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 Index
1. The Concept and Role of Mutual Funds.
2. Funds Structure and Constituents.
3. Legal and Regulatory Framework.
4. The Offer Document.
5. Fund Distribution and Sales Practices.
6. Accounting, Valuation & Taxation.
7. Investor Services.
8. Investment Management.

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! . Measuring and Evaluating Mutual Fund Performance.
1!. Helping Investors with financial planning.
11. Recommending Financial Planning Strategies to Investors.
12. Selecting the right Investment Products for Investors.
13. Helping Investors understand Risks in Fund Investing.
14. Recommending Model Portfolios and selecting the right Fund.
15. Business Ethics in Mutual Fund.

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 þ  !$

þ ! 

" !
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 Š !# !
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{ It is a pool of money, collected from investors, and is invested

according to certain investment objectives

{ The ownership of the fund is thus joint or mutual, the fund

belongs to all investors.

{ A mutual funds business is to invest the funds thus collected,

according to the the wishes of the investors who created the
pool

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 & !! !#!#" !
%
{ The ownership is in the hands of the investors who have pooled in
their funds so it is joint or mutual.
{ It is managed by a team of investment professionals and other
service providers.
{ The pool of funds is invested in a portfolio of marketable investments.
{ The investors share is denominated by µunits¶ whose value is called
as Net Asset Value (NAV) which changes everyday.
{ The investment portfolio is created according to the stated investment
objectives of the fund.
{ Mutual Funds are also known as Financial Intermediaries
{ In India, Mutual Funds are constituted as TRUSTS.

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 |'!#" !
#!'#!#%

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

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 Š !! #'!#"'#!
!   !
#%
{ No control over the costs. Regulators limit the
expenses of Mutual Funds. Fees are paid as percentage
of the value of investment.

{ No tailor made portfolios.

{ Managing a portfolio of funds. ( Investor has to hold a

portfolio for funds for different objectives ).

{One fund can have schemes of similar objectives so,

selection becomes difficult.

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 Evolution of Mutual Funds in India

Phase 1 ± ( 1 64 ± 1 87)- Growth of UTI

{ UTI sole player in the industry, created by an |!"(&!)$*+,
{ The first product launched by UTI was Unit Scheme 1 64
{ UTI creates products such as ULIP (1 71), MIP's, Children Plans(1 86)
,Offshore Funds etc.
{ |- .| - $*/ $#!'#"-0!'#!&! &
1
{ INDIA Fund ± 1st Indian offshore fund launched in August 1 86.

Phase 2 ± ( 1 87 ± 1 3)- Entry of Public Sector Funds

{ In 1 87 Public Sector Banks and FI's got permission to set up MF.
{ 2&!"3#! "#!4&!")#! 
'&5$*/
{ This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC
and PNB MF
{ In 1 3, Mutual Fund Industry was open to private players.
{ SEBI got its regulatory powers in 1 2

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{ Phase 3 ± ( 1 3-1 6) ± Emergence of Private Funds
{ In 1 3, Mutual Fund Industry was open to private players.
{ SEBI's first set of regulations for the industry formulated in 1 3
{ Significant innovations, mostly initiated by private players
Phase 4 ± ( 1 6-1 ) ± Growth and SEBI Regulation
{ Implementation of new SEBI regulations led to rapid growth
{ Bank mutual funds were recast as per SEBI guidelines
{ UTI came under voluntary SEBI supervision.
{ Dividends made tax free in 1 .
{ Mutual funds assets in mid-2!!2 were app. 1,!!,!!! crore
{ During this phase, both SEBI and AMFI launched investor awareness
programmes.

|
# 5# 56!!!7 6 !
#36"

  '#!#89:

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Phase 5 ± (1 -2!!4) ± Emergence of a large and
uniform industry
± UTI Act Repealed in February 2!!3.
{ | 5"; 1 $);)
{ Rapid growth, significant increase in corpus of private players
{ Tax break offered created arbitrage opportunities
{ Bond funds and liquid funds registered highest growth

Phase 6 ± From 2!!4 onwards : Consolidation and Growth

Mergers and Acquisitions witnessed
Alliance MF acquired by Birla Sunlife
Sun F&C by Principal PNB Mutual fund.

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 -&""&#!
{ UTI Act repealed in 2!!3.
{ UTI now does not have a special status. (now under
SEBI)
{ Size of industry was $);) crore in ;.
{ Merger and Acquisitions happening.
{ Fidelity, Largest MF has entered India.
{ At the end of March 2!!6, there were 2 Funds.

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!
þ##"!#

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 Š ! 4"#%

{ In an open ended fund, investors can buy and sell units of

the fund, at NAV related prices, at any time, directly from
the fund.
{ Open ended scheme are offered for sale at a pre-
specified price, say Rs. 1!, in the initial offer period. After a
pre-specified period say 3! days, the fund is declared open
for further sales and repurchases
{ Investors receive account statements of their holdings,
{ The number of outstanding units goes up and down
{ The unit capital is not fixed but variable.
{the corpus of an Open-ended scheme changes everyday

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 Š !#4"#%

{ A closed -end fund is open for sale to investors for a

specified period, after which further sales are closed.
{ Any further transactions happen in the secondary market
(stock exchange) where closed-end funds are listed.

{ The price at which the units are sold or redeemed depends

on the market prices, which are fundamentally linked to the
NAV.

{ The number of units of closed ended funds remains

unchanged.
{The unit capital is fixed because of one time sale.

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 Load and No Load Funds

{ Load is the one time fee payable by the investor to allow

the fund to meet initial issue expenses including
brokers/agents¶/distributors¶ commissions, advertising
and marketing expenses.
{ Funds that charge front end( entry) load, back end( exit),
or deferred loads are called LOAD funds.
{ IF the investors¶ objective is to get the benefit of
compounding his initial investment by reinvesting and
holding his investment for a very long term, then , a no
front load fund is preferable.

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 Tax Exempt Vs. Non Tax Exempt Funds

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

exempt fund.
{ In India any income received by mutual fund is tax free.
{ After 1 budget, all dividend income received from MF is tax free
in hands of the investor. But all funds other than open ended equity
funds have to pay a dividend distribution tax.
{ So in India, open end equity oriented mutual fund schemes are tax
exempt investment avenue, while other funds are taxable for
distributable income.
{ After 2!!5 budget, repurchase transaction for equity oriented
schemes are subject to Securities Transaction Tax.

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 „

    


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Predominantly invest in equity shares of the company.
þ #0!"#1
{ Aggressive Growth Funds (Targets maximum capital appreciation.)
{ Growth Funds (Capital appreciation over 3 to 5 years at above average rate.)
{ Specialty Funds
m Sector Funds (Bank, Power, Pharma, IT, Telecom)
m Foreign Securities Fund ( investment in shares of different countries
to make it more diversified)
m Mid cap or Small cap Equity funds
m Option Income Funds (Do not yet exist in India)
{ Diversified Equity Funds (Do not focus on any one or few sectors or shares)
{ Equity Index Funds (These funds take only the overall market risk)
{ Value Funds (Invests in the companies whose shares are under-priced)
{ Equity Income or Dividend yield funds (Invests in the shares of the
companies with high dividend yield.)

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 Š !0=  6!"#%
{ These debt funds invest only in instruments with
maturities ## !   .
{ Lowest in the order of risk level.
{ The investment portfolio is very liquid and enables
investors to hold their investments for very short
horizons of a day or more.
What are Gilt Funds?
{ It invests only in securities that are issued by the Government and
therefore do not carry any credit risk
{ 9'&!  #   # ! #!# #1
{ It invests in medium to long-term government papers.
{ Ideal for institutional investors who have to invest in Govt. Securities
{ Enables retail Participation

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- -0!6#'# &

{ 3 year lock in period

{ Minimum investment of !
in equity markets at all
times
{ So ELSS investment automatically leads to investment
in equity shares.
{ Open or closed ended.
{ Eligible under Section 8! C upto Rs.1 lakh allowed
{ Dividends are tax free.
{ Benefit of Long term Capital gain taxation.

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 Fixed Term Plan Series

{ FTPs are closed ended in nature.

{ AMC issues a fixed number of units for each series only
once, and closes the issue after an initial offering period.
{ Fixed Term plan are usually for shorter term ± less than
a year.
{ They are not listed on a stock exchange.
{ FTP series are likely to be an Income scheme.
{ Good alternate of Bank deposits/ corporate deposits.

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 Commodity Funds
{ It will invest directly in commodities or through
shares of the commodity companies or through
commodity futures contract.
{ Most common example of such fund is precious-
metal fund.
{ Gold funds invest in Gold, Gold futures or shares of
gold mines.

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 Exchange Traded Funds
{ It combines the best features of open end and closed
structure.
{ It tracks a market index and trades like a stock on
the stock market.
{ ETFs are not the index funds

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 Real Estate Funds
It can :
{ Invest in real estate
{ Fund real estate developers
{ Buy shares of housing finance companies
{ Buy securitized assets.

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.3"#""!!&#"! #6
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Important points

{ IN USA, a MF is constituted as an investment company and an

investor buys the share of the fund.
{ In USA, all mutual funds are open ended.
{ In USA, funds are also classified as Tax Exempt and Non Tax
Exempt Funds
{ In India, classified as Open ± Closed ended, Load and No Load
Funds.
{ Mutual Fund is NOT a company, it can be called as a portfolio of
stocks, bonds and other securities or it can be called as pool of
funds used to purchase securities on behalf of investors or a
collective investment vehicle.

