amfi-trainig abhi
TRANSCRIPT
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A Joint Venture with Standard Life Investments
AMFI Training- Advisors¶ Module
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What is a Mutual Fund ?
A mutual fund is a collective investment thatallows many investors, with a common
objective, to pool individual investments and
give to a professional manager who in turn
would invest these money in line with thecommon objective.
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History of Indian Mutual Funds
Phase I (1964-87)
Set up by RBI, de- linked later.
Act of parliament
First scheme US 64, still outside SEBI purview
Phase II (1987-93) entry of PSU Banks/ FIs
SBI in 87, LIC in 89, Indian Bank in 90
Phase III (1993-95) Entry of Private players
Phase IV (1996 onwards) SEBI regulation of
Mutual Funds
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Types of Mutual Funds Schemes
Wide Range of Choices - to suit one and all
By Constitution
By Investment Objective
By Nature of Investments
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By Constitution
OPEN-END
No fixed maturity
Variable Corpus
Not Listed
Buy from and sell to
the Fund Entry/Exit at NAV
related prices
CLOSE-END
Fixed Maturity
Fixed Unit Capital
Generally Listed
Buy and sell in the
Stock Exchanges Entry/Exit at the
market prices
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By Constitution
Load or non load funds
Tax exempt or non tax exempt
Nature of Investments
Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate)
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Investment objective / patterns
Growth - Equity
Income - Debt
Balanced - Equity and Debt
Money Market - Liquid Debt
Tax Saving - Equity
Specialised - Equity Assured Return - Equity and Debt
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Aggressive Growth Funds
Objective - Aggressive Capital Growth
Investment Pattern
EQUITY OF
Less researched Companies
Speculative and momentum stocks Suitable for investors who are comfortable in
taking high risk.
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Diversified Growth Funds
Objective - Capital Growth
Investment Pattern - Weightage
EQUITY of
Well researched and high market cap companies
Debt
Money market securities
Minimum time recommended for investment to deliver
expected returns - 5 years +
Suitable for investors looking at capital growth over a
longer period of time
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Other variety of equity funds
Specialised Funds
Sector Funds
Offshore Funds
Small Cap Equity Funds
Option Income funds - writes options
ELSS - Indian Variety
Equity Index Funds Value Funds
Equity Income Funds - invest in co. with higher
dividend yields i.e. power/utilities
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Other equity oriented funds ...
Hybrid Funds
Balanced Funds
Growth & Income Funds
Assets Allocation Funds
Commodity Funds
Real Estate Funds
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Debt Funds
Diversified Debt Funds
Focussed Debt Funds
Sector / Specialised / Offshore Municipal bonds / infrastructure cos bond funds
Mortgaged backed
High yield debt funds
Assured Return Funds - Indian variety
Liquid Funds
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Advantages of Mutual Funds
AFFORDABILITY
PROFESSIONAL MANAGEMENT
REDUCTION/DIVERSIFICATION OF RISK
REDUCTION OF TRANSACTION COSTS
LIQUIDITY
CONVENIANCE AND FLEXIBILITY
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Mutual Funds:
A Packaged Product
Professional
Management
Convenience
Tax Benefits
Liquidity
Diversification
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Your needs
Short Term
Medium Term
( 1 to 3 years)
(3 to 5 years)
Long Term
Banks / Liquid Funds
Debt or Debt Related
Funds
Mix of Debt/Equity or
funds with an appropriatemix (Balance)
Equity or Equity Related
Funds
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MUTUAL FUND - FRAMEWORK- India
FundManagement
Registrar Custody
MarketingOperations
Distribution
Trustee Company
Sponsor
Asset Management Company
Fiduciaryresponsibility to
the
InvestorsBank
Brokers
Markets
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What is the Structure Here?
Trust
Trustee
Asset Management
Company
Scheme 1 Scheme 2 Scheme 3
Other Service
Providers
Sponsor Foreign
Partner
HDFC Ltd.
HDFC Trustee Co Ltd.
HDFC Asset Management Co. Ltd.
HDFC Mutual FundComputer Age Management
MFund
HDFC Bank
Standard Life Investments
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The MF Structure
TRUSTEE TRUSTEES:Manages the Mutual Fund and look after the
operations of the appointed AMC.
The investments are held by the Trustee.
The beneficiaries from the assets are the unit holders.
The trustees have a fiduciary responsibility.
Trustees approve each MF scheme floated by AMC.
Trustees receive fees for their services.
