NISM Mutual Fund Module

Importance of this session.

� Mutual fund is an important financial product.

� Learning will help us sell this product in a better way.

� NISM certification is a must for Financial planners, who need to sell Mutual Funds.

� Exam consists of 100 Questions, each carrying one mark.

� Negative mark – 0.25%

� Pass – 50%

� Duration – 2 hrs

Concept & Role of a Mutual Fund

Mutual Fund

� A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

� The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

� The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them.

� Investors are Beneficial Owners of MF.

� A MF Invests in Marketable Securities.

Mutual Fund Operation Flow Chart

Advantages of Mutual Funds to Investors

� Portfolio Diversification

� Professional management

� Reduction in risk

� Reduction in transaction cost (Economies of Scale)

� Liquidity – Highly Liquid than Shares.

� Convenience and flexibility

� Tax benefits

Drawbacks of Mutual Funds

� Selecting a Scheme from over 800 Schemes – Choice Overload

� No tailor-made portfolios or lack of portfolio customization

Types of Funds

Open ended funds

� Open ended funds are ones that sell & repurchase units at all times.

� Units are Issued and Redeemed by AMC

� Repurchase – Surrender of Units. Also called as Redemption

Close ended funds

� Close ended funds are one that make a one time sale of units. After the NFO CEF’s do not let the investors buy directly from the fund.

� To provide liquidity to the investors,

1. these funds are traded in the stock markets as per Listing Agreement with Exchange

2. Interval Scheme – Combination of Closed and Open Ended. Open during an Interval.

� The unit capital of the scheme remains stable

Open Ended & Close Ended Funds

Based on Schemes / Investment Philosophy

� Equity Schemes

High Risk – High returns

Invests minimum 65% of Corpus in Indian Equity

� Debt Mutual Funds

Risk is low. Alternative to Post office and Bank Deposits.

GILT Fund, Money Market Fund, Income, Medium/Short term funds.

� Balanced Schemes

Invests in both Equity and Debt.

Equity Oriented and Debt Oriented Balanced Funds are available.

MIP, Pension Plan, Children's Plan are Debt oriented Balanced Funds.

� By nature of investment objective

Growth funds invest for medium to long term capital appreciation.

Value funds invest in equities that are currently under valued, & whose value might be unlocked in future.

Types of Equity Schemes

� Diversified Equity – Invest Across Sectors & Across Companies

� Sector Funds /Thematic Funds

Invests only in a Particular Sector (Reliance Banking)

Invest based on a theme (Reliance Infrastructure Fund)

Carry the highest level of risk

� ELSS Schemes (Equity Linked Saving Schemes)

Sec 80C benefit upto Rs 1 Lakh. Min – Rs 500/-. Max – No limit.

Dividends and Maturity are Tax Free

Lockin Period of 3 yrs.

� Equity Income or Dividend Yield Schemes

Invests in High Dividend Yield Companies

Share Prices of such companies Fluctuate less and hence the NAV of such schemes. Example : UTI Dividend Yield Fund

� Arbitrage FundsTake Contrary Positions in different markets

Ex: Buying a Share in NSE & Selling the same in BSE

Invest in Futures and Options (Derivatives)

� Index Funds or Passive FundsFollows Passive Style of Investment. Low Cost.

Invests in Underlying Index Stocks as per the Weightage.

Fund Manager has no role in deciding on investments.

These funds are not designed to Outperform the Index

Low Running Cost. Performance tends to mirror the particular index.

Tracking Error – Index return – Index Fund return

� Active FundsFund Manager has an active role in Investment decision

Designed to Outperform the Market

High Running Cost

Types of Equity Schemes

� Diversified Debt Funds or Income Funds

Invest to generate regular income, rather than capital appreciation.

Invest in all the type of Debt Securities (both Gov bonds & Pvt Co Debentures)

� Gilt Funds

Invests in Gov Sec & T-Bills. No Credit / Default risk as issued by government.

Dated Securities – Gov Securities with Maturity Period greater than a year.

T-Bills or Treasury Bills are G-Sec with less than one year maturity.

� Fixed Maturity Plan / Fixed Term Plan.

A Closed End Debt Scheme investing in Predefined Investments.

Try to achieve the indicative Yield.

Invests in Sec that Matures along with the term of the Plan.

Alternative to Bank FD

fund manager has little ongoing role in deciding on the investment options

� Floating Rate Funds

Invest in Floating Rate Debt Securities

The NAVs of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest.

Types of Debt Schemes

� Junk Bond Schemes or High Yield Bond Schemes

Invest in Companies that are of poor credit quality.

Invest in Debentures of High Coupon rates.

Risky avenue

� Money Market or liquid funds.

Money Market is a place for short term borrowing and lending.

Used for Working Capital Requirement.

Call Money/Notice Money,T-Bills, Certificate of Deposits issued by SCB, Commercial Paper issued by Corporate etc. are money market instruments.

Safest of all MF investments.

Invest mainly in securities of short term (less than 91 days of maturity)

Highly Liquid. Invests in Money Market Securities

Reliance Liquid Fund Treasury Plan

� FOF – Fund Of Fund Invest in other Mutual Fund Schemes.

Types of Debt Schemes

� Monthly Income Plan (not a guaranteed plan)

seeks to declare a dividend every month though not guaranteed.

Mostly 80% in Debt and 20% in Equity

Flexible Asset Allocation for fund manager

Ex : Reliance Monthly Income Plan

� Capital Protected Schemes

Closed End Schemes - ensure that investors get their principal back

invest in Zero Coupon G-Sec which mature along with the scheme

Invests some portion in Equity to give better returns.

Capital Protection Oriented Schemes – Instead of Investing in Zero Coupon G-Sec, they generally invest in Good Quality Debentures.

Capital Protection can also be offered by a Guarantor.

Types of Hybrid / Balanced Schemes

� ETF – Exchange Traded Funds

Open Ended Funds

Market Maker offers Buy and Sell Quote (Provides Liquidity)

Traded in Stock Exchange

Nifty Bees, Liquid Bees etc are Examples

� Gold Funds

GOLD ETF – invests in Physical Gold

GOLD Sector Funds – Invests in the fund will invest in shares of companies engaged in gold mining and processing - NAV of these funds do not closely mirror gold prices

� Real Estate Funds

� Commodity Funds

Invest in Commodities.

Commodity ETF are not available in INIDA

Commodity Sector Funds are available – SBI Magnum Comma

� International Funds

Collects money in India (Feeder Fund)

Invests money in Foreign Mutual Fund Schemes (Host Funds)

Miscellaneous Schemes

Risk-Return

Matrix

Charges

Charges� Entry Load

Difference between the Sale Price and NAV is called ENTRY LOAD

W.e.f Aug 2009, ENTRY Load has been banned

� Exit Load

Difference between NAV and Repurchase Price.

