AMFI PPT-1

AMFI MUTUAL FUND(ADVISOR) – January 2008

Training Module

Index

Index1. The Concept and Role of Mutual Funds.

2. Funds Structure and Constituents.

3. Legal and Regulatory Framework.

4. The Offer Document.

5. Fund Distribution and Sales Practices.

6. Accounting, Valuation & Taxation.

7. Investor Services.

8. Investment Management.

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09. Measuring and Evaluating Mutual Fund Performance.

10. Helping Investors with financial planning.

11. Recommending Financial Planning Strategies to Investors.

12. Selecting the right Investment Products for Investors.

13. Helping Investors understand Risks in Fund Investing.

14. Recommending Model Portfolios and selecting the right Fund.

15. Business Ethics in Mutual Fund.

Concept and Role

Of Mutual Funds

Chapter 1

Index

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

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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.

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Advantages of Mutual Funds to Investors?

• Portfolio diversification• Professional Management• Reduction in Risk• Reduction in Transaction costs• Liquidity• Convenience and Flexibility• Safety – Well regulated by SEBI

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What are the disadvantages of investing through Mutual Funds?

• No control over the costs. Regulators limit the expenses of Mutual Funds. Fees are paid as percentage of the value of investment.

• No tailor made portfolios.

• Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

•One fund can have schemes of similar objectives so, selection becomes difficult.

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Evolution of Mutual Funds in India

Phase 1 – ( 1964 – 1987)- Growth of UTI• UTI sole player in the industry, created by an Act of Parliament ,1963• The first product launched by UTI was Unit Scheme 1964• UTI creates products such as ULIP (1971), MIP's, Children

Plans(1986) ,Offshore Funds etc.• MASTERSHARE (1987) – 1st Diversified Equity Investment Scheme in

India.• INDIA Fund – 1st Indian offshore fund launched in August 1986.

Phase 2 – ( 1987 – 1993)- Entry of Public Sector Funds• In 1987 Public Sector Banks and FI's got permission to set up MF.• SBI mutual fund was the first non -UTI mutual fund, set up in

November 1987• This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC

and PNB MF• In 1993, Mutual Fund Industry was open to private players.• SEBI got its regulatory powers in 1992

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• Phase 3 – ( 1993-1996) – Emergence of Private Funds• In 1993, Mutual Fund Industry was open to private players.• SEBI's first set of regulations for the industry formulated in 1993• Significant innovations, mostly initiated by private playersPhase 4 – ( 1996-1999) – Growth and SEBI Regulation• Implementation of new SEBI regulations led to rapid growth • Bank mutual funds were recast as per SEBI guidelines• UTI came under voluntary SEBI supervision.• Dividends made tax free in 1999.• Mutual funds assets in mid-2002 were app. 1,00,000 crore• During this phase, both SEBI and AMFI launched investor awareness

programmes.

AMFI also published a booklet titled “ Making Mutual Funds work for you – The investors’ Guide”

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Phase 5 – (1999-2004) – Emergence of a large and uniform industry

– UTI Act Repealed in February 2003.• AUM by end of 2005 app. INR 1,50,000 crore• Rapid growth, significant increase in corpus of private players• Tax break offered created arbitrage opportunities• Bond funds and liquid funds registered highest growth

Phase 6 – From 2004 onwards : Consolidation and GrowthMergers and Acquisitions witnessed Alliance MF acquired by Birla SunlifeSun F&C by Principal PNB Mutual fund.

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Emergence of Large and Uniform Industry

• UTI Act repealed in 2003.

• UTI now does not have a special status. (now under SEBI)

• Size of industry was 1,50,000 crore in 2005.

• Merger and Acquisitions happening.

• Fidelity, Largest MF has entered India.

• At the end of March 2006, there were 29 Funds.

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Mutual Fund Classifications

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What are open-ended funds?

• In an open ended fund, investors can buy and sell units 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, in the initial 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

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What are closed-end funds?

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

• Any 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.

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Load and No Load Funds

• Load is the one time fee payable by the investor to allow the fund to meet initial issue expenses including brokers/agents’/distributors’ commissions, advertising and marketing expenses.

• Funds that charge front end( entry) load, back end( exit), or deferred loads are called LOAD funds.

• IF the investors’ objective is to get the benefit of compounding his initial investment by reinvesting and holding his investment for a very long term, then , a no front load fund is preferable.

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Tax Exempt Vs. Non Tax Exempt Funds

• When a fund invests in tax exempt securities, it is called a tax exempt fund.

• In India any income received by mutual fund is tax free.

• After 1999 budget, all dividend income received from MF is tax free in hands of the investor. But all funds other than open ended equity funds have to pay a dividend distribution tax.

• So in India, open end equity oriented mutual fund schemes are tax exempt investment avenue, while other funds are taxable for distributable income.

• After 2005 budget, repurchase transaction for equity oriented schemes are subject to Securities Transaction Tax.

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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

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What are equity funds?Predominantly invest in equity shares of the company. Choices in equity funds.• Aggressive Growth Funds (Targets maximum capital appreciation.)

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

• Specialty Funds Sector Funds (Bank, Power, Pharma, IT, Telecom) Foreign Securities Fund ( investment in shares of different countries

to make it more diversified) Mid cap or Small cap Equity funds Option Income Funds (Do not yet exist in India)

• 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.)

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What are Liquid / Money Market funds?• These debt funds invest only in instruments with

maturities less than a year.• Lowest in the order of risk level.• The investment portfolio is very liquid and enables

investors to hold their investments for very short horizons of a day or more.What are Gilt Funds?

• It invests only in securities that are issued by the Government and therefore do not carry any credit risk

• Government papers are called as dated securities also.• It invests in medium to long-term government papers.• Ideal for institutional investors who have to invest in Govt. Securities• Enables retail Participation

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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.

• Open or closed ended.

• Eligible under Section 80 C upto Rs.1 lakh allowed

• Dividends are tax free.

• Benefit of Long term Capital gain taxation.

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Fixed Term Plan Series

• FTPs are closed ended in nature.

• AMC issues a fixed number of units for each series only once, and closes the issue after an initial offering period.

• Fixed Term plan are usually for shorter term – less than a year.

