NISM SERIES - VA:

MUTUAL FUND DISTRIBUTORS CERTIFICATION EXAMINATION

Trainer: Dr. Sudeshna Dutta

Assessment structure
 MCQ Type Questions

 2 to 4 Options to choose

 100 questions

 100 Marks (1 mark each)

 2 hours

 The passing score 50%

 There shall be no negative marking.

Contents
1. Investment Landscape
2. Concept & Role of a Mutual Fund in India
3. Legal Stricture of Mutual Funds in India
4. Legal & Regulatory Framework
5. Scheme Related Information
6. Funds Distribution and Channel Management Practices
7. NAV, TER and Pricing of Units
8. Taxation
9. Investor Services
10. Return, Risk & Performance of Funds
11. Mutual Fund Scheme Performance
12. Mutual Fund Scheme Selection

By Dr. Sudeshna Dutta

 Investment Landscape - Chapter 1
 Why Investments? – To beat inflation
 Financial Goals –
 Children's Higher Education,
 Children’s Marriage,
 Self-Retirement,
 Buying a New House,
 Charity, foreign Tour etc. Financial Goals, Time Horizon & Inflation
 The Mathematics
 How much would it cost?
 Time horizon
 Inflation with respect to the goal value
 Time Value of Money (TVM)

A = P × (1 + i)n
here,
A = Rupee requirement in future
P = Cost in today’s terms
i = Inflation
N = Number of years into the future, when the expense
will be incurred

 Factors to evaluate investments

 Safety
 Liquidity
 Returns
 Convenience
 Ticket size
 Taxability of income
 Tax deduction

By Dr. Sudeshna Dutta

  Different Asset Classes
 Real Estate
 Commodities
 Fixed Income
 Equity
 Investment Risks
 Inflation Risk
 Liquidity Risk
 Credit Risk
 Market Risk and Price Risk
 Interest Rate Risk
 Risk Measures and Management Strategies
 Avoid
 Take a position to benefit from some event / development
 Diversify
 Behavioral Biases in Investment Decision
 Availability Heuristic
 Confirmation Bias
 Familiarity Bias
 Herd Mentality
 Loss Aversion
 Overconfidence
 Recency bias
 Risk Profiling
 The need to take risks
 The ability to take risks, and
 The willingness to take risks
 Understanding Asset Allocation
 Tactical Asset Allocation
 Strategic Asset Allocation

By Dr. Sudeshna Dutta

 CONCEPT AND ROLE OF A MUTUAL FUND - Chapter 2
 Concept of a Mutual fund – The BUS Story…!!!
 Role of Mutual Funds
(How Mutual Fund helps economy)
 To assist investors in earning an income or building their wealth.
 Benefits governments, companies or other entities, directly or
indirectly, to raise moneys.
 The mutual funds can keep a check on the operations of the investee
company.
 It promotes economic development and nation building.
 A key participant in the capital market of any economy.
 Different Mode of Transport
 Bus
 Train
 Flight
 Investment Objectives of Mutual Funds
 HOW DO MUTUAL FUND SCHEMES OPERATE?

 Investment Policy of Mutual Funds

 Every scheme has a pre-announced investment objective,
 The money mobilized from investors is invested by the mutual fund
scheme in a portfolio of securities as per the stated investment
objective,
 Profits or losses, as the case might be, belong to the investors or
unitholders,

By Dr. Sudeshna Dutta

  No other entity involved in the mutual fund in any capacity participates
in the scheme’s profits or losses,
 They are all paid a fee or commission for the contributions they make
to launching and operating the schemes.
 Important Concepts in Mutual Funds
 NFO – New fund Offer
 NAV – Net Asset Value
 AUM – Assets under Management
 Units
 Face Value
 Unit Capital
 Equity & Debt
 Advantages of Mutual Funds for Investors
 Professional Management
 Affordable Portfolio Diversification
 Economies of Scale
 Liquidity
 Tax Deferral
 Tax benefits
 Convenient Options
 Investment Comfort
 Regulatory Comfort
 Systematic approach to investments
 Limitations of Mutual Fund
 Lack of portfolio customization
 Choice Overload
 No Control Over Costs
 No Guaranteed Returns

By Dr. Sudeshna Dutta

  Classification of Mutual Funds

 Open Ended Fund

By the structure
of the fund  Close Ended Fund
 Interval Fund

Mutual Funds By the management  Actively managed funds

of the portfolio  Passive funds

By the investment  Equity Schemes

universe  Debt Schemes
 Hybrid Schemes
 Solution Oriented Schemes
 Other Schemes

 Market Capitalisation
𝑵𝑵𝑵𝑵𝑵𝑵 𝑵𝑵 𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵 𝑵𝑵𝑵𝑵𝑵𝑵 × 𝑵𝑵𝑵
 Large Cap: 1st – 100th company
 Mid Cap: 101st – 250th company
 Small Cap: 251st company onwards

 Equity Schemes:
 Multi cap fund
 Flexi cap Fund
 Large cap fund
 Mid cap fund
 Small cap fund
 Dividend yield fund
 Value fund or Contra fund
 Focused fund
 Sectoral / thematic
 ELSS
 Debt Funds:
 Overnight fund
 Liquid fund

By Dr. Sudeshna Dutta

  Ultra short duration fund
 Money market fund
 Dynamic fund
 Corporate bond fund
 Credit risk fund
 Banking and PSU fund
 Gilt fund
 Hybrid Funds:
 Conservative hybrid fund
 Balanced hybrid fund or Aggressive fund
 Dynamic asset allocation fund or Balanced advantage fund
 Multi asset allocation fund
 Arbitrage fund
 Equity savings fund
 Solution Oriented funds:
 Retirement fund
 Children’s fund
 Other Funds:
 Index funds / ETFs
 FoFs (Overseas / Domestic)

By Dr. Sudeshna Dutta

 LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA
 Structure of Mutual Funds in India

 Key features of a mutual fund are:

 It is established as a trust,
 It raises money through sale of units to the public or a section of the
public,
 The units are sold under one or more schemes,
 The schemes invest in securities (including money market instruments)
or gold or gold-related instruments or real estate assets.
 Sponsors
 The application to SEBI for registration of a mutual fund is made by
the sponsor.
 Invest in the capital of AMC.
Eligibility criteria for Sponsor:
 Should be carrying on business in financial services for 5 years,
 Should have positive net worth for each of those 5 Years,

By Dr. Sudeshna Dutta

  Latest net worth should be more than the capital of the AMC,
 Should have earned profits, after providing for depreciation and
interest, in 3 of the previous 5 years,
 Needs to have a minimum 40% shareholding in the capital of the AMC
 Sponsors have to contribute a minimum of Rs. 1,00,000 as initial
contribution to the corpus of the mutual fund.
 Board of Trustees
SEBI expects Trustees to perform a key role in ensuring legal compliances
and protecting the interest of investors. Accordingly, various General Due
Diligence and Special Due Diligence responsibilities have been assigned to
them.
 Sponsor will have to appoint at least 4 trustees.
 If a trustee company has been appointed, then that company would
need to have at least 4 directors on the Board.
 At least 2/3rd of the trustees or directors on the Board of the trustee
company, would need to be independent trustees (not associated
with the sponsor).
 No person who is appointed as a trustee of a mutual fund shall be
eligible to be appointed as trustee of any other mutual fund.
 Prior approval of SEBI needs to be taken, before a person is appointed
as Trustee.
 Mutual Fund Trust
 A mutual fund is constituted in the form of a trust,
 The instrument of trust is in the form of a deed.
 Asset Management Company - 1
Day to day operations of asset management are handled by the AMC. As
per SEBI regulations:
 Directors of the AMC should have adequate professional experience,
 Directors and key personnel of the AMC should not have been found
guilty of moral turpitude (tur-pi-tude = অসচ্চরি ত্রত ) or convicted of
an
economic offence or violation of any securities laws,
 Key personnel of the AMC should not have worked for any asset
management company or mutual fund or any intermediary during the

By Dr. Sudeshna Dutta

 period when its registration was suspended or cancelled at any time by
SEBI.
 Prior approval of the trustees is required, before a person is appointed
as director on the board of the AMC,
 At least 50% of the directors should be independent directors,
 The AMC needs to have a minimum net worth of Rs. 50 crore.
 The AMC has to take all reasonable steps and exercise due diligence,
 The appointment of an AMC can be terminated by a majority of the
trustees or by 75% of the Unit-holders.
 Any change in the AMC is subject to prior approval of SEBI and the Unit-
holders.
 Custodian
The custodian has custody of the assets of the fund.
SEBI regulations stipulates that:
 If the sponsor control 50% or more of the shares of a custodian, or if
50% or more of the directors of a custodian represent the interest of
the sponsor, then that custodian cannot appointed for the mutual fund
operation of the sponsor,
 All custodians need to register with SEBI,
 Appointment of Custodian is done by the Trustee.

