Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Candidates can take the computer based exam at the NSE centers or the written exams conducted by UTIICM The exam is now available in 2 languages : Hindi and English
The computer based exam is only in English. The written exam is in English and Hindi
Registration on the NSE exams can be done on-line at www.nseindia.com Registration for written exams can be done by downloading the application forms from www.iicm.com
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There are 2 hours to do the paper, most people do it in 1 hour Written exam
There is an answer sheet with boxes for each question. Color the appropriate box with pencil. Valuation is done using an optical reader. Results are announced in 10 days.
Some Tips
It is not a great idea to read the paper fully, attempt questions as you see them.
Reading fatigue sets in.
Mark and keep aside questions for which you are not sure of the answers, revert only to these questions.
Revising all questions can create confusion. Do not revise and redo the questions that have been already attempted.
Negative marking
25% of the marks of a question is reduced for a wrong answer.
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Approximate Weighting
Concept, History & Type of Mutual Funds (10 Marks) Fund Structure & Constituents (4 Marks) Legal & Regulatory Framework (5 Marks) Offer Document (9 Marks) Mutual Fund Distribution & Sales Practices (6 Marks) Accounting Valuation & Taxation (9 Marks) Investor Services (3 Marks) Investment Management (6 Marks) Return, Risk, Performance & Fund Selection (8 Marks)
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Approximate Weighting -2
Financial Planning Concept & Process (4 Marks) Life Cycles & Wealth Cycles (4 Marks) Creating & Recommending a Model Portfolio (5 Marks) Investment Strategies (5 Marks) Investment Products (7 Marks) Business Ethics for Mutual Fund (4 Marks)
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A mutual fund is a pool of investors money The money collected is invested based on pre-specified investment objectives
HDFC Income Fund DSPML Top 100 Equity Fund
The investment objective of a fund determines its investment portfolio and its risk and return. The benefits from the pool is shared only by the investors who contributed to it
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Proportionate Share
Contribution to the pool is not equal
Hence the share is not equal, but proportionate
10000 20000 30000 60000 12000 72000 Current Value of the Investment is proportionate
72000
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Method to measure the contribution is standardized Share of the pool is called Unit
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Shares
Units
Investor in shares - Share holder Mutual fund investor - Unit holder Holds the share of the company Share has a face value First time issue - IPO (Initial Public Offering) Subsequent transactions in stock exchange Holds the units of the fund Unit has a face value First time issue - NFO (New Fund Offer) Subsequent transaction through the fund (sometimes listed)
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Portfolio of a Fund
The money pooled is invested in a portfolio of marketable securities such as:
Equity shares Bonds and debentures Money market instruments Derivatives
Securities are tradable and have a market price. The portfolio value changes with changes in the market price of the underlying securities. The value of the investors holding changes with a change in the portfolio value. If we divide the value of the portfolio by the number of units, we get the net asset value (NAV) per unit.
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14 NumericalsNuvo Limited 2008 exam; only for understanding Copyright Aditya Birla not in the
Valuation of Portfolio - 2
Security
No. of Shares
If the NAV of the fund was Rs.10 at the start, it would now be Rs.12.18 at the end of 10 days, when the value of the portfolio moved up.
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The total assets of a mutual fund refers to the current value of its portfolio.
No other long-term assets are held in the balance sheet. Current assets and accrued income are added to the portfolio value.
Net Assets
Net assets of the mutual fund = Market value of the portfolio + (Accrued income and current assets) - (Accrued expenses and current liabilities) Net asset value of a unit (NAV) = Net assets / Number of units Net assets of the fund = NAV * Number of units
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Professional Managers
The fund managers have expertise in sector evaluation and security selection.
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Reduction in Risk
Portfolio diversification and professional management of the funds leads to a reduction in risk for the investor.
Flexibility
The choice of products and options allow investors to structure their investment and returns in the way that suits them.
