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A presentation by

Joint Venture with Standard Life Investments



Mutual Funds

Concept and Role of a

Mutual Fund



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 monies in line with the common objective.



Operation flow chart

FUND MANAGER

SECURITIES

RETURNS

INVESTORS



Characteristics of Mutual Funds

Investors own the mutual fund.

Professional managers (AMC) manage the fund for a

small fee.

Fees charged is specified by SEBI and is expressed as apercentage of assets managed

The funds are invested in a portfolio of marketable

securities in accordance with the investment

objective.

Value of the portfolio and investors’ holdings, alterswith change in the market value of investments.



Mutual Funds:

A Packaged Product

Professional

Management

Convenience

Tax Benefits

Liquidity

Diversification



Role of Mutual Fund

1. Assist investors in earning income or createwealth.

2. Supply funds to govt. and industry to invest.

3. Keep a check on operations, corporategovernance and ethical standards.

4. Act as market stabilizer, counter large inflows or outflows.



Mutual Fund Operations

a. Announcement of investment objective

b. Marketing the scheme to public

c. Allotment of units to the investor

d. Earns income: Interest, Dividend, Capital gain or loss.

e. Valuation Gains or loss, incur operational expenses.



Mutual Fund Operations

f. Profit increase the true worth of a unit (NAV), and loss

decrease it.

g. Profits may be distributed as dividends to the investors

or may be retained for future growth. (Options: Dividend

payout, dividend reinvestment, growth)

h. Size of mutual fund companies is assessed by AUM,

AUM is affected by Profitability metric, inflows and

outflows.



Profitability Matrix

A. Interest Income

B. + Dividend Income

C. + Realized capital GainsD. + Valuation Gains

E. - Realized Capital Loss

F. - Valuation Losses

G. - Scheme Expenses



Advantages of Mutual Funds Professional Management

Afford able Portfol io Diversi f icat ion

Econom ies o f Scale : better terms with brokers, bankers

etc.

Liqu id i ty : units are more liquid than shares Tax Deferral : returns are tax free

Tax Benefits : ELSS, Sec 80 C benefits

Convenient Opt ions : Growth, Dividend etc.

Investment Comfo rt : Little Documentation, ECS facilityetc.

Regu latory Com fort : Control of SEBI

Systemat ic Appro ach to Investments : SIP, STP, SWP



Disadvantages of Mutual Funds

No control over costs for an investor

No tailor made portfolios for an investor

Issues relating to management of a portfolioof mutual funds

Note: These are just disadvantages of the

concept of mutual fund. SEBI has takenadequate measures to overcome few of them.



Types of Mutual Funds

1) Open ended, Close ended and Interval Funds.

2) Actively Managed and Passively Managed Funds.

3) Debt, Equity and Hybrid Funds.



Open-End Funds

Schemes which sell/ buy units round the year

Buying/ selling price is based on NAV

Schemes under no obligation to keep selling units atall times

Schemes have to repurchase units at all times

Scheme’s corpus keeps changing due to portfolio

performance & buying/ selling of units



Close-End Funds

Units are sold only once – at the launch of the

scheme (NFO)

Investors’ money is locked in the scheme for a stipulated time

Schemes are listed on exchanges to provide

liquidity to investors

Unit capital is fixed and corpus changes only

on portfolio performance

SEBI regulations ensure investors get exit

option once or twice a year



Types of Debt Funds

a. Gil t Funds

Invests only in Govt. Securities

b. Divers i f ied debt funds

Invests in Mix of Govt. and Non-Govt., Debtsecurities

c. Junk bond funds

Invests in poor quality debtd. Fixed Maturity plans (FMP’s)

Investment portfolio is aligned with the maturity

of the underline debt security



Types of Debt Funds

e. Floating Rate Funds

Invests in Floating Rate Debt

f . Liquid Schemes

Invests in debt securities with tenure of upto

91 days.