 Register and Transfer Agent (RTA)

The RTA maintains investor records. Their Investor Service Centers (ISCs),
perform a useful role in handling the documentation of investors.
 Appointment of RTA is done by the AMC
 AMC can choose to handle this activity in-house
 All RTAs need to register with SEBI
 AMFI
Association of Mutual Funds in India (AMFI) is the association of all the
registered Asset Management Companies.
A major role of AMFI involves the registration of mutual fund distributors,
by allotting them AMFI Registration Number (ARN).

By Dr. Sudeshna Dutta

 An important point to note here is that AMFI is neither a regulatory body
nor a Self-Regulatory Organisation (SRO).
Role and Function of AMFI
 To define and maintain high professional & ethical standards for
Industry,
 To recommend and promote best business practices and code of
conduct,
 To interact with the SEBI and to represent to SEBI,
 To represent to the Government, RBI and other,
 To develop a cadre of well-trained Agent distributors and to implement
a program of training and certification,
 To undertake nationwide investor awareness program,
 To disseminate information on Mutual Fund Industry and to undertake
studies and research bodies for industry.

By Dr. Sudeshna Dutta

 LEGAL AND REGULATORY FRAMEWORK
 Role of Regulators in India
 Reserve Bank of India (RBI) that regulates the banking system, as well
as money markets;
 Securities and Exchange Board of India (SEBI) that regulates the
securities markets;
 Insurance Regulatory and Development Authority of India (IRDAI)
that regulates the insurance market;
 Pension Fund Regulatory and Development Authority of India
(PFRDA) that regulates the pension market.
These regulators come under the purview of the Ministry of Finance.
 Role of SEBI
SEBI regulates Securities markets, mutual funds, depositories, custodians
and registrars and transfer agents (RTAs) in the country,
The regulations cover three important aspects:
 Disclosures by issuers of securities, e.g. companies that issue shares or
debentures, and mutual funds that issue mutual fund units,
 Efficiency of transactions in the securities markets,
 Low transaction costs.
Apart from the above, various other areas also warrant regulations:
 Deliberate speculation in stock markets,
 Insider trading,
 Excessive risks taken by mutual funds,
 Inadequate collateral by issuers of debt securities.
Regulatory reforms by SEBI
Different types of Regulation Categories are:
 Scheme related documents
 New products
 Risk management system
 Disclosures and reporting norms
 Governance norms

By Dr. Sudeshna Dutta

  Net Asset Value (NAV)
 Valuation
 Loads, fees and expenses
 Dividend distribution procedure
 Investment by schemes
 Advertisements
 Investor rights and obligations
 Certification and registration of intermediaries
 Categorisation of mutual fund schemes
 Segregated Portfolio
 Mutual Funds Regulations
 The applicable guidelines for mutual funds are set out in SEBI (Mutual
Funds) Regulations, 1996, as amended from time to time.
 RBI regulates the money market and foreign exchange market in the
country. Therefore, mutual funds need to comply with RBI’s regulations
regarding investment in the money market, investments outside the
country, investments from people other than Indians resident in India,
remittances (inward and outward) of foreign currency etc.,
 Stock Exchanges are regulated by SEBI. Every stock exchange has its
own listing, trading and margining rules. Mutual Funds need to comply
with the rules of the exchanges with which they choose to have a
business relationship i.e. for listing the units of the mutual fund
schemes launched by them.
 Investment restrictions & portfolio diversification norms for MF schemes
The regulator’s objective behind setting these limits is:
 To ensure mitigation of risks in the scheme and protecting the
investor’s interests,
 The restrictions specified apply at the time of making the investment.
 These restrictions are:
 (A) General Restrictions
 The Mutual Fund will buy and sell securities on delivery basis,
 The Mutual Fund shall not advance any loans,

By Dr. Sudeshna Dutta

  The scheme will not invest in the unlisted or privately placed securities
of any associate or group company of the sponsor. Investment in the
listed securities of the group companies of the sponsor will be limited
to 25% of the net assets.
 The scheme may invest in other schemes of the same Mutual Fund or
other Mutual subject to a maximum of 5% of the net asset value of the
scheme. No fees will be charged on such investments. This does not
apply to Fund of Funds.
 The Mutual Fund under all its schemes shall not own more than 10%
of a company’s paid up capital bearing voting rights.
(B) Restrictions pertaining to investment in Debt Securities
 A mutual fund scheme shall not invest more than 10% of its NAV in
rated debt instruments issued by a single issuer. Such investment limit
may be extended to 12% of the NAV of the scheme with the prior
approval of the Board of Trustees and Board of Directors of the AMC.
This restriction is not applicable to Government securities.
 The Mutual Fund Schemes may invest in unlisted non-convertible
debentures up to a maximum of 10% of the debt portfolio of the
scheme,
 Parking of funds in Short-term deposits with all scheduled commercial
banks shall be limited to 15% of the net assets of the scheme. This can
be raised to 20% with the approval of the trustees. No management
fee will be charged for such investments by the scheme.
(C) Restrictions pertaining to investment in Equity
 All investments by a mutual fund scheme in equity shares and equity
related instruments shall only be made provided such securities are
listed or to be listed,
 The ELSS notification requires that atleast 80% of the ELSS funds should
be invested in equity and equity-linked securities,
 The Scheme shall not invest more than 10% of its NAV in the equity
shares and equity related instruments of a company.
(D) Restrictions pertaining to investment in REITs and InvITs
No mutual fund under all its schemes shall own more than 10% of units
issued by a single issuer of REIT and InvIT; and
 A mutual fund scheme shall not invest –

By Dr. Sudeshna Dutta

  more than 10% of its NAV in the units of REIT and InvIT; and
 More than 5% of its NAV in the units of REIT and InvIT issued by a single
issuer. The limits mentioned above are not applicable for investments
in case of index funds or sector or industry specific scheme pertaining
to REIT and InvITs.
 SEBI Advertisement Code for Mutual Funds
Advertisement issued by mutual funds shall be in terms of 6th Schedule of
SEBI (Mutual Fund) Regulations, 1996.
 Performance advertisement of mutual fund schemes shall be provided
in terms of CAGR for the past 1 year, 3 years, 5 years and since
inception.
 Point-to-point returns on a standard investment of Rs. 10,000 shall also
be shown in addition to CAGR for the scheme to provide ease of
understanding to retail investors.
 For the sake of standardization, a similar return in INR and by way of
CAGR must be shown.
 Celebrity endorsements of Mutual Funds at industry level
 SEBI has permitted celebrity endorsements at industry level for the
purpose of increasing awareness of Mutual Funds as a financial
product category,
 The celebrity endorsements shall not promote a scheme of a particular
Mutual Fund or be used as a branding exercise of an AMC,
 Expenses towards such celebrity endorsements shall be limited to the
amounts that are aggregated by Mutual Funds at industry level for the
purpose of conducting investor education and awareness initiatives,
 Prior approval of SEBI shall be required.
 SEBI Guidelines for Circulation of Unauthenticated News
SEBI has issued guidelines to all market intermediaries relating to
circulation of unauthenticated news through various modes of
communication.
 Investors’ Rights & Obligations:
Right to beneficial ownership
 Investor can ask for a Unit Certificate for his Unit-holding.

By Dr. Sudeshna Dutta

  Investors also have the option to receive allotment of mutual fund units
of open ended and closed end schemes in their demat account.
Right to change the distributor

 Investors can choose to change their distributor or opt for direct

investing.

 This needs to be done through a written request by the investor.

Right to inspect documents
 Unit-holders have the right to inspect key documents such as the Trust
Deed, Investment Management Agreement, Custodial Services
Agreement, RTA agreement and Memorandum & Articles of
Association of the AMC.

