NiSM – Mutual Fund Distributor Va - Key Points

Chapter 1: Financial Planning and Model Portfolios

§ Financial Planning: Helping the clients to achieve their “financial goals”
§ Financial goal is defined with “Time” and “Money”. For ex: Buying a house worth
Rs.60 Lakhs after 5 years
§ Categorize the financial goals into Immediate term, Near Term, Medium Term and
Long Term
§ Future value of goals can be estimated based on current cost, time to goal and the
expected rate of inflation
• Estimating future value of financial goals done through “Future Value” function.
• FV = PV * (1+r/100)n

§ Financial planning (FP) process (Steps in Financial Planning):

1. Establishing the Client relationship, defining Client-Planner relationship
2. Gathering client financial data and defining financial goals
 3. Analyzing and Evaluating client’s financial status
4. Developing and Presenting Financial Planning Recommendation
5. Implementing the financial planning recommendation
6. Monitoring the plan
§ The objective of FP is to ensure the right combination of savings and investment for
meeting financial goals

§ Accumulation phase is the stage when investors are saving money for long term to
build wealth and not dependent on investment income. Accumulation phase of
wealth cycle can be compared to childhood, young unmarried, young married,
married with young children phase of Life cycle
§ An individual who’s few years before retirement is in Transition phase. The individual
would be achieving some of the key financial goals like Children’s higher education,
marriage, buying a bigger house etc.
§ Reaping or Distribution phase is also called as Retirement phase
§ Young investors need lower investment income but higher insurance protection;
Older investors need higher investment income and lower insurance
§ The allocation to growth or income-oriented assets will be determined by wealth
stage of the investor
§ Wealthy investors do not need goal based financial planning but need planning to
manage their wealth
 § Risk profiling seeks to understand the risk appetite of investors to ascertain and
appropriate asset allocation plan
§ Risk appetite depends upon age, accumulated capital, stability of income, number of
earning members and number of dependents
§ A model portfolio is indicative of the ideal asset allocation based on investor profile
and goals
§ Asset allocation: Deciding on how much to invest in Equity, debt, gold and real estate
and allocating the funds between these assets
§ Asset allocation must take correlation of assets into account. For ex: Equity markets
and gold prices are negatively correlated
§ Asset allocation that remains faithful to the investor’s financial goal and risk profile
is called strategic asset allocation
• Strategic asset allocation is changes when changes in family status of the
individual, change in financial goal or risk scenario etc
• Change in market conditions generally shouldn’t affect strategic asset
allocation
§ Tactical allocation involves including a market view, or expectations about
performance of an asset class, into the asset allocation decision
§ Fixed allocation involves periodic rebalancing of the investor’s portfolio to maintain
the fixed ratio whereas flexible asset allocation does not.

Behavioral biases in investment decision making

§ Confirmation Bias: Tendency to look for additional information that confirms their
already held belief or view. Using new information to confirm their existing views.
§ Familiarity Bias: Investor focuses on the investments which are familiar. This bias
prevents the investors from looking for new/better investment options.
§ Herd Mentality: Follow/invest where everyone is investing
§ Loss Aversion: Investors rather opt to avoid losses. Hold on to loss making
investments and hoping to make profits only from those stocks
 § Overconfidence: Individual’s overconfidence in the decision-making process which
clouds the judgement.
§ Recency bias: Recent positive or negative experiences influences the decision-making
process.

Selecting the Right Investment Product for Investors

§ 4 Assets Classes: Equity, Fixed Income, Gold and Real Estate
§ Real rate of return: Returns generated by the asset class after adjusting inflation
§ Ex: FD rate 8% and inflation 5%. Real rate = (1+ Investment rate) / (1+Inflation) - 1
§ In India historically, physical assets were preferred over financial assets due to their
tangible form
§ Government fixed income saving schemes offers guaranteed returns while equity,
bonds and mutual funds are non-guaranteed investments because they carry market
risk
§ Gold may be held in physical or financial forms. Investment in the financial form is
recommended. Physical gold is considered as true international asset class.
§ Gold ETF is a better investment compared to gold-linked companies’ funds.
§ REMFs are recommended over physical real estate due to limitations of small
investors, liquidity, and concentration
§ Investments in direct equity shares are considered to be risky for small investors.
Exposure to equities through mutual funds reduces risk due to portfolio diversification
and professional fund management
§ Debentures offered to retail investors are secured and listed but liquidity is low
§ Company deposits are unsecured and risky
§ Infrastructure bonds are unsecured and have low liquidity. They are preferred for tax
benefits
§ Investment Risks: Inflation Risk, Liquidity Risk, Credit Risk, Market Risk & Price Risk &
Interest Rate Risk
§ Public Provident Fund (PPF): One account per individual – original maturity of 15
years – Minimum investment Rs. 500/- p.a and maximum of Rs. 150,000/-
§ Investment in PPF enjoys the benefit of tax deduction u/s 80C along with other
investment options like 5 years Bank FD, NSC, Life Insurance Premium, ELSS schemes,
Home Loan principal etc
§ PPF is preferred for return assurance but is not liquid

§ National Pension Scheme (NPS):

§ Regulated by Pension Fund Regulatory and Development Authority (PFRDA)
§ Permanent Retirement Account Number (PRAN) allotted to the investor upon opening
of account in NPS
§ The NPS portfolio consists of;
• Asset Class E – Equity
• Asset Class C – Corporate Bonds (carries credit risk)
• Asset Class G – Government Bonds
• Asset Class A – Alternate Asset class (Investment in Mortgage backed securities,
Asset backed securities, Alternate Investment Funds. All these should be regulated
by SEBI)

§ Investors can actively choose – Aggressive Life Style Fund (Equity exposure 75%),
Moderate Life Style Fund (Equity exposure 50%) and Conservative Life Style Fund
(Equity exposure 25%)
§ Auto option in NPS decides the equity exposure in NPS portfolio for investors based
on their age. As the investor’s age increases, the exposure towards equity reduces
§ Investors would have
• Tier 1 Account – Pension. Limited withdrawal facility
• Tier 2 Account – Savings account. Partial withdrawal facility is possible. But Active
Tier 1 account is a necessity
Chapter 2: Concept and Role of a Mutual Fund
§ Investment objective defines the risk-return profile of the mutual fund

§ Unit Capital = No. of units * Face value

§ Face Value of MF units is assumed to be Rs.10/-
§ Value of the investment portfolio changes with a change in market price of the
securities
§ Assets Under Management (AUM) = Current NAV X Total Units Outstanding
§ Net Assets = Total assets + Accrued income –Current liabilities –Accrued expenses
§ Net Asset Value = Net assets/total outstanding units

§ If you are investing Rs. 100,000 and the NAV of the fund is Rs. 50 and Face Value is
Rs. 10/-. You will get 2000units (Rs. 100,000 / Rs. 50 per unit). Here Face Value and
Exit load will not make any difference.
§ Calculate NAV for the following questions:

§ Dividend accrued or interest accrued, are types of income earned but not received.
These items to be added
§ NAV = (150 + 67 + 2.36 + 1.09 + 2.68 – 0.36) / 1.90
§ NAV = 222.77 / 1.90
§ NAV = Rs. 117.25

