Understanding Mutual Funds and Their Operations

NJ GURUKUL
NISM –
SERIES V – A :
MUTUAL FUND DISTRIBUTORS

CERTIFICATION EXAMINATION
Presentation Updated On Aug 18

EXAMINATION OBJECTIVES
 Know the basics of mutual funds, their role and structure,

different kinds of mutual fund schemes and their features.
 Understand how mutual funds are distributed in the
market-place, how schemes are to be evaluated, and how
suitable products and services can be recommended to
investors and prospective investors in the market.
 Get oriented to the legalities, accounting, valuation and
taxation aspects underlying mutual funds and their
distribution.
 Get acquainted with financial planning as an approach to
investing in mutual funds, and an aid for advisors to
develop long term relationships with their clients.
ASSESSMENT STRUCTURE
 The examination consists of 100 questions of 1 mark each.

 Should be completed in 2 hours.
 The passing score on the examination is 50%.

There shall be NO negative marking. So, attempt all
questions.
SCHEDULE
 Day 1 :  Day 2 :

Chapter 1 
Chapter 8

Chapter 2 
Chapter 6

Chapter 3 
Chapter 9

Chapter 4 
Chapter 10

Chapter 5 
Chapter 11

Chapter 7 
Chapter 12
CHAPTER 1
CONCEPT AND ROLE OF A
MUTUAL FUND
CONCEPT OF MUTUAL FUND
 Mutual fund is a vehicle to mobilize moneys from

investors, to invest in different markets and securities, in
line with the investment objectives agreed upon, between
the mutual fund and the investors.
 In other words, through investment in a mutual fund, a
small investor can avail of professional fund management
services offered by an asset management company.
 The ownership of the fund is thus joint or mutual, the fund
belongs to all investors.
ROLE OF MUTUAL FUNDS
 Primary Role is to assist investors in earning an

income or building their wealth.
 It is possible for mutual funds to structure a
scheme for any kind of investment objectives.
 The the mutual fund structure, through its various
schemes, makes it possible to tap a large corpus
of money from diverse investors
ULTIMATE BENEFIT
 The money that is raised from investors, ultimately benefits
governments, companies or other entities, directly or indirectly, to
raise moneys to invest in various projects or pay for various
expenses.
 Mutual funds can also act as a market stabilizer and therefore
viewed as a key participant in the capital market of any economy. .
 Important : As a large investor, the mutual funds can keep a check
on the operations of the investee company, and their corporate
governance and ethical standards.
 Funds raised through Mutual Funds are invested in various projects,
resulting in increased employment in the economy as well as within
the intermediaries of Mutual Fund industry and also results in growth
in revenue of the Government through more taxes.
WHY MUTUAL FUND?
 Mutual funds seek to mobilize money from all possible investors.

Various investors have different investment preferences.
 In order to accommodate these preferences, mutual funds mobilize
different pools of money. Each such pool of money is called a
‘Mutual Fund Scheme’ as mentioned before.
 Every scheme has a pre-announced investment objective. When
investors invest in a mutual fund scheme, they are effectively
buying into its investment objective. The objective can be to invest
in Equity, Debt, Gold or it can be to invest in all of them together
through various hybrid schemes.
OPERATIONS OF MUTUAL FUND
 The investment in a Mutual Fund scheme gets translated

into units of the scheme. Thus, the investor is issued 'units'
for his investment.
 Under the law, every unit has a face value of Rs. 10.
(However, older schemes in the market may have a
different face value).
 No. of Units * Face Value (Rs. 10) = Unit Capital
 Returns in Mutual funds can be earned through
 Interest income
 Dividends on the investments it holds
 Capital gains / capital losses when it sells the investments
OPERATIONS OF MUTUAL FUND - AUM
 The relative size of mutual fund companies is assessed by their

Assets Under Management (AUM).
 When a scheme is first launched, assets under management
would be the amount mobilized from investors. Thereafter, if the
scheme has a positive profitability metric, its AUM goes up; a
negative profitability metric will pull it down.
 Further, if the scheme is open ended contributions from investors
boost the AUM. Conversely, if the scheme pays any money to the
investors, either as dividend or as consideration for buying back
the units of investors, the AUM falls.
 The AUM thus captures the impact of the profitability metric and
the flow of unit-holder money to or from the scheme.
OPERATIONS OF MUTUAL FUND
 It is possible that the market value of the securities in the

portfolio is absolutely different than its purchase price.
Difference between the Purchase Price and Current Market
Price of the securities is called ‘Valuation Gains /
Valuation Losses’ (When the securities are not sold –
They are still lying in the portfolio).
 The true worth of a unit of the scheme is otherwise called
‘Net Asset Value (NAV) of the scheme’.
 When a scheme is first made available for investment, it is
called a ‘New Fund Offer’ (NFO).
IMPORTANT POINTS
 The ownership is in the hands of the investors (Unit

holders) who have pooled in their funds so the ownership is
‘Joint and Mutual’.
 The price at which the units are bought and sold from the
AMC is called ‘NAV’ (loads not considered) and it changes
every day.
 In India, Mutual Funds are constituted as a TRUST.
 Risk can be divided into two : i. Standard Risk ii. Specific
Risk. Standard Risk Factors are common for all Mutual
Funds as against Specific risks
 Mutual Funds are not allowed to invest in ‘Art’ in India.
ADVANTAGES
 Portfolio Diversification
 Reduction In Risk
 Professional Management
 Economies Of Scale
 Liquidity
 Tax Deferral – Payment of Tax at the time of sale only.
 Tax Benefits – ELSS
 Convenience And Flexibility
 Regulatory Comfort
 Systematic Approach To Investment – SIP, STP and SWP
SIP, STP AND SWP
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Scheme 1 Scheme 2
SystematicTransfer Plan
SIP, STP AND SWP
 Systematic Investment Plan (SIP) :

 SIP is an approach where the investor invests
constant amounts at regular intervals.
 A benefit of such an approach is, it gives Rupee Cost
Averaging.
 Through an SIP, the investor does not end up in the
unfortunate position of acquiring all the units at the
peak of the market.
 Mutual funds make it convenient for investors to lock
money into SIPs by investing through Post-Dated
Cheques (PDCs), ECS or standing instructions.
SIP, STP AND SWP
 Systematic Withdrawal Plan (SWP) :
 Just as the investors do not want to buy all their units at the market
peak, they also do not want to redeem all their units at the market
trough.
 Investors can opt for a safer route of offering for re-purchase, a
constant value against units.
 Mutual funds make it convenient for investors to manage their
SWPs by indicating the amount, periodicity (generally monthly) and
period for their SWP.
 Accordingly, the mutual fund will re-purchase the appropriate
number of units for the unit-holder, without the formality of requiring
a re-purchase instruction for each transaction.
 Some schemes even offer the facility of transferring only the
appreciation or the dividend.
SIP, STP AND SWP
 Systematic Transfer Plan (STP) :

 This is a variation of SWP.
 In a STP, the amount that is withdrawn from a scheme is re-
invested in some other scheme of the same mutual fund.
 Thus, it operates as a SWP from the first scheme, and a SIP
into the second scheme.
 STP is a combination of SWP and SIP
 The Unit-holder can avoid two sets of paper work (Sale and
Re-purchase) for every period.
 Thus, STP offered by mutual funds is a cost-effective and
convenient facility.
DISADVANTAGES
 Lack of customization
 Choice overload – However, SEBI has introduced the
categorization of mutual funds to ensure uniformity in
characteristics of similar type of schemes. This will
help investors to evaluate the different options
available before making informed decision to invest.
 Issues relating to management of portfolios of Mutual
Funds
 No control over costs – However, SEBI has imposed
certain limits on the expenses that can be charged to
any scheme.
CLASSIFICATION OF MF
Open Ended
Basic Features Close Ended Funds
Funds
Purchase / Can be done at any Can be done during NFO only. Post NFO,
Additional time, even after the additional purchases can be made only
Purchase NFO. through stock exchanges.
Only at maturity. However, Post NFO,

transactions can be done through Stock
Redemption Any time Exchanges. (It is mandatory for them to be
listed on a stock exchange – Price at stock
exchange can be different from NAV.)
No of Units Variable Fixed
Unit Capital Variable Fixed
SEBI has abolished entry load since 1st August 2009 from all mutual fund schemes. Prior to
that, the purchase transactions were happening at a price linked to the NAV.
 Interval Funds :
 Basically close ended funds, but combines the features of open
ended funds also.
 Opens at certain predetermined intervals.
 The periods when an interval scheme becomes open-ended, are
called ‘transaction periods'. So, any sort of transactions can be
done during this period. The period between the close of a
transaction period, and the opening of the next transaction period
is called ‘interval period’.
 Minimum duration of a transaction period and interval period is 2
and 15 days respectively.
 During the intervals, the units are compulsorily listed on stock
exchanges.
Basic
Active Funds Passive Funds
Features
Get higher returns, beat the
Objective market
Mirror the returns of the market
Does not have to be active as he will

Fund Very active, chooses take only those securities which are
securities in the portfolios and part of the benchmark whose returns
Manager’s churn the portfolio if required, are to be mirrored and no churning
Activities to get better returns required as market returns are not to
be beaten.
Expense
High Low
Ratio
Diversified Equity or Debt
Examples Scheme
Index Funds
SCHEME RISK PROFILE
Risk Level Debt Funds Hybrid Funds Equity Funds

High Risk
Se ctor Funds
Balanced fund base d on
Flex ible a sse t alloca tion
Grow th Funds
High Yie ld De bt Fund
Dive rsifie d Equity Funds
Index Funds
Va lue Funds
Equity Income Funds

Divide nd yie ld Funds
Fix e d a sse t alloca tion
Monthly Income Pla ns
Capita l prote ction funds

Diversified De bt Fund
Gilt Funds
Money Marke t & Liquid

Low Risk sche me s
CLASSIFICATION OF MF – AS PER
INVESTMENT OBJECTIVE
 Equity Funds :
 Has an investment objective to invest largely in equity shares and
equity-related investments like convertible debentures.
 The investment objective of such funds is to seek capital appreciation
through investment in growth assets.
 Debt Funds : Schemes with an investment objective that limits
them to investments in debt securities - Government or Corporate.
 Hybrid funds : Have an investment charter that provides for
investment in both Debt, Equity and even in Gold
CONCEPT OF EQUITY & DEBT
Equity:
Equity represents ownership in the company that has issued the

shares to the extent of shares held.
 Investment in equity is investment in a growth-oriented asset.
 The primary source of return to the investor is from the appreciation in
the value of the investment.
 Dividends are declared by the company when there are adequate
profits and provide periodic income to the shareholders.
CONCEPT OF EQUITY & DEBT
Debt:
Debt represents the borrowings of the issuer
 Investment in debt is investment in an income-oriented asset.

 The primary source of return to the investor is regular income in the
form of interest.
TYPES OF EQUITY FUNDS
 Market Segment based funds
 Large Cap Funds: Invest in Large Cap stocks1 i.e. large, liquid blue-chip
companies with stable performance and returns. The minimum investment in
equity and equity related instruments of large cap companies shall be at least 65%
of the total assets.
 Mid Cap Funds: Invest in Mid Cap stocks2, they have the potential for faster
growth and higher returns. Mid Cap Funds carry higher risk, since the companies
may not be able to withstand the slump in revenues and profits. Similarly, the price
of the stocks also fall more when markets fall.
 Small Cap Funds: Invest in Small Cap stocks3 with intent of benefiting from the
higher gains in the price of stocks. The risks are also higher.
Stock Categorization
1 Large Cap: 1st -100th company in terms of full market capitalization
2 Mid Cap: 101st -250th company in terms of full market capitalization
3 Small Cap: 251st company onwards in terms of full market capitalization
 Market Segment based funds
 Large Cap Funds: Invest in Large Cap stocks1 i.e. large, liquid blue-chip
companies with stable performance and returns.
 Mid Cap Funds: Invest in Mid Cap stocks2, they have the potential for
faster growth and higher returns. Mid Cap Funds carry higher risk, since
the companies may not be able to withstand the slump in revenues and
profits. Similarly, the price of the stocks also fall more when markets fall.
 Small Cap Funds: Invest in Small Cap stocks3 with intent of benefiting
from the higher gains in the price of stocks. The risks are also higher.
Stock Categorization
1 Large Cap: 1st -100th company in terms of full market capitalization
2 Mid Cap: 101st -250th company in terms of full market capitalization
3 Small Cap: 251st company onwards in terms of full market capitalization
 Diversified Equity Fund or MultiCap Funds is a category of funds that
invest in a diverse mix of securities that cut across sectors.
 Sector funds invest in only a specific sector. For Eg., Banking Fund, it will
invest in stocks of banking companies only. Sector funds carry high risk,
since they are directly correlated with performance of the sector they invest
in. If the sector performs, the fund's NAV will rise and vice-versa.
 Thematic funds, invest in line with an investment theme. It will invest in
diverse sectors, but within the theme. Eg. Infrastructure Fund, it may invest
in construction, infrastructure toll-collection, cement, steel, telecom, power
etc.
An infrastructure fund is more diversified than a Sector fund and less
diversified than a Diversified Fund.
 Equity Income / Dividend Yield Schemes invest in securities whose

shares fluctuate less, and the dividend represents a larger proportion of
the returns on those shares.
 Arbitrage Funds take contrary positions in different markets / securities,
such that the risk is neutralized, but a return is earned. Most of them take
contrary positions between the equity market and the futures and options
market. The objective is to take advantage of mis pricing of securities
between the two markets.
 They are taxed as Equity Schemes.
 Value fund invests in shares of fundamentally strong companies that are
currently under-valued in the market, with the expectation of benefiting
from an increase in price as the market recognizes the true value.
 Growth funds invest in companies whose earnings are expected to
grow at a rate higher than the average rate. These funds aim at
providing capital appreciation to the investors and provide above
average returns in bullish markets. The volatility in returns is higher in
such funds.
 Focused funds concentrates on a limited number of stocks. Selection
risks are high in such funds. If the fund manager selects the right
stocks then the strategy pays off.
 Equity Linked Saving Schemes [ ELSS ] :
 Offer tax benefit on investments up to Rs. 1,50,000
 3 year lock in period from each installment
 Maximum investment is in equities only
 Tax benefit at the time of investment u/s 80 (C) and redemption value does
not attract Capital Gain Tax.
SEBI CATEGORIZATION OF OPEN ENDED EQUITY SCHEMES

 Multi Cap Fund: Invests across large cap, mid cap, small cap stocks.
The minimum investment in equity and equity related instruments shall
be 65% of total assets.
 Large Cap Funds: Predominantly invests in large cap stocks. The
minimum investment in equity and equity related instruments of large cap
companies shall be 80% of total assets.
 Large and Mid Cap Fund: Invests in both Large & Mid Cap stocks,The
minimum investment in equity and equity related instruments of large cap
and Mid Cap Companies shall be 35% and 35% respectively of total
assets.
 Mid Cap Fund: Predominantly invests in mid cap stocks. The minimum
investment in equity and equity related instruments of mid cap
companies shall be 65% of total assets.
 Small Cap Funds: Invest in Small Cap stocks The minimum investment in
equity and equity related instruments of small cap companies shall be 65%
of total assets.
 Dividend Yield Fund: Predominantly investing in dividend yielding stocks.
The minimum investment in equity shall be 65% of total assets.
 Value Fund or Contra Fund: Follows a value investment strategy.
Minimum investment in equity & equity related instruments shall be 65% of
total assets. A contra fund follows contrarian investment strategy. Mutual
Funds will be permitted to offer either Value fund or Contra fund.
 Focused Fund: Can invest in maximum 30 stocks (the scheme needs to
mention where it intends to focus, viz., multi cap, large cap, mid cap, small
cap). Minimum investment in equity & equity related instruments shall be
65% of total assets.

 Sectoral/Thematic: Invests in a specific sector/theme. The minimum
investment in equity & equity related instruments of a particular sector/
particular theme shall be 80% of total assets.
 Equity Linked Savings Scheme (ELSS):
- 3 year lock-in period
- The minimum investment in equity and equity related instruments shall be
80% of total assets (in accordance with Equity Linked Saving Scheme, 2005
notified by the Ministry of Finance).
TYPES OF DEBT FUNDS
 Gilt Funds invest in only treasury bills and government securities,
which do not have a credit risk.
 Diversified Debt Funds on the other hand, invest in a mix of
government and non-government debt securities. They are also
known as Income Funds.
 Junk Bond schemes or high yield bond schemes invest in
companies that are of poor credit quality (Credit Rating lower than
Investment Grade).
 Fixed Maturity plans are a kind of debt fund where the investment
portfolio is closely aligned to the maturity of the scheme. Being close-
ended schemes, they do not accept money post-NFO. Returns can be
reasonably predicted at the time of investment only. Good alternative
to Fixed Deposits with compromise in liquidity.
TYPES OF DEBT FUNDS
 Floating Rate Funds invest largely in floating rate debt

securities i.e. debt securities where the interest rate payable
by the issuer changes in line with the market. The NAVs of
such schemes fluctuate lesser than debt funds that invest
more in debt securities offering a fixed rate of interest.
 Liquid Schemes or Money Market Schemes are a variant
of debt schemes that invest only in short term debt
securities. They can invest in debt securities of upto 91 days
maturity. However, these funds generally keep 60 day
maturity to avoid volatility of NAV caused by MTM valuation
after 60 days.
TYPES OF DEBT FUNDS
SEBI CATEGORIZATION OF OPEN ENDED DEBT SCHEMES
 Overnight Fund: The investment is in overnight securities having
maturity of 1 day
 Liquid Fund: Liquid scheme whose investment is into debt and money
market securities with maturity of upto 91 days only.
 Ultra Short Duration Fund: An ultra-short term debt scheme investing
in debt and money market instruments with Macaulay duration between
3 months and 6 months.
 Low Duration Fund: A low duration debt scheme investing in debt and
money market instruments with Macaulay duration between 6 months
and 12 months.
 Money Market Fund: Invests in money market instruments having
maturity upto 1 year.
TYPES OF DEBT FUNDS
 Short Duration Fund: Invests in debt and money market instruments
with Macaulay duration between 1 year and 3 years.
 Medium Duration Fund: Invests in debt and money market instruments
with Macaulay duration of the portfolio being between 3 years and 4
years.
 Medium to Long Duration Fund: Invests in debt and money market
instruments with Macaulay duration between 4 years and 7 years.
 Long Duration Fund: Invests in debt and money market instruments
with Macaulay duration greater than 7 years.
 Banking and PSU Fund: Predominantly invests in debt instruments of
banks, PSUs, Public Financial Institutions and Municipal Bonds. The
minimum investment in such instruments should be 80% of total assets.
TYPES OF DEBT FUNDS
 Corporate Bond Fund: Predominantly invests in AA+ and above rated
corporate bonds. The minimum investment in corporate bonds shall be
80 percent of total assets (only in AA+ and above rated corporate
bonds)
 Credit Risk Fund: Invests in below highest rated corporate bonds. The
minimum investment in corporate bonds shall be 65% of total assets
(only in AA (excludes AA+ rated corporate bonds) and below rated
corporate bonds)
 Banking and PSU Fund: Predominantly investing in debt instruments
of banks, Public Sector Undertakings, Public Financial Institutions and
Municipal Bonds. The minimum investment in such instruments should
be 80 percent of total assets.
TYPES OF DEBT FUNDS
 Gilt Fund: Invests in government securities across maturity. The
minimum investment in G-secs is defined to be 80 percent of total assets
(across maturity).
 Floater Fund: Predominantly invests in floating rate instruments
(including fixed rate instruments converted to floating rate exposures
using swaps/derivatives). Minimum investment in floating rate
instruments (including fixed rate instruments converted to floating rate
exposures using swaps/derivatives) shall be 65 percent of total assets.
 Dynamic Bond: An open ended dynamic debt scheme investing across
duration.
INVESTMENT OPTIONS IN GOLD THROUGH MF
 Gold Exchange Traded Fund (Gold ETF) is a fund that

