Académique Documents
Professionnel Documents
Culture Documents
Study Material
1
Index
Offer Document 40
Distribution channels 54
Accounting NAV 61
NPA 67
Investor Services 74
Financial Planning 96
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Life cycle & Wealth cycle 100
Charges
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Concept & Role of Mutual Funds
Objective –
Understanding what mutual funds are.
Understanding how Mutual funds work.
The Mutual fund flow chart
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Concept & Role of Mutual Fund
• A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal.
• The money thus collected is then invested in capital market instruments such as shares, debentures
and other securities.
• The income earned through these investments and the capital appreciations realized are shared by its
unit holders in proportion to the number of units owned by them.
• Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity
to invest in a diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund:
5
Question Time
6
Stages in Mutual Fund industry
Objective –
Understanding the evolution of mutual funds
The changes the industry has seen since inception
7
Stages in mutual fund industry
8
Question Time
1. _________ was the year SEBI Regulations for Mutual Funds was formulated.
a. 1992
b. 1993
c. 1995
d. 1996
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Types of Mutual Fund
Objective –
Understanding the various types of Mutual funds
The various difference based on structure, risk, return, charges etc.
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Types of Mutual Funds
Other classifications.
• By nature of investments
Equity, Bond, money market, liquid funds invest in financial assets
Precious metal funds, real estate funds invest in physical assets.
• Gilt Funds
Medium to long term maturity.
Little risk of default as issued by government.
Face interest rate risk.
• Equity Funds
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Offer greater risk than debt funds, as well as offer higher potential for growth.
Subject to equity price fluctuation in the markets. Price movements are caused by many factors
like political, social as well as economic.
• Hybrid Funds
Funds seeking to balance equity & debt securities are termed as hybrid.
• Balanced funds
Has a portfolio comprising of debt instruments, convertible securities, and preference & equity
shares.
Aim is to attain the objectives of income, moderate capital appreciation, & preservation of capital
& are ideal for investors with a conservative & long term orientation.
• Commodity Funds.
Specialize in investing in different commodities directly or through shares of commodity
companies or though commodity futures contract.
May invest in a single commodity or a commodity group like edible oils, while diversified
commodity will spread their assets over many commodities.
Precious Metal funds are an ideal example.
• Fund of Funds.
Invest in other Mutual Fund Schemes. Fund of funds are not allowed to invest in other fund of
fund.
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Types of debt funds.
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Types of equity funds
• Growth funds
Invest in companies whose earnings are expected to rise above average.
Target capital appreciation over a three to five year span.
Less volatile than aggressive growth funds.
• Speciality funds
Have narrow portfolio orientation & invest in only companies that meet predefined criteria.
Sector Funds:
Invest in a particular sector, like pharma, power, IT etc.
Since they are not diversified in nature, they carry a higher risk than growth funds.
Foreign Securities Fund.
Invest in equities of one or more countries.
Advantageous because it offers greater diversification
Carries inherent risk of foreign exchange rate risk.
Performance depends on the economic conditions of countries invested in.
Mid-Cap or Small- Cap funds:
Invest in companies that have a lower market capitalization compared to blue chip companies.
More volatile as the scripts are not freely traded.
Option income funds.
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Question Time:
6. 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 it is listed
d. To the agent through which he / she subscribed to the units of the
fund
15
Fund structure & classification
Objective –
Understanding the various participants that constitute a fund.
The various objectives, functions, duties & responsibilities
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Fund Structure & classification
Structure in India
Sponsor
Trustees
Asset Management Company
Custodian / Depository Participant
R & T Agent
Distributors
Bankers
Sponsor
Trustee
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Sponsor
Any person acting alone or in combination with another corporate establishes a mutual fund. He is like a
promoter of a company as he gets the fund registered with SEBI.
Chapter 2 of SEBI (MF) regulations 1996 describes the eligibility criteria of sponsor.
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Mutual funds as a Trust.
Trustees
• Board of trustees is governed by the `Indian Trust Act 1882` it must also comply with the
`Companies Act of 1056`
• As an independent body acts as protector of unit holders money.
• Trustees do not manage the portfolio of securities; they appoint an ASSET management company.
• The trust is created though a trust deed that is executed by the fund sponsor in favour of the
trustees.
• 3rd schedule of the SEBI MF regulations specify the contents of the trust deed
• The trust deed is to be stamped & registered with the Indian registration Act & registered
with SEBI
• Minimum 2/3 of the trustees are independent directors, based on SEBI guidelines.
• Trustees must insure investors interests are safe guarded & the AMC’s operations are along
professional lines.
Rights of trustees
• Trustees appoint the AMC with the prior approval of SEBI
• All schemes, floated by the AMC, must be approved by the trustees.
• Right to request any necessary information from the AMC.
• Right to remedial action if they believe the conduct of the AMC is not in accordance with
SEBI regulations. Right to dismiss the AMC, with approval of SEBI.
• ANY shortfall in the net worth of AMC is made up by the AMC.
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Asset Management Company.
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Custodian & Depositories.
• Custodian is appointed by the board of trustees for safe keeping of physical securities.
• Mutual funds are in a business of buying & selling securities. A custodian is appointed by the board of
trustees for safe keeping of physical securities or participating in any clearing system though
approved depository companies on behalf of the mutual fund in case of dematerialized securities.
• Mutual funds are dematerialized securities holdings are held in a depository though a depository
participant.
• Chapter 4 of SEBI (MF) regulations 1996 Custodian should be an entity independent of the sponsor &
is required to be registered with SEBI.
Bankers
• A funds banker plays an important role with respect to its financial dealings by holding its bank
accounts & providing it with remittance services.
Distributors.
• A fund to sell units across a wide retail base of individual investors an established network of
distributors is essential.
• AMC’s usually appoint distributors (agents, brokers intermediaries)
• Distributors need to have an AMFI registration number to distribute mutual funds.
• Distributors normally act on behalf several mutual funds simultaneously.
Distributors can appoint several sub brokers under him.
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Question Time
3. Distributors or agents
a. can distribute several mutual funds simultaneously
b. cannot appoint sub-agents or sub-brokers
c. should be only individuals not companies or banks
d. should not be an employee or associate of the AMC
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b. updating investor records
c. preparing transfer documents
d. investing the funds in securities markets
12. A transfer in the management of a close-ended scheme does not require the consent of
a. unit holders with 75% voting rights
b. SEBI
c. Trustees
d. AMC
15. The AMC is required to be approved & registered with SEBI with a net worth of –
a. Rs. 20 crores
b. Rs. 100 crores
c. Rs. 50 crores
d. Rs. 10 crores
16. The Trustees appoint the AMC with the prior approval of
a. SEBI
b. Stock exchange
c. AMFI
d. None of the above
Answers : 1(c), 2(a), 3(a), 4(a), 5(b), 6(d), 7(c), 8(c), 9(c), 10(b), 11(d), 12(d), 13(c), 14(b), 15(d),
16(a), 17(b), 18(c), 19(b)
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Fund merger & scheme takeover
Objective –
Understanding the merger & acquisition by mutual funds
The various legalities, compliance issues & sanctions required.
The role of Trustees, Investors & regulators.
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Fund Mergers & scheme takeovers.
A fund’s sponsors, trustees & fund managers are all key people. Any change can impact the performance
of the fund or change the very character of the fund or its schemes.
• The AMC managing the scheme may be taken over by another set of sponsor
• AMC may merge with another AMC, the AMC managing schemes of both AMC’s.
• The trustees may decide to change the AMC & hand over the AMC to a new fund manager.
• The schemes could be taken over by another set of trustees.
• The schemes may be merged with the schemes of the same fund managed by the same trustees or
other schemes managed by the AMC
Mergers & Acquisitions are now a common activity in many businesses. It leads to over all efficiency
through improved skills, lower costs, and better competitor position.
