AMFI PPT_PS

8/8/2019 AMFI PPT_PS

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AMFI MUTUAL FUND

(ADVISOR) April 2008Training Module


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Index

Day -1

Part -1

Part-2

1. Concept and Role of Mutual Funds2. Fund Structure and

3. Constituents3. Legal and Regulatory

4. Offer Document

5. Fund Distribution and Sales Practice

6. Investor Plan and Services

7. Measuring and Evaluating Mutual Fund Performance

8. Helping Investors Understand Risk in Fund Investing


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Concept and Role

Of mutual Funds

Chapter 1

Trainer must elaborate the concept before starting the ppt.


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What is a Mutual Fund ?

It is a pool of money, collected from investors, and is investedaccording to certain investment objectives

The ownership of the fund is thus joint or mutual, the fund belongsto 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 intheir funds so it isjoint or mutual.

It is managed by a team of investment professionals and other serviceproviders.

The pool of funds is invested in a portfolio ofmarketable investments.

The investors share is denominated by units whose value is called asNet Asset Value (NAV) which changes everyday.

The investment portfolio is created according to the stated investmentobjectives 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 investingthrough Mutual Funds?

No control over the costs. Regulators limit the expenses ofMutual Funds. Fees are paid as percentage of the value ofinvestment.

No tailor made portfolios.

Managing a portfolio of funds. ( Investorhas to hold aportfolio 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) ,OffshoreFunds 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 PNBMF

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 players

Phase 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 t

his p

hase, bot

hSEBI and

AMFI launc

hed 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 uniformindustry

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 Growth

Mergers and Acquisitions witnessed

Alliance MF acquired by Birla Sunlife

Sun F&C by Principal PNB Mutual fund.


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Emergence of Large and Uniform Industry

U

TI

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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What are open-ended funds?

In an open ended fund, investors can buy and sell units of thefund, at NAV related prices, at any time, directly from the fund.

Open ended scheme are offered for sale at a pre- specifiedprice, say Rs. 10, in the initial offer period. After a pre-specifiedperiod say 30 days, the fund is declared open for further sales andrepurchases

Investors receive account statements of theirholdings, The number of outstanding units goes up and down The unit capital is not fixed but variable.

the corpus of an Open-ended scheme changes everyday

Mutual Fund Classifications


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What are closed-end funds?

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

Any further transactions happen in the secondary market (stockexchange) where closed-end funds are listed.

The price at which the units are sold or redeemed depends onthe 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 tomeet initial issue expenses including brokers/agents/distributorscommissions, advertising and marketing expenses.

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

IF the investors objective is to get the benefit of compounding hisinitial investment by reinvesting and holding his investment for a verylong 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 taxexempt fund.

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

After 1999 budget, all dividend income received from MF istax free in hands of the investor. But all funds other than

open ended equity funds have to pay a dividend distributiontax.

So in India, open end equity oriented mutual fund schemesare tax exempt investment avenue, while other funds aretaxable for distributable income.

After 2005 budget, repurchase transaction for equity orientedschemes are subject to Securities Transaction Tax.


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Types of Funds - By Investment Objective

Equity Debt Money Market

Equity FundsIndex Funds

Sector Funds

Fixed IncomeFunds

GILT Funds

Money MarketMutual 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.)

Speciality 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 withhigh 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 andtherefore 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 equityshares.

Open or closed ended.

Eligible under Section 80 C up to 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 seriesonly once, and closes the issue after an initialoffering period.

Fixed Term plan are usually for shorter term lessthan 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 throughshares of the commodity companies or throughcommodity futures contract.

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

Gold funds invest in Gold, Gold futures or sharesof 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 astock on the stock market.

ETFs are not the index funds

Real Estate Funds

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


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How are funds different in terms of their risk profile?

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 TaxExempt Funds

In India, classified as Open Closed ended, Load and No LoadFunds.

Mutual Fund is NOT a company, it can be called as a portfolio ofstocks, bonds and other securities or it can be called as pool offunds used to purchase securities on behalf of investors or acollective investment

Equity Funds High leve l o f Return , but has a high leve l o f risk too

Debt Funds Ret urns co mparat ively less risky t han equit y f unds

Provide st able but low level of ret urnLiquid and MoneyMarket Funds


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Very Important Points to Remember

An Open Ended Fund offers repurchase facility unconditionally atall 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 DatedSecurities only.

Units from an Open ended fund are bought throughAgenciesappointed 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 ownerof the asset of thatMutual fund ( he is not a creditor, not a debtor and not a trustee ofthat 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.


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Questions for RevisionQ-1

A

mutual fund investor(a) Has a say in deciding the individual securities to be included in the portfolio

(b) Can ask the fund manager to construct a tailor-made portfolio forhim

(c) Can never change the investment manager of the scheme

(d) Delegates the decision of portfolio construction to the fund manager.

Q-2

Which of the following was the first scheme launched by UTI Mutual Fund?