invests in gold, gold-related securities or gold deposit
schemes of banks. The NAV of such funds moves in line
with gold prices in the market.
 Gold Fund invest in the units of Gold Exchange Traded
Funds. They operate like any other mutual fund.
 Gold Sector Fund will invest in shares of companies
engaged in gold mining and processing. Therefore, NAV of
these funds do not closely mirror gold prices.
 It is important to understand that unlike Gold sector fund,
Gold ETF does not invest in equity shares of companies
involved in Gold related businesses including gold mining.
TYPES OF HYBRID FUNDS
 Debt-oriented Hybrid funds invest primarily in debt with a small
allocation to equity. The equity allocation can range from 5% to 30%
and is stated in the offer document.
The equity component works to boost to the returns, and the debt
component works to protect the downside.
 Monthly Income Plan : Is a type of debt oriented hybrid fund. It
seeks to declare a dividend every month. However, an MIP does not
guarantee a monthly income.
 Multiple Yield Funds : generate returns over the medium term with
exposure to multiple asset classes, such as equity and debt.
 Equity-oriented Hybrid funds: invest primarily in equity, with a
portion of the portfolio invested in debt to bring stability to the returns.
 Balanced Fund : A popular category of Equity Oriented Fund is a
Balanced Fund.
 It is a combination of equity and debt. The objective of these schemes is to
provide growth and stability.
 The balanced funds can have fixed or flexible allocation between equity and
debt.
 Capital Protected Schemes are close-ended schemes, which

are structured to ensure that investors get their principal back,
irrespective of what happens to the market.
 The amount is invested in Zero Coupon Government Securities,
maturity of which is aligned with the maturity of these schemes, in
such a way that at the maturity the investor will get at least the
capital back. Rest of the money is invested to get higher returns.
 If investment is done in corporate debt securities also, they will
be called Capital Protection Oriented Schemes.
 Some of these funds are also launched as Asset Allocation
Funds. These schemes are not different from those under the
Hybrid category.
SEBI CATEGORIZATION OF OPEN ENDED HYBRID SCHEMES
 Conservative Hybrid Fund: Predominantly invests in debt securities.
Investment in debt instruments shall be between 75% and 90% of total
assets while investment in equity and equity instruments shall be
between 10% and 25% of total assets.
 Balanced Hybrid Fund*: The investment in equity and equity related
instruments shall be between 40% and 60% of total assets while
investment in debt shall be between 40% and 60%
 Aggressive Hybrid Fund*: Predominantly invests in equity and equity
related instruments. The investment in equity and equity related
instruments shall be between 65% to 80% of total assets while
investment in debt instruments shall be between 20% and 35%
Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or
Balanced Fund.

 Dynamic Asset Allocation or Balanced Advantage: Investment in
equity/debt that is managed dynamically
 Multi Asset Allocation: investing in at least three asset classes with a
minimum allocation of at least 10% each in all three asset classes.
Foreign securities are not treated as a separate asset class in this kind of
scheme.
 Equity Savings Fund: Invests in a combination of equity, arbitrage and
debt. The minimum investment in equity and equity related instruments
shall be 65% (including arbitrage) and in debt 10% of total assets.
SOLUTION ORIENTED SCHEMES

 Retirement Fund: A solution oriented scheme having a lock-in of 5
years or till retirement age of the investor, whichever earlier.
 Children’s Fund: An open ended fund for investment for children
having a lock-in for at least 5 years or till the child attains age of
majority, whichever earlier.
OTHER FUNDS
 Real Estate Funds take exposure to real estate. Such funds

make it possible for small investors to take exposure to real
estate as an asset class. Although permitted by law, real estate
mutual funds are yet to hit the market in India.
 Fund of Funds: It is a mutual fund that invests in other mutual
funds. It does not hold securities in its portfolio, but other funds
that have been chosen to match its investment objective.
Feeder Fund in International fund is an example of Fund of
Funds.
Fund of Fund can be domestic and international also.
OTHER FUNDS
 International Funds are funds that invest outside the country.

 A mutual fund may offer a scheme to investors in India, with an
investment objective to invest abroad.
 Option I
 Domestic AMC - Feeder Fund
 Foreign AMC - Host Fund
 Option II
 Setting up own infrastructure to function in other country.
 Risks
 Asset Performance Risk
 Currency Risk
OTHER FUNDS
 Exchange Traded funds (ETF) are open-ended funds, whose units
are traded in a stock exchange.
In order to facilitate transactions in the stock market, the mutual fund
appoints some intermediaries as Market Makers, whose job is to offer a
price quote for buying and selling units at all times.
The authorized dealers can make more units available in the market to
meet higher demand by getting units released by the mutual fund in
creation unit. They can also reduce the available units available in the
market by getting units redeemed in creation units.
In a regular open-ended mutual fund, all the transactions by investors
on a day happen at a single price. A key benefit of an ETF is that
investors can buy and sell their units in the stock exchange, at various
prices during the day that closely track the market at that time.
KEY DEVELOPMENTS OVER THE YEARS
The history of the MF industry can be traced back to the 80s, when public
sector mutual funds were first permitted, and then in the mid-90s, when
private sector mutual funds commenced operations.
AUM of the industry, as of 31st March 2018 stands at Rs 22.71 trillion,

which is a more than three and half fold increase in a span of 6 years.
AUM of the Indian mutual fund market accounts for less than one percent
of the global mutual fund AUM which is around USD 40 trillion whereas
US accounts for 39 percent of the same.
END OF THE CHAPTER - 1
CHAPTER 2
FUND STRUCTURE AND
CONSTITUENTS
STRUCTURE
Sponsor Auditorsfor AMC
Distributors
Trustee(s) Asset Management
Company
(AMC)
R & T Agent
Custodian
Bankers
STRUCTURE - EXAMPLE
Sponsor :
State Bank of India Auditorsfor AMC
Trustee : AMC : Distributors

SBI Mutual Fund Trustee SBI Funds Management
Company Private Limited Private Limited
R & T Agent :
Computer Age Management
Custodians : Services Pvt. Ltd (CAMS)
• HDFC Bank Limited, Mumbai
• CITI
CITI BANK
BANK N.A.,
N.A., Mumbai
Mumbai
• Stock Holding Corporation of India Ltd., Mumbai
• Bank of Nova Scotia (custodian for Gold) Bankers

SPONSOR
 The application to SEBI for registration of a mutual fund is made by
the sponsor/s.
 Eligibility of a Sponsor :
 Sponsor should be carrying on business in financial services for not less
than 5 years.
 Sponsor should have positive net worth (share capital plus reserves minus accumulated
losses) for each of those 5 years.
 Latest net worth should be more than the amount that the sponsor contributes to the
capital of the AMC.
 The sponsor should have earned profits, after providing for depreciation and interest, in
three of the previous five years, including the latest year.
 The sponsor needs to have a minimum 40% share holding in the
capital of the AMC.
 The sponsor should be a fit and proper person for such operation
 Sponsors have to contribute a minimum of Rs.1,00,000 as initial
contribution to the corpus of the mutual fund
TRUST
 In order to perform the trusteeship role, either individuals may be
appointed as trustees or a Trustee company may be appointed by
the sponsors only.
 Prior approval of SEBI needs to be taken, before a person is
appointed as a Trustee.
 They have a critical role in ensuring that the mutual fund complies
with all the regulations, and protects the interests of the unit-holders.
 Eligibility
 Every trustee has to be a person of ability, integrity and standing.
 A person who is guilty of moral turpitude cannot be appointed trustee.
 A person convicted of any economic offence or violation of any securities laws cannot be appointed
as trustee.
 No AMC and no director (including independent director), officer, employee of an AMC shall be
eligible to be appointed as a trustee of a mutual fund.
 No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as trustee
of any other mutual fund.
TRUST
 In order to perform the trusteeship role, either individuals may be
appointed as trustees or a Trustee company may be appointed by
the sponsors only.
 Prior approval of SEBI needs to be taken, before a person is
appointed as a Trustee.
 They have a critical role in ensuring that the mutual fund complies
with all the regulations, and protects the interests of the unit-holders.
 Eligibility
 Every trustee has to be a person of ability, integrity and standing.
 A person who is guilty of moral turpitude cannot be appointed trustee.
 A person convicted of any economic offence or violation of any securities laws cannot be appointed
as trustee.
 No AMC and no director (including independent director), officer, employee of an AMC shall be
eligible to be appointed as a trustee of a mutual fund.
 No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as trustee
of any other mutual fund.
TRUST
 The sponsor will have to appoint at least 4 trustees.

 If a trustee company has been appointed, then that company
would need to have at least 4 directors on the Board.
 At least two-thirds (2/3) of the trustees / directors on the Board
of the trustee company, would need to be independent trustees
i.e. not associated with the sponsor in any way.
 The agreement between Sponsor(s) and Trustees is called
‘Trust Deed’.
 SEBI expects Trustees to perform a key role in ensuring legal
compliances and protecting the interest of investors.
Accordingly, various General Due Diligence and Special Due
Diligence responsibilities have been assigned to them.
ASSET MANAGEMENT COMPANY
 Day to day operations of asset management is handled by the AMC.

 The AMC is appointed by the sponsor or the Trustees.
 Prior approval of the trustees is required, before a person is
appointed as director on the board of the AMC.
 The AMC has to ensure that the investment of funds pertaining to
any scheme is not contrary to the provisions of the SEBI regulations
and the trust deed.
 At least 50% of the directors should be independent directors i.e. not
associate of or associated with the sponsor or any of its subsidiaries
or the trustees.
 The AMC needs to have a minimum net worth of Rs.50 crore.
 The agreement between the Trustees and the AMC is known as
‘Investment Management Agreement’.
ASSET MANAGEMENT COMPANY
 An AMC cannot invest in its own schemes, unless the

intention to invest is disclosed in the Offer Document.
Further, the AMC cannot charge any fees for its own
investment in any of the schemes managed by itself.
 The appointment of an AMC can be terminated by majority
of the trustees, or by 75% of the Unit-holders. However,
any change in the AMC is subject to prior approval of SEBI
and the Unit-holders.
ENTITIES IN AMC
 Operations of AMCs are headed by a Managing Director, Executive Director
or Chief Executive Officer. Some other business heads are:
 Chief Investment Officer (CIO) is responsible for overall investments of the
fund. Fund managers assist the CIO.
 As per SEBI regulations, every scheme requires a fund manager,
though the same fund manager may manage multiple schemes.
 Securities Analysts support the fund managers through their research
inputs.
 Securities Dealers help in putting the transactions through in the market.
 Chief Marketing Officer (CMO) is responsible for mobilizing money under
the various schemes.
 Chief Operations Officer (COO) handles all operational issues.
 Compliance Officer needs to ensure all the legal compliances. In Offer
Documents of new issues, he signs a due-diligence certificate to the effect
that all regulations have been complied with. He directly reports to the head
of the AMC.
OTHER SERVICE PROVIDERS - CUSTODIANS
 The custodian has custody of the assets of the fund.

 The Custodian is appointed by the mutual fund (Trustees).
 All custodians need to register with SEBI.
 The custodian needs to accept and give delivery of
securities for the purchase and sale transactions of the
various schemes of the fund. The custodian settles all the
transactions on behalf of the mutual fund schemes.
 A ‘Custodial Agreement’ is entered into between the
trustees and the custodian.
 More than 50% of the custodian or directors of the
custodians should be independent from the sponsors. So,
the custodian and sponsor cannot be the same entity.
OTHER SERVICE PROVIDERS – R & T AGENT
 All RTAs need to register with SEBI.

 The appointment of RTA is done by the AMC.
 The functions of the RTA includes
 Processing of and dealing with purchase and redemption transactions of the
investor, receiving funds for purchases and making payments for redemptions
 Updating the unit capital of the scheme to reflect these transactions
 Updating the information in the individual records of the investor
 Keeping the investor updated about the status of their investment account and
information related to the investment
 It is not compulsory to appoint a RTA. The AMC can

choose to handle this activity in-house also.
 Examples : CAMS and Karvy
OTHER SERVICE PROVIDERS – AUDITORS
 Auditors are responsible for the audit of accounts.

 Accounts of the schemes need to be maintained
independent of the accounts of the AMC.
 The auditor appointed to audit the scheme accounts
needs to be different from the auditor of the AMC.
 While the scheme auditor is appointed by the Trustees,
the AMC auditor is appointed by the AMC.
OTHER SERVICE PROVIDERS
 Fund Accountant performs the role of calculating the

NAV.
 There is no need for a registration with SEBI to perform this
function.
 The AMC can either handle this activity in-house or can
outsource it.
 Distributors
 Distributors have a key role in selling suitable types of units
to their clients i.e. the investors in the schemes of mutual
funds with whom they are empanelled
 Distributors need to pass the prescribed certification test,
and register with AMFI.
 Collecting Bankers
 The investors’ moneys go into the bank account of the
scheme they have invested in. These bank accounts are
maintained with collection bankers who are appointed by the
AMC.
 KYC Registration Agencies
 SEBI has mandated a unified KYC for the securities market
through KYC Registration Agencies registered with SEBI.
 In-Person Verification (IPV) by a SEBI-registered
intermediary is compulsory for all investors.
 Distributors who have a valid NISM-Series-V-A: Mutual Fund
Distributors certificate and a valid ARN can carry out the In-
person verification if they have completed the KYD process.
 Central KYC (cKYC)
 cKYC refers to Central KYC (Know Your Customer), is an initiative of the
Government of India, allows investors to complete their KYC only once before
interacting with various entities across the financial sector.
 Managed by CERSAI (Central Registry of Securitization Asset Reconstruction
and Security Interest of India)
 The objective is to reduce the burden of producing KYC documents and getting
them verified every time the investor deals with a financial entity for the first time.
 cKYCR will act as centralized repository of KYC records of investors, with
uniform KYC norms and inter-usability of the KYC records across the sector.
 Besides the information asked in KYC from the client, cKYC requires certain
additional information from the client like investor’s maiden name, mother’s
name, FATCA information etc. The idea is to know new people entering the
markets and curb money laundering problem at the root itself.
 Central KYC (cKYC) Contdd:
CKYC Process:
 To get cKYC done, one may approach a financial intermediary regulated by RBI,
SEBI, IRDAI or PFRDA like a bank, a NBFC, a stock broker, AMC, a distributor or
an Insurance company.
 After filling the cKYC form, copies of required documents have to be attached.
 The form and documents are then checked for completeness and correctness by
the intermediary by performing an in- person verification (IPV).
 After the successful completion of this process, an investor is allotted a 14 digit KYC
Identification Number (KIN).
 Thereafter the investor is said to be KYC Compliant.
 The KIN is allotted to an eligible application within 4-5 working days by CERSAI.
 Other Service Providers
 Payment Aggregators such as Tech Process, Bill Desk are payment
providers in the online market place.
 Payment Aggregators enable the users to make the payments online
through their existing bank account in a secured and a convenient manner.
 Aggregators allow mutual fund houses to accept credit card and bank
transfers without having to setup a merchant account with the banks.
 The Aggregator provides the means for facilitating payment from the
consumer via credit cards or bank transfer to the mutual fund. The mutual
fund is paid by the aggregator.
IMPORTANT STATEMENTS
 The structure of mutual funds in India is governed by SEBI(Mutual Fund)
Regulations, 1996.
 Sponsor is the entity who wants to open Mutual Fund. Sponsor is like a
Promoter of a company. Sponsor can be one or more.
 The fund sponsor acts as the Settler of trust. A sponsor of a mutual fund can
act as the distributor of the Mutual fund but cannot act as Trustee and/or
Custodian of the Mutual Fund.
 In India Mutual Fund is established as a Trust. They are governed by the
Indian Trusts Act, 1882.
 Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.
That is why it is said that “Trust holds investor’s money in fiduciary capacity”.
 It is mandatory to have a three tier structure of Sponsor-Trustee-Asset
Management Company.
CHAPTER 3
LEGAL AND REGULATORY
ENVIRONMENT
REGULATOR - SEBI
 SEBI is the regulatory authority for securities markets in India.

