Mutual Fund Basic Certification guide PDF

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Mutual Fund Basic Certification Program for Distributors...

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Mutual Funds Basics Certification

Study and Reference Guide

July 2017

Institute of Financial Markets of Pakistan © 2017

IFMP - Mutual Funds Basics Certification

Mutual Funds Basics Certification

Study and Reference Guide

July 2017

2 Study and Reference Guide

IFMP - Mutual Funds Basics Certification

Copyright © 2017

Institute of Financial Markets of Pakistan (Formerly Institute of Capital Markets) Karachi, Pakistan All rights reserved This is document is for educational purposes only and the Institute of Financial Markets of Pakistan (IFMP) (Formerly Institute of Capital Markets) accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from actions as a result of any material in this publication can be accepted by the IFMP or its members. IFMP has prepared its study guides with the best intent for educational reference purposes only and the documents shall not be considered as an ultimate authority on the subject or to pass the IFMP qualifications. Readers are encouraged to study additional relevant material and as recommended by IFMP. The IFMP's training materials are solely for the purpose of referencing and the matter provided may not be taken as any empirical theory on the subject which is dynamic and evolving with latest research and developments. While some of the content has been taken from third-party sources, their efforts and work on the topic are highly acknowledged. For any comments, suggestions and information, you may reach IFMP at [email protected]

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IFMP - Mutual Funds Basics Certification

TABLE OF CONTENTS

1. Objective of the Examination…………………………………………………………….

05

2. Exam Specification …………………………………………………………………………….

06

3. Summary Syllabus ………………………………………………………………………………

07

4. Recommended Readings …………………………………………………………………..

14

5. Detailed Study Material…………………………………………………………………..…

15

6. Acronyms …………………………………………………………………………………………..

16

7. Element 1 - Introduction to Financial Services and Products …………..…

17

8. Element 2 - Introduction to Mutual Funds ………………………………………...

25

9. Element 3 - Regulatory Framework ………………………………………………….

55

10. Element 4 - Fund Features and Mechanics ……………………………………….

57

11. Element 5 - Ethics, Disclosure and Best practices……………………………….

80

12. Glossary………………………………………………………………………………………………

92

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IFMP - Mutual Funds Basics Certification

OBJECTIVE OF THE EXAMINATION This Certification Exam is specifically designed to meet the minimum qualification needs of the mutual fund distributors working either directly with a fund management company or through a distribution agent. It intends to ensure that they are competent to provide investment advice to the investors. TARGET AUDIENCE This exam has been mandated for Sales Staff of Mutual Fund Companies/ Collective Investment Schemes and their distributors. SYLLABUS STRUCTURE The curriculum is divided into elements and these are broken down into a series of learning objectives. Each learning objective begins with one of the following prefixes: know, understand, be able to calculate and be able to apply. These words indicate the different levels of skill to be tested. Learning objectives prefixed:  know require the candidate to recall information such as facts, rules and principles  understand require the candidate to demonstrate comprehension of an issue, fact, rule or principle  be able to calculate require the candidate to be able to use formulae to perform calculations  be able to apply require the candidate to be able to apply their knowledge to a given set of circumstances in order to present a clear and detailed explanation of a situation, rule or principle

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IFMP - Mutual Funds Basics Certification

EXAMINATION SPECIFICATION Each examination paper is constructed from a specification that determines the weightings that will be given to each element. The specification is given below. It is important to note that the numbers quoted may vary slightly from examination to examination as there is some flexibility to ensure that each examination has a consistent level of difficulty. However, the number of questions tested in each element should not change by more than plus or minus 2. Examination Specification 100 multiple choice questions Element number 1 2 3 4 5

Element Introduction to Financial Services and Products Introduction to Mutual Funds Regulatory Framework Fund Features and Mechanics Ethics, Disclosures and Best Practices Total

Questions 20 30 10 20 20 100

ASSESSMENT STRUCTURE  This will be a 150 minutes examination of 100 multiple choice questions.  All questions will carry equal marks.  There will be no negative marking on any wrong answer.

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SUMMARY OF THE SYLLABUS

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IFMP - Mutual Funds Basics Certification

ELEMENT 1 Introduction to Financial Services and Products On completion, the candidate should: 1.1

know the role of the Securities Market and Financial System including  stock exchanges  retail/commercial banks  pension/mutual funds  insurance companies  fund managers/asset management companies  custodians  industry trade bodies (MUFAP)

1.2

know the products and asset classes including:    

Cash deposits Government securities and Corporate Bonds Equities Commodities

1.3

know the difference between retail and institutional investors

1.4

understand the role and functions of Primary Market

1.5

understand the role and functions of Secondary Market

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ELEMENT 2 Introduction to Mutual Funds On completion, the candidate should: 2.1

know the Concept and Role of Mutual Funds including:  Importance of Mutual Funds in the Financial Markets  Concept of Mutual Funds  Advantages Mutual Funds

2.2

know the structure of Mutual Funds

2.3

know the benefits of Mutual Funds

2.4

know the types of Mutual funds in Pakistan including:  Types of Funds  Significance of various types of Funds

2.5

know the differences between Mutual Funds and Bank Deposits.

