1. Index 1. The Concept and Role of Mutual Funds.
2. Funds Structure and Constituents.
3. Legal and Regulatory Framework.
4. The Offer Document.
5. Fund Distribution and Sales Practices.
6. Accounting, Valuation & Taxation.
7. Investor Services.
8. Investment Management.

2. 09. Measuring and Evaluating Mutual Fund Performance.
10. Helping Investors with financial planning.
11. Recommending Financial Planning Strategies to Investors.
12. Selecting the right Investment Products for Investors.
13. Helping Investors understand Risks in Fund Investing.
14. Recommending Model Portfolios and selecting the right Fund.
15. Business Ethics in Mutual Fund.

3. Concept and Role Of Mutual Funds
Chapter 1
Concept and Role
Of Mutual Funds

4. 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 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

5. 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.

6. Advantages of Mutual Funds to Investors?
Portfolio diversification
Professional Management
Reduction in Risk
Reduction in Transaction costs
Liquidity
Convenience and Flexibility
Safety – Well regulated by SEBI

7. What are the disadvantages of investing through Mutual Funds?
No control over the costs. Regulators limit the expenses of Mutual Funds. Fees are paid as percentage of the value of investment.
No tailor made portfolios.
Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

8. 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
MASTERSHARE – Ist Diversified Equity Investment Scheme in India.
INDIA Fund – Ist indian offshore fund lauched in August 1996.
In 1987 Public Sector Banks and FI's got permission to set up MF.
SBI mutual fund was the first non -UTI mutual fund
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.
Dividends made tax free in 1999.
Rapid growth, significant increase in corpus of private players
Tax break offered created arbitrage opportunities
Bond funds and liquid funds registered highest growth

9. Emergence of Large and Uniform Industry
UTI Act repealed in 2003.
UTI now does not have a special status.( now under SEBI)
Size of industry was crore in 2005.
Merger and Acquisitions happening.
Fidelity, Largest MF has entered.
As on March Funds.

10. Mutual Fund Products

11. 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,
The number of outstanding units goes up and down
The unit capital is not fixed but variable.

12. 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.
The corpus of closed ended funds remains unchanged.
The unit capital is fixed, one time sale.

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

14. 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
Small Cap Equity Funds
Diversified Equity Funds
ELSS
Index funds
Value Funds

15. 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

16. 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.
Open or closed ended.
Eligible under Section 80 C upto Rs.1 lakh allowed
Dividends are tax free.
Benefit of Long term Capital gain taxation.

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

18. Important points
IN USA, a MF is constituted as an investment company and an investor buys the share of the fund.
In USA, all mutual funds are open ended.
In USA, funds are also classified as Tax Exempt and Non Tax Exempt Funds
In India, classified as Open – Closed ended, Load and No Load Funds.
Mutual Fund is NOT a company, it can be called as a portfolio of stocks, bonds and other securites or it can be called as pool of funds used to purchase securities on behalf of investors or a collective investment vehicle.

19. Fund Structure and Constituents
Chapter 2
Fund Structure and Constituents

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

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

22. 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

23. 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

24. How are Mutual Funds Structured?
In India Mutual fund is the form of a Public Trust created under the Indian trust Act
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.

25. 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.

26. 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

27. 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

28. Compliance with Sebi’s Requirements
Sebi has categorised obligations of Trust into General Due Diligence and Specific Due Diligence.
General Due Diligence – Due care in appointing AMC Directors, observing irregularities in functioning. The purpose is to ensure that trust properties are protected by competent persons and agencies. Ensuring that appointed constituents are duly regd. With SEBI.
Specific Due Diligence – Trustees must appoint independent auditors and obtain periodic audit reports. To obtain Compliance Test reports from the AMC once every 2 months. To prescribe a Code of Ethics for Trustees and AMC personnel.

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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.
Limit of 5% per broker

35. 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

36. 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

37. Various Forms of Fund Mergers and Takeovers
Merger of AMC to become a single entity ( Example : HB Mutual and Taurus 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 ) and ( Zurich’s Scheme Takeover by HDFC Mutual Fund)

38. 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 ( in case of open ended funds else 75% consent is required)
High Court approval is required as AMC’s are companies.

