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AMFI MODULE

TRAINING ON MUTUAL FUNDS FOR AMFI CERTIFICATION About the NCFM-AMFI Examination
The exam is now available in 2 languages : Hindi and English. Candidates can take the computer based exam at the NSE centers or the written exams arranged by Prudential ICICI or UTI, and conducted by UTIICM. The computer based exam is only in English. The written exam is in English and Hindi. Last date to clear the exam is December 31, 2003 for employees of mutual funds who deal with customers (Sales, marketing and customer care).

Format of the Exam


Multiple choice examination Example: The NAV of an open-ended fund has to be disclosed
Every Friday Every Monday Every Day None of the above

All questions are multiple choice with four or five options.

Marks
The paper has 69 questions, with 38 questions of 1 mark each and 31 questions of 2 marks each. Candidates have to score a minimum of 50% to pass.
A wrong answer will lead to negative marking of 25%. If you get a 2 mark question wrong, you loose 2 marks for getting it wrong, and 0.5 marks as penalty for the wrong answer (25% of 2). The marks for each question is given along with the question.

Question paper design


Each chapter has a weightage: not disclosed. Read the whole book. The question bank has questions stored for each chapter.

The paper is generated by the computer, by randomly choosing from the bank. The question paper for each candidate is different. In the written exam, there are 5 sets of papers in the hall.

Chapters and Weightages


Chapter No of questions No of marks 1&2 6 7 3&4 2 3 544 6,7,8,9 14 22 10,11,12 7 10 13,14 4 6 15,16 7 11 17 - 22 25 37 69 100

Attempting the paper


There are 2 hours to do the paper. Most 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

NSE Online Exam


Answers are chosen with the click of the mouse Results is known as soon as the paper is submitted.

Some tips
It is not a great idea to read the paper fully. Attempt questions as you see them. Mark and keep aside questions for which you are not sure of the answers. Revert only to these questions. Do not revise and redo the questions that have been already attempted. Remember the negative marking.

Session 1
Concepts of Mutual Fund Stages of Mutual Fund Types of Funds

Charges Rapid Fire

Mutual Fund
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Explain the basics of mutual funds Joint investment by a group of people (minimum 20) Investments in debt, money market & equity. Discuss the concept of equitable distribution of wealth based on the ownership of units. Mention the advantages of Mutual funds as discussed 2 slides later. Time taken 15 minutes.

Mutual Fund Operation Flow Chart


Flow of investors wealth. Investors invest with AMCs money is pooled together, depending on the fund, invested by the fund manager across various securities Securities consists of equity, debt & money market funds. Various securities generate returns which in turn can be encashed by the investor. Investors reinvest & or add fresh investments & the flow continues.

Advantages of Mutual Funds to Investors


Diversification Professional management Reduction in risk Reduction in transaction cost Liquidity Convenience and flexibility Stress on each of these points. The participants needs to understand the value by investing in MF. Diversification : iStress on each of these points. The participants needs to

understand the value by investing in MF. Diversification : investments can be in equity, debt or money market. Investors have a limited amount to invest on a monthly basis. For eg. If an investor can invest a sum of Rs. 10,000/- per month, he can hardly buy 5 to 20 shares of a blue chip company. If the company faces a crisis in the short term the investor can lose money. However in a mutual fund, due to pooling of money by many investors various quantities of equity across the market spectrum. Thus an investor can invest only Rs. 10,000/- a month & benefit from a varied range of investments. Professional Management: the fund manager is an expert in the debt or equity market & is supported by a team of research analysts, who track the equity & debt markets & advise the fund manager. Reduction of Risk: Every product carries its own risk return profile. Due to diversification the risk is spread thus making the investors money safe. Reduction in transaction cost: Mutual funds normally charge an entry fee (entry load) ranging between 1.5% - 2.5% for equity funds. If the investor had to invest directly in the equity market, he would have to pay a brokerage ranging between 0.5 1.0%. An equity investor normally churns his portfolio 2 -3 times a year. Liquidity: An debt bond usually has a lock in period (more than 1 year). An investor can invest in a debt mutual fund & can encash the money within 2 days. Hence by investing in a debt mutual fund, the money is not locked. Convenience and flexibility: Daily tracking & researching the markets, wrt which share or bond to buy, its risk return analysis is best to the fund management team. nvestments can be in equity, debt or money market. Investors have a limited amount to invest on a monthly basis. For eg. If an investor can invest a sum of Rs. 10,000/- per month, he can hardly buy 5 to 20 shares of a blue chip company. If the company faces a crisis in the short term the investor can lose money. However in a mutual fund, due to pooling of money by many investors various quantities of equity across the market spectrum. Thus an investor can invest only Rs. 10,000/- a month & benefit from a varied range of investments. Professional Management: the fund manager is an expert in the debt or equity market & is supported by a team of research analysts, who track the equity & debt markets & advise the fund manager. Reduction of Risk: Every product carries its own risk return profile. Due to diversification the risk is spread thus making the investors money safe. Reduction in transaction cost: Mutual funds normally charge an entry fee (entry load) ranging between 1.5% - 2.5% for equity funds. If the investor had to invest directly in the equity market, he would have to pay a brokerage ranging between 0.5 1.0%. An equity investor normally churns his portfolio 2 -3 times a year. Liquidity: An debt bond usually has a lock in period (more than 1 year). An investor can invest in a debt mutual fund & can encash the money within 2 days. Hence by investing in a debt mutual fund, the money is not locked. Convenience and flexibility: Daily tracking & researching the markets, wrt which share or bond to buy, its risk return analysis is best to the fund management team.

Drawbacks of Mutual Funds


No control over costs

No tailor-made portfolios

Stages of Mutual Fund


Stages in mutual fund industry
Phase 1 Growth of Unit Trust of India 1964 1987 In 1963 UTI was established as an Act of Parliament. US -64, the first open ended mf Largest investor base Phase 2 Entry of Public Sector Funds 1987- 1993 1st SBI MF in Nov 1987 Phase 3 Emergence of private funds 1993-1996 1993-1994 five new players 1994-1995 six new players

(oft asked question) In 1963 UTI was established as an Act of Parliament. 1st public sector MF SBI
Phase 4 Growth & SEBI regulations 1996- 1999 SEBI Mutual Fund regulation s 1996 was adopted UTI adopted SEBI regulations. Budget of 1999 exempted income tax at the hands of the investors Phase 5 Emergence of a large & uniform industry 1999- 2004 In Feb 2003, the UTI Act was repealed, thus creating UTI MF, & it adopted the same structure as any other MF, that of a Trust & AMC. All new schemes are now SEBI approved. Between 1999 to 2005, the size of the industry doubled. 68000 crores to 1,50,000 crores. Phase 6 Consolidation & Growth 2004 onwards.

Phase 4 very important. Discuss in detail. Stress on growth of market. 1999 68,000 crores 2005 1,50,000 crores dec 2007 5,49,000 crores (oft asked question) Importance of year 1996 & 1999

TYPES OF FUNDS
Open ended funds Open ended funds are ones that sell & repurchase units at all times. They might stop selling units if the fund size becomes too big to manage. However repurchase of units is done at all times.
Close ended funds Close ended funds are one that make a one time sale of units. After the offer closes CEFs do not let the investors buy directly from the fund. To provide liquidity to the

investors, 1. these funds are traded in the stock markets. 2. The fund house also offers buy backs at regular intervals. SEBI regulations state that all fund houses should need to give one of the 2 exit options to the customers.

Open Ended & Close Ended Funds


Important points Fund size constant in close ended funds 2 modes offered to investors for liquidity of funds in case of close ended funds. Why do investors sell close ended funds at a NAV less than the listed NAV Ans: The buyer does not expect the NAV to be sustained in future.

Load & No load fund


Load Funds - Funds that charge any of the below mentioned terms are load funds At the time of entry, by deducting a specific amount from the contribution. (Entry Load) By charging the fund a fixed amount during the tenure of the fund, for a specified period. (deferred load) At the time, the investor is leaving the fund, by deducting specific amount from the proceeds payable to him. (exit load) No load funds Funds that charge neither of them are.

Discuss the 3 types of load. Important question Ques: explain deferred load?

