shristy wealth management

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accumulated a significant amount of wealth for wealth management strategies to be effective

and is also one of the key areas that are growing at a tremendous rate.

Wealth management can be provided by large corporate entities, independent financial

advisers or multi-licensed portfolio managers whose services are designed to focus on high-

net worth customers. Large banks and large brokerage houses create segmentation marketing-

strategies to sell both proprietary and non-proprietary products and services to investors

designated as potential high net-worth customers.

Independent wealth managers use their experience in estate planning, risk management, and

their affiliations with tax and legal specialists, to manage the diverse holdings of high net

worth clients. Banks and brokerage firms use advisory talent pools to aggregate these same

services.

The events of 2008 in the financial markets caused investors to address concerns within their

portfolios. "The past 18 months have challenged traditional thinking about investing and asset

allocation, diversification, and correlation.

For individual investors, risk tolerances have been tested, investment assumptions have been

overturned, and fundamental truisms have been questioned."

For this reason wealth managers must be prepared to respond to a greater need by clients to

understand, access, and communicate with advisers regarding their current relationship as

well as the products and services that may satisfy future needs.

Moreover, advisors must have sufficient information, from objective sources, regarding all

products and services owned by their clients to answer inquiries regarding performance and

degree of risk-at the client, portfolio and individual security levels. "

This state of affairs poses a dilemma for wealth managers, who, for a generation, have

adhered to the core principles of asset allocation and earned their keep by preaching the

2
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The range of wealth management can be expressed by this exhibit chart.

STUDENT START OF CAREER CAREERESTABLISHED

RETIREMENT

Liquidity

Management

(Cash Mgt)

* Deposit based

comfort A/C

* Credit cards

* Comfort A/c with credit

limit

* Gold Card

* Premium A/c

* Platinum Card

* Premium A/c

* Platinum Card

* Overnight money A/c

* Money Market & Fixed Income Fund

* Near Money Market Fund

* ZINS Plus

* Overnight money A/c

* Money Market & Fixed Income Fund

* Near Money Market Fund

* ZINS Plus

* Special Investments

Wealth

Formation

(Savings

Plans)

* Top portfolio

* Flagship portfolio

* Titan portfolio

* Top portfolio


* Titan portfolio

* Capital formation benefit

funds

* Top portfolio


* Titan portfolio

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Wealth

Optimization

(Lump sum

Investment)

* Absolute Return Portfolio

* Holding and Private Equities

* Modular Wealth Management

* Individual Wealth Management* Premium Portfolio

* Titan Portfolio

SERVICES PROVIDED BY WEALTH MANAGEMENT

INSTITUTIONS

(1) Custodian Services:-

(A) Securities Safekeeping

(B) Income collection from Securities

(C) Settlement of Securities trades as directed

(D) Payment of fund when directed

(E) Timely settlement delivery

(2) Trust Services:-

(A) Charitable Trust

(B) Revocable Trust

(C) Irrevocable life Insurance Trust

(D) Special Need Trust

(E) Institutional Trust

(3) Retirement Plan Services:

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(A) IRA's Custodian Or Trustee

(B) Defined Benefit Plans

(C) Defined Contribution Plans

Advantages:

The following are the advantages of wealth management concept:

1) Helpful in Tax Planning: The wealth management professional always shows the good

path to the customers and provide the service of tax planning, how to minimize the tax and

save more money.

2) Helpful in Selection of Investment Strategy: Another advantage from the customer point

of view is with the help of WM Professional the customer can easily know the investment

strategy and analyze risk and return.

3) Helpful in Estate Management: With the help of wealth management professional we

can also manage our estate. Estate management is a task to provide objective administration

of our funds tailored to aim in responsible distribution and protection of our overall estate.

4) Helpful in Forward Looking: We can say planning, that recognizes as our estate grows

and changes occurs we require some team of professionals who help us in future planning.

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5) Helpful for Indian Economy: Banks which are engaged in business of WM earning

revenues from the foreign countries i.e. outsourcing for economy.

Limitations:

1) WM Reduces The Scope Of Management: Though we all know that management

has existence at all levels of life and society but the term wealth management only

related with the higher level means rich people, and is not having any plans and

provisions for poor and lower and middle level of society.

2) Chances of Fraud: Another demerit or limitation of the WM concept is it is not

showing the actual position. The customer doesn't know about the things going on

with using his wealth and there may be chances of forgery and fraud with customers.

3) Actual Picture VS Inflation:

What is the actual position of market we don't know,

because everything is done by some WM Professionals. So we cannot assume our position in

the market that also results in inflation because economy is unknown about the actual state.

There may be chance that the customers are in risk but they are showing the false return and

vice-versa.

WEALTH MANAGEMENT STRATEGIES FOR INVESTORS

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Start early: In order to reach pre-specified financial goals, investors will have to

determine the amounts they can save and the period over which these investments

should grow to enable them to meet the financial goal. Investors, who start early, can

have comfortable saving plans with lower outlays, and choose safer investment

options whose returns are low to moderate.

Investors, who begin late, will have to invest higher amounts, and choose higher

return-higher risk instruments, to reach the same financial goals.

Harness the power of compounding: Investors should understand the simple

principle of finance, that growth in investment can be rapid if investment proceeds are

re-invested. If interest incomes' are re-invested and allowed to earn at the same rates

for the investor, the returns are enhanced over a period of time. For example, Rs. 100

invested at 10% earns a simple interest of Rs. 10 per annum. If this amount is

withdrawn and spent, the investor receives only the original invested sum of Rs. 100,

at the end of any holding period.

On the other hand, if the interest is re-invested, the investment grows to Rs. 110 at the

end of first year, Rs. 121 at the end of the second year and so on.

At the end of 10 years, money thus re-invested would have grown to Rs. 259, or about

two-and a- half times the original investment. Investors should allow their

investments to compound, for maximum benefit.

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Have realistic expectations: Investors should set saving and investment goals that

are realistic to implement. If strategies are not pursued because they are not

'sustainable, investors may not be able to meet their financial goals.

Invest regularly: Investors may be able to pursue financial plans that enable them to

save smaller amounts regularly, than lump sum amounts on ad hoc basis.

CORE ELEMENTS OF WEALTH MANAGEMENT SERVICES

In most basic sense, wealth management services involve fiduciary responsibilities in

providing professional investment advice and investment management services to

Institutions, funds (Pension/mutual/Hedge), corporations, trusts as well as HNWIs. In the

present context of our discussion, we would keep our focus limited to HNWIs. Some of

analogous terms used for wealth management could be considered as Portfolio Management,

Investment Management and many times Fund Management or Asset Management.

Depending on the mandate of the services given to the Wealth Manager, wealth management

services could be packaged at various levels.

a) Advisory

Wealth mangers role is limited to the extent of providing guidance on investment financial

planning and tax advisory, based on client profile. Investment decisions are solely taken by

the client, as per his /her own judgment.

b) Investment processing (transaction oriented)

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Client engages wealth manager to execute specific transaction or set of transactions.

Investment planning, decision and further management remain vested with the client.

c) Custody, Safekeeping and Asset Servicing

Client is responsible for investment planning, decision and execution. Wealth manager is

entrusted with management, administration and oversight of investment process.

d) End-to-end Investment Lifecycle Management

Wealth manager owns the whole gamut of investment planning, decision, execution and

management, on behalf of the client. He is mandated to make financial planning, implement

investment decisions and manage the investment throughout its life.