• Since AMC’s are companies under the preview of the Indian companies act,
• Provisions of the companies act apply.
• Approval of the specific high court is needed.
• Merger to be approved by SEBI.
• Consent of unit holders with 75% voting rights needed. Unit holders who do not give their
assent have an option to exit the scheme, without paying any exit load.
• Investors must be informed individually & though newspaper advertisements.
Key documents such as Trust deed, offer documents, AMC agreement & memorandum of articles of the
AMC may require amendments.
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Question Time
1. To transfer the management of a scheme from 1 AMC to another, the consent of the following is
required
a. SEBI
b. Unit holders
c. Both SEBI and unit holders
d. None of the above
2. A change in the following key people does not materially impact the performance of the fund
a. fund sponsors
b. trustees of the fund
c. fund Manager
d. members of the AMFI Committee
4. __________ % of unit holders need to give their approval before a merger takes place
a. 75%
b. 51%
c. 50%
d. 76%
6. Does the memorandum of article need to change when a merger takes place?
a. No
b. Yes
c. Depends on the AMC
d. Only if SEBI permits
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Legal & regulatory environment
Objective –
Understanding the various regulators.
The need & various controls & reporting structure among the various departments.
Understanding the powers & functions of each department.
The legal structure & independent judiciary authorities
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Legal & regulatory environment
Regulators in India.
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Ministry of Finance.
• Is charged with implementing government policies, ultimately supervises both RBI & SEBI
• Ultimate policy making & supervising entity.
• Securities Appellate tribunal has been created to provide the apex appeal mechanism for any decision
taken by SEBI.
• Formed in 2003.
• Securities Appellate tribunal (SAT) works as an independent judicial authority.
Stock exchanges
• Are self regulatory organizations supervised by SEBI?
• Many close ended schemes are listed on one or more stock exchanges. This is done though a listing
agreement between the fund & the stock exchange.
• AMC’s do not get directly involved in the transactions. The registrar’s handle it.
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Questions Time
1. The Highest authority among the following is the
a. SEBI
b. Company Law Board
c. RBI
d. Ministry of Finance
2. The accounts and all other records of an AMC are filed with
a. AMFI
b. Registrar of Companies
c. Agents Association
d. UTI
5. If the Directors of an AMC commit fraud, Unit Holders investments’ cannot be protected by the
Department of Company Affairs and the Company Law Board
a. True
b. False
11. Name the independent judicial authority under the Ministry of Finance?
a. Company Law board
b. Company law bench
c. Financial court
d. Securities Appellate Tribunal
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12. Department of company affairs can prosecute company directors for –
a. Failure to comply with any provision under the company’s act
b. Non repayment of deposit
c. fraud & other offences
d. All of the above
13. How are close ended funds listed on the stock exchange?
a. AMC’s have a listing agreement with stock exchanges
b. They are not stocks, hence not listed.
c. By the registrars
d. As small cap stocks
14. Who handles the investor’s transaction when they sell or buy close ended funds from the stock
market?
a. The Asset management company
b. the stock broker
c. The registrars
d. The stock exchange
Answers: 1(d), 2(b), 3(d), 4(c), 5(a), 6(a), 7(a), 8(c), 9(b), 10(b), 11(d), 12(d), 13(a), 14(c)
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Self regulatory organization
AMFI
Objective –
Understanding what a Self regulatory organization
The organizations they exert their authority over.
What is AMFI & what are its objectives
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Self regulatory organizations
AMFI
• Association of Mutual Funds in India – not a self regulatory organization.
• Incorporated in 1995, with the objective of representing the mutual fund industry collectively.
• Board of directors elected from the mutual fund members governs AMFI.
• AMFI, though not a SRO does register fund distributors, test & verify their competency.
AMFI has the power to deny registration to distribution for failing the test or violating the AMFI code of
conduct (AGNI)
33
Question Time
34
Investor rights & obligations
Objective –
Understanding the rights enjoyed by investors
The obligations & limitations of investor rights
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Investors Rights & obligations.
Investors are owners of the scheme’s assets, and it is therefore imperative that they are aware of their
rights with respect to their scheme, its management, and recourse to trustees, the AMC & other
constituents.
• Right to information.
Unit holders have the right to receive any information that may have an adverse impact on their
investments.
Unit holders have the right to inspect major documents of the fund. For eg. The trust deed,
Investment management agreement, the custodian service agreement & the registrar & transfer
agency agreement.
Memorandum & articles of association of the AMC, Recent audited financial statements SEBI
regulations, Indian trust act & The Offer document.
Right to receive a copy of annual financial statement.
Complete statement of scheme portfolio before the expiry of one month of each ½ year (31st
March & 30th Sept.) unless printed in one English national newspaper and a regional newspaper
where the head office is based.
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obligation to meet the shortfall in case the assured return is not achieved. Only if the offer document
has specifically provided such guarantee from the sponsor, the investor will have a right to sue them.
• A prospective investor does not have any standing or rights with respect to the fund, AMC or any
other constituent. It is only after he has invested does he have any rights.
Investors’ Obligations.
• It is the investor’s duty to study the offer document. Failure to effectively study the offer document,
does not give the investor any recourse to the fund.
• It is mandatory for the investor to submit his PAN number along with his bank account details.
Investor complaints.
• SEBI does entertain complaints against mutual funds & intervenes with fund management to help the
investor resolve his complaint.
• Sponsors of new schemes need to appoint a compliance officer, who must issue a due diligence
certificate to the effect that all SEBI guidelines are followed.
Investors are neither shareholders nor depositors in the AMC; hence they are not protected by any of the
company act regulators. The investors can remove the AMC with 75% vote. They may try to get
the directors prosecuted.
37
Question Time
1. The scheme wise annual report of an AMC shall be published or mailed to unit holder not later than –
a. 3 months
b. 6 months
c. 12 months
d. Monthly
2. Right to any dividend or income received under the scheme, can be categorized as –
a. Right to timely service
b. Right to information
c. Right to beneficial ownership
d. None of the above
3. Unit holders are entitled to dividend within _______ from the date dividend is declared.
a. 30 days
b. 10 days
c. 45 days
d. 07 days
4. Interest payable to investors, in case redemption proceeds are not received by the investor within
a. 7 days
b. 10 days
c. 15 days
d. 3 days
5. Investors have a right to claim dividends or redemption due to them within _______
a. 180 days
b. 365 days
c. 3 years
d. 2 years
6. An application at the time of NFO, the investors should receive Units within ______ days from the
issue closing date
a. 30 days
b. 15 days
c. 45 days
d. 25 days
9. Investors need the prior approval of ________ before they can exercise their vote to terminate the
AMC or wind up the scheme
a. AMC trustees
b. AMFI
c. SEBI
d. Trustees of the AMC
10. _______ % of investors need to vote to wind up the scheme or terminate the AMC
a. 75%
b. 51%
c. 50%
d. 100%
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b. Investors bear the risk while investing in mutual funds
c. They can sue the trust
d. Any trust cannot be sued.
Answers: 1(b), 2(c), 3(a), 4(b), 5(c), 6(a), 7(d), 8(d), 9(c), 10(a), 11(a), 12(d), 13(d).
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Offer document
Objective –
Understanding what an offer document is.
The importance of the offer document.
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Offer Document
Offer document: - the document that contains details of a new fund offer that the AMC or the sponsor
prepares & circulates to prospective customers. It has to be registered with SEBI.
In the USA an offer document is called prospectus.
Offer document of a close ended fund is issued once at the time of launch,
In case of open ended funds, SEBI requires the offer document to be revised every 2 years.
Importance
• The most important source of information from the perspective of the prospective investor.
