M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v .

J u n 2 0 1 0 Page 1

MF Distributors Certification Examination

- Revision Kit
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 2

Key Learning Points

M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 3
Chapter 1
Concept & Role of a Mutual Fund
• Mutual funds are a vehicle to mobilize moneys from investors, to invest in
different markets and securities.
• The primary role of mutual funds is to assist investors in earning an income or
building their wealth, by participating in the opportunities available in the
securities markets.
• In order to accommodate investor preferences, mutual funds mobilize different
pools of money. Each such pool of money is called a mutual fund scheme.
Mutual funds address differential expectations between investors within a
scheme, by offering various options, such as dividend payout option, dividend
reinvestment option and growth option. An investor buying into a scheme gets to
select the preferred option also.
• The investment that an investor makes in a scheme is translated into a certain
number of 'Units’ in the scheme. The number of units multiplied by its face value
(Rs 10) is the capital of the scheme — its Unit Capital.
• When the profitability metric is positive, the true worth of a unit, also called Net
Asset Value (NAV), goes up.• When a scheme is first made available for
investment, it is called a 'New Fund Offer’(NFO).
• The money mobilized from investors is invested by the scheme as per the
investment objective committed. Profits or losses, as the case might be, belong
to the investors. The investor does not however bear a loss higher than the
Amount invested by him.
• The relative size of mutual fund companies is assessed by their assets under
management (AUM). The AUM captures the impact of the profitability metric and
the flow of unit-holder money to or from the scheme.
• Investor benefits from mutual funds include professional management, portfolio
diversification, economies of scale, liquidity, tax deferral, tax benefits, convenient
options, investment comfort, regulatory comfort and systematic approach to
investing.
• Limitations of mutual funds are lack of portfolio customization and an overload
of schemes and scheme variants.
• Open-ended funds are open for investors to enter or exit at any time and do not
have a fixed maturity. Investors can acquire new units from the scheme through a
sale transaction at their sale price, which is linked to the NAV of the scheme.
Investors can sell their units to the scheme through a re-purchase transaction at
their re-purchase price, which again is linked to the NAV.
• Close-ended funds have a fixed maturity and can be bought and sold in a stock
exchange.
• Interval funds combine features of both open-ended and close-ended
schemes.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 4
• Actively managed funds are funds where the fund manager has the flexibility to
choose the investment portfolio, within the broad parameters of the investment
objective of the scheme.
• Passive funds invest on the basis of a specified index, whose performance it
seeks to track.
• Gilt funds invest in only treasury bills and government securities.
• Diversified debt funds on the other hand, invest in a mix of government and
nongovernment debt securities.
• Junk bond schemes or high-yield bond schemes invest in companies that are
of poor credit quality.
• Fixed maturity plans (FMPs) are a kind of debt fund where the investment
portfolio is closely aligned to the maturity of the scheme.
• Floating rate funds invest largely in floating rate debt securities.
• Liquid schemes or money market schemes are a variant of debt schemes that
invest only in debt securities of less than 91-days maturity.
• Diversified equity funds invest in a diverse mix of securities that cut across
sectors.
• Sector funds invest in only a specific sector.
• Thematic funds invest in line with an investment theme. The investment is
more broadbased than a sector fund, but narrower than a diversified equity fund.
• Equity Linked Savings Schemes (ELSS) offer tax benefits to investors.
• Equity Income/Dividend Yield Schemes invest in shares that fluctuate less, and
therefore dividends represent a significant part of the returns on those shares.
• Monthly Income Plan seeks to declare a dividend every month.
• Capital Protected Schemes are close-ended schemes, which are structured to
ensure that investors get their principal back, irrespective of what happens to the
market.
• Gold funds invest in gold and gold-related securities. They can be structured as
Gold
Sector Funds or ETF- Gold Schemes.
• Real estate funds invest in real estate.
• Commodity funds invest in asset classes like food crops, spices, fibres,
industrial metals, energy products or precious metals as may be permitted by
their investment charter.
