Marketing of Financial Products

Syllabus ( Part II)

Mutual Fund
III
Investment Landscape, Concept and Role of Mutual Fund, Legal Structure of Mutual
Fund in India.
Mutual Fund
Legal and Regulatory Framework, Scheme Related Information, Fund Distribution and
IV
Channel Management Practices, Net Asset Value and Taxation Aspects of Mutual
Funds.
Mutual Fund
Investor Services, Risk, Return and Performance of Mutual Fund Scheme and
V
Selection of right Mutual Fund Scheme.
 About NISM

• The National Institute of Securities Markets (NISM) is a public trust

established in 2006 by the Securities and Exchange Board of India
(SEBI), the regulator of the securities markets in India. The institute
carries out a wide range of capacity building activities at various levels
aimed at enhancing the quality standards in securities markets.
• National Institute of Securities Markets (NISM) develops and conducts
certification examinations for market professionals, aspiring students,
and investors.
NISM V A Certification ( Mutual Fund Distributor)

This 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

This certification aims to enhance the quality of sales, distribution and related
support services in the mutual fund industry.
 NISM Test Details

Test Duration No. of Certificate #

Fees (Rs.) Maximum Marks Pass Marks* (%)
(in minutes) Questions Validity (in years)

1500+ 120 100 100 50 3

* No negative marks for incorrect answers.

+ Payment gateway charges extra.

# Passing Certificate will be issued only to those candidates who have furnished/ updated their Income Tax
Permanent Account Number (PAN) in their registration details.
Investment
Landscape
 Flow of the Presentation
• Saving & Investment
• Why Investment ?
• Different Asset Classes
• Factors to evaluate Investment Options
• Investment Risks
• How Risk can be Managed ?
• Biases in Investment Decision Making
• Asset Allocation
Savings
and
Investment
 Planting seeds
Mango trees which give
you more mangoes

Keeping them in a
box Boxes full of mango seeds
This is exactly the difference between Savings and Investment.

Investing
Wealth Grows

Saving
Wealth does not grow
 Saving & Investment
Purpose behind Saving & Investment

• Saving : Safety of Money with liquidity.

• Investment : Parking money to earn profits of it.

 Saving & Investment
• Saving is the process of parking hard cash in extremely safe and
liquid securities. The primary aim should be capital
preservation and the secondary goal getting some returns, if
possible.
• Investments involve putting money to work to create wealth for
achieving long-term or short term goals .
• Investing is buying assets such as stocks, bonds, mutual funds
or real estate with the expectation that your investment will
make money for you.
Useful tips on Saving
• Savings are not done once; save regularly
• Spend less to save more; record your
expenses
• S a v e to avoid debt
• S a v e and invest first and spend later

Expenses = Income – Savings

Atleast 25% of your monthly income should be saved and invested

• Shalini, an eight-year-old girl, lives in a mid-size town in North India with her
parents. She is highly inspired by watching the recent success of India’s space
programs, in which some women scientists played a huge role. She wants to
become a space scientist. Her parents, Mrs. And Mr. Gupta want to support her
pursue her dream.
• Rabindra, 45 years old, is working as an engineer in a large multinational firm.
His wife is a homemaker. Since the company does not provide any pension plan,
he is worried about how they would be able to live a comfortable life once he
retires from the job.
• Surinder Singh has recently moved to a large city from his hometown, as he got a
promotion and a transfer in the company where he works. While his job is very
good, he is facing trouble in settling down with a house. He is tired of going
house-hunting every now and then and is thinking of buying his own house in the
near future.
• Mrs. D’Souza has recently retired from her job. She received a large sum as
retirement benefits. She intends to invest the same in order to receive regular
income to live a comfortable life.
 Why Investment ?
❖To meet Financial Goals

❖Financial Goals: Amount and timeline attached to financial

objectives makes a specific financial goal to be achieved through
investment.

❖Short term Goal, Mid Term & Long-term Goal

❖Financial Goal should consider inflation. (Real Rate / Nominal Rate)

Investment
for Various
Goals
 …are also Financial Goals

Building your home Marriage Children’s Education

Setting up a small business Buying agricultural land Retirement

Inflation 1 kg sugar

10 years ago Today 8 years from now

Rs.16 Rs.50 Rs.80

 Inflation !! …. How does it affect us ???

