Amfi

AMFI MUTUAL FUND
(ADVISOR) – April 2008

Training Module
Day 1 Day 2
Index
Day -1
Part -1 1. Concept and Role of Mutual Funds
2. Fund Structure and

Constituents
3. Legal and Regulatory
Framework
Part-2 4. Offer
Document
5. Fund Distribution and Sales
Practice
6. Investor Plan and Services
7. Measuring and Evaluating Mutual Fund
Performance
8. Helping Investors Understand Risk in Fund
Investing
Day 1 Day 2
Chapter 1
Concept and Role

Of mutual Funds
Day 1 Day 2
What is a Mutual Fund ?
•
It is a pool of money, collected from investors, and is invested
according to certain investment objectives
•
The ownership of the fund is thus joint or mutual, the fund belongs to
all investors.
•
A mutual funds business is to invest the funds thus collected,
according to the the wishes of the investors who created the pool
Day 1 Day 2
Important characteristics of a Mutual Fund?
•
The ownership is in the hands of the investors who have pooled in
their funds so it is joint or mutual.
•
It is managed by a team of investment professionals and other service
providers.
•
The pool of funds is invested in a portfolio of marketable investments.
•
The investors share is denominated by ‘units’ whose value is called as
Net Asset Value (NAV) which changes everyday.
•
The investment portfolio is created according to the stated investment
objectives of the fund.
•
Mutual Funds are also known as Financial Intermediaries
•
In India, Mutual Funds are constituted as TRUSTS.
Day 1 Day 2
Advantages of Mutual Funds to Investors?
•
Portfolio diversification
•
Professional Management
•
Reduction in Risk
•
Reduction in Transaction costs
•
Liquidity
•
Convenience and Flexibility
•
Safety – Well regulated by SEBI
Day 1 Day 2
What are the disadvantages of investing
through Mutual Funds?
•
No control over the costs. Regulators limit the expenses of
Mutual Funds. Fees are paid as percentage of the value of
investment.
•
No tailor made portfolios.
•
Managing a portfolio of funds. ( Investor has to hold a
portfolio for funds for different objectives ).
One fund can have schemes of similar objectives so, selection

•
becomes difficult.
Day 1 Day 2
Evolution of Mutual Funds in India
Phase 1 – ( 1964 – 1987)- Growth of UTI

• UTI sole player in the industry, created by an Act of Parliament ,1963
• The first product launched by UTI was Unit Scheme 1964
• UTI creates products such as ULIP (1971), MIP's, Children Plans(1986) ,Offshore
Funds etc.
• MASTERSHARE (1987) – 1st Diversified Equity Investment Scheme in India.
• INDIA Fund – 1st Indian offshore fund launched in August 1986.
Phase 2 – ( 1987 – 1993)- Entry of Public Sector Funds

• In 1987 Public Sector Banks and FI's got permission to set up MF.
• SBI mutual fund was the first non -UTI mutual fund, set up in November 1987
• This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC and PNB
MF
• In 1993, Mutual Fund Industry was open to private players.
• SEBI got its regulatory powers in 1992
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• Phase 3 – ( 1993-1996) – Emergence of Private Funds

• In 1993, Mutual Fund Industry was open to private players.
• SEBI's first set of regulations for the industry formulated in 1993
• Significant innovations, mostly initiated by private players
Phase 4 – ( 1996-1999) – Growth and SEBI Regulation
• Implementation of new SEBI regulations led to rapid growth
• Bank mutual funds were recast as per SEBI guidelines
• UTI came under voluntary SEBI supervision.
• Dividends made tax free in 1999.
• Mutual funds assets in mid-2002 were app. 1,00,000 crore
• During this phase, both SEBI and AMFI launched investor awareness programmes.
AMFI also published a booklet titled “ Making Mutual Funds work for you – The
investors’ Guide”
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Phase 5 – (1999-2004) – Emergence of a large and uniform industry

– UTI Act Repealed in February 2003.
• AUM by end of 2005 app. INR 1,50,000 crore
• Rapid growth, significant increase in corpus of private players
• Tax break offered created arbitrage opportunities
• Bond funds and liquid funds registered highest growth
Phase 6 – From 2004 onwards : Consolidation and Growth

• Mergers and Acquisitions witnessed
• Alliance MF acquired by Birla Sunlife
• Sun F&C by Principal PNB Mutual fund.
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Emergence of Large and Uniform Industry
• UTI Act repealed in 2003.
• UTI now does not have a special status. (now under SEBI)
• Size of industry was 1,50,000 crore in 2005.
• Merger and Acquisitions happening.
• Fidelity, Largest MF has entered India.
• At the end of March 2006, there were 29 Funds.
Day 1 Day 2
Mutual Fund Classifications
What are open-ended funds?

•
In an open ended fund, investors can buy and sell units of the
fund, at NAV related prices, at any time, directly from the fund.
•
Open ended scheme are offered for sale at a pre- specified
price, say Rs. 10, in the initial offer period. After a pre-specified
period say 30 days, the fund is declared open for further sales and
repurchases
•
Investors receive account statements of their holdings,
•
The number of outstanding units goes up and down
•
The unit capital is not fixed but variable.
the corpus of an Open-ended scheme changes everyday
•
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What are closed-end funds?
•
A closed -end fund is open for sale to investors for a specified
period, after which further sales are closed.
•
Any further transactions happen in the secondary market (stock
exchange) where closed-end funds are listed.
•
The price at which the units are sold or redeemed depends on the
market prices, which are fundamentally linked to the NAV.
•
The number of units of closed ended funds remains unchanged.
•
The unit capital is fixed because of one time sale.
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Load and No Load Funds
• Load is the one time fee payable by the investor to allow the
fund to meet initial issue expenses including
brokers/agents’/distributors’ commissions, advertising and
marketing expenses.
• Funds that charge front end( entry) load, back end (exit), or
deferred loads are called LOAD funds.
• IF the investors’ objective is to get the benefit of compounding
his initial investment by reinvesting and holding his investment
for a very long term, then , a no front load fund is preferable.
Day 1 Day 2
Tax Exempt Vs. Non Tax Exempt Funds
• When a fund invests in tax exempt securities, it is called a tax
exempt fund.
• In India any income received by mutual fund is tax free.
• After 1999 budget, all dividend income received from MF is tax free
in hands of the investor. But all funds other than open ended equity
funds have to pay a dividend distribution tax.
• So in India, open end equity oriented mutual fund schemes are tax
exempt investment avenue, while other funds are taxable for
distributable income.
• After 2005 budget, repurchase transaction for equity oriented
schemes are subject to Securities Transaction Tax.
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Types of Funds - By Investment Objective
Equity Debt Money Market
Equity Funds Fixed Income Money Market

Index Funds Funds Mutual Funds
Sector Funds GILT Funds
Balanced Funds Liquid Funds
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What are equity funds?
Predominantly invest in equity shares of the company.
Choices in equity funds.
•
Aggressive Growth Funds (Targets maximum capital appreciation.)
•
Growth Funds (Capital appreciation over 3 to 5 years at above average rate.)
•
Speciality Funds

Sector Funds (Bank, Power, Pharma, IT, Telecom)

Foreign Securities Fund ( investment in shares of different countries to make it
more diversified)
Mid cap or Small cap Equity funds


Option Income Funds (Do not yet exist in India)
•
Diversified Equity Funds (Do not focus on any one or few sectors or shares)
•
Equity Index Funds (These funds take only the overall market risk)
•
Value Funds (Invests in the companies whose shares are under-priced)
•
Equity Income or Dividend yield funds (Invests in the shares of the companies
with high dividend yield.)
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What are Liquid / Money Market funds?
•
These debt funds invest only in instruments with maturities
less than a year.
•
Lowest in the order of risk level.
•
The investment portfolio is very liquid and enables investors to
hold their investments for very short horizons of a day or more.
What are Gilt Funds?

•
It invests only in securities that are issued by the Government and therefore do
not carry any credit risk
•
Government papers are called as dated securities also.
•
It invests in medium to long-term government papers.
•
Ideal for institutional investors who have to invest in Govt. Securities
•
Enables retail Participation
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ELSS ( Equity Linked Saving Scheme )
• 3 year lock in period
• Minimum investment of 90% in equity markets at all times
• So ELSS investment automatically leads to investment in
equity shares.
• Open or closed ended.
• Eligible under Section 80 C up to Rs.1 lakh allowed
• Dividends are tax free.
• Benefit of Long term Capital gain taxation.
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Fixed Term Plan Series
• FTPs are closed ended in nature.

• AMC issues a fixed number of units for each series only
once, and closes the issue after an initial offering period.
• Fixed Term plan are usually for shorter term – less than a
year.
• They are not listed on a stock exchange.
• FTP series are likely to be an Income scheme.
• Good alternate of Bank deposits/ corporate deposits.
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Commodity Funds
• It will invest directly in commodities or through
shares of the commodity companies or through
commodity futures contract.
• Most common example of such fund is precious-
metal fund.
• Gold funds invest in Gold, Gold futures or shares
of gold mines.
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Exchange Traded Funds
• It combines the best features of open end and closed
structure.
• It tracks a market index and trades like a stock on the
stock market.
• ETFs are not the index funds
Real Estate Funds
It can :
• Invest in real estate
• Fund real estate developers
• Buy shares of housing finance companies
• Buy securitized assets.
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How are funds different in terms of their risk profile?
Equit y Funds High leve l o f Re t urn , but has a high le vel o f ris k t o o
Debt Funds Re t urns c o mpa rat ively le s s ris ky t ha n e quit y f unds
Liquid a nd Mo ne y
Pro vide s t a ble but lo w le vel o f ret urn
Ma rket Funds
Important points
−
In USA, a MF is constituted as an investment company and an investor buys
the share of the fund.
−
In USA, all mutual funds are open ended.
−
In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds
−
In India, classified as Open – Closed ended, Load and No Load Funds.
−
Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds
and other securities or it can be called as pool of funds used to purchase
securities on behalf of investors or a collective investment
Day 1 Day 2
Very Important Points to Remember
• An Open Ended Fund offers repurchase facility unconditionally at all times
(But It is not obliged to keep selling new units at all times).
• A Gilt Fund is a special type of Fund that invests in Dated Securities only.
• Units from an Open ended fund are bought through Agencies appointed by
AMC ( Distributors, Banks, Post offices, brokers etc.)
• The Unit Capital of a closed Ended Fund is fixed. Also the number of units
are also fixed.
• Each unit holder of a mutual Fund is part owner of the asset of that Mutual
fund ( he is not a creditor, not a debtor and not a trustee of that mutual
fund).
• Units from an Open Ended fund are bought from the Fund Itself ( not from
the AMFI, stock exchange, distributors or the banks).
• The assured return schemes of the UTI have gradually been wound up.
Day 1 Day 2
Questions for Revision
Q-1
A mutual fund investor
(a) Has a say in deciding the individual securities to be included in the portfolio
(b) Can ask the fund manager to construct a tailor-made portfolio for him
(c) Can never change the investment manager of the scheme
(d) Delegates the decision of portfolio construction to the fund manager.
Q-2
Which of the following was the first scheme launched by UTI Mutual Fund?
(a) US 64 (b) Children Growth Plan (c)Master share (d) None of the above.
Q-3
Which of the following fund targets capital appreciation over 3 to 5 year period at above
average rate?
(a) Aggressive growth fund (b) Growth fund (c) Sector fund
(d) None of the above.
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Q-4
GIC launched the mutual fund product in phase
(a) I (b) II (c) III (d) IV.
Q-5
Gold funds can invest in
(a) Gold (b) Gold futures (c) Shares of gold mines (d) All of the above.
Q-6
Which of the following is not charged by the no-load funds?
(a) Marketing expenses (b) Management and advisory charges
(c) Ongoing expenses (d) Both (b) and (c) above.
Q-7
Which one of the following funds does not qualify as a speciality fund?
(a)Pharma Fund (b)Balanced Fund (c) Small-Cap Fund (d) Emerging Markets Fund
Answers:
Q-1 : (d), Q-2 : (d), Q-3 : (b), Q-4 : (b), Q-5 : (d), Q-6 : (a), Q-7 : (b)
Day 1 Day 2
Chapter 2
Fund Structure and

Constituents
Trainer must elaborate the concept before starting the ppt.

