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Questions and Answers

What is the primary feature that distinguishes interval funds from traditional closed-ended mutual funds?

They become open-ended at pre-specified intervals. (correct)

They allow unlimited buying and selling at any time.

They offer guaranteed returns regardless of market performance.

They exclusively invest in equities.

Which of the following best describes the liquidity of interval funds?

They provide limited liquidity compared to open-ended funds but more than traditional closed-ended funds. (correct)

They allow for immediate redemption at any time.

They are completely illiquid and cannot be sold once purchased.

They have the same liquidity as open-ended funds.

What advantage do interval funds offer to fund managers?

They only allow investments in high-risk equities.

They require constant management of asset allocations.

They enable investments in illiquid assets without frequent redemption pressures. (correct)

They allow for high-frequency trading.

Interval funds typically focus on which type of investment to provide lower-risk returns?

Debt instruments. Signup and view all the answers

How does the taxation of interval funds primarily depend?

On the asset allocation of the fund. Signup and view all the answers

What is one of the primary responsibilities of registrar and transfer agents?

Issuing unit certificates Signup and view all the answers

Which function is not performed by fund accountants?

Sending refund orders Signup and view all the answers

What role do legal advisors primarily fulfill for the AMC?

Offering legal guidance for scheme execution Signup and view all the answers

Who is responsible for conducting independent inspections of the AMC's accounting activities?

Auditors Signup and view all the answers

Which of the following is a responsibility of the lead manager?

Coordinating activities of intermediaries Signup and view all the answers

Investment advisors are primarily compensated based on what?

The average weekly value of the fund's net assets Signup and view all the answers

Which function is specifically associated with fund accountants?

Computing net asset value per unit Signup and view all the answers

What is a common activity undertaken by mutual funds to generate additional income?

Underwriting issues Signup and view all the answers

What is the minimum percentage of independent trustees required to ensure fair dealings?

75% Signup and view all the answers

What is the primary role of the custodian in mutual funds?

To keep custody of the securities Signup and view all the answers

Who appoints the custodian in a mutual fund structure?

Board of Trustees Signup and view all the answers

What is a requirement for the Board of Directors of an Asset Management Company?

At least 50% must be independent directors Signup and view all the answers

What is the function of the Asset Management Company regarding new schemes?

To float new schemes in the name of the Trust Signup and view all the answers

How is the fee for the Asset Management Company's services paid?

It is deducted from the money collected from investors Signup and view all the answers

What must the Asset Management Company comply with while managing funds?

Rules and regulations prescribed by SEBI Signup and view all the answers

What is true regarding the separation of the Sponsor and the Custodian?

They must be separate entities as per regulations Signup and view all the answers

What is the primary purpose of analyzing the consistency of spreads between a portfolio's returns and a benchmark's returns?

To predict the future performance of the portfolio. Signup and view all the answers

What does the term 'co-variance' refer to in the analysis of a portfolio's returns?

The relationship between the returns of the portfolio's securities. Signup and view all the answers

Which of the following factors does NOT typically determine a portfolio's tracking error?

The performance of other investors. Signup and view all the answers

Given the returns of XYZ Fund and the Big Stock Index, what is the first step in calculating the tracking error?

Subtract the Big Stock Index's returns from XYZ Fund's returns. Signup and view all the answers

How is the tracking error determined after calculating the summed squared values?

By dividing the sum by N - 1. Signup and view all the answers

What value represents the final tracking error based on the calculations provided?

0.304% Signup and view all the answers

In the context of portfolio management, what does a high tracking error indicate?

The portfolio has significant deviation from the benchmark. Signup and view all the answers

Which of the following components is NOT part of calculating the tracking error?

Management fees associated with the portfolio. Signup and view all the answers

What is a key feature of closed-ended funds regarding unit creation?

A fixed number of units is issued during the NFO. Signup and view all the answers

How are transactions conducted in a closed-ended fund after the NFO?

On stock exchanges between different investors. Signup and view all the answers

What happens to the unit capital of a closed-ended fund after the NFO?

It remains stable or fixed. Signup and view all the answers

What is the likely reason for a transaction price to differ from the NAV in a closed-ended fund?

Transactions are influenced by investor sentiment and market conditions. Signup and view all the answers

Which of the following is NOT a characteristic of closed-ended funds?

Units can be purchased in recurring installments. Signup and view all the answers

What is a primary investment objective of ICICI Prudential Growth Fund?

