CONTINUING PROFESSIONAL

EDUCATION (CPE) PROGRAM

FOR
MUTUAL FUND DISTRIBUTORS
Version: 5.0

1
About NISM CPE:

-NISM Continuing Professional Educational Program aims at

updating certificate holders with recent changes in market and
regulations introduce new topics that may add value
-The CPE Program is of one day duration and the candidate can
attend it anytime during the last year of the validity of his/her
certificate.
-At the end of the day there will be an evaluation based on the
topics covered in the CPE Program.
-Participants will be considered eligible for revalidation/ issue
of certificate once they have successfully completed the related
CPE Program of NISM.
-Please see the CPE Guidelines available on NISM website
(www.nism.ac.in)
Instructions:
For successfully completing CPE Program:
Please make the complete payment towards CPE fee.
Please submit all the required proofs and photograph.
Please attend the complete CPE Program.
Please remember to sign on the attendance sheet at the beginning and at
the end of the program.
The candidate handout contains additional information for reading and
reference which may/may not be covered during the training session.
Please switch off your mobiles.
Please keep all your questions for the end of each session.
Disclaimer:
This presentation has been updated in October 2019. The trainers may inform the
candidates about the latest market and regulatory changes that took place post
this version.
This presentation is made for the purpose of use by our trainers for the sessions
and for the benefit of participants.
NISM does not endorse the views and opinions expressed by the trainers.
NISM will not be held responsible for any personal opinions expressed by the
trainers.
 Agenda
Session 1: Mutual fund trends
Session 2: Mutual fund scheme selection
Session 3: Mutual fund scheme selection (contd.)
Session 4: Mutual Fund Operations, and sources of information

5
SESSION 1: MUTUAL FUND TRENDS

6
 Session 1 Agenda
• Changes in the recent past
– Product
– Regulatory
• Industry growth
– Growth of mutual fund industry
– Growth of mutual fund distribution

7
 Products
• ETFs
• Smart Beta / quant funds
• Dynamic asset allocation funds
• Overnight funds
• ESG funds

8
 Mutual
funds ETFs
Stocks

Understanding Exchange Traded Funds

 What is an ETF?
• Open-ended funds
– Available through stock exchange platforms,
– Do not have real time price
• Close-ended funds
– Listed on stock exchanges, trade at a price which
may be far away from the daily NAV

10
 How ETFs work ETF mechanics
Primary Market Secondary Market

Subscription during NFO

All Eligible including retail
Mutual Fund
Investors

Buy/Sell ETF Units

ETF Units
In Creation
Creation Redemptions
Units Size
(i.e.5000 Units)

Authorized Participants/Large National Stock Exchange (NSE)

Investors Capital Market Segment
Market Making/Arbitrage

Source: www.nseindia.com
11
Creation of units

12
Redemption of units

13
 Traditional mutual funds and index ETFs – differences
Open-ended funds Close-ended funds Index ETFs

Unit capital Flexible Fixed Flexible

NAV Daily Daily Real time
Liquidity Fund Stock market Fund and stock
provider market
Transaction NAV linked price Significant premium / Very close to real
price discount to NAV time NAV
Portfolio Monthly Monthly Daily
disclosure
Intra-day Not possible Expensive (due to bid- Possible at low
trading ask spreads) costs
14
 ETF advantages …1
• Can be bought / sold like a stock
– Through stock exchange terminals spread across the
country
– Throughout the day
– Paperless transactions
– Possible to put limit orders
– Intra-day trading possible
– Minimum investment: 1 unit

15
 ETF advantages …2
• Protects long term investors from actions of
short term investors
• Low cost
– Bid-ask spread
– No need to maintain cash in the portfolio
• Access to market (or a specific segment) at
low cost
16
 Uses of ETFs
• Exposure to markets or asset classes
– Efficient
– Low cost
• Asset allocation
– Strategic
– Tactical
• Intra-day opportunities
• Low cost diversification

17
 Recent trends in ETFs
• Index ETF
• CPSE ETF
• Bharat-22 ETF

EPFO

18
 Recent proposals
• PSU Debt ETFs
• Section 80C benefits extended to ETFs

19
 Smart Beta funds
• Mid-way between active and passive
• Do not exactly mirror an index, but are far
cheaper than active funds
• Stocks selected from an index basis certain
financial factors

20
 Quant funds
A quant fund is an investment fund that selects
securities using advanced quantitative analysis.
In a quant fund, the managers build customized
models using software programs to determine
the fund's investments.

