Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Index
Day 1
Part 1 1. Concept and Role of Mutual Funds 2. Fund Structure and Constituents 3. Legal and Regulatory Environment Part 2 4. 5. 7. 8. Offer Document Fund Distribution and Channel Management Practices Investor Services Return,Risk & Performance of Funds
Chapter 1
It is a pool of money, collected from investors, and is invested according to certain investment objectives The ownership of the fund is thus joint or mutual, the fund belongs to all investors. A mutual funds business is to invest the funds collected, according to the wishes of the investors who created the pool.
Primary Role is to assist investor in earning an income or building their wealth by participating in opportunities available in various security market. Money that is raised from investors ultimately benefits Governments, companies or other entities directly or indirectly. It is possible for mutual funds to structure a scheme for any kind of investment objective. Mutual Funds are therefore viewed as a key participant in the capital Market of any economy.
Why Mutual Fund Mutual Fund seek to mobilize money from all possible investors. as per their investment preferences. In order to accommodate different preferences mutual fund mobilize Different pool of money. Each pool is called mutual Fund scheme. Every Scheme has a pre-announced investment objective. When investor invest in mutual Fund they are effectively buying into its investment objective.
Combine features of both open-ended and close ended schemes. They are largely close-ended, becomes open ended at pre- specified intervals. If it is half yearly interval fund then it will open between 1 to 15 th Jan, & 1 to15 July,each year. The benefit for investors is they are not completely dependent on the exchange.
Fund Management
Equity
Debt
Money Market
Balanced Funds
Liquid Funds
Aggressive Growth Funds (Targets maximum capital appreciation.) Growth Funds (Capital appreciation over 3 to 5 years at above average rate.) Speciality Funds Sector Funds (Bank, Power, Pharma, IT, Telecom) Foreign Securities Fund Mid cap or Small cap Equity funds Diversified Equity Funds (Do not focus on any one or few sectors or shares) Equity Index Funds (These funds take only the overall market risk) Value Funds (Invests in the companies whose shares are underpriced) Equity Income or Dividend yield funds (Invests in the shares of the companies with high dividend yield.)
3 year lock in period Minimum investment of 90% in equity markets at all times So ELSS investment automatically leads to investment in equity shares. Eligible under Section 80 C up to Rs.1 lakh allowed Dividends are tax free. Benefit of Long term Capital gain taxation.
Arbitrage Funds
Take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned. For instance, by buying a share in BSE, and simultaneously selling the same share in the NSE at a higher price. Most arbitrage funds take contrary positions between the equity market and the futures and options market.
Concentrates in Single sector of market for investment. High Risk High Yes Among sector only
Capital appreciation in 3 can invest in across all the To invest into theme to 5 years sectors. like infrastructure High Risk High Yes Diversified across all sectors Average High Yes Diversified across all sectors Above average High Yes Can be Diversified across as per theme
To mirror the index Market risk Related more with Market Return Yes Most diversified
Focused on stocks within a Invest in to companies certain business or Features show promise of strong industry. More volatile than growth in coming years the overall market.
Best of the return are invest across A passive fund style generated per unit of risk companies which are suits to conservative taken by the investors. part of said theme. investors.
Debt Funds
Schemes with an objective that limits them to investments in debt securities like Government Securities, Bonds and Debentures are called debt funds. By investing in such instruments, these funds ensure low risk and provide stable income to the investors. They are classified as :Gilt funds Invest in only government securities, with Zero credit risk. Diversified debt funds Invest in a mix of government & non-government debt securities. Junk bond Funds Invest in companies with poor credit or High yield stocks
Debt Funds
Fixed maturity plans (FMP) In such debt funds where the investment portfolio is closely aligned to the maturity of the scheme. Floating rate funds Invests in floating rate debt securities where the interest rate payable by issuer changes in line with the market. NAV`s of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest. Liquid schemes or money market schemes Invest only in money market securities that matures within 91-days. They are the lowest in risk among all kinds of mutual fund schemes.
Hybrid funds
Monthly Income Plan Seeks to declare a dividend every month. invests largely in debt securities. & Small percentage in equity shares to improve the schemes yield. Capital Protected Schemes They are close-ended schemes, They are structured to ensure that investors get their principal back, irrespective of market conditions. Mainly invests in Zero coupon govt securities whose maturity is aligned with scheme's maturity & part amount will be invested in equity instruments.
Gold Exchange Traded Fund, They are like an index fund that invests in gold. NAV of such funds moves in line with gold prices in the market. Gold Sector Funds They are like an equity sectors funds the prices of these shares are more closely linked to the profitability and gold reserves of the companies. NAV of these funds do not closely mirror gold prices. Real Estate Funds These funds make it possible for small investors to take exposure to real estate as an asset class. Although permitted by law, such mf are yet to hit the market in India.
Gilt Funds
FMP
MIP
For consistent For higher return For fixed returns over for regular returns & liquidity. than gilt funds & fixed-maturity income Between the call rates & Nearly Fixed sort of Higher than pure Moderate Higher Yield 1yr T Bills returns debt fund Very less Nil Yes Nil Medium to high Yes Yes Yes Yes Yes Nil Yes Yes Yes Yes short duration fixed income paper & into equity funds
Invest in short-term debt invest G-Secs of Invest in a mix of Schemes maturity is instruments with less central & state govt govt and non govt aligned with portfolio than 1 year maturity. & T. Bills. securities. maturity Very High 3 Business days
Liquidity
Balanced Fund
The discussion on asset allocation brought out the benefit of diversifying the investment portfolio across asset classes
Balanced fund is not a 50/50 fund! Equity oriented Balanced funds (at least 65% in equity) Debt / Income oriented Balanced fund (at least 65% in debt) Investing in a balanced scheme makes things simpler for investor, because Fewer scheme selection decisions to be made. Investor looking for hybrid funds with tax benefit should invest in balance fund.
International Fund
These are the funds that invests outside the country. For Ex. MF may offer scheme to investor in India with an investment Objective to invest abroad. One way for the fund to manage the investment is to hire the requisite People who will manage the fund. Their salaries would add to the fixed costs of managing the fund. Alternative Route would be to tie up with a foreign fund (Host Fund) For Ex. If an MF sees potential in china it will tie up with Chinese fund Investors in India will invest in feeder fund. The money collected in such Fund would invest in the host fund. Thus when Chinese market does well host fund do well & Feeder Fund in India will follow suit.
Fund Of Fund
A Fund structured to invest in various other funds either in India or abroad are called Fund of Funds. The Feeder fund was a example of a fund that invests in another fund. These fund of fund pre-specify the mutual funds whose scheme they will buy & the kind of scheme they will invest in. They are designed to help investors get over the trouble of choosing between multiple schemes & their variants in the Market. Expense Ratio of the fund of fund is usually higher then normal mutual fund scheme.
An open ended Index funds that are traded on stock exchange. A feature of open ended funds which allows investor to buy & sell units from MF scheme. Such feature is allowed only to very large investors in an ETF. Other investor have to buy & sell on Exchange platform. A baskets of securities that are traded, like individual stocks, on an exchange. ETF`s can be bought and sold throughout the trading day like any stock. One must pay a brokerage to stock broker to buy & sell ETF units. ETF is exempted from wealth Tax Gold ETF is eligible for LTCG after 1 year as compare 3 yr in physical gold.
Investment Choices
Investor can Achieve income & capital appreciation in all funds by various choices available such as
Dividend Option Regular Dividend Dividend Reinvestment Option Growth Option Most of the Funds are available with all above options. Investor can choose according to his investment objective.
An Open Ended Fund offers repurchase facility unconditionally at all times (But It is not obliged to keep selling new units at all times). A Gilt Fund is a special type of Fund that invests in Dated Securities only. The Unit Capital of a closed Ended Fund is fixed. Also the number of units are also fixed. Each unit holder of a mutual Fund is part owner of the AUM of that Mutual fund ( he is not a creditor, not a debtor and not a trustee of that mutual fund). Transfer of Security from one scheme to another scheme is allowed at Market price. Units from an Open Ended fund are bought from the Fund Itself ( not from the stock exchange, distributors or the banks)
The Liquidity needs of an investor are met through Money Market Funds. A retired person generally needs a greater proportion of Debt Funds. A young investor, for growth and wealth creation, should be advised to invest in Equity Growth Funds. An Equity Fund can be said to be concentrated when Top 10 holdings account for more than 50% of net assets invested. The size of the market cap of funds equity holdings is inversely proportional to the level of risk assumed by the fund. ( Large Market Cap have low risk). A steady holdings of investments in an equity funds portfolio indicates both Long Term orientation and Lower Transaction Costs. Before investing in equity fund one should look at Ex Mark, Beta, Yield, Age and size of the fund, Portfolio turnover rate, etc.
