AMFI Material

Mutual Fund Testing Programme - Participants’ Handbook
AMFI
Mutual Fund Testing
Programme
Participants’ Handbook
Karvy Learning Centre Internal Circulation Only 1

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Contents
Preface ….4
Chapter 1 The Concept & Role of Mutual Funds ….5
Chapter 2 Fund Structure and Constituents ….7
Chapter 3 Legal and Regulatory Framework ….8
Chapter 4 The Offer Document ….9
Chapter 5 Fund Distribution and Sales Practices ….11
Chapter 6 Accounting, Valuation & Taxation ….12
Chapter 7 Investor Services ….16
Chapter 8 Investment Management ….18
Chapter 9 Measuring and Evaluating Mutual Fund Performance ….22
Chapter 10 Helping Investors with financial Planning ….25
Chapter 11 Recommending Financial Planning Strategies to Investors ….26
Chapter 12 Selecting the right Investment Products for Investors ….28
Chapter 13 Helping Investors Understand Risks in Fund Investors ….30
Chapter 14 Recommending Model Portfolios and selecting the right Fund ….30
Chapter 15 Business Ethics in Mutual Fund ….31

Preface
M utual funds are emerging as an important financial intermediary for the
investing public in India. Conceptually and operationally they are different.
The investors need to understand the working of a mutual fund and the increasingly
diverse and complex investment options brought to them by a large number of mutual
funds. AMFI believes that the key channel in bringing the mutual funds to a large number
of investors all over the country is the network of INTERMEDIARIES /
DISTRIBUTORS.
The intermediaries/distributors have to take on the role of financial advisors to investors,
a role for which they need preparation. AMFI Mutual Fund Certification and Registration
Programme has been put together to give the fund distributors the knowledge and insights
required for them to become both better intermediaries and more informed mutual fund
advisors. Even mutual fund employees need to understand the complexities of how the
funds function internally and externally.
This handbook has a special ‘Summary / Important Points’ approach to help you with you
last minute revision for the AMFI Mutual Fund (Advisors) Module.

Chapter 1: The Concept & Role of Mutual Funds

1. Mutual fund is a pool of money collected from investors and is invested according to stated
investment objectives
2. Mutual fund investors are like shareholders and they own the fund.
3. Mutual fund investors are not lenders or deposit holders in a mutual fund.
4. Everybody else associated with a mutual fund is a service provider, who earns a fee.
5. The money in the mutual fund belongs to the investors and nobody else.
6. Mutual funds invest in marketable securities according to the investment objective.
7. The value of the investments can go up or down, changing the value of the investors’ holdings.
8. NAV of a mutual fund fluctuates with market price movements.
9. The market value of the investors’ funds is also called as net assets.
10. Investors hold a proportionate share of the fund in the mutual fund. New investors come in and
old investors can exit, at prices related to net asset value per unit.
11. Advantages of mutual funds to investors are:
Portfolio diversification
Professional management
Reduction in risk
Reduction in transaction cost
Liquidity
Convenience and flexibility
12. Disadvantages of mutual funds to investors are:
No control over costs
No tailor made portfolios
Problems of managing a large portfolio of funds
13. Evolution of MF in India
Phase 1 – 1964 to 1987: Growth of UTI which was established by an Act of
Parliament in 1963.
Phase 2 – 1987 to 1993: Entry of Public Sector Funds. SBI established the first
non-UTI mutual fund in Nov ’87.
Phase 3 – 1993 to 1996: Emergence of private funds. Kothari Pioneer Mutual Fund
launched its scheme in 1993.
Phase 4 – 1996 to 1999: Growth and SEBI regulation. Dividend exempted for the
first time in the Union Budget 1999.
Phase 5 – 1999 to 2004: Emergence of a large and uniform industry. UTI Act 1963
repealed in Feb ’03 and birth of UTI mutual fund.
14. SEBI got regulatory powers in 1992.
15. The first mutual fund product was Master share in 1987.

16. Mutual funds can be open ended or close ended.

17. In an open-ended fund, sale and repurchase of units happen on a continuous basis, at NAV related
price, from the fund itself.
18. The corpus of open-ended funds therefore changes everyday.
19. A close-ended fund offers units for sale only in the IPO. It is then listed in the market. Investors
wanting to buy or sell units have to do so in the stock markets. Usually close-ended funds sell at
a discount to NAV.
20. The corpus and the outstanding units of a close-ended fund remain unchanged.
21. Mutual fund products can be broadly classified as equity, debt, hybrid, commodity, real estate,
exchange traded funds and fund of funds.
22. Equity funds have the following categories:
Index funds which replicate an index
Sectoral funds which focus on a sector
ELSS schemes, that have the following features:
9 3 year lock in
9 Minimum investment of 90% in equity markets at all times
9 Open or close ended
9 Deduction from income under 80C of the Income Tax Act for investments
up to Rs.1, 00,000.
Diversified funds that invest in the broad markets
23. Debt funds are of the following types:
Diversified debt funds which invest in the broad debt market
Gilt funds that invest only in Government securities
Money market funds or liquid funds which invest only in short term securities
Short term funds which invest in debt of tenor higher than the money market
funds.
Fixed term plans that invest in securities and hold them to maturity, for a fixed
period.
24. Commodity funds specialize in investing in different commodities directly or through shares of
commodity companies or through commodity futures contracts.
25. Real estate funds would invest in real estate directly, or may fund real estate developers or lend to
them, or buy shares of housing finance companies or may even buy their securitized assets.
26. An Exchange Traded Fund (ETF) tracks a market index and trades like a single stock on the stock
exchange. Its pricing is linked to the index and units can be bought or sold on the stock exchange.
27. A Fund of Funds invests in a portfolio of the units of other mutual fund schemes.
28. Equity funds are risky; liquid funds have the lowest risk.
29. Equity funds are for the long term; liquid funds are for the short term.
30. Investors choose funds based on their objective, risk appetite, time horizon and return
expectations.
Chapter 2: Fund Structure and Constituents

1. Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC
2. Sponsor is the promoter of the fund.
3. Sponsor creates the AMC and the trustee company and appoints the Boards of both these
companies, with SEBI approval.
4. A mutual fund is constituted as a Trust
5. A trust deed is signed by trustees and registered under the Indian Trust Act.
6. The mutual fund is formed as trust in India, and supervised by the Board of Trustees.
7. The trustees appoint the asset management company (AMC) to actually manage the investor’s
money.
8. The AMC’s capital is contributed by the sponsor. The AMC is the business face of the mutual
fund.
9. Investors’ money is held in the Trust (the mutual fund). The AMC gets a fee for managing the
funds, according to the mandate of the investors.
10. The trustees make sure that the funds are managed according to the investors’ mandate.
11. Sponsor should have atleast 5-year track record in the financial services business and should have
made profit in atleast 3 out of the 5 years.
12. Sponsor should contribute atleast 40% of the capital of the AMC.
13. Trustees are appointed by the sponsor with SEBI approval.
14. Atleast 50% of trustees should be independent.
15. Atleast 50% of the AMC’s Board should be of independent members
16. An AMC cannot engage in any business other than portfolio advisory and management.
17. An AMC of one fund cannot be Trustee of another fund.
18. AMC should have a net worth of at least Rs. 10 crore at all times.
19. AMC should be registered with SEBI.
20. AMC signs an investment management agreement with the trustees.
21. Trustee company and AMC are usually private limited companies.
22. Trustees oversee the AMC and seek regular reports and information from them.
23. Trustees are required to meet atleast 4 times a year to review the AMC
24. The investors’ funds and the investments are held by the custodian.
25. Sponsor and the custodian cannot be the same entity.
26. R&T agents manage the sale and repurchase of units and keep the unit holder accounts.
27. If the schemes of one fund are taken over by another fund, it is called as scheme take over. This
requires SEBI and trustee approval.
28. If two AMCs merge, the stakes of sponsor’s changes and the schemes of both funds come
together. High court, SEBI and Trustee approval needed.

