Amfi

AMFI
Study Material
Name of Candidate: _______________________________
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1
Index
Contents Page No.
Concept & Role of Mutual Fund 04
Stages in mutual fund industry 07
Types of Mutual Funds 10
Fund Structure & classification 16
Fund Merger & scheme takeover 24
Legal & regulatory environment 27
Self Regulatory environment 32
Investor rights & obligation 35
Offer Document 40
Offer documents – contents 43
Key Information Memorandum 48
Who can invest? 51
Distribution channels 54
Sales Practices & SEBI regulations 57
Accounting NAV 61
NPA 67
Valuation of scheme portfolio 70
Investor Services 74
Equity Portfolio Management 78
Debt portfolio Management 83
Investment policy & restrictions 88
Measuring & evaluating Mutual fund performance 91
Financial Planning 96
2
Life cycle & Wealth cycle 100
Financial strategy for investors 102
Asset Allocation principles 105
Right investment products for investors 108
Risk in Investing 111
Developing a model portfolio 115
Fund selection 118
Business Ethics 123
Charges
3
Concept & Role of Mutual Funds
Objective –
Understanding what mutual funds are.
Understanding how Mutual funds work.
The Mutual fund flow chart
Concepts & Contents

Explanation of Mutual Funds.
How do mutual funds work?
Expected Marks – 3 – 5 marks
4
Concept & Role of Mutual Fund
Mutual Fund concept & working
• A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal.
• The money thus collected is then invested in capital market instruments such as shares, debentures
and other securities.
• The income earned through these investments and the capital appreciations realized are shared by its
unit holders in proportion to the number of units owned by them.
• Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity
to invest in a diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operation Flow Chart
5
Question Time
1. A mutual fund is owned by

a. The Govt of India
b. SEBI
c. All its investors
d. AMFI
2. A mutual fund is not

a. Owned jointly by all investors
b. A company that manages investment portfolios of high net worth individuals
c. A pool of funds to purchase securities on behalf of investors
d. A collective investment vehicle
Answers: 1(c), 2 (b)
6
Stages in Mutual Fund industry
Objective –
Understanding the evolution of mutual funds
The changes the industry has seen since inception
Concepts & Contents

Various stages in Mutual fund industry
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Stages in mutual fund industry
Phase 1 Growth of Unit Trust of India – 1964 – 1987

• In 1963 UTI was established as an Act of Parliament.
• US -64, the first open ended mf
• Largest investor base
Phase 2 Entry of Public Sector Funds 1987- 1993

• 1st SBI MF in Nov. 1987
Phase 3 Emergence of private funds 1993-1996

• 1993-1994 five new players
• 1994-1995 six new players
Phase 4 Growth & SEBI regulations 1996- 1999

• SEBI Mutual Fund regulation s 1996 was adopted
• UTI adopted SEBI regulations.
• Budget of 1999 exempted income tax at the hands of the investors
Phase 5 Emergence of a large & uniform industry 1999- 2004

• In Feb 2003, the UTI Act was repealed, thus creating UTI MF, & it adopted the same structure as
any other MF, that of a Trust & AMC.
• All new schemes were now SEBI approved.
• 1999 to 2005, the size of the industry doubled. 68000 crores to 1, 50,000 crores.
Phase 6 Consolidation & Growth 2004 onwards
8
Question Time
1. _________ was the year SEBI Regulations for Mutual Funds was formulated.
a. 1992
b. 1993
c. 1995
d. 1996
2. Name the oldest Mutual Fund in India

a. UTI Mutual Fund
b. SBI Mutual Fund
c. Kothari Pioneer Mutual Fund
d. Reliance Mutual Fund
3. The UTI act was repealed in the year

a. 1996
b. 1994
c. 1993
d. 2003
4. What regulation came in the year 2003

a. All new schemes have to be SEBI approved
b. SEBI Mutual Fund regulation was adopted
c. The UTI Act was repealed
d. Income tax exempted at the hands of the investors
5. UTI was established as

a. An act of parliament
b. By the Finance Ministry
c. As a subsidiary of RBI
d. Unit selling & buying company
6. The entry of mutual funds in India was initiated by

a. Public Sector Banks.
b. Private Sector mutual funds.
c. Unit Trust of India.
d. Mutual funds set up by insurance companies.
7. After UTI, the first mutual funds were started by

a. private sector banks
b. public sector banks
c. financial institutions
d. non-banking finance companies
8. The Mutual fund industry began in the year

a. 1992
b. 1963
c. 1964
d. 1989
Answers :- 1 (d), 2(b), 3(d), 4(c), 5(a), 6(c), 7(b), 8(b)
9
Types of Mutual Fund
Objective –
Understanding the various types of Mutual funds
The various difference based on structure, risk, return, charges etc.
Concepts & Contents

Types of Mutual funds – based on structure, risk, return
Classification of Mutual Funds – Financial & physical assets
Equity, Debt, Money market – Financial assets
Commodities, Real estate – Physical assets
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Types of Mutual Funds
In accordance with their structure

• Open & Close ended funds
 Open ended funds are ones that sell & repurchase units at all times. The Asset under
management keeps fluctuating depends investors buying or selling units. An AMC might stop
selling units if the fund size becomes too big to manage. However repurchase of units is done at
all times.
 Close ended funds are one that make a one time sale of units. After the offer closes CEF’s do not
let the investors buy directly from the fund. To provide liquidity to the investors, these funds are
traded in the stock markets. Some times the fund house also offers buy backs at regular
intervals. SEBI regulations state that all fund houses should need to give one of the 2 exit options
to the customers.
• Load & No load funds

There are three ways to charge a customer to recover the marketing expenses of a new fund
 At the time of entry, by deducting a specific amount fro the contribution. (Entry Load)
 By charging the fund a fixed amount during the tenure of the fund, for a specified period.
(deferred load)
 At the time, the investor is leaving the fund, by deducting specific amount from the proceeds
payable to him. (exit load)
Funds that charge any of the above are termed as load funds or else as no-load funds.
• Tax exempt & non tax exempt funds.

 Some Mutual Funds offer tax benefits under Section 80C. Investors are not able to withdraw
money for 3 years. They are open ended funds, however the three year lock in is because of the
tax benefits received by the investor.
Other classifications.
• By nature of investments
 Equity, Bond, money market, liquid funds invest in financial assets
 Precious metal funds, real estate funds invest in physical assets.
• By nature of investment objective

 Growth funds invest for medium to long term capital appreciation.
 Income funds invest to generate regular income, rather than capital appreciation.
 Value funds invest in equities that are currently under valued, & whose value might be unlocked
in future.
• By nature of risk profile.

 Equity funds have a greater risk of capital loss, while they look for greater returns.
 Debt funds seek to protect the capital while capital appreciation takes place at a slower rate.
 Liquid funds seek to follow the policy of safety first & invest in short term securities.
• Money Market & liquid funds.

 Considered to the safest of all investments.
 Invest in debt securities of short term (less than 1 year maturity)
 Major strengths – liquidity & safety of principal due to short duration.
• Gilt Funds
 Medium to long term maturity.
 Little risk of default as issued by government.
 Face interest rate risk.
• DEBT Funds (income funds)

 Invest in debt instruments issued by the government, private companies, banks, financial
instruments & other entities like infrastructure companies, utilities etc.
 Target low risk – stable income.
 Invest in long term securities.
 They do not target long term appreciation but look for current income. They distribute a
substantial part of their surplus to investors.
• Equity Funds
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 Offer greater risk than debt funds, as well as offer higher potential for growth.
 Subject to equity price fluctuation in the markets. Price movements are caused by many factors
like political, social as well as economic.
• Hybrid Funds
 Funds seeking to balance equity & debt securities are termed as hybrid.
• Balanced funds
 Has a portfolio comprising of debt instruments, convertible securities, and preference & equity
shares.
 Aim is to attain the objectives of income, moderate capital appreciation, & preservation of capital
& are ideal for investors with a conservative & long term orientation.
• Growth & Income funds.

 Strike a balance between capital appreciation & income for the investor.
 Portfolio comprise of companies offering good dividends & those with a potential of higher capital
appreciation.
• Commodity Funds.
 Specialize in investing in different commodities directly or through shares of commodity
companies or though commodity futures contract.
 May invest in a single commodity or a commodity group like edible oils, while diversified
commodity will spread their assets over many commodities.
 Precious Metal funds are an ideal example.
• Real Estate Funds.

 Invest in real estate or in companies dealing with real estate.
• Exchange traded Funds.

 Trade like a single stock on the stock exchange
• Fund of Funds.
 Invest in other Mutual Fund Schemes. Fund of funds are not allowed to invest in other fund of
fund.
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Types of debt funds.
Diversified debt fund:-

 Invests in all types of debt securities issued by entities across all industries & sectors.
 Benefit of risk reduction though diversification.
Focused debt fund:-

 Have a narrower approach; invest in sector, offshore & specialized debt funds.
 Higher risk than diversified debt funds.
 Eg. Invest in corporate debentures, tax free bonds or municipal bonds.
High yield debt funds:-

 Debt funds invest in securities issued by borrowers who are rated by credit rating agencies & are
considered to be ìnvestment grade`.
 These funds target securities which carry a higher risk, as they give a higher return. These are
considered risky as they are exposed to higher default risk.
Assured return funds:-

 Assured returns are offered to the investor. (An Indian variant)
 Explicit guarantee is required by the guarantor.
Fixed term plan series:-

 Mutual funds can either be open or close ended. In India MF's have developed an innovative
middle approach.
 A series of plans are offered & units are issued at frequent intervals for short plan durations.
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Types of equity funds
• Aggressive Growth funds:

 Target maximum capital appreciation.
 Invest in less researched or speculative shares & may adopt speculative investment strategies to
attain their objectives of high returns.
• Growth funds
Invest in companies whose earnings are expected to rise above average.
Target capital appreciation over a three to five year span.
Less volatile than aggressive growth funds.
• Speciality funds
Have narrow portfolio orientation & invest in only companies that meet predefined criteria.
Sector Funds:
Invest in a particular sector, like pharma, power, IT etc.
Since they are not diversified in nature, they carry a higher risk than growth funds.
Foreign Securities Fund.
Invest in equities of one or more countries.
Advantageous because it offers greater diversification
Carries inherent risk of foreign exchange rate risk.
Performance depends on the economic conditions of countries invested in.
Mid-Cap or Small- Cap funds:
Invest in companies that have a lower market capitalization compared to blue chip companies.
More volatile as the scripts are not freely traded.
Option income funds.
• Diversified Equity Funds

Invest majority portion of their funds in the equity market & a small portion in liquid money market
securities.
Invest in equity across sectors, definitely more than one sector.
Have lower risk than growth funds because they are diversified in nature.
• Equity linked saving schemes

Offer tax benefits under section 80 C
Lock in period of 3 years.
• Equity index funds

 Track the performance of a specific stock market index
 Objective of the fund is to out perform the index.
 There can be sector specific, like pharma sector index fund. These deal with only pharma
companies which form a part of the index.
• Value index funds.

 Invest in companies with good or improving profit prospects, aiming primarily at capital
appreciation.
 Seek out fundamentally strong companies, whose shares are currently under valued in the
market.
 Have stocks which are selling at lower price earning ratios.
• Equity income or dividend yield fund.

 Equity funds designed to give investors a high level of current income along with some steady
capital appreciation.
 Invest mainly in companies giving a high dividend & less price fluctuation.
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Question Time:
1. A close-ended mutual fund has a fixed

a. NAV
b. Fund Size
c. Rate of Return
d. Number of distributors
2. A gilt fund is a special type of fund that invests

a. In very high quality equity only
b. In instruments issued by companies with a sound track record
c. In short term securities
d. In government securities only
3. Of the following fund types the highest risk is associated with

a. Balance Funds
b. Gilt Funds
c. Equity Growth Funds
d. Debt Funds
4. The NAV of a Mutual Fund

a. Is always constant
b. Keeps going up at a steady rate
c. Fluctuates with market price movements
d. Cannot go down at all
5. An open ended Mutual fund is one that has

a. An option to invest in any kind of security
b. Units available for sales and purchase at all times
c. An upper limit on its NAV
d. A fixed fund size
6. An investor in a close ended mutual fund can get his / her money back by selling his/ her units
a. Back to the fund
b. To a special trust at NAV
c. On a stock exchange where it is listed
d. To the agent through which he / she subscribed to the units of the
fund
7. Units from an open ended mutual fund are bought from

a. on the stock exchange
b. The fund itself
c. AMFI
d. The distributor
Answers :- 1 (b), 2(d), 3(c), 4(c), 5(b), 6(c), 7(b)
15
Fund structure & classification
Objective –
Understanding the various participants that constitute a fund.
The various objectives, functions, duties & responsibilities
Concepts & Contents

Legal structure of Mutual Funds
The various components, hierarchy & their workings
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Fund Structure & classification
Legal Structure of Mutual Fund
Structure in India
Sponsor
Trustees
Asset Management Company
Custodian / Depository Participant
R & T Agent
Distributors
Bankers
Mutual Fund Structure in USA

Mutual Funds are set up as Investment companies. It can be a corporation, partnership or a unit
investment trust. Only Open ended funds are called mutual funds. They are regulated by the
‘Securities Exchange commission.
Mutual Fund structure in UK

Two alternative structures
Open ended funds – are in form of UNIT trusts – regulated by Securities & Investment
board.
Close ended funds – are in form of corporate entities although called Investment Trusts.
Sponsor
Trustee
Custodian / Asset Management

Depository Participant Company
R & T Agent Bankers Distributors
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Sponsor
Any person acting alone or in combination with another corporate establishes a mutual fund. He is like a
promoter of a company as he gets the fund registered with SEBI.
A sponsor will form a trust & appoint a board of trustees.

A sponsor will also generally appoint an Asset Management company as fund managers.
The sponsor, directly or acting though the trustees will also appoint a Custodian to hold the fund assets.
As per SEBI guidelines a Sponsor must

• Contribute 40% of the net worth of the AMC.
• Possess a sound financial track record over 5 years prior to the registration.
Chapter 2 of SEBI (MF) regulations 1996 describes the eligibility criteria of sponsor.
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Mutual funds as a Trust.
• Constituted as a public trust under the Ìndian Trust Act of 1882

• Mutual fund is a pass though vehicle. Under the Indian trust act the fund has no independent legal
capacity. It is the trustees who have the legal capacity & therefore all acts in relation to the trust are
taken on its behalf by the trustees.
• The trustees hold the unit holders money in fiduciary capacity. I.e. The money belongs to the unit
holders & is entrusted to the fund for investment purpose.
• Investors or unit holders are beneficial owners of the investments held by the trust.
Trustees
• Board of trustees is governed by the Ìndian Trust Act 1882` it must also comply with the
`Companies Act of 1056`
• As an independent body acts as protector of unit holders money.
• Trustees do not manage the portfolio of securities; they appoint an ASSET management company.
• The trust is created though a trust deed that is executed by the fund sponsor in favour of the
trustees.
• 3rd schedule of the SEBI MF regulations specify the contents of the trust deed
• The trust deed is to be stamped & registered with the Indian registration Act & registered
with SEBI
• Minimum 2/3 of the trustees are independent directors, based on SEBI guidelines.
• Trustees must insure investors interests are safe guarded & the AMC’s operations are along
professional lines.
Rights of trustees
• Trustees appoint the AMC with the prior approval of SEBI
• All schemes, floated by the AMC, must be approved by the trustees.
• Right to request any necessary information from the AMC.
• Right to remedial action if they believe the conduct of the AMC is not in accordance with
SEBI regulations. Right to dismiss the AMC, with approval of SEBI.
• ANY shortfall in the net worth of AMC is made up by the AMC.
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Asset Management Company.
• Acts as an investment manager of the trust.

• In the name of the trust, float & manage different investment schemes.
• Net worth of Rs. 10 crores at all times.
• 50% of directors on the AMC board are independent.
• AMC cannot act as a trustee of any other mutual fund.
• AMC must always act in the interest of unit holders & report to the trustees with respect to its
activities.
Obligations of the AMC & its directors

• Investment of funds in accordance with SEBI regulations & trust deed.
• AMC takes responsibility for the acts of the employees & others whose services it has procured.
• They are answerable to the trustees & must submit quarterly reports to them on AMC activities &
compliance with SEBI regulations.
• If it uses the services of Sponsor employee or associate, the AMC must make appropriate disclosure
disclosures to unit holders with regard to amount of commission or brokerage paid.
• They cannot undertake any other activity conflicting with managing the fund.
• They can float schemes with the prior approval of Trustees & SEBI.
• They will make the required relevant disclosures to the investors in areas of AMC operations. Like
calculating the NAV, portfolio details, half yearly accounts of the fund etc.
• File details of security transactions by AMC directors with the trustees on a quarterly basis. They
would report only those transactions where the value is more than Rs. 1 lakh.
NAV to be updated on AMFI’s website by 8:00 pm everyday & the month end assets under management
figure on the 1st working day of the next month.
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Custodian & Depositories.
• Custodian is appointed by the board of trustees for safe keeping of physical securities.
• Mutual funds are in a business of buying & selling securities. A custodian is appointed by the board of
trustees for safe keeping of physical securities or participating in any clearing system though
approved depository companies on behalf of the mutual fund in case of dematerialized securities.
• Mutual funds are dematerialized securities holdings are held in a depository though a depository
participant.
• Chapter 4 of SEBI (MF) regulations 1996 Custodian should be an entity independent of the sponsor &
is required to be registered with SEBI.
Bankers
• A funds banker plays an important role with respect to its financial dealings by holding its bank
accounts & providing it with remittance services.
Registrars & transfer agents.

