Amfi Training New With Questions

A presentation by

Joint Venture with Standard Life Investments

Mutual Funds Conceptual Framework

What is a Mutual Fund ? A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective.

Operation flow chart INVESTORS

FUND MANAGER

RETURNS

SECURITIES

Characteristics of Mutual Funds  Investors own the mutual fund.  Professional managers (AMC) manage the fund for a small fee.  Fees charged is specified by SEBI and is expressed as a percentage of assets managed

 The funds are invested in a portfolio of marketable securities in accordance with the investment objective.  Value of the portfolio and investors’ holdings, alters with change in the market value of investments.

Mutual Funds: A Packaged Product Professional Management

Diversification

Convenience

Liquidity Tax Benefits

Diversification Portfolio of investments spreads out Risk  Attempts Minimises value erosion Potential losses are shared with other investors

Liquidity  Open-ended:  Assures liquidity  As liquid as the banks

 Close-ended:  Buying and selling can be done through the stock exchange  Periodic redemption Mutual Funds

by

Convenience Easy Way to Invest Reduces excessive paperwork Outsourcing of expertise

Affordability Provides an opportunity for a small investor Minimum investment is approx.  Rs.5000/Rs.500 and in multiples of Rs.1000/100 depending on the Scheme

Provision to apply using SIP

Wide Choice Offers a VARIETYOF SCHEMES  Meet the investment needs of all Investors

Disadvantages of a Mutual Fund  No control over costs for an investor  No tailor made portfolios for an investor  Issues relating to management of a portfolio of mutual funds Note: These are just disadvantages of the concept of mutual fund. SEBI has taken adequate measures to overcome few of them.

Classification of Mutual Funds  Open-ended funds  Closed-ended funds &  Load fund  No load fund &  Equity fund  Debt fund  Balanced fund  Fund of funds

Open-ended vs Closedended Funds OPEN-ENDED ● No fixed maturity ● Variable Corpus ● Not Listed ● Buy from and sell to the Fund ● Entry/Exit at NAV related prices

CLOSED-ENDED ● Fixed Maturity ● Fixed Corpus ● Generally Listed ● Buy and sell in the Stock Exchanges ● Entry/Exit at the market prices

Sub-classification of equity mutual funds Equity fund:  Pre-dominantly invest in equity markets  Diversified portfolio of equity shares  Select set based on some criterion  Diversified equity funds  ELSS as a special case  Primary market funds  Small stock funds  Index funds  Sector specific funds (sectoral funds)

Sub-classification of debt mutual funds  Pre-dominantly invest in the debt markets.  Diversified debt funds  Select set based on some criterion

   

Income funds or diversified debt funds Gilt funds Liquid or money-market funds Serial plans or fixed term plans

Balanced Funds  Investment in more than one asset class:  Debt and equity in predefined proportions  Pre-dominantly debt with some exposure to equity  Pre-dominantly equity with some exposure to debt

 Education plans and children’s plans

Fund of Funds  Investment of its corpus in other mutual fund schemes  Schemes of same mutual fund house  Schemes of other mutual fund house

 Is considered like a Debt scheme for tax purposes  The effective expenses become higher as the investors have to bear the expenses of the invested schemes as well

Investment Options  Investors can achieve income and growth objectives in al funds  Dividend pay-out option  Regular dvidend  Ad-hoc dividend  Growth option  Re-investment option

 Most funds provide multiple options and the facility to switch between options

Basics of Classification  Risk  Sectoral funds are most risky; money market funds are least risky

 Tenor  Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs

 Investment objective  Equity funds suit growth objectives; debt funds suit income objectives

The Risk Return Trade-off Hedge Funds Potential for return Debt Funds

Growth Funds Aggressive, Value, Growth

Balanced Funds

Ratio of Debt : Equity

Gilt Funds, Bond Funds, High Yield Funds

Liquid Funds

Risk

Sectoral Funds

History of Indian Mutual Funds  Phase I (1964-87)  Set up by RBI, de- linked later.  Act of parliament  First scheme US 64, still outside SEBI purview  Phase II (1987-93) entry of PSU Banks/ FIs  SBI in 87, LIC in 89, Indian Bank in 90  Phase III (1993-95) Entry of Private players  Phase IV (1993 onwards) SEBI regulation of Mutual Funds

Fund Structure and Constituents  In UK Two alternative structure  In USA Investment Companies structure  In India 3 tier structure Sponsor Trust/Trustee AMC

MUTUAL FUND - FRAMEWORK- India Sponsor

Asset Management Company

Trustee Company

Fiduciary responsibility to the

Investors

Fund Management Brokers Markets

Operations

Registrar Bank

Custody

Marketing Distribution

UTI : Differences  Formed as a trust under UTI Act 1963  Voluntary submission to SEBI regulation  No separate sponsor or AMC  Major Difference -Assured return Scheme -Different accounting norm -Ability to take and make loans

SPONSOR : Role  Promoter of the mutual fund  Creates a Trust under Indian Trusts Act, 1882  Appoints trustees  Creates AMC under Companies Act, 1956  Fulfils necessary formalities and applies to SEBI for registration of the Trust as a Mutual Fund

Who is eligible to be a Sponsor…?  Criteria  Financial services business  Sound track record Positive net worth in last five years 3 year profit making record in the last 5 years including the last year Atleast 40% contribution to AMC capital Sponsors’ net worth in the immediately preceding year is more than the capital contribution to the AMC

