AMFI Mutual Fund (Advisor) Module Revision Kit 2008

AMFI Mutual Fund
(Advisor) Module
Revision Kit
2008
This AMFI Revision Kit has been prepared by ICICI Prudential AMC Ltd. in association with
Pivot Training Pvt. Ltd. No part of this document may be reproduced for any purpose, without
the written consent of ICICI Prudential AMC Ltd.
Some Exam related pointers
1. The examination required to be taken by distributors is the ‘AMFI Mutual Fund (Advisor)
Module’.
2. The exam is of 2-hour duration.
3. Examination has 72-75 Multiple Choice Questions (appx. 50 Questions are for 1 mark
each and balance appx. 25 for 2 marks each).
4. Max Marks is 100.
5. Pass percentage is 50.
6. The exam has negative marking (25% of the question score).
7. Be careful about the language of the question.
8. AMFI expects candidates to be thorough with the key concept before taking the exam
and this is evident in the type of questions in the current examination.
9. Please review the contents of this revision kit very thoroughly before the exam along
with Practice Tests available separately.
10. A read-through of the AMFI Workbook would be an added advantage for the exam taker.
Good Luck!
CHAPTER 1
CONCEPT AND ROLE OF MUTUAL FUNDS
A mutual fund is a pool of money, which is collected from many investors and is invested
by an asset management company to achieve some common objectives of the investors.
The birth place of Mutual Fund is U.S.A.
Advantages of Mutual Fund
• Increases the purchasing power of the investors
• Allows participation in the securities market with small investments
• Enables them to have a well-diversified portfolio (‘Diversification’ is best described by the
tem “don’t put all your eggs in one basket”)
• Reduction of risk
• Money would be managed by professionals at low cost
• Reduction of transaction cost (economies of scale)
• Liquidity (conversion into cash without loss of value)
• Convenience and Flexibility
Disadvantages of Mutual Fund
• No control over cost
• No tailor made portfolio
• Managing a portfolio of funds
Evolution of Mutual Funds In India

Phase 1- 1964-87: Growth of Unit Trust of India
The first scheme launched by UTI was Unit Scheme 1964. It was the first open-ended
scheme in the country.
Phase 2 – 1987-93: Entry of Public Sector Funds
State bank of India established the first non-UTI mutual fund-SBI mutual fund in November
1987.
Phase 3 – 1993-96: Emergence of Private Funds – Private and foreign fund houses
were permitted to set up MFs in India. Kothari Pioneer was the first private sector fund.
Phase 4 – 1996-99: Growth and SEBI Regulations
A set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual
Fund) regulations, 1996.
Phase 5 – 1999-2004: Emergence of a large and uniform industry
In February 2003, UTI Act was repealed, UTI was split into two and UTI no longer had a
special legal status and it also adopted the same structure as any other fund in India. UTI
Mutual Fund is the present name of the erstwhile Unit Trust of India.
Phase 6 – 2004 onwards: Period of Consolidation & Growth
In this period the industry has witnessed a spate of mergers and takeovers. Also more and
more new international and private sector players are entering the fray. This period also saw
the growth of the industry
Important Milestones in the MF history in India

1963: UTI (special privileges – assured return schemes, guarantees, loans)
1987: Public Sector MFs
1993: Private Sector MFs
1995: AMFI was set-up (internal checks & balances, representation to the govt and consumer
education – publish a book titled “Making Mutual Funds Work for You – an Investor’s Guide”)
1996: SEBI (MF) Regulations
1999: Dividend income made tax free in the hands of investor
2003: UTI Act repealed (level playing field, UTI split, UTIMF created)
2004-onwards: Consolidation & Growth (AUM at the end of FY 2004-05 was appx. Rs.
153,000 crores)
Types of Funds
Open-ended funds vs. Closed-ended funds
An open-ended fund is one that sells and repurchases units at all times.
Investor buys into the scheme and redeems from the fund house directly.
Subscription at all times is not mandatory.
Redemption must be permitted within certain obvious conditions.
The corpus changes everyday
OEFs are subject to higher redemption pressure.
The scheme calculates its NAV on a daily basis.
A close-ended fund Close Ended Funds have a fixed tenure of say 1/2/3/4/5 etc years.
After the closure of its NFO, no new units of M.F are available for sale from the fund
house directly.
Exit option is available to investors in two ways: a) exit window or b) listing on a stock
exchange
Units are repurchased by the fund itself through intermittent periodic exit windows.
The fund corpus in such a case can only reduce.
The units of listed funds are traded usually at discount to its NAV.
The Unit capital of such a fund remains constant, thus no redemption pressure.
Debt Funds, Equity Fund, Liquid (MMMF) and Balanced (Hybrid) Funds
Debt Funds or (Income Funds): A fund can be classified as Debt Fund, which invests
primarily in Debt (loan) Securities. Debts fund can be further classified as:
Gilt Funds: invests primarily in Govt Securities or Gilts (Govt. borrowing programme)
Diversified Debt: invests in different varieties of Debt Securities i.e. say Govt Securities,
Corporate Debts, Securities of different Maturities etc.
Income fund: invests in Debt securities so as to provide regular income to Investors.
Diversified Debt Fund: a fund that invests in all available types of debt - securities issued
by entities across all industries and sectors.
Focused Debt Fund: invest only in specified securities and thus have a higher risk than
diversified debt funds.
High Yield Debt Fund: seek to obtain higher interest returns by investing in debt
instruments that are considered below investment grade.
Assured Return Funds: an Indian variant, were being offered by erstwhile UTI and now no
longer offered.
Fixed Term Plan Funds: essentially close-end in nature and usually for term less than a
year. Being of short duration they are not listed on the stock exchange. Invest in such
securities whose residual maturity is equal to the scheme tenor.
Equity Funds: A fund that invests primarily in equity (ownership) instruments. Equity Funds can
be further classified as:
Diversified Equity Fund: investing in a mix of equity from different sectors
Index Funds: Portfolio replicates a selected Index
Sectoral Fund: invests in equity instruments of one sector for eg. Technology Fund, Pharma
Fund, Banking Fund etc.
Aggressive Growth Fund: target maximum capital appreciation, invest in less researched
or speculative shares
Growth Fund: This fund invests in equities of Growth companies only i.e. the companies
which have the potential to grow at higher rate in future
Large Cap/Mid Cap/Small Cap Fund: These Funds invests in equities of Large/Mid/ Small
Cap companies respectively.
Specialty (or Thematic) Funds: have a narrow portfolio orientation and invest in
companies that meet pre-defined criteria. Eg. Infrastructure Fund or ASEAN Fund
Equity Linked Saving Scheme (ELSS) an Indian Variant: Investment in these schemes
entitle the investor an income tax deduction u/s 80C (max Rs. 1 lakh in year 2007-08). These
are open-ended funds but investment in these schemes (including the reinvested dividends)
gets locked-in for a period of 3 years.
Value Funds: try to seek out fundamentally sound companies whose shares are currently
under-priced in the market. These fund add those shares to their portfolio that are selling at
low price-earnings ratios, low market to book value ratios and are believed to be undervalued
compared to their true potential.
Equity Income or Dividend Yield Funds: invest in stocks which have a high Div Yield i.e.,
Div to Market Price ratio
Balanced Funds: These Funds invest in both equity & debt instruments in varying proportion.
Some have higher proportion of Equity while others have high proportion of Debt.
Growth and Income Funds: Unlike income focused or growth focused funds these funds seek
to strike a balance between capital appreciation and income for the investor. These funds would
be less risky than pure growth funds, though more risky than income funds.
Asset Allocation Funds: where the fund manager has the flexibility to change the allocation of
funds between equity and debt as per own perceptions about direction of the market.
Commodity Funds: specialize in investing in different commodities directly or through shares of

commodity companies or through commodity futures contracts. A most common example of
commodity fund is the so-called Precious Metals Funds. As of date, Indian MF industry does not
have commodity funds except the ones that invest in Gold.
Real Estate Funds: would invest in real estate directly, or may fund real estate developers, or
lend to them, or buy shares of housing finance companies. As of date there are no pure real
estate mutual funds in the country as SEBI guidelines are awaited.
Exchange Traded Funds: It tracks a market index and trades like a single stock on the stock
exchange. It is a unique category of open-ended index funds which gets listed on the stock
market. It combines the features of open-ended as well as close-ended schemes.
Fund of Funds: invests in a portfolio of the units of other mutual fund schemes.
Liquid Funds (Money Market) Mutual Funds: These Funds are actually Debt Funds, which
Invests in Money Market & Call Money Market Debt Securities (T-bills, Commercial Paper &
Certificate of Deposits). These Funds have very little Interest Rate Risk and are considered safer
than even Gilt or other Debt Funds.
Load and No Load Funds: Funds that charge front-end (Entry), back-end (Exit) or deferred
(Contingent Deferred Sales Charge – CDSC) loads are called load funds. Funds that make no such
charges are called no-load funds.
In India, SEBI has defined a load as the one-time fee payable by the investor to allow the fund to
meet initial issue expenses including brokers’ commission, advertising and marketing expenses
etc. As per SEBI definition ONLY those funds that charge an entry load are considered as load
funds.
Risk Hierarchy of Mutual Funds
RETURN
SECTORAL
DIVERSIFIED
INDEX
BALANCED
INCOME
GILT
MMMF
RISK
Quick Wit
1. A close-ended mutual fund has a fixed

a. NAV
b. Fund size
c. Rate of return
d. Number of distributors
2. An investor in a close-ended mutual fund can get his/her money back by selling his/her units
a. Back to the fund
b. To a special trust at NAV
c. On a stock exchange where the fund is listed
d. To the agent through which he/she subscribed to the units of the fund
3. A mutual fund is not

a. Owned jointly by all investors
b. A company that manages investment portfolios of high net worth individuals
c. A pool of funds used to purchase securities on behalf of investors
d. A collective investment vehicle
4. The most important advantage of a money market mutual fund is

a. Quick capital appreciation
b. High regular income
c. Safety of principal
d. No loads
5. Debt funds target

a. Low risk and stable income
b. Protection of principal
c. High growth with risk
d. Long term capital appreciation
6. After UTI, the first mutual funds were started by

a. Private sector banks
b. Public sector banks
c. Financial institutions
d. Non-banking finance companies
7. “Making mutual funds work for you – the investor’s guide” was published by:
a. SEBI
b. AMFI
c. UTI
d. Investor Education and Protection Fund
8. A mutual fund is:

a. a partnership
b. a pass through vehicle
c. a private trust
d. an association of persons
9. Which one is more diversified?

a. Fund A which invests in Shares in India
b. Fund B which invests in shares in India and USA both
c. Both are equally diversified
d. Insufficient information
10. An investor should not invest in a mutual fund if

a. His capital base is large
b. He is able to carry out detailed investment research and monitor the stock market
c. Both the above
d. None of the above
11. Fixed Term Plan series are (as per AMFI Workbook)
a. Closed ended
b. Generally short term in nature
c. Not listed on stock exchange
d. All of the above
Answers
1. b
2. c
3. b
4. c
5. a
6. b
7. b
8. b
9. b
10.c
11.d (as per AMFI workbook)
CHAPTER 2
FUND STRUCTURE AND CONSTITUENTS
MF Structure in the USA: In the USA MF’s are set up as investment companies.
MF Structure in the UK
In UK MF’s have two alternative structures -
• Open-end funds are in the form of Unit trusts
• Close-end funds are in the form of corporate entities or Investment Trusts
MF Structure in INDIA
• In India Open end and Close end funds are constituted along one unique structure as unit
trusts. A mutual fund may have several different schemes, open and close ended, under it
• Open ended and Close ended schemes are governed by the same regulations and the
regulatory body, SEBI (M F) Regulations, 1996.
Legal Structure of Mutual Funds
SPONSOR
TRUSTEE AMC
CUSTODIAN R&T AGENT
The Fund Sponsor

Sponsor is defined under the SEBI regulations as any person who, acting alone or in
combination with another body corporate, establishes a mutual fund.
Sponsor must possess a sound financial track record over five years prior to registration.
Sponsor could be a bank, a corporate or a financial institution.
The sponsor of a fund will form a trust and appoint a board of trustees.
The sponsor will also appoint an AMC as fund managers and will also appoint a custodian to
hold the fund in accordance with SEBI regulations.
The sponsor must be profit making in at least 3 out of previous 5 years, including the last
year
Net worth (Share Capital plus reserves & surplus) of the Sponsor must be positive
To qualify as a sponsor he must contribute at least 40% of the net worth of the AMC
Mutual Funds as Trusts

