NISM – Mutual Fund

Distribution Certification
Examination
Assessment Structure

The examination consists of 100 questions of 1 mark

each and should be completed in 2 hours. The
passing score 50%. There shall be negative marking
of 25% of the marks assigned to a question.
Session
Objectives
By the end of the session you will be able to :
 Explain the Concept & Role of a Mutual Fund
 Explain the Mutual Fund Structure & Constituents
 Explain the Legal & Regulatory Environment
 Define and describe the Offer Document
 Explain Fund Distribution & Channel Management Practices
 Define & describe the Accounting, Valuation & Taxation
 Explain the various Investor Services
 Explain the various ways to calculate Return, Risk &
Performance of Funds
Session
Objectives
 Explain the steps of Scheme Selection
 Explain the Selection of Right Investment Products for
Investors
 Define and describe the term Financial Planning
 Explain the Model Portfolios & Financial Plans
Test Time !
What are our Financial Goals?
Our Financial Goals

 Buying a House  Daughter’s Marriage

 Buying a Car  Retirement Planning
 Holiday Planning  Tax Planning
 Children’s Education  Meeting emergencies
Where do we invest?

Fixed
Deposits

Mutual Post
Fund Office

Investment
Avenues
Insuranc Real
e Estate

Stock
Gold
Market
CONCEPT AND ROLE OF A MUTUAL FUND
Concept of Mutual Fund

Pool of Money:
A Mutual Fund is a collective investment vehicle. It is a pool of
investor’s money invested according to pre-specified
investment objectives. The benefits from the investment of
the pooled money accrue to those that contribute to the
pool. There is thus mutuality in the contribution and the
benefit. Hence the name ‘mutual fund’
Investment Objective

• A mutual fund is a pool of investor’s money, invested in a

portfolio of securities as per the stated objective

Capital Capital
Regular Income
Appreciation Preservation

Real Estate
Savings A/c Post Office MIS

Equity Market
Liquid Mutual Debt Mutual
Equity Mutual Fund Fund
Fund
Important Terms

Mutual Fund Units

New Fund Offer (NFO)
Unit Capital
Investment Portfolio
Assets Under

Management
Net Assets
Net Asset Value
(NAV)
Profitability metric

(A) Interest income

(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses
The true worth of a unit of the scheme is otherwise called
Net Asset Value (NAV) of the scheme
Advantages of Mutual Funds

 Professional Management
 Portfolio Diversification
 Economies of Scale
 Liquidity
 Tax Deferral
 Tax benefits
 Convenient Options
 Investment Comfort
 Regulatory Comfort
 Systematic approach to investments
Limitations of a Mutual
Fund

 Lack of portfolio customization

 Choice overload
 No control over costs
Types of
Funds
 Open-ended funds are open for investors to enter or exit at
anytime, even after the NFO
 Close-ended funds have a fixed maturity. Investors can buy
units of a close-ended scheme, from the fund, only during its
NFO
 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
 Actively Managed Funds and Passive Funds
 Debt, Equity and Hybrid Funds
Types of Debt
Funds
 Gilt funds
 Diversified debt funds
 Junk bond schemes
 Fixed maturity plans
 Floating rate funds
 Liquid schemes
Types of Equity
Funds
 Diversified equity fund
 Sector funds
 Thematic funds
 Equity Linked Savings Schemes (ELSS)
 Equity Income / Dividend Yield Schemes
 Arbitrage Funds
Types of Hybrid
Funds
 Monthly Income Plan
 Capital Protected Schemes
Other Funds

 Gold Funds
 Gold Exchange Traded Fund
 Gold Sector Funds
 Real Estate Funds
 Commodity Funds - Commodity ETF or Commodity Sector
Funds
 International Funds
 Fund of Funds
 Exchange Traded Funds
Role Of Mutual
Fund
 For investors, Mutual Fund offers an investment opportunity
and for issuers it acts as an institutional investors
 The balance represents the mutual fund, its an important
financial intermediary in the system

Issuers Investors

Retail
Government
Investors

Corporate
Corporate
Investor
Key Developments over the Years

AUM of the industry, as of February 2010 has touched

Rs766,869crore from 832 schemes offered by 38 mutual funds
FUND STRUCTURE AND CONSTITUENTS
Legal Structure of Mutual Funds
in India

Key Constituents are :

 Sponsor
 Trust
 Trustees
 AMC
 Custodian
 Transfer Agent
Sponsor

 The application to SEBI for registration of a mutual fund is

made by the sponsor/s
 Invest in the capital of AMC

 Eligibility criteria for Sponsor/s:

 Should be carrying on business in financial services for 5
years
 Should have positive net worth for each of those 5 Yrs
 Latest net worth should be more than the capital of the
AMC
Sponsor

 Should have earned profits, after providing for

depreciation and interest, in 3 of the previous 5yrs
 Needs to have a minimum 40% share holding in the capital
of the AMC
Mutual Fund As a
TRUST
 Is a public trust registered under the `Indian Trust Act of
1882`
 Mutual fund is a pass through vehicle
 It has no independent legal capacity
 It is the trustees who have the legal capacity & therefore all
acts in relation to the trust are taken on its behalf by the
trustees
 The trustees hold the unit holders money in fiduciary
capacity
 Investors or unit holders are beneficial owners of the
investments held by the trust
Trustee