Trusts are formed through Trust Deed Furnish report to SEBI on half yearly basis on AMC and Fund
functioning
AMC: Acts as investment manager of the trust under the boardsupervision and direction of the trustees
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The Sponsor & The AMC
A sponsor appoints the asset management company.
Sometimes, this power is given by the sponsor to the
trustees through the trust deed.
The AMC acts as the Investment Manager of the MF
At least 50% of directors on the board of asset
management company should be independent of the
sponsor.
Asset management company shall not deal with any
broker/firm associated with sponsor beyond 5% of daily
gross business of the MF.
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SEBI
All Mutual Funds / AMC/ Trustee Companies to be
registered with SEBI
Responsible for protecting investors interest andpromote orderly growth of Mutual Fund Industry
Formulates regulations,monitors performance andconduct of Mutual funds and enforces compliance toregulations through reviewing reports and regular inspections
Regulators for MF industry
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Reserve Bank of India & SE
RBI
Dual supervision for bank sponsored AMCs
Issue concerning ownership bank promoted AMC
falls with RBI
Stock Exchange (SE)
Close ended MF listed of SE. Needs to comply with
listing guidelines.
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Office of public Trustee
MF being public trustee - governed by Indian
Trust Act , 1882
Trustee Co or Board of Trustee accountable to
office of Public Trustee
Public trustees reports to Charity Comm.
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Ministry of Finance
Supervises both SEBI and RBI
Ultimate policy making & supervising body
Appellate Authority for any disputes over SEBI
guidelines
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Investor¶s rights
Proportionate ownership in scheme¶s assets
Rights of information from Trustee
To received dividend warrants, inspect major docs (Trust
deed, investment management agreement, R&T A
Agreement, custodian services agreement
with 75% voting rights and approval of SEBI can close the
scheme, change the AMC.
Rights of info for fundamental change in the schemefeatures and also an opportunity to redeem units without
any load.
Receive annual report and a/c statement
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Investor¶s rights & Obligations
Rights - Legal Limitations
Unit holder¶s are not distinct from trust, they
cannot sue trust.
Sponsor do not have any legal obligations
(Limited to initial contribution)
No rights to prospective investors
Obligations
Must read offer doc & AOD
Beware of risk factors
Must monitor investments regularly
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Investor¶s complaint redressal mechanism
Client Servicing
Compliance Officer
Investors cannot be protected by companiesAct.
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Mutual Fund - The Top Scorer
FDs FI Bonds MutualFunds
Accessibility Low LowH
ighT enor Fixed (Medium) Fixed (Long) No Lock-in
Min. Invest. Rs. 10000 Rs. 5000 Rs. 500
Tax Benefits None 80L,88 Depends
Liquidity Low Very Low Very High
Convenience Medium Tedious Very High
T r ansparency None None Very High
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The Offer Document
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What is offer documents
Contains the details of scheme.
Like Prospectus of an IPO
Legal document that protects and governs the right of the investor to information
Is the primary vehicle for the investment decision
Is the operating document and describes thefundamental attributes of schemes.
One of the most important sources of information for the prospective investor
Is a reference document for the investor to look for relevant information at any time.
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All ODs are to be approved by the trustees of a mutual
fund,ODs are prepared and issued by an asset
management company
All ODs are filed with SEBI with filing fees (Rs. 25,000)
Modifications, if any, are advised by SEBI within 21
working days from the date of its filing Close ended fund: the time of issue
Open ended fund: revision after every two years
Offer Document (OD)
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Mandatory Information
Details of the Sponsor
Description of the scheme and investment objective/strategy
Terms of issue
Historical statistics
Investors Rights and Services
K ey Information Memorandum that is distributedwith the application form is an abridged version of
the offer document .
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Investment Options & Features
Options
Growth
Dividend and Dividend Reinvestment
Plans
Systematic Investment Plan - SIP
Value Averaging Plan - VAP
Systematic Withdrawal Plan - SWPSystematic Transfer Plan - STP
Other
Nomination facility
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INVESTMENT PLANS
Automatic Reinvestment plan
ARP is also called Growth option
Allows investor to reinvest in additional units theamounts of dividends or other distributions
They do not receive dividends
Reinvestment takes place at ex-div NAV
Investor reaps benefit of Compounding Some funds allow reinvestment in other schemes of
same fund family.
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Automatic & Voluntary Accumulation Plans
To inculcate saving in a disciplined and phased manner
Investor gets flexibility of the amount and frequency of
Investment in VAP while a fixed sum in AIP periodically.