A mutual fund in India is constituted in the form of a Public Trust created under the Indian
Trusts Act, 1882.
Under the Indian Trust Act the trust or the Fund has no independent legal capacity itself.
Trustees
The Trustee is an independent body acts as protector of the unit holder.
They ensure that the fund is managed by the AMC as per the defined objectives and in
accordance with the Trust Deed and SEBI Regulations.
The trust is created through a document called the trust deed that is executed by the Fund
Sponsor in favor of the Trustees.
Role of Trustees
The role of the Trustees is to safeguard the interest of the investor/unit-holder of the fund –
Fiduciary Capacity.
The trustees make sure that the funds are invested according to the investor’s mandate and
objective.
The board of trustees is appointed by Sponsor with SEBI approval and at least 2/3rd of the
board of trustees should be independent.
Trustees of one mutual fund cannot be trustee of another mutual fund.
Trustee of one mutual fund cannot be AMC of another & vice versa.
The board of trustees is required to meet at least 4 times in a year to review the AMC.
Trust created through a document called the ‘Trust Deed’, executed by the Fund Sponsor in
favour of the Trustees.
Rights of Trustees
The trustees appoint the AMC with the prior approval of SEBI.
They also approve each of the schemes floated by the AMC.
They have the right to request any necessary information from the AMC concerning the
operations of various schemes managed by the AMC.
Trustees have the right to dismiss the AMC with the approval of SEBI and in accordance with
the regulations.
The trustees have the right to ensure that, based on their quarterly review of the AMC’s
networth; any shortfall in the networth is made up by the AMC.
Obligations of Trustees
The trustees must enter into an Investment Management Agreement (IMA) with the AMC
according to Fourth schedule of SEBI (MF) Regulations, 1996.
They must ensure that the fund’s transactions are in accordance with the trust deed.
The trustees are responsible for ensuring that the AMC has proper system and procedures in
place and has appointed key personnel including Fund managers and a compliance officer,
besides the other constituents such as the auditors and registrars.
The trustees must ensure due diligence on part of the AMC for empanelment of brokers.
The trustees must furnish to SEBI on a half yearly basis.
Asset Management Company (AMC)

The AMC is created by and its capital contributed by the Sponsor (at least 40%).
The AMC is appointed as fund managers of a mutual fund by the trustees (through the IMA).
The Net worth of the AMC must be Rs. 10 crore at all times.
Minimum ½ of the directors must be independent.
AMC of one fund cannot be Trustee of another.
AMC of one fund can do advisory business with other funds (domestic as well as offshore).
Other Fund Constituents
Custodian and Depositories

Appointed by the board of trustees for safekeeping (in case of physical securities) or
participating in any clearing system through approved depository companies on behalf of
mutual fund (in case of dematerialized securities).
The custodian should be an entity independent of the sponsor and is required to be
registered with SEBI.
Custodians function as investment back office of a mutual fund.
Bankers are appointed for holding bank accounts and providing remittance services.
Registrar and Transfer Agents are responsible for issuing and redeeming units of the MF and
providing other related services such as preparation of transfer documents and updating records.
Distributors
AMC appoints the distributors who sell units on behalf of the fund.
A sponsor or an associate can act as a distributor for the AMC with which he or she is
associated.
A distributor usually acts on behalf of several MF’s simultaneously and may have several sub-
brokers under him for the purpose of distribution of units.
The distributor community includes brokers as also independent individuals.
Brokers
Engaged for transactions in the securities markets.
Not more than 5% of the trade should be done with a related broker.
Brokers also provide research reports to the AMCs.
Fund Mergers and Scheme Takeovers
A running fund constitution can change in the following possible ways

1. Trustees may decide to change the AMC and handover the scheme to a new AMC
2. The scheme may be merged with another scheme of the same AMC
3. The AMC is taken over by another set of sponsors
4. One AMC may merge with another AMC
5. Just the schemes may be taken over by another set of trustees
Transaction Type Trustee SEBI High Court

Approval Approval Approval
AMC Takeover by new sponsor Yes Yes No
AMC Merger Yes Yes Yes
Trustees changing AMC Yes Yes No
Schemes taken over by another AMC Yes Yes No
Scheme Merger Yes Yes No
Example of AMC Merger - HB & Taurus – Two MF companies in India which merged using the
AMC merger route
Example of AMC Takeover - Zurich acquired Threadneedle globally and bought out ITC
Threadneedle’s India business. Zurich similarly acquired Kemper Twentieth Century Finance. In
recent times Alliance was taken over by Birla.
Example of Scheme Takeover – Zurich finally exited MF business in India and sold all its
schemes in India to HDFC (technically the AMC was not sold but just the schemes)
Quick Wit
1. A mutual fund is owned by

a. The Govt. of India
b. SEBI
c. All its investors
d. AMFI
2. The structure, which is required to be followed by mutual funds in India, is laid down by
a. Financial Ministry
b. Securities & Exchange Board of India (SEBI)
c. Fund Sponsor Association of Mutual Funds of India (AMFI)
d. RBI
3. The Board of Trustees of a mutual fund:

a. Act as a protector of investor’s interests
b. Directly manage the portfolio of securities
c. Do not have the right to dismiss the AMC
d. Cannot supervise and direct the working of the AMC
4. The trust that manages a mutual fund is appointed by

a. The Finance Ministry
b. RBI
c. SEBI
d. The sponsor of that mutual fund
5. The custodian of a mutual fund:

a. Is appointed for safekeeping of securities
b. Need not be an entity independent of the sponsors
c. Not required to be registered with SEBI
d. Does not give or receive deliveries of physical securities
6. Transfer Agents of a mutual fund are not responsible for

a. Issuing and redeeming units of the mutual fund
b. Updating investor records
c. Preparing transfer documents
d. Investing the funds in securities markets
7. The sponsor of a mutual fund may be compared to

a. A director in a Company
b. The Chief Executive of a Company
c. Promoter of a Company
d. An equity shareholder in a Company
8. Issuing and redeeming units of a mutual fund is the role

a. The custodian
b. The transfer agent
c. The trustees
d. The bankers
9. The fund sponsors should have a sound financial track record of

a. 7 years
b. 12 months
c. 5 years
d. 3 years
10. The net worth of an asset management company should be greater than
a. Rs.100 Crores
b. Can be decided by the Sponsor
c. Should be at least Rs.10 Crores at all times
d. Should be greater than Rs.10 Crores
11. The role of an AMC is to act as

a. Promoter
b. Investment Manager
c. Distribution agent
d. Regulator
12. As per SEBI’s principles, the AMC and the Board of Trustees of a fund should belong to the
same Sponsors
a. True
b. False
13. Role of the custodian is

a. managing the fund’s distribution channel
b. making investments on behalf of the Fund Managers
c. handling payment of investments with bankers
d. safe keeping of securities or participating in the clearing system on behalf of the mutual
fund
14. As per investment company institute, AMFI equivalent in the US, corporate bond funds have
higher risk than:
a. Money Market funds
b. Index funds
c. Aggressive funds
d. Growth funds
15. In case of a fund take-over

a. High court approval may not be necessary
b. SEBI approval is a must
c. All unit holders must be informed
d. All of the above
Answers
1. c
2. b
3. a
4. d
5. a
6. d
7. c
8. b
9. c
10. d
11. b
12. a
13. d
14. a
15. d
CHAPTER 3
LEGAL AND REGULATORY FRAMEWORK
Legal & Regulatory Environment
SEBI - Securities and Exchange Board of India has been setup by an Act of Parliament in 1992.
SEBI is the overall Capital Markets Regulator and regulates all MFs.
RBI - Apex Banking Body Regulates the Banking System and Money Market. Mutual Funds are
investors in Money Market and thus indirectly under RBI’s regulation. As the apex banking body,
RBI regulates any bank assured return scheme. Thus if a bank sponsored AMC wants to offer
assured return scheme, it will have to take RBIs approval as well.
Ministry of Finance - Ministry of Finance ultimately supervises both RBI and SEBI.
Securities Appellate Tribunal (SAT) - created in 2003 to provide the apex appeal mechanism
for actions taken by SEBI.
Company Law Board - is a body specially constituted by the central govt. for carrying out
judicial proceedings with respect to company affairs
Department of Company Affairs (DCA) - responsible for formulating and modifying

regulations relating to companies. DCA has legal powers to prosecute company directors for
failure to comply with any of the provision of companies Law, as also for non-payment of
deposits or frauds and other offences.
Registrar of Companies (RoC) - is the primary legal interface for all companies. All AMC
accounts and records are filed with the RoC. The RoC monitors regulatory compliance by
companies.
Office of the Public Trustee - Board of Trustees of the Trustee Company is accountable to the
office of the Public Trustee, which in turn reports to the Charity Commissioner.
Self Regulatory Organizations (SROs) - is an association representing a group of market

participants, which is specially empowered by the apex regulatory authority to exercise pre-
defined authority over the regulation of their members.
Stock Exchanges - These are SROs under the supervision of SEBI. Eg. BSE and NSE.
Association of Mutual Funds in India (AMFI) - AMFI is simply an industry association, even-
though it performs certain self-regulatory functions, it does not have an SRO status yet.
Its principle objectives are:
To promote the interest of MFs and unit holders and interact with SEBI/RBI/Govt./
Regulators
To set and maintain ethical, commercial and professional standards in the industry
To increase public awareness and understanding of the concept and working of MFs in the
country
To develop a cadre of well trained distributors and to implement a program of training and
certification for all intermediaries and others engaged in the industry
Investor’s Rights and Obligations
Investor’s Rights
Right of Proportionate Beneficial Ownership of the scheme’s assets
Right to Timely Service

Unit holders are entitled to receive the dividend warrants within 30 days of the date of
dividend declaration and redemptions proceeds within 10 days otherwise Unit holders have
the right to payment of interest at a rate specified by SEBI
Right to Information
Unit-holders have the right to inspect major documents of the fund like
o trust deed
o investment management agreement
o custodian service agreement
o registrar and transfer agency agreement
o memorandum and articles of association of the AMC
o right to receive a copy of the annual financial statements
o right to receive a complete statement of scheme portfolio before the expiry of one month
from the close of each half year (that is 31st march and 30th September).
Right to approve changes in fundamental attributes

To carry out a change in fundamental attributes
o All unit-holders have to be informed in writing
o Advertisement in an English daily newspaper having nationwide circulation and in a
newspaper in the regional language of MF head office
o The unit-holders must be given an option to redeem their holdings in the fund without
any exit load
Right to wind up a scheme

If 75% of the investors pass a resolution to this effect.
Right to terminate the AMC

The appointment of an AMC of a fund can be terminated by 75% of the unit-holders of the
scheme with the prior approval of SEBI.
Investors Obligations
Study OD
Provide PAN
Monitor their investment
Investors Complaints Redressal Mechanism

Investor Grievances can be addressed to Trustee
SEBI is the primary body to address MF complaints
Investors cannot seek redressal under Companies Act since fund investors are neither share
holders nor depositors in AMC
Legal limitations to Investors’ rights

Unit-holders (Investors) are not distinct from the trust and thus they cannot sue the trust
A prospective investor does not enjoy any rights
Quick Wit
1. Documents available to investors for inspection do not include

a. Memorandum and Articles of Association of AMC
b. Consent of auditors and legal advisors
c. Investment management reports
d. Reports based on which actual investments are made
2. AMFI is governed by
a. RBI
b. Ministry of Finance
c. A board of directors elected from among members of AMFI
d. SEBI
3. The highest authority among the following is the

a. SEBI
b. Company Law Board
c. RBI
d. Ministry of Finance
4. The entity that SEBI does not regulate is

a. Share registrars
b. Mutual funds
c. Stock exchanges
d. Non-banking finance companies
5. The accounts and all other records of an AMC are filed with
a. AMFI
b. Registrar of Companies
c. Agent’s Association
d. UTI
6. Fund merger involving 2 or more schemes of different AMCs requires consent of unit holders
with X% voting rights. X is
a. 50
b. 100
c. 51
d. 75
7. A close-ended scheme of a mutual fund is not governed by

a. Exchange Rules of the stock exchange where it is listed
b. Listing Agreement between the fund and the stock exchange
c. Guidelines issued by the Ministry of Commerce
d. Companies Act provisions relating to transactions in securities
8. Which of the following is a Self-Regulatory Organisation?

