NISM V-A Mutual Fund Distributor Examination

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CONTENTS
CHAPTER 1 - CONCEPT AND ROLE OF A MUTUAL FUND .................................................................... 5

CONCEPT AND ROLE OF A MUTUAL FUND .............................................................................................. 5

Concept of Mutual Fund .................................................................................................................... 5
Net Asset Value (NAV) ....................................................................................................................... 5
Assets Under Management (AUM) .................................................................................................... 5
ADVANTAGES OF MUTUAL FUNDS FOR INVESTORS ............................................................................................. 5
Professional Management ................................................................................................................. 5
Cost effective ..................................................................................................................................... 6
Diversification .................................................................................................................................... 6
Liquidity .............................................................................................................................................. 6
Tax Benefits ........................................................................................................................................ 6
Convenient Options ........................................................................................................................... 7
Investment Comfort ........................................................................................................................... 7
Regulatory Comfort............................................................................................................................ 7
Systematic Approach to Investments ................................................................................................ 7
TYPES OF FUNDS.......................................................................................................................................... 7
Open-ended and Close-ended funds ................................................................................................. 8
EQUITY, DEBT, HYBRID, SOLUTION ORIENTED AND OTHER SCHEMES ..................................................................... 8
Equity Schemes .................................................................................................................................. 8
Debt Schemes .................................................................................................................................... 9
Hybrid Schemes................................................................................................................................ 10
Solution-Oriented Schemes ............................................................................................................. 11
Other Schemes ................................................................................................................................. 11

CHAPTER 2 - FUND STRUCTURE AND CONSTITUENTS ...................................................................... 11

LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA .............................................................................................. 12

CONSTITUENTS OF MUTUAL FUND ................................................................................................................ 12
a. Sponsor......................................................................................................................................... 12
b. Trustee ......................................................................................................................................... 12
c. Asset management company (AMC) ............................................................................................ 13
d. Custodian ..................................................................................................................................... 13
e. Registrar & Transfer Agents (RTA) ............................................................................................... 13
f. Auditors ......................................................................................................................................... 13
g. Fund Accountants......................................................................................................................... 13
h. Distributors .................................................................................................................................. 13
i. Collecting Bankers ......................................................................................................................... 14

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j. KYC Registration Agencies (KRA) ................................................................................................... 14

i. Central KYC (cKYC) ........................................................................................................................ 14
j. Payment Aggregators .................................................................................................................... 14

CHAPTER 3 - LEGAL AND REGULATORY ENVIRONMENT .................................................................. 15

FUNCTIONS OF SEBI: ................................................................................................................................. 15

1. Protective Functions: ................................................................................................................... 15
2. Developmental Functions: ........................................................................................................... 16
3. Regulatory Functions: .................................................................................................................. 16
Other Functions ............................................................................................................................... 17
ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) ......................................................................................... 17
AMFI is not an SRO ........................................................................................................................... 17
OBJECTIVES OF AMFI........................................................................................................................ 17
AMFI Registration Number or ARN .................................................................................................. 18
How to Register or Renew ARN ....................................................................................................... 18
DUE DILIGENCE PROCESS BY AMCS FOR DISTRIBUTORS OF MUTUAL FUNDS ......................................................... 18
INVESTMENT RESTRICTIONS FOR SCHEMES ...................................................................................................... 19
General Restrictions ......................................................................................................................... 19
Restrictions pertaining to investment in Debt Securities: ............................................................... 19
Restriction related to Short-term deposits ...................................................................................... 19
Group Exposure: .............................................................................................................................. 20
Restrictions pertaining to investment in Equity: ............................................................................. 20

CHAPTER 4 - OFFER DOCUMENTS ................................................................................................... 20

OFFER DOCUMENT ............................................................................................................................... 20

NEW FUND OFFER (NFO) ........................................................................................................................... 21
SCHEME INFORMATION DOCUMENT (SID) ..................................................................................................... 21
STATEMENT OF ADDITIONAL INFORMATION (SAI) ............................................................................................ 21
KEY INFORMATION MEMORANDUM (KIM) .................................................................................................... 22

CHAPTER 5 - FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES................................. 23

INDIVIDUAL .............................................................................................................................................. 23
INSTITUTIONAL CHANNELS ........................................................................................................................... 23
INTERNET ................................................................................................................................................. 23
DISTRIBUTION THROUGH BANKS ................................................................................................................... 24
PRE-REQUISITES TO BECOME DISTRIBUTOR OF A MUTUAL FUND ......................................................................... 24
COMMISSION STRUCTURES .......................................................................................................................... 24
Initial or Upfront Commission .......................................................................................................... 25
Trail commission .............................................................................................................................. 25

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CHAPTER S 6 - ACCOUNTING, VALUATION AND TAXATION ............................................................. 26

NET ASSETS OF SCHEME.............................................................................................................................. 26

NET ASSETS OF SCHEME FORMULA ................................................................................................................ 26
NET ASSET VALUE (NAV) ........................................................................................................................... 26
MARK TO MARKET..................................................................................................................................... 27
ENTRY AND EXIT LOADS ............................................................................................................................... 27
TRANSACTION CHARGES.............................................................................................................................. 27
FEES AND EXPENSES ................................................................................................................................... 27
Initial Issue expenses ....................................................................................................................... 28
Recurring Expenses .......................................................................................................................... 28

CHAPTER 7 - INVESTOR SERVICES ................................................................................................... 28

ELIGIBILITY TO INVEST ................................................................................................................................. 28

KYC DOCUMENTS...................................................................................................................................... 29
Proof of Address............................................................................................................................... 29
KYC REGISTRATION AGENCIES ..................................................................................................................... 29
Centralised KYC Registration Agencies (KRA) .................................................................................. 29
Direct Plan and Regular Plan ............................................................................................................ 30
Cut-off Time ..................................................................................................................................... 30
INVESTMENT PLANS AND SERVICES ................................................................................................................ 30
Growth, Dividend Payout and Dividend Re-Investment Options .................................................... 30
SYSTEMATIC TRANSACTIONS ........................................................................................................................ 31
Systematic Investment Plan (SIP): ................................................................................................... 31
Systematic Withdrawal Plan (SWP): ................................................................................................ 31
Systematic Transfer Plan (STP): ....................................................................................................... 31
Dividend Transfer Plan (DTP) ........................................................................................................... 31

CHAPTER 8 - RETURN, RISK AND PERFORMANCE OF FUNDS............................................................ 31

FUNDAMENTAL ANALYSIS ............................................................................................................................ 31

TECHNICAL DISCIPLINE ................................................................................................................................ 33
INVESTMENT STYLES – GROWTH AND VALUE .................................................................................................. 33
Growth investing .............................................................................................................................. 33
Value investing ................................................................................................................................. 33
PORTFOLIO BUILDING APPROACH – TOP DOWN AND BOTTOM UP ........................................................................ 33
Top down approach ......................................................................................................................... 33
Bottom-up approach ........................................................................................................................ 33
MEASURES OF RETURNS ............................................................................................................................. 34
Simple Return ................................................................................................................................... 34

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Annualized Return............................................................................................................................ 34
Compounded Return........................................................................................................................ 34
Compound return: ........................................................................................................................... 35
COMPOUNDED ANNUAL GROWTH RATE (CAGR) ............................................................................................ 35
RISK IN MUTUAL FUND SCHEMES ................................................................................................................. 35
Portfolio risk ..................................................................................................................................... 36
Portfolio liquidity ............................................................................................................................. 36
MEASURES OF RISK .................................................................................................................................... 36
1)Alpha: ............................................................................................................................................ 36
2)Beta: .............................................................................................................................................. 36
3) R-Squared:.................................................................................................................................... 36
4) Standard Deviation (SD): .............................................................................................................. 37
5) Sharpe Ratio: ................................................................................................................................ 37
6) Treynor Ratio ............................................................................................................................... 38

CHAPTER 11 - HELPING INVESTORS WITH FINANCIAL PLANNING .................................................... 39

What is financial planning ................................................................................................................ 39

1. DETERMINE YOUR CURRENT FINANCIAL SITUATION ................................................................................... 40
2. DEVELOP YOUR FINANCIAL GOALS .............................................................................................................. 40
3. IDENTIFY ALTERNATIVE COURSES OF ACTION ................................................................................................ 40
4. EVALUATE ALTERNATIVES ......................................................................................................................... 40
5. CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN ................................................................................ 40
6. REVIEW AND REVISE THE FINANCIAL PLAN.................................................................................................... 41
LIFE CYCLE IN FINANCIAL PLANNING ............................................................................................................... 41
Childhood ......................................................................................................................................... 41
Young Unmarried ............................................................................................................................. 41
Young married .................................................................................................................................. 41
Married with young children ........................................................................................................... 42
Married with older children ............................................................................................................. 42
Pre-retirement ................................................................................................................................. 42
Retirement ....................................................................................................................................... 42
WEALTH CYCLE ......................................................................................................................................... 43
Accumulation ................................................................................................................................... 43
Transition ......................................................................................................................................... 43
Inter-generation money transfer ..................................................................................................... 43
Reaping/Distribution ........................................................................................................................ 43
Sudden Wealth ................................................................................................................................. 43
Bottomline - Risk profiling modeling ............................................................................................... 43

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CHAPTER 12 - RECOMMENDING MODEL PORTFOLIOS AND FINANCIAL PLANS ................................ 44

NEED FOR RISK PROFILING........................................................................................................................... 44

RISK APPETITE OF THE INVESTOR ................................................................................................................... 44

MUTUAL FUND DISTRIBUTORS

CERTIFICATION EXAMINATION

CHAPTER 1 - CONCEPT AND ROLE OF A MUTUAL FUND

CONCEPT AND ROLE OF A MUTUAL FUND

CONCEPT OF MUTUAL FUND

 Mutual fund is a vehicle (in the form of a “trust”) to mobilize money from investors, to invest in
different markets and securities, in line with the common investment objectives agreed upon, between
the mutual fund and the investors

NET ASSET VALUE (NAV)

 NAV is the market value of the securities held by the scheme. Mutual Funds invest the money collected
from investors in securities markets. Since market value of securities changes every day, NAV of a
scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme
divided by the total number of units of the scheme on any particular date.
 When a scheme is first made available for investment, it is called a ‘New Fund Offer’ (NFO). During the
NFO, investors get the chance of buying the units at their face value. Post-NFO, when they buy into a
scheme, they need to pay a price that is linked to its NAV.

