NISM Training - Mutual Funds

Mutual
Fund Distributor’s Certification Exam
CONTENTS
Click on the below lines to go to that particular page:

Understanding of Personal Finance - Test Chapter 6: Accounting & Expenses
Purpose of this workshop Chapter 7: Investor Services
NISM MF Distributors Certification Exam Chapter 8: Return, risk and performance

of funds
Chapter 1: The concept of Mutual Funds Chapter 9: Scheme selection
Chapter 2: Fund Structure & Constituents Chapter 10: Selecting the right
investment products for investors
Chapter 3: Legal & Regulatory Chapter 11: Introduction to Financial
Environment Planning
Chapter 4: Offer Document Chapter 12: Recommending model
portfolios and financial plans
Chapter 5: Fund distribution & channel
management practices
www.prudentcorporate.com
Let’s test our understanding of
personal finance
1. Do you know what is Power of Compounding?
2. You have invested Rs. 100,000/‐ @ 8 % pa, what is your real rate of return?
3. How much time do you spend in month in understanding Investments?
4. Do you know much money you will need post retirement?
5. Do you think about inflation while making a investment decision?
6. Have you protected your family in case of unfortunate event?
This workshop ‐
Aims at exploring MFs and their importance in enhancing

your personal finance
It will also help you in clearing regulatory exam
NISM MF Distributors Certification
Exam
• Only online exam possible. No written exam available.
• NSE preferred over BSE for ease of Q paper layout.
• Certification Validity for 3 years only.
• Refresher program available thereafter – has to be taken
before expiry and is valid for 3 years.
• Examination consists of 100 questions of one mark each.
• Duration: 2 Hrs
• Passing marks is 50%
• No negative marking now so you should attempt all questions
even if some are wrongly answered.
Exam
Some suggested strategies to qualify the test:
• Attempt the questions in the workbook after reading one

particular chapter.
• Due to your busy professional schedule it may not be possible
for you to attempt multiple chapters in one sitting.
• Break the chapters into 12 independent sessions and work on
each chapter once a day or maximum 2 chapters a day.
• Try to squeeze these sessions in the early morning period. We
understand that you start early and work late.
• Remember ! this is a temporary schedule.
• A fresh mind remembers more.
Exam
1. Concept & Role of MF [6 marks]
2. Fund Structure & Constituents [4 marks]
3. Legal & Regulatory Environment [10 marks]
4. Offer Document [6 marks]
5. Fund Distribution & Channel Management Practices [8 marks]
6. Accounting, Valuation & Taxation [10 marks]
7. Investor Services [12 marks]
8. Return, Risk & Performance of Schemes [10 marks]
9. Scheme Selection [10 marks]
10. Selecting Right Investment Products for Investors [9 marks]
11. Helping Investors with Financial Planning (FP) [7 marks]
12. Recommending Model Portfolios & FP [8 marks]
Chapter 1
The Concept of Mutual Funds
Why MFs came into existence ?
I want to invest in Capital Markets ‐
What will I need to do?
I need to answer following questions –
• Which shares to buy?
• How many shares of each company to buy?
• Do I have enough money to build a portfolio of
securities?
• What should be the entry / exit price?
• Do I have time / resources for research?
MFs came into existence as an
Answer…
Simply speaking, MFs provide a window for investing into Capital Markets
Prominent advantages ‐
• Professional Management
• Economies of scale
• Liquidity
Other Advantages ‐
• Tax deferral / Tax Benefits
• Convenient Options
• Investment & Regulations
• Systematic Approach to investments
MFs & Economy
• Help in spreading capital markets to all the sections of society thereby

ensuring that fruits of economic growth are shared by large number of
people
• Acts as market stabilizer in countering large inflows/ outflows from
Foreign Investors
• Due to their size/expertise are known to be activist investors and can play
a significant role in Corp Governance
Features of a Mutual Fund
• Vehicles to mobilize moneys from investors, to invest in different markets &
securities
• Different pools for different objectives
• Schemes are launched as NFOs by declaring their investment objective
• During NFO units are offered at face value and post at market value
• Investor investment amount is converted to Units & issued to investors
• Every unit has a face value of Rs. 10. Face Value*Units = Unit Capital
Features of a Mutual Fund
• Scheme earns interest / dividend income on the investments it hold
• Schemes buys / sells securities making capital gains / losses (also called
Realized Capital Gains / Losses)
• Market Price of investments can be higher or lower than cost price
(Valuation Gain / Loss)
• Value of unit is reflected in its Net Asset Value (NAV)
• Different preferences for sharing profits – Dividend / Growth
• Assets Under Management (AUM) – Size of scheme
Limitations of Mutual Funds
What are the limitations of Mutual Funds ?
• Lack of portfolio customization
• Choice overload
Mutual Funds – A Packaged Product
Professional Portfolio
Management Diversification
Reduction/
Diversification
Reduction of of risk
Transaction
Cost
Liquidity
Convenience &
Flexibility Tax Benefits Safety
How Do MF Schemes Operate?
• Investment made by investors in a scheme is translated into

certain no. of UNITS in the scheme.
• Every UNIT has a face value of Rs.10 ( older schemes may have
different face value of Rs.100 or Rs.1000)
• UNITS of a scheme * Face value = UNIT CAPITAL (or corpus of
the fund)
• Scheme purchases/ sells investments earning Capital gains/
Capital losses. Called REALIZED CAPITAL GAINS / REALIZED
CAPITAL LOSSES.
• Investments in schemes may be quoted in the market at
higher than cost paid, called VALUATION GAINS or VALUATION
LOSSES when quoted at a price lower than cost price
Types of Funds
Open Ended • Open for investors to enter / exit always
• Have a fixed maturity
Closed Ended • Investors can buy units only during NFO
• Compulsory listing on stock exchanges
• Largely closed ended but , becomes open
Interval Fund ended at pre‐specified intervals
• Open ended fund is the one that sells & repurchases units
at all times
Is an Open Ended fund under an obligation to sell units at all
points of time?
• In Closed ended funds Unit capital is fixed (Liquidity can be
thru listing on stock exchanges or redemption window)
ELSS fund is an open ended or closed ended fund?
Types of Funds
Active Passive
• Fund Manager selects securities • Mirrors chosen index

