Mutual Fund

Presentation by

Prof. Shriram Nerlekar

Index

Index
1. The Concept and Role of Mutual Funds.
2. Funds Structure and Constituents.
3. Legal and Regulatory Framework.
4. The Offer Document.
5. Fund Distribution and Sales Practices.
6. Accounting, Valuation & Taxation.
7. Investor Services.
8. Investment Management.

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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.

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Chapter 1

Concept and Role

Of Mutual Funds

What is a Mutual Fund ?

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

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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.

The pool of funds is invested in a portfolio of marketable

investments.

The investors share is denominated by units whose

value is called as Net Asset Value (NAV) which changes
everyday.

The investment portfolio is created according to the

stated investment objectives of the fund.
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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

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What are the disadvantages of investing

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

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Important phases in Indian Mutual Fund Industry

UTI sole player in the industry, created by an Act of Parliament ,1963
UTI launches first product Unit Scheme 1964
1963 1987

1987 - 1993

UTI creates products such as MIP's, children plans ,offshore funds etc
MASTERSHARE Ist Diversified Equity Investment Scheme in India.
INDIA Fund Ist indian offshore fund lauched in August 1996.
In 1987 Public Sector Banks and FI's got permission to set up MF.
SBI mutual fund was the first non -UTI mutual fund
In 1993, Mutual Fund Industry was open to private players.

1993 - 1996

SEBI's first set of regulations for the industry formulated in 1993

Significant innovations, mostly initiated by private players
Implementation of new SEBI regulations led to rapid growth

1996 - 1999

Bank mutual funds were recast as per SEBI guidelines

UTI came under voluntary SEBI supervision.
Dividends made tax free in 1999.
Rapid growth, significant increase in corpus of private players

1999 - 2000

Tax break offered created arbitrage opportunities

Bond funds and liquid funds registered highest growth

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Emergence of Large and Uniform Industry

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

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Mutual Fund Products

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What are open-ended funds?

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

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What are closed end funds?

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

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Types of Funds - By Investment

Objective
Equity

Debt

Equity Funds
Index Funds
Sector Funds

Fixed Income
Funds
GILT Funds

Balanced Funds

Money Market
Money Market
Mutual Funds

Liquid Funds

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What are equity funds?

Predominantly invest in equity shares of the company.
Choices in equity funds.
Aggressive Growth Funds
Growth Funds
Specialty Funds
Sector Funds
Small Cap Equity Funds

Diversified Equity Funds

ELSS
Index funds
Value Funds

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What are liquid and money market funds?

These debt funds invest only in instruments with
maturities less than a year.
The investment portfolio is very liquid and enables
investors to hold their investments for very short
horizons of a day or more.
What are Gilt Funds?
It invests only in securities that are issued by the
Government and therefore do not carry any credit risk
It invests in both long-term and short-term paper.
Ideal for institutional investors who have to invest in Govt.
Securities
Enables retail Participation
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) 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.
Open or closed ended.
Eligible under Section 80 C upto Rs.1 lakh allowed
Dividends are tax free.
Benefit of Long term Capital gain taxation.

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How are funds different in terms of their risk

profile?
Equity Funds

High level of Return , but has a high level of risk too

Debt Funds

Returns comparatively less risky than equity funds

Liquid and Money

Market Funds

Provide stable but low level of return

Investors have to face the risk- return trade off

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Important points
IN USA, a MF is constituted as an investment company
and an investor buys the share of the fund.
In USA, all mutual funds are open ended.
In USA, funds are also classified as Tax Exempt and
Non Tax Exempt Funds
In India, classified as Open Closed ended, Load and
No Load Funds.
Mutual Fund is NOT a company, it can be called as a
portfolio of stocks, 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.

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Chapter 2

Fund Structure and

Constituents

?How does a Mutual Fund work

AMC

Savings

Investments

Trust
Units
Returns

Unit holders

Registrar

SEBI

Trust
Custodian

AMC

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Unit Trusts Constituents

Fund Sponsor.
Mutual Fund as Trust.
Asset Management Company.
Other fund constituents.

