Amf Ippt


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Amf Ippt

  1. 1. Training on Mutual Funds for AMFI Certification Sponsored by Prudential ICICI Mutual Fund
  2. 2. About the NCFM-AMFI Examination <ul><li>All agents and distributors should take the MF Advisor’s module (No 12). Basic module is for employees. </li></ul><ul><li>Computerised multiple choice examination </li></ul><ul><li>Example: </li></ul><ul><li>The NAV of an open-ended fund has to be disclosed </li></ul><ul><ul><li>Every Friday </li></ul></ul><ul><ul><li>Every Monday </li></ul></ul><ul><ul><li>Every Day </li></ul></ul><ul><ul><li>None of the above </li></ul></ul><ul><li>All questions are multiple choice with four options. </li></ul>
  3. 3. Marks <ul><li>The paper has 69 questions, with 1 and 2 mark questions adding up to 100 marks. </li></ul><ul><li>Candidates have to score a minimum of 50% to pass. </li></ul><ul><li>A wrong answer will lead to negative marking of 25%. </li></ul><ul><ul><li>If you get a 2 mark question wrong, you loose 2.5 marks. </li></ul></ul><ul><li>The marks for each question is given along with the question. </li></ul>
  4. 4. Question paper design <ul><li>Each chapter has a weightage: not disclosed. Read the whole book. </li></ul><ul><li>The question bank has questions stored for each chapter. </li></ul><ul><li>The question paper for each candidate is different. </li></ul><ul><li>The paper is generated by the computer, by randomly choosing from the bank. </li></ul>
  5. 5. Attempting the paper <ul><li>There is a practice exam to help first timers. Detailed instructions are given. </li></ul><ul><li>Click the blank button of the chosen answer. It will turn black. </li></ul><ul><li>Clicking another answer for the same question will automatically change the answer to the new one. </li></ul><ul><li>Clicking on the black button of the chosen answer, will make it blank. </li></ul><ul><li>You can scroll up and down and change your answers. </li></ul>
  6. 6. Time and Submission <ul><li>There are 2 hours to do the paper. Most do it in 1 hour. </li></ul><ul><li>There is a clock on the screen. </li></ul><ul><li>End of two hours, paper will be automatically submitted. </li></ul><ul><li>There is a back-up sheet on which answers can be written. </li></ul><ul><li>Once you click on finish, a summary of attempted and unattempted questions appears. You can go back to the paper. </li></ul><ul><li>If you say”submit” at this stage, your marks will be displayed. Exam over. </li></ul>
  7. 7. Session 1: Structure and Regulation <ul><li>Introduction </li></ul><ul><li>Mutual fund products </li></ul><ul><li>Sponsor-Trustee-AMC </li></ul><ul><li>Other constituents </li></ul><ul><li>Regulatory framework </li></ul><ul><li>Merger and acquisitions </li></ul>
  8. 8. What Is a Mutual Fund? <ul><li>A mutual fund is a pool of money collected from investors and is invested according to stated investment objectives </li></ul><ul><li>Terms to know </li></ul><ul><ul><li>Mutual </li></ul></ul><ul><ul><li>Pool </li></ul></ul><ul><ul><li>Investment objectives </li></ul></ul>
  9. 9. Characteristics of a Mutual Fund <ul><li>Investors own the mutual fund. </li></ul><ul><li>Professional managers manage the affairs for a fee. </li></ul><ul><li>The funds are invested in a portfolio of marketable securities, reflecting the investment objective. </li></ul><ul><li>Value of the portfolio and investors’ holdings, alters with change in market value of investments. </li></ul>
  10. 10. Advantages of Mutual Funds <ul><li>Portfolio diversification </li></ul><ul><li>Professional management </li></ul><ul><li>Reduction in risk </li></ul><ul><li>Reduction in transaction cost </li></ul><ul><li>Liquidity </li></ul><ul><li>Convenience and flexibility </li></ul>
  11. 11. Disadvantages of Mutual Funds <ul><li>No control over costs </li></ul><ul><li>No tailor-made portfolios </li></ul><ul><li>Issues relating to management of a portfolio of mutual funds </li></ul>
  12. 12. Mutual Fund Products <ul><li>Open ended funds </li></ul><ul><ul><li>Initial issue for a limited period </li></ul></ul><ul><ul><li>Continuous sale and repurchase </li></ul></ul><ul><ul><li>Size of the fund changes as investors enter and exit </li></ul></ul><ul><ul><li>NAV-based pricing </li></ul></ul>
  13. 13. Mutual Fund Products <ul><li>Closed end funds </li></ul><ul><ul><li>Sale of units by fund only during IPO </li></ul></ul><ul><ul><li>Listing on exchange and liquidity for investors </li></ul></ul><ul><ul><li>Size of fund is kept constant </li></ul></ul><ul><ul><li>Price in the market is usually at a discount </li></ul></ul>
  14. 14. Equity Funds <ul><li>Pre-dominantly invest in equity markets </li></ul><ul><ul><li>Diversified portfolio of equity shares </li></ul></ul><ul><ul><li>Select set based on some criterion </li></ul></ul><ul><li>Diversified equity funds </li></ul><ul><ul><li>ELSS as a special case </li></ul></ul><ul><li>Primary market funds </li></ul><ul><li>Small stock funds </li></ul><ul><li>Index funds </li></ul><ul><li>Sectoral funds </li></ul>
  15. 15. Debt Funds <ul><li>Predominantly invest in the debt markets </li></ul><ul><ul><li>Diversified debt funds </li></ul></ul><ul><ul><li>Select set based on some criterion </li></ul></ul><ul><li>Income funds or diversified debt funds </li></ul><ul><li>Gilt funds </li></ul><ul><li>Liquid and money market funds </li></ul><ul><li>Serial plans or fixed term plans </li></ul>
  16. 16. Balanced Funds <ul><li>Investment in more than one asset class </li></ul><ul><ul><li>Debt and equity in comparable proportions </li></ul></ul><ul><ul><li>Pre-dominantly debt with some exposure to equity </li></ul></ul><ul><ul><li>Pre-dominantly equity with some exposure to debt </li></ul></ul><ul><li>Education plans and children’s plans </li></ul>
  17. 17. Investment Options <ul><li>Investors can achieve income and growth objectives in all funds </li></ul><ul><ul><li>Dividend option </li></ul></ul><ul><ul><ul><li>Regular dividend </li></ul></ul></ul><ul><ul><ul><li>Ad-hoc dividend </li></ul></ul></ul><ul><ul><li>Growth option </li></ul></ul><ul><ul><li>Re-investment option </li></ul></ul><ul><li>Most funds provide multiple options and the facility to switch between options </li></ul>
  18. 18. Basis for Classification <ul><li>Risk </li></ul><ul><ul><li>Sectoral funds are most risky; money market funds are least risky </li></ul></ul><ul><li>Tenor </li></ul><ul><ul><li>Equity funds require a long investment horizon; liquid funds are for the short term liquidity needs </li></ul></ul><ul><li>Investment objective </li></ul><ul><ul><li>Equity funds suit growth objectives; debt funds suit income objectives </li></ul></ul>
  19. 19. Risk and Return Liquid funds ST debt funds Gilt funds Debt Funds Index funds Equity funds Sectoral funds Balanced funds Risk Return
  20. 20. Fund Structure & Constituents <ul><li>3-tier structure </li></ul><ul><ul><li>Sponsor </li></ul></ul><ul><ul><li>Trustee </li></ul></ul><ul><ul><li>AMC </li></ul></ul>
  21. 21. Sponsor <ul><li>Promoter of the the mutual fund </li></ul><ul><li>Creates AMC and appoints trustees </li></ul><ul><li>Criteria </li></ul><ul><ul><li>Financial services business </li></ul></ul><ul><ul><li>5-year track record </li></ul></ul><ul><ul><li>3-year profit making record </li></ul></ul><ul><ul><li>At least 40% contribution to AMC capital </li></ul></ul>