WEALTH MANAGEMENT SERVICES COMPRISES OF FOLLOWING

KEY FUNCTION AREAS:

1) Financial Planning

Client Profiling

Clientprofiling takes in account multitude of behavioural, demographic and investment

characteristics of a client that would determine each clients wealth management

requirements. Some of key characteristics to be evaluated for defining clients investment

objective are:

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Current and future Income level

Family and life events

Risk appetite / tolerance

Taxability status

Investment horizon

Asset Preference /restriction

Cash flow expectations

Religious belief (non investment in sin sector like - alcohol, tobacco, gambling firms,

or compliant with Sharia laws)

Behavioural History (Pattern of past investment decisions)

Level of clients engagement in investment management (active / passive)

Present investment holding and asset mix

Investment Objective

Based on the client profile, investment expectations and financial goals of the client could be

clearly outlined. Defining investment objectives helps to identify investment options to be

considered for evaluation. Investment objective for most of the investors could be generally

considered amongst the following:

Current Income

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Growth (Capital Appreciation)

Tax Efficiency (Tax Harvesting)

Capital Preservation (often preferred by elderly people to make sure they dont outlive

their money.)

2) Portfolio Strategy Definition / Asset Allocation

Defining Portfolio Strategies and Portfolio Modeling

After establishing investment objectives, a broad framework for harnessing possible

investment opportunities is formulated.

This framework would factor for risk-return tradeoff of considered options, investment

horizon and provide a clear blueprint for investment direction. Investment strategy helps in

forming broad level envisioning of asset class (Securities, Forex, Commodity, Real State,

Reference and Indices, Art/Antique and Lifestyle Assets (Car, Boat, Aircraft), market,

geography, sector and industry. Each of these asset classes is to be comprehensively

evaluated for inclusion in portfolio model, in view of defined investment objectives.

While defining the strategy, consideration of client preference or avoidance for specific asset

class, risk tolerance, religious beliefs is the key element, which would come into picture.

Thus, for a client with a belief of avoidance of investment in sin industries (alcohol, tobacco,

gambling etc.) is to be duly taken care of. Likewise, for a client looking for Sharia compliant

investment, strategy formulation should consider investment options meeting with the client

expectations.

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Determination of Portfolio Constituents and Allocation of Assets

Guided with the investment strategy, constituents in portfolio model are determined, which

would directly and efficiently contribute towards clients investment objectives.

Thus, a broad level investment guidance of

investment in fixed income in emerging market would further determine classification

within Fixed Income such as Govt. or corporate bonds, fixed or variable rate bonds, Long or

short maturity bonds, Deep discounted or Par bonds, Asset backed or other debt variants.

Return profile, risk sensitivity and co-relation of constituents within portfolio model would

help to determine the size (weightage) of each individual constituent in the portfolio.

3) Strategy Implementation

Having decided the portfolio constituents and its composition, transactions to acquire specific

instruments and identified asset class is initiated. As acquisition cost would be having bearing

on overall performance of the portfolio, many times process of asset acquisition may be

spread over a period of time to take care of market movement and acquire the asset at

favourable price range.

4) Portfolio Management

Portfolio Administration

Portfolio Administration involves handling of investment processes and asset servicing.

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This would also require tax management, portfolio accounting, fee administration, client

reporting, document management and general administration relating with portfolio and

client.

This function would involve back office administration and custodial services to manage

transaction processes (trading and settlement) interfacing with brokers/dealers/agents, Fund

managers, Custodians, Cash Agent and many other market intermediaries.

Performance Evaluation and Analytics

Performance evaluation of the portfolio is an ongoing process. Portfolio return is

continuously monitored and analyzed with respect to defined portfolio objectives. Analysis

dimension could be varied simple and complex. These may include - absolute return,

relative return (in comparison to chosen benchmark), trend, pattern, cost impact, tax impact,

concentration, lost opportunity and other form of sensitivity and what-if analysis.

Any deviation of portfolio performance observed during performance evaluation would lead

to strategy review and any possible alignment of portfolio strategy.

5) Strategy Review and Alignment

Recalibration of Portfolio Strategy

Based on performance evaluation and future outlook of the investment, portfolio strategy is

evaluated on periodic basis. To keep it aligned with the defined investment objectives,

portfolio strategy is suitably re-calibrated from time to time.

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Many times, review of portfolio strategy would be necessitated due to change in client profile

or expectations.

Rebalancing, Reallocation and Divestment of Assets

Any re-calibration of strategy and consequent change in portfolio model would require

rebalancing of the assets in portfolio. This would be achieved through rebalancing the asset

(divesting over-allocated part and acquiring under allocated), relocation (from one sector the

other or from one instrument to other instrument in the same class) or complete divestment.

KEY CHALLENGE AREA

Wealth management firms face many challenges in formulating winning services offering

meeting the client needs. Some of key challenges faced by wealth management firms are:

1. Highly Personalized and Customized Services

2. Personal relationship driving the business

3. Evolving Client Profile

4. Client Involvement Level

5. Passion Investment (Philanthropy and Social Responsibility)

6. Limited Leveraging Capabilities of Technology(as an enabler)

7. Technical Architecture and Technology Investment

8. Intricate Knowledge of Cross-functional Domain

CONCEPT OF ASSET CLASSES

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Asset Mix

Asset mix is the allocation of a portfolio between asset classes, it balances return and risk.

Returns are a combination of the income from an investment and the price appreciation over

the period. Risk is usually proxied by the standard deviation of returns, how much the

return changes about the long-term average.

List of Different Asset Class:

1) FIXED DEPOSITS

FDs, are the most popular today. With FDs you deposit a lump sum of money for a fixed

period ranging from a few weeks to a few years and earn a pre-determined rate of interest.

FDs are offered by both banks and companies though putting your money with the latter is

generally considered riskier.

Merits and Demerits

The main advantage is that FDs from reputed banks are a very safe investment because such

banks are carefully regulated by the Reserve Bank of India, RBI, the banking regulator in

India. Note that company FDs isnt as safe as bank FDs because if the company goes

bankrupt you may lose your money. Make sure you check the credit rating of a company

before investing in its FDs. You should be especially wary of companies which offer interest

rates significantly higher than the average to attract your money. The other advantage of FDs

is that you have the option of receiving regular income through the interest payments that are

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made every month or quarter. This option is especially useful for retirees. On the flip side, a

fixed deposit wont give you the same returns that you may get in the stock markets. For

instance a stock-portfolio may rise 20-30 per cent in a good year whereas a fixed deposit

typically earns only 7- 10 per cent. A fixed deposit also doesnt offer protection against

inflation.

If inflation rises steeply during the maturity of the FD your inflation adjusted return will fall.

The rate of interest on FDs varies according to the maturity with longer deposits generally

earning a higher interest rate. Interest paid on a fixed

deposit is paid either monthly or quarterly according to the investors choice. So if you invest

Rs 3 lakhs in a one year fixed deposit which pays 8 per cent you can earn Rs 2,000 of interest

every month or Rs 6,000 of interest every quarter.

Interest rates on FDs

The rate of interest on FDs varies according to the maturity with longer deposits generally

earning a higher interest rate. Here are the interest rates offered by ICICI Bank on their FDs.

Note that FDs vary quite a bit from bank to bank so you should search around before

investing. Interest paid on a fixed deposit is paid either monthly or quarterly according to the

investors choice. So if you invest Rs 3 lakhs in a one year fixed deposit which pays 8 per

cent you can earn Rs 2,000 of interest every month or Rs 6,000 of interest every quarter.

