amfi trainning presentation.pdf

7/28/2019 AMFI Trainning presentation.pdf

1/262

NISM - Series -

MUTUAL FUND Distributors CertificationExamination - June 2010


2/262

Index

Day 1

Part 1

1. Concept and Role of Mutual Funds2. Fund Structure and Constituents3. Legal and Regulatory Environment

Part 2

4. Offer Document5. Fund Distribution and Channel Management Practices7. Investor Services8. Return,Risk & Performance of Funds


3/262

CONCEPT AND ROLEOF MUTUAL FUNDS

Chapter 1


4/262

What is a Mutual Fund ?

It is a pool of money, collected frominvestors, and is invested according tocertain investment objectives

The ownership of the fund is thus joint

or mutual, the fund belongs to allinvestors.

A mutual funds business is to investthe funds collected, according to thewishes of the investors who created

the pool.


5/262

Important characteristics of a Mutual Fund

The ownership is in the hands of the investors (Unit holders)who have

pooled in their funds so ownership isjoint or mutual.

It is managed by a team of investment professionals & service providers.

The investors share is denominated by units whose value is called as Net

Asset Value (NAV) which changes everyday.

The investment portfolio is created according to the stated investment

objectives of the fund.

In India, Mutual Funds are constituted as TRUST.

Standard Risk factors are common for all Mutual Funds.

Unaudited accounts must be published every 3 months.

Mutual Funds are not allowed to invest inArt in india.


6/262

Role Mutual Fund

Primary Role is to assist investor in earning an income or

building their wealth by participating in opportunities availablein various security market.

Money that is raised from investors ultimately benefits

Governments, companies or other entities directly or indirectly.

It is possible for mutual funds to structure a scheme for any kind

of investment objective.

Mutual Funds are therefore viewed as a key participant in thecapital Market of any economy.


7/262

Why Mutual Fund

Mutual Fund seek to mobilize money from all possible investors.

as per their investment preferences.

In order to accommodate different preferences mutual fund mobilize

Different pool of money.

Each pool is called mutual Fund scheme.

Every Scheme has a pre-announced investment objective.

When investor invest in mutual Fund they are effectively buying

into its investment objective.


8/262

Advantages & Limitations of Mutual Funds

Advantage of a Mutual Funds

Portfolio diversification Professional Management

Economies of Scale

Reduction in Risk

Liquidity Tax Deferral

Tax benefits

Convenience and Flexibility

Regulatory Comfort

Systematic Approach toinvestment

Limitation of a Mutual Funds

Lack of Customisation Choice Overload

Issue relating to management ofportfolio of Mutual Funds


9/262

Flow of Mutual Fund Scheme

Steps Details

1 MF Scheme File offer documents with SEBI for Approval

2 MF Scheme Announces Invetment Objective

3 Seeks the Investment from the Public (NFO)

4

No of units X Face Value (Unit capital)

5

Investment done in MF is translated into units. (each UnitFace Value is Rs.10/-) & alloated to Invetors

Investment done in MF scheme is further invested by the

Fund manager as per the presepfied Investment objective.


10/262

History of Mutual Funds in India

Phase 1 (1964-87) : Growth of UTI

Phase 2 (1987-93) : Entry of Public Sector Funds-S.B.I.,Canara etc.

Phase 3 (1993-96) : Emergence of Private Sector MF &Joint Ventures between Foreign & Indian Funds

Phase 4 (1996-99) : Growth and SEBI Regulation

Phase 5 (1999-04) : UTI Act 1963 repealed in Feb 2003 UTI MutualFund

Phase 6 (2004) : Consolidation & Growth 32 MF as at 31-03-07


11/262

Basic Classifications Mutual Funds

Basic Features Open Ended Funds Close ended Funds

Purchase Done Any time Done during the specified period.

Re-purchase Done Any time Done during the specified period.

Redemption Done Any time Done during the specified period.

Further Trasaction NA Can be done in secondary Market

Unit Capital Is not fixed but variable Unit Capital is Fixed

No of Units Outstanding Units goes up & down Outstanding Units remains unchanged

Mutual Funds in India are basically classified according to Investmentobjective & structure


12/262

Interval Funds

Combine features of both open-ended and close ended schemes.

They are largely close-ended, becomes open ended at pre- specifiedintervals.

If it is half yearly interval fund then it will open between 1 to 15th Jan, &1 to15 July,each year.

The benefit for investors is they are not completely dependent on theexchange.

Basic Classifications Mutual Funds


13/262

Mutual Fund Classifications As Fund Management

Basic Features Active Funds Passive Funds

Role of fund manager

Fund Management

Expenses Ratio High Low

Rate of Return Expected high rate of return

Examples Diversified Equity Schemes Index Funds

Responsibility & Role is of FundManager to decide the investment

avenues to build the portfolio.

No Great Role of fund manager asprotfolio is defined by the index itself

Flexibility of fund management

depended on Fund manager

Fund management is done on the

prespecified index.hence less or no

flexibility.

Rate of return would mirror the concern

index.


14/262

Types of Funds - By Investment Objective

Equity Debt Money Market

Equity FundsIndex Funds

Sector Funds

Fixed IncomeFunds

GILT Funds

Money MarketMutual Funds

Balanced Funds Liquid Funds


15/262

Types of Equity Funds (A Risky asset class)

Aggressive Growth Funds (Targets maximum capital appreciation.) Growth Funds (Capital appreciation over 3 to 5 years at above

average rate.)

Speciality Funds Sector Funds (Bank, Power, Pharma, IT, Telecom) Foreign Securities Fund

Mid cap or Small cap Equity funds

Diversified Equity Funds (Do not focus on any one or few sectors orshares)

Equity Index Funds (These funds take only the overall market risk) Value Funds (Invests in the companies whose shares are under-

priced) Equity Income or Dividend yield funds

(Invests in the shares of the companies with high dividend yield.)


16/262

ELSS ( Equity Linked Saving Scheme )

3 year lock in period

Minimum investment of 90% in equity markets at all times

So ELSS investment automatically leads to investment in equity shares.

Eligible under Section 80 C up to Rs.1 lakh allowed

Dividends are tax free.

Benefit of Long term Capital gain taxation.


17/262

Take contrary positions in different markets / securities, such thatthe risk is neutralized, but a return is earned.

For instance, by buying a share in BSE, and simultaneously selling

the same share in the NSE at a higher price.

Most arbitrage funds take contrary positions between the equitymarket and the futures and options market.

Arbitrage Funds


18/262

Types of Equity FundsSector Funds Growth Funds Diversified Equity Funds Thematic Funds Index Funds

To mirror the index

Risk High Risk High Risk Average Above average Market risk

High High High High

Liquidity Yes Yes Yes Yes Yes

Among sector only Most diversified

Features

Investment

Objective

Concentrates in Singlesector of market for

investment.

Capital appreciation in 3to 5 years

can invest in across all thesectors.

To invest into themelike infrastructure

Return onInvestment

Related more withMarket Return

Asset

allocationDiversified across all

sectorsDiversified across all

sectorsCan be Diversified

across as per theme

Focused on stocks within acertain business or

industry. More volatile thanthe overall market.

Invest in to companiesshow promise of stronggrowth in coming years

Best of the return aregenerated per unit of risk

taken by the investors.

invest acrosscompanies which arepart of said theme.

A passive fund stylesuits to conservative

investors.

Comparison of Equity Funds


19/262

Debt Funds

Schemes with an objective that limits them to investments in debtsecurities like Government Securities, Bonds and Debentures are calleddebt funds.

By investing in such instruments, these funds ensure low risk and providestable income to the investors. They are classified as :-

Gilt fundsInvest in only government securities, with Zero credit risk.

Diversified debt fundsInvest in a mix of government & non-government debt securities.

Junk bond FundsInvest in companies with poor credit or High yield stocks


20/262

Fixed maturity plans (FMP) In such debt funds where the investment portfolio is closely aligned to

the maturity of the scheme.

Floating rate funds Invests in floating rate debt securities where the interest rate payable

by issuer changes in line with the market. NAV`s of such schemes fluctuate lesser than debt funds that invest

more in debt securities offering a fixed rate of interest.

