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Mutual Funds - An Introduction


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AMFI Exam Beginner Module Slides.

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Mutual Funds - An Introduction

  2. 2. What is mutual fund? <ul><li>Common pool of money </li></ul><ul><li>Joint or “mutual” ownership </li></ul><ul><li>Hence…like shares of the joint stock company </li></ul><ul><li>Units are the representation of ownership </li></ul><ul><li>“ Not a company which manages individual portfolios” </li></ul>
  3. 3. Advantages of mutual funds <ul><li>Portfolio diversification </li></ul><ul><li>Professional management </li></ul><ul><li>Reduction/diversification of risk </li></ul><ul><li>Reduction of transaction costs </li></ul><ul><li>Liquidity </li></ul><ul><li>Convenience and flexibility </li></ul>
  4. 4. Disadvantages of investing through mf <ul><li>No control over cost </li></ul><ul><li>No tailor-made portfolio </li></ul><ul><li>Managing a portfolio of fund </li></ul>
  5. 5. History of mf in India <ul><li>Mf industry started in India in 1963 with formation of uti </li></ul><ul><li>Different phases : </li></ul><ul><ul><ul><li>Phase -1(uti) </li></ul></ul></ul><ul><ul><ul><li>Phase-2 (Entry of public sector mfs) </li></ul></ul></ul><ul><ul><ul><li>Phase-3 (Entry of private mfs) </li></ul></ul></ul><ul><ul><ul><li>Phase-4 (under sebi regulation) </li></ul></ul></ul>
  6. 6. PHASE-1 <ul><li>Establishment of uti in 1963 </li></ul><ul><li>Launch of first scheme us-64 </li></ul><ul><li>Followed by ulip in 1971,cggf(1986), mastershare(1987) </li></ul><ul><li>Uti the only player in the market with monopoly power </li></ul><ul><li>Huge mobilization of funds </li></ul>
  7. 7. PHASE-2 <ul><li>Establishment of sbi-mf---the first non-uti mf </li></ul><ul><li>Followed by canbank-mf, lic-mf,boi-mf </li></ul><ul><li>Change in the mind set of the investors </li></ul><ul><li>Uti still the undisputed leader of the market </li></ul>
  8. 8. PHASE-3 <ul><li>Entry of the private sector fund in 1993 </li></ul><ul><li>Jv of foreign fund management companies with Indian promoters </li></ul><ul><li>More competitive product innovation, investment management techniques, investors servicing techniques </li></ul><ul><li>Investors started become selective </li></ul>
  9. 9. PHASE-4 <ul><li>Sebi- the regulatory authority </li></ul><ul><li>Uti came under sebi regulation voluntarily </li></ul><ul><li>Govt.’S steps for investors’ protection </li></ul>
  10. 10. Types of funds <ul><li>Close end/ open end </li></ul><ul><li>Load / no-load </li></ul><ul><li>Tax exempt/non-tax exempt </li></ul>
  11. 11. <ul><li>OPEN END FUND: </li></ul><ul><ul><ul><li>Units available for sale and repurchase at all times </li></ul></ul></ul><ul><ul><ul><li>Investors can buy or redeem on NAV </li></ul></ul></ul><ul><li>CLOSE END FUND: </li></ul><ul><ul><ul><li>Don’t allow investors to buy/ redeem units directly from funds </li></ul></ul></ul><ul><ul><ul><li>Get listed on stock exchange to provide liquidity </li></ul></ul></ul><ul><ul><ul><li>“Units may be traded at a discount or premium to NAV based on investor’s perception on future performance and market factors” </li></ul></ul></ul>
  12. 12. <ul><li>LOAD FUND: </li></ul><ul><ul><ul><li>Load charge to cover the expenses </li></ul></ul></ul><ul><ul><ul><li>Entry/front load and exit/ back load </li></ul></ul></ul><ul><ul><ul><li>Deferred load - charged over a period of time </li></ul></ul></ul><ul><ul><ul><li>Exit load preferred over entry load for benefit of compounding </li></ul></ul></ul><ul><ul><ul><li>Contingent deferred sales charge- exit load charged depending on the period. Ex: bond fund </li></ul></ul></ul><ul><ul><ul><li>Even close end funds may have loads </li></ul></ul></ul><ul><li>NO LOAD FUND: </li></ul><ul><ul><ul><li>There is no load- no sales expense charge </li></ul></ul></ul><ul><ul><ul><li>Nav calculated after accounting for other expenses </li></ul></ul></ul>
  13. 13. Mutual fund types <ul><li>By nature of investments </li></ul><ul><ul><ul><li>Equity, bond, money market funds </li></ul></ul></ul><ul><li>By investment objective </li></ul><ul><ul><ul><li>Income, growth, value funds </li></ul></ul></ul><ul><li>By risk profile </li></ul><ul><ul><ul><li>High, low, moderate risk funds </li></ul></ul></ul>
  14. 14. Money market fund <ul><li>Lowest risk </li></ul><ul><li>Investment in the security of less than one year security </li></ul><ul><li>Investment in treasury bills, cd, com. Papers, call money </li></ul><ul><li>Strength: liquidity and safety of principal </li></ul>
  15. 15. Gilt fund <ul><li>Low risk but higher than that of mmf </li></ul><ul><li>Medium to long term maturity (more than 1 year) </li></ul><ul><li>Little default risk, high interest risk </li></ul><ul><li>It’s prices falls interested rate increases and vice versa </li></ul>
  16. 16. Debt/income fund <ul><li>Risk higher than g-sec fund </li></ul><ul><li>More emphasis on income distribution than capital appreciation </li></ul><ul><li>Types </li></ul><ul><ul><ul><li>Diversified </li></ul></ul></ul><ul><ul><ul><li>Focused </li></ul></ul></ul><ul><ul><ul><li>High yield (investment in lower rate) </li></ul></ul></ul><ul><ul><ul><li>Assured return </li></ul></ul></ul>
  17. 17. Types of equity funds <ul><li>AGGRESSIVE GROWTH FUNDS: investment in less researched or speculative/non-blue chip stocks </li></ul><ul><li>GROWTH FUNDS: investment in stocks with above average growth prospects over 3-5 years. Ex: tech stock </li></ul><ul><li>SPECIALITY FUNDS: sector, offshore, small-cap equity, option income funds </li></ul><ul><li>DIVERSIFIED EQUITY FUNDS </li></ul><ul><li>EQUITY INDEX FUNDS </li></ul><ul><li>VALUE FUNDS: invest in fundamentally sound companies with low P/E ratio. </li></ul><ul><li>Equity income fund: invest in sectors where low fluctuation in stock price and high dividend is expected. </li></ul>
  18. 18. Types of hybrid funds <ul><li>BALANCED FUNDS: More or less equal proportion </li></ul><ul><li>GROWTH -INCOME FUNDS: Mix between good dividend paying records and with potential of capital appreciation. </li></ul><ul><li>ASSET ALLOCATION FUNDS:Asset allocation between equity,debt or money market and asset allocation policy may be pre-determined or flexible. </li></ul><ul><li>OTHER FUNDS </li></ul><ul><li>COMODITY FUNDS </li></ul><ul><li>REAL ESTATE FUNDS </li></ul>
  19. 19. Fund structure and constituents <ul><li>Legal structure </li></ul><ul><li>Role of different operating bodies </li></ul><ul><li>Fund mergers and scheme takeovers </li></ul>
  20. 20. Legal structure <ul><li>In India </li></ul><ul><ul><ul><li>Issue of open and close end funds in same legal structure </li></ul></ul></ul><ul><ul><ul><li>Follow the sebi regulation </li></ul></ul></ul><ul><ul><ul><li>Trust form </li></ul></ul></ul><ul><li>Sponsor: establishes the mutual fund </li></ul><ul><ul><ul><li>Must contribute 40% of the net worth of the AMC </li></ul></ul></ul><ul><ul><ul><li>Need to have sound financial track record </li></ul></ul></ul><ul><ul><ul><li>Appoint trustees </li></ul></ul></ul>
  21. 21. Legal structure <ul><li>TRUSTEES:Manages the Mutual Fund and look after the operations of the appointed AMC. </li></ul><ul><li>The investments are held by the Trustee. </li></ul><ul><li>The beneficiaries from the assets are the unit holders. </li></ul><ul><li>The trustees have a fiduciary responsibility. </li></ul><ul><li>Trustees approve each MF scheme floated by AMC. </li></ul><ul><li>Trustees receive fees for their services. </li></ul><ul><li>Trusts are formed through “Trust Deed” </li></ul><ul><li>“ Furnish report to SEBI on half yearly basis on AMC and Fund functioning” </li></ul><ul><li>Amc: acts as investment manager of the trust under the board supervision and direction of the trustees </li></ul><ul><li>“ Submit report to AMC on quarterly basis, mentioning activity and compliance factor. </li></ul>
  22. 22. Legal structure <ul><li>AMC: Acts as investment manager of the trust under the board supervision and direction of the trustees. </li></ul><ul><li>AMC is the fund manager </li></ul><ul><li>AMC floats the different MF schemes. </li></ul><ul><li>AMC is responsible to the trustees. </li></ul><ul><li>AMC fees have a ceiling decided by SEBI </li></ul><ul><ul><li>Initial issue expenses not exceeding 6% </li></ul></ul><ul><ul><li>Recurring expenses such as trustee fees, audit fees, etc. </li></ul></ul><ul><ul><li>When net assets do no exceed Rs.100 crores, asset management fee is maximum 1.25% of average weekly net assets. </li></ul></ul><ul><ul><li>When assets exceed Rs.100 crores, an additional asset management fee of maximum 1% of additional net assets. </li></ul></ul><ul><ul><li>If the scheme is a no-load scheme, further fee of maximum 1% of average weekly net assets. </li></ul></ul>
  23. 23. Legal structure <ul><li>The Sponsor </li></ul><ul><li>A sponsor appoints the asset management company. </li></ul><ul><li>Sometimes, this power is given by the sponsor to the trustees through the trust deed. </li></ul><ul><li>At least 50% of directors on the board of asset management company should be independent of the sponsor. </li></ul><ul><li>Asset management company shall not deal with any broker/firm associated with sponsor beyond 5% of daily gross business of the MF. </li></ul><ul><li>All security transactions of the asset management company with its associates should be disclosed. </li></ul>
  24. 24. Contingent Deferred Sales Charge <ul><li>For no-load schemes </li></ul><ul><li>Redemption during the first four years after purchase </li></ul><ul><li>First year maximum 4% </li></ul><ul><li>Second year maximum 3% </li></ul><ul><li>Third year maximum 2% </li></ul><ul><li>Fourth year maximum 1% </li></ul>
  25. 25. Ceiling on expenses <ul><li>Excepting initial and redemption expenses, the total of all other expenses should be a maximum of </li></ul><ul><li>Average weekly Fees as % of </li></ul><ul><li>net assets (Rs.Crores) average weekly net assets </li></ul><ul><li>0-100 2.5% </li></ul><ul><li>next 300 2.25% </li></ul><ul><li>next 300 2.0% </li></ul><ul><li>balance 1.75% </li></ul>
  26. 26. Legal structure <ul><li>Custodian: </li></ul><ul><ul><ul><li>Appointed by board of trustees for safekeeping of securities. </li></ul></ul></ul><ul><ul><ul><li>It’s an entity independent of sponsors </li></ul></ul></ul><ul><li>Bankers </li></ul><ul><li>Transfer agents </li></ul><ul><ul><ul><li>Issue and redeem of units and other related service </li></ul></ul></ul><ul><li>Distributors </li></ul><ul><ul><ul><li>Appointed by amc </li></ul></ul></ul><ul><ul><ul><li>May act on behalf of different funds </li></ul></ul></ul><ul><ul><ul><li>Agents - as individual </li></ul></ul></ul>