29. If one AMC or sponsor buys out the entire stake of another sponsor in an AMC, there is a take
over of AMC. The sponsor, who has sold out, exits the AMC. This needs high court approval as
well as SEBI and Trustee approval.
30. Investors can choose to exit at NAV if they do not approve of the transfer. They have a right to
be informed. No approval is required, in the case of open-ended funds.
31. For close-ended funds investor approval is required for all cases of merger and take-over.
Chapter 3: Legal and Regulatory Framework

1. Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.
2. SEBI is the regulator of all funds, except offshore funds.
3. RBI regulates money and government securities markets, in which mutual funds invest.
4. Listed mutual funds are subject to the listing regulations of stock exchanges.
5. Since the AMC and Trustee Company are companies, they are regulated by the Department of
company affairs. They have to send periodic reports to the ROC (Registrar of Companies) and
the CLB (Company Law Board) is the appellate authority.
6. Bank sponsored mutual funds are regulated by SEBI.
7. Investors cannot sue the trust, as they are the same as the trust and can’t sue themselves.
8. SROs are the second tier in the regulatory structure.
9. SROs get their powers from the apex regulating agency and act on their instructions.
10. SROs cannot do any legislation on their own.
11. All stock exchanges are SROs.
12. AMFI is an industry association of mutual funds.
13. AMFI is not yet a SEBI registered SRO.
14. AMFI has created code of conduct for mutual funds.
15. AMFI aims at increasing investor awareness about mutual funds, encouraging best practices and
bringing about high standards of professional behavior in the industry.
16. Investor’s rights
Right of proportionate “Beneficial Ownership”
Right to timely service
Right to information
Right to approve changes in fund attributes of the scheme
Right to wind up a scheme, if 75% of the investors pass a resolution to this effect.
Right to terminate the AMC, if 75% of the investors pass a resolution.
Investors have the right to receive redemption proceeds within 10 days and
dividend within 30 days.
Investors have the right to sue the AMC, Trustees or Sponsor.

An open ended fund opens for sale and repurchase within 30 days from the date of
closure of the IPO.
Investors can redeem units at the prevailing NAV, up to 3 years from the due date.
The first right of the investor is towards the trustees.
17. Legal limitations to investor’s rights
Cannot sue the trust
Sponsors of a mutual fund do not have any legal obligation to meet the shortfall in
case the assured return is not achieved.
Only if the offer document has specifically provided such guarantee by a named
sponsor, the investors will have the right to sue the sponsors.
Prospective investor has no rights.
18. Investor’s obligations
Investor’s duty to carefully study the offer document before investing in units of a
scheme.
Investors are now required by SEBI to mention their Permanent Account Number
(if the application for purchasing units is for Rs. 50,000 or more)
Monitoring the investments is entirely the investor’s own responsibility.
19. Investor complaints redressal mechanism
SEBI intervenes with fund managements to help the investor resolve his
complaints
SEBI helps the investors in a new scheme is by requiring the sponsors of a new
scheme to appoint a Compliance Officer who must issue a Due Diligence
Certificate.
Investor can at best remove the AMC with 75% vote to this effect.
In any case, SEBI and all other regulators take great care to ensure that only
persons of integrity serve as AMC Directors or Fund Trustees, and only companies
with track record in investment management are given recognition to manage
funds.
Chapter 4: The Offer Document

1. Offer Document (OD) is the most important source of information for investors.
2. Abridged version is called as Key Information Memorandum (KIM).
3. Investors are required to read and understand the offer document.
4. No recourse is available to investors for not reading the OD or KIM
5. A glossary of important terms is included in the offer document.
6. The cover page contains the details of the scheme being offered and the names of sponsor, trustee
and AMC.

7. Mandatory disclaimer clause of SEBI should also be on the cover page.

8. OD is issued by the AMC on behalf of the trustees.
9. KIM has to be compulsorily made available along with the application form.
10. Close ended funds issue an offer document at the time of the IPO.
11. Open ended funds have to update OD atleast once in 2 years.
12. Any change in scheme attributes calls for updating the OD.
13. Addendums for financial data should be submitted to SEBI and made available to investors.
14. Trustees approve the contents of the OD and KIM.
15. The format and content of the OD has to be as per SEBI Guidelines
16. The AMC prepares the OD and is responsible for the information contained in the OD.
17. Compliance Officer has to sign the due diligence certificate. He is usually an AMC employee.
18. The due diligence certificate states that
Information in the OD is according to SEBI formats
Information is verified and is true and fair representation of facts
All constituents of the fund are SEBI registered.
19. SEBI does not approve or certify the contents of the OD.
20. OD has to be submitted to SEBI prior to the launch of the scheme.
21. The OD contains
Preliminary information on the fund and scheme
Information on fund structure and constitution
Fundamental attributes of the scheme
Details of the offer
Fee structure and expenses
Investor rights
Information on income and expenses of existing schemes
22. Risk factors, both standard and scheme-specific, have to be disclosed
23. Factors common to all funds are called as standard risk factors. These include market risk, no
assurances of return, etc.
24. Factors specific to a scheme are scheme-specific, risk factors in the Offer Document. These
include restrictions on liquidity such as lock-in period, risks of investing in the first scheme of a
fund, etc.
25. Fundamental attributes of a scheme include:
Scheme type
Objectives
Investment pattern
Fees and expenses

Liquidity conditions
Accounting and valuation
Investment restrictions, if any
26. For any change in fundamental attributes, investor approval is not needed. Trustees and SEBI
should approve the change and investors should be informed.
27. A scheme cannot make any guarantee of return, without stating the name of the guarantor, and
disclosing the networth of the guarantor.
28. Information on existing schemes and financial summary of existing schemes to be given for 3
years.
29. Information on transactions with associate companies to be provided for the past 3 years.
30. If any expense incurred is higher than what was stated in the OD, for past schemes, explanations
should be given.
31. There is no information on other mutual funds, their product or performance in the OD.
32. Investors’ rights are stated in the OD.
33. The borrowing restrictions on the mutual fund should be disclosed. This includes the purposes
and the limits on borrowing.
34. Investors have the right to inspect a number of documents. These are:
Trust deed
Investment management agreement
SEBI (MF) Regulations
AMC Annual reports
Unabridged offer document
Annual reports of existing schemes
35. 3 years track record of investors’ complaints and redressal should be disclosed in the OD.
36. Any pending cases or penalties against sponsors or AMC should be disclosed in the OD.
Chapter 5: Fund Distribution & Sales Practices

1. Categories of investors eligible to apply are stated in the offer document.
2. Whether a certain class of investor, such as a trust or a company can invest in a fund, depends on
the list of eligible investors in the OD.
3. NRIs and OCBs are eligible to invest in mutual funds.
4. Foreign nationals and entities cannot invest in mutual funds.
5. Any investor, who becomes a foreign citizen after investing in a fund, has to compulsorily redeem
the units after obtaining foreign citizenship.
6. Prospective investors have no legal remedies.
7. Mutual funds use multiple channels to distribute the units.

