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In the era of specialisation,
uncertainty which is theonly certainty, Mutual
Funds are the way ahead.
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Mutual Funds-Huge Scope ahead
India-
Allocation of Household income
Non-Bankin g deposit s
4.0%
Capit al Market
2.0%
Sm all Savings
11.9%
Others
7.0%
Unit Trust of India
0.5%
Provident Fund
17.9%
Life Insur ance Fund
10.9%
Bank Deposit s
45.8%
Banks-45.8%
P.F.-17.9%
Small savings-11.9%
LIC-10.9%
others=-7%
Capital markets-2%Non-bkg.fin.-4%
UTI- 0.5%
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MUTUAL FUNDS
A Mutual fund represents a pool of money collected frominvestors and is invested according to certain investmentobjectives to maximize the yield.
Features
1. The ownership of the fund belong to the investors.
2. Fund managed by professionals who earn a fee for
the services.3. The pool of funds is invested in a mixed portfolio
of marketable securities. Their values are updatedevery day.
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Advantages:
a. Portfolio Diversification
b. Professional managementc. Risk reduction
d. Reduction in transaction costs
e. Liquidity
f. Convenience & flexibility
g. Promotes regular periodic savings
h. Reporting information
Disadvantages:
1. No control over cost
2. No tailor-made portfolios.
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ROAD MAP OF MUTUAL FUNDS IN INDIA
1963-87- UTI the sole monarch.
1987-93- Entry of Public sector banks and FIsGrowth oriented close ended funds.
1993-96- SEBI-1993- open to pvt. Sector/foreign
Product design, servicing etc.
1996-99- SEBI regulations stringent (UTI/Banks)
1999-2002- Rapid growthMF assets cross theRs. 100000 crore mark. Tax breaks toMFUTI share drops to 50%
May-2007 AUM crosses Rs. 4,07,750 Crore !!
May-2009 AUM stands at Rs. 6,39,847 Crore !!!
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Mutual Fund- profile
AUM Crossed Rs. 868000 cr. as on 31st
May-2013.
41 Mutual Funds are operating in India.
Mutual Fund Assets constitute 9% of
Indias GDP.
18 applications lying with SEBI for licence
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TOP TEN FUND HOUSES BY
AUM AS ON 30-6-11No. Fund name AUM ( Rs crores)
1 Reliance Mutual Fund 101259
2 HDFC Mutual Fund 92033
3 ICICI Prudential Mutual Fund 79759
4 UTI Mutual Fund 69105
5 Birla Sun Life Mutual Fund 67475
6 SBI Mutual Fund 47874
7 Franklin Templeton Mutual Fund 34729
8 Kotak mahindra Mutual Fund 33993
9 DSP Blackrock Mutual Fund 30021
10 IDFC Mutual Fund 27849
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MUTUAL FUND STRUCTURE
SPONSOR:- PROMOTER-APPOINTS TRUSTEES,CUSTODIAN, AMC WITH SEBI APPROVAL.
Should have at least 5 years track record.
Profit making in 3 out of the 5 years.
Should contribute at least 40% of capital of AMC.
TRUSTEES:- They appoint AMC.
AMCs:- Responsible for the management.
RTA:- Maintain investors records. Link with investors.
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Brokers:-
Selling Agents & Distributors.
Custodians.
Depository Participants.
BANKERS LEGAL ADVISORS AUDITORS.
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Requirements regarding AMCs:-
a) Minimum Net worth Rs. 10 crore.(Rs. 50 cr. Debated?)
b) Cannot be an AMC or trustee of another mutual fund.c) Not indulge in any other business.
d) At least half of the members must be independent.
e) SEBI regulations set out rights & obligations.
AMFIAssociation of Mutual funds in India1995
a) To promote the interests of mutual funds Must beregistered with SEBI.
b) and unit holders.c) To set ethical, commercial and professional standards in
the industry.
d) To increase public awareness of the industry.
