AMFI Advisiory

8/14/2019 AMFI Advisiory

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Revision and Practice Test KitVersion 2

For AMFI Mutual Fund (Advisors) Certification ExaminationFebruary 2003

Uma ShashikantPrudential ICICI Asset Management Company Ltd.


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Revision and practice test kit 2

Chapters 1 & 2

Introduction & Mutual Fund ProductsApproximate Weightage: 6 questions, 7 marks

Key Points

A mutual fund is a pool of money collected from investors and is invested accordingto stated investment objectives.

Mutual fund investors are like shareholders and they own the fund. Mutual fund investors are not lenders or deposit holders in a mutual fund. Everybody else associated with a mutual fund is a service provider, who earns a fee. The money in the mutual fund belongs to the investors and nobody else. Mutual funds invest in marketable securities according to the investment objective. The value of the investments can go up or down, changing the value of the investors

holdings. The net asset value (NAV) of a mutual fund fluctuates with market price movements. The market value of the investors funds is also called as net assets. Investors hold a proportionate share of the fund in the mutual fund. New investors

come in and old investors can exit at prices related to net asset value per unit. Advantages of mutual funds to investors are:

o Portfolio diversificationo Professional managemento Reduction in risko Reduction in transaction costo Liquidityo Convenience and flexibility

Disadvantages of mutual funds to investors are:o No control over costso No tailor made portfolioso Problems of managing a large portfolio of funds

UTI was the only mutual fund during the period 1963-1988. UTI was the only fund for a long period and enjoyed monopoly status.

UTI is governed by the UTI Act, 1963. In 1987 banks, financial institutions and insurance companies in the public sector

were permitted to set up mutual funds. SEBI got regulatory powers in 1992. SBI Mutual Fund was the first bank-sponsored mutual fund to be set up. The first mutual fund product was UTIs Master Share in 1986. The private sector players were allowed to set up mutual funds in 1993. In 1996 the mutual fund regulations were substantially revised and modified. In 1999 dividends from mutual funds were made tax exempt in the hands of

investors. Mutual fund assets in mid-2002 were approximately Rs. 1,00,000 crore. Mutual funds can be open ended or closed end. In an open-ended fund, sale and repurchase of units happen on a continuous basis,

at NAV related prices, from the fund itself. The corpus of open-ended funds, therefore, changes everyday.

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Prudential ICICI Mutual Fund 3

A closed-end fund offers units for sale only in the IPO. It is then listed in the market.Investors wanting to buy or sell units have to do so in the stock markets. Usuallyclosed-end funds sell at a discount to NAV.

The corpus of a closed-end fund remains unchanged. Mutual funds also offer equity linked savings schemes (ELSS) that have the following

features: 3 year lock in Minimum investment of 90% in equity markets at all times Open ended or closed end Rebate of 20% under section 88 for investments up to Rs. 10,000.

Gilt funds are funds that invest only in government securities Sectoral funds are also called as specialty funds. Equity funds are risky; liquid funds have the lowest risk. Equity funds are for the long term; liquid funds are for the short term. Investors choose funds based on their objective, risk appetite, time horizon and

return expectations.

Chapters 3 & 4

Sponsor, Trustee, AMC and Other Constituents

Approximate Weightage: 2 questions; 3marks

Key Points

Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC. Sponsor is the promoter of the fund. Sponsor creates the AMC and the trustee company and appoints the boards of both

these companies, with SEBI approval. The mutual fund is formed as trust in India, and not as a company. In the US mutual funds are formed as investment companies.

The AMCs capital is contributed by the sponsor. Investors money is held in the Trust (the mutual fund). The AMC gets a fee for

managing the funds, according to the mandate of the investors. The trustees make sure that the funds are managed according to the investors

mandate. Sponsor should have at least a 5-year track record in the financial services business

and should have made profit in at least 3 out of the 5 years. Sponsor should contribute at least 40% of the capital of the AMC. Trustees are appointed by the sponsor with SEBI approval. At least 2/3 of trustees should be independent. At least of the AMCs Board should be of independent members An AMC cannot engage in any business other than portfolio advisory and

management. An AMC of one fund cannot be Trustee of another fund. AMC should have a net worth of at least Rs. 10 crore at all times. AMC should be registered with SEBI. AMC signs an investment management agreement with the trustees.


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Trustee company and AMC are usually private limited companies. Trustees are required to meet at least 4 times a year to review the AMC. The investors funds and the investments are held by the custodian, who is the

guardian of the funds and assets of investors. Sponsor and the custodian cannot be the same entity. R&T agents manage the sale and repurchase of units and keep the unit holder

accounts. If the schemes of one fund are taken over by another fund, it is called as scheme

take over. This requires SEBI and trustee approval. If two AMCs merge, the stakes of sponsors changes and the schemes of both funds

come together. High court, SEBI and Trustee approval needed. If one AMC or sponsor buys out the entire stake of another sponsor in an AMC, there

is a take over of AMC. The sponsor who has sold out, exits the AMC. This needshigh court approval as well as SEBI and Trustee approval.

Investors can choose to exit at NAV if they do not approve of the transfer. Theyhave a right to be informed. No approval is required, in the case of open-endedfunds.

For closed-end funds, investor approval is required for all cases of merger and take-over (as per the curriculum). Closed end fund investors also do not have exit option.

Chapter 5

Legal and Regulatory Framework

Approximate Weightage: 4 questions; 4 marks.

Key Points

Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996. SEBI is the regulator of all funds, except offshore funds. Bank-sponsored mutual funds are jointly regulated by SEBI and RBI. If there is a bank-sponsored fund, it cannot provide a guarantee without RBI

permission. RBI regulates money and government securities markets, in which mutual funds

invest. Listed mutual funds are subject to the listing regulations of stock exchanges. Since the AMC and Trustee Company are companies, any complaints against their

board can be made to the CLB. Investors cannot sue the trust, as they are the same as the trust and cannot sue

themselves. UTI does not have a separate sponsor and AMC. UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations. SROs are the second tier in the regulatory structure. SROs get their powers from the apex regulating agency, act on their instructions and

regulate their own members in a limited manner. SROs cannot do any legislation on their own. All stock exchanges are SROs. AMFI is an industry association of mutual funds. AMFI is not yet a SEBI registered

SRO.

AMFI is regulated by its own board made up of its members.

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Chapter 6

Offer Document and Key Information Memorandum

Approximate Weightage: 7questions; 12 marks

Key Points

Offer Document (OD) is the most important source of information for investors. Abridged version of the OD is called as Key Information Memorandum (KIM). Investors are required to read and understand the offer document. No recourse is available to investors for not reading the OD or KIM, as they sign the

form stating that they have read the OD. The cover page contains the details of the scheme being offered and the names of

sponsor, trustee and AMC. Mandatory disclaimer clause of SEBI should also be on the cover page of the Offer

document. OD is issued by the AMC on behalf of the trustees. KIM has to be compulsorily made available along with the application form. Closed end funds issue an offer document at the time of the IPO. Open ended funds have to update OD at least once in 2 years. Trustees approve the contents of the OD and KIM. The format and content of the OD has to be as per SEBI guidelines. The AMC prepares the OD and is responsible for the information contained in the

OD. The Compliance Officer has to sign the due diligence certificate. He is usually an

AMC employee. The due diligence certificate states that:

o Information in the OD is according to SEBI formatso Information is verified and is a true and fair representation of factso All constituents of the fund are SEBI registered

SEBI does not approve or certify the contents of the OD. Factors common to all funds are called as standard risk factors. These include

market risk, no assurances of return, etc.

Factors specific to a scheme are scheme-specific risk factors in the OfferDocument.These include restrictions on liquidity such as lock-in period, risks ofinvesting in the first scheme of a fund, etc.

Fundamental attributes of a scheme include its basic features. For any change in fundamental attributes, investor approval is not needed. Trustees

and SEBI should approve the change. Each investor should be informed through a communication and given the option to

exit without paying any exit load. A scheme cannot make any guarantee of return, without stating the name of the

guarantor, and disclosing the networth of the guarantor. The past performance ofthe assured return schemes should also be given.

Information on existing schemes and financial summary of existing schemes to begiven for 3 years.

Information on transactions with associate companies to be provided for the past 3years.

If any expense incurred is higher than what was stated in the OD, for past schemes,explanations should be given.


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There is no information on other mutual funds, their product or performance in theOD.

Investors rights are stated in the OD. The borrowing restrictions on the mutual fund should be disclosed. This includes the

purposes and the limits on borrowing. Investors have the right to inspect a number of documents. These are:

o Trust deedo Investment management agreemento SEBI (MF) Regulationso AMC annual reportso Unabridged offer documento Annual reports of existing schemes

3 years track record of investors complaints and redressal should be disclosed in theOD.

Any pending cases or penalties against sponsors or AMC should be disclosed in theOD.

