Introduction to

Mutual Funds
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 Flow of Presentation
 What is a Mutual Fund ?  How to invest in Mutual Funds?
 Structure of Mutual Fund  Centralized KYC
 What is an Asset Management  Mutual Fund investment procedure
Company (AMC)?
 Investment Modes in Mutual Funds
 How does a Mutual Fund Work?
 Mutual Funds
 Classification of Mutual Funds
 Plans – Growth vs Dividend Options
 Based on Structure
 How to check information about the
 Based on Investment Objective Mutual Funds (Offer Document)?
 Investment Portfolio  Risk-o-Meter
 Risk vs Return
 Categorization of Mutual Funds

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What is a Mutual Fund (MF)?

Common pool of funds contributed by investors and

invested in accordance to the objectives.

Investments are held in a trust of which the

investors alone are the joint beneficial owners.

Trustees oversee the management by investment

manager.

4
Structure of Mutual Fund

5
 What is an Asset Management Company (AMC)?

• Investment manager of the mutual fund.

• Appointed by the trustees, with SEBI approval.

• Trustees and AMC enter into an investment management agreement.

• Required to invest seed capital of 1% of amount raised subject to a maximum of Rs.50 lakh in
all open-ended schemes.

• Should have a net worth of at least Rs.50 crore at all times.

• At least 50% of members of the board of an AMC have to be independent.

• AMC of one mutual fund cannot be an AMC or trustee of another fund.

• AMCs cannot engage in any business other than that of financial advisory and investment
management

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How does a Mutual Fund Work?

• Pool of investors
money.
• Invested according to
pre-specified
investment objectives.
• Benefits accrue to
those that contribute to
this pool.
• There is thus mutuality
in the contribution and
the benefit.
• Hence the name
‘mutual’ fund.

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 Classification of Mutual Funds

Classification of Mutual Funds

Based on Investment Based on

Based on Structure
Objective Investment Style

Open Ended
Debt Funds Passive Funds
Funds

Closed Ended
Equity Funds Active Funds
Funds

Interval Funds Hybrid Funds

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 Classification - Based on Structure

• No fixed maturity date.

Open Ended • Accept continuous sale and re-purchase requests.
• Transactions are NAV-based.
Funds • Unit capital is not fixed.

• Run for a specific period.

Closed • Offered in an NFO but are closed for further
purchases after NFO.
Ended Funds • Unit capital is kept constant.

Interval • Variant of closed-ended funds.

• Becomes open-ended at specific intervals.
Funds • Have to be mandatorily listed.

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Classification - Based on Investment Objective

Debt • Invest in short and long term debt instruments.

• Aim to provide regular income.
Funds
Equity • Invest in equity securities.
• Aim to provide growth and capital appreciation over
Funds long term.

Hybrid • Invest in a combination of equity and debt securities.

• Proportion of equity and debt may vary.
• Aim to provide for both income and capital
Funds appreciation.

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 Classification - Based on Investment Style

• Replicate a market index.

Passive • Invest in same securities and in same proportion as that of
index.
• No active selection of any stock / sector.

Funds • Expenses are lower.

• Portfolio is modified every time index composition changes.

• Invests in securities and sectors that may offer a better return

Active than the index.
• Actively manage the allocation to market securities and cash.
• May perform better or worse than the market index.

Funds • Incur a higher cost than passive funds.

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 Categorization of Mutual Fund Schemes
 Categorization of open-end mutual funds:
- To ensure uniformity in characteristics of similar type of schemes launched by
different mutual funds.
- Helps investors to evaluate different options available before making informed
decision to invest.
Hybrid
Schemes

Debt
Schemes Solution oriented
Schemes

Categorization of
Equity
Schemes Mutual Fund Other
Schemes
Schemes
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 How to invest in Mutual Funds?

Via Physical Mutual Via Online Mode

Fund Application (Website of Mutual
Form Fund)

Via AMFI Registered

Mutual Fund
Via Mobile App of
Distributor (using
Mutual Fund
physical form/ online/
mobile app)

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 Centralized KYC (C-KYC) in Securities Market
 KYC registration is centralized through KYC Registration
Agencies (KRAs) registered with SEBI.
 Each investor to undergo KYC process only once in securities
market and details would be shared with other intermediaries by
the KRAs.
 Standard Account Opening form (AOF) has 2 parts:
- Part I : Basic and uniform KYC details of the investor
- Part II : Additional KYC information as may be sought
separately by the Mutual Fund

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 Mutual Funds investment procedure

Indicate whether you are a First Time Investor/ Existing Investor.

Visit official website of KRA and check whether you are KYC compliant or not.
You must submit this KYC status.

Provide your details like name, address, etc.

Submit Bank account details and copy of “Cancelled Cheque”.

Once documents are accepted by Mutual Fund Company, you may start
making investment.

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 Investment Modes in Mutual Funds

Lump-sum • One time investment.

• Usually, large sum of money is invested in one go.
Investment • Investor faces risk of volatility in markets.

Systematic •
•
Staggered Investment.
Period of commitment - 6 months, 1 / 3 / 5 years.
Investment •
•
Specific intervals - monthly, quarterly, half-yearly.
Made on specific dates e.g. 1st, 5th, 10th, 15th of
Plan (SIP) every month.

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 Investment Modes in Mutual Funds

Direct Mutual Fund Regular Mutual Fund

• Directly offered by fund house. • Bought through an

• No involvement of third party intermediary.
agents – brokers or • Intermediaries can be brokers,
distributors. advisors or distributors.
• No commissions and • Commissions and brokerage
brokerage. paid.
• Have low Expense ratio • High Expense ratio as there
(because of no commissions). are commissions to pay.
• Have high NAV. • Low NAV.
• Return is higher due to a lower • Return is lower due to a higher
expense ratio expense ratio

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 Mutual Fund Plans – Growth vs Dividend Options

• Gains made in portfolio are retained and reflected in NAV.

Growth • Realized profit/loss is treated as capital gains or loss.
Option • No increase or decrease in number of units, except if units
are purchased or sold, by the investor.

Dividend • Fund declares dividend from realized profits.

• Amount and frequency varies and depends upon distributable
Payout surplus.
Option • NAV falls after dividend payout to the extent of dividend paid.

• Dividend is re-invested in same scheme by buying additional

Dividend units at ex-dividend NAV.
Reinvestment • Number of units standing to the credit of the investor,
Option increases each time a dividend is declared, and reinvested
back into the scheme.

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 How to check information about
the Mutual Funds (Offer Document)?

Statement • Contains generic and statutory information of

mutual fund.
of additional • Contains financial information of mutual fund.
information • Lays down rights of investor.
• Other additional information.
(SAI)

• Scheme type (open or closed end).

Scheme • Investment objective.
•
information •
Asset allocation.
Investment strategies.
document • Terms with regard to liquidity.
• Fees and expenses.
(SID) • Other information relating to the scheme.

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 Risk-o-Meter and its importance

Six levels of risk for mutual fund Importance of Risk-o-meter :

schemes:
- Helps align risk that a fund carries with
i. Low Risk the risk profile of the investor.
ii. Low to Moderate Risk
iii. Moderate Risk - Equity as asset class: Volatile: High risk
iv. Moderately High Risk - Debt as asset class: Stable: Low risk
v. High Risk and - Hybrid: Moderate: Depends on
vi. Very High Risk allocation and concentration