• International funds invest abroad. They are often structured as feeder funds
linked to a host fund.
• Fund of Funds invest in other funds.
• Exchange Traded Funds are open-end funds that trade in the stock exchange.
• AUM of the industry, as of February 2010 has touched Rs 766,869 crore from
832 schemes offered by 38 mutual funds.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 5
Chapter 2
Fund Structure & Constituents
• Mutual funds in India are governed by SEBI (Mutual Fund) Regulations 1996,
as amended till date.
• The regulations permit mutual funds to invest in securities including money
market instruments, or gold or gold-related instruments or real estate assets.
• Mutual funds are constituted as trusts. The mutual fund trust is created by one
or more Sponsors, who are the main persons behind the mutual fund operation.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund
trust, are the investors who invest in various schemes of the mutual fund.
• In order to perform the trusteeship role, either individuals may be appointed as
trustees or a Trustee company may be appointed. When individuals are
appointed Trustees, they are jointly referred to as Board of Trustees. A trustee
company functions through its Board of Directors.
• Day to day management of the schemes is handled by an AMC. The AMC is
appointed by the Sponsor or the Trustees.
• Although the AMC manages the schemes, custody of the assets of the scheme
(securities,gold gold-related instruments & real estate assets) is with a
Custodian, who is appointed bythe Trustees.
• Investors invest in various schemes of the mutual fund. The record of investors
and their unit-holding may be maintained by the AMC itself, or it can appoint a
Registrar & Transfer Agent (RTA).
• The Sponsor needs to have a minimum 40% share holding in the capital of the
AMC.
• The Sponsor has to appoint minimum 4 Trustees & at least two-thirds of them
need to be independent. Prior approval of SEBI needs to be taken, before a
person is appointed as Trustee.
• AMC should have net worth of at least Rs 10 crore. At least 50% of the
directors should be independent directors. Prior approval of the trustees is
required, before a person is appointed as director on the board of the AMC
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 6
Chapter 3
Legal and Regulatory Environment
• SEBI regulates mutual funds, depositories, custodians and registrars & transfer
agents in the country.
• AMFI is an industry body but not a Self-Regulatory Organization (SRO).
• The AMFI Code of Ethics sets out the standards of good practices to be
followed by the Asset Management Companies in their operations and in their
dealings with investors, intermediaries and the public.
• AMFI has framed AGNI, a set of guidelines and code of conduct for
intermediaries, consisting of individual agents, brokers, distribution houses and
banks engaged in selling of mutual fund products.
• Investment objective defines the broad investment charter. Investment policy
describes in greater detail, the kind of portfolio that will be maintained,
Investment strategies are decided on a day-to-day basis by the senior
management of the AMC. At least 65% of the corpus should, in the normal
course, be invested in the kind of securities/sectors implied by the
scheme's name.
• Statement of accounts is to be sent to investors within 5 days of closure of the
NFO.
• Investor can ask for a Unit Certificate for his Unit Holding. This is different from
a Statement of Account.
• NAV has to be published daily, in at least 2 newspapers.
• NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI
and the mutual fund.
• The investor/s can appoint a nominee, who will be entitled to the Units in the
event of the demise of the investor/s.
• The investor can also pledge the units. This is normally done to offer security to
a financier.
• Dividend warrants have to be dispatched to investors within 30 days of
declaration of the dividend.
• Redemption / Re-purchase cheques would need to be dispatched to investors
within 10 working days from the date of receipt of request.
• Unit-holders have proportionate right to the beneficial ownership of the assets
of the scheme.
• Investors can choose to change their distributor or go direct. In such cases,
AMCs will need to comply, without insisting on No Objection Certificate from the
existing distributor.
