NISM VA Training Module

ABSLMF – NISM
Certification Examination
DD-MM-YY
Training
Aditya Birla Sun Life AMC Ltd. 1

About the Examination
The examination seeks to create a common minimum knowledge benchmark for all
persons involved in selling and distributing mutual funds including:
– Individual Mutual Fund Distributors
– Employees of organizations engaged in sales and distribution of Mutual Funds
– Employees of Asset Management Companies specially persons engaged in sales and distribution
of Mutual Funds
Source for entire PowerPoint Presentation :

Workbook for NISM-Series-V-A: Mutual Fund Distributors Certification Examination

Assessment Structure
• The examination consists of 100 questions of 1 mark each and should be

completed in 2 hours.
• The passing score on the examination is 50%.
• There shall be no negative marking.
• Examination Structure
– The exam covers knowledge competencies related to the basics of mutual funds and
how mutual fund schemes are to be evaluated, and suitable mutual fund products and
services offered to investors and prospective investors.
• How to register and take the examination
– To find out more and register for the examination please visit www.nism.ac.in

Table of Contents
1. Concept & Role of a Mutual Fund(6) 3. Legal & Regulatory Environment (10)
1.1 Introduction 3.1 Role of Regulators in India
1.2 Types of Funds 3.2 Investment Restrictions for Schemes
1.3 Key Developments over the Years 3.3 Investors’ Rights & Obligations
3.4 Can a Mutual Fund Scheme go bust?
3.5 Appendix 1: AMFI Code of Ethics
2. Fund Structure & Constituents (4) 3.6 Appendix 2: Code of Conduct for Intermediaries
2.1 Legal Structure of Mutual Funds in India 4. Offer Document (6)
2.2 Key Constituents of a Mutual Fund 4.1 Offer Document - NFO, SID, SAI
2.3 Other Service Providers 4.2 Key Information Memorandum
4.3 Appendix 3: Format of Scheme Information Document
4.4 Appendix 4: Format of Key Information Memorandum

Table of Contents
5. Fund Distribution & Channel Management Practices 7. Investor Services (12)

(8) 7.1 Mutual Fund Investors
5.1 Distribution Channels 7.2 KYC Requirements for Mutual Fund Investors
5.2 Channel Management Practices 7.3 PAN Requirements for Micro-SIPs
7.4 Additional Documentation Requirements
applicable for Institutional Investors
6. Accounting, Valuation & Taxation (10) 7.5 Demat Account
6.1 Accounting and Expenses 7.6 Transactions with Mutual Funds
6.2 Valuation 7.7 Transactions through the Stock Exchange
6.3 Taxation 7.8 Investment Plans and Services
7.9 Appendix 5: KYC Form for Individuals
7.10 Appendix 6: KYC Form for Non-Individuals

Table of Contents
8 Return, Risk & Performance of Funds(10) . 9 Scheme Selection (10)

8.1 Drivers of Returns in a Scheme 9.1How to choose between Scheme Categories?
9.2 How to select a Scheme within a Scheme
8.2 Measures of Returns
Category?
8.3 Drivers of Risk in a Scheme 9.3 Which is the Better Option within a Scheme?
8.4 Measures of Risk 9.4 Sources of Data to track Mutual Fund
8.5 Benchmarks and Performance Performance
8.6 Quantitative Measures of Fund Manager

Performance

Table of Contents
10 Selecting the Right Investment Products for 11 Helping Investors with Financial Planning(7)
Investors (9) 11.1 Introduction to Financial Planning
10.1 Financial and Physical Assets 11.2 Alternate Financial Planning Approaches
10.2 Gold – Physical or Financial? 11.3 Life Cycle and Wealth Cycle in Financial
10.3 Real Estate – Physical or Financial? Planning
10.4 Fixed Deposit or Debt Scheme 12 Recommending Model Portfolios & Financial
10.5 New Pension Scheme Plans (8)
10.6 Other Financial Products 12.1 Risk Profiling
12.2 Asset Allocation
12.3 Model Portfolios

Chapter 1: Concept and Role of a Mutual
Fund

Introduction
• Concept of Mutual Fund
Mutual funds are a vehicle to mobilize moneys from
investors, to invest in different markets and securities, in line
with the investment objectives agreed upon, between the
mutual fund and the investors.
• Role of Mutual Funds

Their primary role is to assist investors in earning an income
or building their wealth, by participating in the opportunities
available in various securities and markets.
Introduction
• Role of Mutual Funds

– It is possible for mutual funds to structure a scheme for any kind of investment
objective.
– The money that is raised from investors, ultimately benefits
governments, companies or other entities, directly or indirectly
– The mutual funds can keep a check on the operations of the investee company, and their
corporate governance and ethical standards.
– Overall economic development is promoted.
– Offers livelihood to a large number of employees of mutual funds, distributors, registrars
and various other service providers.
– Mutual funds are therefore viewed as a key participant in the
capital market of any economy.

Introduction
Why Mutual Fund Schemes?

• Various investors have different investment preferences. In
order to accommodate these preferences, mutual funds mobilize
different pools of money. Each such pool of money is called a
mutual fund scheme.
• Every scheme has a pre-announced investment objective. When
investors invest in a mutual fund scheme, they are effectively
buying into its investment objective.

Introduction
• The scheme earns interest income or dividend income on the
investments it holds.
• Further, when it purchases and sells investments, it earns capital
gains or incurs capital losses. These are called realized capital
gains or realized capital losses as the case may be.
• Investments owned by the scheme may be quoted in the market at
higher/lower than the cost paid. These are known as valuation
gains/losses.
• Operating Expenses.

Introduction
• How do Mutual Fund Schemes Operate?

– Mutual fund schemes announce their investment objective and seek investments
from the public.
– Depending on how the scheme is structured, it may be open to accept money
from investors, either during a limited period only, or at any time.
– An investor in a scheme is issued units of the scheme.
– Every unit has a face value of Rs10.
– The number of units multiplied by its face value (Rs10) is the capital of the
scheme – Scheme’s Unit Capital.

Introduction
• Investments can be said to have been handled profitably, if the following profitability
metric is positive:
– (A) Interest income
– (B) + Dividend income
– (C) + Realized capital gains
– (D) + Valuation gains
– (E) – Realized capital losses
– (F) – Valuation losses
– (G) – Scheme expenses
• The true worth of a unit of the scheme is otherwise called Net Asset Value (NAV) of
the scheme.
Introduction
• When a scheme is first made available for investment, it is called a ‘New Fund Offer’
(NFO).
• During the NFO, investors may have the chance of buying the units at their face
value.
• Post-NFO, when they buy into a scheme, they need to pay a price that is linked to its
NAV.
• Profits or losses, as the case might be, belong to the investors.
• The investor does not however bear a loss higher than the amount invested by
him.
Introduction
• The relative size of mutual fund companies is assessed by their assets under
management (AUM).
• When a scheme is first launched, assets under management would be the amount
mobilized from investors. (Example: 100 crores)
• Thereafter, if the scheme has a positive profitability metric, its AUM goes up (110
crores); a negative profitability metric will pull it down (90 crores)
• AUM can go up because of inflows (sales) or come down because of outflows

(repurchase/payment of dividend)

Introduction
• Advantages of Mutual Funds for Investors

– Professional Management
• investing in line with the investment objective
• investing based on adequate research, and ensuring that prudent investment processes
are followed.
– Portfolio Diversification
– Economies of Scale
– Liquidity
• Depending on the structure of the mutual fund scheme, this would be possible, either at any
time, or during specific intervals, or only on closure of the scheme.
• Schemes where the money can be recovered from the mutual fund only on closure of the
scheme, are listed in a stock exchange.

Introduction
• Advantages of Mutual Funds for Investors

– Tax Deferral
– Tax benefits
• Dividends from certain categories of schemes are subject to DDT
• 80c-150000, RGESS-50000 -3F YRS- 50%, 12 LACS
– Convenient Options
• Withdrawing part of the money,additional amount of investment.(SIP,STP etc)
– Investment Comfort
– Regulatory Comfort

Introduction
• Systematic approach to investments:

– STP,SIP and SWP.
– SWP allow the investor to structure a regular cash flow from the investment account

Introduction
• Types of Funds
– Open Ended
• Unit Capital Changes
• Sale and Repurchase at NAV
Entry load abolished from 01.Aug.2009.
Prior to that purchase transactions happened at a price linked to NAV.
– Close Ended
• Unit capital does not change
• Listed in stock exchange
• Can be bought during NFO only

Introduction
• Limitations of a Mutual Fund

– Lack of portfolio customization
– Choice overload
• Over 2000 mutual fund schemes offered by 47 mutual funds
– No control over Costs

Introduction
• Interval Funds
Combination of Open Ended and Close Ended.
– Minimum duration of an interval period in an interval scheme/plan is 15 days.
– No redemption/repurchase of units are allowed except during the specified
transaction period (the period during which both subscription and redemption
may be made to and from the scheme).
– The specified transaction period will be of minimum 2 working days, as per
revised SEBI Regulations.
– Between these intervals the Units have to be compulsorily listed on stock
exchange.
– Difference between interval period and transaction period.

Introduction
• Actively Managed Funds and Passive Funds
• Actively managed funds
– Fund manager has the flexibility to choose the investment portfolio
– Expenses for running the fund turn out to be higher
– Investors expect actively managed funds to perform better than the market.
• Passive funds
– Invest on the basis of a specified index, whose performance it seeks to track.
– The proportion of each share in the scheme’s portfolio would also be the same as the
weightage assigned to the share in the computation of the BSE Sensex.
– The fund manager has no role in deciding on investments. Therefore, these schemes
have low running costs.
– The performance of these funds tends to mirror the concerned index.

Introduction
Debt, Equity and Hybrid Funds

• Equity Funds
– Investment objective to invest largely in equity shares and equity-related investments
like convertible debentures.
• Debt Funds
– Investment objective that limits them to investments in debt securities like Treasury
Bills, GovernmentSecurities, Bonds and Debentures
• Hybrid Funds
– Investment charter that provides for a reasonable level of investment in both debt and
equity.
– There are funds that also invest in Gold along with either equity, or debt or both.

Introduction
Types of Debt Funds

– Gilt funds
Invest in only treasury bills and government securities, which do not have a
credit risk
– Diversified debt funds
On the other hand, invest in a mix of government and non-government debt
securities.
– Junk bond schemes
Or high yield bond schemes invest in companies that are of poor credit
quality.

Introduction
• Types of Debt Funds

– Fixed maturity plans
• are a kind of debt fund where the investment portfolio is closely aligned to the
maturity of the scheme.
• gives more clarity to investors on the likely returns if they stay invested in the
scheme until its maturity.
• This helps them compare the returns with alternative investments like bank
deposits.

Introduction

– Floating rate funds
• Invest largely in floating rate debt securities i.e. debt securities where the
interest rate payable by the issuer changes in line with the market.
• For example:
– A debt security where interest payable is described as ‘5-year Government
Security yield plus 1%’, will pay interest rate of 7%, when the 5-year
Government Security yield is 6%;
– If 5-year Government Security yield goes down to 3%, then only 4%
interest will be payable on that debt security.
– The NAVs of such schemes fluctuate lesser than debt funds that invest
more in debt securities offering a fixed rate of interest.
Introduction
– Liquid schemes
• or money market schemes are a variant of debt schemes that invest only in
debt securities where the moneys will be repaid within 91-days.
• lowest in risk among all kinds of mutual fund schemes.
• MTM for >60 days

Introduction
• Types of Equity Funds
– Diversified equity fund

• Is a category of funds that invest in a diverse mix of securities that cut across
sectors
– Sector funds
• However invest in only a specific sector.
• For example, a banking sector fund will invest in only shares of banking
companies.
• Gold sector fund will invest in only shares of gold-related companies.

Introduction

– Thematic funds
• Invest in line with an investment theme.
• The investment is thus more broad-based than a sector fund; but narrower than
a diversified equity fund.
• An infrastructure thematic fund might invest in shares of companies that are
into infrastructure construction, infrastructure toll-collection, cement, steel,
telecom, power etc.

Introduction
– Equity Linked Savings Schemes (ELSS),

• As seen earlier, offer tax benefits to investors. However, the investment is
subject to lock-in period of 3years.
– Equity Income / Dividend Yield Schemes

• Invest in securities whose shares fluctuate less, and therefore, dividend
represents a larger proportion of the returns on those shares.
• The NAV of such equity schemes are expected to fluctuate lesser than other
categories of equity schemes.

Introduction

– Arbitrage Funds
• take contrary positions in different markets /securities, such that the risk is
neutralized, but a return is earned.
• Most arbitrage funds take contrary positions between the equity market and
the futures and options market.
• ‘Futures’ and ‘Options’ are commonly referred to as derivatives.
• Although these schemes invest in equity markets, the expected returns are in
line with liquid funds.

Introduction
Type Of Equity Funds:
1. Rajiv Gandhi Equity Savings Schemes (RGESS) too, as seen earlier, offer tax
benefits to first-time investors. Investments are subject to a fixed lock-in period of 1
year, and flexible lock-in period of 2 years

Introduction
• Types of Hybrid Funds

– Monthly Income Plan
• seeks to declare a dividend every month. It therefore invests largely in
debt securities. However, a small percentage is invested in equity shares
to improve the scheme’s yield.
– Capital Protected Schemes
• are close-ended schemes, which are structured to ensure that investors get
their principal back, irrespective of what happens to the market. This is
ideally done by investing in Zero Coupon Government Securities whose
maturity is aligned to the scheme’s maturity.

Introduction
• Suppose an investor invested Rs 10,000 in a capital protected scheme of 5 years. If 5-year

government securities yield 7% at that time, then an amount of Rs 7,129.86 invested in 5-year
zero coupon government securities would mature to Rs 10,000 in 5 years. Thus, by investing
Rs 7,129.86 in the 5-year zero-coupon government security, the scheme ensures that it will
have Rs 10,000 to repay to the investor in 5 years.
• After investing in the government security, Rs 2,870.14 is left over (Rs 10,000 invested by the
investor, less Rs 7129.86 invested in government securities). This amount is invested in riskier
securities like equities. Even if the risky investment becomes completely worthless (a rare
possibility), the investor is assured of getting back the principal invested, out of the maturity
moneys received on the government security
• Since any borrower other than the government can default, it would be appropriate to view
these alternate structures as Capital Protection Oriented Schemes rather than Capital
Protected Schemes.

Introduction
– Balanced Fund Category

• Gives an exposure to both equity and debt in the same portfolio.
• Objective was to provide growth/stability or regular income.
• It can have fixed or flexible allocation between equity and debt.This
information would be available in SID.
Note: Since mutual funds are allowed to invest in Gold there are hybrid funds that also invest in Gold.
Some of these funds are also launched as Asset Allocation funds. They are not different from the
Hybrid Category. Please go through the SID to understand the unique characteristics of the scheme.

Introduction
• Gold Funds
• Gold Exchange Traded Fund,
–
which is like an index fund that invests in gold.. The NAV of such funds
moves in line with gold prices in the market.
• Gold Sector Funds
– i.e. the fund will invest in shares of companies engaged in gold mining and
processing.
– the prices of these shares are more closely linked to the profitability and gold
reserves of the companies.
– Therefore, NAV of these funds do not closely mirror gold prices.

