The document discusses the regulatory structure and key constituents of mutual funds in India. It states that mutual funds are structured as trusts with a sponsor, board of trustees, and asset management company (AMC). The trustees are responsible for protecting investors' interests, appointing the AMC, and overseeing operations. The AMC manages the day-to-day activities of the fund such as launching schemes, marketing to investors, and portfolio management. Other constituents include custodians, registrars, brokers, and distributors. The key regulators are SEBI, RBI, and the Ministry of Finance.

1. Mutual Funds

2. Concept and Role
Of Mutual Funds

3. What is a Mutual Fund ?
• It is a pool of money, collected from investors, and is invested
according to certain investment objectives
• The ownership of the fund is thus joint or mutual, the fund
belongs to all investors.
A mutual funds business is to invest the funds thus
collected, according to the the wishes of the investors who
created the pool
• e.g. money market mutual fund seeks investors to invest
predominantly in Money Market Instruments

4. Important Characteristics of a Mutual Fund
• The ownership is in the hands of the investors who have
pooled in their funds.
• It is managed by a team of investment professionals and
other service providers.
• The pool of funds is invested in a portfolio of marketable
investments.
• The investors share is denominated by ‘units’ whose
value is called as Net Asset Value (NAV) which changes
everyday.
• The investment portfolio is created according to the
stated investment objectives of the fund.

5. Advantages of Mutual Funds to Investors
• Portfolio diversification
• Professional management
• Reduction in risk
• Reduction in transaction costs
• Liquidity
• Convenience and flexibility
• Safety – well regulated by SEBI

6. What are the disadvantages of investing
through Mutual Funds?
• No control over the costs. Regulators limit the
expenses of Mutual Funds. Fees are paid as percentage
of the value of investment.
• No tailor made portfolios.
• Managing a portfolio of funds.( Investor has to hold a
portfolio for funds for different objectives )

7. Important phases in Indian Mutual Fund Industry
1963 – 1987
UTI sole player in the industry, created by an Act of Parliament ,1963
UTI launches first product Unit Scheme 1964
UTI creates products such as MIP's, children plans ,offshore funds etc
MASTERSHARE – Ist Diversified Equity Investment Scheme in India.
INDIA Fund – Ist indian offshore fund lauched in August 1996.
1987 - 1993
In 1987 Public Sector Banks and FI's got permission to set up MF.
SBI mutual fund was the first non - UTI mutual fund
1993 - 1996
In 1993, Mutual Fund Industry was open to private players.
SEBI's first set of regulations for the industry formulated in 1993
Significant innovations, mostly initiated by private players
1996 - 1999
Implementation of new SEBI regulations led to rapid growth
Bank mutual funds were recast as per SEBI guidelines
UTI came under voluntary SEBI supervision.
Dividends made tax free in 1999.
1999 - 2000
Rapid growth, significant increase in corpus of private players
Tax break offered created arbitrage opportunities
Bond funds and liquid funds registered highest growth

8. Emergence of Large and Uniform Industry
• UTI Act repealed in 2003.
• UTI now does not have a special status.( now under
SEBI)
• Size of industry was 150000 crore in 2005.
• Merger and Acquisitions happening.
• Fidelity, largest MF has entered.
• As on March 2006 - 29 Funds.

9. Mutual Fund Products

10. What are open-ended funds?
• In an open ended fund, investors can buy and sell units of
the fund, at NAV related prices, at any time, directly from
the fund.
• Open ended scheme are offered for sale at a pre-
specified price, say Rs. 10, in the initial offer period. After a
pre-specified period say 30 days, the fund is declared open
for further sales and repurchases
• Investors receive account statements of their holdings,
•The number of outstanding units goes up and down
• The unit capital is not fixed but variable.

11. What are closed ended funds?
• A closed-ended fund is open for sale to investors for a
specified period, after which further sales are closed.
• Any further transactions happen in the secondary market
where closed-end funds are listed.
• The price at which the units are sold or redeemed depends
on the market prices, which are fundamentally linked to the
NAV.
• The corpus of closed ended funds remains unchanged.
•The unit capital is fixed, one time sale.

12. Types of Funds - By Investment
Objective
Equity Debt Money Market
Equity Funds
Index Funds
Sector Funds
Fixed Income
Funds
GILT Funds
Money Market
Mutual Funds
Balanced Funds Liquid Funds

13. What are equity funds?
• Predominantly invest in equity shares of the company.
Choices in equity funds.
• Aggressive Growth Funds
• Growth Funds
• Specialty Funds
 Sector Funds
 Small Cap Equity Funds
 Diversified Equity Funds
 ELSS
 Index funds
 Value Funds

14. What are liquid and money market funds?
• These debt funds invest only in instruments with
maturities less than a year.
• The investment portfolio is very liquid and enables
investors to hold their investments for very short
horizons of a day or more.
What are Gilt Funds?
• It invests only in securities that are issued by the
Government and therefore do not carry any credit risk
• It invests in both long-term and short-term paper.
• Ideal for institutional investors who have to invest in Govt.
Securities
• Enables retail Participation

15. ELSS ( Equity linked saving scheme(
• 3 year lock in period
• Minimum investment of 90% in equity markets at all
times
• So ELSS investment automatically leads to investment
in equity shares.
• Open or closed ended.
• Eligible under Section 80 C upto Rs.1 lakh allowed
• Dividends are tax free.
• Benefit of long term capital gain taxation.

16. How are funds different in terms of their risk
profile?
Equity Funds High level of Return , but has a high level of risk too
Debt Funds Returns comparatively less risky than equity funds
Liquid and Money
Market Funds
Provide stable but low level of return
Investors have to face the risk- return trade off

17. Important points
• IN USA, a MF is constituted as an investment company
and an investor buys the share of the fund.
• In USA, all mutual funds are open ended.
• In USA, funds are also classified as Tax Exempt and
Non Tax Exempt Funds
• In India, classified as Open – Closed ended, Load and
No Load Funds.
• Mutual Fund is NOT a company, it can be called as a
portfolio of stocks, bonds and other securites or it can be
called as pool of funds used to purchase securities on
behalf of investors or a collective investment vehicle.

18. Fund Structure and
Constituents

19. How does a Mutual Fund work?
SEB
I
AMC
Unit holders
Savings
Units
Trust Investments
Returns
Trust
AMCCustodian
Registrar

20. Unit Trusts – Constituents
• Fund Sponsor.
• Mutual Fund as Trust.
• Asset Management Company.
• Other fund constituents.
• Custodian and Depositories.
• Bankers.
• Transfer Agent.
• Distributors.

