Mutual Funds - An Introduction

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CONCEPT AND ROLE OF MUTUAL FUNDCONCEPT AND ROLE OF MUTUAL FUND

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What is mutual fund?What is mutual fund?

Common pool of moneyCommon pool of money Joint or “mutual” ownershipJoint or “mutual” ownership Hence…like shares of the joint stock Hence…like shares of the joint stock

companycompany Units are the representation of ownershipUnits are the representation of ownership ““Not a company which manages individual Not a company which manages individual

portfolios”portfolios”

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Advantages of mutual fundsAdvantages of mutual funds

Portfolio diversificationPortfolio diversification Professional managementProfessional management Reduction/diversification of riskReduction/diversification of risk Reduction of transaction costsReduction of transaction costs LiquidityLiquidity Convenience and flexibilityConvenience and flexibility

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Disadvantages of investing through mfDisadvantages of investing through mf

No control over costNo control over cost No tailor-made portfolioNo tailor-made portfolio Managing a portfolio of fundManaging a portfolio of fund

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History of mf in IndiaHistory of mf in India

Mf industry started in India in 1963 with Mf industry started in India in 1963 with formation of utiformation of uti

Different phases : Different phases : Phase -1(uti)Phase -1(uti) Phase-2 (Entry of public sector mfs)Phase-2 (Entry of public sector mfs) Phase-3 (Entry of private mfs)Phase-3 (Entry of private mfs) Phase-4 (under sebi regulation)Phase-4 (under sebi regulation)

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PHASE-1PHASE-1 Establishment of uti in 1963Establishment of uti in 1963 Launch of first scheme us-64Launch of first scheme us-64 Followed by ulip in 1971,cggf(1986), Followed by ulip in 1971,cggf(1986),

mastershare(1987)mastershare(1987) Uti the only player in the market with monopoly powerUti the only player in the market with monopoly power Huge mobilization of funds Huge mobilization of funds

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PHASE-2PHASE-2

Establishment of sbi-mf---the first non-uti mfEstablishment of sbi-mf---the first non-uti mf Followed by canbank-mf, lic-mf,boi-mfFollowed by canbank-mf, lic-mf,boi-mf Change in the mind set of the investorsChange in the mind set of the investors Uti still the undisputed leader of the marketUti still the undisputed leader of the market

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PHASE-3PHASE-3

Entry of the private sector fund in 1993Entry of the private sector fund in 1993 Jv of foreign fund management companies with Indian Jv of foreign fund management companies with Indian

promoterspromoters More competitive More competitive product innovation, investment innovation, investment

management techniques, investors servicing management techniques, investors servicing techniques techniques

Investors started become selectiveInvestors started become selective

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PHASE-4PHASE-4

Sebi- the regulatory authoritySebi- the regulatory authority Uti came under sebi regulation voluntarilyUti came under sebi regulation voluntarily Govt.’S steps for investors’ protectionGovt.’S steps for investors’ protection

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Types of fundsTypes of funds

Close end/ open endClose end/ open end Load / no-loadLoad / no-load Tax exempt/non-tax exemptTax exempt/non-tax exempt

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OPEN END FUND:OPEN END FUND: Units available for sale and repurchase at all Units available for sale and repurchase at all

timestimes Investors can buy or redeem on NAVInvestors can buy or redeem on NAV

CLOSE END FUND:CLOSE END FUND: Don’t allow investors to buy/ redeem units Don’t allow investors to buy/ redeem units

directly from fundsdirectly from funds Get listed on stock exchange to provide liquidityGet listed on stock exchange to provide liquidity ““Units may be traded at a discount or premium Units may be traded at a discount or premium

to NAV based on investor’s perception on future to NAV based on investor’s perception on future performance and market factors”performance and market factors”

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LOAD FUND:LOAD FUND: Load charge to cover the expenses Load charge to cover the expenses Entry/front load and exit/ back loadEntry/front load and exit/ back load Deferred load - charged over a period of timeDeferred load - charged over a period of time Exit load preferred over entry load for benefit Exit load preferred over entry load for benefit

of compoundingof compounding Contingent deferred sales charge- exit load Contingent deferred sales charge- exit load

charged depending on the period. Ex: bond charged depending on the period. Ex: bond fundfund

Even close end funds may have loadsEven close end funds may have loadsNO LOAD FUND:NO LOAD FUND:

There is no load- no sales expense chargeThere is no load- no sales expense charge Nav calculated after accounting for other Nav calculated after accounting for other

expensesexpenses

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Mutual fund typesMutual fund types

By nature of investmentsBy nature of investments Equity, bond, money market fundsEquity, bond, money market funds

By investment objectiveBy investment objective Income, growth, value fundsIncome, growth, value funds

By risk profileBy risk profile High, low, moderate risk fundsHigh, low, moderate risk funds

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Money market fundMoney market fund

Lowest risk Lowest risk Investment in the security of less than one year securityInvestment in the security of less than one year security Investment in treasury bills, cd, com. Papers, call moneyInvestment in treasury bills, cd, com. Papers, call money Strength: liquidity and safety of principalStrength: liquidity and safety of principal

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Gilt fundGilt fund

Low risk but higher than that of mmfLow risk but higher than that of mmf Medium to long term maturity (more than 1 year)Medium to long term maturity (more than 1 year) Little default risk, high interest riskLittle default risk, high interest risk It’s prices falls interested rate increases and vice versaIt’s prices falls interested rate increases and vice versa

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Debt/income fundDebt/income fund

Risk higher than g-sec fundRisk higher than g-sec fund More emphasis on income distribution than More emphasis on income distribution than

capital appreciation capital appreciation TypesTypes

DiversifiedDiversified FocusedFocused High yield (investment in lower rate)High yield (investment in lower rate) Assured returnAssured return

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Types of equity fundsTypes of equity funds

AGGRESSIVE GROWTH FUNDS: investment in less AGGRESSIVE GROWTH FUNDS: investment in less researched or speculative/non-blue chip stocksresearched or speculative/non-blue chip stocks

GROWTH FUNDS: investment in stocks with above GROWTH FUNDS: investment in stocks with above average growth prospects over 3-5 years. Ex: tech average growth prospects over 3-5 years. Ex: tech stockstock

SPECIALITY FUNDS: sector, offshore, small-cap equity, SPECIALITY FUNDS: sector, offshore, small-cap equity, option income fundsoption income funds

DIVERSIFIED EQUITY FUNDSDIVERSIFIED EQUITY FUNDS EQUITY INDEX FUNDSEQUITY INDEX FUNDS VALUE FUNDS: invest in fundamentally sound VALUE FUNDS: invest in fundamentally sound

companies with low P/E ratio.companies with low P/E ratio. Equity income fund: invest in sectors where low Equity income fund: invest in sectors where low

fluctuation in stock price and high dividend is fluctuation in stock price and high dividend is expected.expected.

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Types of hybrid fundsTypes of hybrid funds

BALANCED FUNDS: More or less equal proportionBALANCED FUNDS: More or less equal proportion GROWTH -INCOME FUNDS: Mix between good GROWTH -INCOME FUNDS: Mix between good

dividend paying records and with potential of capital dividend paying records and with potential of capital appreciation.appreciation.

ASSET ALLOCATION FUNDS:Asset allocation between ASSET ALLOCATION FUNDS:Asset allocation between equity,debt or money market and asset allocation equity,debt or money market and asset allocation policy may be pre-determined or flexible. policy may be pre-determined or flexible.

OTHER FUNDSOTHER FUNDS COMODITY FUNDSCOMODITY FUNDS REAL ESTATE FUNDSREAL ESTATE FUNDS

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Fund structure and constituentsFund structure and constituents

Legal structure Legal structure Role of different operating bodiesRole of different operating bodies Fund mergers and scheme takeoversFund mergers and scheme takeovers

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Legal structureLegal structure In India In India

Issue of open and close end funds in Issue of open and close end funds in same legal structuresame legal structure

Follow the sebi regulationFollow the sebi regulation Trust form Trust form

Sponsor: establishes the mutual fundSponsor: establishes the mutual fund Must contribute 40% of the net worth of Must contribute 40% of the net worth of

the AMCthe AMC Need to have sound financial track recordNeed to have sound financial track record Appoint trustees Appoint trustees

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Legal structureLegal structure

TRUSTEES:Manages the Mutual Fund and look after the TRUSTEES:Manages the Mutual Fund and look after the operations of the appointed AMC.operations of the appointed AMC.

The investments are held by the Trustee.The investments are held by the Trustee. The beneficiaries from the assets are the unit holders.The beneficiaries from the assets are the unit holders. The trustees have a fiduciary responsibility.The trustees have a fiduciary responsibility. Trustees approve each MF scheme floated by AMC.Trustees approve each MF scheme floated by AMC. Trustees receive fees for their services.Trustees receive fees for their services. Trusts are formed through “Trust Deed”Trusts are formed through “Trust Deed” ““Furnish report to SEBI on half yearly basis on AMC and Furnish report to SEBI on half yearly basis on AMC and

Fund functioning”Fund functioning” Amc: acts as investment manager of the trust under the Amc: acts as investment manager of the trust under the

board supervision and direction of the trusteesboard supervision and direction of the trustees ““Submit report to AMC on quarterly basis, mentioning Submit report to AMC on quarterly basis, mentioning

activity and compliance factor.activity and compliance factor.

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Legal structureLegal structure

AMC: Acts as investment manager of the trust under the AMC: Acts as investment manager of the trust under the board supervision and direction of the trustees.board supervision and direction of the trustees.

AMC is the fund managerAMC is the fund manager AMC floats the different MF schemes.AMC floats the different MF schemes. AMC is responsible to the trustees.AMC is responsible to the trustees. AMC fees have a ceiling decided by SEBIAMC fees have a ceiling decided by SEBI

Initial issue expenses not exceeding 6%Initial issue expenses not exceeding 6% Recurring expenses such as trustee fees, audit fees, etc. Recurring expenses such as trustee fees, audit fees, etc. When net assets do no exceed Rs.100 crores, asset When net assets do no exceed Rs.100 crores, asset

management fee is maximum 1.25% of average weekly management fee is maximum 1.25% of average weekly net assets.net assets.