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Thank You

21
MUTUAL FUNDS
INTRODUCTION
• A mutual fund is a professionally managed
collective investment scheme that pools
money from many investors and invests it
in stocks, bonds, short-term money market
instruments and other securities.
• Mutual funds have a fund manager who
invests the money on behalf of the
investors by buying / selling stocks, bonds.
• The fund manager studies and analyzes
numerous stocks before selection.
• Another reason why investors prefer
mutual funds is because mutual funds
offer diversification.
• An investor’s money is invested by the
mutual fund in a variety of shares, bonds
and other securities thus diversifying the
investor’s portfolio across different
companies and sectors.
• This diversification helps in reducing the
overall risk of the portfolio.
 MF - Structure
• Three tier Structure
• Sponsor : The sponsor should have sound track record
and general reputation of fairness and integrity in all his
business transactions. Sound track record shall mean
the sponsor should
• Be carrying out the business of financial services for not
less than five years
• Have positive net worth in all the preceding five years
• The net worth in the immediately preceding financial
year is more than the capital contribution in the asset
management company
• Has profits after depreciation, interest and tax in three of
out the five preceding years including the fifth year
• The sponsor contributes not less than 40%
of the net worth of the asset management
company
• Once approved by SEBI, the sponsor
creates a Public Trust (the Second tier) as
per the Indian Trusts Act, 1882.
• Once the Trust is created, it is registered
with SEBI after which this trust is known
as the mutual fund.
• It is important to understand the difference
between the Sponsor and the Trust. They
are two separate entities.
• Sponsor is not the Trust; i.e. Sponsor is
not the Mutual Fund. It is the Trust which
is the Mutual Fund.
• The Trustees role is not to manage the
money. Their job is only to see, whether
the money is being managed as per stated
objectives. Trustees may be seen as the
 Asset Management Company
(AMC)
• Trustees create the Asset Management Company (AMC),
to manage investor’s money. The AMC in return charges
a fee for the services provided and this fee is borne by
the investors as it is deducted from the money collected.
• The AMC’s Board of Directors must have at least 50%
directors, who are not associate of, or associated in any
manner with, the sponsor or any of its subsidiaries or the
trustees. The AMC has to be approved by SEBI.
• The AMC functions under the supervision of its Board of
Directors, and also under the direction of the Trustees
and SEBI.
• It is the AMC, which in the name of the Trust, floats and
manages schemes by buying and selling securities.
• Whenever the fund intends to launch a new scheme, the
AMC has to submit a Draft Offer Document to SEBI.
• This draft offer document, after getting SEBI approval
becomes the offer document of the scheme.
• The Offer Document (OD) is a legal document and
investors rely upon the information provided in the OD
for investing in the mutual fund scheme.
• The Compliance Officer has to sign the Due Diligence
Certificate in the OD. This certificate says that all the
information provided inside the OD is true and correct.
This ensures that there is accountability and somebody
is responsible for the OD. In case there is no compliance
officer, then senior executives like CEO, Chairman of the
 Custodian
• The assets of the mutual fund scheme are held
by the custodian.
• A custodian’s role is safe keeping of physical
securities and also keeping a tab on the
corporate actions like rights, bonus and
dividends declared by the companies in which
the fund has invested.
• The Custodian is appointed by the Board of
Trustees.
• Since the custody of the assets is separated
from the management it protects the investors
• The custodian also participates in a clearing and
settlement system through approved depository
companies on behalf of mutual funds, in case of
dematerialized securities.
• In India today, securities (and units of mutual funds) are
no longer held in physical form but in dematerialized
form with the Depositories through Depository
Participants (DPs).
• Only the physical securities are held by the Custodian.
• The deliveries and receipt of units of a mutual fund are
done by the custodian or a depository participant at the
instruction of the AMC.
• Regulations provide that the Sponsor and the Custodian
 Role of AMC
The role of the AMC is to manage investor’s money on a
day to day basis. Thus it is imperative that people with the
highest integrity are involved with this activity.
• The AMC cannot deal with a single broker beyond a
certain limit of transactions.
• The AMC cannot act as a Trustee for some other Mutual
Fund. The responsibility of preparing the OD lies with the
AMC.
• Appointments of intermediaries like independent
financial advisors (IFAs), national and regional
distributors, banks, etc. is also done by the AMC.
• It is the AMC that does all the operations.
• All activities by the AMC are done under the name of the
Trust, i.e. the mutual fund.
• The AMC charges a fee for providing its services. SEBI
has prescribed limits for this. The fee is charged as a
percentage of the scheme’s net assets.
• There is a maximum limit to the amount that can be
charged as expense to the scheme, and this fee has to
be within that limit.
 NFO
• The launch of a new scheme is known as a New Fund
Offer (NFO). We see NFOs coming up in markets
regularly.
• When a scheme is launched, the distributors mobilize
potential investors.
• Mutual funds cannot accept cash.
• Mutual funds units can also be purchased on-line
through a number of intermediaries who offer on-line
purchase / redemption facilities.
• Before investing, it is expected that the investor reads
the Offer Document (OD) carefully to understand the
risks associated with the scheme.
 RTA
• Registrars and Transfer Agents (RTAs) perform
the important role of maintaining investor
records.
• All the New Fund Offer (NFO) forms, redemption
forms (i.e. when an investor wants to exit from a
scheme) go to the RTA’s office where the
information is converted from physical to
electronic form.
• The applicable NAV, how much money will he
get in case of redemption, exit loads, folio
number, etc. is all taken care of by the RTA.
 Procedure for Investing in NFO
• Before investing in mutual funds or NFOs, the investor
must have the KYC in place.
• The mutual funds or the KYC Registration Agencies
(KRAs) must be approached to complete the KYC
formalities.
• KYC or know your customer is a form that must be filled
giving all details of investor like name, age, address
along with supporting documents like PAN Card and
address proof.
• Once this is done, the investor is to have a bank account
and a demat account for transactions in mutual fund
units for incoming and outgoing of money and units.
• Once these formalities are complete, the
investor has to fill a form, which is available with
the distributor or online.
• The investor must read the Offer Document (OD)
before investing in a mutual fund scheme.
• One must read at least the Key Information
Memorandum (KIM) or Scheme Information
Document (SID), which is available with the
application form. Investors have the right to ask
for the KIM/ OD from the distributor.
• Once the form is filled and the cheque is issued to the
distributor, he forwards both these documents to the RTA.
The RTA captures all the information from the application
form into the system.
• After the cheque is cleared, the RTA then creates units
for the investor.
• The same process is followed in case an investor
intends to invest in a scheme, whose units are available
for subscription on an on-going basis, even after the
NFO period is over.
• In an online system, this entire process is carried out
electronically from filling of forms to online payment to
allotment of units in the demat account of the investor.
 Investor Rights & Obligations
• Investors are mutual, beneficial and proportional owners
of the scheme’s assets. The investments are held by the
trust in fiduciary capacity
• The fiduciary duty is a legal relationship of confidence or
trust between two or more parties.
• In case of dividend declaration, investors have a right to
receive the dividend within 30 days of declaration.
• On redemption request by investors, the AMC must
dispatch the redemption proceeds within 10 working
days of the request.
• In case the AMC fails to do so, it has to pay an interest
@ 15%. This rate may change from time to time subject
to regulations.
• In case the investor fails to claim the redemption
proceeds immediately, then the applicable NAV depends
upon when the investor claims the redemption proceeds.
• Investors can obtain relevant information from the
trustees and inspect documents like trust deed,
investment management agreement, annual reports,
offer documents, etc.
• They must receive audited annual reports within 6
months from the financial year end.
• Investors can wind up a scheme or even terminate the
AMC if unit holders representing 75% of scheme’s
assets pass a resolution to that respect.
• Investors have a right to be informed about changes in
the fundamental attributes of a scheme.
• Fundamental attributes include type of scheme,
investment objectives and policies and terms of issue.
• Investors can approach the investor relations officer for
grievance redressal.
• In case the investor does not get appropriate solution, he
can approach the investor grievance cell of SEBI. The
investor can also sue the trustees.
• OD contains the risk factors, dividend policy,
investment objective, expenses expected to be
incurred by the proposed scheme, fund
manager’s experience, historical performance of
other schemes of the fund etc.
• It is not mandatory for the fund house to
distribute the OD with each application form but
on demand the fund house has to provide it.
• However, an abridged version of the OD, known
as the Key Information Memorandum (KIM) or
Scheme Information Document (SID) has to be
provided with the application form.
MUTUAL FUND -
PRODUCTS &
FEATURES
 SID & SAI
• Mutual Fund Offer Documents have two parts:
• Scheme Information Document (SID), which has details
of the scheme
• Statement of Additional Information (SAI), which has
statutory information about the mutual fund, offering the
scheme.
• The above documents are prepared by the fund house
and vetted by SEBI.
• Investor can download these documents from the mutual
fund website.
• The Scheme Information Document sets forth concisely
the information about the scheme that a prospective
investor ought to know before investing.
• Before investing, investors should also ascertain about
any further changes to this Scheme Information
Document after the date of this Document from the
Mutual Fund / Investor Service Centres / Website/
Distributors or Brokers.
 Key Information Memorandum
(KIM)
• The Key Information Memorandum (KIM) is a summary
of the SID and SAI.
• As per SEBI regulations, every application form is to be
accompanied by the KIM.
The important contents of KIM are:
• Name of the AMC, mutual fund, Trustee, Fund Manager
and scheme
• Dates of Issue Opening, Issue Closing & Re-opening for
Sale and Re-purchase
• Plans and Options under the scheme
• Risk Profile of Scheme
• Price at which Units are being issued and minimum
amount / units for initial purchase, additional purchase
and re-purchase
• Benchmark
• Dividend Policy
• Performance of scheme and benchmark over last 1 year,
3 years, 5 years and since inception.
• Loads and expenses
• Contact information of Registrar for taking up investor
grievances
 NAV
• Net Assets of a scheme is the market value of assets of the scheme
less all scheme liabilities.
• NAV i.e. net asset value is calculated by dividing the value of Net
Assets by the outstanding number of Units.

