Mutual Funds

NISM-Series-V-A: Mutual Fund
Distributors Certification
Examination
Concept and role of a mutual

fund
Concept
Mobilize money from investors
Investment in different markets and securities
Common Investment objectives
Role of mutual funds

Investors
Income or wealth building
Large investors can keep a check on the operations
of the investee company, their corporate governance
and ethical standards.
Role of Mutual Funds
Government
Raise money to invest in various projects
Raise money to pay for various expenses
Higher employment, income and output in the economy boos the
revenue collection of the government through taxes and other
means.
Companies
Money to invest in various projects and pay for various expenses
Economy
Employment to people
The income they earn helps the employees buy goods and services
offered by other companies.
Overall economic development is promoted
Stabilize market by countering large inflows or outflows from
foreign investors
How do Mutual Fund schemes

operate?
Schemes announce investment objectives

Seek investments from the public
Structure of the scheme decides whether the
money from investors will be accepted during a
limited period or at any time
Units
The investment in a scheme is translated into a certain
number of units.
Under the law, every unit has a face value of Rs. 10
(older schemes in the market may have a different
face value)
No. of units x face value = Unit capital

operate?
Earnings:
Interest income
Dividend income
Realized capital gains (or realized capital losses)
when investment is sold
Valuation gains (loss): investments are quoted in
the market at higher (lower) than the cost
Operating expenses

operate?
Net Asset Value (NAV) = Unit-holders funds
in the scheme/ No. of units
New Fund Offer (NFO)
Schemes first availability

Units are available at face value
Options
Growth
Dividend payout
Dividend re-investment

operate?
AUM (assets under management)

Relative size of mutual fund companies
Investments increase AUM whereas redemptions decrease
AUM
Profitability metric
(+) interest income

(+) dividend income
(+) realized capital gains
(+) valuation gains
(-) realized capital losses
(-) valuation losses
(-) scheme expenses
Advantages of Mutual
Fund
Professional Management
Adequate research
Prudent processes
In line with investment objectives
Affordable portfolio diversification

Can achieve diversification even with Rs. 500
Economies of scale
Professional managers
Cost of research
Negotiation of better terms with brokers, bankers
and other service providers.
Fund
Liquidity
Tax deferral
Not liable to pay tax on the mutual fund income in

the same year.
If the income were earned indirectly, tax may
have to be paid in the same financial year.
Investor can let their money grow to defer the tax
liability.
Investors can legally build their wealth faster than
would have been the case, if they were to pay tax
on the income each year.
Fund
Tax benefits
Tax deduction upto Rs. 1,50,000 in a financial year for
investment in ELSS.
RGESS (Rajiv Gandhi Equity Savings Scheme offers a
rebate to first time retail investors with annual income
upto Rs. 12 lakhs.
RGESS:
50% of the amount invested upto Rs. 50,000 can be claimed
as deduction
Investment limit of Rs. 50,000 is applicable for a block of
three financial years starting with the year of first investment.
The maximum deduction that can be made from the taxable
income over the period of three financial years is 50% of Rs.
50,000 i.e. Rs. 25,000.
Fund
Dividends received from mutual fund schemes are tax-free in
the hands of the investors.
Long term capital gains arising out of sale of some categories
of schemes are subject to long term capital gains tax.
Convenient options
Ability to withdraw only part of the money from the
investment account.
Ability to invest additional amounts
Investment comfort
Once an investment is made, further purchases can be
made with very little documentation
Regulatory comfort
Mutual fund investors enjoy protection of the regulator
Fund
Systematic approach to investments

Systematic investment plan
Systematic Withdrawal plan
Systematic Transfer plan
Limitations of Mutual Fund
Lack of portfolio customization

Unitholder cannot influence what securities or
investments should the scheme buy.
Choice overload
Over 1800 mutual fund schemes offered by 45
mutual funds and their multiple options
Investor has no control over costs
Types of Funds
Open- ended funds

Open for investors to enter or exit at any time after the
NFO
When units are acquired, it is known as a sale transaction.
It happens at a sale price which is equal to NAV
When investors choose to return any of their units, it is
called a re-purchase transaction. This also happens at NAV
Although some unit-holders may exit from the scheme,
wholly or partly, the scheme continues operations with the
remaining investors.
The on-going entry and exit of investors implies that the
unit capital in an open-ended fund would keep changing on
a regular basis
Types of Funds
Close-ended funds
Fixed maturity
Units can be bought only during NFO
Post NFO, units are traded on a stock exchange
Listing on stock exchange is compulsory for closeended schemes
Unit Capital of the scheme remains fixed
The transaction price of the units is likely to be
different from the NAV as the fund is not involved in
the transaction
The transaction price depends on the demand and
supply of the scheme
Types of Funds
Interval funds
Combination of Open-ended and close-ended schemes
Largely close-ended but become open-ended at pre-specified
intervals
Investors are not completely dependent on the stock exchange to be
able to buy or sell units
Between these intervals, the units have to be compulsorily listed on
stock exchanges
Period when an interval scheme becomes open-ended, is called
transaction period
Period between the close a transaction period and the opening of the
next transaction period is called interval period
Minimum duration of transaction period is 2 days and minimum
duration of interval period is 15 days.
No redemption/repurchase of units is allowed except during the
specified transaction period
Types of Funds
Actively managed funds

Fund manager has the flexibility to choose the
investment portfolio within the broad parameters
of the investment objectives
Expenses for running the fund turn out to be
higher
These funds are expected to perform better than
the market
Types of Funds
Passive funds
They track the performance of a specified index
and mirror the investment
The composition and the proportion of each share
in the schemes portfolio is same as the benchmark
index
They are not designed to perform better than the
market
They are also called Index funds
Low expenses for running the scheme
The fund manager has no role in deciding on
investments
Types of Funds
Equity Schemes
Investment objective is to invest largely in equity
shares and equity related investments like convertible
debentures
Investment objective is to seek capital appreciation
Debt funds
Investment objective is to limit investments in debt
securities like Treasury bills, Government securities,
Bonds and Debentures
Hybrid funds
Investment in both debt and equity
Some of them invest in gold along with debt and equity
Types of Debt Funds
Gilt funds
Invest only in treasury bills and government
securities which do not have a credit risk
Diversified Debt funds

Invest in a mix of government and nongovernment debt securities such as corporate
bonds, debentures and commercial paper.
Also known as Income funds
Types of Debt Funds
Junk bond schemes / High yield bond schemes

Invest in companies that are of poor credit quality
Fixed maturity plans

Investment portfolio is closely aligned to the maturity
of the scheme.
They are close-ended schemes
Little role of fund manager in deciding the investing
options
Investors have more clarity on the likely returns if
they stay invested in the scheme until its maturity
(though there can be no guarantee of such returns)
Types of Debt Funds
Floating rate funds

Invest in floating rate debt securities
Interest rate payable by the issuer changes in line
with the market
The NAVs of such schemes fluctuate lesser than
other debt funds that invest more in debt securities
offering a fixed rate of interest
Liquid schemes
Invest only in short term debt securities (upto 91
days maturity)
Liquid schemes are the lowest in price risk among
all kinds of mutual fund schemes
Types of Equity Funds
Diversified equity fund

Invest in a diverse mix of securities that cut
across sectors.
Sector funds
Invest only in a specific sector.
Thematic funds
Invest in line with an investment theme.
More broad based than a sector fund; but
narrower than a diversified equity fund
Equity linked savings scheme

Offer tax benefits to investors
Lock-in period of 3 years
Rajiv Gandhi equity savings schemes (RGESS)

Offers tax benefits to first time investors
Investments are subject to a fixed lock-in period of 1
year and flexible lock-in period of 2 years
Equity income / dividend yield schemes

Invest in securities whose shares fluctuate less and the
dividend represents a larger proportion of the returns
The NAV is expected to fluctuate lesser than other
category of equity schemes
Arbitrage funds
Take opposite positions in different markets /
securities such that the risk is neutralized but a
return is earned
Most arbitrage funds take contrary positions
between the equity market and the futures and
options market
Expected returns are in line with liquid funds
Gold funds
Invest in gold and gold-related securities
Types of Gold funds
Gold Exchange Traded Fund