ASSETS UNDER MANAGEMENT (AUM)

 The relative size of mutual fund companies is assessed by their assets under management (AUM). When
a scheme is first launched, assets under management is the amount mobilized from investors.
Thereafter, if the scheme’s NAV increase, its AUM goes up; a negative profitability metric will pull it
down.

ADVANTAGES OF MUTUAL FUNDS FOR INVESTORS

PROFESSIONAL MANAGEMENT

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 Investing is obviously not an easy task. Investing, be it in shares, real estate, gold, bonds, and so on
depends on a multitude of factors that constantly need to be studied and understood.
 The advantage of mutual funds is that they are managed by professional experts. Thus, to ensure your
money is invested in the right place, you have to choose the right mutual fund.

COST EFFECTIVE

 Large investment corpus leads to various other economies of scale. For instance, costs related to
investment research and office space gets spread across investors. Further, the higher transaction
volume makes it possible to negotiate better terms with brokers, bankers and other service providers.

DIVERSIFICATION

 One of the biggest advantages mutual funds give you is that of immediate diversification. You may not
have enough money to spread your investments in varied stocks and sectors, but by pooling money
from thousands of similar investors, a mutual fund spreads your investment and hence, risk. It is highly
unlikely that all the stocks will go down by the same proportion on any particular day. This ensures that
you have not kept all your eggs in one basket and are safe from incurring huge losses from a single bad
investment.

LIQUIDITY

 You can easily move your money in and out of mutual fund investments. Investments in open-ended
funds can be redeemed in part or as a whole any time to receive the current value of the units.

TAX BENEFITS

 There are various tax benefits available on your investments in mutual funds. For example, investments
in Equity Linked Savings Schemes (ELSS) qualify for tax deductions(upto Rs. 150,000 in a financial year)
under Section 80C of the Income Tax Act.

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CONVENIENT OPTIONS

 The options offered under a scheme allow investors to structure their investments in line with their
liquidity preference and tax position.
 There is also great transaction conveniences like the ability to withdraw only part of the money from
the investment account, ability to invest additional amount to the account, setting up systematic
transactions, etc.

INVESTMENT COMFORT

 Once an investment is made with a mutual fund, they make it convenient for the investor to make
further purchases with very little documentation. This simplifies subsequent investment activity.

REGULATORY COMFORT

 The regulator, Securities and Exchange Board of India (SEBI), has mandated strict checks and balances in
the structure of mutual funds and their activities. Mutual fund investors benefit from such protection.

SYSTEMATIC APPROACH TO INVESTMENTS

 Mutual funds also offer facilities that help investor invest amounts regularly through a Systematic
Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP); or
move money between different kinds of schemes through a Systematic Transfer Plan (STP). Such
systematic approaches promote investment discipline, which is useful in long-term wealth creation and
protection.

TYPES OF FUNDS

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 Mutual funds can be classified in various ways, depending on their structure and the nature of
investments they make.

OPEN-ENDED AND CLOSE-ENDED FUNDS

OPEN-ENDED FUNDS

 Open-ended funds are open for investors to enter or exit at any time, even after the NFO.
 The scheme does not have any kind of time frame in which it is to be closed.
 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

 Close-ended funds have a fixed maturity.

 Investors can buy units of a close-ended scheme, from the fund, only during its NFO.
 The fund makes arrangements for the units to be traded, post-NFO in a stock exchange.
 Listing is compulsory for close-ended schemes.

INTERVAL FUNDS

 Interval funds combine features of both open-ended and close-ended schemes. They are largely close-
ended, but become open-ended at pre-specified intervals.
 For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15,
each year.
 The periods when an interval scheme becomes open-ended, are called ‘transaction periods’; the period
between the close of a transaction period, and the opening of the next transaction period is called
‘interval period”.
 Minimum duration of transaction period is 2 days, and minimum duration of interval period is 15 days.
 No redemption/repurchase of units is allowed except during the specified transaction period’.

EQUITY, DEBT, HYBRID, SOLUTION ORIENTED AND OTHER SCHEMES

EQUITY SCHEMES

Category Scheme Characteristics

Multi Minimum investment in equity & equity related instruments- 65% of total assets
Cap Fund

Large Cap Minimum investment in equity & equity related instruments of large cap companies- 80% of
Fund total assets

Large & Mid Minimum investment in equity & equity related instruments of large cap companies- 35% of
Cap Fund total assets Minimum investment in equity & equity related instruments of mid cap stocks-
35% of total assets

Mid Cap Fund Minimum investment in equity & equity related instruments of mid cap companies- 65% of
total assets

Small Minimum investment in equity & equity related instruments of small cap companies- 65% of

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cap Fund total assets

Dividend Scheme should predominantly invest in dividend yielding stocks. Minimum investment in
Yield Fund equity- 65% of total assets

Value Fund Scheme should follow a value investment strategy. Minimum investment in equity & equity
related instruments - 65% of total assets

Contra Fund Scheme should follow a contrarian investment strategy. Minimum investment in equity &
equity related instruments - 65% of total assets

Focused Fund A scheme focused on the number of stocks (maximum 30). Minimum investment in equity &
equity related instruments - 65% of total assets. Funds will mention where the scheme intends
to focus, viz.,multi cap, large cap, mid cap, small cap

Sectoral/ Minimum investment in equity & equity related instruments of a particular sector/ particular
Thematic theme- 80% of total assets

ELSS Minimum investment in equity & equity related instruments - 80% of total assets. An open
ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit

*Mutual funds will be permitted to offer either Value fund or Contra fund

DEBT SCHEMES

Category Scheme Characteristics

Overnight Fund Investment in overnight securities having maturity of 1 day

Liquid Fund Investment in Debt and money market securities with maturity of upto 91 days
only

Ultra Short Duration Fund Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 3 months - 6 months

Low Duration Fund Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 6 months- 12 months

Money Market Fund Investment in Money Market instruments having maturity upto 1 year

Short Duration Fund Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 1 year - 3 years

Medium Duration Fund Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 3 years - 4 years

Medium to Long Duration Investment in Debt & Money Market instruments such that the Macaulay
Fund duration of the portfolio is between 4 - 7 years

Long Duration Fund Investment in Debt & Money Market Instruments such that the Macaulay

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duration of the portfolio is greater than 7 years

Dynamic Bond Investment across duration

Corporate Bond Fund Minimum investment in corporate bonds- 80% of total assets (only in highest
rated instruments)

Credit Risk Fund Minimum investment in corporate bonds- 65% of total assets (investment in
below highest rated instruments)

Banking and PSU Fund Minimum investment in Debt instruments of banks, Public Sector Undertakings,
Public Financial Institutions- 80% of total assets

Gilt Fund Minimum investment in Gsecs- 80% of total assets (across maturity)

Gilt Fund with 10 Minimum investment in Gsecs- 80% of total assets such that the Macaulay
yearconstant duration duration of the portfolio is equal to 10 years

Floater Fund Minimum investment in floating rate instruments- 65% of total assets

HYBRID SCHEMES

Category Scheme Characteristics

Conservative Hybrid Fund Investment in equity & equity related instruments- between 10% and 25% of
total assets; Investment in Debt instruments- between 75% and 90% of total
assets

Balanced Hybrid Fund* Equity & Equity related instruments- between 40% and 60% of total assets;
Debt instruments- between 40% and 60% of total assets. No arbitrage would be
permitted in this scheme

Aggressive Hybrid Fund* Equity & Equity related instruments- between 65% and 80% of total assets;
Debt instruments- between 20% 35% of total assets

Dynamic Asset Allocation or Investment in equity/ debt that is managed dynamically

Balanced Advantage

Multi Asset Allocation # Invests in at least three asset classes with a minimum allocation of at least 10%
each in all three asset classes

Arbitrage Fund Scheme following arbitrage strategy. Minimum investment in equity & equity
related instruments- 65% of total assets

Equity Savings Minimum investment in equity & equity related instruments- 65% of total
assets and minimum investment in debt- 10% of total assets. Minimum hedged
& unhedged to be stated in the SID.

