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Transcript of Amfi Training New Hdfc
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A presentation by
Joint Venture with Standard Life Investments
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Mutual Funds
Concept and Role of a
Mutual Fund
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What is a Mutual Fund ?
A mutual fund is a collective investment thatallows many investors, with a common objective,
to pool individual investments and give to a
professional manager who in turn would invest
these monies in line with the common objective.
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Operation flow chart
FUND MANAGER
SECURITIES
RETURNS
INVESTORS
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Characteristics of Mutual Funds
Investors own the mutual fund.
Professional managers (AMC) manage the fund for a
small fee.
Fees charged is specified by SEBI and is expressed as apercentage of assets managed
The funds are invested in a portfolio of marketable
securities in accordance with the investment
objective.
Value of the portfolio and investors’ holdings, alterswith change in the market value of investments.
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Mutual Funds:
A Packaged Product
Professional
Management
Convenience
Tax Benefits
Liquidity
Diversification
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Role of Mutual Fund
1. Assist investors in earning income or createwealth.
2. Supply funds to govt. and industry to invest.
3. Keep a check on operations, corporategovernance and ethical standards.
4. Act as market stabilizer, counter large inflows or outflows.
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Mutual Fund Operations
a. Announcement of investment objective
b. Marketing the scheme to public
c. Allotment of units to the investor
d. Earns income: Interest, Dividend, Capital gain or loss.
e. Valuation Gains or loss, incur operational expenses.
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Mutual Fund Operations
f. Profit increase the true worth of a unit (NAV), and loss
decrease it.
g. Profits may be distributed as dividends to the investors
or may be retained for future growth. (Options: Dividend
payout, dividend reinvestment, growth)
h. Size of mutual fund companies is assessed by AUM,
AUM is affected by Profitability metric, inflows and
outflows.
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Profitability Matrix
A. Interest Income
B. + Dividend Income
C. + Realized capital GainsD. + Valuation Gains
E. - Realized Capital Loss
F. - Valuation Losses
G. - Scheme Expenses
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Advantages of Mutual Funds Professional Management
Afford able Portfol io Diversi f icat ion
Econom ies o f Scale : better terms with brokers, bankers
etc.
Liqu id i ty : units are more liquid than shares Tax Deferral : returns are tax free
Tax Benefits : ELSS, Sec 80 C benefits
Convenient Opt ions : Growth, Dividend etc.
Investment Comfo rt : Little Documentation, ECS facilityetc.
Regu latory Com fort : Control of SEBI
Systemat ic Appro ach to Investments : SIP, STP, SWP
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Disadvantages of Mutual Funds
No control over costs for an investor
No tailor made portfolios for an investor
Issues relating to management of a portfolioof mutual funds
Note: These are just disadvantages of the
concept of mutual fund. SEBI has takenadequate measures to overcome few of them.
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Types of Mutual Funds
1) Open ended, Close ended and Interval Funds.
2) Actively Managed and Passively Managed Funds.
3) Debt, Equity and Hybrid Funds.
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Open-End Funds
Schemes which sell/ buy units round the year
Buying/ selling price is based on NAV
Schemes under no obligation to keep selling units atall times
Schemes have to repurchase units at all times
Scheme’s corpus keeps changing due to portfolio
performance & buying/ selling of units
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Close-End Funds
Units are sold only once – at the launch of the
scheme (NFO)
Investors’ money is locked in the scheme for a stipulated time
Schemes are listed on exchanges to provide
liquidity to investors
Unit capital is fixed and corpus changes only
on portfolio performance
SEBI regulations ensure investors get exit
option once or twice a year
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Types of Debt Funds
a. Gil t Funds
Invests only in Govt. Securities
b. Divers i f ied debt funds
Invests in Mix of Govt. and Non-Govt., Debtsecurities
c. Junk bond funds
Invests in poor quality debtd. Fixed Maturity plans (FMP’s)
Investment portfolio is aligned with the maturity
of the underline debt security
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Types of Debt Funds
e. Floating Rate Funds
Invests in Floating Rate Debt
f . Liquid Schemes
Invests in debt securities with tenure of upto
91 days.
