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Tag: best mutual funds

Employee Unique Identification Number required for all Mutual Fund Transactions

Investments in Mutual Funds

EUIN for Investments in Mutual Funds

In order to address the problem of mis-selling of Mutual Fund products, SEBI (Regulatory body) has made it mandatory to mention the unique identification number (EUIN) of the employee / relationship manager / sales person of the distributor interacting with the investor, in addition to the AMFI Registration Number (ARN) of the distributor.

What is Employee Unique Identification Number (EUIN) :

EUIN is a unique number that will capture the identification of the sales person / employee / relationship manager interacting with the investor, irrespective of whether the transaction is “Execution only” or “Advisory”. It is allotted to each Sales Person holding a valid NISM certificate and associated with an ARN holder who wish to interact with the investor for the sale of mutual fund products. However, a mere quoting of EUIN will not give an “advisory” character to the transaction.

ARN holders are requested to intimate AMFI, in case they employ any ‘Sales Person’ so that EUIN could be allotted to them.

Purpose :

It has been observed that there is a lot of mis-selling happening in the mutual fund sector. And at times it becomes difficult to track the person responsible for such mis-selling. EUIN will assist in tackling the problem of mis-selling even if the employee / relationship manager / sales person leaves the employment of the distributor or his / her sub broker.

Is it Mandatory to provide EUIN in transaction ?

Quoting of EUIN is mandatory irrespective of whether the transaction is “Execution only” or “Advisory”. The ARN Holder should put his / her EUIN in the column provided in the application form. Investors are therefore advised to check & mention the AMFI allotted ‘Employee Unique Identification Number (EUIN)’ of the distributor’s sales personnel who has advised / executed the investment/switch.

However, in case of certain exceptional instances where the investment / switch has been carried out or submitted without any interaction by the employee / sales person / relationship manager of the distributor / sub broker with respect to the transaction, Investors are requested to submit the following declaration separately:

“I / We hereby confirm that the EUIN box has been intentionally left blank by me/us as this transaction is executed without any interaction or advice by the employee / relationship manager / sales person of the above distributor / sub broker or notwithstanding the advice of in-appropriateness, if any, provided by the employee / relationship manager / sales person of the distributor / sub broker.”

Separate declaration must be furnished for each separate transaction / application. Investors are advised to use new application forms which have the provision for ARN code, Sub broker ARN code, EUIN, Sub broker code (code allotted by the ARN holder).

Applicable Transactions :

  • EUIN Applicable : Purchases, Switches, Registration of Systematic Investment Plan (SIP) and Registration of Systematic Transfer Plan (STP) including transactions routed through stock exchanges
  • EUIN Not Applicable : Registration of Systematic Withdrawal Plan, Ongoing instalments under SIP / STP / SWP, Dividend Reinvestments, allotment of Bonus Units and Redemption, transactions routed through overseas distributors.

As an Investor what you must ensure ?

  • If routed through a distributor, please use new forms that have space for EUIN and Sub broker code and must ensure that the application form shall have a valid EUIN besides a valid ARN code and, Sub broker ARN code.
  • Investors transacting online or through any other mode offered by a distributor, do mention the EUIN and sub-broker ARN code while placing the transaction. In case of transaction where there is no interaction with any representative / agent of a distributor, investors are requested to clearly indicate the same by submitting the above declaration format.

Challenges :

Challenge will come to ensure that all salespersons are EUIN compliant. Moreover mis-selling is so rampant at all levels and mere getting EUIN may not prevent employees to indulge in mis-selling. There is still no clarity on what constitutes mis-selling. Though the new system of labelling the mutual funds is already there, yet its not fool-proof. Further, mutual fund advisors rarely undertake proper risk profiling of the clients, or ascertain their needs and goals.

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Measuring performance, risk / reward associated with an investment / portfolio

how to invest

tracking performance of an investment

Before you make an investment, besides other things, you must also measure the performance and risk / reward associated with it. For example, if your investment is giving higher returns, but is too volatile and is not in tune with objective of your investments, than you must stay away from it because of the risk associated with such investments.

There are many factors to keep in mind, but lets start with some statistical indicators. Some of the standard  tools to measure risk associated with investments such as mutual funds and stocks, form part of Modern Portfolio Theory. These include standard deviation, r-squared, alpha, beta, and Sharpe ratios. These ratios help us measure the historical behavior of investment risk and volatility.

1.. Standard Deviation

“High standard deviation denotes high volatility”.

Standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). It measures the dispersion of data from its mean. In simple words, the more that data is spread apart, the higher the difference is from the norm. It lets you understand that based on its historical performance, how much the return on an instrument is deviating from the expected returns.

2.. R-Squared

Another statistical measure that represents the percentage of a fund portfolio’s and can be explained by movements in a benchmark index is known as R-squared. Its values range from 0 to 100. A mutual fund / stock with an R-squared value between 85 and 100 denotes that the performance of the fund is closely correlated with that of the benchmark index (of same class). And performance of an instrument that has a rating of 70 or less is less correlated with that of benchmark index.

However higher the R square in case of mutual fund, means either the fund is an index fund or is close to being the index fund. These let you take a decision on whether you invest in a ETF or another diversified fund, depending on your objective of investment.

3.. Alpha

Another tool to judge performance of a fund / portfolio is to measure its “Alpha”.

Alpha measures performance on a risk-adjusted basis. Alpha ratio takes the price risk (volatility) of a mutual fund / portfolio and compares its risk-adjusted performance to a given benchmark index. The return an investment generates in excess of the investment relative to the return of the benchmark index is its “alpha.”

In other words, more the alpha, the better it is. A positive alpha of 1 means the investment has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under performance of 1%.

4.. Beta

Beta measures the systematic risk / volatility of a portfolio in comparison to the market as a whole. Beta denotes how a fund , stock or portfolio performance would swing in response to any swing in the market. By definition, the market has a beta of 1.0.

A beta of 1.0 indicates that the investment’s price will move exactly in accordance with the behavior of market. A beta of more than 1.0 indicates that the investment will be more volatile than the market. Thus, if a fund portfolio’s / stock beta is 1.2, it is said to be 20% more volatile than the market. Similarly, a beta of less than 1.0 indicates that the investment’s price will be less volatile than the market. If you want to play safe, not take much risk and is looking more to preserve capital, you must focus on fund portfolios with low beta. Similarly if you are an aggressive investor and foresee market performing well in coming times, you must invest in portfolio with a high beta.

5.. Sharpe Ratio

Last, but not the least is “Sharpe ratio” — another important way to measure performance of a fund / portfolio.

The Sharpe ratio tells investors whether an investment’s returns are due to result of excess risk taken by the fund manager or is it because of the smart decisions taken to manage the fund.

This measurement is very useful because although one portfolio can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The higher the Sharpe ratio of a portfolio, the better its risk adjusted performance.

There are some other measures also to evaluate performance, risk/reward associated with an investment. Do keep in mind that the ratios may mislead you if other parameters are also not considered.

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