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PROJECT REPORT ON A STUDY ON PORTFOLIO MANAGEMENT SERVICES

TOWARDS FULFILLMENT FOR THE POST GRADUATE DEGREE IN MASTER OF MANAGEMENT STUDIES (MMS) AS PER UNIVERSITY OF MUMBAI

SUBMITTED BY PANKAJ MASUTAGE (FINANCE) Batch 2010-12

KOHINOOR BUSINESS SCHOOL, KURLA, MUMBAI.

A PROJECT REPORT ON A STUDY ON PORTFOLIO MANAGEMENT SERVICES

SUBMITTED BY PANKAJ MASUTAGE (FINANCE) ROLL NO A-33 Batch 2010 - 2012

UNDER THE GUIDANCE OF PROF. MADHAVI DHOLE CORE FACULTY - FINANCE

UNIVERSITY OF MUMBAI KOHINOOR BUSINESS SCHOOL, KURLA, MUMBAI.

DECLARATION
I hereby declare that the project report entitled A STUDY ON PORTFOLIO MANAGEMENT SERVICE is my work submitted in partial fulfillment of the requirement for Degree of MASTER OF MANAGEMENT STUDIES (MMS), UNIVERSITY OF MUMBAI from KOHINOOR BUSINESS SCHOOL, KURLA, MUMBAI and not submitted for the award of any degree, diploma, fellowship or any similar titles or prizes.

Date:

Signature: ____________

Place: Mumbai

Student Name: PANKAJ MASUTAGE

CERTIFICATE

This is to certify that the project entitled A STUDY ON PORTFOLIO MANAGEMENT SERVICE is successfully completed by Pankaj Masutage during the second year of his course, in partial fulfillment of the Masters Degree in Management Studies, under the University of Mumbai, through KOHINOOR BUSINESS SCHOOL, Kurla, Mumbai-400070.

Date: Place: Mumbai Prof Madhavi Dhole

Acknowledgement
The success of any project is the result of hard work & endeavour of not one but many people and this project is no different. I am indebted to the Kohinoor Business School for giving me an opportunity to work on this project. I would further like to thank my project guide Miss MADHAVI DHOLE for assisting me in project and making it such a great learning experience. This project has helped me broaden my horizons and provide me with valuable insights in the area of Investment Management. Last but not the least; I would like to express my gratitude to everyone at Kohinoor Business School, who helped me get some valuable insights into the Investment strategies during tenure of my project.

Table of Contents
EXECUTIVE SUMMARY....7 INTRODUCTION..........................................................................9 LITERATURE REVIEW..12 SCOPE, OBJECTIVES & LIMITATIONS....13 TYPES OF RISKS INVOLVED IN AN INVESTMENT17 INVESTMENTALTERNATIVES....25 MUTUAL FUNDS............................31 TYPES OF MUTUAL FUNDS SCHEMES.34 TRADING FOREX....38 THE FOREIGN CURRENCY MARKETS........40 CARBON CREDIT....50 EXCHANGE TRADED FUNDS...59 GOLD EXCHANGE TRADED FUNDS......62 CONCLUSION....67 RECOMMENDATIONS....52 REFERENCES...........68

EXECUTIVE SUMMARY

Traditionally, the role of a Finance Manager was to procure funds for the Organisation. However, as the time passed by the role got bit extended from its original parameter. In todays modern era, the role of a Finance Manger is not only to procure funds but also to cater to the needs in the area of Application.

Portfolio Management in simpler terms can also be referred as Investment Management. The art of investing is evolving into the science of investing. This evolution has been happening steadily and will continue for some time in the years to come.

In seeking to achieve a client financial goal an investment manager can choose from a broad range of financial instruments and numerous portfolio strategies.

The modern portfolio theory looks at total risk and total return. That is returns, risk, benchmarks and information ratios constitute the foundations of active portfolio management.

One of the safest ways an investment portfolio generates money is through fixed income investments. These are usually in the form of stock & bonds issued by corporations or governments or from dividends paid to shareholders by a corporation. Issues effecting fixed income are the credit worthiness, or default risk, of the issuer, and the yield earned by the bondholder.

Investments, though a source of gain to generate wealth out of the existing wealth, is accompanied by various risks. Awareness about the various types of risks one might face, making choices about the risks one is willing to take, and an understanding of how to build and balance ones portfolio to offset potential problems, one can manage investment risks to their advantage

Portfolio Management broadly covers the following areas:

Setting Investment Objectives

The first main step in the investment management process is setting investment objectives. For institutions such as banks, the objective may be to lock in a minimum interest rate spread over the cost of their funds. For others such as mutual funds, the investment objective may be to maximize return.

Establishing Investment Policy

The second main step is establishing policy guidelines to satisfy the objectives. Setting policy begins with asset allocation among the major asset classes - the products of the capital market. The major asset classes includes equities, fixed income securities, real estate, and foreign securities

Selecting Portfolio Strategy

Selecting a portfolio strategy that is consistent with the objectives and policy guidelines of the client or institution is the third step in the investment management process. Portfolio strategies can be classified as either active strategies or passive strategies. For example, active equity strategy may include forecasts of future earnings, dividends or price- earnings ratios. On the other hand passive portfolio involves minimal expectation input.

Selecting the Assets

Once a portfolio is selected, the next step is the selection of the specific assets to be included in the portfolio. An optimal or efficient portfolio is one that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return.

Measuring & Evaluating Performance

The measurement and evaluation of investment performance is the last step in the investment management process. This step involves measuring the performance and then evaluating that performance relative to some realistic benchmark.

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Introduction to Portfolio Theory

Introduction to Portfolio Management Investing in securities such as shares, debentures, and bonds is profitable as well as exciting. It is indeed rewarding, but involves a great deal of risk and calls for scientific knowledge as well artistic skill. In such investments both rationale and emotional responses are involved. Investing in financial securities is now considered to be one of the best avenues for investing one savings while it is acknowledged to be one of the best avenues for investing one saving while it is acknowledged to be one of the most risky avenues of investment. It is rare to find investors investing their entire savings in a single security. Instead, they tend to invest in a group of securities. Such a group of securities is called portfolio. Creation of a portfolio helps to reduce risk, without sacrificing returns. Portfolio management deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios. An investor who understands the fundamental principles and analytical aspects of portfolio management has a better chance of success.

An investor considering investment in securities is faced with the problem of choosing from among a large number of securities and how to allocate his funds over this group of securities. Again he is faced with problem of deciding which securities to hold and how much to invest in each. The risk and return characteristics of portfolios. The investor tries to choose the optimal portfolio taking into consideration the risk return characteristics of all possible portfolios.

An investor invests his funds in a portfolio expecting to get good returns consistent with the risk that he has to bear. The return realized from the portfolio has to be measured and the performance of the portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an investment portfolio. Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specifically with the security analysis, portfolio analysis, portfolio selection, portfolio revision & portfolio evaluation. Portfolio management makes use of analytical techniques of analysis and conceptual theories regarding rational allocation

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of funds. Portfolio management is a complex process which tries to make investment activity more rewarding and less risky.

Two basic principles of Finance form the basis of Portfolio theory, namely, Time value of Money and Safety of Money.

Rupee today is worth than rupee of tomorrow or a year hence and as parting with money involves the loss of present consumption, it has to be rewarded by a return commensurate with time of waiting. Secondly, a safe rupee is preferred to an unsafe rupee at any point of time. Due to risk aversion of investor, they feel risk is inconvenient and has to be rewarded by a return. The larger the risk taken, the higher should be the return.

Present values and future values are related by a discount factor comprising of firstly the interest rate component and secondly the time factor. The future flows are to be discounted to the present by a required rate of discount to make them comparable and equal in value.

As regards the risk factor, there is a direct relationship between the expected return and unavoidable risk. Avoidable risk can be reduced or even eliminated by measures like diversification.