Called as Contingent Deferred Sales Charge (CDSC)

Varies with Holding period of investors. Longer the holding period lower the CDSC.

Exit loads/ CDSC in excess of 1% have to be credited back to the scheme

Needs to be same for all Unit Holders of a scheme.

� Initial Issue Expenses – Deferred Load

Expenses incurred during launch of fund.

Initial expenses should not exceed 6% of the Corpus raised during the NFO.

AMCs need to bear the initial issue expenses now. So, deferred load is not applicable for newer schemes.

� Investment Management / Asset Management /Fund Management Fee

A fee charged for managing Investors funds. It is the business revenue of a MF.

Cannot be charged for funds parked in Short Term Deposits of Commercial banks by Liquid Funds / Debt Funds.

Cannot be charged for AMCs own investment in a scheme

� Recurring expenses - Expenses for an On going fund.

Fees of various service providers, such as Trustees, AMC,

Registrar & Transfer Agents, Custodian, & Auditor

Selling expenses including scheme advertising & commission to the distributors

Expenses on investor communication, account statements, dividend / redemption cheques / warrants

Listing fees and Depository fees, Service tax etc.

� Expenses that cannot be charged to the schemes

Penalties, Interest on delayed payment to Unit Holders

Legal,Marketing,Publication & other expenses not attributable to any scheme

Expenses on General Management, General administration etc

Software development expenses, depreciation on fixed assets

Other expenses prohibited by SEBI from time to time.

� Recurring Expenses – Limits

Limit on Expenses Equity fund Other than Equity

Net assets % of charge

First 100 crores 2.50% 2.25%

next 300 crores 2.25% 2.00%

next 300 crores 2.00% 1.75%

>700 crores 1.75% 1.50%

� For FOF the total expenses should not exceed 0.75%

� Recurring Expenses includes Fund Management Fee alsoMaximum Expenses

Rapid Fire

� The number of mutual fund schemes in India is about:

100

800

2000

� Open-ended schemes offer exit option through a stock exchange

True

False

� Sector funds invest in a diverse range of sectors

True

False

� High yield bond schemes invest in junk bonds

True

False

� Investment objective is closely linked to

Scheme

Option

Plan

Rapid Fire

� A close-ended mutual fund has a fixed

NAV

Unit Capital

Rate of Return

� An open ended Mutual fund is one that has

An option to invest in any kind of security

Units available for sales and purchase at all times

An upper limit on its NAV

A fixed fund size

� _________ was the year SEBI Regulations for Mutual Funds was formulated.

1992

1993

1996

� An investor in need of regular income should not select

A bank deposit

a debt fund

an equity growth fund

� Debt Funds target

Low risk and stable income

Protection of principle

Low growth with risk

Long term capital appreciation

� Excess distribution expenses are to be borne by the

AMC

Unit holders

SEBI

AMFI

� Which of the following is not a benefit from a Mutual Fund?

Investor is able to diversify risk

Investor has custody of securities where fund invests

Investor can save costs

Professional Management of money

� An investor asks you in what order he should list the following schemes, going from the scheme with the least risk to the one with the highest risk.

� 1. A Balanced Fund,

� 2. A Stock Index Fund

� 3. A liquid/ Money Fund,

� 4. A Pharma sector fund

1,2,3,4

3,1,2,4

2,3,1,4

� Charge to an investor at the time he redeems his units from the fund is known as

Repurchase load.

Redemption weight.

Exit load.

� Contingent Deferred Sales Charge (CDSC).

is higher for investors who stay invested in the scheme longer

is lower for investors who stay invested in the scheme longer.

Is the same for all investors irrespective of how long they stay invested.

Is not allowed to be charged to mutual fund investors in India.

Fund Structure & Constituents

Constituents of a Mutual Fund

� Sponsor

� Trustees

� Asset Management Company

� Custodian

� R & T Agent

� Distributors

� Bankers

� MF in India is a 3-Tier Structure consisting of Sponsor, Trustee and AMC.

Sponsor

� He is the promoter of a MF and gets the fund registered with SEBI.

� A sponsor will form a trust & appoint a board of trustees with SEBI approval.

� minimum 40% share holding in the capital of the AMC

� Financial Services Business for past 5 years prior to the registration.

� Positive net worth in last 5 yrs.

� Profit making in 3 out of last 5 yrs including 5th Year.

Mutual funds as a Trust

� Mutual fund is a pass though vehicle. MF in India – Trust form.

� Investors or unit holders are beneficial owners of the investments held by the trust. Trust is the registered owner.

� Acts as protector of unit holders money. Appoint AMC for managing funds.

� Min – 4 Trustees. 2/3rd Trustees must be independent.

� Signs Trust deed with SPONSOR

Asset Management Company

� Acts as an investment manager of the trust. It’s a Pvt Ltd. Co.

� Net worth of Rs. 10 crores at all times.

� 50% of directors on the AMC board are independent.

� An AMC cannot invest in its own schemes, unless the intention to invest is disclosed in the Offer Document

� The appointment of an AMC can be terminated by a majority of thetrustees, or by 75% of the Unit-holders (Subject to SEBI Approval)

� Prior Approval of Trustee is required for appointing Board of Directors of AMC

Custodian & Depositories.

� A custodian has custody of the assets of the fund & is appointed by the board of trustees

� custodian needs to accept & give delivery of securities for the purchase and sale transactions of the various schemes of the fund – Clearing & Settlement

� Sponsor & Custodian cant be the same. Custodian must be Independent

� The SEBI regulations provide that if the sponsor or its associates control 50% or more of the shares of a custodian, or if 50% or more of the directors of a custodian represent the interest of the sponsor or its associates, then that custodian cannot be appointed for the mutual fund operation

� Have to be registered with SEBI

Auditors

� Scheme Auditor & AMC Auditor are different

� Scheme Auditor appointed by Trustee, AMC auditor by AMC.

Registrars & transfer agents - RTA.

� RTA appointed by AMC maintains investors records.

� Investor Service Centres (ISCs), which perform a useful role in handling the documentation of investors are offices of R&T.