Like an Index fund that invests in gold, gold-related
securities or gold deposit schemes of banks
NAV of such funds moves in line with gold prices in
the market
Gold Sector Fund

Invest in shares of companies engaged in gold
mining and processing
Prices of these shares are more closely linked to the
profitability and gold reserves of the companies
NAV of theses funds do not closely mirror gold
prices
Types of Hybrid funds
Monthly Income Plans

Declare a dividend every month
Invest largely in debt securities
A small percentage is invested in equity shares to
improve schemes yield
Balanced fund
Invests in both equity and debt simultaneously in
one portfolio
Growth through equity and stability (regular
income) through debt
Types of Hybrid Funds
Capital protection schemes

Close-ended schemes
Investors get the principal back irrespective of what
happens to the market
Investment is made in zero coupon government
securities whose maturity is aligned to the schemes
maturity
Zero coupon securities are securities that do not pay a
regular interest but accumulate the interest, and pay it
along with the principal when the security matures
Some of the hybrid funds are launched as Asset

Allocation Funds
Real Estate Funds

Exposure to real estate
Small investors can take exposure to real
estate as an asset class
Although permitted by law, real estate
mutual funds are yet to hit the market in
India
Real Estate Investment Trusts are aimed at
high net worth investors
Commodity Funds
Commodities, as an asset class, include:
Food crops like wheat and gram

Spices like pepper and turmeric
Fibres like cotton
Industrial metals like copper and aluminium
Energy products like oil and natural gas
Precious metals (bullion) like gold and silver
Gold funds are structures as Gold ETF or gold

sector funds
In India, mutual fund schemes are not permitted to invest
in commodities, other than Gold
Commodity sector funds are a kind of equity fund because
these funds can invest in shares of companies that are into
commodities
International funds
These funds invest outside the country

A mutual fund may offer a scheme to investors in
India, with an investment objective to invest abroad
This can happen in two ways:
Hire the requisite people who will manage the fund
Tie up with a foreign fund (host fund). If an Indian mutual
fund sees potential in China, it will tie up with a Chinese
fund. In India, it will launch a feeder fund.
The investment in these funds could be specific to

a country or diversified across countries
Legal restrictions of India and the other country/
countries are applicable
International funds
Local investors invest in rupees which are
converted into foreign currency for investing
abroad. They need to be re-converted into
rupees when the money is paid back to local
investor
Since the future foreign currency rates cannot
be predicted today, there is an element of
foreign currency risk
Investors total return depends on how the
international investment performs as well as
how the foreign currency performs
Fund of funds
Funds that invest in various other funds,
whether in India or abroad are called Fund
of funds
They pre-specify the mutual funds whose
schemes they will buy and/ or the kind of
schemes they will invest in
Exchange traded funds
Open ended funds whose units are traded in a

stock exchange
Only very large investors are allowed to buy
and sell units from the mutual fund
The mutual fund appoints some intermediaries
as market makers, whose job is to offer a price
quote for buying and selling units at all times
Major advantage of the market makers is to
provide liquidity in the units of the ETFs to the
investors
Exchange traded funds
In an ETF, investors can buy and sell their

units in the stock exchange at various
prices during the day rather than a single
NAV on a day in case of regular open-ended
funds
Mutual funds in India

today
As of July 31, 2014:
45 mutual funds
AUM of Rs. 10,06,452 crores
1823 schemes
Mutual fund AUM is about 12.5% of bank deposits
High proportion of AUM in debt
Fund Structure and

Constituents
Legal structure of mutual funds in India

Mutual funds in india are governed by SEBI (mutual fund)
Regulations, 1996
Established as a trust. They are governed by the Indian
Trusts Act, 1882
The mutual funds can invest in securities including money
market instruments, gold or gold deposits or real estate
assets
The units are sold under one or more schemes
SEBI has stipulated the legal structure under which mutual
funds in India need to be constituted
The mutual fund trust is created by one or more Sponsors,
who are the main persons behind the mutual fund business
Legal structure of mutual

funds
Investors who invest in various schemes are the
beneficiaries
The operations of the mutual fund trust are governed
by a Trust Deed, which is executed between the
sponsors and the trustees
Trustees play the role of protecting the investors
Either individuals may be appointed as trustees or a
Trustee company may be appointed. Individuals are
jointly referred to as Board of Trustees. A trustee
company functions through its Board of Directors
Day to day management of the schemes is handled by
an Asset Management Company (AMC) which is
appointed by the sponsor or the Trustees
Legal structure of mutual

funds
The trustees execute an investment
management agreement with the AMC,
setting out its responsibilities
Although the AMC manages the schemes,
custody of the assets is with a Custodian, who
is appointed by the Trustees
Investors invest in various schemes of the
mutual fund. The record of investors and their
unit-holding may be maintained by the AMC
itself, or it can appoint a Registrar & Transfer
Agent (RTA)
Example
Mutual Fund Trust
HDFC Mutual Fund
Sponsor
Housing Development Finance Corporation Ltd.
Trustee
HDFC Trustee Company Limited
AMC
HDFC Asset Management Company Limited
Custodian
HDFC Bank Limited

Citibank N.A.
The Bank of Nova Scotia
RTA
Computer Age Management Services Pvt. Ltd
Key Constituents of a Mutual

Fund
Sponsors: Invest in the capital of the AMC

Should have a sound track record and reputation of
fairness and integrity in all business transactions
Should be carrying on business in financial services of 5
years
Should have positive net worth (share capital plus
reserves minus accumulated losses) for each of those 5
years
Latest net worth should be more than the amount that
the sponsor contributes to the capital of the AMC
Should have earned profits, after providing for
depreciation and interest, in three of the previous five
years, including the latest year

Fund
Sponsors
Needs to have a minimum 40% share-holding in
the capital of the AMC. Anyone who has more
than 40% share-holding in the AMC is considered
to be a sponsor and should therefore fulfill the
eligibility criteria

Fund
Trustees: Ensure that the mutual fund complies with

all the regulations and protects the interests of the
unit-holders
Every trustee has to be a person of ability, integrity and
standing
Sponsor needs to appoint at least 4 trustees
If a trustee company has been appointed, then that company
would need to have at least 4 directors on the Board.
At least, two-thirds of the trustees/ directors on the Board of
the trustee company would need to be independent trustees
i.e. not associated with the sponsor in any way
General Due Diligence and Special Due Diligence
responsibilities have been assigned to the Trustees

Fund
AMC: responsible for day to day operations

The directors of the asset management company
need to be person having adequate professional
experience in finance and financial services
related field
The directors as well as key personnel should not
have been found guilty of moral turpitude
Key personnel of the AMC should not have worked
for any AMC or mutual fund or any intermediary
during the period when its registration was
suspended or cancelled any time by SEBI

Fund
AMC
Prior approval of the trustees is required before a
person is appointed as director on the board of
the AMC
At least 50% of the directors should be
independent directors
Needs to have a minimum net worth of Rs. 50
crore. This is immediately applicable to new
AMCs. AMCs in existence in May 2014 have been
given 3 years to raise their net worth to Rs. 50
crore. They cannot launch any new scheme until
they comply with this requirement

Fund
AMC
An AMC cannot invest in its own schemes, unless
the intention to invest is disclosed in the Offer
Document
The AMC cannot charge any fees for its own
investment in any of the schemes managed by
itself
The appointment of an AMC can be terminated by
a majority of the trustees or by 75% of the Unitholders. Any change in the AMC is subject to prior
approval of SEBI and the Unit-holders

Fund
Custodian: settles all the transactions on

behalf of the mutual fund schemes
Is appointed by the mutual fund
Needs to register with SEBI
Unless specific conditions are fulfilled, a custodian
cannot be appointed if the sponsor or its
associates control 50% or more of the shares of a
custodian
Also tracks actions such as dividends, bonus and
rights in companies where the fund has invested

Fund
RTA: maintains investor records

Appointed by the AMC
Handles the documentation of investor through its
various service centres
Not compulsory to appoint a RTA. The AMC can
choose to handle this activity in-house
All RTAs need to register with SEBI

Fund
Auditors: Audit of accounts

Accounts of the schemes need to be maintained
independent of the accounts of the AMC
Auditor for scheme accounts needs to be different
from the auditor of the AMC
The scheme auditor is appointed by the Trustees
The AMC auditor is appointed by the AMC