  27. 27. Fund merger & takeovers <ul><li>Constitution can change in many possible ways </li></ul><ul><ul><ul><li>Amc taken over by another sponsor </li></ul></ul></ul><ul><ul><ul><li>Merger of two amc’s </li></ul></ul></ul><ul><ul><ul><li>Decision of trustee to change amc </li></ul></ul></ul><ul><ul><ul><li>Change of trustees </li></ul></ul></ul><ul><ul><ul><li>Merger of two schemes with same amc/trustees </li></ul></ul></ul>
  28. 28. <ul><li>MERGER OF TWO amcs </li></ul><ul><ul><ul><li>Needs to follow Indian co. Act </li></ul></ul></ul><ul><ul><ul><li>Sebi approval required </li></ul></ul></ul><ul><ul><ul><li>Consent of unit holders with 75% voting rights </li></ul></ul></ul><ul><li>Amc takeover by new sponsors </li></ul><ul><ul><ul><li>High court approval not required but sebi clearance required </li></ul></ul></ul><ul><li>Scheme take over </li></ul><ul><ul><ul><li>Amc cannot withdraw or transfer the management of scheme to another amc without unit holders consent </li></ul></ul></ul><ul><ul><ul><li>Trustees cannot effect amc without unit holders consent </li></ul></ul></ul><ul><li>“ any amendments in scheme require consent of unit holders in case of only close end fund. Open end fund needs to just inform” </li></ul>
  29. 29. Legal and Regulatory Environment
  30. 30. Regulators in India <ul><li>Sebi </li></ul><ul><ul><li>SEBI regulates mfs </li></ul></ul><ul><ul><li>All mfs have to be registered with SEBI </li></ul></ul><ul><li>Rbi </li></ul><ul><ul><li>Bank-owned mfs are under RBI and SEBI </li></ul></ul><ul><ul><ul><li>Ownership of AMC by the bank </li></ul></ul></ul><ul><ul><ul><li>Guarantees issued by the bank as sponsor </li></ul></ul></ul><ul><ul><ul><li>Fund mergers of bank-sponsored mfs </li></ul></ul></ul><ul><ul><li>Permission to access inter-bank call money market </li></ul></ul>
  31. 31. Regulators in India… <ul><li>Ministry of finance </li></ul><ul><li>Company law board </li></ul><ul><ul><li>Department of company affairs </li></ul></ul><ul><ul><ul><li>Registrar of companies </li></ul></ul></ul><ul><li>Stock exchanges </li></ul><ul><li>Charity commissioner </li></ul><ul><ul><li>Office of the public trustee </li></ul></ul><ul><ul><ul><li>Board of trustees of mfs </li></ul></ul></ul>
  32. 32. Self-regulatory Organization <ul><li>An organization specially empowered to regulate activities of its members </li></ul><ul><li>Amfi is not a self-regulatory organization </li></ul>
  33. 33. AMFI <ul><li>Promote the interests of the mutual funds and unit-holders </li></ul><ul><li>Set ethical, commercial, and professional standards in the industry </li></ul><ul><li>Increase the public awareness of MF industry </li></ul>
  34. 34. Investors Rights and Obligations <ul><li>Right of Proportionate “beneficial Ownership” </li></ul><ul><li>Right to Timely Service </li></ul><ul><li>Right to Information </li></ul><ul><li>Right to Approve changes in Fundamental Attributes </li></ul><ul><li>Right to Wind Up a Scheme </li></ul><ul><li>Right to Terminate the AMC </li></ul>
  35. 35. Legal Limitations to Investors Rights <ul><li>Investors cannot Sue the Trust. </li></ul><ul><li>Investors can initiate legal proceedings against the trustees </li></ul><ul><li>Sponsors of a MF have no obligation to meet the shortfall in non- assured schemes </li></ul><ul><li>Only if the OD has specifically provided such guarantee by a named sponsor the investors have a right to sue the sponsors </li></ul><ul><li>Prospective Investors cannot sue the Trust / the AMC or any other constituent. </li></ul>
  36. 36. Investors Obligations / Complaint Redressal <ul><li>Investors should: </li></ul><ul><li>Read Offer Document </li></ul><ul><li>Understand Risk factors </li></ul><ul><li>Monitor Investments </li></ul><ul><li>Ask for information required </li></ul><ul><li>“ Monitoring is entirely his/ her own responsibility” </li></ul><ul><li>SEBI intervention </li></ul><ul><li>For issue of due diligence certificate for new scheme by compliance officer </li></ul><ul><li>Companies Act cannot protect investors as fund investors are neither shareholders in the AMC nor depositors </li></ul>
  38. 38. What is an offer document (od) <ul><li>OD of a mutual fund scheme is a prospectus issued by an Asset Management Company/ sponsor inviting public for subscription in units of the scheme disclosing information which is adequate to enable an investor to make informed investment decision. </li></ul>
  39. 39. Offer document (OD) <ul><li>A legal document </li></ul><ul><li>issued by AMC or Sponsor </li></ul><ul><li>OD describes the product </li></ul><ul><li>Very important document from the perspective of prospective investor </li></ul><ul><li>Primary vehicle for investment decision </li></ul>
  40. 40. <ul><li>All ODs are to be approved by the trustees of a mutual fund </li></ul><ul><li>ODs are prepared and issued by an asset management company’ </li></ul><ul><li>All ODs are filed with SEBI with filing fees (Rs. 25,000) </li></ul><ul><li>Modifications, if any, are advised by SEBI within 21 working days from the date of its filing </li></ul>Offer Document (OD)
  41. 41. <ul><li>Close ended fund: the time of issue </li></ul><ul><li>Open ended fund: revision after every two years </li></ul><ul><li>KIM: Abridged version of OD which is distributed along with the application form </li></ul>Offer Document (OD)
  42. 42. <ul><li>Summary information </li></ul><ul><li>Definitions </li></ul><ul><li>Risk Factors </li></ul><ul><li>Legal and Regulatory Compliance </li></ul><ul><li>Financial Information </li></ul><ul><li>Constitution of the Mutual Fund </li></ul><ul><li>Investment objectives and policies </li></ul><ul><li>Management of the Fund </li></ul><ul><li>Offer Related information </li></ul>Contents of the Offer Document
  43. 43. <ul><li>Summary Information (Cover Page) : </li></ul><ul><li>Name of Mutual Fund/ AMC </li></ul><ul><li>Name of Scheme/ Type of scheme </li></ul><ul><li>Period of opening / closing </li></ul><ul><li>SEBI Disclaimer </li></ul>Contents of the Offer Document
  44. 44. <ul><li>Risk Factors </li></ul><ul><li>Standard Risk factors </li></ul><ul><li>Scheme specific risk factor's </li></ul>Contents of the Offer Document
  45. 45. <ul><li>Legal and Regulatory Compliance </li></ul><ul><li>AMC shall confirm that a Due diligence certificate is duly signed by compliance officer/CEO/Whole time Director/MD </li></ul><ul><li>Certificate to the effect </li></ul><ul><li>(a) OD prepared is in accordance with SEBI (MF) Regulations, </li></ul><ul><li>(b) legal requirements are complied with, </li></ul><ul><li>(c) disclosures are true and fair, </li></ul><ul><li>(d) intermediaries named in the OD are registered with SEBI. </li></ul>Contents of the Offer Document
  46. 46. <ul><li>Financial Information </li></ul><ul><li>Expenses - Sales load, CDSC, Initial issue expenses, estimated annual recurring expenses </li></ul><ul><li>Condensed Financial information of schemes </li></ul><ul><li>- Information regarding schemes launched during the last 3 years </li></ul><ul><li>- Historical per unit statistics </li></ul>Contents of the Offer Document
  47. 47. <ul><li>Constitution of the Mutual Fund/ </li></ul><ul><li>Management of the Fund </li></ul><ul><li>Name of the sponsor / AMC / Board of Trustees </li></ul><ul><li>Powers of Trustees </li></ul><ul><li>Name of Key personnel </li></ul><ul><li>Custodian / Registrars </li></ul><ul><li>Investors relations officer </li></ul><ul><li>Name,age, qualifications and experience of fund manager's </li></ul>Contents of the Offer Document
  48. 48. <ul><li>Investment objectives and Policies </li></ul><ul><li>Investment only in transferable securities in the money market and the capital market or in privately placed debt or securitised debt provided they are rated not below investment grade. </li></ul><ul><li>Minimum and maximum asset allocation under equity, debt and money market instruments has to be specified in the OD. </li></ul><ul><li>MF can alter the asset allocation for a short term period on defensive consideration. </li></ul><ul><li>Investment Strategy: Regarding portfolio turnover, overseas investments, limits, stock lending etc. </li></ul>Contents of the Offer Document
  49. 49. <ul><li>Offer Related Information </li></ul><ul><li>Investment procedure </li></ul><ul><li>Schemes policy on dividends & distributions, ISTs </li></ul><ul><li>Associate Transactions </li></ul><ul><li>Borrowing Policy </li></ul><ul><li>NAV and Valuation </li></ul>Contents of the Offer Document
  50. 50. <ul><li>Offer Related Information contd… </li></ul><ul><li>Procedure for Redemption or Repurchase </li></ul><ul><li>Description of accounting policies </li></ul><ul><li>Tax treatment of investments </li></ul><ul><li>Investors’ rights and services </li></ul><ul><li>Redressal mechanism for investor grievances </li></ul>Contents of the Offer Document
  51. 51. Equity portfolio Management <ul><li>Stock selection </li></ul><ul><li>Review of the Indian equity market </li></ul><ul><li>Types of equity investments </li></ul><ul><li>Equity classes </li></ul><ul><ul><li>based on market cap </li></ul></ul><ul><ul><li>Based on anticipated earnings </li></ul></ul><ul><li>Approaches to portfolio management </li></ul><ul><li>Organization structure of equity funds </li></ul>
  52. 52. Fund Distribution & Sales Practices
  53. 53. Investor Community Institutional Investors Individual Investors HNIs Retail
  54. 54. Who can invest in Mutual Funds in India? <ul><li>Residents : </li></ul><ul><ul><li>Resident Individuals </li></ul></ul><ul><ul><li>Indian Companies </li></ul></ul><ul><ul><li>Indian Trusts/ Charitable Institutions </li></ul></ul><ul><ul><li>Banks / NBFCs </li></ul></ul><ul><ul><li>Insurance Companies </li></ul></ul><ul><ul><li>Provident funds </li></ul></ul>
  55. 55. Who can invest in Mutual Funds in India? <ul><li>Non Residents : </li></ul><ul><ul><li>NRIs </li></ul></ul><ul><ul><li>OCBs </li></ul></ul><ul><li>Foreign Entities: </li></ul><ul><ul><li>FIIs registered with SEBI </li></ul></ul>
  56. 56. Role of the Distribution Channels “ MFs are primarily vehicles for large collective investments , based on the principle of pooling the funds from a large number of investors” Hence, “ Majority of schemes are targeted at the retail level, from where a substantial portion of investment takes place” So, “ Distribution network becomes critical in view of the spread of investor community”
  57. 57. Types of Distribution Channels: 1.Individual Agents 2. Distribution Companies 3. Banks / NBFCs 4. Direct Marketing ( By the Sales Officers) 5.Current Distribution patterns - Non UTI funds rely on the 2&3 above.