 SEBI expects Trustees to perform a key role in ensuring legal

compliances and protecting the interest of investors
Accordingly, various General Due Diligence and Special Due
Diligence responsibilities have been assigned to them
 Sponsor will have to appoint at least 4 trustees
 If a trustee company has been appointed, then that company
would need to have at least 4 directors on the Board
 At least 2/3rd of the trustees / directors on the Board of the
trustee company, would need to be independent trustees
AM
C
 Day to day operations of asset management are handled by
the AMC
 It has to exercise due diligence and care in all its
investment
decisions as per SEBI regulations and trust deed
As per SEBI regulations :
 Directors of the AMC should have adequate professional
experience
 Directors and key personnel of the AMC should not
have been found guilty of moral turpitude or convicted
of an economic offence or violation of any securities
laws
AM
C
 At least 50% of the directors should be independent
directors
 AMC needs to have a minimum net worth of Rs10 Crs
 AMC cannot invest in its own schemes, unless its disclosed in
the Offer Document
 Appointment of an AMC can be terminated by a majority of
the trustees, or by 75% of the Unit-holders
 Operations of AMCs are headed by a Managing Director,
Executive Director or Chief Executive Officer
AM
C
 Other business-heads are:
 Chief Investment Officer (CIO)
 Securities Analysts
 Securities Dealers
 Chief Marketing Officer (CMO)
 Chief Operations Officer (COO)
 Compliance Officer
Custodian

 The custodian has custody of the assets of the fund, SEBI

regulations stipulates that:
 If the sponsor control 50% or more of the shares of a
custodian, or if 50% or more of the directors of a custodian
represent the interest of the sponsor, then that custodian
cannot appointed for the mutual fund operation of the
sponsor
 All custodians need to register with SEBI
RT
A
The RTA maintains investor records. Their Investor Service
Centers (ISCs), perform a useful role in handling the
documentation of investors.
 Appointment of RTA is done by the AMC
 AMC can choose to handle this activity in-house
 All RTAs need to register with SEBI
Other Service Providers

 Auditors - They are responsible for the audit of accounts

 Accounts of the schemes need to be maintained independent
from the accounts of the AMC
 While the scheme auditor is appointed by the Trustees, the
AM auditor is appointed by the AMC
 Fund Accountant - They perform the role of calculating the
NAV, by collecting information about the assets and liabilities
of each scheme
 AMC can either handle this activity in-house or it can be
outsourced
Other Service Providers

 Distributors - They have a key role in selling suitable types of

units to their Clients
 Collecting Bankers - The investors’ moneys go into the bank
account of the scheme maintained with collection bankers
appointed by the AMC
LEGAL AND REGULATORY
ENVIRONMENT
Role of Regulators in
India
 SEBI – Securities Exchange Board Of India
 SEBI regulates mutual funds, depositories, custodians and
registrars & transfer agents in the country
 The applicable guidelines for mutual funds are set out in SEBI
(Mutual Funds) Regulations, 1996
 Stock Exchanges are regulated by SEBI
 RBI – Reserve Bank Of India
 RBI regulates the money market and foreign exchange
market
 SRO – Self Regulatory Organizations
 Eg - Institute of Chartered Accountants of India (ICAI)
 Eg – NSE & BSE
Role of Regulators in
India
 AMFI – Association of Mutual Funds Of India
AMCs in India are members of AMFI, an industry body that has
been created to promote the interests of the mutual funds
industry
AMF
I
 Objectives of AMFI:
 Recommends and promotes best business practices and code
of conduct
 Represent the industry to the regulators, and policy
makers in SEBI, RBI and the Government on matters
concerning the mutual fund industry
 To develop a cadre of well trained Agent distributors and to
implement a programs of training and certification
 To undertake nationwide investor awareness programs
 To disseminate information on Mutual Fund Industry
AMFI Code Of
Ethics
 The AMFI Code of Ethics sets out the standards of good
practices to be followed by the AMC’s in their operations and
in their dealings with investors, intermediaries and the
public
 SEBI (Mutual Funds) Regulation, 1996 requires all Asset
Management Companies and Trustees to abide by the Code
of Conduct as specified in the Fifth Schedule to the Regulation
AG
NI
 AMFI Guidelines & Norms for Intermediaries (AGNI)
 AMFI has also framed a set of guidelines and code of conduct
for intermediaries, consisting of individual agents, brokers,
distribution houses and banks engaged in selling of mutual
fund products
Investor Rights and Service
Standards

Rights with respect to receiving “Information”

Right to receive “Timely Service”

Rights with respect to “Management of the mutual

fund”
Information Disclosure

NAV

Key Portfolio
Documents Disclosure
Service Standard

Routine
transactions
Transactions
Special
Transaction
s
Routine Transactions

Transaction Turnaround Time

Allotment of Units in a NFO (Other 5 days from NFO Closing date
Than ELSS)
Allotment of Units in a ELSS NFO 30 days from NFO closing date
Dispatch of Statement of account (on 10 working days from transaction
going) request
Dispatch of Statement of account 10 days from end of calendar quarter
(Systematic transactions)

Dispatch of dividend warrants 30 days from the date of dividend

Dispatch of redemption proceeds 10 working days from transaction
request
Service Standards

 Interest @ 15% p.a. to be paid by AMC in case of delay in

dispatching dividend warrants or redemption proceeds
 In case of systematic transaction, on specific request by
investors, their statement of accounts should be dispatched
within 10 days of each transaction
 Dormant investors will receive statement of accounts every
year
 Investors can request for soft copy of their holdings
Special
Transactions