Liquid schemes ormoney market schemes

Invest only in money market securities that matures within 91-days. They are the lowest in risk among all kinds of mutual fund schemes.

Debt Funds


21/262

Monthly Income Plan Seeks to declare a dividend every month. invests largely in debt securities. & Small percentage in equity shares to

improve the schemes yield.

Capital Protected Schemes

Theyare close-ended schemes, They are structured to ensure that investors get their principal back,

irrespective of market conditions. Mainly invests in Zero coupon govt securities whose maturity is aligned

with scheme's maturity & part amount will be invested in equityinstruments.

Hybrid funds


22/262

Other types of funds

Gold Exchange Traded Fund, They are like an index fund that invests in gold. NAV of such funds moves in line with gold prices in the market.

Gold Sector Funds They are like an equity sectors funds the prices of these shares are more

closely linked to the profitability and gold reserves of the companies. NAV of these funds do not closely mirror gold prices.

Real Estate Funds These funds make it possible for small investors to take exposure to real

estate as an asset class.Although permitted by law, such mf are yet to hit the market in India.


23/262

Commodities Funds Such funds Invest in shares of Companies that are in to commodities

Like Gold sector funds, Commodity Sector Funds etc.

International funds Invest outside the country the Common practice is tie up with a foreign

fund. In such case a feeder fund will be launched & will subsequentlyinvest into the host fund of the foreign fund house.

Fund of funds (FOF) Such funds invest in various other funds, whether in India or abroad. They are designed to help investors get over the trouble of choosing

between Multiple schemes and their variants in the market.

Other types of Funds

C i f D bt F d


24/262

Debt Funds

Liquid Funds Gilt Funds FMP MIP

High Liquidity

Return Moderate Higher Yield High

Default Risk Very less Nil Yes Yes Yes High

Nil Medium to high Yes Nil Yes Yes

Credit rating Yes Yes Yes Yes Yes Yes

Portfolio

Liquidity Very High 3 Business days 3 Business days

Diversified Debt

Funds

High Yield

Debt FundsInvestment

ObjectiveFor consistent

returns & liquidity.For higher return

than gilt fundsFor fixed returns over

& fixed-maturityfor regular

incomeFor higher

returns

Between the call rates &1yr T Bills

Nearly Fixed sort ofreturns

Higher than puredebt fund

Interest raterisk

Invest in short-term debtinstruments with lessthan 1 year maturity.

invest G-Secs ofcentral & state govt

& T. Bills.

Invest in a mix ofgovt and non govt

securities.

Schemes maturity isaligned with portfolio

maturity

short durationfixed incomepaper & into

equity funds

risky debtinstruments

can be redeemedbefore maturity at

exchange.

comparativelylow

Comparison of Debt Funds


25/262

Balanced Fund

The discussion on asset allocation brought out the benefit of diversifyingthe investment portfolio across asset classes

Balanced fund is not a 50/50 fund!

Equity oriented Balanced funds (at least 65% in equity)

Debt / Income oriented Balanced fund (at least 65% in debt)

Investing in a balanced scheme makes things simpler for investor,because Fewer scheme selection decisions to be made.

Investor looking forhybrid funds with tax benefit should invest inbalance fund.


26/262

International Fund

These are the funds that invests outside the country. For Ex. MF may offerscheme to investor in India with an investment Objective to invest abroad.

One way for the fund to manage the investment is to hire the requisitePeople who will manage the fund. Their salaries would add to thefixed costs of managing the fund.

Alternative Route would be to tie up with a foreign fund (Host Fund)

For Ex. If an MF sees potential in china it will tie up with Chinese fundInvestors in India will invest in feeder fund. The money collected in suchFund would invest in the host fund.

Thus when Chinese market does well host fund do well & Feeder Fund inIndia will follow suit.


27/262

Fund Of Fund

A Fund structured to invest in various other funds either in Indiaor abroad are called Fund of Funds.

The Feeder fund was a example of a fund that invests in anotherfund.

These fund of fund pre-specify the mutual funds whose scheme

they will buy & the kind of scheme they will invest in.

They are designed to help investors get over the trouble ofchoosing between multiple schemes & their variants in theMarket.

Expense Ratio of the fund of fund is usually higher then normalmutual fund scheme.


28/262

Exchange Traded Funds

An open ended Index funds that are traded on stock exchange.

A feature of open ended funds which allows investor to buy & sell unitsfrom MF scheme. Such feature is allowed only to very large investors inan ETF.

Other investor have to buy & sell on Exchange platform.

A baskets of securities that are traded, like individual stocks, on anexchange.

ETF`s can be bought and sold throughout the trading day like any stock.

One must pay a brokerage to stock broker to buy & sell ETF units.

ETF is exempted from wealth Tax

Gold ETF is eligible for LTCG after 1 year as compare 3 yr in physicalgold.


29/262

Investment Choices

Investor can Achieve income & capital appreciation in all funds by variouschoices available such as

Dividend Option Regular Dividend Dividend Reinvestment Option

Growth Option

Most of the Funds are available with all above options.Investor can choose according to his investment objective.

V I t t P i t


30/262

Very Important Points

An Open Ended Fund offers repurchase facility unconditionally at all times(But It is not obliged to keep selling new units at all times).

A Gilt Fund is a special type of Fund that invests in Dated Securities only.

The Unit Capital of a closed Ended Fund is fixed. Also the number of unitsare also fixed.

Each unit holder of a mutual Fund is part ownerof the AUM of that Mutualfund ( he is not a creditor, not a debtor and not a trustee of that mutualfund).

Transfer of Security from one scheme to another scheme is allowed atMarket price.

Units from an Open Ended fund are bought from the Fund Itself ( not fromthe stock exchange, distributors or the banks)

V I t t P i t


31/262

The Liquidity needs of an investor are met through Money Market Funds.A retired person generally needs a greater proportion of Debt Funds.

A young investor, for growth and wealth creation, should be advised toinvest in Equity Growth Funds.

An Equity Fund can be said to be concentrated when Top 10 holdingsaccount for more than 50% of net assets invested.

The size of the market cap of funds equity holdings is inversely

proportional to the level of risk assumed by the fund. ( Large Market Caphave low risk).

A steady holdings of investments in an equity funds portfolio indicatesboth Long Term orientation and Lower Transaction Costs.

Before investing in equity fund one should look at Ex Mark, Beta, Yield,Age and size of the fund, Portfolio turnover rate, etc.

Very Important Points


32/262

Debt Schemes are popular because the returns are more predictable.Equity returns are volatile and very less predictable.

If an investor needs income, he should select a fund with high current yield.

YTM ( Yield to maturity) of debt funds portfolio gives an indication of TotalReturn ( Not current income).

Longer the average duration of debt fund portfolio, greater the interest rate

risk. Running a Money Market Mutual Fund requires more of Trading Skills.

The investors should invest in Debt Fund with a Higher Rated Portfolio andLower Expense Ratio.

An Ideal money market MF has lower expense Ratio.

Very Important Points Debt Funds

Q ti f R i i


33/262

Q-1 What is not an advantage of the Mutual Fund ?

(a) professional management (b) Choice over load

(C) High liquidity (d) Economic scale

Q-2 Which of the following fund targets capital appreciation over 3 to 5 yearperiod at above average rate?

(a) Aggressive growth fund (b)Growth fund

(c) Sector fund (d)None of the above.

Q-3 Gold funds can invest in

(a)Gold (b)Gold futures (c) Shares of gold mines (d) All of the above.

Q-4 Which of the following fund would fall under passive management ?(a) Diversified Equity Fund (b) Index Fund

(c) Equity Growth Fund (d) all of Above.

Question for Revision

Q ti f R i i


34/262

Q-5 Which one of the following funds does not qualify as a specialityfund?

(a)Pharma Fund (b) Balanced Fund(c) Small-Cap Fund (d) Emerging Markets Fund

Q-6 After NFO in Open Ended fund transactions can be done by ?

(a) Existing Investors (b) Existing & New Investors

(b) New Investors (d) None of the Above.

Q-7 Compare to Sector Funds Thematic Fund would have a widerchoice for investment ?

