Alliance MF acquired by Birla Sunlife Sun F&C by Principal PNB Mutual fund. Rapid growth.‡ Phase 5 ± (1999-2004) ± Emergence of a large and uniform industry ± Uti Act Repealed in February 2003. Index .

children plans .Important phases in Indian Mutual Fund Industry UTI sole player in the industry. 1987 . INDIA Fund ± Ist indian offshore fund lauched in August 1996. Mutual Fund Industry was open to private players. created by an Act of Parliament .1963 UTI launches first product Unit Scheme 1964 1963 ± 1987 UTI creates products such as MIP's.2000 Tax break offered created arbitrage opportunities Bond funds and liquid funds registered highest growth Index . significant increase in corpus of private players 1999 . Dividends made tax free in 1999. Rapid growth.1996 SEBI's first set of regulations for the industry formulated in 1993 Significant innovations. In 1987 Public Sector Banks and FI's got permission to set up MF.1999 Bank mutual funds were recast as per SEBI guidelines UTI came under voluntary SEBI supervision. mostly initiated by private players Implementation of new SEBI regulations led to rapid growth 1996 . 1993 .1993 SBI mutual fund was the first non -UTI mutual fund In 1993.offshore funds etc MASTERSHARE ± Ist Diversified Equity Investment Scheme in India.

Largest MF has entered. ‡ As on March 2006. ‡ Merger and Acquisitions happening. ‡ UTI now does not have a special status.29 Funds. ‡ Fidelity. Index .( now under SEBI) ‡ Size of industry was 150000 crore in 2005.Emergence of Large and Uniform Industry ‡ UTI Act repealed in 2003.

Mutual Fund Classifications Index .

say Rs. the fund is declared open for further sales and repurchases ‡ Investors receive account statements of their holdings. at any time. investors can buy and sell units of the fund. ‡ Open ended scheme are offered for sale at a pre. ‡ The number of outstanding units goes up and down ‡ The unit capital is not fixed but variable. at NAV related prices. directly from the fund. in the initial offer period.What are open-ended funds? ‡ In an open ended fund.specified price. Index . After a pre-specified period say 30 days. 10.

What are closed end funds? ‡ A closed -end fund is open for sale to investors for a specified period. ‡ Any further transactions happen in the secondary market where closed-end funds are listed. which are fundamentally linked to the NAV. one time sale. ‡The unit capital is fixed. ‡ The corpus of closed ended funds remains unchanged. ‡ The price at which the units are sold or redeemed depends on the market prices. after which further sales are closed. Index .

then . ‡ ‡ ‡ Index . a no front load fund is preferable. Funds that makes no such charges or loads ae called No LOAD funds. back end( exit).Load and No Load Funds ‡ Load is the one time fee payable by the investor to allow the fund to meet initial issue expenses including brokers/agents¶/distributors¶ commissions. or deferred loads are called LOAD funds. Funds that charge front end( he entry) load. advertising and marketing expenses. IF the investors¶ objective is to get the benefit of compounding his initial investment by reinvesting and holding his investment for a very long term.

all dividend income received from MF is tax free in hands of the investor. Index . open end equity oriented mutual fund schemes are tax exempt investment avenue. it is called a tax exempt fund. ‡ After 1999 budget.Tax Exempt Vs. Non Tax Exempt Funds ‡ When a fund invests in tax exempt securities. ‡ In India any income received by mutual fund is tax free. But all funds other than open ended equity funds have to pay a dividend distribution tax. while other funds are taxable for distributable income. ‡ So in india.

Types of Funds .By Investment Objective Equity Debt Fixed Income Funds GILT Funds Money Market Equity Funds Index Funds Sector Funds Money Market Mutual Funds Balanced Funds Liquid Funds Index .

What are equity funds? ‡ Predominantly invest in equity shares of the company. ‡ Aggressive Growth Funds ‡ Growth Funds ‡ Specialty Funds  Sector Funds  Foreign Securities Fund ( investment in shares of different countries to make it more diversified)  Mid cap or Small cap Equity funds  Option Income Funds Diversified Equity Funds Equity Index Funds Value Funds Equity Income or Dividend yield funds Index . Choices in equity funds.

‡ It invests in both long-term and short-term paper.What are liquid and money market funds? ‡ These debt funds invest only in instruments with maturities less than a year. ‡ Ideal for institutional investors who have to invest in Govt. What are Gilt Funds? ‡ It invests only in securities that are issued by the Government and therefore do not carry any credit risk ‡ Government papers are called as dated securities also. ‡ The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more. Securities ‡ Enables retail Participation Index .

ELSS ( Equity linked saving scheme ) ‡ 3 year lock in period ‡ Minimum investment of 90% in equity markets at all times ‡ So ELSS investment automatically leads to investment in equity shares. ‡ Benefit of Long term Capital gain taxation. ‡ Eligible under Section 80 C upto Rs. ‡ Open or closed ended.1 lakh allowed ‡ Dividends are tax free. Index .

‡ AMC issues a fixed number of units for each series only once and closes the issue after an initial offering period. ‡ Good alternate of Bank deposits/ corporate deposits. ‡ Fixed Term plan are usually for shorter term ± less than a year. Index . ‡ FTP series are likely to be an Income scheme. ‡ They are not listed on a stock exchange.Fixed Term Plan Series- ‡ FTPs are closed ended in nature.

ut ha s a hi h le e l of risk too e turns om pa ra ti e l le ss risk tha n e uit funds Pro ide sta le ut low le e l of re turn i uid a nd one a rke t unds In estors ha e to fa e the risk.return trade off Index .How are funds different in terms of their risk profile? uit e t unds unds Hi h le e l of e turn .

classified as Open ± Closed ended.Important points ‡ IN USA. bonds and other securites or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle. Q&A Index . ‡ In USA. a MF is constituted as an investment company and an investor buys the share of the fund. it can be called as a portfolio of stocks. funds are also classified as Tax Exempt and Non Tax Exempt Funds ‡ In India. ‡ In USA. ‡ Mutual Fund is NOT a company. all mutual funds are open ended. Load and No Load Funds.

Chapter 2 Fund Structure and Constituents .

How does a Mutual Fund work? Savings Trust Units Unit holders AMC Investments Returns Registrar SEBI Trust Custodian AMC Index .

Constituents ‡ Asset Management Company. ‡ Other fund constituents. ‡ Bankers. ‡ Transfer Agent. ‡ Mutual Fund as Trust. ‡ Custodian and Depositories. ‡ Distributors. Index .Unit Trusts ‡ Fund Sponsor.

‡ AMC is the business face of the mutual fund as it manages all the affairs of the fund Index . ‡ It is mandatory to have a three tier structure of Trustee-Asset Management Company. Sponsor- ‡ The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund.What is the regulatory structure of MF in India? ‡ The structure of mutual funds in India is governed by SEBI(Mutual Fund)Regulations. 1996.

‡ Sponsor must contribute at least 40 % of the net worth of the AMC Index .Who can be the Sponsor? What does the Sponsor do? ‡ The sponsor establishes the mutual fund and registers the same with SEBI ‡ Sponsor appoints the Trustees. custodians and the AMC 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.

The trust is either managed by a Board of Trustees. Mutual funds are organized as trusts.How are Mutual Funds Structured? ‡ In India Mutual fund is the form of a Public Trust created under the Indian trust Act. ‡ In India. ‡ The fund sponsor acts as the Settler of trust. Index . ‡ The trustees hold the unit holders money in a fiduciary capacity.(Money belongs to unit holders) ‡ In legal sense. or by a trustee company. 1882. the investors are the beneficial owners of investments. contributes the initial capital and appoints the trustees to hold the trust for the benefit of the unit holders.

‡ There must be at least 4 members in the Board of Trustees and at least 2/3 of the members of the board of trustees must be independent. Index . ‡ Trustee of one mutual fund can not be a trustee of another mutual fund.