When assets exceed Rs.100 crores, an additional asset When assets exceed Rs.100 crores, an additional asset management fee of maximum 1% of additional net management fee of maximum 1% of additional net assets.assets.

If the scheme is a no-load scheme, further fee of If the scheme is a no-load scheme, further fee of maximum 1% of average weekly net assets.maximum 1% of average weekly net assets.

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Legal structureLegal structure

The SponsorThe Sponsor

A sponsor appoints the asset management A sponsor appoints the asset management

company.company. Sometimes, this power is given by the sponsor to Sometimes, this power is given by the sponsor to

the trustees through the trust deed.the trustees through the trust deed. At least 50% of directors on the board of asset At least 50% of directors on the board of asset

management company should be independent of management company should be independent of the sponsor.the sponsor.

Asset management company shall not deal with Asset management company shall not deal with any broker/firm associated with sponsor beyond any broker/firm associated with sponsor beyond 5% of daily gross business of the MF.5% of daily gross business of the MF.

All security transactions of the asset management All security transactions of the asset management company with its associates should be disclosed.company with its associates should be disclosed.

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Contingent Deferred Sales Contingent Deferred Sales ChargeCharge For no-load schemesFor no-load schemes Redemption during the first four years after Redemption during the first four years after

purchasepurchase

First yearFirst year maximum 4%maximum 4% Second yearSecond year maximum 3%maximum 3% Third yearThird year maximum 2%maximum 2% Fourth yearFourth year maximum 1%maximum 1%

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Ceiling on expensesCeiling on expenses

Excepting initial and redemption expenses, the total of Excepting initial and redemption expenses, the total of

all other expenses should be a maximum of all other expenses should be a maximum of

Average weekly Average weekly Fees as % of Fees as % of net assets (Rs.Crores)net assets (Rs.Crores) average weekly net average weekly net

assets assets

0-1000-100 2.5%2.5% next 300next 300 2.25%2.25% next 300next 300 2.0%2.0% balancebalance 1.75%1.75%

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Legal structureLegal structure Custodian: Custodian:

Appointed by board of trustees for Appointed by board of trustees for safekeeping of securities.safekeeping of securities.

It’s an entity independent of sponsors It’s an entity independent of sponsors BankersBankers Transfer agentsTransfer agents

Issue and redeem of units and other related Issue and redeem of units and other related serviceservice

DistributorsDistributors Appointed by amcAppointed by amc May act on behalf of different fundsMay act on behalf of different funds Agents - as individualAgents - as individual

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Fund merger & takeoversFund merger & takeovers

Constitution can change in many possible waysConstitution can change in many possible ways Amc taken over by another sponsorAmc taken over by another sponsor Merger of two amc’sMerger of two amc’s Decision of trustee to change amcDecision of trustee to change amc Change of trusteesChange of trustees Merger of two schemes with same amc/trusteesMerger of two schemes with same amc/trustees

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MERGER OF TWO amcsMERGER OF TWO amcs Needs to follow Indian co. ActNeeds to follow Indian co. Act Sebi approval requiredSebi approval required Consent of unit holders with 75% voting rightsConsent of unit holders with 75% voting rights

Amc takeover by new sponsorsAmc takeover by new sponsors High court approval not required but sebi clearance High court approval not required but sebi clearance

requiredrequired Scheme take overScheme take over

Amc cannot withdraw or transfer the management of Amc cannot withdraw or transfer the management of scheme to another amc without unit holders consentscheme to another amc without unit holders consent

Trustees cannot effect amc without unit holders Trustees cannot effect amc without unit holders consent consent

““any amendments in scheme require consent of unit holders any amendments in scheme require consent of unit holders in case of only close end fund. Open end fund needs to in case of only close end fund. Open end fund needs to just inform”just inform”

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Legal and Regulatory Legal and Regulatory EnvironmentEnvironment

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Regulators in IndiaRegulators in India

SebiSebi– SEBI regulates mfsSEBI regulates mfs– All mfs have to be registered with SEBIAll mfs have to be registered with SEBI

RbiRbi– Bank-owned mfs are under RBI and SEBIBank-owned mfs are under RBI and SEBI

Ownership of AMC by the bankOwnership of AMC by the bank Guarantees issued by the bank as sponsorGuarantees issued by the bank as sponsor Fund mergers of bank-sponsored mfsFund mergers of bank-sponsored mfs

– Permission to access inter-bank call money marketPermission to access inter-bank call money market

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Regulators in India…Regulators in India…

Ministry of financeMinistry of finance Company law boardCompany law board

– Department of company affairsDepartment of company affairs Registrar of companiesRegistrar of companies

Stock exchangesStock exchanges Charity commissionerCharity commissioner

– Office of the public trusteeOffice of the public trustee Board of trustees of mfsBoard of trustees of mfs

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Self-regulatory Self-regulatory OrganizationOrganization

An organization specially empowered to regulate activities of its members

Amfi is not a self-regulatory organization

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AMFIAMFI

Promote the interests of the mutual funds and Promote the interests of the mutual funds and unit-holdersunit-holders

Set ethical, commercial, and professional Set ethical, commercial, and professional standards in the industrystandards in the industry

Increase the public awareness of MF industryIncrease the public awareness of MF industry

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Investors Rights and Investors Rights and

ObligationsObligations Right of Proportionate “beneficial Ownership” Right of Proportionate “beneficial Ownership” Right to Timely Service Right to Timely Service Right to InformationRight to Information Right to Approve changes in Fundamental Attributes Right to Approve changes in Fundamental Attributes Right to Wind Up a SchemeRight to Wind Up a Scheme Right to Terminate the AMCRight to Terminate the AMC

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Legal Limitations to Investors Legal Limitations to Investors RightsRights Investors cannot Sue the Trust.Investors cannot Sue the Trust. Investors can initiate legal proceedings against Investors can initiate legal proceedings against

the trusteesthe trustees Sponsors of a MF have no obligation to meet the Sponsors of a MF have no obligation to meet the

shortfall in non- assured schemesshortfall in non- assured schemes Only if the OD has specifically provided such Only if the OD has specifically provided such

guarantee by a named sponsor the investors guarantee by a named sponsor the investors have a right to sue the sponsorshave a right to sue the sponsors

Prospective Investors cannot sue the Trust / the Prospective Investors cannot sue the Trust / the AMC or any other constituent.AMC or any other constituent.

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Investors Obligations / Complaint RedressalInvestors Obligations / Complaint Redressal Investors should:Investors should: Read Offer DocumentRead Offer Document Understand Risk Understand Risk

factorsfactors Monitor InvestmentsMonitor Investments Ask for information Ask for information

required required ““Monitoring is entirely Monitoring is entirely

his/ her own his/ her own responsibility”responsibility”

SEBI intervention SEBI intervention For issue of due For issue of due

diligence certificate for diligence certificate for new scheme by new scheme by compliance officercompliance officer

Companies Act cannot Companies Act cannot protect investors as protect investors as fund investors are fund investors are neither shareholders in neither shareholders in the AMC nor depositorsthe AMC nor depositors

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OFFER DOCUMENTOFFER DOCUMENT

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What is an offer document (od)What is an offer document (od)

OD of a mutual fund scheme is a prospectus issued OD of a mutual fund scheme is a prospectus issued by an Asset Management Company/ sponsor inviting by an Asset Management Company/ sponsor inviting public for subscription in units of the scheme public for subscription in units of the scheme disclosing information which is adequate to enable an disclosing information which is adequate to enable an investor to make informed investment decision.investor to make informed investment decision.

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Offer document (OD)Offer document (OD) A legal document A legal document issued by AMC or Sponsorissued by AMC or Sponsor OD describes the productOD describes the product Very important document from the perspective of Very important document from the perspective of

prospective investorprospective investor Primary vehicle for investment decisionPrimary vehicle for investment decision

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* All ODs are to be approved by the trustees of a All ODs are to be approved by the trustees of a mutual fundmutual fund

* ODs are prepared and issued by an asset ODs are prepared and issued by an asset management company’management company’

* All ODs are filed with SEBI with filing fees (Rs. All ODs are filed with SEBI with filing fees (Rs. 25,000)25,000)

* Modifications, if any, are advised by SEBI within Modifications, if any, are advised by SEBI within 21 working days from the date of its filing21 working days from the date of its filing

Offer Document (OD)Offer Document (OD)

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Close ended fund: the time of issueClose ended fund: the time of issue Open ended fund: revision after every two yearsOpen ended fund: revision after every two years

KIM: KIM: Abridged version of OD which is distributed Abridged version of OD which is distributed along with the application formalong with the application form

Offer Document (OD)Offer Document (OD)

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Summary informationSummary information DefinitionsDefinitions Risk FactorsRisk Factors Legal and Regulatory ComplianceLegal and Regulatory Compliance Financial InformationFinancial Information Constitution of the Mutual FundConstitution of the Mutual Fund Investment objectives and policiesInvestment objectives and policies Management of the FundManagement of the Fund Offer Related informationOffer Related information

Contents of theContents of the Offer DocumentOffer Document

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Summary Information (Cover Page) :Summary Information (Cover Page) :

Name of Mutual Fund/ AMCName of Mutual Fund/ AMC Name of Scheme/ Type of scheme Name of Scheme/ Type of scheme Period of opening / closingPeriod of opening / closing SEBI DisclaimerSEBI Disclaimer

Contents of theContents of the Offer Offer DocumentDocument

4444

Risk FactorsRisk Factors

Standard Risk factorsStandard Risk factors

Scheme specific risk factor'sScheme specific risk factor's

Contents of theContents of the Offer Offer DocumentDocument

4545

Legal and Regulatory ComplianceLegal and Regulatory Compliance

AMC shall confirm that a Due diligence certificate AMC shall confirm that a Due diligence certificate is duly signed by compliance officer/CEO/Whole is duly signed by compliance officer/CEO/Whole time Director/MDtime Director/MD

Certificate to the effect Certificate to the effect (a) OD prepared is in accordance with SEBI (MF) (a) OD prepared is in accordance with SEBI (MF)

Regulations,Regulations,(b) legal requirements are complied with,(b) legal requirements are complied with,(c) disclosures are true and fair, (c) disclosures are true and fair, (d) intermediaries named in the OD are registered (d) intermediaries named in the OD are registered

with SEBI.with SEBI.