• They are not listed on a stock exchange.

• FTP series are likely to be an Income scheme.

• Good alternate of Bank deposits/ corporate deposits.

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Commodity Funds

• It will invest directly in commodities or through shares of the commodity companies or through commodity futures contract.

• Most common example of such fund is precious-metal fund.

• Gold funds invest in Gold, Gold futures or shares of gold mines.

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Exchange Traded Funds• It combines the best features of open end and closed

structure.

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

• ETFs are not the index funds

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Real Estate Funds

It can :• Invest in real estate• Fund real estate developers• Buy shares of housing finance companies• Buy securitized assets.

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How are funds different in terms of their risk profile?

Equity Funds High level of Return , but has a high level of risk too

Debt Funds Returns comparatively less risky than equity funds

Liquid and Money Market Funds Provide stable but low level of return

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Important points

• IN USA, a MF is constituted as an investment company and an investor buys the share of the fund.

• In USA, all mutual funds are open ended.

• In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds

• In India, classified as Open – Closed ended, Load and No Load Funds.

• Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds and other securities or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle.

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Very Important Points to Remember• 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 Agencies appointed by AMC ( Distributors, Banks, Post offices, brokers etc.)

• 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 assured return schemes of the UTI have gradually been wound up.

Chapter 2

Fund Structure and Constituents

Index

How does a Mutual Fund work?

SEBI

AMC

Unit holders

Savings

UnitsTrust Investments

Returns

Trust

AMC Custodian

Sponsor

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Mutual Fund Constituents

• Fund Sponsor.

• Trust.

• Asset Management Company.

• Other fund constituents.• Custodian and Depositories.• Bankers.• Transfer Agent.• Distributors.

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What is the 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

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Who can be the Sponsor? What does the Sponsor do?• The sponsor establishes the mutual fund and registers

the same with SEBI• 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 of business interest in the financial markets

• 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.)

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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.

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• 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.

• Trustees are the primary guardians of the unit-holders’ funds and assets.

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

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What are the rights of the Trustees?

• Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations

• All Mutual Fund Schemes floated by the AMC have to be approved by the Trustees

• Trustees can seek remedial actions from AMC, and in cases dismiss the AMC

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What are the obligations of the Trustees?• 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

• SEBI Regulations require that the meeting of the trustees should be held at least once in every two months.

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Regulatory requirements for the AMC?• Only SEBI registered AMC can be appointed as investment

managers of mutual funds• 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• At least half of the members of the Board of an AMC, have to

be independent• The 4th Schedule of SEBI regulations spells out rights and

obligations of both trustees and AMCs• The agreement between the Trustees and the AMC is

known as “Investment Management Agreement”.

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Who appoints the AMC and defines its functions?

• The sponsors, or the trustees, if authorized by the trust deed appoint the AMC.

• The AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholders

• The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr.

• The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC

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How are Indian mutual funds organised?

• Though the trust is the mutual fund, the AMC is its operational face

• The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries

• The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors

• All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working

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What do the Registrar and Transfer Agents do?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

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What is the role of selling and distribution agents ?

• Selling agents bring investors funds for a commission

• Distributors appoint agents and other mechanisms to mobilize funds from investors

• Banks and post offices also act as distributors

• The commission received by the distributors is split into initial (Upfront) commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund

• Sponsor or an associate can also act as a distributor for the AMC.

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What are the 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

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Various Forms of Fund Mergers and Takeovers

• Merger of AMC to become a single entity ( Example : HB Mutual and Taurus Mutual )

• AMC takeover by sponsors ( Example : ITC Threadneedle and 20th century taken over by Zurich) ( ITI by Franklin Templeton) (Alliance by Birla)

• Scheme take over (Apple’s scheme taken over by Birla AMC ) and ( Zurich’s Scheme Takeover by HDFC Mutual Fund)

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What are the conditions under which two AMC’s can be merged?

SEBI regulations require the following :

• SEBI and Trustees of both funds must approve of the merger

• Unit holders should be notified of the merger, and provided the option to exit at NAV, without load in case of open ended funds else 75% consent is required.

• Provisions of Companies Act apply to merger and High Court approval is required as AMC’s are companies.

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Under what conditions can an AMC be taken over by another sponsor ?

• SEBI approval is required of the change of ownership and unit holders have to be informed of the takeover

• Investors have to be informed but HIGH Court approval not required

What is scheme take over?

• If an existing mutual fund scheme is taken over by another AMC, it is called as scheme take over. The two mutual funds continue to exist.Trustee and SEBI approval and notification of unit holders are required for scheme takeovers

• Disagreed investors can redeem their investments

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Important Points

• In USA, the regulatory body is known as Securities Exchange Commission.

• The sponsor may be compared to promoter of a company

• Issuing units and redeeming units is the role of Transfer Agent

• 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.

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• 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 can contribute 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

Legal and Regulatory Framework

Chapter 3

Index

Regulating Agencies of Mutual Fund• SEBI ( Established in 1992 by an Act of Parliament)

• 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, come under the regulatory umbrella of SEBI.

• RBI regulates the money and government securities market where the mutual funds invest but the 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)

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

• All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under purview of the SEBI

• SEBI regulates Share Registrars, Custodians, Mutual Funds, Stock Exchanges and share brokers. But it does not regulate Non Banking Finance companies.

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What is the role of Ministry of Finance in mutual fund regulations ?

• The finance ministry is the supervisor of both the RBI and SEBI

• Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds

• AMCs has to file its annual statements with Registrar of Companies ( RoC)

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What are self regulatory organizations (SRO’s)?

• Stock exchanges are Self-Regulatory Organizations

• SROs are the second-tier in the regulatory structure

• SROs get their powers from the apex regulating agency and act on their instructions

• SROs cannot do legislation of their own

• SROs regulate only their own members in limited manner

• SROs facilitate decentralization in the regulatory structure.

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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.

Objectives• To promote the interests of mutual funds and unit holders.• To set ethical, commercial and professional standards in

the industry.• To increase public awareness of the mutual fund industry.• To develop a cadre of well trained distributors

AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.