Types of Equity Funds

a. Divers if ied equ ity funds

b . Secto r funds

c. Thematic funds d . ELSS

e. Div idend Yield schemes (less flu ctuat ing

shares)

f. A rb itrage funds



Types of Hybrid Funds

a. Month ly In come Plan s (MIP)

b . Cap ital Protec tion Schemes (Close Ended )

Types of Gold Funds

a. Go ld Exchange Traded Fund (Go ld ETF)

b . Go ld sector fund



Types of other funds

a. Real Estate Funds

b . Commodity Funds

Commodity ETF and Commodity Sector Funds.(In India MF’s can not invest in Commodities

hence only Commodity sector Funds Exist)

c. Internat ional Funds (Feeder Funds)

d. Fund of Funds e. Exchange Traded Funds



Evolution In India

Phase 1 – 1964 – 87

Growth of UTI

Phase 2 – 1987 – 93

Entry Of Public Sector Funds

Phase 3 – 1993 – 86

Emergence Of Pvt. Funds



Evolution In India

Phase 4 – 1996 – 99

Growth & SEBI Regulations

Phase 5 – 1999 – 2004

Emergence Of A large & Uniform Industry

Phase 6 – 2004 Onwards

Consolidation & Growth



Fund of Funds

Investment of its corpus in other mutual fund

schemes Schemes of same mutual fund house

Schemes of other mutual fund house

Is considered like a Debt scheme for tax

purposes

The effective expenses become higher as the

investors have to bear the expenses of theinvested schemes as well



Investment Options

Investors can achieve income and growth objectives

in all funds Dividend pay-out option

Regular dvidend

Ad-hoc dividend

Growth option

Re-investment option

Most funds provide multiple options and the facility to

switch between options



Basics of Classification

Risk Sectoral funds are most risky; money market funds are least risky

Tenor Equity funds require a long investment horizon; liquid funds are for

the short term liquidity needs

Investment objective Equity funds suit growth objectives; debt funds suit income

objectives



Risk

Potential

for

return

Liquid Funds

DebtFunds

The Risk Return Trade-off

Growth FundsAggressive, Value,

Growth Balanced Funds

Sectoral Funds

Gilt Funds, Bond

Funds, High

Yield Funds

Ratio of Debt : Equity

Hedge Funds



History of Indian Mutual Funds

Phase I (1964-87) Set up by RBI, de- linked later.

Act of parliament

First scheme US 64, still outside SEBI purview

Phase II (1987-93) entry of PSU Banks/ FIs

SBI in 87, LIC in 89, Indian Bank in 90

Phase III (1993-96) Entry of Private players

Phase IV (1996-99) Growth & SEBI regulations

Phase V (1999-2004)Emergence of large and uniform industry

Phase VI (From 2004 Onwards) Consolidation & Growth



Fund Structure and Constituents

In UK

Two alternative structure

In USA

Investment Companies structure In India

3 tier structure

Sponsor

Trust/Trustee

AMC



MUTUAL FUND - FRAMEWORK- India

FundManagement

Registrar Custody

MarketingOperations

Distribution

Trustee Company

Sponsor

Asset Management Company

Fiduciaryresponsibility to

the

Investors Bank

Brokers

Markets



SPONSOR : Role

Promoter of the mutual fund

Creates a Trust under Indian Trusts Act, 1882

Appoints trustees

Creates AMC under Companies Act, 1956 Fulfils necessary formalities and applies to SEBI for

registration of the Trust as a Mutual Fund



Who is eligible to be a

Sponsor…? Criteria

Financial services business

Sound track record

Positive net worth in last five years

3 year profit making record in the last 5 yearsincluding the last year

Atleast 40% contribution to AMC capital

Sponsors’ net worth in the immediatelypreceding year is more than the capitalcontribution to the AMC



TRUSTEE

Fiduciary responsibility to the Investors.Directors to be approved by SEBI.

Execution of trust deed by sponsor in favour of trustee.

Trust deed is stamped and registered with SEBI

Legally responsible for administering the Trust andCompliance with Regulations.

Norms for Trustees:Experience in Financial Services

Minimum 4 members on the board and 2/3rd of the membersnot to be connected with the sponsor