  22. 22. Trustees <ul><li>Fiduciary responsibility for investor funds </li></ul><ul><li>Appointed by sponsor with SEBI approval </li></ul><ul><li>Registered ownership of investments is with Trust </li></ul><ul><li>Board of trustees or Trustee Company </li></ul><ul><li>Appoints all other constituents </li></ul>
  23. 23. Trustees <ul><li>At least 4 trustees </li></ul><ul><ul><li>2/3 should be independent </li></ul></ul><ul><li>Trustees of one mutual fund cannot be trustee of another mutual fund </li></ul><ul><ul><li>Independent trustee </li></ul></ul><ul><ul><li>Board approval </li></ul></ul><ul><li>Right to seek regular information and remedial action </li></ul><ul><li>All major decisions need trustee approval </li></ul>
  24. 24. Asset Management Company <ul><li>Responsible for operational aspects of the mutual fund </li></ul><ul><li>Investment management agreement with trustees </li></ul><ul><li>Registered with SEBI </li></ul><ul><li>Rs. 10 crore of net worth to be maintained at all times </li></ul><ul><li>At least 1/2 of the board members to be independent </li></ul>
  25. 25. Asset Management Company <ul><li>Appoints other constituents </li></ul><ul><li>Cannot have any other business interest </li></ul><ul><li>Structured as a private limited company </li></ul><ul><ul><li>Sponsor and associates hold capital </li></ul></ul><ul><li>AMC of one MF cannot be trustee of another MF </li></ul><ul><li>Quarterly reporting to Trustees </li></ul>
  26. 26. Other Constituents <ul><li>Custodian </li></ul><ul><ul><li>Investment back-office </li></ul></ul><ul><li>Registrar and Transfer agent </li></ul><ul><ul><li>Investor records and transactions </li></ul></ul><ul><li>Broker </li></ul><ul><ul><li>Purchase and sale of securities </li></ul></ul><ul><ul><li>5% limit per broker </li></ul></ul><ul><li>Auditor </li></ul><ul><ul><li>Separate auditor for AMC and mutual fund </li></ul></ul>
  27. 27. Regulatory Framework <ul><li>SEBI (Mutual Fund) Regulations, 1996 </li></ul><ul><li>RBI as regulator </li></ul><ul><ul><li>Guarantees of sponsors in bank-sponsored mutual funds </li></ul></ul><ul><ul><li>Regulator of G-Secs and money markets </li></ul></ul><ul><li>Stock exchange </li></ul><ul><ul><li>listed mutual funds </li></ul></ul>
  28. 28. Regulatory Framework <ul><li>Companies Act </li></ul><ul><ul><li>AMCs and Trustee Company </li></ul></ul><ul><ul><li>DCA as regulator </li></ul></ul><ul><ul><li>RoC for Compliance </li></ul></ul><ul><ul><li>CLB for prosecution and penalties </li></ul></ul><ul><li>Office of the public trustee </li></ul><ul><ul><li>Registration </li></ul></ul><ul><ul><li>Complaints against trustees </li></ul></ul>
  29. 29. UTI: Differences <ul><li>Formed as a trust under UTI Act, 1963 </li></ul><ul><li>Voluntary submission to SEBI regulation </li></ul><ul><li>No separate sponsor or AMC </li></ul><ul><li>Major Differences </li></ul><ul><ul><li>Assured return schemes </li></ul></ul><ul><ul><li>Different accounting norms </li></ul></ul><ul><ul><li>Ability to take and make loans </li></ul></ul>
  30. 30. Self-regulatory Organisations <ul><li>Derive powers from regulator </li></ul><ul><li>Ability to make bye-laws </li></ul><ul><li>Example : Stock exchanges </li></ul><ul><li>Industry Associations </li></ul><ul><ul><li>Collective industry opinion </li></ul></ul><ul><ul><li>Guidelines and recommendation </li></ul></ul><ul><ul><li>Example: Association of Mutual Funds in India </li></ul></ul>
  31. 31. Mergers and Acquisitions <ul><li>Scheme takeover </li></ul><ul><ul><li>One AMC buys schemes of another AMC </li></ul></ul><ul><ul><li>Organic growth in assets </li></ul></ul><ul><ul><li>No change in AMC stakes </li></ul></ul><ul><li>AMC merger </li></ul><ul><ul><li>Two AMCs merge </li></ul></ul><ul><ul><li>Similar to merger of companies </li></ul></ul><ul><ul><li>Sponsor stakes change </li></ul></ul>
  32. 32. Mergers and Acquisitions <ul><li>AMC take-over </li></ul><ul><ul><li>Stake of one sponsor in a AMC bought out by another sponsor </li></ul></ul><ul><ul><li>Change in AMC and sponsor </li></ul></ul><ul><li>Investor rights </li></ul><ul><ul><li>No prior approval needed </li></ul></ul><ul><ul><li>Option to exit at NAV </li></ul></ul><ul><ul><li>Right to be informed </li></ul></ul>
  33. 33. Session 2: Offer Document <ul><li>Offer Document </li></ul><ul><li>Key Information Memorandum </li></ul><ul><li>Application and form of holding </li></ul><ul><li>Distribution channels </li></ul><ul><li>Investors rights </li></ul><ul><li>Taxation of Income and capital gain </li></ul><ul><li>NAV and Load </li></ul>
  34. 34. Offer Document <ul><li>Legal offer from AMC to investor </li></ul><ul><li>Contains vital information about Fund and schemes </li></ul><ul><li>SEBI approved format </li></ul><ul><li>KIM is a mandatorily enclosed to application forms </li></ul><ul><li>Investor has no recourse for not having read the OD/KIM </li></ul>
  35. 35. Period of Validity <ul><li>Updated every 2 years for OEFs </li></ul><ul><li>Regular Addendum for results </li></ul><ul><li>Updated for every major change </li></ul><ul><ul><li>Change in the AMC or Sponsor of the mutual fund. </li></ul></ul><ul><ul><li>Change in the load structures. </li></ul></ul><ul><ul><li>Changes in the fundamental attributes of the schemes. </li></ul></ul><ul><ul><li>Changes in the investment options to investors; inclusion or deletion of options. </li></ul></ul>
  36. 36. Fundamental Attributes <ul><li>Scheme type </li></ul><ul><li>Investment objective </li></ul><ul><li>Investment pattern </li></ul><ul><li>Terms of the scheme with regard to liquidity </li></ul><ul><li>Fees and expenses </li></ul><ul><li>Valuation norms and accounting policies </li></ul><ul><li>Investment restrictions </li></ul>
  37. 37. Changes in Fundamental Attributes <ul><li>Investors have right to be informed </li></ul><ul><li>Public announcement by AMC </li></ul><ul><li>Option to exit without load </li></ul><ul><li>SEBI and Trustee approval </li></ul><ul><li>New offer document </li></ul>
  38. 38. Contents of Offer Document <ul><li>Preliminary information </li></ul><ul><ul><li>Summary information about the mutual fund, the scheme and the terms of offer. </li></ul></ul><ul><ul><li>Mandatory disclaimer clauses as required by SEBI. </li></ul></ul><ul><ul><li>Glossary of terms in the offer document, which defines the terms used. </li></ul></ul><ul><ul><li>Standard and scheme specific risk factors pertaining to the scheme being offered. </li></ul></ul>
  39. 39. Fund Specific Information <ul><ul><li>Constitution of fund, details of sponsor, trustees and AMC. </li></ul></ul><ul><ul><li>Financial history of sponsor(s) for 3 years, in summary form. </li></ul></ul><ul><ul><li>Director of Boards of the trustees and the AMC. </li></ul></ul><ul><ul><li>Details of key personnel of the AMC. </li></ul></ul><ul><ul><li>Details of Fund constituents </li></ul></ul>