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Types of Equity Funds
a. Divers if ied equ ity funds
b . Secto r funds
c. Thematic funds d . ELSS
e. Div idend Yield schemes (less flu ctuat ing
shares)
f. A rb itrage funds
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Types of Hybrid Funds
a. Month ly In come Plan s (MIP)
b . Cap ital Protec tion Schemes (Close Ended )
Types of Gold Funds
a. Go ld Exchange Traded Fund (Go ld ETF)
b . Go ld sector fund
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Types of other funds
a. Real Estate Funds
b . Commodity Funds
Commodity ETF and Commodity Sector Funds.(In India MF’s can not invest in Commodities
hence only Commodity sector Funds Exist)
c. Internat ional Funds (Feeder Funds)
d. Fund of Funds e. Exchange Traded Funds
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Evolution In India
Phase 1 – 1964 – 87
Growth of UTI
Phase 2 – 1987 – 93
Entry Of Public Sector Funds
Phase 3 – 1993 – 86
Emergence Of Pvt. Funds
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Evolution In India
Phase 4 – 1996 – 99
Growth & SEBI Regulations
Phase 5 – 1999 – 2004
Emergence Of A large & Uniform Industry
Phase 6 – 2004 Onwards
Consolidation & Growth
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Fund of Funds
Investment of its corpus in other mutual fund
schemes Schemes of same mutual fund house
Schemes of other mutual fund house
Is considered like a Debt scheme for tax
purposes
The effective expenses become higher as the
investors have to bear the expenses of theinvested schemes as well
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Investment Options
Investors can achieve income and growth objectives
in all funds Dividend pay-out option
Regular dvidend
Ad-hoc dividend
Growth option
Re-investment option
Most funds provide multiple options and the facility to
switch between options
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Basics of Classification
Risk Sectoral funds are most risky; money market funds are least risky
Tenor Equity funds require a long investment horizon; liquid funds are for
the short term liquidity needs
Investment objective Equity funds suit growth objectives; debt funds suit income
objectives
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Risk
Potential
for
return
Liquid Funds
DebtFunds
The Risk Return Trade-off
Growth FundsAggressive, Value,
Growth Balanced Funds
Sectoral Funds
Gilt Funds, Bond
Funds, High
Yield Funds
Ratio of Debt : Equity
Hedge Funds
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History of Indian Mutual Funds
Phase I (1964-87) Set up by RBI, de- linked later.
Act of parliament
First scheme US 64, still outside SEBI purview
Phase II (1987-93) entry of PSU Banks/ FIs
SBI in 87, LIC in 89, Indian Bank in 90
Phase III (1993-96) Entry of Private players
Phase IV (1996-99) Growth & SEBI regulations
Phase V (1999-2004)Emergence of large and uniform industry
Phase VI (From 2004 Onwards) Consolidation & Growth
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Fund Structure and Constituents
In UK
Two alternative structure
In USA
Investment Companies structure In India
3 tier structure
Sponsor
Trust/Trustee
AMC
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MUTUAL FUND - FRAMEWORK- India
FundManagement
Registrar Custody
MarketingOperations
Distribution
Trustee Company
Sponsor
Asset Management Company
Fiduciaryresponsibility to
the
Investors Bank
Brokers
Markets
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SPONSOR : Role
Promoter of the mutual fund
Creates a Trust under Indian Trusts Act, 1882
Appoints trustees
Creates AMC under Companies Act, 1956 Fulfils necessary formalities and applies to SEBI for
registration of the Trust as a Mutual Fund
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Who is eligible to be a
Sponsor…? Criteria
Financial services business
Sound track record
Positive net worth in last five years
3 year profit making record in the last 5 yearsincluding the last year
Atleast 40% contribution to AMC capital
Sponsors’ net worth in the immediatelypreceding year is more than the capitalcontribution to the AMC
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TRUSTEE
Fiduciary responsibility to the Investors.Directors to be approved by SEBI.
Execution of trust deed by sponsor in favour of trustee.
Trust deed is stamped and registered with SEBI
Legally responsible for administering the Trust andCompliance with Regulations.
Norms for Trustees:Experience in Financial Services
Minimum 4 members on the board and 2/3rd of the membersnot to be connected with the sponsor
All major Decisions need trustee approval
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ASSET MANAGEMENT COMPANY Required to be registered with SEBI
Responsible for :Launching Schemes
Managing Funds for Schemes
Performing Accounting Functions
All day to day affairs of the Mutual Fund
Quarterly reporting to TrusteesIncome of an AMC /Asset Management Fee
1.25% of weekly average NAV of each Scheme up to Rs.100 cr of
assets managed
1.00% greater than Rs.100 cr
Minimum 4 directors with 1/2 independent
At least Rs 10 cr of net worth to be maintained at all times
AMC cannot act as trustee for other MF
AMC of one MF cannot be trustee of another MF
50 % of the directors on the board must be independent
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TRANSFER AGENTS
Issue of Account Statements toInvestors
Arranges payment to Investors when
they redeemTakes care of Non commercial
transactions like change of address,loss
of account statement etc.Should be registered with SEBI
Appointed by Board of AMC
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CUSTODIAN
Safe keeping of the assets held by the Fund
Receives and Delivers Securities for payment
Follow up on Corporate benefitsProvide an independent means of control
Independent of Sponsors
Should be registered with SEBI Appointed by the Board of Trustee
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Other Constituents
Broker
-Purchase and sale of securities
-Not more than 5% through a relatedbroker
Auditor -Separate auditor for AMC and mutual
Fund
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Mergers and Acquistions
Scheme takeover
-One AMC buys schemes of another AMC
-Organic growth in assets-No change in AMC stakes
AMC Merger
-Two AMC’s merge
-Similar to merger of companies-Sponsor stakes change
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Mergers and Acquisitions
AMC take-over
-Stake of one sponsor in an AMC bought out
by another sponsor -Change in AMC and sponsor
Investor rights
-No prior approval needed
-Option to exit at NAV-Right to be informed
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Fund Mergers & Take overs
Mergers of two AMC
Provisions of Cos Act
Approval of high court and SEBI75% unit holders consent
Scheme takeover
Unit holders permission - 75%
SEBI’s permission
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Fund Mergers & Take overs
AMC taken over by other sponsor
(a. Zurich - 20th Century b. ITC
Threedneedle - Zurich c. FT - Kothari -HFCL)
No high court approval
No unit holders consent , only info with
rights to exit from scheme without any loadSEBI clearance is compulsory
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Legal & Regulatory Environment
SEBI - Capital Markets Regulator
RBI - Money Markets Regulator
MOF - PoliciesCLB, DCA, ROC
Stock Exchanges
Office of the Public Trustee
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SEBI
All Mutual Funds / AMC/ Trustee Companies to be
registered with SEBI
Responsible for protecting investors interest andpromote orderly growth of Mutual Fund Industry
Formulates regulations,monitors performance and
conduct of Mutual funds and enforces compliance toregulations through reviewing reports and regular
inspections
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Reserve Bank of India & SE
RBI
Dual supervision for bank sponsored AMCs
Issue concerning ownership bank promoted AMC falls with RBI
Regulates investments pertaining to MoneyMarket Instruments
Stock Exchange (SE)Close ended MF listed of SE. Needs to
comply with listing guidelines.