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CONTENTS OF AN OFFER DOCUMENT
1. Preliminary information.
2. Fund-specific information.
3. Scheme attributes.
4. Details of scheme offered.
5. Load, fee structure.
6. Unit holder rights.
7. Associate transactions.(key information memorandum)
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Standard Risk Factor:-
a. Mutual funds and securities investments are
subjected to market risk and so there is no
assurance that the objectives of the MF will be
achieved.
b. NAV can go up or down based on capital market.
c. Past performance of the sponsor/MF no
guarantee.
d. Name of the scheme does not indicate quality of
the prospects.
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SCHEME SPECIFIC RISK FACTORS
a) Investment strategy.
b) Non-diversification.c) Assured returns without guarantee from sponsor.
d) Previous experience- to be indicated
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Investor Rights:
1. Entitled to receive dividends within 30 days.2. Redemption proceeds within 10 days of receipt
(penalty 15%)
3. Claim div/redemption proceeds within 3 years.
4. MF to allot the units within 30 days of IPO.
5. MF to publish half-yearly results and entire portfolio
once in 6 months.
6. Any matter of material interest to be made public.
7. Scheme can be wound up if 75% of the unit holders
decide.
8. Right of inspection of documents.
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Tax aspects:
a) Open ended fund-with more than 50 %
equity, dividend is not taxable but on otherfunds div. distribution tax of 12.5%
+surcharge of 2.5% to be paid by the
MF.(12.8125%)
b) Div. received by corporates can be set off
against div. paid by them.
c) ELSS- deductions under S-80C-Max-Rs.
100,000
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A mutual fund registered under the SEBI
(Mutual Fund) Regulations, 1996 is ful ly
exempt from paying tax on i ts income
under S.10 (23 D) of I T Act.
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Regulations regarding Investments by MFa) Can invest only in marketable securities.
b) All investments on actual delivery basis only.
c) Cannot hold more than 10% of PUC of a company in all itsschemes.
d) Cannot invest more than 10% of its NAV in a single co.(except for sectoral and index funds)
e) Investments in rated investment grade issues cannot exceed15 % of net assets (20%-trustees)
f) Investments in unrated securities not exceed 10%.
g) Investments in unlisted shares not to exceed 5% of netassets for an open-ended fund and 10% for a close endedfund.
h) Can invest in ADR/GDR upto $50 ml. Or 10% ofnetassets whichever is lower.
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Net Asset:
Represent the market value of assets of investors on a given
date.=
Market Value of Investments + Current and other assets plus
accrued income.
Less- Current Liabilities & Other liabilities.Less- Accrued expenses
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THE TALE (TOLL) OF US-64
1. For 2/3 years in succession the return distributed to the unit
holders was more than returns earned from investments.2. Reduction in the value of residual investments in the scheme.
3. Persistent fall in basic commodity industry shares and PSUshares compounded the crisis.
4. At a time the NAV of the US-64 was going down, UTI keptincreasing the sale and re-purchase price of the units.
5. After Pokhran II the stock market collapsed, which resulted inerosion of the schemes book reserves and a wide difference
between actual NAV and sale/repurchase price.
6. Money supply reduced. High interest rates ruled in the market.For liquidity, many Corporates and Banks started redeemingtheir holdings in mutual funds and UTI The market crashed.
7. Now the UTI is bent on building the confidence of the unitholders.
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Lesson:
The sale/repurchase price to be marked to market/NAVbased.
Investor confidence should be built on strong financials andnot on temporary better yields.
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THE MORGAN MUDDLE
Early 1994- Morgan Stanley raises huge corpus by way of
IPO (more than 10 bl.)
The hype- internationally acclaimed AMC!
Fund investors expected-superior returns.
No one realized that MS was only a service provider-giving
investment advice and management of funds. Artificial grey
market premium added to the scene.
IPO was a roaring success-a dream of One million Indians.
The funds were raised when the stock market was in boom.
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Plenty of money was flowing in from FII into the stock
market. The fund managers of Morgan Stanley could notwait to lose the opportunity. They invested in small-cap
companies which were doing well in the recent past. But
Indian stock market lacks depth and is quite illiquid.
In late 1994, the market changed. The corporates were flush
with funds from public issues at high prices and massive
private placements in equity and GDR at huge premium.
RBI intervened to tighten the money supply to control theinflation.