• Higher running costs • Lower running costs
• Investor expect fund to • Also called index schemes
outperform benchmark
Debt / Hybrid Funds
Sub Categories Scheme Characteristics Taxation
Overnight Investment in overnight securities having maturity of 1 day Debt
Liquid Maturity of upto 91 days only Debt
Ultra Short Term Macaulay duration of the portfolio is between 3 months - 6 months Debt
Low Duration Macaulay duration of the portfolio is between 6 months- 12 months Debt
Money Market Maturity of up to 1 year Debt
Short Duration Macaulay duration of the portfolio is between 1 year – 3 years Debt
Medium Duration Macaulay duration of the portfolio is between 3 years – 4 years Debt
Medium to Long Duration
Macaulay duration of the portfolio is between 4 years – 7 years Debt
Fund
Long Duration Fund Macaulay duration of the portfolio is greater than 7 years Debt
Dynamic Bond Investment across duration Debt
Corporate Bond Min 80% in invested in Corporate Bonds Debt
Credit Risk Min 65% in invested in Corporate Bonds below highest rated instruments Debt
Min 80% in invested in Debt instruments of banks, Public Sector Undertakings,

Banking & PSU Debt
Public Financial Institutions
GILT Min 80% in invested in Gsecs across maturity Debt
Gilt Fund with 10 year Min 80% in invested in Gsecs such that the Macaulay duration of the portfolio is
Debt
constant duration equal to 10 years
Floater Fund Min 65% in invested in Floating rate instruments Debt
Debt / Hybrid Funds
Sub Categories Scheme Characteristics Taxation
Conservative Hybrid 10 ‐ 25% in Equity related instruments & 75 to 90% in Debt instruments Debt
Balance Hybrid 40 ‐ 60% in Equity related instruments & 40 to 60% in Debt instruments Debt
Aggressive Hybrid 65 ‐ 80% in Equity related instruments & 20 to 35% in Debt instruments Equity

Dynamic Asset
Allocation/ Balanced Investment in equity/ debt that is managed dynamically Equity/Debt
Advantage
Multi Asset Allocation Min 10% investment in atleast 3 asset classes Equity/Debt
Min 65% in Equity related instruments which should follow Arbitrage
Arbitrage Fund Equity
strategy
Equity Savings Min 65% in Equity related instruments & Min 10% in Debt instruments Equity
Equity Funds
1. Multi cap Fund
• Min 75% in Equity & equity related instruments.
Large cap companies ‐ 25% of total assets
MID CAP companies ‐ 25% of total assets
Small cap companies ‐ 25% of total assets
2. Large Cap Fund: An open‐ended equity scheme predominantly investing in
large cap stocks. The minimum investment in equity and equity related
instruments of large cap companies shall be 80 percent of total assets.
3. Large and Mid‐Cap Fund: An open‐ended equity scheme investing in both
large cap and mid cap stocks. The minimum investment in equity and equity
related instruments of large cap companies shall be 35 percent of total assets.
The minimum investment in equity and equity related instruments of mid cap
stocks shall be 35 percent of total assets.
4. Mid Cap Fund: An open‐ended equity scheme predominantly investing in mid
cap stocks.The minimum investment in equity and equity related instruments of
mid cap companies shall be 65 percent of total assets.
Equity Funds
5. Small cap Fund: An open‐ended equity scheme predominantly investing in small
cap stocks. Minimum investment in equity and equity related instruments of small
cap companies shall be 65 percent of total assets.
6. Dividend Yield Fund: An open‐ended equity scheme predominantly investing in
dividend yielding stocks. Scheme should predominantly invest in dividend yielding
stocks. The minimum investment in equity shall be 65 percent of total assets.
7. Value Fund or Contra Fund: A value fund is an open‐ended equity scheme
following a value investment strategy. Minimum investment in equity & equity
related instruments shall be 65 percent of total assets. A contra fund is an open‐
ended equity scheme following contrarian investment strategy. Mutual Funds will
be permitted to offer either Value fund or Contra fund.
8. Focused Fund: An open‐ended equity scheme investing in maximum 30 stocks
(the scheme needs to mention where it intends to focus, viz., multi cap, large cap,
mid cap, small cap). Minimum investment in equity & equity related instruments
shall be 65 percent of total assets.
Equity Funds
9. Sectoral /Thematic: An open‐ended equity scheme investing in a specific
sector such as bank, power is a sectoral fund. While an open‐ended equity
scheme investing in line with an investment theme. For example, an
infrastructure thematic fund might invest in shares of companies that are
into infrastructure, construction, cement, steel, telecom, power etc. The
minimum investment in equity and equity related instruments of a particular
sector/ theme shall be 80 percent of total assets.
10. Equity Linked Savings Scheme: An open‐ended equity linked saving
scheme with a statutory lock‐in of 3 years and tax benefit. The minimum
investment in equity and equity related instruments shall be 80 percent of
total assets (in accordance with Equity Linked Saving Scheme,
2005 notified by the Ministry of Finance).
Other Fund Types
Gold Funds
• Gold ETFs
• Gold Sector Funds
Real Estate Funds
• Exposure to direct real estate
Commodity Funds
• Commodity sector funds only
• In India MFs are not permitted to take exposure to commodities
directly
International Funds
• Invests directly
• Thru feeder fund route
Fund of Funds
• Funds investing into funds – Domestic / International
Exchange Traded Funds
• Open ended index funds which trade on the exchange
Definition of Large‐cap, Mid‐cap and Small‐cap
Large cap, mid cap and small cap companies are defined as
follows:
1. Large Cap: 1st ‐100th company in terms of full market
capitalization
2. Mid Cap: 101st ‐250th company in terms of full market
capitalization
3. Small Cap: 251st company onwards in terms of full market
capitalization
Key Developments
• AUM of industry as of Dec 2020 has touched Rs. 31,02,475 Cr

from 2244 schemes offered by 41 Mutual Funds
@: less than 1 percent Source: www.amfiindia.com www.prudentcorporate.com

Chapter 2
Fund Structure & Constituents
Legal Structure of Mutual Funds in
India
• Governed by SEBI (Mutual Fund) Regulations, 1996
• Regulations permit MFs to invest in money market, debt
securities, equities, gold (gold related) and real assets
Asset R & T agents

