+ All Categories
Home > Documents > Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Date post: 15-Dec-2015
Category:
Upload: serena-carnell
View: 388 times
Download: 16 times
Share this document with a friend
Popular Tags:
108
Mutual Funds - Detailed
Transcript
Page 1: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Mutual Funds - Detailed

Page 2: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Concept &

Role of Mutual Funds

Page 3: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is a Mutual Fund ?

• It is a pool of money, collected from investors, and is invested according to certain investment objectives

• The contributors and beneficiaries are the same class of people namely the investors

• A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool

• e.g. money market mutual fund seeks investors to invest predominantly in Money Market Instruments

Page 4: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Important characteristics of a Mutual Fund?

• The ownership is in the hands of the investors who have pooled in their funds.

• It is managed by a team of investment professionals and other service providers.

• The pool of funds is invested in a portfolio of marketable investments.

• 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.

Page 5: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Advantages of Mutual FundsAdvantages of Mutual Funds

Portfolio Diversification

Professional Management

Reduction of risk

Reduction of transaction costs

Liquidity

Convenience and flexibility

Access to information

Page 6: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

• Dividends Tax Free in the hands of investors for all type of MF schemes

• There will be Dividend Distribution Tax

Debt Funds …

Individuals 12.50% + surcharge

Corporates 20.00% + surcharge

Effective tax rate is much lower than on interest of bank FD for higher tax bracket Individuals and Corporate investors

• Dividend Tax Free for all Equity and Balanced schemes

Tax Benefits in Mutual FundsTax Benefits in Mutual Funds

Page 7: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

• Capital Gain Tax

- For Equity / Balanced Funds

LT Capital Gain Tax Nil

ST Capital Gain Tax @ 10%

- For Debt Funds

LT Capital Gain Tax @ 10%

ST Capital Gain Tax Tax bracket of Investors

Deduction upto Rs. 1 lakh available u/s 80C for investment in ELSS from FY2005-06

Tax Benefits in Mutual Funds - ContinueTax Benefits in Mutual Funds - Continue

Page 8: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the disadvantages of investing through Mutual Funds?

• No control over the costs. Regulators therefore limit the expenses of Mutual Funds.

• No tailor made portfolios.

• Managing a portfolio of funds. ( Investor has to hold a portfolio for funds for different objectives ).

Page 9: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Mutual Funds Industry in US vs. India

• IN US the asset under management crosses $ 9 trillion (that is approx. Rs 378 lacs crores)

• In India the Asset under management is around Rs.2 lacs crores

Cleary Indicates the Fact that Indian Investors needs to be educated on the most accepted

investment vehicle worldwide. Source ici.org

Page 10: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Important phases in Indian Mutual Fund Industry

1963 – 1987

UTI sole player in the industry, created by an Act of Parliament ,1963

UTI launches first product Unit Scheme 1964

UTI creates products such as MIP's, children plans ,offshore funds etc

UTI managed assets of 6700 Cr at the end of this phase

1987 - 1993

In 1987 Public Sector Banks and FI's

SBI mutual fund was the first non -UTI mutual fund

UTI's corpus grew to Rs.38,247 Cr & public Sector Funds got Rs 8750 Cr

1993 - 1996

In 1993, Mutual Fund Industry was open to private players.

SEBI's first set of regulations for the industry formulated in 1993

Significant innovations, mostly initiated by private players

1996 - 1999

Implementation of new SEBI regulations led to rapid growth

Bank mutual funds were recast as per SEBI guidelines

UTI came under voluntary SEBI supervision.

1999 - 2000

Rapid growth, significant increase in corpus of private players

Tax break offered created arbitrage opportunities

Bond funds and liquid funds registered highest growth

UTI's market share drops to nearly 50%

Page 11: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Mutual Fund Products

Page 12: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are open-ended funds?

• In an open ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund.

• Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period. After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases

• Investors receive account statements of their holdings

Page 13: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are closed end funds?

• A closed -end fund is open for sale to investors for a specified period, after which further sales are closed.• Any further transactions happen in the secondary market where closed-end funds are listed.

• The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV.

• Investors receive either certificates or depository receipts, for their holdings

Page 14: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Types of Funds - By Investment Objective

Equity Debt Money Market

Equity FundsIndex FundsSector Funds

Fixed IncomeFunds

Money Market Mutual Funds

Balanced Funds Liquid Funds

Page 15: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are equity funds?• Predominantly invest in equity shares of the company Choices in equity funds• Aggressive Growth Funds• Growth Funds• Specialty Funds

Sector Funds Offshore Funds Small Cap Equity Funds Option Income Funds

• Diversified Equity Funds ELSS Index funds Value Funds Equity Income Funds

Page 16: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are liquid and money market funds?

