Summary of "NISM VA Mutual Fund Chapter 12 - Mutual Fund Scheme Selection | 2024 - New Syllabus | #nism5a #nism"
NISM VA Mutual Fund Chapter 12 - Mutual Fund Scheme Selection | 2024 - New Syllabus
Key Finance-Specific Content Summary
1. Mutual Fund Scheme Selection Factors
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Investor Needs:
- Long-term capital appreciation: Equity/index funds expected to yield 12-15% returns over 10+ years (e.g., a house in Mumbai worth ₹1 crore today may cost ₹3 crore in 10 years).
- Periodic income: Fixed maturity plans, withdrawal plans, or debt funds.
- Tax savings: ELSS (Equity Linked Savings Schemes).
- Liquidity: Ability to enter/exit investments anytime, important for short-term gains or emergencies.
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Risk Profile: Risk appetite depends on:
- Willingness to take risk
- Ability to take risk (financial capacity)
- Need for risk (investment goals)
Risk-return tradeoff: - High risk → High potential returns and losses - Low risk → Lower returns and losses
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Asset Allocation: Based on investor’s needs, time horizon, risk capacity, and return expectations. Assets include Equity, Debt, Real Estate, Gold, etc. Proper asset allocation balances risk and return.
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Age Factor:
- Younger investors (19-24 years) can take higher risks, investing more in equities.
- Older investors with dependents should take lower risks, preferring debt/liquid funds.
- Investment horizon must align with goals (e.g., avoid equities for goals under 3 years).
2. Portfolio Construction: Core and Satellite Portfolio
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Core Portfolio: Focused on long-term goals; invested mainly in equity mutual funds or stocks.
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Satellite Portfolio: Targets short-term or near-term goals; can include sector/thematic funds or debt funds.
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Diversification: Reduces risk by spreading investments across sectors and asset classes.
3. Mutual Fund Categories & Risk-Return Hierarchy
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Riskometer: A tool to assess mutual fund risk levels: Low → Moderate → High.
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Fund Types & Risk Levels (Increasing Risk & Return):
- Liquid Funds (lowest risk and return)
- Debt Funds (varying by duration and credit risk)
- Hybrid Funds (mix of equity and debt; aggressive hybrid > balanced hybrid > conservative hybrid)
- Equity Funds (highest risk and return)
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Equity Fund Subcategories:
- Large Cap: Top 100 companies, stable, lower risk
- Mid Cap: Companies ranked 101-250 by market cap, higher risk and return
- Small Cap: Companies below 250 rank, highest risk and return
- Multi Cap: Mix of large, mid, small caps; lower concentration risk
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Sector/Thematic Funds:
- Highest risk due to concentration in one sector/theme (e.g., IT, pharma, EVs).
- Thematic funds are slightly less risky than pure sector funds due to some diversification within the theme.
4. Debt Fund Risks
- Interest Rate Risk: Increases with longer duration debt funds.
- Credit Risk: Arises if issuers default on interest or principal payments.
- Gilt Funds: Government securities with the lowest credit risk.
- Credit Risk Funds: Carry the highest credit risk.
5. Active vs Passive Funds
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Active Funds: Fund manager actively selects stocks/assets; higher expense ratio due to management efforts.
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Passive Funds: Track an index (e.g., Nifty 50); lower expense ratio; returns mirror the index; NAV falls if the market falls.
6. Open-Ended vs Close-Ended Funds
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Open-Ended: Investors can enter/exit anytime at NAV.
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Close-Ended: Fixed subscription period; no exit before maturity unless listed on exchange.
7. Fund Selection Criteria
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Matching Fund Objective with Investor Need: Ensure fund’s stated investment objective aligns with investor’s goals.
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Fund Manager Track Record: Experienced managers with consistent performance (e.g., Prashant Jain) preferred.
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Fund Performance: Past returns are not indicative of future returns; avoid chasing past performance blindly.
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Fund Age: Older funds provide more data for analysis; newer funds have limited track record.
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Fund Size:
- Larger funds offer diversification and economies of scale but may be less flexible.
- Smaller funds can be more nimble but may carry higher risk.
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Portfolio Turnover Ratio: High churning indicates frequent buying/selling, increasing costs and possibly indicating manager uncertainty.
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Expense Ratio: Lower expense ratios preferred as high fees reduce net returns, especially important in debt funds with lower returns.