TRUSTEE Fiduciary responsibility to the Investors. Directors to be approved by SEBI. Execution of trust deed by sponsor in favour of trustee. Trust deed is stamped and registered with SEBI Legally responsible for administering the Trust and Compliance with Regulations. Norms for Trustees: Experience in Financial Services Minimum 4 members on the board and 2/3rd of the members not to be connected with the sponsor All major Decisions need trustee approval

ASSET MANAGEMENT COMPANY Required to be registered with SEBI Responsible for : Launching Schemes Managing Funds for Schemes Performing Accounting Functions All day to day affairs of the Mutual Fund Quarterly reporting to Trustees Income of an AMC /Asset Management Fee 1.25% of weekly average NAV of each Scheme up to Rs.100 cr of assets managed 1.00% greater than Rs.100 cr Minimum 4 directors with 1/2 independent At least Rs 10 cr of net worth to be maintained at all times AMC cannot act as trustee for other MF AMC of one MF cannot be trustee of another MF

TRANSFER AGENTS  Issue of Account Statements to Investors  Arranges payment to Investors when they redeem  Takes care of Non commercial transactions like change of address,loss of account statement etc.  should be registered with SEBI  Appointed by Board of AMC

CUSTODIAN  Safe keeping of the assets held by the Fund  Receives and Delivers Securities for payment  Follow up on Corporate benefits  Provide an independent means of control  Independent of Sponsors  Should be registered with SEBI  Appointed by the Board of Trustee

Other Constituents  Broker -Purchase and sale of securities -Not more than 5% through a related broker  Auditor -Separate auditor for AMC and mutual Fund

Legal & Regulatory Environment SEBI - Capital Markets Regulator RBI - Money Markets Regulator MOF - Policies CLB, DCA, ROC Stock Exchanges Office of the Public Trustee

SEBI  All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI  Responsible for protecting investors interest promote orderly growth of Mutual Fund Industry

and

 Formulates regulations,monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections

Reserve Bank of India & SE  RBI Dual supervision for bank sponsored AMCs Issue concerning ownership bank promoted AMC falls with RBI Regulates investments pertaining to Money Market Instruments

 Stock Exchange (SE) Close ended MF listed of SE. Needs to comply with listing guidelines.

Office of public Trustee  MF being public trustee - governed by Indian

Trust Act , 1882  Trustee Co or Board of Trustee accountable to office of Public Trustee  Public trustees reports to Charity Comm.

Trustee and AMC to comply with Cos Act 1956 R

e

g

i s t r a

D

e

p

a

C

o M

m i n

r s

r t m p

a

o

e

n

n

y

i s t r y

o

f

f

C

o

t

o

f

L

a

w

L

a

m

C

p o

m

B w

a

o &

p a

r J

Ministry of Finance  Supervises both SEBI and RBI  Ultimate policy making & supervising body  Appellate Authority for any disputes over SEBI guidelines

Self regulatory Organizations  Derive powers from regulator  Ability to make bye laws  Example : Stock Exchanges (NSE, BSE)  Industry Associations -Collective Industry opinion -Guidelines and recommendation -Example : Association of Mutual Funds in India

Mergers and Acquistions  Scheme takeover -One AMC buys schemes of another AMC -Organic growth in assets -No change in AMC stakes  AMC Merger -Two AMC’s merge -Similar to merger of companies -Sponsor stakes change

Mergers and Acquisitions  AMC take-over -Stake of one sponsor in an AMC bought out by another sponsor -Change in AMC and sponsor  Investor rights -No prior approval needed -Option to exit at NAV -Right to be informed

Fund Mergers & Take overs  Mergers of two AMC  Provisions of Cos Act  Approval of high court and SEBI  75% unit holders consent

 Scheme takeover (Apple and Birla)  Unit holders permission - 75%  SEBI’s permission

Fund Mergers & Take overs  AMC taken over by other sponsor (a. Zurich - 20th Century b. ITC Threedneedle - Zurich c. FT - Kothari - HFCL)  No high court approval  No unit holders consent , only info with rights to exit from scheme without any load  SEBI clearance is compulsory

Investing in Mutual Funds – Understanding the Process  Offer Document  Key Information Memorandum  Application and form of holding  Distribution channels  Investors rights  Taxation of Income and Capital gain  NAV and Load

In India a mutual fund is constituted as A) partnership firm B) trust c) company D) government corporation

Unit holder of a MF owns A) share in AMC B) proportionate ownership C) no ownership D) none

A close ended mutual fund has a fixed A) NAV B) fund size C) rate of return D) number of distributors

Index funds aim to : A) beat all market indices B) beat a specific market index C) track a specified index subject to a small tracking error D) invest in well researched stock to beat the popular indices

How is UTI different from other MFs ? A) Can borrow internally and abroad B) Can “hire, lease” C) Can underwrite D) All of the above

A sponsor of a mutual fund may be compared to – A) a director in a company B) a chief executive of a company C) a promoter of a company D) An equity shareholder in a company

Mutual funds in India can invest in A) transferable securities in the capital and money markets B) gold C) real-estate D) all of the above

The AMFI objectives does not include the following A) to improve standards of mutual fund industry B) to regulate the stock markets along with sebi in tandem C) to create awareness about mutual funds D) to emphasize on ethical and moral trade practices

The minimum number of trustees who need to be independent persons is A) one-third B) two-thirds C) three-fourths D) one-half

The Offer Document

What is an offer document ? Legal offer from AMC to investor Contains vital information about Fund and schemes SEBI approved format Key Information Memorandum (KIM) contains vital information pertaining to the Scheme and it is mandatory to attach KIM to the application forms  Investor has no recourse for not having read the OD/KIM    