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Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund.
#Foreign securities will not be treated as a separate asset class

SOLUTION-ORIENTED SCHEMES

Category Scheme Characteristics

Retirement Fund Scheme having a lock-in for at least. 5 years or till retirement age whichever is earlier

Children's Fund Scheme having a lock-in for at least 5 years or till the child attains age of majority
whichever is earlier

OTHER SCHEMES

Category Scheme Characteristics

Index Funds/ ETFs Minimum investment in securities of a particular index (which is being replicated/
tracked)- 95% of total assets

FoFs (Overseas/ Minimum investment in the underlying fund- 95% of total assets
Domestic)

CHAPTER 2 - FUND STRUCTURE AND CONSTITUENTS

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LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA

 Mutual funds are constituted as Trusts. 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.
 The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of
the mutual fund.
 The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the
sponsors and the trustees.
 The Trust acts through its trustees. Therefore, the role of protecting the interests of the beneficiaries
(investors) is that of the Trustees.
 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.
 The trustees execute an investment management agreement with the AMC, setting out its
responsibilities.

CONSTITUENTS OF MUTUAL FUND

A. SPONSOR

 A mutual fund sponsor is basically promoter of the company i.e. any person who either itself or in
association with another body corporate establishes a mutual fund. Not everyone can start a mutual
fund, SEBI checks whether the person of integrity, whether he has enough experience in the financial
sector. Once the SEBI is convinced, the sponsor creates a public trust.

B. TRUSTEE

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 A mutual fund in India needs to be constituted in the form of trust. The trust is created through a
document called trust deed which is executed by the fund sponsor in favour of trustees. They may be
seen as an internal regulator of a mutual fund. Therefore, the role of protecting the investors is that of
the trustees. Trustees have to appoint all key personnel like Fund Managers, Auditors, Custodian,
Registrar, Compliance Officer Etc, and to inform the SEBI about same.

C. ASSET MANAGEMENT COMPANY (AMC)

 Trustees appoint the AMC, to manage investor’s money through an agreement called ‘Investment
Management Agreement’. The AMC structures various schemes, launches the scheme and mobilizes
initial amount, manages the funds and give services to the investors. The mutual fund pays a small fee
to the AMC for the management of the funds.

D. CUSTODIAN

 In Mutual funds, Asset Management Company buys different securities in the forms of Shares, bonds,
gold etc. in different schemes. These Securities are bought in the name of Trust but they are not kept
with the Trust. The responsibility of safe keeping the securities is on the custodian. They collect and
account for the dividends and interest receivables on mutual fund investments. They also keep track of
various corporate actions like bonus issue, rights issue, and stock split; buy back offers, open offer etc
and act on these as per instructions of the Investment manager.

E. REGISTRAR & TRANSFER AGENTS (RTA)

 Mutual fund investors are spread across the country so it is not possible to provide these services to
investors at all these places by Asset Management Company. Instead, they use entities called as
Registrars and Transfer agents, which perform the important role of maintaining investor’s records.
How many units will the investor get, at what price, what is the applicable NAV, how much money will
he get in case of redemption, exit loads, etc is all taken care by the RTA.

F. AUDITORS

 Auditors are responsible for the audit of accounts.

 Accounts of the mutual fund schemes need to be maintained independent of the accounts of the AMC.
 The auditor appointed to audit the mutual fund 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.

G. FUND ACCOUNTANTS

 The fund accountant performs the role of calculating the NAV, by collecting information about the
assets and liabilities of each scheme. The AMC can either handle this activity in-house, or engage a
service provider. There is no need for a registration with SEBI to perform this function.

H. DISTRIBUTORS

 Distributors have a key role in selling suitable types of units to their clients i.e. the investors in the
schemes of mutual funds with whom they are empanelled. A distributor can be empanelled with more
than one mutual fund. Distributors can be individuals or institutions such as distribution companies,
broking companies and banks.

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 Distributors need to pass the prescribed certification test (NISM-Series- V-A: Mutual Fund Distributors
(MFD) Certification Examination), and register with AMFI. Regulatory aspects of their role and, some of
the distribution and channel management practices are covered later.

I. COLLECTING BANKERS

 The investors’ money go into the bank account of the scheme they have invested in. These bank
accounts are maintained with collection bankers who are appointed by the AMC.
 Leading collection bankers make it convenient to invest in the schemes by accepting applications of
investors in most of their branches.

J. KYC REGISTRATION AGENCIES (KRA)

 To do away with multiple KYC formalities with various intermediaries, SEBI has mandated a unified KYC for
the securities market through KYC Registration Agencies (KRA) registered with SEBI. Any new investor, Joint
holders, Power of Attorney holders, Donors and Guardian (in case of minors) have to comply with the KYC
formalities. In-Person Verification (IPV) by a SEBI-registered intermediary is compulsory for all investors.
However, the investor needs to get IPV done by only one SEBI-registered intermediary (broker, depository,
mutual fund distributor etc.). This IPV will be valid for transactions with other SEBI-registered intermediaries
too.

I. CENTRAL KYC (CKYC)

 cKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. The aim of this
initiative is to have a structure in place which allows investors to complete their KYC only once before
interacting with various entities across the financial sector. cKYC is managed by CERSAI (Central Registry of
Securitization Asset Reconstruction and Security Interest of India), which is authorized by the Government
of India to function as the Central KYC Registry (cKYCR). The objective of cKYCR is to reduce the burden of
producing KYC documents and getting those verified every time when the investor deals with a financial
entity for the first time. Thus, cKYCR will act as centralized repository of KYC records of investors in the
financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.

J. PAYMENT AGGREGATORS

 Payment Aggregators such as Razorpay, Bill Desk etc. are service providers that facilitate payment
processing in the online market place. Payment aggregators enable the users to make the payments online
through their existing bank account in a secured and a convenient manner.

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CHAPTER 3 - LEGAL AND REGULATORY ENVIRONMENT

 SEBI (Securities and Exchange Board of India) is an apex institution for investment in India. Let's know about
functions of SEBI :

FUNCTIONS OF SEBI:

We can classify the functions of SEBI into three categories:-

1. Protective functions
2. Developmental functions
3. Regulatory functions

1. PROTECTIVE FUNCTIONS:

 As the name suggests, the main focus of this function of SEBI is to protect the interest of investor and
security of their investment
 As protective functions SEBI performs following functions:

(I) SEBI CHECKS PRICE RIGGING:

 Price Rigging means some people manipulate the prices of securities for inflation or depressing the
market price of securities. SEBI prohibits such practice to avoid fraud and cheating which can happen to
any investor.

(II) SEBI PROHIBITS INSIDER TRADING:

 Any person which is connected with a company such as directors, promoters, workers etc is called
Insiders. Due to working in the company they have sensitive information which affects the prices of the

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[Link] information is not available to people at large but Insider gets this key full knowledge by
working in such company. Insider can use this information for their personal benefits or make a profit
from it, such process is known as Insider Trading.
 For Example - Managers or Directors of a company may know that company will issue Bonus shares to
its shareholders at a particular time and they purchase shares from market to make a profit with bonus
issue.
 SEBI always restricts these types of practices when Insiders are buying securities of the company and
take strict action to avoid this in future

(III) SEBI PROHIBITS FRAUDULENT AND UNFAIR TRADE PRACTICES:

 SEBI always restricts the companies which make misleading statements which are likely to induce the
sale or purchase of securities by any other person.

(IV)

 SEBI sometimes educate the investors so that become able to evaluate the securities and always invest
in profitable securities.

(V)

 SEBI issues guidelines to protect the interest of debenture holders.

(VI)

 SEBI is empowered to investigate cases of insider trading and has provision for stiff fine and
imprisonment.

(VII)

 SEBI has stopped the practice of allotment of preferential shares unrelated to market prices.

(VII)

 SEBI has stopped the practice of making a preferential allotment of shares unrelated to market prices.

2. DEVELOPMENTAL FUNCTIONS:

Under developmental categories following functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting a flexible and adaptable approach
in following way:
o SEBI has permitted internet trading through registered stock brokers.
o SEBI has made underwriting optional to reduce the cost of issue.
o An Even initial public offer of primary market is permitted through the stock exchange.

3. REGULATORY FUNCTIONS:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities
of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as
merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement has
been made more restrictive.

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(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.

OTHER FUNCTIONS

1. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to
issue, trustees of the trust deed, registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment adviser and such other intermediaries who may be associated with securities
markets in any manner.
2. SEBI also perform the function of registering and regulating the working of depositories, custodians of
securities. Foreign Institutional Investors, credit rating agencies etc.
3. Registering and regulating the working of Venture Capital Funds and collective investments schemes
including mutual funds.
4. Promoting and regulating self - regulatory organizations.
5. Calling for information form, undertaking inspection, conducting inquiries and audits of the stock
exchange, mutual funds and intermediaries and self - regulatory organizations in the securities market.
6. Calling for information and record from any bank or any other authority or boars or corporation
established or constituted by or under any Central, State or Provincial Act in respect of any transaction
in securities which are under investigation or inquiry by the Board.
7. Conduct research on any matter described if any.
8. Calling information from any agency, institution, banks etc.

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

 Asset Management Companies (AMCs) in India are members of Association of Mutual Funds in India
(AMFI), an industry body that has been created to promote the interests of the mutual funds industry
[such as the Confederation of Indian Industry (CII) for overall industry and NASSCOM for the IT/BPO
industry].