Load charge
A load funds declared NAV does not include the load. For eg. Investment amount Rs. 1000. NAV Rs. 10 Entry load 2% Ideally the investor would get 100 units ( Rs. 1000 / Rs. 10 NAV). Since there is an entry load of 2%, the investor would get 980 units. {(Rs. 1000/ Rs 10 NAV) * 2/100}. This is the entry charge. Explain with examples. Important question?

Question on an investment of Rs. 10,000/-, an entry load of 2% is charged. Assuming the NAV is priced at 10. number of units assigned to the investor is a) 9800 b) 9080 c) 980 d) 1020

Other classifications.
By nature of investments Equity, Bond, money market, liquid funds invest in financial assets Precious metal funds, real estate funds invest in physical assets By nature of investment objective Growth funds invest for medium to long term capital appreciation. Income funds invest to generate regular income, rather than capital appreciation. Value funds invest in equities that are currently under valued, & whose value might be unlocked in future.

Explain physical & financial assets in detail (normally participants assume MFs invest in equity & debt only) Investment objectives If the investor wants higher amounts of return with corresponding risks growth fund If the investor wants steady & regular returns with low risk income fund If the investor wants higher amounts of return over a longer period of time by investing in stocks which are currently undervalued value fund

By nature of risk profile.


Risk 0 Returns 5 5 Equity Debt Liquid Equity funds have a greater risk of capital loss, while they look for greater returns. Debt funds seek to protect the capital while capital appreciation takes place at a slower rate. Liquid funds seek to be follow the policy of safety first & invest in short term securities.
Liqui d funds ST debt funds Gilt funds Debt Funds Index funds Equity funds Sector al funds Balance d funds

Risk
Return

Risk profile: Equity funds high return high risk Debt funds low return low risk Liquid funds safety first low return ( invest in securities of less than 365 days) Money Market & liquid funds. Considered to the safest of all investments. Invest in securities of short term (less than 1 year maturity) Major strengths liquidity & safety of principal due to short duration. Gilt Funds Medium to long term maturity. Little risk of default as issued by government. Face interest rate risk. Gilt securities prices fall when interest rates go up & rise when interest rates go down Money Market & liquid funds Highest safety, investment in bonds less than 365 days Gilt funds Investment in only government bonds Gilt funds Prices of bond fall when interest rates go up & visa versa. Important question If interest rates rise a) Bond price stays constant b) Bond price falls c) Bond price rise d) No co relation between bond price & interest rates. The question might also be framed as a) Explain the co relation between interest rates & price of bond OR b) Interest rates rise hence Price of bond will trade a) At par b) Below par c) Above par d) All of the above DEBT Funds (income funds) Invest in debt instruments issued by the government, private companies, banks, financial instruments & other entities like infrastructure companies, utilities etc. Target low risk stable income. Invest in long term securities. Debt Funds They do not target long term appreciation but look for current income. They distribute a substantial part of their surplus to

investors. Debt funds invest in both government & corporate securities Investment time frame more than 365 days

Types of debt funds.


Diversified debt fund:Invests in all types of debt securities issued by entities across all industries & sectors. Benefit of risk reduction though diversification. Focused debt fund:Have a narrower approach, invest in sector, offshore & specialized debt funds. Higher risk than diversified debt funds. Eg. Invest in corporate debentures, tax free bonds or municipal bonds. High yield debt funds All bonds are rated in the market. High yield debt funds invest in bonds which carry a high risk & hence they offer higher returns.

Types of debt funds


High yield debt funds:Debt funds invest in securities issued by borrowers who are rated by credit rating agencies & are considered to be `investment grade`. These funds target securities which carry a higher risk, as they give a higher return. These are considered risky as they are exposed to higher default risk. Assured return funds:Assured returns are offered to the investor. (An Indian variant) Explicit guarantee is required by the guarantor. Fixed term plan series:Mutual funds can either be open or close ended. In India MFS have developed an innovative middle approach. A series of plans are offered & units are issued at frequent intervals for short plan durations. Fixed term plan series normally monthly, quarterly, half yearly, annually Customers invest in these funds as the duration is known before hand & the investor can reinvest when the fund closes as a new one starts the next day, for a similar period. Equity Funds Offer greater risk than debt funds, as well as offer higher potential for growth.

Subject to equity price fluctuation in the markets. Price movements are caused by many factors like political, social as well as economic. Tax exempt funds. Funds offer tax benefit under 80 C Are open ended funds having a 3 year lock in period for investors.

Types of Equity funds.


Aggressive Growth funds:
Target maximum capital appreciation. Invest in less researched or speculative shares & may adopt speculative investment strategies to attain their objectives of high returns.

Growth funds
Invest in companies whose earnings are expected to rise above average. Target capital appreciation over a three to five year span. Less volatile than aggressive growth funds.

Types of Equity funds contd.


Specialty funds
Have narrow portfolio orientation & invest in only companies that meet predefined criteria. Sector Funds:
Invest in a particular sector, like pharma, power, IT etc. Since they are not diversified in nature, they carry a higher risk than growth funds.

Foreign Securities Fund.


Invest in equities of one or more countries. Advantageous because it offers greater diversification Carries inherent risk of foreign exchange rate risk. Performance depends on the economic conditions of countries invested in.

Diversified Equity Funds Invest majority portion of their funds in the equity market & a small portion in liquid money market securities. Invest in equity across sectors, definitely more than one sector. Have lower risk than growth funds because they are diversified in nature. Equity linked saving schemes Offer tax benefits under section 80 C Lock in period of 3 years. Mid-Cap or Small- Cap funds: Invest in companies that have a lower market capitalization compared to blue chip companies. More volatile as the scripts are not freely traded. Equity index funds

Track the performance of a specific stock market index Objective of the fund is to out perform the index. There can be sector specific, like pharma sector index fund. These deal with only pharma companies which form a part of the index. Value index funds. Invest in companies with good or improving profit prospects, aiming primarily at capital appreciation. Seek out fundamentally strong companies, whose shares are currently under valued in the market. Have stocks which are selling at lower price earning ratios. Equity income or dividend yield fund. Equity funds designed to give investors a high level of current income along with some steady capital appreciation. Invest mainly in companies giving a high dividend & less price fluctuation.

Hybrid funds
Funds seeking to balance equity & debt securities are termed as hybrid. Balanced funds Has a portfolio comprising of debt instruments, convertible securities, preference & equity shares. Aim is to attain the objectives of income, moderate capital appreciation, & preservation of capital & are ideal for investors with a conservative & long term orientation. Growth & Income funds. Strike a balance between capital appreciation & income for the investor. Portfolio comprise of companies offering good dividends & those with a potential of higher capital appreciation.

Commodity Funds & real Estate funds


Commodity Funds. Specialize in investing in different commodities directly or through shares of commodity companies or though commodity futures contract. May invest in a single commodity or a commodity group like edible oils, while diversified commodity will spread their assets over many commodities. Precious Metal funds are an ideal example. Real Estate Funds. Invest in real estate or in companies dealing with real estate.

Ques: Real Estate Funds invest in a) Real estate b) Real estate bonds c) Stocks of companies dealing with real estate.

d) Invest in real estate or in companies dealing with real estate. commodity Funds invest in a) commodities b) Precious metals only c) Stocks of companies dealing with commodities. d) different commodities directly or through shares of commodity companies or though commodity futures contract.

Charges
0

Charges
Initial issue expenses should not exceed 6% of the initial corpus raised during the NFO. Recurring charges applicable (equity fund) Net assets % of charge <100 crores 2.50% next 300 crores 2.25% next 300 crores 2.00% >700 crores 1.75% If the AMC has absorbed the initial charges an increase 1% more can be charged.

Mutual funds charge 1. Initial issue expenses cannot exceed 6% of NFO collection. If the expense increases 6% the AMC would have to bear the additional expense. 2. Recurring charges are based on the corpus. For eg. If the total collected corpus is Rs. 1000 crores. The total recurring charge would be Rs. 20.50 crores. In case the AMC absorbed the initial charged, the AMC can charge an additional 1% on the recurring charge structure.

Charges applicable on a debt fund


Recurring charges applicable (debt fund) Net assets % of charge <100 crores 2.25% next 300 crores 2.00% next 300 crores 1.75% >700 crores 1.50% If the AMC has absorbed the initial charges an increase 1% more can be charged.

