MC 1.

5
31

M.COM.
SEMESTER - I

(REVISED SYLLABUS
AS PER NEP 2020)

MUTUAL FUND
MANAGEMENT AND
WEALTH MANAGEMENT
 © UNIVERSITY OF MUMBAI
Prof. Ravindra Kulkarni
Vice-Chancellor,
University of Mumbai,

Prin. Dr. Ajay Bhamare Prof. Shivaji Sargar

Pro Vice-Chancellor, Director,
University of Mumbai, CDOE, University of Mumbai,

Programme Co-ordinator : Dr. Rajashri Pandit

Asst. Prof. in Economic,
Incharge Head Faculty of Commerce,
CDOE, University of Mumbai, Mumbai

Course Co-ordinator : Mr. Vinayak Joshi

Assistant Professor,
CDOE, University of Mumbai, Mumbai

Editor : Dr. Neha Bhatia

Assistant Professor,
Parle Tilak Vidyalaya Association’s
Institute of Management Chitrakar Ketkar Marg,
Vile Parle East, Mumbai

Course Writer : Mr. Vinayak Joshi

Assistant Professor,
CDOE, University of Mumbai, Mumbai

: Adv Duvannadhan Nadar

Assistant Professor,
Pramod Ram Ujagar Tiwari Saket Institute
Of Management Saket Vidyanagari Marg,
Chinchpada Road, Katemanivali,
Kalyan, Maharashtra

November 2024, Print - 1

Published by : Director,
Centre for Distance and Online Education,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.

DTP Composed : Mumbai University Press

Printed by Vidyanagari, Santacruz (E), Mumbai
 CONTENTS
Unit No. Title Page No.

1 Fundamentals of Mutual Funds: Origins, Structure, and Ethical

Considerations 1

2. Regulatory Framework and Governance of Mutual Funds in India 20

3. Types of Mutual Funds: An Overview of Their Characteristics

and Functions 69

4. Portfolio Maturity and Calculation of Net Asset Value (NAV) 90

5 Foundations of Wealth Management: Concepts, Processes,

and Market Overview 114

6. Comprehensive Financial Planning: Wealth Sources, Life Stages,

and Risk Management 130

7. Asset Classes in Wealth Management: Debt, Equity, and Risk

Considerations 145

8. Financial Mathematics for Wealth Management: Return

Calculations, Asset Valuation, and Key Financial Ratios 159

9. Tax and Estate Planning Essentials: Strategies for Income

Management, Will Drafting, and Retirement Savings 188


 Electives 1

Programme Name: M.Com (Advanced Accountancy)

CourseName: Mutual Fund Management and Wealth Management
TotalCredits:04 TotalMarks:100
Universityassessment:50 Collegeassessment:50
Prerequisite:

MODULEI: (2CREDITS)
Unit1: Introduction to Mutual Fund
A) History & Origin, Definition, Meaning, Characteristics, Advantages, Disadvantages,
Limitations of Mutual Funds, Ethics in Mutual Fund. Entities involved – Sponsor, Trust,
Trustee, Asset Management Company, Registrar and Transfer Agent ( RTA) and Fund
Houses inIndia.
B) Legal Framework - Role of regulatory agencies for Mutual funds –SEBI, RBI, AMFI,
Ministry of Finance, SRO, Company Law Board,Department of Company’s affairs,
Registrar of Companies,MF guidelines on advertisement , Accounting , Taxation and
Valuationnorms, Guidelines to purchase Mutual Funds, Investor protection and MF
regulations, Grievance mechanism in MF in India.

Unit2: Classification of Mutual Fund

A) Types of Mutual Fund- (introduction and Characteristics)
x Functional/Operational – Open ended, close ended, Interval
x Portfolio – Income, Growth, Balanced, MMMF
x Geographical/ Location – Domestic, Offshore
x Miscellaneous - Tax Saving Funds, Exchange Traded Funds, Balance Funds, Fixed
Term Plan, Debt Funds, Systematic Investment Planning& Systematic Transfer Plan
B) Portfolio Maturity, Calculations of NAV

MODULEII: (2CREDITS)
Unit3: Overview of Wealth Management
A) Introduction to Wealth management Definition of Wealth management; understanding
wealth management; wealth
Management process; phases in wealth management process; wealth management
market in India Holistic Planning Framework
B) Sources of wealth; human Capital; Financial Capital; Financial Life Cycle; Working
Life – Pre-family independence; Family; Pre-retirement; Retirement – Active
retirement; Passive Retirement; Elderly Care; Retirement related risk – risk
identification; Market Risk, Asset Allocation Risk, Interest Rate Risk, Inflation Risk,
Health/liquidity risk, Longevity Risk, The Financial Planning process Establish and
define the relationship with the client; Personal Fact Finding; AnalyzeClient’s
financial status, Risk profile and determine financial goals; Develop financial planning
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 recommendation and present it to client; Implement client’s financial planning
recommendations; Monitor and review the client’s situation
Asset Classes
Debt as an asset class; Role of debt in wealth management; risk of investing in debt
securities; Equity as an asset class – investing in stocks

Unit4:

a) Financial Mathematics:

● Calculation of Returns (CAGR ,Post-tax Returns etc.), Total Assets, Net

Worth Calculations, Financial Ratios

b) Tax and Estate Planning:

● Tax Planning Concepts, Assessment Year, Financial Year, Income Tax Slabs,

TDS, Advance Tax, LTCG, STCG, Carry Forward & Set-off, Estate

Planning Concepts –Types of Will – Requirements of a Valid Will– Trust –

Deductions -Exemptions

Retirement Planning/ Income Streams & Tax Savings Schemes

References:
x Future scenario of Financial services : R. Gordan&Natarajan (Himalaya)
x Marketing of Financial services : V. K. Avadhani (Himalaya)
x MF, Data, Interpretation & analysis : K.G. Shahadevan&Thripairaju (Prentice hall of
x India)
x Mutual funds in India (Modern scenario): Dr. Manoj Dave & Mr. LalitkumarChauhan,
x (Paradise Publishers)
x Mutual Funds & Financial Management : Ramesh Garg (Yking books)
x Mutual Fund products & services : Indian institute for Banking & Finance ( Taxmann)

x Stuart E Lucas, Wealth, Wharton School Publishing

x Dun &Bradstreet, Wealth Management, Tata McGraw – Hill Publishing Co. Ltd.
x Ben Stein &Phil Demuth, Your Life Time Guide to Financial Planning,New Beginnings
Press
x Ram NiwasLakhotia, SubhashLakhotia, Tax and Succession Planning through Trusts
and Wills, Vision Books Pvt Ltd
x NaratCharupat, Huaxiong Huang & Moshe A. Milevsky, Strategic Financial Planning over
the Life Cycle,
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x Cambridge University Press
x Roger G Ibbotson, Moshe A Milevsky and Kevin X Zhu, Lifetime Financial Advice :
Human Capital, Asset
x Allocation and Insurance, Research Foundation of CFA Institute, SundarShankaran,
Wealth Engine Indian Financial Planning and Wealth Management handbook,
Vision Books Pvt. Ltd

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 Module 1

1
FUNDAMENTALS OF MUTUAL FUNDS:
ORIGINS, STRUCTURE, AND ETHICAL
CONSIDERATIONS
Unit Structure :
1.0 Learning Objectives
1.1 History and Origin of Mutual Funds
1.2 Definition, Meaning, Characteristics, of Mutual Funds
1.3 Advantages, Disadvantages, Limitations of Mutual Funds
1.4 etHics in Mutual Fund
1.5 Entities Involved in Mutual Fund
1.6 Exercise

1.0 LEARNING OBJECTIVES

By the end of this unit, learners should be able to:

 Understand the History and Origin of Mutual Funds

 Define and Explain the Meaning of Mutual Funds
 Identify and Describe the Characteristics of Mutual Funds
 Evaluate the Advantages and Disadvantages of Mutual Funds
 Assess the Limitations of Mutual Funds
 Examine Ethics in Mutual Fund Management
 Identify and Explain the Roles of Key Entities in Mutual Funds
 Explore Fund Houses in India

1.1 HISTORY AND ORIGIN OF MUTUAL FUNDS

1.1.1 GLOBAL HISTORY
The history of mutual funds dates back several centuries, originating as a
concept to pool resources for shared financial benefit. Here's a timeline of
key developments:
1. Early Beginnings in the 18th Century:
o Mutual fund - like investments emerged in Europe in the 18th century.
In 1774, a Dutch merchant named Adriaan van Ketwich created a trust
called “EendragtMaaktMagt,” meaning "Unity Creates Strength." He

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Mutual Fund Management gathered small investors to pool their resources, allowing them to diversify
and Wealth Management and reduce risk.
2. 19th Century Expansion in Europe:
o The mutual fund concept spread through Europe, particularly in the UK
and France. By the mid-1800s, investment trusts were popular,
especially among those with smaller amounts of capital.
3. Modern Mutual Funds in the United States:
o The first official mutual fund in the U.S., the Massachusetts Investors
Trust (MIT), was established in 1924. It introduced the modern
structure of mutual funds by allowing investors to pool resources to
access diversified portfolios of securities.
o By 1929, around 19 mutual funds were operating in the U.S., though
the Great Depression affected their growth. However, the market’s
recovery in the 1930s led to increased regulation and protection for
investors, such as the Investment Company Act of 1940, which still
governs U.S. mutual funds.
4. Post-World War II Growth:
o The prosperity following World War II, combined with enhanced
financial literacy, spurred significant mutual fund growth in the 1950s
and 1960s. By the 1980s, the rise of mutual funds was further fueled by
the development of money market funds and index funds.
5. Global Expansion:
o Mutual funds became globally popular by the late 20th century.
Various countries, including India, developed their own mutual fund
industries. For example, India’s mutual fund history began in 1963 with
the formation of the Unit Trust of India (UTI), a government
initiative to promote savings and investment.
6. 21st Century and Digital Advancements:
o Mutual funds became accessible to millions via digital platforms,
online trading, and mobile apps, allowing broader participation and
easier fund management.
o Today, mutual funds continue to evolve with the introduction of
environmental, social, and governance (ESG) funds, actively
managed exchange-traded funds (ETFs), and AI-powered fund
strategies.
In summary, mutual funds have a rich history rooted in Europe’s 18th-
century financial innovations, later formalized in the U.S., and expanded
globally. They continue to evolve, adapting to changing markets,
technology, and investor preferences.

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1.1.2 HISTORY AND ORIGIN OF MUTUAL FUNDS IN INDIA Fundamentals of Mutual
Funds: Origins, Structure,
The history and origin of mutual funds in India is marked by several and Ethical Considerations
phases of development and regulatory changes, eventually establishing it
as a popular investment avenue. Here's a timeline of its evolution:

1. Introduction and Early Years (1963-1987):

 1963: The mutual fund industry in India began with the formation of
the Unit Trust of India (UTI). Established by the Government of India
and the Reserve Bank of India (RBI), UTI was the only mutual fund
provider in India for many years.
 1964: UTI launched its first mutual fund product, Unit Scheme 1964
(US-64), which became highly popular and marked the beginning of
mutual fund investments in the country.

2. Entry of Public Sector Funds (1987-1993):

 In the 1980s, the Indian government encouraged other public sector
financial institutions to start their own mutual funds.
 1987: Non-UTI funds were introduced as State Bank of India, Canara
Bank, Punjab National Bank, and Life Insurance Corporation of
India (LIC) launched their own funds. This expanded the mutual fund
market beyond UTI and introduced competition.
3. Entry of Private Sector and Regulatory Reforms (1993-2003):
 1993: The mutual fund industry opened to the private sector, allowing
non-government players to enter. This led to the establishment of
several private sector mutual fund companies.
 Securities and Exchange Board of India (SEBI) was appointed as the
regulator for mutual funds, enforcing guidelines for investor protection.
 SEBI introduced the Mutual Fund Regulations in 1996, which
established rules for transparency, management, and investor rights,
and led to the formation of the Association of Mutual Funds in India
(AMFI) to support industry growth and maintain standards.

4. Growth Phase and Investor Awareness (2003-2013):

 Following the regulatory reforms, the industry saw robust growth, with
both domestic and international fund houses entering the market.
 During this period, investor education initiatives by AMFI and SEBI
increased mutual fund awareness.
 Mutual fund products became more diversified, with options like
Systematic Investment Plans (SIPs) becoming popular as an
affordable and disciplined way to invest.

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Mutual Fund Management 5. Modern Mutual Fund Industry and Digital Transformation (2013-
and Wealth Management Present):
 The rise of digital platforms and online investment tools has made
mutual funds more accessible to individual investors across India.
 2017: SEBI’s re-categorization of mutual funds created clearer
guidelines, improving transparency and helping investors make
informed choices.
 2020: The industry adapted to the challenges of the COVID-19
pandemic, with more investors relying on digital platforms for
investing in mutual funds.

Key Highlights
 AMFI's Role: AMFI's "Mutual Funds Sahi Hai" campaign has been
instrumental in educating the public and expanding the investor base.
 Growth in AUM: The mutual fund industry in India has seen
consistent growth in Assets Under Management (AUM), which reached
over INR 41 lakh crore by 2023.
 Focus on Retail Investors: Mutual funds have become accessible to
retail investors through mobile applications and online portals,
especially through SIPs.
In summary, the mutual fund industry in India started with UTI in 1963
and evolved with regulatory changes, private sector involvement, and
digital advancements. It continues to grow, becoming a significant part of
India’s investment landscape with a strong focus on transparency, investor
protection, and accessibility.

1.2 DEFINITION, MEANING, CHARACTERISTICS, OF

MUTUAL FUNDS
1.2.1 Definition of Mutual Funds
A mutual fund is an investment vehicle that pools money from multiple
investors to invest in a diversified portfolio of assets, including stocks,
bonds, money market instruments, or other securities. Professional fund
managers manage these funds, aiming to achieve the fund’s investment
objectives, whether it be growth, income, or capital preservation.

1.2.2 Meaning of Mutual Funds

Mutual funds offer a way for individual investors to invest in a broad
range of securities with small amounts of capital. By pooling resources,
investors can access a diversified portfolio and professional management,
which may be difficult to achieve individually. The fund’s performance is
reflected in its Net Asset Value (NAV), which changes daily based on the
underlying assets’ value. This structure allows investors to benefit from

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diversification, reduced risk, and potential returns in line with market Fundamentals of Mutual
performance. Funds: Origins, Structure,
and Ethical Considerations

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1.2.3 Characteristics of Mutual Funds

1. Pooling of Resources: Mutual funds collect funds from multiple
investors to form a larger capital pool, enabling investments across
diverse asset classes.
2. Professional Management: Mutual funds are managed by
professional fund managers who use research, expertise, and
experience to make investment decisions aligned with the fund's
objectives.
3. Diversification: A key benefit of mutual funds is diversification,
which spreads investments across various assets to reduce the impact
of poor performance in any single security or sector.
4. Liquidity: Mutual funds, particularly open-ended funds, offer liquidity
to investors, allowing them to buy or sell fund units at the prevailing
Net Asset Value (NAV) on any business day.
5. Transparency: Mutual funds provide regular updates on portfolio
holdings, NAV, and performance, enabling investors to track how their
investments are managed.
6. Regulated and Secure: In most countries, including India, mutual
funds are regulated by government bodies like the Securities and
Exchange Board of India (SEBI), which ensures that funds operate
under strict guidelines to protect investors.
7. Variety of Investment Options: Mutual funds offer various types of
funds such as equity funds, debt funds, balanced funds, and index
funds, catering to different risk profiles and investment goals.
8. Convenience and Affordability: Mutual funds allow investors to
begin with relatively low amounts, and the fund’s management takes
care of all administrative work, making it easy and accessible.

5
Mutual Fund Management These aspects make mutual funds an appealing choice for investors
and Wealth Management seeking a diversified, professionally managed, and accessible investment
option.

1.3 ADVANTAGES, DISADVANTAGES, LIMITATIONS

OF MUTUAL FUNDS
1.3.1 ADVANTAGES OF MUTUAL FUNDS
1. Professional Management: Mutual funds are managed by skilled
fund managers who research and make strategic investment decisions,
benefiting investors who lack expertise or time to manage investments
actively.
2. Diversification: Mutual funds allow for investments across a wide
range of assets, such as equities, bonds, and money market
instruments, reducing exposure to individual security risk.
3. Affordability: Mutual funds offer a low-cost entry point for investors,
with some allowing investments as low as 500 per month through
SIPs, making them accessible for investors of all sizes.
4. Systematic Investment Plans (SIPs): SIPs allow investors to invest
fixed amounts regularly, promoting disciplined investing and helping
average out costs over time.
5. Transparency and Reporting: Mutual funds are required to provide
regular, transparent updates on their performance, portfolio holdings,
and NAV, enabling investors to stay informed.
6. Liquidity: Open-ended mutual funds offer liquidity by allowing
investors to redeem units at any time based on the fund’s NAV,
providing flexibility and access to cash.
7. Regulatory Oversight: Mutual funds are regulated by bodies like
SEBI, ensuring investor protection, ethical standards, and proper
management practices.
8. Tax Efficiency Options: Some mutual funds, such as Equity Linked
Savings Schemes (ELSS), offer tax benefits under Section 80C,
enabling investors to save on taxes while building wealth.

1.3.2 DISADVANTAGES OF MUTUAL FUNDS

1. Fees and Charges: Mutual funds may charge various fees, such as
management fees, administrative expenses, and sometimes entry/exit
loads, which reduce the overall return on investment.
2. No Direct Control Over Holdings: Investors relinquish control over
individual investment decisions to the fund manager, which may not
always align with their personal investment views.

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3. Market Risks: Mutual funds are subject to market fluctuations, Fundamentals of Mutual
meaning investors could experience losses if the market performs Funds: Origins, Structure,
poorly, especially in equity-oriented funds. and Ethical Considerations

4. Dilution of Returns: While diversification lowers risk, it also means

that the fund’s returns may be diluted if only a few of the portfolio’s
holdings perform well.
5. Potential Lock-in Periods: Some funds, like ELSS or certain debt
funds, have lock-in periods that restrict access to the investment for a
specific duration, limiting liquidity.
6. Inconsistent Returns: Returns are not guaranteed in mutual funds, as
fund performance may vary over time and may not always meet
investors' expectations.
7. Taxes on Gains: Investors are liable for taxes on both short-term and
long-term capital gains from mutual funds, which can impact net
earnings.
8. Expense Ratios: The fund's expense ratio (annual fees as a percentage
of AUM) can vary, and higher expense ratios can eat into returns,
especially over long-term investments.

1.3.3 LIMITATIONS OF MUTUAL FUNDS

1. Dependence on Fund Manager’s Expertise: The fund’s performance
largely depends on the skill of the fund manager, and any changes in
management or poor decisions can negatively impact returns.
2. Market Dependency: Since mutual funds are market-linked, their
performance is tied to market conditions, making them susceptible to
volatility and downturns that impact overall value.
3. Capital Gains Tax Implications: Taxes on capital gains (STCG and
LTCG) reduce actual returns, especially if the investor needs to sell
units sooner than planned due to financial needs.
4. Lower Returns in Passive Funds: Passive funds, like index funds,
only aim to mirror the performance of an index rather than beat it,
potentially yielding lower returns than actively managed funds.
5. High Expense Ratios in Some Funds: Actively managed funds tend
to have higher expense ratios compared to passive funds, which can
impact long-term compounding.
6. Complexity in Fund Selection: With a wide variety of funds
available, investors may find it challenging to choose the right fund
without substantial research and analysis.
7. Exposure to Credit Risk (in Debt Funds): Debt-oriented mutual
funds are subject to credit risk, meaning that the companies or
governments issuing bonds in the portfolio may default on their
obligations.
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Mutual Fund Management 8. Possibility of Underperformance: Some mutual funds may
and Wealth Management underperform the market or their benchmark indices, making it
difficult for investors to achieve expected returns.

1.4 ETHICS IN MUTUAL FUND

Ethics in mutual funds is essential for maintaining trust and safeguarding
investors' interests, as mutual funds are often managed on behalf of
thousands of individual investors. Ethical practices guide fund managers
and firms to act responsibly, transparently, and fairly. Here are key areas
of ethics in mutual funds:
1. Transparency and Disclosure: Mutual fund companies must provide
clear and comprehensive information regarding fund holdings,
performance, fees, and risks. Regular, transparent disclosures help
investors make informed decisions and maintain trust in fund
management.
2. Fiduciary Duty: Fund managers and firms have a fiduciary
responsibility to act in the best interest of investors, prioritizing
clients' interests over personal or company gains. This includes
making investment choices that align with the fund’s objectives rather
than personal benefit.
3. Fair Pricing and Honest Reporting: Ethical mutual funds adhere to
fair pricing standards for buying and selling units, ensuring that all
investors receive accurate NAV valuations. Honest reporting of fund
performance, without misleading or exaggerating returns, upholds
investor trust.
4. Avoiding Conflicts of Interest: Fund managers should avoid
conflicts of interest, such as preferential treatment of certain clients,
self-dealing, or personal trading on information not available to the
public. Ethical practices include disclosing any potential conflicts and
addressing them in ways that protect investors.
5. Ethical Marketing and Advertising: Mutual funds should avoid
misleading advertisements and only make realistic claims about fund
performance and objectives. This prevents investors from being
swayed by overly optimistic projections or manipulated statistics.
6. Compliance with Regulations: Ethical mutual funds strictly adhere
to regulatory standards set by bodies like SEBI in India, which
establish guidelines on transparency, reporting, and risk management.
Non-compliance can lead to penalties and loss of investor confidence.
7. Confidentiality and Data Protection: Protecting investors' personal
information is crucial, as ethical funds ensure data confidentiality and
compliance with data protection laws, safeguarding investors from
unauthorized use of their information.

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8. Responsible Investment Practices: Some ethical funds incorporate Fundamentals of Mutual
Environmental, Social, and Governance (ESG) factors, investing in Funds: Origins, Structure,
companies with sustainable practices. ESG-focused investing aligns and Ethical Considerations
with ethical standards by avoiding investments in companies with
harmful practices.
9. Accurate Risk Representation: Ethical funds clearly communicate
the risks associated with each mutual fund, ensuring that investors
understand potential losses as well as gains. Accurate risk
representation avoids misleading investors regarding the true nature of
their investments.
10. Code of Ethics and Internal Conduct: Mutual fund companies often
establish a formal code of ethics, requiring employees to follow
standards on transparency, responsibility, and investor-first practices.
This includes guidance on personal conduct, fair dealings, and
protecting the firm's reputation.

1.5 ENTITIES INVOLVED IN MUTUAL FUND

1.5.1 SPONSOR
I. Definition: The sponsor is the entity or company that initiates and
promotes the establishment of the mutual fund. The sponsor essentially
acts as the parent organization responsible for setting up the mutual fund
and investing in its initial capital.

II. Role & Responsibilities:

1. Capital Contribution: The sponsor provides the initial capital
required to establish the mutual fund and bears some level of financial
risk.
2. Establishing the Trust: The sponsor initiates the creation of the
mutual fund trust and appoints trustees to oversee its operations.
3. Setting Up the AMC: The sponsor is responsible for setting up the
Asset Management Company (AMC), which will manage the mutual
fund’s investments.
4. Obtaining Regulatory Approval: The sponsor must meet specific
financial and operational criteria set by regulatory authorities like
SEBI in India, demonstrating credibility and stability before launching
a mutual fund.
III. Importance:The sponsor’s reputation and financial strength provide
confidence to investors, as they serve as a foundation for the
trustworthiness and long-term stability of the mutual fund.

1.5.2 TRUST
I. Definition: A mutual fund is structured as a trust, created under the
Indian Trusts Act, 1882. The sponsor establishes this trust by executing a
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Mutual Fund Management trust deed in favour of trustees, who hold and manage the fund’s assets for
and Wealth Management the benefit of investors.

II. Role & Responsibilities:

1. Ownership of Assets: The trust is the legal owner of the mutual
fund’s assets, held on behalf of investors.
2. Setting Objectives: The trust’s objectives are to operate the fund in
alignment with the interests of investors and to ensure compliance with
regulatory requirements.
3. Ensuring Fiduciary Responsibility: The trust acts as a custodian of
investors' money, ensuring that funds are managed responsibly and in
line with the stated investment objectives.
III. Importance: The trust provides the legal framework and governance
structure within which the mutual fund operates, ensuring that investors'
interests are safeguarded through a well-defined trust deed.

1.5.3 TRUSTEE
I. Definition: Trustees are individuals or entities appointed by the sponsor
to oversee the functioning of the mutual fund and ensure that it operates in
compliance with regulations and investor interests.

II. Role & Responsibilities:

1. Monitoring the AMC: Trustees monitor the activities of the AMC,
ensuring that it manages the fund in accordance with the objectives
outlined in the scheme.
2. Regulatory Compliance: Trustees make sure that the AMC complies
with SEBI regulations and other legal requirements, protecting
investors' interests.
3. Reviewing Performance: Trustees periodically review the fund’s
performance and check the financial health of the AMC.
4. Addressing Investor Grievances: They also handle and address any
complaints or grievances from investors and act if there’s any
malpractice.
III. Importance: Trustees act as a vital layer of oversight, ensuring that
the mutual fund is managed transparently and in investors' best interests,
thus building trust in the industry.

1.5.4 ASSET MANAGEMENT COMPANY (AMC)

I. Definition: The AMC is a professional investment management
company appointed by the trustees to manage the mutual fund’s assets on
a day-to-day basis. It makes investment decisions to achieve the fund’s
objectives.

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II. Role & Responsibilities: Fundamentals of Mutual
Funds: Origins, Structure,
1. Investment Management: The AMC conducts research, selects and Ethical Considerations
securities, and manages the portfolio according to the fund’s
objectives.
2. Fund Administration: The AMC is responsible for operational tasks
like NAV calculation, record-keeping, and fund accounting.
3. Regulatory Compliance: The AMC ensures compliance with SEBI
regulations, including reporting requirements, and adheres to the
scheme's guidelines.
4. Marketing and Distribution: The AMC promotes the mutual fund
schemes and ensures proper distribution through various channels to
attract investors.
III. Importance: The AMC is the engine of the mutual fund, using
professional expertise to manage and grow investors’ money, contributing
to the fund’s success and stability.

1.5.5 REGISTRAR AND TRANSFER AGENT (RTA)

I. Definition: The RTA is an external service provider appointed by the
AMC to manage administrative tasks related to investor transactions and
records.
II. Role & Responsibilities:
1. Record Maintenance: The RTA keeps records of all mutual fund unit
holders and processes their transactions.
2. Transaction Processing: RTAs handle purchase, redemption,
transfer, and switch requests from investors, ensuring smooth
transactions.
3. Investor Servicing: RTAs provide customer support, issue account
statements, and resolve investor queries, enhancing service quality.
4. Compliance and Reporting: They maintain records for regulatory
reporting and assist the AMC in fulfilling SEBI’s data retention and
reporting requirements.
III. Importance: RTAs are crucial for operational efficiency, ensuring
that investor records are well-maintained and that transactions are
processed accurately and on time.
1.5.6 FUND HOUSES IN INDIA
I. Definition: Fund houses (also known as mutual fund companies or
AMCs) are the overarching organizations that own, launch, and manage
mutual fund schemes. These are companies registered with SEBI and
licensed to offer mutual fund products.

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Mutual Fund Management II. Role & Responsibilities:
and Wealth Management 1. Launching Schemes: Fund houses create and launch different mutual
fund schemes catering to various investor goals and risk appetites.
2. Investor Education and Communication: Fund houses are
responsible for educating investors, communicating scheme-related
information, and promoting financial literacy.
3. Risk Management: They ensure that each scheme is managed with a
defined risk strategy and is aligned with investors' financial goals and
expectations.
4. Accountability and Governance: Fund houses are responsible for
ensuring that each scheme operates under ethical practices and
maintains investor trust.
III. Importance: Fund houses represent the face of the mutual fund
industry, and their reputation, performance, and ethical practices build
confidence in investors, fostering a healthy investment environment in
India.
Each entity in the mutual fund ecosystem contributes to building trust,
ensuring regulatory compliance, managing investments efficiently, and
providing transparent and reliable services to investors. Together, they
create a structured, regulated system that protects investors and promotes
efficient market functioning.

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Mutual Fund Three Tier Structure: Investor Education Video by
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1.6 EXERCISE
A. Select the correct alternative
1. Who is considered the creator of the first mutual fund-like investment in
Europe?
a) John D. Rockefeller b) Adriaan van Ketwich
c) Warren Buffett d) Benjamin Graham
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2. In what year was the first official mutual fund, the Massachusetts Fundamentals of Mutual
Investors Trust (MIT), established in the U.S.? Funds: Origins, Structure,
and Ethical Considerations
a) 1920 b) 1930 c) 1924 d) 1940

3. What was the name of the first mutual fund introduced by UTI in India?
a) SIP Scheme b) Mutual Trust 1963
c) Unit Scheme 1964 (US-64) d) Growth Investment Scheme

4. Which regulatory body governs mutual funds in India?

a) RBI b) SEBI c) AMFI d) IRDA

5. Which entity is responsible for maintaining investor records and

processing transactions in mutual funds?
a) Sponsor
b) Asset Management Company (AMC)
c) Registrar and Transfer Agent (RTA)
d) Fund House

6. In which year did SEBI introduce Mutual Fund Regulations to ensure

transparency and investor rights?
a) 1993 b) 1996 c) 2003 d) 2013

7. What is one of the primary advantages of investing in mutual funds?

a) High fees b) Single security investment
c) Diversification d) Limited liquidity

8. The term "SIP" in mutual funds stands for:

a) Systematic Investment Plan b) Secured Investment Product
c) Strategic Investment Portfolio d) Stock Investment Plan

9. Which phase in India’s mutual fund history saw the entry of private
sector funds?
a) 1963-1987 b) 1987-1993
c) 1993-2003 d) 2003-2013
10. What does "NAV" stand for in mutual fund terminology?
a) Net Annual Value b) Net Asset Value
c) New Asset Value d) Non-Active Value
Answer Key:
1. b) Adriaan van Ketwich
2. c) 1924
3. c) Unit Scheme 1964 (US-64)
4. b) SEBI
5. c) Registrar and Transfer Agent (RTA)

13
Mutual Fund Management 6. b) 1996
and Wealth Management 7. c) Diversification
8. a) Systematic Investment Plan
9. c) 1993-2003
10. b) Net Asset Value

B. True or False
1. Mutual funds in India began with the establishment of UTI in 1963.
2. The Massachusetts Investors Trust, established in 1924, is the first
official mutual fund in India.
3. Trustees are responsible for monitoring the AMC and ensuring
regulatory compliance.
4. A fund house is also known as an Asset Management Company
(AMC).
5. SEBI regulates mutual funds in India to ensure investor protection.
6. The Net Asset Value (NAV) of a mutual fund remains constant.
7. The "Mutual Funds Sahi Hai" campaign was initiated by SEBI to
promote mutual funds.
8. A Systematic Investment Plan (SIP) helps investors average out costs
over time.
9. Mutual funds do not offer any tax benefits under Section 80C.
10. Trustees in mutual funds are not allowed to address investor
grievances.

Answer Key:
1. True
2. False
3. True
4. True
5. True
6. False
7. False
8. True
9. False
10. False

14
C. Match the Pair Fundamentals of Mutual
Funds: Origins, Structure,
Column A Column B and Ethical Considerations

1. Eendragt Maakt Magt a. First mutual fund in the U.S. (1924)

2. SEBI b. Dutch trust established in 1774
3. Unit Trust of India (UTI) c. Regulator of Indian mutual funds
4. Mutual Fund Regulations of d. First mutual fund in India (1963)
1940
5. Massachusetts Investors e. U.S. regulation established investor
Trust (MIT) safeguards
6. Adriaan van Ketwich f. Founder of the first mutual fund
concept
7. Private Sector Entry in 1987 g. Allowed new private mutual funds
in India
8. Digital Transformation h. Technology-driven fund
accessibility
9. Public Sector Banks' Mutual i. Mutual funds launched by
Funds government banks
10. Investor Protection j. Key objective of SEBI’s regulations

Answer

Column A Column B
1. EendragtMaaktMagt b. Dutch trust established in 1774
2. SEBI c. Regulator of Indian mutual funds
3. Unit Trust of India (UTI) d. First mutual fund in India (1963)
4. Mutual Fund Regulations of e. U.S. regulation established
1940 investor safeguards
5. Massachusetts Investors Trust a. First mutual fund in the U.S.
(MIT) (1924)
6. Adriaan van Ketwich f. Founder of the first mutual fund
concept
7. Private Sector Entry in 1987 g. Allowed new private mutual funds
in India
8. Digital Transformation h. Technology-driven fund
accessibility
9. Public Sector Banks' Mutual i. Mutual funds launched by
Funds government banks
10. Investor Protection j. Key objective of SEBI’s
regulations

15
Mutual Fund Management D. Answer in Brief
and Wealth Management 1. Explain the concept of a mutual fund and how it works as an
investment vehicle.
2. Discuss the historical origins of mutual funds and highlight the
contributions of Adriaan van Ketwich in the 18th century.
3. Describe the growth of the mutual fund industry in India, including
key milestones from its inception in 1963 to the present.
4. What is NAV (Net Asset Value), and why is it significant in the
context of mutual funds?
5. Compare and contrast equity mutual funds and debt mutual funds.
What are the main differences in terms of risk, returns, and
investment strategy?
6. How do systematic investment plans (SIPs) benefit individual
investors compared to lump-sum investments? Provide examples to
illustrate your answer.
7. Explain the role of a fund manager in a mutual fund and the impact of
their decisions on the fund's performance.
8. Discuss the importance of diversification in mutual fund investments.
How does diversification help reduce risk for investors?
9. Describe the different types of mutual funds based on investment
objectives, such as growth funds, income funds, and balanced funds.
10. Analyze the advantages and disadvantages of investing in mutual
funds versus direct stock market investments.

E. Short Notes
1. Role of the Securities and Exchange Board of India (SEBI) in
Regulating Mutual Funds
2. Unit Trust of India (UTI) and Its Impact on the Indian Mutual Fund
Industry
3. Mutual Fund Regulations under the Investment Company Act of 1940
4. Technological Advancements in the Mutual Fund Industry
5. Evolution of Mutual Funds from Closed-End to Open-End Funds

Summary:
1. Global History: Mutual funds originated in the 18th century in
Europe, with Adriaan van Ketwich's pooled trust
"EendragtMaaktMagt." The concept evolved through the 19th and
early 20th centuries, especially in the U.S., where the Massachusetts
Investors Trust, founded in 1924, became the first official mutual fund.
Post-WWII prosperity boosted mutual funds' popularity, and
technological advancements in the 21st century made them globally
accessible.

16
2. Indian History: Mutual funds in India began in 1963 with the Unit Fundamentals of Mutual
Trust of India (UTI). In the 1980s, public sector banks launched funds, Funds: Origins, Structure,
and private sector participation began in 1993, with SEBI establishing and Ethical Considerations
regulatory guidelines. The industry grew significantly, focusing on
digital access, retail investors, and regulatory reforms.
3. Definition, Meaning, and Characteristics: A mutual fund pools
investors' money to invest in a diversified portfolio managed by
professionals. Key characteristics include resource pooling,
professional management, diversification, transparency, liquidity,
regulatory oversight, and convenience.
4. Advantages:
 Professional Management and Diversification minimize individual
security risks.
 SIPs, affordability, and tax efficiency enhance appeal for retail
investors.
 Transparency, liquidity, and regulatory oversight provide security
and flexibility.
5. Disadvantages:
 Fees and charges reduce net returns.
 No direct control, market risks, and tax implications can be
deterrents.
 Expense ratios and inconsistent returns affect long-term gains.
6. Ethical Standards: Ethical mutual fund practices include transparency,
fiduciary duty, fair pricing, conflict avoidance, accurate risk
representation, and compliance. These principles aim to protect investors
and maintain industry credibility.
7. Entities in Mutual Funds:
 Sponsor: Initiates the fund, providing initial capital.
 Trust: Legal framework holding assets for investors.
 Trustee: Oversees fund operations, ensuring regulatory compliance.
 AMC (Asset Management Company): Manages investments and fund
operations.
 RTA (Registrar and Transfer Agent): Handles investor transactions
and records.
 Fund Houses: Manage and launch schemes, focusing on investor trust
and education.

17
Mutual Fund Management Glossary
and Wealth Management
Adriaan van Ketwich: Dutch merchant who created the first mutual fund
concept.
Asset Management Company (AMC): Manages the mutual fund's
investments and day-to-day operations.
Assets Under Management (AUM): Total market value of assets
managed by a mutual fund.
Equity Linked Savings Scheme (ELSS): Mutual fund offering tax
benefits under Section 80C.
Environmental, Social, and Governance (ESG): Investment criteria
focusing on sustainability and ethical practices.
Expense Ratio: Percentage of fund assets used for administrative and
management costs.
Fiduciary Duty: Ethical obligation to act in the best interest of clients or
investors.
Massachusetts Investors Trust (MIT): First official U.S. mutual fund,
founded in 1924.
Net Asset Value (NAV): Per-share value of a mutual fund, calculated
daily.
Registrar and Transfer Agent (RTA): Manages mutual fund
transactions and records.
Securities and Exchange Board of India (SEBI): Regulates the mutual
fund industry in India, promoting transparency and investor protection.
Sponsor: Entity that establishes and promotes a mutual fund.
Systematic Investment Plan (SIP): Investment plan allowing regular,
small investments in mutual funds.
Trustee: Oversees mutual fund operations, ensuring investor protection.
Unit Trust of India (UTI): India’s first mutual fund organization,
established in 1963.

References:

 https://resource.cdn.icai.org/74835bos60509-cp8.pdf

 https://icmai.in/upload/Students/Syllabus2022/Final_Stdy_Mtrl/P14.pdf

 https://www.icsi.edu/media/webmodules/publications/CM&SL%20Fin
al%20PDF.pdf

 https://www.nseindia.com/products-services/mf-about-mfss
18
 https://www.bseindia.com/Static/Markets/MutualFunds/BSEStarMF.as Fundamentals of Mutual
px Funds: Origins, Structure,
and Ethical Considerations
 https://www.amfiindia.com/

 https://www.mutualfundssahihai.com/

 https://www.moneycontrol.com/mutualfundindia/

 https://www.etmoney.com/mutual-funds



19
 Module 1

2
REGULATORY FRAMEWORK AND
GOVERNANCE OF MUTUAL
FUNDS IN INDIA
Unit structure :
2.0 Learning Objectives
2.1 Role of Regulatory Agencies for Mutual Funds
2.2 Mutual Funds Guidelines
2.3 Grievance Mechanism in MF in India
2.4 Exercise

2.0 LEARNING OBJECTIVES

After reading this chapter, learner will be able to:

 Identify the roles of regulatory agencies like SEBI, RBI, AMFI,

Ministry of Finance, and others in governing mutual funds in India.
 Understand the functions of self-regulatory organizations (SROs), the
Company Law Board, Department of Company Affairs, and the
Registrar of Companies in mutual fund regulation.

 Analyze the guidelines and norms for mutual fund advertising,

accounting, taxation, and valuation.
 Comprehend the regulations and procedures for purchasing mutual
funds in India.

 Explore the investor protection mechanisms and mutual fund

regulations in place to ensure a safe investment environment.
 Recognize the grievance redressal mechanisms available for mutual
fund investors in India.

2.1 ROLE OF REGULATORY AGENCIES FOR

MUTUAL FUNDS
Regulatory agencies in India play a critical role in governing the mutual
fund industry, ensuring its integrity, transparency, and accountability.
Here’s an overview of the key regulatory bodies and their functions in the
mutual fund sector:

20
2.1.1 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) Regulatory Framework and
Governance of Mutual
 Primary Regulator: SEBI is the main regulatory authority for mutual Funds in India
funds in India.
 Approval of Schemes: Approves new mutual fund schemes and
oversees fund performance to ensure investor protection.
 Disclosure Norms: Mandates transparency in fund operations,
requiring periodic disclosures on portfolio holdings, expenses, and
performance.
 Risk Management: Imposes asset allocation limits to reduce risk
exposure.
 Investor Protection: Enforces regulations to prevent fraudulent
practices and misrepresentation, ensuring fair treatment of investors.
 Grievance Redressal: Provides a mechanism for investors to raise
complaints and ensure swift redressal.

The Role of SEBI as a Regulatory Agency for Mutual Funds in India

1. Overview of SEBI
 The Securities and Exchange Board of India (SEBI) is the primary
regulatory body overseeing the securities market in India, including
mutual funds.
 Established in 1988, SEBI's mandate is to protect the interests of
investors, promote fair market practices, and ensure transparency in
the securities market.

2. Regulatory Functions of SEBI in Mutual Funds

 SEBI regulates all aspects of mutual fund operations to ensure investor
protection, transparency, and accountability in the industry.

3. Key Roles of SEBI in the Mutual Fund Industry

 Approval of New Schemes: SEBI reviews and approves all new
mutual fund schemes to ensure compliance with regulatory standards.
 Guidelines and Norms: Sets guidelines for the formation,
functioning, and management of mutual funds, such as minimum
capital requirements, asset diversification, and disclosure norms.
 Transparency and Disclosure: Requires mutual funds to provide
detailed disclosures on portfolio holdings, fund performance,
expenses, and other financial details to maintain transparency for
investors.
 Risk Management: Imposes limits on exposure to various asset
classes to manage and mitigate risk in mutual fund investments.

21
Mutual Fund Management  Fair Pricing: Regulates the valuation of mutual fund assets to ensure
and Wealth Management accurate and fair pricing of units, protecting investors from price
manipulation.
 Investor Education: Promotes financial literacy and awareness about
mutual funds through campaigns, helping investors make informed
decisions.
 Grievance Redressal: Provides a mechanism for investors to register
complaints regarding mutual funds and ensures timely redressal of
grievances.

4. SEBI Regulations and Compliance

 SEBI enforces regulations under the SEBI (Mutual Funds)
Regulations, 1996, which cover areas such as fund structure,
management, disclosures, and audit requirements.
 Mutual funds must comply with SEBI's reporting standards, maintain
accurate records, and submit periodic reports for regulatory review.

5. Role in Investor Protection

 SEBI works to protect investors from malpractices like insider trading,
front-running, and misrepresentation of fund performance.
 Implements a framework to prevent mis-selling and promotes ethical
practices among fund managers.
6. Enforcement and Penalties
 SEBI has the authority to investigate and penalize mutual fund
companies, trustees, and asset management companies for regulatory
violations.
 SEBI can impose fines, suspend or cancel licenses, and even ban
entities from the market to maintain industry standards and protect
investors.

7. Recent SEBI Initiatives in Mutual Funds

 SEBI has introduced initiatives like categorization of mutual funds,
revised expense ratios, and stricter norms for debt funds to safeguard
investors' interests.
 SEBI also requires greater transparency in mutual fund advertising and
disclosure practices, helping investors make well-informed choices.
By ensuring strict adherence to these regulations, SEBI plays a vital role
in fostering a fair and trustworthy mutual fund industry in India,
safeguarding investor interests, and promoting ethical practices across the
industry.

22
2.1.2 Reserve Bank of India (RBI) Regulatory Framework and
Governance of Mutual
While SEBI is the primary regulator for mutual funds in India, the Reserve Funds in India
Bank of India (RBI) also plays a critical role in maintaining stability and
providing oversight in certain areas of the mutual fund industry, especially
where banks and foreign investments are involved.
 Banking Regulations: Regulates banks that offer mutual fund
products and monitors their role in promoting or distributing mutual
funds.
 Foreign Exchange Management: Regulates mutual funds' exposure
to international assets, guiding foreign investments and remittances for
fund managers.
 Liquidity Support: Provides liquidity facilities to mutual funds,
especially during times of financial stress, to stabilize markets.

1. Banking Regulations and Supervision

 Banks as Distributors: RBI oversees the role of banks that act as
distributors or sponsors of mutual fund schemes. Banks must comply
with RBI's guidelines to ensure fair practices in distributing mutual
fund products.
 Bank-Owned Asset Management Companies (AMCs): For banks
that own or sponsor mutual fund AMCs, RBI ensures compliance with
banking regulations to prevent conflicts of interest and protect
customer deposits.
 Credit and Exposure Limits: RBI mandates specific credit exposure
norms to ensure that banks avoid excessive exposure to mutual funds
and related instruments, reducing risk in the financial system.

