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Study Notes for

NISM Series V – A:
MUTUAL FUND DISTRIBUTORS Exam
(Earlier - AMFI Exam)
Version - MAY 2024
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YouTube Training Video Link

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www.modelexam.in provides with basic information, study material & online model
exams to help you succeed in NISM exams. (NISM – National Institute of Securities
Markets – A SEBI Institute)
Both Premium (Paid) & Demo (Free) Versions are available in the website.
HARDCOPY / SOFTCOPY of the tests will NOT be provided

NISM Series 5A - MUTUAL FUND DISTRIBUTORS EXAM

Assessment Structure
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Total Questions = 100 X 1 mark each (NO NEGATIVE MARKS)
Total Duration = 2 hours.

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Passing score = 50%

Certificate Validity = 3 years.
Certificate Renewal → Attend NISM CPE Session
Call Srinivasan @ 98949 49988 for NISM CPE Training details in South India.
Chapterwise Weightages
Unit 1 Investment Landscape 8%
Unit 2 Concept & Role of a Mutual Fund 6%
Unit 3 Legal Structure of Mutual Funds in India 4%
Unit 4 Legal and Regulatory Framework 10 %
Unit 5 Scheme Related Information 10 %
Unit 6 Fund Distribution and Channel Management Practices 6%
Unit 7 Net Asset Value, Total Expense Ratio and Pricing of units 8%
Unit 8 Taxation 4%
Unit 9 Investor Services 20 %
Unit 10 Risk, Return and Performance of Funds 7%
Unit 11 Mutual Fund Scheme Performance 7%
Unit 12 Mutual Fund Scheme Selection 10 %
YouTube videos – Topic wise
1. How to become a Mutual Fund Agent?
2. NISM Mutual Fund Distributors Exam Pattern
3. What is a Mutual Fund?
4. Terminologies used in Mutual Fund Industry
5. Open and Closed end funds
6. Types of Equity Funds
7. Types of Debt Mutual Funds
8. Types of Hybrid Schemes, Balanced Schemes
9. Tax Saving Scheme - ELSS
10.Gold Exchange Traded Fund
11.Passive Funds and Fixed Maturity Plans
12.Index Funds
13.Tracking Error - Index Funds
14.Mutual Fund Structure and Constituents
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15.Grandfather Clause introduced in Budget and Taxation changes

16.Capital Gain Tax
17.Calculation of Long term capital gain tax using Indexation
18.Tax Deducted at Source and Securities Transaction Tax
19.NAV Cut off Timing for Non Liquid Funds | Mutual Fund NAV - YouTube
20.Cutoff Time for Liquid Fund Purchase | Mutual Fund - YouTube
21.Liquid Funds - Redemption
22.Who can Invest in Mutual Funds?
23.Micro SIP and PAN Exempt Cases
24.Risk Adjusted Performance - Sharpe Ratio
25.Risk Adjusted Performance - Treynor ratio and Alpha
26.Mutual Fund Offer Document
27.Statement of Additional Information
28.NAV, Sale Price, Repurchase Price
29.NAV Calculation - Part1
30.NAV Calculation - Part2
31.Asset Allocation, Strategic Asset Allocation
32.SIP and STP
33.SWP, Dividend Payout, Dividend Reinvestment and Growth Options
34.Systematic Risk and Unsystematic Risk
35.Beta - measure of Market risk
36.Upfront Commission, Trail Commission, Transaction Charges
37.Total Expense Ratio - Part1
38.Total Expense Ratio - Part2
39.Transmission, Dividend Stripping, Capital Protection Oriented Schemes
40.Arbitrage Funds, Interval Funds, National Pension System
41.Stamp Duty on Mutual Funds | Mutual Fund Industry Updates - YouTube
42.Mutual Fund Instant Access Facility | Instant Redemption - YouTube
43.Taxation of Mutual Fund Dividend | TDS on MF Dividends - YouTube
44.Direct Plan & Regular Plan of Mutual Funds | Which is Best for Investors ? -
YouTube
45.What is Sensex and Nifty? How it is calculated? (not in syllabus. Just for
knowledge sake)

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Chapter 1 – The Investment Landscape

1. Saving and investing are not to be considered as two completely different things,
but two steps of the same process – in order to invest money, one needs to save
first. Thus, saving precedes investing.
2. Factors to evaluate investments - Safety, Liquidity, Returns, Convenience,
Ticket size, Taxability of income, Tax deduction
3. There are four broad asset categories or asset classes i.e. Real estate,
Commodities, Equity and Fixed income.
4. Real estate could be further classified into various categories, viz., residential real
estate, land, commercial real estate, etc.
5. Real estate is illiquid. It is not a divisible asset
6. Apart from capital appreciation, Real Estate can also generate current income in
form of rents.
7. In case of real estate, the transaction costs, e.g., brokerage charges, registration
charges, etc. are quite high. This would bring down the return on investment.
8. Bonds can be classified into subcategories on the basis of issuer type i.e., issued
by the government or corporates or on the basis of the maturity date: short term
bonds (ideal for liquidity needs), medium term bonds, and long-term bonds
(income generation needs).
9. Bonds pay regular interest; thus, the investors can expect current income. Bond
transactions through secondary market may result into capital gains or losses.
10.Two commodities that many investors are quite familiar with as investment
avenues, are gold and silver (Metal commodities).
11.Investments in equity and bonds can be done only in financial form, whereas one
can buy the other two assets, viz., real estate and commodities either in financial
or in physical form. It is this physical form that gives a feeling of safety to many.
Anything that is tangible is perceived to be safer than something intangible.
12.Real estate and commodities like silver or gold could be bought as investment or
for consumption purposes
13.Equity - owner’s capital in a business. Also known as Risk Capital.
14.Apart from long term capital appreciation, equity share owners may also receive
dividends
15.Inflation or price inflation is the general rise in the prices of various
commodities, products, and services that we consume.
16.Inflation erodes the purchasing power of the money.
17.The returns on investment without factoring inflation is known as the “nominal
rate”. Returns adjusted for inflation, one gets the “real rate of return”. If the
investment returns are higher than inflation, the investor is earning a positive real
rate, and vice versa.
18.Liquidity risk is when the investor cannot liquidate their investments at will.