Contents of theContents of the Offer Offer DocumentDocument

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Financial InformationFinancial Information

Expenses - Sales load, CDSC, Initial issue Expenses - Sales load, CDSC, Initial issue expenses, estimated annual recurring expensesexpenses, estimated annual recurring expenses

Condensed Financial information of schemes Condensed Financial information of schemes - Information regarding schemes launched during - Information regarding schemes launched during

the last 3 yearsthe last 3 years- Historical per unit statistics- Historical per unit statistics

Contents of theContents of the Offer Offer DocumentDocument

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Constitution of the Mutual Fund/Constitution of the Mutual Fund/Management of the FundManagement of the Fund

Name of the sponsor / AMC / Board of Trustees Name of the sponsor / AMC / Board of Trustees Powers of TrusteesPowers of Trustees Name of Key personnelName of Key personnel Custodian / Registrars Custodian / Registrars Investors relations officerInvestors relations officer Name,age, qualifications and experience of fund Name,age, qualifications and experience of fund

manager'smanager's

Contents of theContents of the Offer Offer DocumentDocument

4848

Investment objectives and PoliciesInvestment objectives and Policies

Investment only in transferable securities in the Investment only in transferable securities in the money market and the capital market or in money market and the capital market or in privately placed debt or securitised debt provided privately placed debt or securitised debt provided they are rated not below investment grade.they are rated not below investment grade.

Minimum and maximum asset allocation under Minimum and maximum asset allocation under equity, debt and money market instruments has to equity, debt and money market instruments has to be specified in the OD.be specified in the OD.

MF can alter the asset allocation for a short term MF can alter the asset allocation for a short term period on defensive consideration.period on defensive consideration.

Investment Strategy: Regarding portfolio turnover, Investment Strategy: Regarding portfolio turnover, overseas investments, limits, stock lending etc.overseas investments, limits, stock lending etc.

Contents of theContents of the Offer DocumentOffer Document

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Offer Related InformationOffer Related Information

Investment procedureInvestment procedure Schemes policy on dividends & distributions, ISTsSchemes policy on dividends & distributions, ISTs Associate TransactionsAssociate Transactions Borrowing PolicyBorrowing Policy NAV and ValuationNAV and Valuation

Contents of theContents of the Offer DocumentOffer Document

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Offer Related Information contd…Offer Related Information contd…

Procedure for Redemption or RepurchaseProcedure for Redemption or Repurchase Description of accounting policiesDescription of accounting policies Tax treatment of investmentsTax treatment of investments Investors’ rights and servicesInvestors’ rights and services Redressal mechanism for investor grievancesRedressal mechanism for investor grievances

Contents of the Offer DocumentContents of the Offer Document

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Equity portfolio Equity portfolio ManagementManagement Stock selectionStock selection Review of the Indian equity marketReview of the Indian equity market Types of equity investmentsTypes of equity investments Equity classesEquity classes

– based on market capbased on market cap– Based on anticipated earningsBased on anticipated earnings

Approaches to portfolio managementApproaches to portfolio management Organization structure of equity fundsOrganization structure of equity funds

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Fund Distribution & Sales PracticesFund Distribution & Sales Practices

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Investor CommunityInvestor Community

Institutional

Investors

Individual Investors

HNIs

Retail

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Who can invest in Mutual Funds in India?Who can invest in Mutual Funds in India?

Residents : Resident Individuals Indian Companies Indian Trusts/ Charitable Institutions Banks / NBFCs Insurance Companies Provident funds

5555

Who can invest in Mutual Funds in India?Who can invest in Mutual Funds in India?

Non Residents : NRIs OCBs

Foreign Entities: FIIs registered with SEBI

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Role of the Distribution ChannelsRole of the Distribution Channels

“MFs are primarily vehicles for large collective investments , based on the principle of pooling the funds from a large

number of investors”Hence,

“Majority of schemes are targeted at the retail level, from where a substantial portion of investment takes place”

So,“Distribution network becomes critical

in view of the spread of investor community”

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Types of Distribution Channels:Types of Distribution Channels:

1.Individual Agents

2. Distribution Companies

3. Banks / NBFCs

4. Direct Marketing ( By the Sales Officers)

5.Current Distribution patterns - Non UTI funds rely on the 2&3 above.

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Sales Practices in MF MarketSales Practices in MF Market

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Commission can be paid upfront or trail commission.

Market Practice: 1-1.5% (Equity funds)

0.6-0.8% (Debt Funds)

Higher commission paid for Tax-benefit schemes as there is a lock-in period.

Agents’ CommissionAgents’ Commission

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•The initial issue expense cap of 6% includes brokerage as well.

• All SEBI regulated open ended funds are authorized to charge exit /entry loads to cover the funds’ distribution expenses.

• A no load fund includes these expenses as a part of the regular management & marketing expenses.

• SEBI prescribes a cap on all the total expenses that can be charged to a scheme each year. Any additional expense will have to be borne by the AMC

Agents’ CommissionAgents’ Commission

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• Know the important characteristics of the scheme.•Know your client profile (age, risk tolerance,income levels)• Understand clients’ needs (investment objective,return expectation, cash flow requirement)• Assistance in making the right choice of investment• Encourage regular investment and seek commitment from the client to invest.• Personalized post sales service.

Effective Selling of MF SchemesEffective Selling of MF Schemes

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SEBI's Advertising Code• The code protects from misleading investors.• Past performance is not a guarantee• Dividends declared/paid shall be mentioned in Rs.per

unit• Only compound and annualized yield can be advertised

for schemes for more than one year.• Annualised yield must be shown for at least one, three

fine and since launch.• For less than one year performance may be shown in

terms of total returns should not be annualized.• Appropriate benchmark should be chosen. And once

chosen it should be consistent.• Where any ranking has been made should be explained.

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Appointment of AgentsAppointment of Agents

The key terms of agreement are as follows:

• The agent will provide a copy of the abridged OD to the customer and will make available for inspection a copy of the OD and sell at price currently in effect.

• The agent will execute all the transactions on behalf of the customer who will not have any recourse to the agent in case of an errors/problems/quality of investment.

• The agent must make the customer know that the funds’ units are not endorsed by him and do not constitute his obligation.

•Agent responsible at his expense to ensure compliance with applicable regulation in each jurisdiction.

•Fund not responsible for any losses claims or damages.

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Key terms of Key terms of

Agreement………….2Agreement………….2

•The agent will offer/sell/purchase unit at the current public offering price.

• All orders become effective only upon acceptance and confirmation by the fund.

• The agent is responsible to ensure compliance with the applicable regulations in each transaction he deals in and the fund is not responsible for any breach by agent in this regard.

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AMFI Code of

Ethics

AMFI has recommended a code of practices with respect

to overall fund operation including distribution and selling.

1. Management of fund should be in the interest of unit holders.

2. High standards of service are expected from funds

3. Adequate disclosure standards4. Professional Selling practices.5. Fund Management in accordance to stated

investment objective.6. Avoid conflict of interest in its dealing with its

employees.7. Refrain from unethical market Practices.

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Fund broking practices in Fund broking practices in USUS Cap on sales/distribution expenses. Broker is not allowed to describe a fund as no

load fund if it has front-end or default load. Broker prohibited from recommending that

purchase of units before ex-dividend may be advantageous.

Prohibited from using commission as a basis for recommending a fund.

Preferred pricing to specific investors prohibited.

6767

Accounting, Valuation and TaxationAccounting, Valuation and Taxation

6868

Section one : accountingSection one : accounting

The importance of Accounting– MF BS is different from a bank or a company.

MF have special requirements concerning accounting for the fund’s assets, liabilities and transactions with investors and other outside constituents such as banks, securities custodians and registrars.

– Follows accounting policies laid down by SEBI regulations 1996.

– Knowledge is essential to explain the scheme performance to the investors

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Net Asset Value (NAV)Net Asset Value (NAV)– Investors’ subscriptions are not accounted as Investors’ subscriptions are not accounted as

liabilities or deposits but as Unit Capitalliabilities or deposits but as Unit Capital– Investments made on behalf of the investors are Investments made on behalf of the investors are

reflected on the assets side.reflected on the assets side.– Liabilities also form part of the balance sheetLiabilities also form part of the balance sheet– NAV is asset minus liabilities and divided by total NAV is asset minus liabilities and divided by total

number of outstanding units.number of outstanding units.

NAV = Assets - LiabilitiesNAV = Assets - Liabilities

NAV = Net assets of the scheme / Number of units NAV = Net assets of the scheme / Number of units outstanding Market value of investments + outstanding Market value of investments + receivables + accrued income + other assets - receivables + accrued income + other assets - accrued expenses-payables- liabilitiesaccrued expenses-payables- liabilities

No.of units outstanding on NAV dateNo.of units outstanding on NAV date

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– Daily NAV for open-end schemes – Weekly NAV for close-end schemes– Those closed - end schemes which are not

mandatorily required to be listed in any stock exchange may publish NAV at monthly or quarterly intervals (for e.g. MIPs)

– A fund’s NAV is affected by Purchase and sale of investment securities Valuation of all investment securities held Other assets and liabilities Units sold or redeemed

– Valuation of investment securities must be at their market prices.

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– Other Assets includes any income due but not Other Assets includes any income due but not received (for e.g. Dividend announced by a received (for e.g. Dividend announced by a company)company)

– Other Liabilities includes expenses payable by the Other Liabilities includes expenses payable by the fund (for e.g. Management fee to AMC)fund (for e.g. Management fee to AMC)

– All income and expenses have to be “accrued” upto All income and expenses have to be “accrued” upto the valuation date and included in the computation the valuation date and included in the computation of the NAV.of the NAV.