Significance  Legal document that protects and governs the right of the investor to information  Is the primary vehicle for the investment decision  Is the operating document and fundamental attributes of schemes.

describes

the

 One of the most important sources of information for the prospective investor  Is a reference document for the investor to look for relevant information at any time

Period of Validity  Updated every 2 years for OEFs  Regular Addendum for modification  Updated for every major change -Change in the AMC or Sponsor of the mutual fund -Changes in the fundamental attributes of the schemes -Changes in the investment options to investor; inclusion or deletion of options

Fundamental Attributes  Scheme type  Investment objective  Investment pattern  Terms of the scheme with regard to liquidity  Fees and expenses  Valuation norms and accounting policies  Investment restrictions

Changes in Fundamental Attributes Approval from trustees Approval from SEBI Public announcement by AMC Investors to be informed and option given to exit at NAV without any exit load  New offer document    

Contents of Offer Document  Preliminary information  Summary information about the mutual fund, the scheme and terms of offer  Mandatory disclaimer clauses as required by SEBI  Glossary of terms in the offer document, which defines the terms used  Standard and scheme specific risk factors pertaining to the scheme being offered

Fund Specific Information  Constitution of fund, details of sponsor, trustees and AMC  Financial history of sponsor (s) for 3 years, in summary form  Director of boards of the trustees and the AMC  Details of key personnel of the AMC  Details of fund constituents

Details of the Scheme Being Offered  Dates of NFO  Details regarding sale and repurchase

 Minimum subscription and face value  Initial issue expenses  Current scheme and the past schemes

 Special facilities to investors  Eligibility for investing  Documentation required

 Procedure for applying, and subsequent operations relating to transfer, redemption, nomination, pledge and mode of holding of units

Who can invest ?  Resident Indian Individuals/HUF  Indian Companies/Partnership Firms  Trusts / charitable institutions / PFs  Banks/ FIs / NBFCs  Insurance Companies  NRIs/ FIIs  Partnership firms etc.

Investor’s rights  Proportionate ownership in scheme’s assets  Rights of information from Trustee  To received dividend warrants, inspect major docs (Trust deed, investment management agreement, R&T A Agreement, custodian services agreement)  with 75% voting rights and approval of SEBI can close the scheme, change the AMC.  Rights of info for fundamental change in the scheme features and also an opportunity to redeem units without any load.  Receive annual report and a/c statement

Investor’s rights & Obligations  Rights - Legal Limitations  Unit holder’s are not distinct from trust, they cannot sue trust.  Sponsor do not have any legal obligations (Limited to initial contribution)  No rights to prospective investors

 Obligations  Must read offer doc & AOD  Beware of risk factors  Must monitor investments regularly

Investor’s complaint redressal mechanism  Client Servicing  Compliance Officer  Investors cannot be protected by companies Act

Associate Transactions  Summary information on associate companies being used as constituents.  Summary information of associates investing in schemes of the mutual fund  Summary information on investment made by mutual fund schemes in associate company securities.

Verification and Due Diligence  SEBI : format and content  Trustee approval  Compliance office certifies that  Information contained therein is true and fair  Is in accordance with SEBI regulations  Constituents of the fund are all SEBI registered entities.

 The AMC is responsible for the contents and the accuracy of information

Distribution Channels Individual Agents Distribution Companies Banks and NBFCs Direct marketing channels

NAV - COMPUTATION NAV = Net assets of scheme / No of units Outstanding i.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities No. of units outstanding as at the NAV date Imp : Day of NAV Calculation is known as valuation day NAV is computed for each business day

HOW NAV IS COMPUTED Market value of Equities - Rs.100 crore - Asset Market value of Debentures - Rs.50 crore - Asset Dividends Accrued - Rs.1 crore -Income Interest Accrued - Rs.2 crore - Income Ongoing Fee payable - Rs.0.5 crore - Liability Amt.payable on shares purchased -Rs.4.5 crore - Liability No. of units held in the Fund : 10 crore units NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80

NAV - Other information Open end funds to declare NAV daily NAV to be published at least weekly Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP) NAV has to consider up to date transactions Non - recorded transactions not to affect NAV calculation by more than 2%

NAV  Nav is influenced by Purchase and sale of Investment Valuation of Investment Other assets and Liabilities Units sold or redeemed.

CHANGE IN NAV FORMULA :

For NAV change in absolute terms = (NAV at end of period - NAV at beginning of period) * 100 NAV at beginning of period

For NAV change in annualised terms = ( NAV change in % in absolute terms) * (365 / No. of days )

Loads  Entry Load or front ended load Paid at the time of purchase Sale Price = NAV * (1+ Sales Load, if any)

 Exit Load or back ended load Paid at the time of exit Redemption Price = NAV*(1- Exit Load)

 Contingent Deferred Sales Load (CDSL)  Deferred exit load depending on the period  Also known as deferred load

PRICING OF UNITS Sale price not greater than 107% of the NAV Re-purchase price to be not lower than 93% (95% for close-end funds) of the NAV Difference between the repurchase & sale price can not be more than 7% of the sale price

For example… If the NAV is Rs 10, Sale price cannot be higher than Rs 10.7 Repurchase price cannot be lower than Rs 9.3 However, the mutual fund cannot charge both these prices  If the sale price is Rs 10.7, the repurchase price cannot be lower than Rs 9.95 (10.7*0.93)  If the repurchase price is Rs 9.3, the sale price cannot be higher than Rs 10.00 (9.3/0.93)    

Sale Price Sale Price is the price at which units are sold to investors. Sale Price = NAV + Entry load Formula for computation of Sale Price = NAV*(1+Load) Assuming an entry load of 2% in the earlier NAV computation example Sale Price = 14.80*(1+ 0.02) = 15.10