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19.Interest rate risk is the risk that an investment’s value will change as a result of a
change in interest rates.
20.Interest rate risk affects the value of bonds/debt instruments. Any reduction in
interest rates will increase the value of the Bonds and vice versa
21.Credit Risk - When someone lends money to a borrower, the borrower commits
to repay the principal as well as pay the interest as per the agreed schedule. The
issuer pays the dues, but with some delay, and the issuer does not pay principal
and the interest at all – this is known as Credit Risk
22.Market Risk - the prices of all stocks (or at least a large number of stocks) in the
market may witness a fall. This is a market wide fall.
23.Market Risk is also known as Systematic Risk or NON-Diversifiable risk. It
cannot be reduced or diversified. It is measured by BETA
24.when the sales of a company’s products fall, due to technological changes, or
arrival of a better product, the company’s share price falls. During such times,
there could be many other companies, whose share prices may rise. This is an
example of a company specific risk
25.Industry Specific Risk - if the Government policy changes with respect to a
particular industry, all the firms may get impacted. Similarly, if a new and better
technology becomes available, all the firms within the same industry that use the
old technology may get impacted.
26.Confirmation bias is the tendency to look for additional information that confirms
their already held beliefs or views. investors decide first and then look for data to
support their views.
27.Availability Heuristic - Most people rely on examples or experiences that come
to mind immediately while analyzing any data, information, or options to choose
from.
28.Familiarity Bias - An individual tends to prefer the familiar over the novel, as the
popular proverb goes, “A known devil is better than an unknown angel.” This
leads an investor to concentrate the investments in what is familiar, which at
times prevents one from exploring better opportunities, as well as from a
meaningful diversification.
29.Herd Mentality - “Man is a social animal” – Human beings love to be part of a
group.
30.Loss Aversion explains people's tendency to prefer avoiding losses to acquiring
equivalent gains: people to stay away from profitable opportunities, due to
perception of high risks
31.Overconfidence This bias refers to a person’s overconfidence in one’s abilities or
judgment. This leads one to believe that one is far better than others at
something, whereas the reality may be quite different

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32.Recency bias - The impact of recent events on decision making can be very
strong. This applies equally to positive and negative experiences. Investors tend
to extrapolate the event into the future and expect a repeat.
33.The risk profilers try to ascertain the risk appetite of the. In order to ascertain the
risk appetite, the following must be evaluated:
• The need to take risks
• The ability to take risks, and
• The willingness to take risks
34.Asset Allocation is a process of allocating money across various asset categories
in line with a stated objective.
35.https://www.youtube.com/watch?v=KjdIf1zA6wU (Asset allocation video)
36.Strategic Asset Allocation is allocation aligned to the financial goals of the
individual. It considers the returns required from the portfolio to achieve the
goals, given the time horizon available for the corpus to be created and the risk
profile of the individual.
37.Strategic asset allocation - to maintain a target allocation across various asset
categories. to arrive at allocation between various asset categories in percentage
terms. This percentage target is also called the “strategic asset allocation”.
38.Tactical asset allocation is typically suitable for seasoned investors operating
with a large investible surplus.
39.Tactical asset allocation dynamically changes the allocation between the asset
categories to take advantage of the opportunities presented by various markets at
different points of time
40.A mutual fund is managed by a team of professionals, known as the asset
management company. By choosing to invest through mutual funds, one is not
investing in alternative investment options, but only changing the way of
investing money.
Chapter 2 – Concept and Role of a Mutual Fund
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4WMMRUXMWydc
1. https://youtu.be/07mktpDEYiI?list=PLCZvkZJiAVK56z_al_5b-
4WMMRUXMWydc
2. A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal to invest in different markets and securities, in
line with stated investment objectives.
3. The investment that an investor makes in a scheme is translated into a certain
number of ‘Units’ in the scheme.
4. The number of units issued by a scheme multiplied by its face value (Rs. 10) is
the capital of the scheme–its Unit Capital.

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5. The fees or commissions paid to various mutual fund constituents come out of
the expenses charged to the mutual fund scheme. These are known as recurring
expenses.
6. the true worth of a unit, is called Net Asset Value (NAV).
7. When a scheme is first made available for investment, it is called a ‘New Fund
Offer’ (NFO).
8. Sum of all investments made by investors in the mutual fund scheme is the entire
mutual fund scheme’s size, is known as the scheme’s Assets Under Management
(AUM).
9. Process of valuing each security in the investment portfolio of the scheme at its
current market value is called Mark to Market (MTM).
10.Mutual funds also offer facilities that help investors invest amounts regularly
through a Systematic Investment Plan (SIP); or withdraw amounts regularly
through a Systematic Withdrawal Plan (SWP); or move money between different
kinds of schemes through a Systematic Transfer Plan (STP).
11.Open-ended funds allow the investors to enter or exit at any time, after the NFO.
12.Close-ended funds have a fixed maturity. Investors can buy units of a close-
ended scheme, from the fund, only during its NFO.
13.Closed Ended Funds have a fixed Unit Capital
14.Interval funds combine features of both open-ended and close-ended schemes.
They are largely close-ended but become open-ended at pre-specified intervals.
15.The periods when an interval scheme becomes open-ended, are called
‘transaction period’; the period between the close of a transaction period, and the
opening of the next transaction period is called the ‘interval period’.
16.Minimum duration of transaction period is 2 days, and minimum duration of
interval period is 15 days.
17.Exchange Traded Funds (ETFs) are those mutual fund schemes that are traded on
a stock exchange just like any other stock. These funds usually track an index or
have a fixed portfolio strategy based on some index so they are passive in nature.
18.Actively managed funds are funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the investment
objective of the scheme.
19.Passive funds invest on the basis of a specified index; whose performance it
seeks to track. They are not designed to perform better than the market. Such
schemes are also called index schemes. these schemes have low running costs
20.Fixed Maturity Plans are a kind of close-ended debt fund where the duration of
the investment portfolio is closely aligned to the maturity of the scheme.
21.Capital Protection Funds are closed-end hybrids funds. In these types of funds,
the exposure to equity is typically taken through the equity derivatives market.
22.Infrastructure Debt Funds are investment vehicles that can be sponsored by
commercial banks and NBFCs in India in which domestic/offshore institutional

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investors, especially insurance and pension funds can invest through units and
bonds issued by the IDFs.
23.SEBI has defined large cap, mid cap and small cap companies as follows:
a. Large Cap: 1st -100th company in terms of full market capitalization
b. Mid Cap: 101st -250th company in terms of full market capitalization
c. Small Cap: 251st company onwards in terms of full market capitalization

Equity Schemes

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BrcI9E&index=9&list=PLCZvkZJiAVK56z_al_5b-4WMMRUXMWydc

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Category of
No. Scheme Characteristics
Schemes
1 Multi Cap Fund Large cap – 25% ; Midcap – 25% ; Small Cap – 25%
2 Flexicap Fund Minimum investment in equity across market cap - 65%
3 Large Cap Fund Large cap companies-80% of total assets
Large & Mid Cap
4 Large cap -35% & Mid cap stocks-35% of total assets
Fund
5 Mid Cap Fund Minimum investment in mid cap -65% of total assets
6 Small cap Fund Minimum investment small cap -65% of total assets
Dividend Yield
7 Minimum investment -65% in Dividend yielding stocks
Fund
Value Fund* Value investment strategy. 65% of total assets in equity
8 Contrarian investment strategy. 65% of total assets in
Contra Fund*
equity
Max number of 30 stocks. Needs to mention where it
9 Focused Fund
intends to focus - Multi / Large / Mid /Small cap.
10 Sectoral/ Thematic 80% of total assets in that Particular Sector / Theme
At least 80% in Equity & Equity related instruments.
11 ELSS
Sec 80C tax benefit. 3 years Lock-in.

