Mutual Fund Distributor's Certification Exam

Equity Funds 10. Sectoral /Thematic: An open‐ended equity scheme investing in a specific sector such as bank, power is a sectoral fund. While an open‐ended equity scheme investing in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power etc. The minimum investment in equity and equity related instruments of a particular sector/ theme shall be 80 percent of total assets. 11. Equity Linked Savings Scheme: An open‐ended equity linked saving scheme with a statutory lock‐in of 3 years and tax benefit. The minimum investment in equity and equity related instruments shall be 80 percent of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance).

Other Fund Types Gold Funds Gold ETFs Gold Sector Funds Real Estate Funds Exposure to direct real estate Commodity Funds Commodity sector funds only In India MFs are not permitted to take exposure to commodities directly International Funds Invests directly Thru feeder fund route Fund of Funds Funds investing into funds – Domestic / International Exchange Traded Funds Open ended index funds which trade on the exchange www.prudentcorporate.com

Definition of Large‐cap, Mid‐cap and Small‐cap Large cap, mid cap and small cap companies are defined as follows: Large Cap: 1st ‐100th company in terms of full market capitalization Mid Cap: 101st ‐250th company in terms of full market capitalization Small Cap: 251st company onwards in terms of full market capitalization

Key Developments AUM of industry as of Dec 2020 has touched Rs. 31,02,475 Cr from 2244 schemes offered by 41 Mutual Funds @: less than 1 percent Source: www.amfiindia.com www.prudentcorporate.com

Chapter 2 Fund Structure & Constituents www.prudentcorporate.com

Legal Structure of Mutual Funds in India Governed by SEBI (Mutual Fund) Regulations, 1996 Regulations permit MFs to invest in money market, debt securities, equities, gold (gold related) and real assets Sponsor Asset Management Company R & T agents Trustees Custodians www.prudentcorporate.com

Example: Pramerica Mutual Fund – Legal Structure Mutual Fund Trust Sponsor Trustee AMC Custodian RTA Pramerica Mutual Fund Prudential Financial Inc, USA Pramerica Trustees Pramerica Asset Managers Citibank NA Karvy www.prudentcorporate.com

Key Constituents Sponsors Trustee AMC 5 years of experience in Financial Services Positive net worth since last 5 years At least 3 years of Profit in last 5 years Should contribute at least 40% in AMC capital At least 4 trustees to be appointed, 2/3rd independent Prior Approval of SEBI required for trustee appointment Minimum net worth of 50 Cr. 50% directors should be independent Trustee approval required for appointment of directors www.prudentcorporate.com

Other Service Providers Custodian RTA Auditors Fund Accountants Distributors Collecting Bankers www.prudentcorporate.com

Other Service Providers Custodian Custodian accepts and gives delivery of securities for the purchase and sale transactions of the various schemes of the fund RTA RTAmaintains investor records Auditors Auditors are responsible for the audit of accounts Fund Accountants Fund accountants performs the role of calculating the NAV Distributors Distributors sell suitable types of units to their clients Collecting Bankers Collecting bankers maintain the bank a/c of the scheme www.prudentcorporate.com

Chapter 3 Legal and Regulatory Environment www.prudentcorporate.com

Role of regulators in India SEBI – Capital Markets Regulator All MFs need to be registered with SEBI Issues investment guidelines Issues expense related guidelines Disclosures Norms www.prudentcorporate.com

Other Regulators Ministry of Finance Reserve Bank of India Company Law Board Stock Exchanges Office of Public Trustee www.prudentcorporate.com

Self Regulatory Organizations A Self Regulatory Organization Is an industry body Is registered with the regulatory body Has limited powers to enforce rules, award penalties All stock exchanges are SROs www.prudentcorporate.com

Important Learning Points AMFI Code of Ethics (ACE) for AMCs AMFI has framed AGNI – guidelines and norms for intermediaries Investment Objective – Broad investment charter Investment Policy – Detail of how portfolio will be managed Investment Strategy – Day to day fund management Atleast 65% of the corpus should be invested in securities / sectors as implied by the scheme’s name www.prudentcorporate.com