• Registrars & transfer agents are responsible for issuing & redeeming units of the mutual fund &
providing other related services such as preparation of transfer documents & updating investor
records.
• A fund may carry out this activity in house & charge the scheme for the same or appoint an outside
transfer agent.
• Buying & selling of units, switching from one fund to another, systematic investment or
withdrawals, recording nominations & bank details are all part of the registrars & transfer
agent’s job role.
Distributors.
• A fund to sell units across a wide retail base of individual investors an established network of
distributors is essential.
• AMC’s usually appoint distributors (agents, brokers intermediaries)
• Distributors need to have an AMFI registration number to distribute mutual funds.
• Distributors normally act on behalf several mutual funds simultaneously.
Distributors can appoint several sub brokers under him.
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Question Time
1. The AMC of a mutual fund cannot

a. undertake advisory services or financial consulting
b. cannot invest the funds in government paper
c. act as a Trustee of more than one mutual fund
d. cannot invest the funds in securities
2. The Board of Trustees of a mutual fund

a. Act as protector of investors interests
b. Directly manage the portfolio of securities
c. Do not have the right to dismiss the AMC
d. Cannot supervise and direct the working of the AMC
3. Distributors or agents
a. can distribute several mutual funds simultaneously
b. cannot appoint sub-agents or sub-brokers
c. should be only individuals not companies or banks
d. should not be an employee or associate of the AMC
4. The custodian of a mutual fund

a. is appointed for safekeeping of securities
b. need not be an entity independent of the sponsors
c. does not give or receive deliveries of physical securities
d. All of the above
5. Issuing and redeeming units of mutual fund is the role of

a. the custodian
b. the transfer agent
c. the trustees
d. the bankers
6. The trust that manages a mutual fund is appointed by

a. The Finance Ministry
b. R.B.I.
c. SEBI
d. The sponsor of that mutual fund
7. The fund sponsors should have a sound financial track record of

a. 7 years
b. 12 months
c. 5 years
d. 3 years
8. The sponsor of a mutual fund may be compared to

a. a director in a company
b. the Chief Executive of a Company
c. Promoter of a company
d. An equity shareholder in a Company
9. The fund sponsor has to contribute

a. nothing to the AMC
b. the total net worth of the MAC
c. at least 40% of the AMC’s net worth
d. exactly 50%
10. The AMC and directors are answerable to

a. Stock Exchanges
b. The Board of Trustees
c. Agents and distributors
d. Stock Brokers
11. Transfer Agents of mutual fund are not responsible for

a. issuing and redeeming units of the mutual fund
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b. updating investor records
c. preparing transfer documents
d. investing the funds in securities markets
12. A transfer in the management of a close-ended scheme does not require the consent of
a. unit holders with 75% voting rights
b. SEBI
c. Trustees
d. AMC
13. The net worth of an asset management company should be

a. greater than Rs. 100 Crores
b. can be decided by the Sponsor
c. should be at least Rs. 10 Crores at all times
d. should be greater than 10 Crores
14. The role of an AMC is to act as

a. promoters
b. investment managers
c. distribution agents
d. regulators
15. The AMC is required to be approved & registered with SEBI with a net worth of –
a. Rs. 20 crores
b. Rs. 100 crores
c. Rs. 50 crores
d. Rs. 10 crores
16. The Trustees appoint the AMC with the prior approval of
a. SEBI
b. Stock exchange
c. AMFI
d. None of the above
17. A mutual fund is owned by

a. SEBI
b. Investors
c. Govt. of INDIA
d. AMFI
18. A mutual fund is constituted as

a. Investment company
b. Company
c. Trust
19. What is the duty of the custodian?

a. Marketing various AMC schemes
b. Handling securities in terms of physical delivery & eventual safe keeping
c. Issuing & redeeming units
Answers : 1(c), 2(a), 3(a), 4(a), 5(b), 6(d), 7(c), 8(c), 9(c), 10(b), 11(d), 12(d), 13(c), 14(b), 15(d),
16(a), 17(b), 18(c), 19(b)
23
Fund merger & scheme takeover
Objective –
Understanding the merger & acquisition by mutual funds
The various legalities, compliance issues & sanctions required.
The role of Trustees, Investors & regulators.
Concepts & Contents

How mutual funds & schemes, merger or can be acquired.
The process & sanctions required.
24
Fund Mergers & scheme takeovers.
A fund’s sponsors, trustees & fund managers are all key people. Any change can impact the performance
of the fund or change the very character of the fund or its schemes.
• The AMC managing the scheme may be taken over by another set of sponsor
• AMC may merge with another AMC, the AMC managing schemes of both AMC’s.
• The trustees may decide to change the AMC & hand over the AMC to a new fund manager.
• The schemes could be taken over by another set of trustees.
• The schemes may be merged with the schemes of the same fund managed by the same trustees or
other schemes managed by the AMC
Mergers & Acquisitions are now a common activity in many businesses. It leads to over all efficiency
through improved skills, lower costs, and better competitor position.
• Since AMC’s are companies under the preview of the Indian companies act,
• Provisions of the companies act apply.
• Approval of the specific high court is needed.
• Merger to be approved by SEBI.
• Consent of unit holders with 75% voting rights needed. Unit holders who do not give their
assent have an option to exit the scheme, without paying any exit load.
• Investors must be informed individually & though newspaper advertisements.
Key documents such as Trust deed, offer documents, AMC agreement & memorandum of articles of the
AMC may require amendments.
25
Question Time
1. To transfer the management of a scheme from 1 AMC to another, the consent of the following is
required
a. SEBI
b. Unit holders
c. Both SEBI and unit holders
2. A change in the following key people does not materially impact the performance of the fund
a. fund sponsors
b. trustees of the fund
c. fund Manager
d. members of the AMFI Committee
3. For merger to take place approval of _______________ is required

a. SEBI
b. High court
c. Both SEBI & high court
4. __________ % of unit holders need to give their approval before a merger takes place
a. 75%
b. 51%
c. 50%
d. 76%
5. How are investors informed about the merger or acquisition?

a. Informed individually
b. Advertisement sent in one national & one local paper
c. Both (A) & (B)
d. Investors can visit the AMFI or AMC website.
6. Does the memorandum of article need to change when a merger takes place?
a. No
b. Yes
c. Depends on the AMC
d. Only if SEBI permits
7. Can a scheme of one AMC be taken over by another AMC?

a. Yes
b. No
Answers: 1(c), 2(d), 3(c), 4(d), 5(c), 6(b), 7(a).
26
Legal & regulatory environment
Objective –
Understanding the various regulators.
The need & various controls & reporting structure among the various departments.
Understanding the powers & functions of each department.
The legal structure & independent judiciary authorities
Concepts & Contents

Regulators in India – SEBI & RBI
Ministry of finance, & the legal government departments that Mutual funds deal with.
The stock markets & mutual funds agreements or tie ups.
Office of public trust.
27
Legal & regulatory environment
Regulators in India.
SEBI (Securities & exchange board of India)

`The capital market regulator`
• Constituted as an act of parliament in 1992.
• Apex regulator of all entities that either raise funds in the capital market or invest in capital market
securities such as shares & debentures listed on the stock exchange.
• Mutual funds have emerged as an important institutional investor.
• Entities regulated by SEBI are:-
 companies which issue equity or debt,
 share registrars,
 custodians,
 bankers in the primary markets,
 stock exchanges,
 brokers in the secondary market &
 foreign and institutional investors,
 Off shore mutual funds with dedicated Indian Mutual funds or venture capital investors.
RBI (Reserve bank of India)

`The money market regulator`
• Issues concerning the ownership of bank owned mutual funds fall under the regulatory ambit of the
RBI. Market related & investor related activities are supervised by SEBI.
• RBI controls call market access & the money market instruments.
• Liquid funds that invest in money market instruments are governed by SEBI.
• Liquid funds can no longer invest in call money market.
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Ministry of Finance.
• Is charged with implementing government policies, ultimately supervises both RBI & SEBI
• Ultimate policy making & supervising entity.
• Securities Appellate tribunal has been created to provide the apex appeal mechanism for any decision
taken by SEBI.
• Formed in 2003.
• Securities Appellate tribunal (SAT) works as an independent judicial authority.
Company Law board, Department of company affairs & registrar of companies.

• Mutual fund asset management companies are registered under the `Companies Act of 1956`
• The primary interface is registrar of companies, who is supervised by department of company affairs,
which forms a part of company law board.
• All AMC accounts and records are filed with ROC.
• Department of company affairs’ formulates & modifies regulations relating to companies. It reserves
the right to prosecute any company director for failure to comply with any provisions of the
company’s act.
• The company law board is the apex regulatory authority under the Companies Act.
• Company Law Bench is the appellate authority for corporate offences.
• Any person aggrieved by the decision of Company Law bench may appeal to the High court.
• Department of company affairs has legal powers to prosecute company directors for :-
• Failure to comply with any of the provisions of company law.
• Non re-payments of deposits
• Fraud & other offences.
Stock exchanges
• Are self regulatory organizations supervised by SEBI?
• Many close ended schemes are listed on one or more stock exchanges. This is done though a listing
agreement between the fund & the stock exchange.
• AMC’s do not get directly involved in the transactions. The registrar’s handle it.
Office of public trust

• Mutual funds being public trusts are governed by the Indian Trust Act of 1882.
• Board of trustees is accountable to the office of the public trustees who in turn reports to the Charity
commissioner.
Unit trust of India

1. Formed by an act of parliament in 1963.
2. UTI Act initiated the entry of mutual funds in India
3. All UTI schemes were functionally under the UTI act. All such guaranteed schemes have been wound
up & now all UTI schemes are under the UTI mutual fund, which is under the regulatory
purview of SEBI.
29
Questions Time
1. The Highest authority among the following is the
a. SEBI
b. Company Law Board
c. RBI
d. Ministry of Finance
2. The accounts and all other records of an AMC are filed with
a. AMFI
b. Registrar of Companies
c. Agents Association
d. UTI
3. The entity that SEBI does not regulate is

a. shares registrars
b. mutual funds
c. stock exchanges
d. non-banking finance companies
4. Bank owned Mutual funds are supervised by

a. SEBI
b. RBI
c. Jointly by SEBI & RBI
d. AMFI
5. If the Directors of an AMC commit fraud, Unit Holders investments’ cannot be protected by the
Department of Company Affairs and the Company Law Board
a. True
b. False
6. Shortfalls in the case of assured returns are met

a. by sponsors of such schemes
b. only if the offer document specifically provided such a guarantee a named sponsor
c. the Government of India
d. AMFI
7. Money Market securities are regulated by

a. RBI
b. SEBI
c. Ministry of Finance
d. Scheduled commercial bank
8. How was SEBI formed & in which year?

a. BY the ministry of Finance in 1948
b. Stock exchanges & AMFI in 1992
c. As an act of parliament in 1992
d. BY the ministry of Finance in 1992
9. Who is the regulator for custodians & share registrars?

a. Ministry of Finance
b. SEBI
c. RBI
10. Can liquid funds invest in call money markets?

a. Yes
b. No
d. Only with SEBI approval
11. Name the independent judicial authority under the Ministry of Finance?
a. Company Law board
b. Company law bench
c. Financial court
d. Securities Appellate Tribunal
30
12. Department of company affairs can prosecute company directors for –
a. Failure to comply with any provision under the company’s act
b. Non repayment of deposit
c. fraud & other offences
d. All of the above
13. How are close ended funds listed on the stock exchange?
a. AMC’s have a listing agreement with stock exchanges
b. They are not stocks, hence not listed.
c. By the registrars
d. As small cap stocks
14. Who handles the investor’s transaction when they sell or buy close ended funds from the stock
market?
a. The Asset management company
b. the stock broker
c. The registrars
d. The stock exchange
Answers: 1(d), 2(b), 3(d), 4(c), 5(a), 6(a), 7(a), 8(c), 9(b), 10(b), 11(d), 12(d), 13(a), 14(c)
31
Self regulatory organization
AMFI
Objective –
Understanding what a Self regulatory organization
The organizations they exert their authority over.
What is AMFI & what are its objectives
Concepts & Contents

The powers, functions & duties of self regulatory organizations.
The main objectives of AMFI, its governance.
32
Self regulatory organizations
• A self regulatory organization is an association representing a group of market participants

which is specially empowered by the apex regulatory authority to exercise pre defined
authority over the regulation of their members.
• A stock exchange is an entity that can regulate its own broker members in a certain limited
way, under the overall regulatory supervision of SEBI.
AMFI
• Association of Mutual Funds in India – not a self regulatory organization.
• Incorporated in 1995, with the objective of representing the mutual fund industry collectively.
• Its main objectives are:-

 To promote the interests of mutual funds & unit holders & interact with SEBI/
RBI/regulators/Govt.
 To set & maintain ethical, commercial & professional standards in the industry & to recommend &
promote best business practices.
 To increase public awareness & understanding of the concept & working of mutual funds in the
country. To undertake investor awareness programs.
 To develop a cadre of well trained distributors& to implement a program of training of training &
certification.
• Board of directors elected from the mutual fund members governs AMFI.
• AMFI, though not a SRO does register fund distributors, test & verify their competency.
AMFI has the power to deny registration to distribution for failing the test or violating the AMFI code of
conduct (AGNI)
33
Question Time
1. Which of the following is a self- regulatory authority?

a. AMFI
b. SEBI
c. RBI
d. Bombay Stock exchange
2. Who does the Stock exchange regulate?

a. AMFI
b. It’s broker members in a certain way
c. SEBI
d. It regulates nothing
3. The objectives of AMFI do not include?

a. To emphasis on ethical & moral trade practices
b. To create awareness about Mutual funds
c. To regulate the stock markets along with SEBI
d. To improve the standards of the mutual fund industry.
4. Who governs AMFI?

a. Board of directors elected from members of AMC
b. SEBI
c. Ministry of Finance
d. No one. Its only an association
5. Name any two Self regulatory Organizations?

a. AMFI & SEBI
b. SEBI & RBI
c. NSE & BSE
d. AMFI & RBI
6. What does AMFI stand for?

a. Association of Mutual Funds of India
b. Associate Mutual Funds of India
c. Association of Mutual Funds in India
d. Associate Mutual funds in India
Answers: 1(d), 2(b), 3(c), 4(a), 5(c), 6(c).
34
Investor rights & obligations
Objective –
Understanding the rights enjoyed by investors
The obligations & limitations of investor rights
Concepts & Contents

Rights investor’s enjoy their obligations & limits each investor complies with.
35
Investors Rights & obligations.
Investors are owners of the scheme’s assets, and it is therefore imperative that they are aware of their
rights with respect to their scheme, its management, and recourse to trustees, the AMC & other
constituents.
• Right to proportionate `Beneficial ownership`

 They have a right to any dividend or income declared under the scheme.
 Unit holders have the option to nominate a person in whom all the beneficial ownership rights in
the units will be vest in the event of his/her death.
• Right to timely service.

 Unit holders are entitled to receive dividends within 30 days from the date dividend declared.
 Unit holders have the right to interest at a rate specified by SEBI in the event of failure on the
part of the mutual fund to dispatch the redemption or repurchase proceeds within 10 working
days.
 Any investor who has failed to claim redemption proceeds or dividends due to him, the investor
has a right to do so within a period of 3 years of the due date at the prevailing NAV. After 3 years
he will be paid at the NAV applicable on the end of 3rd year.
 For initial offers in case of OED, investor has a right to receive units within 30 days from closure
of the issue. The scheme must remain open for sale or repurchase of units within 30 days from
the closure of the initial offer period.
 Investors have the right to receive compensation from the AMC representing the difference in
NAV calculations on account of non recording of transaction.
• Right to information.
 Unit holders have the right to receive any information that may have an adverse impact on their
investments.
 Unit holders have the right to inspect major documents of the fund. For eg. The trust deed,
Investment management agreement, the custodian service agreement & the registrar & transfer
agency agreement.
Memorandum & articles of association of the AMC, Recent audited financial statements SEBI
regulations, Indian trust act & The Offer document.
 Right to receive a copy of annual financial statement.
 Complete statement of scheme portfolio before the expiry of one month of each ½ year (31st
March & 30th Sept.) unless printed in one English national newspaper and a regional newspaper
where the head office is based.
• Right to approve changes in Fundamental attributes of the scheme.

 A change in the fundamental attributes to the scheme (type of scheme, investment objective,
terms of issues, expense payable or merger or consolidation of schemes cannot be carried out
unless the investors are individually informed in writing and advertisement printed in one English
national newspaper and a regional newspaper where the head office is based. The unit holders
are given an option to redeem their units without paying any exit load.
• Right to wind up scheme.

 Investors can demand the trustees to wind up the scheme prior to its earlier fixed date & repay
the investors if 75% of them pass this resolution. This right applies to close ended funds
and open ended or close ended fixed term plan series.
• Right to terminate the AMC

 75% votes by investors can terminate the AMC with the prior approval of SEBI
Legal limitations to investor rights.