8. Institutional distributors have a dominant market share in the Indian industry.

9. Agents can sell products of multiple mutual funds.
10. Banks are large distributors in developed countries.
11. Distribution channels are appointed by the AMC.
12. Fees and commissions are decided by the AMC and not subject to any regulation.
13. AMFI has a recommended code of conduct and best practices for agents
14. Agents are paid up front and trail commissions. Trail depends on holding period of investors.
15. AMFI code of ethics provides guidelines for sales practices and is a set of recommendations.
16. SEBI code for advertising is mandatory for mutual funds
Chapter 6: Accounting, Valuation & Taxation

Accounting & Valuation
1. Accounting policies to be followed by mutual funds are laid down in the SEBI (Mutual Fund)
Regulations, 1996.
2. Mutual funds are pools of investments held by investors with common investment objective.
Therefore there is a separate account for every mutual fund scheme. Each scheme has a
distinctive balance sheet and profit and loss account.
3. Investor’s subscriptions to the mutual fund are accounted as unit capital, and not as liabilities or
deposits.
4. Assets of a mutual fund are the investments made by the fund.
5. Liabilities of a mutual fund are strictly short term in nature.
6. The unit capital account is maintained at face value
7. Other short-term assets in the fund balance sheet are called as current assets.
8. Net assets, in simple terms, refer to market value of investments less current liabilities.
9. Net assets are computed as:
Market value of investments
Plus other assets
Plus accrued income
Less current liabilities
Less accrued expenses
10. Accrued income refers to income that is due and not yet received such as interest payments that
are accrued on everyday basis, but paid only at the end of 6 months.
11. Accrued expenses refer to expenses due but not paid, such as investment management fees, which
are accrued everyday, but paid at the end of the year.
12. NAV is the net assets per unit, computed as Net asset divided by number of units outstanding.

13. Given number of units and NAV, net assets can be computed. Similarly, given net assets and
number of units NAV can be computed.
14. The day on which NAV is calculated is called as the valuation date.
15. The major factors affecting the NAV of a fund are:
Sale and purchase of securities
Sale and repurchase of units
Valuation of assets
Accrual of income and expenses
16. All mutual funds have to disclose their NAV everyday, by posting it on the AMFI web site by
8.00 p.m.
17. Open-ended funds have to compute and disclose NAVs everyday.
18. Closed end funds can compute NAVs every week, but disclosures have to be made everyday.
19. Closed end schemes not mandatorily listed on stock exchanges can publish NAV according to the
periodicity of 1 month or 3 months, as permitted by SEBI.
20. Changes in NAV due to the assumptions about accruals should not impact NAV by more than
1%.
21. Changes in NAV attributable to non-recording of sale and repurchase of units or securities cannot
be more than 2%, and that these transactions should be recorded within 7 days.
22. Initial issue expenses of a scheme cannot exceed 6% of funds mobilized. Any amounts above this
have to be borne by sponsors or AMC.
23. Open-ended funds have to compulsorily charge NFO expenses as entry load and no amortization
is possible.
24. Closed-end schemes need not charge entry loads but can amortize NFO expenses over the
maturity of the scheme. Any investor exiting before the maturity of a closed-end scheme needs to
pay exit charges equivalent to his share of unamortized expenses.
25. A fund that does not charge any of the initial issue expenses is called a no-load fund. AMCs can
charge 1% higher investment management fee in this case.
26. The mutual fund can charge the following expenses:
Investment management fees to the AMC
Custodian’s fees
Trustee Fees
Registrar and transfer agent fees
Marketing and distribution expenses
Operating expenses
Audit fees
Legal expenses
Costs of mandatory advertisements and communications to investors

27. The maximum limit on the expenses that can be charged to a mutual fund are:
For net assets up to Rs. 100 crore: 2.5%
For the next Rs. 300 crore of net assets: 2.25%
For the next Rs. 300 crore of net assets: 2%
For the remaining net assets: 1.75%
28. These regulatory ceilings are applied on the weekly average net assets of the mutual fund scheme.
29. On debt funds the limits on expenses are lower by 0.25%.
30. The investment management fees are regulated by SEBI as follows:
For the first Rs. 100 crore of net assets: 1.25%
For net assets exceeding Rs. 100 crore: 1.00%
31. 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/installment has
fallen due.
32. Valuation of equity shares is done on the basis of traded price; provide that price is not more than
30 days old.
33. If a share is not traded for 30 days or is thinly traded (less than 50,000 shares and Rs. 5 lakh
volume in a month), SEBI approved valuation norms have to be applied.
34. Debt securities with less than 182 days to maturity are valued on accrual basis.
35. Illiquid securities cannot be more than 15% of the portfolio’s net assets. Any illiquid assets above
this limit have to be valued at zero.
36. NAV = Net Assets of the Scheme / Number of Units outstanding, i.e.
(Market value of investments + Receivables + Other Accrued Income + Other Assets - Accrued
Expenses – Other Payables – Other Liabilities)
--------------------------------------------------------------------------------------------------
No. of Units Outstanding on the valuation date.
37. SALE PRICE = Applicable NAV*(1+Entry Load, if any)
38. REPURCHASE PRICE = Applicable NAV*(1-Exit Load, if any)
39. @ 1.25% of the first Rs.100 crores of Weekly average net assets outstanding in the accounting
year, and @ 1% of weekly average net assets in excess of Rs.100 crores.
40. The Total Expenses charged by the AMC to a scheme, excluding issue or redemption expenses
but including investment management and advisory fees, are subject to the following limits:
On the first Rs.100 crores of daily or average weekly net assets – 2.5%
On the next Rs. 300 crores of daily or average weekly net assets – 2.25%
On the next Rs. 300 crores of daily or average weekly net assets – 2.0%
On the balance of daily or average weekly net assets – 1.75%
For bond Funds, the above percentages are required to be lower by 0.25%
In case of a Fund of Funds, total expenses of the scheme including management
fees cannot exceed 0.75% of the average net assets.