Portfolio management is an investment advisory discipline that incorporates financial

planning, investment portfolio management and a number of aggregated financial services. High Net Worth Individuals (HNWIs), small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be an independent Certified Financial Planner, MBAs, Chartered Strategic Wealth Professional, CFA Charterholders or any credentialed professional money manager who works to enhance the income, growth and tax favored treatment of long-term investors. Wealth management is often referred to as a high-level form of private banking for the especially affluent. One must already have accumulated a significant amount of wealth for wealth management strategies to be effective.

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Evolution of Portfolio Management

Portfolio management is essentially a systematic method of maintaining ones investment efficiently. Many factors have contributed to the existence and development of the concept. In the early years of the century analyst used financial statements to find the value of the securities. The first to be analyzed using this was Railroad Securities of the USA. A booklet entitled The Anatomy of the Railroad was published by Thomas F. Woodlock in 1900. As the time progressed this method became very important in the investment field, although most of the writers adopted different ways to publish there data. They generally advocated the use of different ratios for this purpose. John Moody in his book The Art of wall Street Investing, strongly supported the use of financial ratios to know the worth of the investment. The proposed type of analysis later on became the common-size analysis. The other major method adopted was the study of stock price movement with the help of price charts. This method later on was known as Technical Analysis. It evolved during 19001902 when Charles H. Dow, the founder of the Dow Jones and Co. presented his view in the series of editorials in the Wall Street Journal in USA. The advocates of technical analysis believed that stock prices movement is ordered and systematic and the definite pattern could be identified. There investment strategy was build around the identification of the trend and pattern in the stock price movement. Second phase began in the year 1930. The phase was of professionalism. After coming up of the Securities Act, the investment industry began the process of upgrading its ethics, establishing standard practices and generating a good public image. As a result the investments market became safer place to invest and the people in different income group started investing. Investors began to analyze the security before investing. During this period the research work of Benjamin Graham and David L. Dood was widely publicized and publicly acclaimed. They published a book Security Analysis in 1934, which was highly sought after. There research work was considered first work in the field of security analysis and acted as the base for further study. They are considered as pioneers of security analysis as a discipline.

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Third phase was known as the scientific phase. The foundation of modern portfolio theory was laid by Markowitz. His pioneering work on portfolio management was described in his article in the Journal of Finance in the year 1952 and subsequent books published later on.

Literature Review
Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensensalpha) that estimates how much a managers forecasting ability contributes to funds returns. Mishra (2002) measured mutual fund performance using lower partial moment. He measures of evaluating portfolio performance based on lower partial moment are developed. Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified target rate like risk-free rate. Kshama Fernandes (2003) evaluated index fund implementation in India. The tracking error of index funds in India is measured. The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. Dominguez and Frankel (1993) use daily and weekly official and press report data on intervention directed at the yen/dollar and mark/dollar exchange rates between 1984 and 1990. The authors find that intervention had a significant impact on the exchange rate, especially when it was publicly announced and coordinated. Catte (1994) confirm that intervention influences exchange rates particularly for coordinated interventions. Dominguez (2003) concludes that recent G3 intervention was often successful with regard to both short and longer-term exchange rate movements. However, other papers do not support the conclusion that intervention is effective.

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Baillie and Humpage (1992) find a positive relationship between Federal Reserve, Bank of Japan and Bundes bank intervention and the conditional volatility of the mark/dollar and yen/dollar exchange rates for the period February 1987 to February 1990.

Scope of Portfolio Management:Portfolio management is a continuous process. It is a dynamic activity. The following are the basic operations of a portfolio management. a) b) c) Monitoring the performance of portfolio by incorporating the latest market Identification of the investors objective, constraints and preferences. Making an evaluation of portfolio income (comparison with targets and

conditions.

achievement). d) Making revision in the portfolio. e) Implementation of the strategies in tune with investment objectives

Objectives
To become conscious of all the individual listings in the portfolio. To develop a big picture view and a deeper understanding of the the collection as a whole. To allow sensible sorting, adding, and removing of items from the collection based on their costs, benefits, and alignment with long-term strategies or goals. To allow the portfolio owner to get the best bang for the buck from resources invested.

Limitations
Portfolio management service is a huge business today. There is stiff competition which makes it difficult for the investor to choose a good manager. However, this can be sorted out by taking his previous history and performance into account. One limitation faced, is the authority given to the manager to have control over your investments. When we ourselves,

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manage and trade, it's a different scenario altogether. However, trusting a portfolio management advisor is difficult and risky as well. There are many known cases of churning, where the consultant shifts investment from one fund to another. Some investors restrict this practice by limiting the commission to the consultant depending on his performance; however, if there is a loss, it wouldn't matter much to them. All in all, the professional brokers are very efficient and the process and detailing is strong, since the amount invested is big. I would suggest you look for good brokers and ask them about their ways of functioning; also check their credibility.

Growth of income and asset mix

Here the investor requires a certain percentage of growth as the income from the capital he has invested. The proportion of equity varies from 60 to 100 % and that of debt from 0 to 40 %. The debt may be included to minimize risk and to get tax exemption.

Capital appreciation and Asset Mix

It means that value of the investment made increases over the year. Investment in real estate can give faster capital appreciation but the problem is of liquidity. In the capital market, the value of the shares is much higher than the original issue price.

Safety of principle and asset mix

Usually, the risk adverse investors are very particular about the stability of principal. Generally old people are more sensitive towards safety.

Risk and return analysis

The traditional approach of portfolio building has some basic assumptions. An investor wants higher returns at the lower risk. But the rule of the game is that more risk, more return. So while making a portfolio the investor must judge the risk taking capability and the returns desired.

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Diversification
Once the asset mix is determined and risk return relationship is analyzed the next step is to diversify the portfolio. The main advantage of diversification is that the unsystematic risk is minimized.

Role of Portfolio Management

There was a time when portfolio management was an exotic term. A practice which is beyond the reach of the small investor, but the time has changed now. Portfolio management is now a common term and is widely practiced in INDIA. The theories and concepts relating to portfolio management now find there way in the front pages of the financial newspapers and magazines. In early 90s India embarked on a program of economic liberalization and globalization, with high participation of private players. This reform process has made the Indian industry efficient, with rapid computerization, increased market transparency, better infrastructure and customer services, closer integration and higher volume. The markets are dominated by large institutional investors with their diversified portfolios. A large number of mutual funds have come up in the market since 1987. With this development investment in securities has gained considerable momentum Along with the spread of the securities investment way among Indian investors have changed due to the development of the quantitative techniques. Professional portfolio management, backed by research is now being adopted by mutual funds, investment consultants, individual investors and big brokers. The Securities Exchange Board of India (SEBI) is a regulatory body in INDIA. It ensures that the stock market is free from fraud, and of course the main objective is to ensure that the investors money is safe. With the advent of computers the whole process of portfolio management has become quite easy. The computer can absorb large volumes of data, perform the computations accurately and quickly give out the results in any desired form. Moreover simulation, artificial intelligence etc provides means of testing alternative solutions.

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The trend towards liberalization and globalization of the economy has promoted free flow of capital across international borders. Portfolio not only now include domestic securities but foreign too. So financial investments cant be reaped without proper management. Another significant development in the field of investment management is the introduction to Derivatives with the availability of Options and Futures. This has broadened the scope of investment management. Investment is no longer a simple process. It requires a scientific knowledge, a systematic approach and also professional expertise. Portfolio management is the only way through which an investor can get good returns, while minimizing risk at the same time. So portfolio management objectives can be stated as: Risk minimization. Safeguarding capital. Capital Appreciation. Choosing optimal mix of securities. Keeping track on performance.

Managing Investment Risk

Investments, though a source of gain to generate wealth out of the existing wealth, it is accompained by various risks. With insured bank investments, such as certificates of deposit (CDs), there is inflation risk, which means that one may not earn enough over time to keep pace with the increasing cost of living. With investments that aren't insured, such as stocks, bonds, and mutual funds, there is a risk that one might lose money, which can happen if the price falls and the asset is sold for less than the amount paid to buy the asset.

