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Mutual Funds - Detailed. Concept & Role of Mutual Funds.

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1 Mutual Funds - Detailed

2 Concept & Role of Mutual Funds

3 What is a Mutual Fund ? It is a pool of money, collected from investors, and is invested according to certain investment objectives The contributors and beneficiaries are the same class of people namely the investors A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool e.g. money market mutual fund seeks investors to invest predominantly in Money Market Instruments

4 Important characteristics of a Mutual Fund? The ownership is in the hands of the investors who have pooled in their funds. It is managed by a team of investment professionals and other service providers. The pool of funds is invested in a portfolio of marketable investments. The investors share is denominated by ‘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.

5 Advantages of Mutual Funds Portfolio Diversification Professional Management Reduction of risk Reduction of transaction costs Liquidity Convenience and flexibility Access to information

6 Dividends Tax Free in the hands of investors for all type of MF schemes There will be Dividend Distribution Tax Debt Funds … Individuals 12.50% + surcharge Corporates 20.00% + surcharge Effective tax rate is much lower than on interest of bank FD for higher tax bracket Individuals and Corporate investors Dividend Tax Free for all Equity and Balanced schemes Tax Benefits in Mutual Funds

7 Capital Gain Tax - For Equity / Balanced Funds LT Capital Gain Tax Nil ST Capital Gain 10% - For Debt Funds LT Capital Gain 10% ST Capital Gain Tax Tax bracket of Investors Deduction upto Rs. 1 lakh available u/s 80C for investment in ELSS from FY Tax Benefits in Mutual Funds - Continue

8 What are the disadvantages of investing through Mutual Funds? No control over the costs. Regulators therefore limit the expenses of Mutual Funds. No tailor made portfolios. Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

9 Mutual Funds Industry in US vs. India IN US the asset under management crosses $ 9 trillion (that is approx. Rs 378 lacs crores) In India the Asset under management is around Rs.2 lacs crores Cleary Indicates the Fact that Indian Investors needs to be educated on the most accepted investment vehicle worldwide. Source

10 Important phases in Indian Mutual Fund Industry 1963 – 1987 UTI sole player in the industry, created by an Act of Parliament,1963 UTI launches first product Unit Scheme 1964 UTI creates products such as MIP's, children plans,offshore funds etc UTI managed assets of 6700 Cr at the end of this phase In 1987 Public Sector Banks and FI's SBI mutual fund was the first non -UTI mutual fund UTI's corpus grew to Rs.38,247 Cr & public Sector Funds got Rs 8750 Cr In 1993, Mutual Fund Industry was open to private players. SEBI's first set of regulations for the industry formulated in 1993 Significant innovations, mostly initiated by private players Implementation of new SEBI regulations led to rapid growth Bank mutual funds were recast as per SEBI guidelines UTI came under voluntary SEBI supervision Rapid growth, significant increase in corpus of private players Tax break offered created arbitrage opportunities Bond funds and liquid funds registered highest growth UTI's market share drops to nearly 50%

11 Mutual Fund Products

12 What are open-ended funds? In an open ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund. Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases Investors receive account statements of their holdings

13 What are closed end funds? A closed -end fund is open for sale to investors for a specified period, after which further sales are closed. Any further transactions happen in the secondary market where closed-end funds are listed. The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV. Investors receive either certificates or depository receipts, for their holdings

14 Types of Funds - By Investment Objective Equity Debt Money Market Equity Funds Index Funds Sector Funds Fixed Income Funds Money Market Mutual Funds Balanced Funds Liquid Funds

15 What are equity funds? Predominantly invest in equity shares of the company Choices in equity funds Aggressive Growth Funds Growth Funds Specialty Funds  Sector Funds  Offshore Funds  Small Cap Equity Funds  Option Income Funds Diversified Equity Funds  ELSS  Index funds  Value Funds  Equity Income Funds

16 What are liquid and money market funds? These debt funds invest only in instruments with maturities less than a year. The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more. What are Gilt Funds? It invests only in securities that are issued by the Government and therefore do not carry any credit risk It invests in both long-term and short-term paper. Ideal for institutional investors who have to invest in Govt. Securities Enables retail Participation