Management
Company
Sponsor
Mutual Fund Custodians
Example: Pramerica Mutual Fund –
Legal Structure
Mutual Fund Trust Pramerica Mutual Fund
• Sponsor • Prudential Financial Inc, USA

• Trustee • Pramerica Trustees
• AMC • Pramerica Asset Managers
• Custodian • Citibank NA
• RTA • Karvy
Key Constituents
• 5 years of experience in Financial Services
• Positive net worth since last 5 years
Sponsors • At least 3 years of Profit in last 5 years
• Should contribute at least 40% in AMC capital
• At least 4 trustees to be appointed, 2/3rd
independent
Trustee • Prior Approval of SEBI required for trustee
appointment
• Minimum net worth of 50 Cr.
• 50% directors should be independent
AMC • Trustee approval required for appointment of
directors
Other Service Providers
Custodian RTA
Fund
Auditors
Accountants
Collecting
Distributors
Bankers
Other Service Providers
Custodian
• Custodian accepts and gives delivery of securities for the
purchase and sale transactions of the various schemes of the
fund
RTA
•RTA maintains investor records
Auditors
• Auditors are responsible for the audit of accounts
Fund Accountants
• Fund accountants performs the role of calculating the NAV
Distributors
•Distributors sell suitable types of units to their clients
Collecting Bankers
• Collecting bankers maintain the bank a/c of the scheme
Chapter 3
Legal and Regulatory Environment
Role of regulators in India
SEBI – Capital Markets Regulator
• All MFs need to be registered with SEBI
• Issues investment guidelines
• Issues expense related guidelines
• Disclosures Norms
Other Regulators
• Ministry of Finance
• Reserve Bank of India
• Company Law Board
• Stock Exchanges
• Office of Public Trustee
Self Regulatory Organizations
A Self Regulatory Organization
• Is an industry body
• Is registered with the regulatory body
• Has limited powers to enforce rules, award
penalties
• All stock exchanges are SROs
Is AMFI an SRO?
Important Learning Points
• AMFI Code of Ethics for AMCs
• AMFI has framed AGNI – guidelines for intermediaries
• Investment Objective – Broad investment charter
• Investment Policy – Detail of how portfolio will be managed
• Investment Strategy – Day to day fund management
• Atleast 65% of the corpus should be invested in securities /
sectors as implied by the scheme’s name
• SOA should be sent within 5 days of NFO closure
• Investors in whose folios transactions have taken place
during a calendar month shall be sent a Consolidated
account statement ( CAS) by the 10th of next month
• Dividend warrants have to sent within 30 days of declaration
date
• Investors can ask for Unit Certificate
• NAV has to be published daily in at least 2 Newspapers
• NAV, Sale Price, Re‐Purchase price is to be updated in the
website of AMFI and the Mutual Fund
• MF units can be pledged
• Investors can choose to change their broker or go direct.
NOC from existing broker is not required.
• Redemption payouts have to be sent within 10 business
days from the date of redemption
• Investors can have their units in de‐mat form
• Trustees / AMC can only make any changes in the
fundamental attributes of a scheme after giving dissenting
unit holder options to withdraw at prevailing NAV without
any exit load. Exit window should be open for 30 days
• AMC can be discontinued – By majority of trustees or 75%
of the unit holders
• Investors can file a suit against trustees
• Investor can claim his money from scheme within

3 years at prevailing NAV. After 3 years payment is
based on NAV at the end of 3 years
• PAN No. and KYC is compulsory with the
exception of Micro SIP
• Bank details are mandatory for MF Investments
• Merger or consolidation of schemes is not considered a
change in the fundamental attribute of the surviving
scheme if the following conditions are met –
There is no other change in the Fundamental attributes

of the surviving scheme i.e. the scheme which remains
in existence after the merger.
Mutual Funds are able to demonstrate that the
circumstances merit merger or consolidation of schemes
and the interest of the unit holders of surviving scheme
is not adversely affected.
Unclaimed Amounts
MF can deploy unclaimed div / redemption amounts in money
market. AMC can recover investment management fees and
advisory fees on mgt of these funds @ rate not exceeding 0.50%
p.a.
If investor claims within 3 years then payment is based on

prevailing NAV i.e. after adding the income earned on the
unclaimed money
If claimed after 3 years then it is at NAV at the end of 3 years.
Can a Mutual Fund scheme go bust?
While the AMC manages the investments of the scheme, the
assets of the scheme are held by the Custodian.
Both operate under the overall control of the Trustees. This

system of checks and balances protects the investors from
misappropriation of funds, fraud etc.
Chapter 4
Offer Document
Offer Document
NFO SID SAI
• NFOs other than ELSS can remain open for a maximum of

15 days.
• Allotment of units, should be done within 5 business days
of NFO closure date
• Open‐ended schemes have to re‐open within 5 business
days of the allotment.
• OD is one of the most important sources of information
about the scheme for investors.
• Principle of caveat emptor (i.e. let the buyer beware) is
applicable for Investors
• MF OD have two parts: SID & SAI
• Scheme Information Document (SID) ‐ details of the scheme
• Statement of Additional Information (SAI) ‐ which has
statutory information about the mutual fund that is offering
the scheme.
• In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• SID Updation– a) Yearly b) Need based
• SAI Updation – a) Quarterly b) Ongoing
Does SEBI approve Offer Documents?
• KIM (summary of the SID and SAI). As per SEBI regulations,
every application form is to be accompanied by the KIM.
• KIM updation has to be done on yearly basis
Riskometer
A pictoral representation of the risk to the principal invested in a
mutual fund product will be depicted using a ‘Riskometer’.
The picto‐meter will categorize the risk in the scheme at one of
five levels of risk, as shown in the table in the next page/slide.
There will also be a written statement of the risk to the principal
below the ‘Riskometer’.
Riskometer
Riskometer
Requirements of Minimum Investors
Applicability for an open‐ended scheme:

• The Scheme/Plan shall have a minimum of 20 investors and no
single investor shall account for more than 25% of the corpus
of the Scheme/Plan(s). However, if such limit is breached
during the NFO of the Scheme, the Fund will endeavour to
ensure that within a period of three months or the end of the
succeeding calendar quarter from the close of the NFO of the
Scheme, whichever is earlier, the Scheme complies with these
two conditions.
• If there is a breach of the 25% limit by any investor over the
quarter, a rebalancing period of one month would be allowed
and thereafter the investor shall be given 15 days notice to
redeem his exposure over the 25% limit.
Requirements of Minimum Investors
Applicability for close‐ended / interval scheme:

• The Scheme(s) and individual Plan(s) under the Scheme(s)
shall have a minimum of 20 investors and no single investor
shall account for more than 25% of the corpus of the
Scheme(s)/Plan(s). These conditions will be complied with
immediately after the close of the NFO itself i.e. at the time of
allotment.
• Consequently, such exposure over 25% limits will lead to
refund within 6 weeks of the date of closure of the New Fund
Offer.
• For interval scheme the aforesaid provision will be applicable
at the end of NFO and specified transaction period.
Due Diligence Certificate
• Whenever a new scheme’s offer document is made, this

certificate is given by the Compliance Officer of the mutual
fund that proper care is taken in making the scheme and the
Offer Document.
• It certifies that :
a. The offer document is prepared as per SEBI regulations as
amended until date.
b. Legal requirements regarding launch of the scheme have
been complied.
c. The information given in the offer document is true and fair.
d. The intermediaries involved with the mutual fund scheme are
all registered with SEBI and their registration is valid until
date.
Chapter 5
Fund Distribution and Channel
Management Practices
Traditional • Individuals
• Institutional – Banks /
NDs
Current • IFAs
• Internet
New • Stock Exchanges
How to become an MF Distributor
• An individual or Corporate entity can become a Mutual

Fund distributor after clearing regulatory certification
• No SEBI approval required
New Cadre of Distributors

• Postal Agents, retired Govt and semi‐Govt class III and
above officials, retired teachers and retired bank officers
with minimum 10 years of service
• They can sell diversified equity funds, FMPs, and Index
funds which have returns better than their last 3 yrs
benchmark returns.
The individual needs to pass the Certifying Examination

prescribed by SEBI. Distributors / employees who were above the
age of 50 years, and had at least 5 years of experience as on
September 30, 2003 were exempted. But they need to attend a
prescribed refresher course.
KYD Requirements:
As part of SEBI’s drive to streamline the distribution process of

mutual fund products, AMFI has introduced the KYD process to
verify the correctness of the information provided in the
registration documents and to have verification of the ARN
holders.
The new rules are applicable to new registrations and renewals

have come to effect from September 1, 2010.
After passing the examination and completing KYD requirements,

the next stage is to register with AMFI. On registration, AMFI
allots an AMFI Registration Number (ARN).
Individuals from the exempted category described above can

obtain the ARN without passing the Certifying Examination,
provided they have attended the prescribed refresher course.
Sub‐brokers also need to comply with all the regulations
Armed with the ARN No., the IFA / distributor / stock exchange
broker can get empaneled with any number of AMCs.
Alternatively, they can become agents of a distributor who is

already empaneled with AMCs.
Empanelment with the AMC, or enrolment as an agent of an

empaneled distributor is compulsory to be able to sell mutual
fund schemes and earn the commissions.
Distribution Incentives
Upfront commission –is a one time payment and is paid as a percentage of the
amount invested through the distributor.
Trail Commission remains invested in the fund. –usually paid on a monthly or

quarterly basis as a percentage of the investment and for the duration for which
the investor
In addition to this a Mutual Fund may also declare volume incentives based of
the total amount of business generated through a distributor.
Advisory Fees – Fees which ARN holder charges from the

customer
SEBI Regulations related to Sales
Practices
• No commission on own investments
• The distributors has to disclose all the incentives /
commissions payable to them
• The practice of rebating is banned
SEBI Advertising Code
• Must mention Past performance is not a guarantee of future
performance
• Dividends declared/paid shall be mentioned in Rs. per unit
• Only compound and annualized yield can be advertised for
schemes for more than one year
• Annualized yield must be shown for at least one, three, five
and since launch
• Appropriate benchmark should be chosen. And once chosen
it should be consistent
• Rankings made , if any, should be explained
Chapter 6
Accounting & Expenses
Net Asset Value (NAV) Computation
Net Asset Value (NAV) =
Net Assets of the Scheme / Outstanding Units
Net Assets of the Scheme =
(Market Value of Investments + Receivables + Other
Accrued Income + Other Assets – Accrued Expenses
– Other Payables – Other Liabilities)
Profitability Metric
+ive
• Interest Income
• Dividend Income
• Realized Capital gains
• Valuation Gains
-ive
• Realized Capital Losses
• Valuation Losses
• Scheme expenses
Mark to Market
• Process of valuing each security in the investment
portfolio of the scheme at its market value.
• Marking to market reflects worth of each unit of
NAV
Price and Loads
• Sale Price = NAV + Stamp Duty
• Re‐purchase Price = NAV – Exit Load
The position since August 1, 2009 is that:
• SEBI has banned entry loads
• Exit loads / CDSC (Contingent Deferred Sales Charge) in
excess of 1% of the redemption proceeds have to be credited
back to the scheme
• Exit load structure needs to be the same for all unit‐holders
representing a portfolio
Applicable NAV
Type of Scheme Transactio Cut off Applicable NAV
n time
Equity oriented funds Purchases 3.00 pm Same day NAV is received is received after cut off time
and debt funds (except
liquid funds) in respect Switch in Next business day NAV for applications received after cut off time.
of purchases less than
Rs. 2 lacs
Liquid fund Purchases 1.30 pm Previous day NAV if received before cut off time and funds are realised.
Switch in If received after cut off time, NAV of the day previous to funds realisation.
Equity Oriented Funds, Purchases 3.00 pm Same day NAV if received before cut off time.