21. What is the regulatory structure of MF in India?
• The structure of mutual funds in India is governed by
SEBI(Mutual Fund)Regulations, 1996.
• It is mandatory to have a three tier structure of
Sponsor-Trustee-Asset Management Company.
• The Sponsor is the promoter and he appoints the
Trustees who are responsible to the investors of the
fund.
• AMC is the business face of the mutual fund as it
manages all the affairs of the fund.

22. Who can be the Sponsor? What does the Sponsor do?
• The sponsor establishes the mutual fund and registers
the same with SEBI
• Sponsor appoints the Trustees, custodians and the AMC
with prior approval of SEBI and in accordance with SEBI
Regulations
• Sponsor must have a 5-year track record of business
interest in the financial markets
• Sponsor must have been profit making in at least 3 of the
above 5 years.
• Sponsor must contribute at least 40% of the AMC

23. How are Mutual Funds Structured?
• In India Mutual fund is the form of a Public Trust created
under the Indian trust Act. 1882.
• In India, Mutual funds are organized as trusts. The trust is
either managed by a Board of Trustees, or by a trustee
company.
• The trustees hold the unit holders money in a fiduciary
capacity.(Money belongs to unit holders)
• In legal sense, the investors are the beneficial owners of
investments.

24. • There must be at least 4 members in the Board of
Trustees and at least 2/3 of the members of the board of
trustees must be independent.
• Trustee of one mutual fund can not be a trustee of
another mutual fund.

25. What are the rights of the Trustees?
• Trustees appoint the AMC, in consultation with the
sponsor and according to SEBI Regulations
• All Mutual Fund Schemes floated by the AMC have to be
approved by the Trustees
• Trustees can seek information from the AMC regarding
the Operations and compliance of the mutual fund.
• Trustees can seek remedial actions from AMC, and in
cases dismiss the AMC
• Trustees review and ensure that net worth of the AMC is
according to stipulated norms, every quarter

26. What are the obligations of the Trustees?
• Trustees must ensure that the transactions of the mutual
fund are in accordance with the trust deed
• Trustees must ensure that the AMC has systems and
procedures in place, and that all the fund constituents are
appointed
• Trustees must ensure due diligence on the part of AMC in
the appointment of constituents and business associates
• Trustees must furnish to the SEBI, on half yearly basis a
report on the activities of the AMC
• Trustees must ensure compliance with SEBI regulations

27. Compliance with SEBI’s Requirements
• Sebi has categorised obligations of Trust into General
Due Diligence and Specific Due Diligence.
• General Due Diligence – Due care in appointing AMC
Directors, observing irregularities in functioning. The
purpose is to ensure that trust properties are protected
by competent persons and agencies and to ensure that
appointed constituents are duly registered with SEBI.
• Specific Due Diligence – Trustees must appoint
independent auditors and obtain periodic audit reports.
To obtain Compliance Test reports from the AMC once
every 2 months. To prescribe a Code of Ethics for
Trustees and AMC personnel.

28. Regulatory Requirements for the AMC
• Only SEBI registered AMC can be appointed as investment
managers of mutual funds
• AMC must have a minimum net worth of Rs. 10 Cr., at all times
• An AMC cannot be an AMC or Trustee, of another Mutual Fund
• AMC’s cannot indulge in any other business, other than that
of asset management
• At least half of the members of the Board of an AMC, have to
be independent
• The 4th Schedule of SEBI regulations spells out rights and
obligations of both trustees and AMC’s

29. Who appoints the AMC and defines its functions?
• The trustees, on the advice of the sponsors usually
appoint the AMC
• The AMC is usually a private limited co. in which the
sponsors and their associates or joint venture partners
are shareholders
• The AMC has to be a SEBI registered entity, with a
minimum net worth of Rs. 10 Cr.
• The trustees sign an investment management agreement
with the AMC, which spells out the functions of the AMC

30. How are Indian mutual funds organised?
• Though the trust is the mutual fund, the AMC is its
operational face
• The AMC is the first functionary to be appointed and is
involved in the appointment of all other functionaries
• The AMC structures the mutual fund products, markets
them and mobilises the funds, manages the funds and
services the investors
• All the functionaries are required to report to the trustees
who lay down the ground rules and monitor their working

31. What are the restrictions on the AMC ?
• AMC’ s cannot launch a scheme without the prior approval
of the trustees
• AMC’ s have to provide full details of investments by
employees and Board members in all cases where the
investment exceeds Rs.1 Lakh
• AMC’ s cannot take up any activity that is in conflict with
the activities of the mutual fund

32. What do the Registrar and Transfer Agents do?
They are responsible for investor servicing functions
• Process investor applications
• Record details of investors
• Send information to investors
• Process dividend payout
• Incorporate changes in investor information
• Keeping investor information up to date

33. What is the role of Brokers in a mutual fund?
• Enable investment managers to buy sell securities
• Brokers are registered members of the stock exchange
• They charge a commission for their services.
• In some cases provide investment managers with
research reports
• Act as an important source of market information.
• Limit of 5% per broker

34. What is the role of selling and distribution
agents ?
• Selling agents bring investors funds for a commission
• Distributors appoint agents and other mechanisms to
mobilize funds from investors
• Banks and post offices also act as distributors
• The commission received by the distributors is split into
initial commission which is paid on mobilization of funds
and trail commission which is paid depending on the time
the investor stays with the fund

35. What are the functions of the custodians ?
• Responsible for the securities held in the mutual fund’s
portfolio
• Keep an investment record of the mutual fund
• Collect dividends and investment payments due on the
mutual funds investment
• Track corporate actions like bonus issues, right offers, offer
for sale, buy back and open offers for acquisition

36. Various Forms of Fund Mergers and Takeovers
• Merger of AMC to become a single entity
( Example : HB Mutual and Taurus Mutual )
• AMC takeover by sponsors ( Example : ITC
Threadneedle and 20th
century taken over by Zurich)
and ( ITI by Franklin Templeton)
• Scheme take over (Apple’s scheme taken over by Birla
AMC ) and ( Zurich’s scheme takeover by HDFC
Mutual Fund)

37. What are the conditions under which two AMC’s
can be merged?
SEBI regulations require the following :
• SEBI and Trustees of both funds must approve of the
merger
• Unit holders should be notified of the merger, and provided
the option to exit at NAV, without load ( in case of open
ended funds else 75% consent is required)
• High Court approval is required as AMC’s are companies.

