7/30/2019 AMFI Presentation Slides 1
1/279
1
Welcometo
AMFI Mutual Fund Testing Program
Duration2 days
7/30/2019 AMFI Presentation Slides 1
2/279
2
Chapter 1
THE CONCEPT AND
ROLE OF MUTUAL
FUNDS
7/30/2019 AMFI Presentation Slides 1
3/279
3
MUTUAL FUNDS OPPOTUNITY
Most Appropriate investment opportunity for smallinvestors.
Birth of Mutual Funds U.S.A.Good Alternative to Direct Investing.
Size in USA > Bank Deposits.
Financial Intermediary.
UTI only player between 1964-87.
Helps in the growth of Capital Markets.
7/30/2019 AMFI Presentation Slides 1
4/279
4
A common pool of money into whichinvestors place their contributions to beinvested in accordance with a statedobjective.
The ownership of the fund is joint or mutual
The fund belongs to all investors
Ownership is proportionate to contributionmade by one
Concept of a Mutual Fund
7/30/2019 AMFI Presentation Slides 1
5/279
5
Portfolio Diversification
Professional Management
Reduction / Diversification of Risk
Liquidity
Flexibility & Convenience
Reduction in Transaction cost
Safety of regulated environment
Advantages of Investing through Mutual Funds
over Direct Investments
7/30/2019 AMFI Presentation Slides 1
6/279
6
Disadvantages of Investing through
Mutual Funds over Direct Investments
No Control over Cost
No Tailor-made Portfolios
Managing a Portfolio Funds
7/30/2019 AMFI Presentation Slides 1
7/2797
Phase 1 (1964-87) : Growth of UTI.AUM FROM Rs 600 Crin 84 Grew To Rs6700 Cr in 88.
Phase 2 (1987-93) : Entry of PSU Banks and FinancialInstitutions MFs. AUM RS
47004 CRS.
Phase 3 (1993-96) : Emergence of Private Sector Mutual
Funds.
Joint Ventures between ForeignFunds & Indian Promoters
resulting in innovations in- Investment Management
Techniques, - Investor
ServicingTechniques
History of Mutual Funds
7/30/2019 AMFI Presentation Slides 1
8/2798
Phase 4 (1996-99) : SEBI Regulations forInvestors Protection
Phase 5 (1999-2004) : UTI Act 1963 repealed in Feb 2003
UTI Mutual Fund becomes SEBIcompliant
Assured Return Schemes of UTItaken over by a specialundertaking administered by GOIEmergence of large & uniform
industry
Phase 6 (2004 onwards): Consolidation & Growth
29 Mutual Funds as at 31-03-06
History of Mutual Funds
7/30/2019 AMFI Presentation Slides 1
9/2799
Industry Structure
Public Sector MFsPrivate Sector MFsUTI
Indian Private Sector
Funds
JV with Foreign Funds Foreign MFs
Industry Profile
7/30/2019 AMFI Presentation Slides 1
10/27910
Assets under Management (Rs. in Crs)
As at UTI PublicSector
PrivateSector
Total
31/3/99 53,320 8,292 6,860 68,472
31/3/01 58,017 6,840 25,730 90,587
31/3/04 - 34,624 1,04,992 1,39,616
31/3/06 - 50,348 1,81,514 2,31,862
7/30/2019 AMFI Presentation Slides 1
11/27911
Types of Mutual Fund
Mutual Funds can be classified as:
Close ended / Open-ended Funds
Load Fund / No-Load Funds
Tax-exempt / Non-Tax exempt Funds
7/30/2019 AMFI Presentation Slides 1
12/27912
Close Ended FundsClose Ended Fund:
Initial Public Offer
Investor cannot buy units later on from MF
Get listed on the Stock ExchangeTraded on Stock exchange at a discount/premiumto NAV
Redemption of Units on expiry date
Unit Capital ConstantClose ended funds may allow buy back of unitsoption
7/30/2019 AMFI Presentation Slides 1
13/279
13
Open Ended Funds
Open Ended Fund:
Units available for sale / purchase at all times at
NAV based prices
Unit Capital variable
Fresh subscriptions may be discontinued
Any time redemptions always allowed, exceptwhen there is lock in period.
7/30/2019 AMFI Presentation Slides 1
14/279
14
Load FundsLoad is one time fee payable by the investor whenthey enter / exit an open-ended scheme.
Loads are charged to recover initial issue expenses
including marketing & selling expenses, brokerage,advertising costs. Such Expenses not to exceed 6%.
SEBI prescribes ceiling on Recurring Expenses.There can be Entry load or Exit load or bothEntry load is also called Front-end load.Exit load is also called Back-end load or Deferred load
7/30/2019 AMFI Presentation Slides 1
15/279
15
No Load Funds & Impact of Loads
In a No load fund, marketing and selling expenses areabsorbed by the AMC and the investor buys and sells unitsat NAV price
Return on investment to the investor is reduced becauseof the loads
When the investor buys a unit from the MFs, he paysmore than NAV
(NAV + entry load)
When the investor sells the unit to the MF, he gets less
than NAV
(NAV exit load)
7/30/2019 AMFI Presentation Slides 1
16/279
16
Example on Loads and ReturnsDate Action NAV (Rs) Entry Load Exit Load
1/1/1999
31/12/1999
Entry
Exit
11.00
12.00
2%
-
-
1%
ROI with Loads
Amount invested = 11 + 0.22 = 11.22 Rs.
Amount received = 12 0.12 = 11.88 Rs.
Gain = 0.66 Rs.ROI = (0.66 x 100) /11.22 = 5.88%
7/30/2019 AMFI Presentation Slides 1
17/279
17
ROI without loads
Amount invested = 11 Rs.
Amount received = 12 Rs.
Gain = 1 Rs.
ROI=(1 x 100) /11 = 9.09%
Example on Loads and Returns
7/30/2019 AMFI Presentation Slides 1
18/279
18
Contingent Deferred Sales Charge
(CDSC) Exit Charge may vary depending upon the holding period. If Exit Charge varies with the holding period it is called
Contingent Deferred Sales Charge (CDSC) and it may vary asshown under.
Redemption during the first five years from the date of purchase
First Year Maximum CDSC 4%
Second Year Maximum CDSC 3%
Third Year Maximum CDSC 2%
Fourth Year Maximum CDSC 1%Fifth Year Nil
7/30/2019 AMFI Presentation Slides 1
19/279
19
Mutual Funds classified as per
Class (Nature) of InvestmentsEquity Funds
Bond Funds
Money Market Funds
7/30/2019 AMFI Presentation Slides 1
20/279
20
Growth Funds
Income Funds
Value Funds
Mutual Funds classified as per Investment Objectives
7/30/2019 AMFI Presentation Slides 1
21/279
21
High Risk Funds
Moderate Risk Funds
Low Risk Funds
Mutual Funds classified as per Risk Profiles
7/30/2019 AMFI Presentation Slides 1
22/279
22
Risk Return Hierarchy of Different Funds
Risk High
Risk Low MMMF
Gilt Funds
Debt Funds
Balanced Funds
Index Funds
Diversified Equity Funds
Sector Funds
Low return High return
7/30/2019 AMFI Presentation Slides 1
23/279
23
Invest in securities of less than 1 yearmaturity
High liquidity &safety of principal
Low risk and low returns
Money Market Funds
7/30/2019 AMFI Presentation Slides 1
24/279
24
Gilt Funds
Invest only in Government Securities of over1 year maturity
Risk and return low but higher than that ofMMF
No default risk but carry interest rate risk
Fund values drop when interest rates go up &rise when interest rates go down
7/30/2019 AMFI Presentation Slides 1
25/279
25
Debt Funds & TypesInvest in Corporate Bonds and Government
Securities
Risk higher than that of Gilt Funds
Aims at regular income distribution and not at
capital appreciation
Types of Debt Funds:
- Diversified Debt Funds- Focused Debt Funds
- High yield Debt Funds
- Assured return Debt Funds
- Fixed Term Plan Series
7/30/2019 AMFI Presentation Slides 1
26/279
26
Equity Funds & TypesInvest in Equity and Equity relatedinstruments
High risk and aim at Capital appreciation
Types of Equity Funds Aggressive Growth Funds Growth Funds
Value Funds
Specialty Funds: Sector Funds, Foreign Securities Funds,
Mid-Cap or Small-Cap Equity Funds,
7/30/2019 AMFI Presentation Slides 1
27/279
27
Diversified Equity Funds
ELSS Funds
Equity Index Funds
Equity Income or Dividend Yield Fund
Equity Funds & Types
7/30/2019 AMFI Presentation Slides 1
28/279
28
Types of Hybrid Funds
Balanced Funds: Seek to provide regularincome & Capitalappreciation
Growth & Income Funds: Seek to provide
High dividend andCapital appreciation
Asset Allocation Funds: Flexible asset allocationbetween Debt, Equity &MM
7/30/2019 AMFI Presentation Slides 1
29/279
29
Other Funds
Commodity Funds : Invest in commodity stocks
Real Estate Funds : Invest in stocks of real estate
companies
Exchange Traded Funds : Trade like a single
stock on the stock
exchange
Fund of Funds : Invest in other Mutual
Fund Schemes
7/30/2019 AMFI Presentation Slides 1
30/279
30
EXCHANGE TRADED FUNDSIt tracks the market index & trades like a singlestock.
Unlike Index Funds, unit price varies during the dayas per market movements.
ETFS are bought & sold through market makers whogive a two way quote. (Ask & Bid ).
Benefit of holding a single share & diversification &cost efficiency of an index.
Market makers allow exchange of units for theunderlying shares.
7/30/2019 AMFI Presentation Slides 1
31/279
31
Fund of Funds.