Change of Broker

Nomination

Unit Certificate

Demat

Holding
Rights with respect of management of
funds

Change in
Fundamental
Attributes

Termination or
winding up

Structural
Protection
Limits to Investors
Rights

Cannot sue the Trust

No Recourse for Ignorance

Limit to redressal
OFFER DOCUMENT
Role Of Offer
Documents
 A legal document that helps investors take a balanced view
on the investment
 Most important sources of information on the scheme as it
contains the fundamental attributes
 Investors get to know the details of any NFO through the
Offer Document
New Fund Offer
(NFO)

Decide the Holds events with Distribution of

Scheme Intermediaries Forms

Prepares offer Promotional

Document Campaigns Starts

Files documents
with SEBI for Decides Time
Approval Table
NF
O
 NFO Open Date
 NFO Close Date
 Scheme Re-Opening Date

 SEBI Stipulates:
 NFOs other than ELSS can remain open for a maximum of 15
days
 Allotment of units or refund of moneys should be done within
5 business days of closure of the scheme
 Offer Document

Scheme Information Statement of Additional

Document (SID) – Information (SAI) –
Scheme Related Mutual Fund Related
Content of
SID
 Highlights
 Introduction
 Risk Factors
 Standard
 Scheme-specific
• Provisions regarding minimum no. of investors in the scheme
• Any other special considerations
• Definitions
• Due Diligence Certificate (issued by the AMC)
Content of
SID
 Information about the scheme
 Units and Offer
 Fees & Expenses
 Rights of Unit-holders
 Penalties, Litigation etc.

 Note - SID is to be updated every year

Content of
SAI
 Information about Sponsors, AMC and Trustee Company
 It includes contact information, shareholding pattern,
responsibilities, names of directors and their contact
information, profiles of key personnel, and contact
information of service providers {Custodian, Registrar &
Transfer Agent, Statutory Auditor, Fund Accountant (if
outsourced) and Collecting Bankers}
 Condensed financial information (for schemes
launched in last 3 financial years)
 How to apply
 Rights of Unit-holders
Content of
SAI
 Investment Valuation Norms
 Tax, Legal & General Information

Update of SAI
 Regular update is to be done by the end of 3 months of every
financial year
 Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI
Key Information Memorandum

 Role of KIM
 KIM is essentially a summary of the SID and SAI. It is more
easily and widely distributed in the market
 As per SEBI regulations, every application form is to be
accompanied by the KIM
Key Items of
KIM
 Name of the AMC, mutual fund, Trustee, Fund Manager
and scheme
 Dates of Issue Opening, Issue Closing & Re-opening for Sale
and Re-purchase
 Plans and Options under the scheme
 Risk Profile of Scheme
 Price at which Units are being issued and minimum
amount / units for initial purchase, additional purchase and
re-purchase
 Bench Mark
 Dividend Policy
Key Items of
KIM
 Performance of scheme and benchmark over last 1 year, 3
years, 5 years and since inception
 Loads and expenses
 Contact information of Registrar for taking up
investor grievances
 Update of KIM
 KIM is to be updated at least once a year
 As in the case of SID, KIM is to be revised in the case of
change in fundamental attributes. Other changes can be
disclosed through addenda attached to the KIM
FUND DISTRIBUTION AND CHANNEL
MANAGEMENT PRACTICES
Distribution
Channels
 Traditional Distribution Channels
 Individual – IFA’s
 Institutional Channels – Banks and Distribution Companies

 Newer Distribution Channels

 Internet
 Stock Exchanges
Pre-requisites to become Distributor
of a Mutual Fund

 The individual needs to pass the NISM Mutual

Fund Distribution Certification Examination
 Distributors / employees who were above the age of 50 years,
and had at least 5 years of experience as on September 30,
2003 were exempted. But they need to attend a prescribed
refresher course
 After passing the examination, the next stage is to register
with AMFI and obtain AMFI Registration Number (ARN)
Pre-requisites to become Distributor
of a Mutual Fund

 Armed with the ARN No., the IFA / distributor / stock

exchange broker can get empanelled with any number of
AMCs
 Alternatively, they can become agents of a distributor who is
already empanelled with AMCs. Empanelment with the AMC,
or enrolment as an agent of an empanelled distributor is
compulsory to be able to sell mutual fund schemes and earn
the commissions
 Institutions that are into distribution of mutual funds need to
register with AMFI. Besides, all their employees who are into
selling mutual funds need to have an ARN
Channel Management Practices

 Commission Structures
 Initial or Upfront Commission
 Trail commission

 ACE and AGNI

 Every person who is into selling of mutual funds should be
familiar with the AMFI Code of Ethics (ACE) and AMFI’s
Guidelines & Norms for Intermediaries (AGNI)
Channel Management Practices

 SEBI Regulations related to Sales Practices

 No commission is payable on their own investments
 Distributors has to disclose commission received by them for
whole year
 Practice of rebating with the investors is banned
ACCOUNTING, VALUATION AND
TAXATION
Accounting and
Expenses
 Net Assets of Scheme
 Case: Investors have bought 20crore units of a mutual fund
scheme at Rs 10 each. The scheme has thus mobilized 20Crs
units X Rs 10 per unit i.e. Rs 200Crs
 An amount of Rs 140Crs, invested in equities, has appreciated
by 10%
 The balance amount of Rs 60Crs, mobilized from investors,
was placed in bank deposits. Interest and dividend received
by the scheme is Rs 8Crs, scheme expenses paid is Rs 4Crs,
while a further expense of Rs 1Crs is payable
Net Assets of Scheme

