New Note Book 2021-02 (1) (1) (Autosaved) - 1
New Note Book 2021-02 (1) (1) (Autosaved) - 1
Assessment structure
MCQ Type Questions
2 to 4 Options to choose
100 questions
2 hours
Contents
1. Investment Landscape
2. Concept & Role of a Mutual Fund in India
3. Legal Stricture of Mutual Funds in India
4. Legal & Regulatory Framework
5. Scheme Related Information
6. Funds Distribution and Channel Management Practices
7. NAV, TER and Pricing of Units
8. Taxation
9. Investor Services
10. Return, Risk & Performance of Funds
11. Mutual Fund Scheme Performance
12. Mutual Fund Scheme Selection
Investment Landscape - Chapter 1
Why Investments? – To beat inflation
Financial Goals –
Children's Higher Education,
Children’s Marriage,
Self-Retirement,
Buying a New House,
Charity, foreign Tour etc. Financial Goals, Time Horizon & Inflation
The Mathematics
How much would it cost?
Time horizon
Inflation with respect to the goal value
Time Value of Money (TVM)
A = P × (1 + i)n
here,
A = Rupee requirement in future
P = Cost in today’s terms
i = Inflation
N = Number of years into the future, when the expense
will be incurred
The risk profilers try to ascertain the risk appetite of the investor so that
one does not sell
mutual fund schemes that carry higher risk than what the investor can
handle. In order to
ascertain the risk appetite, the following must be evaluated:
• The need to take risks
• The ability to take risks, and
• The willingness to take risks
Rebalancing
Market Capitalisation
𝑵 𝒖𝒎 𝒃𝒆𝒓𝒐𝒇 𝒐𝒖𝒕𝒔𝒂𝒕 𝒏𝒅𝒊𝒏𝒈 𝑺𝒉𝒂𝒓𝒆𝒔 × 𝑪𝑴 𝑷
Large Cap: 1st – 100th company
Mid Cap: 101st – 250th company
Small Cap: 251st company onwards
Equity Schemes:
Multi cap fund
Flexi cap Fund
Large cap fund
Mid cap fund
Small cap fund
Dividend yield fund
Value fund or Contra fund
Focused fund
Sectoral / thematic
ELSS
Debt Funds:
Overnight fund
Liquid fund
Ultra short duration fund
Money market fund
Dynamic fund
Corporate bond fund
Credit risk fund
Banking and PSU fund
Gilt fund
Hybrid Funds:
Conservative hybrid fund
Balanced hybrid fund or Aggressive fund
Dynamic asset allocation fund or Balanced advantage fund
Multi asset allocation fund
Arbitrage fund
Equity savings fund
Solution Oriented funds:
Retirement fund
Children’s fund
Other Funds:
Index funds / ETFs
FoFs (Overseas / Domestic)
LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA CHAPTER
3
Structure of Mutual Funds in India
Asset
Trustee Management
company
Operations and
Fund customer Sales & Other
Compliance Management marketing functions
service
Unit-holders have the right to inspect key documents such as the Trust
Deed, Investment Management Agreement, Custodial Services
Agreement, RTA agreement and Memorandum & Articles of
Association of the AMC.
But unitholders cannot ask for a research report based on which some
investment decisions have been taken off.
Right to appoint nominees
The Annual Report has to mention the unclaimed amount and the
number of such investors for each scheme.
If the investor claims the money within 3 years, then payment is based
on prevailing NAV i.e. after adding the income earned on the
unclaimed money.
If the investor claims the money after 3 years, then payment is based
on the NAV at the end of 3 years.
Due Diligence Process by AMCs for Distributors of Mutual Funds
The AMCs are vested with the responsibility of regulating the practices
of the distributors.
AMCs are required to conduct a due diligence of their distributors.
SEBI has issued a circular regarding the process for carrying out such
an exercise.
This has been discussed section in Chapter 6 in detail.
Investor Grievance Redress Mechanism
In the event of any issue with the AMC or mutual fund scheme, the
investor can first approach the investor service centre. If the issue is
not redressed, even after taking it up at senior levels in the AMC, then
the investor can write to SEBI with the complaint details.