Fund of Fund invest in other mutualfund schemes of the same AMC/other
AMCS.
It does not invest directly in CapitalMarkets.
Greater Diversification.
Higher Expenses.
7/30/2019 AMFI Presentation Slides 1
32/279
32
Chapter 2
FUND STRUCTURE AND
CONSTITUTENTS
7/30/2019 AMFI Presentation Slides 1
33/279
33
Mutual Fund StructureMutual Funds in U.S are setup as investmentcompanies
Mutual Funds in U.K are either Unit Trusts (Trust)or Investment Trust (Companies)
Mutual Funds are Public Trusts under the IndianTrusts Act, 1882
Mutual Fund is a 3 tier structure:Sponsor,
Trustee and
AMC
7/30/2019 AMFI Presentation Slides 1
34/279
34
Mutual Funds investin Capital market instruments
on behalf of investors
All gains and losses of funds are shared bythe unit holders
MF is a pass-through structure and it hastax implications
Mutual Fund Structure
7/30/2019 AMFI Presentation Slides 1
35/279
35
Constituents of a Mutual Fund
1. Sponsor
2. Trustees
3. Asset Management Company
4. Custodian / Depository Participant
5. R & T Agent
6. Distributors
7. Banker
7/30/2019 AMFI Presentation Slides 1
36/279
36
Role of Sponsor
Sponsor is a person who sets up a Mutual FundSponsor settles the Trust and executes TrustDeed
Sponsor contributes to the initial capital of theTrust
Sponsor appoints the Board of Trustees
Sponsor appoints Asset Management Company
Sponsor contributes minimum 40% of networth of AMC
7/30/2019 AMFI Presentation Slides 1
37/279
37
Who can be a Sponsor?
Criteria of a Sponsor are
Positive net worth
Minimum 5 years track record
History of positive After Tax Profit for 3 out of 5 yearsincluding fifth year
Net Worth more than Contribution for AMC
Fit and Proper person
7/30/2019 AMFI Presentation Slides 1
38/279
38
Board of Trustees & RoleTrustees appointed by the Sponsor with SEBI approvalAt least two third Trustees must be Independent
The Trustees have a FIDUCIARY responsibilitytowards unit holders
Trustees not liable for acts done ingood faith and ifthey have exercised adequate due diligence
Trustees oversee the functioning of AMC
Trustees approve each MF scheme floated by AMC
The investments in MFs are held by the Trustees
Trustees receive fees for their services.
Obligation to undertake General & specific duediligence.
7/30/2019 AMFI Presentation Slides 1
39/279
39
Who can be a Trustee
Eligibility Conditions :
Person of high repute and integrity
Not guilty of moral turpitude
Not convicted for economic offence under
securities laws
Not a part of AMC eg. Director, Employee or
Officer of AMC
One can be Trustee of two MFs if approved
by Board of Trustees of both the Mutual
Funds.
7/30/2019 AMFI Presentation Slides 1
40/279
40
Asset Management Company
Constituted as a Company under the Indian
Companies Act
Minimum Net worth of Rs. 10 crores for AMCMinimum contribution of sponsor: 40% of share
capital of AMC
At least 50% of Directors of AMC to beindependent
7/30/2019 AMFI Presentation Slides 1
41/279
41
AMC can do only the following businesses
Asset Management Services
Portfolio Management Services
Portfolio Advisory Services
AMC can be terminated/changed with the
consent ofMajority of Trustees or
At least 75% majority of Unit holders
Asset Management Company
7/30/2019 AMFI Presentation Slides 1
42/279
42
Role of AMC
AMC is the Fund Manager for managing Mutual FundAssets
AMC floats different MF schemes
AMC accountable to the Trustees
AMC charges Asset Management Fees subject toceiling prescribed by SEBI.
Asset Management Agreement between AMC andTrustee
7/30/2019 AMFI Presentation Slides 1
43/279
43
Obligations of AMC
Limit of 5% of aggregate purchase and salesof Securities under all its scheme per brokerper quarter
As far as possible AMC to avoid services of
its sponsor.All Security transactions with a Sponsor andhis associates to be disclosed
Disclosure of transactions with a companywhich has invested more than 5% of NAV inany scheme
7/30/2019 AMFI Presentation Slides 1
44/279
44
Custodian / Depository
ParticipantCustodian / DP:
Appointed by Board of Trustees
Keep record & account of Securities /Investments
Collects benefits under Securities
Sponsor & Custodian / DP cannot be the
same entityRegistered with SEBI
7/30/2019 AMFI Presentation Slides 1
45/279
45
Registrar & Transfer Agent
Registrar & Transfer Agent:
Issues, redeems, transfers units of MF
schemes
Keeps Unit Holders A/cs upto date
Registered with SEBI
7/30/2019 AMFI Presentation Slides 1
46/279
46
Merger of two AMCs
Merger of 2 AMCs:
Approval of Trustees of both AMCs required
SEBI approval required
Approval of High Court also required
Unit holders are informed and given option to exitwithout load
7/30/2019 AMFI Presentation Slides 1
47/279
47
Take Over of AMC / Scheme of AMC
Take over of AMC by new SponsorTrustees approval required
SEBI clearance required
Unit holder to be informed
Merger of two schemes of different AMCs
Scheme of one Mutual Fund taken over by anotherMutual Fund
Trustees approval required
SEBIs approval required
Unit holders to be informed
7/30/2019 AMFI Presentation Slides 1
48/279
48
Chapter 3
LEGAL & REGULATORY
FRAMEWORKS
7/30/2019 AMFI Presentation Slides 1
49/279
49
Regulators in IndiaSEBI is Capital Market Regulator with legal powers
SEBI regulates Mutual Funds.
All Mutual Funds to be registered with SEBI
RBI is Money Market Regulator
SEBI is regulator for Liquid Funds Investing in MM instruments
MOF supervisory body for RBI & SEBI
Security Appellate Tribunal setup in 2003 to hear appeal against SEBI
decisions
Registrar of Companies(ROC) ensures compliance by AMC & by
Trustee Company with the Indian Companies Act 1956
ROC supervised by Department of Company Affairs (DCA)
7/30/2019 AMFI Presentation Slides 1
50/279
50
Regulators in India
DCA frames and modifies regulations relating to thecompanies
DCA is a part of Company Law Board
CLB is a part of Ministry of Law and JusticeCompany Law Board carries out judicial proceedings
for offences under Companies Act
Mutual Fund Trustees accountable to Public Trustees
Public Trustee reports to Charity Commissioner
UTI set up under UTI Act 1963
7/30/2019 AMFI Presentation Slides 1
51/279
51
Self Regulatory OrganisationsSROs are second tier in the regulatory structure
SRO is an association of Market Participants
Approval of SRO given by MOF
All Stock Exchanges are SROs and are supervised bySEBI
Close Ended Funds listed on SE observe listing
Agreement Requirements of SEs
AMFI was incorporated in 1995 and is not an SRO
Role of AMFI
To promote interest of MFs & Unit HoldersTo set ethical, commercial & professional standards
To increase public awareness of MF industry
7/30/2019 AMFI Presentation Slides 1
52/279
52
Role of AMFITo promote interest of MFS & unit holders.
Interact with the Regulator.
To create public awareness.To set ethical, commercial & business standards.
To promote best business practices and formulatecode of conduct for persons engaged in the activities
of MF and for the AMCS.To implement the certification programme.
7/30/2019 AMFI Presentation Slides 1
53/279
53
Investors Rights & Obligations
Right of proportionate beneficial ownership
Right to timely service
Right to information eg. NAV Calculation, Unit Pricing
Right to approve changes in fundamental attributes of
the scheme
Right to wind up a close ended scheme with 75%
majority of unit holdersRight to terminate the AMC with 75% majority of unit
holders
7/30/2019 AMFI Presentation Slides 1
54/279
54
Investor Rights to Services
Investor to be informed about change infundamental attributes of the scheme eg. from NoLoad fund to Load fund or change in Pricingnorms for purchase/sale of Units
Open ended Fund must reopen within 30 daysafter the Offer period
Nomination facility allowed
Redemption proceeds to be sent to investor within10 working days otherwise Penal interest at the
rate specified by SEBI for the full period
7/30/2019 AMFI Presentation Slides 1
55/279
55
Investor Rights to Services
Annual Holding statements and Transaction
statements to be sent to investors
Dividend Warrants to be dispatched within 30
days of dividend declaration by MF
Mandatory portfolio disclosure for half-yearly
period to unit holders within 1 month
7/30/2019 AMFI Presentation Slides 1
56/279
56
Investors right to inspect documents
such as
Trust deed,
AMC Agreement,
Balance Sheets of MF Schemes and
Balance Sheet of AMC
Investor Rights to Services
7/30/2019 AMFI Presentation Slides 1
57/279
57
Legal limitation to Investor
RightsInvestors cant sue the Trust
Investor can sue the Trustee
Sponsor of fund not responsible for shortfallin non assured scheme
Prospective investors cant sue thetrustees/AMC/ Custodians
7/30/2019 AMFI Presentation Slides 1
58/279
58
Investors Obligations & Complaint Redressal
Investor should:Read Offer Documents
Understand Risk factors
Monitor performance of investments.
To submit PAN/Bank details.
Complaint RedressalThrough SEBI intervention. Complaints can bemade to AMC/Trustees/SEBI.
Investors cannot seek redressal under Companies Act
since fund investors are neither share holders nor
depositors in AMC
7/30/2019 AMFI Presentation Slides 1
59/279
59
Chapter 4
OFFER DOCUMENT
7/30/2019 AMFI Presentation Slides 1
60/279
60
What is an Offer Document ?