(a) US 64 (b) Children Growth Plan (c)Master share (d) None of the above.

Q-3

Which of the following fund targets capital appreciation over 3 to 5 year period at aboveaverage rate?

(a) Aggressive growth fund (b) Growth fund (c) Sector fund

(d) None of the above.


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GIC launched the mutual fund product in phase

(a) I (b) II (c) III (d) IV.

Q-5Gold funds can invest in

(a) Gold (b) Gold futures (c) Shares of gold mines (d) All of the above.

Q-6

Which of the following is not charged by the no-load funds?

(a) Marketing expenses (b) Management and advisory charges

(c) Ongoing expenses (d) Both

(b) and (c) above.Q-7

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

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

Answers:

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


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Chapter 2

Fund Structure andConstituents



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*Custodians are appointed by Trustees

Marketing & Distribution

Sponsor

Trustee AMC

Fund Management

Registrar & Custodian*

Structural Framework of Mutual Funds

Responsible for investors

money (Primary Guardian)

Banks


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What is the regulatory structure of MF in India?

The structure of mutual funds in India isgoverned 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 theTrustees who are responsible to the investors ofthe fund.

AMC is the business face of the mutual fund as itmanages all the affairs of the fund


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Who can be the Sponsor? What does the Sponsor do?

The sponsor establis

hes t

he mutual fund and registersthe same with SEBI

Sponsor appoints the Trustees, the AMC and custodianswith prior approval of SEBI and in accordance with SEBIRegulations

Sponsor must have a 5-year track record of businessinterest in the financial markets

Sponsor must have been profit making in at least 3 ofthe above 5 years.

Sponsor must contribute at least 40% of t

he net wort

hofthe AMC

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


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How are Mutual Funds Structured?

In India Mutual fund is t

he form of a Public

Trust createdunder the Indian trust Act 1882.

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

Mutual fund is just a pass-through vehicle

In India, Mutual funds are organized as trusts. The trustis either managed by a Board ofTrustees, or by a trusteecompany.

The trustees hold the unit holders money in afiduciary 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 t

he Board ofTrustees 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

anoth

er mutual fund.

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

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


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What are the obligations 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 incases dismiss the AMC

What are the rights of the Trustees?

Trustees must ensure due diligence on the part ofAMC inthe appointment of constituents and business associates

Trustees must furnish to the SEBI, on half yearly basis a

report on the activities of t

he

AMC

Trustees must ensure compliance with SEBI regulations

SEBI Regulations require that the meeting of the trustees should be heldat 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 orTrustee, of another MutualFund

AMC s cannot indulge in any other business, other thanthat of asset management

At least half of the members of the Board of an AMC, haveto be independent

The 4th Schedule of SEBI regulations spells out rights andobligations of both trustees and AMCs

The agreement between the Trustees and the AMC isknown as Investment Management Agreement.


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What do the Registrar and Transfer Agents do?

They are responsible forissuing and redeeming units ofthe Mutual Fund. Their other services include:

Process investor applications

Record details of Investors

Send information to Investors

Process dividend payout

Incorporate changes in investor information

Keeping Investor information up to date

Example Karvy and CAMS


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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 tomobilize funds from investors

Banks and post offices also act as distributors

The commission received by the distributors is split intoinitial (Upfront) commission which is paid on mobilization offunds and trail commission which is paid depending on thetime 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 funds

portfolio and is required to be registered with SEBI

Custodian is appointed by the Board ofTrustees

Keep an investment record of the mutual fund

Collect dividends and investment payments due on themutual funds investment

The custodian and sponsor cannot be the same entity

The custodian is the guardian of the funds and assets ofinvestors


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Various Forms of Fund Mergers and Takeovers

Merger ofAMC to become a single entity( Example : HB Mutual and Taurus Mutual )

AMC takeover by sponsors ( Example : ITCThreadneedle and 20th century taken over by

Zurich) ( ITI by Franklin Templeton) (Alliance byBirla)

Scheme takeover (Apples scheme taken over by

BirlaA

MC ) and ( Zurich

s Sch

emeT

akeover byHDFC Mutual Fund)


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T rust ee SEBI High Court Unit Holders

YES YES YES YES

YES YES NO Informed NO

YES YES NO Informed YES

Exit optionwithout

LoadMergers oftwo AMCs

75% in caseof CES

Takeover ofAMCs

Takeover ofSchemes

A p p r o v a l r e qu i r e d f o r Va r i o u s M e r g e r s a n d A c qu i s i t i o n


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Important Points

In USA

, th

e regulatory body is known asSecurities Exchange Commission.

The sponsor may be compared to promoter ofa company

Issuing units and redeeming units is t

he role ofTransferAgent

The appointment ofAMC can be terminated byMajority of directors of trustees.

Fund manager is responsible for filingdetails of the funds portfolio with SEBI.


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Important Points

A sponsor of a mutual fund can act as the distributor

of the Mutual fund.