Effective Return

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Before you invest in FDs you need to understand the concept of effective return which is

higher than the rate of interest on the FD. Effective return is relevant if you choose to reinvest

your interest every year which means that you will be earning compound.

2) MUTUAL FUND

A mutual fund is a professionally managed firm of collective investments that collects money

from many investors and puts it in 60 stocks, bonds, short-term money market instruments,

and/or other securities. The fund manager, also known as portfolio manager, invests and

trades the funds underlying securities, realizing capital gains or losses and passing any

proceeds to the individual investors. Currently, the worldwide value of all mutual funds totals

more than $26 trillion. Since 1940, there have been three basic types of investment

companies in the United States: open-end funds, also known in the US as mutual funds; unit

investment trusts (UITs); and closed-end funds. Similar funds also operate in Canada.

However, in the rest of the world, mutual fund is used as a generic term for various types of

collective investment vehicles, such as unit trusts, open-ended investment companies

(OEICs), unitized insurance funds, and undertakings for collective investments in transferable

securities

(UCITS).

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Characteristics Of Mutual Fund

A mutual fund actually belongs to the investors who have pooled their funds. The

ownership of the mutual fund is in the hands of the investors.

A mutual fund is managed by well-qualified and experienced investment professionals

and other service providers, who earn a fee for their services, from the fund.

The pool of funds is invested in a portfolio of marketable investments. The value of the

portfolio is updated every day.

The investors share in the fund is denominated by units. The value of the units changes

with change in the portfolios value every day. The value of one unit of investment is

called as the Net Asset Value or NAV.

The investments portfolio of the mutual fund is created according to the stated investment

objectives of the fund.

Advantages Of Mutual Funds To Investors

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Portfolio diversification: mutual fund invests money in a variety of instruments giving

rise to a diversified portfolio and hence a choice

Professional management

Reduction in risk through diversification

Reduction of transaction costs

Liquidity

Convenience and flexibility

Mutual Funds Help In The Financial Planning Objectives Of Investors

Though the categories of products offered can be classified under about a dozen generic

heads, competition in the industry has lead to innovative alterations to standard products. It is

also possible for investors to decide the manner in which their returns would be distributed,

and choose from daily, monthly, quarterly, or annual payouts; or re-investment of dividends

into the mutual fund product itself; or a growth option that would seek the growth in

investment over distribution of income.

The most important benefit of product choice is that it enables investors to choose options

that suit their return requirements and risk appetite. Investors can combine the options to

arrive at their own mutual fund portfolios that fit with their financial planning objectives.

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Mutual Fund Reduce Risks For The Investors Through Diversification

Mutual funds invest in a portfolio of securities. This means that all funds are not invested in

the same investment avenue. It is well known that risk and returns of various investment

options do not move uniformly or in the sympathy with one another.

If a Pharma company share is going down, an InfoTech companys shares could be moving

up; if the equity market is moving down, the debt market s may b moving up.

Therefore, holding a portfolio that is diversified across investment avenues is a wise way to

manage risk. When such a portfolio is liquid and marked to market, it enables investors to

continuously evaluate the portfolio and manage their risks efficiently.

Mutual Funds Reduce Transaction Costs

Mutual funds provide the investor the benefit of economies of scale, by virtue of their size.

Though the individual investors contribution may be small, the mutual fund itself is large

enough to be able to reduce costs in the transactions. These benefits are passed to the

investors.

Liquidity Features Of A Mutual Fund Investment

Most of the funds being sold today are open-ended. That is, investors can sell their existing

units, or buy new units, at any point of time, at prices that are related to the NAV of the fund

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Types of mutual funds

a) Open-end fund

The term mutual fund is the common name for what is classified as an open-end investment

company by the SEC.

Being open-ended means that, at the end of every day, the fund issues new shares to investors

and buys back shares from investors wishing to leave the fund.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any

corporation or trust will be classified by the SEC as an investment company if it issues

securities and primarily invest in non-government securities.

An investment company will be classified by the SEC as an open-end investment company if

they do not issue undivided interests in specified securities (the defining characteristic of unit

investment trusts or UITs) and if they issue redeemable securities.

Registered investment companies that are not UITs or open-end investment companies are

closed-end funds.

Neither UITs nor closed-end funds are mutual funds (as that term is used in the US).

b) Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an

open-end investment company.

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ETFs combine characteristics of both mutual funds and closed-end funds.

ETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at

prices generally approximating the ETFs net asset value.

Most ETFs are index funds and track stock market indexes. Shares are issued or redeemed by

institutional investors in large blocks (typically of 50,000).

Most investors purchase and sell shares through brokers in market transactions. Because the

institutional investors normally purchase and redeem in kind transactions, ETFs are more

efficient than traditional mutual funds (which are continuously issuing and redeeming

securities and, to effect such transactions, continually buying and selling securities and

maintaining liquidity positions) and therefore tend to have lower expenses.

c) Equity fund

Equity funds, which consist mainly of stock investments, are the most common type of

mutual fund.

Equity funds hold 50 percent of all amounts invested in mutual funds in the United States.

Often equity funds focus investments on particular strategies and certain types of issuers.

d) Bond funds

Bond funds account for 18% of mutual fund asset. Types of bond funds include term funds,

which have a fixed set of time (short-, medium-, or long-term) before they mature.

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Municipal bond funds generally have lower returns, but have tax advantages and lower risk.

High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With

the potential for high yield, these bonds also come with greater risk.

e) Money market funds

Money market funds hold 26% of mutual fund assets in the United States. Money market

funds entail the least risk, as Well as lower rates of return. Unlike certificates of deposit

(CDs), money market shares are liquid and redeemable at any time. The interest rate quoted

by money market funds is known as the 7 Day SEC Yield.

f) Funds of funds

Are mutual funds which invest in other underlying mutual funds (i.e., they are funds

comprised of other funds). The funds at the underlying level are typically

funds which an investor can invest in individually. A fund of funds will typically charge a

management fee which is smaller than that of a normal fund

because it is considered a fee charged for asset allocation services.

The fees charged at the underlying fund level do not pass through the statement of operations,

but are usually disclosed in the funds annual report, prospectus, or statement of additional

information.

The fund should be evaluated on the combination of the fund-level expenses and underlying

fund expenses, as these both reduce the return to the investor. Most FoFs invest in affiliated

funds (i.e., mutual funds managed by the same advisor), although some invest in funds

managed by other (unaffiliated) advisors.

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The cost associated with investing in an unaffiliated underlying fund is most often higher

than investing in an affiliated underlying because of the investment management research

involved in investing in fund advised by a different advisor.

Recently, FoFs have been classified into those that are actively managed (in which the

investment advisor reallocates frequently among the underlying funds in order to adjust to

changing market conditions) and those that are passively managed (the investment advisor

allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for

investors who are unable to or unwilling to determine their own asset allocation model. Fund

companies such as TIAA-CREF, American Century Investments, Vanguard, and Fidelity

have also entered this market to provide investors with these options and take the guess

work out of selecting funds.

The allocation mixes usually vary by the time the investor would like to retire: 2020, 2030,

2050, etc. The more distant the target retirement date, the more aggressive the asset mix.

g) Hedge funds

Hedge funds in the United States are pooled investment funds with loose SEC regulation and

should not be confused with mutual funds.