Debt funds, Liquid funds
Switch out Next business day NAV for applications received after cut off time.
Equity oriented funds Purchases 3.00 pm NAV of the business day on which funds for the entire amount of

and debt funds (except liquid subscription / purchase as per the application are available for utilization before
funds) in respect of transaction Switch in the cut‐off time will apply.
of Rs. Rs. 2 lacs or more
Expenses
Initial Issue Expenses – These are one‐time expenses that
come up when the scheme is offered for the first time
(NFO). These need to be borne by the AMC
Recurring Expenses – These can be charged to the scheme.
Applicability of GST
AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes within the limits
prescribed under SEBI (Mutual Fund) Regulations.
• GST on fees paid on investment management and advisory fees shall be charged to
the scheme in addition to the overall limits specified as per the Total Expense Ratio
(TER) provisions.
• GST on all the fees other than investment and advisory fees shall be charged to the
scheme within the maximum limit of TER.
• GST on exit load, if any, shall be deducted from the exit load and the net amount shall
be credited to the scheme.
• GST on brokerage and transaction cost paid for execution of trade, if any, shall be
within the limit of TER.
• The commission payable to the distributors of mutual funds may be subject to GST, as
applicable in case of the ARN holder. Such tax cannot be charged to the scheme.
Recurring Expenses
Net Assets (Rs crore) Equity Debt

Schemes Schemes
Upto Rs 100 crore 2.50% 2.25%

Next Rs 300 crore 2.25% 2.00%
Next Rs 300 crore 2.00% 1.75%
Excess over Rs 700 crore 1.75% 1.50%
Management fees cannot be charged by liquid schemes and

other debt schemes on funds parked in short term deposits of
commercial banks.
Admissible Expenses
Indicative list is as follows:
• Fees of various service providers, such as Trustees, AMC,
Registrar & Transfer Agents, Custodian, & Auditor
• Selling expenses including scheme advertising and
commission to the distributors
• Expenses on investor communication, account statements,
dividend / redemption cheques / warrants
• Listing fees and Depository fees
• GST tax
Inadmissible Expenses
• Penalties and fines for infraction of laws.
• Interest on delayed payment to the unit holders.
• Legal, marketing, publication and other general expenses
not attributable to any scheme(s).
• Fund Accounting Fees.
• Expenses on general administration, corporate advertising
and infrastructure costs.
• Depreciation on fixed assets and software development
expenses.
ETFs / FOFs
FoFs can charge Management fees + Scheme recurring expenses +
expenses levied by underlying schemes not more than 2.25% of net
assets (Liquid, Index and ETF = 1%, more then 65% Equity = 2.25% and
rest 2%).
Index funds cannot charge more than 1% as recurring expense.
Dividends & Distributable Reserves
SEBI guidelines stipulate that dividends can be paid out of
distributable reserves. In the calculation of distributable reserves:
• All the profits earned are treated as available for distribution.
• Valuation gains are ignored. But valuation losses need to be
adjusted against the profits.
• That portion of sale price on new units, which is attributable to
valuation gains, is not available as a distributable reserve.
This conservative approach to calculating distributable reserves
ensures that dividend is paid out of real profits, after providing
for all possible losses.
Tax Aspects ‐ Equity
Short Term Capital Gain: < 1 Year
Short Term Capital Gain Tax Rate: 15%
Long Term Capital Gain: > 1 Year
Long Term Capital Gain Tax Rate: 10% (up to 1 lakh
exempted)
Dividend Distribution Tax: 10% + 12% surcharge + 4%
cess = 11.65%
93 www.prudentcorporate.com
Tax Aspects ‐Debt
Short Term Capital Gain: < 3 Years
Short Term Capital Gain Tax Rate: As per tax slab
Long Term Capital Gain: > 3 Year
Long Term Capital Gain Tax Rate: 20% with indexation
Dividend Distribution Tax: 25% + 12% surcharge + 4% cess =
29.12%
Indexation
Adjusting capital gains for inflation by applying an appropriate factor from Cost
Inflation Index to the original price.
Applicable for 3 years and above tenure (Long Term Capital Gains only from Debt
Funds)
For Example:
Original Investment = Rs. 100,000/‐
Redemption Value = Rs. 150,000 (After 3 year)
Inflation Index = 7%
Indexed Cost = 100000(1+7%)^3 = 1,22,504.30

Capital Gain after adjusting for Inflation Index = 27,495.70
Capital Gain without adjusting for Inflation Index = 50,000
Chapter 7
Investor Services
• Individual and non‐individual investors are permitted to
invest in mutual funds in India.
• Foreign nationals, foreign entities and OCBs are not
permitted to invest.
• FIIs are permitted to invest, foreign entities can take this
route. The ‘Who can invest’ section of the Offer Document
is the best source to check on eligibility to invest.
• All investments of Rs 50,000 and above need to comply
with KYC documentation
• To become KYC compliant, broadly mutual fund investors
need the following documents:
• Proof of Identity
• Proof of Address
• PAN Card
• Photograph
Where investment is made by a minor, KYC requirements have
to be complied with by the Guardian.
In the case of investments by a Power of Attorney holder on
behalf of an investor, KYC requirements have to be complied
with both – investor and PoA holder.
• Micro SIPs are exempted from the PAN Card requirement.
• Demat makes it possible to trade in Units in the stock

exchange.
• Investors can pay through cheque / DD, Net‐based

remittances, ECS / Standing Instructions or ASBA.
• Mbanking is likely to increase in importance in the days to