§ NAV = (230 + 5 + 2.39 + 2.34 – 7.5 – 0.41)/2.65

§ NAV= 231.82/2.65
§ NAV= 87.48

§ Mutual funds offer benefits of Diversification, Professional Fund Management, Low

Costs, and Liquidity
§ Investment objective of mutual funds: The investors invest money into mutual funds,
they might have different objectives and end goals in mind. There might be people
who are looking for “Capital Appreciation”, “Regular Income” or “combination of both
Capital Appreciation & Regular Income”.
§ Each MF scheme must have pre-announced Investment Objective.
§ Mutual Funds can offer “Assured Returns” provided there is a financial guarantor

§ The investors can purchase or sell mutual fund units in Open-ended funds at any time.
Investors can buy additional units in the scheme any-time after scheme opens for
ongoing transactions
§ The closed-ended funds are listed on stock exchange. Investors can invest in close
ended funds only during NFOs and the fund will be closed after maturity. No fresh
purchase or redemptions allowed after the NFO of the fund. Post the NFO, the
transactions are done through stock exchange (no involvement of AMC)
§ Interval funds are closed-ended but become open-ended at specific intervals
§ International funds invest the corpus outside India. Hence exposed to “Foreign
Exchange Risk” and performance risk of the asset class where the money is invested.

§ Types of equity Funds

• Large Cap fund: Top 100 companies based on Market Capitalization
• Mid Cap fund: Next 150 (rank 101-250) companies
• Small Cap fund: Beyond 250 (rank no 251 onwards) companies
§ Large cap index and Large cap funds are considered to be safest and Sectoral funds
are riskiest funds among equity fund category
§ ELSS have a 3-year lock-in and provide tax deduction upto Rs.150,000 u/s 80C

§ Types of Debt Funds

§ Overnight and Liquid funds have the lowest risk of NAV volatility
§ Floating rate funds offer low mark to market risk
§ Gilt funds carry no credit risk
§ Corporate Bond funds and credit risk funds have a higher credit risk and provide
benefit of higher coupon
§ High yield bond funds invest in debt instruments that have lower credit ratings. They
are considered as riskiest funds in the debt fund family
§ Credit risk of a bond is measured by Credit ratings. A bond with lower credit rating
tends to offer higher rate of interest (interest offered by the bond is called as Coupon).
§ Interest rate risk - as the interest rates go up, bond prices go down – interest rate &
bond price carry negative correlation (inverse relationship)
§ As the bond’s tenor increases, the interest rate risk increases. The interest rate risk
is measured by modified duration
Benchmark for Debt Funds:

§ FMPs have no market/portfolio risk

§ MIP is debt-oriented while Balanced fund is equity-oriented

Hybrid Funds:
§ Balanced fund may have fixed or flexible asset allocation
§ Active funds seek to better the returns over the benchmark
§ International funds may invest in foreign securities or foreign funds
§ ETF transactions are executed on stock exchange. Indian commodity funds invest in
stocks of commodity companies or commodity ETFs
§ Arbitrage Funds takes advantage of price difference of same asset class but in 2
different markets. This strategy generates “Risk-free profit” , hence the returns can
be compared to Liquid Funds
§ Arbitrage funds are exposed to “Basis Risk”. These funds are safest in Hybrid Fund
family
Benchmark for Hybrid Funds:

§ Disadvantages of Mutual Funds

• Too many schemes to choose from
• Non-customization
• No control over costs
Chapter 3: Legal Structure of Mutual Funds in India

§ Mutual Funds in India are formed as “Trusts” – Governed by Indian Trusts Act 1882
§ Three-tier structure of Sponsor-Trust-Asset Management Company where sponsor
(Sponsor could be one or more) is the promoter
§ SEBI issues the license to start a MF and Sponsor applies for the license with SEBI
§ Sponsor appoints the Board of Trustees and Board of Directors of the AMC
§ The operations of MF are governed by Trust Deed. The Trust Deed is executed
between Sponsors and Trustees.
§ Investment Management Agreement: Entered between Trustees and Asset
Management Company (AMC)

§ Sponsor;
• A sponsor should have min 5 years of experience in financial services industry
• Positive net-worth for the preceding 5 years
• The sponsor should have earned profit (PAT) last 5 years. Should have an average
annual profit (PAT) of Rs. 10crs
• The sponsor needs to contribute 40% of the net worth of the AMC
• Sponsors have to contribute a min Rs. 50 Lakhs or 1% of the Corpus raised in NFO
as initial contribution to the corpus of the mutual fund (this doesn’t apply for close
ended funds)

§ Trustee;
• SEBI Approval is needed to before appointing the trustee
• Protector of investor’s interest
• 2/3rd of the trustee should be independent
• The trustee company should have minimum 4 trustees
§ Prior approval to be taken from SEBI before appointing the Trustees
§ Investors in the mutual fund are beneficiaries of the trust
§ Board of trustees oversee the working of the AMC and management of the mutual
fund
§ Trustees shall ensure that no change in the fundamental attributes of any scheme,
the fees and expenses payable or any other change which would modify the scheme
and affect the interest of the unit holders
§ On a quarterly basis the trustees shall review the transactions of the mutual fund with
the AMC and its associates. review the net worth of the AMC on a quarterly basis
§ The trustees shall file half-yearly reports to SEBI

§ Asset Management Company;

• Day to day and regular operations of the mutual funds is run by AMC
• AMC is the investment manager of the mutual fund companies
• Should have a net worth of at least Rs. 50cr always
• 50% of Directors of the AMC should be independent. Prior approval of trustees
needed for appointing the director
• Day to day management of the schemes handled by AMC. Signs to the “Due
Diligence Certificate” which states all the regulations have been met with. Reports
directly to the Head of the AMC
• 75% of the unit holders can come together to terminate the AMC
§ Changes in the controlling interest can be only made after prior approval from SEBI
and trustees.
• Communication of such to be intimated to all unit holders,
• an advertisement is given in one English daily national newspaper and
• in a regional newspaper where the head office of the AMC is located
• Unit holders should be given an option to exit without any exit load at the
current NAV, upto 30 calendar days from the date of communication
§ Compliance officer ensures all the legal compliance aspects are taken care.
§ Other Constituents of Mutual Funds
§ All the constituents (except) of Mutual Funds are appointed by AMC with the
approval of trustees
§ All the constituents of the mutual funds must be registered with SEBI
§ Custodian holds securities and cash and is appointed by the Trustees. Custodian
settles all the transactions on behalf of mutual fund.
• Custodians accept and give delivery of securities to complete the purchase and
sale transactions
• Custodian tracks Corporate Actions likes dividends, stock split, bonuses etc for
the fund
• All custodians need to register with SEBI (Custodians) Regulation 1996
• A custodial agreement is entered into between the trustees and the custodian
§ Custodial Agreement entered between “Trustees and the custodian” and Sponsor
cannot provide custodial services to its own AMC
§ Mutual fund constituents (except custodians) are appointed by the AMC with the
approval of the trustees
§ All mutual fund constituents must be registered with SEBI
§ R&T agent maintains investor records, services customers, handles the processing of
purchase and redemption transactions of the investors. This can be done in-house.
RTAs also act as Investor Service Centre (ISC) for multiple AMCs
• RTA functions include “Processing of Purchase & Redemption” transactions of
investors
§ Fund accountant calculates NAV, and it is not mandatory to outsource the role of a
fund accountant. Fund Accountants need not register with SEBI.
§ Auditors of the AMC (company) must be different from the auditors of the mutual
fund scheme
• Scheme auditors are appointed by Trustees
• AMC auditors are appointed AMC
 § Distributors enable the reach of mutual fund products across geographical locations.
Sponsor can be distributor for the AMC promoted and Sub-brokers are appointed by
distributors
§ Sponsor can be a distributor for their own AMCs
§ KYC Registration Agencies (KRAs): Carry out unified KYC formalities for securities
markets
• KYC needs to be completed under PMLA Act of 2002
• KRAs processes documents and details to establish the identity of the investor
§ Credit Rating Agencies
• Credit rating agencies like CIRISL & ICRA also takes care of the “Valuation of
securities”. They arrive at the fair value of the instruments
§ Depositories (NSDL & CDSL) holds securities in dematerialized or electronic form.
Depository participants helps in reaching out to clients.
§ Stock Exchanges and Transaction Platforms: They enable MF distributors to complete
MF transactions for their respective investors. BSE Star MF and NSE Mutual Fund II.
Mutual Fund Utilities (MFU) another platform powered by AMFI
§ Execution only Platforms: Enable MF transactions. To be registered with SEBI & AMFI