Repurchase Price Repurchase Price is the price at which units are repurchased from investors. Sale Price = NAV – Exit load Formula for computation of Sale Price = NAV*(1-Load) Assuming an exit load of 2% in the earlier NAV computation example Sale Price = 14.80*(1- 0.02) = 14.50

Taxation  Mutual fund is exempt from paying taxes (section 10 (23D))  Income for investors -Dividend -Capital Gain  Present position -Dividend exempt from tax in the hands of Investor -Funds with >65% in Indian equity pay no DDT -Other funds pay DDT (14.025% for individual and HUF and 22.44% for others including companies)

Taxation  Securities Transaction Tax(STT) of 0.25% sale on Equity Mutual Fund Scheme  As per Section 80C of the Finance Act Investor can claim a rebate for maximum of Rs 1 lakh in ELSS.  Mutual Funds units are not included under wealth tax

Treatment of Capital Gains  Long Term : > 12 months  Short Term : =< 12 months  Funds with > 65% in Indian Equity - Short term gain taxed at 10% -Long Term gains taxed at Nil  Other Funds -Short term gains taxed at marginal rate of tax -Long Term gains * 20% + surcharge after indexation *10% + surcharge without indexation

Indexation  Investor buys on March 31, 1999 and sells on April 1, 2000. What is the indexation adjustment factor?  1998-99 – 351  1999-00 – 386  2000-01 – 406

 Investor buys on April 1, 1998 and sells on March 31, 2001. What is the indexation adjustment factor?

Capital markets and Mutual Funds  Equity    

Market and products Asset classes Investment styles Value indicators

 Debt    

Debt markets Terminology Yield and duration Investment styles

 Investment restrictions

Equity investment  Options  Ordinary shares  Pref. shares  Equity warrants  Convertible Debentures

Investment Strategies     

Growth and value Active and passive Large and small cap Cyclical stock Stock selection  P/E ratio  Dividend yield  Undervalued companies

 Fundamental analysis  Technical analysis  Quantitative analysis

Debt Markets  Tenor  Short and long  Put and call options

 Interest payment  Fixed and floating  Periodic vs discounted

 Credit quality  Gilt, guaranteed and others

 Traded and non-traded

Debt instruments  Commercial Deposits  Corporate Debentures  Zero coupon bond  Floating rate bonds

Debt instruments  Commercial papers (CPs)  Govt Securities  T - bills (7- 364 days)  Banks/ FIs/ PSU Bonds

Risk in a Debt Fund  Interest Rate Risk  Credit Risk (Asset quality)  Reinvestment Risk  Call Risk  Liquidity  Inflation

Price and Yield    

Increase in yield reduces value of existing bonds. Decrease in yield increases value of existing bonds. Price and yield are inversely related. The relationship between yield and tenor can be plotted as the yield curve.

Terms used in MFs  Yield Curve  Graph which shows yields of various maturities using a bench mark  usually upward - some time inverted

 Yield to Maturity (YTM)  Annual rate of return expected of a bond over its maturity with the assumption that all coupon payment will be recd on time and reinvested at the same rate and principal recd on maturity.

Current Yield and YTM  Coupon as a percentage of current market price.  If we bought a 8 % bond at Rs 110, the current yield is : = (8/110)*100 = 7.27%

Interest Rate Sensitivity  Measured by a number called duration.  If duration is 3 years, and interest changes by 1%, price of the bond will change in the opposite direction, by 3%

Example  Duration of a bond is 4 years. Yield spread increases by 1.5% What is the change in price = 1.5*4 = - 6%

Credit Risk  Probability of default by the borrower  Change in credit rating:  Downgrade increases the yield and decreases the price  Upgrade decreases the yield and increases the price

Portfolio Management Styles  Equity  Passive - Index  Active - (a) Growth (b) Value

 Debt  Buy and hold - Passive  Duration management - Active  Credit Selection - in anticipation of changes in credit ratings  Prepayment predictions

Investment Restrictions as a % of Net assets - AMC  Max. Investment under all schemes of the AMC in paid up capital carrying voting rights in single Co. - 10 %  Max. Inter scheme investments of the same AMC - 5 % (no AMC fee payable)  Inter scheme transfers at CMP and within the objectives of scheme  Max. Investment in listed shares of Group Co’s - 25 % for each scheme.  No investments allowed in unlisted/private placement of group/associate cos.  Can borrow only to meet liquidity requirements. Max for 6 months & not more than 20% of NAV of scheme.

Investment Restrictions as a % of Net Assets -Debt  Max. Investment in Rated paper in single Co - 15% (can be increased to 20% with approval by Board of AMC/Trustee)  Max.Investment in Unrated/ Rated but below investment grade in single issuer- 10% of NAV  Max. Investment in Unrated/Rated but below investment grade in all cos - 25% (subject to approval of Board of AMC /Trustee).  Restrictions not applicable to Govt. Securities/Money Market  Can only invest in marketable securities - no loans

Investment Restrictions as a % of Net Assets -Equity  Max. Investment in Equity/Equity related instruments of single Co. - 10%  No restrictions in case of Index Fund  Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open ended funds  Buy & Sell securities on Delivery position , No short selling/ carry forward allowed.  Security should be transferred to schemes immediately. Cannot remain in general a/c

Investment Restrictions  Not more than 10% of its NAV in a single company -Exceptions : Index Funds and Sectoral Funds  Rated investment grade issues of a single issuer cannot exceed 15% of the net assets - Can be extended to 20% with the approval of the trustees.  Investment in unrated securities of one company cannot exceed 10% of the net assets of a scheme and not more than 25% of net assets of a scheme can be in such securities