The offer document contains detailed information, while the KIM is a summary formof the OD. If any information is crucial to the investor, it will be found in both KIMand OD. For example, the details of guarantee if the scheme is an assured returnscheme.

The name and addresses of trustees and AMC directors will be found in the KIM, butthe details of their role, responsibilities and duties will not be found in the KIM, butonly in the OD.

The OD and KIM are documents of a mutual fund and there will be no informationabout other mutual funds in an OD. There will be no comparisons are data onperformance of other mutual funds.

The OD and KIM will not contain names of securities in which the mutual fund plansto invest. Only broad allocation will be given.

Chapter 7

Processes, rights and obligations for investors

Approximate Weightage: 4 questions; 5 marks

Key Points

Categories of investors eligible to apply is stated in the offer document. Whether a certain class of investor, such as a trust or a company can invest in a

fund, depends on the list of eligible investors in the OD. Non-resident Indians (NRIs) and overseas corporate bodies (OCBs) are eligible to

invest in mutual funds. Foreign nationals and entities cannot invest in mutual funds. Any investor who becomes a foreign citizen after investing in a fund, has to

compulsorily redeem the units after obtaining foreign citizenship. The curriculum does no explicitly recognise a Person of Indian Origin (PIO).

Therefore any Indians seeking foreign citizenship should redeem their units. This isnot the case in reality, but is the expected answer in the examination.


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FIIs can invest in mutual funds. They invest through the Non-resident rupeeaccount.

RBI permission for NRIs, OCBs and FIIs is a blanket permission. Every investmentdoes not need RBI approval.

Prospective investors have no legal remedies. Agents can sell products of multiple mutual funds. Agents are appointed after they clear the AMFI exam and sign an agreement with

the AMC on non-judicial stamp paper. Fees and commissions are decided by the AMC and not subject to any regulation. Investors have the right to receive redemption proceeds within 10 days. Investors have the right to sue the AMC, Trustees or Sponsor. Investors cannot sue the Trust as they are the Trust and cant sue themselves. An open ended fund opens for sale and repurchase within 30 days from the date of

closure of the IPO. Investors do not have any remedy for performance of the fund being below the

investors expectations. If investors representing 75% of the unit capital approve, the AMCs services can be

terminated, or the scheme can be wound up. The first right of the investor is towards the trustees. If a fund does not redress their complaint they can go to SEBI. AMFI does not require that every investment decision must be approved by an

investor.

Chapter 8

Tax Aspects

Approximate weightage 1 question; 2 marks

Key Points

Mutual funds themselves pay no tax on the incomes they earn. They are fully exemptfrom tax.

If an investor holds units for 12 months or less, any gain from selling the units iscalled as short-term capital gain.

Short-term capital gains are taxable at the marginal rate of taxation of the investor. If an investors holding period is more than 12 months, any gain or loss from sale is

called as long-term capital gain. Long-term capital gain can be indexed for inflation. Indexing refers to updating of the purchase price, based on the cost of inflation

index published by the CBDT.The formula for indexation is purchase price X (index inthe year of sale/index in the year of purchase).

Investors can pay either 10% tax (plus surcharge) on the capital gain tax withoutindexation or 20% (plus surcharge) on capital gains after indexation, which ever islower.

Example:


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An investor invests Rs. 4,00,000 in a mutual fund. He sells his investments after 2years for Rs. 6,00,000. What is the capital gains tax payable, without indexation?(Ignore surcharge).o In the above case the capital gain is Rs. 2,00,000, on which 10% is payable as

capital gains tax, without indexation. This amounts to Rs. 20,000.

Chapter 9

NAV and Pricing

Approximate Weightage: 2 questions; 3marks.

Key Points

Load is charged to the investor when the investor buys or redeems (repurchases)units.

Load is an adjustment to the NAV, to arrive at the price. Load that is charged on sale of units is called as entry load. An entry load will increase the price, above the NAV, for the investor. Load that is charged when the investor redeems his units is called an exit load. Exit load reduces the redemption proceeds of the investor. Load is primarily used to meet the expenses related to sale and distribution of units. An exit load that varies with the holding period of an investor is called a (contingent

deferred sales charge) CDSC. To arrive at the sale price, given NAV and load (%), we have to calculate the amount

of load and add it to the NAV. The amount of load will be = NAV x (entry load/100). To arrive at the sale price, given NAV and load (%), we have to calculate the amount

of load and reduce it from the NAV. The amount of load will be = NAV x (exitload/100).

Load is subject to SEBI regulations SEBI has stipulated that the maximum level ofentry or exit load cannot () be

higher than 7%. SEBI also stipulates that the repurchase price cannot be less than 93% of the sale

price.o Minimum repurchase price, given sale price is = NAV X (1 7%)

For closed end funds, the maximum entry of exit load cannot be higher than 5%.The repurchase price cannot be less than 95% of the sale price.

Chapter 10


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Equity Markets and Mutual Funds


Key Points

The investment pattern of the fund is primarily dictated by the fund objectives. A fund manager whose style is value investing, will prefer to invest in established

profit making companies, and will buy only if the price is right. He will look forundervalued shares, which have a value proposition that is yet to be recognized bythe market.

A fund manager, whose style is growth, is more aggressive and is willing to invest incompanies with future profit potential. He is willing to buy even if the stock looksexpensive. He focuses on sectors that are expected to do well in future, and will bewilling to buy them even at higher prices.

Equity stocks can be classified as large cap and small cap stocks. Large cap stocks are liquid and trade every day. They are established companies

offering normal profit potential. Small cap stocks provide higher return potential. But they are generally not very

liquid. Cyclical stocks are those whose performance is closely linked to macro economic

factors. P/E ratio is the ratio of earnings per share (EPS) to market price per share. Growth

shares sell at higher P/E ratios than value shares. Dividend yield is the ratio between the dividend per share and market price per

share. Growth shares have lower dividend yields than value shares. If the market prices move up, P/E ratios are higher and dividend yields are lower. If the market prices move down, P/E ratios are lower and dividend yields are higher. An active fund manager hopes to do better than the market by selecting companies,

which he believes, will outperform the market. A passive fund manager simply replicates the index, and hopes to do as well as the

index. A passive fund manager tries to keep costs down and has to rebalance his portfolio if

the composition of the index changes. Fundamental analysis is the analysis of the profit potential of a company, based on

the numbers relating to products, sales, costs, profits etc, and the management of acompany. Technical analysis is an analysis of market price and volumes, to identify clues to the

market assessment of a stock. A fund manager focuses on asset allocation; a dealer buys and sells shares; and an

analyst researches companies and recommends them for buy and sell.

Chapter 11


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Debt Markets and Mutual Funds

Approximate Weightage: 2 questions; 3marks.

Key Points

Debt Instruments are issued by government, banks and companies. They can pay interest on fixed rates, floating rates or on discounted basis. If no interest is paid, such an instrument is a zero coupon instrument. Debt markets are wholesale markets in which large institutional investors

operate. Banks are the largest players in debt markets. About 96% of secondary market trading happens in government securities. Basic characteristics of bonds are as follows:

o Principal value, par value, or face value is the amount representing theprincipal borrowed and the rate of interest is calculated on this sum. Onredemption this amount is payable.

o Coupon is the interest paid periodically to the investor.o Maturity date is the date on which a bond is redeemed. Term to maturity or

tenor is the period remaining for the bond to mature.o Put option refers to the option to the investor to redeem the bond before

maturity. Call option is the option to the borrower to redeem beforematurity.

o If interest rates go up, above the coupon rate, investors may exercise theput option. If interest rates fall below the coupon rate, issuers may exercisethe call option.

Current yield is the ratio of coupon amount to market price of a bond. If a bond,paying coupon at 8% is selling in the market for Rs. 105, the current yield is 8/105 =7.62%.

Changes in interest rates impacts bond values, in the opposite direction. An increasein interest rates leads to a fall in bond values; a decrease in interest rates leads to anincrease in bond values.

Duration of a bond helps measure the interest rate risk of a bond. It is the weightedaverage maturity of a bond.

Credit risk refers to the risk of default.

The base rate or benchmark rate in the bond market is the rate at which thegovernment borrows in the market. All other borrowers pay a rate that is higher,due to the presence of credit risk.

The difference between the benchmark rate and the rate that is paid by otherborrowers is called the credit spread. (Called as yield spread in the AMFI book).

Chapter 12


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Restrictions on Investment


Key Points

Mutual funds can invest only in marketable securities. A mutual fund, under all its schemes, cannot hold more than 10% of the paid-up

capital of a company. Except in the case of sectoral funds and index funds, a mutual fund scheme cannot

invest more than 10% of its NAV in a single company. Investments in rated investment grade issues of a single issuer cannot exceed 15%

of the net assets and can be extended to 20%, with the approval of the trustees. Investment in unrated securities cannot exceed 10% of the net assets for one issue

and 25% of net assets for all such issues. Investment in unlisted shares cannot exceed 5% of net assets for an open-ended

scheme, and 10% of net assets for a closed end scheme. Inter scheme transfers are allowed by the SEBI regulations, provided:

Such transfers happen on a delivery basis, at market prices. Such transfers do not result in significantly altering the investment objectives of

the schemes involved. Such transfer is not of illiquid securities, as defined in the valuation norms.