(a) True (b) False

Question for Revision

Answers


35/262

Answers:

Q-1 : (b), Q-2 : (b), Q-3 :

(d), Q-4 : (b), Q-5 : (b) ,Q-6 : (b), Q-7 : (True)

Answers

Chapter 2


36/262

FUND STRUCTURE AND

CONSTITUENTS

Chapter 2

Structural Frame Work of Mutual Funds


37/262

Structural Frame Work of Mutual Funds

*Custodians are appointed by Trustees

Marketing &Development

Sponsor(Reliance capital Limited)

TrusteeRel. Cap. Trustee Co. Ltd.

AMCRel. Cap. Asset. Mgmt. Ltd

Fund

Management

Registrar & Custodian*Karvy & CAMS

Responsible for investorsmoney (Primary Guardian)

Banks

Contributes

at least 40%in the capital

Appoints

Regulatory structure of MF in India


38/262

Regulatory structure of MF in India

The structure of mutual funds in India is governed by SEBI(Mutual Fund)

Regulations, 1996.

It is mandatory to have a three tier structure of Sponsor-Trustee-AssetManagement Company.

The Sponsor is the promoter and he appoints the Trustees who areresponsible to the investors of the fund.

AMC is the business face of the mutual fund as it manages all the affairsof the fund

How are Mutual Funds Structured


39/262

How are Mutual Funds Structured

In India Mutual fund is the form of a Public Trust created under the Indiantrust Act 1882.

The fund sponsor acts as the Settler of trust, contributes the initial capitaland appoints the trustees to hold the trust for the benefit of the unitholders.

Mutual fund is just a pass-through vehicle

In India, Mutual funds are organized as trusts. The trust is either managedby a Board of Trustees, or by a trustee company.

The trustees hold the unit holders money in a fiduciary capacity.

(Money belongs to unit holders)

In legal sense, the investors are the beneficial owners of investments.

Sponsor


40/262

The sponsor is a promoter of the mutual fund.

Sponsor appoints the Trustees, the AMC and custodians with prior.approval of SEBI and in accordance with SEBI Regulations.

Sponsor must have a 5-year track record in the financial Servicesbusiness.

Sponsor must have been profit making in at least 3 of the above 5 years.

Sponsor must contribute at least 40% of the net worth of the AMC.

Sponsor could be a bank (SBI, PNB, ICICI, HDFC) a financial institution(Fidelity, Franklin Templeton) or a Corporate (Reliance, Birla, Tata etc.)

Sponsor

Trustee


41/262

Independent Trustees are appointed by the sponsor.

The role of the trustee is to safeguard the interest of the investor of the fund.

The trustee make sure that the fund are invested as per the investmentobjective.

There must be at least 4 members in the Board of Trustees and at least 2/3of the members of the board of trustees must be independent.

Trustee of one mutual fund can not be a trustee of another mutual fund.

All major decisions are taken by trustee.

The 3rd schedule of the SEBI regulations specifies the content of the trustdeed.

Trustee

Rights & Obligations of trustees


42/262

Rights & Obligations of trustees

Rights :-

Trustees appoint the AMC, consultation with the sponsor according toSEBI.

All Schemes floated by the AMC have to be approved by the Trustees. Trustees can seek remedial actions from AMC & in cases dismiss the AMC

Obligations :-

Trustees must ensure due diligence on the part of AMC in the appointmentof constituents and business associates

Trustees must furnish to the SEBI, on half yearly basis a report on theactivities of the AMC

Trustees must ensure compliance with SEBI regulations

The meeting of the trustees should be held at least once in every 2 months.

Asset Management Company


43/262

Asset Management Company

Must be registered with SEBIAMC also can be formed as Pvt Ltd Company.

AMC is responsible for all operational aspects.AMC gets fees for fund management. AMC must have a minimum net worth of Rs. 10 Cr., at all timesAn AMC cannot be an AMC or Trustee, of another Mutual FundAMC s cannot indulge in any other business, other than that of asset

management.AMC can not be trustee / AMC for another MF.At least half of the members of the Board of an AMC, have to be

independent Quarterly reporting to trustees.

The agreement between the Trustees and the AMC is known asInvestment Management Agreement.

Functions of the Custodians


44/262

Functions of the Custodians

Responsible for the securities held in the mutual funds portfolio and is

required to be registered with SEBI

Custodian is appointed by the Board of Trustees

Keep an investment record of the mutual fund

Collect dividends and investment payments due on the mutual funds

investment

The custodian and sponsor cannot be the same entity

The custodian is the guardian of the funds and assets of investors

Key Persons in AMC


45/262

Key Persons in AMC

Managing Director: Operations of AMC is headed by Managingdirector, Executive Director or Chief Executive Director.

Chief Investment Officer: He is responsible for overall Investmentof the Fund. Fund Manager assist the CIO.

Securities Analysts : He supports the Fund manager through theirresearch inputs.

Securities Dealer: He helps in putting the transactions in the market.

Chief Marketing Officer: He is responsible for mobilizing moneyunder Various scheme.

Direct sales team who generally focus on large investor and Channelmanager who manage the distributors support the CMO.

Chief Operations Officer: He handles all the operational issues.

Compliance office: He need to ensure all the legal Compliance

Registrar and Transfer Agents


46/262

Registrar and Transfer Agents

They are responsible forissuing and redeeming units of the Mutual Fund.

Their other services include. Process investor applications, Record details of Investors

Send information to Investors, Process dividend payouts.

Incorporate changes in investor information

Keeping Investor information up to date

Also do the collection & payments on behalf of fund.

Example Karvy and CAMS

Other's important authorities


47/262

Other s important authorities

Auditors : -

Auditors are responsible for the audit of accounts.

The auditor appointed to audit the scheme accounts needs to be differentfrom the auditor of the AMC.

While the scheme auditor is appointed by the Trustees

Fund Accountants : -

Fund accountants calculate the NAV by collecting the information aboutthe assets and liabilities of each scheme.

AMC can either handle this activity in house or can hire the agency.

Other's important authorities


48/262

Distributors :-

They play a key role in selling suitable types of units to their clients. But beforeselling distributors needs pass the prescribed certification tests

Collecting Bankers :-

The Investors Money go into bank account of the scheme they have investedin. These banks accounts are maintained with collection bankers who areappointed by AMC.

Other s important authorities

Important Points


49/262

po ta t o ts

The appointment of AMC can be terminated by Majority of directors or

trustees. Fund manager is responsible for filing details of the funds

portfolio with SEBI.A sponsor of a mutual fund can act as the distributor of the Mutual

fund. The sponsor can be compared as promoter of a company Sponsor can contribute to the initial corpus of the trust. Sponsor contributes to the capital of the AMC and can invest in his own

funds schemes. Sponsor can not act as Trustee , Custodian of the Mutual Fund.

Questions for Revision


50/262

Q

Q-1 The appointments of fund distributors are made by

(a)Transfer Agents (b)Fund Sponsor (c)Trustees (d) AMC

Q-2 In India, a mutual fund has to be structured:

(a) As a trust (b) As an investment company(c) Either as a trust or as a company at the choice of the sponsor(d) None of the above

Q-3 Which of the following entities is responsible for issuing and redeemingunits?

(a) Custodian (b) Bankers (c) Registrar (d) Distributors.

Q-4 Minimum Net worth needed by AMC ?

(a) 10Cr (b) 15 Cr (c) 20Cr (d) 5Cr.

Answers


51/262

Answers:Q-1 : (d), Q-2 : (a),

Q-3 : (c), Q-4 : (a)

Chapter 3


52/262

LEGAL AND REGULATORY

ENVIRONMENT

Chapter 3

Regulating Agencies of Mutual Fund


53/262


Mutual Funds are regulated by SEBI (Mutual Funds) Regulations, 1996

SEBI regulates all funds, except offshore funds i.e. those schemesoffered in a foreign country

Bank-sponsored mutual funds were jointly regulated by SEBI and RBI

Subsequently it has been clarified that all MFs being primarily capitalmarket players,regulatory come under the umbrella of SEBI.

RBI regulates the money and government securities market where the

mutual funds invest. But not the MMMF.



