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A presentation by

Joint Venture with Standard Life Investments

Mutual Funds

Conceptual Framework
What is a Mutual Fund ?

A mutual fund is a collective investment that

allows many investors, with a common objective,
to pool individual investments and give to a
professional manager who in turn would invest
these monies in line with the common objective.
Operation flow chart



Characteristics of Mutual
 Investors own the mutual fund.
 Professional managers (AMC) manage the fund for a
small fee.
 Fees charged is specified by SEBI and is expressed as a
percentage of assets managed
 The funds are invested in a portfolio of marketable
securities in accordance with the investment
 Value of the portfolio and investors’ holdings, alters
with change in the market value of investments.
Mutual Funds:
A Packaged Product
Management Diversification

Tax Benefits

Portfolio of investments spreads out Risk

 Attempts Minimises value erosion

Potential losses are shared with other investors


 Open-ended:  Close-ended:
 Assures liquidity  Buying and selling
 As liquid as the can be done
banks through the stock

 Periodic
redemption by
Mutual Funds
Easy Way to Invest

Reduces excessive paperwork

Outsourcing of expertise

Provides an opportunity for a small investor

Minimum investment is approx.

 Rs.5000/Rs.500 and in multiples of
Rs.1000/100 depending on the Scheme

Provision to apply using SIP

Wide Choice


 Meet the investment needs of all Investors

Disadvantages of a Mutual Fund

 No control over costs for an investor

 No tailor made portfolios for an investor
 Issues relating to management of a portfolio
of mutual funds

Note: These are just disadvantages of the

concept of mutual fund. SEBI has taken
adequate measures to overcome few of them.
Classification of Mutual Funds
 Open-ended funds
 Closed-ended funds
 Load fund
 No load fund
 Equity fund
 Debt fund
 Balanced fund
 Fund of funds
Open-ended vs Closed-
ended Funds
● No fixed maturity ● Fixed Maturity

● Variable Corpus ● Fixed Corpus

● Not Listed ● Generally Listed

● Buy from and sell to ● Buy and sell in the

the Fund Stock Exchanges

● Entry/Exit at NAV ● Entry/Exit at the

related prices market prices

Sub-classification of equity mutual
Equity fund:
 Pre-dominantly invest in equity markets

 Diversified portfolio of equity shares

 Select set based on some criterion

 Diversified equity funds

 ELSS as a special case

 Primary market funds

 Small stock funds

 Index funds

 Sector specific funds (sectoral funds)

Sub-classification of debt mutual
 Pre-dominantly invest in the debt markets.
 Diversified debt funds
 Select set based on some criterion
 Income funds or diversified debt funds
 Gilt funds
 Liquid or money-market funds
 Serial plans or fixed term plans
Balanced Funds

 Investment in more than one asset class:

 Debt and equity in predefined proportions

 Pre-dominantly debt with some exposure to equity
 Pre-dominantly equity with some exposure to debt

 Education plans and children’s plans

Fund of Funds

 Investment of its corpus in other mutual fund

 Schemes of same mutual fund house
 Schemes of other mutual fund house
 Is considered like a Debt scheme for tax
 The effective expenses become higher as the
investors have to bear the expenses of the
invested schemes as well
Investment Options

 Investors can achieve income and growth objectives

in al funds
 Dividend pay-out option
 Regular dvidend
 Ad-hoc dividend
 Growth option
 Re-investment option

 Most funds provide multiple options and the facility to

switch between options
Basics of Classification

 Risk
 Sectoral 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
The Risk Return Trade-off
Hedge Funds

Growth Funds Sectoral Funds

Aggressive, Value,
for Growth
Funds Balanced Funds
Gilt Funds, Bond Ratio of Debt : Equity
Funds, High
Yield Funds

Liquid Funds
History of Indian Mutual Funds
 Phase I (1964-87)
 Set up by RBI, de- linked later.
 Act of parliament
 First scheme US 64, still outside SEBI purview
 Phase II (1987-93) entry of PSU Banks/ FIs
 SBI in 87, LIC in 89, Indian Bank in 90
 Phase III (1993-95) Entry of Private players
 Phase IV (1993 onwards) SEBI regulation of Mutual
Fund Structure and Constituents

 In UK
Two alternative structure
 In USA
Investment Companies structure
 In India
3 tier structure