2. Foreign Exchange Management

 Regulation of Foreign Investments: RBI regulates foreign exchange
transactions for mutual funds investing abroad, managing permissible
investment limits for overseas assets and preventing over-exposure to
foreign market risks.
 FEMA Compliance: Through the Foreign Exchange Management Act
(FEMA), RBI regulates cross-border transactions and remittances by
mutual funds to maintain a stable balance of payments and protect
against excessive foreign currency risks.

3. Liquidity Management
 Providing Liquidity Support: During times of financial stress or
liquidity crises, such as sudden redemption pressures, RBI may offer
short-term liquidity support to mutual funds. This helps maintain
stability in the financial market and prevents widespread panic.

23
Mutual Fund Management  Repo and Reverse Repo Facility: RBI may allow mutual funds to
and Wealth Management participate in its repo and reverse repo operations under specific
conditions, helping mutual funds manage short-term liquidity needs
effectively.

4. Systemic Risk Monitoring

 Financial Stability Oversight: RBI monitors the mutual fund sector's
exposure to different asset classes (like commercial paper, corporate
bonds, etc.) to assess the potential for systemic risk. It identifies
sectors that might cause vulnerabilities, especially for debt mutual
funds.
 Cooperation with SEBI: RBI coordinates closely with SEBI to
manage systemic risks, particularly for debt mutual funds and money
market mutual funds, which could affect the overall financial stability
if there are defaults or high redemption volumes.

5. Guidelines for Investment and Borrowing Limits

 Exposure Limits: RBI enforces exposure limits for mutual funds
investing in banking or financial services companies to prevent undue
concentration of investments in specific sectors.
 Borrowing Norms: Mutual funds are allowed to borrow up to a
certain extent under RBI guidelines, especially in cases where they
face redemption pressures. This helps mutual funds maintain liquidity
without destabilizing the fund.

6. Custodians and Settlement Processes

 Regulation of Custodians: RBI regulates custodians who handle the
securities on behalf of mutual funds, ensuring that mutual funds’ assets
are securely managed and settlement processes are transparent and
secure.
 Efficient Payment and Settlement Systems: By maintaining robust
and efficient payment and settlement systems, RBI ensures timely and
secure transactions for mutual funds, enhancing investor confidence in
the sector.

7. Monitoring Non-Banking Financial Companies (NBFCs)

 Regulating NBFC Participation in Mutual Funds: RBI regulates
NBFCs that invest in or sponsor mutual fund schemes, ensuring these
entities follow sound financial practices and maintain adequate
liquidity to meet their obligations.

RBI's Impact on Mutual Fund Industry Stability

RBI’s regulatory functions in the mutual fund sector are crucial to
maintaining systemic stability, especially in the areas of foreign
investment, liquidity support, and banking oversight. By setting guidelines
and collaborating with SEBI, RBI helps ensure that mutual funds operate
24
within a stable and well-regulated financial environment, ultimately Regulatory Framework and
protecting investors and supporting the integrity of India’s financial Governance of Mutual
markets. Funds in India

2.1.3 ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

The Association of Mutual Funds in India (AMFI) is a self-regulatory
organization (SRO) for the mutual fund industry, formed in 1995. While it
does not have the statutory powers of SEBI, AMFI plays a vital role in
promoting ethical practices, educating investors, and fostering the healthy
growth of the mutual fund industry.
 Industry Body: AMFI is a self-regulatory organization (SRO)
promoting ethical practices among mutual fund companies.
 Code of Conduct: Sets a code of conduct and ethical guidelines for
fund managers and distributors, promoting best practices in marketing
and sales.
 Investor Education: Engages in awareness programs to enhance
investor understanding of mutual funds.
 Dispute Resolution: Facilitates a grievance redressal process, acting
as a mediator between investors and mutual fund companies.

1. Industry Representation and Self-Regulation

 Industry Voice: AMFI represents the mutual fund industry and works
closely with SEBI, the Ministry of Finance, and other regulators to
ensure that the industry's interests are considered in policy-making.
 Code of Conduct: AMFI has established a Code of Ethics for all its
member asset management companies (AMCs) and other industry
participants, which outlines ethical sales practices, investor
transparency, and guidelines for fair marketing practices.

2. Investor Education and Awareness

 Campaigns for Financial Literacy: AMFI runs educational
campaigns to improve investor understanding of mutual funds, the
benefits of long-term investing, and the risks involved.
 Investor Awareness Programs: Conducts workshops, seminars, and
outreach programs to promote financial literacy, helping investors
make informed decisions.
 Promotion of Mutual Funds as an Investment Avenue: AMFI helps
increase mutual fund adoption by educating the public on the
advantages of mutual funds, reducing reliance on unregulated
investment options.

25
Mutual Fund Management 3. Grievance Redressal Mechanism
and Wealth Management
 Investor Complaint Redressal: AMFI provides an online grievance
redressal mechanism, enabling investors to lodge complaints against
AMCs or distributors.
 Mediation Role: AMFI acts as an intermediary, working with SEBI
and fund houses to resolve investor grievances swiftly and effectively.
 Ensuring Fair Practices: Ensures that AMCs follow fair practices
when handling complaints, thereby building investor trust in the
mutual fund industry.

4. Setting and Enforcing Standards for Distributors

 Distributor Certification and Registration: AMFI certifies and
registers mutual fund distributors through the AMFI Registered
Mutual Fund Advisors (ARMFA) certification, ensuring that only
qualified advisors serve investors.
 Distributor Code of Conduct: Enforces a code of conduct for
distributors, ensuring that they provide accurate, unbiased information
to investors and refrain from mis-selling.
 Training and Development Programs: Offers continuous training
and development for distributors to ensure they stay updated with
industry trends and regulatory requirements.
5. Mutual Fund Data and Industry Reports
 Industry Statistics and Analytics: AMFI publishes regular reports on
mutual fund industry performance, including fund inflows, assets
under management (AUM), and sector allocation data.
 Transparency and Investor Information: These data reports provide
investors and analysts with insights into industry trends, helping with
decision-making and enhancing industry transparency.

6. Regulatory Support and Collaboration with SEBI

 Assistance to SEBI: AMFI works closely with SEBI to ensure
compliance with regulatory guidelines and provides inputs on new
policy initiatives that affect mutual funds.
 Implementation of SEBI Guidelines: Assists in implementing
SEBI’s mutual fund regulations across the industry, helping fund
houses align with changes in the regulatory landscape.
 Collaborative Oversight: AMFI’s cooperation with SEBI ensures that
the mutual fund industry follows best practices in governance,
operational transparency, and investor protection.

26
7. Prevention of Malpractices Regulatory Framework and
Governance of Mutual
 Addressing Malpractices and Mis-selling: AMFI actively works to Funds in India
reduce malpractices, such as mis-selling or providing misleading
information, by enforcing a code of conduct among AMCs and
distributors.
 Ethics and Compliance Initiatives: AMFI promotes ethical sales
practices and fosters an environment of accountability among industry
participants.

8. Advocacy for the Mutual Fund Industry

 Policy Suggestions: AMFI provides input on regulatory and policy
matters affecting mutual funds, ensuring that industry-specific
concerns are represented.
 Promoting Mutual Fund-friendly Policies: By advocating policies
that benefit investors and fund houses, AMFI aims to create a
regulatory environment conducive to growth and investor trust.

Impact of AMFI’s Role on the Mutual Fund Industry

AMFI’s role as a self-regulatory organization is instrumental in fostering
transparency, accountability, and ethical standards within the mutual fund
industry. By promoting investor education, facilitating grievance redressal,
and setting guidelines for distributors, AMFI helps create a safe and fair
environment for mutual fund investors, supporting the overall stability and
growth of the mutual fund sector in India.

2.1.4 Ministry of Finance

The Ministry of Finance (MoF) in India plays a crucial role in shaping the
overall financial and regulatory framework under which mutual funds
operate. While SEBI and other regulatory bodies are directly involved in
the day-to-day regulation of mutual funds, the Ministry of Finance
influences key policies, financial strategies, and regulatory changes that
impact the industry.
 Policy and Regulation: Sets broad policy frameworks and guidelines
that shape the mutual fund industry.
 Taxation Policies: Defines taxation policies related to mutual funds,
including tax benefits on certain funds, influencing investor behavior.
 Financial Stability: Coordinates with other regulatory bodies like
SEBI and RBI to ensure financial stability and promote investor
confidence.

1. Policy Formulation and Financial Regulation

 Setting Financial Policies: The Ministry of Finance formulates
policies that shape the overall functioning of the financial markets,

27
Mutual Fund Management including mutual funds. These policies often focus on promoting
and Wealth Management market growth, investor protection, and financial stability.
 Budget and Tax Policies: The MoF plays a critical role in
determining tax policies for mutual funds, such as tax exemptions on
specific types of mutual funds (e.g., Equity Linked Savings Schemes -
ELSS) and capital gains tax on mutual fund investments.
 Legislative Oversight: The MoF influences key financial legislation,
which may include laws impacting mutual fund taxation, compliance,
and investor protection.

2. Regulatory Coordination
 Collaboration with SEBI: The Ministry of Finance works closely
with SEBI to formulate and revise the regulatory framework governing
mutual funds. This collaboration ensures that the regulations align with
national financial goals, investor protection, and economic growth.
 Supervision of SEBI: While SEBI is responsible for the day-to-day
regulation of mutual funds, the MoF has oversight powers to ensure
that SEBI's actions are in line with broader government objectives.
The MoF can provide guidance or introduce new regulations that
influence SEBI’s decisions.

3. Taxation Policies and Incentives

 Taxation of Mutual Fund Investments: The Ministry of Finance
decides the tax treatment of mutual fund returns, including the tax
rates on dividends, capital gains, and interest income. Policies such as
the introduction of tax exemptions or incentives (e.g., tax breaks for
ELSS) encourage investment in mutual funds.
 GST on Mutual Fund Services: The Ministry also plays a role in
determining whether services provided by mutual fund houses (e.g.,
fund management, advisory services) are subject to Goods and
Services Tax (GST), impacting the overall cost structure of mutual
funds.

4. Investor Protection Framework

 Policy for Investor Safety: The Ministry of Finance contributes to
building a legal framework for investor protection in mutual funds. It
ensures that regulations around investor education, fair practices, and
redressal mechanisms are robust and aligned with global best
practices.
 Financial Literacy Campaigns: Through collaboration with
regulatory agencies like SEBI and AMFI, the MoF supports initiatives
aimed at improving financial literacy and investor awareness,
especially regarding mutual fund investments.

28
5. Promoting Financial Inclusion Regulatory Framework and
Governance of Mutual
 Encouraging Broader Access: The Ministry of Finance plays a role Funds in India
in promoting the penetration of mutual funds in underserved and rural
areas. It encourages mutual fund companies to offer low-cost,
accessible products to foster financial inclusion.
 Incentives for Retail Investors: Policies introduced by the Ministry,
such as tax incentives or encouragement for mutual funds to design
products tailored to retail investors, help expand mutual fund
participation across different socio-economic groups.

6. Structural Reforms and Industry Development

 Reforming the Financial Sector: The Ministry of Finance helps lead
efforts for ongoing reforms in India’s financial markets, which directly
affect mutual funds. For example, it has supported the development of
a more transparent and efficient capital market, which provides mutual
funds with better investment opportunities.
 Capital Market Development: The MoF also plays a role in the
evolution of India’s capital markets, indirectly benefiting mutual funds
by ensuring that the markets where mutual funds invest are liquid,
well-regulated, and efficient.

7. Regulatory and Legislative Initiatives

 Legal Framework for Mutual Funds: The Ministry of Finance,
through the Securities Contracts (Regulation) Act (SCRA) and other
financial legislation, sets the foundation for mutual fund regulations.
This includes framing policies related to mutual fund structures,
investment norms, and governance.
 New Financial Products and Schemes: The Ministry of Finance is
involved in approving new financial products or schemes that may be
introduced by mutual funds, ensuring that these products align with
national objectives like economic growth and inclusion.

8. International Cooperation and Policy Alignment

 Global Standards Compliance: The Ministry of Finance ensures that
India’s mutual fund industry aligns with global regulatory standards
and practices. This includes complying with International Organization
of Securities Commissions (IOSCO) guidelines, ensuring that India’s
mutual fund market is globally competitive and trustworthy.
 Cross-border Investment Policies: It also plays a role in managing
policies related to cross-border mutual fund investments, which allows
foreign investments into Indian mutual funds and vice versa,
strengthening India’s integration with global financial markets.

29
Mutual Fund Management Impact of the Ministry of Finance's Role on Mutual Funds
and Wealth Management
The Ministry of Finance’s role is foundational in shaping the regulatory
and policy environment in which mutual funds operate in India. By
influencing taxation, financial policies, investor protection laws, and
industry reforms, the Ministry ensures the smooth functioning and growth
of the mutual fund industry. It works to enhance investor confidence,
encourage wider participation, and create an ecosystem that supports the
long-term success and stability of mutual funds in the Indian market.
2.1.5 Company Law Board (CLB) & Ministry of Corporate Affairs
(MCA)
The Company Law Board (CLB) and the Ministry of Corporate
Affairs (MCA) play important roles in overseeing the legal and corporate
governance framework within which mutual funds operate in India. While
SEBI regulates mutual fund operations, the CLB and MCA ensure that
mutual fund companies follow corporate governance norms, comply with
company law provisions, and operate in a transparent and ethical manner.
 Legal Oversight: Regulates mutual fund companies under company
law, ensuring legal compliance and fair practices.
 Corporate Governance: Enforces corporate governance standards for
mutual fund companies, including transparency and ethical
management.
 Registrar of Companies (ROC): Responsible for the registration and
compliance monitoring of mutual fund companies, ensuring lawful
operation.

Role of the Ministry of Corporate Affairs (MCA)

1. Legal and Corporate Governance Framework
 Corporate Structure of Mutual Funds: The Ministry of Corporate
Affairs, through its regulations, oversees the legal structure and
functioning of mutual fund companies, ensuring that mutual funds
operate as corporate entities in accordance with the Companies Act,
2013.
 Regulation of AMCs: Asset Management Companies (AMCs) that
manage mutual funds are registered as corporate entities under the
Companies Act. The MCA ensures that these entities comply with
legal requirements, including those related to corporate governance,
financial disclosures, and investor protection.
 Appointment of Directors: The MCA governs the process of
appointing directors to mutual fund companies, including ensuring that
the board composition meets the regulatory standards set by SEBI and
other authorities.

30
 Compliance with Corporate Governance: MCA ensures that mutual Regulatory Framework and
fund companies adhere to corporate governance norms, which include Governance of Mutual
maintaining transparency, safeguarding investor interests, and ensuring Funds in India
accountability of fund managers and trustees.

2. Financial Disclosures and Reporting

 Regulation of Financial Statements: The MCA mandates mutual
fund companies to prepare and submit their financial statements in
compliance with the Companies Act, ensuring transparency in their
operations and disclosures.
 Auditor Oversight: The MCA monitors the appointment and
functioning of external auditors for mutual fund companies, ensuring
that financial statements are independently verified and comply with
accounting norms.

3. Investor Protection
 Regulation of Shareholders’ Rights: The MCA ensures that
shareholders of mutual fund companies are provided with adequate
protection and that their rights are not violated, especially in the case
of changes in the structure or operations of mutual funds.
 Regulation of Related Party Transactions: The Ministry also
regulates transactions between mutual fund companies and their
related parties, ensuring that such transactions do not negatively affect
investor interests.

4. Liquidation and Restructuring

 Winding-Up Procedures: In the event of the winding-up of a mutual
fund, the MCA ensures that the mutual fund follows the proper legal
procedures for liquidation, as stipulated by the Companies Act. This
protects investors’ assets and ensures that the mutual fund's liabilities
are settled fairly.
 Reorganization or Merger: If a mutual fund undergoes
reorganization or merger with another company, the MCA ensures that
such processes are carried out in accordance with legal procedures and
that investor interests are not compromised.

Role of the Company Law Board (CLB)

The Company Law Board (CLB), which was an adjudicatory body under
the Ministry of Corporate Affairs, was replaced by the National
Company Law Tribunal (NCLT) in 2016, but its functions are still
relevant through the NCLT. The CLB had a role in resolving corporate
disputes and overseeing certain governance matters in mutual funds, and
now these roles are carried out by the NCLT.

31
Mutual Fund Management 1. Dispute Resolution and Legal Oversight
and Wealth Management
 Dispute Resolution: The CLB (and now NCLT) had the power to
resolve disputes related to the management of mutual fund companies.
This included disputes between mutual fund companies, shareholders,
and other stakeholders.
 Legal Oversight on Corporate Matters: The CLB helped in ensuring
that mutual fund companies adhered to the provisions of the
Companies Act and other related regulations. It was involved in
resolving cases of mismanagement or violations of corporate
governance norms within mutual fund companies.
 Investor Grievances: The CLB acted as an appellate body to address
complaints and grievances of investors related to the corporate
practices of mutual funds, ensuring that the investors’ rights were
upheld.

2. Protection of Minority Shareholders

 Ensuring Fair Practices: The CLB (now NCLT) ensured that mutual
fund companies did not engage in unfair or oppressive conduct,
especially when it came to decisions that could disproportionately
affect minority shareholders, such as mergers or acquisitions.
 Prevention of Mismanagement: The CLB had the authority to take
actions against mutual fund companies if there were any cases of
mismanagement or fraud that threatened the interests of the investors
or violated corporate laws.

3. Approval of Corporate Decisions

 Special Resolution for Changes: For significant corporate actions
(such as changes to the mutual fund's structure, mergers, or
amendments to the articles of association), mutual funds had to obtain
approval from the CLB (now NCLT) to ensure that such decisions
were in the best interests of investors.
 Corporate Filings: The CLB was responsible for adjudicating on
legal issues related to the filings made by mutual fund companies with
the Ministry of Corporate Affairs, ensuring compliance with statutory
regulations.

Key Functions of MCA & CLB (Now NCLT) for Mutual Funds
1. Corporate Governance Compliance: Ensuring mutual fund
companies comply with governance rules, financial disclosures, and
regulations under the Companies Act.
2. Investor Protection: Safeguarding the interests of shareholders and
investors through legal frameworks that protect against unfair practices
and corporate mismanagement.

32
3. Corporate Dispute Resolution: Overseeing and resolving disputes Regulatory Framework and
within mutual fund companies and ensuring transparent decision- Governance of Mutual
making. Funds in India

4. Legal Framework for Operational Changes: Overseeing major

operational decisions like mergers, acquisitions, or changes in the
structure of mutual fund companies to protect investor interests.

Conclusion
The Ministry of Corporate Affairs (MCA) and the Company Law Board
(CLB) (now replaced by the NCLT) play a significant role in ensuring that
mutual funds in India operate within a robust legal and regulatory
framework. They are involved in ensuring that mutual fund companies
adhere to corporate governance norms, maintain transparency, and protect
the rights of investors. Through their oversight, they contribute to the
integrity and stability of the mutual fund industry in India, fostering
investor confidence and supporting sustainable growth.

2.1.6 Self-Regulatory Organizations (SROs)

 Industry Standards: Work to uphold ethical and operational
standards within the mutual fund industry, often setting guidelines for
fair marketing and investor interaction.
 Compliance Support: Assist in educating mutual fund companies on
regulatory compliance, ensuring industry-wide adherence to legal
standards.

Key SROs in the Indian Mutual Fund Industry

1. AMFI (Association of Mutual Funds in India) (Discussed earlier)
2. BSE (Bombay Stock Exchange) and NSE (National Stock Exchange)
3. IBA (Indian Banks' Association)

Role and Functions of SROs in the Mutual Fund Industry

1. Setting Industry Standards
 AMFI's Role: The Association of Mutual Funds in India (AMFI) is
the most prominent SRO in the mutual fund sector. It is a self-
regulatory organization that represents the interests of asset
management companies (AMCs) in India. AMFI helps establish
industry standards, such as best practices in fund management,
investor communication, and marketing. It works with SEBI to align
its guidelines with regulatory requirements and promote ethical
business practices within the mutual fund industry.
 Code of Conduct: AMFI has developed a Code of Conduct for its
members, which includes guidelines on ethical sales practices,
transparency in fund management, and the treatment of investors. This
code is binding on all AMCs and their distributors.
33
Mutual Fund Management 2. Training and Certification
and Wealth Management
 Certification Programs for Distributors: AMFI plays a key role in
promoting the professionalization of mutual fund distribution by
offering certification programs for mutual fund distributors, known as
the AMFI Registration Process (ARP). This certification ensures that
distributors are well-equipped to provide financial advice, ensuring
they follow ethical practices and possess a good understanding of
financial products.
 Training Programs: AMFI organizes training and awareness
programs for distributors, financial advisors, and other stakeholders in
the mutual fund ecosystem, to ensure that they are up-to-date with
regulatory changes and industry trends.

3. Investor Protection
 Addressing Investor Grievances: One of the key roles of SROs like
AMFI is to ensure that investor grievances are addressed promptly.
AMFI acts as an intermediary between investors and AMCs, resolving
complaints regarding mis-selling of mutual fund products, non-
disclosure of fees, or unethical conduct by distributors.
 Guidelines for Fair Practices: SROs issue guidelines that ensure
mutual fund products are marketed transparently and accurately. For
example, they issue guidelines on the disclosures that must be made by
AMCs in their advertisements, ensuring that investors are not misled
by exaggerated claims or unclear information.

4. Enforcing Ethical Conduct

 Disciplinary Actions: SROs like AMFI can take disciplinary action
against members who do not comply with the industry’s standards and
guidelines. They have the power to issue warnings, impose fines, or
even expel members who fail to adhere to the code of conduct or other
regulations.
 Monitoring Market Practices: SROs continuously monitor the
practices of AMCs, distributors, and other market participants to
ensure that they comply with ethical standards and do not engage in
practices that could harm investors or distort the market.

5. Market Surveillance
 Monitoring Market Activities: SROs help monitor the activities of
mutual fund companies, ensuring that their operations align with the
regulatory framework. While SEBI primarily handles enforcement of
market regulations, SROs play a complementary role by focusing on
the conduct of their members.
 Prevention of Malpractices: SROs help detect and prevent
malpractices such as insider trading, misrepresentation of fund
performance, or the mismanagement of investors' funds. They often
34
 collaborate with SEBI and other authorities to investigate such Regulatory Framework and
incidents. Governance of Mutual
Funds in India
6. Promoting Transparency
 Reporting Standards: SROs ensure that mutual fund companies
follow proper reporting standards, including clear and transparent
communication of fund performance, charges, and investment risks.
This helps investors make informed decisions and increases trust in the
mutual fund industry.
 Public Disclosure: SROs like AMFI ensure that AMCs disclose their
financials, operational details, and risk factors in a transparent manner.
This includes regular updates on the Net Asset Value (NAV) of the
funds, the performance of various schemes, and the composition of
their portfolios.

7. Collaboration with Regulatory Authorities

 Liaison with SEBI: SROs collaborate with SEBI to enforce
compliance with regulations. They act as a bridge between SEBI and
the mutual fund industry, helping to implement regulatory reforms and
ensuring that industry participants follow the rules.
 Feedback on Regulatory Developments: SROs provide feedback to
SEBI on regulatory developments or proposed changes that could
affect the mutual fund industry. This ensures that the perspectives of
mutual fund companies are taken into account when new regulations
are introduced.

Benefits of SROs in Mutual Fund Regulation

1. Self-Regulation Promotes Accountability: By establishing a strong
framework for self-regulation, SROs ensure that mutual fund
companies operate with integrity and accountability, reducing the risk
of misconduct or fraud.
2. Investor Confidence: With a strong SRO presence, investors are more
likely to trust the mutual fund industry. Transparency in operations,
adherence to ethical standards, and the resolution of grievances foster
confidence in the market.
3. Cost-Effective Regulatory Oversight: SROs provide a cost-effective
way to implement and enforce industry standards, reducing the burden
on government regulators like SEBI while still ensuring high levels of
compliance and transparency.
4. Faster Dispute Resolution: SROs act as intermediaries to resolve
disputes between investors and mutual fund companies, providing
quicker resolutions compared to more formal regulatory processes.
5. Industry Cohesion: SROs help unify the industry by creating a
common platform for all market participants to discuss issues, share
35
Mutual Fund Management knowledge, and work together to address challenges facing the mutual
and Wealth Management fund industry.

Conclusion
Self-Regulatory Organizations (SROs) like AMFI play a crucial role in the
mutual fund industry by setting industry standards, providing
certifications, protecting investors, and enforcing ethical conduct. They
work closely with SEBI and other regulatory bodies to ensure that the
mutual fund industry remains transparent, fair, and accountable, helping to
foster trust and growth in the sector. SROs serve as a vital link between
regulators and market participants, ensuring that mutual funds operate in
the best interests of investors while maintaining high standards of
corporate governance.
4o mini
2.1.7 Role of the Department of Company Affairs (DCA) in the
Regulation of Mutual Funds in India
The Department of Company Affairs (DCA), now known as the Ministry
of Corporate Affairs (MCA), plays an integral role in the corporate
governance and regulatory framework that governs companies, including
Asset Management Companies (AMCs) managing mutual funds in India.
While the primary regulation of mutual funds falls under SEBI, the
DCA/MCA focuses on the broader corporate governance aspects, ensuring
that mutual fund companies and their structures comply with company law
and corporate best practices.
Key Roles of the Department of Company Affairs (DCA) in Mutual
Fund Regulation
1. Corporate Structure and Legal Framework
 Formation of Asset Management Companies (AMCs): The DCA
(now MCA) oversees the registration, incorporation, and regulation of
AMCs under the Companies Act, 2013. Mutual fund companies must
comply with the provisions of this Act, which governs their formation,
operations, and dissolution.
 Corporate Governance: Ensures that mutual fund companies
maintain good governance practices, including maintaining
transparency, fairness, and accountability in their management and
operations.

2. Regulation of Companies Act Compliance

 Compliance with Corporate Laws: Mutual fund companies must
comply with the provisions of the Companies Act, which includes
rules on financial reporting, corporate governance, shareholder rights,
and dispute resolution. The DCA ensured that AMCs adhere to these
legal norms, protecting investor interests.

36
 Filing and Disclosure Requirements: The DCA/MCA oversees Regulatory Framework and
mandatory filings by mutual fund companies, such as their annual Governance of Mutual
returns, financial statements, and other required disclosures, ensuring Funds in India
transparency in their operations.

3. Supervision of Corporate Governance

 Board Composition and Oversight: The DCA ensures that mutual
fund companies maintain proper corporate governance structures, such
as the appointment of independent directors to the boards of AMCs,
ensuring that decisions are made in the best interest of investors.
 Protecting Minority Shareholders: Through the provisions of the
Companies Act, the DCA ensures that minority shareholders are
protected from any oppressive or unfair practices, especially in cases
of corporate changes, mergers, or acquisitions.

4. Investor Protection Mechanisms

 Dispute Resolution: The DCA (through its powers now transferred to
MCA and NCLT) was previously involved in resolving corporate
disputes that could affect mutual fund investors. It ensured that
investors' grievances regarding corporate practices in mutual fund
companies were addressed appropriately.
 Regulation of Related Party Transactions: The DCA ensures that
mutual fund companies engage in fair and transparent transactions,
particularly with related parties, to prevent conflicts of interest and
ensure that the interests of investors are not compromised.

5. Promotion of Fair Practices and Ethical Standards

 Ethical Standards in Fund Management: Through its oversight of
corporate governance norms, the DCA ensured that mutual fund
companies follow ethical standards in their management of funds. This
includes proper disclosure of investment strategies, risks, and fees
associated with mutual fund products.
 Prevention of Fraud: Ensures that mutual fund companies operate in
a manner that is free from fraud or illegal activities that could affect
investor interests, maintaining the integrity of the mutual fund
industry.

6. Implementation of Changes in Corporate Laws

 Amendments to the Companies Act: The DCA/MCA is responsible
for making amendments to the Companies Act to incorporate changes
that affect mutual fund companies, such as changes in compliance
norms, disclosure requirements, or governance structures.
 Aligning with SEBI Regulations: The DCA ensures that the
regulatory framework for mutual funds aligns with the policies set by

37
Mutual Fund Management SEBI. While SEBI focuses on market regulations, the DCA focuses on
and Wealth Management company-specific laws that govern mutual fund operations.

7. Corporate Financial Reporting and Auditing

 Financial Disclosures: The DCA ensures that mutual fund companies
comply with legal requirements for financial disclosures, ensuring that
investors have access to accurate and timely information regarding the
financial health of the mutual fund.
 External Auditors: Ensures that mutual fund companies appoint
independent auditors to verify the accuracy of their financial
statements, maintaining investor trust and ensuring compliance with
accounting standards.

Impact of the DCA/MCA’s Role in Mutual Fund Regulation

The Department of Company Affairs (DCA), now under the Ministry
of Corporate Affairs (MCA), contributes significantly to the regulation
of mutual fund companies by ensuring compliance with the Companies
Act, promoting transparency, and safeguarding investor interests. While
SEBI handles the market-specific regulations, the DCA/MCA's role is
critical in ensuring that mutual fund companies adhere to corporate
governance standards, maintain ethical practices, and provide investors
with the protection they need. By overseeing the legal framework,
corporate governance, and dispute resolution processes, the DCA/MCA
helps ensure the stability, integrity, and growth of the mutual fund
industry in India.
2.1.8 Role of the Registrar of Companies (ROC) in Mutual Fund
Regulation in India
The Registrar of Companies (ROC), operating under the Ministry of
Corporate Affairs (MCA), plays a vital role in the corporate governance
and regulatory framework within which mutual fund companies, including
Asset Management Companies (AMCs), are incorporated and regulated
in India. While SEBI is responsible for regulating the mutual fund
industry from a market perspective, the ROC ensures that mutual fund
companies, as corporate entities, comply with the Companies Act, 2013,
and other related provisions of corporate law.
Key Functions of the Registrar of Companies (ROC) in the Mutual
Fund Sector
1. Incorporation of Mutual Fund Companies
 Registration of AMCs: The ROC is responsible for the incorporation
of Asset Management Companies (AMCs) that manage mutual fund
schemes. AMCs are incorporated as companies under the Companies
Act, 2013, and are required to submit necessary documents to the
ROC to receive legal recognition.

38
 Legal Structure of Mutual Funds: The ROC ensures that mutual Regulatory Framework and
fund companies (AMCs) are properly structured according to legal Governance of Mutual
requirements, and that they are registered as legal entities under Indian Funds in India
corporate law, following the provisions of the Companies Act, 2013.

2. Monitoring Compliance with the Companies Act

 Regulation of Corporate Governance: The ROC ensures that mutual
fund companies adhere to corporate governance standards set under
the Companies Act, 2013. This includes ensuring that companies
maintain a proper board of directors, hold Annual General Meetings
(AGMs), and file necessary returns with the ROC.
 Filing Requirements: AMCs are required to file key documents such
as annual financial statements, auditor reports, and shareholder
resolutions with the ROC. The ROC monitors these filings to ensure
compliance with corporate laws, ensuring transparency and
accountability within the mutual fund companies.

3. Corporate Financial Reporting and Auditing

 Submission of Financial Statements: Mutual fund companies are
required to file their annual balance sheets, profit and loss accounts,
and auditor reports with the ROC. These reports must be prepared in
accordance with the accounting standards mandated by the
Companies Act, ensuring that investors have access to clear and
accurate financial data.
 Auditor Appointment: The ROC oversees the process of appointing
statutory auditors for mutual fund companies. It ensures that the
auditors are independent and that the financial statements accurately
reflect the mutual fund’s financial position.

4. Regulating Shareholder Relations

 Shareholder Rights: The ROC ensures that mutual fund companies
uphold shareholder rights, including voting rights, rights to attend
AGMs, and rights to receive information about the company's
financial performance and operations.
 Changes in Shareholding Structure: Any significant changes to the
mutual fund's shareholding structure, including mergers, acquisitions,
or changes in ownership, must be reported to the ROC. The ROC
reviews these changes to ensure compliance with corporate
governance norms and the protection of investor interests.

5. Amendments to Corporate Documents

 Alterations in Memorandum or Articles of Association: If a mutual
fund company wishes to amend its Memorandum of Association
(MOA) or Articles of Association (AOA) to reflect changes in
business operations, the ROC oversees and approves such changes to
ensure they align with corporate law.
39
Mutual Fund Management  Regulation of Corporate Resolutions: The ROC monitors resolutions
and Wealth Management passed by mutual fund companies, including those related to the
issuance of shares, changes in the capital structure, and other
significant corporate actions, ensuring that they comply with legal
provisions.

6. Winding-up and Liquidation of Mutual Fund Companies

 Insolvency and Liquidation: In the event that a mutual fund company
faces financial distress and is unable to continue its operations, the
ROC plays a role in overseeing the winding-up process under the
Companies Act, 2013. This process ensures that the assets of the
mutual fund are liquidated in an orderly manner and that investor
interests are protected during the liquidation process.
 Regulation of Mergers and Amalgamations: If mutual funds
undergo mergers, demergers, or restructuring, the ROC ensures that
these processes are carried out in accordance with legal requirements,
safeguarding the interests of investors and stakeholders.

7. Investor Protection
 Corporate Governance Oversight: By ensuring mutual fund
companies follow corporate governance rules, the ROC indirectly
protects the interests of investors. It ensures that the directors and key
management personnel of mutual fund companies operate with due
diligence and in good faith.
 Resolution of Shareholder Disputes: The ROC plays a role in
resolving disputes between mutual fund companies and shareholders.
This may involve issues related to shareholder rights, board
appointments, or changes in corporate structure.

8. Ensuring Compliance with Statutory Provisions

 Regulation of Dividend Distribution: Mutual fund companies must
comply with regulations regarding the distribution of dividends to
shareholders. The ROC ensures that these distributions are made in
accordance with the provisions of the Companies Act, ensuring that
mutual fund companies maintain transparency in their dealings.
 Filing of Annual Returns: Mutual fund companies are required to file
their annual returns with the ROC, detailing financial performance,
shareholding patterns, and other corporate activities. The ROC ensures
that these filings are accurate and timely.

Conclusion
The Registrar of Companies (ROC) plays an essential role in regulating
mutual fund companies in India by ensuring compliance with the
Companies Act, 2013, and other corporate governance norms. While the
Securities and Exchange Board of India (SEBI) focuses on market
conduct and regulations, the ROC oversees the legal and corporate
40
governance aspects of mutual fund companies, ensuring that they operate Regulatory Framework and
as compliant corporate entities. Through its regulatory and supervisory Governance of Mutual
functions, the ROC ensures transparency, accountability, and the Funds in India
protection of investor interests in the mutual fund sector.

2.2 MUTUAL FUNDS GUIDELINES

MF Guidelines refer to a set of rules, regulations, and standards issued by
regulatory bodies like SEBI (Securities and Exchange Board of India),
AMFI (Association of Mutual Funds in India), and other financial
authorities that govern the functioning, operations, and management of
mutual funds (MFs) in India. These guidelines aim to ensure that mutual
funds operate in a fair, transparent, and investor-friendly manner,
promoting trust and confidence in the financial markets.

2.2.1 Key Aspects Covered by MF Guidelines:

1. Regulatory Compliance: Guidelines ensure mutual funds adhere to
legal and regulatory standards set by authorities like SEBI, ensuring
that funds are managed in the best interest of investors.
2. Investor Protection: Guidelines provide rules to safeguard investor
interests, such as ensuring transparency in scheme offerings, proper
disclosure of risks, and the handling of complaints.
3. Advertising and Marketing: Mutual fund advertisements must
comply with specific rules to avoid misleading claims, and to disclose
the risks involved with investments clearly.
4. Accounting and Reporting: Mutual funds must maintain proper
financial records, calculate Net Asset Values (NAVs) transparently,
and disclose key financial information, including performance reports.
5. Taxation Norms: The guidelines provide clarity on the taxation of
mutual fund schemes and their investors, including rules around
capital gains, dividend distribution, and other tax-related matters.
6. Valuation of Assets: Mutual funds must follow specific rules for
valuing assets within their portfolio (e.g., equities, bonds, and other
securities) to ensure fair and consistent pricing for investors.
7. Investor Education: Guidelines also include provisions related to
educating investors about mutual funds, their risk profiles, and the
steps involved in purchasing and redeeming units.
8. Operational Guidelines: These cover how mutual funds should be
structured, the role of various parties like the Asset Management
Company (AMC), Trustee, and Registrar and Transfer Agent
(RTA), and their duties towards investors.
Overall, MF Guidelines ensure that mutual funds operate in a structured,
ethical, and transparent manner, adhering to legal norms and protecting the
interests of investors.
41
Mutual Fund Management 2.2.2 MF Guidelines on Advertisement
and Wealth Management
Mutual funds must adhere to specific advertising guidelines to ensure that
they promote their products transparently, without misleading investors.
The primary objective is to protect investors by promoting accurate and
fair communication regarding mutual fund schemes.

Key Advertisement Guidelines:

 DisclosureRequirements:
All mutual fund advertisements must contain clear and accurate
information about the scheme being promoted. The details must include:
o Scheme Objectives: The primary goals of the fund, such as capital
appreciation, income generation, or a combination of both.
o Risk Factors: Ads must provide clear and conspicuous disclosure
about the risk factors associated with the scheme. For example, in
equity funds, the potential for high volatility should be highlighted.
o Past Performance Disclaimer: Mutual fund advertisements often
mention past performance. However, they must include a disclaimer
that past performance is not indicative of future returns. This is
especially important to avoid misleading investors into believing that
high returns in the past will continue in the future.
 Performance Reporting:
o Returns Disclosure: If an advertisement mentions the past
performance of a mutual fund, it must clearly state how the returns
were calculated (i.e., compounded annual growth rate or annualized
return) and provide data for a significant time period, like 1, 3, 5, or 10
years.
o Comparison: If a mutual fund is compared with other mutual funds or
benchmarks (like market indices), the comparison must be relevant,
accurate, and in line with the mutual fund's objective.
 Risk Disclosure:
o Mutual fund ads must prominently display a statement about the risks
involved, especially when it comes to equity or sectoral schemes,
which can be volatile.
o Example: “Investments in equity funds are subject to market risks.
Please read the offer document carefully.”
 Prohibition of Misleading Claims:
o Ads must not guarantee returns or claim that a fund is “risk-free.” This
is because mutual funds, by nature, involve market risks. Misleading
statements such as "X% guaranteed returns" are prohibited.

42
 SEBI's Role in Advertisement Guidelines: SEBI ensures that mutual Regulatory Framework and
fund advertisements comply with the SEBI (Mutual Fund) Governance of Mutual
Regulations, 1996, and their updates. SEBI enforces transparency and Funds in India
protects investors from potentially harmful advertising practices.

2.2.3 MF Guidelines on Accounting

Mutual funds need to maintain high standards of accounting to ensure
transparency, accuracy, and compliance with legal and regulatory
requirements.

Key Accounting Guidelines:

 Net Asset Value (NAV):
o The Net Asset Value (NAV) represents the per-unit value of a mutual
fund scheme and is used to price the units bought or sold by investors.
o NAV Calculation: NAV is calculated by subtracting the total
liabilities of the fund from the total assets and dividing the result by
the number of outstanding units in the fund.
NAV=Total Assets−LiabilitiesNumber of Outstanding Units\text{NA
V} = \frac{\text{Total Assets} - \text{Liabilities}}{\text{Number of
Outstanding
Units}}NAV=Number of Outstanding UnitsTotal Assets−Liabilities
o NAV is updated at the end of each trading day and published by
mutual fund companies, ensuring that investors know the value of their
investments in real time.
 Expense Ratio:
o The Expense Ratio is the annual fee charged by the AMC to manage
the mutual fund. It covers operational expenses like fund management,
custodial services, and administrative costs.
o The maximum expense ratio for equity-oriented mutual funds is
capped by SEBI, usually at 2.25% of the average daily net assets,
while for debt funds, it can be slightly lower.
o This ratio is disclosed in the Scheme Information Document (SID)
and Key Information Memorandum (KIM).
 Accounting Standards:
o Mutual funds must follow Indian Accounting Standards (Ind AS),
as notified by the Institute of Chartered Accountants of India
(ICAI), ensuring that their financial statements are consistent,
transparent, and accurate.
o This includes ensuring that mutual funds keep accurate records of all
transactions, including purchases, sales, income, and expenses related
to the fund's assets.

43
Mutual Fund Management  Annual Financial Statements:
and Wealth Management
o Every mutual fund is required to prepare annual reports that include
the balance sheet, profit and loss account, and statement of changes in
financial position, in accordance with SEBI regulations.
o These statements must be independently audited to verify that they
comply with accounting standards and that the fund is operating
efficiently.

2.2.4 MF Guidelines on Taxation

Taxation on mutual funds in India is an important aspect of both the
fund’s operations and the investor's returns. Mutual fund schemes are
taxed under the Income Tax Act, 1961, with different tax treatments for
equity and debt funds.

Key Taxation Guidelines for Mutual Funds:

 Capital Gains Tax:
o Short-term Capital Gains (STCG):
 For equity funds, if the units are sold within 3 years, the gains are
classified as short-term and taxed at 15%.
 For debt funds, if sold within 3 years, the gains are taxed at the
investor's applicable income tax slab rate.
o Long-term Capital Gains (LTCG):
 For equity funds, units held for more than 3 years attract LTCG
tax of 10% without the benefit of indexation, if the gain exceeds
1 lakh in a financial year.
 For debt funds, units held for more than 3 years attract 20% tax
with the benefit of indexation. Indexation adjusts the purchase
price with inflation, reducing the taxable amount.
 Dividend Distribution Tax (DDT):
o Mutual funds are required to pay Dividend Distribution Tax (DDT)
on dividends distributed to investors. The tax rate is typically 10% for
equity-oriented funds and 25% for non-equity funds, including debt
funds.
 Taxation on Investors:
o Investors must report their mutual fund investments in their income tax
returns and pay taxes accordingly on interest income, dividends, and
capital gains.
o Tax-Saving Mutual Funds (ELSS): These funds offer tax benefits
under Section 80C of the Income Tax Act, allowing investors to claim
deductions up to 1.5 lakh per year.
44
 SEBI's Role in Taxation: Regulatory Framework and
Governance of Mutual
o SEBI ensures mutual funds comply with tax-related disclosure Funds in India
requirements, ensuring that the tax implications of investment are
clearly communicated to investors in the Scheme Information
Document (SID).

2.2.5 MF Guidelines on Valuation Norms

Valuation of securities and assets in a mutual fund is critical for
calculating the NAV and ensuring that investors get a fair price for their
investments. Mutual fund companies are required to follow specific
valuation norms set by SEBI.

Key Valuation Guidelines:

 Market Valuation:
o Mutual fund companies must value listed securities (equity shares,
debt instruments) at the market price (the last traded price or the
average of the last few prices) for the day.
o In the case of illiquid securities, the last available price or fair value
must be used.
 Valuation of Debt Instruments:
o Debt instruments that are traded infrequently or not at all must be
valued using amortization or a fair value model as per SEBI
guidelines.
o For example, if the debt instrument is a bond, its value is typically
calculated using yield curves or mark-to-market methods.
 Fair Value Pricing:
o Mutual funds must use fair value pricing for assets that are unlisted or
have no trading price. For example, investments in private equity or
unlisted bonds require an independent valuation to ensure they are
priced fairly in the NAV calculation.
 Independent Auditor Review:
o Mutual funds are required to submit their valuation methodology to
auditors to ensure it complies with SEBI's valuation norms and
ensures fair pricing for all investors.

2.2.6 Guidelines to Purchase Mutual Funds

Investing in mutual funds in India is a straightforward process but requires
adherence to specific guidelines and steps to ensure compliance with
regulatory norms.