Through AIP & VAP Investment can only be in Open end
schemes
AIP is a contractual obligation of the Investor to keep investing
In VAP Investor is not obliged to keep investing, but hasvoluntary self discipline
Investment accounts are maintained for both VAP and SIP
Benefit Benefit of of RupeeRupee cost cost AveragingAveraging
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Systematic Withdrawal Plan
Allows Investor to make Periodic withdrawals from Fund
Investment accounts
Amount withdrawn is treated as redemption of units at the
applicable NAVs
They are different from MIPs, because MIPs pay any
income generated on the capital.
Hence, Dividend Tax is not levied on SWP, whereas it islevied for MIPs with more than 50% in debt.
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Systematic Transfer Plans
Allows investor to transfer on a periodic basis a specified
amount from one scheme to another within same fund
family.
The redemption or investment will be at applicable NAV
It is necessary to maintain a minimum balance under both
the schemes.
The service allows the investor to manage his Investmentsactively to achieve his objectives
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Who can Invest ?
Resident Indian Individuals
Indian Companies
Trusts / charitable institutions / PFs
Banks/ FIs / NBFCs
Insurance Companies NRIs/ OCBs/ FIIs
Partnership firms etc.
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NAV - COMPUTATION
NAV = Net assets of scheme / No of units Outstanding
i.e. Market value of investments+ Receivables+Other accrued income+ Other assets- accrued
expenses- Other Payables- Other liabilities
No. of units outstanding as at the NAV date
Imp :Day of NAV Calculation is known as valuation day
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An Example
Market value of Equities - Rs.100 crore - Asset
Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore -Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt..payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80
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NAV - Other Information
Open end funds to declare NAV daily
NAV to be published at least weekly
Close end Schemes (which are not listed) may publish NAV
monthly/qt with prior approval from SEBI (MIP)
NAV has to consider up to date transactions
Non - recorded transactions not to affect NAV calculation by more
than 2%
NAV is influenced by Purchase and Sales of Securities, Valuation
of Investment Securities, Sale and Redemption of Units and Other
Assets and liabilities
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Loads
Entry Load or f ront ended l oad
Paid at the time of purchase
Sale Price = NAV / (1- Sales Load, if any) Exit Load or back ended l oad
Paid at the time of exit
Redemption Price = NAV/(1+ Exit Load)
Contingent Deferred S ales Load (CDSL)
Deferred exit load depending on the period
Also known as deferred load
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PR ICING OF UNITS
Sale price not more than 107% of the NAV
Re-purchase price to be not lower than 93% (95% for close-
end funds) of the NAV
Difference between the repurchase & sale price can not be
more than 7% of the sale price
Example1: NAV= Rs 100, Sales Price= Rs 105
OES- Min. Rep Price= Higher of 93 and 105*0.93=97.65
CES- Min. Rep Price= Higher of 95 and 97.65
Example 2: NAV= Rs 100, Sales Price= Rs 102
OES- Min. Rep Price= Higher of 93 and 102*0.93=94.83
CES- Min. Rep Price= Higher of 95 and 94.83
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MUTUAL FUND ACCOUNTING &VALUATION
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Initial Issue
ExpensesTransaction Cost
Entry / Exit load
CDSC for no-load
schemes
FEES & EXPENSES
Annual RecurringExpenses
AMC Fee
Custodian Fee
Registry Exp.
Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
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Fees & Expenses
Initial Issue expenses For launching of the scheme
Can charge up to 6%
Amortized in 5 Years for OES & over the period of
scheme for CES Recurring Expenses
Mkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communications cost
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Fees & Expenses
Amc can charge Investment management fee to the fundon weekly avg. net assets. It is a part of the RecurringExpenses with its own limits:
The limits are: (Subject to overall limit of 6%)
1.25% for up to Rs.100 cr Of weekly avg net assets
1% for amount in excess of Rs.100 cr.
No Load schemes can charge an additional fee of 1%
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Fees & Expenses
Total Expenses that can be charged to the Fund ( excludingentry and exit loads):
Other Sch. Pure- Debt On the first Rs.100 cr 2.50% 2.25%
On the next Rs.300 cr 2.25% 2.00%
On the next Rs.300 cr 2.00 % 1.75%
On the balance assets 1.75% 1.50%
Based on average weekly net assets
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MUTUAL FUNDS - FEES
Initial issue expenses
Can Charge to the scheme capped at 6% of the initial resources
raised under that scheme
Contingent Deferred Sales Charge ( For No-Load Schemes)
Ceiling For redemption within 1year 4%
For redemption within 2years 3%
For redemption within 3years 2%
For redemption within 4years 1%
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AMORTISATION
Initial Expenses amortisation for load schemes -
For close-ended schemes - on a weekly basis over the period of
the scheme
For open-ended schemes - annually over a period not greater
than 5 years
Un-amortised portion to be added to other assets for
computation of NAV- No AMC fees on this
Amortization not part of normal recurring expenses
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MF Balance Sheet
MF BS is different from a bank or a company. MF havespecial requirements concerning accounting for the fundsassets, liabilities and transactions with investors and otheroutside constituents such as banks, securities custodiansand registrars.