Trustee Company Asset Management Company

Fiduciary Fund Operations Marketing

responsibility to Management

the Distribution
Brokers Registrar
Markets Bank
UTI : Differences
 Formed as a trust under UTI Act 1963
 Voluntary submission to SEBI regulation
 No separate sponsor or AMC
 Major Difference
-Assured return Scheme
-Different accounting norm
-Ability to take and make loans
 Promoter of the mutual fund
 Creates a Trust under Indian Trusts Act, 1882
 Appoints trustees
 Creates AMC under Companies Act, 1956
 Fulfils necessary formalities and applies to SEBI for
registration of the Trust as a Mutual Fund
Who is eligible to be a
 Criteria
 Financial services business
 Sound track record
Positive net worth in last five years
3 year profit making record in the last 5
years including the last year
Atleast 40% contribution to AMC capital
Sponsors’ net worth in the immediately
preceding year is more than the capital
contribution to the AMC
Fiduciary responsibility to the Investors.
Directors to be approved by SEBI.
Execution of trust deed by sponsor in favour of trustee.
Trust deed is stamped and registered with SEBI
Legally responsible for administering the Trust and
Compliance with Regulations.
Norms for Trustees:
Experience in Financial Services
Minimum 4 members on the board and 2/3rd of the members
not to be connected with the sponsor
All major Decisions need trustee approval
Required to be registered with SEBI
Responsible for :
Launching Schemes
Managing Funds for Schemes
Performing Accounting Functions
All day to day affairs of the Mutual Fund
Quarterly reporting to Trustees
Income of an AMC /Asset Management Fee
1.25% of weekly average NAV of each Scheme up to Rs.100
cr of assets managed
1.00% greater than Rs.100 cr
Minimum 4 directors with 1/2 independent
At least Rs 10 cr of net worth to be maintained at all times
AMC cannot act as trustee for other MF
AMC of one MF cannot be trustee of another MF
 Issue of Account Statements to
 Arranges payment to Investors when
they redeem
 Takes care of Non commercial
transactions like change of address,loss
of account statement etc.
 should be registered with SEBI
 Appointed by Board of AMC

 Safe keeping of the assets held by the Fund

 Receives and Delivers Securities for payment
 Follow up on Corporate benefits
 Provide an independent means of control
 Independent of Sponsors
 Should be registered with SEBI
 Appointed by the Board of Trustee
Other Constituents
 Broker
-Purchase and sale of securities
-Not more than 5% through a related

 Auditor
-Separate auditor for AMC and mutual
Legal & Regulatory Environment

SEBI - Capital Markets Regulator

RBI - Money Markets Regulator
MOF - Policies
Stock Exchanges
Office of the Public Trustee
 All Mutual Funds / AMC/ Trustee Companies to be
registered with SEBI

 Responsible for protecting investors interest and

promote orderly growth of Mutual Fund Industry

 Formulates regulations,monitors performance and

conduct of Mutual funds and enforces compliance to
regulations through reviewing reports and regular
Reserve Bank of India & SE
Dual supervision for bank sponsored AMCs
Issue concerning ownership bank promoted
AMC falls with RBI
Regulates investments pertaining to Money
Market Instruments
 Stock Exchange (SE)
Close ended MF listed of SE. Needs to
comply with listing guidelines.
Office of public Trustee
 MF being public trustee - governed by Indian
Trust Act , 1882

 Trustee Co or Board of Trustee accountable

to office of Public Trustee

 Public trustees reports to Charity Comm.

Trustee and AMC to comply with Cos
Act 1956
R e g i s t r a r s o f C o m p a

D e p a r t m e n t o f C o m p

C o m p a n y L a w B o a r

M i n i s t r y o f L a w & J
Ministry of Finance
 Supervises both SEBI and RBI

 Ultimate policy making & supervising body

 Appellate Authority for any disputes over SEBI

Self regulatory Organizations
 Derive powers from regulator
 Ability to make bye laws
 Example : Stock Exchanges (NSE, BSE)
 Industry Associations
-Collective Industry opinion
-Guidelines and recommendation
-Example : Association of Mutual Funds in
Mergers and Acquistions
 Scheme takeover
-One AMC buys schemes of another AMC
-Organic growth in assets
-No change in AMC stakes
 AMC Merger
-Two AMC’s merge
-Similar to merger of companies
-Sponsor stakes change
Mergers and Acquisitions
 AMC take-over
-Stake of one sponsor in an AMC bought out
by another sponsor
-Change in AMC and sponsor
 Investor rights
-No prior approval needed
-Option to exit at NAV
-Right to be informed
Fund Mergers & Take overs
 Mergers of two AMC
 Provisions of Cos Act
 Approval of high court and SEBI
 75% unit holders consent
 Scheme takeover (Apple and Birla)
 Unit holders permission - 75%
 SEBI’s permission
Fund Mergers & Take overs
 AMC taken over by other sponsor
(a. Zurich - 20th Century b. ITC Threedneedle
- Zurich c. FT - Kothari - HFCL)
 No high court approval
 No unit holders consent , only info with
rights to exit from scheme without any
 SEBI clearance is compulsory
Investing in Mutual Funds –
Understanding the Process
 Offer Document
 Key Information Memorandum
 Application and form of holding
 Distribution channels
 Investors rights
 Taxation of Income and Capital gain
 NAV and Load
The Offer Document
What is an offer document ?
 Legal offer from AMC to investor
 Contains vital information about Fund and schemes
 SEBI approved format
 Key Information Memorandum (KIM) contains vital
information pertaining to the Scheme and it is
mandatory to attach KIM to the application forms
 Investor has no recourse for not having read the
 Legal document that protects and governs the right of
the investor to information