45
Mutual Fund Management Steps to Invest in Mutual Funds:
and Wealth Management
 KYC (Know Your Customer) Process:
o Before purchasing mutual funds, investors must complete the KYC
process, which involves submitting identity proof (Aadhaar, PAN
card) and address proof (passport, utility bills) to verify the investor's
identity.
o KYC is mandatory for all investors (individuals and entities) as per
SEBI regulations.
 Investment Options:
o Direct Plans: These are available directly through the mutual fund’s
website, AMC branches, or kiosks. Direct plans do not involve any
intermediary and, therefore, have a lower expense ratio than regular
plans.
o Regular Plans: Investors can also invest through financial advisors,
brokers, or distributors. These intermediaries may charge
commissions, which are included in the expense ratio.
 SIP (Systematic Investment Plan):
o SIP allows investors to invest a fixed amount regularly (monthly or
quarterly) in mutual fund schemes. This helps in averaging the cost of
investment over time and reduces the impact of market volatility.
 Minimum Investment Amount:
o Mutual funds typically require a minimum investment amount of
500 for SIPs and 1,000 for lump sum investments in most
schemes.
 Redemption Process:
o Investors can redeem mutual fund units at the prevailing NAV by
submitting a redemption request. This is typically done through the
mutual fund’s website or distributor.
 Investment Considerations:
o Investors should select mutual funds based on their investment
objectives, risk tolerance, and investment horizon.
o Always read the Scheme Information Document (SID) and Key
Information Memorandum (KIM) before investing.

2.2.7 MF guidelines on Investor Protection

Investor protection is one of the key objectives of regulatory frameworks
governing the mutual fund industry. Mutual funds are designed to pool
investments from multiple investors and provide returns based on market
performance, with the risks of these investments being shared across all
46
unit holders. To safeguard the interests of investors, the Securities and Regulatory Framework and
Exchange Board of India (SEBI), AMFI (Association of Mutual Funds Governance of Mutual
in India), and other regulatory bodies have laid down a comprehensive set Funds in India
of guidelines to ensure that mutual fund operations are transparent, fair,
and operate in the best interest of investors.
Below is a detailed discussion of the Mutual Fund guidelines on
investor protection.

1. Transparency in Operations
Transparency is fundamental to investor protection in mutual funds, as it
enables investors to make informed decisions. The guidelines emphasize
full disclosure of the mutual fund's activities, performance, fees, and risk
factors to investors. This ensures that investors can assess whether a
particular mutual fund is suitable for their financial goals and risk
tolerance.

Key Aspects of Transparency:

 Scheme Information Document (SID):
o The SID is a detailed document provided by mutual funds that outlines
the fund’s objectives, investment strategy, risk factors, and more. It
also includes information such as the AMC's background, the fund's
risk profile, and how the funds will be managed.
o SEBI Regulation: Mutual funds must file the SID with SEBI, and any
amendments to it must also be submitted for approval.
o Disclosure of Fees: The SID must disclose all fees, including the
expense ratio, which is the percentage of assets the fund charges
annually for managing the scheme.
 Key Information Memorandum (KIM):
o The KIM is a simplified document, typically a summary of the SID,
designed to help investors understand the basic aspects of the fund
such as its objectives, risk factors, and investment strategy.
o KIM must contain a summary of the fund's past performance,
investment strategy, and risk details.
 Risk Disclosure:
o SEBI mandates mutual funds to disclose the risks associated with their
investments, such as volatility in equity markets, interest rate risk in
debt markets, etc. These risks should be clearly communicated in the
SID and KIM.
o The "Investments are subject to market risks" statement must be
included in all advertising and promotional materials.

47
Mutual Fund Management 2. Investor Grievance Redressal Mechanism
and Wealth Management
A grievance redressal mechanism is vital to ensure that any issues or
complaints faced by investors are addressed promptly and fairly. SEBI has
set up various platforms for resolving complaints, ensuring accountability
and the protection of investors' rights.

Key Aspects of Grievance Redressal:

 SEBI Complaints Redressal System (SCORES):
o This is an online platform developed by SEBI that allows investors to
file complaints against mutual funds or AMCs. Investors can track the
status of their complaint through this platform, which ensures a timely
resolution of issues.
o Mutual funds and AMCs are required to respond to complaints filed
through SCORES within a specified time frame.
 AMFI's Role:
o AMFI is the self-regulatory organization that represents mutual funds
in India. It has set up its own grievance redressal system to ensure that
complaints are addressed by the respective mutual fund houses or
AMCs. If the issue is not resolved, the matter can be escalated to
AMFI.
o AMFI Guidelines: AMFI mandates mutual fund schemes to have a
dedicated team for resolving investor complaints and issues related to
the fund’s operation, such as redemption delays, NAV discrepancies,
or transfer of units.

3. Fair Pricing and NAV Calculation

Fair pricing ensures that investors are charged a fair price when
purchasing or redeeming mutual fund units. Net Asset Value (NAV) is the
price at which mutual fund units are bought or sold, and it is based on the
value of the assets held by the fund.

Key Aspects of Fair Pricing:

 NAV Calculation:
o SEBI mandates that the NAV should be calculated daily based on the
current market value of the mutual fund’s portfolio. The value of each
asset in the portfolio is determined using the mark-to-market method,
i.e., based on the market price of the asset on the valuation date.
o This method ensures that investors get an accurate and fair price for
buying or selling their mutual fund units.

48
 One-day NAV Rule: Regulatory Framework and
Governance of Mutual
o SEBI mandates that mutual funds calculate NAV on a daily basis. Funds in India
Investors who place an order for mutual fund units before a cut-off
time will be able to purchase the units at the NAV applicable for that
day.
o The fair calculation of NAV ensures that all investors are treated
equally, with no unfair advantages or manipulations in pricing.
 Redemption and Purchase Process:
o SEBI guidelines ensure that investors can redeem mutual fund units at
the prevailing NAV on the same day, ensuring fair treatment. Mutual
fund units cannot be purchased or redeemed at arbitrary prices, thus
ensuring transparency.

4. Regulation of AMCs (Asset Management Companies)

Asset Management Companies (AMCs) are responsible for managing
mutual fund schemes. To ensure the protection of investor interests, SEBI
has laid down a robust set of regulations to ensure the proper functioning
of AMCs, focusing on ethical conduct, operational integrity, and investor
interest.

Key Aspects of AMC Regulation:

 Independence of Trustees:
o SEBI Regulations require mutual funds to appoint independent
trustees who act as custodians of investors’ funds. Trustees ensure that
the fund is managed as per the regulations and in the best interest of
investors.
o Trustees have the power to monitor the performance of AMCs and
ensure that the fund’s assets are used according to the scheme's
objectives.
 AMC’s Duty of Care:
o AMCs are required to exercise fiduciary responsibility, meaning they
must act in the best interest of investors and adhere to the fund’s stated
investment objectives. They must ensure that investors’ funds are
handled with due diligence and in compliance with the guidelines.
 Disclosures by AMCs:
o AMCs must provide quarterly reports on the performance of the
mutual fund schemes, along with details about the portfolio
composition, NAV, performance against benchmark indices, and
other key metrics.

49
Mutual Fund Management 5. Advertisement and Marketing Guidelines
and Wealth Management
SEBI has set strict advertising guidelines to ensure that mutual fund
advertisements are truthful, transparent, and not misleading. These
guidelines ensure that investors are not swayed by unrealistic claims about
returns and that they are fully informed about the risks involved.

Key Aspects of Advertising Guidelines:

 No Misleading Claims:
o Mutual fund advertisements cannot contain exaggerated or misleading
claims such as “guaranteed returns.” They must clearly mention that
mutual fund investments are subject to market risks and provide
necessary risk warnings.
 Risk Disclosure in Ads:
o Mutual fund advertisements must include the standard disclaimer:
"Mutual Fund investments are subject to market risks." In addition, the
ad must provide details about the specific risks associated with the
scheme being advertised.
 Past Performance Disclosures:
o Advertisements that refer to past performance must include a
disclaimer that past performance is not indicative of future returns.
These must include appropriate comparisons with relevant benchmark
indices and must show the fund's performance over different time
periods (e.g., 1-year, 3-year, 5-year).

6. Know Your Customer (KYC) and Suitability

KYC is a process that mutual funds must follow to verify the identity and
suitability of investors. KYC norms ensure that mutual fund investments
are made by legitimate investors and that the investment is appropriate for
the investor’s financial profile.

Key Aspects of KYC Guidelines:

 Investor Identity Verification:
o KYC involves verifying the identity of the investor by submitting
documents such as PAN cards, address proof, and photographs.
This process ensures that the investor is legitimate and complies with
anti-money laundering laws.
 Risk Profiling:
o Before recommending an investment, mutual funds must assess the
investor's risk profile, which includes understanding the investor’s
financial goals, investment horizon, and risk tolerance.

50
o Funds are required to recommend suitable schemes based on this risk Regulatory Framework and
assessment to prevent investors from investing in high-risk schemes if Governance of Mutual
they are not financially prepared for such risks. Funds in India

7. Investor Education and Awareness

Investor education is an essential part of investor protection. SEBI and
AMFI conduct various initiatives to educate investors about mutual funds,
their benefits, risks, and the investment process.

Key Aspects of Investor Education:

 Educational Campaigns:
o SEBI and AMFI conduct investor education campaigns to inform
investors about the importance of long-term investment, the risks
associated with different types of mutual funds, and the benefits of
diversification.
 Educational Resources:
o Mutual funds are required to provide resources like investment
calculators, guidelines for SIP investments, and fund performance
tracking tools to help investors make better decisions.
o Regular workshops, seminars, and online resources ensure that
investors understand key concepts such as NAV, expense ratio,
portfolio diversification, and risk management.
Conclusion
The MF guidelines on investor protection are designed to ensure that
mutual funds operate fairly and transparently, providing a secure
environment for investors. These regulations address transparency in
operations, grievance redressal, fair pricing of mutual fund units, proper
AMC governance, and ensure that mutual fund advertisements are truthful
and not misleading. Together, these measures aim to create a robust
framework that prioritizes investor interests, reduces the risks of fraud and
mismanagement, and promotes financial literacy and trust in mutual funds
as an investment vehicle
2.2.8 MUTUAL FUND GUIDELINES ON MF REGULATIONS IN
INDIA
Mutual fund regulations are designed to ensure that the mutual fund
industry operates in a transparent, fair, and efficient manner, safeguarding
investor interests. The guidelines focus on governance, investor
protection, disclosure requirements, and adherence to SEBI’s standards.
Below is a detailed discussion of the Mutual Fund guidelines on mutual
fund regulations in India, as laid down by regulatory bodies like SEBI
and AMFI.

51
Mutual Fund Management 1. Structure and Constitution of Mutual Funds
and Wealth Management
Mutual funds in India are structured as trusts, where the assets are held by
the trustees on behalf of the investors (unit holders). These funds must
comply with specific guidelines concerning their structure, including
registration with SEBI and the appointment of asset management
companies (AMCs) and trustees.

Key Guidelines:
 Constitution as Trusts:
o A mutual fund must be constituted as a trust under the Indian Trusts
Act, 1882, with a Trustee Board that oversees the management of the
fund.
o Trustees must be independent to ensure proper oversight and the
safeguarding of investor interests.
 Approval and Registration:
o Mutual funds and AMCs must register with SEBI before starting
operations. The registration process ensures that funds adhere to
SEBI’s guidelines, protecting investor interests.
 Asset Management Company (AMC):
o The AMC manages the mutual fund’s portfolio and must be licensed
by SEBI. It must operate under the fund’s Scheme Information
Document (SID) and adhere to investment objectives.

2. Investment Guidelines
Mutual funds must follow specific investment guidelines designed to
ensure diversified portfolios, manage risks, and protect investor interests.
These guidelines help prevent overconcentration in one asset class or
company, ensuring that the fund achieves its investment objectives.

Key Guidelines:
 Asset Allocation:
o Mutual funds must follow the investment strategy outlined in the
SID, which typically includes guidelines on asset allocation,
investment in equity, debt, or money market instruments.
o For example, equity funds must invest a certain percentage of their
corpus in equities, while debt funds must invest in debt securities.
 Diversification:
o Mutual funds must adhere to diversification norms to avoid
concentrated risk. A fund must invest in a mix of securities across
different sectors, industries, and asset classes.

52
 Risk Management: Regulatory Framework and
Governance of Mutual
o SEBI guidelines require mutual funds to maintain a prudential limit Funds in India
on exposure to individual securities to ensure that risk is spread across
multiple assets. For example, a mutual fund cannot invest more than a
prescribed percentage (usually 10%) in any one security or issuer.
 Debt Investment:
o For debt funds, SEBI has defined guidelines for investment in
government bonds, corporate bonds, and other debt instruments. Funds
must comply with credit rating requirements for the securities they
invest in.
 Investment in Derivatives:
o Mutual funds are permitted to invest in derivatives (like futures and
options) for hedging purposes or to enhance returns. However, such
investments must comply with the risk management guidelines and
must not exceed a specified percentage of the fund’s assets.
3. Disclosure Requirements
One of the key objectives of mutual fund regulations is transparency,
ensuring that investors have access to clear and accurate information about
the fund’s performance, risks, fees, and management. Regular disclosures
allow investors to make informed decisions.
Key Guidelines:
 Scheme Information Document (SID):
o The SID provides detailed information about the mutual fund,
including its investment objectives, asset allocation, risk factors, and
financials. It also includes the expense ratio, which details the cost of
managing the fund.
 Key Information Memorandum (KIM):
o The KIM is a simplified version of the SID and is given to investors
before they make an investment. It contains essential details about the
mutual fund, such as its objectives, risk profile, past performance, and
expenses.
 Performance Reporting:
o Mutual funds must disclose the performance of their schemes on a
quarterly basis. They must compare the fund’s performance to a
benchmark index to give investors a clear picture of how the fund is
performing relative to the market.
 Portfolio Disclosure:
o Mutual funds must disclose their portfolio holdings on a monthly
basis, providing details on the securities they hold, their market value,
and their weightage in the portfolio.
53
Mutual Fund Management  NAV (Net Asset Value):
and Wealth Management
o Mutual funds must disclose the NAV of their schemes on a daily basis,
which reflects the price at which the units are bought or sold.
4. Expense Ratio and Fee Structure
SEBI mandates a cap on the expense ratio that mutual funds can charge,
ensuring that fees are reasonable and transparent for investors. The
expense ratio is the percentage of assets that a mutual fund charges
annually for managing the scheme. It covers management fees,
distribution expenses, and other costs associated with running the fund.
Key Guidelines:
 Expense Ratio Cap:
o For equity-oriented schemes, the expense ratio is capped at 2.25% of
the average daily net assets (AUM). For debt-oriented schemes, the
expense ratio is capped at 2.00% of AUM.
o For smaller funds (with assets below a certain threshold), the expense
ratio may be slightly higher to accommodate the fixed operational
costs.
 Transparency of Fees:
o Mutual funds must clearly disclose the fee structure in the SID,
including management fees, administration costs, distribution
costs, and exit loads.
5. Investor Protection Measures
Investor protection is at the core of mutual fund regulations. SEBI has
implemented various mechanisms and guidelines to ensure the fair
treatment of investors, including measures to handle grievances, manage
risks, and ensure fair dealings.
Key Guidelines:
 Grievance Redressal Mechanism:
o AMCs must establish effective grievance redressal systems to resolve
complaints. Investors can approach the Securities and Exchange
Board of India (SEBI) through its SCORES platform for complaints
that are not addressed satisfactorily by the fund house.
 Investor Education:
o SEBI and AMFI promote investor education programs to raise
awareness about mutual funds, their risks, and benefits. Investors are
encouraged to understand the investment process and make informed
decisions.

54
 Fair Advertising: Regulatory Framework and
Governance of Mutual
o SEBI enforces strict guidelines on mutual fund advertising. Ads cannot Funds in India
contain exaggerated claims or guarantees of returns. The "Mutual
Fund investments are subject to market risks" disclaimer must be
prominently included in all promotional materials.
 Suitability of Products:
o Mutual funds must assess the suitability of their products for different
investor categories (e.g., risk appetite, investment horizon). This
ensures that investors are recommended products that align with their
financial goals and risk tolerance.
6. NAV (Net Asset Value) Calculation Guidelines
The Net Asset Value (NAV) is the price at which investors buy and sell
mutual fund units. Accurate NAV calculation is crucial to ensure that
investors are charged fairly for their investments.
Key Guidelines:
 Daily NAV Disclosure:
o Mutual funds must disclose the NAV of their schemes every business
day. NAV is calculated based on the market value of the assets held by
the fund, and it represents the total value of the fund’s assets minus
liabilities, divided by the number of outstanding units.
 Valuation of Securities:
o Mutual funds must follow SEBI-approved valuation norms for the
assets in their portfolio. These norms ensure that the value of each
asset is calculated fairly and transparently.
7. SEBI’s Enforcement and Monitoring
SEBI plays a central role in overseeing the mutual fund industry to ensure
compliance with regulations. If mutual funds fail to comply with the
guidelines, SEBI can take corrective actions, including imposing fines or
suspending the fund's operations.
Key Guidelines:
 Surveillance and Compliance Audits:
o SEBI conducts regular surveillance and audits to monitor the
functioning of mutual funds. These include checks on portfolio
management, asset allocation, and investor disclosure.
 Penalties for Non-Compliance:
o SEBI has the authority to penalize AMCs for violations of mutual fund
regulations. Penalties can range from warnings to fines and even
suspension or cancellation of the mutual fund's registration in severe
cases.
55
Mutual Fund Management Conclusion
and Wealth Management
The Mutual Fund regulations in India, as defined by SEBI and other
regulatory bodies, aim to establish a well-regulated environment for the
mutual fund industry. These regulations ensure that mutual funds are
structured properly, investments are managed transparently, and investors
are provided with the necessary protection and education.
Through guidelines on investment management, disclosure, expense
ratios, investor protection, and grievance redressal, SEBI ensures that
mutual funds operate in the best interest of investors. The emphasis on
transparency, compliance, and fair pricing fosters trust in the mutual
fund industry, helping it grow and function effectively.

2.3 GRIEVANCE MECHANISM IN MF IN INDIA

A grievance mechanism is a critical aspect of the regulatory framework
for mutual funds in India, designed to ensure that investors have a clear
and effective process to raise complaints or resolve disputes related to
their investments. This mechanism ensures transparency, fairness, and
accountability within the mutual fund industry, ultimately fostering
investor confidence.
In India, mutual fund regulations require the establishment of grievance
redressal systems by the Asset Management Companies (AMCs),
Securities and Exchange Board of India (SEBI), and the Association of
Mutual Funds in India (AMFI) to provide investors with a systematic
and prompt way to address complaints.

1. Grievance Mechanism at the AMC Level

Each Asset Management Company (AMC) is required to have an
effective internal grievance redressal mechanism to handle investor
complaints.

Key Elements:
 Investor Service Desk:
o AMCs are mandated to set up investor service desks or help lines that
investors can contact to resolve issues related to their mutual fund
investments. These desks serve as the first point of contact for
complaints.
 Types of Grievances Handled:
o Transaction-related complaints: Issues such as delay in processing
investments, incorrect NAVs, errors in account statements, or mistakes
in redemption.
o Non-receipt of payments: Non-receipt of dividends, redemption
proceeds, or confirmations for transactions.

56
o Misleading or inadequate information: Complaints regarding Regulatory Framework and
misleading marketing materials, sales practices, or unclear investment Governance of Mutual
policies. Funds in India

o Other issues: Any other concerns that investors may have about the
functioning of the mutual fund, such as issues with the fund’s
portfolio, fees, or performance.
 Response Time:
o AMCs are required to acknowledge the complaint within 3 working
days and aim to resolve the issue within 30 days. If the complaint is
not resolved within this period, the investor can escalate it further.
 Communication:
o Investors are provided with a reference number upon lodging a
complaint, allowing them to track the progress of the grievance.
o The AMC must provide a written response to the investor, explaining
the actions taken and the resolution provided.

2. SEBI Complaints Redressal System (SCORES)

SCORES (SEBI Complaints Redressal System) is an online platform
launched by SEBI to facilitate the filing and tracking of complaints
against mutual funds or AMCs. This system allows investors to file their
complaints directly with SEBI if they are unsatisfied with the resolution
provided by the AMC.

Key Features of SCORES:

 Filing Complaints:
o Investors can file complaints against AMCs or mutual funds through
the SCORES portal (https://scores.sebi.gov.in). The platform accepts
a wide range of complaints, including those related to non-payment of
dividends, redemption delays, discrepancies in NAV calculation, and
other issues.
 Acknowledgment and Tracking:
o Once a complaint is filed, SCORES sends an acknowledgment
receipt to the investor, and they can track the status of their complaint
online in real time.
 AMC's Response:
o AMCs are required to respond to complaints filed through SCORES
within 30 days. If the complaint is resolved satisfactorily, the investor
is notified of the outcome.

57
Mutual Fund Management  Escalation:
and Wealth Management
o If an investor is dissatisfied with the response provided by the AMC or
if the issue is not resolved within the stipulated time frame, they can
escalate the matter to SEBI for further investigation.
 Investigation by SEBI:
o SEBI monitors the status of complaints and ensures that mutual funds
comply with the regulations and resolve complaints promptly. If
necessary, SEBI may initiate action against non-compliant entities.

3. AMFI's Role in Grievance Redressal

The Association of Mutual Funds in India (AMFI), a self-regulatory
body for the mutual fund industry, plays a role in maintaining the ethical
standards of the industry and facilitating investor protection.

Key Functions of AMFI:

 Investor Education:
o AMFI runs programs to educate investors about their rights and how
they can lodge complaints. They provide information on the grievance
redressal process, ensuring that investors are aware of the steps to
follow when they face issues with mutual funds.
 Code of Conduct:
o AMFI enforces a Code of Conduct for mutual fund distributors and
AMCs. This ensures that any distributor who fails to adhere to ethical
standards is subject to disciplinary action.
 Mediation:
o AMFI acts as an intermediary in resolving disputes between investors
and mutual funds. In cases where investors are dissatisfied with the
AMC's resolution, AMFI can intervene to mediate and suggest
solutions.

4. Grievance Escalation Process

If an investor is dissatisfied with the resolution provided by the AMC or
through the SCORES platform, there are multiple levels of escalation
available:

Escalation Process:
1. AMC’s Internal Dispute Resolution:
o Initially, the grievance should be taken up with the AMC’s investor
service desk. If unresolved, the investor can escalate the matter to the
Investor Relations Officer or senior management within the AMC.

58
2. SEBI (SCORES Platform): Regulatory Framework and
Governance of Mutual
o If the AMC does not resolve the complaint within 30 days, or if the Funds in India
investor is dissatisfied with the solution, they can escalate the issue to
SEBI through the SCORES platform.
3. Legal Action:
o In cases of serious grievances where the investor feels that they have
been wronged or subjected to fraudulent activities, they can approach
legal authorities and seek judicial intervention. Investors may
approach consumer courts for redressal in case of violations of their
rights.
4. AMFI Mediation:
o In certain cases, AMFI may intervene to mediate between the investor
and the AMC and assist in reaching a resolution.

5. Investor Protection and SEBI Guidelines

To protect investors, SEBI has put in place stringent rules for mutual fund
advertising, marketing practices, and other investor-related activities to
ensure fair practices in the industry.

Key Guidelines for Investor Protection:

 Fair Advertising:
o Mutual funds are required to follow strict advertising standards that
prevent misleading claims or exaggerated returns. All advertisements
must include the disclaimer: “Mutual Fund investments are subject to
market risks.”
 Transparency:
o Mutual funds must disclose detailed information about their
investment strategies, portfolio holdings, and performance. The
Scheme Information Document (SID) and Key Information
Memorandum (KIM) must clearly highlight the risk involved.
 Redressal of Complaints:
o SEBI’s role is to ensure that investor complaints are resolved fairly.
They provide an independent platform (SCORES) for the resolution of
complaints that cannot be resolved by the AMCs.

6. Role of Distributors in Grievance Redressal

Mutual fund distributors often act as intermediaries between investors
and mutual funds. They play an important role in ensuring that investors
are provided with accurate information and that any issues with
transactions are resolved efficiently.

59
Mutual Fund Management Distributors' Responsibilities:
and Wealth Management
 Ethical Selling:
o Distributors must adhere to the AMFI Code of Conduct and follow
ethical selling practices. If an investor has issues regarding mis-selling
or unsuitable product recommendations, they can lodge complaints
against the distributor.
 Complaint Handling:
o In case of any disputes with a distributor, the investor can approach the
AMC or escalate the issue through the SCORES platform.

7. Timeline for Redressal and Resolution

 AMC Response:
o Mutual funds are required to acknowledge complaints within 3
working days and resolve them within 30 days. If not resolved within
this period, the investor can escalate the matter.
 SCORES Response:
o AMCs must respond to complaints lodged on SCORES within 30
days. If not, SEBI steps in to monitor the progress of the complaint.

Conclusion
A robust grievance mechanism in the Indian mutual fund industry is
crucial to maintaining transparency and protecting investor interests. The
involvement of regulatory bodies like SEBI, AMFI, and SCORES
ensures that investors have access to clear procedures for lodging and
resolving complaints. The system encourages fairness and efficiency, and
through proper dispute resolution processes, investors can feel confident
that their concerns will be addressed in a timely and effective manner.
In case an investor is dissatisfied with the resolution, there are multiple
avenues for escalation, including AMFI's mediation, SEBI's monitoring
through SCORES, and legal action. This ensures that the mutual fund
industry operates with integrity and maintains trust among investors.

2.4 EXERCISE
I. Choose the most appropriate Alternative
1. Which platform allows investors to file and track complaints related to
mutual funds in India?
a) AMFI
b) SEBI Complaints Redressal System (SCORES)
c) IRDAI
d) NSE

60
2. How soon must a mutual fund AMC acknowledge an investor’s Regulatory Framework and
grievance upon receipt? Governance of Mutual
Funds in India
a) Within 7 working days b) Within 3 working days
c) Within 5 working days d) Within 10 working days

3. Which body is responsible for regulating mutual fund advertising and

investor education in India?
a) RBI b) AMFI
c) SEBI d) Ministry of Finance

4. What is the primary purpose of the grievance redressal mechanism in

mutual funds?
a) To increase fund performance
b) To ensure ethical marketing
c) To resolve investor complaints and disputes
d) To track market movements

5. What happens if a mutual fund AMC fails to resolve a complaint within

30 days?
a) The investor gets automatic compensation
b) The issue is transferred to SEBI for investigation
c) The AMC is given an extension
d) The investor can no longer file a complaint

6. SCORES is primarily used for:

a) Filing tax returns
b) Filing complaints related to mutual fund transactions
c) Trading mutual fund units
d) Checking mutual fund performance

7. The first point of contact for a grievance in mutual funds is

a) SEBI b) AMFI
c) AMC Investor Service Desk d) Registrar of Companies

8. What does AMFI do in the grievance redressal process?

a) Acts as a legal authority
b) Acts as an intermediary between investors and AMCs
c) Handles all complaints directly
d) Only educates investors on how to file complaints

61
Mutual Fund Management 9. What must be included in all mutual fund advertisements according to
and Wealth Management SEBI guidelines?
a) Fund manager’s credentials
b) Historical returns data
c) A disclaimer stating "Mutual Fund investments are subject to market
risks"
d) A promise of guaranteed returns

10. If a complaint is not resolved through SEBI's SCORES platform,

which legal body can an investor approach?
a) RBI b) Consumer Court
c) Ministry of Corporate Affairs d) National Stock Exchange

Answers
1. b) SEBI Complaints Redressal System (SCORES)
2. b) Within 3 working days
3. c) SEBI
4. c) To resolve investor complaints and disputes
5. b) The issue is transferred to SEBI for investigation
6. b) Filing complaints related to mutual fund transactions
7. c) AMC Investor Service Desk
8. b) Acts as an intermediary between investors and AMCs
9. c) A disclaimer stating "Mutual Fund investments are subject to
market risks"
10. b) Consumer Court

II. State whether the following statements are true or false

1. The SEBI Complaints Redressal System (SCORES) is an online
platform for filing complaints related to mutual fund transactions.
2. AMFI handles all mutual fund investor grievances directly.
3. Mutual fund AMCs must resolve investor grievances within 30 days.
4. The grievance redressal mechanism in mutual funds does not involve
SEBI at any point.
5. SCORES is only for filing complaints against mutual funds and not
other financial products.
6. If an investor is dissatisfied with the response from AMCs, they can
escalate the complaint to SEBI.
7. AMCs are not required to provide any acknowledgment to investors
when a complaint is filed.
8. Mutual fund advertisements can make exaggerated claims about
returns if the information is supported by past performance.
62
9. Grievance redressal in mutual funds only applies to issues related to Regulatory Framework and
payments and not to investment-related concerns. Governance of Mutual
Funds in India
10. The role of the investor service desk is to provide a formal resolution
of grievances in mutual funds.
1. True 2. False 3. True 4. False 5. True
6. True 7. False 8. False 9. False 10. False

III. Match the Pair

Column A Column B
1. SEBI Complaints a. Industry standards and dispute
Redressal System resolution intermediary
2. AMC Investor Service b. Regulates advertising and investor
Desk protection
3. AMFI c. First point of contact for investor
grievances
4. Ministry of Finance d. Monitors and penalizes for unresolved
complaints
5. Mutual Fund e. "Mutual Fund investments are subject
Advertisement Guidelines to market risks" disclaimer
6. SCORES f. Online complaint filing platform for
mutual funds
7. 30-Day Resolution g. Deadline for grievance resolution by
Requirement AMCs
8. Investor Education h. Reduces complaints through financial
Initiatives literacy
9. Legal Escalation i. Consumer court if grievance remains
unresolved
10. Transparency in Mutual j. Builds trust and reduces grievances
Fund Transactions

Answers:

Column A Column B
1. SEBI Complaints Redressal f. Online complaint filing
System platform for mutual funds
2. AMC Investor Service Desk c. First point of contact for
investor grievances
3. AMFI a. Industry standards and dispute
resolution intermediary

63
Mutual Fund Management 4. Ministry of Finance d. Monitors and penalizes for
and Wealth Management unresolved complaints
5. Mutual Fund Advertisement e. "Mutual Fund investments are
Guidelines subject to market risks"
disclaimer
6. SCORES f. Online complaint filing
platform for mutual funds
7. 30-Day Resolution Requirement g. Deadline for grievance
resolution by AMCs
8. Investor Education Initiatives h. Reduces complaints through
financial literacy
9. Legal Escalation i. Consumer court if grievance
remains unresolved
10. Transparency in Mutual Fund j. Builds trust and reduces
Transactions grievances

IV. Answer in brief

1. Explain the role of the SEBI Complaints Redressal System (SCORES)
in the grievance redressal process for mutual funds.
2. What are the key responsibilities of mutual fund AMCs in ensuring an
effective grievance redressal mechanism for investors?
3. Discuss the role of AMFI in the grievance redressal system and how it
helps in resolving disputes between investors and mutual funds.
4. Describe the types of complaints that mutual fund investors typically
raise and how these issues can be resolved.
5. Explain the process an investor must follow if their grievance is not
resolved by the AMC’s investor service desk.
6. What are the legal implications for mutual funds if they fail to resolve
investor complaints within the stipulated time frame?
7. How does transparency in mutual fund advertisements contribute to
investor protection and grievance reduction?
8. Discuss the importance of investor education in preventing grievances
and ensuring mutual fund investors understand their rights and
responsibilities.
9. What steps should an investor take if they receive incorrect or
misleading information from a mutual fund distributor?
10. How does SEBI ensure that mutual funds comply with grievance
redressal norms, and what penalties can be imposed for non-
compliance?

64
IV. Short Notes Regulatory Framework and
Governance of Mutual
1. SEBI Complaints Redressal System (SCORES) Funds in India

2. AMC Investor Service Desk

3. Role of AMFI in Grievance Resolution
4. Legal Escalation of Mutual Fund Complaints
5. Investor Education by AMFI and SEBI
6. Grievance Resolution Timeline in Mutual Funds
7. SCORES Platform Features
8. Ethical Advertising in Mutual Funds
9. Investor Protection Mechanisms in Mutual Funds
10. Dispute Resolution Between Investors and Mutual Fund Distributors

Summary:
1. Role of SEBI (Securities and Exchange Board of India):
 Primary regulator for mutual funds in India.
 Establishes guidelines for mutual fund operations, investor protection,
advertisement standards, and grievance mechanisms.
 Manages SCORES, the SEBI Complaints Redressal System, to help
investors lodge complaints.
2. Role of RBI (Reserve Bank of India):
 Oversees the banking operations of AMCs and ensures that funds are
handled ethically and securely.
 Sets guidelines for mutual fund activities in relation to the banking
sector.
3. Role of AMFI (Association of Mutual Funds in India):
 Self-regulatory organization promoting ethical practices and acting as
an intermediary in dispute resolution.
 Provides investor education to improve financial literacy and prevent
grievances.
4. Ministry of Finance:
 Supervises compliance with financial regulations.
 Works to ensure that mutual fund operations align with national
economic policies.

65
Mutual Fund Management 5. Self-Regulatory Organizations (SROs):
and Wealth Management  Work alongside SEBI to enforce industry standards, oversee ethical
practices, and resolve disputes within the mutual fund sector.
6. Company Law Board (CLB) and Ministry of Corporate Affairs
(MCA):
 Regulate corporate governance of AMCs and enforce compliance with
company laws.
7. Department of Company Affairs:
 Oversees regulations relating to company formation, investor
protection, and compliance with corporate laws affecting mutual
funds.
8. Registrar of Companies:
 Manages registration and legal documentation of AMCs, ensuring that
these entities comply with regulatory standards.
9. MF Guidelines on Advertisement, Accounting, Taxation, and
Valuation Norms:
 Advertisement: SEBI guidelines ensure that mutual fund
advertisements are accurate and include disclaimers about market
risks.
 Accounting: Regulates reporting and disclosure standards to promote
transparency in fund management.
 Taxation: Outlines tax benefits and obligations for investors and
AMCs.
 Valuation: Provides norms for valuing fund assets to ensure fair and
consistent practices.
10. Guidelines for Purchasing Mutual Funds:
 Outlines the due diligence that investors must follow, such as
understanding the risk factors, expense ratios, and fund objectives.
11. Investor Protection:
 SEBI mandates disclosures, transparency, and grievance mechanisms
to protect investors from fraud and mismanagement.
12. Mutual Fund Regulations:
 Regulatory framework ensures that mutual funds operate within legal
boundaries and follow ethical practices.
13. Grievance Mechanism in Mutual Funds:
 A structured complaint redressal system, including SEBI's SCORES
platform and AMC investor service desks, provides investors with
resolution avenues.

66
Glossary: Regulatory Framework and
Governance of Mutual
Accounting Standards refer to the rules and principles governing Funds in India
financial reporting, which aim to promote transparency and accountability
in the management of mutual funds.
AMFI (Association of Mutual Funds in India) is a self-regulatory
organization that sets industry standards, promotes ethical practices,
facilitates dispute resolution, and conducts investor education to enhance
awareness in the mutual fund sector.
AMC (Asset Management Company) is a company responsible for
managing mutual fund portfolios, handling administration, and providing
investor services related to mutual funds.
CLB (Company Law Board) is the regulatory authority ensuring
corporate governance and compliance within companies, including mutual
fund companies, under the Ministry of Corporate Affairs.
Department of Company Affairs is a government body responsible for
regulating company formation, ensuring compliance with corporate laws,
and overseeing investor protection measures.
Grievance Mechanism is a structured process allowing investors to file
complaints about mutual fund services and resolve disputes. This process
includes steps for escalation if the complaint is not resolved promptly.
Investor Education consists of programs and resources provided by
regulatory bodies like SEBI and AMFI, aimed at improving financial
literacy and awareness among mutual fund investors.
Investor Protection encompasses various regulatory measures designed
to safeguard mutual fund investors, including requirements for
transparency, fair practices, and an accessible grievance mechanism.
Legal Escalation is the process that investors can follow to seek legal
action, including approaching consumer courts if their grievances are
unresolved by mutual fund companies or regulatory authorities.
Ministry of Corporate Affairs (MCA) is the government body
overseeing company laws and corporate governance standards, including
those applicable to mutual fund entities and their administration.
Ministry of Finance is the central government department responsible for
formulating and overseeing financial regulations affecting mutual funds,
aligning these with broader economic policies.
Mutual Fund Advertisement Guidelines are the rules set by SEBI to
ensure that mutual fund advertisements are accurate, ethical, and include
necessary risk disclaimers to inform investors.
Registrar of Companies is the official authority responsible for managing
the registration, regulatory compliance, and legal documentation of
companies, including mutual fund companies.
67
Mutual Fund Management Regulatory Body refers to organizations like SEBI or the Ministry of
and Wealth Management Finance, which are tasked with creating, implementing, and enforcing
rules to ensure mutual funds operate ethically and transparently.
RBI (Reserve Bank of India) is the central banking authority that
regulates banking operations related to AMCs, ensuring security and
adherence to financial and banking guidelines.
SCORES (SEBI Complaints Redressal System) is an online platform
provided by SEBI where investors can file mutual fund complaints and
monitor the resolution process.
SEBI (Securities and Exchange Board of India) is the primary
regulatory authority for the mutual fund industry, responsible for
establishing guidelines for mutual funds and ensuring investor protection.
Self-Regulatory Organization (SRO) is an industry body that sets and
enforces ethical standards, providing additional oversight alongside SEBI
in the mutual fund sector.
Transparency in mutual fund operations involves open and clear
communication of information to investors, helping to build trust and
prevent grievances.
Valuation Norms are standards for calculating and reporting the value of
mutual fund assets, ensuring accuracy, fairness, and consistency in asset
valuation for investors.

References:
 https://resource.cdn.icai.org/74835bos60509-cp8.pdf
 https://icmai.in/upload/Students/Syllabus2022/Final_Stdy_Mtrl/P14.p
df
 https://www.icsi.edu/media/webmodules/publications/CM&SL%20Fin
al%20PDF.pdf
 https://www.nseindia.com/products-services/mf-about-mfss
 https://www.bseindia.com/Static/Markets/MutualFunds/BSEStarMF.as
px
 https://www.amfiindia.com/
 https://www.mutualfundssahihai.com/
 https://www.moneycontrol.com/mutualfundindia/
 https://www.etmoney.com/mutual-funds



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 3
TYPES OF MUTUAL FUNDS: AN
OVERVIEW OF THEIR
CHARACTERISTICS AND FUNCTIONS
Unit Structure :
3.0 Learning Objectives
3.1 Types of Mutual Funds
3.2 Exercise

3.0 LEARNING OBJECTIVES

After reading this chapter learner will be able to:

 Identify and understand the primary types of mutual funds based on

their functionality, portfolio composition, geographical scope, and
special features.
 Learn the specific characteristics and benefits of each type of mutual
fund category, such as liquidity, investment horizon, risk, and return
potential.
 Understand how these categories operate functionally, along with their
liquidity and redemption options.

 Analyze how different portfolio compositions meet diverse investment

objectives, such as income generation, capital appreciation, and risk
tolerance.

 Gain insights into the geographic classification of mutual funds and

how location affects fund investment strategies and regulations.

 Understand the purpose of unique mutual fund categories such as

tax-saving funds, exchange-traded funds, and debt funds, along with
the concepts of systematic investment planning and transfer plans.

 Assess how various types of mutual funds align with different

financial goals, risk preferences, and investment timelines for
individual and institutional investors.

3.1 TYPES OF MUTUAL FUNDS

Mutual funds come in various types, each serving specific investment
needs and catering to different risk appetites, time horizons, and financial
goals. Here’s an in-depth look into each classification:

69
Mutual Fund Management
and Wealth Management

3.1.1 FUNCTIONAL/OPERATIONAL CLASSIFICATION:

The functional, or operational, classification of mutual funds categorizes
funds based on their structure, specifically how investors can buy and sell
shares, the fund's liquidity, and the fund’s duration or maturity. This
classification includes Open-Ended Funds, Close-Ended Funds, and
Interval Funds. Here's an in-depth look at each:

 Open-Ended Funds:
o Definition: Open-ended funds allow investors to buy and sell units
directly from the fund house at any time. There is no fixed maturity
period.

o Characteristics:
 Liquidity: Highly liquid as investors can enter and exit freely.

 NAV-Based Pricing: Transactions happen at the Net Asset Value

(NAV) determined daily.

 Ideal For: Investors looking for flexibility in entering and exiting

investments without being tied to a specific period.

 Risk Level: Depends on the fund’s underlying assets, ranging from

low-risk debt funds to high-risk equity funds.

 Close-Ended Funds:
o Definition: These funds have a fixed maturity period, usually ranging
from 3 to 5 years, and units can only be bought during the initial offer
period. Afterward, units can be traded on stock exchanges.

70
o Characteristics: Types of Mutual Funds: An
 Limited Liquidity: Investors cannot redeem units directly from the Overview of Their
fund until maturity, though units may be bought/sold on exchanges. Characteristics and Functions

 Fixed Capital: Fund size remains constant after the initial subscription
period.

 Ideal For: Investors willing to commit capital for a set period to

potentially benefit from long-term growth.

 Risk Level: Varies based on fund investments; often aligned with

medium to long-term objectives.

 Interval Funds:
o Definition: Interval funds are hybrid funds that allow investors to
buy/sell units at specific intervals.

o Characteristics:

 Periodic Liquidity: Redemption is allowed only at specific intervals,

providing moderate liquidity.

 NAV-Based Pricing: Transactions occur at NAV, but only during

specific windows.

 Ideal For: Investors seeking periodic access to funds, combining the

benefits of open and close-ended funds.

 Risk Level: Moderate, depending on fund composition.

Summary of Open-Ended, Close-Ended, and Interval Funds

Feature Open- Close-Ended Funds Interval Funds
Ended
Funds
Maturity No fixed Fixed maturity No fixed maturity,
Period maturity (e.g., 3-5 years) but specific
intervals
Liquidity Highly Limited to stock Available at
liquid exchange intervals
Pricing NAV-based Exchange-traded NAV-based at
(may vary from intervals
NAV)
Entry/Exit Any time During NFO, then Only at intervals
on exchange

Key Takeaways
Functional or operational classification is important for understanding the
flexibility and liquidity of mutual funds. Open-ended funds offer
71
Mutual Fund Management maximum liquidity and flexibility, while close-ended funds suit investors
and Wealth Management comfortable with a locked-in period. Interval funds offer a balance,
allowing periodic access, making each type suitable for different financial
needs and investment goals.

3.1.2 PORTFOLIO-BASED CLASSIFICATION:

Portfolio-based classification categorizes mutual funds according to the
type of assets they invest in and the specific investment objectives they
aim to achieve. This classification helps investors align their investment
choices with their goals, such as income generation, capital growth, or a
balanced approach. Here are the main types of portfolio-based mutual
funds:
 Income Funds:
o Definition: These funds invest in fixed-income securities like bonds,
debentures, and other debt instruments with the primary objective of
generating regular income. It is also popularly known as debt funds.

o About:
A debt fund is a Mutual Fund scheme that invests in fixed income
instruments, such as Corporate and Government Bonds, corporate debt
securities, and money market instruments etc. that offer capital
appreciation. Debt funds are also referred to as Fixed Income Funds or
Bond Funds. A few major advantages of investing in debt funds are low-
cost structure, relatively stable returns, relatively high liquidity and
reasonable safety.

Debt funds are appropriate for investors who aspire for regular income,
but are risk-averse. Debt funds are less volatile and, consequently, are less
dangerous than equity funds. Debt mutual funds may be a better choice if
you have been saving in conventional fixed income products, such as bank
deposits, and are seeking consistent returns with less volatility. This is
because they enable you to reach your financial objectives in a more tax-
efficient way, which results in higher returns.

Debt funds function similarly to other mutual fund schemes in several

aspects. Nonetheless, they outperform equities mutual funds in terms of
capital safety.

o Characteristics:
 Steady Returns: Focused on providing regular interest payments
rather than capital appreciation.
 Low to Moderate Risk: Less volatile than equity-based funds, making
them suitable for conservative investors.
 Ideal For: Retirees or those looking for a steady source of income.
 Risk Level: Low, though interest rate changes can impact
performance.

