MUTUAL FUND MANAGEMENT

MUTUALFUND MANAGEMENT

1INTRODUCTION

TO MUTUAL FUNDS

WHAT IS A MUTUAL FUND?

• TYPE OF FINANCIAL INTERMEDIARY THAT POOLS FUNDS FROM INVESTORS

• THESE FUNDS MANGED UNDER DIVERSIFIED PORTFOLIO BY INVESTMENT MANAGERS

• TERM “MUTUAL” IS USED ALL ITS RETURNS – EXPENSES ARE SHARED BY FUNDS UNIT HOLDERS

MF INVESTING V/S INVESTING THROUGH

BANKS• MF ARE ONLY ONE KIND OF INTERMEDIARY

• BANKS ARE LARGEST INTERMEDIARY IN FINANCIAL SYSTEM, INVT. IN BANK ENTITLE THE DEPOSTORS DIFFERENT FINANCIAL CLAIMS THAN THE ONE GENERATED BY MFS

ADVANTAGES OF MUTUAL FUNDS

• DIVERSIFICATION BENEFIT• LOW TRANSACTION COSTS• AVAILABILITY OF VARIOUS

SCHEMES• PROFESSIONAL MANAGEMENT• LIQUIDITY • TAX BENEFITS• FLEXIBILITY

DISADVANTAGES OF MUTUAL FUNDS

MFs ARE:• NOT GET RICH QUICK

INVESTMENT• NOT RISK FREE INVESTMENT• NOT ASSURED RETURN

INVESTMENT • NOT UNIVERSAL SOLUTION TO

ALL INVESTMENT NEEDS

2EVOLUTION OF MUTUAL

FUNDS

HISTORY OF MUTUAL FUND INDUSTRY

• THE SCOTTISH AMERICAN CO. ESTABLISHED IN UK IN 1860 AS CLOSE ENDED & INVESTED PRIMARILY IN STOCK MARKET

• IN 19TH CENTURY INVT. COs CAME IN US TOO DID NOT GROW LIKE UK DUE TO LACK OF INVESTROS INTEREST IN STOCK MARKET

• IN 1920s INVT. COs WERE REVIVED WITH BOOM IN STOCK MARKET THEIR GROWTH WAS MORE IN US THAN IN UK

MUTUAL FUND INDUSTRY IN INDIA PHASE - I 1964-

87• UTI WAS ESTABLISHED IN 1963• IT WAS SET UP BY RBI • IN 1978 UTI WAS DELINKED FROM

RBI• SCHEME LAUNCHED BY UTI WAS

UNIT SCHEME 1964• AT THE END BY 1988 UTI HAD

6700 CRS AUM

ENTRY OF PSU FUNDS PHASE – II 1987-93

• 1987 MARKED BY ENTRY OF NON-UTI, PSU, LIC & GIC

• SBI MF WAS 1ST NON-UTI MF ESTABLISHED IN JUNE 1987

• FOLLOWED BY CANBANK, PNB, INDIAN BANK, BOI, BOB AND LIC MF

• AT THE END OF 1993 MF INDUSTRY HAD AUM RS.47000 CRS

ENTRY OF PVT SECTOR FUNDS

PHASE – III 1993-2003• WITH THE ENTRY OF PVT MFs NEW ERA STARTED IN MF INDUSTRY

• KOTHARI PIONEER (NOW MERGED WITH FRANKLIN TEMPLETON) WAS THE 1ST PVT SECTOR MF REGISTERED IN 1993

• IN 1993 1ST MF REGULATIONS CAME ALL MFs EXCEPT UTI WAS TO BE REGISTERED & GOVERNED

• 1993 SEBI REGULATIONS WERE SUBSITUTED BY SEBI MF REGULATIONS 1996

PHASE – IV SINCE FEB 2003

• IN FEB 2003 DUE TO REPEAL OF UTI ACT 1963 UTI WAS BIFURCATED INTO 2 SEPARATE ENTITIES

• ONE IS SPECIFIED UNDERTAKING OF UTI WITH ASSETS OF US 64 AND ASSURED RETURN SCHEMES

• SECOND IS UTI MF SPONSORED BY SBI, PNB, BOB, AND LIC REGISTERED WITH SEBI AND FUNCTIONS UNDER MF REGULATIONS

• IN MARCH 2006 UTI MF HAVING MORE THAN 76000 CRS AUM

FUTURE OF MF INDUSTRY IN INDIA

• INDIAN MF INDUSTRY PASSING THROUGH A TRANSFORMATION, IT HAS A NO. OF REGULATORY DEVELOPMENTS

• REGULATORY CHANGES HAS BEEN MADE KEEPING IN MIND BEST INTEREST OF INVESTORS

• MARKET PARTICIPANTS TRYING TO MAINTAIN ITS PACE OF GROWTH

• MFs ARE RECONSTRUCTING THEIR BUSINESS TO PROVIDE FOR INCREASE EFFICIENCIES AND INVESTOR SATISFACTION

3

ORGANISATIONAL STRUCTURE

OF MUTUAL FUNDS

ORGANISATIONAL STUCTURE OF A MF IN US

• MF IS ORGANISED EITHER AS A CO. OR BUSINESS TRUST

• SHAREHOLDERS - INVESTMENT• BODs – MANAGING FUNDS PORTFOLIO

ACCORDING TO ITS OBJECTIVES• CUSTODIAN – HOLDS THE FUNDS ASSETS• INDEPENDENT PUBLIC ACCOUNTANT –

CERTIFIES FUNDS FINANCIAL STATEMENTS• TRANSFER AGENTS – EXECUTIVE ALL

TRANSACTIONS• PRINCIPAL UNDERWRITER – SELLS FUNDS

EITHER DIRECTLY OR THROUGH OTHER FIRMS

ORGANISATIONAL STUCTURE OF A MF IN UK

• IN UK THERE ARE UNIT TRUSTS & INVESTMENT TRUSTS

• UNIT TRUSTS ARE OPEN ENDED FUNDS CREATED BY TRUST DEED

• TRUSTEES SAFEGAURD THE UNIT HOLDERS INTEREST, ASSETS ARE HELD BY TRUSTEE ON BEHALF OF BENEFICIARIES

• ASSETS ARE HELD BY THE TRUSTEES THEY SUPERVISE THE REGISTER OF UNIT HOLDERS SETTLE ALL INVT. TRANSACTIONS

• INVESTMENT TRUSTS ARE CLOSE ENDED THEY HAVE A FIXED NO. OF SHARES IN ISSUE

LEGAL STRUCTURE OF A MF IN INDIA• MFs ARE CONSTITUTED AS TRUST,

GOVERNED BY ITA, 1882• MF IS CREATED BY ONE OR MORE

SPONSORS WHO ARE MAIN PERSONS BEHIND MF BUSINESS

• EVERY TRUST HAS BENEFICIARY WHO INVEST IN VARIOUS SCHEMES OF MF

• THE OPERATION OF MF TRUST ARE GOVERNED BY TRUST DEED EXECUTED BETWEEN SPONSORS & TRUSTEES

• TRUST ACT THROUGH ITS TRUSTEES, ROLE OF PROTECTING INVESTORS IS THAT OF TRUSTEES

KEY CONSTITUENTS OF A MFSPONSORS:• PROMOTER OF MF• CARRYING ON BUSINESS IN

FINANCIAL SERVICES FOR 5 YEARS• POSITIVE NET WORTH FOR EACH OF

THOSE 5 YEARS• LATEST NETWORTH SHOULD BE

MORE THAN THE SPONSOR CONTRIBUTES TO THE CAPITAL OF AMC

• SPONSOR NEEDS TO HAVE A MIN 40% SHARE HOLDING IN CAPITAL OF AMC

TRUSTEES• EVERY TRUSTEE HAS TO BE A

PERSON OF ABILITY INTEGRITY AND STANDING

• SPONSOR HAVE TO APPOINT AT LEAST 4 TRUSTEES IF TRUSTEE CO APPOINTED CO WOULD NEED TO HAVE AT LEAST 4 DIRECTORS

• 2/3 OF THE TRUSTEES/DIRECTORS NEED TO HAVE INDEPENDENT TRUSTEES

• TRUSTEES PERFORM KEY ROLE IN LEGAL COMPLIANCES AND PROTECTING INTEREST OF INVESTORS

AMC• DAY TO DAY OPERATIONS OF ASSET

MANGEMENT HANDLED BY AMC• DIRECTORS OF AMC HAVING ADEQUATE

PROFESSIONAL EXPERIENCE IN FINANCE AND FINANCIAL SERVICES

• PRIOR APPROVAL OF THE TRUSTEES IS REQUIRED BEFORE A PERSON APPOINTED AS DIRECTOR

• 50% OF THE DIRECTORS SHOULD BE INDEPENDENT NOT ASSOCIATED WITH SPONSOR OR ANY SUBSIDIARIES OR THE TRUSTEES

• AMC MUST HAVE MIN NETWORTH OF 10 CRS• APPOINTMENT OF AMC CAN BE TERMINATD BY

MAJORITY OF TRUSTEES OR BY 75% OF THE UNIT HOLDERS

OTHER SERVICE PROVIDERS• CUSTODIAN• RTA• AUDITORS• FUND ACCOUNTANTS• DISTRIBUTORS• COLLECTING BANKERS• KYC REGISTRATION AGENCIES

