amfi bafdl

8/14/2019 Amfi Bafdl

1/33

INDEX

Chapters Name of Chapter

Approx No.

of Question

Approx

No.of Marks

1 & 2 Introduction & Mutual fund Products 6 7

3 & 4 Sponsor, Trustee, AMC and Other Constituents 2 3

5 Legal and Regulatory Framework 4 4

6 Offer Document and Key Information Memorandum 7 12

7 Processes, rights and obligations for investors 4 5

8 Tax Aspects 1 2

9 NAV and Pricing 2 3

10 Equity Markets and Mutual Funds 2 3

11 Debt Markets and Mutual Funds 2 3

12 Restrictions on Investment 3 4

13 , 14 Accounting and Valuation 4 6

15 , 16 Risk, Return and Performance 7 11

17 Financial Planning Process

18 Life Cycle and Wealth Cycle Stages

19 Investment Products

20 Investment Strategies

21 Asset Allocation and Model Portfolios 25 37

Total Test Duration: 2 hrs 69 100


2/33

Chapters 1 & 2

Introduction & Mutual Fund ProductsApproximate Weightage: 6 questions, 7 marks

Key Points

A mutual fund is a pool of money collected from investors and is invested according to

stated investment objectives. Mutual fund investors are like shareholders and they own the fund.

Mutual fund investors are not lenders or deposit holders in a mutual fund.

Everybody else associated with a mutual fund is a service provider, who earns a fee.

The money in the mutual fund belongs to the investors and nobody else.

Mutual funds invest in marketable securities according to the investment objective.

The value of the investments can go up or down, changing the value of the investorsholdings.

The net asset value (NAV) of a mutual fund fluctuates with market price movements.

The market value of the investors funds is also called as net assets.

Investors hold a proportionate share of the fund in the mutual fund. New investors comein and old investors can exit at prices related to net asset value per unit.

Advantages of mutual funds to investors are:

Portfolio diversification

Professional management

Reduction in risk

Reduction in transaction cost

Liquidity

Convenience and flexibility

Disadvantages of mutual funds to investors are:

No control over costs

No tailor made portfolios

Problems of managing a large portfolio of funds

Background

UTI was the only mutual fund during the period 1963-1988

UTI was the only fund for a long period and enjoyed monopoly status.

The UTI Act, 1963, governs UTI.

In 1987 banks, financial institutions and insurance companies in the public sector werepermitted to set up mutual funds.

SEBI got regulatory powers in 1992.

SBI Mutual Fund was the first bank-sponsored mutual fund to be set up.

The first mutual fund product was UTIs Master Share in 1986.

The private sector players were allowed to set up mutual funds in 1993.

In 1996 the mutual fund regulations were substantially revised and modified.

In 1999 dividends from mutual funds were made tax exempt in the hands of

investors. Mutual fund assets in mid-2002 were approximately Rs. 1,00,000 crore.

Mutual funds can be open ended or closed end.

In an open-ended fund, sale and repurchase of units happen on a continuous basis, atNAV related prices, from the fund itself.

The corpus of open-ended funds, therefore, changes everyday.

A closed-end fund offers units for sale only in the IPO. It is then listed in the market.

Investors wanting to buy or sell units have to do so in the stock markets. Usuallyclosed-end funds sell at a discount to NAV.


3/33

The corpus of a closed-end fund remains unchanged.

Mutual funds also offer equity linked savings schemes (ELSS) that have the followingfeatures:

3 year lock in Minimum investment of 90% in equity markets at all times Open ended or closed end Rebate of 20% under section 88 for investments up to Rs. 10,000.

Gilt funds are funds that invest only in government securities

Sectoral funds are also called as specialty funds.

Equity funds are risky; liquid funds have the lowest risk.

Equity funds are for the long term; liquid funds are for the short term.

Investors choose funds based on their objective, risk appetite, time horizon andReturn expectations.

Chapters 3 & 4

Sponsor, Trustee, AMC and Other ConstituentsApproximate Weightage: 2 questions; 3marks

Key Points

Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC.

Sponsor is the promoter of the fund.

Sponsor creates the AMC and the trustee company and appoints the boards of boththese companies, with SEBI approval.

The mutual fund is formed as trust in India, and not as a company.

In the US mutual funds are formed as investment companies.

The sponsor contributes the AMCs capital.

Investors money is held in the Trust (the mutual fund). The AMC gets a fee for managingthe funds, according to the mandate of the investors.

The trustees make sure that the funds are managed according to the investors mandate.

Sponsor should have at least a 5-year track record in the financial services business andshould have made profit in at least 3 out of the 5 years.

Sponsor should contribute at least 40% of the capital of the AMC.

Trustees are appointed by the sponsor with SEBI approval. At least 2/3 of trustees should be independent.

At least of the AMCs Board should be of independent members

An AMC cannot engage in any business other than portfolio advisory and management.

An AMC of one fund cannot be Trustee of another fund.

AMC should have a net worth of at least Rs. 10 crore at all times.

AMC should be registered with SEBI.

AMC signs an investment management agreement with the trustees.

Trustee company and AMC are usually private limited companies.

Trustees are required to meet at least 4 times a year to review the AMC.

The investors funds and the investments are held by the custodian, who is the guardianof the funds and assets of investors.

Sponsor and the custodian cannot be the same entity.

R&T agents manage the sale and repurchase of units and keep the unit holder accounts. If the schemes of one fund are taken over by another fund, it is called as scheme take

over. This requires SEBI and trustee approval.

If two AMCs merge, the stakes of sponsors changes and the schemes of both fundscome together. High court, SEBI and Trustee approval needed.

If one AMC or sponsor buys out the entire stake of another sponsor in an AMC, there is atake over of AMC. The sponsor who has sold out, exits the AMC. This needs high courtapproval as well as SEBI and Trustee approval.


4/33

Investors can choose to exit at NAV if they do not approve of the transfer. They have aright to be informed. No approval is required, in the case of open-ended funds.

For closed-end funds, investor approval is required for all cases of merger and takeover(as per the curriculum). Closed end fund investors also do not have exit option.

Chapter 5

Legal and Regulatory Framework

Approximate Weightage: 4 questions; 4 marks.

Key Points

Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.

SEBI is the regulator of all funds, except offshore funds.

Bank-sponsored mutual funds are jointly regulated by SEBI and RBI.

If there is a bank-sponsored fund, it cannot provide a guarantee without RBIpermission.

RBI regulates money and government securities markets, in which mutual funds invest.

Listed mutual funds are subject to the listing regulations of stock exchanges.

Since the AMC and Trustee Company are companies, any complaints against theirboard can be made to the CLB.


Investors cannot sue the trust, as they are the same as the trust and cannot suethemselves.

UTI does not have a separate sponsor and AMC.

UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations.

SROs are the second tier in the regulatory structure.

SROs get their powers from the apex regulating agency, act on their instructions andregulate their own members in a limited manner.

SROs cannot do any legislation on their own.

All stock exchanges are SROs.

AMFI is an industry association of mutual funds. AMFI is not yet a SEBI registered SRO.

AMFI is regulated by its own board made up of its members.

Chapter 6

Offer Document and Key Information MemorandumApproximate Weightage: 7questions; 12 marks

Key Points

Offer Document (OD) is the most important source of information for investors.

Abridged version of the OD is called as Key Information Memorandum (KIM).

Investors are required to read and understand the offer document.

No recourse is available to investors for not reading the OD or KIM, as they

sign the form stating that they have read the OD. The cover page contains the details of the scheme being offered and the names

of sponsor, trustee and AMC.

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

OD is issued by the AMC on behalf of the trustees.

KIM has to be compulsorily made available along with the application form.

Closed end funds issue an offer document at the time of the IPO.

Open-ended funds have to update OD at least once in 2 years.


5/33

Trustees approve the contents of the OD and KIM.

The format and content of the OD has to be as per SEBI guidelines.

The AMC prepares the OD and is responsible for the information contained in the OD.

The Compliance Officer has to sign the due diligence certificate. He is usually anAMC employee.

The due diligence certificate states that:

Information in the OD is according to SEBI formats Information is verified and is a true and fair representation of facts All constituents of the fund are SEBI registered SEBI does not approve or certify the contents of the OD.

Factors common to all funds are called as standard risk factors. These include

Market risk, no assurances of return, etc.

Factors specific to a scheme are scheme-specific risk factors in the Offer

Document. These include restrictions on liquidity such as lock-in period, risks of

Investing in the first scheme of a fund, etc.

Fundamental attributes of a scheme include its basic features.

For any change in fundamental attributes, investor approval is not needed. Trustees andSEBI should approve the change.

Each investor should be informed through a communication and given the option to exit

without paying any exit load. A scheme cannot make any guarantee of return, without stating the name of the

Guarantor, and disclosing the net worth of the guarantor. The past performanceof the assured return schemes should also be given.

Information on existing schemes and financial summary of existing schemes to be

given for 3 years.

Information on transactions with associate companies to be provided for the past3 years.