Custodian and Depositories.

Bankers.
Transfer Agent.
Distributors.

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?What is the regulatory structure of MF in India

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

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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.
Sponsor must contribute at least 40 % of the AMC

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How are Mutual Funds Structured?

In India Mutual fund is the form of a Public Trust created
under the Indian trust Act. 1882.
In India, Mutual funds are organized as trusts. The trust is
either managed by a Board of Trustees, or by a trustee
company.
The trustees hold the unit holders money in a fiduciary
capacity.(Money belongs to unit holders)
In legal sense, the investors are the beneficial owners of
investments.

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 There must be at least 4 members in the Board of

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

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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.
Trustees can seek remedial actions from AMC, and in
cases dismiss the AMC
Trustees review and ensure that net worth of the AMC is
according to stipulated norms, every quarter
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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

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Compliance with Sebis Requirements

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

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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. 10 Cr., 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, have to
be independent
The 4th Schedule of SEBI regulations spells out rights and
obligations of both trustees and AMCs

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Who appoints the AMC and defines its functions?

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

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How are Indian mutual funds organised?

Though the trust is the mutual fund, 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, markets
them and mobilises the funds, 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

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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.1 Lakh
AMC s cannot take up any activity that is in conflict with
the activities of the mutual fund

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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

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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.
In some cases provide investment managers with
research reports
Act as an important source of market information.
Limit of 5% per broker

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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

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What are the functions of the custodians ?

Responsible for the securities held in the mutual funds
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, offer
for sale, buy back and open offers for acquisition

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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 (Apples scheme taken over by Birla
AMC ) and ( Zurichs Scheme Takeover by HDFC
Mutual Fund)

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What are the conditions under which two AMCs

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, and provided
the option to exit at NAV, without load ( in case of open
ended funds else 75% consent is required)
High Court approval is required as AMCs are companies.

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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, it is called as scheme take over. The two mutual
funds continue to exist.Trustee and SEBI approval and
notification of unit holders are required for scheme
takeovers

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Important Points

In USA, the regulatory body is known as Securities Exchange

Commission.

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.

Sponsor signs the trust deed with the trustees.

Fund manager is responsible for filing details of the funds portfolio

with SEBI.

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Chapter
3

Legal and Regulatory Framework

Regulating agencies for MF & its Constituents

SEBI
RBI
- as a supervisor of bank owned mutual funds
- as a supervisor of MMMFs
Ministry of Finance
Company Law Board, Department of Company Affairs
and Registrar of Companies
Stock Exchanges -(For listed Mutual Funds)
Office of the Public Trustee

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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. SEBI is the regulator of all mutual
funds
Mutual funds are affected by the RBI stipulations on
structure, issuance, pricing & trading of Govt. Securities
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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

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What are self regulatory organisations )SROs)?

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

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What are the objectives of AMFI ?

AMFI is an industry association, incorporated in 1995, is
not an SRO, so it can just issue guidelines to members. It
cannot enforce regulations.
Objectives
To promote the interests of mutual funds and unit holders.
To set ethical, commercial and professional standards in
the industry.
To increase public awareness of the mutual fund industry.
To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from
mutual funds and is headed by a full time chairman.

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What are the rights of the investors in respect of

service standards that they can expect from MFs?
1. Investors are entitled to receive dividends declared in a scheme within 30 days
2. Redemption proceeds have to be sent to investors within 10 days
3. 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.
4. Mutual funds have to allot units within 30 days of the IPO an dalso open the
scheme for redemption, if it is an open -ended scheme
5. Mutual funds have to publish their half yearly results in at least one national daily
and publish their entire portfolios, at least once in 6 months . Such disclosure should
be done within 30 days from 6 monthly account closing dates of the fund
6. 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. If 75% of the unit holders so decide, 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. If there is any change in the fundamental attributes of the scheme, the unit holders
have to be notified through a letter. They also have a right to repurchase at NAV
without any load, before such change is effected.
9. Unit holders have the right to inspect certain documents

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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).
Investors can lodge complaints with SEBI for noncompliance.
Investors cannot be compensated if the performance
of the fund is below expectations.
There are not legal remedies for to a prospective
investor

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Important Points

Sebi does entertain complaints against MF and intervenes with

fund managements to help the investor.

