Indian Mutual Funds HandBook

“A comprehensive guide to the world of Indian mutual funds, its operational and regulatory mechanisms, the advantages and limitations of investing in them, along with a practical approach to personal financial planning. It highlights the finer nuances. . . .”

The Economic Times

“From his experience as a trainer in strategic management and financial markets, Sundar Sankaran visits the subject of mutual funds in a nononsense manner . . . Indian Mutual Funds Handbook is ideal for investors looking for a deeper understanding of mutual funds . . . Sankaran simplifies concepts for the layman.” 

Business World

“For those who are joining the mutual funds show, Sundar Sankaran hasjust the right book for you. . . . And Sundar is confident you’d make money in mutual funds.”

The Hindu Business Line

“The best book that I have come across for understanding mutual funds. Will be useful for employees of asset management companies, marketing intermediaries, investors and students — any one who wants insights into mutual funds in India.”

M. Subramanian, CEO India, Barclays Bank plc.

“The common sense approach to mutual funds makes interesting reading.”

C. Jayaram, Joint Managing Director, Kotak Mahindra Asset Management Co Ltd.

“I congratulate you for a genuine effort at demystification and to make understanding of mutual funds crisp and simple.”

P.G.R. Prasad, former Managing Director, SBI Funds Management Pvt Ltd.

“If you think you know everything about mutual funds, read the book to find out how much you do not know!”

Prof. G. Sethu, former Dean, UTI Institute of Capital Markets

“Very comprehensive. Covers every topic relating to the mutual fund industry in simple language.”

M.V. Suryanarayana, former Chief Executive, Jeevan Bima Sahayog Asset
Management Company Limited (Asset Manager for LIC Mutual Fund)

“An attempt to unfold various facets of mutual fund industry at a time when industry is poised for accelerated growth rate is a welcome move.”

Manubhai Parekh, former Managing Director, BOB Asset Mgt Co. Ltd.

“The chapter on financial planning may catalyse several new business models in mutual fund distribution.”