– Major expense such as management fees should be Major expense such as management fees should be accrued on a day to day basis, while others need accrued on a day to day basis, while others need not be accrued, if non-accrual does not affect NAV not be accrued, if non-accrual does not affect NAV by more than 1%by more than 1%

– Sale or repurchase of units and sale or purchase of Sale or repurchase of units and sale or purchase of investment securities must be recorded within 7 investment securities must be recorded within 7 days of the transaction provided the non-recording days of the transaction provided the non-recording does not affect NAV by more than 2%.does not affect NAV by more than 2%.

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Pricing of UnitsPricing of Units– Repurchase price should not be lower than 93% of Repurchase price should not be lower than 93% of

NAV (95% in case of closed-end schemes)NAV (95% in case of closed-end schemes)– Sale price can not be higher than 107% of NAVSale price can not be higher than 107% of NAV– The difference between the repurchase and sale price The difference between the repurchase and sale price

can not be more than 7% of the sale pricecan not be more than 7% of the sale price

Fees and ExpensesFees and Expenses– The AMC may charge the scheme with a fees @1.25% The AMC may charge the scheme with a fees @1.25%

for first 100 crores of weekly average net assets for first 100 crores of weekly average net assets outstanding in the accounting year and @1% of outstanding in the accounting year and @1% of weekly average net assets in excess of Rs.100 croresweekly average net assets in excess of Rs.100 crores

– No load schemes may charge an additional No load schemes may charge an additional management fee upto 1% of weekly average net management fee upto 1% of weekly average net assets outstanding in the accounting year.assets outstanding in the accounting year.

– Initial expenses of launching schemes not to exceed Initial expenses of launching schemes not to exceed 6% of initial resources raised6% of initial resources raised

7373

• Total expenses excluding issue or redemption expenses butTotal expenses excluding issue or redemption expenses butincluding investment management and advisory fees are including investment management and advisory fees are

subject tosubject tofollowing limitsfollowing limits

First 100 crs of avg weekly net assets - 2.5%First 100 crs of avg weekly net assets - 2.5% Next 300 crs of avg weekly net assets - 2.25%Next 300 crs of avg weekly net assets - 2.25% Next 300crs of avg weekly net assets - 1.75%Next 300crs of avg weekly net assets - 1.75%

– For bond funds, the above percentages are required to For bond funds, the above percentages are required to be lower by0.25%be lower by0.25%

• Initial Issue ExpensesInitial Issue Expenses– All expenses cannot be charged to a scheme in the first All expenses cannot be charged to a scheme in the first

year itself. SEBI permits amortization as follows.year itself. SEBI permits amortization as follows.– CE scheme, the initial issue expenses shall be amortized CE scheme, the initial issue expenses shall be amortized

on a weekly basis over the period of the scheme.on a weekly basis over the period of the scheme.– OE scheme, initial issue expenses may be amortized OE scheme, initial issue expenses may be amortized

over a period not exceeding five years.over a period not exceeding five years.– Unamortized portion of expenses shall be included for Unamortized portion of expenses shall be included for

NAV calculation, considered as other assets.NAV calculation, considered as other assets.

7474

– The investment advisory fee cannot be claimed on this The investment advisory fee cannot be claimed on this asset. Hence, they have to be excluded while determining asset. Hence, they have to be excluded while determining the chargeable investment management/advisory fees.the chargeable investment management/advisory fees.

– While calculating the maximum amount of chargeable While calculating the maximum amount of chargeable expenses, the unamortised portion of the initial issue expenses, the unamortised portion of the initial issue expenses will not be included as part of the average weekly expenses will not be included as part of the average weekly net assets figure.net assets figure.

Disclosures and Reporting RequirementsDisclosures and Reporting Requirements– Annual report and annual statement of accountsAnnual report and annual statement of accounts– Annual statement of account to be auditedAnnual statement of account to be audited– Must dosMust dos

publish through an ad, scheme-wise annual report or an publish through an ad, scheme-wise annual report or an abridged summary of the reportabridged summary of the report

mail the summary to all unit holdersmail the summary to all unit holders forward to SEBI, a copy of the annual report and other forward to SEBI, a copy of the annual report and other

information including details of investments and deposits information including details of investments and deposits held by the fund.held by the fund.

7575

– The fund shall furnish to SEBI once a yearThe fund shall furnish to SEBI once a year copies of audited annual schemewise SOAcopies of audited annual schemewise SOA copy of six monthly unaudited accountscopy of six monthly unaudited accounts quarterly statement of movements in the net assets quarterly statement of movements in the net assets

for each scheme fo the fundfor each scheme fo the fund quarterly portfolio statement, including changes from quarterly portfolio statement, including changes from

the previous periods for each schemethe previous periods for each scheme– Publish Publish

unaudited financial results in one national English unaudited financial results in one national English newspaper and one in the language of the region newspaper and one in the language of the region where the head office of the fund is situated.where the head office of the fund is situated.

– The trustee to makeThe trustee to make such disclosures to investors as are essential to keep such disclosures to investors as are essential to keep

them informed about any information which may them informed about any information which may have an adverse bearing on their investment.have an adverse bearing on their investment.

7676

Specific half-yearly disclosuresSpecific half-yearly disclosures Expenses exceeding 10% of the total Portfolio Scripwise disclosure of NPAs Large unit-holdings (over 25% of the net assets) Indicate that unit-holders may seek annual report from the

MF

Amortization:

Initial Expenses charged over years

Close ended schemes (Load basis): Amortized on a weekly basis over the period of the scheme. E.g for a 5 yr. scheme, 260 weeks must be taken.

Open ended schemes (Load basis): Amortized annually over a period not greater than 5 years.

Un-amortized portion to be added for NAV calculation. No AMC fee on this.

7777

Accounting PoliciesAccounting Policies– Investments marked to marketInvestments marked to market– Unrealised appreciation can not be distributedUnrealised appreciation can not be distributed– Dividend received by fund should be recognised on the date Dividend received by fund should be recognised on the date

the share is quoted on ex-dividend basis and not on the date of the share is quoted on ex-dividend basis and not on the date of declaration.declaration.

– To calculate gain or loss on sale of investments, the average To calculate gain or loss on sale of investments, the average cost method must be followed to determine the cost of cost method must be followed to determine the cost of purchasepurchase

– Purchase sale to be recognized on the date of transaction and Purchase sale to be recognized on the date of transaction and not settlementnot settlement

– Bonus/rights to be recognized on ex-bonus/ex-right day.Bonus/rights to be recognized on ex-bonus/ex-right day. Investments that are NPAsInvestments that are NPAs

– An asset shall be regarded as NPA, if the interest and/or An asset shall be regarded as NPA, if the interest and/or principal has been outstanding for more than one quarter from principal has been outstanding for more than one quarter from the due date of receiptthe due date of receipt

– Income that accrues in such cases should be provided for and Income that accrues in such cases should be provided for and no further accrual should be made for such investment.no further accrual should be made for such investment.

7878

Provision for NPAs

3 months after classification as NPA3 months after classification as NPA : 10%: 10%

6…………………………………… 6…………………………………… : 30%: 30%

9…………………………………… 9…………………………………… : 50%: 50%

12………………………………….. 12………………………………….. : 75%: 75%

15………………………………….. 15………………………………….. : 100%: 100%

7979

Section two: valuationValuation of traded securities

– Valued at the last quoted closing price on the stock exchange where it is principally traded

– IF not traded, then take the value at which it was traded on the earliest previous day provided it is not more than 30 days prior to valuation

Thinly traded equities– Monthly trading value <Rs. 5 lakhs and volume <

50,000– When a stock exchange declares an equity as

thinly traded– When trading is suspended for less than 30 days,

take the last traded price– When trading is suspended for more than 30

days, asset management company to make valuation.

8080

Thinly traded debt security– Traded value < Rs. 15 crores in a month.– Add value traded on all exchanges to compute this

figure.– Such security to be valued using the method for

non-traded debt security.

Valuation of Non-traded Securities– Valuation of equity instrument is on the basis of

capitalization of earnings solely or in combination with its balance sheet net asset value.

– Capitalization rate will be determined by reference to the Price or earning ratios of comparable traded securities with an appropriate discount for lower liquidity to be used.

8181

Valuation of Non-traded non-government debt with less Valuation of Non-traded non-government debt with less than 182 days for maturitythan 182 days for maturity

– Upto 182 day maturity, valued as money market instrument Upto 182 day maturity, valued as money market instrument (cost + accrual of interest)(cost + accrual of interest)

– Debt instruments are to be valued on YTM basis, the Debt instruments are to be valued on YTM basis, the capitalization factor being determined for comparable traded capitalization factor being determined for comparable traded securities with an appropriate discount for lower liquidity.securities with an appropriate discount for lower liquidity.

– Call money, bills purchases under rediscount and short term Call money, bills purchases under rediscount and short term deposits with banks are to be valued at (cost+accrual).deposits with banks are to be valued at (cost+accrual).

– Other money market instruments at yield at which they are Other money market instruments at yield at which they are currently tradedcurrently traded

Non-traded non-government debt with over 182 days to maturityNon-traded non-government debt with over 182 days to maturity

Investment grade: YTM basis Non-investment grade

Performing: 25% discount to face valueNon-performing: Make provisions

8282

Taxation Provisions

Internationally, trusts are pass-through vehicles; hence, they pay no tax.