Sebi requires that sponsors of a new scheme should appoint a

compliance officer who must issue a Due Diligence Certificate to
the effect that all regulations have been complied with by the fund
and sponsors.

Unitholders have right to timely service, right to information, right to

approve changes in fundamental attributes, right to wind up a
scheme, right to terminate the AMC.

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.

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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 , in a
prescribed format giving all the information of the fund and
the scheme.
An abridged version of the offer document, in a prescribed
format is appended to the application form.
Investors can get a summary of the offer document in the
abridged version known as the Key Information
Memorandum
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?What does the Offer Document usually contain

It contains information regarding,
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
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Importance of Offer Document

Most important source of information from the perspective of the

prospective investor.

Investor must understand the fundamental attributes of the scheme

to make the decision.

It is the operating document and describes the product.

Principle of Buyers Beware applies here.

It is the primary vehicle for the investment decision, a legal

document that protects the rights of investors.

Also a reference document for investor to look for the relevant

information anytime.

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Is the offer document issued only when the MF

?issues units for the first time
Closed ended scheme- offer document during the IPO
Open ended scheme- offer document is valid through the
life of the scheme, 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;
inclusion or deletion of options
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What are the mandatory disclosures to be made

on the cover page of the OD?

Name of the mutual fund.

Name of the scheme.
Type of scheme.
Name of the AMC.
Classes of units offered for sale.
Price of units plus applicable load.
Name of the guarantor in case of assured return
schemes.
Opening , closing and earliest closing date of offer.
Mandatory statements.
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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.
Past performance of the sponsor/AMC/ Mutual fund does
not indicate the future performance of the scheme.
The name of the scheme does not in any manner indicate
any either the quality of the scheme or the future
performance of the scheme

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What are scheme specific risks?

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

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What is the Key Information Memorandum (KIM)

Since the offer document is very detailed, 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.

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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, 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

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Important Points regarding OD and KIM

In USA, the OD is known as prospectus
The first time investor should read detailed offer
document, once he has gained familiarity with the AMC,
he can just refer to KIM
The 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

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Chapter 5

Fund distribution and Sales

Practices

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What are the categories of investors eligible to

buy MF units?

Resident Individuals
Indian Companies
Indian trusts and charitable institutions
Banks
NBFCs
Insurance companies
Provident funds
Non-resident Indians
OCBs
SEBI registered FIIs

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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, as it is possible that some
categories are not allowed to invest in some schemes.
For example, charitable trusts are not allowed to invest
in some category of schemes in some funds. So in this
case distributor should refer offer document.

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Distribution Channels

Individual Agents- A person has to sign an agreement with a fund

on non judicial stamp paper. He has to be AMFI certified also to sell
Mutual Fund products.

Only exemption is distributors abvoe 50 years of age and with at

least 5 years of experience as on Sep 30, 2003. Such exempted
distributors were required to complete AMFIs refresher course by
Sep 30, 2004.

UTI MF requires its agents to have atleast passed the level of

matriculation and also to provide 2 references.

Distribution Companies

Banks and NBFCs

Post Offices

Direct Marketing
- CURRENTLY 49837 are amfi certified and 30028 have
taken the ARN numbers ( as on 31/3/2005)
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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.Agents should be highly familiar with the profile of the investors, in terms
of return expectations, requirements and risk tolerance
3. Agents must strive to cultivate disciplined approach to investing and a
regular investment habit among clients
4. Agents must have a thorough understanding of the needs of their
investors
5. Agents must be able to help investors to choose from alterntative
investment products, and enable an appropriate asset allocation
6. Agents should seek from investors the commitment to invest to enable
which they may assist the client with the forms and procedures for
investing

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What is SEBIs advertising code?