4

CLASSIFICATION OF MUTUAL

FUND PRODUCTS

TYPES OF FUNDSOPEN ENDED FUNDS:• OPEN FOR INVESTORS TO ENTER

OR EXIT AT ANY TIME• NEW/EXISTING INVESTOR BUY

UNITS OF OPEN ENDED SCHEME IS CALLED SALE TRANSACTION - EQUAL TO NAV

• INVESTOR CHOOSE TO GET BACK FROM THE SCHEME IS CALLED RE-PURCHASE TRANSACTION – LINKED TO NAV

CLOSE-ENDED FUNDS• CEFs HAVE A FIXED MATURITY• INVESTORS BUY UNITS OF CES

DURING NFO • FUND MAKE ARRANGEMENT FOR

UNITS TO BE TRADED POST NFO IN A STOCK EXCHANGE

• LISTING IS COMPULSORY FOR CESs

• INVESTOR SELL OR BUY UNITS IN THE SE

INTERVAL FUNDS• COMBINE FEATURES OF BOTH OPEN

AND CLOSE ENDED SCHEMES• IFs ARE LARGELY CLOSE ENDED BUT

BECOME OPEN ENDED AFTER PRE-SPECIFIED INTERVALS

• INVESTOR ARE NOT COMPLETELY DEPENDENT ON SE FOR BUY OR SELL OF UNITS OF THE INTERVAL FUND

ACTIVELY MANGED FUNDS & PASSIVE FUNDS

AMFs :• FMs HAS FLEXIBLE TO CHOOSE THE

INVESTMENT PORTFOLIO WITHIN THE INVT OBJECTIVE OF THE SCHEME

• INVESTORS EXPECT ACTIVELY MANAGED FUND TO PERFORM BETTER THAN THE MARKET

PASSIVE FUNDS:• INVEST ON THE BASIS OF SPECIFIED

INDEX• PASSIVE FUND TRACKING THE BSE

SENSEX IS BUY ONLY SHARES THAT ARE PART OF THE BSE SENSEX

• SUCH SCHEMES ALSO CALLED INDEX FUNDS

TYPES OF DEBT FUNDS

• GILT FUNDS• DIVERSIFIED DEBT FUNDS• JUNK BOND SCHEMES• FIXED MATURITY PLANS• FLOATING RATE FUNDS• LIQUID SCHEMES

TYPES OF EQUITY FUNDS• DIVERSIFIED EQUITY FUND• SECTOR FUNDS• THEMATIC FUNDS• EQUITY LINKED SAVINGS

SCHEMES (ELSS)• EQUITY INCOME/DIVIDEND YIELD

SCHEMES• ARBITRAGE FUNDS

TYPES OF HYBRID FUNDS

• MONTHLY INCOME PLAN• CAPITAL PROTECTED SCHEMES

GOLD FUNDS

• FUNDS INVEST IN GOLD & GOLD RELATED SECURITES

• GOLD ETF LIKE AN INDEX FUND INVEST IN GOLD

• GOLD SECTOR FUNDS

REAL ESTATE FUNDS

• THESE FUNDS TAKE EXPOSRE TO REAL ESTATE AS AN ASSET CLASS

• COMMODITY FUNDS:

• COMMODITIES AS AN ASSET CLASS INCLUDE FOOD CROPS,SPICES, FIBRES, COPPER, ENERGY PRODUCTS & PRECIOUS METALS

INTERNATIONAL FUNDS

• INVEST OUTSIDE THE COUNTRY• MF OFFER A SCHEME TO INDIAN

INVESTOR TO INVEST ABROAD• TIE UP WITH FOREIGN FUNDS

FUND OF FUNDS

• FUNDS STRUCTURE TO INVEST IN VARIOUS OTHER FUNDS

• FUNDS PRE-SPECIFIED THE MF SHCEMES THEY WILL INVEST IN

• DESIGNED TO HELP INVESTORS GET OVER THE TROUBLE OF CHOOSING MULTIPLE SCHEMES

EXCHANGE TRADED FUNDS

• ETF ARE OPEN ENDED INDEX FUNDS TRADED IN SE

• INVESTORS HAVE TO BUY AND SELL UNITS OF THE ETF IN THE SE

DIFFERENT OPTIONS PROVIDED BY MUTUAL

FUNDS• DIVIDEND PAYOUT, DIVIDEND

RE-INVESTMENT & GROWTH OPTION

• SYSTAMATIC INVESTMENT PLAN (SIP)

• SYSTAMATIC WITHDRAWAL PLAN (SWP)

• SYSTAMATIC TRANSFER PLAN (STP)

5INVESTMENT

PROCEDURE IN MUTUAL FUNDS

OFFER DOCUMENT• OD IS A LEGAL DOCUMENT

WHICH PROVIDE OVERALL INFORMATION ABOUT MF SCHEME

• SEBI HAS PRESCRIBED STANDARD FORMAT OF OD THAT MFs IN INDIA FOLLOWS

• LIKE THE PROSPECTUS THE OD IS LIKE TO DISCLOSE INFORMATION ABOUT INVESTMENT INSTRUMENTS

CONTENTS OF OFFER DOCUMENT

• FRONT PAGE ALWAYS SHOW THE DATE OF PUBLICATION NAME & TYPE OF SCHEME

• STATEMENT ABOUT INVT. OBJECTIVES & INVT. POLICY OF SCHEME

• RISK FACORS, HISTORIC STATISTICS, FEATURE & PLANS OF SCHEME, MGT. OF FUNDS, LOAD & EXPENSES, INVT. RESTRICTIONS, REDEMPTION & SWITCHOVER, TAX TREATMENT, NAV, MIN. AMT OF INVT.

MUTUAL FUND OFFER DOCUMENT AND FACT

SHEET• MF OD AND FACT SHEET CARRY INFORMATION THAT GIVES A GREAT DEAL OF DETAIL ABOUT THE FUND

• DATA PROVIDED BY THE AMCs IN FACT SHEETS ARE IMPORTANCE TO THE INVESTORS

• FACT SHEET GUIDE THE INVESTORS TO GET MORE INFORMATION ON SCHEME AND INVT. DECISION

KEY INFORMATION MEMORANDUM - KIM

• KIM IS ABRIDGED VERSION OF OD IT IS USUALLY PROVIDED WITH APPLICATION FORM

• KIM IS PREPARED AS PER GUIDELINES ISSUED BY SEBI & NEED TO UPDATE ATLEAST ONCE IN 2 YEARS

• CONTENTS OF KIM: INVT. OBJECTIVES, ASSET ALLOCATION PATTERN, BENCHMARK INDEX, DIVIDEND POLICY, NAME OF FM & TRUSTEES, PERFORMANCE OF SCHEMES, EXPENSES LOAD STRUCTURE,NAV, INVESTORS GRIEVANCE CONTACTS

ADVERTISEMENT CODE KEY CONTENTS

• AN ADVT. SHALL BE FAIR, TRUTHFUL & CLEAR, IT SHOULD NOT CONTAIN PROMISE OR FORECAST WHICH IS UNTRUE OR MISLEADING

• IT SHOULD NOT COMPARE THE PERFORMACNE OF OTHER FUNDS UNLESS IT IS RELEVANT TO BE DISCLOSED TO INVESTORS

• COMPUTATION OF NAV & OTHER CALCULATIONS SHOULD BE BASED ON NORMS PRESCRIBED BY SEBI

• MF SHOULD INDICATED DETAILS OF TRUSTEES, FMs, AND ADVISERS

ADVERTISEMENT CODE CONTD….