Balance after
one Year

Money Deposited Saving Interest Rate 4 % Rs.104

Rs. 100

1 Kg = Rs 100 1 yrs Inflation After one year

7% 1 Kg = Rs 107
 Inflation !! …. How does it affect us ???

Balance after
one Year

Money Deposited Saving Interest Rate 4 % Rs.104

Rs. 100 Short by Rs. 3/-

1 Kg = Rs 100 1 yrs Inflation After one year

7% 1 Kg = Rs 107
 Inflation !! …. How does it affect us ???

Balance after
one Year
Rs.104 Very Important !!
Money Deposited Saving Interest Rate 4 %
Invest some portion
Rs. 100
of your saving in
Financial products
which can match or
beat inflation !!!

1 Kg = Rs 100 1 yrs Inflation After one year

7% 1 Kg = Rs 107
Asset Class
• An asset class is a grouping of investments that exhibit similar
characteristics. There are four broad asset categories or asset classes,
and then there are various subcategories, within each of these. The
four broad categories—Real estate, Commodities, Equity and Fixed
income.
 Different Asset Classes

• Cash ( Liquid Funds, Saving a/c, wallets, hard cash)

• Equity
• Real Estate/Infrastructure
• Fixed Income (RD, FD, PPF, NSC & Bond)
• Commodities ( Gold, Silver, Crude Oil )
 Factors to Evaluate Investment

• Safety,
• Liquidity,
• Returns,
• Convenience,
• Ticket size,
• Taxability of income,
 Investments Risks

• Inflation Risk
• Liquidity Risk
• Credit Risk/ Default Risk
• Market Risk & Price Risk
• Interest Rate Risk
 How Risk can be Managed ?

• Diversify Investment into various asset class.

• Avoid the asset class which investor don’t know.
• Take a position to benefit from some event /development
• Risk assessment through credit rating and various measures.
Are the investors Rational while taking
Investment Decision
Behavioral Biases in Investment Decision Making
• Availability Bias or Availability Heuristic: Most people rely on examples
or experiences that come to mind immediately while analyzing any data,
information, or options to choose from. In the investing world, this means
that enough research is not undertaken for evaluating investment options.
• Confirmation Bias : It is the tendency to look for additional information
that confirms to their already held beliefs or views. It also means
interpreting new information to confirm the views.
• Familiarity Bias : An individual tends to prefer the familiar over the novel,
as the popular proverb goes, 'A known devil is better than an unknown
angel.' This leads an investor to concentrate the investments in what is
familiar, which at times prevents one from exploring better opportunities.
 Behavioral Biases in Investment Decision Making

• Overconfidence Bias: It refers to a person's overconfidence in one's abilities or

judgment. This leads one to believe that one is far better than others at something,
whereas the reality may be quite different. Under the spell of such a bias, one tends
to lower the guards and take on risks without proper assessment.
• Herd Mentality : Since our evolution, we tried to remain in groups. We all want to
belong to a group. While taking investment decision we follow the group.
• Recency Bias : The impact of recent events on decision making can be very strong.
A bear market or a financial crisis lead people to prefer safe assets. Similarly, a bull
market makes people allocate more than what is advised for risky assets. The recent
experience overrides analysis in decision making.
• Loss Aversion: Loss aversion is a tendency in behavioral finance where investors
are so fearful of losses that they focus on trying to avoid a loss more so than on
making gains. It means people feel pain from losses much more acutely than they
feel pleasure from the gains of the same size.
• Example: In the wake of a financial crisis, such as the 2008 global recession,
many investors were afraid to invest in equities or real estate, recalling the
crash and the losses. Their decisions were influenced by the vivid memory
of the crisis rather than an objective evaluation of the long-term potential
of these assets.
• Let’s look at an example of confirmation bias:
• I have four cards for you (each has a number on one side and a letter on the other
side). One of the cards shows an E, one shows a 4 on one face, one has a K on one
face, and one has a 7.
• I say that a card with a vowel on one side (such as “E”) must show an even
number on the other side.
• My question to you is: Which card(s) do you need to turn over to see if I am
telling the truth? And what’s the minimum number of cards you need to turn over
in order to see if I am telling the truth?
• What did you choose? Most people will choose the E and the 4.
Unfortunately, that’s not the correct answer. The correct answers are
actually E and 7.
• If you turn over the E, and you find that there is an odd number, you’ve
proven that I was lying.
• If you turn over the 7 and you find that there is a vowel, then again, I was
lying.
• By turning over the 4, if there is a vowel on the other side, you only
prove that you don’t prove anything. All you do is confirm my statement.
 Herd Mentality Bias