a. Bombay Stock Exchange
b. SEBI
c. AMFI
d. RBI
9. A Self-Regulatory Organisation can regulate
a. All entities in the market
b. Only it’s own members in a limited way
c. Its own members with total jurisdiction
d. No entity at all
10. Only one of the following is required to pass the AMFI examination
a. trustees
b. officers of SEBI working in the Mutual Fund department
c. employees in a call center dealing with mutual fund investors
d. fund managers
11. The amount of authority enjoyed by a Self-regulatory Organisation is defined by

a. The apex regulatory authority
b. Company law board
c. It’s own members
d. RBI
12. The role of AMFI in the mutual funds industry is not to

a. Promote the interests of the unit holders
b. Set a Code of Ethics
c. Regulate mutual funds
d. Increase public awareness of mutual funds in the county
13. Bank owned Mutual Funds are supervised by

a. SEBI
b. RBI
c. Jointly by SEBI & RBI
d. AMFI
14. Mutual fund units cannot be distributed by

a. Trustees of the fund
b. The AMC
c. Non-banking finance companies
d. Banks
15. An Investor invested in the UTI Money Market Mutual Fund. To see the relevant financial
statements, she should read
a. Financial statement of the schemes managed by UTI trustee
b. Annual report of AMFI
c. Annual report of SEBI
d. Financial statement of the UTI AMC
Answers
1. d
2. c
3. d
4. d
5. b
6. d
7. c
8. a
9. b
10. c
11. a
12. c
13. a
14. a
15. a
CHAPTER 4
OFFER DOCUMENT
Offer Document: contains the details of a scheme that the AMC prepares on behalf of the
trustees and circulates to the prospective investor
Contents of the OD
Details of the sponsor and the AMC
Description of the scheme and the investment objective
Terms of issue
Historical statistics
Investor’s rights and services
Fee structure and expenses
Information on income and expenses of existing schemes
Front page of the offer document contains its date of publication, name & type of fund and
its major objectives. Specifically the following:
Name of Mutual Fund
Name of Scheme
Type of Scheme (Equity/Income/Balanced)
Name of AMC
Unit Price
Opening, Closing & Earliest Closing date
Name of Guarantor if the scheme is an assured return
SEBI disclaimer
Statement to the effect that it is important for a prospective investor to read it and retain for
future reference
Validity of the OD for new schemes

For a new scheme – 6 months from the date of receipt by the AMC of the letter containing
observations from SEBI.
For existing open-ended funds – updated at least once every 2 years
For closed ended funds – published only once during the lifetime at the time of NFO
Investors right to Information on Material Changes in scheme

Examples of such major changes include:
Reconstruction of the AMC
Imposing or enhancing of entry or exit load
Change in the Key personnel of the AMC especially the fund manager
Addition of new plans in the existing scheme
Change in management/controlling interest of the AMC
Other important information regarding OD

Compliance Officer, an AMC employee, has to sign the due diligence certificate which states
that
Information in the OD is according to SEBI formats
Information is verified and is true and fair representation of facts
All constituents of the fund are SEBI registered.
Risk factors, both standard and scheme-specific, have to be disclosed
Factors common to all funds are called as standard risk factors. These include market
risk, no assurances of return, etc.
Factors specific to a scheme are scheme-specific risk factors in the - these include
restrictions on liquidity such as lock-in period, risks of investing in the First scheme of a
fund, etc.
Fundamental attributes of a scheme include:
Scheme type
Objectives
Investment pattern
Fees and expenses
Liquidity conditions
Accounting and valuation
Investment restrictions, if any
For any change in fundamental attributes, investor approval is not needed. Trustees and
SEBI should approve the change and investors should be informed.
A scheme cannot make any guarantee of return, without stating the name of the guarantor
and disclosing the net worth of the guarantor.
Information on existing schemes and financial summary of existing schemes to be given for 3
years.
Information on transactions with associate companies to be provided for the past 3 years.
If any expense incurred is higher than what was stated in the OD, for past schemes,
explanations should be given.
There is no information on other mutual funds, their product or performance in the OD.
Investors’ rights are stated in the OD.
The borrowing restrictions on the mutual fund should be disclosed. This includes the
purposes and the limits on borrowing.
3 years track record of investors’ complaints and redressal should be disclosed in the OD.
Any pending cases or penalties against sponsors or AMC should be disclosed in the OD.
Key information Memorandum (KIM)

KIM is the abridged version of Offer document. It is distributed with all application forms.
In fact, the Offer document does not have an application form with it but a Key Information
Memorandum does.
Quick Wit
1. Which of the following is true?

a. KIM is abridged offer document
b. OD is abridged shareholder agreement
c. KIM is abridged Investment Management Agreement
d. OD is abridged KIM
2. The following is not required on the cover page of the OD

a. Date on which approved by trustees
b. Earliest closing date for New Fund Offer
c. Date the NFO closes
d. Date the NFO opens
3. A due diligence certificate does not certify that

a. The draft offer document forwarded to SEBI is in accordance with SEBI regulations
b. All legal requirements connected with launching of the scheme have been complied with
c. Disclosures made in the offer document are true, fair and adequate
d. The AMC guarantees a good performance
4. For assured return schemes, information about the guarantor's net worth which justifies
guarantor's ability to meet shortfalls in the returns assured under the scheme can be found in
a. The offer document
b. The key information memorandum
c. Both (a) and (b)
5. In the offer document, funds are required to make disclosures summarising associate
transactions and their impact on the performance of the scheme for the last
a. One fiscal year
b. 2 fiscal years
c. 3 fiscal years
d. 5 fiscal years
6. An open ended scheme can change its fundamental attributes

a. by allowing unit holders to exit scheme after 6 months without exit load
b. after obtaining prior approval from SEBI
c. informing each unit holder individually and allowing exit without exit load
d. both b and c above
7. The front page of an offer document need not cover

a. Opening, closing and earliest closing date of the offer
b. Disclaimer clause
c. Legal and regulatory compliance
d. Price of units
8. The OD should indicate the management of the fund. The management doesn’t include
a. name of trustees
b. name of the Fund Manager
c. business experience of the key personnel of the AMC
d. registration number of the custodian
9. OD must contain information about unit holder transaction expenses. Which of the following is
not an item under this?
a. Repurchase load
b. Initial issue expenses
c. Max sales load
d. Switchover load
Answers
1. a
2. a
3. d
4. c
5. c
6. d
7. c
8. d
9. b
CHAPTER5
FUND DISTRIBUTION & SALES PRACTICES
Who can invest in a Mutual Fund?

Residents including
– Resident Individuals / HUF – Indian companies
– Partnership Firms – Indian Trusts / Charitable Institutions
– Insurance Companies – Banks
– Financial Institutions – NBFCs
– Provident Funds -- Mutual Funds
Non Residents
– NRI’s & Persons of Indian Origin
Foreign Entities
– FII’s registered with SEBI
Foreign citizens / entities cannot invest in MF
Distribution Channels
MF products can be distributed by individual distributors as well as large distribution
companies.
MFs tend to prefer large distribution companies as it tends to reduce their administrative
burden of dealing with individuals and thus saves on costs.
Min Qualification required to be an MF Distributor is Class 12th.
However everyone has to pass the AMFI test before selling MFs.
As of March 31, 2005, almost 50,000 candidates had passed the AMFI certification out of
which 30,000 had registered themselves.
Sales Practices
Norms for Distributors

Distributors are compensated by funds through commissions.
There are no rules prescribing the minimum or maximum commission rates.
Commission could be paid as either or both of
o Upfront Commission – paid for sale i.e., for getting the investment
o Trail Commission – paid for retention of investors in the fund
Distributor’s Obligations
There are no mandatory guidelines for mutual fund distributors’ role and services to
investors.
Distributors need to comply with AMFI’s Code of Ethics titled AMFI Guidelines & Norms for
Intermediaries (AGNI) as well as Code of Conduct given by the AMC they are registered with.
AGNI as well as SEBI prohibits distributors from rebating commission.
AMFI recommends certain distributor practices like knowing important characteristics of the
scheme, identifying clients, know your clients, understanding needs of clients and helping
them choose an investment etc.
Sales Practices for Mutual Funds

SEBI has laid an advertising code for MFs as per which:
Dividends should be mentioned in rupees along with FV of each unit of that scheme
For schemes > 1 year old, only CAGR can be advertised for 1, 3, 5 years and since
inception
Performance is compared against benchmarks
Quick Wit
1. An agent's appointment by a fund

a. Requires SEBI's approval
b. Is a lengthy and cumbersome process
c. Is mandatorily preceded by an AMFI test
d. Does not require any approval
2. The following are not termed as "sales practices"

a. Agents commission
b. Before-and after-sales service to investors
c. Advertising of schemes
d. Stock broking
3. Who among the following are not eligible to invest in MF?

a. Indian Companies
b. Banks
c. Non Banking Finance Companies
d. Foreign Citizens
4. Who among the following are not Institutional Investors?

a. Banks
b. Resident Individuals
c. Provident Funds
d. Non Banking Finance Companies
5. Generally, which category of investors needs advice for Investing in Mutual Funds?
a. Non Banking Finance Companies
b. Insurance Companies
c. Foreign Institutional Investors
d. Individuals
6. Agents are compensated by mutual funds

a. Through salaries
b. Through commissions
c. Through an annual fee
d. Not in cash but in kind
7. An NRI wishes to invest in a Mutual Fund. Which of the following is true?

a. He cannot apply as he will be paying in Foreign Currency
b. Need not take individual permission as RBI has granted general permission in this regard
c. The investor has to apply to RBI seeking permission as he will be paying in foreign
currency
d. Cannot apply as it is open to Indian residents only
8. The cut-off time for redemption request kept by an AMC is 3:00 pm. An application for
redemption received at 3:01pm
a. redemption will be based on next day NAV but no exit load will be charged
b. redemption will be based on next day NAV
c. applicant will be asked to resubmit the request 10 am the next day
d. the same day NAV will apply since the gap is less than 30 minutes from cut-off time
9."Sales Practices" cover the following areas
a. Desirable marketing practices
b. Agents responsibilities to the investor
c. Ethical code of conduct
d. All of the above
Answers
1. c
2. d
3. d
4. b
5. d
6. b
7. b
8. b
9. d
CHAPTER 6
ACCOUNTING VALUATION AND TAXATION
Accounting policies to be followed by mutual funds are laid down in the SEBI (Mutual Fund)
Regulations, 1996.
Investor’s subscriptions to the mutual fund are accounted as unit capital, and not as liabilities
or deposits.
However unit capital is found on the liabilities side of the balance sheet and is maintained at
face value.
Assets of a mutual fund are the investments made by the fund.
Other short-term assets in the fund balance sheet are called as current assets.
Liabilities can be in the nature of short-term (Bridge) loans – max 6 months and max 20% of
net assets (for dividend or redemption payment only)
Net assets, in simple terms, refer to market value of investments less current liabilities.
Net Assets are computed as:
(Market value of investments + other assets + accrued income - current liabilities - accrued
expenses)
NAV is computed as Net Assets/No. of units outstanding
All mutual funds have to disclose their NAV everyday, 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.
NAVs to be rounded off at least upto 4 decimal places for liquid/MMMFs and at least upto 2
decimal places for others.
Sale Price – Price at which MF sells and investor buys (Subscribes) = NAV + Entry Load
Repurchase Price – Price at which MF buys and investor sells (Redeems) = NAV – Exit
Load
!!!CAUTION!!! For Numerical, always do load calculations on NAV.
Other accounting guidelines

Changes in NAV due to the assumptions about accruals should not impact NAV by more than
1%.
Changes in NAV attributable to non-recording of sale and repurchase of units or securities
cannot be more than 2%, and these transactions should be recorded within 7 days.
Initial issue expenses of a scheme cannot exceed 6% of funds mobilized. Any amounts above
this have to be borne by Sponsor or AMC.
For a closed end fund, initial issue expenses are charged over the life of the scheme, on a
weekly basis.
Open-end funds can no longer charge initial issue expenses to the scheme, any expenses
towards launch have to be recovered from the entry load and excess have to be borne by the
AMC.
A fund that does not charge any of the initial issue expenses is called a no-load fund.
AMC can charge 1% higher investment management fee in case of a no-load scheme.
The mutual fund can charge the following recurring expenses:
o Investment management fees to the AMC
o Custodian’s fees
o Trustee Fees
o Registrar and transfer agent fees
o Marketing and distribution expenses
o Operating expenses
o Audit fees
o Legal expenses
o Costs of mandatory advertisements and communications to investors
Regulatory Ceilings on Fees & Loads
Fee Type Open-End Closed- Maximum Limit

