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1.THE CONCEPT AND ROLE OF MUTUALFUNDS

  A)Mutual funds oppotunity
 

>>Most Appropriate investement opportunity for small investors
>>Birth of Mutual Funds U.S.A.
>> Good Alternative to Direct Investing.
>>Size in USA > Bank Deposits
>>Financial Intermediary
>>UTI only player between 1964-87.
>>Helps in the growth of Capital Markets.

  B)Concept of Mutual Fund
 
>>A common pool of money into which investors place their contributions to be invested in adcordance with a stated objective.
>>The ownership of the fund is joint or mutual
>>The fund belongs to all investors
>>Ownership is proportionate to contribution made by one
  C)Advantages of Investing through Mutual Funds over Direct Investments
  >>Portfolio Diversification
>>Professional Management
>>Reduction/Diversification of Risk
>>Liquidity
>>Flexibility & Convenience
>>Reduction in Transaction cost
>>Safety of regulated enviornment
  D)Disadvantages of Investing through Mutual Funds over Direct Investments
  >>No Control over Cost
>>No Tailor-made Portfolios
>>Managing a Portfolio Funds
  E)History of Mutual Funds
 

>>Phase 1(1964-87) : Growth of UTI. AUM FROM Rs 600 Cr in 84 Grew To Rs 6700 Cr in 88.
>>Phase 2(1987-93) : Entry of PSU Banks and Financial Instituitions MFs. AUM Rs 47004 Crs.
>>Phase 3(1993-96) :Emergency of Private Sector Mutual Funds.
Joint Ventures between Foreign Funds & Indian Promoters resulting in innovations in
-Investment Management Techniques,
-Investor Servicing Techniques

>>Phase 4(1995-99) :SEBI Regulations for Investor's Protection
>>Phase 5(1999-2004) :UTI Act 1963 repealed in Feb 2003 UTI Mutual Fund becomes SEBI compliant
Assured Return Schemes of UTI taken over by a special undertaking administered by GOI Emergence of large & uniform industry.
>>Phase 6(2004 onwards) :Consolidation & Growth 29 Mutual Funds as at 31-03-06.

  F)Industry Profile
 

Industry Structure

  G)Assets under Management (Rs. in Crs)
 
As at UTI Public Sector

Private Sector

Total
31/3/99 53,320 8,292 6,860 68,472
31/3/99 58,017 6,840 25,730 90,587
31/3/04
-
34,624 1,04,992 1,39,616
31/3/04
-
50,348 1,81,514 2,31,862
  H)Types of Mutual Fund
 

Mutual Funds can be classified as:

>>Close ended/Open-ended Funds
>>Load Fund/No-Load Funds
>>Tax-exempt/Non-Tax exempt Funds

  I)Close Ended Funds
 

>>Close Ended Fund

-Intial Public Offer
-Investor cannot buy units later on from MF
-Get listed on the Stock Exchange
-Traded on Stock exchange at a discount/premium to NAV
-Redemption of Units on expiry date
-Unit Capital Constant
-Close ended funds may allow back of units option

  J)Open Ended Funds
  >>Open Ended Fund:

-Units available for sale/purchase at all times at NAV based prices
-Unit Capital variable
-Fresh subscriptions may be discontinued
-Any time redemptions always allowed, except when there is lock in period.

  K)Load Funds
  >>Load is one time fee payable by the investor when they enter/exit an open-ended scheme.
>>Loads are charged to recover intial issue expences including marketing & selling expenses, brokerage, advertising costs. Such Expenses not to exceed 7-6%.
>>SEBI prescribes ceiling on Recuring Expenses.
>>There can be Entry load or Exit load or both
>>Entry load is also called Front-end load.
>>Exit load is also called Back-end load or Deferred load
  L) No Load Funds & Impact of Loads
  >>Ina No load fund, marketing and selling expense are absorbed by the AMC and the investor buys and sells units at NAV price.
>>Return on investment to the investor is reduced because of the loads
-When the investor buys a uniform the MFs, he pays more than NAV
(NAV + entry load)
-When the investor sells the unit to the MF, he gets less than NAV
(NAV +exit load)
  Example on Loads and Returns
Date Action NAV(Rs) Entry Load Exit Load
1/1/1999
Entry
11.00
2%
-
31/12/1999
Exit
12.00
-
1%

ROI with Loads
Amount invested =11+0.22=11.22RS.
Amount received =12-0.12=11.88Rs.
Gain= 0.66Rs.
ROI =(0.66 X 100)/11.22=5.88%
  Example on Loads and Returns
ROI without loads
Amount invested=11Rs.
Amount received=12RS.
Gain=1Rs.
ROI=(1X100)/11=9.09%
  M)Contingent Deferred Sales CHarge(CDSC)
  >> Exit charge may vary depending upon the holding period.
>>If Exit Charge varies with the holding period it is called Contingent Deferred Sales Charge(CDSC) and it may vary as shown under.
>>Redemption during the first five years from the date of purchase
First Year Maximum CDSC 4%
Second Year Maximum CDSC 3%
Third Year Maximum CDSC 2%
Forth Year Maximum CDSC 1%
Fifth Year Nil
  N)Mutual Funds classified as per Class(Nature) of Investments
  >>Equity Funds
>>Bond Funds
>>Money Market Funds
  O)Mutual FUnds classified as per Investment Objectives
  >>Growth Funds
>>Income Funds
>>Value Funds
  P)Mutual Funds classified as per RIsk Profiles
  >>High RIsk Funds
>>Moderate RIsk FUnds
>>Low RIsk FUnds
  Q)Risk Return Hierarchy of Different Funds
 
  R)Money Market Funds
  >>Invest in securities of less than 1 year
>>High liquidity & safety of principal
>>Low risk and low returns
  S)Gift Funds
  >>Invest only in GOvernment Securities of over 1 Year maturity
>>Risk and return low but higher than that of MMF
>>No default risk but carry interest rate risk
>>Fund values drop when interest rates go up & rise when interest rates go down
  T)Debt Funds & Types
  >>Invest in Corporate Bonds and Government Securities
>>RIsk higher than that of GIft Funds
>>Aims at regular income distribution and not at capital appreciation
>>Types of Debt Funds:
-Diversified Debt Funds
-Focused Debt Funds
-High Yield Debt Funds
-Assured return Debt Funds
-Fixed Term Plan Series
  U)Equity Funds & Types
  >>Invest in Equity and Equity related instruments
>>High risk and aim at capital appreciation
>>Types of Equity Funds
-Aggressive Growth Funds
-Growth Funds
-Value Funds
-Speciality Funds
  U)Equity Funds & Types
  >>Diversified Equity Funds
>>ELSS Funds
>>Equity Index Funds
>>Equity Income or Dividend Yield Fund
  V)Types of Hybrid Funds
  >>Balanced Funds: Seek to provide regular income & Capital appreciation
>>Growth & Income Funds: Seek to provide High dividend and Capital appreciation
>>Asset Allocation Funds: Flexible asset allocation between Debt, Equity & MM
  W)Other Funds
  >>Commodity Funds:Invest in commodity stocks
>>Real Estate Funds:Invest in stocks of real estate companies
>>Exchange Traded Funds: Trade lijke a single stock on the exchange
>>Fund of Funds:Invest in other Mutual Fund Schemes
  X)Exchange Trade
  >>It tracks the market index & trades like a single stock
>>Unlike Index Funds, unit price varies during the day as per market movements.
>>ETF,s are bought &sold through market makers who give a two way quote.(Ask & Bid).
>>Benefit of holding a single share & diversification & cost efficiency of an index.
>>Market makers allow exchange of units for the underlying shares.
  Y)Fund of Funds
 

>>Fund of fund invest in other mutual fund schemes of the same AMC/other AMC's.
>>It does not invest directly in Capital Markets.
>>Greater Diversification.
>>Higher Expenses.

 
  Chapter 2
  A)Mutual Fund Structure
  >>Mutual Funds in U.S are setup as investment companies.
>>Mutual Funds in U.K are either Unit Trusts (Trust) or Investment Trust(Companies)
>>Mutual Funds are Public Trusts under the Indian Trusts Act, 1882
>>Mutual Fund is a 3 tier structure:
-Sponsor,
-Trustee and
-AMC
  B)Mutual Fund Structure
  >>Mutual Funds invest
-in Capital market instruments
-on behalf of investors
>>All gains and losses of funds are shared by the unit holders
  C)Constituents of a Mutual Fund
  1. Sponsor
2.Trustees
3.Asset Management Company
4.Custodian/Depository Participant
5.R & T Agent
6.Distributors
7. Banker
  D)ROle of Sponsor
  >>Sponsor is a person who set up a Mutual Fund
>>Sponsor settles the Trust and executes Trust Deed.
>>Sponsor contributes to the intial capital of the Trust
>>Sponsor appoints the Board of Trustees
>>Sponsor appopints Asset Management Company
>>Sponsor contributes minimum 40% of net worth of AMC
  E)Who can be a Sponsor?
 
>>Criteria of a Sponsor are
-Positive net worth
-Minimum 5 Years' track record
-History of positive After Tax Profit for 3 out of 5 years including fifth year.
-Net Worth more than Contribution for AMC
-'FIt and Proper' person
 
F)Board of Trustees & Role
 
>>Trustees appointed by the Sponsor with SEBI approval
>>At least two third Trustees must be Independent
>>The Trustees have a FIDUCIARY responsibility towards unit holders
>>Trustees not liable for acts done in good faith and if they have exercised adequate due diligence
>>Trustees oversee the functioning of AMC
Trustees approve each MF scheme floated by AMC
>>The investments in MF's are held by the Trstees
>>Trustees receive feed for their services.
>>Obligation to undertake General; & specific due diligence.
 
G)Who can be a Trustee
 
>>Eligibility Conditions:
-Person of high repute and integrity
-Not guity of moral turpitude
-Not convicted for economic offence under securities laws
-Not a part of AMC eg.Director, Employee or Officer of AMC
-One can be Trustee of two MF's if approved by Board of Trustees of both the Mutual Funds.
 
H)Asset Management Company
 
>>Constitued as a Company under the Indian Companies Act.
>>Minimum Net worth of Rs.10crores for AMC.
>>Minimum contribution of sponsor: 40% of share capital of AMC.
>>At least 50% of Directors of AMC to be independent
 
I)Asset Management Company
 
>>AMC can do only the following businesses
-Asset Management Services
-Portfolio Management Services
-Portfolio Advisory Services
>>AMC can be terminated/changed with the consent of
-Majority of Trustees or
-At least 75% majority of Unit holders.
 
