MMS-semester-3-Mutual-Funds-1-munotes

Page 1

1 1
INTRODUCTION
Unit Structure
1.0 Objectives
1.1 Introduction to Investment Avenues
1.2 Concept and Role of Mutual Fund
1.3 Comparison of Mutual Fund with Equity and Bond Instruments
1.4 History of Mutual Fund in India
1.5 Summary
1.6 Multiple Choice Questions
1.7 Question
1.8 References
1.0 OBJECTIVES
1) To know the different investment avenues
2) To understand the concept and role of mutual fund.
3) To acquire the knowledge of Equity and Bond Instruments in
Comparison with Mutual Fund
4) To know the history of Mutual Fund in India

1.1 INTRODUCTION TO INVESTMENT AVENUES
In its broadest sense, an investment is a sacrifice of current money or other
resources for future benefits. Several avenues of investment are available
today. You can deposit money in a Saving bank account or purchase a
long-term govern ment bond or invest in the equity shares of a company or
contribute to a provident fund account or buy a stock option or buy a stock
future or acquire a plot of land or invest in some other form.
The two key aspects of any investment are time and risk. Th e sacrifice
takes place now and is certain. The benefit is expected in the future and
tends to be uncertain. In some investments (like government bonds) the
time element is the dominant attribute. In other investments (like stock
options) the risk element is the dominant attribute. In yet other
investments (like equity shares) both time and risk are important. Almost
everyone owns a portfolio of investments. The portfolio is likely to
comprise financial assets (bank deposits, bonds, stocks, and so on) and
real assets (car, house, and so on). The portfolio may be the result of a
series of haphazard decisions or may be the result of deliberate and careful
planning. Your economic well -being in the long run depends significantly
on how wisely or foolishly you in vest. useful in systematic and rational munotes.in

Page 2

Mutual Fun d
2 investment management. It seeks to improve your abilities in the field of
investments.
As an investor you have a wide array of investment avenues available to
you. Sacrificing some rigour, they may be classified as s hown in Fig 1.1

1. Non-marketable Financial Assets
A good portion of financial assets is represented by non -
marketable financial assets. They can be classified into the
following broad categories:
 Fixed Deposits in Bank
 Recurring Deposits
 Post office dep osits
 Company deposits
 Provident fund deposits

2. Equity Shares
Equity shares represent ownership capital. As an equity
shareholder, you have an ownership stake in the company.
 Blue chip shares
 Mid Cap
 Small Cap
 Sector Specific shares

3. Bonds or deben tures
It represent long -term debt instruments. Bond is a negotiable
certificate evidencing indebtedness. It is normally unsecured. A
debt security is generally issued by a company, municipality, or
government. A bond investor lends money to the issuer and in
exchange the issuer promises to repay the loan amount on a
specified maturity date. Debentures includes debenture stock, munotes.in

Page 3

Introduction

3 bonds and any other securities of a company, whether constituting
a charge on the company’s assets or not”. Following are the
differ ent forms of Bonds or Debentures.
 Savings bonds
 Government agency securities
 PSU bonds
 Debentures of private sector companies

4. Money Market Instrument
It is a market for short term funds i.e., period of 364 days or less.
The money market is an avenue for borrowing and lending for the
short term. While on one hand money market helps in shifting big
amount of money between banks, on the other hand, it provides a
mean by which the surplus of funds of the cash rich institutions can
be used by bank (at cost ). A supplier of funds to the money market
can be virtually anyone with a temporary excess of funds. Money
Market Instruments are more liquid in nature. Following are the
examples of Money Market Instruments
 Treasury Bills
 Certificate of Deposits
 Commercia l Papers

5. Mutual Funds
Instead of directly buying equity shares and/or fixed income
instruments, you can participate in various schemes floated by
mutual funds which, in turn, invest in equity shares and fixed
income securities. There are three broad ty pes of mutual fund
schemes:
 Open Ended Funds
 Close Ended Funds
 Growth Funds
 Income Funds
 Balanced schemes
 Money Market Mutual Funds
 Gilt Funds
 Hybrid Funds

6. Life Insurance
In a broad sense, life insurance may be viewed as an investment.
Insurance premiu ms represent the sacrifice and the assured sum,
the benefit. The important types of insurance policies in India are:
 Endowment assurance policy
 Money back policy
 Whole life policy
 Term assurance policy

7. Real Estate
For the bulk of the investors the m ost important asset in their
portfolio is a domestic house. In addition to a residential house, the munotes.in

Page 4

Mutual Fun d
4 more affluent investors are likely to be interested in the following
types of real estate:
 Agricultural land
 Semi -urban land
 Commercial property
 A resor t home
 A second house Precious Objects
 Shops

8. Precious objects
There are items that are generally small in size but highly valuable
in monetary terms. The important precious objects are:
 Gold and silver
 Precious stones - Diamond
 Art objects -Paintings

9. Financial Derivatives
A financial derivative is an instrument whose value is derived from
the value of an underlying asset. It may be viewed as a side bet on
the asset. The most important financial derivatives from the point
of view of investors are:
 Future &Options - Currency Derivative, Commodity Derivatives,
Stock and Index Future & Options

1.2 CONCEPT AND ROLE OF MUTUAL FUND
Concept
According to SEBI Regulations, 1996, “Mutual Fund means a fund
established in the form of trust to raise monies through the sale if units to
the public or a section of public under one or more schemes for investing
in securities, in accordance with regulation”.
The securities market being highly volatile requires lot of expertise and
knowledge for investment in it by inve stors. Thus, it is reinforced by the
Securities Market ‘put not your trust in money, put your money in trust’.
Which implies special type of investment vehicles such as Mutual Funds.
Mutual Funds are trust which pool resources from large number of
investor s through issue of units for investments in capital market such as
shares, debentures and bonds and money market instruments, such as
Commercial Paper, Certificate of Deposits and Treasury Bonds. The
income earned through these investments and the capital appreciation
realized are shared by its unit holders in proportion to the number of units
owned by them. The process converts individual savings, which would
otherwise have remained idle, into funds usable in industries. The
investments are speared over wi de cross section of industries and sectors
through careful analysis by experts. The diversification eliminates
unsystematic risks and the investors can expect better returns for lesser
risk. Such diversifications are usually not attainable by individuals’
investors due to fund constraints and lack of necessary expertise. munotes.in

Page 5

Introduction

5 A Mutual Fund is a trust that pools the savings of several investors who
share a common financial goal. Anybody with an investible surplus of as
little as a few hundred rupees can invest in different Mutual Funds
Schemes. These investors buy units of a particular Mutual Fund scheme
that has a defined investment objective and strategy. The money thus
collected is then invested by the fund manager in different types of
securities. These could range from shares to debentures to money market
instruments, depending upon the scheme’s stated objectives. The income
earned through these investments and the capital appreciation realized by
the scheme is shared by its unit in proportion to the number o f units owned
by them. Thus, a Mutual Fund offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low -
cost.

Role of Mutual Fund
The Mutual Fund segment is one of the fastest expanding segments
of our Indian Economy. During the last ten -year period the industry
has grown at nearly 22 per cent CAGR. With assets of US $ 125
billion, India ranks 19th and one of the rapid growing countries of
the world. The factors leading to the development of the industr y
are large market Potential, high savings rate, comprehensive
regulatory framework, tax policies, innovations of new schemes,
aggressive role of distributors, investor education awareness by
SEBI, and past performance. Mutual funds are not only providing
growth to capital market through channelization of savings of retail
investors but themselves playing active role as active investor in
Indian companies in secondary as well as primary market. Let’s
look at the mutual fund’s role in capital market developm ent in
detail.
(1) Mutual fund as a source of household sector savings
mobilization: Mutual fund industry has come a long way to assist
the transfer of savings to the real sector of the economy. Total AUM
of the mutual fund industry clocked a CAGR of 12.4 per cent over munotes.in

Page 6

Mutual Fun d
6 FY 07 -16. That shows how mutual funds have played pivotal role in
mobilising retail investors’ savings into capital market in last 10
years in India. By the end of March, 2017 AUM with Mutual funds
are around Rs. 17.5 lakh crores. In 2017 its elf, investors poured Rs.
3.4 lakh crores across all the categories of Mutual funds in India.
(2) Mutual Fund as Financial service or Intermediary: The
financial services sector is the second -largest component after trade,
hotels, transport and communicati on all combined together, and
contributes around 15 per cent to India’s GDP. With the rapid
growth, mutual funds have become increasingly important suppliers
of debt and equity funds.
(3) Mutual funds popularity among small investors: Small
investors have lots of problems like limited funds, lack of expert
advice, lack of access to information etc. Mutual funds have come
as a great help to all retail investors. It is a special type of
institutional mechanism or an investment method through which the
small as well as large investors pool their savings which are
invested under the advice of a team of professionals in large variety
of portfolios of corporate securities Safety with good return on
investment is the outcome of these professional investment in
mutual funds. It forms a significant part of the capital market,
providing the advantage of a well -diversified portfolio and expert
fund manager to a large number, particularly retail investors. An
ordinary investor who applies for shares in a IPO of any comp any is
not sure of any guaranteed allotment. But mutual funds who invest
in the particular capital issue made by companies get confirmed
allotment of, shares, therefore, the investment in good IPO’s can be
achieved though investment in a mutual fund.
(4) Mutual Funds as part of financial inclusion policy of Govt. of
India: Now SEBI is motivating mutual funds to spread in smaller
cities and in rural India to attract small savings and making rural
people aware of new investment avenue like mutual fund providi ng
good returns at low risk. So Govt. of India policy of financial
inclusion to mobilise savings of unbanked people of India is being
supported actively by mutual funds now. In its effort to encourage
investments from smaller cities, SEBI allowed AMCs to h ike
expense ratio up to 0.3 per cent on the condition of generating more
than 30 per cent inflow from smaller cities. Mutual funds and AMFI
undertake Investor awareness programmes for this purpose of
financial inclusion.



munotes.in

Page 7

Introduction

7 1.3 COMPARISON OF MUTUAL FUND W ITH EQUITY
AND BOND INSTRUMENTS

1.4 HISTORY OF MUTUAL FUND IN INDIA
A strong financial market with broad participation is essential for a
developed economy. With this broad objective India’s first mutual fund
was establishment in 1963, namely, Unit Trus t of India (UTI), at the
initiative of the Government of India and Reserve Bank of India ‘ with a
view to encouraging saving and investment and participation in the
income, profits and gains accruing to the Corporation from the
acquisition, holding, managem ent and disposal of securities’ .
The history of Mutual Funds in India can be broadly divided into five
distinct phases as follows:
 First Phase - 1964 -1987
Unit Trust of India (UTI) was established in 1963 by an Act of Parliament.
It was set up bythe Reserv e Bank of India and functioned under the
Regulatory and administrative control ofthe Reserve Bank of India. In
1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control
in place of RBI. The first scheme launched by UTI was Unit Scheme
1964. At the end of 1988UTI had Rs. 6,700 crores of assets under
management.

munotes.in

Page 8

Mutual Fun d
8  Second Phase - 1987 -1993 (Entry of Public Sector Funds)
1987 marked the entry of non-UTI, public sector mutual funds set up by
public sector banksand Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India(GIC). SBI Mutual Fund was the
first non-UTI Mutual Fund established in June 1987followed by Can bank
Mutual Fund (Dec 87), Punjab Nationa l Bank Mutual Fund (Aug
89),Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund(Oct 92). LIC established its mutual fund in June
1989 while GIC had set up its mutual fundin December 1990. At the end
of 1993, the mutual fund industry had assets undermanagement of Rs.
47,004 crores.
 Third Phase - 1993 -2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the
Indian mutual fundindustry, giving the Indian investors a wider choice
of fund families. Also, 1993 was the yearin which the first Mutual Fund
Regulations came into being, under which all mutual funds,except UTI
were to be registered and governed. The erstwhile Kothari Pioneer (now
mergedwith Franklin Templeton) was the first private sector mutual fund
registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were
substituted by a more comprehensive andrevised Mutual Fund Regulations
in 1996. The industry now functions under the SEBI(Mutual Fund)
Regulations 1996.The number of mutual fund houses went on increasing,
with many foreign mutual fundssetting up funds in India and also the
industry has witnessed several mergers and acquisitions.As at the end of
January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805crores. The Unit Trust of India with Rs. 44,541 crores of assets
under management were wayahead of other mutual funds.
 Fourth Phase - February 2003 - April 2014
In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI wasbifur cated into two separate entities. One is the Specified
Undertaking of the Unit Trust ofIndia with assets under management of
Rs. 29,835 crores as at the end of January 2003,representing broadly, the
assets of US 64 scheme, assured return and certain other schemes.The
Specified Undertaking of Unit Trust of India, functioning under an
administrator andunder the rules framed by Government of India and does
not come under the purview of theMutual Fund Regulations.The second is
the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registeredwith SEBI and functions under the Mutual Fund Regulations.
With the bifurcation of theerstwhile UTI which had in March 2000 more
than Rs. 76,000 crores of assets undermanagement and with the setting up
of a UTI Mutual Fund, conforming to the SEBI MutualFund Regulations,
and with recent mergers taking place among different private sector
funds,the mutual fund industry has entered its current phase of
consolidation and growth.
munotes.in

Page 9

Introduction

9  Fifth Phase (Since 2014)
Taking cognisance of the lack of penetration of MFs, especially in tier II
and tier III cities, and the need for greater alignment of the interest of
various stakeholders, SEBI introduced several progressive measures in
September 2012 to "re -energize" the Indian Mutual Fun d industry and
increase MFs’ penetration.
In due course, the measures did succeed in reversing the negative trend
that had set in after the global melt -down and improved significantly after
the new Government was formed at the Center.
Since May 2014, the I ndustry has witnessed steady inflows and increase in
the AUM as well as the number of investor folios (accounts).
 The Industry’s AUM crossed the milestone of 10 Trillion ( 10
Lakh Crore) for the first time as on 31st May 2014 and in a short span
of about three years the AUM size had increased more than two folds
and crossed 20 trillion (20 Lakh Crore) for the first time in
August 2017. The AUM size crossed 30 trillion ( 30 Lakh Crore)
for the first time in November 2020.
 The overall size of the Indian MF Industry has grown from 7.20
trillion as on 30th September 2012 to 38.42 trillion as on 30th
September 2022, more than 5 fold increase in a span of 10 years.
 The MF Industry’s AUM has grown from 20.40 trillion as on
September 30, 2017 to 38.42 trillion as on September 30, 2022,
around 2 fold increase in a span of 5 years.
 The no. of investor folios has gone up from 6.20 crore folios as on 30 -
Sep-2017 to 13.81 crore as on 30 -Sep-2022, more than 2 fold increase
in a span of 5 years.
 On an average 12.67 lakh new folios are added every month in the last
5 years since September 2017.
The growth in the size of the industry has been possible due to the twin
effects of the regulatory measures taken by SEBI in re -energising the MF
Industry in September 2012 and the support from mutual fund distributors
in expanding the retail base.
MF Distributors have been providing the much needed last mile connect
with inves tors, particularly in smaller towns and this is not limited to just
enabling investors to invest in appropriate schemes, but also in helping
investors stay on course through bouts of market volatility and thus
experience the benefit of investing in mutual funds.
MF distributors have also had a major role in popularising Systematic
Investment Plans (SIP) over the years. In April 2016, the no. of SIP
accounts has crossed 1 crore mark and as on 30th September 2022 the
total no. of SIP Accounts are 5.84 crore.
(Source: https://www.amfiindia.com) munotes.in

Page 10

Mutual Fun d
10 1.5 SUMMARY
A mutual fund is a fund that pools money from various investors and is
managed by a team of fund managers. The fund is invested in a bucket of
stocks - domestic market as well as international markets (NASDAQ,
TAIWAN etc.), bonds, and cash equivalents. The assets of the fund are
chosen around a particular theme. The fund is continuously adjusted as per
the performance of the underlying assets.
The amount contributed by each investor is invested in stocks/ secur ities/
bonds of the bucket, proportionate to their weights in the bucket. The
investor, however, doesn’t have any ownership of the underlying asset.
They just own the units of the mutual fund.
While looking at Mutual Funds vs Bonds, we have seen that while bonds
offer nearly risk -free fixed returns, Mutual funds come with a potential of
high returns at relatively higher risk. Individual stocks beat them both with
the highest risk and returns. One must weigh the nuances of Mutual Funds
Vs Bonds Vs Stocks aga inst their risk appetite, goals, and investment
horizon before choosing the right mix.
1.6 MULTIPLE CHOICE QUESTIONS
1. ___________ is a type of investment vehicle consisting of a portfolio of
stocks, bonds, or other securities.
A) Government Securities B) Mutual Funds
C) Derivatives D) Shares
2. Mutual funds in India are permitted to invest in___________
A) Securities B) Securities and gold
C) Securities other than real estate D) Securities, gold, real estate
3. Phase 1 of Mutual funds i n India extended from ……………..
a. 1964 - 1987 b. 1961 - 1987 c. 1964 - 1988 d. 1961 - 1988
4. Phase 2 of Mutual funds in India extended from ……………….
a. 1987 -1994 b. 1987 -1993 c. 1988 -1995 d. 1987 -1992
5. Phase 3 of Mutual funds in India extended from ……………… .
a. 1996 -2004 b. 1994 -2000 c. 1995 -2002 d. 1993 -2003
6. Phase 4 of Mutual funds in India extended from ……………….
a. 2003 -2014 b. 2004 -2013 c. 2004 -2012 d. 2002 -2011
munotes.in

Page 11

Introduction

11 7. The history of mutual funds in India can be broadly divided into
………. phases.
a. 4 b. 6 c. 7 d. 5
Solution - 1- B, 2- D, 3-A, 4- B, 5-D, 6- A, 7- D
1.7 QUESTION
1) What is the Concept of Mutual Fund? Explain the role of mutual fund?
2) Write a note on History of Mutual Fund in India.
3) Explain the comparison of Mutual Fund with Equ ity and Bond
Instruments
1.7 REFERENCES
Books
1) Workbook for NISM -Series -V-B: Mutual Fund Foundation
Certification Examination
2) Workbook for NISM -Series -V-C: Mutual Fund Distributors (Level 2)
Certification Examination
3) Mutual Funds - Portfolio Structures, Analys is, Management, and
Stewardship John A. Haslem, Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.
4) Financial Management - Ravi Kishore, Taxmann Publication
Website
https://corporatefinanceinstitute .com/
https://www.timesnownews.com/
https://www.amfiindia.com/
https://www.icicidirect.com/
https://www.utimf.com/
https://pgimindiamf.com/
https://www.etmoney.com/
https://upstox.com/



munotes.in

Page 12

12 2
DIFFERENT TYPES OF FUNDS
Unit Structure
2.0 Objectives
2.1 Scheme Selection
2.2. Expense Ratio
2.4 Income Ratio
2.5 Portfolio turnover rate and Transaction Costs
2.6 Summary
2.7 Multiple Choice Questions
2.8 Question
2.9 References
2.0 OBJECTIVES
1) To understand how investor d o the scheme selection in Mutual Funds
2) To learn more about expense ratios and Income ratios
3) To acquire the knowledge about portfolio turnover rate and
Transaction costs
2.1 MUTUAL FUND SCHEME SELECTION
Mutual fund means a fund established in the form of a trust to raise money
through sale of units to the public under one or more schemes for
investing in securities, including money market instruments.
The small investors who generally lack expertise to invest on their own in
the securities market prefer some kind of collective investment vehicle
like mutual fund, which pool their managerial resources, invest in
securities, and distribute the returns there from among them on
cooperative principles. The investor benefits in terms of reduced risk and
higher retu rns arising from professional expertise of fund manager
employed by the Mutual Fund.
A Mutual Fund scheme invests across various type of marketable
securities as per the stated investment objective of each individual
schemes. This is an emerging as a prefe rred option for meeting
individual’s financial goals according to each individual’s choice of
investment horizon and risk appetite. The Mutual fundinvestment
decisions are made by professional fund managers, backed by a team of
research analysts. In return , each individual scheme charges certain munotes.in

Page 13

Different types of funds

13 expenses to the investor of the scheme towards costs related to fund
management, operating expenses, distribution expenses, investor
awareness, etc. However, Securities & Exchange Board of India (SEBI)
has prescribe d certain limits on expenses that could be charged to each
individual schemes. Further, the investors tend to benefit from
professional fund management at relatively lower costs by investing in
mutual fund schemes .
Different asset class or categories of mutual fund schemes open for the
investors to choose from:
1) By Structure
i) Open Ended Schemes
These schemes do not have a fixed maturity period. An open -endedfund
sells and repurchases units at all times at a price linked to net asset value
(NAV). These schemes are available for subscription and repurchase on a
continuous basis. The key feature of these schemes is liquidity.
ii) Close Ended Schemes
A close -ended fund makes a one -time sale of a fixed number of units
during the initial offer period. These schemes have a stipulated maturity
period. The fund is open for subscription only during a specified period at
a time of launch of the scheme. In order to provide an exit route to the
investors, some close -ended funds give an option of selling back the units
to the mutual fund through periodic repurchase at NAV related prices
through listing on stock exchanges. These mutual funds schemes disclose
NAV generally on weekly basis.
iii) Interval Schemes
These combines the features of open -ended schemes and close ended
schemes which may be traded on the stock exchange any time or will be
open for sale or redemption during predetermined intervals at NAV related
prices.
2) Actively Managed Funds & Passive Funds
i) Actively Managed Funds
Funds where the fund manager has the flexibility to choose the investment
portfolio, within the broad parameters of the investment objective of the
scheme. Since this increases the role of the fund manager, the expenses for
running the fund turn out to be higher. Investors expect actively managed
funds to perform better than the market.
ii) Passive Funds
In this fund, investment on the basis of specified index, whose
performance it seeks to track. The proportion of each share in the
scheme’s portfolio wou ld also be the same as the weightage assigned to
the share in the computation of the S & P BSE Sensex. The performance munotes.in