What are the rights of the Trustees? ‡ Trustees appoint the AMC. in consultation with the sponsor and according to SEBI Regulations ‡ All Mutual Fund Schemes floated by the AMC have to be approved by the Trustees ‡ Trustees can seek information from the AMC regarding the Operations and compliance of the mutual fund. and in cases dismiss the AMC ‡ Trustees review and ensure that net worth of the AMC is according to stipulated norms. every quarter Index . ‡ Trustees can seek remedial actions from AMC.

What are the obligations of the Trustees? ‡ Trustees must ensure that the transactions of the mutual fund are in accordance with the trust deed ‡ Trustees must ensure that the AMC has systems and procedures in place. and that all the fund constituents are appointed ‡ 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 Index .

‡ General Due Diligence ± Due care in appointing AMC Directors. The purpose is to ensure that trust properties are protected by competent persons and agencies. Index . To obtain Compliance Test reports from the AMC once every 2 months. Ensuring that appointed constituents are duly regd.Compliance with Sebi¶s Requirements ‡ Sebi has categorised obligations of Trust into General Due Diligence and Specific Due Diligence. observing irregularities in functioning. ‡ Specific Due Diligence ± Trustees must appoint independent auditors and obtain periodic audit reports. With SEBI. To prescribe a Code of Ethics for Trustees and AMC personnel.

10 Cr.Regulatory requirements for the AMC? ‡ Only SEBI registered AMC can be appointed as investment managers of mutual funds ‡ AMC must have a minimum net worth of Rs. have to be independent ‡ The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC¶s Index . at all times ‡ 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..

on the advice of the sponsors usually appoint the AMC ‡ The AMC is usually a private limited co.. which spells out the functions of the AMC Index .Who appoints the AMC and defines its functions? ‡ The trustees. with a minimum net worth of Rs. in which the sponsors and their associates or JV partners . 10 Cr.are shareholders ‡ The AMC has to be a SEBI registered entity. ‡ The trustees sign an investment management agreement with the AMC.

markets them and mobilises the funds. the AMC is its operational face ‡ The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries ‡ The AMC structures the mutual fund products.How are Indian mutual funds organised? ‡ Though the trust is the mutual fund. manages the funds and services the investors ‡ All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working Index .

1 Lakh ‡ AMC¶ s cannot take up any activity that is in conflict with the activities of the mutual fund Index .What are the restrictions on the AMC ? ‡ AMC¶ s cannot launch a scheme without the prior approval of the trustees ‡ AMC¶ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.

What do the Registrar and Transfer Agents do? They are responsible for investor servicing functions ‡ Process investor applications ‡ Record details of Investors ‡ Send information to Investors ‡ Process dividend payout ‡ Incorporate changes in investor information ‡ Keeping Investor information up to date Index .

‡ In some cases provide investment managers with research reports ‡ Act as an important source of market information.What is the role of Brokers in a mutual fund? ‡ Enable investment managers to buy sell securities ‡ Brokers are registered members of the stock exchange ‡ They charge a commission for their services. ‡ Limit of 5% per broker Index .

What is the role of selling and distribution agents ? ‡ Selling agents bring investors funds for a commission ‡ Distributors appoint agents and other mechanisms to mobilize funds from investors ‡ Banks and post offices also act as distributors ‡ The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund Index .

offer for sale. buy back and open offers for acquisition Index .What are the functions of the custodians ? ‡ Responsible for the securities held in the mutual fund¶s portfolio ‡ Keep an investment record of the mutual fund ‡ Collect dividends and investment payments due on the mutual funds investment ‡ Track corporate actions like bonus issues. right offers.

Various Forms of Fund Mergers and Takeovers ‡ Merger of AMC to become a single entity Example : HB Mutual and Taurus Mutual ) ( ‡ AMC takeover by sponsors ( Example : ITC Threadneedle and 20th century taken over by Zurich) ( ITI by Franklin Templeton) ‡ Scheme take over (Apple¶s scheme taken over by Birla AMC ) and ( Zurich¶s Scheme Takeover by HDFC Mutual Fund) Index .

and provided the option to exit at NAV. Index .What are the conditions under which two AMC¶s can be merged? SEBI regulations require the following : ‡ SEBI and Trustees of both funds must approve of the merger ‡ Unit holders should be notified of the merger. without load ( in case of open ended funds else 75% consent is required) ‡ High Court approval is required as AMC¶s are companies.

it is called as scheme take over.Trustee and SEBI approval and notification of unit holders are required for scheme takeovers Index . The two mutual funds continue to exist.Under what conditions can an AMC be taken over by another sponsor ? ‡ SEBI approval is required of the change of ownership and unit holders have to be informed of the takeover ‡ Investors have to be informed but HIGH Court approval not required What is scheme take over? ‡ If an existing mutual fund scheme is taken over by another AMC.

Sponsor signs the trust deed with the trustees.Important oints ‡ ‡ ‡ ‡ ‡ ‡ In USA. the regulatory body is known as Securities Exchange Commission. Fund manager is responsible for filing details of the funds¶ portfolio with SEBI. Q&A Index . The sponsor may be compared to promoter of a company Issuing units and redeeming units is the role of Transfer Agent The appointment of AMC can be terminated by Majority of directors of trustees.

Chapter 3 Legal and Regulatory Framework .

as a supervisor of MMMFs ‡ Ministry of Finance ‡ Company Law Board.as a supervisor of bank owned mutual funds .Regulating agencies for MF & its Constituents ‡ SEBI ( Established in 1992 by an act of parliament) ‡ RBI . Department of Company Affairs and Registrar of Companies ‡ Stock Exchanges -(For listed Mutual Funds) ‡ Office of the Public Trustee ‡ ( All the MFs are registered with SEBI) Index .

pricing & trading of Govt. SEBI is the regulator of all mutual funds ‡ Mutual funds are affected by the RBI stipulations on structure.What is the regulatory jurisdiction of RBI over mutual funds ? ‡ RBI is the monetary authority and the regulator of the banking system ‡ Bank sponsored mutual funds were under the dual control of RBI and SEBI ‡ Presently RBI is only the regulator of the sponsors of bank sponsored mutual funds. issuance. Securities Index .

What is the role of Ministry of Finance in mutual fund regulations ? ‡ The finance ministry is the supervisor of both the RBI and SEBI ‡ Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds Index .

What are self regulatory organisations (SRO¶s)? ‡ SRO¶ s are the second-tier regulatory mechanism created by market participants. they are also registered SRO¶ s ‡ For example. BSE and NSE are SROs. Index . it obtains certain powers from the regulatory authority ‡ For example though the stock exchanges are regulated by SEBI. ‡ AMFI si not yet a SEBI registered SRO. to regulate the working of a group of persons/organizations ‡ If the SRO is registered with the regulatory authority.

Index .What are the objectives of AMFI ? AMFI is an industry association. is not an SRO. ‡ 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. ‡ To set ethical. so it can just issue guidelines to members. ‡ To increase public awareness of the mutual fund industry. incorporated in 1995. commercial and professional standards in the industry. Objectives ‡ To promote the interests of mutual funds and unit holders. It cannot enforce regulations.

Unit holders have the right to inspect certain documents Index . After 3 years he will be paid at NAV applicable at the end of 3rd year 4. at least once in 6 months . If 75% of the unit holders so decide. They also have a right to repurchase at NA without any load. Redemption proceeds have to be sent to investors within 10 days 3. If there is any change in the fundamental attributes of the scheme. Mutual funds have to publish their half yearly results in at least one national daily and publish their entire portfolios. Mutual funds have to allot units within 30 days of the IPO an dalso open the scheme for redemption. Trustees will have to ensure that any information having a material impact on the unit holders investments should be made publicby the mututal fund 7. 9. the unit holders have to be notified through a letter. If an investor fails to claim the dividend or redemption proceeds he has the rights to claim it up to a period of 3 years from the due date at the then prevailing NAV. if it is an open -ended scheme 5. Investors are entitled to receive dividends declared in a scheme within 30 days 2. Such disclosure should be done within 30 days from 6 monthly account closing dates of the fund 6.What are the rights of the investors in respect of service standards that they can expect from MFs? 1. 1)The scheme can be wound up 2)Meeting of unit holders can be called 3)Appointment of the AMC of the mutual fund can be terminated 8. before such change is effected.