38. Under what conditions can an AMC be
taken over by another sponsor ?
• SEBI approval is required of the change of ownership and
unit holders have to be informed of the takeover
• Investors have to be informed but HIGH Court approval
not required
What is scheme take over?
• If an existing mutual fund scheme is taken over by another
AMC, it is called as scheme take over. The two mutual
funds continue to exist.Trustee and SEBI approval and
notification of unit holders are required for scheme
takeovers

39. Important Points
• In USA, the regulatory body is known as Securities Exchange
Commission.
• The sponsor may be compared to promoter of a company
• Issuing units and redeeming units is the role of Transfer Agent
• The appointment of AMC can be terminated by majority of directors
or trustees.
• Sponsor signs the trust deed with the trustees.
• Fund manager is responsible for filing details of the funds’ portfolio
with SEBI.

40. Legal and Regulatory Framework

41. Regulating agencies for MF & its Constituents
• SEBI
• RBI
- as a supervisor of bank owned mutual funds
- as a supervisor of MMMFs
• Ministry of Finance
• Company Law Board, Department of Company Affairs
and Registrar of Companies
• Stock Exchanges -(For listed Mutual Funds)
• Office of the Public Trustee

42. What is the regulatory jurisdiction of RBI
over mutual funds ?
• RBI is the monetary authority and the regulator of the
banking system
• Bank sponsored mutual funds were under the dual control
of RBI and SEBI
• Presently RBI is only the regulator of the sponsors of bank
sponsored mutual funds. SEBI is the regulator of all mutual
funds
• Mutual funds are affected by the RBI stipulations on
structure, issuance, pricing & trading of Govt. Securities

43. What is the role of Ministry of Finance in
mutual fund regulations ?
• The finance ministry is the supervisor of both the RBI
and SEBI
• Aggrieved parties can make appeals to the Ministry of
Finance on the SEBI rulings relating to mutual funds

44. What are self regulatory organisations (SRO’s)?
• SRO’ s are the second-tier regulatory mechanism created
by market participants, to regulate the working of a group
of persons/organizations
• If the SRO is registered with the regulatory authority, it
obtains certain powers from the regulatory authority
• For example though the stock exchanges are regulated by
SEBI, they are also registered SRO’ s. For example, BSE
and NSE are SROs.
• AMFI is not yet a SEBI registered SRO.

45. What are the objectives of AMFI ?
AMFI is an industry association, incorporated in 1995, is
not an SRO, so it can just issue guidelines to members. It
cannot enforce regulations.
Objectives
• To promote the interests of mutual funds and unit holders.
• To set ethical, commercial and professional standards in
the industry.
• To increase public awareness of the mutual fund industry.
• To develop a cadre of well trained distributors
AMFI is governed by a board of directors elected from
mutual funds and is headed by a full time chairman.

46. What are the rights of the investors in respect of
service standards that they can expect from MFs?
1. Investors are entitled to receive dividends declared in a scheme within 30 days
2. Redemption proceeds have to be sent to investors within 10 days
3. If an investor fails to claim the dividend or redemption proceeds he has the rights to
claim it up to a period of 3 years from the due date at the then prevailing NAV.
4. Mutual funds have to allot units within 30 days of the IPO an dalso open the
scheme for redemption, if it is an open -ended scheme
5. Mutual funds have to publish their half yearly results in at least one national daily
and publish their entire portfolios, at least once in 6 months . Such disclosure should
be done within 30 days from 6 monthly account closing dates of the fund
6. Trustees will have to ensure that any information having a material impact on the
unit holders investments should be made publicby the mututal fund
7. If 75% of the unit holders so decide, 1)The scheme can be wound up 2)Meeting of
unit holders can be called 3)Appointment of the AMC of the mutual fund can be
terminated
8. If there is any change in the fundamental attributes of the scheme, the unit holders
have to be notified through a letter. They also have a right to repurchase at NAV
without any load, before such change is effected.
9. Unit holders have the right to inspect certain documents

47. What are the limitations to investors right ?
• Investors cannot sue the trust as they are not distinct from
the trust
• Investors cannot lodge complaints against the
trustees (with the Registrar of Public Trusts) or the
AMC (with the CLB).
• Investors can lodge complaints with SEBI for non-
compliance.
• Investors cannot be compensated if the performance
of the fund is below expectations.
• There are not legal remedies for to a prospective
investor

48. Important Points
• SEBI does entertain complaints against MF and intervenes with
fund managements to help the investor.
• SEBI requires that sponsors of a new scheme should appoint a
compliance officer who must issue a Due Diligence Certificate to
the effect that all regulations have been complied with by the fund
and sponsors.
• Unit holders have right to timely service, right to information, right to
approve changes in fundamental attributes, right to wind up a
scheme, right to terminate the AMC.
• IIIrd Schedule of SEBI (MF) regulations 1996 specifies the contents
of the Trust Deed.
• The body to which investors may address their complaints is SEBI.

49. Offer Document

50. • The mutual fund is required to file with SEBI a detailed
information memorandum called the offer document , in a
prescribed format giving all the information of the fund and
the scheme.
• An abridged version of the offer document, in a prescribed
format is appended to the application form.
• Investors can get a summary of the offer document in the
abridged version known as the Key Information
Memorandum
Where can the investors find out the details about
a MF scheme, before investing?

51. What does the Offer Document usually contain?
It contains information regarding,
• Objective of the scheme
• Asset allocation
• Sale and repurchase procedure
• Load and expense structure of the scheme
• Accounting and valuation policies
It also contains
• Structure of the mutual fund
• Its constituents
• Operational details as how to apply
• Rights and duties of the investors

52. Importance of Offer Document
• Most important source of information from the perspective of the
prospective investor.
• Investor must understand the fundamental attributes of the scheme
to make the decision.
• It is the operating document and describes the product.
• Principle of “Buyers Beware” applies here.
• It is the primary vehicle for the investment decision, a legal
document that protects the rights of investors.
• Also a reference document for investor to look for the relevant
information anytime.

53. Is the offer document issued only when the MF
issues units for the first time?
• Closed ended scheme- offer document during the IPO
• Open ended scheme- offer document is valid through the
life of the scheme, which is revised every 2 years
• Major changes that have to be notified to the investors:
• Change in the AMC or Sponsor of the mutual fund
• Changes in the load structure
• Changes in the fundamental attributes of the schemes
• Changes in the investment options to investors;
inclusion or deletion of options

54. What are the mandatory disclosures to be made
on the cover page of the Offer Document?
• Name of the mutual fund.
• Name of the scheme.
• Type of scheme.
• Name of the AMC.
• Classes of units offered for sale.
• Price of units plus applicable load.
• Name of the guarantor in case of assured return
schemes.
• Opening , closing and earliest closing date of offer.
• Mandatory statements.