� It is not compulsory to appoint a RTA. The AMC can choose to handle this activity in-house (Franklin)

Fund Accountants

� performs the role of calculating the NAV by collecting information about the assets and liabilities of each scheme

� The AMC can either handle this activity in-house, or engage a service provider

Rapid Fire

� The assets of the mutual fund are held by

AMC

Trustees

Custodian

Registrar

� AMC directors are appointed with the permission of Trustees

True

False

� Most investor service centres are offices of

Trustees

Registrar

Fund Accountant

Custodian

� Fund accounting activity of a scheme is to be compulsorily outsourced

True

False

Rapid Fire

� The custodian of a mutual fund

Has custody of assets and is appointed by Trustees

need not be an entity independent of the sponsors

does not give or receive deliveries of physical securities

� Issuing and redeeming units of mutual fund is the role of

the custodian

the transfer agent

the trustees

the bankers

� The accounts and all other records of an AMC are filed with

AMFI

Registrar of Companies

Agents Association

UTI

� The Board of Trustees of a mutual fund

Act as protector of investors interests

Directly manage the portfolio of securities

Do not have the right to dismiss the AMC

Cannot supervise and direct the working of the AMC

� The AMC and directors are answerable to

Stock Exchanges

The Board of Trustees

Agents and distributors

Stock Brokers

� Transfer Agents of mutual fund are not responsible for

issuing and redeeming units of the mutual fund

updating investor records

preparing transfer documents

investing the funds in securities markets

� Who needs to sign the Trust Deed with the Trustee?

AMC

SEBI

Investor

SPONSOR

� Under the Indian Trust Act the interest of Unit Holders is safeguarded by

A board of trustees

A trustee company

Either A or B

SPONSOR

� The AMC shall make investment decisions solely in the interest of

SPONSOR

Trustee

Unit Holders

Employees of AMC

Legal & regulatory environment

SEBI (Securities & exchange board of India)

� The APEX regulator of capital market. Formed in 1992.

� All MF constituents are registered with SEBI.

Self regulatory organizations

� Prime responsibility is to regulate their own members.

� The statutory regulatory bodies - lay down the broad policy framework, and leave the micro regulation to the SRO

� No SRO for Mutual Fund Industry. MF Industry directly regulated by SEBI

� AMFI is not a self regulatory organization.

� BSE & NSE, Institute of Chartered Accountants (ICAI) are examples

Investor Rights & obligation

Investor rights

� If 75% Unit Holders decide.

Scheme can be winded up.

AMC can be dismissed / terminated

� Schemes except ELSS, need to allot units or refund moneys within 5 business days of closure of the NFO.

� Open-ended schemes, Except ELSS, to re-open for ongoing sale / re-purchase within 5 business days of allotment

� Right to Receive dividend with in 30 days of declaration.

� Nominees -up to 3.The investor can also specify the percentage distribution between the nominees.

� The investor can also pledge the units.

� Redemption proceeds with in 10 days or AMC to pay penalty of 15% PA.

Investor rights – Dispatch of Statement of Account

� In the case of NFO - within 5 business days of allotment of Units.

� Post-NFO investment – within 10 working days of the investment

� In the case of SIP / STP / SWP� • Initial transaction – within 10 working days� • Ongoing – Within 10 working days of the end of every quarter� • On specific request , SOA dispatched to him within 5 working days

� SOA to dormant investors (no transaction during the previous 6 months can be sent along with the Portfolio Statement / Annual Return.

� If mandated by the investor, soft copy to be mailed to investor every month.

� NAV has to be published daily, in at least 2 newspapers

� NAV is to be updated in the website of AMFI and the mutual fund� In the case of Fund of Funds, by 10 am the following day� In the case of other schemes, by 9 pm the same day� In case of Closed End Schemes NAV calculated every Wednesday

Investor rights

� Investor can ask for a Unit Certificate. It is different from a SOA

� SOA shows the opening balance, transactions during the period and closing balance

� A Unit Certificate only mentions the number of Units held by the investor.

� SOA is like a bank pass book, while the Unit Certificate is like a Balance Confirmation Certificate issued by the bank.

� Unit Certificates are non-transferable & do not offer any real transactional convenience.

� On request, the AMC is bound to issue the Unit Certificate within 30 days of receipt of request.

Rapid Fire

� SEBI regulatesMutual Funds

Depositories

Registrar & Transfer Agents

All the above

� Statement of Account is to be sent to investors within ___ days of NFO closure

3

5

7

15

� Within ___ days of dividend declaration, warrants will have to be sent to investors

30

10

15

Rapid Fire

� Unit Holder can hold his unit in DEMAT formTrue

False

� If a unit-holder does not agree to the merger of his fund with another, hehas no exit option

True

False.

� The structure which is required to be followed by mutual funds in India is laid down by

Financial Ministry

Securities & Exchange Board of India (SEBI)

Fund Sponsor

Association of Mutual Funds of India (AMFI)

� The role of AMFI in the mutual funds industry is not topromote the interests of the unit holders

set a Code of Ethics

regulate mutual funds.

Increase public awareness of mutual funds in the country.

� A Self Regulatory Organization can regulateall entities in the market

only its own members in a limited way

it’s own members with total jurisdiction

no entry at all

� The amount of authority enjoyed by a self regulatory organization is defined by

the apex regulatory authority

company law board

it’s own members

RBI

� Which of the following qualifies as a self regulatory organization?

SEBI

RBI

AMFI

NSE

� The Sponsor of a fund can act as its custodian if it has the required experience and SEBI registration

True

False

� In order to ensure independence, the Compliance Officer reports directly to the head of the AMC and works closely with the Trustees on various compliance and regulatory issues

True

False

Offer Document

Offer Document

� Offer document: - Called as Prospectus/Legal or Reference Document.

� Contains all the necessary information that a prospective investor ought to know before investing.

� Investors are mandated to read the OD. OD is filed with SEBI.

� Investment is governed by the principle of caveat emptor i.e. let the buyer beware

� NFOs other than ELSS can remain open for a maximum of 15 days.

� Open-ended schemes have to re-open for sale / re-purchase within 5 business days of the allotment

Offer Document

� OD has two parts

Scheme Information Document (SID) – has details of the scheme

Draft SID is available for viewing in SEBI website for 21 working days.

Final SID is hosted on AMFI site 2 days before the issue opens.

Statement of Additional Information (SAI) – has statutory information about the Mutual Fund offering the scheme

Single SAI is relevant for all the schemes offered by a Mutual Fund

SAI is part of SID. SID should be read in conjunction with the SAI and not in Isolation

Contents of SID

� Summary information – Cover Page

Name of the Mutual Fund

Name of Scheme

Type of the scheme (Equity / Debt, Open / Closed etc)

Price of the Units

Opening, closing and earliest closing date for the offer.

Disclaimer clause by SEBI

Name of guarantor in case of assured return scheme.

� SAI Contains the following details for the past 3 years.

Financial Summary of Sponsor

Condensed Financial Information of All Schemes.

Associate Transactions if any.

Investor grievance summary report.

�Risk Factors – Standard Risk Factor

� Mutual funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the mutual fund will be achieved.