Fund
Fund accountants
Calculate the NAV
AMC can either handle this activity in-house or
engage a service provider
Need not register with SEBI to perform this
function
Distributors
Sell suitable types of units to their clients
Need to pass the prescribed certification test and
register with AMFI

Fund
Collecting bankers
Investors money go into the bank account of the scheme
they have invested in. These bank accounts are maintained
with collection bankers
These banks enable collection and payment of funds for the
schemes
KYC registration agencies

SEBI has mandated a unified KYC for the securities market
through KYC Registration Agencies registered with SEBI.
IPV (In-person verification) by a SEBI-registered intermediary
is compulsory for all investors
Distributors who have a valid NISM mutual fund distributors
certificate and a valid ARN can carry out the IPV if they have
completed the KYD process
Legal and regulatory

environment
SEBI
Is the regulatory authority for securities markets in
India. It regulates mutual funds, depositories,
custodians and registrars & transfer agents
Some segments of the financial markets have their
own independent regulatory bodies. Wherever
applicable, mutual funds need to comply with these
other regulators also
Mutual fund investors have recourse to the trustees,
AMC and SEBI, in that order, for the redressal of their
complaints
Anyone who is aggrieved by a ruling of SEBI can file an
appeal with the Securities Appellate Tribunal (SAT)

environment
Self regulatory organizations (SRO)

Sometimes regulators empower an industry body to
supervise the working of its members. Such bodies are
known as Self regulatory organizations
SROs are the second tier in the regulatory structure
A stock exchange is an example of an SRO, registered with
SEBI, empowered to regulate the activities of its members
Mutual funds in India have not constituted any SRO for
themselves. They are directly regulated by SEBI
AMFI is an association of mutual funds. It is not an SRO.
AMFI provides guidelines to mutual funds, but the
regulations are issued by SEBI. The AMFI board is appointed
by AMCs and is made up of AMC representatives

environment
AMFI code of ethics

Standards of good practices to be followed by the AMCs
AMFIs code of conduct for intermediaries of mutual funds

In the event of breach of the code of conduct by an intermediary,
the following sequence of steps is to be followed:
Write to the intermediary and ask for an explanation within 3 weeks
In case explanation is not received within 3 weeks, or if the
explanation is not satisfactory, AMFI will issue a warning letter
indicating that any subsequent violation will result in cancellation of
AMFI registration
If there is a proved second violation by the intermediary, the
registration will be cancelled and intimation will be sent to all AMCs
The intermediary has a right of appeal to AMFI

environment
Due diligence process by AMCs for

distributors of mutual funds
SEBI has mandated AMCs to put in place a due
diligence process to regulate distributors who
qualify any one of the following criteria:
Multiple point presence (more than 20 locations)
AUM raised over Rs. 100 crore across industry in the
non-institutional category
Commission received of over Rs. 1 crore p.a. across
industry
Commission received of over Rs. 50 lakhs from a
single mutual fund
Investment restrictions for

schemes
The SEBI regulations provide for various limits to the

kinds of investments that are possible in mutual fund
schemes and their limits
Every mutual fund scheme should have an investment
objective
The investment policy describes in greater detail, the
kind of portfolio that will be maintained
Investment strategy goes into details such as
Should the liquidity component be increased in a scheme
Should we go overweight on the steel sector
While the investment objective and investment policy

are part of the offer document, investment strategy is
decided more frequently
Investors rights &

obligations
Services standards mandated for a mutual fund

towards its investors
Schemes other than ELSS and RGESS can remain open
for subscription for a maximum of 15 days
In the case of RGESS schemes, the offering period shall
not be more than 30 days
Schemes, other than ELSS and RGESS, need to allot
units or refund money within 5 business days of
closure of the NFO. RGESS schemes are given a period
of 15 days from the closure of the NFO
In the event of delays in refunds, investors need to be
paid interest @ 15% p.a. for the period of the delay.
This interest cannot be charged to the scheme
Investors rights &

obligations
Open-ended schemes, other than ELSS, have to reopen sale/re-purchase within 5 business days of
allotment
Statement of accounts are to be sent to investors
as follows:
In the case of NFO within 5 business days of closure of

the NFO (15 days for RGESS)
In the case of post-NFO investment within 10 working
days of the investment
In the case of SIP/ STP/ SWP:
Initial transaction within 10 working days
Ongoing once every calendar quarter within 10 working
days of the end of the quarter
Investors rights &

obligations
On specific request by investor, it will be dispatched
to investor within 5 working days without any cost
Statement of account shall also be sent to dormant
investors i.e. investors who have not transacted
during the previous 6 months
If mandated by the investor, soft copy shall be emailed to investor every month
Units of all mutual fund schemes held in demat

form are freely transferable
Only in the case of ELSS and RGESS schemes,
free transferability of units is curtailed for the
statutory minimum holding period
Investors rights &

obligations
Investor can ask for a Unit Certificate for his

unit-holding
A statement of account shows the opening balance,
transactions during the period and the closing
balance. A unit certificate mentions the number of
units held by the investor
The statement of account is like a bank pass book
while the unit certificate is like a balance
confirmation certificate issued by the bank
NAV has to be published daily in at least 2

daily newspapers having circulation all over
India
Investors rights &

obligations
NAV and re-purchase price are to updated

on AMFI website and the mutual fund
In the case of Fund of funds by 10 am the
following day
In the case of other schemes by 9 pm the same
day
The investor/s can appoint upto 3 nominees

and also specify the percentage distribution
between the nominees. If no distribution is
indicated, an equal distribution between the
nominees will be presumed
Investors rights &

obligations
The investor can also pledge the units to offer

security to a financier
Dividend warrants have to be dispatched to investors
within 30 days of declaration of the dividend
Redemption cheques need to be dispatched to
investors within 10 working days from the date of
receipt of transaction request
In the event of delays in dispatching dividend
warrants or redemption cheques, the AMC has to pay
the unit-holder, interest at the rate of 15% p.a. This
expense has to be borne by the AMC and cannot be
charged to the scheme
Investors rights &

obligations
Investors can choose to change their

distributor or go direct. This needs to be done
through a written request by the investor. In
such cases, AMCs will need to comply without
insisting on any kind of No objection certificate
from the existing distributor
Investors can choose to hold the units in demat
form
The demat statement given by the Depository
participant would be treated as statement of
account
Investors rights &

obligations
The mutual fund has to publish a complete
statement of the scheme portfolio and the
half-yearly unaudited financial results,
within 1 month from the close of each half
year. In lieu of the advertisement, the
mutual fund may choose to send the
portfolio statement to all unit-holders
Unit holders have a right to inspect key
documents
Investors rights &

obligations
SEBI has categorized complaints into various
categories. For each complaint category, the mutual
fund has to report on the number of complaints, the
time period in which they were resolved or will be
resolved. The trustees have to sign off this report and it
is to be disclosed on AMFI website, the website of the
individual mutual fund and its annual report
The offer document has details of the number of
complaints received and their disposal. Pending
complaints can be a ground for SEBI to refuse
permission for launch of new schemes
The annual report of the AMC has to be displayed on
the website of the mutual fund.
Investors rights &

obligations
The trustees / AMC cannot make any change

in the fundamental attributes of a scheme
unless
A written communication to this effect is sent to
each unit holder and an advertisement is issued in
an English daily having nation wide circulation and in
a newspaper published in the language of the region
where the head office of the mutual fund is located
Dissenting unit-holders are given the option to exit
at the prevailing NAV without any exit load. This exit
window has to be open for at least 30 days
Investors rights &

obligations
The appointment of the AMC for a mutual fund can be

terminated by a majority of the trustees or by 75% of
the unit-holders of the scheme
75% of the unit-holders can pass a resolution to wind-up
a scheme
Merger or consolidation of schemes is not considered a
change in the fundamental attribute of the surviving
scheme if the following conditions are met:
There is no other change in the fundamental attributes of the
surviving scheme
Mutual funds are able to demonstrate that the circumstances
merit merger or consolidation of schemes and the interest of the
unit holders of the surviving scheme is not adversely affected
Limitation of rights of unitholders

