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AMFI Certification Program
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Mutual Funds
Conceptual Framework
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What is a Mutual Fund ?
A mutual fund is a collective investment thatallows many investors, with a common
objective, to pool individual investments and
give to a professional manager who in turn
would invest these monies in line with thecommon objective.
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What Is a Mutual Fund?
The money thus collected is then invested in Financialmarkets, both Money market instruments like Bonds,
T.Bills & Call Money etc and Capital market instruments
such as shares, debentures and other securities.
The income earned through these investments and thecapital appreciation realized are shared by its unit
holders in proportion to the number of units owned by
them.
A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial
goal
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Investors
Fund
Manager
Pool their
money with
Securities
Returns
Invest inGenerates
Passed
back to
MF Operation Flow Chart
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Mutual Funds Interesting Statistics
3/4th of all U.S households invest in Mutual funds
There are 3,400 Mutual funds with 30,000 schemes and 50 millionshare holder accounts
The Mutual fund industry in U.S. occupies the premier position inthe financial sector followed by Banking and Insurance.
Japan has 5,400 funds; U.K has 1,400 funds and France has about1,000 funds.
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Mutual Funds THE INDIA STORY
The idea of a first Mutual fund was born out of the vision of
Sri.T. KrishnamachariFinance Minister under Jawaharlal Nehru
U.T.I Act was passed in 1963 leading to the formation ofUnit TrustOf India.
The first open ended scheme was launched in 1964, popularly known
as U.S. 64.
The period 1987 1992 saw the birth of public sector Mutual funds,
S.B.I and Canara bank [1987], LIC [1989], Bank of India and PNB
[1990] , Indian bank [1991]. Private both domestic and foreign players were allowed entry in
1992-1993.
The first private sector Mutual fund was Kothari Pioneer, launchedin 1993 followed by Morgan Stanley in 1994
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History of Indian Mutual Funds
Phase I (1964-87)
Set up by RBI, de- linked later.
Act of parliament
First scheme US 64, still outside SEBIpurview
Phase II (1987-93) entry of PSU Banks/ FIs
SBI in 87, LIC in 89, Indian Bank in 90
Phase III (1993-95) Entry of Private players
Phase IV (1993 onwards) SEBI regulation of
Mutual Funds
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Types of
Mutual Funds -
Wide Range of Choice
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Types of Mutual Funds Schemes
By Constitution
By Investment Objective
By Nature of Investments
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By Constitution
OPEN-ENDED
No fixed maturity
Variable Corpus
Not Listed
Buy from and sell to
the Fund Entry/Exit at NAV
related prices
CLOSE-ENDED
Fixed Maturity
Fixed Corpus
Generally Listed
Buy and sell in the
Stock Exchanges Entry/Exit at the
market prices
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By Constitution
Load or non load funds
Tax exempt or non tax exempt
Nature of Investments
Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate)
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Investment objective / patterns
Growth - Equity
Income - Debt
Balanced - Equity and Debt
Money Market - Liquid Debt
Tax Saving - Equity
Specialised - Equity Assured Return - Equity and Debt
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Aggressive Growth Funds
Objective - Aggressive Capital Growth
Investment Pattern
EQUITY OF
Less researched Companies
Speculative and momentum stocks Suitable for investors who are comfortable in
taking high risk.
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Diversified Growth Funds
Objective - Capital Growth
Investment Pattern
EQUITY of
Well researched and high market capcompanies
Debt
Money market securities
Minimum time recommended for investment to
deliver expected returns 5 years +
Suitable for investors looking at capital growth
over a longer period of time
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Other variety of equity funds
Specialised Funds
Sector Funds
Offshore Funds/International funds
Small Cap Equity Funds ELSS
Equity Index Funds
Value Funds
Equity Income Funds - invest in co. with
higher dividend yields i.e. power/utilities
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Other equity oriented funds ...
Hybrid Funds
Balanced Funds
Growth & Income Funds
Commodity Funds
Real Estate Funds(REITs)
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Debt Funds
Diversified Debt Funds
Focussed Debt Funds
Sector / Specialised / Offshore Municipal bonds / infrastructure cos bond funds
Mortgaged backed
High yield debt funds
Assured Return Funds
Liquid Funds
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Types ofSchemes
Mutual
Fund Types
Who Should
Invest?