Sponsor can contribute to the initial corpus of thetrust.

Sponsor contributes to the capital of the AMC.

Sponsor can invest in his own funds schemes.

Sponsor can not act as Trustee of Mutual fund.

Sponsor can not act as Custodian of the Mutual Fund


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The appointments of fund distributors are made by

(a) The TransferAgents (b) The Fund Sponsor (c) The Trustees (d) The AMC

Q-2

In India, a mutual fund has to be structured:

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

(c) Either as a trust or as a company at the choice of the sponsor

(d) None of the above

Q-3

Which of the following is true with respect to the merger of two AMCs?

(a) The Companies Act apply to the mergers of the two AMCs

(b) For such mergers the approval of respective High Court is also needed

(c) Merger of HB and Taurus is the example of the merger of two AMCs

(d) All of the above.


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Which of the following entities is responsible for issuing and redeeming units?(a) Custodian (b)Bankers (c) Registrar (d) Distributors.

Q-5

The acquisition of Zurich by HDFC is the example of

(a) Scheme takeover (b) AMC takeover by a new sponsor

(c) Merger of two AMCs (d) None of the above.

Answers:

Q-1 : (d), Q-2 : (a), Q-3 : (d), Q-4 : (c), Q-5 : (a)


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Legal and Regulatory Framework

Chapter 3



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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)

What are self regulatory organizations (SROs)?

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 anSRO, so it can just issue guidelines to members. It cannotenforce regulations.

Objectives

To promote the interests of mutual funds and unit holders.

To set ethical, commercial and professional standards in theindustry.

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 mutualfunds and is headed by a full time chairman.

Wh t th i ht f th i t i t f


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What are the rights of the investors in respect ofservice standards that they can expect from MFs?

2. Redemption proceeds have to be sent to investors within 10 days

1. Investors are entitled to receive dividends declared in a scheme within 30

days

f an investor fai s to c aim the dividend or redempt ion proceeds hehas the rights to c aim it p to a period of years f rom the d e dateat the then prevai ing f ter years he i e paid atapp ica e at the end of rd year

4. Mutual funds have to allot units within 30 days of the closure of the issue andalso open the scheme for redemption, if it is an open - ended scheme

daily and publish their entire portfolios, at least once in 6 months . Suchdisclosure should be done within 30 days from 6 monthly account closing datesof the fund

6. Trustees will have to ensure that any information having a material impact onthe unit holders investments should be made public by the mutual fund

7. If 75% of the unit holders so decide, 1)The scheme can be wound up2)Meeting of unit holders can be called 3)Appointment of the AMC of the mutualfund can be terminated


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Rights of the investor

8. 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 schemeportfolio before the expiry of one month from the close of eachhalf year.

What are the limitations to investors right ?

Investors cannot sue the trust as they are not distinct fromthe trust Investors cannot lodge complaints against the trustees (with theRegistrar 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 isbelow expectations. There are no legal remedies for to a prospective investor. Onlyafterhis investment in the scheme he becomes eligible for the earliermentioned 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 officerwho must issue a Due Diligence Certificate to the effect that all regulations havebeen 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 approvechanges 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 TrustDeed.

The body to which investors may address their complaints is SEBI.

Investors money is not protected by the Companies Act.Questions for Revision

Q-1. Bank owned mutual funds are regulated by:

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

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

(a) Zero (b) Face value of the unit (c) Due date NAV plus interest @15% p.a.

(d) NAV at the end of three years after the due dateAnswers: Q-1 : (d), Q-2 : (d)


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Offer

Document

Chapter 4



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The Offer Document

Offer Document is the most important source of information about a mutualfund 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 nameof the sponsor, trustee, AMC etc.

Mandatory disclaimer clause of SEBI should also be on the cover page ofthe 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 Offer Document

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

Investors 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

the OD must contain a due diligence certificate signed by a complianceofficer, 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


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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 3years

Information on transactions with associate companies to be provided forpast 3 years

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

Investors rights are stated in the OD

3 year track record of investors complaints and redressal should bedisclosed

Any pending cases or penalties against sponsor orAMC

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

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

Th d dd f t t d AMC di t ill b f d i


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

There is no information about other mutual funds, their performance inthe 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 plansto invest, only broad asset allocation will be given.

Fundamental attributes

Fundamental attributes of a scheme are its basic features. Foreg. open or close ended, lock-in period, fund objectives, assetallocation, loads and charges etc.

For any change in fundamental attributes, SEBI and Trusteeapproval is required.

Investor approval is not needed. However, each investor mustbe informed through a communication and given the option toexit 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 isno assurance that the objective will be achieved

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

Past performance of the sponsor/AMC/ Mutual fund does notindicate the future performance of the scheme.

The name of the scheme does not in any manner indicate any

eith

er th

e quality of th

e sch

eme or th

e future performance of th

escheme


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What are scheme specific risks?