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However, investment risks can be minimized in order to gain control over what happens to the money invested. Awarness about the various types of risks one might face, making choices about the risks one is willing to take, and an understanding of how to build and balance ones portfolio to offset potential problems, one can manage investment risks to their advantage.

Types of risks involved in an investment

Various types of risks involved in an investment are as follows:1)

Interest rate risk: This arises due to variability in the interest rates from time
to time. A change in the interest rates establishes in an inverse relationship in the price of security i.e. price of securities tends to move inversely with change in rate of interest, long term securities show greater variability in the price with respect to interest rate changes than short term securities. Interest rate risk vulnerability for different securities is as under:-

Types Cash Equivalent Long Term Bonds

Risk Extent Less vulnerable to interest rate risk More vulnerable to interest rate risk

2)

Purchasing power risk: It is also known as inflation risk. It arises because

inflation affects the purchasing power adversely. Nominal return contains both the real return component and an inflation premium in a transaction involving risk of the above type to compensate for inflation over an investment-holding period. Inflation rates vary over time and investors are caught unaware when rate of inflation changes unexpectedly causing erosion in the value of realised rate of return and expected return. Purchasing power risk is more in inflationary conditions especially in respect of bonds and fixed income securities. It is not desirable to invest in such securities during inflationary periods. Purchasing power risk is however, less in flexible income securities like equity shares or common stock where rise in dividend income offsets increase in the rate of inflation and provides advantage of capital gains.

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3)

Business risk: Business risk emanates from sale and purchase of securities affected

by business cycles technological changes etc. Business cycles affect all types of securities viz; there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trends in depression brings down fall in the prices of types of securities. Flexible income securities are more affected than fixed rate securities during depression due to decline in their market price.

4)

Financial risk: It arises due to changes in the capital structure of the company. It

is also known as leveraged risk and expressed in terms of debt-equity ratio. Excess of debt vis--vis equity in the capital structure indicates that the company is highly geared. Although a leveraged companys earnings per share are more but dependence on borrowings exposes it to the winding-up for its inability to honour its commitment towards lenders / creditors. The risk is known as leveraged or financial risk of which investors should be aware and portfolio manager should be very careful.

ASSESSING RISK
It's one thing to know that there are risks in investing. But how do you figure out ahead of time what those risks might be, which ones you are willing to take, and which ones may never be worth taking? There are three basic steps to assessing risk: 1. 2. 3. Understanding the risk posed by certain categories of investments Determining the kind of risk you are comfortable taking Evaluating specific investments

You can follow this path on your own or with the help of one or more investment professionals, including stockbrokers, registered investment advisers, and financial planners with expertise in these areas.

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1.

Determine the Risk of an asset class

The first step in assessing investment risk is to understand the types of risk a particular category or group of investmentscalled an asset classmight expose you to. For example, stock, bonds, and cash are considered separate asset classes because each of them puts your money to work in different ways: Stocks, don't have a fixed value but reflect changing investor demand, one of the

greatest risks you face when you invest in stock is volatility, or significant price changes in relatively rapid succession. Bonds face a risk of default on the part of the bond issuer and a risk of change in the

market price of bonds due to upward or downward movement in interest rates Cash investments like treasury bills and money market mutual funds though highly

liquid pose a risk of losing ground to inflation. Other assets classes, including real estate, pose their own risks, while investment

products, such as annuities or mutual funds that invest in a specific asset class, tend to share the risks of that class. However ,if one understands what those risks are, one can generally take steps to offset those risks.

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Selecting Risk

The second step is to determine the kinds of risk you are comfortable taking at a particular point in time. Since it's rarely possible to avoid investment risk entirely, the goal of this step is to determine the level of risk that is appropriate for you and your situation. Your decision will be driven in large part by: A. B. C. Your age Your goals and your timeline for meeting them Your financial responsibilities

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D.

Your other financial resources

3.

Evaluating Specific Investments

The third step is evaluating specific investments that you are considering within an asset class. There are tools you can use to evaluate the risk of a particular investmenta process that makes a lot of sense to follow both before you make a new purchase and as part of a regular reassessment of your portfolio. It's important to remember that part of managing investment risk is not only deciding what to buy and when to buy it, but also what to sell and when to sell it. For stocks and bonds, the place to start is with information about the issuer, since the

value of the investment is directly linked to the strength of the companyor in the case of certain bonds, the government or government agencybehind them. o o o One should take a note of the issuing companys documents like: Audited Financial Statements, Prospectus in case of initial public offer, Credit ratings given by independent rating agencies like ICRA, CARE, CIRSIL etc.

The higher the letter grade a rating company assigns, the lower the risk you are taking. But remember that ratings aren't perfect and can't tell you whether or not your investment will go up or down in value. Research companies also rate or rank stocks and mutual funds based on specific sets of criteria. Brokerage firms that sell investments similarly provide their assessments of the probable performance of specific equity investments. Before you rely on ratings to select your investments, learn about the methodologies and criteria the research company uses in its ratings. You might find some research companies' methods more useful than others'.

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Asset Allocation
Analyst and other experts invariably spout jargon. Terms like valuation, diversification, asset allocation are thrown at us from every angle. Little wonder that investors are invariably confused. But not all these things are as incredibly complex as they sound. One such term we often hear is asset allocation. Though it appears intimidating, in actual fact, the meaning is quite straightforward. Asset allocation is all about putting your eggs in different baskets. Its a kind of insurance or protection, should one of your investments go bad. If the stock market crashes, your non-stock holdings can help bail you out. Or if real estate plunges, you will thank God for your PPF account. In actual fact, whether you realise it or not, you are already allocating your assets as most of us have our wealth divided into different assets gold, real estate, stocks, bank account, etc. The question is whether you are doing so consciously and strategically, or simply in a random or haphazard manner. The two phrases, asset allocation and diversification are often used interchangeably. But not many know that there is a subtle difference between the two terms. This is because they have similar objectives: To minimise risk and provide exposure to differing growth opportunities within an investment portfolio. Diversification is often likened to the old adage; Dont put all your eggs in one basket. By doing this, you can help prevent losing it all on one poor choice-just as all your eggs would break if your dropped the basket. A diversified portfolio help protect against large losses because, typically, if some securities crash, other may perform well.

Asset allocation is similar to diversification, but involves some amount of strategy. The cornerstone of this is allocation of assets over different asset classes. In a diversified stock portfolio, we not only have a stock portfolio, but a bond portfolio, a cash equivalent portfolio, and maybe some other types of assets as well. The combination of multiple asset classes offers the growth potential of stocks, combined with regular income and relative stability of bonds and the liquidity and security of cash. Most of us spend sleepless nights trying to figure out which stocks to buy or sell, or whether to own mutual funds or derivatives. These are no doubt real concerns, but much of the tension could be minimized by some prior planning. And it is this planning that is called asset allocaton.

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Asset allocation is actually a relatively new concept. Till about twenty or thirty years ago, it was believed that specific stock selection, or market timing, or timing the decision to move from stocks to bonds were the most important determinants of investment success. But today, though most of us still try to live on timing and selection of individual securities, he investment professionals have come to recognize the importance of asset allocation.

Several studies in the recent past have shown that asset allocation is the single greatest determinant of investment performance. Depending on whose research you look at, you will find that the distribution of our money amongst types of asset.