Page 14

Mutual Fund
14 of these funds tends to the concerned index. It is not designed to perform
better than the Index market. Such schemes is also called inde x schemes.
iii) Exchange Traded Funds
An ETF is an amalgam financial product, a cross between a stock and a
mutual fund. ETF is a portfolio or basket of securities that replicate the
composition of indices like NIFTY, BANKNIFTY, SENSEX etc. The
units are issue d to the investors in a new fund offer (NFO) after which
they are available for sale and purchase on a stock exchange. The units of
the ETD are traded at real time prices that are linked to the changes in the
underlying index.
3) SEBI - Categorisation & Ration alisation of MF Schemes
The Schemes would be broadl classified in the following groups as per
SEBI guidelines: Equity Schemes, Debt Schemes, Hybrid Schemes,
Solution Oriented Schemes, Other Schemes
 Equity Schemes
(a) An Equity scheme should invest minimum 65% of its assets in
Equity and Equity related instruments.
 Large Cap Fund: Investing in large cap stocks. The minimum
investment in equity and equity related instruments of large cap
companies shall be 80 percent of total assets.
 Mid Cap Fund: Investing in mi d cap stocks.The minimum investment
in equity and equity related instruments of mid cap companies shall be
65 percent of total assets.
 Large and Mid Cap Fund: Investing in both large and mid cap stock.
Large Cap Stocks - Min 35 %, Mid Cap Stock - Min 35 % of total
assets
 Multi Cap Fund: Large Cap, Mid Cap and Small cap stocks. The
minimum investment in equity and equity related instruments shall be
65 % of total assets
 Equity Income or Dividend Yield Funds: These funds mainly invests
in stocks of companies whose dividend payout is higher. Capital
appreciationis main object and increase the higher income through the
dividends.
 Focused Fund: Investing in maximum 30 stocks. The scheme
document must mention the focus stock which may be Large Cap, Mid
Cap, Small Cap, M ulti Cap etc
 Diversified Equity Fund: These funds seek to invest substantially in
equities, leaving a small portion in liquid money market securities.
These funds seek to reduce the sector specific risks through
diversification. munotes.in

Page 15

Different types of funds

15  Speciality Fund: These fund s invest in only predetermined portfolio of
securities. Most of the speciality funds tend to be concentrated funds
and are more volatile than diversified funds.
 Sector Funds: The fund’s portfolio consists of investment in only one
industry or sector of the market such as pharmaceuticals,
telecommunication, Financial Services and Banking, Information
Technology etc. The returns in those funds are dependent on the
performance of the respective sectors. These funds may give higher
returns, but they are riskier compared to diversified funds.
Debt Schemes
 Overnight Fund: The investment is in overnight securities having
maturity of 1 days.
 Liquid Fund: Investment is into money market and debt securities
with maturity of upto 91 days
 Ultra Short Fund: Investing in money market and debt instruments
with maturity duration between 3 monthsand 6 months.
 Low Duration Fund: Investing in debt and money market instruments
with Macaulay duration between 6 months and 12 months.
 Money Market Fund: Investing in money market instruments having
Macaulayup to 1 year.
 Short Duration Fund: Investing in debt and money market
instruments with Macaulay duration between 1 year and 3 years.
 Medium Duration Fund: Investing in debt and money market
instruments with Macaulay duration of the portfolio being between 3
years and 4 years. Portfolio Macaulay duration under anticipated
adverse situation is 1 year to 4 years.
 Medium to Long Duration Fund: Investing in debt and money
market instruments with Macaulay duration between 4 years and 7
years. Portfolio Macaulay duration under anticipated adverse situation
is 1 year to 7 years.
 Long Duration Fund: Investing in debt and money market
instruments with Macaulay duration greater than 7 years.
 Dynamic Bond: An open -ended dynamic debt schem e investing
across duration.
 Corporate Bond Fund: An open -ended debt scheme predominantly
investing in AA+ and above rated corporate bonds. The minimum
investment in corporate bonds shall be 80 percent of total assets (only
in AA+ and above rated corporat e bonds)
munotes.in

Page 16

Mutual Fund
16 Hybrid Schemes
 Aggressive Hybrid Fund/ Balanced Fund: Investment in equity 65
% to 80 % of total assets while investment in debt instruments shall be
between 20 % and 35 % of total assets.
 Dynamic Asset Allocation or Balanced Advantage: It is an open -
ended dynamic asset allocation fund with investment in equity/debt
that is managed dynamically.
 Multi Asset Allocation: An open -ended scheme investing in at least
three asset classes with a minimum allocation of at least 10 percent
each in all three asset classes. Foreign securities are not treated as a
separate asset class in this kind of scheme.
 Arbitrage Fund: The minimum investment in equity and equity
related instruments shall be 65 percent of total assets. They
simultaneously buy and sell secu rities in different markets to take
advantage of the price difference. Returns are more in line with money
market returns, rather than equity market returns. Moderately Low
Risk Category. Arbitrage funds are not meant for equity risk exposure,
but to lock into a better risk -return relationship than liquid funds and
ride on the tax benefits that equity schemes offer.
Solution Oriented Schemes
 Retirement Fund: An open -ended retirement solution oriented
scheme having a lock -in of 5 years or till retirement age (whichever is
earlier).
 Children's Fund: An open ended fund for investment for children
having a lock -in for at least 5 years or till the child attains age of
majority (whichever is earlier).
Other Schemes
 Gold Exchange Traded Funds (GETFs) - Gold Exchan ge Traded
Funds offer investors an innovative, cost -efficient and secure way to
access the gold market. Gold ETFs are intended to offer investors a
means of participating in the gold bullion market by buying and selling
units on the Stock Exchanges, withou t taking physical delivery of
gold. GOLD ETF invests in 99.99% pure GOLD. NAV of GOLD ETF
depends on Real Prices of GOLD Bullion. Gold funds invest in gold
and gold -related securities.
 Real estate funds invest in real estate: Commodity funds invest in
asset classes like food crops, spices, fibres, industrial metals, energy
products or precious metals as may be permitted by their investment
charter. Direct investing in Commodities is not allowed in India. munotes.in

Page 17

Different types of funds

17  Fund of Funds (FOFs): Fund of Funds are schemes that i nvest in
other mutual fund schemes. Minimum investment in the underlying
fund - 95% of total assets.
Criteria in Selection of Mutual Fund
It is very important to carefully analyse a mutual fund before one chooses
the right fund for himself. The following a re a set of features to be looked
into in a mutual fund.
 Fund Manager’s Track Record: The fund manager should have a
proven track record as efficient fund management is able to create
confidence in the mind of the investor.
 Portfolio Quality: If the poor q uality investments don’t backfire, a fund
might generate high returns. High credit ratings of investments, means
that the fund is investing in low risk instruments, indicating portfolio
safety.
 Number of Retail Investors and Average Holding Size: It is eas ier to
deploy and manage a small fund but even if a few investors leave it, a
small fund could be in trouble.
 Size of fund: Critical mass gives access to opportunities not available to
smaller funds.
 Weighted Average Maturity: Longer maturities hedge again st
downward movement in interest rates while it could lose out on short
term upswings in interest rates. Short maturities protect against rising
interest rates.
 Sudden change in Portfolio or NAV: This might be a case of a revamp
of the portfolio for good b ut also beware that it might suddenly be open
to more risk due to a change in investment.
 Dividend Frequency: Tax free dividends are good for those looking for
regular returns but frequent dividends can hinder capital growth
through redeployment.
2.2. EXPE NSE RATIO
The expense ratio is the percentage that denotes the amount of money you
are paying to the Asset Management Compan y as a fee to manage your
investments. In other words, it is the per -unit cost for running and
managing the mutual fund. The expense ratio differs from one mutual fund
to another. You do not pay for this expense ratio separately; it is calculated
as a perc entage of the daily investment value.
For example, if you invest Rs 50000 in a mutual fund with an expense
ratio of 2%, then (2%/365=0.0054%) will be deducted from the
investment value each day. The per -day levying of the expense ratio
ensures that you onl y pay for the period you stay invested. But this munotes.in

Page 18

Mutual Fund
18 deduction of the expense ratio is lowering your returns by a tiny amount
every day. Hence, a mutual fund scheme with a lower expense ratio is
more beneficial to you because it takes away a lesser portion of money
from your returns
Formula for Expense Ratio
Expense Ratio= (Total costs that are borne by the mutual
fund)/(Average assets under management)
 Total costs that are borne by the fund: The costs incurred by the
AMC mentioned above like fund manager’s fee, marketing, and
distribution expenses, legal/audit costs.
 Average assets under management: The total value of all investors’
money in that fund
Currently, in India, the expense ratio is fungible, i.e., there is no limit on
any allowed expense as long as t he total expense ratio is within the
prescribed limit. The regulatory limits of TER that can be
incurred/charged to the fund by a Mutual Fund AMC have been specified
under Regulation 52 of SEBI Mutual Fund Regulations.
Effective from April 1, 2020 the TER limit has been revised as follows.

(Source: https://www.amfiindia.com )
In addition, mutual funds have been allowed to charge up to 30 bps more,
if the new inflows from retail investors from beyond top 30 cities (B30)
cities are at least munotes.in

Page 19

Different types of funds

19 (a) 30% of gross new inflows in the scheme or
(b) 15% of the average assets under management (year to date) of the
scheme, whichever is higher. This is essentially to encourage inflows into
mutual funds from tier - 2 and tier - 3 cities.
2.3 INCOME RATIO
The investor who invests in mutual fund units can receive returns in the
following two ways:
 Capital Appreciation - Profit earned on sale of units at a higher NAV
than the original cost.
 Income Distribution ( Dividend) When a fund m akes a profit on its
investment, this profit will be given to investor as a dividend which can
be reinvested in the fund or retain it in the form of cash.
r = (NAVt -NAV t -1) + It+ Gt
___________________________________
NAV t -1

Where, r = return on mutual fund
It = Income at time period ‘t’
NAVt=Net asset value at the time period ‘t’
Gt = Capital gain distribution at time period ‘t’
NAV t -1 = Net asset value at time period t -1
Example: A mutual fund that had a net asset value of Rs. 10 at the
beginning of month -t made income an d capital gain distribution of
Rs. 0.05 and Rs. 0.04 per share respectively during the month, and then
ended the m onth with a net asset value of Rs. 10.03. Calculate monthly
return.
r = (NAVt -NAV t -1 ) + It+ Gt
___________________________ ________
NAV t -1

By substituting, we get
r = (10.03 -10.00) + 0.05+ 0.04
___________________________________
10.00

r = 0.012 = 1.20 % p.m. or 14.4 % p.a

munotes.in

Page 20

Mutual Fund
20 2.4 PORTFOLIO TURNOVER RATE AND
TRANSACTION COSTS
2.4.1 Portfolio Turnover Rate
It provides a measurement on how many times the fund managers bought
or sold the assets under a fund over a period of time. It is often determined
by the market conditions and fund management style.
How to calculate Portfolio Turnover Rate?
We can take t he minimum of either bought stock or sold stocks under a
fund and divide them by the average Assets Under Management (AUM).
The number you get is the Portfolio Turnover Ratio of that particular fund.
The stocks and the AUM have to be taken from the same ti me horizon.
The time horizon can be monthly or yearly. The Portfolio Turnover Rate is
always stated in percentage.
Suppose an equity fund purchased stocks worth Rs. 350 crore and sold
stocks worth Rs. 450 crore. The average AUM of the fund is Rs.1400
crore . In this case, the Portfolio turnover ratio of the fund is 25%, which
means one -fourth of the stocks were traded.
This can be calculated using the following Portfolio Turnover Ratio
formula :
Portfolio Turnover Ratio = Minimum stocks bought or sold / Aver age
AUM * 100
Portfolio Turnover Ratio = 350 Crore/ 1400 Crores *100
= 25%
Higher Portfolio Turnover Ratio Indicates
1) High frequency in stock( high trading activities)
2) Higher transaction cost, makes the fund manage ment expensive
3) Fund manager can take risk of purchase and sale of stocks.
Lower Portfolio Turnover Ratio Indicates
1. Low frequency in stock ( Low trading activities)
2. Lower transaction cost, does not affected by the management cost
3. The fund managers are co nfident on the purchase of stock and want
to hold them till the tenure.
4. The high risk factor make fund managers less active.
munotes.in

Page 21

Different types of funds

21 2.4.2 Transaction Cost
Asset Management Companies (AMC) charge a well -earned fee from the
investors and these charges are approve d by the Securities and Exchange
Board of India (SEBI). The fees include costs such as advisory fees,
operational costs, investment management fees, registrar and transfer
agent fees, ongoing service charges, etc. All the expenses involved are
together kno wn as the total expense ratio (TER).
It is divided into two parts
1) One Time charges
 Transaction charges for first -time investors: If you invest directly
(without agents - Direct Mode) into a mutual fund scheme, then there will
be no transaction charges at as all. If you invest through mutual fund
agents/ distributors (Regular), then no charges are there for investments
less than Rs 10,000. However, Rs 150 will be charged for investments
more than Rs 10,000.

For example, if you invest Rs 7,000, then the enti re 7,000 will be invested
and you will purchase units for the whole Rs 7,000 but if you invest Rs
11,000, then Rs 150 will be deducted and the remaining amount Rs 10,850
(11,000 -150) will be invested and you will purchase units for Rs 10,850
only.

 Transac tion charges for existing investors: If you invest directly
(without agents - Direct Mode) into a mutual fund scheme, then there will
be no transaction charges at all. If you invest through mutual fund agents/
distributor (Regular), there will be no charges for investments less than
Rs 10,000. For investments more than Rs 10,000, a charge of Rs 100 will
be levied.

 Transaction charges for SIP: If you invest directly (without agents -
Direct) into a mutual fund SIP scheme, then there will be no transaction
charges at all. However, if you invest through agents/ Distributor -
Regular, while there will be no charges at all if the total investment in a
SIP is less than Rs 10,000 if the total investment is more than Rs 10,000,
then Rs 100 will be deducted. This Rs 1 00 will be deducted in
four installments of Rs 25 each on 2nd, 3rd 4th and 5th months.

 Exit Charges: Exit charges are like a penalty that the investor has to
pay if he sells the units before the specific period applicable for a mutual
fund scheme. Exit ch arges may vary from one scheme to another scheme.
Generally, exit charges am from 1% to 3%.
For example, if you are trying to sell the units of an equity mutual fund
before 1 year, then 1% will be deducted from the final amount that you are
going to recei ve. munotes.in

Page 22

Mutual Fund
22 Exit charges are deducted from the scheme's NAV and hence the NAV
value will come down resulting in a lesser final amount. This is known as
"Redemption NAV'.
For example, you have invested in an equity mutual fund and you got
1,000 units. You are tryi ng to withdraw the entire 1000 units after 10
months. The current NAV is 15. So, exit load of 1% is applied
2) Recurring Charges
Recurring charges are collected by the mutual fund company for providing
various professional fund management services to the inv estors. These
recurring charges are calculated on a daily basis and deducted from the net
assets of the fund. The NAV declared every day is after deducting these
recurring charges
2.5 SUMMARY
 Mutual funds are also fast emerging as a preferred option for meeti ng
individual’s financial goals according to each individual’s choice of
investment horizon and risk appetite. The investors can invest in
different mutual fund sche mes by submitting the application form
physically at the Official Points of Acceptance or through the website/
mobile app of the mutual fund house, or other digital options provided
by Registrar & Transfer Agents, etc.
 Hybrid mutual funds invest across asset classes like equities, debt
securities and gold. The different kinds of hybrid mutual funds
are:Conservative hybrid funds, Balanced hybrid funds, Aggressive
hybrid funds
 The portfolio turnover ratio refers to the percentage change of the
assets in a fund over a one -year period.
 Transaction Cost includes the costs such as advisory fees, operational
costs, investment management fees, registrar and transfer agent fees,
ongoing service charges, etc. All the expenses involved are together
known as the tota l expense ratio (TER).
2.6 MULTIPLE CHOICE QUESTIONS

1. The value of one unit of investment in Mutual fund is called the
_______________.
A) Net Asset Value B) Issue value
C) Market value D) Gross Asset value

2. The feature of a mutual fund, where it spr eads the investment in
varied stocks and sectors by pooling the funds of various investors, is
called as ______________.
A) Professional Management B) Affordability
C) Diversification D) Profit munotes.in

Page 23

Different types of funds

23 3. The funds in which units can be purchased only during the initial offer
period are called
A) Open -Ended Funds B) Close -Ended Funds
C) Interval Funds D) Fixed maturity plan

4. ______________ are considered high -risk funds but also tend to
provide high returns.
A) Equity Funds B) Money Market Fund s
C) Balanced or Hybrid Funds D) Debt Funds

5. ____________ are funds that invest in company debentures,
government bonds and other fixed -income assets.
A) Equity Funds B) Money Market Funds
C) Balanced or Hybrid Funds D) Debt Funds

6. Which typ e of fund is more volatile?
A) Large -cap funds B) Mid -cap funds
C) Small -cap funds D) Hybrid Funds

7. Investors can enter and exit under _______ at any time
A) Fixed maturity plan B) Open -Ended Funds
C) Close -Ended Funds D) Interval fund

8. Mutual Fund schemes are first offered to investors through.
A) Stock exchange B) New Fund Offer
C) Initial Public Offer D) AMFI

9. In ____________ funds, the money is invested primarily in short -term
or very short -term instruments e.g. T -Bills, CPs etc.
A) Growth funds B) Income funds
C) Liquid funds D) Tax -Saving Funds (ELSS)

10. Transaction cost is ………… with investment in Mutual Funds.
A) High B) Low
C) Very high D) Nil

Solution - 1 -A, 2- C, 3- B, 4- A, 5- D, 6- A, 7-B, 8 – B, 9- C, 10 - B

2.7 QUESTION

1) Explain the different types of mutual fund schemes and their criteria
to select the scheme.

2) What is Portfolio Turnover Rate? Mention how we can calculate the
Portfolio Turnover Ratio?

3) Write a note on Transaction Charges on Mutual Fun d

4) Briefly explain Expense ratio in Mutual Fund
munotes.in

Page 24

Mutual Fund
24 2.8 REFERENCES
Books
1) Workbook for NISM -Series -V-B: Mutual Fund Foundation
Certification Examination

2) Workbook for NISM -Series -V-C: Mutual Fund Distributors (Level 2)
Certification Examination

3) Mutual Funds - Portfolio Structures, Analysis, Management, and
Stewardship John A. Haslem, Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.

4) Financial Management - Ravi Kishore, Taxmann Publication
Website
https:// corporatefinanceinstitute.com/
https://www.timesnownews.com/
https://www.amfiindia.com/
https://www.icicidirect.com/
https://www.utimf.com/
https://pgimindiamf.com/
https://www.etmoney.com/
https://upstox.com/



munotes.in

Page 25

25 3
STRUCTURE AND KEY CONSTITUENTS
OF MUTUAL FUND
Unit Structure
3.0 Objectives
3.1 Sponsor
3.2. Trustees
3.3 Asset Management Company (AMC)
3.4 Custodian
3.5 Depositories
3.6 Distributors
3.7 Summary
3.8 Multiple Choice Questions
3.9 Question
3.10 Reference
3. 0 OBJECTIVES
1) To understand the roles of Sponsor, Trustees, AMC, Custodian
2) To know about the depositories
3) To acquire the knowledge about the distributors
Introduction
It is a trust that pools together resources of investors to make a foray into
investments in capital ma rkets, thereby making investors part owners of
the assets of mutual funds.
Mutual funds provide the leverage of earning higher returns with little
savings. For Ex. ­ if an individual has Rs.50000 as savings, he may invest
in few stocks and create a portfo lio of his own, but his returns would be
limited to changes in the market value of the share and dividends from the
stocks. He would be exposed to the risk of those stocks not performing
well. Whereas in case of mutual funds, with little investment, you ge t a
share of larger portfolio and the risk is diversified to lot many stocks in the
portfolio. As a matter of financial discipline, if I have Rs. l 000 per month
to invest in, I can invest in a fund every month through a Systematic
Investment Plan (SIP) munotes.in

Page 26

Mutual Fund
26 So by investing in mutual funds you are not only putting your eggs in
different baskets but also overcoming the limitation of the quantum of
investment in hand and you can do away with the burden of managing you
portfolio of your own as this is being 'outso urced' to a fund manager
having expertise in the field
Parties to Mutual Fund
1. Sponsor
2. Trustees
3. Custodian
4. Asset Management Company
5. Distributors/ Agents
6. Bankers
7. Registrar and Transfer Agent

3.1 SPONSOR ( PROMOTERS OF A COMPANYWHO
RUNS THE SHOW)
 The SEBI (M utual Funds) Regulations, 1996, defines sponsor as any
person who, acting alone or in combination with another body
corporate, establishes a mutual fund.
 The sponsor forms the Trust and appoints the board of trustees,
appoints the AMC as the fund managers and may also appoint
custodian to hold the fund assets. munotes.in

Page 27

Structure and Key
constituents of mutual fund

27  As per the SEBI (Mutual Fund) Regulations, 1996, sponsor makes an
application for registration of the mutual fund and contributes atleast
40% of the net worth of the asset management company.
 The s ponsor must comply with the eligibility criteria without which
the Board may reject the application.
Eligibility criteria for grant of certificate of registration are that the
sponsor should
(i) have a sound track record and general reputation of fairness and
integrity in all his business transactions.
(ii) (the applicant is a fit and proper person
(iii) in the case of an existing mutual fund, such fund is in the form of a
trust and the trust deed has been approved by the Board;
(iv) the sponsor has contributed or contribut es at least 40% to the net
worth of the asset management company:
(v) the sponsor or any of its directors or the principal officer to be
employed by the mutual fund should not have been guilty of fraud or
has not been convicted of an offence involving moral t urpitude or
has not been found guilty of any economic offence;
(vi) appointment of trustees to act as trustees for the mutual fund in
accordance with the provisions of the regulations
(vii) appointment of asset management company to manage the mutual
fund and operate the scheme of such funds in accordance with the
provisions of these regulations;
(viii) appointment of custodian in order to keep custody of the securities
or gold and gold related instrument or other assets of the mutual
fund held in terms of these regulations, and provide such other
custodial services as may be authorised by the trustees
3.2. TRUSTEES
Trustees hold unit holder money in authentic manner. The Eligibility
Criteria for a trustee and the rights and obligations of the trustees as stated
in the SEBI ( Mutual Fund) Regulations, 1996 are as follows:
A) Eligibility criteria for being a trustee:
No person shall be eligible to be appointed as a trustee unless­
(a) he is a person of ability, integrity and standing; and
(b) has not been found guilty of moral turpitude; and
(c) has not been convicted of any economic offence or violation of any
securities laws; munotes.in