� As with any investments in securities, the Net asset Value (NAV) of the units of the schemes can go up as well as down depending on the factors and forces affecting securities markets.

� Past performance of the sponsor / the Asset Management Company / Mutual Fund does not indicate the future performance of the schemes of the mutual fund.

� The names of the respective schemes do not in any manner indicate either the quality of the scheme, or their future prospects and returns.

� Investors are not being offered any guaranteed / assured returns

�Scheme Specific Risk factors

�Risk due to Investment Philosophy / Liquidity / Redemption etc.�Schemes investing in Equities�Schemes investing in Bonds�Risks associated with Investing in Foreign Securities�Risks associated with Investing in Derivatives�Risks associated with Investing in Securitized Debt�Risks associated with Short Selling and Securities Lending�Risk due to Non Diversification.

�Fundamental Attributes of the Scheme

�Investment Objective / Investment Pattern/Asset Allocation Pattern�Type of the scheme�Aggregate fees & Expenses�Liquidity provisions such as listing, repurchase etc�Guarantee if any�Options like Growth,Div etc

�Is Offer Document Verified by SEBI for its Accuracy ? NO�OD is “Vetted” by SEBI though SEBI doesn't formally APPROVE them

�DUE DILIGENCE CERTIFICATE (Legal & Regulatory Compliance)�Issued by Compliance Officer / CEO / MD/WHOLE TIME DIRECTOR/EXECUTIVE DIRECTOR appointed by AMC

�The draft OD forwarded to SEBI is in accordance with SEBI Regulations

�All legal requirements connected with launching of the scheme have been complied with.

�Disclosures made in the OD are TRUE, FAIR & ADEQUATE to enable the investors to make a well informed decision regarding investment.

�The intermediaries named in the OD are registered with SEBI and their registration till date is valid.

�OD without DUE DILIGENCE Certificate will be rejected by SEBI.

� KIM – Key Information Memorandum (Abridged Version of OD).

Fundamental Attributes, Plans and Options under the scheme

Details about Fund Manager, Trustee Company, AMC

Performance of the scheme and Benchmark Index in CAGR

Source for obtaining daily NAV, Investor grievance Contact

Information about obtaining Account Statement, Annual Financial Results, Half Yearly Portfolio etc.

Dates of Offer, Risk Profile of the scheme, Dividend Policy

KIM UPDATED ONCE IN A YEAR

KIM revised in case of change in Fundamental Attributes. Other changes are disclosed through an Addendum

� Lending & Borrowing by MF

No lending. Borrowing only to meet Redemption / Liquidity needs.

Borrowing limited to 20% of Net Assets for a Max Period of 6 months.

Borrowed amount cant be invested.

� Minimum No of Investors in a Scheme – 20. No single investor should hold more than 25% of Net Assets of a scheme.

� Updation of SID – Regular UpdationIf a scheme is launched in the first 6 months of FISCAL, then the first Update is due with in 3 months of the end of Financial Year.

If a scheme is launched in the second half of the FISCAL, then the first update is due within 3 months of the end of the next financial year.

Thereafter SID is to be updated once in a YEAR

� Updation of SID – Need BasedReconstitution of AMC

Change of Fundamental Attributes

Change in Key Personnel of the AMC especially the Fund Manager

Fresh Litigation cases or Adjudication proceedings against AMC/Sponsor.

� SAI updated by the end of 3 months of every Financial Year� Eligibility to Invest in Mutual Funds

All except Foreign Citizens & OCB

PIO (Person of Indian Origin) can invest

Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least 60% by NRIs.

PIO and OCB

� A Person of Indian Origin (PIO) is usually a person of Indian origin who is not a citizen of India

� Person of Indian Origin Card (PIO Card) is a form of identification issued to a Person of Indian Origin who hold a passport in another country other than Pakistan and Bangladesh. Other conditions are:

person at any time held an Indian passport or;

person's parents or grand parents or great grand parents were born in and permanent residents in India, but not moved to Pakistan and Bangladesh or;

person is spouse of a citizen of India or a person of Indian origin as per above.

It came into force with effect from 15 September 2002.

� Overseas Corporate Body (OCB) means a company, partnership firm,society and other corporate body owned directly or indirectly to the extent of at least 60% by NRIs.

Sales Practices

SEBI does not prescribe any limit of commission payable to distributors by the fund house.

� 2 types of commissions

Upfront commission for mobilization of funds paid by Investors directly

Trail commission to encourage the retention of the investors.

Trail commission is paid Quarterly on Average Net Assets.

Trail Commission increases when the market value of investment increases.

Rapid Fire

� NFOs other than ELSS can be open for a maximum of7 days

10 days

15 days

30 days

� Legally, SAI is part of the SIDTRUE

FALSE

� Offer documents of mutual fund schemes are approved by SEBITRUE

FALSE

� Application form is attached toSID

SAI

KIM

� KIM has to be updated every 6 monthsTrue

False

Rapid Fire

� The front page of an offer document need not cover

opening, closing and earliest closing date of the offer.

Disclaimer clause

Legal and regulator compliance

Price of units

� Though the offer document of a scheme is prepared as per SEBI Regulations and is filed with SEBI. SEBI does not certify the accuracy or adequacy of the document.

True

False.

� What document Mutual Fund distributors need to refer for finding out eligible category of investors in a particular Mutual Fund Scheme?

SEBI Regulations Manual

AMFI booklet

Offer document

RBI Guidelines

� Most eligible investors of Mutual Funds can broadly be grouped into either individual or institutional investors

True

False

� The front Page of the offer document contains

SEBI Disclaimer Clause

Name and Type of the fund

Major Objectives of the Fund

A & B

� The Board of Trustees of a mutual fund

Act as protector of investors interests

Directly manage the portfolio of securities

Do not have the right to dismiss the AMC

Cannot supervise and direct the working of the AMC

� The legal responsibility for the accuracy of the statements made in the offer document lies with

SEBI

The AMC

AMFI

The Company Law Board

� The rights of investors in a mutual Fund scheme are laid down in

the Offer Document of that scheme

Quarterly Reports

Annual reports

Marketing Brochures

� The first time investor would be well advised to refer to

KIM

Offer Document

Either of the Above

� Validate the statement - The investor is not obligated to read the offer document before investing in Mutual Funds

Completely True

Completely False

Rarely True

Partly False

Session 5Accounting, Valuation & Taxation

NET ASSET VALUE - NAV

� The unit-holders’ funds in the scheme is commonly referred to as “net assets”.

� NAV = (Market value of investments + Assets – Liabilities) /(no of units outstanding)

� Higher the interest, dividend & capital gains earned by the scheme, higher would be NAV.

