1.

Test Objectives: Concept & Role of a MF

a) Concept & Advantages of MFs

b) Brief History of MFs in India
c) Differentiation between various types of funds
d) Key Developments over the years

1
 What is a Mutual Fund ?
A mutual fund is a collective investment ( pool) that allows
many investors, with a common objective, to pool
individual investments and give to a professional manager
who in turn would invest these monies in line with the
common objective.
Each pool of money is called a Mutual Fund Scheme.By
buying a MF scheme investors are buying into investment
objective.

2
 MF Operation Flow Chart

Passed Investors Pool their

back to money with

Returns Fund
Manager
Generates Invest
Securities in
 Characteristics of Mutual Funds
• Investors own the mutual fund.
• A portfolio is a collection of securities.These can be
E/D/MM/derivatives and the like.
• Professional managers (AMC) manage the fund for a
small fee.
Fee is expressed as a percentage of assets managed
• The funds are invested in a portfolio of marketable
securities, reflecting the investment objective.
• Value of the portfolio and investors’ holdings, alters
with change in the market value of investments.

4
 Mutual Funds:
A Packaged Product
Professional Portfolio
Management Diversification

Reduction/
Diversification
Reduction of of risk
Transaction
Cost

Liquidity
Convenience &
Flexibility Tax Benefits Safety
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Disadvantages of Investing in the MF's
The benefits far out weight the disadvantages
a)No Control over costs
The cost is paid by investor as long as he remains in
the fund, albeit in return for the professional
management & research.
The fees is also a percentage of the value of his
investments; irrespective of market going up or down.
( Distribution is cost which is not incurred in direct
investing)
However the limits for costs have been set by SEBI.
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 b) No Tailor-Made Portfolios
• By investing directly one can build own portfolio
of shares bonds & other securities.
• Investing therein Mutual Funds means he
delegates his decision to FM. (Constraint for
HNW/ Corporate clients)
• This is overcome by offering large options of
schemes by a MF house.Investor can choose
different investment schemes/plans/options and
construct an investment portfolio that meets his
investment objectives.
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 c) Managing a portfolio of funds
• Availability of a large no. of options from MF's can
actually mean too much choice for the investor.
• Will need advice similar to the situation when he
has to select individual shares or bonds to invest
in.
• Country has a large no. of AMFI registered FPs
who are capable of guiding the investors.

8
 Open-ended vs. Closed-ended
Funds
OPEN-ENDED CLOSED-ENDED
 No fixed maturity  Fixed Maturity

 Variable Corpus  Fixed Corpus

 Not Listed  Generally Listed

 Buy from and sell to the  Buy and sell in the Stock

Fund Exchanges
 Entry/Exit at NAV  Entry/Exit at the market

related prices prices

9
 Interval Funds
• Combination of open Ended and Close Ended
• Largely Close ended , become open ended for
specific period
• Benefit to investors- not completely
dependent on the stock exchange to buy/sell
their units.

10
 Terms used in Mutual Funds
NAV-Net Asset Value. Current market price of
the unit.
Sale Price -It is the price you pay when you
invest in a scheme. Also called offer price.
Sale Price=NAV + Entry Load
Repurchase Price: Redemption price by the
mutual fund.
Repurchase Price=NAV-Exit Load
 Actively v/s Passively managed Funds

• Actively Managed Funds : eg Open Ended

Diversified Fund

• Passively Managed Funds: eg, Index Fund

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 Market Capitalization
• Large Cap: 1st -100th company in terms
of full market capitalization
• Mid Cap: 101st -250th company in terms
of full market capitalization
• Small Cap: 251st company onwards in
terms of full market capitalization
 Types of Mutual Funds
Based on investment horizon
•Equity funds are recommended for the long term (five years and above)
•Hybrid funds are recommended for three years and above
•Income funds are recommended for medium term (one year and above)
•Short term debt funds are recommended for the short term (up to 1 year)
•Liquid funds are recommended for ultra-short periods (up to a month)
Based on investment categories
•Equity funds invest in equity shares; Debt funds invest in debt securities;
•Money market funds invest in money market securities; Commodity funds
•invest in commodity-linked securities;
•Real estate funds invest in property-linked securities; Gold funds invest in
•gold-linked securities
 Types of Schemes
Mutual Who Should Objective Investment RISK Ideal
Fund Types Invest? Portfolio Investment
Horizon

Diversified Moderate
Equity and
Funds aggressive High growth Equity Shares High 1-3 Years
investors
• Large Cap
High Equity Shares Very 3- 5 Years
•Mid Cap Aggressive
investors Growth High
• Small Cap
Sector
Funds Aggressive High growth Equity Shares Very high 3-5 Years
Thematic investors
Funds
Index Moderate To Generate Portfolio index Returns of 1-3
Funds investors returns which like BSE NAV vary years
are similar the Sensex, Nifty with index
returns of the etc. performance
respective index.

Equity Moderate and Long term Equity Shares High 1-3

Linked aggressive growth with tax Years
Saving investors saving
Scheme
(ELSS)
Moderate Long term 1-3 years
Balanced Debt & Equity Moderate
investor
funds

Arbitrage Moderate Short term Equity (Deri- Moderate Below

Fund investor Vaties) 1 year
Bond Funds Salaried and Regular Predominantl Credit risk Over 9-12
conservative income y debentures, and interest months
investors Govt. rate risk
Securities,
Corporate
Bonds

Salaried and Security Interest rate Over 12

Gilt Funds Govt
conservative and income risk months
Securities

Call money,
Investors with Liquidity commercial Little 3 weeks-3
Short-term surplus short- interest rate months
Funds and papers, T-
term funds moderate Bills, Short- risk
income term G-Secs
Liquid Investors who Liquidity + T-Bills Negligible 2 days- 3
Funds park their funds moderate certificate of risk weeks
in current income + deposits,
account or short preservatio commercial
term bank fixed n of capital papers,
deposits securities call
money
 c) Broad Fund types by Risk Hierarchy

Growth Funds
Potential Aggressive, Value,
for Sectoral Funds
Growth
return Debt
Funds
Gilt Funds, Bond Balanced Funds
Funds, High Ratio of Debt : Equity
Yield Funds

Liquid Funds
Risk 18
 Types of Equity Funds
Market cap based funds Dividend Yield Funds
Multi Cap Fund Invest in companies with high
Large Cap Fund dividend yield
Large and Mid Cap Fund Attractive in bearish and over
Mid Cap Fund valued markets
Small Cap Fund

Equity Linked Savings Scheme (ELSS)