Some hedge fund managers are required to register with SEC as investment advisers under

the Investment Advisers Act.

The Act does not require an adviser to follow or avoid any particular investment strategies,

nor does it require or prohibit specific investments.

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Hedge funds typically charge a management fee of 1% or more, plus a performance fee of

20% of the hedge funds profits.

There may be a lock-up period, during which an investor cannot cash in shares.

A variation of the hedge strategy is the 130-30 fund for individual investors.

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3) EQUITY INVESTMENT

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Scheme Name Nature 1 M % 6 M % 1 Y % 3 Y %

DSP BlackRock Micro Cap Equity -8.74 17.36 51.02 -

ICICI Prudential SMART F Debt - - 21.34 -

HDFC Balanced Fund - Growth Balanced -3.36 17.34 29.00 13.53

HDFC Multiple Yield Fund MIP -0.59 5.94 11.31 10.20

Escorts Liquid Plan - Growth Liquid 0.65 3.35 5.51 7.59

Quantum Tax Saving Fund ELSS -2.43 23.73 30.31 -

Kotak PSU Bank ETF ETF -11.25 35.03 34.68 16.60

Baroda Pioneer Gilt Fund Gilt 0.48 3.36 16.69 6.71

HDFC Index Fund - Sensex Index -4.82 18.18 18.30 4.65
http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=DS121http://www.mutualfundsindia.com/top_detailed_view1.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI772http://www.mutualfundsindia.com/top_detailed_view4.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD002http://www.mutualfundsindia.com/top_detailed_view3.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD067http://www.mutualfundsindia.com/top_detailed_view7.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=EM016http://www.mutualfundsindia.com/top_detailed_view8.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=QU009http://www.mutualfundsindia.com/top_detailed_view2.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=KM251http://www.mutualfundsindia.com/top_detailed_view11.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BB007http://www.mutualfundsindia.com/top_detailed_view5.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD029http://www.mutualfundsindia.com/top_detailed_view6.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=DS121http://www.mutualfundsindia.com/top_detailed_view1.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI772http://www.mutualfundsindia.com/top_detailed_view4.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD002http://www.mutualfundsindia.com/top_detailed_view3.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD067http://www.mutualfundsindia.com/top_detailed_view7.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=EM016http://www.mutualfundsindia.com/top_detailed_view8.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=QU009http://www.mutualfundsindia.com/top_detailed_view2.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=KM251http://www.mutualfundsindia.com/top_detailed_view11.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BB007http://www.mutualfundsindia.com/top_detailed_view5.asp?perform_on=1yrhttp://www.mutualfundsindia.com/fundfactsheet1.asp?sname=HD029http://www.mutualfundsindia.com/top_detailed_view6.asp?perform_on=1yr


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Generally refers to the buying and holding of shares of stock on a stock market by individuals

and funds in anticipation of income from dividends and capital gain as the value of the stock

rises.

It also sometimes refers to the acquisition of equity (ownership) participation in a private

(unlisted) company or a start-up (a company being created or newly created).

When the investment is in infant companies, it is referred to as venture capital investing and

is generally understood to be higher risk than investment in listed going-concern situations.

Dividends are the only cash payments regularly made by corporations to their stockholders.

They are decided upon the declared by the board of directors and can range from zero to

virtually any amount the corporation can afford to pay (typically, up to 100 percent of present

and past net earnings). Therefore, common stocks involve substantial risk because the

dividend is at the companys discretion and stock prices typically fluctuate sharply, which

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means that the value of investors claims may rise and fall rapidly over relatively short

periods of time.

The following two dividend terms are important:

The dividend yield is the income component of a stocks return stated on a percentage basis.

It is one of the two components of total return. Dividend yield typically is calculated as the

most recent 12-month dividend divided by the current market price.

The payout ratio is the ratio of dividends to earnings. It indicates the percentage of a firms

earnings paid out in cash to its stockholders. The complement of the payout ratio, or (1.0

payout ratio), is the retention ratio, and it indicates the percentage of a firms current earnings

retained by it for reinvestment purposes. Dividends are declared and paid quarterly.

Stock dividends and stock splits attract considerable investor attention. Astock dividendis a

payment by the corporation in shares of stock instead of cash.

Astock splitinvolves the issuance of a larger number of shares in proportion to the existing

shares outstanding. With a stock split, the book value and par value of the equity are changed;

for example, each would be cut in half with a 2-for-1 split. However, on a practical basis,

there is little difference between a stock dividend and a stock split.

Example: A 5% stock dividend would entitle an owner of 100 shares of a particular stock to

an additional five shares. A 2-for-1 stock split would double the number of shares of the

stock outstanding, double an individual owners number of shares (e.g., from 100 shares to

200 shares), and cut the price in half at the time of the split.

The important question to investors is the value of the distribution, whether a dividend or a

split. It is clear that the recipient has more shares (i.e., more pieces of paper), but has

anything of real value been received?

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Other things being equal, these additional shares do not represent additional value because

proportional ownership has not changes. Quite simply, the pieces of paper, stock certificates,

have been repackaged. For example, if you own 1000 shares of a corporation that has

100,000 shares of stock outstanding, your proportional ownership is 1 percent; with a 2-for-1

split, your proportional ownership is still 1 percent, because you now own 2000 shares out of

a total of 200,000 shares outstanding. If you were to sell y our newly distributed shares,

however, your proportional ownership would be cut in half.

Capitalization

Stocks are sometimes categorized by their size. Market capitalization refers to a companys

size and is derived by multiplying the number of shares outstanding by the current market

price of the shares. This is a very important concept.

Stock A may be trading at Rs.22 per share and stock B trading at Rs.20 per share. One cannot

assume that company A is therefore worth more than company B. Company A may have

one million shares outstanding and company B could have eight million shares outstanding,

making the total value of all its stock (market capitalization) much greater than that of

company A.

Generally, stocks are considered to fall into one of the following three categories:

Small Cap Stocks with a market capitalization of less than $750 million.

Historically these have been among the best and worst performers within the stock

market because they are usually younger, less established companies.

They obviously carry more investment risk because of that.

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Mid Cap - Stocks with market capitalization of from $750 million to $3 or $4 billion.

While the standard deviation (risk measurement) is higher for these stocks than the

large caps, it is considerably less than small caps. Over one thousand companies fit

this category and some are household names.

Large Cap - Stocks with market capitalization over $4 billion. Many of these

companies are among the largest in their respective field and are household names.

This category of stocks tends to be the most widely covered by research analysts and

institutions.

Direct holdings and pooled funds

The equities held by private individuals are often held via mutual funds or other forms of

pooled investment vehicle, many of which have quoted prices that are listed in financial

newspapers or magazines; the mutual funds are typically managed by prominent fund

management firms (e.g. Fidelity Investments or The Vanguard Group).

Such holdings allow individual investors to obtain the diversification of the fund(s) and to

obtain the skill of the professional fund managers in charge of the fund(s).

An alternative, usually employed by large private investors and pension funds, is to hold

shares directly;in the institutional environment many clients that own portfolios have what

are called segregated funds as opposed to, or in addition to, the pooled e.g. mutual fund

alternative

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4) COMMODITIES MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and

sold in standardized contracts.

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs,

rare seashells, or other items as commodity money, people have sought ways to standardize

and trade contracts in the delivery of such items, to render trade itself more smooth and

predictable.