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What are the rights of the investors in respect of service standards that they can expect from MFs?Right to Timely Service1. Investors are entitled to receive dividends declared in a scheme within 30 days 2. Redemption proceeds have to be sent to investors within 10 days 3. If an investor fails to claim the dividend or redemption proceeds he has the rights to claim it up to a period of 3 years from the due date at the then prevailing NAV. After 3 years he will be paid at NAV applicable at the end of 3rd year4. Mutual funds have to allot units within 30 days of the closure of the issue and also open the scheme for redemption, if it is an open -ended scheme5. Mutual funds have to publish their half yearly results in at least one national daily and publish their entire portfolios, at least once in 6 months . Such disclosure should be done within 30 days from 6 monthly account closing dates of the fund6. Trustees will have to ensure that any information having a material impact on the unit holders investments should be made publicby the mututal fund7. If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of unit holders can be called 3)Appointment of the AMC of the mutual fund can be terminated

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Rights of the investor8. If there is any change in the fundamental attributes of the scheme,

the unit holders have to be notified through a letter. They also have a right to repurchase at NAV without any load, before such change is effected.

9. Unit holders have the right to inspect certain documents

10. Unit holders have the right to receive the complete statement of the scheme portfolio before the expiry of one month from the close of each half year.

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What are the limitations to investors right ?

• 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 not legal remedies for to a prospective investor. Only after his investment in the scheme he becomes eligible for the earlier mentioned rights.

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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

• 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.

Offer Document

Chapter 4

Index

• 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

• An abridged (summary) version of the OD is Key Information Memorandum (KIM)

• 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 cover page of OD contains details of scheme being offered, the name of the sponsor, trustee, AMC etc.

• Mandatory disclaimer clause of SEBI should also be on the cover page of the OD

• The format and contents of the OD must be as per SEBI guidelines

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

• The AMC is responsible for the information in the OD

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The Content

Broadly the OD issued by MFs in India are required by SEBI to include the following:

• Details of the sponsor and the AMC

• Description of the scheme and the investment objectives/strategy

• Terms of the issue

• Historical statistics

• Investor’s right and services.

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• Close-ended funds issue an OD at the time of the IPO

• Open-ended funds have to update OD and KIM at least once in 2 years

• Copy of all the changes in the OD is to be filed with SEBI

• Trustees approve the contents of the OD and KIM

• KIM is compulsorily made available with every application form

• SEBI does not approve or certify the contents of the OD

• Investor’s rights are stated in the OD

• The OD contains detailed info, while KIM is the summary document

• If any information is crucial to the investor, it will be found in both OD and KIM. For e.g. details of guarantee, if the scheme is an assured return scheme

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• the OD must contain a due diligence certificate signed by a compliance officer, an AMC employee

– The due diligence certificate states that:- Information in the OD is according to SEBI formats- Information is verified and is true and a fair representation of facts- All constituents of the fund are SEBI registered

• The following information would be available in the OD:

– Category of Investors eligible to apply, viz. Individual, HUF, FI, Trust, Society, Corporate, Association of Persons, NRI, PIO, OCB etc

– Information on existing schemes and financial summary to be given for 3 years

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

– If any expense incurred in a past scheme is higher than what was stated in OD, explanations should be given

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– Investor’s rights are stated in the OD

– 3 year track record of investor’s complaints and redressal should be disclosed

– Any pending cases or penalties against sponsor or AMC

– The borrowing restrictions on the mutual fund should be disclosed, including the purpose and limit of borrowings and the borrowing at the end of last fiscal year

– In case of a guaranteed scheme, name of guarantor, their net worth and past performance of assured return schemes

• The name and addresses of trustee and AMC directors will be found in KIM, but the details of their role, responsibilities and duties will be found in OD

• There is no information about other mutual funds, their performance in the OD. No comparison or data on performance of other mutual funds is found in OD

• The OD and KIM will not contain names of securities in which the fund plans to invest, only broad asset allocation will be given.

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• Fundamental attributes of a scheme are its basic features. For eg. open or close ended, lock-in period, fund objectives, asset allocation, loads and 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.

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What are the mandatory disclosures to be made on the cover page ( Front Page) of the OD?

• Name of the mutual fund.• Name of the scheme.• Type of scheme ( growth, income, balanced etc.)• Major Objective• Name of the AMC.• Classes of units offered for sale.• Price of units plus applicable load.• Name of the guarantor in case of assured return

schemes.• Opening , closing and earliest closing date of offer.• Mandatory statements.• Date of its publications.

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What are the 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

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What are 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

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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 OD do not contain the address of the Trustees of MF

• 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.

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Important Points• 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.

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Chapter 5

Fund distribution and Sales Practices

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What are the 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

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Important point

• Distributor should look up the offer document to see which category of investors are allowed to invest in any particular scheme of the fund, as it is possible that some categories are not allowed to invest in some schemes.

• For example, charitable trusts are not allowed to invest in some category of schemes in some funds. So in this case distributor should refer offer document.

• Any investor who becomes a foreign citizen after investing in a fund, has to compulsorily redeem the units after obtaining foreign citizenship

• FIIs can invest in Mutual Funds through their Non Resident Rupee Account

• RBI has granted a blanket permission to NRI, OCB and FIIs; every investment does not require RBI approval.

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Distribution Channels

• Individual Agents- A person has to sign an agreement with a fund on non judicial stamp paper. He has to be AMFI certified also to sell Mutual Fund products.

• Only exemption is distributors above 50 years of age and with at least 5 years of experience as on Sep 30, 2003. Such exempted distributors were required to complete AMFI’s refresher course by Sep 30, 2004.

• Distribution Companies

• Banks and NBFCs

• Post Offices

• Direct Marketing- CURRENTLY 49,837 are AMFI certified and 30,028

have taken the ARN numbers ( as on 31/3/2005)

Index

What are the AMFI recommended best practices for mutual fund agents?