All major Decisions need trustee approval



ASSET MANAGEMENT COMPANY Required to be registered with SEBI

Responsible for :Launching Schemes

Managing Funds for Schemes

Performing Accounting Functions

All day to day affairs of the Mutual Fund

Quarterly reporting to TrusteesIncome of an AMC /Asset Management Fee

1.25% of weekly average NAV of each Scheme up to Rs.100 cr of

assets managed

1.00% greater than Rs.100 cr

Minimum 4 directors with 1/2 independent

At least Rs 10 cr of net worth to be maintained at all times

AMC cannot act as trustee for other MF

AMC of one MF cannot be trustee of another MF

50 % of the directors on the board must be independent



TRANSFER AGENTS

Issue of Account Statements toInvestors

Arranges payment to Investors when

they redeemTakes care of Non commercial

transactions like change of address,loss

of account statement etc.Should be registered with SEBI

Appointed by Board of AMC



CUSTODIAN

Safe keeping of the assets held by the Fund

Receives and Delivers Securities for payment

Follow up on Corporate benefitsProvide an independent means of control

Independent of Sponsors

Should be registered with SEBI Appointed by the Board of Trustee



Other Constituents

Broker

-Purchase and sale of securities

-Not more than 5% through a relatedbroker

Auditor -Separate auditor for AMC and mutual

Fund



Mergers and Acquistions

Scheme takeover

-One AMC buys schemes of another AMC

-Organic growth in assets-No change in AMC stakes

AMC Merger

-Two AMC’s merge

-Similar to merger of companies-Sponsor stakes change



Mergers and Acquisitions

AMC take-over

-Stake of one sponsor in an AMC bought out

by another sponsor -Change in AMC and sponsor

Investor rights

-No prior approval needed

-Option to exit at NAV-Right to be informed



Fund Mergers & Take overs

Mergers of two AMC

Provisions of Cos Act

Approval of high court and SEBI75% unit holders consent

Scheme takeover

Unit holders permission - 75%

SEBI’s permission



Fund Mergers & Take overs

AMC taken over by other sponsor

(a. Zurich - 20th Century b. ITC

Threedneedle - Zurich c. FT - Kothari -HFCL)

No high court approval

No unit holders consent , only info with

rights to exit from scheme without any loadSEBI clearance is compulsory



Legal & Regulatory Environment

SEBI - Capital Markets Regulator

RBI - Money Markets Regulator

MOF - PoliciesCLB, DCA, ROC

Stock Exchanges

Office of the Public Trustee



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 and

conduct of Mutual funds and enforces compliance toregulations through reviewing reports and regular

inspections



Reserve Bank of India & SE

RBI

Dual supervision for bank sponsored AMCs

Issue concerning ownership bank promoted AMC falls with RBI

Regulates investments pertaining to MoneyMarket Instruments

Stock Exchange (SE)Close ended MF listed of SE. Needs to

comply with listing guidelines.



Office of public Trustee

MF being public trustee - governed by Indian

Trust Act , 1882

Trustee Co or Board of Trustee accountable

to office of Public Trustee

Public trustees reports to Charity Comm.



Trustee and AMC to comply with Cos

Act 1956

Ministry of Law & Justice

Company Law Board (CLB)

Department of Company Affairs

Registrars of Companies (ROC)



Ministry of Finance

Supervises both SEBI and RBI

Ultimate policy making & supervising body

Appellate Authority for any disputes over SEBI

guidelines



Self regulatory Organizations

Derive powers from regulator

Ability to make bye laws

Example : Stock Exchanges (NSE, BSE)Industry Associations

-Collective Industry opinion

-Guidelines and recommendation-Example : Association of Mutual Funds inIndia



Investor’s rights

Proportionate ownership in scheme’s assets Rights of information from Trustee

To received dividend warrants, inspect major docs (Trust

deed, investment management agreement, R&T A

Agreement, custodian services agreement) with 75% voting rights and approval of SEBI can close the

scheme, change the AMC.

Rights of info for fundamental change in the scheme

features and also an opportunity to redeem units withoutany load.

Receive annual report and a/c statement



Investor’s rights & Obligations

Rights - Legal LimitationsUnit 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 (Abridged Offer Document)

Beware of risk factors

Must monitor investments regularly



Investor’s complaint redressal mechanism

Client Servicing

Compliance Officer

Investors cannot be protected by companies Act



Investing in Mutual Funds –

Understanding the ProcessOffer Document

Key Information Memorandum

Application and form of holdingDistribution channels

Investors rights

Taxation of Income and Capital gainNAV and Load



The Offer Document



What is an offer document ?

Legal offer from AMC to investor

Contains vital information about Fund and schemes

SEBI approved format

Key Information Memorandum (KIM) contains vital

information pertaining to the Scheme and it is

mandatory to attach KIM to the application forms

Investor has no recourse for not having read the

OD/KIM



Significance

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



Fundamental Attributes

Scheme type

Investment objective

Investment patternTerms of the scheme with regard to liquidity

Fees and expenses

Valuation norms and accounting policies

Investment restrictions



Changes in Fundamental

Attributes Approval from trustees

Approval from SEBI

Public announcement by AMC

Investors to be informed and option given to exit at

NAV without any exit load

New offer document



OD: Contents

Details of the Sponsor & the AMC

Description of the Scheme & the investment

objective/ strategy

Terms of issue

Historical statistics

Investor Rights & services



Period of Validity

For New Schemes: 6 months from the date of receipt.