Chapter 4: Legal and Regulatory Framework

§ Indian mutual funds are supervised and regulated by SEBI (Mutual Funds) Regulations
Act, 1996. AMC and Trustee company are governed by the Companies Act and Indian
Trusts Act respectively
§ SEBI issues guidelines and framework for advertisements by MFs. Celebrity
endorsement of mutual funds at industry level (to create awareness) but not for
promoting individual schemes or AMCs
• Advertisement Guidelines:
• The standard warning “Mutual Fund Investments are subjected …….” , all 14
words, the running time should be minimum of 5 seconds (Clear and
Understandable Language)
• Ad guidelines – Disclosure of Performance:
• Point to Point returns (CAGR) of 1 year, 3 years, 5 years and Since inception to be
declared for funds who have been in existence for 3 years
• Point of Point returns to be published on standard investment of Rs. 10,000/-
• Additional Benchmark

• Mutual Fund Schemes should use “Total Return Index (TRI)” while comparing the
returns of the fund
• MF schemes cannot invest in unlisted securities or privately places securities by
the group companies of the sponsor. Can invest upto 25% of the net assets in the
group companies of the sponsor
• Debt funds shouldn’t invest more than 10% of the net assets in a debt instrument
(both Money Market & Non-money market instrument included). This can be
extended upto 12% with the approval of trustees. These limits not applicable on
Govt Securities & T-Bills
• Investing in Bank Deposits: Not exceeding 15% of net assets, but can be extended
upto 20% with the approval of the trustees

• SEBI Regulation on Investor Rights & Obligations:

• The MF investors are the beneficial owners of the assets of the scheme. Can ask
for “Unit Certificate” which discloses the number of units held by the investor
(doesn’t disclose current valuation).
 • Investor can change the Distributor or shift to Direct option without NOC (no
objection certificate) from the existing distributor. In such cases no commission
would be paid to neither new or old MF distributor
• Investor has the right to inspect documents like – Trust Deed, Investment
Management Agreement, Custodial Services Agreement, RTA Agreement &
Articles of Association of the AMC. But will not have access to documents like
investment strategy or stock selection process etc.
• Can Pledge MF units
• To bring in transparency – MF schemes are expected to disclose daily transactions
into Debt & Money Market securities with a time lag of 15 days
• SEBI Complaint Redress System (SCORES) – www.scores.gov.in – A centralized
grievance redressal system

§ RBI regulates Mutual Funds in the following circumstances;

• MFs will have to adhere to the guidelines with respect to investments in money
market & Govt Bonds – RBI is the regulator for Money Market and Govt Bond
market
• Investments done by Qualified Foreign Investors (QFIs) and Indian Mutual Funds
investing outside India etc
• RBI regulates sponsors of the Bank promoted mutual funds
§ Mutual funds would also have to adhere to the listing guidelines laid down by Stock
Exchanges since the MF schemes are listed and traded in there
§ Stock Exchanges are the Self-Regulatory Organizations (SROs)

§ Association of Mutual Funds in India (AMFI), is an industry body of AMCs in India in

order to promote the interests of the mutual fund industry and AMFI is not an SRO
§ AMFI issues AMFI Code of Ethics (ACE) and AMFI Guidelines and Norms for
Intermediaries (AGNI)
§ ACE sets out explicit standards for AMCs and Trustees
§ ACE sets the standards for good practices to be followed by AMCs in operations and
dealing with investors.
§ ACE is specified in 5th Schedule of SEBIs MF regulation act
§ ACE and AGNI have been recommended by AMFI and mandated by SEBI

§ AGNI – sets code of conducts for intermediaries like – Individual agents, Brokers,
Distribution houses and Banks engaged in selling MF products
§ The intermediary (MF distributors) has right of appeal to AMFI
§ In case of breach of Code of Conduct by intermediary, AMFI can initiate the following
• Write to intermediary and seek explanation within 3 weeks
• If the explanation is not received or it is not satisfactory, AMFI can issue a warning letter
- “subsequent violation will lead cancelation of AMFI Registration”
• Proven 2nd violation will lead to cancelation of AMFI registration and the same will
intimated to other AMCs

§ A Mutual Fund NFO

• Remains open for a maximum of 15 days
• The new scheme should allot the units within 5 days of closure of the NFO
• Account statement to be sent to the investors within 5 days
§ For ongoing mutual fund transactions, account statement to be sent within 10 days of the
transaction
§ ELSS and RGESS Fund NFO could be open for 30 days
§ The redemption proceeds to be sent within 10 days
§ Dividend warrant to be sent within 30 days
§ In case of delay in redemption proceeds or Dividend warrant, the AMC will have to pay 15%
penal interest
§ The interest cannot be charged to the scheme. It will have to be borne by the AMC
§ Dormant investors receive the updated account statement once in 6 months
§ Consolidated Account Statement (CAS) to be sent to the investors monthly (the deadline is
the statement for the current month sent to the investors by 10th of next month)
 § NAVs to be disclosed on AMFI website by 9 pm every business day and Fund of Funds to
declare the NAV by 10 am next business day
§ NAV is rounded off to 2 decimals for all schemes and to 4 decimals for liquid schemes
§ NAV for liquid funds is computed every calendar day
§ Mutual funds to disclose detailed Portfolio in the prescribed format every 6 months

§ Voluntary portfolio disclosure to unit holders should be done every month through Factsheet
§ Debt fund shouldn’t invest more than 10% of net assets on securities issued by single issuer
and shouldn’t invest more than 15% of net assets in Bank deposits
§ Equity fund shouldn’t invest more than 10% of net assets in equity shares of one company
§ Scheme-wise annual report to be mailed to all unitholders
§ The investor cannot sue any one for non-performance of the fund
§ Cannot sue the trust because it’s a notional entity
§ Termination or winding up of MF Schemes/AMCs by unit holders needs resolution by unit
holders holding at least 75% of assets in the scheme
§ Termination or winding up by trustees needs consent of unit holders
§ Change in Sponsor or the AMC must provide option to redeem without exit load
§ In case of unclaimed funds.
• If the investor claims the money within 3 years, in such case AMC will have to pay based
on current prevailing NAV
• If the investor claims the money after 3 years, the payment is based on the NAV at the
end of 3rd year