Introduction
• Real Estate Funds

– They take exposure to real estate.
– real estate mutual funds are yet to hit the market in India.
• Commodity Funds
– The investment objective of commodity funds would specify which of the
commodities it proposes to invest in.
– Structured as Commodity ETF or Commodity Sector Funds.
– Mutual fund schemes are not permitted to invest in commodities.
Therefore, the commodity funds in the market are in the nature of
Commodity Sector Funds,
– funds that invest in shares of companies that are into commodities.

Introduction
• International Funds
– These are funds that invest outside the country. For instance, a mutual fund
may offer a scheme to investors in India, with an investment objective to invest
abroad.
– An alternative route would be to tie up with a foreign fund (called the host
fund). If an Indian mutual fund sees potential in China, it will tie up with a
Chinese fund.
– Eg Investing in dollars when you will make profit?
– Appreciation in the respective currency will boost the portfolio performance

Introduction
• Fund of Funds
– ‘fund of funds’ pre-specify the mutual funds whose schemes they will buy and /
or the kind of schemes they will invest in.
– They are designed to help investors get over the trouble of choosing between
multiple schemes and their variants in the market.
• Exchange Traded Funds
– are open-ended index funds that are traded in a stock exchange.
– the mutual fund appoints some intermediaries as market makers, whose job is
to offer a price quote for buying and selling units at all times.
– A key benefit of an ETF is that investors can buy and sell their units in the
stock exchange, at various prices during the day that closely track the market at
that time.
Introduction
• Key Developments over the Years
– Significant spurts in size were noticed in the late 80s, when public sector mutual
funds were first permitted, and then in the
– mid-90s, when private sector mutual funds commenced operations.
– institutional distributors increased their focus on mutual funds.
– The emergence of stock exchange brokers as an additional channel of distribution.
– AUM of the industry, as of January 2017 has touched Rs. 17,37,087 crore from 2244
schemes offered by 41 mutual funds. These were distributed as follows: (Source:
www.amfiindia.com)

Introduction

Introduction

Chapter 2: Fund Structure and
Constituents

Fund Structure and Constituents
• Mutual funds are constituted as Trusts.
• The mutual fund trust is created by one or more Sponsors, who are the main persons behind
the mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are
the investors who invest in various schemes of the mutual fund.
• The operations of the mutual fund trust are governed by a Trust Deed, which is executed by
the sponsors. SEBI has laid down various clauses that need to be part of the Trust Deed.
• The Trust acts through its trustees.
• Therefore, the role of protecting the beneficiaries (investors) is that of the Trustees.
• The first trustees are named in the Trust Deed, which also prescribes the procedure for
change in Trustees.

• In order to perform the trusteeship role, either individuals may be appointed as
trustees or a Trustee company may be appointed. When individuals are appointed
trustees, they are jointly referred to as Board of Trustees.
• A trustee company functions through its Board of Directors.
• Day to day management of the schemes is handled by an Asset Management
Company (AMC).
• The AMC is appointed by the sponsor or the Trustees.
• Although the AMC manages the schemes, custody of the assets of the scheme
(securities, gold, gold-related instruments & real estate assets) is with a
Custodian, who is appointed by the Trustees.
• The record of investors and their unit-holding may be maintained by the AMC
itself, or it can appoint a Registrar & Transfer Agent (RTA).


Sponsor of a Mutual Fund
• The sponsor is the promoter of the mutual fund
– At least 5 years experience in the financial services industry

– Positive net worth in the immediately preceding three years
– At least 40% of the AMC’s capital to be contributed by the sponsor
• The role of the sponsor includes
– Setting up the trust & AMC and contribute capital
– Appointing the members of the Board of trustees and AMC
– Appointing the custodian
• A sponsor of a mutual fund can be an Indian company, foreign entity or joint
venture

Trustees of a Mutual Fund
• The sponsor registers the mutual fund as a trust and
appoints the trustees with the approval of SEBI
– The trustees can be constituted either as Board of Trustees or
Trustee Company
– Trustees have to meet at least 6 times in a year
– Trustees are paid a fee for their services
– Minimum 4 Trustees
• Trustees have fiduciary responsibility to protect the
interest of the investors
− The authority and responsibility of the trustees are laid down in
the trust deed

Role of the Trustees
• Registered ownership of investments is with the trust
• At least two-thirds of the trustees should be independent of the sponsor

• Trustees of one mutual fund cannot be trustee of another mutual fund
– Independent trustee
– Board approval
• Right to seek regular information and remedial action
• All major decisions need trustee approval

Asset Management Company
• The AMC is the investment manager of a mutual fund appointed by the trustees:
– Set up by the sponsor /trustee as a public or private company through contribution
of capital.
– The investment management agreement lays down the role and responsibilities of
the AMC.
– The AMC reports to the trustees periodically and have to provide all information
when ever required.
• The creation, marketing and management of mutual fund products is the responsibility
of the AMC.
Regulatory Norms for AMC
• The AMC has to be registered with Sebi which has laid down the eligibility norms :
– An AMC must have a net worth of at least Rs. 50 crore at all times. Before may 2014
3 yrs to raise. No new scheme until then.
– 50% of the members of the board have to be independent.
– The AMC of one mutual fund cannot be the AMC/Trustee of another mutual fund.
– An AMC cannot engage in any business other than investment management.
– The AMC must make periodic statutory disclosures to SEBI.

Regulatory Norms for AMC
• An AMC cannot invest in its own schemes, unless the intention to invest is
disclosed in the Offer Document. Further, the AMC cannot charge any fees for
the investment.
• The appointment of an AMC can be terminated by a majority of the

trustees, or by 75% of the Unit-holders. However, any change in the AMC is
subject to prior approval of SEBI and the Unit-holders.

Outsourced functions of AMC
• The constituents of a mutual fund are appointed to take care of specific activities:
– Appointed by the AMC
– Should be registered with SEBI & approved by Trustees
– Paid a service fee
– Governed by the agreement entered into with the AMC and Sebi’s regulations
– Fund Accountants
– The fund accountant performs the role of calculating the NAV, by collecting
information about the assets and liabilities of each scheme.
– The AMC can either handle this activity in-house, or engage a service provider.

Custodians and R&T Agents
• Custodians hold the cash and securities of the mutual fund and are responsible for
the safekeeping of the assets
o The custodian must be an entity independent of the sponsor
• The R&T agents are the record keepers of a mutual fund

o They operate Investor Service Centers (ISCs) that are official
o Issue & redeem units, update unit capital
o Enable investor transactions
o Create, maintain and update investor records
o Send periodic statutory information to investors

Other Constituents
• Banks
– Provide collection services
– Investor cheques / DDs are collected into scheme accounts
• Auditors
– Audit the books of mutual funds
– Separate auditors for AMC accounts
• Brokers
– Execute buying & selling stocks as instructed by the fund managers
– Give research reports on securities to the AMC

Distributors
• AMCs appoint non-exclusive distributors to sell 4. IFAs & employees of corporate distributors
mutual fund units have to
• A distributor can appoint multiple sub-brokers – Clear NISM Certification Exam
• A distributor can be – Empanel with a mutual fund
– An individual (IFA - Independent Financial – Take refresher course once in five
Advisor) years
– Institutions such as banks
– Non-banking finance companies (NBFC)
– Broking & distribution companies

Title
• KRAs
• IPV
• AMC and KYD complaint distributors are authorised to do IPV.

Title

Title

Chapter 3: Legal and Regulatory
Environment

Legal and Regulatory Environment
• SEBI
– SEBI regulates mutual funds, depositories, custodians and registrars & transfer agents in
the country.
– The applicable guidelines for mutual funds are set out in SEBI(Mutual Funds)
Regulations, 1996, as amended till date.
• RBI
– Regulates the money market and foreign exchange market in the country. Therefore,
mutual funds need to comply with RBI’s regulations regarding investment in the money
market, investments outside the country, investments from people other than Indians
residents in India, remittances (inward and outward)of foreign currency etc.
• Stock Exchanges are regulated by SEBI.
– Mutual Funds need to comply with the rules of the exchanges with which they choose to
have a business relationship.

• Self Regulatory Organizations (SRO)
– Prime responsibility is to regulate their own members.
– the statutory regulatory bodies set up by the Government (like SEBI in India)
only lay down the broad policy framework, and leave the microregulation to the
SRO.
– the Institute of Chartered Accountants of India (ICAI) regulates its own members.
– Mutual Funds in India have not constituted any SRO for themselves.
Therefore, they are directly regulated by SEBI.

• AMFI
– AMCs in India are members of AMFI, an industry body that has been created to
promote the interests of the mutual funds industry.
– AMFI is not an SRO.



• AMFI Code of Ethics (ACE)

– Sets out the standards of good practices to be followed by the Asset
Management Companies in their operations and in their dealings with
investors, intermediaries and the public.
– SEBI (Mutual Funds) Regulation, 1996 requires all Asset Management
Companies and Trustees to abide by the Code of Conduct as specified in
the Fifth Schedule to the Regulation.
– The AMFI Code has been drawn up to supplement that schedule, to
encourage standards higher than those prescribed by the Regulations for the
benefit of investors in the mutual fund industry.

• AMFI Guidelines & Norms for Intermediaries (AGNI)

– A set of guidelines and code of conduct for intermediaries, consisting
of individual agents brokers, distribution houses and banks engaged in
selling of mutual fund products.
– SEBI has made it mandatory for intermediaries to follow the Code of
Conduct.


Guidelines on Circulation of Unauthenticated News
• This guideline is for Market Intermediaries.
• Employees should not encourage or circulate rumours or unverified
information obtained from client /industry or any other sources without
verification.
• Employees should be directed that any market related news received by
them in their official mail/personal mail/blog should be forwarded only after
the same has been seen and approved by the concerned intermediary’s
compliance officer.
• Employees and the Compliance Officer shall be held liable for breach of
duty in this regard.
• Pl also refer to corrigendum for more details.
Due Diligence Process by AMC for Distributors
• Distributors who qualify any one of the following criteria:
– Multiple point of Presence(More than 20 locations).

– AUM raised over Rs 100 crores across industry in the non-institutional category
but including HNIs.
– Commission received of over 1crore p.a across industry.
– Commission received of over Rs 50 lac from a single MF.
• Please refer corrigendum for further details:
• Advisory or Execution only(Add)

• Investment Restrictions for Schemes
– The SEBI Regulations provide for various limits to the kind of investments
that are possible in mutual fund schemes, and the limits thereof.
– In a few cases, there are also aggregate limits for all schemes of a mutual fund
together.
– every distributor and investor ought to know the following investment
boundaries of schemes.

• Investment Objective
• Investment objective of a diversified equity scheme might read as follows:
• “To generate capital appreciation from a portfolio of predominantly equity related
securities”
• The investment objective of a diversified debt scheme could be:
• “To generate income by investing predominantly in a wide range of debt and money
market securities”
• A balanced scheme would have an investment objective like:
• “To achieve growth by investing in equity and equity related investments, balanced
with income generation by investing in debt and money market instruments”

• Investment Policy
– This describes in greater detail, the kind of portfolio that will be
maintained
– For example:
– “The portfolio will generally comprise of equity and equity related
instruments of around 30 companies, which may go upto 39 companies”;
or
– “Investment will be predominantly in mid-cap stocks”; or
– “More than 50% will be invested in equity and equity related
securities; the rest would be in debt and money market securities”

• When a scheme’s name implies investment in a particular kind of security

or sector, it should have a policy that provides for investing at least 65% of
its corpus in that security or sector, in normal times.
• Thus, a debt scheme would need to invest at least
• 65% in debt securities;
• An equity scheme would need to invest that much in equities;
• A steel sector fund would need to invest at least 65% in shares of steel
companies.

• Investment Strategy
Investment strategy goes into details such as:
• Should we increase the liquidity component in a scheme?
• Should we go overweight on the steel sector?
While the investment objective and investment policy are part of the
offer document, investment strategy is decided more frequently.

• Investors’ Rights & Obligations

– Schemes, other than ELSS, need to allot units or refund
moneys within 5 business days of closure of the NFO.
– Open-ended schemes, other than ELSS, have to re-open for ongoing sale / re-
purchase within 5 business days of allotment.
– Statement of accounts are to be sent to investors as follows:
In the case of NFO - within 5 business days of closure of the NFO.
In the case of post-NFO investment – within 10 working days of the
investment

In the case of SIP / STP / SWP
• Initial transaction – within 10 working days
• Ongoing – once every calendar quarter (March, June, September,
December) within 10 working days of the end of the quarter
• On specific request by investor, it will be dispatched to investor within
5 working days without any cost.
• Statement of Account shall also be sent to dormant investors i.e.
investors who have not transacted during the previous 6 months.
• If mandated by the investor, soft copy shall be e-mailed to investor
every month

• Units of all mutual fund schemes held in demat form are freely
transferable.
• Only in the case of ELSS/RGESS Schemes, free transferability of units

(whether demat or physical) is curtailed for the statutory minimum
holding period of 3 years/1 yr.
• Investors have the option to receive allotment of MF units of open ended

and close ended schemes in their demat account.

• Investor can ask for a Unit Certificate for his Unit Holding. This is different from a
Statement of Account as follows:
• A Statement of Account shows the opening balance, transactions during the period
and closing balance.
• A Unit Certificate only mentions the number of Units held by the investor.
• Since Unit Certificates are non-transferable, they do not offer any real transactional
convenience for the Unit-holder.
• However, if a Unit-holder asks for it, the AMC is bound to issue the Unit Certificate
within 30 days of receipt of request.

• NAV has to be published daily, in at least 2 daily newspapers having circulation all
over India.
• NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI and
the mutual fund.
– In the case of Fund of Funds, by 10 am the following day
– In the case of other schemes, by 9 pm the same day
• The investor/s can appoint upto 3 nominees. The investor can also specify the
percentage distribution between the nominees. If no distribution is indicated, then
an equal distribution between the nominees will be presumed.

• The investor can also pledge the units. This is normally done to offer security to a
financier.
• Dividend warrants have to be dispatched to investors within 30 days of
declaration of the dividend.
• Redemption / re-purchase cheques would need to be dispatched to investors
within 10 working days from the date of receipt of transaction request.
• In the event of delays in dispatching dividend warrants or redemption /
repurchase cheques, the AMC has to pay the unit-holder, interest at the rate of
15% p.a.
• This expense has to be borne by the AMC i.e. it cannot be charged to the
scheme.