• These debt funds invest only in instruments with maturities less than a year.

• The investment portfolio is very liquid and enables investors to hold their investments for very short horizons of a day or more.

What are Gilt Funds?

• It invests only in securities that are issued by the Government and therefore do not carry any credit risk

• It invests in both long-term and short-term paper.• Ideal for institutional investors who have to invest in Govt.

Securities• Enables retail Participation

Page 17: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

How are funds different in terms of their risk profile?

Equity Funds High level of Return , but has a high level of risk too

Debt Funds Returns comparatively less risky than equity funds

Liquid and Money Market Funds

Provide stable but low level of return

Investors have to face the risk- return trade off

Page 18: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Risk

Income Funds

Money Market Investment horizon

Days 1 year 3 years

Risk Profile…Risk Profile…

Floating Rate Funds

Short Term Plans

Returns >>

Gilt Funds

MIPs

Balanced Funds

Diversified Equity Funds

Sectoral Funds

Page 19: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Why Equity Mutual Funds are successfulWhy Equity Mutual Funds are successful??

Qualities DescriptionDo you

Have?

Does a

MF have?

Investment

Process

A systematic method of selection of the scrips, with the synchronization of objective.

?? Yes

Infrastructure Technology, information at hand, statistical tools, research team, time etc.

?? Yes

Experience

The experience of making investment decisions on a regular basis & experience of standing all the business/economy cycles.

?? Yes

Page 20: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Why Equity Mutual Funds are successfulWhy Equity Mutual Funds are successful??

Qualities DescriptionDo you

Have?

Does a

MF have?

Knowledge &

Qualification

Most Fund managers are professionally qualified. Moreover, their knowledge is assisted by a lot many support which they get in the form of their research team, study etc

?? Yes

Constant

Monitoring

Reviewing & analyzing your investment at every moment of time

?? Yes

Page 21: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

Oct

-95

Apr

-96

Oct

-96

Apr

-97

Oct

-97

Apr

-98

Oct

-98

Apr

-99

Oct

-99

Apr

-00

Oct

-00

Apr

-01

Oct

-01

Apr

-02

Oct

-02

Apr

-03

Oct

-03

Apr

-04

Oct

-04

Inde

xed

Val

ues Equity Fund Composite Sensex

2121.256.846.3Actively Managed Funds

5.43.826.627.4Sensex

9 Yr5 Yr3 Yr1 YrCAGR(%)

Performance Comparison

For the chart: Adjusted NAV price and the Sensex closing price for the first trading day every month have been considered. The Equity fund composite comprises of five funds for which data was available for the last nine years(1/10/95 to 1/10/2004). The values were indexed to arrive at a common scale

For the Table: Daily NAV’s and Sensex closing prices have been considered for a time period from 1/10/1995 to 1/10/2004.A buy and hold strategy has been assumed for 1, 3, 5 and 9 year time periods. Source: Credence Analytics

ACTIVE Vs PASSIVE : THE INDIAN EXPERIENCE

Page 22: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Fund Structure and Constituents

Page 23: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

How does a Mutual Fund work?

SEBI

AMC

Unit holders

Savings

Units

Trust Investments

Returns

Trust

AMC Custodian

Registrar

Page 24: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Unit Trusts – Constituents

Fund Sponsor

Mutual Fund as Trust

Asset Management Company

Other fund constituents

Custodian and Depositories

Bankers

Transfer Agent

Distributors

Page 25: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the 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-Asset Management Company.

• The Sponsor is the promoter and he appoints the Trustees who are responsible to the investors of the fund.

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

Page 26: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Who can be the Sponsor? What does the Sponsor do?

• The sponsor establishes the mutual fund and registers the same with SEBI

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

• Sponsor must have a 5-year track record of business interest in the financial markets

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

• Sponsor must contribute at least 40 % of the AMC

Page 27: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

How are Mutual Funds Structured?

• Company Form

• Trust Form

Company Form is popular in US

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

Page 28: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

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

• Trustee of one mutual fund cannot be a trustee of another mutual fund

Page 29: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the rights of the Trustees?

• Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations

• All Mutual Fund Schemes floated by the AMC have to be approved by the Trustees

• Trustees can seek information from the AMC regarding the Operations and compliance of the mutual fund.

