CH: 2: Market and Sale Mutual Fund

2.1 Types of mutual fund in India. / Various types of mutual fund

schemes in India.

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1) Classification on the basis of Operations/ Structure:

a) Open ended Scheme: in an open-ended mutual fund there are no limit

on the total size of the corpus (fund raised). Investors are permitted to
enter (Buy) and exit (Sell) the open ended mutual fund at any point of
time at net asset value (NAV).
 These schemes are opened throughout the year with no definite
closing period. It provides, excellent liquidity, although the units are
not listed.
 Axis Triple Advantages Fund, Birla Sun Life Basic Industries Fund,
IDBI (Industrial Development bank of India.) India Top 100 Equity
Fund, L&T Contra Fund, are some of the open ended mutual funds.

 Characteristics:

1. Accepts funds from investors on continuous basis.

2. Repurchase facility available.
3. No listing in stock exchange.
4. Better liquidity due to continuous repurchase.
5. Sale and purchase based on NAV of the units.

b) Close ended Scheme: Here the duration and amount to be raised from
the funds is pre-fixed schemes are opened or specific time period. Once
the subscription reaches the pre-determined level, the entry of investors is
closed.
 After the expiry of the fixed period, the entire fund raise is
disinvested and the proceeds are distributed to the various unit
holders in proportion to their holding.
 Investors can buy or sell the units of the scheme on the stock
exchanges where they are listed.

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  The market price at the stock exchanges could vary from the net
asset value (NAV) of the scheme on account of demand and supply
situation.
 Canara Robeco Equity Tax Saver-93, Tata Life Sciences and
Technology Fund, Kotak Gold ETF are some of the close ended funds
in India.

 Characteristics:
1. Schemes are opened only for short duration.
2. Corpus normally does not change, throughout the year.
3. Normally these scheme are listed in stock exchanges.
4. Liquidity is available to investors at the time of redemption.
5. Market price may be below or above par.

c) Interval Schemes: Basically it is a close ended scheme with a peculiar

feature that every year for a specified period (interval) it is made open. Prior
to and after such interval the schemes operates as closed ended schemes.
 During the said period, mutual fund is ready to buy or sell the units
directly from or to the investor. Reliance interval Fund, ICICI Pru’s
Interval Fund II are some of the Intervals funds in India.

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2) Classification by Investment Objectives:

a) Income Schemes: To maximize the current income is the objectives of this

scheme. Periodical income distribution is the feature. Investment in low
risk securities is made in these schemes.
 Some of the example of Indian income mutual funds are IDFC
Capital Protection Oriented Fund, Kotak Hybrid Fixed Term Plan,
Reliance Fixed Horizon Fund, SBI Capital Protection Oriented Fund
etc.

b) Growth Schemes: To achieve capital appreciation is the objective of this

scheme. Investment is made in growth oriented securities like equity
shares. They concentrate mainly on long run gains i.e., capital
appreciation. They do not offer regular income and they aim at capital
appreciation in the long run.
 Canara Robeco emerging equities, DWS Investment Opportunity
Fund, Fidelity Equity Fund, HSBCDynamic Fund, and Quantum
Long-Term Equity Fund are some example of growth mutual fund in
India.

c) Balanced schemes: To provide current income as well as capital

appreciation is the objective. Investment in Equity and Fixed income
securities as per the offer document. HDFC Balanced Fund, UTI Balanced
Fund, Tata Balanced Funds are some of the example of these funds in
India.

d) Money market funds: Investment of these funds is in securities of Short-

term nature, which generally means securities of less than one-year
maturity. The major advantages are the liquidity and safety.

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3) Other classification:

a) Sector Funds: These funds invest the funds in securities (equity shares)
of certain sector of the economy like, IT, Pharma, Automobile etc. The risk
is confined to one particular sector.
b) Tax saving schemes: These schemes provide tax incentives to Individual
tax payers under section 80C of Income Tax Act. By investing in these
scheme the taxpayer can reduce his tax liability. These funds have
minimum lock in period of three years.

c) Index Funds: These funds invest the money in equity shares of those
companies which are part of indices such as Sensex, Nifty, etc. The
objective is to match the performance of the stock market by tracking an
index that represents the overall market.

2.2 Studying the contents of offer Documents and Role of Offer Documents.

 Offer Document – NFO, SID, SAI

 New Fund Offer (NFO) Units in a mutual fund scheme are offered
to public investors for the first time through a NFO. The offer is made
through a legal document called the Offer Document. The following
are a few key steps leading to the NFO:
 The AMC decides on a scheme to be taken to the market. This is
decided on the basis of inputs from the Chief Investment Officer
(CIO) on investment objectives that would benefit investors, and
inputs from the Chief Marketing Officer (CMO) on the interest in the
market for the investment objectives.
 The AMC prepares the draft Offer Document for the NFO. This needs
to be approved by the Trustees and the Board of Directors of the
AMC.