 Is the primary vehicle for the investment decision

 Is the operating document and describes the

fundamental attributes of schemes.

 One of the most important sources of information for

the prospective investor

 Is a reference document for the investor to look for

relevant information at any time
Period of Validity
 Updated every 2 years for OEFs
 Regular Addendum for modification
 Updated for every major change
-Change in the AMC or Sponsor of the mutual
-Changes in the fundamental attributes of the
-Changes in the investment options to investor;
inclusion or deletion of options
Fundamental Attributes
 Scheme type
 Investment objective
 Investment pattern
 Terms of the scheme with regard to liquidity
 Fees and expenses
 Valuation norms and accounting policies
 Investment restrictions
Changes in Fundamental
 Approval from trustees
 Approval from SEBI
 Public announcement by AMC
 Investors to be informed and option given to exit at
NAV without any exit load
 New offer document
Contents of Offer Document

 Preliminary information
 Summary information about the mutual
fund, the scheme and terms of offer
 Mandatory disclaimer clauses as required by
 Glossary of terms in the offer document,
which defines the terms used
 Standard and scheme specific risk factors
pertaining to the scheme being offered
Fund Specific Information

 Constitution of fund, details of sponsor, trustees and

 Financial history of sponsor (s) for 3 years, in
summary form
 Director of boards of the trustees and the AMC
 Details of key personnel of the AMC
 Details of fund constituents
Details of the Scheme Being
 Dates of NFO
 Details regarding sale and repurchase
 Minimum subscription and face value
 Initial issue expenses
 Current scheme and the past schemes
 Special facilities to investors
 Eligibility for investing
 Documentation required
 Procedure for applying, and subsequent operations
relating to transfer, redemption, nomination, pledge
and mode of holding of units
Who can invest ?
 Resident Indian Individuals/HUF

 Indian Companies/Partnership Firms

 Trusts / charitable institutions / PFs

 Banks/ FIs / NBFCs

 Insurance Companies

 NRIs/ FIIs

 Partnership firms etc.

Investor’s rights
 Proportionate ownership in scheme’s assets
 Rights of information from Trustee
 To received dividend warrants, inspect major docs (Trust
deed, investment management agreement, R&T A
Agreement, custodian services agreement)
 with 75% voting rights and approval of SEBI can close the
scheme, change the AMC.
 Rights of info for fundamental change in the scheme
features and also an opportunity to redeem units without
any load.
 Receive annual report and a/c statement
Investor’s rights & Obligations
 Rights - Legal Limitations
 Unit holder’s are not distinct from trust, they
cannot sue trust.
 Sponsor do not have any legal obligations (Limited
to initial contribution)
 No rights to prospective investors
 Obligations
 Must read offer doc & AOD
 Beware of risk factors
 Must monitor investments regularly
Investor’s complaint redressal mechanism

 Client Servicing

 Compliance Officer

 Investors cannot be protected by companies

Associate Transactions

 Summary information on associate companies being

used as constituents.
 Summary information of associates investing in
schemes of the mutual fund
 Summary information on investment made by mutual
fund schemes in associate company securities.
Verification and Due
 SEBI : format and content
 Trustee approval
 Compliance office certifies that
 Information contained therein is true and fair
 Is in accordance with SEBI regulations
 Constituents of the fund are all SEBI registered entities.
 The AMC is responsible for the contents and the
accuracy of information
Distribution Channels

Individual Agents
Distribution Companies
Banks and NBFCs
Direct marketing channels

NAV = Net assets of scheme / No 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 as at the NAV date
Imp :
Day of NAV Calculation is known as valuation day
NAV is computed for each business day

Market value of Equities - Rs.100 crore - Asset

Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore -Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt.payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80
NAV - Other information
Open end funds to declare NAV daily

NAV to be published at least weekly

Close end Schemes (which are not listed) may publish

NAV monthly/qt with prior approval from SEBI (MIP)

NAV has to consider up to date transactions

Non - recorded transactions not to affect NAV

calculation by more than 2%
 Nav is influenced by

Purchase and sale of Investment

Valuation of Investment
Other assets and Liabilities
Units sold or redeemed.