J)Role of AMC
 
@ AMC is the Fund Manager for managing Mutual Fund Assets
@Amc floats different MF schemes
@ AMC accountable to the Trustees
@ AMC charges Asset Management Fees subject to celing prescribed by SEBI.
@ Asset Management Agreement between AMC and Trustee.
 
K)Obligations of AMC
 
>>Limit of 5% of aggregate purchase and sales of securities under all its scheme per broker per quarter
>>As far as possible AMC to avoid services of its sponsor.
>>All Security transactions with a Sponsor and his associates to be disclosed
>>Disclosure of transactions with a company which has invested more than 5% of NAV in any scheme
 
L)Custodian/Depository Participant
 
>>Custodian/DP
-Appointed by Board of Trustees
-Keep record & account of securities/Investments
-Collects benefits under Securities
-Sponsor & Custodian/DP cannot be the same entity
-Registered with SEBI
 
M)Registrar & Transfer Agent
 
>>Registrar & Transfer Agent:
-Issues,redeems, transfers units of MF schemes
-Keep Unit Holders A/c's upto date
-Registered with SEBI
 
N)Merger of two AMC's
 
>>Merger of 2 AMC's:
-Approval of Trustees of both AMC's required
-SEBI approval required
-Approval of High Court also required
-Unit holders areinformed and given option to exit without load
 
O)Take over of AMC/Scheme of AMC
 
>>Take over of AMC by new Sponsor
-Trustees approval required
-SEBI clearence required
-Unit holder to be informed
>>Meger of two schemes of different AMC's
-Sche of one Mutual Fund taken over by another Mutual Fund
.Trustees approval required
.SEBI clearence required
.Unit holder to be informed
 
 
Chapter 3
  A)Regulators in India
  >>SEBI is capital Market Regulator with legel power-SEBI regulaters Mutual Funds.
-All Mutual Fund's to be registered with SEBI.
>>RBI is Money Market Regulator
>>SEBI is regulator for Liquid Funds Investing in MM instruments
>>MOF supervisory body for RBI & SEBI
>>Security Appllate Tribunal setup in 2003 to hear appeal against SEBI decisions.
>>Registrar of Companies(ROC) ensures compliance by AMC & by Trustee Company with the Indian Companies Act 1956
>>ROC supervised by Department of Company Affairs(DCA)
  B)Regulators in India
  >>DCA frames and modifiers regulations relating to the companies.
>>DCA is a part of Comapny Law Board
>>CLB is a part of Ministry of Law and Justice
>>Company Law Board carries out judical proceedings for offences under Companies Act.
>>Mutual Fund Trustees accountable to Public Trustees
>>Public Trustee reports to Charity Commissioner
>>UTI set up under UTI Act 1963
 
C)Self Regulatory Organisations
  >>SROs are second tier in the regulatory structure
>>SRO is an association of market participants
>>Approval of SRO given by MOF
>>All stock Exchanges are SROs and are supervised by SEBI.
>>Close Ended Funds listed on SE observe listing Agreeement Requirements of SE's.
>>AMFI was incorporated in 1995 and is not an SRO
>>Role of AMFI
-To promote interest of MF's & Unit Holders
-TO set ethical, commercial & professional standards
-To increase public awareness of MF industry
  D)Role of AMFI
  -To promote interest of MF's & unit holders.
-Interact with the Regulator.
-TOcreate Public awareness
-To set ethical, commercial & business standards.
-To promote best business practices and formulate code of conduct for persons engaged in the activities of MFand for the AMC's.
-To implement the certification programme.
  E)Investor's Rights & Obligations
  >>RIght of proportionate 'benefical' ownership
>>Right to timely service
>>RIght to information eg. NAV Calculation, Unit pricing
>>RIght to wind up a close ended scheme with 75% majority of unit holders.
>>Right to approve changes in fundamental attributes of the scheme
>RIght to terminate the AMC with 75% majority of unit holders.
  F)Investor RIghts to Services
  >>Investor to be informed about change in fundamntal attributes of the scheme eg.from No Load fund to Load fund or change in Pricing norms for purchase/sale of Units
>>Open ended Fund must reopen within 30 days after the Offer period.
>>Nomination facility allowed
>>Redemption processed to be sent to investor within 10 working days otherwise Penal interest at the rate3 specified by SEBI for the full period.
  G)Investor RIghts to Services
  >>Annual Holding statements and Transaction statements to be sent to investors
>>Dividend Warrants to be dispatched within 30 days of dividend declaration by MF.
>>Mandatory portfolio disclosure for half-yearly period to unit holders within 1 month
  H)Investor RIghts to Services
  >>Investor's right to inspect documents such as
-Trust deed,
-AMC Agreement,
-Balance sheets of MF Schemes and
-Balance Sheet of AMC
  I)Legel limitation to Investor Rights
  >>Investors can't sue the Trust
>>Investor can sue the Trustee
>>Sponsor of fund not responsible for shortfall in non assured scheme
>>Prospective investors can't sue the trustees/AMC/Custodians
  J)Investor's Obligations & Complaint Redressal
  >>Investor should::
-Read Offer Documents
-Understand Risk Factors
-Monitor performance of investments.
-To submit PAN/Bank details.
>>Complaint Redressal
-Through SEBI intervention. Complaints can be made to AMC/Trustees/SEBI.
-Investors cannot seek redressal under COmpanies ACT since fund investors are neither share holders nor depositors in AMC
 
  Chapter 4
  A)What is an Offer Document?
  >>Offer Document of a MF scheme is like a prospectus issued by AMC inviting public to subscribe to units of MF scheme
>>Disclose adequate information for investors to take informed investment decisions
  B)Offer Document & KIM
  >>Offer Document
-A legal document
-Issued by AMC on behalf of Trustees
-Offer Document describes the Product/Scheme
-Very important document for prospective investor]
-First time investors must read OD before deciding to invest
-For close ended FUnd issued at the time of launching a scheme
-FOr open Ended FUnd revised every 2 Years
>>KIM
-A abridged version of Offer Document
-A part of the Application Form
-TO be in the format as prescribed by SEBI
  C)Offer Document
  >>Offer Document prepared and issued by AMC
>>Offer Document to be approved by Trustees
>>Offer Document field with SEBI with fees of Rs.25000/-.
>>Modifications if any advised by SEBI within 21 days of its filing
>>SEBI neither approves nor disapproves an OD.
>>Offer Document valid for ^ months for launching of scheme from the date of receipt of by AMC of SBI letter containing observations. Thereafter fresh OD to be filled with SEBI.
  D)COntents of Offer Document
  >>Summary information on COver page:
-Names of Trustees, AMC, Scheme, Period of Opening/Closing, Face value of unit, SEBI Disclaimer
>>Risk factors: Standard & Scheme Specific
>>Legal & Regulatory Compliance Certificate
>>Financial information on Schemes & Expenses for last 3 years
>>Constitution of MF its Sponsors, Trustees, AMC & their functions
>>Investment objectives & policies
>>Managment of FUnds: Names of Fund Manager
>>Offer related information: Minimum Subscription amount
  E) Finanacial information in Offer Document
  >>Expenses
-Sales load, Redemption load
-COntigent Deferred Sales Charge
-Intial Issue Expenses for the scheme and or schemes launched during last one year
-Estimated annual recurring expenses
>>Condensed finanacial information about schemes launched during last 3 years and their performance
  F)Constitution of Mutual Fund in Offer Document
  >>Name of Sponsor/AMC/Board of Trustees
>>POwers of Trustee
>>Names & Background of key personnel
>>Names of Custodian/Registrar
>>Name, age, qualification & experience of Fund Managers
>>Details of Investor Relation Officer
  G)Investment objectives and POlicies asper OD.
  >>Short description of type of Securities for investment
>>Asset Allocation percentages
>>Policy of Diversification
>>Portfolio Turnover Policy
>>Investment Limitations
>>If Name suggests predominance of investments in a particular asset class, the minimum exposure to be at least 65%.
  H)Borrowing policy of the Scheme as per OD
  >>Fund not to borrow for making investments
>>Temporary borrowing allowed
-For a maximum period of 6 months
-Amount not exceeding 20% of NAV of the scheme
-Borrowing for redemption of scheme only
  I)Other Contents in OD
  >>Procedure for redemption
>>Disclosure of Valuation of Securities norms and NAV calxulation
>>Description of Accounting Policies
>>Tax treatment of Investments as per existing laws
  J)Offer related Information in OD
  >>Minimum subscription amount
>>Offer period: Calender of opening, closing, allotment etc.
>>Name of SE where close ended units will be listed
>>Procedure for transfer and transmissions of units
>>Different plans under the scheme
>>Dividends and Distribution Policy
>>Procedure for winding up of the scheme
  K)Standard Risk factors in MF investing as per OD
  >>NAV can go up and down depending upon Capital market movements
>>Past performance on AMC is not indicative of future performance.
>>Name of the scheme does not indicate its quality or prospects
>>There is no guarantee that objectives of the scheme will be met
 
  Chapter 5
  A)Who can invest in a Mutual FUnd Scheme
  >>Residents
-Resident Individuals/HUF
-Indian companies
-Partnership FIrms
-Indian Trusts/Charitable Insatitutions
-Insurance Companies
-Banks
-FInancial Institutions
>>NBFCs
>>Provident FUnds
-Mutual Funds
  B)Who can invest in a Mutual Fund Scheme
  >>Non Residents
-NRI's & Persons of Indian Orgin
-Overseas Corporate Bodies)OCBs)
>>Foreign Entities
-FII's registered with SEBI
>.FOreign nationals cannot invest in MF
  C)Different Distribution Channels
  1.DIrect Marketing BY Sales Officers through
-Mailers
-Call Centers
-Branch networks
  D)Distribution Channels- Types
  2. Individual Agents as Distributors and Advisors
3.Institutional Intermediaries
-Fund distribution companies
-FInance Companies
-Investment Advisory Companies
-Banks and Institutions
-Post Offices
-Brokers and Sub-brokers
  Private Sector MF prefer established FUnd distribution Cos as Fund Distributors
  E)AMFI Regisytered Distributors
 

>>AMFI Registration No.(ARN) card necessary before selling
>>As on 31/3/2005,
-49837 candidates passed AMFI Certification Test
-out of which 30028 candidates registered with AMFI
>>Out of 30028 AMFI registerede candidates,
-Individuals are 24850
-Corporates are 1946
-Corporate Employees are 3232