NAV =

(Market value of investments + receivables + accured income + other

assets – accured expenses – other payables – other liabilities)/
No. of units outstanding as of valuation date
 Fund Fact Sheet
• This is a monthly document which all mutual funds have
to publish. This document gives all details as regards
• the AUMs of all its schemes
• top holdings in all the portfolios of all the schemes
• loads, minimum investment
• performance over 1, 3, 5 years and also since launch
• Comparison of scheme’s performance with the
benchmark index
• most mutual fund schemes compare their performance
with a benchmark index such as the Nifty 50) over the
same time periods
• fund managers outlook
• portfolio composition
• expense ratio
• portfolio turnover
• risk adjusted returns
• equity/ debt split for schemes
• YTM for debt portfolios and other information which the
mutual fund considers important from the investor’s
decision making point of view.
 Expenses
• There are two types of expenses incurred by a scheme
• Initial issue expenses – these expenses are incurred
when the NFO is made. These need to be borne by the
AMC.
• Recurring expenses – These expenses are incurred
regularly. These include
• fees paid to trustees, custodians, auditor, registrar and
transfer agents
• selling and commission expenses
• listing fees and depository fees
• expenses related to investor communication
• service tax
 Limit of Expenses
NetAssets(Rscrs.) EquitySchemes

UptoRs.100crs. 2.50% 2.25%

NextRs.300crs. 2.25% 2.00%

NextRs.300crs. 2.00% 1.75%

ExcessoverRs.700crs. 1.75% 1.50%

• The above percentages are to be calculated on the
average daily net assets of the scheme.
• The expense limits (including management fees) for
index schemes (including Exchange Traded Funds) is
1.5% of average net assets.
• In case of a fund of funds scheme, the total expenses of
the scheme including weighted average of charges
levied by the underlying schemes shall not exceed 2.50
per cent of the average daily net assets of the scheme.
In addition to the limits specified, the following costs or
expenses may be charged to the scheme, namely
• Brokerage and transaction costs which are incurred for
the purpose of execution of trade and is included in the
cost of investment, not exceeding 0.12% in case of cash
market transactions and 0.05% in case of derivatives
transactions
• Expenses not exceeding of 0.30% of daily net assets.
• Additional expenses not exceeding 0.20 per cent of daily
net assets of the scheme
• Any expenditure in excess of the limits specified above
shall be borne by the asset management company or by
the trustee or sponsors.
 Expense Ratio
• Expense Ratio is defined as the ratio of expenses incurred by a
scheme to its Average Weekly Net Assets.
• It means how much of investors’ money is going for expenses and
how much is getting invested.
• This ratio should be as low as possible.
• Assume that a scheme has average weekly net assets of Rs 100 cr.
and the scheme incurs Rs.1 cr. as annual expenses, then the
expense ratio would be 1/ 100 = 1%.
• In case this scheme’s expense ratio is comparable to or better than
its peers then this scheme would qualify as a good investment.
• If this scheme’s AUM increases to Rs. 150 cr in the next year &
annual expenses increase to Rs. 2 cr, then expense=2/ 150 = 1.33%.
• Ideally as net assets increase, the expense ratio should come down.
• Since the direct plans do not entail distributor commissions, they
may have a lower expense ratio.
 Portfolio Turnover
• A very high churning frequency will lead to higher trading
and transaction costs, which may eat into investor
returns.
• Portfolio Turnover is the ratio which helps us to find how
aggressively the portfolio is being churned.
• While churning increases the costs, it does not have any
impact on the Expense Ratio.
• Transaction costs are not considered while calculating
expense ratio.
• Transaction costs are included in the buying & selling
price of the scrip by way of brokerage, STT, cess, etc.
Thus the portfolio value is computed net of these
expenses
 Cash Levels
• If the scheme is having higher than industry average
cash levels consistently, more so in a bull market, it will
lead to a inferior performance by the scheme.
• However, in a falling market, it is this higher cash level
that will protect investor wealth from depleting.
• Why the fund manager is holding high cash levels ?
• It may be so that he is expecting a fall therefore he is not
committing large portion of money.
• It may be so in a bull market or a bear market, the
strategy could be to enter once the prices correct.
• High cash levels can also be seen as a cushion for
sudden redemptions and in large amounts.
 Exit Load
• Exit Loads, are paid by the investors in the scheme, if
they exit one of the scheme before a specified time
period.
• Exit Loads reduce the amount received by the investor.
Not all schemes have an Exit Load, and not all schemes
have similar exit loads as well.
• Some schemes have Contingent Deferred Sales Charge
(CDSC), where in the investor has to pay different exit
loads depending upon his investment period.
• If the investor exits early, he will have to bear more Exit
Load.
• Thus the longer the investor remains invested, lesser is
the Exit Load.
Differences Between ETF and MF

ETF vrs MF
 Major Differences
• ETF • MF
• ETFs are traded like • Mutual Funds are
stocks in stock purchased and sold thru
exchanges distributor or directly
• ETFs are passively from AMCs
managed funds • MF are actively
managed funds which
means portfolio is
revised continuously
 ETF MF
• ETFs are traded like stocks • MFs are traded at the end
any time a day of each day when market
closes at closing NAV
• No minimum initial • Minimum initial investment
investment needed in ETFs. of Rs. 5000/- (500 units
It can be purchased for the *Rs.10/- FV) required for
price of a single unit.
most of MF schemes.
• ETF fees/cost/expense ratio
is low since it is passively • MF fees/expense ratio is
managed high since it is actively
managed
 ETF MF
• ETF is tax efficient since • MFs are not tax efficient
investor can control the since investors do not have
buying and selling time control over fund manager’s
period. decision of buying and
selling of securities in the
• ETFs are more liquid since it portfolio thereby paying
can be traded any time. capital gains tax.
• MFs are less liquid (End of
the day trading)
 ETF MF
• ETFs track their underlying • MF’s performance depends
index with minimal tracking on the performance of its
error underlying assets
• Demat and trading accounts • Demat and trading accounts
are required for ETF trade not required for MF trade.
 ETF
• Any asset class can be used to create ETFs
• ETFs are of three types :
Index ETF/Fund
Gold ETF
Liquid Fund ETF
• An Index ETF is one where the underlying is an
index, say NIFTY
• Gold ETFs are special type of ETF which invest
in gold and gold related securities. This
product gives investor an option to diversify
his investments into a different asset class,
other than equity and debt
• Holding physical gold has the following
disadvantages :
Fear of theft
Wealth tax
No surety of uality
Changes in fashion and trend
Locker costs
Lesser realisation on remoulding of ornaments
• In case of gold ETFs, investors buy units which
are backed by gold. Thus, every time investor
buys one unit of G-ETFs, certain fixed quantity
of gold being earmarked for him somewhere.
• Thus G-ETF units are as good as gold.
• For example,
1 G-ETF = 1gm of 24 carat gold
U buy 1 G-ETF every month for 10 years
Then after 10 years, U hold 120 gms of gold
U can convert G-ETFs into 120 gms of gold bu
approaching MF or
Sell the G-ETFs in the market at the then
market price and buy 120 gms of gold
• Thus G-ETF is equivalent of holding gold in
paper form
• G-ETFs are an open ended scheme
• Investors can buy & sell units any time at then
prevailing market price
• AMC of MF is required to buy gold of specified
quantity based upon the no. of G-ETF units
sold from investor’s money
• The gold which Authorised Participants (AP), who
are typically large institutional investors deposit
with AMC for buying the bundled ETF units is
known as Portfolio Deposit.
• This Portfolio Deposit has to be kept with the
custodian who handles the physical gold for AMC
and ensures its safety.
• The custodian maintains record of all the gold
that is deposited and withdrawn under the G-ETF.
• An account is maintained for this purpose
which is known as “Allocated Account”.
• Custodian enters on a daily basis the inflows
and outflows of gold bars from this account.
• The money which the AP deposits for buying
the bundled ETF units is known as “Cash
Component”. The cash component is paid to
AMC.
• The cash component is not mandatory and is
paid to adjust the difference between
applicable NAV and the market value of
portfolio deposit.
• Thus, to summarize, Authorised Participants
(APs) pay portfolio deposit and cash
component to get creation units in return
from AMC
 Market Making by APs
• APs are market makers and continuously offer
two way quotes.
• The differential is their earning which is known as
bid-ask spread.
• They provide liquidity to ETFs buy continuously
offering both bid and ask quotations
• Bid quote – 999
Ask quote – 1001
Thus, Rs 2/- per unit is the profit of AP
 Custodian
• The custodian maintains record of all gold that
inflows and outflows of scheme’s portfolio
deposit
• Makes respective entries in the Allocated
Account thus transferring gold into and out of the
scheme daily.
• Custodian buys insurance for the gold held.
• Charges fees from AMC for services rendered and
insurance
• This expense contributes to tracking error
 Tracking Error
• The difference between return given by gold
and those delivered by scheme is known as
Tracking Error
• It is defined as the variance between the daily
returns of the underlying (Gold here) and NAV
of the scheme.
• Tracking error should be as low as possible
• It’s a measure of performance of ETF.
 FIN204 Introduction to Mutual Funds