What are the limitations to investors right ? ‡ Investors cannot sue the trust as they are not distinct from the trust ‡ Investors cannot lodge complaints against the trustees (with the Registrar of Public Trusts) or the AMC (with the CLB). ‡ There are not legal remedies for to a prospective investor Index . ‡ Investors cannot be compensated if the performance of the fund is below expectations. ‡ Investors can lodge complaints with SEBI for noncompliance.

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.Important oints ‡ ‡ Sebi does entertain complaints against MF and intervenes with fund managements to help the investor. IIIrd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed. The body to which investors may address their complaints is SEBI. right to information. right to wind up a scheme. Unitholders have right to timely service. right to approve changes in fundamental attributes. Q&A Index ‡ ‡ ‡ . right to terminate the AMC.

Chapter 4 Offer Document .

Where can the investors find out the details about a MF scheme before investing ? ‡ The mutual fund is required to file with SEBI a detailed information memorandum called the offer document . ‡ Investors can get a summary of the offer document in the abridged version known as the Key Information Memorandum Index . in a prescribed format is appended to the application form. in a prescribed format giving all the information of the fund and the scheme. ‡ An abridged version of the offer document.

‡ Objective of the scheme ‡ Asset allocation ‡ Sale and repurchase procedure ‡ Load and expense structure of the scheme ‡ Accounting and valuation policies It also contains ‡ Structure of the mutual fund ‡ Its constituents ‡ Operational details as how to apply ‡ Rights and duties of the investors Index .What does the Offer Document usually contain? It contains information regarding.

Index .Importance of Offer Document ‡ ‡ ‡ ‡ ‡ ‡ Most important source of information from the perspective of the prospective investor. Principle of ³Buyers Beware´ applies here. It is the primary vehicle for the investment decision. Investor must understand the fundamental attributes of the scheme to make the decision. a legal document that protects the rights of investors. Also a reference document for investor to look for the relevant information anytime. It is the operating document and describes the product.

Is the offer document issued only when the MF issues units for the first time? ‡ Closed ended scheme.offer document is valid through the life of the scheme. inclusion or deletion of options Index . which is revised every 2 years ‡ Major changes that have to be notified to the investors: ‡ Change in the AMC or Sponsor of the mutual fund ‡ Changes in the load structure ‡ Changes in the fundamental attributes of the schemes ‡ Changes in the investment options to investors.offer document during the IPO ‡ Open ended scheme.

Type of scheme. Index . closing and earliest closing date of offer. Name of the scheme. Price of units plus applicable load. Name of the AMC.What are the mandatory disclosures to be made on the cover page of the OD? ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Name of the mutual fund. Name of the guarantor in case of assured return schemes. Classes of units offered for sale. Opening . Mandatory statements.

What are the standard risk factors? ‡ Mutual fund and securities are subject to market risk and there is no assurance that the objective will be achieved ‡ NAV of units issued under the scheme can go up or down depending on factors and forces affecting capital markets. ‡ The name of the scheme does not in any manner indicate any either the quality of the scheme or the future performance of the scheme Index . ‡ Past performance of the sponsor/AMC/ Mutual fund does not indicate the future performance of the scheme.

a disclosure to the at effect should be made Index . if any ‡ If a scheme offers assured returns. the scheme must state that the assurance is on the basis of the guarantees provided by the sponsor/AMC ‡ If the AMC has no previous experience in managing a mutual fund. investment strategy and asset allocation of the scheme ‡ Risk arising from non ±diversification .What are scheme specific risks? ‡ Risk arising from investment objective.

‡ ‡ Index . it is not feasible to provide them to all investors SEBI regulations allows mutual funds to summarize the key points in a summary document called as key information memorandum It is mandatory to provide KIM to all investors alongwith the application form.What is the Key Information Memorandum (KIM) ‡ Since the offer document is very detailed.

and the compliance officer The compliance officer has to also certify that the constituents of the fund are all SEBI registered entities The AMC is responsible for the contents and accuracy of information in the offer document Index .Is the offer document verified by SEBI for its accuracy? ‡ ‡ ‡ ‡ ‡ ‡ No SEBI does not approve or disapprove anything contained in the offer document The offer document is prepared as per a certain format prescribed by SEBI The contents of the offer document are verified by the trustees.

he can just refer to KIM ‡ The OD do not contain the address of the Trustees of MF ‡ The front page of OD contains date of its publication and name and type of fund( does not contain objectives) ‡ The offer document is issued by the AMC / Trustees Q&A Index . once he has gained familiarity with the AMC. the OD is known as prospectus ‡ The first time investor should read detailed offer document.Important oints regarding OD and KIM ‡ In USA.

Chapter 5 Fund distribution and Sales Practices Index .

What are the categories of investors eligible to buy MF units? ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Resident Individuals Indian Companies Indian trusts and charitable institutions Banks NBFC¶s Insurance companies Provident funds Non-resident Indians OCB¶s SEBI registered FII¶s Index .

Index . as it is possible that some categories are not allowed to invest in some schemes. charitable trusts are not allowed to invest in some category of schemes in some funds.Important point ‡ Distributor should look up the offer document to see which category of investors are allowed to invest in any particular scheme of the fund. ‡ For example. So in this case distributor should refer offer document.

Distribution Companies Banks and NBFCs Post Offices Direct Marketing . He has to be AMFI certified also to sell Mutual Fund products. Only exemption is distributors abvoe 50 years of age and with at least 5 years of experience as on Sep 30. 2003.CURRENTLY 49837 are amfi certified and 30028 have taken the ARN numbers ( as on 31/3/2005) ‡ ‡ ‡ ‡ ‡ ‡ Index .Distribution Channels ‡ Individual Agents.A person has to sign an agreement with a fund on non judicial stamp paper. UTI MF requires its agents to have atleast passed the level of matriculation and also to provide 2 references. 2004. Such exempted distributors were required to complete AMFI¶s refresher course by Sep 30.

Agents must have a thorough understanding of the needs of their investors 5. Agents should seek from investors the commitment to invest to enable which they may assist the client with the forms and procedures for investing Index . requirements and risk tolerance 3. Agents must be able to help investors to choose from alterntative investment products.Agents should be highly familiar with the profile of the investors. and enable an appropriate asset allocation 6. in terms of return expectations. Agents must strive to cultivate disciplined approach to investing and a regular investment habit among clients 4.What are the AMFI recommended best practices for mutual fund agents? 1. Agents must be fully aware and informed about the features of the products that they offer to the investors 2.

For funds with less than 1 year performance can be in terms of total returns.3.Appropriate benchmarks and identical time period must be used while comparing. 6. All advertisements should in the main body of the adevertisement immediately after the return/yields and in the same font mention that past performance may or may not be sustained in future Index .Annualised yield should be shown for 1. 5.5 years and since launch of the scheme.What is SEBI¶s advertising code? h e d ivid e n d s d e c a re d o r a id s h a e e n tio n e d in s n it a o n g ith th e a c e va e o e a c h n it a n d th e re va i in g a t th e ti e o d e c a ra tio n o th e d ivid e n d n co o n d e d a n n a is e d ie d c a n e a d ve rtis e d i th e s c h e e h a s e e n in e is ta n c e o r o re th a n ear e r o r a n c e c a c a tio n s s h a e as ed on on a n d th e a o ts to th e n it h o d e rs 4. Once chosen the benchmark should be used consistently over time.

