NiSM – Mutual Fund Distributor Va - Key Points

Chapter 1: Financial Planning and Model Portfolios

§ Financial Planning: Helping the clients to achieve their “financial goals”
§ Financial goal is defined with “Time” and “Money”. For ex: Buying a house worth
Rs.60 Lakhs after 5 years
§ Categorize the financial goals into Immediate term, Near Term, Medium Term and
Long Term
§ Future value of goals can be estimated based on current cost, time to goal and the
expected rate of inflation
• Estimating future value of financial goals done through “Future Value” function.
• FV = PV * (1+r/100)n

§ Financial planning (FP) process (Steps in Financial Planning):

1. Establishing the Client relationship, defining Client-Planner relationship
2. Gathering client financial data and defining financial goals
3. Analyzing and Evaluating client’s financial status
4. Developing and Presenting Financial Planning Recommendation
5. Implementing the financial planning recommendation
6. Monitoring the plan
§ The objective of FP is to ensure the right combination of savings and investment for
meeting financial goals
§ Accumulation phase is the stage when investors are saving money for long term to
build wealth and not dependent on investment income. Accumulation phase of
wealth cycle can be compared to childhood, young unmarried, young married,
married with young children phase of Life cycle
§ An individual who’s few years before retirement is in Transition phase. The individual
would be achieving some of the key financial goals like Children’s higher education,
marriage, buying a bigger house etc.
§ Reaping or Distribution phase is also called as Retirement phase
§ Young investors need lower investment income but higher insurance protection;
Older investors need higher investment income and lower insurance
§ The allocation to growth or income-oriented assets will be determined by wealth
stage of the investor
§ Wealthy investors do not need goal based financial planning but need planning to
manage their wealth
§ Risk profiling seeks to understand the risk appetite of investors to ascertain and
appropriate asset allocation plan
§ Risk appetite depends upon age, accumulated capital, stability of income, number of
earning members and number of dependents
§ A model portfolio is indicative of the ideal asset allocation based on investor profile
and goals
§ Asset allocation: Deciding on how much to invest in Equity, debt, gold and real estate
and allocating the funds between these assets
§ Asset allocation must take correlation of assets into account. For ex: Equity markets
and gold prices are negatively correlated
§ Asset allocation that remains faithful to the investor’s financial goal and risk profile
is called strategic asset allocation
 • Strategic asset allocation is changes when changes in family status of the
individual, change in financial goal or risk scenario etc
• Change in market conditions generally shouldn’t affect strategic asset
allocation
§ Tactical allocation involves including a market view, or expectations about
performance of an asset class, into the asset allocation decision
§ Fixed allocation involves periodic rebalancing of the investor’s portfolio to maintain
the fixed ratio whereas flexible asset allocation does not.

Behavioral biases in investment decision making

§ Confirmation Bias: Tendency to look for additional information that confirms their
already held belief or view. Using new information to confirm their existing views.
§ Familiarity Bias: Investor focuses on the investments which are familiar. This bias
prevents the investors from looking for new/better investment options.
§ Herd Mentality: Follow/invest where everyone is investing
§ Loss Aversion: Investors rather opt to avoid losses. Hold on to loss making
investments and hoping to make profits only from those stocks
§ Overconfidence: Individual’s overconfidence in the decision-making process which
clouds the judgement.
§ Recency bias: Recent positive or negative experiences influences the decision-making
process.

Selecting the Right Investment Product for Investors

§ 4 Assets Classes: Equity, Fixed Income, Gold and Real Estate
§ Real rate of return: Returns generated by the asset class after adjusting inflation
§ Ex: FD rate 8% and inflation 5%. Real rate = (1+ Investment rate) / (1+Inflation) - 1
§ In India historically, physical assets were preferred over financial assets due to their
tangible form
§ Government fixed income saving schemes offers guaranteed returns while equity,
bonds and mutual funds are non-guaranteed investments because they carry market
risk
§ Gold may be held in physical or financial forms. Investment in the financial form is
recommended. Physical gold is considered as true international asset class.
§ Gold ETF is a better investment compared to gold-linked companies’ funds.
§ REMFs are recommended over physical real estate due to limitations of small
investors, liquidity, and concentration
§ Investments in direct equity shares are considered to be risky for small investors.
Exposure to equities through mutual funds reduces risk due to portfolio diversification
and professional fund management
§ Debentures offered to retail investors are secured and listed but liquidity is low
§ Company deposits are unsecured and risky
§ Infrastructure bonds are unsecured and have low liquidity. They are preferred for tax
benefits