Other Rights of Investors
• Unit-holders have proportionate right to the beneficial ownership of the assets of

the scheme.
• Investors can choose to change their distributor or go direct.
• In such cases, AMCs will need to comply, without insisting on any kind of No
Objection Certificate from the existing distributor.
• Investors can choose to hold the Units in dematerialised form.
• In the case of unit-holding in demat form, the demat statement given by the
Depository Participant would be treated as compliance with the requirement of
Statement of Account.
• The mutual fund has to publish a complete statement of the scheme portfolio and the
unaudited financial results, within 1 month from the close of each half year.
• The advertisement has to appear in one National English daily, and one newspaper published
in the language of the region where the head office of the mutual fund is situated.
• In lieu of the advertisement, the mutual fund may choose to send the portfolio statement
to all Unit-holders.
• Debt-oriented, close-ended / interval, schemes /plans need to disclose their portfolio in their
website every month, by the 3rd working day of the succeeding month.
• Unit-holders have the right to inspect key documents such as the Trust Deed, Investment
Management Agreement, Custodial Services Agreement, R&T agent agreement and
Memorandum & Articles of Association of the AMC

• SEBI has prescribed a detailed format for annual reporting on redressal of complaints
received against the mutual fund (including its authorised persons, distributors,
employees etc.).
• The report categorises different kinds of complaints. For each complaint category, the
mutual fund has to report on the number of complaints, the time period in which they
were resolved, and if not resolved, for how long they remain unresolved.
• The trustees have to sign off on this report, which is to be disclosed in AMFI website,
the website of the individual mutual fund, and its Annual Report.

• Scheme-wise Annual Report, or an abridged summary has to be mailed to all unit-
holders within 6 months of the close of the financial year.
• The Annual Report of the AMC has to be displayed on the website of the mutual fund.
The Scheme-wise Annual Report will mention that Unit-holders can ask for a copy of
the AMC’s Annual Report.
• In the event of any issue with the AMC or scheme, the investor can first approach the
investor service centre. If the issue is not redressed, even after taking it up at senior
levels in the AMC, then the investor can write to SEBI with the details.
• Further, the offer document has details of the number of complaints received and their
disposal.
• Pending investor complaints can be a ground for SEBI to refuse permission to the
AMC to launch new schemes.

• The trustees / AMC cannot make any change in the fundamental attributes of a scheme,
unless
– A written communication about the proposed change is sent to each Unit-holder, and
an advertisement is issued in an English daily Newspaper having nationwide
circulation, and in a newspaper published in the language of the region where the
head office of the mutual fund is located.
– Dissenting unit-holders are given the option to exit at the
prevailing Net Asset Value, without any exit load.
– This exit window has to be open for at least 30 days.

• The appointment of the AMC for a mutual fund can be terminated by a majority of
the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the
Scheme.
• 75% of the Unit-holders (in practice, Unit-holding) can pass a resolution to wind-
up a scheme.
• The Trustees are bound to obtain consent of the Unit-holders:
• Whenever required to do so by SEBI, in the interest of the Unit-holders
• Whenever required to do so by 75% of the Unit-holders (in practice, Unit-
holding) of the scheme
• When the trustees decide to wind-up or prematurely redeem the scheme
• If an investor feels that the trustees have not fulfilled their obligations, then he can
file a suit against the trustees for breach of trust
• The merger or consolidation of two or more schemes has so far been considered as a
change in the fundamental attributes of the schemes. It has now been provided that such
merger or consolidation shall not be considered a change in the fundamental attribute of
the surviving scheme
• if the following conditions are met:

– There is no other change in the Fundamental attributes of the surviving scheme i.e.
the scheme which remains in existence after the merger.
– Mutual Funds are able to demonstrate that the circumstances merit merger or
consolidation of schemes and the interest of the unit holders of surviving scheme is
not adversely affected.

• Limitation of Rights of Unit-holders
– Under the law, a trust is a notional entity. Therefore, investors cannot sue the trust (but
they can file suits against trustees).
– the unit-holder cannot seek legal protection on the grounds of not being aware,
especially when it comes to the provisions of law, and matters fairly and transparently
stated in the Offer Document.
– Unit-holders have a right to proceed against the AMC or trustees in certain cases.
However, a proposed investor i.e. someone who has not invested in the scheme does not
have the same rights.
– An investor in a scheme is however, neither a share-holder, nor a fixed deposit-holder
– and the scheme is in any case not a company. Therefore, these protections under the
Companies Act, 1956 are not available to investors in a scheme.

• Unclaimed Amounts
– The mutual fund has to deploy unclaimed dividend and redemption amounts in the
money market.
– AMC can recover investment management and advisory fees on management of these
unclaimed amounts, at a maximum rate of 0.50% p.a.
– If the investor claims the money within 3 years, then payment is based on prevailing
NAV i.e. after adding the income earned on the unclaimed money.
– If the investor claims the money after 3 years, then payment is based on the NAV
at the end of 3 years
– The Annual Report has to mention the unclaimed amount and the number of such
investors for each scheme.

• Proceeds of illiquid securities

• If the amounts are substantial, and recovered within 2 years,then the
amount is to be paid to the old investors
• In other cases, the amount is to be transferred to the Investor Education Fund
maintained by each mutual fund.
• Investor’s Obligations
– PAN No. and KYC documentation is compulsory for mutual fund
investments. Only exception is micro-SIPs.
– Investors need to give their bank account details along with the redemption
request

• Can a Mutual Fund Scheme go bust?
– While the AMC manages the investments of the scheme, the assets of the scheme are
held by the Custodian. Both operate under the overall control of the Trustees.
– Even if some sponsors wish to move out of the business, they need to bring in some other
sponsor, acceptable to SEBI, before they can exit. The new sponsor would need to put in
place the entire framework of Trustees, AMC etc.
– The custodian is independent of the sponsor and the AMC. This ensures structural
protection of the scheme assets for the benefit of investors.
– Further, in the event of a change in sponsorship that an investor is not comfortable with,
the option of exiting from the scheme with the full NAV is available for a 30-day period.


4. Within ___ days of dividend declaration, warrants will have to be sent to investors.
a. 7
b. 10
c. 15
d. 30
5. Unit holders can hold their units in demat form
a. True
b. False

Chapter 4: Offer Document

Offer Document
New Fund Offer (NFO)

• The following are a few key steps leading to the NFO:
– The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
– AMC prepares the Offer Document for the NFO. This needs to be
approved by the Trustees
– The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated.

Offer Document
– After approval by the trustees, the Offer Document can be issued in the market.
– The AMC decides on a suitable time-table for the issue, keeping in mind the
market situation.
– The AMC launches its advertising and public relations campaigns to make
investors aware of the NFO. These need to comply with SEBI’s advertising
code.
– The AMC holds events for intermediaries and the press to make them familiar
with the scheme, its unique features, benefits for investors, etc.
– The Offer Documents and Application Forms are distributed to market
intermediaries, and circulated in the market, so that investors can apply in the
NFO.

Offer Document
• Three dates are relevant for the NFO of an open-ended scheme:
– NFO Open Date – This is the date from which investors can invest in the NFO
– NFO Close Date – This is the date upto which investors can invest in the NFO
– Scheme Re-Opening Date – This is the date from which the investors can offer their
units for re-purchase to the scheme (at the re-purchase price); or buy new units of the
scheme (at the sale price).
• The AMC announces Sale and Re-purchase prices from the Scheme Re-Opening Date.
• Close-ended Schemes have an NFO Open Date and NFO Close Date. But, they have
no Scheme Re-opening Date, because the scheme does not sell or re-purchase units.
• Investors will need to buy or sell units from the stock exchange(s) where the scheme is
listed.

Offer Document
• NFOs other than ELSS/RGESS can remain Open for a maximum of 15 days.
• Allotment of units or refund of moneys, as the case may be, should be done within 5
business days of closure of the scheme.
• Further, open-ended schemes have to re-open for sale / re-purchase within 5 business
days of the allotment.
• The Role of Offer Documents
– Since the disclosures in the Offer Document are as prescribed by SEBI, it is a legal
document that helps investors take a balanced view on the investment
– The Offer Document is one of the most important sources of information on the
scheme, to help prospective investors evaluate the merits and demerits of investing in
it.

Offer Document
• An investor is presumed to have read the Offer Document, even if he has not
actually read it. Therefore, at a future date, the investor cannot claim that he was not
aware of something, which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts:

– Scheme Information Document (SID), which has details of the scheme
– Statement of Additional Information (SAI), which has statutory information
about the mutual fund that is offering the scheme.
• SID and SAI are two separate documents, though the legal technicality is that
SAI is part of the SID.

Offer Document
• Both documents are prepared in the format prescribed by SEBI, and submitted to
SEBI. The contents need to flow in the same sequence as in the prescribed format.
• The mutual fund is permitted to add any disclosure, which it feels, is material for the
investor.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations.
• Offer Documents in the market are “vetted” by SEBI, though SEBI does not formally
“approve” them.
Aditya Birla Sun Life AMC Ltd.

Offer Document
Contents of SID
• The cover page has the name of the scheme followed by its type viz.
• Open-ended / Close-ended / Interval (the scheme structure)
• Equity / Balanced / Income / Debt / Liquid / ETF (the expected nature of scheme
portfolio)
• It also mentions the face value of the Units being offered, relevant NFO dates
(opening, closing, re-opening), date of SID, name of the mutual fund, and name &
contact information of the AMC and trustee company.
• Finally, the cover page has the following standard clauses, which every investor
ought to note:

Offer Document

Offer Document
Update of SID
• Regular
– If a scheme is launched in the first 6 months of the financial year (say, April 2010), then the first
update of the SID is due within 3 months of the end of the financial year (i.e. by June 2011).
– If a scheme is launched in the second 6 months of the financial year (say, October 2010), then the
first update of the SID is due within 3 months of the end of the next financial year (i.e. by June
2012).
– Thereafter, SID is to be updated every year.
• Need-based
– In case of change in the fundamental attributes, the SID has to be updated immediately after the
lapse of the time period given to existing investors to exit the scheme.

Offer Document
In case of any other change-
– It will be printed on a separate piece of paper (addendum) and distributed along with
the SID, until the SID is updated.
– If a change is superseded by a further change (for instance, change in load), then
addenda is not required for the superseded change i.e. addenda is only required to
disclose the latest position.
– The change is to be advertised in an English newspaper having nation-wide
circulation, and in a newspaper of the language of the region where the head office of
the mutual fund is located.
– The change is to be mentioned in the website of the mutual fund.

Offer Document
Contents of SAI
– Information about Sponsors, AMC and Trustee Company (includes contact
information, shareholding pattern, responsibilities, names of directors and their
contact information, profiles of key personnel, and contact information of service
providers {Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund
Accountant (if outsourced) and Collecting Bankers}
– Condensed financial information (for schemes launched in last 3 financial

years)
– How to apply

Offer Document
– Rights of Unit-holders
– Investment Valuation Norms
– Tax, Legal & General Information (including investor grievance redressal mechanism, and
data on number of complaints received and cleared, and opening and closing number of
complaints for previous 3 financial years, and for the current year to-date).
Update of SAI
• Regular update is to be done by the end of 3 months of every financial year.
• Material changes have to be updated on an ongoing basis and uploaded on the websites of
the mutual fund and AMFI.

Offer Document
Key Information Memorandum

• Role of KIM
– KIM is essentially a summary of the SID and SAI.
– It is more easily and widely distributed in the market.
– As per SEBI regulations, every application form is to be accompanied by the KIM.

Offer Document
Contents of KIM
Some of the key items are as follows:
1. Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
2. Dates of Issue Opening, Issue Closing & Re-opening for Sale and Re-purchase
3. Plans and Options under the scheme
4. Risk Profile of Scheme
5. Price at which Units are being issued and minimum amount / units for initial purchase, additional
purchase and re-purchase
6. Bench Mark
7. Dividend Policy
8. Performance of scheme and benchmark over last 1 year, 3 years, 5 years and since
inception.
9. Loads and expenses
10.Contact information of Registrar for taking up investor grievances

Offer Document
• Update of KIM
• KIM is to be updated at least once a year.
• As in the case of SID, KIM is to be revised in the case of change in

fundamental attributes. Other changes can be disclosed through addenda
attached to the KIM.

Offer Document

Offer Document

Offer Document
REQUIREMENT OF MINIMUM INVESTORS IN THE SCHEME:
• The Scheme/Plan shall have a minimum of 20 investors and no single investor

shall account for more than 25% of the corpus of the Scheme/Plan(s).
• However, if such limit is breached during the NFO of the Scheme, the Fund
will endeavour to ensure that within a period of three months or the end of
the succeeding calendar quarter from the close of the NFO of the Scheme,
whichever is earlier, the Scheme complies with these two conditions.

Offer Document
(Applicability for a Close ended scheme / Interval scheme)
• The Scheme(s) and individual Plan(s) under the Scheme(s) shall have a minimum of 20
investors and no single investor shall account for more than 25% of the corpus of the
Scheme(s)/Plan(s).
• These conditions will be complied with immediately after the close of the NFO itself
i.e. at the time of allotment.

Offer Document

Offer Document
FUNDAMENTAL ATTRIBUTES
• Type of a scheme
– Open ended/Close ended/Interval scheme
– Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Index Fund/Any
other type of Fund
• Investment Objective
– Main Objective - Growth/Income/Both.
• Terms of Issue
– Liquidity provisions such as listing, repurchase, redemption.
– Aggregate fees and expenses charged to the scheme.
– Any safety net or guarantee provided.

Offer Document
• Pl refer to corrigendum

Additional Disclosure for Close ended debt oriented Scheme
Following additional disclosures in the SID/SAI and KIM should be made without indicating
the portfolio yield:
• Credit Evaluation Policy for the investment in Debt Securities.

• List of sectors the AMC would not be investing for the particular scheme.
• The type of instruments which the scheme proposes to invest viz.CPs,CDs,Tbills etc.
• The floors and ceilings within a range of 5% of the intended allocation(in %) against each
sub asset class/credit rating.
• After closure of NFO, the AMCs will report in the next meeting of AMCs and Trustees the
publicised % allocation and the final portfolio.
• Variations between indicative portfolio allocation and final portfolio will not be permissible.

Additional Disclosure for Close ended debt oriented Scheme
• Mutual Funds must ensure that total exposure of debt schemes

of a mutual funds in a particular sector (Excluding Bank
CDs,CBLOs,Gsecs,T Bills,AAA securities issed by PFIs and
PSBs) do not exceed 30% of the net assets of the Schemes..
• Schemes which do not meet the above conditions must meet
the same within a year’s time.

Offer Document

Offer Document
4. Application form is attached to

a. SID
b. SAI
c. KIM
d. None of the above
5. KIM has to be updated every 6 months

a. True
b. False

Chapter 5: Fund Distribution
& Channel Management
Practices

Fund Distribution & Channel Management Practices
• Independent Financial Advisors (IFAs), who are individuals.

• The bigger IFAs operate with support staff who handle backoffice work,
while they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution companies
and non-banking finance companies
• Bank distributors
• Ownership of all-India or regional network of locations meant that the
institutional channels could deal with product manufacturers as equals, and
negotiate better terms than what the agents could manage

• Newer Distribution Channels

• Internet
– The internet gave an opportunity to mutual funds to establish direct contact with investors
• Stock Exchanges
– Over the last few months, SEBI has facilitated buying and selling of mutual fund
units through the stock exchanges. Both NSE and BSE have developed mutual fund
transaction engines for the purpose.

Pre-requisites to become Distributor of a Mutual Fund

• A fund may appoint an individual, bank, non-banking finance company or
distribution company as a distributor.
• No SEBI permission is required before such appointment.
• SEBI has prescribed a Certifying Examination, passing in which is
compulsory for anyone who is into selling of mutual funds, whether as IFA,
or as employee of a distributor or AMC.
• Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.