21
 ESG Investing
Environmental, social and governance (ESG)
refers to the three central factors in measuring
the sustainability and ethical impact of
an investment in a company or business. These
criteria help to better determine the future
financial performance of companies (return and
risk).
22
 Overnight funds
• Invest in overnight securities having maturity
of 1 day
• True accrual funds with zero mark-to-market
valuation requirement

23
MAJOR REGULATORY CHANGES
In the last three years

24
 Regulatory change # 1
• Categorization and rationalization of open-
ended mutual fund schemes

25
 Main provisions
• Applicable to open-ended funds
• Categories defined by SEBI
• Only one scheme per category is allowed,
except in case of index funds/ETFs, sector
funds and funds-of-funds.
• Market cap defined by SEBI

26
 Advantages to the investors
• Uniformity in the characteristics of similar
types of schemes
• Comparison between schemes within a
category would be more sensible now
• With only one scheme per category, confusion
reduced further

27
• Many schemes saw change in fundamental
attributes, due to change in investment
objective, or scheme merger, which was the
result of the said regulation

28
 Regulatory change # 2
• Segregated portfolios

29
 Main provisions
• AMC may create segregated portfolio in case
of a credit event
• Optional and at the discretion of the AMC
• Allowed only if SID has provisions for the same
• A written down policy is a must with the AMC
• No AMC fees can be charged by the AMC
30
 Main provisions
• Allowed only in case of a credit event
• Must be done within 24 hours of the event
with specific approval of the fund trustees

31
 Benefits to investors
• Protection against losses caused by illiquidity
issues after a credit event
• Short-term opportunistic investors cannot
take undue benefit in case of higher
markdown

32
• Allowing creation of segregated portfolio in an
existing scheme is a change in fundamental
attributes of the scheme

33
 Regulatory change # 3
• Benchmarking scheme’s performance to total
return index

34
 Main provisions
• Most schemes were benchmarked against
Price Return Index (PRI), especially among
equity schemes, ignoring the effect of
dividend
• This gave an edge to mutual fund schemes
• Now, the schemes have to be benchmarked
against Total Return Index (TRI)

35
 Main provisions
• Selection of the benchmark to be in alignment
with the investment objective, asset
allocation, and investment strategy of the
scheme

36
 Benefits to investors
• Appropriate benchmark selection, and
benchmarking against TRI gives a fair picture
of a scheme’s relative performance, making
the evaluation better

37
 Regulatory change # 4
• Valuation of money market and debt
securities

38
 Main provisions
• Residual maturity for amortization based
valuation reduced from 60 days to 30 days
• All money market and debt securities below
investment grade to be valued as per the
valuation matrix from the designated agencies
• Valuation of debt and money market instruments
based on amortization shall be dispensed with
and shall completely shift to mark to market
valuation with effect from April 1, 2020.
39
 Benefits to investors
• The valuation of units becomes fairer, which
means that all investors – be it incoming,
outgoing, or long term investors get fair
treatment

40
 Caveat
• Liquid and money market funds may witness
higher volatility

41
 Regulatory change # 5
• Changes in TER (Total Expense Ratio) and
• Review of Commission, Expenses, Disclosure
norms etc. –Mutual Fund

42
 Main provisions
• Maximum limit for the TER lowered across the
board (MF regulations modified through a
Gazette notification)
– Equity funds: 2.25%
– Other than equity funds: 2.00%
– Index funds and ETFs: 1.00%

43
 Main provisions
• Distributor commission to be paid only out of the
scheme and cannot be paid by the AMC
• Distributor commission only on a trail basis
– Upfront commission allowed only in case of SIPs with
certain conditions
• AMCs to prominently disclose TER
• Change in TER to be communicated to investors
44
 Benefit to investors
• Cost of owning mutual funds comes down
• Portfolio churning in order to earn upfront
commission no longer possible

45
 Regulatory change # 6
• Performance disclosure post consolidation /
merger of mutual fund scheme

46
 Main provisions
• Merger between two schemes:
– If both the scheme were similar
• Weighted average past performance to be disclosed
– If the two were different
• Performance of the scheme whose features are
retained need to be disclosed
• If the features of neither are retained, past
performance cannot be disclosed

47
 Benefit to investors
• Disclosure of past performance that is
relevant to the present characteristics of the
scheme

48
 Regulatory change # 7
• Instant Access Facility

49
 Main provisions
• Liquid mutual funds are allowed to offer Instant
Access Facility (IAF) to investors (only resident
individuals) upto Rs. 50,000 or 90% of the value,
whichever is lower,
• The limit is applicable per day per scheme per
investor
• This means, investors can get their bank account
credited on the same day of redemption
50
 Main provisions
• Funds cannot borrow for this, and the facility
must be provided only from the available
funds with the scheme

51
 Benefit to investors
• Instant access to funds, within a few hours of
redemption

52
 Regulatory change # 8
• E-wallet

53
 Main provisions
• MFs are now allowed to accept subscription through e-
wallets
• The limit per investor per MF is Rs. 50,000 per year.
This is a combined limit for e-wallets and cash
• No cashbacks are allowed against such purchases
• Money loaded to wallet must be through cash, debit
cards, or net banking. It cannot be through credit cards
or cashbacks

54
 Benefits to investors
• This is a step towards promoting digitization
• Small investors can easily invest in and benefit
from mutual funds

55
 Regulatory change # 9
• Investment restrictions
– REITs / InvITs
– Derivatives
– Exposure limits in debt funds
– Gold ETFs  Gold monetization scheme
– Unlisted securities

56
 Main provisions
• REITs / InvITs
– Investment restrictions:
• Maximum exposure across all schemes to a single
issuer: 10% of issued units
• Maximum exposure to REITs and InvITs in a scheme:
10% of NAV
• Maximum exposure to a single issuer in a scheme: 5%
of NAV