A mutual fund can borrow a sum not exceeding 20% of its net assets, for a periodnot exceeding 6 months. This facility is clearly designed as a stopgap arrangement,and is not a permanent source of funds for the scheme.

A fund can borrow only to meet liquidity requirements for paying dividend or meetingredemptions.

All investment made in the marketable securities of the sponsor and its associatedcompanies must be disclosed by the mutual fund in its annual report and offerdocument.

A mutual fund scheme cannot invest in unlisted securities of the sponsor or anassociate or group company of the sponsor.

A mutual fund scheme cannot invest in privately placed securities of the sponsor orits associates.

Investment by a scheme in listed securities of the sponsor or associate companiescannot exceed 25% of the net assets of the scheme.

Chapter 13 & 14


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Accounting and Valuation


Key Points

Investors subscriptions to the mutual fund are accounted as unit capital, and not asliabilities or deposits.

Assets of a mutual fund are the investments made by the fund. Liabilities of a mutual fund are strictly short term in nature. The unit capital account is maintained at face value. NAV is the net assets per unit, computed as net asset divided by number of units

outstanding. The day on which NAV is calculated is called as the valuation date. All mutual funds have to disclose their NAV everyday, by posting it on the AMFI web

site by 8.00 p.m. 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. Initial issue expenses of a scheme cannot exceed 6% of funds mobilised. Any

amounts above this have to be borne by sponsors or AMC. For a closed end fund, initial issue expenses are charged over the life of the scheme,

on a weekly basis. For an open-ended scheme, the initial issue expenses are carried in the balance

sheet of the fund as deferred revenue expenses. They are written off over aperiod not exceeding 5 years.

The maximum limit on the expenses that can be charged to an equity mutual fundare: For net assets up to Rs. 100 crore: 2.5% For the next Rs. 300 crore of net assets: 2.25% For the next Rs. 300 crore of net assets: 2% For the remaining net assets: 1.75% These limits are lower by 0.25% for debt funds

These regulatory ceilings are applied on the weekly average net assets of the mutualfund scheme.

The investment management fees are regulated by SEBI as follows: For the first Rs. 100 crore of net assets: 1.25% For net assets exceeding Rs. 100 crore: 1.00%

Valuation of equity shares is done on the basis of traded price; provided that price isnot more than 30 days old.

Debt securities with less than 182 days to maturity are valued on accrual basis. Theaccrual is calculated as follows:

A t-bill is issued at Rs. 80 and redeemed at Rs. 100 after 364 days. The accrual per dayis = 20/364 = 0.5494 Illiquid securities cannot be more than 15% of the portfolios net assets. Any illiquid

assets above this limit have to be valued at zero.

Chapter 15 & 16


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Risk, Return and Performance


Key Points

Rate of return is computed as: (Income earned/Amount invested)*100. This number can be annualised by multiplying the result by the factor 12/n, where n

is the number of months in the holding period. If the holding period is in days, theabove factor will be 365/n, where n is the number of days in the holding period.

Change in NAV method of calculating return is applicable to growth funds and fundswith no income distribution.

Change in NAV method computes return as follows:(NAV at the end of the holding period NAV at the beginning of the holdingperiod)/NAV at the beginning of the period.

Return is then multiplied by 100 and annualised. The total return with re-investment method or the ROI method is superior to all

these methods. It considers dividend and assumes that dividend is re-invested atthe ex-dividend NAV.

Total Return or ROI Method computes return as follows: [(Value of holdings at the end of the period - value of holdings at the beginning

of the period)/ value of holdings at the beginning of the period] x 100 Value of holdings at the beginning of the period = number of units at the

beginning x begin NAV. Value of holdings end of the period = (number of units held at the beginning +

number of units re-invested) x end NAV. Number of units re-invested = dividends/ex dividend NAV.

Expense ratio is an indicator of efficiency and very crucial in a bond fund. Income ratio is the ratio of net investment income by net assets. This ratio is

important for fund earning regular income, such as bond funds, and not for fundswith growth objective, investing for capital appreciation.

Portfolio turnover rate refers to the ratio of amount of sales or purchases (which everis lesser) to the net assets of the fund.

Higher the turnover ratio, greater is the amount of churning of assets done by thefund manager.

High turnover ratio can also mean higher transaction cost. This ratio is relevant foractively managed equity portfolios.

If the turnover of a fund is 200%, on average every investment is held for a periodof 6 months.

Risk arises when actual returns are different from expected returns. Standard deviation is an important measure of total risk. Beta co-efficient is a measure of market risk. The quality of beta depends on ex-

marks. If ex-marks are high beta is more reliable. Ex-marks are an indication of extent of correlation with market index. Index funds

have ex-marks of 100%. Comparable passive portfolio is used as benchmark. Usually a market index is used as a benchmark. Compare both risk and return, over the same period for the fund and the benchmark. Risk-adjusted return is the return per unit of risk. Comparisons are usually done

With a market index With funds from the same peer group


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With other similar products in which investors invest their funds When comparing fund performance with peer group funds, size and composition of

the portfolios should be comparable. Treynor and Sharpe ratios are used for evaluating performance of funds. The quality of beta depends on ex-marks.

Chapter 17

Financial Planning Process

Approximate Weightage: Chapters 17 22: 25 questions; 37 marks

Key Points

Financial planning comprisesa. Defining a client's profile and goalsb. Recommending appropriate asset allocationc. Monitoring financial planning recommendations

Financial planning helps a mutual fund distributor to establish long-term relationshipsand build a profitable business.

Financial planning is a very profitable business in the US. Steps in financial planning are:

a. Asset Allocationb. Selection of fundc. Studying the features of a scheme

Financial planning is concerned only with broad asset allocation, leaving the actualselection of securities and their management to fund managers.

Investors delegate the task of investing in securities to the fund manager. The financial planner can only work with defined goals and cannot take up larger

objectives that are not well defined.

The client is responsible ultimately for realising the goals of the financial plan. The basis of genuine investment advice should be financial planning to suit the

investor's situation

Risk tolerance of an investor is not dependent on the market, but his own situations.

Chapter 18

Life Cycle and Wealth Cycle Stages


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Key Points

The life cycle stages of an investor can be classified as follows:o Childhood stageo Young unmarried stageo Young married with children stageo Married with older children stageo Pre-retirement stageo Retirement stage

The income level of investors, the saving potential, the time horizon and the riskappetite of an investor depend on his life cycle.

Younger investors have higher income and saving potential, take longer-term viewand may be willing to take risks.

Older investors may have limited income and saving, shorter time horizon, andunwilling to risk their savings.

There are 3 wealth cycle stages for investors: Accumulation stage is when investors are earning and have limited need for

investment income. They focus on saving and accumulating wealth for the longterm. Equity investments are preferred in this stage.

Transition stage is when financial goals are approaching. Investors still earnincomes, but have also draw on their earnings. Investors choose balancedportfolios that have both debt and equity.

Reaping stage or distribution stage in when investors need the income from theirinvestment, and cannot save further. They reap the benefits of their savings.They prefer debt investments and preserving of capital at this stage.

Inter-generational fund transfer refers to transfer of wealth to an investor. Thepreferred investment avenue will depend on the life cycle and wealth cycle stage ofthe beneficiaries.

These investors who transfer wealth do not require financial planning. Sudden wealth surge refers to winnings in games and lotteries. Investors should be

advised to temporarily park their funds in money market investments and create along-term plan after thinking through the plan. They must also take into account theimpact of tax.

Affluent investors are of two types: Wealth preserving investors who are risk-averse and like to invest in debt. Wealth creating investors who prefer growth and are willing to take the risk of

equity investments.

Chapter 19

Investment Products


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Key Points

Key features of all investment options should be remembered. Please note that thequestions are based on the date of the curriculum, which is December 2001. Anychanges in rates and other features after that date are not included in theexamination. For example, rate on the RBI Relief Bond, for the exam, is 8.5% andnot 8%.

Physical assets like gold and real estate are preferred by investors who like physicalownership. These investments are not liquid.

Physical assets are perceived to be a hedge against inflation. Real estate investment requires high initial investments. Bank deposits are preferred by a large number of investors due to the perception of

bank deposits being safe and free of default. Features of PPF

o 15 years deposit product made available through banks.o 9.5% p.a. interest payable on monthly balances.o Minimum Rs. 100 and maximum Rs. 60,000 p.a. investment allowed.o Tax benefits u/s 88 under IT Act.o Interest receipt and withdrawal of principal exempt from tax.o Limited liquidity available.o Only individuals and HUFs are eligible to invest

Features of RBI Relief Bondso Issued by banks on behalf of the RBI.o Tenure of five years.o 8.5% p.a. interest payable semi-annually.o Option to receive or reinvest interest.o Interest income exempt from tax.