For NAV change in absolute terms =

(NAV at end of period - NAV at beginning of period) * 100
NAV at beginning of period

For NAV change in annualised terms =

( NAV change in % in absolute terms) * (365 / No. of days )
 Entry Load or front ended load
Paid at the time of purchase
Sale Price = NAV * (1+ Sales Load, if any)
 Exit Load or back ended load
Paid at the time of exit
Redemption Price = NAV*(1- Exit Load)
 Contingent Deferred Sales Load (CDSL)
 Deferred exit load depending on the
 Also known as deferred load

Sale price not greater than 107% of the NAV

Re-purchase price to be not lower than 93%

(95% for close-end funds) of the NAV

Difference between the repurchase & sale price

can not be more than 7% of the sale price
For example…

 If the NAV is Rs 10,

 Sale price cannot be higher than Rs 10.7
 Repurchase price cannot be lower than Rs 9.3
 However, the mutual fund cannot charge both these
 If the sale price is Rs 10.7, the repurchase price
cannot be lower than Rs 9.95 (10.7*0.93)
 If the repurchase price is Rs 9.3, the sale price
cannot be higher than Rs 10.00 (9.3/0.93)
Sale Price

Sale Price is the price at which units are sold to

Sale Price = NAV + Entry load
Formula for computation of Sale Price =
Assuming an entry load of 2% in the earlier
NAV computation example
Sale Price = 14.80*(1+ 0.02)
= 15.10
Repurchase Price
Repurchase Price is the price at which units are
repurchased from investors.
Sale Price = NAV – Exit load
Formula for computation of Sale Price =
Assuming an exit load of 2% in the earlier
NAV computation example
Sale Price = 14.80*(1- 0.02)
= 14.50
 Mutual fund is exempt from paying taxes (section 10
 Income for investors
-Capital Gain
 Present position
-Dividend exempt from tax in the hands of Investor
-Funds with >65% in Indian equity pay no DDT
-Other funds pay DDT (14.025% for individual and
HUF and 22.44% for others including companies)
 Securities Transaction Tax(STT) of 0.25%
sale on Equity Mutual Fund Scheme
 As per Section 80C of the Finance Act
Investor can claim a rebate for maximum of
Rs 1 lakh in ELSS.
 Mutual Funds units are not included under
wealth tax
Treatment of Capital Gains
 Long Term : > 12 months
 Short Term : =< 12 months
 Funds with > 65% in Indian Equity
- Short term gain taxed at 10%
-Long Term gains taxed at Nil
 Other Funds
-Short term gains taxed at marginal rate of tax
-Long Term gains
* 20% + surcharge after indexation
*10% + surcharge without indexation

 Investor buys on March 31, 1999 and sells on April 1,

2000. What is the indexation adjustment factor?
 1998-99 – 351
 1999-00 – 386
 2000-01 – 406
 Investor buys on April 1, 1998 and sells on March 31,
2001. What is the indexation adjustment factor?
Capital markets and Mutual
 Equity
 Market and products
 Asset classes
 Investment styles
 Value indicators
 Debt
 Debt markets
 Terminology
 Yield and duration
 Investment styles
 Investment restrictions
Equity investment
 Options
 Ordinary shares
 Pref. shares
 Equity warrants
 Convertible Debentures
Investment Strategies
 Growth and value
 Active and passive
 Large and small cap
 Cyclical stock
 Stock selection
 P/E ratio
 Dividend yield
 Undervalued companies
 Fundamental analysis
 Technical analysis
 Quantitative analysis
Debt Markets

 Tenor
 Short and long
 Put and call options
 Interest payment
 Fixed and floating
 Periodic vs discounted
 Credit quality
 Gilt, guaranteed and others
 Traded and non-traded
Debt instruments

 Commercial Deposits

 Corporate Debentures

 Zero coupon bond

 Floating rate bonds

Debt instruments

 Commercial papers (CPs)

 Govt Securities

 T - bills (7- 364 days)

 Banks/ FIs/ PSU Bonds

Risk in a Debt Fund
 Interest Rate Risk

 Credit Risk (Asset quality)

 Reinvestment Risk

 Call Risk

 Liquidity

 Inflation
Price and Yield

 Increase in yield reduces value of existing bonds.

 Decrease in yield increases value of existing bonds.
 Price and yield are inversely related.
 The relationship between yield and tenor can be
plotted as the yield curve.
Terms used in MFs
 Yield Curve
 Graph which shows yields of various maturities
using a bench mark
 usually upward - some time inverted

 Yield to Maturity (YTM)

 Annual rate of return expected of a bond over its
maturity with the assumption that all coupon
payment will be recd on time and reinvested at the
same rate and principal recd on maturity.
Current Yield and YTM

 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%
Interest Rate Sensitivity

 Measured by a number called duration.

