NISM - Series - MUTUAL FUND Distributors Certification

Examination - June 2010

Index

Day 1

Part 1

1. Concept and Role of Mutual Funds2. Fund Structure and Constituents3. Legal and Regulatory Environment

Part 2

4. Offer Document5. Fund Distribution and Channel Management Practices7. Investor Services8. Return,Risk & Performance of Funds

CONCEPT AND ROLE OF MUTUAL FUNDS

Chapter 1

History of Mutual Funds in India

Phase 1 (1964-87) : Growth of UTI

Phase 2 (1987-93) : Entry of Public Sector Funds-S.B.I.,Canara etc.

Phase 3 (1993-96) : Emergence of Private Sector Mutual Funds Joint Ventures between Foreign Funds & Indian Promoters - bringing latest product innovation, investment management techniques, and investor servicing technology

Phase 4 (1996-99) : Growth and SEBI Regulation

Phase 5 (1999-04) : UTI Act 1963 repealed in Feb 2003 UTI Mutual Fund becomes SEBI compliant Assured Return Schemes of UTI taken over by a special undertaking administered by

GOI Emergence of large & uniform industry

Phase 6 (2004…) : Consolidation & Growth 32 Mutual Funds as at 31-03-07

What is a Mutual Fund ?

• It is a pool of money, collected from investors, and is invested according to

certain investment objectives

• The ownership of the fund is thus joint or mutual, the fund belongs to all investors.

● A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool

Important characteristics of a Mutual Fund?

● The ownership is in the hands of the investors who have pooled in their funds so it is joint or mutual.

● It is managed by a team of investment professionals and other service providers.

● The pool of funds is invested in a portfolio of marketable investments.

● The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday.

● The investment portfolio is created according to the stated investment objectives of the fund.

● Mutual Funds are also known as Financial Intermediaries

● In India, Mutual Funds are constituted as TRUSTS.

Advantages of Mutual Funds to Investors ?

● Portfolio diversification● Professional Management● Economies of Scale● Reduction in Risk● Liquidity● Tax Deferral● Tax benefits● Convenience and Flexibility● Regulatory Comfort● Systematic Approach to investment

Limitation of a Mutual Funds?● Lack of Customisation● Choice Overload ● Issue relating to management of protfolio of Mutual Funds

● In an open ended fund, investors can enter and exit out of the fund, at NAV related prices, at any time, directly from the fund.

● Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, during the New offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases.

● Investors receive account statements of their holdings,

● The number of outstanding units goes up and down

● The unit capital is not fixed but variable.

● The corpus of an Open-ended scheme changes everyday

Mutual Fund Classifications – Open ended Funds

● A closed -end fund is open for sale to investors for a specified period, after which further sales are closed.

● Further transactions happen in the secondary market (stock exchange) where closed-end funds are listed.

● The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV.

● The number of units of closed ended funds remains unchanged.

● The unit capital is fixed because of one time sale.

Mutual Fund Classifications – Close ended Funds

Interval Funds

● Combine features of both open-ended and close ended schemes.

● They are largely close-ended, becomes open ended at pre- specified intervals.

● Might become open-ended between 1 to 15th Jan, & 1 to15 July,each year.

● The benefit for investors is they are not completely dependent on the exchange.

Mutual Fund Classifications – Interval Funds.

Active Funds● where the fund manager has the flexibility to choose Portfolio, within the

parameters of Schemes ● The expenses for running the fund turn out to be higher. ● Investors would expect such funds to outperform the market.

Passive Funds● Invest on the basis of a specified index, whose performance it seeks to

track. ● The proportion of each share in the portfolio would also be the same as the

weight age assigned to the share in the Sensex.● Thus, the performance of these funds would mirror the concerned index.

Such schemes are also called index schemes. ● Running Cost of such scheme would be low.

Mutual Fund Classifications – Active Funds / Passive Funds

Types of Funds - By Investment Objective

Equity Debt Money Market

Equity FundsIndex FundsSector Funds

Fixed IncomeFunds

GILT Funds

Money Market Mutual Funds

Balanced Funds Liquid Funds

Risk associated with various types of funds

Risk Level Debt Funds Hybrid Funds Equity FundsHigh Risk

Sector Funds

Growth FundsHigh Yield Debt Fund

Diversified Equity Funds

Index Funds

Value Funds

Monthly Income Plans

Capital protection fundsDiversified Debt Fund

Gilt Funds

Low Risk

Balanced fund based on Flexible asset allocation

Equity Income Funds Dividend yield Funds

Balanced fund based on Fixed asset allocation

Money Market & Liquid schemes

What are Equity Funds ? (A Risky asset class)

• Aggressive Growth Funds (Targets maximum capital appreciation.)

• Growth Funds (Capital appreciation over 3 to 5 years at above average rate.)

• Speciality Funds Sector Funds (Bank, Power, Pharma, IT, Telecom)

Foreign Securities Fund Mid cap or Small cap Equity funds

• Diversified Equity Funds (Do not focus on any one or few sectors or shares)

• Equity Index Funds (These funds take only the overall market risk)

• Value Funds (Invests in the companies whose shares are under-priced)

• Equity Income or Dividend yield funds (Invests in the shares of the companies with high dividend yield.)

ELSS ( Equity Linked Saving Scheme )

• 3 year lock in period

• Minimum investment of 90% in equity markets at all times

• So ELSS investment automatically leads to investment in equity shares.

• Eligible under Section 80 C up to Rs.1 lakh allowed

• Dividends are tax free.

• Benefit of Long term Capital gain taxation.

• Take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned.

• For instance, by buying a share in BSE, and simultaneously selling the same share in the NSE at a higher price.

• Most arbitrage funds take contrary positions between the equity market and the futures and options market.

Arbitrage Funds

Types of Equity FundsSector Funds Growth Funds Diversified Equity Funds Thematic Funds Index Funds

To mirror the index

Risk High Risk High Risk Average Above average Market risk

High High High High

Liquidity Yes Yes Yes Yes Yes

Among sector only Most diversified

Features

Investment Objective

Concentrates in Single sector of market for

investment.

Capital appreciation in 3 to 5 years

can invest in across all the sectors.

To invest into theme like infrastructure

Return on Investment

Related more with Market Return

Asset allocation

Diversified across all sectors

Diversified across all sectors

Can be Diversified across as per theme

Focused on stocks within a certain business or

industry. More volatile than the overall market.

Invest in to companies show promise of strong growth in coming years

Best of the return are generated per unit of risk

taken by the investors.

invest across companies which are part of said theme.

A passive fund style suits to conservative

investors.

Comparison of Equity Funds

Debt Funds

Schemes with an objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.

Types of Debt funds:

Gilt funds

Invest in only treasury bills and government securities, with Zero credit risk.

Diversified debt funds

Invest in a mix of government and non-government debt securities.

Junk bond schemes

Invest in companies with poor credit quality.

Fixed maturity plans

are debt funds where the investment portfolio is closely aligned to the maturity of the scheme & usually for shorter term – less than a year.

Floating rate funds:

Invests in floating rate debt securities where the interest rate payable by issuer changes in line with the market. NAV`s of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest.

Liquid schemes or money market schemes

invest only in debt securities that matures within 91-days. They are the lowest in risk among all kinds of mutual fund schemes.

What are debt funds?

Monthly Income Plan

● Seeks to declare a dividend every month.

● invests largely in debt securities. & Small percentage in equity shares to improve the scheme’s yield.

Capital Protected Schemes

● They are close-ended schemes,

● They are structured to ensure that investors get their principal back, irrespective of market conditions.

● Mainly invests in Zero coupon govt securities whose maturity is aligned with scheme`s maturity.

What are hybrid funds?

What are other types of funds?

Gold Exchange Traded Fund,

● They are like an index fund that invests in gold. NAV of such funds moves in line with gold prices in the market.

Gold Sector Funds

● Such funds like any equity sectors funds the prices of these shares are more closely linked to the profitability and gold reserves of the companies. NAV of these funds do not closely mirror gold prices.

Real Estate Funds

● Such funds make it possible for small investors to take exposure to real estate as an asset class. although permitted by law, such mutual funds are yet to hit the market in India.

Commodities Funds

● Such funds Invest in shares of Companies that are in to commodities Like Gold sector funds, Commodity Sector Funds etc.

International funds

● Invest outside the country the Common practice is tie up with a foreignfund. In such case a feeder fund will be launched & will subsequently invest into the host fund of the foreign fund house.

Fund of funds (FOF)

● Such funds invest in various other funds, whether in India or abroad. They are designed to help investors get over the trouble of choosing between ultiple schemes and their variants in the market.

What are Other types of Funds

Exchange Traded Funds

● An open ended fund that trades on stock exchange.

● A baskets of securities that are traded, like individual stocks, on an exchange.

● ETF`s can be bought and sold throughout the trading day like any stock.

● It tracks a market index and trades like a stock on the stock market.

● One must pay a brokerage to buy and sell ETF units.

● ETF`s are not the index funds.

Debt FundsLiquid Funds Gilt Funds FMP MIP

High Liquidity

Return Moderate Higher Yield High

Default Risk Very less Nil Yes Yes Yes High

Nil Medium to high Yes Nil Yes Yes

Credit rating Yes Yes Yes Yes Yes Yes

Portfolio

Liquidity Very High 3 Business days 3 Business days

Diversified Debt Funds

High Yield Debt Funds

Investment Objective

For consistent returns & liquidity.

For higher return than gilt funds

For fixed returns over & fixed-maturity

for regular income

For higher returns

Between the call rates & 1yr T Bills

Nearly Fixed sort of returns

Higher than pure debt fund

Interest rate risk

Invest in short-term debt instruments with less than 1 year maturity.

invest G-Secs of central & state govt

& T. Bills.

Invest in a mix of govt and non govt

securities.

Schemes maturity is aligned with portfolio

maturity

short duration fixed income paper & into equity funds

risky debt instruments

can be redeemed before maturity at

exchange.

comparatively low

Comparison of Debt Funds

Balanced Fund

The discussion on asset allocation brought out the benefit of diversifying the investment portfolio across asset classes

Balance fund is rarely a 50/50 fund!

Equity oriented Balanced funds (up to 65% in equity)

Income oriented Balanced fund (up to 65% in debt)

Investing in a balanced scheme makes things simpler for investor, because Fewer scheme selection decisions to be made

● Fund Age

● Scheme running expenses

● Tracking error

● Regular income yield

● Risk, return and risk adjusted returns

● Investor behavior

● Experts view

Parameters to consider while selecting any fund

Investment Choices

Investor can Achieve income & capital appreciation in all funds by various choices available such as

● Dividend Option – Regular Dividend

● Dividend Reinvestment Option

● Growth Option

Most of the Funds are available with all above options Investor can choose according to his investment objective.

Very Important Points

● An Open Ended Fund offers repurchase facility unconditionally at all times (But It is not obliged to keep selling new units at all times).

● A Gilt Fund is a special type of Fund that invests in Dated Securities only.

● Units from an Open ended fund are bought through Distributors, Banks, Post offices, brokers appointed by AMC.

● The Unit Capital of a closed Ended Fund is fixed. Also the number of units are also fixed.

● Each unit holder of a mutual Fund is part owner of the asset of that Mutual fund ( he is not a creditor, not a debtor and not a trustee of that mutual fund).

● Units from an Open Ended fund are bought from the Fund Itself ( not from the AMFI, stock exchange, distributors or the banks).

● The Liquidity needs of an investor are met through Money Market Funds.

● A retired person generally needs a greater proportion of Debt Funds.

● A young investor, for growth and wealth creation, should be advised to invest in Equity Growth Funds.