Offer tax benefits u/s 80C
Investment up to Rs. 150,000 in a year in such funds can be deducted
from taxable income of individual investors
ELSS must hold atleast 80% of the portfolio in equity securities
Lock-in period of 3 years from the date of investment
 Types of Debt Fund
Liquid Funds Money Market Funds
Very short term maturity Risk and return profile
Debt securities with less than similar to liquid funds
91 days to maturity Choose securities with
Primary source of income is slightly longer tenor of up to
interest 364 days
Safety of principal and superior
liquidity
Used primarily by large
corporate investors and
institutional investors
 Types of Debt Fund 2
Ultra Short Duration Funds
Invest in Debt & Money Market
instruments such
that the Macaulay duration of the
portfolio is between 3 months - 6
months
Low Duration Funds
Invest in Debt & Money Market
instruments such that the Macaulay
duration of the portfolio is
between 6 months - 12 months
Short Duration Funds
Invest in Debt & Money Market
instruments such that the Macaulay
duration of the portfolio is
between 1 year – 3 years
Medium to Long Duration Fund
Investment in Debt & Money Market
instruments such that the
Macaulay duration of the portfolio is
between 4 – 7 years
Long Duration Fund
Investment in Debt & Money Market
Instruments such that the
Macaulay duration of the portfolio is
greater than 7 years
Credit Risk Funds
Invest in medium-term and long-
term securities issued by the
government, banks and corporates
Benefit of higher coupon
Higher credit risk
High interest rate risk due to long
term orientation
 Types of
Conservative Hybrid Funds
Hybrid Funds Fund of Funds (FoF)
• Smaller allocation to equity (10%
to 25%) ,Debt-oriented
• Periodic distribution of dividends,
though there is no assurance
• Balanced Hybrid Fund
• Equity allocation between 40% to
60%;Debt oriented
• No arbitrage permitted
• Aggressive Hybrid Funds
• Equity-oriented hybrids that invest
from 65% - 80% in equity
• For investors who seek growth
from equity but want protection
from volatility
Invests in funds of same fund house
or various fund houses
(Multimanager)
Choice of funds according to
investment objective
Two levels of expenses- underlying
level and FoF level
International Funds
Invests in foreign securities or
foreign funds
‘Feeder‘ fund ties up with the ‘Host
fund in an FoF structure
Foreign currency risk is involved as
the INR invested by local investors
are converted in foreign currency
Weakness in the foreign currency
can adversely impact the total
return to the investor
Appreciation in the foreign currency
will boost portfolio performance
 Other Types of Funds
REITS – Real Estate Investment
Retirement Fund
Trusts
Oriented to create retirement
SEBI registered trust
corpus
Invests directly in to commercial real
Lock in for at least 5 years or
estate either through properties or
till retirement
mortgages
age, whichever earlier
Income in the form of rents received
Children’s Fund
as well as capital appreciation
Oriented to create corpus for
Offers liquidity
children’s
Minimum assets to be raise in an IPO
education/marriage
is
Lock in for at least 5 years or
Rs.500 crore with an offer size of not
till child
less than Rs.250 crores
attains majority, whichever
Minimum subscription amount of
earlier.
Rs.2 lakhs
 Other Type of Mutual Funds
Infrastructure Debt Funds
Mutual fund schemes that invest at least 90% of their assets in
debt securities or securitized debt instruments or special purpose
vehicles of infrastructure companies
2 types of schemes – either a closed end scheme maturing after 5
years or an interval scheme with lock in of 5 years
Minimum investments by an IDF is Rs.1 crore with Rs.10 laks as
the minimum unit size
Infrastructure Investment Trusts
Invest in infrastructure sector
Minimum offer size in the IPO should be at least Rs.250 crores with
proposed asset size of at least Rs.500 crores
Trust should have minimum 25% public float with a minimum 20
investors
Minimum subscription size Rs.10 lakhs
 Gold Funds
The funds which invest in gold and gold related
securities:
Gold Exchange Traded Fund: Invests in gold, gold
related securities or gold deposit schemes of
banks.
Gold Sector Fund: The fund will invest in shares of
companies engaged in gold mining and processing.

25
 Exchange Traded Funds

• It tracks market index and trades like single

stock on the stock exchange.
• Its pricing is linked to index and units can be
bought or sold on the stock exchange.
• ETFs are less costly and more efficient in terms
of tracking the index performance.
• Gold EFT invests in 99.99% pure gold.
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 Plans offered by Mutual Funds
• Growth Plan: The returns from the investment are
reinvested.The number of units remain the same but the
unit value will increase.
• Dividend Plan: The income is distributed from time to
time.Regular income is paid.
• Dividend Reinvestment Plan: The returns are reinvested
as additional units of the plan.The NAV does not increase
much.
• Systematic Investment Plan(SIP): Investment is done in a
specified frequency in a scheme of a mutual fund.
• Systematic Withdrawal Plan(SWP): It is a facility provided
to the investor to withdraw at a predetermined amount at
a pre determined frequency.

27
 A Systematic Investment Plan (SIP) is one of the better ways of
investing in Equity Mutual Funds. Taking advantage of the two
basic principles i. e.

- Power of Compounding

- Rupee Cost Averaging

SIPs work as a powerful tool that can help you create wealth over
time.

.
 Mutual Funds (SIPs)
Monthly Amt Invested Purchase No.of units
Investment (Rs) Price (NAV) purchased
Initial Investment 1000 10.00 100.00
1 1000 8.20 121.95
2 1000 7.40 135.14
3 1000 6.10 163.93
4 1000 5.40 185.19
5 1000 6.00 166.67
6 1000 8.20 121.95
7 1000 9.25 108.11
8 1000 10.00 100.00
9 1000 11.25 88.89
10 1000 13.40 74.63
11 1000 14.40 69.40
12000 1435.90
Average unit cost = Rs.12000/1435.90 = Rs.8.36
 Systematic Withdrawal Plan
• Just as investors do not want to buy all their units at a
market peak, they do not want all their units redeemed
in a market trough.
• Investors can therefore opt for the safer route of
offering for repurchase, a constant value of units.
• Some schemes even offer the facility of transferring
only the appreciation or the dividend.
• Accordingly, the mutual fund will re-purchase the
appropriate number of units of the unit-holder,
without the formality of having to give a re-purchase
instruction for each transaction
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 Systematic Withdrawal Plan
An investor may opt for SWP for several reasons:
• To minimise the risk of redeeming all the units
during a market trough.
• Meet liquidity needs for regular expenses.
• Assuming the scheme is profitable, the re-
purchase ensures that some of the profits are being
regularly encashed by the investor.

31
 Systematic Transfer Plan
• This is a variation of SWP.
• While in a SWP the constant amount is paid to the
investor at the pre-specified frequency, in a STP, the
amount which is withdrawn from a scheme is re-
invested in some other scheme of the same mutual
fund.
• It operates as a SWP from the first scheme, and a SIP
into the second scheme.

32
 Risk Classification based on Riskometer
• It is a pictorial representation of the risk to the
principal invested in a mutual fund.
• Risk has five levels.
Level of Risk Definition Example

Low Principal at low risk Overnight Fund/Liquid Fund

Moderately Low Principal at moderately low risk Fixed Maturity Plans/Capital Protection
Oriented Scheme

Moderate Principal at moderate risk Income Fund/Conservative Monthly

Income Plans

Moderately High Principal at moderately high risk Index Fund/Exchange Traded

Fund/Equity Dividend Yield Fund/
Solution oriented schemes

High Principal of high risk Sector Fund/Thematic Fund

Riskometer
 Fund Structure & Constituents

Legal Structure of Mutual Funds in India

35
MUTUAL FUND - FRAMEWORK- India
Trust Deed executed by Sponsor
Sponsors on clauses laid down
by SEBI

Asset Management Company

Trustee Company Day to day operations

Custodian
appointed by
Trustees
Fund Operations Marketing
The role of protecting the interest Management
of the investors.
Distribution
First trustees are named in the Brokers RTA
Trust Deed.
Markets Bank
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 Constitution of SBI Mutual Fund
Mutual Fund Trust SBI Mutual Fund
Sponsor State Bank of India
Trustee SBI Mutual Fund Trustee
Company Pvt Ltd
AMC SBI Funds Management Pvt Ltd
Custodian HDFC Bank Ltd, Mumbai
Citi Bank, Mumbai
Stock Holding Corp of India Ltd
RTA Computer Age Management
Services Pvt Ltd

37
 Fund Structure and Constituents
•It is established as a trust.
•It is created by one or more sponsors.
•Sponsors are the main person behind the mutual fund
operations.
•Every trust has beneficiaries.
•The beneficiaries of the mutual fund trust are the
investors.
•It raises money through sale of units to the public
•The units are sold under one or more schemes
•The schemes invest in Securities or Gold.
38
 Trust Deed
•Trust Deed governs the operations of the mutual fund.
•Trust deed is executed by the sponsors.
•SEBI lays down the clause for the trust deed.
 Legal Structure of Mutual Fund
– MF trust is created by one or more sponsors
– Every trust has beneficiaries. They are investors who invest in
various schemes
– MF operations are governed by the Trust deed, executed by
sponsors. SEBI clauses in Trust deed.
– Role of protecting the beneficiaries ( investors) is that of the
trustees.
– To perform trusteeship role- individuals or a trustee co. may be
appointed.
– Appointed individuals are referred to as Board of Trustees
– A trustee company functions through Board of Directors.