§ Public Provident Fund (PPF): One account per individual – original maturity of 15
years – Minimum investment Rs. 500/- p.a and maximum of Rs. 150,000/-
§ Investment in PPF enjoys the benefit of tax deduction u/s 80C along with other
investment options like 5 years Bank FD, NSC, Life Insurance Premium, ELSS schemes,
Home Loan principal etc
§ PPF is preferred for return assurance but is not liquid

§ National Pension Scheme (NPS):

§ Regulated by Pension Fund Regulatory and Development Authority (PFRDA)
§ Permanent Retirement Account Number (PRAN) allotted to the investor upon opening
of account in NPS
§ The NPS portfolio consists of;
• Asset Class E – Equity
 • Asset Class C – Corporate Bonds (carries credit risk)
• Asset Class G – Government Bonds
• Asset Class A – Alternate Asset class (Investment in Mortgage backed securities,
Asset backed securities, Alternate Investment Funds. All these should be regulated
by SEBI)

§ Investors can actively choose – Aggressive Life Style Fund (Equity exposure 75%),
Moderate Life Style Fund (Equity exposure 50%) and Conservative Life Style Fund
(Equity exposure 25%)
§ Auto option in NPS decides the equity exposure in NPS portfolio for investors based
on their age. As the investor’s age increases, the exposure towards equity reduces
§ Investors would have
• Tier 1 Account – Pension. Limited withdrawal facility
• Tier 2 Account – Savings account. Partial withdrawal facility is possible. But Active
Tier 1 account is a necessity

Chapter 2: Concept and Role of a Mutual Fund

§ Investment objective defines the risk-return profile of the mutual fund

§ Unit Capital = No. of units * Face value
§ Face Value of MF units is assumed to be Rs.10/-
§ Value of the investment portfolio changes with a change in market price of the
securities
§ Assets Under Management (AUM) = Total Assets + Current Assets
§ Net Assets = Total assets + Accrued income –Current liabilities –Accrued expenses
§ Net Asset Value = Net assets/total outstanding units
§ If you are investing Rs. 100,000 and the NAV of the fund is Rs. 50 and Face Value is
Rs. 10/-. You will get 2000units (Rs. 100,000 / Rs. 50 per unit). Here Face Value and
Exit load will not make any difference.
§ Mutual funds offer benefits of Diversification, Professional Fund Management, Low
Costs, and Liquidity
§ Investment objective of mutual funds: The investors invest money into mutual funds,
they might have different objectives and end goals in mind. There might be people
who are looking for “Capital Appreciation”, “Regular Income” or “combination of both
Capital Appreciation & Regular Income”.
§ Each MF scheme must have pre-announced Investment Objective.
§ Mutual Funds can offer “Assured Returns” provided there is a financial guarantor

§ The investors can purchase or sell mutual fund units in Open-ended funds at any time
§ The closed-ended funds are listed on stock exchange. Investors can invest in close
ended funds only during NFOs and the fund will be closed after maturity. Interval
funds are closed-ended but become open-ended at specific intervals
§ International funds invest the corpus outside India. Hence exposed to “Foreign
Exchange Risk” and performance risk of the asset class where the money is invested.
§ Types of equity Funds
• Large Cap fund: Top 100 companies based on Market Capitalization
• Mid Cap fund: Next 150 (rank 101-250) companies
• Small Cap fund: Beyond 250 (rank no 251 onwards) companies

§ Large cap index and Large cap funds are considered to be safest and Sectoral funds
are riskiest funds among equity fund category
§ ELSS have a 3-year lock-in and provide tax deduction upto Rs.150,000 u/s 80C

§ Types of Debt Funds

§ Overnight and Liquid funds have the lowest risk of NAV volatility
§ Floating rate funds offer low mark to market risk
§ Gilt funds carry no credit risk
§ Corporate Bond funds and credit risk funds have a higher credit risk and provide
benefit of higher coupon
§ High yield bond funds invest in debt instruments that have lower credit ratings. They
are considered as riskiest funds in the debt fund family
§ Credit risk of a bond is measured by Credit ratings. A bond with lower credit rating
tends to offer higher rate of interest (interest offered by the bond is called as Coupon).
Benchmark for Debt Funds:

§ FMPs have no market/portfolio risk

§ MIP is debt-oriented while Balanced fund is equity-oriented

Hybrid Funds:
§ Balanced fund may have fixed or flexible asset allocation
§ Active funds seek to better the returns over the benchmark
§ International funds may invest in foreign securities or foreign funds
§ ETF transactions are executed on stock exchange. Indian commodity funds invest in
stocks of commodity companies or commodity ETFs
§ Arbitrage Funds takes advantage of price difference of same asset class but in 2
different markets. This strategy generates “Risk-free profit” , hence the returns can
be compared to Liquid Funds
§ Arbitrage funds are exposed to “Basis Risk”. These funds are safest in Hybrid Fund
family
Benchmark for Hybrid Funds:

§ Disadvantages of Mutual Funds

• Too many schemes to choose from
• Non-customization
• No control over costs
Chapter 3: Legal Structure of Mutual Funds in India

§ Mutual Funds in India are formed as “Trusts” – Governed by Indian Trusts Act 1882
§ Three-tier structure of Sponsor-Trust-Asset Management Company where sponsor
(Sponsor could be one or more) is the promoter
§ SEBI issues the license to start a MF and Sponsor applies for the license with SEBI
§ Sponsor appoints the Board of Trustees and Board of Directors of the AMC
§ The operations of MF are governed by Trust Deed. The Trust Deed is executed
between Sponsors and Trustees.
§ Investment Management Agreement: Entered between Trustees and Asset
Management Company (AMC)

§ Sponsor;
• A sponsor should have min 5 years of experience in financial services industry
• Positive net-worth for the preceding 5 years
• The sponsor should have earned profit (PAT) in at least 3 of the last 5 years
• The sponsor needs to contribute 40% of the net worth of the AMC
• Sponsors have to contribute a min Rs. 50 Lakhs or 1% of the Corpus raised in NFO
as initial contribution to the corpus of the mutual fund (this doesn’t apply for close
ended funds)

§ Trustee;
• Protector of investor’s interest
• 2/3rd of the trustee should be independent
• The trustee company should have minimum 4 trustees
§ Prior approval to be taken from SEBI before appointing the Trustees
§ Investors in the mutual fund are beneficiaries of the trust
§ Board of trustees oversee the working of the AMC and management of the mutual
fund
§ Asset Management Company;
• AMC is the investment manager of the mutual fund companies
• Should have a net worth of at least Rs. 50cr at all times
• 50% of Directors of the AMC should be independent
• Day to day management of the schemes handled by AMC
§ Changes in the controlling interest can be only made after prior approval from SEBI
and trustees. Communication of such to be intimated to all unit holders, an
advertisement is given in one English daily national newspaper and in a regional
newspaper where the head office of the AMC is located.
§ All the constituents (except) of Mutual Funds are appointed by AMC with the
approval of trustees
§ Custodian holds securities and cash and is appointed by the Trustees. Custodian
settles all the transactions on behalf of mutual fund. Custodian tracks Corporate
Actions likes dividends, stock split, bonuses etc for the fund.
§ Custodial Agreement entered between “Trustees and the custodian” and Sponsor
cannot provide custodial services to its own AMC
§ Mutual fund constituents (except custodians) are appointed by the AMC with the
approval of the trustees
§ All mutual fund constituents must be registered with SEBI
§ R&T agent maintains investor records, services customers, handles the processing of
purchase and redemption transactions of the investors. This can be done in-house
§ Fund accountant calculates NAV, and it is not mandatory to outsource the role of a
fund accountant. Fund Accountants need not register with SEBI.
§ Auditors of the AMC (company) must be different from the auditors of the mutual
fund schemes
§ Distributors enable the reach of mutual fund products across geographical locations.
Sponsor can be distributor for the AMC promoted and Sub-brokers are appointed by
distributors
 § Sponsor can be a distributor for their own AMCs
§ KYC Registration Agencies (KRAs): Carry out unified KYC formalities for securities
markets
§ Credit Rating Agencies
§ Depositories (NSDL & CDSL) holds securities in dematerialized or electronic form.
Depository participants helps in reaching out to clients.