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Office of public Trustee
MF being public trustee - governed by Indian
Trust Act , 1882
Trustee Co or Board of Trustee accountable
to office of Public Trustee
Public trustees reports to Charity Comm.
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Trustee and AMC to comply with Cos
Act 1956
Ministry of Law & Justice
Company Law Board (CLB)
Department of Company Affairs
Registrars of Companies (ROC)
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Ministry of Finance
Supervises both SEBI and RBI
Ultimate policy making & supervising body
Appellate Authority for any disputes over SEBI
guidelines
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Self regulatory Organizations
Derive powers from regulator
Ability to make bye laws
Example : Stock Exchanges (NSE, BSE)Industry Associations
-Collective Industry opinion
-Guidelines and recommendation-Example : Association of Mutual Funds inIndia
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Investor’s rights
Proportionate ownership in scheme’s assets Rights of information from Trustee
To received dividend warrants, inspect major docs (Trust
deed, investment management agreement, R&T A
Agreement, custodian services agreement) with 75% voting rights and approval of SEBI can close the
scheme, change the AMC.
Rights of info for fundamental change in the scheme
features and also an opportunity to redeem units withoutany load.
Receive annual report and a/c statement
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Investor’s rights & Obligations
Rights - Legal LimitationsUnit holder’s are not distinct from trust, they
cannot sue trust.
Sponsor do not have any legal obligations (Limited
to initial contribution)
No rights to prospective investors
Obligations
Must read offer doc AOD (Abridged Offer Document)
Beware of risk factors
Must monitor investments regularly
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Investor’s complaint redressal mechanism
Client Servicing
Compliance Officer
Investors cannot be protected by companies Act
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Investing in Mutual Funds –
Understanding the ProcessOffer Document
Key Information Memorandum
Application and form of holdingDistribution channels
Investors rights
Taxation of Income and Capital gainNAV and Load
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The Offer Document
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What is an offer document ?
Legal offer from AMC to investor
Contains vital information about Fund and schemes
SEBI approved format
Key Information Memorandum (KIM) contains vital
information pertaining to the Scheme and it is
mandatory to attach KIM to the application forms
Investor has no recourse for not having read the
OD/KIM
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Significance
Legal document that protects and governs the right of the investor to information
Is the primary vehicle for the investment decision
Is the operating document and describes thefundamental attributes of schemes.
One of the most important sources of information for
the prospective investor
Is a reference document for the investor to look for relevant information at any time
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Fundamental Attributes
Scheme type
Investment objective
Investment patternTerms of the scheme with regard to liquidity
Fees and expenses
Valuation norms and accounting policies
Investment restrictions
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Changes in Fundamental
Attributes Approval from trustees
Approval from SEBI
Public announcement by AMC
Investors to be informed and option given to exit at
NAV without any exit load
New offer document
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OD: Contents
Details of the Sponsor & the AMC
Description of the Scheme & the investment
objective/ strategy
Terms of issue
Historical statistics
Investor Rights & services
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Period of Validity
For New Schemes: 6 months from the date of receipt.
Updated every 2 years for Open Ended Funds
Regular Addendum for modification
Updated for every major change
-Change in the AMC or Sponsor of the mutual fund
-Changes in the fundamental attributes of the schemes
-Changes in the investment options to investor; inclusion
or deletion of options
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Contents of Offer Document
Preliminary information
Summary information about the mutual fund, thescheme and terms of offer
Mandatory disclaimer clauses as required by SEBI
Glossary of terms in the offer document, whichdefines the terms used
Standard and scheme specific risk factorspertaining to the scheme being offered
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Fund Specific Information
Constitution of fund, details of sponsor, trustees and
AMC
Financial history of sponsor (s) for 3 years, in
summary form
Director of boards of the trustees and the AMC
Details of key personnel of the AMC
Details of fund constituents
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Details of the Scheme Being
Offered Dates of NFO
Details regarding sale and repurchase
Minimum subscription and face value
Initial issue expenses Current scheme and the past schemes
Special facilities to investors
Eligibility for investing Documentation required
Procedure for applying, and subsequent operationsrelating to transfer, redemption, nomination, pledgeand mode of holding of units
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Who can invest ?
