Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: BFIA
SEMESTER-III
Subject Name:
Study COUNTRY:
Roll Number (Reg. No.):
Student Name:
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C
DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions
MARKS
10
10
10
Assignment B
Assignment C
Page | 2
Q. 1).
Answer:
A mutual fund is a professionally managed type of collective investment scheme
that pools money from many investors and invests it in stocks, bonds, short-term
money market instruments and other securities. Mutual funds have a fund
manager who invests the money on behalf of the investors by buying / selling
stocks, bonds etc. Thus Mutual funds are 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.
The following are advantages of mutual funds for investors:
1)
Professional Management: Mutual funds offer investors the opportunity to
earn an income or build their wealth through professional management of their
investible funds. There are several aspects to such professional management viz.
investing in line with the investment objective, investing based on adequate
research, and ensuring that prudent investment processes are followed.
Page | 3
2)
Portfolio Diversification: Units of a scheme give investors exposure to a
range of securities held in the investment portfolio of the scheme. Thus, even a
small investment of Rs 5,000 in a mutual fund scheme can give investors a
diversified investment portfolio.
With diversification, an investor ensures that all the eggs are not in the same
basket. Consequently, the investor is less likely to lose money on all the
investments at the same time. Thus, diversification helps reduce the risk in
investment. In order to achieve the same diversification as a mutual fund scheme,
investors will need to set apart several lakh of rupees. Instead, they can achieve
the diversification through an investment of a few thousand rupees in a mutual
fund scheme.
3)
Economies of Scale: The pooling of large sums of money from so many
investors makes it possible for the mutual fund to engage professional managers
to manage the investment.
Individual investors with small amounts to invest cannot, by themselves, afford to
engage such professional management.
Large investment corpus leads to various other economies of scale. For instance,
costs related to investment research and office space get spread across investors.
Further, the higher transaction volume makes it possible to negotiate better terms
with brokers, bankers and other service providers.
4)
Liquidity: At times, investors in financial markets are stuck with a security
for which they cant find a buyer worse; at times they cant find the company
they invested in! Such investments become illiquid investments, which can end in
a complete loss for investors.
Investors in a mutual fund scheme can recover the value of the moneys invested,
from the mutual fund itself. Depending on the structure of the mutual fund
scheme, this would be possible, either at any time, or during specific intervals, or
only on closure of the scheme. Schemes where the money can be recovered from
the mutual fund only on closure of the scheme are listed in a stock exchange. In
such schemes, the investor can sell the units in the stock exchange to recover the
prevailing value of the investment.
5)
Tax Deferral: Mutual funds are not liable to pay tax on the income they
earn. If the same income were to be earned by the investor directly, then tax may
have to be paid in the same financial year.
Mutual funds offer options, whereby the investor can let the moneys grow in the
scheme for several years. By selecting such options, it is possible for the investor
to defer the tax liability. This helps investors to legally build their wealth faster
than would have been the case, if they were to pay tax on the income each year.
Page | 4
6)
Tax benefits: Specific schemes of mutual funds (Equity Linked Savings
Schemes) give investors the benefit of deduction of the amount invested, from their
income that is liable to tax. This reduces their taxable income, and therefore the
tax liability.
Further, the dividend that the investor receives from the scheme is tax-free in his
hands.
7)
Convenient Options: The options offered under a scheme allow investors to
structure their investments in line with their liquidity preference and tax position.
8)
Investment Comfort: Once an investment is made with a mutual fund,
they make it convenient for the investor to make further purchases with very little
documentation. This simplifies subsequent investment activity.
9)
Regulatory Comfort: The regulator, Securities & Exchange Board of India
(SEBI) has mandated strict checks and balances in the structure of mutual funds
and their activities. These are detailed in the subsequent units. Mutual fund
investors benefit from such protection.
10) Systematic approach to investments: Mutual funds also offer facilities
that help investor invest amounts regularly through a Systematic Investment Plan
(SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP);
or move moneys between different kinds of schemes through a Systematic Transfer
Plan (STP). Such systematic approaches promote an investment discipline, which
is useful in long term wealth creation and protection.