Risk arising from investment objective, investment strategy andasset 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 thesponsor/AMC

If the AMC has no previous experience in managing a mutualfund, 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 hasgained 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 ofsixmonths and if the scheme is not launched within this period a fresh OD isrequired to be filed.

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

OD must disclose the names and background offund managers, keypersonnel, 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 signedby Compliance officer / CEO / MD has been submitted toSEBI.

If a schemes name implies that it will invest primarily in aparticular type of security or in certain industry, then it willinvest at least 65% of the value of its assets in theindicated type of security/ industry.

OD must contain brief description of investors complainthistory for the last 3 Fiscal years of existing schemes.


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Questions for Revision

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

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

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

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

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

Q-3 Offer Document issued for the launch of the new scheme is valid for a period of

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

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

(a) Risk arising from the schemes objective

(b) Risk arising from the non-diversification

(c) No previous experience in managing a fund

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



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Q-5 Which of the following document is attached with the application form?

(a) Offer document (b) Prospectus (c) Offer for sale document (d) KIM.

Q-6 SEBI directs that certain information must appear on the cover page of the offerdocument of any scheme. This includes the following except

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

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

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

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

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

(a) Once issued, the Offer Document of an existing scheme cannot be updated

(b) The Offer Document must be updated whenever there is a material change in itscontents

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

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

Answers:

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


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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

NBFCs

Insurance companies

Provident funds

Non-resident Indians / PIO

OCBs

SEBI registered FIIs


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Important point

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

For example, charitable trusts are not allowed to invest in somecategory of schemes in some funds. So in this case distributorshould refer offer document.

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

FIIs can invest in Mutual Funds through their Non Resident RupeeAccount

RBI has granted a blanket permission to NRI, OCB and FIIs; everyinvestment 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 Fundproducts.

Only exemption is distributors above 50 years of age and with at least 5years of experience as on Sep 30, 2003. Such exempted distributors wererequired to complete AMFIs 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)

Wh t th AMFI d d b t ti


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What are the AMFI recommended best practicesfor mutual fund agents?

1. Agents must be fully aware and informed about the features of theproducts that they offer to the investors

2.Agents should be highly familiar with the profile of the investors, interms of return expectations, requirements and risk tolerance

3. 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 theirinvestors

5. Agents must be able to help investors to choose from alternativeinvestment products, and enable an appropriate asset allocation

6. Agents should seek from investors the commitment to invest toenable which they may assist the client with the forms and proceduresfor investing


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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 unitholders and trustees.

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

Management of funds collected has to be in accordance with statedinvestment objective

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

Funds have to refrain from unethical market practices.

Wh t i th i i t t f t l f d


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What is the commission structure for mutual fundagents?

The commission consists of two components

Initial ( Upfront )commission - Paid as a fixed percentage ofamount mobilised by agents

Trail commission - it is paid periodically on the funds that

remain invested in the scheme. Trail is an effective way torestrict 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.


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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 toexceed 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 whostays 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 theinvestors.


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Questions for RevisionQ-1 Which one of the following statements is correct?

(a) An individual agent can distribute/sell only one mutual fund's products

(b)A

ny category of distributors/agents can distribute as many of th

e mutual funds'products as allowed by the concerned AMCs

(c) Banks are not allowed to sell mutual fund products, except their own funds'

(d) A distribution company can distribute/sell only one mutual fund's products

Q-2 Which of the following can invest in Indian Mutual fund?

(a) SEBI (b) RBI (c) Foreign Banks (d) AMFI.

Q-3 Which of the following categories of distributors will be exempt from passing the

AMFI Mutual Fund Test?(a) All the existing agents of UTI mutual fund and other funds

(b) New applicants for distributorship, if the AMC approves their applications

(c) Employees of banks who distribute the funds


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


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Q-1 InvestorAhas opted for a systematic transfer plan. This means

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

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

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

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

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

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

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

(c) SWP is same as the Monthly Income Plan


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

(a) It give the flexibility to the investor regarding the amount to be invested

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

(c) VAP follower is obliged to keep investing


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


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Chapter 9

Measuring And Evaluating Mutual

Fund Performance



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Numerical


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Numerical

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%

Oth f


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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 investorreturns. It is indicator of the Funds Efficiency and Cost Effectiveness.

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

Fund size Small funds are easy to manage and can achieve their

objectives in a focused manner with limited holdings.

Large funds benefit from economies of scale with lower expense ratios

and superior fund management skills.

Cashholdings

Important Points


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Important Points

The returns should be computed on an annualized averagecompound rate of return from cumulative figure.

If the fund performance data relates to a period of less than oneyear, it should not be annualized, except for liquid mutual fundswhichhave a short investment horizon.

Borrowings by Mutual Fund A mutual fund can borrow for a maximum of 20% of net assets.

For Maximum period of 6 months.

Purpose should be to meet liquidity requirements for payingdividend or meeting redemptions.