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Small cap companies were worst hit by the redemptions.These stocks lost more than 90% of their peak prices.Morgans investment being in small-cap companies, it hadto restructure its fund portfolio at big loss. NAV went
below par and investors confidence in the foreign company.Was shattered. Being close-ended and listed on the Stock
exchange-the price in the stock market went crashingquoting at a steep discount to its NAV.
In a last minute attempt to regain investors, MS started re-
purchase of its unit in order to reduce the discount andboost the NAV. But its shear corpus size would not help inrectifying the position with any amount of buy-back.
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Consequently NAV mirrored the gory saga
of Morgan Stanley Growth Fund
In the last one and a half years the fund has regained itsposition substantially by large investments in FMCG, pharma
and software companies and the NAV has improved since
1998 onwards.
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MUTUAL FUND PRODUCTS
BASED ON NATURE OF PARTICIPATION
1. Open-ended- Fund open for additional sales/repurchase.
Buy/sell linked to the NAV. Statement of account for
holding. (74% share)
2. Close-ended- Open for sale during a specific period.Further buy/sell only through SE if listed. Certificate or
Dep. Receipts.
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BASED ON NATURE OF INCOME DISTRIBUTION
Dividend option (warrants)Growth option (value of portfolio grows)
Reinvestment of dividends option (holdings grow)
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TYPES OF PRODUCTS OFFERED
Based on Investment portfolio:-
- Equity Funds.
- Simple equity funds (80-90%).
- Equity linked savings schemes.
- Primary market funds.- Sectoral funds (volatile returns).
- Index funds (eg. CNX-Nifty).
- Other equity funds.
a) Small stock funds.
b) PSU funds.
c) Top 200 funds.
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- Debt Funds:- Income Funds (periodic payments).
- (Long term bonds or short term).
- Simple debt.
- Sectoral debt (rating wise)- Liquid fund/MMMF.
- Serial/fixed term plans.
- Balanced Funds (based on risk-return profile).
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MUTUAL FUNDS-STYLE OF INVESTMENTS
To achieve the desired returns out of theportfolio , every fund manager follows a
particular style of Investment.
A healthy investment portfolio can be achieved
only when the right kind of asset in the rightproportion and at the right time is acquired.
Hence style Analysis of the funds is important.
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MUTUAL FUNDS-
STYLE OF INVESTMENTS
STOCK/EQUITY FUNDS:
AGGRESSIVE GROWTH FUNDS: They seek
capital appreciation and employ techniquessuch as short selling, leveraging, frequent
trading, and small cap equities. Do not believe
in interest income or dividend and they
redeploy the earnings in the company. Thefocus is on growth . This style is generally the
riskiest style of investment but views high
returns.
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MUTUAL FUNDS-
STYLE OF INVESTMENTSSTOCK/EQUITY FUNDS
EQUITY INCOME FUNDS:- basically for those
who seek current income /dividends. Then investment (about 50%) is made in stocks with above average yield.
- GROWTH FUNDS: invest in stocks of companieswith earnings that are expected to grow at an above
average industry-rate. These funds sek capitalappreciation. Not very aggressive and offer current
income as second objective.
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MUTUAL FUNDS-
STYLE OF INVESTMENTS
DEBT FUNDS
LIQUID FUNDS: invests predominantly in
money market instruments.
GILT FUNDS: invests in Government
Bonds.
Basically for risk-averse investors seeking
steady return on regular basis.
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MUTUAL FUNDS-
STYLE OF INVESTMENTS
INTERNATIONAL FUNDS
International Equity: invest heavily in foreign
stocks
International Bonds: Invest in non-indian
currency denominated debts ( often anobligation of foreign governments or
agencies.)
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MUTUAL FUNDS-
STYLE OF INVESTMENTS
HYBRID FUNDS
o They do not specialize in any particular security.
o They are structured to meet special objectives suchas rapid growth, matching a market index, or
sector funds.
o They invest in both stocks and bonds.E,g. Balanced Funds and Income Funds
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MUTUAL FUNDS-
STYLE OF INVESTMENTS SECURITY SPECIFIC:
TOP DOWN APPROACH
BOTTOM UP APPROACH FUND SPECIFIC:
ACTIVE STYLE
PASSIVE STYLE
MARKET RISK SPECIFIC:CONTRARIAN STYLE
CONSERVATIVE STYLE
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MUTUAL FUNDS-
STYLE BOX
VALUE
MIXED
GROWTH
SMALL MID-CAP LARGE
Market capitalisation
Large Cap:
Companies with
Market cap of
Over Rs. 1500 cr
Mid-Cap: market
Cap of Rs. 500 to
Rs. 1500 crore
Small cap: market
Cap of less than Rs.