SEBI Complaint Redress System (SCORES) is a web based centralized
grievance redress system of SEBI. SCORES enables investors to lodge,
follow up on their complaints and track the status of redressal of such
complaints online on the website (http://scores.gov.in).
An investor, who is not familiar with SCORES or does not have access
to SCORES, can lodge complaints in physical form at any of the offices
of SEBI.
Entities against which complaints are handled by SEBI include:
Listed companies and or, registrar & transfer agents
Brokers and or, stock exchanges
Depository participants and or, depository
Mutual funds
Portfolio Managers
Other entities (KYC Collective investment scheme, Merchant banker,
Credit rating, Foreign portfolio investor etc.)
AMFI Code of Ethics (ACE)
The AMFI Code of Ethics (ACE) sets out the standards of good practices
to be followed by the Asset Management Companies in their
operations and in their dealings with investors, intermediaries and the
public.
SEBI (Mutual Funds) Regulation, 1996 requires all Asset Management
Companies and Trustees to abide by the Code of Conduct as specified
in the 5th Schedule to the Regulation.
AMFI Guidelines & Norms for Intermediaries (AGNI)
AMFI has also framed a set of guidelines and code of conduct for
intermediaries, consisting of individual agents, brokers, distribution
houses and banks engaged in selling of mutual fund products.
In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is initiated by AMFI:
For persons who have attained the age of 50 years or who have at
least 10 years of experience in the securities markets in the sale
and/ or
distribution of mutual fund products as on May 31, 2010, can obtain
the certification either by passing the NISM certification examination
or qualifying for Continuing Professional Education (CPE) by obtaining
such classroom credits as may be specified by NISM from time to time.
Step 2: Know Your Distributor Requirement
Step 3: Obtaining AMFI Registration Number
Step 4: Empanelment with AMCs
the total expense ratio of the scheme including the investment and
advisory fees shall not exceed 1% of the daily net assets.
In case of other open ended schemes
The rate of tax on the indexed capital gains is 20%, and thus the tax
liability would be Rs. 2,952.76.
Dividend income
From Financial Year 2020-2021 (AY 21-22), dividends is taxable in the
hands of the recipient at the applicable tax rate,
Tax on dividend would be a function of the applicable rate of tax based
on total income for the year, and hence the tax rate goes up for those
in higher income,
The dividend income would be tax exempt for investors in various tax-
exempt categories, for example: charitable trusts, mutual fund
schemes and individuals in the tax exempt slab.
Setting off of Capital Gains and Losses under Income Tax Act
Capital loss, short term or long term, cannot be set off against any
other head of income (e.g. salaries),
Short term capital loss is to be set off against short term capital gain or
long term capital gain,
Long term capital loss can only be set off against long term capital gain.
Bonus Stripping: Suppose an investor buys units of a scheme at Rs. 30.
Thereafter, the scheme declares a 1:1 bonus issue. At this stage, if the
investor sells the original unit at Rs. 15. However, such capital loss is not
available for setting off against capital gains, if the original units were
bought within a period of 3 months prior to the record date for the bonus
issue and sold off within a period of 9 months after the record date.
Securities Transaction Tax
When an investor sells units of an equity fund in the stock exchange,
or offers them for re-purchase to the fund, he will have to incur
Securities Transaction Tax (STT),
STT is not applicable on purchase of units of an equity scheme. It is
also not applicable to transactions in debt securities or debt mutual
fund schemes.
Tax benefit under Section 80C of the Income Tax Act
Certain mutual fund schemes, known as Equity Linked Savings
Schemes (ELSS) are eligible for deduction u/s 80C of the Income Tax
Act. The scheme invests in equity shares,
The benefit is available upto Rs. 1.50 lacs per year per taxpayer in case
of individuals and HUFs,
The scheme has a lock-in period of 3 years from the date of
investment,
If one is investing in this scheme through SIP, each investment would
be locked-in from the date of the respective investment for a period of
3 years,
The tax benefit would be available to the first holder, in case of a joint
holding.