Niraj Chokshi & Jignesh Desai, Directors, NJ IndiaInvest
Foreword to the Second Edition 13
Foreword to the First Edition 15
Preface to the Fifth Edition 17
Acknowledgements 19
Chapter 1: Introduction 21
1.1 What is a Mutual Fund? 22
1.2 Who are the Parties Involved? 23
1.3 Capital Flow in the Economy 26
1.4 Corporate Governance 26
1.5 Schemes and Units 26
1.6 Net Asset Value (NAV) 26
1.7 Benefits of Investing in Mutual Funds 27
1.8 Limitations of Mutual Funds 28
1.9 Indian Mutual Fund Industry (Size) 29
Annexure 1.1: Assets under Management (1965-2018) 31
Annexure 1.2: Mutual Funds and Average AUM 31
Chapter 2: Mutual Fund Schemes and Comparable Products 33
2.1 Types of Schemes by Tenor 33
2.2 Types of Schemes by Asset Class 35
2.3 Types of Schemes by Position Philosophy 44
2.4 Types of Schemes by Solution Orientation 50
2.5 Types of Schemes by Geography 50
2.6 Fund of Funds (FoF) Schemes 52
2.7 Schemes versus Options or Plans 52
2.8 Comparison with Other Products 54
2.9 Indian Mutual Fund Industry (Schemes) 58
Annexure 2.1: Assets under Management (Category and Type-wise) 60
Annexure 2.2: Distribution of Investor Accounts 61
Annexure 2.3: Age-wise Analysis of Investor Accounts 62
Chapter 3: Legal Structure of Mutual Funds in India 63
3.1 Sponsor 63
3.2 Trusteeship 64
3.3 Asset Management Company (AMC) 68
3.4 Maintenance of Investor Records 71
3.5 Unique Client Code 72
3.6 Custody of Investments 72
3.7 Setting up a Mutual Fund Operation 72
3.8 Change in Fundamental Attributes 75
3.9 Mergers and Acquisitions 76
3.10 Categorisation and Rationalisation of Mutual Fund Schemes 81
Chapter 4: Investments by Mutual Fund Schemes 83
4.1 Types of Equity 83
4.2 Risks in Equity Investing 88
4.3 Value Drivers in Equity Market 90
4.4 Valuation of Equity Securities in Mutual Fund Schemes 94
4.5 Equity Investment Restrictions for Mutual Funds 96
4.6 Management of Equity Portfolio 98
4.7 Types of Debt 101
4.8 Risks in Debt Investing 105
4.9 Yield to Maturity and Price 109
4.10 Valuation of Debt Securities in Mutual Fund Schemes 111
4.11 Debt Investment Restrictions for Mutual Funds 114
4.12 Management of Debt Portfolio 115
4.13 Types of Derivatives 117
4.14 Investment in Derivatives by Mutual Funds 117
4.15 Gold 119
4.16 Real Estate 120
Chapter 5: Expenses, Net Asset Value and Loads 122
5.1 Initial Issue Expense 122
5.2 Deferred Load 122
5.3 Net Asset Value 123
5.4 Recurring Expenses 127
5.5 Load and Its Implications 130
5.6 Profitability Metric 131
Chapter 6: Liability of Schemes 133
6.1 Unit Capital Accounting 133
6.2 Management of Liquidity 136
Chapter 7: Offer Document, Key Information Memorandum and Advertising 138
7.1 Scheme Information Document (SID) 142
7.2 Statement of Additional Information 142
7.3 Standard Observations 143
7.4 Key Information Memorandum 144
7.5 Extracts from Select Offer Documents 144
7.6 Advertising 150
Annexure 7.1: Key Contents of SID 153
Annexure 7.2: Key Contents of SAI 161
Annexure 7.3: Format of Key Information Memorandum 164
Chapter 8: Financial Statements 166
8.1 Asset Management Companies 166
8.2 Schemes 168
8.3 Disclosures and Other Commitments 170
Chapter 9: Scheme Comparison — Returns 173
9.1 Absolute Returns 173
9.2 Relative Returns 182
Chapter 10: Scheme Comparison — Risk 186
10.1 Quantitative Factors 186
10.2 Quantitative Factors Applicable Only to Debt 204
10.3 Qualitative Factors 206
Chapter 11: Scheme Comparison — Risk Adjusted Returns 218
11.1 Sharpe Ratio 224
11.2 Treynor Ratio 225
11.3 Jensen Alpha 226
11.4 Eugene Fama 228
11.5 Appraisal Ratio 229
11.6 Modigliani and Modigliani (M2) 229
11.7 Sortino Ratio 229
11.8 Which is the Best Measure? 230
11.9 CRISIL’s Rating and Ranking 231
Chapter 12: Scheme Comparison — Investment Objective,Style Analysis and Other Factors 233
12.1 Investment Objective 233
12.2 Investment Styles 237
12.3 Qualitative Factors 242
Chapter 13: Performance Attribution, Drivers and Smart Beta 246
13.1 Performance Attribution 246
13.2 Alpha Drivers and Beta Drivers 251
13.3 Smart Beta 253
Chapter 14: Managing a Portfolio of Mutual Fund Schemes 254
14.1 Risk Profiling 254
14.2 Asset Classes and Generic Risk 256
14.3 Asset Allocation 259
14.4 Scheme Selection 263
14.5 Exit from Schemes 264
14.6 Tips and Tricks 265
Chapter 15: Mechanics of Investing in Mutual Funds: KYC,KYD and Investor Empowerment 267
15.1 Who Can Invest in Mutual Fund Schemes? 267
15.2 Investment by Qualified Foreign Investors (QFIs) 268
15.3 Investment by Foreign Portfolio Investors (FPIs) 268
15.4 Who cannot Invest in Mutual Fund Schemes? 269
15.5 Minimum Number of Investors 269
15.6 Know Your Customer (KYC) 270
15.7 Systematic Investment Plan (SIP), Systematic
Withdrawal Plan (SWP) and Systematic Transfer Plan (STP)
272
15.8 Switches, Triggers and Dividend Transfer Plan (DTP) 274
15.9 Steps to Invest / Dis-invest Mutual Fund Units (Other than through Stock Exchange) 275
15.10 Steps to Invest / Dis-invest Mutual Fund Units (Through Stock Exchange) 275
15.11 Mutual Fund Utilities — The Aggregater 276
15.12 Cut-Off Time 277
15.13 Official Points of Acceptance 279
15.14 Post-Investment Servicing 281
15.15 Who Can Distribute Mutual Funds and Earn Brokerage 282
15.16 Know Your Distributor (KYD) 283
15.17 Brokerage, Commission and Transaction Charge 286
15.18 Supervision of Large Distributors 287
15.19 Investor Empowerment 290
Annexure 15.1: SIP — NAV up 1% 291
Annexure 15.2: SIP — NAV down 1% 292
Annexure 15.3: SIP — Random 293
Chapter 16: Investor Protection 294
16.1 Structural Protection 294
16.2 Role of AMFI 294
16.3 Rights of Unit Holders 296
16.4 Investor Relations Officer 297
16.5 SEBI 298
16.6 Implications Under Various Other Statutes 298
16.7 The Role of Press 299
Annexure 16.1: Form for Nomination / Cancellation of Nomination 300
Chapter 17: Taxation 302
17.1 Asset Management Companies 302
17.2 Mutual Fund 302
17.3 Schemes 302
17.4 Investors 304
17.5 Tax in Specific Situations 314
17.6 Tax in Summary 318
Chapter 18: Big Data, Artificial Intelligence, Block-chain and Mutual Funds 320
18.1 Big Data 320
18.2 Artificial Intelligence 322
18.3 Block-chain 324
List of Abbreviations and Acronyms 327
Glossary 330
Further Learning 334
Websites 334
Journals 334
References 335
Index 340

Mutual funds can be a conundrum for people who are not closely associated with the industry. Even many who have been part of the industry for several years continue to have some misconceptions. This book aims to unravel some of the mysteries and clear the typical confusions I have noticed among participants in my workshops, and other people I interact with.