Let’s look at an example of how the herd bias can affect someone in real life. You’re in a new city
and you’re looking for a place to eat. It’s early evening and you see two Greek restaurants right
across the street from each other.
Which restaurant do you choose? The one that’s crowded, full of people, or the restaurant with a
lot of open tables?
• It’s interesting – we’re hard-wired to herd. When asked, most people
will choose the busy restaurant over the empty restaurant. While some
may be rationally concluding that the busier restaurant probably has
better food (which may or may not be true) many are just making their
decision based on the decision of others.
• But what would happen if I told you this? – That, in fact, the first few
tables of people in the busy restaurant were actually comprised of
hired actors. The restaurant hired them to sit in the restaurant to make
the place look busy. How might that affect your decision?
 Loss Aversion

Selling Winners and

Holding Losers

Many investors don’t acknowledge a loss as being such until it is realized.

Therefore, to avoid experiencing the pain of a “real” loss, they will continue to hold
onto an investment even as their losses from it increase.

This is because they can avoid psychologically or emotionally facing the fact of
their loss as long as they haven’t yet closed out the trade. In their subconscious, if
not their conscious, thinking, the loss doesn’t “count” until the investment is closed.
 Asset Allocation

• Asset Allocation is a process of allocating money across various asset

categories in line with a stated objective.
• When you invest in one investment option or asset class, the risk you
are taking is extremely high. So, to reduce the risk you need to
diversify your investments by investing your money in different
investment options and asset classes like real estate, gold, mutual
funds, equities, and fixed deposits. This is what asset allocation is all
about.
 Asset Allocation Strategies
• Strategic Asset Allocation is allocation aligned to the financial goals of the
individual. It considers the returns required from the portfolio to achieve the goals,
given the time horizon available for the corpus to be created and the risk profile of
the individual. It is a passive diversified portfolio, and not changing your
allocations based on market conditions. You just hold, add money, and re-
balance.

• Tactical Asset Allocation is more advanced, and refers to actively adjusting your
weightings to different asset classes based on momentum or expected forward
returns from those asset classes. The purpose of such an approach may be to take
advantage of the opportunities presented by various markets at different points of
time, but the primary reason for doing so is to improve the risk-adjusted return of
the portfolio.
 How to Decide Your Asset Allocation?
Asset allocation varies from investor to investor due to difference in
financial goals and risk profile. Risk profile constitute with three
components – risk appetite, risk capacity, and risk tolerance.
• Risk appetite is how much risk you are willing to take.
• Risk Capacity is how much risk you can take.
• Risk Tolerance is how much risk you can tolerate, psychologically,
and mentally.
To know the risk profile of investor age, income, expenses, Liabilities
and time horizon are analyzed.
Test Yourself
Q.1 Which among the following investment avenues does not offer income
on a regular basis ?
a. Real Estate b. Physical Gold c. Stocks d. Debentures

Q.2 Which amongst the following asset categories can also be purchased for
consumption purposes apart from investment ?
a. Real Estate b. Stocks c. Bonds d. Debentures

Q.3 The Purchasing power of currency changes on account of which of the

following?
a. Asset allocation b. Compound Interest c. Inflation d. Diversification
Test Yourself
Q.4 What is the real rate of return :
a. Return that the investor gets after payment of all expenses
b. Return that the investor gets after taxes
c. Return that the investor gets after adjusting the risks
d. Return that the investor gets after adjusting inflation

Q.5 When interest rate in the economy increases, the price of existing
bonds…..
a. Increases b. Fluctuates c. Decreases