1. Agents must be fully aware and informed about the features of the products that they offer to the investors2.Agents should be highly familiar with the profile of the investors, in terms of return expectations, requirements and risk tolerance3. Agents must strive to cultivate disciplined approach to investing and a regular investment habit among clients4. Agents must have a thorough understanding of the needs of their investors5. Agents must be able to help investors to choose from alterntative investment products, and enable an appropriate asset allocation6. Agents should seek from investors the commitment to invest to enable which they may assist the client with the forms and procedures for investing

Index

What is SEBI’s advertising code?1.The dividends declared or paid shall be mentioned in Rs/unit along with the face value of each unit and the prevailing NAV at the time of declaration of the dividend.2.Only compounded annualised yield can be advertised if the scheme has been in existance for more than 1 year3.All performance calculations shall be based only on NAV and the payouts to the unit holders . 4.Annualised yield should be shown for 1,3,5 years and since launch of the scheme. For funds with less than 1 year performance can be in terms of total returns.5.Appropriate benchmarks and identical time period must be used while comparing. Once chosen the benchmark should be used consistently over time.6. All advertisements should in the main body of the adevertisement immediately after the return/yields and in the same font mention that past performance may or may not be sustained in future7. Where any ranking is used such ranking should be appropriately mentioned.

Index

What is the AMFI Code of Ethics?

• Management of the fund ought to be in the interest of unit holders

• High standards of service are expected from the fund.

• Adequate disclosures by the funds ought to be made to the unit holders and trustees.

• Funds are urged to adopt the use of professional selling practices.

• Management of funds collected has to be in accordance with stated investment objective

• Funds should avoid conflicts of interest in dealings by directors, officers and employees.

• Funds have to refrain from unethical market practices.

Index

What is the commission structure for mutual fund agents?

• The commission consists of two components Initial ( Upfront )commission - Paid as a fixed percentage

of amount mobilised by agents Trail commission - it is paid periodically on the funds that

remain invested in the scheme. Trail is an effective way to restrict the practice of rebating, and link commissions

• The rates of commission are decided by the mutual fund themselves and are not subject to regulation by

either AMFI or SEBI.

Index

Fundamental Attributes of a Scheme• Type of Scheme, Investment Objective and Terms of the issue,

change in the load structure, Investment Pattern, Asset allocation, Fees and Expenses, Valuation norms and Investment Restrictions.

• Any change in Fundamental Attributes, Trust, Fees and expenses payable and other changes which affect unit holders interest have to be informed to investors either in writing or newspaper advertisement. One in English daily and other in a paper published in the language of the region where the HO of a MF is situated.

• The unit holders are given option to redeem their holdings in the fund without any exit if anything in above is changed.

Index

Loads• Load is charged to investor when the investor buys or redeems units. It is

primarily used to meet the expenses related to sale and distribution of units

• Load charged on sale of units is entry load. It increases the price above the NAV for new investor.

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

• Maximum Entry load or Exit load is 7%. (For Open ended Funds)

• The difference between the repurchase price and the sale price is not permitted to exceed 7% of the sale price.

• Max. Entry or Exit load for closed ended funds is 5%

• CDSC is Contingent Deferred Sales Charges.

• CDSC is an exit load that varies with holding period. It is less for investors who stays longer in the fund.

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

• A No load Fund is one in which the Initial issue expenses are not charged to the investors.

Chapter 6

Accounting Valuation and Taxation

Accounting

Index

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 investmentsPlus(+): Current assets and other assetsPlus(+): Accrued incomeLess(-): Current liabilities and other liabilitiesLess(-): Accrued expenses

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

Index

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.

Index

How frequently is the NAV calculated ?

• All mutual funds have to disclose their NAVs daily, 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.

• 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.

Index

What are the initial issue expenses ?

Expenses that are incurred in the launch of the fund are called as initial issue expenses.

∙ The costs of registration and fund formation∙ Legal and advisory expenses∙ Costs of launching the scheme∙ Advertisement and promotion expenses∙ Distribution costs ∙ Commissions to selling agents

SEBI imposes a ceiling of 6% on these expenses.

Index

Can the Fund be launched without bearing any initial issue expenses ?

∙Yes

∙Such funds are called as no load funds

∙AMCs can charge an investment management fee, which is 1% higher than the statutory limit, in this case.

Index

Latest changes on Initial Issue Expenses

• 6% IIE will be permitted for closed ended schemes only and they will not charge any Entry load

• IN CES, IIE shall be amortized on a weekly basis over the period of scheme

• If an investor exiting the scheme before amortization is completed, AMC shall redeem the units only after recovering the balance amortization

• Unamortized portion of initial issue expenses shall be included for NAV calculation, considered as other asset

• IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE.

Index

What are the expenses incurred by a mutual fund?

• Investment management fees to the AMC

• Custodian’s fees

• Trustee fees

• Registrar and transfer agent fees

• Marketing and distribution expenses

• Operating expenses

• Audit fees

• Legal expenses

• Cost of mandatory advertisements & communications to investors

Index

Can the AMC charge all the expenses that it incurs, to the income of the fund ?

• No. There are two levels of restrictions• At the first level only certain kinds of expenses, that are

identified as having been incurred for the conduct of the business of the fund, can be charged to the fund.

• The second level of regulation refers to the limit on the total expenses, that can be charged to the fund

Maximum Limit on the expenses Equity DebtFor net assets up to Rs. 100 Cr 2.50% 2.25%For the next Rs 300 Cr. Of net assets 2.25% 2%For the next Rs 300 Cr. Of net assets 2% 1.75%For the remaining net assets 1.75% 1.50%

Index

What are the investment management and advisory fees charged by the AMC ?

The fees are regulated by SEBI as follows:• For the first Rs.100 Cr. Of net assets: 1.25%• For the net assets exceeding Rs. 100 Crore: 1.00%• If the AMC does not charge any of the initial issue expenses to

the fund, it can charge the scheme a management fee, that is 1% higher than the above rates

AMC charges are subject to the overall ceiling for expenses discussed in the previous slide.

Fund type Load No-loadFor first Rs.100 Cr. of net assets 1.25% 2.25%Above 100 crore 1.00% 2%

Index

Numerical

• Weekly Net average asset=1400 Cr.

• What could be the maximum ongoing expenses.

• On 1st 100 cr. 2.5% i.e. 2.5 Cr.

• On next 300 Cr. 2.25% i.e. 6.75cr.

• On next 300 Cr. 2% i.e. 6 Cr.

• On Rest of the WNAS

• (700 cr.) 1.75% i.e. 12.25 Cr.