Offer Document of a MF scheme is like aProspectus issued by AMC inviting public to
subscribe to units of MF scheme
Discloses adequate information for investorsto take informed investment decisions
7/30/2019 AMFI Presentation Slides 1
61/279
61
Offer Document & KIMOffer Document
A Legal document
Issued by AMC on behalf of Trustees
Offer Document describes the Product/Scheme
Very important document for prospective investor
First time investors must read OD before deciding to invest
For Close Ended Fund issued at the time of launching ascheme
For Open Ended Fund revised every 2 years
KIMA abridged version of Offer DocumentA part of the Application Form
To be in the format as prescribed by SEBI
7/30/2019 AMFI Presentation Slides 1
62/279
62
Offer DocumentOffer Document prepared and issued by AMC
Offer Document to be approved by Trustees
Offer Document filed with SEBI with fees of
Rs. 25000/-
Modifications if any advised by SEBI within 21 days of itsfiling
SEBI neither approves nor disapproves an OD
Offer Document valid for 6 months for launching of
scheme from the date of receipt of by AMC of SEBI letter
containing observations. Thereafter fresh OD to be filled
with SEBI
7/30/2019 AMFI Presentation Slides 1
63/279
63
Contents of Offer Document
Summary information on Cover page: Names of Trustees, AMC, Scheme, Period of
Opening / Closing, Face value of unit , SEBIDisclaimer
Risk factors: Standard & Scheme Specific
Legal & Regulatory Compliance Certificate
Financial information on Schemes & Expenses for last3 years
Constitution of MF its Sponsors, Trustees, AMC &
their functionsInvestment objectives & policies
Management of Funds: Names of Fund Manager
Offer related information: Minimum Subscription
amount
7/30/2019 AMFI Presentation Slides 1
64/279
64
Financial Information in Offer
DocumentExpenses Sales load, Redemption load
Contingent Deferred Sales Charge
Initial Issue Expenses for the scheme and for
schemes launched during last one year
Estimated annual recurring expenses
Condensed financial information aboutschemes launched during last 3 years andtheir performance
7/30/2019 AMFI Presentation Slides 1
65/279
65
Constitution of Mutual Fund in Offer
DocumentName of Sponsor / AMC / Board ofTrustees
Powers of Trustee
Names & Background of Key PersonnelNames of Custodian / Registrar
Name, age, qualification & experience of
Fund ManagersDetails of Investor Relation Officer
7/30/2019 AMFI Presentation Slides 1
66/279
66
Investment Objectives and Policies as per OD
Short description of type of Securities forinvestment
Asset Allocation percentages
Policy of DiversificationPortfolio Turnover Policy
Investment Limitations
If Name suggests predominance of
investments in a particular asset class, theminimum exposure to be at least 65%.
7/30/2019 AMFI Presentation Slides 1
67/279
67
Borrowing Policy of the Scheme
as per ODFund not to borrow for making investments
Temporary borrowing allowed
For a maximum period of 6 months
Amount not exceeding 20% of NAV of the scheme
Borrowing for redemption of scheme only
7/30/2019 AMFI Presentation Slides 1
68/279
68
Other Contents in OD
Procedure for redemption
Disclosure of Valuation of Securities norms
and NAV calculation
Description of Accounting Policies
Tax treatment of Investments as perexisting laws
7/30/2019 AMFI Presentation Slides 1
69/279
69
Offer related Information in OD
Minimum subscription amount
Offer period : Calendar of opening, closing, allotment etc.
Name of SE where Close ended units will be listed
Procedure for transfer and transmission of units
Different plans under the scheme
Dividends and Distribution PolicyProcedure for winding up of the scheme
7/30/2019 AMFI Presentation Slides 1
70/279
70
Standard Risk factors in MF investing as per OD
NAV can go up and down depending uponCapital market movements
Past performance on AMC is not indicative of
future performance
Name of the scheme does not indicate itsquality or prospects
There is no guarantee that objectives of thescheme will be met
7/30/2019 AMFI Presentation Slides 1
71/279
71
Chapter 5
FUND DISTRIBUTION
&
SALES PRACTICES
h i i l
7/30/2019 AMFI Presentation Slides 1
72/279
72
Who can invest in a Mutual
Fund SchemeResidents Resident Individuals / HUF
Indian companies
Partnership Firms
Indian Trusts / Charitable Institutions
Insurance Companies
Banks
Financial Institutions
NBFCs
Provident Funds
Mutual Funds
Wh i i M l
7/30/2019 AMFI Presentation Slides 1
73/279
73
Who can invest in a Mutual
Fund SchemeNon Residents NRIs & Persons of Indian Origin
Overseas Corporate Bodies (OCBs)
Foreign Entities FIIs registered with SEBI
Foreign nationals cannot invest in MF
7/30/2019 AMFI Presentation Slides 1
74/279
74
Different Distribution Channels
1. Direct Marketing By Sales Officers through
Mailers
Call Centers
Branch networks
7/30/2019 AMFI Presentation Slides 1
75/279
75
Distribution Channels - Types
2. Individual Agents as Distributors andAdvisors
3. Institutional Intermediaries
Fund distribution companiesFinance CompaniesInvestment Advisory CompaniesBanks and Institutions
Post OfficesBrokers and Sub-brokers
Private Sector MF prefer established Funddistribution Cos as Fund Distributors
7/30/2019 AMFI Presentation Slides 1
76/279
76
AMFI Registration No. (ARN) card necessarybefore selling
As on 31/3/2005,
49837 candidates passed AMFI Certification Testout of which 30028 candidates registered withAMFI
Out of 30028 AMFI registered candidates,
Individuals are 24850Corporates are 1946
Corporate Employees are 3232
AMFI Registered Distributors
7/30/2019 AMFI Presentation Slides 1
77/279
77
Agents Commission
Commission can be paid upfront or trailcommissionMarket practice
1.5 to 2.5 % for Equity funds0.25 to 1.25% for Debt FundsStill lower for Liquid FundsHigher commission for ELSS
AMFI has prohibited parting / sharing ofcommission (see AMFI Guidelines & Norms
for Intermediaries [AGNI] ).SEBI CIR of 2002.SEBI does not prescribe any ceiling oncommission
Process of Effective Selling of M F
7/30/2019 AMFI Presentation Slides 1
78/279
78
Process of Effective Selling of M F
Schemes prescribed for Distributors
Know the important characteristics ofschemeKnow your client profile (age, risktolerance, income level, etc.)
Understand clients needs (investmentobjective, return expectation, cash flowrequirement, etc.)
Assist in making the right choice
Encourage regular investment &commitment to investPersonalised post sales service
7/30/2019 AMFI Presentation Slides 1
79/279
79
AMFI Code of Ethics for MFs
Funds to be managed in the interest of unit holders
Unit holders to be treated equally & fairly
Ensure meaningful disclosures
Avoid conflict of interest
Ensure segregate accounting
Stick to ethical standards and fairness in dealings
High standards of care, diligence, services anddisclosure announcements
7/30/2019 AMFI Presentation Slides 1
80/279
80
SEBI Advertisement Code for MFs
No promises in the future without resourcesbacked guarantee
Standard measures to compare such as AnnualYield, CAGR etc.
Annualised yields for at least one, three, five
years & since launchFor less than 1 year performance, Absolute Returnwithout annualisation
Past gains may not repeat in future
Risk factors prominently statedNo Celebrities
No add-ons during offer period
Appropriate benchmark to be chosen
Any ranking of fund to be explained
7/30/2019 AMFI Presentation Slides 1
81/279
81
Chapter 6
ACCOUNTING,VALUATION
& TAXATION
7/30/2019 AMFI Presentation Slides 1
82/279
82
ACCOUNTING
7/30/2019 AMFI Presentation Slides 1
83/279
83
Mutual Fund Accounting
Knowledge of MF accounting vitalSeparate Balance Sheet for each scheme of a MF
MFs to follow Accounting Policies laid down by SEBI
(Mutual Funds) Regulations, 1996
Unit holders subscriptions accounted
not as liabilities or deposits
but as Unit Capital at Face Value
Investments made by the fund appear on Asset side in the
Balance Sheet
All assets of the scheme belong to Investors
7/30/2019 AMFI Presentation Slides 1
84/279
84
NAV CalculationsNet Assets = Assets - Liabilities
Assets = Market value of Investments+ Receivables + Accruedincome + Other Assets
Liabilities = Accrued expenses +Payables + Liabilities
NAV of a Unit = Net Assets of the Scheme
Number of units outstanding
7/30/2019 AMFI Presentation Slides 1
85/279
85
Disclosing Net Asset Value of a Unit
Date on which NAV is calculated is calledValuation Date
Open ended Funds are required to computeand disclose NAV daily
Close ended Funds can compute NAVs
every week NAV Calculation has to considerup to date transactions
7/30/2019 AMFI Presentation Slides 1
86/279
86
All income, expenditure to be accounted upto date of valuation
Non accrual of small amounts not affecting NAV by more than1% permitted
Non-recorded transactions should not affect NAV calculation bymore than 1%
If NAV is more than 1% AMC to:-
-Pay excess difference.
- Recover excess paid.
Disclosing Net Asset Value of a Unit
7/30/2019 AMFI Presentation Slides 1
87/279
87
Allocation / De-Allocation of Units
For all valid applications received before the Cut-
off time, units are allotted / cancelled based on
NAV at the end of the same day
For valid application received after the cut-off
time, units are allotted / cancelled based upon
NAV of the next business day.
The above rule does not apply to liquid fund
schemes
7/30/2019 AMFI Presentation Slides 1
88/279
88
Cut-off Time
The cut-off time for all Mutual Fund schemes except liquidfund schemes is 3 pm
For liquid fund schemes valid application received upto 1
p.m. are allotted units based on NAV of the previous day
For liquid fund schemes valid application received upto 1p.m. are allotted units based on NAV of the same day
For repurchases under liquid funds the cut-off time is 10
a.m instead of 1 p.m.