End
Initial Issue Expenses Cannot Can Charge Not to exceed 6% of initial resources
(Charged on Corpus Charge
collected during NFO)
Recurring Expenses Can Charge Can Charge Up to 100Cr – 2.5%
(Charged on Weekly 100Cr-400Cr – 2.25%
Average Net Assets) 400Cr-700Cr – 2.00%
Above 700Cr – 1.75%
Above limits are lower by 0.25% for debt
funds
For FOFs this is 0.75% flat
Investment Can Charge Can Charge Up to 100Cr – 1.25%
Management Fee Above 100Cr – 1.00%
(included in recurring
expenses above) Higher by 1% for No-Load Schemes
(Charged on Weekly
Average Net Assets)
Entry Load Can Charge Cannot For Open-end fund
(Charged on NAV) Charge Entry + Exit Load <= 7% of NAV
Exit Load Can Charge Can Charge Also Repurchase price cannot be less than
(Charged on NAV) 93% of Sale Price
For Closed-end fund
Exit Load <= 5% of NAV
CDSC (Variable Exit Can Charge Can Charge Up to 12 months – 4%
Load) Up to 24 months – 3%
(Charged on NAV) Up to 36 months – 2%
Up to 48 months – 1%
Above 48 months - Nil
Accounting Policies applicable to MFs

Investments are marked to market using market prices
Dividends should be recognized not on the date of declaration but on the day the share gets
quoted ex-dividend. Same for Bonus & Rights shares
To calculate gain or loss from sale, average cost method must be followed
Purchase/Sale to be recognized on trade date and not on settlement date
Distributable Reserves = Income + Realised Gain – Expenses – Unrealised losses
Equalization a/c is created to ensure that regular sale and repurchase of units does not
change the percentage of income distributed
Non Performing Assets

An asset is classified as NPA if interest or principal amount remained outstanding for one qtr
from the day such installment has fallen due.
Deep Discount Bonds (DDBs) are classified as NPAs if the grade falls to BB or below OR it is
defaulting on other commitments OR in case of full Networth erosion of the borrower.
Valuation of Scheme Portfolios
Valuation of Equity Securities

Traded Securities – Mark to Market – i.e., last quoted closing price on the stock exchange
where it is ‘principally traded’
Thinly Traded Securities – Those securities which are traded for less than 5 lacs AND less
than 50,000 shares – Complex valuation method is used if the security is not traded for more
than 30days otherwise last traded price.
Valuation of Debt Securities

Traded Securities – as quoted in market upto last 15 days
Thinly Traded Securities – those securities (except GoI securities) where there is no trade in
marketable lot of Rs 5 Cr on valuation date
Securities with maturity upto 182 days are valued on the basis of amortization cost +
accrued interest
Taxation
In the hands of the funds – Income earned by all SEBI registered MFs is exempt from tax
under Sec 10 (23D) of IT Act, 1961.
In the hands of investors

As per Income Tax all funds are classified as
Equity Oriented (>=65% in Indian Equities)

Debt Oriented (<65% in Indian Equities)
Current tax-rates (FY 2007-08) are as follows:
Income Type Fund Type Tax Rate (in the hands of)
MF Investors
Equity NIL NIL
Dividend
Debt Pays DDT NIL
Equity NIL 10%*
STCG
Debt NIL Added to income*
Equity NIL NIL
LTCG Debt NIL 10% flat or 20% with
indexation*
* for NRI Investors, this is deducted at source by the MF. 20% in case of LTCG for Debt schemes
DDT Rates
Individuals & HUFs – 12.5% + Surcharge & Education Cess = Effective Rate of 14.1625%
Other Investors – 20% + Surcharge & Education Cess = Effective Rate of 22.66%
For liquid funds = DDT rate is 25% + Surcharge & Education Cess = Effective Rate of 28.325%
irrespective of the category of investor
Securities Transaction Tax – Levied at the time of sale/redemption of Equity Oriented Funds
@ 0.25%
MF units are not under Wealth Tax ambit

FOFs are treated as debt schemes even though they may be investing in equity schemes
Quick Wit
1. NAV means:
a. (Market Value of Assets – Liabilities) / number of units outstanding
b. (Book Value of Assets – Liabilities) / number of units outstanding
c. unit capital / number of units outstanding
d. net assets / initial number of units
2. A mutual fund may transfer investments from one scheme to another

a. Not at all
b. At current market rates
c. At cost price
d. At a fixed premium over market rate
3. In case of listed securities of group companies of the sponsor, mutual fund is not allowed to
invest more than
a. 25% of its net assets
b. 10% of its net assets
c. cannot invest at all
d. >5% of net assets
4. In a mutual fund investor's subscriptions are accounted for as

a. Liabilities
b. Deposits
c. Unit capital
5. Liabilities in the balance sheet of a mutual fund are

a. In the form of long-term loans
b. Strictly short term in nature
c. Combination of long term and short term
d. Not allowed as per regulations
6. Which of the below is a short-term capital asset?

a. Unit of MF held for a period of not more than one year preceding the date of transfer
b. Unit of MF held for a period of less than one year preceding the date of transfer
c. Unit of MF held for a period of less than three years preceding the date of transfer
d. Unit of MF held for a period of not more than three years preceding the date of transfer
7. For a scheme that has a load, the AMC can charge an investment management fee not
exceeding
a. 1.50%
b. 2.00%
c. 1.25%
d. 0.50%
8. The maximum load that a fund can charge is determined by

a. AMC
b. SEBI
c. AMFI
d. Distribution agents based on demand for the fund
9. The "load" charged to an investor in a mutual fund is
a. Entry fee
b. Cost of the paper on which the unit certificates are printed
c. The fee the agent charges to the investor
d. The expenses incurred by fund managers for distributing a mutual fund scheme
10. NAVs of equity funds are not affected by

a. Stock market movements
b. Events affecting the industry/sector in which the fund has invested
c. Happenings in the companies in which the fund has invested
d. Real estate prices
11. All expenses and income accrued upto the valuation date shall be considered for valuation.
Some minor expenses need not be so accrued, provided their affect on the NAV is not more than:
a. 2.0%
b. 1.5%
c. 0.5%
d. 1.0%
12. Net Asset Value (NAV) of a mutual fund scheme is defined as the scheme’s
a. Assets minus liabilities
b. Assets per unit
c. Assets minus liabilities per unit
13. For an open-ended fund, the repurchase price should not be lower than
a. NAV
b. 95% of NAV
c. 93% of NAV
d. 97% of NAV
14. Contingent deferred sales charge (CDSC)

a. Is higher for investors who stay invested in the scheme longer
b. Is lower for investors who stay invested in the scheme longer
c. Is the same for all investors irrespective of how long they stay invested
d. Is not allowed to be charged to mutual fund investors in India
15. What would be the maximum initial issue expenses charged from the investors, if the amount
mobilized from a mutual fund during the NFO is Rs. 50 crore?
a. Rs. 5 crore
b. Rs. 2 crore
c. Rs. 3 crore
d. Rs. 1 crore
16. The charge to an investor at the time of redemption of units from the fund is known as
a. Recovery charge
b. Repurchase load
c. Redemption weight
d. Exit load
17. The total net assets of a fund scheme increased from 100 cr to 120 cr. Of this, 5 cr was
unrealized gain. The number of units is 10 cr. The maximum dividend per unit the scheme can
declare is:
a. Rs 2
b. Rs 1.50
c. Rs. 0.50
d. Rs. 1
18. Loads are recovered

a. from agents and distributors
b. as a fixed amount each year
c. at the time of investor’s entry or exit
d. none of the above
Answers
1. a
2. b
3. a
4. c
5. b
6. a
7. c
8. b
9. d
10. d
11. d
12. c
13. c
14. b
15. c
16. d
17. b
18. c
CHAPTER 7
INVESTOR SERVICES
Investment Plans/Options and Services

The term investment plan generally refers to the portfolio flexibility that the fund provides to
investors offering different ways to invest or reinvest.
Automatic Reinvestment Plans (ARP) - to reinvest the amount of dividends or other

distributions made by the fund in the same fund.
Systematic Investment Plans (SIP) - Invest a fixed sum periodically, through direct
debit/PDCs to the investor’s bank account.
Systematic Withdrawal Plan (SWP) - allow the investors to make systematic withdrawals
from his fund investment account on a periodic basis.
Systematic Transfer Plans (STP) - allow the investor to transfer on periodic basis a
specified amount from one scheme to another within the same fund family (meaning two
schemes managed by the same AMC and belonging to the same mutual fund).
A transfer will be treated as redemption of units from the scheme from which the transfer is
made and as investment in units of the scheme into which the transfer is made.
Other Investors services
Telephone/Internet transactions
Investors may redeem or purchase units by calling a fund representative or registrar or investor
service centre. Many distribution companies, banks and brokers accept investor’s instructions by
telephone or through internet/e-mail.
Cheque writing
Some open end mutual funds allow the facility of cheques writing by providing the investor with a
cheques book treating his fund account as the equivalent of a bank savings account for this
purpose. The fund must have RBI approval in order to offer this service. RBI rules do not permit
investors to issue cheques to third parties for other payments.
Periodic Statement and Tax Information

All mutual funds provide periodic statements to investors in the form of financial statements and
performance reports. SEBI regulations require funds to send annual financial statements to unit
holders within six months of the close of the accounting year.
Loans against Units

Several banks lend to the investors against mutual funds units held by them. The amount of loan
is usually a percentage of the value of the investors holding in units.
Quick Wit
1. What is the proof that the investor has invested in mutual fund units?
a. The investors receive units commensurate with the investment made
b. Investors get an account statement, showing their holdings and their price
c. The receipt of money acts as the proof
2. Which of the following is true?

a. SEBI does not allow the investor to pledge his mutual fund units in favor of a financial
institution
b. An investor cannot redeem his mutual fund holding in part
c. The frequency of investment offered for SIP varies from one fund to another
d. All of the above
3. Which of the following is TRUE of an automatic reinvestment (or growth) plan?

a. The growth plan allows for the automatic reinvestment of all returns
b. The major benefit of automatic reinvestment is compounding
c. An investor who subscribes to the growth option under a scheme can later switch to a
dividend option
d. All of these
4. A Systematic Investment Plan

a. Requires the investor to invest a fixed sum periodically
b. Enforces saving in a disciplined and phased manner
c. Provides the benefit of Rupee Cost Averaging
d. All of these
5. A systematic withdrawal plan is ideal for

a. Investors with growth as the main investment objective
b. Investors who wish to benefit from market fluctuations
c. Investors who prefer a regular income stream
d. Investors who are not sure about themselves
6. Mutual fund in India do not offer

a. Nomination and transfer facilities
b. Redemption of units
c. Loans against units
d. Providing periodic statements to unit holders regarding their transactions
Answers
1. b
2. c
3. d
4. d
5. c
6. c
AMFI Revision Kit/Ver. 2008.01

CHAPTER 8
INVESTMENT MANAGEMENT
Investment or Portfolio Management is a “specialist” function.

After collecting and investing an investor’s money effective portfolio management will have to
give acceptable returns to the investor, in order to keep him satisfied and prevent him from
moving to any other competitor fund.
Equity Portfolio Management
Types of Equity Instruments
Ordinary shares – constitute ownership of the company and each share entitles the holder to
ownership privileges such as dividend declared by the company and voting rights at meetings.
Preference shares – do not constitute ownership. However holders have preference over
ordinary shareholders in two instances a) in payment of dividend at fixed rates subject to
availability of profits after tax, b) in payment of principal in case of winding up of the company.
Equity Warrants - are long term rights that offer holders the right to purchase equity shares in
a company at a fixed price on a future date (akin to a call option).
Convertible Debentures - fixed rate debt instruments that are converted into equity shares at
the end of a specified period.
Equity Classes
On the basis of Market Capitalisation

Market Capitalisation or M-Cap is equivalent to the current value of a company i.e. No of
shares outstanding * current market price.
Every fund manager could categorise M-Cap differently
An indicative figure is:
Large Caps – Market Cap > Rs 5000 Cr
Mid-Cap – Market Cap > Rs 1000 Cr but < Rs 5000Cr
Small-Cap – Market Cap < Rs 1000 Cr
Classification in Terms of Anticipated Earnings
Price/earning ratio: Price of a share/Earnings per share (MPS/EPS)

Dividend yield: Dividend per share/Current market price (DPS/MPS)
Cyclical Stocks: are shares of companies whose earnings are correlated with the state of the
economy. Their earnings tend to go up during upward economic cycles and vice versa. E.g.
Cement & Steel stocks
Growth Stocks: are shares of companies whose earnings are expected to increase at rates that
exceed normal market levels. They tend to re-invest earnings and usually have high P/E ratio and
low dividend yield.
Value Stocks: are shares of companies in mature industries and are expected to yield growth in
earnings. These companies may, however have assets whose values have not been recognized
by investors in general and are thus underpriced /available cheap.