• Total 27.5 Cr.

Index

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

Index

Tax Implication in Mutual Funds

• Income earned by any mutual fund registered with SEBI is exempt from tax.( It is a trust) Under section 10(23 D)

• The dividends are tax free in the hands of unit holders but it is liable to dividend distribution tax in case of closed ended fund and debt funds( equity <50%)

• No TDS on any income distribution by MF

• The earning on selling units is known as Capital Gain

– If units are held for not more than 12 months - STCG

– Else the earnings is known as LTCG.

Index

Capital Gain Taxation

• The difference between sale and purchase price is known as capital gain or loss.

• The sale and purchase of units in equity oriented scheme of MF is subject to STT at the prescribed rate

• Under Section 111 A of the IT ACT, STCG on sale of equity oriented scheme is taxed at the rate specified by the govt. ( currently10%). LTCG

• LTCG if equity oriented scheme of MF is exempt from tax.• Tax on other scheme is 10% for LTCG ( without indexation) and 20% with

indexation.

• under section 54 of Income Tax Act, LTCG are exempt from tax if invested in specified bonds (54EC) issued by NABARD, NHAI, REC or specified equity (54ED) within 6 months of transfer of units

• the bonds must be held for minimum 3 years and no loan be taken against these bonds and the equity must be held for minimum 1 year

Index

Other points

• Section 80 C – Individual and HUF are entitled to deduction upto 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 3 months of record date, then the loss if any, shall be ignored.

• 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.

Index

Numerical

• An investor purchased units in an approved Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He sold the units on December 1, 1999 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/-

Index

Valuation of Securities

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/installment has fallen due.

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

Index

Valuation of Equity Securities

• Closing price on valuation date

• Selected stock exchange

• Use of alternate stock exchange quote

• On the basis of earliest previous quote (not more than 30 days prior to valuation date).

• If trading is suspended up to 30 days, last quoted price; if it is suspended for more than 30 days, AMC/Trustee decide valuation norms and document such norms.

Index

• Equity and equity related security

• Rs. 5 lakh or less OR less than 50000 shares in a month

• For unlisted: AMC need to make its own judgment and guideline - which need to be documented

• Aggregate of illiquid securities - non traded, thinly traded, and unlisted equity shares should not exceed 15% of the total assets of open-end scheme and 20% of a closed-end scheme. Any assets in excess of above limits will be valued zero.

• If no Trade done during the past thirty days then has to be treated as non traded security and the Valuation is done on basis of “Good Faith”.

Thinly traded Equity Securities

Index

Valuation of Debt Security

• A Debt Security is treated as traded if traded any day during the previous 15 days prior to the date of valuation

• A Debt Security if not traded in last 15 days is called Not Traded Security

Index

Valuation of a Thinly Traded Security (<182 Days)

For example, if a security was issued at Rs. 90 and redeemable at Rs. 100, after 364 days, the accrued interest for each day is

= 10/364

= 0.02747

The value of the security is increased by 2.747 paise every day, so that the security is worth Rs. 100 on the date of maturity.

If it has to be valued 200 days after issuance, its value is

90+(0.02747*200) = 95.494

Index

• 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.

Investor Plans and Services

Chapter 7

Index

Investment Plans

• Broadly 2 options- Growth option and Dividend Option

• Automatic Reinvestment Plans (ARP) – Reinvestment of amount of dividend made by fund in the same fund and receive additional units. It gives Benefit of Power of Compounding.

• Systematic Investment Plans(SIP) – For regular investment

• Systematic Withdrawal Plan (SWP) – For regular income (SWP is not similar to MIP as SWP allow investor to get back the principal amount)

• Systematic Transfer Plan (STP) – Transfer on a periodic basis a specified amount from one scheme to another within the same fund family.

Index

SIP and VAP

• 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).

• 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.

Index

Other Investment Services

• Telephone / Internet Transactions.

• Cheque writing – usually for liquid funds.

• Periodic statements and Tax Information

• Loans against units – MF DOES NOT GIVES LOANS but banks can give against units held by unit holder.

• Nomination and Transfer by unit holders.

• NRI investors have to make payments from their FCNR bank account or their NRE Account.

• FIIs can make payments from their Non-Resident Rupee Account

Investment Management

Chapter 8

Index

Types of equity Instruments• Ordinary shares : Ordinary shareholders are the

owners of the company.

• Preference shares: Entitle the holders to dividends at a fixed rate subject to availability of PAT

• Equity Warrants: Option on stock. Long-term rights that offer the holders right to purchase shares of a company at a fixed price

• Convertible Debentures: Converts into a specified number of equity shares at the end of specified period.

Since September 2005 mutual funds are allowed to trade in derivatives.

Index

What are large-cap and small cap shares?

The size of a company in the equity markets is determined by market capitalization= (no. of shares issued market price/share)

Large Cap Small Cap

Market capitalisation high Market Capitalisation LowGreater Liquidity Poor LiquidityComparatively smaller returns Comparatively higher returnsCost of transaction low Cost of transaction high

Index

• Equity stocks can be classified as large cap, mid cap and small cap

• The P/E ratio :

• = Market Price Per Share / Earnings Per Share

• Indicates the price the market is willing to pay per rupee of company’s potential earnings

• Higher P/E ratio indicates growth stock; value stocks generally have lower P/E ratio

• P/E ratio reflects overvaluation and under valuation.

Index

What is dividend yield?

• Dividend paid is usually a percentage of face value of the share

• Dividend Yield = (Dividend paid/Market Price) *100

What is the relationship between dividend yield?

• Both the measures are sensitive to market price per share• If market prices are higher, P/E multiple will be higher, but

dividend yield will be lower and vice versa

Index

Classifications of Stocks

• Cyclical Stocks – Cyclical stocks are those whose performance is closely linked to macro economic factors; e.g. cement stocks which are linked to infrastructure development in the country. Have relatively lower PE ratios and higher dividend payouts.

• Growth Stocks – Stocks having potential for higher earnings. They tend to reinvest the earnings and usually have High PE ratio and low Dividend yields.

• Value stocks – Companies in mature industries and are expected to yield low growth in earnings. Good assets value. Currently under valued but can yield superior returns later.