  40. 40. Details of the Scheme <ul><li>Dates of IPO </li></ul><ul><ul><li>details regarding sale and repurchase. </li></ul></ul><ul><li>Minimum subscription and face value </li></ul><ul><li>Initial issue expenses </li></ul><ul><ul><li>current scheme and the past schemes. </li></ul></ul><ul><li>Special facilities to investors </li></ul><ul><li>Eligibility for investing </li></ul><ul><ul><li>documentation required. </li></ul></ul><ul><li>Procedure for applying, and subsequent operations relating to transfer, redemption, nomination, pledge and mode of holding of units. </li></ul>
  41. 41. Loads and Expenses <ul><li>Load and the annual recurring expenses </li></ul><ul><ul><li>Proposed scheme and other schemes </li></ul></ul><ul><ul><li>Comparison with offer document numbers </li></ul></ul><ul><li>Scheme expenses (3 years) </li></ul><ul><li>Condensed financial information (3 years) </li></ul>
  42. 42. Unit Holder Rights <ul><li>Rights of unit holders </li></ul><ul><ul><li>services </li></ul></ul><ul><ul><li>information </li></ul></ul><ul><ul><li>protection of rights and problem resolution. </li></ul></ul><ul><li>Details of information disclosure and their periodicity. </li></ul><ul><li>Documents available for inspection </li></ul><ul><li>Details of pending litigation and penalties </li></ul>
  43. 43. Unit Holder Rights <ul><li>Cannot sue the mutual fund </li></ul><ul><ul><li>Complaints against AMC, sponsor and BoT </li></ul></ul><ul><li>75% unit holders can </li></ul><ul><ul><li>wind up a scheme </li></ul></ul><ul><ul><li>seek AMC termination </li></ul></ul><ul><li>Prospective investor has no rights </li></ul><ul><li>Right to redeem for fundamental changes </li></ul>
  44. 44. Associate Transactions <ul><li>Summary information on associate companies being used as constituents. </li></ul><ul><li>Summary information of associates investing in schemes of the mutual fund. </li></ul><ul><li>Summary information on investment made by mutual fund schemes in associate company securities. </li></ul>
  45. 45. Verification and Due Diligence <ul><li>SEBI: Format and Content </li></ul><ul><li>Trustee Approval </li></ul><ul><li>Compliance Office certifies that </li></ul><ul><ul><li>information contained therein is true and fair </li></ul></ul><ul><ul><li>is in accordance with SEBI regulations </li></ul></ul><ul><ul><li>constituents of the fund are all SEBI registered entities. </li></ul></ul><ul><li>The AMC is responsible for the contents and the accuracy of information </li></ul>
  46. 46. Investing in a Fund Scheme <ul><li>Units or amount </li></ul><ul><li>Certificates and account statement </li></ul><ul><li>Minimum amount </li></ul><ul><li>Initial offer and subsequent buying </li></ul><ul><li>List of eligible investors </li></ul><ul><ul><li>Check eligibility with offer document </li></ul></ul><ul><ul><li>Foreign investors not eligible (FII Regulations) </li></ul></ul><ul><li>Documents for classes of investors </li></ul>
  47. 47. Distribution Channels <ul><li>Individual agents </li></ul><ul><li>Distribution companies </li></ul><ul><li>Banks and NBFCs </li></ul><ul><li>Direct marketing channels </li></ul>
  48. 48. Individual Agents <ul><li>Wide network </li></ul><ul><li>No exclusivity </li></ul><ul><li>Certification </li></ul><ul><ul><li>New agents from November 2001 </li></ul></ul><ul><ul><li>Exiting agents by March 2003 </li></ul></ul><ul><li>Commission structure </li></ul><ul><ul><li>Initial and Trail </li></ul></ul><ul><li>Loyalty and volume incentives </li></ul>
  49. 49. Institutional Distributors <ul><li>Banks </li></ul><ul><ul><li>HNIs and personal banking </li></ul></ul><ul><li>Distribution companies </li></ul><ul><ul><li>NBFCs </li></ul></ul><ul><ul><li>Service and collection </li></ul></ul><ul><ul><li>Advisory </li></ul></ul><ul><li>Direct Marketing </li></ul><ul><ul><li>Direct Service Agents </li></ul></ul><ul><ul><li>Investor Service Centres </li></ul></ul>
  50. 50. Procedure <ul><li>Proof of purchase </li></ul><ul><ul><li>Certificate </li></ul></ul><ul><ul><li>Account statement </li></ul></ul><ul><li>Application </li></ul><ul><ul><li>Joint holding </li></ul></ul><ul><ul><li>Minor </li></ul></ul><ul><ul><li>Nomination </li></ul></ul><ul><ul><li>PAN number </li></ul></ul><ul><ul><li>Tax status </li></ul></ul><ul><ul><li>Folio number </li></ul></ul><ul><ul><li>Bank details </li></ul></ul>
  51. 51. NAV and Load <ul><li>Sale and repurchase price are NAV-based </li></ul><ul><ul><li>Cut-off time for NAV </li></ul></ul><ul><li>Load is a charge on the NAV </li></ul><ul><ul><li>Entry load is charged on NAV and increases the sale price </li></ul></ul><ul><ul><li>Exit load is charged on NAV and reduces the repurchase price </li></ul></ul><ul><li>Load is defined as a percentage </li></ul><ul><li>CDSC is variable exit load, charged depending on duration of stay in the fund </li></ul><ul><li>Loads are subject to SEBI Regulation and vary depending on industry practice </li></ul>
  52. 52. Entry Load : Example <ul><li>If the entry load (sales load) for a scheme is 1.5% and the NAV of the scheme is Rs. 24.50, the investor who wants to buy the units will not be able to buy at Rs. 24.50. He will pay </li></ul><ul><li>= 24.5 + (24.5*1.5/100) </li></ul><ul><li>= 24.5 + 0.3675 </li></ul><ul><li>= 24.8675 </li></ul>
  53. 53. Exit Load : Example <ul><li>If a fund imposes an exit load of 1.25%, the investor who repurchases his units, will get a price that is: </li></ul><ul><li>= 24.5 – (24.5*1.25/100) </li></ul><ul><li>= 24.5 - 0.30625 </li></ul><ul><li>= 24.19375 </li></ul>
  54. 54. SEBI Regulations : Load <ul><li>There are 2 regulatory requirements: </li></ul><ul><ul><li>The sale price cannot be more than 107% of the NAV and the repurchase price cannot be less than 93% of the NAV. That is, the maximum load can be only 7%. </li></ul></ul><ul><ul><li>The repurchase price cannot be less than 93% of the sale price. </li></ul></ul><ul><ul><li>For a close ended fund, the limits are set at 5% of NAV. </li></ul></ul>
  55. 55. Example <ul><li>If the NAV is Rs. 10, </li></ul><ul><li>Sale price cannot be higher than Rs. 10.7. </li></ul><ul><li>Repurchase price cannot be lower than Rs. 9.3. </li></ul><ul><li>However, the mutual fund cannot charge both these prices. </li></ul><ul><li>If the sale price is Rs. 10.7, the repurchase price cannot be lower than Rs. 9.95 (10.7*0.93). </li></ul><ul><li>If the repurchase price is Rs. 9.3, the sale price cannot be higher than Rs.10 (9.3/0.93). </li></ul>
  56. 56. Taxation <ul><li>Mutual fund is exempt from paying taxes (Section 10 (23D)) </li></ul><ul><li>Income for investors </li></ul><ul><ul><li>Dividend </li></ul></ul><ul><ul><li>Capital gain </li></ul></ul><ul><li>Present position (AMFI examination) </li></ul><ul><ul><li>Dividend exempt from tax </li></ul></ul><ul><ul><li>Fund pays dividend distribution tax at 10% </li></ul></ul><ul><ul><li>Open end funds with >50% in equity, fully exempt. </li></ul></ul><ul><ul><li>Tax arbitrage for investors </li></ul></ul>
  57. 57. Taxation:Finance Act 2002-03 <ul><li>Dividend fully taxable in the hands of investors </li></ul><ul><ul><li>TDS @10% for dividends above Rs.1000 </li></ul></ul><ul><ul><li>Deductions under Section 80L along with other interest and dividend income, up to Rs. 9000. </li></ul></ul><ul><li>Section 88 benefit reduced </li></ul><ul><ul><li>GTI less than 1.5 lakhs :20% </li></ul></ul><ul><ul><li>GTI >1.5 lakhs < 5 lakhs:15% </li></ul></ul><ul><ul><li>GTI > 5 lakhs, no rebate. </li></ul></ul>