17 How are funds different in terms of their risk profile? Investors have to face the risk- return trade off

18 Risk Income Funds Money Market Investment horizon Days1 year 3 years Risk Profile… Floating Rate Funds Short Term Plans Returns >> Gilt Funds MIPs Balanced Funds Diversified Equity Funds Sectoral Funds

19 Why Equity Mutual Funds are successful? QualitiesDescription Do you Have? Does a MF have? Investment Process A systematic method of selection of the scrips, with the synchronization of objective. ?? Yes Infrastructure Technology, information at hand, statistical tools, research team, time etc. ?? Yes Experience The experience of making investment decisions on a regular basis & experience of standing all the business/economy cycles. ?? Yes

20 Why Equity Mutual Funds are successful? QualitiesDescription Do you Have? Does a MF have? Knowledge & Qualification Most Fund managers are professionally qualified. Moreover, their knowledge is assisted by a lot many support which they get in the form of their research team, study etc ?? Yes Constant Monitoring Reviewing & analyzing your investment at every moment of time ?? Yes

21 Actively Managed Funds Sensex 9 Yr5 Yr3 Yr1 YrCAGR(%) Performance Comparison For the chart: Adjusted NAV price and the Sensex closing price for the first trading day every month have been considered. The Equity fund composite comprises of five funds for which data was available for the last nine years(1/10/95 to 1/10/2004). The values were indexed to arrive at a common scale For the Table: Daily NAV’s and Sensex closing prices have been considered for a time period from 1/10/1995 to 1/10/2004.A buy and hold strategy has been assumed for 1, 3, 5 and 9 year time periods. Source: Credence Analytics ACTIVE Vs PASSIVE : THE INDIAN EXPERIENCE

22 Fund Structure and Constituents

23 How does a Mutual Fund work? SEBI AMC Unit holders Savings Units Trust Investments Returns Trust AMC Custodian Registrar

24 Unit Trusts – Constituents u Fund Sponsor u Mutual Fund as Trust u Asset Management Company u Other fund constituents u Custodian and Depositories u Bankers u Transfer Agent u Distributors

25 What is the regulatory structure of MF in India? The structure of mutual funds in India is governed by SEBI(Mutual Fund)Regulations, It is mandatory to have a three tier structure of Sponsor-Trustee-Asset Management Company. The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund. AMC is the business face of the mutual fund as it manages all the affairs of the fund

26 Who can be the Sponsor? What does the Sponsor do? The sponsor establishes the mutual fund and registers the same with SEBI Sponsor appoints the Trustees, custodians and the AMC with prior approval of SEBI and in accordance with SEBI Regulations Sponsor must have a 5-year track record of business interest in the financial markets Sponsor must have been profit making in at least 3 of the above 5 years. Sponsor must contribute at least 40 % of the AMC

27 How are Mutual Funds Structured? Company Form Trust Form Company Form is popular in US In India, Mutual funds are organised as trusts. The trust is either managed by a Board of Trustees, or by a trustee company

28 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 cannot be a trustee of another mutual fund

29 What are the rights of the Trustees? Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations All Mutual Fund Schemes floated by the AMC have to be approved by the Trustees Trustees can seek information from the AMC regarding the Operations and compliance of the mutual fund. Trustees can seek remedial actions from AMC, and in cases dismiss the AMC Trustees review and ensure that net worth of the AMC is according to stipulated norms, every quarter

30 What are the obligations of the Trustees? Trustees must ensure that the transactions of the mutual fund are in accordance with the trust deed Trustees must ensure that the AMC has systems and procedures in place, and that all the fund constituents are appointed 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

31 Regulatory requirements for the AMC? Only SEBI registered AMC can be appointed as investment managers of mutual funds AMC must have a minimum net worth of Rs. 10 Cr., at all times An AMC cannot be an AMC or Trustee, of another Mutual Fund AMC’ s cannot indulge in any other business, other than that of asset management At least half of the members of the Board of an AMC, have to be independent The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC’s

32 Who appoints the AMC and defines its functions? The trustees, on the advice of the sponsors usually appoint the AMC The AMC is usually a private limited co., in which the sponsors and their associates or JV partners,are shareholders The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr. The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC

33 How are Indian mutual funds organised? Though the trust is the mutual fund, the AMC is its operational face The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working