  58. 58. <ul><li>Sales Practices in MF Market </li></ul>
  59. 59. <ul><li>Commission can be paid upfront or trail commission. </li></ul><ul><li>Market Practice: 1-1.5% (Equity funds) </li></ul><ul><ul><li>0.6-0.8% (Debt Funds) </li></ul></ul><ul><li>Higher commission paid for Tax-benefit schemes as there is a lock-in period. </li></ul>Agents’ Commission
  60. 60. <ul><li>The initial issue expense cap of 6% includes brokerage as well. </li></ul><ul><li>All SEBI regulated open ended funds are authorized to charge exit /entry loads to cover the funds’ distribution expenses. </li></ul><ul><li>A no load fund includes these expenses as a part of the regular management & marketing expenses. </li></ul><ul><li>SEBI prescribes a cap on all the total expenses that can be charged to a scheme each year. Any additional expense will have to be borne by the AMC </li></ul>Agents’ Commission
  61. 61. <ul><li>Know the important characteristics of the scheme. </li></ul><ul><li>Know your client profile (age, risk tolerance,income levels) </li></ul><ul><li>Understand clients’ needs (investment objective,return expectation, cash flow requirement) </li></ul><ul><li>Assistance in making the right choice of investment </li></ul><ul><li>Encourage regular investment and seek commitment from the client to invest. </li></ul><ul><li>Personalized post sales service. </li></ul>Effective Selling of MF Schemes
  62. 62. <ul><li>SEBI's Advertising Code </li></ul><ul><li>The code protects from misleading investors. </li></ul><ul><li>Past performance is not a guarantee </li></ul><ul><li>Dividends declared/paid shall be mentioned in Rs.per unit </li></ul><ul><li>Only compound and annualized yield can be advertised for schemes for more than one year. </li></ul><ul><li>Annualised yield must be shown for at least one, three fine and since launch. </li></ul><ul><li>For less than one year performance may be shown in terms of total returns should not be annualized. </li></ul><ul><li>Appropriate benchmark should be chosen. And once chosen it should be consistent. </li></ul><ul><li>Where any ranking has been made should be explained. </li></ul>
  63. 63. Appointment of Agents <ul><li>The key terms of agreement are as follows: </li></ul><ul><li>The agent will provide a copy of the abridged OD to the customer and will make available for inspection a copy of the OD and sell at price currently in effect. </li></ul><ul><li>The agent will execute all the transactions on behalf of the customer who will not have any recourse to the agent in case of an errors/problems/quality of investment. </li></ul><ul><li>The agent must make the customer know that the funds’ units are not endorsed by him and do not constitute his obligation. </li></ul><ul><li>Agent responsible at his expense to ensure compliance with applicable regulation in each jurisdiction. </li></ul><ul><li>Fund not responsible for any losses claims or damages. </li></ul>
  64. 64. Key terms of Agreement………….2 <ul><li>The agent will offer/sell/purchase unit at the current public offering price. </li></ul><ul><li>All orders become effective only upon acceptance and confirmation by the fund. </li></ul><ul><li>The agent is responsible to ensure compliance with the applicable regulations in each transaction he deals in and the fund is not responsible for any breach by agent in this regard. </li></ul>
  65. 65. AMFI Code of Ethics <ul><li>AMFI has recommended a code of practices with respect </li></ul><ul><li>to overall fund operation including distribution and selling. </li></ul><ul><li>Management of fund should be in the interest of unit holders. </li></ul><ul><li>High standards of service are expected from funds </li></ul><ul><li>Adequate disclosure standards </li></ul><ul><li>Professional Selling practices. </li></ul><ul><li>Fund Management in accordance to stated investment objective. </li></ul><ul><li>Avoid conflict of interest in its dealing with its employees. </li></ul><ul><li>Refrain from unethical market Practices. </li></ul>
  66. 66. Fund broking practices in US <ul><li>Cap on sales/distribution expenses. </li></ul><ul><li>Broker is not allowed to describe a fund as no load fund if it has front-end or default load. </li></ul><ul><li>Broker prohibited from recommending that purchase of units before ex-dividend may be advantageous. </li></ul><ul><li>Prohibited from using commission as a basis for recommending a fund. </li></ul><ul><li>Preferred pricing to specific investors prohibited. </li></ul>
  67. 67. Accounting, Valuation and Taxation
  68. 68. Section one : accounting <ul><li>The importance of Accounting </li></ul><ul><ul><li>MF BS is different from a bank or a company. MF have special requirements concerning accounting for the fund’s assets, liabilities and transactions with investors and other outside constituents such as banks, securities custodians and registrars. </li></ul></ul><ul><ul><li>Follows accounting policies laid down by SEBI regulations 1996. </li></ul></ul><ul><ul><li>Knowledge is essential to explain the scheme performance to the investors </li></ul></ul>
  69. 69. <ul><li>Net Asset Value (NAV) </li></ul><ul><ul><li>Investors’ subscriptions are not accounted as liabilities or deposits but as Unit Capital </li></ul></ul><ul><ul><li>Investments made on behalf of the investors are reflected on the assets side. </li></ul></ul><ul><ul><li>Liabilities also form part of the balance sheet </li></ul></ul><ul><ul><li>NAV is asset minus liabilities and divided by total number of outstanding units. </li></ul></ul><ul><li>NAV = Assets - Liabilities </li></ul><ul><li>NAV = Net assets of the scheme / Number of units outstanding Market value of investments + receivables + accrued income + other assets - accrued expenses-payables- liabilities </li></ul><ul><li>No.of units outstanding on NAV date </li></ul>
  70. 70. <ul><ul><li>Daily NAV for open-end schemes </li></ul></ul><ul><ul><li>Weekly NAV for close-end schemes </li></ul></ul><ul><ul><li>Those closed - end schemes which are not mandatorily required to be listed in any stock exchange may publish NAV at monthly or quarterly intervals (for e.g. MIPs) </li></ul></ul><ul><ul><li>A fund’s NAV is affected by </li></ul></ul><ul><ul><ul><li>Purchase and sale of investment securities </li></ul></ul></ul><ul><ul><ul><li>Valuation of all investment securities held </li></ul></ul></ul><ul><ul><ul><li>Other assets and liabilities </li></ul></ul></ul><ul><ul><ul><li>Units sold or redeemed </li></ul></ul></ul><ul><ul><li>Valuation of investment securities must be at their market prices. </li></ul></ul>
  71. 71. <ul><ul><li>Other Assets includes any income due but not received (for e.g. Dividend announced by a company) </li></ul></ul><ul><ul><li>Other Liabilities includes expenses payable by the fund (for e.g. Management fee to AMC) </li></ul></ul><ul><ul><li>All income and expenses have to be “accrued” upto the valuation date and included in the computation of the NAV. </li></ul></ul><ul><ul><li>Major expense such as management fees should be accrued on a day to day basis, while others need not be accrued, if non-accrual does not affect NAV by more than 1% </li></ul></ul><ul><ul><li>Sale or repurchase of units and sale or purchase of investment securities must be recorded within 7 days of the transaction provided the non-recording does not affect NAV by more than 2%. </li></ul></ul>
  72. 72. <ul><li>Pricing of Units </li></ul><ul><ul><li>Repurchase price should not be lower than 93% of NAV (95% in case of closed-end schemes) </li></ul></ul><ul><ul><li>Sale price can not be higher than 107% of NAV </li></ul></ul><ul><ul><li>The difference between the repurchase and sale price can not be more than 7% of the sale price </li></ul></ul><ul><li>Fees and Expenses </li></ul><ul><ul><li>The AMC may charge the scheme with a fees @1.25% for first 100 crores of weekly average net assets outstanding in the accounting year and @1% of weekly average net assets in excess of Rs.100 crores </li></ul></ul><ul><ul><li>No load schemes may charge an additional management fee upto 1% of weekly average net assets outstanding in the accounting year. </li></ul></ul><ul><ul><li>Initial expenses of launching schemes not to exceed 6% of initial resources raised </li></ul></ul>
  73. 73. <ul><li>Total expenses excluding issue or redemption expenses but </li></ul><ul><li>including investment management and advisory fees are subject to </li></ul><ul><li>following limits </li></ul><ul><ul><ul><li>First 100 crs of avg weekly net assets - 2.5% </li></ul></ul></ul><ul><ul><ul><li>Next 300 crs of avg weekly net assets - 2.25% </li></ul></ul></ul><ul><ul><ul><li>Next 300crs of avg weekly net assets - 1.75% </li></ul></ul></ul><ul><ul><li>For bond funds, the above percentages are required to be lower by0.25% </li></ul></ul><ul><li>Initial Issue Expenses </li></ul><ul><ul><li>All expenses cannot be charged to a scheme in the first year itself. SEBI permits amortization as follows. </li></ul></ul><ul><ul><li>CE scheme, the initial issue expenses shall be amortized on a weekly basis over the period of the scheme. </li></ul></ul><ul><ul><li>OE scheme, initial issue expenses may be amortized over a period not exceeding five years. </li></ul></ul><ul><ul><li>Unamortized portion of expenses shall be included for NAV calculation, considered as other assets. </li></ul></ul>