AMFI IS NOT AN SRO

 The statutory regulatory bodies set up by the Government only lay down the broad policy framework,
and leave the micro-regulations to the SRO. For instance, the Institute of Chartered Accountants of
India (ICAI) regulates its own members.
 The securities exchanges in India such as the NSE, BSE and MSEI are vested with self-regulatory
responsibilities.

OBJECTIVES OF AMFI

 To define and maintain high professional and ethical standards in all areas of operation of mutual fund
industry.
 To recommend and promote best business practices and code of conduct to be followed by members
and others engaged in the activities of mutual fund
 To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all
matters concerning the mutual fund industry.
 To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the
mutual fund industry.

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 To undertake nationwide investor awareness programme so as to promote proper understanding of

the concept and working of mutual funds.
 To disseminate information on mutual fund Industry and to undertake studies and research directly
and/or in association with other bodies.

In the event of breach of the Code of Conduct by an intermediary, the following sequence of steps is initiated
by AMFI:

 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.

AMFI REGISTRATION NUMBER OR ARN

 AMFI Registration Number (ARN) is a unique number assigned to mutual fund agents, distributors, and
brokers.
 Only those who clear NISM Certification can get one.
 And if you are a senior citizen, passing the CPE (Continuing Professional Education) is mandatory for the
same.
 Without this number, you cannot sell a mutual fund or even recommend one.
 AMFI issues ARN ID card to companies and individuals engaged in mutual fund trading. Remember,
NISM certificate is valid only for 3 years.

HOW TO REGISTER OR RENEW ARN

 For ARN registration or renewal, link your Aadhaar and registered mobile number
 In case, you have not submitted the Aadhar details, apply manually
 Pay the fee to register or renew ARN via online banking
 There is no need to submit your NISM passing certificate to register/renew as CAMS can import it
directly from NISM
 Once they verify the documents uploaded on AMFI portal, you get a new ARN license instantly.

DUE DILIGENCE PROCESS BY AMCS FOR DISTRIBUTORS OF MUTUAL FUNDS

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

At the time of empanelling distributors and during the period i.e. review process, mutual funds/AMCs have to
undertake a due diligence process to satisfy ‘fit and proper’ criteria that incorporate, amongst others, the
following factors:

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 Business model, experience and proficiency in the business.

 Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made;
causes for these and resultant corrective actions taken.
 Review of associates and subsidiaries on above factors.
 Organizational controls to ensure that the following processes are delinked from sales and relationship
management processes and personnel:
o Customer risk / investment objective evaluation.
o MF scheme evaluation and defining its appropriateness to various customer risk categories.

INVESTMENT RESTRICTIONS FOR SCHEMES

 The SEBI Regulations provide for various limits to the kind of investments that are possible in mutual fund
schemes, and the limits thereof. In a few cases, there are also aggregate limits for all schemes of a mutual
fund together. The regulator’s objective behind setting these limits is to ensure mitigation of risks in the
scheme and protecting the investor’s interests.

GENERAL RESTRICTIONS

 The Mutual Fund will buy and sell securities on delivery basis. Securities purchased will be transferred
in the name of the Mutual Fund on account of the respective scheme.
 The Mutual Fund shall not advance any loans.
 The scheme will not invest in the unlisted or privately placed securities of any associate or group
company of the sponsor.
 The scheme may invest in other schemes of the same Mutual Fund or other Mutual Funds. This will be
limited to not more than 5 percent of the net asset value of the scheme. No fees will be charged on
such investments. This does not apply to Fund of Funds.
 Investment in the listed securities of the group companies of the sponsor will be limited to 25 percent
of the net assets.
 The Mutual Fund under all its schemes shall not own more than 10 percent of a company’s paid up
capital bearing voting rights.
 Provided no sponsor of a mutual fund, its associate or group company including the Asset Management
Company of the fund, through the schemes of the mutual fund or otherwise, individually or collectively,
directly or indirectly, have 10% or more of the share-holding or voting rights in the asset management
company or the trustee company of any other mutual fund.

RESTRICTIONS PERTAINING TO INVESTMENT IN DEBT SECURITIES:

 The scheme shall not invest more than 10 percent of its NAV in investment grade debt instruments
issued by a single issuer. This can be extended to 12 percent with the approval of the trustees. The limit
shall not apply to Government Securities, Treasury Bills and CBLO.
 Investment in unrated debt securities of a single issuer will be limited to 10 percent of its NAV and the
total investments in such securities shall not exceed 25 percent of the NAV of the scheme.

RESTRICTION RELATED TO SHORT-TERM DEPOSITS

 Parking of funds in Short-term deposits with all scheduled commercial banks shall be limited to 15
percent of the net assets of the scheme. This can be raised to 20 percent with the approval of the
trustees. The Scheme cannot invest in the short-term deposits of a bank that has invested in the
scheme. No management fee will be charged for such investments by the scheme.

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GROUP EXPOSURE:

 Mutual Funds/AMCs shall ensure that the total exposure of debt schemes of mutual funds in a
particular sector (excluding investments in Bank CDs, CBLO, G-secs, T-Bills, Short Term Deposits of
Schedule Commercial Banks and AAA rated securities issued by the Public Sector Units, Public Financial
Institutions and Public Sector Banks) shall not exceed 25 percent of the net assets of the scheme.
 Provided that an additional exposure to financial services sector (over and above the limit of 25
percent) not exceeding 10 percent of the net assets of the scheme shall be allowed only by way of
increase in exposure to Housing Finance Companies (HFCs);
 Provided further that the additional exposure to such securities issued by HFCs are rated AA and above
and these HFCs are registered with National Housing Bank (NHB) and the total investment/ exposure in
HFCs shall not exceed 25 percent of the net assets of the scheme.

RESTRICTIONS PERTAINING TO INVESTMENT IN EQUITY:

 The ELSS notification requires that atleast 80 percent of the ELSS’ funds should be invested in equity
and equity-linked securities.
 The Scheme shall not invest more than 10 percent of its net assets in the equity shares and equity
related instruments of a company. The limit is not applicable for investments in Index/sector/industry
specific schemes.
 Not more than 5 percent of the net assets of the scheme will be invested in unlisted equity shares and
equity related instruments in case of open ended scheme and 10% of its NAV in case of close ended
scheme.

CHAPTER 4 - OFFER DOCUMENTS

OFFER DOCUMENT

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 Every mutual fund has three important documents which are prepared by respective AMCs to provide
information about a particular scheme. The approval of these documents is given by the Securities and
Exchange Board of India (SEBI). These documents include Scheme Information Document (SID),
Statement of Additional Information (SAI) and Key Information Memorandum (KIM). All these
documents are provided with the details which an investor ought to know before investing in a mutual
fund scheme. Let’s understand these terms individually to get better understanding.

NEW FUND OFFER (NFO)

Units in a mutual fund scheme are offered to public investors for the first time through a NFO. The offer is
made through a legal document called the Offer Document. The following are a few key steps leading to the
NFO:

 The AMC decides on a scheme to be taken to the market. This is decided on the basis of inputs from the
Chief Investment Officer (CIO) on investment objectives that would benefit investors, and inputs from
the Chief Marketing Officer (CMO) on the interest in the market for the investment objectives.
 The AMC prepares the draft Offer Document for the NFO. This needs to be approved by the Trustees
and the Board of Directors of the AMC.
o The trustees have to give an undertaking that the scheme is a new product and not a minor
modification of an existing scheme.
 The documents are then filed with SEBI. The observations that SEBI makes on the draft Offer Document
need to be incorporated. In case no modifications are suggested by SEBI within 21 working days of filing
the same, the AMC can issue the offer document in the market.
 The AMC decides on a suitable time-table for the issue, keeping in mind the market situation.
 The AMC launches its advertising and public relations campaigns to make investors aware of the NFO.
These need to comply with SEBI’s advertising code, which is discussed in Chapter 5.
 The AMC holds events for intermediaries and the press to make them familiar with the scheme, its
unique features, benefits for investors, etc.
 The Offer Documents and Application Forms are distributed to market intermediaries, and circulated in
the market, so that investors can apply in the NFO.

Three dates are relevant for the NFO of an open-ended scheme:

 NFO Open Date – This is the date from which investors can invest in the NFO
 NFO Close Date – This is the date upto which investors can invest in the NFO

SCHEME INFORMATION DOCUMENT (SID)

 It provides the basic information about a particular scheme, which the investor should know before
investing. But, at times it can overwhelm the investor who is reading the bulk information that it
carries. So, here are some important points which are specifically mentioned in the SID of a scheme:
o The fundamental attributes like Investment Objective, Policies and Asset Allocation Pattern
o Past Performance, Benchmark, Plans & Options
o Fund Management Team Details
o Expense Ratio, Loads, Fees and Liquidity details
o Risk Factors And Risk Mitigation Mechanism
o Tax Implication and Limits on Investments & Redemption Details It must be noticed that the SID
must be read in conjunction with the SAI and not in isolation.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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 It is a kind of mutual fund’s prospectus which contains additional information about the fund and
disclosure of its operations. Basically, this document carries information about any changes made in the
scheme’s operations and other related areas. The information provided in the document is not so
important for the investors because the abbreviated form of all this information is already mentioned in
SID. Furthermore, details about the AMC, constitution of the mutual fund & other related authorities,
general and legal information, financial & legal issues are also provided in it, due to which it is also
called Part B of fund’s registration documents. The regulatory bodies require that the AMCs must
provide a copy of its part B prospectus to the investors free of charge upon request.