Day 1 Day 2
Structural Framework of Mutual Funds
Sponsor
Trustee AMC
Responsible for investors

money (Primary Guardian)
Fund Management Marketing & Distribution
Banks Registrar & Custodian*
*Custodians are appointed by Trustees

What is the regulatory structure of MF in India?
•
The structure of mutual funds in India is governed by
SEBI(Mutual Fund)Regulations, 1996.
•
It is mandatory to have a three tier structure of Sponsor-
Trustee-Asset Management Company.
•
The Sponsor is the promoter and he appoints the Trustees
who are responsible to the investors of the fund.
•
AMC is the business face of the mutual fund as it manages all
the affairs of the fund
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Who can be the Sponsor? What does the Sponsor do?
•
The sponsor establishes the mutual fund and registers the same
with SEBI
•
Sponsor appoints the Trustees, the AMC and custodians with
prior approval of SEBI and in accordance with SEBI Regulations
•
Sponsor must have a 5-year track record of business interest in
the financial markets
•
Sponsor must have been profit making in at least 3 of the above
5 years.
•
Sponsor must contribute at least 40% of the net worth of the
AMC
•
Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution
(Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)
Day 1 Day 2
How are Mutual Funds Structured?
•
In India Mutual fund is the form of a Public Trust created under
the Indian trust Act 1882.
•
The fund sponsor acts as the Settler of trust, contributes the
initial capital and appoints the trustees to hold the trust for the
benefit of the unit holders.
•
Mutual fund is just a “pass-through vehicle”
•
In India, Mutual funds are organized as trusts. The trust is either
managed by a Board of Trustees, or by a trustee company.
•
The trustees hold the unit holders money in a fiduciary
capacity. (Money belongs to unit holders)
•
In legal sense, the investors are the beneficial owners of
investments.
Day 1 Day 2
•
There must be at least 4 members in the Board of Trustees and
at least 2/3 of the members of the board of trustees must be
independent.
•
Trustee of one mutual fund can not be a trustee of another
mutual fund.
•
Trustees are the primary guardians of the unit-holders’ funds
and assets.
•
The 3rd schedule of the SEBI regulations specifies the content
of the trust deed.
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What are the rights of the Trustees?
•
Trustees appoint the AMC, in consultation with the sponsor and
according to SEBI Regulations
•
All Mutual Fund Schemes floated by the AMC have to be
approved by the Trustees
•
Trustees can seek remedial actions from AMC, and in cases
dismiss the AMC
What are the obligations of the Trustees?
•
Trustees must ensure due diligence on the part of AMC in the
appointment of constituents and business associates
•
Trustees must furnish to the SEBI, on half yearly basis a report on
the activities of the AMC
•
Trustees must ensure compliance with SEBI regulations
•
SEBI Regulations require that the meeting of the trustees should be held at
least once in every two months.
Day 1 Day 2
Regulatory requirements for the AMC?
•
Only SEBI registered AMC can be appointed as investment
managers of mutual funds
•
AMC must have a minimum net worth of Rs. 10 Cr., at all times
•
An AMC cannot be an AMC or Trustee, of another Mutual Fund
•
AMC’ s cannot indulge in any other business, other than that of
asset management
•
At least half of the members of the Board of an AMC, have to be
independent
•
The 4th Schedule of SEBI regulations spells out rights and
obligations of both trustees and AMCs
•
The agreement between the Trustees and the AMC is known
as “Investment Management Agreement”.
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Who appoints the AMC and defines its functions?
•
The sponsors, or the trustees, if authorized by the trust deed
appoint the AMC.
•
The AMC is usually a private limited co., in which the sponsors
and their associates or JV partners ,are shareholders
•
The AMC has to be a SEBI registered entity, with a minimum
net worth of Rs. 10 Cr.
•
The trustees sign an investment management agreement with
the AMC, which spells out the functions of the AMC
Day 1 Day 2
What do the Registrar and Transfer Agents do?
They are responsible for issuing and redeeming units of the
Mutual Fund. Their other services include:
•
Process investor applications
•
Record details of Investors
•
Send information to Investors
•
Process dividend payout
•
Incorporate changes in investor information
•
Keeping Investor information up to date
•
Example Karvy and CAMS
Day 1 Day 2
What is the role of selling and distribution agents ?
•
Selling agents bring investors funds for a commission
•
Distributors appoint agents and other mechanisms to mobilize
funds from investors
•
Banks and post offices also act as distributors
•
The commission received by the distributors is split into initial
(Upfront) commission which is paid on mobilization of funds and
trail commission which is paid depending on the time the investor
stays with the fund
•
Sponsor or an associate can also act as a distributor for the AMC.
Day 1 Day 2
What are the functions of the custodians ?
•
Responsible for the securities held in the mutual fund’s portfolio
and is required to be registered with SEBI
•
Custodian is appointed by the Board of Trustees
•
Keep an investment record of the mutual fund
•
Collect dividends and investment payments due on the mutual
funds investment
•
The custodian and sponsor cannot be the same entity
•
The custodian is the guardian of the funds and assets of investors
Day 1 Day 2
Various Forms of Fund Mergers and Takeovers
•
Merger of AMC to become a single entity
( Example : HB Mutual and Taurus Mutual )
•
AMC takeover by sponsors ( Example : ITC
Threadneedle and 20th century taken over by Zurich)
( ITI by Franklin Templeton) (Alliance by Birla)
•
Scheme takeover (Apple’s scheme taken over by Birla
AMC ) and ( Zurich’s Scheme Takeover by HDFC
Mutual Fund)
Day 1 Day 2
Approval required for Various Mergers and Acquisition
Exit option
without
Trustee SEBI High Court Unit Holders Load
Mergers of 75% in case
two AMCs YES YES YES of CES YES
Takeover of
AMCs YES YES NO Informed NO
Takeover of
Schemes YES YES NO Informed YES
Day 1 Day 2
Important Points
• In USA, the regulatory body is known as Securities
Exchange Commission.
• The sponsor may be compared to promoter of a company
• Issuing units and redeeming units is the role of Transfer
Agent
• The appointment of AMC can be terminated by Majority of
directors of trustees.
• Fund manager is responsible for filing details of the
funds’ portfolio with SEBI.
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Important Points
• A sponsor of a mutual fund can act as the distributor

of the Mutual fund.
• Sponsor can contribute to the initial corpus of the
trust.
• Sponsor contributes to the capital of the AMC.
• Sponsor can invest in his own fund’s schemes.
• Sponsor can not act as Trustee of Mutual fund.
• Sponsor can not act as Custodian of the Mutual Fund
Day 1 Day 2
Q-1
The appointments of fund distributors are made by
(a) The Transfer Agents (b) The Fund Sponsor (c) The Trustees (d) The AMC
Q-2
In India, a mutual fund has to be structured:
(a) As a trust (b) As an investment company
(c) Either as a trust or as a company at the choice of the sponsor
(d) None of the above
Q-3
Which of the following is true with respect to the merger of two AMCs?
(a) The Companies Act apply to the mergers of the two AMCs
(b) For such mergers the approval of respective High Court is also needed
(c) Merger of HB and Taurus is the example of the merger of two AMCs
(d) All of the above.
Day 1 Day 2
Q-4
Which of the following entities is responsible for issuing and redeeming units?
(a) Custodian (b)Bankers (c) Registrar (d) Distributors.
Q-5
The acquisition of Zurich by HDFC is the example of
(a) Scheme takeover (b) AMC takeover by a new sponsor
(c) Merger of two AMCs (d) None of the above.
Answers:
Q-1 : (d), Q-2 : (a), Q-3 : (d), Q-4 : (c), Q-5 : (a)
Day 1 Day 2
Chapter 3
Legal and Regulatory Framework

Day 1 Day 2
Regulating Agencies of Mutual Fund
• SEBI ( Established in 1992 by an Act of Parliament)
• Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996
• SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign
country
• Bank-sponsored mutual funds were jointly regulated by SEBI and RBI
• Subsequently it has been clarified that all MFs being primarily capital market players,
come under the regulatory umbrella of SEBI.
• RBI regulates the money and government securities market where the mutual funds
invest but the not the MMMF.
• Liquid funds which invest in money market instruments are now governed by
SEBI alone. ( Money Market Mutual Funds are now regulated by SEBI)
• If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission
• All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under
purview of the SEBI
• SEBI regulates Share Registrars, Custodians, Mutual Funds, Stock Exchanges
and share brokers. But it does not regulate Non Banking Finance companies.
Day 1 Day 2
What is the role of Ministry of Finance in mutual fund
regulations ?
•
The finance ministry is the supervisor of both the RBI and SEBI
•
Aggrieved parties can make appeals to the MoF on the SEBI rulings
relating to mutual funds
•
AMCs has to file its annual statements with Registrar of Companies
( RoC)
What are self regulatory organizations (SRO’s)?
−
Stock exchanges are Self-Regulatory Organizations
−
SROs are the second-tier in the regulatory structure
−
SROs get their powers from the apex regulating agency and
act on their instructions
−
SROs cannot do legislation of their own
−
SROs regulate only their own members in limited manner
−
SROs facilitate decentralization in the regulatory structure.
Day 1 Day 2
What are the objectives of AMFI ?
AMFI is an industry association, incorporated in 1995, is not an
SRO, so it can just issue guidelines to members. It cannot
enforce regulations.
Objectives
•
To promote the interests of mutual funds and unit holders.
•
To set ethical, commercial and professional standards in the
industry.
•
To increase public awareness of the mutual fund industry.
•
To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from mutual
funds and is headed by a full time chairman.
Day 1 Day 2
What are the rights of the investors in respect of
service standards that they can expect from MFs?
1. Investors are entitled to receive dividends declared in a scheme within 30
days
2. Redemption proceeds have to be sent to investors within 10 days
3. If an invest or f ails t o claim t he dividend or red empt ion proceeds he
has t he right s t o claim it up t o a period of 3 years f rom t he due dat e
at t he t hen prevailing NAV. Af t er 3 years he will be paid at NAV
applicable at t he end of 3rd year
4. Mutual funds have to allot units within 30 days of the closure of the issue and
also open the scheme for redemption, if it is an open - ended scheme
daily and publish their entire portfolios, at least once in 6 months . Such
disclosure should be done within 30 days from 6 monthly account closing dates
of the fund
6. Trustees will have to ensure that any information having a material impact on
the unit holders investments should be made public by the mutual fund
7. If 75% of the unit holders so decide, 1)The scheme can be wound up
2)Meeting of unit holders can be called 3)Appointment of the AMC of the mutual
fund can be terminated
Day 1 Day 2
8. If there is any change in the fundamental attributes of the scheme, the unit
holders have to be notified through a letter. They also have a right to
repurchase at NAV without any load, before such change is effected.
9. Unit holders have the right to inspect certain documents
10. Unit holders have the right to receive the complete statement of the scheme
portfolio before the expiry of one month from the close of each half year.
What are the limitations to investors right ?
•
Investors cannot sue the trust as they are not distinct from
the trust
•
Investors cannot lodge complaints against the trustees (with the
Registrar of Public Trusts) or the AMC (with the CLB).
•
Investors can lodge complaints with SEBI for non-compliance.
•
Investors cannot be compensated if the performance of the fund is
below expectations.
•
There are no legal remedies for to a prospective investor. Only
after his investment in the scheme he becomes eligible for the earlier
mentioned rights.
Day 1 Day 2
Important Points
• SEBI entertains the complaints against MF and intervenes with fund managements
to help the investor.
• SEBI requires that sponsors of a new scheme should appoint a compliance officer
who must issue a Due Diligence Certificate to the effect that all regulations have
been complied with by the fund and sponsors.
• The fund investors are neither shareholders nor depositors in the AMC
• Unit holders have right to timely service, right to information, right to approve
changes in fundamental attributes, right to wind up a scheme, right to terminate the
AMC.
• 3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed.
• The body to which investors may address their complaints is SEBI.
• Investors money is not protected by the Companies Act.