Liquidity
Mutual fund portfolios are managed to provide liquidity and easy exit options to investors.
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Open-ended Funds
No fixed maturity date. Offered during NFO for the first time.
Investors can buy redeem on a continuous basis after the fund re-opens for transactions. On-going transactions are done at NAV-based prices.
Unit capital is not fixed but changes with purchase and redemption. Transactions can be restricted by the fund under special situations.
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Equity Funds
Growth funds & Value funds Mid & small stock funds Index funds Specialty funds (sector and thematic funds)
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Debt Funds
Income funds or diversified debt funds Gilt funds short and long term gilt fund Liquid and money market funds Serial plans or fixed maturity plans Erstwhile assured return funds
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Hybrid Funds
Other Funds
Commodity funds
Invest in commodity stocks and futures
International funds
Invest in global ETFs, funds and securities
Fund of funds
Invest in other funds Two layers of management fees
ETFs
Passive funds linked to an index Bought and sold on the exchange
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Risk
Sector funds are most risky; money market funds are least risky
Tenor
Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs
Investment objective
Equity funds suit growth objectives; debt funds suit income objectives
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Securities held
Shares
- Bonds / Government securities - Short maturity fixed income instruments Shares & fixed income instruments Gold, commodity stocks and futures Real estate Other funds Government securities Debt instruments with lower credit rating
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Active Funds
Actively managed by the fund manager Tries to deliver better returns than the market index A particular market index is chosen as benchmark
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In India, the structure to be followed by mutual funds is specified in Sebis (Mutual Fund) Regulations of 1996.
Three-tier structure of Sponsor, Trust, AMC (Asset Management Company)
Sponsor promotes the fund and sets up the AMC. The mutual fund is the trust supervised by the trustees. Trustees appoint the AMC to manage the funds. Sebis regulations lays down the eligibility norms, role and responsibilities of each constituent.
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Regulatory Norms
Sebis regulations for mutual funds has laid down the eligibility norms for a sponsor:
At least 5 years experience in the financial services industry Good financial track record
Positive net worth in the immediately preceding three years
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The sponsor registers the mutual fund as a trust and appoints the trustees with the approval of SEBI
The trustees can be constituted either as Board of Trustees or Trustee Company Trustees have to meet at least 6 times in a year Trustees are paid a fee for their services
Trustees have fiduciary responsibility to protect the interest of the investors The authority and responsibility of the trustees are laid down in the trust deed
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Registered ownership of investments is with the trust At least two-thirds of the trustees should be independent of the sponsor Trustees of one mutual fund cannot be trustee of another mutual fund
Independent trustee Board approval
Right to seek regular information and remedial action All major decisions need trustee approval
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The creation, marketing and management of mutual fund products is the responsibility of the AMC.
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The AMC has to be registered with Sebi which has laid down the eligibility norms :
An AMC must have a net worth of at least Rs. 10 crore at all times. 50% of the members of the board have to be independent. The AMC of one mutual fund cannot be the AMC/Trustee of another mutual fund. An AMC cannot engage in any business other than investment management. The AMC must make periodic statutory disclosures to SEBI.