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


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Benchmarking

Benchmarking should be selected by reference to The asset class it

invests in and the funds stated investment objective.

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

For debt funds, the benchmark should have the same portfolio compositionand 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


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Sources for tracking Mutual Fund Performance


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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 FundPerformance and Ranks the Scheme by Performance.

Q-1 An open-end fund was purchased when its NAV was Rs.22. 18 months later,its NAV was Rs.24. The annualized percent NAV change is:

(a) 5.56% (b) 9.09% (c) 6.06% (d) Insufficient data

Q-2 Ahigh portfolio turnover rate for a fund could mean

(a) That the fund is very active in its dealing on the market

(b) Ahigh level of transaction costs

(c) A greater risk-prone portfolio management strategy

(d) All of the above

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


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J b d ti f tf li b d


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Jacobs recommendations of portfolios basedon 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% goldfunds

E l ti th Ri k f M t l F d


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Evaluating the Risks of a Mutual Fund

What is Risk ?

Risk means the possibility of financial loss.

Risk is thus equated withVolatility of Earnings Equity Price Risk

Company Specific

Sector Specific

Market Level

Volatility of an Equity mutual fund comes from:

Kind of stocks in the portfolio ( growth/value/big/small)

The number of stocks ( Degree of diversification. Smaller portfoliosare more volatile than large PFs)

Fund managers 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, hisincome and his job security.

Risk Tolerance is independent of the Stock Market Movements.

E l ti th Ri k f M t l F d


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Evaluating the Risks of a Mutual Fund Risk Measures

Standard Deviation SD measures the fluctuations of a fund`s returns around

a mean level. SD gives an idea ofh

ow volatile th

e earnings are. SD measurestotal risk.

Disadvantage of SD is that it is based on Past Returns.

Beta Coefficient Beta relates a fund's return with a market index andmeasures the sensitivity of the fund's returns to change in market index. A betaof 1 means the fund moves with market. A beta of less than one means the fundwill less volatile than the market.

Beta is based on past returns. ExMarks or a number known as R-Squared

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

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



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Alpha

Risk adjusted performance calculation is called Alpha.

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

Risk Adjusted performance

Sharpe ratio and Treynor Ratio

Risk premium= Funds return Risk free rate of return

Sharpe Ratio = Risk premium/SD

Treynor Ratio = Risk Premium/Beta

Both the ratios measures the adequacy of returns against the riskassumed.


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Index


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Index

Day-2

Part-3

Part-4

9. Accounting, Valuation andTaxation

10.InvestmentManagement

11. Helping investors with FinancialPlanning12.Recommending Financial Planning Strategies toInvestors

13.Selecting the Right Investment products forInvestors

14.Recommending Model Portfolios and Selecting the RightFund

15.Business Ethics in MutualFund


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Chapter 6

Accounting Valuation and Taxation



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How frequently is the NAV calculated ?

All mutual funds have to disclose their NAVs daily, by posting it onthe AMFI web site by 8.00 p.m.

Open ended funds have to compute and disclose NAVs

everyday; closed end funds can compute NA

Vs every week, butdisclosures have to be made everyday.

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


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Latest changes on Initial Issue Expenses


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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, AMCshall redeem the units only after recovering the balance amortization

Unamortised portion of initial issue expenses shall be included for NAVcalculation, considered as other asset

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

What are the expenses incurred by a mutual fund?


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What are the expenses incurred by a mutual fund?

Investment management fees to the AMC

Custodians 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

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


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the income of the fund ?

No. There are two levels of restrictions

At the first level only certain kinds of expenses, that are identified ashaving 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 totalexpenses, that can be charged to the fund

a uity ebtor net assets up to s. Cr . .or the next s Cr. of net assets .

or the next s Cr. f net assets .or the remaining net assets . .


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What are the investment management and advisoryfees 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.

y oad oloadFor first Rs.100 Cr. of net assets 1.25% 2.25%

Above 100 crore 1.00% 2%


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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 corporateadvertising and infrastructure costs

Depreciation on fixed assets

Tax provision for Equity Mutual Fund


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Equity >65%

Dividends

DDT Short Terms Long TermsInvestors

Capital Gains

Tax Free NIL Tax Free10%

Within 12 m After 12 m

Short Terms Long Terms


Tax provision for Debt Mutual Funds


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Debt Mutual Fund

Dividend Capital Gain

Investor DDTShort term Long term


T

wo optionsA

s per slab

10%

Paid by th

e Fund

20% afterindexation

Tax free

Tax Implication in Mutual Funds


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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 butit is liable to dividend distribution tax in case of closedended fund and debt funds( equity


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Numerical

An investor purchased units in an approved debt

Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He soldthe units on December 1, 2001 for Rs. 750000/-.Calculate the capital gain taxes paid by him. ( Ignoreindexation).