 It regulates, among other entities, mutual funds, depositories,
custodians and registrars & transfer agents in the country.
 Mutual Funds are regulated by SEBI but they need to comply with with
other regulators also. Like RBI regulates the money market and
foreign exchange market, so the mutual fund has to comply with RBI's
regulations regarding investment in the money market, investments
outside the country, investments from people other than Indians
resident in India, remittances (inward and outward) of foreign currency
etc. Mutual Funds need to comply with the rules of the exchanges with
which they choose to have a business relationship.
 Anyone who is aggrieved by a ruling of SEBI, can file an appeal with
the Securities Appellate Tribunal (SAT).
SELF REGULATORY ORGANIZATIONS (SRO)
 Regulators lay down the broad policy framework, and leave

the micro-regulation to the SRO.
 Prime responsibility of SRO is to regulate their own
members.
 Examples : Institute of Chartered Accountants of India
(ICAI), NSE, BSE
 AMFI is a body created to promote the interests of the
mutual funds industry
 AMFI is not an SRO
AMFI OBJECTIVES
 To define and maintain high professional and ethical standards in all
areas of operation of mutual fund industry
 To recommend and promote best business practices and code of
conduct.
 To interact with the SEBI and to represent to SEBI on all matters
concerning the mutual fund industry.
 To represent to the Government, Reserve Bank of India and other
bodies on all matters related to MF industry.
 To develop a cadre of well-trained Agent distributors and to
implement a programme of training and certification.
 To undertake nationwide investor awareness programme.
 To disseminate information on Mutual Fund Industry and to
undertake studies and research directly.
AMFI’S CODE OF CONDUCT FOR INTERMEDIARIES
OF MUTUAL FUNDS
 AMFI has framed a set of guidelines and code of conduct for
intermediaries, consisting of individual agents, brokers, distribution
houses and banks.
 In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is provided for:
 Write to the intermediary (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within 3 weeks.
 In case explanation is not received within 3 weeks, or if the explanation is
not satisfactory, AMFI will issue a warning letter indicating that any
subsequent violation will result in cancellation of AMFI registration.
 If there is a proved second violation by the intermediary, the registration
will be cancelled, and intimation sent to all AMCs.
 The intermediary has a right of appeal to AMFI.
* The details are given on Appendix 2 on page no. 59. Go through it at least once.
GUIDELINES FOR CIRCULATION OF UNAUTHENTICATED NEWS
 Employees/ temporary staff/voluntary workers etc. should not

encourage or circulate rumors or unverified information obtained
from client, industry, any trade or any other sources without
verification.
 Any market related news received by them either in their official
mail/personal mail/blog or in any other manner, should be
forwarded only after the approval of concerned Intermediary’s
Compliance Officer.
 Access to Blogs/Chat forums/Messenger sites etc. should either
be restricted under supervision or access should not be allowed.
Logs for any usage of such Blogs/Chat forums/Messenger sites
(called by any nomenclature) have to be treated as records and
the same should be maintained.
 If an employee fails to comply with the regulations, then he/she
shall be liable for action. The Compliance Officer shall also be
held liable for breach of duty in this regard.
DUE DILIGENCE PROCESS BY AMCS FOR
DISTRIBUTORS OF MUTUAL FUNDS
 SEBI has mandated AMCs to put in place a due

diligence process to regulate distributors who qualify
any one of the following criteria:
 Multiple point presence (More than 20 locations)
 AUM raised over Rs.100 crore across industry in the
non-institutional category but including high net worth
individuals (HNIs)
 Commission received of over Rs. 1 Crore p.a. across
industry
 Commission received of over Rs. 50 Lakhs from a single
mutual fund
 Please refer to factors for the same on page no. 44.
INVESTMENT RESTRICTIONS FOR SCHEMES
General Restrictions
 The Mutual Fund will buy and sell securities on delivery basis.
 The Mutual Fund shall not advance any loans.
 The scheme will not invest in the unlisted or privately placed securities of any
associate or group company of the sponsor. Investment in the listed securities of
the group companies of the sponsor will be limited to 25% of the net assets.
 The Scheme may invest in other schemes of the same Mutual Fund or other
Mutual Funds. This will be limited to not more than 5% of the net asset value of
the scheme. No fees will be charged on such investments. This does not apply to
Fund of Funds.
 The Mutual Fund under all its schemes shall not own more than 10% of a
company’s paid up capital bearing voting rights.
Restrictions pertaining to Investment in Debt Securities
 The Scheme shall not invest more than 10% of its NAV in investment grade debt instruments
issued by a single issuer.
 This can be extended to 12% with the approval of the trustees.
 The limit shall not apply to Government Securities, Treasury Bills and CBLO.
 Investment in unrated debt securities of a single issuer will be limited to 10% of its net assets
and the total investments in such securities shall not exceed 25%.
 These limits shall not apply to investments in Government securities, treasury
bills and CBLO.
 Parking of funds in Short-term deposits with all scheduled commercial banks shall be limited
to 15% of the net assets of the scheme. This can be raised to 20% with the approval of the
trustees.
 The Scheme cannot invest in the short-term deposits of a bank that has invested in the
scheme.
 No management fee will be charged for such investments by the scheme.
Group Exposure
 Mutual Funds/AMCs shall ensure that the total exposure of debt schemes of
mutual funds in a particular sector (excluding investments in Bank CDs,CBLO,
G-secs, T-Bills, Short Term Deposits of Schedule Commercial Banks and AAA
rated securities issued by the PSU's, Public Financial Institutions and Public
Sector Banks) shall not exceed 25% of the net assets of the scheme.
 Provided that an additional exposure to financial services sector (over and
above the limit of 25%) not exceeding 15% of the net assets of the scheme
shall be allowed only by way of increase in exposure to Housing Finance
Companies (HFCs);
 Provided further that the additional exposure to such securities issued by
HFCs are rated AA and above and these HFCs are registered with National
Housing Bank (NHB) and the total investment/ exposure in HFCs shall not
exceed 25% of the net assets of the scheme
 Restrictions pertaining to investment in Equity

 The ELSS notification requires that at least 80% of the ELSS’ funds should be
invested in equity and equity-linked securities.
 The Scheme shall not invest more than 10% of its net assets in the equity shares
and equity related instruments of a company.
 Not more than 5% of the net assets of the scheme will be invested in unlisted
equity shares and equity related instruments.
MAJOR TERMINOLOGIES
 Investment Objective : It defines asset class in which money will be

invested.
 For example, the investment objective of a Diversified Equity Scheme
might read as follows:
“To generate capital appreciation from a portfolio of
predominantly equity related securities.”
 The investment objective of a Diversified Debt Scheme could be:
“To generate income by investing predominantly in a wide range
of debt and money market securities.”
 A Balanced Scheme would have an investment objective like:
“To achieve growth by investing in equity and equity related
investments, balanced with income generation by investing in
debt and money market instruments.”
MAJOR TERMINOLOGIES
 Investment Policy :
 Defines which kind and how many of papers or stocks the fund
can buy and it can buy
 For example:
 “The portfolio will generally comprise of equity and equity
related instruments of around 30 companies, which may go
upto 39 companies”; or
 “Investment will be predominantly in mid-cap stocks”; or
 “More than 50% will be invested in equity and equity related
securities; the rest would be in debt and money market
securities”
MAJOR TERMINOLOGIES
 Investment Strategy :
It caters to questions like:
 Should exposure of any sector/stock be increased
 Should cash be increased
 While the investment objective and investment policy
are part of the offer document, investment strategy is
decided more frequently. Many AMCs have a practice,
where every morning, the senior management (CEO,
CIO, and Fund Managers) discuss the need for any
change in their investment strategy.
INVESTORS’ RIGHTS & OBLIGATIONS
 Service Standards Mandated for a Mutual Fund towards its
Investors
 Schemes other than ELSS can remain open for subscription for a
maximum of Fifteen (15) days.
 In the case of schemes, the offering period shall be not be more than thirty
(30) days.
 Schemes, other than ELSS, need to allot units or refund moneys within 5
business days of closure of the NFO.
 If minimum amount required to operate the scheme is not collected from
NFO then the money has to be returned in SIX Weeks. In the event of
delays in refunds, dividend warrants or redemption / repurchase cheques,
investors need to be paid interest at the rate of 15% p.a. for the period of
the delay. This interest cannot be charged to the scheme.
 Open-ended schemes, other than ELSS, have to re-open for ongoing sale /
re-purchase within 5 business days of allotment.
Statement of accounts are to be sent to investors as follows:

 Within 5 business days of closure
 In the case of NFO of the NFO
 Post-NFO investment  Within 5 working days from the day
of receiving the request
 In the case of SIP / STP / SWP

 Initial transaction
 within 10 working days
 Ongoing
 once every calendar quarter
(Mar,June,Sept,Dec) within 10 working
days of the end of the quarter
 On specific request  Within 5 working days

 Statement of accounts are to be sent to investors as follows:
 Statement of Account shall also be sent to dormant investors
also i.e. investors who have not transacted during the previous
6 months.
 If mandated by the investor, soft copy shall be e-mailed to
investor every month.
 If a Unit-holder asks Unit Certificates, the AMC is bound to
issue the Unit Certificate within 5 working days of receipt of
request.
 Dividend warrants have to be dispatched to investors within 30
days of declaration of the dividend.
 Redemption / re-purchase cheques would need to be
dispatched to investors within 10 working days from the date of
receipt of transaction request.
 NAV has to be published daily, in at least 2 daily

newspapers having circulation all over India.
 NAV and re-purchase price are to be updated in the
website of AMFI and the mutual fund
 In the case of Fund of Funds, by 10 am the following day
 In the case of other schemes, by 9 pm the same day
 The investor/s can appoint up to 3 nominees, who will be
entitled to the Units in the event of the demise of the
investor/s.
 The investor can also pledge the units.
Other Rights of Investors
 Investors can choose to change their distributor or go direct without insisting
on any kind of No Objection Certificate from the existing distributor.
 Investors can choose to hold the Units in dematerialized form.
 In the case of unit-holding in demat form, the demat statement given by the
Depository Participant would be treated as compliance with the requirement
of Statement of Account.
 The mutual fund has to publish complete statement of the scheme portfolio
and the half-yearly unaudited financial results within 1 month from the close
of each half year in one National English daily, and one newspaper
published in the language of the region where the head office of the mutual
fund is situated.
 Debt-oriented, close-ended / interval, schemes /plans need to disclose their
portfolio in their website every month, by the 3rd working day of the
succeeding month.
 Annual Report
 SEBI has prescribed a detailed format for annual reporting on redressal of
complaints received against the mutual fund.
 The mutual fund has to report on the number of complaints, the time period in
which they were resolved, and if not resolved, for how long they remain unresolved.
 Scheme-wise Annual Report or an abridged summary has to be mailed to all unit-
holders within 6 months of the close of the financial year. The Annual Report of the
AMC has to be displayed on the website of the mutual fund.
 Consolidated Account Statement
Consolidated Account Statement is also issued to investors. This statement provides
information in terms of name of schemes where the investor has invested, number of
units held and its market value. Each CAS issued to the investor also provides the
total purchase cost/cost of investment in each scheme. The CAS issued for half year
(September/March) shall also provide:
 The amount of actual commission paid by AMCs/Mutual Funds to distributors
 The schemes average total expense ratio

 Investor Redressal
 In the event of any issue with the AMC or scheme, the investor can first
approach the investor service centre. If the issue is not redressed, even after
taking it up at senior levels in the AMC, then the investor can write to SEBI with
the details.
 The offer document has details of the number of complaints received and their
disposal. Pending investor complaints can be a ground for SEBI to refuse
permission to the AMC to launch new schemes.

The Trustees / AMC cannot make any change in the fundamental
attributes of a scheme, unless
 A written communication about the proposed change is sent to each
Unit-holder, and an advertisement is issued in an English daily
Newspaper having nationwide circulation, and in a newspaper
published in the language of the region where the HO of the MF.
 Dissenting unit-holders are given the option to exit at the prevailing
Net Asset Value, without any exit load. This exit window has to be
open for at least 30 days.
INVESTORS’ RIGHTS & OBLIGATIONS - IMPORTANT

 The appointment of the AMC for a mutual fund can be
terminated by a majority of the trustees or by 75% of the Unit-
holders (in practice, Unit-holding) of the Scheme.
 75% of the Unit-holders (in practice, Unit-holding) can pass a
resolution to wind-up a scheme.
 The Trustees are bound to obtain consent of the Unit-holders:
 Whenever required to do so by SEBI, in the interest of the Unit-
holders
 Whenever required to do so by 75% of the Unit-holders (in practice,
Unit-holding) of the scheme
 When the trustees decide to wind-up or prematurely redeem the
scheme
 Consolidation of Schemes
 Merger or consolidation of schemes is not considered a change in the
fundamental attribute of the surviving scheme if:
 There is no other change in the Fundamental attributes of the surviving
scheme i.e. the scheme which remains in existence after the merger.
 Mutual Funds are able to demonstrate that the circumstances merit merger or
consolidation of schemes and the interest of the unit holders of surviving
scheme is not adversely affected.
 After approval by the Boards of AMCs and Trustees, the mutual funds shall file
such proposal with SEBI. SEBI would communicate its observations on the
proposal within the time period prescribed.
 The letter to unit holders shall be issued only after the final observations
communicated by SEBI have been incorporated and final copies of the same
have been filed with SEBI
LIMITATION OF RIGHTS OF UNIT-HOLDERS
 If an investor feels that the trustees have not fulfilled his

obligations, then he can file a suit against the trustees for
breach of trust but cannot sue the Trust.
 The principle of caveat emptor (let the buyer beware) applies
to mutual fund investments.
 No legal protection on the grounds of not being aware.
 A proposed investor i.e. someone who has not invested in the
scheme does not have rights to proceed against the AMC or
trustees.
 Investors in MF can not get protection under Companies Act,
2013.
UNCLAIMED AMOUNTS
 The mutual fund has to deploy unclaimed dividend and

redemption amounts in the money market.
 AMC can recover investment management and advisory fees
on management of these unclaimed amounts, at a maximum
rate of 0.50% p.a.
 Recovery of such unclaimed amounts by the investors is as
follows:
 If the investor claims the money within 3 years, then payment
is based on prevailing NAV i.e. after adding the income
earned on the unclaimed money.
 If the investor claims the money after 3 years, then payment
is based on the NAV at the end of 3 years.
PROCEEDS OF ILLIQUID SECURITIES
 If the amounts are substantial, and recovered within 2 years,

then the amount is to be paid to the old investors
 In other cases, the amount is to be transferred to the Investor
Education Fund maintained by each mutual fund.
CAN A MUTUAL FUND SCHEME GO BUST?
 While the AMC manages the investments of the scheme, the

assets of the scheme are held by the Custodian (custodian
has custody of the investments in a scheme ).
 Both operate under the overall control of the Trustees. This
system of checks and balances protects the investors from
misappropriation of funds, fraud etc.
 Even if some sponsors wish to move out of the business, they
need to bring in some other sponsor, acceptable to SEBI,
before they can exit.
 Therefore, unlike the occasional experience of ‘vanishing
companies’ in shares, mutual funds cannot vanish.
 These structural requirements ensure that the investor is fully
protected from most of the contingencies that can be
envisaged.
CHAPTER 4
OFFER DOCUMENT
PROCESS OF NFO
 The AMC decides on a scheme to take to the market.
 AMC prepares the Offer Document for the NFO. This needs to be
approved by the Trustees and the Board of Directors of the AMC.
 The documents are filed with SEBI. SEBI just gives its observations
and does not Approve/Disapprove the OD. The observations that
SEBI makes on the Offer Document need to be incorporated.
 The AMC decides on a suitable time-table for the issue, keeping in
mind the market situation.
 The AMC launches its advertising and public relations campaigns,
holds events for intermediaries and the press, to make them aware of
the NFO.
 The Offer Documents and Application Forms are distributed to
market intermediaries, and circulated in the market.
 The Offer Document is valid for 6 months and the AMC needs to
launch the scheme within period.
RELEVANT DATES FOR NFO
 NFO Open Date – This is the date from which investors can
invest in the NFO
 NFO Close Date – This is the date up to which investors can
invest in the NFO
 Scheme Re-Opening Date – Only in case of open ended
funds.
 Close-ended Schemes have an NFO Open Date and NFO
Close Date. But, they have no Scheme Re-opening Date.
Investors will need to go to the stock exchange(s) where the
scheme is listed Post - NFO.
THE ROLE OF OFFER DOCUMENT
 The Offer Document is one of the most important sources of

information on the scheme, to help prospective investors
evaluate the merits and demerits of investing in it. Offer
Document is the operating document and describes the
product.
 Mutual Fund Offer Documents have two parts:
 Scheme Information Document (SID)
 Which has details of the scheme.
 Statement of Additional Information (SAI)
 Which has statutory information about the mutual fund, that
is offering the scheme.
THE ROLE OF OFFER DOCUMENT
 In practice, SID and SAI are two separate documents, though

the legal technicality is that SAI is a part of the SID.
 Both documents are prepared in the format prescribed by
SEBI, and submitted to SEBI.
 The documents are prepared in simple language, and in clear,
concise and easy to understand style.
SCHEME INFORMATION DOCUMENT (SID)
 Contents of SID
 The cover page has the name of the scheme followed by its
type viz.
 Open-ended / Close-ended / Interval (the scheme structure)
 Equity / Balanced / Income / Debt / Liquid / ETF (the
expected nature of scheme portfolio)

 It also mentions
 Face value of the Units being offered
 Relevant NFO dates (opening, closing, re-opening),
 Date of SID
 Name of the mutual fund, and name & contact information of
the AMC and trustee company.

 The Table of Contents
 Highlights
 Introduction
 Risk Factors
 Standard
 Scheme-specific
 Provisions regarding minimum no. of investors in the scheme
 Any other special considerations
 Definitions
 Due Diligence Certificate (issued by the AMC)
 Information about the scheme
 Units and Offer
 Fees & Expenses
 Rights of Unit-holders
 Penalties, Litigation etc.
 The SID mentions the proposed asset allocation mix and nature of
investments in which the moneys of the scheme will be deployed.
 Draft SID is a public document, available for viewing in SEBI’s
website (www.sebi.gov.in) for 21 working days.
 The final SID (after incorporating SEBI’s observations) has to be
hosted on AMFI’s website (www.amfiindia.com) two days before the
issue opens.
 A disclaimer has to be included, that investors should consult their
financial advisers if they are not clear about the suitability of the
product.
 SEBI has also instituted a product labelling system
 Nature of scheme such as to create wealth or provide regular
income in an indicative time horizon (short/ medium/ long term).
 A brief about the investment objective (in a single line sentence)
followed by kind of product in which investor is investing
(Equity/Debt).
 A pictoral representation of the risk to the principal invested in a mutual fund

product will be depicted using a ‘Riskometer’.
The picto-meter will categorize the risk in the scheme at one of five levels of
risk, shown as follows:
Level of Risk Definition Example

Low Principal at low risk Liquid or Money Market Fund
Moderately Low Principal at moderately Fixed Maturity Plans/Capital Protection
low risk Oriented Scheme
Moderate Principal at moderate Short term Income Fund/Conservative
risk Monthly Income Plans
Moderately High Principal at moderately Index Fund/Balanced Fund/Equity
high risk Dividend Yield Fund
High Principal of high risk Sector Fund/Equity Focussed Fund
 The product labels are to be disclosed in :

 Front page of initial offering application forms, Key Information
Memorandum (KIM) and Scheme Information Documents
(SIDs).
 The product label is to be placed in proximity to the caption of
the scheme and shall be prominently visible.
 Common application form – along with the information about
the scheme.
The product label is to be placed in proximity to the caption of
the scheme and shall be prominently visible.
 Scheme advertisements – placed in manner so as to be
prominently visible to investors.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
It contains every detail regarding the fund house other than a

particular scheme for which investors wants to apply.
SAI is relevant for all the schemes offered by a mutual fund.
 Contents of SAI :
 Information about Sponsors, AMC and Trustee Company
(includes contact information, shareholding pattern,
responsibilities, names of directors and their contact
information, profiles of key personnel, and contact information of
service providers {Custodian, Registrar & Transfer Agent,
Statutory Auditor, Fund Accountant (if outsourced) and
Collecting Bankers}
STATEMENT OF ADDITIONAL INFORMATION (SAI)
 Contents of SAI continued :

 Condensed financial information (for schemes launched in last 3
financial years)
 How to apply
 Rights of Unit-holders
 Investment Valuation Norms
 Tax, Legal & General Information (including investor grievance
redressal mechanism, and data on number of complaints received
and cleared, and opening and closing number of complaints for
previous 3 financial years and for the current year to-date).
 Every mutual fund, in its website, provides for download of its
SAI. Investors have a right to ask for a printed copy of the SAI.
 Through AMFI website (www.amfiindia.com) investors can access
the SAI of all the mutual funds
KEY INFORMATION MEMORANDUM (KIM)
 The KIM is essentially a summary of the SID and SAI.