54/262

Liquid funds which invest in money market instruments are now governedby SEBI alone. ( MMMF are now regulated by SEBI). But they need to

comply with RBI's regulations.

If a bank-sponsored mutual fund offers a guarantees, it requires RBIpermission.

SEBI does not regulate Non Banking Finance companies.

The finance ministry is the supervisor of both the RBI and SEBI.

Aggrieved parties can make appeals to the Ministry of finance on the

SEBI rulings relating to mutual funds.

egu at g ge c es o utua u d

Self regulatory organizations (SROs)


55/262

g y g ( )

In developed Countries it is common for market players to CreateSRO, Whose prime responsibility is to regulate the their ownmembers

Where ever SRO exits statutory regulatory bodies lays down the broadpolicy framework and leave micro regulation to the SRO.

SRO are the second-tier in the regulatory structure & gets their powersfrom the apex regulating agency and act on their instructions

SRO facilitate decentralization in the regulatory structure.

For Instance - Stock exchanges are Self-Regulatory Organizations

What are the objectives of AMFI ?


56/262

j

AMFI is an industry association, incorporated in 1995, is not an SRO,

so it can just issue guidelines to members. It cannot enforce regulations.

To Define & Maintain high professional , ethical standards in all areas ofoperation in MF Industry.

To recommend best business practice and code of conduct to be followed

by the members and other engaged in various activities.

To interact with the Securities and Exchange Board of India (SEBI) andrepresent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodies

on all matters relating to the Mutual Fund Industry. To develop a cadre of well trained agent distributors. To Undertake nationwide investor awareness programme to promote

better understanding of the concept & working of mutual funds

AMFI Guidelines


57/262

AMFI Guidelines

AMFI Code of Ethics( For AMC) : ACE is set out tomaintain good standards of Practices to be followed by

AMCs in their operations and in their dealings withinvestor, intermediaries and the public.

AGNI( For Distributors) : AMFI has framed AGNI, a setof Guidelines and code of conduct for intermediaries,consisting of individual agent , brokers, distributionhouses and banks engaged in selling of mutual fund

products.

AMFI code of ethics (ACE)


58/262

( )

AMFI Code of Ethics sets out the standards of

Good practices to be followed by the AMC in their operations and intheir dealings with investors , intermediaries and the public.

SEBI Regulation 1996 requires all the AMC and trustees to abide by

the code of conduct.



59/262

( )

Integrity

Members in business shall observe the high standard of integrity andfairness in all the dealing done by them.

Mutual Fund Scheme shall be organized & Managed and theirportfolios of securities selection should be in the interest of all classes of

unit holder and not in the interest of any associates.



60/262

( )

Due Diligence Members in the conduct of their Asset Management Business shall

at all times Render high standard of service, Exercise due diligence,Exercise independent professional judgement.

Member shall have and employ effectively adequately resources andprocedures which are needed for the conduct of Asset Management

activity

Disclosures Member shall ensure timely dissemination to all unit holder of

adequate,accurate, and explicit information presented in a simplelanguage about the investment objectives, investment policies, financial

positions and general affairs of the scheme.



61/262

( )

Professional Selling Practice

Member shall not use any unethical means to sell,market or induce anyinvestors to buy their products and scheme.

Investment Practice Members shall manage all the schemes in accordance with the

Fundamental investment objectives and investment policies stated

In the offer documents and take investment decisions solely in theInterest of the unit holders.

Members shall not knowingly buy or sell securities for any of theirschemes from or to Any director, officer, or employee of the member.



62/262

( )

Operations Members shall avoid conflicts of interest in managing the affairs of the

schemes and shall keep the interest of all unitholders. Members or any of their directors, officers or employees shall not indulgein front running.

Reporting Practices Members shall follow comparable and standardized valuation policies in

accordance with the SEBI Mutual Fund Regulations.

Unfair Competition Members shall not make any statement or become privy to any act,

practice or competition, which is likely to be harmful to the interests of

other Members or is likely to place other Members in a disadvantageousposition in relation to a market player or investors.



63/262

( )

Observance Of Statutes, Rules And Regulations Members shall abide by the letter and spirit of the provisions of the

Statutes, Rules and Regulations which may be applicable & relevant tothe activities carried on by the Members.EnforcementMembers shall:

Widely circulate the AMFI Code to all persons and entities covered by it

Make observance of the Code a condition of employment Require that each officer and employee of the Member sign a statement

that he/she has received and read a copy of the Code Establish internal controls and compliance mechanisms, including

assigning supervisory responsibility.

AMFI code of ethics (ACE) - Summary


64/262

AMFI code of ethics broadly deals with:

Integrity

Due diligence

Disclosures

Professional selling practices

Investment practices

Operations

Reporting practices

Unfair competition

Observation of statutes, rules and regulations

Enforcement Definitions like AMFI, Member, Trustee, Trustee company etc.

( ) y

AMFI guidelines & norms for intermediaries (AGNI)


65/262

Take necessary steps to ensure that the clients interest is protected.

Adhere to SEBI Mutual Fund Regulations and guidelines issued from time

to time related to selling, distribution and advertising practices.

Be fully conversant with the key provisions of the Scheme InformationDocument (SID), Statement of Additional Information (SAI) and KeyInformation Memorandum (KIM) as well as the operational requirementsof various schemes

Highlight risk factors of each scheme, avoid misrepresentation andexaggeration and urge investors to go through SID/KIM before deciding tomake investments.

Disclose to the investors all material information including all the

commissions (in the form of trail or any other mode) received for thedifferent competing schemes of various Mutual Funds from amongst whichthe scheme is being recommended to the investors.

AMFI guidelines & norms for intermediaries (AGNI)


66/262

Abstain from indicating or assuring returns in any type of scheme, unlessthe SID is explicit in this regard.

Maintain confidentiality of all investor deals and transactions.

When marketing various schemes, remember that a clients interest andsuitability to their financial needs is paramount.

Intermediaries will not rebate commissions back to investors and avoid

attracting clients through temptation of rebates / gifts etc.

A focus on financial planning and advisory services ensure correctselling, and also reduces the trend towards investors asking for passback of commission.

All employees engaged in sales and marketing should obtain AMFI(NISM Series-V-A: Mutual Fund Distributors Certification Examination)

Investment Objective


67/262

j

This defines the broad investment charter of scheme.

For Ex :The objective of a diversified equity schememight read as

To generate Capital appreciation from a portfolio of predominantlyequity related securities.

The objective of a diversified the debt scheme could be :

To generate income by investing predominantly in a wide range ofdebt & money market securities.

Investment Policy


68/262

The Policy describes in a greater details, kind of portfolio that willbe maintained. Such as below.

The portfolio will generally comprise of equity & equity relatedinstruments of around 30 companies, which may go upto 30Companies.

OR

More than 50% will be invested in equity & equity relatedsecurities. The rest would be in debt & money market securities.

Investment Strategy


69/262

Investment Strategy goes into much details of a MF Schemesuch as

Should we increase the liquidity component in a scheme.

Should we go overweight on the steel sector.

Investment objective & investment policy are part of the OD. Butinvestment strategy is decided more frequently.

Many AMC have a practice where every morning the seniormanagement discuss the need for a change in their strategy.

Investors Rights & Obligations


70/262

Service Standards Mandated for a Mutual Fund towards its

Investors:

Schemes, other than ELSS, need to allot units or refund moneys within 5

business days of closure of the NFO. Open-ended schemes, other than ELSS, have to re-open for ongoing

sale / re-purchase within 5 business days of allotment. Statement of accounts are to be sent to investors as follows:

NFO - within 5 business days of closure of the NFO. Post-NFO investment within 10 working days of the investment. Ongoing Investments Once in quarterend of calender year with in

10 working days. Request by investor - With in 5 working days with out charges.



71/262

Investor can ask for a Unit Certificate for his Unit Holding. AMC is bound

to issue unit certificates within 30 days of receipts of request. NAV has to be published daily, in at least 2 newspapers NAV, Sale Price and Re-purchase Price is to be updated in the website of

AMFI and the mutual fund by 9 pm. In case of Fund of Funds, by 10 am the following day

The investor/s can appoint up to 3 nominees, . The investor has a right to pledge the units held. Dividend warrants have to be dispatched to investors within 30 days of

declaration of the dividend Redemption / re-purchase cheque would need to be dispatched to

investors within 10 working days from the date of receipt of transaction

request.