1.The dividends declared or paid shall be mentioned in Rs/unit along
with the face value of each unit and the prevailing NAV at the time of
declaration of the dividend.
2.Only compounded annualised yield can be advertised if the scheme
has been in existance for more than 1 year
3.All performance calculations shall be based only on NAV and the
payouts to the unit holders .
4.Annualised yield should be shown for 1,3,5 years and since launch of
the scheme. For funds with less than 1 year performance can be in
terms of total returns.
5.Appropriate benchmarks and identical time period must be used
while comparing. Once chosen the benchmark should be used
consistently over time.
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
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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.
Adequate disclosures by the funds ought to be made to
unit holders and trustees.

the

Funds are urged to adopt the use of professional selling

practices.
Management of funds collected has to be in accordance with
stated investment objective
Funds should avoid conflicts of interest in dealings by
directors, officers and employees.
Funds have to refrain from unethical market practices.
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What is the commission structure for mutual fund

agents?
The commission consists of two components
Initial ( Upfront )commission - Paid as a fixed percentage of
amount mobilised by agents
Trail commission - it is paid periodically on the funds that
remain invested in the scheme. Trail is an effective way to
restrict the practice of rebating, 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.

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Fundamental Attributes of a Scheme

Type of Scheme, Investment Objective and Terms of the
issue, Investment Pattern, Fees and Expenses,
Valuation norms and Investment Restrictions.
Any change in Fundamental Attributes, Trust, Fees and
expenses payable and other changes which affect unit
holders interest have to be informed to investors either
in writing or newspaper advertisement( one in English
daily and other in a paper published in the language of
the region where the HO of a MF is situated)
The unit holders are given option to redeem their
holdings in the fund without any exit if anything in above
is changed.

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Loads

Load is charged to investor when the investor buys or redeems

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

Load charged on sale of units is entry load. It increases the price

above the NAV for new investor.

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

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

Max. Entry or Exit load for closed ended funds is 5%

CDSC is an exit load that varies with holding period.

Load is an amount which is recovered from the investor.

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Chapter 6

Accounting Valuation and Taxation

What are net assets of a mutual fund ?

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

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How frequently is the NAV calculated ?

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

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

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What are the initial issue expenses ?

Expenses that are incurred in the launch of the fund are
called as initial issue expenses.
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.
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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.

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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, IIE shall be amortized on a weekly basis over
the period of scheme.
IN OES, the sales, marketing and other expenses of
sales should be met from the entry load and not IIE

Index

What are the expenses incurred by a mutual fund?

Investment management fees to the AMC
Custodians 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

Can the AMC charge all the expenses that it

incurs, to the income of the fund ?
No. There are two levels of restrictions
At the first level only certain kinds of expenses, that are
identified as having been incurred for the conduct of the
business of the fund, can be charged to the fund.
The second level of regulation refers to the limit on the total
expenses, 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. Of net assets
For the next Rs 300 Cr. Of net assets

2.50%
2.25%
2%

For the remaining net assets

1.75%

On debt funds the limits on expenses are lower by 0.25%

Index

What are the fees charged by the AMC ?

The fees are regulated by SEBI as follows:
For the first Rs.100 Cr. Of net assets: 1.25%
For the net assets exceeding Rs. 100 Crore: 1.00%
If the AMC does not charge any of the initial issue
expenses to the fund, it can charge the scheme a
management fee, that is 1% higher than the above rates

Index

Numerical

Weekly Net average asset=1400 Cr.

What could be the maximum ongoing expenses.

On 1st 100 cr. 2.5% i.e. 2.5 Cr.

On next 300 Cr. 2.25%

On next 300 Cr. 2% i.e. 6 Cr.

On Rest of the WNAS

(700 cr.) 1.75%

i.e. 12.25 Cr.

Total

27.5 Cr.

i.e. 6.75cr.