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  The documents are then filed with SEBI. The observations that SEBI
makes on the draft Offer Document need to be incorporated. In case
no modifications are suggested by SEBI within 21 working days of
filing the same, the AMC can issue the offer document in the market.
 The AMC decides on a suitable time-table for the issue, keeping in
mind the market situation.
 The AMC launches its advertising and public relations campaigns to
make investors aware of the NFO. These need to comply with SEBI’s
advertising code.
 The AMC holds events for intermediaries and the press to make
them familiar with the scheme, its unique features, and benefits for
investors, etc.
 The Offer Documents and Application Forms are distributed to
market intermediaries, and circulated in the market, so that
investors can apply in the NFO.
 Three dates are relevant for the NFO of an open-ended scheme:
 NFO Open Date – This is the date from which investors can
invest in the NFO
 NFO Close Date – This is the date upto which investors can
invest in the NFO
 Scheme Re-Opening Date – This is the date from which the
investors can offer their units for repurchase to the scheme (at
the re-purchase price); or buy new units of the scheme (at the
sale price, which is the NAV itself). The AMC announces Sale
and Re-purchase prices from the Scheme Reopening Date.
 Close-ended Schemes have an NFO Open Date and NFO Close
Date. But, they have no Scheme Reopening Date, because the
scheme does not sell or re-purchase units. Investors will need
to buy or sell units in the stock exchange(s) where the scheme
is listed.

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  Under the SEBI guidelines, NFOs other than ELSS can remain
open for a maximum of 15 days. Allotment of units or refund of
moneys, as the case may be, should be done within 5 business
days of closure of the scheme. Further, open-ended schemes
have to re-open for sale and re-purchase within 5 business days
of the allotment.

 The Role of Offer Documents:

Investors get to know the details of the scheme in which they are
considering to invest through the Offer Document. This may be in the
NFO of the scheme, or in the case of an open-ended scheme, in the
continuous offer period. SEBI requires that all the information that the
investor may require to make an informed investment decision should be
available in the Offer Document.

Information like the nature of the scheme, its investment objectives and
strategy, the terms of the offer, liquidity and the services available to the
investor enables an investor to make an investment decision.

Since the disclosures in the Offer Document are as prescribed by SEBI,

it is a legal document that helps investors to take a balanced view on the
investment.

The Offer Document is the most important source of information on the

core aspects of the scheme called its fundamental attributes. The
fundamental attributes of the scheme includes:

 The type of scheme

 Open-ended/ Close-ended/ Interval
 Equity fund/Debt fund/Hybrid/Any other type of fund
 Investment objective(s) and Investment Pattern of the scheme
 Investment objective- Growth/Income/Both

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  Investment pattern-The indicative break-up of the portfolio
between equity, debt and money market instruments with
minimum and maximum allocation to each. The fund could retain
the right to alter the allocation for defensive consideration.
 Terms of the issue
 Liquidity provisions such as listing, repurchase and redemption
 Fees and expenses charged to the scheme
 Any safety net or guarantee provided

 Mutual Fund Offer Documents have two parts:

a) Scheme Information Document (SID), which has details of the

particular scheme

b) Statement of Additional Information (SAI), which has statutory

information about the mutual fund or AMC that is offering the
scheme.

Both documents are prepared in the format prescribed by SEBI, and

submitted to SEBI. The contents need to flow in the same sequence
as in the prescribed format. The mutual fund is permitted to add any
other disclosure, which it feels, is material for the investor.

 Contents of SID:
The cover page has the name of the scheme followed by its type viz.
 Open-ended / Close-ended / Interval (the scheme structure)
 Equity / Debt / Liquid / Hybrid etc (the expected nature of scheme
portfolio) It also mentions the face value of the Units being offered,
relevant NFO dates (opening, closing, reopening), date of SID, name of the
mutual fund, and name and contact information of the AMC and trustee
company.