If any expense incurred is higher than what was stated in the OD, for past schemes,explanations should be given.

There is no information on other mutual funds, their product or performance in the OD.

Investors rights are stated in the OD.

The borrowing restrictions on the mutual fund should be disclosed. This includes the

purposes and the limits on borrowing. Investors have the right to inspect a number of documents. These are:

Trust deed Investment management agreement SEBI (MF) Regulations AMC annual reports Unabridged offer document Annual reports of existing schemes

3 years track record of investors complaints and redressal should be disclosed in theOD.

Any pending cases or penalties against sponsors or AMC should be disclosed in the OD.

The offer document contains detailed information, while the KIM is a summary form of theOD. If any information is crucial to the investor, it will be found in both KIM and OD. For

example, the details of guarantee if the scheme is an assured return scheme. The name and addresses of trustees and AMC directors will be found in the KIM, but the

details of their role, responsibilities and duties will not be found in the KIM, but only in theOD.

The OD and KIM are documents of a mutual fund and there will be no information aboutother mutual funds in an OD. There will be no comparisons are data on performance ofother mutual funds.

The OD and KIM will not contain names of securities in which the mutual fund plans toinvest. Only broad allocation will be given.


6/33

Chapter 7Processes, rights and obligations for investorsApproximate Weightage: 4 questions; 5 marks

Key Points

Categories of investors eligible to apply is stated in the offer document.

Whether a certain class of investor, such as a trust or a company can invest in afund, depends on the list of eligible investors in the OD.

Non-resident Indians (NRIs) and overseas corporate bodies (OCBs) are eligible to investin mutual funds.

Foreign nationals and entities cannot invest in mutual funds.

Any investor who becomes a foreign citizen after investing in a fund, has toCompulsorily redeem the units after obtaining foreign citizenship.

The curriculum does no explicitly recognise a Person of Indian Origin (PIO).

Therefore any Indians seeking foreign citizenship should redeem their units. This is notthe case in reality, but is the expected answer in the examination.

FIIs can invest in mutual funds. They invest through the Non-resident rupeeAccount.

RBI permission for NRIs, OCBs and FIIs is blanket permission. Every investment doesnot need RBI approval.

Prospective investors have no legal remedies.

Agents can sell products of multiple mutual funds.

Agents are appointed after they clear the AMFI exam and sign an agreement with theAMC on non-judicial stamp paper.

Fees and commissions are decided by the AMC and not subject to any regulation.

Investors have the right to receive redemption proceeds within 10 days.

Investors have the right to sue the AMC, Trustees or Sponsor.

Investors cannot sue the Trust as they are the Trust and cant sue themselves.

An open ended fund opens for sale and repurchase within 30 days from the date ofclosure of the IPO.

Investors do not have any remedy for performance of the fund being below the

Investors expectations. If investors representing 75% of the unit capital approve, the AMCs services can be

terminated, or the scheme can be wound up.

The first right of the investor is towards the trustees.

If a fund does not redress their complaint they can go to SEBI.

AMFI does not require that every investment decision must be approved by aninvestor.

Chapter 8Tax AspectsApproximate weightage 1 question; 2 marks

Key Points

Mutual funds themselves pay no tax on the incomes they earn. They are fully exemptfrom tax.

If an investor holds units for 12 months or less, any gain from selling the units iscalled 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 calledas long-term capital gain.


7/33

Long-term capital gain can be indexed for inflation.

Indexing refers to updating of the purchase price, based on the cost of inflationindex published by the CBDT.The formula for indexation is purchase price X (index in theyear of sale/index in the year of purchase).

Investors can pay either 10% tax (plus surcharge) on the capital gain tax withoutindexation or 20% (plus surcharge) on capital gains after indexation, whichever is lower.

Example:An investor invests Rs. 4,00,000 in a mutual fund. He sells his investments after 2 years for

Rs. 6,00,000. What is the capital gains tax payable, without indexation?(Ignore surcharge).In the above case the capital gain is Rs. 2,00,000, on which 10% is payable ascapital gains tax, without indexation. This amounts to Rs. 20,000.

Chapter 9

NAV and PricingApproximate Weightage: 2 questions; 3marks.

Key Points

Load is charged to the investor when the investor buys or redeems (repurchases)units.

Load is an adjustment to the NAV, to arrive at the price.

Load that is charged on sale of units is called as entry load.

An entry load will increase the price, above the NAV, for the investor.

Load that is charged when the investor redeems his units is called an exit load.

Exit load reduces the redemption proceeds of the investor.

Load is primarily used to meet the expenses related to sale and distribution of units.

An exit load that varies with the holding period of an investor is called a (contingentdeferred sales charge) CDSC.

To arrive at the sale price, given NAV and load (%), we have to calculate theamount of load and add it to the NAV. The amount of load will be = NAV x (entryload/100).

To arrive at the sale price, given NAV and load (%), we have to calculate the amount ofload and reduce it from the NAV. The amount of load will be = NAV x (exit load/100).

Load is subject to SEBI regulations SEBI has stipulated that the maximum level of entry or exit load cannot () be

higher than 7%.

SEBI also stipulates that the repurchase price cannot be less than 93% of the saleprice.

Minimum repurchase price, given sale price is = NAV X (1 7%)


For closed end funds, the maximum entry of exit load cannot be higher than 5%.

The repurchase price cannot be less than 95% of the sale price.

Chapter 10

Equity Markets and Mutual FundsApproximate Weightage: 2 questions; 3 marks.

Key Points

The investment pattern of the fund is primarily dictated by the fund objectives.

A fund manager whose style is value investing, will prefer to invest in establishedprofit making companies, and will buy only if the price is right. He will look for

undervalued shares, which have a value proposition that is yet to be recognized


8/33

by the market.

A fund manager, whose style is growth, is more aggressive and is willing to invest incompanies with future profit potential. He is willing to buy even if the stock looksexpensive. He focuses on sectors that are expected to do well in future, and will bewilling to buy them even at higher prices.

Equity stocks can be classified as large cap and small cap stocks.

Large cap stocks are liquid and trade every day. They are established companies

offering normal profit potential.

Small cap stocks provide higher return potential. But they are generally not very

liquid.

Cyclical stocks are those whose performance is closely linked to macro economic factors.

P/E ratio is the ratio of earnings per share (EPS) to market price per share. Growthshares sell at higher P/E ratios than value shares.

Dividend yield is the ratio between the dividend per share and market price per

share. Growth shares have lower dividend yields than value shares.

If the market prices move up, P/E ratios are higher and dividend yields are lower.

If the market prices move down, P/E ratios are lower and dividend yields are higher.

An active fund manager hopes to do better than the market by selecting companies,which he believes, will outperform the market.

A passive fund manager simply replicates the index, and hopes to do as well as theindex.

A passive fund manager tries to keep costs down and has to rebalance his portfolio if thecomposition of the index changes.

Fundamental analysis is the analysis of the profit potential of a company, based on thenumbers relating to products, sales, costs, profits etc, and the management of acompany.

Technical analysis is an analysis of market price and volumes, to identify clues to themarket assessment of a stock.

A fund manager focuses on asset allocation; a dealer buys and sells shares; and ananalyst researches companies and recommends them for buy and sell.

Chapter 11

Debt Markets and Mutual FundsApproximate Weightage: 2 questions; 3marks.

Key Points

Debt Instruments are issued by government, banks and companies.

They can pay interest on fixed rates, floating rates or on discounted basis.

If no interest is paid, such an instrument is a zero coupon instrument.

Debt markets are wholesale markets in which large institutional investorsoperate. Banks are the largest players in debt markets.

About 96% of secondary market trading happens in government securities.

Basic characteristics of bonds are as follows:

Principal value, par value, or face value is the amount representing theprincipal borrowed and the rate of interest is calculated on this sum.On redemption this amount is payable.

Coupon is the interest paid periodically to the investor.

Maturity date is the date on which a bond is redeemed. Term to maturity ortenor is the period remaining for the bond to mature.

Put option refers to the option to the investor to redeem the bond beforematurity. Call option is the option to the borrower to redeem beforematurity.


9/33

If interest rates go up, above the coupon rate, investors may exercise theput option. If interest rates fall below the coupon rate, issuers may exercisethe call option.

Current yield is the ratio of coupon amount to market price of a bond. If a bond,paying coupon at 8% is selling in the market for Rs. 105, the current yieldis 8/105 = 7.62%.

Changes in interest rates impacts bond values, in the opposite direction. An increase ininterest rates leads to a fall in bond values; a decrease in interest rates leads to anincrease in bond values.

Duration of a bond helps measure the interest rate risk of a bond. It is the weightedaverage maturity of a bond.

Credit risk refers to the risk of default.

The base rate or benchmark rate in the bond market is the rate at which thegovernment borrows in the market. All other borrowers pay a rate that is higher,due to the presence of credit risk.

The difference between the benchmark rate and the rate that is paid by otherborrowers are called the credit spread. (Called as yield spread in the AMFI book).