‡ Funds have to refrain from unethical market practices. ‡ Management of funds collected has to be in accordance with stated investment objective ‡ Funds should avoid conflicts of interest in dealings by directors.What is the AMFI Code of Ethics? ‡ Management of the fund ought to be in the interest of unit holders ‡ High standards of service are expected from the fund. Index . officers and employees. the unit ‡ Funds are urged to adopt the use of professional selling practices. ‡ Adequate disclosures by the funds ought to be made to holders and trustees.

Trail is an effective way to restrict the practice of rebating.Paid as a fixed percentage of amount mobilised by agents Trail commission .What is the commission structure for mutual fund agents? ‡ The commission consists of two components Initial ( Upfront )commission . and link commissions ‡ The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either AMFI or SEBI. Index .it is paid periodically on the funds that remain invested in the scheme.

Fees and Expenses. Investment Pattern. Investment Objective and Terms of the issue.Fundamental Attributes of a Scheme ‡ Type of Scheme. 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) ‡ The unit holders are given option to redeem their holdings in the fund without any exit if anything in above is changed. Index . ‡ Any change in Fundamental Attributes. Valuation norms and Investment Restrictions.

( For Open ended Funds) Max. Q&A ‡ ‡ ‡ ‡ ‡ ‡ Index . It is primarily used to meet the expenses related to sale and distribution of units Load charged on sale of units is entry load. Entry or Exit load for closed ended funds is 5% CDSC is an exit load that varies with holding period. Load charged on redemption is exit load.Loads ‡ Load is charged to investor when the investor buys or redeems units. Load is an amount which is recovered from the investor. It reduces price. It increases the price above the NAV for new investor. Maximum Entry load or Exit load is 7%.

Chapter 6 Accounting Valuation and Taxation .

Net assets are calculated as: Market value of investments Plus(+) current assets and other assets Plus(+) accrued income Less(-) current liabilities and other liabilities Less(-) accrued expenses Index . on a given date.What are net assets of a mutual fund ? The net assets represent the market value of assets which belong to the investors.

Index .How frequently is the NAV calculated ? ‡ All mutual funds have to disclose their NAVs daily. but disclosures have to be made everyday. as permitted by SEBI. by posting it on the AMFI web site by 8.00 p. ‡ Closed end schemes not mandatorily listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months. ‡ Open ±ended funds have to compute and disclose NAVs everyday.m. closed end funds can compute NAVs every week.

Numerical ‡ Unit capital of a MF scheme is Rs. 55 million. The market value of investments is Rs.55 ± Not possible to say Index . 75 ± Rs.20 million. 20 ± Rs. The NAV is ± Rs. The number of units is 1 million.

Index . · The costs of registration and fund formation · Legal and advisory expenses · Costs of launching the scheme · Advertisement and promotion expenses · Distribution costs · Commissions to selling agents SEBI imposes a ceiling of 6% on these expenses.What are the initial issue expenses ? Expenses that are incurred in the launch of the fund are called as initial issue expenses.

Index .Can the Fund be launched without bearing any initial issue expenses ? · Yes · Such funds are called as no load funds · AMCs can charge an investment management fee. which is 1% higher than the statutory limit. in this case.

‡ IN OES. marketing and other expenses of sales should be met from the entry load and not IIE Index .Latest changes on Initial Issue Expenses ‡ IIE will be permitted for closed ended schemes only and such scheme will not charge Entry load ‡ IN CES. the sales. IIE shall be amortized on a weekly basis over the period of scheme.

What are the expenses incurred by a mutual fund? Investment management fees to the AMC ‡ Custodian¶s fees ‡ Trustee fees ‡ Registrar and transfer agent fees ‡ Marketing and distribution expenses ‡ Operating expenses ‡ Audit fees ‡ Legal expenses ‡ Cost of mandatory advertisements & communications to investors Index .

that can be charged to the fund Following is the maxmum limit on the expenses For net assets up tp Rs. 100 Cr For the next Rs 300 Cr. There are two levels of restrictions ‡ At the first level only certain kinds of expenses.Can the AMC charge all the expenses that it incurs. to the income of the fund ? ‡ No. Of net assets For the next Rs 300 Cr.75% On debt funds the limits on expenses are lower by 0.25% Index . ‡ The second level of regulation refers to the limit on the total expenses. can be charged to the fund. that are identified as having been incurred for the conduct of the business of the fund.25% 2% 1. Of net assets For the remaining net assets 2.50% 2.

25% ‡ For the net assets exceeding Rs.100 Cr.00% ‡ If the AMC does not charge any of the initial issue expenses to the fund. Of net assets: 1. it can charge the scheme a management fee. that is 1% higher than the above rates Index .What are the fees charged by the AMC ? The fees are regulated by SEBI as follows: ‡ For the first Rs. 100 Crore: 1.

) 1.75cr.e. 2.5% i. 6.25 Cr. 12. What could be the maximum ongoing expenses.5 Cr. 2.e. ‡ ‡ ‡ ‡ ‡ ‡ Index . On next 300 Cr. 27. 6 Cr.Numerical ‡ ‡ Weekly Net average asset=1400 Cr.25% On Rest of the WNAS (700 cr. i.e.75% Total i. 2.e. 2% i. On next 300 Cr.5 Cr. On 1st 100 cr.

Index .Tax Implication in Mutual Funds ‡ Income earned by any mutual fund registered with SEBI is exempt from tax.STCG ± Else the earnings is known as LTCG.( It is a trust) Under section 10(23 D) ‡ The dividends are tax free in the hands of unitholders by it is liable to dividend distribution tax in case of closed ended fund and debt funds( equity <50%) ‡ No TDS on any income distribution by MF ‡ The earning on selling units is known as Capital Gain ± If units are held for less than 12 months--.

Capital Gain Taxation ‡ ‡ ‡ ‡ ‡ The difference between sale and purchase price is known as capital gain / loss. LTCG LTCG if equity oriented scheme of MF is exempt from tax. 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. ( currently10%). Index . Tax on other scheme is 10% for LTCG ( without indexation) and 20% with indexation.

Dividend Stripping ± ( Section 94(7) ± If investor buy units within 3 months prior to record date of dividend and sells those units within 3 months of record date.Other points ‡ Section 80 C ± Individual and HUF are entitled to deduction upto Rs. 1 lakh in respect of payment out of taxable income towards certain instruments which includes ELSS of Mutual funds. 48% TDS if unit holder is foreign company. ‡ ‡ ‡ Index . shall be ignored. then the loss if any. Units are not considered under wealth tax Section 195 ± 20% TDS for LTCG and 30% TDS on STCG if unit holder is a NRI.

‡ Answer : ± Long term capital gain = 250000/ ± So Tax on LTCG = 250000* 10% = Rs. 750000/-. 1999 for Rs.500000/-.Numerical ‡ An investor purchased units in an apporved Mutual Fund on Jan. He sold the units on December 1. 25000/- Index . Calculate the capital gain taxes paid by him. 1998 for Rs. ( Ignore indexation). 1.

Valuation of Securities Non Performing Assets (NPA) An asset shall be classified as an NPA. Such assets will be classified as NPAs. Index . if the interest and/or principal amount have not been received or have remained outstanding for one quarter. soon after the lapse of a quarter from the date on which payments were due. from the day such income/installment has fallen due.

Valuation of Equity Securities ‡ Closing price on valuation date ‡ Selected stock exchange ‡ Use of alternate stock exchange quote ‡ On the basis of earliest previous quote (not more than 30 days prior to valuation date). Index . if it is suspended for more than 30 days. last quoted price. ‡ If trading is suspended up to 30 days. AMC/Trustee decide valuation norms and document such norms.

which need to be documented ‡ Aggregate of illiquid securities . ‡ 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 Index . and unlisted equity shares should not exceed 15% if the total assets of the scheme and any assets above that limit will be valued at zero. 5 lakhs or less OR less than 50000 shares in a month ‡ For unlisted: AMC need to make its own judgement and guideline .non traded. thinly traded.Thinly traded Equity Securities ‡ Equity and equity related security ‡ Rs.

