Welcome Delegates

AMFI Mutual Fund (Advisor)

Module
Preparatory Training Program
 Exam logistics
 AMFI Mutual Fund (Advisor) Module
 2-hour examination – manual as well as online
 72-74 MCQs
 48Q 1 mark each and 26Q 2 marks each indicated with the question
 Max marks 100
 Passing marks 50%
 Negative Marking 25% of the question score
 Each candidate has a different question paper
 Each chapter has a weightage which is not disclosed
 One needs to be thorough with the entire syllabus
 The language is the tricky part
 The exam emphasis is on conceptual clarity.

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Section 1
Nuts and Bolts

1. Concept & Role of Mutual Funds

2. Fund Structure and Constituents
3. Legal & Regulatory Framework
 Concept of Mutual Fund
 A pool of money contributed by many investors and
collectively managed by an asset management company
 Investments made in accordance with stated objectives
 A financial intermediary that allows small investors to
participate in the securities market
 Ownership of the fund is mutual and beneficial
 An investor becomes part owner of the fund’s assets when he
buys into the fund
 The investor is allotted units for the amount subscribed.

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 What it means

Investors

Receive
Contribute dividend/capital
money appreciation

Trust
(pool of money)
Receive
interest,
Invest in
markets dividend or
capital growth
Markets
(volatile, has fluctuation)

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 The MF Cycle

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 Characteristics
 Investors own the mutual fund
 Everyone else associated with the fund
earns a fee
 Things which are mutual
 Pool of money
 Investment objective
 Risk and return
 Funds are invested in a portfolio of
marketable securities reflecting the
investment objective
 Value of the portfolio and investors’
holdings change with change in the market
value of investments.

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 Advantages

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 Disadvantages
 No Control Over Costs
 No Tailor Made Portfolios
 Managing a large number
of funds/types.

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 History of Mutual Funds

 Birthplace of Mutual Funds – USA

 History in India:
 1964-1987 (Phase I) – Growth of Unit Trust of India
 1987-1993 (Phase II) – Entry of Public Sector Funds
 1993-1996 (Phase III) – Emergence of Private Funds
 1996-1999 (Phase IV) – Growth and SEBI Regulation
 1999-2004 (Phase V) – Emergence of large & uniform Industry
 2004 onwards (Phase VI) – Consolidation and Growth.

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 Types of Funds
Existing funds
 Open-ended (OEF) & Close-
ended (CEF)
 Growth, Income and Hybrid
 Equity, Debt and Balance
 Load & No-Load
 Guaranteed & Non-Guaranteed
 Tax-exempt & Non tax-exempt
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New Gen Mutual Funds
 Fund of Fund
 Commodity fund
 Real Estate fund
 Asset Allocation fund
 Exchange-traded fund
 Derivative fund
 Capital Protection Oriented
Fund.
 OEF & CEF
OEF
 No fixed tenor
 Continuous sale & purchase by the
fund
 Subscription is not mandatory
 Redemption mandatory, with
certain obvious conditions
 Fund size changes everyday
 No secondary market trading
 Redemption pressure on fund
managers is higher
 Daily NAV (calc & disclosure)
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CEF
 Fixed tenor – 1/3/5/7 years
 Sale of units only during NFO
 No subscription after closure of NFO
 Redemption in 2 ways
 Exit window – periodically
repurchase of units by the fund
 Listing – secondary market trading
of units, like stocks
 Fund size either constant or
decreases
 Lower redemption pressure on fund
managers
 Weekly NAV (calc weekly but
disclosure daily).
 Equity-oriented
 Diversified
 Sectoral
 Thematic or Specialty
 ASEAN fund, Infrastructure Fund
 Growth & Value
 Large, Mid & Small Cap
 Dividend Yield or Equity Income
 Index
 ELSS

Primary objective: growth or capital appreciation.

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 Debt Oriented
 Diversified Debt
 Focussed/Sectoral Debt
 Gilt Fund
 Bond Fund
 Fixed Maturity/Term Plan (FMP/FTP)
 Liquid or Money Market MF

Primary objective: regular income.

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 Balance
 Investment in more than one asset class
 Debt and equity in various proportions

Primary objective: hybrid (regular income as well as capital

appreciation).

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 Fund of Funds
 Invest in other schemes of same or other mutual fund
 Is considered like a Debt scheme for tax purposes
 2 advantages:
 Since FOF is a mutual fund scheme, no tax on income generated
from buying and selling securities
 Allows fund managers to rebalance portfolio freely
 Investor need not to decide when to sell units and execute
transactions
 Convenience to the investor.

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 Commodity Fund
 specialize in investing in different commodities directly or
through shares of commodity companies or through
commodity futures contracts.
 Example - Precious Metals Funds
 As of date, Indian MF industry does not have commodity
funds except the ones that invest in Gold.

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 Real Estate Fund
 Invest in real estate directly, or fund real estate developers,
or buy shares of housing finance companies
 Fund to invest min 30 % corpus in real estate projects
 Balance in equity, bonds/debentures of real estate cos.
 Close-ended schemes with secondary market trading
 Move to bring transparency, documentation and fair
valuation of property
 Allow small investors with small investments to enjoy
upswing of property without downside of high stamp duty,
legal expenses, high initial investment, element of black
money and disposal at the right prices.

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 Asset Allocation Fund
 Fund manager has the flexibility to change the allocation of
funds between equity and debt based on perception about
direction of the market.

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 Exchange-traded fund
 Passively managed fund that tracks a benchmark index
 An ETF is like a hybrid financial instrument, a cross
between an index fund and a stock
 An equity-based ETF would invest in a basket of stocks that
reflects the composition of an index, say Nifty or Sensex
 These funds are freely traded on the stock exchange and derive
value from the underlying asset, i.e., stocks.

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 Gold ETF
 Gold ETFs invest in physical gold and derive their value
from the underlying asset
 The price of gold ETFs will be directly linked to the price of gold
itself and hence the returns from a gold ETF will more or less
equal to returns from gold bars or coins
 Investors can buy or sell units of these schemes, like any
other stock listed on the exchange, through brokers.

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 Derivative fund
 Hedging
 Futures
 Options
 Arbitraging
 Stock Arbitrage
 Index Arbitrage.

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 Capital Protection Oriented fund
 Close-ended with no exit option
 Debt scheme from a tax standpoint
 No guarantee by the AMC or sponsor
 Capital protection on account of the structure
 Eg. Debt component of 80 in zero coupon bonds which give 100
on maturity and investment of the balance 20 in equity
 With tools such as dynamic portfolio insurance, increase equity
component by a multiplier
 Rating of the scheme mandatory.

