AMFI

NISM - Series MUTUAL FUND Distributors Certification Examination Nov 2011
Index
Day 1
Part 1 1. Concept and Role of Mutual Funds 2. Fund Structure and Constituents 3. Legal and Regulatory Environment Part 2 4. 5. 7. 8. Offer Document Fund Distribution and Channel Management Practices Investor Services Return,Risk & Performance of Funds
Chapter 1
CONCEPT AND ROLE OF MUTUAL FUNDS
What is a Mutual Fund ?
It is a pool of money, collected from investors, and is invested according to certain investment objectives The ownership of the fund is thus joint or mutual, the fund belongs to all investors. A mutual funds business is to invest the funds collected, according to the wishes of the investors who created the pool.
Role Of Mutual Fund
Primary Role is to assist investor in earning an income or building their wealth by participating in opportunities available in various security market.
Money that is raised from investors ultimately benefits Governments, companies or other entities directly or indirectly. It is possible for mutual funds to structure a scheme for any kind of investment objective. Mutual Funds are therefore viewed as a key participant in the capital Market of any economy.
Why Mutual Fund
Mutual Fund seek to mobilize money from all possible investors. as per their investment preferences.
In order to accommodate different preferences mutual fund mobilize Different pool of money.
Each pool is called mutual Fund scheme.

Every Scheme has a pre-announced investment objective. When investor invest in mutual Fund they are effectively buying into its investment objective.
Important characteristics of a Mutual Fund
The ownership is in the hands of the investors (Unit holders)who have pooled in their funds so ownership is joint or mutual. It is managed by a team of investment professionals & service providers.
The investors share is denominated by units whose value is called as Net

Asset Value (NAV) which changes everyday. The investment portfolio is created according to the stated investment objectives of the fund. In India, Mutual Funds are constituted as TRUST. Standard Risk factors are common for all Mutual Funds. Unaudited accounts must be published every 3 months. Mutual Funds are not allowed to invest in Art in india.
Advantages & Limitations of Mutual Funds
Advantage of a Mutual Funds Portfolio diversification Professional Management Economies of Scale Reduction in Risk Liquidity Tax Deferral Tax benefits Convenience and Flexibility Regulatory Comfort Systematic Approach to investment
Limitation of a Mutual Funds Lack of Customisation Choice Overload Issue relating to management of portfolio of Mutual Funds No control over costs
Basic Classifications Mutual Funds
Mutual Funds in India are basically classified according to Investment objective & structure
Basic Features Purchase Re-purchase Redemption Further Trasaction Unit Capital No of Units Open Ended Funds Done Any time Done Any time Done Any time NA Is not fixed but variable Outstanding Units goes up & down Close ended Funds Done during the specified period. Done during the specified period. Done during the specified period. Can be done in secondary Market Unit Capital is Fixed Outstanding Units remains unchanged
Basic Classifications Mutual Funds
Interval Funds
Combine features of both open-ended and close ended schemes.
They are largely close-ended, becomes open ended at pre- specified intervals.
If it is half yearly interval fund then it will open between 1 to 15th Jan, & 1 to15 July,each year.
The benefit for investors is they are not completely dependent on the exchange.
Mutual Fund Classifications As Fund Management
Active Funds Responsibility & Role is of Fund Role of fund manager Manager to decide the investment avenues to build the portfolio. Flexibility of fund management depended on Fund manager High Expected high rate of return Diversified Equity Schemes
Basic Features
Passive Funds No Great Role of fund manager as protfolio is defined by the index itself Fund management is done on the prespecified index.hence less or no flexibility. Low Rate of return would mirror the concern index. Index Funds
Fund Management
Expenses Ratio Rate of Return Examples
Types of Funds - By Investment Objective
Equity : E.g. Diversifed equity fund, Index fund, Sector fund, Arbitrage fund, ELSS, Dividend yield Schemes. Debt: E.g. GILT fund, FMP, Junk bond fund, Liquid schemes Hybrid: E.g. MIP, Capital Protection Fund.
Types of Equity Funds (A Risky asset class)
Aggressive Growth Funds (Targets maximum capital appreciation.) Growth Funds (Capital appreciation over 3 to 5 years at above average rate.)
Speciality Funds Sector Funds (Bank, Power, Pharma, IT, Telecom) Foreign Securities Fund Mid cap or Small cap Equity funds
Diversified Equity Funds (Do not focus on any one or few sectors or shares) Equity Index Funds (These funds take only the overall market risk) Value Funds (Invests in the companies whose shares are underpriced) Equity Income or Dividend yield funds (Invests in the shares of the companies with high dividend yield.)
ELSS ( Equity Linked Saving Scheme )
3 year lock in period

Minimum investment of 90% in equity markets at all times So ELSS investment automatically leads to investment in equity shares. Eligible under Section 80 C up to Rs.1 lakh allowed Dividends are tax free. Benefit of Long term Capital gain taxation.
Arbitrage Funds
Take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned. For instance, by buying a share in BSE, and simultaneously selling the same share in the NSE at a higher price. Most arbitrage funds take contrary positions between the equity market and the futures and options market.
Comparison of Equity Funds
Types of Equity Funds

Sector Funds Growth Funds Diversified Equity Funds Thematic Funds Index Funds
Investment Objective Risk Return on Investment Liquidity Asset allocation
Concentrates in Single sector of market for investment. High Risk High Yes Among sector only
Capital appreciation in 3 can invest in across all the To invest into theme to 5 years sectors. like infrastructure High Risk High Yes Diversified across all sectors Average High Yes Diversified across all sectors Above average High Yes Can be Diversified across as per theme
To mirror the index Market risk Related more with Market Return Yes Most diversified
Focused on stocks within a Invest in to companies certain business or Features industry. More volatile than show promise of strong growth in coming years the overall market.
Best of the return are invest across A passive fund style generated per unit of risk companies which are suits to conservative taken by the investors. part of said theme. investors.
Debt Funds
Schemes with an objective that limits them to investments in debt securities like Government Securities, Bonds and Debentures are called debt funds. By investing in such instruments, these funds ensure low risk and provide stable income to the investors. They are classified as :Gilt funds Invest in only government securities, with Zero credit risk. Diversified debt funds Invest in a mix of government & non-government debt securities. Junk bond Schemes or High yield schemes Invest in companies with poor credit.
Debt Funds
Fixed maturity plans (FMP) In such debt funds where the investment portfolio is closely aligned to the maturity of the scheme.
Floating rate funds Invests in floating rate debt securities where the interest rate payable by issuer changes in line with the market. NAV`s of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest.
Liquid schemes or money market schemes Invest only in money market securities that matures within 91-days. They are the lowest in risk among all kinds of mutual fund schemes.
Hybrid funds
Monthly Income Plan Seeks to declare a dividend every month. invests largely in debt securities. & Small percentage in equity shares to improve the schemes yield. Capital Protected Schemes They are close-ended schemes, They are structured to ensure that investors get their principal back, irrespective of market conditions. Mainly invests in Zero coupon govt securities whose maturity is aligned with scheme's maturity & part amount will be invested in equity instruments.
Comparison of Debt Funds
Debt Funds
Liquid Funds
Investment Objective Return Default Risk Interest rate risk Credit rating High Liquidity
Gilt Funds
Diversified Debt Funds
FMP
MIP
High Yield Debt Funds

For higher returns High High Yes Yes risky debt instruments
For consistent For higher return For fixed returns over for regular returns & liquidity. than gilt funds & fixed-maturity income Between the call rates & Nearly Fixed sort of Higher than pure Moderate Higher Yield 1yr T Bills returns debt fund Very less Nil Yes Nil Medium to high Yes Yes Yes Yes Yes Nil Yes Yes Yes Yes short duration fixed income paper & into equity funds
Portfolio
Invest in short-term debt invest G-Secs of Invest in a mix of Schemes maturity is instruments with less central & state govt govt and non govt aligned with portfolio than 1 year maturity. & T. Bills. securities. maturity Very High 3 Business days
Liquidity
can be redeemed comparatively before maturity at 3 Business days low exchange.
Other types of funds

Gold Exchange Traded Fund, They are like an index fund that invests in gold. NAV of such funds moves in line with gold prices in the market. Gold Sector Funds They are like an equity sectors funds which invests mainly in Gold mining companies. The prices of these shares are more closely linked to the profitability and gold reserves of the companies. NAV of these funds do not closely mirror gold prices. Real Estate Funds These funds make it possible for small investors to take exposure to real as an asset class. Although permitted by law, such mf are yet to hit the market in India. estate
Other types of Funds

Commodities Funds Such funds Invest in shares of Companies that are in to commodities Like Gold sector funds, Commodity Sector Funds etc.
International funds Invest outside the country the Common practice is tie up with a foreign fund. In such case a feeder fund will be launched & will subsequently invest into the host fund of the foreign fund house. There is an element of foreign currency risk. Fund of funds (FOF) Such funds invest in various other funds, whether in India or abroad. They are designed to help investors get over the trouble of choosing between Multiple schemes and their variants in the market. Expense Ratio of the fund of fund is usually higher then normal mutual fund scheme.
International Fund
These are the funds that invests outside the country. For Ex. MF may offer scheme to investor in India with an investment Objective to invest abroad. One way for the fund to manage the investment is to hire the requisite People who will manage the fund. Their salaries would add to the fixed costs of managing the fund.
Alternative Route would be to tie up with a foreign fund (Host Fund)

For Ex. If an MF sees potential in china it will tie up with Chinese fund Investors in India will invest in feeder fund. The money collected in such Fund would invest in the host fund. Thus when Chinese market does well host fund do well & Feeder Fund in India will follow suit.
Exchange Traded Funds
An open ended Index funds that are traded on stock exchange.

A feature of open ended funds which allows investor to buy & sell units from MF scheme. Such feature is allowed only to very large investors in an ETF.
Other investor have to buy & sell on Exchange platform.

A baskets of securities that are traded, like individual stocks, on an exchange. ETF`s can be bought and sold throughout the trading day like any stock. One must pay a brokerage to stock broker to buy & sell ETF units. ETF is exempted from wealth Tax ETF is eligible for LTCG after 1 year as compare 3 yr in physical gold.
Very Important Points
An Open Ended Fund offers repurchase facility unconditionally at all times (But It is not obliged to keep selling new units at all times). Unit capital is variable.
The Unit Capital of a closed Ended Fund is fixed. Also the number of units are also fixed. Each unit holder of a mutual Fund is part owner of the AUM of that Mutual fund ( he is not a creditor, not a debtor and not a trustee of that mutual fund). Transfer of Security from one scheme to another scheme is allowed at Market price. Units from an Open Ended fund are bought from the Fund Itself ( not from the stock exchange, distributors or the banks)
Very Important Points
The Liquidity needs of an investor are met through Money Market Funds. A retired person generally needs a greater proportion of Debt Funds. A young investor, for growth and wealth creation, should be advised to invest in Equity Growth Funds. An Equity Fund can be said to be concentrated when Top 10 holdings account for more than 50% of net assets invested. A steady holdings of investments in an equity funds portfolio indicates both Long Term orientation and Lower Transaction Costs. Unit is always issued at 10Rs at NFO ( New Fund Offer )
Very Important Points Debt Funds
Debt Schemes are popular because the returns are more predictable. Equity returns are volatile and very less predictable. Gilt fund invests only in treasury bills and government securities
Junk Bond funds / High yield debt funds invests in companies with poor credit.
Money market funds/liquid funds invests only in the securities with maturity lesser than 91 days.
Longer the average duration of debt fund portfolio, greater the interest rate risk.
Running a Money Market Mutual Fund requires more of Trading Skills. The investors should invest in Debt Fund with a Higher Rated Portfolio and Lower Expense Ratio. An Ideal money market MF has lower expense Ratio.
Question for Revision
Q-1 Mutual fund is exempted from Wealth Tax (a) True (b) False Q-2 Mutual fund are constituted in India as (a) Companies (c) Partnership Firm (b) Trust (d) NGO.
Q-3 Gold funds can invest in (a)Gold (b)Gold futures (c) Shares of gold mines (d) All of the above.
Q-4 Which of the following fund would fall under passive management ? (a) Diversified Equity Fund (b) Index Fund (c) Equity Growth Fund (d) all of Above.
Q-5 Which one of the following funds does not qualify as a speciality fund? (a)Pharma Fund (b) Balanced Fund (c) Small-Cap Fund (d) Emerging Markets Fund Q-6 After NFO in Open Ended fund transactions can be done by ? (a) Existing Investors (b) Existing & New Investors (b) New Investors (d) None of the Above. Q-7 Compare to Sector Funds Thematic Fund would have a wider choice for investment ? (a) True (b) False
Q-8 Close ended fund allows investors to sale their units (a) By allowing fixed number of Units to sale (b)By selling number of units in a fixed interval ( c) by listing MF in stock exchange (d ) Can not sale
Q-9
One of the advantage of ETF is.. (a) Investor can see where his money is invested
(b) These schemes can generate higher returns than mutual

fund. (c) Investors can buy of sell units on stock exchanges at price that closely track valuation at that time (d) ETF offer tax benefits. Q-10 Whats is true about the FMP (a) NAV does fluctuate (b) No default Involved (c ) Returns can be reasonably predicted before the maturity (d) All of the above
Answers
Answers: Q-1 : ( True) , Q-2 : (b), Q-3 : (d), Q-4 : (b), Q-5 : (b) , Q-6 : (b), Q-7 : (True) , Q-8 : (c) Q-9 : (c)
Q-10 : (c)
Chapter 2
FUND STRUCTURE AND CONSTITUENTS
Structural Frame Work of Mutual Funds
Sponsor (Reliance capital Limited)
Contributes at least 40% in the capital
Trustee Rel. Cap.Ltd. Co. Trustee Responsible for investors money (Primary Guardian)
Appoints
AMC Rel. Cap. Asset. Mgmt. Ltd
Fund Management Banks
Marketing & Development
*Custodians are appointed by Trustees
Registrar & Custodian* Karvy & CAMS
Regulatory structure of MF in India