 If the above details are to be captured in a listing of assets

and liabilities of the scheme, it would read as follows:
Net Assets of Scheme

 The unit-holders’ funds in the scheme is commonly referred to as “net

assets”
 As is evident from the table:
 Net assets includes the amounts originally invested, the profits booked in
the scheme, as well as appreciation in the investment portfolio
 Net assets go up when the market prices of securities held in the
portfolio
go up, even if the investments have not been sold
 A scheme cannot show better profits by delaying payments
 Similarly, any income that relates to the period will boost profits,
irrespective of whether or not it has been actually received in the bank
account
Mark to Market

 The process of valuing each security in the investment

portfolio of the scheme at its market value is called ‘mark to
market’ i.e. marking the securities to their market value
 Why is this done?
 If investments are not marked to market, then the investment
portfolio will end up being valued at the cost at which each
security was bought
 Investors buy or sell units on the basis of the information
contained in the NAV
 Helps in assessing the performance of the scheme / fund
manager
Sale Price, Re-purchase Price
and Loads

 A distinctive feature of open-ended schemes is the ongoing

facility to acquire new units from the scheme (“sale
transaction”) or sell units back to the scheme (“re-purchase
transaction”)
 The difference between the Sale Price and NAV is called the
“entry load”
 The difference between the NAV and Re-purchase Price is
called the “exit load”
 Reducing load during unit holding period is “Contingent
Deferred Sales Charge (CDSC)”
Position since August 1,
2009
 SEBI has banned entry loads
 Exit loads / CDSC in excess of 1% of the redemption
proceeds have to be credited back to the scheme
immediately
 Exit load structure needs to be the same for all unit-holders
representing a portfolio
Expenses

 Initial Issue Expenses - one-time expenses that come up

when the scheme is offered for the first time (NFO)
 Initial Issue Expenses were treated as immediate
expenses
or
written off gradually as deferred load
 AMCs need to bear the initial issue expenses now

 Recurring Expenses
 Fees of various service providers, such as Trustees, AMC,
Registrar & Transfer Agents, Custodian, & Auditor
Recurring
Expenses
 Expenses on investor communication, account statements,
dividend / redemption cheques / warrants
 Listing fees and Depository fees
 Service tax
 The following expenses cannot be charged to the scheme:
 Penalties and fines for infraction of laws
 Interest on delayed payment to the unit holders
 Legal, marketing, publication and other general expense
 Fund Accounting Fees
 Expenses on general management
Contd.

 Expenses on general administration, corporate advertising

and infrastructure costs
 Depreciation on fixed assets and software development
expenses
Recurring Expense
Limits
Management Fees Limits

 Management Fees Limits

 1.25% on the first Rs 100Crs of net assets of a scheme
 1.00% on the balance net assets
 Management fees cannot be charged by liquid schemes and
other debt schemes on funds parked in short term deposits of
commercial banks
Expense Limit of other
funds
 Expense limits for index schemes (including Exchange Traded
Funds) is as follows:
 Recurring expense limit (including management 1.50% fees)
 Management fees 0.75%

 Expense Limits for Fund of Funds, the recurring expense limit

(including management fees) is 0.75%
Dividends & Distributable
Reserves

 SEBI guidelines stipulate that dividends can be paid out of

distributable reserves
 All the profits earned are treated as available for distribution
 Valuation gains are ignored. But valuation losses need to be
adjusted against the profits
 That portion of sale price on new units, which is
attributable
to valuation gains, is not available as a distributable reserve
Key Accounting and
Reporting
Requirements
 The accounts of the schemes need to be maintained distinct
from the accounts of the AMC. The auditor for the AMC has
to be different from that of the schemes
 Norms are prescribed on when interest, dividend, bonus
issues, rights issues etc. should be reflected for in the
accounts
 NAV is to be calculated upto 4 decimal places in the case of
index funds, liquid funds and other debt funds
 NAV for equity and balanced funds is to be calculated upto at
least 2 decimal places
Key Accounting and
Reporting
Requirements
 Investors can hold their units even in a fraction of 1 unit.
However, current stock exchange trading systems may restrict
transacting on the exchange to whole units
Valuation

 Closing price of a security is taken as the value of the security

in the portfolio on the valuation date
 Where equity shares of a company are not traded in the
market on a day, or they are thinly traded, a formula is used
for the valuation. The valuation formula is based on the
Earnings per Share of the company, its Book Value, and the
valuation of similar shares in the market (peer group)
 Where an individual security that is not traded or thinly
traded, represents more than 5% of the net assets of a
scheme, an independent valuer has to be appointed
Valuation

 Debt securities that are not traded on the valuation date are
valued on the basis of the yield matrix prepared by an
authorized valuation agency. The yield matrix estimates the
yield for different debt securities based on the credit rating of
the security and its maturity profile
Taxation On Mutual Fund
Short Term Capital Gains (Units held for
36
months or less)

Investor Equity Funds Debt Funds

s
Individual - Individual –
Individual
15.45% 30.90%

Corporate – Corporate –
Corporate 16.2225% 32.445%

NRI NRI – 15.45% 30.90%

Long Term Capital Gains (Units held
for more than 36 months)

Investors Equity Funds Debt Funds

Individual Nil 20%+Surcharge with indexation

Corporate Nil 20%+Surcharge with indexation

NRI Nil 20%+Surcharge with indexation

Dividend Distribution
Tax

Equity Debt Liquid

Investors
Funds Funds Funds

Individual Nil 13.51% 27.0375%

Corporate Nil 32.445% 32.445%

NRI Nil 13.51% 27.0375%

Securities Transaction Tax
(STT)

 Note - STT is not payable on transactions in debt or debt-

oriented mutual fund units
Setting off Gains and Losses
under Income Tax Act

 Few key provisions here are:

 Capital loss, short term or long term, cannot be set off against
any other head of income (e.g. salaries)
 Short term capital loss is to be set off against short term
capital gain or long term capital gain
 Long term capital loss can only be set off against long
term
capital gain
 Since long term capital gains arising out of equity-oriented
mutual fund units is exempt from tax, long term capital loss
arising out of such transactions is not available for set off
Limitations on Set-off in case
of Mutual Fund Dividends

 In order to avoid Dividend Stripping, it is now provided that:

 If an investor buys units within 3 months prior to the record
date for a dividend, and
 Sells those units within 9 months after the record date, any
capital loss from the transaction would not be allowed to be
set off against other capital gains of the investor, up to the
value of the dividend income exempted

 Lets Take an Example !!!