  F)Agent's Commission
  >>Commission can be paid upfront or trail commission
>>Market practice
-1.5 to 2.5 % for Equity funds
-.25% to 1.25% for Debt FUnds
-Still lower for liquid FUnds
-Higher commission for ELSS
>>AMFI has prohibited parting/sharing of commission (see AMFI GUidlines & Norms for Intermediaries [AGNI]). SEBI CIR of 2002.
>>SEBI does not prescribe any ceiling on commission
  G)Process of Effective Selling of MF Schemes prescribed for Distributors
  >>Know the important characteristics of scheme
>>Know your client profile (age, risk, tolerence, income level, etc)
>>Understand client's need (investment objective, return expectation, cash flow requirements, etc)
>>Assist in making the right choice
>>Encourage regular investment & commitment to invest
>>Personalised post sales service
  H)AMFI Code of Ethics for MF's
  >>Funds to be managed in the interest of unit holders
>>Unit holderes to be treated equally & fairly
>>Ensure meaningful disclosures
>>Avoid conflict of interest
>>Ensure segregate accounting
>>Stick to ethical standards and fairness in dealings
>>High standards of care, diligence, services and disclosure announcements
  I)SEBI Advertisement COde for MF's
  >>No promises in the future without resources backed guarantee
>>Standard measures to compare such as Annual Yield, CAGR etc.
>>Annualised yields for at least one, three, five years & since launch
>>For less than 1 year performance, Absolute Return without annualisation
>>Past gains may not repeat in future
>>Risk factors prominently stated
>>No Celebrities
>>No add-ons during offer period
>>Appropriate benchmark to be chosen
>>Any ranking of fund to be explained
 
  Chapter 6
  ACCOUNTING
  A)Mutual Fund Accounting
  >>Knowledge of MF accounting vital
>>Seperate Balance Sheet for each scheme of a MF
>>MFs to follow Accounting Policies laid down by SEBI(Mutual FUnds) Regulations, 1996
>>Unit holders' subscriptions accounted
-not as liabilities or deposits
-but as Unit capital at Face Value
>>Investements made by the fund appear on Asset side in the Balance Sheet
>>All assets of the scheme belong to Investors
  B)NAV Calaulations
  >>Net Assets= Asset - Liabilities
.Assets = Market value of Investments + receivables+Accured income+Other Assets
.Liabilities = Accured expenses + Payables +Liabilities
>>NAV of a Unit =Net Assets of the scheme/ Number of units outstanding
  C)Disclosing Net Asset Value of a Unit
  >>Data on which NAV is calculated is called Valuation Date
>>Open ended Funds are required to compute and disclose NAV daily
>>Close ended Funds can compute NAV's every week NAV Calculatiopn has to consider up to date transactions
  D)Disclosing Net Asset Value of a Unit
  >>All income, expenditure to be accounted upto date of valuation
>>Non accural of small amounts not affecting NAV by more than 1% permitted
>>Non-record transactions should not affect NAV calculation by more than 1%
>>If NAV is more than 1% AMC to:-
-PAy excess difference.
-Recover excess paid.
  E)Allocation/De-Allocation of Units
  >>For all valid applications received before the Cut-off time, units are allotted/cancelled based on NAV at the end of the same day
>>FOr valid application received after the cut-off time, units are allotted/cancelled based upon NAV of the next business day.
>>The above rule does not apply to liquid fund schemes
  F)Cut_off Time
  >>The cut_off time for all mutual funds schemes except liquid fund schemes is 3 pm
>>For liquid fund schemes valid application received upto 1 p.m. are allotted units based on NAV of the previous day
>>For liquid fund schemes valid application received upto 1 p.m. are alloted units based on NAV of the same day
>>For repurchases under liquid funds the cut_off time is 10 a.m instead of 1 p.m.
>>NAVs are required to be rounded off upto 4 decimal places for liquid funds & upto 2 decimal places for other funds
  G)Factors Affecting Net Asset Value Of a Unit
  >>NAV is affected by 4 set of factors:
-Purchase & sale of investment securities
-valuation of all investment securities held
-Other assests and liabilities
-Units sold or redeemed
  H)Pricing of a Fund Unit
  >>SEBI Regulations on pricing of Mutual Fund units
-For open ended funds
.Repurchase price not lower than 93% of NAV
.Sale price cannot be more than 107% of NAV
.Difference between the repurchase and sale price of a Unit cannot be more than 7%
  I)Charges in MF
  >>Mutual Funds can recover two types of Expenses
a. Intial issue expenses
b.Recuring Expenses
>>Intial Issue Expenses
-effective APril 04' 2006 allowed up to 6% for Close Ended FUnds only
-Close Ended Funds cannot charge Entry Loads
-Open Ended Funds can recover intial expenses through Entry Load
  J)Maximum Recurring Expenses
  Recuring Expenses cannot exceed the following regulatory limits
 

Average Weekly Assets

For Equity Funds

For Bond Funds

For first Rs.100 crs

2.50%

2.25%

For next Rs.300 crs

2.25%

2.00%

For next Rs.300 crs

2.0%

1.75%

On the Balance Average

Weekly Assets

1.75%

1.50%

Fund of Funds

Max 0.75%

 

  K)Asset Management Fees
  AMC charges Asset Management Fees
>>Limits on AMC Fees as per SEBI Regulations:
-1.25% of the 1st Rs.100 crs of weekly Average Net Assets
-1.00% of the weeekly Average Net Assets in excess of Rs.100 crs
-AMC may charge additional 1 % of weekly Average Net Assets for "No Load" Funds
>>Asset Management Fees are not in addition to but a part of Recuring Expenses
>>Asset Management fees are usually lower for Debt FUnds as compared to Equity Funds and are disclosed in OD.
  L)Amortization of Intial Expenses
  >>Close Ended Funds do not charge intial expenses of fund but amortize the same over a period of years
>>Intial Expenses amortized on a weekly basis over the period of the scheme.e.g for a 5 year scheme, amortized over 260 weeks
>>Investor exiting before expiry of period of scheme will be charged unrecovered intial issue expenses
>>Conversion of close ended funds into open ended funds allowed only after recovery of unrecovered intial expenses
>>Un-amortized portion added for NAV calculation as Other Asset but no AMC fee on this amount
  M)Amortisation An Example
  >>Assume close ended fund of five years collects Rs 100 crores and incurs intial issue expenses of Rs 5 Crores.
Units issued =10 crores
Investment = 95 crores
Intial NAV =(95 +((260/260)*5)/10)*10
After 4 weeks let the maeket value of investments-98 Cr
NAV = 98+((256/260)*5)/10=10.29
  N)Intial Issue expenses impact on NAV
  >>Open ended fund collects RS 100 Crores
>>Entry load 2.25%
>>Intial issue expenses Rs 5 Crores
>>Impact on NAV
-Intial NAV 10
As No of Units allotted would be 9.775 crores.
  O)Disclosure and Reporting Requirements
  >>AMC to prepare Annual Report and Annual Statement of Account for each scheme
>>Annual Statement of Account to be audited by an Auditor independent of the Auditor of AMC
>>Within 6 months of Accounting year, FUnd shall
-Publish scheme wise abridged summary of report in newspapers
-Mail summary of report to all unit holders
-Forward to SEBI Annual Audited Accounts, Half yearly Unaudited Accounts, Quarterly Portfolio statement
-Display the scheme wise annual reports on their website & on AMFI website
-Mail Annual Reports to all unit holders
  P)Accounting Policies
  >>Investments to be marked to market
>>Unrealized appreciation can't be distributed
>>Dividend/Bonus recognized on the share is quoted ex-dividend/ex-bonus
>>Average cost considered for determining gain/loss on sale of shares
  Q)Accounting Policies
  >>Purchase/sale of investments recognized
-on the trade date,
-not on settlement date
>>Debt Investments to be taken as NPA
-if interest or Principal amount remains unpaid on 1/10/2000 it becomes NPA on 1/10/2000
  R)Provisioning of NPA_ Debt Securities
 

If interest remain unpaid for 6 months

10% of Book Value

If interest remain unpaid for 9 months

20% of Book Value

If interest remain unpaid for 12 months

Another 20% of Book Value

If interest remain unpaid for 15 months

Another 25% of Book Value

If interest remain unpaid for 18 months

Balance 25% of Book Value

  VALUATION NORMS FOR MUTUAL FUNDS
  A)Valuation Norms for Mutual Funds
 

>>Valuation Norms prescribed by SEBI to protect investor's interests
>>Valuation Norms
-Based upon fair portfolio valuation
-Uniform across all funds
>>SEBI
-Prescribed detailed valuation methodologies in its fund regulations
-Mandates disclosure of valuation methods used for investor's information