 If duration is 3 years, and interest changes by 1%,
price of the bond will change in the opposite direction,
by 3%

 Duration of a bond is 4 years. Yield spread increases

by 1.5% What is the change in price

= 1.5*4
= - 6%
Credit Risk

 Probability of default by the borrower

 Change in credit rating:
 Downgrade increases the yield and decreases the price
 Upgrade decreases the yield and increases the price
Portfolio Management Styles
 Equity
 Passive - Index
 Active - (a) Growth (b) Value
 Debt
 Buy and hold - Passive
 Duration management - Active
 Credit Selection - in anticipation of changes in
credit ratings
 Prepayment predictions
Investment Restrictions as a % of Net assets - AMC
 Max. Investment under all schemes of the AMC in paid up capital
carrying voting rights in single Co. - 10 %
 Max. Inter scheme investments of the same AMC - 5 % (no AMC
fee payable)
 Inter scheme transfers at CMP and within the objectives of
 Max. Investment in listed shares of Group Co’s - 25 % for each
 No investments allowed in unlisted/private placement of
group/associate cos.
 Can borrow only to meet liquidity requirements. Max for 6 months
& not more than 20% of NAV of scheme.
Investment Restrictions as a % of Net Assets
 Max. Investment in Rated paper in single Co - 15%
(can be increased to 20% with approval by Board
of AMC/Trustee)
 Max.Investment in Unrated/ Rated but below
investment grade in single issuer- 10% of NAV
 Max. Investment in Unrated/Rated but below
investment grade in all cos - 25% (subject to
approval of Board of AMC /Trustee).
 Restrictions not applicable to Govt.
Securities/Money Market
 Can only invest in marketable securities - no loans
Investment Restrictions as a % of Net Assets -Equity
 Max. Investment in Equity/Equity related
instruments of single Co. - 10%
 No restrictions in case of Index Fund
 Max. Investment in Unlisted Cos. - 10% in
close ended & 5% in open ended funds
 Buy & Sell securities on Delivery position , No
short selling/ carry forward allowed.
 Security should be transferred to schemes
immediately. Cannot remain in general a/c
Investment Restrictions
 Not more than 10% of its NAV in a single
-Exceptions : Index Funds and Sectoral Funds
 Rated investment grade issues of a single issuer
cannot exceed 15% of the net assets
- Can be extended to 20% with the approval of the
 Investment in unrated securities of one company
cannot exceed 10% of the net assets of a scheme
and not more than 25% of net assets of a scheme
can be in such securities
Investment Restrictions
 Investment in unlisted shares cannot exceed
-5% of the net assets for an open ended scheme
-10% of the net assets for a close ended scheme
 Mutual funds can invest in ADRs/GDRs
-up to a maximum limit of 10% of AUM(as on 31st
Jan) or $50 million which ever is lower
-The limit for the mutual fund industry as a whole
is $2 Billion
 Mutual funds can also invest in a limited manner
in treasury bonds and AAA rated rated corporate
debt issued outside India

Initial Issue
Transaction Annual Recurring Expenses
Cost Expenses
Entry / Exit load AMC Fee
Custodian Fee
CDSC for no-load Registry Exp.
schemes Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Fees & Expenses
 Initial Issue expenses only for closed
ended equity fund
For launching of the scheme
Can charge up to 6%
 Recurring Expenses
Mkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communication’s cost
Fees & Expenses
 Amc can charge Investment management fee to
the fund on weekly avg. net assets.

 The limits are: (Subject to overall limit of 2.25%

for debt schemes & 2.5% for equity schemes)
 1.25% for up to Rs.100 cr of weekly avg net
 1% in excess of Rs.100 cr.
 No Load schemes can charge an additional
fee of 1%
Limits on Fees & Expenses

 Total Expenses that can be charged to the Fund

( excluding entry and exit loads):
Equity Debt
 On the first Rs.100 cr 2.50% 2.25%
 On the next Rs.300 cr 2.25% 2.00%
 On the next Rs.300 cr 2.00 % 1.75%
 On the balance assets 1.75% 1.50%

Based on average weekly net assets

Fees and Expenses contd..
Initial issue expenses
Charge to the scheme capped at 6% of the initial
resources raised under that scheme
Entry/Exit Loads - Transaction costs
Sale price not greater than 107% / Re-purchase price not
than 93% (95% for close-ended schemes) of the NAV
Contingent Deferred Sales Charge ( For No-Load Schemes)
Ceiling For redemption within 1year 4%
For redemption within 2years 3%
For redemption within 3years 2%
For redemption within 4years 1%
Expenses that cannot be charged

 Penalties and fines for infraction of laws.