KEY INFORMATION MEMORANDUM (KIM)

 It is a concise version of SID. As the name suggests, KIM contains the key information about the scheme
which is necessary for an investor to know. It comes attached along with the application form of the
scheme. In short it is said that KIM is a summary of SID & SAI.
 Read the following important aspects in ‘Scheme Related Documents’ to make an informed decision
in mutual funds:
o Investment Objective: The investment objectives and plans of the scheme are provided in the
mainstay of the ODs. The objectives of the scheme along with the way of achieving that are
described here which the investor should be aware of. Before investing in any scheme, investor
must match his/her own financial goals with that of the scheme given in the documents.
o Past Performance: Before making commitment to something, it is better to analyse its history.
Same is in the case of mutual fund investment. To be on the safe side, it is needed to view the
past performance, total AUM, and the inception date of the fund.
o Risk Factors and Risk Mitigation Mechanism: Not all the investors are same, they differ in
investment style, size of investment, exposure and risk profile. Upon all, risk is an important
factor which the investor wishes to reduce to the minimum level. The ‘Offer Documents’ specify
the market risks contained by a particular scheme and the process to be followed to reduce the
same. Do not get worried by so much of risks shown in the documents, mutual fund companies
are specified by law to highlight every type of financial risk to you. You may be exposed to them
if investments are made in that particular scheme.
o Fees, Loads and Taxes: Exit loads are the charges which are deducted from the withdrawn
amount at the time of redemption and entry load is the fee charged at the time of investment.
There are other expenses as well which include Transaction Charges, Securities Transaction Tax
(STT), etc. All these expenditures are combined to be known as Total Expense. The expense
ratio is the annual fee that all mutual funds charge from their shareholders. Different funds vary
in their expense charges as they are different in asset size an carry varying expenditures due to
which they have inconstant NAV.
o Investment and Redemption Criteria: This is one more important point one must read in the
documents. Every scheme has a different investment limit which describes the minimum and
the maximum amount which can be invested in them. You must read the details carefully to set
your investment plan in an effective manner. On the other part, liquidity is a major factor which
most of the investors want in their investments. Moreover, there are certain charges on the
redemption of the money before the maturity of a predetermined period, which should be
known to the investor.

Therefore, it can be said that an investor should know the where about of the fund which is available in the
form of ‘Scheme Related Documents’. They are provided for the purpose of gaining detailed knowledge about
the fund and related terms & policies. The ‘Scheme Related Documents, i.e., SID, SAI & KIM of any particular
mutual fund are available on the website of SEBI and particular AMC.

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CHAPTER 5 - FUND DISTRIBUTION AND CHANNEL MANAGEMENT

PRACTICES

INDIVIDUAL

 In the past, individual agents distributed units of Unit Trust of India and insurance policies of Life
Insurance Corporation (LIC). These individual agents facilitated investments in Government’s small
savings schemes and also sold fixed deposits and public issues of shares of companies, either directly, or
as a sub-broker of some large broker.

INSTITUTIONAL CHANNELS

The changing competitive context led to the emergence of institutional channels of distribution for a wide
spectrum of financial products. This comprised:

 Brokerage firms and other securities distribution companies, who widened their offering beyond
company fixed deposits and public issue of shares.
 Banks, who started viewing distribution of financial products as a key avenue to earn fee-based income,
while addressing the investment needs of their customers.
 Non-banking finance companies (NBFC) with multiple branches.

INTERNET

 The internet gave an opportunity to mutual funds to establish direct contact with investors. Investors
can now access the website of the mutual fund and deal directly with the fund. Direct transactions
afford scope to optimize on the commission costs involved in distribution. Other electronic/internet

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based modes of conducting financial and non-financial transactions include those offered by banks,
financial institutions, distributors, registrar and transfer agent, electronic platforms provided by stock
exchanges such as NSE’s MFSS and BSE’s StAR platform

DISTRIBUTION THROUGH BANKS

Mutual funds have built relationships with PSU banks that have a wide reach in the non-urban centres to
distribute mutual fund products through them. Also private and foreign banks actively participate in the
distribution process of mutual fund product.

PRE-REQUISITES TO BECOME DISTRIBUTOR OF A MUTUAL FUND

 An Asset Management Company may appoint an individual, bank, non-banking finance company or
distribution company as a distributor.
 SEBI has mandated mutual fund distributors, agents or any persons employed or to be employed in the
sale and/or distribution of mutual fund products, to have a valid certification from the National Institute
of Securities Markets (NISM) by passing NISM Series-V-A: Mutual Fund Distributors Certification
Examination.

In order to be eligible to sell or market mutual funds, the following are compulsory:

 Obtaining NISM Certification

 The individual needs to pass the NISM certification examination mandated by SEBI.
 For persons who have attained the age of 50 years or who have at least 10 years of experience in the
securities markets in the sale and/ or distribution of mutual fund products as on May 31, 2010, can
obtain the certification either by passing the NISM certification examination or qualifying for Continuing
Professional Education (CPE) by obtaining such classroom credits as may be specified by NISM from
time to time.8
 Know Your Distributor (KYD) Requirements

COMMISSION STRUCTURES

 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.
 Total Expense Ratio: The total expense ratio (TER) will be as follows:

AUM (Rs TER for equity-oriented schemes (%) TER for other schemes (excl. Index, ETFs and
crore) Fund of Funds)

0 - 500 2.25 2.00

500 - 750 2.00 1.75

750 - 2,000 1.75 1.50

2,000 - 1.60 1.35

5,000

5,000 – 1.50 1.25

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10,000

10,000 – TER reduction of 0.05% for every increase of TER reduction of 0.05% for every increase of
50,000 5,000 crore AUM or part thereof 5,000 crore AUM or part thereof

> 50,000 1.05 0.80

 In case of close-ended and interval schemes, TER for equity-oriented schemes shall be a maximum of
1.25 per cent and for other than equity oriented schemes shall be a maximum of 1.00 per cent. The TER
for index schemes, Exchange Traded Funds (ETFs) and Fund of Funds shall be maximum of 1.00 per
cent. The TER for fund of funds (FoFs) shall be a maximum of twice the TER of the underlying funds. -
FoFs investing primarily in Liquid, Index and ETF schemes: Total TER (including the TER of underlying
schemes) shall be maximum of 1.00 per cent. - FoFs investing primarily in active underlying schemes:
Total TER (including the TER of the underlying schemes), shall be maximum of 2.25 per cent for equity
oriented schemes, and maximum of 2 per cent for other than equity oriented schemes.
 Additional expenses of 30 bps for penetration in B-30 cities: The additional expense permitted for
penetration in B-30 cities, shall be based on inflows from retail investors. The definition of ‘retail
investors’ shall be determined in consultation with the industry. Pending such clarification, the
additional incentive shall be permitted for inflows from individual investors only and not on inflows
from corporates and institutions. Further, the B-30 incentive shall be paid as trail only.
 Performance Disclosure: Adequate disclosure of all schemes’ returns (category wise) vis-à-vis its
benchmark (total returns) shall be made available on the website of AMFI.
 Upon implementation of the above decisions, the trustees and AMC boards shall monitor the
implementation by the respective AMCs and shall report to SEBI periodically, says Sebi in its board
meeting report.

INITIAL OR UPFRONT COMMISSION

 The scheme application forms carry a suitable disclosure to the effect that the upfront commission to
distributors will be paid by the investor directly to the distributor, based on his assessment of various
factors including the service rendered by the distributor. Investors should make sure that the
commission costs they incur are in line with the value they get.

TRAIL COMMISSION

 Trail commission is calculated as a percentage of the net assets attributable to the Units sold by the
distributor. The commission payable is calculated on the daily balances and paid out periodically to the
distributor as per the agreement entered into with AMC.
 The trail commission is normally paid by the AMC on a quarterly basis or monthly basis. Since it is
calculated on net assets, distributors benefit from increase in net assets arising out of valuation gains in
the market.
 For example, suppose an investor has bought 1000 units at Rs. 10 each. The distributor who procured
the investment may have been paid an initial commission calculated as a percentage on 1000 units X Rs.
10 i.e. Rs 10,000.

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CHAPTER S 6 - ACCOUNTING, VALUATION AND TAXATION

NET ASSETS OF SCHEME

 NAV is the total value of the securities in the fund minus the liabilities and divided by shares
outstanding. It represents a fund’s per share market value and is calculated by the AMC at the end of
every business day, after taking into account the closing market prices of the securities that the fund or
scheme holds.

Let us understand the concept with a simple example:

 Investors have bought 20 crore units of a mutual fund scheme at Rs. 10 each. The scheme has thus
mobilized 20 crore units X Rs. 10 per unit i.e. Rs 200 crore. An amount of Rs. 140 crore, invested in
equities, has appreciated by 10 percent. The balance amount of Rs 60 crore, mobilized from investors,
was placed in bank deposits.

NET ASSETS OF SCHEME FORMULA

NAV = Market value of the fund's investments + Receivables + Accrued Income - Liabilities - Accrued Expenses

NET ASSET VALUE (NAV)

In the market, when people talk of NAV, they refer to the value of each unit of the scheme. This is equivalent
to:

Unit-holders’ Funds in the Scheme (Net Assets) ÷ No. of outstanding Units

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In the above example, it can be calculated as: Rs 217 crore ÷ 20 crore = i.e. Rs 10.85 per unit.