Tax Deducted at Source
There is no TDS on re-purchase proceeds to resident investors,
For certain cases of non-resident investments (NRI), the same is
applicable,
The TDS applicable for non-resident investors is the lower of the rate
specified in the income tax regulations or the tax specified in the DTAA
of the country where the investor is resident.
In case of dividends from mutual fund schemes, even for resident
Indians, TDS is applicable,
The tax is required to be deducted at 10% on the dividend amount if it
exceeds Rs. 5,000.
Applicability of GST
AMC(s) can charge GST, as per applicable Taxation Laws, to the
schemes within the limits prescribed under SEBI (Mutual Fund)
Regulations. These are:
On investment management and advisory fees,
On all the fees other than investment and advisory fees,
On brokerage and transaction cost,
- within the maximum limit of TER.
GST on exit load, if any, shall be deducted from the exit load and the
net amount shall be credited to the scheme.
The commission payable to the distributors of mutual funds may be
subject to GST, as applicable in case of the ARN holder. Such tax cannot
be charged to the scheme.
INVESTOR SERVICES
The NFO process
Steps Leading to NFO:
AMC decides on a scheme to take to the market,
AMC prepares the Scheme Information Document (SID) for the NFO
and needs to approved by the Trustees and the Board of Directors of
the AMC,
AMC Files the draft Offer Document with SEBI. SEBI does not approve
or disapprove Offer Documents, it gives its observations,
AMC decides on a suitable time-table for the issue
AMC launches its advertising and public relations campaigns to make
investors aware of the NFO
AMC holds events for intermediaries.
Offer Documents and Application Forms are distributed to market
intermediaries.
Three dates are relevant for the NFO of an open-ended scheme:
NFO Open Date – This is the date from which investors can invest in
the NFO
NFO Close Date – This is the date upto which investors can invest in
the NFO
Scheme Re-Opening Date – This is the date from which the investors
can offer their units for re-purchase to the scheme (at the re-purchase
price); or buy new units of the scheme.
New Fund Offer Price/On-going Offer Price for subscription
New Fund Offer (NFO) Price is the price per unit that the investors have
to pay to invest during the NFO.
Ongoing price for purchase, redemption (sale) /switch outs (to other
schemes/plans of the Mutual Fund) by investors is the price at which the
investor purchases or receives redemptions/switch outs.
Investment Plans and Services
Investment Plans:
Direct
Regular Plans
Investment Options:
Dividend Pay-out,
Dividend Re-
Investment
Growth Options
Allotment of Units
to the Investor
NFO: At Face
value, which is
generally Rs. 10
in case of Mutual
Fund
On-going offer:
Prevailing NAV
In a rights issue: Be noted that rights issues, which are common for
shares, are less meaningful for units of mutual fund schemes.
In a bonus issue: The investor does not pay anything. The fund allots
new units for free. Thus, in a 1:3 bonus issue, the investor is allotted 1
new unit (free) for every 3 units already held by the investor.
Account statements for investments
Monthly Statement of Account: Mutual funds issue the Statement of
Account every month if there is a transaction during the month.
Annual Account Statement: The Mutual Funds provide the Account
Statement to the Unit-holders who have not transacted during the last
six months prior to the date of generation of account statements.
Consolidated Account Statement (CAS)
A CAS for each calendar month is sent by post/email on or before 10th
of the succeeding month provided there has been a financial
transaction in the folio in the previous month.
If an email id is registered with the AMC, only a CAS via email is sent.
Where there are no transactions in a folio during any 6 month period,
a CAS detailing holding across all schemes of all mutual funds at the
end of every such 6 month period
Mutual Fund Investors
Eligibility to Invest:
Individual Investors
Resident Indian
adult individuals,
Foreign investors can invest in equity schemes of MFs registered with
SEBI after completing KYC process.
Non-individual Investors
Companies / corporate bodies, registered in India
Registered Societies and Co-operative Societies
Religious and Charitable Trusts
Trustees of private trusts
Partner(s) of Partnership Firms etc.