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The constituents of a mutual fund are appointed to take care of specific activities:
Appointed by the AMC
Custodians are an exception and are appointed by the sponsor directly
Should be registered with SEBI & approved by Trustees Paid a service fee Governed by the agreement entered into with the AMC and Sebis regulations
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Custodians
Custodians hold the cash and securities of the mutual fund and are responsible for the safekeeping of the assets The custodian must be an entity independent of the sponsor The functions of the custodian include:
Complete the transactions, deliver & accept cash & securities Track and complete corporate actions & payouts
Rights, bonus, dividends, & interests Sale & buy back offers, redemptions
Coordination with depository participants (DP) Some custodians may offer fund accounting & valuation services
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R & T Agents
The R&T agents are the record keepers of a mutual fund They operate Investor Service Centers (ISCs) that are official points to accept and process transactions They are primarily responsible to provide investor services and are paid a fee for their services
Issue & redeem units, update unit capital Enable investor transactions Create, maintain and update investor records Bank the payment instruments & notify AMC Process redemption and dividend payouts Send periodic statutory information to investors
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Other Constituents
Banks
Provide collection services Investor cheques / DDs are collected into scheme accounts
Auditors
Audit the books of mutual funds Separate auditors for AMC accounts
Brokers
Execute buying & selling stocks as instructed by the fund managers Give research reports on securities to the AMC
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Distributors
AMCs appoint non-exclusive distributors to sell mutual fund units A distributor can appoint multiple sub-brokers A distributor can be
An individual (IFA - Independent Financial Advisor) Institutions such as banks Non-banking finance companies (NBFC) Broking & distribution companies
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AMC Take-over
Sponsor of one AMC sells their equity holding to another sponsor.
AMC Merger
Two AMCs merge their operations Structure of AMC and holdings of the sponsors change.
AMC Change
Trustees may terminate one AMC and appoint another.
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75% of voting rights must approve the reorganization in case of a close-end scheme
Approval sought through postal ballot No response is deemed to be an approval
All activities of mutual funds are defined and regulated by SEBI Investor complaints redressal is done by trustees, AMC & SEBI UTI came under SEBIs regulation in 2003
Now all the UTI schemes are managed by UTI AMC UTIs Assured returns scheme are under a special undertaking
Role of RBI Bank sponsored mutual funds are regulated by both SEBI & RBI RBI also regulates money markets and gilt markets
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Other Regulators
The ministry of finance is the apex supervisor
SEBI and RBI are governed by Acts of Parliament
(SEBI Act 1992, RBI Act 1949)
The Company Law Board (CLB) is the regulator under the Companys Act 1956
AMC & trustee company are formed as companies Complaints against directors are escalated to CLB Dept of company affairs can prosecute the company directors The Registrar of companies ensures compliance
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Other Regulators -2
Stock Exchange
Listing regulations govern the schemes listed on the stock exchange
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Source of Information
The offer document (OD)provides all information that an investor needs to evaluate a mutual fund
The OD is first prepared at the time of an NFO It is a legal document Investors are required to read the OD before investing
The AMC is responsible for the accuracy of information in the OD The Due diligence certificate is signed by the compliance officer of the AMC
It is part of the offer document
Updating the OD
The OD must have relevant information to help make appropriate investment decisions The OD prepared at the time of the NFO will have to be updated for changes Sebi prescribes the frequency with which the OD has to be revised
OD of open ended schemes are revised every two years OD of closed-end schemes do not require revision
(The format and revision rules have been changed by Sebi with effect from June 1, 2008)
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Addendum to OD
The changes in the material information in the offer document is intimated through an addendum
Attached as an appendix to the OD Approved by trustees and notified to Sebi Has to be published in two news papers and displayed in all OPoAs
The information in the addendum is included in the OD when the OD is revised Change in material information includes
Change in sponsor, AMC Change in fundamental attributes, loads, options in the scheme
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The risk in a mutual fund scheme may be standard or scheme specific risks Standard risks are common to all mutual fund schemes
All schemes are subject to market risks Past performance is not indicative of future performance
Scheme specific risks depend upon the investment objective, asset allocation and strategy of a fund
A sector fund has risk of concentration The first scheme of a fund house has the risk of no past history
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The OD gives background information about the constituents of the mutual fund. Information about the sponsor in the OD includes:
Name and financial history of the past three years Liability of the sponsor for assured return scheme, if any
Information is provided of other constituents such as custodian, R&T agent and auditor The offer document gives information for the preceding three years Information in the OD is limited to the schemes of the fund house.