Features of other government schemeso Indira Vikas Patra and KVP issued by central government and sold by post

offices.o Current yield on IVP is 10.5% (according to the curriculum).o Interest is taxable.o Investor identity is protected and investment in cash is possible.

Features of instruments issued by companieso Commercial Paper: Short term (90days) unsecured instrument. Credit rated.o Debentures: Secured fixed income instruments with credit rating.o Equity Shares Liquidity through listing.o Preference Shares Fixed rate of dividend.o Fixed Deposits Unsecured deposits with credit risk.o Bonds of FI Unsecured fixed income securities issued by public financial

institutions.o Features of insurance policies

Investors buy due to tax concessions, while they should buy for theinsurance cover.

With profit policy provides bonus along with sum assured. Without profit policy only provides insurance cover.

Why MF is the best optiono Mutual funds combine the advantages of each of the investment products.o Dispense the shortcomings of the other options.o Returns get adjusted for the market movements.


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Chapter 20

Investment Strategies

Key Points

Investors should choose to allow their investment to compound over the long run. This can be achieved by choosing the growth or re-investment option of mutual

funds. Automatic reinvestment plans can also be used. Buy and hold strategy which is preferred by many investors, may not be beneficial

because investors may not weed out poor performing companies and invest in betterperforming companies.

Rupee-cost averaging (RCA) involves the following: A fixed amount is invested at regular intervals. More units are bought when price is low and fewer units are bought when

price is high.

Over a period of time, the average purchase price of the investors holdingswill be lower than if one tries to guess the market highs and lows.

RCA does not tell indicate when to sell or switch from one scheme to another. This isa disadvantage.

Investors use the systematic investment plan or automatic investment plan toimplement RCA.

Value averaging involves the following: A fixed amount is targeted as the desired value of the portfolio at regular

intervals.

If markets have moved up, the units are sold and the target value isrestored.

If markets move down, additional units are bought at the lower prices. Over a period of time, the average purchase price of the investors holdings

will be lower than if one tries to guess the market highs and lows.

Value averaging is superior to RCA, because it enables the investor to book profitsand rebalance the portfolio.

Investors can use the systematic withdrawal and automatic withdrawal plans toimplement value investing.

Investors can also use a money market fund and an equity fund to implement valueaveraging.

Chapter 21


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Asset Allocation and Model Portfolios

Key Points

Asset allocation is about allocating money between equity, debt and money marketsegments.

Asset allocation varies from one investor to another depending on their situation,financial goals and risk appetite.

A model portfolio creates an ideal approach for the investors situation and is asensible way to invest.

The asset allocation for an investor will depend on his life cycle and wealth cycle. Investors can have two strategies:

Fixed asset allocation Flexible asset allocation

Fixed asset allocation means Maintaining the same ratio between various components of the portfolio Re-balancing the portfolio in a disciplined manner

Fixed allocation means a periodical review and returning to the original allocation. Ifequity is going up, such investors would book profits. They are disciplined.

Flexible allocation means allowing the portfolios profits to run, without booking them. If equity market appreciates, flexible asset allocation will result in higher percentagein equity than in debt. Graham recommends that most investors should choose a 50:50 allocation, that is

50% in equity and 50% in debt. Bogle recommends that age, risk profile and preferences have to be combined in

asset allocation Older investors in distribution phase - 50% equity; 50% debt Younger investors in distribution phase - 60% equity; 40% debt Older investors in accumulation phase - 70% equity; 30% debt Younger investors in accumulation phase - 80% equity; 20% debt

Steps in developing a model portfolio for the investors: Develop long term goals Determine asset allocation Determine sector distribution Select specific fund schemes for investment

Jacobs Model Portfolios Accumulation phaseo Diversified equity: 65 - 80%o Income and gilt funds: 15 - 30%o Liquid funds: 5% Distribution phaseo Diversified equity: 15 - 30%o Income and gilt funds: 65 - 80%o Liquid funds: 5%

Chapter 22Fund selection


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Fund selection refers to the actual choice of funds according to the chosen model portfolio forthe investor.

Equity funds: Characteristics:o Fund category the fund chosen should be suitable to investor objectiveo Investment style Choose between growth and value depending on investors risk

perceptiono Age of the fund Experienced funds are preferred to new fundso Fund management experience Track record of the fund managers is importanto Size of the fund Larger funds have lower costso Performance and risk risk adjusted performance matters

High beta means higher risk. High turnover means high transaction costs.

o Equity Funds: Selection Criteria

o Percentage holding in cash should be low Funds can always sell liquid stocks for liquidityrequirements.

o Concentration in portfolio should be low An equity fund should be well diversified.o Market capitalization of the fund High capitalization means better liquidityo Portfolio turnover Higher turnover means more transactions and costs, but exploitation

of opportunities. Low turnover represents patience and stable investments.

Risk Statisticso Beta represents market risk, higher the beta higher the risk.o Ex-Marks represents correlation with markets higher the ex-marks, lower the risk. A

fund with higher ex-marks is better diversified than a fund with lower ex-marks.o Gross dividend yield represents return. Funds with higher gross dividend yield should be

preferred.o Funds with low beta, high ex-marks and high gross dividend yield are preferable

Debt Funds: Selection Criteriao A smaller or new debt fund may not necessarily be risky.

For debt funds expense is important. For short-term investors, load is more important than expense ratio. For long-term investors, expense ratio is more important than expense

ratio.o Total return rather than yield to maturity (YTM) is important.o Expenses are very important, because high expense ratios lead to yield sacrifice.o Credit quality - Better the rating of the holdings, safer the fund.o Average maturity - Higher average maturity means higher duration and interest rate risk.

Funds with higher average maturity are more risky than funds with lower averagematurity.

Money Market Fundso Liquidity and high turnover rate is high.o Shorter-term instruments are turned over more frequently.o Protection of principal invested is important.o NAV fluctuation limited due to low duration and lack of interest rate risk.o Credit quality of portfolio should be high.o Low expense ratio is important.


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Sample Test - 1

1. A mutual fund is not (1 mark)a. A portfolio of stocks, bonds and other securitiesb. A company that manages investment portfoliosc. A pool of funds used to purchase securities on behalf of investorsd. A collective investment vehicle

2. After UTI, the first mutual funds were started by (1 mark)

a. Private sector banksb. Public sector banksc. Financial institutionsd. Non-banking Finance Companies

3. Mutual fund can benefit from economics of scale because of (1 mark)

a. Portfolio diversificationb. Risk reductionc. Large volume of tradesd. None of the above

4. Equity Linked Savings Scheme does not have which of the following features? (2 marks)

a. It entitles the unit holder to tax rebateb. The investment is locked in for 3 yearsc. A minimum stated level of investments is made in equity and equity related instrumentsd. None of the above

5. A close ended mutual fund has a fixed (1 mark)

a. NAVb. Fund Sizec. Rate of Returnd. Number of Distributors

6. Of the following fund types, the highest risk is associated with (1 mark)

a. Balanced Fundsb. Gilt Fundsc. Equity Growth Fundsd. Debt Funds

7. The custodian of a mutual fund: (2 marks)

a. Is appointed for safekeeping of securitiesb. Need not be an entity independent of the sponsorsc. Not required to be registered with SEBId. Does not give or receive deliveries of physical securities

8. The Mutual fund is constituted as (1 mark)

a. A Trustb. A Private limited companyc. An asset management companyd. A trustee company

9. A Self Regulatory Organisation can regulate (1 mark)


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a. All entities in the marketb. Only its own members in a limited wayc. Its own members with total jurisdictiond. No entity at all

10. Bank owned Mutual Funds are supervised by (1 mark)

a. SEBI

b. RBI

c. Jointly by SEBI & RBI

d. AMFI

11. In case of merger of two AMC, 75% of the unit holders have to approve the merger in case of

(1 mark)

a. Open ended funds

b. Both open and close ended funds

c. Close ended funds

d. None of the above

12. The first level regulator of AMCs is (1 mark)

a. Board of Trusteesb. Company Law Boardc. SEBId. RBI

13. As per SEBI guidelines, a due diligence certificate is not (2 marks)

a. Signed by a Compliance Officer of the mutual fundb. A certificate that all legal formalities of a scheme are completedc. Attached to Annual reportd. A part of offer document

14. An offer document contains an AMCs investor grievances history for the past (1 mark)

a. 1 fiscal yearb. 2 fiscal yearc. 3 fiscal yeard. Six months

15. For scheme to be able to change its fundamental attributes, the fund managers must obtain the

consent of (2 marks)

a.