Banks and Financial Institutions and Investment Institutions
Foreign Portfolio Investors registered with SEBI
International Multilateral Agencies approved by the Government of
India
Foreign portfolio investors who meet KYC requirements to invest in
equity and debt schemes of Mutual Funds can invest through two
routes:
Direct route - Holding MF units in demat account through a SEBI
registered depository participant (DP)
Indirect route - Holding MF units via Unit Confirmation Receipt
(UCR).
It is a good practice to check the ‘Who can Invest?’ section of the Scheme
Information Document (SID), especially for a first time investor.
Filling the Application Form for Mutual Funds
The information required to be provided in the application form are
discussed below.
Direct Plan and Regular Plan
Unit Holder Information
Status of the Holder and Mode of Holding
KYC Details
FATCA and CRS Details
Bank Account Details
Investment Details
Payment Details
Unit Holding Option
Nomination
Financial Transactions with Mutual Funds
Initial Purchase of Mutual Fund Units
Additional Purchases
Repurchase of Units
Switch
Payment Mechanism for mutual fund purchases
Online Transactions
Internet Banking
Unified Payment Interface
Application Supported by Blocked Amount (ASBA)
Aadhaar Enabled Payment Service
National Unified USSD Platform
Cards
E-Wallets
One-Time Mandate (OTM)
Cheque/Demand Draft
Cash Payments
Small investors, who may not be tax payers and may not have
PAN/bank accounts, such as farmers,
small traders/businessmen/workers are allowed cash
transactions for purchase of units in mutual funds to the extent of Rs.
50,000/- per investor, per mutual fund, per financial year,
This facility is available only for resident individuals,
sole
proprietorships and minors investing through their guardians,
A prescribed deposit slip for making cash investments available at the
Investor Service Centre (ISC) has to be used to give details of the
scheme in which the investment is being made and the amount of
investment.
The deposit slip along with the cash has to be deposited at the bank
branches designated to accept the cash investments.
The acknowledgement copy of the bank slip received from the bank
along with the application form/transaction slip has to be submitted to
the ISC for time stamping.
Third Party Payments
A third-party payment is defined as one made through a bank account
other than that of the first holder of the folio.
There are some exceptions where third party payments will be
accepted:
If the payment is made through a joint bank account, then the person
mentioned as the first holder of the folio should be one of the joint
holders for the payment to be considered non-third party payment.
Payment by Parents/Grand-Parents/Related Persons on behalf of a
minor in consideration of natural love and affection or as gift for a
value
not exceeding Rs 50,000/- for each regular purchase or per SIP
instalment,
Employer making payments on behalf of employee through payroll
deductions
Payments by the AMC to its empanelled distributors on account of
commissions etc. in the form of units of the mutual fund scheme
managed by the AMC either through an SIP or lump sum investments
or a similar arrangement of payment of commission by a Company to
its agents,
Compliance with the KYC norms and providing the PAN details are
mandatory by the third party making the payment irrespective of the
amount involved.
Payment Mechanism for Repurchase of Units
Cheque
Electronic Modes
Instant Access Facility
Cut-off Time and Time Stamping
Time Stamping
As a convenience, the distributor may accept the transaction request
from the investor, but this would need to be sent to an Official Points
of Acceptance (OPoAs) at the earliest.
When the cut-off timing is applied, the time when it is submitted to
the OPoA is relevant – not the time when the investor submits the
transaction request to the distributor.
These points of acceptance have time stamping machines with
tamper- proof seal.
Opening of the machine has to be properly documented and reported
to the Trustees,
The daily time stamping of application does not start with serial One.
KYC Requirements for Mutual Fund Investors
PAN Card with photograph is mandatory for all applicants as a proof of
identity, except those who are specifically exempted,
Proof of Address,
Photo,
Minor - KYC requirements have to be complied with by the Guardian,
Power of Attorney holder - KYC requirements have to be complied
with, by both, investor and PoA holder,
NRI investors - PAN is the sole identification number for KYC
compliance. A copy of the passport/PIO card/OCI card and overseas
address proof is mandatory.