Answer :

Long term capital gain = 250000/

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


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Valuation of Equity Securities


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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 quotedprice; if it is suspended for more than 30 days,

AMC/Trustee decide valuation norms and documentsuch norms.

Thinly traded Equity Securities


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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 judgement and guideline - whichneed to be documented

Aggregate of illiquid securities - non traded, thinly traded, and unlisted

equity shares s

hould not exceed 15% of t

he total assets of open-endscheme 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 nontraded security and the Valuation is done on basis of Good Faith.

Thinly traded Equity Securities

Valuation of Debt Securities


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Valuation of Debt Securities

Non PerformingA

ssets (NPA

)An asset shall be classified as an NPA, if the interest

and/or principal amount have not been received orhave remained outstanding forone quarter, from the

day such income/instalment has fallen due.

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

V l ti f D bt S it


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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 ifnot traded in last 15 days is called Not Traded

Security

Valuation of a Thinly Traded Security (


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

Unit Capital is found in the Liability side of schemes balance sheet.

Investment made by Mutual fund on behalf of investors areaccounted as Assets.

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

The Day on which NAV is calculated is known as Valuation Date.

Questions for RevisionQ-1An equity fund has weekly average net assets of Rs. 1400.00 crore outstanding in

the year. The maximum ongoing expenses (excluding issue/redemption expenses)that may be charged to the fund amount to:

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

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

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

Question for Revision


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Q-3 A fund's portfolio includes an equity security which is listed at the NSE. Its last quotedclosing prices were: Rs. 27 on July 10, Rs. 35 on July 13 and Rs. 28 on July 16. On July28, using SEBI norms, the fund should value this security at:

(a) 35 (b) 28 (c) 30 (d) 31.50.

Q-4 A mutual fund holds a debenture redeemable after two years and with next quarterlyinterest receivable on 31/12/2001. The debenture issuing company failed to pay theinterest on that date. Is this debenture a Non Performing Asset? If yes, from what date?

(a) Yes, it would be considered an NPA from 1/4/2002, if interest is not received for thequarter ending 30/3/2002 as well

(b) No, it is not an NPA

, as th

e principal amount is not yet due(c) No, it would not be considered an NPA until both principal and interest amounts becomeoverdue

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

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

(a) Large cap shares (b) Mid cap shares(c) Small cap shares (d) All of the above.

Answer: Q-1 : (d), Q-2 : (c), Q-3 : (b), Q-4 : (a), Q-5 : (a)


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Investment Management

Chapter 8


T f it I t t


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Types of equity Instruments

Ordinary shares : Ordinary shareholders are theowners of the company.

Preference shares: Entitle the holders to dividends at afixed rate subject to availability of PAT

Equity Warrants: Option on stock. Long-term rightsthat offer the holders right to purchase shares of acompany at a fixed price

Convertible Debentures: Converts into a specified

number of equity shares at t

he end of specified period.

Since September 2005 mutual funds are allowed to tradein derivatives.

What are large-cap and small cap shares?


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The size of a company in the equity markets is determined by

market capitalization= (no. of shares issued marketprice/share)

Large Cap Smal l Cap

Marke t Capitalizat ion H igh Marke t Capitalizat ion Low

Gre ate r Liquidity Poor Liquidity

Comparat ive ly smalle r re turns Comparat ive ly highe r re turns

Cost of transaction low Cost of transaction high

Price Earning Ratio (P/E)


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The P/E ratio :

= Market Price Per Share / Earnings Per Share

Indicates the price the market is willing to pay per rupee ofcompanys potential earnings

Hig

her P/E ratio indicates growt

hstock; value stocks generally

havelower P/E ratio

P/E ratio reflects over valuation and under valuation.

What is dividend yield?


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y

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 dividendyield will be lower and vice versa

Classifications of Stocks


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Cyclical Stocks Cyclical stocks are those whose performance is

closely linked to macro economic factors; e.g. cement stocks which arelinked to infrastructure development in the country. Have relatively lowerPE ratios and higher dividend payouts.

Growth Stocks Stocks having potential forhigher earnings. They tendto reinvest the earnings and usually have High PE ratio and low

Dividend yields.

Value stocks Companies in mature industries and are expected toyield low growth in earnings. Good assets value. Currently under valuedbut can yield superior returns later.

What is Active equity fund management


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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 righttime, can translate into superior performance for his portfolio.

What is passive equity fund management?

Fund manager believes, that holding a well diversified portfolio is

the cost efficient way to better returns, he would tend to mimic themarket index.

It requires limited research and monitoring costs and is thereforecheaper. (The Expenses are low)

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

A passive fund managerhas to rebalance his portfolio every timechanges are made in the index.


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What is the types of equity research done in MF?


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Fundamental analysis Future earnings and risk profileconsidered (whether to buy or not) Fundamental Analysis is theanalysis of the profit potential of a company, based on numbers relating toits products, sales, costs, profits and management of the company.