 But unitholders cannot ask for a research report based on which some
investment decisions have been taken off.
Right to appoint nominees

 The investors can appoint upto 3 nominees, who will be entitled to

the ‘Units’ in the event of the demise of the investors.
 At the time of additional purchase if different nominee structure has
been provided, that will supersede the old nomination.
Right to pledge mutual fund units
 Investors can pledge their mutual fund units.
 This is normally done to offer security to a financier.
Right to grievance redressal

 SEBI has mandated that the status of complaints redressed should be

published by each AMC in their annual report.

 Pending investor complaints can be a ground for SEBI to refuse

permission to the AMC to launch new schemes.
Rights of investors in context of change in Fundamental Attributes

 If there is a change in the fundamental attributes of a mutual fund

scheme, then the unitholders are provided the option to exit at the
prevailing NAV without any exit load.
 This exit window has to be open for at least 30 days.

By Dr. Sudeshna Dutta

 Rights to terminate appointment of an AMCs
 75% of unit holders can terminate the appointment of an AMC. Also,
75% of the unitholders (unitholding) 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.
Right to unclaimed amounts

 AMC is expected to make a continuous effort to remind the investors

through letters to claim their dues.
 The Annual Report has to mention the unclaimed amount and the
number of such investors for each scheme.
 If the investor claims the money within 3 years, then payment is based
on prevailing NAV i.e. after adding the income earned on the
unclaimed money.
 If the investor claims the money after 3 years, then payment is based
on the NAV at the end of 3 years.
 Due Diligence Process by AMCs for Distributors of Mutual Funds
 The AMCs are vested with the responsibility of regulating the practices
of the distributors.
 AMCs are required to conduct a due diligence of their distributors.
 SEBI has issued a circular regarding the process for carrying out such an
exercise.
 This has been discussed section in Chapter 6 in detail.
 Investor Grievance Redress Mechanism
 In the event of any issue with the AMC or mutual fund scheme, the
investor can first approach the investor service centre. If the issue is
not redressed, even after taking it up at senior levels in the AMC, then
the investor can write to SEBI with the complaint details.
 SEBI Complaint Redress System (SCORES) is a web based centralized
grievance redress system of SEBI. SCORES enables investors to lodge,
follow up on their complaints and track the status of redressal of such
complaints online on the website (http://scores.gov.in).

By Dr. Sudeshna Dutta

  An investor, who is not familiar with SCORES or does not have access
to SCORES, can lodge complaints in physical form at any of the offices
of SEBI.
 Entities against which complaints are handled by SEBI include:
 Listed companies and or, registrar & transfer agents
 Brokers and or, stock exchanges
 Depository participants and or, depository
 Mutual funds
 Portfolio Managers
 Other entities (KYC Collective investment scheme, Merchant banker,
Credit rating, Foreign portfolio investor etc.)
 AMFI Code of Ethics (ACE)
 The AMFI Code of Ethics (ACE) 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.
 SEBI (Mutual Funds) Regulation, 1996 requires all Asset Management
Companies and Trustees to abide by the Code of Conduct as specified
in the 5th Schedule to the Regulation.
 AMFI Guidelines & Norms for Intermediaries (AGNI)
 AMFI has also framed 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.
 In the event of breach of the Code of Conduct by an intermediary, the
following sequence of steps is initiated by AMFI:

 Write to the intermediary (an explanation within 3 weeks),

 In case of non-satisfactory explanation received within 3 weeks, AMFI
will issue a warning letter indicating that any subsequent violation will
result in cancellation of AMFI registration.

 If there is a proved second violation by the intermediary, the

registration will be cancelled, and intimation sent to all AMCs.
 The intermediary has a right of appeal to AMFI.

By Dr. Sudeshna Dutta

 SCHEME RELATED INFORMATION
 Scheme Information Document (SID)
 Which has details of the particular scheme
 Statement of Additional Information (SAI),
 Which has statutory information about the mutual fund or AMC that is
offering the scheme.
 Mandatory Documents
 Both documents are prepared in the format prescribed by SEBI and
submitted to SEBI.
 While SEBI does not approve or disapprove the Scheme Related
Documents, it gives its observations,
 Draft SID and SAI are public documents, available for viewing on SEBI’s
website.
 The final documents (after incorporating SEBI’s observations) have to
be hosted on AMFI’s website 2 (TWO) days before the issue opens.
 Investors need to note that their investments are governed by the
principle of caveat emptor i.e. let the buyer beware.
A. Scheme Information Document
 The Scheme Information Document (SID) sets forth concisely the
information about the scheme that a prospective investor ought to
know before investing.
B. Statement of Additional Information
 Statement of Additional Information (SAI), has statutory information
about the mutual fund or AMC that is offering the scheme.
 Therefore, a single SAI is relevant for all the schemes offered by a
mutual fund.
C. Key Information Memorandum
 While an investor is expected to read all the scheme related
documents, circulation of the same along with the application forms is
too difficult and costly, especially if the printed forms are to be
distributed.
 KIM is essentially a summary of the SID and SAI.

By Dr. Sudeshna Dutta

  It contains the key points of these documents that are essential for the
investor to know to make a decision on the suitability of the investment
for their needs.
 It is more easily and widely distributed in the market.
 As per SEBI regulations, every application form is to be accompanied
by the KIM.
Addendum
While the SID, SAI and KIM need to be updated periodically, the interim
changes are updated through the issuance of such addendum. The
addendum is considered to be a part of the scheme related documents,
and must accompany the KIM.
 Updation of Scheme Documents
 If a scheme is launched in the first 6 months of the financial year (say,
May 2019), then the first update of the SID is due within 3 months of
the end of the financial year (i.e. by June 2020). If a scheme is launched
in the second 6 months of the financial year (say, December 2019),
then the first update of the SID is due within 3 months of the end of
the next financial year (i.e. by June 2021). Thereafter, SID is to be
updated every year.
 Regular update of SAI has to be done by the end of 3 months of every
financial year.
 KIM is to be updated at least once a year.
 Non-Mandatory Disclosures
(Fund Factsheet)
This document is extensively used by different entities to access
information about the various schemes of the mutual fund. These entities
includes:
 Investors,
 Fund distributors,
 Fund rating agencies, Research analysts, Media and others
It is not a regulatory requirement to publish the monthly fact sheet, it is a
market practice followed by all the fund houses, on a voluntary basis.

By Dr. Sudeshna Dutta

 FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES
 The role and importance of mutual fund distributors
 Distributor Vs. Fund Manager
 Role of Fund Manager
 Role of Mutual fund distributors
 Different kinds of mutual fund distributors
 Individual players
 Non-individual entities
 Partnerships,
 Regional Distributors,
 National Distributors,
 NBFCS,
 Banks,
 Stock brokers etc.
The different models of online distribution
 Online Channel Partners,
 Stock Exchange Platforms,
 MF Utilities,
 Computer-based and Mobile-based Apps offered by distributors,
 Electronic platforms created by the AMCs.
 Modes of distribution
 Traditional physical paper-based transactions,
 New age, digital mode (online) of transactions,
 Hybrid mode.
 Pre-requisites to become Distributor of a Mutual Fund
Step 1: Obtaining NISM Certification -

 The individual needs to pass the NISM certification examination

mandated by SEBI,
 For persons who have attained the age of 50 years or who have at least
10 years of experience in the securities markets in the sale and/ or

By Dr. Sudeshna Dutta

 distribution of mutual fund products as on May 31, 2010, can obtain
the certification either by passing the NISM certification examination
or qualifying for Continuing Professional Education (CPE) by obtaining
such classroom credits as may be specified by NISM from time to time.
Step 2: Know Your Distributor Requirement
Step 3: Obtaining AMFI Registration Number
Step 4: Empanelment with AMCs

 Revenue for a mutual fund distributor

 Transaction linked commission:
When an individual transacts on the stock exchange through a stock
broker to buy or sell a stock or Mutual Fund, the individual pays
brokerage commission to the broker.
 AUM-linked commission:
The AUM-linked commission is payable on an on-going basis, so long
as the investor remains invested. This is called Trail Commission.
 Carve out:
Up-fronting of trail commission or payment of expected future trail
commission upfront at the time of the transaction. Up-fronting of trail
commission is allowed only in case of inflows through SIPs of upto Rs.
5,000/- p.m. for an investor investing in mutual fund schemes for the
first time.
Carve out means up-fronting of trail commission, based on SIP inflows,
shall be upto 1 percent payable yearly in advance for a maximum period
of three years.
 Concept of Trail Commission
 Trail commission is calculated as a percentage of the net assets
attributable to the Units sold by the distributor,
 The commission payable is calculated on the daily balances and paid
out periodically to the distributor as per the agreement entered into
with AMC,
 The trail commission is normally paid by the AMC on a quarterly basis
or monthly basis,