50% of the unit holdersb. 50% of the trusteesc. 75% of the unit holdersd. None of the above

16. SEBI does not require the following to be included in the offer document issued by a mutual fund

(1 mark)

a. Details of the Sponsor and the AMCb. Description of the Scheme & investment objective/strategyc. Investors' Rights and Servicesd. Performance of other mutual funds

17. Mutual funds do not justify the need for paying commission to agents when the investors skip out of

the scheme before a specified period. In India this practice is adopted by (2 marks)

a. Agents voluntarily paying back the commission to the Mutual fundb. Trail commission is not paid to the agentsc. None of the above


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d. The whole of commission is paid to the agents18. An aggrieved unit-holder of a mutual fund can sue (1 mark)

a. The AMCb. The trusteesc. The sponsor if returns have been guaranteed by themd. None of the above

19. Distributors or agents (1 mark)

a. Can distribute several mutual funds simultaneouslyb. Cannot appoint sub-agents or sub-brokersc. Should be only individuals not companies or banksd. Should not be an employee or associate of the AMC

20. If a charitable trust approaches a distributor with an application for investment in a mutual fund, the

distributor should (2 marks)

a. Accept the application without wasting timeb. Reject the application outrightc. Refer to the offer documentd. Accept the application as a direct application

21. One of your friends who have invested in a mutual fund is about to get Canadian citizenship. What

would you advise? (2 marks)

a. He should transfer the investment to his relativeb. He should get RBI approval for continuingc. If he does not need the money, he can continued. He should immediately redeem his investment since foreign citizens are not eligible investors

22. The AMFI code of ethics does not cover the following prescriptions (1 mark)

a. Adequate disclosures should be made to the investorsb. Funds should be managed in accordance with stated investment objectivesc. Conflict of interest should be avoided in dealings with directors or employeesd. Each investment decision should be approved by investors

23. Unit holders' right to information does not include (2 marks)

a. Obtaining from the trustees any information having an adverse effect on their investmentsb. Inspecting major documents of a fundc. Receiving of a copy of the annual financial statements of that fundd.

Approving investment decisions of the fund

24. A Debt fund distributes 10% dividend. How much tax does the investor have to pay on this dividend?

(2 marks)

a. 10%b. 12%c. 20%d. None

25. Contingent Deferred Sales Charge (CDSC) (1 mark)

a. Is higher for investors who stay invested in the scheme longerb. Is lower for investors who stay invested in the scheme longerc. Is the same for all investors irrespective of how long they stay investedd. Is not allowed to be charged to mutual fund investors in India

26. The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs.20 is:(2 marks)


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a. Rs.2000b. Rs.2015c. Rs.1985d. Rs.2030

27. A high P/E multiple of a fund in comparison to average market multiple could be of (1 mark)

a. Value fundb. Growth fundc. Balanced fundd. Equity diversified fund

28. A company whose earnings are strongly related to the state of economy is a (1 mark)

a. Economy stocksb. Cyclical Stocksc. Value Stocksd. Growth stocks

29. A value manager does not look for (2 marks)

a. Stocks that are currently undervalued in the marketb. Stocks whose worth will be recognized by the market in the long termc. High current yieldd. Long term capital appreciation

30. A bond's rating indicates its (1 mark)

a. Reinvestment riskb. Default riskc. Inflation riskd. Interest-rate risk

31. When interest rates rise, bond prices (2 marks)

a. Also riseb. Fallc. Are not affectedd. Fluctuate either up or down

32. As per SEBI, mutual funds can borrow for short term to the extent of (2 marks)

a. Total net assetsb. 50% of net assetsc.

25% of net assets

d. 20% of net assets33. A mutual fund is not allowed to invest in the sponsor company, (2 marks)

a. >25% of its net assetsb. >10% of its net assetsc. Not at alld. >5% of net assets

34. Liabilities in the balance sheet of a mutual fund are (1 mark)

a. In the form of long-term loansb. Strictly short term in naturec. Combination of long term and short termd. Not allowed as per regulations

35. A funds weekly average net assets are Rs. 1000 crore. What is the limit on the expenses of the fund?

(2 marks)a. Rs. 10.5 crore


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b. Rs. 10.25 crorec. Rs. 20.5 crored. Rs. 17.5 crore

36. A fund's investments at market value total Rs.700 crores, Total liabilities stand at Rs.50 lacs and the

number of units outstanding is 28 Crores. What is the NAV? (2 marks)

a. Rs.30.19b. Rs.24.98c. Rs.32.15d. Rs.40.49

37. For valuation of traded securities, which of the following is not true? (1 mark)

a. The security is valued at the last quoted priceb. The security is valued on the basis of earnings capitalisationc. Marking to market is appliedd. If the security has not been traded on valuation date, the trading price on any previous date

may be used, provided that date is not more than 30 days prior to valuation date.

38. A high portfolio turnover in an equity fund means (1 mark)

a. The fund is very active in marketb. Transaction costs are highc. The fund may be quite riskyd. All of the above

39. An actively managed equity fund expects to (1 mark)

a. Be able to beat the benchmarksb. Earn the same returns as the benchmarkc. Have no benchmarksd. Under-perform when compared with the benchmark

40. An Investor buys one unit of a fund at an NAV of Rs.20. He receives a dividend of Rs.3 when the NAV is

Rs. 21. The unit is redeemed at an NAV of Rs.22. Total Return is (2 marks)

a. 25.71%b. Rs. 27.51c. 21.27%d. Rs. 21.75%

41. For evaluating sectoral funds, the preferred benchmark would be the (1 mark)

a.

BSE Sensexb. S&P CNX Niftyc. BSE 200d. S&P CNX Sectoral Indices

42. The appropriate benchmark for evaluating a fund's performance depends on (1 mark)

a. The fund managerb. The investment objective of the fundc. SEBId. AMFI

43. The Expense Ratio as a measure of a fund's performance is defined as (2 marks)

a. Total expenses and average net assetsb. Total expenses and total assetsc. Average expenses and average net assetsd. None of the above

44. The most suitable measure of fund performance for all fund types is (1 mark)


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a. NAV Changeb. Total Returnc. Total Return with reinvestmentd. None of the above

45. Financial planners and their clients should focus on (1 mark)

a. Allocating funds to asset classes (e.g. debt, equity etc.)b. Allocating funds to individual securitiesc. Tracking stocks which they feel have potentiald. None of the above

46. Financial Planning comprises (1 mark)

a. Defining a client's profile and goalsb. Recommending appropriate asset allocationc. Monitoring financial planning recommendationsd. All of the above

47. Which of the following is the first step in financial planning (1 mark)

a. Asset Allocationb. Selection of fundc. Studying the features of a schemed. None of the above

48. Within an asset class, which individual security to invest in should be decided by (2 marks)?

a. The financial plannerb. The investor himselfc. A professional fund managerd. An objective advisor

49. The biggest disadvantage of investment in real estate is (1 mark)

a. Less potential for capital appreciationb. High purchase pricec. Depreciation in value as time passesd. Value gets eroded due to inflation

50. The current yield on Indira Vikas Patra works out to (1 mark)

a. 10.5%b. 11%c.

10%

d. 9%51. The maturity period of RBI Relief Bonds is (2 marks)

a. 5 yearsb. 6 yearsc. 7 yearsd. 8 years

52. The most important factor look for when investing in a corporate fixed deposit is the (1 mark)

a. Yieldb. Rate of interestc. Credit rating of the depositd. None of the above

53. The most important reason for an investor to prefer a bank deposit to a mutual fund is

(2 marks)a. The creditworthiness of the bank


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b. Because the bank does not invest in securitiesc. That the bank offers a guaranteed. All of the above

54. Annual contribution to Public Provident Fund should be (2 marks)

a. Rs.10000b. Between 100 and Rs.60000c. Between Rs.600 and Rs.1000d. None of the above

55. Compounding of interest is best explained by a (1 mark)

a. Balanced fundb. Growth fundc. Value fundd. Income fund

56. Listing of shares at a stock exchange ensures (1 mark)

a. Guaranteed returnsb. Long term capital appreciationc. Low riskd. High liquidity

57 The annual yield on RBI Relief Bonds is (2 marks)

a. 9.5%b. 9.5% before taxc. 8.5% before taxd. 8.5% after tax

58. Flexible asset allocation means (2 marks)

a. Continuously changing the ratio of various assets in the portfoliob. Not doing any re-balancing and letting the profits runc. Active switchingd. None of the above

59. A very high proportion of investment in all types of equity funds is advisable for investors

(1 mark)

a. In distribution phaseb. In accumulation phasec.

