aatish assignment 3 version 2

8/6/2019 Aatish Assignment 3 Version 2

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Securities Analysis

And

Portfolio Management

Assignment 2

Submitted

to

Prof Akshay Damani

Name: Atish Shroff (MMS Finance)

Roll No 108



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Q 1 what are pension funds?

A fund established by an employer to facilitate and organize the investment of employees'

retirement funds contributed by the employer and employees. The pension fund is a common asset

pool meant to generate stable growth over the long term, and provide pensions for employees when

they reach the end of their working years and commence retirement.

Pension funds are commonly run by some sort of financial intermediary for the company and its

employees, although some larger corporations operate their pension funds in-house. Pension funds

control relatively large amounts of capital and represent the largest institutional investors in many

nations.

In India the pension fund is regulated by the Government of India. PFRDA was established

by Government of India on 23rd August, 2003. The Government has, through an executive order

dated 10th October 2003, mandated PFRDA to act as a regulator for the pension sector. The mandate

of PFRDA is development and regulation of pension sector in India. The New Pension System

reflects Government¶s effort to find sustainable solutions to the problem of providing adequate

retirement income. As a first step towards instituting pensionary reforms, Government of India

moved from a defined benefit pension to a defined contribution based pension system by making itmandatory for its new recruits (except armed forces) with effect from 1st January, 2004. Since 1st

April, 2008, the pension contributions of Central Government employees covered by the New Pension

System (NPS) are being invested by professional Pension Fund Managers in line with investment

guidelines of Government applicable to non-Government Provident Funds.

What is the New Pension System (NPS)?

The NPS is a new contributory pension scheme introduced by the Central Government for its own

new employees. Under the new pension system, each new central government employee will open a

personal retirement account on joining service. Every month, and till the employee retires or leaves

government service, a part of the employee's salary will be transferred into this account. When the

person retires, he will be able to use these savings to take care of the needs and expenses of his family

during old age.

The NPS was introduced by the government last year to give people a way to get a pension during

their old age. Employees of the government sector already get a pension, so this scheme was

introduced as a social security measure that enables people from the unorganized sector to draw a

pension as well. The working mechanism is quite simple ± you contribute a certain sum every month

during your working years, which is then invested according to your preference. You can then

withdraw the money when you retire, which is currently set at 60 years old

Who is covered by the NPS?

You are covered by the NPS if

1. You joined central government service on or after 01 January 2004, and

2. You are an employee of a Central (Civil) Ministry or Departments, or

3. You are an employee of a non-civil Ministry or Department including Railways, Posts,

Telecommunication or Armed Forces (Civil), or



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4. You are an employee of an Autonomous Body, Grant in-Aid Institution, Union Terr itory or any

ot¡

er under tak ing whose employees are eligi¢

le to a pension from the Consolidated Fund of India.

What is the process for enrolling in NPS?

A) Eligi¢

ility: 18-55 years of age. Upon registration, you will recei £ e a permanent retirement account

number. Minimum annual contr i bution is R s.6, 000. The minimum number of instalments per year isfour. There is no upper limit on the contr i bution per instalment or on the number of instalments

What are Tier I and Tier II accounts in the NPS?

The NPS is meant to be a pension scheme, so it is geared towards gi¤ ing you a steady stream of

income on your retirement. That means that NPS makes it diff icult to withdraw your money dur ing

your work ing years or till the age of 60 in this case. Tier I and Tier II are two options under the

scheme where you can invest your money; the pr imary difference between them is how they differ in

allowing you to withdraw your money before retirement.

NPS Tier I

There is severe restr iction on withdrawing your money before the age of 60, because it is necessary to

invest 80% of your money in an annuity with Insurance R egulatory Development Author ity (IR DA) if

you withdraw before 60. You can keep the remaining 20% with you.When you attain the age of 60,

you have to invest at least 40% in an annuity with IR DA; the remaining can be withdrawn in lump-

sum or in a phased manner.Here are the details of how your money can be withdrawn in a NPS Tier I

account.

NPS Tier II Account

The f irst thing about the NPS Tier II account is that you need to have a Tier I account in order to open

a Tier II account. The Tier II account makes it easy for you to withdraw your money before retirement



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because there is no limit on the withdrawals you can make from the Tier II account. You need to

maintain a minimum balance of Rs. 2,000, and you can transfer money from the Tier II account to

Tier I account, but not the other way around. There is a Rs. 350 CRA (Credit Record Keeping

Agency) charge which is not present in the Tier II account, but the rest of the fees remain the same.