Chapter 4: Legal and Regulatory Framework

§ Indian mutual funds are supervised and regulated by SEBI (Mutual Funds) Regulations
Act, 1996. AMC and Trustee company are governed by the Companies Act and Indian
Trusts Act respectively
§ SEBI issues guidelines and framework for advertisements by MFs. Celebrity
endorsement of mutual funds at industry level (to create awareness) but not for
promoting individual schemes or AMCs
§ RBI regulates Money market and Foreign exchange market. MFs will have to adhere
to the guidelines with respect to investments in money market, done by Qualified
Foreign Investors (QFIs) and Indian Mutual Funds investing outside India etc
§ RBI regulates sponsors of the Bank promoted mutual funds
§ Mutual funds would also have to adhere to the listing guidelines laid down by Stock
Exchanges since the MF schemes are listed and traded in there
§ Stock Exchanges are the Self-Regulatory Organizations (SROs)
§ Association of Mutual Funds in India (AMFI), is an industry body of AMCs in India in
order to promote the interests of the mutual fund industry and AMFI is not an SRO
§ AMFI issues AMFI Code of Ethics (ACE) and AMFI Guidelines and Norms for
Intermediaries (AGNI)
§ ACE and AGNI have been recommended by AMFI and mandated by SEBI
§ ACE is specified in 5th Schedule of SEBIs MF regulation act
§ Investor can change the distributor/opt for Direct option without NOC from existing
distributor
§ A Mutual Fund NFO
• Remains open for a maximum of 15 days
• The new scheme should allot the units within 5 days of closure of the NFO
• Account statement to be sent to the investors within 5 days
§ ELSS and RGESS Fund NFO could be open for 30 days
§ The redemption proceeds to be sent within 10 days
§ Dividend warrant to be sent within 30 days
§ In case of delay in redemption proceeds or Dividend warrant, the AMC will have to pay 15%
penal interest
§ The interest cannot be charged to the scheme. It will have to be borne by the AMC
§ Dormant investors receive the updated account statement once in 6 months
§ Consolidated Account Statement (CAS) to be sent to the investors monthly (the deadline is
the statement for the current month sent to the investors by 10th of next month)
§ NAVs to be disclosed on AMFI website by 9 pm every business day and Fund of Funds to
declare the NAV by 10 am next business day
§ NAV is rounded off to 2 decimals for all schemes and to 4 decimals for liquid schemes
§ NAV for liquid funds is computed every calendar day
§ Mutual funds to disclose detailed Portfolio in the prescribed format every 6 months
§ Voluntary portfolio disclosure to unit holders should be done every month through Factsheet
§ Debt fund shouldn’t invest more than 10% of net assets on securities issued by single issuer
and shouldn’t invest more than 15% of net assets in Bank deposits
§ Equity fund shouldn’t invest more than 10% of net assets in equity shares of one company
§ Scheme-wise annual report to be mailed to all unitholders
§ Unit certificate only provides number of units held and is non-transferable
§ The investor cannot sue any one for non-performance of the fund
§ Cannot sue the trust because it’s a notional entity
§ Termination or winding up of MF Schemes/AMCs by unit holders needs resolution by unit
holders holding at least 75% of assets in the scheme
§ Termination or winding up by trustees needs consent of unit holders
§ Change in Sponsor or the AMC must provide option to redeem without exit load
 § Additional benchmark for MF schemes

§ In case of unclaimed funds.

• If the investor claims the money within 3 years, in such case AMC will have to pay based
on current prevailing NAV
• If the investor claims the money after 3 years, the payment is based on the NAV at the
end of 3rd year
Chapter 5: Scheme Related Information (Offer Document)
§ The mutual fund scheme is offered through a legal document called “Offer Document”
§ The document is filed with SEBI for approval
§ If SEBI doesn’t revert with modifications within 21 days from filing the document, the
AMC can launch the scheme in the market
§ SEBI doesn’t approve or dis-approve the scheme documents; it just gives its
observation. The Scheme documents are just “Vetted” by SEBI, not Approved
§ Offer Document consists of the details of
• Sponsor
• Trustees
• AMC: Details of the key personnel – constituents – condensed financial
information of schemes launched in last 3 financial years
• Scheme: Investment objective – Risk factors – Fees and expenses
§ The Offer Document has been split into 2 parts: Statement of Additional Information
(SAI) and Scheme Information Document (SID)
§ The information like details of Sponsor, Trustees, AMC etc is common for all the
schemes and have been put under one document called as SAI
§ Last 3 years performance of existing schemes of the AMC is given in SAI
§ Document specific to the scheme related information is called as SID
§ Investment objective of the fund, eligible investors, Risk factors and Riskometer, Asset
Allocation, Benchmark of the fund etc are the details which are specific to the fund.
These are covered in SID
§ Every time a new scheme is launched, AMC will have to publish only SID and submit
the same with SEBI for approval for the fund
§ One common SAI is printed for all schemes offered by a mutual fund
§ SAI is part of SID
§ Both SAI and SID should be updated every financial year (within 3 months from the
end of the financial year)