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 Very Important Points to Remember
{ An Open Ended Fund offers repurchase facility unconditionally at all
times (But It is not obliged to keep selling new units at all times).
{ A Gilt Fund is a special type of Fund that invests in Dated Securities
only.
{ Units from an Open ended fund are bought through Agencies
appointed by AMC ( Distributors, Banks, Post offices, brokers etc.)
{ The Unit Capital of a closed Ended Fund is fixed. Also the number
of units are also fixed.
{ Each unit holder of a mutual Fund is !3 of the asset of that
Mutual fund ( he is not a creditor, not a debtor and not a trustee of
that mutual fund).
{ Units from an Open Ended fund are bought from the Fund Itself
( not from the AMFI, stock exchange, distributors or the banks).
{ The assured return schemes of the UTI have gradually been wound
up.

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 þ  !

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 .3# !
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{ Fund Sponsor.

{ Trust.

{ Asset Management Company.

{ Other fund constituents.

{ Custodian and Depositories.
{ Bankers.
{ Transfer Agent.
{ Distributors.

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Š !#! !#!!"
%

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{ It is mandatory to have a three tier structure of

Sponsor-Trustee-Asset Management Company.

{ The Sponsor is the promoter and he appoints the

Trustees who are responsible to the investors of the
fund.

{ AMC is the business face of the mutual fund as it

manages all the affairs of the fund

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Š 5!  #%Š !#!  #%
{ The sponsor establishes the mutual fund and registers
the same with SEBI
{ Sponsor appoints the Trustees, the AMC and custodians
with prior approval of SEBI and in accordance with SEBI
Regulations
{ Sponsor must have a 5-year track record of business
interest in the financial markets
{ Sponsor must have been profit making in at least 3 of the
above 5 years.
{ Sponsor must contribute at least 4!
of the net worth of
the AMC
{ Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution
(Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)

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 .3 !
#!!%

{ In India Mutual fund is the form of a Public Trust created

under the !#!|!$1
{ The fund sponsor acts as the Settler of trust, contributes
the initial capital and appoints the trustees to hold the
trust for the benefit of the unit holders.
{ Mutual fund is just a 7 ##4!  ' :
{ In India, Mutual funds are organized as trusts. The trust is
either managed by a Board of Trustees, or by a trustee
company.
{  !#!# ! ! #&
" !1 5#!! #
{ ##)! '#!#! 5"3#
"'#!&!#1

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{ There must be at least  members in the Board of
Trustees and at least =, of the members of the board of
trustees must be  !.

{ Trustee of one mutual fund can not be a trustee of

another mutual fund.

{ Trustees are the &# of the unit-holders¶

funds and assets.

{ The ,#  of the SEBI regulations specifies the

content of the trust deed.

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 Š !!  !#"! #!#%

{ Trustees appoint the AMC, in consultation with the

sponsor and according to SEBI Regulations
{ All Mutual Fund Schemes floated by the AMC have to be
approved by the Trustees
{ Trustees can seek remedial actions from AMC, and in
cases dismiss the AMC

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 Š !! 5!#"! #!#%
{ Trustees must ensure due diligence on the part of AMC in
the appointment of constituents and business associates
{ Trustees must furnish to the SEBI, on half yearly basis a
report on the activities of the AMC
{ Trustees must ensure compliance with SEBI regulations
{ SEBI Regulations require that the meeting of the trustees should be held at
least '!3&! #.

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 !0&!#"! | þ%
{ Only SEBI registered AMC can be appointed as investment
managers of mutual funds
{ | þ&#! '&&&!3! " #1$þ1)!
!&#
{ An AMC cannot be an AMC or Trustee, of another Mutual Fund
{ AMC¶ s cannot indulge in any other business, other than that
of asset management
{ At least half of the members of the Board of an AMC, have to
be independent
{ The 4th Schedule of SEBI regulations spells out rights and
obligations of both trustees and AMCs
{  &!5!3! #!#! | þ#
63#7'#!&! &!|&!:1

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Š  !#! | þ"#!#"!#%

{ The sponsors, or the trustees, if authorized by the trust

deed appoint the AMC.

{ The AMC is usually a private limited co., in which the

sponsors and their associates or JV partners ,are
shareholders

{ The AMC has to be a SEBI registered entity, with a

minimum net worth of Rs. 1! Cr.

{ The trustees sign an investment management agreement

with the AMC, which spells out the functions of the AMC

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 .3&!"##%

{ Though the trust is the mutual fund, the AMC is its

operational face

{ The AMC is the first functionary to be appointed and is

involved in the appointment of all other functionaries

{ The AMC structures the mutual fund products, markets

them and mobilises the funds, manages the funds and
services the investors

{ All the functionaries are required to report to the trustees

who lay down the ground rules and monitor their working

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Š !!  #!#"|!#%
They are responsible for ##& units of
the Mutual Fund. Their other services include:
{ Process investor applications
{ Record details of Investors
{ Send information to Investors
{ Process dividend payout
{ Incorporate changes in investor information
{ eeping Investor information up to date

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 Š !#! "##!5!
!#%

{ Selling agents bring investors funds for a commission

{ Distributors appoint agents and other mechanisms to

mobilize funds from investors

{ Banks and post offices also act as distributors

{ The commission received by the distributors is split into

initial (Upfront) commission which is paid on mobilization
of funds and trail commission which is paid depending on
the time the investor stays with the fund

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

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 Š !! "!#"! #!#%
{ Responsible for the securities held in the mutual fund¶s
portfolio and is required to be registered with SEBI

{ Custodian is appointed by the Board of Trustees

{ eep an investment record of the mutual fund

{ Collect dividends and investment payments due on the

mutual funds investment

{  #!# #!5! #&!!

{  #!#! "! "###!#"

'#!#

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#
&#"
 #6'#

{ Merger of AMC to become a single entity

( Example : HB Mutual and Taurus Mutual )

{ AMC takeover by sponsors ( Example : ITC

Threadneedle and 2!th century taken over by Zurich)
( ITI by Franklin Templeton) (Alliance by Birla)

{ Scheme take over (Apple¶s scheme taken over by Birla

AMC ) and ( Zurich¶s Scheme Takeover by HDFC
Mutual Fund)

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 Š !! !#3  !3| þ8#
5&%

SEBI regulations require the following :

{ SEBI and Trustees of both funds must approve of the

merger

{ ! ## 5!""! &)

'!  !!<!!|
)3! !#
" "##/;>#!#01

{ Provisions of Companies Act apply to merger and . 

þ! '#0 as AMC¶s are companies.

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 3 !!#| þ5
!6'5! # #%
{ SEBI approval is required of the change of ownership and
unit holders have to be informed of the takeover
{ '#!# '!5"&5!.9.þ!
 '!0

What is scheme take over?

{ If an existing mutual fund scheme is taken over by another

AMC, it is called as scheme take over. The two mutual
funds continue to exist.Trustee and SEBI approval and
notification of unit holders are required for scheme
takeovers
{ #'#!#&! '#!&!#

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 & !!(!#

{ In USA, the regulatory body is known as Securities

Exchange Commission.
{ The sponsor may be compared to promoter of a
company
{ Issuing units and redeeming units is the role of Transfer
Agent
{ The appointment of AMC can be terminated by Majority
of directors of trustees.
{
&## #5""!#"! 
"#8 !"3! -21

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{ A sponsor of a mutual fund can act as the distributor of
the Mutual fund.
{ Sponsor can contribute to the initial corpus of the trust.
{ Sponsor can contribute to the capital of the AMC.
{ Sponsor can invest in his own fund¶s schemes.
{  #!!##!" !"1
{  #!!#þ#!"!  !



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 þ  !,

 !
&36
 Regulating Agencies of Mutual Fund
{ SEBI ( Established in $**5|!"(&!)
{ Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1 6
{ SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign
country
{ 264# #&!"#3 ?!!5-2 2
{ Subsequently it has been clarified that all MFs being primarily capital market players,
come under the regulatory umbrella of SEBI.
{ RBI regulates the money and government securities market where the mutual funds
invest but the not the MMMF.
{ 0"#3  '#!&&6!#!&!#3'5
-21   6! !
#3!5-2
{ If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission
{ All schemes of UTI are now under UTIMF, are managed by a UTI AMC and under
purview of the SEBI
{ -2!#  #!#)þ#!#) !
#)!6-< #
# 56#12!!#!!26
& #1

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&!"!#%

{ The finance ministry is the supervisor of both the RBI

and SEBI

{ Aggrieved parties can make appeals to the MoF on the

SEBI rulings relating to mutual funds

{ AMCs has to file its annual statements with Registrar of

Companies ( RoC)

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 Š !#"!@!#  8#%

{ Stock exchanges are Self-Regulatory Organizations

{ SROs are the second-tier in the regulatory structure
{ SROs get their powers from the apex regulating agency
and act on their instructions
{ SROs cannot do legislation of their own
{ SROs regulate only their own members in limited
manner
{ SROs facilitate decentralization in the regulatory
structure.

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 Š !! 5?!'#"|
%
AMFI is an industry association, incorporated in 1 5, is
not an SRO, so it can just issue guidelines to members. It
cannot enforce regulations.
5?!'#
{ To promote the interests of mutual funds and unit holders.
{ To set ethical, commercial and professional standards in
the industry.
{ To increase public awareness of the mutual fund industry.
{ To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from
mutual funds and is headed by a full time chairman.

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 Š !!  !#"! '#!## !"
#'#!#! !! < !"&
#%
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 Rights of the investor
1"! # ! "&!!!5!#"! # &)
! ! # '!5!"!  !!1 # '
 !!  #!|
3! !)5"#  
#""!1
. Unit holders have the right to inspect certain documents
1!. Unit holders have the right to receive the complete statement of the
scheme portfolio before the expiry of one month from the close of each
half year.

?

 Š !! &!!#!'#!# !%

{ Investors cannot sue the trust as they are not distinct from
the trust
{ Investors cannot lodge complaints against the
trustees (with the Registrar of Public Trusts) or the
AMC (with the CLB).
{ Investors can lodge complaints with SEBI for non-
compliance.
{ Investors cannot be compensated if the performance
of the fund is below expectations.
{ There are not legal remedies for to a prospective
investor. Only after his investment in the scheme he
becomes eligible for the earlier mentioned rights.