2.6

know the Categories of Mutual Funds including:  Equity Funds  Debt Funds  Money Market Funds  Sector Funds  Balanced Funds  Index Funds  Pension Funds

2.7 Pension Funds 2.7.1

know the purpose, benefits and financial protection provided by Pension Funds

2.7.2 know the type and categories of Life assurance products available through Mutual Funds

2.8

2.7.3

Understand and be able to calculate the Tax treatment of pensions

2.7.4

Know Legislation and taxation benefits on Pension Funds

know the Risks associated with Mutual Funds including:  Market Risk  Credit Risk 9 Study and Reference Guide

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    2.9

Liquidity Risk Inflation Risk Interest Rate Risk Settlement Risk

know the types of Shariah compliant Islamic Mutual Funds including:

   

Shariah Compliant Equity Fund Shariah Compliant Money Market and Income Funds Commodity Fund Hybrid Funds

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ELEMENT 3 Regulatory Framework On completion, the candidate should: 3.1

Briefly understand the scope, core functions and powers of the Securities and Exchange Commission of Pakistan (SECP)

3.2

understand the NBFC and Notified Entities Regulations 2008 including:       

3.3

Section 38: Obligations of the Asset Management Company Section 49: Custody of assets Section 52: Periodical reports to shareholders, etcetera Section 55: Investment policy and diversification Section 57: Pricing, issue and redemption of units Section 61: Remuneration to Asset Management Companies Section 66A: Sale and Distribution of units of Collective Investment Schemes

understand the SECP Directives to Fund Management Companies on Conduct of Business, Investor Warnings, etc.

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ELEMENT 4 Fund Features and Mechanics On completion, the candidate should: 4.1

understand the structure and importance of Regulatory Documents including  Prospectus/Offering Documents  Trust Deed

4.2

know Investor Services and requirements including:       

Account Statements Electronic Issuance and Certificates Minimum Balance Requirements Fund Expenses Transaction Costs Sales and Purchase of Units/ Offer and Redemption Registration of Unit Holders/ Investors

4.3

understand the investment planning and various funds asset allocation strategy

4.4

understand the Net Asset Value (NAV) of the Fund and be able to calculate the return of the Fund as per MUFAP Total Return Methodology

4.5

know the Zakat applicability, exemption and should be able to calculate Zakat on Units/ investment

4.6

understand the Fund Redemption and Transfer procedure including:  Payment of redemption proceeds  Partial redemption  Partial transfer

4.7

understand the Fund Valuation and Taxation including:  Taxation on Fund Units  Taxation on Dividends and Bonus  Tax Exemptions, Rebates and Allowances

4.8

know the Mutual Fund ratings, Fund Manager Ratings and benchmarks

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4.9

Understand and be able to calculate the Tax treatment of pensions,

4.10

Know Legislation and taxation benefits on Pension Funds.

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ELEMENT 5 Ethics, Disclosures and Best Practices On completion, the candidate should: 5.1

know the methods of information dissemination and disclosure requirements

5.2

know the requirements and importance of NAV announcement related to:  Matching investments and redemption  Cut-off and market timings  Performance

5.3

understand the disclaimers, policies and their disclosure requirements related to Investments and Risks

5.4

understand the duty to investors relating to mis-selling under and overselling

5.5

understand the importance and methods of investor profiling for affordability and suitability

5.6

know the importance of maintenance of investor records

5.7

understand the confidentiality related to:  Clients’ Information

5.8

know the relevant sections of Anti Money Laundering Ordinance and KYC/CDD requirements

5.9

know the requirements of Fair Dealing including:    

5.10

Risks & Rewards of Investing Maintenance of Records Time Stamps Misstatements & Mis-selling/ False Selling

know the process and handling of Investor Complaints

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Recommended Readings The next section of this study guide covers a brief extract from some of the below mentioned documents. Candidates are advised to study the respective documents (in detail and original) which are available free-to-download from IFMP's website and / or the respective organization's websites. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Code of Corporate Governance, 2012 SECP Act, 1997 Securities Act, 2015 Securities Brokers (Licensing and Operations) Regulations, 2016 Securities (Leveraged Markets and Pledging) Rules, 2011 Stock Exchange Members (Inspection of Books and Record) Rules , 2001 Securities & Exchange Rules, 1971 Voluntary Pension System Rules, 2005 NBFC Regulations 2008

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STUDY MATERIAL

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ACRONYMS AFS AMC CDC CDS CEF CGT CRA CVT GDP GNP IFRS IFMP KMI MUFAP NAV NBFC NCCPL PMEX PSX NCSS REIT RMS SECP SBP TFC VPS