Mutual funds in India are permitted to offer either Value Fund or Contra Fund.
If a Mutual Fund has launched Value Fund then it cannot Launch Contra Fund
If a Mutual Fund has launched Contra Fund then it cannot Launch Value Fund

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DEBT Funds
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iUJzc&index=7&list=PLCZvkZJiAVK56z_al_5b-4WMMRUXMWydc

Category of Schemes Scheme Characteristics

Overnight Fund Investment in overnight securities having maturity of 1 day
Debt & money market securities with maturity of upto 91 days
Liquid Fund
only
Ultra Short Duration
Investment in Debt & Money Market - 3 months -6 months
Fund
Low Duration Fund Investment in Debt & Money Market - 6 months-12 months

Money Market Fund Money Market instruments having maturity upto 1 year
Investment in Debt & Money Market instruments - 1 year –3
Short Duration Fund
years
Medium Duration Investment in Debt & Money Market instruments - 3 years –4
Fund years
Medium to Long
Investment in Debt & Money Market instruments - 4 –7 years
Duration Fund
Long Duration Fund Investment in Debt & Money Market greater than 7 years
Dynamic Bond Investment across duration (i.e Bonds of all maturity / term)
Corporate Bond Fund Corporate bonds – 80% in AA+ & above rated bonds
Credit Risk Fund Minimum 65% in AA and Below rated bonds
Banking and PSU Fund Debt instruments of banks, PSU, PFI -80% of total assets
Minimum investment in Gsecs-80% of total assets (across
Gilt Fund
maturity)
Gilt Fund with 10 year Minimum investment in Gsecs-80% of total assets such that the
constant duration Macaulay duration of the portfolio is equal to 10 years
Minimum investment in floating rate instruments-65% of total
Floater Fund
assets

Hybrid Funds – Investing in two or more asset class

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56z_al_5b-4WMMRUXMWydc

Category of Schemes Scheme Characteristics

Conservative Hybrid Fund Equity - 10% to 25%; Debt - 75% to 90% of total assets

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Balanced Hybrid Fund Equity - 40% to 60%; Debt - 40% to 60% of total assets
Aggressive Hybrid Fund Equity - 65% to 80%; Debt - 20% to 35% of total assets
Dynamic Asset Allocation Investment in equity/ debt that is managed dynamically
or Balanced Advantage Equity - 0% to 100%; Debt - 0% to 100% of total assets
Invests in at least three asset classes with a minimum
Multi Asset Allocation
allocation of at least 10% each in all three asset classes
Scheme following arbitrage strategy. Minimum investment in
Arbitrage Fund
equity & equity related instruments- 65% of total assets
Equity – minimum 65% of total assets and minimum
Equity Savings
investment in debt- 10% of total assets. Hedging ALLOWED
Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or
Balanced Fund.

Solution Oriented Schemes:

Sr.
Category of Schemes Scheme Characteristics
No
Scheme having a lock-in for at least 5 years or till
1 Retirement Fund
retirement age whichever is earlier
Scheme having a lock-in for at least 5 years or till the
2 Children’s Fund
child attains age of majority whichever is earlier

Other Schemes

Sr.
Category of Schemes Scheme Characteristics
No
Minimum investment in securities of a particular index
1 Index Funds/ ETFs
(which is being replicated/ tracked)- 95% of total assets
FoFs (Overseas/ Minimum investment in the underlying fund- 95% of
2
Domestic) total assets.

There can be only one scheme per category, except in the following cases:
1. Index funds and ETFs replicating or tracking different indices,
2. Fund of Funds having different underlying schemes, and
3. Sector funds or thematic funds investing in different sectors or themes

Index or Passive Funds : https://www.youtube.com/watch?v=uq7ICqOk4bw

Gold Exchange Traded Funds (GETFs) –

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https://youtu.be/VOzaJ55IM5o?list=PLCZvkZJiAVK56z_al_5b-4WMMRUXMWydc

Gold Sector Funds are schemes that invest in shares of gold mining and other gold
processing companies.

Capital Protected Schemes are close-ended schemes, which are structured to ensure
that investors get their principal back, irrespective of what happens to the market.

Fund of Funds (FOFs) - Fund of Funds are schemes that invest in other mutual fund
schemes. Minimum investment in the underlying fund - 95% of total assets.

Fixed Maturity Plans – close ended with a fixed tenure, the maturity period ranging
from one month to three/five years. Fixed maturity plans are a kind of debt fund where
the investment portfolio is closely aligned to the maturity of the scheme.

CHAPTER 3: LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA

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1. Mutual funds are constituted as Trusts. Therefore, they are governed by the
Indian Trusts Act, 1882.
2. Day to day management of the schemes is handled by an Asset Management
Company (AMC). The AMC is appointed by the sponsor or the Trustees.
3. AMC should have networth of at least Rs 50 crore.
4. At least 50% of the directors of AMC should be independent directors.
5. Prior approval of the trustees is required before a person is appointed as director
on the board of the AMC.
6. Appointment of an AMC can be terminated by a majority of trustees, or by 75 %
of the Unit-holders
7. The sponsor needs to have a minimum 40% shareholding in the capital of the
AMC.
8. The sponsor has to appoint at least 4 trustees – at least two-thirds of them need to
be independent.
9. The application to SEBI for registration of a mutual fund is made by the sponsor(s)
and the sponsor invests in the capital of the AMC.
10.Association of Mutual Funds in India's (AMFI) website lists the names of all the
Asset Management Companies, which are members of AMFI, in terms of the
category of the sponsor, viz., Banks, Institutions, Private sector, etc.
11.The custodian has custody of the assets of the fund. Custodian Accept and give
delivery of securities and settles all the transactions
12.Custodian is a SEBI Registered entity appointed by Trustees and Tracks
corporate actions such as dividends, bonuses and rights

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13.Scheme auditor is appointed by the Trustees, the AMC auditor is appointed by

the AMC. Auditor appointed to audit MF scheme accounts needs to be different
from the auditor of the AMC. Scheme A/c maintained independently of AMC
A/c
14.Collecting banks enable the collection and payment of funds for the schemes
15.Depository holds the securities in dematerialised or electronic form. National
Securities Depository Limited (NSDL) and Central Depository Services Limited
(CDSL) are two depositories in India
16.Fund management is the most critical function in an Asset Management
Company. It is at the core of the value proposition offered by the firm. The main
function of this team is to invest the investors' money in line with the stated
objective of the scheme and to manage the same effectively.
17.Registrar and Transfer Agency (RTA), which is a big part of this unit, maintains
investor records as well as allots or redeems units, processes
purchase/redemption/switch requests, dividends, etc. Appointing a Registrar &
Transfer Agent (RTA) is optional. AMC can do this in-house also
18.Offices of RTA – Investor Service Centres
19.Dealer place orders with securities brokers based on the instructions of the fund
managers
20.Fund accountant performs the role of calculating the NAV, by collecting
information about the assets and liabilities of each scheme.
21.All distributors need to pass the NISM Certification Examination (NISM-Series-
V-A: Mutual Fund Distributors (MFD) Certification Examination) and register
with AMFI.
22.It is mandatory for all investors in the securities market, including the mutual
fund investors, to be KYC (Know Your Customer) compliant under the
provisions of the Prevention of Money Laundering Act.
23.AMFI involves the registration of mutual fund distributors, by allotting them
AMFI Registration Number (ARN), which is mandatory for becoming a mutual
fund distributor. For employees of Mutual Fund Distributors AMFI allot EUIN
(Employee Unique Identification Number)
24.AMFI is neither a regulatory body nor a Self-Regulatory Organisation (SRO).
AMFI conductes nationwide investor awareness programme and also interact
with SEBI, RBI, Government on all matters concerning the mutual fund industry
25.AMFI disseminate information on the MF industry and to undertake studies and
research
CHAPTER 4: LEGAL AND REGULATORY FRAMEWORK
1. Reserve Bank of India (RBI) that regulates the banking system, as well as money
markets; Securities and Exchange Board of India (SEBI) regulates the securities
markets; Insurance Regulatory and Development Authority of India (IRDAI)