40
 SPONSOR : Role
– Provides capital for the mutual fund.
– Should have carried business in financial services for 5 years.
– Should have a positive net worth for those 5 years.
– The latest net worth should be more than the amount the sponsor
contributes to the AMC capital.
– The sponsor should have earned profits in 3 of the previous 5 years
including last year.
– Must own at least 40% of the Asset Management Company
• Sponsors have to contribute a minimum of Rs.50,00,000 as initial
contribution to the corpus of the mutual fund

41
 Legal Structure -Trustees
• The trustees ensure that the MF complies with all the rules ,
regulations & interest of the unit holders.
• SEBI stipulates that:
– Trustee to be a person of ability, integrity and standing.
– Not guilty of moral turpitude, convicted of economic
offence.
– Prior approval of SEBI required before appointing a
trustee.
– The sponsor to appoint at least 4 trustees
– If Trustee company minimum 4 directors out of which - at
least 2/3 to be independent.
 Legal Structure AMC

• Day to day management is handled by AMC. AMC

is appointed by the sponsor or the Trustees.
• AMC should have minimum net worth of 50
crore.
• As per SEBI
– The directors need to be persons having
adequate professional experience
– 50% of directors should be independent
directors.
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 AMC

• An AMC cannot invest in its own scheme unless it is

disclosed in the offer document.
• AMC can be terminated by the majority of the
trustees or 75% of the unit holders.
• For any change in AMC prior approval of the unit
holders & trustees is required.
• AMC cannot charge any fees for investment.
• AMC cannot act as a trustee for another MF.
 Asset Management Company
• Operations of AMC are headed by MD, ED, Chief
Executive Officer
• CIO: Is responsible for overall investments of the
Funds.
• Fund Managers: FMs assist the CIO. Same FM may
manage multiple schemes
• Securities Analysts : Helps the fund managers
research inputs
• Securities Dealers: help in putting the transactions
through in the market.
45
The other constituents that work along with AMC to
manage the investors money in a MF are :

• Registrar & Transfer agents: Appointed by AMC

– Need to be registered with SEBI
– Not compulsory to appoint an RTA.
• Custodian: Appointed by Trustees
– need to be registered with SEBI.
– Agreement between trustees and custodian
– Tracks corporate actions like dividends, bonus and rights issue.
• Selling & Distribution agents
• Auditors: Scheme auditors are appointed by Trustees, AMC auditor
is appointed by the AMC.
46
 REGISTRARS & TRANSFER
AGENTS
• Processing investors’ application
• Recording of Transactions
• Issue of Account Statements to Investors
• Arranging payment to Investors when they redeem
• Taking care of Non commercial transactions like change of
address,loss of account statement etc.
• Should be registered with SEBI
• Appointed by AMC
• Responsible for issuing & redeeming units of the MF.

47
 CUSTODIAN & DEPOSITORIES
• Safe keeping of the assets held by the Fund
• Receives and Delivers Securities out of de-mat account
as and when necessary
• Follow up on Corporate benefits
• Provide an independent means of control
• Independent of Sponsors
• Should be registered with SEBI
– Appointed by board of trustees

48
 Chapter 3
Legal and Regulatory Environment
 3.Test Objectives: Legal and Regulatory
Environment
• Role of regulators in India
• Know investment restrictions & related
regulation
• Understand Investors Rights and obligations

50
 SEBI as the Regulator
• SEBI is primarily responsible for safeguarding the interests of the
investors.
• Indian mutual funds are supervised and regulated by SEBI (Mutual
Funds) Regulations, 1996
• SEBI was set up by the SEBI Act, 1992 and is supervised by Ministry
of Finance
Regulation of Constituents
• SEBI regulates registrars, custodians, brokers, collecting banks.
• Distributors must clear the mandatory certification prescribed by
SEBI
• Constituents must be registered with SEBI
• AMC and Trustee company are also governed by the Companies
Act and Indian Trusts Act respectively
 RBI and Stock Exchanges
• RBI regulates banks in India
• Banks can act as sponsors, custodians, bankers and
distributors of mutual funds
• Mutual funds also invest in money market instruments
and Gsecs.
• Money and debt markets are regulated by RBI
• Closed-ended funds/ETFs are listed on stock exchanges
• Listing agreement with stock exchanges
• Subject to regulatory and disclosure requirements
 AMFI-Association of Mutual Funds in India

AMFI is industry association

•It is not a Self Regulating Organisation (SRO).
• An SRO is set up by a statutory body which sets out policy
framework, leaving micro regulation to SRO.
AMFI’s functions
•Recommends best business practices and code of conduct for
members.
•Represents the industry to regulators and policy makers
•Conducts investor awareness programs
•Disseminates information
•Amfi Registration Number (ARN)
 Association of Mutual Funds in India (AMFI)
AMFI Code of Ethics (ACE)
•Adapted as a supplement in the Fifth Schedule of the SEBI (Mutual
Fund) Regulation
•Guidelines for mutual fund’s relationship with investors,
intermediaries and the public.
AMFI Guidelines and Norms for Intermediaries (AGNI)
•Sebi has made it mandatory for distributors to follow the code
•It sets out guidelines for intermediaries engaged in selling and
distribution of mutual funds.
AMFI is authorised by SEBI to seek explanation, issue warnings,
or cancel the registration
 Investment Restrictions for Schemes
• General Restrictions
• Mutual fund scheme cannot invest in the unlisted or privately
placed securities of any associate or group company of the
sponsor.
• Investment in the listed securities of the group companies of
the sponsor is limited to 25% of the net assets.
• They may invest in other schemes of the same Mutual Fund
or other Mutual Funds, limited to not more than 5% of the
net asset value of the scheme.
• No fees are charged on such investments. This does not apply
to Fund of Funds.
• All the Mutual Fund schemes cannot own more than 10% of a
company paid up capital bearing voting rights.
 Investment Restrictions for Schemes
Debt Securities
•A mutual fund scheme cannot invest more than 10% of its NAV
in debt instruments issued by a single issuer.
•This can be extended to 12% with the approval of the trustees.
•Investment in unrated debt securities of a single issuer is limited
to 10% of its net assets and the total investments in such
securities cannot exceed 25%.
•These limits do not apply to investments in G Secs, T-Bills and
CBLO.
•The Scheme cannot invest in the short-term deposits of a bank
that has invested in the scheme.
 Investor Rights for Information Disclosure (1)
• NAV and Sale and Purchase prices disclosed on AMFI website by 9pm every
business day
• NAV should be published in at least 2 newspapers with nationwide circulation
• FoFs can publish their NAV by 10 am of the next business day
• Detailed Portfolio disclosure in the prescribed format every 6 months within 1
month of the close of half-year
• Summarized portfolio disclosure to unit holders every month through
factsheet
• Month end portfolio disclosure for all schemes on Mutual fund website by
10th of the next month.
• User-friendly and downloadable format (preferably in a spreadsheet)
• Scheme-wise annual report to be mailed to all unit-holders within 6 months
of financial year-end
 Investor Rights for Information Disclosure (2)
• Key documents of mutual fund and AMC may be inspected by
investors
• Trust deed, Investment management agreement, Custodial
services agreement, R&T agreement, MOA & AOA of the AMC
• Annual reporting on redressal of complaints received against the
mutual fund.
• Mailing of Annual Report or Abridged Summary
• AMCs to provide investors the option of receiving scheme annual
accounts or abridged summary through email
• If email-id is not available, physical copies to be sent to investors
• Investors can ask for physical copies even if the email-id is
registered with the mutual fund
 Investor Rights for Service Standards
• Delay in dispatching dividend warrants or redemption
proceeds AMC has to pay the unit-holder interest at the rate
of 15% p.a
• Investors in whose folios transactions have taken place during
a calendar month should receive Consolidated account
statement (CAS) by the 10th of the next month.
• CAS to be sent every half yearly (September/ March)by the
10th of the next month giving holding at the end of the six
months, across all schemes of all mutual funds, to all such
investors in whose folios no transaction has taken place
during that period.
• Soft copy of the Statement of Accounts shall be emailed to
the unit holders instead of a physical statement if mandated
by investor.
Rights with respect to Unclaimed Dividend /Redemption