Follows accounting policies laid down by SEBI regulations1996.
Unit Capital is mentioned as Unit Capital only and not asAssets
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Accounting Policies
Investments to be marked to market.
Unrealised appreciation cannot be distributed.
Purchase & sale of investments to be recognised on the trade date
and not on settlement date.
Investments to be taken as NPA if it gives no return through
interest for more than 6 months
Dividend / Bonus/ rights to be recognised on ex-dividend / ex-
bonus dates and not on declared dates.
Income receivable on Invst NOT accrued for more than 3 months ,
should be provided for.
For determining gain/ loss on investments - avg cost is to be taken
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Provision for NPAs
3 months after classification as NPA: 10%
6«««««««««««««« : 30%
9«««««««««««««« : 50%
12««««««««««««« : 75%
15««««««««««««« :100%
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Mutual Fund Valuation
Equity Valuation Norms - Listed, Unlisted, NPA, Un-traded
Debt valuation norms - Listed, Unlisted, Illiquid
Money Market Instruments - valuation norms
Effect of Buybacks, Mergers
Valuation Models - CRISIL
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Valuation
TRADED SECURITIES
Last quoted closing price on the SE where principally traded
If Not traded on any SE on a particular day, then earliest
previous day price is taken (not more than 30 days)
Valuation = MP * current holding
NON - TRADED SECURITIES
Stocks which are not traded for more than 30 days on any SE are
valued on good faith basis by AMC within following parameters
Debt - YTM basis
Equity
Capitalisation of earning or NAV or combination of both
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Thinly traded debt security
Traded value < Rs. 15 crores in a month. Add value traded on all exchanges to compute this figure.
Such security to be valued using the method for non-tradeddebt security.
Valuation of Non-traded Securities
Valuation of equity instrument is on the basis of capitalization of earnings solely or in combination with itsbalance sheet net asset value.
Capitalization rate will be determined by reference to thePrice or earning ratios of comparable traded securities withan appropriate discount for lower liquidity to be used.
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Disclosures and Reporting
Audit by independent auditor
Audited Annual report every year
Un-audited accounts to be published within 1 month after March
31 & September 30
Within 6 months of closure, publish abridged summary of report
scheme-wise in newspapers
Summary to be forwarded to SEBI & unit holders
Full portfolio disclosure to be made within a month from the half-
year ended March 31 & September 30
Expenses totalling more than 10% of total
Large account holdings- More than 25% of NAV
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Disclosure and Reporting
Reporting to SEBI
Annual audited accounts
Six monthly unaudited a/cs
Half yearly statement of movements in net assets of each scheme
Qtr portfolio statement
Monthly amount mobilized
Communication to investor Qtr portfolio
Annual report
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MF¶s and Tax Benefits
Income Tax Benefits Equity funds - 10% TDS, 2% surcharge
Debt Funds - Dividends are taxable
Benefit up 20%/15% (depending on your IncomeSlab) of investments up to Rs. 10,000/- invested
under ELSS (section 88)
Capital Gain Benefits - Section 112 (1)
Long term capital gain tax of 10% withoutindexation,or
Long term capital tax of 20% with indexation
There is 2% surcharge
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Indexation
Mr. X invests Rs. 2,00,000 in FY 97-98 MF units
After 1 year, he liquidates the asset to get Rs. 2,40,000.
His tax returns would be:
Without Indexation- 40000*10% = Rs 4,000
CII 99-00 : 389, CII 97-98 : 331, Ratio : 389/331 = 1.18
Indexed Cost (2,00,000 x 1.18) = Rs. 2,36,000
Capital Gains ² Rs. 4,000
Long-term tax liability of Mr. H: Rs. 4,000 * 20%= Rs. 800
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Taxation
In case of individuals and Hindu UndividedFamilies a deduction upto Rs. 9000 from the
total income will be admissible in respect of income from investments specified in Section80L, including income from Units of the mutualFund.