Loads
41. Load is charged to the investor when the investor buys or redeems (repurchases) units.
42. Load is an adjustment to the NAV, to arrive at the price.
43. Load that is charged on sale of units is called as entry load.
44. An entry load will increase the price above the NAV, for the investor.
45. Load that is charged when the investor redeems his units is called as exit load.
46. Exit load reduces the redemption proceeds of the investor.
47. Load is primarily used to meet the expenses related to sale and distribution of units.
48. An exit load that varies with the holding period of an investor is called as CDSC (Contingent
deferred sales charge).
49. To arrive at the sale price, given NAV and load (%), we have to calculate the amount of load
and add it to the NAV. The amount of load will be = NAV x entry load/100.
50. To arrive at the sale price, given NAV and load (%), we have to calculate the amount of load and
reduce it from the NAV. The amount of load will be = NAV x exit load/100.
51. Load is subject to SEBI regulations
52. SEBI has stipulated that the maximum entry of exit load cannot be higher than 7%.
53. SEBI also stipulates that the repurchase price cannot be less than 93% of the sale price.
Maximum sale price given repurchase price is = NAV / (1 – load
Minimum repurchase price, given sale price is = NAV X (1 – load)
For closed end funds, the maximum entry or exit load cannot be higher than 5%. The repurchase
price cannot be less than 95% of the sale price.
Tax Aspects
54. Taxation in the hands of the fund – Exempt u\s 10(23D).
55. Distribution tax
Paid by closed-end or debt fund on distribution of dividend to unit holders.
Not applicable to open ended equity oriented fund (i.e. funds with >50% of their
portfolio in equity).
Indirectly paid by the investors
56. Tax implications for investors.
Dividend income exempt
Capital gains
9 Capital gains or losses arise when investors buy and sell units. The
difference between the sale and purchase price is the gain (sale
price>purchase price) or loss (sale price<purchase price)
9 Long term (>=12 months) – units of equity oriented funds exempt.

9 (20% tax + surcharge if benefit of indexation availed & 10% + surcharge if

indexation benefit not availed)
9 Short term (<12 months)
9 (units of equity oriented fund subject to 10% tax & that of debt fund are
subject to tax at the maximum marginal rate)
Indexing refers to updating of the purchase price, based on the cost of inflation
index published by the CBDT.
Indexed cost of acquisition = Cost of acquisition * cost inflation index for year of
transfer \ cost inflation index for year of acquisition or improvement.
Exemption i.r.o. long capital gains
9 54EC – on investment of capital gains in bonds issued by NABARD,
NHAI or Rural Electrification Corporation
9 54ED – on investment of capital gains in equity shares issued by a
company registered in India and offered for subscription to the public.
9 Investments to be made within 6 months of transfer.
57. Securities transaction tax – Applicable on sale or purchase of units in equity oriented scheme of
Mutual Fund at the prescribed rate.
58. Investments in ELSS schemes (subject to 3 year lock in period) of mutual funds, up to a
maximum of Rs.1, 00, 000 enable the investor to avail exemption under section 80C.
59. Dividend stripping – Buying of units before declaration of dividend and selling on payment of
dividend.
60. Wealth tax – Units not considered as wealth and therefore not chargeable to tax.
61. No TDS applicable except on certain transactions of non residents.
Chapter 7: Investor Services
Applying for and redeeming mutual fund units

1. Broadly, Indian citizens, Indian entities, NRIs and foreign entities (subject to FIPB/RBI approval)
are allowed to invest in mutual funds in India.
2. Procedure for purchase of units – The offer document provides the investor with a description of
the procedure for purchase of units with respect to the required application form, acceptable mode
of payment , permissible places of payment minimum subscription required (for new applications
& additional units)
3. The Key Information Memorandum contains the application form to be filled by the investors.
4. Some funds permit the investors to apply through the internet, instead of filling up a physical
application form.

5. The application form contains a statement to the effect that the investor has read and understood
the offer document and that he abides by the terms and conditions of the investment in the given
scheme.
6. The mode of payment is usually by cheque, demand draft or cash (in certain cases).
7. SEBI has laid down that fund investors requesting redemptions must give their bank account
details and redemption cheques will be sent to these accounts
8. The redemption request has to be signed by the single or the joint holders of the units, or the
required number of authorized signatories in case of corporate or other bodies.
9. Investors must know whether they are required to redeem a specific amount or a specific number
of units, and fill the form accordingly.
Investment Plans/Options and services

10. Automatic Reinvestment Plan(ARP) – Dividend option or growth option .This allows the
investor to reinvest the amount of dividends or other distributions made by the fund in the same
fund and receive additional units instead of receiving them in cash.
11. Systematic Investment Plans (SIP) – Requires the investor to invest a fixed sum periodically,
thereby letting the investor save in a disciplined and phased manner
12. Systematic Withdrawal Plans (SWP) – Allows the investor to make systematic withdrawals from
his fund investment account on a periodic basis, thereby providing the same benefit as regular
income. The amount withdrawn is treated as redemption of units at the applicable NAV as
specified in the offer document.
13. Systematic Transfer Plan (STP) – Allows the investor to transfer on periodic bases a specified
amount from one scheme to another within the same fund family – meaning two schemes
managed by the same AMC and belonging to the same mutual fund. A transfer is treated as
redemption of units from the scheme from which the transfer is made, and as investment in units
of the scheme into which the transfer is made.
Other services
14. Telephone \ Internet transactions – Investors may redeem or purchase units by calling a fund
representative, or registrars or investor service centers. Increasingly, many distribution
companies, banks and brokers accept investor instructions by telephone or through internet\email.
15. Cheque writing – Some open ended mutual funds allow the facility of cheque writing by
providing the investor wit a cheque book , treating his fund account as the equivalent of a bank
savings account for this purpose. RBI rules do not permit investors to issue cheques to third
parties for other payments.
16. Periodic statements and tax information – All mutual funds provide periodic statements to
investors in the form of financial statements and performance reports. Funds also help investors
with tax – related information at the end of a tax year.
17. Loans against units – Several banks lend to investors against mutual fund units held by them. The
amount of loan is usually a percentage of the value of the investor’s holding in units.
18. Nomination and transfer by unit holders – If an application for units is made in the name of a
single holder, the unit holder may subsequently nominate a successor to get the units transferred

in the name of the nominee upon the death of the original holder. Where an investor holds units of
a closed end scheme, he can transfer his units to another person, as he can do in case of shares
held .In case of close end scheme is not listed on an exchange, the transfer is carried out by the
fund or its registrars designated for the purpose.
Chapter 8: Investment Management
Equity Markets and Mutual Funds

1. The investment pattern of the fund is primarily dictated by the fund objectives.
2. The fund states in the offer document, the broad asset allocation. The fund manager has to adhere
to this allocation, except under extra-ordinary circumstances.
3. Investment style refers to the manner in which a fund manager will choose securities in a given
sector.
4. A fund manager whose style is value investing, will prefer to invest in established profit making
companies, and will buy only if the price is right. He will look for “undervalued” shares, which
have a value proposition that is yet to be recognized by the market.
5. A fund manager, whose style is growth, is more aggressive and is willing to invest in companies
with future profit potential. He is willing to buy even if the stock looks expensive. He focuses on
sectors that are expected to do well in future, and will be willing to buy them even at higher
prices.
6. Equity stocks can be classified as large cap and small cap stocks.
7. Large cap stocks are liquid and trade every day. They are established companies offering normal
profit potential.
8. Small cap stocks provide higher return potential. But they are generally not very liquid.
9. Cyclical stocks are those whose performance is closely linked to macro economic factors.
10. P/E ratio is the ratio of Earnings per share to market price per share. Growth shares sell at higher
P/E ratios than value shares.
11. Dividend yield is the ratio between the dividend per share and market price per share. Growth
shares have lower dividend yields than value shares.
12. If the market prices move up, P/E ratios are higher and dividend yields are lower.
13. If the market prices move down, P/E ratios are lower and dividend yields are higher.
14. An equity fund manager can invest in equity, equity warrants, and preference shares and in
convertible securities.
15. An equity warrant gives the investor the right to buy equity shares at specific prices
16. An active fund manager hope to do better than the market by selecting companies, which he
believes, will outperform the market.
17. A passive fund manage simply replicates the index, and hopes to do as well as the index.