Index

Tax Implication in Mutual Funds

Income earned by any mutual fund registered with SEBI
is exempt from tax.( 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--- STCG
Else the earnings is known as LTCG.

Index

Capital Gain Taxation

The difference between sale and purchase price is known as capital

gain / loss.

The sale and purchase of units in equity oriented scheme of MF is

subject to STT at the prescribed rate

Under Section 111 A of the IT ACT, STCG on sale of equity

oriented scheme is taxed at the rate specified by the govt.
( currently10%). LTCG

LTCG if equity oriented scheme of MF is exempt from tax.

Tax on other scheme is 10% for LTCG ( without indexation) and

20% with indexation.

Index

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.

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, then the loss if any, shall be ignored.

Units are not considered under wealth tax

Section 195 20% TDS for LTCG and 30% TDS on STCG if unit
holder is a NRI. 48% TDS if unit holder is foreign company.

Index

Numerical
An investor purchased units in an apporved Mutual Fund
on Jan. 1, 1998 for Rs.500000/-. He sold the units on
December 1, 1999 for Rs. 750000/-. Calculate the
capital gain taxes paid by him. ( Ignore indexation).

Answer :
Long term capital gain = 250000/
So Tax on LTCG = 2500000* 10% = Rs. 25000/-

Index

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

Index

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).
If trading is suspended up to 30 days, last quoted price;
if it is suspended for more than 30 days, AMC/Trustee
decide valuation norms and document such norms.

Index

Thinly traded Equity Securities

Equity and equity related security
Rs. 5 lakhs or less OR less than 50000 shares in a
month
For unlisted: AMC need to make its own judgement and
guideline - which need to be documented
Aggregate of illiquid securities - non traded, thinly
traded, 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.
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 Good Faith
Index

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.

If illiquid securities are more than 5% of the portfolio, independent

valuation to be done
Index

Valuation of Debt Securities

Valuation of a Thinly Traded Security (<182 Days)
For example, if a security was issued at Rs. 90 and
redeemable at Rs. 100, after 364 days, the accrued
interest for each day is
= 10/364
= 0.02747
The value of the security is increased by 2.747 paise every
day, so that the security is worth Rs. 100 on the date of
maturity.
If it has to be valued 200 days after issuance, its value is
90+(0.02747*200) = 95.494
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.
Both these methods use duration to classify bonds and
assign a rate for each duration bucket

Index

Chapter 7

Investor Plans and Services

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

Index

Other Investment Services

Telephone / Internet Transactions.
Cheque writing usually for liquid funds.
Periodic statements and Tax Information
Loans against units MF DOES NOT GIVES LOANS
but banks can give against units held by unitholder.
Nomination and Transfer by unit holders.

Index

Chapter

Investment Management

Equity Portfolio Management

Equity funds can invest into equity shares, preference
shares, warrants or convertible debentures.
As on march 2004, indian stock exchanges have over
9400 listed companies.
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.

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

Small Cap

Market capitalisation high

Greater Liquidity
Comparatively smaller returns
Cost of transaction low

Market Capitalisation Low

Poor Liquidity
Comparatively higher returns
Cost of transaction high

Index

P/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 P/E Ratio
P/E ratio has a sensitive numerator and an insensitive
denominator.
P/E ratios are reflective of the phase of the market.

Index

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, P/E multiple will be higher, but
dividend yield will be lower and vice versa

Index

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

Index

What is active equity fund management

Fund manager tends to look at specific attributes in selecting stocks.
Active fund manager believes, that his ability to buy right stock at the
right time, can translate into superior performance for his portfolio.

What are the basic active equity fund management style?

Growth Investment style ( objective is to capital appreciation,
look for companies that are expected to give above average
earnings growth, The shares are more risky and thus expected to
offer higher returns over a long investment horizons.
Value Investment Style Look for companies that are currently
undervalued but whose worth will be recongnized eventually. ( eg.
Privatization/buy back)

Index

What is passive equity fund management?