Q-1. Bank owned mutual funds are regulated by:
(a) RBI and SEBI (b) Respective parent banks (c) RBI (d) SEBI
Q-2. If an investor failed to claim the redemption proceeds after 3 years of due date he has
the right to receive an amount equal to
(a) Zero (b) Face value of the unit (c) Due date NAV plus interest @15% p.a.
(d) NAV at the end of three years after the due date
Answers: Q-1 : (d), Q-2 : (d)
Day 1 Day 2
Chapter 4
Offer
Document
Day 1 Day 2
The Offer Document
Offer Document is the most important source of information about a mutual
fund scheme for investors
• OD is the operating document and describes the product
• An abridged (summary) version of the OD is Key Information
Memorandum (KIM)
• Investors are required to read and understand the OD
• Investors sign the form stating that they have read the OD. No
recourse is available to investors for not reading the OD or KIM
• The cover page of OD contains details of scheme being offered, the name
of the sponsor, trustee, AMC etc.
• Mandatory disclaimer clause of SEBI should also be on the cover page of
the OD
• The format and contents of the OD must be as per SEBI guidelines
• The OD is issued by the AMC on behalf of the trustees
• The AMC is responsible for the information in the OD
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The Content
Broadly the OD issued by MFs in India are required by
SEBI to include the following:
• Details of the sponsor and the AMC
• Description of the scheme and the investment
objectives/strategy
• Terms of the issue
• Historical statistics
• Investor’s right and services.
Day 1 Day 2
The Offer Document
• Close-ended funds issue an OD at the time of the IPO

• Open-ended funds have to update OD and KIM at least once in 2 years
• Copy of all the changes in the OD is to be filed with SEBI
• Trustees approve the contents of the OD and KIM
• KIM is compulsorily made available with every application form
• SEBI does not approve or certify the contents of the OD
• Investor’s rights are stated in the OD
• The OD contains detailed info, while KIM is the summary document
• If any information is crucial to the investor, it will be found in both OD and
KIM. For e.g. details of guarantee, if the scheme is an assured return scheme
• the OD must contain a due diligence certificate signed by a compliance
officer, an AMC employee
– The due diligence certificate states that:
• Information in the OD is according to SEBI formats
• Information is verified and is true and a fair representation of facts
• All constituents of the fund are SEBI registered
Day 1 Day 2
• The following information would be available in the OD:
– Category of Investors eligible to apply, viz. Individual, HUF, FI, Trust, Society,
Corporate, Association of Persons, NRI, PIO, OCB etc
– Information on existing schemes and financial summary to be given for 3
years
– Information on transactions with associate companies to be provided for
past 3 years
– If any expense incurred in a past scheme is higher than what was stated in OD,
explanations should be given
– Investor’s rights are stated in the OD
– 3 year track record of investor’s complaints and redressal should be
disclosed
– Any pending cases or penalties against sponsor or AMC
– The borrowing restrictions on the mutual fund should be disclosed,
including the purpose and limit of borrowings and the borrowing at the
end of last fiscal year
– In case of a guaranteed scheme, name of guarantor, their net worth
and past performance of assured return schemes
Day 1 Day 2
– The name and addresses of trustee and AMC directors will be found in
KIM, but the details of their role, responsibilities and duties will be found
in OD
• There is no information about other mutual funds, their performance
in the OD. No comparison or data on performance of other mutual
funds is found in OD
• The OD and KIM will not contain names of securities in which the fund
plans to invest, only broad asset allocation will be given.
Fundamental attributes
• Fundamental attributes of a scheme are its basic features. For
eg. open or close ended, lock-in period, fund objectives, asset
allocation, loads and charges etc.
• For any change in fundamental attributes, SEBI and Trustee
approval is required.
• Investor approval is not needed. However, each investor must
be informed through a communication and given the option to
exit without exit load.
Day 1 Day 2
What are the mandatory disclosures to be made on the
cover page ( Front Page) of the OD?
•
Name of the mutual fund.
•
Name of the scheme.
•
Type of scheme ( growth, income, balanced etc.)
•
Major Objective
•
Name of the AMC.
•
Classes of units offered for sale.
•
Price of units plus applicable load.
•
Name of the guarantor in case of assured return schemes.
•
Opening , closing and earliest closing date of offer.
•
Mandatory statements.
•
Date of its publications.
Day 1 Day 2
What are the standard risk factors?
•
Mutual fund and securities are subject to market risk and there is
no assurance that the objective will be achieved
•
NAV of units issued under the scheme can go up or down
depending on factors and forces affecting capital markets.
•
Past performance of the sponsor/AMC/ Mutual fund does not
indicate the future performance of the scheme.
•
The name of the scheme does not in any manner indicate any
either the quality of the scheme or the future performance of the
scheme
Day 1 Day 2
What are scheme specific risks?
•
Risk arising from investment objective, investment strategy and
asset allocation of the scheme
•
Risk arising from non –diversification , if any
•
If a scheme offers assured returns, the scheme must state that
the assurance is on the basis of the guarantees provided by the
sponsor/AMC
•
If the AMC has no previous experience in managing a mutual
fund, a disclosure to the at effect should be made
Day 1 Day 2
Important Points regarding OD and KIM
• In USA, the OD is known as prospectus

• The first time investor should read detailed offer document, once he has
gained familiarity with the AMC, he can just refer to KIM
• The OD do not contain the address of the Trustees of MF
• The offer document is issued by the AMC / Trustees
• OD is a legal document.
• OD issued for launching of a new schemes is valid for a period of six
months and if the scheme is not launched within this period a fresh OD is
required to be filed.
• OD contains the accounting policies to be followed. Such policies should be
in accordance with the SEBI regulations.
• OD must disclose the names and background of fund managers, key
personnel, investor relation officer, AMC and its directors, custodian,
registrar, transfer agent and the statutory auditor.
Day 1 Day 2
Important Points
• KIM is available at various distribution points such as
banks, distributors and brokers
• AMC must confirm that a due diligence certificate signed
by Compliance officer / CEO / MD has been submitted to
SEBI.
• If a scheme’s name implies that it will invest primarily in a
particular type of security or in certain industry, then it will
invest at least 65% of the value of its assets in the
indicated type of security/ industry.
• OD must contain brief description of investors’ complaint
history for the last 3 Fiscal years of existing schemes.
Day 1 Day 2
Q-1 Which of the following is the operating document for a mutual fund?
(a) Offer document (b) KIM (c) Trust deed (d) None of the above.
Q-2 The OD may not disclose the names and background of
(a) Fund manager (b) Key personnel (c) Investor relation officer
(d) Statutory auditor (e) None of the above.
Q-3 Offer Document issued for the launch of the new scheme is valid for a period of
(a) 1 month (b) 3 months (c) 6 months (d) 1 year.
Q-4 Which of the following is not the scheme specific risk factor?
(a) Risk arising from the schemes objective
(b) Risk arising from the non-diversification
(c) No previous experience in managing a fund
(d) Movement in NAV because of the market movements.
Day 1 Day 2
Q-5 Which of the following document is attached with the application form?
(a) Offer document (b) Prospectus (c) Offer for sale document (d) KIM.
Q-6 SEBI directs that certain information must appear on the cover page of the offer
document of any scheme. This includes the following except
(a) A statement to the effect that the document contains information that a prospective
investor should know before investing
(b) A description of the investment policies for the scheme on offer
(c) Opening, closing and earliest closing date for the offer
(d) Type of scheme and price of units on offer
Q-7 Only one of the following statements is correct as regards the required frequency of
updating the contents of the Offer Document of an existing mutual fund scheme. Which
one?
(a) Once issued, the Offer Document of an existing scheme cannot be updated
(b) The Offer Document must be updated whenever there is a material change in its
contents
(c) The Offer Document must be updated on a half-yearly basis
(d) The Offer Document must be updated on a yearly basis.
Answers:
Q-1 : (a), Q-2 : (e), Q-3 : (c), Q-4 : (d), Q-5 : (d), Q-6 : (b), Q-7 : (b)
Day 1 Day 2
Chapter 5
Fund distribution and Sales Practices

Day 1 Day 2
What are the categories of investors eligible to buy
MF units?
•
Resident Individuals
•
Indian Companies
•
Indian trusts and charitable institutions
•
Banks
•
NBFC’s
•
Insurance companies
•
Provident funds
•
Non-resident Indians / PIO
•
OCB’s
•
SEBI registered FII’s
Day 1 Day 2
Important point
• Distributor should look up the offer document to see which category
of investors are allowed to invest in any particular scheme of the
fund, as it is possible that some categories are not allowed to invest
in some schemes.
• For example, charitable trusts are not allowed to invest in some
category of schemes in some funds. So in this case distributor
should refer offer document.
• Any investor who becomes a foreign citizen after investing in a fund,
has to compulsorily redeem the units after obtaining foreign
citizenship
• FIIs can invest in Mutual Funds through their Non Resident Rupee
Account
• RBI has granted a blanket permission to NRI, OCB and FIIs; every
investment does not require RBI approval.
Day 1 Day 2
Distribution Channels
• Individual Agents- A person has to sign an agreement with a fund on non
judicial stamp paper. He has to be AMFI certified also to sell Mutual Fund
products.
• Only exemption is distributors above 50 years of age and with at least 5
years of experience as on Sep 30, 2003. Such exempted distributors were
required to complete AMFI’s refresher course by Sep 30, 2004.
• Distribution Companies
• Banks and NBFCs
• Post Offices
• Direct Marketing
– CURRENTLY 49,837 are AMFI certified and 30,028 have taken
the ARN numbers ( as on 31/3/2005)
Day 1 Day 2
What are the AMFI recommended best practices
for mutual fund agents?
1. Agents must be fully aware and informed about the features of the
products that they offer to the investors
2.Agents should be highly familiar with the profile of the investors, in
terms of return expectations, requirements and risk tolerance
3. Agents must strive to cultivate disciplined approach to investing
and a regular investment habit among clients
4. Agents must have a thorough understanding of the needs of their
investors
5. Agents must be able to help investors to choose from alternative
investment products, and enable an appropriate asset allocation
6. Agents should seek from investors the commitment to invest to
enable which they may assist the client with the forms and procedures
for investing
Day 1 Day 2
What is SEBI’s advertising code?
1.The dividends declared or paid shall be mentioned in Rs/unit
along with the face value of each unit and the prevailing NAV at the
time of declaration of the dividend.
2.Only compounded annualised yield can be advertised if the
scheme has been in existance for more than 1 year
3.All performance calculations shall be based only on NAV and the
payouts to the unit holders .
4.Annualised yield should be shown for 1,3,5 years and since
launch of the scheme. For funds with less than 1 year performance
can be in terms of total returns.
5.Appropriate benchmarks and identical time period must be used
while comparing. Once chosen the benchmark should be used
consistently over time.
6. All advertisements should in the main body of the adevertisement
immediately after the return/yields and in the same font mention that
past performance may or may not be sustained in future
7. Where any ranking is used such ranking should be
appropriately mentioned.
Day 1 Day 2
What is the AMFI Code of Ethics?
•
Management of the fund ought to be in the interest of unit holders
•
High standards of service are expected from the fund.
•
Adequate disclosures by the funds ought to be made to the unit
holders and trustees.
•
Funds are urged to adopt the use of professional selling practices.
•
Management of funds collected has to be in accordance with stated
investment objective
•
Funds should avoid conflicts of interest in dealings by directors,
officers and employees.
•
Funds have to refrain from unethical market practices.
Day 1 Day 2
What is the commission structure for mutual fund
agents?
•
The commission consists of two components
Initial ( Upfront )commission - Paid as a fixed percentage of
amount mobilised by agents
Trail commission - it is paid periodically on the funds that
remain invested in the scheme. Trail is an effective way to
restrict the practice of rebating, and link commissions
•
The rates of commission are decided by the mutual fund
themselves and are not subject to regulation by either AMFI or
SEBI.
Day 1 Day 2
Loads
• Load is charged to investor when the investor buys or redeems units. It is primarily used
to meet the expenses related to sale and distribution of units
• Load charged on sale of units is entry load. It increases the price above the NAV for new investor.
• Load charged on redemption is exit load. It reduces price.
• Maximum Entry load or Exit load is 7%. (For Open ended Funds)
• The difference between the repurchase price and the sale price is not permitted to exceed 7%
of the sale price.
• Max. Entry or Exit load for closed ended funds is 5%
• CDSC is Contingent Deferred Sales Charges.
• CDSC is an exit load that varies with holding period. It is less for investors who stays
longer in the fund.
• Load is an amount which is recovered from the investor.
• A No load Fund is one in which the Initial issue expenses are not charged to the
investors.
Day 1 Day 2
Q-1 Which one of the following statements is correct?
(a) An individual agent can distribute/sell only one mutual fund's products
(b) Any category of distributors/agents can distribute as many of the mutual funds'
products as allowed by the concerned AMCs
(c) Banks are not allowed to sell mutual fund products, except their own funds'
(d) A distribution company can distribute/sell only one mutual fund's products
Q-2 Which of the following can invest in Indian Mutual fund?
(a) SEBI (b) RBI (c) Foreign Banks (d) AMFI.
Q-3 Which of the following categories of distributors will be exempt from passing the AMFI
Mutual Fund Test?
(a) All the existing agents of UTI mutual fund and other funds
(b) New applicants for distributorship, if the AMC approves their applications
(c) Employees of banks who distribute the funds
Answers: Q-1 : (b), Q-2 : (c), Q-3 : (d)
Day 1 Day 2
Chapter 7
Investor Plans and Services