The structure of mutual funds in India is governed by SEBI(Mutual Fund) Regulations, 1996.
It is mandatory to have a three tier structure of Sponsor-Trustee-Asset Management Company.
Mutual funds are constituted as Trusts.
Operations of the mutual funds are governed by Trust Deed which is executed by Sponsers.
The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund. AMC is the business face of the mutual fund as it manages all the affairs of the fund
How are Mutual Funds Structured
In India Mutual fund is the form of a Public Trust created under the Indian trust Act 1882. The fund sponsor acts as the Settler of trust, contributes the initial capital and appoints the trustees to hold the trust for the benefit of the unit holders. Mutual fund is just a pass-through vehicle In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company. The trustees hold the unit holders money in a fiduciary capacity. (Money belongs to unit holders)
In legal sense, the investors are the beneficial owners of investments.
Sponsor
The sponsor is a promoter of the mutual fund. Sponsor appoints the Trustees, the AMC and custodians with prior. approval of SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record in the financial Services business. Must have positive Networth for each of above 5 years. Sponsor must have been profit making in at least 3 of the above 5 years including latest year. Sponsor must contribute at least 40% of the share holding of the AMC. Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution (Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)
Trustee
Independent Trustees are appointed by the sponsor with prior approval of SEBI. The role of the trustee is to safeguard the interest of the investor of the fund. The trustee make sure that the fund are invested as per the investment objective. There must be at least 4 members in the Board of Trustees and at least 2/3 of the members of the board of trustees must be independent. Trustee of one mutual fund can not be a trustee of another mutual fund. All major decisions are taken by trustee.
Rights & Obligations of trustees
Rights :Trustees appoint the AMC, consultation with the sponsor according to SEBI. All Schemes floated by the AMC have to be approved by the Trustees. Trustees can seek remedial actions from AMC & in cases dismiss the AMC Obligations :Trustees must ensure due diligence on the part of AMC in the appointment of constituents and business associates Trustees must furnish to the SEBI, on half yearly basis a report on the activities of the AMC Trustees must ensure compliance with SEBI regulations The meeting of the trustees should be held at least once in every 2 months.
Asset Management Company
Carries out Day to day operations of asset management Must be registered with SEBI Prior approval of SEBI is required before any person is appointed as Director on the board of the company. AMC gets fees for fund management. AMC must have a minimum net worth of Rs. 10 Cr., at all times AMC can not invest in its own scheme unless intention is disclosed in the Offer document. Can not charge any fees for such investments. At least 50% of the members of the Board of an AMC, have to be independent The agreement between the Trustees and the AMC is known as Investment Management Agreement.
AMC key Persons

Chief Investment Officer is responsible for overall investments of the fund. Fund manager reports to CIO Securities Dealers help in putting transactions through in the market Chief marketing officer is responsible for mobilizing money under the various scheme. Chief Operations officer handles all operational issues.
Compliance Officer needs to ensure all legal compliance. He signs

DueDiligence certificate to the effect that all regulations have been complied with.
Functions of the Custodians
Custodian has custody of the assets of the fund. Custodian is required to be registered with SEBI
Custodian is appointed by the Board of Trustees Collect dividends and investment payments due on the mutual funds investment The custodian and sponsor cannot be the same entity The custodian is the guardian of the funds and assets of investors
Registrar and Transfer Agents
They are responsible for issuing and redeeming units of the Mutual Fund. Their other services include. Process investor applications, Record details of Investors Send information to Investors, Process dividend payouts. Incorporate changes in investor information RTA is appointed by AMC AMC can do RTA operations IN HOUSE Also do the collection & payments on behalf of fund. Example Karvy and CAMS
Other's important authorities

Auditors :
Auditors are responsible for the audit of accounts. The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC. While the scheme auditor is appointed by the Trustees AMC auditors appointed by AMC. Fund accountants calculate the NAV AMC can either handle this activity in house or can hire the agency.
Fund Accountants :
Other's important authorities
Distributors :They play a key role in selling suitable types of units to their clients. Distributors needs to PASS necessary certification and get registered with AMFI. Collecting Bankers :The Investors Money go into bank account of the scheme they have invested in. These banks accounts are maintained with collection bankers who are appointed by AMC.
Important Points
The appointment of AMC can be terminated by Majority of directors or trustees. A sponsor of a mutual fund can act as the distributor of the Mutual fund. The sponsor can be compared as promoter of a company Sponsor can contribute to the initial corpus of the trust. Sponsor can not act as Trustee , Custodian of the Mutual Fund. Securities of the fund are handled by custodian
Questions for Revision
Q-1 The appointments of fund distributors are made by (a)Transfer Agents (b)Fund Sponsor (c)Trustees Q-2 ______ has been appointed by Trustee
(a) custodian (c) distributor (b) R&T (d) None of the above
(d) AMC
Q-3 Between whom the Trust deed is executed. (a) Trustee & Sponser (b) Trustee and custodian (c) trustee and AMC (d) AMC & Sponser
Q-4 Minimum Net worth needed by AMC ? (a) 10Cr (b) 15 Cr (c) 20Cr (d) 5Cr.
Q-5 Approval of SEBI is needed to appoint a person as Trustee (a) True (b) False Q-6 Mutual Fund sponsor can be compared to (a) Depositor of a company (b) Company director (c) Promoter of Company (d) CEO of a company Q-7 SEBI regulates (a) Mutual funds (b) RTA (c) Depositories (d) All of the above
Q-8 The asset management company shall confirm that a due diligence certificate is signed by the Compliance Officer (a) True (b) False
Q-9 Which function AMC can't do in house (a) Custodian (b) accounting
(c) fund management (d) distribution Q-10 Who Appoints the AMC (a) Custodian (b) R& T
(c) Trustee
(d) Distributors
Answers
Answers: Q-1 : (d), Q-2 : (a), Q-3 : (a), Q-4 : (a) Q-5 : (a)
Q-6 : (c), Q-7 : (d), Q-8 : (a), Q-9 : (a) Q-10 : (c)
Chapter 3
LEGAL AND REGULATORY ENVIRONMENT
Regulating Agencies of Mutual Fund
Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996 SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign country Bank-sponsored mutual funds were jointly regulated by SEBI and RBI Subsequently it has been clarified that all MFs being primarily capital market players,regulatory come under the umbrella of SEBI. Mutual funds need to comply with regulations of exchange and RBI but regulated only by SEBI. RBI regulates the money and government securities market where the mutual funds invest. But not the MMMF.
Regulating Agencies of Mutual Fund
Liquid funds which invest in money market instruments are now governed by SEBI alone. ( MMMF are now regulated by SEBI). But they need to comply with RBI's regulations. The finance ministry is the supervisor of both the RBI and SEBI. Aggrieved parties can make appeals to the Ministry of finance on the SEBI rulings relating to mutual funds.
Self regulatory organizations (SROs)
In developed Countries it is common for market players to Create SRO, Whose prime responsibility is to regulate the their own members Where ever SRO exits statutory regulatory bodies lays down the broad policy framework and leave micro regulation to the SRO.
SRO are the second-tier in the regulatory structure & gets their powers from the apex regulating agency and act on their instructions
SRO facilitate decentralization in the regulatory structure.
For Instance BSE , NSE
What are the objectives of AMFI ?
AMFI is an industry association, incorporated in 1995, is not an SRO, so it can just issue guidelines to members. It cannot enforce regulations. To Define & Maintain high professional , ethical standards in all areas of operation in MF Industry. To recommend best business practice and code of conduct to be followed by the members and other engaged in various activities. To interact with the Securities and Exchange Board of India (SEBI) and represent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry. To develop a cadre of well trained agent distributors. To Undertake nationwide investor awareness programme to promote better understanding of the concept & working of mutual funds
AMFI code of ethics (ACE)
AMFI Code of Ethics sets out the standards of Good practices to be followed by the AMC in their operations and in their dealings with investors , intermediaries and the public. SEBI Regulation 1996 requires all the AMC and trustees to abide by the code of conduct.
Integrity Members in business shall observe the high standard of integrity and fairness in all the dealing done by them. Mutual Fund Scheme shall be organized & Managed and their portfolios of securities selection should be in the interest of all classes of unit holder and not in the interest of any associates.
Due Diligence Members in the conduct of their Asset Management Business shall at all times Render high standard of service, Exercise due diligence, Exercise independent professional judgement. Member shall have and employ effectively adequately resources and procedures which are needed for the conduct of Asset Management activity Disclosures Member shall ensure timely dissemination to all unit holder of adequate,accurate, and explicit information presented in a simple language about the investment objectives, investment policies, financial positions and general affairs of the scheme.
Professional Selling Practice Member shall not use any unethical means to sell,market or induce any investors to buy their products and scheme. Investment Practice Members shall manage all the schemes in accordance with the Fundamental investment objectives and investment policies stated In the offer documents and take investment decisions solely in the Interest of the unit holders.
Members shall not knowingly buy or sell securities for any of their schemes from or to Any director, officer, or employee of the member.
Operations Members shall avoid conflicts of interest in managing the affairs of the schemes and shall keep the interest of all unitholders. Members or any of their directors, officers or employees shall not indulge in front running.
Reporting Practices Members shall follow comparable and standardized valuation policies in accordance with the SEBI Mutual Fund Regulations.
Unfair Competition Members shall not make any statement or become privy to any act, practice or competition, which is likely to be harmful to the interests of other Members or is likely to place other Members in a disadvantageous position in relation to a market player or investors.
Observance Of Statutes, Rules And Regulations Members shall abide by the letter and spirit of the provisions of the Statutes, Rules and Regulations which may be applicable & relevant to the activities carried on by the Members.
Enforcement Members shall: Widely circulate the AMFI Code to all persons and entities covered by it Make observance of the Code a condition of employment Require that each officer and employee of the Member sign a statement that he/she has received and read a copy of the Code Establish internal controls and compliance mechanisms, including assigning supervisory responsibility.
AMFI code of ethics (ACE) - Summary
AMFI code of ethics broadly deals with:
Integrity
Due diligence
Disclosures Professional selling practices Investment practices Operations Reporting practices Unfair competition Observation of statutes, rules and regulations Enforcement Definitions like AMFI, Member, Trustee, Trustee company etc.
AMFI guidelines & norms for intermediaries (AGNI)
Take necessary steps to ensure that the clients interest is protected. Adhere to SEBI Mutual Fund Regulations and guidelines issued from time to time related to selling, distribution and advertising practices. Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes Highlight risk factors of each scheme, avoid misrepresentation and exaggeration and urge investors to go through SID/KIM before deciding to make investments. Disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended to the investors.
AMFI guidelines & norms for intermediaries (AGNI)
Abstain from indicating or assuring returns in any type of scheme, unless the SID is explicit in this regard.
Maintain confidentiality of all investor deals and transactions. When marketing various schemes, remember that a clients interest and suitability to their financial needs is paramount. Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptation of rebates / gifts etc. A focus on financial planning and advisory services ensure correct selling, and also reduces the trend towards investors asking for pass back of commission. All employees engaged in sales and marketing should obtain AMFI (NISM Series-V-A: Mutual Fund Distributors Certification Examination)
Investment Objective
This defines the broad investment charter of scheme. For Ex : The objective of a diversified equity scheme might read as To generate Capital appreciation from a portfolio of predominantly equity related securities. The objective of a diversified the debt scheme could be : To generate income by investing predominantly in a wide range of debt & money market securities.
Investment Policy
The Policy describes in a greater details, kind of portfolio that will be maintained. Such as below. The portfolio will generally comprise of equity & equity related instruments of around 30 companies, which may go upto 30 Companies. OR More than 50% will be invested in equity & equity related securities. The rest would be in debt & money market securities.
Investment Strategy
Investment Strategy goes into much details of a MF Scheme such as Should we increase the liquidity component in a scheme. Should we go overweight on the steel sector. Investment objective & investment policy are part of the OD. But investment strategy is decided more frequently. Many AMC have a practice where every morning the senior management discuss the need for a change in their strategy.
Investors Rights & Obligations

Service Standards Mandated for a Mutual Fund towards its Investors: Schemes, other than ELSS, need to allot units or refund moneys within 5 business days of closure of the NFO. Open-ended schemes, other than ELSS, have to re-open for ongoing sale / re-purchase within 5 business days of allotment. Statement of accounts are to be sent to investors as follows: NFO - within 5 business days of closure of the NFO. Post-NFO investment within 10 working days of the investment. Ongoing Investments Once in quarter end of calender year with in 10 working days. Request by investor - With in 5 working days with out charges.
Investor can ask for a Unit Certificate for his Unit Holding. AMC is bound to issue unit certificates within 30 days of receipts of request. NAV has to be published daily, in at least 2 newspapers NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI and the mutual fund by 9 pm. In case of Fund of Funds, by 10 am the following day The investor/s can appoint up to 3 nominees, . The investor has a right to pledge the units held. Dividend warrants have to be dispatched to investors within 30 days of declaration of the dividend Redemption / re-purchase cheque would need to be dispatched to investors within 10 working days from the date of receipt of transaction request.
Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme.
Investors can choose to change their distributor or go direct. In such cases, AMCs will need to comply, without insisting on any kind of NOC from the existing distributor.
Investors can choose to hold the Units in dematerialized form.
In the case of unit-holding in demat form, the demat statement given by the Depository Participant would be treated as compliance with the requirement of Statement of Account.
The mutual fund has to publish a complete statement of the scheme portfolio and the unaudited financial results, within 1 month from the close of each half year. Advertisement need to publish in one National English & regional language of the region where the HQ of the mutual fund is situated. Debt-oriented, close-ended / interval, schemes /plans need to disclose their portfolio in their website every month, by the 3rd working day of the succeeding month.
Unit-holders can inspect key documents such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, R&T agent agreement and Memorandum & Articles of Association of the AMC.
Scheme-wise Annual Report, or an abridged summary has to be mailed to all unitholders within 6 months of the close of the financial year.
The offer document has details of the number of complaints received and their disposal. Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.
The trustees / AMC cannot make any change in the fundamental attributes of a scheme, unless a written communication is sent to each Unit-holder, and an advertisement should be published in news papers (english & regional). An option of exit would be give to unit holders with out any exit load. with in 30 days.
Appointment / Termination of an AMC A majority of the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the Scheme. The Winding of a Scheme Only after 75% of the Unit-holders (in practice, Unit-holding) pass a resolution to wind-up a scheme. The Trustees are bound to obtain consent of the Unit-holders: Whenever required to do so by SEBI, in the interest of the Unit-holders Whenever required to do so by 75% of the Unit-holders (in practice, Unit-holding) of the scheme. When the trustees decide to wind-up or prematurely redeem the scheme If an investor feels that the trustees have not fulfilled their obligations, then he can file a suit against the trustees for breach of trust.
Limitations to Investors right
Investors cannot sue the trust as they are not distinct from the trust Investors cannot lodge complaints against the trustees (with the Registrar of Public Trusts) or the AMC (with the CLB). Investors can lodge complaints with SEBI for non-compliance. Investors cannot be compensated if the performance of the fund is below expectations. There are no legal remedies available for a prospective investor. The principle of caveat emptor (let the buyer beware) applies to mutual fund investments. So, the unit-holder cannot seek legal protection on the grounds of not being aware.
Unclaimed Amounts
The mutual fund has to deploy unclaimed dividend & redemption amounts in the money market. AMC can recover investment management and advisory fees at maximum rate of 0.50% p.a. Recovery of such unclaimed amounts by the investors is as follows: If the investor claims the money within 3 years, then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money. If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years AMC is expected to make a continuous effort to remind the investors through letters to claim their dues. The Annual Report has to mention the unclaimed amount and the number of such investors for each scheme.
Proceeds of liquid Securities