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

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
companys 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 Portfolio

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

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.
Put option- Allows investors to redeem the bonds prior
to maturity

Index

Measure of Bond Yields

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

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 bonds 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

What are the various types of fixed income

securities available in the Indian Market?
Issuer

Central Govt.

Central Govt.

Instrument

Dated
Securities

Stare Govt.

T-Bills
Dated
Securities

PSU's

Bonds,
structured
Obligations

Corporates
Corporates,
Primary
Dealers
Banks

Debentures
Commercial
Paper
Certificates of
Deposit

Maturity

Investors
RBI, Banks , Insurance
Companies, Provident funds,
Mutual Funds , Primary
2- 30 Years Dealers
RBI, Banks , Insurance
Companies, Provident funds,
Mutual Funds , Pd's,
91/364 days Individuals
Banks, Insurance
5-10 Years
Companies, Provident funds
Banks, Insurance
Companies, Provident funds,
5-10 Years
Mutual Funds, Individuals
Banks, Mutual Funds,
1-12 Years
Corporates, Individuals
Banks, Corporate, Financial
3 months - 1 Institutions, Mutual Funds,
Year
Individuals
3 months - 1
Year
Banks , Corporates

Index

Restrictions

Mutual funds can invest only in marketable securities

All investments are on delivery basis, no squaring off.

A MF under all its schemes cannot hold more than 10% of the paid
up capital of a company.

A MF scheme can invest max. 10% of its NAV in a single

company.( Exception Index and Sectoral funds)

Debt funds - single issuer not more than 15% of NAV, can be
relaxed to 20% with approval of trustees and AMC

MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $

50 million, whichever is lower.

Funds of 1 scheme can be invested in any other MF ( Max 5% of

Net Assets)

Index

Inter Scheme Transfer

Such transfers happen on a delivery basis, at market

prices.
Such transfers should not result in significantly altering
the investment objectives of the scheme involved.
Such transfer should not be of illiquid securities, as
defined in the valuation norms.
One scheme can invest in another scheme, up to 5% of
net assets, No fee is payable on these investments.

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.
Investment by a scheme in listed securities of the
sponsor or associate companies cannot exceed 25% of
the net assets of the scheme

Index

Borrowings by Mutual Fund

A mutual fund can borrow for a maximum of 20% of net

assets.
For Maximum period of 6 months.
Purpose should be to meet liquidity requirements for
paying dividend or meeting redemptions.
It is not a permanent source of funds for the scheme.

Index

New Provisions on Investment Policy

Minimum Number of Investors per scheme
Purpose of MF is sharing the risks with a large number of
investors.
SEBI requires each scheme to have a minimum number
of investors.
So now each scheme and individual plan under the
scheme should have a minimum number of 20 investors
AND no single investor should account for more than
25% of the corpus of such scheme.
OES are allowed three months or upto end of the
succeeding calendar quarter from the close of IPO to
ensure compliance with this requirement
Index

Fund of Funds Scheme

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

Index

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

Index

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.

While comparing funds performance with peer group funds, size

and composition of the portfolios should be comparable.

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 is lesser of assets purchased or sold divided by

the funds 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

Purchase price Rs. 22 per Unit

NAV at year end

Interim Div. Rs. 3

Ex.-Div. NAV Rs. 21

Total Return=?

Assume investment of Rs. 10000

Step 1: Initial Units alloted =10000/22=454.55

Step 2:Total Div.=454.55*3=1363.65

Step 3: Additional Units=1363.65/21=64.94

Step 4:Total Units=454.55+64.94=519.49

Step 5:Withdral Amt. =519.49*23=11947.17

Gain =11947.17-10000=1947.17

Gain of 1947.17 on the investment of Rs. 10000

So that on the investment of Rs. 100 gain is 19.47

Ans:19.47%

Rs. 23 per Unit

Index

Benchmarking
Benchmarking should be selected by reference to The
asset class it invests in and the funds stated investment
objective.
3 kinds of benchmarks are used Relative to market as
a whole, relative to other mutual funds, and relative to
other comparable financial products.
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

Criteria for peer group comparisons

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

Index

Chapter
10

Helping Investors with financial

planning

Definition and objective

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 lifes goals.
The objective is to ensure that right amount of money is
available in the right hands at the right point in future
to achieve an individuals financial goals.