Objective Investment
Portfolio
RISK Ideal
Investment
Horizon
Diversified
Equity
Funds
Large Cap
Mid Cap
Small Cap
Moderate
and
aggressive
investors
Aggressive
investors
High growth
High
Growth
Equity Shares
Equity Shares
High
Very
High
1-3 Years
3- 5 Years
SectorFunds
Thematic
Funds
Contra
Fund
Aggressive
investors
High growth Equity Shares Very high 3-5 Years
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Index
Funds
Moderate
investors
To Generate
returns which
are similar the
returns of therespective index.
Portfolio index
like BSE
Sensex, Nifty
etc.
Returns of
NAV vary
with index
performance
1-3
years
Equity
Linked
Saving
Scheme(ELSS)
Balanced
funds
Moderate and
aggressive
investors
Moderate
investor
Long term
growth with tax
saving
Long term
Equity Shares
Debt & Equity
High
Moderate
1-3 Years
1-3 years
Arbitrage
Fund
Moderate
investor
Short term Equity (Deri-
Vaties)
Moderate Below
1 year
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Bond Funds
Gilt Funds
Short-term
Funds
Salaried and
conservative
investors
Salaried and
conservative
Investors with
surplus short-
term funds
Regular
income
Security
and income
Liquidity
and
moderate
income
Predominantl
y debentures,
Govt.
Securities,
CorporateBonds
Govt
Securities
Call money,
commercial
papers, T-
Bills, Short-
term G-Secs
Credit risk
and interest
rate risk
Interest rate
risk
Little
interest rate
risk
Over 9-12
months
Over 12
months
3 weeks-3
months
LiquidFunds
Investors whopark their funds
in current
account or short
term bank fixed
deposits
Liquidity +moderate
income +
preservatio
n of capital
T-Billscertificate of
deposits,
commercial
papers, call
money
Negligiblerisk
2 days- 3weeks
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Mutual FundsNew Fund Ideas
International Funds
Gold Funds
- ETFs
- Stocks of Gold Mining/Trading companies Real Estate Funds
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Mutual FundsDebt Funds
These are like Fixed Deposits and comes in varying tenors of
30 days, 60 days, 90 days, 180 days,370 days,3 years and soon. The returns are superior to Fixed Deposits due to twofactors.
1. Indexation Benefit
2. Lower incidence of tax
.
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Advantages of
Mutual Funds
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Why Mutual funds?
Stock markets are very sophisticated
Free pricing and integration with world markets
Time , knowledge and luck
Substantial capital for diversification
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Mutual Funds:
A Packaged Product
Professional
Management
Convenience
Tax Benefits
Liquidity
Diversification
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Advantages of Mutual fund
A packaged product
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of
Schemes
Tax Benefits
Well Regulated
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Convenience
Easy Way to Invest
Reduces excessive paperwork
Outsourcing of expertise
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Liquidity
Open-ended:
Assures liquidity
As liquid as the banks.
Close-ended:
Buying and selling can be done throughthe stock exchange
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Affordability
Provides an opportunity for a small investor
Invest as less as an amount of
Rs.5000/Rs.500 and in multiples of
Rs.1000/100 depending on the Scheme
(micro SIP) - discuss
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Wide Choice
Offers a VARIETYOF SCHEMES
Meet the investment needs of all Investors
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Your needs
Short Term
Medium Term
( 1 to 3 years) (3 to 5 years)
Long Term
Banks / Liquid Funds
Debt or Debt Related
Funds
Mix of Debt/Equity or
funds with an appropriate
mix (Balance)
Equity or Equity Related
Funds
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MFs and Tax Benefits
Income Tax Benefits in Equity funds(ELSS)
Investment upto 1 lakh underSec 80C
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Capital GainsShort Term Long Term
Equity 15%*(16.995%) NIL
Debt 30%*(33.99%) 20%**/10%***
*plus surcharge(@ 10% + 3%)
**with indexation
***without indexation
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Well regulated
Governed by Multiple agencies
MOF/ CLB/ ROC
SEBI
RBI
Trustees
Auditors
Board of Directors
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SEBI
All Mutual Funds / AMC/ Trustee Companies to
be registered with SEBI
Responsible for protecting investors interest and
promote orderly growth of Mutual Fund Industry
Formulates regulations,monitors performanceand conduct of Mutual funds and enforces
compliance to regulations through reviewing
reports and regular inspections
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Reserve Bank of India & SE
RBI
Dual supervision for bank sponsored
AMCs Issue concerning ownership bank
promoted AMC falls with RBI
Stock Exchange (SE)
Close ended MF listed of SE. Needs to
comply with listing guidelines.