39. 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
Investors have to be informed but HIGH Court approval not required
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

40. Important Points
In USA, the regulatory body is known as Securities Exchange Commission.
The sponsor may be compared to promoter of a company
Issuing units and redeeming units is the role of Transfer Agent
The appointment of AMC can be terminated by Majority of directors of trustees.
Sponsor signs the trust deed with the trustees.
Fund manager is responsible for filing details of the funds’ portfolio with SEBI.

41. Legal and Regulatory Framework
Chapter 3
Legal and Regulatory Framework

42. 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 -(For listed Mutual Funds)
Office of the Public Trustee

43. 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

44. 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

45. 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
For example, BSE and NSE are SROs.
AMFI si not yet a SEBI registered SRO.

46. 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.
To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.

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

48. What are the 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 not legal remedies for to a prospective investor

49. Important Points
Sebi does entertain 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.
Unitholders 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.
IIIrd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed.
The body to which investors may address their complaints is SEBI.

50. Chapter 4
Offer Document

51. Where can the investors 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 offer document , 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

52. 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

53. Importance of Offer Document
Most important source of information from the perspective of the prospective investor.
Investor must understand the fundamental attributes of the scheme to make the decision.
It is the operating document and describes the product.
Principle of “Buyers Beware” applies here.
It is the primary vehicle for the investment decision, a legal document that protects the rights of investors.
Also a reference document for investor to look for the relevant information anytime.

54. 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

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 alongwith the application form.

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. 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 OD do not contain the address of the Trustees of MF
The front page of OD contains date of its publication and name and type of fund( does not contain objectives)
The offer document is issued by the AMC / Trustees

61. Fund distribution and Sales Practices
Chapter 5
Fund distribution and Sales Practices

62. 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

63. Important point
Distributor should look up the offer document to see which category of investors are allowed to invest in any particular scheme of the fund, as it is possible that some categories are not allowed to invest in some schemes.
For example, charitable trusts are not allowed to invest in some category of schemes in some funds. So in this case distributor should refer offer document.

64. Distribution Channels
Individual Agents- A person has to sign an agreement with a fund on non judicial stamp paper. He has to be AMFI certified also to sell Mutual Fund products.
Only exemption is distributors abvoe 50 years of age and with at least 5 years of experience as on Sep 30, Such exempted distributors were required to complete AMFI’s refresher course by Sep 30, 2004.
UTI MF requires its agents to have atleast passed the level of matriculation and also to provide 2 references.
Distribution Companies
Banks and NBFCs
Post Offices
Direct Marketing
CURRENTLY are amfi certified and have taken the ARN numbers ( as on 31/3/2005)

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

66. What is SEBI’s advertising code?

67. 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.

68. What is the commission structure for mutual fund agents?
The commission consists of two components
Initial ( Upfront )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.

69. Fundamental Attributes of a Scheme
Type of Scheme, Investment Objective and Terms of the issue, Investment Pattern, Fees and Expenses, Valuation norms and Investment Restrictions.
Any change in Fundamental Attributes, Trust, Fees and expenses payable and other changes which affect unit holders interest have to be informed to investors either in writing or newspaper advertisement( one in English daily and other in a paper published in the language of the region where the HO of a MF is situated)
The unit holders are given option to redeem their holdings in the fund without any exit if anything in above is changed.

70. Loads
Load is charged to investor when the investor buys or redeems units. It is primarily used to meet the expenses related to sale and distribution of units
Load charged on sale of units is entry load. It increases the price above the NAV for new investor.
Load charged on redemption is exit load. It reduces price.
Maximum Entry load or Exit load is 7%.( For Open ended Funds)
Max. Entry or Exit load for closed ended funds is 5%
CDSC is an exit load that varies with holding period.
Load is an amount which is recovered from the investor.

71. Accounting Valuation and Taxation
Chapter 6
Accounting Valuation and Taxation

72. 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

73. 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.

74. Numerical
Unit capital of a MF scheme is Rs.20 million. The market value of investments is Rs. 55 million. The number of units is 1 million. The NAV is
Rs. 20
Rs. 75
Rs.55
Not possible to say

75. 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.

76. 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.