Under the law, a trust is a notional entity.
Therefore, investors cannot sue the trust but
they can file suits against the trustees if they feel
that the trustees have not fulfilled their
obligations
The principle of caveat emptor (let the buyer
beware) applies to mutual fund investments. The
unit-holder cannot seek legal protection on the
grounds of not being aware, especially when it
comes to the provisions of law and matters fairly
and transparently stated in the Offer Document
Limitation of rights of unitholders

A prospective investor does not enjoy any
rights with respect to the fund, the AMC or
any other constituent
Fund investors are neither shareholder in
the AMC nor are they depositors with the
fund. Their investments cannot be
protected by any of the regulators under
the Companies Act
Unclaimed amounts
The mutual fund has to deploy unclaimed

dividend and redemption amounts in the money
market. AMC can recover investment
management and advisory fees on management
of these unclaimed amounts, at a maximum rate
of 0.50% p.a.
Recovery of such unclaimed amounts by the
investors is as follows:
If the investor claims the money within 3 years, then
payment is based on the prevailing NAV.
If the investor claims the money after 3 years, then
payment is based on the NAV at the end of 3 years
Unclaimed amounts
AMC is expected to make a continuous
effort to remind the investors through
letters to claim their dues
The annual report has to mention the
unclaimed amount and the number of such
investors for each scheme
Investors obligations
PAN no and KYC documentation are
compulsory for mutual fund investments.
Only exception is micro-SIPs (where annual
investment does not exceed Rs. 50,000)
Small investors investing in cash upto Rs.
20,000 per mutual fund per financial year
do not need to provide PAN card
Investors need to give their bank account
details along with the redemption request
Can a mutual fund scheme go

bust?
If some sponsors wish to move out of the business,
they need to bring in come other sponsor, acceptable
to SEBI, before they can exit. The new sponsor would
need to put in place the entire framework of trustees,
AMC, etc. Therefore, mutual funds cannot vanish
The custodian has custody of the investments in a
scheme. The custodian is largely independent of the
sponsor and the AMC. This ensures structural
protection of the scheme
In the event of a change in sponsorship than an
investor is not comfortable with, the option of exiting
from the scheme with the full NAV is available for a 30day period
Offer Document
New Fund Offer
First time offer

CIO provides inputs on the investment objectives
CMO provides inputs on interest in the market
AMC prepares the OD for NFO which needs to approved by the
Trustees and the Board of Directors of the AMC
Document is filed with SEBI for approval. The observations made
by SEBI need to be incorporated. After approval by the Trustees,
the OD can be issued in the market.
Role of AMC:
To decide a suitable time for issue of the scheme

To launch its advertising and public relations campaign
To hold events for intermediaries and the press
To distribute the Offer Document and Application Forms to the
investors through intermediaries and otherwise.
Offer Document
Since disclosures in the Offer Document are
prescribed by SEBI, it is a legal document.
Contains the fundamental attributes of the
scheme:
Nature of the scheme

Investment objectives
Fundamental attributes of a scheme cannot be

changed without going through specific legal
processes.
An investor is presumed to have read the OD
(principle of caveat emptor)
Offer Document
Two parts:
Scheme Information Document (SID)
Details of the scheme
Statement of Additional Information (SAI)

Statutory information about the mutual fund that is offering the
scheme
In practice, SID and SAI are two separate documents.

Legally, SAI is part of SID
Both the documents are prepared in the format prescribed
by SEBI and are submitted to SEBI
The contents need to flow in the same sequence as in the
prescribed format
Mutual fund is permitted to add any disclosure, which it
feels, is material for the investor
Offer Document
Offer Documents are vetted by SEBI. SEBI
does not approve or disapprove Offer
Documents. It gives its observations
SEBIs observations need to be incorporated
by the AMC in the Offer Document
Scheme Information Document

(SID)
Cover page:
Name of the scheme Open ended/ close ended/
interval
Equity / balanced/ income/ debt/ liquid/ ETF
Face value of the units
Relevant NFO dates (Opening, closing and reopening)
Date of SID
Name of the mutual fund
Name & Contact information of the AMC and the
trustee company

(SID)
Table of content
Highlights
Information about the scheme
Units and offer
Fees and expenses
Rights of unit-holders
Proposed asset allocation mix

(SID)
SID should be read in conjunction with the
SAI and not in isolation
Draft SID is a public document and is
available for viewing on SEBIs website (
www.sebi.gov.in) for 21 working days
The final SID (after incorporating SECIs
observations) has to be hosted on AMFIs
website (www.amfiindia.com) two days
before the issue opens

(SID)
All mutual funds have to label their schemes on the

following parameters for ease of understanding of
the investors:
Nature of scheme such as to create wealth or provide regular
income in an indicative time horizon (short/ medium/ long
term)
A brief about the investment objective (in a single sentence)
followed by kind of product (debt/ equity)
Level of risk depicted by colour code boxes:
Blue principal at low risk
Yellow principal at medium risk
Brown principal at high risk
The colour codes should be described in text beside the

colour code box

(SID)
A disclaimer has to be included that investor

should consult their financial advisors if they
are not clear about the suitability of the
product
The product labels should be disclosed in:
Front page of Key Information Memorandum (KIM)
and SID (to be placed in proximity to the caption of
the scheme and shall be prominently visible)
Common application form (along with the information
about the scheme)
Scheme advertisements (placed in a manner so as to
be prominently visible to investors.
Update of SID
Regular update:
If a scheme is launched in the first 6 months of
the financial year (say April 2010), then the first
update of the SID is due within 3 months of the
end of the financial year (by june 2011)
If a scheme is launched in the second 6 months of
the financial year (say, October 2010), then the
first update of the SID is due within 3 months of
the end of the next financial year (by June 2012)
Thereafter, SID is to be updated every year
Update of SID
Need-based update
In case of change in the fundamental attributes, the SID has
to be updated immediately after the lapse of the time
period given to existing investors to exit the scheme
In case of other changes:
It will be printed on a separate piece of paper (addendum) and
distributed along with the SID, until the SID is updated.
If a change is superseded by a further change (for instance,
change in load), then addenda are not required for the
superseded change i.e. addenda is only required to disclose the
latest position
The change is to advertised in an English newspaper having
nation-wide circulation, in a news paper of the language of the
region where the head office of the mutual fund is located. The
change is to be mentioned in the website of the mutual fund
Contents of SAI
Information about sponsors, AMC, Trustee

company(includes contact info, shareholding
pattern, responsibilities, names of directors and
their contact info, profiles of key personnel),
and contact info of service providers (custodian,
registrar & Transfer agent, statutory auditor,
fund accountant and collecting bankers)
Condensed financial information for schemes
launched in last 3 financial years)
How to apply
Rights of unit-holders
Contents of SAI
Investment valuation norms
Tax, legal & General info
Investor grievance redressal mechanism,
opening and closing number of complaints
for previous 3 financial years and for the
current year to-date
Every mutual fund, it its website, provides
for download of its SAI. Investor have a right
to ask for a printed copy of it.
Update of SAI
Regular update is to be done by the end of
3 months of every financial year
Material changes have to be updated on an
ongoing basis and uploaded on the websites
of the mutual fund and AMFI
Key Information
Memorandum
Is a summary of the SID and SAI
As per SEBI, every application form is to be
accompanied by the KIM
Contents:
Name of the AMC, mutual fund, trustee, fund

manager and scheme
Dates of issue opening, closing & re-opening
Plan and options under the scheme
Risk profile of scheme
Key Information
Memorandum
Contents:
Price at which units are being issued and
minimum amount/units for initial purchase,
additional purchase and re-purchase
Benchmark
Dividend policy
Performance of scheme and benchmark over last
1 year, 3 years, 5 years and since inception
Loads and expenses
Contact information of Registrar for investor
grievances
Update of KIM
KIM is to be updated at least once a year
As in case of SID, KIM is to be revised in
case of change in fundamental attributes.
Other changes can be disclosed through
addenda attached to the KIM
Fund distribution and channel

management practices
Independent Financial Advisors
Non-bank distributors
Broking firms
Securities distribution companies
Non-banking finance companies
Banks
Internet
Stock exchanges
Close-ended schemes are required to be listed in a

stock exchange
ETFs are bought and sold in the stock exchange
Fund distribution and channel

management practices
SEBI has provided for new cadre of distributors

since September 2012
Postal agents
Retired government officials
Retired semi-government officials (Class III or above)
Retired teachers and retired bank officers with a service
of at least 10 years
Allowed to sell units of simple and performing

mutual fund schemes
Simple and performing mutual fund schemes comprise of
diversified equity schemes, FMPs and index schemes that
have returns equal to or better than their scheme
benchmark returns during each of the last three years
Pre-requisites to become Distributor of a

Mutual Fund
The individual needs to pass the Certifying

Examination prescribed by SEBI.
Distributors / employees who were above the
age of 50 years, and had at least 5 years of
experience as on September 30, 2003 were
exempted.
But they need to attend a prescribed refresher
course.
Pre-requisites to become Distributor of a

Mutual Fund
KYD Requirements:
Document verification and bio-metric process.