Approaches to Portfolio Management
Passive – in which the fund manager’s objective is to seek a return equal to that of the
index (the benchmark that it tracks) e.g. Index Funds
Active – in which Fund Manager seeks to do better than the index it tracks
Securities Research
Fundamental Analysis – involves research into a company’s management, its operations,
its competition and finances.
Technical Analysis – involves predicting future price movement on the basis of historical
stock price movement and trading volumes.
Quantitative Analysis – uses mathematical models for equity valuation.
Portfolio Management Organisation Structure

Fund Managers are strategists who take overall decisions on asset allocation or industry
exposures
Security Analysts support the fund manager in tracking of sectors and companies
Security Dealers execute the actual order by dealing with brokers and internal operating staff
Debt Portfolio Management
Classification of Debt Instruments

Secured – backed by assets of the borrowers, generally in case of Corporate Debentures
Unsecured – no asset backing of the borrower e.g. FI Bonds
Interest Bearing – in which interest is paid
Discounted – Instruments which are issued at a discount to face value, on maturity the face
value is paid and no interest (coupon) payment in between, the difference being chargeable
to tax as interest
Fixed Rate – Interest rate is fixed
Floating Rate or Floater – Interest rate varies with a certain benchmark (e.g. MIBOR etc.)
Type of Debt Instruments
Short-Term
Certificate of Deposit are unsecured instruments issued by banks for 91days to 1 year at a
discount to face value
Commercial Paper are unsecured instruments issued by corporates for 3 months to a year
at a discount to face value (generally used for working capital finance requirements)
Treasury Bills are short term government obligations for 91days to 364 days, issued at a
discount to face value
Long-Term
G-Secs/Corporate Debentures/ PSU Bonds/FI Bonds issued by the respective issuers
Characteristics of Debt Instruments

Par Value – Amount to be paid on maturity
Coupon – Annual interest payment
Maturity – Date on which issuer has to repay face value
Call Option – Allows the issuer to redeem (call back the bond) before maturity; exercised in
case interest rates fall in the economy
Put Option – Allows the investor to redeem before maturity; would be beneficial to exercise
in case interest rates rise in the economy

Measures of Bond Yields
Current Yield = Annual Coupon Interest/Current Market Price
Yield to Maturity = is a bond’s IRR = Prevailing interest rates
Risks in Bond Investing

Interest Rate Risk – Bond Prices and Interest rates move in opposite direction
Reinvestment Risk – Risk of not being able to reinvest earnings into same rate
instruments
Call Risk – Risk of instrument getting redeemed before maturity leading to loss of interest
Default Risk – Risk of borrower not being able to repay on time
Inflation Risk – Higher inflation raises return expectation
Liquidity Risk – Not being able to cash out when required
Yield Spreads – It is a measure of default risk. It is the difference or additional yield in
comparison to a benchmark which is usually a govt security. Higher the Credit rating, lower is
the spread.
Duration – is a measure of interest rate risk. It measures the percentage change in stock
price for a 1% change in yield
Investment Restrictions
Minimum number of investors – 20, where no single investor should have more than
25% of corpus
Investments in Equity Shares or equity related instruments of a single company cannot
exceed 10% of NAV (except index and Sectoral funds, where the respective index limit
applies)
A Mutual Fund under all its schemes combined cannot own more than 10% of any
company’s paid-up capital with voting rights
Investments in ‘rated investment grade’ instrument of a single issuer cannot exceed
15%. This limit can be extended to 20% with prior approval of AMC board and Board of
Trustees.
For unrated instruments the limit is 10% for one issuer and 25% collectively in a
scheme.
Investment in unlisted shares is capped to 10% for closed-end and 5% for open-
end schemes.
Mutual Funds can also invest in overseas listed companies upto USD 300 million per
fund house and USD 4 billion as the industry combined.
No lending.
Prohibition from investing in unlisted companies of the sponsor.
Only delivery based sale/purchase is allowed.
Securities have to be bought in the name of the scheme.

Quick Wit
1. Calculate the current yield on a G. Sec with at par value of Rs. 1000, coupon of 11% and
market price of Rs. 1010.
1. 11.20%
2. 10.89%
3. 11.21%
4. 12.20%
2. Cyclical stocks command,

1. Relatively lower P/E ratio, and have higher dividend payouts
2. Relatively higher P/E ratio, and have higher dividend payouts
3. Relatively higher P/E ratio, and have lower dividend payouts
4. Relatively lower P/E ratio, and have lower dividend payouts
3. Current yield relates interest on a security to

a. Its current market price
b. Its face value
c. Its fair value
d. The current price of T-Bills
4. Dividend yield for a stock is

a. Dividend per share
b. Dividend per face value
c. Dividend per share to current market price
5. 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
6. As per SEBI, Non-Performing assets (NPA) of a mutual fund can be defined as

a. An equity which is trading below its par value
b. An equity share which is yet to be listed on the stock exchange
c. A debt security on which either interest or the principle or both amounts are due but not
received for one quarter after the due date
d. None of these
7. Of the following, which type of the fund would have a higher P/E multiple in comparison to
average market multiple
a. A value fund
b. A growth fund
c. An index fund
d. Could be any of the above three, one cannot generalise
8. The differentiating factor among debt funds of comparable maturity and quality is
a. Gross yields
b. Costs
c. Fund age
d. Tenure of the fund manager

9. Up to what extent unlisted equity shares can be held in an Equity fund?
a. 10% in Closed Ended fund
b. 5% in open ended fund
c. Both a and b
10. An active style of portfolio management includes the following

a. Application of ‘Systematic Transfer Plan’ in various schemes of a fund
b. Undertake macroeconomic analysis to determine profitable investment trends
c. Invest in companies with high market capitalization
d. All of the above
11. When interest rate rises, bond price

a. is not affected
b. fluctuates up or down
c. also rises
d. falls
12. A growth fund manager would apply the following strategies

a. Invest in those companies that would give more returns than the average returns in the
industry.
b. Invest in companies having a large equity base.
c. Invest in companies coming out with new “Initial public offer’
d. All of the above
13. When interest rates for similar maturities bonds are 11.5%, bond with a 8% coupon rate will
become
a. More attractive
b. Less attractive
c. At par
d. The price is unrelated to the interest rates for similar securities
14. Duration of a bond means the percent change in:

a. price with change in yield
b. price as a result of stock market fluctuations
c. price with change in coupon rate
d. none of the above

Answers
1. b
2. a
3. a
4. c
5. b
6. c
7. b
8. b
9. c
10. b
11. d
12. a
13. b
14. a

CHAPTER 9
MEASURING AND EVALUATING FUND PERFORMANCE
Methods of calculating return
Change in NAV or Absolute Return Method

This method is suitable for computing returns between two dates. This is simple to compute &
easy to understand.
(NAV at the end of Period-NAV at the beginning of Period)*100

NAV at the beginning of Period
Simple Total Return method

In this method, dividends distributed are added to change in NAV to compute total return. Thus
the formula is
(Change in NAV + Distribution)*100

NAV at the beginning of period
Return on Investment or Total Return with Dividend Reinvested method

In this method, dividends are assumed to be reinvested (purchase more units).
The Formula is:
(NAV at end*Units at end)-(NAV at beginning*Units at beginning)*100
NAV at beginning* Units at beginning
Units at end = Units at Beginning + Additional Units purchased

Additional Units purchased = Dividend Amount / Ex-Div NAV
CAGR
This is the simple compound interest formula solved for r. The formula is:
n
A = P (1+r)
A= Amount at Maturity, P = Principal investment, r = Rate of Interest, n = no of year
Solve the equation for r
1/n
r = (A/P) - 1
For a fund that has not completed a year, only absolute return should be used.
Less than one year return should not be annualized except for liquid funds.
For a scheme that has completed a year, CAGR is used.
Expense Ratio = Total Expenses/Net Average Assets – is an indicator of fund’s efficiency and
cost effectiveness
Income Ratio = Net Investment Income/Net Assets – usually for income oriented funds
Portfolio Turnover Rate = Lower of assets purchased or sold/Net Assets. This indicates churn
and transaction cost
Evaluating Fund Performance

Funds performance is measured against a benchmark, usually an index
Index funds performance is also measured against the index it is designed to track, called the
BASE index. Variation in actual return from index return is called tracking error
Debt funds performance is tracked against an appropriate index similar to composition of the
fund. FMPs are usually compared against Fixed deposits of similar maturity

Quick Wit
1. The NAV of an open-ended fund was Rs.16 at the beginning of the year and Rs.22 after 13
months. The annualised change in NAV is
a. 6.0%
b. 34.6%
c. 40.6%
d. 37.5%
2. A fund has a front load of 1% and back-end load of 0.5%. The investor enters at NAV of Rs.10
and exits at NAV of Rs.12. The return of investment earned by him is
a. 20%
b. 18.22%
c. 18.5%
d. None of these
3. What would be a suitable benchmark to evaluate a closed-end debt fund?

a. BSE Sensex
b. I-sec’s Si-bex
c. Crisil Composite Bond Fund Index
d. S & P CNX Nifty
4. An actively managed equity fund expects to

a. Be able to beat the benchmarks
b. Earn the same returns as the benchmark
c. Have no benchmarks
d. Underperform when compared with the benchmark
5. Turnover rates would be most relevant to analyze the performance of

a. Equity funds
b. Growth funds
c. Debt funds
d. Value funds
6. Which of the following is of no relevance in evaluating fund's performance?

a. The performance of the stock market as a whole
b. The performance of other mutual funds
c. The returns given by other comparable financial products
d. The change in wholesale price index
7. The difference between NAV change and total return as measures of fund performance is
a. None
b. Total return takes dividend into account while NAV change does not
c. Total return does not take NAV into account
d. Total return does not take the time period into account

Answers
1. b
2. b
3. b
4. a
5. a
6. d
7. b

CHAPTER 10
HELPING INVESTORS WITH FINANCIAL PLANNING
Financial planning is an exercise aimed at identifying all financial needs of an individual,

translating the needs into monetarily measurable goals at different times in the future, and
planning the financial investments that will allow the individual to provide for and satisfy his
future financial needs and achieve his/her life’s goals.
Benefits of becoming a financial planner include:
ability to establish long term relationships
ability to build a profitable business
A financial planner’s role is discussion of client’s goals and asset allocation and then help
client select an appropriate scheme and fund manager.
The fund manager’s role is analysis of markets and choice of individual securities.
Asset allocation refers to allocation of a client’s investments at a broad level across various
asset classes, including real assets (real estate, jewellery etc.) and financial assets.
Risk tolerance of a client refers to the extent of loss that a client can tolerate and for how
long they can withstand such declines in value.
Portfolio rebalancing refers to the process of making changes to asset allocation and specific
investments to ensure that the strategy remains current with changes in the client needs,
financial situations and market conditions.
Client Financial Fund Portfolio

Planner Manager Investments
Discussion Choice of Market Analysis

Of Goals Schemes & Choice of
& Asset & Fund Securities
Allocation Manager
Financial Planning process was first formalized by the Certified Financial Planner – Board of
Standards (USA) and consists of six steps:
I. establish and define client-planner relationship
II. gathering client data, defining client goals
III. analyzing and evaluating a client’s financial status
IV. developing and presenting financial planning recommendations and/or options
V. implementing the financial planning recommendations
VI. monitoring the financial planning recommendations
Indian Financial Planner should use the process as follows:

Step 1: Establish and define the relationship with the client
Step 2: Define the client’s goals
Step 3: Gather & analyze data, assess current resource & future income potential of client
Step 4: Determine and shape the risk tolerance level of the client
Step 5: Ascertain the client’s tax situation
Step 6: Recommend the appropriate asset allocation and specific investments
Step 7: Execute the plan and make the client invest
Step 8: Review progress and rebalance portfolio

Measurable financial goals must be set.
Financial planning is not the same as investing, it comes before investing.
A client must understand the effect of each financial decision on other areas of life.
Once every 3 to 6 months, the planner should meet the client to review progress and
perform an active, ongoing evaluation of results.
The client must play an active role in decision-making, ask questions and stay ‘in charge’.
Basis of Financial Planning
Life Cycle and Wealth Cycle Stages