• Fundamental attributes of the scheme, which cannot be altered without the knowledge of the
investor.
• Operating document & describes the product, i.e. that scheme on offer.
• All relevant information to the investor is disclosed in the offer document.
• Buyer Beware
• Primary vehicle for investment decisions, a legal document that protects & governs the
rights of the investor. It also serves as a reference document for the investor to look for relevant
information at all times.
• An offer document contains a statement SEBI does not approve or disapprove anything contained in
the offer document.
• Trustees must vet the document before it is issued.
Contents
• Details of sponsor & AMC
• Description of scheme & investment objective
• Terms of issue
• Historical statistics.
• Investors rights & services
Key Information Memorandum (KIM):- An abridged version of the offer document is usually
distributed with the application form.
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• Where to obtain the updated offer document.
It is the investor’s legal right to ask for a detailed offer document.
They may obtain a copy from the fund house, or though a distributor.
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Question time
3. For open ended funds, the offer documents needs to be revised every ________ years
a. 2 years
b. 1 year
c. 5 years
d. End of every financial year
7. Is the investor informed when the AMC enhances or imposes an entry or exit load
a. Yes
b. No
c. Depends on the AMC
d. Only if SEBI mandates it
8. If the scheme is not launched within __________ months of SEBI approval, a fresh offer document
has to be signed.
a. 3 months
b. 1 month
c. 6 months
d. 12 months
9. Who approves the offer document once the AMC plans to launch it?
a. Investors
b. AMFI
c. SEBI
d. Trustee & then SEBI
Answers: 1(b), 2(a), 3(a), 4(b), 5(a), 6(a), 7(a), 8(c), 9(d).
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Offer documents - contents
Objective –
Understanding the contents of the offer document.
Its importance & value, both with regard to the investor & the AMC
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Offer documents – Contents
• Glossary of defined terms. This would include terms normally used in the offer document.
• Financial Information
Expenses
Sales load, contingent deferred sales charge redemption load etc all at a % of NAV
Details of initial issue expenses for the scheme & for other schemes launched during
the last one fiscal year.
Estimated annual recurring expense as a % of average weekly net assets.
In case of a FOF, the investors need to know that they will pay double expense.
Condensed financial information of schemes
All schemes launched by the fund during the last 3 fiscal years, NAV at the
beginning/ end of the year, net income per unit, dividends, transfer of
reserves, etc.
Information on the borrowing of the fund at the end of the last fiscal year.
Investments in companies which have in turn invested in the AMC schemes.
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Functions & responsibilities of it’s constituents, sponsors, AMC, trustees
Activities of the sponsor & its last 3 years financial performance
Names & addresses of the board of trustees/ directors, giving details of their occupation &
current directorship
Summary of trust deed
Trusteeship fees
• Investment objectives
Short description of the type of securities in which the scheme will invest.
Asset allocation pattern.
Policy of diversification.
If the scheme name implies, it will invest primarily in that class, at least 65% investment.
For open ended schemes, if illiquid assets are likely to be more than 10%, it must be
disclosed.
Justification of net worth of guarantor in case of assured returns.
Portfolio turnover policy
Investment limitations
• Management of funds.
Name & background of the fund manager, key personal, investor relations officer, AMC & its
directors.
Investment procedure
The manner in which a prospective investor may purchase units should be described
Name/address of collection banks & investor service centers.
Special purchase plans or methods such as accumulation plans, dividends reinvestment plans
Minimum initial or subsequent investment.
Details on who can invest sales price fixation & nomination facilities.
Schemes policy on
Dividend & distribution
Inter-scheme transfer
Borrowing policy
Purpose & circumstance of borrowing
Regulatory limits on borrowing
Potential risk to AMC & unit holders
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Procedure for redemption or repurchase
Brief description of determination of redemption & repurchase price of units along with statutory
restrictions.
Names of centers where redemption can be affected.
Redressal mechanism
Brief description of investor’s complaints history.
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Question Time
4. the offer document contains condensed financial information of all schemes launched in the last
a. 3 years
b. 5 years
c. 7 years
d. 9 years
48
Key Information Memorandum
Objective –
Understanding the Key information Memorandum
The various objectives & importance.
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Key Information Memorandum (KIM)
Key information Memorandum is the abridged version of the offer document & in distributed
along with the application form.
Investment objective
Benchmark index & dividend policy
Name of Fund Manager & trustee company
Asset allocation pattern of the scheme
Plans & options
Performance of schemes in terms of compounded annualized returns over 1, 3, 5 year period.
Along with the benchmark returns.
Expenses with regard to load & recurring expenses.
Source of obtaining daily NAV
Investor grievance contact
Mechanism to provide unit holders with information such as account statements, annual financial
results & ½ yearly portfolio disclosures.
50
Question Time
51
Who can invest?
Objective –
Understanding the investor base
The various types of investors & one who can vote & one’s who can
52
Who can invest?
• Residents
o Resident Indian individuals/ HUF
o Insurance companies
o Provident funds
o Mutual funds
• Foreign Entities
o Foreign institutional investors
53
Question Time
54
Distribution channels
Objective –
Different types distribution.
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Distribution Channels
• Distribution companies – A large administrative mechanism which supports a large direct sales
force. The AMC deals with the distribution company directly instead of dealing with separate sales
force. Employees who engage in sales & marketing of distribution companies, banks or other
corporate entities are required to pass the AMFI certification test & obtain an ARN card. Many private
funds prefer Distribution companies.
• Banks & NBFC’s – in developed countries banks play a major role in distributing mutual funds. In
the last 5 years banks in India have been a major distributing factor of mutual funds.
• Post offices – Mutual funds have entered into tie ups with post offices, thus giving themselves a very
wide geographical area.
• Direct marketing – Fund houses sell their products directly to investors. This is a very small % &
caters mainly to HNI’s or institutional investors.
All distributors are required to abide by a code of conduct as prescribed by SEBI & based of AGNI of AMFI.
There are now more corporate distributors & less individual distributors.
56
Question Time
4. In the last 5 years which distribution channel has been a major distributing factor of Mutual Funds
a. Individual investors
b. Banks
c. Corporate Distributors
d. Post offices
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Sales practices & SEBI
regulation
Objective –
Understanding the various types of commissions paid to distributors.
Importance of SEBI advertisement code
Importance of AMFI code of ethics
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Sales Practices & SEBI regulations
Distributors (individuals or distribution companies) are compensated by funds though commissions. AMC
pay commission to distributors at basic rate plus an incentive depending on the volume of business.
Commission rates
2 types of commissions
Upfront commission for mobilization of funds
Trail commission to encourage the retention of the investors.
Commission rates
Equity funds 1.5% - 2.5%
Debt funds 0.25% - 1.25%
SEBI does not prescribe any limit of commission payable to distributors by the fund house.
Market Practice
Rebating is banned by SEBI vide their circular dated 26th June 2002.liable to lose their AMFI
registration.
Distributor’s obligations
Sub brokers act as agents of the brokers/ distributors. Brokers/ distributors must make sure of their
actions.
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Distributor must provide customer with `key information memorandum`& make available for
inspection the offer document.
The distributor will execute every transaction on behalf of the customer & mention that he does
not endorse the fund & that it does not constitute his obligations.
The distributor will offer & sell units at the public offering price & that it would be effective only
after the fund has received it.
The distributor is responsible at his expense to ensure compliance with applicable regulation.
60
Question Time
5. In which type of fund, should annualized returns be shown even if the fund is less than one year?
a. Equity
b. Debt
c. Exchange traded fund
d. Liquid funds
9. Does the AMC need the sanction of SEBI or AMFI, when it appoints a distributor?
a. Depends on the AMC
b. Yes
c. No
d. Only in the first three years of its existence
Answers: 1(c), 2(d), 3(a), 4(c), 5(d), 6(b), 7(b), 8(c), 9(c), 10(a)
61
Accounting NAV
Objective –
Understanding the calculation of Nett Asset Value.