Updated every 2 years for Open Ended Funds

Regular Addendum for modification

Updated for every major change

-Change in the AMC or Sponsor of the mutual fund

-Changes in the fundamental attributes of the schemes

-Changes in the investment options to investor; inclusion

or deletion of options



Contents of Offer Document

Preliminary information

Summary information about the mutual fund, thescheme and terms of offer

Mandatory disclaimer clauses as required by SEBI

Glossary of terms in the offer document, whichdefines the terms used

Standard and scheme specific risk factorspertaining to the scheme being offered



Fund Specific Information

Constitution of fund, details of sponsor, trustees and

AMC

Financial history of sponsor (s) for 3 years, in

summary form

Director of boards of the trustees and the AMC

Details of key personnel of the AMC

Details of fund constituents



Details of the Scheme Being

Offered Dates of NFO

Details regarding sale and repurchase

Minimum subscription and face value

Initial issue expenses Current scheme and the past schemes

Special facilities to investors

Eligibility for investing Documentation required

Procedure for applying, and subsequent operationsrelating to transfer, redemption, nomination, pledgeand mode of holding of units



Who can invest ?

Resident Indian Individuals/HUF

Indian Companies/Partnership Firms

Trusts / charitable institutions / PFs

Banks/ FIs / NBFCs

Insurance Companies

NRIs/ FIIs

Partnership firms etc.



Verification and Due Diligence

SEBI : format and content

Trustee approval

Compliance office certifies that Information contained therein is true and fair

Is in accordance with SEBI regulations

Constituents of the fund are all SEBI registered entities.

The AMC is responsible for the contents and the

accuracy of information



Distribution Channels

Individual Agents

Distribution Companies

Banks and NBFCs

Direct marketing channels



Sales Practices

Advertising: Divd declared to be mentioned in Rs. Per unit along with NAV

Only CAGR if the scheme has been in existence for more than 1yr.Less than 1 year to be on absolute basis

For liquid schemes simple annualisation of yields possible if performance figure is available for more than 30 days

For funds in existence for more than 1 yr. annualized

return have to be furnished for 1,3,5 yr and since

inception



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

NAV is computed for each business day



HOW NAV IS COMPUTED

Market value of Equities - Rs.100 crore - Asset

Market value of Debentures - Rs.50 crore - Asset

Dividends Accrued - Rs.1 crore -Income

Interest Accrued - Rs.2 crore - Income

Ongoing Fee payable - Rs.0.5 crore - Liability

Amt.payable on shares purchased -Rs.4.5 crore - Liability

No. of units held in the Fund : 10 crore units

NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10

= [153-5]/10= Rs. 14.80



NAV - Other information Open end funds to declare NAV daily

NAV to be published at least weekly

Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP)

NAV has to consider up to date transactions

Non - recorded transactions not to affect NAV

calculation by more than 2%



NAV

NAV is influenced by

Purchase and sale of Investment Valuation of Investment

Other assets and Liabilities

Units sold or redeemed.

d



Loads

Entry Load or front ended loadPaid at the time of purchase

Sale Price = NAV * (1+ Sales Load, if any)

** Not applicable now……

Exit Load or back ended load

Paid at the time of exit

Redemption Price = NAV*(1- Exit Load)

Contingent Deferred Sales Load (CDSL)Deferred exit load depending on the period

Also known as deferred load



PRICING OF UNITS

Sale price = NAV

Re-purchase price to be not lower than 93%(95% for close-end funds) of the NAV

Difference between the repurchase & sale pricecan not be more than 7% of the sale price



For example…

If the NAV is Rs 10,

Sale price = Rs. 10

Repurchase price cannot be lower than Rs 9.3



MUTUAL FUND ACCOUNTING &

VALUATION



Initial Issue

ExpensesTransaction Cost

Entry / Exit load

CDSC for no-load

schemes

FEES & EXPENSES

Annual Recurring

ExpensesAMC Fee

Custodian Fee

Registry Exp.

Trustee Fee

Audit Fee

Mktg. & Selling Exp.

Brokerage Exp.

Others



Fees & Expenses Initial Issue expenses only for closed

ended equity fund

For launching of the scheme

Can charge up to 6%

Recurring ExpensesMkt & selling exp including brokerage

Transaction cost

R&T cost

Custodian Fees

Audit fees etc

Investor Communication’s cost



Fees & Expenses

Amc can charge Investment management fee to

the fund on weekly avg. net assets.

The limits are( subject to limit of 2..5% for

equity & 2.25% for debt

1.25% for up to Rs.100 cr of weekly avg net

assets1% in excess of Rs.100 cr.