77. Latest changes on Initial Issue Expenses
IIE will be permitted for closed ended schemes only and such scheme will not charge Entry load
IN CES, IIE shall be amortized on a weekly basis over the period of scheme.
IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE

78. 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

79. 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

80. 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

81. Numerical Weekly Net average asset=1400 Cr.
What could be the maximum ongoing expenses.
On 1st 100 cr. 2.5% i.e. 2.5 Cr.
On next 300 Cr. 2.25% i.e cr.
On next 300 Cr. 2% i.e. 6 Cr.
On Rest of the WNAS
(700 cr.) 1.75% i.e Cr.
Total Cr.

82. Tax Implication in Mutual Funds
Income earned by any mutual fund registered with SEBI is exempt from tax.( It is a trust) Under section 10(23 D)
The dividends are tax free in the hands of unitholders by it is liable to dividend distribution tax in case of closed ended fund and debt funds( equity <50%)
No TDS on any income distribution by MF
The earning on selling units is known as Capital Gain
If units are held for less than 12 months--- STCG
Else the earnings is known as LTCG.

83. Capital Gain Taxation
The difference between sale and purchase price is known as capital gain / loss.
The sale and purchase of units in equity oriented scheme of MF is subject to STT at the prescribed rate
Under Section 111 A of the IT ACT, STCG on sale of equity oriented scheme is taxed at the rate specified by the govt. ( currently10%). LTCG
LTCG if equity oriented scheme of MF is exempt from tax.
Tax on other scheme is 10% for LTCG ( without indexation) and 20% with indexation.

84. Other points
Section 80 C – Individual and HUF are entitled to deduction upto Rs. 1 lakh in respect of payment out of taxable income towards certain instruments which includes ELSS of Mutual funds.
Dividend Stripping – ( Section 94(7) – If investor buy units within 3 months prior to record date of dividend and sells those units within 3 months of record date, then the loss if any, shall be ignored.
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.

85. Numerical
An investor purchased units in an apporved Mutual Fund on Jan. 1, 1998 for Rs /-. He sold the units on December 1, 1999 for Rs /-. Calculate the capital gain taxes paid by him. ( Ignore indexation).
Answer :
Long term capital gain = /
So Tax on LTCG = * 10% = Rs /-

86. Valuation of Securities
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/installment has fallen due.
Such assets will be classified as NPAs, soon after the lapse of a quarter from the date on which payments were due.

87. Valuation of Equity Securities
Closing price on valuation date
Selected stock exchange
Use of alternate stock exchange quote
On the basis of earliest previous quote (not more than 30 days prior to valuation date).
If trading is suspended up to 30 days, last quoted price; if it is suspended for more than 30 days, AMC/Trustee decide valuation norms and document such norms.

88. Thinly traded Equity Securities
Equity and equity related security
Rs. 5 lakhs or less OR less than shares in a month
For unlisted: AMC need to make its own judgement and guideline - which need to be documented
Aggregate of illiquid securities - non traded, thinly traded, and unlisted equity shares should not exceed 15% if the total assets of the scheme and any assets above that limit will be valued at zero.
If no Trade done during the past thirty days then has to be treated as non traded security and the Valuation is done on basis of “Good Faith

89. Valuation of Thinly Traded Equity
Networth per share
Earnings capitalisation value
Discount the industry P/E by 75%
Average of the two methods
10% discount for illiquidity
Earning capitalisation is zero if
EPS if negative
Accounts not available for 9 months after closing date.
If illiquid securities are more than 5% of the portfolio, independent valuation to be done

90. Valuation of Debt Securities
Valuation of a Thinly Traded Security (<182 Days)
For example, if a security was issued at Rs. 90 and redeemable at Rs. 100, after 364 days, the accrued interest for each day is
= 10/364 =
The value of the security is increased by paise every day, so that the security is worth Rs. 100 on the date of maturity.
If it has to be valued 200 days after issuance, its value is
90+( *200) =

91. Valuation of other debt security (>182 days)
G-Secs are valued at market prices or using the CRISIL Gilt valuer.
Corporate bonds are valued at market prices or using the CRISIL Bond valuer.
Both these methods use duration to classify bonds and assign a rate for each duration bucket

92. Investor Plans and Services
Chapter 7
Investor Plans and Services

93. Investment Plans Broadly 2 options- Growth option and Dividend Option
Automatic Reinvestment Plans– Benefit of Power of Compounding.
Systematic Investment Plans – For regular investment
Systematic Withdrawal Plan – For regular income ( it is not similar to MIP)
Systematic Transfer Plan

94. Other Investment Services
Telephone / Internet Transactions.
Cheque writing – usually for liquid funds.
Periodic statements and Tax Information
Loans against units – MF DOES NOT GIVES LOANS but banks can give against units held by unitholder.
Nomination and Transfer by unit holders.