It is possible that any security was treated as wholly or partly nonrecoverable at the time of maturity or winding up of a scheme. The security may subsequently yield a higher amount to the scheme. In such cases treatment of excess is as follows :
If amounts are substantial & recovered within 2 years, then the amount is to be paid to old investors. In other cases the amount is to transferred to the investor education funds maintained by each mutual fund.
Can mutual Fund Scheme go burst ?
The structural requirements ensures that the investor is fully protected from most of the contingencies that can be envisaged. While AMC Manages the investments of the scheme, the assets of the scheme are held by the custodian.
AMC & Custodian operates under the overall control of the trustees.
Such arrangement of checks & balances protects the investors from misappropriation of funds, fraud etc. If sponsor wishes to move out of business they needs to bring in some other sponsor acceptable to SEBI.
Important Points
SEBI entertains the complaints against MF and intervenes with fund managements to help the investor. SEBI requires that sponsors of a new scheme should appoint a compliance officer who must issue a Due Diligence Certificate to the effect that all regulations have been complied with by the fund and sponsors. Mutual fund has to deploy unclaimed dividend and redemption amount in money market, where they can charge .50% as investment management and advisory fees. Unit holders have right to timely service, right to information, right to approve changes in fundamental attributes, right to wind up a scheme, right to terminate the AMC. 3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed. Investors money is not protected by the Companies Act. PAN and KYC are compulsory for mutual funds investments except Micro-SIPs.
Q-1. Bank owned mutual funds are regulated by (a) RBI and SEBI (b) Respective parent banks (c) RBI Q-2. AGNI IS
(a) Code of Conduct For Intermediaries (b) Terms & Conditions Regulations (d) Non of the above (c) Rules &
(d) SEBI
Q-3 Payment of redemption is delayed then what % Interest has to be paid by AMC ? (a) 10% (b)20% (c)9% (d) 15%
Q-4 Although AGNI is mandated. there are no penalties for breach of code of conduct. (a) True (b) False
Q-5 The distributor can charge fees from the Investor (a) True (b) False Q-6 In case of breach of Code of conduct license is canceled by(a) AMFI (b) SEBI (c) Sponser (d) AMC Q-7 Which is prohibited in AMC's Code of ethics (a) Inter scheme transfer (b) Front Running (c) Security transaction through associated broker (d) Distributor of MF through AMC Q-8 Which of the following are self regulatory organization(SRO)
(a) BSE (b) SEBI (c) RBI (d) AMFI
Q-9 Which of the following is not government saving scheme? (a) Infrastructure bonds (b) RBI bonds (c) KVP (d) POST
Q-10 If complaint of an investor is not solved by AMC, investor has to complain to (a) SEBI (b) Trustees (c) Sponser (d) R & T
Answers
Answers: Q-1 : (d), Q-2 : (a), Q-3 : (d), Q-4 : (a) Q-5 : (a)
Q-6 : (a), Q-7 : (b), Q-8 : (a), Q-9 : (a) Q-10 : (a)
Chapter 4
OFFER DOCUMENT
New Fund Offer
Units of mutual fund are offered to investors for the first time through a NFO. AMC decide the scheme to take to the market. AMC prepares offer Document for the NFO. This needs to be approved by the trustees. The documents are to be filed with SEBI. SEBI does not approve / Disapprove the OD it given only the observation. Any observation made by SEBI needs to be incorporated in OD. AMC decides the suitable time for launch.
New Fund Offer
AMC holds events for intermediaries and press to make them familiar with the scheme. Finally offer documents and Application forms are distributed to market intermediaries for investor to apply. There are 3 Relevant dates related to NFO NFO Open date NFO Close Date Scheme Reopening Date Under SEBI guidelines, NFOs other ELSS can remain open for maximum 15 days.
The Offer Document
Offer Document is the most important source of information about fund scheme for investors OD is the Operating Document and describes the product. Mutual fund offer document is divided into 2 parts,
mutual
Scheme information document (SID) & Statement of additional information (SAI).
SID comprises of details of the scheme while SAI deals with statutory information about the mutual fund that is offering scheme.
Both documents are prepared in the format as prescribed by SEBI.
The Offer Document

Investors are required to read and understand the OD. Investors sign the form stating that they have read the OD.
No recourse is available to investors for not reading the OD or KIM

The OD is issued by the AMC on behalf of the trustees The AMC is responsible for the information in the OD
Contents of SID
Cover Page has the name of the scheme followed by its type Open-ended / Close ended / Interval Equity / Balanced / Income / Debt / Liquid / ETF Finally the cover page has the following standard clauses. Table of Contents Highlights Introduction - Risk Factors Standard Scheme-specific - Minimum no. of investors in scheme, Definitions, Due Diligence Certificate (issued by the AMC) Information about the scheme - Units & Offer, Fees & Expenses ,Rights & Penalties Unit-holders, Litigation etc.
Updation of SID
If a scheme is launched in the first 6 months of the financial year (say, April 2010), then the first update of the SID is due within 3 months of the end of the financial year (i.e. by June 2011). If a scheme is launched in the second 6 months of the financial year (say, October 2010), then the first update of the SID is due within 3 months of the end of the next financial year (i.e. by June 2012). Thereafter, SID is to be updated every year.
Contents of SID Other changes
In case of change in fundamental attributes SID has to be updated immediately after the lapse of time period given to existing investors to exit the scheme. It will be printed on a separate piece of paper (addendum) and distributed along with the SID, until the SID is updated. If a change is superseded by a further change (for instance, change in load), then addenda is not required for the superseded change i.e. addenda is only required to disclose the latest position.
The change is to be advertised in an English newspaper having nationwide circulation, and in a newspaper of the language of the region where the head office of the mutual fund is located.
The change is to be mentioned in the website of the mutual Fund.
Contents of SAI
Information about Sponsors, AMC & Trustee ,shareholding responsibilities, names of directors and their contact information. pattern,
profiles of key personnel, and contact information of service providers (Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers)
Condensed financial information (for schemes launched in last 3 financial years) How to apply Rights of Unit-holders Investment Valuation Norms
Tax,Legal & General Information (including investor grievance Redressal mechanism of past 3 years.)
Update of SAI
Regular update is to be done by the end of 3 months of every financial year.
Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.
Contents of KIM
KIM is a summary of the SID and SAI. As per SEBI regulations, every application form is to be accompanied by the KIM.

Name of the AMC, mutual fund, Trustee, Fund Manager and scheme Dates of Opening /Closing Issue & Re-opening for Sale & Re-purchase Plans and Options under the scheme
Risk Profile of Scheme

Price at which Units are being issued and minimum amount / units for initial purchase, additional purchase and re-purchase Bench Mark , Dividend Policy
Performance of scheme and benchmark over last 1 year, 3 years, 5 years and since inception.
Loads and expenses and Tax Treatment for the investors Contact information of Registrar for taking up investor grievances
Update of KIM
KIM is to be updated at least once a year.

As in the case of SID, KIM is to be revised in the case of change in fundamental attributes. Other changes can be disclosed through addenda attached to the KIM.
Standard risk factors
Mutual fund and securities are subject to market risk and there is no assurance that the objective will be achieved NAV of units issued under the scheme can go up or down depending on factors and forces affecting capital markets. Past performance of the sponsor/AMC/ Mutual fund does not indicate the future performance of the scheme. The name of the scheme does not in any manner indicate any either the quality of the scheme or the future performance of the scheme Standard risk factors are same (common) for all the MF Schemes.
Fundamental attributes
Fundamental attributes of a scheme are its basic features. For eg. Type of a scheme, Investment Objective, Terms of issue etc.
For any change in fundamental attributes, SEBI and Trustee approval is required.
Investor approval is not needed. However, each investor must be informed through a communication and given the option to exit without exit load.
Scheme specific risks
Risk arising from investment objective, investment strategy and asset allocation of the scheme
Risk arising from non diversification , if any If a scheme offers assured returns, the scheme must state that the assurance is on the basis of the guarantees provided by the sponsor/AMC.
If the AMC has no previous experience in managing a mutual fund, a disclosure to the at effect should be made
Requirement of minimum investors in the sheme
20 :25 Rule Scheme must have min 20 investors Single investor can not hold more than 25 % of the corpus.
Important Points regarding OD and KIM
In USA, the OD is known as prospectus The first time investor should read detailed offer document, once he has gained familiarity with the AMC, he can just refer to KIM The offer document is issued by the AMC / Trustees OD is a legal document. OD issued for launching of a new schemes is valid for a period of six months and if the scheme is not launched within this period a fresh OD is required to be filed. OD contains the accounting policies to be followed. Such policies should be in accordance with the SEBI regulations.
OD must disclose the names and background of fund managers, key personnel, investor relation officer, AMC and its directors, custodian, registrar, transfer agent and the statutory auditor.
Important Points
KIM is available at various distribution points such as banks, distributors and brokers AMC must confirm that a due diligence certificate signed by Compliance officer / CEO / MD has been submitted to SEBI. If a schemes name implies that it will invest primarily in a particular type of security or in certain industry, then it will invest at least 65% of the value of its assets in the indicated type of security/ industry. OD must contain brief description of investors complaint history for the last 3 Fiscal years of existing schemes. In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID. Both documents need to be updated regularly.
Q-1 Which of the following is the operating document for a mutual fund? (a) Offer Document (b) KIM (c) Trust deed (d) None of the above. Q-2 The OD may not disclose the names and background of (a) Fund manager (b) Key personnel (c) Investor relation officer (d) Statutory auditor (e) None of the above. Q-3 Offer Document issued on launch of the new scheme is valid for ? (a) 1 month (b) 3 months (c) 6 months (d) 1 year.
Q-4 Which of the following is not the scheme specific risk factor? (a) Risk arising from the schemes objective (b) Risk arising from the non-diversification (c) No previous experience in managing a fund (d) Movement in NAV because of the market movements. Q-5 SEBI directs that certain information must appear on the cover page of the offer document of any scheme. This includes the following except (a) A statement to the effect that the document contains information that a prospective investor should know before investing (b) A description of the investment policies for the scheme on offer (c) Opening, closing and earliest closing date for the offer (d) Type of scheme and price of units on offer
Q-6 There is no need for educational qualification to be MF advisor. (a)True (b) False Q-7 Only one of the following statements is correct as regards the required frequency of updating the contents of the Offer Document of an existing mutual fund scheme. Which one? (a) Once issued, the OD of an existing scheme can`t be updated (b) The OD must be updated whenever there is a material change in its contents (c) The OD must be updated on a half-yearly basis (d) The OD must be updated on a yearly basis.
Q-8 A disclosure should be made in the offer document if an AMC has invested more than the following percentage of its net assets in group companies (A) 5 Q-9 (B) 25 (c) 40 (d) 10 KIM is attached with ?
(A) Transaction slip (B) Application form (c) Either or (d) Neither nor Q-10 NFO other than ELSS is open for a maximum of (A) 7 (B) 10 (C )15 (D) 30
Answers
Answers: Q-1 : (a), Q-2 : (e), Q-3 : (c), Q-4 : (d), Q-5 : (B), Q-6 : (b), Q-7 : (b) Q-8 (b ) Q-9 (b) Q-10 (c)
Chapter 5
FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES
Traditional Distribution Channels
Individual Agents (Individual Financial Advisors ) Those agents who facilitates the investment individually for Insurance co`s or Govt. Savings schemes etc. IFAs do not have huge branch network. Institutional Channels The changing competitive context led to the emergence of the institutional distributors for a wide spectrum of financial products such as Private Distribution Companies (Brokerage firms, National Distributors) Banks ( Private and Foreign ) and NBFC`s Post Offices
Newer distribution Channels
Technologies has opened the doors to newer ways with help of such technologies there is a emergence of newer distribution channels which would play an important role in the years to come. Internet Stock Exchanges (BSE,NSE) Direct Interactions High penetration Reduction in Cost High volume of transactions Convenience Cost effectiveness. Less paper work High standards in Servicing the clients
Pre-requisites to become MF Advisor
The Individual needs to pass the certification Examination conducted by NISM. And get the ARN registration from AMFI. With out Certification / ARN one can not advise or sell any Mutual fund schemes. In case of corporates employee involved in sales & Marketing has to Pass the certification examination. Once the passing certification one can advise all the AMC`s Mutual Fund After completing the empanelment process with each AMC separately
KYD Requirement
AMFI has introduced the KYD process to verify the correctness of information provided in the registration documents and to have verification of the ARN holders.
Commission structure for mutual fund agents
Initial ( Upfront )commission Paid on the amount mobilised by agents. The scheme application forms carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor. Trail commission it is paid normally on quarterly basis for the funds that remain invested the scheme. Trail is an effective way to restrict the practice of rebating, and link commissions. Investors do not get commission on their own investments
in
Example
Suppose an investor has bought 1000 units at Rs 10 each. The distributor who procured the investment may have been paid an initial commission calculated as a percentage on 1000 units X Rs 10 i.e. Rs 10,000. Later, suppose the NAV of the scheme goes up to Rs 15. Trail commission is payable on 1000 units X Rs 15 i.e. Rs 15,000 & not on the Rs 10,000 mobilised. The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either AMFI or SEBI.
SEBIs advertising code
Standard measures to compare such as Compounded Annualized Yield, CAGR etc. for scheme in existence for more than 1 year. Annualized yields for at least 1, 3, 5 years & since launch For less than 1 year performance, Absolute Return ( Total Returns ) without annualisation except for liquid schemes For liquid schemes performance can be advertised by Simple Annulisation. MF investments are subject to market risks read OD carefully before investing disclosure should be made atleast for 5 seconds in any audiovisual media. for more than 1 year CAGR should be used. Dividend declared to be mentioned in rupees per unit with face value of each unit and the prevailing NAV at the time of declaration
SEBIs advertising code
Risk factors prominently stated For comparing performance against benchmarks,appropriate benchmark to be used and identical time periods to be used Any ranking of fund to be explained appropriately
Loads
Load is charged to investor when the investor redeems units. It is primarily used to meet the expenses related to sale and distribution of units Load charged on redemption is exit load. It reduces price. Maximum Exit load is 7%. (For Open ended Funds)
Exit load should be charged equally for all types of investors. AMC should not discriminate on the basis of Investment Value.
Load is an amount which is recovered from the investor.
Q-1 Which one of the following statements is correct? (a) An individual agent can distribute/sell only one mutual fund's products (b) Any category of distributors/agents can distribute as many of the mutual funds' products as allowed by the concerned AMCs (c) Banks are not allowed to sell mutual fund products, except their own funds' (d) A distribution company can distribute/sell only one mutual fund's products Q-2 Which of the following can invest in Indian Mutual fund? (a) SEBI (b) RBI (c) Foreign Banks (d) AMFI. Q-3 Which of the following categories of distributors will be exempt from passing the AMFI Mutual Fund Test? (a) All the existing agents of UTI mutual fund and other funds (b) New applicants for distributorship, if the AMC approves their applications (c) Employees of banks who distribute the funds (d) None of the above.
Q-4
A distributor needs different ARN for each AMC
(a) True (b) False Q-5 A mutual fund distributor is paid commission for (a) First 5 years (b) First 10 years (c) First 3 years (d) As long as investor held the investment Q-6 For a distribution channel, 60% of the employees should have AMFI Registration Number (a) True (b) False Q-7 Institutional Distributors Build Reach through (a) Employees ( b) Agents (c ) Sub brokers (d) any of the above
Q-8 Distributors do not get commission on self business (a) True (b) False
Q-9 In India one can invest in MF only through distributor