• Unit holders are not distinct from trust & therefore they cannot sue the trust i.e. they do
not have any legal recourse to the trust as it is not any separate entity.
• They can initiate legal proceedings against trustees, if they are aggrieved by any action of the
trustees that is seen not to be in their interest.
• The fundamental concept of mutual funds is that the investors invest at their risk. Investors need to
understand that except in certain circumstances the sponsors of a mutual fund do not have any legal
36
obligation to meet the shortfall in case the assured return is not achieved. Only if the offer document
has specifically provided such guarantee from the sponsor, the investor will have a right to sue them.
• A prospective investor does not have any standing or rights with respect to the fund, AMC or any
other constituent. It is only after he has invested does he have any rights.
Investors’ Obligations.
• It is the investor’s duty to study the offer document. Failure to effectively study the offer document,
does not give the investor any recourse to the fund.
• It is mandatory for the investor to submit his PAN number along with his bank account details.
Investor complaints.
• SEBI does entertain complaints against mutual funds & intervenes with fund management to help the
investor resolve his complaint.
• Sponsors of new schemes need to appoint a compliance officer, who must issue a due diligence
certificate to the effect that all SEBI guidelines are followed.
Investors are neither shareholders nor depositors in the AMC; hence they are not protected by any of the
company act regulators. The investors can remove the AMC with 75% vote. They may try to get
the directors prosecuted.
37
Question Time
1. The scheme wise annual report of an AMC shall be published or mailed to unit holder not later than –
a. 3 months
b. 6 months
c. 12 months
d. Monthly
2. Right to any dividend or income received under the scheme, can be categorized as –
a. Right to timely service
b. Right to information
c. Right to beneficial ownership
3. Unit holders are entitled to dividend within _______ from the date dividend is declared.
a. 30 days
b. 10 days
c. 45 days
d. 07 days
4. Interest payable to investors, in case redemption proceeds are not received by the investor within
a. 7 days
b. 10 days
c. 15 days
d. 3 days
5. Investors have a right to claim dividends or redemption due to them within _______
a. 180 days
b. 365 days
c. 3 years
d. 2 years
6. An application at the time of NFO, the investors should receive Units within ______ days from the
issue closing date
a. 30 days
b. 15 days
c. 45 days
d. 25 days
7. Non recording transactions in NAV calculation by AMC

a. Investor faces losses
b. Penalty paid to SEBI by AMC
c. Investors might face the loss, as it is a mistake
d. Investors have aright to receive compensation
8. Investors have a right to receive a copy of

a. Annual financial statement
b. offer document
c. Key information Memorandum
d. All of the above
9. Investors need the prior approval of ________ before they can exercise their vote to terminate the
AMC or wind up the scheme
a. AMC trustees
b. AMFI
c. SEBI
d. Trustees of the AMC
10. _______ % of investors need to vote to wind up the scheme or terminate the AMC
a. 75%
b. 51%
c. 50%
d. 100%
11. Why can’t the investors sue the trust?

a. they are part of the trust & not a separate entity
38
b. Investors bear the risk while investing in mutual funds
c. They can sue the trust
d. Any trust cannot be sued.
12. Which of these is not an investor obligation?

a. Investing in mutual funds
b. submission of the Pan card is mandatory
c. It is the investors duty to read the offer document
d. (B) & (C)
13. Can investors sue the Sponsor?

a. Yes – if the returns are not per expectations
b. No
c. Yes – with the prior permission of SEBI
d. Yes – in case of the assured returns are not given to investors, even after mentioning in
the offer document.
Answers: 1(b), 2(c), 3(a), 4(b), 5(c), 6(a), 7(d), 8(d), 9(c), 10(a), 11(a), 12(d), 13(d).
39
Offer document
Objective –
Understanding what an offer document is.
The importance of the offer document.
Concepts & Contents

The offer documents & the launch period.
It’s importance & contents.
SEBI guidelines.
40
Offer Document
Offer document: - the document that contains details of a new fund offer that the AMC or the sponsor
prepares & circulates to prospective customers. It has to be registered with SEBI.
In the USA an offer document is called prospectus.
Offer document of a close ended fund is issued once at the time of launch,
In case of open ended funds, SEBI requires the offer document to be revised every 2 years.
Importance
• The most important source of information from the perspective of the prospective investor.
• Fundamental attributes of the scheme, which cannot be altered without the knowledge of the
investor.
• Operating document & describes the product, i.e. that scheme on offer.
• All relevant information to the investor is disclosed in the offer document.
• Buyer Beware
• Primary vehicle for investment decisions, a legal document that protects & governs the
rights of the investor. It also serves as a reference document for the investor to look for relevant
information at all times.
• An offer document contains a statement SEBI does not approve or disapprove anything contained in
the offer document.
• Trustees must vet the document before it is issued.
Contents
• Details of sponsor & AMC
• Description of scheme & investment objective
• Terms of issue
• Historical statistics.
• Investors rights & services
Key Information Memorandum (KIM):- An abridged version of the offer document is usually
distributed with the application form.
SEBI guidelines: - Regulation & investor rights.

• Validity of offer document: - new scheme has to be launched within 6 months from the time
SEBI sends its observations. If the scheme is not launched within 6 months a fresh offer document
has to be filed by the AMC to SEBI.
• SEBI lays the format for a standard offer document & Key Information Memorandum (KIM).
•
• Investor right to information on material changes:

 Reconstitution of the AMC
 Imposing or enhancing of entry or exit load.
 Change in key person of the AMC especially the fund manager.
 Additional of new plans in the existing scheme.
 Change in management/ controlling interest of AMC
 Fresh litigation cases, penalties imposed etc.
• Periodic revision required in the offer document.

 Once every 2 years in case of an open ended fund.
 After the 1st completed year, the condensed financial information has to be included in the offer
document & KIM.
• Distribution of revised document specified.

 An addendum giving details to each of the changes has to be attached to offer documents & the
memorandum. The addendum has to be distributed to all the distributors & brokers so they can
attach it to all the existing offer documents already in stock. The same has to be sent to all the
existing unit holders.
 The date of the revised offer document / latest addendum has to be given in the offer document.
 An advertisement or a press release stating the changes. It also has to display them on the
website.
 A copy has to be filed with SEBI.
41
• Where to obtain the updated offer document.
 It is the investor’s legal right to ask for a detailed offer document.
 They may obtain a copy from the fund house, or though a distributor.
42
Question time
1. Offer document is required by Mutual Fund as a __________ requirement

a. AMC
b. SEBI
c. Investor
d. AMFI
2. The first time investor should be well advised to refer to the –

a. Offer document
b. Key information memorandum
c. Trust deed
d. AMFI guidelines
3. For open ended funds, the offer documents needs to be revised every ________ years
a. 2 years
b. 1 year
c. 5 years
d. End of every financial year
4. For a prospective investor, which is the most important source of investment?

a. Scheme brochure
b. Offer document
c. AMFI website
d. AMC website
5. Is the offer document a legal document?

a. Yes
b. No
c. Only if the trustees sign it
d. Only in case of open ended funds
6. Key information memorandum is distributed

a. Along with the application form
b. By the agents
c. By the employees of the AMC
d. while it is available at the SEBI offices
7. Is the investor informed when the AMC enhances or imposes an entry or exit load
a. Yes
b. No
d. Only if SEBI mandates it
8. If the scheme is not launched within __________ months of SEBI approval, a fresh offer document
has to be signed.
a. 3 months
b. 1 month
c. 6 months
d. 12 months
9. Who approves the offer document once the AMC plans to launch it?
a. Investors
b. AMFI
c. SEBI
d. Trustee & then SEBI
Answers: 1(b), 2(a), 3(a), 4(b), 5(a), 6(a), 7(a), 8(c), 9(d).
43
Offer documents - contents
Objective –
Understanding the contents of the offer document.
Its importance & value, both with regard to the investor & the AMC
Concepts & Contents

The contents & various disclosures made by the AMC when it offers a new product to
the investor.
The legal guidelines & various information needed by the investor.
44
Offer documents – Contents
The contents of an offer document:-
• Summary information – (cover page)

 Name of the Mutual Fund
 Name of Scheme
 Type of scheme (growth, balanced, income)
 Name of AMC
 Classes of units offered on sale.
 Price of units
 Name of guarantor (if assured returns)
 Opening, closing & earliest closing date of scheme.
 A statement that the document contains information that a prospective investor should know
& that he should retain the offer document for future reference.
 A statement that the document has been prepared as per SEBI regulations, filed with SEBI,
& the scheme has not approved / disapproved by SEBI.
• Glossary of defined terms. This would include terms normally used in the offer document.
• Risk factors:- Standard & scheme specific

 Standard risk
 Investments are subject to market risks
 NAV may go up or down on the basis of capital market movement
 Past performance of sponsor/AMC/ mutual fund is no t an indicator to future
performance.
 Name of scheme does not indicate its qualities or prospects.
 Risks associated with derivatives instruments, if the fund plans to use these
instruments.
 Scheme specific
 Arising fro the scheme objective.
 Risk arising from non diversification (if any)
 Specific risk factors associated with close ended schemes.
 For assured schemes, if the returns are guaranteed for a specific time or till the end
of the term.
 No track record. If there is track record, it needs to be mentioned.
• Legal & regulatory compliance

 A compliance officer must submit a due diligence certificate that confirms:-
 The draft document forwarded to SEBI is in accordance with SEBI regulations.
 All legal requirements connected with launching the scheme have been complied
with.
 Disclosures made in the offer documents are true, fair & adequate to enable the
investor to make a well informed decision.
 The intermediaries name in offer document are registered with SEBI
• Financial Information
 Expenses
 Sales load, contingent deferred sales charge redemption load etc all at a % of NAV
 Details of initial issue expenses for the scheme & for other schemes launched during
the last one fiscal year.
 Estimated annual recurring expense as a % of average weekly net assets.
 In case of a FOF, the investors need to know that they will pay double expense.
 Condensed financial information of schemes
 All schemes launched by the fund during the last 3 fiscal years, NAV at the
beginning/ end of the year, net income per unit, dividends, transfer of
reserves, etc.
 Information on the borrowing of the fund at the end of the last fiscal year.
 Investments in companies which have in turn invested in the AMC schemes.
• Constitution of the Mutual fund

 Brief description of the objectives of the fund
45
 Functions & responsibilities of it’s constituents, sponsors, AMC, trustees
 Activities of the sponsor & its last 3 years financial performance
 Names & addresses of the board of trustees/ directors, giving details of their occupation &
current directorship
 Summary of trust deed
 Trusteeship fees
• Investment objectives
 Short description of the type of securities in which the scheme will invest.
 Asset allocation pattern.
 Policy of diversification.
 If the scheme name implies, it will invest primarily in that class, at least 65% investment.
 For open ended schemes, if illiquid assets are likely to be more than 10%, it must be
disclosed.
 Justification of net worth of guarantor in case of assured returns.
 Portfolio turnover policy
 Investment limitations
• Management of funds.
 Name & background of the fund manager, key personal, investor relations officer, AMC & its
directors.
• Offer related information

This section contains all practical information needed by the investor & the distributor.
 Minimum amount required to be raised as per SEBI regulations & maximum amount in case
of an assured return scheme.
 Circumstances for refund & period within which the refund must be carried out.
 Calendar indicating the opening, closing, earliest closing, allotment & dispatch of certificates
& account statements.
 In case of close ended funds, name of the stock exchange where it would be listed.
 Policy regarded reissue of units.
 Option to convert a close ended scheme into a open ended scheme, if it exists & an option to
the investor to redeem in full.
 Restrictions on the right to freely to freely retain or dispose of units.
 Maturity period of the scheme & circumstances under which it can be extended.
 Circumstances under which a scheme can be would up.
 Procedure for transfer & transmission of units.
Investment procedure
The manner in which a prospective investor may purchase units should be described
 Name/address of collection banks & investor service centers.
 Special purchase plans or methods such as accumulation plans, dividends reinvestment plans
 Minimum initial or subsequent investment.
 Details on who can invest sales price fixation & nomination facilities.
Schemes policy on
 Dividend & distribution
 Inter-scheme transfer
Associate/Group company transactions

 Details of sponsors, their affiliates & associates.
 Policy of investing in associate/group companies of the sponsor/affiliates/ associates including
aggregate market value of investments & as a % of aggregate NAV
 In case a scheme has invested more than 25% of its net assets in associate or group companies.
Borrowing policy
 Purpose & circumstance of borrowing
 Regulatory limits on borrowing
 Potential risk to AMC & unit holders
NAV & Valuation

 Frequency of disclosure of NAV & valuation of Assets
 Valuation of non traded security
46
Procedure for redemption or repurchase
 Brief description of determination of redemption & repurchase price of units along with statutory
restrictions.
 Names of centers where redemption can be affected.
Description of accounting policies

 Must describe its accounting policy which is in accordance with SEBI regulations of 1996
Tax treatment on Investments

If the fund income is subject to taxation in his hands or even in the hands of the fund itself. Measuring
after tax performance is important.
Investor rights & service

 Investors right under the scheme
 Documents available for inspection
 Access to information on NAV computation
 Details of funds contact person who should take care of investors complaints
Redressal mechanism
 Brief description of investor’s complaints history.
Penalties pending litigation or proceedings
47
Question Time
1. What features figure on the cover page of the offer document?

a. Name of Mutual fund
b. Name of the scheme
c. Glossary of defined terms
d. Both (A) & (B)
2. Does name of the scheme indicate its quality or prospects?

a. Yes
b. No
3. Constitution of the fund describes

a. Objectives of the fund
b. Activities of the sponsor & its last 3 years financial performance
c. Name & address of trustees, directors etc
d. All of the above
4. the offer document contains condensed financial information of all schemes launched in the last
a. 3 years
b. 5 years
c. 7 years
d. 9 years
Answers: 1(d), 2(b), 3(d), 4(a),
48
Key Information Memorandum
Objective –
Understanding the Key information Memorandum
The various objectives & importance.
Concepts & Contents

What is a key information memorandum?
Who prescribes the format?
What does the KIM include?
49
Key Information Memorandum (KIM)
Key information Memorandum is the abridged version of the offer document & in distributed
along with the application form.
SEBI has prescribed the format for KIM.
KIM includes & covers the following critical areas.
 Investment objective
 Benchmark index & dividend policy
 Name of Fund Manager & trustee company
 Asset allocation pattern of the scheme
 Plans & options
 Performance of schemes in terms of compounded annualized returns over 1, 3, 5 year period.
Along with the benchmark returns.
 Expenses with regard to load & recurring expenses.
 Source of obtaining daily NAV
 Investor grievance contact
 Mechanism to provide unit holders with information such as account statements, annual financial
results & ½ yearly portfolio disclosures.
50
Question Time
1. Who prescribes the format for KIM?

a. AMC
b. AMFI
c. SEBI
d. Ministry of finance
2. Which of the following is not part of KIM?

a. Name of Fund Manager & trustee company
b. Expenses with regard to load & recurring expenses.
c. Investor grievance contact
d. Address of trustees & directors
3. KIM is the abridged version of?

a. offer document
b. Trust deed
c. Part of AMFI guidelines
4. Is it mandatory of an AMC to disclose ___________ in the KIM?

a. Investment objective
b. Performance of schemes in terms of compounded annualized returns over 1, 3, 5 year period.
Along with the benchmark returns.
c. Plans & options
d. All of the above
Answers: 1(c), 2(d), 3(a), 4(d),
51
Who can invest?
Objective –
Understanding the investor base
The various types of investors & one who can vote & one’s who can
Concepts & Contents

List of investors
Classification of investors
52
Who can invest?
Who can invest in mutual funds?
• Residents
o Resident Indian individuals/ HUF
o Indian companies / Partnership companies
o Indian trusts / charitable organizations
o Banks / Financial institutions
o Non banking financial companies
o Insurance companies
o Provident funds
o Mutual funds
• Non resident Indians

o Non resident Indians / persons of Indian origin
o Overseas corporate bodies
• Foreign Entities
o Foreign institutional investors
Foreign citizens/ entities are not allowed to invest in India
Investors are categorized as Institutional or Individual.

Banks, Financial institutions, Non banking financial companies, Insurance companies, Provident funds,
overseas corporate bodies, and foreign institutional investors are all institutional investors. They tend to
have large amounts of investments & generally invest directly in mutual funds.
Individual investors can be classified as High net worth individuals (HNI) or retail or small investors.
53
Question Time
1. Who cannot invest in Mutual Funds?

a. PIO’s
b. NRI’s
c. Residents
d. Foreign Investors
2. If an Indian Mutual Fund investor takes up an Australia citizenship?

a. He would have to redeem his units
b. He continues with his investments
c. He transfers them to his cousin’s name
d. He opts for growth option instead dividend pay out
3. Which foreign entity can invest in Indian Mutual Fund?

a. Foreign citizens
b. Foreign entities
c. Foreign Institutional investors
d. Everyone can invest in Indian Mutual Funds
4. Investors are categorized as

a. Institutional & individual
b. Rich & moderate
c. HNI & both
d. All of the above
5. Individual Investors are classified as HNI or retail

a. Yes
b. No
Answers: 1(d), 2(a), 3(c), 4(a), 5(a)
54
Distribution channels
Objective –
Different types distribution.
Concepts & Contents

Different types distribution.
The importance of each distribution channel.
The preference various AMC’s have over distribution channels
55
Distribution Channels
Types of distribution channels

• Individuals – use of agents has been the most prevalent practice for distribution over the years. An
agent acts on behalf of a principal – (mutual fund). An agent is essentially a broker between the fund
& the investor. A broker can have a large number of sub brokers working under him. Passing the AMFI
examinations is mandatory to become an agent. All agents are required to obtain an ARN card
from AMFI. Passing of AMFI exam is mandatory by SEBI’s for: -
o Newly recruited individual distributors
o Existing individual distributors
o Employees of mutual funds/AMC engaged in Sales & marketing
o Employees who interact with investors( investor relations & call centers)
• Distribution companies – A large administrative mechanism which supports a large direct sales
force. The AMC deals with the distribution company directly instead of dealing with separate sales
force. Employees who engage in sales & marketing of distribution companies, banks or other
corporate entities are required to pass the AMFI certification test & obtain an ARN card. Many private
funds prefer Distribution companies.
• Banks & NBFC’s – in developed countries banks play a major role in distributing mutual funds. In
the last 5 years banks in India have been a major distributing factor of mutual funds.
• Post offices – Mutual funds have entered into tie ups with post offices, thus giving themselves a very
wide geographical area.
• Direct marketing – Fund houses sell their products directly to investors. This is a very small % &
caters mainly to HNI’s or institutional investors.
All distributors are required to abide by a code of conduct as prescribed by SEBI & based of AGNI of AMFI.
As on 31st March ‘05

49,837 have passed the AMFI certification exam
30,028 are registered with AMFI
Individuals – 24,850
Corporate – 1,946
Corporate employee – 3232
There are now more corporate distributors & less individual distributors.
56
Question Time
1. Currently the number of ARN holders are highest with

a. Individual investors
b. Banks
c. Corporate Distributors
d. Post offices
2. Can a distributor have people (sub brokers) working under him?

a. Yes
b. No
c. With prior SEBI permission
d. Only if the AMC permits
3. To become an ARN holder, what are the basic criteria?

a. Should be a graduate
b. Should have at least passed his 12th standard exam
c. Should have a sound knowledge of the market
d. Should have passed the mandatory AMFI exam
4. In the last 5 years which distribution channel has been a major distributing factor of Mutual Funds
b. Banks
c. Corporate Distributors
d. Post offices
5. Most private funds in India prefer

b. Banks
c. Distribution companies
d. Post offices
6. Which distribution channel has the largest geographical base in India?

b. Banks
d. Post offices
7. Which distribution channel mainly caters mainly to HNI or institutional investors?

b. Banks
d. Direct marketing
Answers: 1(c), 2(a), 3(d), 4(b), 5(c), 6(d), 7(d)
57
Sales practices & SEBI
regulation
Objective –
Understanding the various types of commissions paid to distributors.
Importance of SEBI advertisement code
Importance of AMFI code of ethics
Concepts & Contents

Various commission rates paid to distributors
SEBI MF regulations of 1996
SEBI advertisement code
Terms in appointing distributors
AMFI code of Ethics
58
Sales Practices & SEBI regulations
Distributors (individuals or distribution companies) are compensated by funds though commissions. AMC
pay commission to distributors at basic rate plus an incentive depending on the volume of business.
Commission rates
2 types of commissions
 Upfront commission for mobilization of funds
 Trail commission to encourage the retention of the investors.
Commission rates
 Equity funds 1.5% - 2.5%
 Debt funds 0.25% - 1.25%
SEBI does not prescribe any limit of commission payable to distributors by the fund house.
SEBI MF regulations of 1996

• All initial issue expenses is 6% (including brokerage paid to distributors)
• OEF’s can charge entry & exit load to cover the fund distribution expense. Load should not exceed %
specified in the offer document. The excess charge if any cannot be passed to the unit holders &
would be borne by the AMC.
• A no load fund pays distributor commission as part of regular management & marketing expenses.
• Distributors are not entitled to commission on their own investments.
Market Practice
Rebating is banned by SEBI vide their circular dated 26th June 2002.liable to lose their AMFI
registration.
Distributor’s obligations
Sub brokers act as agents of the brokers/ distributors. Brokers/ distributors must make sure of their
actions.
Investor servicing – AMFI recommended practices

 Distributors should be fully aware of the product, investment objectives, risk, special features of
the scheme etc.
 They should know their client profile, age, earning & risk capacity.
 Identify clients & cultivate the habit of professional investment.
 Understand the clients needs, investment objective, returns expectations etc
 Must make them start investment early, & encourage investment.
 Offer personalized after sale service.
SEBI Advertisement code

• The code protects the investor misleading advertising by specifying norms for computing returns,
management capability & comparisons that may be contained in the advertisement.
• The code classifies advertisement into 2 categories - for basic information of existing schemes & other
for information on the scheme’s performance.
The following is a list for information on the scheme’s performance.