• Investors can choose to hold the Units in dematerialised form. The mutual fund
/ AMC is bound to co-ordinate with the RTA and Depository to facilitate this. As
per new NSDL circular AMC/RTA will not play any role in this it will be done only
by depository.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 7
• Unitholders who intend to avail of the facility to trade in units are required to
have a demat Account. Unitholders holding units in SOA form and desires to
trade in the units, can do so by dematerialising the SOA through depositories.
• For conversion of Mutual Fund units represented by SOA into dematerialized
form or vicea- versa, the unitholders are required to approach depositories.
• In the case of unit-holding in demat form, the demat statement given by the
Depository Participant would be treated as compliance with the requirement of
Statement of Account.
• The mutual fund has to publish a complete statement of the scheme portfolio
and the unaudited financial results, within 1 month from the close of each half
year. In lieu of the advertisement, the mutual fund may choose to send the
portfolio statement to all Unitholders.
• Debt-oriented, close-ended / interval schemes / plans need to disclose their
portfolio in their website every month, by the 3rd working day of the succeeding
month.
• Scheme-wise Annual Report or an abridged summary has to be mailed to all
unit-holders within 4 months of the close of the financial year.
• The Annual Report of the AMC has to be displayed on the website of the
mutual fund. The Scheme-wise Annual Report will mention that Unit-holders can
ask for a copy of the AMCs Annual Report.
• The Trustees / AMC cannot make any change in the fundamental attributes of
a scheme,unless the requisite processes have been complied. This includes
option to dissenting unitholders to exit at the prevailing Net Asset Value, without
any exit load. This exit window has to be open for at least 30 days.
• The appointment of the AMC for a mutual fund can be terminated by a majority
of the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the
Scheme.
• 75% of the Unit-holders (in practice, Unit-holding) can pass a resolution to
wind-up a scheme.
• If an investor feels that the trustees have not fulfilled their obligations, then he
can file a suit against the trustees for breach of trust.
• Under the law, a trust is a notional entity. Therefore, investors cannot sue the
trust (but they can file suits against trustees).
• The principle of caveat emptor (let the buyer beware) applies to mutual fund
investments.
• The investor can claim his moneys from the scheme within 3 years. Payment
will be based on prevailing NAV. If the investor claims the money after 3 years,
then payment is based on the NAV at the end of 3 years.
• If a security that was written off earlier is now recovered, within 2 years of
closure of the scheme, and if the amounts are substantial, then the amount is to
be paid to the old investors. In other cases, the amount is to be transferred to the
Investor Education Fund maintained by each mutual fund.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 8
• PAN and KYC documentation is compulsory for mutual fund investments. The
only exception is micro-SIPs.
• Investors need to give their bank account details along with the redemption
request.
• Adequate safeguards exist to protect the investors from the possibility of a
scheme going bust.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 9
Chapter 4
Offer Document
• Under the SEBI guidelines, NFOs other than ELSS can remain open for a
maximum of 15 days. Allotment of units or refund of moneys, as the case may
be, should be done within 5 business days of closure of the scheme. Further,
open-ended schemes have to re-open for sale / re-purchase within 5 business
days of the allotment.
• Investors get to know the details of any NFO through the Offer Document,
which is one of the most important sources of information about the scheme for
investors. Investments by the investor are governed by the principle of caveat
emptor i.e. let the buyer beware.
• Mutual Fund Offer Documents have two parts: (a) Scheme Information
Document (SID),
which has details of the scheme (b) Statement of Additional Information (SAI),
which has statutory information about the mutual fund that is offering the
scheme.
• In practice, SID and SAI are two separate documents, though the legal
technicality is that SAI is part of the SIC. Both documents need to be updated
regularly.
• SID in the market are “vetted" by SEBI, though SEBI does not formally
"approve” them.
• KIM is essentially a summary of the SIC arid SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is to be
accompanied by the KIM.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 10
Chapter 5
Fund Distribution & Channel Management Practices
• The changing competitive context has led to the emergence of institutional
channels of distribution, to supplement the individuals who distribute mutual
funds.
• Institutional channels build their reach through employees, agents and sub-
brokers.