By Dr. Sudeshna Dutta

  Unlike products like insurance, where agent commission is paid for a
limited number of years, a mutual fund distributor is paid trail
commission for as long as the investor’s money is held in the fund.
 Trail commission for the day = (AUM × commission rate p.a./365)
 Additional commission for promoting mutual funds in small towns
With a view to promoting mutual funds in smaller towns, SEBI has allowed
mutual funds to charge additional expenses, which can be used for
distribution related expenses, including distributor commission.
 Transaction Charges
 SEBI has allowed a transaction charge per subscription of Rs. 10,000/-
and above to be paid to distributors of the mutual fund products,
 In case of investments through SIP, the Transaction Charge(s) is
deducted in 4 equal instalments,
 The transaction charge, if any, is deducted by the AMC from the
subscription amount and paid to the distributor; and the balance
amount is invested,
 Distributors have the option of opting out of charging transaction
charges.
 Applicability of GST on distributors commission
 A mutual fund distributor, who has registered and obtained a GST
number would be required to raise an invoice for the commission, and
pay the GST to Government,
 As per Section 9(4) of the CGST Act and Section 5(4) of the IGST Act,
the registered recipient is liable to pay tax on procurements from
unregistered suppliers under reverse charge mechanism,
 However, in the reverse charge mechanism, the recipient of the goods
and services pays the said tax to the Government,
 The AMC / MF is liable to pay GST under reverse charge on commission
paid to unregistered distributors.
 Commission Disclosure mandated by SEBI
SEBI has mandated Mutual Funds/AMCs to disclose on their respective
websites the total commission and expenses paid to distributors who
satisfy one or more of the following conditions with respect to retail and
HNI investors (non-institutional):
 Multiple point of presence (More than 20 locations)

By Dr. Sudeshna Dutta

  AUM raised over Rs. 100 crore across industry in the non-institutional
category but including high networth individuals (HNIs).
 Commission received of over Rs. 1 crore p.a. across industry
 Commission received of over Rs. 50 lakhs from a single Mutual
Fund/AMC.
Mutual Funds/AMCs shall also submit the above data to AMFI. AMFI shall
disclose the consolidated data in this regard on its website.
 Due Diligence Process by AMCs for Distributors of Mutual Funds
Further, SEBI has mandated AMCs to put in place a due diligence process
to regulate distributors who qualify (as per previous slide). At the time of
empanelling distributors and during the period i.e. review process, mutual
funds/AMCs have to undertake a due diligence process to satisfy ‘fit and
proper’ criteria that incorporate, amongst others, the following factors:
 Business model, experience and proficiency in the business.
 Record of regulatory/statutory levies, fines and penalties, legal suits,
customer compensations made; causes for these and resultant
corrective actions taken.
 Review of associates and subsidiaries on above factors.
 Organizational controls to ensure that the following processes are
delinked from sales and relationship management processes and
personnel:
 Customer risk / investment objective evaluation.
 MF scheme evaluation and defining its appropriateness to various
customer risk categories.
 Nomination facilities to Distributors and Payment of Commission to
Nominee
 The AMCs provide nomination facility to the mutual fund distributors
at the time of empanelment,
 A nominee/legal heir need not be an ARN holder to claim and receive
the commission,
 Commission can be paid to the nominee/legal heir only for those assets
which were procured by the deceased MFD during the validity of his
ARN prior to his/her demise.

By Dr. Sudeshna Dutta

  The future expiry of the ARN of the deceased agent/distributor post his
demise is not taken into account for continued payment of upfront and
trail commission to the nominee/legal heir.
 Commission can be paid to the nominee till AUM under the ARN of the
deceased ARN holder becomes nil.
 Change of distributor
 The mutual fund industry allows the investor to change the distributor,
without specifying any reason,
 In case of change of distributor code in a folio, no commission would
be payable to any distributor, neither the old one nor the new one,
 Investors can choose to change their distributor or go direct,
 If the change of distributor code is initiated by the investor on account
of voluntary cessation of business by the distributor, the new
distributor would get the trail commission.

By Dr. Sudeshna Dutta

 NET ASSET VALUE, TOTAL EXPENSE RATIO AND PRICING OF UNITS
 Fair Valuation Principles
 In order to ensure such a fair treatment to all investors, SEBI has laid
down certain fair valuation principles specified in the 8th Schedule of
SEBI (Mutual Funds) Regulations, 1996,
 The asset management companies are required to compute and carry
out valuation of investments made by its scheme(s) in accordance with
the investment valuation norms,
 10 valuation principles as laid out by SEBI.
 Valuation guidelines laid down by SEBI and AMFI
 The securities shall be valued at the last quoted closing price on the
stock exchange,
 When the securities are traded on more than one recognised stock
exchange, the securities shall be valued at the last quoted closing price
on the stock exchange where the security is principally traded. The
lowest price will be considered.
 When a security is not traded on any stock exchange on a particular
valuation day, the value at which it was traded on the selected stock
exchange or any other stock exchange, as the case may be, on the
earliest previous day may be used provided such date is not more than
30 days prior to the valuation date.
 Valuation guidelines laid down by SEBI and AMFI
 When a security is not traded on any stock exchange for a period of 30
days prior to the valuation date, the scrip must be treated as a ‘non-
traded’ scrip.
 Non-traded securities shall be valued “in-good faith” by the AMC on
the basis of appropriate valuation methods based on the principles
approved by the Board of the asset management company.
 The gold held by a gold exchange traded fund scheme shall be valued
at the AM fixing price of London Bullion Market Association (LBMA) in
US dollars per troy ounce for gold having a fineness of 995.0 parts per
thousand.

By Dr. Sudeshna Dutta

  Net Assets of Scheme:
Investors have bought 20 crore units of a mutual fund scheme at Rs. 10
each. :
 The scheme has thus mobilized: (20 Crs. units × Rs. 10 per unit) = Rs.
200 Crs.
 An amount of Rs. 140 Crs. invested in equities, has appreciated by 10%.
 The balance amount of Rs. 60 Crs., mobilized from investors, was
placed in bank deposits.
 Interest and dividend received by the scheme is Rs. 8 Crs.,
 Scheme expenses paid is Rs. 4 Crs., while a further expense of Rs. 1 Cr.
is payable.
The unit-holders’ funds in the scheme is commonly referred to as “Net
Assets”.
 In the market, when people talk of NAV, they refer to the value of each
unit of the scheme. NAV = Unit-holders’ Funds in the Scheme ÷ No. of
Units
 In the above example, it can be calculated as:
Market Value of Equities (140 × 110%) 154 Crore
Add: Principal Value of Bank Deposits 60 Crore
Add: Interest & Dividend earned 8 Crore
Less: Expenses incurred 4 Crore
Less: Expenses Payable 1 Crore
Net Assets of the Scheme as on date: 217 Crore
When people talk of NAV, it is Rs. (217 ÷ 20) = Rs. 10.85 per unit.
 Profitability metric
The profitability metric as being equal to:
(A)+ Interest income
(B) + Dividend income
(C) + Realized capital gains
(D) + Valuation gains
(E) – Realized capital losses
(F) – Valuation losses
(G) – Scheme expenses

By Dr. Sudeshna Dutta

  Calculate the NAV given the following information:
 Value of stocks: Rs. 150 cr,
 Value of bonds: Rs. 67 cr
 Value of money market instruments: Rs. 2.36 cr,
 Dividend accrued but not received: Rs. 1.09 cr,
 Interest accrued but not received: Rs. 2.68 cr
 Fees payable: Rs. 0.36 cr,
 No. of outstanding units: 1.90 cr.
Answer (i) Rs. 117.25 per unit.
(ii) Calculate the NAV given the following information:
 Value of stocks: Rs. 230 cr,
 Value of money market instruments: Rs. 5 cr,
 Dividend accrued but not received: Rs. 2.39 cr,
 Amount payable on purchase of shares: Rs. 7.5 cr
 Amount receivable on sale of shares: Rs. 2.34 cr
 Fees payable: Rs. 0.41 cr,
 No. of outstanding units: 2.65 cr
Answer (ii) Rs. 87.48 per unit
 Mark to Market
The process of valuing each security in the investment portfolio of the
scheme at its market value is called ‘mark to market’ i.e. marking the
securities to their market value
Why is this done?
 If investments are not marked to market, then the investment portfolio
will end up being valued at the cost at which each security was bought,
 Investors buy or sell units on the basis of the information contained in
the NAV,
 Helps in assessing the performance of the scheme / fund manager.
 Total Expenses in Mutual Fund Scheme
 Investment and Advisory Fees are charged to the scheme by the AMC,