In transition phase

d. Who are wealth preserving affluent individuals60. For older investors who want to transfer their wealth (2 marks)

a. Financial planning is requiredb. The right investment strategy depends upon who the beneficiaries arec. The right investment strategy depends upon the state of the stock marketd. All the funds can be invested in aggressive equity funds

61. Of the following, which would be suitable for a retiree with a modest risk appetite

(1 mark)

a. Value Fundb. Diversified Equity Fundc. Growth Fundd. Balanced Fund

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


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(2 marks)

a. Buy and hold on to investments for a long timeb. Liquidate poorly performing investments from time to timec. Liquidate good performing investments fro time to timed. Switch from poor performers to good performers

63. The transition phase of an investor's wealth cycle is when the (1 mark)

a. Financial goals have been already metb. The investor has retiredc. Financial goals are approachingd. Investor suddenly gets a windfall

64. Which of the following lets an investor book profits in a rising market and increase holdings in a falling

market (2 marks)

a. Fixed Rates of Asset Allocationb. Flexible Ratio of Asset Allocationc. Investment without any asset allocation pland. Buy and Hold Strategy

65. A criticism of rupee-cost averaging is (2 marks)

a. Investment is for the same amount at regular intervalsb. Over a period of time, the average purchase price will work out lower than if one tries to

guess the market highs and lows

c. It does not tell you when to buy, sell or switch from one scheme to anotherd. Rupee cost averaging has no serious shortcomings

66. A wealth preserving affluent investor is likely to invest pre-dominantly in (2 marks)

a. Equity securitiesb. Debt funds and fixed income securitiesc. Money marketd. Real estate

67. A fund with stable positive earnings (1 mark)

a. Gives higher returnsb. Is less riskyc. Gives lower returnsd. Is more risky

68. Investors should be advised to avoid investing in a debt fund with a (2 marks)a. Lower rated portfolio and higher expense ratiob. Higher rated portfolio and lower expense ratioc. Lower rated portfolio and lower expense ratiod. None of the above

69. Which of the following funds should a risk-averse investor choose? (2 marks)

a. Gross dividend yield 15% Beta 1.5, Ex-Marks 90b. Gross dividend yield 10%, Beta 1, Ex-Marks 70c. Gross dividend yield 11%, Beta 0.9, Ex-Marks 80d. Gross dividend yield 12%, Beta 1.2, Ex-Marks 80


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Sample Test 2

1. The Board of Trustees of the UTI does not have nominees from (1 mark)

a. RBIb. LICc. IDBId. The Bombay Stock Exchange (BSE)

2. A gilt fund is a special type of fund that invests (1 mark)a. In very high quality equity onlyb. In instruments issued by companies with a sound track recordc. In short-term securitiesd. In government securities only

3. The private sector was granted permission to enter the mutual fund industry in (1 mark)

a. 1992b. 1993c. 1998d. 1995

4. A close-ended scheme is quoted on the stock exchange at a discount to its NAV when

(2 marks)

a. The markets are bearishb. Investors perceive that the fund will be unable to maintain the NAVc. The assets of the fund are undervaluedd. None of the above

5. In the re-investment option offered by mutual funds, the number of units held by an investor increases

because of (2 marks)

a. Growth in net asset valueb. Reinvestment of dividendc. Interest received on the fund's assetsd. None of the above

6. Transfer Agents of a mutual fund are not responsible for (1 mark)

a. Issuing and redeeming units of the mutual fundb. Updating investor recordsc. Preparing transfer documentsd. Investing the funds in securities markets

7. Who is the primary guardian of unit holders' funds/assets (1 mark)?

a. The AMCb. The Trusteesc. The Registrarsd. The custodians

8. If the schemes of a mutual fund are taken over by another mutual fund, which of the following is false?

(2 marks)

a. There is a change in the AMC of the schemes that are taken overb. There is a change in the Sponsor of the schemes that are taken overc. The scheme has to be wound up compulsorilyd. The schemes offer documents have to be changed and updated.

9. The amount of authority enjoyed by a self-regulatory organisation is defined by (1 mark)a. The apex regulatory authority


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b. Company law boardc. Its own membersd. RBI

10. The role of AMFI in the mutual funds industry is not to (1 mark)

a. Promote the interests of the unit holdersb. Set a Code of Ethicsc. Regulate mutual fundsd. Increase public awareness of mutual funds in the country

11. A due diligence certificate does not certify that (2 marks)

a. The draft offer document forwarded to SEBI is in accordance with SEBI regulationsb. All legal requirements connected with launching of the scheme have been complied withc. Disclosures made in the offer document are true, fair and adequated. The AMC guarantees a good performance

12. Along with the application, it is mandatory to distribute (1 mark)

a. Investment rebateb. Offer documentc. Key information memorandumd. None of the above

13. An offer document contains the summary of expenses history of all schemes for the past

(2 marks)

a. 1 fiscal yearb. 2 fiscal yearc. 3 fiscal yeard. Six months

14. Excess distribution expenses are to be borne by the (1 mark)

a. AMCb. Unit holdersc. SEBId. AMFI

15. Offer Document of a mutual fund is (1 mark)

a. Required by investorsb. Required by the AMC for its own referencec.

Required as per SEBI regulations

d. Not mandatory as per SEBI16. Procedure for redemption or repurchase need not (2 marks)

a. Be described in the offer documentb. Include how redemption or repurchase price of units would be determinedc. Include names of centers where redemption can be effectedd. Indicate the redemption or repurchase price as at the end of the current fiscal year

17. SEBI guidelines for agents includes (2 marks)

a. Agents can sell products of a single mutual fundb. Agents can sell products of mutual funds with whom he has entered into agreementsc. Agents could be only individualsd. None of the above

18. Agents are compensated by mutual funds (1 mark)

a. Through salariesb. Through commissions


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c. Through an annual feed. Not in cash but in kind

19. An agent's appointment by a fund (1 mark)

a. Requires SEBIs approvalb. Is a lengthy and cumbersome processc. Is mandatorily preceded by an AMFI testd. Does not require any approval

20. An investor buys units in a fund that has given excellent returns in the past, but his expectations are

not met, as the fund does not perform well this year. The investor can (2 marks)

a. Sue the AMCb. Sue the Trusteesc. Sue the agentd. None of the above

21. Are Overseas Corporate Bodies allowed to invest in Mutual Funds (1 mark)?

a. Nob. Yesc. If Ministry of Finance approvesd. If AMFI approves

22. Documents available to investors for inspection do not include (1 mark)

a. Memorandum and Articles of Association of AMCb. Consent of auditors and legal advisorsc. Investment management reportsd. Reports based on which actual investments are made

23. Distribution tax should be taken into account when computing net returns from (2 marks)

a. Equity fundsb. Debt fundsc. Both the aboved. None of the above

24. A mutual fund declares Re 1 as distribution. The income in the hands of unit holders is (2 marks)

a. Taxable at 20%b. Not taxable in the hands of unit holdersc. Information is inadequate to assess tax liabilityd.

Income tax will be assessed as per unit holders liability

25. For a close-ended fund, the repurchase price should not be lower than (2 marks)

a. NAVb. 95% of NAVc. 93% of NAVd. 97% of NAV

26. The "load" charged to an investor in a mutual fund is (1 mark)

a. Entry feeb. Cost of the paper on which the unit certificates are printedc. The fee the agent charges to the investord. The expenses incurred by fund managers for marketing a mutual fund scheme

27. A passive fund has the following feature (2 marks)

a. A passive fund tracks the indexb. A passive fund matches the performance of the index


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c. A passive fund selects the stocks that are present in the indexd. All of the above

28. A growth manager looks for (1 mark)

a. High current incomeb. Undervalued stocksc. Above average earnings growthd. None of the above

29. An owner of preference shares is given which of the following rights (2 marks)

a. Voting rightsb. Fixed dividend income from post-tax profitsc. Voting rights and unlimited dividend incomed. No guaranteed rights

30. Continuous tracking of the companies in which a mutual fund has invested is done by

(1 mark)

a. Continuous tracking systemsb. Equity analystsc. Trusteesd. Security dealers

31. Dividend yield for a stock is (1 mark)

a. Dividend per shareb. Dividend per face valuec. Dividend per share to current market priced. None of the above

32. Which of the following is applicable to the debt market in India? (1 mark)

a. The debt market is a wholesale marketb. There are large players like banks, financial institutions, mutual funds, etcc. Government securities are traded on a large scaled. All of the above

33. A bond with a coupon of 9% when interest rates for similar maturities are 11% will sell

(2 marks)

a. Above parb. Below parc.