PAN exempt investments in mutual funds
Generally, PAN is compulsory for all mutual fund investments,
Exception has been made for Micro-SIPs i.e. SIPs where annual
investment (12 month rolling or April-March financial year) does not
exceed Rs. 50,000/-,
Small investors investing upto Rs. 50,000/- per mutual fund per
financial year do not need to provide PAN Card,
Instead, the investors can submit PHOTO IDENTIFICATION documents
along with Micro SIP applications,
Investment by individuals, minors and sole-proprietary firms within
the limits specified above are exempted from the requirement of PAN
card.
Centralised KYC Registration Agencies
SEBI has instituted a centralised KYC process for the capital market,
including mutual funds.
The Government of India authorised the Central Registry of
Securitisation and Asset Reconstruction and Security Interest of India
(CERSAI) to act as and to perform the functions of the Central KYC
Record Registry.
It shall be responsible for electronically storing, safeguarding and
retrieving the KYC records and making such records available online to
reporting entities or Director.
Information updated about a customer shall be disseminated on
request by Central KYC Registry to any reporting entity that avail the
services of the Central KYC Registry in respect of the customer.
The services of the Central KYC Registry will be available on payment
of prescribed fee, in advance.
KYC through e-KYC service of UIDAI
In consultation with Unique Identification Authority of India (UIDAI)
and the market participants, e-KYC service launched by UIDAI has also
been accepted as a valid process for KYC verification.
Entities would be registered with UIDAI as KYC user agency (KUA) and
shall allow all the SEBI registered intermediaries/mutual fund
distributors to undertake Aadhaar Authentication of their clients for
the purpose of KYC through them.
KYC through Intermediaries
Where the investors choose to hold the units in demat form or for
applicants who choose to invest through the stock exchange
infrastructure, the KYC performed by the Depository Participant will be
considered in compliance with the KYC norms.
KYC Process
The requisite form has to be filled-in along with supporting
documents.
The original documents of the identity and address proof are returned
to the investor after verification while the forms and supporting
documents are uploaded in the server of any centralised KRA.
The intermediaries mentioned above are also authorised to perform
an In-Person Verification (IPV) of the investor, which is mandatory. The
name, designation and organisation of the person conducting the IPV
has to be recorded on the KYC form. An IPV performed by Scheduled
Commercial Bank is also acceptable for mutual fund investments.
Additional Requirements applicable for Institutional Investors
Since institutional investors are not natural persons, authorised
individuals invest on behalf of the institution. Therefore, few additional
documents are essential.
FATCA and Common Reporting Standards (CRS)
To comply with the requirements of Foreign Account Tax Compliance
Act (FATCA) and Common Reporting Standards (CRS) provisions,
financial institutions, including mutual funds, are required to
undertake due diligence process to identify foreign reportable
accounts. The application form requires information to be provided if
the citizenship/nationality/place of birth/tax residency are places
other than India for all categories of investors. The countries of tax
residency and respective tax payer reference ID has to be provided.
If there is a change in the status of the investor after the information is
first provided, then the same has to be reported to the mutual fund
within 30 days.
Systematic Transactions
Systematic Investment Plan
Systematic Withdrawal Plan
Systematic Transfer Plan
Switch
Dividend Transfer Plan
Non-Financial Transactions
Nomination
Pledge/Lien of Units
Demat Account
Change in Folio Details
Change in Personal Information
Change in Bank Account Details
Transmission of Units
Investor transactions – turnaround times
Mutual Fund Schemes to allot units or refund Within 5 business days of closure of NFOs
money
Scheme-wise Annual Report or an abridged Four months from the date of closure of the
summary to all unit holders relevant accounts year
Statement of portfolio to be sent to all Before the expiry of 10 days from the close of
Unitholders each half year (i.e. 31st Mar and 30th Sep)
Half Yearly Disclosures (unaudited financial Within 1 month from the close of each half
results) on mutual fund website year (i.e. 31st Mar and 30th Sep)
Dividend Yield
Dividend yields tend to go down across stocks in a bull market and rise in a bear market.
