NISM VA full short notes
Chapter 1
• Mutual fund is a vehicle to mobilize moneys from investors, to invest in
different markets and securities, in line with the investment objectives
agreed upon, between the mutual fund and the investors. In other words,
through investment in a mutual fund, a small investor can avail of
professional fund management services offered by an asset management
company.
• Mutual funds perform different roles for different constituencies.
• The mutual fund structure, through its various schemes, makes it possible
to tap a large corpus of money from diverse investors.
• It is possible for mutual funds to structure a scheme for any kind of
investment objective.
• The money that is raised from investors, ultimately benefits governments,
companies or other entities, directly or indirectly, to raise moneys to invest
in various projects or pay for various expenses.
• As a large investor, the mutual funds can keep a check on the operations of
the investee company, and their corporate governance and ethical
standards.
• The mutual fund industry itself, offers livelihood to a large number of
employees of mutual funds, distributors, registrars and various other
service providers.
• Mutual funds can also act as a market stabilizer, in countering large inflows
or outflows from foreign investors. Mutual funds are therefore viewed as a
key participant in the capital market of any economy.
• Under the law, every unit has a face value of Rs. 10. (However, older
schemes in the market may have a different face value). The face value is
relevant from an accounting perspective. The number of units multiplied by
its face value (Rs. 10) is the capital of the scheme – its Unit Capital.
Investments can be said to have been handled profitably, if the following
profitability metric is positive:
(A) +Interest income
(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses
• When the investment activity is profitable, the true worth of a unit goes
up; when there are losses, the true worth of a unit goes down. The true
worth of a unit of the scheme is otherwise called Net Asset Value (NAV) of
the scheme.
• The relative size of mutual fund companies is assessed by their assets
under management (AUM). When a scheme is first launched, assets under
management would be the amount mobilized from investors. Thereafter, if
the scheme has a positive profitability metric, its AUM goes up; a negative
profitability metric will pull it down.
• Advantages of Mutual Funds for Investors are:
a. Professional Management
b. Affordable Portfolio Diversification
c. Economies of Scale
d. Liquidity
e. Tax Deferral
f. Tax benefits
g. Convenient Options
h. Investment Comfort
i. Regulatory Comfort
j. Systematic Approach to Investments
• Limitations of a Mutual Fund
a. Lack of portfolio customization
b. Choice overload
c. No control over costs
• Open-ended funds are open for investors to enter or exit at any time, even
after the NFO.
• The on-going entry and exit of investors implies that the unit capital in an
open-ended fund would keep changing on a regular basis.
• Close-ended funds have a fixed maturity. Investors can buy units of a closeended
scheme, from the fund, only during its NFO. The fund makes
arrangements for the units to be traded, post-NFO in a stock exchange. This
is done through a listing of the scheme in a stock exchange. Such listing is
compulsory for close-ended schemes.
• Since post-NFO, sale and purchase of close-ended funds units happen to or
from counter-party in the stock exchange – and not to or from the mutual
fund – the unit capital of the scheme remains stable or fixed.
• Depending on the demand-supply situation for the units of the close-ended
scheme on the stock exchange, the transaction price could be higher or
lower than the prevailing NAV.
• Interval funds combine features of both open-ended and close-ended
schemes. They are largely close-ended, but become open-ended at prespecified
intervals. For instance, an interval scheme might become openended
between January 1 to 15, and July 1 to 15, each year. The benefit for
investors is that, unlike in a purely close-ended scheme, they are not
completely dependent on the stock exchange to be able to buy or sell units
of the interval fund. However, between these intervals, the Units have to
be compulsorily listed on stock exchanges to allow investors an exit route.
Minimum duration of an interval period in an interval scheme/plan is 15
days. No redemption/repurchase of units is allowed except during the
specified transaction period (the period during which both subscription and
redemption may be made to and from the scheme). The specified
transaction period will be of minimum 2 working days, as per revised SEBI
Regulations.
• Actively managed funds are funds where the fund manager has the
flexibility to choose the investment portfolio, within the broad parameters
of the investment objective of the scheme. Since this increases the role of
the fund manager, the expenses for running the fund turn out to be higher.
Investors expect actively managed funds to perform better than the
market.
• Passive funds invest on the basis of a specified index, whose performance
it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy
only the shares that are part of the composition of the BSE Sensex. The
proportion of each share in the scheme’s portfolio would also be the same
as the weightage assigned to the share in the computation of the BSE
Sensex. Thus, the performance of these funds tends to mirror the
concerned index. They are not designed to perform better than the market.
Such schemes are also called index schemes. Since the portfolio is
determined by the index itself, the fund manager has no role in deciding on
investments. Therefore, these schemes have low running costs.
• Schemes with an investment objective that limits them to investments in
debt securities like Treasury Bills, Government Securities, Bonds and
Debentures are called debt funds.
• Hybrid funds have an investment charter that provides for investment in
both debt and equity.
• Gilt funds invest in only treasury bills and government securities, which do
not have a credit risk (i.e. the risk that the issuer of the security defaults).
• Diversified debt funds on the other hand, invest in a mix of government
and non-government debt securities such as corporate bonds, debentures
and commercial paper. These schemes are also known as Income Funds.
• Junk bond schemes or high yield bond schemes invest in companies that
are of poor credit quality. Such schemes operate on the premise that the
attractive returns offered by the investee companies makes up for the
losses arising out of a few companies defaulting.
• Fixed maturity plans are a kind of debt fund where the investment
portfolio is closely aligned to the maturity of the scheme. Further, being
close-ended schemes, they do not accept moneys post-NFO.
• Floating rate funds invest largely in floating rate debt securities i.e. debt
securities where the interest rate payable by the issuer changes in line with
the market. For example, a debt security where interest payable is
described as‘5-year Government Security yield plus 1%’, will pay interest
rate of 7%, when the 5-year Government Security yield is 6%; if 5-year
Government Security yield goes down to 3%, then only 4% interest will be
payable on that debt security. The NAVs of such schemes fluctuate lesser
than debt funds that invest more in debt securities offering a fixed rate of
interest.
• Liquid schemes or money market schemes are a variant of debt schemes
that invest only in debt securities where the moneys will be repaid within
60-days.
• Diversified equity fund is a category of funds that invest in a diverse mix of
securities that cut across sectors.
• Sector funds however invest in only a specific sector. For example, a
banking sector fund will invest in only shares of banking companies. Gold
sector fund will invest in only shares of gold-related companies.
• Thematic funds invest in line with an investment theme. For example, an
infrastructure thematic fund might invest in shares of companies that are
into infrastructure construction, infrastructure toll-collection, cement,
steel, telecom, power etc. The investment is thus more broad-based than a
sector fund; but narrower than a diversified equity fund
• Equity Income / Dividend Yield Schemes invest in securities whose shares
fluctuate less, and the dividend represents a larger proportion of the
returns on those shares. The NAV of such equity schemes are expected to
fluctuate lesser than other categories of equity schemes.
• Arbitrage Funds take contrary positions in different markets / securities,
such that the risk is neutralized, but a return is earned.
• Gold Exchange Traded Fund, which is like an index fund that invests in
gold, gold-related securities or gold deposit schemes of banks.
• Gold Sector Fund i.e. the fund will invest in shares of companies engaged in
gold mining and processing.
• Monthly Income Plan seeks to declare a dividend every month. It therefore
invests largely in debt securities. However, a small percentage is invested in
equity shares to improve the scheme’s yield. Another very popular
category among the hybrid funds is the Balanced Fund category. The
balanced funds can have fixed or flexible allocation between equity and
debt.
• Capital Protected Schemes are close-ended schemes, which are structured
to ensure that investors get their principal back, irrespective of what
happens to the market. This is ideally done by investing in Zero Coupon
Government Securities whose maturity is aligned to the scheme’s maturity.
• International Funds are funds that invest outside the country. For instance,
a mutual fund may offer a scheme to investors in India, with an investment
objective to invest abroad. An alternative route would be to tie up with a
foreign fund (called the host fund). If an Indian mutual fund sees potential
in China, it will tie up with a Chinese fund. In India, it will launch what is
called a feeder fund. Investors in India will invest in the feeder fund. The
moneys collected in the feeder fund would be invested in the Chinese host
fund. Thus, when the Chinese market does well, the Chinese host fund
would do well, and the feeder fund in India will follow suit.
• The feeder fund was an example of a fund that invests in another fund.
Similarly, funds can be structured to invest in various other funds, whether
in India or abroad. Such funds are called fund of funds.
• AUM of the industry, as of July 31, 2013 has touched Rs 760,833 crore from
1172 schemes offered by 44 mutual funds.
Chapter 2
• Mutual Fund is established as a trust. Therefore, they are governed by the
Indian Trusts Act, 1882
• The mutual fund trust is created by one or more Sponsors, who are the
main persons behind the mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.
• Day to day management of the schemes is handled by an Asset
Management Company (AMC). The AMC is appointed by the sponsor or the
Trustees.
• Sponsor should be carrying on business in financial services for 5 years.
