X- coune For westwext DUATIN & LEAN NISM VA — MUTUAL FUND DISTRIBUTORS EXAMINATION Short Notes for Revision 1. Investment Investor The first step in goal setting is to identify life-cycle events in life. After identifying the events, one needs to assign priorities— which of these are more important than the others. Retirement, or children’s education fall into the responsibility’s category, whereas a grand vacation maybe a good-to-have goal. Having said that, it is only the individual and the family that can decide which is which. After that, one needs to assign a timeline as well as amount of funding required at the time of such events. Take for example, if someone is planning to buy a house, one needs to decide the type of house one wants, as well as the location. These inputs would help arrive at approximate cost. After that one needs to decide by when one would like to buy this. Both the timeline and amount are critical for one to be able to plan to achieve the goal. Such an exercise allows one to classify the goals in terms of the timeline — are the goals in the near term, or far in the future? NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |1.‘cen Fon nvesTmENT a EDUCATION a LEARN 1.1 Financial Goals, Time Horizon for their achievement and Inflation The next step would be to assign amount to the financial goals. In the process of planning, this is an important question: How much would it cost? Shalini, the eight-year- old, wants to be a space scientist, for which she needs a good quality education. How much would such education cost? Well, this question must be answered in terms of amount needed when Shalini reaches college. And that is roughly a decade from now. In such a case, the costs are quite likely to move up. Such a rise in the cost of the goals is called inflation. It applies to many other areas of personal finance. This is known as inflation with respect to the goal value. Inflation has a long-term impact, and hence while planning for funding all the long-term goals, one must consider inflation in the cost of the goal. On the other hand, the immediate term and near-term goals may not have a big impact due to changes in price. 1.2 Factors to evaluate investments The three most important factors to evaluate investments are safety, liquidity, and returns. In addition to these, there are few more parameters such as convenience, ticket size (or the minimum investment required), taxability of earnings, tax deduction, etc. These factors have been discussed below: Safety: This begins with the safety of capital invested. However, one could stretch that to also include the degree of surety of income from investment. In order to understand NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION |21C cevrne For nwestment ‘caTon a ten the safety of an investment, it is important to understand the risks involved. Liquidity: How easily can one liquidate the investment and convert it to cash? The degree of ease is different across different categories, and even within the categories, the same could be different across products. Sometimes, the nature of the product could be such that selling it is difficult, whereas sometimes there could be some operational features, e.g., a lock-in for a certain period, after which one may be able to liquidate the investment, or a penalty for early exit. While such a penalty does not hamper liquidity, it only lowers the investment returns. Another aspect that one may also want to look at is the divisibility. Is it possible to liquidate part of the investment or is it necessary to sell the whole thing? Returns: As seen earlier in the definition of investments, the major purpose is to get some returns from investment. Such returns may be in the form of regular (or periodic) income, also known as current income, and capital appreciation, or capital gains. The current income is receivable periodically, without having to sell the investment, whereas the capital gains can be realized only when one sells the investment. The exit charges, or penalty would bring down the returns, as seen earlier. Hence, whenever there are any such charges for early withdrawals, the same must be considered as a trade- off between liquidity and returns. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [3@¢==<= same Convenience: Any investment must be evaluated in terms of convenience with respect to investing, taking the money out— fully or partially, as well as the investor’s ability to conveniently check the value of the investment, as well as to receive the income. Ticket size: What is the minimum amount required for investment? There are some avenues where an investor can start investing amounts as small as Rs. 50 or Rs. 100, whereas some require more than Rs. 1 lakh, and sometimes more than Rs. 1 crore. This becomes an important factor while taking a decision about selection of investment options. Taxability of income: What one retains after taxes is what matters, and hence, taxation of the earnings is another important factor that one must consider. 1.3 Different Asset Classes Various investment avenues can be grouped in various categories, called asset classes. An asset class is a grouping of investments that exhibit similar characteristics. There are four broad asset categories or asset classes, and then there are various subcategories, within each of these. The four broad categories—Real estate, Commodities, Equity and Fixed income. 