Investment Restrictions  Investment in unlisted shares cannot exceed -5% of the net assets for an open ended scheme -10% of the net assets for a close ended scheme  Mutual funds can invest in ADRs/GDRs -up to a maximum limit of 10% of AUM(as on 31st Jan) or $50 million which ever is lower -The limit for the mutual fund industry as a whole is $2 Billion  Mutual funds can also invest in a limited manner in treasury bonds and AAA rated rated corporate debt issued outside India

The following do not form a part of the investment procedure described in an offer document

A) various plans under the scheme (e.G.Dividend reinvestment plan) B) minimum initial (and subsequent) investment C) details of who can invest D) details of other competing mutual funds

Which of the following information would not be available in mutual fund offer document A) details of the sponsor and the amc

B) description of the scheme and the investment objective C) historical statistics D) statistics of funds of other amc’s in the same class of funds

An offer document needs to be published A) at the time of launching the scheme B) whenever there is any material change C) offer document once published cannot be printed subsequently D) none of the above

The following are not required to be disclosed in the abridged offer document

A) initial issue expenses B) annual recurring expenses C) transaction expenses D) none of the above

MUTUAL FUND ACCOUNTING & VALUATION

FEES & EXPENSES

Transaction Cost

Annual Recurring Expenses

Entry / Exit load

AMC Fee

Custodian Fee CDSC for no-load schemes

Registry Exp. Trustee Fee Audit Fee Mktg. & Selling Exp. Brokerage Exp. Others

Initial Issue Expenses

Fees & Expenses  Initial Issue expenses only for closed ended equity fund For launching of the scheme Can charge up to 6%

 Recurring Expenses Mkt & selling exp including brokerage Transaction cost R&T cost Custodian Fees Audit fees etc Investor Communication’s cost

Fees & Expenses  Amc can charge Investment management fee to the fund on weekly avg. net assets.  The limits are: (Subject to overall limit of 2.25% for debt schemes & 2.5% for equity schemes)  1.25% for up to Rs.100 cr of weekly avg net assets  1% in excess of Rs.100 cr.  No Load schemes can charge an additional fee of 1%

Limits on Fees & Expenses  Total Expenses that can be charged to the Fund ( excluding entry and exit loads): Equity Debt  On  On  On  On

the the the the

first Rs.100 cr next Rs.300 cr next Rs.300 cr balance assets

2.50%2.25% 2.25% 2.00% 2.00 % 1.75% 1.75% 1.50%

Based on average weekly net assets

Fees and Expenses contd.. Initial issue expenses Charge to the scheme capped at 6% of the initial resources raised under that scheme Entry/Exit Loads - Transaction costs Sale price not greater than 107% / Re-purchase price not lower than 93% (95% for close-ended schemes) of the NAV Contingent Deferred Sales Charge ( For No-Load Schemes) Ceiling For redemption within 1year 4% For redemption within 2years 3% For redemption within 3years 2% For redemption within 4years 1%

Expenses that cannot be charged  Penalties and fines for infraction of laws.  Interest on delayed payments to unit holders  Legal marketing and publication expenses not attributable to any scheme  Expenses on investment and general management  Expenses on general administration corporate advertising and infrastructure costs  Expenses on fixed assets and software development expenses.  Such other costs as may be prohibited by SEBI.

AMORTISATION Initial Expenses amortisation for load schemes For close -ended schemes - annually over a period not greater than 5 years For open- ended schemes amortisation is not allowed Un-amortised portion to be added to other assets for computation of NAV Amortisation not part of normal recurring expenses

Accounting Policies Investments to be marked to market on market prices. Unrealised appreciation cannot be distributed. Purchase & sale of investments to be recognised on the trade date and not on settlement date. Investments to be taken as NPA if it gives no return through interest for more than 6 months  Dividend / Bonus/ rights to be recognised on exdividend / ex-bonus dates and not on declared dates. Income receivable on Invest NOT accrued for more than 3 months , should be provided for. For determining gain/ loss on investments - avg cost is to be taken

Disclosures and Reporting Audit by independent auditor Audited Annual report every year Un-audited accounts to be published within 1 month after March 31 & September 30 Within 6 months of closure, publish abridged summary of report scheme-wise in newspapers Summary to be forwarded to SEBI & unit holders Full portfolio disclosure to be made within a month from the half-year ended March 31 & September 30

Disclosure and Reporting  Reporting to SEBI  Annual audited accounts  Six monthly unaudited a/cs  Half yearly statement of movements in net assets of each scheme  Qtr portfolio statement  Monthly amount mobilized

 Communication to investor  Qtr portfolio  Annual report

Non Performing Asset  An asset is classified as an NPA, if the interest and/or principal amount remain outstanding for one quarter from the due date.  After classification as NPA:   

Accrual should be stopped. Income accrued till date needs to be accounted for Principal due needs to be accounted for either in a graded manner after 3 months of classification or as a write off in totality in 15 months after classification.