• ALL ADVT. CONTAIN INFORMATION ABOUT YIELD & PERFORMANCE SHOULD DISCLOSE ALL RISK FACTORS & MAKE CLEAR STATEMENT

• “INVT. IN MF IS SUBJECT TO MARKET RISK PLEASE READ THE OD CAREFULLY BEFORE INVESTING”

• IT SHOULD ALSO SPECIFY A CLAUSE NAV OF SCHEME SUBJECT TO CHANGE AS PER CHANGES IN SECURITIES MARKET

• ADVT. ON PERFORMANCE OF SCHEME OR AMC SHOULD BE ON HISTORIC DATA

STEPS IN MUTUAL FUND INVESTMENT

• IDENTIFICATION OF NEEDS• CHOOSING THE APPROPRIATE FUND• SELECTION OF MIX• REGULAR INVESTMENT• COST & TAX IMPLICATION• INVESTMENT• REVIEW & STRATEGY

PROCEDURE FOR INVESTING IN A FUND

• APPLICATION FORM• SUBMISSION OF DOCUEMENTS• ACKNOWLEDGMENT• VERIFICATION• ISSUE OF STATEMENT• REVIEW• INVESTMENT STRATEGY

SPECIAL AREAS OF MF INVESTMENT

PROCEDURE TO :

• BUY ADDITIONAL UNITS• SWITCH UNITS• REDEEM/REPURCHASE OF UNITS• POWER OF ATTORNEY (POA)• NOMINATION

6RIGHTS AND DUTIES OF

INVESTORS

INVESTMENT PARAMETERS UNDER SEBI REGULATIONS

SEBI HAS ISSUED A NO. OF NORMSREGULATING THE PATTERN OF INVESTMENTBY MFs• MAX. INVT. IN UNLISED SHARES OR CONVERTIBLES

TO BE RESTRICTED TO 5 OF THE CORPUS REFLECTED BY NAV

• MAX. INVT.IN ONE CO. CAN BE 10% OF NAV• TOTAL INVT. IN UNRATED DEBT SHOULD NOT

EXCEED 25 % OF NAV• NO SINGLE MF CAN HOLD 10 PERCENT OF VOTING

RIGHTS OR 10% OF SINGLE CO.• KYC NORMS SHOULD BE OBSERVED

DISCLOSURE AND COMPLIANCE STANDARDS

• ALL MFs TO DISCLOSE THEIR FULL PORTFOLIO WITHIN ONE MONTH FROM CLOSING OF FINANCIAL YEAR, COMMUNICATION SHOULD BE THROUGH POSTAL SYSTEM TO U/Hs OR PUBLISHED IN NEWSPAPERS

• AMC MUST PREPARE A COMPLIANCE MANUAL AND DESIGN INTERNAL AUDIT SYSTEM BEFORE LAUNCHING THE SCHEME

• TRUSTEES SHOULD ENSURE THAT THE RECOMMENDIONS AND OBSERVATION OF AUDIT COMMITTEE ARE IMPLEMENTED AND RITHT ACTION TAKEN

• TRUSTEES SHALL ALSO REVIEW ALL TRANSACTIONS OF MFs WITH ASSOCIATES OR REGULAR BASIS

• AMC SHOULD CONSTITUTE IN-HOUSE VALUATION COMMITTEE TO REVIEW THE SYSTEM & PRACTICE OF VALUATION OF SECURITIES

WHO CAN INVEST IN MUTUAL FUNDS

• RESIDENTS: ADULT INDIVIDUALS HOLDING SINGLY OR JOINTLY, MINORS CAN INVEST THROUGH PARENTS OR GUARDIANS, HUF THROUGH THEIR HEAD OR KARTA

• COs, CORPORATE BODIES, BANKS, NBFCs, ASSOCIATION OF PERSONS, BODY OF INDIVIDUALS, RELIGIOUS AND CHARITABLE TRUSTS, SOCIETIES REGISTERED UNDER SOCIETIES REGISTRATION ACT 1960

• MFs REGISTERED WITH SEBI• FOREIGN INSTITUTIONAL INVESTORS REGISTERED

WITH SEBI• OVERSEAS FINANCIAL ORGANISATION WHICH HAVE

ENTERED INTO AN ARRANGEMENT FOR INVT. IN INDIA• NRIs/OCBs/FIIs & PERSONS OF INDIAN ORIGIN

RESIDING ABROAD ON A FULL REPATIATION/NON-REPATRIATION BASIS

RIGHTS OF INVESTORS• ALL RIGHTS & DUTIES OF INVESTORS

ARE LAID DOWN IN OFFER DOCUMENT. OD GIVES & DISCLOSE ALL MATERIAL FACTS REQUIRED OF INVT. DECISION

• RIGHT TO HAVE PROPOTIONATE BENEFITS

• RIGHT TO INFORMATION• RIGHT TO HAVE TIME BOUND SERVICES• RIGHT TO APPROVE CHANGES• RIGHT TO WIND UP MF SCHEME• RIGHT TO WIND UP AMC

DUTIES OF AN INVESTOR

• STUDY OF OTHER DOCUMENTS• SUPPLY OF DOCUEMENTS• STUDY OF REPORTS

7INVESTMENT

DECISION MAKING IN

MUTUAL FUND

DIRECT INVESTMENT V/S INDIRECT INVESTMENT

• DIRECT INVT. REFERS TO INVESTMENT IN MULTIPLE INVT. AVENUES BY INVESTOR

• INVESTORS BEARS ALL RISK , CHOOSE TO INVEST AS PER OWN NEED OF RETURN, LIQIDITY ETC.

• INDIRECT INVT. REFERS TO INVT. IN MARKET THROUGH A PERSON/INSTITUTE/FUND WHICH HAS MARKET KNOWLEDGE TO OUTPERFORM RISK

CRITERIA FOR SELECTING MUTUAL FUND

• HISTORIC PERFORMANCE• TIME FACTOR• AGE AND SIZE OF FUND• FUND MANAGER• PRICE TO EARNING RATIO• EXPENSES RATIO• TURNOVER OF PORTFOLIO

RATING OF MUTUAL FUND SCHEMES

• RATING OF MF HELPS INVESTORS TO MAKE SUITABLE INVT. DECISIONS

• RATINGS GIVEN BY CRISIL, ECONOMIC TIMES AND VALUE RESEARCH INDIA ARE GENERALLY CONSIDERED FOR PERFORMANCE EVALUATION OF MF SCHEMES

• RANKING GIVEN BY CRISIL – TOP 10% VERY GOOD – NEXT 20% GOOD – NEXT 40% AVERAGE NEXT 20% – BELOW AVERAGE LAST 10% - POOR

• ECONOMIC TIMES TOP 10% – PLATINUM FUNDS NEXT 20% GOLD FUNDS NEXT 40% SILVER NEXT 30% GENERAL

• VALUE RESEARCH – TOP 10% 5 STAR, NEXT 22.5% 4 STAR, NEXT 35% 3 STAR, NEXT 22.5% 2 STAR, LAST 10% 1 STAR

CHOISE BETWEEN EQUITY FUNDS

GUIDELINES MAY BE FOLLOWED BY INVESTORS FOR INVESTING IN EQUITY MFs

• INVEST IN MF SCHEME WITH BROADER INVT. POOL

• CONSIDER COST OF ACQUISITION OF FUND (LOAD & EXPENSES RATIO)

• CONSIDER PERFORMANCE OF SCHEME FOR LAST DECADE OR DATE OF INCEPTION

• DON’T SELECT TOPMOST SCHEMES IN A CATEGORY, THEY MAY NOT PERFORM AS PER EXPECTATION IN LONG TERM

• DON’T INVT. IN SUCH SCHEMES WHICH ARE UNDERPERFORMING COMPARED TO MARKET

CHOISE BETWEEN DEBT FUNDS

THREE IMPORTANT CRITERIAS FOR EVALUATION OF INVT. IN DEBT FUND

• CREDIT RISK• INTEREST RATE RISK• EXPENSE RATIO

8VALUE

CONCEPTS AND NET ASSET

VALUE

VARIOUS CONCEPTS OF VALUE

• BOOK VALUE – IT’S A VALUE OF AN INVT./FINANCIAL ASSET RECORDED IN THE BOOKS OF ACCOUNTS

• IT IS EQUALLY APPLICABLE FOR LIABILITIES TOO

• MF BOOK VALUE IS TOTAL OF ALL INDIVIDUAL ASSETS

• IT IS CALLED UNIT CAPITAL OF THE SCHEME

VARIOUS CONCEPTS OF VALUE

• INVESTMENT VALUE – THIS TYPE OF VALUE THOUGHT OF VALUE AS FUTURE BENEFITS DUE TO OWNERSHIP IN EQUITY

• EQUITY INSTRUMENTS PROVIDE YIELD BENEFITS IN FUTURE IN VARIOUS FORMS

• INVT. VALUE MAY DIFFER FROM POTENTIAL BUYER TO ANOTHER FOR REASONS:

• VALUE CREATION ABILITY, TAX STATUS, RISK & VOLATILITY

VARIOUS CONCEPTS OF VALUE• GOING CONCERN VALUE – GOING

CONCERN VALUE TYPICALY ESTIMATES PROFITABILITY OF OPERATIONS OF BUSINESS IF IT IS CONTINUES IN NEAR FUTURE

• VALUE MEASUREMENT FOLLOWS 2 STEPS

• ESTIMATING FUTURE BENEFITS• VALUE MEASUREMENT USING

CAPITALISATION FACTOR

VARIOUS CONCEPTS OF VALUE• INTRINSIC VALUE – ALSO KNOWN AS

FUNDAMENTAL VALUE, CONCEPT USED FOR VALUATION OF VARIOUS SECURITIES , STOCKS, DEBENTURES

• VALUE OF INVT. DETERMINED ON THE BASIS OF EARNING POWER AND EARNING QUALITY OF INVT.

• INTRINSIC VALUE > MARKET VALUE – BUY

• INTRINSIC VALUE < MARKET VALUE - SELL

NET ASSET VALUE• MONEY INVESTED BY INVESTORS IN MFs

IS RECORDED AS UNIT CAPITAL AND NOT AS LIABILITY OR DEPOSITS ACCEPTED BY FUND

• INVT. OF FUNDS REFLECTED IN BALANCE SHEET AS ASSETS OF AMC

• FOR ALL MF SCHEMES IT IS MANDATORY TO VALUE THEIR INVESTMENT AND COMPUTE THE VALUE OF EACH UNIT KNOWN AS NET ASSET VALUE (NAV)

NET ASSET VALUE• FORMULA: NAV = NET ASSETS OF

SCHEME NO. OF OUTSTANDING

UNITS• MARKET VALUE OF INVESTMENT +

RECEIVBLES + ACCRUED INCOME – LIABILITIES – ACCURED EXPENSES

• NO. OF OUTSTANDING UNITS• FACTORS AFFECTING NAV:• PURCHASE/SALE OF SECURITIES• VALUATION OF SECURITIES ON DAILY

BASIS• OTHER ASSETS/LIABILITIES• UNITS PURCHASED/REDEEMED

NET ASSET VALUE• ADDITIONS TO BE MADE FOR NAV:• DIVIDENDS/INTEREST RECEIVABLE• OTHER RECEIVABLES• OTHER ASSETS• DEDUCTIONS TO BE MADE FOR NAV:• EXPENSES OUTSTANDING• LIABILITIES FOR UNPAID ASSETS• SHORT TERM/LONG TERM LIABILITIES

SEBI REGULATIONS FOR NAV CALCULATION

• SEBI REQUIRES MFs TO COMPUTE NAV OF EACH SCHEME AND TO DISCLOSE DAILY OR WEEKLY DEPENDING ON TYPE OF SCHEME

• VALUATION OF SECURITIES SHOULD BE BASED ON VIIIth SCHEDULE OF SEBI NORMS

• SALE & REPURCHASE PRICE OF EVERY SCHEME SHOULD BE BASED ON NAV ON GIVEN VALUATION DATE

BASIC TERMS/CONCEPTS• ENTRY LOAD: • IN MF SCHEME INVESTORS ARE UNDER

OBLIGATION TO BEAR EXPENSES FOR PROFESSIONAL SERVICE PROVIDED BY AMC, ONE OF EXPENSES IS ENTRY LOAD

• ENTRY LOAD IS LEVIED TO COVER UP SELLING & DISTRIBUTION EXPENSES

• ENTRY LOAD ALSO KNOWN AS “FRONT LOAD” IT ALSO AFFECTS BUYING PRICE FOR INVESTOR

BASIC TERMS/CONCEPTS• EXIT LOAD: • INVESTOR NEEDS TO PAY ADDITIONAL

CHARGE AT THE TIME OF ENTERING IN SCHEME, SIMILARLY HE HAS TO INSURE EXPENSE AT THE TIME OF EXIT FROM SCHEME

• ALL SCHEME MAY NOT HAVE EXIT LOAD AND EXIT LOAD FOR ALL SCHEMES MAY NOT BE SAME

• SOME SCHEMES CHARGE CONTIGENT DEFERRED SALES CHARGE

BASIC TERMS/CONCEPTS• ASSET MIX: • REFERS TO ALLOCATION OF FUNDS OF

SCHEME TOWARDS VARIOUS ASSETS LIKE STOCKS, BONDS CASH ETC.

• ASSET MIX OF SCHEME DEPENDS ON NATURE OF FUND

• IF ASSET MIX IS 60:20:20 IT MEANS SCHEME PUT 60 PERCENT IN STOCKS 20 PERCENT IN DEBTS 20 PERCENT IN CASH

BASIC TERMS/CONCEPTS• MARKET PRICE: • CLOSE ENDED SCHEME LISTED ON A

RECOGNISED STOCK EXCHANGE• IF MARKET PRICE IS LOWER THAN NAV

IT IS SAID TO BE TRADING AT DISCOUNT• IF MARKET PRICE IS HIGHER THAN NAV

IT IS SAID TO BE TRADING AT PREMIUM• AN OPEN ENDED SCHME IS NOT LISTED

AT STOCK EXCHANGE SHOULD BE PRICED ON REGULAR BASIS

BASIC TERMS/CONCEPTS• REPURCHASE AND SALE PRICE: • RE-PURCHASE PRICE IS A PRICE WHICH

MF SCHEMES BUY BACK THE UNITS FROM UNITHOLDERS, FOR INVESTORS IT IS SALE PROCEEDS OR REDEMPTION

• SALE PRICE IS A PRICE AT WHICH MF SCHEMES SELLS THE UNITS OF THE SCHEME

• FOR INVESTORS IT IS COST OF INVESTING IN MF SCHEME

HOW TO CALCULATE NAV• NO. OF OUTSTANDING SHARES 10 CRS. • FACE VALUE OF SHARES RS.10/-• INVESTMENT 160 CRS• RECEIVABLES 5 CRS• ACCRUED INCOME 2 CRS• LIABILITIES 2.5 CRS• ACCRUED EXPENSES 2.5 CRS• NAV = 160 + 5 + 2 – 2.5 – 2.5• 10• RS. 16.2

9VALUATION

AND VALUATION

NORMS

VALUATIONS• SEBI HAS LAID DOWN 2 BROAD

GUIDELINES SO THAT PURPOSE OF INVESTORS PROTECTION MAY BE SERVED

• (i) VALUATION BE BASED ON “FAIR VALUATION”. PRINCIPLE OF VALUATION

• (ii) FOR ALL SCHEMES AND ALL TYPES OF FUNDS VALUATION PRINCIPLE FOR SAME TYPE OF SECURITIES SHOULD BE KEPT CONSTANT

VALUATION PRINCIPLES

• PRINCIPLE OF ALTERNATIVES:• PRINCIPLE BASED ON ASSUMPTION

THAT INVESTORS BUY AND SELLERS SELL OWNERSHIP OF FINANCIAL ASSETS AT THEIR FREE WILL THERE IS NO COMPULTIONS ON BOTH THE PARTIES, WE ASSUME THAT ALTERNATIVE PRINCIPLE IS FOLLOWED AND FAIR VALUE OF TRANSITION IS ESTABLISED


• PRINCIPLE OF FUTURE BENEFITS:• THIS PRINCIPLE IMPLIES THAT

INVESTORS NOT ONLY INVEST TO GENRATE BENEFITS IN PRESENT BUT ALSO IN FUTURE, THEY ARE READY TO PAY ADDITIONAL MONEY TO ACQUIRE SUCH INVESTMENTS WHICH SHALL APPRECIATE IN FUTURE