55. What are the standard risk factors?
• Mutual fund and securities are subject to market risk and
there is no assurance that the objective will be achieved
• NAV of units issued under the scheme can go up or down
depending on factors and forces affecting capital markets.
• Past performance of the sponsor/ AMC/ Mutual fund does
not indicate the future performance of the scheme.
• The name of the scheme does not in any manner indicate
any either the quality of the scheme or the future
performance of the scheme

56. What are scheme specific risks?
• Risk arising from investment objective, investment
strategy and asset allocation of the scheme
• Risk arising from non-diversification , if any
• If a scheme offers assured returns, the scheme must
state that the assurance is on the basis of the guarantees
provided by the sponsor/AMC
• If the AMC has no previous experience in managing a
mutual fund, a disclosure to the at effect should be made

57. What is the Key Information Memorandum (KIM)
• Since the offer document is very detailed, it is not
feasible to provide them to all investors
• SEBI regulations allows mutual funds to summarize the
key points in a summary document called as key
information memorandum
• It is mandatory to provide KIM to all investors along with
the application form.

58. Is the offer document verified by SEBI for its accuracy?
• SEBI does not approve or disapprove anything contained
in the offer document
• The offer document is prepared as per a certain format
prescribed by SEBI
• The contents of the offer document are verified by the
trustees, and the compliance officer
• The compliance officer has to also certify that the
constituents of the fund are all SEBI registered entities
• The AMC is responsible for the contents and accuracy of
information in the offer document

59. Important Points regarding OD and KIM
• In USA, the OD is known as prospectus
• The first time investor should read detailed offer
document, once he has gained familiarity with the AMC,
he can just refer to KIM
• The OD does not contain the address of the Trustees of
MF
• The front page of OD contains date of its publication and
name and type of fund( does not contain objectives)
• The offer document is issued by the AMC / Trustees

60. Fund Distribution and Sales
Practices

61. What are the categories of investors eligible to
buy MF units?
• Resident Individuals
• Indian Companies
• Indian trusts and charitable institutions
• Banks
• NBFC’s
• Insurance companies
• Provident funds
• Non Resident Indians
• Overseas Corporate Bodies
• SEBI registered FII’s

62. Important points
• Distributor should look up the offer document to see
which category of investors are allowed to invest in any
particular scheme of the fund, as it is possible that some
categories are not allowed to invest in some schemes.
• For example, charitable trusts are not allowed to invest
in some category of schemes in some funds. So in this
case distributor should refer offer document.

63. Distribution Channels
• Individual Agents- A person has to sign an agreement with a fund
on non judicial stamp paper. He has to be AMFI certified also to sell
Mutual Fund products.
• Only exemption is distributors above 50 years of age and with at
least 5 years of experience as on Sep 30, 2003. Such exempted
distributors were required to complete AMFI’s refresher course by
Sep 30, 2004.
• UTI MF requires its agents to have at least passed the level of
matriculation and also to provide 2 references.
• Distribution Companies
• Banks and NBFCs
• Post Offices
• Direct Marketing

64. What are the AMFI recommended best
practices for mutual fund agents?
1. Agents must be fully aware and informed about the features of the
products that they offer to the investors
2.Agents should be highly familiar with the profile of the investors, in terms
of return expectations, requirements and risk tolerance
3. Agents must strive to cultivate disciplined approach to investing and a
regular investment habit among clients
4. Agents must have a thorough understanding of the needs of their
investors
5. Agents must be able to help investors to choose from alterntative
investment products, and enable an appropriate asset allocation
6. Agents should seek from investors the commitment to invest to enable
which they may assist the client with the forms and procedures for
investing

65. What is SEBI’s advertising code?
1.The dividends declared or paid shall be mentioned in Rs/unit along
with the face value of each unit and the prevailing NAV at the time of
declaration of the dividend.
2.Only compounded annualised yield can be advertised if the scheme
has been in existance for more than 1 year
3.All performance calculations shall be based only on NAV and the
payouts to the unit holders .
4.Annualised yield should be shown for 1,3,5 years and since launch of
the scheme. For funds with less than 1 year performance can be in
terms of total returns.
5.Appropriate benchmarks and identical time period must be used
while comparing. Once chosen the benchmark should be used
consistently over time.
6. All advertisements should in the main body of the adevertisement
immediately after the return/yields and in the same font mention that
past performance may or may not be sustained in future

66. What is the AMFI Code of Ethics?
• Management of the fund ought to be in the interest of unit
holders
• High standards of service are expected from the fund.
• Adequate disclosures by the funds ought to be made to the
unit holders and trustees.
• Funds are urged to adopt the use of professional selling
practices.
• Management of funds collected has to be in accordance with
stated investment objective
• Funds should avoid conflicts of interest in dealings by
directors, officers and employees.
• Funds have to refrain from unethical market practices.

67. What is the commission structure for mutual fund
agents?
• The commission consists of two components
Initial ( Upfront )commission - Paid as a fixed percentage of
amount mobilised by agents
Trail commission - it is paid periodically on the funds that
remain invested in the scheme. Trail is an effective way to
restrict the practice of rebating, and link commissions
• The rates of commission are decided by the mutual fund
themselves and are not subject to regulation by either AMFI
or SEBI.

68. Fundamental Attributes of a Scheme
• Type of Scheme, Investment Objective and Terms of the
issue, Investment Pattern, Fees and Expenses,
Valuation norms and Investment Restrictions.
• Any change in Fundamental Attributes, Trust, Fees and
expenses payable and other changes which affect unit
holders interest have to be informed to investors either
in writing or newspaper advertisement( one in English
daily and other in a paper published in the language of
the region where the HO of a MF is situated)
• The unit holders are given option to redeem their
holdings in the fund without any exit if anything in above
is changed.

69. Loads
• Load is charged to investor when the investor buys or redeems
units. It is primarily used to meet the expenses related to sale and
distribution of units
• Load charged on sale of units is entry load. It increases the price
above the NAV for new investor.
• Load charged on redemption is exit load. It reduces price.
• Maximum Entry load or Exit load is 7%.( For Open ended Funds)
• Maximum Entry or Exit load for closed ended funds is 5%
• Load is an amount which is recovered from the investor.

70. Accounting Valuation and Taxation

71. What are net assets of a mutual fund ?
The net assets represent the market value of assets which
belong to the investors, on a given date.
Net assets are calculated as:
Market value of investments
Plus(+) current assets and other assets
Plus(+) accrued income
Less(-) current liabilities and other liabilities
Less(-) accrued expenses

72. How frequently is the NAV calculated ?
• All mutual funds have to disclose their NAVs daily, by
posting it on the AMFI web site by 8.00 p.m.
• Open –ended funds have to compute and disclose NAVs
everyday; closed end funds can compute NAVs every
week, but disclosures have to be made everyday.
• Closed end schemes not mandatorily listed on the stock
exchange can publish NAV according to the periodicity of 1
month or 3 months, as permitted by SEBI.