come.
• NRI investment on repatriation basis has to be paid through

cheque on NRE account, or a banker’s certificate that
investment is made out of moneys remitted from abroad.
• Besides KYC, non‐individual investors need to provide
additional documentation to support their investment.
• Company’s own incorporation documents
(Memorandum of Association and Articles of
Association or Trust Deed).
• Similarly, in some states, permission of the Charity
Commissioner is necessary, before Religious and
Charitable Trusts can invest.
• Authorisation for the investing institution to invest.
This is typically in the form of a Board Resolution.
• Authorisation for the official to sign the documents
on behalf of the investing institution. This again is
provided for in the Board Resolution.
• Cut‐off timings have been specified for different types of
schemes
• Cut off timings are not applicable for NFOs &
International Schemes.
• Time Stamping is a mechanism to ensure that the cut‐off
timing is strictly followed.
• NSE’s platform is called NEAT MFSS.
• BSE’s platform is BSE StAR Mutual Funds Platform.
• Both platforms are open from 9 am to 3 pm on every
working day
Parameter Dividend Dividend Growth
Payout Reinvestment Option
Option Option
Dividend received Yes No No
in bank account
Income Yes, for debt Yes, for debt No
Distribution Tax schemes schemes
Increase in number of units No Yes No
on account of reinvestment of
Dividend
NAV change NAV declines to the NAV declines to NAV
extent of dividend and the extent of captures
Income Distribution tax dividend and the portfolio
income change
distribution tax Entirely
• Automatic reinvestment plans
• Systematic investment plans
• Systematic transfer plans
• Systematic withdrawal plans
• Trigger Options
• Other facilities are : 1) Transact on the net
2) Pledging of units
3) Nomination facility available with funds
Chapter 8
Return, Risk & Performance of Funds
What drives the performance of the scheme?
What drives the performance of
equities
Long Term Trend of Equity Markets
Source: Bloomberg, MOAMC internal analysis, Data as on 31st March 2017
Note: The information herein is used for comparison purpose and is illustrative and is not sufficient and shouldn’t be used for the
development or implementation of an investment strategy. It should not be construed as investment advice to any party.
Past performance may or may not be sustained in future.
Equity Funds
Fundamental Analysis
• Understanding internal and external factors impacting
the business
Technical Analysis
• Studying historic Price and Volume movements to
predict future movement
Valuation Ratios
Let’s get grip of following 1st ‐
Earnings per share (EPS) = Net earnings of a company

Total Outstanding shares
Book Value Per Share = Total Assets – Liabilities & Intangible Assets

Total outstanding shares
PE Ratio (Price to earnings ratio /
Earnings Multiple)
PE Ratio = Market Price of a stock

Earnings per share
Reflection of market view on Company’s future prospects
Gives idea of companies valuation – over/under valued
Tells us how much investor is willing to pay per rupee of earnings
PB Ratio or Price to Book Value
PB Ratio = Market Price of a share
Market Value
Book Value per share
Accounting Value
• Compare a stock's market value to its book value
• Tells us how much investors are willing to pay per rupee of assets
What kinds of sectors / companies will have high PB
Ratio and why
Investing style
Value
• Selecting stocks that trade for less than their intrinsic
value.
Growth
• Selecting companies whose earnings are expected to
grow at an above‐average rate than the industry or the
overall market.
Portfolio Building Approach
Portfolio Top Down
Stocks Sectors
Bottom Up Portfolio
Debt Schemes
Rate of Interest Tenor Principal
Yield ‐ The return that an investor earns or is likely to
earn on a debt security
Issuer Instrument Typical Maturity range Investors
Central Government Dated Securities (G‐ 2 ‐ 30 years RBI, Banks, Insurance Companies, Provident Funds,

Sec) Mutual Funds, PDs, FII
Central Government T‐Bills 91‐364 days RBI, Banks, Insurance Companies, Provident Funds,

PDs, Mutual Funds, Individuals, FII
State Government Dated Securities (SDLs) 5‐10 years Banks, Insurance Companies, Provident Funds, FII
PSUs Bonds, Debentures 5‐10 years Banks, Insurance Companies, Corporate, Provident

Funds, Mutual Funds, Individuals, FII
Corporate Bonds, Debentures 1‐15 years Banks, Mutual Funds, Corporate, Individuals, FII
Banks Certificates of Deposit 91‐364 days Banks, Corporate, FII, Mutual Funds
Corporate, PDs Commercial paper 91‐364 days Banks, Corporate, Financial institutions, Mutual

Funds, Individuals, FII
Banks/ NBFCs Asset Backed 6months to 15 year Banks, Corporate,

securities FII, Mutual Funds www.prudentcorporate.com
Yield Curve and Spread
Spreads
Yield
Maturity
Credit Ratings
The below mentioned Rating Agencies currently operating
in India
CRISIL ICRA FITCH CARE
Highes Lowest Highes Lowest Highes Lowest Highes Lowest

t Rating t Rating t Rating t Rating
Rating Rating Rating Rating
LONG AAA D LAAA LD AAA D AAA D
TERM
SHORT P1+ P5 A1+ A5 F1+ F5 PR1+ PR5

TERM
Duration – Measure of Interest rate
risk
Duration measures the sensitivity of the bond’ price
changes to interest rate changes
Duration of a bond is 3 years, interest rate moves by 2% ,
price will fall by
Risk of Investing in Bonds
• Interest rate risk ‐ As interest rates move up or down , price of the bond
moves in opposite direction
• Default risk ‐ Risk of default on the part of the borrower
• Reinvestment risk ‐ Risk of not being able to redeploy the cash flows at
the same rate as coupon
• Inflation risk ‐ Value of bond on maturity is less due to inflation
• Call risk ‐ Risk that the borrower may call back the bond as rates have
fallen
• Liquidity Risk – How quickly investments can be converted to cash
Major factors impacting interest rates
Liquidity Inflation Credit Growth
Global Interest Rates Fiscal Deficit
Other Options
Gold
Real Estate
Gold
The value of gold in India depends on:
• The international price of gold (which is quoted in foreign
currency)
• The exchange rate for converting the currency into Indian
rupees
• Any duties on the import of gold.
Gold is seen as a safe haven asset class. Therefore, whenever

there is political or economic turmoil, gold prices shoot up.
Most countries hold a part of their foreign currency reserves in

gold. Similarly, institutions like the International Monetary Fund
have large reserves of gold.
Real Estate
Unlike gold, real estate is a local asset. It cannot be transported –
and its value is driven by local factors. Some of these factors are:
• Economic scenario: If there is uncertainty about the economy,

people preferred to postpone real estate purchases.
Consequently, real estate prices weakened. As the economy
improves, real estate prices also tend to keep pace.
• Infrastructure development: Whenever infrastructure in an
area improves, real estate values go up.
• Interest rates: When money is cheap and easily available,
more people buy real estate. This pushes up real estate
values. Rise in interest rates therefore softens the real estate
market.
Returns
Simple Return ‐ Change in NAV