MCQ: Unit 1-Unit 3

Unit 1

Which of the following is true about mutual fund?

Mutual Funds are a vehicle for retail and institutional investors to benefit
from the capital markets.

They offer different kinds of schemes to cater to various types of investors,

companies and institutions

Mutual fund schemes are offered to investors for the first time through a
New Fund Offering (NFO).

All of the above

Which is the right option of structure based mutual fund?

Growth Funds
Money Market Funds
Income Funds
Interval Funds

Which one of the following is the investment objectives based mutual fund?

Growth Funds
Interval Funds
Income Funds
Both A and C

Which one of the following is not the advantage of mutual fund?

Convenience and Flexibility

Wide Choice to suit risk-return profile
Managing a portfolio of funds
All of the above

Which one of the following is not the obligation of Trustees?

Enter into an investment management agreement with the AMC.

Furnish to SEBI on a half-yearly basis, a report on the fund's activities
The right to request any necessary information from the AMC.
All of the above

Which term describes the price at which an investor can purchase the units
of a mutual fund?
Net purchase price
Unit sale price
Investor expense ratio
None of the above
B

SEBI ________ offer documents of mutual fund schemes.

Vets
Approves
Disapproves
Registers
A

In declining interest rate scenario, which of the following is better?

Floaters
Gold schemes
Conventional debt investments like bank deposits
Conventional debt schemes
D

Mutual funds in India are permitted to invest in

Securities other than real estate

Securities
Securities, gold and real estate
Securities and Gold
C
Which index comprises 30 of the largest and most liquid companies in India?

S&P 500
Russell 3000
CNX Nifty
S&P BSE Sensex
D

Investor’s return is different from scheme return to the extent of

MTM
AMC fees
Scheme running expenses
Load
D

Mutual Fund schemes are first offered to investors through

Stock Exchange
IPO
NFO
AMFI
C
_________ is lowest in risk
Fixed maturity plans
Gilt funds
Diversified equity funds
Liquid funds
D

Risk can be measured by ______.

Standard Deviation
Beta
Variance
Any of the above
D

What is an open-ended fund?

It is a fund that offers sale of units or redemption of units at periodic

intervals.
The fund’s returns closely track the returns of a benchmark index.
It is a fund that buys and sells units on a continuous basis.
The units of the fund are not available for sale after the NFO period ends.
C

Which type of Fund is required to be listed on Stock Exchange?

Debt fund
Liquid fund
Close ended fund
Sector fund
C

Funds which combined the features of an Open-Ended and Close-Ended

funds are known as which of the following?

Interval funds
Balance funds
Specialty funds
All of the above

Which of the following organizations is the Mutual Fund market regulator in

India?
RBI
IDBI
CIBIL
SEBI
D
What do you mean by NAV?
National assets value
Net asset value
Net assigned value
Net assessment value
B

SIP is best example of

Rupee Cost Averaging

Value Averaging
Buy and Hold
None of the above
A

A high turnover rate for a fund indicates

High transaction costs

Greater efficiency
High returns to the investor
A rising market

A
Q. 18 The systematic approaches offered by mutual funds to promote an
investment discipline for long term wealth creation are

A. SIP, STP
B. SIP, STP, SWP
C. SIP, SWP
D. None of the above
B

Investments in mutual fund can be made using

Cheque / DD
Remittance
ASBA
Any of the above
D

A greater portion of returns from conventional debt investments is generally

through

Capital gain
Interest income
Dividend income
Inflation
B

The liquidity needs of an investor are met through

Equity Funds
Index Funds
Money Market Funds
Sector Funds
C

Which of the following is not a benefit from a Mutual Fund?

Investor is able to diversify risk

Investor has custody of securities where fund invests
Investor can save costs
Professional Management of money
B

Offer document of mutual fund scheme is prepared by

AMC
Trustees
RTA
SEBI
A

The custodian has the custody of the investments in a scheme and a custodian is
largely independent of

A. Sponsors
B. AMCs
C. Trustees
D. Both (A) and (B)
D

Which of the following document must be read carefully in order to get details on
risk factors before investing in Mutual Fund Units?
KIM
SAI
SID
None of the above

Day to day operations of a mutual fund is handled by

Asset Management Company

Sponsor
Trustee
None of the above
A

Which of the following is not a benefit of investing in mutual funds?

Professional management

Transaction costs
Switching services
Diversification
B
Issuing additional fresh units and redeeming the existing units of a mutual fund
scheme is the role of:

The custodian
The transfer agent
The trustees
The bankers
B
Q. 29 Under the Indian Trusts Act, the interests of the unit-holders is safeguarded
by

A board of trustees
A trustee company
Either
Neither
C

A Mutual Fund is not

A company that manages an investment portfolio.

A portfolio of stocks, bonds and other securities.
A pool of funds used to purchase securities on behalf of investors
A collective investment vehicle.
A

To a prospective investor the reliable source of pertinent information about a

scheme is

Financial Press
Offer document
AMFI Website
Advice from the distributor
B

Which of the most appropriate position under MF Regulations?

 Buyer beware
 Buyer is always right
 Seller is always right
 Seller is guilty unless proved right
A
The asset management company is appointed by

SEBI
Unit holders
Sponsors
Trustee
D
Q. 34 In case of a dispute, against whom can the Unitholders initiate legal
proceedings?

Trust
Trustee
AMC
None of the above
B

Mutual funds in India are set up as a

Company
Trust
Partnership
Association of Person
B
Q. 36 Which of the following should not be viewed primarily as an investment
option?

Mutual Funds
Equity shares
Life Insurance
PPF
C
Q. 37 The appointment of AMC for the Mutual Fund can be terminated by

 Majority of Directors of the Trustee

 50% of the Unitholders
 45% of the Unitholders
 60% of the Unitholders
A

A type of mutual fund that maintains relatively stable proportions of its

funds invested in equities and in fixed-income securities is called a
_______________.

Specialized sector fund

Index fund
Asset allocation fund

Balanced fund

Q. 39 Which of the following is an advantage to investors of exchange traded

funds (ETFs) that is not available to investors in open-end mutual funds?

a. ETFs allow investors to invest in broad U.S. market indexes as well as

international indexes.

b. Investors can avoid incurring an expense in the form of a bid-ask spread

by purchasing an ETF rather than investing in an open-end mutual fund.

c. ETFs offer a potential tax advantage to investors who incur capital gains

taxes only when they sell ETF shares.

d. ETF prices can not deviate from net asset value.

Q. 40 Cost incurred by a mutual fund in managing the fund, including

administrative expenses and advisory fees, are referred to as the fund's
______________.

a. charges

b. Front-end load

c. Management fee

d. Operating expenses

Q. 41 Investors in a common stock mutual fund incur an income tax liability

when _______________.

a. They sell their mutual fund shares at a gain

b. The mutual fund sells stock in its portfolio at a gain

c. The mutual fund receives dividends on the stock owned by the mutual
fund

d. All of the above

Which of the following is incorrect w.r.t. different agencies involved in

setting up of Mutual Fund?

