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    THE CONCEPT AND ROLE

    OF MUTUAL FUNDS

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    A common pool of money into which investors placetheir contributions to be invested in accordance witha stated objective.

    The ownership of the fund is joint or mutual

    The fund belongs to all investors

    Ownership is proportionate to contribution made byone

    Concept of a Mutual Fund

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    Dilemma investor faces in Equity investmentsdirectly

    Buying potential Stocks ?

    Market timing ?

    Discipline ?

    Expert recommendation ?

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    Not as difficult as researching individual stocks

    Portfolio Diversification

    Professional Management Reduction / Diversification of Risk

    Liquidity

    Flexibility & Convenience

    Reduction in Transaction cost

    Safety of regulated environment

    Advantages of Investing through

    Mutual Funds over Direct Investments

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    Disadvantages of Investing through

    Mutual Funds over Direct Investments

    No Control over Cost

    No Tailor-made Portfolios

    Managing a Portfolio Funds

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    Phase 1 (1964-87) : Growth of UTI

    Phase 2 (1987-93) : Entry of PSU Banks and FinancialInstitutions MFs

    Phase 3 (1993-96) : Emergence of

    Private Sector Mutual Funds

    Joint Ventures between

    Foreign Funds & Indian Promoters

    resulting in innovations in- Investment Management

    Techniques, - Investor ServicesTechniques

    History of Mutual Funds

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    Phase 4 (1996-99) : SEBI Regulations forInvestors Protection

    Phase 5 (1999-2004) : UTI Act 1963 repealed in Feb2003

    UTI Mutual Fund becomes SEBIcompliant

    Assured Return Schemes of UTItaken over by a specialundertaking administered

    by GOI Emergence oflarge & uniform inds.

    Phase 6 (2004 onwards): Consolidation & Growth

    35 AMC in 2008

    History of Mutual Funds

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    Growth of AUM

    31 3 -1999 68,472 CRORES

    31-03-2001 90587 CRORES

    31-03-2004 139616 CRORES

    30-11-2008 4,02,000 CRORES

    31-12-2012 7,95,000 CRORES

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    Top Mutual Fund Companies in In India inAUM

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    HDFC MutualFund

    101,393 3.70

    RelianceMutual Fund

    90,636 4.99

    ICICIPrudentialMutual Fund

    81,394 6.55

    Birla Sun LifeMutual Fund

    76,890 5.47

    UTI MutualFund

    70,638 -0.20

    SBI MutualFund

    53,311 4.62

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    Types of Mutual Fund

    Mutual Funds can be classified as:

    Close ended / Open-ended Funds

    Load Fund / No-Load Funds : entry / front & exit /back load

    Tax-exempt / Non-Tax exempt Funds

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    Example on Loads and Returns

    Date Action NAV (Rs) Entry Load Exit Load

    1/1/1999

    31/12/1999

    Entry

    Exit

    11.00

    12.00

    2%

    -

    -

    1%

    ROI with Loads

    Amount invested = 11 + 0.22 = 11.22 Rs.

    Amount received = 12 0.12 = 11.88 Rs.

    Gain = 0.66 Rs.ROI = (0.66 x 100) /11.22 = 5.88%

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    Contingent Deferred Sales Charge

    (CDSC) Charges varying with the holding period it is called

    Contingent Deferred Sales Charge (CDSC) and it mayvary as shown under.

    Redemption during the first five years from the date of

    purchaseFirst Year Maximum CDSC 4%

    Second Year Maximum CDSC 3%

    Third Year Maximum CDSC 2%

    Fourth Year Maximum CDSC 1%

    Fifth Year Nil

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    Types of Funds

    Money Market Funds

    Gilt Funds

    Debt Funds

    Equity Funds Hybrid Funds

    ETF

    Commodity

    Real estate

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    Invest in securities of less than 1 year maturity

    High liquidity & safety of principal

    Low risk and low returns

    Money Market Instruments :

    Treasury Bills (T-Bills By RBI for 3,6,12 Months at discount price)Commercial Papers (promissory notes that are unsecured and issuedby companies for 1 to 270 days)

    Current Return in MMMF is 8.5 %

    Money Market Funds

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    Gilt Funds

    Invest only in Government Securities of over 1 yearmaturity

    Risk and return low but higher than that of MMF

    No default risk but carry interest rate risk

    Fund values drop when interest rates go up & risewhen interest rates go down

    Returns from 11 % to 14 %

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    Debt Funds & Types

    Invest in Corporate Bonds and Government

    Securities

    Risk higher than that of Gilt Funds

    Aims at regular income distribution and not at capitalappreciation

    Types of Debt Funds:- Diversified Debt Funds

    -Assured return Debt Funds

    - Fixed Term Plan Series

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    Equity Funds & Types

    Invest in Equity and Equity related instruments High risk and aim at Capital appreciation