Chapter 5: Scheme Related Information (Scheme Documents)

§ The mutual fund scheme is offered through a legal document called “Offer Document”
§ Investment products are run by a principal “Caveat emptor” i.e, Buyer Beware
§ If SEBI doesn’t revert with modifications within 21 days from filing the document, the
AMC can launch the scheme in the market
§ SEBI doesn’t approve or dis-approve the scheme documents; it just gives its
observation. The Scheme documents are just “Vetted” by SEBI, not Approved
§ Offer Document consists of the details of
• Sponsor
• Trustees
• AMC: Details of the key personnel – constituents – condensed financial
information of schemes launched in last 3 financial years
• Scheme: Investment objective – Risk factors – Fees and expenses
§ The Offer Document has been split into 2 parts: Statement of Additional Information
(SAI) and Scheme Information Document (SID)
§ Both these documents are prepared based on the format prescribed by SEBI

§ The information like details of Sponsor, Trustees, AMC etc is common for all the
schemes and have been put under one document called as SAI
§ Last 3 years performance of existing schemes of the AMC is given in SAI
§ SAI is common document for all schemes offered. But technically SAI is part of SID
§ Document specific to the scheme related information is called as SID
§ Investment objective of the fund, eligible investors, Risk factors and Riskometer, Asset
Allocation, Benchmark of the fund etc are the details which are specific to the fund.
These are covered in SID
§ SID gives the information about who can and who cannot invest in the scheme
§ Risk-O-Meter – To be printed on the face of the SID

§ Fundamental Attributes of the Scheme:

• Type of Scheme (Open/close Ended, Equity/Debt/Hybrid)
• Investment Objective (Growth/Income generation/Both, Asset Allocation etc)
 • Terms of Issue (Liquidity provisions, Aggregate fees & expenses etc)
§ Every time a new scheme is launched, AMC will have to publish only SID
§ One common SAI is printed for all schemes offered by a mutual fund
§ SAI is part of SID
§ SAI provides the details of the Sponsors, AMC, Trustee Company, Other constituents
§ Condensed Financial information, Schemes launched in the last 3 financial years,
Rights of the Unit holders, Investor Valuation Norms, Investor Grievance etc

§ Key Information Memorandum (KIM):

§ KIM is the summary of SAI & SID. KIM would consist of the information of AMC, MF,
trustees, fund manager, Issue dates – opening & closing dates, Investment objective
of the scheme etc
§ The application form is found attached to KIM
§ SAI, SID & KIM need to be updated periodically. Any interim changes are updated via
Addendum. Addendum is part of scheme documents

§ Updation of SID:
§ Open Ended & Interval Schemes: The SID shall be updated within next 6 months from
the end of the 1st half or the 2nd half of the financial year
§ On ongoing basis SID is updated once in 6months, this updation needs to be
completed within a month
§ KIM shall be updated atleast once in half-year, within a month
§ SAI to be updated by the end of 3 months of every financial year.

§ Scheme documents only provide mandatory information that help a prospective

investor to make informed decision. But existing investors might not find any of that
information in Scheme documents
§ Current Value of Investments = Number units held by investor X Current NAV
§ Disclose the TER on daily basis – AMC and AMFI website
§ Any change in base TER to be communicated to investors via Email/SMS atleast 3
working days prior to effecting such change
§ All AMCs must publish “Scheme-wise dashboard” - All the details of the scheme to be
provided
§ MF schemes shall disclose the portfolio “as on the last day of the month/half-year” –
in the AMC & AMFI website within 10days from the close of the month/half-year
§ In case of Debt funds portfolio disclosure done once in fortnightly (once in 15 days)
basis. This is to be done within 5 days of every fortnight

§ Half yearly unaudited financial results of the AMC to be published. Advertised in one
English national daily and local language where the head office of the fund located
§ Annual reports to be published in AMC & AMFI website and advertised. The same
needs to be sent to the investors via email within 4 months of closure of the Fin Year
§ Factsheet of a mutual fund is not a mandatory document. But needs to be follow
SEBI disclosure norms. You would find Security & Sector wise allocation for equity
funds. Rating profile of various securities
Chapter 6: Fund Distribution and Channel Management Practices
§ Distributor’s role is to understand the needs, limitations, resources, and the financial
goals of the investors. Helps in arrive at the suitable asset allocation
§ Types of Investors:

Mutual Fund investors

- Individuals & HUF Non - Individual Investors

- Non resident Indians (NRIs) - Companies, partnership firms,
Banks, PFs etc
- Persons of India Origin (PIOs)
- Trusts and charitable institutions
- Foreign Nationals
- Qualified Foreign Investors (QFIs)

§ Individuals, HUFs, Companies, Partnerships, Trusts, Mutual funds, insurance

companies, banks, NRIs, FIIs, PIOs are eligible to invest in mutual funds
§ Foreign nationals (QFI – Qualified Foreign Investors) are allowed to invest in mutual
funds in India
§ Overseas Corporate Bodies are not eligible
§ Retail investors may be individuals, NRIs, minors, HNIs
§ Institutional investors require charter document, Board resolution and signatures by
authorized signatories to invest in mutual funds
§ Along with the regular set of documents, Institutional investors would also have to
submit last 2 years financial statements as per of KYC requirement

The traditional distribution channel by Mutual Fund:

 Mutual Funds

Non banking
Independent
Banks finance
financal advisors
companies

§ A distributor can sell the products of multiple mutual funds; there is no restriction on
the distributor to sell their choice of funds
§ Distributors helps the investors in completing the transactions for the investors. Such
transactions are submitted at “Official Point of Acceptance (OPOA)”
§ Institutional distributors provide benefit of a large network of clients and branches,
research and geographical reach
§ Other than conventional distribution platform, the eligible investors can invest
through the following two routes:

• Online Mutual Fund Distribution- Online investments, view current holdings at

latest NAV and conduct sale/re-purchase transactions
• Distribution through Stock Exchanges- Stock exchange brokers conduct mutual
fund transactions through their trading platforms
• Mutual funds are traded on stock exchange platforms through brokers between 9am and
3pm. Transactions done through stock exchange doesn’t replace R&T Agents, RTA agents
settles the transactions
• MF Utilities (MFU): Transaction aggregation platform connects Investors, RTAs,
Distributors, Banks, AMCs etc. Provides online access to distributors to complete investor
transactions
• Investors who register with MFU platform are allotted with Common Account Number
(CAN), where you can aggregate all MF transactions. CAN mapping is done based on PAN
§ Becoming a MF Distributor
• Individual distributors and employees of institutional distributors must clear the
NISM MFD – Series Va certification examination
§ Exception from writing the exam for individuals who attained the age of
50 years or has 10 years’ experience in securities markets as on 31st May
2010. They can attend Continuing Professional Education (CPE) training
program conducted by NiSM to get the NiSM MFD Va certificate
• Individual distributors need to obtain the AMFI Registration Number (ARN)
• Individuals & Institutions in the distribution business also need to get registered
with AMFI & complete KYD formalities
• To strengthen the registration procedure of distributors and to ensure correctness
of information in the ARN registration application, AMFI has introduced the KYD
process. This helps to verify the details of the distributor.
§ Self-attested copy of PAN card and Address Proof – to be submitted along
with the application form with CAMS-POS. Original documents to be
shown for verification
§ Biometric Process: Impression of right hand’s index finger. In case of non-
individuals Bio-metric details of “Specified authorized persons” is taken
• All the employees of distributors should have ARN number and employ Unique
Identification Number (EUIN) from AMFI
• Empanel with individual AMCs separately.