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  Scheme Information Document is structured in the following manner:
 Table of Contents
 Highlights
 Introduction
o Risk Factors
 Standard
 Scheme-specific
o Provisions regarding minimum number of investors in
the scheme
o Any other special considerations
o Definitions
o Due Diligence Certificate (issued by the AMC)
 Information about the scheme
 Units and Offer
 Fees & Expenses
 Rights of Unit-holders
 Penalties, Litigation etc.
 Contents of SAI:
 Information about Sponsors, AMC and Trustee Company (includes contact
information, shareholding pattern, responsibilities, names of directors and
their contact information, profiles of key personnel), and contact
information of service providers {Custodian, Registrar & Transfer Agent,
Statutory Auditor, Fund Accountant (if outsourced) and Collecting
Bankers}
 Condensed financial information (for schemes launched in last 3
financial years)
 How to apply
 Rights of Unit-holders
 Investment Valuation Norms

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  Tax, Legal & General Information (including investor grievance redressal
mechanism, and data on number of complaints received and cleared, and
opening and closing number of complaints for previous 3 financial years
and for the current year to-date)

2.3 Key Information Memorandum (KIM)

 Role of KIM:
KIM is essentially a summary of the SID and SAI. It contains the key points
of the offer document that are essential for the investor to know to make
a decision on the suitability of the investment for their needs. It is more
easily and widely distributed in the market. As per SEBI regulations, every
application form is to be accompanied by the KIM.

 Contents of KIM :
Some of the key items are as follows:
 Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
 Dates of Issue Opening, Issue Closing & Re-opening for Sale and Re-
purchase
 Plans and Options under the scheme
 Risk Profile of Scheme
 Price at which Units are being issued and minimum amount / units for
initial purchase, additional purchase and re-purchase
 Benchmark
 Dividend Policy
 Performance of scheme and benchmark over last 1 year, 3 years, 5 years
and since inception.
 Loads and expenses
 Contact information of Registrar for taking up investor grievances

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  Format of Scheme Information Document (SID)
SCHEME INFORMATION DOCUMENT

NAME OF THE SCHEME

(Type of Scheme - Open /Closed / Interval/
Equity/ Balanced/ Income/ Debt/
Liquid/ETF etc.)

Offer of Units of Rs. -- each for cash (subject to applicable load) during the
New Fund Offer and Continuous offer for Units at NAV based prices

New Fund Offer Opens on: _______

New Fund Offer Closes on: _______
Scheme re-opens on: __________
Name of Mutual Fund:
Name of Asset Management Company:
Name of Trustee Company:
Addresses, Website of the entities:

The particulars of the Scheme have been prepared in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations 1996,
(herein after referred to as SEBI (MF) Regulations) as amended till date,
and filed with SEBI, along with a Due Diligence Certificate from the AMC.
The units being offered for public subscription have not been approved or
recommended by SEBI nor has SEBI certified the accuracy or adequacy of
the Scheme Information Document.

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 The Scheme Information Document sets forth concisely the information
about the scheme that a prospective investor ought to know before
investing. Before investing, investors should also ascertain about any
further changes to this Scheme Information Document after the date of
this Document from the Mutual Fund / Investor Service Centers / Website
/ Distributors or Brokers.

The investors are advised to refer to the Statement of Additional

Information (SAI) for details of ________ Mutual Fund, Tax and Legal issues
and general information on www.__________. (Website address).

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2.4 Understanding Fund distribution and sales practices.

With mutual funds, distributions represent the allocation of capital gains

and dividend or interest income generated by the fund for the investors
periodically during a calendar year.

One common type is the net capital gains distributions that come from
profits on the sale of a mutual fund's holdings. For example, if a stock is
bought for $75 and later sold for $150, the capital gains are $75 minus
the fund's operating expenses. The exact amount of the distribution is
tallied after the subtraction of these operating expenses.

Once dividends and distributions are disbursed, the fund’s share price
declines by the total of the per-share distribution to the fund’s
shareholders. The price falls because the distribution is withdrawn from
the fund’s assets, which decreases the net asset value (NAV).

 Stock and Bond Distributions:

With securities like stocks or bonds, a distribution is a payment of

interest, principal, or dividend by the issuer of the security to the
shareholders or bondholders.

When a corporation earns a profit, it can reinvest the funds in the

business, but may also pay a portion of the profit to shareholders in
the form of a dividend. Sometimes the company offers a dividend
reinvestment plan, where the amount can be applied to buying
additional shares of the stock or fund.

Without a reinvestment plan, the funds flow into the investor's account
as cash.

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  Investment Trust Distributions:

The income generated from an investment trust is awarded to investors,

typically as a monthly or quarterly distribution.

For this reason, distributions function similarly to stock dividends.

However, distributions typically offer higher yields that can be as high
as 10% a year.

The distributions received lower a trust's taxable income and, as a

result, little or no income tax is paid.

 Retirement Account Distributions:

Distributions from a traditional individual retirement account (IRA) can

happen at any time after the creation of the account. Retirement
account distributions fall into two categories.

1. Distributions before age 59½ are subject to an IRS penalty and

ordinary income tax. Many IRA owners may face these fees if they
use the IRA funds to make large purchases or for an emergency
because the funds were untaxed when being deposited into the
account.
2. During or after an individual reaches age 59½, distributions incur
without the penalty. However, taxpayers will still pay tax on the
sums withdrawn at their current tax bracket.