Entry & Exit load.


Open ended funds Sale price = NAV + entry load (cannot be more than 7%) Repurchase price = NAV exit load (cannot be more than 7%) The difference between the repurchase price & sale price of a unit is not permitted to exceed 7% of the sale price. Close ended funds Sale price = NAV + entry load (cannot be more than 5%) Repurchase price = NAV exit load (cannot be more than 5%) The difference between the repurchase price & sale price of a unit is not permitted to exceed 7% of the sale price.

Fees & expenses

Investment management & advisory fees @1.25% of the first 100 crores of weekly average net assets. @1% in excess of 100 crores. No load fund, AMC can charge additional management fees of 1% Initial expenses Are charged at the time of launch, cannot exceed 6% of initial resources raised.

Fees & expenses


Recurring expenses Marketing & selling expenses (distributors commission) Brokerage & transaction costs Registrar fees for transfer of units sold or redeemed Fees & expenses of trustees Audit fees Custodian fees Cost related to investor communication Costs of fund transfer from location to location Cost of providing account statements, dividend/ redemption cheques & warrants. Insurance premium paid for the fund Winding up cost. Other costs as approved by SEBI

Total expense charged by the AMC 1st 100 crores 2.50% Next 300 crores 2.25% Next 300 crores 2.00% On the balance 1.75% Initial expense permitted for close ended scheme where entry load is not charged. The charges are amortized on a weekly basis over the period of scheme AMC will redeem the units before the closing day by recovering the balance amortized charge. Unamortized portion of the initial issue expenses shall be included for NAV calculation as it will be considered as other asset.

Unamortized portion of the initial issue expenses shall be included for NAV calculation as it will be considered as other asset. Extremely important statement

Association of Mutual Funds in India


Incorporated in 1995, with the objective of representing the mutual fund industry collectively. Its main objectives are:To promote the interests of mutual funds & unit holders & interact with SEBI/ RBI/regulators/Govt. To set & maintain ethical, commercial & professional standards in the industry & to recommend & promote best business practices. To increase public awareness & understanding of the concept & working of mutual funds in the country. To undertake investor awareness programs.

4 objectives of AMFI very important. At least 1 mark question.

Association of Mutual Funds in India


To develop a cadre of well trained distributors& to implement a program of training of training & certification. Board of directors elected from the mutual fund members govern AMFI. AMFI, though not a SRO, does register fund distributors, test & verify their competency.

Investor Rights & obligation

Investor rights
Right to proportionate `Beneficial ownership` Right to timely service. Right to information. Right to approve changes in Fundamental attributes of the scheme.
Investors are owners of the schemes assets, and it is therefore imperative that they are aware of their rights with respect to their scheme, its management, and recourse to trustees, the AMC & other constituents. Investor rights important. 2 marks question atleast. 75% voting rights needed to 1. Wind up scheme ( close ended schemes) 2. Terminate the AMC

Investor rights
Right to wind up scheme. Investors can demand the trustees to wind up the scheme prior to its earlier fixed date & repay the investors if 75% of them pass this resolution. Right to terminate the AMC 75% votes by investors can terminate the AMC with the prior approval of SEBI
Unit holders are not distinct from trust & therefore they cannot sue the trust They can initiate legal proceedings against trustees. The fundamental concept of mutual fund is that the investors invest at their risk. A prospective investor does not have any standing or rights with respect to the fund, AMC or any other constituent. It is only after he has invested does he have any rights.

Legal limitations to investor rights.


Investors Obligations. It is the investors duty to study the offer document.. Pan card is mandatory along with all applications along with his bank account details. Investor complaints. SEBI does entertain complaints against mutual funds & intervenes with fund management to help the investor resolve his complaint. Investors are neither shareholders nor depositors in the AMC; hence they are not protected by any of the company act regulators. The investors can remove the AMC with 75% vote. They may try to get the directors prosecuted.

Rapid Fire
If a unit-holder does not agree to the merger of his fund with another, he has no exit option True False. The structure which is required to be followed by mutual funds in India is laid down by Financial Ministry Securities & Exchange Board of India (SEBI) Fund Sponsor Association of Mutual Funds of India (AMFI)

Rapid Fire
The legal responsibility for the accuracy of the statements made in the offer document lies with SEBI The AMC AMFI The Company Law Board The role of AMFI in the mutual funds industry is not to promote the interests of the unit holders set a Code of Ethics regulate mutual funds. Increase public awareness of mutual funds in the country. A Self Regulatory Organization can regulate all entities in the market only its own members in a limited way its own members with total jurisdiction no entry at all

Rapid Fire

Rapid Fire
The amount of authority enjoyed by a self regulatory organization is defined by

the apex regulatory authority company law board its own members RBI The rights of investors in a mutual und scheme are laid down in the Offer Document of that scheme Quarterly Reports Annual reports Marketing Brochures

Session 4
Offer Document Sales Practices Distribution Channels Investors SEBI MF regulations of 1996

Offer Document
3 5 marks normally

Offer Document
Offer document: - the document that contains details of a new fund offer that the AMC or the sponsor prepares & circulates to prospective customers. It has to be registered with SEBI. It is issued once at the time of launch, in case of close ended funds. It is revised every 2 years , in case of open ended funds. Offer documents are revised Once only for close ended funds Every 2 years for open ended funds Importance of offer document (important) Buyer beware means the customer has to read the offer document & decide after that. He cannot say he was cheated into buying it.

Importance of Offer document


The most important source of information from the perspective of the prospective investor. Fundamental attributes of the scheme, which cannot be altered without the knowledge of the investor. Operating document & describes the product, i.e. that scheme on offer. All relevant information to the investor is disclosed in the offer document. Buyer Beware Primary vehicle for investment decisions, a legal document that protects & governs the rights of the investor. It also serves as a reference document for the investor to look for relevant information at all times.

Contents of the offer document


Summary information Name of the Mutual Fund Name of Scheme Glossary of defined terms Risk factors:- Standard & scheme specific Legal & regulatory compliance Financial Information Expenses Condensed financial information of schemes Constitution of the Mutual fund Investment objectives Management of funds.

Glossary of defined terms explaining the different terms used in the offer document. Risk factors:- Standard & scheme specific Standard risk mutual funds are subject to market. Please read the offer document before investing Scheme specific for eq. an sector scheme No diversification of investments Financial Information Expenses : expenses of current schemes (last 3 yrs) Condensed financial information of schemes: returns the schemes have offered. Constitution of the Mutual fund Investment objectives- whether its a growth fund or a value fund, debt or equity, or gilt fund or high yield fund etc etc

Sales Practices Distribution Channels Investors


Who can invest in mutual funds?
Residents Resident Indian individuals/ HUF Indian companies / Partnership companies Indian trusts / charitable organizations Banks / Financial institutions Non banking financial companies Insurance companies Provident funds Mutual funds Important question An Indian citizen having units worth Rs. 10 lakhs takes an australian citizenship. What should the investor do? a) Continue holding the units. b) Redeem them c) Continue as he is considered a PIO d) Foreign citizens can hold mutual funds, not buy them

Who can invest in mutual funds?


Non resident Indians Non resident Indians / persons of Indian origin Overseas corporate bodies Foreign Entities Foreign institutional investors Foreign citizens/ entities are not allowed to invest in India

Investor Servicing
AMFI recommended practices Distributors should be fully aware of the product, investment objectives, risk, special features of the scheme etc. They should know their client profile, age, earning & risk capacity. Identify clients & cultivate the habit of professional investment. Understand the clients needs, investment objective, returns expectations etc Must make them start investment early, & encourage investment. Offer personalized after sale service

Mutual Funds
Specific norms for computing returns, management capability & comparisons which may be advertised. Dividends declared shall be mentioned in rupees per unit along with the face value of unit of the scheme & the prevailing NAV Annualized yields must be shown for 1,3, 5 years & since inception. For funds less than 1 year, absolute returns must be shown & not on an annualized basis. Comparisons should be make against appropriate benchmarks( identical time periods) All advertisements must display `past performance may or may not be sustained in future` Ranking of the fund must be appropriately explained.