By Dr. Sudeshna Dutta

  In addition to the investment and advisory fee, the AMC may charge
the mutual fund scheme with Recurring Expenses.
 Marketing and selling expenses including agents’ commission,
 Brokerage and transaction cost,
 Audit fees,
 Costs related to investor communication,
 Insurance premium paid by the fund,
 Costs of statutory advertisements etc.
Any expense other than investment advisory fee and recurring expenses
shall be borne by the asset Management Company or trustee or sponsors.
 Recurring Expenses Limits
In case of fund of funds scheme
 Investing in liquid schemes, index fund scheme and exchange traded
funds, the total expense ratio of the scheme including weighted
average of the total expense ratio levied by the underlying scheme(s)
shall not exceed 1% of the daily net assets of the scheme,
 Investing a minimum of 65% of AUM in equity oriented schemes as per
scheme information document, the total expense ratio of the scheme
including weighted average of the total expense ratio levied by the
underlying scheme(s) shall not exceed 2.25% of the daily net assets of
the scheme.

 Investing in schemes other than as specified above, the total expense

ratio of the scheme including weighted average of the total expense
ratio levied by the underlying scheme(s) shall not exceed 2% of the
daily net assets of the scheme.
In case of an index fund scheme or exchange traded fund

 the total expense ratio of the scheme including the investment and
advisory fees shall not exceed 1% of the daily net assets.

By Dr. Sudeshna Dutta

 In case of other open ended schemes

In case of close ended and interval schemes,

 The total expense ratio of equity oriented scheme(s) shall not exceed
1.25% of the daily net assets of the scheme,
 the total expense ratio of close ended and interval scheme(s) other
than schemes specified in clause d (i) above shall not exceed 1% of the
daily net assets of the scheme.
 Other Charges
In addition to the above mentioned limits, the following expenses may be
charged to the scheme:
 Brokerage and transaction cost - for the purpose of execution of trade
 Additional incentive for B30 cities
 Mutual funds are also allowed to charge any additional expenses,
incurred under the various heads of permitted recurring expenses and
investment and advisory fees, not exceeding 0.05% of daily net assets
of the scheme. However, the schemes wherein exit load is not
levied/not applicable, the above mentioned additional expenses shall
not be charged to the schemes.
 AMCs need to prominently disclose on a daily basis, the TER (scheme
wise, date wise) of all schemes under a separate head – “Total Expense
Ratio of Mutual Fund Schemes” on their website and on the website of
AMFI in downloadable spreadsheet format.
 Dividends & Distributable Reserves
 SEBI guidelines stipulate that dividends can be paid out of Distributable
Reserves.
By Dr. Sudeshna Dutta
  All the profits earned are treated as available for distribution,
 Valuation gains are ignored. But valuation losses need to be adjusted
against the profits,
 That portion of sale price on new units, which is attributable to
valuation gains, is not available as a distributable reserve.
 Concept of Entry and Exit Load and its impact on NAV
A distinctive feature of open ended schemes is the ongoing facility to
acquire new units from the scheme (“sale” transaction) or sell units back
to the scheme (“re-purchase” transaction).
 The difference between the Sale Price and NAV is called “Entry Load”,
 The difference between the NAV and Re-purchase price is called the
“Exit Load”,
 Investors would be incentivized to hold their units longer, For instance,
load would be 4 percent if the investor were to exit in year 1, 3 percent
if the investor were to exit in year 2, and so on. Such structures of load
are called “Contingent Deferred Sales Charge (CDSC)”.
 SEBI has banned entry loads w.e.f. 1st August 2009,
 Exit loads / CDSC 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.
 Key Accounting and Reporting Requirements
 The accounts of the schemes need to be maintained distinct from the
accounts of the AMC. The auditor for the AMC has to be different from
that of the schemes,
 Norms are prescribed on when interest, dividend, bonus issues, rights
issues etc. should be reflected for in the accounts,
 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.

By Dr. Sudeshna Dutta

  NAV, Total expense ratio and pricing of units for the Segregated
Portfolio
 To ensure fair treatment to all investors in case of a credit event and to
deal with liquidity risk, SEBI has permitted creation of segregated
portfolio of debt and money market instruments by mutual funds
schemes.
 AMC shall not charge investment and advisory fees on the segregated
portfolio,
 TER (excluding the investment and advisory fees) can be charged, on a
pro-rata basis only upon recovery of the investments in segregated
portfolio,
 The Net Asset Value (NAV) of the segregated portfolio shall be declared
on a daily basis.

By Dr. Sudeshna Dutta

 TAXATION
 Applicability of taxes in respect of mutual funds

Income earned by mutual fund schemes:

As per the prevailing tax laws in India, a mutual fund’s income is exempt
from income tax, since mutual funds are constituted as trusts in India for
the benefits of the unitholders. Section 10(23)(D) of the Income Tax Act
exempts all the income earned by the mutual fund schemes from any tax.
Income earned by the investor from investment in mutual fund units:
The tax rates would vary as under –
 Type of income
 Type of mutual fund schemes
 Type of investor
 Capital Gains (Mutual Fund Types)

By Dr. Sudeshna Dutta

  Capital Gains (Holding Period)

 Capital Gains (Tax Rate)

 Capital Gains (Other Points)

 In addition to the above, surcharge and cess is applicable. The
surcharge is calculated on the base tax and the cess is calculated on the
aggregate of base tax and surcharge,
 Equity mutual funds were exempt from long term capital gains tax
earlier. In the Union Budget of the year 2018, this was changed,
 Exemption upto Rs. 1 lakh: In case of long term capital gains arising
out of equity shares and equity-oriented mutual funds, the tax is
applicable only on the capital gains above Rs. 1 lakh. The first Rs. 1 lakh
worth of long term capital gain from this category is tax-exempt.
 Grandfathering of capital gains: This meant that the capital gains
earned till January 31, 2018 would not be taxable

By Dr. Sudeshna Dutta

  Indexation
Assume that an investor invested a sum of Rs. 1,00,000 in a debt fund in
the year 2015, and sold the same after 3 years. He got Rs. 1,25,000 as the
redemption proceeds. The capital gain is Rs. 25,000 on an investment of
Rs. 1,00,000 in 3 years.
Though the actual gain is Rs. 25,000; tax is not payable on the entire gain,
due to the benefit of indexation.

 Indexed cost of acquisition =

Actual cost of acquisition × [CII in the year of sale / CII in the year of
purchase]

 In our example, indexed cost of acquisition =

Rs. 1,00,000 X [280/254] = Rs. 1,10,236.221
 The indexed capital gain would be =
Rs. 14,763.78 (Rs, 1,25,000.00 – Rs. 1,10,236.22)

 The rate of tax on the indexed capital gains is 20%, and thus the tax
liability would be Rs. 2,952.76.
 Dividend income
 From Financial Year 2020-2021 (AY 21-22), dividends is taxable in the
hands of the recipient at the applicable tax rate,
 Tax on dividend would be a function of the applicable rate of tax based
on total income for the year, and hence the tax rate goes up for those
in higher income,
 The dividend income would be tax exempt for investors in various tax-
exempt categories, for example: charitable trusts, mutual fund
schemes and individuals in the tax exempt slab.
 Setting off of Capital Gains and Losses under Income Tax Act
 Capital loss, short term or long term, cannot be set off against any
other head of income (e.g. salaries),
 Short term capital loss is to be set off against short term capital gain or
long term capital gain,
 Long term capital loss can only be set off against long term capital gain.
 Bonus Stripping: Suppose an investor buys units of a scheme at Rs. 30.
Thereafter, the scheme declares a 1:1 bonus issue. At this stage, if the

By Dr. Sudeshna Dutta

 investor sells the original unit at Rs. 15. However, such capital loss is not
available for setting off against capital gains, if the original units were
bought within a period of 3 months prior to the record date for the bonus
issue and sold off within a period of 9 months after the record date.
 Securities Transaction Tax
 When an investor sells units of an equity fund in the stock exchange,
or offers them for re-purchase to the fund, he will have to incur
Securities Transaction Tax (STT),
 STT is not applicable on purchase of units of an equity scheme. It is
also not applicable to transactions in debt securities or debt mutual
fund schemes.
 Tax benefit under Section 80C of the Income Tax Act
 Certain mutual fund schemes, known as Equity Linked Savings Schemes
(ELSS) are eligible for deduction u/s 80C of the Income Tax Act. The
scheme invests in equity shares,
 The benefit is available upto Rs. 1.50 lacs per year per taxpayer in case
of individuals and HUFs,
 The scheme has a lock-in period of 3 years from the date of
investment,
 If one is investing in this scheme through SIP, each investment would
be locked-in from the date of the respective investment for a period of
3 years,
 The tax benefit would be available to the first holder, in case of a joint
holding.
 Tax Deducted at Source
 There is no TDS on re-purchase proceeds to resident investors,
 For certain cases of non-resident investments (NRI), the same is
applicable,
 The TDS applicable for non-resident investors is the lower of the rate
specified in the income tax regulations or the tax specified in the DTAA
of the country where the investor is resident.
 In case of dividends from mutual fund schemes, even for resident
Indians, TDS is applicable,
 The tax is required to be deducted at 10% on the dividend amount if it
exceeds Rs. 5,000.