§ Updation of SID:
• If the scheme is launched in the first half of the financial year, then the first update
of the SID is to be done within 3 months of the end of financial year
For ex: If the scheme is launch in July 2018, then the first update is to be done
before the end of June 2019

• If the scheme is launched in the 2nd half of the financial year, then the first update
of the SID is to be done within 3 months of the end of next financial year
For ex: If the scheme is launch in Oct 2018, then the first update is to be done
before the end of June 2020

§ Key Information Memorandum (KIM): The condensed version of the offer document
§ KIM would consist of the information of AMC, MF, trustees, fund manager, Issue dates
– opening & closing dates, Investment objective of the scheme etc
§ MF application is found attached to KIM
§ Even KIM needs to be revised every financial year

§ Half yearly unaudited financial results of the AMC to be published. Advertised in one
English national daily and local language where the head office of the fund located
§ Annual reports to be published in AMC website and advertised
§ Factsheet of a mutual fund is not a mandatory document
Chapter 6: Fund Distribution and Channel Management Practices

§ Types of Investors:

Mutual Fund investors

- Individuals & HUF Non - Individual Investors

- Non resident Indians (NRIs) - Companies, partnership firms,
Banks, PFs etc
- Persons of India Origin (PIOs)
- Trusts and charitable institutions
- Foreign Nationals
- Qualified Foreign Investors (QFIs)

§ Individuals, HUFs, Companies, Partnerships, Trusts, Mutual funds, insurance

companies, banks, NRIs, FIIs, PIOs are eligible to invest in mutual funds
§ Foreign nationals (QFI – Qualified Foreign Investors) are allowed to invest in mutual
funds in India
§ Overseas Corporate Bodies are not eligible
§ Retail investors may be individuals, NRIs, minors, HNIs
§ Institutional investors require charter document, Board resolution and signatures by
authorized signatories to invest in mutual funds
§ Along with the regular set of documents, Institutional investors would also have to
submit last 2 years financial statements as per of KYC requirement

The traditional distribution channel by Mutual Fund:

Mutual Funds

Non banking
Independent
Banks finance
financal advisors
companies

§ A distributor can sell the products of multiple mutual funds; there is no restriction on
the distributor to sell their choice of funds
§ Institutional distributors provide benefit of a large network of clients and branches,
research and geographical reach
§ Other than conventional distribution platform, the eligible investors can invest
through the following two routes:

• Online Mutual Fund Distribution- Online investments, view current holdings at

latest NAV and conduct sale/re-purchase transactions
• Distribution through Stock Exchanges- Stock exchange brokers conduct mutual
fund transactions through their trading platforms
• Mutual funds are traded on stock exchange platforms through brokers between 9am and
3pm
§ Becoming a distributor;
• Individual distributors and employees of institutional distributors have to clear the
NISM MFD – series 5a certification examination
 • Individual distributors need to obtain the AMFI Registration Number (ARN)
• Institutions in the distribution business also need to get registered with AMFI &
complete KYD formalities
• All the employees of distributors should have ARN number and employ Unique
Identification Number (EUIN) from AMFI

§ Know Your Distributor (KYD): To strengthen the registration procedure of

distributors and to ensure correctness of information in the ARN registration
application, AMFI has introduced the KYD process. This helps to verify the details of
the distributor.
§ Commission to Distributors: Distributors earn only commission, not any other type of
remuneration for selling mutual funds.
§ No upfront commission is paid to the distributor at the time of investment
§ A distributor earns only trail commission. Trail commission is paid by the AMC till the
time investments are held and paid on monthly basis. The trail commission is
calculated based on the AUM (market value of the portfolio).
§ Distributors must follow ACE, AGNI and guidelines prescribed by the AMC