34 What are the obligations of the AMC? Investments have to be according to the investment management agreement and SEBI regulations The actions of its employees and associates have to be as mandated by the trustees AMC’ s have to submit detailed quarterly reports, on the working and performance of the mutual fund AMC’ s have to make the necessary statutory disclosures on portfolio, NAV and price to investors

35 What are the restrictions on the AMC ? AMC’ s cannot launch a scheme without the prior approval of the trustees AMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh AMC’ s cannot take up any activity that is in conflict with the activities of the mutual fund

36 What do the Registrar and Transfer Agents do? They are responsible for investor servicing functions Process investor applications Record details of Investors Send information to Investors Process dividend payout Incorporate changes in investor information Keeping Investor information up to date

37 What is the role of Brokers in a mutual fund? Enable investment managers to buy sell securities Brokers are registered members of the stock exchange They charge a commission for their services. In some cases provide investment managers with research reports Act as an important source of market information

38 What is the role of selling and distribution agents ? Selling agents bring investors funds for a commission Distributors appoint agents and other mechanisms to mobilize funds from investors Banks and post offices also act as distributors The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund

39 What are the functions of the custodians ? Responsible for the securities held in the mutual fund’s portfolio Keep an investment record of the mutual fund Collect dividends and investment payments due on the mutual funds investment Track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition

40 What are the various forms of Fund mergers and takeovers in India? Merger of AMC ( Example : HB Mutual and Tauraus Mutual ) AMC takeover by sponsors ( Example : ITC Threadneedle and 20 th century taken over by Zurich) ( ITI by Franklin Templeton) Scheme take over (Apple’s scheme taken over by Birla AMC )

41 What are the conditions under which two AMC’s can be merged? SEBI regulations require the following : SEBI and Trustees of both funds must approve of the merger Unit holders should be notified of the merger, and provided the option to exit at NAV, without load

42 Under what conditions can an AMC be taken over by another sponsor ? SEBI approval is required of the change of ownership and unit holders have to be informed of the takeover What is scheme take over? If an existing mutual fund scheme is taken over by another AMC, it is called as scheme take over. The two mutual funds continue to exist.Trustee and SEBI approval and notification of unit holders are required for scheme takeovers

43 Legal and Regulatory Framework

44 Regulating agencies for MF & its Constituents SEBI RBI - as a supervisor of bank owned mutual funds - as a supervisor of MMMFs Ministry of Finance Company Law Board, Department of Company Affairs and Registrar of Companies Stock Exchanges (self regulatory Organization) Office of the Public Trustee

45 What is the regulatory jurisdiction of RBI over mutual funds ? RBI is the monetary authority and the regulator of the banking system Bank sponsored mutual funds were under the dual control of RBI and SEBI Presently RBI is only the regulator of the sponsors of bank sponsored mutual funds. SEBI is the regulator of all mutual funds Mutual funds are affected by the RBI stipulations on structure, issuance, pricing & trading of Govt. Securities

46 What is the role of Ministry of Finance in mutual fund regulations ? The finance ministry is the supervisor of both the RBI and SEBI Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds

47 What are self regulatory organisations (SRO’s)? SRO’ s are the second-tier regulatory mechanism created by market participants, to regulate the working of a group of persons/organizations If the SRO is registered with the regulatory authority, it obtains certain powers from the regulatory authority For example though the stock exchanges are regulated by SEBI, they are also registered SRO’ s

48 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. Objectives To promote the interests of mutual funds and unit holders. To set ethical, commercial and professional standards in the industry. To increase public awareness of the mutual fund industry. AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.

49 Investing in Mutual Funds: Understanding the Process

50 The mutual fund is required to file with SEBI a detailed information memorandum called the prospectus, in a prescribed format giving all the information of the fund and the scheme. An abridged version of the offer document, in a prescribed format is appended to the application form. Investors can get a summary of the offer document in the abridged version known as the Key Information Memorandum Where can the investor find out the details about a MF scheme, before investing?