72
 Types of Mutual Funds: An
Overview of Their
Characteristics and Functions

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 Growth Funds:
o Definition:A Growth Fund is a Mutual Fund Scheme that invests
predominantly in shares/stocks of companies. They are more popularly
known as Equity Funds.
o About:
There are two types of equity funds: active and passive. A fund manager
in an active fund searches the market, investigates businesses, analyzes
performance, and finds the finest stocks to buy. The fund manager of a
passive fund constructs a portfolio that closely resembles a well-known
market index, such as the Sensex or Nifty Fifty.
Market capitalization, or the amount that the capital market values the
equity of a whole company, is another way to split equity funds. Large,
mid, small, and micro-cap funds are all possible.
Also, there can be a further classification as Diversified or Sectoral /
Thematic. In the former, the scheme invests in stocks across the entire
market spectrum, while in the latter it is restricted to only a particular
sector or theme, say, Infotech or Infrastructure.
Thus, an equity fund essentially invests in company shares, and aims to
provide the benefit of professional management and diversification to
ordinary investors.

o Characteristics:
 High Potential for Returns: Ideal for wealth creation over the long
term.
 Higher Volatility: Prone to market fluctuations due to equity
exposure.
 Ideal For: Investors with a higher risk tolerance and a long-term
investment horizon.
 Risk Level: High, with greater exposure to stock market risks.

73
Mutual Fund Management
and Wealth Management

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 Balanced Funds:

o Definition: Balanced funds, or hybrid funds, invest in both equity and

debt instruments, balancing growth potential with income stability.

o About:
An investor in a Mutual Funds can select and invest separately in several
schemes, e.g. equity fund , debt fund , gold fund , liquid fund , etc. At the
same time, there are schemes like a combo meal – known as hybrid
schemes. Previously referred to as balanced funds, these hybrid schemes
invest in two or more asset classes so that the investor can gain from both.
The Indian mutual fund market offers a variety of hybrid fund types. Some
investment methods combine two assets, such as debt and gold or equity
and debt. Schemes that invest in gold, debt, and equities are also available.
Nonetheless, the majority of well-known hybrid plans make investments
in both debt and equity.

o Characteristics:
 Moderate Risk-Return Profile: Lower risk than pure equity funds,
but higher potential returns than debt funds.
 Diversification: Spreads risk across multiple asset classes.
 Ideal For: Investors seeking a blend of growth and income with
moderate risk.
 Risk Level: Moderate, with some protection from debt allocation.

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74
 Money Market Mutual Funds (MMMF): Types of Mutual Funds: An
o Definition: These funds invest in short-term, high-quality money Overview of Their
market instruments like treasury bills, certificates of deposit, and Characteristics and Functions
commercial paper.

o About:
One must consider a few things here:
1. The money is parked for a short period of time
2. One would prefer that there is no drop in investment value
3. Even low returns should be fine, if it means the money is safe
4. The period may not be fixed or even known

Placing funds in a fixed deposit may fulfill the goal, but only to a certain
degree, given the four aforementioned requirements. The security of a
fixed deposit is one of its main advantages. However, one of the
restrictions is frequently disregarded: the money can only be parked for a
set amount of time; there is no flexibility in this regard.

Liquid mutual funds might be a good option in this situation. Because they
provide complete freedom of redemption at any time, safety, and returns
that are comparatively good (compared to savings accounts or even
extremely short term fixed deposits).

o Characteristics:
 Very Low Risk: Focused on capital preservation with minimal risk.
 High Liquidity: Typically used for parking surplus funds temporarily.
 Ideal For: Risk-averse investors or those needing a safe place for
short-term funds.
 Risk Level: Very low, making them one of the safest mutual fund
options.

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75
Mutual Fund Management Summary of Portfolio-Based Classification
and Wealth Management Fund Primary Risk Level Suitable for
Type Goal
Income Regular Low to Conservative investors,
Funds income moderate retirees
Growth Capital High Long-term investors, risk-
Funds appreciation tolerant investors
Balanced Capital Moderate Moderate-risk investors,
Funds growth & those wanting both income
income and growth
MMMF Capital Very low Investors with short-term
preservation horizons, low-risk investors
& liquidity

Key Takeaways
Portfolio-based classification helps investors choose mutual funds aligned
with their specific financial goals, time horizon, and risk tolerance.
Income funds offer stability and steady income, growth funds are ideal for
aggressive wealth creation, balanced funds provide a mix of growth and
income, and money market funds offer a low-risk, liquid option.

3.1.3 GEOGRAPHICAL/LOCATION-BASED CLASSIFICATION

Geographical or location-based classification categorizes mutual funds
according to the regions or countries where they invest. This classification
helps investors gain exposure to either their home country's market or
international markets, depending on their preferences for diversification
and growth potential. Here are the two primary types:

 Domestic Funds:
o Definition: Domestic funds invest primarily in assets located within
the investor’s home country.

o Characteristics:

 Regulatory Alignment: Operates under local regulations, making

them simpler to manage and understand.

 Economic Linkage: Directly affected by the local economic climate.

 Ideal For: Investors focusing on the performance of their home

country's economy.

 Risk Level: Depends on domestic economic and market conditions.

 Offshore Funds:

o Definition: These funds invest in markets outside the investor’s home

country, providing exposure to global markets.
76
o Characteristics: Types of Mutual Funds: An
Overview of Their
 Global Diversification: Offers exposure to foreign economies, which Characteristics and Functions
can reduce domestic market risk.

 Currency Risk: Exposed to currency fluctuations, which can affect

returns.

 Ideal For: Investors looking to diversify internationally or gain from

high-growth foreign markets.

 Risk Level: Moderate to high, depending on global market conditions

and currency exposure.

Summary of Geographical/Location-Based Classification

Type Investment Focus Benefits Risks
Domestic Home country’s Familiarity, local Dependent on
Funds assets economy local economy
Offshore International/global Diversification, Currency risk,
Funds assets global growth foreign market
volatility

Key Takeaways
Geographical or location-based classification allows investors to decide
between focusing on domestic opportunities or tapping into global
markets. Domestic funds are ideal for those who want to invest within
their country and avoid currency risk, while offshore funds suit investors
looking for international diversification and exposure to global growth
potential.

3.1.4 MISCELLANEOUS CLASSIFICATION

Miscellaneous-based classification includes mutual funds that don’t neatly
fall under traditional categories and are often designed with unique
structures, purposes, or investment strategies. These funds cater to specific
needs, such as tax-saving, investment flexibility, and tailored financial
goals. Here’s a breakdown of common miscellaneous mutual fund types:

 Tax-Saving Funds (ELSS):

o Definition: Equity-Linked Savings Schemes (ELSS) are equity-

oriented funds that provide tax benefits under specific tax regulations.

o Characteristics:
 Tax Benefits: Investments qualify for tax deductions under local tax
laws.

 Lock-In Period: Usually has a lock-in of 3 years, restricting early

withdrawals.
77
Mutual Fund Management  Ideal For: Investors looking to reduce tax liability and gain from
and Wealth Management equity growth potential.

 Risk Level: High, due to equity exposure.

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 Exchange-Traded Funds (ETFs):

o Definition: ETFs are funds that trade on stock exchanges like

individual stocks and usually track an index.

o Characteristics:
 High Liquidity: Can be traded anytime during market hours at real-
time prices.
 Low Cost: Generally has a lower expense ratio than actively managed
funds.
 Ideal For: Investors seeking index-based returns with trading
flexibility.
 Risk Level: Moderate, based on the index it tracks and market
conditions.

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78
 Fixed Term Plans (FTPs): Types of Mutual Funds: An
Overview of Their
o Definition: These are close-ended funds with a predetermined tenure, Characteristics and Functions
investing in fixed-income instruments.

o Characteristics:

 Predictable Returns: Provides an expected return over a specified

period.

 Limited Liquidity: Typically, funds cannot be redeemed before

maturity.
]
 Ideal For: Investors with a fixed investment horizon and low-risk
tolerance.

 Risk Level: Low to moderate, depending on underlying debt

securities.

 Debt Funds:

o Definition: Debt funds invest in fixed-income securities like bonds,

government securities, and debentures.

o Characteristics:

 Steady Returns: Less volatile than equity funds, focusing on stable

income.

 Interest Rate Sensitivity: Returns can fluctuate with changes in

interest rates.

 Ideal For: Conservative investors seeking regular income.

 Risk Level: Low to moderate, with some interest rate and credit risks.

 Systematic Investment Plan (SIP)

 Definition: A Systematic Investment Plan (SIP) is a disciplined
approach to investing where an investor commits to making regular,
often monthly, contributions to a mutual fund. Instead of a lump sum,
the investor purchases mutual fund units in smaller amounts over time,
making it a popular option for long-term wealth building.

 Key Features:
o Disciplined and Habitual Investing: SIPsinstill a habit of regular
investing, which is critical for long-term financial planning and goal
setting. It allows even small investors to participate by investing
manageable sums each month.

79
Mutual Fund Management o Rupee Cost Averaging: By investing a fixed amount regularly, SIP
and Wealth Management helps average the purchase price of fund units. When markets are
down, more units are bought; when markets are up, fewer units are
bought. This helps reduce the impact of volatility and lowers the
average cost over time.

o Power of Compounding: SIPs benefit from compounding, where

returns generated are reinvested, helping investments grow
significantly over the long term.

o Flexibility: Investors can adjust the SIP amount, pause contributions,

or even withdraw funds if needed, making it flexible and adaptable to
changing financial needs.

 Example: If an investor invests 5,000 every month in an equity

mutual fund through SIP, they would purchase more units when the
price is low and fewer units when the price is high. Over years, this
could result in a substantial amount, even if the markets fluctuate.

 Ideal For: Investors with a long-term investment horizon who are

looking to accumulate wealth gradually, particularly for goals like
retirement or children's education.

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 Systematic Transfer Plan (STP)

 Definition: A Systematic Transfer Plan (STP) is a strategy that allows
investors to transfer a predetermined amount from one mutual fund
(typically a debt fund) to another (often an equity fund) at regular
intervals. STPs are used for better portfolio management, especially
for managing the risk associated with market fluctuations.

 Key Features:
o Risk Management: STPs provide a way to gradually shift from debt
to equity or vice versa, helping reduce the risk of investing a large sum
in volatile markets all at once.

80
o Controlled Asset Allocation: Investors use STPs to strategically Types of Mutual Funds: An
balance their portfolio between different asset classes, based on Overview of Their
changing market conditions or life stages. Characteristics and Functions

o Tax Efficiency: Instead of liquidating and reinvesting funds directly,

STPs enable a phased approach, which can help in managing capital
gains tax implications more efficiently.

o Customization: Investors can choose the amount and frequency

(weekly, monthly, or quarterly) of transfers. STPs are typically used to
move funds from a low-risk investment (like a debt fund) into higher-
risk investments (like equity funds).

 Example: Suppose an investor has a large sum in a debt fund but

wants to invest in an equity fund. To avoid market timing risk, they
could use an STP to gradually transfer a fixed amount monthly to the
equity fund, allowing them to buy at various price points.

 Ideal For: Investors looking to balance risk by gradually reallocating

funds, those transitioning from debt to equity for long-term growth, or
those approaching retirement who may want to reduce equity exposure
slowly.

 Systematic Withdrawal Plan (SWP)

 Definition: A Systematic Withdrawal Plan (SWP) is a strategy that
allows investors to withdraw a fixed amount from their mutual fund
investment at regular intervals, effectively providing a steady stream
of income while allowing the remaining balance to stay invested.

 Key Features:
o Regular Income Stream: SWP is designed to provide investors with a
consistent income, which is especially beneficial for retirees or
individuals who need periodic cash flow.

o Capital Preservation: Unlike selling the entire fund, SWP allows for
controlled withdrawals, letting the remaining amount continue to
grow. It offers a way to utilize investment returns while preserving
part of the original capital.

o Flexibility in Withdrawals: Investors can customize the withdrawal

amount and frequency, based on their specific income needs. They can
also stop or adjust the SWP if their circumstances change.

o Tax Efficiency: For certain investors, SWP may offer tax advantages
over dividend income, as withdrawals are treated as capital gains
rather than ordinary income. This tax treatment can potentially reduce
the overall tax burden.

 Example: An investor could set up an SWP to withdraw 10,000

monthly from a mutual fund investment of 10 lakhs. Each month,
81
Mutual Fund Management they receive the amount, while the remaining balance continues to
and Wealth Management grow based on market performance.

Summary of Miscellaneous-Based Classification

Fund Type Primary Purpose Key Features Suitable for
Tax-Saving Tax savings + Tax deduction, Taxpayers looking
Funds (ELSS) growth equity exposure for long-term
growth
Exchange- Index tracking Real-time Investors seeking
Traded Funds trading, low- market index
(ETFs) cost exposure
Balanced Income + Mix of debt and Moderate-risk
Funds growth equity investors
Fixed Term Predictable Fixed maturity, Fixed-horizon,
Plans (FTPs) returns debt-focused low-risk investors
Debt Funds Income Invests in bonds Conservative
generation and securities investors
Systematic Gradual wealth Regular Investors aiming
Investment accumulation contributions for disciplined
Plan (SIP) over time investing
Systematic Controlled Transfers Investors
Transfer Plan transition between funds managing asset
(STP) between funds at intervals allocation
Systematic Regular income Periodic, Retirees or those
Withdrawal withdrawals customizable needing regular
Plan (SWP) withdrawals cash flow

Key Takeaways
Miscellaneous-based classification encompasses funds tailored for specific
financial needs or investment strategies, like tax-saving, index-tracking, or
systematic investments. This category allows investors to choose mutual
funds that meet unique financial goals and preferences, enhancing
flexibility and customization in investment planning.

82
3.2 EXERCISE Types of Mutual Funds: An
Overview of Their
Characteristics and Functions
I. Multiple Choice Questions
1. Which of the following is a characteristic of Systematic Investment Plan
(SIP)?
a) One-time lump sum investment b) Regular contributions over time
c) Guaranteed returns d) Only for high-risk investments

2. Systematic Withdrawal Plan (SWP) is primarily used for:

a) Tax saving b) Regular income
c) Short-term investing d) Capital appreciation

3. Which plan helps to gradually transfer funds from one mutual fund to
another?
a) SWP b) SIP
c) STP d) ETF

4. The Rupee Cost Averaging benefit is associated with which plan?

a) SWP b) SIP
c) STP d) FTP

5. In which type of mutual fund classification are ELSS funds included?

a) Geographical classification b) Portfolio-based classification
c) Functional classification d) Miscellaneous classification

6. A mutual fund that invests only in the investor’s home country is called:
a) Domestic Fund b) Offshore Fund
c) Balanced Fund d) Exchange-Traded Fund

7. Which of the following is NOT a feature of STP?

a) Risk management b) Phased transfers
c) Immediate one-time transfer d) Customizable transfer frequency

8. SIPs are best suited for:

a) Short-term investors b) Long-term wealth building
c) Immediate income d) Emergency funding

9. Tax-Saving Funds qualify for tax deductions under which section of the
Indian Income Tax Act?
a) Section 24 b) Section 80C
c) Section 10 d) Section 87

10. Exchange-Traded Funds (ETFs) are usually:

a) Actively managed b) Traded like stocks
c) Illiquid investments d) Tax-exempt

83
Mutual Fund Management Answers:
and Wealth Management
1. b) Regular contributions over time
2. b) Regular income
3. c) STP
4. b) SIP
5. d) Miscellaneous classification
6. a) Domestic Fund
7. c) Immediate one-time transfer
8. b) Long-term wealth building
9. b) Section 80C
10. b) Traded like stocks

II. True or False

1. SIP requires a one-time lump sum investment.
2. STP helps in transferring funds gradually from one fund to another.
3. SWP is ideal for investors seeking a regular income stream.
4. ELSS funds have no lock-in period.
5. ETFs are traded on stock exchanges like regular stocks.
6. Domestic funds invest in foreign assets for global diversification.
7. Balanced funds invest only in equity securities.
8. SIP helps average out the cost of mutual fund units over time.
9. FTPs are typically short-term, high-risk investments.
10. SWP is beneficial for retirees who need steady income.

Answers:
1. False
2. True
3. True
4. False
5. True
6. False
7. False
8. True
9. False
10. True
84
III. Match the Pair Types of Mutual Funds: An
Overview of Their
Characteristics and Functions
Column A Column B
1. SIP a. Regular income
2. SWP b. Geographical classification
3. STP c. Regular investments
4. Domestic Fund d. Long-term growth and income
5. ELSS e. Equity tax-saving benefit
6. ETFs f. Traded on stock exchanges
7. Balanced Funds g. Controlled fund transfers
8. Tax-Saving Funds h. High growth potential
9. Offshore Funds i. International diversification
10. Debt Funds j. Fixed income securities

Answer: Match the Pair

1. SIP - c. Regular investments

2. SWP - a. Regular income
3. STP - g. Controlled fund transfers
4. Domestic Fund - b. Geographical classification
5. ELSS - e. Equity tax-saving benefit
6. ETFs - f. Traded on stock exchanges
7. Balanced Funds - d. Long-term growth and income
8. Tax-Saving Funds - e. Equity tax-saving benefit
9. Offshore Funds - i. International diversification
10. Debt Funds - j. Fixed income securities

IV. Answer in Brief:

1. Explain the benefits of Systematic Investment Plan (SIP) and how it
supports disciplined investing.
2. Describe the purpose of a Systematic Transfer Plan (STP) and how it
helps manage investment risk.
3. What are the key features and benefits of a Systematic Withdrawal
Plan (SWP)?
4. Compare domestic and offshore mutual funds based on their
characteristics and ideal investors.
5. How does Rupee Cost Averaging work in a SIP? Explain with an
example.

85
Mutual Fund Management 6. What are tax-saving funds, and how do they benefit investors in
and Wealth Management India?
7. Discuss the role of balanced funds in an investment portfolio and the
type of investor they suit best.
8. Explain how ETFs are different from traditional mutual funds.
9. What is the lock-in period in ELSS funds, and why is it implemented?
10. How does an STP help in transitioning funds between different asset
classes?

V. Short Notes
1. Systematic Investment Plan (SIP)
2. Systematic Transfer Plan (STP)
3. Systematic Withdrawal Plan (SWP)
4. Domestic Funds
5. Offshore Funds
6. Exchange-Traded Funds (ETFs)
7. Tax-Saving Funds (ELSS)
8. Balanced Funds
9. Debt Funds
10. Fixed Term Plans (FTPs)

Mutual funds are investment vehicles that pool money from various
investors to invest in a diversified portfolio of securities. They are
categorized in various ways, each focusing on different aspects such as
function, investment objectives, geographical focus, or tax benefits. Here's
a breakdown of the types of mutual funds discussed:

1. Functional/Operational Classification:

o Open-Ended Funds: Offer high liquidity, allowing investors to buy

and sell shares at any time based on the Net Asset Value (NAV).

o Close-Ended Funds: Have a fixed maturity period, with units bought

during the initial offer period and later traded on stock exchanges.

o Interval Funds: Provide liquidity at specific intervals, combining

features of both open and close-ended funds.

2. Portfolio-Based Classification:

o Income Funds: Invest in fixed-income securities like bonds, aiming to

provide steady income with low to moderate risk.
86
o Growth Funds: Primarily invest in equities, offering high growth Types of Mutual Funds: An
potential but at a higher risk due to market volatility. Overview of Their
Characteristics and Functions
o Balanced Funds: Invest in both equity and debt instruments,
balancing risk and return to suit moderate-risk investors.

o Money Market Mutual Funds (MMMF): Focus on short-term, low-

risk investments, providing high liquidity and very low risk.

3. Geographical/Location-Based Classification:

o Domestic Funds: Invest within the investor's home country, subject to

local economic conditions.

o Offshore Funds: Invest in international markets, offering global

diversification but with exposure to currency risks and foreign market
volatility.

4. Miscellaneous Classification:

o Tax-Saving Funds (ELSS): Equity-oriented funds offering tax

benefits and a lock-in period.

o Exchange-Traded Funds (ETFs): Trade like stocks on exchanges,

offering liquidity and typically lower costs.

o Fixed Term Plans (FTPs): Close-ended funds with a predetermined

tenure, investing in fixed-income instruments.

o Debt Funds: Focus on fixed-income securities, offering lower

volatility and stable returns.

o Systematic Investment Plan (SIP): A strategy for disciplined, regular

investing, averaging the cost of investment over time.

o Systematic Transfer Plan (STP): Allows for the gradual transfer of

funds between different mutual fund types.

o Systematic Withdrawal Plan (SWP): Provides regular withdrawals,

offering a steady income stream.

Glossary
Balanced Funds are hybrid mutual funds that invest in both equity and
debt instruments, providing a balance between capital growth and income
generation. They offer moderate risk and returns, making them suitable for
investors seeking diversification.

Close-Ended Funds are mutual funds with a fixed maturity period,

usually 3-5 years. Units can only be purchased during the initial offer
period, after which they are traded on stock exchanges.
87
Mutual Fund Management Debt Funds are mutual funds that invest in fixed-income securities such
and Wealth Management as bonds and government securities, offering steady returns with low
volatility. They are ideal for conservative investors seeking regular
income.

Domestic Funds are mutual funds that primarily invest in assets located
within the investor's home country. They offer exposure to local markets
and economies, with risks tied to domestic economic conditions.

Exchange-Traded Funds (ETFs) are funds that trade on stock exchanges

like individual stocks, typically tracking an index. ETFs offer high
liquidity, low-cost management, and provide exposure to various market
sectors with moderate risks.

Fixed Term Plans (FTPs) are close-ended funds with a fixed tenure that
invest in fixed-income securities, providing predictable returns over a set
period. They are suitable for investors with a fixed investment horizon.

Growth Funds are mutual funds that primarily invest in equity or stocks,
aiming for capital appreciation. They are higher-risk investments, ideal for
long-term investors willing to accept market volatility.

Income Funds are mutual funds that invest in fixed-income securities

such as bonds and debentures, with the primary goal of providing regular
income. They are ideal for conservative investors seeking stable returns.

Interval Funds are a hybrid category of mutual funds that allow investors
to buy and sell units at specific intervals. They offer moderate liquidity
and are priced based on the NAV during the specific windows.

Money Market Mutual Funds (MMMF) are mutual funds that invest in
short-term, high-quality money market instruments like treasury bills,
certificates of deposit, and commercial paper. They are low-risk, highly
liquid funds ideal for short-term parking of funds.

Offshore Funds are mutual funds that invest in markets outside the
investor's home country. These funds offer global diversification but come
with added risks like currency fluctuations and exposure to foreign market
volatility.

Open-Ended Funds are mutual funds that allow investors to buy and sell
units directly from the fund house at any time, with no fixed maturity
period. They provide high liquidity and are priced based on the daily Net
Asset Value (NAV).

Systematic Investment Plan (SIP) is a method of investing in mutual

funds by contributing fixed amounts regularly, usually monthly. It helps in
rupee cost averaging and capitalizes on the power of compounding over
time.

88
Systematic Transfer Plan (STP) is a strategy that allows investors to Types of Mutual Funds: An
transfer a fixed amount from one mutual fund (typically a debt fund) to Overview of Their
another (such as an equity fund) at regular intervals, helping manage risk Characteristics and Functions
and optimize portfolio allocation.

Systematic Withdrawal Plan (SWP) is a method of withdrawing a fixed

amount from a mutual fund at regular intervals, offering a steady stream of
income while allowing the remaining investment to continue growing. It is
commonly used for retirement or periodic cash flow needs.

Tax-Saving Funds (ELSS) are equity-oriented mutual funds that offer tax
benefits under specific regulations. These funds typically have a 3-year
lock-in period and are ideal for investors looking to reduce tax liability
while gaining from equity growth potential.

References:

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 https://icmai.in/upload/Students/Syllabus2022/Final_Stdy_Mtrl/P14.pdf

 https://www.icsi.edu/media/webmodules/publications/CM&SL%20Fin
al%20PDF.pdf

 https://www.nseindia.com/products-services/mf-about-mfss

 https://www.bseindia.com/Static/Markets/MutualFunds/BSEStarMF.as
px

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 https://www.moneycontrol.com/mutualfundindia/

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

89
 4
PORTFOLIO MATURITY AND
CALCULATION OF NET
ASSET VALUE (NAV)
Unit Structure :
4.0 Learning Objectives
4.1 Portfolio Maturity
4.2 Net Asset Value (NAV)
4.3 Illustrations
4.4 Exercise

4.0 LEARNING OBJECTIVES

By the end of this topic, learners should be able to:

 Explain the concept of portfolio maturity and how it influences the risk
and return profile of an investment portfolio.

 Recognize the role of individual asset maturities and their impact on

the overall portfolio maturity.

 Accurately calculate the NAV of a mutual fund, understanding the

components of total assets, liabilities, and outstanding shares.
 Understand how the maturity of a portfolio influences the NAV,
particularly in relation to interest rate changes and market fluctuations.
 Assess how different maturity strategies (short-term vs long-term)
affect portfolio performance and investor returns.

4.1 PORTFOLIO MATURITY

4.1.1 Introduction to Portfolio Maturity
 Definition:
Portfolio maturity refers to the weighted average maturity of the
securities within an investment portfolio. It measures the average time
it takes for the assets to mature, considering the time until maturity for
each asset and its weight in the portfolio.

 Significance:
The maturity of a portfolio influences the portfolio’s risk and returns.
The longer the maturity, the higher the potential risk due to interest
rate fluctuations, but with the potential for higher returns. Shorter
maturities generally provide stability but with lower returns.

90
 Role in Portfolio Management: Portfolio Maturity and
Portfolio maturity is a crucial aspect of managing interest rate risk Calculation of Net Asset
and liquidity needs. Understanding the maturity structure of a portfolio Value (NAV)
helps investors align their portfolio with their financial goals, whether
it’s for capital appreciation or steady income.

4.2.2 Components of Portfolio Maturity

 Types of Securities:

Different securities contribute differently to portfolio maturity:

o Bonds: Have a defined maturity date and thus directly impact portfolio
maturity.

o Stocks: Do not have a maturity date but may be held until a target
price is achieved.

o Treasury Bills, Notes, and Bonds: Each of these government

securities has varying maturity profiles that affect portfolio maturity.

o Loans and Mortgages: Similarly to bonds, loans can have fixed or

variable maturities.

 Weighting of Assets:
The weight of each asset in the portfolio must be factored in when
calculating portfolio maturity. For example, a bond with a longer maturity
but smaller proportion in the portfolio will affect the weighted average
maturity less than a bond with a shorter maturity but higher proportion.

4.2.3 Calculating Portfolio Maturity

 Formula for Weighted Average Maturity (WAM): The Weighted
Average Maturity (WAM) can be calculated as:

Where:
Maturity of Asset: Time to maturity of the individual securities in the
portfolio.

Weight of Asset: Proportional value of each asset relative to the total

portfolio.

 Example Calculation:
Given:
o 50% of 5-year bond,
o 30% of 10-year bond,
o 20% of 3-year bond,

91
Mutual Fund Management The weighted average maturity is:
and Wealth Management

4.2.4 The Concept of Duration and Its Relationship with Portfolio

Maturity
 Duration vs. Maturity:
While portfolio maturity measures the time until the bonds and
securities in the portfolio mature, duration measures the sensitivity of
the portfolio's value to changes in interest rates. Duration is an
important concept when assessing risk because it gives a more precise
measure of interest rate sensitivity than maturity alone.

 Modified Duration:
Duration can be modified to account for how the price of a security (or
portfolio) will change in response to interest rate changes. It is
calculated as:

Where:
o YTM = Yield to Maturity.
o n = Number of compounding periods per year.

 Impact on Portfolio Risk:

Longer duration means greater price volatility with interest rate changes,
similar to a longer maturity. Therefore, managing portfolio duration and
maturity helps reduce unwanted risks and align the portfolio’s behaviour
with the investor’s risk appetite.

Example 01:
The following data is available for a bond. Face value is ` 100, Coupon
rate is 14%, years to maturity is 5 years, and redemption value is ` 100.
YTM is l5%. Calculate duration of bond and modified duration.

Statement showing calculation of Duration of Bond

1 2 3 4=2x3 5=1x4
Year Interest @ DF @ 15% PVCF Year x
14% PVCF
1 14 0.8696 12.17 12.17
2 14 0.7561 10.59 21.17
92
3 14 0.6575 9.21 27.62 Portfolio Maturity and
Calculation of Net Asset
4 14 0.5718 8.01 32.02 Value (NAV)
5 114 0.4972 56.68 284.40
96.65 376.39

Duration of Bond = 4.89 Years

Modified Duration

5. Impact of Portfolio Maturity on Interest Rate Sensitivity

 Interest Rate Risk:
The longer the maturity of a portfolio’s assets, the more it is exposed to
interest rate risk. When interest rates rise, the value of long-term bonds
decreases more significantly than that of short-term bonds. Conversely,
when interest rates fall, long-term bonds will benefit more in terms of
price appreciation.

 Risk Mitigation Strategies:

o Shortening Portfolio Maturity: Investors can reduce their portfolio's
maturity to minimize exposure to rising interest rates.

o Barbell Strategy: A strategy where the portfolio holds both short-term

and long-term bonds while avoiding intermediate maturities, balancing
risk and return.

93
Mutual Fund Management o Laddering Strategy: A strategy where bonds are purchased with
and Wealth Management different maturities, ensuring that a portion of the portfolio matures
regularly to avoid exposure to large interest rate changes.

6. Implications for Different Investor Profiles

 Risk Tolerance:
o A high-risk tolerance investor may opt for a portfolio with longer
maturity to capture higher yields.

o A low-risk tolerance investor may prefer shorter maturity securities to

minimize risk and maintain stability.

 Investment Horizon:
o An investor with a long-term horizon (e.g., retirement 20 years away)
might invest in longer-maturity assets, expecting higher returns over
the long term.

o An investor with a short-term horizon might prefer short-term

investments to minimize exposure to market volatility and interest rate
risk.

7. Role of Portfolio Maturity in Diversification

 Diversification Across Maturities:
A well-diversified portfolio includes a mix of short, medium, and long-
term assets, helping to smooth out returns and reduce risks associated with
interest rate fluctuations. By diversifying across maturities, investors can
better manage the volatility of the portfolio.

 Diversification within Fixed Income:

o A fixed income portfolio that holds only bonds can be diversified
across different maturities to balance both income and price stability.

o Mixed portfolios (e.g., equities, fixed income, and cash) also benefit
from maturity diversification.

8. Portfolio Rebalancing and Maturity

 Periodic Rebalancing:
Over time, the portfolio’s maturity structure can shift due to the
maturation of bonds or changes in market conditions. Rebalancing
involves adjusting the portfolio to maintain the desired maturity profile.

 Rebalancing Strategies:
o Target Date Funds: These funds automatically adjust the maturity
structure as the target date (e.g., retirement) approaches, typically
shifting from longer to shorter maturities.

o Active Management: Investors or fund managers can actively adjust

portfolio maturity based on forecasts of interest rates, inflation, or
economic conditions.

94
9. Practical Examples and Case Studies Portfolio Maturity and
 Government vs. Corporate Bonds: Calculation of Net Asset
Government bonds typically have longer maturities than corporate bonds, Value (NAV)
which might have a higher yield but shorter maturities. Discuss how
different types of bonds contribute to portfolio maturity and risk.

 International Portfolios:
Discuss the impact of investing in global bonds with different maturities.
Consider the influence of foreign exchange risk, geopolitical risk, and
how different countries' interest rate policies affect bond maturities.

 Mutual Funds:
Analyze the role of maturity in bond funds. Long-term bond funds will
have different characteristics compared to short-term bond funds,
influencing both risk and return.

10. Summary and Key Takeaways

 Portfolio Maturity is a key concept in portfolio management,
representing the average maturity of assets, weighted by their proportion
in the portfolio.

 Longer maturity generally involves higher interest rate risk, while

shorter maturity provides stability but lower returns.

 Effective management of portfolio maturity involves balancing

duration, aligning maturity with investment goals, and considering
economic conditions.

 Investors can adjust their portfolio’s maturity profile using strategies

like laddering, barbell, or target-date funds.

4.2 NET ASSET VALUE (NAV)

4.2.1 Introduction to NAV
 Definition: The Net Asset Value (NAV) of a mutual fund is the price
per share or unit of the fund, calculated by determining the value of all
the fund’s assets, subtracting liabilities, and dividing by the total
number of outstanding units. It represents what each unit of the mutual
fund is worth at any given time.
 According to Investopedia: NAV is “a fund's per-share market value.
It is derived by dividing the total net assets of the fund by the number
of shares outstanding.”
 NAV is often compared to the “book value” of the fund and is a key
metric for understanding the fund’s financial health and tracking its
performance over time.

95
Mutual Fund Management 4.2.2 Significance of NAV in Mutual Fund Investments
and Wealth Management
 NAV serves as a benchmark for evaluating a fund's value over
time, enabling investors to measure the growth or decline of their
investments.
 It acts as an indicator of a mutual fund’s market value, allowing
investors to make informed decisions on whether to buy, hold, or sell
units.
 NAV is especially important because mutual funds do not trade like
stocks throughout the day; they are only bought or sold at the NAV
calculated at the end of each trading day.

4.2.3 How NAV is Calculated

 The formula to calculate NAV is as follows:

o Total Assets: The cumulative value of the stocks, bonds, cash, and
other securities held by the mutual fund.
o Total Liabilities: These are the obligations or debts of the mutual
fund, including fees, management expenses, and other financial
liabilities.
o Number of Outstanding Units: The total number of units that
investors hold in the fund.

Example Calculation:
Imagine a mutual fund has:

 Total Assets = ` 1,00,000

 Total Liabilities = ` 5,000

 Outstanding Units = 1,000
In this case:

 So, each unit of the fund is valued at ` 95.

96
4.2.4 Understanding Daily Changes in NAV Portfolio Maturity and
Calculation of Net Asset
 Daily NAV Updates: Unlike stocks, mutual funds don’t trade at Value (NAV)
various prices throughout the day. Instead, the NAV is calculated at
the end of each trading day based on the current market value of the
underlying assets. This is known as mark-to-market accounting.
 Market Influence: The NAV fluctuates due to market changes,
reflecting the changing value of the securities held by the fund. An
increase in the value of underlying assets will increase the NAV, and
vice versa.
 According to a study published in the Journal of Financial Economics,
“NAV is influenced by both market performance and the portfolio
strategy employed by the mutual fund,” indicating that NAV’s change
is also affected by the fund’s investment decisions and asset allocation
strategies.

4.2.5 NAV vs. Stock Price

 Different Purposes: Unlike a stock price, which represents the
market's valuation of a company’s share, NAV represents the book
value of the fund's total assets per unit after deducting liabilities.
 Not a Profit Indicator: NAV doesn’t directly represent the fund’s
profitability. Rather, it is a snapshot of the fund’s current per-unit
value.
 Example for Clarity:
o A company’s stock price reflects investor sentiment, demand, and
projected growth.
o A mutual fund’s NAV reflects only the book value of its assets. As
The Financial Analyst Journal explains, “NAV should be interpreted
as a measure of current valuation, not as an indicator of future price
movements or profitability.”

4.2.6 NAV and Investment Returns

 Growth in NAV: Investment gains from a mutual fund come from
increases in the NAV over time, as well as from distributions such as
dividends or capital gains.
 Example Scenario:
o If an investor buys units when the NAV is ` 100 and sells when it has
risen to ` 110, the investor has earned a ` 10 profit per unit.
 NAV’s Relevance: While the NAV provides insight into a fund’s per-
unit value, the return on investment depends on the change in NAV
over time. According to Morningstar, “NAV changes serve as an
effective measure for tracking fund performance, especially over
longer periods.”
97
Mutual Fund Management 4.2.7 Why is NAV Important for Investors?
and Wealth Management
 Performance Measurement: NAV’s day-to-day changes help
investors track fund performance over time.
 Ease of Comparison: NAV can be used to compare mutual funds with
similar investment objectives.
 Determines Entry and Exit Price: Investors buy or sell mutual funds
at the day’s closing NAV, making it essential for timing and pricing
decisions.

4.2.8 Illustrative Analogy:

 Think of a mutual fund like a joint bank account. If several people
contribute to a shared account (the total assets), each person’s share
(the NAV per unit) fluctuates with additions or withdrawals and with
any changes in account value (similar to market fluctuations).

4.2.9 Limitations of NAV

 Not Indicative of Market Demand: Unlike stocks, which reflect
investor demand, NAV doesn’t fluctuate due to buying or selling
activity but rather due to changes in asset value.
 Doesn’t Indicate Performance Alone: A low NAV doesn’t mean a
fund is cheap or underperforming; it simply reflects the fund's current
asset value per unit.
4.2.10 Summary
 NAV reflects the per-unit market value of a mutual fund and changes
daily based on the market value of assets in the fund.
 It’s calculated by dividing the net assets (total assets minus liabilities)
by the total number of outstanding units.
 NAV is essential for understanding the per-unit value of a mutual
fund, tracking performance, and determining buy/sell prices for
investors.

4.3 ILLUSTRATIONS

Illustration 01:
A bond with face value ` 1,000 yields 6% returns with maturity value of 4
years. Currently the market price of the bond is 840. Calculate the yield to
maturity investment in the bond.
Solution 01:
Given Information:

Face Value (FV) = `1,000

98
Coupon Rate = 6% (This means an annual coupon payment of `1,000 × Portfolio Maturity and
6% = `60) Calculation of Net Asset
Value (NAV)
Current Market Price (P) = `840
Years to Maturity (n) = 4
Solution 01:

Illustration 02:
A Bond of ` 100 has a coupon rate of 8% per annum and Maturity period
of 3 years. The bond is currently selling at ` 91. What is the yield to
maturity in the investment of this bond? (TYBAF., Apr. 2019).

Solution 02:

99
Mutual Fund Management Illustration 03:
and Wealth Management
Calculate the duration and modified of Bond from the following details.

Face Value = ` 1,000

Coupon Rate (payable annually) = 13 %
Years to Maturity = 5 years

Redemption value = ` 1,000

Current Market Price = ` 1,036

Yield To Maturity = 12%

Solution 03:
Statement showing calculation of Duration of Bond

1 2 3 4=2x3 5=1x4

Year Interest @ 13% YTM @ 12% PVCF Year x PVCF

1 130 0.8929 116.08 116.08

2 130 0.7972 104.64 207.28

3 130 0.7118 92.53 277.59

4 130 0.6355 82.62 330.48

5 1130 0.5674 641.16 3,205.80

1,036.03 4,137.23

Modified Duration

100
 Portfolio Maturity and
Calculation of Net Asset
Value (NAV)

Illustration 04:
Find the duration of bond with the face value of ` 1,000 making interest of
7% if it has 14 years until maturity. The bond is redeemable at 10%
premium. The current annual interest rate is 8%. (Calculate upto 4
decimal).

Solution 04:
Statement showing calculationof Duration of Bond

1 2 3 4=2x3 5=1x4
Year Interest @ 7% DF @ 8% PVCF Year x PVCF
1 70 0.9259 64.81 64.81
2 70 0.8573 60.01 120.02
3 70 0.7938 55.57 166.70
4 70 0.7350 51.45 205.80
5 70 0.6806 47.64 238.21
6 70 0.6302 44.11 264.68
7 70 0.5835 40.85 285.92
8 70 0.5403 37.82 302.57
9 70 0.5002 35.01 315.13
10 70 0.4632 32.42 324.24
11 70 0.4289 30.02 330.25
12 70 0.3971 27.80 334.56
13 70 0.3677 25.74 334.61
14 1170 0.3405 398.39 5,577.39
951.64 8,864.89

101
Mutual Fund Management Modified Duration
and Wealth Management

Illustration 05:
Find out NAV per unit from the following information of Scheme Money
Plant

Name of the scheme - Money Plant

Size of the scheme ` 100 Lakhs
Face value of the units ` 100
Number of the outstanding units 1 Lakhs
Market value of the fund’s investments ` 180 Lakhs
Receivables ` 2 Lakhs
Liabilities ` 1 Lakh

Solution 05:

Calculation of Net Assets Value

Particulars Amount (in Lacs)
Assets
Market Value of Shares 180.00
Receivables 2.00
Less: Liabilities
Liabilities (1.00)
Net Assets for Funds 181.00
(÷) No.of Units Outstanding 1.00
Net Assets Value per unit 181.00

102
Illustration 06: Portfolio Maturity and
Calculation of Net Asset
Cinderella Mutual Fund has the following assets in Scheme Rudolf at the Value (NAV)
close of business on 31 st March, 2014.

Company No. of Market Price Per

Shares Share
Nairobi Ltd. 25,000 ` 20
Dakar Ltd. 35,000 ` 300
Senegal Ltd. 29,000 ` 380
Cairo Ltd. 40,000 ` 500

The total number of units of Scheme Rudolf fare 10 lacs. The Scheme
Rudolf has accrued expenses of ` 2,50,000 and other liabilities of `
2,00,000. Calculate the NAV per unit of the Scheme Rudolf.

Solution 06:

Calculation of Net Assets Value

Particulars Amount (in Lacs)
Assets:
Market Value of Shares
Nairobi Ltd. (25,000 x 20) 5,00,000.00
Dakar Ltd. (35,000 x 300) 1,05,00,000.00
Senegal Ltd. (29,000 x 380) 1,10,20,000.00
Cairo Ltd. (40,000 x 500) 2,00,00,000.00
Total Assets 4,20,20,000.00
Less: Liabilities
Accrued Expenses (2,50,000.00)
Other Liabilities (2,00,000.00)
Net Assets for Fund 4,15,70,000.00
(÷) No. of Units Outstanding 10,00,000.00
Net Assets Value 41.57

103
Mutual Fund Management Illustration 07
and Wealth Management
A Mutual Fund made an issue of 10,00,000 units of `10 each on
01.01.2012. No entry load was charged. It made the following
investments:

Particulars `
50,000 Equity Shares of `100 each @ ` 160 each 80,00,000
7% Government Securities 8,00,000
9% Debentures (Unlisted) 5,00,000
10% Debentures (Listed) 5,00,000
Total 98,00,000

During the year, dividends of ` 12,00,000 were received on equity shares.

Interest on all types of debt securities was received as and when due. At
the end of the year equity shares and 10% debentures are quoted at 175%
and 90% respectively. Other investments are quoted at par. Find out the
Net Asset Value (NAV) per unit given that the operating expenses during
the year amounted to ` 5,00,000. Also find out the NAV, if the Mutual
Fund had distributed a dividend of ` 0.90 per unit during the year to the
unit holders.

Solution 07:

(a) Calculation of Net Assets Value

Particulars Amount (in Lacs)
Assets:
50,000 Equity shares at ` 100 each, Valued @
175 (100 x 175%) 87,50,000.00
7% Government Securities 8,00,000.00
9% Debentures (Unlisted) 5,00,000.00
10% Debentures (Listed) (Quoted at 90%) 4,50,000.00
Cash (WN. 1) 10,51,000.00
Total Assets 1,15,51,000.00
Less: Liabilities -
Net Assets Value for Fund 1,15,51,000.00
(÷) No. of Units Outstanding 10,00,000.00
Net Assets Value Per Unit 11.55

104
(b) Calculation of Net Assets Value (When Dividend is Paid) Portfolio Maturity and
Calculation of Net Asset
Particulars Amount (in Lacs) Value (NAV)
Net Assets Value for Fund 1,15,51,000.00
(-) Dividend Paid (10,00,000 x 0.90) (9,00,000.00)
Net Assets Value of Fund (Post dividend) 1,06,51,000.00
(÷) No. of Units Outstanding 10,00,000.00
Net Assets Value Per Unit 10.65
WN. 1: Statement showing calculation of Cash balance

Particulars Amount
Raised from issue of Units 1,00,00,000
Less: Investments purchased (98,00,000)
Cash Balance 2,00,000
(+) Dividend received on Equity Shares 12,00,000
(+) Interest on Government Securities 56,000
(+) Interest on 9% Debentures 45,000
(+) Interest on 10% Debentures 50,000
(-) Operating Expenses (5,00,000)
Net Cash Balance 10,51,000

WN. 2: Statement showing calculation of Cash balance

Particulars Amount
Cash Balance 10,51,000
Less: Dividend Paid on MF Units (10,00,000 x 0.90) (9,00,000)
Net Cash Balance 1,51,000

Illustration 08:
A Mutual Fund Co. has the following assets under it on the close of
business as on:

1st February 2012 2nd February 2012

No. of Market price per Market price per
Company
Shares share share
` `
L Ltd 20,000 20.00 20.50
M Ltd 30,000 312.40 360.00
N Ltd 20,000 361.20 384.10
P Ltd 60,000 505.10 504.90
105
Mutual Fund Management Total No. of Units 6,00,000
and Wealth Management i. Calculate Net Assets Value (NAV) of the Fund.
ii. Following information is given:
Assuming one Mr A, submits a cheque of ` 30,00,000 to the Mutual Fund
and the Fund manager of this company purchases 8,000 shares of M Ltd;
and the balance amount is held in Bank. In such a case, what would be the
position of the Fund?
iii. Find new NAV of the Fund as on 2nd February 2012.
Solution 08:
i. Calculation of Net Assets Value

Particulars Amount (in Lacs)

Assets:
L Ltd. (20,000 x 20) 4,00,000.00
M Ltd. (30,000 x 312.40) 93,72,000.00
N Ltd. (20,000 x 361.20) 72,24,000.00
P Ltd. (60,000 x 505.10) 3,03,06,000.00
Total Assets 4,73,02,000.00
Less: Liabilities -
Net Assets Value for Fund 4,73,02,000.00
(÷) No. of Units Outstanding 6,00,000.00
Net Assets Value Per Unit 78.84

ii. No. of units purchased = 8,000 x 312.40 = 24,99,200

Balance Cash = 30,00,000– 24,99,200=5,00,800
iii. Calculation of Net Assets Value

Particulars Amount (in Lacs)

Assets:
L Ltd. (20,000 x 20.50) 4,10,000
M Ltd. (38,000 x 360.00) 1,36,80,000
N Ltd. (20,000 x 384.10) 76,62,000
P Ltd. (60,000 x 504.90) 3,02,34,000
Bank (WN. ii) 5,00,800
Total Assets 5,24,86,800
Less: Liabilities -
Net Assets Value for Fund 5,24,86,800
(÷) No. of Units Outstanding (6,00,000 + 6,38,052
38,052)
Net Assets Value Per Unit 82.26
106
Illustration 09: Portfolio Maturity and
Calculation of Net Asset
Sun Mutual Funds provides you with the following data related to Value (NAV)
unbalanced mutual fund scheme. You are required to compute the Net
Assets Value of the scheme on unit basis as on 30th September 2018.