  B)Valuation Norms for Shares
  >>Valuation of traded shares
-done on the basis of traded price
-if not more than 30 days old
>>Valuation of thinly traded shares
-less than 50,000 shares or Rs.5 lacs or less amount and
-Done as per SEBI approved Norms
>>Valuation of not traded shares
-done as per SEBI approved valuation norms
  C)Valuation Norms for Shares
  >>If Thinly traded & Non traded Equity Securities exceed 5% of the total assets of the scheme,
-independent value should be appointed for valuation
>>If Illiquid Securities exceed
-15% of net assets for open ended funds
-20% of net assets for close ended funds
-value is taken zero for Securities in excess of 15 % 20%
  D)Limit on Illuquid Shares
  >>Illiquid Share)(Non traded, Thinly Traded & Unlisted Equity Shares)
-not to exceed 15% for Open Ended Fund Assets
-not to exceed 20% for Close Ended Fund Assets
  E)Valuation Norms for Thinly-traded and Non-traded Shares
  Equity Instruments
>>Calculate biik vakue per share
>>Calculate earning value per share based upon Verage capitalization rate of industry P/E and discount it by 75%.(Latest audited EPS be taken for this purpose)
>>Calculate Fair value per share taking 90% of average of book value and earning value per share
>>If EPS is negative or not available for within previous nine months, it should be taken as zero.
  F)Capitalisation of Earnings - AN Example
  >>Assume Net worth/share Rs 8
Audited EPS RS 12
>>Industry P/E 12
>>Discounted P/E for comp(25% of 12)=3
>>value of share(2*3)=6
>>Average value(8+6)/2=7
>>Value to be taken discounted by 10%= 90% of Average value(7)=Rs 6.30
  G)Valuation of Traded Debt Securities
  >>A Debt Security is treated as traded if traded any day during the last 15 days
>>Trading can be on a stock exchange or between institutions
>>Publicly traded price or private placement price if private placement is within last 15 days is taken as valuation price
>>Market lot for trading in debt securities is 5 Crores
>>A Debt Security if not traded in last 15 days is called Not Traded or Thinly Traded Debt Security
  H) Valuation of Thinly-traded and Non-traded Debt Securities
  >>Debt Instruments
-Less than 182 days maturity
.valued at cost pius accured interest and
.Difference between redemption value and cost uniformly spread over remaining life of instrument
>>More than 182 days maturity
-Government securities valued at prices released by CRISIL
-Investment Grade debt securities valued on the basis of YTM derived from CRISIL Valuation Matrix
-Non Investment Grade
.Performing Asset valued at 25% discount to theirface value
.NPA valued as per valuation norms for NPA's
  I)Valuation of Thinly and Non-traded Debt Securities
  Calculating Yields for pricing Debt Securities
-A risk free benchmark yield curve is built on GOI securities as the base.
-A matrix of spreads(based on the credit risk) are built for making up the benchmark Yields
-Marked Yields are adjusted for liquidity risk
-The yields so arrived are used to price debt portfolios
  J)Gross Redemption Yield(GRY)
  >>Gross Redemption Yield(GRY) is also called Yield to Maturity(YTM)
>>YTM is the Internal Rate of Return on investment in Bond.
>>Internal Rate of return is computed based on:
i. Coupon Rate
ii. Purchase Price
iii. Period to Maturity
  K)Gross Redemption Yield(GRY)
  >>If purchase price is the same as Face Value of Bond,
-YTM will be same as the Coupon Rate.
>>If purchase price is more than the Face Value,
-YTM will be lower than the Coupon Rate.
>>If purchase price is less than the Face Value,
-YTM will be more than the Coupon rate.
  L)Calculating Price of Bond with given YTM
  An ExampleGiven data:
Face Value : Rs.1000
Coupon : 10%
Tenure : 5 Years
Interest Payment : Yearly
Yield : 8.72%
Calculate price of the bond/Cash flows under the bond and their present vaolues are as under
100/(1+8.72%) + 100/(1+8.72%)2 + 100/(1+8.72%)3 + 100/(1+8.72%)4 +(100+1000)/(1+8.72%)5
Price of the bond=Rs.1050(By solving the above equation)
  TAXATION OF MUTUAL FUNDS
  A)Taxation of MF's and Investors
 

>>FInance Act 1999 radically changed taxation of Dividends received by investors in Mutual Funds
>>Mutual FUnd as an entity is not taxed since it is a Pass through Entity. Section 10(23d) of the IT Act.
>>Finance Act 1999 made income(dividends)from UNITS totally EXEMPT from tax u/s 10(33) in the hands of all investors
>>Income(dividends)distributed by a Debt Fund was made Liable to Divident Distribution Tax at applicable rate.
>>Open ended FUnds with more than 50% invested in Equity do not pay any DDT (since changed to 65% in FY 06-07)
>>Individuals 14.02%. Companies 22.44%

  B)Taxation of MF's and Investors
  >>Security Transaction Tax(STT) is charged as applicable
>>80 C benefit under ELSS upto Rs.1 Lac
>>Restriction on dividend stripping(Sec 94(7))
-Within 3 months prior to record date of dividend distribution and
-within 3 months after record date for dividend distribution
  C)Impact of Dividend Distribution Tax
  >>Investor pays the tax indirectly, since NAV comes down to the extent of tax paid by the Fund.
>>DD Tax bears no relationship to the investor's tax bracket.
>>Dividend reinvested is also subject to Dividend Distribution Tax.
>>In Growth Plans, Dividend Distribution Tax not applied, since no dividend is distributed.
  D)Short/Long Term Capital Gains Tax
  >>Short Term Capital Gain
-If units held for less than 12 months
>>Long Term Capital Gain
-If units held for more than 12 months
>>Short Term Capital Gains at normal tax rates as applicable to investor
>>Long Term Capital Gains taxed at 20% with indexation or at 10% without indexation of cost+Applicable Surcharge & Educational Cess
  C)Short/Long Term Capital Gains Tax
  >>Under Section 111(a) of I.T Act
-No long term gains tax on equity oriented schemes if STT charged.
-Short term gains tax at Government specified rate if STT is charged for equity oriented schemes currently the rate is 10%.
  D)Capital Gains Tax
  >>Option to pay 20% or 10% lies with investor for each and every security
>>2% surcharge also payable
>>Indexation Benefit on Unlisted Bonds not available
>>No capital gain tax payable if entire capital gain invested in capital gain bonds of NABARD, NHAI, REC under sec 54 EC with a lock in of 3 Years.
>>Long term capital gains exempt u/s 54ED if invested within 6 months in shares of companies formed and regisatered in india with a lock in of 1 year.
  E)Calculating capital gain tax- An example
  >>Mr.J Invests Rs.2lacs in MF units during FY 97-98
-After 2 years, he sells units and gets Rs.2.4lacs
-His tax liability will be:
CII 99-00:389, CII 97-98:331, Ratio:389/331=1.18
-Indexed Cost(2,00,000X1.18)=Rs=2,36,000
-Capital Gains-Rs.4,000
-Long term capital gain tax of Mr.H:
Rs.4,000*20%=Rs.800 or Rs. 40,000/-i.e Rs.4,000/-
Obviously he will select the option of paying Rs.800/-
  F)Wealth Tax
  >>Ownership of Units not included in 'Net Wealth'
>>Hence no wealth tax payable on Mutual Fund units
 
  Chapter 7
  INVESTOR SERVICES
  A)Investor Services
 

>>Application procedure-as per offer document
-Wide distribution of application forms
-Downloadable application forms
-Application through Internet
>>The procedure for NRIs/OCB provided in the OD/KIM
>>Bank details to be given in the application form
>>PAN no.to be given if investments is Rs.50,000/- or more
>>Joint account can be operated jointly by all

  B)Application procedure for purchase of MF Units
  >>The application form is an important agreement on the part of the investor of havinf read and understood the OD
>>The various modes of payment specified in the OD.
>>NRIs can pay
-from FCNR/NRE accounts by demand drafts or cheques in case of repatriation benefits.
-for non repartiation benefits payment can be made from NRO/NRNR A/c.
  C)Application Procedure for Purchase of MF Units
  >>FIIs can remit directly from abroad or pay from their NRW A/c.
>>Offer Documents contains procedure purchaising and redeeming of units
>>Introduction of Multi purpose Application Form
-dispenses with need for existing Investors to fill up full Application form
-for making further investements
  D)Investment Plans and Services
  Investment Plans
>>Systematic Investment Plan(SIP)
-Regular investment of fixed amount periodically(Rupee cost averaging advantage)
>>Automatic Reinvestment plan(ARP)
-Reinvestment of Divident at Ex dividend NAV
>>Systematic withdrawel plans(SWP)
-Regular withdrawals at periodical intervals
>>Systematic Transfer Plans(STP)
-Selling units of one scheme & buying units of another scheme at regular periodical intervals of the same AMC
  E)Other services available under Mutual Funds
  >>Phone Transactions
>>Internet/Email transactions
>>Cheque writing facility for liquid funds
>>Periodic statements of holdings
>>Periodic statement of Investement Portfolio disclosures
  F)Other services available under Mutual Funds
  >>Mutual funds cannot give loan against units
>>Banks can give loan agaist MF units
>>Nomination facility allowed
>>Units of close end schemes can be transferred to another person
>>Transfer in open ended fund happens upon
-death of unit-holder or
-when units are pledged or
-by operation of law i.e insolvency or
-winding up of the corporate investor
 
  Chapter 8
  INVESTMENT MANAGEMENT EQUITY AND DEBT PORTFOLIOS
  A)Investment Management
 

>>Fund management style impacts investment performance
>>Magnitude of returns vary across funds
>>Time horizon of investments impacts investor's returns

  PART1: MANAGING EQUITY PORTFOLIOS
  A)Types of Equity Instruments
 

>>Equity shares
>>Preference shares
>>Equity Warrants
>>Convertible Debentures

  B)2 Major tsk of Equity Portfolio manager
  >>Construction of a portfolio of equity shares
-consistent with the objectives of the fund
>>Constantly rebalance the portfolio
-to produce capital appreciation & Earnings
-rewarding the Investor's with superior returns
  C)Management of Equity Portfolios
  >>Asset aloocation
>>Stock selection
>>Market timing
>>Monitoring of performance
>>Portfolio re-balancing
>>Evaluation of performance
>>RIsk assessment and Risk management
  D)Equity Markets: Positive Features
  >>Largest number of listed stocks (9400 companies listed on all stock exchanges as at 31/3/04 out of which 7200 listed at BSE with a market cap of over 13 Lac Crores)
>>Industrial diversity>(50 Industries/Sectors represented)
>>Electronic trading and settlement system
>>Growing number of Institutional Players
>>Lower Transactions cost
>>Lower settlement Risks
  E)Equity Markets: Issue of Concern
  >>Concentration of market cap and liquidity(Group A shares at BSE 140,B1 1100, B2 4500)
>>High levels of volatility
>.Information inadequancies
-Disclosure of information
-Insider trading
>>Lack of depth for large volumes
  F)Market capitalisation base classification of shares
  >>Large cap companies
-High liquidity
-Low Transaction costs
>>Mid cap companies
-Moderate Liquidity
-More transaction cost
>>Different Indices and Benchmarks for Large/Mid/Small cap
  G)Earning based classification of shares
  >>Price/Earnings Ratios
-Higher the P/E, greater the growth potential
>>Dividend Yield
-Lower the dividend yield, Higher the growth potential
  H)Cyclical, Growth, Value Stocks
  >>Cyclical Stocks
-Earnigns linked with market cycles
>>Growth Stocks
-Low Asset base
-High growth potential
-Highj P/E-low dividend yields
>>Value Stocks
-Large Asst base
-Long term good track record
-Moderate P/E & Moderate Dividend yield
  I)Passive fund managment style v/s Active fund management style
  >>Passive fund management style
-Relicates a chosen Index
-Low fees
-Low costs
-Index linked returns
>>Active fund management style
-Aim for Out-performance
-Higher fees
-Higher costs
-Stocks selection and timing
  J)Active Fund Management Strategies
 

-Growth Investment Strategy
.Fund Manager selects stocks of companies
.having potential of ab0ove average rate of growth in earnings.