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The fundamental attributes of a scheme define the risk and return characteristics of a scheme
Type of scheme Investment objective Investment Pattern Terms with regard to liquidity Fes and expenses Accounting and valuation and investment norms
The suitability of a scheme for an investors needs depends on its fundamental attributes
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The OD of a scheme has to be revised The investment by the investor may require review for continued suitability
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The OD provides information of the performance of existing schemes for the last three years
Financial summary of existing schemes Investor complaints and redressal for existing schemes
The offer document will give information on the services and information that an investor can expect
Process for addressing investor grievance Information that is given and their periodicity
Information on Investments
Details of the borrowing policy of the fund Details of the investment in the sponsor group companies Policy on inter-scheme transfers and valuation of securities Information on the method of calculating NAV, sale and redemption price
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The OD gives information that is essential for the investor to complete the investment process
The period of NFO The NFO price for subsequent transactions Minimum initial and subsequent investment Plans ,options and loads Availability of forms, payment instruments and submission Investors eligible to invest Facilities such as switch and SIPs Date of commencement of on-going purchase and sale
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A first time investor should refer to the OD for information. An existing investor can use the KIM for continuing transactions The format of the KIM is prescribed by Sebi
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Types of Investors
Offer document clearly specifies the investors eligible to invest in the mutual fund scheme
Some schemes may have restrictions
FIIS need to register with SEBI before investing Foreign citizens and overseas corporate bodies are not allowed to invest in mutual funds NRIs and PIOs can invest without separate approval from RBI
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Individual Investors
The documents
PAN mandatory for all investors including NRI KYC norms to be fulfilled for all investments above Rs.50,000
Institutional Investors
List of Authorized signatories is mandatory May not require investment advise May not go through intermediaries
Direct sales channels
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Intermediaries
Mutual funds may employ distributors to reach their products (channels) There are non-exclusive individual and institutional channels Individual distributors
Establish personal long term relationship with investors Hand-hold the investor through the process Have evolved as financial planners providing personalized service
Institutional channels
Have large depositor / client base Client acquisition process is standardized
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Institutional
Have many employees and sub-brokers Large foot print in terms of branches AMC deals with single entity instead of large number of investors Have established client base & offer multiple products Able to give research based advice
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Appointment of Distributors
AMC appoints the distributor
SEBI approval is not required The sponsor can be a distributor Employees cannot be distributors
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Commission to Distributors
Primary form of remuneration for the distributor is commission
Commission is split as up-front and trail Commission is paid at the discretion of the fund No maximum / minimum limit prescribed by SEBI Commission is influenced by market practice Equity schemes have higher commission than debt schemes No commission for own investment
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The investment portfolio, along with any accrued income and receivables represents the assets of the scheme. A scheme has some short-term liabilities, payables and accrued expenses. Nets assets of a scheme are computed as assets minus liabilities. Net asset value (NAV) is a per unit representation of a schemes net assets and is computed as
Net assets/Number of units outstanding
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NAV is calculated every business day, also called as valuation day, for all mutual fund schemes. NAV has to be posted on the AMFI website every business day by 9 pm. NAV is impacted by the following factors:
Purchase and sale of investments by fund managers Valuation of investments held in the portfolio Valuation of other assets and liabilities of the scheme Sale and purchase of units by investors
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NAV Representation
Expense and income are accrued on a daily basis. Calculation of NAV includes all incomes and expenses accrued until the valuation date. Any transaction that impacts the NAV by more than 1% should not be excluded in computation.
Any errors to computation to be rectified in 7 business days.
NAV is rounded off to 4 decimal points for liquid funds, and two decimal points for other schemes. NAV is published in the newspapers for investor information.
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Applicable NAV
The price at which investors can buy or sell their units depends on the NAV after adjustment for the load. Applicable NAV depends on the cut-off time for the transaction.