 Interest on delayed payments to unit holders
 Legal marketing and publication expenses not attributable
to any scheme
 Expenses on investment and general management
 Expenses on general administration corporate advertising
and infrastructure costs
 Expenses on fixed assets and software development
 Such other costs as may be prohibited by SEBI.
Initial Expenses amortisation for load schemes -

For close -ended schemes - annually over a period not

greater than 5 years
For open- ended schemes amortisation is not allowed
Un-amortised portion to be added to other assets for
computation of NAV
Amortisation not part of normal recurring expenses
Accounting Policies
Investments to be marked to market on market prices.
Unrealised appreciation cannot be distributed.
Purchase & sale of investments to be recognised on
the trade date and not on settlement date.
Investments to be taken as NPA if it gives no return
through interest for more than 6 months
 Dividend / Bonus/ rights to be recognised on ex-
dividend / ex-bonus dates and not on declared dates.
Income receivable on Invest NOT accrued for more
than 3 months , should be provided for.
For determining gain/ loss on investments - avg cost
is to be taken
Disclosures and Reporting
Audit by independent auditor
Audited Annual report every year
Un-audited accounts to be published within 1
month after March 31 & September 30
Within 6 months of closure, publish abridged
summary of report scheme-wise in newspapers
Summary to be forwarded to SEBI & unit holders
Full portfolio disclosure to be made within a month
from the half-year ended March 31 & September 30
Disclosure and Reporting
 Reporting to SEBI
 Annual audited accounts
 Six monthly unaudited a/cs
 Half yearly statement of movements in net
assets of each scheme
 Qtr portfolio statement
 Monthly amount mobilized
 Communication to investor
 Qtr portfolio
 Annual report
Non Performing Asset

 An asset is classified as an NPA, if the interest and/or

principal amount remain outstanding for one quarter
from the due date.
 After classification as NPA:
 Accrual should be stopped.
 Income accrued till date needs to be accounted for
 Principal due needs to be accounted for either in a
graded manner after 3 months of classification or as a
write off in totality in 15 months after classification.

 Marking to Market
 Equity Valuation Norms - Listed, Unlisted, NPA,
 Debt valuation norms - Listed, Unlisted, Illiquid
 Money Market Instruments - valuation norms
 Effect of Buybacks, Mergers
 Valuation Models - CRISIL
Last quoted closing price on the SE where principally
If Not traded on any SE on a particular day, then earliest
previous day price is taken (not more than 30 days)
Valuation = MP * current holding
Stocks which are not traded for more than 30 days on
any SE are valued on good faith basis by AMC within
following parameters
Debt - YTM basis
Capitalisation of earning or NAV or combination of both
Evaluating Fund

Should be judged in light of :

Investment Objectives
Current Market Conditions
Alternative investment returns
Performance Evaluation
Different valuation methods

Change in Nav
Total Return
Total Return with dividend reinvested at NAV
Performance Evaluation
Change in Nav - The most common
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
Does not account for dividend
Suitable only for growth plans
Annualizing Rate of Return

 NAV on Day 1: Rs 10
 Nav after 6 months : Rs 12

Percentage change in NAV : (12-10)/10 * 100

= 20%
To annualize : 20 *12/6
= 40%
Performance Evaluation
Total Return
Nav on day 1 = Rs.20
Nav on day x = Rs.22
Dividend = Rs.4 per unit
Total Return = (( Distribution + Change in
nav)/day1 nav)* 100 = ((4+(22-20)/20)*100
= 30%
does not account for reinvestment
Performance Evaluation
Return on Investments - most suitable
Nav on day 1 = Rs.20
Dividend = Rs.4 per unit Nav at Rs. 21
Div reinvested = Rs (4 /21) = 0.19 units allotted
Total units = 1.19 (original +new allotted)
NAV at year end = Rs.22
Total Return = (Nav on year end*total units )-day1
nav)/ day 1 NAV* 100
= ((22*1.19)- 20))/20*100
= 30.9%
Compounded Annualized
Growth Rate
 CAGR is defined as the rate at which an investment
has grown on an annual compounding basis

Formula : A = P (1+r) ^n
Where A is the total amount at the end of the
investment period, P is the principal amount invested,
r is the rate of return and n is the time period of the
Performance Evaluation
Other Parameters
Expense ratios - indicates fund efficiency
and cost effectiveness
Portfolio Turnover ratio - measures
amount of buying and selling done by the
Transaction cost
Fund size
Cash holdings
How MF Scheme Returns are
 Growth option : Returns calculated using CAGR on
 Dividend option : Returns calculated using CAGR on
ex-dividend NAV’s, assuming dividends re-invested.
 Less than 1 year, returns are calculated using
Change in NAV method.
Risk Parameters

 Standard Deviation is used to measure total risk.