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 Classification of funds
 Risk
 Sectoral funds have higher risk
 Liquid or Money Market funds have least risk
 Tenor
 Equity funds require a long investment horizon
 Liquid funds are for the short term liquidity needs
 Investment objective
 Equity funds suit growth objective
 Debt funds suit income objective.

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 Risk-Return Hierarchy

Return
Sectoral
funds
Equity
funds
Index
funds
Balanced
funds
Debt
Funds
Gilt
funds
ST debt
funds
Liquid
funds Risk

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Mutual Fund
Structure &
Constituents
 MF Structure in India
A mutual fund has a 3-tier structure

Sponsor

Trustee Trust

AMC

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 MF Structure in other countries
Structure in USA
 Management Company – Similar to AMC
 Underwriter – for Sales
 Management Group – Similar to Sponsor
 Custodian

Structure in UK
 Open Ended - Unit Trusts – regulated by Securities and
Investment Board + by relevant SRO
 Closed Ended - Investment Trusts – like a Company.

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 MF Constituents in India

SEBI

Sponsor

Trustee Trust

AMC

Custodian & Banker R&T Agent Distributor

Depository
Securities Investor
Dealer /
Broker
Securities
Markets
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 Trust
 Mutual funds in India constituted as a Public Trust under
Indian Trust Act, 1882
 The trust is registered with the Office of Public Trustee
 OPT reports to the Charity Commissioner
 The trust or the fund has no independent legal capacity itself
 Acts in relation to the trusts are taken on its behalf by the
trustees
 Treated as a separate entity and a pass through vehicle
 Has its own auditors, separate from the AMC.

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 Sponsor
 Promoter of the mutual fund
 Creates a Trust under Indian Trusts Act, 1882 and registers
it with Office of Public Trustee
 Appoints Board of trustees/trustee company
 Creates AMC under Indian Companies Act, 1956
 Fulfills necessary formalities and applies to SEBI for
registration of the Trust as a Mutual Fund.

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 Sponsor Criteria
 Min 5 years track record in financial services
 Bank, corporate or an FI
 Profit making in at least 3 out of past 5 years, including the
previous year
 Positive Net Worth in last 5 years
 At least 40% of the capital of the AMC
 Net worth in the immediately preceding year more than the
capital contribution to the AMC.

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 Trustee
 Appointed by sponsor with SEBI approval
 Have Registered ownership of investments
 Formed either as Board of Trustees or Trustee Company
 Power to appoints all other constituents
 Appoint AMC through the ‘Investment Management
Agreement’ and delegate powers.

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 Trustee Criteria
 Minimum number of trustees is 4
 2/3rd should be independent trustees i.e. no connection of profit
(what so ever) with the sponsor
 Meet at least 4 times in a year to review functioning of AMC
 Trustees hold the unit-holders money in fiduciary capacity
 All major decisions need trustee approval
 Right to seek regular information and take remedial action.

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 AMC
 Required to be registered with SEBI
 Appointed as Investment Manager of the mutual fund
 Appointed by the trustees via an Investment Management Agreement
 Responsible for operational aspects of the mutual fund
 Net Worth of at least Rs.10 crore at all times
 At least 1/2 of the board members must be independent
 Mostly, structured as a private limited company where Sponsor and
associates hold capital
 Quarterly reporting to Trustees.

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 Other Constituents

Custodian &  Investment back-office

Depository

Banker  Providing bank accounts & remittance services

Securities  Purchase and sale of securities

Dealer /  Not more than 5% through a related
Broker broker
 Research report to AMC

R&T Agent  Investor records and transactions

Distributor  Selling & Distributing schemes

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 Role Restrictions
 Sponsor of a fund cannot be its custodian
 Sponsor of a fund can be a distributor
 Trustee of one mutual fund cannot be trustee of another mutual
fund
 Exception is Independent trustees provided they obtain approval of
both the board of trustees
 Trustee of one fund cannot be AMC of another
 AMC of one fund cannot be Trustee of another
 AMC cannot have any business interest other than fund advisory.

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 Mergers & Takeovers
 Scheme Merger
 Scheme merged with another scheme of the same AMC
 AMC Takeover
 AMC is taken over by another set of sponsors
 AMC Merger
 One AMC may merge with another AMC
 Change of AMC/Trust
 Trustees decide to change the AMC and handover the scheme to a
new AMC
 Scheme Takeover
 Just the schemes taken over by another set of trustees.

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 Mergers & Takeovers
 Scheme takeover (HDFC–Zurich, Birla-Apple)
 One AMC buys schemes of another AMC
 Organic growth in assets
 No change in AMC stakes
 AMC merger (HB-Taurus)
 Two AMCs merge
 Similar to merger of companies
 Sponsor stakes change
 AMC take-over (Zurich-ITC Threadneedle, Birla-Alliance)
 Stake of one sponsor in a AMC bought out by another
 Change in AMC and sponsor.

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 Mergers & Takeovers

 Investor rights
 Right to be informed
 No prior approval required
 Option to exit at NAV without exit load.

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 Regulatory framework

MoF  Supervisor of both SEBI & RBI

 Created in 2003
SAT  Provide apex appeal mechanism
for actions taken by SEBI
Registration of AMC and
Trustee Company
RoC for Compliance
RoC is supervised by DCA
Companies DCA is a part of CLB which is
under Ministry of Law and
Act Justice
CLB is the interface for
prosecution and penalties.

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 Regulatory framework
Registration of Trust
Office of Public  Board of Trustees is accountable
to the OPT
Trustee  Complaints against individual
trustees
Derive powers from regulator
Ability to make bye-laws
Regulate own members in a limited
SRO way
Example : Stock exchanges – NSE,
BSE etc.

Collective industry opinion

Industry  Guidelines &
recommendations
Association  Example: Association of
Mutual Funds in India (AMFI).
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Session 2
The Process of Investing

4. The Offer Document

5. Fund Distribution and Sales Practices
7. Investor Services
 The process of investing
 Offer Document
 KIM
 Application and form of holding
 Distribution channels
 Investors rights & obligations.

45
 Offer Document

 Most important document for a prospective investor

 Legal offer from AMC to investor
 Contains vital information about fund and schemes
 SEBI approved format.