95. Investment Management
Chapter 8
Investment Management

96. Equity Portfolio Management
Equity funds can invest into equity shares, preference shares, warrants or convertible debentures.
As on march 2004, indian stock exchanges have over listed companies.
Warrants are long term rights that offer holders the right to purchase equity shares in a company at a fixed price within a specified period.

97. 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)

98. P/E 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.

99. What is the relationship between dividend yield?
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

100. Classifications of Stocks
Cyclical Stocks – Whose earnings are correlated with the state of the economy . Have relatively lower PE ratios and higher dividend payouts.
Growth Stocks – Stocks having potential for higher earnings. High PE and low Dividend yields
Value stocks – Companies in mature industries and are expected to yield low growth in earnings. Good assets value. Currently under valued but can yield superior returns later.

101. 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 style – ( objective is to capital appreciation, look for companies that are expected to give above average earnings growth, The shares are more risky and thus expected to offer higher returns over a long investment horizons.
Value Investment Style – Look for companies that are currently undervalued but whose worth will be recongnized eventually. ( eg. Privatization/buy back)

102. 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.

103. What is the types of equity research done in MF?
Fundamental analysis – Future earnings and risk profile considered ( whether to buy or not)
Technical analysis – Study of historic data on the company’s share price movements and volume ( To find timing)
Quantitative analysis – Equity valuation and evaluate the market as a whole
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

104. Important points on Debt Portfolio Management
Investments only in Market Traded Instruments ( Not in loans as done by banks)
Instruments with maturity less than a year called Money Market Securities.
Instruments with maturity above 1 year are called debt securities.
Zero Coupon Bonds( discounted securities) do not pay regular interest at intervals but are bought discount to their face value.

105. Instruments in Indian Debt Market
Certificate of Deposit – Issued by Commercial banks and maturity of 91 days to 1 year.
Commercial Paper – Issued by corporate bodies and maturity varies between 3 months and 1 year
Corporate Debentures
Floating Rate Bonds
Govt. Securities.
Treasury Bills – Issued through RBI by GOI. Tenure is 91 days and 364 days.
Bonds

106. 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.
Yield is the term used to signify the actual rate earned on an investment.
Current yield is the ratio of coupon amount to market price of a bond. If coupon = 8%, Market Price = 105, then current yield of bond is 8/105 = 7.62%.

107. Important points Par Value or Face Value – Principal amount
Coupon – Annual Rate of interest paid on par value
Maturity – Term of bond
Call Option – Allows the issuer to redeem the bonds before maturity.
Put option- Allows investors to redeem the bonds prior to maturity

108. Measure of Bond Yields
Current yield – Coupon Rate / Current Market Price
Yield to Maturity( YTM) – It is also known as bond’s IRR. It is annual rate of return an investor would realize if he bought a bond at a particular price, received all the coupon payments, reinvested the coupon at same YTM and received the principal at maturity.
There is inverse relationship between price and YTM of a bond.
Yield Curve – Graph showing yields for bonds of various maturities, using a benchmark group of bonds. Also known as TSIR ( term structure of interest rates). The curve is usually upward sloping because longer maturities generally offer higher yields.

109. Risks in Investing in Bonds
Interest Rate Risk
Reinvestment Risk
Call Risk
Default Risk
Inflation Risk
Liquidity Risk

110. Yield Spreads
Yield Spread = Yield of benchmark security – yield of a particular bond
It is the risk premium paid by the bond to induce investor
Higher the credit rating, higher the safety and so lower the yield spread
SO if a bond is downgraded, the yield spread will widen.
Term to Maturity – It is period until the bonds maturity

111. Duration
It is a more accurate measure of the portfolio maturity profile.
It measure the percentage change in bond’s price with a change in yield of 1%
It computes the proportion of the present value of each individual payment as a %age of the sum of the present values of all payments and make this proportion the weight for the year of payment.
The Duration of a bond is less than its maturity, except for zero coupon bonds
Bonds with longer maturities have longer durations.
An interest bearing bond with a higher coupon rate will have lower duration because a higher proportion of the total inflows will be received in the interim.