 Specific norms for computing returns, management capability & comparisons which may be
advertised.
 Dividends declared shall be mentioned in rupees per unit along with the face value of unit of the
scheme & the prevailing NAV
 All performance based calculations shall be based only on the NAV.
 Only compounded returns if the fund exists for 1 or more years.
 Annualized yields must be shown for 1, 3, and 5 years & since inception.
 For funds less than 1 year, absolute returns must be shown & not on an annualized basis.
 Comparisons should be make against appropriate benchmarks( identical time periods)
 All advertisements must display `past performance may or may not be sustained in future ` close
to where the returns are portrayed
 Ranking of the fund must be appropriately explained.
Terms in appointment of distributors

The AMC can appoint resident individual, bank, NBFC or Distribution Company, subject to agreement
between the two. No approval is required from SEBI or any other regulatory authority.
59
 Distributor must provide customer with `key information memorandum`& make available for
inspection the offer document.
 The distributor will execute every transaction on behalf of the customer & mention that he does
not endorse the fund & that it does not constitute his obligations.
 The distributor will offer & sell units at the public offering price & that it would be effective only
after the fund has received it.
 The distributor is responsible at his expense to ensure compliance with applicable regulation.
AMFI code of Ethics

 Management of the fund ought to be in the interest of the investors.
 High standard of service are expected from the fund.
 Adequate disclosures need to be made to unit holders & trustees.
 Funds should adopt the use of professional selling practices.
 Management of funds should be made in accordance stated objectives.
 Avoidance of conflict of interest in dealing with directors, officers or employees.
Funds should refrain from unethical market practices.
60
Question Time
1. Distributors are compensated by AMC’s though

a. Monthly salary
b. Fixed stipend
c. Commission
d. Gift vouchers
2. Name the types of commission paid to distributors

a. Upfront commission
b. Trail commission
c. Business enhancing commission
d. Both (A) &(B)
3. A no load fund pays distributor commission as part of

a. regular management & marketing expenses
b. Initial issue charges
c. No commission is paid on a no load fund
d. Fund management charge
4. SEBI has banned rebating in the year

a. 1992
b. 1994
c. 1996
d. 2003
5. In which type of fund, should annualized returns be shown even if the fund is less than one year?
a. Equity
b. Debt
c. Exchange traded fund
d. Liquid funds
6. Annualized yield must be shown

a. 1 – 2 – 3 years & since inception
b. 1 – 3 – 5 years & since inception
c. 1 – 2 – 5 years & since inception
d. Only absolute yield must be shown to investors
7. All advertisements must display

a. “Mutual funds are subject to market risk
b. ‘Past performance may or may not be sustained in future”
c. No such statutory note is mandatory
d. The names of fund manager
8. Who appoints the distributors?

a. AMFI
b. SEBI
c. AMC
d. All three
9. Does the AMC need the sanction of SEBI or AMFI, when it appoints a distributor?
a. Depends on the AMC
b. Yes
c. No
d. Only in the first three years of its existence
10. Dividends declared should be done

a. in rupees value per unit along with the face value & current NAV
b. In % form only
c. No dividends can be declared
d. As per the wishes of the AMC
Answers: 1(c), 2(d), 3(a), 4(c), 5(d), 6(b), 7(b), 8(c), 9(c), 10(a)
61
Accounting NAV
Objective –
Understanding the calculation of Nett Asset Value.
Understanding the reasons for NAV movement.
Concepts & Contents

Calculation of NAV
Updating the NAV on a daily basis
Factors affecting the NAV
Charges which are included & included in the NAV
62
Accounting NAV
All fund assets belong to the investors & are held in fiduciary capacity.
Mutual Fund are required to follow the accounting policies laid down in SEBI (MF) regulations 1996
NAV (net asset value)

Total net assets = assets – liability
NAV= market value of investments + receivables + other accrued income + other assets – accrued
expenses –other payables –other liabilities / no of units outstanding on the valuable
• NAV have be calculated & uploaded on the AMFI site by 8 pm for OEF’s & every Wednesday
for close ended funds
o Close ended schemes which are not mandated to be listed on the stock exchange for eg.
Monthly income schemes may publish NAV on a monthly or quarterly basis as permitted by
SEBI
• Applications received before the cut off time will carry the same days NAV & ones received
after that will carry the next days NAV. Cut off time is 15:00. for unit repurchases the cut of
time is 10:00 am.
• Factors affecting the NAV

 Purchase & sale of investment securities
 Valuation of all investment securities held
 Other assets & liabilities
 Units sold or redeemed
• Other assets include due to the fund but not received as on the valuation date.
• Other Liability includes expense payable by the fund for eg. Custodian fee or trustee fee.
• NAV needs to be rounded of to 4 decimal points in case of a liquid fund & 2 decimal points
in case of other schemes.
• Purchasing of units.
• Entry & Exit load.

o Sale price = NAV + entry load (cannot be more than 7%)
o Repurchase price = NAV – exit load (cannot be more than 7%)
• The difference between the repurchase price & sale price of a unit is not permitted
to exceed 7% of the sale price.
o In case of close ended funds maximum spread (sale price & repurchase price) is
5%.
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Fees & expenses
• Investment management & advisory fees
 @1.25% of the first 100 crores of weekly average net assets
 @1% in excess of 100 crores
 No load fund, AMC can charge additional management fees of 1%
• Initial expenses
 Are charged at the time of launch, cannot exceed 6% of initial resources raised.
• Recurring expenses
 Marketing & selling expenses (distributors commission)
 Brokerage & transaction costs
 Registrar fees for transfer of units sold or redeemed
 Fees & expenses of trustees
 Audit fees
 Custodian fees
 Cost related to investor communication
 Costs of fund transfer from location to location
 Cost of providing account statements, dividend/ redemption cheques & warrants.
 Insurance premium paid for the fund
 Winding up cost.
 Other costs as approved by SEBI
• Following expenses cannot be charged to the scheme

 Penalties & fines for infraction of law
 Interest on delayed payment to unit holders
 Legal marketing, expenses not related to any scheme.
 Expenses on investment management / general management.
 Expenses on general expenses, infrastructure cost.
 Depreciation on fixed assets.
 Other expenses prohibited by SEBI.
• Total expense charged by the AMC excluding issue or redemption expense but including
investment management & advisory fees are subject to the following limits
 1st 100 crores 2.50%
 Next 300 crores2.25%
 Next 300 crores2.00%
 On the balance 1.75%
For bond funds charges are lower by 0.25%
Fund of fund schemes cannot exceed 0.75% of the average net assets.
• Initial expense – permitted for close ended scheme where entry load is not charged.
 The charges are amortized on a weekly basis over the period of scheme
 AMC will redeem the units before the closing day by recovering the balance amortized charge.
 Open ended schemes should meet the sales, marketing & other expenses connected with sales &
distribution of schemes from the entry load & not from the initial issue expenses.
 Unamortized portion of the initial issue expenses shall be included for NAV calculation
as it will be considered as other asset.
Disclosure & reporting requirements

• MF /AMC have to prepare annual statement of accounts for all schemes.
• Needs to be audited by an independent auditor.
• Within 6 months of closure of the reverent accounting year
 Display scheme wise annual reports on the website linked to AMFI website
 Mail the annual/ abridged annual report to all unit holders
 Forward a copy to SEBI of the annual report & details of investments & deposits held by the fund.
• Specific disclosure of accounts

 Expenses having more than 10% of total expense reported.
 Scrip-wise disclosures of NPA’s
 Large unit holdings (over 25% of net assets of the scheme) shall be disclosed in annual & half
yearly results.
64
 Unit holders can request for the annual report of AMC, the same needs to be mentioned in the
Annual report.
• Dissemination of Information
 To SEBI
• Once a year copies of audited statement of all schemes.
• Copy of six monthly un audited reports.
 Within 30 days of the close of each ½ year (31st March & 30th Sept) the fund shall publish
unaudited financial reports in 0ne English & the regional language where the head office is
located. It would also post the results on its website which is linked to the AMFI website.
 The trustees shall disclose to unit holders about any information which may have an adverse
bearing on their returns.
 The Annual report containing accounts of the AMC should be displayed on the websites of the
mutual funds.
• Accounting policies
 Investments are required to be marked to market price
 Dividend received by the fund on a share shall be the day the share is quoted ex dividend & not
on the date of declaration.
 In determining the holding cost of investment & the loss or gain on sale of investment, the
average cost method should be used.
 Purchase & sale of investments should be recognized on the trade date & not on the settlement
date.
 Non performing assets & income thereon shall be as per SEBI guidelines.
65
Question Time
1. NAV (Net Asset Value) is –

a. Asset value divided by all shares sold since the fund was initiated
b. Total number of shares divided by asset value
c. Total value of assets held by the fund divided by the number of outstanding units
d. Total number of assets held by the annual revenue
2. In case of closed ended schemes, what is the periodicity of amortization of issue expenses?
a. Weekly
b. Quarterly
c. Half yearly
d. Annual
3. All mutual funds assets belong to

a. AMC
b. AMFI
c. Trustees
d. Investors
4. When should the AMC declare its NAV for open ended funds?
a. Every evening by 6 pm.
b. Every morning by 9 am
c. Every evening by 8 pm
d. Every morning by 10 am
5. When should the AMC declare its NAV for close ended funds?
a. Every Wednesday by 6 pm.
b. Every Wednesday by 9 am
c. Every Wednesday by 8 pm
d. Every Wednesday by 10 am
6. If the AMC or the registrar receives the application before 15:00 hours
a. The previous day’s NAV is assigned to the investor
b. The yesterday’s NAV is assigned to the investor
c. The NAV declared in the evening will be is assigned to the investor
d. NAV would be assigned as per the AMC rules
7. What is the cut off time for redemption of units

a. 8 am
b. 10 am
c. 12 noon
d. 03 pm
8. Which factor does not affect the NAV

a. Purchase & sale of investment securities
b. Valuation of all investment security
c. other assets & liability
d. Real estate prices
9. What is the maximum load spread in case of open ended funds?

a. 5%
b. 6%
c. 9%
d. 7%
10. What is the maximum load spread in case of close ended funds?
a. 5%
b. 6%
c. 9%
d. 7%
11. NAV need to rounded of to 4 decimal points in case of

a. Liquid funds
b. Equity funds
c. Debt funds
66
d. Balanced funds
12. NAV need to rounded of to 2 decimal points in case of

a. Balanced funds
b. Equity funds
c. Debt funds
d. All of the above
13. What does other liability mean?

a. Load fund
b. Fund management charges
c. Expense payable to the fund like custodian fee, trustee fee.
14. What happens to the unamortized portion of the initial issue expenses?
a. it shall be considered as an asset & included in NAV calculation
b. It shall be taken out by the fund as per the discretion of the Fund Manager
c. It shall remain so till the fund closes
d. The AMC can recover this money when its personal assets are below 10 crores
15. Which of this is not a specific disclosure of accounts to SEBI?

a. Expenses having more than 10% of total expense reported
b. Large unit holdings (over 25% of net assets of the scheme) shall be disclosed in annual & half
yearly results.
c. Script wise disclosure of NPA
16. What would the total expense that an AMC would charge on their equity fund having an AUM of Rs.
1,000/- crore?
a. Rs. 25.00 crores
b. Rs. 20.50 crores
c. Rs. 17.50 crores
d. Cannot calculate, incomplete data
17. Valuation with regard to purchase & sale of investments should be –

a. settlement date
b. trade date
c. As per AMC accounting policies
d. Every Wednesday
18. AMC sends it’s un audited reports to SEBI

a. 6 monthly
b. monthly
c. Weekly
d. Annually
19. Who audits AMC accounts

a. AMC auditor
b. SEBI auditor
c. Independent auditor
d. AMFI auditor
20. Who discloses to investors about any information which may have an adverse bearing on their
returns.
a. AMC
b. Trustees
c. Sponsor
d. SEBI website
Answers: 1(c), 2(a), 3(d), 4(c), 5(c), 6(c), 7(c), 8(d), 9(d), 10(a), 11(a), 12(d), 13(c), 14(a), 15(d),
16(b), 17(b), 18(a), 19(c), 20(b)
67
Non performing assets
Objective –
Understanding the concept of a non performing asset.
Ways & steps on how to remove a NPA from the scheme
Concepts & Contents

What is NPA?
Status of NPA
Provisioning & reclassification of NPA
Classification of deep discount bonds
68
NPA (Non Performing Assets)
An asset can be treated as non performing if the principal or interest amount has not been
received for one quarter from the day it had fallen due. For eg it the interest was due on 30th
June 2006it would be classified as NPA on 1st Oct.’2006
Once declared as NPA there will be no interest accrual.
• The provisioning will be in the following way

 10% of the book value after 6 months i.e. 3 months from the time it was declared NPA
• Reclassification of assets
 In case the company has cleared all arrears of interest, the interest provision is written back in
full.
 On clearance of all interest arrears & if debt is regularly serviced over the next 2 quarters.
 If all arrears of interest are fully cleared, the interest not credited on accrual basis would be
credited at the time of receipt.
• Classification of deep discount bonds – are classified as NPA’s if

 If the rating go down to BB of below.
 If the company is defaulting in their commitment of other assets
 Full net worth erosion.
69
Question Time
1. When can an asset be considered as Non Performing?

a. 3 months from the day the interest is due
b. 3 months from the day the principal amount is due
c. Both a & b
2. Who would you classify NPA in case of deep discount bonds?

a. If it is rated lower than BB or BB
b. If the company defaults on its commitment of other assets
c. Full net erosion of wealth
d. All the above
3. Within how many months would the NPA be removed from the fund after the principal or interest
is not paid?
a. 15 months
b. 18 months
c. 24 months
d. 12 months
4. For NPA, if the interest or principal is repaid can it be considered as an asset?

a. Yes
b. No
c. Only if SEBI permits
d. Depends on the AMC
5. Under what circumstances can NPA be considered as an asset?

a. On clearance of all interest arrears & if debt is regularly serviced over the next 2
quarters
b. In case the company has cleared all arrears of interest, the interest provision is written
back in full.
c. If all arrears of interest are fully cleared, the interest not credited on accrual basis would
be credited at the time of receipt
d. All of the above
Answers: 1(c), 2(d), 3(b), 4(a), 5(d)
70
Valuation of scheme portfolio
Objective –
Understanding the basic valuation principles
Understanding the valuation of equity tradable, thinly traded & non tradable security.
Understanding the valuation tradable & non tradable (government & corporate
security)
Concepts & Contents

Basic valuation principles
Valuation of each security, debt & equity, tradable or non tradable.
Expected Marks –3 – 7 marks
71
Valuation of Scheme Portfolio
Basic Valuation principles:-

Fair value: - value of a security that is realistic. Value is based on either the purchase cost, market price or
on some accepted principles.
Mutual funds invest in tradable securities or on the money market instruments.
Traded securities are preferred:-
• Ensure liquidity of investments
• Receive fair valuation at market price.
Valuation of tradable security:-

• An equity security is valued at the last quoted closing price on the stock exchange
• If no trade is reported, the last quoted price on any other recognized stock exchange may
be used.
• If the equity security is not traded on any stock exchange, the value at which it was traded
on the earliest previous day provided it was not more than 30 days old.
Valuation of thinly traded shares: - are ones where the trade is less than 5 lakhs in a month or
total volume is less than 50,000 shares.
• In case trading is suspended up to 30 days then the last traded price is used.
• > 30 days, the AMC/ trustees can decide the valuation norms to be followed. Such norms should be
documented & recorded.
Valuation of non-traded shares: - when the security is not traded at any exchange for more
than 30 days it becomes a non-traded security.
• The calculation is as under:- Net worth per share =
share capital + reserves (excluding revaluation reserves) – misc expenses & debit balance on
P7L a/c
----------------------------------------------------------------------------------------------------------------
Divided by no of paid up shares
• The industry PE is taken & 25% is adjusted to it.
Valuation of debt securities

Traded Securities: - A debt security is traded on a stock exchange (corporate securities) or
interbank market (government securities). The quoted price is traded on the exchange.
Thinly traded security. - If on the valuation date, no individual trade in that security in
marketable lots (5 crores) on the principal stock exchange or any other stock exchange.
• Valuation of non traded security:-

Money market securities & debt securities up to 182 days: - the securities are valued on the basis of
amortization of purchase cost, plus accrued interest till the beginning of the day purchased, plus the
difference between the redemption value & purchase cost, that is spread uniformly over the remaining
maturity period.
• Non-traded non government debt instruments over 182 days.