Chapter 12

Restrictions on InvestmentApproximate Weightage: 3 questions; 4 marks.

Key Points

Mutual funds can invest only in marketable securities.

A mutual fund, under all its schemes, cannot hold more than 10% of the paid-upcapital of a company.

Except in the case of sectoral funds and index funds, a mutual fund scheme cannotinvest more than 10% of its NAV in a single company.

Investments in rated investment grade issues of a single issuer cannot exceed 15% ofthe net assets and can be extended to 20%, with the approval of the trustees.

Investment in unrated securities cannot exceed 10% of the net assets for one issue and25% of net assets for all such issues.

Investment in unlisted shares cannot exceed 5% of net assets for an open-endedscheme, and 10% of net assets for a closed end scheme.

The Inter scheme transfers are allowed by the SEBI regulations, provided:

Such transfers happen on a delivery basis, at market prices.

Such transfers do not result in significantly altering the investment objectives ofthe schemes involved.

Such transfer is not of illiquid securities, as defined in the valuation norms.

A mutual fund can borrow a sum not exceeding 20% of its net assets, for a period notexceeding 6 months. This facility is clearly designed as a stopgap arrangement, and isnot a permanent source of funds for the scheme.

A fund can borrow only to meet liquidity requirements for paying dividend or meetingredemptions.

All investment made in the marketable securities of the sponsor and its associatedcompanies must be disclosed by the mutual fund in its annual report and offer document.

A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associateor group company of the sponsor.

A mutual fund scheme cannot invest in privately placed securities of the sponsor or itsassociates.

Investment by a scheme in listed securities of the sponsor or associate companiescannot exceed 25% of the net assets of the scheme.


10/33

Chapter 13 & 14

Accounting and ValuationApproximate Weightage: 4 questions; 6 marks.

Key Points

Investors subscriptions to the mutual fund are accounted as unit capital, and not asliabilities or deposits.

Assets of a mutual fund are the investments made by the fund.

Liabilities of a mutual fund are strictly short term in nature.

The unit capital account is maintained at face value.

NAV is the net assets per unit, computed as net asset divided by number of unitsoutstanding.

The day on which NAV is calculated is called as the valuation date.

All mutual funds have to disclose their NAV everyday, by posting it on the AMFI website by 8.00 p.m.

Open-ended funds have to compute and disclose NAVs everyday.

Closed end funds can compute NAVs every week, but disclosures have to be madeeveryday.

Initial issue expenses of a scheme cannot exceed 6% of funds mobilised. Anyamounts above this have to be borne by sponsors or AMC.

For a closed end fund, initial issue expenses are charged over the life of thescheme, on a weekly basis.

For an open-ended scheme, the initial issue expenses are carried in the balancesheet of the fund as deferred revenue expenses. They are written off over a periodnot exceeding 5 years.

The maximum limit on the expenses that can be charged to an equity mutual fundare: For net assets up to Rs. 100 crore: 2.5% For the next Rs. 300 crore of net assets: 2.25% For the next Rs. 300 crore of net assets: 2% For the remaining net assets: 1.75% These limits are lower by 0.25% for debt funds These regulatory ceilings are applied on the weekly average net assets of the

mutual fund scheme. The investment management fees are regulated by SEBI as follows: For the first Rs. 100 crore of net assets: 1.25% For net assets exceeding Rs. 100 crore: 1.00% Valuation of equity shares is done on the basis of traded price; provided that

price is not more than 30 days old. Debt securities with less than 182 days to maturity are valued on accrual basis.

The accrual is calculated as follows: A t-bill is issued at Rs. 80 and redeemed at Rs. 100 after 364 days. The accrual

per day is = 20/364 = 0.5494 Illiquid securities cannot be more than 15% of the portfolios net assets. Any

illiquid assets above this limit have to be valued at zero.

Chapter 15 & 16

Risk, Return and PerformanceApproximate Weightage: 7 questions; 11 marks.

Key Points


11/33

Rate of return is computed as: (Income earned/Amount invested)*100.

This number can be annualised by multiplying the result by the factor 12/n,where n is the number of months in the holding period. If the holding period is indays, the above factor will be 365/n, where n is the number of days in the holdingperiod.

Change in NAV method of calculating return is applicable to growth funds and fundswith no income distribution.

Change in NAV method computes return as follows:

(NAV at the end of the holding period NAV at the beginning of the holdingperiod)/NAV at the beginning of the period.

Return is then multiplied by 100 and annualised.

The total return with re-investment method or the ROI method is superior to all thesemethods. It considers dividend and assumes that dividend is re-invested at the ex-dividend NAV.

Total Return or ROI Method computes return as follows: ([Value of holdings at the end of the period - value of holdings at the beginning of

the period)/ value of holdings at the beginning of the period] x 100 Value of holdings at the beginning of the period = number of units at the

beginning x begin NAV. Value of holdings end of the period = (number of units held at the beginning +

number of units re-invested) x end NAV. Number of units re-invested = dividends/ex dividend NAV. Expense ratio is an indicator of efficiency and very crucial in a bond fund. Income ratio is the ratio of net investment income by net assets. This ratio is

important for fund earning regular income, such as bond funds, and not for fundswith growth objective, investing for capital appreciation.

Portfolio turnover rate refers to the ratio of amount of sales or purchases (whichever is lesser) to the net assets of the fund.

Higher the turnover ratio, greater is the amount of churning of assets done by thefund manager.

High turnover ratio can also mean higher transaction cost. This ratio is relevantfor actively managed equity portfolios.

If the turnover of a fund is 200%, on average every investment is held for aperiod of 6 months.

Risk arises when actual returns are different from expected returns.

Standard deviation is an important measure of total risk. Beta co-efficient is a measure of market risk. The quality of beta depends on

exmarks. If ex-marks are high beta is more reliable. Ex-marks are an indication of extent of correlation with market index. Index

funds have ex-marks of 100%. Comparable passive portfolio is used as benchmark. Usually a market index is used as a benchmark. Compare both risk and return, over the same period for the fund and the

benchmark. Risk-adjusted return is the return per unit of risk. Comparisons are usually done

With a market index

With funds from the same peer group With other similar products in which investors invest their funds

When comparing fund performance with peer group funds, size and compositionof the portfolios should be comparable.

Treynor and Sharpe ratios are used for evaluating performance of funds. The quality of beta depends on ex-marks.


12/33

Chapter 17

Financial Planning ProcessApproximate Weightage: Chapters 17 22: 25 questions; 37 marks

Key Points

Financial planning comprises

Defining a client's profile and goals

Recommending appropriate asset allocation

Monitoring financial planning recommendations

Financial planning helps a mutual fund distributor to establish long-termrelationships and build a profitable business.

Financial planning is a very profitable business in the US.

Steps in financial planning are: Asset Allocation Selection of fund Studying the features of a scheme

Financial planning is concerned only with broad asset allocation, leaving the actualselection of securities and their management to fund managers.

Investors delegate the task of investing in securities to the fund manager.

The financial planner can only work with defined goals and cannot take up largerobjectives that are not well defined.

The client is responsible ultimately for realising the goals of the financial plan.

The basis of genuine investment advice should be financial planning to suit theinvestor's situation

Risk tolerance of an investor is not dependent on the market, but his own situations.

Chapter 18

Life Cycle and Wealth Cycle Stages

Key Points

The life cycle stages of an investor can be classified as follows: Childhood stage Young unmarried stage Young married with children stage Married with older children stage Pre-retirement stage Retirement stage

The income level of investors, the saving potential, the time horizon and the riskappetite of an investor depend on his life cycle.

Younger investors have higher income and saving potential, take longer-term viewand may be willing to take risks.

There are 3 wealth cycle stages for investors:

Accumulation stage is when investors are earning and have limited need forinvestment income. They focus on saving and

Older investors may have limited income and saving, shorter time horizon, andunwilling to risk their savings. accumulating wealth for the longterm. Equity investments are preferred in this stage.

Transition stage is when financial goals are approaching. Investors still earn


13/33

incomes, but have also draw on their earnings. Investors choose balancedportfolios that have both debt and equity.

Reaping stage or distribution stage in when investors need the income from theirinvestment, and cannot save further. They reap the benefits of their savings.They prefer debt investments and preserving of capital at this stage.

Inter-generational fund transfer refers to transfer of wealth to an investor. Thepreferred investment avenue will depend on the life cycle and wealth cycle stage ofthe beneficiaries.

These investors who transfer wealth do not require financial planning.

Sudden wealth surge refers to winnings in games and lotteries. Investors should beadvised to temporarily park their funds in money market investments and create along-term plan after thinking through the plan. They must also take into account theimpact of tax.

Affluent investors are of two types: Wealth preserving investors who are risk-averse and like to invest in debt. Wealth creating investors who prefer growth and are willing to take the risk of

equity investments.

Chapter 19

Investment Products

Key Points

Key features of all investment options should be remembered. Please note that thequestions are based on the date of the curriculum, which is December 2001. Anychanges in rates and other features after that date are not included in theexamination. For example, rate on the RBI Relief Bond, for the exam, is 8.5% andnot 8%.