(a) True (b) False Q-10 The following would not affect the trail commission to the advisor in mutual Fund
(a) Portfolio value going up with the increase in the market

(b) Investor making fresh purchase during the period (c) Change in the unit capital of the the scheme
(d) Investor redeeming the money during the period
Q-1 : (b), Q-2 : (c), Q-3 : (d), Q-4 : (b), Q-5 : (d), Q-6 : (b), Q-7 : (d) Q-8 (a ) Q-9 (b) Q-10 (c)
Chapter 7
INVESTOR SERVICES
Categories of investors eligible to buy MF units
Resident Individuals HUFs Indian Companies Indian trusts and charitable institutions Banks NBFCs Insurance companies Provident funds Non-resident Indians / PIO OCBs SEBI registered FIIs Advisor should refer to the OD to know the eligible investors.
Investors not eligible to buy MF units
An individual who is a foreign national ( unless of course the person is an NRI or PIO/OCI card holder.) Any entity that is not an Indian resident as per FEMA (Except when the entity is registered as FII with SEBI, or has a sub account with SEBI registered FII. Overseas corporate bodies (OCBs) i.e. societies / trusts held, directly or indirectly, to the extent of over 60% by NRI Trust where more than 60% of beneficial interests is held by such OCBs. Details of eligible investors is available in the Offer Document
KYC Requirement for MF investors
It is compulsory from 1st jan 2011 that all investments done in mutual funds has to be compliant with the regulatory requirements.
Broadly, mutual fund investors need the following Documents. Proof of Identity Proof of Address PAN Card Photograph
MF have made an arrangement with CVL ( CDSL venture Ltd) to comply with the documentation requirement. Select branches / offices of mutual funds, registrars and large distributors serve as Points of Service (POS) for the KYC documentation, listed in AMFI website .www.amfiindia.com Investors will need to provide the Original, along with a copy of the relevant documents, to any of the POS (The Original will be returned after verification). Alternatively, the investor can provide a True Copy attested by a Notary Public, Gazetted Officer or Manager of a Scheduled Commercial Bank.
CVL provides a facility where the POS, from their own office, can access CVLs system, enter the requisite data and generate an acknowledgment with a Mutual Fund Identification Number (MIN).
KYC documentation has to be done only ONCE, with CVL acting through the POS. Based on this acknowledgment, the mutual fund investor can invest in any mutual fund. In case of any change in address or any other information, investor can get it updated at any POS and the same will be changed with all the AMC where the investor has invested. Where investment is made by a minor, KYC requirements have to be complied with by the Guardian. In the case of investments by a Power of Attorney holder on behalf of an investor, KYC requirements have to be complied with, by both, investor and POA holder.
PAN Requirements for Micro-SIPs

PAN requirement is compulsory for all investments except for MICRO-SIPS. MICRO-SIPs are SIPs where annual investment doesnt exceed Rs 50000. Investor have to give declaration that aggregate investment doesnt exceed Rs 50000 in a financial year. This relaxation is not available to HUFs, Non individuals and PIOs. It is available for NRIs.
Documentation for Institutional investor

In case of institution Memorandum of Association , Articles of association or Trust deeds. Company cannot invest if its incorparation documents do not provide for investments.( Even if the board resolution is there) Authorization for the investing institution to invest. This is typically in the form of board resolution. Authorization for the official to sign the documents on behalf of the investing institution.
Demat Account - Benefits
De materialization is a process whereby an investors holding of investments in physical form (paper) is converted into a digital record. Investors purchase & sale of investments get automatically added or subtracted from their investment demat account, without having to execute cumbersome paperwork. Less paperwork in buying or selling the Units, and correspondingly, accepting or giving delivery of the Units. Direct credit of bonus and rights units that the investor is entitled to, into the investors demat account. Change of address or other details need to be given only to the Depository Participant, instead of separately to every company / mutual fund where the investor has invested. NSEs platform is called NEAT MFSS. BSEs platform is BSE STAR Mutual Funds Platform.
Transaction with Mutual Funds

Fresh Purchase Is a instance where the Investor does not have an investment account with specific Mutual Fund.
Additional Purchase
Once the Investor has the folio and he again transact new purchase transaction in the same folio with the help of transaction slip. Additional purchase can be done in amounts only
Online Transaction
Are transaction done through Internet. AMC issues a personal PIN number through which investor can transact except the SIP. It is not mandatory for AMC to provide online facility to investors
Payment mechanism for purchase

Mutual funds do not accept cash.
Application moneys need to come through normal banking channels likeCheque ,DD NRI / PIO applications need to be accompanied by cheque drawn on an NRO account (for non-repatriable investment) or NRE account (for repatriable investment). If payment from NRI is by DD, and investment is on repatriable basis, a bankers certificate will be required to the effect that the DD has come out of moneys remitted from abroad. When the NRI receives money in his bank account in India, the banker would issue a Foreign Inward Remittance Certificate (FIRC), which is evidence that the money was remitted from abroad.
Payment mechanism for purchase & additional purchase

Application Supported by Blocked Amount (ASBA) This is a facility where the investment application is accompanied by an authorization to the bank to block the amount of the application money in the investors bank account. (Facility available only for NFO) The benefit of ASBA is that the money goes out of the investors bank account only on allotment. Until then, it keeps earning interest for the investor. M-Banking is nascent in India. RBI has permitted banks to offer the facility of transferring up to Rs 50,000 per customer per day, through the mobile connection. Once people are comfortable with M-banking, this will become a convenient way to invest. ASBA cannot be used for the purchase of ongoing scheme
Allotment of units to investor

NFO are sold at the face value of Rs.10/- so Investment Amount / Face value = Units investor bought. Price at which units are sold to an investor as part of ongoing sales in an open-end scheme is the sale price.
For Ex. An investor invested Rs.12000/- in a scheme where the applicable sale prices is Rs.12, will be allotted Rs.12000 / Rs.12 = 1,000 units.
Right & Bonus issue

Right Issue : The price at which units are offered Right price is clear at the time of investment. For Ex. Investment Amount / Right price = No of units bought by investor. Bonus Issue :The investor does not have to pay anything. The fund allots units free. For Ex. In a 1:3 bonus issue the investor is alloted 1 unit free for every 3 units already held by investor. As net assets of the scheme remain the same only number of units increases the NAV will be reduced proportionately.
Repurchase of units
The investor in an open ended scheme can offer the units for repurchase to the mutual fund. Re-purchase price is the applicable NAV less exit load. Investor has a right to decide on repurchase amount. & if investor has specified the re-purchase amount then (Amount / Repurchase price = units to be reduced. If an investor specified re-purchase units then (Units specified X Repurchase price = Amount to be paid. If the repurchase of folio goes below minimum limit set by MF for scheme then all the units may be repurchased. Repurchase can be done in units as well as amount.
Payment mechanism for repurchase of units

The investor has various options for receiving the moneys due to him from the scheme on repurchase.
Traditional approach Via Cross cheque favoring investor.
Modern Approach Investor can give instructions of direct transfer of proceeds to his bank account.
For NRI`s Payment is made by the AMC in Rupees. If an investment made on repartiable basis, the cost involved for converting in to foreign currency would be to the account of investor.
Transactions cut off time

Cut off time Transaction Cut-Off Time Sale Sale Sale Re-purchase Re-purchase Sale Sale Sale Sale Re-purchase Re-purchase Received upto 2pm Received after 2pm Received anytime during the day Received before 3pm Received after 3pm Received anytime during the day Appication received upto 3pm with local cheque/DD Appication received after 3pm with local cheque/DD Application redceived with outstation cheque / DD (irrespective of time) Received upto 3pm Received after 3pm
Scheme Type Liquid(If funds are available for the utilisation on the same day) Liquid(If funds are available for the utilisation on the same day) Liquid(If fund are not available for the utilisation on the same day) Liquid Schemes Liquid Schemes Schemes other than liquid Schemes (Investment of Rs.1 Crore or Above) Schemes other than liquid Schemes (Investment upto Rs.1 Crore) Schemes other than liquid Schemes (Investment upto Rs.1 Crore) Schemes other than liquid Schemes (Investment upto Rs.1 Crore) Schemes other than liquid Schemes Schemes other than liquid Schemes
Appicable NAV Closing NAV of Day immediately precedeing the date of application Closing NAV of Day immediately precedeing next business day Closing NAV of day preceding the day on which funds are avialable for utilisation Closing NAV of Day preceding next Business day Closing NAV of next Business day Closing NAV of Day funds are available for utilisation Closing NAV of date application is received Closing NAV of next Business day Closing NAV od day the cheque/DD credited in the bank account Closing NAV of same day Closing NAV of next Business day
Time Stamping
Mutual funds disclose official POA`s & all transactions needs to be submitted at the POA`s. These POA`s have time stamping machines with tamper-proof seal. (Opening / repairing or maintenance is permitted only to vendors or nominated persons of mutual Fund. & has to be documented & informed to trustees) Application are stamped with automatically generated location Code,machine identifier, Serial number, date & time. Acknowledgment issued to investor are stamped with the same information. Acknowledgment for non financial transactions like change of address are stamped. For online transactions time as per the web server to which instruction goes is used in determining the NAV.
Transaction through Exchange
Both NSE & BSE have extended their trading platform to help the brokers become a channel for investor to transact in mutual Fund. NSE platform is called NEAT MFSS BSE platform is called BSE Star
Both platforms are open from 9 am to 3 pm on every working day.

Fresh & additional purchase and redemption are pemitted. The exchange do not offer settlement guarantee responsibility is that of AMC.
Investment plans
Most mutual fund schemes offer three options Dividend and Growth. Dividend reinvestment Option. These are different options within a scheme; they share the same portfolio. Therefore the portfolio returns are the same for all three options. However, they differ in the structure of cash flows and income accruals for the unit-holder, and therefore, the Unit-holders tax ability, number of units held and value of those units.
Investment plans
When a dividend is paid, the NAV of the units falls to that extent. Reduced NAV after dividend payout is called Ex-Dividend After dividend is announced NAV is called Cum-Dividend. E.g. NAV is 12 dividend is declared Rs 2 per unit on record date of 30.11.2011.
Rs 12 is Cum-Dividend
NAV is reduced by Rs 2 new NAV will be Rs 10 i.e. called ExDividend NAV.
Investment plans and services
Systematic Investment Plan SIP is investing a fixed sum periodically in a disciplined manner for long term. It gives benefit of Rupee Cost averaging ( Discussed in later half of presentation). Voluntary Accumulation Plan VAP is modified version of SIP. It is Voluntary Accumulation Plan. It allows the investor flexibility with respect to the amount and frequency of investment. In VAP, investor has to impose voluntary self discipline. Systematic Withdrawal Plan In cases where an investor does not want to withdraw all the amount invested at one time he can opt for facility called SWP which would enable investor to withdraw a specific amount at specific period. Systematic Transfer Plan It is a systematic way of investing an amount at pre-specified frequency from a pool of money available or from any debt scheme to equity.
Investment services
Triggers It is type of an standing instruction given to particular fund for purchase or sell at desired market level. Statement of account & investment certificate The statement of account shows for each transaction & value of transaction, relevant NAV & balance no of units held in that folio. Nomination Nomination is only an authorization for mutual fund to transfer the units to the nominee in the event of demise of the unit holder. Maximum 3 people can be nominated
Investment services
Pledge Mutual funds units can be pledged by unit holders. Same can be affected by pledge form executed by unit holders. Form has provision to specify name of party on who's units are pledged. Once the units are pledged the units can not be sell or transfer until the pledgee gives no-objection to release the pledge.
Investment services
Other Services Online Access to information on investments including consolidated view of various folios that related to different family members. Daily NAV and other key developments transmitted through SMS/email. Sharing of information on the portfolio valuation income booked, returns earned,capital gains working for income tax purpose etc.
Important points
If investment amount is above 1 crore NAV will be applicable of the day when funds are realized and available with AMC for utilisation In case of outstation cheques NAV applicable will be when funds are realized and available with AMC for utilization RTGS means Real time gross settlement NEFT means National Electronic funds transfer
SWIFT used for international transfer