Resident Indian Individuals/HUF
Indian Companies/Partnership Firms
Trusts / charitable institutions / PFs
Banks/ FIs / NBFCs
Insurance Companies
NRIs/ FIIs
Partnership firms etc.
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Verification and Due Diligence
SEBI : format and content
Trustee approval
Compliance office certifies that Information contained therein is true and fair
Is in accordance with SEBI regulations
Constituents of the fund are all SEBI registered entities.
The AMC is responsible for the contents and the
accuracy of information
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Distribution Channels
Individual Agents
Distribution Companies
Banks and NBFCs
Direct marketing channels
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Sales Practices
Advertising: Divd declared to be mentioned in Rs. Per unit along with NAV
Only CAGR if the scheme has been in existence for more than 1yr.Less than 1 year to be on absolute basis
For liquid schemes simple annualisation of yields possible if performance figure is available for more than 30 days
For funds in existence for more than 1 yr. annualized
return have to be furnished for 1,3,5 yr and since
inception
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NAV - COMPUTATION
NAV = Net assets of scheme / No of units Outstanding
i.e. Market value of investments+ Receivables+
Other accrued income+ Other assets- accrued
expenses- Other Payables- Other liabilities
No. of units outstanding as at the NAV date
Imp : Day of NAV Calculation is known as valuation day
NAV is computed for each business day
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HOW NAV IS COMPUTED
Market value of Equities - Rs.100 crore - Asset
Market value of Debentures - Rs.50 crore - Asset
Dividends Accrued - Rs.1 crore -Income
Interest Accrued - Rs.2 crore - Income
Ongoing Fee payable - Rs.0.5 crore - Liability
Amt.payable on shares purchased -Rs.4.5 crore - Liability
No. of units held in the Fund : 10 crore units
NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
= [153-5]/10= Rs. 14.80
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NAV - Other information Open end funds to declare NAV daily
NAV to be published at least weekly
Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP)
NAV has to consider up to date transactions
Non - recorded transactions not to affect NAV
calculation by more than 2%
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NAV
NAV is influenced by
Purchase and sale of Investment Valuation of Investment
Other assets and Liabilities
Units sold or redeemed.
d
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Loads
Entry Load or front ended loadPaid at the time of purchase
Sale Price = NAV * (1+ Sales Load, if any)
** Not applicable now……
Exit Load or back ended load
Paid at the time of exit
Redemption Price = NAV*(1- Exit Load)
Contingent Deferred Sales Load (CDSL)Deferred exit load depending on the period
Also known as deferred load
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PRICING OF UNITS
Sale price = NAV
Re-purchase price to be not lower than 93%(95% for close-end funds) of the NAV
Difference between the repurchase & sale pricecan not be more than 7% of the sale price
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For example…
If the NAV is Rs 10,
Sale price = Rs. 10
Repurchase price cannot be lower than Rs 9.3
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MUTUAL FUND ACCOUNTING &
VALUATION
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Initial Issue
ExpensesTransaction Cost
Entry / Exit load
CDSC for no-load
schemes
FEES & EXPENSES
Annual Recurring
ExpensesAMC Fee
Custodian Fee
Registry Exp.
Trustee Fee
Audit Fee
Mktg. & Selling Exp.
Brokerage Exp.
Others
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Fees & Expenses Initial Issue expenses only for closed
ended equity fund
For launching of the scheme
Can charge up to 6%
Recurring ExpensesMkt & selling exp including brokerage
Transaction cost
R&T cost
Custodian Fees
Audit fees etc
Investor Communication’s cost
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Fees & Expenses
Amc can charge Investment management fee to
the fund on weekly avg. net assets.
The limits are( subject to limit of 2..5% for
equity & 2.25% for debt
1.25% for up to Rs.100 cr of weekly avg net
assets1% in excess of Rs.100 cr.
No Load schemes can charge an additional fee of 1%
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Limits on Fees & Expenses
Total Expenses that can be charged to the
Fund ( excluding entry and exit loads):
Equity Debt
On the first Rs.100 cr 2.50% 2.25%On the next Rs.300 cr 2.25% 2.00%
On the next Rs.300 cr 2.00 % 1.75%
On the balance assets 1.75% 1.50%
Based on average weekly net assets
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Fees and Expenses contd.. Initial issue expenses
Charge to the scheme capped at 6% of the ini tial resour ces raised under that scheme
Entry/Exit Loads - Transaction costs
Sale price not greater than 107% / Re-purchase price not
lower than 93% (95% for close-ended schemes) of the NAV
Contingent Deferred Sales Charge ( For No-Load Schemes)
Ceiling For redemption within 1year 4%
For redemption within 2years 3%
For redemption within 3years 2%
For redemption within 4years 1%
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Disclosures and Reporting
Audit by independent auditor
Audited Annual report every year
Un-audited accounts to be published within 1
month after March 31 & September 30Within 6 months of closure, publish abridged
summary of report scheme-wise in newspapers
Summary to be forwarded to SEBI & unit holdersFull portfolio disclosure to be made within a month
from the half-year ended March 31 & September 30
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Expenses that cannot be charged
Penalties and fines for infraction of laws.