There are so many inter-linked concepts on the subject, that the sequencing of topics was a challenge. I hope my experience of handling several workshops has ensured a reader-friendly sequence. Readers can supplement the learning with my companion publication, Wealth Engine: Indian Financial Planning & Wealth Management Handbook [Vision Books, 2012]. Appropriate references to chapters in Wealth Engine have been provided at relevant places.

Readers who wish to understand the raison d’etre and mechanics of mutual funds, a powerful investment avenue, will treasure the book. Sequential reading is suggested for readers who lack a basic understanding of the product. Others can read the chapters in any sequence. Chapter 10 on risk, and to an extent Chapter 11, are a synthesis of advanced statistics and the financial markets. I hope the complex subject has been explained lucidly. Readers who are uncomfortable with advanced quantitative techniques can skip these chapters.

The subject of taxation is discussed in Chapter 17.*

Books, like people, need to evolve. The evolution continues, with the addition of content on Performance Attribution and Smart Beta. As with earlier editions of this book, I not only explain whatever exists in the Indian mutual funds arena, but also introduce concepts that will find their way in due course.

Needless to say, this book is not a recommendation to buy or sell any financial products. Some of the examples provided are illustrative. Kindly consult your investment advisor before taking any decisions related to your investment portfolio.

* This chapter has been updated with tax provision applicable in Assessment Year 2016-17.

The content in the book is updated till 1 October 2015. The mutual fund industry is dynamic. For a few months after the launch of the book, important subsequent changes will be highlighted at www.imfh.info. However, as suggested by my solicitor, I need to clarify that this is purely a gesture of goodwill. I retain the right to discontinue such updates any time — or offer such updates only as a paid service.

Happy reading! Happy investing! Happy living!

SUNDAR SANKARAN is founder-director of Advantage-India Consulting Pvt. Ltd (www.advantage-india.com) an 18-year old strategy consulting and knowledge incubation boutique. He has also founded finberry academy pvt ltd (www.finberry.org) and Stratberry Publishing
(www.stratberry.com).

Sundar is renowned as an effective trainer, who can simplify concepts, and catalyse learning through linkages with day-to-day examples. He operates with equal ease at macro-level perspective programs as well as micro-drill-down programs. His programs, which cover the entire range from leadership to product to selling, are not merely for knowledge dissemination; they seek to bring change within participants, so that they are enthusiastic about the desired behaviour.

Wide experience across geographies, markets and products have helped Sundar conceptualise several unique seminars and workshops, such as WealthEngine (www.WealthEngine.biz), EconoView (www.EconoView. biz), ThinkStrat (www.ThinkStrat.biz), AssetClass (www.AssetClass.biz)
PondSkill (www.pondskill.biz), Don’t Sell (www.Dont-Sell.biz) and MISCHIEF (www.mischief.biz).

Over the years, Sundar has trained over 20,000 participants across a range of innovative programs. Participants include:

  • Mutual Funds — Kotak Mahindra, Fidelity, Standard Chartered, Canbank Tata, LIC, Unit Trust of India, SBI, HDFC, Optimix and BOB.
  • Banks — Kotak Mahindra Bank, State Bank of India, ICICI Bank, HDFC Bank, Citi, Deutsche Bank, Standard Chartered Bank, ABN Amro Bank, Corporation Bank, Bank of Rajasthan, Bank of Baroda, Bank of India, Punjab National Bank and State Bank of Hyderabad.
  • Other distributors — Kotak Securities, JM Morgan Stanley Distribution, ICICI Capital, Cholamandalam Distribution, NJ IndiaInvest, Birla Sunlife Distribution, Integrated Finance and Bajaj Capital.
  • Press & Media — The Times of India, The Economic Times, Financial Express, Business Line, CNBC.

Sundar has worked in senior capacities at Bajaj Auto and Kotak Mahindra. His hands-on feel of financial markets and industry is well
complemented by his academic qualifications — Post-Graduate Diploma in Management from Indian Institute of Management, Ahmedabad (1988),
Associate of the Institute of Company Secretaries of India (1992) and Associate of the Institute of Cost Accountants of India (1988).

Sundar is active with various industry bodies. He is a member of the Banking & Finance Committee of the Indian Merchants’ Chamber.

His other passions include reading, Indian classical music and travel

“The book is available at Amazon, Flipkart and reputed book-stores all over India. You can also buy it from the publisher, Vision Books.

Further, you can access the e-book on Kindle, GooglePlay and AppleBooks (through iTunes).”