    Types of Equity Funds Growth Funds

    Value Funds Specialty Funds:

    Sector Funds,

    Foreign Securities Funds,

    Mid-Cap or Small-Cap Equity Funds,

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    Diversified Equity Funds

    ELSS Funds

    Equity Index Funds

    Equity Income or Dividend Yield Fund

    Equity Funds & Types

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    Types of Hybrid Funds

    Balanced Funds: Seek to provide regularincome & Capitalappreciation in different

    proportion

    Asset Allocation Funds: Flexible asset allocationbetween Debt, Equity &

    MM

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    Other Funds

    Commodity Funds : Invest in commoditystocks

    Real Estate Funds : Invest in stocksof real estatecompanies

    Exchange Traded Funds :Trade like asingle stock on

    exchange Fund of Funds : Invest in other Mutual

    Fund Schemes

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    Risk Return Hierarchy of Different

    Funds

    Risk High

    Risk Low MMMF

    Gilt Funds

    Debt Funds

    Balanced Funds

    Index Funds

    Diversified Equity Funds

    Sector Funds

    Low return High return

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    Investments plans

    SIP

    SWP

    STP

    VIP

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    FUND STRUCTURE AND

    CONSTITUTENTS

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    Mutual Fund Structure

    Mutual Funds in U.S are setup as investment companies

    Mutual Funds in U.K are either Unit Trusts (Trust) orInvestment Trust (Companies)

    Mutual Funds are Public Trusts under the Indian TrustsAct, 1882

    Mutual Fund is a 3 tier structure: Sponsor, Trustee and

    AMC

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    Mutual Funds invest in Capital market instruments

    on behalf of investors

    All gains and losses of funds are shared by the unitholders

    MF is a pass-through structure and it has taximplications

    Mutual Fund Structure

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    Constituents of a Mutual Fund

    1. Sponsor

    2. Trustees

    3. Asset Management Company

    4. Custodian / Depository Participant

    5. R & T Agent

    6. Distributors7. Banker

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    Role of Sponsor

    Sponsor is a person who sets up a Mutual Fund

    Sponsor settles the Trust and executes Trust Deed

    Sponsor contributes to the initial capital of the Trust

    Sponsor appoints the Board of Trustees

    Sponsor appoints Asset Management Company

    Sponsor contributes minimum 40% of net worth of AMC

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    Who can be a Sponsor?

    Criteria of a Sponsor are

    Minimum 5 years track record

    History of positive After Tax Profit for 3 out of 5 years including

    fifth year

    Net Worth more than Contribution for AMC

    Fit and Proper person

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    Board of Trustees & Role

    Trustees appointed by the Sponsor with SEBIapproval

    At least two third Trustees must be Independent

    The Trustees have a FIDUCIARY responsibility

    towards unit holders Trustees not liable for acts done ingood faith and if

    they have exercised adequate due diligence

    Trustees oversee the functioning of AMC

    Trustees approve each MF scheme floated by AMC

    The investments in MFs are held by the Trustees

    Trustees receive fees for their services

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    Who can be a Trustee

    Eligibility Conditions :

    Person of high repute and integrity

    Not guilty of moral turpitude

    Not convicted for economic offence under securitieslaws

    Not a part of AMC eg. Director, Employee or Officer

    of AMC

    One can be Trustee of two MFs if approved by

    Board of Trustees of both the Mutual Funds.

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    Asset Management Company

    Constituted as a Company under the Indian Companies

    Act

    Minimum Net worth of Rs. 10 crores for AMC

    Minimum contribution of sponsor: 40% of share capital of

    AMC

    At least 50% of Directors of AMC to be independent

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    AMC can do only the following businesses

    Asset Management Services

    Portfolio Management Services

    Portfolio Advisory Services

    AMC can be terminated/changed with the consent of

    Majority of Trustees or

    At least 75% majority of Unit holders

    Asset Management Company

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    Role of AMC

    AMC is the Fund Manager for managing Mutual FundAssets

    AMC floats different MF schemes

    AMC accountable to the Trustees

    AMC charges Asset Management Fees subject to ceiling

    prescribed by SEBI.

    Asset Management Agreement between AMC andTrustee

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    Obligations of AMC

    Limit of 5% of aggregate purchase and sales ofSecurities under all its scheme per broker perquarter

    As far as possible AMC to avoid services of itssponsor.