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 Offer Document

 Contents
 Constitution of fund
 Details of Sponsor, Trustee & AMC & key personnel – financial history
for 3 years
 Description of Scheme & Investment Objective/Strategy
 Terms of Issue/Offer
 Historical Statistics
 Investor’s Rights and Services
 Mandatory Disclaimer clause
 Standard and Scheme-specific Risk Factors.

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 Details of Scheme offered
 Dates of NFO
 details regarding sale and repurchase
 Minimum Subscription and Face Value
 Initial Issue Expenses
 current and past schemes
 Special facilities to investors
 Eligibility for investing
 documentation
 Procedure for applying, and subsequent operations relating
to transfer, redemption, nomination, pledge and mode of
holding of units.

48
 Load, Fee and Expenses
 Load and the annual recurring expenses
 Proposed scheme and other schemes
 Comparison with offer document numbers
 Scheme expenses for past 3 years
 Condensed financial information for 3 years.

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 Unit holder rights
 Rights of unit holders
 Right of proportionate beneficial ownership of scheme’s assets
 Right to timely service
 Right to information
 Right to approve changes in fundamental attributes
 Right to wind up a scheme
 Right to terminate AMC services
 Protection of rights and problem resolution
 Details of information disclosure and their periodicity
 Documents available for inspection
 Details of pending litigation and penalties .

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 Unit holder rights
 Cannot sue the mutual fund
 Can complain against AMC, sponsor and Board of Trustees
 75% unit holders can
 wind up a scheme
 seek AMC termination
 Prospective investor has no rights
 Right to redeem without load in case of change in fundamental
changes.

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 Due Diligence
 SEBI approved format and content
 Trustee Approval
 Compliance Officer certifies that
 Information contained therein is true and fair
 Is in accordance with SEBI regulations
 Fund constituents are all SEBI registered entities
 The AMC is responsible for the contents and the accuracy of
information.

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 Offer Document
 Validity of OD
 For New Schemes - 6 months from the date of receipt by the AMC of the
letter containing observations from SEBI
 Revised at least once every two years for OEFs
 OD is printed only once for CEFs
 Updated for every major change
 Change in the AMC or Sponsor of the mutual fund
 Change in the load structures
 Changes in the fundamental attributes of the schemes
 Changes in the investment options to investors; inclusion or deletion of
options
 After completion of one year of an OEF, condensed
financial information mandatory in the OD & KIM.

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

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 Changes in fundamental attributes
 Approval from Trustees & SEBI
 Public announcement by AMC
 In case of OEF - Investors have to be informed and
option given to exit at NAV without any exit load
 In case of CEF – investor approval is required
 New OD.

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 KIM
 Abridged OD
 KIM is mandatory with every application form.

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 OD & KIM
 Principle of ‘BUYER BEWARE’ applies
 An investor who invests without studying the Offer Document
cannot subsequently hold the fund responsible
 Investor has no recourse for not having read the OD/KIM.

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 Investor Rights & Obligations
 Investor’s Rights
 Investor’s Obligations
 Study the OD
 Provide PAN
 Monitor investment
 Complaints Redressal Bodies
 SEBI
 RoC/DCA/CLB.

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 Sales Practices
 No mandatory guidelines for distributor role & service to investor
 AMFI recommends certain practices for effective selling
 To be fully aware of the important characteristics of the schemes
 Know their clients
 Identify clients
 Understand each client’s needs
 Help a client chose his investments
 Encourage regular investments
 Provide personalized after sales service
 Distribution Commissions are paid by fund houses
 There are no rules governing the min and max
 SEBI (vide Circular dated June 26, 2002) has banned rebating of commissions
 AMFI has also prohibited rebating as specified in AGNI.

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 Investor Services
 Applying for & Redeeming units
 Cut-off timing of 3:00 pm for same day NAV
 the next day NAV is applied in case of application received after
3:00 pm
 in case of liquid funds 11:00 am is cut-off for applying previous
day NAV
 Dividend Reinvestment Plan (DRP)
 Systematic Investment Plan (SIP)
 Systematic Withdrawal Plan (SWP)
 Systematic Transfer Plans (STP).

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 Investor Services
 Telephone/Internet transactions
 Cheque Writing
 Periodic statement and tax information
 Loan against units

61
 Investment Options
 Investors can achieve income and growth objectives
 Growth option
 Dividend-payout option
 Regular
 Ad-hoc
 Dividend Re-investment option
 Most funds provide multiple options and the facility to
switch between options.

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Session 3
Accounting, Valuation &
Taxation

6. Accounting, Valuation and Taxation

 Accounting Policies
 Investments to be marked to market according to SEBI
Guidelines
 Unrealised appreciation cannot be distributed
 Profit or loss on average cost basis
 Dividend on ex-dividend date
 Sale and purchase accounted on trade date
 Brokerage and stamp duties are capitalized and added to
cost of acquisition or sale proceeds.

64
 Specific Disclosures
 Complete portfolio to be disclosed every six months
 Industry practice is monthly disclosure
 Any item of expenditure which is more than 10% of total
expenses
 NPAs, provisioning and NPAs as percent of total assets
 Number of unit holders holding more than 25% of unit
capital.

65
 Net Asset Value
 Frequency of NAV
 Calculated and published at least every Wed for
CEFs
 Calculated and published daily for OEFs
 Updated on AMFI website by 8:00 pm (as per text
book) every business day
 NAVs are rounded off up to four decimal places
for liquid/money market schemes and upto two
decimal places for all other schemes.

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 Net Asset Value
 NAV = Net Assets of the Scheme/No. of Units Outstanding
 Net Assets of the Scheme
+ Market Value of investments
+ Receivables
+ Other accrued income
+ Other assets
- Accrued Expenses
- Other payables
- Other liabilities.

67
 Fees & Expenses
 Initial Issues Expenses
 Recurring Expenses
 Investment Management Fee
 Entry & Exit Load.

68
 Initial Issue expenses
 Expenses incurred in floating a new scheme
 Max 6% of funds mobilized charged to scheme; excess borne by
AMC/sponsor
 Only CEFs are permitted to charge IIE to the fund
 Amortize on weekly basis until maturity
 E.g. 6 crores amortized over a 5-year (260 weeks) tenor would mean Rs. 230,769
charged every week as expense
 No-load fund i.e. funds which do not charge initial issue expenses can charge
additional investment management fees of 1%

w.e.f. Apr 2006 OEFs cannot charge initial issue expenses to the scheme.

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 Recurring Expenses
 Investment management fees
 Custodian’s fees
 Trustee Fees
 Registrar and transfer agent fees
 Marketing and distribution expenses
 Audit fees
 Legal expenses
 Costs of mandatory advertisements and communications to
investors.