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

Important responsibilities of investors in the

?financial planning exercise

Should set measurable financial goals.

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, performance and their changing needs.

Investors benefit immensely by starting early and being systematic

and disciplined in their approach.

Index

Very important points on financial planning

The planner can look at all the clients need including budgeting,
saving, taxes, investments, insurance and retirement planning.

A financial planner can link his own rewards and fees to the clients
financial success and the achievement of their financial goals

MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR

FINANCIAL PLANNING.( CORE PRODUCT)

Financial is not only investing. It comes before investing.

It is relevant for all category of clients.

It is not as same as retirement planning.

It is not only Tax Planning.

Financial planning is important at younger stage of life.

Index

Important points on Financial Planning

The basis of genuine investment advice should be financial

planning to suit the investors situation. It should not be current
market condition.

Financial Planning allows a person to achieve financial goals

through proper management of finances.

Financial planners and their clients should focus on allocating funds

to different asset classes.

Financial planning is relevant not only to HNIs

Financial planning works better for younger/ middle aged client.

Financial planning is not merely tax planning.

Index

Wealth cycle for investors

Stage

Financial needs

Investment preferences

Accumulation stage

Investing for long term identifed

Growth options and long term

financial goals

products.High risk appetite

Near term needs for funds as

Liquid and medium term investments.

pre-specified needs draw closer

Lower risk appetite

Higher liquidity requirements

Liquid and medium term investments.

Transition Stage

Reaping Stage

Preference for income and debt products

Inter Generational

Long term investment of

inheritance

Ability to take risk and invest for the long

term

transfer

Sudden wealth surge

Low liquidity needs.

Medium to long term

Wealth preservation.
Preference for low risk products

Index

Chapter 11

Recommending Financial Planning

Strategies to Investors

Index

Harness the Power of Compounding 1% interest per month is

better than 12% yearly retrun.

Buy and hold is most common strategy BUT most common

mistake. Ideally it should be, track your investments, discard the
non performers and keep the good performers.

Have realistic expectations

Rupee cost averageing

Value Averaging.

Jacobs Rebalancing Strategy

Index

Rupee Cost Averaging

Amount NAV per
Number of Cumulative
I nvested
unit
units bought number of
(Rs)
units
1000
12.5
80.00
80.00

Value of
holding
1000.00

1000

11.25

88.89

168.89

1900.00

1000

10.75

93.02

261.91

2815.56

1000

11

90.91

352.82

3881.03

1000

12.75

78.43

431.25

5498.47

1000

13.35

74.91

506.16

6757.22

1000

13.85

72.20

578.36

8010.30

1000

14.45

69.20

647.57

9357.32

1000

13.85

72.20

719.77

9968.78

1000

13.5

74.07

793.84

10716.86

Average cost

12.60

Index

What are the financial planning strategies that can

?be recommended to investors

Rupee cost averaging.

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.
Over a period of time, the average purchase price of investor is lower than average NAV.

Its disadvantage : Does not indicate when to sell or switch.

Value averaging.

A fixed amount is targetted as the desired value of the portfolio at regular intervals

If markets have moved up, the units are sold to restore target value and vice versa.

It is superior than RCA as it enables the investor to book profits and rebalance the portfolio.