• The mutual fund has to deploy unclaimed dividend and redemption amounts
in the money market
• AMC can recover investment management and advisory fees on management
of these unclaimed amounts, at a maximum rate of 0.50% pa
• Recovery of such unclaimed amounts by the investors is as follows:
• If the investor claims the money within 3 years, then payment is based on
prevailing NAV i.e. after adding the income earned on the unclaimed money
• If the investor claims the money after 3 years, then payment is based on the
NAV at the end of 3 years
• AMC is expected to make a continuous effort to remind the investors through
letters to claim their dues.
• The Annual Report has to mention the unclaimed amount and the number of
such investors for each scheme.
 Redressal of Investor Complaints
• Investor must first approach the Investor Service Centre (ISC)
• If not resolved, then approach the personnel at senior levels in
the AMC
• If not resolved, then the investor may approach SEBI
• If the investor is not satisfied with the SEBI ruling, the investor
may approach Securities Appellate Tribunal (SAT)
• Mutual funds should annually disclose details of complaints
received from all sources on their website, AMFI website and in
annual report
• Compliant can also be initiated through SCORES (SEBI Complaint
• Redress System).
 Summary of Service Standards Imposed by SEBI
Transaction
Allotment of units in a NFO (other than
ELSS)
Allotment of units in a ELSS NFO
Refund of money
Dispatch of Statement of account - NFO or
request by unit holder
Dispatch of Consolidated Account
Statement (CAS)
Dispatch of dividend warrants
Dispatch of redemption proceeds
Turnaround Time
5 days from NFO closing date
30 days from NFO closing date
5 business days from NFO closing
date
5 working days from closure of
subscription list / request
10 days from end of each calendar
month if transaction has taken place
during the month.
30 days from date of dividend
declaration
10 working days from transaction
request
 Other Services
Unit Certificate
•May be provided upon request within 30 working days
•No operational purpose
•Not transferable
•Only specifies number of units held by investor
 Rights With Respect to Fund Management
Change in Fundamental Attributes
• Mutual fund to send a written communication to ALL unitholders about the
proposed change
•Option to exit without exit load
•Termination or winding up by unitholders
•Resolution by unit holders holding atleast 75% of assets in the scheme
Termination or winding up by trustees
•Seek the consent of unit holders
•Change in Sponsor or the AMC
•Option to redeem without exit load
•Structural Protection
•The AMC or the sponsor do not directly hold the funds or securities belonging to
the investors
•Custodian is independent of the Sponsor
 Limits to Investor Rights
• Cannot sue the Trust
• The Trust is only a notional entity
• No recourse for ignorance
• A prospective investor has no rights with respect to the fund,
the AMC or intermediaries
• Limits to redressal
– Neither shareholders nor depositors
– Investments cannot be protected
– Redressal of complaints is not obligatory
– Offer document discloses all pending investor complaints
4.Test Objectives: Offer Document
• Understand regulatory aspects of Offer
Document(OD)
• Understand regulatory aspects of Key
Information Memorandum(KIM)

66
 What is an offer document ?
• Legal offer from AMC to investor – for him to make an
informed investment decision.
• Contains vital information and about Fund to be launched
and performance of existing schemes of the MF.
• AMC prepares it in SEBI approved format & needs approval of
Trustees
• Key Information Memorandum (KIM) contains vital
information pertaining to the scheme, objective of the
scheme, Asset allocation pattern, Sale & re-purchase
procedure, load & expense structure, accounting & valuation
policies and it is mandatory to attach KIM to the application
forms.
• Investor has no recourse for not having read the OD/KIM

67
 Significance
• Legal document that protects and governs the right of the
investor to information

• Is the primary vehicle for the investment decision

• Is the operating document and describes the fundamental

attributes of schemes.

• One of the most important sources of information for the

prospective investor

• Is a reference document for the investor to look for

relevant information at any time. 68
 Period of Validity
OD issued for launching the new schemes are valid
for period of 6 months from date of receipt by the
AMC of the letter from SEBI.
• Updated every 2 years for Other Equity Funds
• Regular Addendum for results
• Updated for every major change
-Change in the AMC or Sponsor of the mutual fund
-Changes in the fundamental attributes of the
schemes
-Changes in the investment options to investor;
inclusion or deletion of options

69
 Role of the Offer Document (OD)
• Format prescribed by SEBI
Components of Offer Document
• Statement of Additional Information:
• Contains information about the structure of the fund, sponsor,
trustees and financial information that is common to all scheme
of a fund.
• Can be common to all schemes of a fund.
Scheme Information Document:
• SID contains information specific to a scheme, in terms of
features and details.
• SID is distinct for each scheme
 Contents of Offer Document
A. Scheme Information Document(SID), details of the scheme
Contents:
The cover page has the name of the scheme followed by its type viz. – Open
Ended/ Close Ended/Interval
-Equity/Balanced/Debt/Liquid/ETF
Has the face value of the units , relevant NFO dates, date of SID, name of
AMC & contact details
• Table of contents
• Highlights
• Introduction
Risk Factors- Standard and Scheme specific Risk factors
Min no. of investors in the scheme
Any other special considerations
Due Diligence Certificate
71
 New Fund Offer Process
• NFO refers to a new fund offer when a mutual fund scheme is offered for
the first time to investors.
• An offer document is prepared for every NFO
• NFO period must be limited to 15 days, except for ELSS upto 30 days
• Open-ended scheme opens for re-purchase and sale after allotment
• Closed-ended scheme gets listed on stock exchange
• Allotment must be completed within 5 days of NFO closure
• Scheme must open for transactions within 5 working days of allotment
• Offer Document for a new fund
• Trustee approval and draft OD filed with SEBI
• NFO must be made within 6 months of SEBI approval
• SEBI does not “approve” the OD, it only vets the OD to ensure that all
required information is provided
 Contents of Statement of additional
Information( SAI)
- Information about Sponsors, AMC and Trustee
Company and contact information of service
providers
-Condensed Financial Information ( for schemes
launched in the last 3 financial years)
-How to apply
-Rights of Unit holders
-Investment valuation norms
-Tax, Legal and General information
-Filed only once with SEBI in the prescribed format
73
 Modifications to SAI and SID
• Open-ended scheme’s SID must be valid at all times
• Updated version to be available on website
Changes to SID
• Material changes to be updated immediately
• No material changes, SID to be updated every year, within 3
months of the end of the FY
• Schemes launched after September 30 must update SID within
3 months of the end of next financial year
Changes to SAI
• Material changes to be updated immediately
• No material changes, SAI to be updated every year, with 3
months at the end of FY
 Key Information Memorandum
• Role of KIM: Is a summary of SID & SAI. More
easily and widely distributed in the market. KIM
has to be accompanied by a application form
• Contents of KIM:
- Name of the AMC, MF, Trustee, FM and Scheme
- Date of opening , Issue Closing& Re-opening for
sale & Re-purchase
- Plans and Options under the scheme
- Risk Profile of scheme
- Issue price and minimum amount.
75
 Contents of KIM
• Bench Mark
• Dividend Policy
• Performance of scheme and benchmark over 1, 3 and 5
years
• Loads and expenses
• Contact information of Registrar

Update of KIM: To be updated atleast once in a year

As in the case of SID, KIM is to be revised in case of change
in fundamental attributes. Other changes can be
disclosed throu` addenda

76
 Fundamental Attributes
• Scheme type
• Investment objective
• Investment pattern
• Terms of the scheme with regard to liquidity
• Fees and expenses
• Valuation norms and accounting policies
• Investment restrictions

77
 Fundamental Attributes and Risk Factors
Fundamental attributes are essential features of the
scheme
•Risk and return parameters are defined by the
fundamental attributes
Change in fundamental attributes:
•The approval of the trustees and SEBI
•Information to investors and option to exit the scheme
without paying an exit load.
 What is Due Diligence Certificate?