72/262

Unit-holders have proportionate right to the beneficial ownership of theassets of the scheme.

Investors can choose to change their distributor or go direct. In such cases,AMCs will need to comply, without insisting on any kind of NOC from theexisting distributor.

Investors can choose to hold the Units in dematerialized form.

In the case of unit-holding in demat form, the demat statement given bythe Depository Participant would be treated as compliance with the

requirement of Statement of Account.



73/262

The mutual fund has to publish a complete statement of the schemeportfolio and the unaudited financial results, within 1 month from the

close of each half year.Advertisement need to publish in one National English & regional

language of the region where the HQ of the mutual fund is situated.

Debt-oriented, close-ended / interval, schemes /plans need to disclosetheir portfolio in their website every month, by the 3rd working day of thesucceeding month.

Unit-holders can inspect key documents such as the Trust Deed,Investment Management Agreement, Custodial Services Agreement,R&T agent agreement and Memorandum & Articles of Association of

the AMC.



74/262

Scheme-wise Annual Report, or an abridged summary has to be mailed toall unitholders within 6 months of the close of the financial year.

The offer document has details of the number of complaints received andtheir disposal. Pending investor complaints can be a ground for SEBI torefuse permission to the AMC to launch new schemes.

The trustees / AMC cannot make any change in the fundamental attributesof a scheme, unless a written communication is sent to each Unit-holder,and an advertisement should be published in news papers (english &regional).

An option of exit would be give to unit holders with out any exit load.with in 30 days.



75/262

If 75% of the unit holder(In practice, Unit Holding) of the scheme

Decide :1) They can terminate the AMC.

2) Wind-up the scheme.

3) Call the meeting of the Unit Holder.

The Trustees are bound to obtain consent of the Unit-holders: Whenever required to do so by SEBI, in the interest of the Unit-holders Whenever required to do so by 75% of the Unit-holders

(in practice, Unit-holding) of the scheme. When the trustees decide to wind-up or prematurely redeem the scheme If an investor feels that the trustees have not fulfilled their obligations,

then he can file a suit against the trustees for breach of trust.

Limitations to Investors right


76/262

Investors cannot sue the trust as they are not distinct from the trust

Investors cannot lodge complaints against the trustees(with the Registrar of Public Trusts) or the AMC (with the CLB).

Investors can lodge complaints with SEBI for non-compliance.

Investors cannot be compensated if the performance of the fund is belowexpectations.

There are no legal remedies available for a prospective investor.

The principle ofcaveat emptor(let the buyer beware) applies to mutualfund investments. So, the unit-holder cannot seek legal protection on thegrounds of not being aware.

Unclaimed Amounts


77/262

The mutual fund has to deploy unclaimed dividend & redemption amounts

in the money market.AMC can recover investment management and advisory fees at maximum

rate of 0.50% p.a. Recovery of such unclaimed amounts by the investors is as follows: If the investor claims the money within 3 years, then payment is based on

prevailing NAV i.e. after adding the income earned on the unclaimed

money. If the investor claims the money after 3 years, then payment is based on

the NAV at the end of 3 yearsAMC is expected to make a continuous effort to remind the investors

through letters to claim their dues. The Annual Report has to mention the unclaimed amount and the number

of such investors for each scheme.

Proceeds of liquid Securities


78/262

It is possible that any security was treated as wholly or partly non-

recoverable at the time of maturity or winding up of a scheme.

The security may subsequently yield a higher amount to the scheme.

In such cases treatment of excess is as follows :-

If amounts are substantial & recovered within 2 years, then the amountis to be paid to old investors.

In other cases the amount is to transferred to the investor educationfunds maintained by each mutual fund.

Can mutual Fund Scheme go burst ?


79/262

The structural requirements ensures that the investor is fully protected

from most of the contingencies that can be envisaged.

While AMC Manages the investments of the scheme, the assets of thescheme are held by the custodian.

AMC & Custodian operates under the overall control of the trustees.

Such arrangement of checks & balances protects the investors frommisappropriation of funds, fraud etc.

If sponsor wishes to move out of business they needs to bring in some

other sponsor acceptable to SEBI.

Important Points


80/262

SEBI entertains the complaints against MF and intervenes with fundmanagements to help the investor.

SEBI requires that sponsors of a new scheme should appoint a complianceofficer who must issue a Due Diligence Certificate to the effect that allregulations have been complied with by the fund and sponsors.

Mutual fund has to deploy unclaimed dividend and redemption amount inmoney market, where they can charge .50% as investment managementand advisory fees.

Unit holders have right to timely service, right to information, right toapprove changes in fundamental attributes, right to wind up a scheme, rightto terminate the AMC.

3rd Schedule of SEBI (MF) regulations 1996 specifies the contents of theTrust Deed.

Investors money is not protected by the Companies Act.



81/262

Q-1. Bank owned mutual funds are regulated by

(a) RBI and SEBI (b) Respective parent banks (c) RBI (d) SEBIQ-2. If an investor failed to claim the redemption proceeds after 3 yearsof due date he has the right to receive an amount equal to

(a) Zero (b) Face value of the unit

(c)Due date NAV plus interest @15% p.a.

(d)NAV at the end of three years after the due date

Q-3 Payment of redemption is delayed then what % Interest has to bepaid by AMC?

(a) 10% (b)20% (c)9% (d) 15%

Answers


82/262

Answers:

Q-1 : (d) Q-2 : (d)Q-3 : (d)

Chapter 4


83/262

OFFER DOCUMENT

New Fund Offer


84/262

Units of mutual fund are offered to investors for the first time through a NFO.

AMC decide the scheme to take to the market.

AMC prepares offer Document for the NFO. This needs to be approved by the

trustees.

The documents are to be filed with SEBI.

SEBI does not approve / Disapprove the OD it given only the observation.Any observation made by SEBI needs to be incorporated in OD.

Only After approval from SEBI & trustees OD can be issued in the Markets.

AMC decides the suitable time for launch.

New Fund Offer


85/262

AMC holds events for intermediaries and press to make them familiarwith the scheme.

Finally offer documents and Application forms are distributed tomarket intermediaries for investor to apply.

NFO ( Other than ELSS ) Open for 15 days.

Post NFO allotment of units to be done in 5 days.

There are 3 Relevant dates related to NFO

NFO Open date NFO Close Date Scheme Reopening Date

The Offer Document


86/262

Offer Document is the most important source of information about

mutual fund scheme for investors

OD is the OOperating DDocument and describes the product.

Mutual fund offer document is divided into 2 parts,

Scheme information document (SID) & Statement of additionalinformation (SAI).

SID comprises ofdetails of the scheme while SAI deals with statutory Iinformation about the mutual fund that is offering scheme.

Both documents are prepared in the format as prescribed by SEBI.

The Offer Document


87/262

Investors are required to read and understand the OD.

Investors sign the form stating that they have read the OD. No recourse isavailable to investors for not reading the OD or KIM

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

The AMC is responsible for the information in the OD

Contents of SID


88/262

Cover Page has the name of the scheme followed by its type

Open-ended / Close ended / Interval Equity / Balanced / Income / Debt / Liquid / ETF

Finally the cover page has the following standard clauses. Table of Contents

Highlights Introduction - Risk Factors Standard Scheme-specific - Minimum no. of investors in scheme, Definitions, Due

Diligence Certificate (issued by the AMC) Information about the scheme - Units & Offer, Fees & Expenses ,Rights &

Penalties Unit-holders, Litigation etc.

Updation of SID


89/262

If a scheme is launched in the first 6 months of the financial year (say, April

2010), then the first update of the SID is due within 3 months of theend of the financial year (i.e. by June 2011).

If a scheme is launched in the second 6 months of the financial year (say,October 2010), then the first update of the SID is due within 3 months of

the end of the next financial year (i.e. by June 2012). Thereafter, SID is to be updated every year.