-value Investment atrategy
.Fund manager selects stocks of companies
.with good trach record,
.stability of earnings
.and are undervalued

  K)Role of security research in Active Fund Management
  >>Fundamental Analysis
-Research inputs based upon Fundamentals of the company and its profit potential
>>Technical analysis
-Analysis of market price and volumes based upon demand and supply position & past trend charts
>>Quantitative Analysis
-Analysis of sectors and Industries based upon macroeconomic factors
  L)Equity Portfolio Management Organisation Structure
  >>Fund Manager
-Focuses on a certain location
-Selects stocksa &
-Fixes price range for purchase & sale
>>Analyst
-researches companies and
-recommends buy & sell
>>Dealer
-Collects market intelligence
-Places buy and sell orders with brokers
  M)For Successful Equity Portfolio Management
  >>Set realistic returns based on a Benchmark
>>Be aware of the flexibility in managing a portfolio
>>Decide on investment philosophy
>>Develop an investment strategy based upon objectives & time horizons
>>Avoid over diversification of portfolio & have well diversified portfolio
>>Develop a flexible approach to investing
  N)Use of Equity Derivatives
  >>Mutual Funds have been allowed to make use of Futures & Option contracts in Equities for
-Portfolio risk management
-Portfolio rebalancing

>>Since September 2005 SEBI has also allowed Mutual Funds to trade in Derivative Contracts
-To enhance portfolio returns
-To launch schemes which invest mainly in Futures & Options

  O)What are Equity Derivatives?
  >>Equity derivatives instruments are specially designed contracts
>>They derive their value from an underlying asset
>>They are traded seperately in F & O segment of Exchange
>>Main derivative instruments are
-Futures,
-Options
  P)What are Equity Derivatives?
  >>In a future contract
-you can buy & sell the underlying equity
-at a specified future date
-at agreed price
  Q)Using derivatives for Hedging Portfolio Risk
  >>If fund manager expects the equity market to decline
-he may not sell the equity in the cash market.
-But can sell the Index Future at the current future price for future delivery.
>>If markets fall the equity portfolio will decline,
-but future contract will show a corresponding profit,
-since fund manager have sold future contract at a higher price.
-This is called Hedging Portfolio Risk
  R)Using derivatives for Hedging Portfolio Risk
  >>If markets rise, instead of declining, the fund will not gain out of rise in the market prices.
>>Other method of hedging investment portfolio risk is by buying a put Option (an option to sell the underlying equity at an agreed price) by all paying premium.
>>A fund manager has to decide whether to sell a future contract or buy a put option depending upon the relative merits of each
.
  PART II: MANAGING DEBT PORTFOLIOS
  A)Debt securities: Types
 

>>Debt securities
-Central Government Securities
-State Government Securities
-Government GUaranteed Bonds
-PSU Bonds
-FI Bonds
-Bank Bonds
-Corporate Debentures

  B)Debt securities: Features
  >>Other features
-Fixed rate/ Floating rate Debt Securities
-Coupon Bonds /Commulative Bonds
-Listed/Un-listed Debt securities
-Rated/Un-rated Debt securities
-Secured/Unsecured Bonds
  C)Money Market Securities
  >>All Debt Securities maturiting within one year are called Money Market Securities
>>Money Market Securities(Instruments)are:
-T-Bills
-CDs
-CPs
Call Money
-Repos
  D)Indian Debt Market Size as at 31/3/1004
 
Type of security
Market Capitalisation (Rs. In Crores)

Central Government Securities

959301

Treasury Bills

32692

State Government Securities

79340

PSU Bonds

56831

Others (FI, Bank, Corporate Bonds, CD, CP)

87697

Total

1215861


  E)basic Characteristics of a Debt security/Bond
  >>Face value, par value
>>Coupon
>>Maturuty Date
>>Put/Call option
  F)Risks of Investing Securities /Bank
  >>Interest rate risk
>>Re-investment risk
>>Call risk
>>Dafault risk
>>Inflation risk
>>Liquidity risk
  G)Measures of Bond Yields, Yields spreads & Credit Risk
  >>Measures of Bond Yields are
-Current yield
-Yield to maturity(YTM)_
>>Yield curve of GOI securities of different maturities is constructed
>>Yield spread is the premium over G-sec rate paid by borrowers according to their credit risk quality
>>Credit risk is priced using the ratings of credit rating agencies.
>>Higher the credit rating, lower the spread
>>Debt portfolios have credit quality objectives started in OD
  H)Duration of a Bond-A measures of interest rate risk
  *Duration of a Bond is the average maturity period of a Bond as distinguished from the term of the Bond
*Duration helps to measure the interest rate risk of a Bond
*Higher the duration of a Debt portfolio,
-higher the risk of loss of value of the portfolio if the rates of interest go up & vice-versa
*Duration of Bond is less than its term, except for zero coupon bonds
  I)Debt managemnt strategies
  >>Passive Debt Management Style
-Buy and Hold strategy exposing the portfolio to
.Interst rate risk
.Credit risk
>>Active Debt Management Style
-Duration management strategy
.Duration increased/reduced based upon interest rates expectations
-Credit Selection Strategy
  J)Factors affecting Interest Rate Movements
  >>Inflation Rate Changes
>>Exchange Rate Change
>>Monitory policy changes by R.B.I
  K)Using derivatives for debt portfolio management
  >.Debt portfolio risk arising out og interest rate increase can be hedged through interest rate derivatives.
>.Interest rate derivatives are either exchange traded or privately traded in OTC market
>>A debt portfolio manager can sell interest rate futures or buy interest rate put options on an exchange to protect Debt portfolio Value
>>He can also buy and sell Forward Contracts or Swaps bilaterally with other market players in OTC.
  L)Using derivatives for debt portfolio Mnagement
  >>In india interest rate futures are available at OTC since 2004
>>Interest rate options are not introduced in india in the exchange
>>Through June 2003 SEBI has permitted Mutual Funds to trade in Exchange Traded Debt Derivatives
  M)Organisation structure of Debt Fund Management
  >>Interest rate forecasting unit
>.Fund manager
>>Security dealer
  N)Risk management system in a Mutual Fund
  >>SEBI has prescribed gudlines for risk management in A M.F
>>Risk management system covers
-Riska in fund management
-Risk in operations
-Risks in marketing & Distribution
-Other Busainess risk
>>Internal Report on its adeqacy to be placed before AMC & Trustee Board
  PART III: INVESTMENT POLICY AND RESTRICTIONS
  A)Investment policy of a Fund
>>Investment policy of a fund scheme is stated in O.D
>>For equity fund
-seek kind of sectoral allocation & companies to invest
>>For debt fund
-See types of instruments,
-credit rating,
-proposed average maturity,
-minimum & maximum MM instruments percentage
  B)Investment policy of a fund
  >>For Balanced Fund
-see equity & debt proportions
>>For Money Market Fund
-See types of instruments preferred & their rating profile
  C)Regulatory Restrictions on Investments by Funds
  >>Minimum no.of investors in a scheme
-20 & no single investor to hold over 25% of the corpus
>>Minimum portfolio diversification
-Investment in equity of a single company-Max 10% of the NAV(Except index funds, sector funds)
-All non government debt to be mandatorily rated by at least one rating company
>>Investment in rated debt instrument of a company
-Max 15% of net assets
-Max 20% of net assets with approval of Bopard of trustee
  D)Regulatory Restrictions on Investments by Funds
  >>Investment in uinrated/below investment grade securities
-Not exceeding 10% of Net Assets in a single company
-Not exceeding 25% of Net Assets of the fund in all the companies
>>Prior approval of Trustees mandatory for investments in unrated debt instruments
  E)Regulatory Restrictions on Investments by Funds
  >>Investment in unlisted shares of companies
-close ended fund: Not more than 10% of net assets
-Open ended fund: Not more than 5% of net assets
>>Investments in equity shares under all schemes of a MF
-Not more than 10% of paid up capital of a company
>>Investment by a mutual fund in ADRs/GDRs allowed companies having share holding of atleast 10% allowed
>>Overall limit of U.S $ 1Billion for such overseas investment for entire M.F industry
>>Overall limit per M>F
-Not exceeding 10% of Net Assets subject to maximum 50 Million
  F)Regulatory Restrictions on Investments by Funds
  >>A Mutual fund can invest
-maximum 5% of Net assets under all its schemes
-into different fund schemes of the same AMC or of any other AMC except fund scheme
>>The above limit does not apply to Fund of FUnds
>>Securities are to be bought or sold only on delivery basis No short selling allowed
>>Securities to be bought and sold for a relevant scheme.
>>Purchase/Sales cannot be aggregated and allocated later
  G)Regulatory Restrictions on Investments by Funds
  >>MFs can lend securities under the SEBI approved Stock Lending scheme
>>A mutual fund can invest only in Marketable securities
>>A Mutual Fund cannot invest in unlisted securities of Sponsor or Sponsor Group Companies
>>A Mutual Fund can invest in listed securities of the sponsor/sponsor Group companies upto 25% of Net Assets of the Fund
  H)Regulatory Restrictions on Investments by Funds
  >>A mutual fund can transfer securities from one scheme to another scheme at market prices and on spot delivery basis
>>Inter-scheme transfers allowed if objectives of both the schemes are same
>>A mutual fund can park its money in depostis of Scheduled commercial banks pending deployment into regular investments
>>Borrowing by MF's restricted upto 20% of net Assets for maximum 6 months for paying dividend/redeeming units
>>Record of investment decisions to be maintained.
>>A FOF can,t invest in other FOF scheme
>>A liquid fund cannot have mark to market component>10%. Maximum Re pricing tenure 1 year.
 
  Chapter 9
  MEASURING AND EVALUATING MUTUAL FUND PERFORMANCE
  A)Measuring MF Performance
 

>>Major source of return to investors are Dividends aND capital Gains
>>Investor should track the value of his investments in terms of
-Return on such investments
-Decide whether he needs to switch to another fund.