Sponsor should have positive net worth (share capital plus reserves
minus accumulated losses) for each of those 5 years. Latest net worth
should be more than the amount that the sponsor contributes to the
capital of the AMC. The sponsor should have earned profits, after
providing for depreciation and interest, in three of the previous five
years, including the latest year. The sponsor needs to have a minimum
40% share holding in the capital of the AMC.
• Prior approval of SEBI needs to be taken, before a person is appointed as
Trustee. The sponsor will have to appoint at least 4 trustees. If a trustee
company has been appointed, then that company would need to have at
least 4 directors on the Board. Further, at least two-thirds of the trustees /
directors on the Board of the trustee company, would need to be
independent trustees i.e. not associated with the sponsor in any way.
• Day to day operations of asset management is handled by the AMC.
• The directors of the asset management company need to be persons
having adequate professional experience in finance and financial services
related field. The directors as well as key personnel of the AMC should not
have been found guilty of moral turpitude or convicted of any economic
offence or violation of any securities laws. Key personnel of the AMC
should not have worked for any asset management company or mutual
fund or any intermediary during the period when its registration was
suspended or cancelled at any time by SEBI.
• Prior approval of the trustees is required, before a person is appointed as
director on the board of the AMC. Further, at least 50% of the directors
should be independent directors i.e. not associate of or associated with the
sponsor or any of its subsidiaries or the trustees.
• The AMC needs to have a minimum net worth of Rs. 10crore. An AMC
cannot invest in its own schemes, unless the intention to invest is disclosed
in the Offer Document. Further, the AMC cannot charge any fees for its
own investment in any of the schemes managed by itself.
• The appointment of an AMC can be terminated by a majority of the
trustees, or by 75% of the Unit-holders. However, any change in the AMC is
subject to prior approval of SEBI and the Unit-holders.
• The custodian has custody of the assets of the fund. As part of this role, the
custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund. Thus, the
custodian settles all the transactions on behalf of the mutual fund
schemes.
• All custodians need to register with SEBI. The Custodian is appointed by the
mutual fund. A custodial agreement is entered into between the trustees
and the custodian.
• The SEBI regulations provide that if the sponsor or its associates control
50% or more of the shares of a custodian, or if 50% or more of the directors
of a custodian represent the interest of the sponsor or its associates, then
that custodian cannot be appointed for the mutual fund operation of the
sponsor or its associate or subsidiary company.
• The custodian also tracks corporate actions such as dividends, bonus and
rights in companies where the fund has invested.
• The RTA maintains investor records. The appointment of RTA is done by the
AMC. It is not compulsory to appoint a RTA. The AMC can choose to handle
this activity in-house. All RTAs need to register with SEBI.
• Auditors are responsible for the audit of accounts. Accounts of the schemes
need to be maintained independent of the accounts of the AMC. The
auditor appointed to audit the scheme accounts needs to be different from
the auditor of the AMC. While the scheme auditor is appointed by the
Trustees, the AMC auditor is appointed by the AMC.
• The fund accountant performs the role of calculating the NAV, by collecting
information about the assets and liabilities of each scheme.
Chapter 3
• SEBI is the regulatory authority for securities markets in India. It regulates,
among other entities, mutual funds, depositories, custodians and registrars
& transfer agents in the country. Mutual funds need to comply with RBI’s
regulations regarding investment in the money market, investments
outside the country, investments from people other than Indians resident
in India, remittances (inward and outward) of foreign currency etc.
• Mutual Funds in India have not constituted any SRO(Self Regulatory
Organizations) for themselves. Therefore, they are directly regulated by
SEBI.
• AMFI is not an SRO.
• ACE stands for AMFI Code of Ethics and AGNI stands for AMFI Guidelines &
Norms for Intermediaries.
• In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is provided for:
- Write to the intermediary (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within 3 weeks.
- In case explanation is not received within 3 weeks, or if the explanation
is not satisfactory, AMFI will issue a warning letter indicating that any
subsequent violation will result in cancellation of AMFI registration.
- If there is a proved second violation by the intermediary, the
registration will be cancelled, and intimation sent to all AMCs.
• The intermediary has a right of appeal to AMFI.
• SEBI has mandated AMCs to put in place a due diligence process to
regulate distributors who qualify any one of the following criteria:
a. Multiple point presence (More than 20 locations)
b. AUM raised over Rs.100 crore across industry in the non-institutional
category but including high networth individuals (HNIs)
c. Commission received of over Rs. 1 Crore p.a. across industry
d. Commission received of over Rs. 50 Lakhs from a single mutual fund
• When a scheme’s name implies investment in a particular kind of security
or sector, it should have a policy that provides for investing at least 65% of
its corpus in that security or sector, in normal times. Thus, a debt scheme
would need to invest at least 65% in debt securities; an equity scheme
would need to invest that much in equities; a steel sector fund would need
to invest at least 65% in shares of steel companies.
• Schemes other than ELSS and RGESS can remain open for subscription for a
maximum of fifteen days.
• In the case of RGESS schemes, the offering period shall be not be more
than thirty days.
• Schemes, other than ELSS and RGESS, need to allot units or refund moneys
within 5 business days of closure of the NFO. RGESS schemes are given a
period of 15 days from closure of the NFO to make the refunds.
• In the event of delays in refunds, investors need to be paid interest at the
rate of 15% p.a. for the period of the delay. This interest cannot be charged
to the scheme.
• Open-ended schemes, other than ELSS, have to re-open for ongoing sale /
re-purchase within 5 business days of allotment.
• Statement of accounts are to be sent to investors as follows:
- In the case of NFO - within 5business days of closure of the NFO (15
days for RGESS).
- In the case of post-NFO investment – within 10 working days of the
investment
-
In the case of SIP / STP / SWP
• Initial transaction – within 10 working days
• Ongoing – once every calendar quarter (March, June, September,
December) within 10 working days of the end of the quarter
• On specific request by investor, it will be dispatched to investor within 5
working days without any cost.
• Statement of Account shall also be sent to dormant investors i.e. investors
who have not transacted during the previous 6 months. This can be sent
along with the Portfolio Statement / Annual Return, with the latest position
on number and value of Units held.
• Units of all mutual fund schemes held in demat form are freely
transferable. Investors have the option to receive allotment of mutual fund
units of open ended and closed end schemes in their demat account.
• Only in the case of ELSS and RGESS Schemes, free transferability of units
(whether demat or physical) is curtailed for the statutory minimum holding
period of 3 years.
• Investor can ask for a Unit Certificate for his Unit Holding. This is different
from a Statement of Account as follows:
• A Statement of Account shows the opening balance, transactions during
the period and closing balance
• A Unit Certificate only mentions the number of Units held by the investor.
• In a way, the Statement of Account is like a bank pass book, while the
Unit Certificate is like a Balance Confirmation Certificate issued by the
bank.
• Since Unit Certificates are non-transferable, they do not offer any real
transactional convenience for the Unit-holder. However, if a Unit-holder
asks for it, the AMC is bound to issue the Unit Certificate within 5 working
days of receipt of request (15 days for RGESS).
• NAV has to be published daily, in at least 2 daily newspapers having
circulation all over India
• NAV and re-purchase price are to be updated in the website of AMFI and
the mutual fund
• In the case of Fund of Funds, by 10 am the following day
• In the case of other schemes, by 9 pm the same day
• The investor/s can appoint upto 3 nominees, who will be entitled to the
Units in the event of the demise of the investor/s. The investor can also
specify the percentage distribution between the nominees. If no
distribution is indicated, then an equal distribution between the nominees
will be presumed.
• The investor can also pledge the units. This is normally done to offer
security to a financier.
• Dividend warrants have to be dispatched to investors within 30 days of
declaration of the dividend
• Redemption / re-purchase cheques would need to be dispatched to
investors within 10 working days from the date of receipt of transaction
request.
• In the event of delays in dispatching dividend warrants or redemption /
repurchase cheques, the AMC has to pay the unit-holder, interest at the
rate of 15% p.a. This expense has to be borne by the AMC i.e. it cannot be
charged to the scheme.
• Scheme-wise Annual Report or an abridged summary has to be mailed to
all unit-holders within 6 months of the close of the financial year.
• The appointment of the AMC for a mutual fund can be terminated by a
majority of the trustees or by 75% of the Unit-holders (in practice, Unitholding)
of the Scheme. 75% of the Unit-holders (in practice, Unit-holding)
can pass a resolution to wind-up a scheme.
• If an investor feels that the trustees have not fulfilled their obligations,
then he can file a suit against the trustees for breach of trust.
• Under the law, a trust is a notional entity. Therefore, investors cannot sue
the trust
• The principle of caveat emptor (let the buyer beware) applies to mutual
fund investments. So, the unit-holder cannot seek legal protection on the
grounds of not being aware, especially when it comes to the provisions of
law, and matters fairly and transparently stated in the Offer Document.
• Unit-holders have a right to proceed against the AMC or trustees in certain
cases. However, a proposed investor i.e. someone who has not invested in
the scheme does not have the same rights.
• The mutual fund has to deploy unclaimed dividend and redemption
amounts in the money market. AMC can recover investment management
and advisory fees on management of these unclaimed amounts, at a
maximum rate of 0.50% p.a.