Day 1 Day 2
SIP and VAP
• SIP is investing a fixed sum periodically in a disciplined manner for long
term. It gives benefit of Rupee Cost averaging ( Discussed in later half of
presentation).
• VAP is modified version of SIP. It is Voluntary Accumulation Plan. It allows
the investor flexibility with respect to the amount and frequency of
investment.
• In VAP, investor has to impose voluntary self discipline.
Other Investment Services

−
Telephone / Internet Transactions.
−
Cheque writing – usually for liquid funds.
−
Periodic statements and Tax Information
−
Loans against units – MF DOES NOT GIVES LOANS but banks can give
against units held by unit holder.
−
Nomination and Transfer by unit holders.
−
NRI investors have to make payments from their FCNR bank account or their
NRE Account.
−
FIIs can make payments from their Non-Resident Rupee Account
Day 1 Day 2
Investment Plans
• Broadly 2 options- Growth option and Dividend Option
• Automatic Reinvestment Plans (ARP) – Reinvestment of amount of
dividend made by fund in the same fund and receive additional units.
It gives Benefit of Power of Compounding.
• Systematic Investment Plans(SIP) – For regular investment
• Systematic Withdrawal Plan (SWP) – For regular income (SWP is
not similar to MIP as SWP allow investor to get back the principal
amount)
• Systematic Transfer Plan (STP) – Transfer on a periodic basis a
specified amount from one scheme to another within the same fund
family.
Day 1 Day 2
Q-1 Investor A has opted for a systematic transfer plan. This means
(a) The investor is allowed to transfer on a periodic basis a specified amount from one
scheme to another scheme within the fund family
(b) A specified amount is automatically transferred from his bank account to his fund account
(c) The investor can withdraw specified amounts at periodic intervals from the plan
(d) The investor can invest any amount in the scheme at periodic intervals
Q-2 Which of the following is not true with respect to the SWP?
(a) All allows the investor to make systematic withdrawals on a regular intervals
(b) Here the amount withdrawn is treated as the redemption of units
(c) SWP is same as the Monthly Income Plan
Q-3 Which of the following is not true with respect to the voluntary accumulation plan?
(a) It give the flexibility to the investor regarding the amount to be invested
(b) It give the flexibility to the investor regarding the frequency of investment
(c) VAP follower is obliged to keep investing
Answer: Q-1 : (a), Q-2 : (c), Q-3 : (d)
Day 1 Day 2
Chapter 9
Measuring And Evaluating Mutual

Fund Performance

Day 1 Day 2
Performance Measurement
• Change in NAV= ( NAV at end – NAV at beg.)*100
NAV at the beginning
• Total Return = ( Change in NAV+ Dividend) *100
NAV at beg.
• Return on investment or Total Return with dividend reinvested at NAV.
• Portfolio Turnover Rate – It measures the amount of buying and selling of securities
done by the fund. It is lesser of assets purchased or sold divided by the fund’s net
assets.
• A 100% turnover implies that the manager replaced his entire portfolio during the
period in question
• 200% means portfolio changed in 6 months
• A liquid fund has the highest portfolio turnover.
• Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, then money will
double in 72/12 = 6 years.
Day 1 Day 2
Numerical
• Purchase price Rs. 22 per Unit
• NAV at year end Rs. 23 per Unit
• Interim Div. Rs. 3
• Ex.-Div. NAV Rs. 21
• Total Return=?
• Assume investment of Rs. 10000

• Step 1: Initial Units allotted =10000/22=454.55
• Step 2:Total Div.=454.55*3=1363.65
• Step 3: Additional Units=1363.65/21=64.94
• Step 4:Total Units=454.55+64.94=519.49
• Step 5:Withdral Amt. =519.49*23=11947.17
• Gain =11947.17-10000=1947.17
• Gain of 1947.17 on the investment of Rs. 10000
• So that on the investment of Rs. 100 gain is 19.47
• Ans:19.47%
Day 1 Day 2
Other performance measures
• The expense ratio ( Ratio of total expenses to average net assets of the fund)-
Funds with small corpus size will have a higher expense ratio affecting investor
returns. It is indicator of the Fund’s Efficiency and Cost Effectiveness.
• The income ratio ( It is the net investment income divided by its net assets for
the period) – useful for debt fund
• Fund size – Small funds are easy to manage and can achieve their
objectives in a focused manner with limited holdings.
• Large funds benefit from economies of scale with lower expense ratios
and superior fund management skills.
• Cash holdings
Day 1 Day 2
Important Points
• The returns should be computed on an annualized average
compound rate of return from cumulative figure.
• If the fund performance data relates to a period of less than one
year, it should not be annualized, except for liquid mutual funds
which have a short investment horizon.
Borrowings by Mutual Fund

−
A mutual fund can borrow for a maximum of 20% of net assets.
−
For Maximum period of 6 months.
−
Purpose should be to meet liquidity requirements for paying
dividend or meeting redemptions.
−
It is not a permanent source of funds for the scheme.
Day 1 Day 2
Benchmarking
• Benchmarking should be selected by reference to – The asset class it
invests in and the fund’s stated investment objective.
• 3 kinds of benchmarks are used – Relative to market as a whole,

relative to other mutual funds, and relative to other comparable
financial products.
• For debt funds, the benchmark should have the same portfolio composition
and the same maturity profile
• Main benchmark for debt funds is I-sec
• Tracking Error – Applicable for Index Fund
• SEBI requires MF to specify Benchmark for each scheme in OD & KIM
Day 1 Day 2
Criteria for peer group comparisons
• The investment objective and risk profiles of the two funds should be the
same.( Debt with debt and equity with equity)
• Portfolio composition of two funds is similar. ( Gilt cannot be compared with

riskier corporate debt)
• Fund size should be comparable.( same size)
• Expense Ratios is also important factor
• Funds should be compared over the same periods only
Benchmarking Debt and MM Funds

−
I-SEC: Its I-bex index is often used to track Govt. securities performance.
−
CRISIL: Has 8 debt indices
−
NSE: Has designed Govt. security index and T-bill index.
−
Besides NSE, JP Morgan has also developed a T-bill index.
Day 1 Day 2
Sources for tracking Mutual Fund Performance
• Mutual Funds Annual & periodic Reports.
• Mutual Funds website.
• AMFI website
• Financial News Papers.
• Fund Tracking Agencies – Credence, Value Research
• Newsletters
• Offer Document of the Fund
• Analytical Articles
• The Credit Rating Agency CRISIL evaluates the Fund Performance
and Ranks the Scheme by Performance.
Q-1 An open-end fund was purchased when its NAV was Rs.22. 18 months later, its
NAV was Rs.24. The annualized percent NAV change is:
(a) 5.56% (b) 9.09% (c) 6.06% (d) Insufficient data
Q-2 A high portfolio turnover rate for a fund could mean
(a) That the fund is very active in its dealing on the market
(b) A high level of transaction costs
(c) A greater risk-prone portfolio management strategy
(d) All of the above
Answers: Q-1 : (c), Q-2 : (d)
Day 1 Day 2
Chapter 13
Helping Investors understand Risks in

Fund Investing

Day 1 Day 2
Jacob’s recommendations of portfolios based
on risk level of different funds
• Low Risk ( conservative) portfolio :
– 50% Gov. sec. fund + 50% Money market fund.
• Moderate Risk ( cautiously aggressive) portfolio:
– 40% growth and income fund+ 30% govt. bond fund + 20%
Growth fund + 10% index funds
• High Risk( Aggressive) portfolio :
– 25% aggressive growth fund+ 25% international funds +
25% sector funds +15% high yield bond funds+ 10% gold
funds
Day 1 Day 2
Evaluating the Risks of a Mutual Fund
• What is Risk ?
– Risk means the possibility of financial loss.
– “Risk” is thus equated with Volatility of Earnings
• Equity Price Risk
– Company Specific
– Sector Specific
– Market Level
Volatility of an Equity mutual fund comes from:

−
Kind of stocks in the portfolio ( growth/value/big/small)
−
The number of stocks ( Degree of diversification. Smaller portfolios
are more volatile than large PFs)
−
Fund manager’s success at market timings.
−
It is independent of number of investors in the scheme.
−
The Risk tolerance of an investor is dependent on his age, his
income and his job security.
−
Risk Tolerance is independent of the Stock Market Movements.
Day 1 Day 2
• Risk Measures
– Standard Deviation – SD measures the fluctuations of a fund`s returns around
a mean level. SD gives an idea of how volatile the earnings are. SD measures
total risk.
– Disadvantage of SD is that it is based on Past Returns.
– Beta Coefficient – Beta relates a fund's return with a market index and
measures the sensitivity of the fund's returns to change in market index. A beta
of 1 means the fund moves with market. A beta of less than one means the fund
will less volatile than the market.
– Beta is based on past returns.
• ExMarks or a number known as “R-Squared”
– How much of a fund's fluctuations is attributable to movements in the overall
market from 0 to 100 percent.
– An index fund will have ExMarks of nearly 100%. Non Diversified funds will have
lower ExMarks.
– Ex Marks of an equity fund measures its Performance
• Standard Deviation is the best measure of risk.
• Beta of an equity fund measures its RISK.
Day 1 Day 2
• Alpha
– Risk adjusted performance calculation is called Alpha.
– Alpha of a fund compares the fund's actual results with what would have
been expected given the fund`s beta and the market index performance.
Risk Adjusted performance
Sharpe ratio and Treynor Ratio

−
Risk premium= Funds return – Risk free rate of return
−
Sharpe Ratio = Risk premium/SD
−
Treynor Ratio = Risk Premium/Beta
−
Both the ratios measures the adequacy of returns against the risk
assumed.
Day 1 Day 2
Important Points
Important Points
• Money Market Funds are low risk fund.
• Sectoral Fund are high risk fund.
• Risk is equated with Volatility of Earnings.
• Diversification reduces Company specific risk but it does not reduce Market
Risk.
• Short Term investment in Equity market is most risky.
• BEST FUND WILL HAVE HIGHER EX MARKS, LOWER BETA AND
HIGHER GROSS DIVIDEND YIELD

Q-1The Sharpe’s ratio divides risk premium by
(a) Alpha (b) Beta (c) R squared (d) Standard deviation.
Q-2 Diversification can not reduce
(a) Company specific risk (b) Sector specific risk
(c) Market risk (d) None of the above.
Answer: Q-1 : (d), Q-2: (c)
Day 1 Day 2
Index
Day-2
Part-3 1. Accounting, Valuation and Taxation
10. Investment Management
Part-4
11. Helping investors with Financial Planning

12. Recommending Financial Planning Strategies to Investors
13. Selecting the Right Investment products for Investors
14. Recommending Model Portfolios and Selecting the Right Fund
15. Business Ethics in Mutual Fund
Day 1 Day 2
Chapter 6
Accounting Valuation and Taxation

Day 1 Day 2
What are net assets of a mutual fund ?
The net assets represent the market value of assets which belong to the
investors, on a given date.
Net assets are calculated as:

Market value of investments
Plus(+): Current assets and other assets
Plus(+): Accrued income
Less(-): Current liabilities and other liabilities
Less(-): Accrued expenses
Net Assets/Total no. of Units Issued = NAV per unit.
A fund’s NAV is affected by four sets of factors
−
Purchase and sale of investment securities
−
Valuation of all investment securities held
−
Other assets and liabilities
−
Units sold and redeemed.
Day 1 Day 2
How frequently is the NAV calculated ?
•
All mutual funds have to disclose their NAVs daily, by posting it on
the AMFI web site by 8.00 p.m.
•
Open –ended funds have to compute and disclose NAVs
everyday; closed end funds can compute NAVs every week, but
disclosures have to be made everyday.
•
Closed end schemes not mandatorily listed on the stock exchange
can publish NAV according to the periodicity of 1 month or 3
months, as permitted by SEBI.
Day 1 Day 2
What are the initial issue expenses ?
Expenses that are incurred in the launch of the fund are called as initial issue
expenses.