112. What is the relationship between the price and the yield of the bond ?
Price and Yield are inversely related.
Changes in interest rate impact bond values in the opposite direction.
Yield also gets increased by downgrading of credit rating of the bond.
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

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

114. Restrictions Mutual funds can invest only in marketable securities
All investments are on delivery basis, no squaring off.
A MF under all its schemes cannot hold more than 10% of the paid up capital of a company.
A MF scheme can invest max. 10% of its NAV in a single company.( Exception – Index and Sectoral funds)
Debt funds - single issuer not more than 15% of NAV, can be relaxed to 20% with approval of trustees and AMC
MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $ 50 million, whichever is lower.
Funds of 1 scheme can be invested in any other MF ( Max 5% of Net Assets)

115. Inter Scheme Transfer
Such transfers happen on a delivery basis, at market prices.
Such transfers should not result in significantly altering the investment objectives of the scheme involved.
Such transfer should not be of illiquid securities, as defined in the valuation norms.
One scheme can invest in another scheme, up to 5% of net assets, No fee is payable on these investments.

116. Investment in Sponsor Company
A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associate or group company of the sponsor.
A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates.
Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed 25% of the net assets of the scheme

117. 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.

118. New Provisions on Investment Policy
Minimum Number of Investors per scheme
Purpose of MF is sharing the risks with a large number of investors.
SEBI requires each scheme to have a minimum number of investors.
So now each scheme and individual plan under the scheme should have a minimum number of 20 investors AND no single investor should account for more than 25% of the corpus of such scheme.
OES are allowed three months or upto end of the succeeding calendar quarter from the close of IPO to ensure compliance with this requirement

119. Fund of Funds Scheme A FoF invests in the schemes of other MF.
A normal MF scheme cannot invest in any FoF scheme.
A FoF scheme cannot invest in another FoF scheme.
A FoF is not allowed to invest its assets other than in schemes of MF, except to the extent of its liquidity requirements.

120. Important points
The current market price of a 9% coupon bond, when other bonds of similar maturites pay 11% will be --- Below Par.
Yield and price move in opposite direction

121. Measuring And Evaluating Mutual Fund Performance
Chapter 9
Measuring And Evaluating Mutual Fund Performance

122. Earnings can be either dividend or capital gains.
Rate of Return = Income Earned *100/ Amount invested.
Simple total return (STR) method includes the dividends paid to the investor
STR = {NAV(end) – NAV ( begin)}+ Dividend paid * NAV at beginning
Rule of 72 is a thumb rule used in finding doubling period. If Rate = 12%, then money will double in 72/12 = 6 years.
While comparing funds performance with peer group funds, size and composition of the portfolios should be comparable.

123. Performance Measurement
Change in NAV= ( NAV at end – NAV at beg.)*100
NAV at the beginning
Total Return = ( Change in NAV+ Dividend) * NAV at beg.
Return on investment or Total Return with dividend reinvested at NAV.
Portfolio Turnover Rate – It is lesser of assets purchased or sold divided by the fund’s net assets.
A 100% turnover implies that the manager replaced his entire portfolio during the period in question
200% means portfolio changed in 6 months
A liquid fund has the highest portfolio turnover.