Change in NAV between the two dates in absolute and percentage terms.
o Absolute terms=NAV at the end‐NAV at the beginning
o Percentage terms=(Absolute change/NAV at the
beginning)*100
Annualized Return
Simple Return * 12 / Period of Simple Return (in Months)
Compounded Annualized Growth Rate (CAGR)
Formula: A = P x (1+R/100) N
• P = Principal invested
• A = Maturity Value
• N = Period of Investment in years
• R = Annualized compound interest rate in %
Q) Can there be a difference between scheme returns and return to
investor
Risks in Mutual Fund Schemes
• Portfolio Risks
• Portfolio Liquidity
• Liquid Assets in the Scheme
• Liabilities in the scheme
• Use of derivatives
• Unit holder churn
Risk Control Measures
• A mutual fund scheme cannot borrow more than 20% of

its net assets
• The borrowing cannot be for more than 6 months.
• The borrowing is permitted only to meet the cash flow
needs of investor servicing
• 20 – 25 : At least 20 investors with no investor holding
more than 25% of Net Assets
Fund Category Specific Risks
Equity / Debt
Generic Portfolio Specific
Q) What can be the risks in Gold and Real Estate investing?
Risk Measures
• Variance
• Standard Deviation
• Beta – Systematic Risks / Non Systematic Risks
Risk Adjusted Returns
• Sharpe Ratio
• Treynor Ratio
• Alpha
Benchmarking
An equity fund delivered 21% returns in one
year, is it a good performance?
Benchmarks are the milestones which an investor can use
to evaluate performance of Mutual Fund schemes.
For example – Sensex as a benchmark for diversified equity
fund.
Choosing an appropriate Benchmark
• The asset class it invests in
• Fund’s stated investment objective
3 types of Benchmarks
• Relative to Market
For example Debt Fund with Bond Index, Mic Cap Fund
with BSE Mid Cap.
• Relative to other Mutual Funds
Peer group comparison
• Relative to other Investment options
Equity fund vs PPF vs FD
• What should be the benchmark of Gold Fund
• What should be the benchmark of International
Funds
Quantitative measures are based on historical

performance, which may or may not be replicated in
future. Scheme evaluation is an art, not a science.
Chapter 9 ‐ Scheme Selection
Sequence of decision making is as
Step 1 – Deciding on the scheme category

Step 2 – Selecting a scheme within the category
Step 3 – Selecting the right option within the scheme
While selecting a Scheme
• Equity is for long term
• Active or Passive; Open Ended or Close Ended
• Large Cap / Mid Cap and Small Cap
• Arbitrage Funds
• Liquid Schemes
• Balanced Schemes
• Gold Schemes
• Debt Funds ‐ Weighted Average Maturity & Credit Quality
• Costs or expense ratio
• Tracking Error in Index Funds
• Ranking and Rating
• Growth or Value funds
• Fund size
• Portfolio turnover
• Fund age
Data Sources
• Mutual Funds annual periodic reports
• Mutual Funds website
• Daily Financial Papers
• Fund Tracking Agencies (For example Value Research)
• Newsletters from brokers
• Offer Document of the Fund
Chapter 10
Selecting the Right Investment Products for Investors
Various Asset Classes
Implication
Comfort Unforeseen Events Economic Context
Gold – Physical / Financial
Physical Gold ETF

• Theft Issue • Gold in paper form
• Storage Cost
• Wealth Tax applicable
• Nomination facility not available
Gold Sector Fund Gold Deposit Schemes

• Invests into Gold related • FD in Gold
companies
• Company specific risks
Real Estate – Physical / Financial
Physical
• Loss due to fire / other hazards
• Ticket Size
• Concentration Risk
• Encroachment Issues
• Liquidity
• Transactions Costs
• Risks related to tenancy
• Project Risk
Financial
• Option not available in India currently
Fixed Deposit or Debt Scheme
Fixed Deposits Debt Scheme
• Insurance Deposit • Potential for

Scheme till Rs. 1 capital
lacs applicable appreciation
• Penalty for pre‐ • Better tax
mature treatment
withdrawals • Flexibility
National Pension Scheme (NPS)
Pension Funds Regulatory and Development Authority (PFRDA) is
the regulator for the New Pension Scheme (NPS). Two kinds of
pension accounts are envisaged:
• Tier I (Pension account), is non‐withdrawable.
•Tier II (Savings account) is withdrawable to meet financial
contingencies. An active Tier I account is a pre‐requisite for
opening a Tier II account.
They can allocate their investment between 3 kinds of portfolios:
• Asset Class E: Investment in predominantly equity market
instruments
• Asset Class C: Investment in Debt securities other than
Government Securities
• Asset Class G: Investments in Government Securities.
National Pension Scheme (NPS)
Investors can also opt for Life‐Cycle fund. With this option, the
system will decide on a mix of investments between the 3 asset
classes, based on age of the investor.
The 3 asset class options are managed by 6 Pension Fund
Managers (PFMs). The investors’ moneys can thus be distributed
between 3 portfolios X 6 PFMs = 18 alternatives.
Chapter 11 ‐ Introduction to Financial
Planning
What is Financial Planning?
Is it really required?
What has changed in last couple of years in
Personal Finance space?
Can a Person do his own Financial Planning?
For house hold expenditure of Rs. 20,000 increasing @
of 8% / 10%, can you guess what will be the amount
required after…
8% 10%
3,48,988
2,01,253
1,34,550
93,219
43,178 51,875
10 years 20 years After 30 years

Who is a Financial Planner
A financial planner
– identifies investor needs
– translates needs into measurable financial goals
– plans investment to achieve these goals
A good financial planner
– listens and understands clients
– understands investment options
– knows tax rules
– analyses client’ life cycle stages
– follows up with clients even went portfolio value declines
– considers overall financial health www.prudentcorporate.com
Benefits of Financial Planning
What are the benefits to Client?
What are the benefits of being a Financial
Advisor?
Role of Mutual Funds in Financial
Planning
• Provides option for all the investor classes like Retail, HNI,
Institutional.
• Provides option for long term and short term goals.
• Provides an opportunity to participate in variety of asset classes
like equity, debt , real estate.
• Provides wide range of options within asset classes like sectoral
fund, mid cap fund, index fund, theme funds in case of equity
funds
• Provides flexible solutions
Financial Planning Process (as per CFP)
Establish &
Gather Client Analyze &
define the client
data & define Evaluate Client’s
–planner
goals Financial Status
relationship
Develop & Present