?

 & !!(!#
{ SEBI entertains the complaints against MF and intervenes with fund
managements to help the investor.
{ SEBI requires that sponsors of a new scheme should appoint a
compliance officer who must issue a Due Diligence Certificate to
the effect that all regulations have been complied with by the fund
and sponsors.
{ The fund investors are neither shareholders nor depositors in the
AMC
{ Unit holders have right to timely service, right to information, right to
approve changes in fundamental attributes, right to wind up a
scheme, right to terminate the AMC.
{ 3rd Schedule of SEBI (MF) regulations 1 6 specifies the contents
of the Trust Deed.
{ The body to which investors may address their complaints is SEBI.
{ Investors money is not protected by the Companies Act.

?

 þ  !

""&!
{ Offer Document is the most important source of information about a
mutual fund scheme for investors
{ OD is the  !&! and describes the product
{ An 5 #&& version of the OD is ey Information
Memorandum ( IM)
{ Investors are required to read and understand the OD
{ '#!##! "&#!!! !!  '! 1
##'5!'#!#"!! A
{ The cover page of OD contains details of scheme being offered, the
name of the sponsor, trustee, AMC etc.
{ Mandatory disclaimer clause of SEBI should also be on the cover
page of the OD
{ The format and contents of the OD must be as per SEBI guidelines
{ The OD is issued by the AMC on behalf of the trustees
{  | þ## #5"! "&!! 
?

 The Content
Broadly the OD issued by MFs in India are required by
SEBI to include the following:
{ Details of the sponsor and the AMC
{ Description of the scheme and the investment
objectives/strategy
{ Terms of the issue
{ Historical statistics
{ Investor¶s right and services.

?

{ þ#4"###!! !&"! (
{ Open-ended funds have to update OD and IM at least once in  years
{ Copy of all the changes in the OD is to be filed with SEBI
{ Trustees approve the contents of the OD and IM
{ A #& #&'53! ' !"&
{ SEBI does not approve or certify the contents of the OD
{ Investor¶s rights are stated in the OD
{ The OD contains detailed info, while IM is the summary document
{ ""&!#!! '#!)!35"5! 
A 1
11!#"!)"! # &###
!# &

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{ the OD must contain a due diligence certificate signed by a compliance
officer, an AMC employee
± The due diligence certificate states that:
- Information in the OD is according to SEBI formats
- Information is verified and is true and a fair representation of facts
- All constituents of the fund are SEBI registered
{ The following information would be available in the OD:
± Category of Investors eligible to apply, viz. Individual, HUF, FI, Trust,
Society, Corporate, Association of Persons, NRI, PIO, OCB etc
± "&!<#!# &#"#&&!5
'",#
± "&!!#!#3! ##!& #!5
'" #!,#
± If any expense incurred in a past scheme is higher than what was
stated in OD, explanations should be given

?

 ± Investor¶s rights are stated in the OD
± 3 year track record of investor¶s complaints and redressal
should be disclosed
± Any pending cases or penalties against sponsor or AMC
± The borrowing restrictions on the mutual fund should be
disclosed, including the purpose and limit of borrowings and the
borrowing at the end of last fiscal year
± #"!# &)&"!)! 
!3!  #! "&"##!# &#
{ The name and addresses of trustee and AMC directors will be
found in IM, but the details of their role, responsibilities and duties
will be found in OD
{  #"&!5!! &!"#)! 
"&! 1& #! "&
"! &!"##"
{ The OD and IM will not contain names of securities in which the
fund plans to invest, only broad asset allocation will be given.

?

{ Fundamental attributes of a scheme are its basic
features. For eg. open or close ended, lock-in period,
fund objectives, asset allocation, loads and charges etc.
{ For any change in fundamental attributes, SEBI and
Trustee approval is required.
{ Investor approval is not needed. However, each investor
must be informed through a communication and given
the option to exit without exit load.

?

Š !! &!###!5&
! '  
!("! %
{ Name of the mutual fund.
{ Name of the scheme.
{ Type of scheme ( growth, income, balanced etc.)
{ Major Objective
{ Name of the AMC.
{ Classes of units offered for sale.
{ Price of units plus applicable load.
{ Name of the guarantor in case of assured return
schemes.
{ Opening , closing and earliest closing date of offer.
{ Mandatory statements.
{ !"!# 5!#1

?

 Š !! #!#6"!#%
{ Mutual fund and securities are subject to market risk and
there is no assurance that the objective will be achieved

{ NAV of units issued under the scheme can go up or down

depending on factors and forces affecting capital markets.

{ Past performance of the sponsor/AMC/ Mutual fund does

not indicate the future performance of the scheme.

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

any either the quality of the scheme or the future
performance of the scheme

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 Š !# &# "#6#%

{ Risk arising from investment objective, investment

strategy and asset allocation of the scheme

{ Risk arising from non ±diversification , if any

{ If a scheme offers assured returns, the scheme must state

that the assurance is on the basis of the guarantees
provided by the sponsor/AMC

{ If the AMC has no previous experience in managing a

mutual fund, a disclosure to the at effect should be made

?

 & !!(!#A
{ In USA, the OD is known as prospectus
{ The first time investor should read detailed offer document, once he
has gained familiarity with the AMC, he can just refer to IM
{ The OD do not contain the address of the Trustees of MF
{ The offer document is issued by the AMC / Trustees
{ OD is a legal document.
{ OD issued for launching of a new schemes is valid for a period of
six months and if the scheme is not launched within this period a
fresh OD is required to be filed.
{ OD contains the accounting policies to be followed. Such policies
should be in accordance with the SEBI regulations.
{ OD must disclose the names and background of fund managers,
key personnel, investor relation officer, AMC and its directors,
custodian, registrar, transfer agent and the statutory auditor.

?

 Important Points
{ IM is available at various distribution points such as
banks, distributors and brokers
{ AMC must confirm that a due diligence certificate signed
by Compliance officer / CEO / MD has been submitted
to SEBI.
{ If a scheme¶s name implies that it will invest primarily in
a particular type of security or in certain industry, then it
will invest at least 65
of the value of its assets in the
indicated type of security/ industry.
{ OD must contain brief description of investors¶ complaint
history for the last 3 Fiscal years of existing schemes.

?

 þ  !;

Fund distribution and Sales

Practices

?

Š !! !#"'#!#5!
5
!#%
{ Resident Individuals
{ Indian Companies
{ Indian trusts and charitable institutions
{ Banks
{ NBFC¶s
{ Insurance companies
{ Provident funds
{ Non-resident Indians / PIO
{ OCB¶s
{ SEBI registered FII¶s

?

 & !! !
{ Distributor should look up the offer document to see which category
of investors are allowed to invest in any particular scheme of the
fund, as it is possible that some categories are not allowed to invest
in some schemes.
{ For example, charitable trusts are not allowed to invest in some
category of schemes in some funds. So in this case distributor
should refer offer document.
{ Any investor who becomes a foreign citizen after investing in a
fund, has to compulsorily redeem the units after obtaining foreign
citizenship
{ FIIs can invest in Mutual Funds through their Non Resident Rupee
Account
{ RBI has granted a blanket permission to NRI, OCB and FIIs; every
investment does not require RBI approval.

?

 #!5!þ #
{ Individual Agents- A person has to sign an agreement with a fund
on non judicial stamp paper. He has to be AMFI certified also to sell
Mutual Fund products.
{ Only exemption is distributors above 5! years of age and with at
least 5 years of experience as on Sep 3!, 2!!3. Such exempted
distributors were required to complete AMFI¶s refresher course by
Sep 3!, 2!!4.
{ Distribution Companies
{ Banks and NBFCs
{ Post Offices
{ Direct Marketing
- CURRENTLY 4 ,837 are AMFI certified and 3!,!28 have
taken the ARN numbers ( as on 31/3/2!!5)

?

 Š !! |
&&5#!
!#"&!"!#%
1. Agents must be fully aware and informed about the features of the
products that they offer to the investors
2.Agents should be highly familiar with the profile of the investors, in terms
of return expectations, requirements and risk tolerance
3. Agents must strive to cultivate disciplined approach to investing and a
regular investment habit among clients
4. Agents must have a thorough understanding of the needs of their
investors
5. Agents must be able to help investors to choose from alterntative
investment products, and enable an appropriate asset allocation
6. Agents should seek from investors the commitment to invest to enable
which they may assist the client with the forms and procedures for
investing

?

 What is SEBI¶s advertising code?
he dividends dec ared or aid s ha e entioned in s nit a ong
ith the ac e va e o eac h nit and the revai ing at the ti e o
dec aration o the dividend
n co o nded ann a is ed ie d c an e advertis ed i the s c he e
has een in e is tanc e or ore than ear
er or anc e c a c ations s ha e as ed on on and the
a o ts to the nit ho ders
4.Annualised yield should be shown for 1,3,5 years and since launch of
the scheme. For funds with less than 1 year performance can be in
terms of total returns.
'

      
 
       
   
 
  

       
    
             
     
   
          
 


?

 What is the AMFI Code of Ethics?

{ Management of the fund ought to be in the interest of unit

holders
{ High standards of service are expected from the fund.
{ Adequate disclosures by the funds ought to be made to the
unit holders and trustees.
{ Funds are urged to adopt the use of professional selling
practices.
{ Management of funds collected has to be in accordance with
stated investment objective
{ Funds should avoid conflicts of interest in dealings by
directors, officers and employees.
{ Funds have to refrain from unethical market practices.

?

 What is the commission structure for mutual fund
agents?

{ The commission consists of two components

Initial ( Upfront )commission - Paid as a fixed percentage of
amount mobilised by agents
Trail commission - it is paid periodically on the funds that
remain invested in the scheme. Trail is an effective way to
restrict the practice of rebating, and link commissions

{ „

 






 




 







?