Q. 3).
Answer:
Open-end Funds: Funds that can sell and purchase units at any point in time are
classified as Open-end Funds. The fund size (corpus) of an open-end fund is
variable (keeps changing) because of continuous selling (to investors) and
repurchases (from the investors) by the fund. An open-end fund is not required to
keep selling new units to the investors at all times but is required to always
repurchase, when an investor wants to sell his units. The NAV of an open-end
fund is calculated every day.
Closed-end Funds: Funds that can sell a fixed number of units only during the
New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a
Closed-end Fund remains unchanged at all times. After the closure of the offer,
buying and redemption of units by the investors directly from the Funds is not
allowed. However, to protect the interests of the investors, SEBI provides investors
with two avenues to liquidate their positions:
Closed-end Funds are listed on the stock exchanges where investors can buy/sell
units from/to each other. The trading is generally done at a discount to the NAV of
Page | 5
the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated
every Thursday).
Closed-end Funds may also offer "buy-back of units" to the unit holders. In this
case, the corpus of the Fund and its outstanding units do get changed.
Interval funds combine features of both open-ended and close ended schemes.
They are largely close-ended, but become open ended at pre-specified intervals.
For instance, an interval scheme might become open-ended between January 1 to
15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely
close-ended scheme, they are not completely dependent on the stock exchange to
be able to buy or sell units of the interval fund
Load Funds: Mutual Funds incur various expenses on marketing, distribution,
advertising, portfolio churning, fund manager's salary etc. Many funds recover
these expenses from the investors in the form of load. These funds are known as
Load Funds. A load fund may impose following types of loads on the investors:
Entry Load - Also known as Front-end load, it refers to the load charged to an
investor at the time of his entry into a scheme. Entry load is deducted from the
investor's contribution amount to the fund.
Exit Load - Also known as Back-end load, these charges are imposed on an
investor when he redeems his units (exits from the scheme). Exit load is deducted
from the redemption proceeds to an outgoing investor.
Deferred Load - Deferred load is charged to the scheme over a period of time.
Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of
exit load reduces as the investor stays longer with the fund. This type of load is
known as Contingent Deferred Sales Charge.
No-load Funds: All those funds that do not charge any of the above mentioned
loads are known as No-load Funds.
Tax-exempt Funds: Funds that invest in securities free from tax are known as
Tax-exempt Funds. All open-end equity oriented funds are exempt from
distribution tax (tax for distributing income to investors). Long term capital gains
and dividend income in the hands of investors are tax-free.
Non-Tax-exempt Funds: Funds that invest in taxable securities are known as
Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds
are liable to pay tax on distribution income. Profits arising out of sale of units by
an investor within 12 months of purchase are categorized as short-term capital
gains, which are taxable.
Page | 6
Actively managed funds: are funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the investment
objective of the scheme. Since this increases the role of the fund manager, the
expenses for running the fund turn out to be higher. Investors expect actively
managed funds to perform better than the market.
Passive funds: invest on the basis of a specified index, whose performance it seeks
to track. Thus, a passive fund tracking the BSE Sensex would buy only the shares
that are part of the composition of the BSE Sensex. The proportion of each share
in the schemes portfolio would also be the same as the weight-age assigned to the
share in the computation of the BSE Sensex. Thus, the performance of these funds
tends to mirror the concerned index. They are not designed to perform better than
the market. Such schemes are also called index schemes. Since the portfolio is
determined by the index itself, the fund manager has no role in deciding on
investments. Therefore, these schemes have low running costs.
Q. 4).
Answer:
Offer document is a prospectus that details the investment objectives and
strategies of a particular fund or group of funds, as well as the finer points of the
fund's past performance, managers and financial information. You can obtain
these documents from fund companies directly, through mail, e-mail or phone.
You can also get them from a financial planner or advisor. All fund companies also
provide copies of their ODs on their websites.
You would have come across this line in all Mutual Fund advertisements, Mutual
Fund investments are subject to market risks. Please read the offer document
carefully before investing. Its an open secret that this 80 to 100 page bulky
document is not simple to read and the legal information it contains is not easy to
understand for most investors.
However, SEBI has made the investors job easier by evolving an abridged form,
the Key Information Memorandum. Also, SEBI has served the cause of investors by
stipulating standard sections and standard disclosures in all Offer Documents.
Hence, the Offer Document can be the friend and guide of an enlightened investor.