  74. 74. <ul><ul><li>The investment advisory fee cannot be claimed on this asset. Hence, they have to be excluded while determining the chargeable investment management/advisory fees. </li></ul></ul><ul><ul><li>While calculating the maximum amount of chargeable expenses, the unamortised portion of the initial issue expenses will not be included as part of the average weekly net assets figure. </li></ul></ul><ul><li>Disclosures and Reporting Requirements </li></ul><ul><ul><li>Annual report and annual statement of accounts </li></ul></ul><ul><ul><li>Annual statement of account to be audited </li></ul></ul><ul><ul><li>Must dos </li></ul></ul><ul><ul><ul><li>publish through an ad, scheme-wise annual report or an abridged summary of the report </li></ul></ul></ul><ul><ul><ul><li>mail the summary to all unit holders </li></ul></ul></ul><ul><ul><ul><li>forward to SEBI, a copy of the annual report and other information including details of investments and deposits held by the fund. </li></ul></ul></ul>
  75. 75. <ul><ul><li>The fund shall furnish to SEBI once a year </li></ul></ul><ul><ul><ul><li>copies of audited annual schemewise SOA </li></ul></ul></ul><ul><ul><ul><li>copy of six monthly unaudited accounts </li></ul></ul></ul><ul><ul><ul><li>quarterly statement of movements in the net assets for each scheme fo the fund </li></ul></ul></ul><ul><ul><ul><li>quarterly portfolio statement, including changes from the previous periods for each scheme </li></ul></ul></ul><ul><ul><li>Publish </li></ul></ul><ul><ul><ul><li>unaudited financial results in one national English newspaper and one in the language of the region where the head office of the fund is situated. </li></ul></ul></ul><ul><ul><li>The trustee to make </li></ul></ul><ul><ul><ul><li>such disclosures to investors as are essential to keep them informed about any information which may have an adverse bearing on their investment. </li></ul></ul></ul>
  76. 76. Specific half-yearly disclosures <ul><li>Expenses exceeding 10% of the total </li></ul><ul><li>Portfolio </li></ul><ul><li>Scripwise disclosure of NPAs </li></ul><ul><li>Large unit-holdings (over 25% of the net assets) </li></ul><ul><li>Indicate that unit-holders may seek annual report from the MF </li></ul><ul><li>Amortization: </li></ul><ul><li>Initial Expenses charged over years </li></ul><ul><li>Close ended schemes (Load basis): Amortized on a weekly basis over the period of the scheme. E.g for a 5 yr. scheme, 260 weeks must be taken. </li></ul><ul><li>Open ended schemes (Load basis): Amortized annually over a period not greater than 5 years. </li></ul><ul><li>Un-amortized portion to be added for NAV calculation. No AMC fee on this. </li></ul>
  77. 77. <ul><li>Accounting Policies </li></ul><ul><ul><li>Investments marked to market </li></ul></ul><ul><ul><li>Unrealised appreciation can not be distributed </li></ul></ul><ul><ul><li>Dividend received by fund should be recognised on the date the share is quoted on ex-dividend basis and not on the date of declaration. </li></ul></ul><ul><ul><li>To calculate gain or loss on sale of investments, the average cost method must be followed to determine the cost of purchase </li></ul></ul><ul><ul><li>Purchase sale to be recognized on the date of transaction and not settlement </li></ul></ul><ul><ul><li>Bonus/rights to be recognized on ex-bonus/ex-right day. </li></ul></ul><ul><li>Investments that are NPAs </li></ul><ul><ul><li>An asset shall be regarded as NPA, if the interest and/or principal has been outstanding for more than one quarter from the due date of receipt </li></ul></ul><ul><ul><li>Income that accrues in such cases should be provided for and no further accrual should be made for such investment. </li></ul></ul>
  78. 78. Provision for NPAs 3 months after classification as NPA : 10% 6…………………………………… : 30% 9…………………………………… : 50% 12………………………………….. : 75% 15………………………………….. : 100%
  79. 79. Section two: valuation <ul><li>Valuation of traded securities </li></ul><ul><ul><li>Valued at the last quoted closing price on the stock exchange where it is principally traded </li></ul></ul><ul><ul><li>IF not traded, then take the value at which it was traded on the earliest previous day provided it is not more than 30 days prior to valuation </li></ul></ul><ul><li>Thinly traded equities </li></ul><ul><ul><li>Monthly trading value <Rs. 5 lakhs and volume < 50,000 </li></ul></ul><ul><ul><li>When a stock exchange declares an equity as thinly traded </li></ul></ul><ul><ul><li>When trading is suspended for less than 30 days, take the last traded price </li></ul></ul><ul><ul><li>When trading is suspended for more than 30 days, asset management company to make valuation. </li></ul></ul>
  80. 80. <ul><li>Thinly traded debt security </li></ul><ul><ul><li>Traded value < Rs. 15 crores in a month. </li></ul></ul><ul><ul><li>Add value traded on all exchanges to compute this figure. </li></ul></ul><ul><ul><li>Such security to be valued using the method for non-traded debt security. </li></ul></ul><ul><li>Valuation of Non-traded Securities </li></ul><ul><ul><li>Valuation of equity instrument is on the basis of capitalization of earnings solely or in combination with its balance sheet net asset value. </li></ul></ul><ul><ul><li>Capitalization rate will be determined by reference to the Price or earning ratios of comparable traded securities with an appropriate discount for lower liquidity to be used. </li></ul></ul>
  81. 81. Valuation of Non-traded non-government debt with less than 182 days for maturity <ul><ul><li>Upto 182 day maturity, valued as money market instrument (cost + accrual of interest) </li></ul></ul><ul><ul><li>Debt instruments are to be valued on YTM basis, the capitalization factor being determined for comparable traded securities with an appropriate discount for lower liquidity. </li></ul></ul><ul><ul><li>Call money, bills purchases under rediscount and short term deposits with banks are to be valued at (cost+accrual). </li></ul></ul><ul><ul><li>Other money market instruments at yield at which they are currently traded </li></ul></ul><ul><ul><li>Non-traded non-government debt with over 182 days to maturity </li></ul></ul>Investment grade: YTM basis Non-investment grade Performing: 25% discount to face value Non-performing: Make provisions
  82. 82. Taxation Provisions <ul><li>Internationally, trusts are pass-through vehicles; hence, they pay no tax. </li></ul><ul><li>In India, </li></ul><ul><ul><li>A mutual fund pays 22% tax on the income distributed to unit holders </li></ul></ul><ul><ul><li>This tax bears no relationship to the unit-holder’s tax bracket. </li></ul></ul><ul><ul><li>Income distributed by a fund is tax exempt in the hands of investors </li></ul></ul>
  83. 83. Tax rebate u/s 88 <ul><ul><li>ELSS investment up to 10,000 tax rebate 20% </li></ul></ul><ul><ul><li>Total investment upto 60,000 qualifies for tax rebate to the extent of 20% of such investment. </li></ul></ul><ul><ul><li>Infrastructure MF investment upto 80,000 also 20% </li></ul></ul>
  84. 84. Capital Gains on Sale of Units <ul><ul><ul><li>If units are held for not more than 12 months, it is short term capital asset, other wise long term. (36 months for assets except shares and securities) </li></ul></ul></ul><ul><ul><ul><li>Tax law definition of capital gains = sale consideration - (cost of acquisition + cost of improvements + cost of transfer) </li></ul></ul></ul><ul><ul><ul><li>If it crosses 12 months, then “indexation” is applicable. The purchase price is marked up by an inflation index. </li></ul></ul></ul>
  85. 85. Indexation <ul><ul><li>Purchase price of a long term capital asset after indexation is computed </li></ul></ul><ul><ul><ul><ul><li>Cost of acquisition or improvement = actual cost of acquisition or improvement * cost inflation index for the year of transfer / cost inflation index for the year of acquisition or 1981 which ever is later) </li></ul></ul></ul></ul><ul><ul><li>Unit-holder can have a choice between: </li></ul></ul><ul><ul><ul><li>10% tax without indexation </li></ul></ul></ul><ul><ul><ul><li>20% tax with indexation </li></ul></ul></ul><ul><ul><li>There is 2% surcharge </li></ul></ul>
  86. 86. Indexation <ul><li>Cost Inflation Index for 1999-2000: 389 </li></ul><ul><li>An example: </li></ul><ul><li>Mr. H invests Rs. 2,00,000 in FY 97-98 MF units </li></ul><ul><li>After 1 year, he liquidates the asset to get Rs. 2,40,000. </li></ul><ul><li>His tax returns would be: </li></ul><ul><li>CII 99-00 : 389, CII 97-98 : 331, Ratio : 389/331 = 1.18 </li></ul><ul><li>Indexed Cost (2,00,000 x 1.18) = Rs. 2,36,000 </li></ul><ul><li>Capital Gains – Rs. 4,000 </li></ul><ul><li>Long-term tax liability of Mr. H: Rs. 4,000 * 20%= Rs. 800 </li></ul>
  87. 87. Schemes for capital gains tax exemption <ul><li>Capital gains tax of sale of long term capital asset is exempt in </li></ul><ul><li>section 54EC of IT Act </li></ul><ul><li>if the amount of the gain is invested in bonds of NABARD, NHAI, and REC within 6 months. These must be held for at least 3 years, and during this time, one cannot take loan/advance against security of such bonds. </li></ul><ul><li>Capital gains tax of sale of mutual funds, if long </li></ul><ul><li>term in nature, is exempt in section 54ED of IT </li></ul><ul><li>Act </li></ul><ul><li>if the gain is invested in equity shares within 6 months. These units must then be held for at least 1 year. </li></ul>