Debt Schemes are popular because the returns are more predictable. Equity returns are volatile and very less predictable. If an investor needs income, he should select a fund with high current yield. YTM ( Yield to maturity) of debt funds portfolio gives an indication of Total Return ( Not current income). Longer the average duration of debt fund portfolio, greater the interest rate risk. Running a Money Market Mutual Fund requires more of Trading Skills. The investors should invest in Debt Fund with a Higher Rated Portfolio and Lower Expense Ratio. An Ideal money market MF has lower expense Ratio.
Answers
Answers: Q-1 : (b), Q-2 : (b), Q-3 : (d), Q-4 : (b), Q-5 : (b) , Q-6 : (b), Q-7 : (True)
Chapter 2
Appoints
The structure of mutual funds in India is governed by SEBI(Mutual Fund) Regulations, 1996. It is mandatory to have a three tier structure of Sponsor-Trustee-Asset Management Company. The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund. AMC is the business face of the mutual fund as it manages all the affairs of the fund
In India Mutual fund is the form of a Public Trust created under the Indian trust Act 1882. The fund sponsor acts as the Settler of trust, contributes the initial capital and appoints the trustees to hold the trust for the benefit of the unit holders. Mutual fund is just a pass-through vehicle In India, Mutual funds are organized as trusts. The trust is either managed by a Board of Trustees, or by a trustee company. The trustees hold the unit holders money in a fiduciary capacity. (Money belongs to unit holders) In legal sense, the investors are the beneficial owners of investments.
Sponsor
The sponsor is a promoter of the mutual fund. Sponsor appoints the Trustees, the AMC and custodians with prior. approval of SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record in the financial Services business. Sponsor must have been profit making in at least 3 of the above 5 years. Sponsor must contribute at least 40% of the net worth of the AMC. Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution (Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)
Trustee
Independent Trustees are appointed by the sponsor. The role of the trustee is to safeguard the interest of the investor of the fund. The trustee make sure that the fund are invested as per the investment objective. There must be at least 4 members in the Board of Trustees and at least 2/3 of the members of the board of trustees must be independent. Trustee of one mutual fund can not be a trustee of another mutual fund. All major decisions are taken by trustee. The 3rd schedule of the SEBI regulations specifies the content of the trust deed.
Trustees appoint the AMC, consultation with the sponsor according to SEBI. All Schemes floated by the AMC have to be approved by the Trustees. Trustees can seek remedial actions from AMC & in cases dismiss the AMC Obligations :-
Trustees must ensure due diligence on the part of AMC in the appointment of constituents and business associates Trustees must furnish to the SEBI, on half yearly basis a report on the activities of the AMC Trustees must ensure compliance with SEBI regulations The meeting of the trustees should be held at least once in every 2 months.
Must be registered with SEBI AMC also can be formed as Pvt Ltd Company. AMC is responsible for all operational aspects. AMC gets fees for fund management. AMC must have a minimum net worth of Rs. 10 Cr., at all times An AMC cannot be an AMC or Trustee, of another Mutual Fund AMC s cannot indulge in any other business, other than that of asset management. AMC can not be trustee / AMC for another MF. At least half of the members of the Board of an AMC, have to be independent Quarterly reporting to trustees. The agreement between the Trustees and the AMC is known as Investment Management Agreement.
Managing Director: Operations of AMC is headed by Managing director, Executive Director or Chief Executive Director. Chief Investment Officer: He is responsible for overall Investment of the Fund. Fund Manager assist the CIO. Securities Analysts : He supports the Fund manager through their research inputs. Securities Dealer: He helps in putting the transactions in the market.
Chief Marketing Officer: He is responsible for mobilizing money under Various scheme. Direct sales team who generally focus on large investor and Channel manager who manage the distributors support the CMO.
Chief Operations Officer: He handles all the operational issues. Compliance office: He need to ensure all the legal Compliance
They are responsible for issuing and redeeming units of the Mutual Fund. Their other services include. Process investor applications, Record details of Investors Send information to Investors, Process dividend payouts. Incorporate changes in investor information Keeping Investor information up to date Also do the collection & payments on behalf of fund. Example Karvy and CAMS
Auditors are responsible for the audit of accounts. The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC. While the scheme auditor is appointed by the Trustees Fund Accountants : -
Fund accountants calculate the NAV by collecting the information about the assets and liabilities of each scheme. AMC can either handle this activity in house or can hire the agency.
Distributors :They play a key role in selling suitable types of units to their clients. But before selling distributors needs pass the prescribed certification tests Collecting Bankers :The Investors Money go into bank account of the scheme they have invested in. These banks accounts are maintained with collection bankers who are appointed by AMC.
Important Points
The appointment of AMC can be terminated by Majority of directors or trustees. Fund manager is responsible for filing details of the funds portfolio with SEBI. A sponsor of a mutual fund can act as the distributor of the Mutual fund. The sponsor can be compared as promoter of a company Sponsor can contribute to the initial corpus of the trust. Sponsor contributes to the capital of the AMC and can invest in his own funds schemes. Sponsor can not act as Trustee , Custodian of the Mutual Fund.
Q-3 Which of the following entities is responsible for issuing and redeeming units? (a) Custodian (b) Bankers (c) Registrar (d) Distributors.
Q-4 Minimum Net worth needed by AMC ? (a) 10Cr (b) 15 Cr (c) 20Cr (d) 5Cr.
Answers
Chapter 3
Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996 SEBI regulates all funds, except offshore funds i.e. those schemes offered in a foreign country Bank-sponsored mutual funds were jointly regulated by SEBI and RBI Subsequently it has been clarified that all MFs being primarily capital market players,regulatory come under the umbrella of SEBI. RBI regulates the money and government securities market where the mutual funds invest. But not the MMMF.
Liquid funds which invest in money market instruments are now governed by SEBI alone. ( MMMF are now regulated by SEBI). But they need to comply with RBI's regulations. If a bank-sponsored mutual fund offers a guarantees, it requires RBI permission. SEBI does not regulate Non Banking Finance companies. The finance ministry is the supervisor of both the RBI and SEBI. Aggrieved parties can make appeals to the Ministry of finance on the SEBI rulings relating to mutual funds.
In developed Countries it is common for market players to Create SRO, Whose prime responsibility is to regulate the their own members Where ever SRO exits statutory regulatory bodies lays down the broad policy framework and leave micro regulation to the SRO. SRO are the second-tier in the regulatory structure & gets their powers from the apex regulating agency and act on their instructions SRO facilitate decentralization in the regulatory structure. For Instance - Stock exchanges are Self-Regulatory Organizations
AMFI Guidelines
AMFI Code of Ethics( For AMC) : ACE is set out to maintain good standards of Practices to be followed by AMCs in their operations and in their dealings with investor, intermediaries and the public.
AGNI( For Distributors) : AMFI has framed AGNI, a set of Guidelines and code of conduct for intermediaries, consisting of individual agent , brokers, distribution houses and banks engaged in selling of mutual fund products.
AMFI Code of Ethics sets out the standards of Good practices to be followed by the AMC in their operations and in their dealings with investors , intermediaries and the public. SEBI Regulation 1996 requires all the AMC and trustees to abide by the code of conduct.
Members in business shall observe the high standard of integrity and fairness in all the dealing done by them. Mutual Fund Scheme shall be organized & Managed and their portfolios of securities selection should be in the interest of all classes of unit holder and not in the interest of any associates.
Due Diligence Members in the conduct of their Asset Management Business shall at all times Render high standard of service, Exercise due diligence, Exercise independent professional judgement. Member shall have and employ effectively adequately resources and procedures which are needed for the conduct of Asset Management activity Disclosures Member shall ensure timely dissemination to all unit holder of adequate,accurate, and explicit information presented in a simple language about the investment objectives, investment policies, financial positions and general affairs of the scheme.