Commodity money and commodity markets in a crude early form are believed to have

originated in Sumerwhere small baked clay tokens in the shape of sheep or goats were used

in trade. Sealed in clay vessels with a certain number of such tokens, with that number

written on the outside, they represented a promise to deliver that number. This made them a

form ofcommodity money - more than an I.O.U. but less than a guarantee by a nation-state

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or bank. However, they were also known to contain promises of time and date of delivery -

this made them like a modern futures contract. Regardless of the details, it was only possible

to verify the number of tokens inside by shaking the vessel or by breaking it, at which point

the number or terms written on the outside became subject to doubt.

Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented

the first system of commodity accounting.

However, the commodity status of living things is always subject to doubt - it was hard to

validate the health or existence of sheep or goats. Excuses for non-delivery were not

unknown, and there are recovered Sumerian letters that complain of sickly goats, sheep that

had already been fleeced, etc.

If a seller's reputation was good, individual backers or bankers could decide to take the risk

ofclearing a trade. The observation that trust is always required between market participants

later led to credit money. But until relatively modern times, communication and credit were

primitive

Classical civilizations built complex global markets trading gold or silver for spices, cloth,

wood and weapons, most of which had standards of quality and timeliness. Considering the

many hazards of climate, piracy, theft and abuse ofmilitary fiatby rulers of kingdoms along

the trade routes, it was a major focus of these civilizations to keep markets open and trading

in these scarce commodities. Reputation and clearing became central concerns, and the states

which could handle them most effectively became very powerful empires, trusted by many

peoples to manage and mediate trade and commerce.

The trading of commodities consists of direct physical trading and derivatives trading. The

commodities markets have seen an upturn in the volume of trading in recent years.

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In the five years up to 2007, the value of global physical exports of commodities increased by

17% while the notional value outstanding of commodity OTC (over the counter) derivatives

increased more than 500% and commodity derivative trading on exchanges more than 200%.

The notional value outstanding of banks OTC commodities derivatives contracts increased

27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold and

silver. Overall, precious metals accounted for 8% of OTC commodities derivatives trading in

2007, down from their 55% share a decade earlier as trading in energy derivatives rose.

Global physical and derivative trading of commodities on exchanges increased more than a

third in 2007 to reach 1,684 million contracts. Agricultural contracts trading grew by 32% in

2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with

higher volume in New York being partially offset by declining volume in Tokyo. Over 40%

of commodities trading on exchanges was conducted on US exchanges and a quarter in

China. Trading on exchanges in China and India has gained in importance in recent years due

to their emergence as significant commodities consumers and producers.

The 2008 global boom in commodity prices - for everything from coal to corn was fuelled

by heated demand from the likes of China and India, plus unbridled speculation in forward

markets.

That bubble popped in the closing months of 2008 across the board. As a result, farmers are

expected to face a sharp drop in crop prices, after years of record revenue. Other

commodities, such as steel, are also expected to tumble due to lower demand.

This will be a rare positive for manufacturing industries, which will experience a drop in

some input costs, partly offsetting the decline in downstream demand.

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Spot Trading

Spot trading is any transaction where delivery either takes place immediately, or with a

minimum lag between the trade and delivery due to technical constraints. Spot trading

normally involves visual inspection of the commodity or a sample of the commodity, and is

carried out in markets such as wholesale markets. Commodity markets, on the other hand,

require the existence of agreed standards so that trades can be made without visual

inspection.

Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future

date a given quantity of a commodity for a price defined today. The fixed price today is

known as the forward price.

Futures contracts

A futures contract has the same general features as a forward contract

but is transacted through a futures exchange.

Commodity and futures contracts are based on whats termed forward contracts. Early on

these forward contracts agreements to buy now, pay and deliver later were used as a

way of getting products from producer to the consumer. These typically were only for food

and agricultural products. Forward contracts have evolved and have been standardized into

what we know today as futures contracts.

Although more complex today, early forward contracts for example, were used for rice in

seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the

1840s, with the appearance of the railroads.

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Chicago, being centrally located, emerged as the hub between Midwestern farmers and

producers and the east coast consumer population centers.

In essence, a futures contract is a standardized forward contract in which the buyer and the

seller accept the terms in regards to product, grade, quantity and location and are only free to

negotiate the price.

Hedging

Hedging, a common (and sometimes mandatory practice of farming cooperatives, insures

against a poor harvest by purchasing futures contracts in the same commodity.

If the cooperative has significantly less of its product to sell due to weather or insects, it

makes up for that loss with a profit on the markets, since the overall supply of the crop is

short everywhere that suffered the same conditions.

Whole developing nations may be especially vulnerable, and even their currency tends to be

tied to the price of those particular commodity items until it manages to be a fully developed

nation.

For example, one could see the nominally fiat money of Cuba as being tied to sugarprices,

since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba

itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a

stable quality of life for its citizens.

Delivery and condition guarantees

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In addition, delivery day, method of settlement and delivery point must all be specified.

Typically, trading must end two (or more) business days prior to the delivery day, so that the

routing of the shipment can be finalized via ship or rail, and payment can be settled when the

contract arrives at any delivery point.

Standardization

U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of

GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced

in the U.S.A. (Non-screened, stored in silo)," and of

deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow

soybeans of Iowa, Illinois and Wisconsin origin produced in the U.S.A. (Non-screened,

stored in silo)." Note the distinction between states, and the need to clearly mention their

status as GMO (Genetically Modified Organism) which makes them unacceptable to

most organic food buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley,pork

bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock,

meats, poultry, eggs, or any other commodity which is so traded.

5) ART FUND

Wealth management now includes art. With prices of paintings rising 10 times in the last two

years, three new financial entities have launched art advisory services as part of Wealth

management services. While Citibank has been providing art advisory services like art

insurance, art storage and using art as a

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tradable collateral for some time, the recent surge in prices has driven Yes Bank, ABN Amro

and Dawnay Day to start this service. The works of M.F. Hussain, Jatin Das or Anjolie Ela

Menon are sought after by art lovers not only for their aesthetic value but also as an asset. Art

galleries are involved in art valuations, i.e. mapping the pricing history of an artist or research

on art. Art is now being treated as an investment and high net worth individuals are

prompting banks to look at alternative asset classes, such as art or real estate, for investment

as a part of Wealth management products.

Features of Art funds

The general features of art funds are:

High minimum investment - about Rs. 10 lakhs

Have a lock-in period of 3 years

Investors get units allotted for their investments

Investor does not get to see the art work

The art buyer is no more only from the elite crowd or belonging to an industrialist family.

Entrepreneurs as well as the educated class are entering the art market like never before.

Moreover, the market for Indian art is also gaining popularity on foreign shores.

Indian art is seeing unprecedented appreciation over the years. There is excess liquidity in the

economy which is funding the surge in the art market. There is an expanding pool of new

artists and the potential of appreciation in the prices of their work is also immense. At the

same time, there is greater liquidity for the senior artists.

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The art market is on its way to the next momentum by promoting more credibility,

transparency, and increased information availability.

The Indian art industry would be taken to the next level when a sound financial infrastructure,

support of banks and insurance companies, and the development of the market are backed by

a mature knowledge base.

Tie-ups with galleries

In the art segment, tie-up with art galleries, Contemporary Indian Art will be at focus. The

hiring specialists in the field for advisory, High Networth Individuals in India are

increasingly looking at contemporary Indian art as a good investment.