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Office of publicT
rustee
MF being public trustee - governed by Indian
Trust Act , 1882
Trustee Co or Board ofTrustee accountable
to office of Public Trustee
Public trustees reports to Charity Comm.
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Trustee and AMC to comply with Cos Act 1956
Ministry of aw Justice
Company aw oard (C )
epartment of Company Affairs
e istrars of Companies ( C)
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Ministry of Finance
Supervises both SEBI and RBI
Ultimate policy making & supervising body
Appellate Authority for any disputes over
SEBI guidelines
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Investors rights & Obligations
Rights - Legal Limitations Unit holders are not distinct from trust,
they cannot sue trust.
Sponsor do not have any legal obligations
(Limited to initial contribution)
No rights to prospective investors
Obligations
Must read offer doc & AOD Beware of risk factors
Must monitor investments regularly
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Investors complaint redressal mechanism
Client Servicing
Compliance Officer
Investors cannot be protected by companiesAct.
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The Offer Document
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What is offer documents
Contains the details of scheme.
Filed with SEBI
Like Prospectus of an IPO
Close ended scheme - One Time
Open ended Scheme - Perpetual - keptupdated from time to time.
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Significance
Legal document that protects and governs the
right of the investor to information
Is the primary vehicle for the investment decision
Is the operating document and describes the
fundamental attributes of schemes.
One of the most important sources of information
for the prospective investor
Is a reference document for the investor to look for
relevant information at any time.
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Mandatory Information
Details of the Sponsor
Description of the scheme and investment
objective/strategy
Terms of issue
Historical statistics
Investors Rights and Services
Key Information Memorandum that is distributed with the
application form is an abridged version of the offer
document.
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Who can invest ?
Resident Indian Individuals
Indian Companies
Trusts / charitable institutions / PFs
Banks/ FIs / NBFCs
Insurance Companies
NRIs/ OCBs/ FIIs
Partnership firms etc.
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NAV - COMPUTATION
NAV = Net assets of scheme / No of units Outstanding
i.e. Market value of investments+ Receivables+
Other accrued income+ Other assets- accrued
expenses- Other Payables- Other liabilities
No. of units outstanding as at the NAV dateImp :
Day of NAV Calculation is known as valuation day
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HOW NAV IS COMPUTED
Market value of Equities - Rs.100 crore - Asset
Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore -Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt..payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10
= Rs. 14.80
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NAV Nav is influenced by
Purchase and sale of Investment
Valuation of Investment
Other assets and Liabilities
Units sold or redeemed.
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CHANGE IN NAV
FORMULA :
For NAV change in absolute terms =
(NAV at end of period - NAV at beginning of period) * 100NAV at beginning of period
For NAV change in annualised terms =
( NAV change in % in absolute terms) * (365 / No. of days )
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Loads
Entry Load or front ended load
Paid at the time of purchase
Sale Price = NAV / (1- Sales Load, if any)
Exit Load or back ended load
Paid at the time of exit
Redemption Price = NAV/(1+ Exit Load)
Contingent Deferred Sales Load (CDSL)
Deferred exit load depending on the period
Also known as deferred load
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PRICING OFUNITS
Sale price not greater than 107% of the NAV
Re-purchase price to be not lower than 93% (95% for
close-end funds) of the NAV
Difference between the repurchase & sale price cannot be more than 7% of the sale price
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Sale Price
Sale Price is the price at which units are sold to
investors.