  58. 58. Treatment of Capital Gains <ul><li>Long term: > 12 months </li></ul><ul><li>Short term: < 12 months </li></ul><ul><li>Long term capital gains subject to indexation benefit </li></ul><ul><ul><li>20% +surcharge after indexation </li></ul></ul><ul><ul><li>10% + surcharge without indexation </li></ul></ul><ul><li>Short term capital gains taxed at marginal rate of taxation. </li></ul>
  59. 59. Indexation <ul><li>Investor buys on March 31, 1999 and sells on April 1, 2000. What is the indexation adjustment factor? </li></ul><ul><ul><li>1998-99 - 351 </li></ul></ul><ul><ul><li>1999-2000 - 386 </li></ul></ul><ul><ul><li>2000-01 - 406 </li></ul></ul><ul><li>Investor buys on April 1, 1998 and sells on March 31, 2001. What is the indexation adjustment factor? </li></ul>
  60. 60. Capital Markets and Mutual Funds <ul><li>Equity </li></ul><ul><ul><li>Market and products </li></ul></ul><ul><ul><li>Asset classes </li></ul></ul><ul><ul><li>Investment styles </li></ul></ul><ul><ul><li>Value indicators </li></ul></ul><ul><li>Debt </li></ul><ul><ul><li>Debt markets </li></ul></ul><ul><ul><li>Terminology </li></ul></ul><ul><ul><li>Yield and duration </li></ul></ul><ul><ul><li>Investment styles </li></ul></ul><ul><li>Investment restrictions </li></ul>
  61. 61. Equity Investment <ul><li>Investment Options </li></ul><ul><ul><li>Equity shares </li></ul></ul><ul><ul><li>Preference shares </li></ul></ul><ul><ul><li>Convertibles </li></ul></ul><ul><ul><li>Equity with Warrants </li></ul></ul>
  62. 62. Investment Strategies <ul><li>Growth and value </li></ul><ul><li>Active and passive </li></ul><ul><li>Large and small cap </li></ul><ul><li>Cyclical stock </li></ul><ul><li>Stock selection </li></ul><ul><ul><li>P/E ratio </li></ul></ul><ul><ul><li>Dividend yield </li></ul></ul><ul><ul><li>Undervalued companies </li></ul></ul><ul><li>Fundamental analysis </li></ul><ul><li>Technical analysis </li></ul><ul><li>Quantitative analysis </li></ul>
  63. 63. Debt Markets <ul><li>Tenor </li></ul><ul><ul><li>short and long </li></ul></ul><ul><ul><li>put and call options </li></ul></ul><ul><li>Interest payment </li></ul><ul><ul><li>Fixed and floating </li></ul></ul><ul><ul><li>Periodic vs discounted </li></ul></ul><ul><li>Credit quality </li></ul><ul><ul><li>Gilt, guaranteed, and others </li></ul></ul><ul><li>Traded and non-traded </li></ul>
  64. 64. Price and Yield <ul><li>Increase in rates reduces value of existing bonds. </li></ul><ul><li>Decrease in rates increases value of existing bonds </li></ul><ul><li>Price and yield are inversely related </li></ul><ul><li>The relationship between yield and tenor can be plotted as the yield curve. </li></ul>
  65. 65. Current Yield and YTM <ul><li>Coupon as a percentage of current market price </li></ul><ul><li>If we bought a 8% bond at Rs. 110, the current yield is: </li></ul><ul><li>= (8/110)*100 </li></ul><ul><li>= 7.27% </li></ul>
  66. 66. Yield to Maturity <ul><li>Rate at which present value of future cash flows equals the current market price. </li></ul><ul><li>Given price, YTM can be calculated through iteration. </li></ul><ul><li>Given YTM, price can be computed, using the YTM rate to discount the future cash flows. </li></ul>
  67. 67. Interest Rate Sensitivity <ul><li>Measured by a number called duration. </li></ul><ul><li>If duration is 3 years, and interest changes by 1%, price of the bond will change in the opposite direction, by 3%. </li></ul>
  68. 68. Example <ul><li>Example: Duration of a bond is 4 years. Yield spreads increases by 1.5%. what is the change in price? </li></ul><ul><li>= 1.5 *4 </li></ul><ul><li>= -6% </li></ul>
  69. 69. Credit Risk <ul><li>Probability of default by the borrower </li></ul><ul><li>Change in credit rating: </li></ul><ul><ul><li>downgrade increases the yield and decreases the price </li></ul></ul><ul><ul><li>upgrade decreases the yield and increases the price. </li></ul></ul>
  70. 70. Debt Portfolio Management Styles <ul><li>Buy and hold </li></ul><ul><ul><li>Portfolio exposed to interest rate risk. </li></ul></ul><ul><li>Duration management </li></ul><ul><ul><li>increase duration if rates are expected to fall </li></ul></ul><ul><ul><li>decrease duration if rates are expected to rise </li></ul></ul><ul><li>Credit selection </li></ul><ul><ul><li>invest in low grade bonds that are likely to be upgraded. </li></ul></ul>
  71. 71. Investment Restrictions <ul><li>Invest only in marketable securities. </li></ul><ul><li>Investment only on delivery basis </li></ul><ul><li>A mutual fund under all its schemes, cannot hold more than 10% of the paid-up capital of a company. </li></ul>
  72. 72. Investment Restrictions <ul><li>Not more than 10% of its NAV in a single company. </li></ul><ul><ul><li>Exceptions: Index Funds and Sectoral funds </li></ul></ul><ul><li>Rated investment grade issues of a single issuer cannot exceed 15% of the net assets </li></ul><ul><ul><li>Can be extended to 20%, with the approval of the trustees. </li></ul></ul><ul><li>Investment in unrated securities of one company cannot exceed 10% of the net assets of a scheme and not more than 25% of net assets of a scheme can be in such securities. </li></ul>
  73. 73. Investment Restrictions <ul><li>Investment in unlisted shares cannot exceed </li></ul><ul><ul><li>5% of net assets for an open-ended scheme, </li></ul></ul><ul><ul><li>10% of net assets for a close-ended scheme. </li></ul></ul><ul><li>Mutual funds can invest in ADRs/GDRs </li></ul><ul><ul><li>up to a maximum limit of 10% of net assets or $50 million, whichever is lower. </li></ul></ul><ul><ul><li>The limit for the mutual fund industry as a whole is $500 million. </li></ul></ul><ul><li>Mutual funds can also invest in a limited manner in treasury bonds and AAA rated corporate debt issued outside India. </li></ul>
  74. 74. Inter-scheme Transfer <ul><ul><li>Such transfers happen on a delivery basis, at market prices. </li></ul></ul><ul><ul><li>Such transfers should not result in significantly altering the investment objectives of the schemes involved. </li></ul></ul><ul><ul><li>Such transfer should not be of illiquid securities, as defined in the valuation norms. </li></ul></ul><ul><ul><li>One scheme can invest in another scheme, up to 5% of net assets. No fee is payable on these investments. </li></ul></ul>
  75. 75. Investment in Sponsor Company <ul><ul><li>A mutual fund scheme cannot invest in unlisted securities of the sponsor or an associate or group company of the sponsor. </li></ul></ul><ul><ul><li>A mutual fund scheme cannot invest in privately placed securities of the sponsor or its associates. </li></ul></ul><ul><ul><li>Investment by a scheme in listed securities of the sponsor or associate companies cannot exceed 25% of the net assets of the scheme </li></ul></ul>
  76. 76. Other Limits <ul><li>Mutual funds cannot make loans </li></ul><ul><li>Mutual funds can borrow upto 20% of net assets for a period not exceeding 6 months. </li></ul><ul><li>Derivatives can be used only after informing investors </li></ul><ul><li>Any change in investment objectives requires information to investor, and provision of option to exit at NAV, without exit load. </li></ul>