With the advent of private art funds and galleries, art is becoming an emerging asset class.

ABN Amro advises clients on investment in art. However, the execution depends on the

client in conjunction with experts in the field.

It is difficult to generalise. The majority of clients begin with an investment of around 4-5 per

cent of their portfolio, targets customers with Rs 2-2.5 crore threshold for investment.

According to the banks, some clients also invest in these asset classes to minimise risk

because they are looking at protecting their capital. Investment in these asset classes requires

a review of clients age, personal ability to take risk and most importantly, clients interest.

What percentage of assets would be allocated to alternative assets would depend on the

clients interest and ability to take risk.

6) INSURANCE-BASED INVESTMENTS

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The modern concept of insurance practices in India started during the British rule in 1818

when Oriental Life Insurance Company was established in Calcutta. India became

independent from British rule in 1946, and by 1956 the insurance sector was nationalized,

with the Life Insurance Corporation of India created by combining almost 245 private life

insurance companies; 107 private non-life companies combined in 1973 to form the General

Insurance Corporation.

But since the very purpose of nationalizing the insurance sector got sidelined due to the

monopolistic power it enjoyed, coupled with the bureaucratic mindset of LIC and GIC,

insurance again was opened to private players in 1999. During 2000-2006, almost 15 life and

13 nonlife private insurance players (mostly joint ventures between Indian and foreign

players) started operations in India, indicating the willingness of foreign institutional

investors to enter the Indian insurance sector.

But through all these major changes the actual impact was felt only in major urban areas,

while the vast majority of the rural population was excluded from the insurance sector.

Around the world, scholars and financial experts believe that in the next 5 to 10 years, India

and China are going to be the targets for insurance companies.

So far, most of the insurance companies in India are not actively tapping the huge potential

of the rural markets. Unless the rural markets are given priority consideration, all predictions

about future insurance industry potential in India are going to be distant dreams. The present

insurance business is not even able to penetrate 20% - 30% of the total population of 1.095

billion, and the projected population figure by 2025 will be approximately 1.501 billion.

The order of the day will be to refocus on micro insurance in India to capture the huge

potential of rural customers Unit Linked Insurance Plan (ULIP) provides for life insurance

where the policy value at any time varies according to the value of the underlying assets at

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the time. ULIP is life insurance solution that provides for the benefits of protection and

flexibility in investment.

The investment is denoted as units and is represented by the value that it has attained called

as Net Asset Value (NAV). ULIP came into play in the 1960s and is popular in many

countries in the world. The reason that is attributed to the wide spread popularity of ULIP is

because of the transparency and the flexibility which it offers.

As times progress the plans they are also successfully mapped along with life insurance need

to retirement planning. In todays times, ULIP provides solutions for insurance planning,

financial needs, financial planning for childrens marriage planning also can be done with

this.

Types Of Insurance

Auto insurance

Home insurance

Health insurance

Accident, sickness and unemployment insurance

Property Insurance

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Characteristics of Annuities :

Annuities are specifically designed to address one of the biggest concerns of today's investors

- the possibility that he and his spouse could outlive their long-term savings.

This may be an even more significant concern to women, who statistically are more likely to

outlive their spouses.

An annuity is a contract generally issued by an insurance company. Deferred annuities

enables the investor to set aside money and have it grow on a tax-deferred basis for the future

use.

When the person is ready to retire, he can withdraw money as needed, or can turn the value of

his annuity into a regular income stream that is guaranteed bythe issuing insurance company

to last the rest of your life, regardless of how long one lives.

The period during which the investors purchases to a deferred annuity grow on a tax-

deferred basis is generally referred to as the accumulation phase. The period during which he

receives a regular income stream - after he annuitizes his contract - is the payout (or income)

phase. At this point, the investor will begin to receive income payments comprised of the

principal he has paid in, plus any earnings that he has accumulated over the years.

As the investor receives payments, he pays income tax on the portion of each payment that

represents accumulated earnings, because these earnings have not yet been taxed.

Most people annuitize in their retirement years, when they are likely to be in a lower tax

bracket.

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Variable Annuities

Offer a number of important advantages over fixed annuities:

The ability to place money in a family of professionally managed investment options - These

can range from conservative money market investment options to more aggressive stock-

based options.

Some variable annuities may even offer an asset allocation option that provides in one

portfolio strategic diversification among stocks, bonds, and money market instruments.

The privilege to make tax-free transfers among portfolios - In the event that the investors

financial situation or market conditions change, he can move assets from one portfolio to

another without having to worry about paying taxes on any capital gains or income earned.

The potential for higher returns and better protection against inflation over the long term than

is offered by a fixed annuity- it is important to note here that because there is no guaranteed

minimum rate, the value of investors variable annuity could decrease, and the return will

fluctuate just as the value of the underlying mutual fund investment will.

Deferred annuities can be a valuable way to save for a variety of long-term goals.

Any earnings from annuity grow on a tax-deferred basis, offering two advantages.

First, money can grow faster than it can in a taxable investment with a similar rate of return,

because earnings that would have been lost to taxes remain in the annuity to generate

additional earnings.

Second, if the investor waits until retirement to receive the annuity income, he may be in a

lower tax bracket, adding to the value of the income he receives.

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Keep in mind that annuities are designed as long-term savings vehicles. Withdrawing

earnings from the annuity prior to age 59 (other than in the form of lifetime income), the

IRS will generally impose a 10% early withdrawal penalty and the earnings will be taxed at

the investors current tax rate.

Growth Of Insurance Industry In India

A history of almost two centuries and an important change in the sector after the gates of the

market were thrown open for the private companies marks the scene of India Insurance

industry. An open competitive market then a nationalized oneand again a liberalized market

the industry has witnessed many such developments. Public and private companies along

with foreign companies in both the sectors of life and general aided to an immense growth of

the industry. Generally focusing in the life insurance sector, the industry saw a change

recently, when private companies came up with hosts of other forms of insurance like,

automobile, health, property, and many other classes falling under the general category. Life

insurance covers the insurer against death or disability. Non life insurance or general

insurance covers the insurer against any risk of theft, natural disaster, accidents and many

more.

New Comer poses threat: With more companies coming up everyday with the growing

demand of the industry the markets very competitive. Until and unless the existing companies

makes a mark and create their very own brand name it would be quite tough to sustain their

position in the market.

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There is also a probability of big companies taking over the new emerging companies.

Supplier Power: The people providing the capital don't act as big terror as opportunity

always lies in the big hands and they can any day tempt good insurer from small companies

to their own company.

Buyer Power: Individual never stands a chance in front of big corporate sectors as they

dominate the insurance industries with high potential of negotiation power.

Presence of substitutes: The insurance industry is full of replacement option and the large

insurance companies offers the same service as of others be it in any sector of home,

commercial, auto, health or life.

7) REAL ESTATE FUND

India Real Estate Fund is a significant component of the Indian realty market flooded with

Indian and foreign financial institutions. The growing increase in the industrial, commercial

and residential projects have boosted the real estate market in India. This has thrown open

unlimited scope for the incoming of the India Real Estate Funds. The profits have encouraged

financial assistance from not only domestic funds but also lured many foreign investors to

participate in the India Real Estate Fund.

The cooperating assistance from the government has further encouraged liquidity flow into

the India real estate market sector. Theforeign contributions in the India Real Estate Fund

have been witnessing a steady rise of 40%-45% per year. The domestic financial institutions

have also build up their

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investments like their foreign counterparts. This combined participations from both along

with contributions of the corporate houses has accelerated the growth of India Real Estate

Fund.