Physical assets like gold and real estate are preferred by investors who like physicalownership. These investments are not liquid.

Physical assets are perceived to be a hedge against inflation.

Real estate investment requires high initial investments.

Bank deposits are preferred by a large number of investors due to the perception of

bank deposits being safe and free of default.

Features of PPF

15 years deposit product made available through banks. 9.5% p.a. interest payable on monthly balances. Minimum Rs. 100 and maximum Rs. 60,000 p.a. investment allowed. Tax benefits u/s 88 under IT Act. Interest receipt and withdrawal of principal exempt from tax. Limited liquidity available. Only individuals and HUFs are eligible to invest

Features of RBI Relief Bonds

Issued by banks on behalf of the RBI. Tenure of five years. 8.5% p.a. interest payable semi-annually. Option to receive or reinvest interest. Interest income exempt from tax.

Features of other government schemes


14/33

Indira Vikas Patra and KVP issued by central government and sold by post offices. Current yield on IVP is 10.5% (according to the curriculum). Interest is taxable. Investor identity is protected and investment in cash is possible.

Features of instruments issued by companies

Commercial Paper: Short term (90days) unsecured instrument. Credit rated.

Debentures: Secured fixed income instruments with credit rating. Equity Shares Liquidity through listing. Preference Shares Fixed rate of dividend. Fixed Deposits Unsecured deposits with credit risk. Bonds of FI Unsecured fixed income securities issued by public financial institutions.

Features of insurance policies

Investors buy due to tax concessions, while they should buy for theinsurance cover.

With profit policy provides bonus along with sum assured. Without profit policy only provides insurance cover.

Why MF is the best option

Mutual funds combine the advantages of each of the investment products. Dispense the shortcomings of the other options. Returns get adjusted for the market movements.

Chapter 20Investment StrategiesKey Points

Investors should choose to allow their investment to compound over the long run.

This can be achieved by choosing the growth or re-investment option of mutualfunds. Automatic reinvestment plans can also be used.

Buy and hold strategy which is preferred by many investors, may not be beneficialbecause investors may not weed out poor performing companies and invest in better

performing companies.

Rupee-cost averaging (RCA) involves the following: A fixed amount is invested at regular intervals. More units are bought when price is low and fewer units are bought when

price is high. Over a period of time, the average purchase price of the investors holdings

will be lower than if one tries to guess the market highs and lows. RCA does not tell indicate when to sell or switch from one scheme to another. This is a

disadvantage. Investors use the systematic investment plan or automatic investment plan to

implement RCA.

Value averaging involves the following: A fixed amount is targeted as the desired value of the portfolio at regular

intervals. If markets have moved up, the units are sold and the target value is

restored. If markets move down, additional units are bought at the lower prices. Over a period of time, the average purchase price of the investors holdings

will be lower than if one tries to guess the market highs and lows. Value averaging is superior to RCA, because it enables the investor to book profits and

rebalance the portfolio.


15/33

Investors can use the systematic withdrawal and automatic withdrawal plans toimplement value investing.

Investors can also use a money market fund and an equity fund to implement valueaveraging.

Chapter 21Asset Allocation and Model PortfoliosKey Points

Asset allocation is about allocating money between equity, debt and money marketsegments.

Asset allocation varies from one investor to another depending on their situation,financial goals and risk appetite.

A model portfolio creates an ideal approach for the investors situation and is asensible way to invest.

The asset allocation for an investor will depend on his life cycle and wealth cycle.

Investors can have two strategies: Fixed asset allocation Flexible asset allocation

Fixed asset allocation means Maintaining the same ratio between various components of the portfolio

Re-balancing the portfolio in a disciplined manner Fixed allocation means a periodical review and returning to the original allocation. If

equity is going up, such investors would book profits. They are disciplined.

Flexible allocation means allowing the portfolios profits to run, without booking them. If equity market appreciates, flexible asset allocation will result in higher percentage

in equity than in debt. Graham recommends that most investors should choose a 50:50 allocation, that is

50% in equity and 50% in debt. Bogle recommends that age, risk profile and preferences have to be combined in

asset allocation Older investors in distribution phase - 50% equity; 50% debt Younger investors in distribution phase - 60% equity; 40% debt Older investors in accumulation phase - 70% equity; 30% debt

Younger investors in accumulation phase - 80% equity; 20% debt Steps in developing a model portfolio for the investors:

Develop long term goals Determine asset allocation Determine sector distribution Select specific fund schemes for investment Jacobs Model Portfolios Accumulation phase

Diversified equity: 65 - 80%

Income and gilt funds: 15 - 30%

Liquid funds: 5%

Distribution phase

Diversified equity: 15 - 30%

Income and gilt funds: 65 - 80% Liquid funds: 5%

Chapter 22

Fund selection Fund selection refers to the actual choice of funds according to the chosen model

portfolio for the investor.

Equity funds: Characteristics:


16/33

Fund category the fund chosen should be suitable to investor objective

Investment style Choose between growth and value depending on investors riskperception

Age of the fund Experienced funds are preferred to new funds

Fund management experience Track record of the fund managers is important

Size of the fund Larger funds have lower costs

Performance and risk risk adjusted performance matters High beta means higher risk.

High turnover means high transaction costs. Equity Funds: Selection Criteria

Percentage holding in cash should be low Funds can always sell liquid stocks for liquidityrequirements.

Concentration in portfolio should be low An equity fund should be well diversified.

Market capitalization of the fund High capitalization means better liquidity

Portfolio turnover Higher turnover means more transactions and costs, but exploitation ofopportunities. Low turnover represents patience and stable investments.

Risk Statistics

Beta represents market risk, higher the beta higher the risk.

Ex-Marks represents correlation with markets higher the ex-marks, lower the risk. Afund with higher ex-marks is better diversified than a fund with lower ex-marks.

Gross dividend yield represents return. Funds with higher gross dividend yield should be

preferred. Funds with low beta, high ex-marks and high gross dividend yield are preferable

Debt Funds: Selection Criteria

A smaller or new debt fund may not necessarily be risky.

For debt funds expense is important.

For short-term investors, load is more important than expense ratio.

For long-term investors, expense ratio is more important than expenseratio.

Total return rather than yield to maturity (YTM) is important.

Expenses are very important, because high expense ratios lead to yield sacrifice.

Credit quality - Better the rating of the holdings, safer the fund.

Average maturity - Higher average maturity means higher duration and interest rate risk.

Funds with higher average maturity are more risky than funds with lower averagematurity.

Money Market Funds Liquidity and high turnover rate is high. Shorter-term instruments are turned over more frequently. Protection of principal invested is important. NAV fluctuation limited due to low duration and lack of interest rate risk. Credit quality of portfolio should be high. Low expense ratio is important.


17/33

Revision and practice test kit

Sample Test 1

1. A mutual fund is not (1 mark)a. A portfolio of stocks, bonds and other securities b. A company that manages investment portfoliosc. A pool of funds used to purchase securities on behalf of investors d. A collective investment vehicle

2.After UTI, the first mutual funds were started by (1 mark)a. Private sector banks b. Public sector banksc. Financial institutions d. Non-banking Finance Companies

3.Mutual fund can benefit from economics of scale because of (1 mark)a. Portfolio diversification b. Risk reductionc. Large volume of trades d. none of the above

4.Equity Linked Savings Scheme does not have which of the following features? (2 marks)a. It entitles the unit holder to tax rebate b. The investment is locked in for 3 yearsc. A minimum stated level of investments is made in equity d. none of the above

and equity related instruments

5. A close-ended mutual fund has a fixed (1 mark)a. NAV b. Fund Sizec. Rate of Return d. Number of Distributors

6.Of the following fund types, the highest risk is associated with (1 mark)a. Balanced Funds b. Gilt Fundsc. Equity Growth Funds d. Debt Funds

7. The custodian of a mutual fund: (2 marks)a. Is appointed for safekeeping of securities b. Need not be an entity independent of the

sponsorsc. Not required to be registered with SEBI d. Does not give or receive deliveries of

physical securities8. The Mutual fund is constituted as (1 mark)a. A Trust b. A Private limited company

c. An asset management company d. A trustee company

9. A Self Regulatory Organization can regulate (1 mark)a. All entities in the market b. Only its own members in a limited wayc. Its own members with total jurisdiction d. No entity at all

10. Bank owned Mutual Funds are supervised by (1 mark)a. SEBI b. RBIc. Jointly by SEBI & RBI d. AMFI

11. In case of merger of two AMC, 75% of the unit holders have to approve the merger in case of(1 mark)a. Open ended funds b. Both open and close ended fundsc. Close ended funds d. none of the above