Valuation of Thinly Traded Equity ‡ ‡ Networth per share Earnings capitalisation value ± Discount the industry P/E by 75% ‡ Average of the two methods ± 10% discount for illiquidity ‡ Earning capitalisation is zero if ± EPS if negative ± Accounts not available for 9 months after closing date. independent valuation to be done Index . ‡ If illiquid securities are more than 5% of the portfolio.

so that the security is worth Rs. 100 on the date of maturity. after 364 days.02747*200) = 95. if a security was issued at Rs.02747 The value of the security is increased by 2. 90 and redeemable at Rs. the accrued interest for each day is = 10/364 = 0.747 paise every day. If it has to be valued 200 days after issuance. 100. its value is 90+(0.Valuation of Debt Securities ‡ Valuation of a Thinly Traded Security (<182 Days) For example.494 Index .

‡ Both these methods use duration to classify bonds and assign a rate for each duration bucket Q&A Index .Valuation of other debt security (>182 days) ‡ G-Secs are valued at market prices or using the CRISIL Gilt valuer. ‡ Corporate bonds are valued at market prices or using the CRISIL Bond valuer.

Chapter 7 Investor Plans and Services .

‡ Systematic Investment Plans ± For regular investment ‡ Systematic Withdrawal Plan ± For regular income ( it is not similar to MIP) ‡ Systematic Transfer Plan Index .Growth option and Dividend Option ‡ Automatic Reinvestment Plans± Benefit of Power of Compounding.Investment lans ‡ Broadly 2 options.

‡ Periodic statements and Tax Information ‡ Loans against units ± MF DOES NOT GIVES LOANS but banks can give against units held by unitholder. Q&A Index . ‡ Nomination and Transfer by unit holders.Other Investment Services ‡ Telephone / Internet Transactions. ‡ Cheque writing ± usually for liquid funds.

Chapter 8 Investment Management .

‡ Warrants are long term rights that offer holders the right to purchase equity shares in a company at a fixed price within a specified period. ‡ Mutual Fund total sales & purchases exceeded Rs. warrants or convertible debentures. ‡ As on march 2004. preference shares. indian stock exchanges have over 9400 listed companies.Equity ortfolio Management ‡ Equity funds can invest into equity shares. 70.000 crores during 03-04 Index .

What are large-cap and small cap shares? The size of a company in the equity markets is determined by market capitalisation (no. of shares issued * market price/share) Large Cap a rk e t c a p it a lis a t io n h i h re a t e r iq u id it y o m p a ra t i e ly s m a lle r re t u rn s o s t o f t ra n s a c t io n lo Small Cap a rk e t a p it a lis a t io n o o o r iq u id it y o m p a ra t i e ly h i h e r re t u rn s o s t o f t ra n s a c t io n h i h Index .

‡ P/E ratios are reflective of the phase of the market./E Ratio ‡ P/E Ratio=share price/ post tax earnings ‡ Indicator of value the market assigns to every rupee earned by the company ‡ P/E ratio reflects overvaluation and under valuation Important fact of /E Ratio ‡ P/E ratio has a sensitive numerator and an insensitive denominator. Index .

but dividend yield will be lower and vice versa Index . P/E multiple will be higher.What is dividend yield? ‡ Dividend paid is usually a percentage of face value of the share ‡ Dividend Yield= dividend paid/market price of a share What is the relationship between dividend yield? ‡ Both the measures are sensitive to market price per share ‡ If market prices are higher.

Currently under valued but can yield superior returns later.Classifications of Stocks ‡ Cyclical Stocks ± Whose earnings are correlated with the state of the economy . Index . High PE and low Dividend yields ‡ Value stocks ± Companies in mature industries and are expected to yield low growth in earnings. Good assets value. Have relatively lower PE ratios and higher dividend payouts. ‡ Growth Stocks ± Stocks having potential for higher earnings.

‡ Value Investment Style ± Look for companies that are currently undervalued but whose worth will be recongnized eventually. What are the basic active equity fund management style? ‡ Growth Investment style ± ( objective is to capital appreciation. The shares are more risky and thus expected to offer higher returns over a long investment horizons. Privatization/buy back) Index . ‡ Active fund manager believes. look for companies that are expected to give above average earnings growth. ( eg. that his ability to buy right stock at the right time. can translate into superior performance for his portfolio.What is active equity fund management ‡ Fund manager tends to look at specific attributes in selecting stocks.

‡ A passive fund manager has to rebalance his portfolio every time changes are made in the index. that holding a well diversified portfolio is the cost efficient way . he would tend to mimic the market index. ‡ It requires limited research and monitoring costs and is therefore cheaper. or a subset of the index or choose a basket of shares from multiple indices. ‡ Fund manager may choose to mimic a index.What is passive equity fund management? ‡ Fund manager believes.to better returns. Index .

What is the types of equity research done in MF? ‡ Fundamental analysis ± Future earnings and risk profile considered ( whether to buy or not) ‡ Technical analysis ± Study of historic data on the company¶s share price movements and volume ( To find timing) ‡ Quantitative analysis ± Equity valuation and evaluate the market as a whole What are the various steps involved in equity fund Management? ‡ Formulating the investment philosophy ‡ Formulation of investment strategy ‡ Setting of targets and benchmarks ‡ Deciding on the extent of diversification and flexibility ‡ Reviewing . monitoring and rebalancing Index .

Important points on Debt ortfolio Management
‡ Investments only in Market Traded Instruments ( Not in loans as done by banks) ‡ Instruments with maturity less than a year called Money Market Securities. ‡ Instruments with maturity above 1 year are called debt securities. ‡ Zero Coupon Bonds( discounted securities) do not pay regular interest at intervals but are bought discount to their face value.

Index

Instruments in Indian Debt Market
‡ Certificate of Deposit ± Issued by Commercial banks and maturity of 91 days to 1 year. ‡ Commercial Paper ± Issued by corporate bodies and maturity varies between 3 months and 1 year ‡ Corporate Debentures ‡ Floating Rate Bonds ‡ Govt. Securities. ‡ Treasury Bills ± Issued through RBI by GOI. Tenure is 91 days and 364 days. ‡ Bonds
Index

What is real rate and nominal rate?
‡ Nominal rate of interest is the rate that is paid to us by the borrower ‡ The real rate is the nominal rate less the rate of inflation. ‡ Yield is the term used to signify the actual rate earned on an investment. ‡ Current yield is the ratio of coupon amount to market price of a bond. If coupon = 8%, Market Price = 105, then current yield of bond is 8/105 = 7.62%.

Index

‡ Put option.Important points ‡ Par Value or Face Value ± Principal amount ‡ Coupon ± Annual Rate of interest paid on par value ‡ Maturity ± Term of bond ‡ Call Option ± Allows the issuer to redeem the bonds before maturity.Allows investors to redeem the bonds prior to maturity Index .

The curve is usually upward sloping because longer maturities generally offer higher yields. Index . Also known as TSIR ( term structure of interest rates). ‡ There is inverse relationship between price and YTM of a bond.Measure of Bond Yields ‡ Current yield ± Coupon Rate / Current Market Price ‡ Yield to Maturity( YTM) ± It is also known as bond¶s IRR. ‡ Yield Curve ± Graph showing yields for bonds of various maturities. using a benchmark group of bonds. reinvested the coupon at same YTM and received the principal at maturity. It is annual rate of return an investor would realize if he bought a bond at a particular price. received all the coupon payments.