51 What does the Offer Document usually contain? It contains information regarding, Objective of the scheme Asset allocation Sale and repurchase procedure Load and expense structure of the scheme Accounting and valuation policies It also contains Structure of the mutual fund Its constituents Operational details as how to apply Rights and duties of the investors

52 Why is the offer document important to investors? Information about the product, and its fundamental attributes, are specified in the offer document. It forms the basis of investors decisions Offer Document is a legal document that specifies the details of the offer made by the mutual fund

53 Is the offer document issued only when the MF issues units for the first time? Closed ended scheme- offer document during the IPO Open ended scheme- offer document is valid through the life of the scheme, which is revised every 2 years Major changes that have to be notified to the investors: Change in the AMC or Sponsor of the mutual fund Changes in the load structure Changes in the fundamental attributes of the schemes Changes in the investment options to investors; inclusion or deletion of options

54 What are the broad contents of the O D? Summary Information Glossary of Defined terms Risk Factors faced by the fund Legal and regulatory compliance Financial Information Constitution of the Mutual Fund Investment Objectives and Policies Management of the Fund Offer related Information Investment procedure Schemes policy on dividends and Inter-scheme transfers Associate Transactions Borrowing policy NAV Valuation Description of Accounting policies Tax treatment of investments Investors rights and services Redressal mechanism for Investor Grievances Penalties, pending litigation or proceedings

55 What are the mandatory disclosures to be made on the cover page of the OD? Name of the mutual fund. Name of the scheme. Type of scheme. Name of the AMC. Classes of units offered for sale. Price of units plus applicable load. Name of the guarantor in case of assured return schemes. Opening, closing and earliest closing date of offer. Mandatory statements.

56 What are the 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

57 What are 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

58 What is the Key Information Memorandum (KIM) Since the offer document is very detailed, it is not feasible to provide them to all investors SEBI regulations allows mutual funds to summarize the key points in a summary document called as key information memorandum It is mandatory to provide KIM to all investors

59 Is the offer document verified by SEBI for its accuracy? No SEBI does not approve or disapprove anything contained in the offer document The offer document is prepared as per a certain format prescribed by SEBI The contents of the offer document are verified by the trustees, and the compliance officer The compliance officer has to also certify that the constituents of the fund are all SEBI registered entities The AMC is responsible for the contents and accuracy of information in the offer document

60 What are the periodic revisions required in the Offer Document? The offer document and the memorandum have to be fully revised and updated at least once in 2 years After completion of one year by any open ended scheme, its condensed financial information has to be included in the offer document and the memorandum This information has to be updated in subsequent years in the form of an addendum to the offer document till the time new revised document is printed

61 Processes, rights and obligations for investors

62 What are the AMFI recommended best practices for mutual fund agents?

63 What is SEBI’s advertising code?

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

65 What is the commission structure for mutual fund agents? The commission consists of two components Initial commission - Paid as a fixed percentage of amount mobilised by agents Trail commission - it is paid periodically on the funds that remain invested in the scheme. Trail is an effective way to restrict the practice of rebating, and link commissions The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either AMFI or SEBI.

66 What are the categories of investors eligible to buy MF units? Resident Individuals Indian Companies Indian trusts and charitable institutions Banks NBFC’s Insurance companies Provident funds Non-resident Indians OCB’s SEBI registered FII’s

67 What are investment plans ? It refers to the services that the funds provide to investors in offering different ways to invest or reinvest. They determine the level of flexibility for the investor. Some of the investment plans offered are: Automatic Reinvestment Plan (ARP) Automatic Investment Plan (AIP) Systematic Withdrawal Plans (SWP) Systematic Transfer Plans

68 What are the rights of the investors in respect of service standards that they can expect from MFs?

69 What are the limitations to investors right ? Investors cannot sue the trust. Investors cannot lodge complaints against the trustees (with the Registrar of Public Trusts) or the AMC (with the CLB). Investors can lodge complaints with SEBI for non- compliance. Investors cannot be compensated if the performance of the fund is below expectations. There are not legal remedies for to a prospective investor

70 Capital Markets and Portfolio Management

71 What are large-cap and small cap shares? The size of a company in the equity markets is determined by market capitalisation (no. of shares issued * market price/share)

72 What is the Price- Earnings Ratio? P/E Ratio=share price/ post tax earnings Indicator of value the market assigns to every rupee earned by the company P/E ratio reflects overvaluation and under valuation Important fact of P/E Ratio P/E ratio has a sensitive numerator and an insensitive denominator. P/E ratios are reflective of the phase of the market. P/E Ratio