70
 Expenses that cannot be charged
 Penalties and fines for infraction of laws
 Interest on delayed payments to unit holders
 Legal, marketing and publication expenses not attributable to any
scheme
 Expenses on investment and general management
 Expenses on general administration, corporate advertising and
infrastructure costs
 Expenses on fixed assets and software development expenses
 Such other costs as may be prohibited by SEBI.

71
 Recurring Expenses
 Overall ceiling on expenses, including Investment
management and advisory fees
 Based on Weekly Average Net Assets (WANA)
 Equity Funds
First 100 Crores 2.50%
100 - 400 Crores 2.25%
400 – 700 Crores 2.00%
Above 700 Crores 1.75%
 For Bond funds, above figures are lower by 0.25%
 Limit for FOFs is 0.75% of the Weekly Average Net Assets.

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 Investment Management Fee
 SEBI Limits – Investment Management Fee
 For the first Rs. 100 crore of net assets: 1.25%
 For net assets exceeding Rs. 100 crore: 1.00%
 IMA can be 1% more for no load funds

73
 Loads
 Charged to recover sales and distribution expenses
 Entry Load
At the time of sale of units i.e. subscription by investor
 Charged on NAV and increases the sale price
 Exit Load
 At the time of repurchase of units i.e. redemption by investor
 Charged on NAV and reduces the repurchase price
 Load is a charge on the NAV
 Load is defined as a percentage
 CDSC is variable exit load, lower for longer duration of holding
 Loads are subject to SEBI Regulations*

* Change expected in Jan 2008 - In case of Direct investment, no entry load to be

charged to investor.

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 SEBI Regulations - Loads
OEFs
 Maximum Exit load or Entry load : 7% of NAV
 Repurchase price more than or equal to 93% of the Sale
price

CEFs
 Max Entry or Exit Load: 5% of NAV
 Repurchase price more than or equal to 95% of the Sale
Price (NAV in this case)

w.e.f. Apr 2006, CEFs cannot charge entry load.

75
 Pricing of Units
 Sale and repurchase price are NAV-based

SALE PRICE = NAV + Entry Load

REPURCHASE PRICE = NAV – Exit Load

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 Non Performing Asset
 An asset classified as non-performing if interest or principal
amount not been received or remained outstanding for one
quarter from the due date
 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 Net worth erosion of the borrower.

77
 Treatment of NPAs
 Accrual to be stopped
 Income accrued until date of classification to be
provided for
 Provisioning for principal due
 In graded manner after 3 months of classification.
 Complete write off in 15 months from classification.

78
 Valuation of Securities
 Equity
 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 30 days
otherwise last traded price.

79
 Valuation of Securities
 Debt
 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.

80
 Taxation
 Mutual Fund is a pass through vehicle hence not taxed
 Mutual funds are exempt from tax under section 10(23D) of
Income Tax Act, 1961
 Taxation for investor
 Dividend
 Capital Gain
 Taxation as per ‘Equity’ fund (at least 65% of assets in
domestic equity) or ‘Other than Equity’ fund.

81
 Equity Funds (Min 65% domestic equity)

Dividend Capital Gain

Short-Term
Investor (not exceeding 12
months)
NIL
10% + SC +EC
Long-Term
DDT (exceeding 12
months)
NIL
NIL

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 Other than Equity Funds

Dividend Capital Gain

Investor
Short-Term
NIL (not exceeding 12
months)
DDT
Marginal Tax Rate
As per grid
below

Liquid Other than Long-Term

Liquid (exceeding 12 months)
Individual/ 12.5% + SC Indexed Tax Rate
HUF 25% + + EC
Others SC + EC 20.0% + SC
+ EC
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 Other tax aspects
 Securities Transaction Tax (STT)
 54EC
 Section 80C
 Section 111A
 Dividend Stripping
Section 94(7) of the IT act reads – If a person buys or acquires
securities or units within a period of three months prior to the record
date fixed for declaration of dividend and sells or transfers the same
within a period of nine months after such record date and the dividend
recd is exempt, then the loss if any, arising from such purchase or sale
shall be ignored to the extent such loss does not exceed the amount of
such dividend income.

84
Session 4
Mutual Funds & Securities
Markets

8. Investment Management
 Mutual Funds & Securities Markets
 Equity
 Market and products
 Asset classes
 Investment styles
 Value indicators
 Debt
 Market and products
 Terminology
 Investment styles
 Investment restrictions.

86
 Equity investing
 Equity implies ownership
 Equity instruments
 Ordinary shares
 Preference shares
 Convertible debentures
 Equity Warrants.

87
 Equity investing
 Classification of Equity
 Large Cap/ Mid Cap/ Small Cap
 Growth/ Value/ Cyclical
 Equity terminology
 Earnings per Share
 Market Capitalization
 Ratios
 P/E Ratio
 Dividend Yield.

88
 Equity portfolio management
 Approaches to Portfolio Management
 Passive
 Active
 Investment Styles
 Growth
 Value
 Securities Research
 Fundamental Analysis
 Quantitative Analysis
 Technical Analysis
 Portfolio Management Organization Structure
 Fund Managers
 Security Analysts & Researchers
 Dealers.

89
 Approaches to portfolio management
 Active management
 Aim for Out-performance
 Higher fees
 Selection and timing

 Passive Management
 Replicate a chosen Index
 Low fees.

90
 Growth vs. Value

Growth
High Market price per share
High PE ratio
Low div yield
a. MPS?
b. P/E? Value
c. DY? Low MPS
Low PE
High DY

91
 Debt Investing
 Debt implies lending/loan
 Types of debt instruments
 Govt. Securities
 PSU Bonds
 FI Bonds
 Corporate Bonds
 Debentures
 Money Market Securities
 Treasury Bills (T-Bills)
 Commercial Paper (CP)
 Certificate of Deposit (CD).

92
 Debt Classification
 Classification of Debt Securities
 Tenor – long or short
 Credit quality
 Government Securities/Corporate Securities/FI Bonds
 Secured/Unsecured
 Market Traded/Non-traded
 Interest
 Periodic or Discounted
 Fixed or Floating (Floater)
 Call or Put option.

93
 Debt Terminology
 Par or Principal or Face Value
 Coupon or Interest
 Maturity or tenor
 Callable
 Puttable
 Yield.

94
 Price & Yield
 Increase in rates reduces
value of existing bonds
 Decrease in rates increases
value of existing bonds
 Price and yield are inversely
related
 The relationship between
yield and tenor can be plotted
as the yield curve.