In case of change in the fundamental attributes, the SID has to be updatedimmediately after the lapse of the time period given to existing investors to

exit the scheme.

Contents of SID Other changes


90/262

In case of change in fundamental attributes SID has to be updatedimmediately after the lapse of time period given to existing investors to exitthe scheme.

It will be printed on a separate piece of paper (addendum) anddistributed along with the SID, until the SID is updated.

If a change is superseded by a further change (for instance, change in

load), then addenda is not required for the superseded change i.e.addenda is only required to disclose the latest position.

The change is to be advertised in an English newspaper having nation-wide circulation, and in a newspaper of the language of the region where

the head office of the mutual fund is located.

The change is to be mentioned in the website of the mutual Fund.

Contents of SAI


91/262

Information about Sponsors, AMC & Trustee ,shareholding pattern,responsibilities, names of directors and their contact information.

profiles of key personnel, and contact information of service providers(Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund

Accountant (if outsourced) and Collecting Bankers)

Condensed financial information (for schemes launched in last 3 financialyears) How to apply Rights of Unit-holders Investment Valuation Norms

Tax,Legal & General Information (including investor grievance Redressalmechanism of past 3 years.)

Update of SAI


92/262

Regular update is to be done by the end of 3 months of every

financial year.

Material changes have to be updated on an ongoing basis anduploaded on the websites of the mutual fund and AMFI.

Contents of KIM


93/262

KIM is a summary of the SID and SAI. As per SEBI regulations, everyapplication form is to be accompanied by the KIM.

Name of the AMC, mutual fund, Trustee, Fund Manager and scheme Dates of Opening /Closing Issue & Re-opening for Sale & Re-purchase

Plans and Options under the scheme

Risk Profile of Scheme

Price at which Units are being issued and minimum amount / units for initialpurchase, additional purchase and re-purchase

Bench Mark , Dividend Policy

Performance of scheme and benchmark over last 1 year, 3 years, 5 yearsand since inception.

Loads and expenses

Contact information of Registrar for taking up investor grievances

Update of KIM


94/262

KIM is to be updated at least once a year.

As in the case of SID, KIM is to be revised in the case of change infundamental attributes. Other changes can be disclosed throughaddenda attached to the KIM.

Fundamental attributes


95/262

Fundamental attributes of a scheme are its basic features.

For eg. Type of a scheme, Investment Objective, Terms of issueetc.

For any change in fundamental attributes, SEBI and Trustee approval

is required.

Investor approval is not needed. However, each investor must be

informed through a communication and given the option to exit without

exit load.

Standard risk factors


96/262

Mutual fund and securities are subject to market risk and there is no

assurance that the objective will be achieved NAV of units issued under the scheme can go up or down depending on

factors and forces affecting capital markets.

Past performance of the sponsor/AMC/ Mutual fund does not indicate the

future performance of the scheme.

The name of the scheme does not in any manner indicate any either thequality of the scheme or the future performance of the scheme

Standard risk factors are same for all the MF Schemes.

Scheme specific risks


97/262

Risk arising from investment objective, investment strategy and assetallocation of the scheme

Risk arising from non diversification , if any

If a scheme offers assured returns, the scheme must state that the

assurance is on the basis of the guarantees provided by thesponsor/AMC

If the AMC has no previous experience in managing a mutual fund, adisclosure to the at effect should be made.

Risk arising with investment in equity, debt, derivative etc.

Important Points regarding OD and KIM


98/262

In USA, the OD is known as prospectus

The first time investor should read detailed offer document, once he hasgained familiarity with the AMC, he can just refer to KIM

The offer document is issued by the AMC / Trustees

OD is a legal document.

OD issued for launching of a new schemes is valid for a period of sixmonths and if the scheme is not launched within this period a fresh ODis required to be filed.

OD contains the accounting policies to be followed. Such policies should

be in accordance with the SEBI regulations.

Important Points regarding OD and KIM


99/262

Compliance Officer signs the Offer Documents stating that:

1) All the Information is as per Sebi Format

2) All the information is True

3) All the constitutes of AMC are Sebi registered.

OD must disclose the names and background of fund managers, keypersonnel, investor relation officer, AMC and its directors, custodian,registrar, transfer agent and the statutory au

Important Points


100/262

KIM is available at various distribution points such as banks, distributorsand brokers

AMC must confirm that a due diligence certificate signed by Complianceofficer / CEO / MD has been submitted to SEBI.

If a schemes name implies that it will invest primarily in a particular type

of security or in certain industry, then it will invest at least 65% of thevalue of its assets in the indicated type of security/ industry.

OD must contain brief description of investors complaint history for thelast 3 Fiscal years of existing schemes.

In practice, SID and SAI are two separate documents, though the legaltechnicality is that SAI is part of the SID. Both documents need to beupdated regularly.



101/262

Q-1 Which of the following is the operating document for a mutual fund?

(a) Offer Document (b) KIM

(c) Trust deed (d) None of the above.

Q-2 The OD may not disclose the names and background of

(a) Fund manager (b) Key personnel (c) Investor relation officer

(d) Statutory auditor (e) None of the above.

Q-3 Offer Document issued on launch of the new scheme is valid for ?

(a) 1 month (b) 3 months (c) 6 months (d) 1 year.



102/262

Q-4 Which of the following is not the scheme specific risk factor?

(a) Risk arising from the schemes objective

(b) Risk arising from the non-diversification(c) No previous experience in managing a fund

(d) Movement in NAV because of the market movements.

Q-5 SEBI directs that certain information must appear on the cover page ofthe offer document of any scheme. This includes the following except

(a) A statement to the effect that the document contains information thata prospective investor should know before investing

(b) A description of the investment policies for the scheme on offer

(c) Opening, closing and earliest closing date for the offer

(d) Type of scheme and price of units on offer



103/262

Q-6 Which of the following document is attached with the application form?(a) Offer document (b) Prospectus

(c) Offer for sale document (d) KIM.

Q-7 Only one of the following statements is correct as regards the requiredfrequency of updating the contents of the Offer Document of anexisting mutual fund scheme. Which one?

(a) Once issued, the OD of an existing scheme can`t be updated(b) The OD must be updated whenever there is a material change

in its contents

(c) The OD must be updated on a half-yearly basis

(d) The OD must be updated on a yearly basis.

Answers


104/262

Answers:

Q-1 : (a), Q-2 : (e),Q-3 : (c), Q-4 : (d),

Q-5 : (B), Q-6 : (d),Q-7 : (b)

Chapter 5


105/262

FUND DISTRIBUTION ANDCHANNEL MANAGEMENT

PRACTICES

Traditional Distribution Channels


106/262

Individual Agents

Those agents who facilitates the investment individually for Insurance co`s orGovt. Savings schemes etc.

Only exemption is distributors above 50 years of age and with at least 5

years of experience as on Sep 30, 2003. Such exempted distributors were

required to complete AMFIs refresher course by Sep 30, 2004. Institutional Channels

The changing competitive context led to the emergence of the institutionaldistributors for a wide spectrum of financial products such as

Private Distribution Companies Banks and NBFC`s

Post Offices

Newer distribution Channels


107/262

Technologies has opened the doors to newer ways with help of suchtechnologies there is a emergence of newer distribution channels which

would play an important role in the years to come.

Internet

Direct Interactions

Reduction in Cost

Convenience Less paper work

High standards in Servicing the clients

Stock Exchanges

High penetration

High volume of transactions

Cost effectiveness.

Pre-requisites to become MF Advisor


108/262

The Individual needs to pass the certification Examination conducted

by NISM. And get the ARN registration from AMFI. With out Certification / registration one can not advise or sell any

Mutual fund schemes.

In case of corporates employee involved in sales & Marketing has toPass the certification examination.

Once the passing certification one can advise all the AMC`sMutual Fund After completing the empenalment process with each

AMC separately

Commission structure for mutual fund agents


109/262

Initial ( Upfront )commission

Paid on the amount mobilised by agents. The scheme application formscarry a suitable disclosure to the effect that the upfront commission todistributors will be paid by the investor directly to the distributor, basedon his assessment of various factors including the service rendered bythe distributor.