In India,– A mutual fund pays 22% tax on the income

distributed to unit holders – This tax bears no relationship to the unit-

holder’s tax bracket.– Income distributed by a fund is tax exempt in

the hands of investors

8383

Tax rebate u/s 88Tax rebate u/s 88

– ELSS investment up to 10,000 tax rebate 20%ELSS investment up to 10,000 tax rebate 20%– Total investment upto 60,000 qualifies for tax Total investment upto 60,000 qualifies for tax

rebate to the extent of 20% of such investment.rebate to the extent of 20% of such investment.– Infrastructure MF investment upto 80,000 also 20%Infrastructure MF investment upto 80,000 also 20%

8484

Capital Gains on Sale of Units If units are held for not more than 12 months, it is

short term capital asset, other wise long term. (36 months for assets except shares and securities)

Tax law definition of capital gains = sale consideration - (cost of acquisition + cost of improvements + cost of transfer)

If it crosses 12 months, then “indexation” is applicable. The purchase price is marked up by an inflation index.

8585

IndexatioIndexationn

– Purchase price of a long term capital asset after Purchase price of a long term capital asset after indexation is computedindexation is computed

– Cost of acquisition or improvement = actual Cost of acquisition or improvement = actual cost of acquisition or improvement * cost cost of acquisition or improvement * cost inflation index for the year of transfer / cost inflation index for the year of transfer / cost inflation index for the year of acquisition or inflation index for the year of acquisition or 1981 which ever is later)1981 which ever is later)

– Unit-holder can have a choice between:Unit-holder can have a choice between: 10% tax without indexation10% tax without indexation 20% tax with indexation20% tax with indexation

– There is 2% surchargeThere is 2% surcharge

8686

Indexation

Cost Inflation Index for 1999-2000: 389An example:

•Mr. H invests Rs. 2,00,000 in FY 97-98 MF units•After 1 year, he liquidates the asset to get Rs. 2,40,000. •His tax returns would be:•CII 99-00 : 389, CII 97-98 : 331, Ratio : 389/331 = 1.18•Indexed Cost (2,00,000 x 1.18) = Rs. 2,36,000•Capital Gains – Rs. 4,000•Long-term tax liability of Mr. H: Rs. 4,000 * 20%= Rs. 800

8787

Schemes for capital gains tax exemptionSchemes for capital gains tax exemption

Capital gains tax of sale of long term capital asset is Capital gains tax of sale of long term capital asset is exempt inexempt in

section 54EC of IT Actsection 54EC of IT Act if the amount of the gain is invested in bonds of if the amount of the gain is invested in bonds of

NABARD, NHAI, and REC within 6 months. These NABARD, NHAI, and REC within 6 months. These must be held for at least 3 years, and during this must be held for at least 3 years, and during this time, one cannot take loan/advance against time, one cannot take loan/advance against security of such bonds.security of such bonds.

Capital gains tax of sale of mutual funds, if longCapital gains tax of sale of mutual funds, if longterm in nature, is exempt in section 54ED of ITterm in nature, is exempt in section 54ED of ITActAct if the gain is invested in equity shares within 6 if the gain is invested in equity shares within 6

months. These units must then be held for at least months. These units must then be held for at least 1 year.1 year.

8888

Wealth TaxWealth Tax

Ownership of units is not considered as wealth in Ownership of units is not considered as wealth in thethe

wealth tax act, therefore no wealth tax.wealth tax act, therefore no wealth tax.

8989

Special ProvisionsSpecial Provisions

Offshore Fund InvestorsOffshore Fund Investors– Income by way of dividend/long-term capital Income by way of dividend/long-term capital

gain on Indian MF units, purchased in foreign gain on Indian MF units, purchased in foreign currency is taxed at 10%currency is taxed at 10%

NRIsNRIs– Income on units of MF is exempt from taxIncome on units of MF is exempt from tax

FIIsFIIs– Income by way of dividends on units not Income by way of dividends on units not

purchased in foreign exchange is subject to purchased in foreign exchange is subject to tax@20% and the person making payment tax@20% and the person making payment must deduct TDS at this rate.must deduct TDS at this rate.

9090

Investor services by mutual fundsInvestor services by mutual funds

Applying and Redeeming for Mutual Fund Units Investment Plans and Services

9191

Importance of investor serviceImportance of investor service

Besides good returns of funds…Besides good returns of funds… Most important advantage of MF Most important advantage of MF

is…“CONVENIENCE”is…“CONVENIENCE” Depends uponDepends upon

– type of service providedtype of service provided– variety of service providedvariety of service provided

9292

Procedure for purchase of unitsProcedure for purchase of units

Read the Offer DocumentRead the Offer Document– Description of the procedure for purchase of Description of the procedure for purchase of

units units – acceptable mode and permissible places of acceptable mode and permissible places of

paymentpayment Refer Key Information Memorandum (KIM)Refer Key Information Memorandum (KIM)

– Application form Application form – Salient features of schemesSalient features of schemes‘‘Only KIM contains Application form and Only KIM contains Application form and

not OD’not OD’

9393

Submission of application form toSubmission of application form to– Collection CentresCollection Centres– AMC officesAMC offices

‘‘Registrars’ accept new subscriptions and Registrars’ accept new subscriptions and redeem from investors.redeem from investors.

MF may own ‘Investor Service Centres’MF may own ‘Investor Service Centres’ Payment is through Cheque / Demand Draft / Payment is through Cheque / Demand Draft /

Cash (in certain cases), Internet can be used to Cash (in certain cases), Internet can be used to transfer fundstransfer funds

9494

FOR NRIsFOR NRIs

RBI has given permission to all MFs to sell RBI has given permission to all MFs to sell units to NRIs/OCBs/Foreign entitiesunits to NRIs/OCBs/Foreign entities

Companies need to submit Board resolutions, Companies need to submit Board resolutions, memorandum and articles of association with memorandum and articles of association with application formsapplication forms

Mode of Payment:Mode of Payment:

– For repatriation benefits- DDs or cheques For repatriation benefits- DDs or cheques using FCNR account / NRE accountusing FCNR account / NRE account

– Non repatriation benefits- DDs or cheques Non repatriation benefits- DDs or cheques on NRO/NRSR accountson NRO/NRSR accounts

9595

Procedure for redemptionProcedure for redemption

OD contains place where redemption notice must OD contains place where redemption notice must be sentbe sent

Investors have to deal with registrars or Investor Investors have to deal with registrars or Investor service centersservice centers

Payment is through cheque, ECS to bank accountPayment is through cheque, ECS to bank account For NRIs and OCBs: ECS to to NRE or US Dollar For NRIs and OCBs: ECS to to NRE or US Dollar

draft at current exchange ratedraft at current exchange rate‘‘If investment was on repatriable basis’ If investment was on repatriable basis’ Else - Rupee cheque in favor of investors NRO, Else - Rupee cheque in favor of investors NRO,

NR/SR accountNR/SR account

9696

Investment plans and servicesInvestment plans and services

Automatic Reinvestment plan:Automatic Reinvestment plan:– There are two options: Dividend & GrowthThere are two options: Dividend & Growth– ARP is also called Growth optionARP is also called Growth option– allows investor to reinvest in additional units allows investor to reinvest in additional units

the amounts of dividends or other distributions the amounts of dividends or other distributions – they do not receive dividendsthey do not receive dividends– Reinvestment takes place at ex-div NAVReinvestment takes place at ex-div NAV– ‘‘Investor reaps benefit of Compounding’Investor reaps benefit of Compounding’– Some funds allow reinvestment in other Some funds allow reinvestment in other

schemes of same fund family.schemes of same fund family.

9797

Automatic Investment plan:Automatic Investment plan:– Invest a fixed sum periodicallyInvest a fixed sum periodically– Investors save in a disciplined and phased Investors save in a disciplined and phased

mannermanner– Investment mode would be direct debit to Investment mode would be direct debit to

Investor’s salary or Bank account Investor’s salary or Bank account – ‘‘Investor get the benefit of Rupee cost Investor get the benefit of Rupee cost

averaging’averaging’

9898

Voluntary Accumulation PlanVoluntary Accumulation Plan

– Investor gets flexibility of the amount and Investor gets flexibility of the amount and frequency of Investmentfrequency of Investment

– Through AIP & VAP Investment can only be in Open Through AIP & VAP Investment can only be in Open end schemesend schemes

– AIP is a contractual obligation of the Investor to AIP is a contractual obligation of the Investor to keep investingkeep investing

– Whereas in VAP Investor is not obliged to keep Whereas in VAP Investor is not obliged to keep investing, but has voluntary self disciplineinvesting, but has voluntary self discipline

– Investment accounts are maintained for both VAP Investment accounts are maintained for both VAP and SIPand SIP

– Normally. funds which issue certificates do not Normally. funds which issue certificates do not have Investment accounts have Investment accounts

9999

Systematic Withdrawal PlanSystematic Withdrawal Plan– Allows Investor to make Periodic withdrawals Allows Investor to make Periodic withdrawals

from Fund Investment accountsfrom Fund Investment accounts– Amount withdrawn is treated as redemption of Amount withdrawn is treated as redemption of

units at the applicable NAVsunits at the applicable NAVs– They are different from MIPs, because MIPs pay They are different from MIPs, because MIPs pay

the income generated on regular basis, without the income generated on regular basis, without touching the capital.touching the capital.

– Hence, Dividend Tax is not levied on SWP, Hence, Dividend Tax is not levied on SWP, whereas it is levied for MIPs with more than whereas it is levied for MIPs with more than 50% in debt. 50% in debt.

100100

Systematic Transfer Plans:Systematic Transfer Plans:– Allows investor to transfer on a periodic basis a Allows investor to transfer on a periodic basis a

specified amount from one scheme to another specified amount from one scheme to another within same fund family.within same fund family.

– The redemption or investment will be at The redemption or investment will be at applicable NAVapplicable NAV

– It is necessary to maintain a minimum balance It is necessary to maintain a minimum balance under both the schemes.under both the schemes.

– The service allows the investor to manage his The service allows the investor to manage his Investments actively to achieve his objectivesInvestments actively to achieve his objectives

101101

Other investor servicesOther investor services

Phone transactions:Phone transactions:– Investors may telephonically redeem or Investors may telephonically redeem or

purchase units.purchase units.– The telephone instructions are possible in case The telephone instructions are possible in case

of the funds that keep investment accounts, of the funds that keep investment accounts, rather than issue certificates. rather than issue certificates.