Operations Members shall avoid conflicts of interest in managing the affairs of the schemes and shall keep the interest of all unitholders. Members or any of their directors, officers or employees shall not indulge in front running. Reporting Practices Members shall follow comparable and standardized valuation policies in accordance with the SEBI Mutual Fund Regulations. Unfair Competition Members shall not make any statement or become privy to any act, practice or competition, which is likely to be harmful to the interests of other Members or is likely to place other Members in a disadvantageous position in relation to a market player or investors.
Observance Of Statutes, Rules And Regulations Members shall abide by the letter and spirit of the provisions of the Statutes, Rules and Regulations which may be applicable & relevant to the activities carried on by the Members. Enforcement Members shall: Widely circulate the AMFI Code to all persons and entities covered by it Make observance of the Code a condition of employment Require that each officer and employee of the Member sign a statement that he/she has received and read a copy of the Code Establish internal controls and compliance mechanisms, including assigning supervisory responsibility.
Integrity Due diligence Disclosures Professional selling practices Investment practices Operations Reporting practices Unfair competition Observation of statutes, rules and regulations Enforcement Definitions like AMFI, Member, Trustee, Trustee company etc.
Take necessary steps to ensure that the clients interest is protected. Adhere to SEBI Mutual Fund Regulations and guidelines issued from time to time related to selling, distribution and advertising practices. Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes Highlight risk factors of each scheme, avoid misrepresentation and exaggeration and urge investors to go through SID/KIM before deciding to make investments. Disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended to the investors.
Abstain from indicating or assuring returns in any type of scheme, unless the SID is explicit in this regard. Maintain confidentiality of all investor deals and transactions. When marketing various schemes, remember that a clients interest and suitability to their financial needs is paramount. Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptation of rebates / gifts etc. A focus on financial planning and advisory services ensure correct selling, and also reduces the trend towards investors asking for pass back of commission. All employees engaged in sales and marketing should obtain AMFI (NISM Series-V-A: Mutual Fund Distributors Certification Examination)
Investment Objective
This defines the broad investment charter of scheme. For Ex : The objective of a diversified equity scheme might read as To generate Capital appreciation from a portfolio of predominantly equity related securities. The objective of a diversified the debt scheme could be : To generate income by investing predominantly in a wide range of debt & money market securities.
Investment Policy
The Policy describes in a greater details, kind of portfolio that will be maintained. Such as below. The portfolio will generally comprise of equity & equity related instruments of around 30 companies, which may go upto 30 Companies. OR More than 50% will be invested in equity & equity related securities. The rest would be in debt & money market securities.
Investment Strategy
Investment Strategy goes into much details of a MF Scheme such as
Should we increase the liquidity component in a scheme. Should we go overweight on the steel sector.
Investment objective & investment policy are part of the OD. But investment strategy is decided more frequently. Many AMC have a practice where every morning the senior management discuss the need for a change in their strategy.
Schemes, other than ELSS, need to allot units or refund moneys within 5 business days of closure of the NFO. Open-ended schemes, other than ELSS, have to re-open for ongoing sale / re-purchase within 5 business days of allotment. Statement of accounts are to be sent to investors as follows: NFO - within 5 business days of closure of the NFO. Post-NFO investment within 10 working days of the investment. Ongoing Investments Once in quarter end of calender year with in 10 working days. Request by investor - With in 5 working days with out charges.
Investor can ask for a Unit Certificate for his Unit Holding. AMC is bound to issue unit certificates within 30 days of receipts of request. NAV has to be published daily, in at least 2 newspapers NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI and the mutual fund by 9 pm. In case of Fund of Funds, by 10 am the following day The investor/s can appoint up to 3 nominees, . The investor has a right to pledge the units held. Dividend warrants have to be dispatched to investors within 30 days of declaration of the dividend Redemption / re-purchase cheque would need to be dispatched to investors within 10 working days from the date of receipt of transaction request.
Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme. Investors can choose to change their distributor or go direct. In such cases, AMCs will need to comply, without insisting on any kind of NOC from the existing distributor. Investors can choose to hold the Units in dematerialized form. In the case of unit-holding in demat form, the demat statement given by the Depository Participant would be treated as compliance with the requirement of Statement of Account.
The mutual fund has to publish a complete statement of the scheme portfolio and the unaudited financial results, within 1 month from the close of each half year. Advertisement need to publish in one National English & regional language of the region where the HQ of the mutual fund is situated. Debt-oriented, close-ended / interval, schemes /plans need to disclose their portfolio in their website every month, by the 3rd working day of the succeeding month. Unit-holders can inspect key documents such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, R&T agent agreement and Memorandum & Articles of Association of the AMC.
Scheme-wise Annual Report, or an abridged summary has to be mailed to all unit- holders within 6 months of the close of the financial year. The offer document has details of the number of complaints received and their disposal. Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes. The trustees / AMC cannot make any change in the fundamental attributes of a scheme, unless a written communication is sent to each Unit-holder, and an advertisement should be published in news papers (english & regional). An option of exit would be give to unit holders with out any exit load. with in 30 days.
Investors cannot sue the trust as they are not distinct from the trust Investors cannot lodge complaints against the trustees (with the Registrar of Public Trusts) or the AMC (with the CLB). Investors can lodge complaints with SEBI for non-compliance. Investors cannot be compensated if the performance of the fund is below expectations. There are no legal remedies available for a prospective investor. The principle of caveat emptor (let the buyer beware) applies to mutual fund investments. So, the unit-holder cannot seek legal protection on the grounds of not being aware.
Unclaimed Amounts
The mutual fund has to deploy unclaimed dividend & redemption amounts in the money market. AMC can recover investment management and advisory fees at maximum rate of 0.50% p.a. Recovery of such unclaimed amounts by the investors is as follows: If the investor claims the money within 3 years, then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money. If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years AMC is expected to make a continuous effort to remind the investors through letters to claim their dues. The Annual Report has to mention the unclaimed amount and the number of such investors for each scheme.
If amounts are substantial & recovered within 2 years, then the amount is to be paid to old investors. In other cases the amount is to transferred to the investor education funds maintained by each mutual fund.
Important Points
SEBI entertains the complaints against MF and intervenes with fund managements to help the investor. SEBI requires that sponsors of a new scheme should appoint a compliance officer who must issue a Due Diligence Certificate to the effect that all regulations have been complied with by the fund and sponsors. Mutual fund has to deploy unclaimed dividend and redemption amount in money market, where they can charge .50% as investment management and advisory fees. Unit holders have right to timely service, right to information, right to approve changes in fundamental attributes, right to wind up a scheme, right to terminate the AMC. 3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of the Trust Deed. Investors money is not protected by the Companies Act.
Q-2. If an investor failed to claim the redemption proceeds after 3 years of due date he has the right to receive an amount equal to (a) Zero (b) Face value of the unit
(c)Due date NAV plus interest @15% p.a. (d)NAV at the end of three years after the due date Q-3 Payment of redemption is delayed then what % Interest has to be paid by AMC ? (a) 10% (b)20% (c)9% (d) 15%
Answers
Chapter 4
OFFER DOCUMENT
AMC holds events for intermediaries and press to make them familiar with the scheme. Finally offer documents and Application forms are distributed to market intermediaries for investor to apply. NFO ( Other than ELSS ) Open for 15 days. Post NFO allotment of units to be done in 5 days. There are 3 Relevant dates related to NFO
Offer Document is the most important source of information about mutual fund scheme for investors OD is the Operating Document and describes the product. Mutual fund offer document is divided into 2 parts, Scheme information document (SID) & Statement of additional information (SAI). SID comprises of details of the scheme while SAI deals with statutory I information about the mutual fund that is offering scheme. Both documents are prepared in the format as prescribed by SEBI.
Investors are required to read and understand the OD. Investors sign the form stating that they have read the OD. No recourse is available to investors for not reading the OD or KIM The OD is issued by the AMC on behalf of the trustees The AMC is responsible for the information in the OD
Contents of SID
Cover Page has the name of the scheme followed by its type
Open-ended / Close ended / Interval Equity / Balanced / Income / Debt / Liquid / ETF Finally the cover page has the following standard clauses. Table of Contents Highlights Introduction - Risk Factors Standard Scheme-specific - Minimum no. of investors in scheme, Definitions, Due Diligence Certificate (issued by the AMC) Information about the scheme - Units & Offer, Fees & Expenses ,Rights & Penalties Unit-holders, Litigation etc.