Other factors
Investment Styles:
Growth
Value
Portfolio Building Approach
Top down -sector allocation
Bottom up -stock picking
Factors Affecting Performance of Debt Schemes
Interest Rate
Credit Spread or Yield Spread - difference between the yield on Gilt
and the yield on a non-Government Debt security.
Modified Duration
Credit Risk - Credit Rating Companies -CRISIL, ICRA, CARE and Fitch
Fixed Rate Vs. Floating Rate
Different Debt securities issuer:
Securities issued by the Govt. are called Government Securities or G-
Sec or Gilt.
Treasury Bills are short term debt instruments issued by the RBI on
behalf of the Government of India.
Certificates of Deposit are issued by Banks (7 days to 1 year) or
Financial Institutions (1 to 3 years)
Commercial Papers are short term securities (upto 1 year) issued by
companies.
Bonds/Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue bonds, while
private sector companies issue debentures.
Relationship Between Bond Price and Interest Rates
Although both schemes have the same average returns, the periodic
returns fluctuate a lot more for Scheme 2.
Variance measures the fluctuation in periodic returns of a scheme, as
compared to its own average return.
Variance as a measure of risk is relevant for both debt and equity
schemes.
Standard deviation is equal to the square root of variance.
Beta
Beta is based on the Capital Asset Pricing Model (CAPM), which states
that there are two kinds of risk in investing in equities – systematic risk
and non-systematic risk.
It measures the fluctuation in periodic returns in a scheme, as
compared to fluctuation in periodic returns of a diversified stock index
over the same period
The diversified stock index, by definition, has a Beta of 1
Schemes, whose beta > 1, are seen as riskier than the market. Beta <1
is indicative of a scheme that is less risky than the market
Beta as a measure of risk is relevant only for equity schemes
Modified Duration, Weighted Average Maturity & Credit Rating
This measures the sensitivity of value of a debt security to changes in
interest rates.
Higher the modified duration, higher the interest sensitive risk in a
debt portfolio.
Longer the maturity of a debt security, higher would be its interest rate
sensitivity.
Weighted average maturity of debt securities in a scheme’s portfolio is
indicative of the interest rate sensitivity of a scheme too.
The credit rating profile indicates the credit or default risk in a scheme.
Certain Provisions with respect to Credit risk
Gating or restriction on redemption in mutual funds
According to SEBI regulations, such restrictions may be imposed only
for a specified period not exceeding 10 working days in any 90-day
period.
Segregated portfolio or side pocketing
AMC will not charge investment and advisory fees on the segregated
portfolio.
Net Asset Value of Segregated Portfolio
The Net Asset Value (NAV) of the segregated portfolio is required to be
declared on a daily basis.
Risks Associated with Segregated Portfolio
MUTUAL FUND SCHEME PERFORMANCE
Benchmarks
Mutual fund schemes invest in the market for the benefit of Unit-holders.
How well did a scheme perform? An approach to assess the performance
is to pre-define a comparable—a benchmark—against which the scheme
can be compared.
Price Return Index or Total Return Index
PRI only captures capital gains of the index constituents. With effect
from February 1, 2018, the mutual fund schemes are benchmarked to
the Total Return variant of an Index (TRI).
The Total Return variant of an index takes into account all
dividends/interest payments that are generated from the basket of
constituents that make up the index in addition to the capital gains
Basis of Choosing an appropriate performance benchmark
Selection of a benchmark for the scheme of a mutual fund to be in
alignment with the investment objective, asset allocation pattern and
investment strategy of the scheme.
The performance of the schemes of a mutual fund to be benchmarked
to the Total Return variant of the Index chosen as a benchmark.
Mutual funds should use a composite CAGR figure of the performance
of the PRI benchmark and the TRI to compare the performance.
Quantitative Measures of Fund Manager Performance
Measures of risk-adjusted returns:
RISK PREMIUM = (RETURN OF SCHEME – RISK FREE RETURN)