� Higher the appreciation in the investment portfolio, higher would be the NAV.

� Lower the expenses, higher would be the NAV.

� The process of valuing each security in the investment portfolio of the scheme at its market value is called ‘mark to market’

� MF Investments are Marked to Market.

NET ASSET VALUE - NAV

� Example : Investors have bought units of a mutual fund scheme during NFO. The scheme has thus mobilized Rs 200 crore. An amount of Rs 140 crore, invested in equities, has appreciated by 10%. The balance amount of Rs 60 crore, mobilized from investors, was placed in bank deposits. Interest and dividend received by the scheme is Rs 8 crore, scheme expenses paid is Rs 4 crore, while a further expense of Rs 1 crore is payable. Calculate NAV of the scheme ?

Dividends & Distributable Reserves

� SEBI guidelines stipulate that dividends can be paid out of distributable reserves.

� All the profits earned (based on accrual of income & expenses as detailed above) are treated as available for distribution.

� Valuation gains are ignored. But valuation losses need to be adjusted against the profits.

� That portion of sale price on new units, which is attributable to valuation gains, is not available as a distributable reserve

� Each scheme has separate Balance Sheet and profit and loss account.

� Accounts of the schemes need to be maintained distinct from the accounts of the AMC.

� NAV rounded off to 4 decimals – Liquid Schemes, Index Funds & Debt Schemes

� NAV rounded off to 2 decimals – Equity and Balanced or Hybrid Schemes

� Investors can hold their units even in a fraction of 1 unit

� The day on which valuation is done is known as Valuation day. The last quoted price of the Security is taken from Stock Exchange where it is Principally Traded.

� Debt sec not traded on the valuation date are valued on the basis of the Yield matrix.

� Yield matrix estimates the yield for different debt securities based on the credit rating of the security and its maturity profile

� If an Illiquid Sec accounts for more than 5% of Net Assets, then it has to be valued by Independent Valuer.

Key Accounting & Reporting Requirements

TAXATION

� STT – Securities Transaction Tax - tax on the value of transactions in equity shares, derivatives and equity mutual fund units

� STT is not payable on transactions in debt or debt-oriented mutual fund units

0.25%SellEquity MF – Repurchase

0.017%SellSale of Futures and Options

0.125%Sell

0.125%PurchaseEquity-Delivery & for Exchange

Traded Equity Funds

STT rateTransactionProduct

Dividend Distribution Tax

� Dividends are Tax Free at the Hands of Investors.

Dividend Distribution Tax Individuals/HUF Corporates

Equity schemes Nil Nil

Debt schemes 14.163% 22.66%

(Tax + Surcharge + Cess) (12.5% + 10% + 3%) (20% + 10% + 3%)

Money market and Liquid schemes 28.325% 28.325%

(Tax + Surcharge + Cess) (25% + 10% + 3%) (25% + 10% + 3%)

Dividend Stripping Norms

�Section 94(7) disallows any capital loss, arising to a unit holder

�if, an investor buys units within 3 months prior to the record date for a dividend, and

�sells those units within 9 months after the record date, any capital loss from the transaction would not be allowed to be set off against other capital gains of the investor, up to the value of the dividend income exempted.

Capital Gains Tax

� Capital Gain is the difference between sale price and acquisition cost

� Long Term Capital Gain (LTCG) : Gains arising from Sale of Units held for > 12 months

� Short Term Capital Gain (STCG): Gains arising from Sale of Units held for <=12 months

� Long Term Capital Gain Tax

Equity Schemes – NIL. Where STT is not paid, the taxation is similar to debt-oriented schemes

Debt Schemes – Lesser of 10% without indexation or 20% with indexation

Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of inflation

� Short Term Capital Gain Tax

Equity Schemes – 15 %

Debt Schemes – Added to total income and taxed as per the slab

� No TDS on the dividend distribution or re-purchase proceeds to resident investors

Setting off Gains and Losses under Income Tax Act

� Capital loss, short term or long term, cannot be set off against any other head of income (e.g. salaries)

� Mutual Fund Investments are Exempted from Wealth Tax

Cannot be Set OffLong Term Equity

Long Term Gain (Debt)Long Term (Debt)

Long Term / Short Term GainShort Term

Set Off AgainstLoss

Rapid Fire

� Net assets of a scheme is nothing but its investment portfolio

True

False

� The difference between NAV and re-purchase price is

Entry Load

Exit Load

Expense

� NAV of income funds is to be calculated upto ___ decimals

4

3

2

1

� Securities Transaction Tax is applicable to Debt SchemesTrue

False

� Wealth tax is payable at the applicable rates on equity mutual fund units

True

False

Risk Measures

Mutual funds – Return Disclosure Norms

� Only SEBI Prescribed methods for computing returns.

� Dividends declared shall be mentioned in rupees per unit & the prevailing NAV

� Returns for the Past 1,3, 5 years & since inception in CAGR should be disclosed. The returns of the Benchmark shall also be disclosed for the corresponding period.

� For funds less than 1 year, absolute returns must be shown & notannualized.

� All advertisements must display `past performance may or may not be sustained in future`

� Ranking of the fund must be appropriately explained.

Fundamental Analysis

� Fundamental Analysis entails review of the company’s fundamentals viz. financial statements, quality of management, competitive position in its product / service

� Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares outstanding

Tells investors how much profit the company earned for each equity share

� Price to Earnings Ratio (P/E Ratio): Market Price ÷ EPS

indicates how much investors are prepared to pay , in relation to the company’s earnings (Future Earning Potential)

normally calculated based on forward EPS

P/E may be high because the company’s prospects are indeed good

� Book Value per Share: Net Worth ÷ No. of equity shares

indicator of how much each share is worth

� Price to Book Value: Market Price ÷ Book Value per Share

indicator of how much the share market is prepared to pay for each share of the company, as compared to its book value

Technical Analysis & Portfolio Building

� Technical Analysts (Chartists) study price-volume charts

� Price behavior & volumes traded are a reflection of investor sentiment

� long term investment decisions are taken through fundamental analysis

� Comes in handy for short term speculative decisions like intra-day trading

� When a fundamental analysis-based decision has been taken on a stock, technical analysis might help decide when to implement the decision i.e. the timing

� Portfolio building approach – Top down and Bottom up

Top down approach - sector allocation is a key decision

good stocks within the identified sectors are selected for investment

Bottom-up approach - Stock selection is the key decision in this approach

sector allocation is a result of the stock selection decisions

The approach is therefore also called stock picking

Risks in Mutual Fund Investing

� Risk in a generic sense means the possibility of financial loss

� In the investment world possibility of financial loss arises from variability of earnings from time to time.

� Risk is thus equated with volatility of earnings - a statistically measurable concept.