NAVs are required to be rounded off upto 4 decimal places
for liquid funds & upto 2 decimal places for other funds
7/30/2019 AMFI Presentation Slides 1
89/279
89
Factors affecting Net Asset Value of a Unit
NAV is affected by 4 set of factors:
Purchase & sale of investment securities
Valuation of all investment securities held
Other assets and liabilities
Units sold or redeemed
7/30/2019 AMFI Presentation Slides 1
90/279
90
Pricing of a Fund Unit
SEBI Regulations on pricing of Mutual Fundunits
For Open Ended Funds
Repurchase price not lower than 93% of NAV
Sale price cannot be more than 107% of NAV
Difference between the repurchase and sale price of a
Unit cannot be more than 7%
7/30/2019 AMFI Presentation Slides 1
91/279
91
Charges in a MF
Mutual Funds can recover two types ofExpenses
a. Initial issue expenses
b. Recurring Expenses
Initial Issue Expenseseffective April 04 2006 allowed up to 6% for
Close Ended Funds onlyClose Ended Funds cannot charge Entry Loads
Open Ended Funds can recover initial expenses
through Entry Load
7/30/2019 AMFI Presentation Slides 1
92/279
92
Maximum Recurring Expenses
Average Weekly Assets For Equity Funds For Bond Funds
For first Rs.100 crs 2.50% 2.25%
For next Rs.300 crs 2.25% 2.00%
For next Rs.300 crs 2.0% 1.75%
On the Balance AverageWeekly Assets
1.75% 1.50%
Fund of Funds Max-0.75%
Recurring Expenses cannot exceed the followingregulatory limits
7/30/2019 AMFI Presentation Slides 1
93/279
93
Asset Management Fees
AMC charges Asset Management FeesLimits on AMC Fees as per SEBI Regulations:
1.25% of the 1st Rs. 100 crs of weekly Average Net Assets
1.00% of the weekly Average Net Assets in excess of Rs. 100crs
AMC may charge additional 1% of weekly Average Net Assets forNo Load Funds
Asset Management Fees are not in addition to but apart of Recurring Expenses
Asset Management fees are usually lower for DebtFunds as compared to Equity Funds and aredisclosed in OD
7/30/2019 AMFI Presentation Slides 1
94/279
94
Amortization of Initial Expenses
Close Ended Funds do not charge initial expenses offund but amortize the same over a period of years
Initial Expenses amortized on a weekly basis over theperiod of the scheme. e.g for a 5 yr scheme,amortized over 260 weeks
Investor exiting before expiry of period of schemewill be charged unrecovered initial issue expenses
Conversion of close ended funds into open endedfunds allowed only after recovery of unrecovered
initial expensesUn-amortized portion added for NAV calculation asOther Asset but no AMC fee on this amount
7/30/2019 AMFI Presentation Slides 1
95/279
95
Amortisation An Example
Assume close ended fund of five years
collects Rs 100 Crores and incurs initial issue expensesof Rs 5 Crores.
Units issued = 10 Crores.Investment = 95 Crores
Initial NAV= 95+((260/260)*5) 10
10
After 4 weeks let the market value of investments-98 CrNAV = 98+((256/260)*5)
10 =10.29
7/30/2019 AMFI Presentation Slides 1
96/279
96
Initial Issue expenses impact on NAV
Open ended fund collects Rs 100 Crores
Entry load 2.25%
Initial issue expenses Rs 5 Crores
Impact on NAV
Initial NAV 10As No of Units allotted would be
9.775 crores.
7/30/2019 AMFI Presentation Slides 1
97/279
97
Disclosure and Reporting Requirements
AMC to prepare Annual Report and AnnualStatement of Account for each schemeAnnual Statement of Account to be audited byan Auditor independent of the Auditor of AMCWithin 6 months of Accounting year, Fund
shallPublish scheme wise abridged summary ofreport in newspapersMail summary of report to all unit holdersForward to SEBI Annual Audited Accounts,
Half yearly Unaudited Accounts, QuarterlyPortfolio StatementDisplay the scheme wise annual reports ontheir website & on AMFI websiteMail Annual Reports to all unit holders
7/30/2019 AMFI Presentation Slides 1
98/279
98
Accounting Policies
Investments to be marked to market
Unrealized appreciation cant be distributed
Dividend/Bonus recognized on the date shareis quoted ex-dividend/ ex-bonus
Average cost considered for determininggain/loss on sale of shares
7/30/2019 AMFI Presentation Slides 1
99/279
99
Purchase / sale of investments recognized
on the trade date,
not on settlement date
Debt Investments to be taken as NPA
if interest or Principal amount remains unpaid formore than 3 months.
e.g. If Interest due 30th June 2000 remains unpaidon 1/10/2000 it becomes NPA on 1/10/2000
Accounting Policies
7/30/2019 AMFI Presentation Slides 1
100/279
100
Provisioning of NPADebt SecuritiesIf interest remain unpaidfor 6 months
10% of Book Value
If interest remain unpaidfor 9 months
20% of Book Value
If interest remain unpaidfor 12 months
Another 20% of Book Value
If interest remain unpaidfor 15 months
Another 25% of Book Value
If interest remain unpaidfor 18 months
Balance 25% of Book Value
7/30/2019 AMFI Presentation Slides 1
101/279
101
VALUATION NORMS
FOR
MUTUAL FUNDS
7/30/2019 AMFI Presentation Slides 1
102/279
102
Valuation Norms for Mutual Funds
Valuation Norms prescribed by SEBI toprotect investors interests
Valuation NormsBased upon fair portfolio valuation
Uniform across all funds
SEBIPrescribes detailed valuation methodologies in itsfund regulations
Mandates disclosure of valuation methods used forinvestors information
7/30/2019 AMFI Presentation Slides 1
103/279
103
Valuation Norms for Shares
Valuation of traded sharesdone on the basis of traded price
if not more than 30 days old
Valuation of thinly traded sharesless than 50,000 shares or Rs. 5 lacs or less
amount and
Done as per SEBI approved Norms
Valuation of not traded shares
done as per SEBI approved valuation norms
7/30/2019 AMFI Presentation Slides 1
104/279
104
If Thinly traded & Non traded EquitySecurities exceed 5% of the total assets of
the scheme,
independent valuer should be appointed for valuationIf Illiquid Securities exceed
15% of net assets for open ended funds
20% of net assets for close ended funds
value is taken zero for Securities in excess of 15% 20%
Valuation Norms for Shares
7/30/2019 AMFI Presentation Slides 1
105/279
105
Limit on Illiquid Shares
Illiquid Share (Non traded, Thinly Traded &Unlisted Equity Shares)
not to exceed 15% for Open Ended Fund Assets
not to exceed 20% for Close Ended Fund Assets
Valuation Norms for Thinly traded and Non traded Shares
7/30/2019 AMFI Presentation Slides 1
106/279
106
Valuation Norms for Thinly-traded and Non-traded Shares
Equity InstrumentsCalculate book value per share
Calculate earning value per share based upon
Average capitalization rate of industry P/E and
discount it by 75%.( Latest audited EPS be taken
for this purpose)
Calculate Fair value per share taking 90% of
average of book value and earning value per shareIf EPS is negative or not available for within
previous nine months, it should be taken as zero
7/30/2019 AMFI Presentation Slides 1
107/279
107
Capitalisation of Earnings - An Example
Assume Net worth/share Rs 8
Audited EPS Rs 2
Industry P/E 12Discounted P/E for comp (25%of 12)=3
Value of share (2*3) = 6
Average value (8+6)/2 = 7
Value to be taken discounted by 10%=90% of Average value(7)= Rs 6.30
7/30/2019 AMFI Presentation Slides 1
108/279
108
Valuation of Traded Debt Securities
A Debt Security is treated as traded if tradedany day during the last 15 days
Trading can be on a stock exchange orbetween institutions
Publicly traded price or private placementprice if private placement is within last 15days is taken as valuation price
Market lot for trading in debt securities is 5Crores
A Debt Security if not traded in last 15 days iscalled Not Traded or Thinly Traded Debt
Security
Valuation of Thinly-traded and
7/30/2019 AMFI Presentation Slides 1
109/279
109
Non-traded Debt Securities
Debt InstrumentsLess than 182 days maturity
Valued at Cost plus accrued interest and
Difference between redemption value and cost uniformlyspread over remaining life of instrument
More than 182 days maturityGovernment Securities valued at prices released byCRISIL
Investment Grade debt securities valued on the basisof YTM derived from CRISIL Valuation Matrix
Non Investment Grade Performing Asset valued at 25% discount to their
face value
NPA valued as per valuation norms for NPAs
Valuation of Thinly and Non-
7/30/2019 AMFI Presentation Slides 1
110/279
110
traded Debt Securities
Calculating Yields for pricing Debt Securities
A risk free benchmark Yield curve is built on GOIsecurities as the base.
A Matrix of spreads (based on the credit risk) arebuilt for marking up the benchmark Yields
Marked Yields are adjusted for liquidity risk
The yields so arrived are used to price debtportfolios
G R d i Yi ld (GRY)
7/30/2019 AMFI Presentation Slides 1
111/279
111
Gross Redemption Yield (GRY)
Gross Redemption Yield (GRY) is also calledYield to Maturity (YTM)
YTM is the Internal Rate of Return oninvestment in Bond.
Internal Rate of return is computed based on
:i. Coupon Rate
ii. Purchase Price
iii. Period to Maturity
G R d i Yi ld (GRY)
7/30/2019 AMFI Presentation Slides 1
112/279
112
Gross Redemption Yield (GRY)
If purchase price is the same as Face Value ofBond,
YTM will be the same as Coupon Rate.