12. The first level regulator of AMCs is (1 mark)a. Board of Trustees b. Company Law Boardc. SEBI d. RBI

13. As per SEBI guidelines, a due diligence certificate is not (2 marks)a. Signed by a Compliance Officer of the mutual fund b. A certificate that all legal formalities of a

scheme are completedc. Attached to Annual report d. A part of offer document


18/33

14.An offer document contains an AMCs investor grievances history for the past (1 mark)a. 1 fiscal year b. 2 fiscal year c. 3 fiscal year d. Six months

15. For scheme to be able to change its fundamental attributes, the fund managers must obtain theconsent of (2 marks)a. 50% of the unit holders b. 50% of the trustees

c. 75% of the unit holders d. None of the above

16. SEBI does not require the following to be included in the offer document issued by a mutual fund(1 mark)a. Details of the Sponsor and the AMC b. Description of the Scheme & investment

objective/strategyc. Investors' Rights and Services d. Performance of other mutual funds

17.Mutual funds do not justify the need for paying commission to agents when the investors skipout of the scheme before a specified period. In India this practice is adopted by (2 marks)a.Agents voluntarily paying back the commission to the Mutual fund b. None of the abovec. Trail commission is not paid to the agents d.The whole of commission is paid to the agents

18. An aggrieved unit-holder of a mutual fund can sue (1 mark)a. The AMC b. The trusteesc. The sponsor if returns have been guaranteed by them d. None of the above

19. Distributors or agents (1 mark)a. Can distribute several mutual funds simultaneously b. Cannot appoint sub-agents or sub-brokersc. Should be only individuals not companies or banks d. Should not be an employee or associateof the AMC

20. If a charitable trust approaches a distributor with an application for investment in a mutual fund,thedistributor should (2 marks)a. Accept the application without wasting time b. Reject the application outrightc. Refer to the offer document d. Accept the application as a directapplication

21. One of your friends who have invested in a mutual fund is about to get Canadian citizenship.Whatwould you advise? (2 marks)a. He should transfer the investment to his relative b. He should get RBI approval for continuingc. If he does not need the money, he can continue d. He should immediately redeem his

investment since foreign citizens are not eligible investors

22.The AMFI code of ethics does not cover the following prescriptions (1 mark)a. Adequate disclosures should be made to the investorsb.Funds should be managed in accordance with stated investmentobjectivesc.Conflict of interest should be avoided in dealings with directors or employeesd. Each investment decision should be approved by investors

23.Unit holders' right to information does not include (2 marks)

a. Obtaining from the trustees any information having an adverse effect on their investmentsb. Inspecting major documents of a fundc. Receiving of a copy of the annual financial statements of that fundd. Approving investment decisions of the fund

24. A Debt fund distributes 10% dividend. How much tax does the investor have to pay on thisdividend?(2 marks)a. 10% b. 12%c. 20% d.None


19/33

25.Contingent Deferred Sales Charge (CDSC) (1 mark)a. Is higher for investors who stay invested in the scheme longerb. Is lower for investors who stay invested in the scheme longerc. Is the same for all investors irrespective of how long they stay investedd. Is not allowed to be charged to mutual fund investors in India

26.The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs.20is:(2 marks)a. Rs.2000 b. Rs.2015

c. Rs.1985 d. Rs.2030

27.A high P/E multiple of a fund in comparison to average market multiple could be of (1 mark)a. Value fund b. Growth fundc. Balanced fund d. Equity diversified fund

28.A company whose earnings are strongly related to the state of economy is a (1 mark)a. Economy stocks b. Cyclical Stocksc. Value Stocks d. Growth stocks

29.A value manager does not look for (2 marks)a. Stocks that are currently undervalued in the marketb. Stocks whose worth will be recognized by the market in the long termc. High current yieldd. Long term capital appreciation

30.A bond's rating indicates its (1 mark)a. Reinvestment risk b. Default riskc. Inflation risk d. Interest-rate risk

31. When interest rates rise, bond prices (2 marks)a. Also rise b. Fallc. Are not affected d. Fluctuate either up or down

32.As per SEBI, mutual funds can borrow for short term to the extent of (2 marks)a. Total net assets b. 50% of net assetsc. 25% of net assets d. 20% of net assets

33. A mutual fund is not allowed to invest in the sponsor company, (2 marks)

a. >25% of its net assets b. >10% of its net assetsc. Not at all d. >5% of net assets

34.Liabilities in the balance sheet of a mutual fund are (1 mark)a. In the form of long-term loans b. Strictly short term in naturec. Combination of long term and short term d. Not allowed as per regulations

35. A funds weekly average net assets are Rs. 1000 crore. What is the limit on the expenses of thefund?(2 marks)a. Rs. 10.5 crore b. Rs. 10.25 crorec. Rs. 20.5 crore d. Rs. 17.5 crore

36.A fund's investments at market value total Rs.700 crores, Total liabilities stand at Rs.50 lacs andthenumber of units outstanding is 28 Crores. What is the NAV? (2 marks)

a. Rs.30.19 b. Rs.24.98c. Rs.32.15 d. Rs.40.49

37.For valuation of traded securities, which of the following is not true? (1 mark)a. The security is valued at the last quoted priceb. The security is valued on the basis of earnings capitalisationc. Marking to market is appliedd. If the security has not been traded on valuation date, the trading price on any previous date may be used,provided that date is not more than 30 days prior to valuation date.


20/33

38. A high portfolio turnover in an equity fund means (1 mark)a. The fund is very active in market b. Transaction costs are highc. The fund may be quite risky d. All of the above

39.An actively managed equity fund expects to (1 mark)a. Be able to beat the benchmarks b. Earn the same returns as the benchmarkc. Have no benchmarks d. Under-perform when compared with thebenchmark

40. An Investor buys one unit of a fund at an NAV of Rs.20. He receives a dividend of Rs.3 when the

NAV isRs. 21. The unit is redeemed at an NAV of Rs.22. Total Return is (2 marks)a. 25.71% b. Rs. 27.51c. 21.27% d. Rs. 21.75%

41.For evaluating sectoral funds, the preferred benchmark would be the (1 mark)a. BSE Sensex b. S&P CNX Niftyc. BSE 200 d. S&P CNX Sectoral Indices

42.The appropriate benchmark for evaluating a fund's performance depends on (1 mark)a. The fund manager b. The investment objective of the fundc. SEBI d. AMFI

43. The Expense Ratio as a measure of a fund's performance is defined as (2 marks)a. Total expenses and average net assets b. Total expenses and total assetsc. Average expenses and average net assets d. None of the above

44.The most suitable measure of fund performance for all fund types is (1 mark)a. NAV Change b. Total Returnc. Total Return with reinvestment d. None of the above

45. Financial planners and their clients should focus on (1 mark)a. Allocating funds to asset classes (e.g. debt, equity etc.) b. Allocating funds to individual securitiesc. Tracking stocks which they feel have potential d. None of the above

46. Financial Planning comprises (1 mark)a. Defining a client's profile and goals b. Recommending appropriate assetallocationc. Monitoring financial planning recommendations d. All of the above

47.Which of the following is the first step in financial planning (1 mark)a. Asset Allocation b. Selection of fundc. Studying the features of a scheme d. None of the above

48.Within an asset class, which individual security to invest in should be decided by (2 marks)?a. The financial planner b. The investor himself c. A professional fund manager d. An objective advisor

49.The biggest disadvantage of investment in real estate is (1 mark)a. Less potential for capital appreciation b. High purchase pricec. Depreciation in value as time passes d. Value gets eroded due to inflation

50. The current yield on Indira Vikas Patra works out to (1 mark)a. 10.5% b. 11%

c. 10% d. 9%

51.The maturity period of RBI Relief Bonds is (2 marks)a. 5 years b. 6 yearsc. 7 years d. 8 years

52.The most important factor look for when investing in a corporate fixed deposit is the (1 mark)a. Yield b. Rate of interestc. Credit rating of the deposit d. None of the above53. The most important reason for an investor to prefer a bank deposit to a mutual fund is(2 marks)


21/33

a. The creditworthiness of the bank b. Because the bank does not invest insecurities

c. That the bank offers a guarantee d. All of the above

54. Annual contribution to Public Provident Fund should be (2 marks)a. Rs.10000 b. Between 100 and Rs.60000c. Between Rs.600 and Rs.1000 d. None of the above

55.Compounding of interest is best explained by a (1 mark)a. Balanced fund b. Growth fund

c. Value fund d. Income fund

56.Listing of shares at a stock exchange ensures (1 mark)a. Guaranteed returns b. Long term capital appreciationc. Low risk d. High liquidity

57 The annual yield on RBI Relief Bonds is (2 marks)a. 9.5% b. 9.5% before taxc. 8.5% before tax d. 8.5% after tax

58.Flexible asset allocation means (2 marks)a. Continuously changing the ratio of various assets in the portfoliob. Not doing any re-balancing and letting the profits runc. Active switchingd. None of the above

59. A very high proportion of investment in all types of equity funds is advisable for investors(1 mark)a. In distribution phase b. In accumulation phasec. In transition phase d. Who are wealth preserving affluentindividuals