73 What is dividend yield? Dividend paid is usually a percentage of face value of the share Dividend Yield= dividend paid/market price of a share What is the relationship between dividend yield? Both the measures are sensitive to market price per share If market prices are higher, P/E multiple will be higher, but dividend yield will be lower and vice versa

74 What are cyclical stocks? If the earnings of a company are subject to ups and downs over years caused mostly due to economic variables. What are growth stocks? Sectors having potential for higher earnings What are value stocks? Stocks with established earnings history but tend to be undervalued in the market for brief periods

75 What is active equity fund management? Fund manager tends to look at specific attributes in selecting stocks. Active fund manager believes, that his ability to buy right stock at the right time, can translate into superior performance for his portfolio. What are the basic active equity fund management style? Growth Investment Value Investment

76 What is passive equity fund management? Fund manager believes, that holding a well diversified portfolio is the cost efficient way,to better returns, he would tend to mimic the market index. It requires limited research and monitoring costs and is therefore cheaper. Fund manager may choose to mimic a index, or a subset of the index or choose a basket of shares from multiple indices. A passive fund manager has to rebalance his portfolio every time changes are made in the index.

77 What is the types of equity research done in MF? Fundamental analysis Technical analysis Quantitative analysis What are the various steps involved in equity fund management? Formulating the investment philosophy Formulation of investment strategy Setting of targets and benchmarks Deciding on the extent of diversification and flexibility Reviewing, monitoring and rebalancing

78 Debt Markets and Mutual Funds

79 What is real rate and nominal rate? Nominal rate of interest is the rate that is paid to us by the borrower The real rate is the nominal rate less the rate of inflation. What is yield? Yield is the term used to signify the actual rate earned on an investment. Current yield is a simple measure of the yield on the bond.

80 What is the relationship between the price and the yield of the bond? Price and Yield are inversely related What is the yield curve? Rates at which bonds of similar risk of various tenors are traded on a given point in time, are plotted in a graph. This is known as the Yield Curve

81 What are the various types of fixed income securities available in the Indian Market?

82 Accounting and Valuation

83 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

84 What is NAV? How is it computed? NAV is the value of one unit of the fund. NAV= net assets of the fund/ units outstanding

85 How frequently is the NAV calculated ? All mutual funds have to disclose their NAVs daily, by posting it on the AMFI web site by 8.00 p.m. Open –ended funds have to compute and disclose NAVs everyday; closed end funds can compute NAVs every week, but disclosures have to be made everyday. Closed end schemes not mandatorily listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months, as permitted by SEBI.

86 What are the initial issue expenses ? Expenses that are incurred in the launch of the fund are called as initial issue expenses. ∙ The costs of registration and fund formation ∙ Legal and advisory expenses ∙ Costs of launching the scheme ∙ Advertisement and promotion expenses ∙ Distribution costs ∙ Commissions to selling agents SEBI imposes a ceiling of 6% on these expenses.

87 Can the Fund be launched without bearing any initial issue expenses ? ∙ Yes ∙ Such funds are called as no load funds ∙ AMCs can charge an investment management fee, which is 1% higher than the statutory limit, in this case. How is the initial issue expense treated in the accounts of the mutual fund ? ∙ For a closed end fund, initial issue expense are charged over the life of the scheme, on a weekly basis. ∙ For an open ended scheme the initial issue expenses are carried in the balance sheet as ‘deferred revenue expenditure’.They are written off in a period not exceeding 5 years.

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

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

90 What are the fees charged by the AMC ? The fees are regulated by SEBI as follows: For the first Rs.100 Cr. Of net assets: 1.25% For the net assets exceeding Rs. 100 Crore: 1.00% If the AMC does not charge any of the initial issue expenses to the fund, it can charge the scheme a management fee, that is 1% higher than the above rates

91 What are the other financial reporting requirements for mutual funds ? Accounts have to be prepared and audited, and published within 6 months from the date of closure of accounts. Within 30 days of the closure of the half year, unaudited abridged accounts have to be published in at least one national daily The summary of accounts has to be mailed to all unit holders. A copy of the annual report, six monthly unaudited reports, quarterly movement in net assets of the fund and quarterly portfolio statements have to be filed with SEBI

92 Valuation of Securities

93 What are the norms for valuing traded securities in a mutual fund portfolio ? The last quoted closing price on the stock exchange where the security is principally traded is used for valuation. If a security is not traded on a particular day, its traded price on the earliest previous trading day can be used Such a date should not be more than 30 days prior to the valuation date.