Leading India Real Estate Fund:

Some of the leading India Real Estate Fund are:

1) HDFC Property Fund- HDFC India Real Estate Fund (HI-REF), the first scheme HDFC

Property Fund, invest in all the stages of the real estate projects.

2)DHFL Venture Capital Fund- DHFL Venture Capital Fund, promoted by Dewan

Housing, has a focus on developing properties rather than investing in real estate.

3)Kshitij Venture Capital Fund- Kshitij Venture Capital Fund, a group venture of

Pantaloon Retail India Ltd., will be deploying funds exclusively in developing malls specially

in western and southern India.

4) India Advantage Fund (ICICI)

5) Kotak Mahindra Realty Fund

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India Real Estate Mutual Fund:

The further involvement of the real estate mutual funds have improved the quality of the

construction practices.

The 10th Five-Year Plan has proposed that Securities and Exchange Board of India would

regulate the India real estate mutual funds.

Real Estate Investment Trusts:

The primary difference between Real Estate Investment Trusts and a mutual fund is that

investments made in the former are traded in real estate stocks and not invested in company

stocks moreover they provides a heavier liquidity than the mutual funds.

India Real Estate Foreign Funds-

The significant international investments in the India Real Estate Fund are like:

1) Warburg Pincus

2) Blackstone Group

3) Broadstreet

4) Morgan Stanley Real Estate Fund

5) Columbia Endowment Fund

6) Hines

7) Tishman Speyer

8) Sam Zells Equity International

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8) STRUCTURED PRODUCT

A structured product is generally a pre-packaged investment strategy which is based on

derivatives, such as a single security, a basket of securities, options, indices, commodities,

debt issuances and/or foreign currencies, and to a lesser extent, swaps.

The variety of products just described is demonstrative of the fact that there is no single,

uniform definition of a structured product.

A feature of some structured products is a principal guarantee function which offers

protection of principal if held to maturity.

For example, an investor invests 100 dollars, the issuer simply invests in a risk free bond

which has sufficient interest to grow to 100 after the 5 year period. This bond might cost 80

dollars today and after 5 years it will grow to 100 dollars.

With the leftover funds the issuer purchases the options and swaps needed to perform

whatever the investment strategy is. Theoretically an investor can just do this themselves, but

the costs and transaction volume requirements of many options and swaps are beyond many

individual investors.

As such, structured products were created to meet specific needs that cannot be met from the

standardized financial instruments available in the markets. Structured products can be used

as an alternative to a direct investment, as part of the asset allocation process to reduce risk

exposure of a portfolio, or to utilize the current market trend.

Composition

Structured products are usually issued by investment banks or affiliates thereof. They have a

fixed maturity, and have two components: a note and a derivative. The derivative component

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is often an option. The note provides for periodic interest payments to the investor at a

predetermined rate, and the derivative component provides for the payment at maturity.

Some products use the derivative component as a put option written by the investor that gives

the buyer of the put option the right to sell to the investor the security or securities at a

predetermined price.

Other products use the derivative component to provide for a call option written by the

investor that gives the buyer of the call option the right to buy the security or securities from

the investor at a predetermined price.

Risks

The risks associated with many structured products, especially those products that present

risks of loss of principal due to market movements, are similar to those risks involved with

options. The potential for serious risks involved with options trading are well established, and

as a result of those risks customers must be explicitly approved for options trading.

DEBT INVESTMENTS

Money Market Securities

Money markets include short-term, highly liquid, relatively low-risk debt instruments sold

by governments, financial institutions, and corporations to investors with temporary excess

funds to invest.

This market is dominated by financial institutions, particularly banks, and governments. The

size of the transactions in the money market typically is large.

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The maturities of money market instruments range from one day to one year and are often

less than 90 days. The most liquid, short-term debt obligations are traded in the money

market.

Some of these instruments are negotiable and actively traded, and some are not. Investors

may invest directly in some of these securities, but more often they do so indirectly through

money market mutual funds, which are investment companies organized to own and manage

a portfolio of securities and which in turn are owned by investors.

Thus, many individual investors own shares in money market funds that, in turn, own one or

more of these money market certificates.

Another reason of knowledge of these securities is important is the use of the Treasury bill

(T-bill) as a benchmark asset. Although in some pure sense there is no such thing as a risk-

free financial asset, on a practical basis the Treasury bill is risk free. There is no practical risk

of default by the government.

The Treasury bill rate, denoted RF, is used throughout the text as proxy for the nominal

(todays rupee) risk-free rate of return available to investors.

In summary, money market instruments are characterized as short-term, highly marketable

investments, with an extremely low probability of default.

Because the minimum investment is generally large, money market securities are typically

owned by individual investors indirectly in the form of investment companies known as

money market mutual funds, or, as they are usually called, money market funds.

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Money market rates tend to move together, and most rates are very close to each other for the

same maturity.

Treasury bill rates are less than the rates available on other money market securities,

approximately one-third of a percentage point, because of their risk-free nature.

Important Money Market Securities:

1) Treasury Bill:

T-bills are a short-term debt instruments used by the federal government to obtain funds.

They are issued in 3, 6 and 12 months maturities. These instruments do not pay regular

interest payments but instead are sold at a discount.

This means they are sold for an amount that is less than what government promises to pay at

maturity, and the difference between the purchase price and the face value is the return from

buying a T-bill.

For example, if you purchased a one-year T-bill in May 2000 for Rs.9000, in May 2005

(when it matures), the government would pay you Rs.10, 000. The premier money market

instrument, a fully guaranteed and are very liquid instrument. They are sold on an auction

basis every week at a discount from face value; therefore, the discount determines the yield.

The greater the discount at time of purchase, the higher the return earned by investors.

Typical maturities are 13 and 26 weeks. Investors on a competitive or noncompetitive bid

basis can purchase new bills. Outstanding (i.e., already issued) bills can be purchased and

sold in the secondary market, an extremely efficient market where government securities

dealers stand ready to buy and sell these securities.

2) Certificates of Deposit and Cash Equivalents:

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Commercial banks and other institutions offer a variety of savings certificates known as

certificates of deposit (CDs). These certificates are available for various maturities, with

higher rates offered as maturity increases. (Larger deposits may also command higher rates,

holding maturity constant.) In effect, institutions are free to set their own rates and terms on

most CDs. Because of competition for funds, the terms on CDs have been liberalized.

Although some CD issuers have now reduced the stated penalties for early withdrawal, and

even waived them, penalties for early withdrawal of funds can be, and often are, imposed.

3) Negotiable Certificates of Deposit:

CDs are debt instruments sold by banks and other depository institutions. A CD pays the

depositor a specified amount of interest during the term of the certificate, plus the purchase

price of the CD at maturity. For example, a Rs.1000, one year CD paying 5% interest would

pay Rs.1000 plus Rs.50 interest at the end of one year (the term of C.D). Today, negotiable

CDs are sold in large denominations (over Rs.100, 000) and can be resold in the secondary

market.

This makes negotiable CDs highly liquid. The original purchaser need not hold the CD to

maturity or pay a substantial penalty for early withdrawal if he or she needs to liquidate the

CD. Instead the person can sell the CD in secondary market at a price that will depend on the

market interest rate in effect when it is sold. Issued in exchange for a deposit of funds by

most of the banks, the CD is a marketable deposit liability of the issuer, who usually stands

ready to sell new CDs on demand.