Particulars `. (in Crores)

Managers Salary 0.20
Operational Expenses 0.80
Amount payable on shares 0.25
Bonds and debentures at cost 0.60
Interest Income 0.32
Listed Securities at cost 0.93
Dividend Income 0.10
Cash in hand 0.24

Other information
1. Value of listed bonds and debentures is appreciated by l5% of Cost
while unlisted display a downfall of 5% from cost
2. All the listed securities were purchased when market index was 9500
and currently it is 9300.
3. Out of total bonds quoted above 30% of them are unlisted.
4. No of outstanding units is 3,50,000
Also calculate the amount receivable by an investor who wishes to sell
125 units at NAV as on 30th September with 5% exit load.
Solution 09:

Calculation of Net Assets Value

Particulars Amount (in Crores)
Assets
Bonds and Debentures (0.60)
Listed (0.60 x 70%) x 115% 0.48
Unlisted (0.60 x 30%) x 95% 0.17
Interest Income 0.32
Listed Securities (0.93 * 9,300/9,500) 0.91
Dividend Income 0.10
Cash in Hand 0.24
Total Assets 2.22
Less: Liabilties
Amount Payable on share 0.25
Manager's Salary 0.20
Operational Expenses 0.80
1.25
Net Assets 0.97
(÷) No. of Units Outstanding 0.035
Net Assets Value per Unit 27.84

107
Mutual Fund Management 4.4 EXERCISE
and Wealth Management
A. Choose the most appropriate alternative
1. Portfolio maturity is defined as:
A) The average maturity of assets in a portfolio.
B) The value of the longest-held asset.
C) The expected yield of the portfolio.
D) The market value of the portfolio.

2. Which of the following securities has a maturity date?

A) Stocks
B) Bonds
C) Mutual funds
D) Real estate

4. Weighted Average Maturity (WAM) helps in:

A) Measuring average returns
B) Understanding portfolio liquidity needs
C) Assessing sensitivity to market fluctuations
D) Calculating dividends

4. In a bond duration calculation, which factor is NOT considered?

A) Face value
B) Years to maturity
C) Coupon rate
D) Total number of units

5. Which of these strategies reduces exposure to interest rate risk?

A) Laddering
B) Doubling
C) Shorting
D) Averaging

6. NAV of a mutual fund represents:

A) Fund's book value per share
B) Total market capitalization
C) The average asset maturity
D) Market demand for fund units

7. A portfolio's maturity affects:

A) Yield only
B) Risk and returns
C) Volatility only
D) Expenses only
108
8. Shorter maturities typically mean: Portfolio Maturity and
A) Lower risk, lower return Calculation of Net Asset
Value (NAV)
B) Higher risk, higher return
C) No effect on returns
D) Only lower returns

9. Duration of a bond gives insight into:

A) Maturity date
B) Sensitivity to interest rate changes
C) NAV calculation
D) Liquidity of the bond

10. Which maturity strategy includes bonds of varying maturities to

provide income regularly?
A) Barbell
B) Laddering
C) Balloon
D) Tiering
Answer:
1. A) The average maturity of assets in a portfolio.
2. B) Bonds
3. B) Understanding portfolio liquidity needs
4. D) Total number of units
5. A) Laddering
6. A) Fund's book value per share
7. B) Risk and returns
8. A) Lower risk, lower return
9. B) Sensitivity to interest rate changes
10. B) Laddering

B. True or False Questions

1. Portfolio maturity directly impacts the risk-return profile.
2. Stocks contribute significantly to portfolio maturity as they have
maturity dates.
3. Duration is a measure of interest rate sensitivity rather than maturity
alone.
4. NAV is calculated at multiple points throughout the trading day.
5. A mutual fund’s NAV decreases when asset values rise.
6. Modified duration accounts for the impact of interest rate changes.
109
Mutual Fund Management 7. Portfolio maturity has no relation to an investor’s risk tolerance.
and Wealth Management
8. The laddering strategy reduces the risk associated with interest rate
fluctuations.
9. NAV represents the value per share/unit of a mutual fund.
10. The barbell strategy only involves long-term securities.

Answer:
1. True 2. False 4. True 4. False 5. False
6. True 7. False 8. True 9. True 10. False

C. Match the Pairs

Column A Column B
1. Weighted Average Maturity A. Mutual Fund’s Value per Unit
(WAM)
2. Portfolio Maturity B. Risk Management in Portfolio
3. Barbell Strategy C. Holding Short- and Long-Term
Bonds
4. Duration D. Interest Rate Sensitivity
Measure
5. NAV E. Portfolio Asset's Average
Maturity
6. Laddering Strategy F. Series of Maturities
7. Yield to Maturity (YTM) G. Expected Rate of Return
8. Short-Term Maturities H. Low Risk, Low Return
9. Modified Duration I. Adjusted for Interest Rate
Changes
10. Total Liabilities J. Deducted to Find Net Assets

Answer:

Column A Column B
1. Weighted Average Maturity E) Portfolio Asset's Average
(WAM) Maturity
2. Portfolio Maturity B) Risk Management in Portfolio
3. Barbell Strategy C) Holding Short- and Long-Term
Bonds
4. Duration D) Interest Rate Sensitivity
Measure
5. NAV A) Mutual Fund’s Value per Unit

110
6. Laddering Strategy F) Series of Maturities Portfolio Maturity and
Calculation of Net Asset
7. Yield to Maturity (YTM) G) Expected Rate of Return Value (NAV)
8. Short-Term Maturities H) Low Risk, Low Return
9. Modified Duration I) Adjusted for Interest Rate
Changes
10. Total Liabilities J) Deducted to Find Net Assets

D. Answer in Brief
1. Explain the relationship between portfolio maturity and interest rate
sensitivity.
2. How does duration differ from maturity, and why is it essential in
bond portfolio management?
3. Describe the steps in calculating the Net Asset Value (NAV) of a
mutual fund.
4. Discuss the significance of a laddering strategy in managing a
portfolio.
5. Explain how different investor profiles might influence choices
regarding portfolio maturity.
6. What factors determine the portfolio's weighted average maturity?
7. Discuss how NAV is influenced by market changes and portfolio
strategy.
8. Define modified duration and its importance in managing interest rate
risk.
9. How does the barbell strategy balance risk and return?
10. What is the impact of maturity structure on the performance of a
diversified fixed-income portfolio?

E. Short Notes
1. Portfolio Maturity
2. Weighted Average Maturity (WAM)
3. Duration vs. Maturity.
4. Modified Duration
5. Net Asset Value (NAV)
6. Impact of Interest Rate on Portfolio
7. Laddering Strategy
8. Barbell Strategy
9. Significance of Short-term vs. Long-term Maturity in Portfolios
10. NAV vs. Stock Price

111
Mutual Fund Management Summary
and Wealth Management
Portfolio Maturity is a key concept in portfolio management, representing
the weighted average maturity of securities within an investment portfolio.
It influences the portfolio’s risk and return profile—longer maturities
typically increase exposure to interest rate risk but may offer higher
returns, while shorter maturities provide stability with lower returns.
Managing portfolio maturity is essential for aligning a portfolio with an
investor's financial goals and risk tolerance.

Components of Portfolio Maturity include:

 Types of Securities: Bonds (with fixed maturity dates), Treasury
Bills, Loans, and Mortgages, each influencing the overall portfolio
maturity differently.
 Weighting of Assets: The proportion of each asset type impacts the
portfolio’s weighted average maturity (WAM), calculated using each
asset’s time to maturity and its portfolio weight.
Duration measures the portfolio’s sensitivity to interest rate changes,
providing a more precise indicator of interest rate risk than maturity alone.
Modified Duration refines this measure, indicating price volatility based
on interest rate changes.
Strategies for Interest Rate Risk Management include:
1. Shortening Portfolio Maturity to reduce sensitivity to interest rate
changes.
2. Barbell Strategy involving a mix of short-term and long-term bonds.
3. Laddering Strategy, which staggers bond maturities to reduce
exposure to large rate shifts.
Net Asset Value (NAV) represents a mutual fund’s per-share value,
calculated by dividing the fund’s net assets (total assets minus liabilities)
by the number of outstanding units. Unlike stock prices, NAV reflects the
mutual fund’s book value rather than investor demand, changing only at
the close of each trading day. NAV provides a benchmark for mutual fund
performance and is essential for understanding investment value and
pricing decisions.
Investment Strategies: Portfolio maturity and NAV influence an
investor’s returns, depending on investment horizons and risk tolerance.
Portfolios can be rebalanced periodically to maintain the desired maturity
structure, using strategies like Target Date Funds or Active
Management.

Glossary
Barbell Strategy: An approach involving short- and long-term bonds to
balance stability and yield.

112
Duration: Measures the sensitivity of a portfolio's price to interest rate Portfolio Maturity and
changes. Calculation of Net Asset
Value (NAV)
Interest Rate Risk: The risk that changes in interest rates will affect the
portfolio’s value, particularly for bonds and long-term assets.
Laddering Strategy: A bond investment strategy where bonds with
various maturities are purchased to reduce the impact of interest rate
changes.
Modified Duration: Adjusted duration metric accounting for expected
interest rate changes.
Net Asset Value (NAV): The per-unit value of a mutual fund, determined
by dividing the fund’s net assets by the total outstanding units.
Portfolio Maturity: The weighted average time to maturity of securities
within a portfolio, affecting risk and return.
Target Date Fund: A fund designed to gradually adjust portfolio maturity
and asset allocation as the target date (e.g., retirement) approaches.
Weighted Average Maturity (WAM): Calculated by considering each
asset's time to maturity and portfolio weight.
Yield to Maturity (YTM): The expected rate of return on a bond held
until maturity.
References:
https://resource.cdn.icai.org/74835bos60509-cp8.pdf
https://icmai.in/upload/Students/Syllabus2022/Final_Stdy_Mtrl/P14.pdf
https://www.icsi.edu/media/webmodules/publications/CM&SL%20Final%
20PDF.pdf
https://www.nseindia.com/products-services/mf-about-mfss
https://www.bseindia.com/Static/Markets/MutualFunds/BSEStarMF.aspx
https://www.amfiindia.com/
https://www.mutualfundssahihai.com/
https://www.moneycontrol.com/mutualfundindia/
https://www.etmoney.com/mutual-funds



113
 5
FOUNDATIONS OF WEALTH
MANAGEMENT: CONCEPTS,
PROCESSES, AND MARKET OVERVIEW
Unit Structure :
5.0 Learning Objectives
5.1 Introduction to Wealth Management
5.2 Wealth management is important for several reasons
5.5 Types of Wealth Management Services
5.4 Wealth Management Process
5.5 Holistic Wealth Management Framework for India
5.6 Conclusion
5.7 Question
5.8 Conclusion
5.9 Reference

5.0 LEARNING OBJECTIVES

After reading this chapter, learner will be able to:
Define Wealth Management: Understand the concept and services
involved in wealth management.
Understand the Wealth Management Process: Learn the steps involved in
managing wealth, from initial consultation to ongoing monitoring.
Identify Phases in Wealth Management: Recognize the key phases
involved in the wealth management process.
Analyze the Wealth Management Market in India: Examine the current
trends and growth in the wealth management industry in India.
Apply Holistic Planning Framework: Learn how to develop a
comprehensive financial plan that addresses all aspects of an individual’s
financial life.

5.1.1 Introduction to Wealth Management:

Definition: Wealth management is a broad term that encompasses the
process of managing an individual's or family's financial resources to
achieve their financial goals and objectives. Here is a definition of wealth
management by various authors

114
 "Wealth management is the process of creating, preserving, and Foundations of Wealth
distributing wealth over time, while considering the client's overall Management: Concepts,
financial situation, goals, and values." - CFP Board (Certified Processes, and Market
Overview
Financial Planner Board of Standards)

 "Wealth management is a comprehensive approach to managing one's

financial affairs, encompassing investment management, tax planning,
estate planning, insurance planning, and other financial strategies
designed to help clients achieve their financial goals." - Financial
Planning Association

 "Wealth management is the art and science of helping individuals and

families achieve their long-term financial objectives by providing
customized investment strategies, tax and estate planning, risk
management, and other related services." - Investopedia

 "Wealth management is the process of managing one's financial affairs

in a holistic manner, taking into account an individual's or family's
unique financial circumstances, goals, values, and priorities." - Charles
Schwab

 "Wealth management is about creating a comprehensive plan that

integrates all aspects of an individual's or family's financial life,
including investments, taxes, estate planning, insurance, and other
financial matters." - Merrill Lynch
These definitions highlight the importance of a holistic approach to wealth
management, which involves considering multiple factors beyond just
investments. Effective wealth management involves understanding an
individual's or family's overall financial situation, goals, values, and
priorities to develop a customized plan that helps them achieve their long-
term objectives.
Wealth management is the process of planning, organizing, and managing
an individual's or organization's financial resources to achieve their long-
term financial goals. It involves a comprehensive approach that considers
various aspects of an individual's financial situation, including their
income, expenses, assets, debts, and investments. The goal of wealth
management is to ensure that an individual's wealth grows over time,
providing them with financial security and freedom.

5.1.2. Wealth Manger

A wealth manager, also known as a financial advisor or wealth advisor, is
a professional who helps individuals and families manage their financial
affairs and achieve their long-term financial goals. A key part of their role
is creating a customized plan to help clients achieve their financial
objectives.

115
Mutual Fund Management Here's how a wealth manager creates a customized plan:
and Wealth Management
 Initial Consultation: The wealth manager meets with the client to
understand their financial goals, risk tolerance, and investment
preferences. This includes acquiring information on the client's

 Financial situation like income, expenses, assets, liabilities, and net

worth.

 Financial goals include short-term and long-term objectives, such as

saving for retirement, paying off debt, or funding education expenses.

 Risk tolerance level which include the client's ability to take on risk
and potentially lose some or all of their investments.

 Investment preferences is the types of investments cilent prefer, such

as stocks, bonds, or real estate.

1. Financial Analysis: The wealth manager conducts a comprehensive

financial analysis to identify the client's:
 Current financial situation which including cash flow, credit score, and
debt-to-income ratio.

 Investment portfolio analyzing the client's existing investments and

identifying potential areas for improvement.
 Tax situationidentifying opportunities to minimize taxes and optimize
tax-advantaged accounts.

2. Goal-Based Planning: The wealth manager uses the information

gathered to create a customized plan tailored to the client's goals. This
may include:
 Setting specific financial targets: e.g., saving for a down payment on a
house or achieving a certain level of retirement income.
 Developing an investment strategy: Allocating assets among different
asset classes, such as stocks, bonds, and cash.

 Creating a cash flow plan: Managing income and expenses to ensure

sufficient cash flow for living expenses and savings.

3. Implementation: The wealth manager implements the customized

plan by:
 Rebalancing the investment portfolio to ensure it remains aligned with
the client's goals and risk tolerance.

 Opening and managing tax-advantaged accounts for wealth

management can help individuals and businesses optimize their
financial situation by minimizing taxes, reducing financial risk, and
increasing returns on investments. Here are some common types of
tax-advantaged accounts and their benefits such as
116
 In India, tax-advantaged accounts are special types of savings and Foundations of Wealth
investment accounts that offer tax benefits under the Income Tax Act, Management: Concepts,
1961. Here are some common tax-advantaged accounts in India and Processes, and Market
Overview
how to manage them:

e.g. 1. Public Provident Fund (PPF):

o A long-term savings scheme for individuals to save for retirement.
o Contribution limit: ` 1.5 lakhs per annum.
o Interest rate: 7.1% per annum (the current PPF interest rate is 7.1%
for Q4 of FY 2023-24)
o Tax benefits: Exempt from tax on interest and withdrawals.
o How to manage: Open an account with a nationalized bank or a
designated branch of a PSU bank.

e.g. 2. National Pension System (NPS):

o A retirement savings scheme for employees and self-employed
individuals.

o Contribution limit: 10% of basic salary (for employees) or up to `

50,000 per annum (for self-employed).

o Tax benefits: Exempt from tax on contributions, and the corpus is tax-
free on withdrawal after age 60.

o How to manage: Register online with the NPS website or through a

designated Point of Presence (POP) bank.

e.g. 5. Employee Provident Fund (EPF):

o A mandatory savings scheme for salaried employees.
o Contribution limit: 12% of basic salary (employee's share) + 5.67%
(employer's share).
o Tax benefits: Exempt from tax on contributions and interest.
o How to manage: Open an account with a nationalized bank or a
designated branch of a PSU bank.

e.g.4. Employee's Pension Scheme (EPS):

o A pension scheme for salaried employees.
o Contribution limit: 8.33% of basic salary (employee's share).
o Tax benefits: Exempt from tax on contributions and pension received.
o How to manage: Open an account with a nationalized bank or a
designated branch of a PSU bank.

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Mutual Fund Management e.g.5. Rajiv Gandhi Equity Savings Scheme (RGESS):
and Wealth Management
o A tax-saving scheme for low-income individuals investing in equities.
o Investment limit: ` 50,000 per annum.
o Tax benefits: Up to 50% of investments are eligible for tax deduction
under Section 80C.
o How to manage: Invest in a Scheme approved by the government,
such as the UTI-RGESS Scheme.

e.g.6.Tax-Free Fixed Deposit (FD):

o A savings instrument offered by banks and post offices with a fixed
interest rate for a specified period.
o Investment limit: No upper limit, but subject to market regulations.
o Tax benefits: Interest earned is exempt from tax.
o How to manage: Open an FD account with a bank or post office.

e.g. 7. Sukanya Samriddhi Account:

o A savings scheme for girls below the age of 10 years.
o Contribution limit: ` 1.5 lakhs per annum.
o Tax benefits: Interest earned is exempt from tax.
o How to manage: Open an account with a nationalized bank or a
designated branch of a PSU bank.

4. Implementing tax strategies (e.g., tax-loss harvesting).

o Ongoing Monitoring and Adjustments: Effective wealth
management is not a one-time event, but rather an ongoing process
that requires continuous monitoring and adjustments to ensure that
your financial goals are being met. The wealth manager regularly
reviews the client's progress toward their goals and makes adjustments
as needed to:

o Rebalance the investment portfolio: A Key Aspect of Wealth

Management. Rebalancing an investment portfolio is a crucial aspect
of wealth management that helps investors maintain their target asset
allocation and achieve their financial goals. Rebalancing involves
periodically reviewing and adjusting the mix of assets in a portfolio to
ensure that it remains aligned with the investor's risk tolerance,
investment objectives, and time horizon.

o Update tax strategies based on changes in tax laws or personal

circumstances: In wealth management, it is crucial to regularly
review and update tax strategies to ensure optimal tax efficiency.
Changes in tax laws, personal circumstances, and market conditions
can significantly impact an individual's tax liability. Failure to adjust
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 tax strategies accordingly can result in missed opportunities for Foundations of Wealth
savings, increased taxes owed, and even penalties. Management: Concepts,
Processes, and Market
Overview
o Refine the plan to reflect changes in the client's goals or risk
tolerance: As a wealth manager, it is essential to regularly review and
refine the investment plan to ensure that it remains aligned with the
client's evolving goals, risk tolerance, and financial situation. This
involves:

 Monitoring changes in client goals: Clients' goals may change over

time due to life events, such as retirement, inheritance, or changes in
personal circumstances. It is crucial to regularly assess these changes
and update the investment plan accordingly.

 Assessing changes in risk tolerance: Clients' risk tolerance may also

evolve over time due to factors such as changes in their financial
situation, personal values, or market conditions. Wealth managers
should reassess the client's risk tolerance and adjust the investment plan
to ensure that it remains consistent with their comfort level.

 Rebalancing the portfolio: When changes occur in either goals or risk

tolerance, it may be necessary to rebalance the portfolio to ensure that it
remains aligned with the updated objectives. This may involve
adjusting asset allocations, investment strategies, or even reallocating
assets to different investment products.

 Communicating with clients: Effective communication is critical

when refining the plan to reflect changes in client goals or risk
tolerance. Wealth managers should engage with clients to understand
their updated objectives and concerns, and provide clear explanations
of any changes made to their investment plan.
As a savvy investor, it's essential to stay ahead of the game by
implementing tax-efficient strategies that minimize your tax liability. One
effective approach is tax-loss harvesting, a technique that involves selling
securities that have declined in value to offset gains from other
investments.
Throughout this process, the wealth manager provides guidance,
education, and ongoing support to help clients stay on track towards
achieving their financial goals.

5.1.2 What is Wealth Management?

A wealth manager is a professional who helps individuals or families
manage and grow their wealth by creating a customized plan tailored to
their specific financial goals and objectives. The plan may involve a
variety of services, including:

 Investing in stocks, bonds, and other securities: The wealth

manager will help the client invest their money in a diversified
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Mutual Fund Management portfolio of stocks, bonds, mutual funds, exchange-traded funds
and Wealth Management (ETFs), or other securities to achieve their long-term financial goals.

 Managing debt and credit: The wealth manager will help the client
manage their debt by consolidating high-interest debt, negotiating with
creditors, and creating a plan to pay off debt quickly and efficiently.

 Creating a budget and cash flow plan: The wealth manager will help
the client create a budget that allocates their income effectively,
prioritizes spending, and ensures they have enough cash flow to meet
their financial obligations.

 Providing tax planning and preparation: The wealth manager will

help the client minimize their tax liability by optimizing their tax
strategy, preparing tax returns, and ensuring compliance with tax laws
and regulations.

 Creating a retirement plan: The wealth manager will help the client
create a comprehensive retirement plan that includes strategies for
saving for retirement, investing for growth, and ensuring a sustainable
income stream in retirement.

 Providing estate planning services: The wealth manager will help

the client create an estate plan that includes strategies for managing
assets after they pass away, such as wills, trusts, power of attorney,
and inheritance planning.

5.2 WEALTH MANAGEMENT IS IMPORTANT FOR

SEVERAL REASONS
 Financial Security: Wealth management helps individuals and
families achieve financial security by creating a safety net against
unexpected expenses, ensuring that their financial goals are met, and
providing peace of mind.

 Retirement Planning: With increasing life expectancy and the need

to sustain oneself during retirement, wealth management helps
individuals plan and save for a comfortable post-retirement life.

 Estate Planning: Wealth management involves planning and

managing one's estate, ensuring that assets are transferred smoothly to
the next generation, and minimizing taxes and other liabilities.

 Tax Efficiency: Wealth management helps individuals optimize their

tax planning, minimizing tax liabilities and maximizing returns on
investments.

 Risk Management: Wealth management involves identifying and

mitigating risks associated with investments, such as market volatility,
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 interest rate fluctuations, and inflation, to ensure that wealth is Foundations of Wealth
preserved. Management: Concepts,
Processes, and Market
Overview
 Investment Growth: Wealth management helps individuals grow
their wealth by identifying suitable investment opportunities,
diversifying portfolios, and monitoring performance.

 Cash Flow Management: Wealth management ensures that

individuals have a steady cash flow, allowing them to meet their
financial obligations and pursue their goals.

 Family Wealth Preservation: Wealth management helps preserve

family wealth by creating a legacy for future generations, while also
ensuring that family members are educated about wealth management
principles.
By considering these factors, individuals in India can effectively manage
their wealth, achieve financial security, and pursue their long-term goals

5.3 TYPES OF WEALTH MANAGEMENT SERVICES

Wealth management encompasses a variety of services designed to help
individuals and families grow and preserve their wealth. Here's a
breakdown of some of the most common types of wealth management
services:
 Financial Planning: This forms the foundation of wealth
management. Financial planners help you assess your current financial
situation, including income, expenses, debts, and assets. They then
work with you to define your financial goals, such as saving for
retirement, buying a home, or paying for your children's education.
Based on this information, they create a personalized financial plan
that outlines strategies to achieve your goals.
 Asset Allocation: This service involves distributing your investment
portfolio across different asset classes, such as stocks, bonds, real
estate, and cash equivalents. Asset allocation helps to manage risk by
diversifying your investments. A wealth manager will consider your
risk tolerance, investment goals, and time horizon when creating an
asset allocation strategy.
 Investment Management: Wealth managers can provide ongoing
investment advice and management. This may include selecting
investments, buying and selling securities, and rebalancing your
portfolio over time. Some wealth managers offer discretionary
investment management, where they have the authority to make
investment decisions on your behalf, while others offer non-
discretionary management, where you have the final say on investment
decisions.

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Mutual Fund Management  Estate Planning: Estate planning involves taking steps to ensure that
and Wealth Management your assets are distributed according to your wishes after you die. This
may include creating a will, trust, and power of attorney. Wealth
managers can work with estate planning attorneys to develop a
comprehensive estate plan that minimizes taxes and protects your
beneficiaries.
 Tax Planning: Tax planning strategies aim to minimize your tax
liability. Wealth managers can help you identify tax-efficient
investment strategies and deductions that you may be eligible for.
They can also work with tax advisors to develop tax-saving strategies
for your specific situation.
 Retirement Planning: Planning for retirement is a crucial aspect of
wealth management. Wealth managers can help you estimate your
retirement needs, develop a retirement savings plan, and choose the
right investment vehicles for your retirement goals.
These are just some of the most common types of wealth management
services. The specific services you need will depend on your individual
circumstances and financial goals.

5.4 WEALTH MANAGEMENT PROCESS

The wealth management process is a collaborative effort between you and
a wealth advisor, typically involving a series of steps:
1. Gathering Financial Data: This initial stage involves understanding
your current financial situation. The advisor will collect information
on your income, expenses, debts, assets (including their value), and
existing financial plans (if any). This gives them a clear picture of your
financial standing.
2. Establishing Financial Goals: Next, you'll work together to define
your financial goals. These could be short-term, like saving for a down
payment on a house, or long-term, like planning for a comfortable
retirement. Understanding your goals is essential for crafting a
personalized wealth management strategy.
3. Risk Tolerance Assessment: Your risk tolerance refers to your
comfort level with investment fluctuations. The advisor will assess
your risk tolerance through questionnaires or discussions. This helps
determine the appropriate asset allocation for your portfolio, balancing
risk and potential returns.
4. Developing a Wealth Management Plan: Based on the gathered
information and discussions, the advisor will create a personalized
wealth management plan. This plan will outline strategies to achieve
your financial goals, considering your risk tolerance and investment
time horizon. The plan might include recommendations for asset
allocation, investment options, tax-saving strategies, and estate
planning considerations.
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5. Implementing the Plan: Once you're comfortable with the wealth Foundations of Wealth
management plan, it's time to put it into action. This may involve Management: Concepts,
opening investment accounts, purchasing recommended assets, and Processes, and Market
Overview
potentially restructuring your existing financial holdings. The advisor
will guide you through this implementation phase.
6. Monitoring and Reporting: Wealth management is an ongoing
process. The advisor will regularly monitor your portfolio
performance, economic conditions, and your evolving goals. They'll
provide periodic reports summarizing your portfolio performance and
may suggest adjustments to the plan if needed. This ensures your
wealth management strategy remains aligned with your current
situation and objectives.
7. Reviewing and Updating the Plan: Your financial goals and
circumstances will likely change over time. The advisor will schedule
regular reviews to discuss any changes and update the wealth
management plan accordingly. This ensures your strategy continues to
effectively meet your evolving needs.
Remember, the wealth management process is a collaborative journey.
Open communication and a clear understanding of your goals are key to a
successful wealth management experience.

5.5 HOLISTIC WEALTH MANAGEMENT

FRAMEWORK FOR INDIA
Wealth management in India needs to consider a unique set of factors
compared to other countries. Here's a framework for a holistic wealth
management approach in the Indian context:
a) Understanding the Client's Needs:Understanding the client's needs
in the Indian context goes beyond the standard financial planning
approach. Here's a breakdown of what it entails, considering the
unique cultural and economic landscape of India:
 Financial Goals: Standard goals like retirement planning and child
education apply, but also consider Indian specific goals like saving for
a daughter's wedding or supporting extended family needs.
 Risk Tolerance: Indian investors may be more risk-averse due to
cultural factors. The advisor should assess risk tolerance
carefully.There can be several cultural reasons why Indian investors
might be more risk-averse:
o Importance of Family Security: The concept of taking care of
extended family is strong in India. Investors might prioritize
investments that guarantee enough returns to support themselves and
their dependents, even if it means sacrificing higher potential gains.
o Long-Term Perspective: With a longer lifespan due to increasing life
expectancy, Indian investors might need their savings to last longer.
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Mutual Fund Management This can make them cautious about taking risks that could deplete their
and Wealth Management nest egg.
o Historical Context: Experiencing economic volatility or social unrest
in the past can make people more cautious with their finances.

 Investment Horizon: Investment plans should factor in longer

lifespans and potential changes in income due to the joint family
system.
o Longer Lifespans:Due to advancements in healthcare, people in India
are living longer. This means retirement savings need to last for a
longer period compared to the past. Traditional retirement planning
might not be sufficient if you live 20-30 years after retirement.
o Joint Family System: In India, it's common for multiple generations to
live together or financially support extended family members. This can
impact your income throughout your life in two ways:
 Early Career: Younger generations might contribute financially to
support parents or grandparents. This can limit their ability to save
aggressively for their own retirement.
 Later Years: In retirement, you might need to continue supporting
adult children or grandchildren. This places a greater burden on your
retirement savings.

 Tax Environment: Understanding complex tax structures, including

inheritance tax and long-term capital gains tax, is crucial for tax-
efficient planning.The Indian tax system can be intricate, with various
taxes applicable to different types of income and investments. Here are
two important aspects to consider for wealth management:
o Inheritance Tax: While India doesn't have a direct inheritance tax,
there can be tax implications when inheriting assets. For instance,
income generated from inherited property might be taxable, and there
could be capital gains tax on the sale of inherited assets.
o Removal of Indexation- Indexation is the process of adjusting an
asset's cost for inflation when determining capital gains for Indian tax
purposes. This asset might be any property in real estate. Sellers will
no longer be able to benefit from indexation on their property as of
October 1st, 2024. This implies that they would be have to pay a
12.5% tax on the difference between the property's initial price, as
stated in the Finance Minister Nirmala Sitharaman's 2024 Union
Budget, and the selling price.

o Long and Short Term Capital Gains Tax (LTCG): Capital gains
refer to the profit earned when selling an investment. LTCG tax
applies to profits made on selling certain assets held for a specific
period (e.g., stocks held for more than one year). The tax rate and
exemptions for LTCG can vary depending on the asset class. The
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 exemption ceiling for Long Term Capital Gains (LTCG) would rise Foundations of Wealth
from 1 lakh to 1.25 lakh, and the tax rate will increase from 10% to Management: Concepts,
12.5%. While introducing the Union Budget 2024, Finance Minister Processes, and Market
Overview
Nirmala Sitharaman declared that the tax on some assets known as
short-term capital gains (STCG) will rise from 15% to 20%.

b) Financial Planning Strategies: Financial planning strategies in the

Indian context take a unique approach compared to a global approach.
Here's a breakdown of key considerations:

 Balancing Traditional and Modern Instruments:

o Traditional Investments: Indians often favor familiar options like
Public Provident Fund (PPF), National Pension System (NPS), and
Fixed Deposits (FDs) due to their guaranteed returns and tax benefits.
These offer a solid foundation for the plan.
o Modern Investment Options: Integrate Mutual Funds (MFs) suited
for the Indian market and individual risk tolerance. Explore Real
Estate Investment Trusts (REITs) for portfolio diversification and
potential for growth.

 Gold as a Hedge:
o Gold holds cultural significance in India and can be used as a hedge
against inflation. Consider including gold in a balanced portfolio to
protect against rising prices.

 Investment for Different Goals:

 Align investments with specific goals. For example, invest in
aggressive equity funds for long-term retirement goals, while opting
for debt funds or FDs for short-term goals like a down payment on a
house.
 Alternative Investments: For high net-worth individuals, explore
alternative investments like private equity or angel investing in
promising startups.

c) Estate Planning:
 Wills and Trusts: Essential for ensuring assets reach desired
beneficiaries and minimizing tax implications. Consider testamentary
trusts for wealth distribution and managing inheritance for future
generations.
 Succession Planning: For family-owned businesses, develop a clear
succession plan to avoid disputes and ensure smooth business
continuity.

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Mutual Fund Management d) Unique Indian Considerations:
and Wealth Management
 Joint Family System: Financial plans should consider supporting
extended family members while achieving individual goals. Joint
investments or life insurance policies can be explored.
 Social Security: India's social security system is evolving. Factor in
potential changes when planning for retirement income.
 NRI (Non-Resident Indian) Management: For NRIs, address
specific challenges like managing investments remotely and
complying with foreign exchange regulations.

e) Additional Considerations:
 Financial Literacy: Many Indian investors lack financial literacy.
Advisors should educate clients and empower them to make informed
decisions.
 Technology Integration: Utilize online platforms and mobile apps to
provide convenient access to financial information and portfolio
management tools.
By incorporating these elements, wealth managers can create a
comprehensive and culturally sensitive wealth management plan for their
clients in India. This holistic approach takes into account the unique
financial landscape, cultural values, and long-term goals of Indian
investors.

5.6 CONCLUSION
"In conclusion, effective wealth management is a crucial aspect of
achieving financial freedom and securing one's future. By adopting a well-
structured approach to wealth management, individuals can create a solid
foundation for their financial goals and ensure that their hard-earned
money works for them, rather than against them.
In this era of uncertainty and volatility, it's more important than ever to
prioritize wealth management. With the right strategies and mindset,
individuals can overcome the challenges of inflation, market fluctuations,
and economic uncertainty to build a lasting legacy.
By taking control of their finances and making informed decisions about
their money, individuals can:

 Achieve long-term financial stability and security

 Build wealth over time through disciplined investing and savings
 Create a sense of financial freedom and peace of mind
 Pursue their passions and goals without the burden of financial stress
 Leave a lasting legacy for their loved ones

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In conclusion, wealth management is not just about accumulating wealth; Foundations of Wealth
it's about creating a life of purpose, freedom, and fulfilment. By Management: Concepts,
prioritizing wealth management, individuals can unlock their full potential Processes, and Market
Overview
and live the life they truly desire.

5.7 QUESTION
5.7.1. MCQ Question:
1. What is the primary goal of wealth management?
a) To accumulate wealth as quickly as possible
b) To achieve financial stability and security
c) To create a sense of financial freedom
d) To leave a legacy for future generations
Answer: b) To achieve financial stability and security

2. Which of the following is a key component of a comprehensive wealth

management plan?
a) Investing in individual stocks
b) Diversifying a portfolio across asset classes
c) Focusing solely on short-term gains
d) Ignoring taxes and inflation
Answer: b) Diversifying a portfolio across asset classes

3. What is the term for the process of allocating assets to achieve a desired
investment return?
a) Asset allocation
b) Risk management
c) Investment strategy
d) Portfolio rebalancing
Answer: a) Asset allocation

4. Which of the following is a type of investment that can provide a steady

income stream?
a) Stocks
b) Bonds
c) Mutual funds
d) ETFs
Answer: b) Bonds

5. What is the term for the amount of risk an investor is willing to take on?
a) Return on investment (ROI)
b) Risk tolerance
c) Investment horizon
d) Asset allocation
Answer: b) Risk tolerance

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Mutual Fund Management 6. Which of the following is a benefit of diversifying an investment
and Wealth Management portfolio?
a) Increased risk
b) Reduced returns
c) Increased potential for losses
d) Reduced risk and increased potential for returns
Answer: d) Reduced risk and increased potential for returns

7. What is the term for the process of regularly reviewing and adjusting an
investment portfolio?
a) Portfolio rebalancing
b) Asset allocation
c) Risk management
d) Investment strategy
Answer: a) Portfolio rebalancing

8. Which of the following is a type of investment that allows investors to

pool their money together to invest in a diversified portfolio?
a) Mutual fund
b) Exchange-traded fund (ETF)
c) Individual stocks
d) Hedge fund
Answer: a) Mutual fund

9. What is the term for the amount of time an investor has until they need
their money back?
a) Investment horizon
b) Time-to-market return
c) Return on investment (ROI)
d) Interest rate risk
Answer: a) Investment horizon

10. Which of the following is a key consideration when selecting an

investment advisor or wealth manager?
a) Commission-based fees
b) Experience and qualifications
c) Investment returns alone
d) All of the above
Answer: d) All of the above
5.7. 2. Brief Question:

 Define Wealth Manager? How a wealth manager creates a customized

plan?
 Define Wealth Management and explain the process of wealth
management?
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 What is the various service been offered by the wealth manager? Foundations of Wealth
 Explain the important of wealth management in Indian Context. Management: Concepts,
Processes, and Market
Overview
5.8 CONCLUSION
In conclusion, wealth management is a critical aspect of achieving
financial security and stability. It involves creating a comprehensive plan
that takes into account an individual's financial goals, risk tolerance, and
investment horizon. By diversifying your investments, managing risks,
and making informed financial decisions, you can build a robust financial
foundation that supports your lifestyle and goals.
Effective wealth management requires a long-term perspective, discipline,
and a deep understanding of personal finance and investing. It's essential
to work with a trusted financial advisor who can provide guidance and
support throughout the process.
Ultimately, wealth management is not just about accumulating wealth, but
also about maintaining it over time. By adopting a proactive approach to
wealth management, you can ensure that your financial well-being is
protected and that you're able to achieve your financial goals.
In today's complex and rapidly changing financial landscape, it's more
important than ever to have a solid wealth management plan in place. By
taking control of your finances and making informed decisions, you can
build a secure and prosperous financial future.

5.9 REFERENCE
1. "A Random Walk Down Wall Street" by Burton G. Malkiel
2. "The Little Book of Common Sense Investing" by John C. Bogle
3. "The Intelligent Investor" by Benjamin Graham
4. "Wealthy Barber: From Worry to Wealthy" by David Chilton
5. "The Total Money Makeover" by Dave Ramsey




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 Module 2

6
COMPREHENSIVE FINANCIAL
PLANNING: WEALTH SOURCES, LIFE
STAGES, AND RISK MANAGEMENT
Unit Structure :
6.0 Learning Objectives
6.1 Introduction to Wealth Creation
6.2 Types of Sources of Wealth
6.3 Factor affecting Source of Wealth
6.4 Financial Life Cycle
6.5 Retirement
6.6 Retirement Related Risk
6.7 MCQ
6.8 Conclusion
6.9 Reference

6.0 LEARNING OBJECTIVES

After reading this chapter learner will be able to

 Learn about human capital (skills, abilities) and financial capital

(assets, investments), as key drivers of wealth accumulation.

 Recognize the financial stages from pre-family independence to

retirement, and understand the unique goals and challenges of each
phase.

 Understand the phases of retirement (active vs. passive) and plan for
elderly care and related risks.

 Learn to recognize risks such as market, asset allocation, interest rate,

inflation, health, liquidity, and longevity risks in retirement planning.

 Master the key steps: defining the client relationship, gathering

financial information, analysing goals, making recommendations,
implementing, and monitoring the plan.

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6.1 INTRODUCTION TO WEALTH CREATION Comprehensive Financial
Planning: Wealth Sources,
Life Stages, and Risk
6.1.1 Introduction to Wealth Creation: Management
Wealth creation is the process of accumulating and growing one's wealth
over time, often through a combination of financial planning, investing,
and smart money management. The concept of wealth creation is
multifaceted and encompasses various aspects, including financial
literacy, entrepreneurship, investing, and saving. At its core, wealth
creation is about building a financial safety net that enables individuals to
achieve their long-term financial goals and aspirations.The foundation of
wealth creation lies in developing good financial habits, such as creating a
budget, paying off debt, and building an emergency fund. It also involves
setting clear financial goals, such as saving for retirement, a down
payment on a home, or funding a child's education. Once these
foundational habits are in place, individuals can begin to explore
investment opportunities that align with their risk tolerance and financial
objectives.
Investing is a crucial aspect of wealth creation, as it allows individuals to
grow their wealth over time. This can be achieved through a variety of
means, including stocks, real estate, mutual funds, and other investment
vehicles. It is essential to have a diversified portfolio that is regularly
reviewed and rebalanced to ensure optimal returns.Additionally,
entrepreneurship and side hustles can also be a means of creating wealth.
By identifying opportunities to monetize skills or talents, individuals can
generate additional income streams and accelerate their wealth-building
journey. Ultimately, wealth creation requires discipline, patience, and a
long-term perspective. It is not a get-rich-quick scheme, but rather a
marathon that requires consistent effort and dedication. By understanding
the fundamentals of wealth creation and adopting sound financial
practices, individuals can build a strong financial foundation that sets them
up for success in the long run.

6.1.2.Definitions on "Source of Wealth":

1. Warren Buffett: "The key to wealth creation is not to make money in
the stock market, but to make money from our investments in people."
- From an interview with Fortune Magazine
2. Napoleon Hill: "The starting point of all wealth is knowing where we
are going and having a mindful intention to get there." - From his book
"Think and Grow Rich"
3. Andrew Carnegie: "Wealth is not his that has it, but his that enjoys it,
improves it, and leaves it as a blessing to others." - From his book
"The Gospel of Wealth"
4. John D. Rockefeller: "Do we know the only thing that ever gives me
a bit of a worry? The uncertainty about the source of my income." -
From an interview with The Saturday Evening Post

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Mutual Fund Management 5. Tony Robbins: "Wealth is a result of what we do regularly; so if we
and Wealth Management want to become wealthy, we need to do something regularly that
creates wealth." - From his book "Unshakeable"
6. Jim Rohn: "Wealth is not just about earning a lot of money; it's about
living a lifestyle that's free from financial stress and worry." - From his
book "The Power of Ambition"

6.2 TYPES OF SOURCES OF WEALTH

In the Indian context, wealth can be generated through various sources,
including:
a) Inheritance: Wealth inherited from family members, such as parents,
grandparents, or other relatives. In India, inheritance laws are
governed by the Hindu Succession Act, 1956, and the Hindu Women's
Right to Property Act, 1956. Wealth inherited from family members
can include movable and immovable properties, shares, and other
assets.

b) Business: Wealth generated through entrepreneurship, ownership, or

management of a business, including startups, small businesses, or
large corporations. India has a thriving startup ecosystem, with many
entrepreneurs creating innovative products and services that generate
wealth. Established businesses in sectors like IT, pharmaceuticals, and
finance also contribute to the country's wealth.

c) Investments: Wealth generated through investments in stocks, bonds,

real estate, mutual funds, or other investment vehicles. The Indian
stock market is one of the largest in the world, and investing in stocks
and bonds can generate significant wealth. Real estate investments in
cities like Mumbai, Delhi, and Bengaluru have also proven lucrative.

d) Salary and Wages: Wealth generated through regular employment

and salary or wages. Salaries and wages are a primary source of
income for millions of Indians working in various sectors like IT,
finance, healthcare, and manufacturing.

e) Pensions and Retirement Plans: Wealth generated through

employer-sponsored pension plans, or other retirement savings plans.
Many Indian companies offer pension schemes to their employees,
providing a secure source of income in retirement.

f) Dividends and Royalties: Wealth generated through dividends paid

by companies in which an individual owns shares or royalties from
intellectual property. India has a growing number of patent holders and
royalties earners in industries like pharmaceuticals and biotechnology.

g) Government Benefits: Wealth generated through government benefits

such as Social Security, unemployment insurance, or veterans'
benefits. Government programs like the National Pension System
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 (NPS) and Atal Pension Yojana (APY) provide financial security to Comprehensive Financial
eligible individuals. Planning: Wealth Sources,
Life Stages, and Risk
Management
h) Rentals and Leases: Wealth generated through rental income from
real estate or equipment leases. Rental income can be earned through
owning residential or commercial properties in prime locations.

i) Licensing and Patents: Wealth generated through licensing

agreements or patent royalties. India has a thriving licensing industry
for products like software, pharmaceuticals, and biotechnology.

j) Other Sources: Wealth generated through various other sources such

as oil and gas royalties, mineral rights, or prize money. While these
sources may not be as common as others on this list, they can still
contribute significantly to an individual's overall wealth.