Technical analysis Study ofhistoric data on the companysshare price movements and volume (When to buy and sell)Technical Analysis is the analysis of the market prices and trading volumesdata to identify clues to market assessment of a stock.

Instruments in Indian Debt Market


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Certificate of Deposit Issued by commercial banks and maturity of 91 days

to 1 year.

Commercial Paper Issued by corporate bodies and maturity variesbetween 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 364days.

Bonds

Important points on Debt Portfolio Management


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Important points on Debt Portfolio Management

Investments only in Market Traded Instruments (Not in loans as done bybanks)

Debt instruments may be secured (debentures) or may be unsecured (FIbonds)

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 atintervals but are bought discount to their face value and redeemed at facevalue.

Important


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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 governmentsecurities

Current Yield (Very Important)


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( y )

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 = [Coupon/market price] * 100

Important points


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Principal or Par or Face Value the amount representing the principal

borrowed and the rate of interest is calculated on this sum. This is theamount payable on redemption

Coupon the interest paid periodically to the investor

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

Put option refers to the option given to the investor to sell (redeem) thebond before maturity; investor may exercise the option when interestrates 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 wheninterest rates fall below the coupon rate

Measure of Bond Yields


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Yield to Maturity( YTM) It is also known as bonds Internal Rate

of Return (IRR). It is annual rate of return an investor would realizeifhe bought a bond at a particular price, received all the couponpayments, reinvested the coupon at same YTM and received theprincipal at maturity.

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

Yield Curve Graph showing yields for bonds of variousmaturities, using a benchmark group of bonds. Also known asTSIR ( term structure of interest rates). The curve is usuallyupward sloping because longer maturities generally offerhigher

yields and vice versa.

Price

Interest

Bond price movements

Risks in Investing in Bonds


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Interest Rate Risk

Reinvestment Risk

Call Risk ( The issuer may call back) Default Risk

Inflation Risk

Liquidity Risk

Yield Spreads

Yield Spread = Yield of a particular bond Yield of benchmarksecurity (risk free)

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

Higher the credit rating, higher the safety and so lower theyield spread

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

Term to Maturity It is period until the bonds maturity

Duration


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It is a more accurate measure of the portfolio maturity profile.

It measure th

e percentage ch

ange in bonds price with

a ch

ange inyield

The Duration of a bond is less than its maturity, except for zerocoupon bonds

Bonds with longer maturities have longer durations.

An interest bearing bond with a higher coupon rate will have lowerduration because a higher proportion of the total inflows will bereceived in the interim.

What is the relationship between the price and the yield of

the bond ?

Price and Yield are inversely related.

Changes in interest rate impact bond values in the oppositedirection.

Yield also gets increased by downgrading of credit rating of thebond.

What are the various types of fixed income securities

available in the Indian Market?


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Issuer Inst rument Maturit y Investors

Cent ral Govt . 2- 30 Years

Cent ral Govt . T-Bills 91/364 days

Stare Govt . 5-10 Years

PSU's 5-10 Years

Corporates Debentures 1-12 Years

Banks Banks , Corporates

DatedSecurit ies

Companies, Provident f unds,Mutual Funds , PrimaryDealers

Banks , InsuranceCompanies, Provident f unds,Mutual Funds , Pd's

DatedSecurit ies

Banks, InsuranceCompanies, Provident f unds

Bonds,st ructuredObligat ions

Banks, InsuranceCompanies, Provident f unds,Mutual Funds, Individuals

Banks, Mutual Funds,Corporates, Individuals

Corporates,PrimaryDealers

CommercialPaper

3 months -1 Year

Banks, Corporate, FinancialInst itut ions, Mutual Funds

Certif icates ofDeposit

3 months -1 Year

Restrictions


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Mutual funds can invest only in marketable securities

All investments are on delivery basis, no trading.

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

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 gradeinstrument, 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 NAVand 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 endedschemes

Maximum investment in unlisted shares is 5% for Open ended schemes.

Inter Scheme Transfer

Such transfers happen on a delivery basis at market prices


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

Such transfers should not result in significantly altering the investment

objectives of the sc

heme involved.

Such transfer should not be of illiquid securities, as defined in the valuationnorms.

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

Investment in Sponsor Company

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

A mutual fund scheme cannot invest in privately placed securities of thesponsor or its associates.

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


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Important points

Yield and price move in opposite direction


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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.


Q-1 When similar maturity bonds are yielding 11% the bond with 9% coupon will betraded at

(a) At par (b) Below par (c) Above par (d) Insufficient information.

Q-2 Calculate the current yield for the following security: 11.5% GOI Series 2010 - FaceValue Rs.1000 Current price Rs.1010

(a) 11.5% (b) 11.6% (c) 12.5% (d) 11.4%

Q-3 Which of the following instruments have the maturity exceeding one year

(a) Treasury bills (b) Certificate of deposits

(c) Commercial paper (d) Gilt securities.