AMFI code of Ethics


Management of the fund ought to be in the interest of the investors. High standard of service are expected from the fund. Adequate disclosures need to be made to unit holders & trustees. Funds should adopt the use of professional selling practices. Management of funds should be made in accordance stated objectives. Avoidance of conflict of interest in dealing with directors, officers or employees. Funds should refrain from unethical market practices.

Factors affecting the NAV


Purchase & sale of investment securities Valuation of all investment securities held Other assets & liabilities Units sold or redeemed

Disclosure & Reporting Requirements


MF /AMC have to prepare annual statement of accounts for all schemes. Needs to be audited by an independent auditor. Within 6 months of closure of the relevant accounting year Display scheme wise annual reports on the website linked to AMFI website Mail the annual/ abridged annual report to all unit holders Forward a copy to SEBI of the annual report & details of investments & deposits held by the fund.

Rapid Fire
A glossary of Defined Terms must be included in the offer document True False The front page of an offer document need not cover opening, closing and earliest closing date of the offer. Disclaimer clause Legal and regulator compliance Price of units

Rapid Fire
Though the offer document of a scheme is prepared as per SEBI Regulations and is filed with SEBI. SEBI does not certify the accuracy or adequacy of the document. True False. What document Mutual Fund distributors need to refer for finding out eligible category of investors in a particular Mutual Fund Scheme? SEBI Regulations Manual AMFI booklet Offer document RBI Guidelines Most eligible investors of Mutual Funds can broadly be grouped into either individual or institutional investors True False Are Mutual Fund agents/distributors in India required to pass any examination to qualify to sell Mutual Fund Units? Yes, a test conducted by AMFI Yes, a test conducted by SEBI No A Post Graduate university course

Rapid Fire

Rapid Fire
The Board of Trustees of a mutual fund
Act as protector of investors interests Directly manage the portfolio of securities Do not have the right to dismiss the AMC Cannot supervise and direct the working of the AMC

Session 5
Non Performing Assets Valuation of Equity & Debt security

Non Performing Assets


NPA Non performing Assets
An asset can be treated as non performing if the principal or interest amount has not been received for one quarter from the day it had fallen due. Provisioning will be in the following way Month 0 Principal or interest amount has not been received Month 3 Declaration of NPA Month 6 10% of the book value is deducted Month 9 20% of the book value is deducted Month 12 20% of the book value is deducted Month 15 25% of the book value is deducted Month 18 25% of the book value is deducted

Reclassification of assets
In case the company has cleared all arrears of interest, the interest provision is written back in full. The asset will be reclassified as performing if interest of two quarters is paid in full.

Classification of deep discount bonds are classified as NPAs if


If the rating go down to BB of below. If the company is defaulting in their commitment of other assets Full net worth erosion.

Important slide 2 4 marks

Valuation of Equity & Debt security


Valuation of tradable security:Valued at the last quoted closing price on the stock exchange The last quoted price on any other recognized stock exchange may be used. The value at which it was traded on the earliest previous day provided it was not more than 30 days old. If not traded If not traded

Valuation of thinly tradable security


The trade is less than 5 lakhs in a month or total volume is less than 50,000 shares.

If not traded The value at which it was traded on the earliest previous day provided it was not more than 30 days old. > 30 days, the AMC/ trustees can decide the valuation norms to be followed. Such norms should be documented & recorded. If not traded

Valuation of non-traded shares


when the security is not traded at any exchange for more than 30 days it becomes a non-traded security.

Valuation for Debt Securities


A debt security is traded on a stock exchange (corporate securities) or interbank market (government securities). The quoted price is traded on the exchange. Mutual funds are not allowed to transfer illiquid securities among their schemes.

Call money, bills purchased under rediscounting & short term deposits with banks are valued at cost + accrued interest. Convertible debentures & bonds: Non convertible component is valued as a debt instrument & convertible as an equity instrument. Instruments based on repo basis must be valued at the agreed resale price minus interest up to the date of sale.
Securities with call option: the lower of value obtained by valuing the security to final maturity & that valued to call option date. Securities with Put option: the higher of value obtained by valuing the security to final maturity & that valued to call option date.

Valuation of non traded security


instruments up to 182 days instruments over 182 days the securities are valued on the basis of amortization of purchase cost, plus accrued interest till the beginning of the day purchased, plus the difference between the redemption value & purchase cost, that is spread uniformly over the remaining maturity period Valued on yield to maturity basis. If the fund manager expects a YTM of 10% on a security that pays a coupon rate of 9% for a face value of Rs. 100/-, its value will be

marked under to Rs. 90/so its effective yield will be 10% All non government, non investment based securities are valued at a discount of 25%.

Equity Portfolio Management


Two main indexes are Sensex 3o share index BSE S & P CNX Nifty 50 share index NSE
Constructing a portfolio of equity shares or equity linked instruments that is consistent with the objectives of the fund Managing or constantly rebalancing the portfolio to produce capital appreciation & earning that would reward the investors with superior returns.

Types of Equity instruments


. .
Ordinary shares ordinary share holders are owners of the company, & thus eligible for dividends have voting rights. Convertible debentures these are fixed rate debt instruments that are converted into equity shares at the end of a specified period Equity warrants they are long term rights that offer holders the right to purchase equity share in a company at a fixed rate( usually higher) Preference shares entitled to dividends at a fixed rate subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for the years of unpaid profits are paid. No voting

rights

Normally a question on 1. Voting rights 2. Unpaid dividends 3. Convertible debentures debt or equity

Classification of equity
Market capitalization Large Cap Mid Cap Small Cap Anticipated Earning Growth Stocks Value Stocks Value Stocks Cyclical Stocks Dividend yield

Price/ earning ratio price of the share divided by the earning per share & indicate what the investors are willing to pay for the companies earning potential. Young & fast growing companies have high PE, mature & established companies have low PE. Dividend yield. Is the ratio of dividend paid per share to current market price. Low PE have high dividend yields Cyclical stocks are shares whos earning are correlated with the state of the economy. Growth stocks shares of companies whose earnings are expected to increase at rates that exceed normal market price. Value stocks mature industries & are expected to yields low growth in earnings. Assets of these companies have not been recognized by the investors in general. They are currently undervalued & can yield superior returns.

Approaches to Portfolio Management


Active Management Passive Management Growth Investing Value Investing

Passive fund management funds that offer stock index funds, aim to offer returns equal to the returns of that index. Fund expenses are low, so investors returns are as close to the index as possible. Active Fund management Growth & Value investing Growth Investment Primary objective is to obtain capital appreciation, Look for companies that offer above average earning growth, More risky, offer higher returns over long investment horizons Value investments Invest in what they believe are currently unvalued in the market, but their potential would soon be realized.

Role of Security research in active fund management


Fundamental Analyst Technical Analyst Quantitative

Analyst
Fundamental analysis research into the operations & finances of a company with the objective of estimating its future earnings & risk profile. Technical analysis involves the study of historical data on the companys share price movement. Quantitative analysis uses mathematical models for equity valuation & may also use fundamental & technical analysis in tandem. 1 mark question

Set realistic target returns based on appropriate returns. Level of flexibility available while managing the portfolio. Decide on appropriate investment philosophy. Develop an investment strategy. Avoid over diversification.