� Volatility of earnings of an equity fund comes from

Degree of diversification

Fund manager’s success at market timings

Company Specific Risk or Non Systematic Risk – Can be diversified

Sector Specific Risk

Market Level or Systematic Risk - Not diversifiable, not controllable because of changes due to broad economic, political and other factors. Can be controlled to some extent through Equity Index Futures and Options

Risk Measures

� Beta Coefficient Measure of Risk :

Beta relates a fund’s return with a market index.

Measures Market risk or Systematic Risk.

Measures the sensitivity of the Fund’s returns to changes in the Market

Beta of 1– Fund moves with the market i.e.Passive Fund or Index Fund

Beta of less than 1 –less risky than the market i.e conservative Fund.

Beta of More than 1 – more risky than the market i.e Aggressive Fund.

Beta not relevant to Debt Funds.

Risk Measures

� Standard deviation measure of risk

measures fluctuation in periodic returns of a scheme in relation to its own average return.

relevant for both debt and equity schemes.

� ALPHA - Difference between a scheme’s return & its optimal return.

� Alpha – a measure of the fund manager’s performance.

� Positive alpha is indicative of out-performance by the fund manager;

� Negative alpha indicates underperformance.

� Portfolio turnover rate - Measures how many times the fund manager churns his holdings. A 100% means a complete change in portfolio during the period under consideration

High indicates High Transaction Cost.

Relevant for Equity/Balanced funds particularly for those which derive income from active trading.

Not relevant for Value, Growth funds.

Risk Adjusted Performance Measures

� Risk and Returns have co-relation. Risk adjusted Return is measured by using Sharpe Ratio or Treynor Ratio

SHARPE RATIO = _____Risk Premium___Fund’s Standard Deviation

TREYNOR RATIO = ______Risk Premium ______

Fund’s Beta

� Risk Premium - Difference between the Fund’s Average return and Risk free return on Government Securities or Treasury Bills over a given period

� Treynor ratio uses Market risk to rank funds while Sharp ratio uses total risk.

Basic characteristics of bonds or debt security

� Par value – principal value Face value of the bond.

� Coupon – annual rate of interest paid on the par value of the bond.

� Debt securities which mature within a year - money market securities

� Return that an investor earns or is likely to earn on a debt security is its yield.

� Current yield = (Coupon in Rs / Current Market Price) * 100 %

� Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years)

� Commercial Papers are short term securities (upto 1 year) issued by companies.

� The difference between the yield on Gilt and the yield on a non-Government Debt security is called its yield spread

Risk Measurement of Debt Funds

� Debt Funds exposed to Risk of loss through Default (Non Performing Assets) and Interest Rate risk

� Interest Rate Increases, Yield Increases, Price of Existing BOND Decreases

� Average maturity or duration – Longer the Weighted Average maturity (duration) of a debt portfolio greater the loss if interest rates go up.

� Modified Duration – Measures Sensitivity of Bond Prices with respect to Interest Rates

� Higher the Modified Duration, Higher the Interest rate sensitivity of a Bond

� CREDIT PROFILE of Investments

� Benchmark – Representative of the behavior of returns from the markets

MF should use Benchmarks that reflect the asset allocation / Investment Objective/representative of the portfolio of the fund.

Benchmark should be calculated by an independent agency in a transparent manner and should be widely available

Choice of Benchmark is easy for an Index Funds.

Benchmark is decided by AMC in consultation with trustees.

Benchmark mentioned in the OD should be used

SENSEX,S&P CNX Nifty, BSE 100 etc are examples.

� Benchmark for Debt Schemes

Developed by Rating agencies recommended by AMFI

NSE’s MIBOR, CRISIL LiquiFEX for Liquid Schemes

ICICI Securities’ Sovereign Bond Index (I-Bex)

Si-Bex (1 to 3 years), Mi-Bex (3 to 7 years) & Li-Bex (more than 7 years)

CRISIL Gilt Bond Index – for G-Sec, CRISIL AAA Corporate Bond Index

CRISIL CompBEX - Composite Bond Index, CRISIL STBEX - Short-Term Bond Index

CRISIL Debt Hybrid Index – 60:40 : CRISIL Debt Hybrid Index – 75:25

Benchmark

Rapid Fire

� Fundamental analysis is a evaluation of the strength of the company’s price-volume charts.

True

False

� In a top-down approach, sector allocation precedes stock selection

True

False

� Which of the following is a truly international asset class

Real Estate

Equity

Debt

Gold

� Loads and taxes may account for the difference between scheme returns and investor returns

True

False

Rapid Fire

� According to SEBI code for MF Advertisement, for funds that have been in existence for more than a year, annualized returns have to be furnished for

1Yr,3Yrs,5Yrs and since Inception

1yr,5yr and since launch

1yr,3yr,5yr

1yr,3yr and since launch

� Returns can be annualized and compounded only if the scheme has completed

30 days

12 months

6 months

24 months

� An Equity scheme is 90 days old. To compute yield it can use

Absolute return

Simple Annualized return

Compounded annualized return

Any of these

Rapid Fire

� Technical analysis tries to predict future movement of stock price byThe financial workings of a company

The stock price movements of a company

� Beta of an equity fund measures its Performance.

Systematic Risk.

Non Systematic Risk

Both the above.

� Which one of the following portfolios is most risky75% Equity 25% Debt

40% Equity 60% Debt

80% Equity 20% Debt

� Which of the following aspects of portfolio would an investor in a debt scheme give most importance

Sector selection

Stock selection

Weighted Average Maturity

Number of securities in portfolio

Rapid Fire

� Certificates of Deposits (CDs) are issued by

Regional Rural Banks

Corporate India

Schedules commercial banks

None of the above

� Government securities are issued through the RBI

True

False

� Debt securities bought at a discount to their face value are generally

zero coupon bonds or Deep discount Bonds

pay interest at a floating rate

none of the above

� The comparable for a liquid scheme is

Equity scheme

Balanced Scheme

Gilt Fund

Savings Bank account

� Current yield relates interest on a security to

its current market price

its face value

its fair value

the current price of T-bills

� When interest rates rise, bond prices

also rise

fall

are not affected

fluctuate either up or down

� Equity markets are more predictable in the long term than the short.

True

False

� Arbitrage funds are meant to give better equity risk exposure

True

False

Investor Services

Investor Services

� KYC Requirements – Investments of Rs 50,000 or more

� Investments by a minor, KYC requirements done by the Guardian.

� In case of Investments by a PoA holder, KYC requirements have to be complied with, by both, investor and PoA holder.

� PAN Card is compulsory for all mutual fund investments except MICRO SIP

� MICRO SIP – Aggregate SIP amount is Rs 50,000 or less.