  88. 88. Wealth Tax <ul><li>Ownership of units is not considered as wealth in the </li></ul><ul><li>wealth tax act, therefore no wealth tax. </li></ul>
  89. 89. Special Provisions <ul><li>Offshore Fund Investors </li></ul><ul><ul><li>Income by way of dividend/long-term capital gain on Indian MF units, purchased in foreign currency is taxed at 10% </li></ul></ul><ul><li>NRIs </li></ul><ul><ul><li>Income on units of MF is exempt from tax </li></ul></ul><ul><li>FIIs </li></ul><ul><ul><li>Income by way of dividends on units not purchased in foreign exchange is subject to tax@20% and the person making payment must deduct TDS at this rate. </li></ul></ul>
  90. 90. Investor services by mutual funds <ul><li>Applying and Redeeming for Mutual Fund Units </li></ul><ul><li>Investment Plans and Services </li></ul>
  91. 91. Importance of investor service <ul><li>Besides good returns of funds… </li></ul><ul><li>Most important advantage of MF is…“CONVENIENCE” </li></ul><ul><li>Depends upon </li></ul><ul><ul><li>type of service provided </li></ul></ul><ul><ul><li>variety of service provided </li></ul></ul>
  92. 92. Procedure for purchase of units <ul><li>Read the Offer Document </li></ul><ul><ul><li>Description of the procedure for purchase of units </li></ul></ul><ul><ul><li>acceptable mode and permissible places of payment </li></ul></ul><ul><li>Refer Key Information Memorandum (KIM) </li></ul><ul><ul><li>Application form </li></ul></ul><ul><ul><li>Salient features of schemes </li></ul></ul><ul><ul><li>‘ Only KIM contains Application form and not OD’ </li></ul></ul>
  93. 93. <ul><li>Submission of application form to </li></ul><ul><ul><li>Collection Centres </li></ul></ul><ul><ul><li>AMC offices </li></ul></ul><ul><li>‘ Registrars’ accept new subscriptions and redeem from investors. </li></ul><ul><li>MF may own ‘Investor Service Centres’ </li></ul><ul><li>Payment is through Cheque / Demand Draft / Cash (in certain cases), Internet can be used to transfer funds </li></ul>
  94. 94. FOR NRIs <ul><li>RBI has given permission to all MFs to sell units to NRIs/OCBs/Foreign entities </li></ul><ul><li>Companies need to submit Board resolutions, memorandum and articles of association with application forms </li></ul><ul><li>Mode of Payment: </li></ul><ul><ul><li>For repatriation benefits- DDs or cheques using FCNR account / NRE account </li></ul></ul><ul><ul><li>Non repatriation benefits- DDs or cheques on NRO/NRSR accounts </li></ul></ul>
  95. 95. Procedure for redemption <ul><li>OD contains place where redemption notice must be sent </li></ul><ul><li>Investors have to deal with registrars or Investor service centers </li></ul><ul><li>Payment is through cheque, ECS to bank account </li></ul><ul><li>For NRIs and OCBs: ECS to to NRE or US Dollar draft at current exchange rate </li></ul><ul><li>‘ If investment was on repatriable basis’ </li></ul><ul><li>Else - Rupee cheque in favor of investors NRO, NR/SR account </li></ul>
  96. 96. Investment plans and services <ul><li>Automatic Reinvestment plan: </li></ul><ul><ul><li>There are two options: Dividend & Growth </li></ul></ul><ul><ul><li>ARP is also called Growth option </li></ul></ul><ul><ul><li>allows investor to reinvest in additional units the amounts of dividends or other distributions </li></ul></ul><ul><ul><li>they do not receive dividends </li></ul></ul><ul><ul><li>Reinvestment takes place at ex-div NAV </li></ul></ul><ul><ul><li>‘ Investor reaps benefit of Compounding’ </li></ul></ul><ul><ul><li>Some funds allow reinvestment in other schemes of same fund family. </li></ul></ul>
  97. 97. <ul><li>Automatic Investment plan: </li></ul><ul><ul><li>Invest a fixed sum periodically </li></ul></ul><ul><ul><li>Investors save in a disciplined and phased manner </li></ul></ul><ul><ul><li>Investment mode would be direct debit to Investor’s salary or Bank account </li></ul></ul><ul><ul><li>‘ Investor get the benefit of Rupee cost averaging’ </li></ul></ul>
  98. 98. <ul><li>Voluntary Accumulation Plan </li></ul><ul><ul><li>Investor gets flexibility of the amount and frequency of Investment </li></ul></ul><ul><ul><li>Through AIP & VAP Investment can only be in Open end schemes </li></ul></ul><ul><ul><li>AIP is a contractual obligation of the Investor to keep investing </li></ul></ul><ul><ul><li>Whereas in VAP Investor is not obliged to keep investing, but has voluntary self discipline </li></ul></ul><ul><ul><li>Investment accounts are maintained for both VAP and SIP </li></ul></ul><ul><ul><li>Normally. funds which issue certificates do not have Investment accounts </li></ul></ul>
  99. 99. <ul><li>Systematic Withdrawal Plan </li></ul><ul><ul><li>Allows Investor to make Periodic withdrawals from Fund Investment accounts </li></ul></ul><ul><ul><li>Amount withdrawn is treated as redemption of units at the applicable NAVs </li></ul></ul><ul><ul><li>They are different from MIPs, because MIPs pay the income generated on regular basis, without touching the capital. </li></ul></ul><ul><ul><li>Hence, Dividend Tax is not levied on SWP, whereas it is levied for MIPs with more than 50% in debt. </li></ul></ul>
  100. 100. <ul><li>Systematic Transfer Plans: </li></ul><ul><ul><li>Allows investor to transfer on a periodic basis a specified amount from one scheme to another within same fund family. </li></ul></ul><ul><ul><li>The redemption or investment will be at applicable NAV </li></ul></ul><ul><ul><li>It is necessary to maintain a minimum balance under both the schemes. </li></ul></ul><ul><ul><li>The service allows the investor to manage his Investments actively to achieve his objectives </li></ul></ul>
  101. 101. Other investor services <ul><li>Phone transactions: </li></ul><ul><ul><li>Investors may telephonically redeem or purchase units. </li></ul></ul><ul><ul><li>The telephone instructions are possible in case of the funds that keep investment accounts, rather than issue certificates. </li></ul></ul>
  102. 102. <ul><li>Cheque Writing Facility: </li></ul><ul><ul><li>Open - End MFs allow cheque writing by treating fund account equivalent to bank saving account </li></ul></ul><ul><ul><li>Checks can be issued subject to maintaining minimum balance </li></ul></ul><ul><ul><li>RBI approval is needed to start this service </li></ul></ul><ul><ul><li>Usually offered by MMFs and other liquid schemes of short duration. </li></ul></ul><ul><ul><li>Useful for investors with large short-term surpluses. </li></ul></ul>
  103. 103. <ul><li>Periodic statements and Tax information: </li></ul><ul><ul><li>Account statement show units purchased, redeemed or transferred between schemes, distributions and reinvestments and investor’s current holding in units and in amount. </li></ul></ul><ul><ul><li>‘ SEBI regulations require funds to send annual financial statements to unit holders within six months of close of accounting year’ </li></ul></ul><ul><ul><li>If a fund has deducted tax at source from income distributed to the investors, it would also issue TDS statement. </li></ul></ul>
  104. 104. <ul><li>Loans against units: </li></ul><ul><ul><li>Several banks lend to the investors against mutual fund units held by them. </li></ul></ul><ul><ul><li>The amount is usually a percentage of the value of the value of the Investor’s holding in Units </li></ul></ul><ul><ul><li>‘ SEBI prohibits MFs to give loans’ </li></ul></ul>
  105. 105. <ul><li>Nomination facility is available for Open end Funds and Close End Funds not listed on SE. </li></ul><ul><li>The benefits passes to the nominee </li></ul><ul><li>In case of Close Ended schemes listed on SE same procedure as Share transfer is followed </li></ul>
  106. 106. Investment Management <ul><li>We shall cover: </li></ul><ul><li>Equity portfolio management </li></ul><ul><li>Debt portfolio management </li></ul><ul><li>SEBI investment guidelines </li></ul>
  107. 107. <ul><li>Investment Management Functions </li></ul><ul><li>Set Investment policy </li></ul><ul><li>Perform security Analysis </li></ul><ul><li>Construct a portfolio </li></ul><ul><li>Revise the portfolio </li></ul><ul><li>Evaluate the performance of the portfolio </li></ul><ul><li>Security Analysis </li></ul><ul><li>Technical Analysis </li></ul><ul><li>Fundamental Analysis </li></ul>
  108. 108. <ul><li>Portfolio Construction </li></ul><ul><li>selectivity (micro forecasting) </li></ul><ul><li>timing (macro forecasting) </li></ul><ul><li>Diversification </li></ul><ul><li>Portfolio Revision </li></ul><ul><li>(Repetition of the previous three steps) </li></ul><ul><li>Motivations </li></ul><ul><li>size of the transaction costs & the perceived improvement </li></ul><ul><li>Portfolio Performance Evaluation </li></ul><ul><li>risk & returns </li></ul><ul><li>benchmarks </li></ul>
  109. 109. Approaches to Portfolio Management <ul><li>Passive management (indexation)- </li></ul><ul><li>holding securities for relatively long periods with small and infrequent changes </li></ul><ul><li>Active management- </li></ul><ul><li>involves a systematic effort to exceed the performance of a selected target </li></ul>
  110. 110. Types of Equity Instruments <ul><li>Common Stock- legal representation of the ownership position </li></ul><ul><li>Preference Shares- hybrid form of security with the features of both common stock and bonds </li></ul><ul><li>Cumulative convertible preference shares </li></ul><ul><li>Warrants </li></ul><ul><li>Convertible debentures </li></ul>