57
 Main provisions
• Derivatives
– In case of schemes not allowed to invest in
derivatives, no prior consent of investors would be
required, if the fund manager proposes to start
– However, the investors must be given a 30-day
exit window before this is allowed

58
 Main provisions
• Exposure limits in debt funds
– Single issuer exposure in a scheme: 10% of NAV
– Sector exposure: 25% of NAV
– Additional limit for housing finance companies in
finance sector exposure: 10% of NAV

59
 Main provisions
• Gold ETFs  Gold monetization scheme
– Gold Monetization Scheme would be designated
as a gold related instrument, in line with Gold
Deposit Schemes offered by banks

60
 Main provisions
• Unlisted securities
– Mutual fund schemes shall invest only in listed or to
be listed equity shares and debt securities.
– A mutual fund scheme shall not invest in unlisted debt
instruments including commercial papers, except
Government Securities and other money market
instruments. However, mutual fund schemes may
invest in unlisted non-convertible debentures upto a
maximum of 10 percent of the debt portfolio of the
scheme subject to conditions specified by SEBI

61
 Benefits to investors
• New avenues made available for the mutual
fund to invest the money
– Diversification across different avenues
• With tight limits, the concentration risk is kept
low
• Better liquidity due to restrictions on investing
in unlisted securities
62
 Regulatory change # 10
• Restriction on redemptions

63
 Main provisions
• Restriction on redemptions may be imposed only when there
are circumstances leading to a systemic crisis or event that
severely constricts market liquidity or the efficient functioning
of market
• Such restriction may be imposed for a specified period of time
not exceeding 10 working days in any 90 days period
• No redemption requests upto Rs. 2 lakhs shall be subject to
such restriction
• For redemptions above Rs. 2 lakhs, the first Rs. 2 lakhs would
be redeemed. The restriction would apply to balance amount
64
 Benefits to investors
• Small investors can continue to redeem their
money even when the restriction is applied for
larger investors.

65
 Regulatory change # 11
• Investment restrictions

66
 Regulatory change # 11
• Liquid and overnight funds
– Investment restrictions and operational changes

67
 Main provisions
• Liquid funds shall hold at least 20 percent of its net assets in liquid
assets i.e. cash, government securities, T-bills and repo on
government securities w.e.f. April 1, 2020.
• Liquid and overnight funds shall not park funds pending
deployment in short term deposits of scheduled commercial banks.
Liquid funds shall not invest in debt securities having structured
obligations or credit enhancements. However, debt securities with
government guarantee are excluded from such restriction.
• Mutual funds shall levy exit load on investors who exit the liquid
fund within 7 days of their investment.
• Cut-off timing for applicable NAV for purchase of units in liquid and
overnight funds shall be 1.30 p.m. instead of 2.00 p.m.

68
 Benefits to investors
• Clear differentiation between overnight funds
and liquid funds
• Better liquidity provisions

69
MUTUAL FUND INDUSTRY GROWTH
LAST 10 YEARS

70
 Mutual fund industry AUM growth

Month Liquid/money market Gilt Debt oriented Equity oriented Balanced Gold ETF ETF other than Gold FoFs investing overseas Total

Mar-10 75752.81 3461.03 314329.91 199810.80 15783.06 1590.61 956.59 2861.15 614545.96

Mar-11 74699.86 3507.28 294217.42 197562.80 17552.40 4400.20 2516.43 2520.40 596976.79

Mar-12 80048.58 3659.59 291067.75 182402.95 16455.98 9886.06 1606.53 2531.27 587658.71

Mar-13 93173.09 8074.19 396787.82 172651.76 16629.28 11647.82 1476.67 2053.21 702493.84

Mar-14 133279.92 6114.68 460974.50 191683.90 16792.62 8676.32 4528.47 3192.17 825242.58

Mar-15 162562.35 14614.43 516951.12 345138.94 26367.83 6654.87 8059.93 2407.96 1082757.43

Mar-16 199403.71 16306.17 567189.68 386402.96 39145.81 6345.55 16062.63 1966.99 1232823.50

Mar-17 314085.89 14875.23 745690.91 543541.22 84762.99 5479.81 44435.64 1747.29 1754618.98

Mar-18 335524.80 11404.18 788020.75 749789.68 172151.22 4806.06 72888.02 1451.00 2136035.71

Mar-19 436223.88 8099.11 721567.94 892101.03 180648.42 4446.68 134626.03 1871.36 2379584.45