� Relaxation in documentation requirements for micro-SIPs is not available for HUFs and non-individuals. It is available for NRIs, but not PIOs

� Dematerialisation – Converting Paper holdings to Electronic Form.

� Rematerialisation – Converting Electronic Holdings to Physical Form

� Investment Account of an Investor is known as FOLIO

� NRI / PIO applications need to be accompanied by cheque drawn on an NRO A/c (for non-repatriable investment) or NRE A/c (for repatriable investment)

Investor Services

� If payment from NRI is by DD, and investment is on repatriable basis then Foreign Inward Remittance Certificate (FIRC) from his banker is required

� Application Supported by Blocked Amount (ASBA) – This is a facility where the investment application is accompanied by an authorization to the bank to block the amount of the application money in the investor’s bank account

� Benefit of ASBA is that the money is transferred only on allotment. Until then, it keeps earning interest for the investor.

� The investor does not have to wait for any refund

� RBI has permitted transferring Rs 50,000 per day through Mobile Banking

� NSE’s platform is called NEAT

� MFSS. BSE’s platform is BSE StAR Mutual Funds Platform

CUT OFF TIMING

CUT OFF TIMING

� CUT OFF TIME – Schemes other than Liquid Schemes

Cut off time – 3 PM – for Purchase and Repurchase – Same Day NAV

After 3 PM – Next Business day NAV

The above CUT OFF Time is not applicable for NFO Schemes and International Schemes

Same Day NAVReceived till 3RepurchaseNon Liquid Schemes

NAV of the day on which funds are available for

utilization

Received

anytime

SaleNon Liquid Schemes

with Outstation

DD/Cheque

Next Day NAVReceived After 3

Same day NAVReceived till 3Sale Non Liquid Schemes <

1 Crore

NAV of the day on which funds are available for

utilization

Received

anytime

SaleNon Liquid Schemes

>= 1 Crore

Next Day NAVReceived after 3

Same Day NAVReceived till 3 RepurchaseLiquid Funds

Today NAVReceived after 12 SaleLiquid Fund – Funds

are available on

Same day

NAV of the day previous to the day on which Funds

are available for utilization

Received

anytime

SaleLiquid Funds

Applicable NAVCut Off TimeTransactionScheme Type

Rapid Fire

� Foreign nationals are freely permitted to invest in Indian mutual fundsTRUE

FALSE

� PAN Card is compulsory for all MF investments above Rs 50,000 including SIPsTRUE

FALSE

� Investments in mutual fund can be made usingCheque / DD

Remittance

ASBA

Any of the above

� Cut-off timing guidelines are not applicable for NFOs & International FundsTRUE

FALSE

� STP is a combination of SIP and SWPTrue

False

Rapid Fire

� Which is the most appropriate position under MF Regulation

Buyer Beware

Buyer is always right

Seller is always right

Seller is guilty unless proved right

� Practice of taking larger positions based on margin payments is called leveraging

True

False

� Turnover rates would be most relevant to analyze the performance of

Equity Funds

Debt Funds

Value Funds

� A high turnover rate for a fund indicates

high transaction costs

greater efficiency

high returns to the investor

a rising market

� The MF Regulations prescribe

The Minimum Commission to the distributor

The Maximum Commission to the distributor

Both of the above

Neither of the Above

� An NRI holds units in a MF. What should he do if he takes up a foreign citizenship?

Redeems

Continues

Transfers units to his mother, who resides in INDIA

None of the above

� Risk factors may not be mentioned in

Product Launch Advertisement

Tombstone Advertisement

Performance Advertisement

All of the above

� Which of the distribution channels is preferred by Pvt. Mutual Fund ?

Individual Distributor

Small Distribution Companies

Established Distribution Companies

Internet

Financial Planning

� Goal Oriented Financial Planning a financial plan for a specific goal like making the son a doctor

� Comprehensive financial plan all the financial goals of a person are taken together, & the investment strategies worked out on that basis.

� An objective of financial planning is also to let the investor know in advance, if some financial goal is not likely to be fulfilled.

Types of Financial Planning

Financial Products

� Important Points

Gold futures contracts – For Leveraging

Deposit Insurance Scheme – Upto Rs 1 lakh per depositor in a bank across branches including Principal and Interest will be paid by the insurer.

Interest earned in a bank deposit is taxable each year

No income tax is payable on year to year accretions in a DEBT Scheme

GOLD ETF and GOLD Bonds are Exempted from Wealth Tax where as Physical Gold is NOT EXEMPTED

� New Pension Scheme

Pension Funds Regulatory and Development Authority (PFRDA) is the regulator

Tier I (Pension account), is non-withdrawable

Tier II (Savings account) is withdrawable to meet financial contingencies.

An active Tier I account is a pre-requisite for opening a Tier II account

Financial Products

Investors can invest through Points of Presence (POP)

3 kinds of portfolios are available for Investors

Asset Class E: Investment in predominantly equity market instruments

Asset Class C: Investment in Debt securities other than Government Securities

Asset Class G: Investments in Government Securities

Investors can also opt for life-cycle fund. With this option, the system will decide on a mix of investments between the 3 asset classes, based on age of the investor.

The 3 asset class options are managed by 6 Pension Fund Managers(PFMs)

Personal Retirement Account Number (PRAN), is applicable across all the PFMs where the investor’s money is invested

POPs offer services related to moneys invested with any of the PFMs

Classification of Investors

� Life cycle based classification

Childhood Stage

Young Salaried Unmarried Investor with NO Dependants –� Mediclaim / Disability Insurance

� Equity SIP + Whole Life Insurance

Retirement Income – 2/3rd of Previous Year Income

Go for Term Insurance – Cheapest form of Insurance

Go for Cashless Mediclaim Policy

Retirement Stage – Invest some portion in Equities to protect against Inflation

Wealth Cycle Stages

Wealth Preservation. Initially

invested in Liquid Funds then FP

charts a plan.

Medium to long termSudden Wealth Surge (Lottery,

Sale of Shares/Business,

Inheritance, Contest etc.)

Low liquidity needs. Ability to take

risk & invest for long term.

transfer of wealth to the

next generation, in the

event of death

Inter- Generational transfer

Liquid / Money Market Mutual

Funds Lower risk appetite.

Higher liquidity

requirements / Goal has

reached.

Reaping Stage/ Distribution Stage –

Equivalent to Retirement Phase of Life Cycle Stage

Short & Medium term investments.

Lower risk appetite

Near Term needs for

funds as pre- specified

needs draw closer

Transition Stage

Growth options & long term

products. High risk appetite

Investing for long term

identified financial goals

Accumulation Stage

(Phases of Life Cycle Stage:

Young Unmarried to Pre-Retirement.)