• 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
Chapter 4 : Offer Document
• The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
• AMC prepares the Offer Document for the NFO. This needs to be approved
by the Trustees and the Board of Directors of the AMC
• The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated. After approval by the
trustees, the Offer Document can be issued in the market.
• Investors need to note that their investment is governed by the principle of
caveat emptor i.e. let the buyer beware. An investor is presumed to have
read the Offer Document, even if he has not actually read it. Therefore, at a
future date, the investor cannot claim that he was not aware of something,
which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts: Scheme Information
Document (SID), which has details of the scheme. Statement of Additional
Information (SAI), which has statutory information about the mutual fund,
that is offering the scheme.
• It stands to reason that a single SAI is relevant for all the schemes offered
by a mutual fund. In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations in
the Offer Document that is offered in the market. Thus, the Offer
Documents in the market are “vetted” by SEBI, though SEBI does not
formally “approve” them.
• If a scheme is launched in the first 6 months of the financial year (say, April
2010), then the first update of the SID is due within 3 months of the end of
the financial year (i.e. by June 2011).
• If a scheme is launched in the second 6 months of the financial year (say,
October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).
• Regular update is to be done by the end of 3 months of every financial
year. Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI.
• KIM is essentially a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is
to be accompanied by the KIM.
• KIM is to be updated at least once a year. As in the case of SID, KIM is to be
revised in the case of change in fundamental attributes. Other changes can
be disclosed through addenda attached to the KIM.
• The Scheme/Plan shall have a minimum of 20 investors and no single
investor shall account for more than 25% of the corpus of the
Scheme/Plan(s).
• Legally, SAI is part of the SID.
Chapter 5
• Historically, individual agents would distribute units of Unit Trust of
India and insurance policies of Life Insurance Corporation. They would
also facilitate investments in Government’s Small Savings Schemes.
Further, they would sell Fixed Deposits and Public Issues of shares of
companies, either directly, or as a sub-broker of some large broker.
• UTI, LIC or other issuer of the investment product (often referred to in
the market as “product manufacturers”) would advertise through the
mass media, while an all-India field force of agents would approach
investors to get application forms signed and collect their cheques. The
agents knew the investors’ families personally – the agent would often
be viewed as an extension of the family.
• Independent Financial Advisors (IFAs), who are individuals. The bigger
IFAs operate with support staff who handles back-office work, while
they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution
companies and non-banking finance companies
• The internet gave an opportunity to mutual funds to establish direct
contact with investors. Direct transactions afforded scope to optimize
on the commission costs involved in distribution. Investors, on their
part, have found a lot of convenience in doing transactions
instantaneously through the internet, rather than get bogged down
with paper work and having to depend on a distributor to do
transactions. This has put a question mark on the existence of
intermediaries who focus on pushing paper, but add no other value to
investors.
• The institutional channels have had their limitations in reaching out
deep into the hinterland of the country. A disproportionate share of
mutual fund collections has tended to come from corporate and
institutional investors, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand,
have managed to ride on the equity cult in the country and the power
of communication networks to establish a cost-effective all-India
network of brokers and trading terminals. This has been a successful
initiative in the high-volume low-margin model of doing business, which
is more appropriate and beneficial for the country.
• SEBI, in September 2012, provided for a new cadre of distributors, such
as postal agents, retired government and semi-government officials
(class III and above or equivalent), retired teachers and retired bank
officers with a service of at least 10 years, and other similar persons
(such as Bank correspondents) as may be notified by AMFI/ AMC from
time to time. These new distributors are allowed to sell units of simple
and performing mutual fund schemes. Simple and performing mutual
fund schemes comprise of diversified equity schemes, fixed maturity
plans (FMPs) and index schemes that have returns equal to or better
than their scheme benchmark returns during each of the last three
years.
• A fund may appoint an individual, bank, non-banking finance company
or distribution company as a distributor. No SEBI permission is required
before such appointment. SEBI has prescribed a Certifying Examination,
passing in which is compulsory for anyone who is into selling of mutual
funds, whether as IFA, or as employee of a distributor or AMC.
Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.
• There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down
limits on what the total expense (including commission) in a scheme can
be.
• Initial or Upfront Commission, on the amount mobilized by the
distributor.
• Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor.The trail commission is
normally paid by the AMC on a quarterly basis. Since it is calculated on
net assets, distributors benefit from increase in net assets arising out of
valuation gains in the market.
• Further, unlike products like insurance, where agent commission is paid
for a limited number of years, a mutual fund distributor is paid a
commission for as long as the investor’s money is held in the fund.
• A point to note is that the commission is payable to the distributors to
mobilise money from their clients. Hence, no commission – neither
upfront nor trail – is payable to the distributor for their own
investments (self business).
• Typically, AMCs structure their relationship with distributors as Principal
to Principal. Therefore, the AMC it is not bound by the acts of the
distributor, or the distributor’s agents or sub-brokers.
• In hoardings / posters, the statement, “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing”, is to be displayed in black letters of at least 8 inches height
or covering 10% of the display area, on white background.
• In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words) has to be
displayed on the screen for at least 5 seconds, in a clearly legible fontsize
covering at least 80% of the total screen space and accompanied by
a voice-over reiteration. The remaining 20% space can be used for the
name of the mutual fund or logo or name of scheme, etc.
• Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner whatsoever
shall be issued by any Mutual Fund or distributors of its products.
Chapter 6
• Higher the interest, dividend and capital gains earned by the
scheme, higher would be the NAV.
• Higher the appreciation in the investment portfolio, higher would
be the NAV.
• Lower the expenses, higher would be the NAV.
• The process of valuing each security in the investment portfolio
of the scheme at its market value is called ‘mark to market’ i.e.
marking the securities to their market value.
• Marking to market helps investors buy and sell units of a scheme
at fair prices, which are determined based on transparently
calculated and freely shared information on NAV.
• Initial Issue Expenses – These are one-time expenses that come
up when the scheme is offered for the first time (NFO). These
need to be borne by the AMC.
• NAV is to be calculated upto 4 decimal places in the case of index
funds, liquid funds and other debt funds.
• NAV for equity and balanced funds is to be calculated upto at
least 2 decimal places.
• Investors can hold their units even in a fraction of 1 unit.
However, current stock exchange trading systems may restrict
transacting on the exchange to whole units.
• Debt securities that are not traded on the valuation date are
valued on the basis of the yield matrix prepared by an authorized
valuation agency. The yield matrix estimates the yield for
different debt securities based on the credit rating of the security
and its maturity profile.
• There is no TDS on the dividend distribution or re-purchase
proceeds to resident investors
• 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
• Since long term capital gains arising out of equity-oriented
mutual fund units is exempt from tax, long term capital loss
arising out of such transactions is not available for set off.
• If, an investor buys units within 3 months prior to the record date
for a dividend, and sells those units within 9 months after the
record date, any capital loss from the transaction would not be
allowed to be set off against other capital gains of the investor,
up to the value of the dividend income exempted.
• Investments in mutual fund units are exempt from Wealth Tax.
This is irrespective of where the fund invests. Although
investment in physical gold or real estate may attract wealth tax
in case of direct investors, investments in Gold ETF and real
estate mutual funds are exempt from wealth tax.
Chapter 7
• Overseas Corporate Bodies (OCBs) i.e. societies / trusts held, directly or
indirectly, to the extent of over 60% by NRIs, or trusts where more than
60% of the beneficial interests is held by such OCBs were not allowed to
invest until recently.
• SEBI and RBI circulars dated August 9, 2011 have allowed Qualified Foreign
Investors (QFIs) who meet KYC requirements to invest in equity and debt
schemes of Mutual Funds through two routes: Direct route (holding MF
units in a demat account through a SEBI registered depository participant)
and also through indirect route by holding units via Unit Confirmation
Recipt.
• Some gilt schemes have specific plans, which are open only for Provident
Funds, Superannuation and Gratuity Funds, Pension Funds, Religious and
Charitable Trusts and Private Trusts.
• In the case of Exchange Traded Funds, only authorized participants and
large investors can invest in the NFO. Subsequently, in the stock exchange,
anyone who is eligible to invest can buy Units of the ETF.
• Micro-SIP investment by individuals, minors and sole-proprietary firms are
exempted from the requirement of PAN card.
• The normal application form, with KIM attached, is designed for fresh
purchases i.e. instances where the investor does not have an investment
account (technically called “folio”) with the specific mutual fund.
• Both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
have extended their trading platform to help the stock exchange brokers
become a channel for investors to transact in Mutual Fund Units. NSE’s
platform is called NEAT MFSS. BSE’s platform is BSE StAR Mutual Funds
Platform.
• The reduced NAV, after a dividend payout is called ex-Dividend NAV. After
a dividend is announced, and until it is paid out, it is referred to as cum-
Dividend NAV.
• PAN Card is not required for mutual fund investments below Rs 20,000,
where payment is in cash.
• Investors’ KYC details are stored in the server of KRA
Chapter 8
• Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares
• Price to Earnings Ratio (P/E Ratio): Market Price ÷ EPS
• Book Value per Share: Net Worth ÷ No. of equity shares
• Price to Book Value: Market Price ÷ Book Value per Share
• It is generally agreed that longer term investment decisions are best
taken through a fundamental analysis approach, while technical
analysis comes in handy for shorter term speculative decisions,
including intra-day trading.