Sale Price = NAV + Entry load
Formula for computation of Sale Price =
NAV/(1-Load)
Assuming an entry load of 2% in the earlier
NAV computation example
Sale Price = 14.80/(1- 0.02)
= 15.10
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MUTUAL FUND ACCOUNTING &MATHEMATICS
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Initial Issue
ExpensesTransaction Cost
Entry / Exit load
CDSC for no-load
schemes
FEES & EXPENSES
Annual Recurring
Expenses
AMC Fee
Custodian Fee
Registry Exp.
Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
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Fees & Expenses
Initial Issue expenses For launching of the scheme
Can charge up to 6%
Recurring Expenses Mkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communications cost
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F
ees & Expenses Amc can charge Investment management fee to
the fund on weekly avg. net assets.
The limits are: (Subject to overall limit of 6%)
1.25% for up to Rs.100 cr Of weekly avg net assets
1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1%
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Fees & Expenses
Total Expenses that can be charged to the
Fund ( excluding entry and exit loads):
Equity Debt On the first Rs.100 cr 2.50% 2.25%
On the next Rs.300 cr 2.25% 2.00%
On the next Rs.300 cr 2.00 % 1.75%
On the balance assets 1.75% 1.50%
Based on average weekly net assets
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MUTUAL FUNDS - FEES
Initial issue expensesCharge to the scheme capped at 6% of the initial resources
raised under that scheme
Entry/Exit Loads - Transaction costs
Sale price not greater than 107% / Re-purchase price not lowerthan 93% (95% for close-ended schemes) of the NAV
Contingent Deferred Sales Charge ( For No-Load Schemes)
Ceiling For redemption within 1year 4%
For redemption within 2years 3%For redemption within 3years 2%
For redemption within 4years 1%
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AMORTISATION
Initial Expenses amortisation for load schemes -
for close-ended schemes - on a weekly basis over the
period of the scheme
for open-ended schemes - annually over a period notgreater than 5 years
Un-amortised portion to be added to other assets for
computation of NAV
Amortisation not part of normal recurring expenses
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Accounting, Valuation & Taxation
A ti P li i
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Accounting Policies
Investments to be marked to market on market prices.
Unrealised appreciation cannot be distributed.
Purchase & sale of investments to be recognised on the
trade date and not on settlement date.
Investments to be taken as NPA if it gives no returnthrough interest for more than 6 months
Dividend / Bonus/ rights to be recognised on ex-
dividend / ex-bonus dates and not on declared dates.
Income receivable on Invst NOT accrued for more than
3 months , should be provided for.
For determining gain/ loss on investments - avg cost is
to be taken
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Mutual Fund Valuation
Marking to Market
Equity Valuation Norms - Listed, Unlisted, NPA,
Un-traded
Debt valuation norms - Listed, Unlisted, Illiquid
Money Market Instruments - valuation norms
Effect of Buybacks, Mergers Valuation Models - CRISIL
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Disclosures and Reporting
Audit by independent auditor
Audited Annual report every year
Un-audited accounts to be published within 1 month
after March 31 & September30
Within 6 months of closure, publish abridged summary
of report scheme-wise in newspapers
Summary to be forwarded to SEBI & unit holdersFull portfolio disclosure to be made within a month from
the half-year ended March 31 & September30
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Investment Restrictions as a % of Net assets - AMC
Max. Investment under all schemes of the AMC in paid
up capital carrying voting rights in single Co. - 10 %
Max. Inter scheme investments of the same AMC - 5 %
(no AMC fee payable)
Inter scheme transfers at CMP and within the objectivesof scheme
Max. Investment in listed shares of Group Cos - 25 %
for each scheme.
No investments allowed in unlisted/private placement
of group/associate cos.
Can borrow only to meet liquidity requirements. Max
for 6 months & not more than 20% of NAV of scheme.