6.3 FACTOR AFFECTING SOURCE OF WEALTH

In the Indian context, several factors can influence an individual's source
of wealth. These factors can be categorized into five key areas: education,
location, social class, marriage and family, and skills and talents.
 Education: Education level and field of study can influence an
individual's career choices and earning potential.
o In India, education plays a crucial role in shaping an individual's career
trajectory and earning potential.
o The type of education an individual receives can impact their access to
job opportunities, salary ranges, and career advancement prospects.
o For example, a degree in a high-demand field like engineering or
medicine can lead to better job prospects and higher salaries.

 Location: The location where an individual resides can impact

their access to job opportunities, education, and other factors that
affect their source of wealth.
o In India, the location where one resides can significantly impact their
access to job opportunities, education, and other resources that can
influence their source of wealth.
o Cities like Mumbai, Delhi, and Bengaluru are hubs for industries like
finance, IT, and healthcare, offering better job prospects and higher
salaries.
o On the other hand, rural areas may have limited job opportunities and
lower salaries.

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Mutual Fund Management  Social Class: An individual's social class can influence their access
and Wealth Management to resources, networks, and opportunities that can impact their
source of wealth.
o In India, social class can play a significant role in determining an
individual's access to resources, networks, and opportunities.
o Individuals from higher social classes may have greater access to
financial resources, networks, and opportunities that can help them
generate wealth.
o For example, individuals from affluent families may have greater
access to education and job opportunities that can lead to higher
earning potential.
 Marriage and Family: An individual's family dynamics and
relationships can impact their access to financial resources and
support.
o In India, family dynamics and relationships can play a crucial role in
shaping an individual's access to financial resources and support.
o Marriage and family relationships can provide financial support,
emotional support, and networking opportunities that can help
individuals generate wealth.
o For example, Both the working spouse may have a higher income or
own a business that can provide financial support.
 Skills and Talents: An individual's skills and talents can influence
their ability to generate wealth through entrepreneurship,
investments, or other means.
o In India, individuals with unique skills or talents can generate wealth
through entrepreneurship or investments.
o Entrepreneurs with innovative ideas or skills in high-demand fields like
technology or healthcare may be able to generate significant wealth
through their ventures.
o Investors with knowledge of the market or specific industries may be
able to generate wealth through smart investments.

6.4 FINANCIAL LIFE CYCLE

The Financial Life Cycle refers to the various stages that individuals go
through as they navigate their financial journey, from weth to old age. It's
a framework that helps people understand the different financial
challenges and opportunities they'll face at different stages of life, and
plan accordingly.

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The Financial Life Cycle generally consists of the following stages: Comprehensive Financial
Planning: Wealth Sources,
a. Student Years (18-25): Life Stages, and Risk
Management
 Primary focus: Education and career development
o This stage is crucial for setting the foundation for future financial
stability and success. Students should prioritize their education and
career development by:
 Pursuing higher education or vocational training
 Building a strong network of connections in their industry
 Gaining relevant work experience through internships or part-time jobs
 Key financial tasks:
o Budgeting: Create a budget that accounts for tuition fees, living
expenses, and entertainment costs. To avoid spending too much money,
prioritize needs above desires.
o Saving for education expenses: Explore scholarships, grants, and
student loans to cover educational costs. Consider creating a savings
account only for college costs.
o Building an emergency fund: Start building an emergency fund to
cover unexpected expenses, such as medical bills or car repairs. Aim
for one to two months' worth of living costs.

b. Weng Adulthood (25-40):

 Primary focus: Career advancement, paying off debt, and building
wealth
o This stage is characterized by career advancement, paying off debt, and
building wealth. Weng adults should focus on:
 Climbing the career ladder through promotions or switching to a
higher-paying job
 Paying off student loans and other debts
 Building credit by making timely payments on credit cards and loans
 Key financial tasks:
o Paying off student loans: Make timely payments on student loans and
consider refinancing or consolidating high-interest loans.
o Building credit: Use credit responsibly to build credit history and
improve credit scores.
o Investing in retirement accounts: Contribute to employer-matched
retirement accounts, Public Provident Fund (PPF), National Pension
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Mutual Fund Management System (NPS), Employee's Provident Fund (EPF), Atal Pension
and Wealth Management Yojana (APY), and take advantage of tax benefits.
o Investing in other assets: Consider investing in stocks, real estate, or
other investment vehicles to grow wealth.

c. Middle Age (40-60):

 Primary focus: Peak earning years, family planning, and saving for
retirement
o This stage is marked by peak earning potential and family planning.
Middle-aged individuals should focus on:
 Building wealth through investments and savings
 Planning for retirement and maximizing retirement savings
 Planning for long-term care for themselves or elderly parents
 Key financial tasks:
o Building wealth: Continue to invest in assets that provide passive
income or long-term growth.
o Maximizing retirement savings: Contribute as much as possible to
employer-matched retirement accounts and consider catch-up
contributions.
o Planning for long-term care: Research long-term care insurance
options and consider planning for potential care costs.

d. Retirement (60+):
 Primary focus: Living off savings, managing healthcare expenses, and
enjoying retirement
o This stage is characterized by living off savings and enjoying the fruits
of one's labor. Retirees should focus on:
 Managing withdrawals from retirement accounts to ensure
sustainability
 Maintaining insurance coverage for healthcare and other essential
services
 Optimizing healthcare expenses through Medicare, Medicaid, or other
government programs
 Key financial tasks:
o Managing withdrawals from retirement accounts: Create a
sustainable withdrawal strategy to ensure that retirement savings last
throughout one's lifetime.

136
o Maintaining insurance coverage: Review insurance policies regularly Comprehensive Financial
to ensure adequate coverage for healthcare, long-term care, and other Planning: Wealth Sources,
essential services. Life Stages, and Risk
Management
o Optimizing healthcare expenses: Take advantage of government
programs like Medicare or Medicaid to minimize out-of-pocket
healthcare costs.
Some key takeaways from the Financial Life Cycle:
1. Start Early: Start building wealth and savings early in life to take
advantage of compound interest. The earlier we start, the more time our
money has to grow, and the more significant the impact of compound
interest will be. By starting early, we'll be able to build a substantial
corpus over time, giving we the financial freedom we desire.
2. Plan Ahead: Plan for future expenses and goals to avoid financial
stress. Identify our short-term and long-term goals, and create a plan to
achieve them. Whether it's buying a house, retirement, or a dream
vacation, planning ahead will help we stay focused and motivated.
3. Diversify: Diversify our income streams, investments, and assets to
reduce risk. By spreading our risk across different assets, we'll be better
equipped to weather any financial storms that come our way. This will
also help we grow our wealth over time.
4. Save Consistently: Develop a consistent savings habit to build wealth
over time. Set aside a portion of our income each month, and make it
automatic by setting up automatic transfers from our checking account.
Consistency is key to building wealth, so make sure we're saving
regularly.
5. Review and Adjust: Regularly review our financial plan and adjust as
needed to stay on track. Life is full of unexpected twists and turns, and
our financial plan should be flexible enough to adapt to changes in our
life circumstances.

6.5 RETIREMENT
Introduction to Retirement in India
Retirement is an important milestone in a person's life, indicating the end
of their working career and the start of a new chapter of life.In India,
retirement is a complex and multifaceted phenomenon that is influenced
by various factors such as cultural, social, and economic norms. With the
increasing life expectancy and improved healthcare facilities, the concept
of retirement is changing rapidly in India.
Traditionally, retirement in India was seen as a time when individuals
would leave their work and settle into a life of leisure. However, with the
rising cost of living, inflation, and decreased pension coverage, retirement
has become a significant concern for many Indians. According to a recent

137
Mutual Fund Management survey, only 14% of Indians have a retirement plan in place, and many are
and Wealth Management not prepared to meet their financial needs during retirement.
The Indian government has taken several steps to address the issue of
retirement planning. The Employee's Provident Fund (EPF) and the
Pension Fund Regulatory and Development Authority (PFRDA) are two
key institutions that provide social security benefits to employees. The
EPF is a mandatory savings scheme that requires employers to contribute
12% of an employee's salary towards their retirement fund. The PFRDA,
on the other hand, is responsible for regulating the pension industry and
ensuring that pension schemes are transparent and accountable.
In addition to these government initiatives, there are several private
retirement products available in India. These include annuity plans, unit-
linked insurance plans, and pension plans that offer flexible investment
options and guaranteed returns. Some insurance companies also offer
retirement plans that provide lump-sum payouts or regular income
streams.
Despite these efforts, many Indians still struggle to save for retirement. A
lack of financial literacy, inadequate income, and inadequate pension
coverage are some of the key challenges that need to be addressed. To
overcome these challenges, it is essential for individuals to start planning
early and make informed decisions about their retirement savings.
In conclusion, retirement in India is a complex phenomenon that requires
careful planning and consideration. With the increasing life expectancy
and decreasing pension coverage, it is essential for individuals to start
planning early for their retirement. By understanding the available options
and making informed decisions, individuals can ensure a comfortable and
secure retirement.
Retirement is the period of life when an individual stops working and
begins to enjoy the fruits of their labour. It's a time to focus on personal
interests, hobbies, and relationships, without the constraints of a 9-to-5
job.

When do people typically retire?

In most countries, retirement age varies depending on the country's social
security system and pension plans. Traditionally, retirement ages are
around:
 In the United States: 65-67 years old (Full Retirement Age) or 62-64
years old (Early Retirement)
 In Europe: 65-70 years old
 In Australia: 65-67 years old
 In Canada: 65 years old
 In India: 60 years old
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6.5.1 Definition: Comprehensive Financial
Planning: Wealth Sources,
Warren Buffett: "Retirement is not a place we arrive at; it's a process we Life Stages, and Risk
go through. It's about transitioning from one phase of life to another, and Management
making the most of every moment."
Winston Churchill: "Retirement is like a second childhood, but one that
lasts 30 years instead of 30 months."
Ellen DeGeneres: "Retirement is not the end of our life, it's the beginning
of a new chapter. It's a chance to do what we love, to travel, to spend time
with loved ones, and to pursue our passions."

6.5.2 Understanding the Three Types of Retirement

Retirement is a significant life milestone, and it's essential to understand
the different types of retirement to plan effectively. Here are three types of
retirement:

1. Pre-Retirement
As we approach the age of 55-60, we're likely still working hard, but our
sights are set on the horizon of retirementIt is time to establish the
foundation for a stable financial future.
OurGoal: Build a substantial retirement corpus, reduce debt, and increase
income sources.
Our Strategies:
 Boost Our Income: Secure a raise or explore side hustles to increase
our earnings.
 Streamline Our Finances: Cut expenses and tackle debt to free up
more cash for savings.
 Invest Wisely: Contribute to retirement accounts and diversify our
investments to grow our wealth.
By following these steps, we'll be well-prepared for the transition to
retirement, with a financial foundation that will support our golden years.
2. Passive Retirement:
In our 65-70 years, we've finally achieved the freedom of retirement,
having transitioned from active work to a more relaxed pace. Our goal
now is to live off the fruits of our labour, enjoying the luxuries of leisure
time and financial securityTo do this, consider the following main
strategies:

 Diversify Our Income Streams: Invest in assets that generate passive

income, such as rental properties, dividend-paying stocks, or bonds.
This will provide a steady flow of money without requiring our direct
involvement.

139
Mutual Fund Management  Maintain a Balanced Lifestyle: Enjoy our retirement, but do so
and Wealth Management responsibly. Aim for a lifestyle that is sustainable and won't deplete our
wealth too quickly.

 Plan for the Unexpected: Life can be unpredictable, so make sure to

set aside funds for unexpected expenses and taxes. This will help
ensure that our retirement dreams remain intact.

3. Active Retirement:
At 60-85 years old, we've earned the right to enjoy the fruits of
ouremployment tenure. As an active retiree, we're no longer tied to a 9-to-
5 job, but we're still eager to stay engaged, curious, and fulfilled. Our goal
is to:
 Pursue Our Passions: Indulge in hobbies, travel, and spend quality
time with loved ones while maintaining financial independence.
 Stay Engaged and Fulfilled: Discover new skills or hobbies that bring
we joy and keep our mind active.
 Plan for Tomorrow: Prepare for healthcare expenses and long-term
care needs, so we can focus on living life to the fullest.
To achieve this, consider the following strategies:
 Plan Ahead: Anticipate and plan for potential healthcare expenses and
long-term care needs, so we can focus on the things that matter most.

6.6 RETIREMENT RELATED RISK

Retirement-Related Risks: Mitigating the Unknowns

As we transition into retirement, it's crucial to be aware of the various
risks that can impact our financial well-being. These risks can be
overwhelming, but with a clear understanding of each, we can take
proactive steps to mitigate them and ensure a secure and fulfilling post-
work life.

The Importance of Managing Retirement Risks

As we approach retirement, it's essential to be aware of the various risks
that can impact our financial security. These risks can erode our savings,
reduce our purchasing power, and affect our ability to maintain our
standard of living. Here are six key risks to consider:

1. Inflation Risk: Inflation can be a significant threat to our retirement

savings. As prices rise, the value of our money decreases, making it
harder to maintain our standard of living. To combat this risk, consider
investing in inflation-indexed instruments or bonds that keep pace with
inflation. This can help ensure that our purchasing power remains
intact.

140
2. Market Volatility Risk: Market fluctuations can be unsettling, but Comprehensive Financial
they are an inherent part of investing. To mitigate this risk, diversify Planning: Wealth Sources,
your portfolio, invest for the long-term, and avoid making emotional Life Stages, and Risk
Management
decisions based on short-term market volatility. By doing so, you can
reduce the impact of market fluctuations on your retirement savings.

3. Longevity Risk: Living longer than expected can increase the

likelihood of outliving our resources. This risk is often overlooked, but
it's crucial to plan for a potentially longer life expectancy. Ensure your
retirement savings are sufficient and invested wisely to account for this
risk.

4. Healthcare Risk: Rising healthcare costs and uncertainty about long-

term care needs can create financial strain. Consider long-term care
insurance, health savings accounts, or other strategies to mitigate these
risks.

5. Sequence of Returns Risk: The order in which you withdraw from

your investments can affect the sustainability of your retirement
income. This risk occurs when you withdraw from investments during
periods of low returns, reducing their potential for growth. To mitigate
this risk, consider using a systematic withdrawal strategy or working
with a financial advisor to develop a customized plan.

6. Liquidity Risk: Having access to readily available cash is crucial in

retirement. Ensure you have a sufficient emergency fund and liquid
assets to cover unexpected expenses or market downturns. This will
help you maintain your financial stability and avoid dipping into your
retirement savings.

By understanding and managing these risks, you can create a more secure
and sustainable retirement income stream. It's essential to work with a
financial advisor to develop a customized plan that addresses these risks
and helps you achieve your retirement goals.

By acknowledging and addressing these retirement-related risks, we can

create a more sustainable and secure financial plan for our post-work life.
It's essential to consult with a financial advisor or conduct thorough
research to develop a personalized strategy tailored to our unique
circumstances and goals.

6.7.1. MCQ
1. Which of the following is NOT a common source of wealth for
retirement?
A) Savings B) Investments C) Inheritance D) Royalties
Answer: D) Royalties

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Mutual Fund Management 2. Which type of investment is often considered a low-risk option for
and Wealth Management retirement?
A) Stocks B) Bonds C) Real Estate D) Commodities
Answer: B) Bonds

3. What is the primary goal of the 4% rule in retirement planning?

A) To maximize returns
B) To minimize taxes
C) To ensure a sustainable income stream
D) To diversify investments
Answer: C) To ensure a sustainable income stream

4. Which of the following retirement-related risks is most likely to affect

a retiree's standard of living?
A) Inflation risk B) Market volatility risk
C) Longevity risk D) Sequence of returns risk
Answer: A) Inflation risk

5. What is the recommended percentage of retirement savings that

should be allocated to liquid assets?
A) 20% B) 40% C) 60% D) 80%
Answer: C) 60%

6. Which of the following is a common strategy for mitigating longevity

risk?
A) Investing in high-yield bonds
B) Purchasing long-term care insurance
C) Delaying retirement
D) Investing in real estate
Answer: B) Purchasing long-term care insurance

7. What is the term for the risk that an individual may outlive their
retirement savings?
A) Sequence of returns risk B) Longevity risk
C) Inflation risk D) Market volatility risk
Answer: B) Longevity risk

8. What is the primary goal of a Passive Retirement?

A) To continue working full-time and increase income
B) To pursue part-time work or hobbies while living off passive
income
C) To save and invest for a specific goal, such as a dream vacation
D) Retire early and tour the world.
Answer: B) To pursue part-time work or hobbies while living off
passive income
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9. Which of the following is NOT a type of retirement-related risk? Comprehensive Financial
A) Healthcare risk B) Liquidity risk Planning: Wealth Sources,
Life Stages, and Risk
C) Market volatility risk D) Environmental risk Management
Answer: D) Environmental risk

10. Which of the following is a key consideration when planning for

retirement-related expenses?
A) Housing costs B) Food costs
C) Healthcare costs D) All of the above
Answer: D) All of the above
6.7.2. State wither True or False
1. The majority of retirees rely solely on their pension plans for
retirement income.
2. True or False: Inflation risk is a significant concern for retirees with
fixed-income investments.
3. Sequence of returns risk is a concern only for aggressive investors.
4. Longevity risk is a concern only for people who expect to live beyond
100 years old.
5. Market volatility is the primary driver of retirement-related risk.
6. Retirees can rely solely on Social Security benefits for a comfortable
retirement.
7. Healthcare costs are the primary concern for retirees in terms of
expenses.
8. A diversified investment portfolio is the best way to mitigate market
volatility risk.
9. A 4% withdrawal rate from retirement accounts is considered
aggressive.
10. Liquidity risk is a concern only for retirees with limited financial
resources.
Answer- True- 2,7 and 8. Rest are False.
6.7.3. Brief Question:
1. Define source of Wealth and explain different type of source of Wealth.
2. What are the factor affecting Source of Wealth?
3. Explain Financial Life Cycle.
4. Explain Retirement and what different type of retirement.
5. What is Retirement Related Risk?

6.8 CONCLUSION
As we embark on the journey to retirement, it's crucial to understand the
sources of wealth that will sustain us in our golden years. A
comprehensive plan must consider multiple sources of income, including
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Mutual Fund Management pensions, Social Security, and personal savings. However, even with a
and Wealth Management solid plan in place, retirement-related risks can threaten our financial
security.
Inflation, market volatility, longevity, healthcare, sequence of returns, and
liquidity risks are just a few of the challenges we may face. It's essential to
be aware of these risks and develop strategies to mitigate their impact. By
diversifying our investments, building an emergency fund, and planning
for long-term care needs, we can create a more secure financial future.
Ultimately, a successful retirement requires a combination of financial
planning, risk management, and smart decision-making. By understanding
our sources of wealth and the risks associated with retirement, we can
create a sustainable and fulfilling post-work life.

6.9 REFERENCE
1. "The Wealth of Nations" by Adam Smith
2. "The Intelligent Investor" by Benjamin Graham
3. "The Richest Man in Babylon" by George S. Clason
4. "The Millionaire Next Door" by Thomas J. Stanley and William D.
Danko
5. "The 4-Hour Work Week: Escape the 9-5, Live Anywhere and Join the
New Rich" by Timothy Ferriss



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 Module 2

7
ASSET CLASSES IN WEALTH
MANAGEMENT: DEBT, EQUITY,
AND RISK CONSIDERATIONS
Unit Structure :
7.0 Learning Objectives
7.1 Introduction
7.2 Steps in Financial Planning Process:
7.3 Assets Class
7.4 Role of Debt in Wealth Management
7.5 Risks Associated with Debt
7.6 MCQ
7.7 Conclusion
7.8 Reference

7.0 LEARNING OBJECTIVES

After reading this topic, learners will be able to

 Learn about debt securities, their role in portfolio diversification, and

their role in wealth management by offering steady income and lower
risk compared to equities.

 Study the risks associated with debt securities, such as interest rate
risk, credit risk, and liquidity risk, and how they can impact wealth
management strategies.

 Learn how investing in stocks offers potential for high returns, the
risks involved, and its role in portfolio growth and wealth
accumulation.
 Understand how combining both asset classes in a portfolio can
balance risk and reward, aligning with clients’ financial goals.

7.1 INTRODUCTION
Financial planning is a structured process that helps individuals or families
achieve their financial goals by assessing their current financial situation,
identifying potential risks, and developing strategies to mitigate them. The
process involves several stages, from establishing a relationship with the
client to monitoring and reviewing their situation.

145
Mutual Fund Management Effective financial planning starts with a clear understanding of your
and Wealth Management financial situation, including your income, expenses, assets, debts, and
goals. By assessing your current financial status, you can identify areas for
improvement and create a roadmap for achieving your objectives. This
involves:

1. Goal Setting: Define Your Financial Objectives

The first stage is to set financial goals. What do you want to achieve? Are
you looking to save for retirement, pay off debt, or develop wealth? Set
explicit, measurable objectives that reflect your beliefs and priorities. For
example, "I want to save Rs 500,000 for retirement by age 65" or "I want
to pay off my mortgage in ten years." Goals should be written down and
reviewed on a frequent basis to keep focused and motivated.

2. Risk Assessment: Identify Potential Threats

The next step is to identify potential risks that could impact your financial
well-being. This includes market volatility, unexpected expenses, and
other uncertainties that could derail your plans. Consider the likelihood
and potential impact of each risk and develop strategies to mitigate them.
For example, you may want to diversify your investments or build an
emergency fund to cover unexpected expenses.

3. Budgeting: Allocate Your Income Wisely

A budget is a critical part of financial planning. It enables you to arrange
your money properly and prioritize your spending. Begin by recording
your income and spending to see where you may cut back and make
changes. Create a realistic budget that includes all required costs, savings,
and debt repayment. Consider following the 50/30/20 rule: 50% for
required expenses, 30% for discretionary spending, and 20% for savings
and debt reduction.

4. Investment Strategy: Align Your Investments with Your Goals

Your investment strategy should align with your risk tolerance, goals, and
time horizon. Consider working with a financial advisor or conducting
your own research to develop an investment plan that's tailored to your
needs. This might include equities, bonds, real estate, or other investment
instruments. Make careful to diversify your portfolio to reduce risk and
enhance reward.

5. Debt Management: Develop a Strategy for Debt Reduction

If you have debt, developing a strategy for debt reduction is essential. This
may involve consolidating debt into a single loan with a lower interest
rate, reducing spending to free up more money for debt repayment, or
using debt snowballing techniques to pay off high-interest debts first.
Make sure to prioritize high-interest debts and avoid accumulating new
debt while paying off existing debts.

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7.2 STEPS IN FINANCIAL PLANNING PROCESS Asset Classes in Wealth
Management: Debt, Equity,
and Risk Considerations
a. Establishing a Strong Foundation: The Initial Client Meeting
The first step in the financial planning process is a crucial one, as it sets
the one for the entire engagement. The initial meeting or phone call
between the financial advisor and client is an opportunity to establish a
relationship, build trust, and ensure both parties are on the same page. A
well-planned and executed initial meeting can make all the difference in
achieving successful financial planning outcomes.

Step 1: Introduce Yourself and Explain Your Services

The financial advisor should begin by introducing themselves, their
credentials, and their services. This includes explaining their area of
expertise, the types of services they offer, and their approach to financial
planning. This helps the client understand who they are working with and
what they can expect from the process.

Step 2: Discuss the Scope of Work and Expectations

The advisor should clearly outline the scope of work, including the
services they will provide, the process they will follow, and the timeline
for completion. It's essential to set clear expectations regarding
communication, meetings, and reporting. This ensures the client
understands what they will receive and what is expected of them
throughout the engagement.

Step 3: Establish Rapport and Build Trust

Building rapport with the client is critical in establishing a strong
foundation for the relationship. This involves actively listening to their
concerns, asking open-ended questions, and showing genuine interest in
their goals and aspirations. By building trust and understanding, the
advisor can create an environment where the client feels comfortable
sharing their financial information and goals.

Key Takeaways

 Establishing a strong relationship with the client is essential for

successful financial planning.
 The initial meeting or phone call sets the tone for the entire
engagement.
 Clear communication and setting expectations are critical in ensuring
both parties are on the same page.
 Building rapport and trust with the client is vital in creating a
successful working relationship.
By following these steps, financial advisors can lay the groundwork for a
productive and effective engagement. A well-planned initial meeting can
lead to a stronger client-advisor relationship, improved communication,
and ultimately, better financial outcomes.
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Mutual Fund Management b. Personal Fact Finding: Uncovering the Client's Financial Profile
and Wealth Management The personal fact-finding stage is a crucial step in the financial planning
process. It involves gathering detailed information about the client's
personal and financial situation to create a comprehensive understanding
of their financial landscape. This information is used to develop a tailored
financial plan that addresses their unique goals, needs, and objectives.
To gather this information, the financial advisor will typically use a
combination of tools and techniques, including:

1. Demographic Information: The advisor will ask for the client's age,
marital status, number of dependents, and other demographic details to
understand their personal circumstances.

2. Financial Data: The advisor will request detailed financial

information, including:
o Income: Sources of income, frequency, and amount
o Expenses: Fixed and variable expenses, including housing,
transportation, food, entertainment, and debt repayment
o Assets: Cash, investments, real estate, and other assets
o Debts: Credit cards, loans, mortgages, and other debts

3. Financial Goals and Objectives: The advisor will discuss the client's
short-term and long-term financial goals, such asRetirement planning,
Education funding for dependents, Wealth accumulation and Estate
planning

4. Risk Tolerance and Investment Preferences: The advisor will assess

the client's comfort level with investment risk and their preferences
regarding investment types, such as:
o Conservative: Low-risk investments like bonds
o Moderate: Balanced mix of stocks and bonds
o Aggressive: High-risk investments like stocks

5. Estate Planning Needs: The advisor will discuss the client's estate
planning needs, includingWills, Trusts and Powers of attorney

The financial advisor may use various tools to collect this information,
such as:
 Questionnaires: Online or paper-based forms that ask specific
questions about the client's financial situation and goals
 Spreadsheets: Electronic or paper-based templates that help
organize and track financial data
 Online Forms: Digital forms that can be completed online and
securely transmitted to the advisor

By gathering this comprehensive information, the financial advisor can

create a personalized financial plan that addresses the client's unique needs
and objectives. This plan will serve as a roadmap for achieving their
financial goals and ensuring their long-term financial security.
148
c. Analysing the Client's Financial Status: A Comprehensive Review Asset Classes in Wealth
After gathering all the necessary information, the financial advisor Management: Debt, Equity,
embarks on a thorough analysis of the client's financial status. This crucial and Risk Considerations
step allows the advisor to identify areas of strength and weakness,
providing a clear picture of the client's financial situation.

 Net Worth Calculation:

The first step in this analysis is to calculate the client's net worth, which is
the difference between their assets and liabilities. This figure provides an
overview of the client's overall financial health, helping the advisor
understand whether they are financially secure or facing challenges.

 Cash Flow Assessment:

Next, the advisor assesses the client's cash flow, which is calculated by
subtracting their expenses from their income. This analysis helps identify
any cash flow issues, such as overspending or inadequate savings, and
informs strategies for improving financial stability.

 Debt-to-Income Ratio Evaluation:

The advisor then evaluates the client's debt-to-income ratio, which
compares their monthly debt payments to their monthly income. This
metric reveals whether the client is carrying an excessive debt burden,
which can impact their ability to achieve their financial goals.

 Identifying Areas for Improvement:

Through this analysis, the advisor identifies areas where the client may
need improvement, such as:
 High-interest debt that needs to be consolidated or paid off
 Lack of emergency savings or a sinking fund for unexpected expenses
 Inadequate retirement savings or a need for catch-up contributions
 Opportunities to optimize tax-advantaged accounts, NPS, PPF, ELS
etc

By identifying these areas of concern, the financial advisor can develop a

personalized plan to address them, helping the client improve their
financial well-being and achieve their long-term goals.

d. Determine Financial Goals: Clarifying Objectives

After gaining a thorough understanding of a client's financial situation, it's
essential to determine their financial goals. This step helps the financial
advisor create a personalized plan tailored to the client's unique needs and
aspirations. The financial goals can be categorized into six primary areas:

1. Retirement Savings: Building a sufficient retirement corpus to ensure

a comfortable post-work life is a crucial goal for many individuals.
This may involve setting a specific target date for retirement and
determining the necessary savings required to achieve it.

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Mutual Fund Management 2. Wealth Accumulation: Some clients may aim to build wealth over
and Wealth Management time, either for personal enjoyment or to leave a lasting legacy. This
goal requires a disciplined investment strategy and regular monitoring
of progress.

3. Education Expenses: Parents or grandparents may prioritize saving

for their children or grandchildren's education expenses, such as
college tuition or other educational costs.

4. Estate Planning: Clients may aim to ensure their assets are distributed
according to their wishes, while minimizing taxes and administrative
burdens. This goal involves creating a comprehensive estate plan,
including wills, trusts, and power of attorney documents.

5. Debt Reduction: Reducing debt is often a top priority for many

individuals, as it can help alleviate financial stress and free up
resources for other goals. This goal may involve consolidating debt,
negotiating with creditors, or creating a debt repayment plan.

6. Tax Planning: Minimizing tax liabilities is essential for many clients,

as it can help preserve their wealth and reduce the burden of taxes on
their income. Tax planning strategies may include optimizing
investments, claiming deductions, and utilizing tax-advantaged
accounts.
By working closely with the client to understand their priorities and goals,
the financial advisor can develop a clear understanding of what they hope
to achieve. This collaboration is crucial in creating a tailored plan that
aligns with the client's values, risk tolerance, and time horizon. The
financial advisor should:
 Ask open-ended questions to uncover the client's objectives and
motivations
 Identify any conflicting goals or priorities
 Develop a written summary of the client's goals and objectives
 Create a customized plan that addresses each goal, including specific
strategies, timelines, and metrics for success
By clarifying financial goals, the financial advisor sets the stage for
developing a comprehensive plan that helps the client achieve their
aspirations and secure a brighter financial future.

e. Developing a Comprehensive Financial Plan

After analyzing the client's financial status and determining their goals, the
financial advisor creates a personalized financial plan tailored to their
unique needs and objectives. This plan serves as a roadmap for achieving
their financial aspirations, ensuring they are well-prepared for the future.
A comprehensive financial plan is essential for achieving long-term
financial goals and ensuring a secure financial future. A well-crafted plan
should encompass six essential components that work together to provide
a comprehensive framework for managing one's finances. These
components are:

150
 1. Investment Strategy: This component outlines the client's Asset Classes in Wealth
investment approach, including asset allocation, risk tolerance, and Management: Debt, Equity,
investment vehicles to achieve long-term growth and income and Risk Considerations
goals. It provides a clear direction for investing and helps to ensure
that the client's investments are aligned with their overall financial
goals.

2. Cash Flow Management Plan: This component is crucial for

managing income and expenses effectively. A cash flow
management plan ensures that the client has a steady flow of cash,
avoids overspending or under-saving, and builds a cushion for
unexpected expenses. It helps to identify areas where the client can
reduce expenses and increase their savings.

3. Debt Management Plan: Debt can be a significant obstacle to

achieving financial goals. A debt management plan helps to
prioritize and manage debt, paying off high-interest debts first,
consolidating debt, and maintaining a manageable debt-to-income
ratio. This component helps to free up resources that can be
diverted to savings and investments.

4. Insurance Plan: A comprehensive insurance plan ensures that the

client has adequate protection in case of unexpected events such as
death, disability, or long-term care needs. This component includes
a review of life insurance, disability insurance, and long-term care
insurance coverage to ensure that the client's needs are met.

5. Estate Planning Strategy: An estate planning strategy is essential

for ensuring that assets are distributed according to the client's
wishes after they pass away. This component includes a plan for
distributing assets, including wills, trusts, powers of attorney, and
beneficiary designations.

6. Tax Planning Strategy: A tax planning strategy helps to minimize

tax liabilities by utilizing strategies such as tax-loss harvesting,
charitable giving, and tax-deferred savings vehicles. This
component helps to reduce the amount of taxes owed and increase
the client's overall wealth

This comprehensive financial plan provides a clear roadmap for achieving

the client's goals, ensuring they are prepared for retirement, unexpected
expenses, and long-term financial security. By implementing this plan, the
client can confidently pursue their dreams and enjoy a secure financial
future.

f.Ongoing Monitoring and Review: Ensuring Client Success

The financial planning process is not a one-time event, but rather an
ongoing journey. The final stage of the process, monitoring and review, is
crucial to ensure that clients stay on track to achieving their financial
goals. This stage involves:
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Mutual Fund Management 1. Regularly reviewing the client's progress: A financial advisor will
and Wealth Management periodically review the client's financial situation, goals, and progress
towards achieving them. This ensures that the plan remains relevant
and effective.

2. Adjusting the plan as needed: As the client's situation changes or

market conditions evolve, the plan may need to be adjusted to reflect
these changes. A financial advisor will make necessary adjustments to
ensure the plan remains aligned with the client's goals.

3. Providing ongoing support and guidance: Clients may face

unexpected setbacks or need guidance on how to navigate market
volatility. A financial advisor provides ongoing support and guidance
to help clients stay focused and on track.

By regularly monitoring and reviewing the client's situation, a financial

advisor can:
 Identify potential issues before they become major problems
 Make proactive adjustments to the plan
 Provide timely guidance and support
 Ensure the client remains on track to achieving their financial goals

In conclusion, the financial planning process is a comprehensive and

ongoing journey that requires regular monitoring and review. By
following this structured approach, financial advisors can provide expert
guidance and support to help clients achieve long-term success and
achieve their financial goals.

7.3 ASSETS CLASS

In the world of finance, asset classes are the building blocks of a solid
investment strategy. By categorizing investments into distinct groups,
investors can spread risk and potentially increase returns. Each asset class
has its unique characteristics, risks, and rewards, making it essential to
understand them before creating a diversified portfolio.

 Stocks: The Equity Route

Stocks, also known as equities, offer ownership interests in companies,
providing a claim on a portion of the company's assets and profits. Stocks
can be a great way to participate in the growth potential of established
companies or new ventures. However, they often come with higher risk
due to market volatility and company-specific factors.

 Bonds: Fixed Income and Stability

Bonds, on the other hand, are debt instruments issued by corporations or
governments.
They offer a fixed rate of return in the form of interest payments and
eventual return of principal. Bonds are generally considered lower-risk
investments, making them an attractive option for income-seeking
investors.
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 Real Estate: A Tangible Investment Asset Classes in Wealth
Real estate investments, such as rental properties or real estate investment Management: Debt, Equity,
trusts (REITs), can provide a consistent source of income as well as and Risk Considerations
potential long-term growth.

 Commodities: A Hedge Against Inflation

Commodities such as gold, oil, and agricultural items can serve as a hedge
against inflation and market instability. These physical goods have
intrinsic value and can be used as a store of value during times of
economic uncertainty.

 Currencies: Global Market Exposure

Investing in foreign currencies can provide exposure to global markets and
potentially generate returns through fluctuations in exchange rates. This
asset class offers a way to diversify a portfolio beyond traditional
domestic investments.

 Alternative Investments: Beyond the Norm

The alternative investment category includes unique opportunities that
don't fit into traditional asset classes. This includes:
Private Equity: Investing in private companies with high-growth
potential offers a unique opportunity to be part of a company's early stages
and potentially reap significant returns. Private equity investments can
provide a hedge against market volatility and offer the potential for long-
term capital appreciation.

Hedge Funds: Hedge funds are professionally managed pools of money

that invest in a variety of assets, such as stocks, bonds, commodities, and
currencies. They are designed to generate returns regardless of market
conditions, providing a diversification benefit for investors.

Cryptocurrencies: Cryptocurrencies like Bitcoin have gained popularity

in recent years, offering a new asset class for investors. They are
decentralized, secure, and transparent, but highly volatile, making them
suitable for risk-tolerant investors.

Index Funds/ETFs: In India, index funds and ETFs are popular

investment options for retail investors. They offer a cost-effective way to
track the performance of the Indian market, such as the Nifty 50 or
Sensex. By investing in index funds/ETFs, Indian investors can diversify
their portfolio, reduce fees, and benefit from the long-term growth
potential of the Indian equity market.

Mutual Funds: Mutual funds are professionally managed portfolios that

invest in a mix of stocks, bonds, and other securities. They offer
diversification and can provide regular income streams, making them
suitable for investors seeking stability and predictability.

153
Mutual Fund Management Cash and Cash Equivalents: Short-term debt instruments like
and Wealth Management commercial paper, treasury bills, and certificates of deposit (CDs) offer
low-risk, liquid investments. They are suitable for investors seeking
immediate liquidity or those who want to park their money temporarily
while waiting for more favorable investment opportunities.

These investment options cater to different investor profiles, risk tolerance

levels, and financial goals. It's essential to assess individual circumstances
and financial objectives before selecting an investment strategy.

By incorporating these various asset classes into your investment

portfolio, you can create a diversified mix that balances risk and potential
returns. Remember to assess your financial goals, risk tolerance, and time
horizon before investing in any asset class. By doing so, you'll be well-
equipped to navigate the complex world of finance and achieve your long-
term financial objectives.

7.4 ROLE OF DEBT IN WEALTH MANAGEMENT

In India, debt plays a significant role in wealth management, particularly

for individuals building their financial foundation. Debt may be a blessing
or a curse, depending on how it is handled. When used wisely, debt can be
a powerful tool for achieving financial goals, while mismanaged debt can
lead to financial instability.

Benefits of Debt:
1. Investment Opportunities: Debt can provide access to investment
opportunities that might not be possible otherwise. For instance,
investing in real estate or starting a business often requires significant
upfront capital, which can be sourced through debt.

2. Tax Benefits: In India, certain types of debt instruments, such as home

loans and fixed deposits, offer tax benefits that can help reduce an
individual's tax liability. For example, the interest paid on home loans
is tax-deductible, and the principal amount is eligible for tax
exemption under Section 80C of the Income Tax Act.

3. Asset Creation: Debt can be used to purchase assets that appreciate in

value over time, such as real estate or gold. This can provide a hedge
against inflation and potentially generate long-term returns.

To maximize the benefits of debt, it is essential to:

 Use debt only for specific purposes, such as investments or asset
creation
 Manage debt servicing costs effectively
 Choose debt instruments with favorable interest rates and tax benefits
 Avoid accumulating high-interest debt that can lead to financial strain

154
By using debt strategically, individuals in India can create wealth over Asset Classes in Wealth
time and achieve their financial goals more efficiently. Management: Debt, Equity,
and Risk Considerations

7.5 RISKS ASSOCIATED WITH DEBT

In the Indian context, debt can be a double-edged sword. On one hand, it

can provide a means to finance large purchases, invest in business
ventures, or cover unexpected expenses. However, it is essential to be
aware of the risks associated with debt, which can have a significant
impact on one's financial well-being.

The risks associated with debt include:

1. Interest Rates: One of the primary risks is the rising interest rates. As
the Reserve Bank of India (RBI) increases interest rates to control
inflation, the cost of borrowing also increases. This can make it
challenging for individuals and businesses to repay debts, leading to a
significant burden. Moreover, missed payments or high credit
utilization can negatively impact credit scores, limiting access to future
credit and increasing interest rates.

2. Credit Score: Missed payments or high credit utilization can

negatively impact credit scores, limiting access to future credit and
increasing interest rates.

3. Default Risk: Default risk is another significant concern in India.

With a large number of non-performing assets (NPAs) in the banking
sector, the risk of default is higher than ever. Failing to repay debt can
lead to legal action, damaging credit scores and having long-term
implications on one's financial reputation.

4. Opportunity: The opportunity cost of debt is also significant. Using

debt to finance expenses means that the money could be invested
elsewhere, potentially earning a higher return. Inflation is another
factor that can erode the purchasing power of debt repayment, making
it more challenging to pay off debts in real terms.

5. Inflation:Inflation can erode the purchasing power of debt repayment,

making it more challenging to pay off the debt in real terms.

6. Liquidity Risk: Liquidity risk is also a concern in India, particularly

when it comes to private loans or bonds. These instruments may be
difficult to sell or refinance if needed, leaving individuals and
businesses stuck with illiquid assets.

7. Repayment Burden: Lastly, high debt levels can lead to an

unsustainable repayment burden, causing financial stress and
impacting other financial goals. Credit card debt is particularly
problematic in India, with high interest rates and fees making it
challenging to pay off and potentially leading to debt spirals.
155
Mutual Fund Management 8. Credit Card Debt: Credit card debt often carries high interest rates
and Wealth Management and fees, making it challenging to pay off and potentially leading to
debt spirals.

7.6 QUESTIONS

7.6.1. MCQ
1. What is the primary goal of the financial planning process?
a) To increase wealth b) To reduce debt
c) To achieve financial independence d) To plan for retirement
Answer: c) To achieve financial independence

2. Which of the following is NOT a step in the financial planning

process?
a) Goal setting b) Risk assessment
c) Investment selection d) Tax planning
Answer: d) Tax planning (Tax planning is a separate process that
occurs after the financial plan is created)

3. What is the term for the process of allocating assets to achieve a

specific investment objective?
a) Asset allocation b) Risk assessment
c) Return on investment d) Diversification
Answer: a) Asset allocation

4. Which asset class is known for its high returns but also high risk?
a) Stocks b) Bonds c) Real estate d) Commodities
Answer: a) Stocks

5. What is the purpose of diversification in a portfolio?

a) To reduce risk b) To increase returns
c) To increase fees d) To decrease taxes
Answer: a) To reduce risk

6. Which type of bond is considered to be less risky than others?

a) Government bond b) Corporate bond
c) Municipal bond d) High-yield bond
Answer: a) Government bond

7. What is the term for the process of regularly reviewing and adjusting a
portfolio to ensure it remains aligned with an investor's goals and risk
tolerance?
a) Rebalancing b) Diversification
c) Asset allocation d) Risk assessment
Answer: a) Rebalancing

8. Which asset class is often used as a hedge against inflation?

a) Stocks b) Bonds c) Real estate d) Commodities
Answer: d) Commodities

156
9. What is the term for the process of converting an investment into cash Asset Classes in Wealth
or another asset? Management: Debt, Equity,
a) Liquidation b) Consolidation and Risk Considerations
c) Mergers and Acquisitions d) Privatization
Answer: a) Liquidation

10. Which of the following is NOT an asset class?

a) Stocks b) Bonds c) Real estate d) Gold
Answer: d) Gold

7.6.2. State whether True or False:

1. Financial planning is a one-time process that only needs to be done
once in a lifetime.
2. The first step in the financial planning process is to determine your
investment goals.
3. Stocks are a type of bond.
4. A diversified portfolio typically involves investing in only two asset
classes: stocks and bonds.
5. Asset allocation is the process of selecting specific investments within
a portfolio.
6. Cash equivalents are typically considered a low-risk investment
option.
7. It's always best to invest for long-term goals using short-term
instruments like savings accounts.
8. Insurance is an asset class.
9. Real estate is a type of bond.
10. A financial plan should only consider an individual's income and
expenses, without considering their assets and liabilities.
Answer:- True statements – 2, 6 and 8 while the rest are False.