The deposit is maintained in the bank until maturity, at which time the holder receives the

deposit plus interest. However, these CDs are negotiable, meaning that they can be sold in the

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open market before maturity. Dealers make a market in these immature CDs. Maturities

typically range from 14 days (the minimum maturity permitted) to one year.

4) Commercial Paper:

Commercial paper is a promise to pay back a higher specified amount at a designated time in

the immediate future- say 30 days. By issuing commercial paper, a corporation avoids the

process of applying for a loan and instead engages in direct finance.

To engage in direct finance effectively, the issuing company must be large and creditworthy

to find someone willing to accept its commercial paper, which is sold with the aid of brokers.

A short-term, unsecured promissory note issued by large, well-known, and financially strong

corporations (including finance companies).

It comes with maturity of 270 days or less. Commercial paper is usually sold at a discount

either directly by the issuer or indirectly through a dealer, with rates comparable to CDs.

Although a secondary market exists for commercial paper, it is weak and most of it is held to

maturity. Commercial paper is rates by a rating service as to quality (relative probability of

default by the issuer).

5) Repurchase agreements (RPs):

A REPO is an agreement by two parties in which the borrower sells and agrees to buy back a

financial instrument such as a government bond, note or T-bill. Suppose a bank needs short-

term cash today.

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The bank can sell some of its T-bills to a firm such as IBM with the agreement that the bank

will repurchase the T-bills in 30 days at a higher price.

In effect, a REPO is a short-term loan in which a treasury bill serves as a collateral.

An agreement between a borrower and a lender (typically institutions) to sell and repurchase

government securities. The borrower initiates an RP by contracting to sell securities to a

lender and agreeing to repurchase these securities at a pre-specified price on a stated date.

The effective interest rate is given by the difference between the purchase price and the sale

price. The maturity of RPs is generally very short, from three to 14 days, and sometimes

overnight.

CAPITAL MARKET SECURITIES

Following are the principal types of capital market securities typically owned directly by

individual investors with fixed-income securities. All of these securities have a specified

payment schedule. In most cases, such as with a traditional bond, the amount and date of each

payment are known in advance. Some of these securities deviate from the traditional-bond

format, but all fixed-income securities have a specified payment or repayment schedule - they

must mature at some future date.

Bonds can be described simply as long-term debt instruments representing the issuers

contractual obligation.

The buyer of a newly issued coupon bond is lending money to the issuer who, in turn, agrees

to pay interest on this loan and repay the principal at a stated maturity date.

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Bonds are fixed-income securities because the interest payments (if any) and the principal

repayment for a typical bond are specified at the time the bond is issued and fixed for the life

of the bond.

At the time of purchase, the bond buyer knows the future stream of cash flows to be received

from buying and holding the bond to maturity. Barring default by the issuer, these payments

will be received at specified intervals until maturity, at which time the principal will be

repaid.

However, if the buyer decides to sell the bond before maturity, the price received will depend

on the level of interest rates at that time. The par value (face value) of most bonds is Rs.1,

000, and we will use this number as the amount to be repaid at maturity.

The typical bond matures (terminates) on a specified date and is technically known as a term

bond. Most bonds are coupon bonds, where coupon refers to the periodic interest that the

issuer pays to the holder of the bonds. Interest on bonds is typically paid semi-annually.

The most radical innovation is the format of traditional bonds is the zero coupon bond, which

is issued with no coupons, or interest, to be paid during the life of the bond.

The purchaser pays less than par value for zero coupons and receives par value at maturity.

The difference in these two amounts generates an effective interest rate, or rate of return. As

in the case of Treasury bills, which are sold at discount, the lower the price paid for the

coupon bond, the higher the effective return.

Issuers of zero coupon bonds include corporations, municipalities, and government agencies.

The bond buyer must pay the bond seller the price of the bond as well as the interest that has

been earned (accrued) on the bond since the last semi-annual interest payment. This allows an

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investor to sell a bond any time without losing the interest that has accrued. Bond buyers

should remember this additional "cost" when buying a bond because prices are quoted in the

paper without the accrued interest.

A bond has certain legal ramifications. Failure to pay either interest or principal on a bond

constitutes default for that obligation. Default, unless quickly remedied by paying or a

voluntary agreement with the creditor, leads to bankruptcy.

A filing of bankruptcy by a corporation initiates litigation and involvement by a court, which

works with all parties concerned.

Corporate Bonds

A corporate bond is a debt instrument issued by a corporation that states the firm will make

specified interest payments (typically twice each year). The original purchaser of the bond

buys this promise from the firm for an upfront amount, known as the price of the bond.

Unlike the stockholders, bond- holders own no share of the profit; rather they are entitled

only to the interest payments and the face value due on maturity. Corporate bonds, like

corporate stock provide funds to the issuing firm when sold in the primary market.

Most of the larger corporations, several thousand in total, issue corporate bonds to help

finance their operations. Many of these firms have more than one issue outstanding. Although

an investor can find a wide range of maturities, coupons, and special features available from

corporate, the typical corporate bond matures in 20 to 40 years, pays semi-annual interest, is

callable, carries a sinking fund, and is sold originally at a price close to par value.

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Corporate bonds are senior securities. That is, they are senior to any preferred stock and to

the common stock of a corporation in terms of priority of payment and in case of bankruptcy

and liquidation. However, within the bond categories itself there are various degrees of

security. The most common type of unsecured bond is the debenture, a bond backed only by

the issuers overall financial soundness.

ASSET-BACKED SECURITIES

The money and capital markets are constantly adapting to meet new requirements and

conditions. This has given rise to new types of securities that were not previously

available.Securitization refers to the transformation of illiquid, risky individual loans into

more liquid, less risky securities referred to as asset-backed securities (ABS). The best

example of this process, the mortgage-backed securities issued by the federal agencies

mentioned above. The agencies discussed earlier purchase mortgages from banks and thrift

institutions, repackage them in the form of securities, and sell them to investorsas mortgage

pools. Investors in mortgage-backed securities are, in face, purchasing a piece of a mortgage

pool, taking into consideration such factors as maturity and the spread between the yield on

the mortgage security and the yield on 10-year Treasuries (considered a benchmark in this

market). Investors in mortgage-backed securities assume little default risk because most

mortgages are guaranteed by one of the government agencies. However, these securities

present investors with uncertainty because they can receive varying amounts of monthly

payments depending on how quickly homeowners pay off their mortgages. Although the

stated maturity can be as long as 40 years, the average life of these securities to date has been

much shorter. As a result of the trend to securitization, other asset-backed securities have

proliferated as financial institutions have rushed to securitize various types of loans.

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Car loans, credit-card receivables, railcar leases, small-business loans, photocopier leases,

aircraft leases, and so forth have backed marketable securities. The assets that can be

securitized seem to be limited only by the imagination of the packagers, as evidenced by the

fact that by 1996 new asset types include royalty streams from films, student loans, mutual

fund fees, tax liens, monthly electric utility bills, and delinquent child support payments.

Who do investors like these asset-backed securities? The attractions are relatively high yields

and relatively short maturities (often, five years) combined with investment-grade credit

ratings, typically the highest two ratingsavailable. Investors are often protected by a bond

insurer. Institutional investors such as pension funds and life insurance companies have

become increasingly attracted to ABS because of the higher yields, and foreig

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