• Whenever a new schemes offer document is made, this

certificate is given by the Compliance officer of the mutual
fund that proper care is taken in making the scheme and the
offer document.
• It certifies that :
a. The offer document is prepared as per SEBI regulations as
amended until date.
b. Legal requirements regarding launch of the scheme have been
complied.
c. The information given in the offer document is true and fair.
d. The intermediaries involved with the mutual fund scheme are
all registered with SEBI and their registration is valid until date.
79
 Chapter 5

Fund Distribution and

Channel Management Practices
 Investors in Mutual Funds
Investors Eligible to Invest in Mutual funds
•Individuals & Hindu undivided families (HUFs)
•Companies & partnership firms
•Trusts & charitable institutions
•Banks & financial institutions
•Non-banking finance companies (NBFCs)
•Insurance companies, Provident funds, Mutual funds
•Foreign institutional investors (FIIs), Non resident Indians (NRIs),
Persons of Indian origin (PIOs)
Resident individual investors are the largest segment
HUFs can invest through Karta
Overseas Corporate Bodies and foreign citizens (except PIOs) are
not eligible
 Individual and Institutional Distribution Channels
Individual distributors are known as Independent Financial
Advisors (IFAs)
•Establish personal long term contacts across investment products
Institutional distributors can be distribution houses, banks, or
nonbanking finance companies
•Employees and Sub-brokers
•Wide branch network and large client base
•Greater geographical reach
•Standardised processes
•AMC’s channel managers service the institutional distributors
•Provide in-house research and product recommendations to
investors
 Appointment of Distributor
• Distribution agreements with AMCs on Empanelment
• Pre-requisites for being appointed as a distributor:
• Individual distributors and employees of institutional distributors
have to clear the NISM MFD certification examination
• Need to obtain the ARN(Amfi Reg No )
• Institutions in the distribution business also need to get
registered with Amfi
• Validity of certification examination is three years
• Continuing professional education (CPE) training
• Empanelment form must be filled up while seeking empanelment
• Personal details, names of key people handling sales and
operations, business details
• AMC has the power to terminate agreement at any time, after
due notice
 Sales Practices
• Distributor actions must be in the interest of the unit holders
• Distributors have to follow AMFI's code of ethics (ACE) as well as well as
those prescribed by the concerned AMC, AMFI and SEBI.
• AMFI and fund houses have put in place a set of guidelines to be followed
by the distributors. These include the following:
• Distributor is accountable for the activities of the sub-brokers
• Distributors must have complete knowledge of the product on offer.
• Distributors must know their clients’ needs and profile.
• The product chosen must meet the clients’ requirements.
• Distributors must encourage good investment habits such as long term
and regular investment.
• Distributors must provide good and efficient after-sales service.
 Advertisement Guidelines - 1
• Returns to be presented as point to point return on a standard
investment of Rs 10,000, in addition to the CAGR:
• For schemes in existence for more than 3 years, performance
to be provided: since inception and for as many 12 month
periods as possible for the last 3 years.
• For schemes which have been in existence for less than 3
years, returns to be provided: since inception and for as many
12 month periods as possible
• Benchmark indices for the same periods have to be shown.
• Returns to enable relative comparison against benchmark
 Advertisement Guidelines - 2
• A scheme’s performance has to also be compared
with additional benchmarks:
• The Sensex or Nifty (equity funds)
• 10 year GOI paper (debt funds)
• 1 year treasury bill (short term funds)
• Performance to be shown in rupees as well as CAGR
• The performance of all schemes managed by the
fund manager of the scheme being advertised has to
be disclosed.
 Chapter 6

Accounting, Valuation and Taxation

 Net Assets
• Unit holders fund in the scheme is called “ net
assets”.
• Net Assets=Original amount invested+profits
booked+appreciation of portfolio
 Transaction Charges
Particulars Investment Amount Commission Payable

First Time Investor Less than Rs. 10,000 Nil

More than Rs. 10,000 Rs. 150

Existing Investor Less than Rs. 10,000 Nil

More than Rs. 10,000 Rs. 100

Incase of SIP where the investment amount is more than Rs 10,000,

a transaction charge of Rs 100 payable in 4 equal installments starting from 2nd
to the 5th installment.

Transaction charge is applicable only if made through an agent. No load for

direct application to the AMC.
 Expenses
There are two kinds of expenses:
Initial Issue Expenses:
•These are one time expenses that come up when the
scheme is offered for the first time(NFO).
•These need to be borne by the AMC.
Recurring Expenses
•The expense limit for index scheme is 1.5% of average
net assets.
•Fund of Funds Expenses shall not exceed 2.5%.
 Recurring Charges
Recurring Charges are the charges which are collected by the AMC
for professional portfolio management services provided to the
investors.
It is also called as Expense Ratio.
Fund Management Fees At the discretion of the AMC subject toSEBI
Guidelines
2. Marketing/ Selling Expense

3.Audit Fees
 
Based on Actual Expense

4.Registrar Fees

5.Trustee Fees

6.Custodian Fees
 Cannot be charged to Scheme
• Penalties and fines for infraction of laws
• Interest on delayed payment to unit holders
• Legal, marketing, publication and other general
expenses not attributable to any schemes
• Fund accounting fees
• Expenses on Investment mgt/General mgt.
• Expenses on General Admn, Corp Advertising and
Infrastructure costs.
• Depreciation on fixed assets and software dev
expenses
92
 Recurring Charges
SEBI has prescribed the maximum expense that may be charged by the AMC
and they are based on the Average Weekly Net Assets of the AMC.
Operating expenses are calculated on an annualized basis and are normally
accrued on a daily basis and the NAV so computed is shown after deducting
these Recurring Expenses.

Average Weekly Net Assets Percentage Limit

Equity Scheme Debt Scheme
First Rs. 100 Crore 2.50% 2.25%

Next Rs. 300 Crore 2.25% 2.00%

Next Rs. 300 Crore 2.00% 1.75%

On the Balance Assets 1.75% 1.50%

 Exit Load

• These are the charges which are liable to be paid

in case an investor exits a fund before a specified
time frame.
• To discourage investors from withdrawing funds
within a short period, almost all mutual funds
charge exit load of 1-3% based on the time within
which an application for redemption is filed.
• They are usually in brackets of 6 months, 1 year
etc
 Key Accounting and Reporting
Requirements
•The accounts and auditors of the schemes and the
AMC should be different.
•Unit holders can hold their units in a fraction of 1 unit
•NAV to be calculated

4 decimal places Index fund, liquid fund and other debt

funds
2 decimal places Equity and balanced fund
 Taxation of Mutual Fund
• The mutual fund trust is exempt from tax.
• The Trustee company has to pay tax on its
profit.
Dividend Income:
• A tax of 10% is applicable for all resident tax
payers (excluding domestic companies and
few other specified entities) for dividend
income of more than Rs. 10 lakh received
from a domestic company
 Securities Transaction Tax
• This is a tax on the value of transactions in equity shares,
derivatives and equity mutual fund units.
• STT is not applicable on Debt funds or liquid funds.
• On equity oriented schemes of mutual fund
Transaction Rates (in percent) Payable by:
Purchase of units of equity oriented 0.001 Purchaser
mutual fund
Sale of units of equity oriented 0.001 Seller
mutual fund (delivery based)
Sale of units of equity oriented 0.025 Seller
mutual funds (non-delivery based
Intraday)
 Dividend Distribution Tax (DDT)
• This is a tax on the dividend distributed by the equity and
debt oriented mutual fund scheme paid by MF.
• The dividend that the unit holders receive is however
exempt from tax in the hands of the recipient .
Schemes Individual/ HUF Domestic Company NRI
Equity oriented 10% + 12% 10% + 12% Surcharge 10% + 12% Surcharge
Scheme Surcharge + + +
4% cess = 11.648% 4% cess = 11.648% 4% cess = 11.648%
Money Market or 25% + 12% 30% + 12% Surcharge 25% + 12% Surcharge
Liquid Schemes/Debt Surcharge + + +
Schemes (other than 4% cess = 29.12% 4% cess = 34.944% 4% cess = 29.12%
Infrastructure Debt
Fund)
Infrastructure Debt 25% + 12% 30% + 12% Surcharge 5% + 12% Surcharge +
Fund Surcharge + + 4% cess = 5.824%
4% cess = 29.12% 4% cess = 34.944%
 Capital Gains Tax
•Capital Gain is the difference between sale price and acquisition
cost of the investment.
•Investors in mutual fund schemes need to pay a tax on their
capital gains as follows:
Equity-oriented schemes: Applicable on gain above Rs1 Lakh
(Long Term)
Capital Gains Individual/ HUF Domestic Company NRI

Long Term Capital Gains* 10% 10% 10%

(units held for more than
12 months)
Short Term Capital Gains 15% 15% 15%
(units held for 12 months
or less) 99
 Capital Gains of Debt Fund
Individual/HUF Companies NRI