ASBA is Application supported by blocked amount
Q-1 Investor A has opted for a systematic transfer plan. This means (a) The investor is allowed to transfer on a periodic basis a specified amount from one to another scheme within the fund family.
(b) A specified amount is automatically transferred from his bank account to his fund account
(c) The investor can withdraw specified amounts at periodic intervals. (d) The investor can invest any amount in the scheme at periodic intervals Q-2 Which of the following is not true with respect to the SWP? (a) Allows the investor to make systematic withdrawals on a regular intervals (b) Here the amount withdrawn is treated as the redemption of units (c) SWP is same as the Monthly Income Plan (d) None of the above.
Q-3 Which of the following is not true with respect to the voluntary accumulation plan? (a) It give the flexibility to the investor regarding the amount to be invested (b) It give the flexibility to the investor regarding the frequency of investment (c) VAP follower is obliged to keep investing (d) None of the above. Q-4 Mutual funds transaction on stock exchange are governed by stock exchange redressal system (a) True (b) False
Q-5 An investor is doing a liquid investment, fund is available and time is 12.30. NAV would be applicable for the ________
(a) Next working day (b) Same Day (c ) Closing NAV of Day immediately preceding the date of application
(d) Closing NAV of Day immediately preceding next business day

Q-6 Cut-off time for NAV (a) Decided by AMC ( b ) same for all schemes ( c) By Trustee (d) Prescribed by SEBI Q-7 For a customer holding units in demat , the AMC also requires to do his KYC . (a) True (b) False
Q-8 Foreign exchange can be remitted through (a) NEFT (b) RTGS (c ) SWIFT (d) All of the above. Q-9 NRI can not make repartition investment in MF using demand draft. (a) True (b) FALSE Q-10 Which is the fastest way of remitting funds on real time basis? (a) NEFT (b) Demand Draft (c) SWIFT (d) RTGS
Answers
Q-1 : (a), Q-2 : (c), Q-3 : (c), Q-4 : (b),Q-5 : (d), Q-6 : (d), Q-7 : (b) Q-8 (c ) Q-9 (a) Q-10 (d)
Chapter 8
RETURN, RISK & PERFORMANCE OF FUND
Drivers of Returns in a scheme

The portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are different for each asset class.
Equity scheme
Fundamental analysis & Technical analysis. These are quantitative approach for security analysis. Passive fund manager does not need to go through this process as portfolio would be maintained in line with the index. Securities analysis is an important aspect of actively managed scheme.
Securities Analysis Disciplines
Earnings per Share (EPS): Net profit after tax No. of equity shares This tells investors how much profit the company earned for each equity share that they own.
Price to Earnings Ratio (P/E Ratio): Market Price EPS P/E ratio indicates how much investors in the share market are prepared to pay (to become owners of the company), in relation to the companys earnings. P/E may be high because the companys prospects are indeed good, while another companys P/E may be low because it is unlikely to replicate its past performance
Securities Analysis Disciplines
Book Value per Share: Net Worth No. of equity shares This is an indicator of how much each share is worth, as per the companys own books of accounts. Price to Book Value: Market Price Book Value per Share An indicator of how much the share market is prepared to pay for each share of the company, as compared to its book value. Note : Most financial indicators cannot be viewed as stand-alone numbers. They need to be viewed in the context of unique factors underlying each company.
Technical Analysis
The discipline of Technical Analysis has a completely different approach. Technical Analysts believe that price behavior of a share, and the volumes traded are a reflection of investor sentiment, which in turn will influence future price of the share. Technical annalists are also called chartists.
Investment Styles
Growth investment style Potentials investing in high growth stocks i.e. stocks of companies that are likely to grow much faster than the economy. Valuation of these stocks tends to be on the higher side. In the event of a market correction, these stocks tend to decline more. Value investment style Is an approach of picking up stocks which are valued lower, based on fundamental analysis. The belief is that the market has not appreciated some aspect of the Value in a companys share and hence it is cheap. When the market recognizes the intrinsic value, then the price would shoot up. Such stocks are also called value stocks. valuation of these stocks tends to be on the lower side.
Investment Styles
Portfolio building approach Top down and Bottom up: A top down approach, the portfolio manager decides how to distribute the investable corpus between countries (if it invests in multiple geographies) & sectors. Thereafter, the good stocks within the identified sectors are selected for investment. Thus sector allocation is a key decision. A bottom-up approach on the other hand give emphasis on good stock picking. If a stock is good, it is picked for investment. The approach is therefore also called stock picking. Stock selection is the key decision in this approach; sector allocation is a result of the stock selection decisions. Therefore, it can be said that equity returns are a function of sector and stock selection.
Debt
Investment in a debt security, as in the case of a loan, entails a return in the form of interest (at a pre-specified frequency for a pre-specified period), and refund of a pre-specified amount at the end of the pre-specified period. The pre-specified period is also called tenor. At the end of the tenor, the securities are said to mature. The process of repaying the amounts due on maturity is called redemption. Debt securities that are to mature within a year are called money market securities. The return that an investor earns or is likely to earn on a debt security is called its yield. Yield is a combination of interest paid by the issuer and capital gain. Debt securities are issued by Central / State Governments, Banks, Financial Institutions, PSU, Private Companies, Municipalities etc.
Debt
Securities issued by the Government are called Government Securities or G-Sec or Gilt. Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India. Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years) Commercial Papers are short term securities (upto 1 year) issued by companies. Bonds / Debentures are generally issued for tenors beyond a year. Governments and public sector companies tend to issue bonds, while private sector companies issue debentures. The difference between the yield on Gilt and the yield on a nonGovernment Debt security is called its yield spread.
Interest Rates Risk

The interest rate payable on a debt security are specified as a fixed rate, say 6% or floating rate.
Interest rates on floating rate securities (also called floaters) are specified as a Base + Spread. For example, 5-year G-Sec + 2%. Interest rates and Market price of debt security are inversely related to each other. Interest rate sensitivity of the debt security is measured by modified duration of the debt security.
Interest Rates Risk

Yield Spreads: Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market. A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place. For Ex - The difference between the yield on gilt and the yield on a non government debt security is called its yield spread.
Gold
The value of gold in India depends on the international price of gold (quoted in foreign currency)Therefore, returns in gold as an asset class depends on Global price 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.
When they
come to the market to sell, gold prices weaken.
Purchases of gold by large countries tend to push up the price of gold.
Gold
Strength of the Rupee

Economic research into inflation and foreign currency flows helps analysts anticipate the likely trend of foreign currency rates. When the rupee becomes stronger, the same foreign currency can be bought for fewer rupees. Therefore, the same gold price (denominated in foreign currency), translates into a lower rupee value for the gold portfolio. This pushes down the returns in the gold fund. A weaker rupee, on the other hand, pushes up the rupee value of the gold portfolio, and consequently the returns in gold would be higher.
Weaker Rupee = high return in gold portfolio Stronger Rupee = Low return in gold portfolio.
Real Estate
It cannot be transported and its value is driven by local factors. Some of these factors are: Economic scenario In the recent past, when there was 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.
Measures of Returns
Simple Return:
(End Value Initial Value) X 100

Initial value Suppose you invested in a scheme, when its NAV was Rs 12. Later, you found that the NAV has grown to Rs 15. How much is your return? = (15 12) / 12 = 25%
Measures of Returns
Annualized Return: Annualized helps us compare the returns of two different time periods.
Simple Return X 12 Period of simple return (in months)

Suppose Two investment options have indicated their returns since inception as 5% and 3% respectively. If the first investment was in existence for 6 months, and the second for 4 months, then the two returns are obviously not comparable. 1) 5% *12 / 6 = 10% 2) 3% * 12 / 4 = 9%
Measures of Returns
Compounded Return: [ (Later Value / Initial Value )^(1/n) - 1 ]*100 For Ex :- if Rs 1,000 grew to Rs 4,000 in 2 years, LV = Rs 4,000; IV = Rs 1,000; n = 2 years,
then the compounded return is given by such investment; [ ((4000 / 1000) ^ ) - 1 ] *100 = 100%
Logically for a return of 100% the initial value of Rs.1000 should have grown by 100% i.e. doubled to Rs.2000 in 1st year & further doubled to Rs.4000/- in second year.
Compounded annual growth Rate

It is possible to do the above calculations by using the cincerned NAV of a scheme. So if we want to calculate return from a scheme over a specific period of time then NAV at beginning of the period is Intial Value
NAV at the end of the period is Later Value and

Exact number of days during the period, divided by 365 is N The above 3 formula are applicable only for growth schemes only For dividend paying scheme CAGR technique prescribed by SEBI is used.

Calculation on CAGR You Invested Rs.10,000 in a scheme @ Rs.10. On 30th June 08. On 1st Jan 2009 Scheme paid out dividend of Rs.1 per unit exdividend NAV was 12.50. On 1st Jan 2010 scheme paid out another dividend of Rs1 per unit. The ex-dividend NAV was Rs.15 Calculate CAGR.
Solution Initial Investment Value Rs.10000/No of units (10000 / 10 ) - 1000 units. 1st dividend 1000 X 1 Rs.1000

If amount re-invested = Rs.1000 / 12.50 = 80 additional Units Total unit holding = 1000 + 80 = 1080 2nd dividend of Rs.1 per unit on revised unit holding of 1080. If amount re-invested = Rs.1080 / 15 = 72 units Total units holding would be =1080 + 72 = 1152. Later Value = 1152 X 15 = 17280. Calculate CAGR [ (Later Value / Initial Value )^(1/n) - 1 ]*100 ((17280 / 10000)^(1/1.51))-1)*100 = 43.65%

In earlier example the CAGR was calculated with the closing NAV as Rs.15. If an exit load of 1% was applicable, then you will receive only 99% of Rs.15 i.e. 14.85 on repurchase.
Thus your return as investor would be lower than the scheme returns.
While calculating investor return one must ensure if entry load is levied then it has to be added in NAV & Exit load should be deducted from NAV to be calculated.
Drivers of risk in a scheme

Risk in Mutual Fund Schemes
Portfolio Risk It is basically a risk of investment allocated by the Fund manager in to different assets classes. As there is no certainty regarding the performance of the selected assets classes by the fund manager. Portfolio Liquidity It is a risk of investment made by the fund manager in to assets which are not liquid. Especially in case of open ended schemes where investor can ask for redemption at any time. SEBI has therefore laid down criteria to identify illiquid investments and also set a ceiling to the proportion of such illiquid investments in the net assets of a scheme.

Liquid assets in the scheme Scheme maintains a certain proportion of their assets in liquid form. This could be of two reasons.
They believe that the market is over heated and therefore prefer to sell their investment and hold the proceeds in liquid form until the next buying opportunity.
They want to provide for contingencies such as impending dividend payment or re-purchase.
Since liquid assets generally yield a lower return they can be a drag on the scheme returns.

Liabilities in the Scheme
As known NAV is calculated as (Net assets outside liabilities) hence it affects the performance of the fund.
The outside liabilities need to be paid by a scheme, irrespective of the performance of the assets. Some outside liabilities are part of the business. For example, when a scheme purchases an investment, it is liable to pay for it to the stock exchanges. The practice of taking liabilities beyond what is inherent to the normal business of a mutual fund scheme is called leveraging. Internationally, such leveraged funds are commonly found.

Liabilities in the scheme Recognizing the risks involved in such leveraging, SEBI regulations stipulate that : 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 and not for leveraging viz. dividend payments or repurchase payments.