A mutual fund is set up in the form of a trust which is established by a

sponsor who is like a promoter of a company

The trustees of the mutual fund hold its property for the benefit of the unit-
holders

The AMC, approved by SEBI, manages the funds by making investments in

various types of securities

Registrar & Transfer Agent holds the securities of various schemes of the
fund in its custody

Which of the following is not a feature of open-ended mutual fund schemes?

They allow investors to enter and exit as per their convenience

The units are bought and sold at the net asset value (NAV) declared by the
fund

The number of outstanding units remains constant in open ended mutual

fund schemes

All are correct features

C
Q. 44 A group of mutual funds with a common management are known as:
A. funds syndicates
B. fund conglomerates
C. fund families
D. fund complexes

C
Q. 45 Which of the following is a reason for selecting a mutual fund?
A. Its historic return
B. High tax efficiency
C. Charging 12b-1 fees instead of load fees
D. Often realizing portfolio gains

UNIT-3

Which of the following is an advantage of Investing in Gold ETFs instead of

Physical Gold?

Capital Gains tax is waived if held for more than 3 years

Capital Gains tax is waived if held for more than 1 year

Risk of impurity

Risk of storage and theft

Which of the following statement is true?

Equity has outperformed Gold in the long run

Gold is the most liquid investment

Gold prices always go up

All of the above

Which of the following is correct?

There is no effect of Rupee value on Gold investment

Appreciation of rupee might disappoint Gold investors

Depreciation of rupee might disappoint Gold investors

Any movement in rupee might disappoint Gold investors

Why does Gold need to be a part of one’s portfolio when investing for long-
term?

Gold acts as a status symbol

Gold returns are highly correlated with Equity

Gold is a precious element

Gold returns are negatively correlated with Equity

Exchange traded funds are an alternative to what?

Actively managed equity funds.

Call options.
Actively managed bond funds.
Index trackers.

Q. 6 If your investment goal is simply to match the market, should buy a(n)

A. Money market fund.

B. Index fund.
C. Growth fund.
D. None of the above
B

You are evaluating a fund. What activity would you typically not undertake in
this effort?

Calculate or find the fund's rate of return.

Calculate the fund's NAV.
Review the fund's turnover ratio and administrative expenses-to-assets
ratio.
None of the above

Q. 8 Which item below would not be a characteristic of an exchange-traded

fund (ETF)?

A. They have a tax disadvantage in that all gains are taxable, even if
shares are not sold.
B. They are easily bought and sold.
C. They have very low expense ratios.
D. None of the above

With an open-end fund, you

A. Buy and sell shares from and to the fund.

B. Trade shares in the open market.
C. Can buy shares from the fund but you must sell them in the open
market.
D. B and C

Q. 10 A closed-end fund's shares

A. Do not trade in the open market.

B. Are required to trade at the shares' NAV.
C. May trade at a premium or discount.
D. A and B
C

Which service below would a mutual fund typically not offer?

Automatic reinvestment
Internet transactions
Security loss insurance
None of the above
C
A type of mutual fund that maintains relatively stable proportions of its
funds invested in equities and in fixed-income securities is called a
_______________.

A. Specialized sector fund

B. Index fund
C. Asset allocation fund

D. Balanced fund

Which of the following is true about advantages of Gold ETF?

No surety of quality
Lesser realisation on remoulding of ornaments
Changes in fashion and trends
No fear of theft

The Gold which the authorized participant deposits for buying the bundled
ETF units with the Custodian is called?

Allocated Account
Portfolio Deposit
Cash Component
Either A or C

An account in which custodian has to keep record of all the Gold that has
been deposited/withdrawn under the Gold ETF is known as

Allocated Account
Portfolio Deposit
Cash Component
None of the above

The money which the authorized participant deposits for buying the bundled
ETF units is known as
Allocated Account
Portfolio Deposit
Cash Component
None of these

Mutual funds that invest on the basis of a specified index, whose

performance it seeks to track are called

Passive funds
Actively managed funds
Index Fund
None of the above

In which fund, restriction of maximum 10% investment in a single company

share is not applicable ?

Contra Fund
Mid Cap Fund
Fund of Fund
Sectoral Fund

D
Which fund do not directly invest in stocks and shares but invest in units of
other mutual funds
Fund of Funds
Multi Cap Fund
Quant Fund
Contra Fund

Gold ETFs are

Open ended fund

Close ended fund
Interval fund
None of these

A
Which of these is not an ETF ?

Index ETF
Gold ETF
Liquid fund ETF
Mutual fund ETF

Which of these is not true about an ETF

Low expense ratio

Liquidity
No minimum initial investment
Actively managed fund

ETF fees/cost/expense ratio is low since it is

Passively managed

High liquidity

Tax advantage

No minimum initial investment

Which of the following is not the disadvantage of holding physical gold ?

Fear of theft

Locker cost

No surety of quality

Price appreciation
D

Who holds physical gold on behalf of AMC for Gold ETFs ?

Custodian

Trustees

Banker

Registrar & Transfer Agent

A
Debt Funds
 Salient Features
• Debt funds are funds which invest money in debt
instruments such as short and long term bonds,
government securities, t-bills, corporate paper,
commercial paper, call money etc.

• The fees in debt funds are lower, on average, than equity

funds because the overall management costs are lower.

• The main investing objective of a debt fund is usually

preservation of capital and generation of income.
 FV, Coupon & Maturity
• Face Value represents the amount of money taken as
loan. Thus when an investor invests Rs.100 in a paper,
at the time of issuing the paper, then the face value of
that paper is said to be Rs. 100.
• The Coupon represents the rate of interest that the
borrower will pay on the Face Value. Thus, if the Coupon
is 8% for the above discussed paper, it means that the
borrower will pay Rs.8 (8/100 X 100)every year to the
investor as interest income.
• Since the investor will earn a fixed income (8% on
Rs.100 or Rs.8 per year in our example), such
instruments are also known as Fixed Income securities.
• Maturity is the time period after which the
bond ceases to exist.
• If the maturity of the paper is 10 years, it
means that for 10 years the investor will
receive Rs.8 as interest income and after
10 years, he will get his Principal of
Rs.100 back.
• Fixed and Floating Rate of Interest (G-
Sec+2%)
 Interest Rate Risk
• Risk of loosing higher interest earning in case interest rates
rise.
• In a rising interest rate scenario, the investor can reduce
interest rate risk by investing in debt paper of extremely short-
term maturity.
• The best way to mitigate interest rate risk is to invest in
papers with short- term maturities, so that as interest rate
rises, the investor will get back the money invested faster,
which he can reinvest at higher interest rates in newer debt
paper.
• Alternatively the interest rate risk can be partly mitigated by
investing in floating rate instruments. In this case for a rising
interest rate scenario the rates moves up, and for a falling
interest rate scenario the rates move down.
 Credit Risk
• Credit Risk or Risk of Default is the situation where the
borrower fails to honour either one or both of his obligations of
paying regular interest and returning the principal on maturity.
• This risk can be taken care of by investing in paper issued by
companies with very high Credit Rating.
• Government paper is highest in safety when it comes to credit
risk (hence the description ‘risks free security’).
• Credit rating agencies analyse companies on various financial
parameters like profitability, cash flows, debt, industry outlook,
impact of economic policies, etc. based on which instruments
are classified as investment grade and speculative grade.
 Pricing of Debt Instruments
• Present values (PV) of all future cash flows are added to
arrive at the price of the bond.
• Yield to Maturity (YTM ) is rate applied to all the future
cash flows (coupon payment) to arrive at its present
value.
• If the YTM increases, the present value of the cash flows
will go down.
• Yield To Maturity (YTM) is that rate which the investor
will receive in case
He holds a bond till maturity and
He reinvests the coupons at the same rate
• It is a measure of the return of the bond.
• Price of a bond is the present value of future cash flows.
Thus if all the present values go down (due to increase
in YTM), then their sum will also go down.
• As interest rates go up, bond prices come down and vice
versa
• Thus we can say that bond prices and interest rates
move in opposite directions.
• Relationship between interest rates and debt mutual
fund schemes : As interest rates fall, the NAV of debt
mutual funds rise, since the prices of the debt
instruments the mutual fund is holding rises.
• As interest rates rise, the NAV of debt mutual funds fall,
since the prices of the debt instruments the mutual fund
is holding falls.
• Therefore it is paramount to consider interest rate
movements and security maturity prior to investing in any
debt instrument.
 DEBT MUTUAL FUND SCHEMES
Fixed Maturity Plans (FMP)

• FMPs are essentially close ended debt schemes. The

money received by the scheme is used by the fund
managers to buy debt securities with maturities
coinciding with the maturity of the scheme.
• These securities can be sold earlier, but typically fund
managers avoid it and hold on to the debt papers till
maturity.
• If an FMP is giving a relatively higher ‘indicative yield’, it
may be investing in slightly riskier securities. Thus
investors must assess the risk level of the portfolio by
looking at the credit ratings of the securities.
• Indicative yield is the return which investors can expect
from the FMP. Regulations do not allow mutual funds to
guarantee returns, hence mutual funds give investors an
idea of what returns can they expect from the fund.
• Indicative yields are pre-tax. Investors will get lesser
returns after they include the tax liability.