Risks in Investing in Bonds ‡ Interest Rate Risk ‡ Reinvestment Risk ‡ Call Risk ‡ Default Risk ‡ Inflation Risk ‡ Liquidity Risk Index .

Yield Spreads
‡ Yield Spread = Yield of benchmark security ± yield of a particular bond ‡ It is the risk premium paid by the bond to induce investor ‡ Higher the credit rating, higher the safety and so lower the yield spread ‡ SO if a bond is downgraded, the yield spread will widen. ‡ Term to Maturity ± It is period until the bonds maturity

Index

Duration
‡ ‡ ‡ 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% It computes the proportion of the present value of each individual payment as a %age of the sum of the present values of all payments and make this proportion the weight for the year of payment. The Duration of a bond is less than its maturity, except for zero coupon bonds Bonds with longer maturities have longer durations. An interest bearing bond with a higher coupon rate will have lower duration because a higher proportion of the total inflows will be received in the interim.

‡ ‡ ‡

Index

What is the relationship between the price and the yield of the bond ?
‡ 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. Yield Curve : Rates at which bonds of similar risk of various tenors are traded on a given point in time, are plotted in a graph. This is known as the Yield Curve

Index

1 Institutions. Insurance Companies. 5-10 Years Mutual Funds. Stare Govt. Financial 3 months .What are the various types of fixed income securities available in the Indian Market? Issuer Instrument Investors RBI. Mutual Funds. Insurance Companies. Provident funds. Dated Securities Central Govt. Individuals Year 3 months . structured Obligations Debentures Commercial Paper Certificates of Deposit PSU's Corporates Corporates. Pd's. 91/364 days Individuals Banks.30 Years Dealers RBI. Corporates Year Maturity Central Govt. Mutual Funds . Insurance Companies.1 Banks . Individuals Banks. Individuals Banks. Corporate. Mutual Funds . Primary Dealers Banks Index . T-Bills Dated Securities Bonds. Banks . Mutual Funds. Provident funds. Provident funds Banks. Primary 2. Banks . Provident funds. 1-12 Years Corporates. Insurance 5-10 Years Companies.

limit of 10% of NA or $ 50 million. Funds of 1 scheme can be invested in any other MF ( Max 5% of Net Assets) Maximum investment in unlisted shares is 10% of NAV for Closed ended schemes and 5% for Open ended schemes. no squaring off. whichever is lower. A MF scheme can invest max.Restrictions ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Mutual funds can invest only in marketable securities All investments are on delivery basis. A MF under all its schemes cannot hold more than 10% of the paid up capital of a company. Index . can be relaxed to 20% with approval of trustees and AMC MF Can invest in ADR / GDRs upto a max.( Exception ± Index and Sectoral funds) Debt funds .single issuer not more than 15% of NAV. 10% of its NAV in a single company.

‡ Such transfer should not be of illiquid securities.Inter Scheme Transfer ‡ Such transfers happen on a delivery basis. at market prices. as defined in the valuation norms. Index . ‡ Such transfers should not result in significantly altering the investment objectives of the scheme involved. ‡ One scheme can invest in another scheme. No fee is payable on these investments. up to 5% of net assets.

‡ Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed 25% of the net assets of the scheme Index .Investment in Sponsor Company ‡ A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associate or group company of the sponsor. ‡ A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates.

‡ OES are allowed three months or upto end of the succeeding calendar quarter from the close of IPO to ensure compliance with this requirement Index . ‡ So now each scheme and individual plan under the scheme should have a minimum number of 20 investors AND no single investor should account for more than 25% of the corpus of such scheme.New rovisions on Investment olicy ‡ 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.

‡ A normal MF scheme cannot invest in any FoF scheme.Fund of Funds Scheme ‡ A FoF invests in the schemes of other MF. ‡ A FoF is not allowed to invest its assets other than in schemes of MF. Index . ‡ A FoF scheme cannot invest in another FoF scheme. except to the extent of its liquidity requirements.

Below Par. when other bonds of similar maturites pay 11% will be --. ‡ Yield and price move in opposite direction Q&A Index .Important points ‡ The current market price of a 9% coupon bond.

Chapter 9 Measuring And Evaluating Mutual Fund Performance .

‡ Earnings can be either dividend or capital gains. ‡ Rate of Return = Income Earned *100/ Amount invested. ‡ Simple total return (STR) method includes the dividends paid to the investor ‡ STR = {NAV(end) ± NAV ( begin)}+ Dividend paid *100 NAV at beginning ‡ Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, then money will double in 72/12 = 6 years.

Index

Performance Measurement
‡ Change in NAV= ( NAV at end ± NAV at beg.)*100 NAV at the beginning ‡ ‡ Total Return = ( Change in NAV+ Dividend) *100 NAV at beg. Return on investment or Total Return with dividend reinvested at NAV. 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 100% turnover implies that the manager replaced his entire portfolio during the period in question 200% means portfolio changed in 6 months A liquid fund has the highest portfolio turnover.

‡ ‡ ‡ ‡

Index

Numerical
‡ An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______

‡ Answer - % change in NAV = ( 24 -22) *100 = 9.09%
» 22

Index

17-10000=1947.94 Step 4:Total Units=454.55+64.55 Step 2:Total Div.‡ ‡ ‡ ‡ ‡ Purchase price Rs.17 Gain of 1947. 22 per Unit NAV at year end Interim Div.47% Rs. Rs.49 Step 5:Withdral Amt.-Div.47 Ans:19. 21 Total Return=? Assume investment of Rs. NAV Rs.17 Gain =11947. 10000 Step 1: Initial Units alloted =10000/22=454. 23 per Unit ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Index . =519. 10000 So that on the investment of Rs.49*23=11947.17 on the investment of Rs. 100 gain is 19. 3 Ex.94=519.65/21=64.=454.55*3=1363.65 Step 3: Additional Units=1363.

‡ The income ratio ( It is the net investment income divided by its net assets for the period) ± useful for debt fund ‡ Portfolio Turnover rate ‡ Fund size ± Small funds are easy to manage and can achieve their objectives in a focussed manner with limited holdings. Large funds benefit from economies of scale with lower expense ratios and superior fund management skills. ‡ Cash holdings Index .Funds with small corpus size will have a higher expense ratio affecting investor returns.Other performance measures ‡ The expense ratio ( Ratio of total expenses to average net assets of the fund).

‡ The returns should be computed on an annualized average compound rate of return from cumulative figure. except for liquid mutual funds which have a short investment horizon. Index . it should not be annualized. ‡ If the fund performance data relates to a period of less than one year.Important Point ‡ Mutual Fund schemes are based on cumulative returns over a long time period.

Index . ‡ It is not a permanent source of funds for the scheme. ‡ Purpose should be to meet liquidity requirements for paying dividend or meeting redemptions. ‡ For Maximum period of 6 months.Borrowings by Mutual Fund ‡ A mutual fund can borrow for a maximum of 20% of net assets.

and relative to other comparable financial products. ‡ 3 kinds of benchmarks are used ± Relative to market as a whole. relative to other mutual funds. ‡ For debt funds. the benchmark should have the same portfolio composition and the same maturity profile ‡ Main benchmark for debt funds is I-sec ‡ Tracking Error ± Applicable for Index Fund Index .Benchmarking ‡ Benchmarking should be selected by reference to ± The asset class it invests in and the fund¶s stated investment objective.

( Gilt cannot be compared with riskier corporate debt) ‡ Fund size should be comparable.( Debt with debt and equity with equity) ‡ Portfolio composition of two funds is similar.Criteria for peer group comparisons ‡ The investment objective and risk profiles of the two funds should be the same.( same size) ‡ Expense Ratios is also important factor ‡ Funds should be compared over the same periods only Q&A Index .

Chapter 10 Helping Investors with financial planning .