95
 Current Yield and YTM
 Coupon amount as a percentage of current market price

If you bought an 8% bond at Rs. 110, the current yield is,

= (8/110)*100
= 7.27%.

96
 Interest Rate Sensitivity
 Measured by a number called duration
 If duration is 5 years, and interest changes by 1%, price of
the bond will change in the opposite direction, by 5%

Example: Duration of a bond is 3 years. Yield spreads

increases by 1.5%. What is the change in price?
= 1.5 *3
= -4.5%.

97
 Risk in Bond Investing
 Types of Risk
 Interest Rate Risk
 Reinvestment Risk
 Default/Credit Risk
 Inflation Risk
 Liquidity Risk
 Call Risk
 Risk Measures
 Yield Spreads & Credit Ratings
 Duration.

98
 Credit Risk
 Probability of default by the borrower
 Change in credit rating,
 downgrade increases the yield & decreases the price
 upgrade decreases the yield & increases the price.

99
 Debt Portfolio Management
 Buy & Hold
 Portfolio exposed to interest rate risk
 Duration Management
 increase duration if rates are expected to fall
 decrease duration if rates are expected to rise
 Credit Selection
 Invest in low grade bonds that are likely to be upgraded
 Prepayment Prediction.

100
 Investment Policy
 Investment policy of each scheme dictated by the scheme’s
objective
 SEBI imposes certain restrictions on mutual funds to ensure
investor protection
 Minimum 20 investors per scheme
 No one to hold more than 25% of the corpus
 Record of Investment decisions to ensure transparency.

101
 Minimum Portfolio Diversification
 Not more than 10% of NAV in a single company
 Exceptions: Index & Sectoral funds
 Rated Investment grade debt of a single issuer cannot be
more than 15% of NAV (extendable to 20% with AMC
Board and Trustees approval)
 Un-rated instruments
 10% of Net Assets for single issuer
 Overall 25% cap for investment in such securities
 Unlisted shares
 Max 10% of Net Assets for CEFs
 Max 5% of Net Assets for OEFs.

102
 Investment Restrictions
 Invest only in marketable securities
 Investment transactions only on delivery basis
 Securities have to be bought in the name of the scheme
 A mutual fund under all its schemes, cannot hold more than
10% of the paid-up capital of a company
 Equity with voting rights representing 10% of paid-up capital of
one stock.

103
 Approved & Unapproved Investments
 Temporary Investment in Bank FDs – Max 15% of NAV
 ADR/GDR investment permitted
 lower of, 10% of net assets or $200 million
 cap for mutual fund industry as a whole $4 billion
 Limited investment in Treasury Bonds and AAA rated
corporate debt issued outside India
 No Lending.

104
 Investment in Sponsor
 No investment in unlisted securities of sponsor or an
associate or group company of the sponsor
 No investment in privately placed securities of the sponsor
or an associate
 Investment in listed securities of the sponsor or associate
company permitted
 Max 25% of the net assets of the scheme.

105
 Inter-scheme transfer
 Transfers only on a delivery basis, at market prices
 Such transfers should not result in significantly altering the
investment objectives of the schemes involved
 Such transfer should not be of illiquid securities, as defined
in the valuation norms
 One scheme can invest in another scheme, up to 5% of net
assets.
 No fee is payable on these investments.

106
 Other Restrictions
 Mutual funds can borrow up to 20% of net assets for a
period not exceeding 6 months
 Any change in investment objectives requires information to
investor, and provision of option to exit at NAV, without exit
load.

107
Session 5
Return Concepts

9. Measuring & Evaluating Mutual Fund Performance

 Computing Return
 Return defined as Income earned for amount invested
over a given period of time
 Standardize as % per annum
 Sources of return
 Dividend
 Change in NAV
 Return Methods
 Change in NAV or Absolute Return Method
 Simple Total Return Method
 ROI or Return with Dividend Reinvestment Method
 CAGR Method.

109
 Method 1: Change in NAV Method
 Suitable for computing returns between two dates
 Annualize using 12/n or 365/n

(NAV at the end of Period-NAV at the beginning of

Period)*100
NAV at the beginning of Period

110
 Numerical
Q. NAV at start of period was Rs. 13.70. at the end of 16
months the NAV was 18.50.
Calculate the change in NAV.

= (18.50 – 13.70) X 100

13.70
= 35.04%

Annualized return
= 35.04 X 12/16
= 26.28%.

111
 Simple Total Return
 In this method, dividends distributed are added to change in
NAV to compute total return

(Change in NAV + Dividend)*100

NAV at the beginning of period

112
 Numerical
Q. NAV at start of period was Rs. 15.65. At the end of the year
it stood at Rs. 21.05. During the year, investor received 10%
dividend.
Calculate the return earned by the investor.

= ((21.05-15.65)+1.00) X 100
15.65
= 40.89%.

113
 ROI Method
 The method assumes that dividends are reinvested, at Ex-Div NAV

Value at end of period – Value at beginning of period X 100

Value at Beginning

Value of holdings at the beginning of the period = number of units at

the beginning x begin NAV
Value of holdings end of the period = (number of units held at the
beginning + number of units re-invested) x end NAV
Number of units re-invested = dividends/ex dividend NAV.

114
 Numerical
Q. On Jan 01, 2007 an investor bought 1000 units at 12.25. He redeemed
the investment on 01st Jan 2008 when the fund’s NAV stood at 19.50.
During the year he received dividend at the rate of 10%. The ex-Div
NAV was Rs. 15.10.
Calculate his ROI.

= Value of holding at start – 1000 X 12.25 = 12,250

= No of units reinvested – 1000 / 15.10 = 66.2252
= Value of holding at end – 1066.2252 X 19.50 = 20,791.39
= ROI – (20,791.39 – 12,250) X 100
12,250
= 69.73%.

115
 CAGR
 Compound Annual Growth Rate
 rate at which investment has grown from begin point to the end
point, on an annual compounding basis

A = P(1+r)n
V1 = V0(1+r)n
r = ((V1 / V0)1/n) -1

V1 = Amount at the end of Period

V0 = Principal
r = Rate of return
n = Number of periods.

116
 Numerical
Q. An investor buys 1000 units of a fund at Rs. 24.15 on Jan 07,
2007. On June 30, 2007 he receives dividends at the rate of
20%. The ex-dividend NAV was Rs. 30.60. On Jan 01, 2008
the fund’s NAV was Rs. 32.25.
Compute the CAGR.