Long-term capital appreciation through equity investments. Signup and view all the answers

Which fund primarily targets emerging companies with high growth potential?

Mirae Asset Emerging Blue Chip Fund. Signup and view all the answers

What is a typical characteristic of the SBI Tax Advantage Fund?

It has a lock-in period of three years. Signup and view all the answers

What is the formula used to calculate NAV?

NAV = (Current value of investments held + Income accrued + Current assets – Current liabilities – Accrued expenses) / No.of outstanding units Signup and view all the answers

What is the calculated NAV given stocks worth Rs. 230 cr, and other values as described?

Rs. 87.48 Signup and view all the answers

What is the relationship between Sale Price and NAV in current schemes?

Sale Price is the same as NAV. Signup and view all the answers

What is an exit load in the context of mutual fund schemes?

A charge deducted from the repurchase price. Signup and view all the answers

What has SEBI's current position on entry loads?

Entry loads are completely banned. Signup and view all the answers

Which of the following is true regarding exit loads and unitholders?

All unitholders pay the same exit load regardless of investment size. Signup and view all the answers

If a scheme charges a 1 percent exit load on an NAV of Rs. 11.00, what would be the Re-purchase Price?

Rs. 10.89 Signup and view all the answers

How is the income accrued defined in the NAV calculation?

Dividend declared but not received. Signup and view all the answers

Study Notes

Mutual Funds - Concept

Mutual funds pool money from investors to invest in different markets and securities, aligning with agreed-upon investment objectives.
Investors gain access to markets and professional management services unavailable otherwise.

Fund Structure

Fund Sponsor: The initiating corporate entity.
Trustees: Oversee fund management, acting as internal regulators.
Asset Management Company (AMC): Manages investor money. Charges a fee.
Depository: Stores and manages securities.
Agent: Facilitates transactions between AMC and investors.
Custodian: Holds and protects securities.

Structure of Mutual Funds in India

Follows a 3-tier structure.
Sponsor initiates the fund.
Trustees ensure money is managed per objectives.
AMC manages investor money.
AMC charges a fee for services provided.

A corporate body launching a mutual fund.
Must have a sound track record and 5+ years' experience in financial services.
Must meet SEBI requirements (professional competence, financial soundness, reputation).
Contributes 40% of the AMC's net worth.

Trustee

Appointed by the sponsor to act on behalf of the trust.
Holds the fund's assets.
Responsible for ensuring fund management aligns with stated objectives.
At least 75% of trustees must be independent of the sponsor.
Appoints the AMC.

Custodian

Keeps custody of securities.
Monitors corporate actions (rights, bonus, dividends).
Participates in clearing and settlement through depositories.
Responsible for deliveries and receipt of fund units.
Must be separate from the sponsor.

AMC (Asset Management Company)

Manages investor money.
Charges a fee for services.
Board of Directors must have a minimum of 50% independent directors
Approved by SEBI.
Follows SEBI rules and regulations.
Manages schemes, buys and sells securities.

AMC - Continued

Manages investor money daily.
Cannot deal with a single broker beyond a certain limit.
Cannot act as trustee for another mutual fund.
Prepares offer documents.
Appoints intermediaries (IFAs, distributors).
Responsible for employee and service provider actions.

Registrar and Transfer Agents

Appointed by the AMC.
Process application forms.
Issue unit certificates.
Manage unit transfers.
Maintain records.
Process redemptions and issue dividends.

Fund Accountants

Appointed by the AMC.
Maintain proper books of account.
Calculate the net asset value (NAV) daily.
Monitor compliance with SEBI regulations.
Prepare reports for unit holders and SEBI.
Monitor custodian and other service provider performance.

Lead Manager

Carries out intermediary activities.
Develops and executes marketing campaigns.
Attracts investors through meetings and exhibitions.
Promotes sales and publicity.

Investment Advisors

Analyze market conditions.
Design investment strategies for the AMC.
Paid based on the average weekly value of the fund's assets.

Legal Advisors

Provide legal guidance on scheme planning and execution.

Auditors and Underwriters

Appointed by the AMC to independently verify accounting activities.
Underwrite issues generating additional income for mutual funds -require SEBI approval.

Income and Expenses

Include interest, dividend income, realized capital gains,+ valuation gains
Subtract realized capital losses, valuation losses, scheme expenses
Used to calculate Net Asset Value (NAV).