94 What is a thinly traded security ? An equity share is considered thinly traded, if the traded value in a month is less than Rs 5 lakhs and the total volume of shares traded is less than shares a month. If a debt security has traded value of less than Rs. 15 Crore in the 30 days prior to the valuation date, it is to be classified as thinly traded The thinly traded security’s market price may not be representative of its underlying value. What is a non-traded security? If a security equity or debt is not traded in any of the recognised stock exchange for a period of 30 days prior to the valuation date.

95 What are the guidelines to for valuation of thinly traded and non-traded equity securities ? On the basis of the latest available balance sheet find out the net worth per share. The value per share is to be calculated using the earnings capitalisation method. The value has to be averaged. This number is further discounted by 10% because the share being valued is illiquid. The value is the ‘fair value’. If the EPS is negative or if the Balance Sheet is unavailable after 9 months of accounting yr end then earnings capitalisation value is taken as zero. If such a security forms more than 5% of the net assets of the scheme,it should be valued by a independent valuer

96 What is the valuation methodology for a thinly traded debt security, with 182 days or less to maturity ? Valuation is based on amortization of maturity value Most money market instruments are issued on discounted basis, with the redemption being at face value. This principle is applied to all securities with less than 182 days to maturity. The value of the security on valuation date is the cost plus accrued interest up to the date of valuation. Accrued interest is that proportion of the amortized value of the difference between the issue price and redemption value.

97 What are the financial planning strategies that can be recommended to investors? Rupee cost averaging. Value averaging. Jacob’s rebalancing strategy. Graham’s 50:50 portfolio re-balancing.

98 What is Bogle’s strategic asset allocation? Older investors in the distribution phase: -50% equity : 50% debt Younger investors in the distribution phase: -60% equity : 40% debt Older investors in the accumulation phase: -70% equity : 30% debt Younger investors in the accumulation phase: -80% equity : 20% debt

99 The steps in developing a model portfolio for an investor? Develop long term goals. Determine asset allocation. Determine sector distribution. Select specific fund managers and their schemes.

100 Model portfolios recommended for investors according to their life cycle stages: Young unmarried professionals : –50% in aggressive equity funds. –25% in high yield bond funds, growth and income funds. –25% in conservative money market funds. Young couple with 2 incomes and 2 children: –10% in money market funds. –30% in aggressive equity funds. –25% in high yield bond funds and long term growth funds. –35% in municipal bond funds.

101 Contd: Older couple single Income : –30% in short term municipal funds –35% in long term municipal funds –25% in moderately aggressive equity –10% emerging growth equity Recently retired couple : –35% in conservative equity funds for capital preservation / income –25% in moderately aggressive equity for modest capital growth –40% in money market funds

102 What is the recommended portfolio for investors in accumulation phase? Diversified Equity : Sector and balanced funds – 65 – 80% Income and gilt funds : –15 – 30% Liquid funds and bank deposits : –5%

103 What is the recommended portfolio for investors in distribution phase? Diversified Equity and balanced funds: – 15 – 30% Income funds : –65 – 80% Cash funds: –5%

104 What are the steps in selection of an equity fund? Classify into broad categories that signify their risk and return characteristics. Classify the funds on the basis of their fund manager style. Evaluate the performance of the scheme. Understand the structural characteristics of the scheme: –Size of the fund –Fund age –Portfolio manager’s experience –Costs of investing Understand the portfolio characteristics of the scheme.

105 What are the steps in selection of a bond fund? Fund age and size. Relative yield. Costs. Quality of the portfolio. Average maturity.

106 What are the steps in selection of a money market fund? Lower expense ratios. Higher credit quality of the portfolio Yield

107 An open ended mutual fund is one that has a) an option to invest in any kind of security b) units available for sale and repurchase at all times c) an upper limit on its NAV d) a fixed fund size

108 "Because the fund stands ready to redeem units at any time, units in an open-end fund are always worth their" a) Net Asset Value b) Asset Revenue. c) Selling price d) Par value.

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