• Trustees can seek remedial actions from AMC, and in cases dismiss the AMC

• Trustees review and ensure that net worth of the AMC is according to stipulated norms, every quarter

Page 30: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the obligations of the Trustees?

• Trustees must ensure that the transactions of the mutual fund are in accordance with the trust deed

• Trustees must ensure that the AMC has systems and procedures in place, and that all the fund constituents are appointed

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

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

• Trustees must ensure compliance with SEBI regulations

Page 31: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Regulatory requirements for the AMC?

• Only SEBI registered AMC can be appointed as investment managers of mutual funds

• AMC must have a minimum net worth of Rs. 10 Cr., at all times

• An AMC cannot be an AMC or Trustee, of another Mutual Fund

• AMC’ s cannot indulge in any other business, other than that of asset management

• At least half of the members of the Board of an AMC, have to be independent

• The 4th Schedule of SEBI regulations spells out rights and obligations of both trustees and AMC’s

Page 32: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Who appoints the AMC and defines its functions?

• The trustees, on the advice of the sponsors usually appoint the AMC

• The AMC is usually a private limited co., in which the sponsors and their associates or JV partners ,are shareholders

• The AMC has to be a SEBI registered entity, with a minimum net worth of Rs. 10 Cr.

• The trustees sign an investment management agreement with the AMC, which spells out the functions of the AMC

Page 33: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

How are Indian mutual funds organised?

• Though the trust is the mutual fund, the AMC is its operational face

• The AMC is the first functionary to be appointed and is involved in the appointment of all other functionaries

• The AMC structures the mutual fund products, markets them and mobilises the funds, manages the funds and services the investors

• All the functionaries are required to report to the trustees who lay down the ground rules and monitor their working

Page 34: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the obligations of the AMC?

• Investments have to be according to the investment management agreement and SEBI regulations

• The actions of its employees and associates have to be as mandated by the trustees

• AMC’ s have to submit detailed quarterly reports, on the working and performance of the mutual fund

• AMC’ s have to make the necessary statutory disclosures on portfolio, NAV and price to investors

Page 35: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the restrictions on the AMC ?

• AMC’ s cannot launch a scheme without the prior approval of the trustees

• AMC’ s have to provide full details of investments by employees and Board members in all cases where the investment exceeds Rs.1 Lakh

• AMC’ s cannot take up any activity that is in conflict with the activities of the mutual fund

Page 36: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What do the Registrar and Transfer Agents do?

They are responsible for investor servicing functions

• Process investor applications

• Record details of Investors

• Send information to Investors

• Process dividend payout

• Incorporate changes in investor information

• Keeping Investor information up to date

Page 37: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the role of Brokers in a mutual fund?

• Enable investment managers to buy sell securities

• Brokers are registered members of the stock exchange

• They charge a commission for their services.

• In some cases provide investment managers with research reports

• Act as an important source of market information

Page 38: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the role of selling and distribution

agents ?

• Selling agents bring investors funds for a commission

• Distributors appoint agents and other mechanisms to mobilize funds from investors

• Banks and post offices also act as distributors

• The commission received by the distributors is split into initial commission which is paid on mobilization of funds and trail commission which is paid depending on the time the investor stays with the fund

Page 39: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the functions of the custodians ?

• Responsible for the securities held in the mutual fund’s portfolio

• Keep an investment record of the mutual fund

• Collect dividends and investment payments due on the mutual funds investment

• Track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition

Page 40: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the various forms of Fund mergers and

takeovers in India?

• Merger of AMC ( Example : HB Mutual and Tauraus Mutual )

• AMC takeover by sponsors ( Example : ITC Threadneedle and 20th century taken over by Zurich) ( ITI by Franklin Templeton)

• Scheme take over (Apple’s scheme taken over by Birla AMC )

Page 41: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the conditions under which two AMC’s can be merged?

SEBI regulations require the following :

• SEBI and Trustees of both funds must approve of the merger

• Unit holders should be notified of the merger, and provided the option to exit at NAV, without load

Page 42: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Under what conditions can an AMC be taken over by another

sponsor ?

• SEBI approval is required of the change of ownership and unit holders have to be informed of the takeover

What is scheme take over?

• If an existing mutual fund scheme is taken over by another AMC, it is called as scheme take over. The two mutual funds continue to exist.Trustee and SEBI approval and notification of unit holders are required for scheme takeovers

Page 43: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Legal and Regulatory Framework

Page 44: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Regulating agencies for MF & its Constituents

• SEBI

• RBI

- as a supervisor of bank owned mutual funds

- as a supervisor of MMMFs

• Ministry of Finance

• Company Law Board, Department of Company

Affairs and Registrar of Companies

• Stock Exchanges (self regulatory Organization)

• Office of the Public Trustee

Page 45: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the regulatory jurisdiction of RBI over mutual funds ?

