Investment Landscape

• Finding out the purpose of making investment

• Classifying goals based on timelines and priorities
• Saving and Investments – Money is saved by reducing consumption. Saved money can be
invested then. ‘Safety of money’ is important while saving. Investment is made to earn profits.
• Factors to evaluate investments – Safety – Liquidity – Returns – Convenience – Ticket size –
Taxability – Tax deduction
• Different Asset Classes – Real Estate, Commodities, Fixed Income, Equity

• Investment Risks:
o Inflation Risk: Inflation erodes the purchasing power of the money
o Liquidity Risk: Real Estate assets have low liquidity, whereas open-ended MF schemes
have high liquidity
o Credit Risk: Any delay or default in the repayment of principal or interest due to the
ability or intention of the borrower
o Market Risk and Price Risk: First one is economy specific, while the second one is
company specific
o Interest Rate Risk: Any reduction in interest rate will increase the value of bond and vice
versa.

• Behavioral Biases:
o Availability Heuristic: Relying on examples or experiences while analyzing any data,
information or options to choose from. Therefore, not enough research is undertaken
for evaluating investment options.
o Confirmation Bias: Tendency to look for additional information that confirms their
already held beliefs or views.
o Familiarity Bias: When an investor concentrates his investments in what is familiar
instead of exploring better opportunities.
o Herd Mentality: When one prefers to go with the majority without doing independent
research.
o Loss Aversion: People’s tendency to prefer avoiding losses to acquiring equivalent gains
– due to perception of high risks, even when the risk could be very low.
o Overconfidence: This leads to one lowering the guards and taking on risks without
proper assessment.
o Recency Bias: The impact of recent events on decision making can be very strong here.

• Asset Allocation:
o Strategic Asset Allocation: Asset allocation is aligned to the financial goals and considers
returns required to achieve the goals given the time horizon and risk profile of the
investor.
o Tactical Asset Allocation: Allocation between different asset categories is dynamically
changed to take advantage of market movements. The sole goal is to improve the risk-
adjusted return of the portfolio.
 o Rebalancing: Rebalancing of the portfolio as per the initially agreed ratios.

Concept & Role of Mutual Fund

• Role of MF: Assist investors in earning income or building wealth – Mobilization of savings –
Facilitating the infusion of capital in the economy – Market stabilizer

• Advantages of MF: Professional Management, Affordable Portfolio Diversification, Economies of

Scale, Liquidity, Tax Deferral, Tax Benefits, Convenient Options, Regulatory Comfort

• Limitations of Mutual Fund: Lack of portfolio customization, Choice overload, No control over
costs

• Types of Funds Structure-wise: Open-ended, Close-ended, Interval Funds

• Types of Funds Management-style-wise: Active, Passive, ETFs

• Equity Schemes: 11 Sub-categories

o Multi-Cap Fund – Minimum investment in equity must be 75% of total assets – 25%
each in large (1st – 100th companies in terms of full market capitalization), mid (101st –
250th companies in terms of full market capitalization) and small cap (251st company
onwards in terms of full market capitalization)
o Large-Cap Fund – Minimum investment in equity of large cap companies must be 80% of
total assets
o Large and Mid-Cap Fund – Minimum investment in large and mid-cap companies must
be 35% each of total assets
o Mid Cap Fund – Minimum investment in mid-cap companies’ stock must be 65% of total
assets
o Small Cap Fund – Minimum investment in small-cap companies’ stock must be 65% of
total assets
o Dividend Yield Fund
o Value Fund or Contra Fund
o Focused Fund – Investing in maximum 30 stocks
o Sectoral / Thematic – Minimum investment in equity of a particular sector/theme must
be 80% of total assets
o ELSS – Minimum investment in equity must be 80% of total assets – statutory lock-in of 3
years
o Flexi-Cap Fund

