rough work of project

8/7/2019 rough work of project

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An asset can be defined as anything that which can be bought,soldor exchanged; and an asset class is nothing but a category ofan

asset. An asset class is a group of securities that have similarfinancial characteristics. There are many asset classes but themosttraditional and popular ones are cash, bonds and shares, butmanyassets are also considered as investments. These arecommodities,art, classic cars and wines.In recent years there has been a rise or increase of interest in

alternative asset classes such as commercial property. Modernalternatives which includes investments in various mutualfunds,securities etc. which are absolute return funds are alsobecomingmore and more popular.Thus the various asset classes are as follows:1. Real estate2. Mutual funds

3. Commodities4. Shares5. Securities and Bonds6. Money market7. Fixed deposits8. Public Provident Fund9. Post savings10. Insurance11. Arts

1) Bonds:A loan made by an investor to a government or a company iscalledas bond. It is also referred to as fixed income or fixedinterestinvestment. In return for the money that has been invested bytheinvestor the borrower agrees to pay a certain rate of interestand

repay the amount of loan at the end of the pre agreed period ormaturity date.


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There are mainly two types of bonds: Government bonds: As the name suggests these bonds areissued by the government itself. These bonds are traditionallyconsidered to be the safest type of bond as they are backed

by the government guarantees and are generally easy to buyand sell. Corporate bonds: Corporate bonds are issued by companiesmainly to finance or expand operations. Generally the returnson these bonds are higher than the government bonds but theyalso carry a higher level of risk.Benefits: Bonds can offer a steady and predictable income, as well assecurity of capital if bonds are held to the date of maturity and

there are no defaults by the issuers i.e. the investor.

Risks: There is a risk that the issuer may default on the loan andtheprobability of this happening is directly dependent on the creditworthiness of the investor. Fluctuations in interest rates can affect the value of a bondand

generally when the interest rates rise, bond prices fall and viceversa.

Shares:Shares represent ownership stakes in the companies that issuethem.When a person buys shares, he becomes a part owner of thecompany and may have a right to vote on key decisions andalsoshare profits through the payment of dividends.

Shares often have proved to be the best performing asset classgiving returns greater than bonds, commercial property andcashinvestments. They have also had a very high volatility ofreturns.Shares generally have a high risk-reward profile than cash orbonds.Benefits:50

Over the years, shares have outperformed other assetclasses


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over the long-term Shares can also provide a combination of income (throughdividend payments) and capital growth i.e. when the profits ofthe company in which investment has been done continue to

increase then the demand of its shares is likely to grow and itsshare prices more likely to rise.Risks: High volatility of stock market and have experienced bothextreme highs and lows. There are chances of winding up of a company and theshareholders are last to get their money invested in thatcompany. May not be possible to recover the original amount invested

asvalue of shares can go up as well as down.

Commodity:

Commodities are mainly raw materials such as energy, metalslikegold and silver, corn, wheat, cotton, coffee, sugar etc. When alltheseraw materials are grouped together, commodities forms anassetclass.Commodities at times can be a very good investment as theydifferently than other asset classes. So, moderate investment incommodity market apart from shares and various otherportfolios canreduce the overall risk of the investment. That means there canbe abenefit to diversing a portfolio by making a modest allocation

tocommodities. Similar to shares, commodities also have a highriskreturnprofile.Benefits: Lack of supply and growing demand has created a verystrongmarket in certain commodities such as oil and basic metals.52

Commodities are a very effective means to branch outinvestment risk because they move differently from shares and


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bonds. Commodities, unlike shares and bonds, react well tounexpected inflation so they can be a good way to protect theportfolio.

Risks: Commodity prices can be volatile so it is necessary todiversifyinvestment over a wide range of sectors. Commodity prices suffer whenever the economic growth isslowing down.Commodity market is a market where raw or primary productsaretraded. Various metals are also traded such as gold, silver, zinc

etc.The trade is regulated by the Forward Markets Commission. Forlongthe investment universe for Indians consisted of stocks,jewellery,real-estate and bonds. Now, yet another avenue has opened upcommodity futures. Commodity trading is nothing but trading incommodity spot and derivatives (futures). Commodity

derivatives are53traded on the National Commodity and Derivative Exchange(NCDEX) and the Multi-Commodity Exchange (MCX). Gold,silver,agri-commodities including grains, pulses, spices, oils andoilseeds,mentha oil, metals and crude are some of the commodities thattheseexchanges deal in. Trading in commodities futures is quitesimilar toequity futures trading.The commodity market in India gives a daily average turnoverof Rs12,000-15,000 crore.All commodities produced in the agriculture, mineral and fossilsectors have been sanctioned for futures trading. These includecereals, pulses, ginned cotton, un-ginned cotton, oilseeds, oils,jute,

jute products, sugar, gur, potatoes, onions, coffee, tea,


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petrochemicals, and bullion, among others.Though it is four years since the government issued anotificationallowing futures trading, commodities attract but lukewarm

interestamong retail investors.54

A large number of brokerage firms are yet to open divisions forthecommodities market. Common misgivings among investors arethatcommodities are risky and that they are difficult tounderstand.