18. A passive fund manager tries to keep costs down and has to rebalance his portfolio if the
composition of the index changes.
19. Beta is a measure of the sensitivity of the portfolio to the market. A passive fund has a beta of 1.
An active fund’s beta is higher or lower than 1.
20. If Beta is more than 1, the fund is called an aggressive fund
21. If Beta is less than 1, the fund is called a defensive fund.
22. Fundamental analysis is the analysis of the profit potential of a company, based on the numbers
relating to products, sales, costs, profits etc, and the management of a company.
23. Technical analysis is an analysis of market price and volumes, to identify clues to the market
assessment of a stock.
24. Quantitative analysis is the analysis of sectors and industries based on macro economic variables.
25. A fund manager focuses on asset allocation; a dealer buys and sells shares; and an analyst
researches companies and recommends them for buy and sell.
26. Equity derivatives refer to products whose prices depend on prices of equity shares.
27. We have index futures and index options as well as equity stock futures and options in the Indian
markets.
28. In the derivative markets, the settlement is in cash, and there is no delivery of underlying stocks.
Debt Markets and Mutual Fund

29. Debt Instruments can be classified as follows:
Instruments issued by the government such as treasury bonds and treasury bills;
and instruments issued by other agencies like the corporate sector and financial
institutions.
Long-term instruments like bonds and debentures and short-term instruments like
commercial paper, certificates of deposit etc. Instruments with less than 1 year’s
term to maturity are also called as money market instruments.
Instruments that are secured, as in the case of secured corporate debentures and
instruments that are unsecured such as bonds of financial institutions or company
fixed deposits.
Instruments that pay a periodic interest (coupon) and instruments those are issued
on discounted basis, and mature at face value (zero coupon or deep discount
bonds).
Instruments that pay a fixed rate of interest; instruments that pay a floating rate of
interest.
30. Debt markets are wholesale markets in which large institutional investors operate. Banks are the
largest players in debt markets.
31. The Wholesale debt market (WDM) segment of the NSE is a nationwide platform for trading in
debt market securities.
32. About 96% of secondary market trading happens in Government securities.
33. CDs are usually issued by banks and have a maturity of 91 days to a year.

34. CPs is unsecured instruments issued by Corporates. Their maturity ranges from 3 months to 1
year.
35. Corporate debentures are long-term instruments issued by corporates. They are usually secured
and listed on stock exchanges,
36. Government securities are issued through an auction, by the RBI, on behalf of the government of
India.
37. Government securities are held in the form of book entries in the Securities General Ledger
(SGL), maintained by the Public debt office (PDO) of the RBI.
38. Treasury bills are short-term instruments with maturity of 91 days or 364 days, issued by the RBI.
39. Basic characteristics of bonds are as follows:
Principal value, par value, or face value is the amount representing the principal
borrowed and the rate of interest is calculated on this sum. On redemption this
amount is payable.
Coupon is the interest paid periodically to the investor.
Maturity date is the date on which a bond is redeemed. Term to maturity or tenor
is the period remaining for the bond to mature.
Put option refers to the option to the investor to redeem the bond before maturity.
Call option is the option to the borrower to redeem before maturity. If interest
rates go up, investors may exercise the put option. If interest rates fall, issuers may
exercise the call option.
40. Current yield is the ratio of coupon amount to market price of a bond. If a bond, paying coupon
at 8% is selling in the market for Rs. 105, the current yield is 8/105 = 7.62%.
41. Changes in interest rates impacts bond values, in the opposite direction. An increase in interest
rates leads to a fall in bond values; a decrease in interest rates leads to an increase in bond values.
42. Interest rates are affected by inflation rates, exchange rate situation, and the policies of the RBI.
43. Duration of a bond helps measure the interest rate risk of a bond. If duration is 3, and interest
rate changes by 1%, the value of the bond will change by 3% (duration times the change in
interest rate) in the opposite direction.
44. Credit risk refers to the risk of default.
45. Credit ratings are important indicators of credit risk of a bond. Credit risk refers to the risk of
default in the payment of interest and/or principal amount.
46. The base rate or benchmark rate in the bond market is the rate at which the government borrows
in the market. All other borrowers pay a rate that is higher, due to the presence of credit risk.
47. The difference between the benchmark rate and the rate that is paid by other borrowers is called
the credit spread. (Called as yield spread in the AMFI book).
48. Interest rate swap is an interest rate derivative product, used in the debt markets to hedge interest
rate risk.
Restriction on Investment
49. Investment pattern of a scheme is driven by the objectives, as stated in the offer document.

50. SEBI (MF) Regulations place a number of restrictions on the investments of a mutual fund
51. Mutual fund can invest only in marketable securities.
52. All investments by the mutual fund have to be on delivery basis, that is, a mutual fund has to pay
for each buy transaction, and deliver securities for every sell transaction. A mutual fund cannot
enter into trades with the view to squaring off the positions.
53. A mutual fund under all its schemes cannot hold more than 10% of the paid-up capital of a
company.
54. Except in the case of sectoral funds and index funds, a mutual fund scheme cannot invest more
than 10% of its NAV in a single company.
55. Investments in rated investment grade issues of a single issuer cannot exceed 15% of the net
assets and can be extended to 20%, with the approval of the trustees.
56. Investment in unrated securities cannot exceed 10% of the net assets for one issue and 25% of net
assets for all such issues.
57. Investment in unlisted shares cannot exceed 5% of net assets for an open-ended scheme, and 10%
of net assets for a closed end scheme.
58. Mutual funds can invest in ADRs/GDRs up to a maximum limit of 10% of net assets or $50
million, whichever is lower. The limit for the mutual fund industry as a whole is $500 million.
59. Inter scheme transfers are allowed by the SEBI regulations, provided:
Such transfers happen on a delivery basis, at market prices.
Such transfers do not result in significantly altering the investment objectives of
the schemes involved.
Such transfer is not of illiquid securities, as defined in the valuation norms.
60. The funds of one mutual fund scheme can be invested in another mutual fund scheme of the same
mutual fund, or any other mutual fund.
61. Such investment cannot exceed 5% of the net assets of the scheme that invests its funds in another
scheme (not applicable for Fund of Funds). Investment management fees are not paid on such
investments.
62. A mutual fund can borrow a sum not exceeding 20% of its net assets, for a period not exceeding 6
months. This facility is clearly designed as a stopgap arrangement, and is not a permanent source
of funds for the scheme.
63. A fund can borrow only to meet liquidity requirements for paying dividend or meeting
redemptions.
64. All investment made in the marketable securities of the sponsor and its associated companies
must be disclosed by the mutual fund in its annual report and offer document, along with the
amount invested and the share of such investment in the total portfolio of the mutual fund.
65. A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associate or group
company of the sponsor.
66. A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates.
67. Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed
25% of the net assets of the scheme.