 Fundamental Attributes of a Scheme
{ Type of Scheme, Investment Objective and Terms of the issue,
change in the load structure, Investment Pattern, Asset allocation,
Fees and Expenses, Valuation norms and Investment Restrictions.
{ Any change in Fundamental Attributes, Trust, Fees and expenses
payable and other changes which affect unit holders interest have
to be informed to investors either in writing or newspaper
advertisement. One in English daily and other in a paper published
in the language of the region where the HO of a MF is situated.

{ The unit holders are given option to redeem their

holdings in the fund without any exit if anything in above
is changed.

?

 #
{ # !'#!3 ! '#!5#&#!#1!#
&#!&!! < ##!!##!5!"!#
{ Load charged on sale of units is entry load. It increases the price above the NAV for
new investor.
{ Load charged on redemption is exit load. It reduces price.
{ <&&-!-<!# 7
. (For Open ended Funds)
{ The "" between the repurchase price and the sale price is not permitted to
exceed 7
of the sale price.

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

{ CDSC is Contingent Deferred Sales Charges.
{ þþ#<!! !'#3!   1!###"'#!#3 
#!#! "1
{ Load is an amount which is recovered from the investor.
{ |
#3  ! !##< ##! !! 
'#!#1

?

 þ  !+

Accounting Valuation and Taxation

|!
 What are net assets of a mutual fund ?

The net assets represent the market value of assets which

belong to the investors, on a given date.

Net assets are calculated as:

Market value of investments

Plus(+): Current assets and other assets
Plus(+): Accrued income
Less(-): Current liabilities and other liabilities
Less(-): Accrued expenses

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

?

A fund¶s NAV is affected by four sets of factors:
{ Purchase and sale of investment securities
{ Valuation of all investment securities held
{ Other assets and liabilities
{ Units sold and redeemed.

?

 How frequently is the NAV calculated ?

{ All mutual funds have to disclose their NAVs daily, by

posting it on the AMFI web site by 8.!! p.m.

{ Open ±ended funds have to compute and disclose NAVs

everyday; closed end funds can compute NAVs every
week, but disclosures have to be made everyday.

{ Closed end schemes not mandatorily listed on the stock

exchange can publish NAV according to the periodicity of 1
month or 3 months, as permitted by SEBI.

?

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

· The costs of registration and fund formation

· Legal and advisory expenses
· Costs of launching the scheme
· Advertisement and promotion expenses
· Distribution costs
· Commissions to selling agents

SEBI imposes a ceiling of 6
on these expenses.

?

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

6 Yes

6 Such funds are called as no load funds

6 AMCs can charge an investment management fee, which

is 1
higher than the statutory limit, in this case.

?

 Latest changes on Initial Issue Expenses

{ 6
IIE will be permitted for closed ended schemes only and they
will not charge any Entry load
{ IN CES, IIE shall be amortized on a weekly basis over the period of
scheme
{ If an investor exiting the scheme before amortization is completed,
AMC shall redeem the units only after recovering the balance
amortization
{ Unamortized portion of initial issue expenses shall be included for
NAV calculation, considered as other asset
{ IN OES, the sales, marketing and other expenses of sales should
be met from the entry load and not IIE.

?

 What are the expenses incurred by a mutual fund?
{ Investment management fees to the AMC
ï Custodian¶s fees
ï Trustee fees
ï Registrar and transfer agent fees
ï Marketing and distribution expenses
ï Operating expenses
ï Audit fees
ï Legal expenses
ï Cost of mandatory advertisements & communications to
investors

?

 Can the AMC charge all the expenses that it
incurs, to the income of the fund ?
ï No. There are two levels of restrictions
ï At the first level only certain kinds of expenses, that are
identified as having been incurred for the conduct of the
business of the fund, can be charged to the fund.
ï The second level of regulation refers to the limit on the total
expenses, that can be charged to the fund

Y
 

   Ë
 

 
 
 


   


   


    

?

 What are the investment management and
advisory fees charged by the AMC ?
The fees are regulated by SEBI as follows:
{ For the first Rs.1!! Cr. Of net assets: 1.25

{ For the net assets exceeding Rs. 1!! Crore: 1.!!

{ If the AMC does not charge any of the initial issue expenses to
the fund, it can charge the scheme a management fee, that is
1
higher than the above rates
AMC charges are subject to the overall ceiling for expenses
discussed in the previous slide.
p
 ›
  

 
  
  
    

?

 &
{ Weekly Net average asset=14!! Cr.
{ What could be the maximum ongoing expenses.

{ On 1st 1!! cr. 2.5
i.e. 2.5 Cr.

{ On next 3!! Cr. 2.25
i.e. 6.75cr.
{ On next 3!! Cr. 2
i.e. 6 Cr.
{ On Rest of the WNAS
{ (7!! cr.) 1.75
i.e. 12.25 Cr.

{ ! /1;þ1

?

 Expenses that can not be charged to the Scheme

{ Penalties and fines for infraction of law

{ Interest on delayed payment
{ Legal, marketing, publication and other general
expenses not attributable to any scheme
{ Expenses on general administration corporate
advertising and infrastructure costs
{ Depreciation on fixed assets

?

 <& ! !
#

{ Income earned by any mutual fund registered with SEBI

is exempt from tax.( It is a trust) Under section 1!(23 D)
{ The dividends are tax free in the hands of unit holders
but it is liable to dividend distribution tax in case of
closed ended fund and debt funds( equity <5!
)
{ No TDS on any income distribution by MF
{ The earning on selling units is known as Capital Gain
± If units are held for not more than 12 months - STCG
± Else the earnings is known as LTCG.

?

 þ !9<!
{ The difference between sale and purchase price is known as capital gain or
loss.
{ The sale and purchase of units in equity oriented scheme of MF is subject
to STT at the prescribed rate
{ Under Section 111 A of the IT ACT, STCG on sale of equity oriented
scheme is taxed at the rate specified by the govt. ( currently1!
). LTCG
{ LTCG if equity oriented scheme of MF is exempt from tax.
{ Tax on other scheme is 1!
for LTCG ( without indexation) and 2!
with
indexation.
{ under section 54 of Income Tax Act, LTCG are exempt from tax if invested
in specified bonds (54EC) issued by NABARD, NHAI, REC or specified
equity (54ED) within 6 months of transfer of units
{ the bonds must be held for minimum 3 years and no loan be taken against
these bonds and the equity must be held for minimum 1 year

?

 !  !#

{ Section 8! C ± Individual and HUF are entitled to deduction upto

Rs. 1 lakh in respect of payment out of taxable income towards
certain instruments which includes ELSS of Mutual funds.

{ Dividend Stripping ± ( Section 4(7) ± As per the finance Act 2!!1,

If investor buy units within 3 months prior to record date of dividend
and sells those units within 3 months of record date, then the loss if
any, shall be ignored.

{ Units are not considered under wealth tax

{ Section 1 5 ± 2!
TDS for LTCG and 3!
TDS on STCG if unit
holder is a NRI.

{ 48
TDS if unit holder is foreign company.

?

 &

{ An investor purchased units in an approved Mutual

Fund on Jan. 1, 1 8 for Rs.5!!!!!/-. He sold the units
on December 1, 1 for Rs. 75!!!!/-. Calculate the
capital gain taxes paid by him. ( Ignore indexation).

{ Answer :
± Long term capital gain = 25!!!!/
± So Tax on LTCG = 25!!!!! 1!
= Rs. 25!!!/-

?

 Valuation of Securities

Non Performing Assets (NPA)

An asset shall be classified as an NPA, if the interest
and/or principal amount have not been received or have
remained outstanding for 0!, from the day
such income/installment has fallen due.
Such assets will be classified as NPAs, soon after the
lapse of a quarter from the date on which payments
were due.

?

 Valuation of Equity Securities

{ Closing price on valuation date

{ Selected stock exchange
{ Use of alternate stock exchange quote
{ On the basis of earliest previous quote (not more than
3! days prior to valuation date).
{ If trading is suspended up to 3! days, last quoted price;
if it is suspended for more than 3! days, AMC/Trustee
decide valuation norms and document such norms.

?

 Thinly traded Equity Securities
{ Equity and equity related security
{ Rs. 5 lakh or less OR less than 5!!!! shares in a month
{ For unlisted: AMC need to make its own judgment and guideline -
which need to be documented
{ Aggregate of illiquid securities - non traded, thinly traded, and
unlisted equity shares should not exceed 15
of the total assets of
open-end scheme and 2!
of a closed-end scheme. Any assets in
excess of above limits will be valued zero.
{ If no Trade done during the past thirty days then has to be treated
as non traded security and the Valuation is done on basis of ³Good
Faith´.

?

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

{ A Debt Security if not traded in last 15 days is called

Not Traded Security

?

 Valuation of a Thinly Traded Security (<182 Days)

For example, if a security was issued at Rs. ! and redeemable at Rs.

1!!, after 364 days, the accrued interest for each day is
= 1!/364
= !.!2747
The value of the security is increased by 2.747 paise every day, so that
the security is worth Rs. 1!! on the date of maturity.
If it has to be valued 2!! days after issuance, its value is
!+(!.!27472!!) = 5.4 4

?

{ Investors¶ subscriptions are accounted for by the fund
not as liabilities or deposits but as Unit Capital.
{ Unit Capital is found in the Liability side of scheme¶s
balance sheet.
{ Investment made by Mutual fund on behalf of investors
are accounted as Assets.
{ Liabilities in Balance sheet of mutual fund are strictly
short term in nature.
{ The Day on which NAV is calculated is known as
Valuation Date.

?