Self-attested copy of the PAN card and specific documents as proof of
address to be submitted along with application form at the CAMS- Pos.
Bio-metric process consists of taking the impression of the index finger
of the right hand of the ARN holder.
In case of non-individual distributors, bio-metric process will be
conducted on specified authorized persons.
After passing the examination and completing KYD requirements, the
next stage is to register with AMFI.
On registration, AMFI allots an AMFI Registration Number (ARN).
Conditions for Empanelment
Request for Empanelment Form to be filled which

provides the basic details:Personal Information of applicant:-Name of person,
age, trade Name, Contact Information, ARN, PAN,
Income tax, category.
Names and contact information of key people handling
sales and operations.
Business details.
Bank details.
Nominee.
The applicant also needs to sign a declaration.
Commission Structures.
The scheme application forms carry a suitable disclosure to

the effect that the upfront commission to distributors will be
paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered
by the distributor.
Two kinds of commission are earned by distributors:Initial or Upfront Commission:- The scheme application
forms carry a suitable disclosure to theeffect that the upfront
commission to distributors will be paid by the investor directly
to the distributor, based on his assessment of various factors
including the service rendered by the distributor.
Commission Structures.
Trail commission, calculated as a percentage of the

net assets attributable to the Units sold by the
distributor
AMCs pay a trail commission for the period the
investment is held in the scheme.
Since trail commission is calculated as a percentage on
AUM, distributors get the benefit of valuation gains in the
market
Accounting, Valuation & Taxation

Mutual Funds scheme according to the maturity period: A mutual fund scheme can be classified into open-ended scheme or
close-ended scheme depending on its maturity period.
An open-ended Mutual fund is one that is available for subscription
and repurchase on a continuous basis.
These Funds do not have a fixed maturity period.
A close-ended Mutual fund has a stipulated maturity period e.g. 5-7
years.
The fund is open for subscription only during a specified period at
the time of launch of the scheme.
Net Assets Value:- Net Asset Value is the market value of the
assets of the scheme minus its liabilities on day of valuation. The
per unit NAV is the net asset value of the scheme divided by the
number of units outstanding on the valuation date.
NAV significant only for open-end mutual funds.
For closed-end funds, share value is determined in the secondary
markets .
For open-end mutual funds, NAV is a useful determinant for
tracing share price movements.
However, it is not useful for evaluating overall fund performance.
The most important thing to keep in mind is that NAVs change
daily and are not a good indicator of actual performance because
of the impact yearly distributions have on NAV.
The unit-holders funds in the scheme is commonly

referred to as net assets.
Let us understand the concept with a simple example.
Investors have bought 20crore units of a mutual fund
scheme at Rs 10 each. The scheme has thus mobilized
20 crore units X Rs 10 per unit i.e. Rs 200 crore.
An amount of Rs 140 crore, invested in equities, has
appreciated by 10%.
The balance amount of Rs 60 crore, mobilized from
investors, was placed in bank deposits.
Interest and dividend received by the scheme is Rs 8

crore,
scheme expenses paid is Rs 4 crore , while a further
expense of Rs 1 crore is payable.
If the above details are to be captured in a listing of
assets and liabilities of the scheme, it would read as
follows:

Amount
(Rs cr.)
Liabilities
Unit Capital (20crore units of Rs10 each)
200
Profits {Rs 8 crore (interest and dividend received)

minus Rs 4 crore (expenses paid) minus Rs 1
crore (expenses payable)}
Capital Appreciation on Investments held {10% of

Rs 140 crore}
14
Unit-holders Funds in the Scheme
217
Expenses payable
Scheme Liabilities
218

Assets
Market value of Investments (Rs 140
crore + 10%)
154
Bank Deposits {Rs60crore (original) plus 64

Rs 8
crore (interest and dividend received)
minus Rs 4
crore (expenses paid)}
Scheme Assets
218
Net asset includes the amounts originally

invested, the profits booked in the scheme, as
well as appreciation in the investment portfolio. It
goes up when the market goes up, even if the
investments have not been sold.
A scheme cannot show better profits by delaying
payments. While calculating profits, all the
expenses that relate to a period need to be
considered, irrespective of whether or not the
expense has been paid. In accounting jargon,
this is called accrual principle.
Similarly, any income that relates to the period will

boost profits, irrespective of whether or not it has
been actually received in the bank account.
This again is in line with the accrual principle.
In the market, when people talk of NAV, they refer to
the value of each unit of the scheme.
Higher the interest, dividend and capital gains
earned by the scheme, higher would be the NAV.
Higher the appreciation in the investment portfolio,
higher would be the NAV.
Lower the expenses, higher would be the NAV.
Fees Charged by Investment Companies: Investment
companies charge investors a wide assortment
of fees.
Mutual funds that are just coming to market, for example,
may set the price for the initial sale of shares slightly higher
than the shares NAV to help defray start-up costs.
Ostensibly, these fees help reduce the frequency of trading
in and out of the fund and encourage investors to maintain
their positions.

Fees Charged by Investment Companies:
Although these are one-time charges, it makes sense to look at

them in terms of an investor's time horizon.
So, for example, a front load fee of 4.8% on a $10,000 share
purchase ($480) translates to a per-year cost of $160 when an
investor holds the shares for only three years ($480/3).
If the investor holds the shares for 10 years, however, his cost per
year is only $48.
To make fee comparisons easy, services such as Morningstar
calculate the cost of buying and holding $10,000 of a fund's shares
over three-, five- and 10-year time horizons.
Sales commissions provide an incentive to the sales force but they
can seriously impact investors' total return.
Entry and Exit Load

Mutual fund incur certain expenses such as brokerage, marketing
expenses, communication expenses. These expenses are known as Load
and are recovered by fund when it sells the unit to the investors or
repurchases units from with holders.

The difference between the NAV and Re-purchase Price is called the
exit load.
Schemes can also calibrate the load when investors offer their units
for re-purchase.
Investors would be incentivized to hold their
units longer, by reducing the load as the unit
holding period increased.
Such structures of load are called Contingent Deferred Sales
Charge (CDSC).
SEBI has banned entry loads. So, the Sale Price needs to be the
same as NAV.
Exit load structure needs to be the same for all unit holders
representing a portfolio.

Initial issue expenses need to be met by the AMC.
There are limits to the recurring expenses that can be
charged to the scheme.
Dividends can be paid out of distributable reserves.
SEBI has prescribed a conservative approach to its
calculation.
Key Accounting and Reporting Requirements:The accounts of the schemes need to be maintained
distinct from the accounts of the AMC. The auditor for
the AMC has to be different from that of the schemes.
Norms are prescribed on when interest, dividend, bonus
issues, rights issues etc. should be reflected for in the
accounts.
NAV is to be calculated upto 4 decimal places in the
case of index funds, liquid funds and other debt funds.
NAV for equity and balanced funds is to be calculated
upto at least 2 decimal places.

Investors can hold their units even in a fraction
of 1 unit.
However, current stock exchange trading
systems may restrict transacting on the
exchange to whole units.
Mutual funds are exempt from tax.