Updation of SID
If a scheme is launched in the first 6 months of the financial year (say, April 2010), then the first update of the SID is due within 3 months of the end of the financial year (i.e. by June 2011). If a scheme is launched in the second 6 months of the financial year (say, October 2010), then the first update of the SID is due within 3 months of the end of the next financial year (i.e. by June 2012). Thereafter, SID is to be updated every year. In case of change in the fundamental attributes, the SID has to be updated immediately after the lapse of the time period given to existing investors to exit the scheme.
It will be printed on a separate piece of paper (addendum) and distributed along with the SID, until the SID is updated. If a change is superseded by a further change (for instance, change in load), then addenda is not required for the superseded change i.e. addenda is only required to disclose the latest position. The change is to be advertised in an English newspaper having nationwide circulation, and in a newspaper of the language of the region where the head office of the mutual fund is located. The change is to be mentioned in the website of the mutual Fund.
Contents of SAI
Information about Sponsors, AMC & Trustee ,shareholding pattern, responsibilities, names of directors and their contact information. profiles of key personnel, and contact information of service providers (Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers) Condensed financial information (for schemes launched in last 3 financial years) How to apply Rights of Unit-holders Investment Valuation Norms Tax,Legal & General Information (including investor grievance Redressal mechanism of past 3 years.)
Update of SAI
Regular update is to be done by the end of 3 months of every financial year. Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.
Contents of KIM
KIM is a summary of the SID and SAI. As per SEBI regulations, every application form is to be accompanied by the KIM.
Name of the AMC, mutual fund, Trustee, Fund Manager and scheme Dates of Opening /Closing Issue & Re-opening for Sale & Re-purchase Plans and Options under the scheme Risk Profile of Scheme Price at which Units are being issued and minimum amount / units for initial purchase, additional purchase and re-purchase Bench Mark , Dividend Policy Performance of scheme and benchmark over last 1 year, 3 years, 5 years and since inception. Loads and expenses Contact information of Registrar for taking up investor grievances
Update of KIM
KIM is to be updated at least once a year. As in the case of SID, KIM is to be revised in the case of change in fundamental attributes. Other changes can be disclosed through addenda attached to the KIM.
Fundamental attributes
Fundamental attributes of a scheme are its basic features. For eg. Type of a scheme, Investment Objective, Terms of issue etc. For any change in fundamental attributes, SEBI and Trustee approval is required. Investor approval is not needed. However, each investor must be informed through a communication and given the option to exit without exit load.
Mutual fund and securities are subject to market risk and there is no assurance that the objective will be achieved NAV of units issued under the scheme can go up or down depending on factors and forces affecting capital markets. Past performance of the sponsor/AMC/ Mutual fund does not indicate the future performance of the scheme. The name of the scheme does not in any manner indicate any either the quality of the scheme or the future performance of the scheme Standard risk factors are same for all the MF Schemes.
Risk arising from investment objective, investment strategy and asset allocation of the scheme Risk arising from non diversification , if any If a scheme offers assured returns, the scheme must state that the assurance is on the basis of the guarantees provided by the sponsor/AMC If the AMC has no previous experience in managing a mutual fund, a disclosure to the at effect should be made. Risk arising with investment in equity, debt, derivative etc.
In USA, the OD is known as prospectus The first time investor should read detailed offer document, once he has gained familiarity with the AMC, he can just refer to KIM The offer document is issued by the AMC / Trustees OD is a legal document. OD issued for launching of a new schemes is valid for a period of six months and if the scheme is not launched within this period a fresh OD is required to be filed. OD contains the accounting policies to be followed. Such policies should be in accordance with the SEBI regulations.
Compliance Officer signs the Offer Documents stating that: 1) All the Information is as per Sebi Format 2) All the information is True 3) All the constitutes of AMC are Sebi registered.
OD must disclose the names and background of fund managers, key personnel, investor relation officer, AMC and its directors, custodian, registrar, transfer agent and the statutory au
Important Points
KIM is available at various distribution points such as banks, distributors and brokers AMC must confirm that a due diligence certificate signed by Compliance officer / CEO / MD has been submitted to SEBI. If a schemes name implies that it will invest primarily in a particular type of security or in certain industry, then it will invest at least 65% of the value of its assets in the indicated type of security/ industry. OD must contain brief description of investors complaint history for the last 3 Fiscal years of existing schemes. In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID. Both documents need to be updated regularly.
Q-1 Which of the following is the operating document for a mutual fund? (a) Offer Document (b) KIM (c) Trust deed (d) None of the above.
Q-2 The OD may not disclose the names and background of (a) Fund manager (b) Key personnel (d) (c) Investor relation officer Statutory auditor (e) None of the above.
Q-3 Offer Document issued on launch of the new scheme is valid for ? (a) 1 month (b) 3 months (c) 6 months (d) 1 year.
Answers
Answers: Q-1 : (a), Q-2 : (e), Q-3 : (c), Q-4 : (d), Q-5 : (B), Q-6 : (d), Q-7 : (b)
Chapter 5
Those agents who facilitates the investment individually for Insurance co`s or Govt. Savings schemes etc. Only exemption is distributors above 50 years of age and with at least 5 years of experience as on Sep 30, 2003. Such exempted distributors were required to complete AMFIs refresher course by Sep 30, 2004. Institutional Channels The changing competitive context led to the emergence of the institutional distributors for a wide spectrum of financial products such as Private Distribution Companies Banks and NBFC`s Post Offices
Example
Suppose an investor has bought 1000 units at Rs 10 each. The distributor who procured the investment may have been paid an initial commission calculated as a percentage on 1000 units X Rs 10 i.e. Rs 10,000. Later, suppose the NAV of the scheme goes up to Rs 15. Trail commission is payable on 1000 units X Rs 15 i.e. Rs 15,000 & not on the Rs 10,000 mobilised. The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either AMFI or SEBI.
Loads
Load is charged to investor when the investor redeems units. It is primarily used to meet the expenses related to sale and distribution of units Load charged on redemption is exit load. It reduces price. Maximum Exit load is 7%. (For Open ended Funds) Exit load should be charged equally for all types of investors. AMC should not discriminate on the basis of Investment Value. Load is an amount which is recovered from the investor.
Chapter 7
INVESTOR SERVICES
Resident Individuals Indian Companies Indian trusts and charitable institutions Banks NBFCs Insurance companies Provident funds Non-resident Indians / PIO OCBs SEBI registered FIIs Advisor should refer to the OD to know the eligible investors.
It is compulsory from 1st jan 2011 that all investments done in mutual funds has to be compliant with the regulatory requirements. Broadly, mutual fund investors need the following Documents. Proof of Identity Proof of Address PAN Card Photograph
MF have made an arrangement with CVL ( CDSL venture Ltd) to comply with the documentation requirement. Select branches / offices of mutual funds, registrars and large distributors serve as Points of Service (POS) for the KYC documentation, listed in AMFI website .www.amfiindia.com Investors will need to provide the Original, along with a copy of the relevant documents, to any of the POS (The Original will be returned after verification). Alternatively, the investor can provide a True Copy attested by a Notary Public, Gazetted Officer or Manager of a Scheduled Commercial Bank. CVL provides a facility where the POS, from their own office, can access CVLs system, enter the requisite data and generate an acknowledgment with a Mutual Fund Identification Number (MIN).
Documentation for Institutional investor In case of institution Memorandum of Association , Articles of association or Trust deeds. Company cannot invest if its documents do not provide for investments. Authorization for the investing institution to invest. This is typically in the form of board resolution. Authorization for the official to sign the documents on behalf of the investing institution.
De materialization is a process whereby an investors holding of investments in physical form (paper) is converted into a digital record. Investors purchase & sale of investments get automatically added or subtracted from their investment demat account, without having to execute cumbersome paperwork. Less paperwork in buying or selling the Units, and correspondingly, accepting or giving delivery of the Units. Direct credit of bonus and rights units that the investor is entitled to, into the investors demat account. Change of address or other details need to be given only to the Depository Participant, instead of separately to every company / mutual fund where the investor has invested. NSEs platform is called NEAT MFSS. BSEs platform is BSE STAR Mutual Funds Platform.