§ Revenue to the MF Distributor:

§ Commission to Distributors: Distributors earn only commission, not any other type of
remuneration for selling mutual funds.
§ No upfront commission is paid to the distributor at the time of investment. Exception
is for investment in SIP upto Rs. 3000/- per month, by the first-time investor to MF
industry, upfronting the trail commission is allowed
§ A distributor earns only trail commission. It is calculated based on “Net Assets” of the
distributor with the respective AMC
§ Trail commission is paid by the AMC till the time investments are held and paid on
quarterly or monthly basis. The trail commission is calculated based on the AUM
(market value of the portfolio)
§ Let’s understand this with an example:
• If the AUM of the distributor is Rs. 10 lakhs,
• at Rs. 10 NAV the number of units is 100,000
• the trail commission agreed is 1%.
• Then the trail commission calculated as follows

§ Trail commission for the day = AUM X trail commission rate p.a.% /365
§ For promoting mutual fund products in small towns is a tough task. Distributors would be
awarded with higher commission for garnering business from B-30 (Beyond 30) locations
in India
§ Transaction Charges: MF Schemes can charge transaction charges on the investments
and same can be paid to distributors

§ In case of SIPs, if the SIP committed amount is more than Rs. 10,000 and transaction
charges can be charged and deducted in 4 installments
§ These transaction charges are deducted from the Gross Investment amount of the
investors, the balance is invested. If the investment amount is Rs. 10,000 if the
transaction charges are Rs. 150/- then, units would be allotted for Rs. 9,850/-
§ This is not applicable on STP and Switch Transactions
§ Distributor can “Opt out” of the transaction charges, the same will not be deducted
from the investors
§ GST on Distributors Commission: Distributors earning a commission of Rs. 20 lakhs
and above is liable to pay GST – hence they raise GST invoice to AMCs. AMCs deduct
the corresponding GST Value on the unregistered MF distributors and remit the taxes.
§ Distributors must follow ACE, AGNI and guidelines prescribed by the AMC

§ Distributors - Commission Disclosure and Due Diligence Process by AMCs

§ AMCs to disclose the commission paid to the distributors in the respective websites
and conduct the due diligence process to the investors
§ The disclosure and the due diligence process is done for the following distributors,
who meet any one of the following criteria
• Distributors with the presence in more than 20 locations
• Manages the AUM of Rs. 100 crores of Individual investors
• Commission received to an extent of Rs. 1cr from the MF industry
• Commission received to an extent of Rs. 50 lakhs from a single AMC

§ The Due Diligence process includes, AMC looking into the Business model of the
distributor, experience, compliance of regulator aspects, review the associates &
subsidiaries etc

§ Direct and Regular Plan: Direct plan is an option available for investors who are
looking at investing into a mutual fund scheme directly without taking assistance
from distributors. Direct plan will have lower expense ratio compared to “Regular
Plan”. Regular Plan would be opted if the investments are done through a Distributor
§ The difference between the Direct & Regular plan is the commission paid to the
distributor.
§ Both the options shall have different NAVs
§ Since there is no commission payout in this case, the overall expense ratio for this
route would be less. Hence have higher returns
§ If the ARN number is not mentioned in the MF Application form, such application
form would be treated as Direct route application

§ Investor Advisor Vs MF Distributor

§ A service provider can be a MF distributor or a Registered Investment Advisor (RIA).
§ A MF distributor handles only the execution part of the MFs. Investment advice is
incidental to the primary activity i.e, execution/distribution. MF distributors earn
commission from the AMCs
§ An Investment Advisor must be registered with SEBI. Main role is to advice the client
after due process. Can charge investor advisory fees. But need not handle execution,
but an investment advisor doesn’t get commission from the AMCs
§ A MF distributor is subjected to follow the regulation of -SEBI (Prohibition of
Fraudulent and Unfair Trade Practices) Act 2003. Mis-selling of MF units includes;
• Making a false or misleading statement
• Hiding or leaving out the material facts of the scheme
• Hiding the potential risks of the scheme
• Not taking reasonable care to ensure the scheme is suitable to the investor

§ Nomination facilities to MF distributors and Payment of Commission to Nominee

§ It is advisable for all the individual distributors to register “Nomination”
§ In case of death of the MF distributor, trail commission is paid to the nominee or
Legal heirs if there is no nomination
§ Trail commission is paid till the investments by the investors are held or till the ARN is
changed. But no new business permitted under that ARN code. No new systematic
transactions can be registered
§ Nominee need not be ARN holder
§ Transfer of AUM of the deceased distributor: The nominee or legal heir of the valid
ARN holder (deceased distributor), can get the AUM transferred to their name
provided
• The nominee/legal heir also has valid ARN and be compliant with KYD formalities
• The AUM built by the deceased agent till the date of the death or till ARN is valid,
only such AUM is transferred

§ Change of Distributor (change in ARN)

§ As discussed earlier, Investor need not obtain NOC from the existing distributor to
change the distributor or switching to direct plan
§ If the ARN is changed due to existing distributor closing the business voluntarily, in
such cases the new distributor would get the trail commission
§ A distributor can change the ARN number/distributor code under following
circumstances
• Change in legal status of the distributor – Shift from Proprietorship to Pvt Ltd etc
• Merger or Acquisition of the business
• Transfer of AUM due to consolidation within the same family/close relatives of
individual distributors or Transfer of business by Individual distributors
• Such transfer is possible only when the “Entire AUM” is getting transferred from
existing distributor. No further business done in old ARN code and the same is
surrendered
Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of Units
§ Valuation of Securities:
§ Valuing each security in the investment portfolio of the scheme at its “Current
Market Value” is called as “Marking to Market”
§ All equity instruments are valued at its Last Quoted Closing Price on the stock
exchange
§ Value of Gold: Gold held by Gold ETFs is based on the price “AM fixing price of
London Bullion Market Association (LBMA) in US dollars per troy ounce for gold
having a fineness of 995.0 parts per thousand”
§ For Silver – we follow the same principle mentioned above for fineness of 999.0 parts
per thousand
§ Non-traded securities are valued based on Principle of “in-good faith”

§ Accounting: NAV, Loads, FRE, Cut off time guidelines and Time stamping
§ Computing NAV
§ NAV reflects the true worth of each unit of the scheme. Investors buy or sell units
based on the NAV
§ The process of arriving at the current value of the investment portfolio is called as
“Mark to Market (MTM)” – Represents the true worth