Chapter 9: Measuring and Evaluating Mutual Fund Performance

1. The major sources of return to an investor are dividend and capital gain.
2. Holding period is the period for which an investor stays invested in a fund.
3. Rate of return is computed as: (Income earned/Amount invested)*100.
4. This number can be annualized by multiplying the result by the factor 12/n, where n is the number
of months in the holding period. If the holding period is in days, the above factor will be 365/n,
where n is the number of days in the holding period.
5. Change in NAV method of calculating return is applicable to growth funds and funds with no
income distribution.
6. Change in NAV method computes return as follows:
7. (NAV at the end of the holding period – NAV at the beginning of the holding
period)/NAV at the beginning of the period.
8. Return is then multiplied by 100 and annualized.
9. Simple total return method includes the dividends paid to the investor.
10. Simple total return method computes return as follows:
11. (NAV at the end of the holding period – NAV at the beginning of the holding period)+ Dividends
paid/NAV at the beginning of the period.
12. Return is then multiplied by 100 and annualized
13. The total return with re-investment method or the ROI method is superior to all these methods. It
considers dividend and assumes that dividend is re-invested at the ex-dividend NAV.
14. Total Return or ROI Method computes return as follows:
(Value of holdings at the end of the period - value of holdings at the beginning of
the period)/ value of holdings at the beginning of the period x 100
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.
15. If an investment has doubled over a period of time, we can use the rule of 72 to find the
approximate rate of return.
16. Rule of 72 is a thumb rule used in finding our doubling rate or doubling period. If Rs. 100 grows
to Rs. 200 in 7 years, the rate of return is 72/7 = 10.28 years. Similarly, if Rs. 100 grows t Rs.
200 at 8%, the number of years in which this will happen is 72/8 = 9 years.
17. If there is an entry load, the investors’ return will be lower as amount actually invested is less by
the amount of load.
18. SEBI Regulations on returns are as follows:
Standard measurements to be used for computation of return
Compounded annual growth rate to be used for funds over 1 year old.
Return for 1,3 and 5 years, or since inception, which ever is later is to be provided
No annualisation for periods less than a year.

19. Expense ratio is the ratio of total expenses to average net assets of the fund.
20. Expense ratio is an indicator of efficiency and very crucial in a bond fund
21. Expenses do not include brokerage paid (this amount is capitalized) and therefore may be
understated.
22. Income ratio is the ratio of net investment income by net assets. This ratio is important for fund
earning regular income, such as bond funds, and not for funds with growth objective, investing
for capital appreciation.
23. Portfolio turnover rate refers to the ratio of amount of sales or purchases (which ever is lesser) to
the net assets of the fund. Higher the turnover ratio, greater is the amount of churning of assets
done by the fund manager.
24. High turnover ratio can also mean higher transaction cost. This ratio is relevant for actively
managed equity portfolios.
25. Relative returns are important than absolute returns for mutual funds.
26. Comparable passive portfolio is used as benchmark.
27. Usually a market index is used as a benchmark.
28. Compare both risk and return, over the same period for the fund and the benchmark.
29. Risk-adjusted return is the return per unit of risk.
30. Comparisons are usually done
With a market index
With funds from the same peer group
With other similar products in which investors invest their funds
31. SEBI Guidelines on risk and return
Benchmark should be Benchmark should reflect the asset allocation
Benchmark should be the same as stated in the offer document
Growth fund with more than 60% in equity should use a broad based equity index.
Bond fund with more than 60% in bonds should use a bond market index.
Balanced funds should use tailor-made index
Liquid funds should use money market instruments.
32. Other Measures of Performance
Tracking error should be predictable
Tracking error for index funds should be very small.
Rating profile of portfolio should be studied
Higher expense ratios hurt long term investors; for debt funds expense ratio should
be under control
Portfolio turnover should be higher for short-term funds and lower for longer-term
funds.

33. When comparing fund performance with peer group funds, size and composition of the portfolios
should be comparable.
34. For NAV Change in absolute terms:
(NAV at the end of the period) – (NAV at the beginning of the period)
35. For NAV Change in percentage terms:
(Absolute change in NAV / NAV at the beginning)* 100
36. If period covered is less/more than one year: for annualized NAV change:
{[Absolute change in NAV / NAV at the beginning / months covered]*12}*100
37. Total Return:
(Distributions + Change in NAV) / NAV at the beginning of the period)*100
38. For ROI or Total Return with Reinvestment is:
(1+div / ex-dNAV)*endNAV) – begin NAV / begin NAV*100
39. Graham’s approach can be translated into reality by holding different kinds of portfolios of funds.
Bogle suggested the following combinations:
A Basic Managed Portfolio – 50% in diversified Equity ‘Value’ Funds

25% in a Government Securities Fund
25% in High Grade Corporate Bond Funds
A Basic Indexed Portfolio – 50% in Total Stock Market / Index Fund
50% in Total Bond Market Portfolio
A Simple Managed Portfolio – 85% in a Balanced 60/40 Fund
15% in medium term Bond Fund
A Complex Managed – 20% in diversified equity Fund
Portfolio 20% in aggressive growth Funds
10% in specialty Funds
30% in long – term bond funds
20% in short – term bond Fund
A readymade Portfolio – Single Index Fund with 60/40 equity/bond
holdings.

Chapter 10: Helping Investors with Financial Planning
Financial planning process

1. Financial planning comprises
Defining a client's profile and goals
Recommending appropriate asset allocation
Monitoring financial planning recommendations
2. The objective of financial planning is to ensure that the right amount of money is available at the
right time to the investor to be able to meet his financial goals.
3. Tax implications on investment income can affect the choice of products and the financial plan.
4. Financial planning is more than mere tax planning.
5. Financial planning helps a mutual fund distributor to establish long-term relationships and build a
profitable business.
6. Steps in financial planning are:
Asset Allocation
Selection of fund
Studying the features of a scheme
7. Financial planning is concerned only with broad asset allocation, leaving the actual selection of
securities and their management to fund managers.
8. A fund manager has to closely follow the objectives stated in the offer document, because
financial plans of investors are chosen using these objectives.
9. The financial planner can only work with defined goals and cannot take up larger objectives that
are not well defined.
10. The client is responsible ultimately for realizing the goals of the financial plan.
11. The basis of genuine investment advice should be financial planning to suit the investor's situation
12. Risk tolerance of an investor is not dependent on the market, but his own situations.
Life Cycle & Wealth Cycle Stages

13. The life cycle stages of an investor can be classified as follows:
Childhood stage
Young unmarried stage
Young married with children stage
Married with older children stage
Pre-retirement stage
Retirement stage
14. The income level of investors, the saving potential, the time horizon and the risk appetite of an
investor depend on his life cycle.