Commodities generally carry a high risk and attract only thoseinvestors who are willing to take higher risks and earn money.It is commonly assumed that every trader passes through threestages and they are:Every trader loses initially: Every investor who is tradingforthe first time or is a novice in the commodity market or stockmarket initially loses as he might not be able to have controlover his greed and fear. A cycle of fear of loses and the greedto earn more may make him initially give loses.Trader begins to make no profit no loss: It is seen thatout ofthe total investors who enter the first stage, 80% of them finishof at the first stage only and after an year or two find that thestock market or commodity market is not their cup of tea. So inthe 2nd stage only the 20% investors try to break even in their55

trading and quite a lot of them are able to have control overtheir fear and greed with a result that they stop giving losses.

Now these traders are ready for the 3rd stage.The trader starts to make profits: This stage where atradermakes consistent profit i.e. he does not give loss cheque to thebroker. In fact this is the stage which everyone wishes to havein the stock market. But it is strongly believed that anybodywhowishes to come to the 3 rd Stage has to pass through theabove 2 stages.

Analysis of Commodity market:


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There are two primary approaches of analyzing commoditymarket:- Fundamentals focus on financial and economic theories aswell

as political developments to determine forces of demand andsupply. Technical focus on the formation of charts and formula tocapture major and minor trends, identify buying or sellingopportunities assessing the extent of market turnarounds.56

Commodities allow a portfolio to improve overall return at thesamelevel of risk.

Any investor who wants to take advantage of price movementsandwishes to vary his portfolio can invest in commodities. Investorsmustunderstand the demand cycles those commodities go throughandshould have a view on what factors may affect this.Investments mustbe made in those commodities which can be easily analyzedratherthan speculate across products which the investor does nothave anyidea.What Commodity Futures Market does:A well-developed and effective commodity futures market,unlikephysical market, facilitates offsetting the transactions withoutimpacting on physical goods until the expiry of a contract. Alargenumber of different market players participate in buying andsellingactivities in the market based on diverse domestic and globalinformation, such as price, demand and supply, climaticconditionsand other market related information. All these factors puttogetherresult in efficient price discoveryas a result of large number ofbuyers


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and sellers transacting in the futures market. Price behavior ofacommodity in the futures market might show some aberrationsreacting to the element of speculation and bandwagon effect

inherent in any market, but it quickly reverts to long-runequilibriumprice, as information flows in, reflecting fundamentals of therespective commodity. In futures market, speculators play arole inproviding liquidity to the markets and may sometimes benefitsfromprice movements, but do not have a systematic causalinfluence on

prices.Equities versus commoditiesUnlike equities, commodities touch every day life. For instance,sugar. Yet, investors keep away from commodities, unable tounderstand the market. But commodity markets are easier tounderstand than one imagines.For one, there are relatively few factors at play, unlike in thecase ofthe equity market where a wide spectrum of factors

earnings, freecash flows, interest rates and risk premiums drives prices.Alsounlike equities, commodities do not carry operational andmanagement risks.

Though to a certain extent, commodity prices are driven bygeopolitics and duty structures, they most often reflect theunderlyingdemand-supply situation. A mismatch between them causespricechanges.The risk tagInvestment in any asset class commodities, stocks, bonds ortreasury bills carries its own risk element. Commodities, ingeneral,are tagged high-risk. This has been validated using statisticaltoolsbased on historical data.


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Standard deviation is the common tool used to quantify risk,but itreflects volatility more. The risk element is the possibility of theactual

varying, on the negative side, from the expected.Commodity trading is done in the form of futures and thatthrows up ahuge potential for profit and loss as it involves predictions ofthefuture and hence uncertainty and risk. A major difference isthat theinformation availability on supply and demand cycles incommodity

markets is not as robust and controlled as the equity market.