10 yr
CAGR 19.13% 8.87% 8.66% 16.14% 27.60% 10.83% 64.00% -4.16% 14.50%

Source: AMFI reports 71

2500000.00
2379584

Mutual fund industry AUM growth 2136036

2000000.00 Source: AMFI reports

1754619

1500000.00

1232823

1082757
1000000.00
825243
702494
614546 596977 587659
500000.00

0.00
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
72
Liquid/money market Gilt Debt oriented Equity oriented Balanced Gold ETF ETF other than Gold FoFs investing overseas
 MF industry folio growth
No. of investor folios
Equity ETF other FoFs investing
Month Liquid/money market Gilt Debt oriented oriented Balanced Gold ETF than Gold overseas Total
Mar-10 239539 31501 3467310 40928448 2827918 147047 36898 385401 48064062
Mar-11 193422 29178 4305777 39278085 2790050 319679 103122 215520 47234833
Mar-12 196192 33453 5020257 37637507 2729438 475314 148443 211895 46452499
Mar-13 209272 63027 5866482 33167172 2609480 569169 170445 173268 42828315
Mar-14 287996 57298 6522007 29180946 2613308 502613 202228 182014 39548410
Mar-15 311644 65225 6835318 31691619 1990516 465765 233961 146155 41740203
Mar-16 367194 65164 7891516 36025062 2490458 425914 271700 126016 47663024
Mar-17 788860 86182 9124613 40826211 3548912 364110 551017 109726 55399631
Mar-18 1095226 75553 9577303 53534985 5889085 329343 751947 93859 71347301
Mar-19 1669045 73775 9927230 62874496 6395013 320620 1071015 125217 82456411
10 yr CAGR 21.43% 8.88% 11.09% 4.39% 8.50% 8.11% 64.00% -10.63% 5.55%

Source: AMFI reports 73

 MF industry folio growth
90000000
82456411
80000000
71347301
70000000

60000000
55399631
50000000 48064062 47234833 46452499 47663024
40000000 42828315 41740203
39548410
30000000

20000000

10000000

0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Liquid/money market Gilt Debt oriented Equity oriented Balanced Gold ETF ETF other than Gold FoFs investing overseas

Source: AMFI reports 74

 SIP Growth:
Last 3 years

Source: www.amfiindia.com

75
INDUSTRY SIZE

76
 Industry size (June-2019)
• No. of asset management companies
– Bank sponsored:
• Joint ventures (predominantly Indian): 4
• Others: 3
– Institutions:
• Indian: 2 Total AMCs: 44
– Private sector:
• Indian: 23
• Foreign:: 6
• Joint ventures (predominantly Indian): 5
• Joint ventures (others): 1 Source: AMFI reports 77
 Industry size (June-2019)

• No. of mutual fund schemes

– Open-ended schemes: 907
– Close-ended schemes: 1007
– Interval schemes: 26 Total schemes:
1940

Source: AMFI reports 78

 Industry size (June-2019)

• No. of folios
– Open-ended schemes: 8,08,08,785 Total folios:
– Close-ended schemes: 29.49,801 8.37 crores
– Interval schemes: 13,103

No. of PAN cards as on 31st March 2019: 44.57 crores

Among these, individuals: 43.52 crores

Source: AMFI reports,

www.incometaxindia.gov.in 79
 Industry size (June-2019)

• No. of folios
– Open-ended schemes: 8,08,08,785 Total folios:
– Close-ended schemes: 29.49,801 8.37 crores
– Interval schemes: 13,103

No. of Income Tax payers as on 2017-18: 4.99 crores

Source: AMFI reports,

www.incometaxindia.gov.in 80
AUM of Mutual Funds: Rs. 23.79 lakh crores
India’s GDP: Rs. 140 lakh crores

AUM / GDP ratio: 17%, approximately

81
AUM of Mutual Funds: Rs. 23.79 lakh crores
Total bank deposits: Rs. 117 lakh crores

AUM / bank deposits ratio: > 20%

82
ASSET CLASS PERFORMANCE

83
 Fund performance comparison
• Categorywise fund performance data is
available on AMFI website
• The data is downloadable

84
85
SESSION 2

86
 Session 2 Agenda
• Conventional approach to scheme selection
• The recommended approach

87
Conventional approach to
MF scheme selection

88
• Most common approach
1. Historical performance
1. Relative to peer group
2. Relative to benchmark
3. Absolute outperformance (or underperformance)
2. Ratings and rankings by various agencies

89
Various measures of past performance
• Returns
– IRR v/s CAGR
– Point-to-point v/a rolling returns
• Risk measures
– Standard deviation and Beta
• Risk adjusted returns
– Sharpe ratio, Treynor ratio, etc.
90
 Limitations of these measures
• Good for evaluating the past
• No predictive value

Remember: Past performance may or may not be sustained

91
• Risk is often not visible

92
This does not mean that past performance may
be ignored

Check various measures to see how much risk

the scheme has taken in the past

93
 Resources to access
past performance data

• Fact sheet
• Portfolio disclosures
• Mutual fund website
• AMFI website

94
THE RECOMMENDED APPROACH

95
• Understanding mutual fund scheme
categorization by SEBI

96
 Equity schemes

Debt schemes

Mutual funds Hybrid schemes

Solution oriented
schemes

Other schemes

97
 Equity schemes • Multi cap fund
• Large cap fund
• Large & mid cap fund
Debt schemes
• Mid cap fund
• Small cap fund
Mutual funds Hybrid schemes • Dividend yield fund
• Value fund or Contra fund
Solution oriented • Focused fund
schemes
• Sectoral / thematic
• ELSS
Other schemes

98
 Equity schemes • Overnight fund
• Liquid funs
Debt schemes • Ultra short duration fund
• Low duration fund
Mutual funds Hybrid schemes • Money market fund
• Short duration fund
Solution oriented
schemes
• Medium duration fund
• Medium to long duration
Other schemes fund

99
 Equity schemes • Long duration fund
• Dynamic fund
Debt schemes • Corporate bond fund
• Credit risk fund
Mutual funds Hybrid schemes • Banking and PSU fund
• Gilt fund
Solution oriented
schemes
• Gilt fund with 10 year
constant duration
Other schemes • Floater fund