§ Types of Expenses:
§ Loads: MF schemes cannot charge any entry load to the investors. Exit load and
Contingent Deferred Sales Charge (CDSC) must be credited back to the scheme
§ Exit load reduces the re-purchase price to the investor
§ The total expenses charged by the scheme can be segregated into “Investment
Management Fees” & “Recurring Expenses”
§ A MF scheme shall not charge Investment Management fees on Segregated
Portfolios
§ Recurring Expenses (RE) or Total Expenses Ratio (TER): The recurring expenses are
charged to the scheme on a daily basis. The expenses cover the expenses of all the
key constituents
§ Some of the recurring expenses are – Commission paid, Brokerage, Fees paid to RTA-
Custodian-Auditors etc, Costs relating to investor communication, Listing fees,
Storage cost in case of Gold/Silver ETF
§ The expenses of the scheme reduce as size of the fund (AUM) increases. The fund
expenses are negatively correlated with corpus of the fund
§ Any expense incurred over and above the maximum prescribed limits has to be
borne by the AMC
§ Maximum expense ratio (TER – Total Expense Ratio) charged by
• Equity fund - 2.25%
• Debt oriented funds - 2.00%
• Passive Funds like - Liquid, Index and Exchange Traded Funds is 1%
• Interval Funds – Equity Oriented: 1.25% & Debt Oriented: 1%
§ Fines & penalties, Fund Accounting fees and General administration expenses of
the AMC cannot be charged to the scheme as expenses

§ The standard cut off for mutual fund transaction is 3.00pm

§ There are 2 exceptions to this rule;
• In case of purchase in Overnight funds and Liquid funds, if the investor has
transferred the money online before 1.30pm, previous day NAV would be
allotted
• In case investments are done in any type of funds through Cheque the
applicable NAV would be the date of cheque realization
§ Time stamp is recorded for all transactions. Online and stock exchange transactions
are time stamped using server/system time
§ The application form for all transactions, specifically financial transactions, must be
time stamped. The location code, machine identifier, date, time (hh:mm) and
 running serial number are generated in every time stamp. The serial number is a
continuous running serial number
§ For each financial transaction there are three impressions under one-time stamping

§ Valuations:
§ Conservative Approach is followed in calculating “Distributable Reserves”
§ Dividends can be given only from distributable surplus. Distributable surplus
includes realized gains, accrued income and unrealized losses but does not include
unrealized gains
§ Accounts of each mutual fund scheme have to be maintained separately
§ Average cost is used to determine holding cost
§ Equity securities are valued based on last traded price
§ Debt securities with residual maturity more than 31 days are valued on weighted
average price if traded or valued using CRISIL yield matrix. Debt securities with
residual maturity less than 31 days valued on amortization basis

Chapter 8: Taxation
§ Income earned by Mutual fund in its portfolio is exempt from tax (for example, interest
earned by MF portfolio or capital gains by selling stocks is tax free at portfolio level)
§ Income from Mutual funds is exempted because they are “Pass Through Vehicles” –
basically we as investors pay tax in our hands, hence mutual funds aren’t charged
separately
§ Investors would earn – “IDCW – Income Distribution & Capital Withdrawal (Dividends)”
and “Capital Gains”
§ A fund with more than 65% of average net assets invested in direct equity stocks (listed
in India) and equity related instruments are treated as equity funds for the purpose of
taxation. All types of Equity Funds, Equity Hybrid funds, Dynamic Asset Allocation Funds,
Arbitrage funds are treated as equity funds
§ Securities Transaction Tax (STT) is applicable only on redemption of equity mutual fund
units. The applicable rate is @0.001%
§ Stamp Duty on MF units – Levy of stamp duty on the amount invested @0.005% -
applicable at the time of issuance of units

§ Dividends: Dividends are taxable in the hands of investors under the head “income from
other sources”
§ There is no tax deducted by the Mutual Fund (at source) if the value of the dividend is less
than Rs. 5000/-. More than this 10% TDS is deducted
§ Capital Gains:

§ Long Term Capital Gains from equity funds up to Rs.100,000/- p.a. is exempted from tax.
10% LTCG is applicable in excess of Rs.1 Lakh
§ Grand fathering of Capital Gains in Equity: LTCG from equity became taxable income
from 01-Feb-2018. So any LTCG earned from Equity upto 31-Jan-2018 is exempted from
tax.
§ Capital Loss can be set off only against ‘Capital Gains’ not against any other heads of
income
 § STCL can be set off against LTCG/STCG
§ LTCL can be set off only against LTCG

§ Applicability of GST:
§ GST is charges on the TER (including investment management fees)
§ GST is applicable on Exit load & as discussed earlier, applicable on commission paid to
distributor as well

Chapter 9: Investor Services

§ Process of NFO
• AMC decides on the scheme – Inputs from CIO & CMO
• An AMC can have only one fund from the category (Exception – Sectoral &
Thematic Funds can have multiple funds)
• AMC prepared the Scheme Information Document (SID) – This needs to be
approved from Trustees and Board of Directors of the AMC
• The documents are then filed with SEBI. Implement by the observations by SEBI.
After the approval from the trustees, the same can be taken to market
§ Scheme Re-opening date: Date from which the scheme is available for Purchase or
Redemption for the investors. This is not applicable for close ended funds.

§ Renaming the Dividend Option

§ Income Distribution Cum Capital Withdrawal (IDCW) Payout and IDCW Reinvestment
§ When you opt for IDCW reinvestment option, number of units held by you goes up.
This is because every time dividends are declared the same amount is reinvested back
to the fund at the new NAV (ex-dividend)
§ IDCW (Dividends) is paid as a % to Face Value (50% dividend would mean – Rs. 5/-
per unit. This would mean 50% of Rs. 10/-)
§ The NAV of the fund goes down to an extent of divided amount when the dividends
are declared
§ If the NAV is Rs.100/- and the fund declares the dividend of 100% (that means 100%
of Rs. 10/-). The NAV of fund would go down to Rs.90/- once the dividend is paid out
§ Once the dividend is declared and till is not paid out – Such NAV is called as Cum-
dividend. In this example Rs. 100/- is Cum-dividend
§ NAV of Rs.90/- (post dividend declaration) is called as Ex-dividend

§ Mutual Fund Investors:

§ Resident Individual (Adult >18 years) A MF application can have 3 joint holders. Once
the folio is created joint holders can neither be added or deleted, unless death of the
joint holder
• Redemption, Dividends & Tax benefits (80C) etc will go to the first holder
§ No TDS applicable on redemption of MF units by Resident Investors
§ Investment done by Minors: Investment done through guardians. Investment done
in the name of minor cannot have Joint Holders
• PAN & KYC of the guardians is done in case of minor investments
• Age proof of the minor to be submitted
• Once Minor attains the maturity (18years), he/she would replace guardian
• Once attaining the maturity, Fresh KYC, PAN & Signature attested by the banks to
be updated in the folio. Till then the folio/account would be frozen
§ Payment for Minor investments could come from Bank accounts of Minor, Parents or
Legal Guardians or Joint Account of the Minor with Parent/Legal Guardian

§ A MF folio can be operated by a Power of Attorney

§ Both POA holder and the issuer should comply with PAN & KYC requirements – submit
the same to AMC
§ The grantor of the POA (Original investor) can continue to operate even after giving
POA. The POA holder can conduct all MF transactions except changing the nomination
§ Hindu Undivided Families (HUFs) – Investments are done in the name of Karta.
Against the name of the Karta, HUF is added to indicate family investment
§ All categories of Non-individual investors are allowed to invest in Indian Mutual
Funds