102102

Cheque Writing Facility:Cheque Writing Facility:– Open - End MFs allow cheque writing by Open - End MFs allow cheque writing by

treating fund account equivalent to bank treating fund account equivalent to bank saving accountsaving account

– Checks can be issued subject to maintaining Checks can be issued subject to maintaining minimum balanceminimum balance

– RBI approval is needed to start this serviceRBI approval is needed to start this service– Usually offered by MMFs and other liquid Usually offered by MMFs and other liquid

schemes of short duration.schemes of short duration.– Useful for investors with large short-term Useful for investors with large short-term

surpluses.surpluses.

103103

Periodic statements and Tax information:– Account statement show units purchased,

redeemed or transferred between schemes, distributions and reinvestments and investor’s current holding in units and in amount.

– ‘SEBI regulations require funds to send annual financial statements to unit holders within six months of close of accounting year’

– If a fund has deducted tax at source from income distributed to the investors, it would also issue TDS statement.

104104

Loans against units:Loans against units:– Several banks lend to the investors against Several banks lend to the investors against

mutual fund units held by them.mutual fund units held by them.– The amount is usually a percentage of the The amount is usually a percentage of the

value of the value of the Investor’s holding in value of the value of the Investor’s holding in UnitsUnits

– ‘‘SEBI prohibits MFs to give loans’SEBI prohibits MFs to give loans’

105105

Nomination facility is available for Open end Nomination facility is available for Open end Funds and Close End Funds not listed on SE. Funds and Close End Funds not listed on SE.

The benefits passes to the nomineeThe benefits passes to the nominee In case of Close Ended schemes listed on SE In case of Close Ended schemes listed on SE

same procedure as Share transfer is followedsame procedure as Share transfer is followed

106106

Investment ManagementInvestment Management

We shall cover:We shall cover:Equity portfolio managementEquity portfolio managementDebt portfolio managementDebt portfolio managementSEBI investment guidelinesSEBI investment guidelines

107107

Investment Management FunctionsInvestment Management FunctionsSet Investment policySet Investment policyPerform security AnalysisPerform security AnalysisConstruct a portfolioConstruct a portfolioRevise the portfolioRevise the portfolioEvaluate the performance of the portfolioEvaluate the performance of the portfolio

Security AnalysisSecurity AnalysisTechnical AnalysisTechnical AnalysisFundamental AnalysisFundamental Analysis

108108

Portfolio ConstructionPortfolio Constructionselectivity (micro forecasting) selectivity (micro forecasting) timing (macro forecasting)timing (macro forecasting)DiversificationDiversification

Portfolio RevisionPortfolio Revision (Repetition of the previous three steps)(Repetition of the previous three steps)MotivationsMotivationssize of the transaction costs & the perceived size of the transaction costs & the perceived improvementimprovement

Portfolio Performance Evaluation Portfolio Performance Evaluation risk & returnsrisk & returnsbenchmarksbenchmarks

109109

Approaches to Portfolio ManagementPassive management (indexation)- holding securities for relatively long periods with small and infrequent changes

Active management-involves a systematic effort to exceed the performance of a selected target

110110

Types of Equity Instruments

Common Stock- legal representation of the Common Stock- legal representation of the ownership positionownership position

Preference Shares- hybrid form of security with Preference Shares- hybrid form of security with the features of both common stock and bondsthe features of both common stock and bonds

Cumulative convertible preference sharesCumulative convertible preference shares WarrantsWarrants Convertible debenturesConvertible debentures

111111

Market capitalization based Market capitalization based classificationclassification Small cap companiesSmall cap companies

– Profit potential of small cap companiesProfit potential of small cap companies Large cap companiesLarge cap companies

– Liquidity and tradableLiquidity and tradable Differences in Indices and benchmarksDifferences in Indices and benchmarks

Earning based classificationEarning based classification Price/Earnings ratiosPrice/Earnings ratios

– Higher the P/E greater the growth potentialHigher the P/E greater the growth potential Dividend yieldDividend yield Cyclical stocks; Growth stock; Value stockCyclical stocks; Growth stock; Value stock

112112

Growth vs ValueGrowth vs Value Growth Stocks

– High P/E ratio; low dividend yields Value Stocks

– Good track record Growth versus Value controversy

Investor preferencesUse of Equity Derivatives for Portfolio Risk ManagementPortfolio Management Organization Structure

Fund Manager-assets allocation Security Analysts-supports the fund managers security Dealers-executes actual buying or selling

113113

Part II : Debt Portfolios

Types of Debt Securities

•Secured Vs. Unsecured•by the issuer Category •by the maturity profile•Interest bearing Vs. discounted securities•Fixed and floating rate

Instruments in Indian debt Market•Certificate of Deposit (CD)-unsecured Negotiable Promissory Note•Commercial Papers(CP)- unsecured instruments issued by corporate bodies •Corporate debentures-credit rated•Floating Rate Bonds•Government Securities

114114

Debt instruments contd...

Treasury Bills-91, 364 days; Treasury Bills-91, 364 days; Bank & FI BondsBank & FI Bonds

PSU bondsPSU bonds

Basic features of bondsBasic features of bondsPar valuePar valueCouponCouponMaturityMaturityCall optionsCall options

115115

Measuring bond yield

Current yield =annual coupon interest/current market price;when bond is selling at discount CR<CY. When at premium CR>CY.

Yield to maturity– Yield and price are inversely related

Yield curve (TSIR)- tracks the yields across various maturities; upward sloping

116116

Face valueFace value :: Rs. 1000Rs. 1000

CouponCoupon :: 10%10%

TenureTenure :: 5 years5 years

Interest paymentInterest payment :: YearlyYearly

PricePrice :: 10501050

Cashflows are as under:Cashflows are as under:

100 100 100 100 100 100 100 100 (100 + (100 + 1000)1000)

1050 =1050 = + + + + ++ + +

(1 + r)(1 + r)11 (1 + r)(1 + r)22 (1 + r) (1 + r)33 (1 + r) (1 + r)44 (1 + r)(1 + r)55

Solve for ‘r’Solve for ‘r’

r = 8.72% = Yield to maturityr = 8.72% = Yield to maturity

Yield calculation

117117

Face valueFace value :: 10001000

CouponCoupon :: 10% 10%

TenureTenure :: 5 years 5 years

Interest PaymentInterest Payment :: YearlyYearly

YieldYield :: 8.72%8.72%

Cashflows are as under:Cashflows are as under:

PricePrice : : 100 100 100 100 100 100 100 100 (100 + (100 + 1000)1000)

++ + + ++ + +

(1+8.72%)(1+8.72%) (1+8.72%)(1+8.72%)22 (1+8.72%) (1+8.72%)33 (1+8.72%) (1+8.72%)44 (1+8.72%)(1+8.72%)55

Solving for PriceSolving for Price :: Rs. 1050Rs. 1050

Valuing (Pricing) the securities

118118

Risk in Investing in bonds Interest rate risk refers to the possibility that income Interest rate risk refers to the possibility that income

and/or capital loss will result because of an increase in and/or capital loss will result because of an increase in the level of interest ratesthe level of interest rates

Re-investment riskRe-investment risk Call riskCall risk Default riskDefault risk Liquidity riskLiquidity risk

Yield spread and credit risk

•Spread is the premium over G-sec rate paid by borrowers according to their credit risk quality•Credit risk is priced using the ratings of credit rating agencies.•Higher the rating, lower the spread.•Debt portfolios have credit quality objectives. Check for this information.

119119

Duration

Duration measures the sensitivity of the bond portfolio Duration measures the sensitivity of the bond portfolio to changes in interest rates.to changes in interest rates.

Duration is the weighted average term to maturity of a Duration is the weighted average term to maturity of a bond.bond.

Duration of a coupon paying bond is always lower than Duration of a coupon paying bond is always lower than its term to maturity.its term to maturity.

Duration of a zero coupon bond is equal to its MaturityDuration of a zero coupon bond is equal to its MaturityDebt Investment StrategiesDebt Investment Strategies Passive & ActivePassive & Active Buy and holdBuy and hold

– interest rate riskinterest rate risk– credit riskcredit risk

Duration managementDuration management– active management based on interest rate active management based on interest rate

expectationsexpectations

120120

Organization of debt fund management Interest rate forecasting unit Fund managers Security dealers Risk managers

121121

Measuring & Evaluating Mutual Fund Performance Need for measuring fund performance

– To make right investment decisions

Depends upon– Type of fund– Investment objective– Current financial market conditions

122122

Different Performance Measures Change in NAVChange in NAV Change in NAV between the two dates in Change in NAV between the two dates in

absolute and percentage terms.absolute and percentage terms.– Absolute terms-Absolute terms-

NAV at the end-NAV at the beginningNAV at the end-NAV at the beginning– Percentage termsPercentage terms

(Absolute change/NAV at the (Absolute change/NAV at the beginning)*100beginning)*100

123123

Easily understood & applies to any type of fundEasily understood & applies to any type of fund Doesnot take into account interim dividendDoesnot take into account interim dividend Suitable for evaluating Growth funds & Suitable for evaluating Growth funds &

accumulation plans of debt & equity funds.accumulation plans of debt & equity funds.

124124

Different Performance Measures 2) Total Return2) Total Return

– Takes into account the dividends distributed by Takes into account the dividends distributed by the fundthe fund

– [(Distribution+Change in NAV)/NAV at the [(Distribution+Change in NAV)/NAV at the beginning]*100beginning]*100

– Suitable for all categories of funds,more Suitable for all categories of funds,more accurate than first methodaccurate than first method

– Ignores the possibility of reinvestment of Ignores the possibility of reinvestment of dividenddividend

125125

Different Performance Measures 3) Return on Investment (R.O.I)3) Return on Investment (R.O.I)

– Computes the total return with reinvestment Computes the total return with reinvestment of dividends in the fund at ex-dividend date.of dividends in the fund at ex-dividend date.