Interest on delayed payments to unit holders
Legal marketing and publication expenses not attributable
to any scheme
Expenses on investment and general management
Expenses on general administration corporate advertising
and infrastructure costs
Expenses on fixed assets and software development
expenses. Such other costs as may be prohibited by SEBI.
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Accounting Policies
Investments to be marked to market on market prices.Unrealised appreciation cannot be distributed.
Purchase & sale of investments to be recognised on
the trade date and not on settlement date.
Investments to be taken as NPA if it gives no returnthrough interest for more than 6 months
Dividend / Bonus/ rights to be recognised on ex-
dividend / ex-bonus dates and not on declared dates.
Income receivable on Invest NOT accrued for morethan 3 months , should be provided for.
For determining gain/ loss on investments - avg cost
is to be taken
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Disclosure and Reporting
Reporting to SEBI Annual audited accounts
Six monthly unaudited a/cs
Half yearly statement of movements in net assets
of each schemeQtr portfolio statement
Monthly amount mobilized
Communication to investor
Qtr portfolio Annual report
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Non Performing Asset
An asset is classified as an NPA, if the interest and/or
principal amount remain outstanding for one quarter
from the due date.
After classification as NPA: Accrual should be stopped.
Income accrued till date needs to be accounted for
Principal due needs to be accounted for either in a gradedmanner after 3 months of classification or as a write off in totality
in 15 months after classification.
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Taxation
Mutual fund is exempt from paying taxes (section 10
(23D))
Income for investors
-Dividend-Capital Gain
Present position
-Dividend exempt from tax in the hands of Investor
-Funds with >65% in Indian equity pay no DDT-Other funds pay DDT (14.025% for individual and
HUF and 22.44% for others including companies)
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Taxation
Securities Transaction Tax(STT) of 0.25%
sale on Equity Mutual Fund Scheme
As per Section 80C of the Finance ActInvestor can claim a rebate for maximum of
Rs 1 lakh in ELSS.
Mutual Funds units are not included under
wealth tax
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Treatment of Capital Gains
Long Term : > 12 months
Short Term : =< 12 months
Funds with > 65% in Indian Equity
- Short term gain taxed at 10%-Long Term gains taxed at Nil
Other Funds
-Short term gains taxed at marginal rate of tax
-Long Term gains* 20% + surcharge after indexation
*10% + surcharge without indexation
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Indexation
Investor buys on March 31, 1999 and sells on April 1,
2000. What is the indexation adjustment factor? 1998-99 – 351
1999-00 – 386
2000-01 – 406
Investor buys on April 1, 1998 and sells on March 31,
2001. What is the indexation adjustment factor?
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Valuation
Marking to Market
Equity Valuation Norms - Listed, Unlisted, NPA,
Un-traded Debt valuation norms - Listed, Unlisted, Illiquid
Money Market Instruments - valuation norms
Effect of Buybacks, Mergers Valuation Models - CRISIL
Valuation
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Valuation TRADED SECURITIES
Last quoted closing price on the SE where principally traded
If Not traded on any SE on a particular day, then earliest previousday price is taken (not more than 30 days)
Valuation = MP * current holding
NON - TRADED SECURITIESStocks which are not traded for more than 30 days on
any SE are valued on good faith basis by AMC within
following parameters
Debt - YTM basisEquity
Capitalisation of earning or NAV or combination of both
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Risk Parameters
Standard Deviation is used to measure total risk.
Beta co-efficient is used to measure market risk.
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Benchmarks
As per SEBI guidelines, benchmark should reflect asset allocation
Funds with 65% and more in Equity to use a broad based index(Sensex, S&P CNX 500)
Bond fund with more than 65% in bonds to use a bond marketindex
Balanced funds to use a tailor-made index (Crisil Balanced Fundindex)
Liquid funds to use money market instruments.
C it l k t d M t l
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Capital markets and MutualFunds
Equity Market and products
Asset classes
Investment styles
Value indicators
Debt Debt markets
Terminology
Yield and duration Investment styles
Investment restrictions
E it i t t
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Equity investment
Options Ordinary shares
Pref. shares
Equity warrants
Convertible Debentures
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Investment Strategies
Growth and value
Active and passive
Large and small cap
Cyclical stock
Stock selection
P/E ratio
Dividend yield
Undervalued companies
Fundamental analysis
Technical analysis
Quantitative analysis
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Debt Markets
Tenor Short and long
Put and call options
Interest payment Fixed and floating
Periodic vs discounted
Credit quality Gilt, guaranteed and others
Traded and non-traded
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Debt instruments
Commercial Deposits
Corporate Debentures
Zero coupon bond
Floating rate bonds
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Debt instruments
Commercial papers (CPs)
Govt Securities
T - bills (7- 364 days)
Banks/ FIs/ PSU Bonds
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Risk in a Debt Fund
Interest Rate Risk
Credit Risk (Asset quality)
Reinvestment Risk
Call Risk
Liquidity
Inflation
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Price and Yield
Increase in yield reduces value of existing bonds.