No Load schemes can charge an additional fee of 1%



Limits on Fees & Expenses

Total Expenses that can be charged to the

Fund ( excluding entry and exit loads):

Equity Debt

On the first Rs.100 cr 2.50% 2.25%On the next Rs.300 cr 2.25% 2.00%

On the next Rs.300 cr 2.00 % 1.75%

On the balance assets 1.75% 1.50%

Based on average weekly net assets



Fees and Expenses contd.. Initial issue expenses

Charge to the scheme capped at 6% of the ini tial resour ces raised under that scheme

Entry/Exit Loads - Transaction costs

Sale price not greater than 107% / Re-purchase price not

lower than 93% (95% for close-ended schemes) of the NAV

Contingent Deferred Sales Charge ( For No-Load Schemes)

Ceiling For redemption within 1year 4%

For redemption within 2years 3%





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 30Within 6 months of closure, publish abridged

summary of report scheme-wise in newspapers

Summary to be forwarded to SEBI & unit holdersFull portfolio disclosure to be made within a month

from the half-year ended March 31 & September 30



Expenses that cannot be charged

Penalties and fines for infraction of laws.

Interest on delayed payments to unit holders

Legal marketing and publication expenses not attributable

to any scheme

Expenses on investment and general management

Expenses on general administration corporate advertising

and infrastructure costs

Expenses on fixed assets and software development

expenses. Such other costs as may be prohibited by SEBI.



Accounting Policies

Investments to be marked to market on market prices.Unrealised appreciation cannot be distributed.

Purchase & sale of investments to be recognised on

the trade date and not on settlement date.

Investments to be taken as NPA if it gives no returnthrough interest for more than 6 months

Dividend / Bonus/ rights to be recognised on ex-

dividend / ex-bonus dates and not on declared dates.

Income receivable on Invest NOT accrued for morethan 3 months , should be provided for.

For determining gain/ loss on investments - avg cost

is to be taken



Disclosure and Reporting

Reporting to SEBI Annual audited accounts

Six monthly unaudited a/cs

Half yearly statement of movements in net assets

of each schemeQtr portfolio statement

Monthly amount mobilized

Communication to investor

Qtr portfolio Annual report



Non Performing Asset

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

principal amount remain outstanding for one quarter

from the due date.

After classification as NPA: Accrual should be stopped.

Income accrued till date needs to be accounted for

Principal due needs to be accounted for either in a gradedmanner after 3 months of classification or as a write off in totality

in 15 months after classification.



Taxation

Mutual fund is exempt from paying taxes (section 10

(23D))

Income for investors

-Dividend-Capital Gain

Present position

-Dividend exempt from tax in the hands of Investor

-Funds with >65% in Indian equity pay no DDT-Other funds pay DDT (14.025% for individual and

HUF and 22.44% for others including companies)



Taxation

Securities Transaction Tax(STT) of 0.25%

sale on Equity Mutual Fund Scheme

As per Section 80C of the Finance ActInvestor can claim a rebate for maximum of

Rs 1 lakh in ELSS.

Mutual Funds units are not included under

wealth tax



Treatment of Capital Gains

Long Term : > 12 months

Short Term : =< 12 months

Funds with > 65% in Indian Equity

- Short term gain taxed at 10%-Long Term gains taxed at Nil

Other Funds

-Short term gains taxed at marginal rate of tax

-Long Term gains* 20% + surcharge after indexation

*10% + surcharge without indexation



Indexation

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

2000. What is the indexation adjustment factor? 1998-99 – 351

1999-00 – 386

2000-01 – 406

Investor buys on April 1, 1998 and sells on March 31,

2001. What is the indexation adjustment factor?



Valuation

Marking to Market

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

Valuation



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 previousday price is taken (not more than 30 days)

Valuation = MP * current holding

NON - TRADED SECURITIESStocks 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 basisEquity

Capitalisation of earning or NAV or combination of both



Risk Parameters

Standard Deviation is used to measure total risk.

Beta co-efficient is used to measure market risk.



Benchmarks

As per SEBI guidelines, benchmark should reflect asset allocation

Funds with 65% and more in Equity to use a broad based index(Sensex, S&P CNX 500)

Bond fund with more than 65% in bonds to use a bond marketindex

Balanced funds to use a tailor-made index (Crisil Balanced Fundindex)

Liquid funds to use money market instruments.