Page 28

Mutual Fund
28 (d) has furnished particulars as specified in Form C.
(e) No asset management company and no director (including
independent director), officer or employee of an asset managem ent
company shall be eligible to be appointed as a trustee of any mutual
fund
(f) No person who is appointed as a trustee of a mutual fund shall be
eligibleto be appointed as a trustee of any other mutual fund
(g) Two­thirds of the trustees shall be independent pe rsons and shall not
beassociated with the sponsors or be associated with them in any
manner whatsoever
(h) In case a company is appointed as a trustee then its directors can act
astrustees of any other trust provided that the object of the trust is
not in conf lict with the object of the mutual fund.
B) Role of Trustees
(a) Ensure that Asset Management Company is managed independently
and interest is not compromised.
(b) Ensure that transactions entered by Asset Management Company as
per regulations and schemes .
(c) Ensures th at Asset Management Company has not given any undue
advantage to its associates.
(d) Review the investor complaints and ensure redressal; follow the
code of conduct mentioned in the Vth Schedule of the The SEBI
(Mutual Funds) Regulations, 1996
(e) Trustees to fil e details of transactions of dealing in securities on
quarterly basis. It also reviews the networth of the AMC on
quarterly basis.
(f) As a custodian of funds be accountable for the funds and property of
respective schemes.
(g) Trustees should take remedial action for non ­compliance of
regulations.
(h) Trustees should check Asset Management Companies compliances.
C) Approval of the Board for appointment of trustee
(1) No trustee shall initially or any time thereafter be appointed without
prior approval of the Board.
(2) The exis ting trustees of any mutual fund may form a trustee
company to act as a trustee with the prior approval of the Board.
munotes.in

Page 29

Structure and Key
constituents of mutual fund

29 D) ) Trustees shall exercise due diligence as under:
A. General Due Diligence :
(a) The Trustees shall be discerning in the appointment of the d irectors
on the Board of the asset management company.
(b) Trustees shall review the desirability or continuance of the asset
management company if substantial irregularities are observed in
any of the schemes and shall not allow the asset management
company to float new schemes.
(c) (The Trustee shall ensure that the trust property is properly
protected, held and administered by proper persons and by a proper
number of such persons.
(d) The Trustee shall ensure that all service providers are holding
appropriate re gistrations from the Board or concerned regulatory
authority.
(e) The Trustees shall arrange for test checks of service contracts.
(f) Trustees shall immediately report to the Board of any special
developments in the mutual fund.
B. Specific due diligence: Th e Trustees shall :
(i) obtain internal audit reports at regular intervals from independent
auditors appointed by the Trustees,
(ii) obtain compliance certificates at regular intervals from the asset
management company,
(iii) hold meeting of trustees more frequently,
(iv) consider the reports of the independent auditor and compliance
reports of asset management company at the meetings of trust ees for
appropriate action, maintain records of the decisions of the Trustees
at their meetings and of the minutes of the meetings,
(v) prescribe and adhere to a code of ethics by the Trustees, asset
management company and its personnel,
(vi) communicate in writing to the asset management company of the
deficiencies and checking on the rectification of deficiencies.
3.3 ASSET MANAGEMENT COMPA NY (AMC)
An Asset Management Company that manages a mutual fund. The AMC
hires a professional money manager, who buys and sells securities in line
with the fund’s stated objective. It is an organized form of money portfolio
manager which has several or var ied investment objectives. munotes.in

Page 30

Mutual Fund
30 Under SEBI Regulations, every mutual fund is required to have an Asset
Management Company (AMC) incorporated in accordance with the
Companies Act, 2013 to manage the funds of the mutual fund. The AMC
should approve by SEBI and sh ould enter into an agreement with the
trustees of the mutual fund to formulate schemes, raise money against
units, invest the funds in accrued securities and after meeting the
permissible costs as per norms, distribute income to the shareholders of
the fun ds.
Restrictions on AMC are:
 Not act as a trustee of any mutual fund
 Not undertake any activity conflicting with the activities of the mutual
fund
 AMC shall not invest in any of its schemes unless intention to invest
has been made in the offer document
Obligations of AMCs are:
 AMC shall not carry transactions with any broker whether associated
with sponsor or not; for average of 5% or more; with exceptions
 Ensure regulatory compliances & approvals when required
 Liable to mutual funds for the acts of omissi on & commission
 Details of directors, their interest in other companies; changes in
interest to be submitted to the trustees
 Fund manager to ensure that the funds of the scheme are invested to
meet the objectives of the scheme
 Due diligence and care in all investment decisions
 AMC shall not utilize the services of any sponsor or its associates etc
 AMCs to make half yearly disclosures for:
 Underwriting obligations
 Devolvement
 Subscriptions in the schemes lead managed by associates
 Subscriptions to debt/ equi ty issues where sponsors/associates acted
as arranger/ lead manager


munotes.in

Page 31

Structure and Key
constituents of mutual fund

31 3.4 CUSTODIAN
Appointment of Custodian
 The mutual fund should appoint a custodian to carry out the custodial
services for the scheme and send intimation of the same to the SEBI
within fifteen days of the appointment.
 However, in case of a gold exchange traded fund scheme (i.e. a
mutual fund scheme that invests primarily in gold/gold related
instruments), the assets may be kept in custody of a bank registered as
a custodian with the SEB I.
 In case of a real estate asset mutual fund scheme (i.e. a mutual fund
scheme that invests directly/indirectly in real estate assets/ other
permissible assets), the title deed of the assets held by it may be kept
in the custody of a SEBI ­registered cust odian.
 A custodian in which the sponsor or its associates hold 50 per cent or
more of the voting rights or the share capital or where 50 per cent or
more of the directors of the custodian represent the interest of the
sponsor or its associates, cannot act as custodian for a mutual fund
constituted by the same sponsor or any of its associates or subsidiary
company.
 However, a custodian whose 50 per cent or more rights in held by the
sponsors/its associates, can act as a custodian for mutual fund
constitute d by the same sponsor/associates/subsidiaries if
i. networth of the sponsor is `20,000 crore,
ii. its 50 per cent/more directors do not represent the interest of the
promoter/associates,
iii. the custodian and the AMC are not subsidiaries of each other and do
not ha ve common directors and they undertake to act independently in
their dealings with the scheme.
Agreement with custodian
The mutual fund should enter into a custodian agreement, which should
contain the clauses that are necessary for the efficient and ord erly conduct
of the affairs of the custodian. The agreement, the service contract, terms
and appointment of the custodian can be entered into only with the prior
approval of the trustees.
3.5 DEPOSITORIES
A depository is an organisation where the securities of an investor are held
in the electronic form at his request through the medium of a Depository
Participant (DP). If the investor wants to utilize the services offered by a
Depository, the investor has to open a beneficiary account with the
Depository throu gh a DP. DP is the representative or agent in the munotes.in

Page 32

Mutual Fund
32 depository system and it maintains the investor’s securities account
balances and intimates to him the status of his holdings from time to time.
The investor can open accounts with one or more DPs. When a p erson
buys any security e.g. Stock, M.F., Debentures already in depository
mode, the buyer will become owner of the said security in the depository
within a day of settlement being made. The buyer is not required to apply
to the company for registering the security in his name.
Depository is an agency for keeping security on deposits in electronic
(paperless) form and makes scripless trading possible. The physical form
of securities could be held in electronic form by way of immobilization
and dematerializ ation. While custodians immobilize the physical securities
by custodial function, depositories interface with the Investors only
through depository participants who are registered with the depository as
well as SEBI.
Definition and Meaning of Depository
According to Section 2 (e ) of the Depository Act, 1996, “ Depository
means a company formed and registered under the companies Act, 1956
and which has been granted a certificate of registration under Section 12 (
1 A) of the Securities and Exchange Board of India Act, 1992.
There are two depository players in the market i.e., National Securities
Depository Limited (NSDL) and Central Depository Services (India)
Limited (CDSL)
Definition and Meaning of Depository Participant
Depository Participant (DP) is t he agent of the depository and is the
interface between the depository and the investor. According to SEBI
Guidelines, financial institutions, banks, custodians, stock brokers etc can
become depository participants.
Stocking Holding Corporation of India Li mited (SHCIL) is the first
depository participany in India registered with NSDL. Besides SHCIL, a
number of new and private and foreign bank like HDFC Bank, ICICI
Bank, IDBI Bank, Hong Kong Bank, Standard Chartered Bank are
providing shares depository serv ices to its customers from its various
branches.
3.6 DISTRIBUTORS
The mutual fund distributor’s job is to assess the needs, limitations,
resources and financial goals of the investor. This analysis would help the
mutual fund distributor arrive at a suitable as set allocation plan for the
investor.The distributor then goes on to identify mutual fund schemes,
which are appropriate for the investor in the given situation. Look at this
in another way, the mutual fund distributor analyses the situation of the
investo r; whereasthe fundmanager analyses the market factors. Both the
professionals play important roles in helping the investor achieve one’s
financial goals. munotes.in

Page 33

Structure and Key
constituents of mutual fund

33  Different kinds of Mutual Fund Distributor
In India, Mutual Funds distributed through multiple channel s such as
Individual Mutual Fund Distributors, Bank Branches, National
Distributors through their branches or their sub ­agents, post offices and
directly by the AMCs. Now, Mutual Fund is distributed with the use of
technology such websites, mobile applicat ions and stock exchanges as
well as traditional method of paper based applications forms.
1) Individual Players
Mutual Fund Distributors start their business – single ­handedly, as
individuals.This is a very large part of the distribution link between the
asset management companies and the investors. Almost all of them
operated as individuals, and single ­handedly, without any staff orskeleton
staff, mainly to handle the paperwork nut now days distributors have
websites and apps.
2) Non Individual
Non­individual entities include partnerships, regional distributors, national
distributors, NBFCs, banks, stockbrokers, etc. Out of these, the
distribution companies and banks are sometimes referred as institutional
distributors
 Banks
Banks/ NBFCS/ Cooperative Banks
It has emerged as a prominent channel for the distribution of mutual fund
products to theiraccount holders. Within the banking structure, the
multinational banks were the first to enterthe business of mutual fund
distribution. The private sector banks and the public ­sector bankentered
the business much later. Nowadays, even some cooperative banks are also
distributing mutual funds. Banks employ different business units catering
to different client segments, viz., retail banking and wealth management or
private banking.
Modes of Distribution
Financial products were distributed using application forms printed on
paper. This process involved carrying physical forms to the client’s place
and then depositing those forms at the respective official points of
acceptanc e (OPOAs). With the advent of the internet and mobile phones,
the distribution channelshifted to digital mode.
Many distributors and their investors still prefer the paper mode, whereas
the new age Internet ­based businesses, viz. e ­commerce platforms, and
online distributors operate entirely through the digital mode. On the other
hand, there are a few that employ a hybrid mode, where some transactions
take place digitally, some others happen physically.

munotes.in

Page 34

Mutual Fund
34  Online Channel Partner
A few distributors offer tran saction support through their own websites.
Investors, also prefer to transact through the internet, rather than the
cumbersome paperwork and dependence on the distributor.
 Stock Exchange Platforms
SEBI has facilitated buying and selling of the units of op en­ended mutual
funds through the stock exchanges. Exchanges have developed mutual
fund transaction engines for this purpose. The low cost and deeper reach
of the stock exchange network enable an increased level of participation of
retail investors in mutu al funds. Ex ­ NSE MF
 MF Utilities
Investors who register on the MFUtilities are allotted a Common Account
Number (CAN) under which all their mutual fund holdings are
consolidated. Investors have to be KYC compliant to register for a CAN.
Ex­ Prudent
 Compu ter based and Mobile Based Apps
These are through apps and websites that are created by distributors to
facilitate investments for their clients. These multiple channels make it
easier for clients to transact in a simple manner.
 Electronic Platforms creat ed by AMCs
AMCs have also created their own facilities like web ­based and mobile ­
based applications that facilitate various transactions.
3.7 SUMMARY

 Sponsors: Sponsors are the person who alone or in combination with
body corporate, establishes a mutual fu nd.

 Custodian: It is an agency providing custodial services to the fund.

 Trustees: Every mutual fund is in the form of trust deed and the trustee
should be appointed who shall hold the property of mutual fund for the
interest of the unit holders.

 Asset Management Company: Under SEBI Regulations, every
mutual fund is required to have an Asset Management Company
(AMC) incorporated in accordance with the Companies Act, 2013 to
manage the funds of the mutual fund. The AMC should approve by
SEBI and should en ter into an agreement with the trustees of the
mutual fund to formulate schemes, raise money against units, invest the
funds in accrued securities and after meeting the permissible costs as
per norms, distribute income to the shareholders of the funds. munotes.in

Page 35

Structure and Key
constituents of mutual fund

35  Distributor: The mutual fund distributor analyses the situation of the
investor, whereasthe fundmanager analyses the market factors.

3.8 MULTIPLE CHOICE QUESTIONS

1. Who establishes the Mutual Fund in India?
a) Securities Exchange Board of India b) Asset Manage ment Company
c) Sponsor d) Shareholders

2. _____________ are also known as the protectors of the fund and are
employed by the fund sponsor.
a) Sponsor b) Trustees
c) Asset Management Company d) Custodian

3. Mutual funds are constitut ed in India as ____________.
a) Trusts b) Limited liability partnership
c) Companies d) Non ­Government organisations

4. ____________ are an important link between fund managers and
investors.
a) Trustees b) Asset Management Company
c) Custodian d) Registrar And Transfer Agents

5. Net Asset Value (NAV) of a mutual fund scheme is calculated and
published on websites of ________.
a) SEBI website only b) SEBI and AMFI websites
c) AMFI and Mutual fund website d) Mutual fund website only

6. ……………. helps in financial transactions of a mutual fund.
a) custodian b) banker
c) distributor d) sponsor

7. ……………… helps in financial transactions of mutual funds.
a. Distributors b. Trustees c. Custodians d. Banks

8. AMC is required to be approved by …………….
a. RBI b. IBDI c. SEBI d. IRDA

9. AMC look after administrative functions of a mutual fund for which
they charge ………………
a. administrative fees b. professional fees
c. management fees d. Processing fees

10. The ………… … of the mutual fund appoints the AMC.
a. sponsor b. trustee c. custodian d. Broker

11. Mutual Fund is established by ………….
a. Sponsor b. custodian c. Trustee d. Broker
Solution: 1 – C, 2- B, 3- A, 4- D, 5- D, 6- B,7- D, 8- C, 9- C, 10 - B, 11- A
munotes.in

Page 36

Mutual Fund
36 3.9 QUESTION

1) Discuss the Parties in Mutual Fund Industries with its role in short.
2) Write a note on
a) Sponsors
b) Custodian
c) Trustees
d) Asset Management Company
e) Distributor

3.10 REFERENCE
Books
1) Workbook for NISM ­Series ­V­B: Mutual Fund Foundation
Certification Ex amination
2) Workbook for NISM ­Series ­V­C: Mutual Fund Distributors (Level
2) Certification Examination
3) Mutual Funds ­ Portfolio Structures, Analysis, Management, and
Stewardship John A. Haslem, Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.
4) Finan cial Management ­ Ravi Kishore, Taxmann Publication
Website
https://corporatefinanceinstitute.com/
https://www.timesnownews.com/
https://www.amfiindia.com/
https://www.icicidirect.com/
https://www.utimf.com/
https://pgimindiamf.com/
https://www.etmoney.com/
https://upstox.com/

munotes.in

Page 37

37 4
LEGAL AND REGULATORY
FRAMEWORK
Unit Structure
4.0 Objectives
4.1 Role of Regulators in India
4.2. Companies Act, 2013
4.3 Reserve Bank of India
4.4 Role and Function of AMFI
4.5. AMFI Code of Conduct for Intermediaries
4.6 Summary
4.7 Multiple Ch oice Questions
4.8 Question
4.9 Reference
4. 0 OBJECTIVES
1) To understand the role of regulators in India
2) To know about different provisions of companies act, 2013
3) To understand the role of AMFI
4) To know about the AMFI Code of Conduct for Intermediaries
4.1 ROLE OF REGULATORS IN INDIA
The regulations in financial markets are driven by the need to safeguard
the interests of the consumers of various financial products and services,
as well as to ensure a regulated development of the financial markets,
which i s essential for the growth of the economy. Currently, there are four
regulators, viz.,
1. Reserve Bank of India (RBI) that regulates the banking system, as
well as money markets;
2. Securities and Exchange Board of India (SEBI) that regulates the
securities mar kets;
3. Insurance Regulatory and Development Authority of India (IRDAI)
that regulates the insurance market; and
4. Pension Fund Regulatory and Development Authority of India
(PFRDA) that regulatesthe pension market. These regulators come
under the purview of the Ministry of Finance.
munotes.in

Page 38

Mutual Fund
38 4.2 COMPANIES ACT, 2013

Acceptance of Deposit
Section 73 says that no Company shall accept or review deposit under this
Act from public except in a manner provided under Chapter V (
Acceptance of Deposits by Companies), Companies Ac t, 2013.
However, this section does not apply to
a) Banking Companies and
b) NBFC’s as defined under RBI Act, 1934 and
c) Companies specified by central government after consultation of
RBI
Section 73 (3) says that if a company fails to repay the deposit or part
thereof or any interest thereon within the time specified under section 74
or such further times as may be allowed by the Tribunal, the company
shall, in addition to the payment of the amount of deposit or part thereof
and the interest due, be punishable wi th fine shall not be less than Rs..1
Crores but may extend to Rs. 10 Crores and every officer of the company
who is in default shall be punishable with imprisonment which may extent
to 7 years or with fin e which shall not be less than Rs. 25 Lakhs but which
may extend to Rs. 2 Crores or with both.
Misstatement in Prospectus
Section 34 says that where a prospectus, issued, circulated or distributed,
includes any statement which is untrue or misleading in form or context in
which it is included or where any inclusion or omission of any matter is
likely to be misled, every person who authorizes the issue of such
prospectus shall be liable for action under section 447.
Section 447 says that any person who is found to be guilty of fraud, shall
be punishable with imprison ment for a term which shall not be less than 6 munotes.in

Page 39

Legal and Regulatory
Framework
39 months but which may extend to 10 years and shall also be liable to fine
which shall not be less than the amount involved in the fraud, but which
may extend to three times the amount involved in the fraud. Pro vided that
where the fraud in question involves public interest the terms of the
imprisonment shall not be less than three years.
Inducing People to invest money fraudulently
Section 36 says that any person who either knowingly or recklessly makes
any stat ement, promise or forecast which is false, deceptive or misleading,
or deliberately conceals any, material facts, to induce another person to
enter into, or to offer to enter into -
a. Any agreement for, or with a view to, acquiring, disposing of
subscribing for or underwriting, securities; or

b. Any agreement the purpose or the pretended purpose of which is to
secure a profit or any of the parties form the yield of securities or by
reference to fluctuations in the value of securities; or

c. Any agreement, for, or w ith a view to, obtaining credit facilities from
bank or financial institution, shall be liable for action under section
447.
Personation for acquisition of securities
Section 38 says that any person who
a. Makes or abets making an application in a fictitious name to a
company for acquiring, or subscribing for, its securities; or

b. Makes or abets making of multiple applications to the company in
different names or in different combinations of his name or surname for
acquiring or subscribing for its securities; o r

c. Otherwise induces directly or indirectly a company to allot, or register
any transfer therof, securities to him, or to any other person in a
fictitious name, shall be liable for action under section 447.

4.3 RESERVE BANK OF INDIA ACT, 1934
Section 45 QA of the RBI Act gives a depositor similar rights as are
provided under Companies Act to approach Company Law Board for
payment of matured deposits in case of NBFCs.
Section 45QA says the Power of Company Law Board to offer repayment
of deposit.
(1) Every depos it accepted by a non -banking financial company, unless
renewed, shall be repaid in accordance with the terms and condition of
such deposit.
(2) Where a non -banking financial company has failed to repay and
deposit or part thereof in accordance with the te rms and conditions of such munotes.in

Page 40

Mutual Fund
40 deposit, the Company Law Board constituted under section 10E of the
Companies Act, 1956 (1 of 1956), may, if it is satisfied, either on its own
motion or on an application of the depositor, that it is necessary so to do to
safegu ard the interests of the company, the depositors or in the public
interest, direct, by order, the non -banking financial company to make
repayment of such deposit or part thereof forthwith or within such time
and subject to such conditions as may be specifi ed in the order:
Provided that the Company Law Board may, before making any order
under this sub -section, give a reasonable opportunity of being heard to the
nonbanking financial company and the other persons interested in the
matter.]
4.4 ROLE AND FUNCTION O F AMFI
The Association of Mutual Funds in India (AMFI) is dedicated to
developing the Indian Mutual Fund Industry on professional, healthy and
ethical lines and to enhance and maintain standards in all areas with a
view to protecting and promoting the int erests of mutual funds and their
unit holders.
AMFI, the association of all the Asset Management Companies of SEBI
registered mutual funds in India, was incorporated on August 22, 1995, as
a non -profit organisation. As of now, 42 Asset Management Companies
that are registered with SEBI, are its members. (Source: Association of
Mutual Funds in India | Indian Mutual Fund Industry (amfiindia.com) )
Association of Mutual Funds in India (AMFI) is the associ ation of all the
registered Asset Management Companies. AMFI involves the registration
of mutual fund distributors, by allotting them AMFI Registration Number
(ARN), which is mandatory for becoming a mutual fund distributor. For
ARN it is essential for dis tributor to pass NISM Mutual Fund
Certification. Periodically, AMFI also issues various circulars
recommending best practices for the asset management companies, as
well as the distributors. An important point to note here is that AMFI is
neither a regula tory body nor a Self -Regulatory Organisation (SRO).
The objectives of AMFI are:
• To define and maintain high professional and ethical standards in all
areas of operation of mutual fund industry.