500 crore.
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INVESTMENT PHILOSOPHIES OF
MUTUAL FUNDS
J. Mark Mobius-Templeton: -
Believes in Value investing and not momentum investing-
economic recovery is quite common.
Ajay Srinivasan-Prudential ICICI :-
Management quality of the company should be good and the
business should be enduring. Consistent track record of
ROCE/RONW.
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Shreekant Pandey:- Sundaram Newton MF:-
We take a long term perspective-monitor liquidity and go for
diversification.
Niamatullah:- SBI Mutual F uns:-
Bottom-up approach in investment policy. Companyspotential and not the Sectors potential is seen. Focus of thecompany on creation of shareholders wealth is important.
Gul Teckchandani:- Sun F & C Mutual Funds:-
Bottom up approach. People running the business is moreimportant. Past performance is not of much significance.
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R. Sresankar: - DSP Merr il l Lynch MF:-
Bottom up approach is performed. Look out for stocks that
offer growth with value.
Prakash Dalal: - Kotak Mahindra MF:-
We look for even investment mix in a balanced fund-K-
Balance. Maximum exposure in particular sector is 40% andmaximum investment in a particular stock is 15%. Reputed
management and good growth-bottom up approach is the
philosophy.
THUS THE MUTUAL FUNDS AR HERE TO STAY FOR
INVESTOR PROTECTION PARTICULARLY IN A
VOLATILE MARKET.
RUPEE COST AVERAGING
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RUPEE COST AVERAGINGAmount
Invested (a)
NAV Per
Unit (b)
Number of units
bought ( c )
Cumulative number
of units (d)
Value of
holding (e)
1000 12.5 80.00 80 1000.001000 11.25 88.89 168.89 1900.00
1000 10.75 93.02 261.91 2815.56
1000 11 90.91 352.82 3881.03
1000 12.75 78.43 431.25 5498.471000 13.35 74.91 506.16 6757.22
1000 13.85 72.20 578.36 8010.30
1000 14.45 69.20 647.57 9357.32
1000 13.85 72.20 719.77 9968.781000 13.5 74.07 793.84 10716.86
Average cost (13.50)
Helps:- SIP (d) X (b) = (e) (b) = (e) / (d)
(a) / (b) = ( c )
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MUTUAL FUND-
PERFORMANCE EVALUATIONEVALUATION CRITERIA ARE MANY:-
1) Average NAV of similar funds for past
years.
2) Growth rate of NAV.(simple-CAGR)
3) Statistical Testing-using regression ,
Variance and standard deviation .
4) Comparing NAV on select parameters.
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MUTUAL FUND-
PERFORMANCE EVALUATION5) Comparing load adjusted returns.
6) Relative returns with benchmark indices
7) Risk adjusted returns-comparison8) Expenses Ratio.
9) Portfolio Turnover.
10)Fund Size- Depth of the Market.11)Investor concentration
12)Investor servicing.
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INDEX FUNDS
Passivelymanaged funds that track a particular
Index.
Listed and traded on the Exchanges like any otherstock.
Lower cost structure than open-ended index fund.
Less cash required for servicing redemptions.
Churning of Portfolio minimised/avoided.
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EXCHANGE TRADED FUNDS
(ETF) No requirement of minimum contract size.
(so substitute for trading In Index futures)
Open ended and also listed. Intra-day movements in price captured.
Stable and good returns-index performance
Low cost diversified exposure So appeals to long-term Investors/institutional
Investors/retail investors.
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EXCHANGE TRADED FUNDS
(ETF)
Concept of Authorised Participants
Creation units.
Perpetual on line trade through Exchange
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EXCHANGE TRADED FUNDS
(ETF) NIFTY BeES- 8th January,2002(corpus7cr).