§ Direct and Regular Plan: Direct plan is an option available for investors who are
looking at investing into a mutual fund scheme directly without taking assistance
from distributors. Direct plan will have lower expense ratio compared to “Regular
Plan”. Regular Plan would be opted if the investments are done through a Distributor
§ Since there is no commission payout in this case, the overall expense ratio for this
route would be less. Hence have higher returns
§ If the ARN number is not mentioned in the MF Application form, such application
form would be treated as Direct route application
 § MF Utilities (MFU) is a transaction aggregating platform that connects investors, RTAs,
distributors, banks, AMCs and others
§ Investors who register on the MFU are allotted a Common Account Number
(CAN)

Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of Units
§ Valuing each security in the investment portfolio of the scheme at its “Current
Market Value” is called as “Marking to Market”
§ Accounting: NAV, Loads, FRE, Cut off time guidelines and Time stamping
§ Computing NAV
§ Loads: MF schemes cannot charge any entry load to the investors. Exit load and
Contingent Deferred Sales Charge (CDSC) have to be credited back to the scheme
§ Exit load reduces the re-purchase price to the investor
§ Fund Running Expenses (FRE) or Total Expenses Ratio (TER): The recurring
expenses are charged to the scheme on a daily basis. The expenses cover the
expenses of all the key constituents.
§ The expenses of the scheme reduce as size of the fund (AUM) increases. The fund
expenses is negatively correlated with corpus of the fund
§ Any expense incurred over and above the maximum prescribed limits has to be
borne by the AMC
§ Maximum expense ratio charged by Equity fund is 2.25% and Debt oriented funds
the maximum allowed expense ratio (TER – Total Expense Ratio) is 2.00%
§ The maximum expense ratio (TER) allowed for Liquid, Index and Exchange Traded
Funds is 1%
§ Fines & penalties, Fund Accounting fees and General administration expenses of
the AMC cannot be charged to the scheme as expenses
§ The standard cut off for mutual fund transaction is 3.00pm
§ There are 2 exceptions to this rule;
• In case of purchase in Overnight funds and Liquid funds, if the investor has
transferred the money online before 1.30pm, previous day NAV would be
allotted
• In case investments are done in any type of funds through Cheque the
applicable NAV would be the date of cheque realization
§ Time stamp is recorded for all transactions. Online and stock exchange transactions
are time stamped using server/system time
§ The application form for all transactions, specifically financial transactions, must be
time stamped. The location code, machine identifier, date, time (hh:mm) and
running serial number are generated in every time stamp. The serial number is a
continuous running serial number
§ For each financial transaction there are three impressions under one-time stamping

§ Valuations:
§ Dividends can be given only from distributable surplus. Distributable surplus
includes realized gains, accrued income and unrealized losses but does not include
unrealized gains
§ Accounts of each mutual fund scheme have to be maintained separately
§ Average cost is used to determine holding cost
§ Equity securities are valued based on last traded price
§ Debt securities with residual maturity more than 31 days are valued on weighted
average price if traded or valued using CRISIL yield matrix. Debt securities with
residual maturity less than 31 days valued on amortization basis
Chapter 8: Taxation
§ Income earned by Mutual fund in its portfolio is exempt from tax (for example, interest
earned by MF portfolio or capital gains by selling stocks is tax free at portfolio level)
§ Investors would earn – “Dividends” and “Capital Gains”
§ A fund with more than 65% of average net assets invested in direct equity stocks (listed
in India) and equity related instruments are treated as equity funds for the purpose of
taxation. All types of Equity Funds, Equity Hybrid funds, Dynamic Asset Allocation Funds,
Arbitrage funds are treated as equity funds
§ Securities Transaction Tax (STT) is applicable only on redemption of equity mutual fund
units. The applicable rate is @0.001%
§ Stamp Duty on MF units – Levy of stamp duty on the amount invested @0.005% -
applicable at the time of issuance of units