This is a facility where the investment application is accompanied by an authorization to the bank to block the amount of the application money in the investors bank account. The benefit of ASBA is that the money goes out of the investors bank account only on allotment. Until then, it keeps earning interest for the investor. M-Banking is nascent in India. RBI has permitted banks to offer the facility of transferring up to Rs 50,000 per customer per day, through the mobile connection. Once people are comfortable with M-banking, this will become a convenient way to invest.
Repurchase of units
The investor in an open ended scheme can offer the units for repurchase to the mutual fund. Re-purchase price is the applicable NAV less exit load. Investor has a right to decide on repurchase amount. & if investor has specified the re-purchase amount then (Amount / Repurchase price = units to be reduced. If an investor specified re-purchase units then (Units specified X Repurchase price = Amount to be paid. If the repurchase of folio goes below minimum limit set by MF for scheme then all the units may be repurchased.
Sr.no Scheme type 1 Liquid Scheme 2 Liquid Scheme 3 Liquid Scheme 4 Liquid Scheme 5 Other Than Liquid above 1 Cr. 6 Other Than Liquid up to 1 Cr. 7 Other Than Liquid above 1 Cr. 8 Other Than Liquid 9 Other Than Liquid
Transaction Cut of time Sale Received upto 12 Noon Sale Received After 12 Noon Re-purchase Received before 3 pm Re-purchase Received After 3 pm Sale Received any time Sale After 3 PM Sale (With Outstation cheque & DD) Re-purchase Received upto 3 PM Re-purchase After 3 PM
Applicable NAV Previous day NAV Next day NAV Previous day NAV Next day NAV Same day NAV Next day NAV Same day NAV Same day NAV Next day NAV
Time Stamping
Mutual funds disclose official POA`s & all transactions needs to be submitted at the POA`s. These POA`s have time stamping machines with tamper-proof seal. (Opening / repairing or maintenance is permitted only to vendors or nominated persons of mutual Fund. & has to be documented & informed to trustees) Application are stamped with automatically generated location Code,machine identifier, Serial number, date & time. Acknowledgment issued to investor are stamped with the same information. Acknowledgment for non financial transactions like change of address are stamped. For online transactions time as per the web server to which instruction goes is used in determining the NAV.
Investment plans
Most mutual fund schemes offer three options Dividend and Growth. Dividend reinvestment Option. These are different options within a scheme; they share the same portfolio. Therefore the portfolio returns are the same for all three options. However, they differ in the structure of cash flows and income accruals for the unit-holder, and therefore, the Unit-holders tax ability, number of units held and value of those units.
Systematic Investment Plan SIP is investing a fixed sum periodically in a disciplined manner for long term. It gives benefit of Rupee Cost averaging ( Discussed in later half of presentation). Voluntary Accumulation Plan VAP is modified version of SIP. It is Voluntary Accumulation Plan. It allows the investor flexibility with respect to the amount and frequency of investment. In VAP, investor has to impose voluntary self discipline. Systematic Withdrawal Plan In cases where an investor does not want to withdraw all the amount invested at one time he can opt for facility called SWP which would enable investor to withdraw a specific amount at specific period. SWP is not similar to MIP Systematic Transfer Plan It is a systematic way of investing an amount at pre-specified frequency from a pool of money available or from any debt scheme to equity.
Investment services
Triggers It is type of an standing instruction given to particular fund for purchase or sell at desired market level. Statement of account & investment certificate The statement of account shows for each transaction & value of transaction, relevant NAV & balance no of units held in that folio. Nomination Nomination is only an authorization for mutual fund to transfer the units to the nominee in the event of demise of the unit holder.
Investment services
Pledge Mutual funds units can be pledged by unit holders. Same can be affected by pledge form executed by unit holders. Form has provision to specify name of party on who's units are pledged. Once the units are pledged the units can not be sell or transfer until the pledgee gives no-objection to release the pledge.
Investment services
Other Services Online Access to information on investments including consolidated view of various folios that related to different family members. Daily NAV and other key developments transmitted through SMS/email. Sharing of information on the portfolio valuation income booked, returns earned,capital gains working for income tax purpose etc.
Q-3 Which of the following is not true with respect to the voluntary accumulation plan? (a) It give the flexibility to the investor regarding the amount to be invested (b) It give the flexibility to the investor regarding the frequency of investment (c) VAP follower is obliged to keep investing (d) None of the above.
Answers
Chapter 8
The portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are different for each asset class.
Equity scheme
Fundamental analysis & Technical analysis. These are quantitative approach for security analysis. Fundamental analysis tells us which stock to buy. Technical analysis tells us when to buy. Passive fund manager does not need to go through this process as portfolio would be maintained in line with the index. Securities analysis is an important aspect of actively managed scheme.
Net profit after tax No. of equity shares This tells investors how much profit the company earned for each equity share that they own. Price to Earnings Ratio (P/E Ratio):
Market Price EPS P/E ratio indicates how much investors in the share market are prepared to pay (to become owners of the company), in relation to the companys earnings.
P/E may be high because the companys prospects are indeed good, while another companys P/E may be low because it is unlikely to replicate its past performance
Book Value per Share: Net Worth No. of equity shares This is an indicator of how much each share is worth, as per the companys own books of accounts. Price to Book Value: Market Price Book Value per Share An indicator of how much the share market is prepared to pay for each share of the company, as compared to its book value. Note : Most financial indicators cannot be viewed as stand-alone numbers. They need to be viewed in the context of unique factors underlying each company.
Technical Analysis
The discipline of Technical Analysis has a completely different approach. Technical Analysts believe that price behavior of a share, and the volumes traded are a reflection of investor sentiment, which in turn will influence future price of the share.
Investment Styles
Growth investment style Potentials investing in high growth stocks i.e. stocks of companies that are likely to grow much faster than the economy. Valuation of these stocks tends to be on the higher side. In the event of a market correction, these stocks tend to decline more. Value investment style Is an approach of picking up stocks which are valued lower, based on fundamental analysis. The belief is that the market has not appreciated some aspect of the Value in a companys share and hence it is cheap. When the market recognizes the intrinsic value, then the price would shoot up. Such stocks are also called value stocks. valuation of these stocks tends to be on the lower side.
Investment Styles
Portfolio building approach Top down and Bottom up: A top down approach, the portfolio manager decides how to distribute the investable corpus between countries (if it invests in multiple geographies) & sectors. Thereafter, the good stocks within the identified sectors are selected for investment. Thus sector allocation is a key decision. A bottom-up approach on the other hand give emphasis on good stock picking. If a stock is good, it is picked for investment. The approach is therefore also called stock picking. Stock selection is the key decision in this approach; sector allocation is a result of the stock selection decisions. Therefore, it can be said that equity returns are a function of sector and stock selection.
Debt
Investment in a debt security, as in the case of a loan, entails a return in the form of interest (at a pre-specified frequency for a pre-specified period), and refund of a pre-specified amount at the end of the pre-specified period.
The pre-specified period is also called tenor. At the end of the tenor, the securities are said to mature. The process of repaying the amounts due on maturity is called redemption. Debt securities that are to mature within a year are called money market securities. The return that an investor earns or is likely to earn on a debt security is called its yield. Yield is a combination of interest paid by the issuer and capital gain. Debt securities are issued by Central / State Governments, Banks, Financial Institutions, PSU, Private Companies, Municipalities etc.
Debt
Securities issued by the Government are called Government Securities or G-Sec or Gilt. Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India. Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years) Commercial Papers are short term securities (upto 1 year) issued by companies. Bonds / Debentures are generally issued for tenors beyond a year. Governments and public sector companies tend to issue bonds, while private sector companies issue debentures. The difference between the yield on Gilt and the yield on a nonGovernment Debt security is called its yield spread.
The interest rate payable on a debt security are specified as a fixed rate, say 6% or floating rate. Interest rates on floating rate securities (also called floaters) are specified as a Base + Spread. For example, 5-year G-Sec + 2%. Interest rates and Market price of debt security are inversely related to each other. Interest rate sensitivity of the debt security is measured by modified duration of the debt security.
Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market. A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place. For Ex - The difference between the yield on gilt and the yield on a non government debt security is called its yield spread.