Examples :
• SBI Magnum Constant Maturity Fund
• IDFC Govt. Securities Fund
 Capital Protection Funds

• These are close ended funds which invest in debt as well

as equity or derivatives.
• The scheme invests some portion of investor’s money in
debt instruments, with the objective of capital protection.
The remaining portion gets invested in equities or
derivatives instruments like options.
• Equity or derivatives component of investment provides
the higher return potential.
Example :
• SBI Capital Protection Oriented Fund
• ICICI Prudential Capital Protection Oriented Fund
 Gilt Funds

• These are those funds which invest only in securities

issued by the Government. This can be the Central Govt.
or even State Govts.
• Gilt funds are safe to the extent that they do not carry
any Credit Risk.
• However, it must be noted that even if one invests in
Government Securities, interest rate risk always remains.
Examples :
• ICICI Prudential Constant Maturity Gilt Fund
• SBI Magnum Gilt Fund
• UTI Gilt Fund
 Balanced Funds

• These are funds which invest in debt as well as equity

instruments. These are also known as hybrid funds.
Examples :
• Kotak Equity Hybrid
• DSP Equity & Bond Fund
• ICICI Prudential Equity & Debt Fund
• Mirae Asset Hybrid - Equity Fund
 MIPs

• Monthly Income Plans (MIPs) are hybrid funds; i.e. they

invest in debt papers as well as equities. Investors who
want a regular income stream invest in these schemes.
• The objective of these schemes is to provide regular
income to the investor by paying dividends; however,
there is no guarantee that these schemes will pay
dividends every month.
• Investment in the debt portion provides for the monthly
income whereas investment in the equities provides for
the extra return which is helpful in minimising the impact
of inflation.
• ICICI Pru GIFT - Regular Monthly Income
 Child Benefit Plans

• These are debt oriented funds, with very little component

invested into equities. The objective here is to capital
protection and steady appreciation as well.
• Parents can invest in these schemes with a 5 – 15 year
horizon, so that they have adequate money when their
children need it for meeting expenses related to higher
education.
• LIC Child Plan
• HDFC Life Child Education Plan
• Child Education & Insurance Plan - Edelweiss Tokio Life
LIQUID FUNDS
 Features
• Money Market refers to that part of the debt market
where paper with with a short term maturity of less than
1 year is traded.
• Commercial Papers, Certificate of Deposits, Treasury
Bills, Collateralised Borrowing & Lending Obligations
(CBLOs), Interest Rate Swaps (IRS), etc. are the
instruments which comprise this market.
• Demand for short term money by corporates, financial
institutions and Government is huge.
• The market for short term paper; i.e. paper with less than
1 year maturity attracts numerous participants , volume
and money.
• Liquid mutual funds are schemes that make investments
in debt and money market securities with maturity of up
to 91 days only.
• In case of liquid mutual funds cut off time for receipt of
funds is an important consideration.
• As per SEBI guidelines the following cut-off timings shall
be observed by a mutual fund in respect of purchase of
units in liquid fund schemes and the following NAVs shall
be applied for such purchase:
• Where the application is received up to 2.00 p.m. on a
day and funds are available for utilization before the cut-
off time without availing any credit facility, whether, intra-
day or otherwise – the closing NAV of the day
immediately preceding the day of receipt of application
• Where the application is received after 2.00 p.m. on a
day and funds are available for utilization on the same
day without availing any credit facility, whether, intra-day
or otherwise – the closing NAV of the day immediately
preceding the next business day
• Irrespective of the time of receipt of application, where
the funds are not available for utilization before the cut-
off time without availing any credit facility, whether, intra-
day or otherwise – the closing NAV of the day
immediately preceding the day on which the funds are
available for utilization.
• This is relevant since corporates park their daily excess
cash balances with liquid funds.
 Valuation of Securities
• All money market and debt securities, including floating
rate securities, with residual maturity of up to 60 days
shall be valued at the weighted average price at which
they are traded on the particular valuation day. When
such securities are not traded on a particular valuation
day they shall be valued on amortization basis.
• All money market and debt securities, including floating
rate securities, with residual maturity of over 60 days
shall be valued at weighted average price at which they
are traded on the particular valuation day. When such
securities are not traded on a particular valuation day
they shall be valued at benchmark yield/ matrix of spread
over risk free benchmark yield
• The approach in valuation of non traded debt securities
is based on the concept of using spreads over the
benchmark rate to arrive at the yields for pricing the non
traded security.
a. A Risk Free Benchmark Yield is built using the
government securities as the base.
b.A Matrix of spreads (based on the credit risk) are built
for marking up the benchmark yields.
c.The yields as calculated above are Marked up/Marked-
down for ill-liquidity risk
d.The Yields so arrived are used to price the portfolio.
 FLOATING RATE SCHEME
• These are schemes where the debt paper has a Coupon
which keeps changing as per the changes in the interest
rates. Thus there is no price risk involved in such paper.
• When rates go up, bond prices go down and vice versa.
• However, if the rates increase and so also the coupon
changes and increases to the level of the interest rates,
there is no reason for the price of the paper to fall, as the
investor is compensated by getting higher coupon, in line
with the on going market interest rates.
• Investors prefer Floating Rate funds in a rising interest
rate scenario.
 Portfolio Churning in Liquid Funds