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Investment Restrictions as a % of Net Assets -Debt
Max. Investment in Rated paper in single Co - 15% (can
be increased to 20% with approval by Board of
AMC/Trustee)
Max.Investment in Unrated/ Rated but belowinvestment grade in single issuer- 10% of NAV
Max. Investment in Unrated/Rated but below investment
grade in all cos - 25% (subject to approval of Board of
AMC /Trustee). Restrictions not applicable to Govt. Securities/Money
Market
Can only invest in marketable securities - no loans
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Max. Investment in Equity/Equity relatedinstruments of single Co. - 10%
No restrictions in case of Index Fund
Max. Investment in Unlisted Cos. - 10% in closeended & 5% in open ended funds
Buy & Sell securities on Delivery position , No
short selling/ carry forward allowed.
Security should be transferred to schemesimmediately. Cannot remain in general a/c
Investment Restrictions as a % of Net Assets -Equity
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Mutual Fund - Legal Structure
In USA
Investment Companies structure
In UK Two alternative structure
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What is the Structure Here?
Trust
Trustee
Asset ManagementCompany
Scheme 1 Scheme 2 Scheme 3
Other ServiceProviders
SponsorForeign
Partner
HDFC Ltd.
HDFC Trustee Co Ltd.
HDFC Asset Management Co. Ltd.
HDFC Mutual FundComputer Age Management
HDFC Bank
Standard Life Investments
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MUTUAL FUND - FRAMEWORK- India
Fund
Management
Registrar Custodi
an
MarketingOperations
Distribution
Trustee Company
Sponsor
Asset Management Company
Fiduciary
responsibility to
the
InvestorsBank
Brokers
Markets
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SPONSOR
Main Promoter
Approval by SEBI
Sound track record
Experience in Financial Services
Professional Competence, Financial Soundness,
Reputation, etc.
Contribution to AMC Capital 40% minimum Minimum AMC capital of Rs. 10 Cr
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TRUSTEE
Fiduciary responsibility to the Investors.
Directors to be approved by SEBI.
Execution of trust deed by sponsor in favour of
trustee. Trust deed is stamped and registered with SEBI
Legally responsible for administering the Trust and
Compliance with Regulations.
Norms for Trustees
- Experience in Financial Services
- Minimum 4 members on the board and 2/3rd of the
members not to be connected with the sponsor
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ASSETMANAGEMENT COMPANY
Responsible for : Launching Schemes
Managing Funds for Schemes
Performing Accounting Functions
All day to day affairs of the Mutual Fund
Income of an AMC /Asset Management Fee
1.25% of weekly average NAV of each Scheme up
to Rs.100 cr of assets managed
1.00% greater than Rs.100 cr
Minimum 4 directors with 1/2 independent
AMC cannot act as trustee for other MF
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TRANSFERAGENTS
Issue of Account Statements to Investors
Arranges payment to Investors when they
redeem Takes care of Non commercial transactions
like change of address,loss of account
statement etc.
should be registered with SEBI
Appointed by Board of Trustee
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Legal & Regulatory Environment
SEBI - Capital Markets Regulator
RBI - Money Markets Regulator
MOF - Policies
CLB, DCA, ROC
Stock Exchanges
Office of the Public Trustee
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Evaluating Fund Performance
Should be judged in light of:
Investment Objectives
Current Market Conditions
Alternative investment returns
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Performance Evaluation
Different valuation methods
Change in Nav
Total Return
Total Return with dividend reinvested at NAV
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Performance Evaluation
Change in Nav - The most common
Nav on day 1 = Rs.10
Nav on day x = Rs.12
% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
Limitations:
Does not account for dividend
Suitable only for growth plans
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Performance Evaluation Return on Investments - most suitable
Nav on day 1 = Rs.20
Dividend = Rs.4 per unit Nav at Rs. 21
Div reinvested = Rs (4/21) = 0.19 units allotted
Total units = 1.19 (original +new allotted)
NAV at year end = Rs.22
Total Return = (Nav on year end*total units )-day1nav)/ day 1 NAV* 100
= ((22*1.19)- 20))/20*100
= 30.9%
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Performance Evaluation
Other Parameters
Expense ratios - indicates fund efficiency and costeffectiveness