• To recommend and promote best business practices and code o f
conduct to be followed by members and others engaged in the activities
of mutual fund and asset management including agencies connected or
involved in the field of capital markets and financial services.

• To interact with SEBI and to represent to SEBI o n all matters
concerning the mutual fund industry.

• To represent to the Government, Reserve Bank of India and other
bodies on all matters relating to the mutual fund Industry. munotes.in

Page 41

Legal and Regulatory
Framework
41
• To undertake nationwide investor awareness programme to promote
proper unders tanding of the concept and working of mutual funds.

• To disseminate information on mutual fund industry and to undertake
studies and research directly and/or in association with other bodies.

• To regulate conduct of distributors including disciplinary ac tions
(cancellation of ARN) for violations of Code of Conduct.

• To protect the interest of investors/unit holders.
4.4.1 AMFI Code of Conduct for Intermediaries
A) AMFI Code of Ethics (ACE)
Association of Mutual Funds in India (AMFI) is to promote the inv estors’
interest by defining and maintaining high ethical and professional
standards in the mutual fund industry. 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 Fifth Schedule to the
Regulation.
The AMFI Code has been drawn up to supplement that schedule, to
encourage standards higher than those prescribed by the Regulations for
the benefit of investors in the mutual fund industry.
While the SEBI Code of Conduct lays down broad principles, the AMFI
Code of Et hics (ACE) sets more explicit standards for AMCs and
Trustees.
B) AMFI’s Code of Conduct for Intermediaries of Mutual Funds
AMFI has also framed a set of guidelines and code of conduct for
intermediaries (known as AMFI Guidelines & Norms for Intermediarie s
(AGNI)), 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 (enclosing copies of the complaint and other
documentary evidence) and ask for an explanation within 3 weeks.
 In case an explanation is not received within 3 weeks, or if the
explanation is not satisfactory, AMFI will issue a warn ing letter
indicating that any subsequent violation will result in cancellation of
AMFI registration. munotes.in

Page 42

Mutual Fund
42  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.
4.6 SUMMARY
 The regulations in financial markets are driven by the need to safeguard
the interests of the consumers of various financial products and
services, as well as to ensure a regulated development of the financial
markets . Regulators such as RBI, SEBI, PFRDA, IRDAI.

 The Companies Act, 2013 provides laws for issue, allotment and
transfer of securities and also public disclosure to be made at and the
matters and report to the stated in the prospectus, newspaper,
advertiseme nt of prospectus. The main points are covered such as
Acceptance of Deposit, Misstatement in Prospectus, Inducing people to
invest money fraudulently etc.

 Section 45 QA of the RBI Act gives a depositor similar rights as are
provided under Companies Act t o approach Company Law Board for
payment of matured deposits in case of NBFCs.

 Association of Mutual Funds in India (AMFI) is the association of all
the registered Asset Management Companies. AMFI involves the
registration of mutual fund distributors, by allotting them AMFI
Registration Number (ARN), which is mandatory for becoming a
mutual fund distributor. It also the objectives and code of conduct for
Intermediaries.
4.7 MULTIPLE CHOICE QUESTION
1. In India, AMC must be registered with____________.
A) Com pany’s Act, 2013 B) No registration required.
C) Securities Exchange Board of India D) Reserve Bank of India

2. ________________ regulates the Mutual fund industry in India.
A) Reserve Bank of India
B) Association of Mutual Funds of India
C) Sec urities Exchange Board of India
D) State Bank of India

3. The Mutual fund industry follows which of the following regulation?
A) SEBI (Mutual fund) regulations 1996
B) Mutual fund regulation 2004
C) Mutual fund regulation 2003
D) RBI

4. AMFI was incorporated on ________________.
A) 22nd August 1995 B) 12th April 1992
C) 1st April 1935 D) 15th August 1947 munotes.in

Page 43

Legal and Regulatory
Framework
43 5. ARN stands for
A) ASSI Registration Number B) AMFI Registration Number
C) AMC Registration Number D) ANC Registration Number

Solut ion: 1 – C, 2 – C, 3- A, 4- A, 5- B,

4.8 QUESTION
1) What are the different role and objectives of AMFI? Explain the code
of conduct of AMFI.
2) Explain the legal provisions of Companies Act, 2013.
3) Define Section 45QA of the Reserve Bank of India Act.
4.8 REFERENCE
Books
1) Workbook for NISM -Series -V-B: Mutual Fund Foundation
Certification Examination
2) Workbook for NISM -Series -V-C: Mutual Fund Distributors (Level
2) Certification Examination
3) Workbook for NISM -Series -V-A: Mutual Fund Distributors
Certificat ion Examination
4) Mutual Funds - Portfolio Structures, Analysis, Management, and
Stewardship John A. Haslem, Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.
5) Financial Management - Ravi Kishore, Taxmann Publication
Website
https://corporatefinanceinstitute.com/
https://www.timesnownews.com/
https://www.amfiindia.com/
https://www.icicidirect.com/
https://www.utimf.com/
https://pgimindiamf.com/
https://www.etmoney.com/
https ://upstox.com/
munotes.in

Page 44

44 5
NET ASSET VALUE
Unit Structure:
5.0 Net Asset Value
5.1 Calculation of NAV
5.2 Accounting,
5.3 Valuation and tax implications.
5.4 Summary
5.5 Questions
5.6 References
5.0 NET ASSET VALUE (NAV)
Net asset value (NAV) is the value of a fund's assets less the v alue of its
liabilities (NAV). The term "net asset value," which is frequently used in
regard to mutual funds, is used to calculate the worth of the assets owned.
The SEC mandates that mutual funds and unit investment trusts (UITs)
compute their NAV at lea st once per business day.
Calculating Net Asset Value
The following is the NAV formula:

Where:
 Value of assets is the value of all the securities in the portfolio
 Value of liabilities is the value of all liabilities and fund expenses (such
as staff salar ies, management expenses, operational expenses, audit
fees, etc.)
5.1 NAV CALCULATION – WHAT IS IT?
The Net Asset Value (NAV) is the market value of a share in a specific
mutual fund and is frequently linked to investments in mutual funds. By
dividing the difference between a company's assets and liabilities by the
number of outstanding shares, you can get NAV. Investors can determine
whether a fund is undervalued or overvalued using NAV. It determines
how much of a specific fund you'll get when you take yo ur investment out.
NAV Calculation: The Formulae munotes.in

Page 45

Net Asset Value

45 The net asset value, or NAV, of a mutual fund is calculated by dividing its
net assets by the total number of outstanding units. The following is the
mathematical formula for calculating mutual fund NAV:
Net Asset Value = (Assets – Liabilities)/Total Number of Outstanding
Units
Here, the assets include the value of securities held and liquid cash, equity,
debentures, bonds, exchange bills, commercial papers, any interest or
dividend earned. The liabilities in clude expenses in the form of money
payable, interest payable, fund management expenses etc. Fund Managers
calculate the NAV of a mutual fund at the end of the market day.
The NAV of a mutual fund is always calculated at the end of the market
day. This is because the market value of securities changes on a daily
basis. Hence, the NAV of a mutual fund also changes daily.
Example 1
Suppose the market value of the securities of a mutual fund scheme is Rs
500 lakh. The mutual fund issues 10 lakh units of Rs 10 each to its
investors. So, the NAV per unit of the fund is Rs 50.
1. Choose the date of the valuation.
Every day the stock market is open, a mutual fund, hedge fund, or ETF's
net asset value (NAV) changes due to changes in the investment value of
the fund. You must use fund data for the calculation on a date that is
pertinent to your needs for your net asset value estimate to be valuable.
Select a precise date and make sure that all the figures you need to
determine the net asset value of your fund originat e from that date.

2. Calculate the total value of the fund’s securities at the end of the
valuation date.
The stocks, bonds, and other securities that the fund owns are its holdings
in securities. You can find out the value o f your fund's investment in each
type of security at the end of the valuation date because these securities'
values are posted on a daily basis. munotes.in

Page 46

Mutual Fund
46
• The value of any cash on hand at the time of valuation, as well as any
short - or long -term assets held by th e fund, should be included in this
total.


5.2 ACCOUNTING:
Mutual funds accounting is a critical matter for the financial system, given
the increasing preference for mutual funds over direct holdings of
securities such as stocks and bonds by the investing public. In particular,
many, if not most, individual investors and retail clients have the majority
of their savings in employer -sponsored 401(k) plans, which typically offer
a selection of mutual funds as the investment choices. The end product of
mutual funds accounting is the accurate pricing of these investment
vehicles and the correct assignment of investment income to holders
thereof. These are thus, the major concerns for the chief financial officers
(CFOs), controllers , and operations managers of mutual fund companies.
Aspects of Mutual Funds Accounting
Numerous fundamental duties related to mutual fund accounting may be
carried out by internal staff members or contracted out to other service
providers, such custodian banks. These procedures consist of:
 Daily calculating the net asset value, or market value, of its investment
portfolio (NAV).
 Planning for and documenting every revenue, including interest and
dividends.
 Tracking interest that is due on bonds and other fixed -income assets
that are held in the investment portfolio.
 Appropriately amortizing bond purchase discounts or premiums. See
the in -depth justification below.
 Keeping track of all transactions involving sec urities, such as purchases
and sales of portfolio investments. munotes.in

Page 47

Net Asset Value

47  Tracking all long - and short -term capital gains that are a result of
transactions involving securities in the fund.
 Keeping track of all financial inputs and outflows related to purchases
and r edemptions of shares by investors.
 Maintaining records of the shares owned, and transactions made, by
each shareholder in the fund.
 Tracking distributions of income and capital gains made to
shareholders in the fund.
In the best mutual funds accounting dep artments, these activities will be
highly automated. However, some manual input, reviews, and adjustments
may still be necessary.
5.3 VALUATION AND TAX IMPLICATIONS
What are the tax implications of investing in mutual funds? It is a question
I frequently c ome across online. Okay, first, let’s get one thing straight. In
India, you have to pay a tax when you earn a profit either by doing
business, selling any commodity or even getting returns from your
investments. And mutual funds are no exception to this ru le. Between all
the meticulous planning, it’s easy to overlook the tax implications of
investing in mutual funds since all we focus on is the generated returns.
Taxes paid on mutual funds can get a bit confusing since there are
multiple points to remember like type of fund, duration of investment, tax
slab etc. Allow us to simplify this for you.
Firstly, understand earnings from mutual funds
There are two main ways to earn by investing in a recognised mutual fund.
Generate earnings from dividends:
Certain mutual funds offer a dividend payout component, meaning you
can earn from the dividends issued by the stocks in the mutual fund you
invested in. The dividend is received in proportion to the number of shares
you hold via the mutual fund.
How are these divi dends taxed?
Initially, dividends were tax -free when investors received them as
companies paid Dividend Distribution Tax (DDT) before they shared the
profits in the form of dividends. Dividends upto Rs. 10 lakh were tax -free
and anything above would attract a 10% DDT.
However, the Union Budget made amendments in 2020, stating that
dividends received from these funds will be taxed normally, meaning the
dividends will be added to your taxable income. Additionally, if the
dividends cross Rs. 5,000, then a TDS of 10% will be levied. If the PAN
and Aadhaar are not linked, TDS will be 20%. munotes.in

Page 48

Mutual Fund
48 Earnings in the form of capital gains:
The profit you earn after selling an asset at a higher price than what you
initially bought is known as a capital gain. Suppose you buy units at
Rs.1000 and they generate a return of 10%. After some time, the value of
your units will be Rs.1100, and if you sell the units, then Rs.100 earned is
taxable.
How are capital gains on mutual funds taxed?
Capital gains are taxable only after the asset is s old. The tax implications
of investing in mutual funds depend on the scheme and the tenure of the
investment. For making calculations simpler, mutual funds are categorized
below
Fund Type Short -Term Capital Gains Long -Term Capital Gains
Equity Funds Less than one year Over one year
Debt Funds Less than three years Over three years Hybrid Equity oriented Funds Less than one year Over one year Hybrid Debt oriented Funds Less than three years Over three years


Fund Type Short -Term Capital Gains (STCG) Long-Term Capital Gains (LTCG)
Equity Funds 15% + surcharge + cess Up to Rs.1 lakh a year is tax -free. Beyond that is taxed at 10%
Debt Funds Taxed based on income tax slab 20% + surcharge + cess Hybrid Equity oriented Funds 15% + surcharge + cess Up to Rs.1 lakh a year is tax -free. Beyond that is taxed at 10% Hybrid Debt oriented Funds Taxed based on income tax slab 20% + surcharge + cess

Securities Transaction Tax (STT)
Apart from the above LTCG and STCG tax, a 0.001% Securities
Transaction Tax is l evied by the government when units of an equity fund
or hybrid equity -oriented funds are sold. It is very similar to Tax Deducted
at Source (TDS). Having STT helps keep a tab on taxpayers from evading
taxes by not disclosing the profit from the sale of the se units.
munotes.in

Page 49

Net Asset Value

49 Are SIP’s an exemption from tax?
In short, no. A Systematic Investment Plan or SIP allows you to invest a
particular sum every month or quarter in a mutual fund scheme. Suppose
you invest in a mutual fund scheme, and after 13 months, you withdra w
them. Since these funds are held for more than one year, you will get long -
term capital gains. If the gains are less than Rs. 1L, you don’t have to pay
tax.
If you withdraw before 12 months, you will receive short -term capital
gains taxed at 15% + surcharge + cess, irrespective of your income tax
slab.
In a nutshell
Just keep in mind that the longer you stay invested, the better it is. The tax
implications of investing in mutual funds may seem intimidating at first,
but it begins to make more sense as you ke ep investing. As the adage goes,
Rome wasn’t built in a day.
All you need to ensure is that you’re clear on your goals, read the products
carefully, and do your homework. You can always take the help of Fi’s
online calculators before taking the final plunge.
1. Is income from a mutual fund taxable?
The tax depends on the mutual fund scheme and the tenure of the
investment. Any dividends made from Mutual Fu nds are if the dividends
cross Rs. 5,000, then a Tax Deducted at Source (TDS) of 10% will be
levied. If the PAN and Aadhaar are not linked, TDS will be 20%.
Long Term Capital Gains Tax: Any profit you make from the sale of an
investment, held for an extended period, be it stocks or real esta te, results
in Long Term Capital Gains tax. The duration varies for different assets.
Example: For stocks & bonds > over 1 year.
Gold > over 3 years.
Short -term capital gain tax: It is levied on capital gains from the sale of an
asset held for a short per iod. Did well in the stock market? Just sold an
asset that you held for a brief period? Then, get ready to shell out some
hefty charges as Short -Term Capital Gain tax! A type of tax that needs to
be paid by you for the profits gained from short -term invest ments.
P.S Apart from LTCG & STCG tax, a 0.001% Securities Transaction Tax
is also charged when units of an equity fund or hybrid equity -oriented
funds are sold.
2. How much tax do you pay on mutual fund withdrawal?
The rule of the game is to stay investe d longer. The longer you hold your
mutual funds, the more tax efficient they become.
munotes.in

Page 50

Mutual Fund
50 Equity Funds
STCG: 15% + surcharge + cess
LTCG: Up to Rs. 1 lakh a year is tax -free. Beyond that is taxed at 10%
Debt Funds
STCG: Taxed based on income tax slab
LTCG: 20% + surcharge + cess
Hybrid Equity -oriented Funds
STCG: 15% + surcharge + cess
LTCG: Up to Rs. 1 lakh a year is tax -free. Beyond that is taxed at 10%
Hybrid Debt oriented Funds
STCG: Taxed based on income tax slab
LTCG: 20% + surcharge + cess
Note:
STCG stands for Short -Term Capital Gains
LTCG stands for Long -Term Capital Gains
3. Are all mutual funds tax -exempt?
No. Mutual funds are not tax -exempt. Like all things, you have to pay
taxes if you earn a profit on your investments. The good thing is that
mutual fu nds, when used right, are tax efficient. Plus, there are mutual
funds that help you save on income tax
ELSS: Planning to dabble in mutual funds for tax -saving benefits? Check
Equity Linked Saving Schemes (ELSS). Unlike other equity funds, it
enables you to invest in stocks while remaining eligible for tax deductions
(upto Rs. 1.5 lakh)! The caveat here is a 3 year lock -in period.
ULIP: It's insurance + investment! Here part of the premium paid gets
invested (as per choice) & the rest becomes part of an insuran ce policy.
Unit Linked Insurance Plan (ULIP) also offers tax benefits! Sounds like a
winner, right? Before opting in, dig deeper into the fees.
5.4 SUMMARY
1. The net asset value represents the value of the total holdings of the
ULIP / mutual fund.It may be d ivided by the number of units held by
investors and, thereby, represent the net asset value per unit (NAV/unit).
2. Due to the several levels of entering and exiting investments, as well as
governmental regulations, operating costs, and fees, mutual fund
accounting is frequently complicated. For investors looking to maximize
returns while minimizing risk, these funds can provide a fairly secure
method of investing in a variety of securities. In accounting terminology,
the positive side of a mutual fund's balan ce sheet represents investor munotes.in

Page 51

Net Asset Value

51 deposits and investment dividends, while the negative side represents fund
purchases and expenses.
3. In this chapter, we understand earning from mutual funds, generating
earnings from dividends, forms of capital gains, taxes, etc are covered.
5.5 QUESTIONS
Multiple Choice Questions (MCQs):
1. Normal Rate of Return depends on .............
A) Rate of interest
B) Rate of Risk
C) Both (A) and (B)
D) None of the above

2. Any non -trading income included in the profit should be ............
A) Eliminated
B) Deducted
C) Ignored
D) All of the above

3. Under net asset method, value of a share depends on ...........
A) Net Assets available to equity shareholders
B) Net assets available to debentures holders
C) Net assets available to preference shareholders
D) None of the above

4. Net asset value is also called as ............
A) asset backing value
B) Intrinsic value
C) Liquidation value
D) (A) and (B) and (C)

E) While deciding net asset value, fictitious assets ............
Should not be considered
F) Should be considered
G) Added to total assets
H) None of the above

5. Yield value depends on ..........
A) Paid-up equity share capital
B) future maintainable profit
C) Normal rate of return
D) None of the above

6. Fair value of a share is equal to ...........
A) Intrinsic value only
B) Yield value only
C) Average of intrinsic a nd yield value
D) None of the above munotes.in

Page 52

Mutual Fund
52 7. Value of a partly paid equity share is equal to ..............
A) Value of fully paid share -calls unpaid per share
B) Calls in arrears per share
C) Paid-up value per share
D) None of the above

8. To calculate Net Assets
A) Fictitious Asse ts are excluded
B) Fictitious Assets are included
C) Tangible Assets are excluded
D) Intangible Assets are excluded

9. Yield value is subject to ……………………….
A) Gross profits
B) Operating profits
C) Net profit
D) Losses
True or False:
1. To calculate Net Assets Fictitious Assets are excluded: True
2. Yield value is subject to Losses: False
3. Value of a partly paid equity share is equal to Value of fully paid share -
calls unpaid per share: True
4. Under net asset method, value of a share depends on Net Assets
available to equity shareholders: True
Brief Questions:
1. How NAV is calculated? State the examples.
2. Define Mutual fund accounting with a suitable example.
3. Discuss the valuationand taximplications.
Case Study:
This example will make it clear that returns are independent of NAV.
Let us say, you have Rs 10,000 to invest.
You have two choices:

 Portfolios are the same for both funds, but NAVs are different. munotes.in

Page 53

Net Asset Value

53  So, with your money you get either 1,000 units of Fund X or 200 units
of Fund Y.

 After one year, both funds will hav e grown equally as their portfolios
are the same.
Let's assume that the funds have grown by 20 per cent. Then the NAVs
after one year will be Rs 12 for Fund X and Rs 60 for Fund Y. The value
of your investment will be 1,000*12= Rs
12,000 for Fund X, and 200*60 = Rs 12,000 for Fund Y. Thus, your
returns will be the same, irrespective of the NAV.
When we purchase a mutual fund at its NAV, we are buying it at its book
value. And since we are buying it at its book value, we are paying the right
price for its assets, whether it is Rs 10 or Rs100. What you want to buy in
a scheme is its performance, not its NAV. And the simplest way todo this
is to compare returns over similar periods.
5.6 REFERENCES
1. https://www.toptal.com/finance/corporate -finance -
consultants/corporate -tax-reform -and-future -of-valuatio n
2. https://www.hdfclife.com/insurance -knowledge -centre/about -life-
insurance/what -is-net-
assetv alue#:~:text=The%20net%20asset%20value%20represents,the%
20help%20of%20an%20example.
3. https://primeinvestor.in/how -are-mutual -funds -taxed/

munotes.in

Page 54

54 6
FINANCIAL PLANNING
Unit Structure:
6.0 Financial planning
6.1 Overview of Financial Plan,
6.2 Financial planning strategies
6.3 Asset allocation and wealth management.
6.4 Summary
6.5 Questions
6.0 INTRODUCTION TO FINANCIAL PLANNING
Making a plan for you r future, specifically one that addresses how you
will handle your finances and be ready for all potential expenses and
problems is known as financial planning. The procedure entails assessing
your current financial situation, determining your goals, and d eveloping
and putting into practice pertinent recommendations.
Financial planning can include a wide range of services, which we outline
below. It is comprehensive and all -encompassing. Instead, than
concentrating on just one area of your money, it sees cl ients as actual
individuals with a range of objectives and duties. After that, it discusses a
number of financial realities to determine how to help individuals live
their lives to the fullest.
Financial planning is a step -by-step approach to meeting one’s life goals.
A financial plan acts as a guide as you go through life’s journey.
Essentially, it helps you be in control of your income, expenses, and
investments such that you can manage your money and achieve your
goals.
If you take a closer look at the a bove examples, you’ll find that there is
one factor that connects all of them: money. You need to have an adequate
amount of money to fulfill your goals and desires. More importantly, you
need to have money at the right point in time.
For example, if you w ant to build up a corpus of Rs. 10,00,000 for your
daughter’s college education through investments, you need to grow this
amount by the time she turns 18. Not a year later. This is where financial
planning becomes essential.