 þ  !/

Investor Plans and Services

 '#!&!(#

{ Broadly 2 options- Growth option and Dividend Option

{ Automatic Reinvestment Plans (ARP) ± Reinvestment of amount of
dividend made by fund in the same fund and receive additional
units. It gives Benefit of Power of Compounding.
{ Systematic Investment Plans(SIP) ± For regular investment
{ Systematic Withdrawal Plan (SWP) ± For regular income (SWP is
not similar to MIP as SWP allow investor to get back the principal
amount)
{ Systematic Transfer Plan (STP) ± Transfer on a periodic basis a
specified amount from one scheme to another within the same fund
family.

?

 SIP and VAP

{ SIP is investing a fixed sum periodically in a disciplined

manner for long term. It gives benefit of Rupee Cost
averaging ( Discussed in later half of presentation).

{ VAP is modified version of SIP. It is Voluntary

Accumulation Plan. It allows the investor flexibility with
respect to the amount and frequency of investment.
{ In VAP, investor has to impose voluntary self discipline.

?

 Other Investment Services

{ Telephone / Internet Transactions.

{ Cheque writing ± usually for liquid funds.
{ Periodic statements and Tax Information
{ ##!!#
-9
-|5!56#
'#!!# 5! 1
{ Nomination and Transfer by unit holders.
{ NRI investors have to make payments from their FCNR bank
account or their NRE Account.
{ FIIs can make payments from their Non-Resident Rupee Account

?

 þ  !

Investment Management
 Types of equity Instruments
{ Ordinary shares : Ordinary shareholders are the
owners of the company.
{ Preference shares: Entitle the holders to dividends at
a fixed rate subject to availability of PAT
{ Equity Warrants: Option on stock. Long-term rights
that offer the holders right to purchase shares of a
company at a fixed price
{ Convertible Debentures: Converts into a specified
number of equity shares at the end of specified
period.
Since September 2!!5 mutual funds are allowed to
trade in derivatives.

?

 Š !4 #& # #%

The size of a company in the equity markets is determined

by market capitalization= (no. of shares issued Ô market
price/share)

›
    

Y
  
  Y
  


 
 


 
 




   







  


 

?

{ Equity stocks can be classified as large cap, mid cap and
small cap
{ The P/E ratio :
{ = Market Price Per Share / Earnings Per Share
{ Indicates the price the market is willing to pay per rupee of
company¶s potential earnings
{ Higher P/E ratio indicates growth stock; value stocks
generally have lower P/E ratio

{ P/E ratio reflects overvaluation and under valuation.

?

 Š !#'%

{ Dividend paid is usually a percentage of face value of the

share
{ Dividend Yield = (Dividend paid/Market Price) 1!!

What is the relationship between dividend yield?

{ Both the measures are sensitive to market price per share

{ If market prices are higher, P/E multiple will be higher, but
dividend yield will be lower and vice versa

?

 þ##"!#"!6#

{ þ     Cyclical stocks are those whose performance

is closely linked to macro economic factors; e.g. cement stocks
which are linked to infrastructure development in the country.




!  
 
 "
{ Growth Stocks ± Stocks having potential for higher earnings.
They tend to reinvest the earnings and usually have High PE
ratio and low Dividend yields.
{ Value stocks ± Companies in mature industries and are
expected to yield low growth in earnings. Good assets value.
Currently under valued but can yield superior returns later.

?

 Š !#|!'0!"&&!
{ | !' " & #6# ! '  5!! "& !  
 <
{
 & !# ! 6 ! # " !!5!#  #! #!6#1
{ |!' " & 5'#) ! ! # 5! ! 5  ! #!6 ! ! 
 ! !&)  !#! ! #  "& " # !"1

What are the basic active equity fund management style?

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

Value Investment Style ± Look for companies that are currently

undervalued but whose worth will be recognized eventually. ( e.g.
Privatization/buy back)

?

 Š !# ##'0!"&&!%

{ Fund manager believes, that holding a well diversified

portfolio is the cost efficient way ,to better returns, he would
tend to mimic the market index.
{ It requires limited research and monitoring costs and is
therefore cheaper. (The Expenses are low)
{ Fund manager may choose to mimic a index, or a subset
of the index or choose a basket of shares from multiple
indices.
{ A passive fund manager has to rebalance his portfolio
every time changes are made in the index.

?

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

Technical analysis ± Study of historic data on the

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

Quantitative analysis ± Uses mathematical models for

equity valuations may also use fundamental as well as
technical analysis for the valuation of the companies.

?

 & !! !#5!(!"
&!

{ Investments only in Market Traded Instruments (Not in loans as

done by banks)
{ Debt instruments may be secured (debentures) or may be
unsecured (FI bonds)
{ Instruments with maturity less than a year called Money Market
Securities.
{ Instruments with maturity above 1 year are called debt securities.
{ Zero Coupon Bonds (discounted securities) do not pay regular
interest at intervals but are bought discount to their face value and
redeemed at face value.

?

 Important
{ Debt instruments are issued by government, corporate
or banks
{ Debt instruments have fixed interest, floating interest or
zero interest or coupon i.e. on a discounted basis
{ Debt markets are wholesale markets and investors are
large institutional investors, such as banks, insurance
companies, mutual funds and corporate due to large
ticket sizes
{ More than !
of trading in debt markets is in
government securities

?

 #!&!#5! 6!

{ Certificate of Deposit ± Issued by commercial banks and maturity of

1 days to 1 year.
{ Commercial Paper ± Issued by corporate bodies and maturity
varies between 3 months to 1 year
{ Corporate Debentures ± Secured by the physical assets
{ Floating Rate Bonds
{ Govt. Securities.
{ Treasury Bills ± Issued through RBI by GOI. Tenure is 1 days and
364 days.
{ Bonds

?

 þ!B

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

borrower
{ The real rate is the nominal rate less the rate of inflation.

{ Yield is the term used to signify the actual rate earned on

an investment.
{ Current yield is the ratio of coupon amount to market price
of a bond. If coupon = 8
, Market Price = 1!5, then current
yield of bond is 8/1!5 = 7.62
.

?

 & !! !#
± Principal or Par or Face Value ± the amount representing the
principal borrowed and the rate of interest is calculated on this
sum. This is the amount payable on redemption
± Coupon ± the interest paid periodically to the investor
± Maturity ± the date on which the bond is redeemed. Term to
maturity or tenor is the period remaining for the bond to mature
± Put option ± refers to the option given to the investor to sell
(redeem) the bond before maturity; investor may exercise the
option when interest rates go up, above coupon in the market
± Call option ± refers to the option to the borrower to buyback
(repurchase) before maturity; issuer may exercise the option
when interest rates fall below the coupon rate

?

 #"2B#
{ Current yield ± Coupon Rate / Current Market Price
{ Yield to Maturity( YTM) ± It is also known as bond¶s IRR.
It is annual rate of return an investor would realize if he
bought a bond at a particular price, received all the
coupon payments, reinvested the coupon at same YTM
and received the principal at maturity.
{ There is inverse relationship between price and YTM of
a bond.
{ Yield Curve ± Graph showing yields for bonds of various
maturities, using a benchmark group of bonds. Also
known as TSIR ( term structure of interest rates). The
curve is usually upward sloping because longer
maturities generally offer higher yields.

?

 #6#'#!2#

{ Interest Rate Risk

{ Reinvestment Risk
{ Call Risk ( The issuer may call back)
{ Default Risk
{ Inflation Risk
{ Liquidity Risk

?

 B #

{ Yield Spread = Yield of a particular bond ± Yield of

benchmark security (risk free)
{ It is the risk premium paid by the bond to induce investor
{ 

 
# 


 



 "

{    
#

 "
   

{ Term to Maturity ± It is period until the bonds maturity

?

 !
{ It is a more accurate measure of the portfolio maturity
profile.
{ It measure the percentage change in bond¶s price with a
change in yield of 1

{ „
$ 
 
#
%
"
&
 " 
{ Bonds with longer maturities have longer durations.
{ 


    
 "
 


 

 
""

  








?

 Š !#! !#  5!3!  
! "! 5%
{ Price and Yield are inversely related.
{ Changes in interest rate impact bond values in the
opposite direction.
{ Yield also gets increased by downgrading of credit
rating of the bond.

?

 Š !! '#! #""<&
#!#'5!  6!%
?
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    !
 
 

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    !
 


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 #  $%&'(
?  

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     !
 
+) ,- .  *% 

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 -
 %%  ?  

    "  
 
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 #!!#

{ Mutual funds can invest only in marketable securities

{ All investments are on delivery basis, no squaring off.
{ A MF under all its schemes cannot hold more than 1!
of the paid up
capital of a company.
{ A MF scheme can invest max. 1!
of its NAV in a single company.(
Exception ± Index and Sectoral funds)
{ Debt funds - single issuer not more than 15
of NAV for the µinvestment
grade¶ instrument, can be relaxed to 2!
with approval of trustees and
AMC
{ Investment in the unrated instruments of a single issuer is restricted to 1!

of NAV and total for all issuers can not exceed 25
of NAV.
{ MF Can invest in ADR / GDRs upto a max. limit of 1!
of NA or $ 5!
million, whichever is lower.
{ <&&'#!&!#!# ##$>"|
"þ#
# &#;>" # &#1

?

! &#"

{ Such transfers happen on a delivery basis, at market

prices.
{ Such transfers should not result in significantly altering
the investment objectives of the scheme involved.
{ Such transfer should not be of illiquid securities, as
defined in the valuation norms.
{ One scheme can invest in another scheme, up to 5
of
net assets, No fee is payable on these investments.

?

'#!&! #þ& 

{ A mutual fund scheme cannot invest in unlisted

securities of the sponsor or an associate or group
company of the sponsor.
{ A mutual fund scheme cannot invest in privately placed
securities of the sponsor or its associates.
{ Investment by a scheme in listed securities of the
sponsor or associate companies cannot exceed 25
of
the net assets of the scheme

?