60.For older investors who want to transfer their wealth (2 marks)a. Financial planning is requiredb. The right investment strategy depends upon who the beneficiaries arec. The right investment strategy depends upon the state of the stock marketd. All the funds can be invested in aggressive equity funds

61.Of the following, which would be suitable for a retiree with a modest risk appetite

(1 mark)a. Value Fund b. Diversified Equity Fundc. Growth Fund d. Balanced Fund

62.The strategy advisable for an investor to maximise investment return in the long run is (2 marks)a. Buy and hold on to investments for a long timeb. Liquidate poorly performing investments from time to timec. Liquidate good performing investments fro time to timed. Switch from poor performers to good performers

63.The transition phase of an investor's wealth cycle is when the (1 mark)a. Financial goals have been already met b. The investor has retiredc. Financial goals are approaching d. Investor suddenly gets a windfall

64.Which of the following lets an investor book profits in a rising market and increase holdings in a

falling market (2 marks)a. Fixed Rates of Asset Allocation b. Flexible Ratio of Asset Allocationc. Investment without any asset allocation plan d. Buy and Hold Strategy

65. A criticism of rupee-cost averaging is (2 marks)a. Investment is for the same amount at regular intervalsb. Over a period of time, the average purchase price will work out lower than if one tries to guess the markethighs and lowsc. It does not tell you when to buy, sell or switch from one scheme to anotherd. Rupee cost averaging has no serious shortcomings


22/33

66.A wealth preserving affluent investor is likely to invest pre-dominantly in (2 marks)a. Equity securities b. Debt funds and fixed income securitiesc. Money market d. Real estate

67.A fund with stable positive earnings (1 mark)a. Gives higher returns b. Is less riskyc. Gives lower returns d. Is more risky

68. Investors should be advised to avoid investing in a debt fund with a (2 marks)a. Lower rated portfolio and higher expense ratio b. Higher rated portfolio and lower expense

ratioc. Lower rated portfolio and lower expense ratio d. None of the above

69. Which of the following funds should a risk-averse investor choose? (2 marks)a. Gross dividend yield 15% Beta 1.5, Ex-Marks 90 b. Gross dividend yield 10%, Beta 1, Ex-Marks 70c. Gross dividend yield 11%, Beta 0.9, Ex-Marks 80 d. Gross dividend yield 12%, Beta 1.2, Ex-Marks 80

Sample Test 2

1.The Board of Trustees of the UTI does not have nominees from (1 mark)a. RBI b. LICc. IDBI d. The Bombay Stock Exchange (BSE)

2.A gilt fund is a special type of fund that invests (1 mark)a. In very high quality equity only b. In instruments issued by companies with asound track recordc. In short-term securities d. In government securities only

3. The private sector was granted permission to enter the mutual fund industry in (1 mark)a. 1992 b. 1993c. 1998 d. 1995

4.A close-ended scheme is quoted on the stock exchange at a discount to its NAV when(2 marks)a. The markets are bearish b. Investors perceive that the fund will be unable tomaintain the NAV

c. The assets of the fund are undervalued d. None of the above

5. In the re-investment option offered by mutual funds, the number of units held by an investorincreasesbecause of (2 marks)a. Growth in net asset value b. Reinvestment of dividendc. Interest received on the fund's assets d. None of the above

6.Transfer Agents of a mutual fund are not responsible for (1 mark)a. Issuing and redeeming units of the mutual fund b. Updating investor recordsc. Preparing transfer documents d. Investing the funds in securities markets

7.Who is the primary guardian of unit holders' funds/assets (1 mark)?a. The AMC b. The Trusteesc. The Registrars d. The custodians

8.If the schemes of a mutual fund are taken over by another mutual fund, which of the following isfalse?(2 marks)a. There is a change in the AMC of the schemes that are taken overb. There is a change in the Sponsor of the schemes that are taken overc. The scheme has to be wound up compulsorilyd. The schemes offer documents have to be changed and updated.


23/33

9.The amount of authority enjoyed by a self-regulatory organisation is defined by (1 mark)a. The apex regulatory authority b. Company law boardc. Its own members d. RBI

10.The role of AMFI in the mutual funds industry is not to (1 mark)a. Promote the interests of the unit holders b. Set a Code of Ethicsc. Regulate mutual funds d. Increase public awareness of mutualfunds in the country

11.A due diligence certificate does not certify that (2 marks)

a. The draft offer document forwarded to SEBI is in accordance with SEBI regulationsb. All legal requirements connected with launching of the scheme have been complied withc. Disclosures made in the offer document are true, fair and adequated. The AMC guarantees a good performance

12.Along with the application, it is mandatory to distribute (1 mark)a. Investment rebate b. Offer documentc. Key information memorandum d. None of the above

13.An offer document contains the summary of expenses history of all schemes for the past(2marks)a. 1 fiscal year b. 2 fiscal year c. 3 fiscal year d. Six months

14.Excess distribution expenses are to be borne by the (1 mark)a. AMC b. Unit holdersc. SEBI d. AMFI

15.Offer Document of a mutual fund is (1 mark)a. Required by investors b. Required by the AMC for its own referencec. Required as per SEBI regulations d. Not mandatory as per SEBI

16.Procedure for redemption or repurchase need not (2 marks)a. Be described in the offer documentb. Include how redemption or repurchase price of units would be determinedc. Include names of centers where redemption can be effectedd. Indicate the redemption or repurchase price as at the end of the current fiscal year

17.SEBI guidelines for agents includes (2 marks)

a. Agents can sell products of a single mutual fundb. Agents can sell products of mutual funds with whom he has entered into agreementsc. Agents could be only individualsd. None of the above

18.Agents are compensated by mutual funds (1 mark)a. Through salaries b. Through commissionsc. Through an annual fee d. Not in cash but in kind

19.An agent's appointment by a fund (1 mark)a. Requires SEBIs approval b. Is a lengthy and cumbersome processc. Is mandatorily preceded by an AMFI test d. Does not require any approval

20.An investor buys units in a fund that has given excellent returns in the past, but his expectationsare not met, as the fund does not perform well this year. The investor can (2 marks)

a. Sue the AMC b. Sue the Trusteesc. Sue the agent d. None of the above

21.Are Overseas Corporate Bodies allowed to invest in Mutual Funds (1 mark)?a. No b. Yesc. If Ministry of Finance approves d. If AMFI approves

22.Documents available to investors for inspection do not include (1 mark)a. Memorandum and Articles of Association of AMCb. Consent of auditors and legal advisorsc. Investment management reports


24/33

d. Reports based on which actual investments are made

23. Distribution tax should be taken into account when computing net returns from (2 marks)a. Equity funds b. Debt fundsc. Both the above d. None of the above

24.A mutual fund declares Re 1 as distribution. The income in the hands of unit holders is (2 marks)a. Taxable at 20% b. Not taxable in the hands of unitholdersc. Information is inadequate to assess tax liability d. Income tax will be assessed as

per unit holders liability

25.For a close-ended fund, the repurchase price should not be lower than (2 marks)a. NAV b. 95% of NAVc. 93% of NAV d. 97% of NAV

26.The "load" charged to an investor in a mutual fund is (1 mark)a. Entry feeb. Cost of the paper on which the unit certificates are printedc. The fee the agent charges to the investord. The expenses incurred by fund managers for marketing a mutual fund scheme

27. A passive fund has the following feature (2 marks)a. A passive fund tracks the indexb. A passive fund matches the performance of the indexc. A passive fund selects the stocks that are present in the indexd. All of the above

28.A growth manager looks for (1 mark)a. High current income b. Undervalued stocksc. Above average earnings growth d. None of the above

29.An owner of preference shares is given which of the following rights (2 marks)a. Voting rights b. Fixed dividend income from post-taxprofitsc. Voting rights and unlimited dividend income d. No guaranteed rights

30.Continuous tracking of the companies in which a mutual fund has invested is done by(1 mark)a. Continuous tracking systems b. Equity analysts

c. Trustees d. Security dealers

31.Dividend yield for a stock is (1 mark)a. Dividend per share b. Dividend per face valuec. Dividend per share to current market price d. None of the above

32.Which of the following is applicable to the debt market in India? (1 mark)a. The debt market is a wholesale marketb. There are large players like banks, financial institutions, mutual funds, etcc. Government securities are traded on a large scaled. All of the above

33.A bond with a coupon of 9% when interest rates for similar maturities are 11% will sell(2 marks)a. Above par b. Below par

c. At par d. At a price unrelated to the prevailinginterest rate

34.Certificates of Deposits (CDs) are issued by (1 mark)a. Regional Rural Banks b. Corporatesc. Scheduled commercial banks d. None of the above

35.Current yield relates interest on a security to (1 mark)a. Its current market price b. Its face valuec. Its fair value d. The current price of T-Bills


25/33

36. A mutual fund may transfer investments from one scheme to another (1 mark)a. Not at all b. At current market ratesc. At cost price d. At a fixed premium over market rate

37.Mutual funds are allowed to borrow (2 marks)a. Freely to meet their requirements b. For investment purposes onlyc. Only to meet redemption demands d. Not allowed at all