• AMCs keep exploring newer channels of distribution to increase the size of
assets managed.
• The internet has increased the expectations of advice that investors have from
their distributors.
• The stock exchange brokers have became a new channel for distribution of
mutual funds. These brokers too need to pass the prescribed test, get the AMFI
Registration No, and get them empanelled with AMCs whose schemes they want
to distribute.
• 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.
• AMCs pay a trail commission for the period the investment is held in the
scheme.
• Since trail commission is calculated as a percentage on AUM, distributors get
the benefit of valuation gains in the market.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 11
Chapter 6
Accounting, Valuation & Taxation
• The unit-holders funds in the scheme are commonly referred to as "net assets".
• Net asset includes the amounts originally invested, the profits booked in the
scheme, as well as appreciation in the investment portfolio. It goes up when the
market goes up, even if the investments have not been sold.
• A scheme cannot show better profits by delaying payments. While calculating
profits, all the expenses that relate to a period need to be considered,
irrespective of whether or not the expense has been paid. In accounting Jargon,
this is called accrual principle.
• Similarly, any income that relates to the period will boost profits, irrespective of
whether or not it has been actually received in the bank account. This again is in
line with the accrual principle.
• In the market, when people talk of NAV, they refer to the value of each unit of
the scheme. Higher the interest, dividend and capital gains earned by the
scheme, higher would be the NAV. Higher the appreciation in the investment
portfolio, higher would be the NAV. Likewise, lower the expenses higher would be
the NAV.
• The difference between the NAV and Re-purchase Price is called the "exit
load'.
• Schemes can also calibrate the load when investors offer their units for re-
purchase. Investors would be incentivized to hold their units longer, by reducing
the load as the unit holding period increases. Such structures of load are called
"Contingent Deferred Sales Charge (CDSC).
• SEBI has banned entry loads. So, the Sale Price needs to be the same as
NAV.
• Exit loads CDSC in excess of 1% of the redemption proceeds have to be
credited back to the scheme immediately i.e. they are not available for the AMC
to bear selling expenses. Exit load structure needs to be the same for all unit-
holders representing a portfolio.
• Initial issue expenses need to be met by the AMC. There are limits to the
recurring expenses that can be charged to the scheme. These are linked to the
nature of the scheme and its net assets.
• Dividends can be paid out of distributable reserves. SEBI has prescribed a
conservative approach to its calculation.
• NAV is to be calculated upto 4 decimal places in the case of index funds, liquid
funds and other debt funds. NAV for equity and balanced funds is to be
calculated upto at least 2 decimal places.
• Investors can hold their units even in a fraction of 1 unit. However, current
stock exchange trading systems may restrict transacting on the exchange to
whole units.
• Detailed norms on valuation of debt and equity securities determine the
valuation of the portfolio, and therefore the NAV of every scheme.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 12
• Mutual funds are exempt from tax. However, Securities Transaction Tax (STT)
is applicable on investments in equity and equity mutual fund schemes.
Additional tax on income distributed (Dividend distribution Tax or DDT) is
applicable on dividends paid by debt mutual fund schemes.
• Taxability of capital gains and treatment of capital losses is different between
equity and debt schemes, and also between short term and long term. Upto 1
year investment holding is treated as short term.
• There is no Tax Deducted at Source (TDS) on dividend payments or re-
purchase payments to resident investors. Withholding tax is applicable for some
non-resident investors.
• Setting of capital losses against capital gains and other income is subject to
limitations to prevent tax avoidance.
• Investment in mutual fund units is exempt from Wealth Tax.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 13

Chapter 7
Investor Services
• Individual and non-individual investors are permitted to invest in mutual funds
in India.
• Foreign nationals, foreign entities and OCBs are not permitted to invest. Since
Flls are permitted to invest, foreign entities can take this route
• The ‘Who can invest' section of the Offer Document is the best source to check
on eligibility to invest.