In order to be eligible to sell or market mutual funds, the following are compulsory:
• The individual needs to pass the Certifying Examination prescribed by SEBI.
• Distributors / employees who were above the age of 50 years, and had at least 5
years of experience as on September 30, 2003 were exempted.
– But they need to attend a prescribed refresher course.
• KYD Requirements
– As part of Sebi’s drive to streamline the distribution process of mutual fund products,
AMFI has introduced the KYD process to verify the correctness of the information
provided in the registration documents and to have verification of the ARN holders.
– The process consists of document verification and bio-metric process

KYD Process:
• Self-attested copy of the PAN card and specific documents as proof of address to be submitted along
with application form at the CAMS- PoS
• Bio-metric process consists of taking the impression of the index finger of the right hand of the ARN
holder. This will be done at the PoS at the time submission of documents.
• In case of non-individual distributors, bio-metric process will be conducted on specified authorized
persons.
• An acknowledgement confirming the completion of KYD process is received from the CAMS-PoS
• A photocopy of the acknowledgement has to be sent to all the AMCs with whom the distributor is
empanelled
• The new rules is applicable to new registrations and renewals have come to effect from September 1,
2010.


• After passing the examination, the next stage is to register with AMFI. On
registration, AMFI allots an AMFI Registration Number (ARN).
• Armed with the ARN No., the IFA / distributor / stock exchange broker can
get empanelled with any number of AMCs.
• Alternatively, they can become agents of a distributor who is already

empanelled with AMCs.


• Institutions that are into distribution of mutual funds need to register with AMFI. Besides, all their
employees who are into selling mutual funds need to have an ARN. EUIN required apart from ARN
• Conditions for Empanelment
– There is a standard Request for Empanelment Form to be filled.
• Commission Structures
– There are no SEBI regulations regarding the minimum or maximum commission that distributors
can earn. However, SEBI has laid down limits on what the total expense (including commission)
in a scheme can be.
– The commission structures vary between AMCs. Even for the same AMC, different commissions are
applicable for different kinds of schemes.
• Two kinds of commission are earned by distributors on their mobilization:
– Initial or Upfront Commission
– Trail commission, calculated as a percentage of the net assets attributable to the Units sold by the
distributor

Commission Structure
• MFs to disclose on their respective websites the total commission and expenses
paid to distributors who satisy one or more of the following conditions:
• Distributors who qualify any one of the following criteria:

– Multiple point of Presence(More than 20 locations).
– AUM raised over Rs 100 crores across industry in the non-institutional category
but including HNIs.
– Commission received of over 1crore p.a across industry.
– Commission received of over Rs 50 lac from a single MF.
• MFs will also submit the data to AMFI. AMFI shall disclose the consolidated data on
its website.

Commission Structure
• In addition to the total comission and expenses paid to distributors ,

MFs should make additional disclosures regarding:
– Distributor wise Gross Inflows, Net Inflows, Average AUM and ratio
of AUM to gross inflows on the respective website on an yearly
basis.
– If there is excessive portfolio turnover ratio (more than 2 times the

industry average), AMCs will conduct additional due diligence.

SEBI Regulations related to Sales Practices
• Distributors can claim commission on investments made through

them by their clients. However, no commission is payable on
their own investments.
• The practice of rebating i.e., sharing part of the commission

earned with the investors, is banned.

SEBI Advertising Code

• In hoardings / posters, the statement,
“Mutual Fund investments are subject to market risks, read the
offer document carefully before investing”, is to be displayed in
black letters of at least 8 inches height or covering 10% of the
display area, on white background.

• In audio-visual media, the statement ‘Mutual Fund investments are subject

to market risks, read all scheme related documents carefully.’ (without any
addition or deletion of words) has to be displayed on the screen for at least 5
seconds, in a clearly legible font-size covering at least 80% of the total
screen space and accompanied by a voice-over reiteration.
• The remaining 20% space can be used for the name of the mutual fund or
logo or name of scheme, etc.
• Advertisements through audio media like radio, cassettes, CDs etc. shall
also read the above statement in a way that is easily understandable to the
listeners over a period of 5 seconds.

• Pl go thru all advt code
• Pl refer to corrigendum for new regulations on ADVT code.
• Where the scheme has been in existence for less than one
year past performance shall not be provided.(add)



Chapter 6: Accounting, Valuation and
Taxation

Accounting, Valuation and Taxation
Net Assets of Scheme
• Let us understand the concept with a simple example.
• Investors have bought 20 Crore units of a mutual fund scheme at Rs 10 each.
• The scheme has thus mobilized 20 Crore units X Rs 10 per unit i.e. Rs 200 Crore.
• An amount of Rs 140 Crore, invested in equities, has appreciated by 10%.
• The balance amount of Rs 60 Crore, mobilized from investors, was placed in bank
deposits.
• Interest and dividend received by the scheme is Rs 8 Crore,
• Scheme expenses paid is Rs 4 Crore, while a further expense of Rs 1 Crore is payable.


Net Asset Value (NAV)
• In the market, when people talk of NAV, they refer to the value of each unit of the
scheme. This is equivalent to:
• Unit-holders’ Funds in the Scheme ÷ No. of Units
• In the above example, it can be calculated as:

• Rs 217 Crore ÷ 20 Crore
• i.e. Rs 10.85 per unit.

An alternate formula for calculating NAV is:
• (Total Assets minus Liabilities other than to Unit holders) ÷ No. of Units
• i.e. (Rs 218 Crore – Rs 1 Crore) ÷ 20 Crore
• i.e. Rs 10.85 per unit.
• From the above, it follows that:

• Higher the interest, dividend and capital gains earned by the scheme, higher
would be the NAV.
• Higher the appreciation in the investment portfolio, higher would be the
NAV.
• Lower the expenses, higher would be the NAV.

• Mark to Market
– The process of valuing each security in the investment portfolio of the scheme at
its market value is called ‘mark to market’ i.e. marking the securities to their
market value.
• Sale Price, Re-purchase Price and Loads
– The difference between the NAV and Re-purchase Price is called the “exit load”.
– If the NAV of a scheme is Rs 11.00 per unit, and it were to charge exit load of
1%, the Re-purchase Price would be Rs 11 – (1% on Rs 11) i.e. Rs 10.89.

• Schemes can also calibrate the load when investors offer their units for re-purchase.
• For instance, load would be 4% if the investor were to exit in year 1, 3% if the investor
were to exit in year 2, and so on.
• Such structures of load are called “Contingent Deferred Sales Charge (CDSC)”.
• The position since August 1, 2009 is that:
• SEBI has banned entry loads. So, the Sale Price needs to be the same as NAV.
• Exit loads / CDSC in excess of 1% of the redemption proceeds have to be credited
back to the scheme immediately i.e. they are not available for the AMC to bear
selling expenses.
• Exit load structure needs to be the same for all unit-holders representing a portfolio.

• Upfront commission to distributors will be paid by the investor directly to the
distributor.
• Usage of load balances collected before 1.8.2009
• The load balances can be used for marketing and selling expenses including
distributors/agents commission.
• Not more than 1/3 rd of load balance as on 31.7.2009 shall be used in any financial
year including the financial year 2010-11.
• The unutilised balances can be carried forward , yet in no financial year the total
spending can be more than one-third.
• The accretions after July 31, 2009 can be used for marketing and selling expenses
including agents commission without any restrictions.

• Transaction Charges (For Rs 10000 and above)
– First time Mutual Fund Investor- Rs 150.00
– Other than First time Investor- Rs 100.00
• For SIP ,transaction charges shall be deducted only if the total commitment amounts to Rs 10000 or
more.
• Transaction Charges will not be deducted for the following:

• Not routed through any distributor.
• Appln Amount less than Rs 10000
• Switches/STP where there is no additional cash flow.
• Applns through Stock Exchange.
• Opt-out Option: Distributor can exercise this option but not at the investor level
Expenses
• Two kinds of expenses come up in creating and managing a fund:
– Initial Issue Expenses – These are one-time expenses that come up when the scheme is
offered for the first time (NFO). These need to be borne by the AMC.
– Recurring Expenses – These are the fund running expenses incurred to manage the
money raised from the investors. These can be charged to the scheme.
• Since the recurring expenses drag down the NAV, SEBI has laid down the expenses,
which can be charged to the scheme.

Recurring Expenses
An indicative list is as follows:
• Fees of various service providers, such as Trustees, AMC, Registrar
& Transfer Agents, Custodian, & Auditor
• Selling expenses including scheme advertising and commission to
the distributors
• Expenses on investor communication, account statements, dividend
/ redemption cheques / warrants
• Listing fees and Depository fees
• Service tax
Recurring Expenses
• The following expenses cannot be charged to the scheme:

– Penalties and fines for infraction of laws.
– Interest on delayed payment to the unit holders.
– Legal, marketing, publication and other general expenses not attributable to any
scheme(s).
– Fund Accounting Fees.
– Expenses on investment management/general management.
– Expenses on general administration, corporate advertising and infrastructure costs.
– Depreciation on fixed assets and software development expenses.

• Recurring Expense Limits

Recurring Expense Limits
• Within the above limits, the management fees cannot exceed:
– 1.25% on the first Rs 100 crore of net assets of a scheme
– 1.00% on the balance net assets.
• Management fees cannot be charged by liquid schemes and other debt schemes on funds
parked in short term deposits of commercial banks.
• The expense limits for index schemes (including Exchange Traded Funds) is as follows:
– Recurring expense limit (including management fees - 1.50%)
– Management fees 0.75%

• As regards Fund of Funds, the recurring expense limit (including management fees) was
previously 0.75%.
• The limits for Fund of Funds have been revised. The scheme can choose between the
following:
– Management Fee limit of 0.75% of net assets; or
– Management Fees plus Scheme Running Expenses plus Charges levied by
underlying schemes (weighted average of total expense ratio of underlying schemes)
– limit of 2.50% of net assets.
• The Scheme Information Document is to mention which of these limits is being adopted
for the scheme.
• If the new inflows from beyond top 15 cities are atleast :
– 30% of gross inflows or
– 15% of the average AUM(year to date) of the scheme
Which ever is higher, then funds can charge additional expenses upto 30 basis points on
daily net assets of the scheme.
• If the above condition is not satisfied then it will be charged proportionately.
• The additional TER would be clawed back if the investement is withdrawn before 1 year.
• Additional TER charged must be utilised for distribution expenses incurred for bringing
inflows into the scheme

• MFs shall launch new schemes under a single plan and new
investors are subject to single expense structure.
• There will be direct plans wef Jan 2013, with lower expense
ratio.

Dividends & Distributable Reserves

• SEBI guidelines stipulate that dividends can be paid out of distributable reserves. In
the calculation of distributable reserves:
• All the profits earned (based on accrual of income and expenses as detailed above)
are treated as available for distribution.
• Valuation gains are ignored. But valuation losses need to be adjusted against the
profits.
• That portion of sale price on new units, which is attributable to valuation gains, is
not available as a distributable reserve.
• This conservative approach to calculating distributable reserves ensures that dividend is
paid out of real profits, after providing for all possible losses.

Key Accounting and Reporting Requirements

• The accounts of the schemes need to be maintained distinct from the accounts of the AMC.
• The auditor for the AMC has to be different from that of the schemes.
• Norms are prescribed on when interest, dividend, bonus issues, rights issues etc. should be
reflected for in the accounts.
• NAV is to be calculated upto 4 decimal places in the case of index funds, liquid funds and
other debt funds.
• NAV for equity and balanced funds is to be calculated upto at least 2 decimal places.
• Investors can hold their units even in a fraction of 1 unit.
• However, current stock exchange trading systems may restrict transacting on the exchange to
whole units.

Valuation
• Wherever a security, say, Infosys share, is traded in the market on the date of valuation, its
closing price on that date is taken as the value of the security in the portfolio.
• Where equity shares of a company are not traded in the market on a day, or they are thinly
traded, a formula is used for the valuation. The valuation formula is based on the Earnings per
Share of the company, its Book Value, and the valuation of similar shares in the market (peer
group).
• Debt securities that are not traded on the valuation date are valued on the basis of the yield
matrix prepared by an authorized valuation agency. The yield matrix estimates the yield for
different debt securities based on the credit rating of the security and its maturity profile.
• Where an individual security that is not traded or thinly traded, represents more than 5% of the
net assets of a scheme, an independent valuer has to be appointed.

Taxation
• The mutual fund trust is exempt from tax.
• The trustee company will however pay tax in the normal course on its profits.
• For example, in the example of Kotak Mahindra given in Ch 2,
– Kotak Mahindra Mutual Fund is exempt from tax;
– Kotak Mahindra Trustee Company however is liable to tax.
• Equity-oriented scheme is a mutual fund scheme where at least 65% of the assets are
invested in equity shares of domestic companies.
• For Money market mutual funds / Liquid schemes, income tax goes by the SEBI
definition, which says that such schemes are set up with the objective of investing
exclusively in money market instruments (i.e. short term debt securities).

Taxability of Mutual Fund Investor
An investor in an equity-oriented mutual fund scheme

• Would pay STT on the value of the transactions of sale (0.001 percent) of units in the
stock exchange; or on re-purchase (0.001 percent) of the units by the fund
• Would be exempt from capital gains tax, if the units were held for more than a year
• Would pay capital gains tax at 15 percent plus surcharge and education cess, if the
units were held for 1 year or less
• Will receive any dividend free of tax; the scheme too will not incur any tax on the
dividend distribution.

An investor in a debt-oriented mutual fund scheme
• Would not bear any STT

• Would bear a tax on long term capital gains at 20 percent with
indexation
• Would bear a tax on short term capital gains, as per the investor’s
tax slab.
• Will receive any dividend free of tax; but the scheme would have
paid a tax on the dividend distribution.

Additional Tax on Income Distributed
• Dividends are tax-free in the hands of the investor.
• However, there is a tax on dividend distributed by debt-oriented mutual fund schemes which is paid by
the mutual fund.
• Applicability of Dividend Distribution Tax (DDT) is as follows:

– Residential Individuals and HUF : 25 percent + 12 percent Surcharge + 3 percent Education Cess =
28.84 percent
– NRIs : 25 percent + 12 percent Surcharge + 3 percent Education Cess = 28.84 percent
– Domestic Companies : 30 percent + 12 percent Surcharge + 3 percent Education Cess = 34.608
percent
• This additional tax on income distributed (referred to in the market as dividend distribution tax) is not
payable on dividend distributed by equity-oriented mutual fund schemes.

Tax Deducted at Source (TDS)
• There is no TDS on the dividend distribution or re-purchase proceeds to resident investors.
However, for certain cases of nonresident investments, with-holding tax is applicable.
• The income tax regulations prescribe different rates of withholding tax, depending on the
nature of the investor (Indian / Foreign and Individual / Institutional), nature of investment
(equity / debt) and nature of the income (dividend / capital gain).
• The withholding tax applicable for non-resident investors is the lower of the rate specified in
the income tax regulations or the tax specified in the Double Taxation Avoidance
Agreements (DTAA) of the country where the investor is resident.
• The investor, however, will need to satisfy the mutual fund that he is entitled to such
concessional rate as is specified in the DTAA.