Units of the scheme(s) are not subject toWealth-Tax and Gift-Tax.
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Investment Restrictions as a % of Net assets - AMC
Max. Investment under all schemes of the AMC in paid up
capital carrying voting rights in single Co. - 10 %
Max. Inter scheme investments of the same AMC - 5 % (no
AMC fee payable) Inter scheme transfers at CMP and within the objectives of
scheme
Max. Investment in listed shares of Group Co¶s - 25 % for each
scheme. No investments allowed in unlisted/private placement of
group/associate cos.
Can borrow only to meet liquidity requirements. Max for 6
months & not more than 20% of NAV of scheme.
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Investment Restrictions as a % of Net Assets
Max. Investment in Rated paper in single Co - 15% (can be increasedto 20% with approval by Board of AMC/Trustee)
Max.Investment in Unrated/ Rated but below investment grade in
single issuer- 10% of NAV
Max. Investment in Unrated/Rated but below investment grade in allcos - 25% (subject to approval of Board of AMC /Trustee).
Restrictions not applicable to Govt. Securities/Money Market
Can only invest in marketable securities - no loans
No restrictions in case of Index Fund Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open
ended funds
Buy & Sell securities on Delivery position , No short selling/ carry
forward allowed.
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Evaluating FundPerformance
Should be judged in light of :
Investment Objectives
Current Market Conditions
Alternative investment returns
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Performance
Evaluation
Different valuation methods
Change in Nav
Total Return
Total Return with dividend reinvested at NAV
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Change in NAV
F or NAV change in absolute terms =(NAV at end of period - NAV at beginning of period) * 100NAV at beginning of period
F or NAV change in annualised terms =( NAV change in % in absolute terms) * (365 / No. of days )
Applicable for the Growth and Automatic Reinvestment
Plans.
Does not account for Dividend Distributions and allocationof units against the dividends
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Total Return
Takes into account the dividends distributed by the fund
[(Distribution+Change in NAV)/NAV at the beginning]*100
Suitable for all categories of funds,more accurate than first
method
Ignores the possibility of reinvestment of dividend
Return on Investment (R.O.I)
Computes the total return with reinvestment of dividends in the fund at
ex-dividend date.
ROI = [(Units held + div./exROI = [(Units held + div./ex--d NAV)*end NAV]d NAV)*end NAV]--begin NAV /beginbegin NAV /beginNAV*100NAV*100
Accepted by MF tracking agencies(Credence and Value research)
Suitable for accumulation plans, monthly/quarterly income
schemes,debt funds distributing interim dividend.
Examples
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Examples
1. Change in NAV
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
2. Total Return
Nav on day 1 = Rs.20
Nav on day x = Rs.22
Dividend = Rs.4 per unit
Total Return = (( Distribution + Change in nav)/day1 nav)*100
= ((4+(22-20)/20)*100
= 30%
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3.Return on Investments - most suitable
Nav on day 1 = Rs.20
Dividend = Rs.4 per unit. Ex-Div. Nav at Rs. 21
Div reinvested = Rs (4 /21) = 0.19 units allotted
Total units = 1.19 (original +new allotted)NAV at year end = Rs.22
Return = ((Nav on year end*total units )-day1nav))/ day 1 NAV* 100
= ((22*1.19)- 20))/20*100 = 3 0.9%
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Other Parameters
Expense ratios - indicates fund efficiency and cost
effectiveness
Portfolio Turnover ratio - measures amount of buying and
selling done by the fund
Transaction cost
Fund size
Cash holdings
All these information are available from Fund Factsheet,
Newsletter, Sales meet / Mailers etc
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Fund Mergers & Take overs
Mergers of two AMC
Provisions of Cos Act
Approval of high court and SEBI
75% unit holders consent
Scheme takeover (Apple and Birla)
Unit holders permission - 75% SEBIs permission
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Fund Mergers & Take overs
AMC taken over by other sponsor
(a. Zurich - 20th Century b. ITC Threedneedle - Zurich c.