All non traded securities are classified into investment grade & non investment grade securities. All non
investment grade securities are classified as performing & non Performing assets.
All non government, investment grade securities, classified as non tradable are valued on yield to maturity
basis. If the fund manager expects a YTM of 10% on a security that pays a coupon rate of 9% for a face
value of Rs. 100/-, its value will be marked under to Rs. 90/- so its effective yield will be 10%
All non government, non investment based securities are valued at a discount of 25%. Thus a Rs. 100/-
bond will be valued at Rs. 75/-
• Call money, bills purchased under rediscounting & short term deposits with banks are valued at cost +
accrued interest.
• Convertible debentures & bonds: Non convertible component is valued as a debt instrument &
convertible as an equity instrument.
• Instruments based on repo basis must be valued at the agreed resale price minus interest up to the
date of sale.
• Securities with call option: the lower of value obtained by valuing the security to final maturity & that
valued to call option date.
• Securities with Put option: the higher of value obtained by valuing the security to final maturity & that
valued to call option date.
72
• Valuation & disclosure of illiquid securities: if it exceeds 15% the excess would have a value of 0 in
OEF’s. It is 20% is case of OEF’s. Mutual funds are not allowed to transfer illiquid securities
among their schemes.
73
Question Time
1. Mutual Funds Invest in

a. Tradable securities
b. money market instruments
c. Both (A) & (B)
2. Why do mutual funds invest in tradable security?

a. They do not invest in tradable security
b. Ensure Liquidity of investments
c. Receive fair valuation at market price
d. Both (A) & (B)
3. Shares where trade is less than Rs. 5,00,000/- & volumes are less than 50,000 shares are termed as
a. Tradable shares
b. Thinly traded shares
c. non traded shares
d. Investable shares
4. How is value per share calculated for NAV calculation

a. Highest share price of the day
b. Lowest share price of the day
c. Average share price of the day
d. Last quoted share price of the day
5. What happens if the share brought by the AMC is not traded in the stock exchange?
a. The Last quoted share price of the day of any other reputed stock exchange where it has traded
is considered.
b. The previous day’s price is considered.
c. It is considered as NPA
d. The share has to be sold within 7 days
6. What happens to an equity share which has not traded for the past 30 days?
a. Sell it off immediately
b. Ask AMFI/ SEBI for reimbursement
c. Declare the share NPA
d. Do not do anything
7. When is a debt security termed as thinly traded?

a. When no individual trade takes place in marketable lots of 10 crores
b. When no individual trade takes place in marketable lots of 5 crores
c. It is never considered as thinly traded
d. When it stops trading permanently
Answers: 1(c), 2(d), 3(b), 4(d), 5(a), 6(c), 7(b).
74
Investor services
Objective –
Understanding the procedure for buying & selling of Mutual fund (Units)
Understanding the various Investment plans offered by AMC’s.
Understanding the services provided to investors by AMC & distributors
Concepts & Contents

Procedure for Purchase & redemption of units
Offering the various investment plans
75
Investor Services
Procedure for purchase of units

Offer document provides the investor with the description of the procedure for the purchase of
units
 Funds appoint registrars for the purpose of accepting requests for new subscriptions and
redemptions from investors.
 Some funds have their own Investor Service centers.
 The key information memorandum contains the application form.
 The forms are distributed though many distributors & are also available at the AMC office
 Investor may use the services of the broker with respect to filling the application form.
 Some funds permit the investor to apply directly though the internet.
 Companies are generally required to submit their board resolutions & or memorandum & articles
of association.
 Investors are required to submit their PAN number.
 Mode of payment is cheque or demand draft.
 For repatriation benefits, NRI investors have to make payments from their FCNR or
their NRE accounts.
 FII can make payments by remittance from abroad or from their non resident rupee
accounts.
Procedure for redemption of units

 Offer documents give includes details of the procedures & documents required from the investors.
 Investors have to deal with registrars or investor service centers designated by the funds.
 Brokers & banks accept instructions by both the telephone & internet.
 Fund investors must give their bank account details & their redemption cheques would be sent
directly to their account.
 Special provisions in respect to NRI & overseas corporate bodies. It can be credited in his NRE
account or by issue of US $ drafts.
Investment Plans
Automatic reinvestment Plan (ARP): - Reinvest the dividend earned in the scheme. Hence the investor
gains extra units. Reinvestment takes place at the ex- dividend NAV.
Systematic Investment Plan (SIP): - invest a fixed sum periodically thereby letting the investor save
in disciplined & phased manner.
Systematic withdrawal plans (SWP):- allows the investor to make systematic withdrawals fro his fund
investment account on a periodic basis. The withdrawal amount would be deposited in his account or a
cheque sent to him. It is not the same as Monthly Income plans because here the client can withdraw his
principal.
In Monthly Income plans, only the interest is returned to the investor.
Systematic transfer plans (STP):- allows the investor to transfer money from one asset class to
another over a specific period of time.
Other investor services:-

Telephone & internet transactions.
Cheque writing: - investors are offered cheque books when they wish to redeem or transfer funds from
one fund to another. Cheques can’t be issued to 3rd person.
Periodic statement & Tax information: - SEBI regulations mandate AMC’s to send annual financial
statements to all investors within 6 months of the close of the accounting year. In India, if the AMC has
deducted tax at source from the income distributed to the investors, it would issue a Tax deducted at
source (TDS) certificate.
Loans against units: - Banks offer loans to investors against the units held by them. It is normally a
percentage of total units held by the investor. Banks offer a higher % against liquid funds. SEBI prohibits
Mutual funds from giving loans.
Nomination or Transfer by unit holders: -
76
Question Time
1. Which of the following modes of payments do AMC not accept?

a. Demand drafts
b. Cheques
c. Cash
d. Mutual Funds accept al modes of payment
2. Funds appoint ______________ to accept new subscriptions & redemption requests

a. Registrars
b. Banks
c. Collection agents
d. It is done by all insurance agents
3. Which important document does the application form contain?

a. Product details
b. Key Information Memorandum
c. Product brochures
d. Distributors contact details & valuation of past business
4. For repatriation benefits, NRI investors have to make payments

a. In cash
b. Though there international accounts only
c. Though their FCNR or NRE accounts
d. Travelers cheques
5. FII can make payments though these routes

a. Remittance from abroad
b. though their non resident rupee accounts
c. Cash
d. Both (A) & (B)
6. Which of these is not a redemption process?

a. Brokers & Banks accept request via phone & though the internet
b. Investors must give their account details, & the money would be deposited directly
c. Investors have to deal with registrars & hand over the redemption slip to them
d. Money would be given on every Saturday by the AMC
7. Define SIP.
a. Systematic investment period
b. Systematic investment plan
c. Specific investment plan
d. Specific investment period
8. Define SWP
a. Systematic withdrawal period
b. Systematic withdrawal plan
c. Specific withdrawal plan
d. Specific withdrawal period
9. Define STP
a. Systematic transfer period
b. Systematic transfer plan
c. Specific transfer plan
d. Specific transfer period
10. Do banks offer loans against units

a. No
b. Yes
c. Depends on Banks
d. No unless RBI permits
11. Banks offer higher % of loans against

a. Equity funds
b. Balanced funds
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c. Liquid funds
d. Debt funds
12. As per SEBI mandate, AMC must sent annual financial statement to all its investors
a. Immediately after year end
b. Mid year
c. On the Application anniversary
d. Within 6 months of the close of accounting year
Answers: 1(c), 2(a), 3(b), 4(c), 5(d), 6(d), 7(b), 8(b), 9(b), 10(b), 11(c), 12(d).
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Equity portfolio management
Objective –
Understanding the various tasks of an equity fund manager
Understanding the various types of equity instruments
Understanding the various classification of equity.
Understanding the approaches to portfolio management.
Understanding the structure & role of the portfolio management services.
Concepts & Contents

Types of equity instruments
Classification of equity
Approaches to portfolio management
Derivative markets & its uses
Role of security research team.
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Equity Portfolio Management
Main task of the equity fund manager

• Constructing a portfolio of equity shares or equity linked instruments that is consistent with the
objectives of the fund
• Managing or constantly rebalancing the portfolio to produce capital appreciation & earning that would
reward the investors with superior returns.
Review of Indian equity markets

As on march’04 – 9400 listed.
Actively traded shares: - 800 at NSE & 2600 at Sensex.
Two main indexes are
Sensex – 3o share index – BSE
S & P CNX Nifty – 50 share index – NSE
Types of Equity instruments

• Ordinary shares – ordinary share holders are owners of the company, & thus eligible for dividends
have voting rights. Losses as well as profits are shared by the equity share holders.
• Preference shares – entitled to dividends at a fixed rate subject to availability of profits after tax. If
preference shares are cumulative, unpaid dividends for the years of unpaid profits are paid. No voting
rights.
• Equity warrants – they are long term rights that offer holders the right to purchase equity share in
a company at a fixed rate( usually higher)
• Convertible debentures – these are fixed rate debt instruments that are converted into equity
shares at the end of a specified period.
Classification of equity (2 types)
• Market capitalization – Large, Mid or small cap.

• Based on anticipated earnings
 Price/ earning ratio price of the share divided by the earning per share & indicate what the
investors are willing to pay for the companies earning potential. Young & fast growing companies
have high PE; mature & established companies have low PE.
 Dividend yield. Is the ratio of dividend paid per share to current market price. Low PE have high
dividend yields
 Cyclical stocks – are shares who’s earning are correlated with the state of the economy.
 Growth stocks – shares of companies whose earnings are expected to increase at rates that
exceed normal market price.
 Value stocks – mature industries & are expected to yields low growth in earnings. Assets of these
companies have not been recognized by the investors in general. They are currently undervalued
& can yield superior returns.
Approaches to Portfolio Management (Passive & Active)
• Passive fund management – funds that offer stock index funds, aim to offer returns equal to the
returns of that index. Fund expenses are low, so investors’ returns are as close to the index as
possible.
• Active Fund management – Growth & Value investing

• Growth Investment –
 Primary objective is to obtain capital appreciation
 Look for companies that offer above average earning growth.
 More risky, offer higher returns over long investment horizons
• Value investments –
 Invest in what they believe are currently unvalued in the market, but their potential
would soon be realized.
• Investment management styles & the investor –

 All investment managers try to find undervalued shares & sectors that are expected to do well.
The difference in the 2 is, the Value manager believes that the markets are currently under
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valued & the Growth manager believes that the prices are fairly priced but expected to do
better in future.
Role of Security research fund management

 Fundamental analysis – research into the operations & finances of a company with the
objective of estimating its future earnings & risk profile.
 Technical analysis – involves the study of historical data on the company’s share price
movement.
 Quantitative analysis – uses mathematical models for equity valuation & may also use
fundamental & technical analysis in tandem.
• Successful equity portfolio management

 Set realistic target returns based on appropriate returns.
 Level of flexibility available while managing the portfolio.
 Decide on appropriate investment philosophy.
 Develop an investment strategy.
 Avoid over diversification.
 Develop a flexible approach to investing. Markets are dynamic & its impossible to buy stocks for
all seasons.
• Use of equity derivatives for portfolio risk management (futures & options)
 Futures contract allows one to buy or sell an underlying asset on a specific date.
 Options contract allows you to decide whether you want to buy or sell the asset on that date.
Options are used to hedge a portfolio.
Fund Managers can buy or sell futures & options contract for hedging or portfolio balancing. They can also
invest part of the funds of a scheme in derivative instruments. This is possible
a. For new schemes approved by SEBI
b. For old schemes where the consent of the majority investors has been obtained.
• Portfolio management organization structure. 3 types of skilled employees

o Fund Managers
o Security Analysts & researchers
Security dealers – execute the actual buy or sell orders originated by the fund managers.
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Question Time
1. What is the feature of a passive fund?

a. It matches the performance of the index
b. A passive fund tracks the index
c. A passive fund selects the stocks that are present in the index
d. All of the above
2. What is the main task of the equity fund manager?

a. Constructing an equity portfolio, keeping in mind the scheme objective
b. Managing or constantly rebalancing the portfolio.
c. Seeking to increase the NAV performance by at least 10% more than the market returns
d. Both (A) & (B)
3. Name the two main indices

a. BSE – NSE
b. Sensex – Nifty
c. BSE 100 – BSE 200
d. BSE 100 – NSE 100
4. Which of these is not an equity instrument?

a. Ordinary Share
b. Debenture
c. Preferential share
d. Equity warrant
5. Which equity instrument offer voting rights

a. Ordinary shares
b. Preferential shares
c. Both (A) & (B)
6. Which type of equity shares is considered the safest?

a. Large Capitalization
b. Mid Capitalization
c. Small Capitalization
d. Ordinary shares
7. What is the advantage of preferential shares over ordinary shares?

a. They offer voting rights
b. They offer unpaid dividend if the dividend were not issued last year
c. No advantage
d. they offer interest & well as income appreciation
8. What are cyclical stocks?

a. They try to give higher returns than the market.
b. They are currently undervalued, but their true potential will be unearthed soon
c. Their earning are correlated with the state of the economy
d. They invest in high risk – high return stocks
9. What are growth stocks?

10. What are value stocks?

11. List 2 types of active fund management.

a. Growth & Value investing
b. Passive & active investing
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c. Debt & equity Investing
12. Which of these is not a research analyst?

a. Fundamental analyst
b. Technical analyst
c. Quantitative analyst
d. Security analyst
13. Which of these analysts research into the operations & finances of the company, estimating its future
analysis & risk profile?
d. Security analyst
14. Which of these analysts involves the study of historical data on the company’s share price movement?
d. Security analyst
15. Which of these analysts use mathematical models for equity valuation?
d. Security analyst
16. Under what circumstances does SEBI allow AMC’s to invest in the derivative market?
a. For new schemes approved by SEBI
b. For old schemes where unit holders have given the sanction
c. For AMC’s whose asset size in more than 50000 crores
d. Both (A) &(B)
17. Which of these do not form a part of the equity portfolio management team?
a. Fund Managers
b. Security dealer
c. Operation team
d. Security analysts
18. What is the job of Security dealer?

a. Execute the actual buy & sell orders from the fund manager
b. Report the working of the fund to Trustees
c. As a replacement for the fund manager.
d. Market research
Answers: 1(d), 2(d), 3(b), 4(b), 5(a), 6(a), 7(b), 8(c), 9(a), 10(b), 11(a), 12(d), 13(a), 14(b), 15(c),
16(d), 17(c), 18(a).
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Debt portfolio management
Objective –
Understanding the various tasks of an debt fund manager
Understanding the various types of instruments in the Indian Debt market
Understanding the various classification of instruments in the debt market
Understanding the characteristics of money market & debt securities & its measures
Understanding the approaches to portfolio management.
Concepts & Contents

Types of debt instruments
Classification of instruments in the debt market
Risks in investing in debt funds
Duration Management, measuring risk
Debt investment strategies
Role of security research team.
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Debt Portfolio Management
Debt Portfolio Management has to contend with the construction & management of portfolios of debt
instruments with the primary objective of generating income.
Classification of debt securities

• Fund managers invest only in market tradable securities
• Debt funds may be secured – corporate bonds or unsecured – financial institutional bonds
• Issuer category – government security, corporate security or financial institution bonds.
• Maturity profile – short term(under one year) – money market security & term longer than one year –
debt securities
• Interest bearing or discounted securities ( zero coupon bond)
• Fixed income (majority of them are) or floating rate basis.
Debt markets are governed by government securities. Non government securities account for
only 1.6% of trading.
Instruments in the Indian debt market

• Certificate of deposit – issued by scheduled commercial banks, bank CD have a maturity of 91days
to one year, if issued by financial institutions maturity is 1 – 3 years.
• Commercial paper – short term unsecured investment issued by corporate bodies (private & public)
to meet short term capital requirement. Maturity 3 months – 1 year. Can be issued to NRI on non
repatriable non transferable basis.
• Corporate debentures – issued by manufacturing companies, as secured instruments in form of
certificates, rated by credit rating companies, listed on exchanges.
• Floating rate bonds – short to medium term interest bearing instruments issued by financial
intermediaries & corporations. Maturity 3 – 5 years.
• Government securities – medium to long term issued though RBI, by the central & state
government. RBI decides the cut- off coupon on the basis of bids received during auction. The rate is
pre determined, the investor only bids for quantity.
• Treasury bills – short term obligations issued though RBI, by the central government at a discount.
Tenure 91 – 364 days.
• Bank & FI bonds – negotiable certificates issued by financial institutions like IDBI/ICICI or
commercial banks. They are both income bearing & discounted long term, instruments.
• Public sector undertaking bonds – issued by PSU’s in which the government holding is at least
51%. The minimum maturity is 5 years for taxable bonds & 7 years for tax free bonds. Are in
dematerialized form are eligible for repo transactions.
Basic characteristics of money market securities

Liquid funds invest in money market securities, which are under one year, many of them discounted or
zero coupon variety.
• CD, Treasury bill & CP are the three major types of instruments liquid funds invest in.
Basic characteristics of bonds or debt security

• Generally invest in long term fixed income paying debt securities. 4 main characteristics set a the
time of issue are :-
 Par value – principal value the investor will be paid upon maturity of the bond. Also known as
face value.
 Coupon – annual rate of interest paid on the par value of the bond to the investor.
 Maturity – term of the bond.
 Call & put option –
 call option (the issuer can redeem the bond before maturity)
 Put option (the investor will redeem the bond before the maturity)
Measures of bond yield

Returns on a fixed income are generally computed in the form of current yield or a yield to maturity.
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• Current yield: If the interest rates rise yield of the existing bonds will decline & vice versa eg. The
yield of a bond with a par value of RS. 1000, coupon of 10%, the market price of RS. 1200 is 8.33%
i.e. (10% * 1000/1200)
• Yield to maturity – is the annual rate of return an investor would realize if he bought the bond at a
particular price, received all the coupon payments, reinvested the coupons at the same YTM rate &
received the principal at maturity.
o Yield curve – graph showing yields of bonds of various maturity. It is normally upward
sloping as longer maturities offer higher interest. Long term debt carries higher risk on
account of inflation & other economic factors.
Risks in investing in Bonds

• Interest rate risk - when interest rates rise, the price of bonds fall, so the yield of a new investor
will be higher on a lower price he pays.
• Reinvestment risk – A bonds yield to maturity assumes reinvestment of interest received during the
term at a constant rate. This may not be possible if the interest rate falls & the amount is reinvested
at a lesser rate.
• Call risk: if the bond has been issued with a call option, the issuer may call them back if the interest
rates fall & return the investment to the investor.
• Default risk - the issuer may default on his obligation to pay timely interest or the principal amount.
• Inflation risk – rise in inflation rate decreases the purchasing power. Investors therefore expect the
yield to be higher than the inflation rate.
• Liquidity risk – the ease at which investment in a bond can be liquidated or sold at a price near its
value.
Yield Spreads & Credit Rating: a measure of risk