  77. 77. Accounting and Valuation Aspects <ul><li>Net assets </li></ul><ul><li>Accounting policy </li></ul><ul><li>Initial issue expenses </li></ul><ul><li>Operating expenses: Limits </li></ul><ul><li>AMC fees </li></ul><ul><li>Disclosure and reporting norms </li></ul><ul><li>Valuation norms </li></ul>
  78. 78. Net Assets <ul><li>Market value of investments </li></ul><ul><li>Plus current assets and other assets </li></ul><ul><li>Plus accrued income </li></ul><ul><li>Less current liabilities and other liabilities </li></ul><ul><li>Less accrued expenses </li></ul><ul><li>NAV = Net assets/Number of units </li></ul>
  79. 79. Factors Impacting NAV <ul><ul><ul><li>Sale and purchase of securities </li></ul></ul></ul><ul><ul><ul><ul><li>Cannot impact NAV by more than 2% </li></ul></ul></ul></ul><ul><ul><ul><li>Sale and repurchase of units </li></ul></ul></ul><ul><ul><ul><ul><li>Cannot impact NAV by more than 2% </li></ul></ul></ul></ul><ul><ul><ul><li>Valuation of assets </li></ul></ul></ul><ul><ul><ul><li>Accrual of income and expenses </li></ul></ul></ul><ul><ul><ul><ul><li>Cannot impact NAV by more than 1% </li></ul></ul></ul></ul>
  80. 80. Frequency of NAV Calculation <ul><li>Everyday by 8.00 p.m on AMFI website </li></ul><ul><li>Open ended funds: Daily </li></ul><ul><li>Close ended funds: weekly </li></ul><ul><li>Exempt funds: CEFs which are not listed (UTI’s Monthly income schemes) </li></ul>
  81. 81. Historic and Prospective NAV <ul><li>Business day definition and applicable NAV are stated in the offer document </li></ul><ul><li>Cut off time for each scheme is also announced. </li></ul><ul><li>Prospective NAV applies to applications made before the cut-off time. </li></ul>
  82. 82. Accounting Policies <ul><li>Investments to be marked to market according to SEBI Guidelines. </li></ul><ul><li>Unrealised appreciation cannot be distributed. </li></ul><ul><li>Profit or loss on average cost basis. </li></ul><ul><li>Dividend on ex-dividend date. </li></ul><ul><li>Sale and purchase accounted on trade date. </li></ul><ul><li>Brokerage and stamp duties are capitalised and added to cost of acquisition or sale proceeds. </li></ul>
  83. 83. Sources of Income <ul><li>Interest </li></ul><ul><li>Dividend </li></ul><ul><li>Profit from sale of investments </li></ul><ul><li>Other income </li></ul><ul><li>Extra-ordinary income </li></ul>
  84. 84. Initial Issue Expenses <ul><li>Expenses incurred in floating schemes </li></ul><ul><li>Limit of 6%; excess expenses to be borne by AMC/sponsor </li></ul><ul><li>CEF : Amortise on weekly basis until maturity </li></ul><ul><li>OEF : Amortise over period not exceeding 5 years </li></ul><ul><li>No-load fund: additional fees </li></ul>
  85. 85. Operating Expenses <ul><ul><ul><li>Investment management fees </li></ul></ul></ul><ul><ul><ul><li>Custodian’s fees </li></ul></ul></ul><ul><ul><ul><li>Trustee Fees </li></ul></ul></ul><ul><ul><ul><li>Registrar and transfer agent fees </li></ul></ul></ul><ul><ul><ul><li>Marketing and distribution expenses </li></ul></ul></ul><ul><ul><ul><li>Operating expenses </li></ul></ul></ul><ul><ul><ul><li>Audit fees </li></ul></ul></ul><ul><ul><ul><li>Legal expenses </li></ul></ul></ul><ul><ul><ul><li>Costs of mandatory advertisements and communications to investors </li></ul></ul></ul>
  86. 86. Limits on Expenses <ul><li>For net assets up to Rs. 100 crore: 2.5% </li></ul><ul><li>For the next Rs. 300 crore of net assets: 2.25% </li></ul><ul><li>For the next Rs. 300 crore of net assets: 2% </li></ul><ul><li>For the remaining net assets: 1.75% </li></ul><ul><li>Applied on the weekly average net assets of the mutual fund scheme. </li></ul><ul><li>On debt funds the limits on expenses are lower by 0.25%. </li></ul>
  87. 87. Expenses that cannot be charged <ul><ul><ul><li>Penalties and fines for infraction of laws. </li></ul></ul></ul><ul><ul><ul><li>Interest on delayed payments to unit holders. </li></ul></ul></ul><ul><ul><ul><li>Legal, marketing and publication expenses not attributable to any scheme. </li></ul></ul></ul><ul><ul><ul><li>Expenses on investment and general management. </li></ul></ul></ul><ul><ul><ul><li>Expenses on general administration, corporate advertising and infrastructure costs. </li></ul></ul></ul><ul><ul><ul><li>Expenses on fixed assets and software development expenses. </li></ul></ul></ul><ul><ul><ul><li>Such other costs as may be prohibited by SEBI. </li></ul></ul></ul>
  88. 88. Investment Management Fees <ul><li>For the first Rs. 100 crore of net assets: 1.25% </li></ul><ul><li>For net assets exceeding Rs. 100 crore: 1.00% </li></ul><ul><li>1% higher fee for no load funds </li></ul><ul><li>Balance of DRE not included in net assets for computing investment management fee and expense limits. </li></ul>
  89. 89. Reporting Requirements <ul><li>Audited accounts within 6 months of closure of accounts. </li></ul><ul><li>Publish within 30 days of the closure of the half-year, unaudited abridged accounts. </li></ul><ul><li>Summary of the accounts has to be mailed to all unit holders. </li></ul><ul><li>File with SEBI: </li></ul><ul><ul><li>A copy of the annual report </li></ul></ul><ul><ul><li>Six monthly unaudited reports </li></ul></ul><ul><ul><li>Quarterly movement in net assets of the fund </li></ul></ul><ul><ul><li>Quarterly portfolio statements </li></ul></ul>
  90. 90. Specific Disclosures <ul><li>Complete portfolio to be disclosed every six months. </li></ul><ul><ul><li>Industry practice: monthly disclosure. </li></ul></ul><ul><li>Any item of expenditure which is more than 10% of total expenses </li></ul><ul><li>NPAs, provisioning, NPAs as % of total assets. </li></ul><ul><li>Number of unit holders holding more than 25% of unit capital. </li></ul>
  91. 91. Non Performing Asset <ul><li>An asset shall be classified as an NPA, </li></ul><ul><li>if the interest and/or principal amount have not been received or have remained outstanding for one quarter , from the day such income/installment has fallen due. </li></ul><ul><li>Such assets will be classified as NPAs, soon after the lapse of a quarter from the date on which payments were due. </li></ul>
  92. 92. Treatment of NPAs <ul><li>Accrual to be stopped. </li></ul><ul><li>Income accrued until date of classification to be provided for. </li></ul><ul><li>Provisioning for principal due </li></ul><ul><ul><li>In graded manner after 3 months of classification. </li></ul></ul><ul><ul><li>Complete write off in 15 months from classification </li></ul></ul>
  93. 93. Valuation Principles <ul><li>Market price for all frequently traded securities </li></ul><ul><li>Illiquid and thinly traded equity </li></ul><ul><ul><li>Valuation procedure </li></ul></ul><ul><li>Debt: </li></ul><ul><ul><li>< 182 days accrual principal. </li></ul></ul><ul><ul><li>> 182 days common valuation methodology </li></ul></ul><ul><li>Illiquid securities to not exceed 15% of net assets. </li></ul>
  94. 94. Valuation: Equity <ul><li>Market price for Liquid shares </li></ul><ul><ul><li>Price should not be more than 30 days old </li></ul></ul><ul><li>Fair valuation for Illiquid shares </li></ul><ul><ul><li>Earnings based SEBI approved model </li></ul></ul><ul><li>Fair Valuation for Thinly traded shares </li></ul><ul><ul><li>Less than Rs. 5 lakh value and Less than 50,000 shares </li></ul></ul>