C it l k t d M t l



Capital markets and MutualFunds

Equity Market and products

Asset classes

Investment styles

Value indicators

Debt Debt markets

Terminology

Yield and duration Investment styles

Investment restrictions

E it i t t



Equity investment

Options Ordinary shares

Pref. shares

Equity warrants

Convertible Debentures



Investment Strategies

Growth and value

Active and passive

Large and small cap

Cyclical stock

Stock selection

P/E ratio

Dividend yield

Undervalued companies

Fundamental analysis

Technical analysis

Quantitative analysis



Debt Markets

Tenor Short and long

Put and call options

Interest payment Fixed and floating

Periodic vs discounted

Credit quality Gilt, guaranteed and others

Traded and non-traded



Debt instruments

Commercial Deposits

Corporate Debentures

Zero coupon bond

Floating rate bonds



Debt instruments

Commercial papers (CPs)

Govt Securities

T - bills (7- 364 days)

Banks/ FIs/ PSU Bonds



Risk in a Debt Fund

Interest Rate Risk

Credit Risk (Asset quality)

Reinvestment Risk

Call Risk

Liquidity

Inflation



Price and Yield

Increase in yield reduces value of existing bonds.

Decrease in yield increases value of existing bonds.

Price and yield are inversely related.

The relationship between yield and tenor can be

plotted as the yield curve.

T d i MF



Terms used in MFs

Yield CurveGraph which shows yields of various maturities

using a bench mark

usually upward - some time inverted

Yield to Maturity (YTM)

Annual rate of return expected of a bond over its

maturity with the assumption that all coupon

payment will be recd on time and reinvested at thesame rate and principal recd on maturity.



Current Yield and YTM

Coupon as a percentage of current market price.

If we bought a 8 % bond at Rs 110, the current yield

is :

= (8/110)*100

= 7.27%



Interest Rate Sensitivity

Measured by a number called duration.

If duration is 3 years, and interest changes by 1%,

price of the bond will change in the opposite

direction, by 3%



Example

Duration of a bond is 4 years. Yield spread increases

by 1.5% What is the change in price

= 1.5*4

= - 6%



Credit Risk

Probability of default by the borrower

Change in credit rating: Downgrade increases the yield and decreases the price

Upgrade decreases the yield and increases the price

P tf li M t St l



Portfolio Management Styles

EquityPassive - Index

Active - (a) Growth (b) Value

Debt

Buy and hold - Passive

Duration management - Active

Credit Selection - in anticipation of changes in

credit ratings

Prepayment predictions



Evaluating Fund Performance

Should be judged in light of :

Investment ObjectivesCurrent Market Conditions

Alternative investment returns



Performance Evaluation

Different valuation methods

Change in Nav

Total Return

Total Return with dividend reinvested at NAV

CAGR




Change in Nav - The most common

Nav on day 1 = Rs.10

Nav on day x = Rs.12% Change in nav = dayx-day1/day1 * 100

= 2/10 *100 = 20 %

Limitations:Does not account for dividend

Suitable only for growth plans



Annualizing Rate of Return

NAV on Day 1: Rs 10

Nav after 6 months : Rs 12

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

= 20%

To annualize : 20 *12/6

= 40%





Total Return


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%Limitation:

does not account for reinvestment



Performance Evaluation Return on Investments - most suitable


Dividend = Rs.4 per unit Nav at Rs. 21

Div reinvested = Rs (4 /21) = 0.19 units allotted

Total units = 1.19 (original +new allotted)

NAV at year end = Rs.22

Total Return = ( Nav on year end*total units )-day1

nav)/ day 1 NAV* 100= ((22*1.19)- 20))/20*100

= 30.9%

Compounded Annualized Growth



Compounded Annualized GrowthRate

CAGR is defined as the rate at which an investment

has grown on an annual compounding basis

Formula : A = P (1+r/100) ^n

Where A is the total amount at the end of the

investment period, P is the principal amount invested,

r is the rate of return and n is the time period of theinvestment.





Other Parameters

Expense ratios - indicates fund efficiency

and cost effectiveness

Portfolio Turnover ratio - measuresamount of buying and selling done by the

fund

Transaction cost

Fund size

Cash holdings

How MF Scheme Returns are



How MF Scheme Returns areCalculated

Growth option : Returns calculated using CAGR on

NAV’s

Dividend option : Returns calculated using CAGR on

ex-dividend NAV’s, assuming dividends re-invested. Less than 1 year, returns are calculated using

Change in NAV method.

Investment Restrictions as a % of Net assets - AMC



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 eachscheme.

No investments allowed in unlisted/private placement of group/associate cos.

Can borrow only to meet liquidity requirements. Max for 6 months& not more than 20% of NAV of scheme.