Decrease in yield increases value of existing bonds.
Price and yield are inversely related.
The relationship between yield and tenor can be
plotted as the yield curve.
T d i MF
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Terms used in MFs
Yield CurveGraph which shows yields of various maturities
using a bench mark
usually upward - some time inverted
Yield to Maturity (YTM)
Annual rate of return expected of a bond over its
maturity with the assumption that all coupon
payment will be recd on time and reinvested at thesame rate and principal recd on maturity.
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Current Yield and YTM
Coupon as a percentage of current market price.
If we bought a 8 % bond at Rs 110, the current yield
is :
= (8/110)*100
= 7.27%
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Interest Rate Sensitivity
Measured by a number called duration.
If duration is 3 years, and interest changes by 1%,
price of the bond will change in the opposite
direction, by 3%
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Example
Duration of a bond is 4 years. Yield spread increases
by 1.5% What is the change in price
= 1.5*4
= - 6%
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Credit Risk
Probability of default by the borrower
Change in credit rating: Downgrade increases the yield and decreases the price
Upgrade decreases the yield and increases the price
P tf li M t St l
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Portfolio Management Styles
EquityPassive - Index
Active - (a) Growth (b) Value
Debt
Buy and hold - Passive
Duration management - Active
Credit Selection - in anticipation of changes in
credit ratings
Prepayment predictions
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Evaluating Fund Performance
Should be judged in light of :
Investment ObjectivesCurrent Market Conditions
Alternative investment returns
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Performance Evaluation
Different valuation methods
Change in Nav
Total Return
Total Return with dividend reinvested at NAV
CAGR
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Performance Evaluation
Change in Nav - The most common
Nav on day 1 = Rs.10
Nav on day x = Rs.12% Change in nav = dayx-day1/day1 * 100
= 2/10 *100 = 20 %
Limitations:Does not account for dividend
Suitable only for growth plans
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Annualizing Rate of Return
NAV on Day 1: Rs 10
Nav after 6 months : Rs 12
Percentage change in NAV : (12-10)/10 * 100
= 20%
To annualize : 20 *12/6
= 40%
Performance Evaluation
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Performance Evaluation
Total Return
Nav on day 1 = Rs.20
Nav on day x = Rs.22
Dividend = Rs.4 per unit
Total Return = (( Distribution + Change in
nav)/day1 nav)* 100 = ((4+(22-20)/20)*100
= 30%Limitation:
does not account for reinvestment
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Performance Evaluation Return on Investments - most suitable
Nav on day 1 = Rs.20
Dividend = Rs.4 per unit Nav at Rs. 21
Div reinvested = Rs (4 /21) = 0.19 units allotted
Total units = 1.19 (original +new allotted)
NAV at year end = Rs.22
Total Return = ( Nav on year end*total units )-day1
nav)/ day 1 NAV* 100= ((22*1.19)- 20))/20*100
= 30.9%
Compounded Annualized Growth
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Compounded Annualized GrowthRate
CAGR is defined as the rate at which an investment
has grown on an annual compounding basis
Formula : A = P (1+r/100) ^n
Where A is the total amount at the end of the
investment period, P is the principal amount invested,
r is the rate of return and n is the time period of theinvestment.
Performance Evaluation
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Performance Evaluation
Other Parameters
Expense ratios - indicates fund efficiency
and cost effectiveness
Portfolio Turnover ratio - measuresamount of buying and selling done by the
fund
Transaction cost
Fund size
Cash holdings
How MF Scheme Returns are
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How MF Scheme Returns areCalculated
Growth option : Returns calculated using CAGR on
NAV’s
Dividend option : Returns calculated using CAGR on
ex-dividend NAV’s, assuming dividends re-invested. Less than 1 year, returns are calculated using
Change in NAV method.
Investment Restrictions as a % of Net assets - AMC
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Investment Restrictions as a % of Net assets AMC
Max. Investment under all schemes of the AMC in paid up capital
carrying voting rights in single Co. - 10 % Max. Inter scheme investments of the same AMC - 5 % (no AMC
fee payable)
Inter scheme transfers at CMP and within the objectives of scheme
Max. Investment in listed shares of Group Co’s - 25 % for eachscheme.
No investments allowed in unlisted/private placement of group/associate cos.
Can borrow only to meet liquidity requirements. Max for 6 months& not more than 20% of NAV of scheme.
Investment Restrictions as a % of Net Assets -
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Debt
Max. Investment in Rated paper in single Co - 15%(can be increased to 20% with approval by Board
of AMC/Trustee)
Max.Investment in Unrated/ Rated but below
investment grade in single issuer- 10% of NAV
Max. Investment in Unrated/Rated but below
investment grade in all cos - 25% (subject to
approval of Board of AMC /Trustee).Restrictions not applicable to Govt.