  B)Methods of measuring/Evaluating MF Performance
 

>>Absolute Return Method.
>>Simple Annual Return Method.
>>Total Return Method.
>>Total return method when Dividend is Reinvested.
>>Compounded Annual average rate method(CAGR)
>>Expense Ratio Method.
>>Income Ratio Method
>>Portfolio Turn over Ratio Method.
>>Transaction Cost Method
>>Fund size
>>Cash Holding Percentage

  C)Absolute Return Method
  >>Absoluite returns are returns for a specific period.
>>Absolute returns are calculated for less than 1 year period.
>>If NAV changes from 20 to 22 in 6 months, Absolute return is 2/20*100=10%
  D)Simple Annual Return Method
  >>Simple annual return method computes return as folows

-Lets take the previous example
.Nav changed from 20 to 22 in 6 months period
.Annual return is
((22-20)/20)X(12/6)X100=20%

  E)Total Return Method
  >>Formula for Total return when dividend is received but not reinvested:
[(Dividend distributed+Change in NAV)/Nav at the start ]X100
>>Total return when dividendis not received but reinvested
>>This method is used to calculate return on investments when Dividend are declared and reinvested at ex dividend NAV price.
>>See example as given below for calculating Total Returns
  F)Total Return method when Dividend not reinvested at NAV-An example
  >>Assume Units are purchased when NAV is 20
>>Assume that Dividend of Rs.4/- is didtributed when NAV Ex Dividend is 21
>>Assume NAV at the end of the year is Rs.22/-
>>Simple Total returns for the year will be as under
{[((22-20)+4)/20]X100}=30%
  G)Total return or ROI or CAGR Method
  Compounded Average Annual Return Method
Formual
A=PX(1+R/100)N
P=Principal invested
A=Maturity value
N=Period of Investment in years
R=Annualised compound interest rate in %
R=[(Nth Root of A/P)-1X100
  H)Compounded Average Annual Return Method An Example
  >>Begin NAV-100
>>End NAV-200
>>Period of Investment-10 years
>>Average Annual Compound Return-Is it 10% or lower?
>>200=100X(1+R/100)10
>>Solving for 'R' gives Annualized compound rate of 7.1773 or 7.2%
>>Apply thumb rule of 72
>>SEBI prescribes Average Annual Compound Return Method to be followed for advertising Return for over 1 year period.
  I)Returns in impacted by Loads
  >>The above example assumes a No Load Fund.
>>If there is an Entry Load, You will be allotted lesser number of units since you will pay more than NAV>
>>If there is Exit Load, you will get lesser amount per unit than NAV.
  J)Expense Ratio/Income Ratio
  Method of Fund Evaluation
>>Funds can be evaluated based on Expense ratio and Income ratio.
>>Expense Ratio: It is the ratio of total expenses to Average Net Assets of the fund.
-This ratio is important for evaluating Bond Funds
-Expenses do not include brokerage paid since it is capitalized abd therefore expenses may be understated
>>Income Ratio=Net Investment Income/Net Assets
-Income ratio is important for evaluating Bond Funds
  K)Portfolio Turn Over Rate
  Method of Fund Evaluation
>>Another measure of fund evaluation is portfolio turn over rate
>>Portfolio Turnover Rate=Total sales & purchases/Net Assets of the fund
>>Higher turn over rate indicates
-More churning of portfolio
-More transaction costs
>>Portfolio turn over ratio relevant for actively managed funds
  L)Importants of Bench Marking in Evaluating FUnd Performance
  >>Three methods of evaluating fund performance
-Evaluating fund performance agaist Bench marks
-Evaluating fund performance against other peer group Mutual fund schemes
-Evaluating fund performance against other Financial Products
  M)Fund Evaluation against Benchmarks
  >>Fund performance can be evaluated against some 'performance indicators' called Benchmarks
>>Mutual funds are required by regulations to state the benchmark in the OD against which scheme performance will be compared
>>Investors expect fund performance better than the benchmark
3 types of benchmarks:
.Relative to market as a whole
.Relative to other Mutual Funds
.Relative to other comparable financial products
  N)Benchmarks for Equity Funds
 

Type of Equity Fund

Name of Benchmark

Index Funds

BSE Sensex Index or S&P CNX Nifty Index

Diversified Equity Funds

BSE 100/200 Index for Large portfolio. Otherwise Sensex / Nifty

Sector Funds

Sector Specific Index

  O)Benchmarks for Debt funds & Money market funds
 

Type of Debt

Fund

Name of Benchmark

Gilt Fund

Government Security Index

Debt Fund

Corporate Bond Index

Money Market Fund

Mibor reflecting inter bank call money market interest rates.

  P)Benchmarks for Debt funds & Money market funds
  >>There are various indicies for benchmarking of debt funds
>>I-Bex Index of I-SEC indices for tracking Govt.security performance.
>>CRISIL has 8 Debt Indices for tracking performance of corporate Bond market & money market
>>NSE has Govt.Security Index & Treasury Bill Index
  Q)Benchmarking against other Mutual Funds.
  Peer Group COmparisons:
>>Performance of fund can be compared with similar schemes of other Mutual funds.
>>Critertia for Peer group comparison would be similarity in
Investment objectives and rating profile of portfolios
-Average meturity of debt portfolios
-size of fund(big or small)
>>Higher Exspenses Ratio of a Debt fund hurts long term debt investors
  R)Benchmarking with other Financial Products
  Comparison with other comparable Financial Products
>>Risk Return Relationship to be considered
>>Liquidity factors to be considered
>>Average annualised compound returns to be compared.
  S)Fund Performance Ranking
  >>FUnd performance evaluation & ranking done by CRISIL
>>Fund house rating done by CRISIL
  T)Source for tracking Mutual Fund Performance
  Following sources of information can be used to track performance of Mutual FUnd schems
>>Mutual Funds Annual periodic reports.
>>Mutual funds website.
>>AMFI website
>>Daily Financial New Papers.
>>Fund Tracking Agencies-Credence, Value Reaearch & Lipper India
>>Newsletters from brokers.
>>Offer Document of the Fund
>>Analytical Articles
 
  Chapter 10
  HELPING INVESTORS WITH FINANCIAL PLANNING
  A)What is finanacial planning?
 

>>Financial Planning includes
-Identifying all financial needs of an individual
-Translating the needs into monetary goals at different times in the future
-Planning the financial investments to provide and satisfy future financial needs to achieve goals.

>>Objective of financial planning
-RIght amount of money
-RIght hands
-Right time in future

  B)Need of Professional FInancial Planners
  >>Professional FInanacial Planners are need in case the investor:
-Lacks expertise to do financial planning
-Lacks time to do financial planning
>>Does not know where to start
-Feels there will be an improvement in the present situation
>>Has an immediate need
>>Wants professional opinion on self developed plan
  C)Who is a FInancial Planner?
  >>A financial planner
-Uses the financial planning process
-Help in determining the goals of the investor
-identify
.financial planning needs of the customer
.Present priorities
.products that suit their needs
  D)Advantages of a Distributer becoming a Financial Planner
  >>Strong Potential for such services
-High saving habit
-Low awarness of various investment options
-Complexity of various investments
>>Limited supply of financial planners in India
>>Bebefit of establishing long-term relationships with clients
>>Benefit of building a profitable business
  E)What makes a good FInancial Planner?
  >>Building Trust
>>Good Knowledge of FInancial products/options
>>Familarity with Taxation & Estate planning issues
>>understanding of various Life stages in a client's life
>>Independent judgement and balanced thinking
>>Organised way of working
>>Regular contact with clients
>>Clear focus on the overall financial well-being of client
  F)Roles of Each Participant
 
  G)Basic terms used in FInancial Planning
  >>Financial Planning: Advising clients how to achieve their financial goals
>>FInancial goals and objectives: Needs of clients which have a monetary aspect
>>Asset Allocation: Allocation of client's investment across various asset classes
>>Risk Tolerence: Extent of loss a client can toleraate, phychologically and financially and for how long they can withstand such declines in value.
  H)Basic terms used in Financial Planning
  >>Financial Plan: Document that details clearly in writing
-financial goals
-available resources
-time frame for investment
-asset allocation
-specific investment
-asset allocation
specific investments
-clear action plan towards implementation
>>Portfolio Rebalancing: Process of making changes to asset allocation and specific investment strategy stays consistant
  I)Financial Planning Process
 

  J)Steps in Financial Planning Process
  1.Establishing & defining relationship with client
2.Defining clients goals
3.Assessing current resources in future Income potential of the client
4.Determining & Shaping the risk tolerence level of the client
5.Acerting Tax sitiation of the client
6.Recommending appropriate asset allocation & specific investment
7.Executing the plan & making the client invest
8.Reveal the progress & portfolio rebalancing
  K)Common mistakes in Financial Planning(FP)
  >>"Measurable financial goals" are not set
>>Financial decisions made in isolation
>>FP is confused with investing
>>Financial plans are not re-evaluated periodically
>>Considered relevant only for wealthy
>>FP required only when clients get older
>>Only after a crisis FP is started
>>Expectation of unrealistic returns on investments
>>Belief of loss of control when FInancial Planner
>>FP is primarly tax planning
  L)Key Issues in Financial Planning
  >>A financial planner should make the client understand the following key issue:
-To set Measurable FInancial GOals
-To understand the Effect of each finanacial goals
-To re-evaluate Financial Situation Periodically
-To start planning as soon as possible
-To be realistic in Expectations

-To realize that the "Client is in charge"
  M)Life Cycle Stages of an Individual
  >>Childhood stage
>>Young Unmarried Stage
>>Young Married stage
>>Young married with children stage
>>Married with older children stage
>>Post-family/Pre-retirement stage
>>Retirement stage
  N)Life Cycle Stages
 

  O)Constraints to financial planning
  >>Insufficient investible resources
>>Dearth of financial planning products
>>Time factor and risk factor of investments:
-Time is important to benefit from the power of compounding by starting early
-Basic principle of investing is 'Greater the Risk, Greater the Reward'
>>Assumptions of life cycle needs
  P)Financial Planning & Mutual Funds
  >>Individuals have 2types of needs
-Protection Needs
-Investment Needs
>>For protection needs,
-Pure Risk Plan of a life insurance company is the recommended option.
>>For investment needs,
-Mutual Fund schemes are the recommended options
>>Unit linked insurance is a new option satisfying both protection & investment needs.
  Q)Wealth Cycle Stages of Investors
  >>Another method of classifying investor is wealth cycle stage(as against life cycle stage)
>>There are 3 wealth cycle stages for Investors
-Accumulation stage: Choose Equity Funds
-Transition Stage: Choose balanced funds
-Reaping stage: Choose Debt Funds
>Integrational transfer stage refers to transfering wealth.
Investment avenue will be linked with llife cycle stage of the beneficiary
>The sudden wealth stage refers to winning lotteries. Park in MF funds
  R)Categories of Affluent Investors
  >>Affluent investors do not need financial planning for life goals. They can classified into 2 categories
>>Wealth-Creating Affluent Investors
-Build further wealth
-Willing to take a risk of Equity Investments to make net worth grow
>>Wealth-Preserving Affluent Investors
-Preserving the created wealth
-Risk averse, prefer to invest in Debt funds
 
  Chapter 11
  RECOMMENDING FINANCIAL PLANNING STRATEGIES TO INVESTORS
  a)INvestment strategies for Investors
 