Limitations on Set-off in case of
Bonus Units

 What is Bonus Issue?

 Such capital loss is not available for setting off against capital
gains, if the original units were bought within a period of 3
months prior to the record date for the bonus issue and sold
off within a period of 9 months after the record date
INVESTOR SERVICES
Mutual Fund Investors

 Eligibility to Invest
 Individual Investors:
 Resident Indian adult individuals, above the age of 18
 Minors can invest through Parents/ Lawful guardians
 Hindu Undivided Families (HUFs)
 Non-Resident Indians (NRIs) / Persons of Indian origin (PIO)
 Non-individual Investors:
 Companies / corporate bodies, registered in India
 Registered Societies and Co-operative Societies
 Religious and Charitable Trusts
Non-individual
Investors
 Trustees of private trusts
 Partner(s) of Partnership Firms
 Association of Persons or Body of Individuals, whether incorporated or not
 Banks , Financial Institutions and Investment Institutions
 Other Mutual Funds registered with SEBI
 Foreign Institutional Investors (FIIs) registered with SEBI
 International Multilateral Agencies approved by the Government of India
 Army/Navy/Air Force, Para-Military Units and other eligible institutions
 Scientific and Industrial Research Organizations
 Universities and Educational Institutions
Not permitted Investors

 An individual who is a foreign national

 Any entity that is not an Indian resident, as per FEMA
(except when the entity is registered as FII with SEBI, or has a
sub- account with a SEBI-registered FII)
 Overseas Corporate Bodies (OCBs)
KYC
Requirements
 It is compulsory for all investments of Rs 50,000 and above to
be compliant with the regulatory requirements prescribed
under the Anti-Money Laundering Act, 1992 and SEBI circulars
in this regard
 In case of minor, KYC requirements have to be complied with
by the Guardian
 In case of investments by a Power of Attorney holder on
behalf of an investor, KYC requirements have to be complied
with, by both, investor and PoA holder
PAN Requirements for Micro-
SIPs
 PAN Card is compulsory for all mutual fund investments
 Exception has been made for Micro-SIPs i.e. SIPs where
annual investment (12 month rolling or April-March financial
year) does not exceed Rs 50,000
 Instead, the investors can submit PHOTO IDENTIFICATION
documents along with Micro SIP applications:
 Voter Identity Card
 Driving License
 Government / Defense identification card
 Passport
 Photo Ration Card
PAN Requirements for Micro-
SIPs

 Employee ID cards issued by companies registered with

Registrar of Companies
 Photo Identification issued by Bank Managers of Scheduled
Commercial Banks / Gazetted Officer / Elected
Representatives to the Legislative Assembly / Parliament

 Note - Relaxation in documentation requirements for micro-

SIPs is not available for HUFs and non-individuals. It is
available for NRIs, but not PIOs
Additional Documentation for
Institutional Investors

 Additional documents for institutional investors are:

 For a company / trust is eligible to invest under the laws of
the Memorandum of Association and Articles of Association
or Trust Deed
 Authorization for the investing institution to invest known as
Board Resolution
 Authorized Signatory List
 These documentation requirements for institutional investors
are in addition to the normal KYC documentation
Demat Account

 Dematerialization
 Benefits from a Demat account are as follows:
 Less paperwork in buying or selling the Units
 Direct credit of bonus and rights units
 Change of address or other details need to be given only to
the Depository Participant

 Note - The investor also has the option to convert the demat
units into physical form. This process is called
re-materialization
Transactions with Mutual Funds

 Fresh Purchase
 Additional Purchases
 Online Transactions

 Payment Mechanism
 Cheque / Demand Draft (DD)
 Direct Remittance – RTGS or NEFT
 Electronic Clearing System or Auto Debit
ASBA & M-
Banking
 Application Supported by Blocked Amount (ASBA)
 M-Banking

 Benefits of ASBA:
 Money goes out of the investor’s bank account only on
allotment
 Investor does not have to wait for any refund
Allotment of
Units
 NFO : Sale price = Face Value (Rs.10)
 Continuous Offer : Sale Price = NAV
 Rights issue
 Bonus issue
Repurchase of Units

 Possible for Open-Ended Scheme

 Payment Mechanism:
 Cheque
 Direct Credit
Cut-off
Time
Equity Funds Debt Funds Liquid Funds
• Sale & Re-Purchase • Sale & Re-Purchase • Sale Transaction
Transaction Transaction • Cut-Off Time : 2 Pm
• Cut-Off Time : 3Pm • Cut-Off Time : 3Pm • Previous Day or
• Before 3 Pm - Same • Transaction < 1 Cr Preceding Day NAV
Day NAV then Same day NAV • Re-Purchase
• After 3 Pm – Next if received before 3
Pm else next Day
Transaction
Business Day NAV NAV • Cut-Off Time : 3
• Transaction > 1 Cr PM
then the NAV of DAY • Before 3 Pm then
when funds realized same day NAV else
next business day
NAV
Transactions through the Stock
Exchange