117
 Solution
 The value of investment at beginning
= 24.15 x 1000 = Rs. 24,150
 Number of units reinvested
= 2000/30.60 = 65.36 units
 End period value of investment
= 1065.36 x 32.25 = Rs. 34,357.84
 Holding period
= 01/01/08 - 07/01/07 = 359 days
 The CAGR is
= (34,357.84/24,150)365/359 - 1 x 100
= 43.11%.

118
 SEBI Regulation
 Standard measurements and computation
 CAGR for funds that are over 1 year old
 Return for 1,3 and 5 years, or since inception, which ever is
later
 No annualisation for periods less than a year.

119
 Industry Practice
 Less then 1 year, simple return without compounding or
annualisation
 Growth Option: CAGR implicit in the change in holding
period NAVs
 Dividend Option: CAGR implicit in the change in value
over the holding period, assuming re-investment of dividend
at ex-dividend NAV
 Some funds use simple annualised return, without
compounding.

120
 Evaluating fund performance
 Evaluation of a fund
 relative to the market as a whole
 relative to other mutual funds
 relative to other comparable investment options
 Rankings by external agencies
 Economic Times
 Lipper
 CRISIL CPRs, RRR, CQR
 CRISIL Volatility Rating
 CRISIL Fund Management Practice.

121
 Benchmarks
 Relative returns are important than absolute returns for
mutual funds
 Comparable passive portfolio is used as benchmark
 Usually a market index is used
 Compare both risk and return, over the same period for the
fund and the benchmark.

122
 SEBI Guidelines
 Benchmark should reflect the asset allocation
 Same as stated in the offer document
 Growth fund with more than 60% in equity to use a broad
based index
 Bond fund with more than 60% in bonds to use a bond
market index
 Balanced funds to use tailor-made index
 Liquid funds to use money market instruments.

123
 Other Measures of Performance
 Size and portfolio composition
 Credit quality
 Rating profile of portfolio
 Expense ratio
 Higher expense ratio hurts long term investors
 Tracking error
 For index funds this should be nil
 Portfolio turnover
 Higher for short term & lower for longer term funds.

124
 Session 6
Financial Planning & Mutual Funds

10. Helping Investors with Financial Planning

11. Recommending Financial Planning Strategies to Investors
12. Selecting the right Investment Products for Investors
13. Helping Investors understand risks in Fund Investing
14. Recommending Model Portfolios and Selecting the right fund
 Financial Planning & Mutual Funds
 Concept of financial planning
 Financial Planning Strategies
 Mapping life cycles & wealth cycles
 Alternate investment products
 Understanding Risk
 Asset allocation
 Model portfolios
 Fund selection.

126
 Financial Planning

“It is an exercise aimed at identifying

all the 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 need and achieve his
life goals.”

127
 Who is a financial planner?
 Is a person who uses the financial planning process to help
another person determine how to meet his or her life goals
 Key functions of a FP is to help people identify their
financial planning needs, priorities and the products that are
most suitable to meet their needs.

128
 Benefits of Financial Planning
 To client
 Provides direction and meaning to financial decisions
 Helps understand how decision in one area effects other areas
 Helps evaluate short and long term effects of decisions on one’s
life goals
 To Planner
 Ability to establish long term relationships
 Ability to build a profitable business.

129
 Financial Planning Process

Establish & Define the Client Planner Relationship

Define the Client’s Goals
Gather and Analyze Data

Determine and Shape the Risk Tolerance level

Recommend the appropriate Asset Allocation

Ascertain the Client’s Tax Situation

Execute the Plan

Review Progress

130
 Role of participants

Financial Fund Portfolio

Client
Planner Manager Investments

Discussion Choice of
Market Analysis
Of Goals Schemes
& Choice of
& Asset & Fund
Securities
Allocation Manager

131
 Important factors

Set
SetMeasurable
MeasurableFinancial
FinancialGoals
Goals

Understand
Understandthe
theEffect
Effectof
ofEach
EachDecision
Decision

Re-evaluate
Re-evaluateFinancial
FinancialSituation
SituationPeriodically
Periodically

Start
StartPlanning
PlanningASAP
ASAP

Set
Setrealistic
realisticexpectations
expectations

Client
Clientis
isin-Charge
in-Chargeof
ofthe
theprocess
process

132
 Classification of Investors
 Life Cycle Stages
 Wealth Cycle Stages

133
 Life Cycle Stages
 Childhood Stage
 Young Unmarried Stage
 Young Married Stage
 Young Married with Children Stage
 Married with Older Children Stage
 Post family/Pre-retirement Stage
 Retirement Stage.

134
 Wealth Cycle Stages
 Sowing or Accumulation Stage
 Transition Stage
 Reaping or Distribution Stage
 Intergenerational Wealth Transfer Change
 Sudden Wealth Surge Stage
 Affluent investors
 Wealth preserving
 Wealth creating.

135
 Other areas
 Constraints to Financial Planning
 Goal-Oriented Investing
 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.

136
 Strategies for Investors
 Invest whenever there is money!
 Start Planning & Investing Early
 Have realistic Expectations
 Invest Regularly
 Buy and Hold
 may not be good strategy with stocks but is good in case of a mutual fund for
the investor willing to wait out a full market cycle
 When to cash out needs more thought and skill
 in case of stock – sell out as the price rises beyond reason or when
fundamentals start to deteriorate
 in case of mutual funds – redeem when the goals have arrived and money is
needed or if the market appears ‘overvalued’ in terms of fundamentals and
historic valuations.

137
 Useful Strategies
 Power of Compounding
 Rupee Cost Averaging (RCA)
 Value Averaging
 Jacob’s combined approach.

138
 Power of Compounding
 Investing for the long term
 Higher the frequency, greater the growth
 six-monthly compounding of 100 rupees for 10 years would
yield Rs. 321 instead of Rs. 311 with annual compounding

139
 Power of Compounding

n
FV = PV (1 + r)
Save More

Earn More

Start Early

140
 The legend of compounding
Amount Invested = Rs. 10,000
Year of investment = 1977
Growth rate = 49%
Value of holding at the end of 2007 = ???

appx. 157 crores (156,88,73,952)

Which company am I?

141
 Rupee Cost Averaging
 Invest a predetermined amount regularly
 Purchase more units when the market is low; less when the
markets are high
 Reduces the average cost of purchase
 Implemented through SIP
 Disadvantage – it doesn’t tell you when to buy, sell or switch.