Asset Allocation Stocks are the best long-term investments

Though the first article of this primer (What is asset allocation?) lays down the basic reasons for asset allocation, many assume that this is only theoretical. The common belief is that asset allocation is meant only retired or conservative investors. After all, market-savvy punters like us dont need all these bonds and other such boring investments. We know how to play the stock markets so well and make so much money from our capital, that we dont need all this asset allocation stuff. If this is what you believe, then you couldnt be more wrong. If actual fact, the reasons for the recent disillusionment with asset allocation has been the incredible, decade long bull market in the US. In India, too, the unabated (and

phenomenal) rise in ICE stocks has led investors to shun all other options. Obviously, investors believe they can achieve better returns by concentrating their investments rather than diversifying them. Through this strategy may have proved very successful in the late nineties, the year 2000 should have woken you up to the reality. Ultimately, over-

dependence on one asset class ignores the risks that are being taken, while considering only the Returns. Asset allocation may or may not help increase your overall returns, but it will definitely help lower the risks. One should realise that the recent extra-ordinary stock-market performances are just the extra-ordinary! No one knows what the future holds in store, and asset allocation is one simply one measure that tries to insulate on from various possibilities. The first thing to remember is that The future may really be different! Despite the fact the we keep saying that past performance is no guarantee of future returns, do we really believe it

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and base our investments on that? When we are making money had over fist on high-flying stocks like Infosys and Zee, we tend to believe that our stock-picking skills will provide good returns forever. But in our heart of hearts we all know it is impossible to be certain of any future market performance, and the recent crash should have brought around even the most die-hard punters. The selection of any investment is preceded, either implicitly or explicitly, by an asset allocation decision. Asset allocation is therefore said to be the most fundamental of investment decisions. As we saw in the first article of this primer, the asset allocation decision accounts for around 90% of the variation in returns over time. Despite this, until recently, asset allocation was an ad hoc exercise. Investors were advised to allocate

anywhere from 100% in bonds based on a cursory classification by age or income. However, in recent times, much research has gone into the subject and the concept has become much more scientific than in the past. The principles underlying asset allocation are actually quite simple. Firstly, history shows that not all classes of assets move in the same direction at the same time. In one year, large-cap stocks may rise, while bonds fall. In another year small-caps may surge along with real estate. History also tells us that some asset classes are far more volatile than others. For instance, the yearly variance in the stock markets can be quite drastic, while your bank account does not change regardless of what happens in the outside world.

Ideally, if you or I could predict which asset classes would do best in any specific time period, we would have no need for asset allocation. In such a situation (assuming we were operating in Indian markets), we would have moved into stocks in late 1993, exited in late 1994 and bough bonds, entered into IT stocks in late 1996 and then sold out again in early 2000. But then how many of us are psychic?

Or if we were sure that we would not need money for the next thirty years, it may make sense to buy only stocks and stick with them given that this asset class has historically provided the best returns. Again, how many of us can be sure that we wont need money a few years down the line, and this need wont arise when the markets are in the grip of bears?

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Asset allocation is ideal for all us mortals who arent psychic, and who will need to use their savings at some point in their lifetime. By following a policy of balancing the types of assets we own between stocks, bonds, and cash, we trade the best returns wed get if we timed the markets perfectly for predictability and piece of mind. Strangely enough, most people tend to abandon asset allocation just when they need most like at the peak of a bull-run or at the bottom. At the height of a teji we should be looking at non-stock assets more seriously, while at the bottom, we tend to go overboard on bonds, when we should be looking more closely at stocks. Typically a strong recent trend makes us want to concentrate our holdings in that asset class, while logic and long term history tell us that this is when we should actually look closer at other asset classes.

In conclusion, rather than trying to figure out when a particular asset class has peaked or bottomed, it makes sense for investors to formulate a broad strategy for allocation that can be fine tuned from time to time. This is the only way to ensure that you minimize the risks, while taking advantage of growth possibilities.

Different Asset Classes Risk v/s Return

We know asset allocation and present a (hopefully, convincing) case for using this technique. We also spoke loosely about asset classes. Essentially, the allocation process needs to first categorise different assets into broad classes with similar characteristics. In the investment world, there are two parameters that are of paramount importance. The first is the return that one gets from a particular investment, and the second is the risk that one takes to achieve that return. Also, it is known that there is a direct relationship between the two. Typically, the greater the returns, the greater the risk. It is very difficult to foresee the future risks or returns that a particular investment will have, so we tend to use historical data for classification purposes. Conservative investments, such as cash or bank accounts offer minimal risk, and essentially seek to preserve existing capital and offer minimal risk. Moderate-risk investments include highly debt instruments (such as company fixed deposits or bonds issued by corporates) as well as bonds with shorter maturities. Stocks typically offer greater growth possibilities-as well as greater risk potential.

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But it is not simple. Within each of these individual asset classes lie further segments, such as value and growth stocks, corporate and government bonds, bank deposits and PPF. There are also other assets like gold or real estate that may not fit into the three commonly accepted categories. Also, certain types of assets like cyclical stocks are often treated as separate assets classes because they have different historical performance characteristics from other stocks. While talking of real estate, though these investments have been very popular in the Indian context, their lack of liquidity and high unit value makes them intrinsically unsuitable as investments for most of us. For the purpose of this dicussion, we will restrict ourselves to the three basic asset classes comprised of financial securities. Once the basic principles are understood, an investor can choose to define further classes as per his needs and perceptions.

INVESTMENT ALTERNATIVES
A key issue in designing the investment portfolio is determining what investment choices to offer individual participants. The simplest portfolio theory suggests that it is sufficient to provide a choice consisting of one portfolio of risky assets the market portfolio and one risk-free asset, and then to allow individuals to mix these two portfolios in accordance with their individual risk preferences. Most public and private plans however, provide a large number and broad range of choices. For example: In the U.S., the vast majority of private sector defined contribution pension plans offer multiple investment options, often allowing individuals to choose from among several equity, bond, market and balanced fund options. Individuals also have thousands of mutual funds to choose from when allocating their non-pension portfolios.

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In Sweden, the Social Security system provides participants a menu of investment options that includes over 650 funds from which to choose. The central question is whether to choose a mix of investment options available to participants in an individual accounts program matters for portfolio allocation. In particular, we are interested in the behavioral response to the selection of fund options, over and above any mechanical link by which we mean changes that flow directly from adding or relaxing a binding constraint. For example, suppose an individual is prohibited from owning a particular asset class. It is clearly the case that this constraint will alter their portfolio choice if, in the absence of the constraint, the individual would have invested in this asset class. Instead, our focus is on the behavioral response, which might occur when a change in the menu of investment options leads to a large change in asset allocation, even though the investment opportunity set has not significantly changed. For example: Imagine that an investor, faced with a choice between a diversified stock fund and a diversified bond fund, chose to allocate 50 percent of her portfolio to each fund. If this individual were provided a second diversified stock fund as a third investment alternative, then the overall investment opportunity set of this individual has not substantially changed because the additional stock fund is largely redundant of the first. In this case, standard portfolio theory suggests that this individuals optimal allocation would still be close to 50 percent bonds and 50 percent stocks. With frequent spells of high volatility hitting market shores, it becomes imperative for individuals to diversify their portfolio and include other assets and reduce their exposure to any individual asset. To achieve this, one can take a closer look at a few alternative investment options that provide the necessary diversification and avail of potentially good returns.

Investment Altenatives are categorised as : I. Investment options to Save Tax under Section 80C :

There are many ways of reducing the tax liability through sound investments. The most common option is the tax deductions under Section 80 C of the Income Tax Act. There are

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various investing options under 80 C that enable one to reduce the taxable income up to a maximum limit of Rs 1 lakh The eligible deductions are contributions to Employee Provident Fund, Payment of tuition fee or repayment on home loan. In addition there are investment avenues that are eligible for tax deduction which are as below:

A.

Investing in Government Securities

For those who seek absolute protection of their capital, Investing in Postal Saving schemes such as NSC or putting money in PPF (Public provident fund) is an option.

i.

Public Provident Fund (PPF)

PPF offers interest income in the range of 8% with annual compounding. However, the maximum amount that can be invested in PPF is Rs.70,000 and money cannot be withdrawn before the completion of 6 years. Those who look at PPF in terms of their retirement corpus and feel that their current PF deduction is not sufficient, may consider this option.

ii.