• FAIR VALUE PRINCIPLE:• FAIR VALUE NEEDS TO BE CONSIDERED

MOST CRUSIAL PRINCIPLE OF VALUATION PRINCIPLE SUGGEST VALUES OF SECURITIES SHOULD BE BASED ON COST, MARKET PRICE OR SOME ACCEPTED PRINCIPLE FOR VALUATION, FAIR VALUE OF A SECURITY DEPENDING ON NATURE OF SECURITY TRADING, NON-TRADING AND SO ON

VALUATION OF EQUITY INSTRUMENTS

• TRADING SECURITIES:• TRADING SECURITIES ARE VALUED ON

THE BASIS OF “MARKED TO MARKET” • IN THIS CASE CLOSING MARKET PRICE IS

OBTAINED AND SUCH PRICE IS MULTIPLIED WITH CLOSING O/S UNITS TO GET MARKET VALUE OF INVESTMENTS

• VALUATION DATE:• THE DATE ON WHICH THE FUND

CALCULATES ITS NAV FOR ITS PORTFOLIO IS KNOWN AS VALUATION DATE


• THINLY TRADED SECURITIES:• CERTAIN SECURITIES WHICH ARE NOT

TRADED FREQUENTLY OR MAY BE TRADED IN VERY SMALL VOLUME, SOMETIMES IT IS DIFFICULT TO OBTAIN MARKET PRICE SUCH SECURITIES ARE KNOWN AS THINLY TRADED SECURITIES

• SEBI HAS DEFINED THINLY TRADED SECURITES AS:

• TRADING VOLUME < 50000 SHARES OR RS.500,000, SUSPENSION OF TRADING FOR LESS THAN 60 DAYS


• NON-TRADED SECURITIES:• WHEN A SECURITY IS NOT TRADED ON

ANY RECOGNISED SE FOR 60 DAYS PRIOR TO VALUATION DATE IS CONSIDERED AS “NON TRADED SECURITY”

• VALUATION SHOULD BE BASED ON VALUE PER SHARE TAKEN AS AVERAGE OF NET WORTH AND CAPITALISED VALUE WHICH DISCOUNTED FOR PURPOSE OF LIQUIDITY

VALUATION OF DEBT SECURITIES

• TRADING SECURITIES:• DEBT SECURITY TRADING ON A SE

ACCEPTED PRINCIPLE IS TO USE QUOTED MARKET PRICE

• IF A PRTICULAR DEBT SECURITY NOT TRADED ON SE ON A PRTICULAR VALUATION DATE THEN ANY SUCH PRICE PREVAILING ON PREVIOUS VALUATION DATE MAY BE TAKEN AS MARKET PRICE PROVIDED THAT SUCH DATE IS NOT 30 DAYS PRIOR TO THE CURRENT VALUATION OF DEBT


• THINLY TRADED SECURITY:• AS PER SEBI GUIDELINES FOR MF DEBT

SECURITY IS TRADED ON ANY OF RECOGNISED SE FOR LESS THAN RS. 5 CRS. ON A PARTICULAR TRADING DAY

• NON-TRADED SECURITY:• VALUATION OF NON-TRADED SECURITY

MAY BE UNDERTAKEN ON YIELD TO MATURITY BASIS, TAKING CAPITALIZATION FACTOR FOR TRADED SECURITY WHICH NEEDS TO BE DISCOUNTED AT APPROPRIATE FACTOR


• GUIDELINES TO BE FOLLOWED IN CASE OF NON-TRADED/THINLY TRADED SECURITES FOR THE PURPOSE OF VALUATION DIVIDED INTO 2 PARTS:

• (i) MONEY MARKET INSTRUMENTS AND DEBT SECURITIES MATURITY FOR LESS THAN 182 DAYS

• (ii) NON-TRADED, NON GOVT DEBT INSTRUMENTS MATURITY MORE THAN 182 DAYS


• NON-TRADED DEBT SECURITIES MATURING BELOW 182 DAYS SHOULD BE TREATED AS MMIs FOR THE PURPOSE OF VALUATIONS

• SUCH SECURITIES SHOULD BE VALUED AT AMORTISED PURCHASE COST OF INVT PLUS ACCRUED INTEREST TILL THE DATE OF ACQUISITION & DIFFERNCE BETWEEN REDEMPTION VALUE & PURCHASE PRICE SPREAD OVER REMAINING MATURITY PERIOD

VALUATION OF OTHER INSTRUMENTS

• GOVERNMENT SECURITIES:• G-SEC ARE VALUED AT YIELD TO

MATURITY BASED ON PREVAILING MARKET RATE

• CONVERTIBLE DEBENTURES:• CONVERTIBLE PORTION AND NON-

CONVERTIBLE PORTION IS VALUED IN DIFFERENT MANNER

• DEBT COMPONENT IS VALUED ON SAME AS DEBT INSTRUMENT

• EQUITY COMPONENT IS VALUE ON SAME BASIS AS EQUITY INSTRUMENTS

VALUATION OF OTHER INSTRUMENTS

• VALUATION OF GOLD:• VALUATION OF GOLD REQUIRED FOR

FUNDS/SCHEMES INVEST PRIMARILY IN GOLD OR GOLD RELATED INSTRUMENTS SUCH SCHEMES ARE KNOWN AS GETF

• PRICING/VALUATION OF GOLD BASED ON PRICES FIXED BY LONDON BULLION MARKET ASSOCIATION (LBMA) IN US$ PPER OUNCE FOR GOLD HAVING PURITY OF 995

• IN CASE PURITY IS ABOVE 995 LBMA PRICES MAY BE TAKEN A BASED PRICE AND PREMIUM MAY BE ADDED FOR EXTRA FINENESS

10ACCOUNTING

OF MUTUAL FUNDS

BOOKS OF ACCOUNTS• AS PER REGULATION 50 OF SEBI ALL MFs SET

UP IN INDIA SHALL MAINTAIN PROPER BOOKS OF ACCOUNTS, RECORDS AND DOCUMENTS SHOWING DETAILS OF EACH SCHME SEPARATELY

• EVERY MF SHOULD DISCLOSE TRUE & FAIR VIEW OF AFFAIRS OF THE FUND AS PER SEBI REGULATION FOR INVESTOR PROTECTION

• ALL BOOKS OF A/Cs MUST BE PRESERVED FOR 8 YEARS BY MF EVEN IN A SITUATION WHERE SCHEME HAS LAPSED

• AS PER REGULATION 50 AMC SHOULD INFORM SEBI ABOUT PLACE OF BOOKS OF A/Cs & RECORDS

INSPECTION OF BOOKS OF ACCOUNTS BY SEBI

• AS PER REGULATION 61 SEBI CAN APPOINT ONE OR MORE PERSONS, AS THEY FIND FIT AS AN OFFICER ON SPECIAL DUTY FOR INSPECTING BOOKS OF A/Cs OR RECORDS MAINTAINED BY MF

• OFFICER IS AUTHORISED TO UNDERSTAND & EVALUATE AND SEEK FOR ANY INFORMATION ON FOLLOWING:

• BOOKS OF A/Cs, DOCUMENTS & INFRASTRUCTURE, SYSTMES & PROCEDURE, TRUSTEES/AMC

• PRIMARY OBJECTIVE OF INSPECTION IS TO ENSURE REGULATIONS PRESCRIBED ARE COMPLIED WITH OR NOT

ACCOUNTING YEAR• ACCOUNTING YEAR OF A MF FOR ALL

SCHEMES SHALL END ON 31ST MARCH EVERY YEAR

• ALL EXISTING SCHEMES SHALL HAVE OPENING DATE OF FINANCIAL YEAR AS 1ST APRIL & ALL SCHEMES INTRODUCED IN THE YEAR SHALL HAVE DATE OF ISSUE OF MF UNITS AS OPENING DATE

• IF SCHEME IS INTRODUCED IN BETWEEN ACCOUNTING YEAR DISCLOSURE & ACCOUNTING YEAR SHALL APPLY TO SCHEME

• IF A MF IS FLOATED OUTSIDE INDIA WITH DIFFERENT ACCOUNTING YEAR CAN SHOW VALUATION OF DIFFERENT DATE THAN 31ST MARCH ONLY FOR INVESTORS OUTSIDE INDIA