 3('##'#!&!(
{ Minimum Number of Investors per scheme
{ Purpose of MF is sharing the risks with a large number of
investors.
{ SEBI requires each scheme to have a minimum number
of investors.
{ So now each scheme and individual plan under the
scheme should have a minimum number of 2! investors
AND no single investor should account for more than
25
of the corpus of such scheme.
{ OES are allowed three months or upto end of the
succeeding calendar quarter from the close of IPO to
ensure compliance with this requirement

?


"
# &

{ A FoF invests in the schemes of other MF.

{ A normal MF scheme cannot invest in any FoF scheme.
{ A FoF scheme cannot invest in another FoF scheme.
{ A FoF is not allowed to invest its assets other than in
schemes of MF, except to the extent of its liquidity
requirements.
{ Maximum Expense ratio of FoF is capped !.75

?

 & !! !#

{ The current market price of a
coupon bond, when other bonds

of similar maturities pay 11
will be --- Below Par.
{ Yield and price move in opposite direction
{ Certificate of Deposits are issued by BAN S
{ Commercial Paper are issued by Corporate.
{ Corporate Debentures are issued by Manufacturing Companies.
{ Cash of a mutual fund is to be held with scheduled banks and not in
any other bank.

?

 þ  !*

Measuring And Evaluating Mutual

Fund Performance
{ Earnings can be either dividend or capital gains.
{ Rate of Return = Income Earned 1!!/ Amount invested.
{ Simple total return (STR) method includes the dividends paid to the investor
{ STR = {NAV(end) ± NAV ( begin)}+ Dividend paid 1!!
NAV at beginning
{ Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12
, then
money will double in 72/12 = 6 years.

?

 ("& #&!

{ Change in NAV= ( NAV at end ± NAV at beg.)1!!

NAV at the beginning
{ Total Return = ( Change in NAV+ Dividend) 1!!
NAV at beg.
{ Return on investment or Total Return with dividend reinvested at NAV.

{ Portfolio Turnover Rate ± It measures the amount of buying and selling of securities
done by the fund. It is lesser of assets purchased or sold divided by the fund¶s net
assets.
{ A 1!!
turnover implies that the manager replaced his entire portfolio during the
period in question
{ 2!!
means portfolio changed in 6 months
{ A liquid fund has the highest portfolio turnover.

?

&

{ An open ended fund was purchased when its NAV was

Rs. 22. One year later, its NAV was Rs. 24. The
annualised percent NAV change is ______

{ Answer
-
change in NAV = ( 24 -22) 1!! = .!

 22

?

{ Purchase price Rs. 22 per Unit
{ NAV at year end Rs. 23 per Unit
{ Interim Div. Rs. 3
{ Ex.-Div. NAV Rs. 21
{ Total Return=?

{ Assume investment of Rs. 1!!!!

{ Step 1: Initial Units allotted =1!!!!/22=454.55
{ Step 2:Total Div.=454.553=1363.65
{ Step 3: Additional Units=1363.65/21=64. 4
{ Step 4:Total Units=454.55+64. 4=51 .4
{ Step 5:Withdral Amt. =51 .4 23=11 47.17
{ Gain =11 47.17-1!!!!=1 47.17
{ Gain of 1 47.17 on the investment of Rs. 1!!!!
{ So that on the investment of Rs. 1!! gain is 1 .47
{ Ans:1 .47

?

 Other performance measures
{ The expense ratio ( Ratio of total expenses to average net assets of the
fund)- Funds with small corpus size will have a higher expense ratio
affecting investor returns. It is indicator of the Fund¶s Efficiency and
Cost Effectiveness.
{ The income ratio ( It is the net investment income divided by its net
assets for the period) ± useful for debt fund
{ Portfolio Turnover rate
{
#@ &"##!& '! 
5?!'#"#&3! &! #1
{ "#5"!"&&#"#3! 3< #
!## "&&!#6#1
{ Cash holdings

?

 Important Point

{ The returns should be computed on an annualized

average compound rate of return from cumulative figure.
{ If the fund performance data relates to a period of less
than one year, it should not be annualized, except for
liquid mutual funds which have a short investment
horizon.

?

 23#5 !


{ A mutual fund can borrow for a maximum of 2!
of net

assets.
{ For Maximum period of 6 months.
{ Purpose should be to meet liquidity requirements for
paying dividend or meeting redemptions.
{ It is not a permanent source of funds for the scheme.

?

 2 &6
{ Benchmarking should be selected by reference to ± The asset class
it invests in and the fund¶s stated investment objective.
{ ,6#"5 &6## !'!&6!#
3 )!'!! &!"#)!'!! 
& 5" !#1
{ For debt funds, the benchmark should have the same portfolio
composition and the same maturity profile
{ Main benchmark for debt funds is I-sec
{ 6- | 5"<

{ SEBI requires MF to specify Benchmark for each scheme in OD &
IM

?

 Criteria for peer group comparisons

{ The investment objective and risk profiles of the two

funds should be the same.( Debt with debt and equity
with equity)
{ Portfolio composition of two funds is similar. ( Gilt cannot
be compared with riskier corporate debt)
{ Fund size should be comparable.( same size)
{ Expense Ratios is also important factor
{ Funds should be compared over the same periods only

?

 Benchmarking Debt and MM Funds
{ I-SEC: Its I-bex index is often used to track Govt.
securities performance.
{ CRISIL: Has 8 debt indices
{ NSE: Has designed Govt. security index and T-bill
index.
{ Besides NSE, JP Morgan has also developed a T-bill
index.

?

 #"!6 !

("&
{ Mutual Funds Annual & periodic Reports.
{ Mutual Funds website.
{ AMFI website
{ Financial News Papers.
{ Fund Tracking Agencies ± þ,
 # 
{ Newsletters
{ Offer Document of the Fund
{ Analytical Articles
{  þ! !|þ '!#! 

("& 6#!  &5("&1

?

 þ  !$

Helping Investors with financial

planning
 "!5?!'"
(

{ It is identifying all the financial needs of an individual

± Translating needs to monetarily measurable goals
± Planning financial investments that will allow
individual to provide for and satisfy his future financial
needs and achieve his life¶s goals.
The objective is to ensure that right amount of money is
available in the right hands at the right point in future
to achieve an individual¶s financial goals.

?

 Financial Planner

{ A person who uses the financial planning process to

help another person determine how to meet his or her
life goals.
{ Possesses detailed knowledge of wide range of
products and financial planning tools and help clients in
choosing the best products.
{ He looks at all of client¶s needs including budgeting and
saving, taxes, investments, insurance and retirement
planning.

?

 Benefits of Financial Planning
{ Financial Plans are tax efficient.
{ It provides direction and meaning to financial decisions.
{ It allows one to understand how each financial decision one makes
affects other areas of one¶s finances.
Benefits to Financial Planner
{ Ability to establish long term relationships ( Multiple products to one
client)
{ Financial Planner should ideally link his rewards and fees to the
clients financial success and achievement of the financial goals.
{ Ability to build a profitable business ( NO rebating)

?

 Qualities of a Good Financial Planner
{ Building trust with the client
{ Good knowledge of Financial products
{ Familiarity with taxation and estate planning issues
{ Understanding of stages of client¶s life and wealth cycle and asset
allocation
{ Independent judgment and balanced thinking
{ Organized way of working
{ Regular contact with clients
{ Clear Focus on Overall Financial Planning of client rather than on
individual transactions.
{ The basis of genuine advice should be Financial planning to suit the
investor¶s advice.

?

 ! #!
(

{ Establish and define client-Planner Relationship

{ Gather client data, Define client Goal
{ Analyze and evaluate clients financial Status
{ Develop and present financial planning
recommendations
{ Implement the financial planning recommendation
{ Monitor the financial planning recommendations

?

& !!# #5!#"'#!#! 
" <#%
{ Should set measurable financial goals.

{ Should understand the impact of financial decisions on their cash

flows and their income.

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

changing market conditions, performance and their changing needs

and changes in lifestyle or circumstances( inheritance, marriage,

birth, house purchase or change of job status)

{ Investors benefit immensely by starting early and being systematic

and disciplined in their approach.

?


& !! !#" 

{ The planner can look at all the clients need including budgeting,
saving, taxes, investments, insurance and retirement planning.
{ A financial planner can link his own rewards and fees to the client¶s
financial success and the achievement of their financial goals
{ MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR
FINANCIAL PLANNING.( CORE PRODUCT)
{ Financial is not only investing. It comes before investing.
{ It is relevant for all category of clients.
{ It is not as same as retirement planning.
{ It is not only Tax Planning.
{ Financial planning is important at younger stage of life.

?

 Important points on Financial Planning

{ The basis of genuine investment advice should be

financial planning to suit the investor¶s situation. It
should not be current market condition.
{ Financial Planning allows a person to achieve financial
goals through proper management of finances.
{ Financial planners and their clients should focus on
allocating funds to different asset classes.
{ Financial planning is relevant not only to HNIs
{ Financial planning works better for younger/ middle
aged client.

?

 Stages of Life Cycle

{ Childhood Stage
{ Young Unmarried Stage
{ Young Married Stage
{ Young Married with Children Stage
{ Married with Older Children Stage
{ Pre-retirement Stage
{ Retirement Stage

?

 Wealth cycle for investors (Very Important)
!
# '#!&! "#

Accumulation stage Investing for long term identified Growth options and long term
financial goals products.High risk appetite
Transition Stage Near term needs for funds as Liquid and medium term investments.
pre-specified needs draw closer Lower risk appetite

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

Long term investment of

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

Sudden wealth surge Medium to long term Wealth preservation.

Preference for low risk products

?

Affluent investors ± the rich investors are of 2 types:

Wealth creators ± Those who prefer growth and are willing

to take the risk of equity investments. For such investors
7!
to 8!
allocation to diversified equity and sector
funds is advisable.