SOA should be sent within 5 days of NFO closure Investors in whose folios transactions have taken place during a calendar month shall be sent a Consolidated account statement ( CAS) by the 10th of next month Dividend warrants have to sent within 30 days of declaration date Investors can ask for Unit Certificate NAV has to be published daily in at least 2 Newspapers NAV, Sale Price, Re‐Purchase price is to be updated in the website of AMFI and the Mutual Fund MF units can be pledged www.prudentcorporate.com

Investors can choose to change their broker or go direct. NOC from existing broker is not required. Redemption payouts have to be sent within 10 business days from the date of redemption Investors can have their units in de‐mat form Trustees / AMC can only make any changes in the fundamental attributes of a scheme after giving dissenting unit holder options to withdraw at prevailing NAV without any exit load. Exit window should be open for 30 days AMC can be discontinued – By majority of trustees or 75% of the unit holders www.prudentcorporate.com

Investors can file a suit against trustees Investor can claim his money from scheme within 3 years at prevailing NAV. After 3 years payment is based on NAV at the end of 3 years PAN No. and KYC is compulsory with the exception of Micro SIP Bank details are mandatory for MF Investments www.prudentcorporate.com

Merger or consolidation of schemes is not considered a change in the fundamental attribute of the surviving scheme if the following conditions are met – There is no other change in the Fundamental attributes of the surviving scheme i.e. the scheme which remains in existence after the merger. Mutual Funds are able to demonstrate that the circumstances merit merger or consolidation of schemes and the interest of the unit holders of surviving scheme is not adversely affected. www.prudentcorporate.com

Unclaimed Amounts MF can deploy unclaimed div / redemption amounts in money market. AMC can recover investment management fees and advisory fees on mgt of these funds @ rate not exceeding 0.50% p.a. If investor claims within 3 years then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money If claimed after 3 years then it is at NAV at the end of 3 years. www.prudentcorporate.com

Can a Mutual Fund scheme go bust? www.prudentcorporate.com

While the AMC manages the investments of the scheme, the assets of the scheme are held by the Custodian. Both operate under the overall control of the Trustees. This system of checks and balances protects the investors from misappropriation of funds, fraud etc. www.prudentcorporate.com

Chapter 4 Offer Document www.prudentcorporate.com

Offer Document NFO SID SAI www.prudentcorporate.com

Important Learning Points NFOs other than ELSS can remain open for a maximum of 15 days. Allotment of units, should be done within 5 business days of NFO closure date Open‐ended schemes have to re‐open within 5 business days of the allotment. OD is one of the most important sources of information about the scheme for investors. Principle of caveat emptor (i.e. let the buyer beware) is applicable for Investors MF OD have two parts: SID & SAI www.prudentcorporate.com

Scheme Information Document (SID) ‐ details of the scheme Statement of Additional Information (SAI) ‐ which has statutory information about the mutual fund that is offering the scheme. In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is part of the SID. SID Updation– a) Yearly b) Need based SAI Updation – a) Yearly b) Need based Does SEBI approve Offer Documents? www.prudentcorporate.com

KIM (summary of the SID and SAI). As per SEBI regulations, every application form is to be accompanied by the KIM. KIM updation has to be done on yearly basis www.prudentcorporate.com

Riskometer A pictoral representation of the risk to the principal invested in a mutual fund product will be depicted using a ‘Riskometer’. The picto‐meter will categorize the risk in the scheme at one of five levels of risk, as shown in the table in the next page/slide. There will also be a written statement of the risk to the principal below the ‘Riskometer’. www.prudentcorporate.com