 As per SEBI regulations, every application form is to be
accompanied by the KIM.
KEY INFORMATION MEMORANDUM (KIM)
 Contents of KIM :
 Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
 Dates of Issue Opening, Issue Closing & Re-opening for Sale and Re-
purchase
 Plans and Options under the scheme
 Risk Profile of Scheme
 Price at which Units are being issued and minimum amount / units for
initial purchase, additional purchase and re-purchase
 Benchmark
 Dividend Policy
 Performance of scheme and benchmark over last 1 year, 3 years, 5
years and since inception.
 Loads and expenses
 Contact information of Registrar for taking up investor grievances
UPDATION
 Scheme Information Document :

 For the very First time Post – NFO
 Scheme launched in the first 6 months of the financial year
(say, April 2014)
 Within 3 months of the end of the same financial
year (i.e. by June 2015).
 Scheme launched in the second 6 months of the financial
year (say, October 2014)
 The first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2016).
 Regular Update
 To be updated every year.
UPDATION
 Scheme Information Document :

 Need Based :
 In case of change in the fundamental attributes
 The SID has to be updated immediately after the lapse
of the time period given to existing investors to exit the
scheme (30 Days).
UPDATION
 Statement of Additional Information (SAI) :
 Regular
 Regular update is to be done by the end of 3 months of
every financial year.
 Need Based
 Material changes have to be updated on an ongoing basis
and uploaded on the websites of the mutual fund and
AMFI.
 Key Information Memorandum (KIM) :
 Regular
 At least once a year.
 Need Based
 Whenever there is need based change in SID or SAI.
IMPORTANT STATEMENTS
 For any change in fundamental attributes, SEBI and Trustee

approval is required. Investor approval is not needed as they are
given 30 days exit window.
 OD issued for launching of a new scheme 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.
 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 is issued by the AMC on behalf of the trustees.
 The AMC is responsible for the information in the OD.
 Please refer to contents of each documents. It is important.
How the Offer Document helps investors
in making investment decisions
 Eligibility to invest
 How to apply
 Investment Amount
 Investment plan and options
 Investment modes
 Scheme fee and Expenses
 Sources of information
 NAV Calculation
CHAPTER 5
FUND DISTRIBUTION AND
CHANNEL MANAGEMENT PRACTICES
DISTRIBUTION CHANNELS
 Individual Agents (Individual Financial Advisors – IFAs)

 Most important drawback with them is that IFAs do not have
huge branch network.
 Institutional Channels
 Private Distribution Companies (Brokerage firms, National
Distributors)
 Banks ( Private and Foreign ) and NBFCs
 Post Offices
 They can work through Employees, Agents &/or Sub brokers.
NEW DISTRIBUTION CHANNELS
 Technologies has opened the doors to newer ways…

 Internet
 Direct Interactions
 Reduction in Cost
 Convenience - Less paper work
 High standards in Servicing the clients
 Stock Exchanges (BSE, NSE)
 High penetration
 High volume of transactions
 Cost effectiveness.
NEW CADRE OF DISTRIBUTORS
 A new cadre of distributors such as

 Postal agents
 Retired government and semi-government officials
(class III and above or equivalent)
 Retired teachers and retired bank officers with a
service of at least 10 years, and other similar persons
(such as Bank correspondents).
They are allowed to sell units of simple and performing
mutual fund schemes through simplified form of NISM
certification and AMFI Registration.
PRE-REQUISITES TO BECOME DISTRIBUTOR OF A MUTUAL FUND
 Obtain the NISM Certification by passing SEBI’s prescribed Certifying

Examination (NISM Module V-A).
 Know Your Distributor (KYD) Requirements
 Obtain AMFI Registration Number (ARN)
 Empanelment with AMCs
Series V-B: Mutual Fund Foundation Certification Examination and

Mutual Fund Foundation CPE Program have been designed by NISM
for the new cadre of distributors.
KYD REQUIREMENTS
 AMFI has introduced the KYD process to verify the

correctness of the information provided in the registration
documents and to have verification of the ARN holders.
 The process consists of document verification and bio-metric
process.
 In case of non-individual distributors, bio-metric process will
be conducted on specified authorized persons.
 The New Cadre of Distributors are not required to comply
with KYD/ bio-metrics requirements.
 However, they are required to submit
 Self-attested copies of identity proof and
 Address proof, as mentioned in KYD application form.
AMFI REGISTRATION PROCESS
 After passing the examination and completing KYD

requirements, the next stage is to register with AMFI.
 AMFI allots an AMFI Registration Number (ARN).
 After receiving ARN, the IFA / distributor / stock exchange
broker can get empanelled with any number of AMCs.
 The employees of the distributor need to obtain an Employee
Unique Identification Number (EUIN) from AMFI apart from
AMFI Registration Number (ARN).
 The Intermediaries have to ensure that the employees quote
the EUIN in the Application Form for investments.
 Commission Structures
 There are no SEBI regulations regarding the minimum or
maximum commission that distributors can earn.
 However, SEBI has laid down limits on what the total expense
(including commission) in a scheme can be. Any excess will
need to be borne by the AMC i.e. it cannot be charged to the
scheme.
 The commission structures vary between AMCs. Even for the
same AMC, different commissions are applicable for different
kinds of schemes.
COMMISSION STRUCTURES
 Initial or Upfront Commission

 Paid on the amount mobilized by the distributor.
 Upfront commission to distributors will be paid by the investor directly to
the distributor, based on his assessment of various factors including the
service rendered by the distributor.
 Trail Commission
 Calculated as a percentage of the net assets attributable to the Units sold
by the distributor.
 Distributors benefit from increase in net assets arising out of valuation
gains in the market.
 The trail commission is normally paid by the AMC on a quarterly basis.
 Distributor is paid a commission for as long as the investor’s money is held
in the fund.
 No commission – neither upfront nor trail – is payable to the distributor for
their own investments (self business).
 Initial or Upfront Commission, on the amount mobilized by the

distributor. The scheme application forms carry a suitable disclosure
to the effect that the upfront commission to distributors will be paid by
the investor directly to the distributor.
 Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor. The trail commission is
normally paid by the AMC on a quarterly basis.
 Transaction Charges A transaction charge is paid to distributors for
investments of Rs. 10,000 and over. This does not apply to direct
investments. For subscriptions from existing investors, the distributor
will be paid Rs. 100 per transaction and for new investors they will be
paid Rs. 150 to encourage widening the investor base of mutual
funds.
DIRECT & REGULAR PLANS
Mutual funds offer investors two plans or routes for investors to invest in a
mutual fund:
 Direct Plan: The direct plan is for investors who wish to invest directly in the mutual
fund without routing the investment through a distributor.
 The Plan will have a lower expense ratio since there are no distribution expenses or
commissions involved.
 The plan will have a separate NAV that will reflect the lower expenses under this
Plan.
 Regular Plan: Under the Regular plan, the investor indicates a distributor through
whose services the investment decision was made and executed.
 The AMFI Registration Number (ARN) is made available by the investor in the
application form and the mutual fund pays the transaction charges and commissions
to the distributor so identified.
 The expenses under the Regular plan are higher because of the distribution
commissions involved.
In case a valid application is received without indication whether the investor
chooses to invest through the Direct or Regular plan, the AMC will process the
application as under:
 If the ARN code is not mentioned and choice of plan is not indicated then the application will
be processed as a Direct Plan application.
 If ARN code is not mentioned and the Direct Plan is selected, then the application will be
processed as a Direct Plan application.
 If ARN code is not mentioned and the Regular Plan is selected in the application form, then
the application will be processed as a Direct Plan.
 If ARN code is mentioned but the Direct Plan is selected in the application form, then the
application will be processed as a Direct Plan.
 If ‘Direct’ is mentioned in the space provided for ARN code and the Direct Plan is selected in
the application form, then the application will be processed as a Direct Plan.
 If ‘Direct’ is mentioned in the space provided for ARN code and the Regular Plan is selected
in the application form, then the application will be processed as a Direct Plan
Contdd:
Contdd:
● If ARN code is mentioned and the Regular Plan is selected in the application form, then
the application will be processed as a Regular Plan

● If ARN code is mentioned but no Plan is selected in the application form, then the
application will be processed as a Regular Plan.
If the wrong ARN code is mentioned in the application form, then the application will be
processed as a Regular Plan. However, the AMC will contact the investor/distributor for the right
ARN code within 30 calendar days of the receipt of the application form. If the error is not
rectified within these 30 days, the application will be reprocessed as a Direct application without
charging any exit load.
COMMISSION DISCLOSURE
 SEBI has mandated Mutual Funds / AMCs to disclose on their

respective websites the total commission and expenses paid to
distributors who satisfy one or more of the following conditions
with respect to non-institutional (retail and HNI) investors – Same
as Due diligence requirement
 Multiple point presence (More than 20 locations)
 AUM raised over Rs.100 crore across industry in the non-institutional
category but including high net worth individuals (HNIs)
 Commission received of over Rs. 1 Crore p.a. across industry
 Commission received of over Rs. 50 Lakhs p.a. from a single mutual
fund
MULTI-LEVEL DISTRIBUTION CHANNEL
 Large distributors have agents / sub-brokers working under them.

Being the principal, the distributor is bound by the acts of agents /
sub-brokers.
 The distributor therefore needs to ensure that the agents comply
with all the regulations.
 Typically, AMCs structure their relationship with distributors as
Principal to Principal.
 Therefore, the AMC it is not bound by the acts of the distributor, or
the distributor’s agents or sub-brokers.
 Initial or Upfront Commission, on the amount mobilized by the

distributor. The scheme application forms carry a suitable disclosure
to the effect that the upfront commission to distributors will be paid by
the investor directly to the distributor.
 Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor. The trail commission is
normally paid by the AMC on a quarterly basis.
 Transaction Charges A transaction charge is paid to distributors for
investments of Rs. 10,000 and over. This does not apply to direct
investments. For subscriptions from existing investors, the distributor
will be paid Rs. 100 per transaction and for new investors they will be
paid Rs. 150 to encourage widening the investor base of mutual
funds.
SEBI REGULATIONS RELATED TO SALES PRACTICES
 The distributors have to disclose all the

commissions (in the form of trail
commission or any other mode) payable to
them for the different competing schemes
of various mutual funds from, amongst
which the scheme is being recommended
to the investor.
 The practice of rebating (sharing
commission with investors) is banned.
SEBI ADVERTISING CODE
 Advertisements shall be accurate, true, fair, clear, complete,
unambiguous and concise.
 Advertisements shall not contain statements which are false,
misleading, biased or deceptive.
 Advertisements shall not contain statements which directly or by
implication or by omission may mislead the investor.
 Advertisements shall not carry exaggerated or unwarranted slogans.
 Advertisements shall not be so framed as to exploit the lack of
experience or knowledge of the investors.
 Advertisements shall contain information which is timely and consistent
with the disclosures made in the SID, SAI and KIM
 Shall not directly or indirectly discredit other advertisements or make
unfair comparisons
SEBI ADVERTISING CODE - continued
● In hoardings / posters, the statement, “Mutual Fund investments are

subject to market risks, read the offer document carefully before
investing"
● In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words)
● MF should not Promise any returns except in case of assured returns
schemes.
● The dividends declared or paid shall also be mentioned in Rupees
per unit along with the face value of each unit of that scheme and the
prevailing NAV at the time of declaration of the dividend.
PERFORMANCE ADVERTISEMENTS
 Returns
Tenure Since Inception Type of Returns To Be Shown
CAGR
(for last 1 year, 3 years, 5 years)
Point-to-point returns on a standard

investment of Rs. 10,000 along with CAGR
Any Type of Scheme for more than 3
years Footnotes:
Disclosed performance is of regular or
direct plan of the Mutual Fund.
If the same fund manager has not

managed the scheme for the full period
 Returns Contdd.
Tenure Since Inception Type of Returns To Be Shown
Any Type of Scheme for more than 1 Same as above

year but less than 3 years or 5 years Provide Footnote
For the schemes that are in existing for less than a year
Simple Annualized Yields

1. Liquid Scheme
(for at least 7 days, 15 days and 30 days)
Total Returns
2. Other than Liquid Schemes
(without annualization)
 The advertisement shall also include the performance data of all the
other schemes managed by the fund manager/s of that particular
scheme.
 Along-with their respective scheme’s benchmark,
 If the number of schemes managed by a fund manager is more than six,
then the AMC may disclose the total number of schemes managed by
that fund manager along with the performance data of top 3 and bottom
3 schemes
For advertisement published in internet-enabled media, Mutual Funds can
provide an exact website link to such summarized information of performance of
other schemes managed by the concerned fund manager.
CELEBRITY ENDORSEMENTS OF MUTUAL FUNDS AT
INDUSTRY LEVEL
 Celebrity endorsements are allowed at industry level, but subject to the
following conditions:
 Shall not promote a scheme of a particular Mutual Fund or be used as a
branding exercise of a Mutual Fund house/AMC.
 Expenses towards such endorsements shall be limited to the amounts
aggregated by Mutual Funds at industry level for the purpose of
conducting investor education and awareness initiatives.
 Prior approval of SEBI shall be required for issuance of any
endorsement of Mutual Funds as a financial product, which features a
celebrity for the purpose of increasing awareness of Mutual Funds.
Guidelines for showing Returns of the Scheme

Risk
Indicator
Scheme Equity Scheme
Benchmark
Additional
Benchmark
Risk
Indicator
Scheme Liquid / Money Market Scheme

Benchmark
Additional
Benchmark
Risk
Indicator
Scheme Long Term Debt Scheme

Benchmark
Additional
Benchmark Color change : Yellow

CHAPTER 7
INVESTOR SERVICES
ELIGIBILITY TO INVEST
 Individual Investors : Resident Indian adult individuals, Minors through

their Parents/Lawful guardians.
 Hindu Undivided Families (HUFs)
 Non-Resident Indians (NRIs) /Persons of Indian origin (PIO)
 Foreign investors
 Non-individual Investors
 Companies / corporate bodies, registered in India
 Registered Societies and Co-operative Societies
 Trustees of Religious and Charitable Trusts
 Trustees of private trusts
 Partner(s) of Partnership Firms
 Foreign Institutional Investors (FIIs) registered with SEBI
 Association of Persons or Body of Individuals, whether incorporated or not
 Banks etc…
OTHER CATEGORY
 The following were not permitted to invest in mutual

funds in India until recently:
 An individual who is a foreign national (unless of course,
the person is an NRI or PIO / OCI card holder.
 Any entity that is not an Indian resident, as per FEMA
(except when the entity is registered as FII with SEBI, or
has a sub-account with a SEBI-registered FII).
 Overseas Corporate Bodies (OCBs) i.e. societies / trusts
held, directly or indirectly, to the extent of over 60% by
NRIs, or trusts where more than 60% of the beneficial
interests is held by such OCBs.
OTHER CATEGORY
 SEBI and RBI circulars dated August 9, 2011 have

allowed Qualified Foreign Investors (QFIs) who meet
KYC requirements to invest in equity and debt schemes
of Mutual Funds through two routes:
 Direct Route - Holding MF units in demat account through
a SEBI registered depository participant (DP).
 Indirect Route - Holding MF units via Unit Confirmation
Receipt (UCR).
 It is always a good practice to check the ‘Who can
Invest’ section of the Offer Document.
KYC REQUIREMENTS
 The following investors have to be KYC compliant,

irrespective of the investment value (Even if the
investment is less than Rs. 50,000 – discussed later):
 Non-individual investors i.e. companies, partnership firms,
trusts, HUF etc.
 Non-Resident Indians
 Investors coming through channel distributors
KYC - PROCESS
 The requisite form is to be filed along with supporting documents.
 The supporting documents will be verified with the original.
Alternatively, the investor can provide a True Copy.
 The original is returned to the investor, after verification, while the
forms and supporting documents are uploaded in the server of any
centralized KRA.
 The intermediaries mentioned above are also authorised to perform
an In Person Verification of the investor.
 Where investment is made by a minor, KYC requirements have to
be complied with by the Guardian.
 In the case of investments by a Power of Attorney holder on behalf
of an investor, KYC requirements have to be complied with, by
both, investor and PoA holder.
KYC REQUIREMENTS - DOCUMENTS
 Proof of Identity
 Proof of Address
 PAN Card
 Photograph
KYC REGISTRATION AGENCIES
 KYC is required to be done through Centralised KYC Registration Agencies (KRAs)

for the benefit of investors.
 Once done, the investor does not need any further KYC for dealing in any part of the
securities market (depository, stock exchange transactions, mutual fund transactions
etc.).
 The Government of India has authorised the Central Registry of Securitisation and
Asset Reconstruction and Security Interest of India (CERSAI) to act as and to perform
the functions of the Central KYC Record Registry.
KYC REGISTRATION AGENCIES
 Some of the key functions of Central KYC Registry are:
 Electronically storing, safeguarding and retrieving the Know Your Customer (KYC) records
 Information updated about a customer shall be disseminated on request by Central KYC
Registry to any reporting entity that avail the services of the Central KYC Registry in
respect of the customer.
 The services of the Central KYC Registry will be available on payment of prescribed fee, in
advance.
 It shall process the KYC records received from a reporting entity for duplication and issue a
unique KYC Identifier for each client to the reporting entity.
 Where a customer submits a KYC identifier to a reporting entity, then such reporting entity
shall download the KYC records from the Central KYC Registry by using the KYC Identifier
and shall not require a customer to submit the documents again unless:
 There is a change in the information of the customer as existing in the records of Central
KYC Registry.
 The current address of the client is required to be verified.
 The reporting entity considers it necessary in order to verify the identity or address of the
client, or to perform enhanced due diligence or to build an appropriate risk profile of the
client.
KYC KYC
THROUGH
REGISTRATION
e-KYC SERVICE
AGENCIES
OF UIDAI
 KYC through e-KYC service of UIDAI
 The e-KYC service launched by Unique Identification Authority of India (UIDAI) also, is
now a valid process for KYC verification.
 The information containing relevant client details and photograph made available from
UIDAI as a result of e-KYC process shall be treated as sufficient proof of Identity and
Address of the client.
 The client shall have to authorize the intermediary to access his data through UIDAI
system.
 KYC through Intermediaries
 Where the investors choose to hold the units in demat form or for applicants who choose
to invest through the stock exchange infrastructure, the KYC performed by the Depository
Participant will be considered as compliance with the KYC norms.
Centralised KRAs have made the KYC process simpler for investors. Mutual
funds, depositories, registrars and transfer agents, KYD compliant mutual fund
distributors and brokers are authorised to facilitate the KYC documentation of
investors.
PAN CARD REQUIREMENTS FOR MICRO-SIPS
 PAN Card is compulsory for all mutual fund investments.