Portfolio Turnover ratio - measures amount of buying and
selling done by the fund
Transaction cost
Fund size
Cash holdings
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Fund Literature
Fund Factsheet
Newsletter
Sales meet / Mailers etc
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Fund Mergers & Take overs
Mergers of two AMC
Provisions of Cos Act
Approval of high court and SEBI
75% unit holders consent
Scheme takeover
Unit holders permission - 75% SEBIs permission
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Fund Mergers & Take overs
AMC taken over by other sponsor
(a. Zurich - 20th Century b. ITC Threadneedle
- Zurich c. Kothari - HFCL) No high court approval
No unit holders consent , only info with rights
to exit from scheme without any load SEBI clearance is compulsory
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Instruments in the market
Equity Ordinary shares
Pref. shares
Equity warrants Convertible Debentures
P/E Ratio
Dividend Yield
Cyclical / Growth / Value Stocks
Market Capitalisation = Sum total of
CMP of shares * no. of shares outstanding
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Approach/Strategy to Fund Management
Equity
Passive - Index
Active - (a) Growth (b) Value
Debt Buy and hold - Passive
Duration management - Active
Credit Selection - in anticipation ofchanges in credit ratings
Prepayment predictions
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Debt instruments
Commercial Deposits
Issued by SCB and RRBs
Unsecured Promissory Notes
91 to 365 days Issued by FIs can be 1-3 years
Corporate Debentures
Zero coupon bond
Floating rate bonds
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Debt instruments
Commercial papers (CPs)
Short term- 3-12 months and unsecured
Issued by corp bodies
Govt Securities
T - bills (7- 364 days)
Banks/ FIs/ PSU Bonds
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Risk in a Debt Fund
Interest Rate Risk
Credit Risk (Asset quality)
Reinvestment Risk
Call Risk
Liquidity
Inflation
Basic Terminologies:
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Net Asset Value (NAV)
Open-ended Fund
Close-ended Fund
Portfolio
Corpus
Unit
Load
g
Expense Ratio
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Terms used in MFs
Yield Curve
Graph which shows yields of various
maturities using a bench mark
usually upward - some time inverted
Yield to Maturity (YTM)
Annual rate of return expected of a bond
over its maturity with the assumption that
all coupon payment will be recd on time
and reinvested at the same rate and
principal recd on maturity.
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Start
Investments
Early
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Charu is 2 years old
Her parents investRs. 5,000/- every month
for the next 5 years
Total Investment :
Rs. 3 lacs
Invest Early
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Invest Early
Rahul is 12 years old
His parents investRs. 5,000/- every month
for the next 5 years
Total Investment :
Rs. 3 lacs
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Invest Early
Who do you think has
more money at theage of 17 ?
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At the age of 17
Charu has
Rs. 10.6 lacs*
The delay of 10 years, cost Rahul Rs. 6.7 lacs
Rahul has
Rs. 3.9 lacs*
* compounded monthly, @ 10% p.a.
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0 2 5 8 11 14 17
2 year old Charus parents
invests Rs. 5,000 monthly for 5
years. They do not withdraw
any money.
12 year Rahuls parents invest a
similar amount i.e. Rs. 5,000. They
invests for 5 years and they too do
not withdraw any money
Rs. 10.6 lacs
Rs. 3.9 lacs
THE POWEROF COMPOUNDING
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So, how do weplan our investments ?
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Financial goals
Risk-taking ability
Expected Return
Investment Period
First, consider your.
Fi i l Pl i
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Financial Planning
Financial Goals identifying various needs for money
Converting needs into specifics
amount of money time frame for requirement of money
Planning saving & investment to achieve these
goals
P f i l Fi i l Pl
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Professional Financial Planners
Understands investment universe
Understands risk and return profile of variousinvestment alternatives
Assist clients in choosing the right investmentmix keeping in mind clients-- saving ability
-- risk appetite
-- cash flow requirements
-- tax status
Why become a Financial Planner?
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Why become a Financial Planner?