Understanding the reasons for NAV movement.
62
Accounting NAV
All fund assets belong to the investors & are held in fiduciary capacity.
Mutual Fund are required to follow the accounting policies laid down in SEBI (MF) regulations 1996
NAV= market value of investments + receivables + other accrued income + other assets – accrued
expenses –other payables –other liabilities / no of units outstanding on the valuable
• NAV have be calculated & uploaded on the AMFI site by 8 pm for OEF’s & every Wednesday
for close ended funds
o Close ended schemes which are not mandated to be listed on the stock exchange for eg.
Monthly income schemes may publish NAV on a monthly or quarterly basis as permitted by
SEBI
• Applications received before the cut off time will carry the same days NAV & ones received
after that will carry the next days NAV. Cut off time is 15:00. for unit repurchases the cut of
time is 10:00 am.
• Other assets include due to the fund but not received as on the valuation date.
• Other Liability includes expense payable by the fund for eg. Custodian fee or trustee fee.
• NAV needs to be rounded of to 4 decimal points in case of a liquid fund & 2 decimal points
in case of other schemes.
• Purchasing of units.
• The difference between the repurchase price & sale price of a unit is not permitted
to exceed 7% of the sale price.
o In case of close ended funds maximum spread (sale price & repurchase price) is
5%.
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Fees & expenses
• Investment management & advisory fees
@1.25% of the first 100 crores of weekly average net assets
@1% in excess of 100 crores
No load fund, AMC can charge additional management fees of 1%
• Initial expenses
Are charged at the time of launch, cannot exceed 6% of initial resources raised.
• Recurring expenses
Marketing & selling expenses (distributors commission)
Brokerage & transaction costs
Registrar fees for transfer of units sold or redeemed
Fees & expenses of trustees
Audit fees
Custodian fees
Cost related to investor communication
Costs of fund transfer from location to location
Cost of providing account statements, dividend/ redemption cheques & warrants.
Insurance premium paid for the fund
Winding up cost.
Other costs as approved by SEBI
• Total expense charged by the AMC excluding issue or redemption expense but including
investment management & advisory fees are subject to the following limits
1st 100 crores 2.50%
Next 300 crores2.25%
Next 300 crores2.00%
On the balance 1.75%
For bond funds charges are lower by 0.25%
Fund of fund schemes cannot exceed 0.75% of the average net assets.
• Initial expense – permitted for close ended scheme where entry load is not charged.
The charges are amortized on a weekly basis over the period of scheme
AMC will redeem the units before the closing day by recovering the balance amortized charge.
Open ended schemes should meet the sales, marketing & other expenses connected with sales &
distribution of schemes from the entry load & not from the initial issue expenses.
Unamortized portion of the initial issue expenses shall be included for NAV calculation
as it will be considered as other asset.
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Unit holders can request for the annual report of AMC, the same needs to be mentioned in the
Annual report.
• Dissemination of Information
To SEBI
• Once a year copies of audited statement of all schemes.
• Copy of six monthly un audited reports.
Within 30 days of the close of each ½ year (31st March & 30th Sept) the fund shall publish
unaudited financial reports in 0ne English & the regional language where the head office is
located. It would also post the results on its website which is linked to the AMFI website.
The trustees shall disclose to unit holders about any information which may have an adverse
bearing on their returns.
The Annual report containing accounts of the AMC should be displayed on the websites of the
mutual funds.
• Accounting policies
Investments are required to be marked to market price
Dividend received by the fund on a share shall be the day the share is quoted ex dividend & not
on the date of declaration.
In determining the holding cost of investment & the loss or gain on sale of investment, the
average cost method should be used.
Purchase & sale of investments should be recognized on the trade date & not on the settlement
date.
Non performing assets & income thereon shall be as per SEBI guidelines.
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Question Time
2. In case of closed ended schemes, what is the periodicity of amortization of issue expenses?
a. Weekly
b. Quarterly
c. Half yearly
d. Annual
4. When should the AMC declare its NAV for open ended funds?
a. Every evening by 6 pm.
b. Every morning by 9 am
c. Every evening by 8 pm
d. Every morning by 10 am
5. When should the AMC declare its NAV for close ended funds?
a. Every Wednesday by 6 pm.
b. Every Wednesday by 9 am
c. Every Wednesday by 8 pm
d. Every Wednesday by 10 am
6. If the AMC or the registrar receives the application before 15:00 hours
a. The previous day’s NAV is assigned to the investor
b. The yesterday’s NAV is assigned to the investor
c. The NAV declared in the evening will be is assigned to the investor
d. NAV would be assigned as per the AMC rules
10. What is the maximum load spread in case of close ended funds?
a. 5%
b. 6%
c. 9%
d. 7%
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d. Balanced funds
14. What happens to the unamortized portion of the initial issue expenses?
a. it shall be considered as an asset & included in NAV calculation
b. It shall be taken out by the fund as per the discretion of the Fund Manager
c. It shall remain so till the fund closes
d. The AMC can recover this money when its personal assets are below 10 crores
16. What would the total expense that an AMC would charge on their equity fund having an AUM of Rs.
1,000/- crore?
a. Rs. 25.00 crores
b. Rs. 20.50 crores
c. Rs. 17.50 crores
d. Cannot calculate, incomplete data
20. Who discloses to investors about any information which may have an adverse bearing on their
returns.
a. AMC
b. Trustees
c. Sponsor
d. SEBI website
Answers: 1(c), 2(a), 3(d), 4(c), 5(c), 6(c), 7(c), 8(d), 9(d), 10(a), 11(a), 12(d), 13(c), 14(a), 15(d),
16(b), 17(b), 18(a), 19(c), 20(b)
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Non performing assets
Objective –
Understanding the concept of a non performing asset.
Ways & steps on how to remove a NPA from the scheme
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NPA (Non Performing Assets)
An asset can be treated as non performing if the principal or interest amount has not been
received for one quarter from the day it had fallen due. For eg it the interest was due on 30th
June 2006it would be classified as NPA on 1st Oct.’2006
Once declared as NPA there will be no interest accrual.
• Reclassification of assets
In case the company has cleared all arrears of interest, the interest provision is written back in
full.
On clearance of all interest arrears & if debt is regularly serviced over the next 2 quarters.
If all arrears of interest are fully cleared, the interest not credited on accrual basis would be
credited at the time of receipt.
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Question Time
3. Within how many months would the NPA be removed from the fund after the principal or interest
is not paid?
a. 15 months
b. 18 months
c. 24 months
d. 12 months
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Valuation of scheme portfolio
Objective –
Understanding the basic valuation principles
Understanding the valuation of equity tradable, thinly traded & non tradable security.
Understanding the valuation tradable & non tradable (government & corporate
security)
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Valuation of Scheme Portfolio
Valuation of thinly traded shares: - are ones where the trade is less than 5 lakhs in a month or
total volume is less than 50,000 shares.
• In case trading is suspended up to 30 days then the last traded price is used.
• > 30 days, the AMC/ trustees can decide the valuation norms to be followed. Such norms should be
documented & recorded.
Valuation of non-traded shares: - when the security is not traded at any exchange for more
than 30 days it becomes a non-traded security.