By Dr. Sudeshna Dutta

  Applicability of GST
 AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes
within the limits prescribed under SEBI (Mutual Fund) Regulations.
These are:
 On investment management and advisory fees,
 On all the fees other than investment and advisory fees,
 On brokerage and transaction cost,
- within the maximum limit of TER.
 GST on exit load, if any, shall be deducted from the exit load and the
net amount shall be credited to the scheme.
 The commission payable to the distributors of mutual funds may be
subject to GST, as applicable in case of the ARN holder. Such tax cannot
be charged to the scheme.

By Dr. Sudeshna Dutta

 INVESTOR SERVICES
 The NFO process
Steps Leading to NFO:
 AMC decides on a scheme to take to the market,
 AMC prepares the Scheme Information Document (SID) for the NFO
and needs to approved by the Trustees and the Board of Directors of
the AMC,
 AMC Files the draft Offer Document with SEBI. SEBI does not approve
or disapprove Offer Documents, it gives its observations,
 AMC decides on a suitable time-table for the issue
 AMC launches its advertising and public relations campaigns to make
investors aware of the NFO
 AMC holds events for intermediaries.
 Offer Documents and Application Forms are distributed to market
intermediaries.
Three dates are relevant for the NFO of an open-ended scheme:
 NFO Open Date – This is the date from which investors can invest in
the NFO
 NFO Close Date – This is the date upto which investors can invest in the
NFO
 Scheme Re-Opening Date – This is the date from which the investors
can offer their units for re-purchase to the scheme (at the re-purchase
price); or buy new units of the scheme.
 New Fund Offer Price/On-going Offer Price for subscription
New Fund Offer (NFO) Price is the price per unit that the investors have
to pay to invest during the NFO.
Ongoing price for purchase, redemption (sale) /switch outs (to other
schemes/plans of the Mutual Fund) by investors is the price at which the
investor purchases or receives redemptions/switch outs.
 Investment Plans and Services
Investment Plans:
 Direct
 Regular Plans

By Dr. Sudeshna Dutta

  Investment Options:
 Dividend Pay-out,
 Dividend Re-Investment
 Growth Options
 Allotment of Units to the Investor
 NFO: At Face value, which is generally Rs. 10 in case of Mutual Fund
 On-going offer: Prevailing NAV
 In a rights issue: Be noted that rights issues, which are common for
shares, are less meaningful for units of mutual fund schemes.
 In a bonus issue: The investor does not pay anything. The fund allots
new units for free. Thus, in a 1:3 bonus issue, the investor is allotted 1
new unit (free) for every 3 units already held by the investor.
 Account statements for investments
 Monthly Statement of Account: Mutual funds issue the Statement of
Account every month if there is a transaction during the month.
 Annual Account Statement: The Mutual Funds provide the Account
Statement to the Unit-holders who have not transacted during the last
six months prior to the date of generation of account statements.
 Consolidated Account Statement (CAS)
 A CAS for each calendar month is sent by post/email on or before 10 th
of the succeeding month provided there has been a financial
transaction in the folio in the previous month.
 If an email id is registered with the AMC, only a CAS via email is sent.
 Where there are no transactions in a folio during any 6 month period,
a CAS detailing holding across all schemes of all mutual funds at the
end of every such 6 month period
 Mutual Fund Investors
Eligibility to Invest:
Individual Investors
 Resident Indian adult individuals, above the age of 18
 Minors can invest through Parents/ Lawful guardians
 Hindu Undivided Families (HUFs)
 Non-Resident Indians (NRIs) / Persons of Indian origin (PIO)
By Dr. Sudeshna Dutta
  Foreign investors can invest in equity schemes of MFs registered with
SEBI after completing KYC process.
Non-individual Investors
 Companies / corporate bodies, registered in India
 Registered Societies and Co-operative Societies
 Religious and Charitable Trusts
 Trustees of private trusts
 Partner(s) of Partnership Firms etc.
 Banks and Financial Institutions and Investment Institutions
 Foreign Portfolio Investors registered with SEBI
 International Multilateral Agencies approved by the Government of
India
 Foreign portfolio investors who meet KYC requirements to invest in
equity and debt schemes of Mutual Funds can invest through two
routes:
 Direct route - Holding MF units in demat account through a SEBI
registered depository participant (DP)
 Indirect route - Holding MF units via Unit Confirmation Receipt
(UCR).
It is a good practice to check the ‘Who can Invest?’ section of the Scheme
Information Document (SID), especially for a first time investor.
 Filling the Application Form for Mutual Funds
The information required to be provided in the application form are
discussed below.
 Direct Plan and Regular Plan
 Unit Holder Information
 Status of the Holder and Mode of Holding
 KYC Details
 FATCA and CRS Details
 Bank Account Details
 Investment Details
 Payment Details

By Dr. Sudeshna Dutta

  Unit Holding Option
 Nomination
 Financial Transactions with Mutual Funds
 Initial Purchase of Mutual Fund Units
 Additional Purchases
 Repurchase of Units
 Switch
 Payment Mechanism for mutual fund purchases
 Online Transactions
 Internet Banking
 Unified Payment Interface
 Application Supported by Blocked Amount (ASBA)
 Aadhaar Enabled Payment Service
 National Unified USSD Platform
 Cards
 E-Wallets
 One-Time Mandate (OTM)
 Cheque/Demand Draft
Cash Payments
 Small investors, who may not be tax payers and may not have
PAN/bank accounts, such as farmers, small
traders/businessmen/workers are allowed cash transactions for
purchase of units in mutual funds to the extent of Rs. 50,000/- per
investor, per mutual fund, per financial year,
 This facility is available only for resident individuals, sole
proprietorships and minors investing through their guardians,
 A prescribed deposit slip for making cash investments available at the
Investor Service Centre (ISC) has to be used to give details of the
scheme in which the investment is being made and the amount of
investment.
 The deposit slip along with the cash has to be deposited at the bank
branches designated to accept the cash investments.

By Dr. Sudeshna Dutta

  The acknowledgement copy of the bank slip received from the bank
along with the application form/transaction slip has to be submitted to
the ISC for time stamping.
Third Party Payments
A third-party payment is defined as one made through a bank account
other than that of the first holder of the folio.
There are some exceptions where third party payments will be accepted:
 If the payment is made through a joint bank account, then the person
mentioned as the first holder of the folio should be one of the joint
holders for the payment to be considered non-third party payment.
 Payment by Parents/Grand-Parents/Related Persons on behalf of a
minor in consideration of natural love and affection or as gift for a value
not exceeding Rs 50,000/- for each regular purchase or per SIP
instalment,
 Employer making payments on behalf of employee through payroll
deductions
 Payments by the AMC to its empanelled distributors on account of
commissions etc. in the form of units of the mutual fund scheme
managed by the AMC either through an SIP or lump sum investments
or a similar arrangement of payment of commission by a Company to
its agents,
Compliance with the KYC norms and providing the PAN details are
mandatory by the third party making the payment irrespective of the
amount involved.
 Payment Mechanism for Repurchase of Units
 Cheque
 Electronic Modes
 Instant Access Facility