(equivalent to 50 shares of NIFTY)
Prudential ICICI- on BSE-Sensex-SPICE (equivalent to 1/100th of Sensex)-22 Cr.
UTI MF launch ETF based on Nifty with Rs. 300
crore corpus. ETFs will be much sought after instruments
in future.
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ETFs in India
Nifty BeES Track CNX Nifty
Bank BeES CNX Bank Index
Gold BeES Domestic Gold price
PSU Bank BeES PSU Bank stocks in NSE
Junior BeES CNX Nifty Junior Index
Liquid BeES Money market Instruments
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FUND OF FUNDS(FOF)
Approved by SEBI in February,2003.
MFs invests in the schemes of its own and
also other mutual funds/hedge funds.
Over-diversification of risk.
Over-cautious retail investor.
Target group-retired people.(5 in 1 view)
More expensive(cap-0.75% of NAV)
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FUND OF FUNDS(FOF)
Taking exposure on different Investment styles.
All funds do not flounder at the same time.
Investment objectives and Investors criteria canbe matched.
One extra level of professional moneymanagement expertise-by active allocation of
assets. Every rupee well invested as per the need of your
life cycle.
TOP FUND OF FUNDS
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TOP FUND OF FUNDS
FOF AUM-28/2/10(Rs. Cr.) 1 YEAR RETURN(%)
DSPBR WORLD GOLD 1310.40 10.85FT INDIA DYNAMIC PE RATIO 463.75 55.61
AIG WORLD GOLD 213.74 17.19
KOTAK GLOBAL EMERGING
MARKET
210.81 54.93
FT INDIA LIFE STAGE FLOATING
RATE
186.00 20.85
SUNDARAM BNPB GLOBAL ADV 135.99 51.14
ING GLOBAL REAL ESTATE
RETAIL
125.70 46.88
PRINCIPAL GLOBAL
OPPORTUNITIES
125.51 44.69
HSBC EMERGING MARKETS 90.15 40.81
ING LATIN AMERICA EQUITY 61.40 63.87
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FUND OF FUNDS
PLAYERS IN FOFS:-
HDFC MF
PRUDENTIAL ICICI AMCTATA MF
KOTAK MAHINDRA AMC
SHORTLY RELEASINGSTRUCTURED MUTUAL FUNDS !!!!!!!!!
HEDGE FUND V TRADITIONAL FUND
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HEDGE FUND Vs TRADITIONAL FUND
Hedge Fund Traditional Fund
Invest both long and short Invest long only
Are leveraged Not leveraged
Co-investment by fund manager Not encouraged
Use futures and other derivatives Restricted use
Broad investment universe Limited area
Absolute return objective Relative return objective
Can have large cash allocation To remain fully invested
Investor access regulated. Product lightly
regulated
Frequently heavily regulated.
VALUE V GROWTH
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VALUE Vs. GROWTHValue Investing Growth Investing
Traded at discount to Book value low p/bv) Relatively expensive
High dividend yield Normal dividends
Low P/E High P/E
Viewed through margin of safety (I-Value
Vs. Book value)
Multi-baggers in futureabove average
growth.
Generally outperform growth stocks in
long run
Practiced by Warren Buffet, John
Templeton, Martin Whitman, Joel Green
blatt
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AMC ACQUISITIONS
Year Acquired by AMC acquired % stake
acquired
2005 BNP Paribus Sundaram AMC 49.9%
2008 IDFC Standard CharteredAMC
100%
2009 L & T Finance DBS Cholamandalam 100%
2010 Sundaram
Finance
Sundaram BNP
Paribus AMC
49.9%
2011 Goldman Sachs Benchmark Mutual
Fund
100%
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Points to Ponder-
from Sri. S S Tarapore-economist- MFs to separate Retail and Institutional
schemes.
Tax benefits to be available to only retailinvestors.
Not more than 50% of the corpus should beInstitutional.
Min. Net worth of AMCs to be raised from10 cr. To 50 cr.
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Points to Ponder-
from Sri. S S Tarapore-economist- Proliferation of schemes (1000 schemes / 5000 variants)
should be consolidated.
Inter-scheme transfers a cause of concern- ceiling to beprescribed-Board to ratify
Excessive churning to be avoided.