15. Younger investors have higher income and saving potential, take longer-term view and may be
willing to take risks.
16. Older investors may have limited income and saving, shorter time horizon, and unwilling to risk
their savings.
17. There are 3 wealth cycle stages for investors:
Accumulation stage is when investors are earning and have limited need for
investment income. They focus on saving and accumulating wealth for the long
term. Equity investments are preferred in this stage.
Transition stage is when financial goals are approaching. Investors still earn
incomes, but have also draw on their earnings. Investors choose balanced
portfolios that have both debt and equity.
Reaping stage or distribution stage in when investors need the income from their
investment, and cannot save further. They reap the benefits of their savings. They
prefer debt investments and preserving of capital at this stage.
18. Inter generational fund transfer refers to transfer of wealth to an investor. The preferred
investment avenue will depend on the life cycle and wealth cycle stage of the beneficiaries.
19. Sudden wealth surge refers to winnings in games and lotteries. Investors should be advised to
temporarily park their funds in money market investments and create a long-term plan after
thinking through the plan.
20. Affluent investors are of two types:
Wealth preserving investors who are risk-averse and like to invest in debt.
Wealth creating investors who prefer growth and are willing to take the risk of
equity investments.
Chapter 11: Recommending Financial Planning Strategies to Investors
Investment Strategies
1. Investors should choose to allow their investment to compound over the long run.
2. This can be achieved by choosing the growth or re-investment option of mutual; funds.
Automatic reinvestment plans can also be used.
3. Buy and hold strategy which is preferred by many investors, may not be beneficial because
investors may not weed out poor performing companies and invest in better performing
companies.
4. Rupee-cost averaging (RCA) involves the following:
A fixed amount is invested at regular intervals
More units are bought when price is low and fewer units are bought when price is
high.

Over a period of time, the average purchase price of the investor’s holdings will be
lower than if one tries to guess the market highs and lows
5. RCA does not tell indicate when to sell or switch from one scheme to another. This is a
disadvantage.
6. Investors use the Systematic investment plan to implement RCA.
7. Value averaging involves the following:
A fixed amount is targeted as the desired value of the portfolio at regular intervals.
If markets have moved up, the units are sold and the target value is restored.
If markets move down, additional units are bought at the lower prices.
Over a period of time, the average purchase price of the investors holdings will be
lower than if one tries to guess the market highs and lows
8. Value averaging is superior to RCA, because it enables the investor to book profits and rebalances
the portfolio.
9. Investors can use the systematic withdrawal and automatic withdrawal plans to implement value
investing.
10. Investors can also use a money market fund and an equity fund to implement value averaging.
Asset Allocation – A Strategic Tool

11. Asset allocation is about allocating money between equity, debt and money market segments.
12. Asset allocation varies from investor to another depending on their situation, financial goals and
risk appetite.
13. A model portfolio creates an ideal approach for the investors’ situation and is a sensible way to
invest.
14. The asset allocation for an investor will depend on his life cycle and wealth cycle.
15. Investors can have two strategies:
Fixed asset allocation
Flexible asset allocation
16. Fixed asset allocation means
Maintaining the same ratio between various components of the portfolio
Re-balancing the portfolio in a disciplined manner
17. Fixed allocation means periodical review and returning to the original allocation. If equity is
going up, such investors would book profits. They are disciplined.
18. Flexible allocation means allowing the portfolios profits to run, without booking them.
19. If equity market appreciates, flexible asset allocation will result in higher percentage in equity
than in debt.

Chapter 12: Selecting the Right Investment Products for Investors
1. Key features of all investment options should be remembered.

2. Physical assets like gold & real estate are preferred by investors who like physical ownership.
These investments are not liquid.
3. Physical assets are perceived to be a hedge against inflation.
4. Real estate investment requires high initial investments.
5. Bank deposits are preferred by large number of investors due to the perception of bank deposits
being safe and free of default.
6. Features of PPF
15 years deposit product made available through banks.
8% p.a. interest payable on monthly balances
Minimum Rs. 500 & maximum Rs. 70,000 p.a. investment allowed.
Tax benefits u/s 80C under IT Act.
Interest receipt and withdrawal of principal exempt from tax.
Limited liquidity available.
7. Features of RBI Relief Bonds
Issued by banks on behalf of the RBI
Tenure of five years
8.0% p.a. interest payable semi annually.
Option to receive or reinvest interest
Interest income fully taxed.
8. Features of other government schemes
KVP issued by central government & sold by post offices
Money doubles in 8yrs and 7 months.
Interest is taxable
Investor identity is protected and investment in cash is possible
Post office savings and RD – gives fixed rate of interest but are not liquid.
9 These are government guaranteed deposits
9 Attractive for their safety and cash investment options
9. Features of Instruments issued by Companies
Commercial Paper: Short term (90days) unsecured instrument. Credit rated.
Debentures: Secured fixed income instruments with credit rating
Equity Shares – Liquidity through listing.
Preference Shares – Fixed rate of dividend
Fixed Deposits – Unsecured deposits with credit risk
Bonds of FI – Unsecured fixed income securities issued by public financial

institutions
10. Features of insurance policies
Investors buy due to tax concessions, while they should buy for the insurance
cover.
With profit policy provides bonus along with sum assured.
Without profit policy only provides insurance cover.
11. Why MF is the best option
Mutual funds combine the advantages of each of the investment products
Dispense the short comings of the other options
Returns get adjusted for the market movements
Return Safety Volatility Liquidity

Convenience
Equity High Low High High or Low
Moderate
FI Bonds Moderate High Moderate Moderate
High
Corporate Moderate Moderate Moderate Low
Debentures Low
Company Fixed Moderate Low Low Low
Deposits Moderate
Bank Deposits Low High Low High
High
PPF Moderate High Low Moderate
High
Life Insurance Low High Low Low

Moderate
Gold Moderate High Moderate Moderate
Low
Real Estate High Moderate High Low
Low
Mutual Funds High High Moderate High
High

Chapter 13: Helping Investors Understand Risks in Fund Investing
1. Risk arises when actual returns are different from expected returns.
2. Historical average is a good proxy for expected return.
3. Standard deviation is an important measure of total risk.
4. Beta co-efficient is a measure of market risk.
5. Ex-marks are an indication of extent of correlation with market index. Index funds have ex-marks
of 100%.
6. Sharpe ratio and Treynor Ratio measure the returns per unit of risk.
Chapter 14: Recommending Model Portfolios and Selecting the Right Fund
Model Portfolio
1. Steps in developing a model portfolio for the investors:
Develop long term goals
Determine asset allocation
Determine sector distribution
Select specific fund schemes for investment
2. Bogle recommends that age, risk profile and preferences have to be combined in asset allocation.
Older investors in distribution phase - 50% equity; 50% debt
Younger investors in distribution phase - 60% equity; 40% debt
Older investors in accumulation phase - 70% equity; 30% debt
Younger investors in accumulation phase - 80% equity; 20% debt
3. Jacob’s Model Portfolios
Accumulation phase
9 Diversified equity: 65 - 80%
9 Income and gilt funds: 15 - 30%
9 Liquid funds: 5%
Distribution phase
9 Diversified equity: 15 - 30%
9 Income and gilt funds: 65 - 80%