Here is a guide to what an Offer Document is, why it is important and what are the
10 Most Important Things to Read in an Offer Document for investors.
Investors get to know the details of any NFO through the Offer Document.
Information like the nature of the scheme, its investment objectives and term, are
the core of the scheme. Such vital aspects of the scheme are referred to as its
fundamental attributes. These cannot be changed by the AMC without going
through specific legal processes, including permission of investors. Since the
Page | 7
Page | 8
the fund has generated vs. the returns actually expected out of the fund given the
level of its systematic risk. The surplus between the two returns is called Alpha,
which measures the performance of a fund compared with the actual returns over
the period. Required return of a fund at a given level of risk (Bi) can be calculated
as:
Ri = Rf + Bi (Rm - Rf) Where,
Ri represents return on fund.
Rf is risk free rate of return and
Rm is average market return during the given period.
After calculating it, alpha can be obtained by subtracting required return from the
actual return of the fund.
Higher alpha represents superior performance of the fund and vice versa.
Limitation of this model is that it considers only systematic risk not the entire risk
associated with the fund and an ordinary investor cannot mitigate unsystematic
risk, as his knowledge of market is primitive.
4) Fama Model
The Eugene Fama model is an extension of Jenson model. This model compares
the performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these
two is taken as a measure of the performance of the fund and is called net
selectivity.
The net selectivity represents the stock selection skill of the fund manager, as it is
the excess return over and above the return required to compensate for the total
risk taken by the fund manager. Higher value of which indicates that fund
manager has earned returns well above the return commensurate with the level of
risk taken by him.
Required return can be calculated as:
Ri = Rf + Si/Sm*(Rm - Rf) Where,
Ri represents return on fund.
Rf is risk free rate of return and
Sm is standard deviation of market returns.
The net selectivity is then calculated by subtracting this required return from the
actual return of the fund.
Page | 10
Assignment- B
Q. 1). Differentiate between various performance measure of mutual fundsSharpe, Treynors and Jensens Alpha.
Answer:
The difference between Sharpe, Traynors and Jensens Alpha is that Sharpe ratio
measures the return earned in excess of the risk free rate (normally Treasury
instruments) on a portfolio to the portfolio's total risk as measured by the
standard deviation in its returns over the measurement period. Or how much
better did you do for the risk assumed.
The Sharpe ratio is an appropriate measure of performance for an overall portfolio
particularly when it is compared to another portfolio, or another index such as the
S&P 500, Small Cap index, etc.
That said however, it is not often provided in most rating services.
Traynor ratio is similar to Sharpe ratio except it uses beta instead of standard
deviation. It's also known as the Reward to Volatility Ratio, it is the ratio of a
fund's average excess return to the fund's beta. It measures the returns earned in
excess of those that could have been earned on a risk-less investment per unit of
market risk assumed.
Jensens Alpha is the difference between a fund's actual return and those that
could have been made on a benchmark portfolio with the same risk- i.e. beta. It
measures the ability of active management to increase returns above those that
are purely a reward for bearing market risk. Caveats apply however since it will
only produce meaningful results if it is used to compare two portfolios which have
similar betas.
Q. 2). Explain the types of risk involved in mutual fund.
Answer:
Every investment including mutual funds involves risk. Risk refers to the
possibility that you will lose money (both principal and any earnings) or fail to
make money on an investment. A fund's investment objective and its holdings are
influential factors in determining how risky a fund is. Reading the prospectus will
help understand the risk associated with particular fund.
Generally speaking, risk and potential return are related. This is the risk and
return trade-off. Higher risks are usually taken with the expectation of higher
returns at the cost of increased volatility. While a fund with higher risk has the
potential for higher return, it also has the greater potential for losses or negative
returns.
Page | 11
Different mutual fund categories have inherently different risk characteristics and
should not be compared side by side. A bond fund with below-average risk should
not be compared to a stock fund with below average risk.
Mutual funds face risks based on the investments they hold. For example, a bond
fund faces interest rate risk and income risk. Bond values are inversely related to
interest rates. If interest rates go up, bond values will go down and vice versa.
Bond income is also affected by the change in interest rates. Bond yields are
directly related to interest rates falling as interest rates fall and rising as interest
rise. Income risk is greater for a short-term bond fund than for a long-term bond
fund.