• Sector allocation is a key decision in a top down approach.
• The bottom-up approach is called as stock picking as stock selection
is the key decision in this approach.
• Top down approach minimizes the chance of being stuck with large
exposure to a poor sector. Bottom up approach ensures that a good
stock is picked, even if it belongs to a sector that is not so hot.
• Debt securities that are to mature within a year are called money
market securities.
• The difference between the yield on Gilt and the yield on a non-
Government Debt security is called its yield spread.
• The returns in a debt portfolio are largely driven by interest rates
and yield spreads.
• A mutual fund scheme cannot borrow more than 20% of its net
assets
• The borrowing cannot be for more than 6 months.
• The borrowing is permitted only to meet the cash flow needs of
investor servicing viz. dividend payments or re-purchase payments.
• SEBI has stipulated the 20:25 rule viz. every scheme should have at
least 20 investors; no investor should represent more than 25% of
net assets of a scheme.
• Dividend yield funds invest in shares whose prices fluctuate less, but
offer attractive returns in the form of dividend. Such funds offer
equity exposure with lower downside.
Chapter 9
• As a structured approach, the sequence of decision making is as
follows:
Step 1 – Deciding on the scheme category
Step 2 – Selecting a scheme within the category
Step 3 – Selecting the right option within the scheme
• Investing in equities with a horizon below 2 years can be dangerous.
Ideally, the investor should look at 3 years. With an investment horizon
of 5 years and above, the probability of losing money in equities is
negligible.
• An investor in an active fund is bearing a higher cost for the fund
management, and a higher risk. Therefore, the returns ought to be
higher i.e. the scheme should beat the benchmark, to make the
investor believe that choice of active scheme was right.
• The significant benefit that open-ended funds offer is liquidity viz. the
option of getting back the current value of the unit-holding from the
scheme.
• A close-ended scheme offers liquidity through a listing in a stock
exchange. Unfortunately, mutual fund units are not that actively
traded in the market.
• The price of units of a closed-end scheme in the stock exchange tends
to be lower than the NAV. There is no limit to this discount. Only
towards the maturity of the scheme, the market price converges
towards the NAV.
• In a market correction, the Growth funds can decline much more than
value funds.
• Since floating rate debt securities tend to hold their values, even if
interest rates fluctuate, the NAV of floaters tend to be steady. When
the interest rate scenario is unclear, then floaters are a safer option.
Similarly, in rising interest rate environments, floaters can be
considered as an alternative to short term debt funds and liquid funds.
• Amongst index schemes, tracking error is a basis to select the better
scheme. Lower the tracking error, the better it is. Similarly, Gold ETFs
need to be selected based on how well they track gold prices.
Chapter 10
• Physical assets have value and can be touched, felt and used.
• Financial assets have value, but cannot be touched, felt or used as part of
their core value.
• A physical asset is completely gone, or loses substantial value, when stolen,
or if there is a fire, flood or such other hazard. It is for this reason that
some owners of physical assets insure them against such hazards.
• Investor’s money in land, art, rare coins or gold does not benefit the
economy. On the other hand, money invested in financial assets, e.g.
equity shares, debentures, bank deposits can be productive for the
economy.
• Gold futures contracts are traded in commodity exchanges like the National
Commodities Exchange (NCDEX) and Multi-Commodity Exchange (MCX).
The value of these contracts goes up or down in line with increases or
decreases in gold prices.
• Gold ETF on the other hand is an open-ended scheme with no fixed
maturity. It is very rare for an open-ended scheme to liquidate itself early.
Therefore, an investor who buys into a gold ETF can hold the position
indefinitely.
• Wealth Tax is applicable on gold holding (beyond the jewellery meant for
personal use). However, mutual fund schemes (gold linked or otherwise)
and gold deposit schemes are exempted from Wealth Tax.
• Real estate is an illiquid market. Investment in financial assets as well as
gold can be converted into money quickly and conveniently within a few
days at a transparent price. Since real estate is not a standardized product,
there is no transparent price – and deals can take a long time to execute.
• Tier I (Pension account), is non-withdrawable.
• Tier II (Savings account) is withdrawable to meet financial contingencies.
An active Tier I account is a pre-requisite for opening a Tier II account.
• Investors can invest through Points of Presence (POP). They can allocate
their investment between 3 kinds of portfolios:
o Asset Class E: Investment in predominantly equity market instruments
o Asset Class C: Investment in Debt securities other than Government
Securities
o Asset Class G: Investments in Government Securities.
Chapter 11
• The costs mentioned above, in today’s terms, need to be translated into the rupee
requirement in future. This is done using the formula A = P X (1 + i)n, where, 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 steps in creating a comprehensive financial plan, as proposed by the
Certified Financial Planner – Board of Standards (USA) are as follows:
a. Establish and Define the Client-Planner Relationship
b. Gather Client Data, Define Client Goals
c. Analyse and Evaluate Client’s Financial Status
d. Develop and Present Financial Planning Recommendations and / or
Options
e. Implement the Financial Planning Recommendations
f. Monitor the Financial Planning Recommendations
• During the Childhood stage, focus is on education in most cases. Children
are dependents, rather than earning members. Pocket money, cash gifts
and scholarships are potential sources of income during this phase. Parents
and seniors need to groom children to imbibe the virtues of savings,
balance and prudence. Values imbibed during this phase set the foundation
of their life in future.
• Equity SIPs and Whole-life insurance plans are great ways to force the
young unmarried into the habit of regular savings, rather than lavish the
money away.
• Young Married,where both spouses have decent jobs, life can be financially
comfortable. They can plan where to stay in / buy a house, based on job
imperatives, life style aspirations and personal comfort. Insurance is
required, but not so critical. Where only one spouse is working, life
insurance to provide for contingencies associated with the earning spouse
are absolutely critical. In case the earning spouse is not so well placed,
ability to pay insurance premia can be an issue, competing with other basic
needs of food, clothing and shelter. In such cases, term insurance (where
premium is lower) possibilities have to be seriously explored and locked
into.
• Accumulation is the stage when the investor gets to build his wealth. It
covers the earning years of the investor i.e. the phases of the life cycle from
Young Unmarried to Pre-Retirement.
• Transition is a phase when financial goals are in the horizon. E.g. house to
be purchased, children’s higher education / marriage approaching etc.
Given the impending requirement of funds, investors tend to increase the
proportion of their portfolio in liquid assets viz. money in bank, liquid
schemes etc.
• During inter-generational transfer, the investor starts thinking about
orderly transfer of wealth to the next generation, in the event of death.
The financial planner can help the investor understand various inheritance
and tax issues, and help in preparing Will and validating various documents
and structures related to assets and liabilities of the investor.
• Reaping/Distribution is the stage when the investor needs regular money.
Hence, investors in this stage need to have higher allocation to income
generating assets. It is the parallel of retirement phase in the Life Cycle.
• Winning lotteries, unexpected inheritance of wealth, unusually high capital
gains earned – all these are occasions of sudden wealth, that need to be
celebrated. However, given the human nature of frittering away such
sudden wealth, the financial planner can channelize the wealth into
investments, for the long term benefit of the investor’s family.
Chapter 12
• Risk profiling is an approach to understand the risk appetite of investors
- an essential pre-requisite to advise investors on their investments.
• The investment advice is dependent on understanding both aspects of
risk: Risk appetite of the investor & Risk level of the investment options
being considered.
• Risk appetite increases as the number of earning member increases and
vice-versa.
• Risk appetite is higher if life expectancy is longer
• Lower the age, higher the risk that can be taken and vice-versa
• Well qualified and multi-skilled professionals can afford to take more
risk.
• Those with steady jobs are better positioned to take risk
• Higher the capital base, better the ability to take financially the
downsides that come with risk.
• The distribution of an investor’s portfolio between different asset
classes is called asset allocation.
• Strategic Asset Allocation is the ideal that comes out of the risk profile
of the individual. Risk profiling is key to deciding on the strategic asset
allocation. The most simplistic risk profiling thumb rule is to have as
much debt in the portfolio, as the number of years of age.
• Tactical Asset Allocation is the decision that comes out of calls on the
likely behaviour of the market. An investor who decides to go
overweight on equities i.e. take higher exposure to equities, because of
expectations of buoyancy in industry and share markets, is taking a
tactical asset allocation call. Tactical asset allocation is suitable only for
seasoned investors operating with large investible surpluses.
Chapter 1
• Mutual fund is a vehicle to mobilize moneys from investors, to invest in
different markets and securities, in line with the investment objectives
agreed upon, between the mutual fund and the investors. In other words,
through investment in a mutual fund, a small investor can avail of
professional fund management services offered by an asset management
company.
• Mutual funds perform different roles for different constituencies.
• The mutual fund structure, through its various schemes, makes it possible
to tap a large corpus of money from diverse investors.
• It is possible for mutual funds to structure a scheme for any kind of
investment objective.
• The money that is raised from investors, ultimately benefits governments,
companies or other entities, directly or indirectly, to raise moneys to invest
in various projects or pay for various expenses.