Securities/Money Market
Can only invest in marketable securities - no loans
Investment Restrictions as a % of Net Assets -Equit
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Max. Investment in Equity/Equity relatedinstruments of single Co. - 10%
No restrictions in case of Index Fund
Max. Investment in Unlisted Cos. - 10% in
close ended & 5% in open ended funds
Buy & Sell securities on Delivery position , No
short selling/ carry forward allowed.
Security should be transferred to schemesimmediately. Cannot remain in general a/c
Investment Restrictions as a % of Net Assets Equit
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Financial Management
Financial Planning
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Financial Planning
Financial Goalsidentifying various needs for money
Converting needs into specifics
amount of moneytime frame for requirement of money
Planning saving & investment to achieve these
goals
Professional Financial Planners
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Professional Financial Planners
Understands investment universe
Understands risk and return profile of various
investment alternatives
Assist clients in choosing the right investment mix
keeping in mind client’s
-- saving ability
-- risk appetite -- cash flow requirements
-- tax status
Why become a Financial
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Why become a Financial
Planner?
Ability to recommend financial products based on suitability of investor rather than product features
Ability to build mutually beneficial long term relationship withinvestors
Ability to profit from their expertise and value addition to investors
Ability to act as financial intermediaries relied upon by investorsand issuers
Attributes of Financial Planners
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Attributes of Financial Planners
Understanding of the investment universe
-- risk & return profile of investment alternatives
-- past performance
-- behaviour of asset classes
Expertise in tax planning & estate planning Ability to correlate investors life cycle with matching
financial products
Highly organised in their professional lives
Excellent communication and interpersonal skills
Steps involved in Financial
Pl i
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Planning
Establish & define relationship with client
Define Clients Financial Goals
Specific Goals and their timings
Appreciate clients ability to save and cash flow requirements
Appreciate clients disposition to risk
Appreciate tax liability and focus on post-tax returns to client
Recommend appropriate asset allocation
Execute the Plan
Review Periodically
Financial Planning. . . . .
El b t d
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Elaborated Create asset allocation plan
- tailor make portfolio suiting client needs
Enable actual performance
- role of an intermediary
Review and Rebalance continually
- periodic review of performance
- take corrective action, if required
Client Responsibilities
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p
Set measurable goals
Appreciate effect of financial decisions on cash flows
Be open to review and re-balance portfolio on an
ongoing basis
Start early
Be systematic, consistent and disciplined
Investors Needs
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Protection Need Investment Need
To protect living Financial needs served
standards, current and through investments
survival requirements and savings
- Regular Income - Children education- Retirement Income - Housing
- Insurance Cover - Children professional
growth
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Asset Allocation and ModelPortfolio
Recommended Model
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Portfolios . .
Accumulation Stage:
- Investible surplus available
- Financial goals are not near term
• Diversified Equity 65 – 80%
• Income & Gilt 15 – 30%
• Liquid Funds & Bank Deposits 5%
Recommended Model
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Recommended Model
Portfolios . . Transition Stage:
- Closer to Financial Goals
- Transition from ‘Growth to Income’
- Near Retirement , Children Education or Marriage
- Increase Asset Allocation to Income Component
Recommended Model
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Recommended Model
Portfolios . . Distribution Or Reaping Stage:
- Require Income as Dependence on
Investment- Income ‘Grows for Regular Expenses’
- Investors Start Liquidating Portfolio For Current Requirements
• Diversified Equity & Balanced Funds 15 – 30%
• Income Funds 65 – 80%
• Cash Funds 5%
Recommended Model
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Recommended Model
Portfolios . . Inter-generational Or Transfer Stage:
- Focus on Serving Needs of Heirs
- Growth and Income Funds in balance
- Higher percentage in Growth Funds if heirs are ‘Young’
- Income Funds suitable if heirs are ‘Trusts and Charities’
Recommended Model
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Recommended Model
Portfolios . . Affluent Investors:
- HIGHER RISK APPETITE:
• Sectorial and Growth Funds 70 – 80%• Diversified Equity or Balanced Funds Balance
- LOWER RISK APPETITE:• Income , Gilt and Liquid Funds 70 – 80%
• Diversified Equity or Balanced Funds Balance
Asset Allocation
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Asset Allocation
Process of deciding portfolio composition
Allocate funds across equity, debt and other
asset classes based on risk-return profile
Asset Allocation Strategies
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Asset Allocation Strategies Basic Managed Portfolio
- Diversified equity value funds 50%
- Govt. securities fund 25%
- High grade corporate bond fund 25%
Basic Indexed Portfolio
- Stock market index fund 50%
- Bond market index fund 50%
Asset Allocation Strategies Simple Managed Portfolio
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Simple Managed Portfolio
- Balanced Fund 85%
- Medium term bond fund 15%
Complex Managed Portfolio
- Diversified equity fund 20%
- Aggregate growth fund 20%
- Specialty Funds 10%
- Long term bond funds 30%
- Short term bond funds 20%
Readymade Portfolio - Single Index
- Equity 60%
- Debt 40%
Bogle’s Strategic Allocation
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g g
Combines investors age, risk profile and preference in asset allocation
Older investors in distribution phase - 50% Equity, 50% Debt
Younger investors in distribution phase - 60% Equity, 40% Debt
Older investors in accumulation phase - 70% Equity, 30% Debt
Younger investors in accumulation phase - 80% Equity, 20% Debt
Fixed Asset Allocation Strategy
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Maintain fixed ratio between chosen asset classes
Disciplined approach that ensures profit bookingand purchases at lower prices
Example
- 50% Equity and 50% Debt
- Equity markets rise ensuring profit booking
- 50:50 Ratio maintained
Flexible Asset Allocation
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Strategy
No portfolio re-balancing
Ensures riding bull wave if markets arerallying
Ratio changes as per market changes
Model Portfolio
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Set long term goals keeping risk-return profile and
time horizon in mind
Asset allocation exercise based on growth, incomeand liquidity criteria
Sector Distribution exercise
- Allocation of funds across various Mutual Fundproducts
Fund manager selection
- Which scheme? Which Fund house?