Money Market:It is a financial market for short term borrowing and lendingmostly forthirteen months. In the money market banks lend to andborrow fromeach other, short term financial instruments such as certificate

ofdeposits (CDs) or enter into agreements such as repurchaseagreements (repos). It provides short to medium term liquidity.Money Market funds:Money market funds better known as liquid funds providestability,liquidity, capital preservation and most importantly highinterest ratesthan bank accounts. Investing in money market funds means

the fundmanager invests in cash assets such as treasury bills,certificates ofdeposit and commercial papers. The return on these funds,thoughfluctuate but the rate of fluctuation is very minimal ascompared toother funds but they are not guaranteed. These funds aremostly

purchased by corporate and individual investors who wish toput their


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surplus money in a fund for a short period.Balanced funds:As the name suggests, these funds aim for balance and henceare

made up of a mixture of equities and debt instruments. Thesefundsare mostly suitable for investors who are looking for amoderatecapital appreciation as the risk is relatively low as compared tootherfunds. The investors interested in these types of funds arethose whoseek to grow their capital and get regular income. The debt or

bondelement of the fund provides a level of income and acts as thesafetynet during dynamic periods in the market, while equitiesprovide thepotential for capital appreciation.Debt funds:The aim of debt or income funds is to make regular paymentsto its

investors, although dividends can be reinvested to buy moreunits ofthe fund.To provide you with a steady income, these funds generallyinvest infixed income securities such as bonds, corporate debentures,government securities (gilts) and money market instruments.61

Opportunities for capital appreciation are limited and thedownside isthat as interest rates fluctuate, the net asset value or NAV ofthe fundcould follow suit if interest rates fall, the NAV is likely toincreaseand vice versa.There is also a risk that a company issuing a bond may defaulton itspayment, if it is not financially healthy. However, if the fundinvests in


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government securities there is little risk of the governmentdefaultingon its payment.Equity funds

Equity funds (often described as growth funds) aims to providecapitalgrowth by investing in the shares of individual companies.Dependingon the funds objective, this could range from large blue-chiporganizations to small and new businesses. Any dividendsreceivedby the fund can be reinvested by the fund manager to providefurther

growth or paid to investors. Both risk and returns are high buttheycould be a good investment if you have a long-term perspectiveandcan stay invested for at least five years.62

Money market includes the following:-1. Treasury Bills2. Commercial papers3. Certificate of deposit4. Call or Notice money5. Any other instruments as may be permitted by RBI/SEBI fromtime to time1. Treasury bills:-Meaning: - Treasury Bills are money market instruments tofinance the short term requirements of the Government ofIndia.The Treasury Bills are commonly referred as T-bills. These arediscounted securities and thus are issued at a discount to facevalue. The T-bills are issued by the Government/Reserve Bankof India. The return to the investor is the difference betweenthematurity value and the issue price.Types of Treasury Bills: - There are different types of Treasurybills based on the maturity period and utility of the issuancelike,ad-hoc Treasury bills, 3months, 12months Treasury bills etc. InIndia, at present, the Treasury bills are the 91-days, and 364-

days Treasury bills.


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Benefits of investment in Treasury Bills:- No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument

Better returns especially in the short term Transparency Simplified statement High degree of tradability and active secondary marketfacilities meeting unplanned fund requirements.Features:- Form: - The Treasury bills are issued in a form of apromissory note in physical form or by credit to SubsidiaryGeneral Ledger (SGL) account or Gilt account in

dematerialized form.Minimum amount of bids for Treasury bills are to be madefor a minimum amount of Rs. 25000/- only and inmultiples thereof. Eligibility:- All entities registered in India like Banks,Financial institutions, Primary dealers, Firms, Companies,Corporate bodies, Partnership firms, Mutual funds,Foreign Institutional Investors, State Governments,Provident Funds are eligible to bid and purchase Treasury

bills. Repayment:- The Treasury bills are repaid at par on theexpiry of their tenor at the office of the Reserve Bank ofIndia Availability: - All the Treasury bills are highly liquidinstruments available both in the primary and secondarymarket. Day Count: - For Treasury bills the day count is taken as365 days.Primary MarketIn the primary market the Treasury Bills are issued by auctiontechnique.Types of auctions:-Multiple Price Based or French Auction: Under thismethod,all bids equal to or above the cut-off price are accepted.However, the bidder has to obtain the treasury bills at the pricequoted by him. This method is followed in the case of 364daystreasury bills and is valid only for competitive bidders.66


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Uniform Price Based or Dutch auction: Under thissystem, allthe bids equal to or above the cut-off price are accepted at thecut- off level. However, unlike the Multiple Price based method,

the bidder obtains the treasury bills at the cut-off price and notthe price quoted by him. This method is applicable in the caseof 91 days treasury bills only.Secondary Market