– [(Units held + div./ex-d NAV)*end NAV]-begin [(Units held + div./ex-d NAV)*end NAV]-begin NAV /begin NAV*100NAV /begin NAV*100

– Accepted by MF tracking agencies(Credence Accepted by MF tracking agencies(Credence and Value research)and Value research)

– Suitable for accumulation plans, Suitable for accumulation plans, monthly/quarterly income schemes,debt funds monthly/quarterly income schemes,debt funds distributing interim dividend.distributing interim dividend.

126126

Useful Concepts Compare the same time periods since returns

over different time periods vary due to different market conditions.

Annualised returns applicable only to periods greater than 1 year.

Returns to be computed since the inception of the scheme(Rs. 10 as the base amount)

127127

Useful Useful ConceptsConcepts Expense Ratio

– Total expenses/Average Net assets of the fund– Excludes brokerage commissions– Average of 3 to 5 years to be used to judge

the performance of the fund.– Evaluated in the light of fund size and

portfolio composition.

128128

Useful Useful ConceptsConcepts Income RatioIncome Ratio

– Net investment income/Net AssetsNet investment income/Net Assets– Useful for evaluating debt fundsUseful for evaluating debt funds

Portfolio Turnover RatePortfolio Turnover Rate– Amount of buying/selling in the marketAmount of buying/selling in the market– Indicates higher transaction costsIndicates higher transaction costs– Useful in analysis of equity & balanced Useful in analysis of equity & balanced

fundsfunds

129129

Useful Concepts Transaction costsTransaction costs

– Includes brokerage commission,stamp Includes brokerage commission,stamp duty,registrars’ fees,custodian fees,dealers’ duty,registrars’ fees,custodian fees,dealers’ spreads.spreads.

Cash HoldingsCash Holdings Borrowing by MFBorrowing by MF

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Performance Measurement (cont’d)Sharpe Ratio measure fund performance in terms of total risk

Sharpe index = rt - r* / sdt

rt = average return on portfolio tr* = risk less rate of returnsdt= standard deviation of the returns of the portfolio t

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Treynor Ratio measure the fund performance in Treynor Ratio measure the fund performance in term of market risk :term of market risk :

Treynor index = rTreynor index = rnn - r - r* * / beta / beta n n

rrn = n = average return on portfolio naverage return on portfolio nrr* * = risk less rate of return= risk less rate of returnbeta beta nn = beta coefficient of portfolio = beta coefficient of portfolio

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Alpha as measure the performance of the fund manager:

It is the difference between a security’s expected return and its equilibrium expected returnpositive alpha indicates undervalued securitiesnegative alpha indicate over valued securities

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Price/Earning multiple is also another risk measure:Price/Earning multiple is also another risk measure:

Fund P/E ratio = Weighted average of P/E ratio of Fund P/E ratio = Weighted average of P/E ratio of all the stock held in the portfoliosall the stock held in the portfolios

P/E = Market price per share / Earning per shareP/E = Market price per share / Earning per share

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Evaluating Fund Performance

Benchmarks availableBenchmarks available 1) Relative to the Market1) Relative to the Market

– Index fundsIndex funds Tracking ErrorTracking Error

– Active Equity fundsActive Equity funds– Debt fundsDebt funds– Money Market fundsMoney Market funds

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Evaluating Fund Performance 2) Relative to other similar MFs

– Investment objective & Risk Profile– Portfolio Composition– Credit quality & Average Maturity– Fund size– Expense ratios– Compare average annualised returns over the

same periods only,after tax returns.

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Evaluating Fund Performance

3) Relative to other investment options3) Relative to other investment options– Convert cumulative returns to average Convert cumulative returns to average

annualised returnsannualised returns Evaluate the Fund manager/AMCEvaluate the Fund manager/AMC

– Long term perspectiveLong term perspective– Avoid excessive tradingAvoid excessive trading– Consistent performanceConsistent performance

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Tracking Mutual Fund Performance

MF Annual & Periodic reportsMF Annual & Periodic reports Financial pressFinancial press Fund tracking agenciesFund tracking agencies NewslettersNewsletters ProspectusProspectus

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Principles of financial planning and Principles of financial planning and investment advisoryinvestment advisory

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Classification of investment products

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Investment Products are classified on the basis of:1. ASSETS: Physical Assets and Financial Assets1. ASSETS: Physical Assets and Financial Assets

2. FINANCIAL GUARANTEE: Guaranteed and Non - 2. FINANCIAL GUARANTEE: Guaranteed and Non - Guaranteed InvestmentsGuaranteed Investments

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Examples of Physical Assets: Gold and Real Examples of Physical Assets: Gold and Real EstateEstateExamples of Financial Products by Issuer:Banks, Corporates, Government, Financial Institutions, Mutual Funds and Insurance Companies

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Benefits of Physical AssetsBenefits of Physical Assets

GOLD:GOLD: Not subjected to Not subjected to

Rupee depreciationRupee depreciation As a hedge against As a hedge against

inflationinflation As a security in bad As a security in bad

timestimes

REAL ESTATE:REAL ESTATE: Long-term capital Long-term capital

appreciationappreciation As a security in bad As a security in bad

timestimes As an avenue for tax As an avenue for tax

-saving-saving As a hedge against As a hedge against

inflationinflation

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Benefits of Financial AssetsBenefits of Financial Assets

Safety Security Liquidity Returns Tax-Benefits Alternative for parking Idle Cash

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Financial Products Available

Issuer Product Banks - FDs

Corporates -Shares, Debentures and FDs

Government - G-Secs, PPF, other Personal Investments

FIs - Bonds

Insurance Cos. - Insurance Policies

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Comparison of Investment Products By Nature of Investment By Performance

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Benefits of Mutual Fund Investing vs.

Direct Equity Investment Good Stock IdentificationGood Stock Identification DiversificationDiversification Professional ManagementProfessional Management Based on Investment objectiveBased on Investment objective LiquidityLiquidity Lower TransactionLower Transaction ConvenienceConvenience

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Investor Perspective of Mutual Funds Vs. Other Products

Product Investment Objective

Risk Tolerance

Investment Horizon

Equity Cap. App. High Long

FI Bonds Income Low Med.-Long

CDs Income H-M-Low Med.-Long

Co. FDs Income H-M-Low Medium

Bank Dep. Income Lower Flexible

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Contd…...

Product Investment Objective

Risk Tolerance

Investment Horizon

PPF Income Low Long

Life Ins. Risk Cover Low Long

Gold Infla. Hedge Low Long

Real Est. Infla. Hedge Low Long

MFs Cap.Gr.&Inc. H-M-Low Flexible

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BEYOND “SELLING”Objectives of this chapter Built a long term relationship with the investor by

rendering good investment advice. Investor must come to trust his agent as a source

of good financial advice.

Training in the principles and practice of financial planning and

investment advisory functions

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Topics of Discussion

Why Financial Planning ?

Building Risk into financial planning

151151

Why Financial Planning ? Investment is a lifetime activity and no an

ad-hoc process.Avoid Ad-hoc investment recommendation

Encourage long-term plan, suited to his age and financial advisor

Develop a model portfolio

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Principles of financial planning Power of Compounding…..In a longer horizon investment

Deep Discount bonds shows the power of compounding

In MF “growth” option , meaning reinvestment of dividends

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How long and how much to invest?STRATEGY ( MAXIMIZE RETURNS)STRATEGY ( MAXIMIZE RETURNS) Buy and Hold (Do not fall in love with your Buy and Hold (Do not fall in love with your

investment)investment) Rupee Cost Averaging (a regular investor never Rupee Cost Averaging (a regular investor never

loses) however it has one limitation, it does not loses) however it has one limitation, it does not tell when to buy or sell, or to switch from losing to tell when to buy or sell, or to switch from losing to winning fundswinning funds

Value Averaging (investors keeps the target value Value Averaging (investors keeps the target value of his investment constant by investing the of his investment constant by investing the amount by which the investment value has come amount by which the investment value has come down) down)

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Jacobs’ recommendation Combined approach of rupee-cost and value

averaging strategies

Aggressive growth fund + money market fund of ‘same’ family.

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Where to invest ?

ASSET ALLOCATION PRINCIPLES

Benjamin Graham’s 50/50 Balance 50/50 Portfolio of Mutual funds Strategic Asset Allocation Fixed vs. Flexible Asset Allocation Tactical Asset Allocation Increased returns without increased risk

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Benjamin Graham’s 50/50 Balance

50 / 50 split between equities and Bonds when value of equities goes up , balance can be

restored by liquidating part of the equity portfolio and vice versa

Defensive / conservative investment Gain / losses will be limited

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50/50 Portfolio of Mutual funds A basic managed A basic managed

portfolioportfolio

A basic indexed portfolioA basic indexed portfolio

A simple managed A simple managed portfolioportfolio

A complex managed A complex managed portfolioportfolio

A ready made portfolioA ready made portfolio

50% in diversified Equity ‘value’ Fund25% in Govt. security fund25% in High Grade corporate Bond fund50 % in Index portfolio 50% in Total Bond market portfolio85% in a Balanced 60/40 Fund15% in medium term Bond Fund20 % in diversified equity fund20% in aggressive growth funds10% in specialty funds30% in long-term bond funds20% in short term bond fundSinge index fund with 60/40 equity / bond holdings

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Strategic Asset Allocation

DISTRIBUTION PHASE Older investor Older investor 50 / 50 ( equity / debt) 50 / 50 ( equity / debt) younger investors younger investors 60 / 4060 / 40

ACCUMULATION PHASE Older investor Older investor 70 / 30 70 / 30 younger investors younger investors 80 / 20 80 / 20 Younger => more aggressive, let the magic of Younger => more aggressive, let the magic of

compounding work compounding work older => more conservative approacholder => more conservative approach Accumulation phase can take greater riskAccumulation phase can take greater risk

THUMB RULE Debt portion of an investors portfolio should be equal hisage, so let the 30 -years old make 70/30 asset allocation.

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Fixed vs. Flexible Asset Allocation Fixed ratio means that balance is maintained by

liquidating a part of the position in the asset class with higher returns and reinvesting in the other asset with lower return.