• A liquid fund will constantly change its portfolio. This is

because the paper which it invests in is extremely short
term in nature. Regularly some papers would be
maturing and the scheme will get the cash back.
• The fund manager will use this cash to buy new
securities and hence the portfolio will keep changing
constantly. As can be understood from this, Liquid Funds
will have an extremely high portfolio turnover.
• Liquid Funds see a lot of inflows and outflows on a daily
basis. The very nature of such schemes is that money is
parked for extremely short term. Also, investors opt for
options like daily or weekly dividend. All this would mean,
the back end activity for a liquid fund must be quite
hectic – due to the large sizes of the transactions and
also due to the large volumes.
• As in equities, we have different index for Large caps,
Midcaps & Small caps, similarly in bonds we have
indices depending upon the maturity profile of the
constituent bonds. These indices are published by
CRISIL e.g. CRISIL long term bond index, CRISIL liquid
fund index etc.
 Stress testing of Assets
• It is important for mutual funds to ensure sound risk
management practices are applied to ensure that the
portfolio of liquid funds and money market funds is
sound and any early warnings can be identified:
• •AMCs should have stress testing policy in place which
mandates them to conduct stress test on all Liquid Fund
and MMMF Schemes. The stress test should be carried
out internally at least on a monthly basis, and if the
market conditions require so, AMC should conduct more
frequent stress test.
• The concerned schemes shall be tested on the following
risk parameters, among others deemed necessary by
the AMC:
• Interest rate risk
• Credit risk
• Liquidity & Redemption risk
• While conducting stress test, it will be required to evaluate
impact of the various risk parameters on the scheme and it’s
Net Asset Value (NAV). The parameters used and the
methodology adopted for conducting stress test on such type
of scheme, should be detailed in the stress testing policy,
which is required to be approved by the Board of AMC.
Taxation in MF
• Tax rules differ for equity and debt schemes and also for
Individuals, NRIs, OCBs and corporates.
• Three types of taxation in MFs :
– Capital Gains Tax
– Securities Transaction Tax (STT)
– Dividend Tax
 Equity Linked Savings Scheme (ELSS) attracts tax benefit
under 80-C of IT act
 Capital Gains Tax
• Long Term Capital Gains (More than 12 months holding
period) - 0%
• Short Term Capital Gains (Less than or equal to 12
months holding period) - 15% + Surcharge
 Capital Gains Tax in Equity MF
Schemes
• As per SEBI Regulations, any scheme which has
minimum 65% of its average weekly net assets invested
in Indian equities, is an equity scheme.
• If the mutual fund units of an equity scheme are sold /
redeemed / repurchased after 12 months, the profit is tax
exempt.
• However if units are sold before 12 months it results in
short term capital gain. The investor has to pay 15% as
short term capital gains tax.
• While exiting the scheme, the investor will have to bear a
Securities Transaction Tax (STT) @ 0.001% of the value
of selling price.
• Investors in all other schemes have to pay capital gains
tax, either short term or long term.
• In case a scheme invests 100% in foreign equities, then
such a scheme is not considered to be an equity scheme
from taxation angle and the investor has to pay tax even
on the long term capital gains made from such a scheme.
Debt funds, Liquid schemes, Gold ETF,
Short term bond funds etc.
• Long Term Capital Gains (More than 36 months holding
period) - For Residents – 20% with indexation benefit
- FII – 10% without indexation benefit
• Short Term Capital Gains (Less than or equal to 36
months holding period) - Marginal Rate of Tax Profit
added to income (As per the tax slab)
• In case such units are sold within 36 months, the gain is
treated as short term capital gains. The same is added to
the income of the tax payer and is taxed as per the
applicable tax slab including applicable surcharge and
cess depending on the status of the tax payer.
 Indexation Benefit
• Indexation is a procedure by which the investor can get
benefit from the fact that inflation has eroded his returns.
• Indexation works on the simple concept that if an
investor buys a unit @ Rs. 10 and sells it @ Rs. 30 after
5 years, then his profit of Rs. 20 per unit needs to be
adjusted for the inflation increase during the same time
period. This is because inflation reduces purchasing
power.
• If during the same time, inflation has increased by 12%,
then the adjusted cost of the unit purchased (at today’s
price) would be Rs. 10 * (1 + 12%) = Rs. 11.2.
• So his profit would be Rs. 30 – Rs. 11.2 = Rs. 18.8.
• The cost inflation index is notified by the Central
Government (form 1981 up to 2015-16). The same is used
by the tax payer for calculating long term capital gains.
• An investor purchased mutual fund units in January 2006 of
Rs.10,000. The same was sold in the previous year for
Rs.25,000. Long term capital gains applicable is as follows:
• FII - Without availing indexation benefit - Pay 10% on
Rs,15,000 (Rs.25000 – Rs.10,000) = Rs.1,500
• Resident - Calculate indexed cost of acquisition
(Rs.10,000 X 1081/ 497) = Rs.21,751,
Capital gains = Rs.25,000 – Rs.21,751 = Rs.3,249,
Tax@20% on Rs.3249 = Rs.650
DIVIDEND DISTRIBUTION TAX
• The dividend declared by mutual funds in respect of the
various schemes is exempt from tax in the hands of
investors.
• In case of debt mutual funds, the AMCs are required to
pay Dividend Distribution Tax (DDT) from the
distributable income. This ensures ease in tax collection.
However, in case of equity funds no DDT is payable.
• The rates for DDT are as follows:
• For individuals and HUF – 25% (plus surcharge and
other cess as applicable)
• For others – 30% (plus surcharge and other cess as
applicable)
• On dividend distributed to a non-resident or to a foreign
company by an Infrastructure Debt Fund – 5% (plus
surcharge and other cess as applicable)
 Fixed Maturity Plan
• A fixed maturity plan is a close ended debt fund for a
specified period. The maturity of the papers invested in
is matched with the duration of the plan.
• Consider a case where Investor A invests Rs.100,000 in
a bank fixed deposit @9% for 3 years and Investor B
invests Rs.100,000 in a 3 year FMP. The indicative yield
of the FMP is assumed also to be at 9%. We shall
analyze the tax benefit of investing in an FMP.
• For Investor A, the interest income per annum is 100,000
X 9% = Rs.9,000. Each year the investor would have to
pay tax of Rs.2,700 (30%, assuming he is taxed at the
maximum marginal rate). Total tax payable in 3 years is
Rs.8,100.
• For Investor B, since the investment is over 36 months, it
would qualify as long term capital gains.
• When the investor entered the fund, the cost inflation
index was at 939 and when he exited at maturity the cost
inflation index had risen to 1081.
• Thus the new indexed cost of acquisition will become
Rs.100,000 X 1081/939 = Rs.115,122
• Now the profit will be equal to 115,122 – 100,000 =
Rs.15,122
• So the tax payable will be equal to 15,122 * 20% =
Rs.3,024.
• The point to be observed here is that FMP is giving a
higher return (post tax) as compared to a bank FD. This
is true only if the investor is in the 30% tax bracket.
• However Bank fixed deposit offer premature withdrawal
facility; hence they offer better liquidity as compared to
FMP.
Regulations of MFs
 Overview
Regulations ensure that schemes do not invest beyond a certain
percent of their NAVs in a single security. Some of the guidelines
regarding these are given below:
• No scheme can invest more than 10% of its NAV in rated debt
instruments of a single issuer wherein the limit is reduced to 10% of
NAV which may be extended to 12% of NAV with the prior approval
of the Board of Trustees and the Board of Asset Management
Company.2
• No scheme can invest more than 10% of its NAV in unrated paper of
a single issuer and total investment by any scheme in unrated
papers cannot exceed 25% of the NAV.
• No mutual fund scheme shall invest more than 30% in money
market instruments of an issuer: Provided that such limit shall not
be applicable for investments in Government securities, treasury
bills and collateralized borrowing and lending obligations.
 Overview
• No fund, under all its schemes can hold more than 10% of
company’s paid up capital carrying voting rights.
• No scheme can invest more than 10% of its NAV in equity
shares or equity related instruments of any company of a
single company. Provided that, the limit of 10% shall not be
applicable for investments in case of index fund or sector or
industry specific scheme.
• If a scheme invests in another scheme of the same or
different AMC, no fees will be charged. Aggregate inter
scheme investment cannot exceed 5% of net asset value of
the mutual fund.
• No scheme can invest in unlisted securities of its sponsor or
its group entities.
 Overview
• Schemes can invest in unlisted securities issued by
entities other than the sponsor or sponsor’s group.
Open ended schemes can invest maximum of 5% of
net assets in such securities whereas close ended
schemes can invest upto 10% of net assets in such
securities.
• Schemes cannot invest in listed entities belonging to
the sponsor group beyond 25% of its net assets.
 Overview
• Total exposure of debt schemes of mutual funds in a
particular sector (excluding investments in Bank CDs,
CBLO, G-Secs, T Bills, short term deposits of scheduled
commercial banks and AAA rated securities issued by
Public Financial Institutions and Public Sector Banks)
shall not exceed 25% of the net assets of the scheme.
• An additional exposure to financial services sector not
exceeding 5% of the net assets of the scheme shall be
allowed only by way of increase in exposure to Housing
Finance Companies (HFCs) for HFCs rated AA and
above and registered with National Housing Bank
(NHB).
• Total exposure of debt schemes of mutual
funds in a group (excluding investments in
securities issued by Public Sector) shall not
exceed 20% of the net assets of the scheme.
Such investment limit may be extended to
25% of the net assets of the scheme with the
prior approval of the Board of Trustees.
 Objectives of AMFI
• Promote the interests of the mutual funds and unit holders and
interact with regulators-SEBI/RBI/Govt./Regulators.
• To set and maintain ethical, commercial and professional standards
in the industry and to recommend and promote best business
practices and code of conduct to be followed by members and
others engaged in the activities of mutual fund and asset
management.
• To increase public awareness and understanding of the concept and
working of mutual funds in the country, to undertake investor
awareness programmes and to disseminate information on the
mutual fund industry.
• To develop a cadre of well trained distributors and to implement a
programme of training and certification for all intermediaries and
others engaged in the industry.
 PRODUCT LABELLING IN MFs –
RISKOMETER
The product labeling in mutual funds shall be based on the level
of risk which shall be as under:

• Low- principal at low risk

• Moderately Low - principal at moderately low risk
• Moderate - principal at moderate risk
• Moderately High - principal at moderately high risk
• High - principal at high risk

There shall be pictorial depiction of risk named ‘riskometer’

which shall appropriately depict the level of risk in any scheme.
 ADVANTAGES OF MUTUAL FUNDS