• RBI is the monetary authority and the regulator of the banking system

• Bank sponsored mutual funds were under the dual control of RBI and SEBI

• Presently RBI is only the regulator of the sponsors of bank sponsored mutual funds. SEBI is the regulator of all mutual funds

• Mutual funds are affected by the RBI stipulations on structure, issuance, pricing & trading of Govt. Securities

Page 46: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the role of Ministry of Finance in mutual fund regulations ?

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

• Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds

Page 47: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are self regulatory organisations (SRO’s)?

• SRO’ s are the second-tier regulatory mechanism created by market participants, to regulate the working of a group of persons/organizations

• If the SRO is registered with the regulatory authority, it obtains certain powers from the regulatory authority

• For example though the stock exchanges are regulated by SEBI, they are also registered SRO’ s

Page 48: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the objectives of AMFI ?

AMFI is an industry association, incorporated in 1995, is not an SRO, so it can just issue guidelines to members. It cannot enforce regulations.

Objectives• To promote the interests of mutual funds and unit holders.• To set ethical, commercial and professional standards in

the industry.• To increase public awareness of the mutual fund industry.

AMFI is governed by a board of directors elected from mutual funds and is headed by a full time chairman.

Page 49: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Investing in Mutual Funds: Understanding the Process

Page 50: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

• The mutual fund is required to file with SEBI a detailed information memorandum called the prospectus , in a prescribed format giving all the information of the fund and the scheme.

• An abridged version of the offer document, in a prescribed format is appended to the application form.

• Investors can get a summary of the offer document in the abridged version known as the Key Information Memorandum

Where can the investor find out the details about a MF scheme, before investing?

Page 51: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What does the Offer Document usually contain?

It contains information regarding,• Objective of the scheme• Asset allocation• Sale and repurchase procedure• Load and expense structure of the scheme• Accounting and valuation policies

It also contains• Structure of the mutual fund• Its constituents• Operational details as how to apply• Rights and duties of the investors

Page 52: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Why is the offer document important to investors?

• Information about the product , and its fundamental

attributes, are specified in the offer document. It forms

the basis of investors decisions

• Offer Document is a legal document that specifies the

details of the offer made by the mutual fund

Page 53: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Is the offer document issued only when the MF issues units for the first time?

• Closed ended scheme- offer document during the IPO

• Open ended scheme- offer document is valid through the

life of the scheme, which is revised every 2 years

• Major changes that have to be notified to the investors:

• Change in the AMC or Sponsor of the mutual fund

• Changes in the load structure

• Changes in the fundamental attributes of the schemes

• Changes in the investment options to investors;

inclusion or deletion of options

Page 54: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the broad contents of the O D?

• Summary Information

• Glossary of Defined terms

• Risk Factors faced by the fund

• Legal and regulatory compliance

• Financial Information

• Constitution of the Mutual Fund

• Investment Objectives and Policies

• Management of the Fund

• Offer related Information

• Investment procedure

• Schemes policy on dividends and Inter-scheme transfers

• Associate Transactions

• Borrowing policy

• NAV Valuation

• Description of Accounting policies

• Tax treatment of investments

• Investors rights and services

• Redressal mechanism for Investor

Grievances

• Penalties , pending litigation or

proceedings

Page 55: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the mandatory disclosures to be made on the cover page of the OD?

• Name of the mutual fund.• Name of the scheme.• Type of scheme.• Name of the AMC.• Classes of units offered for sale.• Price of units plus applicable load.• Name of the guarantor in case of assured return

schemes.• Opening , closing and earliest closing date of offer.• Mandatory statements.

Page 56: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the standard risk factors?

• 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 the quality of the scheme or the future

performance of the scheme

Page 57: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are scheme specific risks?

• Risk arising from investment objective, investment strategy and asset allocation 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 the sponsor/AMC

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

Page 58: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the Key Information Memorandum (KIM)

• Since the offer document is very detailed, it is not feasible to provide them to all investors

• SEBI regulations allows mutual funds to summarize the key points in a summary document called as key information memorandum

• It is mandatory to provide KIM to all investors

Page 59: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Is the offer document verified by SEBI for its accuracy?