• Debt Schemes: 16 Sub-categories

1. Overnight Fund – The investment is in overnight securities having maturity of 1 day
2. Liquid Fund – The investment is in debt and money market securities with a maturity of
up to 91 days only
 3. Ultra Short Duration Fund – The investment is in debt and money market securities with
Macaulay duration between 3 to 6 months (If a debt fund has a Macaulay duration of 5
years, it means that on average, it will take 5 years for the fund to pay back its investors
through interest payments and return of principal)
4. Low Duration Fund – The investment is in debt and money market securities with
Macaulay duration between 6 to 12 months
5. Money Market Fund – Investment is in money market instruments (T-Bills, CDs, CPs, Call
Money etc.) with a maturity of up to 1 year
6. Short Duration Fund – The investment is in debt and money market securities with
Macaulay duration between 1 – 3 years
7. Medium Duration Fund – The investment is in debt and money market securities with
Macaulay duration between 3 – 4 years
8. Medium to Long Duration Fund – The investment is in debt and money market
securities with Macaulay duration between 4 – 7 years
9. Long Duration Fund – The investment is in debt and money market securities with
Macaulay duration >7 years
10. Dynamic Bond – Investing across durations
11. Corporate Bond Fund – Minimum investment in corporate bonds (AA+ and above rated)
must be 80% of total assets
12. Credit Risk Fund – Minimum investment in corporate bonds (AA and below rated) must
be 65% of total assets
13. Banking and PSU Fund – Minimum investment in debt instruments of banks and PSUs
must be 80% of total assets
14. Gilt Fund – Minimum investment in G-Secs across maturity must be 80% of total assets
15. Gilt Fund with 10-year constant duration – Minimum investment in G-Secs having a
constant maturity of 10 years must be 80% of total assets
16. Floater Fund – Predominantly investing in floating rate instruments

• Hybrid Schemes: 6 Sub-categories

o Conservative Hybrid Fund – Investment in debt instruments must be between 75-90%
of total assets
o Balanced Hybrid Fund – 40-60% in equity and debt instruments each; Aggressive Hybrid
Fund – 65-80% of total assets is in equity and equity related instruments
o Dynamic Asset Allocation or Balanced Advantage Fund
o Multi-Asset Allocation – Investing in at least 3 asset classes with a minimum allocation
of 10% each
o Arbitrage Fund – Exploiting price discrepancies between a derivative (like a futures
contract) and the underlying asset (like a stock or an index)
o Equity Savings – Investing in equity, arbitrage and debt

• Solution Oriented Schemes: 2 Sub-categories

o Retirement Fund – Having a lock-in of 5 years or till retirement age (whichever is earlier)
o Children’s Fund – Having a lock-in of 5 years or till child attains age of majority
(whichever is earlier)
• Other Schemes: 2 Sub-categories
o Index Fund / ETF – Minimum investment in securities of a particular index must be 95%
of total assets
o Fund of Funds (Overseas/Domestic) – Minimum investment in underlying fund must be
95% of total assets

• Fixed Maturity Plans – Close-ended debt fund where the duration of the investment portfolio is
closely aligned to the maturity of the scheme
• Capital Protection Funds – Close-ended hybrid funds
• Infrastructure Debt Funds
• Real Estate MF Schemes / REIT

Legal Structure of MFs in India

• Mutual Funds are established in the form of a trust to raise funds through the sale of units to the
public under one or more schemes for investing in securities including money market
instruments or gold or gold related instruments or real estate assets.

• Key constituents of MF:

o Sponsor – The sponsor invests in the capital of the AMC. The sponsor should be carrying
on business in financial services for not less than 5 years. The sponsor should ensure a
positive net worth (share capital plus reserves minus accumulated losses) in all the
immediately preceding 5 years.
o Board of Trustees – Ensures that the mutual fund complies with all the regulations and
protects the interests of the unitholders. The sponsor will have to appoint at least 4
trustees. If a trustee company has been appointed, then that company would need to
have at least 4 directors on the Board. At least two-thirds of the trustees on the Board of
the trustee company would need to be independent trustees i.e., not associated with
the sponsor in any way.
o Asset Management Company – Day to day operations of a mutual fund is handled by
AMC. The sponsor (or the trustees if so, authorized by the trust deed) appoints the AMC
with the approval of SEBI. The AMC needs to have a minimum net-worth of Rs. 50 Crores
maintained on a continuous basis.
o Custodian – Accepts and gives delivery of securities for the purchase and sale
transactions of the various schemes of the fund. Thus, the custodian settles all the
transactions on behalf of the mutual fund schemes.
o Registrar & Transfer Agents (RTA) – They maintain investor’s records. The appointment
of RTA is done by the AMC. Examples – CAMS, Karvy
o Depositories / Depository Participants – Holds the securities in dematerialized or
electronic form on behalf of the investors.
o Stock Exchanges and Transaction Platforms – BSE-Star MF, NSE MF-II and MF Utilities
India. Stock exchanges (BSE, NSE) in India are Self-Regulatory Organization (SRO).
• Regulators in India – RBI regulates the banking system, as well as money markets. SEBI regulates
the securities market. IRDAI regulates insurance companies. PFRDA regulates the pension
market (e.g. NPS).