The objective is to ensure that right amount of money is available in the right hands at the right point in future to achieve an individual¶s financial goals.Definition and objective of FP ‡ It is identifying all the financial needs of an individual ± Translating needs to monetarily measurable goals ± Planning financial investments that will allow individual to provide for and satisfy his future financial needs and achieve his life¶s goals. Index .

taxes.Financial Planner ‡ A person who uses the financial planning process to help another person determine how to meet his or her life goals. ‡ Possesses detailed knowledge of wide range of products and financial planning tools and help clients in choosing the best products. ‡ He looks at all of client¶s needs including budgeting and saving. ‡ About 250000 certified Financial Planners in USA. investments. Index . insurance and retirement planning.

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.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) Index .Benefits of Financial Planning ‡ ‡ ‡ ‡ Financial Plans are tax efficient. Benefits to Financial Planner ± Ability to establish long term relationships ( Multiple products to one client) .

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 judgement and balanced thinking Organized way of working Regular contact with clients Clear Focus on Overall Financial Planning of client rather than on individual transactions. Index .

Steps to Financial Planning ‡ Establish and define client-Planner Relationship ‡ Gather client data. Define client Goal ‡ Analyze and evaluate clients financial Status ‡ Develop and present financial planning recommendations ‡ Implement the financial planning recommendation ‡ Monitor the financial planning recommendations Index .

Should understand the impact of financial decisions on their cash flows and their income. ‡ Should be willing to revise and re-balance their portfolios with changing market conditions. house purchase or change of job status) ‡ Investors benefit immensely by starting early and being systematic and disciplined in their approach. birth. Index . performance and their changing needs and changes in lifestyle or circumstances( inheritance.Important responsibilities of investors in the financial planning exercise? ‡ ‡ Should set measurable financial goals. marriage.

Very important points on financial planning ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ The planner can look at all the clients need including budgeting. 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. Index . It is not only Tax Planning. saving.( CORE PRODUCT) Financial is not only investing. It comes before investing. It is relevant for all category of clients. Financial planning is important at younger stage of life. It is not as same as retirement planning. taxes. insurance and retirement planning. investments.

‡ Financial Planning allows a person to achieve financial goals through proper management of finances. Index . ‡ Financial planners and their clients should focus on allocating funds to different asset classes. It should not be current market condition.Important points on Financial Planning ‡ The basis of genuine investment advice should be financial planning to suit the investor¶s situation. ‡ Financial planning is relevant not only to HNIs ‡ Financial planning works better for younger/ middle aged client.

Ability to take risk and invest for the long term Sudden wealth surge Medium to long term Wealth preservation.High risk appetite Liquid and medium term investments. Lower risk appetite Liquid and medium term investments. Preference for income and debt products Reaping Stage Higher liquidity requirements Inter Generational transfer Long term investment of inheritance Low liquidity needs.Wealth cycle for investors Stage Financial needs Investment preferences Accumulation stage Transition Stage Investing for long term identifed financial goals Near term needs for funds as pre-specified needs draw closer Growth options and long term products. Preference for low risk products Q&A Index .

Chapter 11 Recommending Financial Planning Strategies to Investors Index .

Jacob¶s Rebalancing Strategy ( Combination of RCA and Value averaging strategies. Buy and hold is most common strategy BUT most common mistake. discard the non performers and keep the good performers. track your investments. Ideally it should be.) ( putting regularly money in liquid fund and set a target value for the equity fund) ‡ ‡ ‡ Index . Rupee cost averageing Value Averaging.‡ ‡ ‡ FINANCIAL PLANNING STRATEGIES Harness the Power of Compounding ± 1% interest per month is better than 12% yearly retrun.Using a aggressive growth fund and liquid fund of the same family.

45 13.43 74.91 78.35 13.89 93.75 13.20 69.20 74.20 72.25 10.85 14.89 261.22 8010.84 12.85 13.78 10716.25 506.75 11 12.07 168.00 1900.16 578.02 90.32 9968.56 3881.5 Number of umulative units bought number of units 80.82 431.03 5498.77 793.86 Average ost £ ¡   Index .00 80.47 6757.57 719.00 88.91 72.5 1000 1000 1000 1000 1000 1000 1000 1000 1000 11.91 352.60 Value of holding 1000.30 9357.Rupee Cost Averaging ¢ Amount NAV er Invested unit ( s) 1000 12.36 647.00 2815.

A fixed amount is targetted as the desired value of the portfolio at regular intervals If markets have moved up. Over a period of time the average purchase price of investor is lower than average NAV. ± ± A fixed amount is invested at regular intervals More units are bought when prices are low and fewer units are bought when prices are high. Index . the units are sold to restore target value and vice versa. ± ± Its disadvantage : Does not indicate when to sell or switch.‡ Rupee cost averaging. It is superior than RCA as it enables the investor to book profits and rebalance the portfolio. BUT As compared to lump sum investing the investor still gains in RCA ‡ ‡ ‡ ‡ Value averaging.

Some Key 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 Index .

Asset Allocation ± The Strategic Tool ‡ Allocation of money between equity. ‡ Benjamin Graham advocates 50/50 split between equities and bond . debt and money market instruments. Index . ‡ Depends upon situations. ‡ Fixed AA and Flexible Asset Allocation. financial goals and risk appetite. ‡ Fixed Asset Allocation is preferable because of periodical review and more disciplined. But Bogle suggests different combinations.

30% in long term bond funds and 20% in short term bond fund A readymade portfolio ± Single index fund with 60/40 equity/bond holdings. 25% in a Govt. 10% in speciality fund. 20% in Aggressive Growth fund. Index ‡ ‡ ‡ ‡ .50% in diversifed Equity Value Funds. Securities Fund and 25% in High grade Corporate Bond Fund.Different Combinations suggested by Bogle ‡ Basic Managed Portfolio . Basic Indexed Portfolio ± 50% in Total Stock market index and 50% in a Total Bond market portfolio A Simple Managed Portfolio ± 85% in Balanced fund and 15% in medium Term bond fund A complex Managed Portfolio ± 20% in Diversified Equity fund.

What is Bogle¶s strategic asset allocation? ‡ Older investors in the distribution phase: ‡ 50% equity : 50% debt Younger investors in the distribution phase: 60% equity : 40% debt ‡ Older investors in the accumulation phase: 70% equity : 30% debt ‡ Younger investors in the accumulation phase: 80% equity : 20% debt Q&A Index .

Chapter 12 Selecting the right Investment Products for Investors Index .

Comparison by Nature of Investment Return Equity FI Bonds Corporate Debentures Company Fixed Deposites Bank Deposites PPF Life Insurance Gold Real Estate Mutual Funds High M te Safety Convenice Low High Moderate Low High High High High Moderate High Volatility High Moderate Moderate Low Low Low Low Moderate High Moderate Liquidity High or Low Moderate Low Low High Moderate Low Moderate Low High Moderate High Moderate Low Moderate Moderate Low High Moderate High Low Moderate Moderate Low High Low High High Index .

The Investor Perspective Funds vs. Other Products Investment Objective Equi IB Corporate Debentures Company Fi ed Deposites Bank Deposites PPF Li e Insurance Gold Real Estate Mutual Funds A I c Income Income Income Income Risk Cover Inflation Hedge Inflation Hedge Capital Growth.Income i l ci i Risk Tolerance Hi L H-M-Low T e same Generally Low Low Low Low Low H-M-Low M Investment Horizon L T ium to Long T m T e same Medium Flexible-All Terms Long Term Long Term Long Term Long Term Flexible-All Terms Index .

70000) ‡ RBI Relief Bonds ( 8% taxable for 5 years) ‡ Indra Vikas Patra ‡ MF ± Best Option Index .‡ Real Estate ( High investment required) ( also it is not easy to liquidate holdings quickly at an appropriate price) ‡ Bank Deposits ( Preferred due to the perception of bank deposits being safe and free of default. ‡ PPF ( 8% tax free and eligible u/s 80c upto Rs.