§ Non-Resident Individuals - Investing in Indian Mutual Funds

§ NRIs can invest in mutual funds in India. Investments can be done through two types
of Account Non-Resident Ordinary (NROs) and Non-Resident External (NRE) accounts
§ NRE accounts are meant for transfer of funds earned in foreign currency outside India.
Investments into MFs can be made using NRE account and money can be transferred
back (repatriated) at redemption
§ NRO accounts are meant for income earned in Indian rupee accounts. The redemption
proceeds are not non-repatriable. If the Investments done via NRO account, then in
such cases redemption proceeds would also be transferred to NRO Account, cannot
be transferred to NRE Account
§ FCNR accounts are used for payment remitted from abroad, FIRC is used as proof
§ NRIs are subject to Tax Deduction at Source (TDS) while redeeming from MFs
§ FIIs use non-resident rupee accounts for investments in India
§ Foreign Investors (referred as Qualified Foreign Investors - QFI) are allowed to invest
in India
§ NRIs & QFIs provides additional information under Foreign Account Tax Compliance
Act (FATCA) and Common Reporting Standards (CRS).
§ The information collected under FATCA is shared with – International Tax Authorities
(US Internal Revenue Services), Foreign Govt or to the Income Tax Authorities
§ Following details collected
• Place of birth, Country of Birth, Country of citizenship/nationality
• Is Investor’s tax residency/country of birth/citizenship/nationality other than India
• If yes, indicate all countries where investor is tax resident associate Tax ID number
§ Bank Account Details:
§ Mandatory to provide bank details. Name of the Bank, Address, Account number,
Type, MICR and IFSC details to be provided
§ One Individual can add upto 5 Bank accounts in a single folio and non-individuals can
add upto 10 bank accounts
§ While opting for holding units in Demat account, Bank details provided in the
application form should match the details of the bank account that is linked to the
Demat Account
§ If you looking to get redemption credited to a different bank account other than the
one you provided during the application process, provide additional documents like
cancelled cheque etc.

§ MF application can have nomination. 3 nominees are allowed, and investment

allocation could be among the nominees
§ Single holder folios must have nomination. If there is no intension to nominate, then
a separate declaration should be provided
§ An investor can hold multiple investments from a Mutual Fund in a single folio

§ Payment Mechanism for MF investments:

§ An investor can invest in Mutual Funds via online platforms including from the AMC
website
§ The investments can be made via traditional payment methods – Cheque or Demand
Drafts (DDs) as well
§ Digital mode of payments (NEFT, RTGS, IMPS, UPI, Aadhar Enabled Payment System,
Debit Cards, SWIFT -for international transfers) are also allowed. Can set up the ECS
mandate using NACH mandate
§ One can invest in NFO using ASBA (Application Supported by Blocked Amount) –
where are funds are blocked in Investor’s Savings account and the money is deducted
when the units are allotted
§ An investor can invest in Mutual Funds using Cash upto Rs. 50,000 p.a. per AMC. PAN
& KYC is compulsory and Dividends or redemption payouts is done via Bank a/c only
§ One can invest using e-wallet as well. The maximum limit is Rs. 50,000/- per mutual
fund per financial year. But the e-wallet shouldn’t have been loaded with Credit cards
or cashbacks for investing
§ Payment modes for SIP-Postdated Cheque, Electronic clearing service and standing
instruction for direct transfer
§ Third Party Payments: The general rule is third party payments are not accepted in
Mutual Fund investments. If the investments are via joint account, First holder in the
Mutual Fund scheme should be one of the joint holder of the bank account. There are
some exceptions to the third-party payment rule
• Parents/Grand-Parents/related parties investing on behalf of minor upto Rs.50,000
• Employer investing on behalf of Employee as part of payroll
• AMC investing on behalf of its distributors in lieu of commission
§ In case of redemption the default mode of payment is Online Transfer
§ Instant Access Facility (IAF) – Allowed for Liquid Funds, the money would be credited
to investor’s bank account the same day. The limit is Rs. 50,000/- or 90% of the fund
value whichever is lower

§ Application form is used for fresh purchase whereas transaction slip is used for
additional purchase
§ KYC is essential for all mutual fund transactions – PAN and Address proof to be
submitted
§ PAN is mandatory for all investors (Exception: Micro SIP-annual investment in SIP or
Lump-sum less than Rs.50,000 p.a.)
• Micro SIP exemption from PAN is applicable only for Individual (proprietor, NRIs
included, Minors) investors, not available for HUF and other non-individual
investors
 • Still will have to complete KYC – PEKRN – Pan Exempt KYC Reference Number
with valid Id and Address Proof
§ Centralized KYC Registration Agencies – Centralized KYC Process done by KRAs (KYC
Registration Agencies). Intermediary should perform the In-Person Verification (IPV)
§ Government of India authorised the Central Registry of Securitisation and Asset
Reconstruction and Security Interest of India (CERSAI) – to perform as Central KYC
Record Registry. This includes receiving, storing, safeguarding and retrieving KYC
records
§ E-KYC by UIDAI is also accepted as a valid KYC

§ Switch options:
§ Systematic Investment Plans (SIPs): Helps investors to invest regularly on a fixed date.
Since the MF units are purchased at different market levels, SIP offers the benefit of
“Rupee Cost Averaging”
§ Applicable NAV for SIP is NAV on installment date
§ Some AMCs also offer Top-up SIP
§ Systematic Withdrawal Plan (SWP) is used to systematically withdraw money from a
stipulated scheme either to book periodic profits or to generate regular income
§ Systematic Transfer Plan (STP) helps in portfolio re-balancing-transfer from source
scheme and investment into destination scheme. STP could be considered as
combination of SWP + SIP
§ A switch is sale and re-purchase transaction rolled into one
§ Switch is carried out by R&T agent in investor records
§ Trigger transactions: Can be used to Switch-in and out of Equities based on market
movements
§ Mutual funds can be pledged for borrowing funds. If the MF units have lock-in period,
such lock-in period should have been completed while the units are being pledged
Chapter 10: Risk, Return and Performance of Funds

§ General & Specific Risk Factors:

§ General Risks – Also referred as Standard (Systematic) Risk – Common risks like GDP
slowing down, higher inflation, market crash etc. Applies on everyone uniformly
Examples: Liquidity, Interest rate risk, Exchange Rate risk, Political, Inflation
§ Specific Risks – These risks are specific to the scheme.

§ Analyzing Equity Shares:

§ Fundamental Analysis uses financial information to evaluate a stock
§ Fundamental analysis is the study of EIC. EIC is Economy-Industry-Company analysis
§ Top down approach is study starting from Economy level and bottom up approach
is starting the study from Company level
§ Technical analysis: Uses Prices and Volume of the stocks as predictive tool

§ PE ratio and Dividend Yield:

§ PE Ratio = Market price of the share /Earnings per share
§ Earnings Per Share (EPS) = Profit After Tax / No of shares outstanding
§ This ratio tells us whether the stock is overvalued or undervalued when compared to
peer group or industry. For ex. If a stock’s current market price per share is Rs. 200/-
and Earning Per Share is Rs.20/- in such case.