ACCOUNTING POLICIES• THE REALISED GAINS OR LOSSES ON SALE OF

REDEMPTION OF INVT. AS WELL AS UNREALISED APPRECIATION OR DEPRECIATION SHALE BE RECOGNISED IN ALL FINANCIAL STATEMENTS

• NON-TRADED INVESTMENTS SHALL BE VALUED IN GOOD FAITH IN ACCORDANCE WITH NORMS SPECIFIED

• FOR QUOTED SHARES THE DIVIDEND INCOME EARNED BY SCHEME SHALL BE RECOGNISED NOT ON THE DATE OF DIVIDEND IS DECLARED BUT ON THE DATE THE SHARE IS QUOTED ON EX-DIVIDEND BASIS

ACCOUNTING POLICIES• IN RESPECT OF ALL INTEREST BEARING

INVESTMENTS INCOME SHALL BE ACCRUED ON A DAY TO DAY BASIS AS IT IS EARNED, WHEN SUCH INVT. ARE PURCHSAED INTEREST PAID FOR THE PERIOD FROM THE LAST INTEREST DUE DATE UPTO THE DATE OF PURCHASE SHALL NOT BE TREATED AS COST OF PURCHASE BUT SHALL BE TREATED TO INTEREST RECOVERABLE A/C

• IN DETERMINING THE HOLDING COST OF INVT. & THE GAINS OR LOSS ON SALE OF INVESTMENTS THE “AVERAGE COST” METHOD SHALL BE FOLLOWED

• TRANSACTION FOR PURCHASE OR SALE OF INVT. SHALL BE RECOGNISED AS OF THE TRADE DATE AND NOT AS OF THE SETTLEMENT DATE

ACCOUNTING POLICIES• WHERE INCOME RECEIVABLE ON INVT. HAS

BEEN ACCRUED & HAS NOT BEEN RECEIVED FOR A PERIOD OF 12 MONTHS BEYOND THE DUE DATE PROVISION SHALL BE MADE BY DEBIT TO REVENEUE A/C

• WHEN THE UNITS OF AN OPEN-ENDED SCHEMES ARE SOLD THE DIFFERENCE BETWEEN THE SALE PRICE AND FACE VALUE OF THE UNIT IF POSITIVE CREDITED TO RESERVES AND IF NEGATIVE IS DEBITED TO RESERVES, THE FACE VALUE BEING CREDITED TO CAPITAL A/C

• THE COST OF INVT. ACQUIRED OR PURCHASE SHALL INCLUDE BROKERAGE, STAMP CHARGES & ANY CHARGE INCLUDED IN BROKERS BOUGTH NOTE

ACCOUNTING STANDARDS• ALL BASIC PRINCIPLES, STANDARDS &

CONCEPTS OF ACCOUNTING OF ANY COMMERCIAL VENTURE IN INDIA ARE EQUALLY APPLICABLE TO MFs

• RECENTLY, FUNDAMENTAL CHANGES IN ACCOUNTING OF MFs HAVE BEEN SUGGESTED TO BRING ACCOUNINT OF MF AT PAR WITH INTERNATIONAL STANDARD, COMMITTEE FORMED PRESCRIBED DISCLOSURE IN 3 BROAD AREAS:

• 1. BALANCE SHEET• 2. REVENUE ACCOUNT• 3. NOTES TO ACCOUNT

SPECIAL ACCOUNTING AREAS• DATE OF RECOGNITION:• DATE OF RECOGNITION CAN BE DETERMINED

IN FOLLOWING CASES:• TRADED SECURITES:• IN CASE OF TRADED SECURITIES TRANSACTION OF

BUYING OR SELLING OF INVT. SHOULD BE ACCOUNTED ON THE DATE OF TRADE & NOT ON SETTLEMENT

• IN CASE OF NON-TRADED INVT. TRANSACTION, PURCHASE: ON SUCH DATE WHEN SCHEME IS LEGALLY ENFORCEABLE & PAYMENT IS DUE TO COUNTER PART

• IN CASE OF SALE ON SUCH DATE WHEN UNDER A SCHEME ONE IS LEGALLY ELIGIBLE TO COLLECT SALES PROCEEDS

SPECIAL ACCOUNTING AREAS• IN CASE OF TRADED SECURITES TRANSACTIONS OF

BUYING OR SELLING OF INVT. SHOULD BE ACCOUNTED ON THE DATE OF TRADE AND NOT ON SETTLEMENT

• IN CASE OF NON-TRADED INVT. IN CASE OF PURHASE ON SUCH DATE WHEN SCHEME IS LEGALLY ENFORCEABLE & PAYMENT IS DUE TO COUNTER PARTY

• IN CASE OF SALE ON SUCH DATE WHEN UNDER A SCHEME ONE IS LEGALLY ELIGIBLE TO COLLECT SALE PROCEEDS

• IN CASE OF BONUS SHARES IT MUST BE ACCOUNTED ON THE DATE WHEN THE ORIGINAL SHARE ON WHICH BONUS IS DECLARED ARE TRADED IN SE AT EX-BONUS PRICE

• IN CASE OF RIGHTS ISSUE SIMILAR RULE IS APPLICABLE AS IT IS IN CASE OF BONUS ISSUE

COST OF INVESTMENT• THE COST OF INVESTMENT SHOULD INCLUDE:• BROKERAGE• STAMP DUTY• LEGAL CHARGES• OTHER INCIDENTAL EXPENSES• IN CASE OF NON-TRADED DEBTS ANY END

DISCOUNT OFFERED SHOULD BE REDUECED FROM TOTAL COST

• IN CASE OF INTEREST BEARING INVT. INCOME OF INVT. ACCRUES ON DAILY BASIS SUCH INCOME ARISING IS REVENUE IN NATURE IT SHOULD NOT BE INCLUDED IN COST BUT ACCOUNTED WITH “INTEREST RECOVERABLE ACCOUNT”

INITIAL ISSUE EXPENSES• IN CASE OF MFs ACCOUNTING OF INITIAL ISSUE

EXPENSES HAS SIGNIFICANT IMPACT ON THE PROCESS OF CALCULATION OF NAV OF A FUND

• SEBI REGULATION FOR INITIAL ISSUE EXPENSES PROVIDE MAXIMUM LIMIT FOR ISSUE EXPENSES CAN BE 6 PERCENT OF FUND RAISED

• ANY EXPENSES IN EXCESS OF PRESCRIBED LIMIT IS TO BE BORNE BY AMC

• SCHEME CLASSIFIED AS LOAN SCHEME SUCH EXPENSES SHOULD BE CHARGED AND ACCOUNTED WITH SCHEMES

• SCHEME CLASSIFIED AS NON-LOAN SCHEME EXPENSES SHOULD BE BORNE BY AMC

CARRYING VALUE OF INVESTMENT

• AS PER SEBI GUIDELINES ALL INVESTMENTS SHOULD BE “MARKED TO MARKET”, THEY SHOULD BE REFLECTED AT MARKET VALUE ON THE DATE OF BALANCE SHEET, THERE IS POSSIBILITY OF REALISED GAIN/LOSS & UNREALISED GAIN/LOSS

• IN CASE OF SALE OR REDEMPTION OF INVT. RESULTING GAIN/LOSS SHOULD BE RECOGNISED & ACCOUNTED AS PART OF DISTRIBUTABLE INCOME OF MF

• IN CASE OF UNREALISED GAIN/LOSS I.E APPRECIATION OR DEPRECIATION IN THE VALUE OF INVT. MFs NEEDS TO MAKE PROVISION FOR THEIR EXCLUSION FROM INCOME AVAILABLE FOR DISTRIBUTION AS PROFIT

ELEVENTH SCHEDULE – SEBI REGULATIONS (REGULATION 54,

56(2)• ANNUAL REPORT (CONTAIN):• REPORT OF BOTs ON THE OPERATIONS OF

VARIOUS SCHEMES & FUTURE OUTLOOK OF THE FUND

• BALANCE SHEET & REVENUE ACCOUNT• AUDITORS REPORT IN ACCORDANCE WITH

PARAGRAPH 5 OF THIS SCHEDULE• BRIEF STATEMENT OF BOTs ON THE

FOLLOWING ASPECTS:• LIABILITIES & RESPONSIBILITIES OF TRUSTEES,

INVT. OBJECTIVE OF THE SCHEME, BASIS OF INVT. POLICY OF UNDERLYING SCHEME

ELEVENTH SCHEDULE – SEBI REGULATIONS (REGULATION 54,

56(2)• AUDITORS REPORT:• ALL MFs SHALL BE REQUIRED TO GET THEIR A/C

S AUDITED THE AUDITORS REPORT SHALL FORM A PART OF ANNUAL REPORT IT SHOULD BE ACCOMPANY THE ABRIDGED B/S AND REVENUE ACCOUNT