Similarly, a sector stock fund (which invests in a single industry, such as
telecommunications) is at risk that its price will decline due to developments in its
industry. A stock fund that invests across many industries is more sheltered from
this risk defined as industry risk.
Following is a glossary of some risks to consider when investing in mutual funds.
Call Risk. The possibility that falling interest rates will cause a bond issuer
to redeem or call its high-yielding bond before the bond's maturity date.
Country Risk. The possibility that political events (a war, national
elections), financial problems (rising inflation, government default), or
natural disasters (an earthquake, a poor harvest) will weaken a country's
economy and cause investments in that country to decline.
Credit Risk. The possibility that a bond issuer will fail to repay interest and
principal in a timely manner. Also called default risk.
Currency Risk. The possibility that returns could be reduced for Americans
investing in foreign securities because of a rise in the value of the U.S. dollar
against foreign currencies. Also called exchange-rate risk.
Income Risk. The possibility that a fixed-income fund's dividends will
decline as a result of falling overall interest rates.
Industry Risk. The possibility that a group of stocks in a single industry
will decline in price due to developments in that industry.
Inflation Risk. The possibility that increases in the cost of living will reduce
or eliminate a fund's real inflation-adjusted returns.
Interest Rate Risk. The possibility that a bond fund will decline in value
because of an increase in interest rates.
Manager Risk. The possibility that an actively managed mutual fund's
investment adviser will fail to execute the fund's investment strategy
effectively resulting in the failure of stated objectives.
Market Risk. The possibility that stock fund or bond fund prices overall will
decline over short or even extended periods. Stock and bond markets tend
to move in cycles, with periods when prices rise and other periods when
prices fall.
Page | 12
Page | 13
Case Study
Following are the data on five mutual funds:
Fund
A
B
C
D
E
Return (%)
14
12
16
10
20
Beta
1.5
0.5
1.0
0.5
2
Fund
Return (%)
Beta
A
B
C
D
E
14
12
16
10
20
6
4
8
6
10
1.5
0.5
1.0
0.5
2
Treynor measure
(Rf Rs)/Beta
(14% - 3%)/1.5 = 7.33333
(12% - 3%)/0.5 = 18
(16% - 3%)/1.0 = 13
(10% - 3%)/0.5 = 14
(20% - 3%)/2 = 8.5
Ranking:
Fund
Return (%)
Beta
B
D
C
E
A
12
10
16
20
14
4
6
8
10
6
0.5
0.5
1.0
2
1.5
Treynor measure
(Rf Rs)/Beta
(12% - 3%)/0.5 = 18
(10% - 3%)/0.5 = 14
(16% - 3%)/1.0 = 13
(20% - 3%)/2.0 = 8.5
(14% - 3%)/1.5 = 7.33333
Page | 14
Q. 2). What is the differential return if the market return is 13%, the
standard deviation of return is 5%, and standard deviation is the
appropriate measure of risk?
Answer:
Page | 15
Assignment C
Q. 1). A mutual fund is not
a)
b)
c)
d)
Portfolio diversification
Risk reduction
Large volume of trades. ()
None of the above
Q. 4). Equity Linked Savings Scheme does not have which of the following
features?
a) It entitles the unit holder to tax rebate
b) The investment is locked in for 3 years
c) A minimum stated level of investments is made in equity and equity
related instruments
d) None of the above. ()
Q. 5). A close ended mutual fund has a fixed
a)
b)
c)
d)
NAV
Fund Size. ()
Rate of Return
Number of Distributors
Q. 6). Of the following fund types, the highest risk is associated with
a)
b)
c)
d)
Balanced Funds
Gilt Funds
Equity Growth Funds. ()
Debt Funds
Page | 16
A Trust. ()
A Private limited company
An asset management company
A trustee company
Q. 11).
In case of merger of two AMC, 75% of the unit holders have to
approve the merger in case of
a)
b)
c)
d)
Q. 12).
a)
b)
c)
d)
Page | 17
Q. 13).
a)
b)
c)
d)
Q. 14).
An offer document contains an AMCs investor grievances history
for the past
a)
b)
c)
d)
1 fiscal year
2 fiscal year
3 fiscal year ()
Six months
Q. 15).
For scheme to be able to change its fundamental attributes, the
fund managers must obtain the consent of
a)
b)
c)
d)
Q. 16).
SEBI does not require the following to be included in the offer
document issued by a mutual fund
a)
b)
c)
d)
Q. 17).
Mutual funds do not justify the need for paying commission to
agents when the investors skip out of the scheme before a specified period.