munotes.in

Page 55

Financial planning

55 What are the Benefits of fin ancial planning?
There are numerous practical benefits to financial planning. It helps you
to:
1. Increase your savings
It may be possible to save money without having a financial plan. But it
may not be the most efficient way to go about it. When you create a
financial plan, you get a good deal of insight into your income and
expenses. You can track and cut down your costs consciously. This
automatically increases your savings in the long run.
2. Enjoy a better standard of living
Most people assume that they wou ld have to sacrifice their standard of
living if their monthly bills and EMI repayments are to be addressed. On
the contrary, with a good financial plan, you would not need to
compromise your lifestyle. It is possible to achieve your goals while living
in relative comfort.
3. Be prepared for emergencies
Creating an emergency fund is a critical aspect of financial planning.
Here, you need to ensure that you have a fund that is equal to at least 6
months of your monthly salary. This way, you don’t have to worry about
procuring funds in case of a family emergency or a job loss. The
emergency fund can help you pay for varied expenses on time.
4. Attain peace of mind
With adequate funds at hand, you can cover your monthly expenses, invest
for your future goals and splu rge a little for yourself and your family,
without worry. Financial planning helps you manage your money
efficiently and enjoy peace of mind. Don’t worry if you have not yet
reached this stage. If you are on the path of financial planning, the
destination of financial peace is not very far away.
Financial planning for life goals
The importance of personal financial planning in India cannot be ignored.
It is not just about increasing your savings and reducing your expenses.
Financial planning is a lot more t han that. This includes achieving your
future goals, such as:
1. Wealth creation
The rise in the price of everyday items means that if you want to maintain
or increase your current standard of living in the future, you need to create
a sufficient corpus of we alth. You may also want to purchase a better car
or a new house in the future. All this requires money, and it merely
highlights the importance of wealth creation. It is possible to achieve these
goals by carefully investing your money in the right avenues . Equity munotes.in

Page 56

Mutual Fund
56 mutual funds can be a suitable option for long term goals. These funds
could help the investor to accumulate wealth in the long run.
2. Retirement planning
Your retirement may be 25 or 30 years in the future. But that does not
mean you plan for it w hen you retire. To enjoy a happy and comfortable
retired life, you need to start building your safety net right now. Planning
at an early stage in life can help secure your future against financial
uncertainties. Also, you invest lesser amounts if you star t early and gain
from the power of compounding which helps to build a large enough
corpus over the 25 -30 year period.
3. Child’s education
Education has become very expensive, not only in India but across the
world. And in future, this cost is only going to r ise. This is why it is
necessary to start planning from the moment your child is born. Calculate
how much you wish to earn and start investing in long -term investment
avenues that can help you achieve this goal. You can approach a financial
advisor for adv ice if you are not sure how to proceed further.
4. Saving tax
Every year, you are probably paying a substantial amount as tax. But you
can now lower your tax outgo legally. The Indian Income Tax Act
provides various provisions for people to reduce their tax o utgo. By
planning your taxes in advance, you can identify the best avenues to invest
your money and reduce your taxable income. Mutual funds provide a tax -
efficient avenue for investing in your life goals.
Importance of Financial Planning
Financial Plannin g is the process of framing objectives, policies,
procedures, programs and budgets regarding the financial activities of a
concern. This ensures effective and adequate financial and investment
policies. The importance can be outlined as -
1. Adequate funds hav e to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily
investing in companies that exercise financial planning.
4. Financial Planning helps in making growth and expansion programs
which helps in the long -run survival of the company.
5. Financial Planning reduces uncertainties with regard to changing
market trends which can be faced easily through enough funds. munotes.in

Page 57

Financial planning

57 6. Financial Planning helps in reducing the uncertainties which can be a
hindrance to the growth of the company. This helps in ensuring
stability and profitability in concern.
6.1 OVERVIEW OF FINANCIAL PLAN
A financial plan is a written description of a perso n's current financial
condition, long -term financial objectives, and plans for achieving
those objectives. A financial plan can be made independently or with
the assistance of a professional financial planner and begins with a
detailed assessment of the pe rson's present financial situation and
future expectations.
Components of a Good Financial Plan
According to Schwab's 2021 Modern Wealth Survey, people who have
financial plans are more likely to pay their payments on time and save
money each month than pe ople who don't. What then constitutes a sound
financial plan?
Schwab has identified the eight crucial elements every plan should
contain, regardless of the method used to create it. While there are many
ways to go about developing a plan —do it yourself, u se a robo -advisor,
work with a financial planner, or a combination thereof —Schwab has
identified the eight critical components.
1. Financial goals
You can’t make a plan until you know what you want to accomplish with
your money —so whether you’re creating i t yourself or working with a
professional, your plan should start with a list of your goals, both big and
small. It can help to organize them by how soon you’ll need the money:
 Short -term goals are those you hope to achieve in the next five years —
such as p aying off debt or buying a new car.
 Medium -term goals are those you hope to achieve in the next five to 10
years —such as the down payment on a home or starting your own
business.
 Long -term goals are those that are 10 or more years away —including
college an d, of course, retirement.
For each goal, specify a dollar figure and a target date. “The more specific
your goals, the easier it is to measure your progress toward them,” says
Rob Williams, vice president of financial planning at the Schwab Center
for Fina ncial Research.
A host of online tools can help you run the numbers, weigh competing
priorities, and determine the best course of action for you. And if you have
multiple goals to work toward, a robo -advisor, or automated investing
platform, can help you w eigh the importance of each goal, ranking them
by needs, wants, and wishes. munotes.in

Page 58

Mutual Fund
58 Any time is a good time to establish a financial plan.
Ideally, you start investing for financial goals early in life, but any time is
a good time to check in on your current finan cial situation and assess how
you’re doing —Are you still on track? Do you have other goals you hadn’t
previously considered? Having a financial plan helps you assess where
you are today and where you want to go next.
2. Net worth statement
Every plan needs a baseline, so next you should determine your net worth.
Make a list of all your assets (bank and investment accounts, real estate,
valuable personal property) and another one of all your debts (credit cards,
mortgages, student loans). Your assets minus y our liabilities equals your
net worth.
“Don’t be discouraged if your liabilities outweigh your assets,” Rob says.
“That’s not uncommon when you’re just starting out —especially if you
have a mortgage and student loans.”
3. Budget and cash flow planning
Your budget is really where the rubber meets the road, planning -wise. It
can help you determine where your money is going and where you can cut
back in order to meet your goals.
A budget calculator can help ensure you don’t overlook irregular but
important ex penses, such as car repairs, out -of-pocket health care costs,
and real estate taxes. As you’re compiling your list, separate your
expenses into two buckets: must -have items such as groceries and rent,
and nice -to-haves such as eating out and gym membership s.
When considering how your goals fit into your budget, you may want to
pressure -test it using “what if” scenarios: What if you want or need to
retire earlier? What if you downsized your mortgage? Some robo -advisors
offer tools that allow you to adjust ce rtain assumptions to see how they
could affect your savings strategy.
4. Debt management plan
Debt is sometimes treated like a four -letter word, but not all debt is bad
debt. A mortgage, for example, can help build equity —and boost your
credit score in t he bargain. High -interest consumer debt like credit cards,
on the other hand, weighs heavily on your credit score. Plus, every dollar
you pay in finance charges and interest is one you can’t put toward other
goals.
If you have high -interest debt, make sure you create a plan that can help
you pay it off as quickly as possible. If you’re not sure where to start, a
financial advisor can help you prioritize, then determine how much of
your budget should go toward your debts each month. munotes.in

Page 59

Financial planning

59 5. Retirement plan
An old rule of thumb says you’ll need approximately 80% of your present
income in retirement. However, this assumes that retiring will free you
from any work -related expenses and taxes, that you’ve paid off your
mortgage, and that your children will be financial ly independent.
It’s also important to keep in mind that Medicare doesn’t cover
everything, and health care expenses that Medicare doesn’t cover —such
as long -term care —can add up quickly. You also might spend more on
other things in retirement, like trave l, dining out, gifts, or financial support
to a relative or friend.
Plugging in different scenarios into a retirement savings calculator can
help you figure out what you may need in retirement.
Don’t count on the 80% rule
If you’re saving 20 –30% of your pre-retirement income, then the 80%
income -replacement rule is a good place to start. Otherwise, it’s safer to
aim at covering 100% of your pre -retirement income, less whatever you’re
saving for retirement. As with any general rule, there are plenty of
exceptions. So be sure to sit down and fine -tune your retirement budget as
the time draws near. This should be your top priority, since you can
borrow for most other goals but not for retirement.
6. Emergency funds
When something unexpected happens —you lose y our job, for example, or
get hit with an unexpected medical bill —an emergency fund can help you
avoid tapping your long -term savings to make ends meet.
It’s generally a good idea to save enough to cover at least three months’ —
but ideally six months’ —worth of essential living expenses (e.g.,
groceries, housing, transportation, and utilities). Save this money in a
highly liquid checking or savings account so you can access it in a hurry
should the need arise.
7. Insurance coverage
Insurance is an important pa rt of protecting your financial downside —but
neither should you overpay for coverage you don’t need. In general:
 Health insurance : Without it, even routine care can cost a pretty
penny, while a serious injury or hospital stay could set you back tens of
thousands of dollars. As you get older, you may want to consider long-
term care insurance, as well.
 Disability insurance : This coverage protects you and your family in
the event you’re unable to work. Employer -provided disability
insurance typically replaces about 60% of your salary. munotes.in

Page 60

Mutual Fund
60  Auto and homeowners’/renters’ insurance : If you own a car or
home —or rent and can’t afford to replace possessions out of pocket —
make sure you’re adequately protected.
 Life insurance : This is generally a good idea for those with
dependents. Work with an insurance agent to understand what type
of—and how much —coverage makes the most sense for you.
8. Estate plan
At a minimum, you should have a will, which states your final wishes with
regards to your assets, dependents, and who you w ant to administer your
estate. You should also keep the beneficiaries of your insurance policies
and retirement accounts up to date. Also consider establishing powers of
attorney for financial and health care decisions, in the case you become
incapacitated .
For help getting started or tackling more complex estate -planning tasks,
consider working with an estate attorney or a qualified financial planner.
6.2 FINANCIAL PLANNING STRATEGIES
When a company's finances are handled with the intention of attaining it s
goals and objectives while also maximizing shareholder value over a
number of years, it is possible for strategic financial planning to be
successful.
Strategic Financial Planning will offer a personalized financial advising
solution that is suited to yo ur unique needs and circumstances, regardless
of where you are in life. In order to help you succeed, accomplish your
goals, and quickly reach financial independence, our knowledgeable
Financial Advisers partner with you at every stage of your unique
finan cial planning journey.
In a broad sense, strategy formulation refers to the market in which a firm
intends to establish itself as a participant. This indicates that the firm has
decided to offer just certain items and services while refusing to sell any
other products or services at all. It is this choice that determines the
chances that the firm will have and the competition that it will most likely
encounter in the future.
In comparison to just being in a strategic position and then competing,
utilizing s trategic financial planning to set your firm in an advantageous
strategic position offers more advantages. It is important to take a long -
term vision of where the firm wants to go in a few years’ time while
making strategic financial decisions for the orga nization.
Examples of Financial Planning Strategy:
Creating strategic financial management goals for a variety of business
objectives, from product growth to customer service to internal operations
and office culture, is simple and straightforward. Nonethe less, from a
financial standpoint, this goal -setting process is more likely to be focused munotes.in

Page 61

Financial planning

61 on financial benchmarks that can be achieved within a particular time
frame. You can also look at examples of financial planning to get some
additional knowledge on i t.
When it comes to strategic financial management, specific goal
formulation is simpler since numbers make it easier to conceive goals and
measure progress. Examples of strategic financial objectives include the
following:
 Reduce operational expenses by $ 300,000 by the beginning of the
following fiscal quarter.
 Profit margins should be increased by 10% in the current financial year.
 Within the following 12 months, reserve working capital should be
increased by fifty percent.
 Over the following three fiscal quarters, revenue must increase by at
least 2 percent every quarter.
You may work backward from your objective to build a template for how
the company can accomplish the desired result once you’ve determined
what you want to achieve.
6.3 ASSET ALLOCATION
Asset allocation is an investment strategy that aims to balance risk and
reward by apportioning a portfolio's assets according to an individual's
goals, risk tolerance, and investment horizon. The three main asset
classes —equities, fixed -income, and cash a nd equivalents —have
different levels of risk and return, so each will behave differently over
time.
Why Asset Allocation Is Important?
There is no simple formula that can find the right asset allocation for
every individual. However, the consensus among mo st financial
professionals is that asset allocation is one of the most important
decisions that investors make. In other words, the selection of individual
securities is secondary to the way that assets are allocated
in stocks, bonds, and cash and equivale nts, which will be the principal
determinants of your investment results.
Factors that can affect asset allocation
The process of determining the right mix of assets for your portfolio is a
very personal one. When making investment decisions, an investor’s asset
allocation decision is influenced by various factors such as personal
financial goals and objectives, risk appetite, and investment horizon. Let’s
understand these factors.
munotes.in

Page 62

Mutual Fund
62 1. Time of horizon
Time horizon is the number of months or years an investor i s expecting to
invest to achieve a particular goal. Different investment horizons entail
different risk tolerance. For instance, a long -term investment horizon
might prompt an investor to invest in a higher -risk portfolio as the slow
economic cycles and hi gh volatility in the market tend to ride out with
time.
2. Risk tolerance
Risk tolerance refers to an investor’s willingness and ability to lose some
or all of their original investment in anticipation of greater potential
returns. Aggressive investors, or in vestors with high risk profile are likely
to risk most of their investments to get better returns. On the other hand,
conservative investors, or risk -averse investors are likely to invest in
securities that preserve their original investments.
3. Risk vs retu rns
When it comes to investing, risk and returns are inseparably intertwined.
The phrase “no pain, no gain” closely sums up the relationship between
risk and reward. All investments hold some level of risk. The reward for
undertaking risk results in higher potential for better returns.
6.4 WEALTH MANAGEMENT
Introduction
Wealth management is a branch of financial services dealing with
the investment needs of affluent clients. These are specialized advisory
services catering to the investment management needs of affluent clients.
Wealth management is a consultative process. It involves consultations
with affluent clients and discussions on their financial needs and goals.
Strategies & Methods Corporations Use to Maximize Wealth
Corporations, just like individu als, attempt to maximize their wealth by
being productive and investing money wisely. In addition to building
wealth for the organization itself, corporations strive to maximize the
wealth of their stockholders. Common strategies and methods corporations
use to maximize wealth include building their credit, investing in real
estate or other investment products and boosting stock prices.
1. Building Credit
Planned, deliberate borrowing can increase a corporation's reputation in
the lending market, granting it a ccess to larger sums of capital with more
desirable loan terms from a wider range of lenders. Greater access to
capital can help a company finance strong expansion, allowing it to
generate real wealth in the process. Paying accounts in full each month munotes.in

Page 63

Financial planning

63 and keeping your number of open accounts at a reasonable level are
surefire ways of boosting your credit score and credit limits over time.
2. Investing
Corporations can invest in real property, mutual funds and insurance
products, among other things, just as ind ividuals can. Since corporations
owe a fiduciary duty to their stockholders to act in their best interest,
corporations should favor highly conservative investment products such as
government bonds, CDs and dividend -focused mutual funds.
Corporations can a lso maximize income by renting out unused real
property and excess productive capacity. Rather than selling your old
building when moving into a larger facility, for example, consider renting
it out through a real estate agent to boost and diversify your i ncome.
3. Retained Earnings
Building wealth through savings is an age -old method of accumulating
wealth that has gained renewed popularity since the turn of the century.
Wise corporations learn to funnel a portion of all profit into safe, interest -
bearing acc ounts. Smart corporations never leave cash sitting idle.
Retained earnings should always be kept in conservative, interest -bearing
accounts.
4. Shareholder Wealth
Corporations exist to increase the wealth of their stockholders. Some
stockholders want to earn a profit from holding stock and selling it at the
right moment; others want to hold it for years and collect dividend
income. The best ways for a corporation to accomplish these goals for
stockholders are to increase company performance on key investment
metrics such as earnings per share (EPS) to boost stock prices, and to
consistently increase dividend payouts.
6.4 SUMMARY:
 A financial plan provides a detailed picture of your current financial
situation, your financial objectives, and any plans you have m ade to
reach those objectives. Details on your cash flow, savings, debt,
investments, insurance, and any other aspects of your financial life
should be included in good financial planning.
 Financial planning is a continuous process that can help you meet y our
short -term demands, minimize financial stress, and create a nest egg for
your long -term objectives, such as retirement.
 Making a financial plan is crucial because it enables you to maximize
your assets, ensures that you achieve your long -term objective s, and
gives you the assurance you need to handle any hiccups along the way. munotes.in

Page 64

Mutual Fund
64  Asset allocation is an investing strategy that divides up a portfolio's
assets in accordance with an investor's objectives, risk tolerance, and
investment horizon in order to bala nce risk and reward.
 There is no easy formula that can determine the ideal asset allocation
for every person because the three major asset classes —equities, fixed -
income, and cash and equivalents —have varying degrees of risk and
return.
 To maintain and inc rease your wealth, wealth management combines
financial planning and investment strategy. It includes estate planning,
retirement planning, and investment management, among other things.
6.5 QUESTIONS:
Multiple Choice Questions (MCQs):
1. Financial managemen t is concerned with managerial activities relating
to
(a) Planning
(b) Procurement and administration of funds
(c) Optimum utilization of funds
(d) All of the above
2. Which of the following factors affect financial decision?
(a) Cost
(b) Risk
(c) Cash flow p osition
(d) All of the above
3. _________ refers to planning regarding financial needs of the
enterprise various sources of raising funds and their optimum
utilization.
(a) Financial planning
(b) Capital structure
(c) Financial management
4. Which of the followi ng is not a feature of a financial plan?
(a) Simplicity
(b) Cost
(c) Flexibility
(d) Foresight
5. _____ is the decision related to composition of capital structure & also
depends upon ability of the business to generate cash.
(a) Market condition
(b) Flexibil ity
(c) Cash flow ability
(d) Control
munotes.in

Page 65

Financial planning

65 6. Rate of return on capital is exceptionally high in
(a) Under – capitalization
(b) Over – capitalization
(c) Working capital
(d) Fixed capital
7. Which of the factors affect dividend decisions?
(a) Preference of sharehold ers
(b) Earning
(c) Stability of dividend
(d) All of the above
8. _____ refers to the structure of total capital funds raised by the
company.
(a) Fixed capital
(b) Capital structure
(c) Capital requirements
(d) Under capitalization
True or False:
1. Investment i s the employment of funds on assets to earn returns: True
2. Registrar to the issue recommends the basis of allotment: True
3. The rise of the Internet has Significantly democratized the flow of
investment information: False
4. Dividends are paid yearly: True
5. Inves tors should be willing to invest in riskier investments onlyIf they
are true speculators: True
Brief Answer Questions:
1. How to make a financial plan for an individual?
2. How do you measure shareholder wealth maximization?
3. Why is shareholder wealth maximizatio n important?
4. Discuss financial planning strategies with suitable examples.
5. Why is asset allocation important?
Case Study:
Financial Planning is an ongoing process to help you make sensible
decisions about money that can help you achieve your goals in life, its not
just about buying products like pension or an individual saving account.
Following case is take into consideration during Financial Planning.
Name - Mr. Rajiv Tibrewal D.O.B -19.06.1958Age -52yrs 10mths
Employment -Employed with the family business (S pouse is the
proprietor) and is the sole key -man of the said business.
munotes.in

Page 66

Mutual Fund
66 Underinsured with the following dependants
Wife - Kavita Tibrewal D.O.B -09.05.1966Age - 44yrs 11mths
Son- Rahul Tibrewal D.O.B -13.11.1989Age -21yrs 5mths
Daughter -Shreya TibrewalD.O.B -16.11.1993 Age -17yrs 6mths
Plan Needed For Retirement At Age 65 Yrs. With A Current Monthly
Surplus Of Approx. Rs.10,000.00
1. Invest Rs. 3,000.00 per month in a conventional pension plan for 13 yrs.
that might build up a corpus of around Rs.7,00,000.00
2. Inves t Rs.3,000.00 per month in PPF for 13 yrs that might build up a
corpus of around Rs.7,70,000.00
3. Invest Rs.3,250.00 per month for 13 yrs in risk -associated instruments
that have the potential to build a corpus of around Rs.11,00,000.00
4. Allot approxim ately Rs.750.00 per month Le. approx. Rs.4500.00 half
yearly for protection worth Rs.5,00,000.00 for 7 yrs.
5. After 7 yrs. invest the unutilized Rs.750.00 per month for the next 6 yrs
that might build up a corpus of around RS.75,000.00
6. The EXPECTED Cor pus after 13 yrs from the above = Rs.26.45,000.00
The above plan is on the basis of certain assumptions and expectations and
is not binding on anyone. The plan might fail due to various external
factors like Government policies, Natural or unnatural calami ties,
unforeseen circumstances, etc. Whoever follows this plan does so entirely
on his/her own risk and discretion


munotes.in

Page 67

67 7
MARKETING OF UNITS
Unit Structure:
7.0 Marketing of units
7.1 Selecting the right investment products for investors
7.2 Fund distribution and channel management practices.
7.3 Summary
7.4 Questions
7.5 References
7.0 MARKETING UNITS
Definitions
Market un it means a dwelling unit authorized to be developed by zoning
designation and which is not subject to any buyer or price restrictions.
“Project” means the lots or parcels and any development thereon, included
and approved in an application by a developer f or zoning or building
permit, subdivision or consolidation, State Land Use District Boundary
Amendment, Zoning Amendment, or amendment into the Visitor
Market unit means a market dwelling unit in the proposed development
that is not an IZ Affordable Housin g Unit.
Market unit means and refer to any Unit within the Condominium that is
not identified and restricted as an Affordable Unit in either this Master
Deed or any applicable Affordable Housing Declaration. These Units are
sometimes called "Fair Market Un its".
7.1 SELECTING THE RIGHT INVESTMENT
PRODUCTS FOR INVESTORS
The majority of investors seek to make their investments in a way that
minimizes their danger of principal loss while generating extremely high
returns as soon as possible. Due to this, many p eople are constantly
searching for the best investing strategies that would allow them to more
than double their money with little to no risk in a short period of time.
Unfortunately, there isn't an investment option that combines high returns
with low ris k. In actuality, risk and returns are inversely correlated; that is,
when returns increase, so does risk, and vice versa.
Before investing, you must match your personal risk profile with the risks
connected with the investment opportunity. There are some i nvestments munotes.in