However, Securities Transaction Tax (STT) is applicable
on investments in equity and equity mutual fund
schemes.
Additional tax on income distributed (Dividend
distribution tax) is applicable on dividends paid by debt
mutual fund schemes.
Taxability of capital gains, and treatment of capital losses
is different between equity and debt schemes, and also
between short term and long term.
Detailed norms on valuation of debt and equity securities

determine the valuation of the portfolio, and therefore the
NAV of every scheme .
Upto 1 year investment holding is treated as short term.
There is no Tax Deducted at Source (TDS) on dividend
payments or re-purchase payments to resident investors.
Withholding tax is applicable for some non-resident investors.
Setting of capital losses against capital gains and other
income is subject to limitations to prevent tax avoidance.
Investment in mutual fund units is exempt from Wealth Tax.
Mutual funds themselves pay no tax on the incomes they

earn.
They are fully exempt from tax.
If an investor holds units for 12 months or less, any gain
from selling the units is called as short-term capital gain.
Short-term capital gains are taxable at the marginal rate
of taxation of the investor.
If an investors holding period is more than 12 months,
any gain or loss from sale is called as long-term capital
gain.

Long-term capital gain can be indexed for inflation.
Indexing refers to updating of the purchase price,
based on the cost of inflation index published by the
CBDT.
The formula for indexation is purchase price X (index in
the year of sale/index in the year of purchase).
Investors can pay either 10% tax (plus surcharge) on
the capital gain tax without indexation or 20% (plus
surcharge) on capital gains after indexation, which ever
is lower.
Equity Schemes taxation
Resident
Individual/HU
F
Domestic
Company
Non-Resident
Individual
Short Term
Capital Gains
Tax (holding
period <=12
months)
Long Term
Capital Gains
Tax (holding
Period > 12
months)
Security
Transactions
Tax(STT)
TDS
15%
Nil
0.001%
Nil
15%
Nil
0.001%
Nil
15% TDS
Nil
0.001%
Nil
Debt Schemes Taxation
Equity Linked Saving Schemes (ELSS)

advantage: all about 80C investments
Instrument
Returns
EPF
Lock In
Period (in
Years)
8.50% Until Retirement
PPF
8%
15
NSC
8%
FDs Banks & Post office
5.70 to 8.50%
Senior Citizen Savings Scheme
5
9%
Life Insurance Policies
5 to 6%
ELSS
Market Linked
ULIP
Market Linked
NPS
Market Linked
ELSS Advantage over other tax saving instruments

1.
Low Lock in period
2.
Earn market linked return
3.
Tax free returns
till age 60
Investor Services
Individual and non-individual investors are permitted

to invest in mutual funds in India.
Since FIIs are permitted to invest, foreign entities
can take this route.
The Who can invest section of the Offer Document
is the best source to check on eligibility to invest.
All investments of Rs 50,000 and above need to
comply with KYC documentation viz. Proof of
Identity, Proof of Address, PAN Card and
Photograph.
Investor Services
Micro SIPs i.e. SIPs with annual investment below Rs 50,000

is exempted from the PAN Card requirement. Simplified
documentation has been prescribed in such cases.
Besides KYC, non-individual investors need to provide
additional documentation to support their investment.
Demat makes it possible to trade in Units in the stock
exchange.
Full application form is to be filled for a first time investment in
a mutual fund.
Thereafter, additional investments in the same
mutual fund are simpler. Only transaction slip would
need to be filled.
Investor Services
Most mutual fund schemes offer two options Dividend and

Growth.
A third option which is possible is the Dividend reinvestment
Option.
Each option has different implications on the investors bank
account, investors taxation and scheme NAV.
In a dividend payout option, the fund declares a dividend from time
to time.
In a dividend re-investment option, as in the case of dividend payout
option, NAV declines to the extent of dividend and income
distribution tax. The resulting NAV is called ex-dividend NAV.
The investor does not receive the dividend in his bank account.
Dividend is not declared in a growth option.
Investor Services
Investor Services
Systematic Investment Plan (SIP):-is an approach where the

investor invests constant amounts at regular intervals.
Systematic Withdrawal Plan(SWP):-Just as investors do not want
to buy all their units at a market peak, they do not want all their units
redeemed in a market trough.
SWP therefore offers the safer route of offering for repurchase a
constant value of units.
Systematic Transfer Plan(STP):-This is a variation of SWP. While
in a SWP the constant amount is paid to the investor at the prespecified frequency.
in a STP, the amount which is withdrawn from a scheme is reinvested in some other scheme of the same mutual fund.
Investment in Mutual Fund through SIP
SIP Systematic Investment Planning

it is a method of investing a fixed sum, at a regular interval, in a mutual fund.
It is very similar to monthly saving schemes like a recurring monthly deposit / post office deposit
Advantages of Systematic Investment Planning
Encourages Regular Investments (just like recurring deposit

schemes)
A Convenient way to invest regularly

Lower initial investment without cutting into regular expense
Long term perspective
No timing the market!!!
Rupee Cost Averaging Benefit to counter volatility - it brings down

the average cost of your Investments
Meet investment objective with investment needs
Helps to match the risk / return profile
SIP - How Rupee Cost Averaging helps
Month
Amount
1
2
3
4
5
6
Total
Rising Market
10000
10000
10000
10000
10000
10000
60000
Falling Market
NAV (Rs) Units Allotted NAV (Rs)

10
1000.00
10
10.5
952.38
9.75
12
833.33
9
14
714.29
7
17
588.24
6.5
18
555.56
6
81.50
4643.79
48.25
Volatile Market
Units
Allotted NAV (Rs) Units Allotted
1000.00
10
1000.00
1025.64
10.5
952.38
1111.11
9
1111.11
1428.57
11
909.09
1538.46
13
769.23
1666.67
11.5
869.57
7770.45
65.00
5611.38
Avg. Purchase NAV (Total of

NAVs/No. of investments
13.58
8.04
10.83
Avg. cost per unit (Total

Investment /No of units held)
12.92
7.72
10.69
Put aside an amount regularly
Rupee cost averaging
Discipline is the key
Control volatility
This example uses assumed figures and is for illustrative purposes only.
SIP: The Power Of Compounding
IP of Rs. 1000 invested per month @ 8% pa till the age of 60.
Starting Age
Total Amount
Saved
Value at the age

of 60
25
4,20,000
23,09,175
30
3,60,000
15,00,295
35
3,00,000
9,57,367
40
2,40,000
5,92,947
the sooner you start, makes a difference!
Demystifying NAV Net Asset Value

While selecting a fund, the NAV shouldnt be the criteria, A low NAV need not mean that
its a good buy ...
In the above example during the period under consideration the best growths have been recorded by the
funds with the lowest (Scheme B Rs 7.44) and the highest (Scheme A- Rs 23.55) NAVs respectively.
On the other hand the least growth has been recorded by (Scheme E), a fund with a low NAV.
Clearly the data suggests that there is no correlation between the NAV size and the returns.
Investor Services
Triggers:-It is not uncommon for investors to rue missed

opportunities of buying or selling because they could not
give the requisite instructions in time.
This is addressed through the trigger option that is
available for some schemes.
For instance, an investor can specify that the Units would
be repurchased if the market reaches a particular level.
In that case, once the market reaches that level, the
Units would be repurchased. Investors should study the
conditionalities attached to trigger Options because
these vary from scheme to scheme .
Return, Risk & Performance of Funds
Drivers of Returns in a Scheme:- The portfolio is the

main driver of returns in a mutual fund scheme.
The underlying factors are different for each asset class.
Securities Analysis Disciplines : Fundamental
Analysis and Technical Analysis.
Fundamental Analysis:- Fundamental Analysis entails
review of the companys fundamentals viz. financial
statements, quality of management,competitive position
in its product / service market etc.
The analyst sets price targets, based on financial

parameters like:Earnings per Share (EPS):- Net profit after tax / No. of
equity shares.
Price to Earnings Ratio (P/E Ratio):- Market Price /
EPS.
Book Value per Share:- Net Worth / No. of equity shares.
Price to Book Value:- Market Price / Book Value per
Share.
The portfolio is the main driver of returns in a mutual fund

scheme.
The underlying factors are different for each asset class.
Fundamental Analysis and Technical Analysis are two
disciplines of securities analysis.
Fundamental Analysis entails review of the companys
fundamentals viz. financial statements, quality of
management, competitive position in its product / service
market etc.
Technical Analysis:-Technical analysts study pricevolume charts of the companys share prices.
Technical analysis comes in handy for shorter term
speculative decisions, including intra-day trading.
Technical analysis might help decide when to
implement the decision i.e. the timing.
It is generally agreed that longer term investment
decisions are best taken through a fundamental
analysis approach.
Investment Styles: Growth and Value.