National Savings Certificate

Another popular avenue investing - NSC also offers a return of 8% on half yearly compounding basis. Another feature is that interest accrued on NSC is also eligible for Section 80 C benefit. The interest on NSC investment, except in the sixth year, is not paid but credited to the investor's account. So, the interest that accumulates is treated as invested in NSC and the accumulated interest thereby qualifies for tax deduction. The duration of NSC is for 6 years with an option of premature encashment after 3 years. However, that would reduce the net yield from NSC.

B.

Tax saving FD's

This is a relatively new kid on the block. Tax saver fixed deposits are issued by banks for a tenure of 5 years and premature withdrawal is not permissible. It generates interest income of 8% with quarterly compounding. The interest income is taxable. If we compare tax saving

29

FD's to NSC, Tax saving FD's have an edge on lock in period which is lesser by one year. However NSC have an edge from the fact that interest accrued is also eligible for 80 C limit for the first five year.

C.

Investment in Equity linked Saving Scheme(ELSS)

ELSS are funds invested primarily in equity shares of companies. They have been in limelight for their superior performance in the recent past and are a popular tax saving investment. Due to their tax saving nature, they are also known as tax saving mutual fund schemes. Like all investment avenues under Section 80C, ELSS funds also involve a certain lock in. In this case the lock in is for three years which means that they cannot be withdrawn for a period of three years from the date of investment. The ELSS Fund manager basically invest 80% of the total amount in the equity shares and the remaining 20% is invested in other instruments like bonds, debentures, government securities and others. However the basic risk with ELSS scheme is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. At the same time, ELSS can also be seen as a way to long term investing in equity markets and with India growth story unfolding and fundamentals looking intact, investment experts anticipate that equities would continue to outperform other investing avenues for at least next 5-7 years. Investing in ELSS provides dual benefit of capitalizing on superior returns as well as tax saving. With the current market turmoil avoid this instrument unless you are looking for a long term investment. If that is the case look for good fund managers with stellar tax records.

D.

Life Insurance and Tax savings

As far as life insurance is concerned, endowment plans (money back plans) have been a popular source of investing.There are various long term life insurance policies which give you good returns, tax savings under 80C and an insurance cover as well. ULIP's offer insurance as well as market related returns in a single product. However, investors should understand the underlying structure of ULIP carefully since these offerings

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have a substantial charge towards expense in the initial years and is advisable only for investors with a large investing horizon. Avoid ULIPs if you do not like to risk money. Also invest in ULIPs with a long term horizon of a minimum of 10 years.

Pension Plans : Another avenue within insurance domain is Pension plans. Pension plans
have got a boost in last finance bill with the overall limit raised from Rs. 10,000 to Rs. 100,000. Senior Citizen Saving Scheme 2004 and Post Office Time Deposit Account have also been included in Section 80 C. However some people may be biased towards other investing options as compared to Life Insurance products since they may prefer insurance and investments separately.

E.

Infrastructure development Bonds

With a return in the range of 5-6% this is the last avenue a tax saver would resort to. The dismal returns provided by these bonds have resulted in the investors shying away from these bonds. The return is hardly good enough to fight inflation, leave alone wealth creation. So investing in any of the above avenues would help you reduce your taxable income by a maximum of Rs 1 lakh, irrespective of how much you earn and under which tax bracket you fall.

II. A.

Asset Classes for Diversification : Stocks & Bonds: Trding in stocks or making long term investments is fairly a

complicated job, as choosing from innumerous company stocks of different industries and also of companies based in different countries is by far tedious and confusing for an individual. However an investor can make smart investments by taing care of the following guidelines before investing : Look for positive price momentum Diversify between industry groups

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Beware os stodgy stocks Weedout takeover situations Check out the chart (Technical Analysis) Other Criterion : Earnings Growth, market capitalisations, buy the price performers,

and share price of the stock. (Fundamental Analysis)

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MUTUAL FUND
A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

33

The flow chart below describes broadly the working of a mutual fund.

A mutual fund is a managed group of owned securities of several corporations. These corporations receive dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors purchase shares in the mutual fund as if it was an individual security. After paying operating costs, the earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion to the amount of money invested. A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; it may be considered as a fluid capital stock. The number of shares changes as investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time for a market price. However the open-end market price is influenced greatly by the fund managers. On the other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with the market. But with

34

close-end funds, the fund manager has less influence because the price of the underlining owned securities has greater influence.

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time.

Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. The concept of mutual fund originated in Belgium by the Society Generale de Belgique in the year 1822. Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on

35

day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly depending on the type of scheme.

TYPES OF MUTUAL FUNDS SCHEMES

Mutual fund schemes may be classified on the basis of its structure and its investment objective:-

A) By Structure 1) Open-ended Fund

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. The term Mutual fund is the common name for an open-end investment company. Being open-ended means that at the end of every day, the investment management company sponsoring the fund issues new shares to investors and buys back shares from investors wishing to leave the fund.

2) Closed-end Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period

36

at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges.

3) Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

B) By Investment Objective 1) Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors for a period of time.

1) Income Funds

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

2) Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

37

3) Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. Money market funds have relatively low risks, compared to other mutual funds (and most other investments). By law, they can invest in only certain high-quality, short-term investments issued by the U.S. government, U.S. corporations, and state and local governments. Money market funds try to keep their net asset value (NAV) which represents the value of one share in a fund at a stable $1.00 per share. But the NAV may fall below $1.00 if the fund's investments perform poorly. Investor losses have been rare, but they are possible. Money market funds pay dividends that generally reflect short-term interest rates, and historically the returns for money market funds have been lower than for either bond or stock funds. That's why "inflation risks" the risk that inflation will outpace and erode investment returns over time can be a potential concern for investors in money market funds.

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GROWTH IN ASSETS UNDER MANAGEMENT

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Trading Forex

Introduction

The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business' income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of

its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates;

40

the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.

Retail participation in off-exchange foreign currency (forex) markets has increased dramatically in the past few years. If you are a retail investor considering participating in this market, you need to fully understand the market and some of its unique features.

Like many other investments,off-exchange foreign currency trading carries a high level of risk and may not be suitable for all investors. In fact, you could lose all of your initial investment and may be liable for additional losses. Therefore, you need to understand the risks associated with this product.

You should also understand the language of the forex markets before trading in those markets. The glossary in the back of this booklet defines some of the most commonly used terms.

It does not suggest that you should or should not participate in the retail off exchange foreign currency market. You should make that decision after consulting with your financial advisor and considering your own financial situation and objectives. In that regard, you may find this booklet helpful as one component of the due diligence process that investors are encouraged to undertake before making any investment decisions about the off-exchange foreign currency market.

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The Foreign Currency Markets

Foreign currency exchange rates are what it costs to exchange one countrys currency for another countrys currency. For example, if you go to England on vacation, you will have to pay for your hotel, meals, admissions fees, souvenirs,and other expenses in British pounds. Since your money is all in US dollars,you will have to use (sell) some of your dollars to buy British pounds.

Trading in foreign currency exchange rates

As you can see from the London vacation example,currency exchange rates fluctuate. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies to make profits. Retail customers also participate in the forex market, generally as speculators who are hoping to profit from changes in currency rates.

Foreign currency exchange rates may be traded in one of three ways:

1.) On an exchange that is regulated by the Commodity FuturesTrading Commission (CFTC). For example, the Chicago Mercantile Exchange offers currency futures and options on futures products. Exchange-traded currency futures and options provide their users with a liquid, secondary market for contracts with a set unit size, a fixed expiration date and centralized clearing.

2.) On an exchange that is regulated by the Securities and Exchange Commission (SEC). For example, the Philadelphia Stock Exchange offers options on currencies (i.e., the right but not the obligation to buy or sell a currency at a specific rate within aspecified time). Exchange-traded options on currencies have characteristics similar to exchangetraded futures and options (e.g.,a liquid, secondary market with a set size, a fixed expiration date and centralized clearing).