Investment PreferencesFinancial NeedsStage

Asset allocations

� Asset Allocation refers to the distribution of the investor’s wealth between different asset classes (gold, property, equity, debt etc.)

� Asset Allocation helps in Risk Management

� Risk Profiling - Risk profiling is an approach to understand the risk appetite of investors through Survey, Questionnaire etc.

� Strategic Asset Allocation – Investors allocation to Debt is Equal to his age.

� Strategic Asset Allocation is done based on Risk Profiling

� Tactical Asset allocation is taking calls on the likely behavior of the market.

� Tactical asset allocation is for seasoned investors with large investible surpluses

� 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.

Recommending a model portfolio

� Young call centre / BPO employee with no dependents50% in Diversified Equity Funds through SIP

20% in Sector Funds, 10% each in Gold ETF, Diversified Debt, Liquid Schemes.

� Young married single income family with two school going kids

35% diversified equity schemes; 15% in gold ETF,

30% diversified debt fund, 10% each in Sector and liquid schemes

� Single income family with grown up children who are yet to settle

35% diversified equity schemes;

15% each in gold ETF, gilt fund & diversified debt fund

20% liquid schemes

Model Portfolios for Client’s

� Couple in their seventies, with no immediate family support15% diversified equity index scheme; 10% gold ETF

30% gilt fund, 30% diversified debt fund, 15% liquid schemes

� Couple in their seventies, with no immediate family support but very sound physically and mentally, & a large investible corpus

20% diversified equity scheme; 10% diversified equity index scheme;

10% gold ETF, 25% gilt fund, 25% diversified debt fund,

10% liquid schemes

Model Portfolios for Client’s

Business Ethics

Ethics related regulations

� Details of Sec Transactions by AMC Directors & Key Persons filed with Compliance Officer once in 6 MONTHS to avoid FRONT RUNNING

� Front Running - (buying or selling of any securities ahead of transaction of the fund, with access to information regarding the transaction which is not public and which is material to making an investment decision, so as to derive unfair advantage).

� Maintain records of all activities and transactions for at least three years, & those records shall be subject to review by the Trustees

� A “Significant Unit holder” means any entity holding 5% or more of the total corpus of any scheme

� MF Distributors are banned from Passing back the commissions to the investors.

� MF Distributors are not entitled for Brokerage for their own investments.

Rapid Fire

� Today’s costs can be translated into future requirement of funds usingA = P X (1 + i)n

A = P / (1 + i)n

P = A n X (1 + i)

P = A n X (1 + i)

� According to the Certified Financial Planner – Board of Standards (USA), the first stage in financial planning is

Analyse and Evaluate Client’s Financial Status

Establish and Define the Client-Planner Relationship

Gather Client Data, Define Client Goals

Develop and Present Financial Planning Recommendations and / or Options

� Investor can get into long term investment commitments inDistribution Phase

Transition Phase

Inter-generational Phase

Accumulation Phase

Rapid Fire

� To satisfy a young investor’s need for growth, a greater proportion of investment should be advised in

Gilt Funds.

Income Funds.

Equity Growth funds.

Liquid funds.

� A high proportion of investment in income funds is required by Accumulating investors.

Affluent investors.

Investors in the inter-generational transfer phase.

Investors in the distribution phase.

� For older investors who want to transfer their wealthNo financial planning is required.

The right investment strategy depends upon who the beneficiaries are.

The right investment strategy depends upon the state of the stock market.

All the funds can be invested in aggressive equity funds.

� Investors who acquire sudden wealth.

can speculate with all the acquired money in the stock markets.

Should not use any of the new wealth to invest in equity.

Should take the effect of taxes into account

Need not pay any taxes on the newly acquired wealth at it is not a part of their regular income.

� Financial Planning is

Investing funds to receive the highest rate of return possible

Resorting to tax planning to keep taxes as low as possible

Planning for retirement with the maximum income possible

Process of solving financial problems and reaching financial goals

� The strategy advisable for an investor to maximise investment return in the long run is

Buy and hold on to investments for a long time

Liquidate poorly performing investments from time to time

Liquidate good performing investments from time to time

Switch from poor performers to good performers

� Your client has won Rs 1 Crore in Lottery. What would your suggestion be ?

Invest the entire amount without any delay in "Old Economy stocks" - since they are back in favor

Invest the entire amount immediately in an Equity Index Fund since the index is at historic low

Invest in very safe liquid investment options and take the time needed to work out a financial plan

Invest immediately in IT stocks, since their valuations are low

� A criticism of Rupee Cost Averaging

Over a period of time average per share price will become more than guessing the highs and lows

It does not tell you when to buy, sell or switch from one scheme to another

Rupee cost averaging has no serious shortcomings

� Which of the following has highest level of liquidity

Stocks

MF

Gold

Real Estate

� SIP is best example of

Rupee Cost Averaging

Value Averaging

Buy and Hold

� Direct investments in stock markets can be a better option over investing through mutual funds if

The investor wants better returns than those offered by Mutual Funds

The investor has large capital, knowledge and resources for research

the investor has identified a bullish phase in the stock market

the investor wants to invest for the long term

� Which of the following should not be viewed primarily as an investment?

Life Insurance

MF Investments

Debentures

Stocks

� What type of portfolio asset mix would you recommend to your 55 year old client who plans to retire at the age of 58? choose a portfolio that is closest match to the investors needs

40% in equity schemes 60% in debt

40% in equity 60% in balanced

20% in equity 20% in liquid 60% in debt

100% in monthly income schemes

� For which of the funds would you consider average maturity as animportant factor in selecting the right one for the investor?

debt fund

balanced fund

a money market or liquid fund

both 1 and 2 above

� Distribution phase of Wealth Cycle is a parallel of Retirement phase of Life Cycle

TRUE

FALSE

� Risk appetite of investors is assessed through

Risk Appetizers

Asset Allocators

Risk Profilers

Financial Plan

� The objective of asset allocation is risk management

True

False

� Model portfolios are a waste of time for financial planners

True

False

� How much equity would you suggest for a young well settled unmarried individual

100%

80%

60%

� Mutual Funds in India are required by SEBI to

prohibit their employees from personal trading in secondary markets

to establish a code of conduct and allow employees to do personal trading that conforms to SEBI Guidelines

allow all employees to trade freely in secondary market without any restrictions

allow employees to carry on personal trading as long as they abide by SEBI guidelines.

� MODULE : AMFI

� MODULE ID : AM 01

� TRAINER NAME : SRINIVASAN .T

� MOBILE : 98 94 94 9988

� aim_cus@yahoo.co.in

� Akshaya Investments, Madurai