For all non-liquid schemes, the cut-off time for both purchase and redemption is 3 pm. The cut-off time for liquid fund purchases is 12 noon
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Loads
The price at which an investor purchases or redeems a mutual fund unit is based on the NAV, adjusted for load. Load refers to expenses incurred on marketing and distribution of a scheme that can be recovered from the price. Loads are of two types: Entry load applies for purchases; exit load applies for redemptions. Entry load means the investor pays a purchase price that is more than the NAV, by the amount of load. Exit load means the investor receives a redemtpion price that is less than the NAV, by the amount of load.
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Entry Load
An investor wants to invest Rs 5000 in XYZ Growth Fund which has an NAV of Rs 45. The investor also has to pay an entry load of 2.25%. The price at which the units will be allotted is
NAV + Load = Rs 45+ 2.25% of Rs 45
SEBI Regulations
SEBI regulations impose a limit on the maximum load that a fund can charge. An open ended fund can charge a maximum load of 7%. A closed end fund can charge a maximum load of 5%. The redemption price cannot be less than 93% of the purchase price.
If the NAV is Rs 10, the maximum purchase price can be Rs10.70. The minimum redemption price can be Rs 9.30.
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Expenses
Only scheme-specific expenses can be charged to the fund. These expenses are:
Investment management fees Marketing and selling expenses Fees of custodians Fees of registrar and transfer agents Audit fees Trustee fees Costs relating to investor communication Costs of statutory advertisements
Expenses incurred on AMC offices, staff salaries and technology are borne by AMC and not charged to the scheme.
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Limits to Expenses
The limits for expenses charged to the fund are as per the following slabs:
2.5% on the first Rs100 crore of net assets 2.25% on the next Rs300 crore of net assets 2% on the next Rs300 crore of net assets 1.75% on the balance net assets
The net assets in the above limit are taken as weekly average net assets. Debt funds are required to charge 0.25% lower in each of the above slabs. Fund of funds can charge a maximum of 0.75% only as recurring expenses.
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Example A fund has net assets of Rs 800 crore. What is the limit on the investment management fees that the AMC can charge to the fund?
For the first 100cr @ 1.25% = 1.25 crore On the balance 700cr @ 1% = 7 crore
Accounting Policies
Mutual funds can distribute dividends only out of realized profits. Dividends, bonus and rights should be recognized on the ex-date. Average cost must be used to determine the holding cost of the securities. Investments must be accounted on the transaction date, not on the settlement date. Scheme-wise annual reports have to be drawn according to SEBI approved format
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Valuation Policies
Uniform policies of valuation are set by AMFI and approved by SEBI. Valuation policies to be disclosed to investors in the offer document. The fair value of a security is the closing price at the markets on the valuation date, in case of liquid securities. In the case of illiquid securities, a valuation methodology is adopted to arrive at the fair value. Valuation of the mutual fund portfolio is done on every business day.
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Thinly traded shares can be valued at the last traded price or at fair valuation approved by the trustees.
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If a corporate security is not of investment grade (credit rating below BBB) it is valued at a discount of 25% on its face value. Money market securities with days to maturity not exceeding one year, are not marked to market.
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Illiquid Securities
An illiquid security is defined as one that is thinly traded, non-traded or unlisted. If a security is illiquid, it cannot be accurately valued. Such securities cannot exceed:
15% of net assets in an open-ended scheme. 20% of net assets in a closed end scheme.
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Taxation
A mutual fund is exempted from income tax under Section 10(23D) of the Income Tax Act. Mutual funds distribute income as dividend, or allow the appreciation to accumulate.
They offer dividend and growth options to investors.
Mutual fund dividends are exempt from tax, in the hands of the investors as per Section 10(35) of the IT Act.
There is no tax deduction at source (TDS) on mutual fund dividends.
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Taxation of Dividends
DDT has to be paid directly by the fund, before distribution of the dividend to the investor.
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Securities transactions tax (STT) is payable at 0.25% by investors on redeeming units of an equity-oriented fund.