Riskometer www.prudentcorporate.com

Riskometer www.prudentcorporate.com

Requirements of Minimum Investors Applicability for an open‐ended scheme: The Scheme/Plan shall have a minimum of 20 investors and no single investor shall account for more than 25% of the corpus of the Scheme/Plan(s). However, if such limit is breached during the NFO of the Scheme, the Fund will endeavour to ensure that within a period of three months or the end of the succeeding calendar quarter from the close of the NFO of the Scheme, whichever is earlier, the Scheme complies with these two conditions. If there is a breach of the 25% limit by any investor over the quarter, a rebalancing period of one month would be allowed and thereafter the investor shall be given 15 days notice to redeem his exposure over the 25% limit. www.prudentcorporate.com

Requirements of Minimum Investors Applicability for close‐ended / interval scheme: The Scheme(s) and individual Plan(s) under the Scheme(s) shall have a minimum of 20 investors and no single investor shall account for more than 25% of the corpus of the Scheme(s)/Plan(s). These conditions will be complied with immediately after the close of the NFO itself i.e. at the time of allotment. Consequently, such exposure over 25% limits will lead to refund within 6 weeks of the date of closure of the New Fund Offer. For interval scheme the aforesaid provision will be applicable at the end of NFO and specified transaction period. www.prudentcorporate.com

Due Diligence Certificate Whenever a new scheme’s offer document is made, this certificate is given by the Compliance Officer of the mutual fund that proper care is taken in making the scheme and the Offer Document. It certifies that : a. The offer document is prepared as per SEBI regulations as amended until date. b. Legal requirements regarding launch of the scheme have been complied. c. The information given in the offer document is true and fair. d. The intermediaries involved with the mutual fund scheme are all registered with SEBI and their registration is valid until date. www.prudentcorporate.com

Chapter 5 Fund Distribution and Channel Management Practices www.prudentcorporate.com

Traditional Current New Individuals Institutional – Banks / NDs IFAs Internet Stock Exchanges www.prudentcorporate.com

How to become an MF Distributor An individual or Corporate entity can become a Mutual Fund distributor after clearing regulatory certification No SEBI approval required New Cadre of Distributors Postal Agents, retired Govt and semi‐Govt class III and above officials, retired teachers and retired bank officers with minimum 10 years of service They can sell diversified equity funds, FMPs, and Index funds which have returns better than their last 3 yrs benchmark returns. www.prudentcorporate.com

How to become an MF Distributor The individual needs to pass the Certifying Examination prescribed by SEBI. Distributors / employees who were above the age of 50 years, and had at least 5 years of experience as on September 30, 2003 were exempted. But they need to attend a prescribed refresher course. KYD Requirements: As part of SEBI’s drive to streamline the distribution process of mutual fund products, AMFI has introduced the KYD process to verify the correctness of the information provided in the registration documents and to have verification of the ARN holders. www.prudentcorporate.com

How to become an MF Distributor The new rules are applicable to new registrations and renewals have come to effect from September 1, 2010. After passing the examination and completing KYD requirements, the next stage is to register with AMFI. On registration, AMFI allots an AMFI Registration Number (ARN). Individuals from the exempted category described above can obtain the ARN without passing the Certifying Examination, provided they have attended the prescribed refresher course. Sub‐brokers also need to comply with all the regulations www.prudentcorporate.com

How to become an MF Distributor Armed with the ARN No., the IFA / distributor / stock exchange broker can get empaneled with any number of AMCs. Alternatively, they can become agents of a distributor who is already empaneled with AMCs. Empanelment with the AMC, or enrolment as an agent of an empaneled distributor is compulsory to be able to sell mutual fund schemes and earn the commissions. www.prudentcorporate.com

Distribution Incentives Upfront commission – a one time payment and was paid as a percentage of the amount invested through the distributor. Now discontinued. Trail Commission depends on amount that remains invested in the fund – usually paid on a monthly or quarterly basis as a percentage of the investment and for the duration for which the investor stayed invested. In addition to this a Mutual Fund may also declare volume incentives based of the total amount of business generated through a distributor. Advisory Fees – Fees which ARN holder charges from the customer www.prudentcorporate.com