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regulates the insurance market; and Pension Fund Regulatory and Development
Authority of India (PFRDA) regulates the pension market.
2. The Mutual Fund will buy and sell securities on delivery basis.
3. The Mutual Fund shall not advance any loans.
4. The scheme will not invest in the unlisted or privately placed securities of any
associate or group company of the sponsor.
5. Investment in the listed securities of the group companies of the sponsor will be
limited to 25 percent of the net assets
6. The Mutual Fund under all its schemes shall not own more than 10 percent of a
company’s paid-up capital bearing voting rights
7. The Scheme shall not invest more than 10 percent of its NAV in the equity shares
and equity related instruments of a company except Index/ Sector/Industry
Specificfunds
8. No celebrities shall form part of the advertisement.
9. A mutual fund scheme shall not invest more than 10 percent of its NAV in debt
instruments comprising money market instruments and non-money market
instruments issued by a single issuer which are rated not below investment grade
10.Non-Convertible Preference Shares are to be treated as debt instruments
11.ELSS requires that at least 80 percent of the ELSS funds should be invested in
equity and equity-linked securities.
12.Performance advertisement of mutual fund schemes shall be provided in terms of
CAGR for the past 1 year, 3 years, 5 years and since inception.
13.Unit-holders have a proportionate right to the beneficial ownership of the assets
of the scheme.
14.Investors can choose to change their distributor or opt for direct investing.
15.Unit-holders have the right to inspect key documents such as the Trust Deed,
Investment Management Agreement, Custodial Services Agreement, RTA
agreement and Memorandum & Articles of Association of the AMC.
16.SEBI Complaint Redress System (SCORES) is a web-based centralized
grievance redress system of SEBI. SCORES enables investors to lodge, follow up
on their complaints and track the status of redressal of such complaints online on
the website (http://scores.gov.in).
17.AMFI has also framed a set of guidelines and code of conduct for intermediaries
(known as AMFI Guidelines & Norms for Intermediaries (AGNI)), consisting of
individual agents, brokers, distribution houses and banks engaged in selling of
mutual fund products.
CHAPTER 5: SCHEME RELATED INFORMATION
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1. Mutual fund investments are subject to market risk. It is necessary to read all
scheme related documents before investing.
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2. There are primarily two important documents for understanding about the mutual
fund scheme:
• Scheme Information Document (SID), which has details of the particular scheme.
• Statement of Additional Information (SAI), which has statutory information
about the mutual fund or AMC, that is offering the scheme.
3. A pictorial representation of the risk to the principal invested in a mutual fund
product is depicted using a 'Riskometer'.
4. Risk-o-meter shall have the following six levels of risk for mutual fund schemes
i.e., low risk, low to moderate risk, moderate risk, moderately high risk, high risk
and very high risk.

5. SID also describes the Investment Objective of the scheme that helps investors
match their objective to that of the scheme.
6. Key Information Memorandum (KIM) is essentially a summary of the SID and
SAI. It contains the key points of these documents that are essential for the
investor to know to make a decision on the suitability of the investment for their
needs.
7. SID, SAI and KIM need to be updated periodically and the interim changes are
updated through the issuance of an addendum. The addendum is considered to be
a part of the scheme related documents and must accompany the KIM.
8. Current value of investments Unit balance in the investor's account X current
NAV
9. Regular updating of SAI has to be done by the end of 3 months of every financial
year.
10.KIM shall be updated at least once in half-year, within one month from the end
of the respective half-year, based on the relevant data and information as at the
end of September and March and shall be filed with SEBI forthwith through
electronic mode only.
11.Mutual Fund declares the Net Asset Value of the scheme on every business day
on AMFI's website www.amfiindia.com.
12.In case of open-ended schemes, the NAV is calculated for all business days and
released to the Press. In case of closed-ended schemes, the NAV is calculated at
least once a week.

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13.Fund factsheet contains the basic information of each scheme such as the
inception date, corpus size (AUM), current NAV, benchmark and a pictorial
depiction of the fund's style of managing the fund.
Scheme Information Document has the following information
• details of the particular scheme
• Name of the scheme
• Type of the scheme-Open-ended/Close-ended/Interval
• Equity/Debt/Liquid/Hybrid etc.(the expected nature of scheme portfolio)
• Standard RiskFactors-risks that all mutual fund investments are exposed to
• Scheme Specific Risk-certain risks specific to the individual asset category.
• minimum number of investors in the scheme-20
SAI – Statement of Additional Information
• Single SAI is relevant for all the schemes offered by a mutual fund
• SAI is part of the SID and has statutory information about the mutual fund or
AMC, that is offering the scheme
• Contents of SAI - Constituents of the mutual fund, How to apply, Rights of Unit
Holders, Investment Valuation norms, Tax Legal, Investor Grievance
Key Information Memorandum KIM
• KIM is essentially a summary or synopsis of the SID and SAI
• Key Information Memorandum (KIM) is mandatorily circulated along with the
application form. As per SEBI regulations, every application form is to be
accompanied by the KIM.
• SID, SAI and KIM need to be updated periodically,
• Interim changes are updated through the issuance of addendum
• Addendum is considered to be a part of the scheme related documents and must
accompany the KIM
Fundamental Attributes
• Type of a scheme - Open ended/Close ended/Interval scheme, Sectoral/Equity
Fund/Balance Fund/Income Fund/Index Fund/Any other type of Fund
• Investment Objective – Growth or Income
• Tentative Portfolio, minimum and maximum asset allocation, option to alter the
asset allocation for a short term period on defensive considerations
• Terms of Issue like Liquidity Provisions such as Listing Purchase Redemption

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• Fees or Expenses charged, Any Safety net or guarantee