MARK TO MARKET

 The process of valuing each security in the investment portfolio of the scheme at its current market
value is called ‘mark to market’ i.e. marking the securities to their market value. Why is this done?
 The NAV is meant to reflect the true worth of each unit of the scheme, because investors buy or sell
units on the basis of the information contained in the NAV. If investments are not marked to market,
then the investment portfolio will end up being valued at the cost at which each security was bought.
Valuing shares of a company at their acquisition cost, say Rs.15, is meaningless, if those shares have
appreciated to, say Rs. 50. If the scheme were to sell the shares at the time, it would recover Rs. 50 and
not Rs. 15. When the NAV captures the movement of the share from Rs.15 to Rs.50, then it is
meaningful for the investors.

ENTRY AND EXIT LOADS

SEBI has banned entry loads. So, the Sale Price needs to be the same as NAV (subject to deduction of
applicable transaction charges, if any, as discussed in the next section).

 While charging exit loads, no distinction will be made among unitholders on the basis of the amount of
subscription. While complying with the same, any imposition or enhancement in the load shall be
applicable only on prospective investments. The parity among unitholders on exit load shall be made
applicable at portfolio level.
 No exit load will be charged on bonus units and units allotted on reinvestment of dividend.
 Exit loads / Contingent Deferred Sales Charge (CDSC) have to be credited back to the scheme
immediately i.e. they are not available for the AMC to bear selling expenses.
 Upfront commission to distributors will be paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered by the distributor.

TRANSACTION CHARGES

 In order to cater to people with small saving potential and to increase reach of mutual fund products in
urban areas and smaller towns, SEBI has allowed a transaction charge per subscription of Rs.10,000/-
and above to be paid to distributors of the Mutual Fund products. However, there shall be no
transaction charges on direct investments. The transaction charge, if any, is deducted by the AMC from
the subscription amount and paid to the distributor; and the balance amount is invested.

FEES AND EXPENSES

 Investment and Advisory Fees are charged to the scheme by the AMC. The details of such fees are fully
disclosed in the offer document.
 In addition to the aforementioned fees, two kinds of expenses come up in creating and managing a
mutual fund:

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INITIAL ISSUE EXPENSES

 Initial Issue expenses are incurred at the time of launching a scheme in an NFO. It is a one- time
expense. Schemes launched before the commencement of the Securities and Exchange Board of India
(Mutual Funds) (Amendment) Regulations, 2008 had to bear the initial issue expenses up to 6 percent
of the amount mobilized. This has been discontinued and the initial issue expenses are now borne by
the AMC.

RECURRING EXPENSES

 Recurring Expenses are the fund running expenses incurred to manage the money raised from the
investors. These can be charged to the scheme. Since the recurring expenses drag down the NAV, SEBI
has laid down the types of expenses, which can be charged to the scheme and the limits to such
expenses.

CHAPTER 7 - INVESTOR SERVICES

ELIGIBILITY TO INVEST

 Indian residents above the age of 18, either individually or jointly (not exceeding 3 people)
 Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) residing abroad, on a full repatriation
basis
 Parents or lawful guardians on behalf of minors
 Hindu Undivided Families (HUFs) in the name of HUF or Karta
 Companies (including public sector undertakings), corporate bodies, trusts (through trustees) and
cooperative societies
 Banks (including regional rural banks) and financial institutions
 Religious and charitable trusts (through trustees), and private trusts authorized to invest in Mutual Fund
schemes under their trust deeds
 Foreign institutional investors registered with SEBI on the basis of repatriation
 Special Purpose Vehicles approved by an appropriate authority (subject to RBI approval)
 International multilateral agencies approved by the Government of India
 Army/navy/air force/paramilitary units and other eligible institutions
 Unincorporated bodies of persons as specified by asset management companies
 Partnership firms
 Scientific and industrial research organisations
 Trustees, AMCs, sponsors, or their associates
 Other individuals/institutions/corporate bodies, as approved by asset management companies, so long
as they conform to SEBI regulations
 Qualified Foreign Investors (QFIs)

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KYC DOCUMENTS

 For the KYC process (for establishing proof of identity and address), the following documents are
required:
 Permanent Account Number (PAN) Card with photograph is mandatory for all applicants except those
who are specifically exempt from obtaining PAN. This serves as the proof of identity.
 The following categories of investors are exempt from producing PAN:
o In case of transactions undertaken on behalf of Central/State government and by officials
appointed by the court.
o Investors residing in the state of Sikkim.
o UN entities/Multilateral agencies exempt from paying taxes/filing tax returns in India.
o Investments (including SIPs and lump sum investments) in Mutual Fund schemes upto
Rs.50,000/- per investor per year per mutual fund.

PROOF OF ADDRESS

 Proof of Address such as Passport, Voter’s Id, Ration card, Driving License, bank account statement,
utility bill and other specified documents. If address for communication and permanent address are
different then documentary proofs have to be provided for both. The proof of address in the name of
the spouse may be accepted.

KYC REGISTRATION AGENCIES

CENTRALISED KYC REGISTRATION AGENCIES (KRA)

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 SEBI has instituted a centralised KYC process for the capital market, including mutual funds. This is a
significant benefit for the investor. Based on completion of KYC process with one capital market
intermediary, the investor can invest across the capital market. KYC Registration Agencies (KRAs)
facilitate this centralised KYC process.

DIRECT PLAN AND REGULAR PLAN

 Investors have the option to invest (purchase or subscribe to mutual fund units) directly without routing
the investment through a distributor (Direct Plan). In this case, the investor must mention
 “Direct” in the space provided in the application form for entering the AMFI Registration Number(ARN)/
Registered Investment Advisor (RIA) number.

CUT-OFF TIME

 As seen earlier, the sale and re-purchase prices are a function of the applicable NAV. In order to ensure
fairness to investors, SEBI has prescribed cut-off timing to determine the applicable NAV.

Mutual Fund Scheme Purchase Cut-off If submitted by cut- If submitted after cut
Time off time off time

Liquid Fund 2 pm NAV of preceding day NAV of same day

Equity/Debt Funds (Investment 3 pm NAV of same day NAV of next day

amount<Rs. 2 lakh)

Equity/Debt Funds (Investment 3 pm NAV of same day NAV of next day

amount>Rs. 2 lakh)

INVESTMENT PLANS AND SERVICES

GROWTH, DIVIDEND PAYOUT AND DIVIDEND RE-INVESTMENT OPTIONS

Parameters Dividend Dividend Growth

Reinvestment

Dividend received in bank Yes No NA

account

Dividend Distribution Tax Yes Yes No

NAV Change NAV declines to the NAV declines to the NAV captures the
extent of dividend extent of dividend portfolio change
and dividend and dividend entirely
distribution tax distribution tax

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Increase in number of units on No Yes No

account of re-investment of
dividend

SYSTEMATIC TRANSACTIONS

SYSTEMATIC INVESTMENT PLAN (SIP):

 An SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined
regular intervals. It is similar to regular saving schemes like a recurring deposit.
 It is a disciplined investment plan and cost averaging helps reduce impact of market volatility.
 With SIP, one can build up significant wealth in long run with small sums of money.

SYSTEMATIC WITHDRAWAL PLAN (SWP):

 SWP is a smart way to plan for your future needs by withdrawing amounts systematically from your
existing portfolio either to reinvest in another portfolio or to meet your expenses.
 It is suitable for retirees who are looking for a fixed flow of income.
 SWP helps investors who require liquidity as it allows them to access their money precisely when they
need it.

SYSTEMATIC TRANSFER PLAN (STP):

 STP is a plan that allows the investor to give a mandate to the fund to periodically and systematically
transfer a certain amount/ number of units from one scheme and invest in another scheme.

DIVIDEND TRANSFER PLAN (DTP)

 Dividend Transfer Plan (DTP) is a facility that allows investors to invest the dividend earned in a mutual
fund investment into another scheme of the same mutual fund. Investors with a low risk profile can get
some benefits of diversification by transferring dividends earned from debt funds into\ equity funds.
Similarly, dividends earned in equity funds can be transferred into debt funds to rebalance the portfolio
and manage risks.

CHAPTER 8 - RETURN, RISK AND PERFORMANCE OF FUNDS

 The portfolio is the main driver of returns in a mutual fund scheme. The asset class in which the fund
invests, the segment or sectors of the market in which the fund will focus on, the styles adopted to
select securities for the portfolio and the strategies adopted to manage the portfolio will all determine
the risk and return in a mutual fund scheme.
 There are two broad approaches to security analysis: fundamental analysis and technical analysis.