• The calculation is as under:- Net worth per share =
share capital + reserves (excluding revaluation reserves) – misc expenses & debit balance on
P7L a/c
----------------------------------------------------------------------------------------------------------------
Divided by no of paid up shares
All non government, investment grade securities, classified as non tradable are valued on yield to maturity
basis. If the fund manager expects a YTM of 10% on a security that pays a coupon rate of 9% for a face
value of Rs. 100/-, its value will be marked under to Rs. 90/- so its effective yield will be 10%
All non government, non investment based securities are valued at a discount of 25%. Thus a Rs. 100/-
bond will be valued at Rs. 75/-
• Call money, bills purchased under rediscounting & short term deposits with banks are valued at cost +
accrued interest.
• Convertible debentures & bonds: Non convertible component is valued as a debt instrument &
convertible as an equity instrument.
• Instruments based on repo basis must be valued at the agreed resale price minus interest up to the
date of sale.
• Securities with call option: the lower of value obtained by valuing the security to final maturity & that
valued to call option date.
• Securities with Put option: the higher of value obtained by valuing the security to final maturity & that
valued to call option date.
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• Valuation & disclosure of illiquid securities: if it exceeds 15% the excess would have a value of 0 in
OEF’s. It is 20% is case of OEF’s. Mutual funds are not allowed to transfer illiquid securities
among their schemes.
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Question Time
3. Shares where trade is less than Rs. 5,00,000/- & volumes are less than 50,000 shares are termed as
a. Tradable shares
b. Thinly traded shares
c. non traded shares
d. Investable shares
5. What happens if the share brought by the AMC is not traded in the stock exchange?
a. The Last quoted share price of the day of any other reputed stock exchange where it has traded
is considered.
b. The previous day’s price is considered.
c. It is considered as NPA
d. The share has to be sold within 7 days
6. What happens to an equity share which has not traded for the past 30 days?
a. Sell it off immediately
b. Ask AMFI/ SEBI for reimbursement
c. Declare the share NPA
d. Do not do anything
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Investor services
Objective –
Understanding the procedure for buying & selling of Mutual fund (Units)
Understanding the various Investment plans offered by AMC’s.
Understanding the services provided to investors by AMC & distributors
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Investor Services
Investment Plans
Automatic reinvestment Plan (ARP): - Reinvest the dividend earned in the scheme. Hence the investor
gains extra units. Reinvestment takes place at the ex- dividend NAV.
Systematic Investment Plan (SIP): - invest a fixed sum periodically thereby letting the investor save
in disciplined & phased manner.
Systematic withdrawal plans (SWP):- allows the investor to make systematic withdrawals fro his fund
investment account on a periodic basis. The withdrawal amount would be deposited in his account or a
cheque sent to him. It is not the same as Monthly Income plans because here the client can withdraw his
principal.
In Monthly Income plans, only the interest is returned to the investor.
Systematic transfer plans (STP):- allows the investor to transfer money from one asset class to
another over a specific period of time.
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Question Time
7. Define SIP.
a. Systematic investment period
b. Systematic investment plan
c. Specific investment plan
d. Specific investment period
8. Define SWP
a. Systematic withdrawal period
b. Systematic withdrawal plan
c. Specific withdrawal plan
d. Specific withdrawal period
9. Define STP
a. Systematic transfer period
b. Systematic transfer plan
c. Specific transfer plan
d. Specific transfer period
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c. Liquid funds
d. Debt funds
12. As per SEBI mandate, AMC must sent annual financial statement to all its investors
a. Immediately after year end
b. Mid year
c. On the Application anniversary
d. Within 6 months of the close of accounting year
Answers: 1(c), 2(a), 3(b), 4(c), 5(d), 6(d), 7(b), 8(b), 9(b), 10(b), 11(c), 12(d).
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Equity portfolio management
Objective –
Understanding the various tasks of an equity fund manager
Understanding the various types of equity instruments
Understanding the various classification of equity.
Understanding the approaches to portfolio management.
Understanding the structure & role of the portfolio management services.
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Equity Portfolio Management
• Passive fund management – funds that offer stock index funds, aim to offer returns equal to the
returns of that index. Fund expenses are low, so investors’ returns are as close to the index as
possible.
• Value investments –
Invest in what they believe are currently unvalued in the market, but their potential
would soon be realized.
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valued & the Growth manager believes that the prices are fairly priced but expected to do
better in future.
• Use of equity derivatives for portfolio risk management (futures & options)
Futures contract allows one to buy or sell an underlying asset on a specific date.
Options contract allows you to decide whether you want to buy or sell the asset on that date.
Options are used to hedge a portfolio.
Fund Managers can buy or sell futures & options contract for hedging or portfolio balancing. They can also
invest part of the funds of a scheme in derivative instruments. This is possible
a. For new schemes approved by SEBI
b. For old schemes where the consent of the majority investors has been obtained.
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Question Time
82
c. Debt & equity Investing
d. None of the above
13. Which of these analysts research into the operations & finances of the company, estimating its future
analysis & risk profile?
a. Fundamental analyst
b. Technical analyst
c. Quantitative analyst
d. Security analyst
14. Which of these analysts involves the study of historical data on the company’s share price movement?
a. Fundamental analyst
b. Technical analyst
c. Quantitative analyst
d. Security analyst
15. Which of these analysts use mathematical models for equity valuation?
a. Fundamental analyst
b. Technical analyst
c. Quantitative analyst
d. Security analyst
16. Under what circumstances does SEBI allow AMC’s to invest in the derivative market?
a. For new schemes approved by SEBI
b. For old schemes where unit holders have given the sanction
c. For AMC’s whose asset size in more than 50000 crores
d. Both (A) &(B)
17. Which of these do not form a part of the equity portfolio management team?
a. Fund Managers
b. Security dealer
c. Operation team
d. Security analysts
Answers: 1(d), 2(d), 3(b), 4(b), 5(a), 6(a), 7(b), 8(c), 9(a), 10(b), 11(a), 12(d), 13(a), 14(b), 15(c),
16(d), 17(c), 18(a).
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Debt portfolio management
Objective –
Understanding the various tasks of an debt fund manager
Understanding the various types of instruments in the Indian Debt market
Understanding the various classification of instruments in the debt market
Understanding the characteristics of money market & debt securities & its measures
Understanding the approaches to portfolio management.
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Debt Portfolio Management
Debt Portfolio Management has to contend with the construction & management of portfolios of debt
instruments with the primary objective of generating income.
Debt markets are governed by government securities. Non government securities account for
only 1.6% of trading.
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• Current yield: If the interest rates rise yield of the existing bonds will decline & vice versa eg. The
yield of a bond with a par value of RS. 1000, coupon of 10%, the market price of RS. 1200 is 8.33%
i.e. (10% * 1000/1200)
• Yield to maturity – is the annual rate of return an investor would realize if he bought the bond at a
particular price, received all the coupon payments, reinvested the coupons at the same YTM rate &
received the principal at maturity.
o Yield curve – graph showing yields of bonds of various maturity. It is normally upward
sloping as longer maturities offer higher interest. Long term debt carries higher risk on
account of inflation & other economic factors.
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Organization structure of debt funds
• Interest rate forecasting unit.
• Fund managers & security dealers
87
Question Time
4. What are debt instruments having a maturity of under one year called?
a. Debt instruments
b. Junior debt instruments
c. Money market security
d. call & put options
10. Which of the following is true, with regard to public sector bonds?
a. Minimum government stake should be 51%
b. Are in dematerialized form & eligible for repo transaction
c. Minimum maturity is 5 years for taxable bonds & 7 years for tax-free.
d. All of the above
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d. All of the above
17. What risk does the bond face when the interest rates falls in future?
a. Call risk
b. Default risk
c. Reinvestment risk
d. Inflation risk
18. What risk does the bond face when the bond cannot be sold at a price nearer its value?
a. Call risk
b. Default risk
c. Reinvestment risk
d. Liquidity risk
Answers: 1(a), 2(c), 3(d), 4(c), 5(c), 6(b), 7(d), 8(d), 9(d), 10(d), 11(d), 12(a), 13(b), 14(c), 15(c),
16(b), 17(c), 18(d), 19(d), 20(a), 21(b).