• THE AUDITOR SHALL STATE WHETHER HE HAS OBTAINED ALL INFORMATION AND EXPLANATIONS TO BEST OF HIS KNOWLEDGE AND BELIEF

• THE B/S & REVENUE A/C ARE IN AGREEMENT WITH BOOKS OF A/CS OF THE FUND

11FINANCIAL

STATEMENT OF MUTUAL FUNDS

BALANCE SHEET• IN CASE OF B/S OF MF THE FINANCIAL ASSETS

& LIABILITIES ARE DISCLOSED• B/S OF MF SCHEME & B/S OF AMC IS ALSO

DISTINGUISHED FROM EACH OTHER• B/S GIVE SCHMEWISE DETAILS OF ASSETS &

LIABILITIES ALL SUCH PARTICULARS ARE DISCLOSED AS PER PRESCRIBED FORMAT IN

• (A) ANNEXURE 1 A (ASSET SIDE)• (B) ANNEXURE 1 B (LIABILITY SIDE)• B/S ALSO TO DISCLOSE THE PER UNIT NAV AT

THE END OF YEAR• MAJOR ITEM IN B/S IS DISCLOSURE OF INVT. IN

TERMS OF VALUE & VOLUME

CONTENTS OF BALANCE SHEET • ASSETS:• (A) INVESTMENTS:• EQUITY/PREFERNCE SHARES, PVT PLACEMENTS,

BONDS, DEBENTURES, G-SEC, CP, ETC• (B) DEPOSITS: DEPOSIT WITH SCHEDULE BANKS,

Cos, INSTITUTIONS ETC.• (C) OTHER CURRENT ASSETS: BAL WITH BANKS

IN C/A, CASH ON HAND, SUNDRY DEBTORS, CONTRACT FOR SALE OF INVT. O/S INCOME, ADVANCE PAYEMENT, EXCESS APPLICATION MONEY IN SHARES/BONDS

• (D) FIXED ASSETS: IN MF FIXED ASSET SHALL CONSTITUTE A SMALL PORTION OF B/S IT WOULD BE SUFFICIENT TO DISCLOSE DEPRECIATED COST OF FIXED ASSETS OR NET BLOCK MAY BE DISCLOED

CONTENTS OF BALANCE SHEET • LIABILITIES:• (A) UNIT CAPITAL: INITIAL CAPITAL, UNIT

CAPITAL(INCLUDING NO. OF UNITS & CACE VALUE PER UNIT)

• (B) RESERVES & SURPLUS: UNIT PREMIUM RESERVE, GENERAL RESERVE, DIVIDEND EQUALIZATION RESERVE

• (C) LOANS: LOANS FROM RBI, LOAN FROM SETTLER, LOAN FROM OTHER COMMERCIAL BANSK

• (D) CURRENET LIBILITIES & PROVISIONS: SUNDRY CREDITORS, INTEREST PAYABLE ON LOANS, CONTRACT FOR PURCHASE OF INVT., BANK OD, UNCLAIMED DISTRIBUTION INCOME

• PROVISIONS: PROVISION FOR LOSS, DEPRECIATION, DOUBTFUL DEPOSITS, O/S & ACCRUED INCOME, PROVISION FOR GRATUITY, SWF, ETC.

REVENUE STATEMENT/ACCOUNT• REVENUE A/C OF MFs IS PREPARED TO PROVIDE DETAILED

INFORMATION ABOUNT SCHEMEWISE PARTICUARS OF INCOME & EXPENDITURE RESULTING INTO SURPLUS/DEFICIT OF MF

• THE REVENUE A/C OF MF SHOULD BE PREPARED AS PER ANNEXURE 2B OF SCHEDULE XI OF SEBI REGULATIONS 1996 THE REVENUE A/C PROVIDE INCOME & EXPENSES OF EACH SCHME SEPARATELY

• IN CASE OF DISPOSAL OF INVT. PROFIT OR LOSS FROM INTER SCHEME TRANSFER OF INVT SHOULD BE TREATED & ACCOUNTED SEPARATELY

• REVENUE A/C SHOULD PROVIDE INFORMAION ABOUT ACCOUNTING POLICY FOLLOWED IN SCHEME

• ABRIDGED REVENUE A/C SHOULD BE PREPARED TO SHOW APPROPRIATION OF SURPLUS BY WAY OF DIVIDENDS TRANSFER TO RESERVES ETC

• TOTAL INCOME & EXPENDITURE AS PERCENTAGE OF AVERAGE NET ASSETS SHOULD BE COMPUTED & DISCLOSED IN REVENUE A/C

CONTENTS OF REVENUE ACCOUNT

• INCOME : • DIVIDENDS, INTEREST, PROFIT OF SALE/REDEMPTION OF

INVESTMENT, PFORIT OF INTER-SCHME SALE/TRANSFER OF INVESTMENT OTHER INCOME

• EXPENSES & LOSSES :• PROVISION FOR DEPRECIATION IN VALUE OF INVESTMENT• PROVISION FOR DOUBTFU ACCRUED INCOME• PROVISION FOR DOUBTFUL DEPOSITS• LOSS ON SALE OF REDEMPTION• MANAGEMENT FEES, TRUSTSHIP FEES, STAFF COST,

ADMINISTRAION & OTHER EXPENSES• AUDIT FEES, CUSTODIAN FEES, PUBLICITY EXPENSES ETC

DISCLOSURE REQUIREMENTS• ALL PROVISIONS MADE BY MF DURING AN

ACCOUNTING YEAR INCLUDING PROVISIONS OF DEPOSIT, DEBT & OTHER CURRENT ASSETS NEED TO BE CLUBBED BUT CAN BE SHOWN AS AGGREGATE FIGURE

• SEPARATE DISCLOSURE NEEDED FOR :• CUSTODIAN FEES• REGISTRAION FEES• NO DISTINCTION TO BE MADE BETWEEN SHORT

TERM CAPITAL GAIN & LONG TERM CAPITAL GAIN• TOTAL INCOME & TOTAL EXPENDITURE SHOULD BE

CALCULATED ON WEEKLY BASIS AS PERCENTAGE OF AVERAGE NET ASSETS AND DISCLOSED ACCORDINGLY

ADDITIONAL DISCLOSURE TO FINANCIAL STATEMENT

• MANAGEMENT FEES PAID TO TOP MANAGEMENT SHOULD BE SHOWN WITH DETAILED BREAK-UP AND COMPUTATION OF THE SAME

• IF BROKERAGE, CUSTODIAN FEES OR ANY OTHER PAYMENT FOR SERVICE IS PAID OR PAYABLE TO ANY THIRD PARTY SHOULD BE DISCLOSED ACCORDINGLY AS SEPARATE DISCLOSURE

• AGGREGATE VALUE OF PURCHASE OF INVT. AND SALE OF INVT. AS PERCENTAGE OF AVERAGE NET ASSETS ON WEEKLY BASIS SHOULD BE DISCLOSED

HISTORIC UNIT STATISTICS• EVERY MF SCHEME NEEDS TO PREPARE THE SPECIAL

STATEMENT AS PER SCHEDULE 11 OF SEBI REGULATIONS TO DISCLOSE PER UNIT STATISTICS FOR PAST 3 YEARS

• NET ASSETS VALUE PER UNIT• GROSS INCOME PER UNIT • AGGREGATE OF EXPENSES WRITTEN OFF,

AMORTISED & CHARGED PER UNIT• NET INCOME PER UNIT• UNREALISED APPRECIATION/DEPRECIATION IN

VALUE OF INVT. PER UNIT• IF THE UNITS ARE TRADED OR REPURCHASED THE

HIGHEST & LOWEST PRICES PER UNIT DURING THE YEAR

• PER UNIT RATIO OF EXPENSES TO AVERAGE NET ASSETS BY PERCENTAGE

12TAX

IMPLICATIONS IN

MUTUAL FUNDS

TAX IMPLICATIONS• DEPENDING ON NATURE & CHARACTERISTICS OF MF

SCHEME AMC & U/Hs IS UNDER OBLIGATION TO PAY TAXES AT PRESCRIBED RATE & TIME WITH SURCHARGE & CESS IF ANY

• TAX IMPLICATION FOR AMC:• DIVIDEND DISTRIBUTION TAX• CAPITAL GAINS• SECURITIES TRANSACTION TAX (STT)• WEALTH TAX• TAX IMPLICATION FOR UNIT HOLDER:• INCOME TAX• STT• GIFT TAX