Change in Fundamental Attributes and other important points
• A written communication about the proposed change is sent to each Unit- holder
and an advertisement is given in one English daily newspaper having nationwide
circulation as well as in a newspaper published in the language of the region
where the Head Office of the mutual fund is situated; and
• The Unitholders are given an option for a period of 30 days to exit at the
prevailing Net Asset Value without any exit load.
• KIM shall be updated at least once in half-year
• SID shall be revised and updated immediately after completion of duration of the
exit option (not less than 30 days from the notice date) in case of change in
Fundamental attributes
• Regular update of SID shall be done within one month from the end of each half-
year period
• Regular update of SAI has to be done by the end of 3 months of every financial
year.
• Documents in the market are “vetted” by SEBI, and not approved by SEBI.
• SID and SAI are prepared in the format prescribed by SEBI
• Draft SID and SAI are available on SEBI’s website
• The final documents (after incorporating SEBI’s observations) have to be hosted
on AMFI’s website (www.amfiindia.com) two days before the issue opens.
• Mutual Funds/ AMCs shall disclose portfolio (along with ISIN) as on the last day
of the month / half-year for all their schemes on their respective website and on
the website of AMFI within 10 days from the close of each month/ half-year
respectively
• Non-Mandatory Document - Monthly Fact Sheet. It is not a regulatory
requirement to publish the monthly fact sheet, rather it is a market practice
followed. Factsheet is a marketing and information document
CHAPTER 6: FUND DISTRIBUTION AND CHANNEL MANAGEMENT
PRACTICES
1. Mutual funds are distributed in India to the investors through multiple channels,
viz., individual mutual fund distributors, bank branches, national distributors
through their branches or their sub-agents, post offices, and directly by the
AMCs.
2. SEBI has facilitated buying and selling of the units of open-ended mutual funds
through the stock exchanges.
3. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have
extended their trading platforms to help the stock exchange brokers become a
channel for investors to transact in Mutual Fund units.
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4. NSE's platform is called NMF II Platform. BSE's platform is the BSE STAR
Mutual Funds Platform.
5. MF Utilities (MFU) is a transaction aggregating platform that connects investors,
RTAs, distributors, banks, AMCs and others.
6. Investors who register on the MFU are allotted a Common Account Number
(CAN) under which all their mutual fund holdings are consolidated.
7. Trail commission is calculated as a percentage of the net assets attributable to the
Units sold by the distributor. It is normally paid by the AMC on a monthly basis.
8. Investment advisor means any person, who for consideration, is engaged in the
business of providing investment advice to clients or other persons or group of
persons and includes any person who holds out himself as an investment adviser.
9. In order to cater to people with small saving potential and to increase reach of
mutual fund products in urban areas and smaller towns, SEBI has allowed a
transaction charge per subscription of Rs. 10,000/- and above to be paid to
distributors of the mutual fund products.
10.Transaction charges do not apply to transactions other than
purchases/subscriptions that result in fresh inflows.
11.Permanent Account Number (PAN)/PAN Exempted KYC Reference Number
(PEKRN) will be used to identify the investor as a new/existing investor.
12.Goods and Services Tax (GST) became applicable with effect from July 2017.
GST is payable by any person making taxable supplies of goods/services and
whose annual turnover exceeds Rs. 20 lakhs.
13.Trail Commission payable as a percentage of AUM attributable to the Units sold
by the distributor
14.Trail commission is paid for as long as the investor’s money is held in the fund.
15.No commission is payable to the distributor for their own investments
Transaction Charges : a transaction charge per subscription of Rs. 10,000/- and above
to be paid to distributors of the mutual fund products.
Type of Investor Transaction Charges (For Purchase /
Subscription of Rs 10,000 and above
First time Mutual Fund Investor Rs 150

Investor other than First time Investor Rs 100

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1. Transaction charges not applicable on direct investments, Switches, STP ,SWP,

Redemption
2. In SIP, transaction charges deducted in 4 equal instalments.

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3. NIL transaction charges for customers of Distributors who have chosen the ‘opt
out’ option
4. ‘OPT OUT’ shall be at the distributor level & Product level and not at Investor
Level
5. PAN/PEKRN will be used to identify the investor as a new/existing investor.
6. SEBI has mandated AMCs to put in place a due diligence process to regulate
distributors who qualify any one of the following criteria:
• Multiple point presence (More than 20 locations)
• AUM raised over Rs. 100 crores across the industry in the non-institutional
category but including high net worth individuals (HNIs)
• The commission received of over Rs. 1 Crore p.a. across industry
• The commission received of over Rs. 50 Lakhs from a single mutual fund
CHAPTER 7: NET ASSET VALUE, TOTAL EXPENSE RATIO AND PRICING
OF UNITS
1. The unit-holders’ funds in the scheme is commonly referred to as “net assets”.
2. Net asset includes the amounts originally invested, the profits booked in the
scheme, as well as appreciation in the investment portfolio. It goes up when the
market goes up, even if the investments have not been sold.
3. NAV of the scheme will depend upon the value of this portfolio, which in turn,
depends upon the value of the securities held in it.
4. The process of valuing each security in the investment portfolio of the scheme at
its current market value is called 'mark to market'.
5. Investment and Advisory Fees are charged to the scheme by the AMC.
6. The difference between the NAV and re-purchase Price is called the "exit load".
7. NAV is to be calculated up to 4 decimal places in the case of index funds, liquid
funds and other debt funds. In case of equity and balanced funds is to be
calculated up to at least 2 decimal places.
8. SEBI has banned entry loads. So, the Sale Price needs to be the same as NAV
9. Exit loads have to be credited back to the scheme immediately
10.Mutual funds are not allowed to charge differential exit loads based on the
amount of investment.
11.Initial Issue / NFO Expenses are Borne by AMC
12.Index fund / ETF - Total expense ratio including the investment and advisory
fees shall not exceed 1%.
13.Closed Ended Equity Scheme Equity Max Total expense ratio including the
investment and advisory fees shall not exceed 1.25%
14.The securities shall be valued at the last quoted closing price on the stock
exchange

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15.When the securities are traded on more than one recognised stock exchange, the
securities shall be valued at the last quoted closing price on the stock exchange
where the security is principally traded.
16.When a security is not traded on any stock exchange for a period of thirty days
prior to the valuation date, the scrip must be treated as a ‘non-traded’ scrip.
17.Segregated Portfolio is a portfolio, comprising of debt or money market
instrument affected by a credit event
18.AMC shall not charge investment and advisory fees on the segregated portfolio.
19.The Net Asset Value (NAV) of the segregated portfolio shall be declared on a
daily basis.
20.Segregated portfolio shall be effective from the day of credit event
21.All existing investors shall be allotted equal number of units in the segregated
portfolio as held in the main portfolio as on the day of the credit event
22.Redemption or subscription is not allowed in a segregated portfolio
23.Units of segregated portfolio shall be listed on recognized stock exchanges
24.NAV = (Value of stocks + Value of bonds + Value of money market instruments
+ Dividend accrued but not received + Interest accrued but not received – Fees
payable) / No. of outstanding units
NAV & Sale Price Explanation - https://youtu.be/rVuo_gTWTLQ
NAV Calculation Video –
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CHAPTER :8 TAXATION

➢ Section 10(23)(D) of the Income Tax Act exempts all the income earned by the
mutual fund schemes.
➢ Long term Capital Gain
• Equity Schemes (65% & above in Domestic Equity) – more than 1 year
holding period
• Non Equity Schemes (35% to 64% in Equity) – more than 3 years Holding
period.
• Non Equity Schemes (less than 35% in Equity) – always Short term
irrespective of Holding period
➢ Short term Capital Gain
• Equity Schemes (65% & above in Domestic Equity) – Less than or Equal to 1
year holding period
• Non Equity Schemes (35% to 64% in Equity) – Less than or Equal to 3 years
Holding period.
• Non Equity Schemes (less than 35% in Equity) – always Short term
irrespective of Holding period

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Indexation Video - https://youtu.be/xvXvR4unxk8?list=PLCZvkZJiAVK56z_al_5b-

4WMMRUXMWydc

➢ Equity Long-term capital gains – First 1 lakh is tax free.