If purchase price is more than the FaceValue,
YTM will be lower than the Coupon Rate.
If purchase price is less than the Face Value,YTM will be more than the Coupon Rate.
Calculating Price of Bond with given YTMAn
7/30/2019 AMFI Presentation Slides 1
113/279
113
ExampleGiven data:
Face Value : Rs.1000
Coupon : 10%
Tenure : 5 Years
Interest Payment : Yearly
Yield : 8.72%
Calculate price of the bond
Cash flows under the bond and their present values are as under :
100 + 100 + 100 + 100 + (100+1000)(1+8.72%) (1+8.72%)2 (1+8.72%)3 (1+8.72%)4 (1+8.72)5
Price of the bond = Rs.1050 ( By solving the above equation)
7/30/2019 AMFI Presentation Slides 1
114/279
114
TAXATION OF MUTUALFUNDS
T i f MF d I
7/30/2019 AMFI Presentation Slides 1
115/279
115
Taxation of MFs and Investors
Finance Act 1999 radically changed taxation of Dividendsreceived by investors in Mutual Funds
Mutual Fund as an entity is not taxed since it is a Pass ThroughEntity. Section 10(23d)of the IT Act.
Finance Act 1999 made income (dividends) from UNITS totallyEXEMPT from tax u/s 10(33) in the hands of all investors
Income (dividends) distributed by a Debt Fund was made liableto Dividend Distribution Tax at applicable rate
Open Ended Funds with more than 50% invested in Equity do
not pay any DDT ( since changed to 65% in FY 06-07)Individuals 14.02%. Companies 22.44%.
T i f MF d I
7/30/2019 AMFI Presentation Slides 1
116/279
116
Security Transaction Tax (STT) is charged asapplicable
80 C benefit under ELSS upto Rs. 1 Lac
Restriction on dividend stripping (Sec 94(7))Within 3 months prior to record date of dividenddistribution and
within 3 months after record date for dividenddistribution
Taxation of MFs and Investors
I f Di id d Di ib i T
7/30/2019 AMFI Presentation Slides 1
117/279
117
Impact of Dividend Distribution Tax
Investor pays the tax indirectly, since NAVcomes down to the extent of tax paid by theFund.
DD Tax bears no relationship to the investors
tax bracket.Dividend reinvested is also subject toDividend Distribution Tax.
In Growth Plans, Dividend Distribution Taxnot applied, since no dividend is distributed.
Sh / L T C i l G i T
7/30/2019 AMFI Presentation Slides 1
118/279
118
Short / Long Term Capital Gains Tax
Short Term Capital GainIf units held for less than 12 months
Long Term Capital GainIf units held for more than 12 months
Short Term Capital Gains at normal tax ratesas applicable to investor
Long Term Capital Gains taxed at 20% withindexation or at 10% without indexation of
cost + Applicable Surcharge & EducationalCess
7/30/2019 AMFI Presentation Slides 1
119/279
119
Short/Long Term Capital Gains Tax
Under Section 111(a) of I.T.Act
- No Long Term Gains Tax on Equity
oriented schemes if STT charged.
- Short Term Gains Tax atGovernment specified rate if STT is
charged for equity oriented schemescurrently the rate is 10%.
C it l G i T
7/30/2019 AMFI Presentation Slides 1
120/279
120
Capital Gains Tax
Option to pay 20% or 10% lies with investor for eachand every security
2% surcharge also payable
Indexation Benefit on Unlisted Bonds not available
No Capital Gain tax payable if entire Capital gain
invested in Capital Gain Bonds of NABARD, NHAI,
REC under sec 54 EC with a lock in of 3 years.
Long Term capital gains exempt u/s 54 ED if investedwithin 6 months in shares of companies formed and
registered in india with a lock in of 1 year.
Calculating Capital Gain Tax - An
7/30/2019 AMFI Presentation Slides 1
121/279
121
g p
Example
Mr. H Invests Rs.2 lacs in MF units during FY97-98After 2 years, he sells units and gets Rs.2.4 lacs
His tax liability will be:
CII 99-00 : 389, CII 97-98 : 331 , Ratio : 389/331=1.18Indexed Cost (2,00,000 x 1.18) = Rs.2,36,000
Capital Gains Rs.4,000
Long Term Capital Gain tax of Mr. H:
Rs.4,000* 20%=Rs.800 or 10% of Rs. 40,000/- i.e.
Rs. 4,000/-
Obviously he will select the option of paying Rs. 800/-
W lth T
7/30/2019 AMFI Presentation Slides 1
122/279
122
Wealth Tax
Ownership of Units not included in
Net Wealth
Hence no Wealth Tax Payable on
Mutual Fund units
7/30/2019 AMFI Presentation Slides 1
123/279
123
Chapter 7
INVESTOR SERVICES
Investor Services
7/30/2019 AMFI Presentation Slides 1
124/279
124
Investor ServicesApplication Procedure as per Offer
DocumentWide Distribution of Application Forms
Downloadable Application Forms
Application through Internet
The Procedure for NRIs/ OCB provided in theOD/KIM
Bank details to be given in the ApplicationForm
PAN no. to be given if investment is Rs.50,000/- or more
Joint Account can be operated jointly by all
Application Procedure for Purchase of
7/30/2019 AMFI Presentation Slides 1
125/279
125
MF UnitsThe Application Form is an importantagreement on the part of the investor ofhaving read and understood the OD
The various modes of payment specified in
the OD
NRIs can pay
from FCNR/NRE accounts by demand drafts or
cheques in case of repatriation benefits.for non repatriation benefits payment can bemade from NRO/NRNR A/c.
Application Procedure for
7/30/2019 AMFI Presentation Slides 1
126/279
126
FIIs can remit directly from abroad or payfrom their NRE A/c.
Offer Documents contains procedurepurchasing and redeeming of units
Introduction ofMulti purpose Application
Formdispenses with the need for existing Investors tofill up full Application Form
for making further investments
pp f
Purchase of MF Units
Investment Plans and Services
7/30/2019 AMFI Presentation Slides 1
127/279
127
Investment Plans and Services
Investment PlansSystematic Investment plan (SIP)
Regular Investment of fixed amount periodically (Rupee CostAveraging Advantage)
Automatic Reinvestment Plan (ARP)Reinvestment of Dividend at Ex dividend NAV
Systematic Withdrawal plans (SWP)
Regular withdrawals at periodical intervals
Systematic Transfer Plans (STP)Selling units of one scheme & buying units of another schemeat regular periodical intervals of the same AMC
O h S i il bl d M l F d
7/30/2019 AMFI Presentation Slides 1
128/279
128
Phone Transactions
Internet / Email transactions
Cheque writing facility for Liquid Funds
Periodic statements of holdings
Periodic statement of Investment Portfoliodisclosures
Other Services available under Mutual Funds
Other Services available under Mutual Funds
7/30/2019 AMFI Presentation Slides 1
129/279
129
Other Services available under Mutual Funds
Mutual Funds cannot give loan against unitsBanks can give loan against MF units
Nomination facility allowed
Units of Close End Schemes can be
transferred to another personTransfer in Open Ended Fund happens upon
death of unit-holder or
when units are pledged or
by operation of law i.e insolvency or
winding up of the corporate investor
7/30/2019 AMFI Presentation Slides 1
130/279
130
Chapter 8
INVESTMENT
MANAGEMENT:
EQUITY AND DEBT
PORTFOLIOS
Investment Management
7/30/2019 AMFI Presentation Slides 1
131/279
131
Fund Management Style impactsinvestment performance
Magnitude of returns vary across funds
Time horizon of investments impactsInvestors Returns
Investment Management
7/30/2019 AMFI Presentation Slides 1
132/279
132
Part I : Managing Equity
Portfolios
Types of Equity Instruments
7/30/2019 AMFI Presentation Slides 1
133/279
133
Types of Equity Instruments
Equity Shares
Preference Shares
Equity Warrants
Convertible Debentures
2 Major Task of Equity Portfolio
7/30/2019 AMFI Presentation Slides 1
134/279
134
ManagerConstruction of a portfolio of equity shares
consistent with the objectives of the fund
Constantly rebalance the portfolio
to produce Capital Appreciation & Earnings
rewarding the Investors with superior returns
Management of Equity
7/30/2019 AMFI Presentation Slides 1
135/279
135
PortfoliosAsset Allocation
Stock Selection
Market timingMonitoring of performance
Portfolio re-balancing
Evaluation of performance
Risk assessment and Risk management
Equity Markets : Positive
7/30/2019 AMFI Presentation Slides 1
136/279
136
FeaturesLargest number of listed stocks (9400companies listed on all stock exchanges as at
31/3/04 out of which 7200 listed at BSE with
a market cap of over 13 Lac Crores)
Industrial diversity> (50 Industries / Sectors
represented
Electronic Trading and Settlement System
Growing number of Institutional Players
Lower Transactions Cost
Lower Settlement Risks
Equity Markets : Issues of
7/30/2019 AMFI Presentation Slides 1
137/279
137
ConcernConcentration of market cap and liquidity(Group A shares at BSE 140, B1 1100, B24500)
High levels of volatility
Information inadequacies Disclosure of information
Insider trading
Lack of depth for large volumes
Market Capitalisation based Classification of Shares
7/30/2019 AMFI Presentation Slides 1
138/279
138
Market Capitalisation based Classification of Shares
Large cap companies High Liquidity
Low Transaction costs
Mid cap companies Moderate Liquidity
More transaction cost
Small cap companies High Profit potential
High Transactions costs
High Volatility
Different Indices and Benchmarks for Large /Mid / Small Cap
Earning based Classification of
7/30/2019 AMFI Presentation Slides 1
139/279
139
Shares
Price/Earnings Ratios
Higher the P/E, greater the growth potential
Dividend yield
Lower the dividend yield, Higher the growth
potential
Cyclical Growth Value Stocks
7/30/2019 AMFI Presentation Slides 1
140/279
140
Cyclical, Growth, Value Stocks
Cyclical StocksEarnings linked with market cycles
Growth StocksLow Asset baseHigh growth potentialHigh P/E - low dividend yields
Value Stocks
Large Asset baseLong term good track recordModerate P/E & Moderate Dividend Yield
7/30/2019 AMFI Presentation Slides 1
141/279
Active Fund Management
7/30/2019 AMFI Presentation Slides 1
142/279
142
StrategiesGrowth Investment Strategy
Fund Manager selects stocks of companies
having potential of above average rate ofgrowth in earnings.