• Mutual Funds give investors best of both the worlds. Investor’s

money is managed by professional fund managers and the money is
deployed in a diversified portfolio.
• Retail investors cannot buy a diversified portfolio for say Rs.5000,
but if they invest in a mutual fund, they can own such a portfolio.
• Mutual Funds help to reap the benefit of returns by a portfolio
spread across a wide spectrum of companies with small
investments.
• Investors may not have resources at their disposal to do detailed
analysis of companies.
• Time is a big constraint and they may not have the expertise to read
and analyze balance sheets, annual reports, research reports etc. A
mutual fund does this for investors as fund managers, assisted by a
team of research analysts, scan this data regularly.
• Investors can enter / exit schemes anytime they want
(at least in open ended schemes).
• They can invest in an SIP, where every month, a
stipulated amount automatically goes out of their
savings account into a scheme of their choice. Such
hassle free arrangement is not always easy in case of
direct investing in shares.
• There may be a situation where an investor holds some
shares, but cannot exit the same as there are no buyers
in the market. Such a problem of illiquidity generally
does not exist in case of mutual funds, as the investor
can redeem his units by approaching the mutual fund.
• As more and more AMCs come in the market, investors will
continue to get newer products and competition will
ensure that costs are kept at a minimum.
• Initially mutual fund schemes could invest only in debt and
equities. Then they were allowed to invest in derivative
instruments. Gold ETFs were introduced, investing in
international securities was allowed and recently real
estate mutual funds where also in the process of being
cleared.
• We may one day have commodity mutual funds or other
exotic asset classes oriented funds. Thus it is in investor’s
best interest if they are aware of the nitty gritties of MFs.
• Investors can either invest with the objective of getting capital
appreciation or regular dividends.
• Young investors who are having a steady regular monthly income would
prefer to invest for the long term to meet various goals and thus opt for
capital appreciation (growth or dividend reinvestment options).
• Whereas retired individuals, who have with them a kitty and would need a
monthly income would like to invest with the objective of getting a regular
income . This can be achieved by investing in debt oriented schemes and
opting for dividend payout option. Mutual funds are therefore for all kinds
of investors.
• An investor with limited funds might be able to invest in only one or two
stocks / bonds, thus increasing his / her risk. However, a mutual fund will
spread its risk by investing in a number of sound stocks or bonds. A fund
normally invests in companies across a wide range of industries, so the
risk is diversified.
• Mutual Funds regularly provide investors with
information on the value of their investments.
• Mutual Funds also provide complete portfolio
disclosure of the investments made by various
schemes and also the proportion invested in each asset
type.
• Mutual Funds offer investors a wide variety to choose
from. An investor can pick up a scheme depending
upon his risk/ return profile.
• All the Mutual Funds are registered with SEBI and they
function within the provisions of strict regulation
designed to protect the interests of the investor.
 Systematic Investment Plan (SIP)
• The investor, by deciding to invest Rs.5000 regularly each
month automatically got the benefit of the swings. He gets
least number of units in bullish market condition when NAV
is high, whereas when the NAV continued its downward
journey subsequently in bearish markets, he accumulated
higher number of units.
• This is the benefit of disciplined investing. Many a times it is
seen that in bear markets, when the NAVs are at their rock
bottom, investor are gripped by panic and either stop their
SIPs or worse, sell their units at a loss.
• Due to the in-built mechanism of SIP, investors average cost
reduces.
 SIP
• Averaging works both ways. Thus, when the
NAV moves sharply in either direction, the
impact of averaging is clearly witnessed as the
change in average cost for the investor is only
marginal.
• As can be seen, SIP helps in averaging cost of
acquiring units; however STP can prove to be
even better than SIP.
 SIP
• There are a small section of investors like domestic
staff, drivers and other employees earning low incomes
and who may not have PAN cards or other
documentation required for investing in mutual funds.
• They are advised by their employers to invest in SIPS.
• SEBI, in order to facilitate their investments, has
withdrawn the requirement of PAN for SIPs where
investments are not over Rs.50,000/- in a financial year.
• Such installments are called micro SIPs.
 Systematic Transfer Plans (STP)
• In SIP investor’s money moves out of his savings account into the
scheme of his choice. Let’s say an investor has decided to invest Rs
5,000 every month, such that Rs. 1,000 gets invested on the 5th,
10th, 15th, 20th and 25th of the month. This means that the
Rs.5000, which will get invested in stages till 25th will remain in the
savings account of the investor for 25 days and earn interest
applicable to SB accounts of the bank.

• If the investor moves this amount of Rs.5000 at the beginning of

the month to a Liquid Fund and transfers Rs.1000 on the given
dates to the scheme of his choice, then not only will he get the
benefit of SIP, but he will earn slightly higher interest as well in the
Liquid Funds as compared to a bank FD. As the money is being
invested in a Liquid Fund, the risk level associated is also minimal.
Add to this the fact that liquid funds do not have any exit loads. This
is known as STP.
 Systematic Withdrawal Plan (SWP)
• SWP stands for Systematic Withdrawal Plan. Here the investor invests a lump sum
amount and withdraws some money regularly over a period of time. This results in
a steady income for the investor while at the same time his principal also gets
drawn down gradually.
• Say for example an investor aged 60 years receives Rs.20 lakh at retirement. If he
wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20
= Rs.1,00,000 per annum. This translates into Rs.8,333 per month. (The investor
will also get return on his investment of Rs.20 lakh, depending on where the
money has been invested by the mutual fund).
• In this example we have not considered the effect of compounding. If that is
considered, then he will be able to either draw some more money every month, or
he can get the same amount of Rs.8,333 per month for a longer period of time.
• The conceptual difference between SWP and MIP is that SWP is an investment
style whereas MIP is a type of scheme.
• In SWP the investor’s capital goes down whereas in MIP, the capital is not touched
and only the interest is paid to the investor as dividend.
• Investors often get confused between the above
mentioned (Dividend Payout, Dividend
Reinvestment and Growth Options) three options
which he has to choose while investing in mutual
fund’s units.
• These options have to be selected by the investor
at the time of purchasing the units and many a
times investors feel that the dividend
reinvestment option is better than growth as they
get more number of units.
• Let’s understand the three options :
 Growth Option
• Growth option is for those investors who are looking for capital
appreciation.
• An investor aged 25 invests Rs.1 lakh in an equity scheme. He would not
be requiring a regular income from his investment as his salary can be
used for meeting his monthly expenses.
• He would instead want his money to grow and this can happen only if he
remains invested for a long period of time. Such an investor should go for
Growth option.
• The NAV will fluctuate as the market moves. So if the scheme delivers a
return of 12% after 1 year, his money would have grown by Rs.12,000.
Assuming that he had invested at a NAV of Rs.100, then after 1 year the
NAV would have grown to Rs.112.
• Notice here that neither is any money coming out of the scheme, nor is
the investor getting more units. His units will remain at 1,000 (1,00,000/
100) which he bought when he invested Rs.1 lakh @ Rs. 100/ unit.
• Only NAV changes
 Dividend Payout Option
• In case an investor chooses a Dividend Payout option, then after 1
year he would Receive Rs. 12 as dividend. This results in a cash
outflow from the scheme.
• The impact of this would be that the NAV would fall by Rs.12 (to Rs.
100 after a year. In the growth option the NAV became Rs. 112) .
• Here he will not get any more number of units (they remain at
1,000),
• But will receive Rs.12,000 as dividend (Rs.12 per unit * 1,000 units).
• Dividend Payout will not give him the benefit of compounding as
Rs.12,000 would be taken out of the scheme and will not continue
to grow like money which is still invested in the scheme.
 Dividend Reinvestment Option
• In case of Dividend Reinvestment option, the investor chooses to reinvest the
dividend in the scheme. So the Rs.12, which he receives as dividend gets
invested into the scheme again @ Rs.100.
• Thus the investor gets Rs.12,000/ Rs. 100 = 120 additional units. Notice here
that although the investor has got 120 units more, the NAV has come down to
Rs.100.
• Hence the return in case of all the three options would be same. For Growth
Option, the investor will have 100 units @ 112, which equals to Rs.1,12,000
while for Dividend Reinvested Option the investor will have 1120 units @ Rs.
100 which again amounts to Rs. 1,12,000.
• Thus it can be seen that there is no difference in either Growth or Dividend
Reinvestment Plan.
• It must be noted that for equity schemes there is no Dividend Distribution Tax,
however for debt schemes, investor will not get Rs.12 as dividend, but less due
to Dividend Distribution Tax.
• For Dividend Reinvestment Option, he will get slightly lesser number of units
and not exactly 120 to the extent of Dividend Distribution Tax for debt MFs.