38.Which of the following measures are not taken by SEBI for protecting investors of mutualfunds(2 marks)

a. Mandating minimum levels of diversification for mutual fundsb. Ensuring that the funds are not used to favour a few companiesc. Tracking the securities that each fund has Invested ind. Ensuring that the funds are invested in approved securities only

39.In a mutual fund investors' subscriptions are accounted for as (1 mark)a. Liabilities b. Depositsc. Unit capital d. None of the above

40.A funds NAV is affected by (2 marks)a. Purchase and sale of investment securities b. Valuation of all investment securities heldc. Units sold or redeemed d. All of the above

41. Which of the following expenses cannot be charged to the scheme (1 mark)a. Audit fees b. Costs related to investor communicationc. Winding costs for terminating the scheme d. Penalties and fines for infraction of laws

42.The valuation norm for non-investment grade, performing assets is done: (2 marks)a. On YTM basis using the Crisil valuation methodology b. On YTM basis with 25% discountc. At 25% discount to face value d. At face value

43. Valuation norms for non-traded securities should be disclosed (1 mark)a. At the end of every financial year b. Every quarter c. In the offer document at the time of launch of the scheme d. Should not be disclosed, beingconfidential information

44.As per SEBI guidelines, a security is to be treated as untraded when (1 mark)a. Security is never traded on stock exchange b. Security is not traded for 30 daysc. Security is not traded for 60 days d. None of the above

45.Ex-marks with 100 % could be for the following fund: (1 mark)a. Growth fund b. Index fundc. Value fund d. Balanced fund

46.A high turnover rate for a fund indicates (1 mark)a. High transaction costs b. Greater efficiencyc. High returns to the investor d. A rising market

47. An investor can assess the performance of his mutual fund by comparing it with the performanceof(2 marks)a. Other mutual fund of the same type b. The stock marketc. Other financial products d. All of the above

48. If the NAV of an open-ended fund was Rs.16 at the beginning of the year and Rs.22 after 13months,the annualized change in NAV is (2 marks)a. 6.0% b. 34.6%c. 40.6% d. 37.5%

49.The choice of an appropriate benchmark for evaluating a fund's performance depends on(1 mark)a. The fund manager b. The investment objective of the fundc. SEBI d. AMFI


26/33

50. When comparing a fund's performance with that of its peer group, the following cannot becompared(2 mark)a. Two debt funds with 5 year maturities b. A broad-based equity fund with an ITSector Fundc. A bond fund with a bond index d. A government securities fund with agovernment security

51. Which of the following is false? (2 marks)a. ROI is a measure similar to Total Return with Reinvestment of distributionb. Total Return with Reinvestment of distributions assumes reinvestment at NAV on the

distribution datec. As a measure of performance, Total Return with Reinvestment of distribution seeks toovercome the shortcomings of simple Total Returnd. Because of its simplicity, simple Total Return is preferred in practice to Total Return withReinvestment of distribution

52.Financial planning allows a person (1 mark)a. To become a billionaire b. To achieve financial goals through proper management of financesc. To invest in foreign countries d. None of the above

53.Financial Planning comprises (1 mark)a. Defining a client's profile and goals b. Recommending appropriate asset allocationc. Monitoring financial planning recommendations d. All of the above

54. Financial planning does not include: (2 marks)a. Enabling investors to define financial goalsb. Assessing the investors risk and return requirementsc. Recommending an appropriate asset allocationd. Selecting securities that will be included in the investors portfolio

55. A small investor can build a diversified portfolio by (1 mark)a. Buying one share each of all listed companiesb. Investing in a mutual fundc. Borrowing enough money to buy shares of well-managed companiesd. None of the above

56.Direct investment in stock market can be a better option than investing through mutual funds ifthe

investor (2 marks)a. Wants better returns than those offered by mutual fundsb. Has large capital, knowledge and resources for researchc.Has identified a bullish phase in the stock marketd.Wants to invest for the long term

57.Indira Vikas Patra is an investment product popular with (1 mark)a. Rural investors b. Investors in high tax bracketc. Urban investors d. Investors who want to protect their identity

58.Most individuals invest in life insurance policies for (1 mark)a. Risk protection b. Tax benefitsc. Easy liquidity d. High returns

59.Which of the following about PPF is false? (2 marks)

a. Investments have to be made form taxable income of the relevant year.b. Investments once made cannot be withdrawn until maturity.c. Both interest and principal are tax free in the year of withdrawal.d. Investments enjoy tax benefits under Section 88 of the IT Act.

60.The difference between debenture and bond is: (2 marks)a. Bonds are issued by corporations and debentures are issued by PSUs.b. Bonds are unsecured and debentures are secured.c. Bonds are backed by loans and debentures are backed by assetsd. None of the above.


27/33

61. A criticism of rupee-cost averaging is (2 marks)a. Investment is for the same amount at regular intervalsb. Over a period of time, the average purchase price will work out lower than if one tries toguess the markethighs and lowsc. It does not tell you when to buy, sell or switch from one scheme to anotherd. Rupee cost averaging has no serious shortcomings

62.A high proportion of investment in income funds is required by (1 mark)a. Accumulating investors b. Affluent investorsc. Investors in the inter-generational transfer phase d. Investors in the distribution phase

63.A high proportion of investment in equity funds is advisable for investors (1 mark)a. In distribution phase b. In accumulation phasec. In transition phase d. Who are wealth preserving affluentindividuals

64. Investors who follow the fixed Asset Allocation approach (2 marks)a. Maintain balance in their portfolio by liquidating a part of the position in the asset class whichhas given higher return and reinvesting in the other asset class which has lower returnb. Are not disciplinedc. Increase their equity position when equity prices tend to climbd. None of the above

65. Mutual fund investors should be advised to expect (1 mark)a. Low post tax returns b. Dramatic resultsc. Better returns than every other available option d. Only realistic wealth accumulation

66. Which of the following fund types are comparable (2 marks)a. An aggressive equity fund and a money market mutual fund b. A value fund and a government securitiesfundc. A bond fund and a debt fund d. A diversified equity fund and a debt fund

67.Which of the following is a disadvantage of standard deviation (2 marks)a. Standard Deviation measures total risk, not just market riskb. It is based on past returns, which does not necessarily indicate further performancec. It is an independent numberd. All types of funds can be measured with standard deviation

68.Which of the following is most risky? (1 mark)a. Investing in a money market mutual fundb. Investing in an index fundc. Short term investment in an equity fundd. Long term investment in an equity fund

69.Yield-to-maturity of a debt fund is more important if the investment objective is (2 marks)a. Current incomeb. Total returnc. Liquidityd. All of the above

Sample Test 3

1. A systematic withdrawal plan is ideal for investors whoa. Seek growth as the main objective b. Wish to benefit from marketfluctuationsc. Prefer a regular income stream d. Not sure about themselves

2.Gilt funds invest ina. IT sector b. AAA securitiesc. Money market securities d. Government bonds

3. Which of the following is recommended by Bogle for older investors inaccumulation stage?


28/33

a. 50% in equity and 50% in debt b. 60% in equity and 40% in debtc. 70% equity and 30% debt d. 40% equity and 60% debt

4.Illiquid securities in a portfolioa. Cannot be transferred across schemes b. Cannot be more than 15% of netassetsc. Cannot be more than 20% of net assets d. a and b are truee. a and c are true

5. Which of the following cannot invest in mutual funds?

a. NRIs b. Charitable trusts

c. FIIs d. Foreign investors

6.Which of the following is true for assured return schemes?a. Name and net worth of guarantor to be given b. Performance of past assuredreturn schemes to be givenc. Whether assurance in earlier scheme was met to be stated d. All of the above

7.Your friend in Dubai wants to invest in a mutual fund. She should be advised toreada. Trust deed b. SEBI regulationsc. Offer document d. AMC balance sheete. All of the above

8.While deciding on asset allocation, an investor must considera. The stage of his life b. The purpose of makinginvestmentc. His risk appetite d. All of the above

9. Mutual funds should be recommended asa. Investments to achieve long term goals b. A get-rich quick optionc. Investments to take advantage of stock market d. All of the above

10.A fund manager who believes in the growth philosophy looks for companies witha. Above average earnings growth b. Large equity basec. Likely to go for public issue d. All of the above

11. An open ended fund can change its fundamental attributes by

a. Allowing investors to exit after 6 months b. Allowing investors to exit at NAVwithout a loadc. With consent of 75% of investors d. None of the above

12. Which of the following is not a SRO?a. BSE b. NSEc. AMFI d. None of the above

13.Which of the following do not provide a guarantee on capital?a. PPF b. NSCc. Post office deposits d. Units of mutual funds

14. Which are the benchmarks used to evaluate fund performancea. Return on benchmarks like S&P and Sensex b. Return on other fundsc. Return on comparable instruments d. All of the above

15. Mutual funds can borrow:a. upto 25% of net assets b. upto 20% of net assetsc. For period not exceeding 6 months d. Both a and ce. Both b and c

