3 What is a Mutual Fund ?It is a pool of money, collected from investors, and is invested according to certain investment objectivesThe contributors and beneficiaries are the same class of people namely the investorsA mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the poole.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 DiversificationProfessional ManagementReduction of riskReduction of transaction costsLiquidityConvenience and flexibilityAccess to information
6 Tax Benefits in Mutual Funds Dividends Tax Free in the hands of investors for all type of MF schemesThere will be Dividend Distribution TaxDebt Funds …Individuals % + surchargeCorporates % + surchargeEffective tax rate is much lower than on interest of bank FD for higher tax bracket Individuals and Corporate investorsDividend Tax Free for all Equity and Balanced schemes
7 Tax Benefits in Mutual Funds - Continue Capital Gain Tax- For Equity / Balanced FundsLT Capital Gain Tax NilST Capital Gain Tax @ 10%- For Debt FundsLT Capital Gain Tax @ 10%ST Capital Gain Tax Tax bracket of InvestorsDeduction upto Rs. 1 lakh available u/s 80C for investment in ELSS from FY
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 croresCleary Indicates the Fact that Indian Investors needs to be educated on the most accepted investment vehicle worldwide.Source ici.org
10 Important phases in Indian Mutual Fund Industry 1963 – 1987UTI sole player in the industry, created by an Act of Parliament ,1963UTI launches first product Unit Scheme 1964UTI creates products such as MIP's, children plans ,offshore funds etcUTI managed assets of 6700 Cr at the end of this phaseIn 1987 Public Sector Banks and FI'sSBI mutual fund was the first non -UTI mutual fundUTI's corpus grew to Rs.38,247 Cr & public Sector Funds got Rs 8750 CrIn 1993, Mutual Fund Industry was open to private players.SEBI's first set of regulations for the industry formulated in 1993Significant innovations, mostly initiated by private playersImplementation of new SEBI regulations led to rapid growthBank mutual funds were recast as per SEBI guidelinesUTI came under voluntary SEBI supervision.Rapid growth, significant increase in corpus of private playersTax break offered created arbitrage opportunitiesBond funds and liquid funds registered highest growthUTI's market share drops to nearly 50%
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 repurchasesInvestors 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 EquityDebtMoney MarketBalanced FundsLiquid FundsEquity FundsIndex FundsSector FundsFixed IncomeFundsMoney MarketMutual Funds
15 What are equity funds?Predominantly invest in equity shares of the companyChoices in equity fundsAggressive Growth FundsGrowth FundsSpecialty FundsSector FundsOffshore FundsSmall Cap Equity FundsOption Income FundsDiversified Equity FundsELSSIndex fundsValue FundsEquity 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 riskIt invests in both long-term and short-term paper.Ideal for institutional investors who have to invest in Govt. SecuritiesEnables retail Participation
17 How are funds different in terms of their risk profile? Investors have to face the risk- return trade off
19 Why Equity Mutual Funds are successful? QualitiesDescriptionDo youHave?Does aMF have?InvestmentProcessA systematic method of selection of the scrips, with the synchronization of objective.??YesInfrastructureTechnology, information at hand, statistical tools, research team, time etc.ExperienceThe experience of making investment decisions on a regular basis & experience of standing all the business/economy cycles.