Wealth preservers ± Those who prefer capital safety and are

risk averse; they prefer debt investments. For such
investors a conservative portfolio with a 7!
to 8!

exposure to income, gilt and liquid funds would be
appropriate.

?

 Chapter 11

Recommending Financial Planning

Strategies to Investors

?

{ ''þ(!(''')„*„)
{ Harness the Power of Compounding ± 1
interest per month is
better than 12
yearly return.
{ Buy and hold is most common strategy BUT most common mistake.
Ideally it should be, track your investments, discard the non
performers and keep the good performers.
{ Rupee cost averaging
{ Value Averaging.
{ Jacob¶s Rebalancing Strategy ( Combination of RCA and Value
averaging strategies- Using a aggressive growth fund and liquid
fund of the same family.) ( putting regularly money in liquid fund and
set a target value for the equity fund)

?

{ Buy and hold strategy may not be a beneficial strategy because
investors may not weed out poor performing companies and invest
in better performing companies
{ Rupee Cost Averaging (RCA) is a technique that involves:
± Fixed amount invested at regular intervals
± When NAV is down, more units are bought and when price is
high, fewer units are bought
± Over a period of time, the average purchase price of the
investor¶s holdings will be lower
± Investors use the SIP or AIP to implement RCA
{ Disadvantage: RCA does not tell when to sell or switch from one
scheme to another.

?

 Rupee Cost Averaging (RCA)

|&! þ&!'
"
'#! "!# " .
!  # |
 # 5 ! !# #
$ $ $1 $1 $1 $)1
 $ $1; 1 $1 );1
, $ $1; /1$ ;1$ ,);+;1
 $ $$1/; ;1$$ ,,;1 ,)*,*1;+
; $ $1; *;1 ,1; );1+
+ $ *1 $$$1$$ ;$1+, )/1+
/ $ 1; $$/1+; +;*1 ;)+,1+
 $ /1+; $,1/ /*1 +),1
* $ 1 $$,1+ *,1+, /)*;$1*/
$ $ *1; $1$$ $)$$1/ *),;1+$
$$ $ $1 ,1,, $)*;1/ $,)$1*
$ $ $;1 ++1+/ $)$+$1/ $/)+1$
|'þ#! $=$$+C $1,,

?

{ Value Averaging (VA) involves:
± A fixed amount is targeted as desired portfolio value at regular intervals
± If market has moved up, the units are sold and the target value is
restored
± If market moves down, additional units are bought at the lower prices
± Over a period of time, the average purchase price of the investor¶s
holding will be lower than if one tries to guess the market highs and
lows
{ VA is superior to RCA because it enables the investor to book profits and
rebalance the portfolio
{ Investors can use the systematic withdrawal and automatic withdrawal plan
to implement value averaging
{ Investors can also use an equity and a money market mutual fund to
implement value averaging.

?

 Value Averaging

!

" þ&!'
!  # |
 # . !#!'#! "!#
$ $ $1 $1 $1 $1
  $1; $);1 +1 $+1
, , $1; )1 ;1;, $1;,
  $$1/; )/,1+ $*1* ,1,
; ; $1; ,);/1/ $,;1/+ /+1$*
+ + *1 );1/$ $*1 +++1+/
/ / 1; ;)+++1+/ $;+1+ ,1;,
  /1+; +),1 1 $);1/;
* * 1 *)1+$ ,1 $)1/,
$ $ *1; *)+1, ;1,; $)$1
$$ $$ $1 $)*/1*/ $+1$ *$+1+/
$ $ $;1 $,)/;1 $$+1+/ 1

?

 Some ey concepts of Financial Planning
{ When to invest ± when they have money to invest
{ When to cash out
± When the goals have arrived and clients need the money for the
purpose for which they have invested
± IF the overall market appears overvalued in terms of
fundamentals and historic valuations
{ Start planning and investing regularly
{ Have realistic expectations
{ Invest Regularly
{ The Strategy advisable for an investor to maximise investment
return in long run is Switch from poor performers to Good
performers.

?

 |##!|!

{ Asset allocation refers to deciding the composition of the portfolio in

terms of debt, equity and money market segments
{ Asset allocation differs from investor to investor and depends upon
their situation, their financial goals and risk appetite
{ The asset allocation for an investor depends upon his life and
wealth cycle stage
{ A model portfolio creates and ideal approach for an investor¶
situation and is a sensible way to invest.

?

{ '#!# '  #D
±
<##!!
±
<5##!!
{
<##!!&#
± &!! #&!5!3'#& !#"!  !"
115# 
± 45!  !"# &
± ('3!!!
± "'"0!& !##)'#!56# "!#
{
<5##!!&#
± |3!  !" "!#!)3! !56! &
± "0!&6! !#)!#!#    !0!! 
5!1

?

 Asset Allocation ± The Strategic Tool

{ Allocation of money between equity, debt and money market

instruments.
{ Depends upon situations, financial goals and risk appetite.
{ Benjamin Graham advocates 5!/5! split between equities and
bond . But Bogle suggests different combinations.
{ Bogle gives a nice rule of thumb for asset allocation : Debt
portion for an investors portfolio should be equal to his age.
{ Example: A 3! year old investor will make 7!/3! asset
allocation.

?

 Š !#28##!!##!!%

{ '#!#! #!5! #D

- 5!
equity : 5!
debt

{ B'#!#! #!5! #D

- 6!
equity : 4!
debt

{ '#!#! &! #D

- 7!
equity : 3!
debt

{ B'#!#! &! #D

- 8!
equity : 2!
debt

?

 Chapter 12

Selecting the right Investment

Products for Investors

?

{ Physical Assets include gold and real estate and traditionally very popular
± Gold is not subject to value erosion on account of rupee depreciation
± Gold is perceived as a protection/hedge against inflation
± Gold-linked unit schemes from mutual funds in India are underway
± Real estate requires a high capital investment and may not be easy to
liquidate at the appropriate price
± Some fund houses are preparing to launch Real estate mutual funds in
the near future
{ Financial assets include equity, debt and money-market instruments
± Equity, debt and money market instruments are direct investments with
the borrower/ issuer of securities
± Mutual funds represent an indirect investment through an intermediary.

?

{ Products by issuer:
{ 
"
± Offer high liquidity and perceived safety
± Low or negligible returns after factoring inflation and tax
þ"

{ Equity
± Issued publicly and listed
± Issued privately and unlisted
± Investors may acquire shares either at the time of IPO or secondary (stock)
market
± Equity offers high growth potential and liquidity
± The challenge is to identify the right shares that are likely to appreciate
± Requires capital to build a diversified portfolio.
±  #!"# #!!6-< ##. 0!#
!!## #1

?

{ Debt
± Debentures issue a fixed rate of interest
± Debentures are secured by the assets of the borrower
± Debentures are provided rating by credit-rating agencies
± Bonds are also generally provided rating by independent
agencies if the maturity exceeds 18 months
± Creditworthiness of borrower and risk of default have to be
analyzed before investing in these bonds and debentures
± Company fixed deposits carry a higher interest rate and are
unsecured
± These would also have tax implications.
± The Rate of interest paid by a company on debentures issued by
it depends on the Company¶s Credit rating.
± The most important factor to look for when investing in a
corporate fixed deposit is the Credit Rating of the deposit.

?

{ )



{ (5('!

± $;4 !
± #64"'&!5!
±  !'#.
#
± ! &!! !!
± ""#!<4"!#!"> 11!5! ! #1/)
& #1;5"!#!þ
±  !!3! 3;>"! 5! /! 

± #!!3! 3#0!1

?

{ Indira and isan Vikas Patra
± Introduced as post office scheme to tap savings in
rural India
± Very popular with urban investors also
± Current yield is 8
over 6 years, fully taxable
± IVP permits cash investment and protection of identity
± Easily transferable and liquid.

?

{ RBI Relief Bonds
± Issued by RBI on behalf of the Government of India
± |;4'#!&! !3! >!#!""
± Interest is currently taxable (used to be tax-free earlier)
± Free of risk of default
{ Government Securities
± Long-term government paper
± Risk-free government obligation
± Low-return and define the benchmark rate of return on the yield curve
± Specially appointed Primary dealers deal in G-Secs
± Generally high ticket investments
± Best accessible to small investors through mutual funds.

?

{ (


± Viewed more for investment and tax purposes than a vehicle for risk protection
± Premium qualify for deduction under section 8!C
± Important to assess need for life insurance with respect to earning potential
± A Without Profits policy offers the Sum Assured in the event of death only
± A With Profit policy pays not only the Sum Assured but also bonus declared from
time to time
± In case a policy is discontinued during its tenure, the policy¶s surrender value is
paid which is a proportionate value based on premiums paid so far
{ A µconvergence¶ of insurance and mutual funds is the development of Unit-Linked
Insurance products ± which offers investors choice of asset allocation between debt
and equity.
{  |&!#&  #!! &"  #
#63#!  | -1

?

{ A comparison of investment products can be done on risk, return,
volatility and liquidity
{ Mutual funds combine the advantages of all investment vehicles while
doing away with their shortcomings
{ The returns in a mutual fund are adjusted for market movements.

{ )''#!##!!##! 
6!#!&!#1
{  5#!'!"'#!&!9# #!
"!1
{  5#!#'!"'#!&! #!!#. 
( #(1B '!'#! &!1
{  '!"56 #!##0!)   '#"!
3! 1#'!#3B"!|E1

?

{ Mutual Funds are more recommended option for
individual investors than direct equity.

{ Direct Investment in stock market can be a better option

than investing in Mutual Funds if the investor has large
capital, knowledge and resources for research.

?