The costs of registration and fund formation

Legal and advisory expenses

Costs of launching the scheme

Advertisement and promotion expenses

Distribution costs

Commissions to selling agents
SEBI imposes a ceiling of 6% on these expenses.
Can the Fund be launched without bearing any initial issue expenses ?

Yes

Such funds are called as no load funds

AMCs can charge an investment management fee, which is 1% higher than
the statutory limit, in this case.
Day 1 Day 2
Latest changes on Initial Issue Expenses
• 6% IIE will be permitted for closed ended schemes only and they will not
charge any Entry load
• IN CES, IIE shall be amortized on a weekly basis over the period of scheme
• If an investor exiting the scheme before amortization is completed, AMC
shall redeem the units only after recovering the balance amortization
• Unamortised portion of initial issue expenses shall be included for NAV
calculation, considered as other asset
• IN OES, the sales, marketing and other expenses of sales should be
met from the entry load and not IIE.
Day 1 Day 2
What are the expenses incurred by a mutual fund?
•
Investment management fees to the AMC
•
Custodian’s fees
•
Trustee fees
•
Registrar and transfer agent fees
•
Marketing and distribution expenses
•
Operating expenses
•
Audit fees
•
Legal expenses
•
Cost of mandatory advertisements & communications to investors
Day 1 Day 2
Can the AMC charge all the expenses that it incurs, to
the income of the fund ?
•
No. There are two levels of restrictions
•
At the first level only certain kinds of expenses, that are identified as
having been incurred for the conduct of the business of the fund,
can be charged to the fund.
•
The second level of regulation refers to the limit on the total
expenses, that can be charged to the fund
Maximum Limit on t he expenses Equity Debt

For net assets up to Rs. 100 Cr 2.50% 2.25%
For the next Rs 300 Cr. of net assets 2.25% 2%
For the next Rs 300 Cr. f net assets 2% 1.75%
For the remaining net assets 1.75% 1.50%
Day 1 Day 2
What are the investment management and advisory
fees charged by the AMC ?
The fees are regulated by SEBI as follows:
•
For the first Rs.100 Cr. Of net assets: 1.25%
•
For the net assets exceeding Rs. 100 Crore: 1.00%
•
If the AMC does not charge any of the initial issue expenses to the
fund, it can charge the scheme a management fee, that is 1% higher
than the above rates
AMC charges are subject to the overall ceiling for expenses discussed
in the previous slide.
Fund type Load N o-load

For firs t R s .100 Cr. of net as s ets 1.25% 2.25%
Above 100 crore 1.00% 2%
Day 1 Day 2
Expenses that can not be charged to the
Scheme
• Penalties and fines for infraction of law
• Interest on delayed payment
• Legal, marketing, publication and other general
expenses not attributable to any scheme
• Expenses on general administration corporate
advertising and infrastructure costs
• Depreciation on fixed assets
Day 1 Day 2
Tax provision for Equity Mutual Fund
Equity >65%
Dividends Capital Gains
Within 12 m After 12 m
Investors DDT Short Terms Long Terms
Tax Free NIL 10% Tax Free
Day 1 Day 2
Tax provision for Debt Mutual Funds
Debt Mutual Fund
Dividend Capital Gain
Within 12 m After 12 m
Investor DDT
Short term Long term
Tax free Paid by the Fund As per slab Two options
10%
20% after
indexation
Day 1 Day 2
Tax Implication in Mutual Funds
• Income earned by any mutual fund registered with SEBI is
exempt from tax.( It is a trust) Under section 10(23 D)
• The dividends are tax free in the hands of unit holders but
it is liable to dividend distribution tax in case of closed
ended fund and debt funds( equity <50%)
• under section 54 of Income Tax Act, LTCG are exempt from tax if invested
in specified bonds (54EC) issued by NABARD, NHAI, REC or specified
equity (54ED) within 6 months of transfer of units
• the bonds must be held for minimum 3 years and no loan be taken against
these bonds and the equity must be held for minimum 1 year
• The sale and purchase of units in equity oriented scheme of MF is subject
to STT at the prescribed rate
Day 1 Day 2
Numerical
• An investor purchased units in an approved debt
Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He sold
the units on December 1, 2001 for Rs. 750000/-.
Calculate the capital gain taxes paid by him. ( Ignore
indexation).
• Answer :
– Long term capital gain = 250000/
– So Tax on LTCG = 2500000* 10% = Rs. 25000/-
Day 1 Day 2
Other points
• Section 80 C – Individual and HUF are entitled to deduction up to Rs.1 lakh

in respect of payment out of taxable income towards certain instruments
which includes ELSS of Mutual funds.
• Dividend Stripping – Section 94(7) – As per the finance Act 2001, If investor
buy units within 3 months prior to record date of dividend and sells those
units within 3 months of record date, then the loss if any, shall be ignored.
• Units are not considered under wealth tax
• Section 195 – 20% TDS for LTCG and 30% TDS on STCG if unit holder is a
NRI.
• 48% TDS if unit holder is foreign company.
Day 1 Day 2
Valuation of Equity Securities
• Closing price on valuation date
• Selected stock exchange
• Use of alternate stock exchange quote
• On the basis of earliest previous quote (not more than
30 days prior to valuation date).
• If trading is suspended up to 30 days, last quoted
price; if it is suspended for more than 30 days,
AMC/Trustee decide valuation norms and document
such norms.
Day 1 Day 2
Thinly traded Equity Securities
• Equity and equity related security
• Rs. 5 lakh or less OR less than 50000 shares in a month
• For unlisted: AMC need to make its own judgement and guideline - which
need to be documented
• Aggregate of illiquid securities - non traded, thinly traded, and unlisted
equity shares should not exceed 15% of the total assets of open-end
scheme and 20% of a closed-end scheme. Any assets in excess of above
limits will be valued zero.
• If no Trade done during the past thirty days then has to be treated as non
traded security and the Valuation is done on basis of “Good Faith”.
Day 1 Day 2
Valuation of Debt Securities
Non Performing Assets (NPA)

An asset shall be classified as an NPA, if the interest
and/or principal amount have not been received or
have remained outstanding for one quarter, from the
day such income/instalment has fallen due.
Such assets will be classified as NPAs, soon after the
lapse of a quarter from the date on which payments
were due.
Day 1 Day 2
Valuation of Debt Security
• A Debt Security is treated as traded if traded any day during the
previous 15 days prior to the date of valuation
• A Debt Security if not traded in last 15 days is called Not Traded
Security
Valuation of a Thinly Traded Security (<182 Days)

For example, if a security was issued at Rs. 90 and redeemable at
Rs. 100, after 364 days, the accrued interest for each day is
= 10/364
= 0.02747
The value of the security is increased by 2.747 paise every day, so
that the security is worth Rs. 100 on the date of maturity.
If it has to be valued 200 days after issuance, its value is
90+(0.02747*200) = 95.494
Day 1 Day 2
Important Points
• Investors’ subscriptions are accounted for by the fund not as
liabilities or deposits but as Unit Capital.
• Unit Capital is found in the Liability side of scheme’s balance sheet.
• Investment made by Mutual fund on behalf of investors are
accounted as Assets.
• Liabilities in Balance sheet of mutual fund are strictly short term in
nature.
• The Day on which NAV is calculated is known as Valuation Date.

Q-1An equity fund has weekly average net assets of Rs. 1400.00 crore outstanding in
the year. The maximum ongoing expenses (excluding issue/redemption expenses)
that may be charged to the fund amount to:
(a) Rs. 26.75 crore (b) Rs. 35.00 crore (c) Rs. 19.75 crore (d) Rs. 27.5 crore
Q-2 Generally the income earned by the mutual fund registered with SEBI is exempt
from tax under section
(a) 80 (C) (b)10(35) (c) 10 (23D) (d) 115 (R).
Day 1 Day 2
Question for Revision
Q-3 A fund's portfolio includes an equity security which is listed at the NSE. Its last quoted
closing prices were: Rs. 27 on July 10, Rs. 35 on July 13 and Rs. 28 on July 16. On July
28, using SEBI norms, the fund should value this security at:
(a) 35 (b) 28 (c) 30 (d) 31.50.
Q-4 A mutual fund holds a debenture redeemable after two years and with next quarterly
interest receivable on 31/12/2001. The debenture issuing company failed to pay the
interest on that date. Is this debenture a Non Performing Asset? If yes, from what date?
(a) Yes, it would be considered an NPA from 1/4/2002, if interest is not received for the
quarter ending 30/3/2002 as well
(b) No, it is not an NPA, as the principal amount is not yet due
(c) No, it would not be considered an NPA until both principal and interest amounts become
overdue
(d) Yes, it would be considered an NPA from 1/1/2002.
Q-5 Which of the following is the most liquid type of shares?

(a) Large cap shares (b) Mid cap shares
(c) Small cap shares (d) All of the above.
Answer: Q-1 : (d), Q-2 : (c), Q-3 : (b), Q-4 : (a), Q-5 : (a)
Day 1 Day 2
Chapter 8
Investment Management

Day 1 Day 2
Types of equity Instruments
• Ordinary shares : Ordinary shareholders are the

owners of the company.
• Preference shares: Entitle the holders to dividends at a
fixed rate subject to availability of PAT
• Equity Warrants: Option on stock. Long-term rights
that offer the holders right to purchase shares of a
company at a fixed price
• Convertible Debentures: Converts into a specified
number of equity shares at the end of specified period.
Since September 2005 mutual funds are allowed to trade
in derivatives.
Day 1 Day 2
What are large-cap and small cap shares?
The size of a company in the equity markets is determined by

market capitalization= (no. of shares issued  market
price/share)
Large Cap Smal l Cap

Marke t Capitalization High Marke t Capitalization Low
Gre ate r Liquidity Poor Liquidity
Comparative ly smalle r re turns Comparative ly highe r re turns
Cost of transaction low Cost of transaction high
Day 1 Day 2
Price Earning Ratio (P/E)
• The P/E ratio :

• = Market Price Per Share / Earnings Per Share
• Indicates the price the market is willing to pay per rupee of company’s
potential earnings
• Higher P/E ratio indicates growth stock; value stocks generally have
lower P/E ratio
• P/E ratio reflects over valuation and under valuation.
Day 1 Day 2
What is dividend yield?
•
Dividend paid is usually a percentage of face value of the share
•
Dividend Yield = (Dividend paid/Market Price) *100
What is the relationship between dividend yield?
•
Both the measures are sensitive to market price per share
•
If market prices are higher, P/E multiple will be higher, but
dividend yield will be lower and vice versa
Day 1 Day 2
Classifications of Stocks
• Cyclical Stocks – Cyclical stocks are those whose performance is
closely linked to macro economic factors; e.g. cement stocks which are
linked to infrastructure development in the country. Have relatively lower
PE ratios and higher dividend payouts.
• Growth Stocks – Stocks having potential for higher earnings. They tend
to reinvest the earnings and usually have High PE ratio and low
Dividend yields.
• Value stocks – Companies in mature industries and are expected to
yield low growth in earnings. Good assets value. Currently under valued
but can yield superior returns later.
Day 1 Day 2
What is Active equity fund management
•
An active fund manager seeks to give a better performance than on an index
•
Fund manager tends to look at specific attributes in selecting stocks.
•
Active fund manager believes, that his ability to buy right stock at the right
time, can translate into superior performance for his portfolio.
What is passive equity fund management?