Long Term Capital 20% after indexation 20% after Listed - 20% after
Gains( Held more than indexation indexation
36 months Unlisted – 10%
without
indexation

Short Term Capital 30% (assuming the 30% 30%

Gains( Held less than investor falls in the (manufacturin
36 months) highest tax bracket) g business)
25% (If total
turnover less
Rs. 250
crores)
 Indexation
• Indexation means the cost of acquisition is
adjusted upwards to reflect the impact of
inflation.
• The government comes out with an index
number for every financial year to facilitate this
calculation.(CII-Cost Inflation Index)
• Indexation benefit is available only in case of long
term capital gains and not short term capital
gains.
 Indexation
Indexed Value =Purchase price*CII year of sale/CII year of
purchase

An investor bought units of debit MF at Rs10 in 1991 and

sold after 4 years at Rs15. What will be the capital gain?
(CII 1991-400 and CII for 1995-440)

Ans: Indexed Cost=10*440/400=Rs11

The capital gain will be Rs15-Rs11=Rs4
Capital Gain tax 4*20%=Rs 0.80 per unit.
 Setting off Gains and Losses under Income Tax
Act
• A few key provisions here are:
• Capital loss, short term or long term, cannot be set off
against any other head of income (e.g. salaries)
• Short term capital loss is to be set off against short
term capital gain or long term capital gain
• Long term capital loss can only be set off against long
term capital gain.
• Since long term capital gains arising out of equity-
oriented mutual fund units is exempt from tax, long
term capital loss arising out of such transactions is not
available for set off.
103
 Applicable NAV
• Cut-off time determines the NAV applicable for the
transaction
• NAV is computed on business days for all schemes
except liquid funds, for which NAV is computed every
calendar day
• Cut-off time varies for liquid fund purchases historical
NAV is possible
• For all non-liquid funds, the applicable NAV is
prospective
Type of Scheme Transaction Cut off Applicable NAV
time
Equity oriented funds • Purchases 3.00 pm • Same day NAV if received
and debt funds (except • Switch in(STP- before cut off time.
liquid funds) in respect Buy) • Next business day NAV for
of purchases less than • (Buying units) applications received after
Rs. 2 lacs cut off time.
Liquid fund • Purchases 2.00 pm • Previous day NAV if received
• Switch ins before cut off time and funds
are realised.
• If received after cut off time,
NAV of the day previous to
funds realisation.
Equity Oriented Funds, • Redemptions 3.00pm • Same day NAV if received
Debt funds, Liquid • Switch out(STP- before cut off time.
funds Sell) • Next business day NAV for
(Selling Units) applications received after
cut off time
Equity oriented • Purchases 3.00 • NAV of the business day on
funds and debt • Switch- in pm which funds for the entire
funds (except amount of subscription /
liquid funds) in
purchase as per the
respect of
transaction of application are available for
Rs. 2 lacs or utilization before the cut-off
more time will apply
 Time Stamping
• Record the time at which a transaction was received at the
official Point of Acceptance(PoA)
• The electronic time stamp is mandatory to determine the
applicable NAV for a financial transaction
• The location code, machine identifier, date, time (hh:mm) and
running serial number are generated in every time stamp
• The time stamping machine records three impressions for
purchase: the application form or transaction slip, the back of
the payment instrument, and the acknowledgement.
• Time stamp determines the applicable NAV according to
SEBI’s cut-off time regulation.
Chapter 7
 Investors Details
• An application can have 3 joint holders
• Signatures for all joint holders as per holding pattern
• Signature is the identity of the investor
• Address of the investor is to enable physical identification of
the investor’s location
• Bank account detail is a mandatory detail
• Investors can hold units of multiple schemes of a fund
house,under one folio
• Folio Number is allotted on the first purchase
• For existing folios, AMC is responsible for updation of investor
details, such as PAN, KYC, signature
 Pan requirement & Micro SIP
• Pan card is compulsory for all MF investment.
• Exception is Micro SIP and small investors
• Micro SIP is the following:
– Where the annual investment in a financial year does not
exceed Rs 50,000.
– Individuals, minors & sole proprietors can invest in micro
SIP without PAN.
• Exemption on account of Micro investments does not apply
for investments by HUFs and PIOs or non-individual investors.
• Such investors should attach a copy of KYC acknowledgement
letter quoting PAN Exempt KYC Reference No (PEKRN)
• Cash can be taken till Rs50,000
 Service Quality
• Service re-purchase requests within 10 working days
failing this, AMCs have to pay a penal interest of 15%
per annum.
• The statement of account (SoA) is dispatched within
after every transaction within 10 business days.
• MFU(Mutual Fund Utilities) a platform that connects
investors, RTAs, distributors, banks, AMCs and others.
• It is an online platform to transact.
• Investors who register on the MFU are allotted a
Common Account Number (CAN)
 Nomination
• Nomination can be made in favor of a maximum of three
nominees.
• The unitholders must define the percentage holding for each
nominee making a total of 100 percent.
• Only individual investors can make a nomination. Investments by
minors cannot have a nomination.
• A Power of Attorney holder cannot make a nomination.
• The nominee can be an individual, including minors and NRIs,
central and state governments and local authorities, religious or
charitable trust.
• A nomination cannot be made in favour of a society, body
corporate, partnership, Karta of an HUF or a Power of Attorney
holder.
 Chapter 8

Risk , Return and Performance of

Funds
 Equity Analysis
• Fundamental Analysis
• It review of the company’s fundamentals viz. financial statements,
quality of management, competitive position in its product etc
• Evaluation of the earning capability of a stock, leading to the
determination of its fair value
• Judge whether the stock is undervalued or overvalued
• Stock evaluated in the context of industry and macro factors

Parameters of Fundamental Analysis

1.Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares
outstanding
2. Price to Earnings Ratio (P/E Ratio): Market Price per share ÷ Earnings Per
Share (EPS)
 Fundamental Analysis
• Book Value per Share: Net Worth ÷ No. of
equity shares outstanding.
• Price to Book Value: Market Price per share ÷
Book Value per share
• Dividend Yield: Dividend per share ÷ Market
price per share
 Technical Analysis
• Check the history of the shares.
• Also called Chartists.
• It is generally agreed that long term
investment decisions are best taken through a
fundamental analysis approach
• Technical analysis comes in handy for shorter
term speculative decisions, including intra-day
trading.
 Investment Styles
• Growth investment style : Investing in high growth stocks i.e.
stocks of companies that are likely to grow much faster than
the market.
• Value investment style is an approach of picking up stocks,
which are priced lower than their intrinsic value, based on
fundamental analysis.
• The market price is low.
• It is for long term.
• Portfolio building approach
– Top Down (Economic situation—stocks are picked)
– Bottom up(stocks selected-companies-sector)
 Debt Securities
• Securities issued by the Government are called Government
Securities or G-Sec or Gilt.
• Treasury Bills are short term debt instruments issued by the
Reserve Bank of India on behalf of the Government of India.
• Certificates of Deposit are issued by Banks (for 7 days to 1 year)
or Financial Institutions (for 1 to 3 years)
• Commercial Papers are short term securities (upto 1 year) issued
by companies.
• Bonds / Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue bonds,
while private sector companies issue debentures.
• There is an inverse relationship between yields and value of debt
securities,
 Gold as an asset class
• The value of gold in India depends on the
international price of gold.