Trail commission

it is paid normally on quarterly basis for the funds that remain investedin the scheme. Trail is an effective way to restrict the practice ofrebating, and link commissions.

Example


110/262

Suppose an investor has bought 1000 units at Rs 10 each.

The distributor who procured the investment may have been paid an initialcommission calculated as a percentage on 1000 units X Rs 10 i.e. Rs10,000.

Later, suppose the NAV of the scheme goes up to Rs 15.

Trail commission is payable on 1000 units X Rs 15 i.e. Rs 15,000 & not onthe Rs 10,000 mobilised.

The rates of commission are decided by the mutual fund themselves and are

not subject to regulation by either AMFI or SEBI.

SEBIs advertising code

S d d h C d d A li d Yi ld


111/262

Standard measures to compare such as Compounded Annualized Yield,

CAGR etc. for scheme in existence for more than 1 year.

Annualized yields for at least one, three, five years & since launch For less than 1 year performance, Absolute Return without annualisation

except for Liquid Mutual Funds.

Dividend declared to be mentioned in rupees per unit with face value of

each unit and the prevailing NAV at the time of declaration

Risk factors prominently stated For comparing performance against benchmarks,appropriate benchmark

to be used and identical time periods to be used

No add-ons during offer

Any ranking of fund to be explained appropriately

Loads


112/262

Load is charged to investor when the investor redeems units. It is primarilyused to meet the expenses related to sale and distribution of units

Load charged on redemption is exit load. It reduces price.

Maximum Exit load is 7%.(For Open ended Funds)

Exit load should be charged equally for all types of investors. AMC shouldnot discriminate on the basis of Investment Value.

Load is an amount which is recovered from the investor.


Q-1 Which one of the following statements is correct?


113/262

Q 1 Which one of the following statements is correct?

(a) An individual agent can distribute/sell only one mutual fund's products

(b) Any category of distributors/agents can distribute as many of the

mutual funds' products as allowed by the concerned AMCs(c) Banks are not allowed to sell mutual fund products,

except their own funds'

(d) A distribution company can distribute/sell only one mutual fund's products

Q-2 Which of the following can invest in Indian Mutual fund?

(a) SEBI (b) RBI (c) Foreign Banks (d) AMFI.

Q-3 Which of the following categories of distributors will be exempt frompassing the AMFI Mutual Fund Test?

(a) All the existing agents of UTI mutual fund and other funds

(b) New applicants for distributorship, if the AMC approves their applications(c) Employees of banks who distribute the funds

(d) None of the above.



114/262

Answers: Q-1 : (b),Q-2 : (c), Q-3 : (d)

Chapter 7


115/262

INVESTOR SERVICES

Categories of investors eligible to buy MF units


116/262

Resident Individuals

Indian Companies Indian trusts and charitable institutions Banks NBFCs Insurance companies Provident funds Non-resident Indians / PIO OCBs SEBI registered FIIs

Advisor should refer to the OD to know the eligible investors.

Investors not eligible to buy MF units


117/262

An individual who is a foreign national ( unless of course the personis an NRI or PIO/OCI card holder.)

Any entity that is not an Indian resident as per FEMA (Except whenthe entity is registered as FII with SEBI, or has a sub account withSEBI registered FII.

Overseas corporate bodies (OCBs) i.e. societies / trusts held,directly or indirectly, to the extent of over 60% by NRI

Trust where more than 60% of beneficial interests is held by suchOCBs.

KYC Requirement for MF investors


118/262

It is compulsory from 1st

jan 2011 that all investments done in mutualfunds has to be compliant with the regulatory requirements.

Broadly, mutual fund investors need the following Documents. Proof of Identity Proof of Address PAN Card Photograph



119/262

MF have made an arrangement with CVL ( CDSL venture Ltd) tocomply with the documentation requirement.

Select branches / offices of mutual funds, registrars and largedistributors serve as Points of Service (POS) for the KYCdocumentation, listed in AMFI website .www.amfiindia.com

Investors will need to provide the Original, along with a copy of the

relevant documents, to any of the POS (The Original will be returnedafter verification). Alternatively, the investor can provide a True Copyattested by a Notary Public, Gazetted Officer or Manager of aScheduled Commercial Bank.

CVL provides a facility where the POS, from their own office, can

access CVLs system, enter the requisite data and generate anacknowledgment with a Mutual Fund Identification Number (MIN).


KYC documentation has to be done only ONCE with CVL acting
http://www.amfiindia.com/http://www.amfiindia.com/


120/262

KYC documentation has to be done only ONCE, with CVL actingthrough the POS.

Based on this acknowledgment, the mutual fund investor can invest inany mutual fund.

In case of any change in address or any other information, investor canget it updated at any POS and the same will be changed with all the

AMC where the investor has invested.

Where investment is made by a minor, KYC requirements have to becomplied with by the Guardian.

In the case of investments by a Power of Attorney holder on behalf ofan investor, KYC requirements have to be complied with, by both,investor and POA holder.

Documentation for Institutional investor


121/262

In case of institution Memorandum of Association , Articles

of association or Trust deeds.

Company cannot invest if its documents do not provide for

investments.

Authorization for the investing institution to invest. This is

typically in the form of board resolution.

Authorization for the official to sign the documents on behalf

of the investing institution.

Demat Account - Benefits

D t i li ti i h b i t h ldi f


122/262

De materialization is a process whereby an investors holding ofinvestments in physical form (paper) is converted into a digital record.

Investors purchase & sale of investments get automatically added orsubtracted from their investment demat account, without having toexecute cumbersome paperwork.

Less paperwork in buying or selling the Units, and correspondingly,accepting or giving delivery of the Units.

Direct credit of bonus and rights units that the investor is entitled to, intothe investors demat account.

Change of address or other details need to be given only to theDepository Participant, instead of separately to every company / mutualfund where the investor has invested.

NSEs platform is called NEAT MFSS. BSEs platform is BSE STARMutual Funds Platform.

Transaction with Mutual Funds

F h P h


123/262

Fresh Purchase

Is a instance where the Investor does not have an investment account with

specific Mutual Fund.

Additional Purchase

Once the Investor has the folio and he again transact new purchase

transaction in the same folio.

Online Transaction

Are transaction done through Internet. AMC issues a personal PIN numberthrough which investor can transact except the SIP.

M t l f d d t t h

Payment mechanism for purchase


124/262

Mutual funds do not accept cash.

Application moneys need to come through normal banking channels like-Cheque ,DD

NRI / PIO applications need to be accompanied by cheque drawn on an

NRO account (for non-repatriable investment) or NRE account (for

repatriable investment). If payment from NRI is by DD, and investment is on repatriable basis, a

bankers certificate will be required to the effect that the DD has come out

of moneys remitted from abroad. When the NRI receives money in his bank account in India, the banker

would issue a Foreign Inward Remittance Certificate (FIRC), which isevidence that the money was remitted from abroad.

Payment mechanism for purchase & additional purchase


125/262

Application Supported by Blocked Amount (ASBA)

This is a facility where the investment application is accompanied by anauthorization to the bank to block the amount of the application money inthe investors bank account.

The benefit of ASBA is that the money goes out of the investors bank

account only on allotment. Until then, it keeps earning interest for theinvestor.

M-Banking is nascent in India. RBI has permitted banks to offer the facilityof transferring up to Rs 50,000 per customer per day, through the mobileconnection. Once people are comfortable with M-banking, this will becomea convenient way to invest.

Allotment of units to investor

NFO ld t th f l f R 10/


126/262

NFO are sold at the face value of Rs.10/- soInvestment Amount / Face value = Units investor bought.

Price at which units are sold to an investor as part of ongoing sales inan open-end scheme is the sale price.

For Ex. An investor invested Rs.12000/- in a scheme where theapplicable sale prices is Rs.12, will be allotted Rs.12000 / Rs.12 =1,000 units.

Right & Bonus issue

Right Issue :


127/262

Right Issue :- The price at which units are offered Right price is clear at the time of investment. For Ex. Investment Amount / Right price = No of units bought by

investor.

