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
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.