1.3.1 Real Estate Real estate is considered as the most important and popular among all the asset classes. However, the popularity of this asset category is largely because of a reason not related to investment. For those who have bought their own NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |41C ceurre Fon nvesttent foveanons una houses, it is the largest expense in life. The word used here is “expense”, and not “investment”. This would be elaborated later, but it is pertinent to mention here that in majority of cases, individuals purchase real estate for self-occupation. This should not be considered as investment, since selling the same may have a negative impact on one’s lifestyle. 1,3.2 Commodities This is another asset category that people at large are familiar with in various ways. On a regular basis, people consume many commodities, e.g., agricultural commodities like spices; petroleum products such as petrol and diesel; or metals like gold and silver. However, it is not possible to invest in most of these, as many of these are either perishable and hence cannot be stored for long, or storage of the same could take a lot of space, creating different kind of difficulties. Though, there are commodities derivatives available on many commodities, it may not be wise to call these “investments” for two reasons, (1) these are leveraged contracts, i.e., one can take large exposure with a small of money making it highly risky and (2) these are normally short-term contracts, whereas the investors’ needs may be for longer periods. On the other hand, there are at least two commodities that many investors are quite familiar with as investment avenues, viz., gold, and silver. 1.3.3 Fixed Income When someone borrows money, one has to return the principal borrowed to the lender in the future. There could also be some interest payable on the amount borrowed. There are various forms of borrowing, some of which are NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [5‘cevmRe Fon vestmENT 7 EDUCATION a EARING through marketable instruments like bonds and debentures. There are many issuers of such papers, e.g., Companies, Union Government, State Governments, Municipal Corporations, banks, financial institutions, public sector enterprises, etc. 1.3.4 Equity This is the owner’s capital in a business. Someone who buys shares in a company becomes a part-owner in the business. In that sense, this is risk capital, since the owner’s earnings from the business are linked to the fortunes, and hence the risks, of the business. When one buys the shares of a company through secondary market, the share price could be high or low in comparison to the fair price. MIS for Regular Income An investor looking for regular income, such as in retirement, invests in the Post office Monthly Income Scheme (MIS) or the Senior Citizen Savings Schemes (SCSS) for guaranteed income, among others. Both these schemes have an upper limit for investment which limits the amount of income that can be earned from them as well as fixed tenure after which they have to be renewed. The Monthly Income Plan (MIP) of mutual funds is debt-oriented hybrid schemes that take some exposure to equity to provide a regular income to the investors. There is no upper limit on the investment that can be made in the scheme and they are open-ended scheme. Though there is no guarantee on the income, there are schemes that have a history of uninterrupted dividend payment for the investor. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [6X ceume ron vest 2 EDUCATION 8 LEARUING 1.3.5 ELSS for Tax Saving Investors have multiple saving products such as NSC, PPF, Bank deposits and others which enable them to save tax under section 80 C of the Income Tax Act. Equity Linked Savings Schemes (ELSS) is equity mutual funds that are also permitted investments under section 80 C. The lock-in period in the ELSS is the lowest at 3 years while compared to the 15 years in PPF, 5 /10 years in NSC and 5 years in bank fixed deposits, among others. Investment up to Rs. 150,000 in a financial year in such funds can be deducted from taxable income of individual investors. An ELSS holds at least 80% of the portfolio in equity securities. 1.3.6 NPS (National Pension Scheme) Pension Funds Regulatory and Development Authority (PFRDA) is the regulator for the National Pension System. Two kinds of pension accounts are offered: Tier | account which is a pension account with limited withdrawal facility. Tier II (Savings account) is withdrawable to meet financial contingencies. An active Tier | account is a pre-requisite for opening a Tier Il account. Investors can invest in 4 types of asset classes: Equity, Debt, Government securities and other alternative investments. Under the Government model of NPS, only 15 percent of the contribution can be invested in equity-oriented investments and the rest in fixed income securities. Subscribers in the government model do not have a choice on how their contributions will be invested. The NPS offers fewer portfolio choices than mutual funds. However, NPS offers the convenience of a single Permanent Retirement Account Number (PRAN), which is applicable across all the PFMs NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |7‘cove Fon vestuent EDUCATION LEARHNG. where the investor’s money is invested. PRAN is a unique ID number for NPS investments and it is portable. There are similarities and differences between the various asset categories. Investments in equity and bonds can be done only in financial form, whereas one can buy the other two assets, viz., real estate and commodities either in financial or in physical form. It is this physical form that gives a feeling of safety to many. Anything that is tangible is perceived to be safer than something intangible. Investor in equity, real estate and commodities is an owner of the asset, whereas an investor in bonds has lent money to someone. In such a case, the lender’s receipts—be it interest payments or return of principal amount invested — are agreed at the time of the issue of such instruments. In all the other three cases, the investor’s cashflows (or receipts) are unknown. To that extent, the future returns from these assets, which may also be called ownership assets, would be highly uncertain in comparison to the lending assets like bonds or fixed deposits. 