Ability to recommend financial products based onsuitability of investor rather than product features
Ability to build mutually beneficial long term
relationship with investors
Ability to profit from their expertise and valueaddition to investors
Ability to act as financial intermediaries relied uponby investors and issuers
Attributes of Financial Planners
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Attributes of Financial Planners
Understanding of the investment universe-- risk & return profile of investment alternatives
-- past performance
-- behaviour of asset classes
Expertise in tax planning & estate planning Ability to correlate investors life cycle with matching
financial products
Highly organised in their professional lives
Excellent communication and interpersonal skills
Financial Planning
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Financial Planning
Establish & define relationship with client
Define Clients Financial Goals Specific Goals and their timings
Appreciate clients ability to save and cash flowrequirements
Appreciate clients disposition to risk
Appreciate tax liability and focus on post-tax returnsto client
Financial Planning Elaborated
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Financial Planning. . . . . Elaborated
Create asset allocation plan- tailor make portfolio suiting client needs
Enable actual performance
- role of an intermediary
Review and Rebalance continually
- periodic review of performance
- take corrective action, if required
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Investors Needs
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Investors Needs
Protection NeedProtection Need Investment NeedInvestment NeedTo protect living Financial needs served
standards, current and through investments
survival requirements and savings
- Regular Income - Children education
- Retirement Income - Housing
- Insurance Cover - Children professional
growth
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Asset Allocation and Model
Portfolio
Recommended Model
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Portfolios . .
Accumulation Stage:
- Investible surplus available
- Financial goals are not near term
Diversified Equity 65 80%
Income & Gilt 15 30%
Liquid Funds & Bank Deposits 5%
Recommended Model
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Portfolios . .
Transition Stage:
- Closer to Financial Goals
- Transition from Growth to Income
- Near Retirement , Children Education or Marriage
- Increase Asset Allocation to Income Component
Recommended Model
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Portfolios . .
Distribution Or Reaping Stage:
- Require Income as Dependence on Investment
- Income Grows for Regular Expenses
- Investors Start Liquidating Portfolio For Current Requirements
Diversified Equity & Balanced Funds 15 30%
Income Funds 65 80%
Cash Funds 5%
Recommended Model
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Portfolios . .
Inter-generational OrTransfer Stage:
- Focus onServing Needs of Heirs
- Growth and Income Funds in balance
- Higher percentage in Growth Funds ifheirs are Young
- Income Funds suitable ifheirs are Trusts and Charities
Recommended Model
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Portfolios . .
Affluent Investors:
-- HIGHER RISK APPETITE:HIGHER RISK APPETITE:
Sectorial and Growth Funds 70 80% Diversified Equity or Balanced Funds Balance
- LOWER RISK APPETITE:LOWER RISK APPETITE:
Income , Gilt and Liquid Funds 70 80%
Diversified Equity or Balanced Funds Balance
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Asset Allocation Strategies
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Asset Allocation Strategies
Basic Managed Portfolio- Diversified equity value funds 50%
- Govt. securities fund 25%
- High grade corporate bond fund 25%
Basic Indexed Portfolio- Stock market index fund 50%
- Bond market index fund 50%
Asset Allocation Strategies
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Simple Managed Portfolio
- Balanced Fund 85%
- Medium term bond fund 15%
Complex Managed Portfolio
- Diversified equity fund 20%
- Aggregate growth fund 20%
- Specialty Funds 10%
- Long term bond funds 30%
- Short term bond funds 20%
Readymade Portfolio- Single Index
- Equity 60%
- Debt 40%
Bogles Strategic Allocation
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Combines investors age, risk profile and
preference in asset allocation
Older investors in distribution phase
- 50% Equity, 50% Debt
Younger investors in distribution phase- 60% Equity, 40% Debt
Older investors in accumulation phase- 70% Equity, 30% Debt
Younger investors in accumulation phase- 80% Equity, 20% Debt
Fixed Asset Allocation Strategy
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Maintain fixed ratio between chosen asset classes
Disciplined approach that ensures profit booking
and purchases at lower prices
Example- 50% Equity and 50% Debt
- Equity markets rise ensuring profit booking
- 50:50 Ratio maintained
Flexible Asset Allocation
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Strategy
No portfolio re-balancing
Ensures riding bull wave if markets are rallying
Ratio changes as per market changes
Model Portfolio
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Model Portfolio
Set long term goals keeping risk-return profileand time horizon in mind
Asset allocation exercise based on growth,income and liquidity criteria
Sector Distribution exercise- Allocation of funds across various Mutual Fundproducts
Fund manager selection- Which scheme? Which Fund house?