 Beta co-efficient is used to measure market risk.

 As per SEBI guidelines,

 benchmark should reflect asset allocation
 Funds with 65% and more in Equity to use a broad based
index (Sensex, S&P CNX 500)
 Bond fund with more than 65% in bonds to use a bond
market index
 Balanced funds to use a tailor-made index (Crisil Balanced
Fund index)
 Liquid funds to use money market instruments.
Financial Management
Financial Planning
 Financial Goals
identifying various needs for money

 Converting needs into specifics

amount of money
time frame for requirement of money

 Planning saving & investment to achieve these

Professional Financial Planners
 Understands investment universe

 Understands risk and return profile of various

investment alternatives

 Assist clients in choosing the right investment mix

keeping in mind client’s
 -- saving ability
 -- risk appetite
 -- cash flow requirements
 -- tax status
Why become a Financial
 Ability to recommend financial products based on suitability of
investor rather than product features

 Ability to build mutually beneficial long term relationship with


 Ability to profit from their expertise and value addition to investors

 Ability to act as financial intermediaries relied upon by investors

and issuers
Attributes of Financial Planners
 Understanding of the investment universe
 -- risk & return profile of investment alternatives
 -- past performance
 -- behaviour of asset classes
 Expertise in tax planning & estate planning
 Ability to correlate investors life cycle with matching
financial products
 Highly organised in their professional lives
 Excellent communication and interpersonal skills
Steps involved in Financial
 Establish & define relationship with client

 Define Clients Financial Goals

 Specific Goals and their timings

 Appreciate clients ability to save and cash flow requirements

 Appreciate clients disposition to risk

 Appreciate tax liability and focus on post-tax returns to client

 Recommend appropriate asset allocation

 Execute the Plan

 Review Periodically
Financial Planning. . . . .
 Create asset allocation plan
 - tailor make portfolio suiting client needs

 Enable actual performance

 - role of an intermediary

 Review and Rebalance continually

 - periodic review of performance
 - take corrective action, if required
Client Responsibilities
 Set measurable goals

 Appreciate effect of financial decisions on cash flows

 Be open to review and re-balance portfolio on an

ongoing basis

 Start early

 Be systematic, consistent and disciplined

Investors Needs
Protection Need Investment Need
To protect living Financial needs served
standards, current and through investments
survival requirements and savings
- Regular Income - Children education
- Retirement Income - Housing
- Insurance Cover - Children professional
Asset Allocation and Model
Recommended Model
Portfolios . .
 Accumulation Stage:

- Investible surplus available

- Financial goals are not near term

• Diversified Equity 65 – 80%

• Income & Gilt 15 – 30%
• Liquid Funds & Bank Deposits 5%
Recommended Model
Portfolios . .
 Transition Stage:

- Closer to Financial Goals

- Transition from ‘Growth to Income’

- Near Retirement , Children Education or Marriage

- Increase Asset Allocation to Income Component

Recommended Model
Portfolios . .
 Distribution Or Reaping Stage:

- Require Income as Dependence on

- Income ‘Grows for Regular Expenses’

- Investors Start Liquidating Portfolio For

Current Requirements
• Diversified Equity & Balanced Funds 15 – 30%
• Income Funds 65 – 80%
• Cash Funds 5%
Recommended Model
Portfolios . .
 Inter-generational Or Transfer Stage:

- Focus on Serving Needs of Heirs

- Growth and Income Funds in balance

- Higher percentage in Growth Funds if heirs are ‘Young’

- Income Funds suitable if heirs are ‘Trusts and Charities’

Recommended Model
Portfolios . .
 Affluent Investors:


• Sectorial and Growth Funds 70 – 80%
• Diversified Equity or Balanced Funds Balance


• Income , Gilt and Liquid Funds 70 – 80%
• Diversified Equity or Balanced Funds Balance
Asset Allocation
 Process of deciding portfolio composition

 Allocate funds across equity, debt and other

asset classes based on risk-return profile
Asset Allocation Strategies
 Basic Managed Portfolio
 - Diversified equity value funds 50%
 - Govt. securities fund 25%
 - High grade corporate bond fund 25%