Value Investment Strategy
Fund Manger selects stocks of companies
with good track record,stability of earnings
and are undervalued
Role of Security Research in Active Fund Management
7/30/2019 AMFI Presentation Slides 1
143/279
143
Role of Security Research in Active Fund Management
Fundamental AnalysisResearch inputs based upon Fundamentals of thecompany and its profit potential
Technical Analysis
Analysis of market price and volumes based upondemand and supply position & past trend charts
Quantitative Analysis
Analysis of Sectors and Industries based uponmacroeconomic factors
Equity Portfolio Management Organisation Structure
7/30/2019 AMFI Presentation Slides 1
144/279
144
Equity Portfolio Management Organisation Structure
Fund ManagerFocuses on a certain locationSelects stocks &Fixes price range for purchase & sale
Analystresearches companies andrecommends buy & sell
DealerCollects market intelligencePlaces buy and sell orders with brokers
For Successful Equity Portfolio Management
7/30/2019 AMFI Presentation Slides 1
145/279
145
For Successful Equity Portfolio Management
Set realistic returns based on aBenchmarkBe aware of the flexibility in managing aportfolio
Decide on investment philosophyDevelop an investment strategy basedupon objectives & time horizons
Avoid over diversification of portfolio &
have well diversified portfolioDevelop a flexible approach to investing
Use of Equity Derivatives
7/30/2019 AMFI Presentation Slides 1
146/279
146
Use of Equity Derivatives
Mutual Funds have been allowed to make useof Futures & Option contracts in Equities forPortfolio risk management
Portfolio Rebalancing
Since September 2005 SEBI has also allowedMutual Funds to trade in Derivative Contracts.
To enhance portfolio returns
To launch schemes which invest mainly in Futures& Options
What are Equity Derivatives?
7/30/2019 AMFI Presentation Slides 1
147/279
147
What are Equity Derivatives?
Equity derivatives instruments are speciallydesigned contracts
They derive their value from an underlying
asset
They are traded separately in F & O segmentof Exchange
Main derivative instruments areFutures,
Options
What are Equity Derivatives?
7/30/2019 AMFI Presentation Slides 1
148/279
148
In a future contractyou can buy & sell the underlying equity
at a specified future date
at agreed price
In option contract
the buyer of option contract gets the right to buy or sellthe underlying equity
at agreed price
on a future date
only if he exercises the option &
for this right he pays a price called Premium.
Option contracts are of two types
What are Equity Derivatives?
Using Derivatives for Hedging Portfolio Risk
7/30/2019 AMFI Presentation Slides 1
149/279
149
If Fund manager expects the equity marketto decline
he may not sell the equity in the Cash Market.
But can sell the Index Future at the current future
price for future delivery.If markets fall the equity portfolio will decline,
but future contract will show a correspondingprofit,
since fund manager have sold future contract at ahigher price.
This is called Hedging Portfolio Risk
g f g g f
Using Derivatives for Hedging Portfolio Risk
7/30/2019 AMFI Presentation Slides 1
150/279
150
If markets rise, instead of declining, the fundwill not gain out of rise in the market prices.
Other method of hedging investment portfolio
risk is by buying a Put Option (an option tosell the underlying equity at an agreed price)by paying premium.
A fund manager has to decide whether to sella future contract or to buy a put optiondepending upon the relative merits of each.
g f g g f
7/30/2019 AMFI Presentation Slides 1
151/279
151
Part II : Managing Debt
Portfolios
Debt Securities: Types
7/30/2019 AMFI Presentation Slides 1
152/279
152
Debt Securities: Types
Debt SecuritiesCentral Government Securities
State Government Securities
Government Guaranteed Bonds
PSU Bonds
FI Bonds
Bank Bonds
Corporate Debentures
Debt Securities: Features
7/30/2019 AMFI Presentation Slides 1
153/279
153
Other Features
Fixed rate / Floating rate Debt Securities
Coupon Bonds / Cumulative Bonds
Listed / Un-listed Debt Securities
Rated / Un-rated Debt Securities
Secured / Unsecured Bonds
Debt Securities: Features
Money Market Securities
7/30/2019 AMFI Presentation Slides 1
154/279
154
Money Ma ket Secu ities
All Debt Securities maturing within oneyear are called Money Market Securities
Money Market Securities (Instruments) are:
T-BillsCDs
CPs
Call MoneyRepos
Indian Debt Market Size as at 31/3/2004
7/30/2019 AMFI Presentation Slides 1
155/279
155
Type of security Market Capitalisation(Rs. In Crores)
Central GovernmentSecurities
959301
Treasury Bills 32692
State GovernmentSecurities
79340
PSU Bonds 56831
Others (FI, Bank,Corporate Bonds, CD, CP)
87697
Total 1215861
Basic Characteristics of a Debt
S it / B d
7/30/2019 AMFI Presentation Slides 1
156/279
156
Security / Bond
Face Value, Par Value
Coupon
Maturity Date
Put/Call options
Risks of Investing in Debt Securities / Bonds
7/30/2019 AMFI Presentation Slides 1
157/279
157
Interest rate risk
Re-investment risk
Call riskDefault risk
Inflation risk
Liquidity risk
Measures of Bond Yields, Yields Spreads
& Credit Risk
7/30/2019 AMFI Presentation Slides 1
158/279
158
Measures of Bond yields areCurrent YieldYield to maturity (YTM)
Yield curve of GOI Securities of differentMaturities is constructed
Yield Spread is the premium over G-sec ratepaid by borrowers according to their credit riskqualityCredit risk is priced using the ratings of credit
rating agencies.Higher the credit rating, lower the spreadDebt portfolios have credit quality objectivesstated in OD
Duration of a BondA
Measure of Interest Rate Risk
7/30/2019 AMFI Presentation Slides 1
159/279
159
Measure of Interest Rate Risk
Duration of a Bond is the average maturityperiod of a Bond as distinguished from theterm of the Bond
Duration helps to measure the interest rate
risk of a Bond Higher the duration of a Debt Portfolio,
higher the risk of loss of value of the Portfolio ifthe rates of interest go up & vice-versa
Duration of Bond is less than its term,except for zero coupon bonds
Debt Management Strategies
7/30/2019 AMFI Presentation Slides 1
160/279
160
g g
Passive Debt Management StyleBuy and Hold Strategy exposing the portfolio to
Interest rate risk
Credit risk
Active Debt Management StyleDuration Management Strategy
Duration increased/reduced based upon interest ratesexpectations
Credit Selection Strategy
Factors affecting Interest Rate
M t
7/30/2019 AMFI Presentation Slides 1
161/279
161
Movements
Inflation Rate Changes
Exchange Rate Changes
Monitory Policy Changes by R.B.I
Using Derivatives for Debt Portfolio
Management
7/30/2019 AMFI Presentation Slides 1
162/279
162
Management
Debt Portfolio Risk arising out of InterestRate increase can be hedged through interestrate derivatives.
Interest rate derivatives are either exchange
traded or privately traded in OTC marketA Debt Portfolio Manager can sell interestrate futures or buy interest rate put optionson an exchange to protect Debt Portfolio
ValueHe can also buy and sell Forward Contracts orSwaps bilaterally with other market players inOTC.
Using Derivatives for Debt
Portfolio Management
7/30/2019 AMFI Presentation Slides 1
163/279
163
In India interest rate futures are available atOTC since 2004
Interest rate options are not introduced in
India in the ExchangeThrough Swaps fund managers can hedgeinterest rate risk to Debt Portfolios
Since June 2003 SEBI has permitted MutualFunds to trade in Exchange Traded DebtDerivatives
Portfolio Management
Organisation Structure of Debt
Fund Management
7/30/2019 AMFI Presentation Slides 1
164/279
164
Fund ManagementInterest Rate Forecasting Unit
Fund Manager
Security Dealer
Risk Management System in a
Mutual Fund
7/30/2019 AMFI Presentation Slides 1
165/279
165
Mutual Fund
SEBI has prescribed guidelines for RiskManagement in a M.F
Risk Management system Covers
Risks in Fund ManagementRisks in Operations
Risks in Marketing & Distribution
Other Business Risk
Internal Report on its adequacy to be placed
before AMC & Trustee Board
7/30/2019 AMFI Presentation Slides 1
166/279
166
Part III : InvestmentPolicy and Restrictions
Investment Policy of a Fund
7/30/2019 AMFI Presentation Slides 1
167/279
167
Investment policy of a fund scheme is statedin O.D
For Equity FundSee kind of Sectoral Allocation & companies toinvest
For Debt FundSee types of instruments,credit rating,proposed average maturity,minimum & maximum MM instruments percentage
Investment Policy of a Fund
7/30/2019 AMFI Presentation Slides 1
168/279
168
For Balanced FundSee equity & debt proportions
For Money Market FundSee types of instruments preferred & theirrating profile
Regulatory Restrictions on
Investments by Funds
7/30/2019 AMFI Presentation Slides 1
169/279
169
Investments by FundsMinimum no. of investors in a scheme
20 & no single investor to hold over 25% of thecorpus
Minimum portfolio diversification
Investment in equity of a single company Max 10%of the NAV (Except index funds, sector funds)
All non government debt to be mandatorily rated byat least one rating company
Investment in rated debt instrument of a Company Max 15% of Net Assets
Max 20% of Net Assets with approval of Board of Trustees
Regulatory Restrictions on
Investments by Funds
7/30/2019 AMFI Presentation Slides 1
170/279
170
Investment in unrated/below investmentgrade securities
Not exceeding 10% of Net Assets in a single
company
Not exceeding 25% of Net Assets of the fund in allthe companies
Prior approval of Trustees mandatory forinvestments in unrated debt instruments
Investments by Funds
Regulatory Restrictions on Investments by Funds
7/30/2019 AMFI Presentation Slides 1
171/279
171
Investment in unlisted shares of companies
Close Ended Fund : Not more than 10% of Net AssetsOpen Ended Fund: Not more than 5% of Net Assets
Investments in Equity shares under all schemes of a MF
Not more than 10% of Paid up capital of a company
Investment by a Mutual Fund in ADRs / GDRs allowed
Investment by a M.F. in Equities of listed overseascompanies having share holding of at least 10% allowed
Overall limit of U.S. $ 1 Billion for such overseas investmentfor entire M.F. industry
Overall limit per M.F.