Page 68

Mutual Fund
68 that carry high risk but have the potential to generate higher inflation -
adjusted returns than other asset classes in the long term while some
investments come with low risk and therefore lower returns.
There are two buckets that investment prod ucts fall into and they are
financial and non -financial assets. Financial assets can be divided into
market -linked products (such as stocks and mutual fund) and fixed income
products (like Public Provident Fund, bank fixed deposits). Non -financial
assets - many Indians invest via this mode - are the likes of physical gold
and real estate.
Here is a look at the 10 investment avenues that Indians can consider
when saving for financial goals.
1. Direct equity
Investing in stocks might not be everyone's cup of tea as it's a volatile
asset class and there is no guarantee of returns. Further, not only is it
difficult to pick the right stock, timing your entry and exit is also not easy.
The only silver lining is that over long periods, equity has been able to
deliv er higher than inflation -adjusted returns compared to all other asset
classes.
At the same time, the risk of losing a considerable portion or even all of
your capital is high unless one opts for stop -loss method to curtail losses.
In stop -loss, one places an advance order to sell a stock at a specific price.
To reduce the risk to certain extent, you could diversify across sectors and
market capitalisations. To directly invest in equity, one needs to open a
demat account.
Banks also allow opening of a 3 -in-1 account. Here's how you can open
one to invest in shares.
2. Equity mutual funds
Equity mutual fund schemes predominantly invest in equity stocks. As per
current the Securities and Exchange Board of India (Sebi) Mutual Fund
Regulations, an equity mutual f und scheme must invest at least 65 percent
of its assets in equity and equity -related instruments. An equity fund can
be actively managed or passively managed.
In an actively traded fund, the returns are largely dependent on a fund
manager's ability to gen erate returns. Index funds and exchange -traded
fund (ETFs) are passively managed, and these track the underlying index.
Equity schemes are categorised according to market -capitalisation or the
sectors in which they invest. They are also categorised by whet her they are
domestic (investing in stocks of only Indian companies) or international
(investing in stocks of overseas companies).
3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady
returns. They are less volatile and , hence, considered less risky compared munotes.in

Page 69

Marketing of units

69 to equity funds. Debt mutual funds primarily invest in fixed -interest
generating securities like corporate bonds, government securities, treasury
bills, commercial paper and other money market instruments.
However, t hese mutual funds are not risk free. They carry risks such as
interest rate risk and credit risk. Therefore, investors should study the
related risks before investing.
4. National Pension System
The National Pension System (NPS) is a long -term retirement -focused
investment product managed by the Pension Fund Regulatory and
Development Authority (PFRDA). The minimum annual (April -March)
contribution for an NPS Tier -1 account to remain active has been reduced
from Rs 6,000 to Rs 1,000. It is a mix of equity, fixed deposits, corporate
bonds, liquid funds, and government funds, among others. Based on your
risk appetite, you can decide how much of your money can be invested in
equities through NPS.
5. Public Provident Fund (PPF)
Since PPF has a long tenure of 1 5 years, the impact of compounding of
tax-free interest is huge, especially in the later years. Further, since the
interest earned and the principal invested is backed by sovereign
guarantee, it makes it a safe investment. Remember, interest rate on PPF is
reviewed every quarter by the government.
6. Bank fixed deposit (FD)
A bank fixed deposit is considered a comparatively safer (than equity or
mutual funds) choice for investing in India. Under the deposit insurance
and credit guarantee corporation (DICGC ) rules, each depositor in a bank
is insured up to a maximum of Rs 5 lakh with effect from February 4,
2020 for both principal and interest amount.
Earlier, the coverage was maximum of Rs 1 lakh for both principal and
interest amount. As per the need, one may opt for monthly, quarterly, half -
yearly, yearly or cumulative interest option in them. The interest rate
earned is added to one's income and is taxed as per one's income slab.
7. Senior Citizens' Saving Scheme (SCSS)
Probably the first choice of most retirees, the Senior Citizens' Saving
Scheme is a must -have in their investment portfolios. As the name
suggests, only senior citizens or early retirees can invest in this scheme.
SCSS can be availed from a post office or a bank by anyone above 60.
SCSS ha s a five -year tenure, which can be further extended by three years
once the scheme matures. The upper investment limit is Rs 15 lakh, and
one may open more than one account. The interest rate on SCSS is
payable quarterly and is fully taxable. Remember, the interest rate on the
scheme is subject to review and revision every quarter. munotes.in

Page 70

Mutual Fund
70 However, once the investment is made in the scheme, then the interest rate
will remain the same till the maturity of the scheme. Senior citizen can
claim deduction of up to Rs 50 ,000 in a financial year under section
80TTB on the interest earned from SCSS.
8. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is for senior citizens aged 60 years and above to provide them an
assured return of 7.4 per cent per annum. The scheme offer s pension
income payable monthly, quarterly, half -yearly or yearly as opted. The
minimum pension amount is Rs 1,000 per month and maximum Rs 9,250
per month. The maximum amount that can be invested in the scheme Rs
15 lakh. The tenure of the scheme is 10 y ears. The scheme is available till
March 31, 2023. At maturity, the investment amount is repaid to the senior
citizen. In the event of death of senior citizen, the money will be paid to
the nominee.
9. Real Estate
The house that you live in is for self -consumption and should never be
considered as an investment. If you do not intend to live in it, the second
property you buy can be your investment.
The location of the property is the single most important factor that will
determine the value of your proper ty and also the rental that it can earn.
Investments in real estate deliver returns in two ways - capital appreciation
and rentals. However, unlike other asset classes, real estate is highly
illiquid. The other big risk is with getting the necessary regula tory
approvals, which has largely been addressed after the coming of the real
estate regulator.
10. Gold
Possessing gold in the form of jewelry has its own concerns such as safety
and high cost. Then there are the 'making charges, which typically range
between 6 -14 percent of the cost of gold (and may go as high as 25
percent in case of special designs). For those who would want to buy gold
coins, there's still an option.
Many banks sell gold coins nowadays. An alternate way of owning gold is
via paper gold . Investment in paper gold is more cost -effective and can be
done through gold ETFs. Such investment (buying and selling) happens on
a stock exchange (NSE or BSE) with gold as the underlying asset.
Investing in Sovereign Gold Bonds is another option to own paper gold.
An investor can also invest via gold mutual funds. Read more about
sovereign gold bonds.


munotes.in

Page 71

Marketing of units

71 7.2 FUND DISTRIBUTION AND CHANNEL
MANAGEMENT PRACTICES
Distribution of Mutual Funds:
_ Mutual funds are sold through five principal distribution channe ls:
(1) the direct channel,
(2) the advice channel,
(3) the retirement planchannel,
(4) the supermarket channel, and
(5) the institutionalchannel.
Individual investors are primarily served by the first four channels.
Investors transact with mutual fund s directly through the direct channel.
Individual investors utilise third parties or intermediaries who deal with
mutual funds on their behalf through the advisory, retirement plan, and
supermarket channels. On behalf of mutual funds, third parties also of fer
services to fund investors.
The provision of investment advice and continuous support to fund clients
by financial advisors at full -service securities firms, banks, insurance
companies, and financial planning firms is the most significant aspect of
the advice channel. Sales loads or asset -based fees are used to pay
advisors.
The employer -sponsored defined contribution plans that offer mutual
funds and other products for purchase by plan participants through payroll
deductions make up the majority of the retirement plan channel.
The cheap brokers that make up the supermarket channel provide mutual
funds from numerous fund sponsors. Numerous fund offers are exempt
from transaction fees and sales loads.
The institutional channel is used by corporations, fin ancial institutions,
endowments, foundations, and other institutional investors to carry out
transactions with mutual funds either directly or indirectly through third
parties.
Mutual Fund Distribution Channels:
The sale of mutual funds is made available t hrough five distribution
channels (Figure 1). Investors use the direct channel to transact with
mutual funds directly via mail, phone, internet, or at customer service
locations. In the advice channel, shareholders use financial advisors from
securities co mpanies, banks, insurance companies, and financial planning
firms to buy and sell shares. Discount brokers provide investors with a big
selection of mutual funds from a wide range of fund firms through the
supermarket channel. Employers that sponsor define d contribution plans munotes.in

Page 72

Mutual Fund
72 must choose a finite number of mutual funds for retirement plan
participants to invest in. The institutional channel, which also includes
endowments, corporations, financial institutions, trusts, non -profit
organisations, and other gro ups, comprises of non -personal accounts.
In contrast to the institutional channel, investors in the other fourchannels
are principally individuals. Among these four channels, it isonly in the
direct channel that investors interact with mutual fundsthemselv es. In the
other three channels — advice, supermarket, andretirement plan — a third
party or intermediary, whether a discountbroker, financial adviser or a
retirement plan administrator selected bythe 401(k) plan sponsor, places
transaction orders with mut ual funds on behalf of investors and provides
services to investors on behalf of mutualfunds. In many instances, the
funds themselves may not know theidentity of the investors but only that
of the intermediaries.
During the 1990s, it became increasingly co mmon to offer mutualfunds
through more than one distribution channel. The developmentof multi -
channel distribution has brought a larger number of funds intodirect
competition within the same distribution channel.
As a share of mutual fund assets, the advic e channel is the largest,
accounting for an estimated 55 percent of all mutual fund assets at theend
of 2002 (Figure 2). The retirement plan channel is second in sizewith an
asset share of 16 percent. The institutional channel has anestimated 13
percent, t he direct channel 12 percent, and the supermarketchannel 5
percent of all fund assets.
However, the asset share of a distribution channel may not accurately
represent how many investors used it. In a household poll of mutual fund
owners performed in 2001, 48% said that their primary source for
purchasing mutual funds was through a retirement plan, while 37% said
that their primary source was through an adviser. The retirement plan
channel is very new; it didn't begin to grow quickly until the 1990s, which
contributes to this reversal. As a result, average account sizes in the
retirement plan channel are substantially lower than in the adviser channel.
Additionally, the rollover of assets from defined contribution plans —
typically prompted by employment chang es and retirement —often
resulted in the appearance of assets in other channels.Ten percent of the
respondents to the survey primarilyused the direct channel, and 5 percent
used the supermarket channel. The remainder of this section describes
more fully the features of thefive distribution channels. munotes.in

Page 73

Marketing of units

73

a) Direct Channel
In the direct channel, investors buy and redeem shares directly from the
fund or, more precisely, through the fund’s transfer agent. The fund
company sponsoring the fund does not provide investm ent advice, so
investors must undertake their own research to choose funds. Fund
companies selling directly to investors provide a variety of products and
tools to assist in decision -making.
When investors purchase fund shares directly, the fund company p rovides
ongoing services to the fund shareholder such as quarterly statements,
recordkeeping, and transaction processing. These firms typically maintain
websites and telephone servicing centers that their direct customers may
use. Because of the relatively fixed cost of providing these services, funds
selling directly to investors often require higher minimum balances than
funds offering shares through third parties, and they frequently assess fees
to those investors who do not maintain the minimum balance levels in
their accounts.
b) Advice Channel
The principal feature of the advice channel is the provision of investment
guidance, assistance, and advice by financial professionals. These include
full-service brokers at national wirehouses, independent financi al planners
and advisers, registered sales representatives at banks and savings
institutions, and insurance agents. Such advisers help fund shareholders
identify financial goals such as retirement, tax management, education
savings, and estate planning. Th ey assess the risk tolerance of their clients
and select mutual funds and other investments to meet these goals. munotes.in

Page 74

Mutual Fund
74 As an intermediary between investors and funds, financial professionals
conduct transactions for the shareholder, maintain the financial recor ds for
the investments under their management, send periodic financial
statements to shareholders, and coordinate the distribution of prospectuses,
financial reports, and proxy statements to shareholders on behalf of the
funds. Shareholders’ questions abou t their funds and accounts often are
handled by the financial professionals rather than by the fund companies
themselves.
c) Retirement Plan Channel
Some employers assume the cost of TPA services. In these cases,
employees receive all of the education and ser vice associated with the
retirement plan as an employee benefit. Other employers do not subsidize
the full cost of the plan. In these cases, third -party services are paid by
employer subsidies, direct charges to employees, or fees included in
mutual fund e xpenses. These expenses that pay for third -party services,
such as 12b -1 fees and service fees, are included in the expense ratio of
the share class along with the annual fees and expenses that shareholders
pay for the management of the fund.
d) Supermarket C hannel
The most important feature of a fund supermarket is its nontransaction -fee
(NTF) program, whereby an investor may purchase mutual funds with no
transaction fees from a large number of fund companies. The NTF
offerings at a discount broker often numb er in the thousands, providing an
investor the convenience of purchasing “noload” funds from different
families at a single location.
Supermarkets generally do not provide investment advice, and investors
must undertake their own research when choosing fun ds.7 However,
supermarkets provide a variety of products and tools to assist
shareholders’ decisionmaking. In addition, the supermarkets provide a
convenient platform through which investors can research funds, obtain
fund literature, and purchase fund sha res. The supermarket platform not
only provides fund sponsors with access to a national retail distribution
channel, but it also promotes competition among funds because investors
can readily compare fund fees, expenses, and returns. The fund
supermarket h olds a single account with each fund and maintains
shareholder transaction records for the mutual fund. The supermarket also
provides consolidated reports to fund shareholders, distributes mutual fund
proxy statements, financial reports, prospectuses, and tax reports. In
addition, because the supermarket maintains the relationship with the
investor rather than the fund itself, fund shareholders rely on the
supermarket’s telephone representatives and website for account
information, reducing the fund’s direc t cost for providing these services.
e) Institutional Channel
The institutional channel comprises a variety of institutions purchasing
fund shares for their own accounts. These institutions include businesses, munotes.in

Page 75

Marketing of units

75 financial institutions, endowments, foundations, and state and local
governments. Fund sponsors often create special share classes or funds for
institutional investors. Because these investors have large average account
balances, the cost of managing a fund or share class with institutional
accounts is lower than that for funds with a large number of small
accounts. Consequently, the expense ratios for institutional funds and
share classes tend to be lower than for comparable funds sold to individual
investors.
7.3 SUMMARY
1. Making an investment for the sake of making an investment is not the
primary objective of investing. Based on your needs, you should invest.
This will allow you to choose the best investment option for your needs.
2. Alternatives to the front -end sales charge have since been introduc ed by
funds offered through financial professionals including brokers. A fee
based on assets is often included in the alternative payment options, along
with a front -end or back -end sales price. Many times, funds provide a
variety of share classes, each of which invests in the same underlying asset
portfolio, but which may provide owners with a different way to pay for
broker services.
7.4 QUESTIONS
Multiple Choice Questions (MCQs):
1. If there is an increase in interest rates then the fixed interest rate of
the corporate bond will
A) Return to the corporation
B) Decrease in value
C) Remain unchanged
D) Increase in value

2. Which one of the following is shown first when the assets are
arranged in the order of their liquidity?
A) Investment
B) Cash in hand
C) Debtors
D) None of the above

3. An investor invests in assets known as a
A) Securities
B) Block of Assets
C) Portfolio
D) None of the above



munotes.in

Page 76

Mutual Fund
76 4. Over the period, investors determine the compound growth rate of
an investment by
A) Arithmetic median
B) Arithmetic mean
C) Calculus mean
D) Geometric mean

5. Investor s agree to invest in high - risk investments if only
A) There are any true speculations
B) The predicted return is satisfactory for taking a risk
C) There are no safe options except for holding cash
D) The return is short

6. In Capital Market Line every investment is
A) Finitely divisible
B) Infinitely divisible
C) Both a & b
D) None of the above

7. Investments would score high only if there is a protection to
A) Real estate
B) Preferred stock
C) Government bonds
D) Common stock

8. A statistical measure of how closely two variables especially in
stock returns move together
A) variation coefficient
B) certainty equivalent
C) variance
D) covariance

9. The ability to convert an asset rapidly and without influencing its
price is referred to as ________.
A. Scalability
B. Liquidity
C. Marketability
D. minimal risk

10. Horse raci ng, card games, and the lottery are all instances of
________.
A. Investing
B. Gambling
C. Speculating
D. Arbitrage



munotes.in

Page 77

Marketing of units

77 True or False:
1. Common stockis most likely to become virtually worthless if a
company declares bankruptcy: True
2. A shareholder -funded investment program that trades in a variety of
assets like Mutual Funds: True
3. Investors agree to invest in high -risk investments if only the predicted
return is satisfactory for taking a risk: True
4. In Capital Market Line every investment is Finitely divisible: False
Brief Answer Questions:
1. How to Select the right investment products for investors?
2. Discuss the mutual fund distribution.
3. Define Mutual fund distribution channelmanagement practices.
7.5 REFERENCES
1. www.ici.org/perspective/index.html.
2. Mutual Fund Indu stry Developments in 2002” Brian Reid and Stefan
Kimball, Vol. 9, No. 1, February 2003


munotes.in

Page 78

78 8
PORTFOLIO MANAGEMENT
Unit Structure:
8.0 Meaning of Portfolio management
8.1 Risk & return trade -off
8.2 Risk -adjusted returns.
8.3 Summary
8.4 Questions
8.5 References
8.0 MEANING OF PORTFOLIO MANAGEMENT
Introduction The way we think about investing may need to shift
fundamentally if we are to create a successful investment plan for the
twenty -first century. For instance, although assuming less risk, a portfolio
with only 60% equity that performs much better than the Sensex should
unquestionably be regar ded as superior. New developments in investment
and finance also provide us with answers that are both simpler and more
beautiful (as well as very, very different) than those we were raised with.
We have been trained to believe that stock selection, market timing, and
manager performance are the secrets to achievement. Even the best
investment techniques, like Strategic Global Asset Allocation, require
some getting used to because of these deeply established ideas.What I'm
advocating is so different from pu blic expectations that sometimes people
look at me as if I'm not quite right or a few bricks short of a full load. For
instance:
1. As an investment advisor, I'm expected to have an opinion on where the
market is going. Well, I have an opinion, but it's n o more likely to come
true than yours or your dog's. People are offended and disappointed when
I tell them that. Thanks to the media, we are exposed daily to countless
'experts' who are worried about the market. Their indicators and forecasts
point to a po ssible 'correction.' They are prepared to retreat to the 'safety'
of cash. This allows them to look responsible, conservative, and caring.
By pandering to the public's fear, they hope thousands of anguished
investors will decide to trust them with their mo ney. On the other hand,
advisors who insist on remaining fully invested at all times appear wild
and crazy.
2. Advisors are supposed to beat somebody or something. Often the first
question people will ask is: "What kind of numbers have you achieved this
year?" Those numbers become the chief yardstick to determine if the
advisor is good or bad. munotes.in

Page 79

Portfolio management

79 3. I'm still waiting for the first investor to ask: "What's the best long -term
allocation?" Or, "How much risk do I need to take to meet my goals?"
Without tools t o evaluate risk or choose between alternative strategies,
investors are left with just one number to compare performance. By
default, year -to-date or last year's performance figures are the only criteria
for measurement. If those figures alone determined a successful
investment plan, we could all buy one copy of Money Magazine each
year, pick the single, top performing mutual fund, and go sailing.
Unfortunately, the Money Magazine approach is often the worst way to
form a strategy.
8.1 RISK & RETURN TRADE -OFF
Definition: Higher risk is associated with a greater probability of higher
return and lower risk with a greater probability of smaller return. This
trade that an investor faces between risk and return while considering
investment decisions is called th e risk -return trade -off.
Description: For example, Rohan faces a risk -return trade -off while
making his decision to invest. If he deposits all his money in a savings
bank account, he will earn a low return i.e. the interest rate paid by the
bank, but all h is money will be insured up to an amount of Rs 1 lakh
(currently the Deposit Insurance and Credit Guarantee Corporation in
India provides insurance up to Rs 1 lakh).
However, if he invests in equities, he faces the risk of losing a major part
of his capita l along with a chance to get a much higher return than
compared to a saving deposit in a bank.
Importance of Risk Return Trade -Off in Mutual Funds
The following are essential reasons to understand the risk -returntrade -off
in mutual funds –
 Portfolio const ruction starts with an understanding of the link between
risk-return trade -offs. Time is another crucial component. Longer time
horizons require larger yields and allow for greater risk -taking. For
instance, you might schedule a tiny monthly SIP to help yo u reach your
financial objective.

 You also need to comprehend how this link is both a cause and an
effect. For instance, the greater risk does not always equate to greater
reward. if you decide to invest your entire portfolio in a sector fund.
Nevertheles s, if a sector experiences a multi -year bear cycle, your
portfolio will perform poorly. It will also produce negative returns,
despite the fact that you took a bigger risk. As a result, you should
always evaluate the risk before making an investment.

 Risk and profit can be balanced by using financial planning. The best
approach is to provide a list of the different asset classes together with
the risk factors for each asset class. Next, decide which asset class to munotes.in

Page 80

Mutual Fund
80 choose based on your financial objectives. For instance, you can choose
a debt fund if your short -term objective is a family vacation. On the
other hand, if you want to make long -term plans for your children's
education, you can select an equity fund.