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3.) In the off-exchange, also called the over-the-counter (OTC) market. A retail customer trades directly with a counterparty and there is no exchange or central clearinghouse to support the transaction.

Working of the off-exchange currency market

The off-exchange forex market is a large, growing and liquid financial market that operates 24 hours a day, 5 days a week. It is not a market in the traditional sense because there is no central trading location or exchange. Most of the trading is conducted by telephone or through electronic trading networks. The primary market for currencies is the interbank market where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates. The true interbank market is only available to institutions that trade in large quantities and have a very high net worth.

In recent years, a secondary OTC market has developed that permits retail investors to participate in forex transactions.While this secondary market does not provide the same prices as the interbank market, it does have many of the same characteristics.

Source: Alpari.co.uk

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Quotes and prices of foreign currencies

Currencies are designated by three letter symbols.The standard symbols for some of the most commonly traded currencies are: EUR Euros USD United States dollar CAD Canadian dollar GBP British pound JPY Japanese yen AUD Australian dollar CHF Swiss franc

Forex transactions are quoted in pairs because you are buyingone currency while selling another.The first currency is the base currency and the second currency is the quote

currency. The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. For example, if EUR/USD has an ask price of 1.2178, you can buy one Euro for 1.2178 US dollars.

Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price) and the second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). In other words,a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178.

A dealer may not quote the full exchange rate for both sides of the spread. For example, the EUR/USD spread discussed above could be quoted as 1.2170/78.The customer should understand that the first three numbers are the same for both sides of the spread.

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Source: Alpari.co.uk

Transaction costs

Although dealers who are regulated by NFA must disclose their charges to retail customers, there are no rules about how a dealer charges a customer for the services the dealer provides or that limit how much the dealer can charge. Before opening an account, you should check with several dealers and compare their charges as well as their services. If you were solicited by or place your trades through someone other than the dealer, or if your account is managed by someone, you may be charged a separate amount for the third partys services.

Some firms charge a per trade commission, while other firms charge amark-up bywidening the spread between the bid and ask prices they give their customers. In the earlier example, assume that the dealer can get a EUR/USD spread of 1.2173/75 from a bank. If the dealer widens the spread to 1.2170/78 for its customers, the dealer has marked up the spread by .0003 on each side.

Some firms may charge both a commission and a mark up.Firms may also charge a different markup for buying the base currency than for selling it.You should read your agreement with the dealer carefully and be sure you understand how the firm will charge you for your trades.

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Closure of trade

Retail forex transactions are normally closed out by entering into an equal but opposite transaction with the dealer. For example, if you bought Euros with U.S. dollars you would close out the trade by selling Euros for U.S. dollars. This is also called an offsetting or liquidating transaction.

Most retail forex transactions have a settlement date when the currencies are due to be delivered. If you want to keep your position open beyond the settlement date, you must roll the position over to the next settlement date. Some dealers roll open positions over automatically, while other dealers may require you to request the rollover. On most open positions, interest is earned on the long currency and paid on the short currency every time the position is rolled over.The interest that is earned or paid is usually the target interest rate set by the central bank of the country that issued the currency. If the interest rates of the two countries are different, then there is usually an interest rate differential which will result in a net earning or payment of interest.This net interest is often called the rollover rate. It is calculated and either added or deducted from the trader's account at the rollover time of each trading day that the position is open. You should check your agreement with the dealer to see what, if anything, you must do to roll a position over and what fees you will pay for the rollover.

Calculation of profits and losses

When you close out a trade, you can calculate your profits and losses using the following formula:

Price(exchange rate) when selling the base currency

Price when buying - the base currency X = transaction size

Profit or Loss

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Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at 1.2188. If the transaction size is 100,000 Euros, you will have a $100 profit. ($1.2188 $1.2178) X 100,000 = $.001 X 100,000 = $100

Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros at 1.2180, you will have a $100 loss. ($1.2170 $1.2180) X 100,000 = $.001 X 100,000 = $100

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50. ($1.2173 $1.2178) X 100,000 = $.0005 X 100,000 = $50

Similarly, if you sold Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50. ($1.2170 $1.2165) X 100,000 = $.0005 X 100,000 = $50

If the quote currency is not in US dollars, you will have to convert the profit or loss to US dollars at the dealers rate. Further, if the dealer charges commissions or other fees, you must subtract those commissions and fees from your profits and add them to your losses to determine your true profits and losses.

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Minimum money needed to trade forex

Forex dealers can set their own minimum account sizes, so you will have to ask the dealer how much money you must put up to begin trading.Most dealers will also require you to have a certain amount of money in your account for each transaction. This security deposit, sometimes called margin, is a percentage of the transaction value and may be different for different currencies. A security deposit acts as a performance bond and is not a down payment or partial payment for the transaction.

Dealers who are regulated by the CFTC and NFA are required to calculate and collect security deposits that equal or exceed the percentage set by their rules. Although the percentage of the security deposit remains constant, the dollar amount of the security deposit will change with changes in the value of the currency being traded.

The formula for calculating the security deposit is :

Current price of base currency x X transaction size

Security deposit % =

Security deposit requirement given in quote currency

Returning to our Euro example with an initial price of $1.2178 for each Euro and a transaction size of 100,000 Euros, a 2% security deposit would be $2,435.60.

$1.2178 X 100,000 X .02 = $2,435.60

Security deposits allow customers to control transactions with a value many times larger than the funds in their accounts. In this example, $2,435.60 would control $121,780 worth of Euros.. Value of Euros = $1.2178 X 100,000= $121,780

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This ability to control a large amount of one currency, in this case the Euro, using a very small percentage of its value is called leverage or gearing. In our example, the leverage is 50:1 because the security deposit controls Euros worth 50 times the amount of the deposit.

The higher the leverage, the more likely you are to lose your entire investment if exchange rates go down when you expect them to go up (or go up when you expect them to go down). Leverage of 50:1 means that you will lose your initial investment when the currency loses (or gains) 2% of its value, and you will lose more than your initial investment if the currency loses (or gains) more than 2% of its value. If you want to keep the position open, you may have to deposit additional funds to maintain a 2% security deposit.

Dealers may not guarantee that you will not lose more than you invest, which includes both the initial deposit and any subsequent deposits to keep the position open. Dealers may charge you for losses that are greater than the amount you invested.

Risks of Trading in the Forex Market

Although every investment involves some risk,the risk of loss in trading off-exchange forex contracts can be substantial. Therefore, if you are considering participating in this market, you should understand some of the risks associated with this product so you can make an informed decision before investing.

THE MARKET COULD MOVE AGAINST YOU.

No one can predict with certainty which way exchange rates will go, and the forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and

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the time you close it out will affect the price of your forex contract and the potential profit and losses relating to it.

YOU COULD LOSE YOUR ENTIRE INVESTMENT.

You will be required to deposit an amount of money (often referred to as a security deposit or "margin") with your forex dealer in order to buy or sell an off-exchange forex contract. As discussed earlier, a relatively small amount of money can enable you to hold a forex position worth many times the account value.This is referred to as leverage or gearing.The smaller the deposit in relation to the underlying value of the contract, the greater the leverage.

If the price moves in an unfavourable direction, high leverage can produce large losses in relation to your initial deposit. In fact,even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.

Other Issues to Consider

In addition to understanding how the off-exchange forex market works and some of the risks associated with this product, there are other unique features about the market that you need to understand before you decide whether to invest in this market and which dealer to use.

Regulatory of off-exchange foreign currency trading

The Commodity Futures Trading Commission (CFTC) has

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regulatory authority over retail off-exchange forex markets. The Commodity Exchange Act (CEA) allows the sale of OTC forex futures and options to retail customers if, and only if, the counterparty (the person on the other side of the transaction) is a regulated entity. These regulated entities include the following: Financial institutions, such as banks and savings associations, SEC-registered broker dealers and certain of their affiliates, CFTC-registered futures commission merchants (FCMs) and certain of their affiliates, CFTC-Registered Retail Foreign Exchange Dealers Financial holding companies, insurance companies, and investment bank holding companies.