100
 Equity schemes • Conservative hybrid fund
• Balanced hybrid fund or
Debt schemes Aggressive fund
• Dynamic asset allocation
Mutual funds Hybrid schemes
fund or Balanced advantage
fund
Solution oriented • Multi asset allocation fund
schemes
• Arbitrage fund
Other schemes
• Equity savings fund

101
 Equity schemes • Retirement fund
• Children’s fund
Debt schemes

Mutual funds Hybrid schemes

Solution oriented
schemes

Other schemes

102
 Equity schemes • Index funds / ETFs
• FoFs (Overseas /
Debt schemes
Domestic)
Mutual funds Hybrid schemes

Solution oriented
schemes

Other schemes

103
• To understand the category of individual scheme,
check the Scheme Information Document
• Look for
– Scheme’s investment objective,
– Investment style,
– Asset allocation, and
– Benchmark for the scheme

104
Various risks to consider
Volatility

Credit
Inflation
risk

Illiquidity

105
FACTORS LEADING TO THESE RISKS

106
 Equity funds & the contributors to risk factors
• Market cap: Large, mid, small cap
• Investment style: Value, growth, dividend yield
• Concentration
• Active or passive
– Portfolio turnover
• Internal liquidity
• Exposure to derivatives
107
 Debt funds & the contributors to risk factors
• Scheme duration
• Credit profile
• Concentration
• Internal liquidity
• Scheme size
• Scheme YTM
108
Hybrid funds & the contributors to risk factors
• Scheme asset allocation
• Management of asset allocation
– Static or dynamic
• Exposure to derivatives
Also check the
parameters discussed in
equity and debt funds
109
• To understand the risk specific to the category
as well as to the individual scheme, check the
Scheme Information Document
• Look for
– General risk factors, and
– Specific risk factors

110
 Some questions to consider …
• Will a value style fund invest in large cap stocks?
• Will a low duration fund take credit risk?
• Will a balanced hybrid fund invest in small cap
stocks?
• What are the single asset limits in case of a
dynamic asset allocation fund?
• Will an arbitrage fund follow pure arbitrage
strategy only?

111
• When you do not find answers to these
questions in the SID, check the scheme
portfolio for the last few months (longer the
period you check, better it is)
– Fact sheet
– Monthly portfolio disclosures
– Mandatory portfolio disclosures
112
PERFORMANCE EVALUATION OF MUTUAL FUNDS

113
 Performance Basics:
Simple in theory, Hard to apply

Why?

114
 Performance Basics:
Simple in theory, Hard to apply
• Rate of return has many possible definition
• Different objectives of investment performance
• None of which is right for all the purposes.
– Investors consider performance as sine qua non of mutual fund investing.
– Financial planners, mutual fund agents & distributors will make their
recommendations accordingly
– Mutual funds themselves need to measure their performance in order to evaluate
the fund managers who work for them
– It serves as an incentive for managers to try to do their best
• Important to have a lot of supplemental information to understand the
quality aspect of return.

115
• An investor invested Rs. 1,00,000 in Alpha
Growth Fund when the NAV was Rs. 12.50.
• At the time of redemption, the NAV was Rs.
15.40 and exit load was 1%.
• How much is the return on investment?

116
• An investor invested Rs. 1,00,000 in Alpha
Growth Fund on 1st April, 2009 when the NAV
was Rs. 12.50.
• At the time of redemption on 31st October,
2010, the NAV was Rs. 15.40 and exit load was
1%.
• How much is the return on investment p.a.?

117
• An investor invested Rs. 1,00,000 in Alpha
Growth Fund on 1st April, 2009 when the NAV
was Rs. 12.50.
• At the time of redemption on 31st October, 2010,
the NAV was Rs. 15.40 and exit load was 1%.
• The investor got a dividend of Rs. 0.60 on 25th
March, 2010. The ex-dividend NAV was Rs. 13.20.
• How much is the return on investment p.a.?

118
 The Concept of Return
• What are the sources of investment returns?

• How can returns be measured?

119
 Sources of Mutual funds’ Investment
Returns
• Two basic types of return:
– Income returns
– Capital Appreciation (Changes in price or value)

120
 Measuring Returns
• Rupee Returns
– Total Rupee Return = Income + Price Change

• Holding Period Return

• Return Relative = Income + (Ending Value – Purchase price)

Purchase Price

• Annualized Returns

121
 Simple Absolute Return
• Simple absolute return is the percentage growth in the value of
investment.
• If
– time ‘t0’ is the date of acquisition/purchase
– time ‘tn’ is the valuation date
– value at time ‘t0’ is V0
– value at time ‘tn’ is Vn.
• Simple absolute return is computed as follows:
• = (Vn– V0)/ V0 x 100
• It may also be written as:
• (Vn/V0)-1 x 100

122
 Simple Absolute Return - Example
• Your investor invested Rs.5000 in an equity mutual fund.
• After a year, the value of the investment was Rs.6000.
• The simple absolute return is:
• (6000 – 5000)/5000 = 20%
• This is a simple method to compute return, from one point to
another, by simply comparing the begin value and end value.
• It is also common to add any dividends received in the interim to
the end value, to represent the total return.
• This method does not consider time value of money, but is simple
for the investor to understand.