Exception has been made for Micro-SIPs.
 SIPs where annual investment (12 month rolling or April-March
financial year) does not exceed Rs 50,000.
 Instead, the investors (including joint holders) can submit
PHOTO IDENTIFICATION (given on page no. 145) documents
along with Micro SIP applications.
 Investors have to give a declaration for Micro – SIP.
 It may be noted that the relaxation in documentation
requirements for micro-SIPs is not available for HUFs and
non-individuals.
 Such relaxation is available for NRIs, but not PIOs.
FILLING THE APPLICATION FORM FOR MUTUAL FUNDS
The information required to be provided in the application form :
● Direct Plan and Regular Plan

● Unit Holder Information
● KYC Acknowledgement Letter
● Other KYC Details
● FATCA and CRS Details
● Bank Account Details
● Investment Details
● Payment Details
● Unit Holding Option
● Demat Account Details
● Nomination
● Minimum Investment
The application has to be signed by all the holders irrespective of the

mode of holding.
ADDITIONAL DOCUMENTATION REQUIREMENTS
FOR INSTITUTIONAL INVESTORS
 Documentation requirements for institutional investors are in

addition to the normal KYC documentation.
 If incorporation documents (Memorandum of Association and
Articles of Association or Trust Deed) don’t give permission to
invest in MF, then they can’t invest in the same.
 This can be changed with help of Board Resolution.
 Authorization for the official to sign the documents on behalf
of the investing institution.
FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)
AND COMMON REPORTING STANDARDS (CRS)
Mutual funds are required to undertake due diligence process to identify

foreign reportable accounts, collect such information as required under the
FATCA and CRS provisions and report the same to the concerned
authorities.
● Once an investor is identified as covered under the said regulation, the
entire investment value of all the folios held will be reported.
● The identity of the investors and their direct and indirect beneficiaries and
controlling persons will be reported.
● If there is a change in the status of the investor after the information is first
provided, then the same has to be reported to the mutual fund within 30
days.
DEMAT ACCOUNT
 Dematerialisation is a process whereby an investor’s holding of

investments in physical form (paper), is converted into a digital
record.
 Once the KYC is performed for opening a demat account, no
separate KYC is required to be done by the AMC or distributor.
 Benefits
 Less paperwork
 Direct credit of bonus and rights units
 Change of address or other details need to be given only to the
Depository Participant
 The investor also has the option to convert the demat units into
physical form. This process is called re-materialisation.
TRANSACTIONS WITH MUTUAL FUNDS
 Fresh Purchase
 Additional Purchases
 Online Transactions – Based on
name and password (Personal
Identification Number – PIN)
PAYMENT MECHANISM FOR PURCHASE / ADDITIONAL PURCHASE
 Mutual funds usually do not accept cash but

 Small investors
 Who may not be tax payers and
 May not have PAN/bank accounts
 are allowed cash transactions for purchase of units
in mutual funds to the extent of Rs. 50,000/- per
investor, per mutual fund, per financial year.
 Although investment can be made in cash,
repayment in form of redemptions, dividend
payments etc. can be only through the banking
channel.
 Cheque / Demand Draft (DD) :
 Required for investment / for additional purchase
 NRI / PIO applications need to be accompanied by cheque drawn on an
NRO account (for non-repatriable investment) or NRE account (for
repatriable investment).
 If payment from NRI is by DD, and investment is on repatriable basis, a
banker’s certificate -Foreign Inward Remittance Certificate (FIRC) will
be required to the effect that the DD has come out of moneys remitted
from abroad.
 Third-party cheques are not accepted except in special cases such as
grandparents/parents making payments not exceeding Rs. 50,000 on
behalf of a minor, employer making payments on behalf of employee
through payroll deductions and custodian on behalf of FIIs.
 Electronic Modes of Payment
 Payment can also be done through Internet Banking, using NEFT, RTGS or
SWIFT and through ECS for SIP
 Mobile Banking
 United Payment Interface (UPI)
 Aadhaar Enabled Payment Service (AEPS)
 National Unified USSD Platform (NUUP)
 Cards
 E-Wallets
One-Time Mandate: Investors can authorize their bank to process debits to their specified
bank account raised by a specific mutual fund for purchase of units by giving a mandate.
The debits happen through the National Automated Clearing House (NACH).
It eliminates the need for the investor to initiate payment every time a purchase transaction is
conducted.
APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)
 The benefit of ASBA is that the money goes out of

the investor’s bank account only on allotment.
 Until then, it keeps earning interest for the investor.
 ASBA facility is available only for NFO, it cannot be
used for the purchase of ongoing scheme.
ALLOTMENT OF UNITS
 Since entry load is banned, Units in an NFO are sold at the face value
i.e. Rs. 10. So the investment amount divided by Rs. 10 would give the
number of units the investor has bought.
 The price at which units are sold to an investor as part of ongoing sales
in an open-end scheme is the sale price, which in turn is the applicable
NAV.
 Thus, an investor who has invested Rs. 12,000, in a scheme where the
applicable sale price is Rs. 12, will be allotted Rs. 12,000 ÷ Rs. 12 i.e.
1,000 units.
 However, in case of subscription/purchase above Rs. 10,000/- for
application sourced from a distributor, in case the distributor has opted to
receive transaction charges, a transaction charge of Rs. 100 (in case of
an existing investor) or Rs. 150 (in case of an investor other than an
existing investor) shall be deducted from the investment amount.
PAYMENT MECHANISM FOR REPURCHASE OF UNITS
 Cheque
 Direct Credit
 It may be noted that for non-resident investors,
payment is made by the AMC in rupees.
 In case the investment has been made on repatriable
basis, and the investor wishes to transfer the moneys
abroad, the costs associated with converting the
rupees into any foreign currency would be to the
account of the investor.
CUT-OFF TIME – VERY IMPORTANT
 SEBI has prescribed cut-off timing to determine the applicable NAV.
Cut off
Type of Scheme Transaction Applicable NAV
time
Equity oriented funds and debt
funds (except liquid funds) in • Purchases • Same day NAV if received before cut off time.
3.00 pm • Next business day NAV for applications received
respect of purchases less than • Switch In after cut off time.
Rs. 2 lacs
Equity oriented funds and debt Irrespective of the time of receipt of application,
funds (except liquid funds) in • Purchases • NAV of the business day on which the
3.00 pm
respect of transaction more • Switch In funds are available for utilisation before the
than Rs. 2 lacs cut-off time of that day is applicable.
• Previous day NAV if received before cut off time

• Purchases and funds are realised.
Liquid fund 2.00 pm
• Switch In • If received after cut off time, NAV of the day
previous to funds realisation.
Equity Oriented Funds, Debt • Same day NAV if received before cut off time.
• Redemptions
3.00 pm • Next business day NAV for applications received
funds, Liquid funds • Switch out
after cut off time.
TIME STAMPING
 The time stamping on the transaction requests is done at the official points
of acceptance.
 These points of acceptance have time stamping machines with tamper-
proof seal.
 Opening the machine for repairs or maintenance is permitted only by
vendors or nominated persons of the mutual fund. Such opening of the
machine has to be properly documented and reported to the Trustees.
 The daily time stamping of application does not start with serial 1.
 Application are stamped with automatically generated Location Code,
Machine identifier, Serial number, Date & Time.
 Similarly applications for non-financial transactions like change of address,
and investor’s acknowledgement are stamped.
 For online transactions, the time as per the web server to which the
instruction goes, is used in determining the NAV for sale / re-purchase
transactions.
TRANSACTIONS THROUGH THE STOCK EXCHANGE
 NSE’s platform is called NEAT MFSS. BSE’s

platform is BSE STAR.
 Both platforms are open from 9 am to 3 pm on
every working day.
 Fresh, additional purchase and redemption are
permitted.
 Stock exchanges only offer a transaction platform,
they do not offer Settlement Guarantee.
Responsibility for settlement is that of the AMC.
TRANSACTIONS THROUGH MF UTILITIES (MFU)
 MFU is a transaction aggregating platform that connects investors, RTAs,

distributors, banks, AMCs and others.
 MFU facilitates the distributors with online access to submit investor
transactions . This platform provides them with a single point for Time-
stamping of transactions, single point for document submission,
paperless transaction facility, provide login facility for their clients.
 Investors who register on the MFU is allotted a Common Account
Number (CAN) under which all their mutual fund holdings are
consolidated.
 The MFU offers a Common Transaction Form to transact in multiple
schemes across participating mutual funds using a single form.
INVESTMENT PLANS
 Growth
 Dividend Payout and
 Dividend Re-Investment Option
 The portfolio returns are the same for all three options. However, they
differ in the structure of cash flows and income accruals for the unit-
holder, and therefore, the Unit-holder’s taxability, number of units
held and value of those units.
 Dividend is declared in both, Dividend Payout and Dividend Re-
investment Option.
 The day on trustee approves the dividend is called CUM – Dividend-
NAV.
 Reduced NAV after the dividend is paid is called Ex- NAV. Dividend is
invested at Ex-NAV in Divided Re-investment option.
INVESTMENT PLANS
Dividend Payout Dividend Re-

Parameter Growth Option
Option investment Option
Dividend received in
Yes No No
bank account
Dividend Distribution
Yes Yes N. A.
Tax
Increase in number
of units on account
No Yes No
of re-investment of
dividend
NAV captures the portfolio
NAV declines to the NAV declines to the change entirely.
extent of dividend and extent of dividend and Declaration of dividend in
NAV change dividend distribution dividend distribution other options has NO
tax tax impact on NAV of growth
option.
INVESTMENT PLANS
Systematic Transactions
 Systematic Investment Plan (SIP)
 Systematic Withdrawal Plan (SWP)
 Systematic Transfer Plan (STP)
 Dividend Transfer Plan: Allows investors to invest the dividend earned in a
mutual fund investment into another scheme of the same mutual fund.
Operational aspects of Systematic Transactions
 SIP Top-up Facility: Investors can increase the SIP amount at intervals
chosen by them. The increase can be of a fixed amount or a percentage of
the existing SIP amount.
 Renewing SIP: To renew an SIP, a renewal form has to be submitted giving
details of the scheme, plan and option, SIP amount, SIP date and period.
INVESTMENT SERVICES
 Triggers
 Helps to transact at the pre-specified price without any additional
requirements at that time.
 Statement of Account and Investment Certificate
 Statement of Account shows for each transaction (sale/re-purchase), the
value of the transaction, the relevant NAV and the number of units
transacted. Besides, it also provides the closing balance of units held in
that folio, and the value of those units based on the latest NAV.
 Annual Account Statement
 The Mutual Funds shall provide the Account Statement to the Unit-
holders who have not transacted during the last six months prior to
the date of generation of account statements.
 The Account Statement shall reflect the latest closing balance and value
of the Units prior to the date of generation of the account statement.
INVESTMENT SERVICES
 Consolidated Account Statement (CAS)

 A Consolidated Account Statement (CAS) for each calendar month
will be sent by post/email on or before 10th of the succeeding
month.
 If an email id is registered with the AMC, only a CAS via email will
be sent.
 Investors will be identified across mutual funds by their
Permanent Account Number (PAN).
 where there are no transactions in a folio during any six month
period, a CAS detailing holding across all schemes of all mutual
funds at the end of every such six month period (i.e.
September/March), shall be sent by post/e-mail by the 10th day of
the month following that half year, to all such Unit holders.
INVESTMENT SERVICES
 Nomination
 If one joint holder dies, then the Units will continue to be
held by the surviving joint holder/s. If the sole Unit-holder or
all joint holders die/s, then the Units will be transferred to
the nominee.
 Maximum 3 nominations can be made.
 Pledge
 Mutual funds units can be pledged by unit holders to
Banks, NBFCs and other financiers.
 Once Units are pledged, the Unit-holder/s (Pledger/s)
cannot sell or transfer the pledged units, until the pledgee
gives a no-objection to release the pledge.
INVESTMENT SERVICES
 Change in Folio Details
 The personal information of the investor captured under the folio is liable to
changes which have to be updated in the records. Some of the information,
such as name, address, status and contact details, are provided during the
KYC compliance process.
 Transmission of Units
 Transmission is the process of transferring units to the person entitled to
receive it in the event of the death of the unit holder.
> If the first holder passes away, the second holder is substituted as first holder.
> In a singly held folio with nominations, the units are transferred to the
nominee.
> If a folio is jointly held and has nominations, the right of the joint holder will
take precedence.
> If there are no nominations in the folio, the units are transmitted to the legal
successors.
IMPORTANT
 Investor has the option to decide on the repurchase

(redemption) amount (which is generally the case) or
number of units offered for re-purchase, where sale
(purchase) application can be done only in amount.
 RTGS means Real time gross settlement.
 NEFT means National Electronic funds transfer.
 SWIFT used for international transfer.
TEST TIME...
TEST TIME
1. Mutual fund in India is constituted as…

 Companies
 Trust
 Partnership Firm
 NGO
2. Cut-off timing guidelines are not applicable for __________.
 NFOs
 International Funds
 Both the above
 None of the above
TEST TIME
3. Compare to Sector Funds, Thematic Fund would have a

wider choice for
 True
 False
4. Close ended fund allows investors to sell their units
 By allowing fixed number of Units to sell
 By selling number of units in a fixed interval
 By listing MF in stock exchange
 Can not sale
TEST TIME
5. One of the advantage of ETF is..

 Investor can see where his money is invested
 These schemes can generate higher returns than mutual fund
 Investors can buy of sell units on stock exchanges at price that
closely track valuation at that time
 ETF offer tax benefits
6. Minimum Net worth needed by AMC ?

 a. 10 Cr b. 15 Cr c. 20 Cr d. 50 Cr.
7. Mutual Fund sponsor can be compared to

 a. Depositor of a company
 b. Company director
 c. Promoter of Company
 d. CEO of a company
TEST TIME
8. The asset management company shall confirm that a due

diligence certificate is signed by the Compliance Officer
 a. True b. False
9. Bank owned mutual funds are regulated by

 a. RBI & SEBI b. Respective parent banks
c. RBI d. SEBI
10. If payment of redemption is delayed then what %

of interest has to be paid by AMC ?
 a. 10% b. 10% c. 9% d. 15%
11. The distributor can charge fees from the Investor

TEST TIME
12. Which of the following is Self Regulatory Organization (SRO)?
 a. BSE b. SEBI c. RBI d. AMFI
13. New Offer Document after clearing by SEBI for scheme launch
is valid for ?
 a. 1 month b. 3 months c. 6 months d. 1 year.
14. The correct frequency for updating Offer Document is
 The OD must be updated whenever there is a material change in its
contents.
 The OD must be updated on a yearly basis.
 Only (1) is right
 Only (2) is right
 Both of them are right
 None of them is right
TEST TIME
15.It is mandatory to attach KIM with

 a. Transaction slip b. Application form
 c. Both of them d. None of them
16. NFO other than ELSS can remain open for a

maximum of _______ days
 a. 7 b. 10 c. 15 d.30
17.Distributors do not get commission on self

business
TEST TIME
18. 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
19. In India one can invest in MF through distributor only.
 a. True
 b. False
TEST TIME
20. Which of the following would not affect the trail commission
to the advisor in mutual Fund
 a. AUM going up with the increase in the market
 b. Investor making fresh purchase during the period
 c. Change in the unit capital of the scheme
 d. Investor redeeming investment during the period
21. Open-ended schemes generally offer exit option to
investors through a stock exchange.
 a. True
 b. False
22. AMC directors are appointed with the permission of Trustees.
 a. True
 b. False
TEST TIME
23. Most investor service centres are offices of _______.

 a. Trustees b. Registrar
 c. AMCs d. Fund Accountant
24. SEBI regulates __________.
 a. Mutual Funds b. Depositories
 c. Registrar & Transfer Agents d. All of the above
25. Legally, SAI is part of the SID.

 a. True
 b. False
26. Offer documents of mutual fund schemes are

approved by SEBI.
 a. True
 b. False
TEST TIME
27. KIM has to be updated every 6 months.
 a. True
 b. False
28. Stock exchange brokers are permitted to distribute mutual
funds without the requirement of passing the certifying test.
 a. True
 b. False
29. Foreign nationals are permitted to invest in Indian mutual
funds, subject to KYC.
 a. True
 b. False
30. PAN Card is not required for mutual fund investments below
Rs 50,000, where payment is in cash.
 a. True
 b. False
END OF DAY - 1
CHAPTER 8
RETURN, RISK &
PERFORMANCE OF FUNDS
DRIVERS OF RETURNS IN A SCHEME
 The portfolio is the main driver of returns in a mutual

fund scheme. The underlying factors are different for
each asset class.
EQUITY SCHEMES
 Securities Analysis Disciplines

 Fundamental Analysis and
 Technical Analysis
A passive fund manager does not need to go through this
process of securities analysis, but securities analysis is an
important aspect of actively managed schemes.
FUNDAMENTAL ANALYSIS
 EPS : Total earnings per share.
Net Profit after tax (for equity share holders)

No. of shares outstanding
 Net profit of the company - Rs. 1000 crores

 No. of equity shares outstanding - 100 crores
 EPS = (Rs. 1000 crore/100 crore) = Rs. 10
 This tells investors how much profit the company earned for
each equity share that they own.
 Price to Earnings Ratio (P/E Ratio) :
Market value per share

EPS
 Market Price of the share - Rs. 50

 Earnings per share - Rs. 10
 P/E Ratio = (Rs. 50 / Rs. 10) = 5
 A low P/E is not a buy always, and a High P/E is not a sell
always.It is based on the expectation of future
performance of the company.
 Book value : Value of company’s asset per share that share

holders will receive if company goes into liquidation.
Paid up equity cap + Reserves & Surplus
No. of Shares Outstanding
 Paid up Capital - Rs. 1000 crore

 Reserves and Surplus - Rs. 250 crore
 No. of Outstanding Shares - 100 crores
 (Rs.1000 crores + Rs. 250 Crores) / 100 crores = Rs. 12.50
 Price to Book Value: An indicator of how much the share

market is prepared to pay for each share of the company, as
compared to its book value.
Market Price
Book Value per Share
 Market Price of Share - Rs. 50

 Book Value per share - Rs. 12.50
 Price to Book Value - ( Rs. 50 / Rs. 12.50) = 4
 Most financial indicators cannot be viewed as stand-alone
numbers.
 They need to be viewed in the context of unique factors
underlying each company.
● Dividend Yield: This is used as a measure of the payouts received
from the company, in percentage, for each rupee of investment in the
share
Dividend per share
Market price per Share
● Market Price of Share - Rs. 50

● Dividend per share - Rs. 5
● Dividend Yield - ( Rs. 5 / Rs. 50)*100 = 10%
● Dividend yield is considered as a parameter by conservative investors
looking to identity steady and lower risk equity investments.
● A high dividend yield is the result of higher payout and/or lower
market prices, both of which are preferred by such conservative
investors.
TECHNICAL ANALYSIS
 Technical Analysts believe that price behaviour of a share, and the

volumes traded are a reflection of investor sentiment, which in turn
will influence future price of the share.
 Technical analysts are also called CHARTISTS.
 It is generally agreed that longer term investment decisions are best
taken through a fundamental analysis approach, while technical
analysis comes in handy for shorter term speculative decisions,
including intra-day trading and even to time the market for decisions
based on fundamental analysis.
INVESTMENT STYLES
 Growth Investment Style :
 These stocks of companies are likely to grow much faster than
the economy.
 Valuation of these stocks tends to be on the higher side.
 In the event of a market correction, these stocks tend to
decline more.
 Value Investment Style :

 An approach of picking up stocks, which are priced lower
than their intrinsic value, based on fundamental analysis.
 In this, if investor’s decision is proved right, they earn very
high returns, which more than offset the losses on failed
decisions.
INVESTMENT STYLES
T Economy e.g. High Growth

B
O O
P T
T
Industry e.g. retail E
D
O M
W
N Company U
P
Bottom Up approach is also known as Stock – Picking approach.