The following factors affect gold price:

1.Global Price of gold: stronger the economy, lesser the
gold price

2.Strength of Rupee:Stronger the rupee, weaker the

gold price and vice versa
 Real Estate
Real estate is a local asset and cannot be transported
its value is driven by local factors.
•Economic factors: Less the demand, less the price
•Infrastructure development:Better infra better rates
of real estate
•Interest rates: Lower the interest rate, higher the
demand for real estate.
 Measures of Returns
The following are some methods of calculation:
Simple Return: Later Value-Initial Value X100
Initial Value
•Ram invested in a scheme at a NAV of Rs. 12. Later, he found that the
NAV has grown to Rs.15. How much is the return?
15-12 X 100 =25%
12
Annual Return: Annualisation helps us compare the returns of
two different time periods.
Simple Return X 12
Period of simple return
 Measures of Return
• Compound Return: It considers the power of compounding.
• Compounded return can be calculated using a formula:
LV /IV -1
1/N
• ‘LV’ is the Later Value
• ‘IV’ is the Initial Value
• ‘n’ is the period in years

• The three formulae are applicable only for growth schemes or

for dividend schemes that have not paid a dividend during the
period for which return is being calculated.
• Whenever a dividend is paid – and compounding is to be
considered - the CAGR technique prescribed by SEBI is used.
 Compounded Annual Growth Rate (CAGR)
• The CAGR calculation is based on an assumption that the
dividend would be re-invested in the same scheme at the ex-
dividend NAV.(after the dividend has been paid
• CAGR shows how much a person’s investment grew over a
specific period of time.
• It takes into account that the rate of return varies over a period
of time.
• CAGR provides rate of return a fund earned each year in a mutual
fund if the returns are re invested during certain period.
• Used when returns are calculated for more than one year.
• For calculation of returns less than 1 year we use Annual Returns.
 CAGR Calculation
Calculation of CAGR in 3 easy steps:
a. The investment made in the initial year (the first year of
investment)
b. Value of investment at the end of the year
c. Tenure of investment.

Eg: You bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year
2016 and further appreciated to ₹150 in the year 2017.
Therefore, the appreciation in the rate from 2015 to 2017 was 50%.
The actual appreciation rate by using CAGR is 22.47%
Assured returns schemes call for a guarantor who is named in the offer document
 Holding Period Return
CAGR – investments held for over 1
year
Absolute return – holding period less
than 1 year
 Borrowing by Mutual Fund
• A mutual fund scheme cannot borrow more
than 20 percent of its net assets
• The borrowing cannot be for more than 6
months.
• The borrowing is permitted only to meet the
cash flow needs of investor servicing viz.
dividend payments or re-purchase payments.
 Measures of Risk
• Fluctuation in returns is used as a measure of risk.
• The fluctuation or variation may be to the higher or
lower side.
• Both are taken as risky.
• The fluctuation in returns can be assessed in relation
to itself or in relation to some other index.
• Measures of Risk
– Variance
– Standard Deviation
 Variance
• Variance measures the fluctuation in periodic returns of a
scheme, as compared to its own average return.
• Variance as a measure of risk is relevant for both debt and
equity schemes.
• Lesser the variance, better the scheme.
• Eg : There are two schemes A and B with their returns:
Month Return of A Return of B
1 5 5
2 4 -10
3 5 20
4 6 5
Average Return 5 5
 Standard Deviation
• Standard Deviation measures the fluctuation in periodic
returns of a scheme in relation to its own average return.
• Standard deviation is equal to the square root of variance.
• Standard deviation is a measure of total risk in an investment.
• It is relevant for both debt and equity schemes
• A high standard deviation indicates greater volatility in the
returns and greater risk.
• Comparing the standard deviation of a scheme with that of
the benchmark and peer group funds gives the investor a
perspective of the risk in the scheme.
• Standard deviation along with the average return can be used
to estimate the range of returns that the investment will take.
Standard Distribution
 Beta
• There are two kinds of risk in investing in equities – systematic risk
and non-systematic risk.
• Systematic risk is integral to investing in the market and cannot
be avoided. For example, risks arising out of inflation, interest
rates, political risks etc.
• This arises primarily from macro-economic and political factors.
• This risk cannot be diversified away. Systematic risk is measured
by its Beta.
• Non-systematic risk is unique to a company; the non-systematic
risk in an equity portfolio can be minimized by diversification
across companies. Eg risk arising out of change in management,
product obsolescence etc.
• Since non-systematic risk can be diversified away, investors need
to be compensated only for systematic risk.
 Beta
• Beta measures the fluctuation in periodic returns in a scheme,
as compared to fluctuation in periodic returns of an index
over the same period.
• The diversified stock index has a Beta of 1.
• Companies or schemes whose beta is more than 1, are seen
as more risky than the market.
• Beta less than 1 is indicative of a company or scheme that is
less risky than the market.
• Beta as a measure of risk is relevant only for equity schemes
• Axis Bank Beta is 1.52
 Bench Mark
• Mutual fund schemes are required to disclose the name of
benchmark index.
• The benchmark for a scheme is decided by the AMC in
consultation with the trustees.
• Benchmark for equity: S&P BSE 200 / Nifty 200
• Debt: ICICI Securities’ Sovereign Bond Index (I-Bex) is again
calculated based on government securities
– Si-Bex (1 to 3 years)
– Mi-Bex (3 to 7 years)
– Li-Bex (more than 7 years)
Scheme Type Bench Mark
Equity Sensex/Nifty
Long Term Debt Scheme 10 year dated Gsec
Short Term 1 year T-Bill
 Risk Adjusted Returns
• This is based on the principle that risk taken
should match the returns.
• Higher the risk, higher should be the return
• This is measured using three metrices:
– Sharpe Ratio
– Treynor Ratio
– Alpha
 Sharpe Ratio
• Sharpe ratio is a very commonly used measure of risk-adjusted
returns.
• The difference between the Risk Free Return(Rf) and the return
of the scheme (Rs) after taking the risk is compared.
• It gives the return for per unit of risk taken.
• The difference between the two returns i.e. Rs– Rf is called risk
premium
• Sharpe Ratio = (Rs minus Rf) ÷ Standard Deviation
• Higher the Sharpe Ratio, better the scheme
• Sharpe Ratio comparisons can be undertaken only for
comparable schemes
• It is calculates the total risk.
 Treynor Ratio
• Treynor Ratio is a ratio that measures risk
premium per unit of risk.
• Treynor Ratio uses Beta for calculation.
• Treynor Ratio = (Rs minus Rf) ÷ Beta
• Higher the Treynor Ratio better the scheme.
• Usually used for diversified equity schemes.
• It calculates the risk return systematic risk
 Alpha
• The difference between a scheme’s actual return and
its optimal return is its Alpha – a measure of the fund
manager’s performance.
• It measures the performance of the investment in
comparison to a suitable market index.
• Positive alpha is indicative of out-performance by the
fund and negative alpha indicates under-
performance.
• Generally used for diversified Equity funds.
 Chapter 9

Mutual Fund Scheme Selection

 Portfolio
• The portfolio are divided into core and satellite portfolios.
• The core portfolio will be invested according to the long term
needs and goals of the investor.
• The satellite portfolio will be invested to take advantage of
expected short-term market movements.
• Eg a diversified equity fund, short-term debt fund form part of
the core portfolio since they generate long-term returns in
broad alignment with the markets.
• Sector funds form a part of the satellite portfolio.
 Types of Plans
MIP: Monthly Income Plan
FMP: Fixed Maturity Plan (more predictable
returns)
Diversified Debt Funds: G-secs and non G-secs
Short Term Debt Funds: 1 to 3 years
 Criteria while selecting MF
Fund Performance:
•The fund should ideally have consistently outperformed the
benchmark.(CAGR)
•The fund’s performance against the peer group should also be
considered to make the right selection.
– Equity: at least 5 years
– Debt: 3 years
– Liquid Fund:7 days, 15 days, 1 month
Fund Portfolio:
•Equity funds- the level of diversification across sector and stocks, the market
segment in which the fund invests, etc
•Debt funds-the average maturity and duration of the portfolio, the credit risk
profile, the contribution of interest and capital gains to the total returns of
the fund, liquid holding in the portfolio
 Selection Criteria
Fund Age: A fund with a long history has a track record that can
be studied.
•A new fund managed by a portfolio manager with a lackluster
track-record is definitely avoidable.
• A new fund that offers a new investment opportunity should be
evaluated for its suitability.
•This criteria is very essential for Equity funds.
Fund Size: For an equity fund that intends to invest in large cap
stocks, a large fund size will be an advantage
•Sector fund or a mid-cap fund with limited investment options,
a large fund size may be a disadvantage
Portfolio Turnover and Scheme Expense
 Chapter 10