  95. 95. Valuation Debt <ul><li>YTM based for Gilt and Corporate securities with investment grade rating </li></ul><ul><li>25% discount for speculative grade performing assets </li></ul><ul><li>NPA norms for NPAs </li></ul><ul><li>Accrual for money market securities </li></ul>
  96. 96. Liquid securities <ul><li>Last traded price in the exchange where the security is principally traded. </li></ul><ul><li>Previous traded date as long as such date is not over 30 days ago. </li></ul>
  97. 97. Thinly Traded Securities <ul><ul><ul><li>Equity shares </li></ul></ul></ul><ul><ul><ul><ul><li>Traded value in a month is less than Rs. 5 lakhs; and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Total volume of shares traded is less than 50,000 shares a month. </li></ul></ul></ul></ul><ul><ul><ul><li>Debt security </li></ul></ul></ul><ul><ul><ul><ul><li>Traded value of less than Rs. 15 crore in the 30 days prior to the valuation date. </li></ul></ul></ul></ul>
  98. 98. Valuation of Thinly Traded Equity <ul><li>Book value of the share </li></ul><ul><li>Earnings capitalisation value </li></ul><ul><ul><li>Discount the industry P/E by 75% </li></ul></ul><ul><li>Average of the two methods </li></ul><ul><ul><li>10% discount for illiquidity </li></ul></ul><ul><li>Earning capitalisation is zero if </li></ul><ul><ul><li>EPS if negative </li></ul></ul><ul><ul><li>Accounts not available for 9 months after closing date. </li></ul></ul><ul><li>If illiquid securities are more than 5% of the portfolio, independent valuation to be done </li></ul>
  99. 99. Valuation of a Thinly Traded Debt Security (<182 Days) <ul><li>For example, if a security was issued at Rs. 90 and redeemable at Rs. 100, after 364 days, the accrued interest for each day is </li></ul><ul><li>= 10/364 </li></ul><ul><li>= 0.02747 </li></ul><ul><li>The value of the security is increased by 2.747 paise every day, so that the security is worth Rs. 100 on the date of maturity. </li></ul><ul><li>If it has to be valued 200 days after issuance, its value is </li></ul><ul><li>90+(0.02747*200) </li></ul><ul><li>= 95.494 </li></ul>
  100. 100. Valuation of other debt securities (>182 days) <ul><li>G-Secs are valued at market prices or using the CRISIL Gilt valuer. </li></ul><ul><li>Corporate bonds are valued at market prices or using the CRISIL Bond valuer. </li></ul><ul><li>Both these methods use duration to classify bonds and assign a rate for each duration bucket. </li></ul>
  101. 101. Session 6: Risk and Return <ul><li>Return Methods </li></ul><ul><ul><li>Change in NAV </li></ul></ul><ul><ul><li>Total Return </li></ul></ul><ul><ul><li>Total Return with dividend re-investment </li></ul></ul><ul><ul><li>CAGR </li></ul></ul><ul><li>Risk </li></ul><ul><ul><li>Standard deviation </li></ul></ul><ul><ul><li>Beta and Ex-Marks </li></ul></ul><ul><li>Benchmark and comparison </li></ul>
  102. 102. Computing Returns <ul><li>Sources of return </li></ul><ul><ul><li>Dividend </li></ul></ul><ul><ul><li>Change in NAV </li></ul></ul><ul><li>Return = Income earned for amount invested over a given period of time </li></ul><ul><li>Standardise as % per annum </li></ul>
  103. 103. Alternate Methodologies <ul><li>Computing return </li></ul><ul><ul><li>Percentage change in NAV. </li></ul></ul><ul><ul><li>Simple total return </li></ul></ul><ul><ul><li>ROI or Total return with dividend re-investment </li></ul></ul><ul><ul><li>Compounded rate of growth </li></ul></ul>
  104. 104. Percentage Change in NAV <ul><li>Assume that change in NAV is the only source of return. </li></ul><ul><li>Example: </li></ul><ul><ul><li>NAV of a fund was Rs. 23.45 at the beginning of a year </li></ul></ul><ul><ul><li>Rs. 27.65 at the end of the year. </li></ul></ul><ul><li>Percentage change in NAV </li></ul><ul><li>= (27.65 – 23.45)/23.45 *100 </li></ul><ul><li>= 17.91% </li></ul>
  105. 105. Annualising the Rate of Return <ul><li>If NAV on Jan 1, 2001 was Rs. 12.75 and the NAV on June 30, 2001 was Rs. 14.35, </li></ul><ul><li>Percentage change in NAV </li></ul><ul><li>= (14.35 – 12.75)/12.75 x 100 </li></ul><ul><li>= 12.55% </li></ul><ul><li>Annualised return: </li></ul><ul><li>= 12.55 x 12/6 </li></ul><ul><li>= 25.10% </li></ul>
  106. 106. Total Return <ul><li>Investor bought units of a mutual fund scheme at a price of Rs.12.45 per unit. </li></ul><ul><li>He redeems the investment a year later, at Rs. 15.475 per unit. </li></ul><ul><li>During the year, he also receives dividend at 7%. </li></ul><ul><li>The rate of return on his investment can be computed as </li></ul><ul><li>=((15.475 – 12.45) + 0.70)/12.45 x 100 </li></ul><ul><li>= (3.725/12.45) x 100 </li></ul><ul><li>= 29.92% </li></ul>
  107. 107. Total Return or ROI Method <ul><li>( Value of holdings at the end of the period - value of holdings at the beginning of the period)/ value of holdings at the beginning of the period x 100 </li></ul><ul><li>Value of holdings at the beginning of the period = number of units at the beginning x begin NAV. </li></ul><ul><li>Value of holdings end of the period = (number of units held at the beginning + number of units re-invested) x end NAV. </li></ul><ul><li>Number of units re-invested = dividends/ex dividend NAV. </li></ul>
  108. 108. ROI Method: Example <ul><li>An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2001. On June 30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31, 2001, the fund’s NAV was Rs. 12.25. </li></ul><ul><li>What is the total return on investment with dividends re-invested? </li></ul>
  109. 109. ROI Method: Solution <ul><li>The begin period value of the investment is = 10.5 x 100 = Rs. 1050 </li></ul><ul><li>Number of units reinvested </li></ul><ul><li>= 100/10.25 = 9.756 units </li></ul><ul><li>End period value of investment </li></ul><ul><li>= 109.756 x 12.25 = Rs. 1344.51 </li></ul><ul><li>The return on investment is </li></ul><ul><li>=(1344.51-1050)/1050 x 100 </li></ul><ul><li>= 28.05% </li></ul>
  110. 111. Compounded Average Growth Rate <ul><li>CAGR is the rate at which investment has grown from begin point to the end point, on an annual compounding basis. </li></ul><ul><li>V 0 (1+r) n = V 1 </li></ul><ul><li>r =((V 1 /V 0 ) 1/n )-1 </li></ul><ul><li>Where n is the holding period in years. </li></ul>
  111. 112. CAGR: Example 1 <ul><li>An investor buys 100 units of a fund at Rs. 10.5 on January 6, 2001. On June 30, 2001 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On March 12, 2002, the fund’s NAV was Rs. 12.25. </li></ul><ul><li>Compute the CAGR. </li></ul>
  112. 113. CAGR: Solution <ul><li>The begin period value of the investment is </li></ul><ul><li>= 10.5 x 100 = Rs. 1050 </li></ul><ul><li>Number of units reinvested </li></ul><ul><li>= 100/10.25 = 9.756 units </li></ul><ul><li>End period value of investment </li></ul><ul><li>= 109.756 x 12.25 = Rs. 1344.51 </li></ul><ul><li>Holding period = 6/01/01 - 12/3/02 </li></ul><ul><li>= 431 days </li></ul><ul><li>The CAGR is </li></ul><ul><li>=(1344.51/1050) 365/431 - 1 x 100 </li></ul><ul><li>= 23.29% </li></ul>
  113. 114. Returns: Industry Practice <ul><li>Growth Option: CAGR implicit in the change in holding period NAVs. </li></ul><ul><li>Dividend Option: CAGR implicit in the change in value over the holding period, assuming re-investment of dividend at ex-dividend NAV. </li></ul><ul><li>Less then 1 year, simple return without compounding or annualisation. </li></ul><ul><li>Some funds use simple annualised return, without compounding. </li></ul>