➢ Dividends are taxed in the hands of Investors as per their slab
➢ Securities Transaction Tax (STT) at the time of Redemption applicable only for
Equity Schemes.

Transaction STT Payable by

Rates
Purchase of units of equity oriented mutual fund Nil Purchaser
Sale of units of equity oriented mutual fund (delivery based) 0.001 Seller
Sale of units of an equity oriented mutual fund to the mutual fund 0.001 Seller

Setting off Capital Losses under Income Tax Act

• Capital loss, short term or long term, cannot be set off against any other head of income
(e.g. salaries).
• Short term capital loss set off against short term capital gain or long-term capital gain.
• Long term capital loss can only be set off against long term capital gain

The dividend would be added to the taxable income of the assessee for the year. The
dividends would be taxable in the hands of the recipient at the applicable tax rate.

Tax benefit under Section 80C of the Income Tax Act

Certain mutual fund schemes, known as Equity Linked Savings Schemes (ELSS) are
eligible for deduction under Section 80C of the Income Tax Act. As the name suggests,
this is an equity linked scheme, and hence the scheme invests in equity shares. The benefit
is available upto Rs. 1.50 lacs per year per taxpayer in case of individuals and HUFs. The
scheme has a lock-in period of three years from the date of investment.

Tax Deducted at Source

There is no TDS on re-purchase proceeds to resident investors.

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In case of dividends from mutual fund schemes, even for resident Indians, TDS is
applicable. Tax is required to be deducted at 10 percent on the dividend amount if it
exceeds Rs. 5,000.
Dividend plans in Mutual Funds are called IDCW (Income Distribution cum Capital
Withdrawal)

CHAPTER 9: INVESTOR SERVICES

Close-ended Schemes have an NFO Open Date and NFO Close Date. But, they have no
Scheme Re-opening Date, because the scheme does not sell or re-purchase units.
Investors will need to buy or sell units from the stock exchange where the scheme is
listed.

Direct and Regular Plans

Investors have the option to invest (purchase or subscribe to mutual fund units) directly
without routing the investment through a distributor (Direct Plan). In this case, the
investor
must mention “Direct” in the space provided in the application form for entering the
AMFI
Registration Number (ARN).

If the investment (purchase/subscription) is routed through a distributor/Advisor (Regular

Plan) then the ARN/RIA number and other details have to be provided in the space
provided
for the same.
The direct plan shall have a lower expense ratio excluding distribution expenses,
commission,
etc., and no commission shall be paid from such plans. Since the TER is different in both
cases, the plans will have separate NAVs

Annual Account Statement – MF’s provide the Account Statement to the Unit-holders
who have not transacted during the last 6 months prior to the date of generation of account
statements. The Account Statement reflects the latest closing balance and value of the
units prior to the date of generation of the account statement.

Consolidated Account Statement - (CAS) for each calendar month is sent by post/email
provided there has been a financial transaction in the folio in the previous month. If an
email id is registered with the AMC, only a CAS via email is sent. For the purpose of
sending CAS, investors are identified across mutual funds by their Permanent Account
Number (PAN).

Switch is a redemption from one scheme & a purchase into another combined into one
transaction. It is a combination of Purchase and Repurchase transactions simultaneously.

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NACH - National Automated Clearing House (NACH) is a centralised clearing system

launched by the National Payments Corporation of India (NPCI). NACH have same day
presentation and settlement, including returns processing. It comes in two variants –
NACH Credit and NACH Debit.

Application Supported by Blocked Amount - (ASBA) is a facility where the

investment
application in a New Fund Offer (NFO) is accompanied by an authorization to the bank
to
block the amount of the application money in the investor’s bank account.
The benefit of ASBA is that the money goes out of the investor’s bank account only on
allotment. Until then, it keeps earning interest for the investor. Further, since the money
transferred from the investor’s bank account is the exact application money that is due
on
account of the allotment, the investor does not have to wait for any refund

Cash Payments - Mutual funds usually do not accept cash. Small investors, who may
not be tax payers and may not have PAN/bank accounts, such as farmers, small
traders/businessmen/workers are allowed cash transactions for purchase of units in
mutual funds to the extent of Rs. 50,000/- per investor, per mutual fund, per financial
year

Instant Access Facility - IAF facilitates credit of redemption proceeds in the bank
account of the investor on the same day of the redemption request. The MFs/AMCs can
offer IAF only in Liquid and Overnight schemes of the mutual fund. The monetary limit
under the IAF is Rs. 50,000 or 90 percent of latest value of investment in the scheme,
whichever is lower. This limit is applicable per day per scheme per investor. Also, there
can be repurchase transactions through the stock exchange platform or MFU platform.

CUT OFF TIMING –

NAV Cut off Timing for Non Liquid Funds | Mutual Fund NAV - YouTube
Cutoff Time for Liquid Fund Purchase | Mutual Fund - YouTube

Purchase – NON Liquid Funds Time NAV

Fund available for Utilisation Till 3 PM Same day NAV
If Fund is not available for utilization on application date before 3PM then the
NAV of the day on which Funds are realized before 3 pm shall be applicable.
Redemption – NON Liquid Funds, Any Amount, till 3 PM, Same Day NAV
Purchase – LIQUID FUNDS Time NAV
Fund available for Utilization Before 1.30 Previous Day NAV
pm
If Fund is not available for utilization on application date before 1.30PM then the
NAV previous to the date of Fund realization before 1.30 pm shall be applicable.

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Redemption – LIQUID Funds

Any Amount Till 3PM
NAV of the day immediately
preceding the next business day
Cutoff timings are not applicable for NFO’s and International Funds.

Time Stamping - The precision in setting cut-off timing makes sense only if there is a
fool proof mechanism of capturing the time at which the sale and re-purchase applications
are received Mutual funds disclose Official Points of Acceptance (OPoAs) and their
addresses in the SID and their website. All transaction requests need to be submitted at
the OPoAs.
The time stamping on the transaction requests is done at the official points of acceptance.

SEBI and RBI have allowed Qualified Foreign portfolio investors who meet KYC
requirements to invest in equity and debt schemes of Mutual Funds through two routes
1) Direct route – Holding MF units in Demat account through a SEBI registered DP
2) Indirect route – Holding MF units via Unit Confirmation Receipt (UCR)

Individual and non-individual investors are permitted to invest in mutual funds in India.
The ‘Who can invest’ section of the Offer Document is the best source to check on
eligibility to invest.