Use of derivative Derivatives are instruments whose value is derived from the value of one or more underlying exposures Mutual funds are permitted to use derivatives for hedging against risk or re-balancing the portfolio, but not for leveraging. Unit holders churn Frequent churning by unit holders keeps the fund under redemption pressure therefore maintaining the higher liquidity. It may sometime force to further liquidate the portfolio in order to meet the redemption. This is generally happen due to FIIs where retail investors suffers for no fault. As a measure to protect the investor, SEBI has stipulated the 20 :25 rule viz. every scheme should have at least 20 investors; no investor should represent more than 25% of net assets of a scheme.
Risks in equity Mutual Fund
Equity Markets seek to reflect the value in the real economy. In Log run equity markets are a good barometer of the real economy. In short run markets can get over- optimistic or over pessimistic to spell of greed & fear. Equity market there for tend to be volatile.
Portfolio Specific. The nature of the portfolio influences scheme risk as follows. Sector funds suffer from concentration risk the entire exposure is to a single sector. If that sector does not perform then scheme returns are serious affected. Diversified Equity Funds have exposure to multiple sectors. Even if a few sectors perform poorly other better performing sectors can make up. Thematic Fund are a variation of sector funds. Here the investment is as per the theme. Thematic fund have a wider exposure then a sector fund but narrower then diversified fund.
Portfolio Specific
Contra Funds take positions that are contrary to the market. Such an investment style has high risk of misjudgments
Dividend Yield Funds Invest in shares whose prices fluctuate less but offer attractive returns in the form of dividend such funds offer equity exposure with lower downside. Arbitrage Funds are categorized as equity funds because they invest in equity. in reality the risk are arbitraged (canceled out) Normally between the cash market & the F&O market.
Risks in Debt Funds
Portfolio Specific
Liquid schemes with 91 days maturity has lowest risk because short maturity securities suffer lesser fluctuation in value as compared to the one with longer tenor. Gilt scheme which invest in only government securities have higher risk because NAV can fluctuate a lot more. Fixed Maturity plans align the maturity of their portfolio to the maturity of the scheme the yield is relatively predictable but only on the maturity.
Risks in Debt Funds
Balance Funds invest in a mix of debt & equity. It is rare for both debt & equity markets to fare poorly at the same time. As performance of scheme is linked to the performance of two asset classes the risk in the scheme is reduced. Monthly Income Plan is a balance fund that seeks to combine a large debt portfolio with an yield kicker as a equity component. It is possible that loss in equity component eat profit in debt component of a portfolio hence dividend will not be announced. Shorter maturity securities fluctuate lesser than longer maturity securities GILT does nt have credit risk but has interest rate risk. Fluctuate more when yield changes.
Risks in Gold Funds
As an international commodity gold prices are lot more difficult to manipulate. Further gold does well when the other financial markets are in turmoil. When a country goes into war and its currency weakens gold funds gives excellent returns. This twin benefit make gold very attractive risk proposition. But investor in a golf fund needs to be sure what kind of gold fund it is Gold sector fund or ETF Gold.
Risks in Real Estate Funds
Every real estate asset is different valuation of real estate assets is therefore highly subjective Real estate transactions suffer the curse of black money transparency is therefore an issue. Real estate is a less liquid asset class the intermediation chain of real estate agents is largely unorganized.
Transaction cost in the form of stamp duty, registration fees etc are high.
Regulatory risk is high in real estate as is the risk of litigation and other encumbrances.
Measures of Risks
Variance It measures the fluctuation in periodic returns of a scheme. This helps determine the risks an investor may take on when purchasing a specific security. Higher the variance = Higher Volatility or return.
Months 1 2 3 4 Variance Scheme 1 5.00% 4.00% 5.00% 5.00% 0.00% Scheme 2 5.00% -10.00% 20.00% 5.00% 1.50%
The Example clearly suggests that monthly returns of scheme 2 are more volatile.
Excel Formula is = var(range of cell where periodic returns are calculated.)
Measures of Risks
Standard Deviation Similar to variance, standard deviation too measures the fluctuation in periodic returns of a scheme in relation to its own average return. Mathematically standard deviation is equal to the square root of variance. Formula of Excel = stdev(range of cells where the periodic returns are calculated) Is a measure of a risk is relevant for both debt & equity scheme.
Measures of Risks
Beta It is based on the capital asset pricing model which states that there are two kind of risk in investing in equities systematic & non systematic. Non systematic risk can be reduced by diversification Systematic risk is integral to investing in the market. It can not be avoided hence Investor needs to be compensated only for systematic risk measured by beta. Beta measures the fluctuation in periodic returns in a scheme as compared to fluctuation of a index over same period. By definition stock index beta would be always 1. So companies whose beta is >1 are seen as more risky then market and vice versa. Beta as a measure of risk is relevant only for equity scheme.
Measures of Risks
Modified Duration Measures the sensitivity of value of a debt securities to changes in interest rates. Higher the modified duration higher the interest sensitivity. Weighted Average Maturity Weighted average maturity of debt securities in a scheme's portfolio is indicative of interest rate sensitivity of a scheme. Longer the weighted average maturity higher will be the interest rate sensitivity professional debt fund manager would rely on modified duration as a better measure of interest rate sensitivity.
Benchmarks & Performance
Mutual Fund schemes invest in the market for the benefit of unit holders. How well did a scheme perform this job ?
An approach to assess the performance is to pre-define a comparable a benchmark against which scheme can be compared.
A creditable benchmark should meet following requirements. It should be in synch with the investment objective of the scheme The benchmark should be calculated by an independent agency. For Ex Choice of benchmark is simplest for an index fund. As investment objective is clear on index that scheme would mirror Gaps between scheme performance & that of the benchmark is called Tracking errors.
Benchmarks
Name of Scheme Benchmark
BSE Sensex S&P CNX Nifty Diversified equity scheme BSE 200 BSE 500 CNX 100 S&P CNX 500 BSE Bankex BSE FMCG Index Sector funds CNX Infrastructure Index CNX Energy Index NSE`s MIBOR (Mumbai Inter- Bank Offered Rate) or CRISIL Short term Money Market LiquiFEX Non-liquid scheme Either of above mentioned depending on nature of portfolio. As per the scheme porfolio for Ex. 65% BSE Sensex and 35% of IBalance Funds bex if the asset allocation is the simler Gold ETF Gold price would be the benchmark A few real estate comapanies have developed an indices but due to Real Estate Funds shorter history yet to earn wider acceptance It depends on where the scheme proposes to invest. For Ex a International Funds scheme seeking to invest in china might have the Chinese index.
Quantitative measure of Fund Manager Performance

Relative Return Relative return comparisons means scheme performance visa vis benchmark or peer group. If a comparison of relative returns indicates that a scheme earned a higher return than the benchmark then that indicates the out performance by the fund manager and vice versa. Risk Adjusted Return Evaluate performance on the relative basis with a consideration of a amount of risk taken by the fund manager.

Sharp Ratio Risk free return Return earned (Risk Premium) -----------------------------------------------------------Standard Deviation Sharp ratio is effectively the risk premium per unit of risk. Higher the sharp ratio better the scheme is considered to be. Comparison should be done only between comparable schemes only.(for Ex Sharp ratio of equity scheme should not be compared with debt scheme.)

Treynor Ratio Risk free return Return earned (Risk Premium) -----------------------------------------------------------Beta Higher the Treynor ratio better the scheme is considered to be. Concept of beta is more relevant for diversified equity scheme. Treynor ratio comparison should ideally be restricted to such scheme only.
Evaluating the Risks of a Mutual Fund
Alpha Difference between a scheme's actual return and its optimal return is its ALPHA a measure of a fund manager's performance. Positive alpha is indicative of out performance by fund manage and vice versa. Since the concept of beta is more relevant for diversified equity schemes, Alpha should be ideally be evaluated only for such schemes. ALPHA = Portfolio Return [Risk Free Rate + Portfolio Beta * (Market Return Risk Free Rate)]
Other performance measures
The expense ratio ( Ratio of total expenses to average net assets of the fund)- Funds with small corpus size will have a higher expense ratio affecting investor returns. It is indicator of the Funds Efficiency and Cost Effectiveness. The income ratio ( It is the net investment income divided by its net assets for the period) useful for debt fund Fund size Small funds are easy to manage and can achieve their objectives in a focused manner with limited holdings. Large funds benefit from economies of scale with lower expense ratios and superior fund management skills. Cash holdings
Sources for tracking Mutual Fund Performance
Mutual Funds Annual & periodic Reports. Mutual Funds website. AMFI website Financial News Papers. Fund Tracking Agencies Credence, Value Research Newsletters Offer Document of the Fund Analytical Articles The Credit Rating Agency CRISIL evaluates the Fund Performance and Ranks the Scheme by Performance.
Important Points
Money Market Funds are low risk fund. Sectoral Fund are high risk fund. Risk is equated with Volatility of Earnings. Diversification reduces Company specific risk but it does not reduce Market Risk. Short Term investment in Equity market is most risky. BEST FUND WILL HAVE HIGHER EX MARKS, LOWER BETA AND HIGHER GROSS DIVIDEND YIELD.
Important Points
The returns should be computed on an annualized average compound rate of return from cumulative figure. If the fund performance data relates to a period of less than one year, it should not be annualized, except for liquid mutual funds which have a short investment horizon.
Borrowings by Mutual Fund

A mutual fund can borrow for a maximum of 20% of net assets. For Maximum period of 6 months.
Purpose should be to meet liquidity requirements for paying dividend or meeting redemptions.
It is not a permanent source of funds for the scheme.
Q-1 A five star rating in MF schemes indicates that

(a) Lowest Expense Ratio (b) Lowest Load (c) Demonstrate superior performance (d) Best Portfolio Q-2 Accepted standard for return calculation in financial market is (a) Absolute Return (b) CAGR (c ) Total Return (d) Simple annulised return Q-3 CRISIL's indicator for highest safety in a debenture is (a) AAA (b) High ( c) Good (d) P1+ Q-4 Difference between scheme's actual return and optimal return for it's risk is (a) Sharpe (b) Treynor (c) Alpha (d) Spread
Q-5 Funds pay dividend in (a) Dividend payout option (b) Dividend reinvest (c) both of the above (d) Growth option Q-6 If beta of a scheme is less than one the fund is (a) More risky compare to market (b) less risky compare to market (c) neither risky nor profitable (d) beta doesn't make any impact on scheme performance Q-7 Index against which performance of a fund is measured, is called (a) Tracking error (b) benchmark (c ) investment objective (d) Ex-mark Q-8 Index funds are safer because their NAV does not go down (a) True (b) False
Q-9 Returns in international fund is dependent on (a) Exchange Rates ( b) asset class performance ( c) Both of the above
(d) None of the above

Q-10 Risk adjusted return is measured by (a) sharpe ratio (b) standard deviation (c ) treynor ratio (d) both A n C
Q-1 : (c), Q-2 : (b), Q-3 : (a), Q-4 : (a),Q-5 : (c), Q-6 : (b), Q-7 : (b) Q-8 (b ) Q-9 (c) Q-10 (d)
Index
Day 2 Part 3 6. Accounting, Valuation and Taxation 10. Selecting the Right Investment products for Investors Part 4 11.Helping investors with Financial Planning 12.Recommending Model Portfolios and Selecting the Right Fund
Chapter 6
ACCOUNTING VALUATION AND TAXATION
What are net assets of a mutual fund ?
The net assets represent the market value of assets which belong to the investors, on a given date. Net assets are calculated as: Market value of investments Plus(+): Current assets and other assets Plus(+): Accrued income Less(-): Current liabilities and other liabilities Less(-): Accrued expenses Net Assets/Total no. of Units Issued = NAV per unit. A funds NAV is affected by four sets of factors Purchase and sale of investment securities Valuation of all investment securities held Other assets and liabilities Units sold and redeemed.
Details related to NAV
Net assets includes the amount originally invested, the profits booked in the scheme, as well as appreciation in the investment portfolio. Net assets go up when the market price of securities held in the portfolio go up, even if the investments have not been sold.
A scheme can not show better profits by delaying payments.

while calculating profits, all the expenses that relate to a period needs to be considered irrespective of whether or not the expense has been paid. Similarly any income that relates to the period will boost profits, irrespective of whether or not it has been actually received in the bank account.
How frequently is the NAV calculated ?
All mutual funds have to disclose their NAVs daily, by posting it on the AMFI web site by 9.00 p.m. In case of any other scheme except FOF where it is to be published by 10 a.m. Of the following day. Open ended funds have to compute and disclose NAVs everyday; closed end funds can compute NAVs every week, but disclosures have to be made everyday. Closed end schemes not mandate listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months, as permitted by SEBI.
Mark to market
The process of valuing each security in the investment portfolio of the scheme at its market value is called MARK TO MARKET Marking to market helps investor buy & sell units of a scheme at a fair price.
Mark to market based NAV helps in assessing the performance of the scheme / Fund manager.
Latest changes since August 1, 2009
SEBI has abolished entry loads. So, the Sale Price needs to be the same as NAV. Exit loads in excess of 1% of the redemption proceeds have to be credited back to the scheme immediately i.e. they are not available for the AMC to bear selling expenses. Exit load structure needs to be the same for all unit-holders representing a portfolio. New SEBI guidelines for Dividend Distribution :All profit earned (including accrual income) are available for distribution. Valuation gain are ignored but valuation losses needs to be adjusted against profit.
The proportion of sale price on new units which is attributable to the valuation gains is not available as a distributable reserve.
Initial issue expenses
Expenses that are incurred in the launch(NFO) of the fund are called as initial issue expenses. These needs to be borne by the AMC.
Recurring expenses
These can be charged to the scheme. Since the recurring expenses drag down the NAV, SEBI has laid down the expenses, which can be charged to the scheme.
Fees of various service providers, such as Trustees, AMC, Registrar & Transfer Agents, Custodian, & Auditor
An indicative list is as follows:
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 Service tax
Recurring expense limit: SEBI has stipulated the following annual Recurring expenses limits on recurring expenses (including management fees) for schemes other than index schemes.
Net Asset ( Rs crore) Upto Rs 100 cr. Next Rs 300 cr. Next Rs 300 cr. Excess over Rs 700 cr.
Equity Debt Scheme Scheme 2.50% 2.25% 2.25% 2.00% 2.00% 1.75% 1.75% 1.50%
The above percentages are to be calculated on the average net asset of the scheme.
Recurring expenses
The management fees can not exceed: 1.25% on the first Rs 100 crore of net assets of a scheme 1.00% on the balance net assets. Management fees cannot be charged by liquid & other debt schemes on funds parked in short term deposits of commercial banks.
The expense limits for index schemes (including Exchange Traded Funds) is as follows: Recurring expense limit (including management fees 1.50% Management fees 0.75% As regards Fund of Funds, the recurring expense limit (including management fees) is 0.75%.
Expenses that can not be charged to the Scheme
Penalties and fines for infraction of law Interest on delayed payment to unit holders Legal, marketing, publication and other general expenses not attributable to any scheme Fund accounting fees Expenses on investment management / General Management. Expenses on general administration, corporate advertising & infrastructure costs. Depreciation on fixed assets & software development expenses.
Key Accounting & Reporting Requirements
The accounts of the scheme need to be maintained distinct from account of AMC. The Auditor of the AMC has to be different from the scheme. Norms are prescribed on when interest,dividend, bonus issues, right issues etc should be reflected in the accounts. NAV is to be calculated up to 4 decimal places in case of Index Funds, liquid funds & other debt funds. NAV of equity & balanced funds is to be calculated up to at least 2 decimal places. Investor can hold their units even in a fraction of 1 units however current stock exchange trading systems may restrict transacting on the exchange to whole units.
Valuation
Whenever a security is traded in the market on the date of valuation, its closing price is taken as the valuation of the security in the portfolio. When equity shares are not traded in the market or thinly traded, a formula is used for the valuation. Debt securities not traded on the valuation date are valued on the basis of yield matrix of prepared by an authorised valuation agency.
When an individual security is not traded or thinly traded represents 5% of the net assets of the scheme, An independent valuer has to be appointed.
Taxability of mutual fund
The mutual Fund Trust is Exempt from tax.
Trustee company will however pay tax in the normal course on its profits.
Securities Transaction Tax (STT)
This is a tax on the value of transactions in equity shares, derivatives and equity mutual fund units. Applicability is as follows.
Equity shares on buy and sell 0.125% Equity MF on stock Exchange sale and repurchase 0.125% Equity MF Repurchase by AMC 0.250% Derivatives transaction 0.017%
Additional Tax on Income distributed
Tax is a tax on dividend distributed by debt oriented mutual fund schemes applicability is as follows.
Money Market Mutual Funds / Liquid Schemes. 25% + Surcharge + Education Cess
Other Debt funds (Investors who are individual / HUF 12.5% + Surcharge + Education cess
Other Debt funds (other investors) 20% +surcharge + Education cess
Capital Gain on Equity Schemes
Equity >65%
Dividends
Capital Gains Within 12 m After 12 m
Inves tors
DDT
Short Term s
Long Term s
Tax Free
NIL
15%
Tax Free
Capital gain for Debt Mutual Funds
Debt Mutual Fund
Dividend
Capital Gain
Within 12 m Inves tor DDT Short term
After 12 m Long term
As per slab Tax free Paid by the Fund
Two options
10 %
20% after indexat ion
Capital Gain Calculation
An investor purchased units in an approved debt Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He sold the units on December 1, 2001 for Rs. 750000/-. Calculate the capital gain taxes paid by him. ( Ignore indexation).
Answer :
Long term capital gain = 250000/