In addition, except for the regulated entities noted above, any entity or individual soliciting retail forex orders, managing retail forex accounts or operating a retail forex pool must register with the CFTC as an Introducing Broker, Commodity Trading Advisor or Commodity Pool Operator or as an associated person of one of these entities. These entities and individuals must also become Members of National Futures Association.

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Carbon Credit
Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is equal to one metric tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources.

The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. Buyers and sellers can also use an exchange platform to trade, such as the Carbon Trade Exchange, which is like a stock exchange for carbon credits. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously validated Clean Development Mechanism.

Background
Burning of fossil fuels is a major source of industrial greenhouse gas emissions[citation needed], especially for power, cement, steel, textile, fertilizer and many other industries which rely on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc., all of which increase the atmosphere's ability to trap infrared energy and thus affect the climate.

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The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The IPCC (Intergovernmental Panel on Climate Change) has observed that: Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. Such policies could include economic instruments, government funding and regulation

While noting that a tradable permit system is one of the policy instruments that has been shown to be environmentally effective in the industrial sector, as long as there are reasonable levels of predictability over the initial allocation mechanism and long-term price.

The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market mechanisms were agreed through the subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.

Emission allowances
Under the Kyoto Protocol, the 'caps' or quotas for Greenhouse gases for the developed Annex 1 countries are known as Assigned Amounts and are listed in Annex B. The quantity of the initial assigned amount is denominated in individual units, called Assigned amount units (AAUs), each of which represents an allowance to emit one metric tonne of carbon dioxide equivalent, and these are entered into the country's national registry.

In turn, these countries set quotas on the emissions of installations run by local business and other organizations, generically termed 'operators'. Countries manage this through their national registries, which are required to be validated and monitored for compliance by the UNFCCC. Each operator has an allowance of credits, where each unit gives the owner the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market. As demand for energy grows over time, the total

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emissions must still stay within the cap, but it allows industry some flexibility and predictability in its planning to accommodate this.

By permitting allowances to be bought and sold, an operator can seek out the most costeffective way of reducing its emissions, either by investing in 'cleaner' machinery and practices or by purchasing emissions from another operator who already has excess 'capacity'.

Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries within the European Union under its European Trading Scheme (EU ETS) with the European Commission as its validating authority. From 2008, EU participants must link with the other developed countries who ratified Annex I of the protocol, and trade the six most significant anthropogenic greenhouse gases. In the United States, which has not ratified Kyoto, and Australia, whose ratification came into force in March 2008, similar schemes are being considered.

Kyoto's 'Flexible mechanisms'

A tradable credit can be an emissions allowance or an assigned amount unit which was originally allocated or auctioned by the national administrators of a Kyoto-compliant capand-trade scheme, or it can be an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to be constructed and credited in advance of the Kyoto trading period.

The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits

Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric

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effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use. Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in Assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under Annex B of the Kyoto Protocol.

These carbon projects can be created by a national government or by an operator within the country. In reality, most of the transactions are not performed by national governments directly, but by operators who have been set quotas by their country.

Emission markets
For trading purposes, one allowance or CER is considered equivalent to one metric ton of CO2 emissions. These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC.

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Each transfer of ownership within the European Union is additionally validated by the European Commission.

Climate exchanges have been established to provide a spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity. Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent (CO2e). Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon dioxide with respect to their global warming potential. These features reduce the quota's financial impact on business, while ensuring that the quotas are met at a national and international level.

Currently there are six exchanges trading in carbon allowances: the Chicago Climate Exchange, European Climate Exchange, NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange Bratislava and the European Energy Exchange. NASDAQ OMX Commodities Europe listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs). Many companies now engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on one of the exchanges. At least one private electronic market has been established in 2008: CantorCO2e. Carbon credits at Commodity Exchange Bratislava are traded at special platform - Carbon place.

Managing emissions is one of the fastest-growing segments in financial services in the City of London with a market estimated to be worth about 30 billion in 2007. Louis Redshaw, head of environmental markets at Barclays Capital predicts that "Carbon will be the world's biggest commodity market, and it could become the world's biggest market overall."

Setting a market price for carbon

Unchecked, energy use and hence emission levels are predicted to keep rising over time. Thus the number of companies needing to buy credits will increase, and the rules of supply and demand will push up the market price, encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell.

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An individual allowance, such as an Assigned amount unit (AAU) or its near-equivalent European Union Allowance (EUA), may have a different market value to an offset such as a CER. This is due to the lack of a developed secondary market for CERs, a lack of homogeneity between projects which causes difficulty in pricing, as well as questions due to the principle of supplementarity and its lifetime. Additionally, offsets generated by a carbon project under the Clean Development Mechanism are potentially limited in value because operators in the EU ETS are restricted as to what percentage of their allowance can be met through these flexible mechanisms.

Yale University economics professor William Nordhaus argues that the price of carbon needs to be high enough to motivate the changes in behavior and changes in economic production systems necessary to effectively limit emissions of greenhouse gases.

Raising the price of carbon will achieve four goals. First, it will provide signals to consumers about what goods and services are high-carbon ones and should therefore be used more sparingly. Second, it will provide signals to producers about which inputs use more carbon (such as coal and oil) and which use less or none (such as natural gas or nuclear power), thereby inducing firms to substitute low-carbon inputs. Third, it will give market incentives for inventors and innovators to develop and introduce low-carbon products and processes that can replace the current generation of technologies. Fourth, and most important, a high carbon price will economize on the information that is required to do all three of these tasks. Through the market mechanism, a high carbon price will raise the price of products according to their carbon content. Ethical consumers today, hoping to minimize their carbon footprint, have little chance of making an accurate calculation of the relative carbon use in, say, driving 250 miles as compared with flying 250 miles. A harmonized carbon tax would raise the price of a good proportionately to exactly the amount of CO2 that is emitted in all the stages of production that are involved in producing that good. If 0.01 of a ton of carbon emissions results from the wheat growing and the milling and the trucking and the baking of a loaf of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The carbon footprint is automatically calculated by the price system. Consumers would still not know how much of the price is due to carbon emissions, but they could make their decisions confident that they are paying for the social cost of their carbon footprint.

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Nordhaus has suggested, based on the social cost of carbon emissions, that an optimal price of carbon is around $30(US) per ton and will need to increase with inflation.

The social cost of carbon is the additional damage caused by an additional ton of carbon emissions. The optimal carbon price, or optimal carbon tax, is the market price (or carbon tax) on carbon emissions that balances the incremental costs of reducing carbon emissions with the incremental benefits of reducing climate damages.If a country wished to impose a carbon tax of $30 per ton of carbon, this would involve a tax on gasoline of about 9 cents per gallon. Similarly, the tax on coal-generated electricity would be about 1 cent per kWh, or 10 percent of the current retail price. At current levels of carbon emissions in the United States, a tax of $30 per ton of carbon would generate $50 billion of revenue per year.

Carbon credits can reduce emissions

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets.

For example, consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government is an Annex I country that enacts a law to limit the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. Instead it may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.

We should consider the impact of manufacturing alternative energy sources. For example, the energy consumed and the Carbon emitted in the manufacture and transportation of a large wind turbine would prohibit a credit being issued for a predetermined period of time.

One seller might be a company that will offer to offset emissions through a project in the developing world, such as recovering methane from a swine farm to feed a power station that previously would use fossil fuel. So although the factory continues to emit

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gases, it would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissions from the atmosphere for that year. Another seller may have already invested in new low-emission machinery and have a surplus of allowances as a result. The factory could make up for its emissions by buying 20,000 tonnes of allowances from them. The cost of the seller's new machinery would be subsidized by the sale of allowances. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly.