At par

d. At a price unrelated to the prevailing interest rate34. Certificates of Deposits (CDs) are issued by (1 mark)

a. Regional Rural Banksb. Corporatesc. Scheduled commercial banksd. None of the above

35. Current yield relates interest on a security to (1 mark)

a. Its current market priceb. Its face valuec. Its fair valued. The current price of T-Bills

36. A mutual fund may transfer investments from one scheme to another (1 mark)

a. Not at allb. At current market rates


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c. At cost priced. At a fixed premium over market rate

37. Mutual funds are allowed to borrow (2 marks)

a. Freely to meet their requirementsb. For investment purposes onlyc. Only to meet redemption demandsd. Not allowed at all

38. Which of the following measures are not taken by SEBI for protecting investors of mutual funds

(2 marks)

a. Mandating minimum levels of diversification for mutual fundsb. Ensuring that the funds are not used to favour a few companiesc. Tracking the securities that each fund has Invested ind. Ensuring that the funds are invested in approved securities only

39. In a mutual fund investors' subscriptions are accounted for as (1 mark)

a. Liabilitiesb. Depositsc. Unit capitald. None of the above

40. A funds NAV is affected by (2 marks)

a. Purchase and sale of investment securitiesb. Valuation of all investment securities heldc. Units sold or redeemedd. All of the above

41. Which of the following expenses cannot be charged to the scheme (1 mark)

a. Audit feesb. Costs related to investor communicationc. Winding costs for terminating the schemed. Penalties and fines for infraction of laws

42. The valuation norm for non-investment grade, performing assets is done: (2 marks)a. On YTM basis using the Crisil valuation methodology

b. On YTM basis with 25% discount

c. At 25% discount to face value

d. At face value43. Valuation norms for non-traded securities should be disclosed (1 mark)

a. At the end of every financial yearb. Every quarterc. In the offer document at the time of launch of the schemed. Should not be disclosed, being confidential information

44. As per SEBI guidelines, a security is to be treated as untraded when (1 mark)

a. Security is never traded on stock exchangeb. Security is not traded for 30 daysc. Security is not traded for 60 daysd. None of the above

45. Ex-marks with 100 % could be for the following fund: (1 mark)

a. Growth fundb. Index fundc. Value fund


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d. Balanced fund46. A high turnover rate for a fund indicates (1 mark)

a. High transaction costsb. Greater efficiencyc. High returns to the investord. A rising market

47. An investor can assess the performance of his mutual fund by comparing it with the performance of

(2 marks)

a. Other mutual fund of the same typeb. The stock marketc. Other financial productsd. All of the above

48. If the NAV of an open-ended fund was Rs.16 at the beginning of the year and Rs.22 after 13 months,

the annualized change in NAV is (2 marks)

a. 6.0%b. 34.6%c. 40.6%d. 37.5%

49. The choice of an appropriate benchmark for evaluating a fund's performance depends on

(1 mark)

a. The fund managerb. The investment objective of the fundc. SEBId. AMFI

50. When comparing a fund's performance with that of its peer group, the following cannot be compared

(2 mark)

a. Two debt funds with 5 year maturitiesb. A broad-based equity fund with an IT Sector Fundc. A bond fund with a bond indexd. A government securities fund with a government security

51. Which of the following is false? (2 marks)

a. ROI is a measure similar to Total Return with Reinvestment of distributionb. Total Return with Reinvestment of distributions assumes reinvestment at NAV on the

distribution date

c. As a measure of performance, Total Return with Reinvestment of distribution seeks toovercome the shortcomings of simple Total Return

d. Because of its simplicity, simple Total Return is preferred in practice to Total Return withReinvestment of distribution

52. Financial planning allows a person (1 mark)

a. To become a billionaireb. To achieve financial goals through proper management of financesc. To invest in foreign countriesd. None of the above

53. Financial Planning comprises (1 mark)

a. Defining a client's profile and goalsb. Recommending appropriate asset allocation


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c. Monitoring financial planning recommendationsd. All of the above

54. Financial planning does not include: (2 marks)

a. Enabling investors to define financial goalsb. Assessing the investors risk and return requirementsc. Recommending an appropriate asset allocationd. Selecting securities that will be included in the investors portfolio

55. A small investor can build a diversified portfolio by (1 mark)

a. Buying one share each of all listed companiesb. Investing in a mutual fundc. Borrowing enough money to buy shares of well-managed companiesd. None of the above

56. Direct investment in stock market can be a better option than investing through mutual funds if the

investor (2 marks)

a. Wants better returns than those offered by mutual fundsb. Has large capital, knowledge and resources for researchc. Has identified a bullish phase in the stock marketd. Wants to invest for the long term

57. Indira Vikas Patra is an investment product popular with (1 mark)

a. Rural investorsb. Investors in high tax bracketc. Urban investorsd. Investors who want to protect their identity

58. Most individuals invest in life insurance policies for (1 mark)

a. Risk protectionb. Tax benefitsc. Easy liquidityd. High returns

59. Which of the following about PPF is false? (2 marks)a. Investments have to be made form taxable income of the relevant year.b. Investments once made cannot be withdrawn until maturity.c. Both interest and principal are tax free in the year of withdrawal.d. Investments enjoy tax benefits under Section 88 of the IT Act.

60. The difference between debenture and bond is: (2 marks)a. Bonds are issued by corporations and debentures are issued by PSUs.b. Bonds are unsecured and debentures are secured.c. Bonds are backed by loans and debentures are backed by assetsd. None of the above.

61. A criticism of rupee-cost averaging is (2 marks)

a. Investment is for the same amount at regular intervalsb. Over a period of time, the average purchase price will work out lower than if one tries to

guess the market highs and lows

c. It does not tell you when to buy, sell or switch from one scheme to anotherd. Rupee cost averaging has no serious shortcomings

62. A high proportion of investment in income funds is required by (1 mark)

a. Accumulating investors


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b. Affluent investorsc. Investors in the inter-generational transfer phased. Investors in the distribution phase

63. A high proportion of investment in equity funds is advisable for investors (1 mark)

a. In distribution phaseb. In accumulation phasec. In transition phased. Who are wealth preserving affluent individuals

64. Investors who follow the fixed Asset Allocation approach (2 marks)

a. Maintain balance in their portfolio by liquidating a part of the position in the asset class whichhas given higher return and reinvesting in the other asset class which has lower return

b. Are not disciplinedc. Increase their equity position when equity prices tend to climbd. None of the above

65. Mutual fund investors should be advised to expect (1 mark)

a. Low post tax returnsb. Dramatic resultsc. Better returns than every other available optiond. Only realistic wealth accumulation

66. Which of the following fund types are comparable (2 marks)

a. An aggressive equity fund and a money market mutual fundb. A value fund and a government securities fundc. A bond fund and a debt fundd. A diversified equity fund and a debt fund

67. Which of the following is a disadvantage of standard deviation (2 marks)

a. Standard Deviation measures total risk, not just market riskb. It is based on past returns, which does not necessarily indicate further performancec. It is an independent numberd. All types of funds can be measured with standard deviation

68. Which of the following is most risky? (1 mark)

a. Investing in a money market mutual fundb. Investing in an index fundc.

Short term investment in an equity fund

d. Long term investment in an equity fund69. Yield-to-maturity of a debt fund is more important if the investment objective is (2 marks)

a. Current incomeb. Total returnc. Liquidityd. All of the above


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Sample Test 3

1. A systematic withdrawal plan is ideal for investors whoa. Seek growth as the main objectiveb. Wish to benefit from market fluctuationsc. Prefer a regular income streamd. Not sure about themselves

2. Gilt funds invest ina. IT sectorb. AAA securitiesc. Money market securitiesd. Government bonds

3. Which of the following is recommended by Bogle for older investors inaccumulation stage?

a. 50% in equity and 50% in debtb. 60% in equity and 40% in debtc. 70% equity and 30% debtd. 40% equity and 60% debt

4. Illiquid securities in a portfolioa. Cannot be transferred across schemesb. Cannot be more than 15% of net assetsc. Cannot be more than 20% of net assetsd. a and b are truee. a and c are true

5. Which of the following cannot invest in mutual funds?a. NRIsb. Charitable trustsc. FIIsd. Foreign investors

6. Which of the following is true for assured return schemes?a. Name and net worth of guarantor to be givenb. Performance of past assured return schemes to be givenc. Whether assurance in earlier scheme was met to be statedd. All of the above

7. Your friend in Dubai wants to invest in a mutual fund. She should be advised toread

a. Trust deedb. SEBI regulationsc. Offer documentd. AMC balance sheete. All of the above

8. While deciding on asset allocation, an investor must considera. The stage of his lifeb. The purpose of making investmentc. His risk appetited. All of the above

9. Mutual funds should be recommended asa. Investments to achieve long term goalsb. A get-rich quick optionc. Investments to take advantage of stock marketd. All of the above

10.A fund manager who believes in the growth philosophy looks for companies witha. Above average earnings growth


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b. Large equity basec. Likely to go for public issued. All of the above

11.An open ended fund can change its fundamental attributes bya. Allowing investors to exit after 6 monthsb. Allowing investors to exit at NAV without a loadc. With consent of 75% of investorsd. None of the above

12.Which of the following is not a SRO?a. BSEb. NSEc. AMFId. None of the above

13.Which of the following do not provide a guarantee on capital?a. PPFb. NSCc. Post office depositsd. Units of mutual funds

14.Which are the benchmarks used to evaluate fund performancea. Return on benchmarks like S&P and Sensexb. Return on other fundsc. Return on comparable instrumentsd. All of the above

15.Mutual funds can borrow:a. upto 25% of net assetsb. upto 20% of net assetsc. For period not exceeding 6 monthsd. Both a and ce. Both b and c