73. Numerical
• Unit capital of a MF scheme is Rs.20 million. The market
value of investments is Rs. 55 million. The number of
units is 1 million. The NAV is
– Rs. 20
– Rs. 75
– Rs.55
– Not possible to say

74. What are the initial issue expenses ?
Expenses that are incurred in the launch of the fund are
called as initial issue expenses.
∙ The costs of registration and fund formation
∙ Legal and advisory expenses
∙ Costs of launching the scheme
∙ Advertisement and promotion expenses
∙ Distribution costs
∙ Commissions to selling agents
SEBI imposes a ceiling of 6% on these expenses.

75. Can the Fund be launched without bearing any
initial issue expenses ?
∙ Yes
∙ Such funds are called as no load funds
∙ AMCs can charge an investment management fee, which
is 1% higher than the statutory limit, in this case.

76. Latest changes on Initial Issue Expenses
• IIE will be permitted for closed ended schemes only and
such scheme will not charge entry load
• In Closed Ended Schemes, IIE shall be amortized on a
weekly basis over the period of scheme.
• In Open Ended Schemes, the sales, marketing and
other expenses of sales should be met from the entry
load and not IIE.

77. What are the expenses incurred by a mutual fund?
Investment management fees to the AMC
• Custodian’s fees
• Trustee fees
• Registrar and transfer agent fees
• Marketing and distribution expenses
• Operating expenses
• Audit fees
• Legal expenses
• Cost of mandatory advertisements & communications to
investors

78. Can the AMC charge all the expenses that it
incurs, to the income of the fund ?
• No. There are two levels of restrictions
• At the first level only certain kinds of expenses, that are
identified as having been incurred for the conduct of the
business of the fund, can be charged to the fund.
• The second level of regulation refers to the limit on the total
expenses, that can be charged to the fund
Following is the maxmum limit on the expenses
For net assets up tp Rs. 100 Cr 2.50%
For the next Rs 300 Cr. Of net assets 2.25%
For the next Rs 300 Cr. Of net assets 2%
For the remaining net assets 1.75%
On debt funds the limits on expenses are lower by 0.25%

79. What are the fees charged by the AMC ?
The fees are regulated by SEBI as follows:
• For the first Rs.100 Cr. of net assets: 1.25%
• For the net assets exceeding Rs. 100 Crore: 1.00%
• If the AMC does not charge any of the initial issue
expenses to the fund, it can charge the scheme a
management fee, that is 1% higher than the above rates

80. Numerical Example
• Weekly Net Average Assets =1400 Cr.
• What could be the maximum ongoing expenses?
• On 1st 100 cr. 2.5% i.e. 2.5 Cr.
• On next 300 Cr. 2.25% i.e. 6.75cr.
• On next 300 Cr. 2% i.e. 6 Cr.
• On Rest of the Weekly Net Avg. Assets
• (700 cr.) 1.75% i.e. 12.25 Cr.
• Total 27.5 Cr.

81. Tax Implication in Mutual Funds
• Income earned by any mutual fund registered with SEBI is exempt
from tax. It is a trust under section 10(23 D)
• The dividends are tax free in the hands of unit holders but it is liable
to dividend distribution tax in case of closed ended fund and debt
funds( equity <50%)
• No TDS on any income distribution by MF
• The earning on selling units is known as Capital Gain
– If units are held for less than 12 months--- Short Term Capital
Gain (STCG)
– Else the earnings is known as Long Term Capital Gain (LTCG)

82. Capital Gain Taxation
• The difference between sale and purchase price is known as capital
gain / loss.
• The sale and purchase of units in an equity oriented scheme of MF
is subject to STT at the prescribed rate
• Under Section 111 A of the IT ACT, STCG on sale of equity
oriented scheme is taxed at the rate specified by the govt.
(currently10%).
• LTCG if equity oriented scheme of MF is exempt from tax.
• Tax on other scheme is 10% for LTCG ( without indexation) and
20% with indexation.

83. Other points
• Section 80 C – Individual and HUF are entitled to deduction upto
Rs. 1 lakh in respect of payment out of taxable income towards
certain instruments which includes ELSS of Mutual funds.
• Dividend Stripping – ( Section 94(7) – If investor buy units within 3
months prior to record date of dividend and sells those units within
3 months of record date, then the loss if any, shall be ignored.
• Units are not considered under wealth tax
• Section 195 – 20% TDS for LTCG and 30% TDS on STCG if unit
holder is a NRI and 48% TDS if unit holder is a foreign company.

84. Numerical
• An investor purchased units in an approved Mutual Fund
on Jan. 1, 1998 for Rs.500000/-. He sold the units on
December 1, 1999 for Rs. 750000/-. Calculate the
capital gain taxes paid by him. ( Ignore indexation).
• Answer :
– Long term capital gain = 250000/
– So Tax on LTCG = 2500000* 10% = Rs. 25000/-

85. Valuation of Securities
Non Performing Assets (NPA)
An asset shall be classified as an NPA, 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.
Such assets will be classified as NPAs, soon after the lapse
of a quarter from the date on which payments were due.

86. Valuation of Equity Securities
• Closing price on valuation date
• Selected stock exchange
• Use of alternate stock exchange quote
• On the basis of earliest previous quote (not more than
30 days prior to valuation date).
• If trading is suspended up to 30 days, last quoted price;
if it is suspended for more than 30 days, AMC/Trustee
decide valuation norms and document such norms.

87. Valuation of Debt Securities
• Valuation of a Thinly Traded Security (<182 Days)
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
= 10/364
= 0.02747
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.
If it has to be valued 200 days after issuance, its value is
90+(0.02747*200) = 95.494

88. Valuation of other debt security (>182 days(
• G-Secs are valued at market prices or using the CRISIL
gilt valuer.
• Corporate bonds are valued at market prices or using
the CRISIL bond valuer.
• Both these methods use duration to classify bonds and
assign a rate for each duration bucket.

89. Investor Plans and Services

90. Investment Plans
• Broadly 2 options- Growth option and Dividend Option
• Automatic Reinvestment Plans– Benefit of Power of
Compounding.
• Systematic Investment Plans – For regular investment
• Systematic Withdrawal Plan – For regular income ( it is
not similar to MIP)
• Systematic Transfer Plan

91. Investment Management

92. Equity Portfolio Management
• Equity funds can invest into equity shares, preference
shares, warrants or convertible debentures.
• As on march 2004, Indian Stock Exchanges have over
9400 listed companies.
• Warrants are long term rights that offer holders the right
to purchase equity shares in a company at a fixed price
within a specified period.