• As a large investor, the mutual funds can keep a check on the operations of
the investee company, and their corporate governance and ethical
standards.
• The mutual fund industry itself, offers livelihood to a large number of
employees of mutual funds, distributors, registrars and various other
service providers.
• Mutual funds can also act as a market stabilizer, in countering large inflows
or outflows from foreign investors. Mutual funds are therefore viewed as a
key participant in the capital market of any economy.
• Under the law, every unit has a face value of Rs. 10. (However, older
schemes in the market may have a different face value). The face value is
relevant from an accounting perspective. The number of units multiplied by
its face value (Rs. 10) is the capital of the scheme – its Unit Capital.
Investments can be said to have been handled profitably, if the following
profitability metric is positive:
(A) +Interest income
(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses
• When the investment activity is profitable, the true worth of a unit goes
up; when there are losses, the true worth of a unit goes down. The true
worth of a unit of the scheme is otherwise called Net Asset Value (NAV) of
the scheme.
• The relative size of mutual fund companies is assessed by their assets
under management (AUM). When a scheme is first launched, assets under
management would be the amount mobilized from investors. Thereafter, if
the scheme has a positive profitability metric, its AUM goes up; a negative
profitability metric will pull it down.
• Advantages of Mutual Funds for Investors are:
a. Professional Management
b. Affordable Portfolio Diversification
c. Economies of Scale
d. Liquidity
e. Tax Deferral
f. Tax benefits
g. Convenient Options
h. Investment Comfort
i. Regulatory Comfort
j. Systematic Approach to Investments
• Limitations of a Mutual Fund
a. Lack of portfolio customization
b. Choice overload
c. No control over costs
• Open-ended funds are open for investors to enter or exit at any time, even
after the NFO.
• The on-going entry and exit of investors implies that the unit capital in an
open-ended fund would keep changing on a regular basis.
• Close-ended funds have a fixed maturity. Investors can buy units of a closeended
scheme, from the fund, only during its NFO. The fund makes
arrangements for the units to be traded, post-NFO in a stock exchange. This
is done through a listing of the scheme in a stock exchange. Such listing is
compulsory for close-ended schemes.
• Since post-NFO, sale and purchase of close-ended funds units happen to or
from counter-party in the stock exchange – and not to or from the mutual
fund – the unit capital of the scheme remains stable or fixed.
• Depending on the demand-supply situation for the units of the close-ended
scheme on the stock exchange, the transaction price could be higher or
lower than the prevailing NAV.
• Interval funds combine features of both open-ended and close-ended
schemes. They are largely close-ended, but become open-ended at prespecified
intervals. For instance, an interval scheme might become openended
between January 1 to 15, and July 1 to 15, each year. The benefit for
investors is that, unlike in a purely close-ended scheme, they are not
completely dependent on the stock exchange to be able to buy or sell units
of the interval fund. However, between these intervals, the Units have to
be compulsorily listed on stock exchanges to allow investors an exit route.
Minimum duration of an interval period in an interval scheme/plan is 15
days. No redemption/repurchase of units is allowed except during the
specified transaction period (the period during which both subscription and
redemption may be made to and from the scheme). The specified
transaction period will be of minimum 2 working days, as per revised SEBI
Regulations.
• Actively managed funds are funds where the fund manager has the
flexibility to choose the investment portfolio, within the broad parameters
of the investment objective of the scheme. Since this increases the role of
the fund manager, the expenses for running the fund turn out to be higher.
Investors expect actively managed funds to perform better than the
market.
• Passive funds invest on the basis of a specified index, whose performance
it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy
only the shares that are part of the composition of the BSE Sensex. The
proportion of each share in the scheme’s portfolio would also be the same
as the weightage assigned to the share in the computation of the BSE
Sensex. Thus, the performance of these funds tends to mirror the
concerned index. They are not designed to perform better than the market.
Such schemes are also called index schemes. Since the portfolio is
determined by the index itself, the fund manager has no role in deciding on
investments. Therefore, these schemes have low running costs.
• Schemes with an investment objective that limits them to investments in
debt securities like Treasury Bills, Government Securities, Bonds and
Debentures are called debt funds.
• Hybrid funds have an investment charter that provides for investment in
both debt and equity.
• Gilt funds invest in only treasury bills and government securities, which do
not have a credit risk (i.e. the risk that the issuer of the security defaults).
• Diversified debt funds on the other hand, invest in a mix of government
and non-government debt securities such as corporate bonds, debentures
and commercial paper. These schemes are also known as Income Funds.
• Junk bond schemes or high yield bond schemes invest in companies that
are of poor credit quality. Such schemes operate on the premise that the
attractive returns offered by the investee companies makes up for the
losses arising out of a few companies defaulting.
• Fixed maturity plans are a kind of debt fund where the investment
portfolio is closely aligned to the maturity of the scheme. Further, being
close-ended schemes, they do not accept moneys post-NFO.
• Floating rate funds invest largely in floating rate debt securities i.e. debt
securities where the interest rate payable by the issuer changes in line with
the market. For example, a debt security where interest payable is
described as‘5-year Government Security yield plus 1%’, will pay interest
rate of 7%, when the 5-year Government Security yield is 6%; if 5-year
Government Security yield goes down to 3%, then only 4% interest will be
payable on that debt security. The NAVs of such schemes fluctuate lesser
than debt funds that invest more in debt securities offering a fixed rate of
interest.
• Liquid schemes or money market schemes are a variant of debt schemes
that invest only in debt securities where the moneys will be repaid within
60-days.
• Diversified equity fund is a category of funds that invest in a diverse mix of
securities that cut across sectors.
• Sector funds however invest in only a specific sector. For example, a
banking sector fund will invest in only shares of banking companies. Gold
sector fund will invest in only shares of gold-related companies.
• Thematic funds invest in line with an investment theme. For example, an
infrastructure thematic fund might invest in shares of companies that are
into infrastructure construction, infrastructure toll-collection, cement,
steel, telecom, power etc. The investment is thus more broad-based than a
sector fund; but narrower than a diversified equity fund
• Equity Income / Dividend Yield Schemes invest in securities whose shares
fluctuate less, and the dividend represents a larger proportion of the
returns on those shares. The NAV of such equity schemes are expected to
fluctuate lesser than other categories of equity schemes.
• Arbitrage Funds take contrary positions in different markets / securities,
such that the risk is neutralized, but a return is earned.
• Gold Exchange Traded Fund, which is like an index fund that invests in
gold, gold-related securities or gold deposit schemes of banks.
• Gold Sector Fund i.e. the fund will invest in shares of companies engaged in
gold mining and processing.
• Monthly Income Plan seeks to declare a dividend every month. It therefore
invests largely in debt securities. However, a small percentage is invested in
equity shares to improve the scheme’s yield. Another very popular
category among the hybrid funds is the Balanced Fund category. The
balanced funds can have fixed or flexible allocation between equity and
debt.
• Capital Protected Schemes are close-ended schemes, which are structured
to ensure that investors get their principal back, irrespective of what
happens to the market. This is ideally done by investing in Zero Coupon
Government Securities whose maturity is aligned to the scheme’s maturity.
• International Funds are funds that invest outside the country. For instance,
a mutual fund may offer a scheme to investors in India, with an investment
objective to invest abroad. An alternative route would be to tie up with a
foreign fund (called the host fund). If an Indian mutual fund sees potential
in China, it will tie up with a Chinese fund. In India, it will launch what is
called a feeder fund. Investors in India will invest in the feeder fund. The
moneys collected in the feeder fund would be invested in the Chinese host
fund. Thus, when the Chinese market does well, the Chinese host fund
would do well, and the feeder fund in India will follow suit.
• The feeder fund was an example of a fund that invests in another fund.
Similarly, funds can be structured to invest in various other funds, whether
in India or abroad. Such funds are called fund of funds.
• AUM of the industry, as of July 31, 2013 has touched Rs 760,833 crore from
1172 schemes offered by 44 mutual funds.
Chapter 2
• Mutual Fund is established as a trust. Therefore, they are governed by the
Indian Trusts Act, 1882
• The mutual fund trust is created by one or more Sponsors, who are the
main persons behind the mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.
• Day to day management of the schemes is handled by an Asset
Management Company (AMC). The AMC is appointed by the sponsor or the
Trustees.
• Sponsor should be carrying on business in financial services for 5 years.
Sponsor should have positive net worth (share capital plus reserves
minus accumulated losses) for each of those 5 years. Latest net worth
should be more than the amount that the sponsor contributes to the
capital of the AMC. The sponsor should have earned profits, after
providing for depreciation and interest, in three of the previous five
years, including the latest year. The sponsor needs to have a minimum
40% share holding in the capital of the AMC.
• Prior approval of SEBI needs to be taken, before a person is appointed as
Trustee. The sponsor will have to appoint at least 4 trustees. If a trustee
company has been appointed, then that company would need to have at
least 4 directors on the Board. Further, at least two-thirds of the trustees /
directors on the Board of the trustee company, would need to be
independent trustees i.e. not associated with the sponsor in any way.
• Day to day operations of asset management is handled by the AMC.