A flexible ration of asset allocation means that letting the profit runif Stock returns > bonds , fixed is better if bond returns > stocks , flexible ratio(answer depends on forecasting)

Normally stocks give higher returns than bond hence fixed asset allocation is better at least in bull market.

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Tactical asset

allocation Asset allocation in the light of future movements

in asset prices Seek extra returns

161161

Increased returns without increased riskISSUE OF COST OF INVESTING expense ratio load ratio

Choose the risk level for the investor and then the fund

with less ‘cost penalty’

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Risks in investing in

mf Prerequisites of investment planning Investors needs and circumstances along with

risk tolerance various strategies to suit investors profileThus it involves managing the risk of investing

Risk of Defining risk appetite

of Investor

Risk of Evaluation of MF Portfolio

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What is risk?

Variability of earnings (total returns ) from time to time

Thus risk is measure of volatility in earnings

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Risk : equity funds

EQUITY PRICES RISKS ( Company specific, Sector specific and market level

MARKET CYCLES

RISK MEASURES

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Equity prices risksEquity prices risks

This risk needs to be found out through thorough research and assessment by the fund analyst and portfolio manager

Market risk arises out of broad economic factor and other factors, managers try to anticipate bear or bull phases and try to adjust their portfolio asset allocation

With equity index futures and options, managers try to

HEDGE their portfolio

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Market Market cyclescycles

Extensively researched by agencies such as Lipper ( US) , brokers, and newspapers

Its important to see how a portfolio performs over a well defined cycle than over some arbitrary period

Sticking to a good fund helps

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Risk measuresRisk measures

Measured by Standard Deviation (SD) Beta Coefficient or R-squared

SD is the best measure of risk

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Risk and returns are Risk and returns are

relatedrelated RISK ADJUSTED PERFORMANCES

SHARPE RATIODivides risk premium by Standard deviation

TREYNOR RATIODivides risk premium by Beta

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A simple way to gauge funds risk level is to see PRICE/ EARNINGS MULTIPLE

It’s the weighted average of the P/E ratios fo all the stocks held in its portfolio Higher P/E as compared to the market or other funds, higher the probability of its fall in the future.

SOURCES Fund tracking agencies Research reports from brokers Fund own reports

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Risk : debt

funds Credit Risk

Interest Rate risk (average maturity)

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Sample Sample questionsquestionsThe strategy advisable for an investors to

maximize returns in the long runs is Buy and hold on the investment for a long time Liquidate poorly performing investments from

time to time Liquidating food performing investments from

time to time Switch from poor performers to good performers

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Sample questions……..A criticism of rupee-cost averaging is : Investment is for the same amount at regular

intervals Over a period of time , average per share price

will be more than guessing the highs and lows it does not tell you when to buy , sell or switch

from one scheme to another Rupee cost averaging has no serious

shortcomings

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Investors rights and servicesInvestors rights and services

The rights of investors under the schemeAccess to informationInvestor friendly servicesSEBI stipulation regarding despatch of dividend/repurchase/maturity /cheques

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Guaranteed Guaranteed ReturnReturn Return can be guaranteed only if the sponsor or

the AMC guarantees fully or the manner in which the guarantee to be met has been disclosed in OD.

In case of UTI - MIPs the returns are guaranteed by DRF.

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SEBI & Offer Document - Miscellaneous contents Accounting policies Inter scheme transfers Investors grievances redressal mechanism Penalties, pending litigations

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Recent changes in SEBI(MF) RegulationsRecent changes in SEBI(MF) RegulationsOD should be revised/updated and printed once in every two yearsProcedure followed to make Investment Decision Scheme to be launched within 6 months from the date of approval of OD

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UTI - Other MF’s ODs

Gazetting of UTI OD Gazetting of UTI OD Repurchase restrictionsRepurchase restrictions No Advisory/Management Fee charged No Advisory/Management Fee charged Details Regarding Associate Transactions Details Regarding Associate Transactions Information Regarding Key PersonnelInformation Regarding Key Personnel Powers of TrusteesPowers of Trustees Sponsor and its past performance Sponsor and its past performance AMC AMC

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Recommending strategies for Recommending strategies for investorsinvestors Developing a Model Portfolio Helping investor choose a fund based on

selection criteria

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Developing a Model PortfolioDeveloping a Model Portfolio

Avoid ad hoc investment advice or decision:– Investor not only needs advice but an

investment strategy based on situation and needs

– Agents should teach investors right approach to investing

– Recommending unsuitable investment to an investor means a loss of customer

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Jacobs 4-step program: Jacobs 4-step program:

Developing model portfolioDeveloping model portfolio Work with investors to develop long - term goalsWork with investors to develop long - term goals Determine asset allocation of the investment Determine asset allocation of the investment

portfolioportfolio– apportion in debt, equity and liquidapportion in debt, equity and liquid

Determine the Sector distributionDetermine the Sector distribution– I.e. in equity - Index funds, GSFs etc.I.e. in equity - Index funds, GSFs etc.

Select specific fund managers and their schemesSelect specific fund managers and their schemes

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Model PortfoliosModel Portfolios

Young, Unmarried Professional– 50% aggressive equity funds– 25% high yield Bond funds, Growth and Income

funds– 25% in conservative MMFs

Young Couple with double income and two children– 10% MMF– 30% aggressive equity funds (GSFs)– 25% high yield bond and long term growth

funds– 35% Municipal Bond Funds (G Secs)

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Older Couple, Single IncomeOlder Couple, Single Income– 30% short term Municipal Funds (G - Secs)30% short term Municipal Funds (G - Secs)– 35% long term Municipal Funds35% long term Municipal Funds– 25% moderately aggressive equity (Index 25% moderately aggressive equity (Index

funds)funds)– 10% Emerging Growth Equity (Software)10% Emerging Growth Equity (Software)

Recently RetiredRecently Retired– 35% conservative equity funds for capital 35% conservative equity funds for capital

preservation/income (Index, Grandmaster)preservation/income (Index, Grandmaster)– 25% moderately aggressive Equity for 25% moderately aggressive Equity for

modest capital growth (Petro)modest capital growth (Petro)– 40% in Money Market Funds40% in Money Market Funds

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Fund Selection

Selecting an Equity fund Selecting Debt/ Bond/ Income fund Selecting Money Market Fund Selecting a Balanced MF

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Selecting an Equity FundSelecting an Equity Fund

Classify available Equity schemesClassify available Equity schemes– Growth (e.g.. PEF, B Group shares)Growth (e.g.. PEF, B Group shares)– Value Funds (e.g.. Basic Industry Fund)Value Funds (e.g.. Basic Industry Fund)– Equity Income Funds (e.g.. Estd. Cos. with Equity Income Funds (e.g.. Estd. Cos. with

Regular Dividends) Regular Dividends) – Broad Based Specialty (UGS 10000, Brand Broad Based Specialty (UGS 10000, Brand

Value)Value)– Concentrated Specialty Fund (Software Concentrated Specialty Fund (Software

Fund)Fund)

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Choose one of the two strategies– Select main stream Growth or Value funds

providing broad diversification (Index Funds)

Returns almost similar to overall Market– Select either a differentiated Growth or

Value fund or a Specialty funds (GSF) Returns will vary from overall market

– Choose a strategy depending on Investor Profile

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Evaluate past returns of available fund Review the salient features of the scheme

– Fund Size : Smaller Funds have high expense

– Fund Age: see performance over 3 years– Portfolio managers experience– Cost of Investing: Entry & Exit load– Portfolio Characteristics

Cash Position Portfolio concentration Market capitalization of the fund Portfolio Turnover Portfolio statistics (Ex-Mark, Beta, Gross)

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ExMark: Funds performance in relation to the ExMark: Funds performance in relation to the benchmark indexbenchmark index– It is from 0-100. With 100% meaning highest relationIt is from 0-100. With 100% meaning highest relation– An index fund has Ex Mark of 100%An index fund has Ex Mark of 100%– If Ex Mark is lower than 80% fund is less predictable If Ex Mark is lower than 80% fund is less predictable

in relation to index and may be riskierin relation to index and may be riskier Beta:Measures sensitivity of the fund’s returns to Beta:Measures sensitivity of the fund’s returns to

changes in the market indexchanges in the market index– Beta of 1: Fund moves with market (Index fund)Beta of 1: Fund moves with market (Index fund)– Beta of less than1: less volatile than market Beta of less than1: less volatile than market

(conservative portfolio)(conservative portfolio)– more than 1: higher volatility than market (software more than 1: higher volatility than market (software

fund) fund) Gross Dividend Yield: Funds reported yield gross before Gross Dividend Yield: Funds reported yield gross before

expenses and net after expensesexpenses and net after expenses– Higher for “value funds”than “growth funds” Higher for “value funds”than “growth funds”

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Selecting a Debt/Bond/income fundSelecting a Debt/Bond/income fund

Narrow down the choices: short term, long term, Narrow down the choices: short term, long term, G-Secs etc.G-Secs etc.

Know your investment objectiveKnow your investment objective Determine right selection criteria and selectDetermine right selection criteria and select

– Fund age and sizeFund age and size– Relative yieldsRelative yields– Costs (most important factor in debt funds)Costs (most important factor in debt funds)– Portfolio characteristics (credit ratings0Portfolio characteristics (credit ratings0– Average Maturity (higher the maturity, higher Average Maturity (higher the maturity, higher

is the risk)is the risk)– Past returns (make an expense performance)Past returns (make an expense performance)

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Selecting a MMFSelecting a MMF Costs (crucial because they offer lower returns) Quality (not applicable to short term MMF) Yields

– lowest principal risk and highest income variability as interest rates fluctuate

190190

Selecting a Balance FundSelecting a Balance Fund Equity oriented balance funds (65% equity) Debt oriented balance funds (65% debt) Selection criteria

– Portfolio balance– Debt portfolio character– Costs– Portfolio statistics– Returns

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Wishing You all the successWishing You all the success