Gold
The value of gold in India depends on the international price of gold (quoted in foreign currency)Therefore, returns in gold as an asset class depends on Global price of gold
Gold is seen as a safe haven asset class. Therefore, whenever there is political or economic turmoil, gold prices shoot up. Most countries hold a part of their foreign currency reserves in gold. Similarly, institutions like the International Monetary Fund have large reserves of gold. When they come to the market to sell, gold prices weaken. Purchases of gold by large countries tend to push up the price of gold.
Gold
Strength of the Rupee Economic research into inflation and foreign currency flows helps analysts anticipate the likely trend of foreign currency rates. When the rupee becomes stronger, the same foreign currency can be bought for fewer rupees. Therefore, the same gold price (denominated in foreign currency), translates into a lower rupee value for the gold portfolio. This pushes down the returns in the gold fund. A weaker rupee, on the other hand, pushes up the rupee value of the gold portfolio, and consequently the returns in gold would be higher.
Weaker Rupee = high return in gold portfolio Stronger Rupee = Low return in gold portfolio.
Real Estate
It cannot be transported and its value is driven by local factors. Some of these factors are: Economic scenario In the recent past, when there was uncertainty about the economy, people preferred to postpone real estate purchases. Consequently, real estate prices weakened. As the economy improves, real estate prices also tend to keep pace. Infrastructure development Whenever infrastructure in an area improves, real estate values go up. Interest Rates When money is cheap and easily available, more people buy real estate. This pushes up real estate values. Rise in interest rates therefore softens the real estate market.
Measures of Returns
Simple Return: (End Value Initial Value) X 100 Initial value Suppose you invested in a scheme, when its NAV was Rs 12. Later, you found that the NAV has grown to Rs 15. How much is your return? = (15 12) / 12 = 25%
Measures of Returns
Annualized Return: Annualized helps us compare the returns of two different time periods. Simple Return X 12 Period of simple return (in months) Suppose Two investment options have indicated their returns since inception as 5% and 3% respectively. If the first investment was in existence for 6 months, and the second for 4 months, then the two returns are obviously not comparable. 1) 2) 5% *12 / 6 = 10% 9% 3% * 12 / 4 =
Measures of Returns
Compounded Return: [ (Later Value / Initial Value )^(1/n) - 1 ]*100 For Ex :- if Rs 1,000 grew to Rs 4,000 in 2 years, LV = Rs 4,000; IV = Rs 1,000; n = 2 years, then the compounded return is given by such investment; [ ((4000 / 1000) ^ ) - 1 ] *100 = 100% Logically for a return of 100% the initial value of Rs.1000 should have grown by 100% i.e. doubled to Rs.2000 in 1st year & further doubled to Rs.4000/- in second year.
Solution Initial Investment Value Rs.10000/No of units (10000 / 10 ) - 1000 units. 1st dividend 1000 X 1 Rs.1000
They believe that the market is over heated and therefore prefer to sell their investment and hold the proceeds in liquid form until the next buying opportunity. They want to provide for contingencies such as impending dividend payment or re-purchase.
Since liquid assets generally yield a lower return they can be a drag on the scheme returns.
Equity Markets seek to reflect the value in the real economy. In Log run equity markets are a good barometer of the real economy. In short run markets can get over- optimistic or over pessimistic to spell of greed & fear. Equity market there for tend to be volatile.
Measures of Risks
Variance It measures the fluctuation in periodic returns of a scheme. This helps determine the risks an investor may take on when purchasing a specific security. Higher the variance = Higher Volatility or return.
Months 1 2 3 4 Variance Scheme 1 5.00% 4.00% 5.00% 5.00% 0.00% Scheme 2 5.00% -10.00% 20.00% 5.00% 1.50%
The Example clearly suggests that monthly returns of scheme 2 are more volatile.
Measures of Risks
Standard Deviation Similar to variance, standard deviation too measures the fluctuation in periodic returns of a scheme in relation to its own average return. Mathematically standard deviation is equal to the square root of variance. Formula of Excel = stdev(range of cells where the periodic returns are calculated) Is a measure of a risk is relevant for both debt & equity scheme.
Measures of Risks
Beta It is based on the capital asset pricing model which states that there are two kind of risk in investing in equities systematic & non systematic. Systematic risk is integral to investing in the market. It can not be avoided hence Investor needs to be compensated only for systematic risk measured by beta. Beta measures the fluctuation in periodic returns in a scheme as compared to fluctuation of a index over same period. Beta of market is always one By definition stock index beta would be always 1. So companies whose beta is >1 are seen as more risky then market and vice versa. Beta as a measure of risk is relevant only for equity scheme.
Measures of Risks
Modified Duration As seen earlier this measures the sensitivity of value of a debt securities to changes in interest rates. Higher the modified duration higher the interest sensitivity. Weighted Average Maturity Weighted average maturity of debt securities in a scheme's portfolio is indicative of interest rate sensitivity of a scheme. Being a simpler to comprehend weighted average maturity is widely used with lay investors. However professional debt fund manager would rely on modified duration as a better measure of interest rate sensitivity.
Benchmarks
Name of Scheme Benchmark
BSE Sensex S&P CNX Nifty Diversified equity scheme BSE 200 BSE 500 CNX 100 S&P CNX 500 BSE Bankex BSE FMCG Index Sector funds CNX Infrastructure Index CNX Energy Index NSE`s MIBOR (Mumbai Inter- Bank Offered Rate) or CRISIL Short term Money Market LiquiFEX Non-liquid scheme Either of above mentioned depending on nature of portfolio. As per the scheme porfolio for Ex. 65% BSE Sensex and 35% of IBalance Funds bex if the asset allocation is the simler Gold ETF Gold price would be the benchmark A few real estate comapanies have developed an indices but due to Real Estate Funds shorter history yet to earn wider acceptance It depends on where the scheme proposes to invest. For Ex a International Funds scheme seeking to invest in china might have the Chinese index.
The expense ratio ( Ratio of total expenses to average net assets of the fund)- Funds with small corpus size will have a higher expense ratio affecting investor returns. It is indicator of the Funds Efficiency and Cost Effectiveness. The income ratio ( It is the net investment income divided by its net assets for the period) useful for debt fund Fund size Small funds are easy to manage and can achieve their objectives in a focused manner with limited holdings. Large funds benefit from economies of scale with lower expense ratios and superior fund management skills. Cash holdings
Important Points
Money Market Funds are low risk fund. Sectoral Fund are high risk fund. Risk is equated with Volatility of Earnings. Diversification reduces Company specific risk but it does not reduce Market Risk. Short Term investment in Equity market is most risky. BEST FUND WILL HAVE HIGHER EX MARKS, LOWER BETA AND HIGHER GROSS DIVIDEND YIELD.
Important Points
The returns should be computed on an annualized average compound rate of return from cumulative figure. If the fund performance data relates to a period of less than one year, it should not be annualized, except for liquid mutual funds which have a short investment horizon. Borrowings by Mutual Fund
A mutual fund can borrow for a maximum of 20% of net assets. For Maximum period of 6 months. Purpose should be to meet liquidity requirements for paying dividend or meeting redemptions. It is not a permanent source of funds for the scheme.
Index
Day 2 Part 3 6. Accounting, Valuation and Taxation 10. Selecting the Right Investment products for Investors Part 4 11.Helping investors with Financial Planning 12.Recommending Model Portfolios and Selecting the Right Fund
Chapter 6
Purchase and sale of investment securities Valuation of all investment securities held Other assets and liabilities Units sold and redeemed.
All mutual funds have to disclose their NAVs daily, by posting it on the AMFI web site by 9.00 p.m. In case of any other scheme except FOF where it is to be published by 10 a.m. Of the following day. Open ended funds have to compute and disclose NAVs everyday; closed end funds can compute NAVs every week, but disclosures have to be made everyday. Closed end schemes not mandate listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months, as permitted by SEBI.
Mark to market
The process of valuing each security in the investment portfolio of the scheme at its market value is called MARK TO MARKET Marking to market helps investor buy & sell units of a scheme at a fair price. Mark to market based NAV helps in assessing the performance of the scheme / Fund manager.