● Retired investors should not invest in securities which bear risk of capital erosion.

● An Equity Fund can be said to be concentrated when Top 10 holdings account for more than 50% of net assets invested.

● The size of the market cap of fund’s equity holdings is inversely proportional to the level of risk assumed by the fund. ( Large Market Cap have low risk).

● A steady holdings of investments in an equity fund’s portfolio indicates both Long Term orientation and Lower Transaction Costs.

● Before investing in equity fund one should look at Ex Mark, Beta, Yield, Age and size of the fund, Portfolio turnover rate.

Very Important Points

● Debt Schemes are popular because the returns are more predictable. Equity returns are volatile and very less predictable.

● If an investor needs income, he should select a fund with high current yield.

● YTM ( Yield to maturity) of debt fund’s portfolio gives an indication of Total Return ( Not current income).

● Longer the average duration of debt fund portfolio, greater the interest rate risk.

● Long term Debt funds carry high interest rate risk.

● Running a Money Market Mutual Fund requires more of Trading Skills.

● The investors should invest in Debt Fund with a Higher Rated Portfolio and Lower Expense Ratio.

● An Ideal money market MF has lower expense Ratio.

Very Important Points – Debt Funds

Q-1 What is not an advantage of the Mutual Fund ?(a) professional management (b) Choice over load (C) High liquidity (d) Economic scale

Q-2 Which of the following fund targets capital appreciation over 3 to 5 year period at above average rate?

(a) Aggressive growth fund (b)Growth fund (c) Sector fund (d)None of the above.

Q-3 Gold funds can invest in (a) Gold (b) Gold futures (c) Shares of gold mines (d) All of the above.

Q-4 Which of the following fund would fall under passive management ?

(a) Diversified Equity Fund (b) Index Fund(c) Equity Growth Fund (d) all of Above.

Question for Revision

Q-5 Which one of the following funds does not qualify as a speciality fund?

(a)Pharma Fund (b) Balanced Fund (c) Small-Cap Fund (d) Emerging Markets Fund

Q-6 After NFO in Open Ended fund transactions can be done by ?

(a) Existing Investors (b) Existing & New Investors(b) New Investors (d) None of the Above.

Q-7 Compare to Sector Funds Thematic Fund would have a wider choice for investment ?

(a) True (b) False

Answers:Q-1 : (b), Q-2 : (b), Q-3 : (d), Q-4 : (b), Q-5 : (b) , Q-6 : (b), Q-7 : (True)

Question for Revision

FUND STRUCTURE AND CONSTITUENTS

Chapter 2

Structural Frame Work of Mutual Funds

*Custodians are appointed by Trustees

Marketing & Development

Sponsor(Reliance capital Limited)

TrusteeRel. Cap. Trustee Co. Ltd.

AMCRel. Cap. Asset. Mgmt. Ltd

Fund Management

Registrar & Custodian* Karvy & CAMS

Responsible for investors money (Primary Guardian)

Banks

Contributesat least 40% in the capital

Appoints

Regulatory structure of MF in India

● The structure of mutual funds in India is governed by SEBI(Mutual Fund) Regulations, 1996.

● It is mandatory to have a three tier structure of Sponsor-Trustee-Asset Management Company.

● The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund.

● AMC is the business face of the mutual fund as it manages all the affairs of the fund

How are Mutual Funds Structured

● In India Mutual fund is the form of a Public Trust created under the Indian trust Act 1882.

● The fund sponsor acts as the Settler of trust, contributes the initial capital and appoints the trustees to hold the trust for the benefit of the unit holders.

● Mutual fund is just a “pass-through vehicle”

● In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company.

● The trustees hold the unit holders money in a fiduciary capacity. (Money belongs to unit holders)

● In legal sense, the investors are the beneficial owners of investments.

● The sponsor is a promoter of the mutual fund

● Sponsor appoints the Trustees, the AMC and custodians with prior approval of SEBI and in accordance with SEBI Regulations.

● Sponsor must have a 5-year track record in the financial Services business.

● Sponsor must have been profit making in at least 3 of the above 5 years.

● Sponsor must contribute at least 40% of the net worth of the AMC

● Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution (Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)

Sponsor

● The role of the trustee is to safeguard the interest of the investor of the fund.

● The trustee make sure that the fund are invested as per the investment objective.

● There must be at least 4 members in the Board of Trustees and at least 2/3 of the members of the board of trustees must be independent.

● Trustee of one mutual fund can not be a trustee of another mutual fund.

● All major decisions are taken by trustee.

● The 3rd schedule of the SEBI regulations specifies the content of the trust deed.

Trustee

Rights & Obligations of trustees

Rights :-

● Trustees appoint the AMC, consultation with the sponsor according to SEBI.

● All Schemes floated by the AMC have to be approved by the Trustees.

● Trustees can seek remedial actions from AMC & in cases dismiss the AMC

Obligations :-

● Trustees must ensure due diligence on the part of AMC in the appointment of constituents and business associates

● Trustees must furnish to the SEBI, on half yearly basis a report on the activities of the AMC

● Trustees must ensure compliance with SEBI regulations

● The meeting of the trustees should be held at least once in every 2 months.

Asset Management Company

● Must be registered with SEBI

● AMC also can be formed as Pvt Ltd Company.

● Amc is responsible for all operational aspects.

● AMC gets fees for fund management.

● AMC must have a minimum net worth of Rs. 10 Cr., at all times

● An AMC cannot be an AMC or Trustee, of another Mutual Fund

● AMC’ s cannot indulge in any other business, other than that of asset management.

● AMC can not be trustee / AMC for another MF.

● At least half of the members of the Board of an AMC, have to be independent

● Quaterly reporting to trustees.

● The agreement between the Trustees and the AMC is known as “Investment Management Agreement”.

Functions of the Custodians

● Responsible for the securities held in the mutual fund’s portfolio and is required to be registered with SEBI

● Custodian is appointed by the Board of Trustees

● Keep an investment record of the mutual fund

● Collect dividends and investment payments due on the mutual funds investment

● The custodian and sponsor cannot be the same entity

● The custodian is the guardian of the funds and assets of investors

Registrar and Transfer Agents

● They are responsible for issuing and redeeming units of the Mutual Fund. Their other services include:

● Process investor applications

● Record details of Investors

● Send information to Investors

● Process dividend payout

● Incorporate changes in investor information

● Keeping Investor information up to date

● Example Karvy and CAMS

Other's important authorities

Auditors : -

● Auditors are responsible for the audit of accounts.

● The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC.

● While the scheme auditor is appointed by the Trustees

Fund Accountants : -

• Fund accountants calculate the NAV by collecting the information about the assets and liabilities of each scheme.

• AMC can either handle this activity in house or can higher the agency.

Distributors :-

They play a key role in selling suitable types of units to their clients. But before selling distributors needs pass the prescribed certification tests

Collecting Bankers :-

The Investors Money go into bank account of the scheme they have invested in . These banks accounts are maintained with collection bankers who are appointed by AMC.

Other's important authorities

Important Points

● The appointment of AMC can be terminated by Majority of directors of trustees.

● Fund manager is responsible for filing details of the funds’ portfolio with SEBI.

● A sponsor of a mutual fund can act as the distributor of the Mutual fund.

● The sponsor can be compared as promoter of a company

● Sponsor can contribute to the initial corpus of the trust.

● Sponsor contributes to the capital of the AMC and can invest in his own fund’s schemes.

● Sponsor can not act as Trustee , Custodian of the Mutual Fund.

● A sponsor of a mutual fund can act as the distributor of the Mutual fund.

● Sponsor can contribute to the initial corpus of the trust.

● Sponsor contributes to the capital of the AMC.

● Sponsor can invest in his own fund’s schemes.

● Sponsor can not act as Trustee of Mutual fund.

● Sponsor can not act as Custodian of the Mutual Fund

Important Points

Questions for Revision

Q-1 The appointments of fund distributors are made by

(a) The Transfer Agents (b) The Fund Sponsor (c) The Trustees (d) The AMC

Q-2 In India, a mutual fund has to be structured:

(a) As a trust (b) As an investment company

(c) Either as a trust or as a company at the choice of the sponsor (d) None of the above

Q-3 Which of the following entities is responsible for issuing and redeeming units?

(a) Custodian (b) Bankers (c) Registrar (d) Distributors.

Q-4 Minimum Net worth needed by AMC ?

(a) 10Cr (b) 15 Cr (c) 20Cr (d) 5Cr.

Answers:

Q-1 : (d), Q-2 : (a), Q-3 : (c), Q-4 : (a)

LEGAL AND REGULATORY ENVIRONMENT

Chapter 3

Regulating Agencies of Mutual Fund

● Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996

● SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign country

● Bank-sponsored mutual funds were jointly regulated by SEBI and RBI

● Subsequently it has been clarified that all MFs being primarily capital market players,regulatory come under the umbrella of SEBI.

● RBI regulates the money and government securities market where the mutual funds invest. But not the MMMF.

● Liquid funds which invest in money market instruments are now governed by SEBI alone. ( Money Market Mutual Funds are now regulated by SEBI). But they need to comply with RBI's regulations

● If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission

● SEBI does not regulate Non Banking Finance companies.

● The finance ministry is the supervisor of both the RBI and SEBI Aggrieved parties can make appeals to the Ministry of finance on the SEBI rulings relating to mutual funds.

Regulating Agencies of Mutual Fund

Self regulatory organizations (SRO’s)

● In developed Countries it is common for market players to Create SRO, Whose prime responsibility is to regulate the their own members

● Where ever SRO exits statutory regulatory bodies lays down the broad policy framework and leave micro regulation to the SRO.

● SRO are the second-tier in the regulatory structure & gets their powers from the apex regulating agency and act on their instructions

● SRO facilitate decentralization in the regulatory structure.

● For Instance - Stock exchanges are Self-Regulatory Organizations

What are the objectives of AMFI ?

● AMFI is an industry association, incorporated in 1995, is not an SRO, so it can● Just issue guidelines to members. It cannot enforce regulations.● To Define & Maintain high professional , ethical standards in all areas of operation in MF Industry.● To recommend best business practice and code of conduct to be followed by the members and other engaged in various activities.● To interact with the Securities and Exchange Board of India (SEBI) and represent to SEBI on all matters concerning the mutual fund industry.● To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry.● To develop a cadre of well trained agent distributors.● To Undertake nationwide investor awareness programme to promote better

understanding of the concept & working of mutual funds

AMFI code of ethics (ACE)

● Amfi Code of Ethics sets out the standards of good practices to be followed by the AMC in their operations and in their dealings with investors , intermediaries and the public.

● SEBI Regulation 1996 requires all the AMC and trustees to abide by the code of conduct.

AMFI code of ethics (ACE)

Integrity

Members and their key personnel, in the conduct of their business shall observe the high standard of integrity and fairness in all the dealing with the investors, issuer,market intemediaries,other members and regulatory and other government authorities.

Mutual Fund Scheme shall be organized, Operated, Managed and and their portfolios of securities selected, in the interest of all classes of unit holder and not in the intererest of ● Sponsors● Directors of Members● Members of Board of Trustees or Directors of the Trustee company● Brokers and Other Market Intermediaries● Associates of Members● A Special class selected from out of Unit Holders

AMFI code of ethics (ACE)

Due Diligence● Mem bers in the conduct of their Asset Management Business shall at all

times● Render high standard of service● Exercise due diligence● Excercise independent professional judgement● Member shall have and employ effectively adequately resources and

procedures which are needed for the conduct of Asset Management activity

Disclosures● Member shall ensure timely dissemination to all unitholder of

adequate,accurate, and explicit information presented in a simple language about the investment objectives, investment policies, financial positions and general affairs oooof the scheme.