• Investments of Rs 50,000 & above need to comply with KYC documentation
viz. Proof of Identity, Proof of Address, PAN Card and Photograph. Once an
investor obtains a Mutual Fund Identification Number (MIN) from CDSL Ventures
Ltd., the investor can apply with any mutual fund.
• Micro-SIPs i.e SIPs with annual investment below Rs 50,000 is exempted from
the PAN Card requirement. Simplified documentation has been prescribed in
such cases.
• Important Update: Sebi master circular of February 12 states that there would
be no minimum threshold or exemption will be available to registered
intermediaries (including fund houses) from obtaining investor information. “It
may be noted that irrespective of the amount of investment made by clients, no
minimum threshold or exemption is available to registered intermediaries from
obtaining the minimum information or documents from clients,” the Sebi
order said. The regulator has gone on to clarify that client due diligence has to be
done irrespective of the class of the investor (retail or institutional).
“(Intermediaries are not exempted) from carrying out client due diligence in
respect of any category of clients. In other words, there shall be no minimum
investment threshold or category-wise exemption available for carrying out client
due diligence measures by registered intermediaries,” clarified the Sebi
order.
• Besides KYC, non-individual investors need to provide additional
documentation to
support their investment.
• Demat makes it possible to trade in Units in the stock exchange.
• Full application form is to be filled for a first time investment in a mutual fund.
Thereafter, additional investments in the same mutual fund are simpler. Only the
transaction slip would need to be filled.
• Investors can pay for their Unit purchases through cheque / DD, Net-based
remittances, ECS / Standing Instructions or ASBA. M-Banking is likely to
increase in importance in the days to come. Non-resident investment on
repatriation basis has to be paid through cheque
on NRE account, or a banker’s certificate that the investment is made out of
moneys remitted from abroad.
• Transaction Slip can be used for re-purchase. Investors can indicate the
amount to re- Purchase or the number of units to repurchase.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 14
• Cut-off timings have been specified for different types of schemes and different
contexts to determine the applicable NAV for sale and re-purchase transactions
These are not applicable for NFOs and International Schemes.
• Time Stamping is a mechanism to ensure that the cut-off timing is strictly
followed.
• NSE's platform for mutual funds is called NEAT MFSS. BSE's platform is BSE
Star Mutual Funds Platform.
• Dividend payout, Dividend investment and Growth are 3 possible options within
a scheme. Each option has different implications on investor’s bank account,
taxation and scheme NAV.
• A constant amount is regularly invested in SIP, withdrawn in SWP and
transferred between schemes in STP. These minimize the risk of timing the
decisions wrongly.
• Triggers are another way of bringing discipline into investing.
• Nomination and Pledge options are available for mutual fund investors.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 15
Chapter 8
Return, Risk & Performance of Funds
• The portfolio is the main driver of returns in a mutual fund scheme. The
underlying factors are different for each asset class.
• Fundamental Analysis and Technical Analysis are two disciplines of securities
analysis.
• Fundamental Analysis entails review of the company's fundamentals viz.,
financial statements, quality of management, competitive position in its product /
service market etc.
• Technical analysts study price-volume charts of the company's share prices.
• It is generally agreed that longer term investment decisions are best taken
through a fundamental analysis approach, while technical analysis comes in
handy for shorter term speculative decisions, Including intra-day trading. Even
where a fundamental analysis-based decision has been taken on a stock,
technical analysis might help decide when to implement the decision i.e. the
timing.
• Growth investment style entails investing in high growth stocks. Value
investment style is an approach of picking up stocks which are valued lower,
based on fundamental analysis.
• In a top-down approach, sector allocation is the key decision. Stock selection is
important in bottom-up approach.
• The returns in a debt Portfolio are largely driven by interest rates and yield
spreads.
• If the portfolio manager expects interest rates to rise, then the portfolio is
switched towards a higher proportion of floating rate instruments; or fixed rate
instruments of shorter tenor. On the other hand, if the expectation is that interest
rates would fall, then the manager increases the exposure to longer term fixed
rate debt securities.