A fund manager must assess the risk of default by the issuer of a debt security. Mutual funds invest in
only market tradable security for the purpose of liquidity. Credit rating companies like Crisil, ICRA & Care
rate debt instruments of all non government borrowers. Government securities are not expected to carry
any risk of default.
Yield spread is the difference of yield of a non government security over a government security with the
same tenure. For eg. A government security offers a yield of 10% & a corporate bond a yield of 12%. The
yield spread would be 2% for the additional risk taken by the fund manager.
Duration – a measure of Interest rate risk

The purpose of computing the duration is to measure its sensitivity to changes of interest rate. Duration
measures the percentage change in a bond’s price with the change in yield of 1%.
Debt investment strategies

• Buy & hold – this strategy holds good if the general interest levels are stable. If the interest rate
rises the price of the bond will fall, hence the fund may generate less returns. Another risk is the
default risk as the investments are stated for a long time.
• Duration management – is active fund management. If the fund manager expects the interest rates
to fall, he would buy long term duration bonds & less short term ones.
• Credit risk – fund managers often buy bonds with lower credit rating expecting it to be rated higher,
higher rating would increase the bond price.
• Prepayment prediction – the funds with call option will be recalled if the interest rates fall, the fund
manager must make buy bonds with low call option or prepare & ready himself for the option.
Interest rates & debt portfolio management –

• Inflation – is the percentage by which prices of goods & services in an economy increase over a
period of time. In India inflation is measured by the wholesale price index although the Consumer
price index is tracked.
• Exchange rates – between 2 countries. Change in exchange rates can affect the interest rate
levels in the country.
• Policy of the central bank – to curb excess liquidity it might impose a higher liquidity ratio on
banks thus controlling credit leading to increase in interest rates
86
Organization structure of debt funds
• Interest rate forecasting unit.
• Fund managers & security dealers
87
Question Time
1. What % of total debt is with non government securities

a. 1.6%
b. 10%
c. 16%
d. 26%
2. What is the minimum term of Debt security?

a. 3 days
b. 7 days
c. 366 days
d. 15 days
3. Which of these is not an issuer of debt securities?

a. Government security
b. Non government security
c. Financial Institutional bonds
d. Money lender in the secondary market
4. What are debt instruments having a maturity of under one year called?
a. Debt instruments
b. Junior debt instruments
c. Money market security
d. call & put options
5. What are zero coupon bonds?

a. Maturity is 0 days
b. they are equity instruments
c. They are available at a discount & hence offer no interest.
6. Who is the issuer of certificate of deposit?

a. Co-operative banks
b. Scheduled banks
c. Reserve bank of India
d. Ministry of Finance
7. Corporate debentures are issued by?

a. Co-operative banks
b. Scheduled banks
c. Reserve bank of India
d. Manufacturing companies
8. What does the RBI auction?

a. The interest rate
b. The term of bond
c. % of corporate bond & government bond
d. The quantity the investors wants
9. What are treasury bills?

a. Issued by the central government though RBI
b. Tenure 91 – 364 days
c. Sold at a discount, means there is no interest payable.
d. All of the above
10. Which of the following is true, with regard to public sector bonds?
a. Minimum government stake should be 51%
b. Are in dematerialized form & eligible for repo transaction
c. Minimum maturity is 5 years for taxable bonds & 7 years for tax-free.
d. All of the above
11. Where do liquid funds invest?

a. Certificate of deposit
b. Commercial paper
c. Treasury bills
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d. All of the above
12. What is call option?

a. The issuer can redeem the bond before maturity
b. The investor can call for the bond back
c. It is similar to equity trade.
d. It is a long term paper payable only on maturity.
13. What is put option?

a. The issuer can redeem the bond before maturity
b. The investor can redeem the bond before maturity.
c. The issuer can put the bond for resale.
d. It is a long term paper payable only on maturity.
14. What is par value?

a. it is opposite of face value
b. It is basic value + dividends
c. Principal value the investor will receive on maturity.
d. It is a bond having no value
15. When the interest rates go up, the

a. price of bond remains same
b. price of bond increases
c. price of bond decreases
d. There is no connection between price of bond & interest rates.
16. When the interest rates go down, the

a. Bond will trade at par
b. Bond will trade below par
c. Bond will trade above par.
d. Bond will not be traded
17. What risk does the bond face when the interest rates falls in future?
a. Call risk
b. Default risk
c. Reinvestment risk
d. Inflation risk
18. What risk does the bond face when the bond cannot be sold at a price nearer its value?
a. Call risk
b. Default risk
c. Reinvestment risk
d. Liquidity risk
19. Which of the following is not a debt investment strategy?

a. Buy & hold
b. Duration management
c. Credit risk
d. Exchange rate risk
20. What is duration – a measure of risk?

a. The % change in the bond’s price with the change in yield of 1%
b. When the fund manager would have to increase the term of bond
c. When short term bond default in their payments
d. When inflation causes prices to rise
21. Inflation in India is measured by the

a. Consumer price index
b. Whole sale price index
c. Sensex
Answers: 1(a), 2(c), 3(d), 4(c), 5(c), 6(b), 7(d), 8(d), 9(d), 10(d), 11(d), 12(a), 13(b), 14(c), 15(c),
16(b), 17(c), 18(d), 19(d), 20(a), 21(b).
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Investment policy & restrictions
Objective –
Understanding the various policies & restrictions paid down by SEBI for portfolio
management.
List of approved & unapproved securities
Concepts & Contents

Investment guidelines in equity & debt funds
Investment restrictions by SEBI
Approved & unapproved investments
Expected Marks – 3- 7 marks
90
Investment policy & restrictions
Investment policies of each scheme are dictated by the investment objective in the offer document.
Equity fund - investment strategies lay guidelines on the sectors & what kind of companies to
invest in, usually minimum & maximum allocation to each fund class.
Debt fund – investment strategy lays guidelines on the portfolio composition in terms of types
of instruments to be held, their credit rating profile & average maturity, minimum & max.
percentage of cash & money market instruments also needs to be mentioned.
Investment restrictions by SEBI

• Mandating minimum levels of diversification in investments
• Ensuring that the investors funds are not used to favor a few or associated investee companies & are
invested in approved securities.
Minimum number of investors per scheme –

• Each scheme should have a minimum of 20 investors
• No single investor should account for more than 25% of the corpus.
Minimum portfolio diversification norm

• The fund can’t have more than 10% investments in a single company.
• Investments in the index funds must be in accordance with the weight age of the script.
• SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer
to15%; it may be extended to 20% with the prior approval of the board of AMC & the board of
trustees.
• In case of unrated debt instruments maximum investment permissible is 10%.
• Max 10% in unlisted equity in case of close ended funds & 5% in unlisted equities in open ended
funds.
• SEBI permits investments in ADR’s/ GDR. It also allows investments in overseas listed companies if at
least 10% holding is with an Indian company.
Approved & unapproved investments
• Equity with voting rights – a fund under all its schemes is not allowed to own more than 10% of
any company’s paid up capital carrying voting rights.
• Not more than 5% of Net asset value of a scheme can be invested in other schemes, so as to prevent
an artificial increase in fund size.
• Credit rating on debt schemes – All debt instruments have to be rated by at least one credit rating
agency.
• Only delivery based purchases/Sales – short selling & carry forward transactions are not allowed.
• Securities in the name of scheme.
• Temporary investments in bank deposits – pending decision on where to invest the money can
be in a bank deposit, subject to it been a scheduled bank.
• No lending. Can’t lend or advance any loans.
• Unlisted or sponsor listed securities –
• Inter scheme transfer – is permitted subject to it be done at market price.
• Use of derivatives
• Record of investment decisions: with the purpose to ensure due diligence & to bring transparency
in investment decisions, SEBI requires AMC to maintain records of each investment.
• Fund of fund scheme – A FOF can not invest in other FOF scheme.
• Liquid funds
91
Question Bank
1. Which of the following is not an investment restriction by SEBI?
a. Mandating minimum levels of diversifications in investments
b. Ensuring that the investor funds are not used to favor associate companies
c. Investments are done in approved securities
d. All funds must invest in Equity to increase the % of returns
2. What is the minimum number of investors per scheme?

a. 10
b. 15
c. 20
d. 100
3. What is the maximum % of corpus a single investor can hold?

a. 10%
b. 15%
c. 25%
d. 5%
4. What is the minimum % a fund can invest in a single company?

a. 10%
b. 15%
c. 5%
d. 2%
5. What is the maximum % of funds that can be invested in a debt paper with & without the trustees’
permission?
a. 10% - 7%
b. 20% - 15%
c. 15% - 10%
d. 20% - 10%
6. What is the maximum % that can be invested in unlisted equity in open ended & close ended funds?
a. 10% -10%
b. 5% - 5%
c. 10% -5%
d. 5% - 10%
7. What is the maximum % a fund can hold in a single company’s paid up capital?
a. 5%
b. 7%
c. 10%
d. 3%
8. Can a fund of fund invest in another fund of fund?

a. Yes
b. No
9. Is inter scheme transfers allowed in NPA?

a. No
b. Yes
10. Can mutual funds lend money?

a. Yes
b. No
11. In whose name does the fund buy securities?

a. Trustees
b. Sponsor
c. Name of Scheme
d. AMC
12. Are inter scheme transfers allowed in equity funds?

a. Yes
b. No
Answers: 1(d), 2(c), 3(c), 4(a), 5(b), 6(d), 7(c), 8(b), 9(a), 10(b), 11(c), 12(a)
92
Measuring & evaluating mutual
fund performance
Objective –
Understanding the calculation of Mutual fund performance.
Understanding benchmarking & performance tracking device.
Concepts & Contents

Different performance while computing NAV
Borrowing by Mutual funds
Benchmarking (equity debt) relative to the market.
Criteria for comparisons & framework of comparisons.
93
Measuring and evaluating Mutual fund performance
Fund performance
• Investor perspective – he would be interested in tracking his performance.
• Advisor perspective – it would be important to give proper advise on which fund has a good
performance record.
Different performance measures

• Change in NAV
• Total return – takes into consideration the dividends issued by the fund. Formula
o Total return = distribution + change in NAV/ NAV at the beginning * 100
o Purchased NAV at 20, dividend paid Rs. 4. end of year NAV is 22.
 = 4 + (22-20) / 20 *100
• Return on investment with dividend reinvestment - takes into consideration the dividends
reinvested in the fund. Formula
o {(1 + div/ ex-d NAV) * end NAV } – begin NAV / begin NAV *100
o Purchased NAV at 20, dividend paid Rs. 4. NAV at 21. end of year NAV is 22.
• Cumulative aggregate or average annualized return – (CAGR) formula
o A= P* (1+R/100)^n
o P= principal invested
o A= maturity value of investment
o N= period of investment in years
o R= Annualized compounded rate
• Compare same periods

• Less than one year returns should not be annualized, unless in liquid funds
• Returns since inception –
Expense ratio – is an indicator of the fund’s efficiency & cost effectiveness. It is the ratio of total expense
to average net assets of the fund.
Brokerage commission on the funds transaction is not included in fund expense figures
The income ratio – net investment income divide by its net assets for the period.
Portfolio turnover rate

It is defined by lesser of the assets purchased or sold divided by the funds net assets
Transaction costs – includes all expenses related to trading such as brokerage commissions paid, stamp
duty on transfers, registrar & custodian fee.
Fund size – can affect performance

 Small can be easily maneuvered 7 can achieve their objectives in a focused manner with limited
holdings
 Large funds benefit from economies of scale.
Borrowing by mutual funds.

• Mutual funds are allowed to borrow only for the purpose of meeting temporary liquidity needs.
• Period not exceeding 6 months
• Maximum burrowing is to the extent of 20% of net assets
Evaluating fund performance

Basis of choosing an appropriate benchmark
• The asset class it invests in. An equity fund has to be judged by an appropriate bench mark from the
equity markets
• The funds stated investment objective – for eg if a person invests in long term growth stocks it should
be bench marked that captures growth stock performance
Benchmarking relative to the market

• Equity funds – BSE 100 or 200 or NSE 100
• Debt fund – indices are available to be used for bench marking. Main sources are –
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 I-SEC – I-Bex index is often used by some analysts as a benchmark to track
government securities performance.
o LI- bex that tracks the securities with long maturities over 7 years
o MI-bex that tracks the securities with maturities between 3 to 7 years
o Si-bex that tracks the securities with maturities between 1 to 3 years
 CRISIL – has 8 debt indices, 4 primary indices that track the price of underlying
securities and 4 derived indices based on primary indices. Primary indices cover AAA AA
rated securities & call market & commercial paper.
 NSE has designed a government securities index & a treasury bills index. They track
o Principal return index - market price movements that are a mirror image of yield
movements.
o Total return index - both interest accruals & capital gains or losses –
Criteria for peer group comparisons
• The investment objective & risk profile. Can’t compare a debt fund with equity fund.
• Portfolio compositions of both are same – high % of corporate bonds fund can’t be compared to one
having a high % of government bond.
• Credit profile – 80% of the fund having AAA can’t be compared with one having 40% AAA
• Expense ratios. The lower the better.
Comparisons can be done only if

• The time frame is same.
• Only average annualized returns are calculated
• Post tax which fund is better.
Tracking Mutual fund performance

The following are common sources in India
• Mutual funds – Annual & periodic report
• AMFI website
• Financial press
• Fund tracking agency
• Newsletters
• Prospectus
• Analytical articles
95
Question Time
1. Investor should track mutual funds in which he has invested because –

a. He comes to know the performance of his fund
b. The annual reports inform him about the NAV of the fund
c. Take decision of keeping, liquidating or acquiring mutual fund
2. Define expense ratio?

a. Ratio of total expense to average net assets of the fund
b. Ratio of total expense to total net assets of the fund
c. Either (A) or (B)
3. Define Income ratio?

a. Ratio of total income to the fund’s net assets
b. Net investment income divided by its net assets for the period
c. Total income divided by total assets
4. Less than one year returns should be annualized in case of which funds?
a. Liquid
b. Debt
c. Equity
d. All of the above
5. Are mutual funds allowed to lend money?

a. Yes
b. No
c. If the trustees allow
d. With the approval of SEBI
6. What is the amount of money mutual funds can lend?

a. 20% of total assets
b. 10% of total assets
c. Not allowed
d. Trustee take the decision
7. Are mutual funds allowed to borrow money?

a. Yes
b. No
c. If the trustees allow
d. With the approval of SEBI
8. What is the amount of money mutual funds can lend?

a. 20% of total assets
b. 10% of total assets
c. Not allowed
d. Trustee take the decision
9. Measuring & evaluating fund performance is important:-

a. Investor perspective
b. Advisor perspective
c. Mutual fund rating perspective
d. Both (A) & (B)
10. Name the different performance measures?

a. Change of NAV
b. Total return – dividend issued is considered
c. Return on investment where dividend is reinvested
d. All of the above
11. What is the maximum period a Mutual fund can borrow for
a. 6 months
b. 9 months
c. 15 days
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d. 12 months
12. Under what circumstances can a mutual fund borrow money?

a. To pay tax on behalf of investors
b. To off set Redemption pressure
c. To invest in the markets at the right time.
d. To meet expenses of the AMC
13. Which fund is better?

a. Small funds can easily be maneuvered, hence better
b. Large funds benefit from economies of scale.
c. Mid sized funds – they have the benefit of both.
d. Fund size does not matter.
14. A 100 % turn over rate indicates

a. The fund has been bought & sold once in a year
b. The fund has been bought & sold once in 6 months
c. The fund has been bought & sold once in a month
15. A 400 % turn over rate indicates

a. The fund has been bought & sold once in a year
b. The fund has been bought & sold once in 6 months
c. The fund has been bought & sold once in 3 months
16. Diversified equity funds are bench marked against

a. BSE 100 or 200 or against NSE 100, Sensex , Nifty
b. Against any sectoral index
c. I – bex
d. Bank deposits
17. long term debt fund is bench marked against

a. Li – Bex
b. Mi– Bex
c. SI- Bex
d. I-Bex
18. Comparisons can be done only if

a. The time frame is the same
b. Only averaged annualized returns are calculated
c. Post tax which fund is better
d. All of the above
19. Mi- bex tracks performance of debt securities having a term

a. 1 – 3 years
b. 3- 7 years
c. Above 7 years
d. Under 1 year
20. Brokerage commission, stamp duty on transfers, registrars & custodian fees form a part of
a. Initial management charge
b. Transaction cost
c. Load fund
Answers: 1(c), 2(a), 3(b), 4(a), 5(b), 6(c), 7(a), 8(a), 9(d), 10(d), 11(a), 12(b), 13(d), 14(a), 15(c),
16(a), 17(a), 18(d), 19(b), 20(b).
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Financial planning
Objective –
Understanding the basic terms in financial planning.
What makes a good financial planner?
Financial planning process & the common mistakes we make in financial planning.
Financial planning process
Concepts & Contents

Basic terms used in Financial Planning
Financial process in India
Common mistakes in financial planning
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Financial Planning
Finance is needed by each one of us at various stages of our life, & to ensure that money is available at
the right time.
Buying a home, providing for children’s education or for retirement are all examples of goals in life that
can be measured in monetary terms.
Personal financial needs: - protection & investment
Financial planning is an exercise aimed at identifying all the financial needs of an individual, translating all
the needs into monetarily measurable goals at different times in future & planning the financial
investments that will allow the individual to provide for & satisfy his future financial needs & satisfy his life
goals.
Why should financial distributors become financial planners?
• Strong potential demand for such services

• Limited supply of financial advisers
Benefits of financial planning

• Ability to establish long term relationships.
• Ability to build a long term profitable business.