• The directors of the asset management company need to be persons
having adequate professional experience in finance and financial services
related field. The directors as well as key personnel of the AMC should not
have been found guilty of moral turpitude or convicted of any economic
offence or violation of any securities laws. Key personnel of the AMC
should not have worked for any asset management company or mutual
fund or any intermediary during the period when its registration was
suspended or cancelled at any time by SEBI.
• Prior approval of the trustees is required, before a person is appointed as
director on the board of the AMC. Further, at least 50% of the directors
should be independent directors i.e. not associate of or associated with the
sponsor or any of its subsidiaries or the trustees.
• The AMC needs to have a minimum net worth of Rs. 10crore. An AMC
cannot invest in its own schemes, unless the intention to invest is disclosed
in the Offer Document. Further, the AMC cannot charge any fees for its
own investment in any of the schemes managed by itself.
• The appointment of an AMC can be terminated by a majority of the
trustees, or by 75% of the Unit-holders. However, any change in the AMC is
subject to prior approval of SEBI and the Unit-holders.
• The custodian has custody of the assets of the fund. As part of this role, the
custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund. Thus, the
custodian settles all the transactions on behalf of the mutual fund
schemes.
• All custodians need to register with SEBI. The Custodian is appointed by the
mutual fund. A custodial agreement is entered into between the trustees
and the custodian.
• The SEBI regulations provide that if the sponsor or its associates control
50% or more of the shares of a custodian, or if 50% or more of the directors
of a custodian represent the interest of the sponsor or its associates, then
that custodian cannot be appointed for the mutual fund operation of the
sponsor or its associate or subsidiary company.
• The custodian also tracks corporate actions such as dividends, bonus and
rights in companies where the fund has invested.
• The RTA maintains investor records. The appointment of RTA is done by the
AMC. It is not compulsory to appoint a RTA. The AMC can choose to handle
this activity in-house. All RTAs need to register with SEBI.
• Auditors are responsible for the audit of accounts. Accounts of the schemes
need to be maintained independent of the accounts of the AMC. The
auditor appointed to audit the scheme accounts needs to be different from
the auditor of the AMC. While the scheme auditor is appointed by the
Trustees, the AMC auditor is appointed by the AMC.
• The fund accountant performs the role of calculating the NAV, by collecting
information about the assets and liabilities of each scheme.
Chapter 3
• SEBI is the regulatory authority for securities markets in India. It regulates,
among other entities, mutual funds, depositories, custodians and registrars
& transfer agents in the country. Mutual funds need to comply with RBI’s
regulations regarding investment in the money market, investments
outside the country, investments from people other than Indians resident
in India, remittances (inward and outward) of foreign currency etc.
• Mutual Funds in India have not constituted any SRO(Self Regulatory
Organizations) for themselves. Therefore, they are directly regulated by
SEBI.
• AMFI is not an SRO.
• ACE stands for AMFI Code of Ethics and AGNI stands for AMFI Guidelines &
Norms for Intermediaries.
• In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is provided for:
- Write to the intermediary (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within 3 weeks.
- In case explanation is not received within 3 weeks, or if the explanation
is not satisfactory, AMFI will issue a warning letter indicating that any
subsequent violation will result in cancellation of AMFI registration.
- If there is a proved second violation by the intermediary, the
registration will be cancelled, and intimation sent to all AMCs.
• The intermediary has a right of appeal to AMFI.
• SEBI has mandated AMCs to put in place a due diligence process to
regulate distributors who qualify any one of the following criteria:
a. Multiple point presence (More than 20 locations)
b. AUM raised over Rs.100 crore across industry in the non-institutional
category but including high networth individuals (HNIs)
c. Commission received of over Rs. 1 Crore p.a. across industry
d. Commission received of over Rs. 50 Lakhs from a single mutual fund
• When a scheme’s name implies investment in a particular kind of security
or sector, it should have a policy that provides for investing at least 65% of
its corpus in that security or sector, in normal times. Thus, a debt scheme
would need to invest at least 65% in debt securities; an equity scheme
would need to invest that much in equities; a steel sector fund would need
to invest at least 65% in shares of steel companies.
• Schemes other than ELSS and RGESS can remain open for subscription for a
maximum of fifteen days.
• In the case of RGESS schemes, the offering period shall be not be more
than thirty days.
• Schemes, other than ELSS and RGESS, need to allot units or refund moneys
within 5 business days of closure of the NFO. RGESS schemes are given a
period of 15 days from closure of the NFO to make the refunds.
• In the event of delays in refunds, investors need to be paid interest at the
rate of 15% p.a. for the period of the delay. This interest cannot be charged
to the scheme.
• Open-ended schemes, other than ELSS, have to re-open for ongoing sale /
re-purchase within 5 business days of allotment.
• Statement of accounts are to be sent to investors as follows:
- In the case of NFO - within 5business days of closure of the NFO (15
days for RGESS).
- In the case of post-NFO investment – within 10 working days of the
investment
-
In the case of SIP / STP / SWP
• Initial transaction – within 10 working days
• Ongoing – once every calendar quarter (March, June, September,
December) within 10 working days of the end of the quarter
• On specific request by investor, it will be dispatched to investor within 5
working days without any cost.
• Statement of Account shall also be sent to dormant investors i.e. investors
who have not transacted during the previous 6 months. This can be sent
along with the Portfolio Statement / Annual Return, with the latest position
on number and value of Units held.
• Units of all mutual fund schemes held in demat form are freely
transferable. Investors have the option to receive allotment of mutual fund
units of open ended and closed end schemes in their demat account.
• Only in the case of ELSS and RGESS Schemes, free transferability of units
(whether demat or physical) is curtailed for the statutory minimum holding
period of 3 years.
• Investor can ask for a Unit Certificate for his Unit Holding. This is different
from a Statement of Account as follows:
• A Statement of Account shows the opening balance, transactions during
the period and closing balance
• A Unit Certificate only mentions the number of Units held by the investor.
• In a way, the Statement of Account is like a bank pass book, while the
Unit Certificate is like a Balance Confirmation Certificate issued by the
bank.
• Since Unit Certificates are non-transferable, they do not offer any real
transactional convenience for the Unit-holder. However, if a Unit-holder
asks for it, the AMC is bound to issue the Unit Certificate within 5 working
days of receipt of request (15 days for RGESS).
• NAV has to be published daily, in at least 2 daily newspapers having
circulation all over India
• NAV and re-purchase price are to be updated in the website of AMFI and
the mutual fund
• In the case of Fund of Funds, by 10 am the following day
• In the case of other schemes, by 9 pm the same day
• The investor/s can appoint upto 3 nominees, who will be entitled to the
Units in the event of the demise of the investor/s. The investor can also
specify the percentage distribution between the nominees. If no
distribution is indicated, then an equal distribution between the nominees
will be presumed.
• The investor can also pledge the units. This is normally done to offer
security to a financier.
• Dividend warrants have to be dispatched to investors within 30 days of
declaration of the dividend
• Redemption / re-purchase cheques would need to be dispatched to
investors within 10 working days from the date of receipt of transaction
request.
• In the event of delays in dispatching dividend warrants or redemption /
repurchase cheques, the AMC has to pay the unit-holder, interest at the
rate of 15% p.a. This expense has to be borne by the AMC i.e. it cannot be
charged to the scheme.
• Scheme-wise Annual Report or an abridged summary has to be mailed to
all unit-holders within 6 months of the close of the financial year.
• The appointment of the AMC for a mutual fund can be terminated by a
majority of the trustees or by 75% of the Unit-holders (in practice, Unitholding)
of the Scheme. 75% of the Unit-holders (in practice, Unit-holding)
can pass a resolution to wind-up a scheme.
• If an investor feels that the trustees have not fulfilled their obligations,
then he can file a suit against the trustees for breach of trust.
• Under the law, a trust is a notional entity. Therefore, investors cannot sue
the trust
• The principle of caveat emptor (let the buyer beware) applies to mutual
fund investments. So, the unit-holder cannot seek legal protection on the
grounds of not being aware, especially when it comes to the provisions of
law, and matters fairly and transparently stated in the Offer Document.
• Unit-holders have a right to proceed against the AMC or trustees in certain
cases. However, a proposed investor i.e. someone who has not invested in
the scheme does not have the same rights.
• The mutual fund has to deploy unclaimed dividend and redemption
amounts in the money market. AMC can recover investment management
and advisory fees on management of these unclaimed amounts, at a
maximum rate of 0.50% p.a.
• 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
Chapter 4 : Offer Document
• The AMC decides on a scheme to take to the market. This is decided on the
basis of inputs from the CIO on investment objectives that would benefit
investors, and inputs from the CMO on the interest in the market for the
investment objectives.
• AMC prepares the Offer Document for the NFO. This needs to be approved
by the Trustees and the Board of Directors of the AMC
• The documents are filed with SEBI. The observations that SEBI makes on
the Offer Document need to be incorporated. After approval by the
trustees, the Offer Document can be issued in the market.
• Investors need to note that their investment is governed by the principle of
caveat emptor i.e. let the buyer beware. An investor is presumed to have
read the Offer Document, even if he has not actually read it. Therefore, at a
future date, the investor cannot claim that he was not aware of something,
which is appropriately disclosed in the Offer Document.