§ Dividends: Dividends are taxable in the hands of investors under the head “income from
other sources”
§ There is no tax deducted by the Mutual Fund (at source) if the value of the dividend is less
than Rs. 5000/-. More than this 10% TDS is deducted
§ Capital Gains:
 § Long Term Capital Gains from equity funds up to Rs.100,000/- p.a. is exempted from tax. 10%
LTCG is applicable in excess of Rs.1 Lakh
§ Capital Loss can be set off only against ‘Capital Gains’ not against any other heads of income
§ STCL can be set off against LTCG/STCG
§ LTCL can be set off only against LTCG

Chapter 9: Investor Services

§ A MF application can have 3 joint holders. Once the folio is created joint holders can neither
be added or deleted, unless death of the joint holder
§ Investment done in the name of minor cannot have Joint Holders
§ MF application can have nomination. 3 nominees are allowed, and investment allocation
could be among the nominees
§ An investor can hold multiple investments from a Mutual Fund in a single folio
§ Application form is used for fresh purchase whereas transaction slip is used for additional
purchase
§ KYC is essential for all mutual fund transactions
§ PAN is mandatory for all investors (Exception: Micro SIP-annual investment in SIP less than
Rs.50000)
§ Micro SIP exemption from PAN is applicable only for Individual (proprietor, NRIs included)
investors, not available for HUF and other non-individual investors
§ Accepted mode of investments – Cheque, Demand draft, Online transfer and Cash
§ Mutual funds accept investments in cash up to Rs. 50,000/- p.a. per asset management
§ MFs can accept e-wallets as mode of payment upto the tune of Rs. 50,000/- provided the
funds are loaded thru bank account/debit card. Funds loaded via credit card and cash backs
cannot be used for investing in Mutual Funds
§ Payment modes for SIP-Postdated Cheque, Electronic clearing service and standing
instruction for direct transfer
§ Third party payments are not allowed. 3 exceptions to the rule.
• Payment by parent/grandparents/related persons on behalf of minors upto the tune of Rs.
50,000/-
• Employer making payment on behalf of employees
• Payment by AMC to its empaneled distributors
§ NRIs can invest in mutual funds in India. Two types of Account Non-Resident Ordinary (NROs)
and Non-Resident External (NRE) accounts

§ NRE accounts are meant for transfer of funds earned in foreign currency outside India.
Investments into MFs can be made using NRE account and money can be transferred back
(repatriated) at redemption
§ NRO accounts are meant for income earned in Indian rupee accounts. The redemption
proceeds are not non -repatriable
§ FCNR accounts are used for payment remitted from abroad, FIRC is used as proof
§ NRIs are subject to Tax Deduction at Source (TDS) while Redeeming from MFs
§ FIIs use non-resident rupee accounts for investments in India
§ Appreciation is reflected in Growth option; dividend is paid out in dividend pay-out option
and additional units are credited using dividend proceeds in re-investment option
§ Instant Access Facility (IAF): applicable for Liquid Funds. IAF credit redemption proceeds in
bank account of the investor on the same day. The limit is Rs. 50,000 or 90% of the latest
value of investment scheme, whichever is lower
§ Government of India authorised the Central Registry of Securitisation and Asset
Reconstruction and Security Interest of India (CERSAI)

§ Switch options:
§ Systematic Investment Plans (SIPs): Helps investors to invest regularly on a fixed date. Since
the MF units are purchased at different market levels, SIP offers the benefit of “Rupee Cost
Averaging”
§ Applicable NAV for SIP is NAV on installment date
 § Systematic Withdrawal Plan (SWP) is used to systematically withdraw money from a
stipulated scheme either to book periodic profits or to generate regular income
§ Systematic Transfer Plan (STP) helps in portfolio re-balancing-transfer from source scheme
and investment into destination scheme. STP could be considered as combination of SWP +
SIP
§ A switch is sale and re-purchase transaction rolled into one
§ Switch is carried out by R&T agent in investor records
§ Mutual funds can be pledged for borrowing funds

Chapter 10: Risk, Return and Performance of Funds

§ Analyzing Equity Shares:

§ Fundamental Analysis uses financial information to evaluate a stock
§ Fundamental analysis is the study of EIC. EIC is Economy-Industry-Company analysis
§ Top down approach is study starting from Economy level and bottom up approach
is starting the study from Company level
§ Technical analysis: Uses Prices and Volume of the stocks as predictive tool

§ PE ratio and Dividend Yield:

§ PE Ratio = Market price of the share /Earnings per share
§ This ratio tells us whether the stock is overvalued or undervalued when compared to
peer group or industry. For ex. If a stock’s current market price per share is Rs. 200/-
and Earning Per Share is Rs.20/- in such case.