SEBI has abolished entry loads. So, the Sale Price needs to be the same as NAV. Exit loads in excess of 1% of the redemption proceeds have to be credited back to the scheme immediately i.e. they are not available for the AMC to bear selling expenses. Exit load structure needs to be the same for all unit-holders representing a portfolio. New SEBI guidelines for Dividend Distribution :-
All profit earned (including accrual income) are available for distribution. Valuation gain are ignored but valuation losses needs to be adjusted against profit. The proportion of sale price on new units which is attributable to the valuation gains is not available as a distributable reserve.
Expenses that are incurred in the launch(NFO) of the fund are called as initial issue expenses. These needs to be borne by the AMC. Earlier initial issue expenses were borne by the unit holder which was 6% of the total amount mobilized in the NFO. In order to prevent intial issue expenses from causing a drastic fall in NAV, the guidelines permitted an accounting treatment called Deferred Load It operated in the principle that if the scheme were to last for 4 years, so initial issue expenses could be written off over 4 years. The part of the initial issue expense that related to periods that have passed would be written off.( Which will reduce the NAV) The part that related to a future time period was treated as an asset of the scheme called, issue expenses not written off.
Recurring expenses
These can be charged to the scheme. Since the recurring expenses drag down the NAV, SEBI has laid down the expenses, which can be charged to the scheme. An indicative list is as follows:
Fees of various service providers, such as Trustees, AMC, Registrar & Transfer Agents, Custodian, & Auditor Selling expenses including scheme advertising and commission to the distributors Expenses on investor communication, account statements, dividend / redemption cheques / warrants Listing fees and Depository fees Service tax
Recurring expenses
Recurring expense limit: SEBI has stipulated the following annual limits on recurring expenses (including management fees) for schemes other than index schemes.
Net Asset ( Rs crore) Upto Rs 100 cr. Next Rs 300 cr. Next Rs 300 cr. Excess over Rs 700 cr.
Equity Debt Scheme Scheme 2.50% 2.25% 2.25% 2.00% 2.00% 1.75% 1.75% 1.50%
The above percentages are to be calculated on the average net asset of the scheme.
Recurring expenses
The management fees can not exceed:
1.25% on the first Rs 100 crore of net assets of a scheme 1.00% on the balance net assets. Management fees cannot be charged by liquid & other debt schemes on funds parked in short term deposits of commercial banks. The expense limits for index schemes (including Exchange Traded Funds) is as follows:
Recurring expense limit (including management fees 1.50% Management fees 0.75% As regards Fund of Funds, the recurring expense limit (including management fees) is 0.75%.
Expenses that can not be charged to the Scheme Penalties and fines for infraction of law Interest on delayed payment to unit holders Legal, marketing, publication and other general expenses not attributable to any scheme Fund accounting fees Expenses on investment management / General Management. Expenses on general administration, corporate advertising & infrastructure costs. Depreciation on fixed assets & software development expenses.
Taxability of mutual fund The mutual Fund Trust is Exempt from tax. Trustee company will however pay tax in the normal course on its profits.
Securities Transaction Tax (STT) This is a tax on the value of transactions in equity shares, derivatives and equity mutual fund units. Applicability is as follows.
Sr.no 1 2 3
STT for equity STT for Investor in MF scheme equity schmes On purchase of equity shares in stock Exchange 0.125% 0.125% On sale of equity shares in stock Exchange 0.125% 0.125% On sale of futures & options in stock Exchange 0.017% 0.250% Transaction Details
Additional Tax on Income distributed Tax is a tax on dividend distributed by debt oriented mutual fund schemes applicability is as follows. Money Market Mutual Funds / Liquid Schemes. 25% + Surcharge + Education Cess Other Debt funds (Investors who are individual / HUF 12.5% + Surcharge + Education cess Other Debt funds (other investors) 20% +surcharge + Education cess
Dividends
Investors
DDT
Short Terms
Long Terms
Tax Free
NIL
15%
Tax Free
Dividend
Capital Gain
Tax free
An investor purchased units in an approved debt Mutual Fund on Jan. 1, 1998 for Rs.500000/-. He sold the units on December 1, 2001 for Rs. 750000/-. Calculate the capital gain taxes paid by him. ( Ignore indexation).
Answer : Long term capital gain = 250000/ So Tax on LTCG = 250000* 10% = Rs. 25000/-
Other points
Section 80 C Individual and HUF are entitled to deduction up to Rs.1 lakh Dividend Stripping Section 94(7) As per the finance Act 2001, If investor buy units within 3 months prior to record date of dividend and sells those units within 9 months of record date, then the loss if any, shall be ignored. Limitation on set off in case of bonus units NAV of the scheme is get adjusted after bonus units are issued therefore any capital loss arising out of such transaction is not allowed to set off if such transaction has happened within 3 months prior to record date of bonus issue and sold off within 9 months after the record date.
Other points
Units are not considered under wealth tax Section 195 20% TDS for LTCG and 30% TDS on STCG if unit holder is a NRI. 48% TDS if unit holder is foreign company.
Closing price on valuation date Selected stock exchange Use of alternate stock exchange quote On the basis of earliest previous quote (not more than 30 days prior to valuation date). If trading is suspended up to 30 days, last quoted price; if it is suspended for more than 30 days, AMC/Trustee decide valuation norms and document such norms.
An asset shall be classified as an NPA, if the interest and/or principal amount have not been received or have remained outstanding for one quarter, from the day such income/instalment has fallen due. Such assets will be classified as NPA`s, soon after the lapse of a quarter from the date on which payments were due.
Restrictions
Mutual funds can invest only in marketable securities All investments are on delivery basis, no trading. A MF under all its schemes cannot hold more than 10% of the paid up capital of a company. A MF scheme can invest max. 10% of its NAV in a single company. ( Exception Index and Sectoral funds) Debt funds - single issuer not more than 15% of NAV for the investment grade instrument, can be relaxed to 20% with approval of trustees and AMC Investment in the unrated instruments of a single issuer is restricted to 10% of NAV and total for all issuers can not exceed 25% of NAV. MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $ 50 million, whichever is lower. Maximum investment in unlisted shares is 10% of NAV for Closed ended schemes Maximum investment in unlisted shares is 5% for Open ended schemes.
Important Points
Investors subscriptions are accounted for by the fund not as liabilities or deposits but as Unit Capital. Unit Capital is found in the Liability side of schemes balance sheet. Investment made by Mutual fund on behalf of investors are accounted as Assets. Liabilities in Balance sheet of mutual fund are strictly short term in nature. The Day on which NAV is calculated is known as Valuation Date. The day on trustee approves the dividend is called CUM Dividend NAV.
Q-3 A fund's portfolio includes an equity security which is listed at the NSE. Its last quoted closing prices were: Rs. 27 on July 10, Rs. 35 on July 13 and Rs. 28 on July 16. On July 28, using SEBI norms, the fund should value this security at: (a) 35 (b) 28 (c) 30 (d) 31.50.
Answers
Chapter 09
SCHEME SELECTION
Debt Funds
Hybrid Funds
Equity Funds
Diversified Equity Funds Index Funds Value Funds Equity Income Funds Dividend yield Funds Balanced fund based on Fixed asset allocation Monthly Income Plans Capital protection funds Diversified Debt Fund Gilt Funds Money Market & Liquid schemes
Low Risk
Factors to be considered
Before deciding between schemes to invest a few principles to keep in mind they are Equity Funds Active or Passive Fund management Open Ended or Close Ended Diversified , Sector or Thematic Large cap, Mid cap, Small cap funds Growth or Value Funds Fund Size Portfolio Turnover Arbitrage funds Domestic or international
Factors to be considered
Debt Funds Regular Debt funds or MIP Open Ended or FMP Gilt funds or Diversified debt funds Long term or short term debt funds Money market or liquid funds Regular Debt funds or Floaters
Balance Funds Client can invest in mix of equity schemes and debt schemes Client can invest in a balance scheme which in turn invests in a mix of equity & debt securities.
Factors to be considered
GOLD FUNDS Investor needs to differentiate between Gold ETF Gold Sector Equity of Gold Mining companies. Investor also needs to understand the structure of the gold schemes more closely.