Available For Sale Asset Management Company Central Depository Company (of Pakistan Limited) Central Depository System Closed-End Fund Capital Gain Tax Credit Rating Agency Capital Value Tax Gross Domestic Product Gross National Product International Financial Reporting System Institute of Financial Markets of Pakistan Karachi Meezan Index Mutual Funds Association of Pakistan Net Asset Value Non-Banking and Finance Companies National Clearing Company of Pakistan Limited Pakistan Mercantile Exchange Limited Pakistan Stock Exchange National Clearing and Settlement System Real Estate Investment Trust Risk Management Ratio Securities & Exchange Commission of Pakistan State Bank of Pakistan Term Finance Certificates Voluntary Pension System

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ELEMENT 1 Introduction to Financial Services and Products On completion, the candidate should: 1.1

know the role of the Securities Market and Financial System including:       

retail/commercial banks pension/mutual funds insurance companies fund managers/asset management companies custodians industry trade bodies (MUFAP) stock exchanges

RETAIL/COMMERCIAL BANKS A commercial bank is a type of financial intermediary and a type of bank. It is a bank that provides checking accounts, savings accounts, and money market accounts and it accepts time deposits. Commercial banks also function as retail bank. Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered by commercial banks include: savings and cheque accounting, mortgages, personal loans, debit cards, credit cards, and so forth. Most banks offer both commercial and retail banking services. MUTUAL AND PENSION FUNDS Mutual Fund is a pool of money (Collective Investment) belonging to a group of investors, who entrust it to a Fund Manager (Asset Management Company) for making prudent investments on their behalf. These investments are made strictly in accordance with the Investment Policy laid down in the Constitutive Documents of the Fund. The ownership of the Fund Property vests in the investors and the Fund manager is entitled only to certain fees, paid by the Fund (by the investors) for managing the Fund. Asset Management Companies have professional management, with a portfolio manager to monitor its holdings and decide which security to buy, hold or sell. Shares/units are sold to the public at Net Asset Value (NAV) price that are subject to certain adjustments. How well the Fund is performing at any time is partly reflected in a rising or declining NAV at that time. Mutual Funds are primarily structured in two ways; the more common structure is an Open End Fund, from which shares can be redeemed at any time at a price that is tied to asset value of the fund. Mutual Funds can also be structured as Close End Fund in which a fixed 18 Study and Reference Guide

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number of redeemable shares are sold at an initial offering and are then traded like common stock on the Stock Exchange or Over-The-Counter (OTC) market. There are, however, different types of mutual funds. There are funds that specialize in debt instruments that may, in turn focus/specialize in corporate or sovereign debt. Similarly funds that invest in common stocks may specialize and invest solely in specialized markets or sectors. Another type of fund, known as an index fund, doesn't try to beat the performance of the overall market, but tries to equal it. Manager of Index Funds buy a portfolio that is a mirror image of an index and therefore less research and expertise is required to manage such funds. A mutual fund's performance can be judged from the consistency of returns on year after year basis. Buying the top funds of the prior year can sometimes be disappointing, since high flyers of one year may not guarantee similar results in later years. Investing in mutual funds requires first doing some basic homework, setting goals, selecting appropriate funds closely matching investment objectives. Mutual Funds should normally be seen by the investors as a relatively longer term investments (minimum five year horizon) A pension fund is a pool of assets similar to Mutual Funds but forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan by the investor. INSURANCE COMPANIES Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment of a premium, and can be thought of as a guaranteed small cost (premium) to prevent a large, possibly devastating loss. Insurance companies perform risk management that is primarily used to hedge against the risk of a contingent loss. An ‘insurer’ is the company selling the insurance while; an ‘insured’ is the person or entity buying the insurance. Insurance companies are one of the major institutional investors in equity and debt markets.

ASSET MANAGEMENT COMPANIES (AMC) Asset Management Company provides the professional management of various securities (shares, bonds etc.) and assets (e.g., mutual funds), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors. Non-Banking Finance Companies and Notified Entities Regulations, 2008 define AMC to mean “Non-Banking Finance Companies licensed by the Commission to provide asset management services”.

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While the Voluntary Pension System Rules, 2005 define AMC to mean “A company which has been licensed by the Commission under rule 5 of the Non-Banking Finance Companies Rules, 2003, to offer investment schemes under trust deeds and to issue redeemable securities”. CUSTODIAN Custodian is a trust company, bank or similar financial institution responsible for holding and safeguarding the securities owned within a mutual fund on behalf of investors. A mutual fund's custodian may also act as the mutual funds transfer agent, maintaining records of unit-holder transactions and balances. Since a mutual fund is essentially a large pool of funds from many different investors, it requires a third-party custodian to hold and safeguard the securities that are mutually owned by all fund's investors. This structure mitigates the risk of dishonest activity by separating the fund managers from the physical/holding of securities and investor records. STOCK E...