DEBT
 It entails a return in the form of interest (at a pre-specified frequency

for a pre-specified period), and refund of a pre-specified amount at
the end of the pre-specified period.
 The pre-specified period is also called Tenor.
 At the end of the tenor, the securities are said to Mature. The process
of repaying the amounts due on maturity is called Redemption.
 The return that an investor earns or is likely to earn on a debt
security is called its Yield. Yield = Interest Income + Capital Gain /
Capital Loss
 Debt securities that are to mature within a year are called money
market securities.
INTRODUCTION TO DEBT SECURITIES
 Debt securities may be issued by Central Government, State
Governments, Banks, Financial Institutions, Public Sector
Undertakings (PSU), Private Companies, Municipalities etc.
 Securities issued by the Government are called Government
Securities or G-Sec or Gilt.
 Treasury Bills are short term debt instruments issued by the Reserve
Bank of India on behalf of the Government of India.
 Certificates of Deposit are issued by Banks (for 91 days to 1 year) or
Financial Institutions (for 1 to 3 years)
 Commercial Papers are short term securities (up to 1 year) issued by
Companies.
 Bonds / Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue bonds,
while private sector companies issue debentures.
CREDIT RATING AND CREDIT RATING AGENCIES
 The possibility of a non-government issuer defaulting on a debt
security i.e. its Credit Risk.
 It is measured by Credit Rating companies like
 CRISIL, ICRA, CARE and Fitch.
 They assign different symbols to indicate the credit risk in a debt
security. For instance ‘AAA’ is CRISIL’s indicator of highest safety
in a debenture.
 Higher the credit risk, higher is likely to be the yield on the debt
security.
 The interest rate offered by company fixed deposits depends on
the credit rating assigned.
 The difference between the yield on Gilt and the yield on a Non-
Government Debt security (with highest safety, i.e. AAA or
equivalent) is called its Yield Spread or Credit Spread.
INTRODUCTION TO DEBT SECURITIES
 Debt securities can be of three types

 Fixed Rate
 Floating Rate
 Zero Coupon – T-bills
 As discussed earlier, NAVs of Floating Rate Schemes fluctuate

lesser than debt funds that invest more in debt securities
offering a fixed rate of interest.
INTEREST RATES AND BOND PRICES
 Interest rates and Market price of debt security are
inversely related to each other.
 A security of longer maturity would fluctuate a lot more, as

compared to short tenor securities. This can be measured by
modified duration.
GOLD
 The value of gold in India depends on the international price of

gold (which is quoted in foreign currency), the exchange rate
for converting the currency into Indian rupees, and any duties
on the import of gold.
 Gold is seen as a safe haven asset class. Therefore, whenever
there is political or economic turmoil, gold prices shoot up.
 Impact of Rupee Valuation :
 Depreciation of home currency - Better returns in Gold
(International Asset)
 Appreciation of home currency - Low returns in Gold
(International Asset)
REAL ESTATE
 Factors affecting Real Estate Prices :

 Economic scenario
 Infrastructure development
 Interest Rates
RETURNS
 Simple Return
 The Simple Return can be calculated with the following
formula:
Later Value minus Initial Value
* 100
Initial Value
 Suppose you invested in a scheme, when its NAV was Rs 12.

Later, you found that the NAV has grown to Rs 15. How much
is your return?
= [ (15 – 12) / 12] * 100 = 25%
RETURNS
 Annualized Return
 The annualized return can be calculated as
Simple Return * 12
Period of Simple Return (In Months)
 Continuing with the same example, if the Simple Return is

achieved in, say, 8 months, the annualized return would be :
= (25% * 12) / 8 = 37.50%
COMPOUNDED RETURN
 What is compounding? Suppose you place Rs 10,000 in a

cumulative bank deposit for 3 years at 10% interest,
compounded annually
Opening Balance Interest ( 10% On Closing Balance
Year ( Rs.) Opening ) ( Rs)
1 10,000 1,000 11,000
2 11,000 1,100 12,100
3 12,100 1,210 13,310
COMPOUNDED RETURN
 In previous two examples effect of compounding is missing.
1/N
Later Value ^
1 * 100
Initial Value
 Frequency of compounding can be any.

COMPOUNDED ANNUAL GROWTH RATE
 The formula is same as Compounded Return
1/N
Later Value ^
1 * 100
Initial Value
 But here the frequency of compounding will be annual only.

 Load will reduce overall return of the portfolio.
 Mutual funds are not permitted to promise any returns,
unless it is an assured returns scheme. Assured returns
schemes call for a guarantor who is named in the offer
document.
DRIVERS OF RISK IN A SCHEME
 Portfolio Risk
 This is related to performance of the assets in the portfolio,
but there is no certainty regarding the performance of the
selected assets classes by the fund manager.
 Portfolio Liquidity
 If assets lying in the portfolio is Liquid, profits can be
booked when required.
 SEBI has laid down criteria to identify illiquid investments,
and also set a ceiling to the proportion of such illiquid
investments in the net assets of a scheme.
 The ceiling is lower for open-ended scheme, which
have a greater need for liquidity because investors can offer
their units for re-purchase at any time.
 Liquid assets in the scheme :

 Two reasons to keep liquidity.
 They believe that the market is over-heated, and therefore
prefer to sell their investments and hold the proceeds in
liquid form, until the next buying opportunity comes up.
 They want to provide for contingencies such as impending
dividend payment or re-purchase expectations.
 Higher the liquid assets in the scheme, lower is the return of

the scheme but at the same time they protect the scheme from
any distress sale of investments.
LIABILITIES IN THE SCHEME
 The outside liabilities need to be paid by a scheme, irrespective

of the performance of the assets.
 Outside liabilities add to the risk in a mutual fund scheme.
 Until the expenditure is paid, it is a liability in the scheme.
 The practice of taking liabilities beyond what is inherent to the
normal business of a mutual fund scheme is called leveraging.
Limits for the same :
 A mutual fund scheme cannot borrow more than 20% of its
net assets
 The borrowing cannot be for more than 6 months.
 The borrowing is permitted only to meet the cash flow needs
of investor servicing viz. dividend payments or re-purchase
payments.
 Use Of Derivatives
 It can be used for the purpose of

Hedging against risk
 Re-balancing the portfolio
 Mutual Funds are barred from writing options.
 Unit Holders Churn
 As a measure to protect the investor, SEBI has stipulated
the 20:25 rule viz. every scheme should have at least 20
investors; no investor should represent more than 25%
of net assets of a scheme.
RISK IN EQUITY FUNDS
Generic :
 The real economy goes through cycles. For a few years until
2008, the economy was booming. Then things started changing.
2009 was gloomy. However, during 2010 an economic recovery
is being seen.
 In the long run, equity markets are a good barometer of the real
economy – but in the short run, markets can get over-optimistic
or over-pessimistic, leading to spells of greed and fear.
 Equity markets therefore tend to be volatile.
RISK IN EQUITY FUNDS
Portfolio Specific
 Sector Funds suffer from concentration risk - the entire exposure
is to a single sector. Performance of the scheme will depend up
on performance of one sector only.
 Diversified Equity Funds, on the other hand, have exposure to
multiple sectors. Diversified equity funds are therefore less risky
than sector funds.
 Thematic Funds are a variation of sector funds. It is discussed in
Chapter 1.
 Mid Cap Funds invest in mid cap stocks, which are less liquid
and less researched in the market, than the frontline stocks.
Therefore, the liquidity risk is high in such portfolios.
 Contra Funds take positions that are contrary to the market. Such
an investment style has a high risk of misjudgments.
PORTFOLIO SPECIFIC RISK
 Dividend Yield Funds invest in shares whose prices fluctuate

less, but offer attractive returns in the form of dividend. Such
funds offer equity exposure with lower downside.
 Arbitrage Funds are categorized as equity funds. Risk is the
lowest among equity funds – even lower than diversified equity
funds. The returns too are lower – more in line with money
market returns, rather than equity market returns.
RISK IN DEBT FUNDS
 There is assured value on maturity, but debt securities fluctuate

in value, with changes in yield in the overall market.
 A fund manager taking a wrong call on the direction of interest
rates can seriously affect the scheme performance.
 Because of Illiquidity in Non – Government Debt Market, an
element of subjectivity creeps into their valuation, and therefore
the NAV.
 Short maturity securities (lower modified duration) suffer
lesser fluctuation in value, as compared to the ones with
longer tenor (higher modified duration).
RISK IN DEBT FUNDS
 Fixed Maturity Plan’s (FMP) yield is relatively more predictable

on maturity but in the interim, the value of these securities will
fluctuate in line with the market – and therefore, the scheme’s
NAV too will fluctuate.
 If the FMP is structured on the basis of investment in non
government paper, then the credit risk is also an issue.
RISK IN BALANCED FUNDS
 Balance Schemes :
 It is rare for both debt and equity markets to fare poorly at the same
time. Since the performance of the scheme is linked to the

performance of these two distinct asset classes, the risk in the scheme
is reduced.
 It can be based on (i) Fixed Asset Allocation (ii) Flexible Asset
Allocation
 Between fixed asset allocation funds and flexible asset allocation
funds, the latter carry higher risk.

 Monthly Income Plan (MIP) :
 It seeks to combine a large debt portfolio with a yield-kicker in the form
of an equity component.
 In such a structure, it is possible that losses in the equity component
eat into the profits in the debt component of the portfolio.

 If the scheme has no profits to distribute, then no dividend will be
declared.
RISK IN GOLD FUNDS
 As an international commodity, gold prices are a lot more difficult to

manipulate. Therefore, there is better pricing transparency.
 Further, gold does well when the other financial markets are in
turmoil. Similarly, when a country goes into war, and its currency
weakens, gold funds give excellent returns.
 These twin benefits make gold a very attractive risk proposition. An
investor in a gold fund needs to be sure what kind of gold fund it is –
Gold Sector Fund or ETF Gold.
RISK IN REAL ESTATE FUNDS
 Valuation of real estate assets is highly subjective, since every asset

is different
 Problems :
 Black money
 Less liquid asset class
 Transaction costs
 Regulatory risk
 Benefits of Real Estate Funds :
 Gives dual benefit : Exposure in Real Estate and Liquidity of MF
 Real estate funds are quite high in risk, relative to other scheme
types. Yet, they are less risky than direct investment in real estate.
MEASURES OF RISK
No Risk Risky
MEASURES OF RISK
MEASURES OF RISK
 Variance
It measures the fluctuation in periodic returns of a scheme, as
compared to its own average return
 MS Excel function of Variance is VAR
 Standard Deviation :
It measures the fluctuation in periodic returns of a scheme in relation
to its own average return.
 standard deviation equal to root of variance
 MS Excel function of Standard Deviation is STDEV
 Variance and Standard Deviation are relevant to EQUITY and
DEBT
BETA - Β
 Beta is a measure of Systematic Risk.

 Beta of any Index will always be 1.
 Beta for particular security or portfolio can be 1, More than 1 or Less
than 1.
 Interpretation :
 β = 1 --- Return of security / portfolio = Market Return
 β > 1 --- Return of security / portfolio >Market Return
Aggressive security / portfolio)
 β < 1 --- Return of security / portfolio <Market Return
(Defensive security / portfolio)
 This is relevant to EQUITY only.
MEASURES OF RISK
 Modified Duration :
 measures the sensitivity of value of a debt security to changes in
interest rates. Higher the modified duration, higher the interest
sensitive risk in a debt portfolio
 Weighted Average maturity :
 Weighted average maturity of debt securities in a scheme’s portfolio
is indicative of the interest rate sensitivity of a scheme
 Relevant to Debt only.
 Credit Rating:
 The credit rating profile indicates the credit or default risk in a
scheme
 Government securities and cash or cash equivalents do not have a
credit risk.
 Corporate issuances carry accredit risk
MEASURES OF RISK & BENCHMARK
 Un-systematic risk / Specific Risk can be reduced through

diversification.
 Performance of the scheme is compared with Benchmark.
 It should be in sync with the investment objective of the scheme
 The benchmark should be calculated by an independent agency in a
transparent manner, and published regularly.
 In case of Index Funds, gaps between the scheme performance,
and that of the benchmark, are called Tracking Errors. Or
 The difference between an index fund’s return and the market
return, as seen earlier, is the Tracking Error.
 Index fund with least Tracking Error is the best.
 Example of Benchmarks : Equity: S&P CNX Nifty, BSE Sensex
Debt: Sibex, Mi-Bex, Li – Bex Gold: Gold Price
Quantitative Measures of Fund Manager Performance
 Sharpe Ratio :
Return Earned From Scheme - Risk free Return
Standard Deviation
 if risk free return is 5%, and a scheme with standard deviation

of 0.5 earned a return of 7%,
 Sharpe Ratio would be (7% - 5%) ÷ 0.5 = 4%
 Difference between Return from scheme and Risk free return is
called Risk Premium
 Sharpe Ratio is effectively the risk premium per unit of risk.
Higher the Sharpe Ratio, better the scheme
 Sharpe ratio is very commonly used measure of risk-adjusted
returns
Quantitative Measures of Fund Manager Performance
 Risk-adjusted Returns :
 Treynor Ratio :
Return Earned From Scheme - Risk free Return
Beta
 if risk free return is 5%, and a scheme with Beta of 1.2 earned a
return of 8%
 Treynor Ratio would be (8% - 5%) ÷ 1.2 = 2.5%
 Alpha :
 The difference between a scheme’s actual return and its benchmark return is
called Alpha
 Measure of the fund manager’s performance
 Positive alpha is indicative of out performance by the fund manager
END OF THE CHAPTER...
CHAPTER 6
ACCOUNTING, VALUATION
AND TAXATION
NET ASSET VALUE
Particulars Amount
Market value of investments

(Stocks,Bonds and money market instruments)
Plus(+): Current assets and other assets
Plus(+): Accrued Interest /dividend but not received ---
Less(-) : Current liabilities and other liabilities
Less(-) : Accrued expenses but not received
Less(-) : Fees Payable
Net Assets ---
(Divided by) Total number of Units Outstanding ---
Net Asset Value (NAV) ---

NET ASSET VALUE ( NAV ) Calculation
Calculate the NAV from given information :
 Value of stocks: Rs. 150 cr,
 Value of bonds: Rs. 67 cr
 Value of money market instruments: Rs. 2.36 cr,
 Dividend accrued but not received: Rs. 1.09 cr,
 Interest accrued but not received: Rs. 2.68 cr
 Fees payable: Rs. 0.36 cr,
 No. of outstanding units: 1.90 cr
NAV = (Value of stocks + Value of bonds + Value of money market

instruments + Dividend accrued but not received + Interest accrued
but not received – Fees payable) / No. of outstanding units
NAV = (150 + 67 + 2.36 + 1.09 + 2.68 – 0.36) / 1.90 = 222.77 /

1.90 = Rs. 117.25
NET ASSETS OF SCHEME
 Net assets includes the amounts

 Originally invested
 The profits booked in the scheme and
 Appreciation in the investment portfolio (Valuation Gains)
 Net assets go up when the market prices of securities held in
the portfolio go up, even if the investments have not been sold.
 A scheme cannot show better profits by delaying payments.
 While calculating profits, all the expenses (Income) that relate
to a period need to be considered, irrespective of whether or
not the expense (income) has been paid (received).
MARK TO MARKET
 The process of valuing each security in the investment portfolio of

the scheme at its market value is called ‘mark to market’ i.e. marking
the securities to their market value.
 Why?
 If investments are not marked to market, then the investment
portfolio will end up being valued at the cost at which each security
was bought.
 When the NAV captures the movement, then only it is meaningful for
the investors.
 Thus, marking to market helps investors buy and sell units of a
scheme at fair prices.
SALE PRICE, RE-PURCHASE PRICE & LOADS
Sale Price Mutual Fund Sells Investor Purchases
Repurchase Price Mutual Fund Repurchases Investor Redeems
 Load
Entry Load (1%) NAV Rs. 10 NAV to Investor Rs. 10.10 No. Of units will be lesser
Amount credited in the

Exit Load (1%) NAV Rs. 10 NAV to Investor Rs. 9.90
bank account will be lesser
 SEBI has banned entry loads w.e.f 1st August, 2009. So, the Sale
Price needs to be the same as NAV.
 Exit load structure needs to be the same for all unit-holders
representing a portfolio.
 Exit loads have to be credited back to the scheme immediately
i.e. they are not available for the AMC to bear selling expenses.
TRANSACTION CHARGES
Types of Investor Transaction Charges
First time mutual fund investor Rs. 150
Investor other than first time mutual fund investor Rs. 100
 This can be charged

 One Time Investment

Investment amount ≥ Rs. 10,000/-
 For SIP
 (SIP Amount * No. Installment) ≥ Rs. 10,000/-
 In case of SIP, the Transaction Charge(s) will be deducted in four equal

installments.
 The transaction charge, if any, shall be deducted by the AMC from the
subscription amount.
TRANSACTION CHARGES
 Transaction Charge(s) will not be deducted if :

 Purchase/Subscription submitted by investor at the designated
collection centers or through AMC’s website, Purchase/

Subscriptions through any stock exchange i.e. transactions which
are not routed through any distributor.
 Purchase/ Subscription through a distributor for an amount less
than Rs. 10,000.