1.4 Investment Risks To obtain a better understanding of the investment avenues, it is essential to understand the different types of risks involved. 1.4.1 Inflation Risk Inflation, or price inflation is the general rise in the prices of various commodities, products, and services that we NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION [8XC cenme rom nese 7 foueanons EAM consume. Inflation erodes the purchasing power of the money. The following table explains what inflation can do to the purchasing power of our money. 1.4.2 Liquidity Risk Investments in fixed income asset are usually considered less risky than equity. Even within that, government securities are considered the safest. In order to avail the full benefits of the investments, or to earn the promised returns, there is a condition attached. The investment must be held till maturity. In case if one needs liquidity, there could be some charges, or such an option may not be available at all. 1.4.3 Credit Risk When someone lends money to a borrower, the borrower commits to repay the principal as well as pay the interest as per the agreed schedule. The same applies in case of a debenture or a bond or a fixed deposit. In case of these instruments, the issuer of the instruments is the borrower, whereas the investor is the lender. The issuer agrees to pay the interest and repay the principal as per an agreed schedule. There are three possibilities in such arrangements: (1) The issuer honours all commitments in time (2) The issuer pays the dues, but with some delay (3) The issuer does not pay principal and the interest at all. While the first is the desirable situation, the latter two are not. Credit risk is all about the possibility that the second or the third situation may arise. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [9X cent ror vestuen EDUCATION LEARNING. Any delay or a default in the repayment of principal or payment of interest may arise due to a problem with one or both of the two reasons: (1) the ability of the borrower (2) the intention of the borrower. While the ability of the borrower, if the same happens to be a company, is a function of the business stability and profitability of the company. 1.4.4 Market Risk and Price Risk When securities are traded in an open market, people can buy or sell the same based on their opinions. It does not matter whether these opinions are based on facts, or otherwise. Since the opinions may change very fast, the prices may fluctuate more in comparison to the change in facts related to the security. Such fluctuations are also referred to as volatility. There are two types of risks to a security—market risk and price risk. 1.4.5 Interest Rate Risk Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds/debt instruments more directly than stocks. Any reduction in interest rates will increase the value of the instrument and vice versa. While most investors are familiar with the concept of debentures, they normally buy and hold these bonds till maturity. On maturity of the bond, they get the maturity amount, since it is part of the bond agreement (assuming the company does not default on the commitment). NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [10cen for nvesrext 2 uCATON a LeAnna 1.5 Helping Investors with Financial Planning 1.5.1 What is Financial Planning? Everyone has needs and aspirations. Most needs and aspirations call for a financial commitment. Providing for this commitment becomes a financial goal. Fulfilling the financial goal sets people on the path towards realizing their needs and aspirations. People experience happiness, when their needs and aspirations are realized within an identified time frame. Financial planning is a planned and systematic approach to provide for the financial goals that will help people realize their needs and aspirations and be happy. Following are some important steps of financial planning. (1) Assessment of financial goals (2) Investment Horizon (3) Assessing the fund required 1.5.2 Financial Planning objectives and benefits The objective of financial planning is to ensure that the right amount of money is available at the right time to meet the various financial goals of the investor. This would help the investor realize his aspirations and experience happiness. It gives direction to the investor’s spending and saving habits. An objective of financial planning is also to let the investor know in advance, if some financial goal is not likely to be fulfilled. 