• Mutual Fund Offer Documents have two parts: Scheme Information
Document (SID), which has details of the scheme. Statement of Additional
Information (SAI), which has statutory information about the mutual fund,
that is offering the scheme.
• It stands to reason that a single SAI is relevant for all the schemes offered
by a mutual fund. In practice, SID and SAI are two separate documents,
though the legal technicality is that SAI is part of the SID.
• While SEBI does not approve or disapprove Offer Documents, it gives its
observations. The mutual fund needs to incorporate these observations in
the Offer Document that is offered in the market. Thus, the Offer
Documents in the market are “vetted” by SEBI, though SEBI does not
formally “approve” them.
• If a scheme is launched in the first 6 months of the financial year (say, April
2010), then the first update of the SID is due within 3 months of the end of
the financial year (i.e. by June 2011).
• If a scheme is launched in the second 6 months of the financial year (say,
October 2010), then the first update of the SID is due within 3 months of
the end of the next financial year (i.e. by June 2012).
• Regular update is to be done by the end of 3 months of every financial
year. Material changes have to be updated on an ongoing basis and
uploaded on the websites of the mutual fund and AMFI.
• KIM is essentially a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is
to be accompanied by the KIM.
• KIM is to be updated at least once a year. As in the case of SID, KIM is to be
revised in the case of change in fundamental attributes. Other changes can
be disclosed through addenda attached to the KIM.
• The Scheme/Plan shall have a minimum of 20 investors and no single
investor shall account for more than 25% of the corpus of the
Scheme/Plan(s).
• Legally, SAI is part of the SID.
Chapter 5
• Historically, individual agents would distribute units of Unit Trust of
India and insurance policies of Life Insurance Corporation. They would
also facilitate investments in Government’s Small Savings Schemes.
Further, they would sell Fixed Deposits and Public Issues of shares of
companies, either directly, or as a sub-broker of some large broker.
• UTI, LIC or other issuer of the investment product (often referred to in
the market as “product manufacturers”) would advertise through the
mass media, while an all-India field force of agents would approach
investors to get application forms signed and collect their cheques. The
agents knew the investors’ families personally – the agent would often
be viewed as an extension of the family.
• Independent Financial Advisors (IFAs), who are individuals. The bigger
IFAs operate with support staff who handles back-office work, while
they themselves focus on sales and client relationships.
• Non-bank distributors, such as brokerages, securities distribution
companies and non-banking finance companies
• The internet gave an opportunity to mutual funds to establish direct
contact with investors. Direct transactions afforded scope to optimize
on the commission costs involved in distribution. Investors, on their
part, have found a lot of convenience in doing transactions
instantaneously through the internet, rather than get bogged down
with paper work and having to depend on a distributor to do
transactions. This has put a question mark on the existence of
intermediaries who focus on pushing paper, but add no other value to
investors.
• The institutional channels have had their limitations in reaching out
deep into the hinterland of the country. A disproportionate share of
mutual fund collections has tended to come from corporate and
institutional investors, rather than retail individuals for whose benefit
the mutual fund industry exists. Stock exchanges, on the other hand,
have managed to ride on the equity cult in the country and the power
of communication networks to establish a cost-effective all-India
network of brokers and trading terminals. This has been a successful
initiative in the high-volume low-margin model of doing business, which
is more appropriate and beneficial for the country.
• SEBI, in September 2012, provided for a new cadre of distributors, such
as postal agents, retired government and semi-government officials
(class III and above or equivalent), retired teachers and retired bank
officers with a service of at least 10 years, and other similar persons
(such as Bank correspondents) as may be notified by AMFI/ AMC from
time to time. These new distributors are allowed to sell units of simple
and performing mutual fund schemes. Simple and performing mutual
fund schemes comprise of diversified equity schemes, fixed maturity
plans (FMPs) and index schemes that have returns equal to or better
than their scheme benchmark returns during each of the last three
years.
• A fund may appoint an individual, bank, non-banking finance company
or distribution company as a distributor. No SEBI permission is required
before such appointment. SEBI has prescribed a Certifying Examination,
passing in which is compulsory for anyone who is into selling of mutual
funds, whether as IFA, or as employee of a distributor or AMC.
Qualifying in the examination is also compulsory for anyone who
interacts with mutual fund investors, including investor relations teams
and employees of call centres.
• There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down
limits on what the total expense (including commission) in a scheme can
be.
• Initial or Upfront Commission, on the amount mobilized by the
distributor.
• Trail commission, calculated as a percentage of the net assets
attributable to the Units sold by the distributor.The trail commission is
normally paid by the AMC on a quarterly basis. Since it is calculated on
net assets, distributors benefit from increase in net assets arising out of
valuation gains in the market.
• Further, unlike products like insurance, where agent commission is paid
for a limited number of years, a mutual fund distributor is paid a
commission for as long as the investor’s money is held in the fund.
• A point to note is that the commission is payable to the distributors to
mobilise money from their clients. Hence, no commission – neither
upfront nor trail – is payable to the distributor for their own
investments (self business).
• Typically, AMCs structure their relationship with distributors as Principal
to Principal. Therefore, the AMC it is not bound by the acts of the
distributor, or the distributor’s agents or sub-brokers.
• In hoardings / posters, the statement, “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing”, is to be displayed in black letters of at least 8 inches height
or covering 10% of the display area, on white background.
• In audio-visual media, the statement “Mutual Fund investments are
subject to market risks, read the offer document carefully before
investing” (without any addition or deletion of words) has to be
displayed on the screen for at least 5 seconds, in a clearly legible fontsize
covering at least 80% of the total screen space and accompanied by
a voice-over reiteration. The remaining 20% space can be used for the
name of the mutual fund or logo or name of scheme, etc.
• Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner whatsoever
shall be issued by any Mutual Fund or distributors of its products.
Chapter 6
• Higher the interest, dividend and capital gains earned by the
scheme, higher would be the NAV.
• Higher the appreciation in the investment portfolio, higher would
be the NAV.
• Lower the expenses, higher would be the NAV.
• The process of valuing each security in the investment portfolio
of the scheme at its market value is called ‘mark to market’ i.e.
marking the securities to their market value.
• Marking to market helps investors buy and sell units of a scheme
at fair prices, which are determined based on transparently
calculated and freely shared information on NAV.
• Initial Issue Expenses – These are one-time expenses that come
up when the scheme is offered for the first time (NFO). These
need to be borne by the AMC.
• NAV is to be calculated upto 4 decimal places in the case of index
funds, liquid funds and other debt funds.
• NAV for equity and balanced funds is to be calculated upto at
least 2 decimal places.
• Investors can hold their units even in a fraction of 1 unit.
However, current stock exchange trading systems may restrict
transacting on the exchange to whole units.
• Debt securities that are not traded on the valuation date are
valued on the basis of the yield matrix prepared by an authorized
valuation agency. The yield matrix estimates the yield for
different debt securities based on the credit rating of the security
and its maturity profile.
• There is no TDS on the dividend distribution or re-purchase
proceeds to resident investors
• 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
• Since long term capital gains arising out of equity-oriented
mutual fund units is exempt from tax, long term capital loss
arising out of such transactions is not available for set off.
• If, an investor buys units within 3 months prior to the record date
for a dividend, and sells those units within 9 months after the
record date, any capital loss from the transaction would not be
allowed to be set off against other capital gains of the investor,
up to the value of the dividend income exempted.
• Investments in mutual fund units are exempt from Wealth Tax.
This is irrespective of where the fund invests. Although
investment in physical gold or real estate may attract wealth tax
in case of direct investors, investments in Gold ETF and real
estate mutual funds are exempt from wealth tax.
Chapter 7
• Overseas Corporate Bodies (OCBs) i.e. societies / trusts held, directly or
indirectly, to the extent of over 60% by NRIs, or trusts where more than
60% of the beneficial interests is held by such OCBs were not allowed to
invest until recently.
• SEBI and RBI circulars dated August 9, 2011 have allowed Qualified Foreign
Investors (QFIs) who meet KYC requirements to invest in equity and debt
schemes of Mutual Funds through two routes: Direct route (holding MF
units in a demat account through a SEBI registered depository participant)
and also through indirect route by holding units via Unit Confirmation
Recipt.
• Some gilt schemes have specific plans, which are open only for Provident
Funds, Superannuation and Gratuity Funds, Pension Funds, Religious and
Charitable Trusts and Private Trusts.
• In the case of Exchange Traded Funds, only authorized participants and
large investors can invest in the NFO. Subsequently, in the stock exchange,
anyone who is eligible to invest can buy Units of the ETF.
• Micro-SIP investment by individuals, minors and sole-proprietary firms are
exempted from the requirement of PAN card.
• The normal application form, with KIM attached, is designed for fresh
purchases i.e. instances where the investor does not have an investment
account (technically called “folio”) with the specific mutual fund.
• Both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
have extended their trading platform to help the stock exchange brokers
become a channel for investors to transact in Mutual Fund Units. NSE’s
platform is called NEAT MFSS. BSE’s platform is BSE StAR Mutual Funds
Platform.