Growth investment style entails investing in high growth
stocks i.e.stocks of companies that are likely to grow much
faster than the economy.
Many market players are interested in accumulating such
growth stocks.
Therefore, valuation of these stocks tends to be on the
higher side.
Further, in the event of a market correction,these stocks
tend to decline more.
Value investment style is an approach of picking up

stocks which are valued lower, based on fundamental
analysis.
The belief is that the market has not appreciated some
aspect of the value in a companys share and hence it
is cheap.
When the market recognizes the intrinsic value, then the
price would shoot up.
Such stocks are also called value stocks.
Portfolio building approach Top down and Bottom

up.
In a top down approach, the portfolio manager decides
how to distribute the investible corpus between countries
(if it invests in multiple geographies) and sectors.
Thereafter, the good stocks within the identified sectors
are selected for investment.
Thus sector allocation is a key decision.
A bottom-up approach on the other hand does not

assign too much importance to the country-allocation
and sector-allocation.
If a stock is good, it is picked for investment.
The approach is therefore also called stock picking.
Stock selection is the key decision in this approach;
sector allocation is a result of the stock selection
decisions.
Both approaches have their merit. Top down approach

minimizes the chance of being stuck with large exposure
to a poor sector.
Bottom up approach ensures that a good stock is
picked, even if it belongs to a sector that is not so hot.
What is important is that the approach selected should
be implemented professionally.
Therefore, it can be said that equity returns are a
function of sector and stock selection.
Investors can also hope for a secular growth in a
diversified mix of equity stocks when the economy does
well.
Debt:- Investment in a debt security, as in the case of a

loan, entails a return in the form of interest (at a prespecified frequency for a prespecified period), and
refund of a pre-specified amount at the end of the prespecified period.
The pre-specified period is also called tenor. At the end
of the tenor, the securities are said to mature.
The process of repaying the amounts due on maturity is
called redemption.
Debt securities that are to mature within a year are

called money market securities.
The return that an investor earns or is likely to earn on a
debt security is called its yield.
The yield would be a combination of interest paid by the
issuer and capital gain.
Debt securities may be issued by Central Government,
State Governments, Banks, Financial Institutions, Public
Sector,Undertakings (PSU), Private Companies,
Municipalities etc.
Securities issued by the Government are called Government

Securities or G-Sec or Gilt.
Treasury Bills are short term debt instruments issued by the
Reserve Bank of India on behalf of the Government of India.
Certificates of Deposit are issued by Banks (for 91 days to 1 year)
or Financial Institutions (for 1 to 3 years)
Commercial Papers are short term securities (upto 1 year)
issued by companies.
Bonds / Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue
bonds, while private sector companies issue debentures.
Why Mutual Funds??
Your Investment Menu Card

Instrument
Tax
Benefit
Return
Duration
EPF
8.50%
Long Term
PPF
8%
Long Term
NSC
8%
Long Term
FDs Banks &

Post Office
5.70 to 8.50%
o Short Term
Senoir Citizen
Savings Scheme
9%
Long Term
Mutual Funds
Market Linked
Long Term &

Short Term
ULIP
Market Linked
Long Term
NPS
Market Linked
Long Term
Direct Equity
Market Linked
Long Term
Gold
Market Linked
Short Term
Real Estate
Market Linked
Long Term
Cost of money lying idle
Money in savings account

Interest earned in 1 year (@3.5 per
annum)
Tax on Interest (@30.9%)
Impact of Inflation (@5% per annum)
+
+
100000
3500
103500
1081
5000
Value at the end of year 1

Your investment ought to beat the inflation !!!
97418
Challenges involved investing directly in

Capital Market
Time
Expertise
Lack of Information
Portfolio
Volatility
Key Investment Considerations

Liquidity
You get your money back when you want it
Safety
You get your
money back
Plus Convenience
How easy is it to invest, disinvest
Post-tax Returns
and adjust to your needs?
How much is really left for you post tax?
What is Mutual Fund and Why Mutual Fund
A mutual fund is the trust that pools the savings of a number of

invetors who share a common financial goal.
Anybody with an investible surplus of as little as a few hundred

rupees can invest in Mutual Funds.
The money thus collected is then invested by the fund manager in

different types of securities. These could range from shares to
debenture to money market instruments, depending upon the
schemes stated objective.
It gives the market returns and not assured returns.
In the long term market returns have the potential to perform

better than other assured return products.
Mutual Fund is the most cost efficient distributors of financial

products

Returns can be measured in various ways Simple Returns,
Annualised Returns, Compounded Returns, Compounded Annual
Growth Rate.
CAGR assumes that all dividend payouts are reinvested in the scheme
at the ex-dividend NAV.
SEBI guidelines govern disclosures of return by mutual fund schemes.
Loads and taxes pull the investors returns below that earned by the
Scheme.
Investor returns are also influenced by various actions of the investor
himself.
Risks in mutual fund schemes would depend on the nature of portfolio,
its liquidity, outside liabilities and composition of unit holders.

Fluctuation in returns is a measure of risk. Variance and
Standard Deviation are risk measures for all kinds of
schemes; beta is relevant for equity; modified duration
and weighted average maturity are applicable for debt
schemes.
Benchmarking is a form of relative returns comparison. It
helps in assessing under-performance or outperformance.
Choice of benchmark depends on scheme type, choice
of investment universe, choice of portfolio concentration
and the underlying exposure.
Sharpe Ratio, Treynor Ratio and Alpha are bases to

evaluate a fund managers performance based on riskadjusted returns.
Quantitative measures are based on historical
performance, which may or may not be replicated in
future.
Scheme evaluation is an art, not a science.
Mutual Fund Products Risk / Return Graph
Hybrid & MIP

GILT & Bond Funds
Short Term Funds
Ultra Short Term Funds
Diversified Funds (ELSS)

Balanced Funds
Arbitrage Funds
Liquid fund
Lo
Med
>> Risk <<
Sectoral Funds
Equity
>> Return <<
>> Return <<
Debt
Index Fund
Hi
Lo
Med
>> Risk <<
Hi
Scheme Selection
Asset allocation is the approach of spreading ones

investments between multiple asset classes to diversify
the underlying risk.
The sequence of decision making in selecting a scheme
is:Step 1:-Deciding on the scheme category (based on
asset allocation).
Step 2 : Selecting a scheme within the category.
Step 3 : Selecting the right option within the scheme.
Scheme Selection
While investing in equity funds, a principle to internalize is that

markets are more predictable in the long term, than in the
short
term.
So, it is better to consider equity funds, when the investment
horizon is adequately long.
In an actively managed diversified fund, the fund manager
performs the role of ensuring higher exposure to the better
performing sectors or stocks.
An investor, investing or taking money out of a sector fund
has effectively taken up the role of making the sector choices .
Scheme Selection
It can be risky to invest in mid-cap / small cap funds during periods
of economic turmoil.
As the economy recovers, and investors start
investing in the market, the valuations in front-line stocks turn
expensive.
At this stage, the mid-cap / small cap funds offer attractive
investment opportunities.
Over longer periods, some of the mid/small cap companies have the
potential to become largecap companies thus rewarding investors.
Arbitrage funds are not meant for equity risk exposure, but to lock
into a better risk-return relationship than liquid funds and ride on
the tax benefits that equity schemes offer.
Scheme Selection
The comparable for a liquid scheme in the case of retail

investors is a savings bank account.
Switching some of the savings bank deposits into liquid
schemes can improve the returns for him.
Businesses, which in any case do not earn a return on their
current account, can transfer some of the surpluses to liquid
schemes.
Balanced schemes offer the benefit of diversity of asset
classes within the scheme.
A single investment gives exposure to both debt and equity.
Investors need to understand the structure of the gold schemes
more closely, before investing.
Scheme Selection
Equity investors would like to convince themselves that

the sectors and companies where the scheme has taken
higher exposure, are sectors / companies that are indeed
promising.
Debt investors would ensure that the weighted average
maturity of the portfolio is in line with their view on interest
rates.
Investors in non-gilt debt schemes will keep an eye on
credit quality of the portfolio and watch out for sector
concentration in the portfolio, even if the securities have a
high credit rating.
Scheme Selection
Any cost is a drag on investors returns. Investors need to be