  114. 115. SEBI Regulations <ul><li>Standard measurements and computation </li></ul><ul><li>Compounded annual growth rate for funds over 1 year old. </li></ul><ul><li>Return for 1,3 and 5 years, or since inception, which ever is later. </li></ul><ul><li>No annualisation for periods less than a year. </li></ul>
  115. 116. Risk in Mutual Fund Returns <ul><li>Risk arises when actual returns are different from expected returns. </li></ul><ul><li>Historical average is a good proxy for expected return. </li></ul><ul><li>Standard deviation is an important measure of total risk. </li></ul><ul><li>Beta co-efficient is a measure of market risk. </li></ul><ul><li>Ex-marks is an indication of extent of correlation with market index. </li></ul>
  116. 117. Benchmarks <ul><li>Relative returns are important than absolute returns for mutual funds. </li></ul><ul><li>Comparable passive portfolio is used as benchmark. </li></ul><ul><li>Usually a market index is used. </li></ul><ul><li>Compare both risk and return, over the same period for the fund and the benchmark. </li></ul><ul><li>Risk-adjusted return, is the return per unit of risk. </li></ul>
  117. 118. SEBI Guidelines <ul><li>Benchmark should reflect the asset allocation </li></ul><ul><li>Same as stated in the offer document </li></ul><ul><li>Growth fund with more than 60% in equity to use a broad based index. </li></ul><ul><li>Bond fund with more than 60% in bonds to use a bond market index. </li></ul><ul><li>Balanced funds to use tailor-made index </li></ul><ul><li>Liquid funds to use money market instruments. </li></ul>
  118. 119. Other Measures of Performance <ul><li>Tracking error </li></ul><ul><ul><li>Tracking error for index funds should be nil. </li></ul></ul><ul><li>Credit quality </li></ul><ul><ul><li>Rating profile of portfolio should be studied </li></ul></ul><ul><li>Expense ratio </li></ul><ul><ul><li>Higher expense ratios hurt long term investors </li></ul></ul><ul><li>Portfolio turnover </li></ul><ul><ul><li>Higher for short term funds and lower for longer term funds. </li></ul></ul><ul><li>Size and portfolio composition </li></ul>
  119. 120. Session 7: Financial Planning <ul><li>Concept of financial planning </li></ul><ul><li>Mapping life cycles and wealth cycles </li></ul><ul><li>Financial products </li></ul><ul><li>Asset allocation </li></ul><ul><li>Model portfolios </li></ul><ul><li>Fund selection </li></ul>
  120. 121. Concept of Financial Planning <ul><li>Financial planning </li></ul><ul><li>Identifies all the financial needs of a person </li></ul><ul><li>Translates the needs into monetarily measurable goals </li></ul><ul><li>These goals can be short term, medium term and long term </li></ul><ul><li>Plans the financial investments that will allow these goals to be met. </li></ul>
  121. 122. <ul><li>Is a person who uses the financial planning process to help another person determine how to meet his or her life goals </li></ul><ul><li>Key functions of a FP is to help people identify their financial planning needs, priorities and the products that are most suitable to meet their needs </li></ul>Who is a Financial Planner?
  122. 123. <ul><li>Provides direction and meaning to financial decisions </li></ul><ul><li>To understand how each financial decision effects other areas of one’s finances </li></ul><ul><li>By viewing each financial decision as part of a whole one can consider its short and long term effects on one’s life goals </li></ul>Benefits of Financial Planning
  123. 124. MFs in Financial Planning <ul><li>Forms the core foundation and building block for any type of FP </li></ul><ul><li>Variety of products available to suit any need or combination of needs </li></ul><ul><li>Barring life and property insurance, rest of the product portfolio can be created out of bouquet of MFs </li></ul>
  124. 125. <ul><li>Strong potential demand for such services </li></ul><ul><li>Limited supply of financial planners </li></ul><ul><li>Ability to establish Long term relationships </li></ul><ul><li>Ability to build a profitable business </li></ul>Why should a Fund distributor become an FP
  125. 126. Attributes of a Good Financial Planner <ul><li>Understands: </li></ul><ul><li>The universe of investment products </li></ul><ul><li>Risk-return attributes </li></ul><ul><li>Tax and estate Planning </li></ul><ul><li>Has the ability to convert life cycles of investors into need and preference based financial products </li></ul><ul><li>Organised approach to work </li></ul><ul><li>Excellent communication and interpersonal skills </li></ul>
  126. 127. Classification of Investors <ul><li>Wealth cycle based classification </li></ul><ul><li>Life cycle based classification </li></ul>
  127. 128. Process of FP in Practice <ul><li>Step I: Establish and define the relationship with the client </li></ul><ul><li>Step II: Define the client’s goals </li></ul><ul><li>Step III: Analyse and evaluate client’s financial status </li></ul><ul><li>Step IV: Determine and shape the client’s risk tolerance level </li></ul>
  128. 129. Process of FP in practice <ul><li>Step V: Ascertain client’s tax situation </li></ul><ul><li>Step VI: Recommend the appropriate asset allocation and specific investments </li></ul><ul><li>Step VII: Executing the plan </li></ul><ul><li>Step VIII: Periodic Review </li></ul>
  129. 130. Products Available <ul><li>Physical Assets – Gold & Real Estate </li></ul><ul><li>Bank Deposits </li></ul><ul><li>Corporate –Shares, Bonds, Debentures & Fixed Deposits </li></ul><ul><li>Government – G. Secs, PPF, RBI Relief Bonds and other personal Investments </li></ul><ul><li>Financial Institutions – Bonds, Shares </li></ul><ul><li>Insurance Companies – Insurance Policies </li></ul>
  130. 131. Bank Deposits <ul><li>Available since a long period of time </li></ul><ul><li>Large geographical network – transactions made easy & convenient </li></ul><ul><li>Fund transfer mechanism available </li></ul><ul><li>Perception of bank deposits being free of default; Deposits guaranteed up to Rs 1 lakh per depositor </li></ul><ul><li>Electronic facilities make it liquid and easy to use </li></ul>
  131. 132. PPF <ul><li>15 years deposit product made available through banks. </li></ul><ul><li>9% p.a. interest payable on monthly balances </li></ul><ul><li>Minimum Rs. 100 & maximum Rs. 60,000 p.a investment allowed. </li></ul><ul><li>Tax benefits u/s 88 under IT Act. Limited by taxable income slabs. </li></ul><ul><li>Interest receipt and withdrawal of principal exempt from tax. </li></ul><ul><li>Limited liquidity available. </li></ul>
  132. 133. RBI Relief Bonds <ul><li>Issued by banks on behalf of the RBI </li></ul><ul><li>Tenure of five years </li></ul><ul><li>8% p.a. interest payable s.a. </li></ul><ul><li>Proposed to be converted to floating rate instrument linked to government yields </li></ul><ul><li>Option to receive or reinvest interest </li></ul><ul><li>Interest income exempt from tax </li></ul><ul><li>Limit of Rs.2 lakh per annum, except for severance benefits. </li></ul>