142
 RCA – An Example
Amount Cumulative
NAV per Units Value of
Month Invest Number of
Unit bought holding
ed Units
1 5000 10 500.00 500.00 5,000
2 5000 15 333.33 833.33 12,500
3 5000 20 250.00 1,083.33 21,667
4 5000 12 416.67 1,500.00 18,000
5 5000 8 625.00 2,125.00 17,000
6 5000 5 1,000.00 3,125.00 15,625
           
Average
Average
11.67 Cost/ 9.60
NAV
  Unit  

143
 Value Averaging
 Invest regularly to achieve a predetermined value
 Book profits at highs, and add units at the lows
 Implemented through SWP
 Reduces the average cost of purchase
 Superior to RCA – allows you to redeem at the right
opportunity.

144
 VA – another example
Target Value of Cum no of
Month NAV (Rs) Units to invest
Value Holding units
1 1,000 10.00 100.00 100.00 100.00
2 2,000 12.50 1,250.00 60.00 160.00
3 3,000 14.25 2,280.00 50.53 210.53
4 4,000 11.75 2,473.68 129.90 340.43
5 5,000 10.50 3,574.47 135.76 476.19
6 6,000 9.00 4,285.71 190.48 666.67
7 7,000 8.50 5,666.67 156.86 823.53
8 8,000 7.65 6,300.00 222.22 1,045.75
9 9,000 8.80 9,202.61 (23.02) 1,022.73
10 10,000 9.25 9,460.23 58.35 1,081.08
11 11,000 12.00 12,972.97 (164.41) 916.67
12 12,000 15.00 13,750.00 (116.67) 800.00

145
 Jacob’s Approach
 Combine RCA and VA
 Use an aggressive growth fund and a money market
fund of the same family.

146
 Asset Allocation
 Besides how much and for how long to invest, the important
question is where to invest
 Equity, debt and money market products are called asset
classes
 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
 The approach must incorporate product, investor profile
and preferences in the portfolio.

147
 Types of Asset Allocation
Fixed
FixedAsset
AssetAllocation
Allocation
Portfolio is periodically re-balanced
Disciplined approach
Profit booking in rising & more investment in a falling market
Better if stocks continue to return more than bonds

Flexible
FlexibleAsset
AssetAllocation
Allocation
No re-balancing - proportions can vary when prices change
If equity returns are higher than debt, equity allocation will
go up faster
Better if bond returns are close to equity
Tactical
TacticalAsset
AssetAllocation
Allocation
making changes in asset allocation within the overall
percentage holding for extra return.
148
 Asset Allocation Approaches
 Benjamin Graham’s 50/50 balance
 a 50/50 split between debt and equity
 Graham’s 50:50 is the basic asset allocation.

149
 Graham’s Portfolios
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 Portfolio 20% diversified equity fund
20% aggressive growth fund
10% specialty fund
Readymade Portfolio 100% Single Index fund with
60/40 equity/bond holding

150
 Jacob’s Investment Strategies

5% Liquid Funds

Income and Gilt Funds

15-30%

Diversified Equity

65-80%

Accumulation Phase

151
 Jacob’s Investment Strategies

5% Liquid Funds

15-30% Diversified Equity

65-80% Income and Gilt Funds

Distribution Phase

152
 Asset Allocation Approaches
 Bogle’s Approach
 Bogle suggested variation to percentages based on
age, financial circumstances and objectives
 Bogle’s thumb rule
 debt portion of an investor’s portfolio equal to
investor’s age.

153
 Bogle’s Asset Allocation Strategy
Accumulation Distribution
Stage Stage

Younger 80% Equity 60% Equity

Investor 20% Debt 40% Debt

Older 70% Equity 50% Equity

Investor 30% Debt 50% Debt

154
Alternate Investment Products
 Alternate Investment Products
 Physical/Real Assets vs. Financial Assets
 Physical Assets – Gold & Real Estate
 High initial investment, liquidity concerns
 Financial Assets
 By class: equity, debt, money market
 By issuer: Govt, FIs, Corporate, Banks
 Guaranteed vs. Non-guaranteed
 Government - G-Secs, PPF, KVPs, NSCs, RBI Relief Bonds
 PSUs/FIs – Bonds
 Banks - FDs
 Corporate - Shares, Debentures, Bonds, FDs
 Insurer - Policies (With Profit or without profit, ULIPs)
 Mutual Fund – a combination asset.

156
 Investment Products
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
PPF Investor
Government
Other personal Investor
investments
FIs Bonds Investor, MFs
Insurers Insurance policies Investor

157
 Quick Wit
 Tenor of RBI Bonds?
 Min/Max investment in PPF?
 Who assigns credit rating to Corporate securities?
 Borrowers with lower rating need to give higher/lower
interest?
 Tax benefit in NSC?
 Liquidity in Mutual Funds higher/lower than equity?
 Tax aspects of life Insurance proceeds?

158
 Comparison of financial products
Convenience Return Safety Volatility Liquidity

Equity Moderate High Low High High-Low

FI Bonds High Moderate High Moderate Moderate
Corp Debentures Low Moderate Moderate Moderate Low
Company FDs Moderate Moderate Low Low Low
Bank Deposits High Low High Low High
PPF High Moderate High Low Low-Moderate
LI (Traditional) High Low High Low Low
LI (ULIPs) High High High Moderate - High Low-Moderate
Gold Low Moderate High Moderate Moderate
Real Estate Low High Moderate High Low
Mutual Funds High High High Moderate-High High

159
 Mutual Fund vs. Direct Equity
Feature Direct Equity Mutual Fund

Stock selection ability Low High

Focussed activity Low High
Diversification Low High
Professional management Low High
Liquidity Low High
Transaction cost High Low
Convenience Low High
Switches
Cheque writing facilities
Investing time, knowledge & resources High Low

160
 Mutual Fund vs. Bank Deposit
 Deposits
 Contractual agreement
 Guaranteed for repayment
 No direct holding of a portfolio of
investment
 Mutual Fund
 No contractual agreement
 No guarantee
 Direct holding of a portfolio
 Return commensurate with risk.