In India this practice is adopted by
a)
b)
c)
d)
Q. 18).
a)
b)
c)
d)
Q. 19).
a)
b)
c)
d)
Distributors or agents
Can distribute several mutual funds simultaneously. ()
Cannot appoint sub-agents or sub-brokers
Should be only individuals not companies or banks
Should not be an employee or associate of the AMC
Q. 20).
If a charitable trust approaches a distributor with an application
for investment in a mutual fund, the distributor should
a)
b)
c)
d)
Q. 21).
One of your friends who have invested in a mutual fund is about
to get Canadian citizenship. What would you advise?
a)
b)
c)
d)
Q. 22).
The
prescriptions
AMFI
code
of
ethics
does
not
cover
the
following
Page | 19
Q. 24).
A Debt fund distributes 10% dividend. How much tax does the
investor have to pay on this dividend?
a)
b)
c)
d)
Q. 25).
a)
b)
c)
d)
10%
12%
20%
None. ()
Contingent Deferred Sales Charge (CDSC)
Is higher for investors who stay invested in the scheme longer
Is lower for investors who stay invested in the scheme longer. ()
Is the same for all investors irrespective of how long they stay invested
Is not allowed to be charged to mutual fund investors in India
Q. 26).
The amount required to buy 100 units of a scheme having an
entry load of 1.5% and NAV of Rs.20 is:
a)
b)
c)
d)
Rs.2000
Rs.2015
Rs.1985
Rs.2030 ()
Q. 27).
A high P/E multiple of a fund in comparison to average market
multiple could be of
a)
b)
c)
d)
Value fund
Growth fund. ()
Balanced fund
Equity diversified fund
Q. 28).
A company whose earnings are strongly related to the state of
economy is a
a)
b)
c)
d)
Q. 29).
a)
b)
c)
d)
Economy stocks
Cyclical Stocks. ()
Value Stocks
Growth stocks
A value manager does not look for
Stocks that are currently undervalued in the market
Stocks whose worth will be recognized by the market in the long term
High current yield. ()
Long term capital appreciation
Page | 20
Q. 30).
a)
b)
c)
d)
Q. 31).
a)
b)
c)
d)
Q. 32).
extent of
a)
b)
c)
d)
Q. 33).
a)
b)
c)
d)
Q. 34).
a)
b)
c)
d)
As per SEBI, mutual funds can borrow for short term to the
Q. 35).
A fund's weekly average net assets are Rs. 1000 Crore. What is
the limit on the expenses of the fund?
a)
b)
c)
d)
Page | 21
Q. 36).
A fund's investments at market value total Rs.700 Crores, Total
liabilities stand at Rs.50 lacs and the number of units outstanding is 28
Crores. What is the NAV?
a)
b)
c)
d)
Q. 37).
true?
a)
b)
c)
d)
Q. 38).
a)
b)
c)
d)
Q. 39).
a)
b)
c)
d)
Rs.30.19
Rs.24.98 ()
Rs.32.15
Rs.40.49
For valuation of traded securities, which of the following is not
The security is valued at the last quoted price
The security is valued on the basis of earnings capitalization. ()
Marking to market is applied
If the security has not been traded on valuation date, the trading price
on any previous date may be used, provided that date is not more than
30 days prior to valuation date.
A high portfolio turnover in an equity fund means
The fund is very active in market
Transaction costs are high
The fund may be quite risky
All of the above. ()
An actively managed equity fund expects to
Be able to beat the benchmarks. ()
Earn the same returns as the benchmark
Have no benchmarks
Under-perform when compared with the benchmark
Q. 40).
An Investor buys one unit of a fund at an NAV of Rs.20. He
receives a dividend of Rs.3 when the NAV is Rs. 21. The unit is redeemed at
an NAV of Rs.22. Total Return is
a)
b)
c)
d)
25.71% ()
Rs. 27.51
21.27%
Rs. 21.75%
Page | 22