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Exit Load: Charges applied if redeemed before a specified period (e.g., 1% if exited before 1 year).
8. Dividend vs Growth Options in Mutual Funds
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Dividend Payout: Dividends credited to investor’s bank account; NAV reduces by dividend amount (ex-dividend NAV).
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Dividend Reinvestment: Dividends used to buy additional units; NAV does not reduce by dividend payout.
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Growth Option: No dividends paid; NAV reflects full capital appreciation; generally higher NAV than dividend options.
9. Important Disclosures & Cautions
- Past performance disclaimers: Past returns do not guarantee future performance.
- Advisers/distributors must recommend schemes based on investor’s financial situation, goals, and risk profile.
- Avoid pushing funds based on higher commissions.
- Educate investors on riskometer and scheme risks.
Methodology / Framework for Mutual Fund Scheme Selection
- Assess investor’s financial goals and investment needs (capital appreciation, income, tax saving, liquidity).
- Determine investor’s risk profile (willingness, ability, and need to take risk).
- Define investment time horizon aligned with goals.
- Decide asset allocation based on risk profile, goals, and horizon (equity, debt, gold, real estate).
- Construct portfolio with core (long-term) and satellite (short-term) components.
- Choose fund categories matching risk-return expectations (large cap, mid cap, small cap, hybrid, debt, sector).
- Evaluate fund manager experience and fund performance history.
- Analyze fund size, expense ratio, portfolio turnover, and exit load.
- Select appropriate investment option (growth, dividend payout, or dividend reinvestment).
- Use SEBI’s riskometer to communicate risk levels to investors.
- Avoid chasing past returns; focus on long-term suitability and consistent methodology.
Specific Instruments, Sectors, and Terms Mentioned
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Mutual Fund Types: Equity (Large Cap, Mid Cap, Small Cap, Multi Cap), Debt (Gilt, Corporate Bond, Banking & PSU, Credit Risk), Hybrid (Aggressive, Balanced, Conservative), Liquid, Fixed Maturity Plans (FMPs), Sectoral, Thematic, Index Funds, ETFs, Arbitrage Funds.
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Sectors/Themes: IT, Pharma, Electric Vehicles (EV), Banking, Infrastructure, Real Estate, Automobile.
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Examples of Companies: Reliance Industries, ITC, Tata Motors, Tata Power, ADAG Bank.
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Returns Expectations: Equity funds ~12-15% long term; debt funds lower returns; risk-return tradeoff emphasized.
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Key Numbers:
- House price example: ₹1 crore today → ₹3 crore in 10 years.
- NAV example for dividend reinvestment: ₹10 NAV, ₹500 dividend → 50 units added.
- Expense ratio impact on returns stressed.
- Exit load example: 1% if redeemed within 1 year.
MCQ Highlights (Sample Questions & Answers)
- Least credit risk scheme: Gilt Fund (Government securities).
- Tool to assess risk level: Riskometer.
- Passive fund NAV behavior: NAV falls if market falls (False that it doesn’t).
- Lowest concentration risk fund: Multi-cap fund.
- Close-ended debt fund example: Fixed Maturity Plans (FMPs).
Disclaimers & Cautions
- Not financial advice; educational content aligned with NISM syllabus.
- Past performance is not indicative of future results.
- Importance of investor suitability and informed decision-making.
- Expense ratios reduce net returns, especially critical for debt funds.
- Riskometer is a mandatory disclosure for mutual funds per SEBI.
Presenters / Sources
- Presenter: Channel “Fines with Nobita”
- Content aligned with NISM VA Mutual Fund Certification (NISM Series VA - Mutual Fund Distributors Certification) Chapter 12
- References to SEBI regulations and mutual fund industry standards.
Summary
This video comprehensively covers mutual fund scheme selection for investors and distributors, focusing on aligning investor goals, risk profiles, and time horizons with appropriate mutual fund categories. It explains various mutual fund types, risk-return hierarchies, portfolio construction strategies (core and satellite), and key selection criteria such as fund manager track record, fund size, expense ratio, and dividend options. The video also emphasizes regulatory tools like the riskometer and cautions against chasing past performance or ignoring investor suitability. It serves as a practical guide for passing the NISM mutual fund distributor exam and making informed mutual fund investment decisions.
Category
Finance