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Investor Information
The investor provides information to the mutual fund at the time of investment
Mandatory information to be provided as required by Sebi
The completed application from has to be submitted at the AMCs office or ISC
Distributors assist in filling up and submitting application forms
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The Offer document and KIM describes the investment process to be followed by each category of investors Individual investors have to provide PAN details with the applications
Maximum of three joint holders are allowed in a mutual fund
NRIs and FIIs have been given blanket permission to invest by RBI
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Payment Instruments
The application form for buying units of a mutual fund must be accompanied by a payment instrument
Minimum investment in a scheme
The accepted payment instruments are mentioned in the offer document/KIM of the scheme
Cheques and Demand drafts Instruments not accepted as valid
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The information provided in the application form is captured under a folio created
Consolidation of holdings Creation of multiple folios Use of transaction slips for additional purchase
Mutual funds allow investors to use a common application form to invest in different schemes of the fund house
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Redemption of Investment
Investors can specify their redemption request in units or amount
Partial redemption and full redemption
The redemption request has to signed by the holders according to their mode of holding
Authorized signatories to sign for institutional investors
The redemption proceeds are paid into the bank account of the first holder
Mandatory to provide bank account details in the application form Repatriation of NRI redemption will depend upon source of funds The redemption proceeds have to be paid within 10 working days
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Investment Options-I
Investment options help investors invest and structure returns according to their specific requirements Automatic Reinvestment Plans
Dividend re-invested and not paid-out Gives compounding benefits
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Investment Options-II
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Pledging of units
Units under lien cannot be redeemed
Nomination facility
Can be modified by the investor
Equity and debt are the two broad categories of securities used to create a fund portfolio
Dynamics of the markets and strategies used by fund managers Types of instruments Sebis regulations govern the investments made by a fund
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Preference Shares
Dividend paid at fixed rates May be cumulative and participating No voting rights
Equity Warrants
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The ratio of the market price to earnings per shares is the P/E ratio
Indicates the markets willingness to pay for the earning potential High for growing companies Positively related to the market price of the shares
The ratio of dividend per share to the market price is the dividend yield of a share
Inversely related to the market price of the share
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Growth stocks
Earnings grow at faster than average rates and are ploughed back Have high P/E ratios and low dividend yields
Value stocks
Undervalued shares with low P/E and high dividend yields Potential to earn profits when such shares find favor with markets
Cyclical stocks
Earnings are linked to economic cycles Have low P/E and high dividend yield
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Fundamental analysis
Research into qualitative and quantitative factors that affect the performance of the company Economy-industry-company analysis
Technical analysis
Use of price data to identify future price movement patterns
Quantitative analysis
Use of mathematical decision making models for fund management
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Fund Managers
Take decisions on style, allocation and stock selection
Security Analysts
Track companies in which the fund has invested and potential opportunities Use fund management tools like fundamental and technical analysis
Security Dealers
Members of the stock exchange Execute buy and sell orders for the fund
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Par value is the principal amount borrowed which is repaid on redemption Coupon is the rate of interest payable on the par value Maturity is the term of borrowing
Call and put option modify the maturity
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Based on issuer
Differ in terms of credit quality
Based on tenor
Instruments with less than one year to maturity are called money market instruments Long-term borrowings are issued for up to 30 years
Certificate of Deposits
Unsecured borrowings of banks
Commercial papers
Credit rated paper to meet working capital requirements of companies
Treasury bills
Issued by the government for tenors of 91,182 and 364 days
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Current yield of a bond is the coupon as a percentage of current market price If we bought a 8% bond at Rs. 110, the current yield is = (8/110)*100 = 7.27% The YTM is the rate at which present value of future cash flows equals the current market price Given price, YTM can be calculated through iteration Given YTM, price can be computed, using the YTM rate to discount the future cash flows.