• MFs/AMC may charge service tax on investment and advisory fees in addition to the
maximum limit of total expenses allowed.
• Service tax on other than investment and advisory fees, if any is to be borne by the
scheme within the max limit of total expenses.
• Service tax on the exit load if any is paid out of the exit load proceeds and exit load net
of service tax need to be credited back to the scheme.
• Service tax on brokerage and transaction cost paid for asset purchases if any must be
within the prescribed limit.

Setting off Gains and Losses under Income Tax Act:
• Capital loss, short term or long term, cannot be set off against any other head of
income (e.g. salaries)
• Short term capital loss is to be set off against short term capital gain or long term
capital gain
• Long term capital loss can only be set off against long term capital gain
• Since long term capital gains arising out of equity-oriented mutual fund units is
exempt from tax, long term capital loss arising out of such transactions is not
available for set off.

Limitations on Set-off in case of Mutual Fund Dividends:
• If, an investor buys units within 3 months prior to the record date
for a dividend, and sells those units within 9 months after the
record date,
• Any capital loss from the transaction would not be allowed to be

set off against other capital gains of the investor, up to the value of
the dividend income exempted.
• Suppose the record date is April 1, 2014, for dividend of Rs1 per unit for a scheme.
• Assume an investor buys units at Rs15 within 3 months prior (i.e. January to March 2014) and sells those
units at Rs12 within 9 months after the record date (i.e. April to December 2014).
• In the normal course, capital loss (short term, because it is held for less than 1 year) of Rs15 minus Rs12
i.e. Rs3 per unit would be available for set off against other capital gain (long term or short term) of the
investor.
• Further, the dividend of Rs1 would be tax-exempt in the hands of the investor.
• On account of the limitations on set-off, the capital loss available for setting off against other capital gain
would be restricted to Rs3 minus Rs1 i.e. Rs2 per unit.
• In the above case, if the unit-holder wanted the entire capital loss to be available for set off, then either the
units should have been bought before Jan 1, 2014, or they should be sold after December 31, 2014.
• Any intelligent investor knows that it would be better to adopt an investment strategy based on market
scenario, and bear the relevant tax, instead of allowing tax optimization to drive the investment strategy

• Limitations on Set-off in case of Bonus Units

• Same as Dividend
• Wealth Tax
• Investments in mutual fund units are exempt from Wealth Tax


4. Securities Transaction Tax is applicable to Equity Schemes

a. True
b. False
5. Wealth tax is payable at the applicable rates on equity mutual fund units
a. True
b. False


Chapter 7: Investor Services

Investor Services
Eligibility to Invest
• Resident Indian adult individuals, above the age of 18. They can invest, either
singly or jointly (not exceeding three names).
• NRI / PIO resident abroad have the facility of investing on repatriable basis i.e.
when they sell the investment, the sale proceeds can be transferred abroad.
• Non-individual Investors: Here, the individuals who sign the documents are
investing on behalf of organizations /institutions they represent.
• Foreign investors can invest in equity schemes of MFs registered with SEBI
after completing KYC process.

Investor Services
Qualified Foreign Investors(QFIs) who meet KYC requirements can invest in
equity and debt schemes of MFs through two routes:
• Direct Route: Holding MF units in demat acct through a SEBI registered

DP.
• Indirect route-Holding MF units via Unit Confirmation Receipt(UCR).
However implementation of the above routes for investment by QFIs is

pending operational guidelines from the regulators.(Add)

Investor Services
The following are not permitted to invest in mutual funds in India:
• An individual who is a foreign national (unless of course, the person is an NRI or

PIO / OCI card holder)
• Any entity that is not an Indian resident, as per FEMA (except when the entity is
registered as FII with SEBI, or has a sub-account with a SEBI-registered FII).
• Overseas Corporate Bodies (OCBs) i.e. societies / trusts held, directly or indirectly,
to the extent of over 60% by NRIs, or trusts where more than 60% of the beneficial
interests is held by such OCBs.

Investor Services
Sources of Information on Eligibility
• It is a good practice to check the ‘Who can Invest’ section of the Offer
Document, especially for a first time investor.
• Some Gilt schemes have specific plans, which are open only for Provident
Funds, Superannuation and Gratuity Funds, Pension Funds, Religious and
Charitable Trusts and Private Trusts.
• In the case of Exchange Traded Funds, only authorized participants and

large investors can invest in the NFO.
Investor Services
KYC Requirements for Mutual Fund Investors:
• It is compulsory for all investments of Rs 50,000 and above.
• Broadly, mutual fund investors need the following documents:

– Proof of Identity
– Proof of Address
– PAN Card
– Photograph

Investor Services
• The regulations have now been revised.

• The following investors have to be KYC compliant,
irrespective of the investment value:
– Non-individual investors i.e. companies, partnership firms, trusts,
HUF etc.
– Non-Resident Indians
– Investors coming through channel distributors

Investor Services
• All new folios/ accounts shall be opened only after ensuring that all
investor-related documents including account opening documents, PAN,
KYC, PoA (if applicable), specimen signature are available with
AMCs/RTAs and not just with the distributor.
• For existing folios, AMCs are responsible for updation of the investor
related documents including account opening documents, PAN, KYC, PoA
(if applicable), specimen signature by November 15, 2010.

Investor Services
• Where investment is made by a minor, KYC requirements have to be complied with by the
Guardian.
• In the case of investments by a Power of Attorney (PoA) holder on behalf of an investor,
KYC requirements have to be complied with, by both, investor and PoA holder.
• For NRI investors PAN is the sole identification number for KYC compliance. A copy of the
passport/PIO card/OCI card and overseas address proof is mandatory.
• SEBI had recently simplified the account opening process for investors in case of stock
brokers prescribing a form for capturing basic details of the client and another form for
additional details specific to dealing in stock exchange.
• It has been decided that same form/documents will be used by all the intermediaries in the
market.
• The new norms have introduced a concept of In-Person Verification (IPV) which has become
mandatory for mutual fund investments.

Investor Services
PAN Requirements for Micro-SIPs
• PAN Card is compulsory for all mutual fund investments.
• Exception has been made for Micro-SIPs i.e. SIPs where annual investment
(12 month rolling or April-March financial year) does not exceed Rs
50,000.
• Micro-SIP investment by individuals, minors and sole-proprietory firms are

exempted from the requirement of PAN card.
Investor Services
• Investors have to give a declaration stating that the he does not have
any existing Micro SIPs which together with the current application
will result in aggregate investments exceeding Rs. 50,000 in a year.
• It may be noted that the relaxation in documentation requirements for

micro-SIPs is not available for HUFs and non-individuals.
• It is available for NRIs, but not PIOs.

Offer Document
Additional Documentation Requirements applicable for Institutional Investors.
• The company / trust cannot invest if its incorporation documents do not

provide for investments of this type.
• Authorisation for the investing institution to invest. This is typically in the
form of a Board Resolution.
• Authorisation for the official to sign the documents on behalf of the investing
institution. This again is provided for in the Board Resolution.
• These documentation requirements for institutional investors are in addition
to the normal KYC documentation.

Investor Services
Demat Account
• Dematerialisation is a process whereby an investor’s holding of

investments in physical form (paper), is converted into a digital
record.
• The demat facility is typically initiated by the mutual fund,

which would tie up with a Depository (like National Securities
Depository Ltd or Central Depository Securities Ltd).

Investor Services
Transactions with Mutual Funds
• The normal application form, with KIM attached, is designed for fresh purchases.
• Additional Purchases
– Once an investor has a folio with a mutual fund, subsequent investments with the same
mutual fund do not call for the full application form and documentation
• Online Transactions
– This facility is given to an existing investor in a mutual fund.
– The investor is required to fill the requisite details in an application form. Based on
this, the registrar would allot a user name and password (Personal Identification
Number – PIN).

Filling the Application Form for Mutual Funds
The information required to be provided in the application form are discussed below:
• Direct Plan and Regular Plan
• Direct Route: Investors have the option to invest (purchase or subscribe to mutual
fund units) directly without routing the investment through a distributor (Direct
Plan). In this case, the investor must mention “Direct” in the space provided in the
application form for entering the AMFI Registration Number (ARN)/ Registered
Investment Advisor (RIA) number.
• Regular Route: If the investment (purchase/subscription) is routed through a

distributor/Advisor (Regular Plan) then the ARN/RIA number and other details
have to be provided in the space provided for the same.

Filling the Application Form for Mutual Funds
The information required to be provided in the application form are discussed below:
• Unit Holder Information
• FATCA and CRS Details
• Bank Account Details
• Investment Details
• Payment Details
• Unit Holding Option
• Demat Account Details
• Nomination
• Minimum Investment

Investor Services
Payment Mechanism for purchase / additional purchase
• Cheque / Demand Draft (DD).
• Electronic modes
• DDs are accepted only if the investor is from outside the location where the application form /
transaction slip is being submitted.
• NRI / PIO applications need to be accompanied by cheque drawn
– NRO account (for non-repatriable investment) or
– NRE account (for repatriable investment).
• If payment from NRI is by DD, and investment is on repatriable basis, a banker’s certificate will
be required to the effect that the DD has come out of moneys remitted from abroad.
• When the NRI receives money in his bank account in India, the banker would issue a Foreign
Inward Remittance Certificate (FIRC), which is evidence that the money was remitted from
abroad.

Investor Services
• Electronic (or Digital) Modes of Payment:
– Internet Banking
• Remittance can be made directly to the bank account of the scheme through Real Time Gross
Settlement (RTGS) / National Electronic Funds Transfer (NEFT) transfers (for transfers within India)
or SWIFT transfer (for transfers from abroad).
• The Immediate Mobile Payment Service (IMPS) is an instant interbank electronic fund transfer
available to registered users of banks that is made available through mobile phones, net banking and
ATMs.
– M-Banking
– Unified Payment Interface (UPI) - allows fund transfer between accounts through the mobile app
– Aadhaar Enabled Payment Service (AEPS) - allows bank to bank transaction using the Aadhar number
of the customer.
– National Unified USSD Platform (NUUP) - NUUP based mobile banking allows transactions even
without a smartphone and internet. The code*99# dialed from the phone registered with a bank for a bank
account allows transactions

Investor Services
• Electronic (or Digital) Modes of Payment:
f. Cards - Cards are the most commonly used mode of digital payments.
g. E-Wallets - E-Wallets are a virtual or digital version of the physical wallet. Money is loaded to the E-
Wallet and used as required to make payments and transfer funds to other E-Wallets.
Digital payments such as Net Banking, Debit cards, UPI are amongst the
accepted modes of payment for mutual fund schemes currently.
Application Supported by Blocked Amount (ASBA)

• This is a facility where the investment application in a New Fund Offer (NFO) is accompanied by an
authorization to the bank to block the amount of the application money in the investor’s bank account.
• The benefit of ASBA is that the money goes out of the investor’s bank account only on allotment.

Investor Services
• Mutual Funds usually do not accept Cash.
• As per new regulation, mutual funds can accept cash to the extent
of Rs 20000 per investor/per mutual fund per financial year
subject to compliance with PMLA,2002.
• Investors who do not have PAN cards Bank accounts.
• Repayment would be paid only through Banking Channel.

Investor Services
Remittance can also be made directly to the bank account of the scheme
through:
• Real Time Gross Settlement (RTGS) / National Electronic Funds Transfer
(NEFT) transfers (for transfers within India) or
• SWIFT transfer (for transfers from abroad).
• While RTGS transfers are instantaneous, NEFT transfers are batched
together in the banking system, and effected at various times during theday.
• SWIFT transfers tend to pass through multiple banks in different
geographies, and multiple levels within the same bank, resulting in delays.

Investor Services
• Third‐party cheques are not accepted except in special cases such as

grandparents/parents making payments not exceeding Rs.50,000 on behalf
of a minor
• Employer making payments on behalf of employee through payroll

deductions and custodian on behalf of FIIs.
• AMCs are required to put checks and balances in place to verify such
transactions.

Investor Services
• Application Supported by Blocked Amount (ASBA) – This is a facility where the investment
application is accompanied by an authorization to the bank to block the amount of the
application money in the investor’s bank account.
• The benefit of ASBA is that the money goes out of the investor’s bank account only on
allotment. Until then, it keeps earning interest for the investor.
• ASBA, which was originally envisaged for public issues in the capital market, has now been
extended to mutual fund NFOs.
• M-Banking is nascent in India. RBI has permitted banks to offer the facility of transferring upto
Rs 50,000 per customer per day, through the mobile connection.

Investor Services
• In case of subscription/purchase above Rs 10000/- for

application sourced from a distributor, a transaction fee of Rs
100 or Rs 150 will be deducted from the investment amount.

Investor Services
Payment Mechanism for Repurchase of Units
• Cheque
• Direct Credit
• In case the investment has been made on repatriable basis, and the investor
wishes to transfer the moneys abroad, the costs associated with converting
the rupees into any foreign currency would be to the account of the
investor
Investor Services
• The applicable NAV for switch-in transactions to liquid funds is the NAV of the day
preceding the day of application provided
• The application is received before cut-off time
• Funds credited to the scheme’s account before cut-off time
• Funds available for utilization without using any credit facilities
• The above cut-off timing is not applicable for NFOs and International Schemes.

Investor Services Cut-Off Time
Type of Scheme Transaction Cut off Applicable NAV

time
Equity oriented funds Purchases and 3.00 pm Same day NAV if received before cut off time.
and debt funds (except Switch ins
liquid funds) in respect Next business day NAV for applications received after cut off time.
of purchases less than
Rs. 2 lakhs
Liquid fund Purchases and 2.00 pm Same day NAV if received before cut off time.
Switch ins Next business day NAV for applications received after cut off time.
If application received after cut off time and funds available for utilisation on the
same day without availing any credit facility, closing NAV of the same day is
applicable.
Irrespective of the time of receipt of applications, where the funds are not
available for utilisation before the cut-off time, without availing any credit
facility, closing NAV of the day immediately preceding the day on which the
funds are available for utilisation.

Investor Services Cut-Off Time
Type of Scheme Transaction Cut off Applicable NAV

time
Equity Oriented Funds, Redemptions 3.00pm Same day NAV if received before cut off time.
Debt funds (Other than and Switch
Liquid funds) outs Next business day NAV for applications received after cut off time.
Liquid fund Redemptions 3.00pm NAV of day immediately preceding the next business day, if received before cut
and Switch off time.
outs Next business day NAV for applications received after cut off time.
Equity oriented funds and Purchases and 3.00 pm Irrespective of the time of receipt of application, NAV of the business day on
debt funds (except liquid Switch ins which the funds are available for utilisation without availing of any credit facility
funds) in respect of before the cut-off time of that day is applicable.
transaction equal to or
more than Rs. 2 lakhs

Investor Services
Transactions through the Stock Exchange
• National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have
extended their trading platform to help the stock exchange brokers become a
channel for investors to transact in Mutual Fund Units.
• NSE’s platform is called NEAT MFSS.
• BSE’s platform is BSE StAR Mutual Funds Platform.
•
Transactions through MF Utilities (MFU)
• MFU is a transaction aggregating platform that connects investors, RTAs,
distributors, banks, AMCs and others.
• MFU facilitates the distributors with online access to submit investor
transactions .
Investor Services
• Investment Plans and Services
• Dividend Payout, Growth and Dividend Re-Investment Options
• When a dividend is paid, the NAV of the units falls to that extent.
• Debt schemes (Non Equity Schemes)need to pay an income distribution tax
on the dividend distributed. This tax payment too reduces the NAV.
• Systematic Investment Plan (SIP)
• Systematic Withdrawal Plan
• Systematic Transfer Plan

Investor Services
• Triggers
– An investor can specify that the Units would be repurchased if the market reaches a
particular level. In that case, once the market reaches that level, the Units would be
repurchased, without the need for going through a separate repurchase documentation.
• Nomination
– In the case of joint holding, every unit-holder will have to sign the nomination form.
• Pledge
– Banks, NBFCs and other financiers often lend money against
– Pledge of Units by the Unit-holder.
• Account Statement:
– Pl refer Corrigendum

Investor Services
20000 below

Investor Services
4. Cut-off timing guidelines are not applicable for

a. NFOs
b. International Funds
c. Both the above
d. None of the above
5. STP is a combination of SIP and SWP

a. True
b. False

Investor Services

Chapter 8: Return, Risk and Performance of
Funds

Return, Risk and Performance of Funds
• Drivers of Returns in a Scheme
– The portfolio is the main driver of returns in a mutual fund scheme. The
underlying factors are different for each asset class.
• Equity Schemes
Securities Analysis Disciplines – Fundamental Analysis and Technical Analysis
A passive fund manager does not need to go through this process of securities
analysis.
Fundamental Analysis
Entails review of the company’s fundamentals viz. financial statements, quality
of management, competitive position in its product / service market etc.