Index

What is Active equity fund management• An active fund manager seeks to give a better performance than on an

index • Fund manager tends to look at specific attributes in selecting stocks.• Active fund manager believes, that his ability to buy right stock at the

right time, can translate into superior performance for his portfolio.

What are the basic active equity fund management style?

Growth Investment style – Objective is to capital appreciation, look for companies that are expected to give above average earnings growth, The shares are more risky and thus expected to offer higher returns over a long investment horizons.

Value Investment Style – Look for companies that are currently undervalued but whose worth will be recognized eventually. ( e.g. Privatization/buy back)

Index

• Fund manager believes, that holding a well diversified portfolio is the cost efficient way ,to better returns, he would tend to mimic the market index.

• It requires limited research and monitoring costs and is therefore cheaper. (The Expenses are low)

• Fund manager may choose to mimic a index, or a subset of the index or choose a basket of shares from multiple indices.

• A passive fund manager has to rebalance his portfolio every time changes are made in the index.

What is passive equity fund management?

Index

What is the types of equity research done in MF?Fundamental analysis – Future earnings and risk profile considered (whether to buy or not) Fundamental Analysis is the analysis of the profit potential of a company, based on numbers relating to its products, sales, costs, profits and management of the company.

Technical analysis – Study of historic data on the company’s share price movements and volume (When to buy and sell) Technical Analysis is the analysis of the market prices and trading volumes data to identify clues to market assessment of a stock.

Quantitative analysis – Uses mathematical models for equity valuations may also use fundamental as well as technical analysis for the valuation of the companies.

Index

Important points on Debt Portfolio Management

• Investments only in Market Traded Instruments (Not in loans as done by banks)

• Debt instruments may be secured (debentures) or may be unsecured (FI bonds)

• Instruments with maturity less than a year called Money Market Securities.

• Instruments with maturity above 1 year are called debt securities.

• Zero Coupon Bonds (discounted securities) do not pay regular interest at intervals but are bought discount to their face value and redeemed at face value.

Index

Important

• Debt instruments are issued by government, corporate or banks

• Debt instruments have fixed interest, floating interest or zero interest or coupon i.e. on a discounted basis

• Debt markets are wholesale markets and investors are large institutional investors, such as banks, insurance companies, mutual funds and corporate due to large ticket sizes

• More than 90% of trading in debt markets is in government securities

Index

Instruments in Indian Debt Market

• Certificate of Deposit – Issued by commercial banks and maturity of 91 days to 1 year.

• Commercial Paper – Issued by corporate bodies and maturity varies between 3 months to 1 year

• Corporate Debentures – Secured by the physical assets

• Floating Rate Bonds

• Govt. Securities.

• Treasury Bills – Issued through RBI by GOI. Tenure is 91 days and 364 days.

• Bonds

Index

Current Yield

• Nominal rate of interest is the rate that is paid to us by the

borrower

• The real rate is the nominal rate less the rate of inflation.

• Yield is the term used to signify the actual rate earned on an investment.

• Current yield is the ratio of coupon amount to market price of a bond. If coupon = 8%, Market Price = 105, then current yield of bond is 8/105 = 7.62%.

Index

Important points

– Principal or Par or Face Value – the amount representing the principal borrowed and the rate of interest is calculated on this sum. This is the amount payable on redemption

– Coupon – the interest paid periodically to the investor

– Maturity – the date on which the bond is redeemed. Term to maturity or tenor is the period remaining for the bond to mature

– Put option – refers to the option given to the investor to sell (redeem) the bond before maturity; investor may exercise the option when interest rates go up, above coupon in the market

– Call option – refers to the option to the borrower to buyback (repurchase) before maturity; issuer may exercise the option when interest rates fall below the coupon rate

Index

Measure of Bond Yields• Current yield – Coupon Rate / Current Market Price

• Yield to Maturity( YTM) – It is also known as bond’s IRR. It is annual rate of return an investor would realize if he bought a bond at a particular price, received all the coupon payments, reinvested the coupon at same YTM and received the principal at maturity.

• There is inverse relationship between price and YTM of a bond.

• Yield Curve – Graph showing yields for bonds of various maturities, using a benchmark group of bonds. Also known as TSIR ( term structure of interest rates). The curve is usually upward sloping because longer maturities generally offer higher yields.

Index

Risks in Investing in Bonds

• Interest Rate Risk

• Reinvestment Risk

• Call Risk ( The issuer may call back)

• Default Risk

• Inflation Risk

• Liquidity Risk

Index

Yield Spreads

• Yield Spread = Yield of a particular bond – Yield of benchmark security (risk free)

• It is the risk premium paid by the bond to induce investor

• Higher the credit rating, higher the safety and so lower the yield spread

• So if a bond is downgraded, the yield spread will widen.

• Term to Maturity – It is period until the bonds maturity

Index

Duration• It is a more accurate measure of the portfolio maturity

profile.

• It measure the percentage change in bond’s price with a change in yield of 1%

• The Duration of a bond is less than its maturity, except for zero coupon bonds

• Bonds with longer maturities have longer durations.

• An interest bearing bond with a higher coupon rate will have lower duration because a higher proportion of the total inflows will be received in the interim.

Index

• Price and Yield are inversely related.

• Changes in interest rate impact bond values in the opposite direction.

• Yield also gets increased by downgrading of credit rating of the bond.

What is the relationship between the price and the yield of the bond ?

Index

What are the various types of fixed income securities available in the Indian Market?

Issuer Instrument Maturity Investors

Central Govt.Dated Securities 2- 30 Years

RBI, Banks , Insurance Companies, Provident funds, Mutual Funds , Primary Dealers

Central Govt. T-Bills 91/364 days

RBI, Banks , Insurance Companies, Provident funds, Mutual Funds , Pd's, Individuals

Stare Govt.Dated Securities 5-10 Years

Banks, Insurance Companies, Provident funds

PSU's

Bonds, structured Obligations 5-10 Years

Banks, Insurance Companies, Provident funds, Mutual Funds, Individuals

Corporates Debentures 1-12 YearsBanks, Mutual Funds, Corporates, Individuals

Corporates, Primary Dealers

Commercial Paper

3 months - 1 Year

Banks, Corporate, Financial Institutions, Mutual Funds, Individuals

BanksCertificates of Deposit

3 months - 1 Year Banks , Corporates

Index

Restrictions

• Mutual funds can invest only in marketable securities

• All investments are on delivery basis, no squaring off.