• The reduced NAV, after a dividend payout is called ex-Dividend NAV. After
a dividend is announced, and until it is paid out, it is referred to as cum-
Dividend NAV.
• PAN Card is not required for mutual fund investments below Rs 20,000,
where payment is in cash.
• Investors’ KYC details are stored in the server of KRA
Chapter 8
• Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares
• Price to Earnings Ratio (P/E Ratio): Market Price ÷ EPS
• Book Value per Share: Net Worth ÷ No. of equity shares
• Price to Book Value: Market Price ÷ Book Value per Share
• It is generally agreed that longer term investment decisions are best
taken through a fundamental analysis approach, while technical
analysis comes in handy for shorter term speculative decisions,
including intra-day trading.
• Sector allocation is a key decision in a top down approach.
• The bottom-up approach is called as stock picking as stock selection
is the key decision in this approach.
• Top down approach minimizes the chance of being stuck with large
exposure to a poor sector. Bottom up approach ensures that a good
stock is picked, even if it belongs to a sector that is not so hot.
• Debt securities that are to mature within a year are called money
market securities.
• The difference between the yield on Gilt and the yield on a non-
Government Debt security is called its yield spread.
• The returns in a debt portfolio are largely driven by interest rates
and yield spreads.
• A mutual fund scheme cannot borrow more than 20% of its net
assets
• The borrowing cannot be for more than 6 months.
• The borrowing is permitted only to meet the cash flow needs of
investor servicing viz. dividend payments or re-purchase payments.
• SEBI has stipulated the 20:25 rule viz. every scheme should have at
least 20 investors; no investor should represent more than 25% of
net assets of a scheme.
• Dividend yield funds invest in shares whose prices fluctuate less, but
offer attractive returns in the form of dividend. Such funds offer
equity exposure with lower downside.
Chapter 9
• As a structured approach, the sequence of decision making is as
follows:
Step 1 – Deciding on the scheme category
Step 2 – Selecting a scheme within the category
Step 3 – Selecting the right option within the scheme
• Investing in equities with a horizon below 2 years can be dangerous.
Ideally, the investor should look at 3 years. With an investment horizon
of 5 years and above, the probability of losing money in equities is
negligible.
• An investor in an active fund is bearing a higher cost for the fund
management, and a higher risk. Therefore, the returns ought to be
higher i.e. the scheme should beat the benchmark, to make the
investor believe that choice of active scheme was right.
• The significant benefit that open-ended funds offer is liquidity viz. the
option of getting back the current value of the unit-holding from the
scheme.
• A close-ended scheme offers liquidity through a listing in a stock
exchange. Unfortunately, mutual fund units are not that actively
traded in the market.
• The price of units of a closed-end scheme in the stock exchange tends
to be lower than the NAV. There is no limit to this discount. Only
towards the maturity of the scheme, the market price converges
towards the NAV.
• In a market correction, the Growth funds can decline much more than
value funds.
• Since floating rate debt securities tend to hold their values, even if
interest rates fluctuate, the NAV of floaters tend to be steady. When
the interest rate scenario is unclear, then floaters are a safer option.
Similarly, in rising interest rate environments, floaters can be
considered as an alternative to short term debt funds and liquid funds.
• Amongst index schemes, tracking error is a basis to select the better
scheme. Lower the tracking error, the better it is. Similarly, Gold ETFs
need to be selected based on how well they track gold prices.
Chapter 10
• Physical assets have value and can be touched, felt and used.
• Financial assets have value, but cannot be touched, felt or used as part of
their core value.
• A physical asset is completely gone, or loses substantial value, when stolen,
or if there is a fire, flood or such other hazard. It is for this reason that
some owners of physical assets insure them against such hazards.
• Investor’s money in land, art, rare coins or gold does not benefit the
economy. On the other hand, money invested in financial assets, e.g.
equity shares, debentures, bank deposits can be productive for the
economy.
• Gold futures contracts are traded in commodity exchanges like the National
Commodities Exchange (NCDEX) and Multi-Commodity Exchange (MCX).
The value of these contracts goes up or down in line with increases or
decreases in gold prices.
• Gold ETF on the other hand is an open-ended scheme with no fixed
maturity. It is very rare for an open-ended scheme to liquidate itself early.
Therefore, an investor who buys into a gold ETF can hold the position
indefinitely.
• Wealth Tax is applicable on gold holding (beyond the jewellery meant for
personal use). However, mutual fund schemes (gold linked or otherwise)
and gold deposit schemes are exempted from Wealth Tax.
• Real estate is an illiquid market. Investment in financial assets as well as
gold can be converted into money quickly and conveniently within a few
days at a transparent price. Since real estate is not a standardized product,
there is no transparent price – and deals can take a long time to execute.
• Tier I (Pension account), is non-withdrawable.
• Tier II (Savings account) is withdrawable to meet financial contingencies.
An active Tier I account is a pre-requisite for opening a Tier II account.
• Investors can invest through Points of Presence (POP). They can allocate
their investment between 3 kinds of portfolios:
o Asset Class E: Investment in predominantly equity market instruments
o Asset Class C: Investment in Debt securities other than Government
Securities
o Asset Class G: Investments in Government Securities.
Chapter 11
• The costs mentioned above, in today’s terms, need to be translated into the rupee
requirement in future. This is done using the formula A = P X (1 + i)n, where, 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 steps in creating a comprehensive financial plan, as proposed by the
Certified Financial Planner – Board of Standards (USA) are as follows:
a. Establish and Define the Client-Planner Relationship
b. Gather Client Data, Define Client Goals
c. Analyse and Evaluate Client’s Financial Status
d. Develop and Present Financial Planning Recommendations and / or
Options
e. Implement the Financial Planning Recommendations
f. Monitor the Financial Planning Recommendations
• During the Childhood stage, focus is on education in most cases. Children
are dependents, rather than earning members. Pocket money, cash gifts
and scholarships are potential sources of income during this phase. Parents
and seniors need to groom children to imbibe the virtues of savings,
balance and prudence. Values imbibed during this phase set the foundation
of their life in future.
• Equity SIPs and Whole-life insurance plans are great ways to force the
young unmarried into the habit of regular savings, rather than lavish the
money away.
• Young Married,where both spouses have decent jobs, life can be financially
comfortable. They can plan where to stay in / buy a house, based on job
imperatives, life style aspirations and personal comfort. Insurance is
required, but not so critical. Where only one spouse is working, life
insurance to provide for contingencies associated with the earning spouse
are absolutely critical. In case the earning spouse is not so well placed,
ability to pay insurance premia can be an issue, competing with other basic
needs of food, clothing and shelter. In such cases, term insurance (where
premium is lower) possibilities have to be seriously explored and locked
into.
• Accumulation is the stage when the investor gets to build his wealth. It
covers the earning years of the investor i.e. the phases of the life cycle from
Young Unmarried to Pre-Retirement.
• Transition is a phase when financial goals are in the horizon. E.g. house to
be purchased, children’s higher education / marriage approaching etc.
Given the impending requirement of funds, investors tend to increase the
proportion of their portfolio in liquid assets viz. money in bank, liquid
schemes etc.
• During inter-generational transfer, the investor starts thinking about
orderly transfer of wealth to the next generation, in the event of death.
The financial planner can help the investor understand various inheritance
and tax issues, and help in preparing Will and validating various documents
and structures related to assets and liabilities of the investor.
• Reaping/Distribution is the stage when the investor needs regular money.
Hence, investors in this stage need to have higher allocation to income
generating assets. It is the parallel of retirement phase in the Life Cycle.
• Winning lotteries, unexpected inheritance of wealth, unusually high capital
gains earned – all these are occasions of sudden wealth, that need to be
celebrated. However, given the human nature of frittering away such
sudden wealth, the financial planner can channelize the wealth into
investments, for the long term benefit of the investor’s family.
Chapter 12
• Risk profiling is an approach to understand the risk appetite of investors
- an essential pre-requisite to advise investors on their investments.
• The investment advice is dependent on understanding both aspects of
risk: Risk appetite of the investor & Risk level of the investment options
being considered.
• Risk appetite increases as the number of earning member increases and
vice-versa.
• Risk appetite is higher if life expectancy is longer
• Lower the age, higher the risk that can be taken and vice-versa
• Well qualified and multi-skilled professionals can afford to take more
risk.
• Those with steady jobs are better positioned to take risk
• Higher the capital base, better the ability to take financially the
downsides that come with risk.
• The distribution of an investor’s portfolio between different asset
classes is called asset allocation.
• Strategic Asset Allocation is the ideal that comes out of the risk profile
of the individual. Risk profiling is key to deciding on the strategic asset
allocation. The most simplistic risk profiling thumb rule is to have as
much debt in the portfolio, as the number of years of age.
• Tactical Asset Allocation is the decision that comes out of calls on the
likely behaviour of the market. An investor who decides to go
overweight on equities i.e. take higher exposure to equities, because of
expectations of buoyancy in industry and share markets, is taking a
tactical asset allocation call. Tactical asset allocation is suitable only for
seasoned investors operating with large investible surpluses.