1.5.3 Need for Financial Planners Most investors are either not organized or lack the ability to make the calculations described above. NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION |11CENTRE FoR MvEsTMENT 2 EDUCATION LEARN. A financial planner’s service is therefore invaluable in helping people realize their needs and aspirations. Even if the investor knows the calculations, the knowledge of how and where to invest may be lacking. The financial planner thus steps in to help the investor select appropriate financial products and invest in them. 1.5.4 Financial Planning Tools The financial plan preparation becomes simpler with the aid of packaged software. These help not only in estimating the cash flow requirements and preparing the financial plan, but also ongoing monitoring of the portfolio. A few mutual funds and brokerage firms provide limited financial planning tools in their websites. A serious financial planner might like to invest in off-the-shelf software that will enable storing of relevant client information confidentially and offer ongoing support to the clients. A future cost, in today’s terms, need to be translated into the rupee requirement in future. This is done using the formula A =P X (1 +i)n (1) Rupee requirement in future (2) Number of years into the future, when the expense will be incurred. (3) i = Rate of inflation (4) P = Cost in today’s terms 1.6 Recommending Model Portfolios and Financial Plans Need for Risk Profiling As seen earlier, various schemes have different levels of risk. Similarly, there are differences between investors with respect to the levels of risk they are comfortable with (risk NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION [121 cen on ester SUCATION LAR appetite). At times there are also differences between the level of risk the investors think they are comfortable with, and the level of risk they ought to be comfortable with. Factors that influence one’s risk profile a. Earning members and dependents in family b. Life Expectancy c. Age d. Employability e. Nature of Job f. Psyche g. Capital Base h. Regularity of Income Role of Asset Allocation ‘Don’t put all your eggs in one basket’ is an old proverb. It equally applies to investments. Different economic conditions may impact the performance of different asset classes differently. The distribution of an investor’s portfolio between different asset classes is called asset allocation. Some international research suggest that asset allocation and investment policy can better explain portfolio performance, as compared to selection of securities within an asset class (stock selection) and investment timing. 1.7 Types of Asset Allocation Strategic Asset Allocation: It is the ideal that comes out of the risk profile of the individual, the return requirement to NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION |13‘cevme Fon vestuent a EDUCATION &LEARHNG meet the goals and the investment horizon. Risk profiling is key to deciding on the strategic asset allocation. The allocation to the various asset classes is not driven by their expected performance. Tactical Asset Allocation: is the decision that comes out of calls on the likely behaviour of the market. An investor who decides to go overweight on equities i.e., take higher exposure to equities, because of expectations of buoyancy in industry and share markets, is taking a tactical asset allocation call. 1.8 Behavioural biases in investment decision making Confidence bias: Investors cultivate a belief that they have the ability to outperform the market based on some investing successes. Familiarity bias: This bias lead investor to choose what they are comfortable with. This may be asset classes they are familiar with, stocks or sectors that they have greater information about and so on. Anchoring: Investors hold on to some information that may no longer be relevant, and make their decisions based on that. Investors who wait for the ‘right price’ to sell even when new information indicate that the expected price is no longer appropriate, are exhibiting this bias. Loss Aversion: Investors prefer to do nothing despite information and analysis favouring a particular action that in the mind of the investor may lead to a loss. Holding on to ISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |14CENTRE FoR nvEsTENT EDUCATN & LEARHING losing stocks, avoiding riskier asset classes like equity when there is a lot of information and discussions going around on market volatility are manifestations of this bias. Herd Mentality: This bias is an outcome of uncertainty and a belief that others may have better information, which leads investors to follow the investment choices that others make. Such choices may seem right and even be justified by short- term performance, but often lead to bubbles and crashes. Recency Bias: The impact of recent events on decision making can be very strong. This applies equally to positive and negative experiences. Investors tend to extrapolate the event into the future and expect a repeat. The recent experience overrides analysis in decision making. Choice Paralysis: The availability of too many options for investment can lead to a situation of not wanting to evaluate and make the decision. Too much of information also leads to a similar outcome on acting. 2. CONCEPT AND ROLE OF A MUTUAL FUND Mutual fund is a vehicle to mobilize money from investors, to invest in different markets and securities, in line with the common investment objectives agreed upon, between the mutual fund and the investors. Through mutual funds, an investor can get access to equities, bonds, money market instruments and/or other securities and they also avail of the ISM VA — MUTUAL FUND DISTRIBUTORS EXAMINATION |15‘cat For nvesTwExT 2 oUCATION 8 LEARN professional fund management services offered by an asset management company. 2.1 Role of Mutual Funds = Assist investors in earning income or building wealth * Mobilization of savings * Facilitating the infusion of capital in the economy = Market stabilizer 2.2 Why are there different kinds of Mutual Fund Schemes? Various investors have different investment preferences and needs. In order to accommodate these preferences, mutual funds mobilize different pools of money. Each such pool of money is called a mutual fund scheme. Every scheme has a pre-announced investment objective. Investors invest in a mutual fund scheme whose investment objective reflects their own needs and preference. 