• This additional return offered by a non-government issuer, above the yield that
the government offers is called yield spread. Better the credit quality, lower the
yield spread.
• Gold is a truly international asset, whose quality can be objectively measured.
The value of gold in India depends on the international price of gold (which is
quoted in foreign currency), the exchange rate for converting the currency into
Indian rupees, and any duties on the import of gold.
• Unlike gold, which is a global asset, real estate is a local asset. It cannot be
transported — and its value is driven by local factors.
• Returns can be measured in various ways — Simple Returns, Annualised
Returns, Compounded Returns, Compounded Annual Growth Rate (CAGR).
CAGR assumes that all dividend payouts are reinvested in the scheme at the ex-
dividend NAV.
• SEBI guidelines govern disclosures of return by mutual fund schemes.
• Loads and taxes pull the investors returns below that earned by the Scheme.
Investor returns are also influenced by various actions of the investor himself.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 16
• Risks in mutual fund schemes would depend on the nature of portfolio, its
liquidity, outside liabilities and composition of unit-holders.
• Fluctuation in returns is a measure of risk. Variance and Standard Deviation
are risk measures for all kinds of schemes; Beta is relevant for equity, Modified
Duration and weighted average maturity are applicable for debt schemes.
• Benchmarking is a form of relative returns comparison. It helps in assessing
underperformance or out-performance.
• Choice of benchmark depends on scheme type, choice of investment universe,
choice of portfolio concentration and the underlying exposure.
• Sharpe Ratio, Treynor Ratio and Alpha are bases to evaluate a fund manager’s
performance based on risk-adjusted returns.
• Quantitative measures are based on historical performance, which may or may
not be replicated in future. Scheme evaluation is an art, not a science.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 17
Chapter 9
Scheme Selection
• Asset allocation is the approach of spreading one's investments between
multiple asset classes to diversify the underlying risk.
• The sequence of decision making in selecting a scheme is:
o Step 1 - Deciding on the scheme category (based on asset allocation)
o Step 2 - Selecting a scheme within the category
o Step 3 - Selecting the right option within the scheme
• While investing in equity funds, a principle to internalize is that markets are
more predictable in the long term, than in the short term. So, it is better to
consider equity funds, when the investment horizon is adequately long.
• In an actively managed diversified fund, the fund manager performs the role of
ensuring higher exposure to the better performing sectors or stocks. An investor,
investing or taking money out of a sector fund has effectively taken up the role of
making the sector choices.
• It can be risky to invest in mid-cap / small-cap funds during periods of
economic turmoil. As the economy recovers, and investors start investing in the
market, the valuations in frontline stocks turn expensive. At this stage, the mid-
cap / small cap funds offer attractive investment opportunities. Over longer
periods, some of the mid/small cap companies have the potential to become
large-cap companies thus rewarding investors.
• Arbitrage funds are not meant for equity risk exposure, but to lock into a better
risk-return relationship than liquid funds — and ride on the tax benefits that equity
schemes offer.
• For retail investors, an investment comparable to a liquid scheme is a savings
bank account. Switching some of the savings bank deposits into liquid schemes
can improve the returns for the investor. Businesses, which in any case do not
earn a return on their current account, can transfer some of the surpluses to
liquid schemes.
• Balanced schemes offer the benefit of diversity of asset classes within the
scheme. A single investment gives exposure to both debt and equity.
• Investors need to understand the structure of the gold schemes more closely,
before investing.
• Equity investors would like to convince themselves that the sectors and
companies where the scheme has taken higher exposure are sectors /
companies that are indeed promising.
• Debt investors would ensure that the weighted average maturity of the portfolio
is in line with their view on interest rates.
• Investors in non-gilt debt schemes will keep an eye on credit quality of the
portfolio — and watch out for sector concentration in the portfolio, even if the
securities have a high credit rating.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 18
• Any cost is a drag on investor’s returns. Investors need to be particularly
careful about the cost structure of debt schemes.