Valuation  Marking

to Market  Equity Valuation Norms - Listed, Unlisted, NPA, Un-traded  Debt valuation norms - Listed, Unlisted, Illiquid  Money Market Instruments - valuation norms  Effect of Buybacks, Mergers  Valuation Models - CRISIL

Valuation  TRADED

SECURITIES

Last quoted closing price on the SE where principally traded If Not traded on any SE on a particular day, then earliest previous day price is taken (not more than 30 days) Valuation = MP * current holding

NON - TRADED SECURITIES Stocks which are not traded for more than 30 days on any SE are valued on good faith basis by AMC within following parameters Debt - YTM basis Equity Capitalisation of earning or NAV or combination of both

Evaluating Fund Performance Should be judged in light of

:

Investment Objectives Current Market Conditions Alternative investment returns

Performance Evaluation Different valuation methods Change in Nav Total Return Total Return with dividend reinvested at NAV  CAGR

Performance Evaluation Change in Nav - The most common Nav on day 1 = Rs.10 Nav on day x = Rs.12 % Change in nav = dayx-day1/day1 * 100 = 2/10 *100 = 20 % Limitations: Does not account for dividend Suitable only for growth plans

Annualizing Rate of Return  NAV on Day 1: Rs 10  Nav after 6 months : Rs 12 Percentage change in NAV : (12-10)/10 * 100 = 20% To annualize : 20 *12/6 = 40%

Performance Evaluation Total Return Nav on day 1 = Rs.20 Nav on day x = Rs.22 Dividend = Rs.4 per unit Total Return = (( Distribution + Change in nav)/day1 nav)* 100 = ((4+(22-20)/20)*100 = 30% Limitation: does not account for reinvestment

Performance Evaluation Return on Investments - most suitable Nav on day 1 = Rs.20 Dividend = Rs.4 per unit Nav at Rs. 21 Div reinvested = Rs (4 /21) = 0.19 units allotted Total units = 1.19 (original +new allotted) NAV at year end = Rs.22 Total Return = (Nav on year end*total units )-day1 nav)/ day 1 NAV* 100 = ((22*1.19)- 20))/20*100

= 30.9%

Compounded Annualized Growth Rate  CAGR is defined as the rate at which an investment has grown on an annual compounding basis

Formula : A = P (1+r) ^n Where A is the total amount at the end of the investment period, P is the principal amount invested, r is the rate of return and n is the time period of the investment.

Performance Evaluation Other Parameters Expense ratios - indicates fund efficiency and cost effectiveness Portfolio Turnover ratio - measures amount of buying and selling done by the fund Transaction cost Fund size Cash holdings

How MF Scheme Returns are Calculated  Growth option : Returns calculated using CAGR on NAV’s  Dividend option : Returns calculated using CAGR on ex-dividend NAV’s, assuming dividends re-invested.  Less than 1 year, returns are calculated using Change in NAV method.

Risk Parameters  Standard Deviation is used to measure total risk.  Beta co-efficient is used to measure market risk.

Benchmarks  As per SEBI guidelines,  benchmark should reflect asset allocation  Funds with 65% and more in Equity to use a broad based index (Sensex, S&P CNX 500)  Bond fund with more than 65% in bonds to use a bond market index  Balanced funds to use a tailor-made index (Crisil Balanced Fund index)  Liquid funds to use money market instruments.

The expenses charged to a fund are calculated on A) average weekly net assets B) average monthly net assets C) average quarterly net assets D) year end net assets

The rate of wealth tax on mutual fund units is a) b) c) d)

10% 20% 30% MF units are exempt from wealth tax

An open-end fund with 10,000 units outstanding had the following items on its balance sheet: Investments at market value – Rs 100,000 Other assets – Rs 20,000 Current liabilities – Rs 25,000 Calculate the funds NAV per unit

a) Rs. 9.5 b) Rs. 12 c) Rs 10 d) Rs 14.5

If a fund has Rs.110 Crores Corpus and 11 crores Units its NAV is a) Rs.11 b) Rs. 9 c) Rs. 10 d) Rs. 10.75

A fund charges 1 % exit load. An investor holds 1000 units. The investor wants to redeem today and the NAV is Rs.20. What amount will he/she get ? a)

20,000

b)

20,200

c)

18,000

d)

19,800

A closed-end equity fund has average weekly net assets of Rs 200 crores. As per SEBI Regulations, the AMC can charge the fund with investment advisory fees upto: a)

Rs. 2.25 crores

b) Rs 2 crores c)

Rs 2.5 crores

d) Rs 3 crores

An equity fund has Rs 1000 crores average weekly net assets under management, the maximum expenses it can charge to the fund is: a) Rs. 25 crores b) Rs. 20.50 crores c) Rs. 22.5 crores d) Rs. 60 crores

Financial Management

Financial Planning  Financial Goals identifying various needs for money

 Converting needs into specifics amount of money time frame for requirement of money

 Planning saving & investment to achieve these goals

Professional Financial Planners  Understands investment universe  Understands risk and return profile of various investment alternatives  Assist clients in choosing the right investment mix keeping in mind client’s  -- saving ability  -- risk appetite  -- cash flow requirements  -- tax status

Why become a Financial Planner?  Ability to recommend financial products based on suitability of investor rather than product features  Ability to build mutually beneficial long term relationship with investors  Ability to profit from their expertise and value addition to investors  Ability to act as financial intermediaries relied upon by investors and issuers

Attributes of Financial Planners  Understanding of the investment universe  -- risk & return profile of investment alternatives  -- past performance  -- behaviour of asset classes  Expertise in tax planning & estate planning  Ability to correlate investors life cycle with matching financial products  Highly organised in their professional lives  Excellent communication and interpersonal skills

Steps involved in Financial Planning  Establish & define relationship with client  Define Clients Financial Goals Specific Goals and their timings   Appreciate clients ability to save and cash flow requirements  Appreciate clients disposition to risk  Appreciate tax liability and focus on post-tax returns to client  Recommend appropriate asset allocation  Execute the Plan  Review Periodically

Financial Planning. . . . . Elaborated

 Create asset allocation plan  - tailor make portfolio suiting client needs  Enable actual performance  - role of an intermediary  Review and Rebalance continually  - periodic review of performance  - take corrective action, if required

Client Responsibilities  Set measurable goals  Appreciate effect of financial decisions on cash flows  Be open to review and re-balance portfolio on an ongoing basis  Start early  Be systematic, consistent and disciplined

Investors Needs Protection Need To protect living standards, current and survival requirements - Regular Income - Retirement Income - Insurance Cover growth

Investment Need Financial needs served through investments and savings - Children education - Housing - Children professional

What is Financial Planning?  Identifying the varying needs for money.  Planning ones saving and investment in a manner the enables one to achieve the pre-specified goal.  Both of the above.  None of the above.