•
Fund manager believes, that holding a well diversified portfolio is
the cost efficient way to better returns, he would tend to mimic the
market index.
•
It requires limited research and monitoring costs and is therefore
cheaper. (The Expenses are low)
•
Fund manager may choose to mimic a index, or a subset of the
index or choose a basket of shares from multiple indices.
•
A passive fund manager has to rebalance his portfolio every time
changes are made in the index.
Day 1 Day 2
Fund Management Styles
Active Passive
Index Funds
Diversified Non diversified
Sector Funds
Growth Value
Growing Under-priced
companies companies
Day 1 Day 2
What is the types of equity research done in MF?
Fundamental analysis – Future earnings and risk profile

considered (whether to buy or not) Fundamental Analysis is the
analysis of the profit potential of a company, based on numbers relating to
its products, sales, costs, profits and management of the company.
Technical analysis – Study of historic data on the company’s

share price movements and volume (When to buy and sell)
Technical Analysis is the analysis of the market prices and trading
volumes data to identify clues to market assessment of a stock.
Day 1 Day 2
Instruments in Indian Debt Market
• Certificate of Deposit – Issued by commercial banks and maturity of 91

days to 1 year.
• Commercial Paper – Issued by corporate bodies and maturity varies
between 3 months to 1 year
• Corporate Debentures – Secured by the physical assets
• Floating Rate Bonds
• Govt. Securities.
• Treasury Bills – Issued through RBI by GOI. Tenure is 91 days and 364
days.
• Bonds
Day 1 Day 2
Important points on Debt Portfolio Management
• Investments only in Market Traded Instruments (Not in loans as done by

banks)
• Debt instruments may be secured (debentures) or may be unsecured (FI
bonds)
• Instruments with maturity less than a year called Money Market Securities.
• Instruments with maturity above 1 year are called debt securities.
• Zero Coupon Bonds (discounted securities) do not pay regular interest at
intervals but are bought discount to their face value and redeemed at face
value.
Day 1 Day 2
Important
• Debt instruments are issued by government, corporate or
banks
• Debt instruments have fixed interest, floating interest or zero
interest or coupon i.e. on a discounted basis
• Debt markets are wholesale markets and investors are large
institutional investors, such as banks, insurance companies,
mutual funds and corporate due to large ticket sizes
• More than 90% of trading in debt markets is in government
securities
Day 1 Day 2
Current Yield (Very Important)
•
Nominal rate of interest is the rate that is paid to us by the
borrower
•
The real rate is the nominal rate less the rate of inflation.
•
Yield is the term used to signify the actual rate earned on an
investment.
•
Current yield = [Coupon/market price] * 100
Day 1 Day 2
Important points
– Principal or Par or Face Value – the amount representing the principal
borrowed and the rate of interest is calculated on this sum. This is the
amount payable on redemption
– Coupon – the interest paid periodically to the investor
– Maturity – the date on which the bond is redeemed. Term to maturity or
tenor is the period remaining for the bond to mature
– Put option – refers to the option given to the investor to sell (redeem) the
bond before maturity; investor may exercise the option when interest
rates go up, above coupon in the market
– Call option – refers to the option to the borrower to buyback
(repurchase) before maturity; issuer may exercise the option when
interest rates fall below the coupon rate
Day 1 Day 2
Measure of Bond Yields
• Yield to Maturity( YTM) – It is also known as bond’s Internal Rate
of Return (IRR). It is annual rate of return an investor would realize
if he bought a bond at a particular price, received all the coupon
payments, reinvested the coupon at same YTM and received the
principal at maturity.
• There is inverse relationship between price and YTM of a bond.

• Yield Curve – Graph showing yields for bonds of various
maturities, using a benchmark group of bonds. Also known as
TSIR ( term structure of interest rates). The curve is usually
upward sloping because longer maturities generally offer higher
yields and vice versa. Bond price movements
Interest
Price
Day 1 Day 2
Risks in Investing in Bonds
• Interest Rate Risk
• Reinvestment Risk
• Call Risk ( The issuer may call back)
• Default Risk
• Inflation Risk
• Liquidity Risk
Yield Spreads
−
Yield Spread = Yield of a particular bond – Yield of benchmark
security (risk free)
−
It is the risk premium paid by the bond to induce investor
−
Higher the credit rating, higher the safety and so lower the
yield spread
−
So if a bond is downgraded, the yield spread will widen.
−
Term to Maturity – It is period until the bonds maturity
Day 1 Day 2
Duration
• It is a more accurate measure of the portfolio maturity profile.
• It measure the percentage change in bond’s price with a change in
yield
• The Duration of a bond is less than its maturity, except for zero
coupon bonds
• Bonds with longer maturities have longer durations.
• An interest bearing bond with a higher coupon rate will have lower
duration because a higher proportion of the total inflows will be
received in the interim.
What is the relationship between the price and the yield of
the bond ?
−
Price and Yield are inversely related.
−
Changes in interest rate impact bond values in the opposite
direction.
−
Yield also gets increased by downgrading of credit rating of the
bond.
Day 1 Day 2
What are the various types of fixed income securities
available in the Indian Market?
Issuer Inst rument Mat urit y Invest ors

Companies, Provident f unds,
Dat ed Mut ual Funds , Primary
Cent ral Govt . Securit ies 2- 30 Years Dealers
Banks , Insurance
Companies, Provident f unds,
Cent ral Govt . T -Bills 91/364 days Mut ual Funds , Pd's
Dat ed Banks, Insurance
St are Govt . Securit ies 5-10 Years Companies, Provident f unds
Bonds, Banks, Insurance
st ruct ured Companies, Provident f unds,
PSU's Obligat ions 5-10 Years Mut ual Funds, Individuals
Banks, Mut ual Funds,
Corporat es Debent ures 1-12 Years Corporat es, Individuals
Corporat es,
Primary Commercial 3 mont hs - Banks, Corporat e, Financial
Dealers Paper 1 Year Inst it ut ions, Mut ual Funds
Cert if icat es of 3 mont hs -
Banks Deposit 1 Year Banks , Corporat es
Day 1 Day 2
Restrictions
• Mutual funds can invest only in marketable securities
• All investments are on delivery basis, no trading.
• A MF under all its schemes cannot hold more than 10% of the paid up capital of a
company.
• A MF scheme can invest max. 10% of its NAV in a single company.( Exception –
Index and Sectoral funds)
• Debt funds - single issuer not more than 15% of NAV for the ‘investment grade’
instrument, can be relaxed to 20% with approval of trustees and AMC
• Investment in the unrated instruments of a single issuer is restricted to 10% of NAV
and total for all issuers can not exceed 25% of NAV.
• MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $ 50 million,
whichever is lower.
• Maximum investment in unlisted shares is 10% of NAV for Closed ended
schemes
• Maximum investment in unlisted shares is 5% for Open ended schemes.
Day 1 Day 2
Inter Scheme Transfer
• Such transfers happen on a delivery basis, at market prices.
• Such transfers should not result in significantly altering the investment
objectives of the scheme involved.
• Such transfer should not be of illiquid securities, as defined in the valuation
norms.
• One scheme can invest in another scheme, up to 5% of net assets, No fee
is payable on these investments.
Investment in Sponsor Company

−
A mutual fund scheme cannot invest in unlisted securities of the
sponsor or an associate or group company of the sponsor.
−
A mutual fund scheme cannot invest in privately placed securities of the
sponsor or its associates.
−
Investment by a scheme in listed securities of the sponsor or associate
companies cannot exceed 25% of the net assets of the scheme
Day 1 Day 2
New Provisions on Investment Policy
• Minimum Number of Investors per scheme

• Purpose of MF is sharing the risks with a large number of investors.
• SEBI requires each scheme to have a minimum number of investors. So now each
scheme and individual plan under the scheme should have a minimum number of 20
investors AND no single investor should account for more than 25% of the corpus of
such scheme.
• OES are allowed three months or upto end of the succeeding calendar quarter from
the close of NFO to ensure compliance with this requirement
Fund of Funds Scheme

−
A FoF invests in the schemes of other MF.
−
A FoF scheme cannot invest in another FoF scheme.
−
A FoF is not allowed to invest its assets other than in schemes of
MF, except to the extent of its liquidity requirements.
−
A normal MF scheme cannot invest in any FoF scheme.
−
Maximum Expense ratio of FoF is capped 0.75%
Day 1 Day 2
Important points
• Yield and price move in opposite direction
• Certificate of Deposits are issued by BANKS
• Commercial Paper are issued by Corporate.
• Corporate Debentures are issued by Manufacturing Companies.
• Cash of a mutual fund is to be held with scheduled banks and not in any other bank.
Q-1 When similar maturity bonds are yielding 11% the bond with 9% coupon will be
traded at
(a) At par (b) Below par (c) Above par (d) Insufficient information.
Q-2 Calculate the current yield for the following security: 11.5% GOI Series 2010 - Face
Value Rs.1000 Current price Rs.1010
(a) 11.5% (b) 11.6% (c) 12.5% (d) 11.4%
Q-3 Which of the following instruments have the maturity exceeding one year
(a) Treasury bills (b) Certificate of deposits
(c) Commercial paper (d) Gilt securities.
Day 1 Day 2
Q-4 Duration of a portfolio is calculated to measure portfolio's sensitivity to changes in

the:
(a) Interest rates (b) Stock market indexes
(c) Inflation rates (d) None of the above.
Q-5 Generally the cyclical stocks have

(a) Higher P/E and lower dividend payout
(b) Higher P/E and higher dividend payout
(c) Lower P/E and lower dividend payout
(d) Lower P/E and higher dividend payout.
Answers: Q-1 : (b), Q-2 : (d), Q-3 : (d), Q-4 : (a), Q-5 : (d)
Day 1 Day 2
Chapter 10
Helping Investors with financial

planning

Day 1 Day 2
Definition and objective of FP
• It is identifying all the financial needs of an individual

– Translating needs to monetarily measurable goals
– Planning financial investments that will allow individual
to provide for and satisfy his future financial needs and
achieve his life’s goals.
The objective is to ensure that right amount of money is
available in the right hands at the right point in future to
achieve an individual’s financial goals.
Day 1 Day 2
Financial Planner
• A person who uses the financial planning process to help another person
determine how to meet his or her life goals.
• Possesses detailed knowledge of wide range of products and financial

planning tools and help clients in choosing the best products.
• He looks at all of client’s needs including budgeting and saving, taxes,

investments, insurance and retirement planning.
Benefits of Financial Planning

−
Financial Plans are tax efficient.
−
It provides direction and meaning to financial decisions.
−
It allows one to understand how each financial decision one makes affects
other areas of one’s finances.
Benefits to Financial Planner
−
Ability to establish long term relationships ( Multiple products to one client)
−
Financial Planner should ideally link his rewards and fees to the clients
financial success and achievement of the financial goals.
−
Ability to build a profitable business ( NO rebating)
Day 1 Day 2
Qualities of a Good Financial Planner
• Building trust with the client
• Good knowledge of Financial products
• Familiarity with taxation and estate planning issues
• Understanding of stages of client’s life and wealth cycle and asset allocation
• Independent judgement and balanced thinking
• Organized way of working
• Regular contact with clients
• Clear Focus on Overall Financial Planning of client rather than on individual
transactions.
• The basis of genuine advice should be Financial planning to suit the investor’s
advice.
Steps to Financial Planning
−
Establish and define client-Planner Relationship
−
Gather client data, Define client Goal
−
Analyze and evaluate clients financial Status
−
Develop and present financial planning recommendations
−
Implement the financial planning recommendation
−
Monitor the financial planning recommendations
Day 1 Day 2
Important responsibilities of investors in the financial
planning exercise?
• Should set measurable financial goals.
• Should understand the impact of financial decisions on their cash flows and
their income.
• Should be willing to revise and re-balance their portfolios with changing
market conditions, performance and their changing needs and changes in
lifestyle or circumstances( inheritance, marriage, birth, house purchase or
change of job status)
• Investors benefit immensely by starting early and being systematic and
disciplined in their approach.
Day 1 Day 2
Very important points on financial planning
• The planner can look at all the clients need including budgeting, saving,
taxes, investments, insurance and retirement planning.
• A financial planner can link his own rewards and fees to the client’s financial
success and the achievement of their financial goals
• MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR FINANCIAL
PLANNING.( CORE PRODUCT)
• Financial is not only investing. It comes before investing.
• It is relevant for all category of clients.
• It is not as same as retirement planning.
• It is not only Tax Planning.
• Financial planning is important at younger stage of life.
Day 1 Day 2
Important points on Financial Planning
• The basis of genuine investment advice should be

financial planning to suit the investor’s situation. It should
not be current market condition.
• Financial Planning allows a person to achieve financial
goals through proper management of finances.
• Financial planners and their clients should focus on
allocating funds to different asset classes.
• Financial planning is relevant not only to HNIs
• Financial planning works better for younger/ middle aged
client.
Day 1 Day 2
Stages of Life Cycle
• Childhood Stage
• Young Unmarried Stage
• Young Married Stage
• Young Married with Children Stage
• Married with Older Children Stage
• Pre-retirement Stage
• Retirement Stage
Day 1 Day 2
Wealth cycle for investors (Very
Important)
Stage Financial needs Investment preferences
Accumulation stage Investing for long term identified Growth options and long term
financial goals products.High risk appetite
Transition Stage Near term needs for funds as Liquid and medium term investments.
pre-specified needs draw closer Lower risk appetite