AMFI code of ethics (ACE)

Professional Selling Practice

● Member shall not use any unethical means to sell,market or induce any investors to buy their products and scheme

Investment Practice

● Members shall manage all the schemes in accordance with the

● Fundamental investment objectives and investment policies stated

● In the offer documents and take investment decisions solely in the

● Interest of the unitholders.

● 5.2 Members shall not knowingly buy or sell securities for any of their schemes from or to

● Any director, officer, or employee of the member

● Any trustee or any director, officer, or employee of the Trustee Company

AMFI code of ethics (ACE)

Operations● Members shall avoid conflicts of interest in managing the affairs of the schemes and

shall keep the interest of all unitholders paramount in all matters relating to the scheme.● Members or any of their directors, officers or employees shall not indulge in 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).

Reporting Practices● Members shall follow comparable and standardized valuation policies in accordance

with the SEBI Mutual Fund Regulations.● Members shall follow uniform performance reporting on the basis of total return.● Members shall ensure scheme-wise segregation of cash and securities accounts.

Unfair Competition● Members shall not make any statement or become privy to any act, practice or

competition, which is likely to be harmful to the interests of other Members or is likely to place other Members in a disadvantageous position in relation to a market player or investors, while competing for investible funds.

AMFI code of ethics (ACE)

Observance Of Statutes, Rules And Regulations● Members shall abide by the letter and spirit of the provisions of the Statutes,

Rules and Regulations which may be applicable and relevant to the activities carried on by the Members.

10.0 Enforcement

Members shall:● Widely disseminate the AMFI Code to all persons and entities covered by it● Make observance of the Code a condition of employment● Make violation of the provisions of the code, a ground for revocation of

contractual arrangement without redress and a cause for disciplinary action● Require that each officer and employee of the Member sign a statement that

he/she has received and read a copy of the Code ● Establish internal controls and compliance mechanisms, including assigning

supervisory responsibility.

AMFI code of ethics broadly deals with:● Integrity● Due diligence● Disclosures● Professional selling practices● Investment practices● Operations● Reporting practices● Unfair competition● Observation of statutes, rules and regulations● Enforcement● Definitions like AMFI, Member, Trustee, Trustee company etc.

AMFI code of ethics (ACE) - Summary

AMFI guidelines & norms for intermediaries (AGNI)

● Take necessary steps to ensure that the clients’ interest is protected.

● Adhere to SEBI Mutual Fund Regulations and guidelines issued from time to time related to selling, distribution and advertising practices.

● Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes

● Highlight risk factors of each scheme, avoid misrepresentation and exaggeration and urge investors to go through SID/KIM before deciding to make investments.

● Disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended to the investors.

● Abstain from indicating or assuring returns in any type of scheme, unless the SID is explicit in this regard.

● Maintain confidentiality of all investor deals and transactions.

● When marketing various schemes, remember that a client’s interest and suitability to their financial needs is paramount.

● Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptation of rebates / gifts etc.

● A focus on financial planning and advisory services ensure correct selling, and also reduces the trend towards investors asking for pass back of commission.

● All employees engaged in sales and marketing should obtain AMFI (NISM Series-V-A: Mutual Fund Distributors Certification Examination)

AMFI guidelines & norms for intermediaries (AGNI)

Investors Rights & Obligations

●Service Standards Mandated for a Mutual Fund towards its Investors:

● Schemes, other than ELSS, need to allot units or refund moneys within 5 business days of closure of the NFO.

● Open-ended schemes, other than ELSS, have to re-open for ongoing sale / re-purchase within 5 business days of allotment.

● Statement of accounts are to be sent to investors as follows:

● NFO - within 5 business days of closure of the NFO.

1. Post-NFO investment – within 10 working days of the investment

2. Ongoing Investments – Once in quarter end of calender year with in 10 working days

3. Request by investor - To be dispatched with in 5 working days with out charges

● Investor can ask for a Unit Certificate for his Unit Holding. AMC is bound to issue unit certificates within 30 days of receipts of request.

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

● NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI and the mutual fund

● case of Fund of Funds, by 10 am the following day

● In the case of other schemes, by 9 pm the same day

● The investor/s can appoint upto 3 nominees, .

● The investor has a right to pledge the units held.

● Dividend warrants have to be dispatched to investors within 30 days of declaration of the dividend

● Redemption / re-purchase cheques would need to be dispatched to investors

● within 10 working days from the date of receipt of transaction request.

Investors Rights & Obligations

● Unit-holders have proportionate right to the beneficial ownership of the assets

of the scheme.

● Investors can choose to change their distributor or go direct. In such cases, AMCs will need to comply, without insisting on any kind of No Objection Certificate from the existing distributor.

● Investors can choose to hold the Units in dematerialized form. The AMC is bound to co-ordinate with the RTA and Depository to facilitate.

● In the case of unit-holding in demat form, the demat statement given by the Depository Participant would be treated as compliance with the requirement of Statement of Account.

Investors Rights & Obligations

Investors Rights & Obligations

● The mutual fund has to publish a complete statement of the scheme portfolio and the unaudited financial results, within 1 month from the close of each half year. Advertisement need to publish in one national English & regional language of the region where the HQ of the mutual fund is situated.

● Debt-oriented, close-ended / interval, schemes /plans need to disclose their portfolio in their website every month, by the 3rd working day of the succeeding month.

● Unit-holders can inspect key documents such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, R&T agent agreement and Memorandum & Articles of Association of the AMC.

● Scheme-wise Annual Report, or an abridged summary has to be mailed to all unit- holders within 6 months of the close of the financial year.

● The offer document has details of the number of complaints received and their disposal. Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.

● The trustees / AMC cannot make any change in the fundamental attributes of a scheme, unless a written communication is sent to each Unit-holder, and an advertisement should be published in news papers (english & regional).

● An option of exit would be give to unit holders with out any exit load. with in 30 days.

Investors Rights & Obligations

● The appointment / Termination of an AMC - A majority of the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the Scheme.

● The Winding of a Scheme - Only after 75% of the Unit-holders (in practice, Unit-holding) pass a resolution to wind-up a scheme.

● The Trustees are bound to obtain consent of the Unit-holders:

● Whenever required to do so by SEBI, in the interest of the Unit-holders

● Whenever required to do so by 75% of the Unit-holders (in practice, Unit- holding) of the scheme.

● When the trustees decide to wind-up or prematurely redeem the scheme

● If an investor feels that the trustees have not fulfilled their obligations, then he can file a suit against the trustees for breach of trust.

Investors Rights & Obligations

● Investors cannot sue the trust as they are not distinct from the trust

● Investors cannot lodge complaints against the trustees (with the Registrar of Public Trusts) or the AMC (with the CLB).

● Investors can lodge complaints with SEBI for non-compliance.

● Investors cannot be compensated if the performance of the fund is below expectations.

● There are no legal remedies available for a prospective investor.

● The principle of caveat emptor (let the buyer beware) applies to mutual fund investments. So, the unit-holder cannot seek legal protection on the grounds of not being aware, especially when it comes to the provisions of law, and matters fairly and transparently stated in the Offer Document.

Limitations to Investors right

Unclaimed Amounts

● The mutual fund has to deploy unclaimed dividend & redemption amounts in the

money market. ● AMC can recover investment management and advisory fees at maximum

rate of 0.50% p.a.● Recovery of such unclaimed amounts by the investors is as follows:● If the investor claims the money within 3 years, then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money● If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years● AMC is expected to make a continuous effort to remind the investors through

letters to claim their dues.● The Annual Report has to mention the unclaimed amount and the number of

such investors for each scheme.

Important Points

● SEBI entertains the complaints against MF and intervenes with fund managements to help the investor.

● SEBI requires that sponsors of a new scheme should appoint a compliance officer who must issue a Due Diligence Certificate to the effect that all regulations have been complied with by the fund and sponsors.

● The fund investors are neither shareholders nor depositors in the AMC● Mutual fund has to deploy unclaimed dividend and redemption amount in money

market, where they can charge .50% as investment management and advisory fees.

● Unit holders have right to timely service, right to information, right to approve changes in fundamental attributes, right to wind up a scheme, right to terminate the AMC.

● 3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed.

● The body to which investors may address their complaints is SEBI.● Investors money is not protected by the Companies Act.

Q-1. Bank owned mutual funds are regulated by

(a) RBI and SEBI (b) Respective parent banks (c) RBI (d) SEBI

Q-2. If an investor failed to claim the redemption proceeds after 3 years of due date he has the right to receive an amount equal to

(a) Zero (b) Face value of the unit

(c)Due date NAV plus interest @15% p.a.

(d)NAV at the end of three years after the due date

Q-3 Payment of redemption is delayed then what % Interest has to be paid by AMC ?

(a) 10% (b)20% (c)9% (d) 15%

Answers: Q-1 : (d) Q-2 : (d) Q-3 : (d)

Questions for Revision

OFFER DOCUMENT

Chapter 4

New Fund Offer

● Units of mutual fund are offered to investors for the first time through a NFO. Following are the key steps leading to NFO.

● AMC decide the scheme to take to the market.

● AMC prepares offer Document for the NFO. This needs to be approved by the trustees.

● The documents are to be filed with SEBI. And any observation made by SEBI needs to be incorporated in OD.

● Only After approval from SEBI & trustees OD can be issued in the Markets.

● AMC decides the suitable time for launch

● AMC holds events for intermediaries and press to make them familiar with the scheme.

● Finally offer documents and Application forms are distributed to market intermediaries for investor to apply.

There are 3 Relevant dates related to NFO

● NFO Open date

● NFO Close Date

● Scheme Reopening Date

New Fund Offer

The Offer Document

● Offer Document is the most important source of information about a mutual fund scheme for investors

● OD is the operating document and describes the product.

● Mutual fund offer document is divided into two parts, Scheme information document (SID) and Statement of additional information (SAI).

● SID comprises of details of the scheme while SAI deals with statutory I information about the mutual fund that is offering scheme.

● Both documents are prepared in the format as prescribed by SEBI.

● SEBI does not approve or dis approve the offer document, it gives its observation which needs to be incorporated in the offer document by the mutual fund.

● Investors are required to read and understand the OD.

● Investors sign the form stating that they have read the OD. No recourse is available to investors for not reading the OD or KIM

● The OD is issued by the AMC on behalf of the trustees

● The AMC is responsible for the information in the OD

The Offer Document

● Cover Page has the name of the scheme followed by its type ● Open-ended / Close ended / Interval● Equity / Balanced / Income / Debt / Liquid / ETF● Finally the cover page has the following standard clauses.● Table of Contents● Highlights● Introduction - Risk Factors● Standard● Scheme-specific - Minimum no. of investors in scheme, Definitions, Due

Diligence Certificate (issued by the AMC)● Information about the scheme - Units & Offer, Fees & Expenses ,Rights &

Penalties Unit-holders, Litigation etc.

Contents of SID

● If a scheme is launched in the first 6 months of the financial year (say, April 2010), then the first update of the SID is due within 3 months of the end of the financial year (i.e. by June 2011).

● If a scheme is launched in the second 6 months of the financial year (say, October 2010), then the first update of the SID is due within 3 months of the end of the next financial year (i.e. by June 2012).

● Thereafter, SID is to be updated every year.

● In case of change in the fundamental attributes, the SID has to be updated immediately after the lapse of the time period given to existing investors to exit the scheme.

Updation of SID

Contents of SID – Other changes

● It will be printed on a separate piece of paper (addendum) and distributed along with the SID, until the SID is updated.