So Tax on LTCG = 250000* 10% = Rs. 25000/-
Other points
Section 80 C Individual and HUF are entitled to deduction up to Rs.1 lakh Dividend Stripping Section 94(7) As per the finance Act 2001, If investor buy units within 3 months prior to record date of dividend and sells those units within 9 months of record date, then the loss if any, shall be ignored. Limitation on set off in case of bonus units NAV of the scheme is get adjusted after bonus units are issued therefore any capital loss arising out of such transaction is not allowed to set off if such transaction has happened within 3 months prior to record date of bonus issue and sold off within 9 months after the record date.
Other points
Units are not considered under wealth tax Section 195 20% TDS for LTCG and 30% TDS on STCG if unit holder is a NRI. 48% TDS if unit holder is foreign company. STT is not charged on Debt schemes DDT not charged on Equity schemes
Non Performing Assets (NPA)
An asset shall be classified as an NPA, if the interest and/or principal amount have not been received or have remained outstanding for one quarter, from the day such income/instalment has fallen due. Such assets will be classified as NPA`s, soon after the lapse of a quarter from the date on which payments were due.
Important Points
Investors subscriptions are accounted for by the fund not as liabilities or deposits but as Unit Capital. Unit Capital is found in the Liability side of schemes balance sheet. Investment made by Mutual fund on behalf of investors are accounted as Assets. Liabilities in Balance sheet of mutual fund are strictly short term in nature. The Day on which NAV is calculated is known as Valuation Date. The day on trustee approves the dividend is called CUM Dividend NAV.
Q-1 An equity fund has weekly average net assets of Rs. 1400. crore outstanding in the year. The maximum ongoing expenses (excluding issue/redemption expenses) that may be charged to the fund amount to: (a) Rs. 26.75 crore (b) Rs. 35.00 crore
(c) Rs. 19.75 crore (d) Rs. 27.5 crore
Q-2 The STT paid on th equity mutual fund purchased on the stock exchange is
(a) (c) Nil
0.125%
(b) 0.250% (d) 0.02%
Q-3 A fund's portfolio includes an equity security which is listed at the NSE. Its last quoted closing prices were: Rs. 27 on July 10, Rs. 35 on July 13 and Rs. 28 on July 16. On July 28, using SEBI norms, the fund should value this security at: (a) 35 (b) 28 (c) 30 (d) 31.50.
Q-4 A mutual fund holds a debenture redeemable after two years and with next quarterly interest receivable on 31/12/2001. The debenture issuing company failed to pay the interest on that date. Is this debenture a Non Performing Asset? If yes, from what date? (a) Yes, it would be considered an NPA from 1/4/2002, if interest is not received for the quarter ending 30/3/2002 as well (b) No, it is not an NPA, as the principal amount is not yet due (c) No, it would not be considered an NPA until both principal and interest amounts become overdue (d) Yes, it would be considered an NPA from 1/1/2002. Q-5 Which of the following is the most liquid type of shares? (a) Large cap shares (b) Mid cap shares (c) Small cap shares (d) All of the above.
Q-6 Expenses in fund of funds? (a) Less then direct Investment in scheme
(b) More than direct investment in scheme

(c) Equal to direct investment in scheme (d) None Q-7 Initial issue expense that can be charged to fund (a) Nil (b) 1.00% (c) 2.00% (d ) 1.75% Q-8 Liquid funds can not charge management fees of funds parked in a short term bank deposits.
(a) True (b) False
Q-9 Mr A holds 1200 units , scheme declares 1:3 bonus. How many units will Mr A gets
(a)
300 (b) 400 (c ) 3600 (d) Depends on NAV
Q-10 The arbitrage funds are taxed like debt funds (a) True (b) False
Answers
Answer: Q-1 : (d),Q-2 : (a), Q-3: (b),Q-4:(a), Q-5 : (a) Q-6: (b) Q-7: (a) Q-8: (a) Q-9: (b) Q-10: (b)
Chapter 09
SCHEME SELECTION
How to choose between schemes
It is always a good practice to first understand the risk exposure that is appropriate for an investor. Based on that decide how the investor's investment should be distributed between different asset classes
Mutual fund is a great vehicle that helps an investor to take exposure to assets classes such as equity, debt and real estate etc.
As a structured approach the sequence of decision making is as follows Step 1 Deciding on the scheme category Step 2 Selecting a scheme within the category Step 3 Selecting the right option within the scheme.
How to choose between schemes

Risk Level
High Risk Sector Funds Balanced fund based on Flexible asset allocation Growth Funds High Yield Debt Fund
Debt Funds
Hybrid Funds
Equity Funds
Diversified Equity Funds Index Funds Value Funds Equity Income Funds Dividend yield Funds Balanced fund based on Fixed asset allocation Monthly Income Plans Capital protection funds Diversified Debt Fund Gilt Funds Money Market & Liquid schemes
Low Risk
Factors to be considered
Before deciding between schemes to invest a few principles to keep in mind they are Equity Funds Active or Passive Fund management Open Ended or Close Ended Diversified , Sector or Thematic Large cap, Mid cap, Small cap funds Growth or Value Funds Fund Size Portfolio Turnover Arbitrage funds Domestic or international
Portfolio Turnover
If a funds does sale and purchase transactions of Rs 10000 cr and the Avg net assets of the funds are 5000 cr then the portfolio turnover ratio is
10000cr/5000cr*100 i.e. 200%.
Debt Funds Regular Debt funds or MIP Open Ended or FMP Gilt funds or Diversified debt funds Long term or short term debt funds Money market or liquid funds Regular Debt funds or Floaters
Balance Funds Client can invest in mix of equity schemes and debt schemes Client can invest in a balance scheme which in turn invests in a mix of equity & debt securities.
GOLD FUNDS Investor needs to differentiate between Gold ETF Gold Sector Equity of Gold Mining companies. Investor also needs to understand the structure of the gold schemes more closely.
Selecting scheme with in the category

Parameters that are considered while selecting schemes with in a category are.
Fund Age
Scheme running expenses Tracking error Regular income yield Risk, return and risk adjusted returns Investor objective Experts view
Q-1: The balance funds based on flexible Asset Allication is lower riskier than high yield debt fund (a) True (b) False Q-2 In case of equity fund, if fund has higher allocation to cash in bullish market the performance is likely to. (a) Be comparable to that of benchmark index (b) Be worse than benchmark return (c) Better than benchmark return (d) cant say Q-3 How to compare index fund (a) Performance (b) expense (c) Tracking error (d ) benchmark
Q-4 Probabilities of losing money in equity is negligible if investment horizon is for at least (a) 6 months (b) 1 year (c) 5 years (d) 3years Q-5 A better performance than the return on index is given by (a) Passive fund (b) Active fund (c) All fund manager (d) no fund managers Q-6 If market crashes after bull run which fund is more safer (a) Growth (b) Value ( c) sector (d) theme Q-7 Avg net asset of scheme is 3000,total transaction of a scheme 10,000 what is portfolio turnover ratio
(a) 0.3 % (b) 4% (c)3.33 % (d) 5%
Q-8 Fund management cost is more in(a) Passive fund (b) gilt fund (c )liquid fund (d ) active fund
Q-9 The investment grow faster in dividend re investment options as compared to the growth option because more units are added on dividend reinvest
(a) True (b) False
Q-10 Performance of the fund is most sensitive to the expense ratio in which of the following Fund
(a) Liquid funds (b) Diversify Equity fund (c ) ETF (d) Sector fund
Answer: Q-1 : (b),Q-2 : (b), Q-3: (c),Q-4:(c), Q-5 : (b)
Q-6: (b) Q-7: (c) Q-8: (d) Q-9: (b) Q-10: (a)
Chapter 10
SELECTING THE RIGHT INVESTMENT PRODUCTS FOR INVESTORS
Physical or Financial
Physical Assets include gold, land, real estate which one can touch and feel.
Financial assets includes shares, bonds, mutual funds, Fixed Deposit etc. it gives ownership but can not be touched or felt.
Physical has can get destroyed or stolen so insurance is very important. Investment in GOLD , land doesnt benefit economy on the other had investment in financial assets can be productive for the economy.
GOLD Physical or financial??

Gold is not subject to value erosion on account of rupee depreciation Gold is perceived as a protection/hedge against inflation Gold ETF, Gold Sector fund , gold futures, gold deposit scheme (offered by bank). Gold in physical form attract wealth tax, however gold deposit scheme and gold MF are free from it. Gold futures are traded in commodity exchanges and the value of these contracts go up and down in line with increase and decrease in gold prices Real estate requires a high capital investment and may not be easy to liquidate at the appropriate price Some fund houses are preparing to launch Real estate mutual funds in the near future
Physical or Financial
Financial assets include equity, debt and money-market Instruments Equity, debt and money market instruments are direct investments with the borrower/ issuer of securities Mutual funds represent an indirect investment through an intermediary.
Bank deposits
Offer high liquidity and perceived safety Low or negligible returns after factoring inflation and tax Deposit Insurance is available upto Rs 100000 per depositor.
Financial Assets
Public Provident Fund 15-year product Risk-free government obligation Open to individuals and HUFs Only one account permitted per entity Offers tax-free interest of 8% p.a. and contribution up to Rs. 70,000 (min Rs. 500) are eligible for deduction under section 80C Option to withdraw 50% of 4th year balance in the 7th year Restriction on withdrawal reduces liquidity. Kisan Vikas Patra Introduced as post office scheme to tap savings in rural India Very popular with urban investors also Current yield is 8% over 6 years, fully taxable Easily transferable and liquid.
Financial Assets
RBI Relief Bonds Issued by RBI on behalf of the Government of India A 5-year investment product with 8% interest offering Interest is currently taxable (used to be tax-free earlier) Free of risk of default Government Securities Long-term government paper Risk-free government obligation Low-return and define the benchmark rate of return on the yield curve Specially appointed Primary dealers deal in G-Secs Generally high ticket investments Best accessible to small investors through mutual funds.
New Pension Scheme
Pension Funds Regulatory and Development Authority (PFRDA) is the regulator for the New Pension Scheme. Two kinds of pension accounts are envisaged
Tier I (Pension account), is non-withdraw able

Tier II (Savings account) is withdraw able to meet financial contingencies. An active Tier I account is a pre-requisite for opening a Tier II account.
New Pension Scheme
Investors can invest through Points of Presence (POP). 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. 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. NPS provides single Personal Retirement Account Number ( PRAN ) which is applicable across all PFMs where money is invested.
Life insurance
Premium qualify for deduction under section 80C Important to assess need for life insurance with respect to earning potential A Without Profits policy offers the Sum Assured in the event of death only A With Profit policy pays not only the Sum Assured but also bonus declared from time to time In case a policy is discontinued during its tenure, the policys surrender value is paid which is a proportionate value based on premiums paid so far A convergence of insurance and mutual funds is the development of Unit-Linked Insurance products which offers investors choice of asset allocation between debt and equity. The Amount an insurance company pays to the nominee if a policyholder dies is known as the SUM ASSURED.
Points of Comparison
A comparison of investment products can be done on risk, return, volatility and liquidity Mutual funds combine the advantages of all investment vehicles while doing away with their shortcomings The returns in a mutual fund are adjusted for market movements. In India, Individual Investors does not direct access to Money Market Instruments.
The biggest advantage of Investment in Gold is hedge against inflation.