Successful equity portfolio management


Explain equity derivatives in detail

Use of equity derivatives for portfolio risk management


Futures Options
allows one to buy or sell an underlying asset on a specific date allows you to decide whether you want to buy or sell the asset on that date. used to hedge a portfolio

Portfolio management organization structure


Fund Managers Research Analyst Security Dealers

3 types of skilled employees Security dealers execute the actual buy or sell orders originated by the fund managers Fixed income (majority of them are) or floating rate basis. Fund managers invest only in market tradable securities Interest bearing or discounted securities ( zero coupon bond)

Debt Portfolio Management


Debt markets securities

Government Securities 98.4% Non government security 1.6% secured corporate bonds unsecured government bonds
Issuer category

government security corporate security Maturity profile Debt security Monet market security

Maturity profile short term (under one year) money market security & term longer than one year debt securities

Instruments in the Indian debt market


Certificate of deposit Commercial paper Corporate debentures Floating rate bonds Government securities Treasury bills Bank & FI bonds Public sector undertaking bonds

Remember all the debt instruments The issuer the term of bond. Important - Public sector undertaking bonds issued by PSUs in which the government holding is at least 51%. Certificate of deposit issued by scheduled commercial banks, bank CD have a maturity of 91days to one year, if issued by financial institutions maturity is 1 3 years. Commercial paper short term unsecured investment issued by corporate bodies (private & public) to meet short term capital requirement. Maturity 3 months 1 year. Can be issued to NRI on non repatriable non transferable basis. Corporate debentures issued by manufacturing companies, as secured instruments in form of certificates, rated by credit rating companies, listed on exchanges. Floating rate bonds short to medium term interest bearing instruments issued by financial intermediaries & corporations. Maturity 3 5 years. Government securities medium to long term issued though RBI, by the central & state government. RBI decides the cut- off coupon on the basis of bids received during auction. The rate is pre determined, the investor only bids for quantity. Treasury bills short term obligations issued though RBI, by the central government at a discount. Tenure 91 364 days. Bank & FI bonds negotiable certificates issued by financial institutions like IDBI/ICICI or commercial banks. They are both income bearing & discounted long term, instruments. Public sector undertaking bonds issued by PSUs in which the government holding is at least 51%. The minimum maturity is 5 years for taxable bonds & 7 years for tax free bonds. Are in dematerialized form are eligible for repo transactions.

Liquid funds invest in MMS, which are under one year, many of them zero bonds.

CD, Treasury bill & CP are the three major types of instruments liquid funds invest in.

Basic characteristics of money market securities


MMS term used in exams (money market security)

Basic characteristics of bonds or debt security


Generally invest in long term fixed income paying debt securities. 4 main characteristics set a the time of issue are :Par value principal value the investor will be paid upon maturity of the bond. Also known as face value. Coupon annual rate of interest paid on the par value of the bond to the investor. Maturity term of the bond. Call & put option call option (the issuer can redeem the bond before maturity) Put option (the investor will redeem the bond before the maturity)

Par value amount an investor gets on maturity of the bond Coupon interest rate Maturity term of bond Measures of bond yield if the interest rates rise yield of the existing bonds will decline & vice versa Current yield: eg. The yield of a bond with a par value of RS. 1000, coupon of 10%, the market price of RS. 1200 is 8.33% ie. (10% * 1000/1200) Yield to maturity is the annual rate of return an investor would realize if he bought the bond at a particular price, received all the coupon payments, reinvested the coupons at the same YTM rate & received the principal at maturity. Yield curve graph showing yields of bonds of various maturity. It is normally upward sloping as longer maturities offer higher interest. Relation between interest rate & price of bond is inversely proposonal For eq.Price of bond interest 1000 10 % 1200 ? =1000 * 10 -------------1200 = 8.33%

Risks in investing in Bonds


Interest rate risk Reinvestment risk

Call risk Default risk Inflation risk Liquidity risk


c Very important study each in detail 3 5 marks Interest rate risk - when interest rates rise, the price of bonds fall, so the yield of a new investor will be higher on a lower price he pays. Reinvestment risk A bonds yield to maturity assumes reinvestment of interest received during the term at a constant rate. This may not be possible if the interest rate falls & the amount is reinvested at a lesser rate. Call risk: if the bond has been issued with a call option, the issuer may call them back if the interest rates fall & return the investment to the investor. Default risk - the issuer may default on his obligation to pay timely interest or the principal amount. Inflation risk rise in inflation rate decreases the purchasing power. Investors therefore expect the yield to be higher than the inflation rate. Liquidity risk the ease at which investment in a bond can be liquidated or sold at a price near its value.

Debt investment strategies


Buy & hold Duration management Credit risk Prepayment prediction
Buy & hold this strategy holds good if the general interest levels are stable. If the interest rate rises the price of the bond will fall, hence the fund may generate less returns. Another risk is the default risk as the investments are stated for a long time. Duration management is active fund management. If the fund manager expects the interest rates to fall, he would buy long term duration bonds & less short term ones. Credit risk fund managers often buy bonds with lower credit rating expecting it to be rated higher, higher rating would increase the bond price. Prepayment prediction the funds with call option will be recalled if the interest rates fall, the fund manager must make buy bonds with low call option or prepare & ready himself for the option.

Inflation Exchange rates between 2 countries Policy of the central bank to curb excess liquidity it might impose a higher liquidity ratio on banks thus controlling credit leading to increase in interest rates

Interest rates & debt portfolio management


Interest rate should always be more than the inflation

Exchange rates are also to considered if investments are made abroad.

Organization structure of debt funds


Interest rate forecasting unit. Fund managers & security dealers Risk managers

Rapid Fire
In India, a large part of debt securities pay interest on a floating rate basis a fixed rate plus a variable portion a fixed rate zero coupon basis Certificates of Deposits (CDs) are issued by Regional Rural Banks Corporate India Schedules commercial banks None of the above

Rapid Fire
Government securities are issued through the RBI True False Debt securities bought at a discount to their face value are generally interest bearing zero coupon bonds paying interest at a floating rate none of the above Current yield relates interest on a security to its current market price its face value its fair value the current price of T-bills Yield curve is also known as Curve of Interest Term Structure of Interest Rates Curve that yields None of the above

Session 6
Investment policy & restrictions Investor Services

Investment policy &

restrictions
Investment policy & restrictions
Investment policies of each scheme are dictated by the investment objective in the offer document. Equity fund - investment strategies lay guidelines on the sectors & what kind of companies to invest in. Usually minimum & maximum allocation to each fund class. Debt fund investment strategy lays guidelines on the portfolio composition in terms of types of instruments to be held. Their credit rating profile & average maturity. Minimum & max. percentage of cash & money market instruments also needs to be mentioned. Investment restrictions by SEBI

Investment restrictions by SEBI


Mandating minimum levels of diversification in investments Ensuring that the investors funds are not used to favor a few or associated investee companies & are invested in approved securities. Minimum number of investors per scheme Each scheme should have a minimum of 20 investors No single investor should account for more than 25% of the corpus.

Minimum portfolio diversification norm


The fund cant have more than 10% investments in a single company. Investments in the index funds must be in accordance with the weight age of the script. SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer to 15%; it may be extended to 20% with the prior approval of the board of AMC & the board of trustees. In case of unrated debt instruments maximum investment permissible is 10%. Max 10% in unlisted equity in case of close ended funds & 5% in unlisted equities in open ended funds. SEBI permits investments in ADRs/ GDR. It also allows investments in overseas listed companies if at least 10% holding is with an Indian company.

Self explanatory but very very important

Approved & unapproved investments


Equity with voting rights a fund under all its schemes is not allowed to own more than 10% of any companys paid up capital carrying voting rights. Not more than 5% of Net asset value of a scheme can be invested in other schemes, so as to prevent an artificial increase in fund size. Credit rating on debt schemes All debt instruments have to be rated by at least one credit rating agency. Only delivery based purchases/Sales

Temporary investments in bank deposits pending decision on where to invest the money can be in a bank deposit, subject to it been a scheduled bank.

The fund cant have more than 10% investments in a single company. For eg. If the fund size is 1000 crores, the maximum the company can invest in one company is 10% ie. 100 crores. However the company shares it purchases should have a market capitalization of 1000 crores. You cant invest in more than 10% of a company voting rights. If the company has a turnover is 150 crores the max the fund house can invest in the stock of the co. is 15 crore

Approved & unapproved investments


No lending. Cant lend or advance any loans. Inter scheme transfer is permitted subject to it being done at market price. Use of derivatives Record of investment decisions Fund of fund scheme A FOF can not invest in other FOF scheme. Liquid funds

Measuring and evaluating Mutual fund performance


Why is it important? Investor perspective he would be interested in tracking his performance. Advisor perspective it would be important to give proper advise on which fund has a good performance record. Expense ratio is an indicator of the funds efficiency & cost effectiveness. It is the ratio of total expense to average net assets of the fund. Brokerage commission on the funds transaction is not included in fund expense figures

Measuring and evaluating Mutual fund performance


The income ratio net investment income divide by its net assets for the period. Portfolio turnover rate - it is defined by lesser of the assets purchased or sold divided by the funds net assets Transaction costs includes all expenses related to trading such as brokerage commissions paid, stamp duty on transfers, registrar & custodian fee.