Who is a professional financial planner?  Understands the universe of investment options.  Well informed on the risk and return attributes of investment options.  Advises investors in financial planning and enables them to choose the right option suiting their risk profile.  All of the above

What are the attributes of a good financial planner?  Sound understanding of the universe of investment products, their risk and return attributes, past performance, and the behaviour of portfolios of asset classes.  Good grounding in tax planning and estate planning.  Ability to convert life-cycles of investors into needs and preferences for financial products.  All of the above.

How can mutual funds help in financial planning?  Offers a range of products which can be combined to create tailor-made solutions for the needs of investors.  It focuses on asset allocation, rather than the individual securities.  The fund portfolios are driven by pre-stated investment objectives.  All of the above.

The basis of genuine investment advice should be a)

The current market situation

b)

The agent commissions paid by different funds

c)

Financial planning to suit the investor's situation

d)

Planning to complete the agent's annual targets

Asset Allocation and Model Portfolio

Recommended Model Portfolios . .  Accumulation Stage: - Investible surplus available - Financial goals are not near term • Diversified Equity • Income & Gilt • Liquid Funds & Bank Deposits

65 – 80% 15 – 30% 5%

Recommended Model Portfolios . .  Transition Stage: - Closer to Financial Goals - Transition from ‘Growth to Income’ - Near Retirement , Children Education or Marriage - Increase Asset Allocation to Income Component

Recommended Model Portfolios . .  Distribution Or Reaping Stage: - Require Income as Dependence on Investment - Income ‘Grows for Regular Expenses’ - Investors Start Liquidating Portfolio For Current Requirements • Diversified Equity & Balanced Funds 15 – 30% 65 – 80% • Income Funds 5% • Cash Funds

Recommended Model Portfolios . .  Inter-generational Or Transfer Stage: - Focus on Serving Needs of Heirs - Growth and Income Funds in balance - Higher percentage in Growth Funds if heirs are ‘Young’ - Income Funds suitable if heirs are ‘Trusts and Charities’

Recommended Model Portfolios . .  Affluent Investors: - HIGHER RISK APPETITE: • Sectorial and Growth Funds • Diversified Equity or Balanced Funds

70 – 80% Balance

- LOWER RISK APPETITE: • Income , Gilt and Liquid Funds • Diversified Equity or Balanced Funds

70 – 80% Balance

Asset Allocation  Process of deciding portfolio composition  Allocate funds across equity, debt and other asset classes based on risk-return profile

Asset Allocation Strategies  Basic Managed Portfolio  - Diversified equity value funds  - Govt. securities fund  - High grade corporate bond fund

50% 25% 25%

 Basic Indexed Portfolio  - Stock market index fund  - Bond market index fund

50% 50%

Asset Allocation Strategies  Simple Managed Portfolio  - Balanced Fund  - Medium term bond fund  Complex Managed Portfolio  - Diversified equity fund  - Aggregate growth fund  - Specialty Funds  - Long term bond funds  - Short term bond funds  Readymade Portfolio  - Single Index  - Equity  - Debt

85% 15% 20% 20% 10% 30% 20%

60% 40%

Bogle’s Strategic Allocation  Combines investors age, risk profile and 

preference in asset allocation

 Older investors in distribution phase 

- 50% Equity, 50% Debt

 Younger investors in distribution phase 

- 60% Equity, 40% Debt

 Older investors in accumulation phase 

- 70% Equity, 30% Debt

 Younger investors in accumulation phase 

- 80% Equity, 20% Debt

Fixed Asset Allocation Strategy  Maintain fixed ratio between chosen asset classes  Disciplined approach that ensures profit booking and purchases at lower prices  Example  - 50% Equity and 50% Debt  - Equity markets rise ensuring profit booking  - 50:50 Ratio maintained

Flexible Asset Allocation Strategy  No portfolio re-balancing  Ensures riding bull wave if markets are rallying  Ratio changes as per market changes

Model Portfolio  Set long term goals keeping risk-return profile and time horizon in mind  Asset allocation exercise based on growth, income and liquidity criteria  Sector Distribution exercise  - Allocation of funds across various Mutual Fund products  Fund manager selection  - Which scheme? Which Fund house?

Recommended Model Portfolios . .  Young unmarried professional  - Aggregate Equity funds  - High yield bond, growth & income funds  - Conservative money market funds

50% 25% 25%

 Young Couple: Double income, 2 Children  - Money Market Funds  - Aggressive Equity Funds  - High Yield Bond & Long Term Growth Funds  - Municipal bond funds

10% 30% 25% 35%

Recommended Model Portfolios . .