123
 Simple Annualised Return
• Simple annualised return is the representation of return as percent, per annum.
• The steps to computing simple annualised return are:
• · Determine the return on the amount invested
• ( Incomes + appreciation) / Amount invested
• · Normalise as percentage return
– Multiply the return by 100
• · Determine the holding period in days
– End date – start date as a number
• · Annualise the percent return
– Percent return x 365/holding period
• In other words, it is nothing but annualisation of the simple absolute return

124
 Annualized Returns
Annualized HPR = (1 + HPR)1/n – 1

Annualized HPR = (Return Relative)1/n – 1

• With returns computed on an annualized

basis, they are now comparable with all other
annualized returns.
125
CALCULATING RETURNS FOR MULTIPLE
TRANSACTIONS

126
• An investor has done monthly SIP of Rs. 3,000
in Omega growth fund – growth option for a
period of 36 months.
• At the end of the 36 month period, the value
of the investments is Rs. 1,35,000
• Calculate the annualised return on
investment.

127
• An investor invested a sum of Rs. 5,00,000 in an
income fund.
• He withdrew Rs. 2,000 every month starting next
month.
• The investor checked the balance in the account 3
years later and found it to be Rs. 5,63,000.
• What is the return on his investment?
• Nominal Vs Real Return
– Real return is adjusted for inflation

128
 Calculate Return on Investment
Date Amount NAV Units Transaction

10-May-2004 Rs. 10,000.00 Rs. 10.24 976.563 Purchase

23-Sep-2004 Rs. 12,000.00 Rs. 9.87 1215.805 Purchase

7-Mar-2005 Rs. 2,192.37 Rs. 12.21 179.555 Reinvestment of

Dividend
2-Apr-2005 Rs. 5,000 Rs. 12.25 408.163 Redemption

20-Dec-2005 Rs. 5,000 Rs. 15.64 319.693 Purchase

30-Jan-2007 53227.29 Rs. 23.31 2283.453 Redemption

Note: Assuming loads, transaction costs and taxes to be zero

129
 Compounded Annualised Growth Rate (CAGR)
• CAGR is the average rate at which investment has grown annually, at a compounded rate.
– The gains of the first year are assumed to be re-invested, and earning returns in the subsequent years
• Steps to compute CAGR:
· Compute the holding period in days ‘n’
o End date less begin date
· Compute the value Vn/Vo
o End value/Begin value
· CAGR is computed as
o r = ((Vn/Vo)365/n)-1
• It is the norm in the financial markets to compute returns greater than 1 year as CAGR.

130
 Risk

• What is risk?

• How is it measured?

131
 Definition of Risk
• Hazard, peril, danger, jeopardy……these synonyms for risk have to do
with the “chance of bad consequences,” the definition of risk given by
Oxford Dictionary
• Risk is the likelihood of losing money in investment.
• Risk is the uncertainty associated with the return on an investment

132
 Sources of Risk
Return Risk

1. Market 1. Beta or Market risk

2. Group/Industry 2. Extra market covariance

Growth or
Cyclical Group risk/industry risk
Stable

3. Individual stock
3. Residual or Specific

133
 A Break Down of Risk
Competition may be Relative Ratios
stronger or weaker Tells more about the
than anticipated style
Exchange rate
Projects may and Political risk
do better or
worse than Entire Sector
Interest rate,
expected may be affected
Inflation &
by action
News about
economy
Firm-specific Market

Actions/Risk that Affects few Affects many Actions/Risk

Affect only one firms firms that affect all
firm investments
134
 Quantifying Risk
• Standard deviations
• Beta

135
 Standard Deviation
• Standard deviation is a measure of dispersion in return
• Reflects the degree to which returns fluctuate around average
• Measure “total risk” of an investment, the combined effects of
systematic and asset-specific risk factors.
• Variance of Returns
s2 = [S(Rt-RA)2]/n-1
• Standard deviation is used probably more than any other measure to
describe the risk of a security

136
 Measuring Systematic Risk
• Market risk (systematic risk) is commonly measured by beta coefficient

• E(Ri)=Rf+b(E(Rm)-Rf)

E(Ri)= Expected return on asset I

Rf= Risk-free-rate
R(Rm)=Expected return on market portfolio
Bi= Beta of investment I

137
 Standard Deviation versus Beta
• Systematic risk versus total risk
• Diversified portfolios’ much of the risk is
systematic risk

138
RISK ADJUSTED PERFORMANCE MEASURES

139
 Sharpe Ratio
• The Sharpe ratio is a reward-to-risk ratio that
focuses on total risk.
• It is computed as a portfolio’s risk premium
divided by the standard deviation for the
portfolio’s return. R R
Sharpe ratio 
p f

σp

140
 The Treynor Ratio
• The Treynor ratio is a reward-to-risk ratio that
looks at systematic risk only.
• It is computed as a portfolio’s risk premium
divided by the portfolio’s beta coefficient.
Rp  R f
Treynor ratio 
βp

141
 Evaluating performance of passive funds
• The concept of index funds
• Matches the portfolio as well as performance of
an underlying index
• Performance of index funds

142
 Performance Measurement of
Index Fund
• Index Funds are no different from other funds.
• Tracking Error is a measure of performance
• Should the performance of an index fund also
be compared to a sample of funds?