• Amongst index schemes, tracking error is a basis to select the better scheme.
Lower the tracking error, the better it is.
• Similarly, Gold ETFs need to be selected based on how well they track gold
prices.
• Mutual fund research agencies assign a rank to the performance of each
scheme within a scheme category (ranking). Some of these analyses cluster the
schemes within a category into groups, based on well-defined performance traits
(rating).
• Seeking to be invested in the best fund in every category in every quarter is
neither an ideal objective, nor a feasible target proposition. Indeed, the costs
associated with switching between schemes are likely to severely impact the
investors' returns.
• The underlying returns in a scheme, arising out of its portfolio and cost
economics, is what is available for investors in its various options viz. Dividend
payout, Dividend re-investment and Growth options.
• Dividend payout option has the benefit of money flow to the investor; growth
option has the benefit of letting the money grow in the fund on gross basis (i.e.
without annual taxation).
Dividend re-investment option neither gives the cash flows nor allows the money
to grow in the fund on gross basis. Taxation and liquidity needs are a factor in
deciding between the options. The advisor needs to understand the investor's
situation before advising.
• Many AMCs, distribution houses and mutual fund research houses offer free
tools in their website to help understand performance of schemes.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 19
Chapter 10
Selecting the Right Investment Products for Investors
• Physical assets like land, building and gold have value and can be touched, felt
and used.
• Financial assets have value, but cannot be touched, felt or used as part of their
core value.Shares, debentures, fixed deposits bank accounts and mutual fund
schemes are all examples of financial assets that investors normally invest in.
• The difference in comfort is perhaps a reason why nearly half the wealth of
Indians is locked in physical assets.
• There are four financial asset alternatives to holding gold in physical form -
ETF Gold, Gold Sector Fund, Gold Futures & Gold Deposits.
• Wealth Tax is applicable on gold holding (beyond the jewellery meant for
personal use).However, mutual fund schemes (gold-linked or otherwise) and gold
deposit schemes are exempted from Wealth Tax.
• Real estate in physical form has several disadvantages. Therefore, investors
worldwide prefer financial assets as a form of real estate investment.
• Bank deposits and mutual fund debt schemes have their respective merits and
demerits.
• Pension Funds Regulatory and Development Authority (PFRDA) is the
regulator for the New Pension Scheme. Two kinds of pension accounts are
envisaged.
o Tier-I (Pension account), is non-withdrawable.
o Tier-II (Savings account) is withdrawable to meet financial contingencies.
o An active Tier-I account is a pre-requisite for opening a Tier-II account.
• The NPS offers fewer portfolio choices than mutual funds. However, NPS
offers the convenience of a single Personal Retirement Account Number (PRAN),
which is applicable across all the Pension Fund Managers (PFMs) where the
investor’s money is invested.
• Further, the Points of Presence (POPs) offer services related to moneys
invested with any of the PFMs.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 20
Chapter 11
Helping Investors with Financial Planning
• Financial planning is a planned and systematic approach to provide for the
financial goals that will help people realize their aspirations, and feel happy.
• The costs related to financial goals, in today’s terms, need to be translated into
the rupee requirement in future. This is done using the formula A=Px(1+i) n.
• The objective of financial planning is to ensure that the right amount of money
is available at the right time to meet the various financial goals of the investor.
• An objective of financial planning is also to let the investor know in advance, if
some financial goal is not likely to be fulfilled.
• The process of financial planning helps in understanding the investor better,
and cementing the relationship with the investor's family. This becomes the basis
for a long term relationship between the investor and the financial planner.
• A "goal-oriented financial plan” is a financial plan for a specific goal. An
alternate approach is a “comprehensive financial plan" where all the financial
goals of a person are taken together, and the investment strategies worked out
on that basis.