  133. 134. Other Government Schemes <ul><li>IVP & KVP issued by central government & sold by post offices </li></ul><ul><li>Interest is taxable </li></ul><ul><li>Investor identity is protected and investment in cash is possible </li></ul>
  134. 135. Other Government Schemes <ul><li>Post office savings and RD – gives fixed rate of interest but are not liquid. </li></ul><ul><li>These are government guaranteed deposits </li></ul><ul><li>Attractive for their safety and cash investment options </li></ul>
  135. 136. Instruments issued by Companies <ul><li>Commercial Paper </li></ul><ul><li>Debentures </li></ul><ul><li>Equity Shares </li></ul><ul><li>Preference Shares </li></ul><ul><li>Fixed Deposits </li></ul><ul><li>Bonds of FI </li></ul>
  136. 137. How to Compare Products <ul><li>Compare options by nature of investments – Characteristics, benefits and risks. </li></ul><ul><li>Current performance and suitability – Taxability, age, risk profile. </li></ul>
  137. 138. Why MF is the Best Option <ul><li>Mutual funds combine the advantages of each of the investment products </li></ul><ul><li>Dispense the short comings of the other options </li></ul><ul><li>Returns get adjusted for the market movements </li></ul>
  138. 139. Strategies for Investors <ul><li>Harness the power of compounding </li></ul><ul><li>Start early </li></ul><ul><li>Have realistic expectations </li></ul><ul><li>Invest regularly </li></ul>
  139. 140. Useful Strategies <ul><li>Rupee Cost Averaging </li></ul><ul><li>Value Averaging </li></ul><ul><li>Jacob’s rebalancing strategy </li></ul><ul><li>Graham’s 50:50 rebalancing strategy </li></ul>
  140. 141. Rupee Cost Averaging <ul><ul><li>Invest regularly a predetermined amount </li></ul></ul><ul><ul><li>Invests in more units when the market is low; less when the markets are high. </li></ul></ul><ul><ul><li>Reduces the average cost of purchase </li></ul></ul>
  141. 142. Rupee Cost Averaging
  142. 143. Value Averaging <ul><ul><li>Invest regularly to achieve a predetermined value </li></ul></ul><ul><ul><li>Books profits at a high, and adds units at the low, and enables meeting financial goals. </li></ul></ul><ul><ul><li>Reduces the average cost of purchase </li></ul></ul>
  143. 144. Value Averaging
  144. 145. Asset Allocation and Model Portfolios <ul><li>Deciding the allocation of funds amongst equity, debt and money market. </li></ul><ul><li>Incorporating product, investor profile and preferences in the portfolio. </li></ul><ul><li>Equity, debt and money market products are called asset classes. Allocating resources to each of these is called asset allocation. </li></ul>
  145. 146. Graham’s Model Portfolio <ul><li>Based on the 50:50 rule. </li></ul><ul><li>Basic managed portfolio. </li></ul><ul><li>Basic indexed portfolio. </li></ul><ul><li>Simple managed portfolio. </li></ul><ul><li>Complex managed portfolio. </li></ul><ul><li>Readymade portfolio. </li></ul>
  146. 147. Bogle’s Strategic Asset Allocation <ul><li>Combine age, risk profile and preferences in asset allocation </li></ul><ul><ul><li>Older investors in distribution phase </li></ul></ul><ul><ul><ul><li>50% equity;50% debt </li></ul></ul></ul><ul><ul><li>Younger investors in distribution phase </li></ul></ul><ul><ul><ul><li>60% equity; 40% debt </li></ul></ul></ul><ul><ul><li>Older investors in accumulation phase </li></ul></ul><ul><ul><ul><li>70% equity; 30% debt </li></ul></ul></ul><ul><ul><li>Younger investors in accumulation phase </li></ul></ul><ul><ul><ul><li>80% equity; 20% debt </li></ul></ul></ul>
  147. 148. Fixed and Flexible Asset Allocation <ul><li>Fixed ratio between asset classes </li></ul><ul><ul><li>Portfolio has to be periodically re-balanced </li></ul></ul><ul><ul><li>Disciplined approach </li></ul></ul><ul><ul><li>Enables investor to book profits in a rising market and invest more in a falling market. </li></ul></ul><ul><li>Flexible allocation </li></ul><ul><ul><li>No re-balancing; asset class proportions can vary when prices change. </li></ul></ul><ul><ul><li>If equity returns are higher than debt returns, equity allocation will go up at a faster rate. </li></ul></ul>
  148. 149. Developing a Model Portfolio <ul><li>Develop long term goals </li></ul><ul><ul><li>Investment avenues, time horizon, return and risk </li></ul></ul><ul><li>Determine asset allocation </li></ul><ul><ul><li>Allocation to broad asset classes </li></ul></ul><ul><li>Determine sector distribution </li></ul><ul><ul><li>Allocation of sectors of the mutual fund industry </li></ul></ul><ul><li>Select specific fund schemes for investment </li></ul><ul><ul><li>Compare products and choose actual funds to invest in </li></ul></ul>
  149. 150. Jacob’s Model Portfolios <ul><li>Accumulation phase </li></ul><ul><ul><li>Diversified equity: 65 - 80% </li></ul></ul><ul><ul><li>Income and gilt funds: 15 - 30% </li></ul></ul><ul><ul><li>Liquid funds: 5% </li></ul></ul><ul><li>Distribution phase </li></ul><ul><ul><li>Diversified equity: 15 - 30% </li></ul></ul><ul><ul><li>Income and gilt funds: 65 - 80% </li></ul></ul><ul><ul><li>Liquid funds: 5% </li></ul></ul>
  150. 151. Fund Selection <ul><li>Equity funds: Characteristics </li></ul><ul><ul><li>Fund category </li></ul></ul><ul><ul><ul><li>Suitability to investor objective </li></ul></ul></ul><ul><ul><li>Investment style </li></ul></ul><ul><ul><ul><li>Growth vs Value </li></ul></ul></ul><ul><ul><li>Age of the fund </li></ul></ul><ul><ul><ul><li>Experience preferred to new fund </li></ul></ul></ul><ul><ul><li>Fund management experience </li></ul></ul><ul><ul><li>Size of the fund </li></ul></ul><ul><ul><ul><li>Larger funds have lower costs </li></ul></ul></ul><ul><ul><li>Performance and risk </li></ul></ul>
  151. 152. Equity Funds: Selection Criteria <ul><li>Percentage holding in cash. </li></ul><ul><li>Concentration in portfolio. </li></ul><ul><li>Market capitalisation of the fund. </li></ul><ul><li>Portfolio turnover. </li></ul><ul><li>Risk Statistics </li></ul><ul><ul><li>Beta </li></ul></ul><ul><ul><li>Ex-Marks </li></ul></ul><ul><ul><li>Gross dividend yield </li></ul></ul><ul><ul><li>Funds with low beta, high ex-marks and high gross dividend yield is preferable </li></ul></ul>
  152. 153. Debt Funds: Selection Criteria <ul><ul><li>A smaller or new debt fund may not necessarily be risky </li></ul></ul><ul><ul><li>Total return rather than YTM is important </li></ul></ul><ul><ul><li>Expense very important </li></ul></ul><ul><ul><ul><li>High expense ratios lead to yield sacrifice </li></ul></ul></ul><ul><ul><li>Credit quality </li></ul></ul><ul><ul><ul><li>Better the rating of the holdings, safer the fund </li></ul></ul></ul><ul><ul><li>Average maturity </li></ul></ul><ul><ul><ul><li>Higher average maturity means higher duration and interest rate risk </li></ul></ul></ul>
  153. 154. Money Market Funds <ul><ul><li>Liquidity and high turnover rate </li></ul></ul><ul><ul><ul><li>Shorter term instruments are turned over more frequently. </li></ul></ul></ul><ul><ul><li>Protection of principal invested </li></ul></ul><ul><ul><ul><li>NAV fluctuation limited due to low duration and low levels of interest rate risk. </li></ul></ul></ul><ul><ul><li>Credit quality of portfolio </li></ul></ul><ul><ul><li>Low expense ratio </li></ul></ul>
  154. 155. Thank you and all the very best!!