• Earnings per Share (EPS): Net profit after tax ÷ No. of outstanding equity shares
– Net Profit Per share
• Price to Earnings Ratio (P/E Ratio): Market Price ÷ EPS

– This ratio is normally calculated based on a projected EPS for afuture period (also
called forward EPS)
– In reality, the P/E may be high because the company’s prospects are indeed good,
while another company’s P/E may be low because it is unlikely to replicate its
past performance.
– Buying shares of a company, they are essentially buying into its future earnings

• Book Value per Share: Net Worth ÷ No. of equity shares
– This is an indicator of how much each share is worth, as per the company’s own
books of accounts
• Price to Book Value: Market Price ÷ Book Value per Share
– An indicator of how much the share market is prepared to pay for each share of the
company, as compared to its book value.
• Financial parameters are compared across companies, normally within a sector.
• As in the case of P/E ratio, most financial indicators cannot be viewed as stand-alone
numbers.
• They need to be viewed in the context of unique factors underlying each company.

Technical Analysts believe that
• Price behaviour of a share, and the volumes traded are a reflection of investor sentiment,
which in turn will influence future price of the share.
• Technical Analysts therefore study price-volume charts (a reason for their frequently
used description as “chartists”) of the company’s shares to decide support levels,
resistance levels, break outs etc.
• Longer term investment decisions are best taken through a fundamental analysis
approach
• Shorter term speculative decisions, including intra-day trading use technical
analysis.
• Technical analysis can be used for timing the purchase of a stock.
• Investment Styles – Growth and Value

– Growth investment style entails investing in high growth stocks i.e. stocks of
companies that are likely to grow much faster than the economy. Valuation of
these stocks tends to be on the higher side. Further, in the event of a market
correction,these stocks tend to decline more.
– Value investment style is an approach of picking up stocks which are valued
lower, based on fundamental analysis. Since no time frame can be set for the
market to recognize the value, value stocks tend to be longer term investments

• It is important to note that ‘high valuation’ is not the equivalent of ‘high share
price’, just as ‘low valuation’ is not the same as ‘low share price’.
• A company’s share price may be high, say Rs 100, but still reasonably valued given
its earnings;
• Similarly, a company may be seen as over-valued, even when its share price is Rs 5,
if it is not matched by a reasonable level of earnings.
• Fundamental analysts look at value in the context of some aspect of the company’s
financials.
• For example, how much is the share price as compared to its earnings per share
(Price to Earnings Ratio); or how much is the share price as compared to its book
value (Price to Book Value Ratio).

• Portfolio building approach – Top down and Bottom up

– In a top down approach, the portfolio manager decides how to distribute the
investible corpus between countries (if it invests in multiple geographies) and
sectors. Thereafter, the good stocks within the identified sectors are selected for
investment. Thus sector allocation is a key decision.(EIC).
– A bottom-up approach on the other hand does not assign too much importance
to the country-allocation and sector-allocation. If a stock is good, it is picked for
investment. Stock selection is the key decision in this approach; sector
allocation is a result of the stock selection decisions.(CIE)

• Top down approach minimizes the chance of being stuck with large
exposure to a poor sector.
• Bottom up approach ensures that a good stock is picked, even if it belongs

to a sector that is not so hot.
• Equity returns are a function of sector and stock selection.

• Debt
– Investment in a debt security, as in the case of a loan, entails a return in the form
of interest (at a pre-specified frequency for a prespecified period), and refund of
a pre-specified amount at the end of the pre-specified period.
– The pre-specified period is also called tenor.
– Debt securities that are to mature within a year are called moneymarket
securities

• The return that an investor earns or is likely to earn on a debt security is called its yield.
The yield would be a combination of interest paid by the issuer and capital gain or
capital loss.
• Securities issued by the Government are called Government Securities or G-Sec or Gilt.
• Treasury Bills are short term debt instruments issued by the Reserve Bank of India on
behalf of the Government of India.
• Certificates of Deposit are issued by Banks (for 7 days to 1 year) or Financial
Institutions (for 1 to 3 years)
• Commercial Papers are short term securities (upto 1 year) issued by companies.
• Bonds / Debentures are generally issued for tenors beyond a year.
• Governments and public sector companies tend to issue bonds, while private sector
companies issue debentures.

• Since the government is unlikely to default on its obligations, Gilts are
viewed as safe. The yield on Gilt is generally the lowest in the market.
• The difference between the yield on Gilt and the yield on a non-
Government Debt security is called its Yield/Credit spread.
• The possibility of a non-government issuer defaulting on a debt security i.e.
its credit risk, is measured by Credit Rating companies like CRISIL, ICRA,
CARE and Fitch.
• ‘AAA’ is CRISIL’s indicator of highest safety in a debenture.
• Higher the credit risk, higher is likely to be the yield on the debt security

• Interest rates on floating rate securities (also called floaters) are specified as
a “Base + Spread”. For example, 5-year G-Sec + 2%.
• Inverse relationship between Price of a bond and Yield
• Inverse relationship between Price of a bond and Interest Rate
• Direct Relationship between Yield and Interest Rate.
• A security of longer maturity would fluctuate a lot more, as compared to
short tenor securities.
• Debt analysts work with a related concept called modified duration to
assess how much a debt security is likely to fluctuate in response to
changes in interest rates.

• If the portfolio manager expects interest rates to rise, then the portfolio is
switched towards a higher proportion of floating rate instruments; or fixed
rate instruments of shorter tenor.
• On the other hand, if the expectation is that interest rates would fall, then the
manager increases the exposure to longer term fixed rate debt securities.
• The calls that a fund manager takes on likely interest rate scenario are therefore a
key determinant of the returns in a debt fund – unlike equity, where the calls on
sectors and stocks are important.
• A debt portfolio manager explores opportunities to earn gains by anticipating
changes in credit quality, and changes in yield spreads between different market
benchmarks in the market place.

• Gold
– gold as an asset class depends on:
– Global price of gold
• Whenever there is political or economic turmoil, gold prices shoot up.
• Most countries hold a part of their foreign currency reserves in gold.
– Strength of the Rupee
• When the rupee becomes stronger, the same foreign currency can be bought for
fewer rupees.
• Therefore, the same gold price(denominated in foreign currency), translates into a
lower rupee value for the gold portfolio. This pushes down the returns in the gold
fund.
• A weaker rupee, on the other hand, pushes up the rupee value of the gold portfolio,
and consequently the returns in gold would be higher
• Real Estate
– Unlike gold, real estate is a local asset. It cannot be transported –and its value is driven by
local factors. Some of these factors are:
– Economic scenario
• uncertainty about the economy, people preferred to postpone real estate purchases.
• Consequently, real estate prices weakened.
• As the economy improves, real estate prices also tend to keep pace.
– Infrastructure development
• Whenever infrastructure in an area improves, real estate values go up.
– Interest Rates
• When money is cheap and easily available, more people buy real estate. This pushes up real
estate values.
• Rise in interest rates therefore softens the real estate market
– The behaviour of real estate is also a function of the nature of real estate viz. residential or commercial;
industrial, infrastructural,warehouse, hotel or retail
• Measures of Returns
• Simple Return
– Formula: (LaterValue-Initial Value )*100
Initial Value
Suppose you invested in a scheme, when its NAV was Rs 12.

Later, you found that the NAV has grown to Rs 15. How much is your return?

• Annualised Return
• The annualized return can be calculated as:
• Simple Return * 12
Period of Simple Return(in Months)
Two investment options have indicated their returns since inception as 5% and
3% respectively. If the first investment was in existence for 6 months, and the
second for 4months.AnnualisedReturn?


Compounded Annual Growth Rate (CAGR)
• It is possible to do the above calculations, by using the concerned NAVs of

a scheme. Thus, if you were calculating the returns from a scheme over a
specific period of time, then:
– NAV at the beginning of the period is ‘IV’;

– NAV at the end of the period is ‘LV’; and
– Exact number of days during the period, divided by 365 is ‘n’



• SEBI Norms regarding Representation of Returns by Mutual Funds in India

– Mutual funds are not permitted to promise any returns, unless it is an assured returns
scheme. Assured returns schemes call for a guarantor who is named in the offer
document
• Scheme Returns & Investor Returns

– Investors might have a return profile that is different, on account of the role of loads.

Risk in Mutual Fund Schemes
– Various investments have different levels of risk.
– Astute fund managers understand the inherent risks. Thus, they can design
portfolios that seek to moderate or enhance the risk as per the investment
philosophy of each scheme.
– Further, quantitative tools are available for portfolio optimization.
– Blind faith in such tools can be dangerous, because most of these tools
rely on past behaviour of the markets.
– The market can behave in a manner not seen in the past.
– Such abnormal behaviour may be rare – like seeing a black swan – but
when they happen, they can cause a lot of damage.
Portfolio Liquidity
• SEBI has therefore laid down criteria to identify illiquid investments, and also set a
ceiling to the proportion of such illiquid investments in the net assets of a scheme. The
prescribed ceiling is lower for open-ended scheme.
Liabilities in the scheme
• Outside liabilities add to the risk in a mutual fund scheme.
SEBI regulations stipulate that:
• A mutual fund scheme cannot borrow more than 20% of its net assets
• The borrowing cannot be for more than 6 months.
• The borrowing is permitted only to meet the cash flow needs of investor servicing viz.
dividend payments or re-purchase payments.

• Use of Derivatives
• Derivatives are instruments whose value is derived from the value of one or more
underlying exposures.
• The underlying could be a shares, exchange rate, interest rate, commodity, precious
metal, index, weather, etc.
• The commonly known derivatives are forwards, futures, options and swaps.
• Hedging against risk
• Re-balancing the portfolio
• Mutual funds are permitted to use derivatives for hedging against risk or re-
balancing the portfolio, but not for leveraging.
• Investment in derivatives would have to be specifically permitted in the Offer
Document
Risk in Equity Funds
• Generic
– In the long run, equity markets are a good barometer of the real economy – but in the
short run, markets can get over-optimistic or over-pessimistic, leading to spells of
greed and fear. Equity markets therefore tend to be volatile.
• Portfolio Specific
– Sector funds
− suffer from concentration risk
– Diversified equity funds
− on the other hand, have exposure to multiple sectors. Less risky than sector funds.

c. Thematic funds
− Are less risky than sector funds, but riskier than diversified equity funds.
d. Mid cap funds
− invest in mid cap stocks, which are less liquid and less researched in the market, than
the frontline stocks. Therefore, the liquidity risk is high in such portfolios.
e. Contra funds
− take positions that are contrary to the market. Such an investment style has a high
risk of misjudgments.
f. Dividend yield funds
− invest in shares whose prices fluctuate less, but offer attractive returns in the form of
dividend. Such funds offer equity exposure with lower downside.

g. Arbitrage funds
− are categorized as equity funds because they invest in equity
− the risk in this category of funds turns out to be the lowest among equity
funds – even lower than diversified equity funds.
− The returns too are lower – more in line with money market returns, rather
than equity market returns.
− one should not forget the basis risk in an arbitrage fund the risk that both
cash and F&O position on a company cannot be reversed at the same time

Risk in Debt Funds

• Generic
• Interest Rates, RBI Policy, Economy, Liquidity, Directional Call
• Portfolio Specific
• Short maturity securities suffer lesser fluctuation in value, as compared to the ones
with longer tenor.
• Liquid schemes, which invest in securities of upto 61 days maturity, have the lowest
risk amongst all kinds of schemes.
• Gilt schemes, which invest in only government securities, have higher risk than
liquid schemes because their NAV can fluctuate a lot more, on account of changes in
yield in the market.

2. Portfolio Specific
• Greater the proportion of longer maturity securities in the portfolio, higher would be the
fluctuation in NAV.
• Fixed Maturity Plans align the maturity of their portfolio to the maturity of the scheme, the
yield is relatively more predictable. However, such predictability is only on maturity, In the
interim, the value of these securities will fluctuate in line with the market.
• If the FMP is structured on the basis of investment in non-government paper, then the credit
risk is an issue.
• In the case of specific structures like securitized debt, it is not possible for the investor to
study the debtors whose obligations support the securitization.
• Greater reliance therefore needs to be placed on the credit rating agencies, who rate the
securitized debt portfolio.

2. Portfolio Specific
• Schemes where the capital guarantee is based on investment in non-sovereign debt,
even if it is a AAA-rated portfolio, have a credit risk. They are therefore in the
nature of capital protection oriented schemes rather than capital guaranteed
schemes.
• Junk bond schemes also called high yield bond schemes, invest in securities of
poor credit quality.
• SEBI Regulations however limit the exposure that mutual fund schemes can take to
unrated debt securities, and debt securities that are below investment grade.
• This risky category of mutual fund scheme is not offered by Indian mutual funds.

• Risk in Balanced Funds

– Balanced funds invest in a mix of debt and equity. It is rare for both debt and equity markets to
fare poorly at the same time.
– Since the performance of the scheme is linked to the performance of these two distinct asset
classes, the risk in the scheme is reduced.
– Monthly Income Plan
• balanced fund that seeks to combine a large debt portfolio with an yield-kicker in the form of
an equity component.
• losses in the equity component eat into the profits in the debt component of the portfolio
• If the scheme has no profits to distribute, then no dividend will be declared.
• Thus, the investor may not get the monthly income implicit in the name Monthly Income
Plan.

• Risk in Balanced Funds

– Flexible Asset Allocation scheme.
• switch a large part of their portfolio between debt and equity, depending on their
view on the respective markets.
• risky for investors, because there is always the risk that the fund manager takes
a wrong asset allocation call.
• investors do not know whether they are investing in a debt scheme or an equity
scheme

• Risk in Gold Funds

– As an international commodity, gold prices are a lot more difficult to
manipulate. Therefore, there is better pricing transparency.
– gold does well when the other financial markets are in turmoil.
– Similarly, when a country goes into war, and its currency weakens, gold funds
give excellent returns.
– An investor in a gold fund needs to be sure what kind of gold fund it is Gold
Sector Fund or ETF Gold.