20 Why Equity Mutual Funds are successful? QualitiesDescriptionDo youHave?Does aMF have?Knowledge &QualificationMost 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??YesConstantMonitoringReviewing & analyzing your investment at every moment of time
21 Performance Comparison ACTIVE Vs PASSIVE : THE INDIAN EXPERIENCEPerformance Comparison2121.256.846.3Actively Managed Funds5.43.826.627.4Sensex9 Yr5 Yr3 Yr1 YrCAGR(%)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 scaleFor 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
23 How does a Mutual Fund work? AMCUnit holdersSavingsUnitsTrustInvestmentsReturnsSEBITrustAMCCustodianRegistrar
24 Unit Trusts – Constituents Fund SponsorMutual Fund as TrustAsset Management CompanyOther fund constituentsCustodian and DepositoriesBankersTransfer AgentDistributors
25 What is the 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.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 SEBISponsor appoints the Trustees, custodians and the AMC with prior approval of SEBI and in accordance with SEBI RegulationsSponsor must have a 5-year track record of business interest in the financial marketsSponsor 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 FormTrust FormCompany Form is popular in USIn 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 independentTrustee 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 RegulationsAll Mutual Fund Schemes floated by the AMC have to be approved by the TrusteesTrustees 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 AMCTrustees 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 deedTrustees must ensure that the AMC has systems and procedures in place, and that all the fund constituents are appointedTrustees must ensure due diligence on the part of AMC in the appointment of constituents and business associatesTrustees must furnish to the SEBI, on half yearly basis a report on the activities of the AMCTrustees must ensure compliance with SEBI regulations
31 Regulatory requirements for the AMC? Only SEBI registered AMC can be appointed as investment managers of mutual fundsAMC must have a minimum net worth of Rs. 10 Cr., at all timesAn AMC cannot be an AMC or Trustee, of another Mutual FundAMC’ s cannot indulge in any other business, other than that of asset managementAt least half of the members of the Board of an AMC, have to be independentThe 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 AMCThe AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholdersThe 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 faceThe AMC is the first functionary to be appointed and is involved in the appointment of all other functionariesThe AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investorsAll 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 regulationsThe actions of its employees and associates have to be as mandated by the trusteesAMC’ s have to submit detailed quarterly reports, on the working and performance of the mutual fundAMC’ 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 trusteesAMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 LakhAMC’ 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 functionsProcess investor applicationsRecord details of InvestorsSend information to InvestorsProcess dividend payoutIncorporate changes in investor informationKeeping Investor information up to date
37 What is the role of Brokers in a mutual fund? Enable investment managers to buy sell securitiesBrokers are registered members of the stock exchangeThey charge a commission for their services.In some cases provide investment managers with research reportsAct as an important source of market information
38 What is the role of selling and distribution agents ? Selling agents bring investors funds for a commissionDistributors appoint agents and other mechanisms to mobilize funds from investorsBanks and post offices also act as distributorsThe 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 portfolioKeep an investment record of the mutual fundCollect dividends and investment payments due on the mutual funds investmentTrack 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 20th 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 mergerUnit 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 takeoverWhat 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
44 Regulating agencies for MF & its Constituents SEBIRBI- as a supervisor of bank owned mutual funds- as a supervisor of MMMFsMinistry of FinanceCompany Law Board, Department of Company Affairs and Registrar of CompaniesStock 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 systemBank sponsored mutual funds were under the dual control of RBI and SEBIPresently RBI is only the regulator of the sponsors of bank sponsored mutual funds. SEBI is the regulator of all mutual fundsMutual 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 SEBIAggrieved 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/organizationsIf the SRO is registered with the regulatory authority, it obtains certain powers from the regulatory authorityFor 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.ObjectivesTo 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 Where can the investor find out the details about a MF scheme, before investing? 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
51 What does the Offer Document usually contain? It contains information regarding,Objective of the schemeAsset allocationSale and repurchase procedureLoad and expense structure of the schemeAccounting and valuation policiesIt also containsStructure of the mutual fundIts constituentsOperational details as how to applyRights 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 decisionsOffer 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 IPOOpen ended scheme- offer document is valid through the life of the scheme, which is revised every 2 yearsMajor changes that have to be notified to the investors:Change in the AMC or Sponsor of the mutual fundChanges in the load structureChanges in the fundamental attributes of the schemesChanges in the investment options to investors; inclusion or deletion of options
54 What are the broad contents of the O D? Summary InformationGlossary of Defined termsRisk Factors faced by the fundLegal and regulatory complianceFinancial InformationConstitution of the Mutual FundInvestment Objectives and PoliciesManagement of the FundOffer related InformationInvestment procedureSchemes policy on dividends and Inter-scheme transfersAssociate TransactionsBorrowing policyNAV ValuationDescription of Accounting policiesTax treatment of investmentsInvestors rights and servicesRedressal mechanism for Investor GrievancesPenalties , 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 achievedNAV 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 schemeRisk arising from non –diversification , if anyIf a scheme offers assured returns, the scheme must state that the assurance is on the basis of the guarantees provided by the sponsor/AMCIf 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 investorsSEBI regulations allows mutual funds to summarize the key points in a summary document called as key information memorandumIt is mandatory to provide KIM to all investors
59 Is the offer document verified by SEBI for its accuracy? NoSEBI does not approve or disapprove anything contained in the offer documentThe offer document is prepared as per a certain format prescribed by SEBIThe contents of the offer document are verified by the trustees, and the compliance officerThe compliance officer has to also certify that the constituents of the fund are all SEBI registered entitiesThe 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 yearsAfter completion of one year by any open ended scheme, its condensed financial information has to be included in the offer document and the memorandumThis 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?