Recommended Model
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Portfolios . .
Young unmarried professional- Aggregate Equity funds 50%
- High yield bond, growth & income funds 25%
- Conservative money market funds 25%
Young Couple: Double income, 2 Children
- Money Market Funds 10%
- Aggressive Equity Funds 30%- High Yield Bond & Long Term Growth Funds 25%
- Municipal bond funds 35%
Recommended Model
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Portfolios . .
Older couple single income- Short term municipal funds 30%
- Long term municipal funds 35%
- Moderately aggressive funds 25%
- Emerging growth equity 10%
Recently retired couple
- Conservative equity funds 35%- Moderately aggressive equity funds 25%
- Money market funds 40%
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Fund Selection
Equity Fund Selection
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Equity Fund Selection . . . . . .
Form categories based on risk-return profile- Diversified , Index , Sectorial & Specialised
Form categories based on fund managers style
- Value and Growth
Evaluate Performance
- Peer Group and Benchmark comparison
Equity Fund Selection . . . . . . . .
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qu ty u d Se ect o Consider Structural Characteristics
- Size of the Fund
- Fund History
- Portfolio Manager Experience
- Cost of Investing: Expense Ratio
Consider Portfolio Characteristics- Percentage Cash
- Portfolio Concentration
- Market Capitalisation of Fund
- Portfolio Turnover: Churn
- Portfolio Risk Characteristics
R-squared
Beta
Dividend Yield
Equity Fund Selection . . . . . . . .
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q y
High R Squared , Low Beta And High
Dividend yield preferred
Bond Fund Selection . . . . . .
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Bond Fund Selection . . . . . .
Fund Age and Size
Relative yield: YTM
Expense Ratio
Portfolio Quality Credit Rating of portfolio holdings
Average maturity Duration
Money Market Fund Selection
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Money Market Fund Selection
Expense Ratio
Credit Quality
Yield
Principal is safe due to lower duration
Income can be volatile
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Strategy To Smart Investing
Identify Objective
Start early
Focus long-term and stay invested
Beware of the effects of inflation & taxes
Need Based Investment Strategy
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Age roup
( ears)
ro th
( quity)
Income
( onds)
iquidity
( anks)
25-40 7
5 15 10%
41- 50 50% 35% 15%
51- 60 35% 45% 20%
Above 60 25% 50% 25%
gy
The Risk Return Trade-off
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Risk
Potential
for
return
Liquid Funds
DebtFunds
GrowthFundsAggressive, Value,
Growth
Balanced Funds
Sectoral Funds
Gilt Funds, Bond
Funds, High
Yield Funds
Ratio of Debt : Equity
Hedge Funds
Equities are the best long term bet
f di d i d i hi h
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56%
63%86%
37%
14%
44%
1 year 3 year 5 year
percentage of studied period in which
Other
investment
outperformed
Stocks
outperformed
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
Equities are the best long term bet
Cumulative annualised returns (1980 98)
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9.2%
7.62%
9.74%
14.47%
20.16%
0.0%
.0%
10.0%
1 .0%
20.0%
2 .0%
Inflation Gold Bank FD Co. FD Equities
Inflation Gold Bank FD Co. FD Equities
Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices - BSE
Cumulative annualised returns (1980 - 98)
9.2%
7.62%
9.74%
14.47%
20.16%
0.0%
.0%
10.0%
1 .0%
20.0%
2 .0%
Inflation Gold Bank FD Co. FD Equities
Inflation Gold Bank FD Co. FD Equities
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Myths and Reality about savings
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y y g
I am not a natural saver Saving is a skill and like most skill it gets better
with practice.
Savings mean putting big amount aside Its the little drops that make mighty ocean
My earnings are not enough
If you have little now, you will have lesser later.
Saving is all about discipline.
Budgeting is unnecessary
You need budgeting to cut expenses.
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Myths and Reality about savings
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Myths and Reality about savings
I earn enough
Nothing is permanent
Never spend saved money
for specific goals
emergencies
Myths and Reality about savings
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Myths and Reality about savings
I earn enough
Nothing is permanent
Never spend saved money
for specific goals
emergencies