 Portfolio optimization with a trade -off betwe en risk and reward.
Portfolio optimization is the process of determining how to maximise
returns for a given level of risk or how to minimise risk for a given
level of return. Once you are aware of the complete amount of risk you
are willing to take as an investor, you can break it into different asset
classes.

 Portfolio creation is not just about aggregating different mutual funds
together. It is about creating diversification in the po rtfolio and
managing the asset allocation and maintaining the risk -return matrix.
How is Risk Return Trade Off Calculated in Mutual Funds?
Mutual funds can help spread out risk as you invest money in a pool of
investments. The pool has a mix of equities , bonds, or other securities with
different risk profiles. Hence, if one underperforms or becomes volatile,
the other investments help to balance it. While investing in mutual funds,
you can determine the risk with different metrics.
The following are some metrics that can be used to calculate risk -return
trade -off in mutual funds –
1. Alpha
Alpha measures the risk -adjusted returns of a mutual fund scheme against
its underlying benchmark. A scheme with zero alpha indicates that it has
delivered the same retur ns as the benchmark. A scheme with negative
alpha indicates that the fund has underperformed its benchmark. On the
other hand, a scheme with positive alpha indicates better performance than
its benchmark. Thus, the higher alpha, the higher the potential re turns.
Alpha = (Mutual Fund Return – Risk Free Return (Rf )) –
[(Benchmark Return – Risk Free Return (Rf )) * Beta]
In simple words, alpha helps to determine how much returns the mutual
fund investment can potentially generate. Even though a higher alpha
indicates higher returns. It is not the only metric to evaluate a fund’s
performance.
2. Beta
Beta measures the volatility of a mutual fund towards dynamic market
movements. In simple words, this metric measures the sensitivity of a
mutual fund portfolio aga inst the market. Beta helps to understand how the
fund responds to market fluctuations. Also, the beta of the market or
benchmark is always one. A fund with a beta lower than one suggests
lesser volatility when compared to its benchmark index. On the other munotes.in

Page 81

Portfolio management

81 hand, a fund with a beta of more than one suggests higher volatility than
its benchmark.
Beta = (Mutual Fund Return – Risk Free Rate (Rf )) / (Benchmark
Return – Risk Free Rate (Rf ))
You can decide whether to include a mutual fund in your portfolio base d
on the beta value. New investors or risk -averse investors should choose
funds with a beta of less than one as they are less volatile. At the same
time, risk -takers can pick funds with higher beta. However, higher beta
does not guarantee high returns, as it does not give information about the
fund’s inherent or absolute risk.
3. Sharpe Ratio
Sharpe ratio is a performance metric that helps in estimating the risk -
adjusted returns potential of a mutual fund sc heme. Risk -adjusted returns
indicate the return that a mutual fund scheme generates over and above the
risk-free rate of return. In simple words, the Sharpe ratio helps to
determine the potential returns a scheme can generate against each unit of
risk it u ndertakes.
The higher the ratio, the better the return potential compared to the risk. A
higher Sharpe ratio indicates the return potential of a fund is higher than
expected at a particular risk level. Similarly, if the Sharpe ratio is negative,
it signif ies that the returns potential of a fund is lower than the risk carried
by the fund.
Share Ratio = (Mutual Fund Returns – Risk Free Rate) / Standard
Deviation
Moreover, the Sharpe ratio considers the investment’s inherent risk
(standard deviation). Thus, y ou can analyse the fund’s risk to understand if
it can generate returns compared to the risk -free rate.
Standard Deviation
Standard deviation helps to measure how much a portfolio re turn deviates
from its average. Simply put, a standard deviation of a mutual fund shows
how much a mutual fund’s performance deviates from expected returns. A
higher standard deviation shows higher volatility and carries a higher level
of risk than a fund with a lower standard deviation. Therefore, standard
deviation measures total risk rather than just market -related volatility.
You can use standard deviation as a performance ratio to compare two
funds in the same category. You cannot determine whether the standard
deviation is high or low without comparing it to other funds in the same
category.
The above are the four metrics used to calculate the risk for different
mutual funds while taking an in vestment decision. There is more emphasis
on building a well -diversified portfolio to protect against market volatility.
Also, the risk -return trade -off applies to every investment. Hence, you munotes.in

Page 82

Mutual Fund
82 must focus on your investment objective, horizon, and risk tole rance level
so that risk -return trade -offs match your investment portfolio.
8.2 RISK ADJUSTED RETURNS
When you compare the performance of two investments or check the
returns of your portfolio, you should not only consider the returns
generated by the inv estments but also the amount of risk taken to earn
these returns. Risk -adjusted return can help you measure the same. It is a
concept that is used to measure an investment’s return by examining how
much risk is taken in obtaining the return. Risk -adjusted returns are useful
for comparing various individual securities and mutual funds, as well as a
portfolio.
How can risk -adjusted returns be calculated?
If we speak of risk -adjusted returns, there are five measures that can be
used - Alpha, Beta, R -squared, S tandard Deviation, and Sharpe Ratio. All
of these measures give specific information to investors about risk -
adjusted returns. Let’s have a closer look at risk -adjusted returns and how
they can be measured:
1. Alpha: If you want to know how well an investment is doing, then
Alpha is a good measure. It is simply the measure of an investment
against a benchmark index such as the Sensex, Nifty, etc. Alpha
provides a picture of the talent of a fund manager or a portfolio
manager because you can see if you are gett ing returns that are
outperforming the benchmark.
2. Beta: Beta is a measure of volatility and indicates how much risk is
involved in investment compared with the broader market. A Beta
value against the market. A Beta value higher than 1 will indicate more
volatility in your chosen investment as compared to the market.
3. Standard Deviation: Standard deviation simply measures how much
an asset’s returns vary over the observed period compared to its mean
or average returns. This is a useful measure since you can learn more
about how steady an asset’s returns are.
4. R-squared: R-squared is used to see the correlation of a portfolio’s
price trends with a benchmark. While Alpha measures performance, R -
squared is more concerned about movement. This statistical measure i s
taken in percentage terms and ranges from 1 -100. The higher the
number, the more your portfolio moves in alignment with the chosen
benchmark. A low R -squared number usually suggests less correlation
with the index.
5. Sharpe Ratio: Sharpe ratio basically me asures how much return an
investor is getting in correlation to the level of risk he is exposing
himself to. Basically, the Sharpe ratio works by taking into
consideration how the asset performed and then subtracting that return
from the returns that could have gotten from a risk -free instrument like munotes.in

Page 83

Portfolio management

83 government security. Now you take that number and divide it by the
standard deviation of the asset. This will provide you with the Sharpe
ratio. The higher the ratio, the more you are rewarded for the risk that
you are taking.
8.3 SUMMARY
A general review of asset management, including categories of investors,
investment programs, and goods, is given in this reading. Investors should
use a portfolio technique to help them reach their financial goals. We
provide an overview of the stages involved in managing a client's
investment portfolio. Next, we contrast the financial requirements of
institutional and individual investors. Next, both defined contribution and
defined benefit pension schemes are explained. The a sset management1
sector is extensively addressed because it acts as a vital link between
sources and consumers of investment capital globally. In our final section,
we go over mutual funds and other pooled investment products that asset
managers provide.
Finding the best investments is the goal of the risk and return analysis. As
a result, investors employ a variety of techniques to assess the market,
sector, and company. Portfolio diversification, or selecting the best
combination of many investment possib ilities, can lower risk and boost
profits.
The stock market is susceptible to changes. Investors should not, however,
monitor the performance of their mutual funds on a daily basis. Typically,
one should conduct a semi -annual or annual evaluation of the pe rformance
of their fund. The performance of the funds cannot be accurately measured
by evaluating them over a shorter time frame. Before they jump to
conclusions and become irritated about the performance of the fund,
mutual fund investors should also keep in mind their financial goal and
investment horizon.
8.4 QUESTIONS
Multiple Choice Questions (MCQs):
1. If there is an increase in interest rates than the fixed interest rate of the
corporate bond will
a. Return to the corporation
b. Decrease in value
c. Remain unchanged
d. Increase in value

2. Which one of the following is shown first when the assets are arranged
in the order of their liquidity?
a. Investment
b. Cash in hand
c. Debtors
d. None of the above
munotes.in

Page 84

Mutual Fund
84 3. An investor invests in assets know n as a
a. Securities
b. Block of Assets
c. Portfolio
d. None of the above

4. Over the period, investors determine the compound growth rate of an
investment by
a. Arithmetic median
b. Arithmetic mean
c. Calculus mean
d. Geometric mean

5. Investo rs agree to invest in high - risk investments if only
a. There are any true speculations
b. The predicted return is satisfactory for taking a risk
c. There are no safe options except for holding cash
d. The return is short

6. In Capital Market Line ev ery investment is
a. Finitely divisible
b. Infinitely divisible
c. Both a & b
d. None of the above

7. Investments would score high only if there is a protection to
a. Real estate
b. Preferred stock
c. Government bonds
d. Common stock

8. Employm ent of funds with the aim of achieving additional income is
known as____
a. Investment
b. Speculation
c. Gambling
d. Biting

9. _______ is based on tips, rumours and hunches, unplanned and without
knowledge of the exact nature of risk.
a. Investment
b. Speculation
c. Gambling
d. Arbitrage

10. Buying low and selling high, making a large capital gain is associated
with ________
a. Investment
b. Speculation
c. Gambling
d. Arbitrage munotes.in

Page 85

Portfolio management

85 True or False:
1. All personal investing is designed to achieve ce rtain objective: True
2. The fundamental analysis approach has been associated with
certainties: False
3. Unsystematic risk is avoidable through proper diversification: True
4. The fundamental analysis is a method of finding out Future price of a
security: True
Brief Answer Questions:
1. Define the concept of portfolio management.
2. Explain risk & return trade -off.
3. What is risk -adjusted returns?How can risk -adjusted returns be
calculated?
Case Study:
Portfolio Management: Institutional
Introduction:
The development of a strategic asset allocation (SAA) for long -horizon
institutional investors like university endowments raises special
challenges. These include supporting spending policies while ensuring the
long-term sustainability of the endowment and establishing optim al
exposure to illiquid investment strategies in the context of a diversified
portfolio.
Large university endowments typically have significant exposure to
illiquid asset classes. The exposure to illiquid asset classes impacts the
portfolio’s overall liqui dity profile and requires a comprehensive liquidity
management approach to ensure liquidity needs can be met in a timely
fashion. In addition, capital market conditions and asset prices change,
resulting in a need to change asset allocation exposures and/o r rebalance
the portfolio to maintain a profile close to the strategic asset allocation.
Derivatives are often used by institutions to manage liquidity needs and
implement asset allocation changes. The cash -efficient nature of
derivatives and their high le vels of liquidity in many markets make them
suitable tools for portfolio rebalancing, tactical exposure changes, and
satisfying short -term liquidity needs —all while maintaining desired
portfolio exposures.
This case study explores these issues from the per spective of a large
university endowment undertaking a review of its asset allocation and then
implementing proposed allocation changes and a tactical overlay program.
Rebalancing needs for the endowment arise as market moves result in the
drift of the end owment’s asset allocation. munotes.in

Page 86

Mutual Fund
86 The case is divided into two major sections. The first section addresses
issues relating to asset allocation and liquidity management. The case
introduces a framework to support management of liquidity and cash
needs in an orderl y and timely manner while avoiding disruption to
underlying managers and potentially capturing an illiquidity premium.
Such concepts as time -to-cash tables and liquidity budgets are explored in
detail. Aspects relating to rebalancing and maintaining a risk profile
similar to the portfolio’s strategic asset allocation over time are also
covered.
The second section explores the use of derivatives in portfolio
construction from a tactical asset allocation (TAA) overlay and
rebalancing perspective. The suitabil ity of futures, total return swaps, and
exchange -traded funds (ETFs) is discussed based on their characteristics,
associated costs, and desired portfolio objectives. The case also presents a
cost–benefit analysis of derivatives and cash markets for impleme nting
rebalancing decisions. Environmental, social, and governance (ESG)
considerations arising in the normal course of investing are also explored.
Learning Outcomes
The member should be able to:
 discuss tools for managing portfolio liquidity risk;
 discu ss capture of the illiquidity premium as an investment objective;
 analyze asset allocation and portfolio construction in relation to
liquidity needs and risk and return requirements and recommend
actions to address identified needs;
 analyze actions in asse t manager selection with respect to the Code of
Ethics and Standards of Professional Conduct;
 analyze the costs and benefits of derivatives versus cash market
techniques for establishing or modifying asset class or risk exposures;
 demonstrate the use of de rivatives overlays in tactical asset allocation
and rebalancing.
Summary
The QU endowment case study covers important aspects of institutional
portfolio management involving the illiquidity premium capture, liquidity
management, asset allocation, and the u se of derivatives versus the cash
market for tactical asset allocation and portfolio rebalancing. In addition,
the case examines potential ethical violations in manager selection that can
arise in the course of business.
From an asset allocation perspectiv e, the case highlights potential risk and
rewards associated with increasing exposure to illiquidity risk through
investments like private equity and private real estate. Although this
exposure is expected to generate higher returns and more -efficient munotes.in

Page 87

Portfolio management

87 portfolios in the long -run, significant uncertainties are involved both from
a modeling and implementation perspective. Finally, the case highlights
social considerations that may arise with investing.
8.5 REFERENCES:
https://www.miraeassetmf.co.in/
https://economictimes.indiatimes.com/definition/risk -return -trade -off
https: //scripbox.com/mf/risk -return -trade -off/


munotes.in

Page 88

88 9
MEASURING FUND PERFORMANCE
Unit Structure:
9.0 Measuring fund performance
9.1 Benchmarking and
9.2 Quantitative measures used for analysis.
9.3 Summary
9.4 Questions
9.5 References
9.0 MEASURING FUND PERFORMANCE
Investments in mutual funds require some level of market and financial
knowledge. Investors have two options here. Either purchase a regular
fund from a third party or invest directly after thorough study. But after
that, an investor still has obligations. It would be beneficial if you also
moni tored the fund's performance on the market.
How to measure Mutual Fund Performance?
1. Define the Investment Goals
What is the purpose of my investment? Answer to this should be the
foundation of your mutual fund choices. For instance, if you want a
regular i ncome with capital protection, you can choose to invest in a debt
fund. However, if you have a higher risk appetite and an aim to build your
wealth, equities will suit your purpose. So it is crucial to define your
financial goal first and then decide your investment. This also has a
pivotal role in fund evaluation.
Shortlist a few peer Funds to compare
It is difficult to assess a mutual fund in isolation. So, you should always
make a small list of comparable funds and continuously compare them.
There are ma ny FinTech firms and third party websites that offer free
mutual fund screener tools.
2. Check the historical Performance Data
Now every mutual fund handbook comes with a disclaimer stating that
past performance is no indicator of future performance. However, this data
can help you check how the fund has fared across different market cycles.
Consistency can also shed light on the skill of the fund manager. In short,
it will be easier for you to find a fund with lower risks but higher returns. munotes.in

Page 89

Measuring fund performance
89 3. Fee Structure of the Fund
A mutual fund company charges you for its services and expertise. Some
funds require deft management and quick decisions on whether to buy, sell
or hold on to an asset. Please remember t hat a fund with a higher fee is
automatically better. Do check out other parameters too before choosing.
4. Risk -Adjusted Returns
Every fund expects certain risks related to the market and the industry.
When fund strategies in such a way that they make more r eturns against
anticipated risks, we call them risk -adjusted returns.
5. Performance against Index
Indexes like Nifty, BSE Sensex and BSE 200 set benchmarks, and all fund
performances are evaluated on this basis. Comparing different timelines
against the benc hmark as well as peers, can be insightful. A well -managed
fund won’t fall too hard during a market low.
9.1 BENCHMARKING
A benchmark is an index that is used to gauge the performance of mutual
funds. For instance, the Nifty 50 serves as a benchmark for man y large -
cap funds and index funds. Securities and Exchange Board of India (SEBI)
mandated that all benchmarks be changed from the Price Index to the
Total Returns Index as of February 1, 2018. (TRI). Since dividends are
taken into account, a Total Returns Index is thought to be more accurate
than a price index. Keep in mind that a benchmark should only be used to
assess a fund by comparing its long -term results. For instance, a 3 -year
performance in an equity fund is more valuable than a 6 -month
performance against the benchmark.
Benefits of Benchmarks
1. You can compare a benchmark return with the return of a mutual
fund to evaluate its performance.

2. You can use a benchmark to compare two different funds that fall in the
same category. For example, if Fund A o utperforms the benchmark by
3%, and Fund B outperforms by 6%, it will be easier for you to decide
which fund to invest in.

3. You can use a benchmark to evaluate the possible performance of a
fund that is about to be launched. Such funds have no past history or
track record. However, the benchmark chosen can give you a rough
idea of the kind of rights you will get.
Which Benchmark to Use?
In their filing paperwork, mutual funds must list their own benchmarks
(called SID or Scheme Information Document). SID ty pically serves as
the fund's benchmark and is disclosed on websites run by third parties and munotes.in

Page 90

Mutual Fund
90 mutual funds. For instance, the Nifty 100 TRI serves as the benchmark for
the HDFC Top 100 Fund, a large -cap equities fund, while the Nifty 500
TRI (Total Return I ndex) serves as the standard for the HDFC Equity
Fund, a multi -cap fund. However, there are situations when the chosen
benchmark may not be entirely appropriate and may overstate a fund's
performance.
For example, Kotak Standard Multicap Fund, which has th e ability to
purchase companies other than the top 200 listed on stock exchanges,
utilises Nifty 200 as its benchmark rather than Nifty 500.
How to Overcome the Problem of an Inappropriate Benchmark?
When the benchmark selected by a fund is inappropriate, the investor
should compare the fund with its category average performance rather
than its benchmark performance. A category average will include all the
funds in a particular category - such as all mid -cap funds or all small -cap
funds. These funds are requ ired to adhere to the same rules as the fund in
question and hence they can be easily compared with that fund.
For example, all large -cap funds are required to invest 80 -100% of their
assets in large -cap stocks (defined as the top 100 stocks by market
capitalization). Some of these funds may choose Nifty 50 as a benchmark
and others may choose Nifty 100. However, you can overcome this
divergence by simply comparing each individual fund against the average
returns of all funds in the large -cap category, rega rdless of which
benchmark they have chosen.
The second solution to a mutual fund choosing an inappropriate
benchmark is that the investor should assign his or her own benchmark to
the fund and measure the fund against that benchmark. This is usually
done b y expert research institutions like Value Research and Morningstar.
You will often see their benchmarks diverging from the ones chosen by
the fund house. This is because they have taken an active decision to
substitute the declared benchmark with an altern ative benchmark.
9.2 QUANTITATIVE MEASURES USED FOR
ANALYSIS
Mutual fund investments(MFI) are subject to market risks. However, there
are various quantitative measures in the Modern Portfolio Theory (MPT)
that can help to objectively analyse your MFIs for potential risks and
volatility to make a more educated decision. Choosing a mutual fund
investment subjectively depends entirely on your financial goals, risk
appetite, and asset allocation
With over 1,500 schemes out there in the mutual fund (MF) industry and
more getting added every other day, there are many options for investors
to choose from. But if you plan to invest directly in MFs, apart from the
past performance, here are four quantitative measures that can help you
make sense of your MFI. munotes.in

Page 91

Measuring fund performance
91 Quantita tive measures give you a brief idea of the risk taken by the fund
and the volatility you can expect in your returns:
1. Standard Deviation:
Standard Deviation is a measure of dispersion that indicates how much the
data deviates from the average. While sele cting mutual funds, standard
deviation indicates the deviation of actual returns from the expected
returns based on their historical performance.
The more spread out the data (Returns), the more standard deviation the
fund's returns will have, indicating h igh volatility in returns and therefore,
high risk. Hence, this is a great measure for adjusting your funds
according to your risk appetite.
2. Sharpe Ratio:
The Sharpe ratio is one of the most popular methods for calculating risk -
adjusted returns. The Sha rpe ratio is used by investors to understand the
return on investment compared to its risk. A Sharpe ratio greater than 1
indicates a fund has a higher return to risk ratio, which is ideal. However,
generally, investors compare the Sharpe Ratios of multipl e funds to select
the funds with a higher Sharpe Ratio to limit the risks and maximise gains.
3. Beta Coefficient:
Beta Coefficient is used to understand the volatility of a fund compared to
the market as a whole. Under this method, Market Beta is consider ed 1 if
the individual MF's Beta is less than 1, it indicates lesser volatility than the
market and a value more than 1 reflects more volatility. For example, if
XYZ Mutual Fund has a 0.8 Beta coefficient, it indicates that this
particular fund is less vol atile than the market. Thus, you can choose the
mutual funds according to the level of volatility you are comfortable with
4. Portfolio:
All mutual funds mandatorily exhibit where the funds allocated will be
invested, whether they will be invested in small companies or large
companies. It also shows if the companies included in the portfolio exhibit
growth or value characteristics
For equity and hybrid funds, portfolio analysis helps you determine asset
allocation and company/sector allocation of the funds. The debt fund
portfolio exhibits credit quantity, instrument breakup, and related
quantitative data (Average maturity period, yield, etc.) All this information
can be found in the factsheets of the funds and can help you make a more
informed choice.