KYC Registration Agencies - KRA

All Investors have to comply with the KYC formalities. In-Person Verification (IPV) by
a SEBI-registered intermediary is compulsory for all investors. IPV done by only one
SEBI-registered intermediary (broker, depository, mutual fund distributor etc.). This IPV
will be valid for transactions with other SEBI-registered intermediaries too. Distributors
who have a valid NISM-Series-V-A: Mutual Fund Distributors certificate and a valid
ARN can carry out the In-person verification if they have completed the KYD process.

PAN Exempt Investments in Mutual Funds

Micro-SIPs i.e., SIPs where annual investment does not exceed Rs 50,000. Small
investors investing up to Rs. 50,000 per mutual fund per financial year do not need to
provide PAN Card. Rs. 50,000 is a composite limit for the small investor’s Micro-SIP
and lump sum investments together.
Government of India authorised the Central Registry of Securitisation and Asset
Reconstruction and Security Interest of India (CERSAI) to act as and to perform the
functions of the Central KYC Record Registry under the PML Rules 2005, including
receiving, storing, safeguarding and retrieving the KYC records in digital form of all the
clients in the financial sector
KYC template finalised by CERSAI has to be used by the registered intermediaries

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SIP Top-up Facility - Mutual funds provide an additional facility through an SIP to
enhance the disciplined savings of investors. It is called the SIP Top-Up facility

Nomination
• Nomination can be made in favour of a maximum of three nominees.
• Where there are multiple nominees, the unitholder(s) must define the percentage
holding for each nominee making a total of 100 percent
• Only individual investors can make a nomination. Investments by minors cannot
have a nomination. A Power of Attorney holder cannot make a nomination.
• The nominee can be an individual, including minors and NRIs, central and state
governments and local authorities. If the nominee is a minor, then a guardian too
can be specified.
• nomination cannot be made in favour of a trust (except a religious or charitable
trust), society, body corporate, partnership, Karta of an HUF or a Power of
Attorney holder.

Transmission of Units - process of transferring units to the person entitled to receive it

in the event of the death of the unit holder. The person entitled to receive it depends upon
the folio conditions of joint holding and nomination. If the first holder passes away, the
second holder is substituted as first holder. In a singly held folio with nominations, the
units are transferred to the nominee. If a folio is jointly held and has nominations, the
right of the joint holder will take precedence. If there are no nominations in the folio, the
units are transmitted to the legal successors

Service provided by Mutual

Turnaround Time
Funds
NAV Calculation and disclosure On a daily basis
Mutual Fund Schemes (other than
IPO of ELSS) to remain open for Maximum of 15 days
subscription
Mutual Fund Schemes to allot
Within 5 business days of closure of NFOs
units or refund money
Re-opening for ongoing sale/re-
purchase of open ended scheme Within 5 business days of allotment
(other than ELSS)
Dispatch of Dividend warrants to
Within 30 days of declaration of the dividend
investors
Dispatch of Redemption/re- Within 10 working days from the date of receipt of
purchase cheques to investors transaction request.
Scheme-wise Annual Report or an
Four months from the date of closure of the
abridged summary to all unit
relevant accounts year
holders
Statement of portfolio to be sent to Before the expiry of 10 days from the close of each
all unitholders half year (i.e. 31st Mar and 30th Sep)
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Half Yearly Disclosures

Within 1 month from the close of each half year
(unaudited financial results) on
(i.e. 31st Mar and 30th Sep)
mutual fund website
A Consolidated Account
On or before 10th of the succeeding month
Statement (CAS) by post/email
To be issued within 5 working days of the receipt
of request for the certificate.
Unit certificate For close ended schemes, units in demat form to
be issued to unitholders within 2 working days of
the receipt of request from unitholders.
Initial transaction SIP / STP / SWP within 10 working days
once every calendar quarter (March, June,
Ongoing SIP/STP/SWP September, December) within 10 working days of
the end of the quarter.
it will be dispatched to investor within 5 working
On specific request by investor
days without any cost.

CHAPTER 10: RISK, RETURN AND PERFORMANCE OF FUNDS

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General Risk Factors

• Liquidity Risk
• Interest Rate Risk
• Re-investment Risk
• Political Risk
• Economic Risk
• Foreign Currency Risk

Specific Risk Factors

• Risk related to equity and equity related securities
o Risk associated with short selling and Stock Lending
o Risks associated with mid-cap and small-cap companies
o Risk associated with Dividend
o Risk associated with Derivatives
• Risks related to debt funds
o Reinvestment Risk
o Rating Migration Risk
o Term Structure of Interest Rates Risk
o Credit Risk
o Risk associated with floating rate securities
o Risk factors associated with repo transactions in Corporate Bonds
o Risks associated with Creation of Segregated portfolio
o Risks associated with investments in Securitized Assets

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Fundamental and Technical analysis

Fundamental analysis is a study of the business and financial statements of a firm in order
to identify securities suitable for the strategy of the schemes as well as those with high
potential for investment returns and where the risks are low.
Fundamental analysis → security selection strategy → identifying long term investment
avenues.

Technical Analysts believe that price behaviour of a share over a period of time throws
up trends for the future direction of the price. Along with past prices, the volumes traded
indicate the underlying strength of the trend and are a reflection of investor sentiment,
which in turn will influence future price of the share. Technical Analysts therefore study
price-volume charts (a reason for their frequently used description as “chartists”) of the
company’s shares to decide support

Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares outstanding

Price to Earnings Ratio (P/E Ratio): Market Price per share ÷ Earnings Per Share (EPS)
The Price Earnings to Growth (PEG) ratio relates the PE ratio to the growth estimated
in the company’s earnings. A PEG ratio of one indicates that the market has fairly valued
the
company’s shares, given its expected growth in earnings. A ratio less than one indicates
the
equity shares of the company are undervalued, and a ratio greater than one indicates an
overvalued share.

Book Value per Share: Net Worth ÷ No. of equity shares outstanding

Price to Book Value: Market Price per share ÷ Book Value per share

Dividend Yield: Dividend per share ÷ Market price per share

Growth investment style entails investing in high growth stocks i.e. stocks of companies
that
are likely to grow much faster than the market

Value investment style is an approach of picking up stocks, which are priced lower than
their
intrinsic value, based on fundamental analysis

Investors need a longer investment horizon to benefit from the price appreciation in such
stocks.

Portfolio building approach – Top down and Bottom up

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A bottom-up approach on the other hand analyses the company-specific factors first and
then
evaluates the industry factors and finally the macro-economic scenario and its impact on
the
companies that are being considered for investment. Stock selection is the key decision
in this approach; sector allocation is a result of the stock selection decisions.

Both the approaches have their merit. Top down approach minimizes the chance of being
stuck with large exposure to a poor sector. Bottom up approach ensures that a good stock
is
picked, even if it belongs to a sector that is not so hot. What is important is that the
approach
selected should be implemented professionally.