Selecting the right investments products

for investors.
 Inflation Risk
• Inflation risk represents the risk that the money received on
an investment may be worth less when adjusted for inflation.
• Inflation risk is also known as purchasing power risk.
• It is the risk that arises from the decline in value of security’s
cash flows due to the falling purchasing power of money.
• It is highest in fixed return instruments such as bonds,
deposits and debentures as investors are paid a fixed periodic
interest
• Eg:A bond pays a coupon of 8% while the inflation rate is 7%,
then the real rate of return is 1% (8-7).
• If inflation goes up to 9%, the bond may return a negative real
rate of return.
 Real Rate of Return
• The return on an investment is usually expressed as a
nominal rate.
• When the nominal rate is adjusted for the effects of
inflation it is known as the real rate of return.
• The nominal return is always a positive rate because
investors have to be paid a positive rate to invest
their money.
• But the real rate can be negative or positive.
• A bond pays 10% interest per annum. The inflation
rate for that year is 5%. What is the real return?
 Effective Rate of Return
• The principle of time value of money is used to understand the
effective real rate of return.
• An investment earns a nominal rate of return but inflation reduces
the value of those investment cash flows which is discounted.
• The real rate of return or effective rate of return on the investment is:
Effective Rate of Return= ((1+nominal rate) / (1+inflation rate)) – 1

• A bond pays 10% interest per annum. The inflation rate for that year
is 5%. What is the effective real rate of return?
 NPS-National Pension System
• Pension Funds Regulatory and Development Authority (PFRDA) is the
regulator for the National Pension System.
• Two kinds of pension accounts are offered:
– Tier I account which is a pension account with limited withdrawal
facility.
Tier II (Savings account) is withdrawable to meet financial contingencies.
An active Tier I account is a pre-requisite for opening a Tier II account.
• Investors can invest through Points of Presence (POP)
• There are four kinds of funds:
 Asset Class E: Investment in predominantly equity market instruments
 Asset Class C: Investment in Debt securities other than Government
Securities
 Asset Class G: Investments in Government Securities
 Asset Class A: Investments in Alternative Investment Products( max 5 pc)
 NPS-National Pension System
• Open an NPS account through identified Points of Presence
• Tier I (Pension account). The amount invested cannot be
withdrawn before the end of the term.
• Tier-II (Savings account). The amount invested can be
withdrawn
• Permanent Retirement Account Number (PRAN) will be
allotted
• Having a running Tier I account is a pre requisite for opening a
Tier II account.
• Allotted a unique identification number –Permanent
Retirement Account Number (PRAN)
 Architecture of NPS
• NPS Trust
• CRA-Central Record Keeping Agency-NSDL, Karvy
• POP-Point of Presence
• PFM-Pension Fund Managers
• ASP-Annuity Service Provider
Life cycle fund
• Aggressive Lifecycle Fund( LC75-75% Equity till 35 years
old)
• Conservative Life Cycle (25% Equity)
• Automatic Life cycle
 Chapter 11

Financial Planning
 Financial Needs and Financial Goals

• Financial need can be described in terms of

the amount of money that may be required to
fulfil the need and the time when the money
would be required
 Estimating Financial Goals
• Future value of goals can be estimated based on
current cost, time to goal and the expected rate of
inflation
• FV=current cost*{1+rate of inflation}^time
Financial Planning
• Considers the overall situation of the investor
• Propose asset allocation to match the investor’s risk profile
• Creating an investment plan and asset allocation strategy to
meet financial goals
• Reviewing the portfolio
What is life cycle stage to financial planning?

Life cycle Features Priority / Investment

Stages
Childhood Period of dependency which Long term investment of money
stage lasts till the full time received in the form of gifts.
education.

Unmarried Still dependent & relatively Main need is to protect

stage lower income. themselves against any
High risk taking ability. disability.
Investment for long term plans.
Young married Sufficient surplus to save. To secure income loss of any
stage- Both Housing, insurance & partner with medium to long
partners earn consumer finance need. term investments.

Contd…
152
Young married Less potential to save.
stage- one Two or more dependence.
partner earn Life assurance of earning
member is must.
Young married Expenditure rises with faster
with children rate.
Children’s education,
holidays & consumer
finance.
Married with Individuals are in mid career. Loan repayment needs.
older children Improved finances.
Post family/ Pre Independent children.
retirement stage Last chance to ensure
adequate income after
retirement.
Retirement stage 1)Low pension.
2)Relatively low pension.
3)Sufficient pension.
Medium to long term
investments.
Pension provision needed.
Consumer finance needs are
high.
Portfolio for growth & long
term.
Equity,debt & pension/Health
insurance
Contribution to health
insurance and pension
products.
1)Continue to work.
2)Produce additional
153 income.
3)Preserve savings.
 Chapter 12

Recommending Model Portfolios & Financial

Plans
 Model Portfolio
Model Portfolio
•Creating an investment portfolio after considering the goals,
investment horizon and required return.
•Created for a given combination of risk, return and investing
horizon.
Risk Profiling
•Willingness of the investor to assume risk influenced by their
personal and financial situation.
•Risk Profiling Tools are used to generate risk appetite scores for
investors.
•Surveys, questionnaires and proprietary risk profiling tools,
scenario analysis
•Past history of the actual transactions of the investors
 Risk Appetite and Asset Allocation
• Age : Older investors may have lower risk appetite than younger
investors
• Accumulated Capital :The higher the accumulated capital, higher
the risk
• Stability of Income: Individuals with regular income tend to have a
higher risk
• Job Security: Individuals with higher job security may be willing to
assume higher risk
• Dependents: Risk appetite decreases as the number of dependents
increases
• Earnings Members :Risk appetite increases as the number of
earning members increases
• Attitude :Individuals willing to experiments may have a higher risk
appetite
 Strategic and Tactical Asset Allocation
Strategic Asset Allocation
•Model portfolio is an example
•Asset allocation is driven completely by his need for return and risk profile
•For example, an investor desiring a return of 14% over 10 years, with a
•moderate appetite for risk, may choose to have 60% of his investments in
•equity (expected return of 18%) and 40% in debt (expected return of 8%)
Tactical Asset Allocation
•Active management of the proportions in various asset classes based on the
expectation of the performance of different asset classes
•For example, if the advisor expects the equity markets to correct and he
•may tactically reducing the allocation to equity and increasing the allocation
to debt
•Carried out by fund managers, expert advisors and experienced investors
 Fixed and Flexible Asset Allocation
Fixed Asset Allocation
•Choose a strategic asset allocation and decide to rebalance
periodically to the same ratio
•Portfolio has an allocation of 60% in equity and 40% in debt and that
equity markets are doing well. Value of equity portfolio goes upto 70%.
•Investor will sell part of the equity holdings and bring it down to 60%
of the portfolio value and invest in debt and restore the proportion to
40%
Flexible Asset Allocation
•Choose an asset allocation and let it move along with the market
without rebalancing
•If equity does well and the allocation increases, they allow it to run,
without rebalancing to a fixed ratio
 Model Portfolios
•Since investors’ risk appetites vary, a single portfolio cannot be
suggested for all.
•The list of model portfolios, for example, might read something
like this:
Young call centre / BPO employee with no dependents:
50% diversified equity schemes (preferably through SIP); 20%
sector funds; 10% gold ETF, 10% diversified debt fund, 10%
liquid schemes.
Young married single income family with two school going kids:
•35% diversified equity schemes; 10% sector funds; 15% gold
ETF, 30% diversified debt fund, 10% liquid schemes.

159
 Model Portfolios
• Single income family with grown up children
who are yet to settle down: 35% diversified
equity schemes; 15% gold ETF, 15% gilt fund,
15% diversified debt fund, 20% liquid
schemes.
• Couple in their seventies, with no immediate
family support: 15% diversified equity index
scheme; 10% gold ETF, 30% gilt fund, 30%
diversified debt fund, 15% liquid schemes.
160
All the Best !!!!!!

Thank You

161
 Case Study
• Ms Meera aged 29 years old is a salary account holder of your
bank since 2015.She is working as a team lead in one of the
leading software companies.
• She is maintaining a balance of Rs3 Lakh in her savings bank
account and is visiting your bank to open a tax saver FD for
Rs100,000 as she wants to reduce her taxable income under
Sec 80C of the IT Act.
• Her friend Neha has suggested that she invest in Axis Long Term
Equity Fund as it has given returns of 18.06% for the last 5 years.
• As an Axis Bank CSO what will be your course of action?