The life cycle of an individual can be sub-divided into:
o Childhood stage
o Young unmarried stage
o Young Married stage
o Young Married with children stage
o Married with Older Children stage
o Post-family/pre-retirement stage
o Retirement Stage
During childhood stage, the main need for children may be to invest cash gifts to provide
lump sum when they are adults.
During young unmarried stage, there may be urgent short term needs such as saving up to
marry and establish a home.
During young married stage, it is important to create an emergency fund before committing
to long-term plans.
The need for life insurance is higher in case only one partner is working.
During the young married with children stage, the need for adequate life cover is higher and
must be met first.
During married with older children stage, provision to provide retirement income is crucial.
During post-family/pre-retirement stage, protection from disability and health problems is
important as well as the need to maximize investment into pension products.
At retirement stage, need for fixed income and capital protection is crucial.
A supplementary approach to life stage guide is the wealth cycle guide.
The wealth cycle approach is more comprehensive and relevant than grouping investor
merely by age or ‘life stage’.
The wealth stages of a client are:
a. accumulation stage – the financial goals are quite some time away and investments
can be made for the long-term; clients are looking to build wealth
b. transition stage – one or more of the goals are approaching and clearly in sight;
c. reaping stage – the cashing out stage when the goal has arrived; a client about to
retire or just retired
d. intergenerational wealth transfer stage – older investors who need to start thinking
about how to share their wealth
e. sudden wealth stage – significant events such as a sale of shares or business,
inheritance or winning from a contest/lottery making the client wealthy.
An effective mode of investing is ‘goal oriented investing’ where a specific and separate
asset allocation and investment strategy is evolved to meet each individual goal.
goal-oriented investing works well for all types of investors.
affluent investors is a category of wealthy individuals who do not need financial planning
to take care of the normal goals such as retirement income, children education/marriage etc
affluent investors are categorized as:
wealth creating – those who are willing to take risk to make their net worth grow
wealth preserving – those who are looking to primarily conserve the wealth that they
already have

Quick Wit
1. Financial planning is:

a. investing funds to receive the highest rate of return possible
b. resorting to tax planning to keep taxes as low as possible
c. planning for retirement with the maximum income possible
d. process of solving financial problems and reaching goals
2. Investment strategy need not be refined if

a. The client’s future needs or current resources change
b. The investment climate and financial markets change
c. The client’s personal situation, on account of a personal or financial event, change
d. The stock market moves up drastically
3. A couple in mid 40s who have children approaching the age of higher education or marriage
are in
a. accumulation stage
b. transition stage
c. reaping stage
d. distribution phase
4. A client whose goal of buying a house or funding a child’s education is close at hand is in the:
a. accumulation stage
b. transition stage
c. reaping stage
d. distribution stage
5. A grandfather wants to make an investment for a newborn grandson. Which is the most
suitable investment?
a. Index funds
b. Income funds
c. Money market funds
d. Gilt funds
6. 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
7. Financial planners and their clients should focus on

a. Allocating funds to asset classes
b. Allocating funds to individual securities
c. Tracking stocks, which they feel have potential
8. Financial Planning comprises

a. Defining a client's profile and goals
b. Recommending appropriate asset allocation
c. Monitoring financial planning recommendations
d. All of the above

9. Where would you place a 53 years old executive planning to retire at age 60?
a. Sudden wealth stage
b. Reaping stage
c. Accumulation stage
d. Transition stage
10. During the reaping phase the investor looks to:

a. building wealth
b. cashing out
c. transferring wealth
d. all of the above
11. A client’s financial plan need not be reviewed when

a. the client has just retired
b. the client has just been divorced at age 40
c. the client feels he has attained his financial goals
d. the client’s mutual fund portfolio shows appreciation

Answers
1. d
2. d
3. b
4. b
5. a
6. c
7. a
8. d
9. d
10. b
11. d

CHAPTER 11
RECOMMENDING FINANCIAL PLANNING STRATEGIES TO INVESTORS
Investing is a life-long activity, not an ad-hoc process.

Investing for the long term provides the benefit of power of compounding.
The more frequent the compounding, greater the growth in capital; six-monthly
compounding of 100 rupees for 10 years would yield Rs. 321 instead of Rs. 311 with annual
compounding.
The ‘growth’ option offered in mutual fund schemes has the same power of compounding
Different investing strategies suit different investors. Different strategies are:
o Buy and hold: most common strategy and the most common mistake made by investors;
falling in love with investments means sometimes holding on to non-performers and losing
the power of compounding
o Rupee Cost Averaging: investing in a disciplined manner; investing the same amount
each month or at regular intervals will average our the cost of purchase, with per unit price
being ‘always’ less than if you try and guess market highs and lows and invest irregularly
Disadvantage: it does not tell you when to buy or sell a fund or to switch from loosing to
winning funds
o Value Averaging: keeping a target value of investment constant by investing the amount
by which the investment value has come down or by cashing the increased value of his
investment or doing nothing if the value is unchanged
o Jacob’s recommendation of a combined approach: combine RCA and VA by using an

aggressive growth fund and a money market fund of the same family
Some key aspects that the client should keep in mind on when to invest and when to cash
out:
o invest whenever they have money
o when to cash out needs more thought and skill
o in case of stock – sell out as the price rises beyond reason or when fundamentals
start to deteriorate
o in case of mutual funds – redeem when the goals have arrived and clients need the
money of if the market appears ‘overvalued’ in terms of fundamentals and historic
valuations
o buy and hold may not be a good strategy with stocks but is good in case of a mutual fund,
provided the investor is willing to wait out a full market cycle
o start planning and investing early
o have realistic expectations
o invest regularly
Asset Allocation – the strategic tool
Besides how much and for how long to invest, the important question is where to invest or
which asset classes to invest in.
Asset allocation means determining the percentage of investments to be held in equities,
bonds and money market/cash instruments.
Over 94% of returns on a managed portfolio come from the right level of asset allocation
between stocks and bonds/cash.
Benjamin Graham suggested a 50/50 split between equities and bonds.

Graham suggested different combinations
Portfolio Type Portfolio mix

Basic managed Portfolio 50% diversified equity ‘value’ fund
25% Govt Securities fund
25% High grade corporate bond fund
Basic Indexed Portfolio 50% total stock market/index fund
50% total bond market portfolio
Simple Managed Portfolio 85% Balanced 60/40 fund
15% Medium term bond fund
Complex Managed 20% diversified equity fund
Portfolio 20% aggressive growth fund
10% specialty fund
Readymade Portfolio 100% Single Index fund with 60/40
equity/bond holding
Graham’s 50/50 is the basic asset allocation.

Bogle suggested variation to percentages based on age, financial circumstances and
objectives.
Bogle’s recommended strategic allocations are:
Younger Older
Investor Investor
Accumulation Stage 80E/20D 70E/30D
Distribution Stage 60E/40D 50E/50D
E – Equity D – Debt
Bogle’s thumb rule for asset allocation is that the debt portion of an investor’s portfolio
should be equal to her age. So a 30-year investor can make a 70/30 asset allocation and at
age 50 she could balance it out.
Fixed asset allocation means liquidating a part of position in the asset class with higher
return and reinvesting in the other asset with lower return. This is a disciplined approach and
lets an investor book profits in rising market and increasing holding in falling markets
Flexible asset allocation means no rebalancing and letting the profits run.
If stocks continue to return more than bonds, then a fixed ratio is better than flexible ratio,
e.g, in bull markets
If bond returns are close to equity market returns, the flexible ratio may work better
Tactical asset allocation refers to making changes in asset allocation within the overall
percentage holding with the objective of yielding extra return e.g. investing in small company
more than large-company shares or prefer value stocks over growth stocks
A fund that earns a higher return than another can still give lower net returns, if its expense
ratio or loads are higher – investors must watch out for such ‘cost penalty’ while selecting
funds

Quick Wit
1. A criticism of Rupee Cost Averaging is:

a. investment is for the same amount at regular intervals
b. over a period of time, average per share price will be more than guessing highs and lows
c. it does not tell you when to buy, sell or switch from one scheme to another
d. rupee cost averaging has no serious shortcomings
2. Value averaging means

a. Keeping the target value of investment constant by investing the amount by which the
investment value has gone down
b. Investing the same amount of funds regularly
c. Investing in one lump sum amount
d. None of these
3. Which of the following strategies is an example of the combined approach of RCA and Value
Averaging?
a. When the investor sets a target value for his investments in an Equity fund
b. When the investor invests a fixed sum each month in a Liquid Fund
c. When the investor invests regularly in a Liquid Fund
d. When the investor invests regularly in a Liquid Fund , sets a target for an Equity Fund,
then invests more in Equity Fund if its value declines and books profits when its value
exceeds the target value
4. Which of the following is the best investment option for the purpose of getting the maximum
benefits of compounding?
a. 12% interest paid yearly
b. 6% interest paid every 6 months
c. 3% interest paid every quarter
d. 1% interest paid monthly
5. As a financial planner, which of the following would you suggest for a person who can take a
moderate risk?
a. Aggressive growth fund
b. Aggressive equity fund
c. Diversified equity fund
d. Sectoral fund
6. Financial planning involves the achievement of following objectives:

a. Buying a home
b. Purchase of a new car
c. Planning for retirement
d. All of the above
7. What is Bogle’s suggestion regarding the ‘rule of thumb’ for asset allocation?
a. 50% equity and 50% debt
b. 60% equity and 40% debt
c. An investor’s allocation to debt should be equal to his age.
d. Investor should not do any re-balancing of his/her portfolio
8. What should be the recommended portfolio for an investor who is risk averse in his transition
phase?
a. Higher allocation to equity funds

b. Higher allocation to debt instruments
c. Investments only in equity
d. He should not invest anywhere
9. Investors who follow the fixed allocation approach

a. Maintain balance in their portfolio by liquidating a part of the position in the class, which
has given higher return, and reinvesting in the other asset class, which has lower return
b. Are not disciplined
c. Increase their equity position when equity prices tend to climb
10. Which of the following lets an investor book profits in rising market and increase holdings in a
falling market?
a. Fixed Rates of Asset Allocation
b. Flexible Ratio of Asset Allocation
c. Investment without any asset allocation plan
d. Buy and hold Strategy
11. A Flexible Ratio of Asset Allocation means

a. Continuously changing the ratio of various assets in the portfolio
b. Not doing any re-balancing and letting the profits run
c. Active switching
12. Deciding on strategies such as long-term compounding, cost averaging, value averaging,
active switching, all depend on the
a. Stock market situation on date
b. Amount of money to be invested
c. Investor's risk tolerance
d. Phase through which the economy is passing

Answers
1. c
2. a
3. d
4. d
5. c
6. d
7. c
8. b
9. a
10. a
11. b
12. c

CHAPTER 12
SELECTING THE RIGHT INVESTMENT PRODUCT FOR INVESTORS
Products available
Gold and real estate are physical assets available for investing.
Investment in Gold is not subject to erosion on account of rupee depreciation.
Historically, Gold is seen as a hedge against inflation or a means of security in bad
times. Gold ETFs are now available which make investing in gold easier and make it a
financial instrument.
Financial assets with guaranteed or fixed returns have been popular e.g. bank deposits,
company deposits, government saving instruments such as PPF, Indira Vikas Patra and NSC.
Financial assets also include capital market securities such as equity/preference shares,
bonds/debentures issued by companies or Financial Institutions, money market instruments
such as commercial paper or certificate of deposits.
Individual investors can buy capital market instruments but have no direct access to money
market instruments.
Mutual funds represent indirect investment through an intermediary – the fund.
Investments in mutual funds, unlike bank deposits or governments saving instruments, are
not guaranteed for return or capital.
Issuer Product Available to

Bank Fixed Deposits Investor, MFs
Shares Investor, MFs
Corporate Bonds, Debentures Investor, MFs
Fixed Deposits Investor, MFs
Govt. Securities Investor, MFs
Government PPF Investor
Other personal investments Investor
FIs Bonds Investor, MFs
Insurers Insurance policies Investor
Bank deposits are favoured investment option due to safety and liquidity.
Yield on bank deposits is negligible after accounting for inflation and tax.
Corporate securities include equity instruments, debt instruments and quasi debt-quasi equity
instruments.
Equity instruments are in the form of shares issued either privately and unlisted, or issued
publicly and listed on a stock exchange.
Shares can be bought either at the time of Initial Public Offer (IPO) or subsequently or
through the Stock Exchange where it is listed.
Benefit of equity investing is the high growth potential and high degree of liquidity
due to the listing on an exchange.
Historically, equity investing has yielded the highest return.
Challenge in equity investing is to identify the shares that are likely to appreciate.
Corporate also issue debentures paying fixed rates of interest.
In India, Debentures are generally secured by the assets of the borrower.
Companies also issue unsecured bonds, like FIs.
Company Fixed Deposit is another avenue available in the market.
Company FDs are unsecured and generally carry a higher rate of interest compared to bank
deposits and are taxable.
Credit rating of the borrower is given by a rating agency.
Borrowers with lower rating need to pay higher interest.
Credit Rating is only an opinion expressed by an independent agency based on review of
the issuer’s business.