    All Security transactions with a Sponsor and hisassociates to be disclosed

    Disclosure of transactions with a company whichhas invested more than 5% of NAV in any scheme

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    Custodian / Depository Participant

    Custodian / DP: Appointed by Board of Trustees

    Keep record & account of Securities / Investments

    Collects benefits under Securities Sponsor & Custodian / DP cannot be the same entity

    Registered with SEBI

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    Registrar & Transfer Agent Registrar & Transfer Agent:

    Issues, redeems, transfers units of MF schemes

    Keeps Unit Holders A/cs upto date

    Registered with SEBI

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    OFFER DOCUMENT

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    Offer Document & KIM

    Offer Document A Legal document

    Issued by AMC on behalf of Trustees

    Offer Document describes the Product/Scheme

    Very important document for prospective investor

    First time investors must read OD before deciding to invest For Close Ended Fund issued at the time of launching a scheme

    For Open Ended Fund revised every 2 years

    KIM A abridged version of Offer Document

    A part of the Application Form To be in the format as prescribed by SEBI

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    Offer Document

    Offer Document prepared and issued by AMC Offer Document to be approved by Trustees

    Offer Document filed with SEBI with fees of

    Rs. 25000/-

    Modifications if any advised by SEBI within 21 days of itsfiling

    SEBI neither approves nor disapproves an OD

    Offer Document valid for 6 months for launching of

    scheme from the date of receipt of by AMC of SEBI letter

    containing observations. Thereafter fresh OD to be filled

    with SEBI

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    Contents of Offer Document

    Summary information on Cover page: Names of Trustees, AMC, Scheme, Period of Opening /Closing, Face value of unit , SEBI Disclaimer

    Risk factors: Standard & Scheme Specific

    Legal & Regulatory Compliance Certificate

    Financial information on Schemes & Expenses for last 3years

    Constitution of MF its Sponsors, Trustees, AMC & theirfunctions

    Investment objectives & policies Management of Funds: Names of Fund Manager

    Offer related information: Minimum Subscription amount

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    Pricing of a Fund Unit

    SEBI Regulations on pricing of Mutual Fund units

    For Open Ended Funds

    Repurchase price not lower than 93% of NAV

    Sale price cannot be more than 107% of NAV Difference between the repurchase and sale price of a

    Unit cannot be more than 7%

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    Charges in a MF

    Mutual Funds can recover two types of Expensesa. Initial issue expenses

    b. Recurring Expenses

    Initial Issue Expenses effective April 04 2006 allowed up to 6% for Close Ended

    Funds only

    Close Ended Funds cannot charge Entry Loads

    Open Ended Funds can recover initial expenses through

    Entry Load

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    Maximum Recurring Expenses

    Average WeeklyAssets

    For EquityFunds

    For BondFunds

    For first Rs.100crs

    2.50% 2.25%

    For next Rs.300crs

    2.25% 2.00%

    For next Rs.300crs 2.0% 1.75%

    On the BalanceAverage WeeklyAssets

    1.75% 1.50%

    Recurring Expenses cannot exceed the followingregulatory limits

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    Asset Management Fees

    AMC charges Asset Management Fees Limits on AMC Fees as per SEBI Regulations:

    1.25% of the 1st Rs. 100 crs of weekly Average Net Assets

    1.00% of the weekly Average Net Assets in excess of Rs. 100crs

    AMC may charge additional 1% of weekly Average Net Assetsfor No Load Funds

    Asset Management Fees are not in addition to but a part ofRecurring Expenses

    Asset Management fees are usually lower for Debt Fundsas compared to Equity Funds and are disclosed in OD

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    Amortization of Initial Expenses

    Close Ended Funds do not charge initial expenses of fund butamortize the same over a period of years

    Initial Expenses amortized on a weekly basis over the period ofthe scheme. e.g for a 5 yr scheme, amortized over 260 weeks

    Investor existing before expiry of period of scheme will becharged unrecovered initial issue expenses

    Conversion of close ended funds into open ended funds allowed

    only after recovery of unrecovered initial expenses

    Un-amortized portion added for NAV calculation as Other Assetbut no AMC fee on this amount

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    Investment in unlisted shares of companies Close Ended Fund : Not more than 10% of Net Assets

    Open Ended Fund: Not more than 5% of Net Assets

    Investments in Equity shares under all schemes of a MF Not more than 10% of Paid up capital of a company

    Investment by a Mutual Fund in ADRs / GDRs allowed Investment by a M.F. in Equities of listed overseas

    companies having share holding of at least 10% allowed

    Overall limit of U.S. $ 5 Billion for such overseas investmentfor entire M.F. industry

    Overall limit per M.F. Not exceeding 10% of Net Assets subject to maximum USD 300

    Million

    Regulatory Restrictions on Investments

    by Funds

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    A Mutual fund can invest maximum 5% of Net Assets under all its schemes

    into different fund schemes of the same AMC or of any otherAMC except Fund of Funds Scheme

    The above limit does not apply to Fund of Funds Securities are to be bought or sold only on delivery

    basis No short selling allowed

    Securities to be bought and sold for a relevant

    scheme. Purchases/Sales cannot be aggregated and allocated

    later

    Regulatory Restrictions on Investments

    by Funds

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    MFs can lend securities under the SEBI approvedStock Lending scheme