Different performance measures


Change in NAV Total return takes into consideration the dividends issued by the fund. Formula Total return = distribution + change in NAV/ NAV at the beginning * 100 Purchased NAV at 20, dividend paid Rs. 4. end of year NAV is 22. = 4 + (22-20) / 20 *100 Return on investment with dividend reinvestment - takes into consideration the dividends reinvested in the fund. Formula

{(1 + div/ ex-d NAV) * end NAV } begin NAV / begin NAV *100 Purchased NAV at 20, dividend paid Rs. 4. NAV at 21. end of year NAV is 22.

Different performance measures


Cumulative aggregate or average annualized return (CAGR) formula A= P* (1+R/100)^n P= principal invested A= maturity value of investment N= period of investment in years R= Annualized compounded rate Compare same periods Less than one year returns should not be annualized, unless in liquid funds Returns since inception

Evaluating fund performance


Basis of choosing an appropriate benchmark The asset class it invests in. An equity fund has to be judged by an appropriate bench mark from the equity markets The funds stated investment objective for eg if a person invests in long term growth stocks it should be bench marked that captures growth stock performance Benchmarking relative to the market Equity funds BSE 100 or 200 or NSE 100

Debt fund indices - bench marking


Main sources are I-SEC I-Bex index is often used by some analysts as a benchmark to track government securities performance. LI- bex that tracks the securities with long maturities over 7 years MI-bex that tracks the securities with maturities between 3 to 7 years Si-bex that tracks the securities with maturities between 1 to 3 years Debt bonds are benchmarked based on the safety & the duration of bond. I sec tracks securities based on the term LI- bex - > 7 years MI- bex - 3 7 years SI-bex 1-3 years Crisil 8 debt indices 4 primary indices 4 secondary indices

Debt fund indices - bench marking


CRISIL has 8 debt indices, 4 primary indices that track

the price of underlying securities and 4 derived indices based on primary indices. Primary indices cover AAA AA rated securities & call market & commercial paper. NSE has designed a government securities index & a treasury bills index. They track Principal return index - market price movements that are a mirror image of yield movements. Total return index - both interest accruals & capital gains or losses Criteria for peer group comparisons The investment objective & risk profile. Cant compare a debt fund with equity fund. Portfolio compositions of both are same high % of corporate bonds fund cant be compared to one having a high % of government bond. Credit profile 80% of the fund having AAA cant be compared with one having 40% AAA Expense ratios. The lower the better. Comparisons can be done only if The time frame is same. Only average annualized returns are calculated Post tax which fund is better.

Tracking Mutual fund performance


The following are common sources in India Mutual funds Annual & periodic report AMFI website Financial press Fund tracking agency Newsletters Prospectus Analytical articles

Borrowing by mutual funds very important

Tracking Mutual fund performance


Fund size can affect performance Small can be easily maneuvered 7 can achieve their objectives in a focused manner with limited holdings Large funds benefit from economies of scale. Borrowing by mutual funds. Mutual funds are allowed to borrow only for the purpose of meeting temporary liquidity needs. Period not exceeding 6 months Maximum burrowing is to the extent of 20% of net assets

Investor Services
Investor Services
Procedure for purchase of units Funds appoint registrars for the purpose of accepting requests for new subscriptions and redemptions from investors. Some funds have their own Investor Service centers. The key information memorandum contains the application form. Investors are required to submit their PAN number. Mode of payment is cheque or demand draft.

For repatriation benefits, NRI investors have to make payments from their FCNR or their NRE accounts. FII can make payments by remittance from abroad or from their non resident rupee accounts.

Investor Services
Procedure for redemption of units Offer documents give includes details of the procedures & documents required from the investors. Investors have to deal with registrars or investor service centers designated by the funds. Brokers & banks accept instructions by both the telephone & internet. Fund investors must give their bank account details & their redemption cheques would be sent directly to their account. Investment Plans Automatic reinvestment option: - Reinvest the dividend earned in the scheme. Y=the investor gains extra units. Systematic Investment Plan Systematic withdrawal plans Systematic transfer plans. Other investor services:Telephone & internet transactions. Cheque writing: - investors are offered cheque books when they wish to redeem or transfer funds from one fund to another. Cheques cant be issued to 3rd person. Periodic statement & Tax information. Loans against units Nomination or Transfer by unit holders

Automatic reinvestment option: - Reinvest the dividend earned in the scheme. Systematic Investment Plan investments are done in installments every month. Systematic withdrawal plans - investments are withdrawn every month by Systematic transfer plans investments are shifted from debt to equity or visa versa at regular intervals.

Rapid Fire
In case of listed securities of group companies of the sponsor, mutual funds is not allowed to invest 25% of its net assets 10% of its net assets at all > 5% of net assets When interest rates for similar maturities bonds are 11% bond with a 9% coupon rate will sell above par below par at par at a price unrelated to the interest rates for similar securities

Turnover rates would be most relevant to analyze the performance of Equity Funds Growth Funds Debt Funds Value Funds

A high turnover rate for a fund indicates high transaction costs greater efficiency high returns to the investor a rising market

Session 7

Financial Planning
Concept of Financial Planning
Financial planning Identifies all the financial needs of a person Translates the needs into monetarily measurable goals These goals can be short term, medium term and long term Plans the financial investments that will allow these goals to be met. 1. Just the fact that you put a figure down to what you would need for retirement, your childs education, for buying a house makes you think about savings differently. 2. Savings, instead of a residual habit, becomes a target. For Example, If I save 4000 a month over the next 10 years will result in a corpus of 8.2 lacs (compounded monthly @ 10% p.a.) which might fund your childs IIM education. 3. Investment, instead of a panic decision becomes a strategy.

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

Who is a Financial Planner?


Financial Planning very important. Atleast three question

Why should financial distributors become Financial planners?


Strong potential demand for such services Limited supply of financial planners Ability to establish Long term relationships Ability to build a profitable business
Investment products Risk-return attributes Tax Planning Has the ability to convert life cycles of investors into need and preference based financial products Organized approach to work

Excellent communication and interpersonal skills

A Financial Planner understandsAtleast spend 10 -15 minutes on this slide Life cycle & wealth cycle has been explained in the following slides. Extremely imp.

MFs in Financial Planning


Forms the core foundation and building block for any type of FP Variety of products available to suit any need or combination of needs Barring life and property insurance, rest of the product portfolio can be created out of bouquet of MFs

Process of FP in Practice
Step I : Establish and define the relationship with the client Step II : Define the clients goals Step III : Analyze and evaluate clients financial status Step IV : Determine and shape the clients risk tolerance level Indicate that these steps are crucial.

Process of FP in Practice
Step V : Ascertain clients tax situation Step VI : Recommend the appropriate asset allocation and specific investments Step VII : Executing the plan Step VIII : Periodic Review

Strategies for Investors


Harness the power of compounding Start early Have realistic expectations Invest regularly
Explain each term Harness the power of compounding : explain the concept of interest earned on interest. Start early : Explain how investing early helps the investor in the long run. Have realistic expectations : expecting higher returns would lead to higher risk on your portfolio. Invest regularly: monthly investment even though the amount is small would help the investor more than lump sum investment once a month.

Benefits of Investing Early


30 YEARS 40 YEARS 60 YEARS Investor 1 Investments Rs

1,20,000 @ Rs. 1000 pm for 10 years Investor 2 Investments Rs 2,40,000 @ Rs. 1000 pm for 20 years Net Worth at 60 Years Rs. 8,75,075 Net Worth at 60 Years Rs. 5,93,075

Returns @ 8 %p.a.
Benefits of investing early & harness the power of compounding.

Classification of Investors
Wealth cycle based classification Life cycle based classification
Refer the class to the life cycle and wealth cycles tables in the workbook.

Life cycle stage guide


Birth and Education Earning Years Retirement Age PHASE I PHASE II PHASE III 22 years 38 years 25-30 Years Marriage Childs Birth Childs Education Childs Marriage

The investor earns only earns in phase 2 & has to safe enough to sustain his family during his retirement age. It is the returns on his saving that the investor would survive on.