● If a change is superseded by a further change (for instance, change in load), then addenda is not required for the superseded change i.e. addenda is only required to disclose the latest position.

● The change is to be advertised in an English newspaper having nation-wide circulation, and in a newspaper of the language of the region where the head office of the mutual fund is located.

● The change is to be mentioned in the website of the mutual

Contents of SAI

● Information about Sponsors, AMC & Trustee ,shareholding pattern, responsibilities, names of directors and their contact information.

● profiles of key personnel, and contact information of service providers {Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers}

● Condensed financial information (for schemes launched in last 3 financial years)How to applyRights of Unit-holdersInvestment Valuation Norms

● Tax, Legal & General Information (including investor grievance redressal mechanism of past 3 years.

● Regular update is to be done by the end of 3 months of every financial year.

● Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.

Update of SAI

● KIM is a summary of the SID and SAI. As per SEBI regulations, every application form is to be accompanied by the KIM.

● Name of the AMC, mutual fund, Trustee, Fund Manager and scheme● Dates of Opening /Closing Issue & Re-opening for Sale & Re-purchase● Plans and Options under the scheme● Risk Profile of Scheme● Price at which Units are being issued and minimum amount / units for initial

purchase, additional purchase and re-purchase● Bench Mark , Dividend Policy● Performance of scheme and benchmark over last 1 year, 3 years, 5 years and

since inception.● Loads and expenses● Contact information of Registrar for taking up investor grievances

Contents of KIM

● KIM is to be updated at least once a year.

● As in the case of SID, KIM is to be revised in the case of change in fundamental attributes. Other changes can be disclosed through addenda attached to the KIM.

Update of KIM

● Fundamental attributes of a scheme are its basic features. For eg. Open or close ended, lock-in period, fund objectives, asset allocation, loadsand charges etc.

● For any change in fundamental attributes, SEBI and Trustee approval is required.

● Investor approval is not needed. However, each investor must be informed through a communication and given the option to exit without exit load.

Fundamental attributes

Standard risk factors

● Mutual fund and securities are subject to market risk and there is no assurance that the objective will be achieved

● NAV of units issued under the scheme can go up or down depending on factors and forces affecting capital markets.

● Past performance of the sponsor/AMC/ Mutual fund does not indicate the future performance of the scheme.

● The name of the scheme does not in any manner indicate any either the quality of the scheme or the future performance of the scheme

Scheme specific risks

● Risk arising from investment objective, investment strategy and asset allocation of the scheme

● Risk arising from non –diversification , if any

● If a scheme offers assured returns, the scheme must state that the assurance is on the basis of the guarantees provided by the sponsor/AMC

● If the AMC has no previous experience in managing a mutual fund, a disclosure to the at effect should be made

Important Points regarding OD and KIM

● In USA, the OD is known as prospectus

● The first time investor should read detailed offer document, once he has gained familiarity with the AMC, he can just refer to KIM

● The offer document is issued by the AMC / Trustees

● OD is a legal document.

● OD issued for launching of a new schemes is valid for a period of six months and if the scheme is not launched within this period a fresh OD is required to be filed.

● OD contains the accounting policies to be followed. Such policies should be in accordance with the SEBI regulations.

● OD must disclose the names and background of fund managers, key personnel, investor relation officer, AMC and its directors, custodian, registrar, transfer agent and the statutory auditor.

● KIM is available at various distribution points such as banks, distributors and brokers

● AMC must confirm that a due diligence certificate signed by Compliance officer / CEO / MD has been submitted to SEBI.

● If a scheme’s name implies that it will invest primarily in a particular type of security or in certain industry, then it will invest at least 65% of the value of its assets in the indicated type of security/ industry.

● OD must contain brief description of investors’ complaint history for the last 3 Fiscal years of existing schemes.

● In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID. Both documents need to be updated regularly.

Important Points

Questions for Revision

Q-1 Which of the following is the operating document for a mutual fund?

(a) Offer Document (b) KIM (c) Trust deed (d) None of the above.

Q-2 The OD may not disclose the names and background of

(a) Fund manager (b) Key personnel (c) Investor relation officer

(d) Statutory auditor (e) None of the above.

Q-3 Offer Document issued on launch of the new scheme is valid for ?

(a) 1 month (b) 3 months (c) 6 months (d) 1 year.

Q-4 Which of the following is not the scheme specific risk factor?

(a) Risk arising from the schemes objective

(b) Risk arising from the non-diversification

(c) No previous experience in managing a fund

(d) Movement in NAV because of the market movements.

Q-5 SEBI directs that certain information must appear on the cover page of the offer document of any scheme. This includes the following except

(a) A statement to the effect that the document contains information that a prospective investor should know before investing

(b) A description of the investment policies for the scheme on offer

(c) Opening, closing and earliest closing date for the offer

(d) Type of scheme and price of units on offer

Questions for Revision

Q-6 Which of the following document is attached with the application form?(a) Offer document (b) Prospectus (c) Offer for sale document (d) KIM.

Q-7 Only one of the following statements is correct as regards the required frequency of updating the contents of the Offer Document of an existing mutual fund scheme. Which one?

(a) Once issued, the OD of an existing scheme can`t be updated

(b) The OD must be updated whenever there is a material change in its contents

(c) The OD must be updated on a half-yearly basis

(d) The OD must be updated on a yearly basis.

Answers:

Q-1 : (a), Q-2 : (e), Q-3 : (c), Q-4 : (d), Q-5 : (B), Q-6 : (d), Q-7 : (b)

Questions for Revision

FUND DISTRIBUTION AND CHANNEL MANAGEMENT

PRACTICES

Chapter 5

Trainer must elaborate the concept before starting the ppt.

Traditional Distribution Channels

● Individual Agents

Those agents who facilitates the investment individually for Insurance co`s or Govt. Savings schemes etc.

● Institutional Channels

The changing competitive context led to the emergence of the institutional distributors for a wide spectrum of financial products such as

Private Distribution Companies

Banks and NBFC`s

Post Offices

Newer distribution Channels

Technologies has opened the doors to newer ways with help of such technologies there is a emergence of newer distribution channels which would play an important role in the years to come.

Internet • Direct Interactions• Reduction in Cost• Convenience• Less paper work• High standards in Servicing the clients

Stock Exchanges • High penetration• High volume of transactions• Cost effectiveness.

Pre-requisites to become MF Advisor

● The Individual needs to pass the certification Examination conducted by NISM.

And get the ARN registration from AMFI.

● With out Certification / registration one can not advise or sell any Mutual fund

schemes.

● In case of corporates employee involved in sales & Marketing has to Pass the

certification examination.

● Once the passing certification one can advise all the AMC`s Mutual Fund After

completing the empenalment process with each AMC separately

Commission structure for mutual fund agents

Initial ( Upfront )commission

Paid on the amount mobilised by agents. The scheme application forms carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

Trail commission

it is paid normally on quarterly basis for the funds that remain invested in the scheme. Trail is an effective way to restrict the practice of rebating, and link commissions.

Suppose an investor has bought 1000 units at Rs 10 each.

The distributor who procured the investment may have been paid an initial commission calculated as a percentage on 1000 units X Rs 10 i.e. Rs 10,000.

Later, suppose the NAV of the scheme goes up to Rs 15.

Trail commission is payable on 1000 units X Rs 15 i.e. Rs 15,000 & not on the Rs 10,000 mobilised.

The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either AMFIor SEBI.

Example

SEBI’s advertising code

• Standard measures to compare such as Compounded Annualized Yield, CAGR etc. for scheme in existence for more than 1 year.

• Annualised yields for at least one, three, five years & since launch

• For less than 1 year performance, Absolute Return without annualisation except for Liquid Mutual Funds.

• Dividend declared to be mentioned in rupees per unit with face value of each unit and the prevailing NAV at the time of declaration

• Risk factors prominently stated

• For comparing performance against benchmarks,appropriate benchmark to be used and identical time periods to be used

• No add-ons during offer

• Any ranking of fund to be explained appropriately

Loads

● Load is charged to investor when the investor redeems units. It is primarily used to meet the expenses related to sale and distribution of units

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

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

● Exit load should be charged equally for all types of investors. AMC should not discriminate on the basis of Investment Value.

● Load is an amount which is recovered from the investor.

Questions for Revision

Q-1 Which one of the following statements is correct? (a) An individual agent can distribute/sell only one mutual fund's products (b) Any category of distributors/agents can distribute as many of the mutual

funds' products as allowed by the concerned AMCs (c) Banks are not allowed to sell mutual fund products, except their own funds' (d) A distribution company can distribute/sell only one mutual fund's products

Q-2 Which of the following can invest in Indian Mutual fund?(a) SEBI (b) RBI (c) Foreign Banks (d) AMFI.

Q-3 Which of the following categories of distributors will be exempt from passing the AMFI Mutual Fund Test? (a) All the existing agents of UTI mutual fund and other funds (b) New applicants for distributorship, if the AMC approves their applications (c) Employees of banks who distribute the funds (d) None of the above.

Answers: Q-1 : (b), Q-2 : (c), Q-3 : (d)

INVESTOR SERVICES

Chapter 7

Categories of investors eligible to buy MF units

● Resident Individuals

● Indian Companies

● Indian trusts and charitable institutions

● Banks

● NBFC’s

● Insurance companies

● Provident funds

● Non-resident Indians / PIO

● OCB’s● SEBI registered FII’s● Advisor should refer to the OD to know the eligible investors.

KYC Requirement for MF investors

● It is compulsory for all investments of Rs 50,000 and above to be compliant with the regulatory requirements prescribed under the Anti-Money Laundering Act, 1992 and SEBI circulars in this regard.

● Broadly, mutual fund investors need the following Documents:

● Proof of Identity

● Proof of Address

● PAN Card

● Photograph

● In order to make the process hassle free for the MF investors, MF have made an arrangement with CVL ( CDSL venture Ltd) to comply with the documentation requirement.

● Select branches / offices of mutual funds, registrars and large distributors serve as Points of Service (POS) for the KYC documentation, listed in AMFI website – .www.amfiindia.com

● Investors will need to provide the Original, along with a copy of the relevant documents, to any of the POS (The Original will be returned after verification. Alternatively, the investor can provide a True Copy attested by a Notary Public, Gazetted Officer or Manager of a Scheduled Commercial Bank.

● CVL provides a facility where the POS, from their own office, can access CVL’s system, enter the requisite data and generate an acknowledgment with a Mutual Fund Identification Number (MIN).

KYC Requirement for MF investors

KYC Requirement for MF investors

• KYC documentation has to be done only ONCE, with CVL acting through the POS.

• Based on this acknowledgment, the mutual fund investor can invest in any mutual fund.

• In case of any change in address or any other information, investor can get it updated at any POS and the same will be changed with all the AMC where the investor has invested.

• Where investment is made by a minor, KYC requirements have to be complied with by the Guardian.

• In the case of investments by a Power of Attorney holder on behalf of an investor, KYC requirements have to be complied with, by both, investor and POA holder.

● PAN Card is compulsory for all mutual fund investments. Exception has been made for Micro-SIPs i.e. SIPs where annual investment (12 month rolling or April-March financial year) does not exceed Rs 50,000.

● Micro-SIP investment by individuals, minors and sole-proprietory firms are exempted from the requirement of PAN card. Instead of they can produce any of the photo identification document along with micro SIP application.

● Voter Identity Card, Driving License, Government / Defense identification card, Passport, Photo Ration Card

● Photo Debit Card (Credit card not included because it may not be backed up by a bank account).

● Employee ID cards issued by companies registered with Registrar of Companies) etc....