TAXATION FOR UNIT HOLDERS• CAPITAL GAIN TAX:• INVESTORS HAVE TO PAY CAPITAL GAIN TAX

ONLY WHEN THEY REALISE CAPITAL GAIN I.E. PPROFIT ON SALE OF ANY MF UNIT

• CAPITAL GAIN CAN BE EITHER LONG TERM OR SHORT TERM IN NATURE

• GAINS ARISING ON TRANSFER OF UNITS (BY SLAE/REDEMPTION/SWITCH) HELD FOR A PERIOD IN EXCESS OF 12 MONTHS ARE CLASSIFIED AS LONG TERM IN ANY OTHER CASE THE GAINS ARE CLASSIFIED AS SHORT TERM CAPITAL GAIN

LONG TERM CAPITAL GAINS• IN CASE OF EQUITY ORIENTED FUND:• UNDER SECTION 10(38) LTCG ARISING ON

SALE /REDEMPTION/SWITCH ARE EXEMPT FROM INCOME TAX IN THE HANDS OF UNITHOLDERS, PROVIDED SUCH TRANSACTIONS ARE ENTERED INTO A RECOGNISED SE OR SUCH UNITS ARE SOLD TO THE MF ARE CHARGABLE TO STT

• EQUITY ORIENTED FUND MEANS WHERE INVESTIBLE FUNDS ARE INVESTED BY MF IN EQUITY SHARES IN DOMESTIC COMPANIES TO THE EXTEND OF 65 PERCENT OF THE TOTAL PROCEEDS

LONG TERM CAPITAL GAINS• IN CASE OF FUNDS OTHER THAN EQUITY

ORIENTED FUND:• FOR INDIVIDUALS & HUF:• ACCORDING TO SECTION 112 OF ACT LTCG

ARISING ON SALE/REDEMPTION/SWICH OF UNITS OF FUNDS OTHER THAN EQUITY ARE TAXABLE AT 10 PERCENT WITHOUT INDEXATION& 20 PER CENT WITH INDEXATION PLUS APPLICTION SURCHARGE 10 PERCENT AND EDUCATION CESS 3 PERCENT

• U/H HAS A OPTION TO OFFER THE LTCG AT CONCESSIONAL RAGE OF 10 PERCENT PLUS SURCHARGE & EDUCATION CESS WITHOUT CLAIMING ANY INDEXATION BENEFTI


ORIENTED FUND:• FOR PARTERSHIP FIRMS/NON RESIDENTS

INDIAN/FOREIGN COMPANIES:• ACCORDING TO SECTION 112 OF ACT LTCG

ARISING ON SALE/REDEMPTION/SWICH OF UNITS OF FUNDS OTHER THAN EQUITY ARE TAXABLE AT 20 PERCENT PLUS APPLICABLE SURCHARGE & EDUCATION CESS AFTER CLAIMING INDEXATION BENEFIT

• U/H HAS A OPTION TO OFFER THE LTCG AT CONCESSIONAL RATE OF 10 PERCENT PLUS SURCHARGE & EDUCATION CESS WITHOUT CLAIMING ANY INDEXATION BENEFIT


ORIENTED FUND:• FOR NRIs UNDER SECTION 115E OF ACT

INCOME UNDER LTCG IS CHARGABLE AT 20 PERCENT PLUS APPLICABLE SURCHARGE & CESS

• FOR OVERSEAS FINANCIAL ORGANISAION INCLUDING OCBs AND FIIs:

• LTCG ARISING ON TRANSFER OF UNITS PRCHASED IN FOREIGN CURRENCY ARE TAXABLE AT 10 PERCENT PLUS APPLICABLE SURCHARGE & CESS SUCH GAINS CALCULATED WITHOUT INDEXATION BENEFIT

SHORT TERM CAPITAL GAINS• EQUITY ORIENTED FUNDS:• SECTION 111A PROVIDE THAT STCG ARISING

ON REDEMPTION OF UNITS OF EUQITY ORIENTED FUNDS ON WHICH STT HAS BEEN PAID ARE TAXABLE AT THE RATE OF 15 PERCENT PLUS APPLICABLE SURCHARGE & CESS

• FUNDS OTHER THAN EQUITY ORIENTED FUNDS:

• STCG REALISED ON TRANSFER OF UNITS ARE TAXABLE AT NORMAL RATES PLUS APPLICABLE SURCHARGE & EDUCATION CESS FOR DIFFERENT UNIT HOLDERS

• RIs & HUF/PARTNERSHIP FIRMS/INDIAN COs/NRIs – 30 PERCENT PLUS SURCHARGE & CESS

• FOREIGN COs 40 PERCENT – OVERSEAS FINANCIAL ORGANISATION/FIIs 30 PERCENT

TAX DUDUCTED AT SOURCE• NO TAX SHALL BE DEDUCTED AT SOURCE IN

RESPECT OF ANY INCOME CREDIT OR PAID IN RESPECT OF UNITS OF A FUND AS PER PROVISIONS OF SECTION 10 (35) SECTION 194K & SECTION 196A

• UNDER SECTION 195 OF ACT TAX SHALL BE DEDUCTED AT SOURCE FOR CAPITAL GAINS AS UNDER:

• IN CASE OF NON-RESIDENT OTHER THAN A CO.:

• LTCG OTHER THAN EQUITY FUNDS – 22.66 PERCENT PLUS APPLICABLE SURCHARGE & CESS

• STCG OTHER THAN EQUITY 33.99 PECENT PLUE APPLICABLE SURCHARGE & CESS

TAX DUDUCTED AT SOURCE• IN CASE OF FOREIGN COMPANY:• LTCG OTHER THAN EQUITY FUNDS – 11.33

PERCENT PLUS APPLICABLE SURCHARGE & CESS

• STCG OTHER THAN EQUITY 33.99 PERCENT PLUS APPLICABLE SURCHARGE & CESS

SECTION 80 C DEDUCTION• SECTION 80 C OF IT ACT ALLOWS CERTAIN

INVESTMENTS & EXPENDITURE TO BE TAX-EXEMPT THE TOTAL LIMIT UNDER THIS SECTION IS RS.100,000/- WHICH CAN BE ANY COMBINATION AS BELOW:

• CONTRIBUTION TO PF OR PPF• PAYMENT TO LIC• INVESTMENT IN PENSION PLANS• INVESTMENT IN ELSS OF MFs

SECURITIES TRANSACTION TAX (STT)

• THE STT SHALL BE COLLECTED BY THE MFs AT SOURCE AS PER CHAPTER VII OF FINANCE ACT 2004

• STT IS NOT APPLICABLE IN CASE OF NON EQUITY ORIENTED MF SHCEMES

• STT TO BE DEDUCTED IN EQUITY ORIENTED SCHMES IS 0.001 PERCENT

• WEALTH TAX:• UNITS IN THE FUND ARE NOT TREATED AS

ASSETS AS DEFINED IN SECTION E(ea) OF WEALTHE TAX ACT 1957 HENCE THEY WOULD NOT BE LIABLE TO WEALTH TAX

DIVIDEND DISTRIBUTION TAX (DTT)• UNDER PROVISION OF SECTION 115R OF ACT

ADDITIONAL INCOME TAX IS PAYABLE AT DIFFERENT RATES ON INCOME DISTRIBUTED TO DIFFERENT CLASS OF UNIT HOLDERS

• NO DDT IS PAYABLE ON INCOME DISTRIBUTED BY OPEN ENDED EQUITY ORIENTED FUNDS

• MFs WHICH ARE MM/LIQUID FUND ARE REQUIRED TO PAY DDT AT 25 PERCENT (EXCLUDING SURCHARGE @ 10 PERCENT EDUCATION CESS 2 PERCENT & SECONDARY & HIGHER EDUCATION CESS @ 1PERCENT)

• MFs OTHER THAN MMFs REQUIRED TO PAY DDT OF 12.5 PERCENT (EXCLUDING SURCHARGE @ 10 PERCENT EDUCATION CESS 2 PERCENT & SECONDARY & HIGHER EDUCATION CESS @ 1PERCENT)

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