2.3 Operations of Mutual Fund Mutual fund schemes announce their investment objective and seek investments from the investor. Thus, an investor in a scheme is issued units of the scheme. The scheme earns interest income or dividend income on the investments it holds. Further, when it purchases and sells investments, it earns capital gains or incurs capital losses. These are called realized capital gains or realized capital losses as the case may be. Investments owned by the scheme may be quoted in the market at higher than the cost paid. Such gains in values on securities held are called valuation gains. Similarly, there can be valuation losses when securities are quoted in the market at a price below the cost at which the scheme NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |16‘cere For vestateT EDUCATION & LEARNING acquired them. When the investment activity is profitable, the true worth of a unit increases. When there are losses, the true worth of a unit decreases. The rue worth of a unit of the scheme is otherwise called Net Asset Value (NAV) of the scheme. 2.4 Advantages of Mutual Funds for Investors 1. Professional Management Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. Investing in the securities markets will require the investor to get into a lot of formalities. Mutual fund investment simplifies the process of investing and holding securities. 2. Affordable Portfolio Diversification Investing in the units of a scheme provide investors the exposure to a range of securities held in the investment portfolio of the scheme in proportion to their holding in the scheme. Thus, even a small investment of Rs.500 in a mutual fund scheme can give benefits of a diversified investment portfolio. 3. Economies of scale Pooling of large sum of money from many investors makes it possible for the mutual fund to engage professional managers for managing investments. Large investment corpus leads to various other economies of scale. Costs related to investment research, office space, brokerages and other bank services. Thus, investing through a mutual fund NISM VA~ MUTUAL FUND DISTRIBUTORS EXAMINATION |17cevmpe Fon nvesTaENT EDUCATION & LEARING offers a distinct economic advantage to an investor as compared to direct investing in terms of cost saving. 4. Liqui Investors in a mutual fund scheme can recover the market value of their investments, from the mutual fund itself at any point of time (Except fund with a lock-in period). Schemes, where the money can be recovered from the mutual fund only on closure of the scheme, are compulsorily listed on a stock exchange. In such schemes, the investor can sell the units through the stock exchange platform to recover the prevailing value of the investment. 5. Tax Deferral Mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year. Mutual funds offer options, whereby the investor can let the money grow in the scheme for several years. By selecting such options, it is possible for the investor to defer the tax liability. This helps investors to legally build their wealth faster than would have been the case, if they were to pay tax on the income each year. 6. Tax benefits Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount subscribed (Up to Rs. 150,000 in a financial year), from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION | 18cere Fon nvestment 7 EDUCATION & LEARNING 7. Convenient Options The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position. There are also great transaction conveniences like the ability to withdraw only part of the money from the investment account, ability to invest additional amount to the account, setting up systematic transactions, etc. 8. Investment Comfort Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. 9. Regulatory Comfort The regulator, Securities and Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities. Mutual fund investors benefit from such protection. 10. Systematic Approach to Investments Mutual funds also offer facilities that help investor invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP); or move money between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote investment discipline, which is beneficial to investors NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION |19‘eve For nvestMENT 7 EDUCATION &LEARUING 2.5 Limitations of a Mutual Fund 1. Lack of portfolio customization A unitholder in a mutual fund is just one of several thousand investors in a scheme. Once a unit holder has bought into the scheme, investment management is left to the fund manager. Thus, the unitholder cannot influence what securities or investments the scheme would invest into. 2. Choice overload There are multiple mutual fund schemes offered by 42 mutual funds — and multiple options within those schemes which make it difficult for investors to choose between them. 3. No control over costs All the investor's money is pooled together in a scheme. Costs incurred for managing the scheme are shared by all the Unitholders in proportion to their holding of Units in the scheme. Therefore, an individual investor has no control over the costs in a scheme. 2.6 Types of Funds 2.6.1 On basis of time of investments Open Ended Funds: - These funds are open for investors to enter or exit at any time, even after the NFO. Although some unitholders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. NNISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |20comme ron vesrucit 7 foverrons tame Close ended funds: - These funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. Interval Funds: - The funds combine features of both open- ended and close-ended schemes. They are largely close ended but become open-ended at pre-specified intervals. The periods when an interval scheme becomes open-ended, are called ‘transaction periods. 