Kothari - HFCL) No high court approval
No unit holders consent , only info with rights to exit from
scheme without any load
SEBI clearance is compulsory
I i h k
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Instruments in the market
Equity
Ordinary shares
Pref. shares Equity warrants
Convertible Debentures
P/E Ratio
Dividend Yield Cyclical / Growth / Value Stocks
Market Capitalisation = Sum total of
CMP of shares * no. of shares outstanding
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Approach/Strategy to Fund Management
Equity
Passive - Index
Active - (a) Growth (b) Value Debt
Buy and hold - Passive
Duration management - Active
Credit Selection - in anticipation of changes in creditratings
Prepayment predictions
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Debt instruments
Corporate Debentures
Zero coupon bond
Floating rate bonds
G-Sec, CP, T-Bills
Commercial Deposits
Banks/ FIs/ PSU Bonds
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Risk in a Debt Fund
Interest Rate Risk
Credit Risk (Asset quality)
Reinvestment Risk
Call Risk
Liquidity
Inflation
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Terms used in MFs
Yield Curve
Graph which shows yields of various maturities using a
bench mark
usually upward - some time inverted
Yield to Maturity (YTM)
Annual rate of return expected of a bond over its maturitywith the assumption that all coupon payment will be recd
on time and reinvested at the same rate and principal recd
on maturity.
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Terms used in MFs
Par Value or face value
Coupon
Maturity
Call or put option
Current Yield
Yield Spread
Duration - % change in bonds¶ price with change in the
yields by 1%.
ExMark:Funds performance in relation to the benchmark index
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ExMark:Funds performance in relation to the benchmark index
It is from 0-100. With 100% meaning highest relation
An index fund has Ex Mark of 100%
If Ex Mark is lower than 80% fund is less predictable inrelation to index and may be riskier
Beta:Measures sensitivity of the funds returns to changes inthe market index
Beta of 1: Fund moves with market (Index fund)
Beta of less than1: less volatile than market (conservativeportfolio)
more than 1: higher volatility than market (software fund)
Gross Dividend Yield: Funds reported yield gross beforeexpenses and net after expenses
Higher for value fundsthan growth funds
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One - time 8 % 10% 12%
investment
(in Rs.) (at the end of 15 yrs.)*
200,000 6,34,434 8,35,450 10,94,713
100,000 3,17,217 4,17,725 5,47,357
50,000 1,58,608 2,08,862 2,73,678
20,000 63,443 83,545 1,09,471
10,000 37,722 41,772 54,736
What your savings can generate ?
* for an initial one time investment compounded annually for a 15 year period
--------------- Rate of return ---------------
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Savings Total amount 8% 10% 12%
per month invested
(for 15 yrs.) (in Rs.) (at the end of 15 yrs.)*
5000 9.0 lacs 17.5 lacs 20.9 lacs 25.2 lacs
4000 7.2 lacs 13.9 lacs 16.8 lacs 20.2 lacs
3000 5.4 lacs 10.4 lacs 12.6 lacs 15.1 lacs
2000 3.6 lacs 6.9 lacs 8.4 lacs 10.1 lacs
1000 1.8 lacs 3.5 lacs 4.2 lacs 5.0 lacs
What your savings can generate ?
* monthly instalments, compounded monthly, for a 15 year period
--------------- Rate of return ---------------
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15.01
22.8
28.31
35.12
8% 10% 11% 12%
REGULAR SAVINGSTHE SIMPLESTWAY TO COMBAT INCR EASING HOUSEHOLD
EXP
ENDITUR
E
R s. 1000 saved every month for 30 years can grow to
a sizeable amount of wealth
depending on the return generated on these savings
% Per annum
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0 2 5 8 11 14 17
2 year old Charu¶s parents
invests Rs. 5,000 monthly for 5
years. They do not withdraw
any money.
12 year Rahul¶s parents invest a
similar amount i.e. Rs. 5,000. They
invests for 5 years and they too do
not withdraw any money
Rs. 10.6 lacs
Rs. 3.9 lacs
THE POWER OF COMPOUNDING
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So,h
ow do weplan our investments ?
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Financial goals
Risk-taking ability
Expected Return
Investment Period
First, consider your«.
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Financial Planning
Financial Goals� identifying various needs for money
Converting needs into specifics� amount of money
� time frame for requirement of money
Planning saving & investment to achieve these
goals
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Professional Financial Planners
Understands investment universe
Understands risk and return profile of various
investment alternatives
Assist clients in choosing the right investmentmix keeping in mind client¶s
-- saving ability-- risk appetite
-- cash flow requirements
-- tax status
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Why become a Financial Planner?