AMC and trustees need to be strictly separate.
Remuneration of Trustees
Weak service system-declaration of dividend, redemption.
Redressal Agency-AMFI, SEBI ??- Ombudsman Transparency of operations-code of conduct- like BCSBI
( banking codes and standards board of India)
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Developments in 2009
No early exit in close ended funds.
FMPs considered as quasi-ponzi schemes
MFs can invest in IDRs
Ban on entry Load.
Uniform exit load for individuals and corporates
Cap on ULIP charges 3% for contribution upto 10years, 2.25% for over 10 years.
( if fund earns 15% Unit holder to get 12.75%)
Proposal to enhance tenure of ULIP from 3 to 5years.
M t l F d ff ti 1 7 2010
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Mutual Funds- effective 1-7-2010 NFO subscription period reduced to 15 days(
earlier 30 days) except for ELSS-(Fasterprocessing/ faster refund )
Ban on distribution of dividend from Unit
Premium Reserve-new investor unaffected.
Extension of ASBA to NFO Investors
No business house less than 5 yrs. in financial
services experience, can own stake in AMC
Valuation of money market and debt security
maturing over 91 days on M to M basis.
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THE ULIP DEBATE
Who should be the Regulator ?
Investor confused with the return
Very heavy frontloading of charges
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ULIP- how resolved
Comes within IRDA ambit
PAC, Surrender charge, Lock in Period, Net
yield to investor, Miniimum guarantee and
covenants revisited.
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ULIP- the changes made
PAC
UPTO 31-8-2010
Frontloading
FROM 1-9-2010
To be distributed over the wholetenure
Surrender
charges
30-40% of first year
premium
Upto Rs. 25000/- not more than 20%
Max-Rs. 3000/-( Ist year)
Not more than 5% ( IVth year)
Over Rs. 25000/- twice the above
Net yield to
Investor
Less than 10 yrs.- 3%
Over 10 years- 2.25%
Upto 5 yrs.4%
Over 5 yrs.3%
Minimum lock in
period/Minimumguaranteed
Lock in period- 3 years
No minimum guaranteedreturn
Lock in period5 years
Min. Guaranteed return- 4.5%
( no partial withdrawal/not a pension
scheme)
Minimum cover
on all life ULIP
5 times the annual
premium
10 times the annual premium
Except pension schemes.
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SEBI GUIDELINES-OCT-20121) Hike in Total Expense Ratio by 0.4% of daily NAV if funds are
received from other than top 15 cities.(if more than 30% ofgross inflow).Investor to bear service tax on TER
2) All schemes under one Plan only-Institutional-Individual
3) Direct Plan route
4) Exit loads- credit back to corpus fund-upto 0.20% can be
recovered under TER by AMC5) Advisors to get only client fee no commission
6) Cash Transactions upto Rs. 20000
7) Product labelling by Regulator.-reveal type of funds
COLOUR CODING SYSTEM FROM 1 7 2013
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COLOUR CODING SYSTEM FROM 1-7-2013
BLUE YELLOW BROWN
LOWEST RISK MODERATE RISK HIGHEST RISK
Average return Above average return Potentially High return
Liquid fund/ Income
funds/gilt fund/short term
debt funds/FMPs
Balanced
Funds/MIPs/Multi asset
funds
Diversified equity
funds/sectoral funds/index
funds/ELSS/RGESS
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MUTUAL FUNDS-
THE ROAD AHEAD FRANKLIN TEMPLETON ACQUIRINGPIONEER ITI AND HDFC MF ACQUIRING
ZURICH MF POINT TOWARDSMORE M &
As -in future.
MORE CONSOLIDATIONS IN THE AIR
FOREIGN BANKS MAY ENTER AS AMCs INLARGER NUMBERS(SCB)
THE ONE WITH LARGE CORPUS WILLSURVIVE.
7/29/2019 FM-REV-MF-2010-F
65/65
TO CONCLUDE
THE MUTUAL FUNDS ARE HERE TO
STAY SO LONG AS THE MARKETS
ARE VOLATILE AND INVESTORLACKS TIME AND EXPERTISE TO
INVEST.