>>Start planning & investing early and regularly.Use SIP
>>Invest for long term
>>Have realistic expectation of returns on Investments
>>Harness the power of componding by choosing Growth option.
>>Choose an investment strategy to maximise returns on investments
-'Buy and hold strategy'
.can be adopted for good mutual fund schemes but not for individual stocks
-Rupee cost averaging strategy for investment.
-Value averaging strategy for investment

  B)Rupee Cost averaging strategy of investment
  >>Rupee cost averaging (RCA) involves the following
-A fixed amount is invested at regular intervals
-More units are bought when NAV is low
-Fewer units are bought when NAV is high
-Over a period, average purchase price per unit is lower than average NAV
-This strategy does not tell you when to sell and switch
-Investor use SIP to implement RCA
  C)Value Averaging Strategy
  >>Value averaging strategy is superior to RCA
>>In enables you to book profits and rebalace portfolios
>>Investors can use SWP to implement value averaging strategy
>>Investors can use MM Funds and equity funds to implement value averaging strategy
  D)Asset Allocation Principles
  >>Asset Allocation is basic tool to translate financial plans into action.
>>Asset allocation is determining the percentages of investments to be held in Equities, Bonds and Money market instruments
>>Over 95% of returns on managed portfolio come from the right level of Asset Allocation amongst stock, bonds &cash
>>Asset allocation differes for investors depending upon
-their personal situation,
-financial goals and
-risk appetite
  E)Model Portfolio for investors Benjamin Graham's 50/50 Balance Strategy for Asset Allocation
  >>50/50 split between Equities and Bonds-
-A common sense approach
-Conservat9ive investment approach
-When value of equaity goes up, balance restored by liquidating part of equaity portfolio or vice versa
-GOod to get half the returns of a rising market and avoid the full losses of a failing market.
  F)Model portfolio for Investors Suggested by Bogle
  Bogle suggests the folowing saombinations:
1.A basic managed portfolio
-50% in diversified equity &'value' funds.
-25% in a Govt.securities funds.
-25%in High grade corp[orate bond funds.
2.A basic Indexed Portfolio
-50% in total stock market index fund
-50% in total Bond market portfolio
3.A simple managed portfolio
-85% in a balanced 60/40 fund.
-15% in medium term bond Fund
  G)Model portfolio for investors suggested by Bogle
  4.A complex Managed Portfolio
-20% in diversified equity fund.
-20% in aggressive growth funds
-10% in specified funds
-30% in Long Term Bond FUnds
-20% in short term bind funds
5.A Readymade Portfolio
-single index fund with 60/40 equity/bond holdings
Bogle's rule of thumb for asset allocation
-Single portion of an investor's portfolio to be equal to his age.
-30 year old investor-70/30(Equity/Debt allocation)
  H)Bogle's Strategic asset allocation strategy for investors
  >>Bogle recommends the following factors to be considered in strategic asset allocation strategy for investors:
-Age
-Financial Cirmustances
-Objectives
Equity/Debt
FOr younger investor in accumulation phase 80/20
For older investors in Accumulation phase 70/30
For yonger investors in Distribution phase 60/40
FOr older investors in Distribution phase 50/50
  I)Fixed v/s FLexible Asset Allocation Strategy
  >>Asset Allocation percentages can be on fixed or flexible basis
>>FIxed ratio of asset allocation:
-Balance maintained by liquidating a part of the position in the asset class with higher return and
-reinvesting in the other assets with lower returns
>>FLexible ratio of asset allocation:
-Not doing any rebalancing and
-letting the profits run
>>Fixed ratio approach works better in bull markets
  Tactical Asset Allocation Stretegy
  >>Change in Asset allocation percentages based on fund manager's views on the future movemnts in asset prices
>>May invest more in shares of small comapnies than large companies.
>>May change the equity debt mix where they expect greater returns.
 
  Chapter 12
  SELECTING THE RIGHT INVESTMENT PRODUCTS FOR INVESTORS
 

A)Asset Types- physical & financial assets

  >>Physical assets
-real estate
-GOld
>>FInancial assets
-Bank deposits-Bond/Debentures
-Company deposits-commercial papers
-NSC,KVP,PPF-Certificate of deposits
-RBI releif bonds-LIfe insurance policies
-Equity/preference shares-Mutual funds
  B)Guaranteed and non-guaranteed investments
  >>Guaranteed investments: Capital protection and interest rates are guranteed by the borrower
-Bank deposits
-GOvernment savings instruments: capital protection and interest rates are NOT guranteed
-Mutual Funds
-Equity Investments
  C)Physical Assets
  >>Individuas can invest in physical assets e.g GOld & Real Estate
>>GOvt. has permitted issue of GOld Bonds by Banks
>>GOld Bonds represent securitisation of gold where they earn some returns and avoid risks associated with storage of gold
>>Investors are likely to be allowed to invest in gold linked unit schemes
>>Real Estate M.F are also in the offing which will offer the investors the twin benefits of
-Real Estate Investing &
-Mutual Fund Investing
  D)Financial Products & Issues
 

ISSUER

PRODUCT

AVAILABLE TO

Banks

Fixed Deposits

Investors, MFs

Corporates

Shares

Investors, MFs

 

Bonds, Debentures

Investors, MFs

 

Fixed Deposits

Investors, MFs

Government

Govt. Securities

Investors, MFs

 

PPF

Investor

FIs

Bonds

Investors, MFs

Insurance Cos .

Insurance Policies

Investor

  E)Evaluating Financial Products
 

 

PRODUCT

SAFETY/CONVIN ENCE

LIQUIDITY

RETURN

VOLATILITY

Equity

Low

High/Low

High-Mod.

High

FI Bonds

High

Moderate

Mod.-High

Moderate

Debentures

Moderate

Low

Mod.-Low

Moderate

Corp. FD

Low

Low

Moderate

Low

Bank Dep.

High

High

Low-High

Low

PPF

High

Moderate

Moderate

Low

Life Ins.

High

Low

Low-Mod

Low

Gold

High

Moderate

Mod.-Low

Moderate

Real Estate

Moderate

Low

High-Low

High

MF

High

High

High

Moderate

  F)Why MF is the Best Option?
  >>MF companies the advantage of each of the investment product choices
>>It reduces the short comings of other options
>>Returns in mutual funds get adjusted for market changes/movements
  G)Investing through MF's Vs Direct Equity Investment
  >>Identifying stocks without detailed research is difficult in direct equity investment
>>Diversification easily achieved in MF
>>Professional management employed in MF
>>Investment activities based on investment objective in MF's.
>>MFs can offer more liquidity
>>Transactions costs are lower for MFs.
>>More convienience in mutual funds
  H)Investor's prespectives: MF's v/s. Other Products
 

Product

INVESTMENT OBJECTIVE

RISK TOLERANCE

TIME HORIZON

Equity

Capital Appr.

High

Long Term

FI Bonds

Income

Low

Med-Long

Debentures

Income

Income

Med-Long

Comp. FD

Income

Income

Medium

Bank Deposits

Income

Low

Flex-All Terms

PPF

Income

Low

Long

Life Insurance

Risk Cover

Low

Long

Gold

Inflation Hedge

Low

Long

Real Estate

Inflation Hedge

Low

Long

Mutual Funds

Cap. Gwt, Inc.

H-M-Low

Flex-All Terms

 
  Chapter 13
  HELPING INVESTORS UNDERSTAND RISKS IN FUND INVESTING
  A)Classification of Investors
 

>>RIsk Tolerence Levels of Investors
-Low Risk TOlerence
-Moderate Risk TOlerence
-High RIsk TOlerence

  B)Classifiacation of FUnds Based on RIsk Levels
 
fig
  C)Jacob's Recommendations for Portfolio Allocation Within Each Category
  Low risk(Conservative)Portfolio:
-50%-GIft FUnd+50% Money Market FUnd
Moderate RIsk(Vautiously Aggressive)Portfolio:
-40%-Growth and Income Funds
30%-Gilt FUnds
-20%-Growth Funds
-10%-Index Funds
High Risk(Aggressive)Portfolio:
-25%-Aggressive Growth FUnds
-25%-International FUnds
-25%-Sector Funds
-15%-High Yield Funds
-10%-Gold Funds
  D)Riska in Mutual Fund Investing
  >>Risk in a generic sense means the possibility of financial loss
>>In the investment world possibility of financial loss arises from variability of earnings from time to time.
>>A fund with stable' positive earnings is less riskly
-than a fund with fluctating total return.
>>Risk is thus eqated with volatility of earnings- a statistically measurable concept.
  E)Risks in Equity Funds
  >>Volatility of earnings of an equity fund comes from
-Kinds of stocks
-Degree of diversification
-Fund manager's success at market timings
>>Equity funds are exposed to equity price risks araising out of
-company specific Risk
-Sector Specific Risk
-Market Level RIsk
>>Market Level Risk
-Not diversifiable, not controllable because of changes due to broad economic, political and other factors.
-Can be controlled to some extent through Equity Index Fund or Futures and Optioins
  F)Risk Measures of an Equity Fund
  >>Beta Co-efficient Measure of Risk
>>EX Marks or 'R Squared' Measure of Risk
>>Standard Deviation Measure of Risk
  G)RIsk Measures
  >>Beta Coefficient Measure of RIsk:
-Beta relates a fund's return with a market index.
-Measures the sensitivity of the FUnd's returns to changes in the Market Index.
-Beta of 1- FUnd moves with the market
i.e.Passive Fund
-Beta of less than 1-Fund less volatile than the market i.e. Defensive FUnd.
-Beta of More than 1-HigherBeta-greater returns in rising markets and higher losses in falling markets i.e.Aggressive Fund.
  H)Risk Measures
  >>Ex-Marks or 'R-squared' Measure of RIsk
-Ex-Marks represents co relation with markets
-Higher the Ex-Marks, lower the risk of the FUnd
-A fund with higher Ex-marks is better diversified than a FUnd with a lower Ex-Mark
>>STANDARD DEVIATION MEASURE OF RISK
-A statistical concept, which measures volatility.
-Measures the fluctuations of Fund's returns around a mean level.
-Basically gives you an idea of how volatile your earnings are
-Broader concept than Beta.
-Measures total risk and just the market risk of the portfolio.
  I)RIsk Adjusted Performance Measures
  >>Risk and Returns have co-relation.
>>Risk adjusted Return is measured by using Sharpe Ratio or Treynor Ratio
SHARPE RATIO = Risk Premium/Fund's Standard Deviation
TREYNOR RATIO = Risk Premium/Fund's Beta

>>Risk Premium
-Difference between the fund's average return and risk free return on Government securities or Treasury Bills over a given period
>>PRICE EARNING MULTIPLES
-Higher the fund's P/E, Higher the probability of its fall in fund values in future.
  J)Risk Measurement of Debt Funds
  >>Beta or P/E ratio not relevant to Debt Funds.
>>Debt FUnds exposed to RIsk of loss through
-Default(Non Performing Assets)and
-Interest Rate changes
>>Look at the credit quality of the fund
-Higher the rating safer the FUnd
>>Longer the average maturity(duration) of a debt portfolio
-greater the loss if interest rates go up.
 