  111. 111. Market capitalization based classification <ul><li>Small cap companies </li></ul><ul><ul><li>Profit potential of small cap companies </li></ul></ul><ul><li>Large cap companies </li></ul><ul><ul><li>Liquidity and tradable </li></ul></ul><ul><li>Differences in Indices and benchmarks </li></ul><ul><li>Earning based classification </li></ul><ul><li>Price/Earnings ratios </li></ul><ul><ul><li>Higher the P/E greater the growth potential </li></ul></ul><ul><li>Dividend yield </li></ul><ul><li>Cyclical stocks; Growth stock; Value stock </li></ul>
  112. 112. Growth vs Value <ul><li>Growth Stocks </li></ul><ul><ul><li>High P/E ratio; low dividend yields </li></ul></ul><ul><li>Value Stocks </li></ul><ul><ul><li>Good track record </li></ul></ul><ul><li>Growth versus Value controversy </li></ul><ul><li>Investor preferences </li></ul><ul><li>Use of Equity Derivatives for Portfolio Risk Management </li></ul><ul><li>Portfolio Management Organization Structure </li></ul><ul><li>Fund Manager-assets allocation </li></ul><ul><li>Security Analysts-supports the fund managers </li></ul><ul><li>security Dealers-executes actual buying or selling </li></ul>
  113. 113. Part II : Debt Portfolios <ul><li>Types of Debt Securities </li></ul><ul><li>Secured Vs. Unsecured </li></ul><ul><li>by the issuer Category </li></ul><ul><li>by the maturity profile </li></ul><ul><li>Interest bearing Vs. discounted securities </li></ul><ul><li>Fixed and floating rate </li></ul>Instruments in Indian debt Market <ul><li>Certificate of Deposit (CD)-unsecured Negotiable Promissory Note </li></ul><ul><li>Commercial Papers(CP)- unsecured instruments issued by corporate bodies </li></ul><ul><li>Corporate debentures-credit rated </li></ul><ul><li>Floating Rate Bonds </li></ul><ul><li>Government Securities </li></ul>
  114. 114. Debt instruments contd... <ul><li>Treasury Bills-91, 364 days; </li></ul><ul><li>Bank & FI Bonds </li></ul><ul><li>PSU bonds </li></ul><ul><li>Basic features of bonds </li></ul><ul><li>Par value </li></ul><ul><li>Coupon </li></ul><ul><li>Maturity </li></ul><ul><li>Call options </li></ul>
  115. 115. Measuring bond yield <ul><li>Current yield = </li></ul><ul><li>annual coupon interest/current market price; </li></ul><ul><li>when bond is selling at discount CR<CY. </li></ul><ul><li>When at premium CR>CY. </li></ul><ul><li>Yield to maturity </li></ul><ul><ul><li>Yield and price are inversely related </li></ul></ul><ul><li>Yield curve (TSIR)- tracks the yields across various maturities; upward sloping </li></ul>
  116. 116. Face value : Rs. 1000 Coupon : 10% Tenure : 5 years Interest payment : Yearly Price : 1050 Cashflows are as under: 100 100 100 100 (100 + 1000) 1050 = + + + + (1 + r) 1 (1 + r) 2 (1 + r) 3 (1 + r) 4 (1 + r) 5 Solve for ‘r’ r = 8.72% = Yield to maturity Yield calculation
  117. 117. Face value : 1000 Coupon : 10% Tenure : 5 years Interest Payment : Yearly Yield : 8.72% Cashflows are as under: Price : 100 100 100 100 (100 + 1000) + + + + (1+8.72%) (1+8.72%) 2 (1+8.72%) 3 (1+8.72%) 4 (1+8.72%) 5 Solving for Price : Rs. 1050 Valuing (Pricing) the securities
  118. 118. Risk in Investing in bonds <ul><li>Interest rate risk refers to the possibility that income and/or capital loss will result because of an increase in the level of interest rates </li></ul><ul><li>Re-investment risk </li></ul><ul><li>Call risk </li></ul><ul><li>Default risk </li></ul><ul><li>Liquidity risk </li></ul>Yield spread and credit risk <ul><li>Spread is the premium over G-sec rate paid by borrowers according to their credit risk quality </li></ul><ul><li>Credit risk is priced using the ratings of credit rating agencies. </li></ul><ul><li>Higher the rating, lower the spread. </li></ul><ul><li>Debt portfolios have credit quality objectives. Check for this information. </li></ul>
  119. 119. Duration <ul><li>Duration measures the sensitivity of the bond portfolio to changes in interest rates. </li></ul><ul><li>Duration is the weighted average term to maturity of a bond. </li></ul><ul><li>Duration of a coupon paying bond is always lower than its term to maturity. </li></ul><ul><li>Duration of a zero coupon bond is equal to its Maturity </li></ul><ul><li>Debt Investment Strategies </li></ul><ul><li>Passive & Active </li></ul><ul><li>Buy and hold </li></ul><ul><ul><li>interest rate risk </li></ul></ul><ul><ul><li>credit risk </li></ul></ul><ul><li>Duration management </li></ul><ul><ul><li>active management based on interest rate expectations </li></ul></ul>
  120. 120. Organization of debt fund management <ul><li>Interest rate forecasting unit </li></ul><ul><li>Fund managers </li></ul><ul><li>Security dealers </li></ul><ul><li>Risk managers </li></ul>
  121. 121. Measuring & Evaluating Mutual Fund Performance <ul><li>Need for measuring fund performance </li></ul><ul><ul><li>To make right investment decisions </li></ul></ul><ul><li>Depends upon </li></ul><ul><ul><li>Type of fund </li></ul></ul><ul><ul><li>Investment objective </li></ul></ul><ul><ul><li>Current financial market conditions </li></ul></ul>
  122. 122. Different Performance Measures <ul><li>Change in NAV </li></ul><ul><li>Change in NAV between the two dates in absolute and percentage terms. </li></ul><ul><ul><li>Absolute terms- </li></ul></ul><ul><ul><ul><li>NAV at the end-NAV at the beginning </li></ul></ul></ul><ul><ul><li>Percentage terms </li></ul></ul><ul><ul><ul><li>(Absolute change/NAV at the beginning)*100 </li></ul></ul></ul>
  123. 123. <ul><li>Easily understood & applies to any type of fund </li></ul><ul><li>Doesnot take into account interim dividend </li></ul><ul><li>Suitable for evaluating Growth funds & accumulation plans of debt & equity funds. </li></ul>
  124. 124. Different Performance Measures <ul><li>2) Total Return </li></ul><ul><ul><li>Takes into account the dividends distributed by the fund </li></ul></ul><ul><ul><li>[(Distribution+Change in NAV)/NAV at the beginning]*100 </li></ul></ul><ul><ul><li>Suitable for all categories of funds,more accurate than first method </li></ul></ul><ul><ul><li>Ignores the possibility of reinvestment of dividend </li></ul></ul>
  125. 125. Different Performance Measures <ul><li>3) Return on Investment (R.O.I) </li></ul><ul><ul><li>Computes the total return with reinvestment of dividends in the fund at ex-dividend date. </li></ul></ul><ul><ul><li>[(Units held + div./ex-d NAV)*end NAV]-begin NAV /begin NAV*100 </li></ul></ul><ul><ul><li>Accepted by MF tracking agencies(Credence and Value research) </li></ul></ul><ul><ul><li>Suitable for accumulation plans, monthly/quarterly income schemes,debt funds distributing interim dividend. </li></ul></ul>
  126. 126. Useful Concepts <ul><li>Compare the same time periods since returns over different time periods vary due to different market conditions. </li></ul><ul><li>Annualised returns applicable only to periods greater than 1 year. </li></ul><ul><li>Returns to be computed since the inception of the scheme(Rs. 10 as the base amount) </li></ul>
  127. 127. Useful Concepts <ul><li>Expense Ratio </li></ul><ul><ul><li>Total expenses/Average Net assets of the fund </li></ul></ul><ul><ul><li>Excludes brokerage commissions </li></ul></ul><ul><ul><li>Average of 3 to 5 years to be used to judge the performance of the fund. </li></ul></ul><ul><ul><li>Evaluated in the light of fund size and portfolio composition. </li></ul></ul>
  128. 128. Useful Concepts <ul><li>Income Ratio </li></ul><ul><ul><li>Net investment income/Net Assets </li></ul></ul><ul><ul><li>Useful for evaluating debt funds </li></ul></ul><ul><li>Portfolio Turnover Rate </li></ul><ul><ul><li>Amount of buying/selling in the market </li></ul></ul><ul><ul><li>Indicates higher transaction costs </li></ul></ul><ul><ul><li>Useful in analysis of equity & balanced funds </li></ul></ul>
  129. 129. Useful Concepts <ul><li>Transaction costs </li></ul><ul><ul><li>Includes brokerage commission,stamp duty,registrars’ fees,custodian fees,dealers’ spreads. </li></ul></ul><ul><li>Cash Holdings </li></ul><ul><li>Borrowing by MF </li></ul>
  130. 130. Performance Measurement (cont’d) Sharpe Ratio measure fund performance in terms of total risk Sharpe index = r t - r * / sd t r t = average return on portfolio t r * = risk less rate of return sd t = standard deviation of the returns of the portfolio t
  131. 131. Treynor Ratio measure the fund performance in term of market risk : Treynor index = r n - r * / beta n r n = average return on portfolio n r * = risk less rate of return beta n = beta coefficient of portfolio
  132. 132. Alpha as measure the performance of the fund manager: <ul><li>It is the difference between a security’s expected return and its equilibrium expected return </li></ul><ul><li>positive alpha indicates undervalued securities </li></ul><ul><li>negative alpha indicate over valued securities </li></ul>
  133. 133. Price/Earning multiple is also another risk measure: Fund P/E ratio = Weighted average of P/E ratio of all the stock held in the portfolios P/E = Market price per share / Earning per share
  134. 134. Evaluating Fund Performance <ul><li>Benchmarks available </li></ul><ul><li>1) Relative to the Market </li></ul><ul><ul><li>Index funds </li></ul></ul><ul><ul><ul><li>Tracking Error </li></ul></ul></ul><ul><ul><li>Active Equity funds </li></ul></ul><ul><ul><li>Debt funds </li></ul></ul><ul><ul><li>Money Market funds </li></ul></ul>