munotes.in

Page 92

Mutual Fund
92 9.3 SUMMARY
When buying mutual funds, many people may have seen the typical
disclaimer that "previous performance is not a guarantee for future
results." This disclaimer highlights the possibility that prior returns
produced by mutual funds won't hold true g oing forward. In other words,
investing in mutual funds does not guarantee a profit. Investors must
therefore go beyond last year's returns to evaluate prior performance.
Investors should also keep an eye on their returns so they can make wise
choices that will result in higher returns.
Due to fluctuations in the overall state of the economy, the capital markets
continue to fluctuate. This alteration also throws off the portfolio's asset
allocation. For instance, the market rally may cause the initial portf olio
allocation of 50/50 equities and debt to move to 60/40. This could raise the
fund's risk profile above and beyond what the investor would prefer.
The evaluation of funds also enables investors to compare the performance
of their investments to those o f other funds that are similar. A change in
the fund manager or in the fund's core characteristics may also prompt an
assessment. Consequently, a mutual fund portfolio needs to be reviewed
and rebalanced on a regular basis. This aids in maintaining the por tfolio's
risk profile.
9.4 QUESTIONS:
Multiple Choice Questions (MCQs):
1. A mutual fund with a beta of 1.1 has outperformed the S&P500 over the
last 20 years. We know that this mutual fund manager _______________ .
A. must have had superior stock selectio n ability
B. must have had superior asset allocation ability
C. must have had superior timing ability

D. may or may not have outperformed the S&P500 on a risk adjusted basis
1. A mutual fund with a beta of 1.1 has outperformed the S&P500 over the
last 20 years. We know that this mutual fund manager _______________ .
A. must have had superior stock selection ability
B. must have had superior asset allocation ability
C. must have had superior timing ability
D. may or may not have outperformed the S&P500 on a risk adjusted basis

1. The First player of the Mutual fund industry was______________.
A) ICICI MF
B) UTI MF
C) SBI MF
D) LIC MF



munotes.in

Page 93

Measuring fund performance
93 2 . UTI mutual fund was set up in the Year _______________.
A) 1963
B) 1986
C) 1956
D) 1947

3. Who establishes t he Mutual Fund in India?
A) Securities Exchange Board of India
B) Asset Management Company
C) Sponsor
D) Shareholders

4. In India, AMC must be registered with____________.
A) Company’s Act, 2013
B) No registration required.
C) Securities Exchange B oard of India
D) Reserve Bank of India

5. ___________ is a type of investment vehicle consisting of a portfolio of
stocks, bonds, or other securities.
A) Government Securities
B) Mutual Funds
C) Derivatives
D) Shares

6. The value of one unit of inve stment in Mutual fund is called the
_______________.
A) Net Asset Value
B) Issue value
C) Market value
D) Gross Asset value

7. ________________ regulates the Mutual fund industry in India.
A) Reserve Bank of India
B) Association of Mutual Funds of I ndia
C) Securities Exchange Board of India
D) State Bank of India

8. _______________ schemes not exposed to sudden and large
movements of funds.
A) Fixed maturity plan
B) Open -Ended Funds
C) Close -Ended Funds
D) Interval fund

9. Dividend income rece ived from mutual in the hands of unit holders
A) Fully Taxable
B) Fully Exempt
C) Partly Exempt
D) Partly Taxable munotes.in

Page 94

Mutual Fund
94 10. Presently there are __________ AMC in India
A) 40
B) 50
C) 44
D) 39

True or False
1. The performance of a scheme is reflected in its Net asset value: True
2. Small amount is needed to invest in Mutual Funds is a myth about
Mutual Fund Investment in India: False
3. Abridged version of OD is called OD: False
4. OD is a supplementary document that contains additional information
about the fund: False
5. Trustee approves the contents of the Offer document: True
Brief answer Questions:
1. Define the measuring fund performance.
2. What is the significance of a mutual fund benchmark?
3. Why is it important to compare a scheme’s performance with that of its
benchma rk?
4. What is benchmark error?
9.5 REFERENCES
1. https://www.investopedia.com/investing/measure -mutual -fund-risk/
2. https://www.moneymanagementindia.net/how -to-analyse -mutual -
funds/
3. https://www.advisorkhoj.com/smf/most -important -analytical -measures -
for-selecting -best-mutual -funds

munotes.in

Page 95

95 10
PROTECTION OF INVESTORS
Unit Structure
10.0 Objectives
10.1 Meaning of Investor Protection
10.2 Rights and Obligation of Investors
10.3 Redressal of Investor Grievances
10.4 Redressal of Investor Grievances at SEBI
10.5 Right to Information Act, 2005
10.6 Summary
10.7 Multiple Choice Questions
10.8 Question
10.9 Reference
10. 0 OBJECTIVES
1) To understand the meaning of Investor Protection
2) Discuss the rights of investor in India
3) Learn about responsibilities of investors
4) Identify the redressal mechanism f or investor grievance.
5) Discuss the various laws and regulations pertaining to investor
protection in India
10.1 MEANING OF INVESTOR PROTECTION
Investors are although the source of financing industries, they faces many
types of grievances such as receipt of inadequate information or
misrepresentation in prospectus or New Fund Offer or any other
documents, delay or non receipt of dividend etc. The basic objective of
establishment if SEBI is to protect interest of investors from these
grievances and to regulat e and promote development of capital market.
SEBI is the most prominent regulatory agency for controlling the
securities market. It is not only lays down laws for issuing securities but
also ensures that the issuers comply with different norms for investor
protection.
SEBI has sought to balance the two objectives by constantly reviewing
and re -appraising its existing policies and programmes, formulating new
policies and regulations, to foster developments in these areas and
implementing them to ensure grow th of the market with efficiency,
integrity and protection of interest of the investor. munotes.in

Page 96

Mutual Fund
96 10.2 INVESTORS’ RIGHTS & OBLIGATIONS
Mutual fund investors are entitled to some important rights which are
meant to protect the investments and bring more transparenc y to the
mutual fund investors. These rights are bifurcated into two parts —AMC
related rights and Fund related rights.
1. Right to beneficial ownership
Mutual Fund Unitholders have a proportionate right tothe beneficial
ownership ofthe assets ofthe scheme. The investor can ask for a Unit
Certificate Statement for his Unit -holding ownership. Investors also have
the option to receive an allotment of mutual fund units of different mutual
fund schemes in their demat account.
2. 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. In such
cases, AMCs will need to comply, without insisting on any kind of ‘No
Objection Certificate’ from the existi ng distributor.
3. 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.
4. Right to appoint nominees
The investors can appoint up to 3 nominees, who will be entitled to the
‘Units’ in the event of the demise of the investors. The investor can also
specify the percentage distribution between the nominees. If no
distribution is indic ated, then an equal distribution between the nominees
will be presumed.
5. Right to pledge mutual fund units
Investors can pledge their mutual fund units. This is normally done to
offer security to a financier.
6. Right to grievance redressal
There is a formal grievance redressal policy for investors. SEBI has
mandated that the status of complaints redressed should be published by
each AMC in their annual report. The same should be available on the
website of the mutual fund and on AMFI’s website. It should pro vide the
status of the number of complaints received by the AMC, the time taken to
resolve the complaints and the status of pending complaints. The scheme
related documents also have details of the number of complaints received
and their disposal. Pending investor complaints can be a ground for SEBI
to refuse permission to the AMC to launch new schemes. munotes.in

Page 97

Protection of Investors

97 10.3 REDRESSAL OF INVESTOR GRIEVANCES
The pronouncement “Caveat Emptor” is a maxim from the law Sales of
Goods Act, 1930 which means that when buying any t hing the buyer must
protect his own interests and in case he fails to exercise reasonable care
and caution, he cannot complain later for any loss caused to him due to his
failure or negligence.
However, in the securities market, the transaction are not car ried on the
principle of caveat emptor and the investors are provided due protection.
For their grievances they can seek redressal from the seller/ issuer of
securities under the law.
The general grievances faced by the investor can be listed as under:
 Delay/ non receipt of refund orders, allotment letters and share
certificates/ Debenture Certificates
 Delay/ non receipt of allotment letter/ debenture certificate after
transfer.
 Furnishing inadequate information of making misrepresentation in
prospectus/ N ew Fund Offer/ Application Form/ Advertisement and
rights of documents.
 Delay in listing of securities with stock exchange
 Delay/ non receipt of share certificates/ bonds/ debentures after
endorsement of part payment/ call money.
 Delay of se certificate / bands/ debentures after sub - division and
consolidation
 Delay/ non receipt of letter of offer of right issue
 Delay/ non receipt of bonus shares/ right shares
 Delay/ non receipt of notices of meeting/ annual report
 Fixing unduly high premium on shares.
 Obta ining undue benefits by company insiders.
 Delay/ default in payment of interest and repayment of deposits
Below are the various investor grievances and authorities to be
approached.
Sr. No. Grievances Pertaining to Regulator
1. Banks - Public/ Private / Fore ign
Bank Reserve Bank of India
2. Banks - Issue collection/ Credit
Rating Agencies/ Custodial Services/
Debentures Trustees/ Depository
Participants/ Financial and
Investment Consultants/ Foreign
Brokers/ Foreign Debt Funds/ FIIs/
Investment Bankers/ Invest or
Association / Mutual Funds and
Asset Management Company / Securities Exchange
Board of India munotes.in

Page 98

Mutual Fund
98 Portfolio Managers/ Registrars &
STAs/ Stock Broker / Stock
Exchanges/ Sub Brokers / Venture
Capital Funds
3 Chit Funds Registrar of the state
concerned
4 Listed Companies  Ministry of
Corporate Affairs
 Registrar of
Companies
 Stock Exchanges
 Securities Exchange
Board of India
5 All Companies  Ministry of
Corporate Affairs
 Registrar of
Companies
6 Company Secretaries Institute of Company
Secretaries of India
7 Auditors  The Institute of
Chartered
Accountants of India
 Comptroller and
Auditor General of
India
8 Co-operative Banks/ NBFCs/
Primary Dealers Reserve Bank of India
9 Mutual Funds Brokers/ Agents  Association of
Mutual Funds in India
 Securities Exchange
Board of India
10 Insurance Companies/ Insurance
Broker/ Agents Insurance Regulatory
and Development
Authority of India.
11 Pension Fund Pension Fund
Regulatory and
Development Authority
( PFRDA)
12 Monopoly and Anti -Competitive
practices Competition
Commission of India
(CCI)
13. Housing Finance Companies National Housing Bank
(NHB) munotes.in

Page 99

Protection of Investors

99
10.3.1. Various Acts and Laws relating to the Investor Protection
Following are the different Acts under which there is specific provision
for investor protection in Indi a.
1. Companies Act, 2013
The Act provides laws for issues, allotment and transfer of securities and
also public disclosures to be made at and the matters and reports to be
stated in the prospectus, newspaper advertisement of prospectus, civil and
criminal li abilities for misstatements in the prospectus, acceptance of
deposits, transfer and transmission of shares and other matters related
theriein.

2. SEBI Act, 1992
The Act provides for the establishment of a Board called as Securities
Exchange Board of India to regulate securities market by empowering the
Board to regulate the business activities of various stock exchanges,
intermediaries, depositories and other self -regulatory organizations to
protect the interests of investors in securities and to promote the
development of the securities market. The Act enable the Board to
regulate the market and market players by empowering the Board to call
for information from and conduct inquiries, investigations and audit of
stock exchanges, various intermediaries and oth er self -regulatory
organisations, to call for any information from banks, any other authority,
board or corporations established under any Central, State or provincial
Act, in respect of transactions related to the securities market, levying of
fees and ch arges, and providing same powers to the Board as vested in the
civil court under the Civil Procedure Code, 1908 in the matter of
discovery and production of documents, summoning and enforcing of the
attendance of persons an examining them on oath and insp ection of any
books, registers and other documents of persons associated to the
securities market, issuing commissions for the examination of witnesses or
documents.

3. Securities Contracts (Regulation) Act, 1956
The Act prevents undesirable transactions in securities by regulating the
business of dealing therein a control of all aspects of securities trading and
the running of stock exchanges
.
4. Reserve Bank of India Act, 1934
Section 45 QA of the Reserve Bank of India Act gives a depositor similar
rights as are provided under Companies Act to approach Company Law
Board for payment of matured deposits in case of NBFCs.

5. Indian Penal Code, 1860
Economic Offence Wings of Police Departments have power under IPC to
take up the cases of cheating, forgery and misapp ropriation etc. relating to
the Investment. munotes.in

Page 100

Mutual Fund
100 10.4 REDRESSAL OF INVESTOR GRIEVANCES AT
SEBI
There will be occasions when an investor has a complaint against, a listed
company or an intermediary registered with SEBI. In the event of such
complaint, the inves tor should first approach the concerned company/
intermediary against whom there is a complaint. Sometimes the response
received may not be satisfactory. Therefore, investor should know as to
which authority they should approach to get their complaints red ressed.
SCORES (SEBI Complaints Redressal System) –
Master Circular on the redressal of investor grievances through the SEBI
Complaints Redress System (SCORES) platform (Link - SEBI | Master
Circular on the redressal of investor grievances through the SEBI
Complaints Redress System (SCORES) platform )
SCORES is a web based centralised grievance redress system of SEBI. It
enables investors to lodge and follow up their complaints and track the
status of redressal of such complaints online on website
https://score s.gov.in/scores/Welcome.html from anywhere.
The salient features of SCORES are
a) It is web enabled and provides online access 24 * 7.
b) Complaints and reminders thereon can be lodged online at the above
website at anytime from anywhere.
c) An email is generated , acknowledging the receipt of complaint and
allotting a unique complaint registration number to the complainant for
future reference and tracking.
d) The complaint forwarded online to the entity concerned for its
redressal.
e) The entity concerned uploads an Ac tion Taken Report (ART) on the
complaint.
f) SEBI scrutinizes the ATR and closes the complaint if it is satisfied that
the complaint has been redressed adequately.;
g) The concerned investor can view the status of the complaint online
from the above given websit e by logging in the unique registration
number.;
h) The entity concerned and the concerned investor can seek and provide
clarification on his complaint online to each other.
i) Every complaint has an audit trail; and
j) All the complaints are saved in a central da tabase which generates
relevant MIS reports to enable SEBI to take appropriate policy
decisions and or remedial actions, if any. munotes.in

Page 101

Protection of Investors

101
(Source: Sebi Website)
How to register complaint online in SCORES?

The complaint registration form contains personal details and complaint
details. There are certain mandatory fields on the Form such as Name,
Address for correspondence, State, Email Address of Investor. Besides
this, select the complaint category, entity name, nature of complaint
related to, complaint details i n brief (up to 1000 characters). A PDF
document (up to 1 MB of size for each nature of complaint) can also be
attached along with the complaint as the supporting document. On
successful submission of complaint, system generated unique registration
number w ill be displayed on the screen which may be noted for future
correspondence. An email acknowledging the complaint with complaint
registration number will also be sent to the complainant’s email ID
entered in the complaint registration form. In case, you a re not able to
register a complaint online, you can send your complaint through post to
any of the SEBI offices whose addresses are given under the menu ‘
Contact us”

Matters that are not considered as complaints in SCORES?
a) Complaints that are incomplete or not specific
b) Allegations without supporting documents.
c) Offering suggestions or seeking guidance/ explanation munotes.in

Page 102

Mutual Fund
102 d) Seeking explanation for non trading of shares or illiquidity of shares
e) Dispute arising out of private agreement with companies/
intermediaries

10.5 RIGHT TO INFORMATION ACT, 2005
10.5. 1. Introduction
The act is one of the most important acts which empowers ordinary
citizens to question to the (Central/ State/ local ) government and its
working. This has been widely used by citizens and media to uncover
corruption, progress in government work, expenses related information,
etc.
All constitutional authorities, agencies, owned and controlled, also those
organisations which are substantially financed by the government comes
under the purview of the a ct. The act also mandates public authorities of
union government or state government, to provide timely response to the
citizens’ request for information.
The act also imposes penalties if the authorities delay in responding to the
citizen in the stipulate d time.
10.5.2 Objectives of the RTI Act
1. Empower citizens to question the government.
2. The act promotes transparency and accountability in the working of the
government.
3. The act also helps in containing corruption in the government and work
for the people i n a better way.
4. The act envisages building better -informed citizens who would keep
necessary vigil about the functioning of the government machinery.
10.5.3 The Information which is Exempt from Disclosure
The Right to Information Act, 2005 under Sections 8 and 9 exempts
certain categories of information from disclosures. These include:
 Information, disclosure of which would prejudicially affect the
sovereignty and integrity of India, the security, strategic, scientific or
economic interests of the State, re lation with foreign State or lead to
incitement of an offence
 Information which has been expressly forbidden to be published by any
court of law or tribunal or the disclosure of which may constitute
contempt of court;
 Information, the disclosure of which w ould cause a breach of privilege
of Parliament or the State Legislature. munotes.in

Page 103

Protection of Investors

103  Information including commercial confidence, trade secrets or
intellectual property, the disclosure of which would harm the
competitive position of a third party, unless the competent authority is
satisfied that larger public interest warrants the disclosure of such
information.
 Information available to a person in his fiduciary relationship, unless
the competent authority is satisfied that the larger public interest
warrants the discl osure of such information.
 Information received in confidence from foreign Government;
information, the disclosure of which would endanger the life or
physical safety of any person or identify the source of information or
assistance given in confidence for law enforcement or security
purposes.
 Information which would impede the process of investigation or
apprehension or prosecution of offenders.
 Information which would impede the process of investigation or
apprehension or prosecution of offenders.
 Informa tion which relates to personal information the disclosure of
which has no relationship to any public activity or interest, or which
would cause unwarranted invasion of the privacy of the individual.
10.5.4 Who will provide Information?
Information is furni shed by the Central Public Information Officer of the
Office. You may also deposit the application with any Central assistant
Public Information Officers (CAPIOs) designated for the purpose at
various levels, who will receive the requests for information f rom the
public and forward it to the Central Public Information Officers (CPIO).
The CPIO will arrange for providing necessary information to the public
as permitted under the law. The public authorities are also required to
designate authorities senior in rank to CPIO, as Appellate Authorities, who
will entertain and dispose off appeals against the decision of the CPIO as
required under the Act. Any person who does not receive the decision
from CPIO wither by way of information or rejection within the time
frame, may within 30 days from the expiry of period prescribed for
furnishing the information or 30 days from the date of receipt of the
decisions, prefer an appeal to the Appellate Authority.
You can submit RTI application online at http://rtionline.gov.in
10.5.5 Fee / Cost to get the Information
A request for obtaining information under Section 6(1) of the Act needs to
be accompanied by an application fee of Rs.10 by way of cash against
proper receipt or by DD or bankers' cheque or Indian Postal Order.
As per the Right to Information (Regulation of Fee and Cost) Rules, 2005,
the public authority shall charge: munotes.in

Page 104

Mutual Fund
104  Rs.2/ - for each page (in A -4 or A -3 size paper) created or copied;
 Actual charge or cos t price of a copy in larger size paper;
 Actual cost or price for samples or models; and
 For inspection of records, no fee for the first hour; and a fee of rupees
five for each subsequent hour (or fraction thereof).
Further, to provide information under Section 7(5) of the Right to
Information Act, 2005, the public authority shall charge:
 Rs. 50/ - per diskette or floppy; and
 for information provided in printed form at the price fixed for such
publication or Rs. 2/ - per page of photocopy for extracts from the
publication
10.6 SUMMARY
Investor protection is to protect the investors from being deceived or being
put to loss by the companies. SEBI has been in fact constitutes for the
purpose of investor protection and welfare only. According to the SEBI
Act, t he objectives is to protect the interest of the investors in securities
and to promote the development and to regulate the securities market.
In order to afford adequate protection to investors, provisions have been
incorporated in different legislations s uch as the Companies Act, 2013,
Securities Contracts (Regulation) Act, 1956, Depository Act, 1956 and
Listing Agreement of the Stock Exchanges supplemented by many
guidelines, circulars and press notes issued by the Ministry of Finance,
Ministry of Corpora te Affairs and SEBI from time to time.
SCORES is a web based centralized grievance redress system of SEBI
which enables investors to lodge and follow up their complaints and track
the status of redressal of such complaints online from the website.
The Gove rnment of India has enacted "Right to Information Act 2005" to
provide for setting out the practical regime of right to information for
citizens to secure access to information under the control of Public
Authorities in order to promote transparency and accountability in the
working of any public authority.
10.7 MULTIPLE CHOICE QUESTION

1. In which year Electronic mode/ platform for lodging and tracking
complaints by t he investors (SCORES) was launched
a) 2010 b)2011 c) 2012 d) 2014

2. Which is major benefit of SCORES?
a) Speedy redressal
b) Reduces the turnaround time
c) Available 24 * 7
d) All of the above munotes.in

Page 105

Protection of Investors

105
3. The title of the RTI Act, 2005 seeks to promote the fo llowing
qualities in the working of every public authority?
a) Reputation
b) Transparency
c) Punctuality
d) Efficiency

4. Right to Information Act, 2005 came into force on which of the
following data?
a) 22nd June, 2005
b) 12th October, 2005
c) 15th June, 2005
d) 15th August, 2005
5. The RTI application is addressed to______
a) Prime Minister of India
b) President of India
c) Public Information Officer
d) Chief Minister of the respective State
Solution - 1- b, 2- d, 3- b, 4- b, 5- c
10.7 QUESTIONS

1) What do you mean by Investor Protection? “ Investo r protection is the
major responsibility of the Securities Exchange Board of India”
2) What are the common grievances of investor in India? State the
authorities which can be approached by an investor for redressal of
these grievances.
3) Describe in brief vario us acts and laws relating to the investor
protection
4) Write a note on SCORES (SEBI Complaints Redressal System)
5) Write a note on Right to Information Act, 2005

10.8 REFERENCE BOOKS

1) Workbook for NISM -Series -V-B: Mutual Fund Foundation
Certification Examinat ion
2) Workbook for NISM -Series -V-C: Mutual Fund Distributors (Level 2)
Certification Examination
3) Mutual Funds - Portfolio Structures, Analysis, Management, and
Stewardship John A. Haslem, Published by John Wiley & Sons, Inc.,
Hoboken, New Jersey.
4) Financial M anagement - Ravi Kishore, Taxmann Publication
5) RTI Online :: Frequently Asked Questions - Reference for Reading


munotes.in

Page 106

Mutual Fund
106 Website
https://corporatefinanceinstitu te.com/
https://www.timesnownews.com/
https://www.amfiindia.com/
https://www.icicidirect.com/
https://www.utimf.com/
https://pgimindiamf.com/
https://www.etmoney.com/
https://upstox.com/




munotes.in