  Chapter 14
  A)RECOMMENDING MODEL PORTFOLIOS AND SELECTING THE RIGHT FUND
  Jacob's Four Steps to Develop a MOdel Portfolio for a Client
  1. Work with investor to develop long term goals.
2. Determine the Asset Allocation of the Investment Portfolio.
3. Determine the Sector Distribution.
4. Select the specific FUnd Manager and their schemes.
  B)Model Portfolios for Client's recommended by Jacob
  >>For Young Unmarrie Professional-
-50% in Aggressive Equity Funds
-25% in High Yield Bond Funds and Growth & Income Funds
-25% in Conservative Money Market Funds
>>For Young Couple with 2 incomes & 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
  C)Model portfolios for Client's recommended by Jacobs
  >>For older Couple, Single Income
-30% in short term municipal funds
-35% in long term municipal funds
-25% in moderately aggressive equity funds
-10% in emerging growth equity funds.
>>FOr Recently Retired Couple
-35% in conservative equity funds for capital preservation.
25% in moderately agressive equity for modest capital growth.
-40% in money market funds
.
  D)Jacob's model portfolio for Investor
  >>Investors in Accumulation Phase:

Asset Class

Allocation %

Diversified Equity & Balanced Funds

15 to 30

Income Funds

65 to 80

Cash Funds

55

  E)Jacob's Model Portfolio for Investors
  >>Investors in Transaction Phase:
-Mid-forties when children are approaching the age of higher educaTION OR MARRIAGE.
-Some of your equity investment into Income and cash funds
.to prepare for these financial commitments
  F)Jacob's Model Portfolio for Investors
  >>Investors in Distribution or Repairing Phase:
fig
  G)Model portfolio for indian investors based on Mutual funds available in India
  >>Investors in Intergenerational Transfer Phase:
Young Investor upto age 50 years
-Life Insurance policy
- to take care of next generation in the event of death.
Older Investor
-FOr grown uo children
.Balanced combination of Income & growth funds.
-For grand children
.Growth funds
-For charitable Institutions
.Income funds to provide current income.
  H)Model Portfolio for Indian Investors Based on Mututal FUnds available in India
  >>Investors in sudden wealth stage:
-Keep money in Liquid Funds
-Take time to decide what to do with the money.
>>Affluent Investors:
-wealth creating individuals-70% to 80% in diversified equity and sector funds.
-wealth preserving individuals-70% to 80% in Income, Gilt & Liquid Funds
  I)Equity fund selection for a client
  .Select specific fund/schemes for inclusion in the portfolio.
Boggle approach:
>>Selecting Equity Funds
-Classify the available equity schemes into Growth, value, equity income, broad based specially etc.
-Either select main stream growth or value fund or specialty fund where risk and return vary from market.
-Evaluate past returns records of available funds
  J)Equity fund selection for a client
  >>Review salient features of a scheme
-fund size
-fund age
-portfolio manager's experience
-cost of investing
-portfolio characteristic(cash position, portfolio concentration, market capitalization)
-Portfolio Turnover
-Portfolio Statistics
-ExMarks, Beta, Gross DIvidend Yield
  K)Debt fund selection for a client
  selecting Debt funds
>>Narrow down the choice
.Know your investor-Long Term Bond Funds
-For Retired Investors-Monthly Income Funds
  L)Debt fund selection for a client
  >>Determine the right selection criteria
-Fund age
-fund size
-relative yields
relative costs
-portfolio characteristics
-average maturity
-Tax implication
-Bonds Vs Bond FUnd
-Post return and
-Expense performance
  M)Selecting MM/Balance Funds for a Client
  .Selecting Money Market Funds
-Costs, Quality, Yields
.Selecting Balance Funds
-Rarely-50/50,
-Equity oriented balanced funds or Income oriented balanced funds.
-Selection Criteria:(Portfolio balances, Debt portfolio characteristics, costs, portfolio statistics, returns)
 
  Chapter 15
  Business Ethics for Mutual Funds
 

A)What is meant by Business Ethics?

  >>Business Ethics means rules of a acceptable & good conduct
>>Every person engaged in any business must comply with a set of rules of good conduct
>>RUles may be sent by those who own and manage business or by agencies regulating such business
>>In addition to laws, rules of ethics are aadopted by the business practitioners themselves
>>Ethics go beyond the laws
>>Laws are enforced by regulator, ethical codes are self enforced.
  B)What is the need for Business Ethics?
  >>The need for Business Ethics from the need to protect the consumer
>>Ethical practices means practices in the interest of the consumer of a product or user of a service.
>>A consumer who feels cheated once will not buy the product again.
>>Mutual funds and their sales person are required to adopt ethical and good business practices
  C)What is the need for Business Ethics?
  >>Consumer of goods and services expect the goods and services meets the promises.
>>A sales person is expected to know the product throughly
>>Not promising more than what the product gives is an ethical business practice.
>>AMFI's code sets a common set of rules for all the funds
  D)Objectives of Business Ethics
  >>One major objective of business ethic is being honest, open and transparent with your potential clients.
>>Another objective of business ethics is to protect the consumer of goods & services from being cheated or exploited
>>In mutual fund industry the product is described in detail in the offer Document.
>>AMFI sets rules of good conduct by fund distributors
  E)Some key terms for business ethics
  >>Fair business practices ensure that business is conducted both in the interest of the seller and consumer/investor
>>Ethical standards are bench mark set for acceptable level of performance
>>Ethical Norms or Guidelines: These norms may be voluntary or compulsory
>>A code of conduct: It is voluntary adopted set of good conduct, acceptable to the business partcipants, the regulators & SRO's
  F)Some key terms of business ethics
  >>Ethical business practice: They ensure with the cmpliance with rules & code of good conduct
>>Conflict of INterest:
>>In mutual fund there are situations where the interest of the investor runs counter to the interest of the agent.
  G)Business ethics & mutual fund regulations in India
  >>The main role of SEBI is to protect the interest of the investors.
>>SEBI encourages develpment of ethical standards among the Mutual Fund
>>SEBI guidelines require mutual funds and AMFI to develop code of conduct for
-Distributors
-FUnd Managers
-All employees
-Associate persons
  H)Business ethics & mutual fund regulations in India
  >>SEBI also lays down its own rule of ethics for certain matters incorporated in the Mutual FUnd regulations
>>SEBI mndates that all activities are done in the best interest of the regulators and it monitor 3 areas
-Fund structure and governance
-Exercise of voting right's by funds
-Fu nd operations
>>The mutual fund structure in India is
-a 3 tier structure
-with sponsor, trustees & AMC as independent bodies
  I)Business ethics & mutual fund regulations in India
  >>AMC's are supervised by independent Trustees
-who have fiduciary responsibility towards the investors
>>There is a seperation of functions,
-AMC charged with investment of funds and they don't hold asset of the fund
-The trust holds investment assets in fiduciary capacity since benefical owners are investors.
-Trustees actually don't hold the trusts assets investment asset are held by the custodians,
>>By seperating ownersahip, managment & custody of assets fraudulent use of assets is prevented.
  J)Business ethics & mutual fund regulations in India
  >>Board of tustees have at least 2/3rd indipendent directors
-thus ensuring independence of organisation
>>AMC board has at least 50% independant directors
-thus reducing the influence of the promoter.
>>The mutual funds have to excercise voting rights in the companies
-in the interest of fund investors and
-not in the interest of fund managers or promoters or employees
>>It is an ethical but not a legal requirement
  K)Business ethics & mutual fund regulations in India
  >>SEBI expects day to day fund operations to be free inethical business practives.
-Insider trading regulations
-No proferential treatment to selected investors
-control over personal trading by Fund Managers and employees
-Uniform cut off time for accepting subscription application & for determining applicability of uniform NAVs to all customers
-Personal trades to be disclosed by the fund managers and the Directors
  L)Business ethics & mutual fund regulations in India
  -All forms of advertisements to be as per SEBI regulations. To ensure that they don't mislead the investors
-regulations require the trustees of the mutual fund to certify that the persons of the AMC do not indulge in Front running or self dealing
-There are regulations on Fund advertisements
-SEBI has made it mandatory for the AMC to appoint a compliance officer to ensure implementation of laws and mutual fund regulation & voluntary code of conduct.
  M)Business Ethics & Mutual FUnd Regulations in India
  >>SEBI requires distributors to follow a code of conduct
>>AMFI has put in place amore detailed code of conduct called AGNI
>>Mutual funds have to report any violation of all these regulations
  N)Business ethics & mutual fund regulations in U.S
  >>The U.S regulator(Security Exchanges COmmission) require at least 75% of the funds board to be independent directors including the Chaireman.
>>Independant directories are required meet seperately every quarter and make self assessment of their effectiveness
>>SEC requires registred investment meet advisors to adopt and enforce codes of ethics applicable to their supervised persons, including personal trading
>>Supervised persons have to acknowledge in writing receipt of copy of the code of ethics
  O)Business ethics & mutual fund regulations in U.S
  >>An advisor's code will require the advisor's supervised persons to comply with applicable Federal Securities Laws.
-There is requirement of reporting of personal securities holding & transactions in Mutual funds advised by the advisor.
-The code requires acess persons to pre clear any personal investments in IPOs
-Prevention if DIsclosure of material non public information about the advisors buy and sell recemmendations.
-Reporting of code violations to the compliance officer
  P)Business ethics & mutual fund regulations in U.S
  >>The law requires intutional investors to invest as a prident Man would invest.
>>The Mutual fund managers have also to follow'Prudent Man Approach'&'Responsibile Investing approach' even though there is no law.
>>Responsible Investing means
-Ethical criteria may preclude investing in companies manufacturing cigarettes or alcohol
-Voting in share holders meeting in the interest of the investors.
-Community investing to help the under privilages communities

  Q)Business ethics & mutual fund regulations in U.S
  >>New Regulations & Fair Business Practices require
-AMCs to avoid making special payments to distributors and brokers
-Uniform cut off time for all funds for NAV calculatiions

   

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