93. What are large-cap and small cap shares?
The size of a company in the equity markets is determined
by market capitalisation (no. of shares issued * market
price/share)
Large Cap Small Cap
Market capitalisation high Market Capitalisation Low
Greater Liquidity Poor Liquidity
Comparatively smaller returns Comparatively higher returns
Cost of transaction low Cost of transaction high

94. • P/E Ratio=share price/ post tax earnings
• Indicator of value the market assigns to every rupee
earned by the company
• P/E ratio reflects overvaluation and under valuation
Important fact of P/E Ratio
• P/E ratio has a sensitive numerator and an insensitive
denominator.
• P/E ratios are reflective of the phase of the market.
P/E Ratio

95. What is dividend yield?
• Dividend paid is usually a percentage of face value of the
share
• Dividend Yield= dividend paid/market price of a share
What is the relationship between dividend yield?
• Both the measures are sensitive to market price per share
• If market prices are higher, P/E multiple will be higher, but
dividend yield will be lower and vice versa.

96. Classifications of Stocks
• Cyclical Stocks – Whose earnings are correlated with
the state of the economy . Have relatively lower PE
ratios and higher dividend payouts.
• Growth Stocks – Stocks having potential for higher
earnings. High PE and low Dividend yields
• Value stocks – Companies in mature industries and are
expected to yield low growth in earnings. Good assets
value. Currently under valued but can yield superior
returns later.

97. What is active equity fund management
• Fund manager tends to look at specific attributes in selecting stocks.
• Active fund manager believes, that his ability to buy right stock at the
right time, can translate into superior performance for his portfolio.
What are the basic active equity fund management styles?
• Growth Investment style – ( objective is to capital appreciation,
look for companies that are expected to give above average
earnings growth, The shares are more risky and thus expected to
offer higher returns over a long investment horizons.
• Value Investment Style – Look for companies that are currently
undervalued but whose worth will be recognized eventually. ( eg.
privatization/buy back)

98. • Fund manager believes, that holding a well diversified
portfolio is the cost efficient way; to better returns, he
would tend to mimic the market index.
• It requires limited research and monitoring costs and is
therefore cheaper.
• Fund manager may choose to mimic a index, or a subset
of the index or choose a basket of shares from multiple
indices.
• A passive fund manager has to rebalance his portfolio
every time changes are made in the index.
What is passive equity fund management?

99. What is the types of equity research done in MF?
• Fundamental analysis – Future earnings and risk
profile considered
• Technical analysis – Study of historic data on the
company’s share price movements and volume
• Quantitative analysis – Equity valuation and evaluate
the market as a whole
What are the various steps involved in equity fund Management?
• Formulating the investment philosophy
• Formulation of investment strategy
• Setting of targets and benchmarks
• Deciding on the extent of diversification and flexibility
• Reviewing , monitoring and rebalancing

100. Important points on Debt Portfolio
Management
• Investments only in Market Traded Instruments ( Not in
loans as done by banks)
• Instruments with maturity less than a year called Money
Market Securities.
• Instruments with maturity above 1 year are called debt
securities.
• Zero Coupon Bonds (discounted securities) do not pay
regular interest at intervals but are bought discount to
their face value.

101. Instruments in Indian Debt Market
• Certificate of Deposit – Issued by Commercial banks
and maturity of 91 days to 1 year.
• Commercial Paper – Issued by corporate bodies and
maturity varies between 3 months and 1 year
• Corporate Debentures
• Floating Rate Bonds
• Govt. Securities.
• Treasury Bills – Issued through RBI by GOI. Tenure is
91 days and 364 days.
• Bonds

102. What is real rate and nominal rate?
• Nominal rate of interest is the rate that is paid to us by the
borrower
• The real rate is the nominal rate less the rate of inflation.
• Yield is the term used to signify the actual rate earned on
an investment.
• Current yield is the ratio of coupon amount to market price
of a bond. If coupon = 8%, Market Price = 105, then current
yield of bond is 8/105 = 7.62%.

103. Important points
• Par Value or Face Value – Principal amount
• Coupon – Annual Rate of interest paid on par value
• Maturity – Term of bond
• Call Option – Allows the issuer to redeem the bonds
before maturity.
• Put option- Allows investors to redeem the bonds prior
to maturity

104. Measure of Bond Yields
• Current yield – Coupon Rate / Current Market Price
• Yield to Maturity( YTM) – It is also known as bond’s IRR.
It is annual rate of return an investor would realize if he
bought a bond at a particular price, received all the
coupon payments, reinvested the coupon at same YTM
and received the principal at maturity.
• There is inverse relationship between price and YTM of
a bond.
• Yield Curve – Graph showing yields for bonds of various
maturities, using a benchmark group of bonds. Also
known as TSIR ( term structure of interest rates). The
curve is usually upward sloping because longer
maturities generally offer higher yields.

105. Risks in Investing in Bonds
• Interest Rate Risk
• Reinvestment Risk
• Call Risk
• Default Risk
• Inflation Risk
• Liquidity Risk

106. Yield Spreads
• Yield Spread = Yield of benchmark security – yield of a
particular bond
• It is the risk premium paid by the bond to induce investor
• Higher the credit rating, higher the safety and so lower
the yield spread
• So if a bond is downgraded, the yield spread will widen.
• Term to Maturity – It is the period until the maturity of
the bond

107. Yield Curve :
Rates at which bonds of similar risk of various tenors
are traded on a given point in time, are plotted in a
graph. This is known as the Yield Curve
• Price and Yield are inversely related.
• Changes in interest rate impact bond values in the
opposite direction.
• Yield also gets increased by downgrading of credit rating
of the bond.
What is the relationship between the price
and the yield of the bond?