• No• SEBI does not approve or disapprove anything contained

in the offer document• The offer document is prepared as per a certain format

prescribed by SEBI• The contents of the offer document are verified by the

trustees, and the compliance officer• The compliance officer has to also certify that the

constituents of the fund are all SEBI registered entities• The AMC is responsible for the contents and accuracy of

information in the offer document

Page 60: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the periodic revisions required in the Offer Document?

• The offer document and the memorandum have to be fully revised and updated at least once in 2 years

• After completion of one year by any open ended scheme, its condensed financial information has to be included in the offer document and the memorandum

• This information has to be updated in subsequent years in the form of an addendum to the offer document till the time new revised document is printed

Page 61: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Processes, rights and obligations for investors

Page 62: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the AMFI recommended best practices for mutual fund agents?

1. Agents must be fully aware and informed about the features of the products that they offer to the investors2.Agents should be highly familiar with the profile of the investors, in terms of return expectations, requirements and risk tolerance3. Agents must strive to cultivate disciplined approach to investing and a regular investment habit among clients4. Agents must have a thorough understanding of the needs of their investors5. Agents must be able to help investors to choose from alterntative investment products, and enable an appropriate asset allocation6. Agents should seek from investors the commitment to invest to enable which they may assist the client with the forms and procedures for investing

Page 63: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is SEBI’s advertising code?1.The dividends declared or paid shall be mentioned in Rs/unit along with the face value of each unit and the prevailing NAV at the time of declaration of the dividend.2.Only compounded annualised yield can be advertised if the scheme has been in existance for more than 1 year3.All performance calculations shall be based only on NAV and the payouts to the unit holders . 4.Annualised yield should be shown for 1,3,5 years and since launch of the scheme. For funds with less than 1 year performance can be in terms of total returns.5.Appropriate benchmarks and identical time period must be used while comparing. Once chosen the benchmark should be used consistently over time.6. All advertisements should in the main body of the adevertisement immediately after the return/yields and in the same font mention that past performance may or may not be sustained in future7. Where any ranking is used such ranking should be appropriately mentioned.

Page 64: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the AMFI Code of Ethics?

• Management of the fund ought to be in the interest of unit holders

• High standards of service are expected from the fund.

• Adequate disclosures by the funds ought to be made to the unit holders and trustees.

• Funds are urged to adopt the use of professional selling practices.

• Management of funds collected has to be in accordance with stated investment objective

• Funds should avoid conflicts of interest in dealings by directors, officers and employees.

• Funds have to refrain from unethical market practices.

Page 65: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the commission structure for mutual fund agents?

• The commission consists of two components

Initial commission - Paid as a fixed percentage of amount mobilised by agents

Trail commission - it is paid periodically on the funds that remain invested in the scheme. Trail is an

effective way to restrict the practice of rebating, and link commissions

• The rates of commission are decided by the mutual fund themselves and are not subject to regulation by either

AMFI or SEBI.

Page 66: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the categories of investors eligible to buy MF units?

• Resident Individuals• Indian Companies• Indian trusts and charitable institutions• Banks• NBFC’s• Insurance companies• Provident funds• Non-resident Indians• OCB’s• SEBI registered FII’s

Page 67: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are investment plans ?

It refers to the services that the funds provide to investors in offering different ways to invest or reinvest.

They determine the level of flexibility for the investor.

Some of the investment plans offered are:• Automatic Reinvestment Plan (ARP)• Automatic Investment Plan (AIP)• Systematic Withdrawal Plans (SWP)• Systematic Transfer Plans

Page 68: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the rights of the investors in respect of service standards that they can expect from MFs?

1. Investors are entitled to receive dividends declared in a scheme within 30 days 2. Redemption proceeds have to be sent to investors within 10 days 3. If an investor fails to claim the dividend or redemption proceeds he has the rights to claim it up to a period of 3 years from the due date at the then prevailing NAV. 4. Mutual funds have to allot units within 30 days of the IPO an dalso open the scheme for redemption, if it is an open -ended scheme5. Mutual funds have to publish their half yearly results in at least one national daily and publish their entire portfolios, at least once in 6 months . Such disclosure should be done within 30 days from 6 monthly account closing dates of the fund6. Trustees will have to ensure that any information having a material impact on the unit holders investments should be made publicby the mututal fund7. If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of unit holders can be called 3)Appointment of the AMC of the mutual fund can be terminated8. If there is any change in the fundamental attributes of the scheme, the unit holders have to be notified through a letter. They also have a right to repurchase at NAV without any load, before such change is effected.9. Unit holders have the right to inspect certain documents

Page 69: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the limitations to investors right ?