• The Certified Financial Planner - Board of Standards (USA) proposes the
following sequence of steps for a comprehensive financial plan:
o Establish and Define the Client-Planner Relationship
o Gather Client Data, Define Client Goals
o Analyze and Evaluate Client's Financial Status
o Develop and Present Financial Planning Recommendations and or Options
o Implement the Financial Planning Recommendations
o Monitor the Financial Planning Recommendations
o Life Cycle and Wealth cycle approaches help understand the investor better.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 21
Chapter 12
Recommending Model Portfolios & Financial Plans
• There are differences between investors with respect to the levels of risk they
are comfortable with (risk appetite).
• Risk profiling is an approach to understand the risk appetite of investors - an
essential prerequisite to advise investors on their investments. Risk profilers
have their limitations.
• Risk profile is influenced by personal information, family information and
financial information.
• Spreading one's exposure across different asset classes (equity, debt, gold,
real estate etc.) balances the risk.
• Some international researches suggest that asset allocation and investment
policy can explain portfolio performance better. In comparison, being exposed to
the right asset classes (asset allocation) is a more critical driver of portfolio
profitability than selection of securities within an asset class (stock selection) and
investment timing.
• Strategic Asset Allocation is the ideal that comes out of the risk profile of the
individual. Tactical Asset Allocation is the decision that comes out of calls on the
likely behaviour of the market.
• Financial planners often work with model portfolios — the asset allocation mix
that is most appropriate for different risk appetite levels. The financial planner
would have a model portfolio for every distinct client profile.
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 22
List of Abbreviations
A/A Articles of Association
ACE AMFI Code of Ethics
AGNI AMFI’s Guidelines & Norms for Intermediaries
AMC Asset Management Company
AMFI Association of Mutual Funds in India
AML Anti-Money Laundering
ARN AMFI Registration Number
ASBA Application Supported by Blocked Amount
CAGR Compound Annual Growth Rate
CDSC Contingent Deferred Sales Charge
CFT Combating Financing of Terrorism
CVL CDSL Ventures Ltd
DD Demand Draft
DDT Dividend Distribution Tax
DP Depository Participant
ECS Electronic Clearing Scheme
F&O Futures & Options
FCNR Foreign Currency Non-Resident Account
FEMA Foreign Exchange Management Act
FII Foreign Institutional Investor
FIRC Foreign Inward Remittance Certificate
FMP Fixed Maturity Plan
HUF Hindu Undivided Family
ISC Investor Service Center
KIM Key Information Memorandum
KYC Know Your Customer
M/A Memorandum of Association
M-Banking Mobile Banking
MF Mutual Fund
Micro-SIP Micro- Systematic Investment Plan (SIP with annual
aggregate investment less than Rs. 50,000)
MIN Mutual Fund Identification Number
NAV Net Asset Value
NBFC Non-Banking Finance Company
NEFT National Electronic Funds Transfer
NFO New Fund Offer
NOC No-Objection Certificate
NPA Non-Performing Asset
NRE Non Resident – External Account
NRI Non Resident Indian
NRO Non-Resident – Ordinary Account
PAN Permanent Account Number
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 23
PDC Post Dated Cheque
PFM Pension Fund Manager
PFRDA Pension Fund Regulatory Development Authority
PIO Person of Indian Origin
PMLA Prevention of Money Laundering Act
PoA Power of Attorney / Points of Acceptance, depending on
context
POP Points of Presence
RBI Reserve Bank of India
RTA Registrar & Transfer Agent
RTGS Real Time Gross Settlement
SAI Statement of Additional Information
SEBI Securities & Exchange Board of India
SID Scheme Information Document
SIP Systematic Investment Plan
SRO Self-Regulatory Authority
STP Systematic Transfer Plan
STT Securities Transaction Tax
SWP Systematic Withdrawal Plan
SWIFT Society for Worldwide Interbank Financial
Telecommunication
M u t u a l F u n d s D i s t r i b u t o r C e r t i f i c a t i o n E x a m i n a t i o n v . J u n 2 0 1 0 Page 24