• Building trust with clients
• Good knowledge of financial products
• Familiarity with taxation & estate planning issues
• Understanding the various stages of a client’s wealth & life cycle.
• Independent judgment & balanced thinking.
• Organized way of working.
• Regular contact with clients.
Place of mutual funds in financial planning:-

Mutual funds can form the core foundation & building block for any type of financial plan – long or short
term – high or low risk & for any type of client, retail, affluent or institutional.
Role of each participant
Client Financial Fund Portfolio

Planning Manager Investments
Discussion Choice of Analysis of

on goals & scheme & markets &
asset fund choice of
allocation manager individual
security
Basic terms used in financial planning
1. Financial Planning: the overall process of advising clients on how to achieve their financial
goals.
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2. Financial goals & objectives: all the goals & needs of a client which have a monetary aspect to
it.
3. Asset Allocation: the allocation of a client’ investments across various asset classes, financial &
physical.
4. Risk tolerance: the extent to loss of value that a client can tolerate, psychologically & financially
& for how long they can withstand such declines in value.
5. Financial Plan: a document that details clearly in writing the financial goals, available recourses,
time frame for investment, asset allocation and an action plan towards implementing the financial
planner’s recommendation.
6. Portfolio rebalancing: the process of making changes to the asset allocation to ensure that the
client’s investment objective stays consistent.
CFS – Certified Financial Planner – board of standards USA

1. Establishing & defining the client planner relationship.
2. Gathering client data & defining client goals.
3. Analyzing & evaluating a client’s financial status.
4. Developing & presenting financial planning recommendation.
5. Implementing financial planning recommendation.
6. Monitoring the financial planning recommendation.
Financial planning process in practice
1. Establish & define the relationship with the client: Financial planner should clearly explain the
service he would provide, the charges for his services & the duration of the professional
relationship.
2. Define the client’s goals: F.P. should get the client to discuss his financial needs, for eg. His
retirement needs, money for his children’s education & marriage needs, purchasing a home etc.
Important time to build trust & confidence with the client.
3. Gather & analysis data, assess the current recourses & future income potential:
4. Define & shape the risk tolerance level of the client:
a. The client’s degree of risk-taking keeps changing with market conditions. The pattern is
that client’s become more risk taking in a rising market & risk averse in a falling one. It
should be the other way round.
b. Client’s attitude towards risk is not consistent with their recourse availability & financial
goals. Clients are extra conservative & at times would not be able to make their financial
goals with their current level of saving & low yield rates.
5. Ascertain the client’s tax situation:
6. Recommend the appropriate asset allocation & specific investments: the purpose of ascertaining
the client’s goals, his resources, his risk tolerance & tax situation is simply to recommend the
most appropriate asset allocation & investment strategy for the client. It is a critical decision &
the essence of financial planning.
7. Executing the plan & making the client invest: executing is most important. The F.P. must help
the client liquidate some of his assets if the need be. If the planner is in charge, he should keep
the client informed about the progress of the investments.
8. Reviewing Progress & Portfolio balancing: once every 3 to 6 months the F.P. should meet the
client to review the ongoing performance of schemes, evaluate the investment strategies & see if
it needs to be refined. It would happen under the following circumstances:
a. The client’s future needs or current resources have changed.
b. The investment climate & market conditions have changed.
c. The client’s personal situation has changed in a significant way, on account of a personal
or financial event.
Common mistakes in Financial Planning
1. Measurable goals are not set

2. Financial decision is make without keeping the other factors in mind.
3. Financial planning is confused with investments.
4. Financial plans are neglected & not re valuated periodically.
5. It is considered relevant only for the wealthy.
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6. It is considered only for the mid aged clients.
7. Considered similar to retirement planning.
8. Acted upon only in case of financial crisis.
9. Expectations of unrealistic returns.
10. Financial planning to some means losing control on your investments.
11. Considered for tax planning only.
The client’s responsibilities
• Set Measurable financial goals – A child’s educational need needs to be measured. The need say of
Rs. 5,00,000/- for your child’s education is a defined amount that needs to be worked at.
• Understand the need of each financial decision – Each financial decision might have an effect on the
client portfolio. Tax implication needs to be taken care of.
• Re-evaluate financial situation periodically – financial planning is a dynamic process. An individual
financial goal changes on a regular basis.
• Start investing as soon as possible.
• Be realistic in expectations – plan according to returns expected. Planning for a return of 18% on a
debt investment could affect the portfolio returns.
• Realize that the client is in charge.
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Life cycle & wealth cycle stages
Objective –
Understanding the various stages, needs, requirements across the different stages of
a man’s life.
Understanding the constraints of financial planning.
Concepts & Contents

Stages of life cycle
Stages of wealth cycle (accumulation, distribution stages etc.)
Financial planning for affluent customers
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Life cycle & Wealth cycle stages.
Stages in life cycle.

• Childhood stage: is a period of dependency which lasts till the full education is completed. The
educational needs are met are met by the parents or the relatives.
• Young unmarried stage: no need of life insurance, need to save for future disability fears or long
term sickness. They may wish to invest in equities as the investment horizon is long & hence have a
higher risk appetite.
• Young married stage: Couples become inter dependant with shared responsibility. Two options:
 Both partners are working: generating two incomes, they have sufficient surplus to invest in their
most important financial needs.
 Only one partner is earning & the other is a home maker: death of the income generator would
deprive the other partner of regular income. The need would be life insurance.
• Young married with child stage: Expenses are rising faster than income generated. Protection
needs of the family are high. Important needs like saving for children’s education, among other saving
for a house, car, retirement needs etc.
• Married with older children stage: Clients are approaching mid life, incomes have gone up. Need
for protection decreases & need for investments, to take care of retirement needs.
• Post family/ pre retirement stage: The children now would in most cases be financially
independent; hence the need now is more towards retirement or pension plans. Health related
problems increase & hence the need for health insurance is of utmost importance. The need for life
insurance is also high as one of the partners might still be dependant on the other.
• Retirement stage: people need 2/3 of their annual income post retirement. Less than 20% people
achieve this number. People fall in one of the 3 categories:
 Low pension & little capital.
 Relatively low capital + some accumulated capital.
 Sufficient pension + substantial asset & capital
Constraints of financial planning:

• Insufficient investable resources.
• Dearth of appropriate financial products.
• Time & risk.
Wealth Cycle Guide
• Accumulation stage: clients are looking to build wealth – financial goals are far away &
investments can be made for the long term.
• Transition stage: one or more of the client’s financial goals are approaching, for eg. A 40 year
old would need money for his child’s educational needs.
• Reaping stage: cashing out stage. Financial goals, for which the client has invested, have to be
met & hence this could also be termed as the spending stage.
• Intergenerational transfer stage: older investors normally plan to park their surplus & hand it
down to their grand children.
• Sudden wealth stage: sale of equity, property, inheritance wealth can give a client a one time
financial bonanza, making him suddenly wealthy.
Goal oriented investing.

Each financial goal is taken care of separately. Investments & financial planning is done in a focused &
goal oriented way.
Financial planning for affluent investors: While they may not be worried about having enough money
to meet their financial expenses, they too look for proper financial guidance. They can be classified into 2
categories:
• Wealth creating: individuals looking to built their wealth.
• Wealth preserving: individuals looking to preserve the wealth they have created.
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Financial strategy for investors
Objective –
Understanding the value of long term financial planning.
Understanding the right financial strategy.
Concepts & Contents

Investing for the long term, the strategies to follow.
The right financial planning strategies.
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Financial strategy for investors
Financial planning strategy: Investing for the long term
• Harness the power of compounding: earning interest on interest greatly appreciates the wealth of
the client. For eg. Investing Rs. 100/- @ 12% would yield Rs.311 at the end of 10 years or Rs. 965/-
at the end of 20 years.
• Choose a strategy to maximize returns on investment:
o Buy & hold: most common strategy, also the most common mistake. Sell the non performers &
buy the good performers.
o Rupee Cost averaging: Equity markets rise & fall, the ideal time to invest is when the markets
are low. A near impossible task year in & year out. Hence we need to invest in the markets on a
regular basis. When buying equity on a regular basis, we would buy stock at a high or a low
price. The average price would be low than the selling price, hence the client benefits.
o Jacob’s recommendation of a combined approach: Invest equal amounts in a liquid & an
aggressive equity fund. If the equity markets fall, transfer money from the liquid fund to
aggressive equity fund. If the equity fund grows by a moderate, do nothing. However if there is a
sharp rise, sell equity & invest in liquid fund. Ideally also called ‘profit booking’.
Right Financial Planning strategy:

• When to invest & when to cash out.
o If the client is holding individual shares or fixed income securities, he has to be active & sell
as soon as the price rises beyond reason or when fundamentals start to deteriorate.
o in case of mutual funds, client should redeem under the following circumstances
• when their financial goals need to be met.
• If the overall market appears over valued in terms of fundamentals or historic
values.
• Start planning & investing early: investing small amounts of money early in life leads to higher
saving. (compounding effect)
• Have realistic expectations: in the 1980’s a 14% return was possible if invested in fixed deposits,
now it’s only 7- 9%. Clients should plan their outflow accordingly. In case of equity markets
expectations should be 4-5% above bank fixed deposit rates.
• Invest regularly.
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Question Time
1. What is the criticism of Rupee Cost averaging?
a. It has no short coming.
b. It invests the same amount of money every year.
c. It does not tell when to invest & when to exit.
d. In the long run the average cost will be more than investing in the market at the right time.
2. Keeping in mind the concept of realistic expectations, what should be our average expectations from
the equity markets?
a. 10 - 12%% more than the bank deposits
b. 4-5% more than the bank deposit
c. On an average 18%
d. 5-10% more than the bank deposit
3. When should a client exit from his mutual fund holdings?

a. When his financial goals are met
b. Even 5 years.
c. He should book profits at every year end.
d. Never.
4. Explain the concept, ‘harness the power of compounding’

a. Investing 10% money more than last year.
b. Investing an additional amount in proportion to the inflation rate.
c. Earning interest on interest appreciates wealth
5. Which of this in not a right financial planning strategy?

a. When to invest, when to cash out.
b. Start planning & investing early.
c. Invest regularly
d. investing only in liquid funds for safety
6. Explain the buy & hold strategy.

a. Sell the non performers, buy the good performers
b. Buy in the beginning of the month & sell at the month end
c. Alternately buy & sell equity & liquid funds
d. None of the above.
Answers: 1(c), 2(b) 3(a) 4(c), 5(d), 6(a).
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Asset allocation principles
Objective –
Understanding the various asset allocation principles
Understanding the strategy asset allocation.
Concepts & Contents

Benjamin’s 50/50 balance
Bogle 50/50 asset allocation based on age.
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Asset allocation principles
• Benjamin Graham‘s 50/50 balance: recommends an equal split between equities & debt. The
balance has to be constantly managed. If the equity markets rise or fall the debt fund would
compensate to keep the balance constant.
• 50/50 portfolio of funds: Bogle suggests the following combination:
o Basic balanced portfolio: 50% in diversified equity value funds, 25% in govt. security fund
& 25% high grade corporate fund.
o Basic Indexed portfolio: 50% in Equity index fund & 50% in total bond market portfolio.
o Simple Managed portfolio: 85% in balanced funds & 15% in medium term bond funds.
o Complex managed portfolio: 20% in diversified equity fund, 20% in aggressive growth
fund, 10% in specialty funds, 30% in long term bond funds & 20% in short term bond fund.
o Readymade portfolio: Single index fund with 60/40 equity/ bond ratio.
Strategy Asset Allocation: Bogle recommends adjusting of portfolio based on the life cycle.
Older investor in distribution stage 50: 50 (equity/debt)
Younger investor in distribution stage 60: 40 (equity/debt)
Older investor in accumulation stage 70: 30 (equity/debt)
Younger investor in accumulation stage 80: 20 (equity/debt)
Fixed & variable asset allocation:

• Fixed allocation: Equity & debt market investments grow at different pace. When the stock market
is growing, the returns in the equity investments would far exceed that of debt market. In such a
case, part of the profit should be transferred from equity to debt to keep the asset allocation intact.
When the equity markets are under performing part of the profits made from debt should be
transferred to equity, to keep the asset allocation intact.
• Variable Asset: the asset allocation does not take place. Growth in equity market remains in the
equity market.
Tactical Asset allocation
Increased returns without increased risk: lower expense ratio will generate higher returns.
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Question Time
1. As per Bogle, what is an ideal asset allocation for older investor in accumulation stage?
a. 50:50 (equity /debt)
b. 60:40 (equity /debt)
c. 70:30 (equity /debt)
d. 80:20 (equity /debt)
2. As per Bogle, what is an ideal asset allocation for younger investor in accumulation stage?
3. As per Bogle, what is an ideal asset allocation for older investor in distribution stage?
4. As per Bogle, what is an ideal asset allocation for younger investor in distribution stage?
5. What is the allocation is basic balanced portfolio?

a. 50% in diversified equity value fund, 25% in government security & 25% in high grade
government bond.
b. 50% in equity index fund & 50% in total bond market portfolio.
c. 85% in balanced funds & 15% in medium term bond funds
d. Single index fund with 60/40 equity/bond ratio.
6. What is the allocation is basic indexed portfolio?

government bond.
7. What is the allocation is simple managed portfolio?

government bond.
8. What is the allocation is readymade portfolio?

government bond.
9. What is meant by fixed asset allocation?

a. when the equity market rise, invest more in them
b. When the equity markets rise, transfer the extra profits to the debt funds
c. When the equity markets fall, transfer money from the debt funds
d. Both (B) & (C)
10. What is meant by the variable asset allocation?

a. When the equity markets rise, transfer the extra profits to the debt funds
b. When the equity markets fall, transfer money from the debt funds
c. Both (B) & (C)
d. Growth in equity market stays in equity markets & at times of loss no transfer from debt funds
take place.
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Answers: 1(c), 2(d), 3(a), 4(b), 5(a), 6(b), 7(c), 8(d), 9(d), 10(d)
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Right investment products
Objective –
Understanding the various assets available to an investor.
The various risk return profile, the stability of returns, liquidity & convience.
Concepts & Contents

Assets Types – Financial & Physical
Comparison of products
Comparing bank deposits v/s debt funds
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Right investment products for investors
Asset types
• Physical & Financial assets:
 Physical assets: gold & real estate
 Gold: Indians traditionally have been gold investors. Gold is an excellent hedge against inflation.
Banks can also issue gold bonds, Mutual funds also offer gold unit linked schemes.
 Real estate: capital required is extremely high & hence not many takers. AMC’s offer real estate
Mutual funds.
• Financial assets:
Issuer Product Available to

Banks Fixed deposit Investors/ MF
Corporates Shares/ Debentures Investors/ MF
Bonds/ F.D.’s Investors/ MF
Government PPF, personal invest Investors
Govt. Securities Investors/ MF
Financial Inst. Bonds Investors/ MF
Insurance Cos. Insurance policies Investors
• Banks: offer safety & liquidity, most are government controlled. Post tax & inflation the yields are
very low. Invertors should be advised to park a small portion of their saving in banks.
• Corporates: offer equity & debt instruments, quasi debt-quasi equity instruments also. Bonds issued
with less than 18 month tenure are exempt from credit rating.
• Financial Inst.: ICICI & IDBI regularly issue bonds. Option to receive periodic interest. Deep
discount bonds do not offer this facility. They qualify for tax benefits under Sec 80 C. usually the
maturity terms are 3,5, 10 & 15 years.
• Government:
 PPF – upto Rs. 70,000/- per year offers tax benefit under 80C. Maximum one account in one
name. Minimum investment Rs. 500/-, lock in period 16 years, tax free returns, with the option
to withdraw 50% of the 4th year balance in the 7th year.
 Indira & Kisan Vikas Patra: yield 8%, maturity 6 years, appeals to urban investors as thy can
invest without being identified. Easily transferable & liquid.
 RBI relief bond: interest rate 8%, interest taxable, virtually free of default risk.
 Govt securities: investment amount high, hence the investment route is though MF’s.
 Life insurance: should be bought for protection but the trend is people buy it for investment
purpose. Main reason for buying insurance is the tax benefit it offers under Sec. 80C & 10(10 D).
Comparison of products
• By nature of investment: investors look for best returns. To determine which fund is better, other
benefits need to be taken into consideration – risk factor, stability of returns, liquidity & the
convenience by which the investment can be managed.
• By current performance: comparisons need to be made based on performance, post tax. Some
Mf’s(ELSS) also offer tax benefits under 80C.
Direct Equity investment v/s Mutual fund investing.