● It may be noted that the relaxation in documentation requirements for micro-SIPs is not available for HUFs and non-individuals. It is available for NRIs, but not PIOs.

PAN requirement for micro SIPs

Demat Account - Benefits

● Dematerialisation is a process whereby an investor’s holding of investments in physical form (paper) is converted into a digital record.

● Investors purchase & sale of investments get automatically added or subtracted from their investment demat account, without having to execute cumbersome paperwork.

● Less paperwork in buying or selling the Units, and correspondingly, accepting or giving delivery of the Units.

● Direct credit of bonus and rights units that the investor is entitled to, into the investor’s demat account.

● Change of address or other details need to be given only to the Depository Participant, instead of separately to every company / mutual fund where the investor has invested.

● NSE’s platform is called NEAT MFSS. BSE’s platform is BSE STAR Mutual Funds Platform.

Transaction with Mutual Funds

Fresh Purchase

Is a instance where the Investor does not have an investment account with specific Mutual Fund.

Additional Purchase

Once the Investor has the folio and he again transact new purchase transaction in the same folio.

Online Transaction

Are transaction done through Internet. AMC issues a personal PIN number through which investor can transact except the SIP.

● Mutual funds do not accept cash. ● Application moneys need to come through normal banking channels like;● Cheque● DD● NRI / PIO applications need to be accompanied by cheque drawn on an

NRO account (for non-repatriable investment) or NRE account (for

repatriable investment).● If payment from NRI is by DD, and investment is on repatriable basis, a

banker’s certificate will be required to the effect that the DD has come out of

moneys remitted from abroad. When the NRI receives money in his bank

account in India, the banker would issue a Foreign Inward Remittance

Certificate (FIRC), which is evidence that the money was remitted from

abroad.

Payment mechanism for purchase & additional purchase

Electronics clearing service (ECS), generally in case of SIP.

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. The benefit of ASBA is that the money goes out of the investor’s bank account only on allotment. Until then, it keeps earning interest for the investor.

M-Banking is nascent in India. RBI has permitted banks to offer the facility of transferring up to Rs 50,000 per customer per day, through the mobile connection. Once people are comfortable with M-banking, this will become a convenient way to invest.

Payment mechanism for purchase & additional purchase

Most mutual fund schemes offer three options –

– Dividend and

– Growth.

– Dividend reinvestment Option.

These are different options within a scheme; they share the same portfolio. Therefore the portfolio returns are the same for all three options. However, they differ in the structure of cash flows and income accruals for the unit-holder, and therefore, the Unit-holder’s taxability, number of units held and value of those units.

Investment plans and services

Investment plans and services

Parameter Growth Option

NO NO

NO

Yes NO

NAV change

Dividend Payout Option

Dividend Reinvestment Option

Dividend received in bank accoun Yes

Income Distribution Tax

Yes, for debt Schemes

Yes, for debt Schemes

Increase in number of units on account

Of reinvestment of Dividend No

NAV declines to the extent of dividend

And Income Distribution tax

extent of dividend and Income distribution

tax NAV declines to the extent of dividend

and Income Distribution tax

NAV captures The portfolio

Change entirel

Systematic Investment Plan

SIP is investing a fixed sum periodically in a disciplined manner for long term. It gives benefit of Rupee Cost averaging ( Discussed in later half of presentation).

Voluntary Accumulation Plan

VAP is modified version of SIP. It is Voluntary Accumulation Plan. It allows the investor flexibility with respect to the amount and frequency of investment.

In VAP, investor has to impose voluntary self discipline.

Systematic Withdrawal Plan

In cases where an investor does not want to withdraw all the amount invested at one time he can opt for facility called SWP which would enable investor to withdraw a specific amount at specific period.

Systematic Transfer Plan

It is a systematic way of investing an amount at pre-specified frequency from a pool of money available or from any debt scheme to equity.

Investment plans and services

Triggers

It is type of an standing instruction given to particular fund for purchase or sell at desired market level.

Investment plans and services

Transactions cut off time

Scheme type Transaction Cut of time Applicable NAV1 Liquid Scheme Sale Previous day NAV2 Liquid Scheme Sale Received After 12 Noon Next day NAV3 Liquid Scheme Re-purchase Received before 3 pm Previous day NAV4 Liquid Scheme Re-purchase Received After 3 pm Next day NAV5 Other Than Liquid above 1 Cr. Sale Received any time Same day NAV6 Other Than Liquid up to 1 Cr. Sale After 3 PM Next day NAV7 Other Than Liquid above 1 Cr. Sale Same day NAV8 Other Than Liquid Re-purchase Same day NAV9 Other Than Liquid Re-purchase After 3 PM Next day NAV

Sr.noReceived upto 12 Noon

(With Outstation cheque & DD) Received upto 3 PM

Questions for Revision

Q-1 Investor A has opted for a systematic transfer plan. This means

(a) The investor is allowed to transfer on a periodic basis a specified amount from one scheme to another scheme within the fund family

(b) A specified amount is automatically transferred from his bank account to his fund account

(c) The investor can withdraw specified amounts at periodic intervals from the plan

(d) The investor can invest any amount in the scheme at periodic intervals

Q-2 Which of the following is not true with respect to the SWP?

(a) All allows the investor to make systematic withdrawals on a regular intervals

(b) Here the amount withdrawn is treated as the redemption of units

(c) SWP is same as the Monthly Income Plan

(d) None of the above.

Q-3 Which of the following is not true with respect to the voluntary

accumulation plan?(a) It give the flexibility to the investor regarding the amount to be

invested(b) It give the flexibility to the investor regarding the frequency of

investment(c) VAP follower is obliged to keep investing(d) None of the above.

Answer: Q-1 : (a), Q-2 : (c), Q-3 : (d)

Questions for Revision

RETURN, RISK & PERFORMANCE OF FUND

Chapter 8

Drivers of Returns in a scheme

The portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are different for each asset class.

Equity scheme

Securities Analysis Disciplines

● Fundamental Analysis & Technical Analysis - These are quantitative approaches to securities analysis. securities analysis is an important aspect of actively managed schemes.

● Fundamental Analysis entails review of the company’s fundamentals viz. financial statements, quality of management, competitive position in its product / service market etc. The analyst sets price targets, based on financial parameters like --

Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares● This tells investors how much profit the company earned for each equity share that they own.

Price to Earnings Ratio (P/E Ratio): Market Price ÷ EPS● When investors buy shares of a company, they are essentially buying into its future earnings. P/E ratio indicates how much investors in the share market are prepared to pay (to become owners of the company), in relation to the company’s earnings.

● P/E may be high because the company’s prospects are indeed good, while another company’s P/E may be low because it is unlikely to replicate its past performance

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

This is an indicator of how much each share is worth, as per the company’s

own books of accounts.

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

An indicator of how much the share market is prepared to pay for each share

of the company, as compared to its book value.

Note :- Most financial indicators cannot be viewed as stand-alone numbers. They need to be viewed in the context of unique factors underlying each company. The fundamental analyst keeps track of various companies in a sector, and the uniqueness of each company, to ensure that various financial indicators are understood in the right perspective.

The discipline of Technical Analysis has a completely different approach. Technical Analysts believe that price behavior of a share, and the volumes traded are a reflection of investor sentiment, which in turn will influence future price of the share.

Technical Analysis

Growth investment style ● entails investing in high growth stocks i.e. stocks of companies that are likely to grow much faster than the economy.● valuation of these stocks tends to be on the higher side.● In the event of a market correction, these stocks tend to decline more.

Value investment style ● is an approach of picking up stocks which are valued lower, based on fundamental analysis. ● The belief is that the market has not appreciated some aspect of the● value in a company’s share – and hence it is cheap. ● When the market recognizes the intrinsic value, then the price would● shoot up. Such stocks are also called value stocks.● valuation of these stocks tends to be on the lower side.

Investment Styles

Portfolio building approach – Top down and Bottom up:

In a top down approach,

the portfolio manager decides how to distribute the investable corpus between countries (if it invests in multiple geographies) and sectors. Thereafter, the good stocks within the identified sectors are selected for investment. Thus sector allocation is a key decision.

A bottom-up approach

on the other hand give emphasis on good stock picking. If a stock is good, it is picked for investment. The approach is therefore also called stock picking. Stock selection is the key decision in this approach; sector allocation is a result of the stock selection decisions.

Therefore, it can be said that equity returns are a function of sector and stock selection.

Debt

Investment in a debt security, as in the case of a loan, entails a return in the form of interest (at a pre-specified frequency for a prespecified period), and refund of a pre-specified amount at the end of the pre-specified period.● The pre-specified period is also called tenor. ● At the end of the tenor, the securities are said to mature. ● The process of repaying the amounts due on maturity is called redemption.● Debt securities that are to mature within a year are called money market securities.● The return that an investor earns or is likely to earn on a debt security is called its yield.● yield is a combination of interest paid by the issuer and capital gain. ● Debt securities are issued by Central / State Governments, Banks, Financial Institutions, Public Sector Undertakings (PSU), Private Companies, Municipalities etc.

Debt

● Securities issued by the Government are called Government Securities or G- Sec or Gilt.

● Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India.

● 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.

● Bonds / Debentures are generally issued for tenors beyond a year. Governments and public sector companies tend to issue bonds, while private sector companies issue debentures.

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

● The interest rate payable on a debt security are specified as a fixed rate, say 6% or floating rate.

● Interest rates on floating rate securities (also called floaters) are specified as a “Base + Spread”. For example, 5-year G-Sec + 2%.

● Interest rates and Market price of debt security are inversely related to each other.

● Interest rate sensitivity of the debt security is measured by modified duration of the debt security.

● If the portfolio manager expects interest rates to rise, then the portfolio is switched towards a higher proportion of floating rate instruments; or fixed rate instruments of shorter tenor. On the other hand, if the expectation is that interest rates would fall, then the manager increases the exposure to longer term fixed rate debt securities.

Interest Rates Risk

Yield Spreads:

● Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market.

● A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place.

Gold is a truly international asset, whose quality can be objectively measured. The value of gold in India depends on the international price of gold (which is quoted in foreign currency), the exchange rate for converting the currency into Indian rupees, and any duties on the import of gold.

Therefore, returns in gold as an asset class depends on:

1) Global price of gold

Gold is seen as a safe haven asset class. Therefore, whenever there is political or economic turmoil, gold prices shoot up. Most countries hold a part of their foreign currency reserves in gold. Similarly, institutions like the International Monetary Fund have large reserves of gold. When they come to the market to sell, gold prices weaken. Purchases of gold by large countries tend to push up the price of gold.

Gold

Strength of the Rupee

Economic research into inflation and foreign currency flows helps analysts anticipate the likely trend of foreign currency rates.

When the rupee becomes stronger, the same foreign currency can be bought for fewer rupees. Therefore, the same gold price (denominated in foreign currency), translates into a lower rupee value for the gold portfolio. This pushes down the returns in the gold fund. A weaker rupee, on the other hand, pushes up the rupee value of the gold portfolio, and consequently the returns in gold would be higher.

Unlike gold, real estate is a local asset. It cannot be transported and its value is driven by local factors. Some of these factors are:

Economic scenario

In the recent past, when there was uncertainty about the economy, people preferred to postpone real estate purchases. Consequently, real estate prices weakened. As the economy improves, real estate prices also tend to keep pace.

Infrastructure development

Whenever infrastructure in an area improves, real estate values go up.

Interest Rates

When money is cheap and easily available, more people buy real estate. This pushes up real estate values. Rise in interest rates therefore softens the real estate market.