Not exceeding 10% of Net Assets subject to maximum50 Million
Regulatory Restrictions on Investments by Funds
7/30/2019 AMFI Presentation Slides 1
172/279
172
A Mutual fund can investmaximum 5% of Net Assets under all its schemesinto different fund schemes of the same AMC or ofany other AMC except Fund of Funds Scheme
The above limit does not apply to Fund ofFunds
Securities are to be bought or sold only ondelivery basis No short selling allowed
Securities to be bought and sold for arelevant scheme.
Purchases/Sales cannot be aggregated andallocated later
Regulatory Restrictions on Investments by Funds
7/30/2019 AMFI Presentation Slides 1
173/279
173
MFs can lend securities under the SEBIapproved Stock Lending scheme
A Mutual Fund can invest only in MarketableSecurities
A Mutual Fund cannot invest in unlistedsecurities of Sponsor or Sponsor GroupCompanies
A Mutual Fund can invest in listed securities
of the sponsor / Sponsor Group Companiesupto 25% of Net Assets of the Fund
Regulatory Restrictions on Investments by Funds
7/30/2019 AMFI Presentation Slides 1
174/279
174
A Mutual fund can transfer Securities from one scheme to
another scheme at market prices and on spot deliverybasisInter-scheme transfers allowed if objectives of both theschemes are sameA Mutual fund can park its money in deposits of
Scheduled Commercial Banks pending deployment intoregular investmentsBorrowing by MFs restricted upto 20% of Net Assets formaximum 6 months for paying dividend/redeeming unitsRecord of investment decisions to be maintained.
A FOF cant invest in other FOF schemeA liquid fund cannot have mark to marketcomponent>10% . Maximum Re pricing tenure 1year.
7/30/2019 AMFI Presentation Slides 1
175/279
175
MEASRUING ANDEVALUATING MUTUALFUND PERFORMANCE
Chapter 9
Measuring MF Performance
7/30/2019 AMFI Presentation Slides 1
176/279
176
Major sources of return to investors areDividends and Capital Gains
Investor should track the value of his
investments in terms of
Return on such investments
Decide whether he needs to switch to anotherfund.
Methods of Measuring / Evaluating MF Performance
7/30/2019 AMFI Presentation Slides 1
177/279
177
Absolute Return Method
Simple Annual Return Method
Total Return Method
Total Return Method when Dividend is Reinvested
Compounded Annual Average Rate Method (CAGR)
Expense Ratio Method
Income Ratio Method
Portfolio Turn over Ratio Method
Transaction Cost Method
Fund Size
Cash Holding Percentage
Absolute Return Method
7/30/2019 AMFI Presentation Slides 1
178/279
178
Absolute returns are returns for a specificperiod
Absolute returns are calculated for less than 1year period
If NAV Changes from 20 to 22 in 6 months,Absolute return is 2/20*100=10%
Simple Annual Return Method
7/30/2019 AMFI Presentation Slides 1
179/279
179
Simple Annual Return Method computesreturns as follows
Lets take the previous example
NAV changed from 20 to 22 in 6 months period
Annual return is
(22-20) x 12 x 100 = 20%
20 6
7/30/2019 AMFI Presentation Slides 1
180/279
Total Return Method when Dividend not
reinvested at NAV - An Example
7/30/2019 AMFI Presentation Slides 1
181/279
181
Assume Units are purchased when NAV is 20Assume that Dividend of Rs. 4/- is distributed
when NAV Ex Dividend is 21
Assume NAV at the end of the year is Rs.22/-
Simple Total returns for the year will be asunder
(22-20) + 4 x 100 = 30%
20
Total Return or ROI or CAGR Method
Compounded Average Annual Return
7/30/2019 AMFI Presentation Slides 1
182/279
182
Compounded Average Annual Return
Method
Formula
A = P x (1+R/100) N
P = Principal invested
A = Maturity Value
N = Period of Investment in years
R = Annualised compound interest rate in %
R = [ (Nth Root of A/P) 1] x 100
Compounded Average Annual Return Method
An Example
B i NAV 100
7/30/2019 AMFI Presentation Slides 1
183/279
183
Begin NAV 100
End NAV 200 Period of Investment 10 years
Average Annual Compound Return - Is it 10% orlower ?
200 = 100 x (1+R/100)10 Solving for R gives Annualised compound rate of
7.1773% or 7.2%
Apply thumb rule of 72
SEBI prescribes Average Annual Compound ReturnMethod to be followed for advertising Returns forover 1 year Period.
Returns impacted by Loads
7/30/2019 AMFI Presentation Slides 1
184/279
184
The above example assumes a No LoadFund.
If there is an Entry Load, you will be allottedlesser number of units since you will paymore than NAV.
If there is Exit Load, you will get lesseramount per unit than NAV.
Expense Ratio / Income Ratio
Method of Fund Evaluation
7/30/2019 AMFI Presentation Slides 1
185/279
185
Funds can be evaluated based on Expense ratio and Income
ratio
Expense Ratio: It is the ratio of total expenses to Average NetAssets of the fund.
This ratio is important for evaluating Bond Funds
Expenses do not include brokerage paid since it is capitalizedand therefore expenses may be understated
Income Ratio = Net Investment IncomeNet Assets
Income ratio is important for evaluating Bond Funds
Portfolio Turn Over Rate
Method of Fund Evaluation
A th M f F d E l ti i P tf li T O R t
7/30/2019 AMFI Presentation Slides 1
186/279
186
Another Measure of Fund Evaluation is Portfolio Turn Over Rate
Portfolio Turnover Rate = Total Sales & Purchases
Net Assets of the Fund.
Higher Turn Over Rate indicatesMore churning of Portfolio
More transaction costs
Portfolio turn over ratio relevant for actively managed
funds
Importance of Bench Marking in
Evaluating Fund Performance
7/30/2019 AMFI Presentation Slides 1
187/279
187
Three methods of evaluating FundPerformance
Evaluating Fund Performance against Bench Marks
Evaluating Fund Performance against other PeerGroup Mutual Fund Schemes
Evaluating Fund Performance against otherFinancial Products
Fund Evaluation against Benchmarks
d f b l d
7/30/2019 AMFI Presentation Slides 1
188/279
188
Funds Performance can be evaluated against some
PerformanceIndicatorscalled BenchmarksMutual Funds are required by regulations to state thebenchmark in the OD against which schemeperformance will be compared
Investors expect Fund Performance better than thebenchmark
3 Types of Benchmarks :
Relative to Market as a whole. Relative to other Mutual Funds
Relative to other comparable financial products.
7/30/2019 AMFI Presentation Slides 1
189/279
Benchmarks For Debt Funds
& Money Market Funds
7/30/2019 AMFI Presentation Slides 1
190/279
190
Type of DebtFund Name of Benchmark
Gilt Fund Government Security Index
Debt Fund Corporate Bond Index
MoneyMarket Fund
Mibor reflecting inter bankcall money market interestrates.
Bond Funds with over 60% in Bonds to use Bond Market IndexBalanced Funds should use Tailor made Index
Benchmarks For Debt Funds
& Money Market Funds
7/30/2019 AMFI Presentation Slides 1
191/279
191
There are various Indicies for benchmarkingof Debt Funds
I-Bex Index of I-SEC is used for tracking
Govt. Security performance
CRISIL has 8 Debt Indices for trackingperformance of Corporate Bond Market &Money Market
NSE has Govt. Security Index & Treasury Bill
I d
Benchmarking against other Mutual Funds.
7/30/2019 AMFI Presentation Slides 1
192/279
192
Peer Group Comparisons :
Performance of Fund can be compared with similarschemes of other Mutual funds.
Criteria for Peer Group Comparison would be similarityin
Investment objectives and rating profile of portfolios
Average maturity of debt portfolios
Size of fund ( big or small)
Higher Expense Ratio of a Debt Fund hurts long termdebt investors
Benchmarking with other
Financial Products
7/30/2019 AMFI Presentation Slides 1
193/279
193
a c a od c sComparison with other comparableFinancial Products
Risk Return Relationship to be considered
Liquidity factors to be considered
Average Annualised compound returns to becompared.
7/30/2019 AMFI Presentation Slides 1
194/279
7/30/2019 AMFI Presentation Slides 1
195/279
7/30/2019 AMFI Presentation Slides 1
196/279
196
Chapter 10
HELPING INVESTORSWITH FINANCIALPLANNING
What is Financial Planning ?