 þ  !$,

Helping Investors understand

Risks in Fund Investing
 Jacob¶s recommendations of portfolios based on
risk level of different funds

{ Low Risk ( conservative) portfolio :

± 5!
Gov. sec. fund + 5!
Money market fund.
{ Moderate Risk ( cautiously aggressive) portfolio:
± 4!
growth and income fund+ 3!
govt. bond fund
+ 2!
Growth fund + 1!
index funds
{ High Risk( Aggressive) portfolio :
± 25
aggressive growth fund+ 25
international
funds + 25
sector funds +15
high yield bond
funds+ 1!
gold funds

?

 Evaluating the Risks of a Mutual Fund

{ Š !# #6%
± Risk means the possibility of financial loss.
± ³Risk´ is thus equated with
!!"-#
{ -0!( #6
± Company Specific
± Sector Specific
± Market Level

?

 Volatility of an Equity mutual fund comes from:

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

{ The number of stocks ( Degree of diversification. Smaller portfolios
are more volatile than large PFs)
{ Fund manager¶s success at market timings.

{ !# !"&5"'#!#! # &1

{ The Risk tolerance of an investor is dependent on his age, his
income and his job security.
{ Risk Tolerance is independent of the Stock Market Movements.

?

 Evaluating the Risks of a Mutual Fund
{ 6!þ#
{ #6 ##
± Standard Deviation ± SD measures the fluctuations of a fund`s
returns around a mean level. SD gives an idea of how volatile
the earnings are. SD measures total risk.
± Disadvantage of SD is that it is based on Past Returns.
± Beta Coefficient ± Beta relates a fund`s return with a market
index and measures the sensitivity of the fund`s returns to
change in market index. A beta of 1 means the fund moves with
market. A beta of less than one means the fund will less volatile
than the market.
± Beta is based on past returns.

?

 Evaluating the Risks of a Mutual Fund

{ -< 6#&563#7 40:

± How much of a fund`s fluctuations is attributable to movements
in the overall market from ! to 1!! percent.
± An index fund will have ExMarks of nearly 1!!
. Non
Diversified funds will have lower ExMarks.
± Ex Marks of an equity fund measures its Performance
{ Standard Deviation is the best measure of risk.
{ Beta of an equity fund measures its RIS .

?

 Risk Adjusted performance

Sharpe ratio and Treynor Ratio

{ Risk premium= Funds return ± Risk free rate of return
{ Sharpe Ratio = Risk premium/SD
{ Treynor Ratio = Risk Premium/Beta
{ Both the ratios measures the adequacy of returns against the
risk assumed.

?

 Evaluating the Risks of a Mutual Fund

{ | 
± Risk adjusted performance calculation is called
Alpha.
± Alpha of a fund compares the fund`s actual results
with what would have been expected given the fund`s
beta and the market index performance.

?

{ Money Market Funds are low risk fund.
{ Sectoral Fund are high risk fund.
{ Risk is equated with Volatility of Earnings.
{ Diversification reduces Company specific risk but it does
not reduce Market Risk.
{ Short Term investment in Equity market is most risky.
{ BEST FUND WILL HAVE HIGHER EX MAR S,
LOWER BETA AND HIGHER GROSS DIVIDEND
YIELD

?

 þ  !$

Recommending Model Portfolios

and selecting the right Fund
  #! #' & !""'#!
58#
! (& '   !"
{ Develop long term goals.

{ Determine asset allocation.

{ Determine sector distribution.

{ Select specific fund managers and their schemes.

{ '  (!"#! &#!-""!'3#!

'#!!   !
#1

?

 58#  !"#&&"
'#!#!! "#!#D
{ B& "###D
± 5!
in aggressive equity funds.
± 25
in high yield bond funds, growth and income funds.
± 25
in conservative money market funds.
B 3! &# D
± 1!
in money market funds.
± 3!
in aggressive equity funds.
± 25
in high yield bond funds and long term growth funds.
± 35
in municipal bond funds.

?

 Contd:

{  #&D
± 3!
in short term municipal funds
± 35
in long term municipal funds
± 25
in moderately aggressive equity
± 1!
emerging growth equity

{ !! D
± 35
in conservative equity funds for capital preservation / income
± 25
in moderately aggressive equity for modest capital growth
± 4!
in money market funds

?

 Š !#! && !""
'#!#&! #%

{ '#"-0!D!5"#

± 65 ± 8!

{ &!"#D

± 15 ± 3!

{ 0"#56 #!#D
± 5

?

 Š !#! && !""'#!#
#!5! #%

{ '#"-0!5"#D

± 15 ± 3!

{ &"#D

± 65 ± 8!

{ þ# "#D
± 5

?

{ Investors in the Inter-Generational Transfer Phase:
± The recommended investment strategy will depend
upon the beneficiaries

{ Investors in the sudden wealth stage :

± Take into account the effect of taxes,
± eep the money in safe liquid investments and take
the time to decide what to do with the money.

?

 Selecting the right equity funds

{ Look at Fund size

{ Look at fund age
{ Look at Portfolio¶s managers experience
{ Look at cost of investing
{ Portfolio characteristics like Cash position, portfolio
concentration, market capitalisation of the fund, portfolio
turnover, portfolio statictics
{ BEST FUND WILL HAVE HIGHER EX MAR S,
LOWER BETA AND HIGHER GROSS DIVIDEND
YIELD

?

 Most important points.
{  0!#"'#!&!!    6!

#1
{ |! ##!  !"5!

#1
{ |'#!)"3! 3! !)# 5
'#!'#!-0!93! 
#1
{ |'.   !"'#!&!! #"0!"#
#'#"'#!#&! #1
{  #! #"'#!8#3! #3 ! 

9#  1
{ |    !"'#!&!&"##05
'#!##!5! #1
{ !'#!## !'#!#!#3  5#6
" !#1

?

 Very Important Points on Equity Funds portfolio
Characteristics.

{ |-0!
5#!5!!
3  $ #!"&! ;>"
!##!#'#!1
{  #@"! &6! ""8#0! #
#'#  !!! '"#6##&
5! "1  6!þ  '3#61
{ |#! #"'#!&!#0!"8#
!"!#5! &!!
3#!þ#!#1

?

 Debt Funds ± Important points

{ Debt Schemes are popular because the returns are more

predictable. Equity returns are volatile and very less predictable.
{ If an investor needs income, he should select a fund with high
current yield.
{ YTM ( Yield to maturity) of debt fund¶s portfolio gives an indication
of Total Return ( Not current income).
{ Longer the average duration of debt fund portfolio, greater the
interest rate risk.
{ Long term Debt funds carry high interest rate risk.
{ The differentiating factor among debt funds of comparable maturity
and quality is Costs.
{ Running a Money Market Mutual Fund requires more of Trading
Skills.

?

{ The investors should invest in Debt Fund with a High
Portfolio and Lower Expense Ratio.
{ An Ideal money market MF has lower expense Ratio.
{ Before investing in equity fund one should look at
ExMark, Beta, Yield, Age and size of the fund, Portfolio
turnover rate.

?

 Selection of Balanced fund
Balance fund is rarely a 5!/5! fund!
Equity oriented Balanced funds (up to 65
in equity)
Income oriented Balanced fund (up to 65
in debt)

?

 þ  !$;

Business Ethics in Mutual Fund

 2###-! #

{ Business Ethics means rules of acceptable and good

conduct.
{ Business must be conducted in a disciplined, organized
and fair manner.
{ Ethical practice means practice in the interest of unit
holders of the scheme.
{ A consumer who feels cheated will never return to buy
the product again.
{ BE ensures that the customer remains a long term
buyer.

?

 2###-! #" !
2###

{ MF is also a business where investors buy investment

products
{ MF and sales persons are required to adopt ethical, fair
and good business practices and apply them to all those
involved in selling/ servicing activities.
{ A salesperson is expected to know the product
thoroughly and describe it accurately.

?

 5?!'#"2###-! #

{ Simply being honest, open and transparent with your

potential clients.
{ Rules are needed to ensure that you deal with the
clients fairly and transparently.
{ To protect the clients from being cheated or exploited.
{ To ensure a level playing field among all categories of
business participants.
{ To ensure fairness in dealing with investor.

?

 Areas particularly monitored by SEBI

{ Fund structure and Governance

{ Exercise of Voting Rights by Funds
{ Fund Operations.

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 ! 0&!#
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{ Separation of Functions ± No one constituent is in

control of the investors assets.( Trust, AMC, Custodian,
Registrar)
{ Independence of Organisations ± Trust independent of
AMC,
{ Independence of Personnel - Trustees can not serve as
Director of AMC they supervise or even any other AMC.
Independent Trustees and BOD members also.

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 -<& #"!  !#

{ Insider Trading ± Buying or selling securities on the basis of

privileged information available to the funds by persons who are
seen as insiders to the company.
{ Preferential Treatment to Selected investors ± Cut off time has been
introduced now to prevent late trading abuses.
{ Personal trading by fund managers and employees
{ Front Running ± Fund manager buying or selling securities ahead
of doing the same transaction for the fund.
{ Some MF ban personal trading by their fund managers.

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 !#(#

{ AMC should file with trustees a quarterly statement of

dealings in securities by the key personnel of the AMC.
{ The director of AMC has be file details of transaction in
MF, where they exceed the value of Rs.1 lakh.
{ In case of Trustees, they may report only those
transaction which exceed the value of Rs.1 lakh
{ Trustees have to certify that the personnel of AMC don¶t
indulge in front running or self dealing.

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 !  !#

{ Mandatory for the AMC to appoint a compliance officer to

monitor and ensure implementation of all laws / regulations.
{ All distributors and agents follow the code of conduct laid
down in the 5th schedule of SEBI MF regulations 1 6.
{ A more detailed code called |9(AMFI Guidelines and
Norms for Intermediaries) has been put into place by AMFI
for all distributors and agents.
{ SEBI has issued detailed guidelines that are mandatory for
AMCs to follow while advertising their mutual fund products.
The basic guidelines are covered in the +! schedule of the
SEBI regulations.

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  6#

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