 National Stock Exchange (NSE) - NEAT MFSS

 Bombay Stock Exchange (BSE) - BSE’s platform is BSE
STAR Mutual Funds Platform

 Timing – 9A.M to 3 P.M

 Transactions:
 Purchase
 Additional Purchase
 Re-Purchase
Investment Plans and Services

 Dividend Payout
 Growth
 Dividend Re-Investment Options

 Systematic Investment Plan (SIP)

 Systematic Withdrawal Plan
 Systematic Transfer Plan
 Triggers
Investment Plans and Services

 Statement of Account and Investment Certificate

 Nomination
 Pledge
RETURN, RISK & PERFORMANCE OF FUNDS
Drivers of Returns in Equity Scheme

Fundamental Technica
Analysis l
Analysis
• Earning Per Share • Study of Price -
• Price to Earning Volume
Ratio relationship
• Book Value Per • Tools like Bars,
Share Charts, Graphs are
• Price to Book used extensively
Value
Drivers of Returns in a
Scheme
 Investment Styles
 Growth
 Value
 Portfolio Building Approach
 Top down - sector allocation
 Bottom up - stock picking
Drivers of Returns in a
Scheme
 Debt Securities
 Money Market Securities
 Debt securities may be issued by
 Central Government &State Governments,
 Banks
 Financial Institutions,
 Public Sector Undertakings (PSU)
 Private Companies
 Municipalities etc…
Debt Securities

 Various Debt Securities:

 Government Securities or G-Sec or Gilt
 Treasury Bills
 Certificates of Deposit
 Commercial Papers
 Bonds / Debentures
Debt Securities

 Yield Spread
 Fixed Rate & Floating Rate
 Credit Risk
 Credit Rating Companies - CRISIL, ICRA, CARE and Fitch
 Symbols – AAA
 Relationship Between Bond Price and Interest Rates
 Modified Duration
 Strategy in Falling interest rates scenario
 Strategy in Rising interest rates scenario
Drivers of Returns in a
Scheme
 Gold
 Factors affecting Gold:
 Global price of gold
 Strength of the Rupee
 Real Estate
 Factors affecting Real Estate:
 Economic scenario
 Infrastructure development
 Interest Rates
Measures of Returns

 Simple Return
 Annualized Return
 Compounded Return
 Compounded Annual Growth Rate (CAGR)
Risk in Equity
Funds
 Generic
 Portfolio Specific
 Sector funds
 Diversified equity funds
 Thematic funds
 Mid cap funds
 Contra funds
 Dividend yield funds
 Arbitrage funds
Risk in Debt
Funds
 Generic
 Portfolio Specific
 Liquid schemes
 Gilt schemes
 Fixed Maturity Plans
 Capital guaranteed schemes
 High yield bond schemes
Risk In Debt
Funds
 Risk in Balanced Funds
 Monthly Income Plan
 Flexible asset allocation scheme
 Risk in Gold Funds
 Risk in Real Estate Funds
 Less Transparency
 Less Liquidity
 High Transaction Cost
 High Regulatory Risk
Measures Of
Risk
 Fluctuation in returns is used as a measure of risk

Risk
Measures

Standard Modified
Varianc Beta
e Deviation Duration
Measures of
Risk
 Variance - It measures the fluctuation in periodic returns of a scheme, as
compared to its own average return
 Suppose there were two schemes, with monthly returns as follows:
Scheme 1: 5%, 4%, 5%, 6%. Average=5%
Scheme 2: 5%, -10%, +20%, 5% Average=5%
 This can be easily calculated in MS Excel using the following
function:
=var(range of cells where the periodic returns are calculated)
 Variance as a measure of risk is relevant for both debt and equity
schemes
Measures of
Risk
 Standard Deviation
 Like Variance, Standard Deviation too measures the
fluctuation in periodic returns of a scheme in relation to its
own average return
 This can be calculated in MS Excel using the following
function:
=stdev(range of cells where the periodic returns are
calculated)
 Standard deviation as a measure of risk is relevant for both
debt and equity schemes
Measures of
Risk
 Beta - It measures the fluctuation in periodic returns in a
scheme, as compared to fluctuation in periodic returns of a
diversified stock index over the same period
 The diversified stock index, by definition, has a Beta of 1
 Schemes, whose beta > 1, are seen as more risky than the
market. Beta <1 is indicative of a scheme that is less risky than
the market
 Beta as a measure of risk is relevant only for equity schemes
Measures of
Risk
 Modified Duration - This measures the sensitivity of value of
a debt security to changes in interest rates
 Higher the modified duration, higher the interest sensitive
risk in a debt portfolio

 Weighted Average Maturity

 Longer the maturity of a debt security, higher would be its
interest rate sensitivity
Benchmarks and Performance

 Benchmarks
 Criteria:
 Should be in synch with the investment objective of the
scheme
 Benchmark should be calculated by an independent agency in
a transparent manner
Benchmarks for Equity schemes

 Important Aspects:
 Scheme type:
 Diversified index, like BSE Sensex or S&P CNX Nifty
 Sectoral indices like BSE Bankex, BSE FMCG Index
 Choice of Investment Universe:
 Large Cap indices - BSE Sensex and S&P CNX Nifty
 Mid cap indices - CNX Midcap or Nifty Midcap 50 or BSE Midcap
 Choice of Portfolio Concentration:
 Narrow indices like BSE Sensex and NSE Nifty
 broader indices like BSE 100, BSE 200 & S&P CNX 500
 Underlying Exposure
 Arbitrage Fund - Money market index
Benchmarks for debt schemes