 Transactions such as Switches, STP where there is no additional
cash flow.
 If the distributor has taken ‘OPT OUT’ option.
EXPENSES
 Initial Issue Expenses :
 Not to be charged to scheme, it has to be born by the AMC.
● Recurring Expenses :
 Covers Fees of service providers like

Trustees,AMC,R&T,Custodian etc.
 Covers Selling Exps,Service tax,listing & depository fees and
communication exps, Listing fee, Insurance premium, service tax,

winding up costs, storage and handling cost of gold in case of
Gold ETFs etc.
 Brokerage and transaction cost may be capitalized to the extent of
0.12% for cash market transactions and 0.05% for derivative

transactions respectively. More than this will come under the limit
of Total Expense Ratio(TER).
 Expenditure in excess of the prescribed total expense ratio limit
(including brokerage and transaction cost, if any) shall be borne by

the AMC or by the trustee or sponsors.
SERVICE TAX
 Mutual funds /AMCs may charge service tax on investment and

advisory fee to the scheme in addition to the maximum limit of total
expense allowed for the scheme
 Service tax on expenses other than investment and advisory fee, if
any, is to be borne by the scheme within the maximum limit of total
expense allowed for the scheme.
EXPENSES CANNOT BE CHARGED TO THE SCHEME
 Penalties and fines for infraction of laws.

 Interest on delayed payment to the unit holders.
 Legal, marketing, publication and other general expenses not
attributable to any scheme(s).
 Fund Accounting Fee.
 Expenses on investment management/general management.
 Expenses on general administration, corporate advertising and
infrastructure costs.
 Depreciation on fixed assets and software development expenses.
RECURRING EXPENSE LIMITS
 Annual limits on recurring expenses (including management fees)
for schemes other than index schemes :
Net Assets ( In Crore) Equity Scheme Debt Scheme
Up to Rs 100 crore 2.50% 2.25%
Next Rs 300 crore 2.25% 2.00%
Next Rs 300 crore 2.00% 1.75%
Excess over Rs 700 crore 1.75% 1.50%
 In case of debt funds the above percentages shall be lesser by

0.25%
RECURRING EXPENSE LIMITS
 Management fees cannot be charged by liquid schemes and other

debt schemes on funds parked in short term deposits of commercial
banks.
 The expense limits for index schemes (including Exchange Traded
Funds) is as follows:
 Recurring expense limit (including management fees):1.50%
 Management fees: 0.75%.
 In case of a Fund of Funds scheme, the total expenses of the
scheme including weighted average of charges levied by the
underlying schemes shall not exceed 2.50% of the daily net assets
of the scheme.
RECURRING EXPENSE LIMITS - ADDITIONAL
 If the new inflows from beyond top 30 cities are at least
 30% of gross new inflows in the scheme
 15% of the average assets under management (year to date) of the
scheme, whichever is higher
the funds can charge additional expense of up to 30 basis points on
daily net assets of the scheme.
 In case inflows from beyond top 30 cities is less than the higher of
(a) or (b) above, additional total expense on daily net assets of the
scheme shall be charged as follows:
Daily net assets x 30 basis points x New inflows from beyond top 30 cities
365 X Higher of (a) or (b) above
 The additional TER on account of inflows from beyond top 30 cities so
charged shall be clawed back in case the same is redeemed within a
period of 1 year from the date of investment.
RECURRING EXPENSE LIMITS - ADDITIONAL
 Mutual funds are allowed to charge any additional expenses,

incurred under the various heads of permitted recurring
expenses and investment and advisory fees, but not
exceeding 0.05% of daily net assets of the scheme.
 However, the schemes wherein exit load is not levied / not

applicable, the above mentioned additional expenses shall
not be charged to the schemes.
DISCLOSURE OF TOTAL EXPENSE RATIO
 AMCs need to disclose the scheme-wise, and date-wise TER on a daily

basis, of all schemes under a separate head – “Total Expense Ratio of
Mutual Fund Schemes” on their website and on the AMFI website in a
downloadable spreadsheet format
 Any changes in the base TER compared with the previous base TER
charged to a scheme, must be communicated to the investors through
email or SMS at least three working days prior to effecting such change.
 Eg. If TER is to be effective from January 8, 2018 (Monday), then notice
shall be given latest by January 2, 2018, considering at least 3 working
days prior to effective date.
 The changes in TER shall also be placed before the Trustees on
quarterly basis along with the rationale.
PROVISIONS WITH RESPECT TO
GOODS AND SERVIXES TAX(GST)
 AMC(s) can charge GST to the schemes, but within the limits prescribed
by SEBI
 GST on fees paid on investment management and advisory fees can be
charged to the scheme in addition to the overall limits specified earlier,
but for other than investment and advisory fees it must be within the
prescribed TER limits
 GST on exit load, if any, shall be deducted from the exit load and the net
amount shall be credited to the scheme.
 GST on brokerage and transaction cost paid for execution of trade, if
any, shall be within the limit of TER
DIVIDENDS & DISTRIBUTABLE RESERVES
 Valuation gains in the scheme’s portfolio may never get translated

into real gains.
 SEBI guidelines stipulate that dividends can be paid out of
distributable reserves.
 All the profits earned (based on accrual of income and expenses)
are treated as available for distribution.
 Valuation gains are ignored. But valuation losses need to be
adjusted against the profits.
 That portion of sale price on new units, which is attributable to
valuation gains, is not available as a distributable reserve.
 It means that dividend is paid out of real profits, after providing
for all possible losses.
 The NAV will be adjusted at the end of the record date to reflect the
pay out of dividend and dividend tax, if applicable.
KEY ACCOUNTING & REPORTING REQUIREMENTS
 The accounts of the schemes need to be maintained distinct from

the accounts of the AMC. The auditor for the AMC has to be different
from that of the schemes.
 Norms are prescribed on when interest, dividend, bonus issues,
rights issues etc. should be reflected for in the accounts.
 NAV for equity and balanced funds is to be calculated up to at least
2 decimal places.
 NAV is to be calculated up to 4 decimal places in the case of index
funds, liquid funds and other debt funds.
 Investors can hold their units even in a fraction of 1 unit. However,
current stock exchange trading systems may restrict transacting on
the exchange to whole units.
VALUATION
Traded Security
 Wherever a security is traded in the market on the date of valuation,
its closing price on that date is taken as the value of the security in
the portfolio.
 If in case the security is not traded on a particular date on any
stock exchange, then the price at which it is traded on the principal

stock exchange or any other stock exchange on the earliest
previous day will be considered for valuation, If this date is not
more than 30 days prior to the Valuation date
VALUATION
Non Traded or Thinly Traded Security
 A Non traded security is one which has not been traded since 30
days prior to the valuation date.
 A thinly traded security is one where the volume and value traded in a
month is less than a specified number. Currently, for equity shares
this value is Rs 5 lakh a month in value and 50,000 in volume.
 A debt instrument (other than government security) is considered
thinly traded if on the valuation date there is no individual trade in the
security in the market lots on the principle stock exchange
 AMFI has appointed third party valuation agencies (currently CRISIL
and ICRA) to provide security level pricing of fixed income securities
with maturity greater than 60 days in order to achieve uniform
valuation by all AMCs.
TAXATION
 The mutual fund trust is exempt from tax but the trustee company
will however pay tax in the normal course on its profits.
TAXATION SECURITY TRANSACTION TAX (STT)
For Investors In Equity / Equity Oriented Schemes Of Mutual Fund
Transaction Rate (in %) Payable By

Purchase of units of equity oriented
NIL Purchaser
mutual fund
Sale of units of equity oriented mutual

0.001% Seller
fund
Sale of units of an equity oriented

0.001% Seller
fund to the mutual fund
* STT is not applicable on transactions in debt or debt-oriented mutual

fund (including liquid fund) units.
TAXATION DIVIDEND DISTRIBUTION TAX (DDT)
Schemes Individual/ HUF Domestic Company NRI
Equity oriented 10% + 12% Surcharge 10% + 12% Surcharge 10% + 12% Surcharge
Scheme + 4% cess = 11.648% + 4% cess = 11.648% + 4% cess = 11.648%
Money Market or
Liquid Schemes
/Debt Schemes 25% + 12% Surcharge 30% + 12% Surcharge 25% + 12% Surcharge
(other than + 4% cess =29.12% + 4% cess = 34.944% + 4% cess =29.12%
Infrastructure Debt
Fund)
Infrastructure Debt 25% + 12% Surcharge 30% + 12% Surcharge 5% + 12% Surcharge +
Fund + 4% cess =29.12% + 4% cess = 34.944% 4% cess = 5.824%
The Dividend Distribution Tax (DDT) is paid by the AMC (for both Equity and Debt
schemes), hence the dividends are exempt from tax in the hands of the unitholders.
CAPITAL GAIN TAX
Type of Scheme STCG LTCG
LTCG < Rs l Lakh = NIL
Equity and Equity 15 % + Surcharge
LTCG > = Rs l Lakh = 10%
Oriented Scheme* and Cess
+ Surcharge and Cess
As per marginal rate
Debt and Debt Oriented
(i.e. as per the tax 20% with indexation
Scheme
slab of the investor)
 For Long term capital gain/loss investment in equity mutual fund
should be one year and above compared to investment in debt Mutual
Fund to be 3 years above.
 Where STT is not paid for Equity Schemes, the taxation is similar to
debt-oriented schemes.
 Dividends in the hands of the investor is tax free.
 There is no TDS on the dividend distribution or re-purchase proceeds
to resident investors.
SETTING OFF GAINS AND LOSSES UNDER INCOME TAX ACT
 In the normal course, one would expect that a loss in one head
of income can be adjusted (“set off”) against gains in another
head of income.
 A few key provisions here are:
 Capital loss, short term or long term, cannot be set off against
any other head of income (e.g. salaries)
 Short term capital loss is to be set off against short term
capital gain or long term capital gain
 Long term capital loss can only be set off against long term
capital gain
 Since long term capital gains arising out of equity-oriented
mutual fund units is exempt from tax, long term capital loss
arising out of such transactions is not available for set off.
WEALTH TAX
 Investments in mutual fund units are exempt from Wealth Tax.

CHAPTER 9
SCHEME SELECTION
BASICS
 The first step before advising a Financial Product is to understand

the Risk appetite of the client. Recommendation should be based on
various factors, amongst which Risk Appetite is the most important.
 As a structured approach, the sequence of decision making is as
follows:
 Step 1 – Deciding on the asset class such as equity, debt or gold
 Step 2 – Deciding on the scheme category
 Step 3 – Selecting a scheme within the category
 Step 4 – Selecting the right option within the scheme
SCHEME RISK PROFILE
Risk Level Debt Funds Hybrid Funds Equity Funds

High Risk
Se ctor Funds
Flex ible a sse t alloca tion
Grow th Funds
High Yie ld De bt Fund
Dive rsifie d Equity Funds
Index Funds
Va lue Funds
Equity Income Funds

Divide nd yie ld Funds
Fix e d a sse t alloca tion
Monthly Income Pla ns
Capita l prote ction funds

Diversified De bt Fund
Gilt Funds
Money Marke t & Liquid

Low Risk sche me s
FACTORS TO CONSIDER
 Equity Funds :  Debt Funds :

 Active Or Passive Fund  Regular Debt Funds Or MIP
 Open Ended Or Close Ended  Open Ended Or FMP
 Diversified , Sector Or Thematic  Gilt Funds Or Diversified Debt
Funds
 Large, Mid or Small Cap Funds
 Long Term Or Short Term Debt
 Growth Or Value Funds Funds
 Fund Size  Money Market Or Liquid Funds
 Portfolio Turnover  Regular Debt Funds Or Floaters
 Arbitrage Funds
 Domestic Or International
PORTFOLIO TURNOVER
 If the sale and purchase transactions amounted to Rs. 10,000 crore.

The average size of net assets is Rs. 5,000 crore.
 Then the portfolio turnover ratio is
1. Rs. 10,000 cr ÷ Rs. 5,000 cr = 2 Times or 200%.
2. This means that investments are held in the portfolio, on an
average for 12 months ÷ 2 i.e. 6 months.
FACTORS TO CONSIDER
 Balance Funds :  Gold Funds

 Investor can invest in a mix of  Gold ETF
equity schemes and debt
schemes. Or
Or
 Gold Sector Funds
 He can invest in a balanced

 Difference is discussed in
scheme, which in turn invests previous chapters.
in a mix of equity and debt
securities.
 Investing in a balanced
scheme makes things simpler
for the investor.
SELECTING SCHEME WITHIN A CATEGORY
 Parameters that are considered while selecting schemes with in a

category are.
 Fund Age
 Scheme Running Expenses
 Tracking Error
 Regular Income Yield
 Risk, Return And Risk Adjusted Returns
 Investor Objective
SOURCES OF DATA TO TRACK MUTUAL FUND PERFORMANCE
 Many AMCs, distribution houses and mutual fund research houses offer
free tools in their website.
 Mutual funds also make available product literature that can be used by
distributors and investors to evaluate schemes in the form of Fund
Factsheets, Product Notes and brochures.
 Apart from information about the schemes themselves, AMCs may also
provide periodic updates on markets and the economy. These are typically
part of the factsheets or may be issued as separate notes.
 The fund factsheets are an official source of information of the fund’s
objective, performance, portfolio and basic investment requirements issued
by the fund house each month.
SOURCES OF DATA TO TRACK MUTUAL FUND PERFORMANCE
 There are agencies which provide access to the raw data of NAVs,
dividends etc. in a systematic manner to the investors. The content can
be free or paid or a mix of both. The active agencies are:
 Credence Analytics (www.credenceanalytics.com)
 CRISIL (www.crisil.com)
 Lipper (www.lipperweb.com)
 Morning Star (www.morningstar.com)
 Value Research (www.valueresearchonline.com)
CHAPTER 10
SELECTING THE RIGHT INVESTMENT
PRODUCTS FOR INVESTORS
SAVING & INVESTMENT
SAVING = INCOME – EXPENSES
What can you do with your saving?
Hold as cash/deposit in savings bank account (Retain the Saving)

OR
Invest the Saving (Deploy the saving in physical or finanacial
products with a view to gain a return on your investment)
PHYSICAL OR FINANCIAL
What happens to the Saving that remains uninvested?
Inflation eats the Uninvested Saving

INFLATION RISK
 Inflation risk represents the risk that the money received on an

investment may be worth less when adjusted for inflation.
 Inflation risk is also known as purchasing power risk.
Eg.
On 1st Jan 2016, Asha had Rs 8 Lacs. She invested this money in a 6% Bank FD for
1 year. So she will be getting Rs 8.48 Lacs* on 31st Dec 2016.
The general rise in prices in India was 7% over the same time period.
This means that what Asha could buy with Rs 8 Lacs on Jan 1, 2016, she will need
Rs 8.56 Lacs for the same purchase on 31st Dec 2016.
But her investment has yielded her Rs 8.48 lacs only.
This has happened because her investment was exposed to inflation risk. Her
purchasing power has decreased.
*Assuming no compounding
INFLATION RISK
 Inflation risk is highest in fixed return instruments, such as bonds,

deposits and debentures.
This can be explained with the concept of Real Rate of Return
The return from the investment is the Nominal Rate.
Real Rate of Return = Nominal Rate – Inflation Rate
For Eg. Coupon of a Bond is 8% (Nominal Rate)
When the
Rate of Inflation is 7%, The Real Rate of Return is 1%
Rate of Inflation is 8%, The Real Rate of Return is 0
Rate of Inflation is 9%, The Real Rate of Return is -1%
The Nominal Rate is always +ve. But the Real Rate of Return can
be +ve,0 or even -ve.
INFLATION RISK
Effective Real Rate of Return
When the Real Rate of Return is adjusted to include the impact of
Time Value of Money, it is called Effective Real Rate of Return
● If an investment earns a nominal rate of return, that is the rate at which
money is being compounded. However, if inflation reduces the value of
those investment cash flows, the value of those returns is discounted by the
rate of inflation
Effective Real Rate of Return =

((1 + Nominal Rate) / (1+ Inflation Rate)) – 1
So, if the coupon of the bond is 8% and Rate of Inflation is 6%

Effective Real Rate of Return = ((1.08) / (1.06)) – 1 = 1.89%
PHYSICAL OR FINANCIAL
 Physical Assets include Gold, Land, Real Estate which one can
touch and feel.
 Financial assets include Shares, Bonds, Mutual Funds, Fixed
Deposit etc. They give ownership but can not be touched or felt.
 Physical assets can get destroyed or stolen. So, insurance is very
important.
IMPLICATION
 Comfort :
 The investor in a physical asset draws psychological comfort from
the fact that the asset is in the investor’s possession, or under the
investor’s control in a locker.
 The value encashment in a financial asset, on the other hand, can
depend on the investee company.
 What if the company closes down?
 What if the bank or mutual fund scheme goes bust?
 These are issues, whether fact or myths, that bother investors.
 Mutual fund schemes can offer a lot of comfort, in this regard.
IMPLICATION
 Unforeseen Events :
 A physical asset may be completely gone, or loses substantial
value, when stolen, or if there is a fire, flood or such other hazard.
 Theft or fire or flood, have no impact on the entitlement of the
investor to a financial asset.
 The investor can always go the investee organization i.e.
company or bank or mutual fund where the money is invested,
and claim the entitlement, based on records of the investee
company and other documentary evidence.
 Dematerialisation makes these processes a lot simpler.
IMPLICATION
 Economic Context :
 A Investor’s money in land, art, rare coins or gold does not benefit the
economy.
 On the other hand, money invested in financial assets, e.g. equity shares,
debentures, bank deposits can be productive for the economy
 The money that the government mobilizes through issue of government
securities can go towards various productive purposes.
 The company, whose shares are bought, can invest the money in a project,
which can boost production, jobs and national income.
 The bank where the bank account or fixed deposit is maintained can
lend the money to such productive activities, and thus help the economy
 Similarly, mutual fund schemes that invest in securities issued by
companies are effectively assisting in building the nation and the
economy.
 This explains the interest of the government in converting more and more of the
physical assets held by investors, into financial assets.
GOLD – PHYSICAL OR FINANCIAL
 Options are…
 A Physical Gold
 Gold ETF
 Gold Sector Fund
 Gold futures contracts traded on commodity exchanges like the
National Commodities Exchange (NCDEX) and Multi-Commodity