  135. 135. Evaluating Fund Performance <ul><li>2) Relative to other similar MFs </li></ul><ul><ul><li>Investment objective & Risk Profile </li></ul></ul><ul><ul><li>Portfolio Composition </li></ul></ul><ul><ul><li>Credit quality & Average Maturity </li></ul></ul><ul><ul><li>Fund size </li></ul></ul><ul><ul><li>Expense ratios </li></ul></ul><ul><ul><li>Compare average annualised returns over the same periods only,after tax returns. </li></ul></ul>
  136. 136. Evaluating Fund Performance <ul><li>3) Relative to other investment options </li></ul><ul><ul><li>Convert cumulative returns to average annualised returns </li></ul></ul><ul><li>Evaluate the Fund manager/AMC </li></ul><ul><ul><li>Long term perspective </li></ul></ul><ul><ul><li>Avoid excessive trading </li></ul></ul><ul><ul><li>Consistent performance </li></ul></ul>
  137. 137. Tracking Mutual Fund Performance <ul><li>MF Annual & Periodic reports </li></ul><ul><li>Financial press </li></ul><ul><li>Fund tracking agencies </li></ul><ul><li>Newsletters </li></ul><ul><li>Prospectus </li></ul>
  138. 138. Principles of financial planning and investment advisory
  139. 139. Classification of investment products
  140. 140. Investment Products are classified on the basis of: 1. ASSETS: Physical Assets and Financial Assets 2. FINANCIAL GUARANTEE: Guaranteed and Non - Guaranteed Investments
  141. 141. Examples of Physical Assets: Gold and Real Estate Examples of Financial Products by Issuer: Banks, Corporates, Government, Financial Institutions, Mutual Funds and Insurance Companies
  142. 142. Benefits of Physical Assets <ul><li>GOLD: </li></ul><ul><li>Not subjected to Rupee depreciation </li></ul><ul><li>As a hedge against inflation </li></ul><ul><li>As a security in bad times </li></ul><ul><li>REAL ESTATE: </li></ul><ul><li>Long-term capital appreciation </li></ul><ul><li>As a security in bad times </li></ul><ul><li>As an avenue for tax -saving </li></ul><ul><li>As a hedge against inflation </li></ul>
  143. 143. Benefits of Financial Assets <ul><li>Safety </li></ul><ul><li>Security </li></ul><ul><li>Liquidity </li></ul><ul><li>Returns </li></ul><ul><li>Tax-Benefits </li></ul><ul><li>Alternative for parking Idle Cash </li></ul>
  144. 144. Financial Products Available
  145. 145. Comparison of Investment Products <ul><li>By Nature of Investment </li></ul><ul><li>By Performance </li></ul>
  146. 146. Benefits of Mutual Fund Investing vs. Direct Equity Investment <ul><li>Good Stock Identification </li></ul><ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Based on Investment objective </li></ul><ul><li>Liquidity </li></ul><ul><li>Lower Transaction </li></ul><ul><li>Convenience </li></ul>
  147. 147. Investor Perspective of Mutual Funds Vs. Other Products
  148. 148. Contd…...
  149. 149. BEYOND “SELLING” <ul><li>Objectives of this chapter </li></ul><ul><li>Built a long term relationship with the investor by rendering good investment advice. </li></ul><ul><li>Investor must come to trust his agent as a source of good financial advice. </li></ul>Training in the principles and practice of financial planning and investment advisory functions
  150. 150. Topics of Discussion <ul><li>Why Financial Planning ? </li></ul><ul><li>Building Risk into financial planning </li></ul>
  151. 151. Why Financial Planning ? <ul><li>Investment is a lifetime activity and no an ad-hoc process. </li></ul><ul><li>Avoid Ad-hoc investment recommendation </li></ul><ul><li>Encourage long-term plan, suited to his age and financial advisor </li></ul><ul><li>Develop a model portfolio </li></ul>
  152. 152. Principles of financial planning <ul><li>Power of Compounding….. </li></ul><ul><li>In a longer horizon investment </li></ul><ul><li>Deep Discount bonds shows the power of compounding </li></ul><ul><li>In MF “growth” option , meaning reinvestment of dividends </li></ul>
  153. 153. How long and how much to invest? <ul><li>STRATEGY ( MAXIMIZE RETURNS) </li></ul><ul><li>Buy and Hold (Do not fall in love with your investment) </li></ul><ul><li>Rupee Cost Averaging (a regular investor never loses) however it has one limitation, it does not tell when to buy or sell, or to switch from losing to winning funds </li></ul><ul><li>Value Averaging (investors keeps the target value of his investment constant by investing the amount by which the investment value has come down) </li></ul>
  154. 154. Jacobs’ recommendation <ul><li>Combined approach of rupee-cost and value averaging strategies </li></ul><ul><li>Aggressive growth fund + money market fund of ‘same’ family. </li></ul>
  155. 155. Where to invest ? <ul><li>ASSET ALLOCATION PRINCIPLES </li></ul><ul><li>Benjamin Graham’s 50/50 Balance </li></ul><ul><li>50/50 Portfolio of Mutual funds </li></ul><ul><li>Strategic Asset Allocation </li></ul><ul><li>Fixed vs. Flexible Asset Allocation </li></ul><ul><li>Tactical Asset Allocation </li></ul><ul><li>Increased returns without increased risk </li></ul>
  156. 156. Benjamin Graham’s 50/50 Balance <ul><li>50 / 50 split between equities and Bonds </li></ul><ul><li>when value of equities goes up , balance can be restored by liquidating part of the equity portfolio and vice versa </li></ul><ul><li>Defensive / conservative investment </li></ul><ul><li>Gain / losses will be limited </li></ul>
  157. 157. 50/50 Portfolio of Mutual funds <ul><li>A basic managed portfolio </li></ul><ul><li>A basic indexed portfolio </li></ul><ul><li>A simple managed portfolio </li></ul><ul><li>A complex managed portfolio </li></ul><ul><li>A ready made portfolio </li></ul>50% in diversified Equity ‘value’ Fund 25% in Govt. security fund 25% in High Grade corporate Bond fund 50 % in Index portfolio 50% in Total Bond market portfolio 85% in a Balanced 60/40 Fund 15% in medium term Bond Fund 20 % in diversified equity fund 20% in aggressive growth funds 10% in specialty funds 30% in long-term bond funds 20% in short term bond fund Singe index fund with 60/40 equity / bond holdings
  158. 158. Strategic Asset Allocation <ul><li>DISTRIBUTION PHASE </li></ul><ul><li>Older investor 50 / 50 ( equity / debt) </li></ul><ul><li>younger investors 60 / 40 </li></ul><ul><li>ACCUMULATION PHASE </li></ul><ul><li>Older investor 70 / 30 </li></ul><ul><li>younger investors 80 / 20 </li></ul><ul><li>Younger => more aggressive, let the magic of compounding work </li></ul><ul><li>older => more conservative approach </li></ul><ul><li>Accumulation phase can take greater risk </li></ul><ul><li>THUMB RULE </li></ul><ul><li>Debt portion of an investors portfolio should be equal his </li></ul><ul><li>age, so let the 30 -years old make 70/30 asset allocation. </li></ul>
  159. 159. Fixed vs. Flexible Asset Allocation <ul><li>Fixed ratio means that balance is maintained by liquidating a part of the position in the asset class with higher returns and reinvesting in the other asset with lower return. </li></ul><ul><li>A flexible ration of asset allocation means that letting the profit run </li></ul><ul><li>if Stock returns > bonds , fixed is better </li></ul><ul><li>if bond returns > stocks , flexible ratio </li></ul><ul><li>(answer depends on forecasting) </li></ul><ul><li>Normally stocks give higher returns than bond hence fixed asset allocation is better at least in bull market. </li></ul>
  160. 160. Tactical asset allocation <ul><li>Asset allocation in the light of future movements in asset prices </li></ul><ul><li>Seek extra returns </li></ul>
  161. 161. Increased returns without increased risk <ul><li>ISSUE OF COST OF INVESTING </li></ul><ul><li>expense ratio </li></ul><ul><li>load ratio </li></ul><ul><li>Choose the risk level for the investor and then the fund </li></ul><ul><li>with less ‘cost penalty’ </li></ul>
  162. 162. Risks in investing in mf <ul><li>Prerequisites of investment planning </li></ul><ul><li>Investors needs and circumstances along with risk tolerance </li></ul><ul><li>various strategies to suit investors profile </li></ul><ul><li>Thus it involves managing the risk of investing </li></ul>Risk of Defining risk appetite of Investor Risk of Evaluation of MF Portfolio
  163. 163. What is risk? <ul><li>Variability of earnings (total returns ) from time to time </li></ul><ul><li>Thus risk is measure of volatility in earnings </li></ul>
  164. 164. Risk : equity funds <ul><li>EQUITY PRICES RISKS ( Company specific, Sector specific and market level </li></ul><ul><li>MARKET CYCLES </li></ul><ul><li>RISK MEASURES </li></ul>
  165. 165. Equity prices risks <ul><li>This risk needs to be found out through thorough research and assessment by the fund analyst and portfolio manager </li></ul><ul><li>Market risk arises out of broad economic factor and other factors, managers try to anticipate bear or bull phases and try to adjust their portfolio asset allocation </li></ul><ul><li>With equity index futures and options, managers try to </li></ul><ul><li>HEDGE their portfolio </li></ul>
  166. 166. Market cycles <ul><li>Extensively researched by agencies such as Lipper ( US) , brokers, and newspapers </li></ul><ul><li>Its important to see how a portfolio performs over a well defined cycle than over some arbitrary period </li></ul><ul><li>Sticking to a good fund helps </li></ul>
  167. 167. Risk measures <ul><li>Measured by </li></ul><ul><li>Standard Deviation (SD) </li></ul><ul><li>Beta Coefficient or R-squared </li></ul><ul><li>SD is the best measure of risk </li></ul>