 Roth IRAs also generally require the funds to remain in the account
until age 59½ before distribution.

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  After the account has been in existence for a certain number of
years, account holders may withdraw funds early but will pay
penalty fees if they withdraw a sum greater than their
contributions—if the distribution includes the account's earnings,
in other words.
Other retirement accounts also have age limitations for withdrawals
without penalties.
 Distributions from qualified plans, such as 403(b) accounts and 457
plans, are two examples of such plans. Specific public school
employees, members of religious orders, and other tax-exempt
groups have 403(b) plans. The 457 plans contain deferred salary
contributions and are mainly used by state and local governments.

 Required Distributions From Retirement Plans:

Except for the Roth IRA, all retirement plans mentioned earlier
require the holder to begin withdrawing funds once they reach the
age of 72. The exact amount of this annual required minimum
distribution (RMD) depends on the account holder's age and the
value of funds in the account, as per IRS guidelines.

All distributions from these retirement accounts are taxed based on

the individual's tax bracket at the time of withdrawal. The tax
assessment reflects the fact that contributions to the account were
made with pretax dollars.

Note that only distributions from Both IRAs or Roth 401(k)s can be
taken without income tax being due on them because Both
contributions are made with after-tax dollars—the investor didn't
receive a tax deduction or credit at the time. Further, the Roth

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 accounts do not have the required minimum distributions at any
age.

 Real-Life Example of Distributions

The Fidelity 500 Index Fund (FXAIX), which seeks to duplicate

the performance of the S&P 500, disburses dividend distributions
quarterly (in April, July, October, and December).

For 2020, investors received $2.08 for every share of the fund
they owned. Unless a customer specifies otherwise, Fidelity
automatically reinvests these distributions, increasing the
number of shares of the fund owned.

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2.5 Parameter and criteria for selecting the best mutual funds:

a) Investment Objective Before deciding to invest in mutual funds, you

need to determine your financial goals (long or short term), the duration for
which you want to stay invested, and the appetite to take risks. The extent
to which an investor is ready to bear the risk will reflect on the returns. An
investor must always invest in diversifying the investments in the various
baskets of funds.

 Investments may range from short- to mid- to long-term and hence,

requires a thoughtful approach while choosing one. An investment
objective helps in deciding the macro-level selection of the mutual fund
types. Choosing to invest in long-term or short-term plans, or a mix of
both can have an instrumental impact on your investment decision.

b) Consistency in Performance The potential of any fund is determined by

its consistency maintained in the previous years and how the fund has
managed to be on top and perform well by delivering excellent and
consistent returns despite the benchmark and market cycles faced. The
fund’s three and five-year returns must be checked before concluding to its
consistency.

c) The Outlook for the Economy The economic factors directly impact the
markets, both national and global, which in turn affects the portfolio, thus
affecting the performance of the fund.

The fund manager plays a vital role in making the decisions and picking up
the stocks that will form the investment portfolio. All of these depends on
the economic condition of the country.

 Various factors affect the economy ranging from government decisions

to industrial and market performances. It is a matter of anticipation,
and hence, the most desirable option is to diversify the investments
keeping in mind the short-term and long-term objectives.

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 d) Asset Under Management AUM of a fund is nothing but the fund size.
The size of a fund shows the potential of the fund due to which investors
are investing majorly in that fund over other funds. This increases the fund
exposure, which in turn increases the overall risk. The best and
experienced fund managers generally manage the flagship mutual fund
schemes with high assets under management.

e) Expense Ratio The expense ratio is an essential factor to consider while

choosing a scheme as they are known to take away a substantial chunk
(Slab, Block) of the returns. As per the industry standards, an expense ratio
of 1.5% is a good deal. Higher the AUM, lesser will be the expense ratio.

f) Exit Load The mutual fund schemes are time-bound. In the event of an
early withdrawal from the plan before the maturity period, the investors are
required to pay the exit load.

 Financial needs of individuals are unpredictable, and in case of

emergency, one may be required to withdraw from mutual fund
schemes prematurely to gain liquidity of assets. It is advisable to avoid
plans with stringent exit load and choose plans with least exit load to
reduce its impact on the returns earned.
 The given parameters and criteria for choosing the best mutual fund
schemes to suit one’s investment decisions and objective may help in
selecting the most appropriate schemes to construct a balanced
portfolio. The well-informed choice of plans, when aligned with
investment objectives, may help gain returns over the period.
 Nevertheless, it is a piece of advice worth remembering that mutual
funds are subject to market risks that cannot be overlooked but can
surely be contained to an extent.

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