9 Liquid funds: 5%
Fund Selection
4. Fund selection refers to the actual choice of funds according to the chosen model portfolio for the
investor.
5. Equity funds: Characteristics:
Fund category – the fund chosen should be suitable to investor objective
Investment style – Choose between growth and value depending on investor’s risk
perception
Age of the fund – Experienced funds are preferred to new funds
Fund management experience –Track record of the fund managers is important
Size of the fund – Larger funds have lower costs
Performance and risk – risk adjusted performance matters
6. Equity Funds: Selection Criteria
Percentage holding in cash should be low – Funds can always sell liquid stocks for
liquidity requirements.
Concentration in portfolio should be low – An equity fund should be well
diversified.
Market capitalization of the fund – High capitalization means better liquidity
Portfolio turnover – Higher turnover means more transactions and costs, but
exploitation of opportunities. Low turnover represents patience and stable
investments.
7. Risk Statistics
Beta – represents market risk, higher the beta higher the risk.
Ex-Marks – represents correlation with markets – higher the ex-marks, lower the
risk. A fund with higher ex-marks is better diversified than a fund with lower ex-
marks.
Gross dividend yield represents return. Funds with higher gross dividend yield
should be preferred.
Funds with low beta, high ex-marks and high gross dividend yield are preferable
8. Debt Funds: Selection Criteria
A smaller or new debt fund may not necessarily be risky.
Total return rather than yield to maturity (YTM) is important.
Expenses are very important, because high expense ratios lead to yield sacrifice.
Credit quality - Better the rating of the holdings, safer the fund.
Average maturity - Higher average maturity means higher duration and interest
rate risk. Funds with higher average maturity are more risky than funds with lower
average maturity.
9. Money Market Funds

Liquidity and high turnover rate is high.
Shorter-term instruments are turned over more frequently.
Protection of principal invested is important.
NAV fluctuation limited due to low duration and lack of interest rate risk.
Credit quality of portfolio should be high.
Low expense ratio is important.
Chapter 15: Business Ethics in Mutual Fund
1. All those engaged in this business – distributors, advisors, fund managers, operating employees of
AMC – need to abide by rules of good conduct in the interest of the investor.
2. The conduct rules for distributors and employees (including fund mangers of each fund) are set by
the Fund Trustees and Directors of AMC.
3. AMFI has set ethical standards and practices for the industry
4. AMFI code includes specific rules of good conduct for AMCs and its employees and the fund
distributors.
5. SEBI also requires the development of ethical standards and practices by all fund houses, and has
asked that each fund or AMFI set up detailed Codes of Conduct for different groups –
distributors, fund managers and other employees.
6. As a fund distributor, you have to abide by all rules of good conduct, whether given by the AMC,
AMFI or SEBI
7. SEBI mandates that the funds would always conduct all their activities in the best interest of the
investors. Three areas in particular are monitored by SEBI
Fund Structure and Governance
Exercise of Voting Rights by Funds.
Fund Operations
8. Principle of Independence in the legal structure is achieved in three ways :
Separation of Functions
Independence of organizations
Independence of personnel
9. The regulations prescribe standards of communication and the information that each type of
advertisement (advertisements that cover the launch of new schemes or those that cover the
reporting of performance of existing schemes) must contain.
*****

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Mutual Fund Testing Programme - Participants’ Handbook

Karvy Learning Centre Internal Circulation Only 1

This book belongs to -

EMPLOYEE ID#: __________________________________________

DIVISION / DEPARTMENT: __________________________________________

Karvy Learning Centre Internal Circulation Only 2

Chapter 1 The Concept & Role of Mutual Funds ….5

Chapter 2 Fund Structure and Constituents ….7

Chapter 3 Legal and Regulatory Framework ….8

Chapter 4 The Offer Document ….9

Chapter 5 Fund Distribution and Sales Practices ….11

Chapter 6 Accounting, Valuation & Taxation ….12

Chapter 7 Investor Services ….16

Chapter 8 Investment Management ….18

Chapter 9 Measuring and Evaluating Mutual Fund Performance ….22

Chapter 10 Helping Investors with financial Planning ….25

Chapter 11 Recommending Financial Planning Strategies to Investors ….26

Chapter 12 Selecting the right Investment Products for Investors ….28

Chapter 13 Helping Investors Understand Risks in Fund Investors ….30

Chapter 15 Business Ethics in Mutual Fund ….31

Karvy Learning Centre Internal Circulation Only 3

M utual funds are emerging as an important financial intermediary for the

investing public in India. Conceptually and operationally they are different.

of investors all over the country is the network of INTERMEDIARIES /

The intermediaries/distributors have to take on the role of financial advisors to investors,

funds function internally and externally.

Karvy Learning Centre Internal Circulation Only 4

Chapter 1: The Concept & Role of Mutual Funds

Karvy Learning Centre Internal Circulation Only 5

16. Mutual funds can be open ended or close ended.

Chapter 2: Fund Structure and Constituents

Karvy Learning Centre Internal Circulation Only 7

Chapter 3: Legal and Regulatory Framework

Karvy Learning Centre Internal Circulation Only 8

Chapter 4: The Offer Document

Karvy Learning Centre Internal Circulation Only 9

7. Mandatory disclaimer clause of SEBI should also be on the cover page.

Karvy Learning Centre Internal Circulation Only 10

Chapter 5: Fund Distribution & Sales Practices

Karvy Learning Centre Internal Circulation Only 11

8. Institutional distributors have a dominant market share in the Indian industry.

Chapter 6: Accounting, Valuation & Taxation

Karvy Learning Centre Internal Circulation Only 12

Karvy Learning Centre Internal Circulation Only 13

Karvy Learning Centre Internal Circulation Only 14

Karvy Learning Centre Internal Circulation Only 15

9 (20% tax + surcharge if benefit of indexation availed & 10% + surcharge if

Chapter 7: Investor Services

Applying for and redeeming mutual fund units

Karvy Learning Centre Internal Circulation Only 16

Investment Plans/Options and services

Karvy Learning Centre Internal Circulation Only 17

Chapter 8: Investment Management

Equity Markets and Mutual Funds

Karvy Learning Centre Internal Circulation Only 18

Debt Markets and Mutual Fund

Karvy Learning Centre Internal Circulation Only 19

Karvy Learning Centre Internal Circulation Only 20

Karvy Learning Centre Internal Circulation Only 21

Chapter 9: Measuring and Evaluating Mutual Fund Performance

 No annualisation for periods less than a year.

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No annualisation for periods less than a year.

Bonds of FI – Unsecured fixed income securities issued by public financial