 Basic Indexed Portfolio

 - Stock market index fund 50%
 - Bond market index fund 50%
Asset Allocation Strategies
 Simple Managed Portfolio
 - Balanced Fund 85%
 - Medium term bond fund 15%
 Complex Managed Portfolio
 - Diversified equity fund 20%
 - Aggregate growth fund 20%
 - Specialty Funds 10%
 - Long term bond funds 30%
 - Short term bond funds 20%
 Readymade Portfolio
 - Single Index
 - Equity 60%
 - Debt 40%
Bogle’s Strategic Allocation
 Combines investors age, risk profile and
 preference 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
Fixed Asset Allocation Strategy
 Maintain fixed ratio between chosen asset classes

 Disciplined approach that ensures profit booking

and purchases at lower prices

 Example
 - 50% Equity and 50% Debt
 - Equity markets rise ensuring profit booking
 - 50:50 Ratio maintained
Flexible Asset Allocation
 No portfolio re-balancing

 Ensures riding bull wave if markets are


 Ratio changes as per market changes

Model Portfolio
 Set long term goals keeping risk-return profile and
time horizon in mind

 Asset allocation exercise based on growth, income

and liquidity criteria

 Sector Distribution exercise

 - Allocation of funds across various Mutual Fund

 Fund manager selection

 - Which scheme? Which Fund house?
Recommended Model
Portfolios . .
 Young unmarried professional
 - Aggregate Equity funds 50%
 - High yield bond, growth & income funds 25%
 - Conservative money market funds 25%

 Young Couple: Double income, 2 Children

 - Money Market Funds 10%
 - Aggressive Equity Funds 30%
 - High Yield Bond & Long Term Growth Funds 25%
 - Municipal bond funds 35%
Recommended Model
Portfolios . .
 Older couple single income
 - Short term municipal funds 30%
 - Long term municipal funds 35%
 - Moderately aggressive funds 25%
 - Emerging growth equity 10%

 Recently retired couple

 - Conservative equity funds 35%
 - Moderately aggressive equity funds 25%
 - Money market funds 40%
Other Useful Strategies

 Rupee Cost Averaging

 Invest regularly a pre-determined amount
 Thus, purchase of more units at lower market levels and
less units at higher levels.
 Thereby, reducing the average cost of purchase.
 Value Averaging
 Invest regularly to achieve a pre-determined value
Fund Selection
Equity Fund Selection . . . . . .
 Form categories based on risk-return profile
 - Diversified , Index , Sectorial &

 Form categories based on fund manager’s

 - Value and Growth

 Evaluate Performance
 - Peer Group and Benchmark comparison
Equity Fund Selection . . . . . . . .
 Consider Structural Characteristics
 - Size of the Fund
 - Fund History
 - Portfolio Manager Experience
 - Cost of Investing: Expense Ratio

 Consider Portfolio Characteristics

 - Percentage Cash
 - Portfolio Concentration
 - Market Capitalisation of Fund
 - Portfolio Turnover: Churn
 - Portfolio Risk Characteristics
• R-squared
• Beta
• Dividend Yield
High R Squared low beta and high dividend yield is preferred
Bond Fund Selection . . . . . .
 Fund Age and Size

 Relative yield: YTM

 Expense Ratio

 Portfolio Quality
 Credit Rating of portfolio holdings

 Average maturity
 Duration
Money Market Fund Selection
 Expense Ratio
 Credit Quality
 Yield

 Principal is safe due to lower duration

 Income can be volatile
Strategy To Smart Investing
 Identify Objective

 Start early

 Focus long-term and stay invested

 Beware of the effects of inflation & taxes

Need Based Investment Strategy

Age Group Growth Income Liquidity

(Years) (Equity) (Bonds) (Banks)
25- 40 75% 15% 10%

41- 50 50% 35% 15%

51- 60 35% 45% 20%

Above 60 25% 50% 25%

Remember :
1. Investment Decision Are Long Term Decision

2. 1% Superior Return Can Make 20%

Difference in 25 Years.

3. Understand the Virtues of Rupee Cost


4. Discipline Is More Important Than


5. Avoid Wastage, Look at Returns Net of Taxes

Business Ethics
 Business Ethics are rules of acceptable and good
conduct in business.

 All persons involved with business should follow

ethical codes of conduct.

 Business ethics are made by managers or

operators of business.

 Business ethics are hard to enforce, hence ideally

should be self-imposed.
Objectives of Business Ethics
 Honest and transparent dealings with customers.

 Protect clients from being cheated and exploited.

 To ensure level playing field among all


 To ensure healthy competition for the benefit of

all customers.
Business Ethics for MF
 Fund Structure
 Separation of functions
 Independence of organization
Independence of personnel
Fund Governance
Exercise of voting rights by funds
Fund operations
Ethics Related Regulations
 Guidelines for good conduct of trustee
and AMC.
Regulations of personal trading
 Regulations of insider trading
 Regulations of fund advertisement
 Compliance officer
 Code of conduct for distributors
All the Best !!!!!!

Thank You