• Investors cannot sue 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 below expectations.

• There are not legal remedies for to a prospective investor

Page 70: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Capital Markets and Portfolio Management

Page 71: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are large-cap and small cap shares?

The size of a company in the equity markets is determined by market capitalisation (no. of shares issued * market price/share)

Large Cap Small Cap

Market capitalisation high Market Capitalisation LowGreater Liquidity Poor LiquidityComparatively smaller returns Comparatively higher returnsCost of transaction low Cost of transaction high

Page 72: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

• What is the Price- Earnings Ratio?

• P/E Ratio=share price/ post tax earnings

• Indicator of value the market assigns to every rupee earned by the company

• P/E ratio reflects overvaluation and under valuation

Important fact of P/E Ratio

• P/E ratio has a sensitive numerator and an insensitive denominator.

• P/E ratios are reflective of the phase of the market.

P/E Ratio

Page 73: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is dividend yield?

• Dividend paid is usually a percentage of face value of the share

• Dividend Yield= dividend paid/market price of a share

What is the relationship between dividend yield?

• Both the measures are sensitive to market price per share• If market prices are higher, P/E multiple will be higher, but

dividend yield will be lower and vice versa

Page 74: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are cyclical stocks?

• If the earnings of a company are subject to ups and downs over years caused mostly due to economic variables.

What are growth stocks?

• Sectors having potential for higher earnings

What are value stocks?

• Stocks with established earnings history but tend to be undervalued in the market for brief periods

Page 75: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is active equity fund management?

• Fund manager tends to look at specific attributes in selecting stocks.

• Active fund manager believes, that his ability to buy right stock at the right time, can translate into superior performance for his portfolio.

What are the basic active equity fund management style?

• Growth Investment • Value Investment

Page 76: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is passive equity fund management?

• Fund manager believes, that holding a well diversified portfolio is the cost efficient way ,to better returns, he would tend to mimic the market index.

• It requires limited research and monitoring costs and is therefore cheaper.

• Fund manager may choose to mimic a index, or a subset of the index or choose a basket of shares from multiple indices.

• A passive fund manager has to rebalance his portfolio every time changes are made in the index.

Page 77: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the types of equity research done in MF?

• Fundamental analysis• Technical analysis• Quantitative analysis

What are the various steps involved in equity fund management?

• Formulating the investment philosophy• Formulation of investment strategy• Setting of targets and benchmarks• Deciding on the extent of diversification and flexibility • Reviewing , monitoring and rebalancing

Page 78: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Debt Markets and Mutual Funds

Page 79: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is real rate and nominal rate?

• Nominal rate of interest is the rate that is paid to us by the

borrower

• The real rate is the nominal rate less the rate of inflation.

What is yield?

• Yield is the term used to signify the actual rate earned on

an investment.

• Current yield is a simple measure of the yield on the bond.

Page 80: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the relationship between the price and the yield of the bond?

Price and Yield are inversely related

What is the yield curve?

Rates at which bonds of similar risk of various tenors are traded on a given point in time, are plotted in a graph. This is known as the Yield Curve

Page 81: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the various types of fixed income securities available in the Indian Market?

Issuer Instrument Maturity Investors

Central Govt.Dated Securities 2- 30 Years

RBI, Banks , Insurance Companies, Provident funds, Mutual Funds , Primary Dealers

Central Govt. T-Bills 91/364 days

RBI, Banks , Insurance Companies, Provident funds, Mutual Funds , Pd's, Individuals

Stare Govt.Dated Securities 5-10 Years

Banks, Insurance Companies, Provident funds

PSU's

Bonds, structured Obligations 5-10 Years

Banks, Insurance Companies, Provident funds, Mutual Funds, Individuals

Corporates Debentures 1-12 YearsBanks, Mutual Funds, Corporates, Individuals

Corporates, Primary Dealers

Commercial Paper

3 months - 1 Year

Banks, Corporate, Financial Institutions, Mutual Funds, Individuals

BanksCertificates of Deposit

3 months - 1 Year Banks , Corporates

Page 82: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Accounting and Valuation

Page 83: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are net assets of a mutual fund ?

The net assets represent the market value of assets which belong to the investors, on a given date.

Net assets are calculated as:

Market value of investmentsPlus(+) current assets and other assetsPlus(+) accrued incomeLess(-) current liabilities and other liabilitiesLess(-) accrued expenses

Page 84: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is NAV? How is it computed?