Financial Planning strategies


Investing for the long term power of compounding Maximize returns on investments Buy & hold Rupee cost average Jacobs recommendation of a combined approach invest in liquid & aggressive equity fund. Active switching move in & out of funds in an effective way to maximize profits. Choose the right financial planning strategy When to cash in when to cash out Start planning & investing early Have realistic expectations Invest regularly

Asset allocations
Benjamin Grahams 50-50 balance Strategic asset allocation Bogle approach Life Cycle Equity/ Debt Older investor in distribution stage 50/50 Younger investor in distribution stage 60/40 Older investor in accumulation stage 70/30 Younger investor in accumulation stage 80/20 Fixed & Flexible asset allocation in fixed we rebalance the portfolio by

removing profits from equity & allocating to debt or transferring money from debt when the markets are in bear stage. Tactical Asset allocation Investing with the expectations that the investment would perform above par.

Asset types
Physical & Financial Assets Guaranteed & Non Guaranteed investments Physical Assets Gold & property Financial Assets products offered byBanks Corporate Financial Institutions Government PPF, RBI relief bonds, NSC, government securities Life Insurance

Comparison of Products
By nature of investments & performance
Their characteristics, benefits & risks certain types of investments may appear superior. Specifics of investment option terms of its current performance & suitability.

By nature of investment investors look for better returns, & compare in terms of safety of capital, the risk of stability of returns, the liquidity or access to funds when needed. By current performance

Fund Category selection


Low Risk funds Money Market Funds Government security funds Moderate risk funds Income funds Balanced funds Growth & income funds Short term bond funds Intermediate bond funds Index funds

Fund Category selection


High risk funds Aggressive growth funds International funds Sector funds Specialized funds Precious Metal funds High yield funds

Commodity funds

The Investment Co. Institute of USA (similar AMFI) rates risk in the following order Money Market Funds Insured Municipal bond funds Corporate bond funds Mortgage funds Govt. bond funds Index funds
Normally a question on which of the them is safer than the others.

The Investment Co. Institute of USA (similar AMFI) rates risk in the following order
Continued.

Income funds Balanced funds Growth & Income funds International funds Precious metal funds Growth funds Aggressive funds

Risks in Mutual Fund Investing


Risk in a generic sense means the possibility of financial loss In the investment world possibility of financial loss arises from variability of earnings from time to time. A fund with stable, positive earnings is less risky
than a fund with fluctuating total return.

Risk is thus equated with volatility of earnings - a statistically measurable concept.

Risks in Equity Funds


Volatility of earnings of an equity fund comes from
Kinds of stocks Degree of diversification Fund managers success at market timings

Equity funds are exposed to equity price risks arising out of


Company Specific Risk Sector Specific Risk Market Level Risk

Risk Measures of an Equity

Fund
Standard Deviation Measure of Risk Beta Co-efficient Measure of Risk EX Marks or R Squared Measure of Risk

Risk Measures
Beta Coefficient Measure of Risk :
Beta relates a funds return with a market index. Measures the sensitivity of the Funds returns to changes in the Market Index. Beta of 1 Fund moves with the market i.e.Passive Fund Beta of less than 1 Fund less volatile than the market i.e Funds with conservative portfolio. Beta of More than 1 Higher Beta greater returns in rising markets and higher losses in falling markets i.e Aggressive Fund.

Risk Measures
Ex-Marks or R-squaredMeasure of Risk
Ex-Marks measures how much of fund fluctuations is attributable to movement in overall market Higher the Ex-Marks, lower the risk of the Fund A Fund with higher Ex-marks is better diversified than a Fund with a lower Ex-Mark

Standard deviation measure of risk


A statistical concept, which measures volatility. Measures the fluctuations of Funds returns around a mean level. Basically gives you an idea of how volatile your earnings are

Risk Adjusted Performance Measures


Risk and Returns have co-relation. Risk adjusted Return is measured by using Sharpe Ratio or Treynor Ratio SHARPE RATIO = _____Risk Premium___ Funds Standard Deviation TREYNOR RATIO = ______Risk Premium ______ Funds Beta

Risk Adjusted Performance Measures


Risk Premium Difference between the Funds Average return and Risk free return on Government Securities or Treasury Bills over a given period PRICE EARNING MULTIPLES : Weighted average of the P/E ratios of all the stocks held in portfolio Higher the Funds P/E, Higher the probability of its fall in future

Risk Measurement of Debt Funds


Beta or P/E Ratio not relevant to Debt Funds.

Debt Funds exposed to Risk of loss through Default (Non Performing Assets) and Interest Rate risk Look at the default experience of fund in the past and Its NPAs at present Average maturity or duration Longer the average maturity (duration) of a debt portfolio greater the loss if interest rates go up.

Recommending a model portfolio


Jacobs 4 Steps to Develop a Model Portfolio for a Client
Work with investor to develop long term goals. Determine the Asset Allocation of the Investment Portfolio. Determine the Sector Distribution. Select the specific Fund Manager and their schemes. For Young Unmarried Professional
50% in Aggressive Equity Funds 25% in High Yield Bond Funds and Growth & Income Funds. 25% in Conservative Money Market Funds.

For Young Couple with 2 incomes & 2 children


10% in Money Market Funds. 30% in Aggressive Equity Funds. 25% in High Yield Bond Funds and Long Term Growth Funds. 35% in Municipal Bond Funds.

Model Portfolios for Clients Recommended by Jacobs


For Older Couple, Single Income
30% in Short Term Municipal Funds. 35% in Long Term Municipal Funds. 25% in Moderately Aggressive Equity Funds. 10% in Emerging Growth Equity Funds

For Recently Retired Couple


35% in Conservative Equity Funds for Capital Preservation. 25% in Moderately Aggressive Equity for modest Capital Growth. 40% in Money Market Funds.

Model Portfolios for Clients Recommended by Jacobs

Jacobs Model Portfolio for Investors


Investors in Accumulation Phase : Asset Allocation

Diversified Equity, sector & balanced funds 65 80% Income & Gilt funds 15 30% Liquid funds & bank deposits - 5%

Investors in Transition Phase : Mid-forties when children are approaching the age of higher education or marriage Explain that as investors near there retirement age, they need to move away from high risk investments to low risk investments. This is a gradual stage when money moves out of the equity market & is invested in income & debt funds.

Jacobs Model Portfolio for Investors


Investors in Transition Phase : Start converting some of your equity investment into Income and Cash Funds to prepare for these financial commitments. Investors in Distribution or Reaping Phase : Asset Allocation Diversified Equity & balanced funds 15 30% Income & Gilt funds 65 80% Liquid funds & bank deposits (Cash funds) - 5%

Investors in Intergenerational Transfer Phase :


Investment will be based depending on the beneficiaries For grown up Children Balanced combination of Income & Growth Funds. For grand Children Growth Funds. For Charitable Institutions Income Funds to provide current income. Investors in Sudden Wealth stage : Keep money in Liquid Funds. Take time to decide what to do with the money. Affluent Investors : Wealth Creating Individuals 70% to 80% in diversified equity and sector funds. Wealth Preserving Individuals - 70% to 80% in income, gilt & liquid funds. Very important question What advise would you give an investor in sudden wealth stage? Invest in debt Invest in equity Invest in liquid funds Invest in all 3 depending on the age.

Selecting the Equity Fund


Selecting Equity Funds Classify the available Equity Schemes into Growth, Value, Equity Income, Broad based Specialty etc. Either Select main stream Growth or Value Fund providing broad diversification. Select differentiated Growth or Value Fund or

Specialty Fund where risk and return vary from market. Evaluate past returns of available funds.
Fund size Fund age Portfolio Managers experience Cost of investing Portfolio characteristics (cash position, portfolio concentration, Market Capitalization) Portfolio Turnover Portfolio Statistics Ex Marks, Beta, Gross Dividend yield.