Real Estate

Simple Return:

(End Value – Initial Value) X 100

Initial value

Suppose you invested in a scheme, when its NAV was Rs 12. Later, you found that the NAV has grown to Rs 15. How much is your return?

= (15 – 12) / 12 = 25%

Measures of Returns

Annualized Return:

Annualized helps us compare the returns of two different time periods.

Simple Return X 12

Period of simple return (in months)

Suppose Two investment options have indicated their returns since inception as 5% and 3% respectively. If the first investment was in existence for 6 months, and the second for 4 months, then the two returns are obviously not comparable.

1) 5% *12 / 6 = 10%

2) 3% * 12 / 4 = 9%

Measures of Returns

Compounded Return:

[ (LV / IV )^(1/n) - 1 ] X 100

LV = later value

IV = Initial value

N = period in years

Suppose if Rs 1,000 grew to Rs 4,000 in 2 years, LV = Rs 4,000; IV =

Rs 1,000; n = 2 years, then the compounded return is given by such investment;

= [ ((4000 / 1000) ^ ½ ) - 1 ] 100 = 100%

Measures of Returns

Risk in Mutual Fund Schemes

Portfolio Risk

It is basically a risk of investment allocated by the Fund manager in to different assets classes. As there is no certainty regarding the performance of the selected assets classes by the fund manager.

Portfolio Liquidity

It is a risk of investment made by the fund manager in to assets which are not liquid. Especially in case of open ended schemes where investor can ask for redemption at any time.

SEBI has therefore laid down criteria to identify illiquid investments and also set a ceiling to the proportion of such illiquid investments in the net assets of a scheme.

Drivers of risk in a scheme

The outside liabilities need to be paid by a scheme, irrespective of the performance of the assets. It is bad enough when the assets perform poorly, but if heavy outside liabilities need to be paid during that time, the scheme faces extreme pressure. Therefore, outside liabilities add to the risk in a mutual fund scheme.Some outside liabilities are part of the business. For example, when a scheme purchases an investment, it is liable to pay for it to the stock exchanges.The practice of taking liabilities beyond what is inherent to the normal business of a mutual fund scheme is called leveraging. Internationally, such leveraged funds are commonly found.Recognizing the risks involved in such leveraging, SEBI regulations stipulate that:

• A mutual fund scheme cannot borrow more than 20% of its net assets• The borrowing cannot be for more than 6 months.• The borrowing is permitted only to meet the cash flow needs of investor

servicing viz. dividend payments or re-purchase payments.

Liabilities in the scheme

Use of derivative

Mutual funds are permitted to use derivatives for hedging against risk or re-balancing the portfolio, but not for leveraging.

Unit holders churn

Frequent churning by unit holders keeps the fund under redemption pressure therefore maintaining the higher liquidity. It may sometime force to further liquidate the portfolio in order to meet the redemption. This is generally happen due to FIIs where retail investors suffers for no fault.

As a measure to protect the investor, SEBI has stipulated the 20 :25 rule viz. every scheme should have at least 20 investors; no investor should represent more than 25% of net assets of a scheme.

Evaluating the Risks of a MutualFund

• What is Risk ?– Risk means the possibility of financial loss.– “Risk” is thus equated with Volatility of Earnings

• Equity Price Risk– Company Specific– Sector Specific– Market Level

Volatility of an Equity mutual fund comes from:Kind of stocks in the portfolio (growth/value/big/small)The number of stocks ( Degree of diversification. Smaller portfolios are more volatile than large PFs)Fund manager’s success at market timings.It is independent of number of investors in the scheme.The Risk tolerance of an investor is dependent on his age, his income and his job security.Risk Tolerance is independent of the Stock Market Movements.

●Risk Measures ● Standard Deviation – SD measures the fluctuations of a fund`s returns around

a mean level. SD gives an idea of how volatile the earnings are. SD measures total risk.

● Disadvantage of SD is that it is based on Past Returns.● Beta Coefficient – Beta relates a fund's return with a market index and

measures the sensitivity of the fund's returns to change in market index. A beta of 1 means the fund moves with market. A beta of less than one means the fund will less volatile than the market.

● Beta is based on past returns.●Ex Marks or a number known as “R-Squared”

● How much of a fund's fluctuations is attributable to movements in the overall market from 0 to 100 percent.

● An index fund will have ExMarks of nearly 100%. Non Diversified funds will have lower ExMarks.

● Ex Marks of an equity fund measures its Performance●Standard Deviation is the best measure of risk.●Beta of an equity fund measures its RISK.

Evaluating the Risks of a MutualFund

• Alpha

– Risk adjusted performance calculation is called Alpha.

– Alpha of a fund compares the fund's actual results with what would have been expected given the fund`s beta and the market index performance.

Risk Adjusted performance

Sharpe ratio and Treynor Ratio

Risk premium= Funds return – Risk free rate of return

Sharpe Ratio = Risk premium/SD

Treynor Ratio = Risk Premium/Beta

Both the ratios measures the adequacy of returns against the risk assumed.

Evaluating the Risks of a Mutual Fund

Important Points

● Money Market Funds are low risk fund.

● Sectoral Fund are high risk fund.

● Risk is equated with Volatility of Earnings.

● Diversification reduces Company specific risk but it does not reduce Market Risk.

● Short Term investment in Equity market is most risky.

● BEST FUND WILL HAVE HIGHER EX MARKS, LOWER BETA AND HIGHER GROSS DIVIDEND YIELD

Other performance measures

● The expense ratio ( Ratio of total expenses to average net assets of the fund)- Funds with small corpus size will have a higher expense ratio affecting investor returns. It is indicator of the Fund’s Efficiency and Cost Effectiveness.

● The income ratio ( It is the net investment income divided by its net assets for the period) – useful for debt fund

● Fund size – Small funds are easy to manage and can achieve their objectives in a focused manner with limited holdings.

● Large funds benefit from economies of scale with lower expense ratios and superior fund management skills.

● Cash holdings

● The returns should be computed on an annualized average compound rate of return from cumulative figure.

● If the fund performance data relates to a period of less than one year, it should not be annualized, except for liquid mutual funds which have a short investment horizon.

Borrowings by Mutual Fund

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

● For Maximum period of 6 months.

● Purpose should be to meet liquidity requirements for paying dividend or meeting redemptions.

● It is not a permanent source of funds for the scheme.

Important Points

Benchmarking

● Benchmarking should be selected by reference to – The asset class it invests in and the fund’s stated investment objective.

● 3 kinds of benchmarks are used – Relative to market as a whole, relative to other mutual funds, and relative to other comparable financial products.

● For debt funds, the benchmark should have the same portfolio composition and the same maturity profile

● Main benchmark for debt funds is I-sec

● Tracking Error – Applicable for Index Fund

● SEBI requires MF to specify Benchmark for each scheme in OD & KIM

Criteria for peer group comparisons

● The investment objective and risk profiles of the two funds should be the same.( Debt with debt and equity with equity)

● Portfolio composition of two funds is similar. ( Gilt cannot be compared with riskier corporate debt)

● Fund size should be comparable.( same size)

● Expense Ratios is also important factor

● Funds should be compared over the same periods only

● Name of Benchmarking Debt and MM Funds

● I-SEC: Its I-bex index is often used to track Govt. securities performance.

● CRISIL: Has 8 debt indices

● NSE: Has designed Govt. security index and T-bill index.

● Besides NSE, JP Morgan has also developed a T-bill index.

Sources for tracking Mutual Fund Performance

• Mutual Funds Annual & periodic Reports.

• Mutual Funds website.

• AMFI website

• Financial News Papers.

• Fund Tracking Agencies – Credence, Value Research

• Newsletters

• Offer Document of the Fund

• Analytical Articles

The Credit Rating Agency CRISIL evaluates the Fund Performance and Ranks the Scheme by Performance.

Index

Day 2

Part 3

9. Accounting, Valuation and Taxation10. Investment Management

Part 4

Helping investors with Financial PlanningRecommending Financial Planning Strategies to InvestorsSelecting the Right Investment products for Investors14. Recommending Model Portfolios and Selecting the Right Fund15. Business Ethics in Mutual Fund

ACCOUNTING VALUATIONAND TAXATION

Chapter 6

Trainer must elaborate the concept before starting the ppt.

What are net assets of a mutual fund ?

The net assets represent the market value of assets which belong to the investors, on a given date.

Net assets are calculated as: Market value of investments

Plus(+): Current assets and other assets

Plus(+): Accrued income

Less(-): Current liabilities and other liabilities

Less(-): Accrued expenses

Net Assets/Total no. of Units Issued = NAV per unit.

A fund’s NAV is affected by four sets of factors

− Purchase and sale of investment securities− Valuation of all investment securities held− Other assets and liabilities− Units sold and redeemed.

How frequently is the NAV calculated ?

• All mutual funds have to disclose their NAVs daily, by posting it on the AMFI web site by 9.00 p.m. In case of any other scheme except FOF where it is to be published by 10 a.m. Of the following day.

• Open –ended funds have to compute and disclose NAVs everyday; closed end funds can compute NAVs every week, but disclosures have to be made everyday.

• Closed end schemes not mandatorily listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months, as permitted by SEBI.

Latest changes since August 1, 2009

● SEBI has abolished entry loads. So, the Sale Price needs to be the same as NAV.

● Exit loads in excess of 1% of the redemption proceeds have to be credited back to the scheme immediately i.e. they are not available for the AMC to bear selling expenses.

● Exit load structure needs to be the same for all unit-holders representing a portfolio.

New SEBI guidelines for Dividend Distribution :-

● All profit earned (including accrual income) are available for distribution.

Valuation gain are ignored but valuation losses needs to be adjusted against profit.

The proportion of sale price on new units which is attributable to the valuation gains is not available as a distributable reserve.

There are two types of expenses:

• Initial issue expenses

• Recurring expenses

What are the initial issue expenses ?

Expenses that are incurred in the launch of the fund are called as initial issue expenses it should not exceed 6% of the funds mobilized. Any amount above this has to be borne by the sponsor or the AMC.

Initial Issue Expense are charged as follows :-

For Close Ended Schemes – Charged over the life of the scheme , on a weekly basis until maturity.

For Open ended Scheme – the initial issue expenses used to be carried in the balance sheet as “deferred revenue expenses” and written off over a period not exceeding 5 years.

What are recurring expenses

● These can be charged to the scheme. Since the recurring expenses drag down

the NAV, SEBI has laid down the expenses, which can be charged to the

Scheme.

An indicative list is as follows:● Fees of various service providers, such as Trustees, AMC, Registrar & Transfer Agents, Custodian, & Auditor● Selling expenses including scheme advertising and commission to the distributors● Expenses on investor communication, account statements, dividend / redemption cheques / warrants● Listing fees and Depository fees● Service tax

Recurring expense limit: SEBI has stipulated the following annual limits on recurring expenses (including management fees) for schemes other than index schemes.

The above percentages are to be calculated on the average net asset of the scheme.

2.50% 2.25%2.25% 2.00%2.00% 1.75%1.75% 1.50%

Net Asset ( Rs crore) Equity Scheme

Debt Scheme

Upto Rs 100 cr.Next Rs 300 cr.Next Rs 300 cr.Excess over Rs 700 cr.

What are recurring expenses

Within above limits, the management fees can not exceed:

• 1.25% on the first Rs 100 crore of net assets of a scheme

• 1.00% on the balance net assets.

Management fees cannot be charged by liquid schemes and other debt schemes on funds parked in short term deposits of commercial banks.

The expense limits for index schemes (including Exchange Traded

Funds) is as follows:

• Recurring expense limit (including management fees 1.50%

• Management fees 0.75%

As regards Fund of Funds, the recurring expense limit (including management fees) is 0.75%.