NAV is the value of one unit of the fund.NAV= net assets of the fund/ units outstanding

Investment in - After 30 DaysRs Rs

Equity Shares 4,50,00,000 6,50,00,000Government bonds 3,00,00,000 2,80,00,000Corporate bonds 1,50,00,000 1,20,00,000Money Market Instruments 1,00,00,000 1,00,00,000

10,00,00,000 11,50,00,000Number of units 1,00,000

Net assetsMTM value of investments 11,50,00,000Plus current assets 4,00,000Plus accrued income 1,00,000

11,55,00,000Less current liabilities 3,00,000Less accrued expenses 1,35,000Net assets of the fund 11,50,65,000

NAV 11.5065

Page 85: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

How frequently is the NAV calculated ?

• All mutual funds have to disclose their NAVs daily, by posting it on the AMFI web site by 8.00 p.m.

• Open –ended funds have to compute and disclose NAVs everyday; closed end funds can compute NAVs every week, but disclosures have to be made everyday.

• Closed end schemes not mandatorily listed on the stock exchange can publish NAV according to the periodicity of 1 month or 3 months, as permitted by SEBI.

Page 86: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the initial issue expenses ?

Expenses that are incurred in the launch of the fund are called

as initial issue expenses.

∙ The costs of registration and fund formation∙ Legal and advisory expenses∙ Costs of launching the scheme∙ Advertisement and promotion expenses∙ Distribution costs ∙ Commissions to selling agents

SEBI imposes a ceiling of 6% on these expenses.

Page 87: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Can the Fund be launched without bearing any initial issue expenses ?

∙ Yes∙ Such funds are called as no load funds∙ AMCs can charge an investment management fee, which is 1%

higher than the statutory limit, in this case.

How is the initial issue expense treated in the accounts of the mutual fund ?

∙ For a closed end fund, initial issue expense are charged over the

life of the scheme, on a weekly basis.∙ For an open ended scheme the initial issue expenses are carried in

the balance sheet as ‘deferred revenue expenditure’.They are

written off in a period not exceeding 5 years.

Page 88: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the expenses incurred by a mutual fund?

Investment management fees to the AMC

• Custodian’s fees

• Trustee fees

• Registrar and transfer agent fees

• Marketing and distribution expenses

• Operating expenses

• Audit fees

• Legal expenses

• Cost of mandatory advertisements & communications to investors

Page 89: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Can the AMC charge all the expenses that it incurs, to the income of the fund ?

• No. There are two levels of restrictions• At the first level only certain kinds of expenses, that are identified

as having been incurred for the conduct of the business of the fund, can be charged to the fund.

• The second level of regulation refers to the limit on the total expenses, that can be charged to the fund

Following is the maxmum limit on the expenses For net assets up tp Rs. 100 Cr 2.50%For the next Rs 300 Cr. Of net assets 2.25%For the next Rs 300 Cr. Of net assets 2%

For the remaining net assets 1.75%

On debt funds the limits on expenses are lower by 0.25%

Page 90: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the fees charged by the AMC ?

The fees are regulated by SEBI as follows:• For the first Rs.100 Cr. Of net assets: 1.25%• For the net assets exceeding Rs. 100 Crore: 1.00%

• If the AMC does not charge any of the initial issue

expenses to the fund, it can charge the scheme a

management fee, that is 1% higher than the above rates

Page 91: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the other financial reporting requirements for mutual funds ?

• Accounts have to be prepared and audited, and published within 6 months from the date of closure of accounts.

• Within 30 days of the closure of the half year, unaudited abridged accounts have to be published in at least one national daily

• The summary of accounts has to be mailed to all unit holders.

• A copy of the annual report, six monthly unaudited reports, quarterly movement in net assets of the fund and quarterly portfolio statements have to be filed with SEBI

Page 92: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Valuation of Securities

Page 93: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the norms for valuing traded securities in a mutual fund portfolio ?

• The last quoted closing price on the stock exchange

where the security is principally traded is used for

valuation.

• If a security is not traded on a particular day, its traded

price on the earliest previous trading day can be used

Such a date should not be more than 30 days prior to the

valuation date.

Page 94: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is a thinly traded security ?

• An equity share is considered thinly traded, if the traded value in a month is less than Rs 5 lakhs and the total volume of shares traded is less than 50000 shares a month.

• If a debt security has traded value of less than Rs. 15 Crore in the 30 days prior to the valuation date, it is to be classified as thinly traded

• The thinly traded security’s market price may not be representative of its underlying value.

What is a non-traded security?