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Investment policy & restrictions
Objective –
Understanding the various policies & restrictions paid down by SEBI for portfolio
management.
List of approved & unapproved securities
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Investment policy & restrictions
Investment policies of each scheme are dictated by the investment objective in the offer document.
Equity fund - investment strategies lay guidelines on the sectors & what kind of companies to
invest in, usually minimum & maximum allocation to each fund class.
Debt fund – investment strategy lays guidelines on the portfolio composition in terms of types
of instruments to be held, their credit rating profile & average maturity, minimum & max.
percentage of cash & money market instruments also needs to be mentioned.
• Equity with voting rights – a fund under all its schemes is not allowed to own more than 10% of
any company’s paid up capital carrying voting rights.
• Not more than 5% of Net asset value of a scheme can be invested in other schemes, so as to prevent
an artificial increase in fund size.
• Credit rating on debt schemes – All debt instruments have to be rated by at least one credit rating
agency.
• Only delivery based purchases/Sales – short selling & carry forward transactions are not allowed.
• Securities in the name of scheme.
• Temporary investments in bank deposits – pending decision on where to invest the money can
be in a bank deposit, subject to it been a scheduled bank.
• No lending. Can’t lend or advance any loans.
• Unlisted or sponsor listed securities –
• Inter scheme transfer – is permitted subject to it be done at market price.
• Use of derivatives
• Record of investment decisions: with the purpose to ensure due diligence & to bring transparency
in investment decisions, SEBI requires AMC to maintain records of each investment.
• Fund of fund scheme – A FOF can not invest in other FOF scheme.
• Liquid funds
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Question Bank
1. Which of the following is not an investment restriction by SEBI?
a. Mandating minimum levels of diversifications in investments
b. Ensuring that the investor funds are not used to favor associate companies
c. Investments are done in approved securities
d. All funds must invest in Equity to increase the % of returns
5. What is the maximum % of funds that can be invested in a debt paper with & without the trustees’
permission?
a. 10% - 7%
b. 20% - 15%
c. 15% - 10%
d. 20% - 10%
6. What is the maximum % that can be invested in unlisted equity in open ended & close ended funds?
a. 10% -10%
b. 5% - 5%
c. 10% -5%
d. 5% - 10%
7. What is the maximum % a fund can hold in a single company’s paid up capital?
a. 5%
b. 7%
c. 10%
d. 3%
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Measuring & evaluating mutual
fund performance
Objective –
Understanding the calculation of Mutual fund performance.
Understanding benchmarking & performance tracking device.
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Measuring and evaluating Mutual fund performance
Fund performance
• Investor perspective – he would be interested in tracking his performance.
• Advisor perspective – it would be important to give proper advise on which fund has a good
performance record.
Expense ratio – is an indicator of the fund’s efficiency & cost effectiveness. It is the ratio of total expense
to average net assets of the fund.
Brokerage commission on the funds transaction is not included in fund expense figures
The income ratio – net investment income divide by its net assets for the period.
Transaction costs – includes all expenses related to trading such as brokerage commissions paid, stamp
duty on transfers, registrar & custodian fee.
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I-SEC – I-Bex index is often used by some analysts as a benchmark to track
government securities performance.
o LI- bex that tracks the securities with long maturities over 7 years
o MI-bex that tracks the securities with maturities between 3 to 7 years
o Si-bex that tracks the securities with maturities between 1 to 3 years
CRISIL – has 8 debt indices, 4 primary indices that track the price of underlying
securities and 4 derived indices based on primary indices. Primary indices cover AAA AA
rated securities & call market & commercial paper.
NSE has designed a government securities index & a treasury bills index. They track
o Principal return index - market price movements that are a mirror image of yield
movements.
o Total return index - both interest accruals & capital gains or losses –
Criteria for peer group comparisons
• The investment objective & risk profile. Can’t compare a debt fund with equity fund.
• Portfolio compositions of both are same – high % of corporate bonds fund can’t be compared to one
having a high % of government bond.
• Credit profile – 80% of the fund having AAA can’t be compared with one having 40% AAA
• Expense ratios. The lower the better.
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Question Time
4. Less than one year returns should be annualized in case of which funds?
a. Liquid
b. Debt
c. Equity
d. All of the above
11. What is the maximum period a Mutual fund can borrow for
a. 6 months
b. 9 months
c. 15 days
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d. 12 months
20. Brokerage commission, stamp duty on transfers, registrars & custodian fees form a part of
a. Initial management charge
b. Transaction cost
c. Load fund
d. None of the above
Answers: 1(c), 2(a), 3(b), 4(a), 5(b), 6(c), 7(a), 8(a), 9(d), 10(d), 11(a), 12(b), 13(d), 14(a), 15(c),
16(a), 17(a), 18(d), 19(b), 20(b).
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Financial planning
Objective –
Understanding the basic terms in financial planning.
What makes a good financial planner?
Financial planning process & the common mistakes we make in financial planning.
Financial planning process
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Financial Planning
Finance is needed by each one of us at various stages of our life, & to ensure that money is available at
the right time.
Buying a home, providing for children’s education or for retirement are all examples of goals in life that
can be measured in monetary terms.
Financial planning is an exercise aimed at identifying all the financial needs of an individual, translating all
the needs into monetarily measurable goals at different times in future & planning the financial
investments that will allow the individual to provide for & satisfy his future financial needs & satisfy his life
goals.
1. Financial Planning: the overall process of advising clients on how to achieve their financial
goals.
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2. Financial goals & objectives: all the goals & needs of a client which have a monetary aspect to
it.
3. Asset Allocation: the allocation of a client’ investments across various asset classes, financial &
physical.
4. Risk tolerance: the extent to loss of value that a client can tolerate, psychologically & financially
& for how long they can withstand such declines in value.
5. Financial Plan: a document that details clearly in writing the financial goals, available recourses,
time frame for investment, asset allocation and an action plan towards implementing the financial
planner’s recommendation.
6. Portfolio rebalancing: the process of making changes to the asset allocation to ensure that the
client’s investment objective stays consistent.
1. Establish & define the relationship with the client: Financial planner should clearly explain the
service he would provide, the charges for his services & the duration of the professional
relationship.
2. Define the client’s goals: F.P. should get the client to discuss his financial needs, for eg. His
retirement needs, money for his children’s education & marriage needs, purchasing a home etc.
Important time to build trust & confidence with the client.
3. Gather & analysis data, assess the current recourses & future income potential:
4. Define & shape the risk tolerance level of the client:
a. The client’s degree of risk-taking keeps changing with market conditions. The pattern is
that client’s become more risk taking in a rising market & risk averse in a falling one. It
should be the other way round.
b. Client’s attitude towards risk is not consistent with their recourse availability & financial
goals. Clients are extra conservative & at times would not be able to make their financial
goals with their current level of saving & low yield rates.
5. Ascertain the client’s tax situation:
6. Recommend the appropriate asset allocation & specific investments: the purpose of ascertaining
the client’s goals, his resources, his risk tolerance & tax situation is simply to recommend the
most appropriate asset allocation & investment strategy for the client. It is a critical decision &
the essence of financial planning.
7. Executing the plan & making the client invest: executing is most important. The F.P. must help
the client liquidate some of his assets if the need be. If the planner is in charge, he should keep
the client informed about the progress of the investments.
8. Reviewing Progress & Portfolio balancing: once every 3 to 6 months the F.P. should meet the
client to review the ongoing performance of schemes, evaluate the investment strategies & see if
it needs to be refined. It would happen under the following circumstances:
a. The client’s future needs or current resources have changed.
b. The investment climate & market conditions have changed.
c. The client’s personal situation has changed in a significant way, on account of a personal
or financial event.