Credit rating is assigned by agencies such as ICRA, CRISIL and CARE.
Earlier financial institutions such as ICICI and IDBI issued bonds, general purpose or for
infrastructure financing, usually unsecured in nature.
FI bonds generally have 2 options – periodic interest or deep discount basis.
Both options qualify for deduction under 80C of Income Tax Act.
Deduction of Interest income under 80L is not applicable.
Public Provident Fund (PPF) is a govt. obligation, risk-free, statutory scheme.
PPF carries tax-free interest of 8% p.a. compounded annually and contribution up to
Rs. 70,000 is eligible for deduction under Section 80C (F.Y. 2007-08).
Only one account per individual is allowed.
The scheme requires annual contribution between Rs. 500 and Rs. 70,000 to be made over
16 years, with the option to withdraw 50% of 4th year balance in the 7th year.
Restriction on withdrawal reduces liquidity for the investor.
Indira and Kisan Vikas Patra were introduced as post office schemes to tap rural savings, but
also became popular with urban investors. Indira Vikas Patra is now no longer issued.
RBI Bonds pay 8% p.a. (F.Y. 2007-08) and are fully taxable and has a maturity of 6 years.
Government Securities are government paper issued for terms ranging from 1-30 years
and define the yield curve to a great extent.
Primary Dealers appointed for this purpose deal in G-Secs.
Direct investing in G-Secs is possible, though amounts required may be large, hence best
accessible through mutual funds.
Life Insurance is available from LIC as well as private players.
Term Insurance is a ‘Without Profit’ policy that provides a certain sum of money (Sum
Assured) to the nominee of the life assured in the event of death within a specified term and
nothing in case of survival.
An endowment policy is generally a ‘with profit’ policy and provides the sum assured in the
event of death or maturity (whichever is earlier) of policy term and also bonuses as declared
from year to year.
Most policies require the individual to pay a fixed premium on a yearly basis.
If the individual decides to discontinue the policy during its tenure, he would be entitled to
receive the policy’s surrender value, which is a percentage of premiums paid till date.
Traditionally, life insurance has been viewed as an investment avenue and for its tax
benefits.
Premium paid on life insurance qualifies for deduction under Section 80C and
proceeds at the time of death or maturity are exempt from tax under section
10(10D).
Life insurance should not be viewed as an investment, but mainly to provide for dependants
in case of untimely death viz. protection.
A ‘convergence’ between mutual funds and life insurance is the advent of ULIPs which offer
investors choice of investment plans with different asset allocation and life cover at the same
time.
Comparison of Investment Products

Until 1980s, bank deposits were the primary investment option.
US-64, the only mutual fund scheme, was managed as a fixed return investment, as safe as
banks, and paying comparable though slightly higher dividends.
Equity investing was introduced subsequently, but these were not perceived to be high-risk
because of under pricing of primary share issues.
After crisis of 1992 and free pricing of shares, risk of direct investing was known to investors.
Professional management and lower of risk through diversification was now sought by
investors.

Comparison of various financial products
Convenience Return Safety Volatility Liquidity
Equity Moderate High Low High High-Low

FI Bonds High Moderate High Moderate Moderate
Corp Low Moderate Moderate Moderate Low
Debentures
Company Moderate Moderate Low Low Low
FDs
Bank High Low High Low High
Deposits
PPF High Moderate High Low Low-
Moderate
Life High Low High Low Low
Insurance
(Traditional)
Life High High High Moderate - Low-
Insurance High Moderate
(ULIPs)
Gold Low Moderate High Moderate Moderate
Real Estate Low High Moderate High Low
Mutual Funds High High High Moderate- High
High
Comparison between direct equity investing and mutual fund investing

Identifying stocks is a difficult and specialized process requiring research and monitoring the
market
Diversification, implied by the term ‘don’t put all your eggs in one basket’ is available to a
mutual fund that pools the resources of many investors
Professional management of funds ensures that the best avenues are tapped based on
comprehensive information and detailed research, full utilization of market opportunities and
tight control over costs
Mutual funds focus on investment activities based on investment objectives such as income,
growth or tax savings, thus providing a vehicle to attain objectives in a planned manner
Mutual Funds offer liquidity through repurchase options and through listing on stock
exchanges as against direct equity, where several stocks are often not traded for long
periods
Direct equity investing involves a high level of transaction costs per rupee invested in the
form of brokerage, commission, stamp duty etc.
In terms of convenience, mutual funds score over direct equity investing due to flexibility
such as switch between schemes, cheque writing facilities etc.
Equity investing is better in case the investor has a truly large portfolio and the time,
knowledge and resources required for direct investing
Comparison between bank deposits and Debt funds

A bank deposit is guaranteed by the bank for repayment of principal and interest
In a mutual fund, unlike the bank, there is no contractual guarantee for repayment of
principal or interest to the investor
In a mutual fund, the expected returns will be commensurate with the level of risk assumed
by the fund
A bank depositor does not directly hold a portfolio of investments, as he does in case of a
fund

The Investor Perspective
Investment Risk Tolerance Investment

Objective Horizon
Equity Capital Appreciation High Long Term
FI Bonds Income Low Medium-Long
Term
Corp Debentures Income High-Moderate-Low Medium-Long
Term
Company FDs Income High-Moderate-Low Medium
Bank Deposits Income Low Short-Medium-
Long Term
PPF Income Low Long Term
Life Insurance Risk Cover Low Long Term
(Traditional)
Life Insurance Risk Cover, Capital High-Moderate-Low Medium-Long
(ULIPs) Growth, Income Term
Gold Inflation hedge Low Medium-Long
Term
Real Estate Capital Growth, Income Low-Moderate Long Term
Mutual Funds Capital Growth, Income High-Moderate-Low Short-Medium-
Long Term
Mutual Funds offer higher flexibility as compared to other investment options.

Mutual funds combine advantages of all other forms, while doing away with the
disadvantages.

Quick Wit
1. Direct investment in stock markets can be a better option over investing through mutual funds
if:
a. the investor wants better returns than those offered by mutual funds
b. the investor has large capital, knowledge and resources for research
c. the investor has identified a bullish phase in the stock market
d. the investor wants to invest for the long term
2. A small investor can build a diversified portfolio by

a. Buying one share each of all listed companies
b. Investing in a mutual fund
c. Borrowing enough money to buy shares of well-managed companies
3. The difference between debenture and bond is:

a. Bonds are issued by corporations and debentures are issued by PSUs
b. Bonds are unsecured and debentures are secured.
c. Bonds are backed by loans and debentures are backed by assets
4. An income fund scheme invests in debenture of a company. What is the relationship of MF

investor with that company?
a. Debenture holder
b. Creditor
c. Shareholder
d. No relationship
5. An investor in need of regular income should not select:

a. a bank deposit
b. a debt fund
c. an equity growth fund
d. PPF
6. Which of the following has the highest level of liquidity?

a. equity
b. PPF
c. Company Fixed Deposits
d. Mutual Funds
7. The most important factor to look for when investing in a corporate fixed deposit is the
a. Yield
b. Rate of interest
c. Credit rating of the deposit
8. Which of the following should not be viewed primarily as an investment option?

a. Mutual Funds
b. Equity shares
c. Life Insurance

9. How would you convince a first-time investor who is risk-averse to invest in mutual funds in
comparison to a bank deposit?
a. Mutual funds is the right choice to grow your wealth at a fast pace
b. Mutual fund has the likelihood of giving more growth than the bank deposit as the
investment is in a diversified portfolio of securities.
c. Investment in Mutual fund doubles your money in 3 years
d. All of the above
10. An investor can assess the performance of his mutual fund by comparing it with the
performance of
a. Other mutual fund of the same type
b. The stock market
c. Other financial products
d. All of the above
11. If an investor needs income, he should select funds with:

a. low expense ratio
b. high expense ratio
c. low current yield
d. high current yield
12. What makes mutual fund the single most important financial instrument as a financial
planner?
a. Mutual Funds help in portfolio diversification and risk reduction
b. Mutual Funds help in doubling investment
c. Both the above
13. An investor claims that the PPF is a superior instrument to Mutual Funds. An argument to
defend investment in a Mutual Fund over PPF is:
a. Mutual Fund will surely yield a better return than PPF
b. A mutual fund offers the potential for higher income and capital appreciation
c. The capital investment is safer in a Mutual Fund
d. A Mutual Fund investment is less volatile
14. The liquidity needs of an investor are met through

a. Equity funds
b. Index funds
c. Money market funds
d. Sector funds
15. There is no contractual guarantee for repayment of principal or interest to an investor in

a. Bank deposit
b. Debt fund
c. Secured debentures
d. All of the above
16. Listing of shares at a stock exchange ensures

a. Guaranteed returns
b. Long term capital appreciation
c. Low risk
d. High liquidity

Answers
1. b
2. b
3. b
4. d
5. d
6. d
7. c
8. c
9. b
10. d
11. d
12. a
13. b
14. c
15. b
16. d

CHAPTER 13
HELPING INVESTORS UNDERSTAND RISK IN FUND INVESTING
Defining Risk
‘Risk’ is equated with volatility of earnings. Risk can also be termed as deviation (both
positive & negative) from expected earnings.
The risk of MF investing can be built into the investment planning in two ways:
o By defining the risk appetite of the investor and aligning the investment objectives to the
investor’s risk tolerance.
o by evaluating and measuring the risks of MF portfolio created for the investor so that
risks assumed are kept in line with the investor’s risk appetite.
The right level of risk tolerance of any investor depends upon his age, the amount of
investable funds available, and his financial circumstances including income level, job
security, family size etc.
From Asset Allocation to Fund Category Selection

Asset allocation is about allocating money between equity, debt and money market
segments.
Jacob’s recommendation of portfolio sub-allocations:
Low-Risk (Conservative) portfolio

50% G Secs + 50% MMMF
Moderate Risk (Cautiously Aggressive) portfolio

40% in Growth & Income + 30% Govt Bonds + 20% Growth Funds + 10% Index Funds
High Risk (Aggressive) Portfolio

25% Aggressive Growth Funds + 25% International Funds + 25% Sector Funds + 15% High
Yield Bond Funds + 10% Gold Funds
Types of Risks in Equity Funds
Company Specific
Sector Specific
Market Risk
Company and Sector risk can be reduced with diversification but market risk cannot be
diversified
Measures of Risk (Statistical)
Standard Deviation (Measure of Volatility) – is considered the best measure if risk. It

measures fluctuation of a fund’s returns around mean level. Standard deviation is a measure
of Total Risk. Lower the better.
Beta Co-efficient (Measure of Sensitivity) – Relates a fund’s returns with the market index
and measures the sensitivity of the fund’s returns to market index. Beta is a measure of
Market Risk. A beta of 1 means that the fund moves with the market. A beta of 2 would
mean that the fund’s volatility is double than that of the market. Higher beta funds do well in
a rising market, lower beta funds do better in a falling market.

Bogle’s Ex-Marks or R-Squared (Measure of Sympathy) – It measures the correlation
between the fund’s performance and the index. It thus helps in spotting questionable betas.
The quality of beta depends on the Ex-marks (higher the Ex-marks, more reliable the beta).
**Index Funds should have a Beta as well as R-Squared of 1**
Measures of Risk Adjusted Return
Sharpe Ratio
S.D.
Treynor Ratio
Beta
R = Fund return
Rf = Risk-free return

Quick Wit
1. If beta is higher than 1, the fund is

a. Less volatile than market
b. More volatile than market
c. Equally volatile than market
d. No relation
2. An investor asks you in what order he should list the following schemes, going from the
scheme with the least risk to the one with the highest risk – 1. Balanced Fund 2. A Stock
Index Fund 3. A Liquid Fund 4. An IT Sector Fund. Suggest the right order.
a. 1,2,3,4
b. 1,3,4,2
c. 3,1,2,4
d. 2,3,1,4
3. The ratio which divides risk premium by Standard Deviation is

a. Sharpe Ratio
b. Treynor Ratio
c. Bogle Ratio
d. Jensen Ratio
4. An ex-mark of 100% is possible for

a. A growth fund
b. An aggressive growth fund
c. An index fund
d. A balanced fund
5. The best equity fund, relative to others would have

a. Higher ex marks, lower beta and higher gross dividend yield
b. Higher ex marks, higher beta and higher gross dividend yield
c. Lower ex marks, lower beta and lower gross dividend yield
d. Lower ex marks, higher beta and higher gross dividend yield
6. A fund with a high beta coefficient gives greater returns in a rising market, and is more risky in
a falling market
a. True
b. False
7. Which of the following is a disadvantage of standard deviation as a measure of risk?

a. Standard deviation measures total risk, not just market risk
b. It is based on past returns, which does not necessarily indicate further performance
c. It is an independent number
d. All types of fund can be measured with standard deviation

Answers
1. b
2. c
3. a
4. c
5. a
6. a
7. b

CHAPTER 14
RECOMMENDING MODEL PORTFOLIOS AND SELECTING THE RIGHT FUNDS
Jacob’s 4 step program to developing a model portfolio
Step I: Work with Investors to develop Long-term goals