• Identifying stocks
• Diversification
• Professional Management
• Investment objectives – income, growth or tax saving
• Liquidity
• Transaction cost
• Convenience
Bank deposits v/s debt funds

Bank deposits cater to investors whose primarily objective is safety. The returns are therefore relative low.
A bank deposit is guaranteed by the bank for repayment of principal & interest. Any risk associated with
investment of investor’s funds has to be borne by the bank.
A mutual fund on the other hand invests at the risk of the investor.
112
Bank deposits are not totally free from risk. A conservative debt fund can give higher returns than a bank
deposit.
113
Question Time
1. Why do people buy Life Insurance?
a. To benefit from income tax.
b. To protect their lives.
c. It is the best place to invest.
d. People do not buy life insurance
2. Other than returns how would you compare funds?

a. Risk factor
b. Stability of returns
c. liquidity
d. All of the above
3. How would you compare products based on current performance?

a. Post tax
b. Excellent if it is liquidity
c. Excellent if it is debt
d. Excellent if it is in liquid funds
4. Where do people invest to protect their identity?

a. Public provident fund
b. Life Insurance
c. Indira Vikas Patra
d. Equity markets
5. Difference between bank deposits & debt funds

a. Risk belongs to the investor in debt funds.
b. Deposits in banks are comparatively risk free.
c. Both (A) & (B)
6. Which is the ideal hedging tool against the inflation?

a. Government Security
b. Gold
c. Equity markets
d. Derivative markets
Answers: 1(a), 2(d), 3(a), 4(c), 5(c), 6(b)
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Risk in investing
Objective –
Understanding the various risks in investing.
Evaluating & measuring risk
Sub allocating assets to evaluate risk return on investments
Concepts & Contents

Evaluating risk
Asset allocation – sub section based on the risk return profile.
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Risk in investing
Risks in mutual fund investing can be built in Investment planning:

• Risk appetite of the customer – debt or equity
• Evaluating & measuring risk: mutual fund risks are in line with the risk appetite of the client.
Asset allocation to fund category section:

• Sub allocating equity & debt % investments to sub categories of equity & debt funds.
• Evaluating the risk & matching it to the investor’s portfolio.
• Low Risk funds

 Money Market Funds
 Government security funds
• Moderate risk funds
 Income funds
 Balanced funds
 Growth & income funds
 Short term bond funds
 Intermediate bond funds
 Index funds
• High risk funds
 Aggressive growth funds
 International funds
 Sector funds
 Specialized funds
 Precious Metal funds
 High yield funds
 Commodity funds

Jacob recommends the following classification:-
• Low risk conservative portfolio
50% government security fund + 50% money market fund
• Moderate risk Portfolio
40% growth & income funds + 30% Govt bond funds+ 20% growth funds + 10% index funds
• High risk (aggressive) Portfolio
25% aggressive growth funds + 25% international funds + 25% sector funds +15% high yield
funds + 10% gold funds
The Investment Co. Institute of USA (similar AMFI) rates funds as per their risk in the
following ascending order:
 Money Market Funds
 Insured Municipal bond funds
 Corporate bond funds
 Mortgage funds
 Govt. bond funds
 Index funds
 Income funds
 Balanced funds
 Growth & Income funds
 International funds
 Precious metal funds
 Growth funds
 Aggressive funds
Evaluating Risk
Equity Funds: Volatility comes from:

 Kind of stocks (growth or value – large or small cap)
 Degree of diversification
 Fund managers success at market timing
Equity price risk
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 Company specific
 Sector specific
 Market level
Market cycle: equity investments are more rewarding in the long term. Any equity fund could be termed
risky if the term is short.
Risk measures: defined as volatility is measured by ‘Standard deviation’. It means the fluctuations of a
fund’s returns around a mean level.
Another measure of a fund’s risk is its “Beta Coefficient” Beta relates to a fund’s return with the market
index & measures the sensitivity of the fund’s return to changes in the market index.
Beta = 1 means it moves with the market.
Beta <1 means the fund will be less volatile than the market eg. a conservative fund.
Beta >1 means the fund will be more volatile than the market. Higher beta portfolio’s give higher returns
in the rising markets.
Standard deviation is the best measure of risk although it is based on past performance.
Bogle’s Ex- Marks or a number known as “R-Squared” is used to spot questionable betas. R-Squared
measures how much of a fund’s fluctuation is attributable to movements in the overall market, from 0 –
100%. Clearly an index fund will have an Ex mark of nearly 100%
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Question Time
1. Among the following which fund offers the least risk?
a. Money market funds
b. Government security funds
c. Balanced funds
d. Equity funds
2. Jacob’s recommendation of 65 year old, investing in the least risk environment -:

a. 50% government security fund, 50% government bond fund
b. 50% government security fund, 50% index fund
c. 50% government security fund, 50% money market fund
d. 50% money market fund, 50% index fund
3. As per the investment company institute of USA, which is the least risk fund?
a. Insured municipal bond funds
b. corporate bond funds
c. income funds
d. Mortgage funds
4. Equity funds, volatility does not come from.

a. Kind of stock
b. Degree of diversification
c. fund manager success at market timings
d. real estate prices
5. Equity funds are more rewarding

a. In the long term
b. In the short term
c. Term has no basis
d. All of the above
6. Standard deviation means

a. It means risk in debt funds
b. It means the fund’s return around a mean level.
c. It measures expense on the fund
d. Equitable distribution of equity & debt.
7. A beta of more than 1 means

a. It is less volatile than the market
b. It is more volatile than the market
c. Fund is risk free
8. Ex- marks or R- squared measures

a. fund manager success at market timings
b. Balanced funds
c. Funds fluctuation as compared to the market
d. Short term investments in equity funds
9. A beta of less than 1 means
a. It is less volatile than the market
b. It is more volatile than the market
c. Fund is risk free
Answers: 1(a), 2(c), 3(a), 4(d), 5(a), 6(b), 7(b), 8(c), 9(a).
118
Developing a model portfolio
Objective –
Understanding Jacob’s 4 step model portfolio
Jacob’s portfolio allocation across different life cycles
Types of investors & recommended investments strategy
Concepts & Contents

Assets allocation across life & wealth cycles
119
Developing a model portfolio
Jacob’s 4 step program:
• Work with the investors to develop long term goals:

• Determine the asset allocation of the investment portfolio:
• Determine the sector distribution:
• Select specific fund managers & their schemes.
Jacob’s 4 different portfolios

Young unmarried professional: 50% in aggressive equity funds, 25% in high yield bonds & growth &
income funds, 25% in conservative money market funds.
Young couple with 2 kids: 10% in money market funds, 30% in aggressive equity funds, 25% in high
yield bonds & long term growth funds & 35% municipal bond funds.
Older couple – single income: 30% in short municipal bond funds, 35% long term municipal bond
funds, 25% moderately aggressive equity & 10% emerging growth equity.
Recently retired couple: 35% in conservative equity funds for capital preservation/ income, 25%
moderately aggressive equity & 40% in money market funds.
Types of investors & recommended investment strategy.

• Investors in accumulation stage: clients are looking to build wealth & their financial goals are far
away.
 Diversified equity & balanced funds 65- 80%
 Income & gilt funds 15- 30%
 Liquid funds & bank deposits 5%
• Investors in transition phase: should convert part of his equity portfolio into debt.
• Investors in distribution phase:
 Diversified equity & balanced funds 15- 30%
 Income funds 65- 80%
 Cash funds 5%
• Investors in the intergenerational transfer stage:

 Children: if the children are grown up, then leaving behind a balanced combination of growth &
income funds.
 Grand children: if the grandchildren are young then growth funds may be the best.
 Charitable causes: typically income funds are best to support this endeavor as they have the
capacity to provide current income.
• Investors in sudden wealth stage.
 Should take into account the effect of taxes as the amount would be greatly reduced when taxed.
 Invest in liquid funds till a complete financial plan is made.
120
Question Time
1. What portfolio mix would you recommend to a 56 year old client?
a. 40% equity, 60% Debt funds
b. 20% Equity, 20% liquid & 60 in debt funds
c. 40% in Equity & 60% in Balanced funds
d. 100% in monthly income plans
2. What advice would you give an investor in a sudden wealth stage?

a. Invest 50% in equity & 50% in debt funds
b. Invest 100% in balanced funds
c. Invest 100% in liquid funds
d. invest in fixed deposit
3. What advise would you offer clients who are in the accumulation stag?
a. Diversified equity & balanced funds 75%, liquid 5% & income & gilt funds 20%
b. Diversified equity & balanced funds 25%, liquid 5% & income & gilt funds 70%
c. Diversified equity & balanced funds 30%, liquid 50% & income & gilt funds 20%
d. 100 equity funds
4. What advise would you offer clients who are in the accumulation stag?
a. invest 100% in balanced portfolio
b. Invest 50% in equity & 50% liquid
c. Invest all in debt funds
d. convert part of your equity portfolio into debt funds
5. What advise would you give an elderly investor who wants to invest for his grandchildren?
a. Equity funds
b. Debt funds
c. Balanced funds
d. Liquid funds
6. Which of these is not Jacob’s 4 step program?

a. Work with the investors for long term goals
b. determine the asset allocation
c. Invest 90% money in equity
d. Select fund managers & their schemes
Answers: 1(b), 2(c), 3(a), 4(d), 5(a), 6(c)
121
Fund selection
Objective –
Understanding the amount an investor needs to invest in equity, debt or balanced
funds.
Selecting from a wide range of products to suit the clients financial goals.
Concepts & Contents

Selecting an equity fund
Selecting a debt fund
Selecting a money market fund
Selecting a balanced fund
122
Fund Selection
An advisor has to decide on the amount to be invested in the basic categories of Equity, Debt, balanced &
money Market funds.
Selecting an equity fund

• Classify the available equity schemes in
 Growth
 Value
 Equity Income
 Broad based specialty
 Concentrated specialty funds
• Choose one of the 2 strategies

 Select mainstream growth or value funds, providing broad based diversification
 Select either a differentiated growth or value fund, or a specialty fund whose risk return will vary
from the overall market.
 Evaluate pass returns of available funds
• Review the salient features of the scheme.
 Fund size – smaller funds means higher expenses.
 Fund age – the older the performing fund the better compared a new unproven fund.
 Portfolio managers experience
 Cost of investing.
 Portfolio character sis
o Cash position – equity funds normally hold little cash, say 5%, more cash would mean less
money is invested. A fund manager might sit on higher % of cash if he predicts a bull or bear
run.
o Portfolio concentration – if the funds 10 largest holdings account for over 50% of the net
assets, it is a concentrated portfolio.
o Market capitalization of funds – large caps funds are deemed safer to invest in compared to
small cap funds.
o Portfolio turnover – A steady holding of investments means long term orientation. Higher
turnover could mean higher capital gain but it would also mean higher transaction cost.
o Portfolio statistic – compare its performance with others.
 Ex marks – if ex mark is lower than 80%, the funds performance relative to the
market is less predictable. An Index funds carries a nearly 100% relationship with
the market index.
 Beta – measures risk.
 Gross dividend yield – is the fund’s reported yield is net after fund expenses or
gross before expenses. Small company funds have lower gross yields.
Selecting an debt/ Income/ Bond fund

• Narrow down on choices- debt funds have a larger variety to choose from. Short term – long term,
government – corporate, high investment grade or low, domestic – global bonds.
• Know your investment objective – younger investor need retirement planning, hence long term bonds
are appropriate, retired investors need money income schemes.
• Review the salient features of the scheme
 Fund age & size –
 Relative yields – if the investor need income, select a fund with high current yield (dividends)
 Cost – lower the expense ratio the better.
 Portfolio characteristics – Credit rating is very important. The higher the rating the safer the
investment.
 Average Maturity – the longer the duration, higher the risk. Interest rate risk.
 Tax implications –
 Bond V/s bond funds – direct interest income on bonds is taxable while the same interest
received though a fund is not taxable.
 Past returns
Selecting a money market or liquid fund

• Costs
• Quality
• Yields
123
Selecting a balanced fund
Any fund that has an allocation of 65% or more in any asset class cannot be termed as a balanced fund.
Selection criteria for balanced funds
• Portfolio balance
• Debt portfolio character
• Costs
• Portfolio statistics
• Returns
124
Question Time
1. Which are the four basic categories for investment?

a. Equity – Growth, Value, Diversified & Sector
b. Debt – Diversified, Concentrated, specific & high yield
c. Both (a) & (b)
d. Equity, balanced debt & money market fund
2. While choosing an equity fund, which is an important criteria?

a. Fund age
b. Fund manager’s experience
c. Cost of investing
d. All of the above
3. When the Ex-marks is lower than ________, the funds performance relative to the market is less
predicable?
a. 80%
b. 90%
c. 75%
d. 85%
4. Small companies have ___________ gross dividend yields

a. Higher
b. Lower
c. Similar
d. Size of the company does not impact yield
5. When EX-marks is nearly 100%, what type of fund are we talking about?
a. Diversified equity fund
b. Debt fund
c. Index Fund
d. Money market fund
6. What does BETA measure?

a. Performance
b. Risk
c. Dividend yield
d. All of the above
7. While choosing a Debt fund, what is an important criteria?

a. Fund age & size
b. Portfolio characteristics
c. Tax implications
d. All of the above
8. Which choosing a Money market fund, what does the investor look at?
a. Cost
b. Quality
c. Yield
d. All of the above
9. If a fund has 65% invested in the equities & 35% invested in debt it is categorized as
a. Equity fund
b. Debt fund
c. Balanced fund
d. Equity balanced fund
10. A fund should have a minimum _________ % invested in its assets to be classified in that asset.
a. 70%
b. 60%
c. 65%
d. 75%
11. Which choosing a debt fund, what does the investor look at?
a. Cost
125
b. debt portfolio characteristics
c. Portfolio balance
d. All of the above
Answers: 1(d), 2(d), 3(a), 4(b), 5(c), 6(b), 7(d), 8(d), 9(a), 10(c), 11(d),
126
Business ethics
Objective –
Understanding the various guidelines SEBI imposes on AMC’s With regard to
acceptable & good business practices.
The various SEBI regulatory requirements, for safe keeping & protecting investor
wealth.
Concepts & Contents

SEBI’s area of monitoring.
Regulatory requirements
127
Business Ethics
Business Ethics means rules of acceptable & good conduct.
Rules may be set by those who own & manage the business or by those agencies that have a right to
regulate the business.
A salesperson is expected to know the product & describe it accurately.
SEBI monitors 3 areas in particular

• Fund structure & governance
• Exercise of voting rights by funds
• Fund operations
Regulatory requirements
• Separation of functions – AMC’s are charged with the actual management of investment
portfolios. They are however not allowed to own or hold assets of the fund. Trustees do not hold
any assets. They are held by custodians.
• Independence of organizations. – AMC’s are run by board of directors & trusts by a board of
trustees. Trustees are charged with independent supervision of all AMC personals including
directors.
• Independence of personal – Trustees cannot serve as directors on the AMC they supervise or any
other AMC.
Exercise of voting rights.

Mutual funds are entitled to vote as investors; however this right comes to them in fiduciary capacity &
hence shall vote keeping the investor in mind.
Fund operations
• Insider trading – means buying & selling securities based on the privileged information available
to the persons in the funds.
• Preferential treatment to selected investors – All investors are to be treated equally. No special
treatment to a certain section. SEBI tracks this very closely. For eg. Late trading abuses. If the
market has gone up substantially the investor would want to exit the fund on the day or if the
markets have collapsed the investor would want to buy units. Time schedule are monitored very
closely by SEBI.
• Personal trading by fund managers & employees – if fund managers & employees trade on their
personal account it creates a conflict of interest thus affecting the fund in a negative way.
Fund publicity & Advertisement

• All forms of advertisement (hoardings, printed literature, audio visual) are covered by regulation.
• Standards of communication information that each type of must contain.
Ethics related regulations

• Guidelines of good conduct for AMC & Trustee Company – issued on 8th May’2001, lays down
guidelines for investment & trading by employees. The responsibility to ensure ethical compliance
lies with the Trustee Company.
• Regulations on personal trading – above Rs. 1,00,000/- transactions have to be reported to
trustees.
• Regulation for insider trading – SEBI insider trading amendment regulation 2002
• Regulation for Fund advertising – 6th schedule of SEBI regulation 1996
• Compliance Officer – All AMC need to appoint a compliance officer, employees need to file their
transaction records with them.
• Board review & reporting to SEBI – board’s members of AMC & trustees need to report any
violation to SEBI.
• Code of conduct for distributors - 5th schedule of SEBI regulation 1996, AMFI has put in place a
more detailed code called AGNI.
Business ethics & fund regulations in USA

• Fund governance – 75% of the funds board will be independent directors. Chairman of the board
would be an independent director.
128
Question Time
1. A good agent will never sell on consideration of
a. Comparative features of funds
b. Assured rate of return
c. Past performance
d. One with a higher return
2. Which of these areas does SEBI not monitor?

a. Fund structure & governance
b. Exercise of voting rights by funds
c. Appointment of distributors
d. Fund operations
3. Can a trustee be appointed as a director of its or any other AMC?

a. No
b. Yes
c. With SEBI permission
d. Only if it has a voting stake in the AMC
4. Who holds the assets of the AMC?

a. AMC themselves
b. Trustees, they are the legal owners
c. Sponsor, he has started the AMC
d. Custodians
5. While exercising voting rights the AMC must vote in the interest of
a. The company its votes for
b. The investors
c. the AMC
6. Explain the term insider trading.

a. buying & selling securities based on privileged information.
b. Knowing the balance sheet of the AMC before it is declared to investors
c. knowing the Nett assets of the AMC
d. All of the above
7. Does SEBI monitor advertising carried out by the AMC?

a. No
b. Yes
8. Beyond what amount of personal trading done by an employee by reported to the trustees?
a. 45,000
b. 99,000
c. 1,00,000
d. 10,00,000
9. Which schedule _________ of SEBI regulation deals with code of conduct for distributors?
a. 4th
b. 5th
c. 6th
d. 3rd
10. Which schedule _________ of SEBI regulation deals with regulations for advertising?
a. 4th
b. 5th
c. 6th
d. 3rd
11. In the USA what % of board members are independent?

a. 50% Chairman should be independent
b. 65% Chairman should be independent
129
c. 75% Chairman should be independent
d. 70% Chairman should be independent
Answers: 1(b), 2(c), 3(a), 4(d), 5(b), 6(a), 7(b), 8(c), 9(b), 10(c), 11(c),
130

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Name of Institution: _______________________________

Date of exam: ____________________________________

Contents Page No.

Concept & Role of Mutual Fund 04

Stages in mutual fund industry 07

Types of Mutual Funds 10

Fund Structure & classification 16

Fund Merger & scheme takeover 24

Legal & regulatory environment 27

Self Regulatory environment 32

Investor rights & obligation 35

Offer documents – contents 43

Key Information Memorandum 48

Who can invest? 51

Sales Practices & SEBI regulations 57

Valuation of scheme portfolio 70

Equity Portfolio Management 78

Debt portfolio Management 83

Investment policy & restrictions 88

Measuring & evaluating Mutual fund performance 91

Financial strategy for investors 102

Asset Allocation principles 105

Right investment products for investors 108

Risk in Investing 111

Developing a model portfolio 115

Fund selection 118

Business Ethics 123

Concepts & Contents

Expected Marks – 3 – 5 marks

Mutual Fund concept & working

Mutual Fund Operation Flow Chart

1. A mutual fund is owned by

2. A mutual fund is not

Answers: 1(c), 2 (b)

Concepts & Contents

Expected Marks – 5 – 7 marks

Phase 1 Growth of Unit Trust of India – 1964 – 1987

Phase 2 Entry of Public Sector Funds 1987- 1993

Phase 3 Emergence of private funds 1993-1996

Phase 4 Growth & SEBI regulations 1996- 1999

Phase 5 Emergence of a large & uniform industry 1999- 2004

Phase 6 Consolidation & Growth 2004 onwards

2. Name the oldest Mutual Fund in India

3. The UTI act was repealed in the year

4. What regulation came in the year 2003

5. UTI was established as

6. The entry of mutual funds in India was initiated by

7. After UTI, the first mutual funds were started by

8. The Mutual fund industry began in the year

Answers :- 1 (d), 2(b), 3(d), 4(c), 5(a), 6(c), 7(b), 8(b)

Concepts & Contents

Expected Marks – 5 – 7 marks

In accordance with their structure

• Load & No load funds

• Tax exempt & non tax exempt funds.

• By nature of investment objective

• By nature of risk profile.

• Money Market & liquid funds.

• DEBT Funds (income funds)

• Growth & Income funds.

• Real Estate Funds.