124. Numerical
An open ended fund was purchased when its NAV was Rs. 22. One year later, its NAV was Rs. 24. The annualised percent NAV change is ______
Answer
% change in NAV = ( ) *100 = 9.09% 22

125. Purchase price Rs. 22 per Unit
NAV at year end Rs. 23 per Unit
Interim Div. Rs. 3
Ex.-Div. NAV Rs. 21
Total Return=?
Assume investment of Rs
Step 1: Initial Units alloted =10000/22=454.55
Step 2:Total Div.=454.55*3=
Step 3: Additional Units= /21=64.94
Step 4:Total Units= =519.49
Step 5:Withdral Amt. =519.49*23=
Gain = =
Gain of on the investment of Rs
So that on the investment of Rs. 100 gain is 19.47
Ans:19.47%

126. Benchmarking
Benchmarking should be selected by reference to – The asset class it invests in and the fund’s stated investment objective.
3 kinds of benchmarks are used – Relative to market as a whole, relative to other mutual funds, and relative to other comparable financial products.
For debt funds, the benchmark should have the same portfolio composition and the same maturity profile
Main benchmark for debt funds is I-sec
Tracking Error – Applicable for Index Fund

127. Criteria for peer group comparisons
The investment objective and risk profiles of the two funds should be the same.( Debt with debt and equity with equity)
Portfolio composition of two funds is similar. ( Gilt cannot be compared with riskier corporate debt)
Fund size should be comparable.( same size)
Expense Ratios is also important factor
Funds should be compared over the same periods only

128. Helping Investors with financial planning
Chapter 10
Helping Investors with financial planning

129. Definition and objective
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 life’s 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 individual’s financial goals.

130. Steps to Financial Planning
Establish and define client-Planner Relationship
Gather client data, Define client Goal
Analyze and evaluate clients financial Status
Develop and present financial planning recommendations
Implement the financial planning recommendation
Monitor the financial planning recommendations

131. Important responsibilities of investors in the financial planning exercise?
Should set measurable financial goals.
Should understand the impact of financial decisions on their cash flows and their income.
Should be willing to revise and re-balance their portfolios with changing market conditions, performance and their changing needs.
Investors benefit immensely by starting early and being systematic and disciplined in their approach.

132. 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 client’s 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.

133. Important points on Financial Planning
The basis of genuine investment advice should be financial planning to suit the investor’s 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.
Financial planning is not merely tax planning.

134. Wealth cycle for investors
Stage
Financial needs
Investment preferences
Accumulation stage
Investing for long term identifed
Growth options and long term
financial goals
products.High risk appetite
Transition Stage
Near term needs for funds as
Liquid and medium term investments.
pre-specified needs draw closer
Lower risk appetite
Reaping Stage
Higher liquidity requirements
Preference for income and debt products
Inter Generational
Long term investment of inheritance
Low liquidity needs.
transfer
Ability to take risk and invest for the long term
Sudden wealth surge
Medium to long term
Wealth preservation.
Preference for low risk products

135. Recommending Financial Planning Strategies to Investors
Chapter 11
Recommending Financial Planning Strategies to Investors

136. Harness the Power of Compounding – 1% interest per month is better than 12% yearly retrun.
Buy and hold is most common strategy BUT most common mistake. Ideally it should be, track your investments, discard the non performers and keep the good performers.
Have realistic expectations
Rupee cost averageing
Value Averaging.
Jacob’s Rebalancing Strategy

137. Rupee Cost Averaging

138. What are the financial planning strategies that can be recommended to investors?
Rupee cost averaging.
A fixed amount is invested at regular intervals
More units are bought when prices are low and fewer units are bought when prices are high. Over a period of time, the average purchase price of investor is lower than average NAV.
Its disadvantage : Does not indicate when to sell or switch.
Value averaging.
A fixed amount is targetted as the desired value of the portfolio at regular intervals
If markets have moved up, the units are sold to restore target value and vice versa.
It is superior than RCA as it enables the investor to book profits and rebalance the portfolio.

139. Selecting the right Investment Products for Investors
Chapter 12
Selecting the right Investment Products for Investors

140. Comparison by Nature of Investment

141. The Investor Perspective Funds vs. Other Products

142. Real Estate ( High investment required)
Bank Deposits ( Preferred due to the perception of bank deposits being safe and free of default.
PPF
RBI Relief Bonds
Indra Vikas Patra
MF – Best Option

143. Helping Investors understand Risks in Fund Investing
Chapter 13
Helping Investors understand Risks in Fund Investing

144. Evaluating the Risks of a Mutual Fund
What is Risk ?
Risk means the possibility of financial loss.
“Risk” is thus equated with Volatility of Earnings
Equity Price Risk
Company Specific
Sector Specific
Market Level

145. Evaluating the Risks of a Mutual Fund
Market Cycles
Risk Measures
Standard Deviation – SD measures the fluctuations of a fund`s returns around a mean level.
Beta Coefficient – Beta relates a fund`s return with a market index and measures the sensitivity of the fund`s returns to change in market index. A beta of 1 means the fund moves with market. A beta of less than one means the fund will less volatile than the market.