Step II: Determine the Asset Allocation
Step III: Determine the Sector Distribution
Step IV: Select specific fund manager and their schemes
Jacob’s Model Portfolios
Investor Recommended Model Portfolio

Young, Unmarried Professional 50% in Aggressive Equity Funds
25% in High Yield Bond Funds and Growth and
Income Funds
25% in Conservative Money Market Funds
Young Couple with two Incomes and two 10% in Money Market
Children 30% in Aggressive Equity Funds
25% in High Yield Bond Funds
35% in Municipal Bond Funds
Older Couple Single Income 30% in Short-term municipal Funds
35% in long-term Municipal Funds
25% in moderately aggressive equity
10% in emerging growth equity
Recently retired couple 35% in conservative Equity funds
25% in moderately Aggressive Equity
40% in Money Market Funds
Jacob’s recommended Investment Strategies
Investors in Accumulation Phase

Equity, Sectoral & Balanced – 65% to 80%
Income & Gilt Funds – 15% to 30%
Liquid Funds – 5%
Investors in Distribution Phase

Equity & Balanced – 15% to 30%
Income funds – 65% to 80%
Liquid Funds – 5%
Planning for Affluent Investors
Wealth Creating Individuals: These are aggressive and tend to invest more in equity,
maybe even 70% to 80%
Wealth Preserving Individuals: Conservative and thus tend to invest majority into
income, gilt and liquid funds

Fund Selection - Bogle’s Approach
Equity
Classify the funds – between Diversified, Sectoral, Index etc
Chose a strategy – between Growth and Value
Evaluate Past Returns – Compare with benchmark and with funds in same category over
same timeframes
Review Fund Size, Age, Costs, Manager’s experience – Bigger Size, Longer Age, Lower
Costs and Higher Fund Manager’s experience are better
Characteristics – Lower Cash Position, Low Concentration, Lower portfolio turnover are
generally better. Higher Cap assumes less risk
Risk Statistics – Low Beta, High Ex-Marks with the index, High Div yield are generally
better
Debt
Type – Differentiate between Income/Gilt/Liquid etc
Fund Age & Size – Bigger the Size and longer the age, better it is.
Costs – Lower the better
Loads – Should be low to none
Average Maturity – Higher average maturity means higher interest rate risk.
Credit Quality – More AAA rated securities, more secure the fund.
MMMF
Quality – Extremely important for Liquid Funds that this is very high
Yields – Higher the better
Balanced
Portfolio Balance – Should match investor’s objective
Debt Portfolio Quality – Should be high
Portfolio Statistics – Just like equity funds

Quick Wit
1. A young couple has 2 incomes and 2 children. Jacob’s recommendation to them would be:
a. 100% equity funds
b. 10% money market, 50-60% aggressive equity and 30-40% conservative bond funds
c. 25% debt 75% equity growth funds
d. 80% debt and 20% equity funds
2. Which of the following is recommended by Jacob for a Low Risk portfolio?

a. 50 % Growth and Income fund + 50% Money Market fund
b. 50% Growth funds + 50% index fund
c. 50% Government Securities fund + 50% Money Market fund
d. 50% Sector Funds + 50 % Money Market fund
3. For which of the following would you consider “average maturity” as an important factor in
selecting the right one for the investor?
a. A debt fund
b. A balanced fund
c. A money market or liquid fund
d. Both a and b above
4. A very high proportion of investment in all types of equity funds is advisable for investors
a. In distribution phase
b. In accumulation phase
c. In transition phase
d. Who are wealth preserving affluent individuals
5. For older investors who want to transfer their wealth

a. No financial planning is required
b. The right investment strategy depends upon who the beneficiaries are
c. The right investment strategy depends upon the state of the stock market
d. All the funds can be invested in aggressive equity funds

Answers
1. b
2. c
3. d
4. b
5. b

CHAPTER 15
BUSINESS ETHICS FOR MUTUAL FUNDS
Business Ethics refers to rules of acceptable and good conduct in business.

All those persons who are engaged in business should comply with rules of good conduct.
These rules may be set by those who own and manage the business, or by those agencies
that have the right to regulate the business.
In many countries, laws such as consumer or investor protection act exist.
Need of Business Ethics

These are required to have honest and fair business practices.
These are required to insure that the business is not done dishonestly and false promises are
not made to the investors.
From social angle, business ethics are required to protect the consumers’ interest.
From the angle of business itself, good ethics means good business.
Honest and fair practices will insure that the customer remain satisfied, will not feel cheated
and the loyalty will increase.
They are also required to have transparency in business dealings and insuring that both the
existing as well as potential clients and consumers are treated at par.
Need of business Ethics in Mutual Funds

Mutual funds are vehicles of collective investment managed by asset managed companies.
AMC manages this money to earn a fee. In this process the AMC take the help of many other
entities including distributors and individual financial advisors. All these need to be abide by
the rules of good conduct.
In this process, the following points are important:
o Trustees and directors of AMC set the rules for distribution and employees
o AMFI has also set rules of good conduct for AMC’s , its employees and distributors
Objective of Business Ethics

The major objective is to have honest and transparent dealing with existing and potential
consumers
Another objective is protection of consumers or clients from being cheated or exploited
We also require business ethics to ensure level playing field among all the business
participants
Business ethics also help in ensuring healthy competition for the benefit of all consumers
Business Ethics and Fund Regulation in India
Regulator’s Responsibilities
Both the Govt. and SEBI are concerned with the protection of investor interest.
SEBI has incorporated the rules of good conduct in MF regulations.
SEBI has also issued guidelines to AMFI and MFs to develop code of conduct for fund
distributors, fund managers and all employees and associates of AMC and Trustee Company.
Regulatory objectives
SEBI mandates the funds would have always conduct all their activities in the best interest of
the investors. Three areas are particularly monitored by SEBI
o Fund structure and Governance
o Exercise of voting rights by funds
o Fund operations

Fund structure – a Fiduciary responsibility for MFs
A fund holds the investors money in trust. The money always continues to belong to
investors.
Fund managers only manage it. Such an arrangement of funds being held in trust places
what is called a fiduciary responsibility on the trustees and fund managers.
Naturally, ethical and honest behavior on the part of the fund trustees and managers is far
more important for the MF industry than any other industry.
The structure of the fund industry has been designed to protect the investor through a
system of checks and balances on the observance of ethical standards by all the industry
constituents.
Fund Governance
Regulators prime concern is investor protection.
The entire legal structure prescribed for MF in India has been conceived to protect the
investor through a system of independent controls or check and balances overall participants
in the business
Fund operations
Insider trading
Insider trading refers to buying and selling securities on the basis of privileged information
available to the funds by person who are seen as insider to the company.
Fund managers are not insiders but they can collude with other insiders to gain access to
private information, and use that information to trade on their personal account.
This would run against the interests of the investors.
Preferential treatment to selected investors

MFs are vehicle of collective investments where all investors in a scheme are to be treated
equally.
One group of investors cannot receive preferential treatment over another.
The regulators keep a watch on AMCs to prevent any unethical practices in this regard.
Personal trading by fund managers and employees

Personal trading by fund employees who also buy and sell securities on behalf of the scheme
can create situations of conflict of interest.
Fund managers buy and sell securities from the markets for the MFs portfolio.
They have access to information not necessarily available to others.
The purpose is to ensure that the fund manager do not use any non-public information for
personal gains.
Compliance officer
SEBI has made it mandatory for every AMC to have a compliance officer who would be
responsible for implementation of all laws, guidelines and voluntary codes of conduct.
Compliance officer not only reviews but can also give approval to personal trading and
investment transactions.
Code of Conduct for Distributors

All the distributors and agents have to follow the code of conduct laid down in the 5th
schedule of the SEBI MF Regulations (1996) as well as AGNI.
Mutual funds have to monitor and report any violation of these guidelines to SEBI and AMFI.

Quick Wit
1. The code of conduct may be put in place by

a. AMFI
b. Board of Trustees
c. Directors of AMC
d. All of the above
2. Insider trading means

a. personal trading transactions done by anyone associated with a Mutual Fund
b. personal transaction done by anyone with knowledge of the fund decision in the security
c. personal trading transaction without prior approval of the AMC
d. personal trading transaction done by an insider of an AMC/Fund
3. Select which of the following is an example of unethical behaviour?

a. Fund distributor buying shares that he knows are part of the fund portfolio recommended
to investors
b. Fund employee buying shares that he knows the fund has decided to buy
c. Fund trustee owning a share portfolio of his own
d. Fund manager buying shares in his own name
4. The code of ethics for mutual funds published by AMFI

a. Is mandatory
b. Is in the form of recommended practices
c. Is unfavourable to investors
d. Does not cover distribution and selling practices
5. The AMFI code of ethics does not cover the following prescriptions
a. Adequate disclosures should be made to the investors
b. Funds should be managed in accordance with stated investment objectives
c. Conflict of interest should be avoided in dealings with directors or employees
d. Investors should approve each investment decision
6. Code of ethics should be followed by distributors as

a. It is required by AMFI
b. It is required by AMC
c. Business increases
d. All of the above
7. What is insider trading?

a. Buying and selling securities ahead of doing the same transaction for the fund
b. Buying and selling securities on the basis of privileged information available to the fund
by persons who are insiders to the company
c. Both of the above
8. Mutual funds in India are required by SEBI to

a. prohibit their employees from personal trading in secondary markets
b. allow all employees to trade freely in secondary markets without restrictions
c. establish a code of conduct and allow employees to do personal trading that conforms to
SEBI guidelines
d. allow employees to carry on personal trading as long as they abide by SEBI regulations

9. The detailed version of SEBI circular regarding code of conduct for distributors, given by AMFI
is known as
a. Ethics code
b. AGNI
c. Front running
d. None of the Above
10. The regulation of Personal trading is applicable to

a. Key Personnel of the AMC
b. The directors of the trustee company
c. Sponsor of the fund
d. Only a and b

Answers
1. d
2. b
3. b
4. b
5. d
6. d
7. c
8. c
9. b
10. d

AMFI Mutual Fund (Advisor) Module Revision Kit 2008

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AMFI Mutual Fund

Evolution of Mutual Funds In India

Important Milestones in the MF history in India

Open-ended funds vs. Closed-ended funds

Commodity Funds: specialize in investing in different commodities directly or through shares of

1. A close-ended mutual fund has a fixed

3. A mutual fund is not

4. The most important advantage of a money market mutual fund is

5. Debt funds target

6. After UTI, the first mutual funds were started by

8. A mutual fund is:

9. Which one is more diversified?

10. An investor should not invest in a mutual fund if

Legal Structure of Mutual Funds

CUSTODIAN R&T AGENT

The Fund Sponsor

Mutual Funds as Trusts

Asset Management Company (AMC)

Other Fund Constituents

Custodian and Depositories

Fund Mergers and Scheme Takeovers

A running fund constitution can change in the following possible ways

Transaction Type Trustee SEBI High Court

1. A mutual fund is owned by

3. The Board of Trustees of a mutual fund:

4. The trust that manages a mutual fund is appointed by

5. The custodian of a mutual fund:

6. Transfer Agents of a mutual fund are not responsible for

7. The sponsor of a mutual fund may be compared to

8. Issuing and redeeming units of a mutual fund is the role

9. The fund sponsors should have a sound financial track record of

11. The role of an AMC is to act as

13. Role of the custodian is

15. In case of a fund take-over

Legal & Regulatory Environment

Department of Company Affairs (DCA) - responsible for formulating and modifying

Self Regulatory Organizations (SROs) - is an association representing a group of market

Right of Proportionate Beneficial Ownership of the scheme’s assets

Right to Timely Service

Right to approve changes in fundamental attributes

Right to wind up a scheme

Right to terminate the AMC

Investors Complaints Redressal Mechanism

Legal limitations to Investors’ rights

1. Documents available to investors for inspection do not include

3. The highest authority among the following is the

4. The entity that SEBI does not regulate is

7. A close-ended scheme of a mutual fund is not governed by

8. Which of the following is a Self-Regulatory Organisation?

11. The amount of authority enjoyed by a Self-regulatory Organisation is defined by

12. The role of AMFI in the mutual funds industry is not to

13. Bank owned Mutual Funds are supervised by

14. Mutual fund units cannot be distributed by

Validity of the OD for new schemes

Investors right to Information on Material Changes in scheme

Other important information regarding OD

Key information Memorandum (KIM)

1. Which of the following is true?

2. The following is not required on the cover page of the OD

3. A due diligence certificate does not certify that

6. An open ended scheme can change its fundamental attributes

7. The front page of an offer document need not cover