Ability to recommend financial products based onsuitability of investor rather than product features
Ability to build mutually beneficial long termrelationship with investors
Ability to profit from their expertise and value
addition to investors
Ability to act as financial intermediaries relied uponby investors and issuers
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Attributes of Financial Planners
Understanding of the investment universe-- risk & return profile of investment alternatives
-- past performance-- behaviour of asset classes
Expertise in tax planning & estate planning
Ability to correlate investors life cycle with matching
financial products Highly organised in their professional lives
Excellent communication and interpersonal skills
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Financial Planning
Establish & define relationship with client
Define Clients Financial Goals
� Specific Goals and their timings
Appreciate clients ability to save and cash flowrequirements
Appreciate clients disposition to risk
Appreciate tax liability and focus on post-tax returnsto client
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Financial Planning. . . . . Elaborated
Create asset allocation plan- tailor make portfolio suiting client needs
Enable actual performance
- role of an intermediary
Review and Rebalance continually
- periodic review of performance
- take corrective action, if required
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Client Responsibilities
Set measurable goals
Appreciate effect of financial decisions on cash
flows
Be open to review and re-balance portfolio on anongoing basis
Start early
Be systematic, consistent and disciplined
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Investors Needs
Protection NeedProtection Need Investment NeedInvestment Need
To protect living Financial needs served
standards, current and through investmentssurvival requirements and savings
- Regular Income - Children education
- Retirement Income - Housing
- Insurance Cover - Children professionalgrowth
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Asset Allocation and Model Portfolio
R d d M d l
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Recommended Model
Portfolios . .
Accumulation Stage:
- Investible surplus available
- Financial goals are not near term
� Diversified Equity 65 ± 80%
� Income & Gilt 15 ± 30%
� Liquid Funds & BankDeposits 5%
R d d M d l
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Recommended Model
Portfolios . .
Transition Stage:
- Closer to Financial Goals
- Transition from µGrowth to Income¶
- Near Retirement , Children Education or Marriage
- Increase Asset Allocation to Income Component
R d d M d l
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Recommended Model
Portfolios . .
Distribution Or Reaping Stage:
- Require Income as Dependence on Investment
- Income µGrows for Regular Expenses¶
- Investors Start Liquidating Portfolio For Current Requirements
� Diversified Equity & Balanced Funds 15 ± 30%
� Income Funds 65 ± 80%
� Cash Funds 5%
Recommended Model
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Recommended Model
Portfolios . .
Inter-generational Or Transfer Stage:
- Focus on ServingNeeds of Heirs
- Growth and Income Funds in balance
- Higher percentage in Growth Funds if heirs are µYoung¶
- Income Funds suitable if heirs are µTrusts andCharities¶
Recommended Model
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Recommended Model
Portfolios . .
Affluent Investors:
-- HIGHER RISK APPETITE:HIGHER RISK APPETITE:
� Sectorial and Growth Funds 70 ± 80%
� Diversified Equity or Balanced Funds Balance
- LOWER RISK APPETITE:LOWER RISK APPETITE:
� Income , Gilt and Liquid Funds 70 ± 80%
� Diversified Equity or Balanced Funds Balance
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Asset Allocation
Process of deciding portfolio composition
Allocate funds across equity, debt and other asset
classes based on risk-return profile
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Asset Allocation Strategies
Basic Managed Portfolio
- Diversified equity value funds 50%
- Govt. securities fund 25%
- High grade corporate bond fund 25%
Basic Indexed Portfolio- Stock market index fund 50%
- Bond market index fund 50%
Asset Allocation Strategies
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Asset Allocation Strategies
Simple Managed Portfolio
- Balanced Fund 85%
- Medium term bond fund 15%
Complex Managed Portfolio
- Diversified equity fund 20%
- Aggregate growth fund 20%
- Specialty Funds 10%
- Long term bond funds 30%
- Short term bond funds 20%
Readymade Portfolio- Single Index
- Equity 60%
- Debt 40%
Bogle¶s Strategic Allocation
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Bogle s Strategic Allocation
Combines investors age, risk profile and
preference in asset allocation
Older investors in distribution phase
- 50% Equity, 50% Debt
Younger investors in distribution phase
- 60% Equity, 40% Debt
Older investors in accumulation phase- 70% Equity, 30% Debt
Younger investors in accumulation phase- 80% Equity, 20% Debt
Fixed Asset Allocation Strategy
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Fixed Asset Allocation Strategy
Maintain fixed ratio between chosen asset classes
Disciplined approach that ensures profit bookingand purchases at lower prices
Example
- 50% Equity and 50% Debt- Equity markets rise ensuring profit booking
- 50:50 Ratio maintained
Flexible Asset Allocation
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Flexible Asset Allocation
Strategy
No portfolio re-balancing
Ensures riding bull wave if markets are rallying
Ratio changes as per market changes
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Model Portfolio
Set long term goals keeping risk-return profile and time horizonin mind
Asset allocation exercise based on growth, income and liquidity
criteria
Sector Distribution exercise
- Allocation of funds across various Mutual Fundproducts
Fund manager selection
-Which scheme?Which Fund house?