146. Evaluating the Risks of a Mutual Fund
ExMarks or a number known as “R-Squared”
How much of a fund`s fluctuations is attributable to movements in the overall market from 0 to 100 percent.
An index fund will have ExMarks of nearly 100%. Non Diversified funds will have lower ExMarks.
Standard Deviation is the best measure of risk.
Risk Adjusted Performance
Sharpe & Treynor Ratios

147. Evaluating the Risks of a Mutual Fund
Alpha
Risk adjusted performance calculation is called Alpha.
Alpha of a fund compares the fund`s actual results with what would have been expected given the fund`s beta and the market index performance.

148. Recommending Model Portfolios and selecting the right Fund
Chapter 14
Recommending Model Portfolios and selecting the right Fund

149. Asset Allocation
Allocation of money between equity, debt and money market instruments.
Depends upon situations, financial goals and risk appetite.
Fixed AA and Flexible Asset Allocation.
Fixed Asset Allocation is preferable because of periodical review and more disciplined.

150. 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

151. 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.

152. 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.

153. 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

154. 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%

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

156. Business Ethics in Mutual Fund
Chapter 15
Business Ethics in Mutual Fund

157. Business Ethics
Business Ethics means rules of acceptable and good conduct.
Business must be conducted in a disciplined, organized and fair manner.
Ethical practice means practice in the interest of unit holders of the scheme.
A consumer who feels cheated will never return to buy the product again.
BE ensures that the customer remains a long term buyer.

158. Business Ethics for Mutual Fund Business
MF is also a business where investors buy investment products
MF and sales persons are required to adopt ethical, fair and good business practices and apply them to all those involved in selling/ servicing activities.
A salesperson is expected to know the product thoroughly and describe it accurately.

159. Business Ethics for Mutual Fund Business
The conduct rules for distributors and employees are set by the Fund trustees and directors of AMCs.
AMFI has also set ethical standards and practices for the industry.
AMFI code includes specific rules of good conduct for the AMCs and its employees and the distributors.
SEBI also requires the development of ethical standards and practices by all fund houses.
As distributor, you should set your ethical standards higher than mimimum requirement of above agencies.

160. Objectives of Business Ethics
Simply being honest, open and transparent with your potential clients.
Rules are needed to ensure that you deal with the clients fairly and transparently.
To protect the clients from being cheated or exploited.
To ensure a level playing field among all categories of business participants.
To ensure fairness in dealing with investor.

161. Areas particularly monitored by SEBI
Fund structure and Governance
Exercise of Voting Rights by Funds
Fund Operations.

162. Regulatory Requirements regarding Principle of Independence
Separation of Functions – No one constituent is in control of the investors assets.( Trust, AMC, Custodian, Registrar)
Independence of Organisations – Trust independent of AMC,
Independence of Personnel - Trustees can not serve as Director of AMC they supervise or even any other AMC. Independent Trustees and BOD members also.

163. Examples of Unethical practices
Insider Trading
Preferential Treatment to Selected investors – Cut off time has been introduced now to prevent late trading abuses.
Personal trading by fund managers and employees
Front Running – Fund manager buying or selling securities ahead of doing the same transaction for the fund

164. Regulations on Personal Trading
AMC should file with trustees a qtrly statement of dealings in securities by the key personnel of the AMC.
The director of AMC has be file details of tranx.in MF, where they exceed the value of Rs.1 lakh.
In case of Trustees, they may report only those tranx. Which exceed the value of Rs.1 lakh
Trustees have to certify that the personnel of AMC don’t indulge in front running or self dealing.

165. Other Regulations
Mandatory for the AMC to appoint a compliance officer to monitor and ensure implementation of all laws / regulations.
All distributors and agents follow the code of conduct laid down in the 5th schedule of SEBI MF regulations
A more detailed code called AGNI has been put into place by AMFI

166. Thanks