Monitor and Implement the
Financial Planning
Review recommendations
recommendations
Common mistakes in Financial
Planning
• Not setting measurable goals
• Confusing financial planning with investing
• Not revisiting a financial plan
• Assuming only wealth/older investors need financial plan
• Starting to plan after a financial crisis
• Fearing that involving a planner means loosing control
• Thinking financial planning, tax planning and retirement
planning are the same
Roles of various participants
Client Financial Fund Manager

Planner
• Discussion • Choice of • Analysis of

of goals & scheme & markets &
asset fund choice of
allocation manager individual
securities
Life Cycle
Young Un Married with

Childhood Young Married
married Young Children
Married with
Retirement Pre Retirement
Older Children
Wealth Cycle Guide
Transition
Stage
• Financial • Cashing out
goals are • Goals are stage
some time near
away
Accumulatio Reaping
n Stage Stage
Intergenerational
Transfer Stage
• Estate Planning Sudden Wealth Stage
• One time windfall gains
Financial Planning for Affluent
Investors
Wealth Creating Wealth Preserving
• willing to take • not willing to take

risks risks
• invest in equity • will tend to
and allied asset choose capital
classes preservation
products
Recommending Financial Planning
Strategies
Power of compounding / Rupee Cost Averaging
Rs. 1000 Investment per month for 20
years
@ 8% @ 15%
Small Car Luxury Car

Rs. 1000 Investment per month for 30
years
@ 8% @ 15%
Luxury Car Apartment

Asset Allocation
Equity/Debt
Accumulation Distribution
80 60
Young Investors
20 40
70 50
Older Investors 30 50
Chapter 12 ‐ Recommending Model
Portfolios and Financial Plans
Factor Influence on Risk Appetite
Family Information
Earning Members Risk appetite increases as the number of earning members
increases
Dependent Members Risk appetite decreases as the number of dependent
members increases
Life expectancy Risk appetite is higher when life expectancy is longer
Personal Information
Age Lower the age, higher the risk that can be taken
Employability Well qualified and multiskilled, professionals can afford to take
more risk
Nature of Job Those with steady jobs are better positioned to take risk
Psyche Daring and adventurous people are better positioned mentally, to
accept the downsides that come with Risk
Factor Influence on Risk Appetite
Financial Information
Capital base Higher the capital base, better the ability to

financially take the downsides that come with risk
Regularity of Income People earning regular income can take more risk
than those with unpredictable income Streams
Asset Allocation
Strategic Asset
• As a result of risk profile
Allocation
Tactical Asset
• Call on Market Behavior
Allocation
Model Portfolios
• Young call centre / BPO employee with no dependents
• Young married single income family with two school
going kids
• Single income family with grown up children who are
yet to settle down 35% diversified
• Couple in their seventies, with no immediate family
support
Thank you
&
wish you all the best

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Purpose of this workshop Chapter 7: Investor Services

NISM MF Distributors Certification Exam Chapter 8: Return, risk and performance

2. You have invested Rs. 100,000/‐ @ 8 % pa, what is your real rate of return?

Aims at exploring MFs and their importance in enhancing

• Attempt the questions in the workbook after reading one

The Concept of Mutual Funds

I need to answer following questions –

• Help in spreading capital markets to all the sections of society thereby

• Investment made by investors in a scheme is translated into

Open Ended • Open for investors to enter / exit always

• Fund Manager selects securities • Mirrors chosen index

Min 80% in invested in Debt instruments of banks, Public Sector Undertakings,

Floater Fund Min 65% in invested in Floating rate instruments Debt

Conservative Hybrid 10 ‐ 25% in Equity related instruments & 75 to 90% in Debt instruments Debt

Balance Hybrid 40 ‐ 60% in Equity related instruments & 40 to 60% in Debt instruments Debt

Aggressive Hybrid 65 ‐ 80% in Equity related instruments & 20 to 35% in Debt instruments Equity

Multi Asset Allocation Min 10% investment in atleast 3 asset classes Equity/Debt

• AUM of industry as of Dec 2020 has touched Rs. 31,02,475 Cr

@: less than 1 percent Source: www.amfiindia.com www.prudentcorporate.com

Asset R & T agents

Mutual Fund Custodians

Mutual Fund Trust Pramerica Mutual Fund

• Sponsor • Prudential Financial Inc, USA

SEBI – Capital Markets Regulator

• AMFI has framed AGNI – guidelines for intermediaries

• Investment Objective – Broad investment charter

• Investment Policy – Detail of how portfolio will be managed

• Investment Strategy – Day to day fund management

• Investor can claim his money from scheme within

 There is no other change in the Fundamental attributes

If investor claims within 3 years then payment is based on

Both operate under the overall control of the Trustees. This

NFO SID SAI

• NFOs other than ELSS can remain open for a maximum of

Applicability for an open‐ended scheme:

Applicability for close‐ended / interval scheme:

• Whenever a new scheme’s offer document is made, this

• An individual or Corporate entity can become a Mutual

New Cadre of Distributors

The individual needs to pass the Certifying Examination

As part of SEBI’s drive to streamline the distribution process of

The new rules are applicable to new registrations and renewals

After passing the examination and completing KYD requirements,

Individuals from the exempted category described above can

Sub‐brokers also need to comply with all the regulations

Alternatively, they can become agents of a distributor who is

Empanelment with the AMC, or enrolment as an agent of an

Trail Commission remains invested in the fund. –usually paid on a monthly or

Advisory Fees – Fees which ARN holder charges from the

Liquid fund Purchases 1.30 pm Previous day NAV if received before cut off time and funds are realised.

Equity Oriented Funds, Purchases 3.00 pm Same day NAV if received before cut off time.

Equity oriented funds Purchases 3.00 pm NAV of the business day on which funds for the entire amount of

Recurring Expenses – These can be charged to the scheme.

Net Assets (Rs crore) Equity Debt

Upto Rs 100 crore 2.50% 2.25%

Management fees cannot be charged by liquid schemes and

Indexed Cost = 100000(1+7%)^3 = 1,22,504.30

• Demat makes it possible to trade in Units in the stock

There is no other change in the Fundamental attributes