What are recurring expenses

Expenses that can not be charged to the Scheme

• Penalties and fines for infraction of law

• Interest on delayed payment

• Legal, marketing, publication and other general expenses not attributable to any scheme

• Expenses on general administration corporate advertising and infrastructure costs

• Depreciation on fixed assets

Equity >65%

Dividends

DDTInvestors

Capital Gains

Tax Free NIL Tax Free15%

Within 12 m After 12 m

Short Terms

Long Terms

Within 12 m After 12 m

Tax provision for Equity Schemes

● Taxability of mutual fund investor in an equity-oriented mutual fund scheme

● Would pay STT on the value of the transactions of sale (0.125%) and purchase (0.125%) of units in the stock exchange; or on re-purchase (0.25%) of the units by the AMC.

● Would be exempt from capital gains tax, if the units were held for more than a year

● Would pay capital gains tax at 15%, if the units were held for 1 year or less

● Will receive any dividend free of tax; the scheme too will not incur any tax on the dividend distribution.

Debt Mutual Fund

Dividend Capital Gain

Investor DDT Short term Long term

Within 12 m After 12 m

Two optionsAs per slab

10%Paid by the Fund

20% after indexation

Tax free

Tax provision for Debt Mutual Funds

● Taxability of mutual fund investor in an debt-oriented mutual fund scheme

● Would not bear any STT

● Would bear a tax on long term capital gains at the lower of 20% with indexation, or 10% without indexation

● Would bear a tax on short term capital gains, as per the investor’s tax slab.

● Will receive any dividend free of tax; but the scheme would have paid a tax on the dividend distribution.

DDT Paid by Mutual fund companies

This is a tax on dividend distributed by debt-oriented mutual fund schemes. Applicability is as follows:

Money Market Mutual Funds / Liquid Schemes:

25% + Surcharge + Education Cess

Other debt funds (investors who are individual / HUF):

12.5% + Surcharge + Education Cess

Other debt funds (other investors):

20% + Surcharge + Education Cess

Numerical

• An investor purchased units in an approved debt Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He sold the units on December 1, 2001 for Rs. 750000/-. Calculate the capital gain taxes paid by him. ( Ignore indexation).

• Answer :

– Long term capital gain = 250000/

– So Tax on LTCG = 2500000* 10% = Rs. 25000/-

Other points

● Section 80 C – Individual and HUF are entitled to deduction up to Rs.1 lakh in respect of payment out of taxable income towards certain instruments which includes ELSS of Mutual funds.

● Dividend Stripping – Section 94(7) – As per the finance Act 2001, If investor buy units within 3 months prior to record date of dividend and sells those units within 9 months of record date, then the loss if any, shall be ignored.

● Limitation on set off in case of bonus units – NAV of the scheme is get adjusted after bonus units are issued therefore any capital loss arising out of such transaction is not allowed to set off if such transaction has happened within 3 months prior to record date of bonus issue and sold off within 9 months after the record date.

● Units are not considered under wealth tax

● Section 195 – 20% TDS for LTCG and 30% TDS on STCG if unit holder is a NRI.

● 48% TDS if unit holder is foreign company.

Non Performing Assets (NPA)

An asset shall be classified as an NPA, if the interest and/or principal amount have not been received or have remained outstanding for one quarter, from the day such income/instalment has fallen due.

Such assets will be classified as NPA`s, soon after the lapse of a quarter from the date on which payments were due.

Important Points

• Investors’ subscriptions are accounted for by the fund not as liabilities or deposits but as Unit Capital.

• Unit Capital is found in the Liability side of scheme’s balance sheet.

• Investment made by Mutual fund on behalf of investors are accounted as Assets.

• Liabilities in Balance sheet of mutual fund are strictly short term in nature.

• The Day on which NAV is calculated is known as Valuation Date.Questions for Revision

Q-1An equity fund has weekly average net assets of Rs. 1400.00 crore outstanding in the year. The maximum ongoing expenses (excluding issue/redemption expenses) that may be charged to the fund amount to:

(a) Rs. 26.75 crore (b) Rs. 35.00 crore (c) Rs. 19.75 crore (d) Rs. 27.5 crore

Q-2 Generally the income earned by the mutual fund registered with SEBI is exempt from tax under section

(a) 80 (C) (b)10(35) (c) 10 (23D) (d) 115 (R).

Question for Revision

Q-3 A fund's portfolio includes an equity security which is listed at the NSE. Its last quoted closing prices were: Rs. 27 on July 10, Rs. 35 on July 13 and Rs. 28 on July 16. On July 28, using SEBI norms, the fund should value this security at: (a) 35 (b) 28 (c) 30 (d) 31.50.Q-4 A mutual fund holds a debenture redeemable after two years and with next quarterly interest receivable on 31/12/2001. The debenture issuing company failed to pay the interest on that date. Is this debenture a Non Performing Asset? If yes, from what date? (a) Yes, it would be considered an NPA from 1/4/2002, if interest is not received for

the quarter ending 30/3/2002 as well (b) No, it is not an NPA, as the principal amount is not yet due (c) No, it would not be considered an NPA until both principal and interest amounts

become overdue

(d) Yes, it would be considered an NPA from 1/1/2002.

Q-5 Which of the following is the most liquid type of shares?

(a) Large cap shares (b) Mid cap shares(c) Small cap shares (d) All of the above.Answer: Q-1 : (d), Q-2 : (c), Q-3 : (b), Q-4 : (a), Q-5 : (a)

HELPING INVESTORS WITHFINANCIAL PLANNING

Chapter 11

Trainer must elaborate the concept before starting the ppt.

• It is identifying all the financial needs of an individual

– Translating needs to monetarily measurable goals

– Planning financial investments that will allow individual to provide for and satisfy his future financial needs and achieve his life’s goals.

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

Definition and objective of FP

Financial Planner

• A person who uses the financial planning process to help another person determine how to meet his or her life goals.

• Possesses detailed knowledge of wide range of products and financial planning tools and help clients in choosing the best products.

• He looks at all of client’s needs including budgeting and saving, taxes, investments, insurance and retirement planning.

Benefits of Financial Planning● Financial Plans are tax efficient.● It provides direction and meaning to financial decisions.● It allows one to understand how each financial decision one makes affects other areas of one’s finances.

Benefits to Financial Planner● Ability to establish long term relationships (Multiple products to one client)● Financial Planner should ideally link his rewards and fees to the clients financial success and achievement of the financial goals.● Ability to build a profitable business (NO rebating)

Qualities of a Good Financial Planner

• Building trust with the client

• Good knowledge of Financial products

• Familiarity with taxation and estate planning issues

• Understanding of stages of client’s life and wealth cycle and asset allocation

• Independent judgement and balanced thinking

• Organized way of working

• Regular contact with clients

• Clear Focus on Overall Financial Planning of client rather than on individual transactions.

• The basis of genuine advice should be Financial planning to suit the investor’s advice.

Steps to Financial Planning

It is used to prepare a comprehensive financial plan where all financial

goals are taken together and the investment strategies are worked out

on that basis.

● Establish and define client-Planner Relationship● Gather client data, Define client Goal● Analyze and evaluate clients financial Status● Develop and present financial planning recommendations● Implement the financial planning recommendation● Monitor the financial planning recommendations

Important responsibilities of investors in the financial planning exercise?

• Should set measurable financial goals.

• Should understand the impact of financial decisions on their cash flows and their income.

• Should be willing to revise and re-balance their portfolios with changing market conditions, performance and their changing needs and changes in lifestyle or circumstances( inheritance, marriage, birth, house purchase or change of job status)

• Investors benefit immensely by starting early and being systematic and disciplined in their approach.

Very important points on financial planning

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

• A financial planner can link his own rewards and fees to the client’s financial success and the achievement of their financial goals

• MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR FINANCIAL PLANNING.( CORE PRODUCT)

• Financial is not only investing. It comes before investing.

• It is relevant for all category of clients.

• It is not as same as retirement planning.

• It is not only Tax Planning.

• Financial planning is important at younger stage of life.

● The basis of genuine investment advice should be financial planning to suit the investor’s situation. It should not be current market condition.

● Financial Planning allows a person to achieve financial goals through proper management of finances.

● Financial planners and their clients should focus on allocating funds to different asset classes.

● Financial planning is relevant not only to HNIs

● Financial planning works better for younger/ middle aged client

Very important points on financial planning

Stages of Life Cycle

• Childhood Stage

• Young Unmarried Stage

• Young Married Stage

• Young Married with Children Stage

• Married with Older Children Stage

• Pre-retirement Stage

• Retirement Stage

Wealth cycle for investors (Very Important)

Preference for low risk products  

Wealth preservation. Medium to long term Sudden wealth surge

   

Ability to take risk and invest for the long term transfer

Low liquidity needs. Long term investment of inheritance Inter Generational

   

Preference for income and debt products  

Liquid and medium term investments. Higher liquidity requirements Reaping Stage

   

Lower risk appetite pre-specified needs draw closer 

Liquid and medium term investments.Near term needs for funds asTransition Stage

products.High risk appetitefinancial goals 

Growth options and long termInvesting for long term identifiedAccumulation stage

Investment preferencesFinancial needsStage

Affluent investors – the rich investors are of 2 types:

Wealth creators – Those who prefer growth and are willing to take the risk of equity investments. For such investors 70% to 80% allocation to diversified equity and sector funds is advisable.

Wealth preservers – Those who prefer capital safety and are risk averse; they prefer debt investments. For such investors a conservative portfolio with a 70% to 80% exposure to income, gilt and liquid funds would be appropriate.

Questions for Revision

Q-1 The stage at which the goals and purpose towards which the clients have been investing have arrived, is known as (a) Accumulation (b) Transition (c) Reaping (d) Transfer. Q-2 As a good financial planner, you should avoid applying the normal Life Cycle Model to your client who is (a) A 25-year-old unemployed person (b) A 60-year-old person who has just

retired (c) A Well-known 32 years old cricketer (d) A 35-year-old unmarried person.Q-3 A salaried executive in late fifties who is planning to retire at 60 years of age, his wealth cycle stage is (a) Accumulation (b) Transition (c) Reaping (d) Transfer.Q-4 For older investors who want to transfer their wealth (a) No financial planning is required(b) The right investment strategy depends upon who the beneficiaries are(c) The right investment strategy depends upon the state of the stock market(d) All the funds can be invested in aggressive equity funds.

Q-5 A high amount of equity investment is suggested to the investor if he is in

(a) Accumulation phase (b) Transition phase(c) Distribution phase(d) Investment has no such relation with any phase of life.

Answers:Q-1 : (c) Q-2 : (c) Q-3 : (b) Q-4 : (b) Q-5 : (a)

Questions for Revision

RECOMMENDING MODEL PORTFOLIO

& FINANCIAL PLANS

Chapter 12

Trainer must elaborate the concept before starting the ppt.

FINANCIAL PLANNING STRATEGIES

• Harness the Power of Compounding – 1% interest per month is better than 12% yearly return.

• Buy and hold is most common strategy BUT most common mistake. Ideally it should be, track your investments, discard the non performers and keep the good performers.

• Rupee cost averaging

• Value Averaging.

• Jacob’s Rebalancing Strategy ( Combination of RCA and Value averaging strategies- Using a aggressive growth fund and liquid fund of the same family.) ( putting regularly money in liquid fund and set a target value for the equity fund)

● Buy and hold strategy may not be a beneficial strategy because investors may not weed out poor performing companies and invest in better performing companies

● Rupee Cost Averaging (RCA) is a technique that involves:

● Fixed amount invested at regular intervals

● When NAV is down, more units are bought and when price is high, fewer units are bought

● Over a period of time, the average purchase price of the investor’s holdings will be lower

● Investors use the SIP or AIP to implement RCA

● Disadvantage: RCA does not tell when to sell or switch from one scheme to another.