  168. 168. Risk and returns are related <ul><li>RISK ADJUSTED PERFORMANCES </li></ul><ul><li>SHARPE RATIO </li></ul><ul><li>Divides risk premium by Standard deviation </li></ul><ul><li>TREYNOR RATIO </li></ul><ul><li>Divides risk premium by Beta </li></ul>
  169. 169. <ul><li>A simple way to gauge funds risk level is to see PRICE/ EARNINGS MULTIPLE </li></ul><ul><li>It’s the weighted average of the P/E ratios fo all the stocks held in its portfolio </li></ul><ul><li>Higher P/E as compared to the market or other funds, higher the probability of its fall in the future. </li></ul><ul><li>SOURCES </li></ul><ul><li>Fund tracking agencies </li></ul><ul><li>Research reports from brokers </li></ul><ul><li>Fund own reports </li></ul>
  170. 170. Risk : debt funds <ul><li>Credit Risk </li></ul><ul><li>Interest Rate risk (average maturity) </li></ul>
  171. 171. Sample questions <ul><li>The strategy advisable for an investors to maximize returns in the long runs is </li></ul><ul><li>Buy and hold on the investment for a long time </li></ul><ul><li>Liquidate poorly performing investments from time to time </li></ul><ul><li>Liquidating food performing investments from time to time </li></ul><ul><li>Switch from poor performers to good performers </li></ul>
  172. 172. Sample questions…….. <ul><li>A criticism of rupee-cost averaging is : </li></ul><ul><li>Investment is for the same amount at regular intervals </li></ul><ul><li>Over a period of time , average per share price will be more than guessing the highs and lows </li></ul><ul><li>it does not tell you when to buy , sell or switch from one scheme to another </li></ul><ul><li>Rupee cost averaging has no serious shortcomings </li></ul>
  173. 173. Investors rights and services The rights of investors under the scheme Access to information Investor friendly services SEBI stipulation regarding despatch of dividend/repurchase/maturity /cheques
  174. 174. Guaranteed Return <ul><li>Return can be guaranteed only if the sponsor or the AMC guarantees fully or the manner in which the guarantee to be met has been disclosed in OD. </li></ul><ul><li>In case of UTI - MIPs the returns are guaranteed by DRF. </li></ul>
  175. 175. SEBI & Offer Document - Miscellaneous contents <ul><li>Accounting policies </li></ul><ul><li>Inter scheme transfers </li></ul><ul><li>Investors grievances redressal mechanism </li></ul><ul><li>Penalties, pending litigations </li></ul>
  176. 176. Recent changes in SEBI(MF) Regulations <ul><li>OD should be revised/updated and printed once in every two years </li></ul><ul><li>Procedure followed to make Investment Decision </li></ul><ul><li>Scheme to be launched within 6 months from the date of approval of OD </li></ul>
  177. 177. UTI - Other MF’s ODs <ul><li>Gazetting of UTI OD </li></ul><ul><li>Repurchase restrictions </li></ul><ul><li>No Advisory/Management Fee charged </li></ul><ul><li>Details Regarding Associate Transactions </li></ul><ul><li>Information Regarding Key Personnel </li></ul><ul><li>Powers of Trustees </li></ul><ul><li>Sponsor and its past performance </li></ul><ul><li>AMC </li></ul>
  178. 178. Recommending strategies for investors <ul><li>Developing a Model Portfolio </li></ul><ul><li>Helping investor choose a fund based on selection criteria </li></ul>
  179. 179. Developing a Model Portfolio <ul><li>Avoid ad hoc investment advice or decision: </li></ul><ul><ul><li>Investor not only needs advice but an investment strategy based on situation and needs </li></ul></ul><ul><ul><li>Agents should teach investors right approach to investing </li></ul></ul><ul><ul><li>Recommending unsuitable investment to an investor means a loss of customer </li></ul></ul>
  180. 180. Jacobs 4-step program: Developing model portfolio <ul><li>Work with investors to develop long - term goals </li></ul><ul><li>Determine asset allocation of the investment portfolio </li></ul><ul><ul><li>apportion in debt, equity and liquid </li></ul></ul><ul><li>Determine the Sector distribution </li></ul><ul><ul><li>I.e. in equity - Index funds, GSFs etc. </li></ul></ul><ul><li>Select specific fund managers and their schemes </li></ul>
  181. 181. Model Portfolios <ul><li>Young, Unmarried Professional </li></ul><ul><ul><li>50% aggressive equity funds </li></ul></ul><ul><ul><li>25% high yield Bond funds, Growth and Income funds </li></ul></ul><ul><ul><li>25% in conservative MMFs </li></ul></ul><ul><li>Young Couple with double income and two children </li></ul><ul><ul><li>10% MMF </li></ul></ul><ul><ul><li>30% aggressive equity funds (GSFs) </li></ul></ul><ul><ul><li>25% high yield bond and long term growth funds </li></ul></ul><ul><ul><li>35% Municipal Bond Funds (G Secs) </li></ul></ul>
  182. 182. <ul><li>Older Couple, Single Income </li></ul><ul><ul><li>30% short term Municipal Funds (G - Secs) </li></ul></ul><ul><ul><li>35% long term Municipal Funds </li></ul></ul><ul><ul><li>25% moderately aggressive equity (Index funds) </li></ul></ul><ul><ul><li>10% Emerging Growth Equity (Software) </li></ul></ul><ul><li>Recently Retired </li></ul><ul><ul><li>35% conservative equity funds for capital preservation/income (Index, Grandmaster) </li></ul></ul><ul><ul><li>25% moderately aggressive Equity for modest capital growth (Petro) </li></ul></ul><ul><ul><li>40% in Money Market Funds </li></ul></ul>
  183. 183. Fund Selection <ul><li>Selecting an Equity fund </li></ul><ul><li>Selecting Debt/ Bond/ Income fund </li></ul><ul><li>Selecting Money Market Fund </li></ul><ul><li>Selecting a Balanced MF </li></ul>
  184. 184. Selecting an Equity Fund <ul><li>Classify available Equity schemes </li></ul><ul><ul><li>Growth (e.g.. PEF, B Group shares) </li></ul></ul><ul><ul><li>Value Funds (e.g.. Basic Industry Fund) </li></ul></ul><ul><ul><li>Equity Income Funds (e.g.. Estd. Cos. with Regular Dividends) </li></ul></ul><ul><ul><li>Broad Based Specialty (UGS 10000, Brand Value) </li></ul></ul><ul><ul><li>Concentrated Specialty Fund (Software Fund) </li></ul></ul>
  185. 185. <ul><li>Choose one of the two strategies </li></ul><ul><ul><li>Select main stream Growth or Value funds providing broad diversification (Index Funds) </li></ul></ul><ul><ul><ul><li>Returns almost similar to overall Market </li></ul></ul></ul><ul><ul><li>Select either a differentiated Growth or Value fund or a Specialty funds (GSF) </li></ul></ul><ul><ul><ul><li>Returns will vary from overall market </li></ul></ul></ul><ul><ul><li>Choose a strategy depending on Investor Profile </li></ul></ul>
  186. 186. <ul><li>Evaluate past returns of available fund </li></ul><ul><li>Review the salient features of the scheme </li></ul><ul><ul><li>Fund Size : Smaller Funds have high expense </li></ul></ul><ul><ul><li>Fund Age: see performance over 3 years </li></ul></ul><ul><ul><li>Portfolio managers experience </li></ul></ul><ul><ul><li>Cost of Investing: Entry & Exit load </li></ul></ul><ul><ul><li>Portfolio Characteristics </li></ul></ul><ul><ul><ul><li>Cash Position </li></ul></ul></ul><ul><ul><ul><li>Portfolio concentration </li></ul></ul></ul><ul><ul><ul><li>Market capitalization of the fund </li></ul></ul></ul><ul><ul><ul><li>Portfolio Turnover </li></ul></ul></ul><ul><ul><ul><li>Portfolio statistics (Ex-Mark, Beta, Gross) </li></ul></ul></ul>
  187. 187. <ul><li>ExMark: Funds performance in relation to the benchmark index </li></ul><ul><ul><li>It is from 0-100. With 100% meaning highest relation </li></ul></ul><ul><ul><li>An index fund has Ex Mark of 100% </li></ul></ul><ul><ul><li>If Ex Mark is lower than 80% fund is less predictable in relation to index and may be riskier </li></ul></ul><ul><li>Beta:Measures sensitivity of the fund’s returns to changes in the market index </li></ul><ul><ul><li>Beta of 1: Fund moves with market (Index fund) </li></ul></ul><ul><ul><li>Beta of less than1: less volatile than market (conservative portfolio) </li></ul></ul><ul><ul><li>more than 1: higher volatility than market (software fund) </li></ul></ul><ul><li>Gross Dividend Yield: Funds reported yield gross before expenses and net after expenses </li></ul><ul><ul><li>Higher for “value funds”than “growth funds” </li></ul></ul>
  188. 188. Selecting a Debt/Bond/income fund <ul><li>Narrow down the choices: short term, long term, G-Secs etc. </li></ul><ul><li>Know your investment objective </li></ul><ul><li>Determine right selection criteria and select </li></ul><ul><ul><li>Fund age and size </li></ul></ul><ul><ul><li>Relative yields </li></ul></ul><ul><ul><li>Costs (most important factor in debt funds) </li></ul></ul><ul><ul><li>Portfolio characteristics (credit ratings0 </li></ul></ul><ul><ul><li>Average Maturity (higher the maturity, higher is the risk) </li></ul></ul><ul><ul><li>Past returns (make an expense performance) </li></ul></ul>
  189. 189. Selecting a MMF <ul><li>Costs (crucial because they offer lower returns) </li></ul><ul><li>Quality (not applicable to short term MMF) </li></ul><ul><li>Yields </li></ul><ul><ul><li>lowest principal risk and highest income variability as interest rates fluctuate </li></ul></ul>
  190. 190. Selecting a Balance Fund <ul><li>Equity oriented balance funds (65% equity) </li></ul><ul><li>Debt oriented balance funds (65% debt) </li></ul><ul><li>Selection criteria </li></ul><ul><ul><li>Portfolio balance </li></ul></ul><ul><ul><li>Debt portfolio character </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Portfolio statistics </li></ul></ul><ul><ul><li>Returns </li></ul></ul>
  191. 191. Wishing You all the success