By Dr. Sudeshna Dutta

  Cut-off Time and Time Stamping

 Time Stamping
 As a convenience, the distributor may accept the transaction request
from the investor, but this would need to be sent to an Official Points
of Acceptance (OPoAs) at the earliest.
 When the cut-off timing is applied, the time when it is submitted to the
OPoA is relevant – not the time when the investor submits the
transaction request to the distributor.
 These points of acceptance have time stamping machines with tamper-
proof seal.
 Opening of the machine has to be properly documented and reported
to the Trustees,
 The daily time stamping of application does not start with serial One.
 KYC Requirements for Mutual Fund Investors
 PAN Card with photograph is mandatory for all applicants as a proof of
identity, except those who are specifically exempted,
 Proof of Address,
 Photo,
 Minor - KYC requirements have to be complied with by the Guardian,
 Power of Attorney holder - KYC requirements have to be complied with,
by both, investor and PoA holder,

By Dr. Sudeshna Dutta

  NRI investors - PAN is the sole identification number for KYC
compliance. A copy of the passport/PIO card/OCI card and overseas
address proof is mandatory.
 PAN exempt investments in mutual funds
 Generally, PAN is compulsory for all mutual fund investments,
 Exception has been made for Micro-SIPs i.e. SIPs where annual
investment (12 month rolling or April-March financial year) does not
exceed Rs. 50,000/-,
 Small investors investing upto Rs. 50,000/- per mutual fund per
financial year do not need to provide PAN Card,
 Instead, the investors can submit PHOTO IDENTIFICATION documents
along with Micro SIP applications,
 Investment by individuals, minors and sole-proprietary firms within the
limits specified above are exempted from the requirement of PAN card.
 Centralised KYC Registration Agencies
 SEBI has instituted a centralised KYC process for the capital market,
including mutual funds.
 The Government of India authorised the Central Registry of
Securitisation and Asset Reconstruction and Security Interest of India
(CERSAI) to act as and to perform the functions of the Central KYC
Record Registry.
 It shall be responsible for electronically storing, safeguarding and
retrieving the KYC records and making such records available online to
reporting entities or Director.
 Information updated about a customer shall be disseminated on
request by Central KYC Registry to any reporting entity that avail the
services of the Central KYC Registry in respect of the customer.
 The services of the Central KYC Registry will be available on payment of
prescribed fee, in advance.
 KYC through e-KYC service of UIDAI
 In consultation with Unique Identification Authority of India (UIDAI)
and the market participants, e-KYC service launched by UIDAI has also
been accepted as a valid process for KYC verification.
 Entities would be registered with UIDAI as KYC user agency (KUA) and
shall allow all the SEBI registered intermediaries/mutual fund

By Dr. Sudeshna Dutta

 distributors to undertake Aadhaar Authentication of their clients for
the purpose of KYC through them.
 KYC through Intermediaries
Where the investors choose to hold the units in demat form or for
applicants who choose to invest through the stock exchange
infrastructure, the KYC performed by the Depository Participant will be
considered in compliance with the KYC norms.
 KYC Process
 The requisite form has to be filled-in along with supporting documents.
 The original documents of the identity and address proof are returned
to the investor after verification while the forms and supporting
documents are uploaded in the server of any centralised KRA.
 The intermediaries mentioned above are also authorised to perform
an In-Person Verification (IPV) of the investor, which is mandatory. The
name, designation and organisation of the person conducting the IPV
has to be recorded on the KYC form. An IPV performed by Scheduled
Commercial Bank is also acceptable for mutual fund investments.
Additional Requirements applicable for Institutional Investors
Since institutional investors are not natural persons, authorised
individuals invest on behalf of the institution. Therefore, few additional
documents are essential.
 FATCA and Common Reporting Standards (CRS)
 To comply with the requirements of Foreign Account Tax Compliance
Act (FATCA) and Common Reporting Standards (CRS) provisions,
financial institutions, including mutual funds, are required to
undertake due diligence process to identify foreign reportable
accounts. The application form requires information to be provided if
the citizenship/nationality/place of birth/tax residency are places
other than India for all categories of investors. The countries of tax
residency and respective tax payer reference ID has to be provided.
 If there is a change in the status of the investor after the information is
first provided, then the same has to be reported to the mutual fund
within 30 days.
 Systematic Transactions
 Systematic Investment Plan

By Dr. Sudeshna Dutta

  Systematic Withdrawal Plan
 Systematic Transfer Plan
 Switch
 Dividend Transfer Plan
 Non-Financial Transactions
 Nomination
 Pledge/Lien of Units
 Demat Account
 Change in Folio Details
 Change in Personal Information
 Change in Bank Account Details
 Transmission of Units
 Investor transactions – turnaround times

Service provided by Mutual Funds Turnaround Time

NAV Calculation and disclosure On a daily basis

Mutual Fund Schemes (other than IPO of ELSS) Maximum of 15 days

to remain open for subscription

Mutual Fund Schemes to allot units or refund Within 5 business days of closure of NFOs
money
Re-opening for ongoing sale/re-purchase of Within 5 business days of allotment
open ended scheme (other than ELSS)

Dispatch of Dividend warrants to investors Within 30 days of declaration of the Dividend

Dispatch of Redemption/re-purchase cheques Within 10 working days from the date of receipt
to investors of transaction request.

Scheme-wise Annual Report or an abridged Four months from the date of closure of the
summary to all unit holders relevant accounts year

Statement of portfolio to be sent to all Before the expiry of 10 days from the close of
Unitholders each half year (i.e. 31st Mar and 30th Sep)

Half Yearly Disclosures (unaudited financial Within 1 month from the close of each half
results) on mutual fund website year (i.e. 31st Mar and 30th Sep)

A Consolidated Account Statement (CAS) by On or before 10th of the succeeding Month

post/email

By Dr. Sudeshna Dutta

 Unit certificate To be issued within 5 working days of the
receipt of request for the certificate. For close
ended schemes, units in demat form to be
issued to unitholders within 2 working days of
the receipt of request from unitholders.
Statement of Account in case of SIP/ STP / SWP
Service provided by Mutual Funds Turnaround Time

Initial transaction SIP / STP / SWP Within 10 working days

Ongoing SIP/STP/SWP Once every calendar quarter (March, June,

September, December) within 10 working days
of the end of the quarter.
On specific request by investor It will be dispatched to investor within 5
working days without any cost.

By Dr. Sudeshna Dutta

 RISK, RETURN AND PERFORMANCE OF FUNDS
 Risk Factors

 General Risk Factors

 Liquidity Risk
 Interest Rate Risk
 Re-investment Risk
 Political Risk
 Economic Risk
 Foreign Currency Risk
 Risks associated with transaction in Units through stock exchange(s)
 Specific Risk Factors
Risk related to equity and equity related securities
 Risks associated with mid-cap and small-cap companies
 Risk associated with Dividend
Risks related to debt funds
 Reinvestment Risk
 Rating Migration Risk
 Interest Rates Risk
 Credit Risk
Risk Factors Associated with Investments in REITs and InvITs
 Price-risk,
 Interest rate risk,
 Liquidity risk.

By Dr. Sudeshna Dutta

  Factors that affect mutual fund performance
Different asset classes have different characteristics. At the same time,
different fund managers may adopt different approaches and strategies,
which may also impact the performance of the schemes. Having said that,
fund managers take certain risks in order to outperform the respective
benchmark’s performance.
 Systematic risk (market risk)
 Unsystematic Risk (company specific risk)

 Drivers of Returns and Risk in a Scheme

The portfolio is the main driver of returns in a mutual fund scheme. There
are few factors which determines the risk and return in a mutual fund
scheme. These are:
 The asset class in which the fund invests,
 The segment or sectors of the market in which the fund will focus on,
 The styles adopted to select securities for the portfolio and
 The strategies adopted to manage the portfolio.
 Factors affecting performance of Equity Schemes
 The returns from equity are linked to the earnings of the business. In
order to generate returns superior to the benchmark, the fund
manager must construct a portfolio that is different from the
benchmark.
 Security selection is an attempt to select good quality securities that
are likely to perform well in the future.
 Market timing, means timing the purchase and sale of a security in
order to capture the upside in prices and to avoid the downside.
 For these purposes, two types of analysis may be used:
 Fundamental analysis, &
 Technical Analysis.

By Dr. Sudeshna Dutta

  Fundamental analysis

Dividend Yield
Dividend yields tend to go down across stocks in a bull market and rise in a bear market.