Recommended Model
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Portfolios . . Young unmarried professional
- Aggregate Equity funds 50%
- High yield bond, growth & income funds 25%
- Conservative money market funds 25%
Young Couple: Double income, 2 Children
- Money Market Funds 10%
- Aggressive Equity Funds 30%
- High Yield Bond & Long Term Growth Funds 25% - Municipal bond funds 35%
Recommended Model
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Portfolios . . Older couple single income - Short term municipal funds 30%
- Long term municipal funds 35%
- Moderately aggressive funds 25%
- Emerging growth equity 10%
Recently retired couple
- Conservative equity funds 35%
- Moderately aggressive equity funds 25%
- Money market funds 40%
Other Useful Strategies
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Other Useful Strategies
Rupee Cost Averaging Invest regularly a pre-determined amount
Thus, purchase of more units at lower market levels and less unitsat higher levels.
Thereby, reducing the average cost of purchase.
Value Averaging Invest regularly to achieve a pre-determined value
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Fund Selection
Equity Fund Selection . . . . . .
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q yForm categories based on risk-return profile
- Diversified , Index , Sectorial &
Specialised
Form categories based on fund manager’sstyle
- Value and Growth
Evaluate Performance
- Peer Group and Benchmark comparison
Equity Fund Selection . . . . . . . . C id St t l Ch t i ti
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Consider Structural Characteristics
- Size of the Fund
- Fund History
- Portfolio Manager Experience
- Cost of Investing: Expense Ratio
Consider Portfolio Characteristics
- Percentage Cash
- Portfolio Concentration
- Market Capitalisation of Fund
- Portfolio Turnover: Churn
- Portfolio Risk Characteristics
• R-squared
• Beta
• Dividend Yield
High R Squared low beta and high dividend yield is preferred
Bond Fund Selection . . . . . .
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Fund Age and Size
Relative yield: YTM
Expense Ratio
Portfolio Quality
Credit Rating of portfolio holdings
Average maturity
Duration
Money Market Fund Selection
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y
Expense Ratio
Credit Quality
Yield
Principal is safe due to lower duration
Income can be volatile
St t T S t I ti
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Strategy To Smart Investing
Identify Objective
Start early
Focus long-term and stay invested
Beware of the effects of inflation & taxes
Need Based Investment Strategy
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Age Group
(Years)
Growth
(Equity)
Income
(Bonds)
Liquidity
(Banks)
25- 40 75% 15% 10%
41- 50 50% 35% 15%
51- 60 35% 45% 20%
Above 60 25% 50% 25%
Remember :1 I t t D i i A L T D i i
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1. Investment Decision Are Long Term Decision
2. 1% Superior Return Can Make 20%
Difference in 25 Years.
3. Understand the Virtues of Rupee Cost Averaging
4. Discipline Is More Important Than
Intelligence.
5. Avoid Wastage, Look at Returns Net of Taxes
Business Ethics
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Business Ethics
Business Ethics are rules of acceptable and good
conduct in business.
All persons involved with business should follow
ethical codes of conduct.
Business ethics are made by managers or
operators of business.
Business ethics are hard to enforce, hence ideally
should be self-imposed.
Objectives of Business Ethics
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Objectives of Business Ethics
Honest and transparent dealings with customers.
Protect clients from being cheated and exploited.
To ensure level playing field among all
participants.
To ensure healthy competition for the benefit of all customers.
Business Ethics for MF
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Business Ethics for MF
Fund Structure
Separation of functions
Independence of organization
Independence of personnel
Fund Governance
Exercise of voting rights by funds
Fund operations
Ethics Related Regulations
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Ethics Related Regulations
Guidelines for good conduct of trustee
and AMC.
Regulations of personal trading
Regulations of insider trading
Regulations of fund advertisement
Compliance officer
Code of conduct for distributors
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All the Best !!!!!!
Thank You