64 What is the AMFI Code of Ethics? Management of the fund ought to be in the interest of unit holdersHigh 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 objectiveFunds 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 componentsInitial commission - Paid as a fixed percentage of amount mobilised by agentsTrail 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 commissionsThe 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 IndividualsIndian CompaniesIndian trusts and charitable institutionsBanksNBFC’sInsurance companiesProvident fundsNon-resident IndiansOCB’sSEBI 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
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 P/E Ratio P/E Ratio=share price/ post tax earnings Indicator of value the market assigns to every rupee earned by the companyP/E ratio reflects overvaluation and under valuationImportant fact of P/E RatioP/E ratio has a sensitive numerator and an insensitive denominator.P/E ratios are reflective of the phase of the market.What is the Price- Earnings Ratio?
73 What is the relationship between dividend yield? What is dividend yield?Dividend paid is usually a percentage of face value of the shareDividend Yield= dividend paid/market price of a shareWhat is the relationship between dividend yield?Both the measures are sensitive to market price per shareIf 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 earningsWhat are value stocks?Stocks with established earnings history but tend to be undervalued in the market for brief periods
75 What are the basic active equity fund management style? 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 InvestmentValue 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 analysisTechnical analysisQuantitative analysisWhat are the various steps involved in equity fund management?Formulating the investment philosophyFormulation of investment strategySetting of targets and benchmarksDeciding on the extent of diversification and flexibilityReviewing , monitoring and rebalancing
79 What is real rate and nominal rate? Nominal rate of interest is the rate that is paid to us by the borrowerThe 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 relatedWhat 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?
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 investmentsPlus(+) current assets and other assetsPlus(+) accrued incomeLess(-) current liabilities and other liabilitiesLess(-) 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 formationLegal and advisory expensesCosts of launching the schemeAdvertisement and promotion expensesDistribution costsCommissions to selling agentsSEBI imposes a ceiling of 6% on these expenses.
87 Can the Fund be launched without bearing any initial issue expenses ? YesSuch funds are called as no load fundsAMCs 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 AMCCustodian’s feesTrustee feesRegistrar and transfer agent feesMarketing and distribution expensesOperating expensesAudit feesLegal expensesCost 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 restrictionsAt 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 dailyThe 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
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 tradedThe 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 valueMost 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% debtYounger investors in the distribution phase:- 60% equity : 40% debtOlder investors in the accumulation phase:- 70% equity : 30% debtYounger 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 funds25% in moderately aggressive equity10% emerging growth equityRecently retired couple :35% in conservative equity funds for capital preservation / income25% in moderately aggressive equity for modest capital growth40% in money market funds
102 What is the recommended portfolio for investors in accumulation phase? Diversified Equity : Sector and balanced funds65 – 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 fundFund agePortfolio manager’s experienceCosts of investingUnderstand 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 portfolioYield
107 An open ended mutual fund is one that has a) an option to invest in any kind of securityb) units available for sale and repurchase at all timesc) an upper limit on its NAVd) a fixed fund size
108 a) Net Asset Value b) Asset Revenue. c) Selling price d) Par value. "Because the fund stands ready to redeem units at any time, units in an open-end fund are always worth their"a) Net Asset Valueb) Asset Revenue.c) Selling priced) Par value.