Standard Deviation - is a measure of total risk in an investment. As a measure of risk it

is
relevant for both debt and equity schemes.
A high standard deviation indicates greater volatility in the returns and greater risk.
Comparing the standard deviation of a scheme with that of the benchmark and peer group
funds gives the investor a perspective of the risk in the scheme

Beta - is based on the Capital Asset Pricing Model (CAPM), which states that there are
two kinds of risk in investing in equities – systematic risk and non-systematic risk.

Modified duration measures the sensitivity of value of a debt security to changes in

interest
rates. Higher the modified duration, higher is the interest sensitive risk in a debt portfolio
The credit rating profile indicates the credit or default risk in a scheme. Government
securities
do not have a credit risk. Similarly, cash and cash equivalents do not have a credit risk.
Investments in corporate issuances carry credit risk. Higher the credit rating, lower is the
default risk.

Segregated portfolio means a portfolio, comprising of debt or money market instrument

affected by a credit event, that has been segregated in a mutual fund scheme. “Main
portfolio” means the scheme portfolio excluding the segregated portfolio.
Asset Management Company (AMC) were allowed to create segregated portfolio in a
mutual fund scheme in case of a credit event at issuer level i.e. downgrade in credit rating
by a SEBI registered Credit Rating Agency (CRA). Creation of segregated portfolio was
made optional and at the discretion of the AMC.

CHAPTER 11: MUTUAL FUND SCHEME PERFORMANCE

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Returns can be measured in various ways – Simple Returns, Annualised Returns,

Compounded Returns, Compounded Annual Growth Rate. CAGR assumes that all
dividend payouts are reinvested in the scheme at the ex-dividend NAV.

SEBI guidelines govern disclosures of return by mutual fund schemes. Loads and taxes
pull the investor’s returns below that earned by the Scheme. Investor returns are also
influenced by various actions of the investor himself.

Price Return Index or Total Return Index

Earlier, the Mutual Fund schemes were benchmarked to the Price Return variant of an
Index
(PRI). PRI only captures capital gains of the index constituents.
Total Return variant of an Index (TRI) variant of an index considers all
dividends/interest payments that are generated from the basket of constituents that make
up the index in addition to the capital gains.

NSE’s MIBOR (Mumbai Inter-Bank Offered Rate) is based on short term money market.
NSE similarly has indices for the Government Securities Market.

ICICI Securities’ Sovereign Bond Index (I-Bex) is based on government securities. It

consists of an umbrella index covering the entire market, and sub-indices catering to three
contiguous maturity buckets. The three sub-indices are—Si-Bex (1 to 3 years), Mi-Bex
(3 to 7 years) and Li-Bex (more than 7 years )
Liquid schemes invest in securities of upto 91 days’ maturity. Therefore, a short term
money
market benchmark such as NSE’s MIBOR or CRISIL Liquid Fund Index is suitable.

Hybrid Funds - invest in a mix of debt and equity. Therefore, the benchmark for a hybrid
fund is a blend of an equity and debt index. CRISIL Hybrid Index

Gold ETF - Gold price would be the benchmark for such funds.

Real Estate Funds - A few real estate services companies have developed real estate
indices. These have shorter histories, and are yet to earn the wider acceptance that the
equity indices enjoy.

International Funds - The benchmark would depend on where the scheme proposes to
invest. Thus, a scheme seeking to invest in China might have the Hang Seng Index
(Chinese index) as the benchmark.
S&P 500 may be appropriate for a scheme that would invest largely in the US market

Standard benchmarks
Equity scheme → Sensex or Nifty
Long term debt scheme → 10 year dated GoI security

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Short-term debt fund → 1 year T-Bill

Gold is a truly international asset, whose quality can be objectively measured. The value
of gold in India depends on the international price of gold (which is quoted in foreign
currency), the exchange rate for converting the currency into Indian rupees, and any
duties on the import of gold.

Unlike gold, which is a global asset, real estate is a local asset. It cannot be transported –
and its value is driven by local factors
Sharpe Ratio = (Rs minus Rf) ÷ Standard Deviation
Treynor Ratio = (Rs minus Rf) ÷ Beta

Alpha - Non-index schemes too would have a level of return, which is in line with its
higher or lower beta as compared to the market. Let us call this the optimal return.
The difference between a scheme’s actual return and its optimal return is its Alpha—a
measure of the fund manager’s performance. Alpha measures the performance
of the investment in comparison to a suitable market index. Positive alpha is indicative
of outperformance by the fund manager; negative alpha might indicate under-
performance
Tracking Error - The Beta of the market, by definition is 1. An index fund mirrors the
index. Therefore, the index fund too would have a Beta of 1, and it ought to earn the same
return as the market. The difference between an index fund’s return and the market return
is the tracking error

CHAPTER 12: MUTUAL FUND SCHEME SELECTION

International Equity funds

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

Portfolio Turnover
Purchase and sale of securities entails broking costs for the scheme. Frequent churning
of the portfolio would not only add to the broking costs, but also be indicative of unsteady
investment management.
Portfolio Turnover Ratio is calculated as Value of Purchase and Sale of Securities during
a
period divided by the average size of net assets of the scheme during the period
The portfolio turnover needs to be viewed in the light of the investment style.
Six month holding period may be too short for a value investment style, but perfectly
acceptable for a scheme that wants to benefit from shifts in momentum. A short holding

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period may indicate that the fund manager is looking for tactical investments to take
advantage of short-term market opportunities rather than identifying and investing in
fundamentally strong companies for the long-term.

Core and satellite portfolio

Core Portfolio
To meet the long-term needs and goals of the investor.
Long-term returns in broad alignment with the markets.
Diversified Equity / Large Cap / Mid Cap funds are examples

Satellite Portfolio
Take advantage of expected short-term market movements - Tactical Asset Allocation
Held for the period when the conditions are suitable.
Examples
(1) Sector / Thematic Funds - Cyclical
(2) Long term GILT Funds – Interest rates are expected to come down
(3) Gold funds – Unstable Political Scenario

The division between core and satellite portfolios will depend upon each investor’s
profile. Conservative investors may like a very small proportion of their overall portfolio
to be managed tactically. A moderate investor may be comfortable with an 80 percent
allocation to core investments and a 20 percent exposure to satellite or tactical portfolio.
An investor comfortable with taking higher risk may have an even higher exposure to
tactical investments.

Significant Unit holder means any entity holding 5% or more of the total corpus of any
scheme.
Amongst index schemes, tracking error is a basis to select the better scheme. Lower the
tracking error, the better it is. Similarly, Gold ETFs need to be selected based on how
well they track gold prices.

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IMPORTANT NOTE :
1. Attend ALL Questions. There is NO NEGATIVE mark.
2. For the questions you don’t know the right answer – Try to eliminate the wrong
answers and take a guess on the remaining answers.
3. DO NOT MEMORISE the question & answers. It’s not the right to way to prepare
for any NISM exam. Good understanding of Concepts is essential.

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