particularly careful about the cost structure of debt schemes.
Amongst index schemes, tracking error is a basis to select the
better scheme. Lower the tracking error, the better it is.
Similarly, Gold ETFs need to be selected based on how well they
track gold prices.
Mutual fund research agencies assign a rank to the

performance of each scheme within a scheme category
(ranking).
Some of these analyses cluster the schemes within a
category into groups,based on well-defined performance
traits (rating).
Scheme Selection
Seeking to be invested in the best fund in every category in

every quarter is neither an ideal objective, nor a feasible
target proposition.
Indeed, the costs associated with switching between
schemes are likely to severely impact the investors returns.
The underlying returns in a scheme, arising out of its portfolio
and cost economics, is what is available for investors in its
various options viz. Dividend payout, dividend re-investment
and growth options.
Dividend payout option has the benefit of money flow to the
investor; growth option has the benefit of letting the money
grow in the fund on gross basis (i.e. without annual taxation).
Scheme Selection
Dividend investment option neither gives the cash flows

nor
allows the money to grow in the fund on gross basis.
Taxation and liquidity needs are a factor in deciding between the
options.
The advisor needs to understand the investors situation before
advising.
Many AMCs, distribution houses and mutual fund research houses
offer free tools in their website to help understand performance of
schemes.
Selecting the Right Investment

Products for Investors
Physical assets like land, building and gold have value and
can be touched, felt and used. Financial assets have value,
but cannot be touched, felt or used as part of their core value.
Shares, debentures, fixed deposits, bank accounts and
mutual fund schemes are all examples of financial assets that
investors normally invest in.
The difference in comfort is perhaps a reason why nearly half
the wealth of Indians is locked in physical assets.
There are four financial asset alternatives to holding gold in
physical form ETF Gold, Gold Sector Fund, Gold Futures &
Gold Deposits.

Wealth Tax is applicable on gold holding (beyond the

jewellery meant for personal use).
However, mutual fund schemes (gold linked or
otherwise) and gold deposit schemes are exempted
from Wealth Tax).
Real estate in physical form has several
disadvantages.
Therefore, investors worldwide prefer financial assets
as a form of real estate investment.
Bank deposits and mutual fund debt schemes have
their respective merits and demerits.

Pension Funds Regulatory and Development Authority

(PFRDA) is the regulator for the New Pension Scheme.
Two kinds of pension accounts are envisaged: Tier I
(Pension account), is non withdrawable.
Tier II (Savings account) is withdrawable to meet
financial contingencies.
An active Tier I account is a pre-requisite
for opening a Tier II account.
The NPS offers fewer portfolio choices than mutual
funds.

However, NPS offers the convenience of a single

Personal Retirement Account Number (PRAN), which is
applicable across all the PFMs where the investors
money is invested.
Further, the POPs offer services related to moneys
invested with any of the PFMs.
Helping Investors with Financial

Planning.
Financial planning is a planned and systematic

approach to provide for the financial goals that will
help people realise their aspirations, and feel happy.
The costs related to financial goals, in todays terms,
need to be translated into the rupee requirement in
future.
This is done using the formula A = P X (1 + i)n
The objective of financial planning is to ensure that the
right amount of money is available at the right time to
meet the various financial goals of the investor.

Planning.
An objective of financial planning is also to let the

investor know in advance, if some financial goal is not
likely to be fulfilled.
The process of financial planning helps in understanding
the investor better, and cementing the relationship with
the investors family.
This becomes the basis for a long term relationship
between the investor and the financial planner.
A goal-oriented financial plan is a financial plan for a
specific goal. An alternate approach is a comprehensive
financial planwhere all the financial goals of a person
are taken together, and the investment strategies worked
out on that basis

Planning.
An objective of financial planning is also to let the

investor know in advance, if some financial goal is not
likely to be fulfilled.
The process of financial planning helps in understanding
the investor better, and cementing the relationship with
the investors family.
This becomes the basis for a long term relationship
between the investor and the financial planner.
A goal-oriented financial plan is a financial plan for a
specific goal. An alternate approach is a comprehensive
financial plan where all the financial goals of a person
are taken together, and the investment strategies worked
out on that basis

Planning.
The
Certified Financial Planner Board of Standards (USA)

proposes the following sequence of steps for a
comprehensive financial plan:
Establish and Define the Client-Planner Relationship
Gather Client Data, Define Client Goals
Analyse and Evaluate Clients Financial Status
Develop and Present Financial Planning
Recommendations and / or Options
Implement the Financial Planning Recommendations
Monitor the Financial Planning Recommendations
Life Cycle and Wealth cycle approaches help understand the
investor better.
Suggested Portfolio based on Risk tolerance

Aggressive Plan
5%
Moderate Plan
9%
14%
32%
18%
19%
62%
41%
This plan may suit:

Investors in their prime earning years and
willing to take more risk
Investors seeking growth over a long term
This plan may suit:

Investors seeking income and
moderate growth
Investors looking for growth and
stability with moderate risk
Conservative Plan
10%
10%
25%
55%
Growth Schemes
This plan may suit:

Retired and other investors who need
to preserve capital and earn regular
income
Income Schemes
Money Market Schemes
Balanced Schemes
Recommending Model Portfolios &

Financial Plans
There are differences between investors with respect to

the levels of risk they are comfortable with (risk
appetite).
Risk profiling is an approach to understand the risk
appetite of investors - an essential pre-requisite to
advise investors on their investments.
Risk profilers have their limitations.
Risk profile is influenced by personal information, family
information and financial information.
Spreading ones exposure across different asset classes
(equity, debt, gold, real estate etc.) balances the risk.

Financial Plans
Some international researches suggest that asset

allocation and investment policy can better explain
portfolio performance, as compared to being
exposed to the right asset classes (asset allocation)
is a more critical driver of portfolio profitability than
selection of securities within an asset class (stock
selection) and investment timing.
Strategic Asset Allocation is the ideal that comes out
of the risk profile of the individual.

Financial Plans
Tactical Asset Allocation is the decision that comes out of
calls on the likely behaviour of the market.
Financial planners often work with model portfolios the
asset allocation mix that is most appropriate for different
risk appetite Levels.
The financial planner would have a model portfolio for
every distinct client profile.

Mutual Funds

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Mutual Funds

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NISM-Series-V-A: Mutual Fund

Concept and role of a mutual

Role of mutual funds

Role of Mutual Funds

How do Mutual Fund schemes

Schemes announce investment objectives

How do Mutual Fund schemes

How do Mutual Fund schemes

Schemes first availability

How do Mutual Fund schemes

AUM (assets under management)

(+) interest income

Affordable portfolio diversification

Not liable to pay tax on the mutual fund income in

Systematic approach to investments

Limitations of Mutual Fund

Lack of portfolio customization

Investor has no control over costs

Open- ended funds

Actively managed funds

Types of Debt Funds

Diversified Debt funds

Types of Debt Funds

Junk bond schemes / High yield bond schemes

Fixed maturity plans

Types of Debt Funds

Floating rate funds

Types of Equity Funds

Diversified equity fund

Types of Equity Funds

Equity linked savings scheme

Rajiv Gandhi equity savings schemes (RGESS)

Equity income / dividend yield schemes

Types of Equity Funds

Types of Gold funds

Gold Exchange Traded Fund

Gold Sector Fund

Types of Hybrid funds

Monthly Income Plans

Types of Hybrid Funds

Capital protection schemes

Some of the hybrid funds are launched as Asset

Real Estate Funds

Commodities, as an asset class, include:

Food crops like wheat and gram

Gold funds are structures as Gold ETF or gold

These funds invest outside the country

The investment in these funds could be specific to

Exchange traded funds

Open ended funds whose units are traded in a

Exchange traded funds

In an ETF, investors can buy and sell their

Mutual funds in India

As of July 31, 2014:

Fund Structure and

Legal structure of mutual funds in India

Legal structure of mutual

Legal structure of mutual

Mutual Fund Trust

HDFC Mutual Fund

Housing Development Finance Corporation Ltd.

HDFC Trustee Company Limited