Index

Chapter 12

Selecting the right Investment

Products for Investors

Index

Comparison by Nature of Investment

Return

Safety
Convenice

Volatility

Liquidity

Equity

High Moderate

Low

High

High or Low

FI Bonds

Moderate High

High

Moderate

Moderate

Corporate Debentures

Moderate Low

Moderate

Moderate

Low

Company Fixed
Deposites

Moderate
Moderate

Low

Low

Low

Bank Deposites

Low High

High

Low

High

PPF

Moderate High

High

Low

Moderate

Life Insurance

Low Moderate

High

Low

Low

Gold

Moderate Low

High

Moderate

Moderate

Real Estate

High Low

Moderate

High

Low

Mutual Funds

High High

High

Moderate

High

Index

The Investor Perspective Funds vs. Other Products

Investment
Objective

Risk Tolerance

Investment
Horizon

Equity

Capital
Appreciation

High

Long Term

FI Bonds

Income

Low

Medium to Long
Term

Corporate Debentures

Income

H-M-Low

The same

Company Fixed
Deposites

Income

The same

Medium

Bank Deposites

Income

Generally Low

Flexible-All Terms

PPF

Income

Low

Long Term

Life Insurance

Risk Cover

Low

Long Term

Gold

Inflation Hedge

Low

Long Term

Real Estate

Inflation Hedge

Low

Long Term

Mutual Funds

Capital
Growth,Income

H-M-Low

Flexible-All Terms

Index

 Real Estate ( High investment required)

Bank Deposits ( Preferred due to the perception of bank
deposits being safe and free of default.
PPF
RBI Relief Bonds
Indra Vikas Patra
MF Best Option

Index

Chapter 13

Helping Investors understand

Risks in Fund Investing

Evaluating the Risks of a Mutual Fund

What is Risk ?
Risk means the possibility of financial loss.
Risk is thus equated with Volatility of Earnings
Equity Price Risk
Company Specific
Sector Specific
Market Level

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.
Beta Coefficient Beta relates a fund`s return with a
market index and measures the sensitivity of the
fund`s returns to change in market index. A beta of 1
means the fund moves with market. A beta of less
than one means the fund will less volatile than the
market.

Index

Evaluating the Risks of a Mutual Fund

ExMarks or a number known as R-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.
Standard Deviation is the best measure of risk.
Risk Adjusted Performance
Sharpe & Treynor Ratios

Index

Evaluating the Risks of a Mutual Fund

Alpha
Risk adjusted performance calculation is called
Alpha.
Alpha of a fund compares the fund`s actual results
with what would have been expected given the fund`s
beta and the market index performance.

Index

Chapter 14

Recommending Model Portfolios

and selecting the right Fund

Asset Allocation
Allocation of money between equity, debt and money
market instruments.
Depends upon situations, financial goals and risk
appetite.
Fixed AA and Flexible Asset Allocation.
Fixed Asset Allocation is preferable because of
periodical review and more disciplined.

Index

?What is Bogles strategic asset allocation

Older investors in the distribution phase:

-

Younger investors in the distribution phase:

-

60% equity : 40% debt

Older investors in the accumulation phase:

-

50% equity : 50% debt

70% equity : 30% debt

Younger investors in the accumulation phase:

-

80% equity : 20% debt

Index

The steps in developing a model portfolio for

?an investor
Develop long term goals.
Determine asset allocation.
Determine sector distribution.
Select specific fund managers and their schemes.

Index

Model portfolios recommended for investors

:according to their life cycle stages

Young unmarried professionals :

50% in aggressive equity funds.

25% in high yield bond funds, growth and income

25% in conservative money market funds.

funds.

Young couple with 2 incomes and 2 children:

10% in money market funds.
30% in aggressive equity funds.
25% in high yield bond funds and long term growth funds.
35% in municipal bond funds.

Index

: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

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

Objectives of Business Ethics

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

Index

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.( Trust, AMC, Custodian,
Registrar)
Independence of Organisations Trust independent of
AMC,
Independence of Personnel - Trustees can not serve as
Director of AMC they supervise or even any other AMC.
Independent Trustees and BOD members also.

Index

Examples of Unethical practices

Insider Trading
Preferential Treatment to Selected investors Cut off
time has been introduced now to prevent late trading
abuses.
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

Regulations on Personal Trading

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

Index

Other Regulations
Mandatory for the AMC to appoint a compliance officer
to monitor and ensure implementation of all laws /
regulations.
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

Index

Thanks