• Risk in Real Estate Funds
– Every real estate asset is different. Valuation of real estate assets is therefore highly
subjective.
– Real estate transactions suffer the curse of black money. Transparency is therefore
an issue.
– Real estate is a less liquid asset class. The intermediation chain of real estate agents
is largely unorganized.
– Transaction costs, in the form of stamp duty, registration fees etc are high.
– Regulatory risk is high in real estate, as is the risk of litigation and other
encumbrances.

• Risk in Real Estate Funds
– The transparency level is low even among the real estate development and
construction companies. Many are family owned and family-driven. Poor
corporate governance standards increase the risks in investing in their
securities.
– Thus, real estate funds are quite high in risk, relative to other scheme types.
Yet, they are less risky than direct investment in real estate.

Measures of Risk
• Variance

Measures of Risk
2. Standard Deviation
– Like Variance, Standard Deviation too measures the fluctuation in periodic
returns of a scheme in relation to its own average return.
– Mathematically, standard deviation is equal to the square root of variance.
– This can be easily calculated in MS Excel using the following function:
=stdev(range of cells where the periodic returns are calculated)
– Standard deviation as a measure of risk is relevant for both debt and equity
schemes.

Measures of Risk
There are two kinds of risk in investing in equities – systematic risk and non-
systematic risk.
– Systematic risk is integral to investing in the market; it cannot be avoided. For

example, risks arising out of inflation, interest rates, political risks etc.
– Non-systematic risk is unique to a company; the non-systematic risk in an equity

portfolio can be minimized by diversification across companies.

Measures of Risk
3. BETA
– Beta measures systemic risk
– Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation
in periodic returns of a diversified stock index over the same period.
– The diversified stock index, by definition, has a Beta of 1.
– Companies or schemes, whose beta is more than 1, are seen as more risky than the
market.
– Beta less than 1 is indicative of a company or scheme that is less risky than the market.
– Beta as a measure of risk is relevant only for equity schemes.

Measures of Risk
4. Modified Duration
– this measures the sensitivity of value of a debt security to changes in interest
rates.
– Higher the modified duration, higher the interest sensitive risk in a debt portfolio.
5. Weighted Average Maturity
– that longer the maturity of a debt security, higher would be its interest rate
sensitivity.
6. Credit Rating
– indicates the credit or default risk in a scheme

Benchmarks
– It should be in synch with the investment objective of the scheme.
– The benchmark should be calculated by an independent agency in a transparent manner, and
published regularly
– Choice of benchmark is simplest for an index fund.
– Gaps between the scheme performance, and that of the benchmark, are called tracking errors.
– An index fund manager would seek to minimize the tracking error.
– The benchmark for a scheme is decided by the AMC in consultation with the trustees.
– Offer document of the scheme has to mention the benchmark.
– Further, along with the past performance of the scheme, the performance of the benchmark
during the same period is to be mentioned.

Benchmarks for equity schemes
• Diversified funds need to have a diversified index, like BSE Sensex or S&P CNX
Nifty or BSE 200 or BSE 500 or CNX 100 or S&P CNX 500 as a benchmark;
• Sectoral funds select sectoral indices like BSE Bankex, BSE FMCG Index, CNX
Infrastructure Index and CNXEnergy Index.
• A diversified equity fund that has chosen mid-cap stocks as its investment
universe, would find mid cap indices like CNX Midcap or Nifty Midcap 50 or
BSE Midcap to be better benchmarks.

Choice of Portfolio Concentration
• Some diversified equity funds prefer to have fewer stocks in their portfolio. For
such schemes, appropriate benchmarks are narrow indices like BSE Sensex and
NSE Nifty.
• Schemes that propose to invest in more number of companies will prefer broader
indices like BSE 100 (based on 100 stocks), BSE 200 (based on 200 stocks) and
S&P CNX 500 (based on 500 stocks).
• Underlying Exposure
• Arbitrage funds invest in equities, but their underlying exposure isnot to the equity
market. The benchmark for an arbitrage fund is generally a short term money
market index, although these are categorized as equity schemes.

Benchmarks for debt schemes
• As per SEBI guidelines, the benchmark for debt (and balanced schemes)
should be developed by research and rating agencies recommended by
AMFI.
• CRISIL, ICICI Securities and NSE have developed various such indices.
• Scheme Type
• Liquid schemes invest in securities of less than 61 days maturity.
• Therefore, a short term money market benchmark like NSE’s MIBOR or
CRISIL LiquiFEX is suitable.

• Non-liquid schemes can use:
– Si-Bex (1 to 3 years),
– Mi-Bex (3 to 7 years) and
– Li-Bex (more than 7 years)
– CRISIL CompBEX - Composite Bond Index
– CRISIL LiquiFEX - Liquid Fund Index
– CRISIL STBEX - Short-Term Bond Index
– CRISIL Debt Hybrid Index – 60:40
– CRISIL Debt Hybrid Index – 75:25
– CRISIL MIP BLENDED INDEX

• CRISIL’s AAA corporate bond index is non-government securities

based index
• Gilt funds invest only in Government securities. Therefore, indices

based on Government Securities are appropriate.
• Balanced Funds
• CRISIL MIPEX is suitable for Monthly Income Plans;
• CRISIL BalanCEX can be considered by balanced funds.

• Gold ETF
Gold price would be the benchmark for such funds
• Real Estate Funds

A few real estate services companies have developed real estate indices. These have shorter
histories, and are yet to earn the wider acceptance that the equity indices enjoy.
• International Funds
– benchmark would depend on where the scheme proposes to invest.
– China might have the Chinese index, Hang Seng as a benchmark.
– S&P 500 may be appropriate for a scheme that would invest largely in the US market.

Quantitative Measures of Fund Manager Performance
• One can do relative comparison viz. how did a scheme perform vis-à-vis its
benchmark or peer group.
• Such comparisons are called relative return comparisons.
• If a comparison of relative returns indicates that a scheme earned a higher return
than the benchmark, then that would be indicative of outperformance by the fund
manager.
• In the reverse case, the initial premise would be that the fund manager under-
performed.
• Such premises of outperformance or under-performance need to be validated
through deeper performance reviews.

Risk-adjusted Returns
• A weakness of Relative returns comparison is that it does not differentiate

between two schemes that have assumed different levels of risk in pursuit of
the same investment objective.
• Evaluating performance, purely based on relative returns, may be unfair towards the
fund manager who has taken lower risk but generated the same return as a peer.
• An alternative approach to evaluating the performance of the fund manager is
through the risk reward relationship.
• The underlying principle is that return ought to be commensurate with the risk
taken.

Sharpe Ratio
• Sharpe Ratio uses Standard Deviation as a measure of risk.
• It is calculated as
– (Rs minus Rf) ÷ Standard Deviation
• Thus, if risk free return is 5%, and a scheme with standard deviation of 0.5
earned a return of 7%, its Sharpe Ratio would be (7% - 5%) ÷ 0.5 i.e. 4%.
• Sharpe Ratio is effectively the risk premium per unit of risk.
• Higher the Sharpe Ratio, better the scheme is considered to be.

Treynor Ratio
• Treynor Ratio is thus calculated as:
• (Rs minus Rf) ÷ Beta
• Thus, if risk free return is 5%, and a scheme with Beta of 1.2 a return of
8%, its Treynor Ratio would be (8% - 5%) ÷ 1.2 i.e. 2.5%.
• Higher the Treynor Ratio, better the scheme is considered to be.
• Since the concept of Beta is more relevant for diversified equity schemes,
Treynor Ratio comparisons should ideally be restricted to such schemes.

Alpha
• The difference between a scheme’s actual return and its optimal return is its
Alpha – a measure of the fund manager’s performance.
• Positive alpha is indicative of out-performance by the fund manager;
• negative alpha might indicate underperformance.
• These quantitative measures are based on historical performance, which
may or may not be replicated.

Tracking Error
• The Beta of the market, by definition is 1. An index scheme mirrors the
index. Therefore, the index scheme too would have a Beta of 1, and it ought
to earn the same return as the market.
• The difference between an index fund’s return and the market return,
as seen earlier, is the tracking error.
• Tracking error is a measure of the consistency of the out-performance of
the fund manager relative to the benchmark.



Chapter 9: Scheme
Selection

Scheme Selection
As a structured approach, the sequence of decision making is as follows:
Step 1 – Deciding on asset class
Step 2 – Deciding on the scheme category
Step 3 – Selecting a scheme within the category
Step 4 – Selecting the right option within the scheme
How to choose between Scheme Categories?
Pl study the next slide well
Remember the order of risk under each category viz debt,equity and
hybrid

Scheme Selection

Scheme Selection
Equity Funds
• A principle to internalize is that markets are more predictable in the
long term, than in the short term.(you may get a true or false stmnt on
this)
• So, it is better to consider equity funds, when the investment horizon is
adequately long.
• How long is long?
• Ideally, the investor should look at 3 years.
• With an investment horizon of 5 years and above, the probability of losing
money in equities is negligible.

Scheme Selection
• Active or Passive
• Investors who are more interested in the more modest objective of having an equity
growth component in their portfolio, rather than the more aggressive objective of
beating the equity market benchmark, would be better off investing in an index fund.
• Open-ended or Close-ended
• The significant benefit that open-ended funds offer is liquidity viz. the option of
getting back the current value of the unit-holding from the scheme.
• A close-ended scheme offers liquidity through a listing in a stock exchange.
Unfortunately, mutual fund units are not that actively traded in the market. The price
of units of a closed-end scheme in the stock exchange tends to be lower than the
NAV. There is no limit to this discount.

Scheme Selection
• Open-end schemes are also subject to the risk of large fluctuations in net assets, on
account of heavy sales or re-purchases. This can put pressure on the fund manager in
maintaining the investment portfolio.
• Diversified, Sector or Thematic

• The critical difference between the two is that the multi-sector exposure in a
diversified fund makes it less risky.
• Diversified funds should be part of the core portfolio of every investor.
• Investors who are comfortable with risk can invest in sector funds.

Scheme Selection
• Large-cap v/s Mid-cap / Small Cap Funds
• Risky to invest in mid-cap / small cap funds during periods of economic turmoil.
• As the economy recovers, and investors start investing in the market, the valuations in front-
line stocks turn expensive.
• At this stage, the mid-cap / small cap funds offer attractive investment opportunities.
• Over a long period of time, some of the mid-cap and small-cap companies will become large
companies, whose stocks get rerated in the market.

Scheme Selection
• Growth or Value funds

• Initial phases of a bull run, growth funds tend to offer good returns.
• Investments in value funds yield benefits over longer holding periods.
• In a market correction, the Growth funds can decline much more than value funds.
• Fund Size
– The size of funds needs to be seen in the context of the proposed investment universe.
– Sector Funds 1000 Crs net assets entire sector 10000 Crs mkt cap.
– Too small a fund size means that the scheme will not benefit from economies of scale.

Scheme Selection
• Portfolio Turnover
• Frequent churning of the portfolio would not only add to the broking costs.
• If sale and purchase transactions amounted to Rs 10,000 crore, and the average size
of net assets is Rs 5,000 crore,
• Then the portfolio turnover ratio is Rs 10,000 cr ÷ Rs 5,000 cr i.e. 200%.
• This means that investments are held in the portfolio, on an average for 12
months ÷ 2 i.e. 6 months.(very imp u will get one question pl understand)
• The portfolio turnover needs to be viewed in the light of the investment style.
• Average Holding = 365 / Portfolio Turnover Ratio

Scheme Selection
Arbitrage funds
• These are not meant for equity risk exposure, but to lock into a better risk-return
relationship than liquid funds – and ride on the tax benefits that equity schemes offer.
Domestic Equity v/s International Equity funds

• When an Indian investor invests in equities abroad, he is essentially taking two
exposures:
• An exposure on the international equity market
• An exposure to the exchange rate of the rupee. If the investor invests in the US, and the
US Dollar becomes stronger during the period of his investment, he benefits; if the US
Dollar weakens (i.e. Rupee becomes stronger), he loses.

Scheme Selection
Debt Funds
• Regular Debt Funds v/s MIPs
• MIP has an element of equity in its portfolio. Investors who do not wish
to take any equity exposure, should opt for a regular debt fund.
• Open-end Funds v/s FMP
• FMP is ideal when the investor’s investment horizon is in sync with
the maturity of the scheme, and the investor is looking for a predictable
return that is superior to what is available in a fixed deposit.

Scheme Selection
Gilt Funds v/s Diversified Debt Funds

– A diversified mutual fund scheme that manages its credit risk well can
generate superior returns, as compared to a Gilt Fund.
– Long-Term Debt Fund v/s Short Term Debt Fund
– Longer term debt securities fluctuate more than shorter term debt
securities.
– Long term debt funds would be sensible in declining interest rate
scenarios.
– if it is expected that interest rates in the market would go up, it
would be safer to go with Short Term Debt Funds.
Scheme Selection
Money Market Funds / Liquid Schemes
• An investor seeking the lowest risk ought to go for a liquid scheme.
• The comparable for a liquid scheme in the case of retail investors is a savings bank
account.
Regular Debt Funds v/s Floaters

• Regular debt funds are subject to the risk of fluctuations in NAV.
• Since floating rate debt securities tend to hold their values, even if interest rates
fluctuate, the NAV of floaters tend to be steady.
• In rising interest rate environments, floaters can be considered as an alternative to
short term debt funds and liquid funds.

Scheme Selection
Balanced Schemes
Option 1: He can invest in a mix of equity schemes and debt schemes
Option 2: He can invest in a balanced scheme, which in turn invests in a mix
of equity and debt securities
Option 1 - choosing the schemes becomes an issue.
Option 2 - No such problem
Things to remember while investing in Balanced Funds:

• Should be clear about equity debt allocation
• Tax benefits based on the same.

Scheme Selection
Gold Funds
• Gold Sector Funds are schemes that invest in shares of gold mining and
other gold processing companies.
• The performance of these gold sector funds is linked to the profitability and
gold reserves of these gold companies – unlike Gold ETFs whose
performance would track the price of gold.
• When gold metal prices go up, gold mining companies with large reserves of
gold can appreciate a lot more than the gold metal. Conversely, they can also
fall more when gold metal prices decline.
• Other Funds
• As per mutual fund regulations, debt, equity, gold and real estate are the only
asset classes permitted for investment

Scheme Selection
How to select a Scheme within a Scheme Category?
• An investor has to be comfortable with the AMC, before investing in any of
its schemes.
• Fund Age
• Scheme running expenses.
• Tracking Error
• Regular Income Yield in Portfolio
• The investor should therefore aim to stay invested in schemes that are in the
top “few” in their category on a consistent basis. The “few” could mean 3 to
5, in categories that have few schemes; or the top 10-15%, in categories
where there are more schemes.