Recommended Model
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Recommended Model
Portfolios . .
Young unmarried professional- Aggregate Equity funds 50%
- High yield bond, growth & income funds 25%
- Conservative money market funds 25%
Young Couple: Double income, 2 Children
- Money Market Funds 10%
- Aggressive Equity Funds 30%- High Yield Bond & Long Term Growth Funds 25%
- Municipal bond funds 35%
Recommended Model
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Recommended Model
Portfolios . .
Older couple single income- Short term municipal funds 30%
- Long term municipal funds 35%
- Moderately aggressive funds 25%
- Emerging growth equity 10%
Recently retired couple
- Conservative equity funds 35%- Moderately aggressive equity funds 25%
- Money market funds 40%
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Fund Selection
E it F d S l ti
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Equity Fund Selection . . . . . .
Form categories based on risk-return profile
- Diversified , I ndex , Sectorial & Specialised
Form categories based on fund manager¶s style
- Value and Growth
Evaluate Performance- Peer Group and Benchmark comparison
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Equity Fund Selection . . . . . . . .
Consider Structural Characteristics- Size of the Fund
- Fund History
- Portfolio Manager Experience
- Cost of Investing: Expense Ratio
Consider Portfolio Characteristics- Percentage Cash
- Portfolio Concentration
- Market Capitalisation of Fund
- Portfolio Turnover:Churn- Portfolio Risk Characteristics
� R-squared
� Beta
� Dividend Yield
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Equity Fund Selection . . . . . . . .
High R Squared , Low Beta And High
Dividend yield preferred
B d F d S l ti
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Bond Fund Selection . . . . . .
Fund Age and Size
Relative yield: YTM
Expense Ratio
Portfolio Quality
� Credit Rating of portfolio holdings
Average maturity� Duration
M M k t F d S l ti
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Money Market Fund Selection
Expense Ratio
Credit Quality
Yield
Principal is safe due to lower duration
Income can be volatile
Strategy To Smart Investing
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Strategy To Smart Investing
Identify Objective
Start early
Focus long-term and stay invested
Beware of the effects of inflation & taxes
Need Based Investment Strategy
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Age Group
(Years)
Growth
(Equity)
Income
(Bonds)
Liquidity
(Banks)
25- 40 75% 15% 10%
41- 50 50% 35% 15%
51- 60 35% 45% 20%
Above 60 25% 50% 25%
Need Based Investment Strategy
The Risk Return Trade-off
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R isk
Potential
for
return
Liquid Funds
DebtFunds
Growth FundsAgg ressive, Value,
Growth
Balanced Funds
Sectoral Funds
Gilt Funds, Bond
Funds, High
Yield Funds
Ratio of Debt : Equity
Hedge Funds
Equities are the best long term bet
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56%
63%
86%
37%
14%
44%
1 year 3 year 5 year
Equities are the best long term bet
percentage of studied period in which
Other
investment
outperformed
Stocks
outperformed
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
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Remember :
1. Investment Decision Are Long Term Decision
2. 1% Superior Return Can Make 20%
Difference in 25 Years.
3. Understand the Virtues of Rupee Cost
Averaging
4. Discipline Is More Important ThanIntelligence.
5. Avoid Wastage, Look at Returns Net of Taxes
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The Final Lap
Important Features
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Important Features
70 questions to be answered in 120 mins
Key Area - Financial Planning (60-70%)
DANGER AREA : Negative marking
(0.25% )
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Main Reasons for Failure
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1st Online Examination in Life : FEARPSYCHOSIS (Appearing for an examination
after ???? Years)
Trying to attempt all the 70 questions
QUESTIONS ARE TRICKY ( N obody has a solution to Offer)
How to cross this BRIDGE ????
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How to cross this BRIDGE ????
Be thorough with the N umericals
Ex. Calculating Loads, Expenses etc. etc.. (NUMERICALS ARE EASY TOSOLVE) - Attempt these questions First (CONFI DENCE BUILDS UP)
THEN, Attempt ONLY those questions which you are sure about
While answering, write the marks of the attempted questions in thepaper provided by NSE & TOTAL I T UP every 30 mins
When YOUR TOTAL is close to 70-75%, recheck the answers you
have marked. If you are confident of the TOTAL, pleaseSTOP Answering further
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All the Best !!!!!! Thank You