143
 Performance Measures Specific to Bond Funds

• Fund risks
– Interest rate risk
• Average maturity / duration / modified duration
• Duration management or accrual
– Credit risk
• Credit profile
– Liquidity risk
• Liquidity in a portfolio

144
 Internal Risk Measurement for Equity Funds

• Company and sector concentration

– Individual scheme- and mutual fund-level

• Liquidity risk
• Exposure to derivatives
• Portfolio turnover - Low turnover is a sign of
investing, high turnover is a sign of trading
– High turnover will also lead to high execution cost , which will adversely
impact fund performance

145
 Internal Risk Measurement for Debt
Funds
• Investor concentration – scheme- and plan-level
• Liquidity risk
• Interest rate risk
• Credit Risk
• Exposure to derivatives
• Portfolio turnover - Low turnover is a sign of investing,
high turnover is a sign of trading
– High turnover will also lead to high execution cost, which
will adversely impact fund performance

146
Benchmark Returns
• In performance analysis you need to make
relevant comparisons.

• The investor has to compare the returns of

his/her manager with the returns that would
have been obtained had he/she invested in an
alternative portfolio with identical risk.

147
 Selection of Benchmarks
• While selecting benchmark attention needs to be paid on:
– Investment Objective
– Investment Strategy
– Investment Style
– Asset Allocation

148
IMPORTANCE OF BENCHMARK

149
 Performance benchmarking
• Mutual fund offers relative returns and not absolute
returns
• What does one compare the performance with?

150
• Benchmark gives an indication of inherent
risks related to the segment of the market

151
• To understand the risk specific to the category
as well as to the individual scheme, check the
Scheme Information Document
• Look for
– General risk factors, and
– Specific risk factors

152
 NISM Series V-A: Mutual Fund Distributors CPE

• Many risks and other information can be checked

from the scheme fact sheet
– Benchmark
– Investment objective
– Concentration
– Credit rating profile
– Duration
– Standard deviation and beta
– Portfolio turnover
153
SESSION 3

154
 Session 3 agenda
• Understanding mutual fund returns
– Lump sum investments
– SIP and other systematic approaches
• Impact of expense ratio on fund performance
• Mutual fund taxation
• Scheme suitability
• What not to expect from various schemes
155
IMPACT OF EXPENSES ON MUTUAL
FUND RETURNS
156
MUTUAL FUND EXPENSES

157
 Type of funds
• Open-ended funds
• Close-ended funds
• ETFs
• Fund of funds

158
 When
• Front-ended
• Back-ended
• On-going

159
 When
• Front-ended • Entry load
• Back-ended • Transaction charges
• Brokerage
• On-going

160
 When
• Front-ended • Exit load
• Back-ended • Brokerage
• On-going

161
 When
• Front-ended • TER
• Back-ended • Demat charges
• On-going

162
 Impact on investment returns
• Accounted in the NAV
• Outside the NAV

• TER
• Loads
• Transaction charges
• Demat charges
163
 Source of information
Expenses debited to scheme
• Scheme Information Document
• Fact sheet

Note: Expense limits are prescribed under SEBI regulations

164
 Mutual fund taxation

• Tax in the hands of the mutual fund

• Tax in the hands of the unit holder

165
 Tax in the hands of mutual fund
• Constituted as a trust
• All income is exempt from tax
• However, dividend distribution tax and STT are
applicable

166
 Tax in the hands of unit holder
• Type of mutual fund scheme
– Equity oriented funds
– Non-equity oriented funds
– Infrastructure debt funds

167
• As per the Income Tax Act:
– Equity-oriented scheme is a mutual fund scheme
where at least 65 percent of the assets are
invested in equity shares of domestic companies.
For calculating this percentage, first the opening
and closing percentage is calculated for each
month. Then the average of such value is taken for
the 12 months in the financial year.

168
 Quiz
• Which of these funds would be classified as
equity-oriented funds?
– Conservative hybrid funds
– Balanced advantage funds
– Arbitrage funds
– Equity savings funds
– US equity fund
– Fund-of-fund investing 80% of AUM in equity schemes
169
 Tax in the hands of unit holder
• Tax on dividend income
• Tax on capital gains
• Securities transaction tax

170
 Tax in the hands of unit holder
• Type of investor
– Resident individuals
– Non-individuals
– NRIs

171
 Taxability of dividends
• Dividend income from mutual fund schemes is
tax-exempt in the hands of the investor
• It does not attract any tax, irrespective of the
dividend earned in a year
– Dividend from equity shares are taxable beyond
Rs. 10 lacs per year

172
 Dividend distribution tax
• Dividend distribution tax is payable by the
mutual fund scheme on the amount
distributed as dividend
• This tax cannot be set off against any other tax
• It cannot be set off against losses, too

173
 Dividend distribution tax
Individual / HUF NRI Domestic company
Equity-oriented 10% + surcharge (12%) + cess (4%) = 11.648%
schemes
Non-equity- 25% + surcharge (12%) + cess (4%) = 30% + surcharge
oriented schemes 29.12% (12%) + cess (4%) =
34.944%
Infrastructure debt 25% + surcharge 5% + surcharge 30% + surcharge
funds (12%) + cess (4%) = (12%) + cess (4%) = (12%) + cess (4%) =
29.12% 5.824% 34.944%

174
• The NAV of the scheme drops to the extent of
the dividend distributed plus the distribution
tax, thereon.