• SEBI regulates, among other entities, mutual funds, depositories, custodians, RTAs, stock
exchanges. SEBI Complaint Redressal System (SCORES) is a web-based centralized grievance
redressal system.

• AMFI is the association of all the registered AMCs. Interacts with and represents to SEBI, RBI,
Govt. of India and other bodies on all matters concerning the MF industry. Regulates the conduct
of distributors including disciplinary actions (cancellation of ARN) for violations of Code of
Conduct. AMFI is neither a regulatory body nor an SRO.

Scheme Related Information

• Investors are governed by the principle of ‘Caveat Emptor’ i.e. ‘Let the buyer beware’.
• There are primarily two important documents for understanding about the mutual fund scheme:
o Scheme Information Document (SID), which has details of the particular scheme
o Statement of Additional Information (SAI), which has statutory information about the
mutual fund or AMC, that is offering the scheme.
• In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is
part of the SID.)
• Both documents are prepared in the format prescribed by SEBI and submitted to SEBI. While
SEBI does not approve or disapprove the scheme related documents, it gives its observations.
The mutual fund needs to incorporate these observations in these documents, Thus, the
documents in the market are "vetted" by SEBI, and not approved by SEBI.
• Key Information Memorandum (KIM) is essentially a summary of the SID and SAI. It contains the
key points of SID and SAI.
• SID needs to be updated within one month from the end of the half-year. In case of a change in
fundamental attributes, SID shall be revised and updated immediately.
• SAI needs to be updated by the end of the 3 months of every financial year. Material changes
must be updated on an ongoing basis.
• KIM needs to be updated at least once in half-year, same as SID.

Net Asset Value, Total Expense Ratio and Pricing of Units

• NAV = Value of each unit of the scheme = (Current value of investments held + Income accrued +
Current assets – accrued expenses – Current liabilities) / No. of outstanding units
• The process of valuing each security in the investment portfolio of the scheme at its current
market value is called ‘mark to market’ i.e. marking the securities to their market value.
• The difference between the NAV and re-purchase price is called the “Exit Load”.
• Total Expense Ratio (TER)
o In case of Fund of Funds (FOF) scheme
▪ Investing in liquid schemes, index fund schemes and ETF – the TER shall not
exceed 1% of the daily net assets of the scheme.
▪ Investing a minimum of 65% of AUM in equity oriented schemes – the TER shall
not exceed 2.25% of the daily net assets of the scheme.
▪ Investing in schemes other than as specified above - the TER shall not exceed 2%
of the daily net assets of the scheme.

o In case of an index fund scheme or ETF - the TER shall not exceed 1% of the daily net
assets of the scheme.

o In case of open-ended schemes other than as specified for fund-of-fund and index fund
schemes – the TER of the scheme shall not exceed the following limits:

Taxation
• From taxation point of view, there are three types of mutual funds –
o Equity Oriented Mutual Fund: Exposure in equity 65% or above.
E.g., all domestic equity funds, Equity Savings Funds, Arbitrage Funds, Aggressive Hybrid
Funds, Balanced Advantage Funds (based on average exposure in domestic equity in a
year).
 Short-Term Capital Gain (STCG) Tax (when holding period is < 1 year): 15% of the gain
amount
Long-Term Capital Gain (LTCG) Tax (when holding period is >= 1 year): 10% of the gain
amount (over and above Rs. 1 lakh gain from sale of equity in an FY)
o Specified Mutual Fund: Exposure in equity 35% or below.
E.g., all Debt Funds, Gold ETF, International Fund of Funds, Conservative Hybrid Fund,
Multi Asset Funds, Dynamic Asset Allocation Fund (based on average exposure in
domestic equity in a year).

Taxed as per respective tax slab of the investor.

o Non-Equity Oriented Mutual Fund: Exposure in equity within 36% to 64%

E.g., Balanced Hybrid Funds, Dynamic Asset Allocation Funds (based on average
exposure in domestic equity in a year), Balanced Advantage Funds (based on average
exposure in domestic equity in a year).