Exchange (MCX).
 Things To Consider
 Storage Cost
 Insurance Cost
 Transaction Cost
 Capital Gain Tax
 Wealth Tax
REAL ESTATE – PHYSICAL OR FINANCIAL
 Real Estate in physical form is prone to a few more disadvantages:

 A Ticket Size
 No Diversification – Due to high ticket size
 Risk Of Encroachment
 Illiquidity
 High Transaction Costs
 Ownership Risk And Credit Risk – For let out property
FIXED DEPOSIT OR DEBT SCHEME
No. Fixed Deposit MF – Debt
Insurance Upto Rs. 1 lakh per

1 No Insurance
depositor
2 No partial liquidity Partial liquidity
None can earn returns higher than Possibility to earn higher return, but
3
promised can incur loss also
4 No tax deferment Deferred Tax
5 No additional facility STP, SWP

NATIONAL PENSION SYSTEM
 Pension Funds Regulatory and Development Authority (PFRDA) is the

regulator for the New Pension Scheme.
 Two kinds of pension accounts are envisaged:
 Tier I (Pension Account) : is non-withdrawable.
 Tier II (Savings Account) : is withdrawable to meet financial
contingencies. An active Tier I account is a pre-requisite for
opening a Tier II account.
 Investors can invest through Points of Presence (POP)
 Investment Choices :
 Asset Class E : Investment in predominantly equity market
instruments
 Asset Class C : Investment in Debt securities other than
Government Securities
 Asset Class G : Investments in Government Securities
 Asset Class A : Investments in Alternate Investments
Asset Class A has been created recently for Private NPS subscribers, in
addition to the existing 3 classes. Investment in Class A can be upto
5% and consists:
 Commercial mortgage based securities or Residential mortgaged
based securities
 Units issued by Real Estate Investment Trusts regulated by SEBI
 Asset Backed Securities regulated by SEBI
 Units issued by Infrastructure Investment Trusts regulated by SEBI
 Alternate Investment Funds (AIF Category I and II) registered by
SEBI
Models of Investing in NPS:

 Government Model: 15% of the contribution can be invested in
equity-oriented investments and the rest in fixed income securities.
Subscribers in the government model do not have a choice on how
their contributions will be invested.
 Private Model: Investors have two options:


Auto Choice
&

Active Choice
 Auto Choice: The investors can choose between:

 Aggressive Life Cycle Fund (LC-75): The maximum allocation
towards equity is 75%
 Moderate Life Cycle Fund (LC-50): The maximum allocation towards
equity is 50%
 Conservative Life Cycle Fund (LC-25): The maximum allocation
towards Equity here is 25%
The ratio would change as per the age of the investor.
The default choice is Moderate LC fund, if the investor has not chosen
any LC Fund.
 Active Choice: The investor can actively decide that how his/her NPS
Wealth will be invested in different asset classes (E,C,G,A)
 The maximum investment limit in Asset Class E is 75%, with tapering off
the equity allocation after attaining the age of 50 years by subscriber.
In case, the investment by the subscriber in equity exceeds the cap in particular age
bucket due to tapering of the caps, the excess portion shall be moved to G-Sec by
default. However the subscriber would continue to have the choice to re-allocate the non-
equity portion between asset classes C, G & A (subject to prescribed limits).
 The maximum investment limit in Asset Class A is 5%
 The asset class options are managed by Pension Fund

Managers (PFMs).
 These PFMs are authorised by PFRDA. SEBI registered AMCs
do not get automatic approval for management of NPS.
 Investor in NPS is allotted a unique ID Number – Personal
Retirement Account Number (PRAN). This provides portability.
 POPs offer services related to moneys invested with any of the
PFMs.
CHAPTER 11
HELPING INVESTORS WITH
FINANCIAL PLANNING
INTRODUCTION TO FINANCIAL PLANNING
 What is Financial Planning?

 People experience happiness, when their needs and aspirations are
realized within an identified time frame.
 The estimated financial commitments towards future expenses
become financial goals.
 The financial goals must be defined in terms of time horizon and the
amount of money required to fund the goal.
 Financial planning is a planned and systematic approach to
provide for the financial goals that will help people realize their
needs and aspirations, and be happy.
ASSESSMENT OF FINANCIAL GOALS
 An estimate of these future expenses (the financial goals) requires the
following inputs :
 How much would be the expense, if it were incurred today?
 How many years down the line, the expense will be incurred?
 During this period, how much will the expense rise on account of
inflation?
 If any of these expenses are to be incurred in foreign currency, then
how would changes in exchange rate affect the financial

commitment?
 This is done using the formula
A = P X (1 + i)^n
 A = Rupee requirement in future
 P = Cost in today’s terms
 i = inflation
 n = Number of years into the future, when the expense will be
incurred.
EXAMPLE
 Mr. A wants to plan for his child’s education. Assuming that he wants
his child to be a doctor. Let’s assume that current expenditure of
medical education is Rs. 15,00,000. His child is 3 years old and would
require fees when he is 18 years. Find out the expenditure required at
the child is 18 years old.
 P = 15,00,000
 N = 15 years (18 -3)
 I = 8% ( It is inflation rate – Assumed)
A = 1500000*(1.08)^15 = Rs. 47,58,253
INVESTMENT HORIZON
 Asset Allocation will be based on Time Horizon of Financial Goals.

 Long Term Goals - Risky Assets (Like Equity)
 Short Term Goals - Moderately Risky
Like Balanced Funds)
or Low Risky Assets
(Like Liquid Funds)
ASSESSING THE FUND REQUIREMENT
 After finding out Future Value of Life Goal, we need to determine what
amount should we invest today to reach that goals after pre – specified
time.
 To do so...
P = A ÷ (1 + r) ^ n
 A = Rupee requirement in future
 P = Cost in today’s terms
 i = Expected Rate of Return from the asset class / Portfolio
 n = Number of years into the future, when the expense will be
incurred
 While the estimation of the goal value calls for an assumption
regarding inflation, the amount required for investment also must
consider the expected rate of return from the chosen investment.
EXAMPLE
 Let’s continue with same example. Now, Mr. A needs to accumulate

Rs. 47,58,253 in 15 years. What amount should he deposit today to
get the desired amount at the end of 15 years?
 As it is a long term goal, a person should invest in a riskier asset class.
Let’s assume that it is Equity and expected return from the same is
12%.
P = Rs. 47,58,253 / (1.12)^15 = Rs. 8,69,315

FINANCIAL PLANNING OBJECTIVES & BENEFITS
 The objective of financial planning is to ensure that the right amount of

money is available at the right time to meet the various financial goals
of the investor.
 An objective of financial planning is also to let the investor know
in advance, if some financial goal is not likely to be fulfilled.
 The process of financial planning helps in understanding the investor
better, and cementing the relationship with the investor’s family. This
becomes the basis for a long term relationship between the investor
and the financial planner.
NEED FOR FINANCIAL PLANNERS
 The Financial Planner helps in

 Performing Complex Financial Calculations
 Understanding Complex Financial Products
 Preparing Financial Plan and Implementing it tax-efficiently
 Planning for Contingencies through advice on insurance products,
inheritance issues etc...
 The Financial Planner thus, is in a position to advise investors on all
the financial aspects of their life.
ALTERNATE FINANCIAL PLANNING APPROACHES
 Financial Plan can be
 Goal-oriented Financial Plan – A financial plan for a specific goal
 Comprehensive Financial Plan -Where all the financial goals of a
person are taken together, and the investment strategies worked out
on that basis.
 The steps in creating a comprehensive financial plan, as proposed by
the Certified Financial Planner – Board of Standards (USA) are as
follows:
1. Establish and Define the Client-Planner Relationship
2. Gather Client Data, Define Client Goals
3. Analyse and Evaluate Client’s Financial Status
4. Develop and Present Financial Planning Recommendations and / or
Options
5. Implement the Financial Planning Recommendations
6. Monitor the Financial Planning Recommendations
LIFE CYCLE
 Childhood :
 During this stage, focus is on education in most cases. They are not
earning members.
 Pocket money, cash gifts and scholarships are potential sources of
income during this phase.

 Young Unmarried :
 The earning years start here.
 A few get on to high-paying salaries early in their career. Others toil
their way upwards. Either way, the person needs to get into the habit
of saving.
 This is the right age to start investing in equity.
 Personal plans of marriage, transportation and residence determine
the liquidity needs.

LIFE CYCLE
 Young Married :
 Where both spouses have decent jobs, life can be financially
comfortable.
 Life Insurance is required, but not so critical. Where only one spouse
is working, life insurance to provide for contingencies associated with
the earning spouse are absolutely critical.
 Health insurance policy cover too should be planned. Starting a
health insurance policy in earlier years is always better.
 Non Cashless policy increases the liquidity provisions that need to be
made for contingencies.
LIFE CYCLE
 Married with Young Children :

 Insurance needs – both life and health - increase with every child.
 Expenses for education right from pre-school to normal schooling to
higher education is growing much faster than regular inflation.
 Adequate investments are required to cover this.
 Married with Older Children :
 The costs associated with helping the children settle i.e. cost of
housing, marriage etc are shooting up.
 If investments in growth assets like shares and real estate, are
started early in life, and maintained, it would help ensure that the
children enjoy the same life style, when they set up their independent
families.
LIFE CYCLE
 Pre-retirement :
 By this stage, the children should have started earning and
contributing to the family expenses.
 Further, any loans taken should have been extinguished.
 The family ought to plan for their retirement
 Retirement :
 At this stage, the family should have adequate corpus, the interest on
which should help meet regular expenses.
 The need to dip into capital should come up only for contingencies –
not to meet regular expenses.
 The availability of any pension income and its coverage will
determine the corpus requirement.
LIFE CYCLE & WEALTH CYCLE
LIFE CYCLE & WEALTH CYCLE
Wealth Cycle Life Cycle Objective
Young Unmarried to Pre-

Accumulation The investor builds his wealth
Retirement
Given the impending requirement of funds,

When financial goals are in the
Transition investors tend to increase the proportion of
horizon
their portfolio in liquid assets
• It is never too early to plan for all

Inter- The investor starts thinking about orderly
this.
Generational transfer of wealth to the next generation, in the
• It should ideally not be
Transfer event of death
postponed beyond the age of 50.
Reaping / Parallel of retirement phase in the This is the stage when the investor needs
Distribution Life Cycle. regular money.
• It is advisable to initially block the money by

investing in a liquid scheme.
Sudden
Any Time • An STP from the liquid schemes into equity
Wealth
schemes will help the long term wealth
creation.
CHAPTER 12
RECOMMENDING MODEL PORTFOLIOS
AND FINANCIAL PLANS
NEED FOR RISK PROFILING
 There are differences between investors with respect to the levels of

risk they are comfortable with (Risk Appetite).
 At times there are also differences between the level of risk the
investors think they are comfortable with, and the level of risk they
ought to be comfortable with.
 Risk profiling is an approach to understand the risk appetite of
investors – an essential pre-requisite to advise investors on their
investments.
 The investment advice is dependent on understanding both aspects of
risk:
 Risk appetite of the investor.
 Risk level of the investment options being considered.
FACTORS THAT INFLUENCE THE INVESTOR’S RISK PROFILE
Factor Influence on Risk Appetite

Family Information
Earning Members Risk appetite increases as the number of earning members increases
Dependent Members Risk appetite decreases as the number of dependent members increases
Life expectancy Risk appetite is higher when life expectancy is longer
Personal Information
Age Lower the age, higher the risk that can be taken
Employability Well qualified and multi-skilled professionals can afford to take
more risk
Nature of Job Those with steady jobs are better positioned to take risk
Psyche Daring and adventurous people are better positioned mentally,
to accept the downsides that come with risk
Financial Information
Capital base Higher the capital base, better the ability to financially take the
downsides that come with risk
Regularity of Income People earning regular income can take more risk than those
with unpredictable income streams
RISK PROFILING TOOLS
 Risk profiling is a tool that can help the investor; it loses meaning if the
investor is not truthful in his answers.
 Some AMCs and securities research houses provide risk profiling tools
on their website.
 Some banks and other distributors have proprietary risk profilers.
 These typically revolve around investors answering a few
questions, based on which the risk appetite score gets generated.
 Some advanced risk profilers are built on the responses to different
scenarios that are presented before the investor.
 Service providers can assess risk profile based on actual transaction
record of their regular clients.
 The financial planner needs to use them judiciously.
RISK PROFILING TOOLS
Risk Appetite The willingness of an investor to take risks

+
Risk Capacity Investor's ability to take risk
+
Risk Tolerance The upper limit of risk that the investor has set
=
Risk Profile The investment choices that investors make
should be aligned to a combination of the
above, their Risk Profile
ASSET ALLOCATION
 ‘Don’t Put All Your Eggs In One Basket’. The distribution of an

investor’s portfolio between different asset classes is called Asset
Allocation.
 With a prudent asset allocation, the investor does not end up in the
unfortunate situation of having all the investments in an asset class
that performs poorly. Thus, the purpose of asset allocation is not to
enhance returns, but to Reduce The Risk.
ASSET ALLOCATION TYPES
 Strategic Asset Allocation
 is what comes out of the risk profile of the individual.
 The most simplistic risk profiling thumb rule is 100 – Age = Equity
Portion.
 It is advisable for the investor.
 Tactical Asset Allocation
 It is the decision that comes out of calls on the likely behaviour of the
market.
 Tactical asset allocation is suitable only for seasoned investors
operating with large investible surpluses. It is temporary. After taking
advantage of market behaviour, one should turn back to Strategic
Asset Allocation.
 The last step in the process of portfolio construction would be
selection of schemes within the agreed asset allocation.
MODEL PORTFOLIOS
 Since investors’ risk appetites vary, a single portfolio cannot be

suggested for all.
 Financial planners often work with model portfolios – the asset
allocation mix that is most appropriate for different risk appetite levels.
 Financial Planner should have a model portfolio for every distinct
client profile. This is then tweaked around based on specific
investor information.
MODEL PORTFOLIOS
Diversified Diversified Diversifie
Sector Gilt Liquid
Investor Index Equity Gold ETF d Debt
Funds Fund Schemes
Scheme Schemes Fund
Young call centre /

BPO employee with 0 50% 20% 10% 0 10% 10%
no dependents
Young married single
income family with
0 35% 10% 15% 0 30% 10%
two school going
kids
Single income family
with grown up
0 35% 0% 15% 15% 15% 20%
children who are yet
to settle down
Couple in their
seventies, with no
15% 0 0 10% 30% 30% 15%
immediate family
support
BEHAVIORAL BIASES IN INVESTMENT DECISION MAKING
A decision to invest in a particular product is taken by a

human being. So, the decision is likely to be influenced
by behavioural biases in the decision maker, which
may lead to less than optimal choices being made.
 Optimism or Confidence Bias: Investors believe they have the ability
to outperform the market based on some investing successes.
 Familiarity Bias: Investors choose what they are comfortable with.
 Anchoring: Investors hold on to some information that may no longer
be relevant, and make their decisions based on that.
 Loss Aversion: Investors prefer to do nothing despite information and
analysis favouring a particular action that in the mind of the investor
may lead to a loss.
 Herd Mentality: We believe that other people around us may have
better market information and so we follow their investment decisions.
This tendency is called Herd Mentality.
 Recency Bias: The impact of recent events on decision making.
 Choice Paralysis: The availability of too many investment options.
Behavioural bias sway an investor away from taking the right decision.
Professional fund managers or professional financial advisors have
systems and processes in place to reduce or negate the effect of such
bias.
It is always good to have a financial advisor who will take a holistic view
of your financial position, and will help you take a sound financial
decision untouched by emotional bias.
TEST TIME...
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Understanding Mutual Funds and Their Operations

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NJ GURUKUL

MUTUAL FUND DISTRIBUTORS

Presentation Updated On Aug 18

 Know the basics of mutual funds, their role and structure,

 The examination consists of 100 questions of 1 mark each.

 Mutual fund is a vehicle to mobilize moneys from

 Primary Role is to assist investors in earning an

 Mutual funds seek to mobilize money from all possible investors.

 The investment in a Mutual Fund scheme gets translated

 The relative size of mutual fund companies is assessed by their

 It is possible that the market value of the securities in the

 The ownership is in the hands of the investors (Unit

 Systematic Investment Plan (SIP) :

 Systematic Transfer Plan (STP) :

Only at maturity. However, Post NFO,

No of Units Variable Fixed

Unit Capital Variable Fixed

Does not have to be active as he will

Risk Level Debt Funds Hybrid Funds Equity Funds

Dive rsifie d Equity Funds

Equity Income Funds

Monthly Income Pla ns

Capita l prote ction funds

Money Marke t & Liquid

Equity represents ownership in the company that has issued the

Debt represents the borrowings of the issuer

 Investment in debt is investment in an income-oriented asset.

 Equity Income / Dividend Yield Schemes invest in securities whose

SEBI CATEGORIZATION OF OPEN ENDED EQUITY SCHEMES

SEBI CATEGORIZATION OF OPEN ENDED EQUITY SCHEMES

 Floating Rate Funds invest largely in floating rate debt

 Gold Exchange Traded Fund (Gold ETF) is a fund that

 Capital Protected Schemes are close-ended schemes, which

SEBI CATEGORIZATION OF OPEN ENDED HYBRID SCHEMES

SEBI CATEGORIZATION OF OPEN ENDED HYBRID SCHEMES

 Real Estate Funds take exposure to real estate. Such funds

 International Funds are funds that invest outside the country.

AUM of the industry, as of 31st March 2018 stands at Rs 22.71 trillion,

Sponsor Auditorsfor AMC

Trustee(s) Asset Management

Trustee : AMC : Distributors

Custodians : Services Pvt. Ltd (CAMS)

• HDFC Bank Limited, Mumbai

• Stock Holding Corporation of India Ltd., Mumbai

• Bank of Nova Scotia (custodian for Gold) Bankers

 The sponsor will have to appoint at least 4 trustees.

 Day to day operations of asset management is handled by the AMC.

 An AMC cannot invest in its own schemes, unless the

 The custodian has custody of the assets of the fund.

 All RTAs need to register with SEBI.

 It is not compulsory to appoint a RTA. The AMC can

 Auditors are responsible for the audit of accounts.

 Fund Accountant performs the role of calculating the

 SEBI is the regulatory authority for securities markets in India.

 Regulators lay down the broad policy framework, and leave

 Employees/ temporary staff/voluntary workers etc. should not

 SEBI has mandated AMCs to put in place a due

 Restrictions pertaining to investment in Equity

 Investment Objective : It defines asset class in which money will be

Statement of accounts are to be sent to investors as follows:

 In the case of SIP / STP / SWP

 On specific request  Within 5 working days