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6. It is considered only for the mid aged clients.
7. Considered similar to retirement planning.
8. Acted upon only in case of financial crisis.
9. Expectations of unrealistic returns.
10. Financial planning to some means losing control on your investments.
11. Considered for tax planning only.
• Set Measurable financial goals – A child’s educational need needs to be measured. The need say of
Rs. 5,00,000/- for your child’s education is a defined amount that needs to be worked at.
• Understand the need of each financial decision – Each financial decision might have an effect on the
client portfolio. Tax implication needs to be taken care of.
• Re-evaluate financial situation periodically – financial planning is a dynamic process. An individual
financial goal changes on a regular basis.
• Start investing as soon as possible.
• Be realistic in expectations – plan according to returns expected. Planning for a return of 18% on a
debt investment could affect the portfolio returns.
• Realize that the client is in charge.
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Life cycle & wealth cycle stages
Objective –
Understanding the various stages, needs, requirements across the different stages of
a man’s life.
Understanding the constraints of financial planning.
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Life cycle & Wealth cycle stages.
• Accumulation stage: clients are looking to build wealth – financial goals are far away &
investments can be made for the long term.
• Transition stage: one or more of the client’s financial goals are approaching, for eg. A 40 year
old would need money for his child’s educational needs.
• Reaping stage: cashing out stage. Financial goals, for which the client has invested, have to be
met & hence this could also be termed as the spending stage.
• Intergenerational transfer stage: older investors normally plan to park their surplus & hand it
down to their grand children.
• Sudden wealth stage: sale of equity, property, inheritance wealth can give a client a one time
financial bonanza, making him suddenly wealthy.
Financial planning for affluent investors: While they may not be worried about having enough money
to meet their financial expenses, they too look for proper financial guidance. They can be classified into 2
categories:
• Wealth creating: individuals looking to built their wealth.
• Wealth preserving: individuals looking to preserve the wealth they have created.
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Financial strategy for investors
Objective –
Understanding the value of long term financial planning.
Understanding the right financial strategy.
104
Financial strategy for investors
• Harness the power of compounding: earning interest on interest greatly appreciates the wealth of
the client. For eg. Investing Rs. 100/- @ 12% would yield Rs.311 at the end of 10 years or Rs. 965/-
at the end of 20 years.
• Choose a strategy to maximize returns on investment:
o Buy & hold: most common strategy, also the most common mistake. Sell the non performers &
buy the good performers.
o Rupee Cost averaging: Equity markets rise & fall, the ideal time to invest is when the markets
are low. A near impossible task year in & year out. Hence we need to invest in the markets on a
regular basis. When buying equity on a regular basis, we would buy stock at a high or a low
price. The average price would be low than the selling price, hence the client benefits.
o Jacob’s recommendation of a combined approach: Invest equal amounts in a liquid & an
aggressive equity fund. If the equity markets fall, transfer money from the liquid fund to
aggressive equity fund. If the equity fund grows by a moderate, do nothing. However if there is a
sharp rise, sell equity & invest in liquid fund. Ideally also called ‘profit booking’.
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Question Time
1. What is the criticism of Rupee Cost averaging?
a. It has no short coming.
b. It invests the same amount of money every year.
c. It does not tell when to invest & when to exit.
d. In the long run the average cost will be more than investing in the market at the right time.
2. Keeping in mind the concept of realistic expectations, what should be our average expectations from
the equity markets?
a. 10 - 12%% more than the bank deposits
b. 4-5% more than the bank deposit
c. On an average 18%
d. 5-10% more than the bank deposit
106
Asset allocation principles
Objective –
Understanding the various asset allocation principles
Understanding the strategy asset allocation.
107
Asset allocation principles
• Benjamin Graham‘s 50/50 balance: recommends an equal split between equities & debt. The
balance has to be constantly managed. If the equity markets rise or fall the debt fund would
compensate to keep the balance constant.
• 50/50 portfolio of funds: Bogle suggests the following combination:
o Basic balanced portfolio: 50% in diversified equity value funds, 25% in govt. security fund
& 25% high grade corporate fund.
o Basic Indexed portfolio: 50% in Equity index fund & 50% in total bond market portfolio.
o Simple Managed portfolio: 85% in balanced funds & 15% in medium term bond funds.
o Complex managed portfolio: 20% in diversified equity fund, 20% in aggressive growth
fund, 10% in specialty funds, 30% in long term bond funds & 20% in short term bond fund.
o Readymade portfolio: Single index fund with 60/40 equity/ bond ratio.
Strategy Asset Allocation: Bogle recommends adjusting of portfolio based on the life cycle.
Older investor in distribution stage 50: 50 (equity/debt)
Younger investor in distribution stage 60: 40 (equity/debt)
Older investor in accumulation stage 70: 30 (equity/debt)
Younger investor in accumulation stage 80: 20 (equity/debt)
Increased returns without increased risk: lower expense ratio will generate higher returns.
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Question Time
1. As per Bogle, what is an ideal asset allocation for older investor in accumulation stage?
a. 50:50 (equity /debt)
b. 60:40 (equity /debt)
c. 70:30 (equity /debt)
d. 80:20 (equity /debt)
2. As per Bogle, what is an ideal asset allocation for younger investor in accumulation stage?
a. 50:50 (equity /debt)
b. 60:40 (equity /debt)
c. 70:30 (equity /debt)
d. 80:20 (equity /debt)
3. As per Bogle, what is an ideal asset allocation for older investor in distribution stage?
a. 50:50 (equity /debt)
b. 60:40 (equity /debt)
c. 70:30 (equity /debt)
d. 80:20 (equity /debt)
4. As per Bogle, what is an ideal asset allocation for younger investor in distribution stage?
a. 50:50 (equity /debt)
b. 60:40 (equity /debt)
c. 70:30 (equity /debt)
d. 80:20 (equity /debt)
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Answers: 1(c), 2(d), 3(a), 4(b), 5(a), 6(b), 7(c), 8(d), 9(d), 10(d)
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Right investment products
Objective –
Understanding the various assets available to an investor.
The various risk return profile, the stability of returns, liquidity & convience.
111
Right investment products for investors
Asset types
• Physical & Financial assets:
Physical assets: gold & real estate
Gold: Indians traditionally have been gold investors. Gold is an excellent hedge against inflation.
Banks can also issue gold bonds, Mutual funds also offer gold unit linked schemes.
Real estate: capital required is extremely high & hence not many takers. AMC’s offer real estate
Mutual funds.
• Financial assets:
• Banks: offer safety & liquidity, most are government controlled. Post tax & inflation the yields are
very low. Invertors should be advised to park a small portion of their saving in banks.
• Corporates: offer equity & debt instruments, quasi debt-quasi equity instruments also. Bonds issued
with less than 18 month tenure are exempt from credit rating.
• Financial Inst.: ICICI & IDBI regularly issue bonds. Option to receive periodic interest. Deep
discount bonds do not offer this facility. They qualify for tax benefits under Sec 80 C. usually the
maturity terms are 3,5, 10 & 15 years.
• Government:
PPF – upto Rs. 70,000/- per year offers tax benefit under 80C. Maximum one account in one
name. Minimum investment Rs. 500/-, lock in period 16 years, tax free returns, with the option
to withdraw 50% of the 4th year balance in the 7th year.
Indira & Kisan Vikas Patra: yield 8%, maturity 6 years, appeals to urban investors as thy can
invest without being identified. Easily transferable & liquid.
RBI relief bond: interest rate 8%, interest taxable, virtually free of default risk.
Govt securities: investment amount high, hence the investment route is though MF’s.