7.6.3 Question
1. Explain the financial objective
2. Explain the steps in financial planning process
3. What are the different type of Assets class available?
4. What are the role of debt in wealth management?
5. What are the different class of risk associate with the Debt
instruments?

7.7 CONCLUSION
In conclusion, a well-structured financial planning process is essential for
achieving long-term financial goals. By evaluating one's financial
situation, setting clear objectives, and developing a tailored plan,
individuals can navigate the complex world of personal finance with
confidence. Understanding the different asset classes available, such as
stocks, bonds, and real estate, is crucial for making informed investment
decisions.
157
Mutual Fund Management A diversified portfolio that allocates assets across various classes can help
and Wealth Management mitigate risk and increase returns. It is essential to regularly review and
rebalance the portfolio to ensure it remains aligned with changing goals
and market conditions.

By combining a comprehensive financial plan with a well-diversified

portfolio, individuals can achieve financial freedom and security. Whether
seeking to save for retirement, fund education expenses, or build wealth, a
solid understanding of financial planning and asset classes is critical for
achieving success.

7.8 REFERENCE

i. "Financial Planning: A Practitioner's Guide" by Roger I. Clark

ii. "Investment Analysis and Portfolio Management" by Frank K. Reilly
and Keith C. Brown
iii. "A Random Walk Down Wall Street" by Burton G. Malkiel
iv. "The Little Book of Common Sense Investing" by John C. Bogle
v. "Asset Allocation: Theory and Practice" by Campbell R. Harvey




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 Module 2

8
FINANCIAL MATHEMATICS FOR
WEALTH MANAGEMENT: RETURN
CALCULATIONS, ASSET VALUATION,
AND KEY FINANCIAL RATIOS
Unit Structure :
8.0 Learning Objectives
8.1 Compound Annual Growth Rate (CAGR)
8.2 Post Tax Returns
8.2 Introduction
8.3 Important of Financial Ratio
8.4 Type of Financial Ratio
8.5 Practical Sum
8.8 MCQ
8.7 Conclusion
8.8 Reference

8.0 LEARNING OBJECTIVES

After reading this chapter, learner will be able to:

 Learn how to calculate different types of returns such as Compound

Annual Growth Rate (CAGR) and Post-tax Returns, and understand
their significance in measuring investment performance.
 Study the methods to calculate total assets by summing up the value
of all owned assets, and how it reflects an individual's or entity's
financial position.

 Learn how to calculate net worth by subtracting liabilities from total

assets, and its use as a key indicator of financial health.

 Gain proficiency in various financial ratios such as liquidity,

profitability, and solvency ratios, and learn how to apply them to
assess the financial performance and stability of individuals or
businesses.

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Mutual Fund Management 8.1 COMPOUND ANNUAL GROWTH RATE (CAGR)
and Wealth Management
Introduction: The Compound Annual Growth Rate (CAGR) is a key
financial metric used to measure the average annual growth of an
investment over a specified period, assuming the profits are reinvested at
the end of each period. It provides a smoothed rate of return that
eliminates the effects of volatility and gives a consistent growth figure,
regardless of fluctuations in the intermediate years.

Formula for CAGR:

Where:
 Ending Value = The value of the investment at the end of the period.
 Beginning Value = The value of the investment at the beginning of
the period.
 n = The number of years (or periods) over which the investment grows

Steps in Calculating CAGR:

1. Identify the Beginning and Ending Values: First, you need the
initial value (beginning value) of the investment and the value at the
end of the investment period (ending value).
2. Determine the Investment Period: The number of years or periods
over which the investment is held.
3. Apply the CAGR Formula: Substituting these values into the
formula gives you the average annual growth rate.

Example
If an investor invests `100,000 in a mutual fund, and after 5 years, the
value grows to `160,000, the CAGR is calculated as:(

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 Financial Mathematics for
Wealth Management: Return
Calculations, Asset Valuation,
and Key Financial Ratios
This means the investment has grown at an average annual rate of 9.85%
over the 5-year period.

Why to Use CAGR?

 Smooths Volatility: CAGR helps smooth out fluctuations in annual
growth, offering a consistent rate of return over the investment
horizon.
 Simplifies Comparison: By providing a single growth rate, CAGR
simplifies the comparison of different investments that may have
varied returns in different years.
 Future Projections: CAGR is often used to project future values,
assuming the investment continues growing at the same rate.

Limitations of CAGR:
While CAGR provides a simplified and effective growth measure, it does
not account for volatility within the periods (i.e., it assumes a steady
growth rate). Therefore, it might not capture the risks or fluctuations of
investments that experience extreme variations year by year.

Practical Uses of CAGR:

 Investment Analysis: Investors use CAGR to evaluate the
performance of stocks, mutual funds, and other investment vehicles
over time.
 Business Growth: Businesses use CAGR to measure the growth in
revenue, market share, or other business metrics over a set period.
 Comparing Alternatives: CAGR allows comparing the performance
of different investment opportunities or business growth rates.

8.2 POST TAX RETURNS

A post-tax return is the actual profit you earn on an investment after
accounting for taxes. It's a crucial metric for investors as it reveals the real
financial benefit of an investment.

Why Post-Tax Returns Matter

 Real Picture of Returns: Pre-tax returns can be misleading. Taxes
significantly erode your investment gains.
 Comparing Investments: Post-tax returns allow you to compare
investments with different tax implications, such as taxable vs. tax-
advantaged accounts.

161
Mutual Fund Management  Financial Planning: Understanding your post-tax returns helps you
and Wealth Management make informed decisions about your financial goals.

How to Calculate Post-Tax Returns

1. Determine Pre-Tax Return: Calculate the total return on your
investment before taxes. This includes capital gains, dividends, and
interest.
2. Identify Applicable Tax Rates: Determine the appropriate tax rate
for your investment. This could be your marginal tax rate for ordinary
income, capital gains tax rate, or a lower rate for qualified dividends.
3. Calculate Tax Liability: Multiply your pre-tax return by the
applicable tax rate to find your tax liability.
4. Subtract Taxes from Pre-Tax Return: Subtract the tax liability from
your pre-tax return to get your post-tax return.

Example:
Suppose you invest ` 10,000 in a stock that appreciates to ` 12,000 in one
year. Your pre-tax return is 20%. If your capital gains tax rate is 15%,
your tax liability is ` 300. Your post-tax return is 17% (` 2000 - ` 300)/
` 10,000.

Factors Affecting Post-Tax Returns

 Investment Type: Different investments have different tax
implications. For example, stocks, bonds, and mutual funds may be
taxed differently.
 Tax Bracket: Your marginal tax rate determines how much tax you'll
pay on your investment gains.
 Holding Period: The length of time you hold an investment can
impact the tax rate applied to capital gains.
 Tax-Advantaged Accounts: Using tax-advantaged accounts like
IRAs and 401(k)s can significantly reduce your tax burden.

Maximizing Post-Tax Returns

 Tax-Loss Harvesting: Sell losing investments to offset capital gains.
 Diversification: Spread your investments across various asset classes
to reduce risk and potentially lower your tax bill.
 Tax-Efficient Investing: Consider tax-efficient funds and strategies.
 Consult a Tax Professional: Seek advice from a qualified tax
professional to optimize your investment strategy.

162
By understanding post-tax returns and implementing effective strategies, Financial Mathematics for
you can increase your overall investment returns and achieve your Wealth Management: Return
financial goals. Calculations, Asset Valuation,
and Key Financial Ratios

8.3 INTRODUCTION TO FINANCIAL RATIO

Financial ratios are mathematical calculations that are used to analyze a
company's financial performance, position, and efficiency. These ratios
provide investors, creditors, and other stakeholders with valuable insights
into a company's financial health, profitability, and potential for growth.
While there isn't a single, universally acclaimed "famous" definition
of a financial ratio, here's a concise and informative one that captures
the essence:
A financial ratio is a quantitative representation of a company's financial
performance, derived from its financial statements. It provides a
comparative measure to assess liquidity, profitability, solvency, efficiency,
and market value.
This definition encapsulates the core purpose of financial ratios, which is
to transform raw financial data into meaningful insights for decision-
making.

8.4 IMPORTANT OF FINANCIAL RATIO

1. Evaluating financial performance: Financial ratios provide a
standardized way to compare a company's performance over time or
with its competitors. This helps investors and analysts evaluate the
company's ability to generate earnings, manage assets and liabilities,
and create shareholder value.
2. Identifying strengths and weaknesses: By analysing different types
of ratios, such as liquidity, profitability, and solvency ratios, financial
analysts can identify a company's strengths and weaknesses. This
information can help managers address areas of improvement and
make informed decisions about investments and resource allocation.
3. Predicting future performance: Financial ratios can be used to
forecast a company's future performance by identifying trends and
patterns in its financial data. This helps investors make informed
investment decisions and businesses anticipate potential risks and
opportunities.
4. Comparing with industry peers: Financial ratio analysis allows for
comparison with industry peers, enabling companies to benchmark
their performance against their competitors. This helps identify areas
where a company may be lagging behind or excelling compared to its
peers.
5. Detecting Accounting Irregularities: Financial ratio analysis can
help auditors and regulators detect potential accounting irregularities,
such as fraud or manipulation of financial statements. By analysing
financial ratios, they can identify anomalies that may indicate
163
Mutual Fund Management suspicious activity, such as unusually high or low profit margins,
and Wealth Management excessive use of off-balance-sheet financing, or unusual changes in
asset values.
6. Assessing Creditworthiness: Lenders use financial ratio analysis to
evaluate a company's creditworthiness and determine whether to
extend credit or loan funds. By analyzing financial ratios such as the
debt-to-equity ratio and current ratio, lenders can assess a company's
ability to meet its financial obligations and repay debts.
7. Identifying Dividend Payment Capacity: Financial ratios such as the
dividend payout ratio help investors assess a company's ability to pay
dividends to shareholders. This is important for investors who rely on
dividend income as a source of return on their investment.
8. Analyzing Capital Structure: Financial ratios like the debt-to-equity
ratio help investors understand a company's capital structure and
assess its level of risk. This information is important for investors who
want to understand the company's funding strategy and risk profile.
9. Evaluating Management Effectiveness: Financial ratios such as
return on equity (ROE) and return on assets (ROA) help evaluate the
effectiveness of management in generating profits from assets and
investments. This information is important for investors who want to
assess the performance of management and make informed decisions
about their investment.
10. Providing Insights for Strategic Decision-Making: Financial ratio
analysis provides valuable insights that can inform strategic decisions,
such as investments in new projects, acquisitions, or divestitures. By
analyzing financial ratios, companies can identify areas where they can
improve their operations, reduce costs, or increase profitability. This
information can help companies make informed decisions about where
to allocate their resources and invest their time and money.

In summary, financial ratio analysis is a powerful tool that can be used for
a variety of purposes beyond evaluating a company's financial
performance. It can help detect accounting irregularities, assess
creditworthiness, identify dividend payment capacity, analyze capital
structure, evaluate management effectiveness, and provide insights for
strategic decision-making.

8.5 TYPE OF FINANCIAL RATIO

There are several types of financial ratios, which can be broadly
categorized into the following:

a. Liquidity Ratio:
Liquidity Ratios are a type of financial ratio that measures a company's
ability to meet its short-term financial obligations, such as paying debts,

164
paying dividends, and meeting unexpected expenses. The three most often Financial Mathematics for
used liquidity ratios are: Wealth Management: Return
Calculations, Asset Valuation,
and Key Financial Ratios
1. Current Ratio: The current ratio is a liquidity ratio that measures a
company's ability to pay its short-term debts, such as accounts
payable, taxes, and other short-term liabilities. It is calculated by
dividing the current assets (cash, accounts receivable, inventory, and
other liquid assets) by the current liabilities (accounts payable, taxes
owed, and other short-term debts).

Current Ratio = Current Assets / Current Liabilities

For example, if a company has current assets of RS.100,000 and current
liabilities of Rs80,000, its current ratio would be 1.25 (100,000/80,000).
This means that the company has sufficient current assets to cover its
current liabilities 1.25 times.

A high current ratio (above 1) indicates that a company has sufficient

liquidity to meet its short-term obligations, while a low current ratio
(below 1) may indicate that the company may struggle to meet its short-
term debts.

2. Quick Ratio: The quick ratio is a more conservative version of the

current ratio that only includes the most liquid assets in the numerator.
It excludes inventory and other non-liquid assets from the calculation.
The quick ratio is calculated by dividing the sum of cash, accounts
receivable, and other liquid assets by the current liabilities.

Quick Ratio = (Cash + Accounts Receivable + Other Liquid Assets) /

Current Liabilities

For example, if a company has cash of Rs20,000, accounts receivable of

Rs50,000, and other liquid assets of Rs10,000, and current liabilities of
Rs80,000, its quick ratio would be 0.85 (20,000 + 50,000 + 10,000 =
80,000). This means that the company has sufficient quick assets to cover
its current liabilities approximately 0.85 times.

A high quick ratio indicates that a company has sufficient liquidity to meet
its short-term obligations using only its most liquid assets.

3. Cash Ratio: The cash ratio is an even more conservative version of

the quick ratio that only includes cash and cash equivalents in the
numerator. It excludes all non-cash assets from the calculation. To
determine the cash ratio, divide cash and cash equivalents by current
liabilities.

Cash Ratio = Cash and Cash Equivalents / Current Liabilities

For example, if a company has cash of Rs20,000 and cash equivalents of

Rs10,000, and current liabilities of Rs80,000, its cash ratio would be 0.35
(20,000 + 10,000 = 30,000). This means that the company has sufficient
165
Mutual Fund Management cash and cash equivalents to cover its current liabilities approximately
and Wealth Management 0.35 times.

A high cash ratio indicates that a company has sufficient liquidity to meet
its short-term obligations using only its cash and cash equivalents.

b. Profitability Ratio:
Profitability ratios are a set of financial metrics that help investors and
analysts evaluate a company's ability to generate earnings compared to its
expenses, assets, and equity. These ratios provide insights into a
company's profitability, helping investors make informed decisions about
whether to invest in the company or not. Here's a detailed explanation of
the four profitability ratios mentioned:

1. Gross Margin Ratio:

The gross margin ratio measures a company's profitability from its sales
by calculating the difference between revenue and the cost of goods sold
(COGS) as a percentage of revenue. The formula is:
Gross Margin Ratio = (Revenue - COGS) / Revenue
This ratio helps investors evaluate a company's pricing power, product
mix, and efficiency in producing its products or services. A high gross
margin indicates that the company has a competitive advantage in its
industry, while a low gross margin may indicate that the company is
struggling to maintain profitability.

2. Operating Profit Margin Ratio:

The operating profit margin ratio measures a company's profitability from
its operations by calculating the difference between operating income and
operating expenses as a percentage of revenue. The formula is:
Operating Profit Margin Ratio = (Operating Income - Operating Expenses)
/ Revenue
This ratio helps investors evaluate a company's ability to generate profits
from its day-to-day operations. A high operating profit margin indicates
that the company has a strong operational efficiency and is able to
maintain profitability even during economic downturns.

3. Net Profit Margin Ratio:

The net profit margin ratio measures a company's profitability after
deducting all expenses, including taxes and interest expenses, from its
revenue. The formula is:
Net Profit Margin Ratio = Net Income / Revenue
This ratio helps investors evaluate a company's overall profitability, taking
into account all expenses and taxes. A high net profit margin indicates that

166
the company has a strong financial position and is able to generate Financial Mathematics for
significant profits. Wealth Management: Return
Calculations, Asset Valuation,
4. Return on Equity (ROE) Ratio: and Key Financial Ratios

The ROE ratio measures a company's return on shareholder equity by

calculating net income as a percentage of shareholder equity. The formula
is:
ROE = Net Income / Shareholder Equity
This ratio helps investors evaluate a company's ability to generate returns
for its shareholders. A high ROE indicates that the company is using its
shareholder equity effectively to generate profits.

5. Return on Assets (ROA) Ratio:

The ROA ratio measures a company's return on total assets by calculating
net income as a percentage of total assets. The formula is:
ROA = Net Income / Total Assets
This ratio helps investors evaluate a company's ability to generate profits
from its assets. A high ROA implies that the firm is making optimal use of
its assets to create profits.
c. Efficiency Ratio:

Efficiency Ratios are a type of financial ratio that measures a company's

ability to generate revenue and profits from its resources, such as assets,
inventory, and accounts receivable and payable. These ratios help to
evaluate the efficiency of a company's operations and identify areas where
improvements can be made.

1. Asset Turnover Ratio:

The Asset Turnover Ratio (ATR) measures a company's efficiency in
using its assets to generate sales. It is determined by dividing total sales by
total average assets.
Formula: ATR = Total Sales / Total Average Assets

Interpretation:
 A higher ATR indicates that the company is using its assets efficiently
to generate sales.
 A lower ATR may indicate that the company has idle assets or
inefficient use of resources.
For example, if a company has an ATR of 2.5, it means that for every
dollar of assets, it generates Rs2.50 of sales.

167
Mutual Fund Management 2. Inventory Turnover Ratio:
and Wealth Management
The Inventory Turnover Ratio (ITR) assesses a company's efficiency in
utilizing inventory to produce revenue. It is determined by dividing the
cost of items sold by the average inventory.

Formula : ITR = Cost of Goods Sold / Average Inventory.

Interpretation:
 A higher ITR indicates that the company is selling its inventory quickly
and efficiently.
 A lower ITR may indicate that the company has too much inventory or
is not selling its products quickly enough.
For example, if a company has an ITR of 5, it means that it sells its
inventory 5 times per year.

3. Accounts Receivable Turnover Ratio:

The Accounts Receivable Turnover Ratio (ART) measures a company's
efficiency in collecting its accounts receivable. It is determined by
dividing net credit sales by average receivables.
Formula: ART = Net Credit Sales / Average Accounts Receivable

Interpretation:
 A higher ART indicates that the company is collecting its accounts
receivable quickly and efficiently.
 A lower ART may indicate that the company is having trouble
collecting its debts or has slow-paying customers.
For example, if a company has an ART of 4, it means that it collects its
accounts receivable 4 times per year.

4. Accounts Payable Turnover Ratio:

The Accounts Payable Turnover Ratio (APTR) measures a company's
efficiency in paying its accounts payable. It is determined by dividing the
cost of items sold by the average accounts payable.
Formula: APTR = Cost of Goods Sold / Average Accounts Payable

Interpretation:
 A higher APTR indicates that the company is paying its accounts
payable quickly and efficiently.
 A lower APTR may indicate that the company is having trouble paying
its debts or has slow payment terms with its suppliers.

168
d. Solvency Ratio: Financial Mathematics for
Wealth Management: Return
Solvency ratios are a type of financial ratio that measures a company's Calculations, Asset Valuation,
and Key Financial Ratios
ability to meet its long-term obligations and pay its debts. These ratios are
essential for investors, creditors, and analysts to evaluate a company's
solvency and assess the level of risk associated with investing in or
lending to the company.

1. Debt-to-Equity Ratio:
The debt-to-equity ratio, also known as the debt-to-capital ratio, measures
a company's debt burden relative to its equity. This ratio is calculated by
dividing the company's total liabilities by its total shareholders' equity.
Debt-to-Equity Ratio = Total Liabilities / Total Shareholders' Equity
For example, if a company has total liabilities of Rs100 million and total
shareholders' equity of Rs50 million, the debt-to-equity ratio would be 2:1,
indicating that the company has twice as much debt as equity.
A high debt-to-equity ratio can indicate that a company is taking on too
much debt and may struggle to meet its obligations. On the other hand, a
low debt-to-equity ratio may indicate that a company is conservatively
financed and has a lower risk profile.

2. Debt-to-Asset Ratio:
The debt-to-asset ratio measures a company's debt burden relative to its
total assets. To compute this ratio, divide the company's total liabilities by
its total assets.
Debt-to-Asset Ratio = Total Liabilities/ Total Assets
For example, if a company has total liabilities of Rs150 million and total
assets of Rs200 million, the debt-to-asset ratio would be 0.75 or 75%,
indicating that the company has 75% of its assets financed through debt.
A high debt-to-asset ratio can indicate that a company is heavily leveraged
and may struggle to meet its obligations. On the other hand, a low debt-to-
asset ratio may indicate that a company is conservatively financed and has
a lower risk profile.

3. Interest Coverage Ratio:

The interest coverage ratio measures a company's ability to pay its interest
expenses on its debt. To compute this ratio, divide the company's profits
before interest and taxes (EBIT) by its interest expenditures.
Interest Coverage Ratio = EBIT/ Interest Expenses
For example, if a company has EBIT of Rs50 million and interest
expenses of Rs20 million, the interest coverage ratio would be 2.5,
indicating that the company has more than enough earnings to cover its
interest expenses.

169
Mutual Fund Management A high interest coverage ratio indicates that a company has sufficient
and Wealth Management earnings to meet its interest expenses and is likely to be able to meet its
debt obligations. On the other hand, a low interest coverage ratio may
indicate that a company is struggling to meet its interest expenses and may
be at risk of defaulting on its debts.
In conclusion, solvency ratios such as the debt-to-equity ratio, debt-to-
asset ratio, and interest coverage ratio provide valuable insights into a
company's ability to meet its long-term obligations and pay its debts.
These ratios are essential for investors, creditors, and analysts to evaluate
a company's solvency and assess the level of risk associated with investing
in or lending to the company.

e. Market Ratio:
Market ratios are a type of financial ratio that helps investors and analysts
evaluate the market performance of a company's stock. Two important
market ratios are the Price-to-Earnings (P/E) ratio and the Price-to-Book
(P/B) ratio.

1. Price-to-Earnings (P/E) Ratio:

The P/E ratio measures the market price of a company's stock relative to
its earnings per share (EPS). It is determined by dividing the current stock
price by the earnings per share. The P/E ratio indicates how much
investors are ready to pay every dollar of profits. The P/E ratio is
calculated as the market price per share divided by earnings per share
(EPS).
Example: If a company's stock is trading at Rs50 and its EPS is Rs2, the
P/E ratio would be 25 (Rs50 ÷ Rs2).
Interpretation:
 A high P/E ratio indicates that investors have high expectations for a
company's future earnings growth and are willing to pay a premium for
its stock.
 A low P/E ratio may indicate that investors are skeptical about the
company's future earnings potential and are not willing to pay as much
for its stock.
 A declining P/E ratio may indicate that investors have become more
cautious about the company's future prospects.

2. Price-to-Book (P/B) Ratio:

The P/B ratio measures the market price of a company's stock relative to
its book value per share. Book value is the company's net assets minus
liabilities. The P/B ratio provides insights into how much investors are
willing to pay for each dollar of book value.
Formula: P/B Ratio = Market Price per Share/Book Value per Share.

170
Example: If a company's stock is trading at Rs50 and its book value per Financial Mathematics for
share is Rs20, the P/B ratio would be 2.5 (Rs50 ÷ Rs20). Wealth Management: Return
Calculations, Asset Valuation,
Interpretation: and Key Financial Ratios

 A high P/B ratio may indicate that investors are optimistic about a
company's growth prospects and are willing to pay a premium for its
stock relative to its book value.
 A low P/B ratio may indicate that investors are skeptical about a
company's growth potential and are not willing to pay as much for its
stock relative to its book value.
 A declining P/B ratio may indicate that investors have become more
cautious about a company's future prospects.

Comparison:
Both the P/E and P/B ratios can provide insights into a company's market
valuation, but they serve different purposes. The P/E ratio focuses on
earnings, which can be influenced by various factors such as accounting
practices, industry trends, and management decisions. The P/B ratio
focuses on book value, which is a more stable metric that can provide
insights into a company's underlying financial health.
By analyzing these two ratios, investors can gain a more comprehensive
understanding of a company's market performance and make more
informed investment decisions.
f. Other Ratio:
1. Dividend Yield Ratio:
The dividend yield ratio measures the percentage return on investment
from dividends paid by a company. Divide the yearly dividend per share
by the current stock price and multiply by 100.The dividend yield ratio
provides investors with an idea of the return they can expect to receive
from the dividend payments made by the company.
Formula: (Annual Dividend Per Share / Current Stock Price) x 100
Example: If a company pays an annual dividend of Rs2 per share and its
current stock price is Rs50, the dividend yield would be (2 / 50) x 100 =
4%.
Interpretation: A higher dividend yield indicates that the company is
paying out a larger percentage of its earnings in dividends, which may be
attractive to income-seeking investors. However, a high dividend yield
may also indicate that the stock price is undervalued or that the company's
earnings are declining.

2. Beta Ratio:
The beta ratio measures a company's systematic risk relative to the overall
market. Beta is a measure of how much a stock's price moves in response
171
Mutual Fund Management to changes in the overall market. A beta of 1 indicates that the stock
and Wealth Management moves in line with the market, while a beta greater than 1 indicates that it
is more volatile, and a beta less than 1 indicates that it is less volatile.
Formula: Beta = (Standard Deviation of Stock Returns / Standard
Deviation of Market Returns)
Example: If a stock has a standard deviation of returns of 15% and the
market has a standard deviation of returns of 10%, the beta would be
(15% / 10%) = 1.5.
Interpretation: A high beta indicates that the company's stock price is more
sensitive to market fluctuations, which may be attractive to investors
seeking higher returns but also increases their risk exposure. A low beta
indicates that the company's stock price is less sensitive to market
fluctuations, which may be attractive to investors seeking stability.

3. Earnings Per Share (EPS) Ratio:

The EPS ratio measures a company's earnings per share of common stock.
It represents the amount of profit earned by each outstanding share of
common stock. EPS is an important metric for investors as it helps them
evaluate a company's profitability and ability to generate earnings.
Formula:
EPS = Net Income / Total Number of Outstanding Shares
Example: If a company reports net income of Rs100,000 and has 10,000
outstanding shares, the EPS would be (Rs100,000 / 10,000) = Rs10.
Interpretation: A higher EPS indicates that the company is generating
more profits per share, which may attract investors seeking higher returns.
A lower EPS may indicate that the company is facing challenges in
generating profits or has been affected by declining revenue or increasing
costs.
These three ratios provide valuable insights into a company's financial
performance and can be used in conjunction with other financial ratios to
gain a comprehensive understanding of its financial health and potential
for future growth.

172
8.6 PRACTICAL SUM Financial Mathematics for
Wealth Management: Return
Calculations, Asset Valuation,
Problem‐1 and Key Financial Ratios
The following Trading and Profit and Loss Account of Aadhi
Guru Ltd for the year 31‐3‐2000 is given below :
Particular Rs. Particular Rs.
To Opening Stock 76,250 By Sales 5,00,000
“Purchases 3,15,250 “Closing stock 98,500
“Carriage and 2,000
Freight “Wages 5,000
“Gross Profit b/d 2,00,000
5,98,500
5,98,500
To Administration expenses 1,01,000 By Gross Profit b/d
“Selling and Dist. expenses 12,000 “Non‐operating in comes: 2,00,000
“Non‐operating expenses 2,000 “ Interest on Securities 1,500
“Financial Expenses 7,000 “Dividend on shares 3,750
NetProfit c/d 84,000 “Profit on sale of shares 750
2,06,000 2,06,000

Calculate:
1. Gross Profit Ratio 2. Expenses Ratio 3. Operating Ratio
1. Net Profit Ratio 5. Operating (Net) Profit Ratio 8. Stock Turnover
Ratio.

Solution–1
1. Gross Profit Margin = Gross profit X100
Sales
2,00,000
5,00,000 X100
=40%

2. Expenses Ratio = Op. Expenses X100

Net Sales
1,13,000
5,00,000 X100
= 22.60%

3. Operating Ratio= Cos to f goods sold + Op. Expenses X100

Net Sales
3,00,000+1,13,000
5,00,000 X100
=82.60%

173
Mutual Fund Management Cos to f Goods sold = Op. stock + purchases + carriage and Freight +
and Wealth Management wages – Closing Stock
= 76250 + 315250 + 2000 + 5000 ‐ 98500
= Rs. 3,00,000

4. Net Profit Ratio= Net Profit X100

Net Sales
84,000
5,00,000 X100
=18.8%

5. Operating Profit Ratio= Op. Profit X100

Net Sales
Operating Profit = Sales – (Op. Exp. + Admin Exp.)
87,000
5,00,000 X100
=17.40%
Problem ‐ 2 The details of Aarudhranareasunder:
Sales (40% cash sales) 15,00,000

8. Stock Turnover Ratio = Cos to f goods sold

Avg. Stock
3,00,000
87,375
=3.43 times
Less : Cos to f sales 7,50,000
7,50,000
GrossPro
fit:
Less : Office Exp. (including in t.ondebentures 1,25,000
Selling Exp. 1,25,000 2,50,000
Profit 5,00,000
before
Taxes:
Less : Taxes 2,50,000

Net 2,50,000
Profit:

174
BalanceSheet Financial Mathematics for
Wealth Management: Return
Calculations, Asset Valuation,
Particular Rs. Particular Rs. and Key Financial Ratios
Equity share 20,00,000 FixedAssets 55,00,000
capital 20,00,000 Stock Debtors 1,75,000
10% Preference share 11,00,000 Billsreceivable 3,50,000
capital Reserves 10,00,000 Cash 50,000
10% Debentures 1,00,000 FictitiousAssets 2,25,000
Creditors 1,50,000 1,00,000
Bank ‐ overdraft 45,000
Bills payable 5,000
Outstanding expenses 64,00,000
64,00,000

Aside from the specifications mentioned above, the initial stock was Rs.
3,25,000. Calculate the following ratios based on 360 days of the year,
then explain the company's position.
(1) Gross profit ratio. (2) Stock turnover ratio. (3) Operating ratio.
(4) Current ratio. (5) Liquid ratio. (6) Debtors ratio. (7) Creditors ratio.
(8) Proprietary ratio. (9) Rate of return on net capital employed. (10)Rate
of return on equity shares.

Solution– 2 (Problem related to Composite Ratio)

1. Gross Profit Margin = Gross profit X100

Sales
7,50,000
15,00,000 X100
= 50%

2. Stock Turnover Ratio = Cos to f goods sold Avg. Stock

Avg. stock = Opening Stock + Closing
Stock 2
COGS = Sales – GP
3,25,000 + 1,75,000
2
AS = 2,50,000
COGS = 15,00,000 – 7,50,000
7,50,000
= 7,50,000
2,50,000
= 3 times
175
Mutual Fund Management 3. Operating Profit Ratio= Op. Profit Net Sales
X100
and Wealth Management
Operating Profit = Sales – (Op.Exp.+COGS.)

O P Ratio = 15,00,000 – (7,50,000 +

1,25,000 +
25,000)
=6,00,000
(excluding Interest on Debentures)
= 6,00,000 X100
15,00,000
= 40%

4.Current Ratio = Current Assets Currentliabilities

Current Assets = Stock + debtors + Bills receivable +
Cash
Current Liabilities = Creditors + bank overdraft + Bills
payable + Outstanding expenses

CA = 1,75,000 + 3,50,000 + 50,000 + 2,25,000

= 8,00,000
CL = 1,00,000 + 1,50,000 + 45,000 + 5,000
= 3,00,000
=8,00,000
3,00,000
=2.67:1
5. Quick Ratio/ Liquid Ratio = Liquid Assets LiquidLiabilities
Liquid / Quick Assets = Current Assets ‐ Stock
Liquid / Quick Liabilities = Current Liabilities –
BOD
QA = 8,00,000 – 1,75,000
= 6,25,000
QL = 3,00,000 – 1,50,000
= 1,50,000
= 6,25,000
1,50,000

=4.17:1

176
 Financial Mathematics for
8. Debtors Ratio Debtors + Bills X 365/ 360 Wealth Management: Return
Calculations, Asset Valuation,
receivable Credit sales days
and Key Financial Ratios
= 3,50,000 + 50,000
9,00,000 X 360 days
(60% of 15,00,000)
= 0.444 X 360 days
= 160 days

7.Creditors Ratio Creditors + Bills payable X 365/ 360

Credit Purchase days
=1,00,000+45,000
7,50,000
Notes: If credit purchase could X 360 days
not find out the cost of goods
offered at that time, consider
credit purchase.
=0.193 X 360 days
=69 days

8. Proprietary Ratio = Share holders’ Funds Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus +
Preference Sh.
Cap. – Fictitious Assets
Total Assets = Total Assets – Fictitious Assets
SHF = 20,00,000 + 20,00,000 + 11,00,000 –
1,00,000
= 50,00,000
TA = 64,00,000 – 1,00,000
= 63,00,000
= 50,00,000
63,00,000
= 0.79:1
Notes:

Rateof Returnon Rate of Rate of return on

Capital Employed Return on Share Equity
holders Fund Shareholders Fund
= EBIT X10 = PAT X10 = PAT– X10
Capital 0 SHF 0 Pref. Div. 0
employed ESHF

177
Mutual Fund Management
and Wealth Management CE = EqSh. Cap. + SHF = Eq. Sh. Cap. + ESHF= Eq.Sh.Cap.+
Pref. Sh. Pref. Sh.
Cap. + Reserves & Cap.+ Reserves & Reserves & Surplus –
Surplus + Debenture Surplus – Fictitious Fictitious Assets
+ Long Term Loan Assets
– Fictitious Assets
Sales 15,00,000
Less : Cost of goods sold 7,50,000
Gross profit 7,50,000
Less : Operating expenses (including Depreciation) 1,50,000
Earnings before Interest & Tax (EBIT) 6,00,000
Less : Interest Cost 1,00,000
Earnings before Tax (EBT) 5,00,000
Less : Taxliability 2,50,000
Earnings after Tax (EAT / PAT) 2,50,000
Less : Preference share dividend 2,00,000
Distributional Profit 50,000

9. 10. 11.

Rate of Return on Rate of Return on Rate of return on

Capital Employed Share holders Fund Equity Share holders
Fund
= EBIT X100 =PATSHF X100 =PAT–Pref. X100
Capital Div.
employed ESHF
CE = Eq Sh. Cap. + Pref. SHF = Eq. Sh. Cap. + Pref. ESHF= Eq.Sh.Cap.+
Sh. Cap. + Reserves & Sh. Cap. + Reserves & Reserves & Surplus –
Surplus + Debenture + Surplus – Fictitious Assets Fictitious Assets
Long Term Loan –
Fictitious Assets
CE = 20,00,000 + SHF = 20,00,000 + ESHF = 20,00,000 +
20,00,000 20,00,000 11,00,000 – 1,00,000
11,00,000 + 10,00,000 11,00,000– 1,00,000
1,00,000

= 60,00,000 = 50,00,000 = 30,00,000

= 6,00,000 X10 = 2,50,000 X1 = 50,000 X1

60,00,000 0 50,00,000 00 30,00,000 00
= 10% = 5% = 1.67%

178
 Financial Mathematics for
Wealth Management: Return
Problem‐3 Calculations, Asset Valuation,
and Key Financial Ratios
Following is the summarized Balance Sheet of Mrs. Diana Anil Yadav. as
on 31‐3‐04.

Particular Rs. Particular Rs.

Equity Shares of Rs.10 10,00,000 Fixed Assets 20,00,000
each 10% Pref. Sh. of 4,00,000 Investments Closing 2,00,000
Rs.100 each Reserves and 7,00,000 Stock Sundry Debtors 2,00,000
Surplus 5,00,000 Bills Receivable 4,60,000
15% Debentures Sundry 2,40,000 Cash at Bank 60,000
Creditors Bank Overdraft 1,60,000 Preliminary Expenses 60,000
20,000
30,00,000 30,00,000

The consolidated profit and loss account for the fiscal year ending on
March 31, 2004 is as follows:
Rs.

Sales (25% Cashsales) 80,00,000

Less : Costof goods sold 56,00,000
Gross Profit 24,00,000
Net profit (Before interest and tax 50%) 9,00,000
Calculate the following ratios: (3)Debt ‐ Equity
(1) Rate on Return on Capital Employed (4)Capital gearing
(2) Proprietary Ratio

Ratio (5) Debtors Ratio (365 days of the year.)

(6) Rate of Return on Shareholders' Funds
(7) Rate of Return on Equity shareholders fund.

Solution‐3 Statement of Profitability

Sales 80,00,000
Less : Costof goods sold 56,00,000
Gross profit 24,00,000
Less : Operating expenses (including Depreciation) 15,00,000
Earnings before Interest & Tax (EBIT) 9,00,000
Less : Interest Cost 75,000
Earnings before Tax (EBT) 8,25,000
Less : Taxliability (50%) 4,12,500
Earnings after Tax (EAT / PAT) 4,12,500
Less : Preference share dividend 40,000
Distributional Profit 3,72,500
179
Mutual Fund Management 1. 8. 7.
and Wealth Management Rate of Return on Capital Rate of Return on Rate of return on Equity
Employed Share holders Fund Share holders Fund
= EBIT X100 = PAT SHF X100 = PAT –Pref. X100
Capital employed Div. ESHF
CE = Eq Sh. Cap. + Pref. SHF = Eq. Sh. Cap. + ESHF = Eq.Sh.Cap.+
Sh. Cap. + Reserves & Pref. Sh. Cap. + Reserves & Surplus–
Surplus + Debenture + Reserves & Surplus – Fictitious Assets
Long Term Loan – Fictitious Assets
Fictitious Assets
CE = 10,00,000 + 4,00,000 SHF = 10,00,000 + ESHF = 10,00,000 +
7,00,000 + 5,00,000 – 4,00,000 + 7,00,000 – 20,000
20,000 7,00,000 ‐ 20,000 = 16,80,000
= 25,80,000 = 20,80,000
= 9,00,000 X100 = 4,12,500 X100 = 3,72,500 X100
25,80,000 20,80,000 16,80,000
= 34.88% = 19.83% = 22.17%

2. Proprietary Ratio = Shareholders’ Funds Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus +
Preference Sh.
Cap. – Fictitious Assets
Total Assets = Total Assets – Fictitious Assets
SHF = 10,00,000 + 7,00,000 + 4,00,000 ‐
20,000
= 20,80,000
TA = 30,00,000 – 20,000
= 29,80,000
= 20,80,000
29,80,000

=0.70:1

3. Debt – Equity Long Term Debt (Liabilities) Share holders Fund

Ratio =
LTL = Debentures + long term loans
SHF = Eq. Sh. Cap. + Reserves & Surplus +
Preference Sh.
Cap. – Fictitious Assets
LTL = 5,00,000
SHF = 10,00,000 + 7,00,000 + 4,00,000 ‐ 20,000
= 20,80,000
= 5,00,000
20,80,000
= 0.24:1
180
4. Capital Gearing Ratio Fixed Interest or Dividend Securities Financial Mathematics for
Equity Share holders Fund Wealth Management: Return
Calculations, Asset Valuation,
Fixed Interest Bearing Security = and Key Financial Ratios
Debentures + Preference share capital
ESHF = Eq. Sh. Cap. + Reserves &
Surplus –Fictitious Assets
LTL = 9,00,000
ESHF = 10,00,000 + 7,00,000 ‐ 20,000
= 16,80,000
= 9,00,000
16,80,000
= 0.54:1

5.Debtors Ratio = Debtors + Bills receivable X365/360 days

(Avg. debt collection period) Credit sales
=4,60,000+60,000 X365days
60,00,000
=0.461 X365days
=31.63 days
=32days(Aprox.)
Problem‐4
Following are incomplete Trading & Profit and Loss A/c. and Balance
Sheet of Ms. Chiki.

Trading A/c.

Particular Rs. Particular Rs.

ToOp.stock 3,50,000 BySales (?)
ToPurchase (?) ByClosingStock (?)
ToPurchaseReturn 87,000
To Gross Profit 7,18,421
14,96,710 14,96,710

Profit&Loss A/c.

Particular Rs. Particular Rs.

To Office Exp. 3,70,000 By Gross Profit 7,18,421
ToInt. on Deb. 30,000 ByCommission (?)
To Tax. Provision 18,421
To Net Profit 3,50,000
(?) (?)

181
Mutual Fund Management BalanceSheet
and Wealth Management
Particular Rs. Particular Rs.
Paid Up Capital 5,00,000 Plant&machinery 7,00,000
GeneralReserve P (?) Stock (?)
& L a/c. (?) Debtors Bank (?)
10% Debenture (?) OtherFixedAssets 62,500
CurrentLiabilities 6,00,000 (?)
(?) (?)

Other details that might help you find missing things are as follows:
1. Current Ratio was 2:1.
2. Closing Stock is 25% of Sales.
3. Proposed Dividend was 40% of paid up capital.
4. Gross profit Ratio was 60%.
5. Amount transfer to General Reserve is same as proposed Dividend.
6. Balance of P & L Account is calculated 10% of proposed dividend.
7. Commission in come is 1/7 of Net profit.
8. Balance of General reserve is twice the current year transfer amount.

Solution‐ 4
TradingA/c.

Particular Rs. Particular Rs.