  10.33 12000/1162= Average Cost  17,426.12 1,161.74 66.67 15.00 100012 13,140.90 1,095.07 83.33 12.00 100011 9,358.61 1,011.74 108.11 9.25 100010 7,951.97 903.63 113.64 8.80 10009 6,043.48 790.00 130.72 7.65 10008 5,603.86 659.28 117.65 8.50 10007 4,874.68 541.63 111.11 9.00 10006 4,520.46 430.52 95.24 10.50 10005 3,939.56 335.28 85.11 11.75 10004 3,565.00 250.18 70.18 14.25 10003 2,250.00 180.00 80.00 12.50 10002 1,000.00 100.00 100.00 10.00 10001

Value of Holding (Rs)

Cumulative No of units

No of units boughtNAV (Rs)

Amount Invested (Rs)Month

Rupee Cost Averaging (RCA)

● Value Averaging (VA) involves:

● A fixed amount is targeted as desired portfolio value at regular intervals

● If market has moved up, the units are sold and the target value is restored

● If market moves down, additional units are bought at the lower prices

● Over a period of time, the average purchase price of the investor’s holding will be lower than if one tries to guess the market highs and lows

● VA is superior to RCA because it enables the investor to book profits and rebalance the portfolio

● Investors can use the systematic withdrawal and automatic withdrawal plan to implement value averaging

● Investors can also use an equity and a money market mutual fund to implement value averaging.

Value Averaging

800.00 (116.67) 13,750.00 15.00 1200012

916.67 (164.41) 12,972.97 12.00 1100011

1,081.08 58.35 9,460.23 9.25 1000010

1,022.73 (23.02) 9,202.61 8.80 90009

1,045.75 222.22 6,300.00 7.65 80008

823.53 156.86 5,666.67 8.50 70007

666.67 190.48 4,285.71 9.00 60006

476.19 135.76 3,574.47 10.50 50005

340.43 129.90 2,473.68 11.75 40004

210.53 50.53 2,280.00 14.25 30003

160.00 60.00 1,250.00 12.50 20002

100.00 100.00 100.00 10.00 10001

Cumulative no of unitsUnits to investValue of HoldingNAV (Rs)

Target Value (Rs)Month

Some Key concepts of Financial Planning

● When to invest – when they have money to invest

● When to cash out

● When the goals have arrived and clients need the money for the purpose for which they have invested

● IF the overall market appears overvalued in terms of fundamentals and historic valuations

● Start planning and investing regularly

● Have realistic expectations

● Invest Regularly

● The Strategy advisable for an investor to maximise investment return in long run is Switch from poor performers to Good performers.

Risk Profiling

Need for Risk Profiling

● Risk profiling is an approach to understand the risk appetite of investors-an essential pre-requisite to advise investors on their investments.

The investment advice is dependent on understanding both aspects of risk:

● Risk appetite of the investor● Risk level of the investment options being considered.

Factors that influence the investor's risk profile:

● 'Don't put all your eggs in one basket' is an old proverb. It equally applies to investments.

● Asset allocation refers to deciding the composition of the portfolio in terms of debt, equity and money market segments

● Asset allocation differs from investor to investor and depends upon their situation, their financial goals and risk appetite

● The asset allocation for an investor depends upon his life and wealth cycle stage

● A model portfolio creates and ideal approach for an investor’ situation and is a sensible way to invest.

● Economic environment and market are dynamic. Your prediction about market can go wrong. But with the prudent asset allocation investor may not end up with total fiasco.

Asset Allocation

Investors can have 2 approaches:● Fixed asset allocation● Flexible asset allocation

Fixed asset allocation means ● maintaining the same ratio between various components of the portfolio i.e.

being disciplined● Re-balancing the portfolio in a disciplined manner● Periodical review and returning to original allocation● If value of equity component increases, investor books profits

Flexible asset allocation means● Allowing the portfolio profits to run, without booking them● If equity market appreciates, it results in higher proportion in equity than

debt.

Asset Allocation

Asset Allocation – The Strategic Tool

● Allocation of money between equity, debt and money market instruments.

● Depends upon situations, financial goals and risk appetite.

● Benjamin Graham advocates 50/50 split between equities and bond . But Bogle suggests different combinations.

● Bogle gives a nice rule of thumb for asset allocation : Debt portion for an investors portfolio should be equal to his age.

● Example: A 30 year old investor will make 70/30 asset allocation.

Model Portfolio

Since investors’ risk appetites vary, a single portfolio cannot be suggested for all. Financial planners often work with model portfolios – the asset allocation mix that is most appropriate for different risk appetite levels. The list of model portfolios, for example, might read something like this:

Young call centre / BPO employee with no dependents:

50% diversified equity schemes (preferably through SIP); 20% sector funds; 10% gold ETF, 10% diversified debt fund, 10% liquid schemes.

Young married single income family with two school going kids:

35% diversified equity schemes; 10% sector funds; 15% gold ETF, 30% diversified debt fund, 10% liquid schemes.

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

35% diversified equity schemes; 15% gold ETF, 15% gilt fund, 15%

diversified debt fund, 20% liquid schemes.

Couple in their seventies, with no immediate family support

15% diversified equity index scheme; 10% gold ETF, 30% gilt fund, 30% diversified debt fund, 15% liquid schemes.

Questions for Revision

Q-1 A criticism of rupee-cost averaging is (a) Investment is for the same amount at regular intervals(b) Over a period of time, the average purchase price will work out higher than if

one tries to guess the market highs and lows(c) It does not inform an investor when to buy, sell or switch from one scheme to

another(d) Rupee cost averaging has no serious shortcomings.Q-2 Fixed ratio of asset allocation means(a) It is a relatively aggressive approach for managing investments (b) Investing the same amount every month (c) Not doing any re-balancing (d) Balance is maintained by liquidating a part of the position in the asset class with higher return and reinvesting in the other asset with lower returnQ-3 Asset allocation for any investor generally depends on(a) Age (b) Financial status (c) Investment objective (d) All of the above.

Answers: Q-1 : (c), Q-2 : (c), Q-3 : (d), Q-4 : (d)

SELECTING THE RIGHT INVESTMENT PRODUCTS FOR

INVESTORS

Chapter 10

Trainer must elaborate the concept before starting the ppt.

Physical Assets include gold and real estate and traditionally very popular

● Gold is not subject to value erosion on account of rupee depreciation

● Gold is perceived as a protection/hedge against inflation

● Gold ETF, Gold Sector fund , gold futures, gold deposit scheme (offered by bank).

● Gold in physical form attract wealth tax, however gold deposit scheme and gold MF are free from it.

● Real estate requires a high capital investment and may not be easy to liquidate at the appropriate price

● Some fund houses are preparing to launch Real estate mutual funds in the near future

Financial assets include equity, debt and money-market instruments● Equity, debt and money market instruments are direct investments

with the borrower/ issuer of securities● Mutual funds represent an indirect investment through an

intermediary.

Bank deposits● Offer high liquidity and perceived safety● Low or negligible returns after factoring inflation and tax

Corporate

Equity

● Issued publicly and listed

● Issued privately and unlisted

● Investors may acquire shares either at the time of IPO or secondary (stock) market

● Equity offers high growth potential and liquidity

● The challenge is to identify the right shares that are likely to appreciate

● Requires capital to build a diversified portfolio.

● The Listing of shares at Stock Exchange ensures High Liquidity as you can trade regularly to sell your shares.

Debt● Debentures issue a fixed rate of interest● Debentures are secured by the assets of the borrower● Debentures are provided rating by credit-rating agencies● Bonds are also generally provided rating by independent agencies if the maturity exceeds 18 months● Creditworthiness of borrower and risk of default have to be analysed before investing in these bonds and debentures● Company fixed deposits carry a higher interest rate and are unsecured● These would also have tax implications.● The Rate of interest paid by a company on debentures issued by it depends on the Company’s Credit rating.● The most important factor to look for when investing in a corporate fixed deposit is the Credit Rating of the deposit.

GovernmentPublic Provident Fund

● 15-year product● Risk-free government obligation● Open to individuals and HUFs● Only one account permitted per entity● Offers tax-free interest of 8% p.a. and contribution up to Rs. 70,000 (min Rs.

500) are eligible for deduction under section 80C● Option to withdraw 50% of 4th year balance in the 7th year● Restriction on withdrawal reduces liquidity.

Kisan Vikas Patra● Introduced as post office scheme to tap savings in rural India● Very popular with urban investors also● Current yield is 8% over 6 years, fully taxable● Easily transferable and liquid.

RBI Relief Bonds● Issued by RBI on behalf of the Government of India● A 5-year investment product with 8% interest offering● Interest is currently taxable (used to be tax-free earlier)● Free of risk of default

Government Securities● Long-term government paper● Risk-free government obligation● Low-return and define the benchmark rate of return on the yield curve● Specially appointed Primary dealers deal in G-Secs● Generally high ticket investments● Best accessible to small investors through mutual funds.

Pension Funds Regulatory and Development Authority (PFRDA) is the regulator for the New Pension Scheme. Two kinds of pension accounts are envisaged

• Tier I (Pension account), is non-withdraw able

• Tier II (Savings account) is withdraw able to meet financial contingencies. An active Tier I account is a pre-requisite for opening a Tier II account.

New Pension Scheme

Investors can invest through Points of Presence (POP).

They can allocate their investment between 3 kinds of portfolios:

• 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). The investors’ moneys can thus be distributed between 3 portfolios X 6 PFMs = 18 alternatives.

New Pension Scheme

Life Insurance● Viewed more for investment and tax purposes than a vehicle for risk protection● Premium qualify for deduction under section 80C● Important to assess need for life insurance with respect to earning potential● A Without Profits policy offers the Sum Assured in the event of death only● A With Profit policy pays not only the Sum Assured but also bonus declared

from time to time● In case a policy is discontinued during its tenure, the policy’s surrender value

is paid which is a proportionate value based on premiums paid so far● A ‘convergence’ of insurance and mutual funds is the development of Unit-

Linked Insurance products – which offers investors choice of asset allocation between debt and equity.

● The Amount an insurance company pays to the nominee if a policyholder dies is known as the SUM ASSURED.

● A comparison of investment products can be done on risk, return, volatility and liquidity

● Mutual funds combine the advantages of all investment vehicles while doing away with their shortcomings

● The returns in a mutual fund are adjusted for market movements.

● In India, Individual Investors does not direct access to Money Market Instruments.

● The biggest advantage of Investment in Gold is hedge against inflation.

● The biggest disadvantage of investment in Real estate is High Purchase Price. You have to invest huge amount.

● The advantage of bank deposits is liquidity, high perceived safety and low entry price. ITS disadvantage is low Yield after TAX.

Important Points

● Mutual Funds are more recommended option for individual investors than direct equity.

● Direct Investment in stock market can be a better option than investing in Mutual Funds if the investor has large capital, knowledge and resources for research.

Questions for Revision

Q-1 RBI relief bonds have the maturity of (a) 3 years (b) 5 years (c) 7 years (d) 10 years

Q-2 Which of the following is not the advantage of bank fixed deposits?(a) Safety (b) Liquidity (c) Lower entry price (d) High yield

Answers: Q-1 : (b), Q-2 : (d)

Thanks

Target should be to Pass the exam – Do not try to attempt all the questions. Answer only those in which

you are confident.

'Best of Luck'