2.6.2 On basis of management style Actively managed funds: - These funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme. Since this increases the role of the fund manager, the expenses for running the fund turn out to be higher. Investors expect actively managed funds to perform better than the market. Passive funds: - These funds invest on the basis of a specified index, whose performance it seeks to track. Thus, performance of a passive fund tends to mirror the concerned index. They are not designed to perform better than the market Exchange Traded Funds (ETFs): - They are also passive funds whose portfolio replicates an index or benchmark such as an equity market index or a commodity index. The units are issued to the investors in a new fund offer (NFO). The units of NISM VA - MUTUAL FUND DISTRIBUTORS EXAMINATION |21cone ron wvesrieert 7 EDUCATION LEARUING. the ETF are traded at real time prices that are linked to the changes in the underlying index. 2.6.3 Equity Schemes Multi Cap Fund: An open-ended equity scheme investing across large cap, mid cap, small cap stocks. Minimum 75% of total assets should be in equity in the following manner. Minimum 25% in Large cap, minimum 25% in Mid cap & Minimum 25% in Small cap. Large Cap Fund: An _ open-ended equity scheme predominantly investing in large cap stocks. The minimum investment in equity and of large cap companies shall be 80 percent of total assets. Large and Mid-Cap Fund: An open-ended equity scheme investing in both large cap and mid cap stocks. Minimum 35% of total assets should be invested in large cap stocks and minimum 35% of total assets should be invested in mid cap stocks. Mid Cap Fund: An open-ended equity scheme predominantly investing in mid cap stocks. The minimum investment in equity of mid cap companies shall be 65 percent of total assets. Small cap Fund: An open-ended equity scheme predominantly investing in small cap stocks. Minimum investment in equity of small cap companies shall be 65 percent of total assets. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION | 22‘CENTRE FOR INVESTMENT 7 EDUCATION & LEARHING Dividend Yield Fund: An open-ended equity scheme predominantly investing in dividend yielding stocks. Scheme should predominantly invest in dividend yielding stocks. Minimum 65% of total assets should be in equity. Value Fund or Contra Fund: A value fund is an open-ended equity scheme following a value investment strategy. Minimum 65% of total assets should be in equity. Focused Fund: An open-ended equity scheme investing in maximum 30 stocks (the scheme needs to mention where it intends to focus, viz., multi cap, large cap, mid cap, small cap). Minimum 65% of total assets should be in equity. Sectoral/ Thematic: An open-ended equity scheme investing in a specific sector such as Bank sector, Power sector etc. is a sectoral fund. While an open-ended equity scheme investing in line with an investment theme is a thematic fund. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power etc. The minimum investment in equity and equity related instruments of a particular sector/ theme shall be 80 percent of total assets. Equity Linked Savings Scheme (ELSS): An open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. The minimum investment in equity and equity related instruments shall be 80 percent of total assets. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |23‘cove Fon nvestiENT EDUCATION 8 LEARNING 2.6.4 Debt Schemes Overnight Fund: An open-ended debt scheme investing in overnight securities. The investment is in overnight securities having maturity of 1 day Liquid Fund: An open-ended liquid scheme whose investment is into debt and money market securities with maturity of up to 91 days only 3 Ultra-Short Duration Fund: An open ended ultra-short-term debt scheme investing in debt and money market instruments with Macaulay duration between 3 months and 6 months. Low Duration Fund: An open-ended low duration debt scheme investing in debt and money market instruments with Macaulay duration between 6 months and 12 months. Money Market Fund: An open-ended debt scheme investing in money market instruments having maturity up to 1 year. Short Duration Fund: An open-ended short-term debt scheme investing in debt and money market instruments with Macaulay duration between 1 year and 3 years. Medium Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio being between 3 years and 4 years. NISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |24NTR FOR NVESTENT EDUCATION & LEARNING Medium to Long Duration Fund: An open-ended medium- term debt scheme investing in debt and money market instruments with Macaulay duration between 4 years and 7 years. Long Duration Fund: An open-ended debt scheme investing in debt and money market instruments with Macaulay duration greater than 7 years. Dynamic Bond: An open-ended dynamic debt scheme investing across duration. Corporate Bond Fund: An open-ended debt scheme predominantly investing in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds) Credit Risk Fund: An open-ended debt scheme investing in below highest rated corporate bonds. The minimum investment in corporate bonds shall be 65 percent of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds). Banking and PSU Fund: An open-ended debt scheme predominantly investing minimum 80 percent of total assets in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds. Gilt Fund: An open-ended debt scheme investing in government securities across maturity. The minimum ISM VA ~ MUTUAL FUND DISTRIBUTORS EXAMINATION |25