Bonus Issue :- The investor does not have to pay anything. The fund allots units free. For Ex. In a 1:3 bonus issue the investor is alloted 1 unit free for

every 3 units already held by investor.As net assets of the scheme remain the same only number of units

increases the NAV will be reduced proportionately.

Repurchase of units

The investor in an open ended scheme can offer the units for


128/262

The investor in an open ended scheme can offer the units forrepurchase to the mutual fund.

Re-purchase price is the applicable NAV less exit load.

Investor has a right to decide on repurchase amount. &

if investor has specified the re-purchase amount then(Amount / Repurchase price = units to be reduced.

If an investor specified re-purchase units then(Units specified X Repurchase price = Amount to be paid.

If the repurchase of folio goes below minimum limit set by MFfor scheme then all the units may be repurchased.

Payment mechanism for repurchase of units

The investor has various options for receiving the moneys


129/262

The investor has various options for receiving the moneysdue to him from the scheme on repurchase.

Traditional approach Via Cross cheque favoring investor.

Modern Approach Investor can give instructions of directtransfer of proceeds to his bank account.

For NRI`s Payment is made by the AMC in Rupees.

If an investment made on repartiable basis, the costinvolved for converting in to foreign currency would be tothe account of investor.

Transactions cut off time

Scheme type Transaction Cut of time Applicable NAVSr.no


130/262

yp pp

1 Liquid Scheme Sale Previous day NAV

2 Liquid Scheme Sale Received After 12 Noon Next day NAV

3 Liquid Scheme Re-purchase Received before 3 pm Previous day NAV

4 Liquid Scheme Re-purchase Received After 3 pm Next day NAV

5 Other Than Liquid above 1 Cr. Sale Received any time Same day NAV6 Other Than Liquid up to 1 Cr. Sale After 3 PM Next day NAV

7 Other Than Liquid above 1 Cr. Sale Same day NAV

8 Other Than Liquid Re-purchase Same day NAV9 Other Than Liquid Re-purchase After 3 PM Next day NAV

Received upto 12 Noon

(With Outstation cheque & DD)

Received upto 3 PM

Time Stamping

Mutual funds disclose official POA`s & all transactions needs to beb itt d t th POA`


131/262

submitted at the POA`s.

These POA`s have time stamping machines with tamper-proof seal.(Opening / repairing or maintenance is permitted only to vendors ornominated persons of mutual Fund. & has to be documented & informed totrustees)

Application are stamped with automatically generated locationCode,machine identifier, Serial number, date & time.

Acknowledgment issued to investor are stamped with the same information.

Acknowledgment for non financial transactions like change of address are

stamped. For online transactions time as per the web server to which instruction goes

is used in determining the NAV.

Transaction through Exchange

Both NSE & BSE have extended their trading platform to help the brokers


132/262

Both NSE & BSE have extended their trading platform to help the brokersbecome a channel for investor to transact in mutual Fund.

NSE platform is called NEATBSE platform is called - MFSS

Both platforms are open from 9 am to 3 pm on every working day.

Fresh & additional purchase and redemption are pemitted.

The exchange do not offer settlement guarantee responsibility is that ofAMC.

Investment plans


133/262

Most mutual fund schemes offer three options

Dividend and

Growth.

Dividend reinvestment Option.

These are different options within a scheme; they share the sameportfolio. Therefore the portfolio returns are the same for all threeoptions. However, they differ in the structure of cash flows andincome accruals for the unit-holder, and therefore, the Unit-holderstax ability, number of units held and value of those units.

Systematic Investment Plan

Investment plans and services


134/262

Systematic Investment Plan SIP is investing a fixed sum periodically in a disciplined manner for long

term. It gives benefit of Rupee Cost averaging ( Discussed in later half ofpresentation).Voluntary Accumulation Plan

VAP is modified version of SIP. It is Voluntary Accumulation Plan. Itallows the investor flexibility with respect to the amount and frequency ofinvestment.

In VAP, investor has to impose voluntary self discipline.Systematic Withdrawal Plan

In cases where an investor does not want to withdraw all the amountinvested at one time he can opt for facility called SWP which would enableinvestor to withdraw a specific amount at specific period. SWP is not similar

to MIPSystematic Transfer Plan

It is a systematic way of investing an amount at pre-specified frequencyfrom a pool of money available or from any debt scheme to equity.

Investment services


135/262

Triggers

It is type of an standing instruction given to particular fund for purchaseor sell at desired market level.

Statement of account & investment certificate

The statement of account shows for each transaction & value oftransaction, relevant NAV & balance no of units held in that folio.

Nomination

Nomination is only an authorization for mutual fund to transfer the unitsto the nominee in the event of demise of the unit holder.

Investment services

Pledge


136/262

Pledge

Mutual funds units can be pledged by unit holders. Same can be

affected by pledge form executed by unit holders.

Form has provision to specify name of party on who's units arepledged.

Once the units are pledged the units can not be sell or transfer until

the pledgee gives no-objection to release the pledge.

Investment services

Other Services


137/262

Other Services

Online Access to information on investments including consolidatedview of various folios that related to different family members.

Daily NAV and other key developments transmitted through SMS/e-mail.

Sharing of information on the portfolio valuation income booked,returns earned,capital gains working for income tax purpose etc.


Q-1 Investor A has opted for a systematic transfer plan. This means


138/262

p y p

(a) The investor is allowed to transfer on a periodic basis a specifiedamount from one to another scheme within the fund family.

(b) A specified amount is automatically transferred from his bank accountto his fund account

(c) The investor can withdraw specified amounts at periodic intervals.

(d) The investor can invest any amount in the scheme at periodic

intervals

Q-2 Which of the following is not true with respect to the SWP?

(a) All allows the investor to make systematic withdrawals on a regularintervals

(b) Here the amount withdrawn is treated as the redemption of units(c) SWP is same as the Monthly Income Plan

(d) None of the above.



139/262

Q-3 Which of the following is not true with respect to the voluntary

accumulation plan?

(a) It give the flexibility to the investor regarding the amount to beinvested

(b) It give the flexibility to the investor regarding the frequency of

investment(c) VAP follower is obliged to keep investing(d) None of the above.

Answers


140/262

Answer: Q-1 : (a),Q-2 : (c), Q-3 : (d)

Chapter 8


141/262

RETURN, RISK &

PERFORMANCE OF FUND

Drivers of Returns in a scheme


142/262

The portfolio is the main driver of returns in a mutual fundscheme. The underlying factors are different for each asset

class.

Equity scheme

Fundamental analysis & Technical analysis. These are quantitative


143/262

y y qapproach for security analysis.

Fundamental analysis tells us which stock to buy. Technical analysis tells us when to buy.

Passive fund manager does not need to go through this process asportfolio would be maintained in line with the index.

Securities analysis is an important aspect of actively managed

scheme.

Earnings per Share (EPS):

Securities Analysis Disciplines


144/262

Net profit after tax No. of equity shares

This tells investors how much profit the company earned for eachequity share that they own.

Price to Earnings Ratio (P/E Ratio):

Market Price EPS

P/E ratio indicates how much investors in the share market areprepared to pay (to become owners of the company), in relation to thecompanys earnings.

P/E may be high because the companys prospects are indeed good,

while another companys P/E may be low because it is unlikely toreplicate its past performance

Book Value per Share:

Securities Analysis Disciplines


145/262

p

Net Worth No. of equity shares

This is an indicator of how much each share is worth, as per thecompanys own books of accounts.

Price to Book Value:

Market Price Book Value per ShareAn indicator of how much the share market is prepared to pay for eachshare of the company, as compared to its book value.

Note :Most financial indicators cannot be viewed as stand-alone numbers.

They need to be viewed in the context of unique factors underlying eachcompany.

Technical Analysis


146/262

The discipline of Technical Analysis has a completely differentapproach. Technical Analysts believe that price behavior of a share,

and the volumes traded are a reflection of investor sentiment, whichin turn will influence future price of the share.

Growth investment style

Investment Styles


147/262

Growth investment style Potentials investing in high growth stocks i.e. stocks of companies that

are likely to grow much faster than the economy. Valuation of these stocks tends to be on the higher side. In the event of a market correction, these stocks ten