Q&A Index . ‡ Gold is perceived as a hedge against inflation or as a means of security in bad times.Important Points ‡ The biggest advantage of GOLD is that it is not subject to erosion on account of rupee depreciation.

Chapter 13 Helping Investors understand Risks in Fund Investing .

fund + 50% Money market fund. ‡ Moderate Risk ( cautiously aggressive) portfolio: ± 40% growth and income fund+ 30% govt. bond fund + 20% Growth fund + 10% index funds ‡ High Risk( Aggressive) portfolio : ± 25% aggressive growth fund+ 25% international funds + 25% sector funds +15% high yield bond funds+ 10% gold funds Index . sec.Jacob¶s recommendations of portfolios based on risk level of different funds ‡ Low Risk ( conservative) portfolio : ± 50% Gov.

± ³Risk´ is thus equated with Volatility of Earnings ‡ Equity Price Risk ± Company Specific ± Sector Specific ± Market Level Index .Evaluating the Risks of a Mutual Fund ‡ What is Risk ? ± Risk means the possibility of financial loss.

Volatility of an Equity mutual fund comes from: ‡ Kind of stocks in the portfolio ( growth/value/big/small) ‡ The number of stocks ( degree of diversification) ± Smaller portfolios are more volatile than large PFs ‡ Fund manager¶s success at market timings Index .

Evaluating the Risks of a Mutual Fund ‡ Market Cycles ‡ Risk Measures ± Standard Deviation ± SD measures the fluctuations of a fund`s returns around a mean level. 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 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. Index .

‡ Standard Deviation is the best measure of risk. ‡ Risk Adjusted Performance ± Sharpe & Treynor Ratios Index .Evaluating the Risks of a Mutual Fund ‡ ExMarks or a number known as ³R-Squared´ ± How much of a fund`s fluctuations is attributable to movements in the overall market from 0 to 100 percent. ± An index fund will have ExMarks of nearly 100%. Non Diversified funds will have lower ExMarks.

Evaluating the Risks of a Mutual Fund ‡ Alpha ± Risk adjusted performance calculation is called Alpha. Q&A Index . ± 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.

Chapter 14 Recommending Model Portfolios and selecting the right Fund .

‡ Determine sector distribution. Index . ‡ Determine asset allocation.The steps in developing a model portfolio for an investor ( Jacob¶s Four Step Program ± Developing a Model portfolio) ‡ Develop long term goals. ‡ Select specific fund managers and their schemes.

growth and income 25% in conservative money market funds. ± 25% in high yield bond funds and long term growth funds. ± 35% in municipal bond funds. Index . 25% in high yield bond funds.Jacob¶s Model portfolios recommended for investors according to their life cycle stages: ‡ Young unmarried professionals : ± ± ± 50% in aggressive equity funds. Young couple with 2 incomes and 2 children: ± 10% in money market funds. ± 30% in aggressive equity funds. funds.

Contd: ‡ Older couple single Income : ± 30% in short term municipal funds ± 35% in long term municipal funds ± 25% in moderately aggressive equity ± 10% emerging growth equity ‡ Recently retired couple : ± 35% in conservative equity funds for capital preservation / income ± 25% in moderately aggressive equity for modest capital growth ± 40% in money market funds Index .

What is the recommended portfolio for investors in accumulation phase? ‡ Diversified Equity : Sector and balanced funds ± ‡ 65 ± 80% Income and gilt funds : ± 15 ± 30% ‡ Liquid funds and bank deposits : ± 5% Index .

What is the recommended portfolio for investors in distribution phase? ‡ Diversified Equity and balanced funds: ± 15 ± 30% ‡ Income funds : ± 65 ± 80% ‡ Cash funds: ± 5% Index .

Index . ± Keep the money in safe liquid investments and take the time to decide what to do with the money.‡ Investors in the Inter-Generational Transfer Phase: ± The recommended investment strategy will depend upon the beneficiaries ‡ Investors in the sudden wealth stage : ± Take into account the effect of taxes.

‡ Wealth preserving individuals: 70% .80% exposure to income. gilt and liquid funds and the remaining in low risk diversified equity or balanced funds.80% allocation to diversified equity and sector funds. Index .Financial planning for affluent investors ‡ Wealth creating individuals : 70% .

LOWER BETA AND HIGHER GROSS DIVIDEND YIELD Q&A Index .Selecting the right equity funds ‡ Look at Fund size ‡ Look at fund age ‡ Look at Portfolio¶s managers experience ‡ Look at cost of investing ‡ Portfolio characteristics like Cash position. market capitalisation of the fund. portfolio concentration. portfolio statictics ‡ BEST FUND WILL HAVE HIGHER EX MARKS. portfolio turnover.

Chapter 15 Business Ethics in Mutual Fund .

Business Ethics
‡ Business Ethics means rules of acceptable and good conduct. ‡ Business must be conducted in a disciplined, organized and fair manner. ‡ Ethical practice means practice in the interest of unit holders of the scheme. ‡ A consumer who feels cheated will never return to buy the product again. ‡ BE ensures that the customer remains a long term buyer.

Index

Business Ethics for Mutual Fund Business
‡ MF is also a business where investors buy investment products ‡ MF and sales persons are required to adopt ethical, fair and good business practices and apply them to all those involved in selling/ servicing activities. ‡ A salesperson is expected to know the product thoroughly and describe it accurately.

Index

Business Ethics for Mutual Fund Business
‡ The conduct rules for distributors and employees are set by the Fund trustees and directors of AMCs. ‡ AMFI has also set ethical standards and practices for the industry. ‡ AMFI code includes specific rules of good conduct for the AMCs and its employees and the distributors. ‡ SEBI also requires the development of ethical standards and practices by all fund houses. ‡ As distributor, you should set your ethical standards higher than mimimum requirement of above agencies.

Index

open and transparent with your potential clients. ‡ To ensure fairness in dealing with investor. ‡ To protect the clients from being cheated or exploited. Index . ‡ Rules are needed to ensure that you deal with the clients fairly and transparently. ‡ To ensure a level playing field among all categories of business participants.Objectives of Business Ethics ‡ Simply being honest.

Areas particularly monitored by SEBI ‡ Fund structure and Governance ‡ Exercise of Voting Rights by Funds ‡ Fund Operations. Index .

Regulatory Requirements regarding Principle of Independence ‡ Separation of Functions ± No one constituent is in control of the investors assets. Custodian. Index . Independent Trustees and BOD members also. ‡ Independence of Personnel .( Trust. AMC.Trustees can not serve as Director of AMC they supervise or even any other AMC. Registrar) ‡ Independence of Organisations ± Trust independent of AMC.

Examples of Unethical practices ‡ Insider Trading ± Buying or selling securities on the basis of privileged information available to the funds by persons who are seen as insiders to the company. ‡ Personal trading by fund managers and employees ‡ Front Running ± Fund manager buying or selling securities ahead of doing the same transaction for the fund Index . ‡ Preferential Treatment to Selected investors ± Cut off time has been introduced now to prevent late trading abuses.

1 lakh.1 lakh ‡ Trustees have to certify that the personnel of AMC don¶t indulge in front running or self dealing. ‡ In case of Trustees. where they exceed the value of Rs.in MF. Index . they may report only those tranx. Which exceed the value of Rs. ‡ The director of AMC has be file details of tranx.Regulations on Personal Trading ‡ AMC should file with trustees a qtrly statement of dealings in securities by the key personnel of the AMC.

Q&A Index . ‡ All distributors and agents follow the code of conduct laid down in the 5th schedule of SEBI MF regulations 1996. ‡ A more detailed code called AGNI has been put into place by AMFI for all distributors and agents.Other Regulations ‡ Mandatory for the AMC to appoint a compliance officer to monitor and ensure implementation of all laws / regulations.

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