175
CAPITAL GAINS TAX

176
 Type of capital gains
Long term capital gains Short term capital gains
Equity-oriented funds Units held for more than Units held for 12 months or
12 months less
Non-equity-oriented funds Units held for more than Units held for 36 months or
36 months less

177
 Rate of capital gains tax

Short term capital gains Long term capital gains

Equity-oriented funds 15% 10% * #
Non-equity-oriented funds At marginal rate of tax, as 20% with benefit of
applicable indexation

* Grandfathering clause: Capital gains accrued till 31st January 2018 are exempt from capital gains tax
# There is no tax on capital gains upto Rs. 1 lakh in a year

178
 Tax Deduction at Source (TDS)
• No TDS in case of Resident Indian investors or
domestic companies
• In case of NRIs, TDS is applicable in case of
capital gains

179
 TDS rates
• NRIs, PIOs, and other foreign entities attract
TDS on capital gains from mutual funds
Nature of capital gains Tax rate
Short term 30% for foreign non-corporates, 40% for foreign corporate
entities
Long term 20% (10% in case of unlisted units)

180
 Some interesting consequences
• Only capital gains taxed, and not the full
withdrawal
• Income for fund is tax-exempt
• Deferred taxation

181
SCHEME SUITABILITY

182
The importance of suitability in case of
mutual fund schemes

183
• According to SEBI (Prohibition of Fraudulent
and Unfair Trade Practices Relating to
Securities Market) (Amendment) Regulations,
2012 mis-selling in mutual fund units is a
fraud

184
• The regulations says that
– Mis-selling means sale of units of a mutual fund
scheme by any person, directly or indirectly, by
• Making a false or misleading statement, or
• Concealing or omitting material facts of the scheme, or
• Concealing the associated risk factors of the scheme, or
• Not taking reasonable care to ensure suitability of the
scheme to the buyer

185
 Suitability
• Financial goals • Risk profile
– Returns required – Need
– Time horizon – Ability
– Willingness

186
Investment products – basics

Safety

Liquidity Returns

187
SESSION 4

188
 Session 4 agenda
• Digital transactions
• Do’s and don’t for MF distributors
• Sources of important information

189
 Digital transactions
• Benefits of moving to digital transactions
• Online transactions
– Websites
– Mobile phones
• Transaction platforms
– AMC
– Distributors
– 3rd party platforms

190
 Benefits
• Business growth
• Operational efficiency
• Reduced operational costs

191
 Benefits
• Business growth • Crossing the geographical
• Operational efficiency barrier
• Reduced operational costs • Increased number of
customers
• Higher number of
transactions

192
 Benefits
• Business growth • Increased number of
• Operational efficiency customers
• Reduced operational costs • Higher number of
transactions
• Reduction in paper related
errors

193
 Benefits
• Business growth • No (or very low)
• Operational efficiency incremental cost for growth
• Reduced operational costs • Saving in costs related to
paper transactions,
including cost of correcting
errors and customer
grievances

194
 Online transactions
Technology platform Offered by
• Through Website • Asset Management
• Mobile phones Companies
– SMS • MF Distributors
– WhatsApp • Stock Exchanges
– Apps • MF Utility
• Stock exchanges • E-com platforms
• Robo advisers
• Registrar & Transfer Agencies

195
DO’S AND DON’TS
FOR MF DISTRIBUTORS
196
 Do’s and don’ts for MF distributor
• Wrong practices and mis-selling
• Nomination for trail commission
• KYD process
• Submission of self-declaration certificates
• Online ARN / EUIN renewal

197
• Wrong practices and mis-selling
– Churning of investments
– Splitting of applications
– Bouncing the cheques
– Recommending inappropriate products only to earn
high commissions
– Not maintaining confidentiality of customer details

198
• Nomination for trail commission

199
• KYD process

200
• Submission of self-declaration certificates
– Annul submission of documents
– Failing which the commission would be held

201
• Online ARN / EUIN renewal

202
SOURCES OF IMPORTANT
INFORMATION
203
 Sources of important information
• Mandatory
• Non-mandatory

204
Mandatory disclosures

205
 Sources of important information
Mandatory Non-mandatory
• Scheme related documents: • Factsheet
SID, SAI, KIM
• Fund dashboard
• NAV and TER disclosures
• Portfolio disclosures
• Annual reports – the fund and
the AMC
• Unclaimed dividends
• Commission disclosure

206
 What’s Next
• Your certificate will be e-mailed to you once you have successfully
completed the CPE Program and have submitted all the required
documents, before expiry of the certificate.
• The certificate should be carefully retained till re-validated.
• If you misplace your certificate, for issue of duplicate certificate, please
email [email protected].
• For further details, please visit: www.nism.ac.in
• Board Numbers: 022 8080806476

207
Thank you

208