P/E ratio = Market Price per share Rs. 200

Earnings per share (EPS) Rs. 20

§ The PE ratio is 10X, which means to earn one rupee of EPS, the investor will have to
invest Rs.10/- or at present market is paying Rs. 10/- to earn Re.1/-. When compared
if a stock’s PE is less than the peer group it is considered to be undervalued and
expenses when a particular stock’s PE is higher than the industry average
§ A “Value Style” investor looks for stocks which are relatively undervalued compared
to the peer group. One of the parameters to look for intrinsic value is PE ratio. Value
style investors seek low PE stocks.
§ “Growth style” investors invest in the stocks of companies that are likely to grow
much faster than the market even though the stocks are relatively expensive.
Investors prefer keeping these stocks in their portfolio, but it tends to decline more in
times of market correction
§ Dividend Yield: This ratio measures the dividend payouts received from the company
as a percentage of each rupee invested in the share. If a company has declared Rs. 5/-
as dividend and its current market price per share is Rs. 100, in that case;
Dividend Yield = Dividend per share = Rs. 5 Dividend yield is 5%
Market Price per share Rs. 100

§ High dividend yield is due to high payout and low market risk which is an ideal Scenario
for conservative investors.
§ PBV Ratio = Market price / Book value per share

§ Measuring the Performance of Equity Mutual Funds

§ Simple Absolute Returns: If you have invested Rs. 10/- and over 6 months if the NAV
of the fund has grown into Rs. 12/-. Then the fund has generated 20% returns =
(12-10)/10. In this case don’t annualize it (mentioning 40% returns p.a. isn’t
recommended)
§ CAGR: Compounded Annualized Growth Rate
§ Alpha: Jenson’s Alpha measures the excess returns generated by the fund over and
above its expected rate of returns
§ Sharpe Ratio:

§ Treynor Ratio: This ratio is very similar to Sharpe Ratio. In denominator we use “Beta”
instead of Standard Deviation

§ Tracking Error: Tells us the relative risk of an investment portfolio when compared
to its benchmark. This tells us how much the investment portfolio is deviating from
the benchmark

§ Understanding the performance of Debt Funds:

§ Bond’s total return consists of accrual income and capital gains/losses. Higher the
modified duration of a bond, higher the interest rate sensitivity of a bond
§ Fund manager alters strategy based on interest rate view
§ Risk in debt funds: Credit Risk and Interest Rate Risk
§ Credit Risk: Risk of default is called as credit risk. Credit risk is measured by Credit
ratings. As the credit rating starts going down, the interest offered by these bonds
increases. A high yield debt fund would invest into bonds with relatively lower credit
rating, hence generating higher returns.
§ Interest rate risk: In a Debt MF scheme, when a fund manager buys a bond, it is not
necessary that the bond should be held till maturity. The fund manager can sell the
bond before its maturity in secondary market.
When the bonds are issued, they are issued at a specific Face Value and Coupon rate
which remains same till the maturity of the bond. But interest rates in the market
keep fluctuating at regular intervals. In such cases;
o When the interest rate in the market goes up, the market price of the bond
goes down.
o When the interest rate in the market goes down, the market price of the bond
goes up.
o The interest rate risk of the fund is measured by “Modified Duration”

§ Other Parameters:
§ Restriction on Redemption of Funds: The Mutual Fund schemes can impose
restrictions from investors redeeming the funds due to any of the issues like Liquidity,
Operational or Market Failure
• Restrictions can be imposed on for a specified period of to an extent of 10 working
days in any 90-day period
 • Approval of Board of Directors of the AMC and Trustees need to be taken before
imposing such restriction
• No restrictions on redemption upto Rs. 2 Lakhs. If the redemption value is more
than Rs. 2 Lakhs, redeem the first 2 lakhs as the request is received and the balance
can be paid once restrictions are lifted
§ Segregation of Mutual Fund Portfolio (Side Pocketing)
§ Applicable when Bonds invested by the MF scheme defaults from its payment or
downgrade in credit rating (also called as Credit Event)
§ The AMC can create a separate portfolio of bonds which defaulted
§ The segregation should be done from the day of credit event
§ No redemption or subscription allowed in the Segregated Portfolio. But These units
are listed in stock exchange
§ AMC cannot charge Investment Management & Advisory Fees

§ Mutual funds manage market risks through diversification

§ Money market securities/large cap stocks help in ensuring sufficient liquidity
§ Deterioration of the credit quality will result in falling prices and net asset values
§ Choice of a benchmark depends on fund objectives and the asset classes in which it
invests
§ Tracking error measures consistency of returns

Chapter 11: Mutual Fund Scheme Performance

§ Compare the performance of the Fund with the appropriate Index called
“Benchmark”
§ The index used is “Total Return Index (TRI)” not Price Return Index (PRI)

§ Factsheet: A voluntary document published by the AMC on a monthly basis

§ Official document by the AMC which shares the fund objective, performance, detailed
portfolio
§ Generally, also provides economic & market update, Fund Manager views etc
§ Provides all the necessary information about the fund

§ An equity fund with a consistent performance over long term, lower cash levels, lower
portfolio turnover ratio and not a large size will be preferred
§ Large cap funds are relatively less risky compared to Mid & Small Cap funds
§ Thematic and Sectoral funds are concentrated and risky. Therefore, must be chosen
tactically
§ Higher the portfolio turnover ratio, greater the frequency of trading, and lower the
average holding period
§ An actively managed (regular Large cap, mid cap funds etc) fund is riskier than a
passive fund (Index funds and ETFs)
§ Dividend yield funds are less risky, compared to growth-oriented funds. Higher
dividend yield fund follows Value strategy considered to be less risky

§ In a bullish market, growth funds outperform; in a bearish market, value funds

outperform
§ Higher the average maturity and modified duration of a debt fund, greater the
interest rate risk of the fund
§ Expense ratio is one of the key parameters considered in selecting debt funds
§ Performance of debt funds is typically evaluated for periods from three months to one
year
§ Performance of a hybrid fund depends on the allocation to asset classes and changes
to this allocation
Chapter 12: Mutual Fund Scheme Selection
§ A Mutual Fund scheme is selected based on Investor Needs, Preference & Risk Profile
§ Risk Profile of the investors done using “Risk Profiler Questionnaire”
§ Factors influencing the scheme selection: Investor’s Allocation, Age of the investor,
Investment Horizon etc

§ Build the mutual schemes portfolio using “Core & Satellite” Portfolio

§ Risk Levels in Mutual Funds

§ Risk hierarchy of MFs by category: Liquid funds – Debt funds – Hybrid funds – Equity
funds
§ Risk hierarchy of Debt Funds: Overnight funds – Liquid funds – Ultra short duration funds
– Low duration funds – Short duration funds – Medium duration funds – Medium to long
duration funds – Long duration funds
§ Risk hierarchy of Equity Funds: Small cap funds – Mid-cap funds – Multi cap funds – Large
and mid-cap funds – Large cap funds
§ Risk hierarchy of Hybrid Funds: Arbitrage fund – Equity savings fund – Conservative
hybrid fund – Dynamic asset allocation fund – Multi asset allocation fund – Balanced hybrid
fund – Aggressive hybrid fund