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Interest rate risk is the increase or decrease in the price of bonds with a change in rates Credit risk is the risk of default in meeting obligations of interest and repayment
Government securities are not credit rated The credit risk of other bonds are measured by credit rating Credit spread is the excess interest paid by other borrowers over what the government is paying for the same tenor Higher the credit rating, lower is the spread
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Reinvestment risk
The risk of reinvestment of interest income at lower rates Affects total income
Liquidity risk
The risk of not being able to sell the bond close to its value
Inflation Risk
The reduction in the value of fixed payments
Call risk
The redemption by the issuer of a high interest debt prior to maturity
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The sensitivity of the price of a bond to changes in interest rates is measured by a number called duration
Interest rate risk is different across bonds Duration is not equal to the tenor of the bond
If duration is 3 years, and interest changes by 1%, price of the bond will change in the opposite direction, by 3%
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Duration management
increase duration if rates are expected to fall decrease duration if rates are expected to rise
Credit selection
invest in low grade bonds that are likely to be upgraded
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Investment in Derivatives
Derivatives are used to rebalance or hedge their portfolios Sebis regulations require mutual funds to inform the investors before using derivatives
Explain the benefits in the offer document with simple examples
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Investment Regulations
Investment Restrictions
A mutual fund under all its schemes, cannot hold more than 10% of the paid-up capital of a company Not more than 10% of its NAV in a single company
Exceptions: Index Funds and Sectoral funds
Debt instruments with investment grade rating of a single issuer cannot exceed 15% of the net assets
Can be extended to 20%, with the approval of the trustees
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A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associate or group company of the sponsor A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed 25% of the net assets of the scheme
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Inter-Scheme Transfers
Inter-scheme transfers happen on a delivery basis, at market prices Such transfers should not result in significantly altering the investment objectives of the schemes involved Such transfer should not be of illiquid securities, as defined in the valuation norms One scheme can invest in another scheme, up to 5% of its net assets
No management fee is payable on these investments
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Dividends are paid out to investors who choose the dividend option Capital gains is the difference between the acquisition price and sale price of units
Realized when units are sold
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The suitable method of calculating returns depends on the investment objective of the investor The performance data published by mutual funds use the CAGR method for the growth option of a scheme
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Percentage change in NAV = (27.65 23.45)/23.45 *100 = 17.91% This method considers only the change in NAV between two dates
Dividend paid, if any, is not considered
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The rate of return on his investment can be computed as = ((15.475 12.45) + 0.70)/12.45 x 100 = (3.725/12.45) x 100 = 29.92% Does not consider the re-investment of dividend
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An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2007. On June 30, 2007, he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2007, the funds NAV was Rs. 12.25.
The begin period value of the investment is = 10.5 x 100 = Rs. 1050 Number of units reinvested = 100/10.25 = 9.756 units End period value of investment = 109.756 x 12.25 = Rs. 1344.51 The return on investment =(1344.51-1050)/1050 x 100 = 28.05%
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CAGR is the rate at which investment has grown from begin point to the end point, on an annual compounding basis
V0(1+r)n = V1 r =((V1/V0)1/n)-1
Where
V0 is the value at the start V` is the value at the end n is the holding period in years r is the CAGR
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Turnover Ratio
Transaction costs have to evaluated in the light of the type of scheme and investment objective
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Portfolio Characteristics
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The performance of a fund has to be compared with other similar funds to be relevant
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Benchmark Comparison
Market benchmarks are independent portfolios that are not managed by any fund manager A funds chosen benchmark has to be mentioned in the offer document
Has to reflect the portfolio and investment objective of the fund Can be changed with approval of the trustees
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The factors to be considered while selecting funds for peer group comparison are:
They should invest in the same asset class Investment pattern must be similar The funds must have comparable investment objective The size and quality of assets must be comparable
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Returns have to be computed for 1,3,5,10 years and since inception Returns for periods less than one year have to be absolute returns
Liquid fund returns alone can be annualized for periods of less than 1 yr
Returns for periods more than on year has to calculated using CAGR Returns have to be disclosed for the fund and benchmark
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Dividends are paid out to investors who choose the dividend option Capital gains is the difference between the acquisition price and sale price of units
Realized when units are sold
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The suitable method of calculating returns depends on the investment objective of the investor The performance data published by mutual funds use the CAGR method for the growth option of a scheme
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Copyright Aditya Birla Nuvo Limited 2008
Percentage change in NAV = (27.65 23.45)/23.45 *100 = 17.91% This method considers only the change in NAV between two dates
Dividend paid, if any, is not considered
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Copyright Aditya Birla Nuvo Limited 2008
The rate of return on his investment can be computed as = ((15.475 12.45) + 0.70)/12.45 x 100 = (3.725/12.45) x 100 = 29.92% Does not consider the re-investment of dividend
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An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2007. On June 30, 2007, he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2007, the funds NAV was Rs. 12.25.
