Workbook - Principal Mutual Fund India

387 Pages·2011·1.4 MB·English

Workbook
for
NISM-Series-V- A: Mutual Fund Distributors
Certification Examination

National Institute of Securities Markets
www.nism.ac.in
This workbook has been developed to assist candidates in preparing for the
National Institute of Securities Markets (NISM) Certification Examination for
Mutual Fund Distributors.

Workbook Version: July 2011

Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2010
Plot 82, Sector 17, Vashi
Navi Mumbai – 400 705, India

All rights reserved. Reproduction of this publication in any form without prior
permission of the publishers is strictly prohibited.
Disclaimer

The contents of this publication do not necessarily constitute or imply its
endorsement, recommendation, or favoring by the National Institute of
Securities Market (NISM) or the Securities and Exchange Board of India
(SEBI). This publication is meant for general reading and educational
purpose only. It is not meant to serve as guide for investment. The views
and opinions and statements of authors or publishers expressed herein do
not constitute a personal recommendation or suggestion for any specific
need of an Individual. It shall not be used for advertising or product
endorsement purposes.

The statements/explanations/concepts are of general nature and may not
have taken into account the particular objective/ move/ aim/ need/
circumstances of individual user/ reader/ organization/ institute. Thus NISM
and SEBI do not assume any responsibility for any wrong move or action
taken based on the information available in this publication.

Therefore before acting on or following the steps suggested on any theme
or before following any recommendation given in this publication
user/reader should consider/seek professional advice.

The publication contains information, statements, opinions, statistics and
materials that have been obtained from sources believed to be reliable and
the publishers of this title have made best efforts to avoid any errors.
However, publishers of this material offer no guarantees and warranties of
any kind to the readers/users of the information contained in this
publication.

Since the work and research is still going on in all these knowledge
streams, NISM and SEBI do not warrant the totality and absolute accuracy,
adequacy or completeness of this information and material and expressly
disclaim any liability for errors or omissions in this information and material
herein. NISM and SEBI do not accept any legal liability what so ever based
on any information contained herein.

While the NISM Certification examination will be largely based on material
in this workbook, NISM does not guarantee that all questions in the
examination will be from material covered herein.
About NISM

In pursuance of the announcement made by the Finance Minister in
his Budget Speech in February 2005, Securities and Exchange
Board of India (SEBI) has established the National Institute of
Securities Markets (NISM) in Mumbai.

SEBI, by establishing NISM, has articulated the desire expressed by
the Indian government to promote securities market education and
research.

Towards accomplishing the desire of Government of India and vision
of SEBI, NISM has launched an effort to deliver financial and
securities education at various levels and across various segments
in India and abroad. To implement its objectives, NISM has
established six distinct schools to cater the educational needs of
various constituencies such as investor, issuers, intermediaries,
regulatory staff, policy makers, academia and future professionals of
securities markets.

NISM brings out various publications on securities markets with a
view to enhance knowledge levels of participants in the securities
industry.

NISM is mandated to implement certification examinations for
professionals employed in various segments of the Indian securities
markets.
Acknowledgement

This workbook has been developed by NISM in cooperation with the
Examination Committee for Mutual Fund Distributors Certification
Examination consisting of representatives of Association of Mutual
Funds in India (AMFI). NISM gratefully acknowledges the
contribution of all committee members.

About the Author

This workbook has been developed for NISM by Mr. Sundar
Sankaran, Director, Finberry Academy, and Author, Indian Mutual
Funds Handbook.
About the Certification Examination for Mutual Fund
Distributors

The examination seeks to create a common minimum knowledge
benchmark for all persons involved in selling and distributing mutual
funds including:
• Individual Mutual Fund Distributors
• Employees of organizations engaged in sales and
distribution of Mutual Funds
• Employees of Asset Management Companies specially
persons engaged in sales and distribution of Mutual Funds

The certification aims to enhance the quality of sales, distribution
and related support services in the mutual fund industry.

Examination Objectives
On successful completion of the examination, the candidate should:
• Know the basics of mutual funds, their role and structure,
different kinds of mutual fund schemes and their features
• Understand how mutual funds are distributed in the market-
place, how schemes are to be evaluated, and how suitable
products and services can be recommended to investors
and prospective investors in the market.
• Get oriented to the legalities, accounting, valuation and
taxation aspects underlying mutual funds and their
distribution.
• Get acquainted with financial planning as an approach to
investing in mutual funds, and an aid for advisors to develop
long term relationships with their clients.
Assessment Structure
The examination consists of 100 questions of 1 mark each and
should be completed in 2 hours. The passing score on the
examination is 50%. There shall be negative marking of 25% of the
marks assigned to a question.

Examination Structure
The exam covers knowledge competencies related to the basics of
mutual funds and how mutual fund schemes are to be evaluated,
and suitable mutual fund products and services offered to investors
and prospective investors.

How to register and take the examination
To find out more and register for the examination please visit
www.nism.ac.in
Table of Contents

1. Concept & Role of a Mutual Fund ...................................... 1
1.1 Introduction ...................................................................... 1
1.2 Types of Funds ................................................................ 11
1.3 Key Developments over the Years .................................. 24
2. Fund Structure & Constituents .......................................... 33
2.1 Legal Structure of Mutual Funds in India ......................... 33
2.2 Key Constituents of a Mutual Fund.................................. 37
2.3 Other Service Providers .................................................. 42
3. Legal & Regulatory Environment ....................................... 49
3.1 Role of Regulators in India .............................................. 49
3.2 Investment Restrictions for Schemes .............................. 53
3.3 Investors’ Rights & Obligations ........................................ 56
3.4 Can a Mutual Fund Scheme go bust? ............................. 65
3.5 Appendix 1: AMFI Code of Ethics .................................... 67
3.6 Appendix 2: Code of Conduct for Intermediaries ............. 77
4. Offer Document ................................................................... 87
4.1 Offer Document - NFO, SID, SAI ..................................... 87
4.2 Key Information Memorandum ........................................ 97
4.3 Appendix 3: Format of Scheme Information Document ... 99
4.4 Appendix 4: Format of Key Information Memorandum .... 133
5. Fund Distribution & Channel Management Practices ...... 141
5.1 Distribution Channels ....................................................... 141
5.2 Channel Management Practices ...................................... 151
6. Accounting, Valuation & Taxation ..................................... 167
6.1 Accounting and Expenses ............................................... 167
6.2 Valuation .......................................................................... 180
6.3 Taxation ........................................................................... 181
7. Investor Services ................................................................. 197
7.1 Mutual Fund Investors ................................................... 197
7.2 KYC Requirements for Mutual Fund Investors............... 201
7.3 PAN Requirements for Micro-SIPs ................................ 203
7.4 Additional Documentation Requirements applicable for
Institutional Investors ..................................................... 206
7.5 Demat Account .............................................................. 207
7.6 Transactions with Mutual Funds .................................... 208
7.7 Transactions through the Stock Exchange .................... 221
7.8 Investment Plans and Services...................................... 223
7.9 Appendix 5: KYC Form for Individuals ........................... 233
7.10 Appendix 6: KYC Form for Non-Individuals ................... 235
8 Return, Risk & Performance of Funds ............................... 241
8.1 Drivers of Returns in a Scheme ....................................... 241
8.2 Measures of Returns ....................................................... 253
8.3 Drivers of Risk in a Scheme ............................................ 262
8.4 Measures of Risk ............................................................. 276