• If a security equity or debt is not traded in any of the recognised stock exchange for a period of 30 days prior to the valuation date.

Page 95: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the guidelines to for valuation of thinly traded and non-traded equity securities ?

• On the basis of the latest available balance sheet find out the net worth per share.

• The value per share is to be calculated using the earnings capitalisation method.

• The value has to be averaged . This number is further discounted by 10% because the share being valued is illiquid. The value is the ‘fair value’.

• If the EPS is negative or if the Balance Sheet is unavailable after 9 months of accounting yr end then earnings capitalisation value is taken as zero.

• If such a security forms more than 5% of the net assets of the scheme ,it should be valued by a independent valuer

Page 96: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the valuation methodology for a thinly traded debt security, with 182 days or less to maturity ?

• Valuation is based on amortization of maturity value

• Most money market instruments are issued on discounted basis,

with the redemption being at face value. This principle is applied

to all securities with less than 182 days to maturity.

• The value of the security on valuation date is the cost plus

accrued interest up to the date of valuation.

• Accrued interest is that proportion of the amortized value of the

difference between the issue price and redemption value.

Page 97: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the financial planning strategies that can be recommended to investors?

• Rupee cost averaging.

• Value averaging.

• Jacob’s rebalancing strategy.

• Graham’s 50:50 portfolio re-balancing.

Page 98: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is Bogle’s strategic asset allocation ?

• Older investors in the distribution phase:

- 50% equity : 50% debt

• Younger investors in the distribution phase:

- 60% equity : 40% debt

• Older investors in the accumulation phase:

- 70% equity : 30% debt

• Younger investors in the accumulation phase:

- 80% equity : 20% debt

Page 99: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

The steps in developing a model portfolio for an investor?

• Develop long term goals.

• Determine asset allocation.

• Determine sector distribution.

• Select specific fund managers and their schemes.

Page 100: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Model portfolios recommended for investors according to their life cycle stages:

• Young unmarried professionals :

– 50% in aggressive equity funds.

– 25% in high yield bond funds, growth and income funds.

– 25% in conservative money market funds.

Young couple with 2 incomes and 2 children:

– 10% in money market funds.

– 30% in aggressive equity funds.

– 25% in high yield bond funds and long term growth funds.

– 35% in municipal bond funds.

Page 101: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

Contd:

• Older couple single Income :

– 30% in short term municipal funds

– 35% in long term municipal funds

– 25% in moderately aggressive equity

– 10% emerging growth equity

• Recently retired couple :

– 35% in conservative equity funds for capital preservation / income

– 25% in moderately aggressive equity for modest capital growth

– 40% in money market funds

Page 102: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the recommended portfolio for investors in accumulation phase?

• Diversified Equity : Sector and balanced funds

– 65 – 80%

• Income and gilt funds :

– 15 – 30%

• Liquid funds and bank deposits :

– 5%

Page 103: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What is the recommended portfolio for investors in distribution phase?

• Diversified Equity and balanced funds:

– 15 – 30%

• Income funds :

– 65 – 80%

• Cash funds:

– 5%

Page 104: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the steps in selection of an equity fund?

• Classify into broad categories that signify their risk and return characteristics.

• Classify the funds on the basis of their fund manager style.

• Evaluate the performance of the scheme.

• Understand the structural characteristics of the scheme:

– Size of the fund

– Fund age

– Portfolio manager’s experience

– Costs of investing

• Understand the portfolio characteristics of the scheme.

Page 105: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the steps in selection of a bond fund?

• Fund age and size.

• Relative yield.

• Costs.

• Quality of the portfolio.

• Average maturity.

Page 106: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

What are the steps in selection of a money market fund?

• Lower expense ratios.

• Higher credit quality of the portfolio

• Yield

Page 107: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

An open ended mutual fund is one that hasAn open ended mutual fund is one that has

a)a) an option to invest in any kind of security an option to invest in any kind of security

b) b) units available for sale and repurchase at all times units available for sale and repurchase at all times

c) c) an upper limit on its NAV an upper limit on its NAV

d) d) a fixed fund size a fixed fund size

Page 108: Mutual Funds - Detailed. Concept & Role of Mutual Funds.

"Because the fund stands ready to redeem units at "Because the fund stands ready to redeem units at any time, units in an open-end fund are always any time, units in an open-end fund are always

worth their"worth their"

a)a) Net Asset Value Net Asset Value

b) b) Asset Revenue. Asset Revenue.

c) c) Selling price Selling price

d) d) Par value. Par value.


Recommended