• A MF under all its schemes cannot hold more than 10% of the paid up capital of a company.

• A MF scheme can invest max. 10% of its NAV in a single company.( Exception – Index and Sectoral funds)

• Debt funds - single issuer not more than 15% of NAV for the ‘investment grade’ instrument, can be relaxed to 20% with approval of trustees and AMC

• Investment in the unrated instruments of a single issuer is restricted to 10% of NAV and total for all issuers can not exceed 25% of NAV.

• MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $ 50 million, whichever is lower.

• Maximum investment in unlisted shares is 10% of NAV for Closed ended schemes and 5% for Open ended schemes.

Index

Inter Scheme Transfer

• Such transfers happen on a delivery basis, at market prices.

• Such transfers should not result in significantly altering the investment objectives of the scheme involved.

• Such transfer should not be of illiquid securities, as defined in the valuation norms.

• One scheme can invest in another scheme, up to 5% of net assets, No fee is payable on these investments.

Index

Investment in Sponsor Company

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

• A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates.

• Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed 25% of the net assets of the scheme

Index

New Provisions on Investment Policy• Minimum Number of Investors per scheme

• Purpose of MF is sharing the risks with a large number of investors.

• SEBI requires each scheme to have a minimum number of investors.

• So now each scheme and individual plan under the scheme should have a minimum number of 20 investors AND no single investor should account for more than 25% of the corpus of such scheme.

• OES are allowed three months or upto end of the succeeding calendar quarter from the close of IPO to ensure compliance with this requirement

Index

Fund of Funds Scheme

• A FoF invests in the schemes of other MF.

• A normal MF scheme cannot invest in any FoF scheme.

• A FoF scheme cannot invest in another FoF scheme.

• A FoF is not allowed to invest its assets other than in schemes of MF, except to the extent of its liquidity requirements.

• Maximum Expense ratio of FoF is capped 0.75%

Index

Important points

• The current market price of a 9% coupon bond, when other bonds of similar maturities pay 11% will be --- Below Par.

• Yield and price move in opposite direction

• Certificate of Deposits are issued by BANKS

• Commercial Paper are issued by Corporate.

• Corporate Debentures are issued by Manufacturing Companies.

• Cash of a mutual fund is to be held with scheduled banks and not in any other bank.

Chapter 9

Measuring And Evaluating Mutual Fund Performance

Index

• Earnings can be either dividend or capital gains.

• Rate of Return = Income Earned *100/ Amount invested.

• Simple total return (STR) method includes the dividends paid to the investor

• STR = {NAV(end) – NAV ( begin)}+ Dividend paid *100 NAV at beginning

• Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, then money will double in 72/12 = 6 years.

Index

Performance Measurement

• Change in NAV= ( NAV at end – NAV at beg.)*100

NAV at the beginning

• Total Return = ( Change in NAV+ Dividend) *100 NAV at beg.

• Return on investment or Total Return with dividend reinvested at NAV.

• Portfolio Turnover Rate – It measures the amount of buying and selling of securities done by the fund. It is lesser of assets purchased or sold divided by the fund’s net assets.

• A 100% turnover implies that the manager replaced his entire portfolio during the period in question

• 200% means portfolio changed in 6 months

• A liquid fund has the highest portfolio turnover.

Index

Numerical

• An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______

• Answer

- % change in NAV = ( 24 -22) *100 = 9.09%» 22

Index

• Purchase price Rs. 22 per Unit

• NAV at year end Rs. 23 per Unit

• Interim Div. Rs. 3

• Ex.-Div. NAV Rs. 21

• Total Return=?

• Assume investment of Rs. 10000

• Step 1: Initial Units allotted =10000/22=454.55

• Step 2:Total Div.=454.55*3=1363.65

• Step 3: Additional Units=1363.65/21=64.94

• Step 4:Total Units=454.55+64.94=519.49

• Step 5:Withdral Amt. =519.49*23=11947.17

• Gain =11947.17-10000=1947.17

• Gain of 1947.17 on the investment of Rs. 10000

• So that on the investment of Rs. 100 gain is 19.47

• Ans:19.47%

Index

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

• Portfolio Turnover rate

• 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

Index

Important Point

• 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.

Index

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.

Index

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

Index

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

Index

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.

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.

Helping Investors with financial planning

Chapter 10

Index

Definition and objective of FP

• 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.

Index

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.

Index

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)

Index

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 judgment 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.

Index

• 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

Steps to Financial Planning

Index

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.

Index

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.

Index

Important points on Financial Planning

• 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.

Index

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

Index

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

Index

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.

Index

Chapter 11

Recommending Financial Planning Strategies to Investors

Index

• 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)

Index

• 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.

Index

  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)

Index

• 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.

Index

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 invest

Value of HoldingNAV (Rs)

Target Value (Rs)Month

Index

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.

Index

• 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.

Asset Allocation

Index

• 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.

Index

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.

Index

What is Bogle’s strategic asset allocation?

• Older investors in the distribution phase:

- 50% equity : 50% debt

• Younger investors in the distribution phase:

- 60% equity : 40% debt

• Older investors in the accumulation phase:

- 70% equity : 30% debt

• Younger investors in the accumulation phase:

- 80% equity : 20% debt

Index

Chapter 12

Selecting the right Investment Products for Investors

Index

• 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-linked unit schemes from mutual funds in India are underway

– 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.

Index

• Products by issuer:

• 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.

Index

• 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 analyzed 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.

Index

• Government

• Public 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.

Index

• Indira and 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

– IVP permits cash investment and protection of identity

– Easily transferable and liquid.

Index

• 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.

Index

• 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.

Index

• 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.

Index

• 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.

Chapter 13

Helping Investors understand Risks in Fund Investing

Index

Jacob’s recommendations of portfolios based on risk level of different funds

• Low Risk ( conservative) portfolio :

– 50% Gov. sec. fund + 50% Money market fund.