161
 Investor Perspective
Investment Objective Risk Tolerance Investment 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

Short-Medium-Long
Bank Deposits Income Low
Term
PPF Income Low Long Term
Life Insurance
Risk Cover Low Long Term
(Traditional)
Risk Cover, Capital Growth,
Life Insurance (ULIPs) High-Moderate-Low Medium-Long Term
Income
Gold Inflation hedge Low Medium-Long Term

Real Estate Capital Growth, Income Low-Moderate Long Term

Short-Medium-Long
Mutual Funds Capital Growth, Income High-Moderate-Low
Term

162
 Why MF is the best option
 Combine the advantages of all investment products
 flexibility, convenience, affordability, liquidity, potential for high
returns
 Dispense the short comings of the other options
 liquidity, low return expectation, risk diversification
 Returns are adjusted for market movements
 Commensurate with level of risk.

163
Risk in Mutual Fund Investing
 Risk in MF investing
 What is Risk?
 Volatility of earnings viz. deviation (+ & - ) from expected
earnings
 Possibility of Financial loss
 Risk can be built into the investment planning by
 Defining the risk appetite of the investor and aligning investment
objectives to risk tolerance
 Evaluating and measuring risks of portfolio to keep in line with the
investor’s risk appetite
 The right level of risk tolerance of any investor depends
upon age, investable funds, circumstances including income
level, job security, family size etc.

165
 Jacob’s recommendation based on risk
level
Jacob’s Recommendation of portfolio sub-allocation
Low-Risk (Conservative)
50% G Secs + 50% MMMF
portfolio

40% in Growth & Income +

Moderate Risk (Cautiously
30% Govt Bonds + 20% Growth
Aggressive) portfolio
Funds + 10% Index Funds

25% Aggressive Growth Funds

+ 25% International Funds +
High Risk (Aggressive)
25% Sector Funds + 15% High
Portfolio
Yield Bond Funds + 10% Gold
Funds

166
 Type of risk in Equity Funds
 Company Specific
 Sector Specific
 Market Risk
 Company and Sector risk can be reduced with diversification but
market risk cannot be diversified
 Market Cycles
 Portfolio performance over a market cycle
 Equity more rewarding in the long-term.

167
 Measures of Risk
 Risk
 Standard Deviation
 Beta
 Ex-marks
 Alpha
 Risk-adjusted return
 Sharpe Ratio
 Treynor Ratio.

168
 Standard Deviation
 Best measure of risk
 Measure of absolute or total risk of a portfolio
 Dispersion around mean
 ‘Quality rating’ of the average
 Higher S.D. indicates more volatile returns
 Lower deviation means less risk
 High S.D. need not mean poor performance
 Sachin Tendulkar vs. Harbhajan Singh.

VOLATILITY!
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 Beta
 Shows how sensitive a fund is to market moves
 If the Sensex moves by 25%, a fund’s bet number will tell you whether
the fund’s return will be more or less than this
 Beta value for an Index is taken as 1
 Multiplying the beta value of a fund will expected percentage
movement of an index gives the expected movement in the fund
 Higher beta means higher impact of market returns
 Lower beta means less risk
 Higher beta funds do well in a rising market, lower beta funds do better in
a falling market.

SENSITIVITY!
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 Ex-Marks or R-Squared
 Quality of Beta depends on Ex-marks
 Beta depends upon the index used to calculate it
 Beta calculated for large cap fund against a mid-cap index has no meaning
 Higher ex-marks means more reliable beta
 Measures return from a fund and the market index and measures
the extent of correlation in their movement
 Lower ex-marks mean lower correlation with market returns
 R-squared varies between 0 and 1
 R-squared of an index fund would be 1 (or Ex-marks 100%).

SYMPATHY!
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 Sharpe & Treynor Ratio

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Recommending model
portfolios & Selecting the
right fund
 Jacobs’ Four-Step Program
 Develop long term goals
 Investment avenues, time horizon, return and risk
 Determine asset allocation
 Allocation to broad asset classes
 Determine sector distribution
 Allocation of sectors of the mutual fund industry
 Select specific fund managers and their schemes
 Compare products & choose actual funds to invest in.

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

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 Fund Selection – Bogle’s Approach
Equity
 Category – Diversified, Sectoral, Index etc
 Strategy – Growth and Value
 Past Returns – Compare with benchmark and with funds in same
category over same time frames
 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, High Div yield are
generally better.

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 Fund Selection – Bogle’s Approach
Debt
 Type – Income/Gilt/Liquid etc
 Fund Age & Size – higher the age and larger the size, the
better
 Costs – lower the better
 Loads – lower the better
 Average Maturity – higher average maturity means higher
interest rate risk
 Credit Quality – More AAA rated securities, more secure the
fund.

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 Fund Selection – Bogle’s Approach
Balanced
 Portfolio Balance –match investor’s objective
 Debt Portfolio Quality – higher the better
 Costs – lower the better
 Portfolio Statistics – similar to equity funds.

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 Fund Selection – Bogle’s Approach
MMMF
 Costs – lower the expense ratio the better
 Yields – higher the better
 Quality – higher is essential
 Liquidity and turnover rate
 Shorter term instruments are turned over more frequently
 Principal protection
 Limited NAV fluctuation due to low duration and low levels of
interest rate risk.

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 Session 7
Business Ethics

15. Business Ethics and Mutual Funds

 Meaning of business ethics
 Refers to rules of acceptable and good conduct in business
 All persons engaged in business should comply with rules of
good conduct and have strong ethics
 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
 Business ethics are hard to enforce, hence desirable that they
be self imposed
 In many countries, laws such as Consumer or Investor
Protection Act exist.

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 Need for business ethics
 Have honest and fair business practices
 Protect the interests of the customer or investor
 Good ethics also mean good business
 Retention of customer and generates loyalty
 Transparency in operations and to ensure that both
potential and existing customers are treated at par.

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 Objectives of Business Ethics
 Honest and transparent dealings with customers
 Protect clients and customer from being exploited or cheated
 Level playing field among all participants
 Healthy competition for the benefit of all customers.

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 SEBI Objectives
 Funds always conduct all activities in the best
interest of investors
 Areas monitored by SEBI
 Fund Structure & Governance
 Exercise of Voting Rights by Funds
 Fund Operations.

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 Implementing Business Ethics
 Fund Governance
 Regulator prime concern is investor protection
 Protect the investor through a system of
independent controls or check and balances
 Separation of functions
 Independence of organizations
 Independence of personnel.

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 Implementing Business Ethics
 Fund Operations
 Insider Trading
 Preferential Treatment to Select Investors
 Personal trading by Fund Manager & employees
 Compliance Officer
 Code of Conduct for Distributors
 AGNI.

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 Thank you for taking the journey
with us;
Good Luck!
The presentation has been prepared by I-PRU AMC & PIVOT
TRAINING PVT. LTD.