Asset Allocation and Categories in the NPS There is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your

money is invested in a certain percentage in the various classes based on your age.

Here are the three investment classes:

Class Risk Profile DescriptionG Ultra Safe Will only invest in Central and State

government bonds.C Safe Fixed income securities of entities other than

the governmentE Medium Investment in equity related products like

index funds that replicate the Sensex.However, equity investment will berestricted to 50% of the portfolio.

In the Active Choice you can select how much of your money will be invested in the different classes

with a cap of 50% in Class E.

Now, there are pension funds that will manage your money, and in either of these options you have to

select the fund manager who will manage your fund. So even if you select the Auto Choice, you still

have to tell them which fund manager you want to manage your money.

Fees and Costs related to the NPS I talk about expenses a lot here, and the expenses on the NPS are really low. The annual fund

management charge is 0.0009%, which is probably the lowest in the world.

There are some other expenses associated with the NPS, but as you will see all of them are quite low

as well. Here is a list of the other expenses.



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What is the minimum amount needed to invest in the NPS?

For a Tier I NPS account you need to contr i bute a minimum of R s. 6,000 per year, and make at least 4

contr i butions in a year. The minimum amount per contr i bution can be R s. 500.Minimum amount for

opening Tier II account is R s. 1,000, minimum balance at the end of a year is R s. 2,000, and you need

to make at least 4 contr i butions in a year.

What are the tax implications of NPS?

The revised Direct Tax Code proposes to make the NPS tax exempt at the time of withdrawal.Initially NPS was going to be taxed at the time of withdrawal, and that had put it at a disadvantage to

other products like ULIPs and Mutual Funds. But the revised code proposes it to be exempt from tax,

and that really adds to its lure.

There are also pr ivate players providing the pension plans in india, like Ba ja j Alliance, India f irst,

Aviva, Tata AIG, ICICI PR UDENTIAL, SBI life insurance etc.

(www. pfrda.org.in) www.epf india.comwww.onemint .com

Q.2 what are hedge funds?

An aggressively managed por tfolio of investments that uses advanced investment strategies such as

leveraged, long, shor t and der ivative positions in both domestic and international markets with the

goal of generating high returns (either in an absolute sense or over a specif ied market benchmark).



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Legally, hedge funds are most often set up as private investment partnerships that are open to a

limited number of investors and require a very large initial minimum investment. Investments

in hedge funds are illiquid as they often require investors keep their money in the fund for at least one

year.

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater tosophisticated investors. In the U.S., laws require that the majority of investors in the fund

be accredited. That is, they must earn a minimum amount of money annually and have a net worth

of more than $1 million, along with a significant amount of investment knowledge. You can think of

hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments

are pooled and professionally managed, but differ in that the fund has far more flexibility in its

investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of

most hedge funds is to maximize return on investment. The name is mostly historical, as the first

hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual

funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge fundsuse dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact,

because hedge fund managers make speculative investments, these funds can carry more risk than the

overall market

3 What is ETF¶s?

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a

stock on an exchange. ETFs experience price changes throughout the day as they are bought andsold. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every

day like a mutual fund does.

By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy

on margin and purchase as little as one share. Another advantage is that the expense ratios for most

ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to

pay the same commission to your broker that you'd pay on any regular order.

One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index

and trades under the symbol SPY.

What are money market mutual funds?



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Money Market Mutual Funds (MMMFs) were introduced in April 1991 to provide an additional

short-term avenue for investment and bring money market investment within the reach of individuals.

These mutual funds would invest exclusively in money market instruments.

MMMFs bridge the gap between small individual investors and the money market. MMMF mobilizes

savings from small investors and invests them in short-term debt instruments or money market

instruments.

The Reserve Bank has been making several modifications to the scheme since 1995-96 to make it

more flexible and attractive to a larger investor base such as banks, financial institutions, and

corporate besides individuals. Modifications such as the removal of ceiling for raising resources,

allowing the private sector to set up MMMFs, permission to MMMFs to invest in rated corporate

bonds and debentures, reduction in the minimum lock-in period to 15 days, and so on are steps

towards making the MMMFs scheme attractive.

The growth in MMMFs has been less than expected. Though, in principle, approvals were granted to

10 entities, only three MMMFs have been set up²one in the private sector²Kothari Pioneer Mutual

Fund, and the other two by IDBI and UTI. The total size of these funds is not very large.