Reaping Stage Higher liquidity requirements Liquid and medium term investments.
Preference for income and debt products

Inter Generational Long term investment of inheritance Low liquidity needs.
transfer Ability to take risk and invest for the long term

Sudden wealth surge Medium to long term Wealth preservation.
Preference for low risk products
Day 1 Day 2
Affluent investors – the rich investors are of 2 types:
Wealth creators – Those who prefer growth and are willing to take
the risk of equity investments. For such investors 70% to 80%
allocation to diversified equity and sector funds is advisable.
Wealth preservers – Those who prefer capital safety and are risk
averse; they prefer debt investments. For such investors a
conservative portfolio with a 70% to 80% exposure to income, gilt
and liquid funds would be appropriate.
Day 1 Day 2
Questions for
Revision
Q-1 The stage at which the goals and purpose towards which the clients have been
investing have arrived, is known as
(a) Accumulation (b) Transition (c) Reaping (d) Transfer.
Q-2 As a good financial planner, you should avoid applying the normal Life Cycle Model
to your client who is
(a) A 25-year-old unemployed person (b) A 60-year-old person who has just retired
(c) A Well-known 32 years old cricketer (d) A 35-year-old unmarried person.
Q-3 A salaried executive in late fifties who is planning to retire at 60 years of age, his
wealth cycle stage is
(a) Accumulation (b) Transition (c) Reaping (d) Transfer.
Q-4 For older investors who want to transfer their wealth
(a) No financial planning is required
(b) The right investment strategy depends upon who the beneficiaries are
(c) The right investment strategy depends upon the state of the stock market
(d) All the funds can be invested in aggressive equity funds.
Day 1 Day 2
Q-5 A high amount of equity investment is suggested to the investor if he is in

(a) Accumulation phase (b) Transition phase
(c) Distribution phase (d) Investment has no such relation with any phase of life.
Answers:
Q-1 : (c), Q-2 : (c), Q-3 : (b), Q-4 : (b), Q-5 : (a)
Day 1 Day 2
Chapter 11
Recommending Financial Planning

Strategies to Investors

Day 1 Day 2
• FINANCIAL PLANNING STRATEGIES
• Harness the Power of Compounding – 1% interest per month is better than
12% yearly return.
• Buy and hold is most common strategy BUT most common mistake. Ideally
it should be, track your investments, discard the non performers and keep
the good performers.
• Rupee cost averaging
• Value Averaging.
• Jacob’s Rebalancing Strategy ( Combination of RCA and Value averaging
strategies- Using a aggressive growth fund and liquid fund of the same
family.) ( putting regularly money in liquid fund and set a target value for the
equity fund)
Day 1 Day 2
• Buy and hold strategy may not be a beneficial strategy because investors
may not weed out poor performing companies and invest in better
performing companies
• Rupee Cost Averaging (RCA) is a technique that involves:
– Fixed amount invested at regular intervals
– When NAV is down, more units are bought and when price is high, fewer
units are bought
– Over a period of time, the average purchase price of the investor’s
holdings will be lower
– Investors use the SIP or AIP to implement RCA
• Disadvantage: RCA does not tell when to sell or switch from one scheme to
another.
Day 1 Day 2
Rupee Cost Averaging (RCA)
Value of
Amount Invested No of units Cumulative No Holding
Month (Rs) NAV (Rs) bought of units (Rs)
1 1000 10.00 100.00 100.00 1,000.00

2 1000 12.50 80.00 180.00 2,250.00
3 1000 14.25 70.18 250.18 3,565.00
4 1000 11.75 85.11 335.28 3,939.56
5 1000 10.50 95.24 430.52 4,520.46
6 1000 9.00 111.11 541.63 4,874.68
7 1000 8.50 117.65 659.28 5,603.86
8 1000 7.65 130.72 790.00 6,043.48
9 1000 8.80 113.64 903.63 7,951.97
10 1000 9.25 108.11 1,011.74 9,358.61
11 1000 12.00 83.33 1,095.07 13,140.90
12 1000 15.00 66.67 1,161.74 17,426.12
Average Cost 12000/1162= 10.33
Day 1 Day 2
• Value Averaging (VA) involves:
– A fixed amount is targeted as desired portfolio value at regular intervals
– If market has moved up, the units are sold and the target value is restored
– If market moves down, additional units are bought at the lower prices
– Over a period of time, the average purchase price of the investor’s holding will
be lower than if one tries to guess the market highs and lows
• VA is superior to RCA because it enables the investor to book profits and rebalance
the portfolio
• Investors can use the systematic withdrawal and automatic withdrawal plan to
implement value averaging
• Investors can also use an equity and a money market mutual fund to implement
value averaging.
Day 1 Day 2
Value Averaging
Target Value Cumulative no of

Month (Rs) NAV (Rs) Value of Holding Units to invest units
1 1000 10.00 100.00 100.00 100.00
2 2000 12.50 1,250.00 60.00 160.00
3 3000 14.25 2,280.00 50.53 210.53
4 4000 11.75 2,473.68 129.90 340.43
5 5000 10.50 3,574.47 135.76 476.19
6 6000 9.00 4,285.71 190.48 666.67
7 7000 8.50 5,666.67 156.86 823.53
8 8000 7.65 6,300.00 222.22 1,045.75
9 9000 8.80 9,202.61 (23.02) 1,022.73
10 10000 9.25 9,460.23 58.35 1,081.08
11 11000 12.00 12,972.97 (164.41) 916.67
12 12000 15.00 13,750.00 (116.67) 800.00
Day 1 Day 2
Some Key concepts of Financial Planning
• When to invest – when they have money to invest
• When to cash out
– When the goals have arrived and clients need the money for the
purpose for which they have invested
– IF the overall market appears overvalued in terms of
fundamentals and historic valuations
• Start planning and investing regularly
• Have realistic expectations
• Invest Regularly
• The Strategy advisable for an investor to maximise investment return
in long run is Switch from poor performers to Good performers.
Day 1 Day 2
Asset Allocation
• Asset allocation refers to deciding the composition of the portfolio in terms

of debt, equity and money market segments
• Asset allocation differs from investor to investor and depends upon their
situation, their financial goals and risk appetite
• The asset allocation for an investor depends upon his life and wealth cycle
stage
• A model portfolio creates and ideal approach for an investor’ situation and is
a sensible way to invest.
Day 1 Day 2
Asset Allocation
• Investors can have 2 approaches:

– Fixed asset allocation
– Flexible asset allocation
• Fixed asset allocation means
– maintaining the same ratio between various components of the portfolio
i.e. being disciplined
– Re-balancing the portfolio in a disciplined manner
– Periodical review and returning to original allocation
– If value of equity component increases, investor books profits
• Flexible asset allocation means
– Allowing the portfolio profits to run, without booking them
– If equity market appreciates, it results in higher proportion in equity than
debt.
Day 1 Day 2
Asset Allocation – The Strategic Tool
• Allocation of money between equity, debt and money market

instruments.
• Depends upon situations, financial goals and risk appetite.
• Benjamin Graham advocates 50/50 split between equities and bond .
But Bogle suggests different combinations.
• Bogle gives a nice rule of thumb for asset allocation : Debt portion for
an investors portfolio should be equal to his age.
• Example: A 30 year old investor will make 70/30 asset allocation.
Day 1 Day 2
What is Bogle’s strategic asset allocation?
• Older investors in the distribution phase:
- 50% equity : 50% debt
• Younger investors in the distribution phase:
• Older investors in the accumulation phase:
• Younger investors in the accumulation phase:
Day 1 Day 2
Q-1 A criticism of rupee-cost averaging is
(a) Investment is for the same amount at regular intervals
(b) Over a period of time, the average purchase price will work out higher than if one tries to
guess the market highs and lows
(c) It does not inform an investor when to buy, sell or switch from one scheme to another
(d) Rupee cost averaging has no serious shortcomings.
Q-2 As per Bogle’s strategic allocation the portfolio for the older investor in accumulation
phase should be
(a) 50% equity; 50% debt (b) 60% equity; 40% debt
(c) 70% equity; 30% debt (d) 80% equity; 20% debt.
Q-3 Fixed ratio of asset allocation means
(a) It is a relatively aggressive approach for managing investments
(b) Investing the same amount every month
(c) Not doing any re-balancing
(d) Balance is maintained by liquidating a part of the position in the asset class with higher
return and reinvesting in the other asset with lower return
Q-4 Asset allocation for any investor generally depends on
(a) Age (b) Financial status (c) Investment objective (d) All of the above.
Answers: Q-1 : (c), Q-2 : (c), Q-3 : (d), Q-4 : (d)
Day 1 Day 2
Chapter 12
Selecting the right Investment

Products for Investors

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• Physical Assets include gold and real estate and traditionally very popular
– Gold is not subject to value erosion on account of rupee depreciation
– Gold is perceived as a protection/hedge against inflation
– Gold-linked unit schemes from mutual funds in India are under way
– Real estate requires a high capital investment and may not be easy to liquidate
at the appropriate price
– Some fund houses are preparing to launch Real estate mutual funds in the near
future
• Financial assets include equity, debt and money-market instruments
– Equity, debt and money market instruments are direct investments with the
borrower/ issuer of securities
– Mutual funds represent an indirect investment through an intermediary.
• Products by issuer:
• Bank deposits
– Offer high liquidity and perceived safety
– Low or negligible returns after factoring inflation and tax
Day 1 Day 2
• Corporate
• Equity
– Issued publicly and listed
– Issued privately and unlisted
– Investors may acquire shares either at the time of IPO or secondary (stock)
market
– Equity offers high growth potential and liquidity
– The challenge is to identify the right shares that are likely to appreciate
– Requires capital to build a diversified portfolio.
– The Listing of shares at Stock Exchange ensures High Liquidity as you can
trade regularly to sell your shares.
• Debt
– Debentures issue a fixed rate of interest
– Debentures are secured by the assets of the borrower
– Debentures are provided rating by credit-rating agencies
– Bonds are also generally provided rating by independent agencies if the maturity
exceeds 18 months
– Creditworthiness of borrower and risk of default have to be analysed before
investing in these bonds and debentures
– Company fixed deposits carry a higher interest rate and are unsecured
– These would also have tax implications.
– The Rate of interest paid by a company on debentures issued by it depends on
the Company’s Credit rating.
– The most important factor to look for when investing in a corporate fixed deposit
is the Credit Rating of the deposit.
Day 1 Day 2
• Government
• Public Provident Fund
– 15-year product
– Risk-free government obligation
– Open to individuals and HUFs
– Only one account permitted per entity
– Offers tax-free interest of 8% p.a. and contribution up to Rs. 70,000 (min
Rs. 500) are eligible for deduction under section 80C
– Option to withdraw 50% of 4th year balance in the 7th year
– Restriction on withdrawal reduces liquidity.
• Indira and Kisan Vikas Patra
– Introduced as post office scheme to tap savings in rural India
– Very popular with urban investors also
– Current yield is 8% over 6 years, fully taxable
– IVP permits cash investment and protection of identity
– Easily transferable and liquid.
Day 1 Day 2
• RBI Relief Bonds
– Issued by RBI on behalf of the Government of India
– A 5-year investment product with 8% interest offering
– Interest is currently taxable (used to be tax-free earlier)
– Free of risk of default
• Government Securities
– Long-term government paper
– Risk-free government obligation
– Low-return and define the benchmark rate of return on the yield curve
– Specially appointed Primary dealers deal in G-Secs
– Generally high ticket investments
– Best accessible to small investors through mutual funds.
Day 1 Day 2
• Life Insurance
– Viewed more for investment and tax purposes than a vehicle for risk protection
– Premium qualify for deduction under section 80C
– Important to assess need for life insurance with respect to earning potential
– A Without Profits policy offers the Sum Assured in the event of death only
– A With Profit policy pays not only the Sum Assured but also bonus declared from time to
time
– In case a policy is discontinued during its tenure, the policy’s surrender value is paid which
is a proportionate value based on premiums paid so far
• A ‘convergence’ of insurance and mutual funds is the development of Unit-Linked Insurance
products – which offers investors choice of asset allocation between debt and equity.
• The Amount an insurance company pays to the nominee if a policyholder dies is known
as the SUM ASSURED.
Day 1 Day 2
• A comparison of investment products can be done on risk, return, volatility and
liquidity
• Mutual funds combine the advantages of all investment vehicles while doing
away with their shortcomings
• The returns in a mutual fund are adjusted for market movements.
• In India, Individual Investors does not direct access to Money Market

Instruments.
• The biggest advantage of Investment in Gold is hedge against inflation.
• The biggest disadvantage of investment in Real estate is High Purchase
Price. You have to invest huge amount.
• The advantage of bank deposits is liquidity, high perceived safety and
low entry price. ITS disadvantage is low Yield after TAX.
Day 1 Day 2
Important points
• Mutual Funds are more recommended option for individual investors than
direct equity.
• Direct Investment in stock market can be a better option than investing in
Mutual Funds if the investor has large capital, knowledge and resources for
research.