Review salient feature of a scheme


Fund size : small funds mean higher expense, avoid them unless they have themselves retricted their AUM for higher growth Fund age: older performing funds are best suited as they offer stability & have past performance to bank on. Portfolio Managers experience: Cost of investing: debt & income funds need to keep low. Portfolio characteristics cash position - % of cash holding in the fund, higher would mean less is invested in the stock market, it could also mean that the fund manager is expecting the markets to fall & would invest when the markets are down. portfolio concentration: check the top holdings of the fund. If top 10 largest companies hold 50% of the funds portfolio it would mean it is not diversified. Market Capitalization: is it investing in large cap, or mid & small capitalization. Large cap funds over less risk. Portfolio Turnover: higher the turnover, higher the brokeage expense. Portfolio Statistics: compare the fund performance with its peer group on the basis of Ex- marks (lower than 80% means the fund performance to market is less predictable. An index funds carries an 100% relationship to the market index). Beta measures risk, less than 1 means less risk, diversified funds have a beta nearer 1, small cap companies have a beta higher than 1. Gross Dividend yield tend to be higher for value funds than for growth funds.

Debt Fund Selection for a Client


Selecting Debt Funds Narrow down the choice Know your investor objectives
For young investor Long Term Bond Funds

For Retired Investors Monthly Income Funds

Narrow down the choice debt funds offer a large variety, govt, corporate, banks, state, treasury bonds etc. Know your investor objectives For young investor Long Term Bond Funds For Retired Investors Monthly Income Funds
Determine the right selection criteria

Fund Age & size Relative yields Relative Costs Portfolio Characteristics Average Maturity Tax implication Bonds Vs Bond Fund Past Returns and Expense performance

Debt Fund Selection for a Client


Fund Age & size not of prime importance as the composition of fund & fund manager are more important. Relative yields - if the investor need income, select a fund with a high current yield or else a debt fund with a high yield to maturity. Relative Costs or expense ratios are more important, the lower the better. Portfolio Characteristics credit ratings. Higher the rating same the fund, lower the rating higher the yield.( higher risk) Average Maturity a debt fund is sensitive to movements in interest rates. The longer the duration the more sensitivity, Tax implication returns should be calculated based on post tax basis Bonds Vs Bond Fund : all bonds carry a default risk as the lock in period could be long, in bond funds exist is possible sooner.

Selecting Money Market Funds


Costs Quality Yields Running a money market fund takes a lot of trading skills

Selecting Money Market fund for clients


Important question Running a money market fund takes a lot of a) Negotiation skills b) Debt management skills c) Trading skills

Selecting a Balance Fund


Selecting Balance Funds
Rarely 50/50, Equity oriented balanced funds or Income oriented balanced funds. Selection Criteria :
Portfolio

balances

Debt portfolio characteristics Costs Portfolio Statistics Returns

Important question Minimum composition % to be rated as equity or debt fund? a) 65% b) 70% c) 55% d) 60% Portfolio balances composition of equity & debt. Debt portfolio characteristics slightly conservative nature hence the debt bonds should be of investment grade quality. Costs lower the better Portfolio Statistics have lower ex mark & lower beta.

Jacobs recommendations
Low risk conservative fund
50% government security fund + 50% money market fund

Moderate risk Portfolio


40% growth & income funds + 30% govt. bond funds+ 20% growth funds + 10% index funds

High risk (aggressive) Portfolio


25% aggressive growth funds + 25% international funds + 25% sector funds +15% high yield funds + 10% gold funds

Normally there is a question on Jacobs Low risk conservative fund - 50% government security fund + 50% money market fund

Direct Equity investment v/sMutual fund investing


Identifying stocks that have growth potential. Diversification Professional management Investment objectives Liquidity High transaction cost in direct equity investments
Explain the points in detail as it would sum up the reasons why he or she should sell mutual funds.

BUSINESS ETHICS
Business Ethics means rules of acceptable & good conduct. Rules may be set by those who own & manage the business or by those agencies who have a right to regulate the business.

A salesperson is expected to know the product & describe it accurately Exercise of voting rights. Mutual funds are entitled to vote as investors; however this right comes to them in fiduciary capacity & hence shall vote keeping the investor in mind. Mutual funds are entitled to vote as investors; however this right comes to them in fiduciary capacity & hence shall vote keeping the investor in mind.

SEBI monitors 3 areas in particular


Fund structure & governance Exercise of voting rights by funds Fund operations

Regulatory requirements
Separation of functions Independence of organizations. Independence of personal

Fund Operations
Insider trading Preferential treatment to selected investors Personal trading by fund managers & employees Fund publicity & Advertisement
All forms of advertisement (hoardings, printed literature, audio visual) are covered by regulation. Standards of communication information that each type of must contain.

Insider trading means buying & selling securities based on the privileged information available to the persons in the funds. Preferential treatment to selected investors All investors are to be treated equally. No special treatment to a certain section. SEBI tracks this very closely. For eg. Late trading abuses. If the market has gone up substantially the investor would want to exit the fund on the day or if the markets have collapsed the investor would want to buy units. Time schedule are monitored very closely by SEBI. Personal trading by fund managers & employees if fund managers & employees trade on their personal account it creates a conflict of interest thus affecting the fund in a negative way.

Ethics related regulations


Guidelines of good conduct for AMC & Trustee Company issued on 8th May2001, lays down guidelines for investment & trading by employees. The responsibility to ensure ethical compliance lies with the Trustee Company. Regulations on personal trading above Rs. 1,00,000/transactions have to be reported to trustees.

Regulation for insider trading SEBI insider trading amendment regulation 2002 Guidelines of good conduct for AMC & Trustee Company issued on 8th May2001, lays down guidelines for investment & trading by employees. The responsibility to ensure ethical compliance lies with the Trustee Company. Regulations on personal trading above Rs. 1,00,000/- transactions have to be reported to trustees. Regulation for insider trading SEBI insider trading amendment regulation 2002 Regulation for Fund advertising 6th schedule of SEBI regulation 1996 Compliance Officer All AMC need to appoint a compliance officer, employees need to file their transaction records with them. Board review & reporting to SEBI boards members of AMC & trustees need to report any violation to SEBI. Code of conduct for distributors - 5th schedule of SEBI regulation 1996, AMFI has put in place a more detailed code called AGNI.

Ethics related regulations


Regulation for Fund advertising 6th schedule of SEBI regulation 1996 Compliance Officer All AMC need to appoint a compliance officer, employees need to file their transaction records with them. Board review & reporting to SEBI boards members of AMC & trustees need to report any violation to SEBI. Code of conduct for distributors - 5th schedule of SEBI regulation 1996, AMFI has put in place a more detailed code called AGNI.

Mutual Funds the best option


Each investment objective has its own strengths & weakness. Some seek to achieve superior returns but with corresponding higher risk. Others provide safety but at the expense of liquidity & growth. Indian mutual fund industry has seen some very poor performing funds as well as some great performers. The trend towards people investing in mutual funds is growing & there is little doubt that within years it will be the preferred mode of investments for the common man.

Rapid Fire
A retired person generally needs a greater proportion of Debt Funds. Equity Funds. Money Market Funds. All of the above. To satisfy a young investors need for growth, a greater proportion of investment should be advised in Gilt Funds. Income Funds.

Equity Growth funds. Liquid funds

Rapid Fire
A high proportion of investment in income funds is required by Accumulating investors. Affluent investors. Investors in the inter-generational transfer phase. Investors in the distribution phase. For older investors who want to transfer their wealth No financial planning is required. The right investment strategy depends upon who the beneficiaries are. The right investment strategy depends upon the state of the stock market. All the funds can be invested in aggressive equity funds. Retired investors should not drawn down on their capital Not invest in securities which bear risk of capital erosion. Continue holding a major portion of their holding in equity growth funds. Never invest in equity. The charge to an investor at the time he redeems his units from the fund is known as recovery charge. Repurchase load. Redemption weight. Exit load. The load amount charged to a scheme over a period of times is called. entry load. Exit load. Deferred load. No-load. Contingent Deferred Sales Charge (CDSC). is higher for investors who stay invested in the scheme longer is lower for investors who stay invested in the scheme longer. Is the same for all investors irrespective of how long they stay invested. Is not allowed to be charged to mutual fund investors in India.
Ex-Mark of an equity fund measures its performance risk. Both the above. None of the above. Beta of an equity fund measures its Performance. Risk. Both the above. None of the above. The best equity fund, relative to others, would have. higher Ex Marks, lower Beta and higher Gross Dividend Yield. Higher Ex Marks, higher Beta and higher Gross Dividend Yield. Lower Ex Marks, lower Beta and lower Gross Dividend Yield. Lower Ex Marks, higher Beta and higher Gross Dividend Yield.

Thank you.