FUNDAMENTAL ANALYSIS

 Fundamental Analysis entails review of the company’s fundamentals viz. financial statements, quality
of management, competitive position in its product / service market etc. The analyst sets price targets,
based on financial parameters. Some of these financial parameters are listed below:

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 Earnings per Share (EPS): Net profit after tax ÷ No. of equity shares outstanding
 This tells investors how much profit the company earned for each equity share that they own.
 Price to Earnings Ratio (P/E Ratio): Market Price per share ÷ Earnings Per Share (EPS)
 When investors buy shares of a company, they are essentially buying into its future earnings. P/E ratio
indicates how much investors in the share market are prepared to pay (to become owners of the
company), in relation to the company’s earnings.
 The forward PE ratio is normally calculated based on a projected EPS for a future period (also called
forward EPS)
 A company’s shares are seen as expensive or otherwise by comparing it’s PE ratio to the market PE and
peer group PE ratios. A simplistic (but faulty) view is that low P/E means that a share is cheap, and
therefore should be bought; the corollary being that high P/E means that a share is expensive, and
therefore should be sold.
 The Price Earnings to Growth (PEG) ratio relates the PE ratio to the growth estimated in the company’s
earnings. A PEG ratio of one indicates that the market has fairly valued the company’s shares, given its
expected growth in earnings.
 PEG ratio ratio of less than one indicates the equity shares of the company are undervalued, and a ratio
greater than one indicates an overvalued share.

 Book Value per Share: Net Worth ÷ No. of equity shares outstanding
 This is an indicator of how much each share is worth, as per the company’s own books of accounts.
 The accounts represent a historical perspective, and are a function of various accounting policies
adopted by the company.
 Price to Book Value: Market Price per share ÷ Book Value per share

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 An indicator of how much the share market is prepared to pay for each share of the company, as
compared to its book value. The drawback with this is that the book value is an accounting measure and
may not represent the true value of the assets of the company.
 Dividend Yield: Dividend per share ÷ Market price per share
 Dividend yield is considered as a parameter by conservative investors looking to identify steady and
lower risk equity investments. A high dividend yield is the result of higher payout and/or lower market
prices, both of which are preferred by such conservative investors.
 Another way of looking at a high dividend payout is that the company may have lower investment
prospects and therefore pays out the profits instead of re-investing it into the company.

TECHNICAL DISCIPLINE

 The discipline of Technical Analysis has a completely different approach. Technical Analysts believe that
price behaviour of a share over a period of time throws up trends for the future direction of the price.
Along with past prices, the volumes traded indicate the underlying strength of the trend and are a
reflection of investor sentiment, which in turn will influence future price of the share. Technical
 Analysts therefore study price-volume charts (a reason for their frequently used description as
“chartists”) of the company’s shares to decide support levels, resistance levels, break outs, and other
triggers to base their buy/sell/hold recommendations for a share.

INVESTMENT STYLES – GROWTH AND VALUE

GROWTH INVESTING

 Growth investors are attracted to companies that are expected to grow faster (either by revenues or
cash flows, and definitely by profits) than the rest. As growth is the priority, companies reinvest
earnings in themselves in order to expand, in the form of new workers, equipment, and acquisitions.
 Growth companies offer higher upside potential and therefore are inherently riskier. There's no
guarantee a company's investments in growth will successfully lead to profit. Growth stocks experience
stock price swings in greater magnitude, so they may be best suited for risk-tolerant investors with a
longer time horizon.

VALUE INVESTING

 Value investing is about finding diamonds in the rough—companies whose stock prices don't necessarily
reflect their fundamental worth. Value investors seek businesses trading at a share price that's
considered a bargain. As time goes on, the market will properly recognize the company's value and the
price will rise.

PORTFOLIO BUILDING APPROACH – TOP DOWN AND BOTTOM UP

TOP DOWN APPROACH

 In a top down approach, the portfolio manager evaluates the impact of economic factors first and
narrows down on the industries that are suitable for investment. Thereafter, the companies are
analysed and the good stocks within the identified sectors are selected for investment.

BOTTOM-UP APPROACH

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 A bottom-up approach on the other hand analyses the company-specific factors first and then evaluates
the industry factors and finally the macro-economic scenario and its impact on the companies that are
being considered for investment. Stock selection is the key decision in this approach; sector allocation is
a result of the stock selection decisions.

MEASURES OF RETURNS

SIMPLE RETURN

Suppose you invested in a scheme at a NAV of Rs. 12. Later, you found that the NAV has grown to Rs.15. How
much is your return?

The Simple Return can be calculated with the following formula:

i.e. 25 percent

ANNUALIZED RETURN

 Two investment options have indicated their returns since inception as 5 percent and 3 percent
respectively. If the first investment was in existence for 6 months, and the second for 4 months, then
the two returns are obviously not comparable. Annualisation helps us compare the returns of two
different time periods.

COMPOUNDED RETURN

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 If the two investment options mentioned above were in existence for 6 years and 4 years respectively,
then it is not possible to calculate the annualised return using the above formula as it does not consider
the effect of compounding.
 What is compounding? Suppose you deposited Rs. 10,000 in a cumulative bank deposit for 3 years at 10
percent interest, compounded annually.
 The bank would calculate the interest in each of the 3 years as follows:

COMPOUND RETURN:

Where, ‘LV’ is the Later Value; ‘IV’ is the Initial Value; and ‘n’ is the period in years.

COMPOUNDED ANNUAL GROWTH RATE (CAGR)

 Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to
grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end
of each year of the investment’s lifespan. The formula for CAGR is as follows:

RISK IN MUTUAL FUND SCHEMES

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PORTFOLIO RISK

 Portfolio risk is the possibility that an investment portfolio may not achieve its objectives. There are a
number of factors that contribute to portfolio risk, and while you are able to minimize them, you will
never be able to fully eliminate them.

PORTFOLIO LIQUIDITY

 Portfolio liquidity is defined as the ability to adjust positioning in a portfolio in response to flows or
changing market conditions, or to satisfy investor redemption requests without structurally changing
portfolio exposures.

MEASURES OF RISK

1)ALPHA:

 Alpha basically is the difference between the returns an investor expects from a fund, given its beta,
and the return it actually produces.
 A positive alpha means the fund has outperformed its benchmark index. Whereas, a negative alpha
indicates an underperformance of the fund. The more positive an alpha the healthier for investors.

2)BETA:

 Beta is a measure of the volatility of a particular fund in comparison to the market as a whole, that is,
the extent to which the fund's return is impacted by market factors. Beta is calculated using a statistical
tool called ‘regression analysis.’By definition, the market benchmark index of Sensex and Nifty has a
beta of 1.0.
1. A beta of 1.0 indicates that the fund NAV will move in same direction as that of benchmark
index. The fund will move up and down in tandem with the movement of the markets (as
indicated by the benchmark)
2. A beta of less than 1.0 indicates that the fund NAV will be less volatile than the benchmark
index.
3. A beta of more than 1.0 indicates that the investment will be more volatile than the benchmark
index. It is an aggressive fund that will move up more than the benchmark, but the fall will also
be steeper.
4. Beta is based on the Capital Asset Pricing Model (CAPM), which states that there are two kinds
of risk in investing in equities – systematic risk and non-systematic risk.
 Systematic risk is integral to investing in the market; it cannot be avoided. For example, risks arising out
of inflation, interest rates, political risks etc. This arises primarily from macro-economic and political
factors. This risk cannot be diversified away.
 Non-systematic risk is unique to a company; the non-systematic risk in an equity portfolio can be
minimized by diversification across companies. For example, risk arising out of change in management,
product obsolescence etc.

3) R-SQUARED:

 As discussed above, beta is dependent on correlation of a mutual fund scheme to its benchmark index.
So, while considering the beta of any fund, an investor also needs to consider another statistic concept
called ‘R-squared’ that measures the correlation between beta and its benchmark index. The beta of a
fund has to be seen in conjunction with the R-squared for better understanding the risk of the fund.

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 ‘R-squared’ values range between 0 and 1, where 0 represents no correlation and 1 represents full
correlation. If a fund's beta has an R-squared value that is between 0.75 and 1, the beta of that fund
should be trusted. On the other hand, an R-squared value that is less than 0.75 than it indicates the
beta is not particularly useful because the fund is being compared against an inappropriate benchmark
index. This fund will not give returns similar to their benchmark index. The lower the R-squared the less
reliable is the beta, and vice versa.
 The R-squared of an index fund, investing in same securities and in the same weightage as the index,
will be one.

4) STANDARD DEVIATION (SD):


The total risk (market risk, security-specific risk and portfolio risk) of a mutual fund is measured by
‘Standard Deviation’ (SD). In mutual funds, the standard deviation tells us how much the return on a
fund is deviating from the expected returns based on its historical performance. In other words can be
said it evaluates the volatility of the fund.
 The standard deviation of a fund measures this risk by measuring the degree to which the fund
fluctuates in relation to its average return of a fund over a period of time.
 In other words, it is a measure of the consistency of a mutual fund's returns. A higher SD number
indicates that the net asset value (NAV) of the mutual fund is more volatile and, it is riskier than a fund
with a lower SD.
 Note: For SD to be an effective tool, investors will need to use it in comparison with peer group mutual
funds. For example, a large-cap mutual fund is to be compared with a large-cap mutual fund with the
same investment objective(s).

5) SHARPE RATIO:

 Sharpe ratio (SR) is another important measure that evaluates the return that a fund has generated
relative to the risk taken. Risk here is measured by SD. It is used for funds that have low correlation with
benchmark index. This ratio helps an investor to know whether it is a safe bet to invest in this fund by
taking the quantum of risk.
 The higher the Sharpe ratio (SR), the better a fund’s return relative to the amount of risk taken. In other
words, a mutual fund with a higher SR is better because it implies that it has generated higher returns
for every unit of risk that was taken. On the contrary, a negative Sharpe ratio indicates that a risk-free
asset would perform better than the fund being analyzed.