 Other factors
Investment Styles:
 Growth
 Value

By Dr. Sudeshna Dutta

 Portfolio Building Approach
 Top down -sector allocation
 Bottom up -stock picking
 Factors Affecting Performance of Debt Schemes
 Interest Rate
 Credit Spread or Yield Spread - difference between the yield on Gilt
and the yield on a non-Government Debt security.
 Modified Duration
 Credit Risk - Credit Rating Companies -CRISIL, ICRA, CARE and Fitch
 Fixed Rate Vs. Floating Rate
Different Debt securities issuer:
 Securities issued by the Govt. are called Government Securities or G-
Sec or Gilt.
 Treasury Bills are short term debt instruments issued by the RBI on
behalf of the Government of India.
 Certificates of Deposit are issued by Banks (7 days to 1 year) or
Financial Institutions (1 to 3 years)
 Commercial Papers are short term securities (upto 1 year) issued by
companies.
 Bonds/Debentures are generally issued for tenors beyond a year.
Governments and public sector companies tend to issue bonds, while
private sector companies issue debentures.
 Relationship Between Bond Price and Interest Rates

 Factors affecting Gold:

 Global price of gold
 Strength of the Rupee

By Dr. Sudeshna Dutta

  Factors affecting Real Estate:
 Economic scenario
 Infrastructure development
 Interest Rates
 Measures of returns
 Simple Return
 Annualized Return
 Compounded Return
 Compounded Annual Growth Rate (CAGR)
 Measures of Risk
 Variance
 Standard Deviation
 Beta
 Modified Duration
 Weighted Average Maturity
 Credit Rating
 Variance & Standard Deviation

 Although both schemes have the same average returns, the periodic
returns fluctuate a lot more for Scheme 2.
 Variance measures the fluctuation in periodic returns of a scheme, as
compared to its own average return.
 Variance as a measure of risk is relevant for both debt and equity
schemes.
 Standard deviation is equal to the square root of variance.

By Dr. Sudeshna Dutta

  Beta
 Beta is based on the Capital Asset Pricing Model (CAPM), which states
that there are two kinds of risk in investing in equities – systematic risk
and non-systematic risk.
 It measures the fluctuation in periodic returns in a scheme, as
compared to fluctuation in periodic returns of a diversified stock index
over the same period
 The diversified stock index, by definition, has a Beta of 1
 Schemes, whose beta > 1, are seen as riskier than the market. Beta <1
is indicative of a scheme that is less risky than the market
 Beta as a measure of risk is relevant only for equity schemes
 Modified Duration, Weighted Average Maturity & Credit Rating
 This measures the sensitivity of value of a debt security to changes in
interest rates.
 Higher the modified duration, higher the interest sensitive risk in a debt
portfolio.
 Longer the maturity of a debt security, higher would be its interest rate
sensitivity.
 Weighted average maturity of debt securities in a scheme’s portfolio is
indicative of the interest rate sensitivity of a scheme too.
 The credit rating profile indicates the credit or default risk in a scheme.
 Certain Provisions with respect to Credit risk
Gating or restriction on redemption in mutual funds
 According to SEBI regulations, such restrictions may be imposed only
for a specified period not exceeding 10 working days in any 90-day
period.
 Segregated portfolio or side pocketing
 AMC will not charge investment and advisory fees on the segregated
portfolio.
 Net Asset Value of Segregated Portfolio
 The Net Asset Value (NAV) of the segregated portfolio is required to be
declared on a daily basis.
 Risks Associated with Segregated Portfolio

By Dr. Sudeshna Dutta

 MUTUAL FUND SCHEME PERFORMANCE
 Benchmarks
Mutual fund schemes invest in the market for the benefit of Unit-holders.
How well did a scheme perform? An approach to assess the performance
is to pre-define a comparable—a benchmark—against which the scheme
can be compared.
 Price Return Index or Total Return Index
 PRI only captures capital gains of the index constituents. With effect
from February 1, 2018, the mutual fund schemes are benchmarked to
the Total Return variant of an Index (TRI).
 The Total Return variant of an index takes into account all
dividends/interest payments that are generated from the basket of
constituents that make up the index in addition to the capital gains
 Basis of Choosing an appropriate performance benchmark
 Selection of a benchmark for the scheme of a mutual fund to be in
alignment with the investment objective, asset allocation pattern and
investment strategy of the scheme.
 The performance of the schemes of a mutual fund to be benchmarked
to the Total Return variant of the Index chosen as a benchmark.
 Mutual funds should use a composite CAGR figure of the performance
of the PRI benchmark and the TRI to compare the performance.
 Quantitative Measures of Fund Manager Performance
 Measures of risk-adjusted returns:
RISK PREMIUM = (RETURN OF SCHEME – RISK FREE RETURN)
or, Risk Premium (𝑹𝑹) = (𝑹𝑹−𝑹𝑹)
Sharpe Ratio =
(𝑵𝑵−𝑵𝑵) / 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺
Thus, if risk free return is 5%, and a scheme with standard deviation of
0.5 earned a return of 7%, its Sharpe Ratio: (7% - 5%) ÷ 0.5 = 4%
Higher the Sharpe Ratio, better the scheme is considered to be.

By Dr. Sudeshna Dutta

 Treynor Ratio
(𝑵𝑵−𝑵𝑵) / Beta
Thus, if risk free return is 5%, and a scheme with Beta of 1.2 earned a
return of 8%, its Treynor Ratio would be (8% -5%) ÷1.2 = 2.5%
Higher the Treynor Ratio, better the scheme is considered to be.
Alpha
 Non-index schemes too would have a level of return which is in line
with its higher or lower beta as compared to the market. This is
Optimal Return.
 The difference between a scheme’s actual return and its optimal
return is its “Alpha” – a measure of the fund manager’s performance.
 Positive alpha is indicative of out-performance by the fund manager
& Vice –versa.
Alpha = 𝑺𝑺 + Beta(𝑺s−𝑺𝑺)
Tracking Error
 The Beta of the market, by definition is 1. Therefore, the index scheme
too would have a Beta of 1, and it ought to earn the same return as
the market.
 The difference between an index fund’s return and the market return,
is the tracking error.
 Scheme Performance Disclosure
 SEBI has mandated disclosure of performance data by all the asset
management companies (AMCs). These disclosures can be accessed
through certain scheme documents and website of the fund house.
 Updated SID and Fact sheet are the main source of information to
analysis scheme performance. There are various portals that also could
be used to access the scheme performance data. The information and
data found in such literature is updated and current, and typically
includes information about suitability, returns and portfolio
description. These are:
 Suitability
 Returns
 Portfolio Description

By Dr. Sudeshna Dutta

 MUTUAL FUND SCHEME SELECTION
 Scheme Selection based on Investor needs, preferences and risk-profile
 Investor Need
 Risk Profile of the investor
 Asset allocation
 Age of the investor
 Investment time horizon
 Core and satellite portfolio
 Risk levels in mutual fund schemes
 Risk-Return Hierarchy of mutual funds
 Risk-Return Hierarchy of debt funds
 Hierarchy of Credit risk in debt funds
 Risk-Return Hierarchy of equity mutual funds
 Risk-Return Hierarchy of Diversified to Concentrated funds
 Risk Return Hierarchy of hybrid funds
 6 types of risk depicted in Riskometer
SEBI has also instituted a product labelling system to provide investors an
easy understanding of the kind of product/scheme they are investing in
and its suitability to them.
 Scheme Selection based on investment strategy of mutual funds
 Active Fund v/s Passive Funds
 Open-ended funds v/s close-ended funds
 Large-cap v/s Mid-cap v/s Small Cap Funds
 Growth or Value funds
 International Equity funds
 FMP, Short Duration Fund, Liquid Funds, Floater Funds
 Hybrid Schemes
 Gold Funds
 Selection of Mutual Fund scheme offered by different AMCs
 Matching fund’s portfolio with its investment objective

By Dr. Sudeshna Dutta

  Fund Manager
 Fund Performance
 Fund Portfolio
 Fund Age
 Fund Size
 Portfolio Turnover
 Scheme Running Expenses
 Selecting options in mutual fund schemes
 Dividend payout,
 Dividend re-investment and
 Growth options
 Do’s and Don’ts while selecting mutual fund schemes
 Ensuring suitability
 Sticking to investor’s asset allocation
 Chasing past performance
 Understanding the investment objective and investment strategy of
the scheme
 Keeping an eye on the taxes and loads
 Developing a consistent methodology for scheme selection

By Dr. Sudeshna Dutta