The biggest disadvantage of investment in Real estate is High Purchase Price. You have to invest huge amount. The advantage of bank deposits is liquidity, high perceived safety and low entry price. ITS disadvantage is low Yield after TAX.
Important Points
Mutual Funds are more recommended option for individual investors than direct equity. Direct Investment in stock market can be a better option than investing in Mutual Funds if the investor has large capital, knowledge and resources for research.
Q-1 RBI relief bonds have the maturity of (a) 3 years (b) 5 years (c) 7 years (d) 10 years
Q-2 Which of the following is not the advantage of bank fixed deposits? (a) Safety (b) Liquidity (c) Lower entry price (d) High yield
Q-3 In new pension scheme(NPS) Tier I account new pension scheme is called pension account True (b) False
Q-4 New Pension Scheme is regulated by
(a) PFRDA (b) IRDA (c) PFRDA + IRDA (d) None of these
Q-5 Real Estate mutual fund is (a) Beyond means of retail investor's
(b) Provided benefits of real estate & MF investing

( C)Are popular investment options (d) Are not easy to liquidate Q-6 STCG in GOLD is applicable if the holding period is less than (a) 12months (b) 36 months (c) 6 months (d) 9 months Q-7 In NPS class-C predominantly invests in (a) Equity (b) Debt (c) Gold (d) Real Estate
Q-8 What is the current PPF Rate ? (a) 8% (b) 8.50% (c ) 7.75% (d ) 7.5%
Q-9 Which of the following is a financial asset ? (a) Govt Security (b) Gold (c) Real Estate (d) None of the above
Q-10NCDEX refers to
(a)
National Contract Exchange (b) National Currency Exchange
(c ) National Commodity Exchange ( d ) National Conversion Exchange
Answers
Answers: Q-1 : (b), Q-2 : (d)
Chapter 11
HELPING INVESTORS WITH FINANCIAL PLANNING
Definition and objective of FP
It is identifying all the financial needs of an individual Translating needs to monetarily measurable goals
Planning financial investments that will allow individual to provide for and satisfy his future financial needs and achieve his lifes goals.
The objective is to ensure that right amount of money is available in the right hands at the right point in future to achieve an individuals financial goals.
Assessment of financial goals
The financial goals are different for each individual. For Ex. An estimate of these future expenses requires to me assessed to achieve defined goals.
For father making the son a doctor, call for commitments over a 6 years. 2 yr of under graduate studies, coaching class expenses. for medical entrance exams followed by the medical education & hostel expense
Year 1 2 3 4 5 6 goals Current Cost 100000 120000 Likely likely Exchange inflation Rate impact 7.00% NA 7.00% NA 7.00% 7.00% 7.00% 7.00% NA NA NA 2.00%
Under graduate studies Under graduate studies Coaching class expense & exam 1000000 preparation Medical Education & hostel Cost 500000 Medical Education & hostel Cost Medical Education & hostel Cost 500000 500000
Assessment of financial goals
How much would be the expense if it were incurred today ? How many years down the line expenses will be incurred ? During this period how much will the expense rise on account of inflation.
If any of there expenses are to be incurred in foreign currency then hoe would changes in exchange rate affect the financial commitment ?
Year 1 2 3 4 5 6 goals Under graduate studies Under graduate studies Coaching class expense & exam preparation Medical Education & hostel Cost Medical Education & hostel Cost Medical Education & hostel Cost Current Cost 100000 120000 1000000 500000 500000 500000 Likely Future rupee inflation requirement 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 107000 137388 1225043 655398 701276 838550
Formula is A = P*(1+i)^n
Investment Horizon
The year wise financial goals statements throws up the investment horizon. It would be risky to expect the first 3 years expenses to be met out of equity investment being made today.
But equity is viable option for expenses starting from 4th year.
In most cases the investor would have some regular income out of which part of expenses can be met. Investment being considered now need to fund only the balance of the financial goals.
Assessing the fund requirement
Suppose the investor is comfortable about meeting Rs.100000 of these expenses each year. The balance would need to be provided out of investment being made today.
Suppose requirement of years 1 to 3 are met out of debt investments that would yield a return of 6% p.a. The requirements of 4th year are met out of equity investment that estimated to yield a return of 9% p.a. The amount that would need to be invested today is as follows
Assessing the fund requirement

Current Likely Future rupee Regular Balance Cost inflation requirement Savings required 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 107000 137388 1225043 655398 701276 838550 100000 100000 100000 100000 100000 100000 7000 37388 1125043 555398 601276 738550 Investment required today @ 6% 6604 33275 944608 393458 390788 440373 2209106
Year 1 2 3 4 5 6
goals
Under graduate studies 100000 Under graduate studies 120000 Coaching class expense & exam 1000000 preparation Medical Education & hostel Cost 500000 Medical Education & hostel Cost Medical Education & hostel Cost Total 500000 500000
Thus a total amount of Rs. 2209106 needs to be invested right now Rs.984487 in debt with a 3year horizon and Rs.1224619 in equity with 4 - 6 year horizon to meet the financial goals. This would help the investor realize the aspiration of seeing his son become doctor.
Financial Planner
A person who uses the financial planning process to help another person determine how to meet his or her life goals. Possesses detailed knowledge of wide range of products and financial planning tools and help clients in choosing the best products. He looks at all of clients needs including budgeting and saving, taxes, investments, insurance and retirement planning.
Benefits of Financial Planner

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

It is used to prepare a comprehensive financial plan where all financial goals are taken together and the investment strategies are worked out on that basis. Steps : Establish and define client-Planner Relationship Gather client data, Define client Goal Analyse and evaluate clients financial Status Develop and present financial planning recommendations Implement the financial planning recommendation Monitor the financial planning recommendations
Alternative Financial planning approaches
Goal Oriented Financial Plan is a plan for a specific Goal E.g. Goal for providing Sons Education Comprehensive financial plan is a approach where all financial goals of a persons are taken together.
Need for Financial Planners

Lack of ability of investor understanding calculations as described. Even if the investor knows the calculation the knowledge of how & where to invest may be lacking. Transactions such as purchase of car,house or even education necessitate a borrowing the financial planner can help the investor decide on the optimal source of borrowing. Taxation is another area that most investors are unclear about Financial Planner can also help investors in planning for contingencies.
Stages of Life Cycle
Childhood Stage Young Unmarried Stage Young Married Stage Young Married with Children Stage Married with Older Children Stage Pre-retirement Stage
Retirement Stage
Very important points on financial planning
The planner can look at all the clients need including budgeting, saving, taxes, investments, insurance and retirement planning. A financial planner can link his own rewards and fees to the clients financial success and the achievement of their financial goals MUTUAL FUND IS THE MOST IMPORTANT TOOL FOR FINANCIAL PLANNING.( CORE PRODUCT) Financial is not only investing. It comes before investing. It is relevant for all category of clients. It is not as same as retirement planning. It is not only Tax Planning. Financial planning is important at younger stage of life.
Very important points on financial planning
The basis of genuine investment advice should be financial planning to suit the investors situation. It should not be current market condition. Financial Planning allows a person to achieve financial goals through proper management of finances. Financial planners and their clients should focus on allocating funds to different asset classes. Financial planning is relevant not only to HNIs Financial planning works better for younger/ middle aged client
Q-1 The stage at which the goals and purpose towards which the clients have been investing have arrived, is known as (a) Accumulation (b) Transition (c) Reaping (d) Transfer.
Q-2 As a good financial planner, you should avoid applying the normal Life Cycle Model to your client who is
(a) 25-year-old unemployed (b) 60-year-old person who has just retired (c) Well-known 32 years old cricketer (d) A 35-year-old unmarried person. Q-3 A salaried executive in late fifties who is planning to retire at 60 years of age, his wealth cycle stage is. (a) Accumulation (b) Transition (c) Reaping (d) Transfer.
Q-4 For older investors who want to transfer their wealth (a) No financial planning is required (b) The right investment strategy depends upon who the beneficiaries (c) The right investment strategy depends upon the state of the stock market (d) All the funds can be invested in aggressive equity funds.
Q-5 A high amount of equity investment is suggested to the investor if he is in which stage ?
(a) Accumulation phase (c) Distribution phase
(b) Transition phase (d) No such relation with any phase of life.
Q-6 According to the Certified Financial Planner - Board of Standards (USA), the third stage in Financial Planning is (a) Establish and Define the client planner relationship (b) Gather client data (c) Define client goals
(d) Analyse and Evaluate Client's Financial Status

Q-7 preparation of WILL is pessimistic exercise, so it is better to avoid (a) True (b) False Q-8 Financial Planner defines that client does not have resources to meet goals. He should (a) Inform the Client (b) Avoid telling as client will be dishearted (c) Avoid telling as he may lose the client (d) Increase risk to generate higher return
Q-9 Tax consultant should not advice financial planning to his client (a) True (b) False
Q-10 Mother want to set apart Rs 25 lakhs in 3 years time

(a ) Financial Goal (b) Asset Allocation ( c) Financial Planning (d) Financial Desire
Answers
Answers: Q-1 : (c) Q-2 : (c) Q-3 : (b) Q-4 : (b) Q-5 : (a) Q-6 (d) Q-7 (b) Q-8 (a) Q-9(a) Q-10(a)
Chapter 12
RECOMMENDING MODEL PORTFOLIO FINANCIAL PLANS &
Strategies
Risk Profiling Risk will not remain same throughout the age of the person. It will differ at the different age and as well as the different stages of the life so risk profiling is very important in the financial planning process. At the same time two person's risk taking capacity will not be same. So a It is duty of a Financial Planner to identify individual's risk Appetite.
Factors influence the investor's risk profile
There are various ways by which risk appetite can be reasonably measure. And few factors which affects this
Factors Influence on risk Appetite
Family Information Risk appetite increases as the number of earning members increases Risk appetite increases as the number of earning members increases Risk appetite is higher when life expectancy is longer. Personal Information Lower the age higher the risk that can be taken Well qualified and multiskilled professionals can afford to take more risk Those with steady jobs are better positioned to take risk Daring and adventurous people are better positioned mentally to accept the downside that come with risk. Financial Information Higher the capital base better the ability to financially take the downside that come with risk People earning regular income can take more risk then those with unpredictable income streams
Earning Member Dependent Member Life Expectancy Age Employability Nature of job Psyche
Capital Base Regularity of income
Asset Allocation
Strategic Asset Allocation Deduct your current age from 100 what ever the no come this is the percentage of the debt in your portfolio and remaining will get invested in the equity. As per this type younger age group person will have more exposer to equity compare to the person in the higher age group As the age advances the exposure of equity will also get reduce. Tactical Asset Allocation Asset class proportions can vary when prices change. If equity returns are higher than debt returns, equity allocation will go up at a faster rate. Depth knowledge of the market require at planners end as he needs to know in which direction the market is moving to follow this strategy.
Model Portfolio
Since investors risk appetites vary, a single portfolio cannot be suggested for all. Financial planners often work with model portfolios the asset allocation mix that is most appropriate for different risk appetite levels. for example, might read something like this:
Sr.no 1 2 3 4 Age
Young call center / bpo employee with no dependance Young married single income family with 2 school going children. Single income family with grown up children yet to be settledown Couple in their seventies with no immidiate family support
Divesified Sector Gold Diversified Liquid Gilt Equity funds ETF Debt Fund Scheme Funds 50% 35% 35% NA 20% 10% NA NA 10% 15% 15% 10% 10% 30% 15% 30% 10% 10% 20% 15% NA NA 15% 30%
Divesified Equity index fund NA NA NA 15%
Q-1 A criticism of rupee-cost averaging is (a) Investment is for the same amount at regular intervals (b) Over a period of time, the average purchase price will work out higher than if one tries to guess the market highs and lows (c) It does not inform an investor when to buy, sell or switch from one scheme to another (d) Rupee cost averaging has no serious shortcomings. Q-2 Fixed ratio of asset allocation means (a) It is a relatively aggressive approach for managing investments (b) Investing the same amount every month (c) Not doing any re-balancing (d) Balance is maintained by liquidating a part of the position in the asset class with higher return and reinvesting in the other asset with lower return Q-3 Asset allocation for any investor generally depends on (a) Age (b) Financial status (c)Investment objective (d) All of the above.
Q-4 ------is the decision outcome based on the market behaviour (a) Tactical Asset Allocation
(b) Strategic Asset Allocation

( c) Flexible Asset Allocation (d) Fixed Asset Allocation Q-5 Asset allocation means (a) Putting all eggs in Same basket (b) Investing according to Market (c) Investing in different assets (d) investing only in Equity Gold and Silver
Q-6 Model portfolio should be determined based on commission income possibility for distributor (a) True (b) False Q-7 A Retired couple with Zero income should invest all the money in Liquid Fund (a) True (b) False Q-8 Last step in the process of designing model portfolio (a) Sector selection (b) Asset allocation ( c) Scheme selection (d) Client selection

Q-9 Which of the following is true for model portfolio (a) Stipulated by SEBI (b) Guaranteed by AMC (c) Decided by financial planner (d) Common across industry Q-10 75% investment in debt is suggested to
(a) Aged couple with no immediate family support

(b) 40 year old man with a family with grown up children (c) Young call centre executive (d) Yound couple with 2 school going kinds
Answers
Answers: Q-1 : (c), Q-2 : (c), Q-3 : (d), Q-4 : (d) Q-5 Q-6 : (b) Q-7: (b) Q-8: ( c) Q-9: (c) Q-10:(a)
Exam related points to consider
Exam is of 100 Marks with 100 question of 1 mark each. Pl. attempt mock test available on www.njgurukul.com IF you have not received your id & pwd call customer care - 18002000155 Duration of test is 2 hours. No body can force u to submit test earlier. Attempt first only those questions which you feel confident & 100 % Correct. Many students fail because they try to attempt all questions Then attempt those questions which you feel & think are 70 to 80% correct.
There is no compulsion of attempting all question.

Don't attempt question which u feel less then 50% confidence if n't required. Pl. do revise from text book before appearing for Exam.
Thanks
Target should be to Pass the exam Do not try to attempt all the questions.
'Best of Luck'

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NISM - Series MUTUAL FUND Distributors Certification Examination Nov 2011

CONCEPT AND ROLE OF MUTUAL FUNDS

What is a Mutual Fund ?

Role Of Mutual Fund

Why Mutual Fund

Each pool is called mutual Fund scheme.

Important characteristics of a Mutual Fund

The investors share is denominated by units whose value is called as Net

Advantages & Limitations of Mutual Funds

Basic Classifications Mutual Funds

Basic Classifications Mutual Funds

Combine features of both open-ended and close ended schemes.

Mutual Fund Classifications As Fund Management

Expenses Ratio Rate of Return Examples

Types of Funds - By Investment Objective

Types of Equity Funds (A Risky asset class)

ELSS ( Equity Linked Saving Scheme )

3 year lock in period

Comparison of Equity Funds

Types of Equity Funds

Investment Objective Risk Return on Investment Liquidity Asset allocation

Comparison of Debt Funds

Diversified Debt Funds

High Yield Debt Funds

can be redeemed comparatively before maturity at 3 Business days low exchange.

Other types of funds

Other types of Funds

Alternative Route would be to tie up with a foreign fund (Host Fund)

Exchange Traded Funds

An open ended Index funds that are traded on stock exchange.

Other investor have to buy & sell on Exchange platform.

Very Important Points

Very Important Points

Very Important Points Debt Funds

Question for Revision

Question for Revision

(b) These schemes can generate higher returns than mutual

FUND STRUCTURE AND CONSTITUENTS

Structural Frame Work of Mutual Funds

Sponsor (Reliance capital Limited)

Contributes at least 40% in the capital

AMC Rel. Cap. Asset. Mgmt. Ltd

Fund Management Banks

Marketing & Development

*Custodians are appointed by Trustees

Registrar & Custodian* Karvy & CAMS

Regulatory structure of MF in India

Mutual funds are constituted as Trusts.

How are Mutual Funds Structured

In legal sense, the investors are the beneficial owners of investments.

Rights & Obligations of trustees

Asset Management Company

AMC key Persons

Compliance Officer needs to ensure all legal compliance. He signs

Functions of the Custodians

Registrar and Transfer Agents

Other's important authorities

Other's important authorities

Questions for Revision

LEGAL AND REGULATORY ENVIRONMENT