Investment Restrictions as a % of Net Assets -



Debt

Max. Investment in Rated paper in single Co - 15%(can be increased to 20% with approval by Board

of AMC/Trustee)

Max.Investment in Unrated/ Rated but below

investment grade in single issuer- 10% of NAV

Max. Investment in Unrated/Rated but below

investment grade in all cos - 25% (subject to

approval of Board of AMC /Trustee).Restrictions not applicable to Govt.

Securities/Money Market

Can only invest in marketable securities - no loans

Investment Restrictions as a % of Net Assets -Equit



Max. Investment in Equity/Equity relatedinstruments of single Co. - 10%

No restrictions in case of Index Fund

Max. Investment in Unlisted Cos. - 10% in

close ended & 5% in open ended funds

Buy & Sell securities on Delivery position , No

short selling/ carry forward allowed.

Security should be transferred to schemesimmediately. Cannot remain in general a/c

Investment Restrictions as a % of Net Assets Equit



Financial Management

Financial Planning



Financial Planning

Financial Goalsidentifying various needs for money

Converting needs into specifics

amount of moneytime frame for requirement of money

Planning saving & investment to achieve these

goals

Professional Financial Planners



Professional Financial Planners

Understands investment universe

Understands risk and return profile of various

investment alternatives

Assist clients in choosing the right investment mix

keeping in mind client’s

-- saving ability

-- risk appetite -- cash flow requirements

-- tax status

Why become a Financial



Why become a Financial

Planner?

Ability to recommend financial products based on suitability of investor rather than product features

Ability to build mutually beneficial long term relationship withinvestors

Ability to profit from their expertise and value addition to investors

Ability to act as financial intermediaries relied upon by investorsand issuers

Attributes of Financial Planners



Attributes of Financial Planners

Understanding of the investment universe

-- risk & return profile of investment alternatives

-- past performance

-- behaviour of asset classes

Expertise in tax planning & estate planning Ability to correlate investors life cycle with matching

financial products

Highly organised in their professional lives

Excellent communication and interpersonal skills

Steps involved in Financial

Pl i



Planning

Establish & define relationship with client

Define Clients Financial Goals

Specific Goals and their timings

Appreciate clients ability to save and cash flow requirements

Appreciate clients disposition to risk

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

Recommend appropriate asset allocation

Execute the Plan

Review Periodically

Financial Planning. . . . .

El b t d



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

Client Responsibilities



p

Set measurable goals

Appreciate effect of financial decisions on cash flows

Be open to review and re-balance portfolio on an

ongoing basis

Start early

Be systematic, consistent and disciplined

Investors Needs



Protection Need Investment Need

To protect living Financial needs served

standards, current and through investments

survival requirements and savings

- Regular Income - Children education- Retirement Income - Housing

- Insurance Cover - Children professional

growth



Asset Allocation and ModelPortfolio

Recommended Model



Portfolios . .

Accumulation Stage:

- Investible surplus available

- Financial goals are not near term

• Diversified Equity 65 – 80%

• Income & Gilt 15 – 30%

• Liquid Funds & Bank Deposits 5%

Recommended Model



Recommended Model

Portfolios . . Transition Stage:

- Closer to Financial Goals

- Transition from ‘Growth to Income’

- Near Retirement , Children Education or Marriage

- Increase Asset Allocation to Income Component

Recommended Model



Recommended Model

Portfolios . . Distribution Or Reaping Stage:

- Require Income as Dependence on

Investment- Income ‘Grows for Regular Expenses’

- Investors Start Liquidating Portfolio For Current Requirements

• Diversified Equity & Balanced Funds 15 – 30%

• Income Funds 65 – 80%

• Cash Funds 5%

Recommended Model



Recommended Model

Portfolios . . Inter-generational Or Transfer Stage:

- Focus on Serving Needs of Heirs

- Growth and Income Funds in balance

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

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

Recommended Model



Recommended Model

Portfolios . . Affluent Investors:

- HIGHER RISK APPETITE:

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

- LOWER RISK APPETITE:• Income , Gilt and Liquid Funds 70 – 80%

• Diversified Equity or Balanced Funds Balance

Asset Allocation



Asset Allocation

Process of deciding portfolio composition

Allocate funds across equity, debt and other

asset classes based on risk-return profile

Asset Allocation Strategies



Asset Allocation Strategies Basic Managed Portfolio

- Diversified equity value funds 50%

- Govt. securities fund 25%

- High grade corporate bond fund 25%

Basic Indexed Portfolio

- Stock market index fund 50%

- Bond market index fund 50%

Asset Allocation Strategies Simple Managed Portfolio



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



g g

Combines investors age, risk profile and preference in asset allocation

Older investors in distribution phase - 50% Equity, 50% Debt

Younger investors in distribution phase - 60% Equity, 40% Debt

Older investors in accumulation phase - 70% Equity, 30% Debt

Younger investors in accumulation phase - 80% Equity, 20% Debt

Fixed Asset Allocation Strategy



Maintain fixed ratio between chosen asset classes

Disciplined approach that ensures profit bookingand purchases at lower prices

Example

- 50% Equity and 50% Debt

- Equity markets rise ensuring profit booking

- 50:50 Ratio maintained

Flexible Asset Allocation



Strategy

No portfolio re-balancing

Ensures riding bull wave if markets arerallying

Ratio changes as per market changes

Model Portfolio



Set long term goals keeping risk-return profile and

time horizon in mind

Asset allocation exercise based on growth, incomeand liquidity criteria

Sector Distribution exercise

- Allocation of funds across various Mutual Fundproducts

Fund manager selection

- Which scheme? Which Fund house?

Recommended Model



Portfolios . . Young unmarried professional

- Aggregate Equity funds 50%

- High yield bond, growth & income funds 25%

- Conservative money market funds 25%

Young Couple: Double income, 2 Children

- Money Market Funds 10%

- Aggressive Equity Funds 30%

- High Yield Bond & Long Term Growth Funds 25% - Municipal bond funds 35%

Recommended Model



Portfolios . . Older couple single income - Short term municipal funds 30%

- Long term municipal funds 35%

- Moderately aggressive funds 25%

- Emerging growth equity 10%

Recently retired couple

- Conservative equity funds 35%

- Moderately aggressive equity funds 25%

- Money market funds 40%

Other Useful Strategies



Other Useful Strategies

Rupee Cost Averaging Invest regularly a pre-determined amount

Thus, purchase of more units at lower market levels and less unitsat higher levels.

Thereby, reducing the average cost of purchase.

Value Averaging Invest regularly to achieve a pre-determined value



Fund Selection

Equity Fund Selection . . . . . .



q yForm categories based on risk-return profile

- Diversified , Index , Sectorial &

Specialised

Form categories based on fund manager’sstyle

- Value and Growth

Evaluate Performance

- Peer Group and Benchmark comparison

Equity Fund Selection . . . . . . . . C id St t l Ch t i ti



Consider Structural Characteristics

- Size of the Fund

- Fund History

- Portfolio Manager Experience

- Cost of Investing: Expense Ratio

Consider Portfolio Characteristics

- Percentage Cash

- Portfolio Concentration

- Market Capitalisation of Fund

- Portfolio Turnover: Churn

- Portfolio Risk Characteristics

• R-squared

• Beta

• Dividend Yield

High R Squared low beta and high dividend yield is preferred

Bond Fund Selection . . . . . .



Fund Age and Size

Relative yield: YTM

Expense Ratio

Portfolio Quality

Credit Rating of portfolio holdings

Average maturity

Duration

Money Market Fund Selection



y

Expense Ratio

Credit Quality

Yield

Principal is safe due to lower duration

Income can be volatile

St t T S t I ti



Strategy To Smart Investing

Identify Objective

Start early

Focus long-term and stay invested

Beware of the effects of inflation & taxes

Need Based Investment Strategy



Age Group

(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%

Remember :1 I t t D i i A L T D i i



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 Than

Intelligence.

5. Avoid Wastage, Look at Returns Net of Taxes

Business Ethics



Business Ethics

Business Ethics are rules of acceptable and good

conduct in business.

All persons involved with business should follow

ethical codes of conduct.

Business ethics are made by managers or

operators of business.

Business ethics are hard to enforce, hence ideally

should be self-imposed.

Objectives of Business Ethics



Objectives of Business Ethics

Honest and transparent dealings with customers.

Protect clients from being cheated and exploited.

To ensure level playing field among all

participants.

To ensure healthy competition for the benefit of all customers.

Business Ethics for MF



Business Ethics for MF

Fund Structure

Separation of functions

Independence of organization

Independence of personnel

Fund Governance

Exercise of voting rights by funds

Fund operations

Ethics Related Regulations



Ethics Related Regulations

Guidelines for good conduct of trustee

and AMC.

Regulations of personal trading

Regulations of insider trading

Regulations of fund advertisement

Compliance officer

Code of conduct for distributors



All the Best !!!!!!

Thank You

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