The MMMFs, earlier under the purview of the Reserve Bank, come under the purview of the SEBI

regulation since March 7, 2000. MMMFs can grow only when the money market grows in volume

and acquires depth

4 what is REITs?

A security that sells like a stock on the major exchanges and invests in real estate directly, either

through properties or mortgages. REITs receive special tax considerations and typically offer

investors high yields, as well as a highly liquid method of investing in real estate.Equity REITs : Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate

assets). Their revenues come principally from their properties' rents. Mortgage REITs: Mortgage

REITs deal in investment and ownership of property mortgages. These REITs loan money for

mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities.

Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs

by investing in both properties and mortgages

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by

investing in a mutual fund that specializes in public real estate. An additional benefit to investing in

REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other

things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some

REITs will invest specifically in one area of real estate - shopping malls, for example - or in one

specific region, state or country. Investing in REITs is a liquid, dividend-paying means of

participating in the real estate market.

What is Index funds?



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Index funds are those mutual funds which only invest in the stocks which form part of a specified

indices.

A type of mutual fund with a portfolio constructed to match or track the components of a market

index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide

broad market exposure, low operating expenses and low portfolio turnover. Investing in an index fundis a form of passive investing. The primary advantage to such a strategy is the lower management

expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as

the S&P 500.

For e.g. HDFC index fund- which invest in BSE SENSEX companies.

5. Index Schemes

Mutual funds seek to mobilize money from all possible investors.Various investors have different

investment preferences. In order to accommodate these preferences, mutual funds mobilize different pools of money. Each such pool of money is called a mutual fund scheme.

1) Equity mutual funds schemes: In this type of mutual fund scheme the fund manager only

invest in the equity markets buying the shares of the companies

a. Diversified equity fund is a category of funds that invest in a diverse mix of securities

that cut across sectors

b. Equity Linked Savings Schemes (ELSS), as seen earlier, offer tax benefits to

investors. However, the investor is expected to retain the Units for at least 3 years.

c. Equity Income / Dividend Yield Schemes invest in securities whose shares fluctuate

less, and therefore, dividend represents a larger proportion of the returns on those

shares. The NAV of such equity schemes are expected to fluctuate lesser than other categories of equity schemes.

d. Arbitrage Funds take contrary positions in different markets / securities, such that the

risk is neutralized, but a return is earned.For instance, by buying a share in BSE, and

simultaneously selling the same share in the NSE at a higher price. Most arbitrage

funds take contrary positions between the equity market and the futures and options

market. (µFutures¶ and µOptions¶ are commonly referred to as derivatives. These are

designed to help investors to take positions or protect their risk in some other

security, such as an equity share. They are traded in exchanges like the NSE and the

BSE. Unit 10 provides an example of futures contract that is linked to gold).

2) Growth fund - A diversified portfolio of stocks that has capital appreciation as its primary

goal, with little or no dividend payouts. Portfolio companies would mainly consist of companies with above-average growth in earnings that reinvest their earnings into expansion,

acquisitions, and/or research and development. Most growth funds offer higher potential

capital appreciation but usually at above-average risk. Growth funds are more volatile than

funds in the value and blend categories. The companies in a growth fund portfolio are in an

expansion phase and they are not expected to pay dividends. Investing in growth funds

requires a tolerance for risk and a holding period with a time horizon of five to 10 years.



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3) SIP and MIP :- SIP Most mutual funds offer the investors Systematic Investment Plan (SIP),

a facility to make periodic or recurring purchases in mutual fund schemes. An SIP is like a

recurring deposit with a mutual fund. An SIP can be viewed as a series of purchase

transactions. SIP is an approach where the investor invests constant amounts at regular

intervals. A benefit of such an approach, particularly in equity schemes, is that it averages

the unit-holder¶s cost of acquisition.

a. MIP :- A type of investment vehicle that provides a specified monthly payment to the

investor. This monthly payment is intended to be a stable form of income and is

therefore typically suited for retired persons or senior citizens

without other substantial sources of monthly income. A monthly income plan can be

thought of as a budget for a retirement income. Rather than reaching retirement and

spending your nest egg by making random withdrawals of varying amounts, a

monthly income plan can ensure you receive a stable amount of funds each month to

spend, which limits the risk of over-spending. In this regard, an MIP is similar in

many ways to an annuity.