Life insurance: should be bought for protection but the trend is people buy it for investment
purpose. Main reason for buying insurance is the tax benefit it offers under Sec. 80C & 10(10 D).
Comparison of products
• By nature of investment: investors look for best returns. To determine which fund is better, other
benefits need to be taken into consideration – risk factor, stability of returns, liquidity & the
convenience by which the investment can be managed.
• By current performance: comparisons need to be made based on performance, post tax. Some
Mf’s(ELSS) also offer tax benefits under 80C.
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Bank deposits are not totally free from risk. A conservative debt fund can give higher returns than a bank
deposit.
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Question Time
1. Why do people buy Life Insurance?
a. To benefit from income tax.
b. To protect their lives.
c. It is the best place to invest.
d. People do not buy life insurance
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Risk in investing
Objective –
Understanding the various risks in investing.
Evaluating & measuring risk
Sub allocating assets to evaluate risk return on investments
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Risk in investing
The Investment Co. Institute of USA (similar AMFI) rates funds as per their risk in the
following ascending order:
Money Market Funds
Insured Municipal bond funds
Corporate bond funds
Mortgage funds
Govt. bond funds
Index funds
Income funds
Balanced funds
Growth & Income funds
International funds
Precious metal funds
Growth funds
Aggressive funds
Evaluating Risk
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Company specific
Sector specific
Market level
Market cycle: equity investments are more rewarding in the long term. Any equity fund could be termed
risky if the term is short.
Risk measures: defined as volatility is measured by ‘Standard deviation’. It means the fluctuations of a
fund’s returns around a mean level.
Another measure of a fund’s risk is its “Beta Coefficient” Beta relates to a fund’s return with the market
index & measures the sensitivity of the fund’s return to changes in the market index.
Beta = 1 means it moves with the market.
Beta <1 means the fund will be less volatile than the market eg. a conservative fund.
Beta >1 means the fund will be more volatile than the market. Higher beta portfolio’s give higher returns
in the rising markets.
Standard deviation is the best measure of risk although it is based on past performance.
Bogle’s Ex- Marks or a number known as “R-Squared” is used to spot questionable betas. R-Squared
measures how much of a fund’s fluctuation is attributable to movements in the overall market, from 0 –
100%. Clearly an index fund will have an Ex mark of nearly 100%
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Question Time
1. Among the following which fund offers the least risk?
a. Money market funds
b. Government security funds
c. Balanced funds
d. Equity funds
3. As per the investment company institute of USA, which is the least risk fund?
a. Insured municipal bond funds
b. corporate bond funds
c. income funds
d. Mortgage funds
Answers: 1(a), 2(c), 3(a), 4(d), 5(a), 6(b), 7(b), 8(c), 9(a).
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Developing a model portfolio
Objective –
Understanding Jacob’s 4 step model portfolio
Jacob’s portfolio allocation across different life cycles
Types of investors & recommended investments strategy
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Developing a model portfolio
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Question Time
1. What portfolio mix would you recommend to a 56 year old client?
a. 40% equity, 60% Debt funds
b. 20% Equity, 20% liquid & 60 in debt funds
c. 40% in Equity & 60% in Balanced funds
d. 100% in monthly income plans
3. What advise would you offer clients who are in the accumulation stag?
a. Diversified equity & balanced funds 75%, liquid 5% & income & gilt funds 20%
b. Diversified equity & balanced funds 25%, liquid 5% & income & gilt funds 70%
c. Diversified equity & balanced funds 30%, liquid 50% & income & gilt funds 20%
d. 100 equity funds
4. What advise would you offer clients who are in the accumulation stag?
a. invest 100% in balanced portfolio
b. Invest 50% in equity & 50% liquid
c. Invest all in debt funds
d. convert part of your equity portfolio into debt funds
5. What advise would you give an elderly investor who wants to invest for his grandchildren?
a. Equity funds
b. Debt funds
c. Balanced funds
d. Liquid funds
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Fund selection
Objective –
Understanding the amount an investor needs to invest in equity, debt or balanced
funds.
Selecting from a wide range of products to suit the clients financial goals.
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Fund Selection
An advisor has to decide on the amount to be invested in the basic categories of Equity, Debt, balanced &
money Market funds.
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Selecting a balanced fund
Any fund that has an allocation of 65% or more in any asset class cannot be termed as a balanced fund.
Selection criteria for balanced funds
• Portfolio balance
• Debt portfolio character
• Costs
• Portfolio statistics
• Returns
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Question Time
3. When the Ex-marks is lower than ________, the funds performance relative to the market is less
predicable?
a. 80%
b. 90%
c. 75%
d. 85%
5. When EX-marks is nearly 100%, what type of fund are we talking about?
a. Diversified equity fund
b. Debt fund
c. Index Fund
d. Money market fund
8. Which choosing a Money market fund, what does the investor look at?
a. Cost
b. Quality
c. Yield
d. All of the above
9. If a fund has 65% invested in the equities & 35% invested in debt it is categorized as
a. Equity fund
b. Debt fund
c. Balanced fund
d. Equity balanced fund
10. A fund should have a minimum _________ % invested in its assets to be classified in that asset.
a. 70%
b. 60%
c. 65%
d. 75%
11. Which choosing a debt fund, what does the investor look at?
a. Cost
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b. debt portfolio characteristics
c. Portfolio balance
d. All of the above
Answers: 1(d), 2(d), 3(a), 4(b), 5(c), 6(b), 7(d), 8(d), 9(a), 10(c), 11(d),
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Business ethics
Objective –
Understanding the various guidelines SEBI imposes on AMC’s With regard to
acceptable & good business practices.
The various SEBI regulatory requirements, for safe keeping & protecting investor
wealth.
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Business Ethics
Rules may be set by those who own & manage the business or by those agencies that have a right to
regulate the business.
Regulatory requirements
• Separation of functions – AMC’s are charged with the actual management of investment
portfolios. They are however not allowed to own or hold assets of the fund. Trustees do not hold
any assets. They are held by custodians.
• Independence of organizations. – AMC’s are run by board of directors & trusts by a board of
trustees. Trustees are charged with independent supervision of all AMC personals including
directors.
• Independence of personal – Trustees cannot serve as directors on the AMC they supervise or any
other AMC.
Fund operations
• Insider trading – means buying & selling securities based on the privileged information available
to the persons in the funds.
• Preferential treatment to selected investors – All investors are to be treated equally. No special
treatment to a certain section. SEBI tracks this very closely. For eg. Late trading abuses. If the
market has gone up substantially the investor would want to exit the fund on the day or if the
markets have collapsed the investor would want to buy units. Time schedule are monitored very
closely by SEBI.
• Personal trading by fund managers & employees – if fund managers & employees trade on their
personal account it creates a conflict of interest thus affecting the fund in a negative way.
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Question Time
1. A good agent will never sell on consideration of
a. Comparative features of funds
b. Assured rate of return
c. Past performance
d. One with a higher return
5. While exercising voting rights the AMC must vote in the interest of
a. The company its votes for
b. The investors
c. the AMC
d. None of the above
8. Beyond what amount of personal trading done by an employee by reported to the trustees?
a. 45,000
b. 99,000
c. 1,00,000
d. 10,00,000
9. Which schedule _________ of SEBI regulation deals with code of conduct for distributors?
a. 4th
b. 5th
c. 6th
d. 3rd
10. Which schedule _________ of SEBI regulation deals with regulations for advertising?
a. 4th
b. 5th
c. 6th
d. 3rd
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c. 75% Chairman should be independent
d. 70% Chairman should be independent
Answers: 1(b), 2(c), 3(a), 4(d), 5(b), 6(a), 7(b), 8(c), 9(b), 10(c), 11(c),
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