The major participants in the secondary market arescheduled banks, financial Institutions, Primary dealers,mutual funds, insurance companies and corporatetreasuries. Other entities like cooperative and regional ruralbanks, educational and religious trusts etc. have also begun

investing their short term funds in treasury bills.Advantages:- Market related yields Ideal matching for funds management particularly forshort term tenors of less than 15 days

Transparency in operations as the transactions would

be put through Reserve Bank of Indias SGL orClients Gilt account only.Two way quotes offered by primary dealers for

purchase and sale of treasury bills.Certainty in terms of availability, entry & exitTredepasury Bills - An Effective Cash ManagementProduct

Treasury Bills are very useful instruments to deploy shortterm surpluses depending upon the availability andrequirement. Even funds which are kept in current accountscan be deployed in treasury bills to maximize returns. Banksdo not pay any interest on fixed deposits of less than 15

days, or balances maintained in current accounts, whereastreasury bills can be purchased for any number of daysdepending on the requirements. This helps in deployment ofidle funds for very short periods as well. Further, since everyweek there is a 91 days treasury bills maturing and everyfortnight a 364 days treasury bills maturing, one canpurchase treasury bills of different maturities as perrequirements so as to match with the respective outflow of

funds. At times when the liquidity in the economy is tight,the returns on treasury bills are much higher as compared to


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bank deposits even for longer term. Besides, better yieldsand availability for very short tenors, another importantadvantage of treasury bills over bank deposits is that thesurplus cash can be invested depending upon the staggered

requirements.2. Commercial Papers:

Commercial papers are short term borrowings by Corporate,FIs, PDs from Money Market.Features:-Commercial Papers when issued in physical form

are negotiable by endorsement and delivery andhence highly flexible instruments.69

Issued subject to minimum of Rs 5 lakhs and in themultiples of Rs. 5 Lac thereafter Maturity is 15 days to 1 year Unsecured and backed by credit of the issuing company Can be issued with or without Backstop facility of Bank /FICommercial Papers can be issued in both physical and dematform.When issued in the physical form Commercial Papers are issued

inthe form of Usance Promissory Note. Commercial Papers areissuedin the form of discount to the face value.Commercial Papers are short-term unsecured borrowings byreputedcompanies that are financially strong and carry a high creditrating.These are sold directly by the issuers to the investors or else

placedby borrowers through agents / brokers etc. Companies use CPstosave interest costs.70

3. Certificate of Deposit:-CDs are short-term borrowings in the form of UsancePromissoryNotes having a maturity of not less than 15 days up to a

maximum ofone year.


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CD is subject to payment of Stamp Duty under Indian StampAct,1899 (Central Act).They are like bank term deposits accounts. Unlike traditional

timedeposits these are freely negotiable instruments and are oftenreferred to as Negotiable Certificate of Deposits.Features:- All scheduled banks (except RRBs and Co-operativebanks) are eligible to issue CDs. Issued to individuals, corporations, trusts, funds andassociations. They are issued at a discount rate freely determined by

the issuer and the market/investors. Freely transferable by endorsement and delivery. Atpresent CDs are issued in physical form (UPN).71

These are issued in denominations of Rs.5 Lacs and Rs. 1 Lacthereafter. Bank CDs have maturity up to one year. Minimumperiodfor a bank CD is fifteen days. Financial Institutions are allowedtoissue CDs for a period between 1 year and up to 3 years. CDsissuedby AIFI are also issued in physical form (in the form of Usancepromissory note) and is issued at a discount to the face value.4. Call or Notice money:-The call money market is an integral part of the Indian MoneyMarket,where the day-to-day surplus funds (mostly of banks) aretraded. Theloans are of short-term duration varying from 1 to 14 days. Themoney that is lent for one day in this market is known as "CallMoney", and if it exceeds one day (but less than 15 days) it isreferred to as "Notice Money". Term Money refers to Money lentfor15 days or more in the InterBank Market.Banks borrow in this money market for the following purpose: To fill the gaps or temporary mismatches in funds.72

To meet the CRR & SLR mandatory requirements as

stipulated by the Central bank. To meet sudden demand for funds arising out of large


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outflows.Thus call money usually serves the role of equilibrating theshort-termliquidity position of banks.

Call Money Market Participants: Those who can both borrow as well as lend in the market- RBI (through LAF) Banks, PDsThose who can only lend Financial institutions-LIC, UTI,GIC, IDBI, NABARD, ICICI and mutual funds etc.

rough work of project

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