108. What are the various types of fixed income
securities available in the Indian Market?
Issuer Instrument Maturity Investors
Central Govt.
Dated
Securities 2- 30 Years
RBI, Banks , Insurance
Companies, Provident funds,
Mutual Funds , Primary
Dealers
Central Govt. T-Bills 91/364 days
RBI, Banks , Insurance
Companies, Provident funds,
Mutual Funds , Pd's,
Individuals
State Govt.
Dated
Securities 5-10 Years
Banks, Insurance
Companies, Provident funds
PSU's
Bonds,
structured
Obligations 5-10 Years
Banks, Insurance
Companies, Provident funds,
Mutual Funds, Individuals
Corporates Debentures 1-12 Years
Banks, Mutual Funds,
Corporates, Individuals
Corporates,
Primary
Dealers
Commercial
Paper
3 months - 1
Year
Banks, Corporate, Financial
Institutions, Mutual Funds,
Individuals
Banks
Certificates of
Deposit
3 months - 1
Year Banks , Corporates

109. Restrictions
• Mutual funds can invest only in marketable securities
• All investments are on delivery basis, no squaring off.
• A MF under all its schemes cannot hold more than 10% of the paid
up capital of a company.
• A MF scheme can invest max. 10% of its NAV in a single company.
Exception – Index and Sectoral Funds
• Debt funds - single issuer not more than 15% of NAV, can be
relaxed to 20% with approval of trustees and AMC
• MF Can invest in ADR / GDRs upto a max. limit of 10% of NA or $
50 million, whichever is lower.
• Funds of 1 scheme can be invested in any other MF ( Max 5% of
Net Assets)

110. Inter Scheme Transfer
• Such transfers happen on a delivery basis, at market
prices.
• Such transfers should not result in significantly altering
the investment objectives of the scheme involved.
• Such transfer should not be of illiquid securities, as
defined in the valuation norms.
• One scheme can invest in another scheme, up to 5% of
net assets, No fee is payable on these investments.

111. Investment in Sponsor Company
• A mutual fund scheme cannot invest in unlisted
securities of the sponsor or an associate or group
company of the sponsor.
• A mutual fund scheme cannot invest in privately placed
securities of the sponsor or its associates.
• Investment by a scheme in listed securities of the
sponsor or associate companies cannot exceed 25% of
the net assets of the scheme

112. Borrowings by Mutual Fund
• A mutual fund can borrow for a maximum of 20% of net
assets.
• For maximum period of 6 months.
• Purpose should be to meet liquidity requirements for
paying dividend or meeting redemptions.
• It is not a permanent source of funds for the scheme.

113. New Provisions on Investment Policy
• Minimum Number of Investors per scheme
• Purpose of MF is sharing the risks with a large number of
investors.
• SEBI requires each scheme to have a minimum number
of investors.
• So now each scheme and individual plan under the
scheme should have a minimum number of 20 investors
AND no single investor should account for more than
25% of the corpus of such scheme.
• OES are allowed three months or upto end of the
succeeding calendar quarter from the close of IPO to
ensure compliance with this requirement

114. Fund of Funds Scheme
• A FoF invests in the schemes of other MF.
• A normal MF scheme cannot invest in any FoF scheme.
• A FoF scheme cannot invest in another FoF scheme.
• A FoF is not allowed to invest its assets other than in
schemes of MF, except to the extent of its liquidity
requirements.

115. Measuring And Evaluating Mutual
Fund Performance

116. • Earnings can be either dividend or capital gains.
• Rate of Return = Income Earned *100/ Amount invested.
• Simple total return (STR) method includes the dividends paid to the
investor
• STR = {NAV(end) – NAV ( begin)}+ Dividend paid *100
NAV at
beginning
• Rule of 72 is a thumb rule used in finding doubling period. If Rate =
12%, then money will double in 72/12 = 6 years.
• While comparing funds performance with peer group funds, size
and composition of the portfolios should be comparable.

117. Performance Measurement
• Change in NAV= ( NAV at end – NAV at beg.)*100
NAV at the beginning
• Total Return = ( Change in NAV+ Dividend) *100
NAV at beg.
• Return on investment or Total Return with dividend reinvested at NAV.
• Portfolio Turnover Rate – It is lesser of assets purchased or sold divided by the
fund’s net assets.
• A 100% turnover implies that the manager replaced his entire portfolio during
the period in question
• 200% means portfolio changed in 6 months
• A liquid fund has the highest portfolio turnover.

118. Numerical
• An open ended fund was purchased when its NAV was
Rs. 22. One year later, its NAV was Rs. 24. The
annualised percent NAV change is ______
• Answer
- % change in NAV = ( 24 -22) *100 = 9.09%
» 22

119. • Purchase price Rs. 22 per Unit
• NAV at year end Rs. 23 per Unit
• Interim Div. Rs. 3
• Ex.-Div. NAV Rs. 21
• Total Return=?
• Assume investment of Rs. 10000
• Step 1: Initial Units alloted =10000/22=454.55
• Step 2:Total Div.=454.55*3=1363.65
• Step 3: Additional Units=1363.65/21=64.94
• Step 4:Total Units=454.55+64.94=519.49
• Step 5:Withdral Amt. =519.49*23=11947.17
• Gain =11947.17-10000=1947.17
• Gain of 1947.17 on the investment of Rs. 10000
• So that on the investment of Rs. 100 gain is 19.47
• Ans:19.47%

120. Benchmarking
• Benchmarking should be selected by reference to the
asset class it invests in and the fund’s stated investment
objective.
• 3 kinds of benchmarks are used – Relative to market as
a whole, relative to other mutual funds, and relative to
other comparable financial products.
• For debt funds, the benchmark should have the same
portfolio composition and the same maturity profile

121. Criteria for peer group comparisons
• The investment objective and risk profiles of the two
funds should be the same.( Debt with debt and equity
with equity)
• Portfolio composition of two funds is similar. ( Gilt
cannot be compared with riskier corporate debt)
• Fund size should be comparable.( same size)
• Expense Ratios is also important factor
• Funds should be compared over the same periods only

122. Recommending Financial Planning
Strategies to Investors

123. Selecting the Right Investment
Products for Investors

124. Return
Safety
Convenice
Volatility Liquidity
Equity High Moderate Low High High or Low
FI Bonds Moderate High High Moderate Moderate
Corporate Debentures Moderate Low Moderate Moderate Low
Company Fixed
Deposites
Moderate
Moderate
Low Low Low
Bank Deposites Low High High Low High
PPF Moderate High High Low Moderate
Life Insurance Low Moderate High Low Low
Gold Moderate Low High Moderate Moderate
Real Estate High Low Moderate High Low
Mutual Funds High High High Moderate High
Comparison by Nature of Investment

125. Investment
Objective
Risk Tolerance
Investment
Horizon
Equity
Capital
Appreciation
High Long Term
FI Bonds Income Low
Medium to Long
Term
Corporate Debentures Income H-M-Low The same
Company Fixed
Deposites
Income The same Medium
Bank Deposites Income Generally Low Flexible-All Terms
PPF Income Low Long Term
Life Insurance Risk Cover Low Long Term
Gold Inflation Hedge Low Long Term
Real Estate Inflation Hedge Low Long Term
Mutual Funds
Capital
Growth,Income
H-M-Low Flexible-All Terms
The Investor Perspective Funds vs. Other Products

126. • Real Estate ( High investment required)
• Bank Deposits ( Preferred due to the perception of bank
deposits being safe and free of default.
• PPF
• RBI Relief Bonds
• Indira Vikas Patra
• MF – Best Option

127. Helping Investors understand the
Risks in Fund Investing

128. Evaluating the Risks of a Mutual Fund
• What is Risk ?
– Risk means the possibility of financial loss.
– “Risk” is thus equated with Volatility of Earnings
• Equity Price Risk
– Company Specific
– Sector Specific
– Market Level

129. Evaluating the Risks of a Mutual Fund
• Market Cycles
• Risk Measures
– Standard Deviation – SD measures the fluctuations
of a fund`s returns around a mean level.
– Beta Coefficient – Beta relates a fund`s return with a
market index and measures the sensitivity of the
fund`s returns to change in market index. A beta of 1
means the fund moves with market. A beta of less
than one means the fund will less volatile than the
market.