4) Income fund: Debt funds that invest pre-dominantly in a wide range bonds are called income

funds. Income funds predominantly in invest in medium-term and long-term debt instrumentsthat are issued by the government, companies, banks and financial institutions. There is a

higher risk of default in these funds as compared to gilt funds, since they invest in securities

issued by non-government agencies that carry the risk of default. They have a higher interest

rate risk than money market funds since they invest in longer-term securities. These funds aim

at providing regular income rather than capital appreciation. Examples: Reliance Income

Fund, Templeton India Income Builder Fund.

5) Debt fund. Debt funds invest predominantly in debt securities. Debt securities have a fixed

term and pay a specific rate of interest. There areseveral types of debt funds that invest in

various segments of the debt market. Debt securities are broadly classified as short term

securities (money market securities) and long term securities (bonds,debentures). Very short

term debt securities provide a steady but low level of return. Longer term debt securities havethe potential to provide a higher level of return, but their price can fluctuaten debt markets,

there is also categorisation based on default risk.This is usually denoted by credit rating. A

debt security with a higher credit rating like AAA, has lower risk of default than say, BBB

rating,

6) Large Cap Funds: These are funds that focus on the equity shares of large sized companies.

Large companies are usually well established, and the shares are easy to buy and sell. Large

cap companies also feature lower risk, due to their long performance track record and

history.Large Cap Funds Examples: Franklin India Blue-chip Fund, Kotak 30 Fund

7) Mid Cap Funds: These are funds that focus on equity shares of medium sized companies.

These are usually the second rung companies in the market and bought for their potential to

become big. Risk of failures especially during the turn in business cycles, can also behigh.Mid Cap Funds Examples: -Sundaram B NP Paribas Select Mid Cap Fund

8) Small Cap Funds: These are funds that focus on equity shares of small companies,many of

them typically new and upcoming companies. They are bought for their future potential, but

they can be difficult to buy and sell in large quantity. Small Cap Funds Examples: DSPBR

Small and Mid Cap Fund



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9) Sector funds/thematic funds: These are funds that focus on companies in a particular

sector,appealing to investors who think that the performance of stocks in this sector would be

better than that of the broad market.Examples: Reliance Banking Fund, JM Pharma Fund.

10) Liquid Funds: Very short term debt funds are also called as liquid funds or money market

funds. They invest in short term debt instruments. Liquid funds invest in debt securities with

less than one year to maturity such as treasury bills, commercial papers and certificate of

deposits. Since liquid funds have very short-term maturity, the risk of NAV fluctuation is

low. Liquid funds provide safety of principal and liquidity. Examples : Kotak Liquid Fund,

Principal Liquid Fund.

11) Hybrid funds: Funds that have a combination of asset classes such as debt and equity in their

portfolio are called hybrid funds. Some mutual fund products invest in both equity and debt

markets. The objective is to bring to the investor the benefit of strategically investing in both

markets, in a single product. There are three broad types of hybrid funds:

a. - Predominantly debt-oriented hybrids

b. - Predominantly equity-oriented hybrids

c. - Dynamic asset allocation hybrids

12) Open ended funds: they are open for investors to enter or exit at any time, even after the NFOWhen existing investors buy additional units or new investors buy units of the open ended

scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV

13) Close-ended fund : have a fixed maturity. Investors can buy units of a close-ended scheme,

from the fund, only during its NFO. The fund makes arrangements for the units to be traded,

post-NFO in a stock exchange. This is done through a listing of the scheme in a stock

exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO,

investors who want to buy Units will have to find a seller for those units in the stock

exchange. Similarly, investors who want to sell Units will have to find a buyer for those units

in the stock exchange. Since postNFO, sale and purchase of units happen to or from a

counter-part in the stock exchange ± and not to or from the mutual fund ± the unit capital of

the scheme remains stable.14) Tax saver or ELSS: Some diversified equity funds that are specially designated as equity

linked saving schemes (ELSS) give tax benefits to the investors on their investment.

Investment up to Rs. 100,000 in a year in such funds can be deducted from taxable income of

individual investors, as per Section 80C of the Income Tax Act. ELSS hold at least 80% 113

of their portfolio in equity securities. Such funds have a lock-in period of 3 years from the

date of investment.



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Bibliography

www.onemint.com www¥

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¥ i www.epf india.com/pension.htm

www.investopedia.com AMFI notes

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