    A Mutual Fund can invest only in Marketable

    Securities

    A Mutual Fund cannot invest in unlisted securities ofSponsor or Sponsor Group Companies

    A Mutual Fund can invest in listed securities of thesponsor / Sponsor Group Companies upto 25% ofNet Assets of the Fund

    Regulatory Restrictions on Investments

    by Funds

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    A Mutual fund can transfer Securities from one scheme toanother scheme at market prices and on spot deliverybasis

    Inter-scheme transfers allowed if objectives of both theschemes are same

    A Mutual fund can park its money in deposits ofScheduled Commercial Banks pending deployment intoregular investments

    Borrowing by MFs restricted upto 20% of Net Assets for

    maximum 6 months for paying dividend/redeeming units Record of investment decisions to be maintained.

    A FOF cant invest in other FOF scheme

    Regulatory Restrictions on Investments

    by Funds

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    Expense Ratio / Income Ratio

    Method of Fund Evaluation

    Funds can be evaluated based on Expense ratio andIncome ratio

    Expense Ratio: It is the ratio of total expenses to AverageNet Assets of the fund. This ratio is important for evaluating Bond Funds

    Expenses do not include brokerage paid since it iscapitalized and therefore expenses may be understated

    Income Ratio = Net Investment IncomeNet Assets

    Income ratio is important for evaluating Bond Funds

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    Portfolio Turn Over Rate

    Method of Fund Evaluation

    Another Measure of Fund Evaluation is Portfolio TurnOver Rate

    Portfolio Turnover Rate = Total Sales & Purchases

    Net Assets of the Fund.

    Higher Turn Over Rate indicates More churning of Portfolio

    More transaction costs

    Portfolio turn over ratio relevant for actively managedfunds

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    LEGAL & REGULATORY

    FRAMEWORKS

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    Regulators in India

    SEBI is Capital Market Regulator with legal powers SEBI regulates Mutual Funds.

    All Mutual Funds to be registered with SEBI

    RBI is Money Market Regulator

    SEBI is regulator for Liquid Funds Investing in MM instruments MOF supervisory body for RBI & SEBI

    Security Appellate Tribunal setup in 2003 to hear appeal against SEBI

    decisions

    Registrar of Companies(ROC) ensures compliance by AMC & byTrustee Company with the Indian Companies Act 1956

    ROC supervised by Department of Company Affairs (DCA)

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    Regulators in India

    DCA frames and modifies regulations relating to thecompanies

    DCA is a part of Company Law Board

    CLB is a part of Ministry of Law and Justice Company Law Board carries out judicial proceedings

    for offences under Companies Act

    Mutual Fund Trustees accountable to Public Trustees

    Public Trustee reports to Charity Commissioner

    UTI set up under UTI Act 1963

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    Self Regulatory Organisations

    SROs are second tier in the regulatory structure

    SRO is an association of Market Participants

    Approval of SRO given by MOF

    All Stock Exchanges are SROs and are supervised by

    SEBI Close Ended Funds listed on SE observe listing

    Agreement Requirements of SEs

    AMFI was incorporated in 1995 and is not an SRO

    Role of AMFI To promote interest of MFs & Unit Holders

    To set ethical, commercial & professional standards

    To increase public awareness of MF industry

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    Investors Rights & Obligations

    Right of proportionate beneficial ownership

    Right to timely service

    Right to information eg. NAV Calculation, Unit Pricing

    Right to approve changes in fundamental attributes of

    the scheme

    Right to wind up a close ended scheme with 75%

    majority of unit holders Right to terminate the AMC with 75% majority of unit

    holders

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    Investor Rights to Services

    Investor to be informed about change in fundamentalattributes of the scheme eg. from No Load fund to Loadfund or change in Pricing norms for purchase/sale of Units

    Open ended Fund must reopen within 30 days after theOffer period

    Nomination facility allowed

    Redemption proceeds to be sent to investor within 10working days otherwise Penal interest at the rate specifiedby SEBI for the full period

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    Investor Rights to Services

    Annual Holding statements and Transaction

    statements to be sent to investors

    Dividend Warrants to be dispatched within 30 days ofdividend declaration by MF

    Mandatory portfolio disclosure for half-yearly period

    to unit holders within 1 month

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    Investors right to inspect documents such as

    Trust deed,

    AMC Agreement,

    Balance Sheets of MF Schemes and

    Balance Sheet of AMC

    Investor Rights to Services

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    Legal limitation to Investor Rights

    Investors cant sue the Trust

    Investor can sue the Trustee

    Sponsor of fund not responsible for shortfall in nonassured scheme

    Prospective investors cant sue the trustees/AMC/Custodians

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