Types of Funds

Open-Ended Funds
Close-Ended Funds
Interval Funds

Open-Ended Funds

Investors can enter/exit at any time (even after NFO).
Additional units acquired/existing units sold—called a sale transaction.
Returning units—called a repurchase transaction.
Unit capital changes regularly.
Examples in India include HDFC Equity Fund, SBI Bluechip Fund, ICICI Prudential Balanced Advantage Fund.

Close-Ended Funds

Fixed maturity.
Investors buy units only during the NFO.
Post-NFO, units trade on a stock exchange.
Listing on a stock exchange is mandatory.
Examples in India include ICICI Prudential Growth Fund, SBI Tax Advantage Fund, and Mirae Asset Emerging Blue Chip Fund.

Interval Funds

Combine features of both open-ended and close-ended funds.
Largely close-ended but become open-ended at specific intervals.
Units can be bought/sold only during these specific time intervals.
Examples in India include Aditya Birla Sun Life Interval Income Fund, Nippon India Interval Fund, and UTI Quarterly Interval Fund.

Key Features of Interval Funds

Limited Liquidity: Units can only be bought/sold at predetermined intervals.
Investment Strategy: Can invest in illiquid assets.
Asset Allocation: Focus on lower-risk assets (usually debt).
Taxation: Tax treatment depends on asset allocation.

Who Should Invest in Interval Funds?

Investors seeking exposure to unconventional assets.
Low-to-moderate risk tolerance.
Investment horizon aligns with fund intervals.

Actively Managed Funds

Fund manager has flexibility in choosing investments (within broad objectives).
Expenses are generally higher.
Investors expect higher returns than the market.

Passive Funds

Invest based on a specified index (e.g., S&P BSE Sensex).
Mirror the index's performance.
Not designed to outperform the market.

Exchange Traded Funds (ETFs)

Passive funds.
Replicate an index or benchmark (e.g., equity market index, commodity index).
Units are issued in NFO, traded on stock exchanges.

Example of ETFs India

Kotak Nifty PSU Bank ETF (tracks publicly owned banks).
Nippon India ETF PSU Bank BeES (focuses on public sector banks).
Bharat 22 ETF (diversified portfolio investing in various sectors).

NAV Calculation

Formula used to calculate the net asset value per unit of a mutual fund.
Values for stocks, bonds, money market instruments, dividends, interest earned, fees payable, and outstanding units are used.

Sale Price, Re-purchase Price, and Loads

In open-ended schemes, sale price and repurchase prices were once higher/lower than the NAV.
These loads ("entry load," "exit load") are no longer permitted.
The sale price is the same as NAV.

Initial Issue Expenses

Incurred during NFO.
Once considered up to 6% of mobilized amount.
Now borne by the AMC.

Recurring Expenses

Expenses incurred in managing fund money.
Affect NAV.
SEBI limits the types of expenses and how much is charged to the scheme.

Measures of Returns (Simple Return)

Formula to calculate percentage returns on an investment.

Annualized Return

Used to compare returns from different-duration investments.
Formula to calculate annualized simple return.

Compounded Annual Growth Rate (CAGR)

Measures the average annual growth rate of an investment over a specific time period.
Considers the effect of dividend reinvestment.

Portfolio Risk

Risk related to the overall portfolio of assets held within a mutual fund.
Standard deviation measures fluctuation in periodic returns.

Drivers of Risk (in a scheme)

Portfolio Risk
Portfolio Liquidity

Standard Deviation

Measures the dispersion of returns around the average return.
Indicates volatility and risk.

Total Risk

Systematic Risk + Unsystematic Risk
Systematic Risk - Market Risk (external to organization)
Unsystematic Risk - Firm Specific Risk

Diversification

Investing in diverse securities reduces specific risk, thereby reducing portfolio risk.

Beta

Measures the systematic risk of a security (or scheme).
Compares its volatility with the market's.
Calculated via covariance between security and market, then dividing by variance of market.

Sharpe Ratio

Measures risk-adjusted return.
Formula: (Rp) - R(f)/ sigma(p)
Higher Sharpe ratios indicate better performance.

Treynor Ratio

Measures risk-adjusted return, using beta instead of standard deviation as the risk measure.

Jensen's Alpha

Measures a fund manager's ability to outperform the market relative to its beta.

Tracking Error

Measures consistency of a fund's outperformance relative to its benchmark.

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