Fund Age Scheme running expenses Tracking error Regular income yield Risk, return and risk adjusted returns Investor objective Experts view
Chapter 10
Physical or Financial
Physical Assets include gold and real estate and traditionally very popular
Gold is not subject to value erosion on account of rupee depreciation Gold is perceived as a protection/hedge against inflation Gold ETF, Gold Sector fund , gold futures, gold deposit scheme (offered by bank). Gold in physical form attract wealth tax, however gold deposit scheme and gold MF are free from it. Real estate requires a high capital investment and may not be easy to liquidate at the appropriate price Some fund houses are preparing to launch Real estate mutual funds in the near future
Physical or Financial
Financial assets include equity, debt and money-market Instruments
Equity, debt and money market instruments are direct investments with the borrower/ issuer of securities Mutual funds represent an indirect investment through an intermediary.
Bank deposits
Offer high liquidity and perceived safety Low or negligible returns after factoring inflation and tax`
Financial Assets
Public Provident Fund 15-year product Risk-free government obligation Open to individuals and HUFs Only one account permitted per entity Offers tax-free interest of 8% p.a. and contribution up to Rs. 70,000 (min Rs. 500) are eligible for deduction under section 80C Option to withdraw 50% of 4th year balance in the 7th year Restriction on withdrawal reduces liquidity. Kisan Vikas Patra Introduced as post office scheme to tap savings in rural India Very popular with urban investors also Current yield is 8% over 6 years, fully taxable Easily transferable and liquid.
Financial Assets
RBI Relief Bonds
Issued by RBI on behalf of the Government of India A 5-year investment product with 8% interest offering Interest is currently taxable (used to be tax-free earlier) Free of risk of default Long-term government paper Risk-free government obligation Low-return and define the benchmark rate of return on the yield curve Specially appointed Primary dealers deal in G-Secs Generally high ticket investments Best accessible to small investors through mutual funds.
Government Securities
Life insurance
Premium qualify for deduction under section 80C Important to assess need for life insurance with respect to earning potential A Without Profits policy offers the Sum Assured in the event of death only A With Profit policy pays not only the Sum Assured but also bonus declared from time to time In case a policy is discontinued during its tenure, the policys surrender value is paid which is a proportionate value based on premiums paid so far A convergence of insurance and mutual funds is the development of Unit-Linked Insurance products which offers investors choice of asset allocation between debt and equity. The Amount an insurance company pays to the nominee if a policyholder dies is known as the SUM ASSURED.
Points of Comparison
A comparison of investment products can be done on risk, return, volatility and liquidity Mutual funds combine the advantages of all investment vehicles while doing away with their shortcomings The returns in a mutual fund are adjusted for market movements. In India, Individual Investors does not direct access to Money Market Instruments. The biggest advantage of Investment in Gold is hedge against inflation. The biggest disadvantage of investment in Real estate is High Purchase Price. You have to invest huge amount. The advantage of bank deposits is liquidity, high perceived safety and low entry price. ITS disadvantage is low Yield after TAX.
Important Points
Mutual Funds are more recommended option for individual investors than direct equity. Direct Investment in stock market can be a better option than investing in Mutual Funds if the investor has large capital, knowledge and resources for research.
Questions for Revision Q-1 RBI relief bonds have the maturity of (a) 3 years (b) 5 years (c) 7 years (d) 10 years Q-2 Which of the following is not the advantage of bank fixed deposits? (a) Safety (b) Liquidity (c) Lower entry price (d) High yield
Answers
Chapter 11
It is identifying all the financial needs of an individual Translating needs to monetarily measurable goals Planning financial investments that will allow individual to provide for and satisfy his future financial needs and achieve his lifes goals. The objective is to ensure that right amount of money is available in the right hands at the right point in future to achieve an individuals financial goals.
Under graduate studies Under graduate studies Coaching class expense & exam 1000000 preparation Medical Education & hostel Cost 500000 Medical Education & hostel Cost 500000 Medical Education & hostel Cost 500000
Under graduate studies 100000 Under graduate studies 120000 Coaching class expense & exam 1000000 preparation Medical Education & hostel Cost 500000 Medical Education & hostel Cost 500000 Medical Education & hostel Cost 500000
Formula is A = P*(1+i)^n
Investment Horizon
The year wise financial goals statements throws up the investment horizon. It would be risky to expect the first 3 years expenses to be met out of equity investment being made today. But equity is viable option for expenses starting from 4th year. In most cases the investor would have some regular income out of which part of expenses can be met. Investment being considered now need to fund only the balance of the financial goals.
Assessing the fund requirement Suppose the investor is comfortable about meeting Rs.100000 of these expenses each year. The balance would need to be provided out of investment being made today. Suppose requirement of years 1 to 3 are met out of debt investments that would yield a return of 6% p.a. The requirements of 4th year are met out of equity investment that estimated to yield a return of 9% p.a. The amount that would need to be invested today is as follows
Under graduate studies 100000 Under graduate studies 120000 Coaching class expense & exam 1000000 preparation Medical Education & hostel Cost 500000 Medical Education & hostel Cost 500000 Medical Education & hostel Cost Total 500000
Thus a total amount of Rs. 2209106 needs to be invested right now Rs.984487 in debt with a 3year horizon and Rs.1224619 in equity with 4 - 6 year horizon to meet the financial goals. This would help the investor realize the aspiration of seeing his son become doctor.
Financial Planner
A person who uses the financial planning process to help another person determine how to meet his or her life goals. Possesses detailed knowledge of wide range of products and financial planning tools and help clients in choosing the best products. He looks at all of clients needs including budgeting and saving, taxes, investments, insurance and retirement planning.
Financial Plans are tax efficient. It provides direction and meaning to financial decisions. It allows one to understand how each financial decision one makes affects other areas of ones finances. Ability to establish long term relationships (Multiple products to one client) Financial Planner should ideally link his rewards and fees to the clients financial success and achievement of the financial goals. Ability to build a profitable business (NO rebating)
Establish and define client-Planner Relationship Gather client data, Define client Goal Analyse and evaluate clients financial Status Develop and present financial planning recommendations Implement the financial planning recommendation Monitor the financial planning recommendations
Accumulation stage Transition Stage Reaping Stage Inter Generational transfer Sudden wealth surge
Investing for long term identified financial goals Near term needs for funds as pre-specified needs draw closer Higher liquidity requirements Long term investment of inheritance Medium to long term
Growth options and long term products.High risk appetite Liquid and medium term investments. Lower risk appetite Liquid and medium term investments. Preference for income and debt products Low liquidity needs. Ability to take risk and invest for the long term Wealth preservation. Preference for low risk products
The basis of genuine investment advice should be financial planning to suit the investors situation. It should not be current market condition. Financial Planning allows a person to achieve financial goals through proper management of finances. Financial planners and their clients should focus on allocating funds to different asset classes. Financial planning is relevant not only to HNIs Financial planning works better for younger/ middle aged client
Answers
Answers: Q-1 : (c) Q-2 : (c) Q-3 : (b) Q-4 : (b) Q-5 : (a)
Chapter 12
Strategies
Risk Profiling Risk will not remain same throughout the age of the person. It will differ at the different age and as well as the different stages of the life so risk profiling is very important in the financial planning process. At the same time two person's risk taking capacity will not be same. So a It is duty of a Financial Planner to identify individual's risk Appetite.
Asset Allocation
Strategic Asset Allocation Deduct your current age from 100 what ever the no come this is the percentage of the debt in your portfolio and remaining will get invested in the equity. As per this type younger age group person will have more exposer to equity compare to the person in the higher age group As the age advances the exposure of equity will also get reduce. Tactical Asset Allocation Asset class proportions can vary when prices change. If equity returns are higher than debt returns, equity allocation will go up at a faster rate. Depth knowledge of the market require at planners end as he needs to know in which direction the market is moving to follow this strategy.
Model Portfolio
Since investors risk appetites vary, a single portfolio cannot be suggested for all. Financial planners often work with model portfolios the asset allocation mix that is most appropriate for different risk appetite levels. for example, might read something like this:
Age
Young call center / bpo employee with no dependance Young married single income family with 2 school going children. Single income family with grown up children yet to be settledown Couple in their seventies with no immidiate family support
Sr.no 1 2 3 4
Divesified Sector Gold Diversified Liquid Gilt Equity funds ETF Debt Fund Scheme Funds 50% 35% 35% NA 20% 10% NA NA 10% 15% 15% 10% 10% 30% 15% 30% 10% 10% 20% 15% NA NA 15% 30%
Answers
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Target should be to Pass the exam Do not try to attempt all the questions.
'Best of Luck'