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Q-4 Duration of a portfolio is calculated to measure portfolio's sensitivity to changes inthe:

(a) Interest rates (b) Stock market indexes

(c) Inflation rates (d) None of the above.

Q-5 Generally the cyclical stocks have

(a) Higher P/E and lower dividend payout

(b) Higher P/E and higher dividend payout(c) Lower P/E and lower dividend payout

(d) Lower P/E and higher dividend payout.

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


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Definition and objective of FP


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It is identifying all the financial needs of an individual

Translating needs to monetarily measurable goals

Planning financial investments that will allow individualto provide for and satisfy his future financial needs and

ach

ieveh

is lifes goals.The objective is to ensure that right amount of money is

available in the right hands at the right point in future toachieve an individuals financial goals.

Financial Planner

A person who uses the financial planning process to help another person


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determine how to meet his orher life goals.

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

He looks at all of clients needs including budgeting and saving, taxes,investments, insurance and retirement planning.

Benefits of Financial Planning

Financial Plans are tax efficient.

It provides direction and meaning to financial decisions.

It allows one to understand how each financial decision one makes affectsother areas of ones finances.

Benefits to Financial Planner

Ability to establish long term relationships ( Multiple products to one client) Financial Planner should ideally link his rewards and fees to the clients

financial success and achievement of the financial goals.

Ability to build a profitable business ( NO rebating)

Qualities of a Good Financial Planner


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Building trust with the client Good knowledge of Financial products

Familiarity with

taxation and estate planning issues Understanding of stages of clients life and wealth cycle and asset allocation Independent judgement and balanced thinking Organized way of working Regular contact with clients Clear Focus on Overall Financial Planning of client rather than on individual

transactions. The basis of genuine advice should be Financial planning to suit the investors

advice.

Steps to Financial Planning

Establish and define client-Planner Relationship

Gather client data, Define client Goal

Analyze and evaluate clients financial Status

Develop and present financial planning recommendations

Implement the financial planning recommendation

Monitor the financial planning recommendations

Important responsibilities of investors in the financial

planning exercise?


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p g

Should set measurable financial goals.

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

their income.

Should be willing to revise and re-balance their portfolios with changing

market conditions, performance and their changing needs and changes in

lifestyle or circumstances( inheritance, marriage, birth, house purchase or

change of job status)

Investors benefit immensely by starting early and being systematic and

disciplined in their approach.

Very important points on financial planning


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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 clients financialsuccess and the achievement of their financial goals

MUTUAL FUND IS THE MOST IMPORTANTTOOL FOR FINANCIALPLANNING.( 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.


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Wealth cycle for investors (Very

Important)


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Important)

Preference for low risk products

Wealth preservation.Medium to long termSudden wealth surge

Ability to take risk and invest for the long termtransfer

Low liquidity needs.Long term investment of inheritanceInter Generational

Preference for income and debt products

Liquid and medium term investments.Higher liquidity requirementsReaping Stage

Lower risk appetitepre-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


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Affluent investors the rich investors are of 2 types:

Wealth creators Those who prefer growth and are willing to takethe 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 riskaverse; they prefer debt investments. For such investors aconservative portfolio with a 70% to 80% exposure to income, giltand liquid funds would be appropriate.

Questions forRevision

Q 1 The stage at which the goals and purpose towards which the clients have been


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Q-1 The stage at which the goals and purpose towards which the clients have beeninvesting have arrived, is known as

(a) Accumulation (b) Transition (c) Reaping (d) Transfer.

Q-2 As a good financial planner, you should avoid applying the normal Life Cycle Modelto your client who is

(a) A 25-year-old unemployed person (b) A 60-year-old person who has just retired

(c) A Well-known 32 years old cricketer (d) A 35-year-old unmarried person.

Q-3 A salaried executive in late fifties who is planning to retire at 60 years of age, hiswealth cycle stage is

(a) Accumulation (b) Transition (c) Reaping (d) Transfer.Q-4 For older investors who want to transfer their wealth

(a) No financial planning is required

(b) The right investment strategy depends upon who the beneficiaries are

(c) The right investment strategy depends upon the state of the stock market

(d) All the funds can be invested in aggressive equity funds.



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Q-5 Ahigh amount of equity investment is suggested to the investor ifhe is in

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

Answers:

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


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Chapter 11

Recommending Financial PlanningStrategies to Investors



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FINANCIAL PLANNING STRATEGIES

Harness the Power of Compounding 1% interest per month is better than12% yearly return.

Buy and hold is most common strategy BUT most common mistake. Ideallyit should be, track your investments, discard the non performers and keepthe good performers.

Rupee cost averaging

Value Averaging.

Jacobs Rebalancing Strategy ( Combination of RCA and Value averagingstrategies- Using a aggressive growth fund and liquid fund of the samefamily.) ( putting regularly money in liquid fund and set a target value for the

equity fund)

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


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may not weed out poor performing companies and invest in betterperforming companies

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

AMFI PPT_PS

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