Scheme Selection
Which is the Better Option within a Scheme?
• Taxation and
• Liquidity
needs are a factor in deciding between the options.
The advisor needs to understand the investor’s situation before advising.
Sources of Data to track Mutual Fund Performance:
• Credence Analytics (www.credenceanalytics.com)
• CRISIL (www.crisil.com)
• Lipper (www.lipperweb.com)
• Morning Star (www.morningstar.com)
• Value Research (www.valueresearchonline.com)

Scheme Selection

Scheme Selection

Chapter 10: Selecting the Right
Investment Products for
Investors

Selecting the Right Investment Products for Investors
Financial and Physical Assets
• Physical assets have value and can be touched, felt and used.
• Financial assets have value, but cannot be touched, felt or used as part of
their core value.
• Shares, debentures, fixed deposits, bank accounts and mutual fund schemes
are all examples of financial assets that investors normally invest in.
• The investor in a physical asset draws psychological comfort from the fact that
the asset is in the investor’s possession, or under the investor’s control in a locker.
• The value encashment in a financial asset, on the other hand, can depend on the
investee company.

Economic Context
• Investor’s money in land, or gold does not benefit the economy. On the other hand,
money invested in financial assets can be productive for the economy.
• Gold and real estate are two physical assets, where a significant portion of investor
wealth is blocked.
• Gold ETF on the other hand is an open-ended scheme with no fixed maturity.
• Gold deposit schemes are offered by some banks. This is like a fixed deposit in gold.
• Wealth Tax is applicable on gold holding (beyond the jewellery meant for personal
use). (very important)
• However, mutual fund schemes (gold linked or otherwise) and gold deposit schemes
are exempted from Wealth Tax. Nomination is available.

• Real Estate – Physical or Financial?
– The ticket size i.e. the minimum amount required for investing
– in real estate is high.
– Once purchased, vacant land can be encroached upon by others.
– Real estate is an illiquid market.
– the transaction costs, such as stamp duty and registration charges, are also high.
– When property is let out, there is a risk that the lessee may lay his own claim to the
property (ownership risk) or be unable to pay the rent (credit risk).

Fixed Deposit or Debt Scheme
• In the event that a bank fails, the deposit insurance scheme of the government comes to
the rescue of small depositors. Upto Rs 1 lakh per depositor in a bank (across branches)
will be paid by the insurer. This limit is inclusive of principal and interest. Mutual fund
schemes do not offer any such insurance.
• With a bank deposit, the depositor can never earn a return higher than the interest rate
promised. In a mutual fund scheme, no return is guaranteed – however it is possible to
earn returns that are much higher than in a bank deposit
• Interest earned in a bank deposit is taxable each year.
• MF debt scheme can earn higher interest.Switch between schemes possible in MF

• Debt Schemes for Fixed Income Investments
• MIS for Regular Income
• Equity funds for Equity Investing
• ELSS for tax saving

New Pension Scheme
– Two kinds of pension accounts are envisaged:(very important)
• Tier I (Pension account), is non-withdrawable.
• Tier II (Savings account) is withdrawable to meet financial contingencies.
– An active Tier I account is a pre-requisite for opening a Tier II account.
– Investors can invest through Points of Presence (POP). They can allocate their investment
between 3 kinds of portfolios:
• Asset Class E: Investment in predominantly equity market instruments
• Asset Class C: Investment in Debt securities other than Government Securities
• Asset Class G: Investments in Government Securities.
• Asset Class A: Investments in Alternate investments
• Investors can also opt for life-cycle fund. With this option, the system will decide on a
mix of investments between the 3 asset classes, based on age of the investor.
• The 3 asset class options are managed by 6 Pension Fund Managers (PFMs). The
investors’ moneys can thus be distributed between 3 portfolios X 6 PFMs = 18
alternatives.
• The NPS offers fewer portfolio choices than mutual funds.
• However, NPS offers the convenience of a single Personal Retirement Account

Number (PRAN), which is applicable across all the PFMs where the investor’s money
is invested



Chapter 11: Helping Investors with Financial
Planning

Helping Investors with Financial Planning
• What is Financial Planning?

• Financial planning is a planned and systematic approach to provide for the
financial goals that will help people realise their needs and aspirations
• Assessment of Financial Goals
• Need to consider current cost, time period, likely inflation and likely exchange rate
fluctuation.

• The costs in today’s terms, need to be translated into the rupee requirement
in future. This is done using the formula:
• A = P X (1 + i) n
where,
A = Rupee requirement in future
P = Cost in today’s terms
i = Inflation rate
n = Number of years into the future, when the expense will be
incurred.
• Investment Horizon
– The year-wise financial goals statement throws up the investment horizon. It

would be risky to expect the first three years expenses to be met out of equity
investments being made today. But equity is a viable investment option for
expenses starting from Year 4.

• Financial Planning - Objectives and Benefits

– The objective of financial planning is to ensure that the right amount of money is
available at the right time to meet the various financial goals of the investor.
– An objective of financial planning is also to let the investor know in advance, if
some financial goal is not likely to be fulfilled.
• Need for Financial Planners
• Most investors are either not organized, or lack the ability to make the calculations . A
financial planner’s service is therefore invaluable in helping people realize their
needs and aspirations.
• Even if the investor knows the calculations, the knowledge of how and where to invest
may be lacking.

• Alternate Financial Planning Approaches
– The financial plan can be a “goal-oriented financial plan” a financial plan

for a specific goal related to the aspiration to make the son a doctor.
– An alternate approach is a “comprehensive financial plan” where all the

financial goals of a person are taken together, and the investment strategies
worked out on that basis.

• The steps in creating a comprehensive financial plan, as proposed by the Certified

Financial Planner – Board of Standards (USA) are as follows:
– Establish and Define the Client-Planner Relationship

– Gather Client Data, Define Client Goals
– Analyse and Evaluate Client’s Financial Status.
– Develop and Present Financial Planning Recommendations and / or Options
– Implement the Financial Planning Recommendations
– Monitor the Financial Planning Recommendations

Life Cycle
• Childhood
– Pocket money, cash gifts and scholarships are potential sources of income
during this phase.
• Young Unmarried
– Equity SIPs and Whole-life insurance plans are great ways to force the
young unmarried into the habit of regular savings, rather than lavish the
money away.

3. Young Married
– Where both spouses have decent jobs, life can be financially comfortable. They can
plan where to stay in / buy a house, based on job imperatives, life style aspirations and
personal comfort. Insurance is required, but not so critical.
– Where only one spouse is working, life insurance to provide for contingencies
associated with the earning spouse are absolutely critical.
– In case the earning spouse is not so well placed, ability to pay insurance premia can
be an issue, competing with other basic needs of food, clothing and shelter. Term
insurance (where premium is lower) possibilities have to be seriously explored and
locked into.
4. Young Married
– Even where the employer provides medical coverage, it would be useful to start a low value
health insurance policy.
– While buying an insurance policy, there has to be clarity on whether it is a cashless policy i.e. a
policy where the insurance company directly pays for any hospitalization expenses
5. . Married with Young Children
– Insurance needs – both life and health - increase with every child.
– Expenses for education right from pre-school to normal schooling to higher education is growing
much faster than regular inflation.
– Adequate investments are required to cover this.

6. Married with Older Children

– If investments in growth assets like shares and real estate, are started early in life, and
maintained, it would help ensure that the children enjoy the same life style, when they set up
their independent families.
7. Pre-Retirement
– The family ought to plan for their retirement –what kind of lifestyle to lead, and how those
regular expenses will be met.
8. Retirement
– Besides the corpus of debt assets to cover regular expenses, there should also be some growth
assets like shares, to protect the family from inflation during the retirement years.

Wealth Cycle
• Accumulation
– This is the stage when the investor gets to build his wealth. It covers the earning years of the
investor i.e. the phases of the life cycle from Young Unmarried to Pre-Retirement. (Equity more)
• Transition
– is a phase when financial goals are in the horizon. E.g. House to be purchased, children’s higher
education / marriage approaching, etc.
– Given the impending requirement of funds, investors tend to increase the proportion of their
portfolio in liquid assets viz. money in bank, liquid schemes etc. (Switch to Debt)

3. Inter-Generational Transfer
– The financial planner can help the investor understand various inheritance and tax issues, and
help in preparing Will and validating various documents and structures related to assets and
liabilities of the investor. (It depends on whom we transfer)
4. Reaping / Distribution
– This is the stage when the investor needs regular money. It is the parallel of retirement phase
in the Life Cycle.
5. Sudden Wealth
– it is advisable to initially block the money by investing in a liquid scheme. An STP from the
liquid schemes into equity schemes will help the long term wealth creation process



Chapter 12: Recommending Model
Portfolios and Financial Plans

Recommending Model Portfolios and Financial Plans
Risk Profiling
• Need for Risk Profiling

– Risk profiling is an approach to understand the risk appetite of investors - an essential
pre-requisite to advise investors on their investments.
– At times there are also differences between the level of risk the investors think they
are comfortable with, and the level of risk they ought to be comfortable with.
• The investment advice is dependent on understanding both aspects of risk:
– Risk appetite of the investor
– Risk level of the investment options being considered.(The next 3 slides are very
important pl go thru)



Risk Profiling Tools
• Risk profiling is a tool that can help the investor; it loses meaning if the investor is
not truthful in his answers.
• While such tools are useful pointers, it is important to understand the robustness of
such tools before using them in the practical world.
• Some of the tools featured in websites have their limitations. The financial
planner needs to use them judiciously.

Risk Appetite Vs Risk Capacity Vs Risk Tolerance

• The risk profile defines the level of risk that an investor is willing and able to take,
which in turn will determine their asset allocation, choice of investment products and
operational decisions.
• Risk appetite - It is the willingness of an investor to take risks to achieve their strategic
investment objectives
• Risk capacity – It is the capacity to take risk and will depend upon personal factors
like age of the investor, income levels and stability of income, the wealth of the
investor, time to the goal, liquidity needs, dependents and other such factors
• The Risk tolerance of an investor defines the limits or boundaries of the risk that an
investor is willing to take.

The Role of Asset Allocation
• Some international researches suggest that asset allocation and investment policy can
better explain portfolio performance, as compared to selection of securities within an
asset class (stock selection) and investment timing.
• Asset Allocation Types
– Strategic Asset Allocation is the ideal that comes out of the risk profile of the
individual. Risk profiling is key to deciding on the strategic asset allocation. The most
simplistic risk profiling thumb rule is to have as much debt in the portfolio, as the
number of years of age.
– Tactical Asset Allocation is the decision that comes out of calls on the likely behaviour
of the market. An investor who decides to go overweight on equities i.e. take higher
exposure to equities, because of expectations of buoyancy in industry and share
markets, is taking a tactical asset allocation call.
Model Portfolios
• Young call centre / BPO employee with no dependents

• 50% diversified equity schemes (preferably through SIP); 20% sector funds;
10% gold ETF, 10% diversified debt fund, 10% liquid schemes.
• Young married single income family with two school going kids
• 35% diversified equity schemes; 10% sector funds; 15% gold ETF, 30%
diversified debt fund, 10% liquid schemes.

Model Portfolios
• Single income family with grown up children who are yet to settle down
35% diversified equity schemes; 15% gold ETF, 15% gilt fund, 15% diversified debt
fund, 20% liquid schemes.
• Couple in their seventies, with no immediate family support

15% diversified equity index scheme; 10% gold ETF, 30% gilt fund, 30% diversified
debt fund, 15% liquid schemes.

• As the reader would appreciate, these percentages are illustrative and subjective.
The critical point is that the financial planner should have a model portfolio for
every distinct client profile.
• Thus, a couple in their seventies, with no immediate family support but very sound
physically and mentally, and a large investible corpus might be advised the
following portfolio, as compared with the previous model portfolio.
– 20% diversified equity scheme; 10% diversified equity index scheme; 10%
gold ETF, 25% gilt fund, 25% diversified debt fund,10% liquid schemes.

Investment decisions are influenced by behavioural biases in the decision
maker, which leads to less than optimal choices being made. Some of the
well documented biases that are observed in decision making are:
• Optimism or Confidence Bias: Investors cultivate a belief that they have the ability
to outperform the market based on some investing successes.
• Familiarity Bias: This bias leads investors to choose (asset classes, stocks or
sectors) that they are comfortable with.
• Anchoring: Investors hold on to some information that may no longer be relevant,

and make their decisions based on that.

4. Loss Aversion: The fear of losses leads to inaction.
5. Herd Mentality: It is an outcome of uncertainty and a belief that others may have
better information, which leads investors to follow the investment choices that
others make.
6. Recency Bias: This refers to the impact of recent events on decision making.
7. Choice Paralysis: Availability of too many options for investment can lead to a
situation of not wanting to evaluate and make the decision.



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ABSLMF – NISM

Aditya Birla Sun Life AMC Ltd. 1

– Individual Mutual Fund Distributors

– Employees of organizations engaged in sales and distribution of Mutual Funds

Source for entire PowerPoint Presentation :

Aditya Birla Sun Life AMC Ltd. 2

• The examination consists of 100 questions of 1 mark each and should be

Aditya Birla Sun Life AMC Ltd. 3

Aditya Birla Sun Life AMC Ltd. 4

5. Fund Distribution & Channel Management Practices 7. Investor Services (12)

Aditya Birla Sun Life AMC Ltd. 5

8 Return, Risk & Performance of Funds(10) . 9 Scheme Selection (10)

8.6 Quantitative Measures of Fund Manager

Aditya Birla Sun Life AMC Ltd. 6

Aditya Birla Sun Life AMC Ltd. 7

Aditya Birla Sun Life AMC Ltd. 8

• Role of Mutual Funds

• Role of Mutual Funds

Aditya Birla Sun Life AMC Ltd. 10

Why Mutual Fund Schemes?

Aditya Birla Sun Life AMC Ltd. 11

Aditya Birla Sun Life AMC Ltd. 12

• How do Mutual Fund Schemes Operate?

Aditya Birla Sun Life AMC Ltd. 13

• Profits or losses, as the case might be, belong to the investors.

• AUM can go up because of inflows (sales) or come down because of outflows

Aditya Birla Sun Life AMC Ltd. 16

• Advantages of Mutual Funds for Investors

Aditya Birla Sun Life AMC Ltd. 17

• Advantages of Mutual Funds for Investors

Aditya Birla Sun Life AMC Ltd. 18

• Systematic approach to investments:

Aditya Birla Sun Life AMC Ltd. 19

Aditya Birla Sun Life AMC Ltd. 20

• Limitations of a Mutual Fund

– No control over Costs

Aditya Birla Sun Life AMC Ltd. 21

Aditya Birla Sun Life AMC Ltd. 22

Aditya Birla Sun Life AMC Ltd. 23

Debt, Equity and Hybrid Funds

Aditya Birla Sun Life AMC Ltd. 24

Types of Debt Funds

Aditya Birla Sun Life AMC Ltd. 25

• Types of Debt Funds

Aditya Birla Sun Life AMC Ltd. 26

• Types of Debt Funds

• Types of Debt Funds

• lowest in risk among all kinds of mutual fund schemes.

• MTM for >60 days

Aditya Birla Sun Life AMC Ltd. 28

• Types of Equity Funds

– Diversified equity fund

Aditya Birla Sun Life AMC Ltd. 29

• Types of Equity Funds

Aditya Birla Sun Life AMC Ltd. 30

• Types of Equity Funds

– Equity Linked Savings Schemes (ELSS),

– Equity Income / Dividend Yield Schemes

Aditya Birla Sun Life AMC Ltd. 31

• Types of Equity Funds