130. Evaluating the Risks of a Mutual Fund
• ExMarks or a number known as “R-Squared”
– How much of a fund`s fluctuations is attributable to
movements in the overall market from 0 to 100
percent.
– An index fund will have ExMarks of nearly 100%. Non
Diversified funds will have lower ExMarks.
• Standard Deviation is the best measure of risk.
• Expense Ratio
• Sharpe Ratio

131. Expense Ratio
• States how much is paid to the fund manager in
percentage term every year to manage the pooled
investment.
• The largest component of the expense ratio is
management and advisory fees. From management
fees, an AMC generates profits. Additionally, there are
marketing and distribution expenses and also expenses
involved in the operations of a fund like the custodian
and auditors’ fees.
• As per SEBI Guidelines, equity funds can charge a
maximum of 2.5% whereas a debt fund can charge
2.25% of the average weekly net assets.

132. Sharpe Ratio
• The Sharpe Ratio represents the trade-off between risk
and return of the fund. Mathematically, the Sharpe Ratio
is the returns generated over the risk-free rate, per unit
of risk.
• Risk in this case is taken to be the fund’s S.D.
• A higher Sharpe Ratio is therefore better as it represents
a higher return generated per unit of risk.

133. Evaluating the Risks of a Mutual Fund
• Alpha
– Risk adjusted performance calculation is called
Alpha.
– Alpha of a fund compares the fund`s actual results
with what would have been expected given the fund`s
beta and the market index performance.

134. Recommending Model Portfolios
and selecting the Right Fund

135. Asset Allocation
• Allocation of money between equity, debt and money
market instruments.
• Depends upon situations, financial goals and risk
appetite.
• Fixed AA and Flexible Asset Allocation.
• Fixed Asset Allocation is preferable because of
periodical review and more disciplined.

136. What is Bogle’s strategic asset allocation?
• Older investors in the distribution phase:
- 50% equity : 50% debt
• Younger investors in the distribution phase:
- 60% equity : 40% debt
• Older investors in the accumulation phase:
- 70% equity : 30% debt
• Younger investors in the accumulation phase:
- 80% equity : 20% debt

137. The steps in developing a model portfolio for
an investor
• Develop long term goals.
• Determine asset allocation.
• Determine sector distribution.
• Select specific fund managers and their schemes.

138. Model portfolios recommended for investors
according to their life cycle stages:
• Young unmarried professionals :
– 50% in aggressive equity funds.
– 25% in high yield bond funds, growth and income funds.
– 25% in conservative money market funds.
Young couple with 2 incomes and 2 children:
– 10% in money market funds.
– 30% in aggressive equity funds.
– 25% in high yield bond funds and long term growth funds.
– 35% in municipal bond funds.

139. Contd:
• Older couple single income :
– 30% in short term municipal funds
– 35% in long term municipal funds
– 25% in moderately aggressive equity
– 10% emerging growth equity
• Recently retired couple :
– 35% in conservative equity funds for capital preservation / income
– 25% in moderately aggressive equity for modest capital growth
– 40% in money market funds

140. Business Ethics in Mutual Fund

141. Business Ethics
• Business Ethics means rules of acceptable and good
conduct.
• Business must be conducted in a disciplined, organized
and fair manner.
• Ethical practice means practice in the interest of unit
holders of the scheme.
• A consumer who feels cheated will never return to buy
the product again.
• BE ensures that the customer remains a long term
buyer.

142. Business Ethics for Mutual Fund Business
• MF is also a business where investors buy investment
products
• MF and sales persons are required to adopt ethical, fair
and good business practices and apply them to all those
involved in selling/ servicing activities.
• A salesperson is expected to know the product
thoroughly and describe it accurately.

143. Business Ethics for Mutual Fund Business
• The conduct rules for distributors and employees are set
by the Fund trustees and directors of AMCs.
• AMFI has also set ethical standards and practices for
the industry.
• AMFI code includes specific rules of good conduct for
the AMCs and its employees and the distributors.
• SEBI also requires the development of ethical standards
and practices by all fund houses.
• As distributor, you should set your ethical standards
higher than minimum requirement of above agencies.

144. Objectives of Business Ethics
• Simply being honest, open and transparent with your
potential clients.
• Rules are needed to ensure that you deal with the
clients fairly and transparently.
• To protect the clients from being cheated or exploited.
• To ensure a level playing field among all categories of
business participants.
• To ensure fairness in dealing with investor.

145. Areas particularly monitored by SEBI
• Fund structure and Governance
• Exercise of Voting Rights by Funds
• Fund Operations.

146. Regulatory Requirements regarding Principle
of Independence
• Separation of Functions – No one constituent is in
control of the investors assets.( Trust, AMC, Custodian,
Registrar)
• Independence of Organisations – Trust independent of
AMC,
• Independence of Personnel - Trustees can not serve as
Director of AMC they supervise or even any other AMC.
Independent Trustees and BOD members also.

147. Examples of Unethical practices
• Insider Trading
• Preferential Treatment to Selected investors – Cut off
time has been introduced now to prevent late trading
abuses.
• Personal trading by fund managers and employees
• Front Running – Fund manager buying or selling
securities ahead of doing the same transaction for the
fund

148. Regulations on Personal Trading
• AMC should file with trustees a qtrly statement of
dealings in securities by the key personnel of the AMC.
• The director of AMC has be file details of tranx.in MF,
where they exceed the value of Rs.1 lakh.
• In case of Trustees, they may report only those tranx.
Which exceed the value of Rs.1 lakh
• Trustees have to certify that the personnel of AMC don’t
indulge in front running or self dealing.

149. Other Regulations
• Mandatory for the AMC to appoint a compliance officer
to monitor and ensure implementation of all laws /
regulations.
• All distributors and agents follow the code of conduct
laid down in the 5th
schedule of SEBI MF regulations
1996.
• A more detailed code called AGNI has been put into
place by AMFI

150. Thanks