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6) TREYNOR RATIO

Like Sharpe Ratio, Treynor Ratio too is a risk premium per unit of risk.

Computation of risk premium is the same as was done for the Sharpe Ratio. However, for risk,

Treynor Ratio uses Beta.

Treynor Ratio is thus calculated as: Treynor Ratio = (Rs minus Rf) ÷ Beta

Thus, if risk free return is 5 percent, and a scheme with Beta of 1.2 earned a return of 8 percent, its

Treynor Ratio would be (8 percent - 5 percent) ÷ 1.2 i.e. 2.5.

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CHAPTER 11 - HELPING INVESTORS WITH FINANCIAL PLANNING

WHAT IS FINANCIAL PLANNING

Financial Planning is a process consisting different steps. Look at the image below.

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1. DETERMINE YOUR CURRENT FINANCIAL SITUATION

You may be a salaried person, a professional or a businessman, check your current financial situation. Where
are you now?

 Do you have enough savings and investments to back your aspirations?

 Is your salary enough to pursue your personal and financial aspirations?
 Are you able to manage your home loan and personal loan responsibilities?

Ask these questions to yourself. Be very clear and honest about your current financial situation.

2. DEVELOP YOUR FINANCIAL GOALS

What financial goals do you want to achieve?

 Retire at 50?
 Be debt free at 40?
 Want to invest in a second home?
 Want to go abroad for further studies?
 Want to send your children abroad for further studies?
 Daughter’s marriage?

The list is endless.

 Where to start?
 Start with important goals first, that can give you financial independence. How about being debt-free at
40? I know some people who are debt-free at 35.
 It’s possible and it needs a disciplined and systematic planning.

3. IDENTIFY ALTERNATIVE COURSES OF ACTION

 What alternative actions you can take to achieve your financial goals?
 I believe some actions like learning good saving habits, learning your relationship with money,
living frugally and keeping positive mindset are some of the ways that help you achieve your financial
goals.

4. EVALUATE ALTERNATIVES

 Consider your current life situation, your personal values, and economic factors. Also, assess risk and
time value of money for each alternative.
 Here, you should check different products available in the market and select the best ones based on
your need.
 You may need to do some changes in your lifestyle so that you achieve your financial and life goals that
are close to your heart.

5. CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN

 Once you take all the five steps mentioned above, you will get a clear idea about your financial goals
and what you need to do to achieve them.
 The key words here are implementation and action.

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 The plan remains on paper if you don’t implement it. So take the first step and rest will follow.

6. REVIEW AND REVISE THE FINANCIAL PLAN

 As you go and implement your financial plan, you should revise your plan periodically, every 6 months
or whenever you achieve a milestone.
 This step is the last step in the financial planning process.

LIFE CYCLE IN FINANCIAL PLANNING

The following are the normal life cycle stages:

CHILDHOOD

 The main focus is on education during childhood. Children are dependents and are not earning in this
stage. They are dependent on the earning members in their family. During this phase, pocket money,
cash prize or any kind of scholarship are the potential sources of income for them. It is during this
phase, that the guardians should cultivate good saving habits in them.

YOUNG UNMARRIED

 This phase marks the beginning of earning years. There are few who get on top of salary packages
towards the beginning itself, whereas most of the others mark their way upwards gradually. Whatever
path it is, the individual needs to learn the art of saving . It is always best to be an early starter for such
things rather than falling in trap of unsustainable life styles.
 SIPs and whole-life insurance plans serve great ways to force young unmarried into the habit of regular
savings, rather than developing "living the lavish way" habit.
 This is the best age to invest in equity. All personal goals, like marriage, buying car or home determine
liquidity needs. Depending on the liquidity needs, the equity portfolio size is determined.

YOUNG MARRIED

 A good amount of corpus builds a lot of confidence when an individual is going for taking up more
responsibilities through marriage associations. Where both spouses are earning, life could be pretty
decent and comfortable. Insurance is required, but not so critical for working couple. Where only one
spouse is working, life insurance is a good investment objective as it helps avoids contingencies
associated with the earning spouse if he is found critically ill.
 Health insurance policy should also be planned depending on the medical coverage provided by the
employers. Even where the employer provides medical coverage, it would be useful to start a low value
health insurance policy, to provide for situations when an earning member may quit job and take up
another after a break. Further, starting a health insurance policy earlier and not having to make claim
against it for few years, is the best antidote to the possibility of insurance companies rejecting future
insurance claims/coverage on account of what is called "pre-existing illness".

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MARRIED WITH YOUNG CHILDREN

 Insurance needs - both life and health insurance increases with every child. The financial planner
advises investors best plans to cover both needs. There are expenses around child education right from
his pre-school to normal schooling to higher education which are an increasing parameter owing to
inflation. Adequate investments are required to cover this.

MARRIED WITH OLDER CHILDREN

 The costs associated with helping the children settle i.e. cost of housing, marriage etc are rising up. If
investments in growth assets like shares and real estate are started in life and maintained, it would help
ensure that the children enjoy the same life style, when they set up their own independent families.

PRE-RETIREMENT

 By this stage, children should have started earning and contributing to the family expenses.
Furthermore, loans taken against house or car, or education of children should have been finished by
now. The family should by now start planning for its retirement - what kind of lifestyle they look
forward to and how those regular expenses could be met.

RETIREMENT

 By this stage, the family should have saved enough corpus, then interest on which could help earn
regular income and help meeting regular expenses. Capital should be touched only in case of
contingencies and not meeting regular expenses. Besides these corpus of debt assets to cover regular
expenses, there should be some amount in growth assets like shares to protect family from inflation
factors during the retirement years.

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WEALTH CYCLE

This is an alternative way to investor profiling. The stages in wealth life cycle are:

ACCUMULATION

 This is the stage where the investor starts to build up his corpus. It covers the earning years of the
investor i.e. the phases of the life cycle comprising Young unmarried to Pre-retirement.

TRANSITION

 This is the phase when the financial goals are in the horizon. It could be building a house, children's
higher education/ their marriages etc. Given the liquidity needs the investors tend to invest in the liquid
assets in their portfolio like bank, liquid schemes etc.

INTER-GENERATION MONEY TRANSFER

 During this phase, the investor starts planning the orderly transfer of wealth to the next or younger
generation, in the event of their death. The financial planner help investor understand various issues
implied with taxation, inheritance etc when one plans wealth transfer and also help him preparing his
Will where he further helps in validating documents and structures related to assets and liabilities of
the investor.
 This activity should ideally not be delayed beyond the age of 50, given the stress level these days
investors face owing to their job and family ecosystems.

REAPING/DISTRIBUTION

 This is the stage when investor needs regular money. It is parallel to retirement phase in life cycle.

SUDDEN WEALTH

Winning lotteries, unexpected inheritance of wealth, unusually high capital gains earned should be definitely
celebrated. However the financial planner can help channelize your funds properly to investment, given the
human nature when one can easily frisk away all money in one go. In such situation it is advisable to initially
block money by investing in liquid scheme.

Given the sudden wealth may enhance life style of individual, hence a complete and comprehensive financial
planning is required in such cases. The financial planner would advise the investors based on the assessment of
the current gained financial corpus.

BOTTOMLINE - RISK PROFILING MODELING

 Different schemes have different levels of risks. There are factors like risk appetite that are borne by the
investors and also the risk level of the investment options being considered which are important to
consider while recommending good investment advice. Therefore financial planners considers these
factors and do the risk profiling of the investors to understand the risk appetite of the investors in order
to advise them accordingly.
 Since investors risk profile differs, a single portfolio cannot be recommended. The following section lists
a sample portfolio model ideal for investors falling under various life cycles:

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Investor class Portfolio model

Young unmarried with no dependents 50% diversified equity scheme,10% gold ETF,10%
debt fund, 10% liquid scheme

Young married with single income family with 35% diversified equity scheme, 10% sector funds,
dependents 15% gold ETF, 30% diversified debt fund, 10%
liquid scheme

Single income family with grown up kids 35% diversified equity scheme,15% gold ETF,15%
gilt fund,15% diversified debt fund,20% liquid
scheme

Couple in their retirement age group 15% diversified equity scheme,10% gold ETF,30%
gilt fund,30% diversified debt fund, 15% liquid
scheme

CHAPTER 12 - RECOMMENDING MODEL PORTFOLIOS AND FINANCIAL

PLANS

NEED FOR RISK PROFILING

 As seen earlier, various schemes have different levels of risk. Similarly, there are differences between
investors with respect to the levels of risk they are comfortable with (risk appetite). At times there are
also differences between the level of risk the investors think they are comfortable with, and the level of
risk they ought to be comfortable with.
 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.

Factor Influence on Risk Appetite

Family Information

Earning Members Risk appetite increases as the number of earning

members increases

Dependent Members Risk appetite decreases as the number of dependent

members increases

Life expectancy Risk appetite is higher when life expectancy is longer

Personal Information

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Age Lower the age, higher the risk that can be taken

Employability Well qualified and multi-skilled professionals can

afford to take more risk

Nature of Job Those with steady jobs are better positioned to take
risk

Psyche Daring and adventurous people are better positioned

mentally, to accept the downsides that come with risk

Financial Information

Capital base Higher the capital base, better the ability to financially
take the downsides that come with risk

Regularity of Income People earning regular income can take more risk than
those with unpredictable income streams

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