Short-Term Capital Gain (STCG) Tax (when holding period is < 3 years): As per respective
tax slab of the investor

Long-Term Capital Gain (LTCG) Tax (when holding period is >= 3 years): 20% of gain with
indexation benefit

• Dividend payout amount (applicable for those who opted for Income Distribution cum Capital
Withdrawal Plan or IDCW which was earlier known as Dividend Plan) is added to the taxable
income of the assessee for the year and would be taxable in the hands of the recipient at the
applicable tax rate. In case of dividends from mutual fund schemes, even for resident Indians,
TDS is applicable. The tax is required to be deducted at 10 percent on the dividend amount if it
exceeds Rs. 5,000.
• Stamp duty of 0.005% is levied on the amount invested against all purchase transactions i.e. Rs.
5 stamp duty is charged in case Rs. 1 lakh is invested
• Short term capital loss is to be set off against short term capital gain or long- term capital gain.
• Long term capital loss can only be set off against long term capital gain.
• When an investor sells units of an equity fund in the stock exchange, or offers them for
repurchase to the fund, he will have to incur Securities Transaction Tax (STT) of 0.001%
• Equity Linked Savings Schemes (ELSS) are eligible for deduction under Section 80C of the
Income Tax Act

Investor Services
• NFOs other than ELSS can remain open for a maximum of 15 days. Allotment of units or refund
of money, as the case may be, should be done within 5 business days of closure of the scheme.
Further, open-ended schemes have to re-open for sale/repurchase within 5 business days of the
allotment.
• Mutual funds issue the Statement of Account every month if there is a transaction during the
month.
• Annual account statement is issued to the Unit-holders who have not transacted during the last
six months prior to the date of generation of account statements.
• Consolidated Account Statement (CAS) for each calendar month is sent by post/email as per the
timeline specified by SEBI from time to time provided there has been a financial transaction in
the folio in the previous month.
• SIP, STP, SWP, Switch, SIP Top-up

Risk, Return & Performance of Funds

• Fundamental analysis is a study of the business and financial statements of a firm, whereas
Technical analysts believe that price behaviour of a share over a period of time throws up trends
for the future direction of the price.

• P/E Ratio = Market Price per share / Earnings Per Share (EPS)

P/E ratio indicates how much investors are prepared to pay in relation to the company’s
earnings. The forward PE ratio is normally calculated based on projected EPS for a future period.

• Growth and Value investment styles, Top-Down approach, Bottom-Up approach of stock
selection

• Absolute return, Annualized return, Compounded Annualized Growth Rate (CAGR)

• The risks that impact the entire economy are known as systematic risks. The company specific
risks are also known as unsystematic risks. The unsystematic risks or company specific risks can
be reduced through diversification across diverse sets of companies. However, the systematic
risks cannot be reduced through such diversification.

• Standard Deviation (which is square root of variance) measures the fluctuation in periodic
returns of a scheme in relation to its own average return.

• Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in

periodic returns of the benchmark index (representing the market) over the same period. The
market or benchmark index, by definition, has a Beta of 1. Schemes, whose beta is more than 1,
are seen as riskier than the market. Beta less than 1 is indicative of a scheme that is less risky
than the market.

• Sharpe ratio and Treynor ratio measures risk adjusted return based on Standard Deviation and
Beta respectively.

• The difference between a scheme’s actual return and its optimal return is its Alpha– a measure
of the fund manager’s performance.
• The Beta of the market by definition is 1. An index fund mirrors the index. Therefore, the index
fund too would have a Beta of 1, and it ought to earn the same return as the market. The
difference between an index fund’s return and the market return is the tracking error.

• Modified duration measures the sensitivity of value of a debt security to changes in interest
rates. The higher the modified duration, higher is the interest sensitive risk in a debt portfolio.

MF Scheme Performance
• Price Return Index (PRI) and Total Return Index (TRI): Earlier, the Mutual Fund schemes were
benchmarked to the Price Return variant of an Index (PRI). PRI only captures capital gains of the
index constituents. With effect from February 1, 2018, the mutual fund schemes are
benchmarked to the Total Return variant of an Index (TRI). The Total Return variant of an index
takes into account all dividends/interest payments that are generated from the basket of
constituents that make up the index in addition to the capital gains.

• For the sake of standardization, schemes need to disclose return in INR and by way of CAGR for
the following benchmarks apart from the scheme benchmarks:

Equity scheme – Sensex or Nifty;

Long Term Debt Scheme – 10 Years GOI Security;
Short Term Debt Scheme – 1 Year T-Bill;

MF Scheme Selection
• The core portfolio will be invested according to the long-term needs and goals of the investor.
The satellite portfolio will be invested in to take advantage of expected short-term market
movements.