The begin period value of the investment is = 10.5 x 100 = Rs. 1050 Number of units reinvested = 100/10.25 = 9.756 units End period value of investment = 109.756 x 12.25 = Rs. 1344.51 The return on investment =(1344.51-1050)/1050 x 100 = 28.05%
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CAGR is the rate at which investment has grown from begin point to the end point, on an annual compounding basis
V0(1+r)n = V1 r =((V1/V0)1/n)-1
Where
V0 is the value at the start V` is the value at the end n is the holding period in years r is the CAGR
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Turnover Ratio
Transaction costs have to be evaluated in the light of the type of scheme and investment objective
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Portfolio Characteristics
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The performance of a fund has to be compared with other similar funds to be relevant
161
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Benchmark Comparison
Market benchmarks are independent portfolios that are not managed by any fund manager A funds chosen benchmark has to be mentioned in the offer document
Has to reflect the portfolio and investment objective of the fund Can be changed with approval of the trustees
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The factors to be considered while selecting funds for peer group comparison are:
They should invest in the same asset class Investment pattern must be similar The funds must have comparable investment objective The size and quality of assets must be comparable
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Returns have to be computed for 1,3,5,10 years and since inception Returns for periods less than one year have to be absolute returns
Liquid fund returns alone can be annualized for periods of less than one year
Returns for periods more than one year has to calculated using CAGR Returns have to be disclosed for the fund and benchmark
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Risk arises when actual returns are different from expected returns
Historical average is a good proxy for expected return
Risk in equity funds depends upon the portfolio characteristics, strategy and fund managers ability
Maybe company specific or market risk Equity investing is profitable over the long-term
Risk in debt funds arises due to interest rate and credit risks
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Measures of Risk
Standard deviation measures the fluctuation of actual return around the mean
Preferred because it is a measure of total return Drawback is that it uses past performance data
Beta measures the sensitivity of a funds return to changes in the market index
Funds with high beta are more volatile Measures only market risk
Ex-marks or R-squared measures the extent to which the fluctuation in returns can be explained by market movements
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Risk Adjusted Return considers risk premium in relation to the risk of the fund
Sharpe ratio & Treynor ratio
Alpha is the excess return generated by a fund over what is justified by its risk measured by beta The P/E ratio of a fund can be used to gauge its risk Interest rate risk and credit risk are the main risks in a debt fund
Average maturity and duration measures interest rate risk Credit rating and NPAs measure credit risk
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Fund category
Suitability to investor objective
Investment style
Growth vs Value
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Percentage holding in cash Concentration in portfolio Market capitalisation of the fund Portfolio turnover Risk Statistics
Beta Ex-Marks Gross dividend yield Funds with low beta, high ex-marks and high gross dividend yield is preferable
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Credit quality
Better the rating of the holdings, safer the fund
Average maturity
Higher average maturity means higher duration and interest rate risk
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Credit quality of portfolio Low expense ratio Investor composition and size of the fund
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Evaluation and selection criteria would depend upon the funds equity or debt orientation
Returns ,risk , cost will depend on this orientation
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