16.The second mutual fund to be set up in India after UTI wasa. Canbank Mutual Fundb. Kothari Pioneer Mutual Fundc. Morgan Stanley Mutual Fundd. SBI Mutual Fund

17. The following is the fund you would advice to an investor who wants to invest forone year

a. A debt fund with expense ratio of 1.15% and a entry load of 2%

b. A debt fund with expense ratio of 1.2 % and a entry load of 2.5 %c. A debt fund with expense ratio of 1.5% and an entry load of 4%

d. A debt fund with expense ratio of 0.5 % and entry load of 3%18.Mutual funds are described as _____ in the SEBI Regulations, 1996

a. Companiesb. AMCsc. Trustsd. Agencies

19.What proportion of a mutual funds trustees have to be independent from thesponsor?

a. 50%b. 2/3rd of trusteesc. 3/4th of the trusteesd. 60% of the trustees

20.Which of the following cannot be distributors of a mutual funda. Sponsorb. Associate of sponsor


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c. Associate of AMCd. Employees of AMC

21.Stock exchanges can act as regulators of:a. SEBI registered mutual fundsb. Closed end funds listed on the exchangec. All sectoral fundsd. All equity mutual funds

22.A mutual fund cannot invest more than _____% of its net assets in un-rateddebt of one issuer. Total investments in un-rated debt cannot exceed ____% ofnet assets.

a. 10; 20b. 15; 25c. 10; 25d. 15;20

23.Which of the following is an ideal allocation for a wealth preserving affluentinvestor?

a. 50% equity;50% debtb. 70% equity; 30% debtc. 30% equity;70% debtd. 100% equity

24. If a 8% bond with face value of Rs. 1,000 is selling for Rs. 1,100, what is thecurrent yield?

a. 8%b. 7.27%c. 7.8%d. 8.2%

25. If you maintain a flexible asset allocation you woulda. Rebalance debt and equity periodicallyb. Rebalance debt and equity frequentlyc. Generally avoid portfolio re-balancingd. Keep fixed percentage in debt and equity at all times.

26.Which of the following will NOT require financial planning?a. A 40 years old doctor with substantial savingsb. A retiree who is currently getting an income of 4,000 but would want Rs.

10,000 a monthc. An old person wanting to transfer all his wealth to his grandchildrend. A young professional aged 26 years

27.What is the portfolio you will recommend to a young couple with two incomesand two children?

a. 10% money market; 30% aggressive equity; 25% diversified equity;35% bond funds

b. 40% aggressive equity; 30% money market; 30% bond fundc. 60% equity; 30% money market; 10% debtd. 70% bond funds; 30% equity funds

28.Financial planning is:a. Investing funds to achieve a highest possible rate of returnb. Resorting to tax planning to keep taxes as low as possiblec. Planning for retirement with maximum income possibled. Process of solving financial problems and reaching financial goals

29.You have just won a huge sum in a lottery. What should your ideal allocationbe? a. Invest everything in sectoral funds, as NAV is very low.

b. Invest in government bonds, as risk is low.


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c. Invest in money market funds and decide over the next few monthsd. Consider the impact of taxe. Both c and d

30.Which of the following is true for closed end funds?a. The fund offers to buy and sell units at NAVb. The corpus of the fund is constantc. The net assets of fund does not changed. None of the above31.Which of the following represents the transition phase?a. Investor has no need for investment incomeb. Investor has a long term horizonc. Investor cannot take risksd. Investors financial goals are approaching.

32.P/E of which of these stocks is usually high?a. Value stocksb. Cyclical stocksc. Small cap stocksd. Growth stocks

33. If an AMC does not resolve an investors complaint, investor can appeal to:a. SEBIb. Ministry of Financec. Office of the public trusteed. Company Law Board

34.Mutual funds can lend funds in the form ofa. Loansb. Promissory notesc. Securitiesd. None of the above

35.An offer document of an open ended fund has to be reviseda. Once in 3 yearsb. Not at allc. Every yeard. Once in two years

36.A FII can invest in a mutual fund through itsa. Non resident external accountb. Non resident ordinary accountc. Non resident rupee accountd. RBI current account

37.You invest Rs. 25,000 in a mutual fund. After 2 years you redeem your units atRs. 32,000. Ignoring indexation and surcharge, what is the capital gain tax onthis transaction?

a. Rs. 7,000b. Rs. 700c. Rs.1,400d. Depends on the marginal rate of taxation

38. If a funds NAV is Rs. 12, what is the maximum sale price it can charge,according to SEBI regulations?

a. Rs. 12.70b. Rs. 12.84c. Rs. 13.68d. Rs. 11.16

39.Debt securities with less than 182 days to maturity are valued ata. Face value


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b. YTM basis

c. Accrual basis

d. Duration basis

40. If a scheme holds more than 15% in illiquid securities, all securities above that

limit have to

a. Be valued at book value

b. Be valued at a discount of 25%

c. Valued at cost priced. Assigned a value of zero

41. Ex-Marks of an equity fund measures its

a. Performanceb. Riskc. Both the aboved. None of the above

42.Which of the following is untrue of an automatic reinvestment plan?a. The plan allows for automatic reinvestment of all income and capitalgains

b. Automatic reinvestment allows for accumulation of additional units of thefund

c. The major benefit of automatic reinvestment is compoundingd. The benefit of automatic reinvestment is often lost on account of theheavy load charge on the reinvestment

43. Retired investors should

a. Not draw down on their capital

b. Not invest in securities which bear risk of capital erosion

c. Continue holding a major portion of their holding in equity growth funds

d. Never invest in equity

44. 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 lower than

if one tries to guess the market highs and lows

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

anotherd. Rupee cost averaging has no serious shortcomings45. A 55 year old investor, who is employed and earning well, can be said to be in

a. Accumulation stageb. Transition stagec. Distribution staged. Inter-generational wealth transfer stage

46. In order to decide an appropriate index as benchmark for an actively traded

fund, one should consider

a. Fund size and portfolio compositionb. Whether the fund is broad based or focused on specific type of securitiesc. Investment objective of the fundd. All of the abovee. None of the above

47. An equity investor wants to maximise his return in the long run. He should

a. Buy and hold investments for a long time


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b. Invest in gold and silver onlyc. Keep selling good performing fundsd. Keep selling off poor performing schemes and replace them with good

performing schemes.

48. Which is the most important factor one should consider before investing in company fixed

deposit?

a.Interest rate on the depositb.Assets against which deposits are securedc.Its credit ratingd.All of the abovee.Only a and c are true

49. After developing a financial plan for a client, financial planners should

a.Leave it as it isb.Review it periodicallyc.Review it once in five yearsd.None of the above

50. The KIM of a mutual fund scheme is available

a.At the AMC officeb.At the offices of authorised agentsc.At the branches of all banksd.Only a and b

51. Investors can inspect the following documents

a. Trust deedb. Agreements with various constituentsc. Memorandum and articles of association of AMC and Trustee companyd. All of the above

52. A bond has been issued with a call provision. This means the issuer may call it back

whenever the interest

a. Fallb. Risec. Changed. Are lower than the coupon rate

53. In determining the holding cost of an investmenta. Average cost method is to be followedb. The weighted average cost method is to be followedc. The market value method to be followedd. Either a or b

54. As per wealth cycle guide, during the accumulation stage

a. The client looks to build wealthb. The clients goals are approachingc. Client cashes outd. Client feels the need to take care of the next generation

55. If the commission paid to agents exceeds the distribution expense rates specified in the offer

document, the excess has to be borne by

a. AMCb. Trusteesc. Unit holders


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d. DRF of the mutual funde. Investor protection fund

56. Unit holders who do not agree with the merger of a funds scheme have the option to

a. Exit from the scheme if it is an open ended schemeb. Exit from the scheme after 6 monthsc. Cannot exit if the AMC does not permit such withdrawald. Can exit only after approval of SEBI

57. While choosing between a bank deposit and a debt income fund, the investor must consider

a. Credit rating of the bankb. Quality of the mutual fund assetsc. His investment objective and risk appetited. All of the above

58. The jurisdiction for resolving legal disputes concerning a mutual fund is

a. Given in the offer documentb. Stated in the stock exchangesc. Decided by company law boardd. Decided by BSE

59. Passive fund is expected to

a. Beat the return of the indexb. Furnish the returns of the market indexc. Keep the costs lowd. Both c and d

60. Which classification of mutual fund does not exist?

a. Closed end or open endb. Load fund or no load fundc. Pension fund or insurance fundd. Active fund or passive fund

61. An investor cannot plead ignorance of the procedures while investing in a mutual fund

because

a. Mutual fund is a risky investmentb. Law does not permit the investor to sue the Trustc.

While applying the investors sign an agreement stating they have read and understoodthe terms and conditions

d. An investor is expected to be careful while investing62. A portfolio turnover of 200% implies that an