SEBI Regulations related to Sales Practices No commission on own investments The distributors has to disclose all the incentives / commissions payable to them The practice of rebating is banned www.prudentcorporate.com

SEBI Advertising Code Must mention Past performance is not a guarantee of future performance Dividends declared/paid shall be mentioned in Rs. per unit Only compound and annualized yield can be advertised for schemes for more than one year Annualized yield must be shown for at least one, three, five and since launch Appropriate benchmark should be chosen. And once chosen it should be consistent Rankings made , if any, should be explained www.prudentcorporate.com

Chapter 6 Accounting & Expenses www.prudentcorporate.com

Net Asset Value (NAV) Computation Net Asset Value (NAV) Net Assets of the Scheme / Outstanding Units Net Assets of the Scheme (Market Value of Investments Receivables Other Accrued Income Other Assets – Accrued Expenses – Other Payables – Other Liabilities) www.prudentcorporate.com

Profitability Metric ive Interest Income Dividend Income Realized Capital gains Valuation Gains -ive Realized Capital Losses Valuation Losses Scheme expenses www.prudentcorporate.com

Mark to Market Process of valuing each security in the investment portfolio of the scheme at its market value. Marking to market reflects worth of each unit of NAV www.prudentcorporate.com

Price and Loads Sale Price NAV Stamp Duty Re‐purchase Price NAV – Exit Load The position since August 1, 2009 is that: SEBI has banned entry loads Exit loads / CDSC (Contingent Deferred Sales Charge) in excess of 1% of the redemption proceeds have to be credited back to the scheme Exit load structure needs to be the same for all unit‐holders representing a portfolio www.prudentcorporate.com

Applicable NAV Type of Scheme Transaction Cut off time Equity oriented funds and debt funds (except liquid funds) in respect of purchases less than Rs. 2 lacs Purchases 3.00 pm Same day NAV is received is received after cut off time Liquid fund Purchases Switch in Applicable NAV Next business day NAV for applications received after cut off time. 1.30 pm Previous day NAV if received before cut off time and funds are realised. Switch in If received after cut off time, NAV of the day previous to funds realisation. Equity Oriented Funds, Debt funds, Liquid funds Redemptions 3.00 pm Same day NAV if received before cut off time. Equity oriented funds and debt funds (except liquid funds) in respect of transaction of Rs. Rs. 2 lacs or more Purchases Switch out Switch in Next business day NAV for applications received after cut off time. 3.00 pm NAV of the business day on which funds for the entire amount of subscription / purchase as per the application are available for utilization before the cut‐off time will apply.

Expenses Initial Issue Expenses – These are one‐time expenses that come up when the scheme is offered for the first time (NFO). These need to be borne by the AMC Recurring Expenses – These can be charged to the scheme. www.prudentcorporate.com

Applicability of GST AMC(s) can charge GST, as per applicable Taxation Laws, to the schemes within the limits prescribed under SEBI (Mutual Fund) Regulations. GST on fees paid on investment management and advisory fees shall be charged to the scheme in addition to the overall limits specified as per the Total Expense Ratio (TER) provisions. GST on all the fees other than investment and advisory fees shall be charged to the scheme within the maximum limit of TER. GST on exit load, if any, shall be deducted from the exit load and the net amount shall be credited to the scheme. GST on brokerage and transaction cost paid for execution of trade, if any, shall be within the limit of TER. The commission payable to the distributors of mutual funds may be subject to GST, as applicable in case of the ARN holder. Such tax cannot be charged to the scheme.

Recurring Expenses Net Assets (Rs crore) Equity Schemes Deb

1. Multi-cap Fund: Multi cap Fund No sector bias -Invests into more than one sector Minimum 25% of total assets of the scheme in each of the three categories - Large Cap, Mid Cap & Small Cap. 2. Flexi-cap Fund: An open-ended, dynamic equity scheme that invests across various market capitalizations (large, mid and small caps). The minimum