7/30/2019 AMFI Presentation Slides 1
197/279
197
Financial Planning includesIdentifying all financial needs of an individualTranslating the needs into monetary goals atdifferent times in the future
Planning the financial investments to provide andsatisfy future financial needs to achieve goals
Objective of financial planningRight amount of money
Right hands
Right time in future
Need of Professional Financial
Planners
7/30/2019 AMFI Presentation Slides 1
198/279
198
Professional Financial Planners are need incase the investor:
Lacks expertise to do financial planning
Lacks time to do financial planning
Does not know where to startFeels there will be an improvement in the presentsituation
Has an immediate need
Wants professional opinion on self developed plan
Who is a Financial Planner?
7/30/2019 AMFI Presentation Slides 1
199/279
199
A Financial Planner
Uses the financial planning process
Help in determining the goals of the investor
Identify
Financial planning needs of the customer
Present priorities
Products that suit their needs
Advantages of a Distributor
becoming a Financial Planner
7/30/2019 AMFI Presentation Slides 1
200/279
200
Strong Potential for such servicesHigh saving habit
Low awareness of various investment options
Complexity of various investments
Limited supply of financial planners in India
Benefit of establishing long-term relationships
with clients
Benefit of building a profitable business
What makes a good Financial Planner?
7/30/2019 AMFI Presentation Slides 1
201/279
201
Building TrustGood Knowledge of Financial products / options
Familiarity with Taxation & Estate planning issues
Understanding of various Life stages in a clients lifeIndependent judgment and balanced thinking
Organized way of working
Regular contact with clients
Clear focus on the overall financial well-being of client
Roles of Each Participant
7/30/2019 AMFI Presentation Slides 1
202/279
202
Client FinancialPlanner
FundManager
PortfolioInvestments
Discussion of goals &
Asset allocationChoice of Schemes
& Fund Manager
Analysis of Markets
& Choice of
Individual Securities
Basic Terms used in Financial Planning
Financial Planning: Advising clients on how to
7/30/2019 AMFI Presentation Slides 1
203/279
203
Financial Planning: Advising clients on how to
achieve their financial goals
Financial Goals and Objectives: Needs ofclients which have a monetary aspect
Asset Allocation: Allocation of clientsinvestment across various asset classes
Risk Tolerance: Extent of loss a client cantolerate, psychologically and financially and forhow long they can withstand such declines invalue
Basic Terms used in Financial Planning
Financial Plan: Document that details clearly
7/30/2019 AMFI Presentation Slides 1
204/279
204
Financial Plan: Document that details clearly
in writingfinancial goals
available resources
time frame for investment
asset allocationspecific investments
clear action plan towards implementation
Portfolio Rebalancing: Process of makingchanges to asset allocation and specificinvestment to ensure the clients investmentstrategy stays consistent
Financial Planning Process
7/30/2019 AMFI Presentation Slides 1
205/279
205
Establishing & Defining the Client-Planner Relationship
Gathering Client Data, Defining Client Goals
Analyzing and Evaluating a Clients Financial Status
Developing & Presenting Financial Planning Recommendations
Implementing the Financial Planning Recommendations
Monitoring the Financial Planning Recommendations
Steps in Financial Planning Process
1. Establishing & defining relationship with client
7/30/2019 AMFI Presentation Slides 1
206/279
206
1. Establishing & defining relationship with client
2. Defining clients goals
3. Assessing current resources in future Incomepotential of the client
4. Determining &Shaping the risk tolerance levelof the client
5. Ascertaining Tax situation of the client
6. Recommending appropriate asset allocation &
specific investment7. Executing the plan & making the client invest
8. Reveal the progress & portfolio rebalancing
Common Mistakes in Financial Planning(FP)
Measurable financial goals are not set
7/30/2019 AMFI Presentation Slides 1
207/279
207
Measurable financial goals are not set
Financial decisions made in isolation
FP is confused with investing
Financial plans are not re-evaluatedperiodically
Considered relevant only for wealthy
FP required only when clients get older
FP is considered same as retirement planning
Only after a crisis FP is started
Expectation of unrealistic returns oninvestments
Belief of loss of control when Financial Planner
FP is primarily tax planning
Key Issues in Financial Planning
A Financial Planner should make the client
7/30/2019 AMFI Presentation Slides 1
208/279
208
A Financial Planner should make the client
understand the following key issues:
To set Measurable Financial Goals
To understand the Effect of each Financial Decision
To re-evaluate Financial Situation Periodically
To start Planning As Soon As Possible
To be Realistic in Expectations
To realize that the Client is in Charge
Life Cycle Stages of an Individual
Childhood Stage
7/30/2019 AMFI Presentation Slides 1
209/279
209
Childhood Stage
Young Unmarried Stage
Young Married Stage
Young Married with Children Stage
Married with Older Children Stage
Post-family/ Pre-retirement Stage
Retirement Stage
Life Cycle StagesI
7/30/2019 AMFI Presentation Slides 1
210/279
210
Birth &
EducationEarning Years Retirement
I
N
C
O
M
E
22 yrs 38 yrsOver 25-30 yrs
EXPENSESMARRIAGE
CHILDS BIRTH
CHILDS
EDUCATION
CHILDSMARRIAGE
Constraints to Financial Planning
7/30/2019 AMFI Presentation Slides 1
211/279
211
Insufficient investible resources
Dearth of financial planning products
Time factor and Risk factor of investments:Time is important to benefit from the power ofcompounding by starting early
Basic principle of investing is Greater the Risk,
Greater the Reward
Assumptions of life cycle needs
Financial Planning & Mutual Funds
Individuals have 2 types of needs
7/30/2019 AMFI Presentation Slides 1
212/279
212
Individuals have 2 types of needs
Protection Needs
Investment Needs
For protection needs,
Pure Risk Plan of a Life Insurance company is therecommended option
For investment needs,Mutual Fund schemes are the recommended
optionsUnit Linked Insurance is a new optionsatisfying both protection & investmentneeds
Wealth Cycle Stages of Investors
Another method of classifying investors is Wealth
7/30/2019 AMFI Presentation Slides 1
213/279
213
Another method of classifying investors is Wealth
Cycle Stage (as against Life Cycle Stage
There are 3 Wealth Cycle Stages for Investors
Accumulation Stage : Choose Equity FundsTransition Stage : Choose Balanced Funds
Reaping Stage : Choose Debt Funds
Intergenerational Transfer Stage refers to transferring wealth.
Investment avenue will be linked with life cycle stage of the
beneficiary
The Sudden Wealth Stage refers to winning lotteries. Park in MM
Funds
Categories of Affluent InvestorsAffluent investors do not need financial
7/30/2019 AMFI Presentation Slides 1
214/279
214
Affluent investors do not need financialplanning for life goals. They can be classifiedinto 2 categories
Wealth-Creating Affluent InvestorsBuild further wealthWilling to take a risk of Equity Investments tomake net worth grow
Wealth-Preserving Affluent InvestorsPreserving the created wealth
Risk averse, prefer to invest in Debt Funds
7/30/2019 AMFI Presentation Slides 1
215/279
215
Chapter 11
RECOMMENDINGFINANCIAL PLANNINGSTRATEGIES TO
INVESTORS.
Investment Strategies for InvestorsStart planning & investing early and regularly. Use SIP
7/30/2019 AMFI Presentation Slides 1
216/279
216
Invest for long term.Have realistic expectation of returns on Investments
Harness the power of compounding by choosing Growthoption.
Choose an investment strategy to maximise returns on
investments.Buy and Hold strategy
can be adopted for good mutual fund schemes butnot for individual stocks.
Rupee Cost Averaging strategy for investment.
Value Averaging strategy for investment.
Rupee Cost Averaging strategy of Investment
Rupee Cost Averaging (RCA) involves the
7/30/2019 AMFI Presentation Slides 1
217/279
217
Rupee Cost Averaging (RCA) involves thefollowing
A fixed amount is invested at regular intervals
More units are bought when NAV is low
Fewer units are bought when NAV is high
Over a period, average purchase price per unit islower than average NAV
This strategy does not tell you when to sell andswitch
Investor use SIP to implement RCA
Value Averaging Strategy of Investment
Value Averaging Strategy involves the following
7/30/2019 AMFI Presentation Slides 1
218/279
218
Value Averaging Strategy involves the following
A fixed amount is targeted as a desired value of theportfolio at regular intervals
If market values go up units are sold to restore target value
If market values go down More investments are made to maintain target value
Over a period,
Average Purchase Price per unit is lower than if one tries to guess the highs and lows of market
Value Averaging Strategy
7/30/2019 AMFI Presentation Slides 1
219/279
219
Value Averaging Strategy is superior to RCA
It enables you to book profits and rebalanceportfolios
Investors can use SWP to implement ValueAveraging Strategy
Investors can use MM Funds and EquityFunds to implement Value Averaging Strategy
7/30/2019 AMFI Presentation Slides 1
220/279
Model Portfolio for Investors Benjamin Grahams
50/50 Balance Strategy for Asset Allocation
7/30/2019 AMFI Presentation Slides 1
221/279
221
50/50 split between Equities and Bonds
A common sense approach
Conservative investment approach
When value of equity goes up, balance restoredby liquidating part of equity portfolio or vice versa.
Good to get half the returns of a rising market andavoid the full losses of a falling market.
Model Portfolio for Investors Suggested By
BogleBogle suggests the following combinations:
7/30/2019 AMFI Presentation Slides 1
222/279
222
1. A Basic Managed Portfolio50% in Diversified Equity & Value Funds.
25% in a Govt.Securities Funds.
25% in High Grade Corporate Bond Funds.2. A Basic Indexed