P/E ratio = Market Price per share Rs. 200

Earnings per share (EPS) Rs. 20
§ The PE ratio is 10X, which means to earn one rupee of EPS, the investor will have to
invest Rs.10/- or at present market is paying Rs. 10/- to earn Re.1/-. When compared
if a stock’s PE is less than the peer group it is considered to be undervalued and
expenses when a particular stock’s PE is higher than the industry average
§ A “Value Style” investor looks for stocks which are relatively undervalued compared
to the peer group. One of the parameters to look for intrinsic value is PE ratio. Value
style investors seek low PE stocks.
§ “Growth style” investors invest in the stocks of companies that are likely to grow
much faster than the market even though the stocks are relatively expensive.
Investors prefer keeping these stocks in their portfolio, but it tends to decline more in
times of market correction
§ Dividend Yield: This ratio measures the dividend payouts received from the company
as a percentage of each rupee invested in the share. If a company has declared Rs. 5/-
as dividend and its current market price per share is Rs. 100, in that case;

Dividend Yield = Dividend per share = Rs. 5 Dividend yield is 5%

Market Price per share Rs. 100

§ High dividend yield is due to high payout and low market risk which is an ideal Scenario
for conservative investors.
§ PBV Ratio = Market price / Book value per share

§ Measuring the Performance of Equity Mutual Funds

§ CAGR: Compounded Annualized Growth Rate
§ Alpha: Jenson’s Alpha measures the excess returns generated by the fund over and
above its expected rate of returns

§ Understanding the performance of Debt Funds:

§ Bond’s total return consists of accrual income and capital gains/losses. Higher the
modified duration of a bond, higher the interest rate sensitivity of a bond
§ Fund manager alters strategy based on interest rate view
§ Risk in debt funds: Credit Risk and Interest Rate Risk
§ Credit Risk: Risk of default is called as credit risk. Credit risk is measured by Credit
ratings. As the credit rating starts going down, the interest offered by these bonds
increases. A high yield debt fund would invest into bonds with relatively lower credit
rating, hence generating higher returns.

§ Interest rate risk: In a Debt MF scheme, when a fund manager buys a bond, it is not
necessary that the bond should be held till maturity. The fund manager can sell the
bond before its maturity in secondary market.
 When the bonds are issued, they are issued at a specific Face Value and Coupon rate
which remains same till the maturity of the bond. But interest rates in the market
keep fluctuating at regular intervals. In such cases;
o When the interest rate in the market goes up, the market price of the bond
goes down.
o When the interest rate in the market goes down, the market price of the bond
goes up.

§ Other Parameters:
§ Mutual funds manage market risks through diversification
§ Money market securities/large cap stocks help in ensuring sufficient liquidity
§ Deterioration of the credit quality will result in falling prices and net asset values
§ Choice of a benchmark depends on fund objectives and the asset classes in which it
invests
§ Tracking error measures consistency of returns

Chapter 11: Mutual Fund Scheme Performance

§ An equity fund with a consistent performance over long term, lower cash levels, lower
portfolio turnover ratio and not a large size will be preferred
§ Large cap funds are relatively less risky compared to Mid & Small Cap funds
§ Thematic and Sectoral funds are concentrated and risky. Therefore, must be chosen
tactically
§ Higher the portfolio turnover ratio, greater the frequency of trading, and lower the
average holding period
§ An actively managed (regular Large cap, mid cap funds etc) fund is riskier than a
passive fund (Index funds and ETFs)
§ Dividend yield funds are less risky, compared to growth-oriented funds. Higher
dividend yield fund follows Value strategy considered to be less risky
§ The index used is “Total Return Index (TRI)” not Price Return Index (PRI)
§ In a bullish market, growth funds outperform; in a bearish market, value funds
outperform
§ Higher the average maturity and modified duration of a debt fund, greater the
interest rate risk of the fund
§ Expense ratio is one of the key parameters considered in selecting debt funds
§ Performance of debt funds is typically evaluated for periods from three months to one
year
§ Performance of a hybrid fund depends on the allocation to asset classes and changes
to this allocation