16.The second mutual fund to be set up in India after UTI wasa. Canbank Mutual Fund b. Kothari Pioneer Mutual Fundc. Morgan Stanley Mutual Fund d. SBI Mutual Fund

17.The following is the fund you would advice to an investor who wants to invest for


29/33

one yeara. A debt fund with expense ratio of 1.15% and a entry load of 2%b. A debt fund with expense ratio of 1.2 % and a entry load of 2.5 %c. A debt fund with expense ratio of 1.5% and an entry load of 4%d. A debt fund with expense ratio of 0.5 % and entry load of 3%

18. Mutual funds are described as _____ in the SEBI Regulations, 1996a. Companies b. AMCsc. Trusts d. Agencies

19.What proportion of a mutual funds trustees have to be independent from thesponsor?a. 50% b. 2/3rd of trusteesc. 3/4th of the trustees d. 60% of the trustees

20.Which of the following cannot be distributors of a mutual funda. Sponsor b. Associate of sponsor c. Associate of AMC d. Employees of AMC

21.Stock exchanges can act as regulators of:a. SEBI registered mutual funds b. Closed end funds listed on theexchangec. All sectoral funds d. All equity mutual funds

22. A mutual fund cannot invest more than _____% of its net assets in un-rateddebt of one issuer. Total investments in un-rated debt cannot exceed ____% ofnet assets.a. 10; 20 b. 15; 25c. 10; 25 d. 15;20

23.Which of the following is an ideal allocation for a wealth preserving affluentinvestor?a. 50% equity;50% debt b. 70% equity; 30% debtc. 30% equity;70% debt d. 100% equity

24. If a 8% bond with face value of Rs. 1,000 is selling for Rs. 1,100, what is thecurrent yield?a. 8% b. 7.27%c. 7.8% d. 8.2%

25.If you maintain a flexible asset allocation you woulda. Rebalance debt and equity periodically b. Rebalance debt and equityfrequentlyc. Generally avoid portfolio re-balancing d. Keep fixed percentage in debtand equity at all times.

26.Which of the following will NOT require financial planning?a. A 40 years old doctor with substantial savingsb. A retiree who is currently getting an income of 4,000 but would want Rs.10,000 a monthc. An old person wanting to transfer all his wealth to his grandchildrend. A young professional aged 26 years

27.What is the portfolio you will recommend to a young couple with two incomes

and two children?a. 10% money market; 30% aggressive equity; 25% diversified equity;35% bond fundsb. 40% aggressive equity; 30% money market; 30% bond fundc. 60% equity; 30% money market; 10% debtd. 70% bond funds; 30% equity funds

28.Financial planning is:a. Investing funds to achieve a highest possible rate of returnb. Resorting to tax planning to keep taxes as low as possiblec. Planning for retirement with maximum income possible


30/33

d. Process of solving financial problems and reaching financial goals

29.You have just won a huge sum in a lottery. What should your ideal allocationbe?a. Invest everything in sectoral funds, as NAV is very low.b. Invest in government bonds, as risk is low.c. Invest in money market funds and decide over the next few monthsd. Consider the impact of taxe. Both c and d

30. Which of the following is true for closed end funds?a. The fund offers to buy and sell units at NAV b. The corpus of the fund is constantc. The net assets of fund does not change d. None of the above

31.Which of the following represents the transition phase?a. Investor has no need for investment income b. Investor has a long term horizonc. Investor cannot take risks d. Investors financial goals are approaching.

32.P/E of which of these stocks is usually high?a. Value stocks b. Cyclical stocksc. Small cap stocks d. Growth stocks

33.If an AMC does not resolve an investors complaint, investor can appeal to:a. SEBI b. Ministry of Financec. Office of the public trustee d. Company Law Board

34. Mutual funds can lend funds in the form ofa. Loans b. Promissory notesc. Securities d. None of the above

35.An offer document of an open ended fund has to be reviseda. Once in 3 years b. Not at allc. Every year d. Once in two years

36.A FII can invest in a mutual fund through itsa. Non resident external account b. Non resident ordinary accountc. Non resident rupee account d. RBI current account

37. You invest Rs. 25,000 in a mutual fund. After 2 years you redeem your units at

Rs. 32,000. Ignoring indexation and surcharge, what is the capital gain tax onthis transaction?a. Rs. 7,000 b. Rs. 700c. Rs.1,400 d. Depends on the marginal rate of taxation

38.If a funds NAV is Rs. 12, what is the maximum sale price it can charge,according to SEBI regulations?a. Rs. 12.70 b. Rs. 12.84c. Rs. 13.68 d. Rs. 11.16

39.Debt securities with less than 182 days to maturity are valued ata. Face value b. YTM basisc. Accrual basis d. Duration basis

40.If a scheme holds more than 15% in illiquid securities, all securities above that

limit have toa. Be valued at book value b. Be valued at a discount of 25%c. Valued at cost price d. Assigned a value of zero

41. Ex-Marks of an equity fund measures itsa. Performance b. Riskc. Both the above d. None of the above

42.Which of the following is untrue of an automatic reinvestment plan?a. The plan allows for automatic reinvestment of all income and capitalgains


31/33

b. Automatic reinvestment allows for accumulation of additional units of thefundc. The major benefit of automatic reinvestment is compoundingd. The benefit of automatic reinvestment is often lost on account of theheavy load charge on the reinvestment

43.Retired investors shoulda. Not draw down on their capitalb. Not invest in securities which bear risk of capital erosionc. Continue holding a major portion of their holding in equity growth funds

d. Never invest in equity

44.A criticism of rupee-cost averaging isa. Investment is for the same amount at regular intervalsb. Over a period of time, the average purchase price will work out lower thanif one tries to guess the market highs and lowsc. It does not tell you when to buy, sell or switch from one scheme toanotherd. Rupee cost averaging has no serious shortcomings

45.A 55 year old investor, who is employed and earning well, can be said to be ina. Accumulation stage b. Transition stagec. Distribution stage d. Inter-generational wealth transfer stage

46.In order to decide an appropriate index as benchmark for an actively tradedfund, one should considera. Fund size and portfolio compositionb. Whether the fund is broad based or focused on specific type of securitiesc. Investment objective of the fundd. All of the abovee. None of the above

47.An equity investor wants to maximise his return in the long run. He shoulda. Buy and hold investments for a long timeb. Invest in gold and silver onlyc. Keep selling good performing fundsd. Keep selling off poor performing schemes and replace them with goodperforming schemes.

48.Which is the most important factor one should consider before investing in company fixeddeposit?a. Interest rate on the deposit b. Assets against which deposits are securedc. Its credit rating d. All of the abovee. Only a and c are true49.After developing a financial plan for a client, financial planners shoulda. Leave it as it is b. Review it periodicallyc. Review it once in five years d. None of the above

50.The KIM of a mutual fund scheme is availablea. At the AMC office b. At the offices of authorised agentsc. At the branches of all banks d. Only a and b

51.Investors can inspect the following documents

a.Trust deedb. Agreements with various constituentsc. Memorandum and articles of association of AMC and Trustee companyd. All of the above

52.A bond has been issued with a call provision. This means the issuer may call it backwhenever the interesta. Fall b. Risec. Change d. Are lower than the coupon rate

53. In determining the holding cost of an investment


32/33

a. Average cost method is to be followed b. The weighted averagecost method is to be followed

c. The market value method to be followed d. Either a or b

54.As per wealth cycle guide, during the accumulation stagea. The client looks to build wealth b. The clients goals are approachingc. Client cashes out d. Client feels the need to take care of the

next generation

55.If the commission paid to agents exceeds the distribution expense rates specified in the offer

document, the excess has to be borne bya. AMC b. Trusteesc. Unit holders d. DRF of the mutual funde. Investor protection fund

56.Unit holders who do not agree with the merger of a funds scheme have the option toa. Exit from the scheme if it is an open ended scheme b. Exit from the scheme after 6 monthsc. Cannot exit if the AMC does not permit such withdrawal d. Can exit only after approval of SEBI

57. While choosing between a bank deposit and a debt income fund, the investor must considera. Credit rating of the bank b. Quality of the mutual fund assetsc. His investment objective and risk appetite d. All of the above

58.The jurisdiction for resolving legal disputes concerning a mutual fund isa. Given in the offer document b. Stated in the stock exchangesc. Decided by company law board d. Decided by BSE

59.Passive fund is expected toa. Beat the return of the index b. Furnish the returns of the market indexc. Keep the costs low d. Both c and d

60.Which classification of mutual fund does not exist?a. Closed end or open end b. Load fund or no load fundc. Pension fund or insurance fund d. Active fund or passive fund

61.An investor cannot plead ignorance of the procedures while investing in a mutual fund becausea. Mutual fund is a risky investmentb. Law does not permit the investor to sue the Trust

c. While applying the investors sign an agreement stating they have read and understoodthe terms and conditionsd. An investor is expected to be careful while investing

62.A portfol