To Op. stock 3,50,000 By Sales (?) 11,97,368
To Purchase (?) 3,41,289 By Closing Stock 2,99,342
(?)
To Purchase Return 87,000
To Gross Profit 7,18,421
14,96,710 14,96,710

6,00,000
12,00,000 = Debtors + 3,61,842
Debtors = 12,00,000 ‐ 3,61,842
Debtors = 8,38,158

182
Profit & Loss A/c. Financial Mathematics for
Wealth Management: Return
Particular Rs. Particular Rs. Calculations, Asset Valuation,
and Key Financial Ratios
To Office Exp. 3,70,000 By Gross Profit 7,18,421
To Int. on Deb. 30,000 By Commission (?) 50,000
To Tax. Provision 18,421
To Net Profit 3,50,000
7,68,421 7,68,421

Balance Sheet

LIABILITIES AMOUNT ASSETS AMOUNT

Paid Up Capital 5,00,000 Plant & machinery 7,00,000
General Reserve (?) 6,00,000 Stock (?) 2,99,342
P & La/c. (?) 20,000 Debtors (?) 8,38,158
10% Debenture (?) 3,00,000 Bank (?) 62,500
Current Liabilities 6,00,000 Other Fixed Assets 1,20,000
20,20,000 20,20,000

1. Gross Profit Margin = Gross profit Sales X100

60 = 7,18,421 X100
Sales
Sales = 7,18,421 X100
60
Sales=11,97,368

2. Closing Stock = Sales x 25%

11,97,368 x 25%

CS =2,99,342

3. Proposed Dividend = Paidup Capital x 40%

= 5,00,000 x 40%
PD = 2,00,000

183
Mutual Fund Management
and Wealth Management 4. General Reserve= GR find out as per
Proposed Dividend
Proposed Dividendis
2,00,000
Sothat
Proposed Dividend =
General Reserve
GR = 2,00,000

5. Commission = Itis 1/7 partof Net Profit

Commission = 3,50,000x1/7
Commission = 50,000

8. Profit & Loss Account = It is 10% of Proposed

Dividend
P & LA/c. = 2,00,000 x
10%
P&LA/c. = 20,000

7. Debenture = Rate of Interest is 10%

Interest amount is
Rs.30,000
Sothat, Debenture valueis
= 30,000 x 10/100
= 3,00,000

8. Current Ratio = Current Assets Currentliabilities

Stock + debtors + Bank Balance

Current Liability
2 = 2,99,342 + debtors + 62,500

184
 8.CurrentRatio = Current Assets Currentliabilities Financial Mathematics for
Wealth Management: Return
Stock + debtors + Bank Balance Calculations, Asset Valuation,
Current Liability and Key Financial Ratios
2 = 2,99,342 + debtors + 62,500
6,00,000
12,00,000 = Debtors + 3,61,842
Debtors = 12,00,000 ‐ 3,61,842
Debtors = 8,38,158

8. Balance of General It is twice of current year provision for General Reserve

Reserve =
Current year provision is Rs.2,00,000
Sothat, Balance of G.R.= 2,00,000 x 2
Balance of GR = 4,00,000
General Reserve = 4,00,000 + 2,00,000
General Reserve = 6,00,000

8.6 MCQ
1. Which of the following represents a liquidity ratio?
A) Return on Equity (ROE) B) Current Ratio
C) Debt-to-Equity Ratio D) Price-to-Earnings (P/E) Ratio
Answer: B) Current Ratio

2. What is the purpose of the Return on Assets (ROA) ratio?

A) To evaluate a company's liquidity
B) To evaluate a company's profitability
C) To evaluate a company's solvency
D) To evaluate a company's efficiency
Answer: D) To evaluate a company's efficiency

3. Which financial ratio measures a company's ability to pay its short-

term debts?
A) Quick Ratio B) Current Ratio
C) Debt-to-Equity Ratio D) Interest Coverage Ratio
Answer: B) Current Ratio

4. What is the formula for the Gross Margin Ratio?

A) (Gross Profit / Sales) x 100
B) (Gross Profit / Cost of Goods Sold) x 100
C) (Net Profit / Sales) x 100
D) (Net Profit / Cost of Goods Sold) x 100
Answer: A) (Gross Profit / Sales) x 100

185
Mutual Fund Management 5. Which financial ratio measures a company's ability to pay its interest
and Wealth Management expenses?
A) Debt-to-Equity Ratio B) Interest Coverage Ratio
C) Current Ratio D) Quick Ratio
Answer: B) Interest Coverage Ratio

6. What is the formula for the Price-to-Earnings (P/E) Ratio?

A) Market Price per Share / Earnings per Share
B) Book Value per Share / Earnings per Share
C) Market Price per Share / Book Value per Share
D) Earnings per Share / Market Price per Share
Answer: A) Market Price per Share / Earnings per Share

7. Which financial ratio measures a company's ability to generate profits

from its equity?
A) Return on Assets (ROA) B) Return on Equity (ROE)
C) Return on Sales (ROS) D) Gross Margin Ratio
Answer: B) Return on Equity (ROE)

8. What is the formula for the Debt-to-Asset Ratio?

A) Total Debt / Total Assets B) Total Equity / Total Assets
C) Total Debt / Total Equity D) Total Assets / Total Liabilities
Answer: A) Total Debt / Total Assets

9. What financial ratio evaluates a company's capacity to recover

accounts receivable?
A) Accounts Payable Turnover Ratio
B) Inventory Turnover Ratio
C) Accounts Receivable Turnover Ratio
D) Asset Turnover Ratio
Answer: C) Accounts Receivable Turnover Ratio

10. What is the purpose of the Dividend Yield Ratio?

A) To evaluate a company's profitability
B) To evaluate a company's solvency
C) To evaluate a company's dividend policy
D) To evaluate a company's investment potential
Answer: C) To evaluate a company's dividend policy

8.7 CONCLUSION
In conclusion, financial ratios are a crucial tool for evaluating a company's
financial performance, position, and prospects. By analyzing various types
of financial ratios, stakeholders can gain insights into a company's
liquidity, profitability, efficiency, solvency, and market performance.
186
Financial ratios provide a comprehensive view of a company's financial Financial Mathematics for
health, allowing for informed decisions on investments, financing, and Wealth Management: Return
strategic planning. Effective use of financial ratios can help identify areas Calculations, Asset Valuation,
and Key Financial Ratios
of improvement, assess creditworthiness, and forecast future performance.
Moreover, financial ratios enable comparison with industry peers and
benchmarks, facilitating competitive analysis and strategic decision-
making. As a result, financial ratio analysis is an essential component of
business intelligence, enabling stakeholders to make informed decisions
that drive business growth and success. By leveraging financial ratios,
businesses can stay ahead of the competition, mitigate risks, and capitalize
on opportunities in an ever-changing market landscape.

8.8 REFERENCE
1. "Financial Ratio Analysis" by Peter S. Koh - This book provides a
comprehensive overview of financial ratio analysis, covering topics
such as liquidity ratios, profitability ratios, and solvency ratios.
2. "Financial Analysis: A Practitioner's Guide" by Robert F. Reilly
and Robert P. Schmidt - This book offers a practical guide to
financial analysis, including a detailed discussion of financial ratios
and their application in financial analysis.

3. "Financial Management: Theory and Practice" by Eugene F.

Brigham and Michael C. Ehrhardt - This book is a comprehensive
textbook on financial management that covers financial ratios,
including liquidity ratios, profitability ratios, and solvency ratios.
4. "Financial Statement Analysis: A Guide for Investors, Managers,
and Analysts" by Martin J. Whitman - This book provides a
detailed guide to financial statement analysis, including a discussion of
financial ratios and their application in analyzing financial statements.
5. "Financial Analysis: A Complete Guide" by Charles T. Horngren
and Walter V. Bunn - This book provides a comprehensive guide to
financial analysis, including a detailed discussion of financial ratios,
financial statements, and financial analysis techniques.



187
 Module 2

9
TAX AND ESTATE PLANNING
ESSENTIALS: STRATEGIES FOR INCOME
MANAGEMENT, WILL DRAFTING, AND
RETIREMENT SAVINGS
Unit Structure :
9.0 Learning Objectives
9.1 Introduction to Tax Planning
9.2 Assessment Year and Financial Year
9.3 Revenue Generated by India Government
9.4 Capital Gain: A Critical Aspect of Income Tax in India
9.5 Illustration
9.6 Carry Forwards and Set Off Loss
9.7 Will
9.8 Deductions
9.9 Question
9.10 Conclusion
9.11 Reference

9.0 LEARNING OBJECTIVES

After reading this chapter learner will be able to:

 Define debt instruments and their role in providing income and

stability.
 Understand debt's role in portfolio diversification and capital
preservation based on investor profiles.
 Recognize key risks like credit, interest rate, and inflation risk, and
learn strategies to mitigate them.
 Understand stock investment for growth and potential returns through
capital appreciation and dividends.
 Compare the two asset classes to balance risk and returns in line with
financial goals.
 Apply these concepts to real-world scenarios, adjusting debt and
equity based on market and personal needs.

188
9.1 INTRODUCTION TO TAX PLANNING Tax and Estate Planning
Essentials: Strategies for
Income Management, Will
Tax planning in India is a crucial aspect of financial management, as it Drafting, and Retirement
enables individuals and businesses to optimize their tax liabilities and Savings
achieve their financial goals. Effective tax planning involves identifying
and exploiting various tax-saving opportunities, minimizing tax liabilities,
and ensuring compliance with tax laws. This requires a thorough
understanding of various tax concepts, including:

1. Taxable income: Understanding what constitutes taxable income is

essential for accurate tax planning. Taxable income includes all
income earned from various sources, such as salaries, investments, and
businesses.
2. Exempt income: Certain types of income are exempt from taxation,
such as income from certain government bonds and scholarships. Tax
planning involves identifying these exempt income sources to reduce
taxable income.
3. Deductions and exemptions: Tax deductions and exemptions can
significantly reduce taxable income. For example, deductions under
Section 80C of the Income Tax Act, 1961, include investments in PPF,
NSC, and life insurance policies.
4. Tax credits: Tax credits can be used to reduce tax liabilities. For
instance, the government offers tax credits for investments in
infrastructure projects.
5. Tax rates and slabs: Understanding tax rates and slabs is crucial for
determining the amount of tax payable. Tax planning involves
optimizing tax rates by minimizing tax liabilities in higher tax
brackets.
6. Tax compliance requirements: Compliance with tax laws is essential
to avoid penalties and interest. Tax planning involves ensuring timely
filing of tax returns, payment of taxes, and maintaining accurate
records.

By understanding these tax concepts, individuals and businesses can

develop effective tax planning strategies that minimize their tax liabilities
and ensure compliance with tax laws. This can lead to significant financial
benefits, such as reduced tax payments, increased cash flow, and improved
financial stability.

9.2 ASSESSMENT YEAR AND FINANCIAL YEAR

In the context of income tax, the terms "Assessment Year" and "Financial
Year" are often used interchangeably, but they have distinct meanings.

189
Mutual Fund Management Financial Year: The financial year is a 12-month period that starts from
and Wealth Management April 1st to March 31st of the next year. It is the period during which a
person's income is earned and is used to calculate their tax liability.

Assessment Year: The assessment year, on the other hand, is the year
following the financial year. It is the year in which an individual's income
tax return is assessed and the tax liability is determined. The assessment
year typically starts from April 1st to March 31st of the next year.

Key Points to Remember:

 The financial year starts on April 1st and ends on March 31st of the
next year.
 The assessment year starts on April 1st of the next year and ends on
March 31st of the subsequent year.
 Income earned during the financial year is assessed in the assessment
year.
 The assessment year is used to determine an individual's tax liability,
while the financial year is used to calculate their income.

For example, if a person earns income from April 1, 2022, to March 31,
2023, their financial year would be from April 1, 2022, to March 31, 2023.
Their assessment year would be from April 1, 2023, to March 31, 2024.

9.3.1. Revenue Generated by India Government:

190
Here's a detailed explanation: Tax and Estate Planning
 4 paisa (or 0.4%) from customs duty: Customs duty is a type of tax Essentials: Strategies for
imposed on imported goods. The revenue generated from customs duty Income Management, Will
Drafting, and Retirement
is a significant portion of the government's total revenue. This includes Savings
taxes on imports such as goods, services, and duties.

 7 paisa (or 0.7%) from union excise duty: Union excise duty is a tax
imposed on goods produced in India. It is also known as Central
Excise Duty. This includes taxes on goods such as cement, steel, and
textiles.

 17 paisa (or 1.7%) from GST (Goods and Services Tax): GST is a
comprehensive indirect tax that was introduced in India in 2019. It is a
multi-point tax that is levied on goods and services at multiple stages
of production and distribution. The revenue generated from GST is a
significant portion of the government's total revenue.

 6 paisa (or 0.6%) from non-tax revenue: Non-tax revenue includes

revenue generated from sources other than taxes, such as:
o Interest income from government securities and other investments
o Dividend income from public sector undertakings
o Rent and lease income from government-owned properties
o Sale of government-owned assets

 2 paisa (or 0.2%) from non-debt capital receipts: Non-debt capital

receipts include revenue generated from the sale of government-owned
assets, such as:
o Sale of shares in public sector undertakings
o Sale of government-owned properties
o Sale of surplus materials

 15 paisa (or 1.5%) from corporate tax: Corporate tax is a tax

imposed on the profits of companies. The revenue generated from
corporate tax is a significant portion of the government's total revenue.

 15 paisa (or 1.5%) from income tax: Income tax is a tax imposed on
individuals and households on their income. The revenue generated
from income tax is also a significant portion of the government's total
revenue.

 34 paisa (or 3.4%) from borrowing and liability: Borrowing and

liability refers to the amount of money borrowed by the government to
finance its expenditure. This includes:
o Borrowing from domestic sources, such as banks and financial
institutions
o Borrowing from international sources, such as foreign governments
and institutions
o Issuance of government securities

191
Mutual Fund Management  In total, the Indian government's revenue is composed of:
and Wealth Management
o 72% from taxes (customs duty, union excise duty, GST, corporate tax,
and income tax)
o 12% from non-tax revenue
o 10% from borrowing and liability
o 6% from non-debt capital receipts

9.3.2. Income Tax Slabs: Work on it

Taxpayers were greatly perplexed by the Budget 2023 when it came to
selecting between the previous and the new tax regimes. In order to
promote the implementation of the new system, the government included a
number of incentives in the 2023 Budget.

These modifications demonstrate the government's intention to gradually

phase out the previous system while easing taxpayers into the new one.
The old tax regime will still be in effect even though the new one is now
the default one.

Financial Minister has proposed changes in the tax structure under the new
tax regime. The new tax regime has been modified, as follows:

Comparison of pre-budget and post-budget tax slab

Tax Slab for FY Tax Slab for FY Tax
Tax Rate
2023-24 2024-25 Rate
Upto ` 3 lakh Nil Upto ` 3 lakh Nil
` 3 lakh - ` 6 lakh 5% ` 3 lakh - ` 7 lakh 5%
` 6 lakh - ` 9 lakh 10% ` 7 lakh - ` 10 lakh 10%
` 9 lakh - ` 12 lakh 15% ` 10 lakh - ` 12 lakh 15%
` 12 lakh - ` 15 lakh 20% ` 12 lakh - ` 15 lakh 20%
More than 15 lakh 30% More than 15 lakh 30%

 Budget 2024 has increased the standard deduction under the new tax
regime to ` 75,000 from early ` 50,000.
 The family pension deduction has also been increased from ` 15,000
to ` 25,000.
 With the revised tax structure, the taxpayer will save ` 17,500.
Let's take a look at both regimens and decide which one to follow in
2024.

192
Comparison of pre-budget and post-budget tax slab for salaried Tax and Estate Planning
person: Essentials: Strategies for
Income Management, Will
Drafting, and Retirement
Savings
Tax Slab for Tax Slab for
Tax Rate Tax Amt Tax Rate Tax Amt Difference
FY 2023-24 FY 2024-25
Upto ` 3 lakh Nil Upto ` 3 lakh Nil ` 0.00
` 3 lakh - ` 6 ` 3 lakh - ` 7
5% ` 15,000 5% ` 20,000.00
lakh lakh
` 6 lakh - ` 9 ` 7 lakh - `
10% ` 30,000 10% ` 30,000.00
lakh 10 lakh
` 9 lakh - ` 12 ` 10 lakh - `
15% ` 45,000 15% ` 30,000.00
lakh 12 lakh
` 12 lakh - ` 15 ` 12 lakh - `
20% ` 60,000 20% ` 60,000.00
lakh 15 lakh
More than 15 More than 15
30% ` 1,50,000 30% ` 1,50,000.00
lakh lakh
Tax Payable ` 3,00,000 Tax Payable ` 2,90,000.00 ` 10,000.00
Standard
deduction@30 ` 50,000 ` 75,000 ` 7,500.00
%
Grand total ` 17,500.00

The comparison of pre-budget and post-budget tax slabs for a salaried

individual reveals a significant difference between the two. In contrast to
the previous tax regime, the new tax regime provides a substantial benefit
of ` 10,000 in reduced tax payable. Additionally, the new tax regime also
offers an increase in standard deduction from ` 50,000 to ` 75,000,
resulting in a substantial augmentation of ` 25,000.

9.3.2. Tax Deducted at Source (TDS):

In India, Tax Deducted at Source (TDS) is a crucial mechanism that
requires payers to deduct a portion of the payment made to the payee and
deposit it with the government. This technique is commonly referred to as
the "withholding tax" or "pay-as-you-go" scheme.

The primary objective of TDS is to collect taxes from the payee's income
at the time of payment, thereby reducing the likelihood of tax evasion and
ensuring that taxes are paid regularly.

Who is Required to Deduct TDS?

In India, Tax Deduction at Source (TDS) is a mandatory requirement for
certain types of payments, aimed at preventing tax evasion and ensuring
timely payment of taxes to the government. As per the Income-tax
Act, 1961, TDS is applicable on three specific types of payments:
1. Salaries: Employers are legally bound to deduct TDS on salaries paid
to their employees. This is a crucial step in ensuring that employees'
income is taxed at the source, thereby reducing the likelihood of tax
evasion.

2. Interest on Securities: Individuals or companies paying interest on

securities, such as bonds, debentures, and other debt instruments, are

193
Mutual Fund Management required to deduct TDS. This measure helps to prevent tax evasion by
and Wealth Management ensuring that interest income is taxed at the source.

3. Rent: Landlords or property owners are obligated to deduct TDS on

rent payments made to tenants. This provision is designed to ensure
that rental income is taxed at the source, thereby reducing the risk of
tax evasion.

By implementing TDS on these types of payments, the government aims

to promote transparency and accountability in tax compliance, thereby
generating revenue and supporting the overall economy.

Who is Required to Pay TDS?

As per the Income Tax Act, individuals and entities that receive payments
subject to Tax Deduction at Source (TDS) are obligated to fulfil specific
responsibilities. The payees, who are recipients of such payments, are
required to file their tax returns with the Income Tax Department, ensuring
compliance with the tax laws. Moreover, they must also pay any
additional taxes due, if necessary, to avoid any penalties or interest.
Furthermore, the payees are mandated to obtain a Tax Deduction Account
Number (TAN) from the Income Tax Department, which is a unique 10-
digit number assigned to them for deducting and depositing taxes on
behalf of the payees. This TAN is essential for facilitating accurate and
timely tax deductions and deposits.

TDS Rates and Thresholds: For the fiscal year 2023–2024, the Tax
Deducted at Source Rate Chart offers a thorough summary of the
rates that apply to different kinds of transactions.
TDS For
Threshold
Section Nature of Payment Individual / For Others
(`)
List HUF
192 Payment made as salaries ` 2,50,000 Slab Rates Slab Rates
Early withdrawal of EPF
192A ` 50,000 10% 10%
(Employee Provident Fund)

Tax deduction at source on

193 ` 10,000 10% 10%
interest earned on securities
194 Distribution of dividends ` 5,000 10% 10%
` 40,000
Interest from banks or post ` 50,000
194A 10% 10%
offices on deposits (For senior
citizens)
Interest from sources other than
194A ` 5,000 10% 10%
securities
Winnings of lotteries, puzzles, Aggregate
194B 30% 30%
or games of ` 10,000

194BA Winnings from online Games - 30% 30%x`

194BB Winnings of horse races ` 10,000 30% 30%

Payments made to contractors
194C ` 30,000 1% 2%
or sub-contractors one time
194
 Payments made to contractors Tax and Estate Planning
194C or sub-contractors on an ` 1,00,000 1% 2% Essentials: Strategies for
aggregate basis Income Management, Will
Drafting, and Retirement
Commission paid on insurance Not Savings
194D ` 15,000 10%
sales to domestic companies Applicable
Commission paid on insurance
Not
194D sales to non-domestic ` 15,000 5%
Applicable
companies
Maturity of life insurance
194DA ` 1,00,000 5% 5%
policy
Payment received from the
194EE National Savings Scheme ` 2,500 10% 10%
(NSS) by individuals
Repurchase of units by UTI
194F (Unit Trust of India) or any No Limit 20% 20%
mutual fund
Payments or commission made
194G ` 15,000 5% 5%
on the sale of lottery tickets
194H Commission or brokerage fees ` 15,000 5% 5%
Rent paid for land, building, or
194I ` 2,40,000 10% 10%
furniture
Rent paid for plant and
194I ` 2,40,000 2% 2%
machinery
Payment for the transfer of
194IA immovable property excluding ` 50,00,000 1% 1%
agricultural land
Rent payment made by an
` 50,000 Not
194IB individual or HUF not covered 5%
(per month) Applicable
under section 194I
Payments made under a Joint
194IC Development Agreement (JDA) No Limit 10% 10%
to individuals or HUF
Fees paid for professional and
194J ` 30,000 10% 10%
technical services
Royalty paid for the sale,
194J distribution, or exhibition of ` 30,000 2% 2%
cinematographic films
Income received from units of a
194K ` 5,000 10% 10%
mutual fund, such as dividends
Compensation payment for
194LA acquiring certain immovable ` 2,50,000 10% 10%
property
Interest payment on
Not
194LB infrastructure bonds to Non- 5% 5%
Applicable
Resident Indians
Distribution of certain income
194LB Not
by a business trust to its unit 10% 10%
A(1) Applicable
holders
Interest payment on rupee-
denominated bonds, municipal Not
194LD 5% 5%
debt security, and government Applicable
securities

195
Mutual Fund Management
and Wealth Management Payments made for contracts,
brokerage, commission, or
194M ` 50,00,000 5% 5%
professional fees (excluding
sections 194C, 194H, 194J)
Cash withdrawal exceeding a
`
194N specified amount from the bank, 2% 2%
1,00,00,000
with filed ITR

Cash withdrawal from a bank

194N ` 20,00,000 2% 2%
without filing ITR

Amount received for the sale of

products/services by e-
194O ` 5,00,000 1% 1%
commerce service providers
through digital platforms
Payments made for the
194Q ` 50,00,000 0.10% 0.10%
purchase of goods
TDS on the payment of
Not
194S cryptocurrencies or other virtual 1% 1%
Applicable
assets
At a higher At a higher
rate than: rate than:

The rate The rate

TDS applicable in case of non- Not specified by specified by
206AA the act the act
availability of PAN Applicable

20% 20%
The currently The currently
applicable rate applicable rate

The higher of: The higher of:

5% Twice the 5% Twice the
rate rate
TDS on non-filers of Income Not
206AB mentioned in mentioned in
Tax Return Applicable
the provision the provision
The currently The currently
applicable rate applicable rate

TDS Compliance
To ensure compliance with TDS rules, payers must:
1. Obtain a TAN from the Income Tax Department.
2. Issue a TDS certificate (Form 16) to the payee at the end of each
financial year.
3. Deposit the deducted TDS amount with the government within 7 days
from the date of deduction.
4. File a TDS return (Form 24Q) with the Income Tax Department by the
due date.

Benefits of TDS
Tax Deducted at Source (TDS) is a crucial mechanism that enhances tax
compliance, reduces tax evasion, and improves the overall tax collection
process. The benefits of TDS are multifaceted and can be summarized as
follows:
196
1. Reduced Tax Evasion Tax and Estate Planning
TDS is designed to reduce tax evasion by ensuring that taxes are deducted Essentials: Strategies for
at the source of income. This approach makes it more difficult for Income Management, Will
Drafting, and Retirement
individuals or businesses to evade taxes by not reporting their income or Savings
underreporting their income. By deducting taxes at the source, TDS helps
to reduce the likelihood of tax evasion and ensures that the government
collects the correct amount of taxes.

2. Simplified Tax Compliance

TDS simplifies tax compliance by allowing payees to receive regular
payments without having to wait for their annual tax returns to be filed.
This approach eliminates the need for payees to save up for taxes and
makes it easier for them to budget and manage their finances.
Additionally, TDS reduces the burden on taxpayers who do not have to
worry about filing their tax returns separately.

3. Improved Cash Flow

TDS improves cash flow for both payees and the government. Payees
receive regular payments without having to wait for taxes to be deducted,
which helps to improve their cash flow and liquidity. The government, on
the other hand, receives regular payments of taxes, which helps to improve
its cash flow and reduce the risk of delayed payments.

4. Increased Transparency
TDS ensures transparency in the tax collection process by making it
mandatory for payers to deduct taxes at the source. This approach provides
a clear trail of taxes deducted and paid, which helps to reduce corruption
and ensures that taxes are collected fairly and efficiently. The TDS process
also ensures that taxes are paid regularly and transparently, which helps to
improve public trust in the tax system.

5. Additional Benefits
In addition to these benefits, TDS also has several other advantages,
including:
 Reduced administrative burden on taxpayers: With TDS, taxpayers
do not have to worry about filing their tax returns separately or
keeping track of their taxes.
 Improved tax compliance: TDS encourages taxpayers to comply with
tax laws and regulations, which helps to improve overall tax
compliance.
 Reduced risk of tax disputes: TDS provides a clear record of taxes
deducted and paid, which helps to reduce the risk of tax disputes
between taxpayers and the government.
 Increased revenue for the government: TDS helps to increase
revenue for the government by ensuring that taxes are collected
regularly and efficiently.

197
Mutual Fund Management 9.4.1 Capital Gain: A Critical Aspect of Income Tax in India
and Wealth Management In India, capital gains are a significant aspect of income tax, and
understanding the differences between Long-Term Capital Gains (LTGC)
and Short-Term Capital Gains (STGC) is crucial for taxpayers. Capital
gains arise when an individual sells or disposes of an asset, such as shares,
securities, or real estate, and the gain is not taxed as regular income.

9.4.2. Long-Term Capital Gains (LTGC)& Short-Term Capital Gains

(STGC)
LTGC is taxed at a lower rate than STGC. To qualify for LTGC, an
individual must have held the asset for a period of more than12 months to
36 month (3 years) depending on the class of the assets.

Short-Term Capital Gains (STGC)

STGC is taxed at a regular income and is subject to a higher rate of
taxation. To qualify for STGC, an individual must have held the asset for a
period of less than 12 month to 36 months (3 years) depending on the class
of the assets. The gains are added to the individual's income and taxed
accordingly separately.

9.4.3 Capital gain on various asset classes is subject to tax rates and
rules as follows:
Capital Asset Holding Long Term Short Term Remarks
Period for Capital Gain Capital Gain
Long Term Tax (LTCG) Tax (STCG)
Capital
Asset
Stocks > 12 months 10% of gain 15% of gain LTCG applicable
if total exceeds
Rs. 1 Lakh in a
financial year.
Unit Linked > 12 months 10% of gain 15% of gain LTCG applicable
Insurance Plan if total exceeds
(ULIPs) Rs. 1 Lakh in a
financial year.
Equity Oriented > 12 months 10% of gain 15% of gain LTCG applicable
Mutual Funds if total exceeds
Rs. 1 Lakh in a
financial year.
Other Mutual > 36 months 20% with Taxed based on
Funds inflation income tax slab
indexation
Government and > 36 months 20% with Taxed based on
Corporate inflation income tax slab
Bonds indexation

Gold > 36 months 20% with Taxed based on

inflation income tax slab
indexation

198
 Tax and Estate Planning
Gold ETF > 12 months 10% of gain Taxed based LTCG applicable Essentials: Strategies for
on income tax if total exceeds Income Management, Will
slab Rs. 1 Lakh in a Drafting, and Retirement
financial year. Savings
Immovable > 24 months 20% with Taxed based on
Property inflation income tax slab
indexation

Movable > 36 months 20% with Taxed based on No tax for LTCG
Property inflation income tax slab reinvested in
indexation approved assets.

Privately held > 24 months 20% with Taxed based on

Stocks inflation income tax slab
indexation

Indexation:
Indexation is a method used to adjust the cost of acquisition of an asset for
inflation, thereby reducing the capital gain. This means that the cost of
acquisition is increased by the inflation rate to arrive at the indexed cost.

For example, if an individual buys a share for Rs. 10,000 in 2015 and sells
it for Rs. 20,000 in 2020, the gain would be Rs. 10,000. However, if the
indexation benefit is applied, the cost of acquisition would be adjusted to
Rs. 15,000 (based on the inflation rate between 2015 and 2020), and the
gain would be Rs. 5,000 (Rs. 20,000 - Rs. 15,000).

9.4.4. Key Differences Between LTGC and STGC

The key differences between LTGC and STGC are:
1. Tax Rate: LTGC is taxed at a lower rate of 20% with indexation
benefit, while STGC is taxed as regular income at a higher rate.
2. Holding Period: LTGC requires a holding period of at least 36
months (3 years), while STGC has no such requirement.
3. Indexation: LTGC has indexation benefit, which adjusts the cost of
acquisition for inflation, while STGC does not have this benefit.

Tax Planning Strategies

To minimize tax liabilities on capital gains, taxpayers can adopt the
following strategies:
1. Hold onto assets: Hold onto assets for a period of at least 36 months
(3 years) to qualify for LTGC.
2. Take advantage of indexation: Take advantage of indexation benefit
to reduce the capital gain.
3. Diversify investments: Diversify investments to reduce the risk of
losses and minimize tax liabilities.

199
Mutual Fund Management 4. Consult a tax professional: Consult a tax professional to ensure
and Wealth Management compliance with tax laws and regulations.

In conclusion, understanding the differences between LTGC and STGC is

crucial for taxpayers to minimize tax liabilities on capital gains. By
adopting tax planning strategies such as holding onto assets, taking
advantage of indexation, diversifying investments, and consulting a tax
professional, taxpayers can optimize their tax returns and reduce their tax
liabilities.

9.5 ILLUSTRATION
1. Mrs Vency D N house property, which was purchased on 1st January
2000 for INR 20 lakhs. On January 1, 2005, the residence underwent
renovations totaling INR 5 lakh. On January 1, 2023, the residence was
sold for INR 75 lakh. The broker received INR 1 lakh as a brokerage fee.
What would be the capital gain amount?

Particulars Calculation Amount

Full value of - INR 75,00,000
consideration
Less: Indexed Cost of acquisition * CII of INR 66,20,000
cost of the year in which the asset is
acquisition sold / CII of the year in
which the asset was
acquired = 20 lakhs * (CII
of 2022-23 / CII of 2001-02
since it is the base year)= 20
lakhs * (331/100)
Less: indexed Cost of improvement * CII INR 14,64,602
cost of of the year in which the
improvement asset is sold / CII of the year
in which the asset was
improved = 5 lakhs * (CII
of 2022-23 / CII of 2004-
05)= 5 lakhs * (272/113)
Less: brokerage - INR 1,00,000
paid
LTCG/LTCL - INR -6,84,602

9.6 CARRY FORWARDS AND SET OFF LOSS

Carry Forwards:
A carry forward is a provision in the Income-tax Act, 1961 that allows
taxpayers to carry forward losses incurred in a particular year to future
years. The aim is to provide relief to taxpayers who incur losses and help
them offset their profits in subsequent years.
Here are the key rules for carry forwards:
200
1. Type of losses: Only business losses (Section 72) and non-business Tax and Estate Planning
losses (Section 73) can be carried forward. However, capital losses Essentials: Strategies for
cannot be carried forward. Income Management, Will
Drafting, and Retirement
2. Period of carry forward: Losses can be carried forward for 8 Savings
consecutive years (Section 72).
3. Limitation: The loss can only be carried forward up to the extent of
the profit of the previous year (Section 72).
4. Applicability: Carry forward is applicable to all types of taxpayers,
including individuals, firms, and companies.

Set Off:
Set Off is a concept that allows taxpayers to offset their losses against
their profits. There are two sorts of setoffs:
1. Set Off within a year: A taxpayer can set off losses against profits in
the same year (Section 72).
2. Set Off over a period: A taxpayer can set off losses against profits
over a period of 8 consecutive years (Section 73).

Key Rules for Set Off:

1. Type of losses: Only business losses (Section 72) and non-business
losses (Section 73) can be set off.
2. Limitation: The loss can only be set off up to the extent of the profit
of the previous year (Section 72).
3. Order of set off: First, set off losses against profits of the same year,
and then carry forward losses to subsequent years (Section 72).

Key Differences:
1. Carry Forward: Losses are carried forward to future years, whereas
Set Off is done within a year or over a period.
2. Purpose: Carry Forward is meant to provide relief to taxpayers who
incur losses, whereas Set Off is used to offset profits against losses.
3. Limitation: Carry Forward has a limitation of 8 consecutive years,
whereas Set Off has no such limitation.

In summary, Carry Forwards allow taxpayers to carry forward losses to

future years, while Set Off allows them to offset their losses against their
profits in the same year or over a period. Understanding these concepts is
essential for tax planning and minimizing tax liabilities in India.

201
Mutual Fund Management 9.6.1. Illustration:
and Wealth Management 1. Miss. Chiki Singh submits the following particulars pertaining to the A.
Y. 2022-23:

Particulars Amount
Income from salary (computed) 4,00,000
Loss from self - occupied property (-)70,000
Loss from let - out property (-)1,50,000
Business loss (-)1,00,000
Bank interest (FD) received 80,000

Compute the total income of Miss. Chiki Singh for the A. Y. 2022-23,
assuming that does not opt for the provisions of section 115 BAC.
Solution
Computation of total income of Miss. Chiki Singh for the A.Y.2022-23

Particulars Amount Amount

Income from salary 4,00,000
Loss from house property of INR 2,20,000 to be (-) 2,00,000
restricted to INR lakhs by virtue of section 71(3A) 2,00,000
Balance loss of INR 20,000 from house property
tobe carry for ward to next assessment year
Income from other sources (interest on fixed deposit 80,000
with bank)
Business loss set-off (-) -
1,00,000
Business loss of INR 20,000 to be carried forward
for set-off against business income in the following
assessment year.
Gross total income [See Note below] 2,00,000
Less : Deduction under Chapter VI-A Nil
Total income 2,00,000

Note:
Gross Total Income comprises salary income of INR 2,00,000 after
deducting a loss of INR 2,00,000 from residential property. The remaining
loss of INR 20,000 from the dwelling property would be carried forward.
Business loss of INR 1,00,000 is set off against bank interest of INR
80,000, and the remaining business loss of INR 20,000 is carried forward
because it cannot be offset against salary income.

2. During the P. Y. 2021 - 22, Mrs. Sunita has the following income and
the brought forward losses :

202
 Particulars Amount Tax and Estate Planning
Essentials: Strategies for
Short term capital gain son sale of shares 1,50,000 Income Management, Will
Long term capital loss of AY2020 - 21 (96,000) Drafting, and Retirement
Savings
Short term capital loss of AY 2021-22 (37,000)
Long term capital gain u/s 112 75,000

What is the taxable income in the hands of Mrs. Sunita for the
AY2022-23 ?
Solution :- The taxable income of Mrs. Sunita for AY2022-23

Particulars Amount
STC Gonsale of shares 1,50,000
Less : Brought forward STCL of (37,000) 1,13,000
A Y 2021-22
LTCG 75,000
Less: Brought forward long-term capital (75,000) Nil
loss of A. Y. 2020 - 21; 96,000 set off to
the extent of 75,000
Tax able short - term capital gains 1,13,000

Note: It is important to note that brought forward long-term capital

loss cannot be offset by short-term capital gain. As a result, the
unadjusted long-term capital loss of 21,000 (96,000 - 75,000) for fiscal
year 2019-20 must be carried over to the next year and offset against
the LTCG of that year.

9.9 WILL
In India, a Will is a legal document that outlines the testator's wishes
regarding the distribution of their property, assets, and debts after their
death. There are several types of wills, each with its own specific
characteristics and purposes. Here are the primary types of wills:
1. Simple Will (Testamentary Will): This is the most common type of
will. It is a written document that outlines the testator's wishes
regarding the distribution of their property, assets, and debts after their
death. The will must be signed by the testator in the presence of two
witnesses, who must also sign the document.
2. Holographic Will: A holographic will is a handwritten will, where the
testator writes their own will by hand. This type of will is recognized
by law, but it is not commonly used due to the potential for errors or
disputes.
3. Nuncupative Will: A nuncupative will is an oral will that is made in
the presence of two witnesses. This type of will is not recognized by
law in most cases, but it can be used in certain situations, such as when
a person is dying or critically ill.
203
Mutual Fund Management 4. Mutual Will: A mutual will is a will that is made between two or
and Wealth Management more people who are parties to the same agreement. This type of will
is commonly used in situations where two people are joint owners of a
property and want to ensure that their property is distributed according
to their wishes.

5. Conditional Will: A conditional will is a will that is made on the

condition that a specific event or situation occurs. For example, a
person may make a will that states that their property will be
distributed among their children if they do not remarry.

6. Supplemental Will: A supplemental will is a will that adds to or

modifies an existing will. This type of will is used when a person
wants to make changes to their existing will without having to make a
completely new document.

7. Residuary Will: A residuary will is a will that disposes of all property

and assets that are not specifically mentioned in the document. This
type of will ensures that any property or assets that are not mentioned
in the original will are distributed according to the testator's wishes.

8. Testamentary Trust Will: A testamentary trust will is a will that

creates a trust at the time of the testator's death. The trust can be used
to manage and distribute the testator's property and assets according to
their wishes.

9. Living Will: A living will is not actually a type of will, but rather a
document that outlines a person's wishes regarding life-sustaining
treatment and medical care if they become incapacitated.

In summary, there are several types of wills in India, each with its own
specific characteristics and purposes. It is essential for individuals to
understand the different types of wills and consult with an attorney to
ensure that their wishes are properly documented and respected after their
death.

9.9.1. A valid will in India must meet the following requirements:

1. Testator's capacity: The testator must be of sound mind and
disposing capacity, meaning they must be able to understand the
nature and effect of making a will.
2. Age: The testator must be at least 18 years old.
3. Signature: The testator must sign the will in the presence of two
witnesses, who must also sign the document.
4. Witnesses: The witnesses must be at least 18 years old and must sign
the will in the presence of the testator.

5. Publication: The will must be published or read out to the testator

before it is signed.

204
6. Written: The will must be written and signed by the testator. Tax and Estate Planning
Essentials: Strategies for
7. No coercion: The testator must not have been coerced or forced to Income Management, Will
make the will. Drafting, and Retirement
Savings
If a will does not meet these requirements, it may be considered invalid or
disputed. It is essential for individuals to ensure that their will meets all
the necessary requirements to ensure its validity and enforceability in a
court of law.

9.8 DEDUCTION
A comprehensive overview of income tax deductions and exemptions in
India!

Income Tax in India is a complex and dynamic system, with various

deductions and exemptions available to individuals and businesses. Here's
a breakdown of the key deductions and exemptions:

Deductions:
1. Section 80C: Upto 1,50,000 - Investments in certain instruments like
PPF, EPF, Life Insurance, and Mutual Funds.

2. Section 80D: Health Insurance Premiums

An individual or HUF can claim a deduction of up to 25,000 per annum
for the premium paid towards health insurance policy for self, spouse, and
dependent children. In addition to this, an individual can claim a deduction
of up to 25,000 per annum for the premium paid towards health
insurance policy for parents (father or mother) who are senior citizens
(i.e., above the age of 60 years).

Additional Deduction for Senior Citizens- If the parent is a senior

citizen, the individual can claim an additional deduction of 50,000 per
annum for the premium paid towards health insurance policy for the
parent. This means that the maximum deduction available under Section
80D is 50,000 per annum for senior citizens

3. Section 80E: Interest on education loans. No specific limit, but the

deduction is available only until the repayment of the loan or until the
completion of the education, whichever is earlier.

4. Section 80G: Donations to charitable institutions. No specific limit,

Donations to recognized charitable institutions and Donations to
political parties

5. Section 80RRB: Interest on bonds issued by the National Housing

Bank. Limit upto Rs. 50,000. Eligible expenses: Interest on bonds
issued by the National Housing Bank

6. Section 80TTA: Interest on savings account utpo 10,000.

205
Mutual Fund Management 7. Section 80 TTB: Under Section 80TTB, a senior citizen (i.e., an
and Wealth Management individual who is 60 years of age or more at any time during the
previous year) can claim a deduction of up to 50,000 per annum for
interest income from savings account

Exemptions:
Section 10(2) of the Income-tax Act, 1961 provides exemption from
income tax on certain types of income, including:
 Agricultural income: Income earned from agricultural activities is
exempt from tax.
 Income from foreign sources: Income earned from foreign sources,
such as dividends, interest, or royalties, is exempt from tax.
 Income from non-resident sources: Income earned from non-resident
sources, such as foreign companies or individuals, is exempt from tax.

Section 10(10) provides exemption from income tax on:

 Life insurance proceeds: Proceeds received from life insurance
policies are exempt from tax.
 PPF deposits: Deposits made into Public Provident Fund (PPF)
accounts are exempt from tax.
 National Savings Certificates: Interest earned on National Savings
Certificates is exempt from tax.

Section 11 provides exemption from income tax on:

 Income of charitable institutions: Charitable institutions, such as
hospitals, schools, and orphanages, are exempt from tax on their
income.
 Income of educational institutions: Educational institutions, such as
schools and universities, are exempt from tax on their income.

Section 12A provides exemption from income tax on:

 Income of charitable trusts: Charitable trusts are exempt from tax on
their income.
 Income of educational institutions: Educational institutions are exempt
from tax on their income.

Section 17 provides exemption from income tax on:

 Allowances for official purposes: Allowances provided to employees
for official purposes, such as travel expenses or subsistence allowance,
are exempt from tax.
 Allowances for foreign travel: Allowances provided to employees for
foreign travel, such as travel expenses or accommodation allowance,
are exempt from tax.

206
 9.9 QUESTION Tax and Estate Planning
Essentials: Strategies for
Income Management, Will
9.9.1. True or False Drafting, and Retirement
i. True or False: A tax-free will is a will that is exempt from taxes. Savings
(Answer: TRUE)
ii. True or False: Estate planning is only necessary for individuals with
significant assets. (Answer: FALSE)
iii. True or False: A living trust can be used to avoid probate taxes.
(Answer: TRUE)
iv. True or False: The goal of tax planning is to minimize taxes at all costs.
(Answer: FALSE)
v. True or False: Tax planning involves only optimizing tax deductions
and credits. (Answer: FALSE)
vi. True or False: A tax-efficient investment strategy considers both tax
and non-tax factors. (Answer: TRUE)
vii. True or False: A will is only necessary for individuals who have minor
children. (Answer: FALSE)
viii. True or False: A will can be used to disinherit someone from inheriting
a specific asset. (Answer: TRUE)
ix. True or False: A will must be witnessed by at least two people to be
legally binding. (Answer: TRUE)
x. True or False: A tax deduction is a reduction in taxable income that is
not subject to tax. (Answer: TRUE)
xi. True or False: Tax deductions can only be claimed by individuals who
itemize their deductions. (Answer: FALSE)
xii. True or False: A tax credit is a dollar-for-dollar reduction in the amount
of taxes owed. (Answer: TRUE)
xiii. True or False: Retirement planning is only necessary for individuals
who are 65 years old or older. (Answer: FALSE)
xiv. True or False: A retirement plan must be funded by an individual's own
contributions to be eligible for tax benefits. (Answer: FALSE)
xv. True or False: Retirement accounts such as IRAs and 401(k)s are
subject to required minimum distributions (RMDs). (Answer: TRUE)

9..9.2. Brief Questions

1. What is the importance of tax planning in estate planning?
2. What is the concept of tax planning and how does it benefit
individuals?
3. How does a will impact tax deductions in an individual's estate?
4. What is the significance of tax planning in retirement planning?

207
Mutual Fund Management 9.10 CONCLUSION
and Wealth Management
 "Effective tax planning and estate planning can help individuals
achieve their financial goals, including securing a comfortable
retirement, while minimizing their tax liabilities. By understanding the
tax implications of their will and leveraging tax deductions,
individuals can make the most of their hard-earned wealth."

 "A well-planned tax strategy, combined with a thoughtful approach to

estate planning, can help individuals build a secure financial future. By
incorporating tax deductions and leveraging retirement planning tools,
individuals can optimize their savings and ensure a comfortable
retirement."

 "Tax and estate planning are crucial components of any

comprehensive financial strategy. By prioritizing tax planning and
incorporating tax deductions, individuals can reduce their tax liabilities
and create a more secure financial future. Additionally, a well-planned
will can help ensure that assets are distributed according to one's
wishes, while also minimizing taxes and other costs."

These conclusions aim to highlight the importance of tax and estate

planning in achieving financial goals, while also emphasizing the benefits
of incorporating tax deductions and retirement planning into one's overall
strategy.

9.11 REFERENCE

i. "Tax Planning and Estate Planning" by David W. Flynn: This

book provides a comprehensive overview of tax planning and estate
planning strategies, including wills, trusts, and probate.

ii. "The Taxwise Approach to Retirement Planning" by Stanley E.

Smith: This book focuses on retirement planning strategies, including
tax-advantaged retirement accounts, Social Security planning, and
long-term care planning.

iii. "Willpower: The Simple Guide to Writing Your Will" by Emily J.

Miller: This book provides a straightforward guide to writing a will,
including tips on estate planning, probate, and inheritance.

iv. "Tax Deductions for Individuals" by J. K. Lasser: This book

provides an in-depth guide to tax deductions for individuals, including
itemized deductions, charitable donations, and mortgage interest.

v. "Retirement Planning: A Comprehensive Guide to Creating a

Secure Financial Future" by Michael J. Wolf: This book provides a
comprehensive guide to retirement planning, including topics such as
investment strategies, income planning, and long-term care planning.
208
Summary Tax and Estate Planning
 Debt and equity represent two fundamental asset classes with distinct Essentials: Strategies for
roles in wealth management. Debt securities, such as bonds, provide Income Management, Will
Drafting, and Retirement
stable income and capital preservation, making them essential for Savings
conservative and balanced portfolios. They support wealth
management through diversification and risk management but come
with risks like credit, interest rate, and inflation risk.

 Equity investments, on the other hand, offer opportunities for growth

through capital appreciation and dividends, contributing to wealth
creation and higher returns over time. However, they also carry higher
volatility and market risk.

 A well-balanced portfolio considers both asset classes, adjusting the

mix based on investor goals, risk tolerance, and market conditions.
Understanding the unique characteristics, roles, and risks of debt and
equity enables investors to make informed decisions for effective
portfolio management and long-term financial success.



209