Q-1 RBI relief bonds have the maturity of
(a) 3 years (b) 5 years (c) 7 years (d) 10 years
Q-2 Which of the following is not the advantage of bank fixed deposits?
(a) Safety (b) Liquidity (c) Lower entry price (d) High yield
Answers:
Q-1 : (b), Q-2 : (d)
Day 1 Day 2
Chapter 14
Recommending Model Portfolios and

selecting the right Fund

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The steps in developing a model portfolio for an investor
( Jacob’s Four Step Program – Developing a Model portfolio)
• Develop long term goals.
• Determine asset allocation.
• Determine sector distribution.
• Select specific fund managers and their schemes.
Developing a Model Portfolio is the most Effective ways to invest through
Mutual Funds.
Day 1 Day 2
Jacob’s Model portfolios recommended for
investors according to their life cycle stages:
• Young unmarried professionals :
– 50% in aggressive equity funds.
– 25% in high yield bond funds, growth and income funds.
– 25% in conservative money market funds.
Young couple with 2 incomes and 2 children:
– 10% in money market funds.
– 30% in aggressive equity funds.
– 25% in high yield bond funds and long term growth funds.
– 35% in municipal bond funds.
Day 1 Day 2
Contd:
• Older couple single Income :
– 30% in short term municipal funds
– 35% in long term municipal funds
– 25% in moderately aggressive equity
– 10% emerging growth equity
• Recently retired couple :

– 35% in conservative equity funds for capital preservation / income
– 25% in moderately aggressive equity for modest capital growth
– 40% in money market funds
Day 1 Day 2
What is the recommended portfolio for investors in accumulation
phase?
• Diversified Equity : Sector and balanced funds

– 65 – 80%
• Income and gilt funds :
– 15 – 30%
• Liquid funds and bank deposits :
– 5%
What is the recommended portfolio for investors in distribution

phase?
−
Diversified Equity and balanced funds:

15 – 30%
−
Income funds :

65 – 80%
−
Cash funds:

5%
Day 1 Day 2
• Investors in the Inter-Generational Transfer Phase:
– The recommended investment strategy will depend upon the

beneficiaries
• Investors in the sudden wealth stage :
– Take into account the effect of taxes,
– Keep the money in safe liquid investments and take the time to decide
what to do with the money.
Day 1 Day 2
Selecting the right equity funds
• Look at Fund size

• Look at fund age
• Look at Portfolio’s managers experience
• Look at cost of investing
• Portfolio characteristics like Cash position, portfolio concentration, market
capitalisation of the fund, portfolio turnover, portfolio statistics.
Day 1 Day 2
Most important points
• The Liquidity needs of an investor are met through Money Market Funds.
• A retired person generally needs a greater proportion of Debt Funds.
• A young investor, for growth and wealth creation, should be advised to
invest in Equity Growth Funds.
• A very High proportion of investment in all types of equity funds is
advised for investors in accumulation phase.
• The Transition phase of an investor’s wealth cycle is when the Financial
Goals are approaching.
• A high proportion of investment in income funds is required by investors
in distribution phase.
• Retired investors should not invest in securities which bear risk of
capital erosion.
Day 1 Day 2
Very Important Points on Equity Funds portfolio
Characteristics.
• An Equity Fund can be said to be concentrated when Top 10
holdings account for more than 50% of net assets invested.
• The size of the market cap of fund’s equity holdings is inversely
proportional to the level of risk assumed by the fund. ( Large Market
Cap have low risk).
• A steady holdings of investments in an equity fund’s portfolio
indicates both Long Term orientation and Lower Transaction Costs.
• Before investing in equity fund one should look at ExMark, Beta,
Yield, Age and size of the fund, Portfolio turnover rate.
Day 1 Day 2
Debt Funds – Important points
• Debt Schemes are popular because the returns are more predictable. Equity returns
are volatile and very less predictable.
• If an investor needs income, he should select a fund with high current yield.
• YTM ( Yield to maturity) of debt fund’s portfolio gives an indication of Total Return
( Not current income).
• Longer the average duration of debt fund portfolio, greater the interest rate risk.
• Long term Debt funds carry high interest rate risk.
• The differentiating factor among debt funds of comparable maturity and quality is
Costs.
• Running a Money Market Mutual Fund requires more of Trading Skills.
• The investors should invest in Debt Fund with a Higher Rated Portfolio and Lower
Expense Ratio.
• An Ideal money market MF has lower expense Ratio.
Day 1 Day 2
Balanced fund
Balance fund is rarely a 50/50 fund!
Equity oriented Balanced funds (up to 65% in equity)
Income oriented Balanced fund (up to 65% in debt)
Question for Revision

Q-1 A retired person should generally invest in
(a) Equity funds (b) Index funds (c) Income funds (d) Liquid funds.
Q-2 Which one of the following statements is NOT a characteristic of a balanced
fund?
(a) The fund targets investors who wish to invest their temporary surpluses
(b) The fund has lower potential risk as compared to pure growth funds
(c) The fund's objectives are to generate both income and long term capital
appreciation
(d) The portfolio consists of both bonds and equity shares.
Day 1 Day 2
Q-3 An ideal money market fund should have

(a) High returns (b) High risk (c) Long term objectives (d) Lower expense ratio.
Q-4 Which of the following is true about Jacob's Model Portfolio for investors in
distribution phase?
(a) Investment in diversified equity should be around 15% -30%
(b) Investment in income and gilt funds should be around 15% -30%
(c) Investment in liquid funds should be around 15% -30 %
Answers:
Q-1 : (c), Q-2 : (a), Q-3 : (d), Q-4 : (a)
Day 1 Day 2
Chapter
15
Business Ethics in Mutual Fund

Day 1 Day 2
Business
• Business Ethics means rulesEthics
of acceptable and good conduct.
• Business must be conducted in a disciplined, organized and fair manner.
• Ethical practice means practice in the interest of unit holders of the scheme.
• A consumer who feels cheated will never return to buy the product again.
• BE ensures that the customer remains a long term buyer.
Business Ethics for Mutual Fund Business

−
MF is also a business where investors buy investment products
−
MF and sales persons are required to adopt ethical, fair and
good business practices and apply them to all those involved in
selling/ servicing activities.
−
A salesperson is expected to know the product thoroughly and
describe it accurately.
Day 1 Day 2
Objectives of Business
Ethics
• Simply being honest, open and transparent with your potential clients.
• Rules are needed to ensure that you deal with the clients fairly and
transparently.
• To protect the clients from being cheated or exploited.
• To ensure a level playing field among all categories of business participants.
• To ensure fairness in dealing with investor.
Areas particularly monitored by SEBI

−
Fund structure and Governance
−
Exercise of Voting Rights by Funds
−
Fund Operations.
Day 1 Day 2
Regulatory Requirements regarding Principle of
Independence
• Separation of Functions – No one constituent is in control of the investors
assets.( Trust, AMC, Custodian, Registrar)
• Independence of Organisations – Trust independent of AMC,
• Independence of Personnel - Trustees can not serve as Director of AMC

they supervise or even any other AMC. Independent Trustees and BOD
members also.
Examples of Unethical practices
−
Insider Trading – Buying or selling securities on the basis of privileged
information available to the funds by persons who are seen as insiders to the
company.
−
Preferential Treatment to Selected investors – Cut off time has been introduced
now to prevent late trading abuses.
−
Personal trading by fund managers and employees
−
Front Running – Fund manager buying or selling securities ahead of doing the
same transaction for the fund.
−
Some MF ban personal trading by their fund managers.
Day 1 Day 2
Regulations on Personal Trading
• AMC should file with trustees a quarterly statement of dealings in securities

by the key personnel of the AMC.
• The director of AMC has be file details of transaction in MF, where they
exceed the value of Rs.1 lakh.
• In case of Trustees, they may report only those transaction which exceed
the value of Rs.1 lakh
• Trustees have to certify that the personnel of AMC don’t indulge in front
running or self dealing.
Day 1 Day 2
Other Regulations
• Mandatory for the AMC to appoint a compliance officer to monitor and

ensure implementation of all laws / regulations.
• All distributors and agents follow the code of conduct laid down in the 5th
schedule of SEBI MF regulations 1996.
• A more detailed code called AGNI (AMFI Guidelines and Norms for
Intermediaries) has been put into place by AMFI for all distributors and
agents.
• SEBI has issued detailed guidelines that are mandatory for AMCs to follow
while advertising their mutual fund products. The basic guidelines are
covered in the 6th schedule of the SEBI regulations.
Day 1 Day 2
Q-1 To sell mutual funds all distributors as required to be registered with
(a) AMFI (b) SEBI (c) Registrar (d) All trustees.
Q-2 All distributors and agents follow the code of conduct laid down in the
(a) 3rd Schedule of SEBI (b) 4th Schedule of SEBI
(c) 5th Schedule of SEBI (d) 6th Schedule of SEBI.
Q-3 What is insider trading?
(a) Buying and selling securities ahead of doing the same transaction for the fund.
(b) Buying and selling securities on the basis of privileged information available to the
fund by persons who are insiders to the company.
(c) Both of the above
Answers:
Q-1 : (a), Q-1 : (c), Q-1 : (b)
Day 1 Day 2
Thanks
Target should be to Pass the exam –

Do not try to attempt all the questions.
Answer only those in which you are
confident.
'Best of Luck'
Day 1 Day 2

Amfi

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AMFI MUTUAL FUND

(ADVISOR) – April 2008

Part -1 1. Concept and Role of Mutual Funds

2. Fund Structure and

Concept and Role

One fund can have schemes of similar objectives so, selection

Phase 1 – ( 1964 – 1987)- Growth of UTI

Phase 2 – ( 1987 – 1993)- Entry of Public Sector Funds

• Phase 3 – ( 1993-1996) – Emergence of Private Funds

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

Phase 6 – From 2004 onwards : Consolidation and Growth

• UTI Act repealed in 2003.

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

• Merger and Acquisitions happening.

• Fidelity, Largest MF has entered India.

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

What are open-ended funds?

Equity Debt Money Market

Equity Funds Fixed Income Money Market

Balanced Funds Liquid Funds

What are Gilt Funds?

• FTPs are closed ended in nature.

Debt Funds Re t urns c o mpa rat ively le s s ris ky t ha n e quit y f unds

Fund Structure and

Trainer must elaborate the concept before starting the ppt.

Responsible for investors

Fund Management Marketing & Distribution

Banks Registrar & Custodian*

*Custodians are appointed by Trustees

• A sponsor of a mutual fund can act as the distributor

Legal and Regulatory Framework

Trainer must elaborate the concept before starting the ppt.

What are self regulatory organizations (SRO’s)?

Questions for Revision

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

• In USA, the OD is known as prospectus

Fund distribution and Sales Practices

Trainer must elaborate the concept before starting the ppt.

Investor Plans and Services

Trainer must elaborate the concept before starting the ppt.

Other Investment Services

Measuring And Evaluating Mutual

Trainer must elaborate the concept before starting the ppt.

• Assume investment of Rs. 10000

Borrowings by Mutual Fund

• 3 kinds of benchmarks are used – Relative to market as a whole,

• Main benchmark for debt funds is I-sec

• Tracking Error – Applicable for Index Fund

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

• Portfolio composition of two funds is similar. ( Gilt cannot be compared with

• Fund size should be comparable.( same size)

• Expense Ratios is also important factor

• Funds should be compared over the same periods only

Benchmarking Debt and MM Funds

Helping Investors understand Risks in

Trainer must elaborate the concept before starting the ppt.

Volatility of an Equity mutual fund comes from:

– Risk adjusted performance calculation is called Alpha.

Risk Adjusted performance

Sharpe ratio and Treynor Ratio

Questions for Revision

Part-3 1. Accounting, Valuation and Taxation