• Moderate Risk ( cautiously aggressive) portfolio:

– 40% growth and income fund+ 30% govt. bond fund + 20% Growth fund + 10% index funds

• High Risk( Aggressive) portfolio :

– 25% aggressive growth fund+ 25% international funds + 25% sector funds +15% high yield bond funds+ 10% gold funds

Index

Evaluating the Risks of a Mutual Fund

• 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

Index

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.

Index

Evaluating the Risks of a Mutual Fund

• Market Cycles

• 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.

Index

Evaluating the Risks of a Mutual Fund

• ExMarks 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.

Index

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.

Index

Evaluating the Risks of a Mutual Fund

• 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.

Index

• 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

Chapter 14

Recommending Model Portfolios and selecting the right Fund

Index

The steps in developing a model portfolio for an investor( Jacob’s Four Step Program – Developing a Model portfolio)

• Develop long term goals.

• Determine asset allocation.

• Determine sector distribution.

• Select specific fund managers and their schemes.

• Developing a Model Portfolio is the most Effective ways to

invest through Mutual Funds.

Index

Jacob’s Model portfolios recommended for investors according to their life cycle stages:

• Young unmarried professionals :

– 50% in aggressive equity funds.

– 25% in high yield bond funds, growth and income funds.

– 25% in conservative money market funds.

Young couple with 2 incomes and 2 children:

– 10% in money market funds.

– 30% in aggressive equity funds.

– 25% in high yield bond funds and long term growth funds.

– 35% in municipal bond funds.

Index

Contd:

• Older couple single Income :

– 30% in short term municipal funds

– 35% in long term municipal funds

– 25% in moderately aggressive equity

– 10% emerging growth equity

• Recently retired couple :

– 35% in conservative equity funds for capital preservation / income

– 25% in moderately aggressive equity for modest capital growth

– 40% in money market funds

Index

What is the recommended portfolio for investors in accumulation phase?

• Diversified Equity : Sector and balanced funds

– 65 – 80%

• Income and gilt funds :

– 15 – 30%

• Liquid funds and bank deposits :

– 5%

Index

What is the recommended portfolio for investors in distribution phase?

• Diversified Equity and balanced funds:

– 15 – 30%

• Income funds :

– 65 – 80%

• Cash funds:

– 5%

Index

• Investors in the Inter-Generational Transfer Phase:

– The recommended investment strategy will depend upon the beneficiaries

• Investors in the sudden wealth stage :

– Take into account the effect of taxes,

– Keep the money in safe liquid investments and take the time to decide what to do with the money.

Index

Selecting the right equity funds

• Look at Fund size

• Look at fund age

• Look at Portfolio’s managers experience

• Look at cost of investing

• Portfolio characteristics like Cash position, portfolio concentration, market capitalisation of the fund, portfolio turnover, portfolio statictics

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

Index

Most important points.• 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.• A very High proportion of investment in all types of equity funds

is advised for investors in accumulation phase.• The Transition phase of an investor’s wealth cycle is when the

Financial Goals are approaching.• A high proportion of investment in income funds is required by

investors in distribution phase.• Retired investors should not invest in securities which bear risk

of capital erosion.

Index

Very Important Points on Equity Funds portfolio Characteristics.

• 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.

Index

Debt Funds – 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.

• The differentiating factor among debt funds of comparable maturity and quality is Costs.

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

Index

• 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.

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

Index

Selection of Balanced fundBalance 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)

Chapter 15

Business Ethics in Mutual Fund

Index

Business Ethics

• Business Ethics means rules of acceptable and good conduct.

• Business must be conducted in a disciplined, organized and fair manner.

• Ethical practice means practice in the interest of unit holders of the scheme.

• A consumer who feels cheated will never return to buy the product again.

• BE ensures that the customer remains a long term buyer.

Index

Business Ethics for Mutual Fund Business

• MF is also a business where investors buy investment products

• MF and sales persons are required to adopt ethical, fair and good business practices and apply them to all those involved in selling/ servicing activities.

• A salesperson is expected to know the product thoroughly and describe it accurately.

Index

Objectives of Business Ethics

• Simply being honest, open and transparent with your potential clients.

• Rules are needed to ensure that you deal with the clients fairly and transparently.

• To protect the clients from being cheated or exploited.

• To ensure a level playing field among all categories of business participants.

• To ensure fairness in dealing with investor.

Index

Areas particularly monitored by SEBI

• Fund structure and Governance

• Exercise of Voting Rights by Funds

• Fund Operations.

Index

Regulatory Requirements regarding Principle of Independence

• Separation of Functions – No one constituent is in control of the investors assets.( Trust, AMC, Custodian, Registrar)

• Independence of Organisations – Trust independent of AMC,

• Independence of Personnel - Trustees can not serve as Director of AMC they supervise or even any other AMC. Independent Trustees and BOD members also.

Index

Examples of Unethical practices

• Insider Trading – Buying or selling securities on the basis of privileged information available to the funds by persons who are seen as insiders to the company.

• Preferential Treatment to Selected investors – Cut off time has been introduced now to prevent late trading abuses.

• Personal trading by fund managers and employees

• Front Running – Fund manager buying or selling securities ahead of doing the same transaction for the fund.

• Some MF ban personal trading by their fund managers.

Index

Regulations on Personal Trading

• AMC should file with trustees a quarterly statement of dealings in securities by the key personnel of the AMC.

• The director of AMC has be file details of transaction in MF, where they exceed the value of Rs.1 lakh.

• In case of Trustees, they may report only those transaction which exceed the value of Rs.1 lakh

• Trustees have to certify that the personnel of AMC don’t indulge in front running or self dealing.

Index

Other Regulations

• Mandatory for the AMC to appoint a compliance officer to monitor and ensure implementation of all laws / regulations.

• All distributors and agents follow the code of conduct laid down in the 5th schedule of SEBI MF regulations 1996.

• A more detailed code called AGNI (AMFI Guidelines and Norms for Intermediaries) has been put into place by AMFI for all distributors and agents.

• SEBI has issued detailed guidelines that are mandatory for AMCs to follow while advertising their mutual fund products. The basic guidelines are covered in the 6th schedule of the SEBI regulations.

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)