 Older couple single income  - Short term municipal funds  - Long term municipal funds  - Moderately aggressive funds  - Emerging growth equity

30% 35% 25% 10%

 Recently retired couple  - Conservative equity funds  - Moderately aggressive equity funds  - Money market funds

35% 25% 40%

Other Useful Strategies  Rupee Cost Averaging  Invest regularly a pre-determined amount  Thus, purchase of more units at lower market levels and less units at higher levels.  Thereby, reducing the average cost of purchase.

 Value Averaging  Invest regularly to achieve a pre-determined value

The basis of genuine investment advice should be a)

The current market situation

b)

The agent commissions paid by different funds

c)

Financial planning to suit the investor's situation

d)

Planning to complete the agent's annual targets

A 55 year old retired person with 25% equity and moderate risk appetite should be advised to invest in: a) Balance fund b) Value fund c) Diversified equity fund d) Growth fund

A 55 year old retiree is in stage a) Accumulation stage b) Growth stage c) Distribution stage d) Income stage

The transition phase of an investors wealth cycle is when a)

The financial goals have been already met

b)

The investor has retired

c)

Financial goals are approaching

d)

Investor suddenly gets a windfall

An investor approaches you to build his portfolio.How will you build it? a) Selection of sector, selection of fund managers and schemes, classification of assets" b) " Classification of assets, Selection of sector, selection of fund managers and schemes" c) " Selection of fund managers and schemes, Selection of sector, Classification of assets" d) " Selection of sector, classification of assets, selection of fund managers and schemes"

According to Bogle, the strategic allocation for older investors in accumulation phase should ideally be a) 50/50 b) 60/40 c) 70/30 d) 80/20

Fund Selection

Equity Fund Selection . . . . . .  Form categories based on risk-return profile  - Diversified , Index , Sectorial & Specialised  Form categories based on fund manager’s style  - Value and Growth   Evaluate Performance  - Peer Group and Benchmark comparison

Equity Fund Selection . . . . . . . .

 Consider Structural Characteristics  - Size of the Fund  - Fund History  - Portfolio Manager Experience  - Cost of Investing: Expense Ratio  Consider Portfolio Characteristics  - Percentage Cash  - Portfolio Concentration  - Market Capitalisation of Fund  - Portfolio Turnover: Churn  - Portfolio Risk Characteristics • R-squared • Beta • Dividend Yield

High R Squared low beta and high dividend yield is preferred

Bond Fund Selection . . . . . .  Fund Age and Size  Relative yield: YTM  Expense Ratio  Portfolio Quality  Credit Rating of portfolio holdings

 Average maturity  Duration

Money Market Fund Selection  Expense Ratio  Credit Quality  Yield  Principal is safe due to lower duration  Income can be volatile

Strategy To Smart Investing  Identify Objective  Start early  Focus long-term and stay invested

 Beware of the effects of inflation & taxes

Need Based Investment Strategy Age Group (Years) 25- 40

Growth (Equity) 75%

Income (Bonds) 15%

Liquidity (Banks) 10%

41- 50

50%

35%

15%

51- 60

35%

45%

20%

Above 60

25%

50%

25%

Remember : 1.

Investment Decision Are Long Term Decision

2.

1% Superior Return Can Make 20% Difference in 25 Years.

3.

Understand the Virtues of Rupee Cost Averaging

4.

Discipline Is More Important Than Intelligence.

5.

Avoid Wastage, Look at Returns Net of Taxes

Business Ethics  Business Ethics are rules of acceptable and good conduct in business.  All persons involved with business should follow ethical codes of conduct.  Business ethics are made by managers or operators of business.  Business ethics are hard to enforce, hence ideally should be self-imposed.

Objectives of Business Ethics  Honest and transparent dealings with customers.  Protect clients from being cheated and exploited.  To ensure level playing field among all participants.  To ensure healthy competition for the benefit of all customers.

Business Ethics for MF  Fund Structure  Separation of functions  Independence of organization Independence of personnel Fund Governance Exercise of voting rights by funds Fund operations

Ethics Related Regulations  Guidelines for good conduct of trustee and AMC. Regulations of personal trading  Regulations of insider trading  Regulations of fund advertisement  Compliance officer  Code of conduct for distributors

Factors to be considered while investing in an equity fund are a) Past Returns b) Portfolio Managers experience c) Cost of investing d) All of the above

Arrange the fund types starting from lowest risk to highest risk 1) 2) 3) 4)

Sector funds Balanced fund Diversified equity fund Money Market fund

a – 4, 2, 3, 1 c - 3, 2, 1, 4

b – 4, 3, 2, 1 d – 3, 4, 2, 1

What is the risk measure of a debt fund ? A) Duration = Weighted average maturity of debt instruments B) Duration= Longer and shorter maturity / 2 C) Duration= Weighted average of credit rating D) Duration = Weighted average beta of the debt funds

A longer maturity has the following impact on its price risk in case of interest rate fluctuation a) Risk increases with longer maturity b) Risk decreases with longer maturity c) Price risk depends solely on credit rating of the issuer d) None of the above

The most significant risk in a welldiversified debt scheme is a) Re-investment risk b) Credit risk c) Interest rate risk d) Liquidity risk

It may not be possible to reinvest interest received at the same rate as principal. This is known as a)

Reinvestment risk

b)

Inflation risk

c)

Interest-rate risk

d)

Call risk

As compared to a fund with fluctuating total returns, a fund with stable positive earnings a)

Gives higher returns

b)

Is less risky

c)

Gives lower returns

d)

Is more risky

Which of these credit ratings signifies "Highest Safety"? a) A b) AA+ c) AAA d) AA

Which of the following are not Speciality Funds? a) Sectoral Funds b) Corporate Bond Fund c) Gilt Fund d) Income Fund

All the Best !!!!!! Thank You