Contents. Foreword to the Second Edition 13 Foreword to the First Edition 15 Preface to the Third Edition 17 Acknowledgements 19

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1 Contents 1 Contents Foreword to the Second Edition 13 Foreword to the First Edition 15 Preface to the Third Edition 17 Acknowledgements 19 Chapter 1: Introduction 21 What is a Mutual Fund? 22 Who are the Parties Involved? 23 Capital Flow in the Economy and Corporate Governance 26 Schemes and Units 26 Types of Schemes 27 Schemes versus Options or Plans 39 Net Asset Value (NAV) 40 Benefits of Investing in Mutual Funds 40 Comparison with Other Products 42 Indian Scenario 48 Annexure 1.1: Growth of Assets under Management ( ) 50 Annexure 1.2: Asset Management Companies (Average for quarter 51 ended 31 March 2011) Annexure 1.3: Assets under Management (31 March, 2011) (Category and 53 Type-wise) (As on 31 March 2011) Annexure 1.4: Distribution of Investor Accounts (As on 30 September 2010) 54 Annexure 1.5: Agewise Analysis of Investor Accounts (As on September 2010) Chapter 2: Legal Structure of Mutual Funds in India 56 Sponsor 56 Trusteeship 57 Asset Management Company (AMC) 61

2 2 Indian Mutual Funds Handbook Maintenance of Investor Records 64 Unique Client Code 64 Custody of Investments 64 Setting up a Mutual Fund Operation 65 Mergers and Acquisitions 69 Chapter 3: Investments Equity 75 Types of Shares 75 Risks in Equity Investing 80 Value Drivers in Equity Market 81 Valuation of Equity Securities in Mutual Fund Schemes 85 Equity Valuation Examples 87 Investment Restrictions 88 Management of Equity Portfolio 91 Ten Lessons for Investors 93 Chapter 4: Investments Debt 94 Instruments 94 Risks in Debt Market 98 Yield to Maturity and Price 102 Valuation of Debt Securities in Mutual Fund Schemes 104 Debt Valuation Examples 108 Valuation of Securities Not Covered in Current Valuation Policy 110 Investment Restrictions 110 Investment Style 111 Management of Debt Portfolio 112 Chapter 5: Investments Derivatives 113 Forwards 114 Futures 114 Option 115 Swap 117 Some Derivative Trading Strategies 118 Investment in Derivatives by Mutual Funds 119 Chapter 6: Investments in Alternate Asset Classes 121 Gold 121 Real Estate 124 Art 127 Chapter 7: Expenses, Net Asset Value and Loads 129 Initial Issue Expense 129 Deferred Load 129 Net Asset Value 130

3 Contents 3 Ongoing Management 134 Load 137 Profitability Metric 138 Chapter 8: Liability of Schemes 140 Unit Capital Accounting 140 Management of Liquidity 143 Chapter 9: Offer Document, Key Information Memorandum and Advertising 145 Scheme Information Document 147 Statement of Additional Information 148 Standard Observations 148 Key Information Memorandum 150 Extracts from Select Offer Documents 150 Advertising 155 Annexure 9.1 KEY INFORMATION MEMORANDUM 158 Annexure 9.2: KEY CONTENTS OF SID 160 Annexure 9.3 KEY CONTENTS OF SAI 167 Chapter 10: Financial Statements 170 Asset Management Companies 170 Schemes 171 Disclosures and Other Commitments 173 Chapter 11: Scheme Comparison Returns 176 Absolute Returns 176 Relative Returns 185 Disclosure Standards and Transparency 187 Chapter 12: Scheme Comparison Risk 190 Quantitative Factors 190 Quantitative Factors Applicable Only to Debt 208 Qualitative Factors 211 Chapter 13: Scheme Comparison Risk Adjusted Returns 222 Sharpe Ratio 228 Treynor Ratio 229 Jensen Alpha 230 Eugene Fama 232 Appraisal Ratio 232 Modigliani and Modigliani (M 2 ) 233 Sortino Ratio 233 Return on Risk Adjusted Capital 234 Which is the Best Measure? 234

4 4 Indian Mutual Funds Handbook CRISIL s Rating and Ranking 235 Chapter 14: Scheme Comparison Investment Objective, Style Analysis and Other Factors 237 Investment Objective 237 Investment Styles 241 Alpha Drivers and Beta Drivers 246 Other Factors 248 Chapter 15: Financial Planning 252 Financial Planner Generalist or Specialist? 252 Different Approaches Different Results 254 Golden Rules for Financial Planners 254 Who Can be a Financial Planner? 256 Steps to Financial Planning 256 Will 271 Financial Plan Investing and Goal-Oriented Investing 273 Financial Blood-Test Report (FBR) 274 Scheme Selection 274 Exit from Schemes 275 Tips and Tricks 275 Emerging Trends on Regulation of Financial Advisers 277 Chapter 16: Mechanics of Investing in Mutual Funds: KYC, KYD and 279 Investor Empowerment Who Can Invest in Mutual Fund Schemes? 279 Investment by Foreign Nationals (Qualified Financial Investors QFIs) 280 Minimum Number of Investors 280 Know Your Customer (KYC) 281 Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), 282 Systematic Transfer Plan (STP) Switches, Triggers and Dividend Transfer Plan (DTP) 284 Steps to Invest / Dis-invest Mutual Fund Units (Other Than through 285 Stock Exchange) Steps to Invest / Dis-invest Mutual Fund Units (Through Stock Exchange) 286 Cut-Off Time 287 Official Points of Acceptance 289 Post-Investment Servicing 290 Who Can Distribute Mutual Funds and Earn Brokerage 291 Know Your Distributor (KYD) 292 Brokerage, Commission and Transaction Charge 295 Supervision of Large Distributors 296 Investor Empowerment 298

5 Contents 5 Annexure 16.1: SIP NAV up 1% 300 Annexure 16.2: SIP NAV down 1% 301 Annexure 16.3: SIP Random 302 Chapter 17: Investor Protection 303 Structural Protection 303 Role of AMFI 303 Rights of Unit Holders 305 Investor Relations Officer 306 SEBI 307 Implications Under Various Other Statutes 307 The Role of Press 308 Annexure 17.1 FORM: NOMINATION / CANCELLATION OF NOMINATION 309 Chapter 18: Case Studies 311 Spot the Problem 311 Debt Portfolio Management 311 Calculate the Returns 312 The Fund Manager Dilemma 313 Investment in Debt Funds 313 Chapter 19: Case Solutions 315 Case Study A 315 Case Study B 316 Case Study C 317 Case Study D 317 Case Study E 318 Chapter 20: Taxation 320 Asset Management Companies 320 Mutual Fund 320 Schemes 320 Investors 322 Tax in Specific Situations 334 Tax in Summary 339 Wealth Tax 341 Direct Tax Code (DTC) 341 Further Learning 343 References 345

6 6 Indian Mutual Funds Handbook