 As per SEBI guidelines, the  CRISIL Benchmarks are:

• benchmark for debt should be  CRISIL CompBEX - Composite
developed by research and rating Bond Index
agencies recommended by AMFI
like CRISIL, ICICI Securities and  CRISIL LiquiFEX - Liquid Fund
NSE Index
 NSE’s benchmarks are:  CRISIL STBEX - Short-Term
Bond
 MIBOR (Mumbai Inter-Bank Index
Offered Rate)
 CRISIL Debt Hybrid Index –
 ICICI Securities’ 60:40
benchmarks are:
 CRISIL Debt Hybrid Index –
 Sovereign Bond Index (I- 75:25
Bex)
 Si-Bex (1 to 3 years),
 o Mi-Bex (3 to 7 years) and
Benchmarks for debt schemes

 Important Aspects for Choosing Benchmark:

 Scheme Type
 Liquid schemes - NSE’s MIBOR or CRISIL LiquiFEX is suitable
 Choice of Investment Universe
 CRISIL’s AAA corporate bond index is one such non -
government securities based index
Benchmarks for other schemes

 Balanced Funds
 synthetic index that is calculated as 65% of BSE Sensex and
35% of I-Bex
 CRISIL MIPEX is suitable for Monthly Income Plans
 CRISIL BalanCEX can be considered by balanced funds
 Gold ETF – Gold Price
 International Funds
 Hang Seng as a benchmark - CHINA
 S&P 500 - US
 Quantitative Measures of
Fund Manager Performance

 Relative return comparisons

 Outperformance
 Under-performance
 Risk-adjusted Returns
Measures of Risk
Adjusted
Returns

Sharpe Ratio Treynor Alpha

Ratio
Sharpe Ratio

 Sharpe Ratio
 Sharpe Ratio is effectively the risk premium per unit of risk
 (Rs minus Rf) ÷ Standard Déviation
 Rf – Risk free return & Rs – Returns earned by risk taking
 Risk Premium – (Rs – Rf)
 Thus, if risk free return is 5%, and a scheme with standard
deviation of 0.5 earned a return of 7%, its Sharpe Ratio would
be (7% - 5%) ÷ 0.5 i.e. 4%
 Higher the Sharpe Ratio, better the scheme is considered to
be
Treynor
Ratio
 Treynor Ratio too is a risk premium per unit of risk
 Treynor Ratio uses Beta
 Formula - (Rf minus Rs) ÷ Beta
 Thus, if risk free return is 5%, and a scheme with Beta of 1.2
earned a return of 8%, its Treynor Ratio would be (8% - 5%) ÷
1.2 i.e. 2.5%
 Higher the Treynor Ratio, better the scheme is considered to
be
Alph
a
 The Beta of the market, by definition is 1
 The difference between an index fund’s return and the
market return, is the tracking error
 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. This is 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
 Positive alpha is indicative of out-performance by the
fund manager & Vice - versa
9. SCHEME SELECTION
Scheme Selection

 As a structured approach, the sequence of decision making is

as follows:
Step 1 – Deciding on the scheme category

Step 2 – Selecting a scheme within the category

Step 3 – Selecting the right option within the scheme

How to choose between Scheme
Categories?

 A Pictorial
representation of
the risk
hierarchy of
different
schemes
Selecting the Scheme Category

 While deciding between schemes to invest in, a few principles

to keep in mind:
 For Equity Funds:
 Markets are more predictable in the long term, than in the
short term
 Role of various broad equity scheme categories in an
investor’s portfolio is as follows:
 Active or Passive
 Open-ended or Close-ended
 Diversified, Sector or Thematic
 Large-cap v/s Mid-cap / Small Cap Funds
Selecting the Scheme Category

 Growth or Value funds

 Portfolio Turnover
 Arbitrage funds
 Domestic Equity v/s International Equity funds
Selecting the Scheme Category

 Debt Funds
 Structures that can meet investor needs are:
 Regular Debt Funds v/s MIPs
 Open-end Funds v/s FMP
 Gilt Funds v/s Diversified Debt Funds
 Long-Term Debt Fund v/s Short Term Debt Fund
 Money Market Funds / Liquid Schemes
 Regular Debt Funds v/s Floaters
 Balanced Funds
 Gold Funds
Selecting a Scheme within a Scheme
Category

 Parameters for selecting schemes within a category are:

 Fund Age
 Scheme running expenses
 Tracking Error
 Regular Income Yield in Portfolio
 Rankings & Ratings by Research Agencies
Selecting the right option within the
scheme

Scheme
Plans

Growth Plan Dividend Plan

Dividend Re- Dividend

investment Payout
10. SELECTING THE RIGHT INVESTMENT
PRODUCTS FOR INVESTORS
Financial and Physical
Assets
 Physical assets have value and can be touched, felt and used
 Plant and Machinery
 Financial assets have value, but cannot be touched, felt or
used as part of their core value
 Shares, debentures, fixed deposits, bank accounts and mutual
fund schemes
 The Implication:
 Comfort
 Unforeseen events
 Economic Context
Gold – Physical or
Financial?
 The exposure to gold as a financial asset can be taken in
different forms:
 Gold ETF
 Gold Sector Fund
 Gold futures contracts are traded in commodity exchanges
like the National Commodities Exchange (NCDEX) and Multi-
Commodity Exchange (MCX)
Real Estate – Physical or
Financial?

 Real estate in physical form is prone to few disadvantages:

 High Ticket size
 Concentration risk
 Encroachment
 Illiquidity
 High Transaction cost
 Ownership risk or Credit Risk
 Note : It is for these reasons that real estate investors prefer
to invest through Real estate mutual funds
Fixed Deposit or Debt
Scheme
 Features where bank deposits clearly score over mutual
funds:
 Deposit insurance scheme
 Premature Close
 Mutual fund debt schemes are superior to bank deposits in
the following respects:
 Possible to earn higher returns
 Interest earned in a bank deposit is taxable
 Mutual Funds are more Flexible
New Pension Scheme

 Pension Funds Regulatory and Development Authority

(PFRDA) is the regulator for the New Pension Scheme.
 Two kinds of pension accounts are envisaged:
 Tier I (Pension account), is non-withdrawable
 Tier II (Savings account) is withdrawable
 Investors can invest through Points of Presence (POP)
New Pension Scheme

 They can allocate their investment between 3 kinds of

portfolios:
 Asset Class E: Investment in predominantly equity
market
Instruments
 Asset Class C: Investment in Debt securities other than
Government Securities
 Asset Class G: Investments in Government Securities
 The 3 asset class options are managed by 6 Pension Fund
Managers (PFMs). The investors’ moneys can thus be
distributed between 3 portfolios X 6 PFMs = 18 alternatives
11. HELPING INVESTORS WITH FINANCIAL
PLANNING
Introduction to Financial Planning

 What is Financial Planning?

 Financial planning is a planned and systematic approach to
provide for the financial goals that will help people realize
their needs and aspirations, and be happy
Introduction to Financial Planning

 Assessment of Financial Goals

 The costs mentioned, in today’s terms, need to be translated
into the rupee requirement in future. This is done using the
formula
 A = P X (1 + i)n, where,
 A = Rupee requirement in future
 P = Cost in today’s terms
 i = inflation
 n = Number of years into the future, when the expense will
be
incurred
Introduction to Financial Planning

 Investment Horizon
 The year-wise financial goals statement throws up the
investment horizon
 Assessing the Fund Requirement
 How much is that investment requirement?
 This can be calculated using a variation of the formula
used
earlier i.e. P = A ÷ (1 + r) n, where:
 r represents the return expected out of the investment
portfolio
Financial Planning Objectives
& Benefits

 Objectives & Benefits:

 To ensure that the right amount of money is available at the
right time
 To let the investor know in advance, if some financial goal is
not likely to be fulfilled
 Financial planning thus helps investors realize their
aspirations and feel happy
 It also helps the financial planner, because the process of
financial planning helps in understanding the investor better,
and cementing the relationship with the investor’s family
Need for Financial
Planners
 Most investors are either not organized, or lack the ability to
make the calculations
 The knowledge of how and where to invest may be lacking
 Financial planner can help the investor to borrow and
structure the loan arrangement with the lender
 Taxation is another area that most investors are
unclear
about
 Financial planners can also help investors in planning for
contingencies through advice on insurance products,
inheritance issues etc
Alternate Financial
Planning
Approaches
 An alternate approach is a “comprehensive financial plan”
where all the financial goals of a person are taken together,
and the investment strategies worked out on that basis.
Steps in Financial
Planning
Step 1 - Establish and Define the Client-
Planner Relationship

Step 2 - Gather Client Data, Define Client Goals

Step 3 - Analyze and Evaluate Client’s Financial Status

Step 4 - Developing the financial

planning recommendations

Step 5 - Implement the Financial

Planning Recommendations

Step 6 - Monitor the Financial Planning

Recommendations
Life Cycle in Financial
Planning
 Life Cycle
 Childhood
 Young Unmarried
 Young Married
 Married with Young Children
 Married with Older Children
 Pre-Retirement
 Retirement
Wealth Cycle in Financial
Planning
 Wealth Cycle:
 Accumulation
 Transition
 Inter-Generational Transfer
 Reaping / Distribution
 Sudden Wealth
MODEL PORTFOLIOS AND FINANCIAL PLANS
Risk
Profiling
 Risk profiling is an
approach to understand
the risk appetite of
investors
 Factors that Influence
the Investor’s Risk
Profile:
Risk
Profiling
Risk Profiling
Tools
 Asset Allocation - The distribution of an investor’s portfolio
between different asset classes is called asset allocation
 Role - With a prudent asset allocation, the investor does not
end up in the unfortunate situation of having all the
investments in an asset class that performs poorly
 Asset Allocation Types
 Strategic Asset Allocation
 Tactical Asset Allocation
Model Portfolios

 Model portfolios – the asset allocation mix that is most appropriate for
different risk appetite levels
 Young call centre / BPO employee with no dependents
 50% diversified equity schemes (preferably through SIP); 20% sector
funds; 10% gold ETF, 10% diversified debt fund, 10% liquid schemes
 Young married single income family with two school going kids
 35% diversified equity schemes; 10% sector funds; 15% gold ETF,
30%
diversified debt fund, 10% liquid schemes
 Single income family with grown up children who are yet to settle
down
 35% diversified equity schemes; 15% gold ETF, 15% gilt fund, 15%
diversified debt fund, 20% liquid schemes
Model Portfolios

 Couple in their seventies, with no immediate family support

 15% diversified equity index scheme; 10% gold ETF, 30% gilt
fund, 30% diversified debt fund, 15% liquid schemes
 Couple in their seventies, with no immediate family support
but very sound physically and mentally, and a large
investible corpus
 20% diversified equity scheme; 10% diversified equity index
scheme; 10% gold ETF, 25% gilt fund, 25% diversified debt
fund, 10% liquid schemes
All the Best !