Additionality and its importance

It is also important for any carbon credit (offset) to prove a concept called additionality. The concept of additionality addresses the question of whether the project would have happened anyway, even in the absence of revenue from carbon credits. Only carbon credits from projects that are "additional to" the business-as-usual scenario represent a net environmental benefit. Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits; or that are compelled by regulations; or that represent common practice in an industry are usually not considered additional, although a full determination of additionality requires specialist review.

It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD). "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in

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GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."

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Exchange Traded Funds

An Exchange Traded Fund (ETF) is an open-ended fund, it is like a unit investment instrument that is registered under the Investment Company Act of 1940, and traded by investors on a registered national securities exchange. The exchange traded fund is issues shares or giving the owner of the shares an economic interest in the fund assets. An index based exchange traded fund is one which track the performance of an index in the market, by holding in its portfolio either the stock which content in the index or the index it is a representative sample of the securities in the index. The number of shares outstanding in an exchange traded fund is not fixed. Its vary as per the movement of the market and the requirement of the market forces. Hence it is also called "open-ended" exchange traded funds or ETFs.

Exchange Traded Funds are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. It is being traded in the stock exchange like an individual companies share in the market. Unlike regular open-end mutual funds. It can be bought and sold throughout the trading day like any stock.

The exchange traded funds first came into existence in the USA in 1993. Where it is being traded in the USA market and it took several years for them to attract public interest. But once they did, the volumes took off like anything in the market. Over the time it becomes very popular in the market and with in few years more than $505.50 billion is invested in more than 660 exchange traded funds which are got listed in the world market. And more than 60% of trading volumes on the American Stock Exchange are from exchange traded funds only. In other words Exchange Traded Funds are basically index funds that are listed and traded on exchanges like stocks. Before it is development and known as of Exchange Traded Funds (ETFs). This was not possible before, but globally exchange traded funds have opened a whole new phenomena of investment opportunities in to the retail as well as institutional money market. They enable investors to gain all types of the exposure to entire stock markets in different countries and specific sectors with relative ease, on a real-time basis, and it is available on the real time basis in the global market at a lower cost than many other forms of investment in the financial market.

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Its also provides exposure to an index of securities that trade on the exchange like a single stock. There are different types of the exchanges traded funds in the global market that offer a number of advantage & disadvantages over a traditional open-ended index funds. The first exchange traded funds in India, stated on National Stock Exchange of India (NSE), that is known as Nifty BeEs (Nifty Benchmark Exchange Traded Scheme) based on S&P CNX Nifty, was launched in January 2002 by Benchmark Mutual Fund. After a long-long time interval where as it is started trading in the USA market since 1993. Its symbol on NSE is NIFTYBEES.

There are different types of exchange traded funds in the market which are given as below,

SPDRs - The S&P 500 Depository Receipts were the first ETFs to be in the market in 1993. SPDRs track the S&P 500. There are select sector SPDR funds available. These are traded on he AMEX.

QQQs - Popularly known as Cubes are listed on the NASDAQ and track the NASDAQ-100. It is one of the most liquid ETFs. The average daily trading volume in QQQ is around 89 million shares.

Shares - World Equity Benchmark Shares are listed on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index.

HOLDRs - represents an undivided beneficial ownership in common stock of a group of several companies within a specified industry. HOLDRs are unlike other ETFs, which add and drop shares depending on changes in the underlying index. In HOLDRs the underlying securities once pre-defined do not change unless due to mergers, acquisitions or other occurrences those lead to the termination of the common shares of the company.

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ETFs derive more liquidity:- ETFs derive their liquidity first from trading the shares in
the secondary market and second through the in-kind creation / redemption process with the fund in creation unit size.

Due to the unique in-kind creation / redemption process of ETFs, the liquidity of an ETF is actually the liquidity in the underlying ETFs allow investors to take benefit of intra-day movements in the market, which is not possible with open-ended funds.

With ETFs one pays lower management fees. As ETFs are listed on the exchange, distribution and other operational expenses are significantly lower, making it costeffective. These savings in cost are passed on to the investor. ETFs have lower tracking error due to the in-kind for creation and redemption.

Due to its unique structure, the long-term investors are insulated from short term trading in the fund.

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Gold Exchange Traded Fund

INTRODUCTION

Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors. Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.

History

The first gold exchange-traded product was Central Fund of Canada, a closed-end fund founded in 1961. It later amended its articles of incorporation in 1983 to provide investors with an exchange-tradable product for ownership of gold and silver bullion. It has been listed on the Toronto Stock Exchange since 1966 and the AMEX since 1986.

The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval at first and was only launched later in March 2007. The first gold ETF actually launched was Gold Bullion Securities, which listed 28 March 2003 on the Australian Stock Exchange. Graham Tuckwell, the founder and major shareholder of ETF Securities, was behind the launch of this fund.

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Source: Alpari.co.uk

Fees

Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each share, so the amount of gold in each share will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars.

In the United States, sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate for collectibles, rather than the rates applied to equity securities.

Exchange-traded and closed-end funds

Central Fund of Canada and Central Gold Trust The Central Fund of Canada (TSX: CEF.A, TSX: CEF.U, NYSE: CEF) and the Central Gold Trust (TSX: GTU.UN, TSX: GTU.U, NYSE: GTU) are closed-end funds headquartered in

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Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in precious metals, with a small percentage of cash. The Central Fund of Canada holds primarily a mix of gold and silver, while the Central Gold Trust holds primarily gold.

The custodian of the precious metals assets of both funds is the main Calgary branch of CIBC. Both funds are considered especially safe because of their published codes of governance and ethics, the Central Fund's history of operation since 1961, and the funds' simple prospectuses which equate shares of the closed-end funds with real units of ownership in the trusts. As of October 2009, the Central Fund of Canada held 42.6 tonnes of gold and 2129.7 tonnes of silver in storage, and the Central Gold Trust held 13.6 tons of gold in storage.

Claymore Gold Bullion ETF

In May 2009 Canadian-based Claymore Investments launched Claymore Gold Bullion ETF (TSX: CGL). As of November 2010 the fund held 10.4 tonnes in gold assets.

Exchange Traded Gold

Several associated gold ETF's are grouped under the name Exchange Traded Gold. The Exchange Traded Gold funds are sponsored by the World Gold Council, and as of June 2009 held 1,315.95 tonnes of gold in storage. Exchange Traded Gold securities are listed on multiple exchanges worldwide by various ETF providers, including:

SPDR Gold Shares

SPDR Gold Shares marketed by State Street Global Markets LLC, an affiliate of State Street Global Advisors, accounts for over 80 percent of the gold within the Exchange Traded Gold group. As of 2009, SPDR Gold Shares is the largest and most liquid gold ETF on the market, and the second-largest exchange-traded fund (ETF) in the world.

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Stock market listings:

United States (NYSE: GLD), Japan (TYO: 1326), Hong Kong (HKEX: 2840) and Singapore (SGX:GLD 10US$)

The SPDR Gold Trust ETF (GLD) holds a proportion of its gold in allocated form in London at HSBC, where it is audited twice a year by the company Inspectorate. GLD has been criticized by Catherine Austin Fitts and Carolyn Betts for its extremely complex structure and prospectus, possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold, and overall lack of transparency. GLD has been compared with mortgage-backed securities and collateralized debt obligations.[9] These problems with SPDR Gold Trust are not necessarily unique to the fund, however as the dominant gold ETF the fund has received the most extensive analysis.

Standard Risk Factors:

Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal. As the price / value / interest rates of the securities in which the Scheme invests fluctuate, the value of your investment in theScheme may go up or down depending on various factors and forces affecting the capital markets/bullion market. Past performance of the Sponsor/AMC/Mutual Fund does not guarantee future performance of the Scheme. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operations of the Scheme beyond the contribution of Rs. 1,50,000/- (Rupees One Lakh Fifty Thousand Only) made by it towards the corpus of the Mutual Fund. The present Scheme is not a guaranteed or assured return scheme.

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Some of the key factors affecting gold prices are:

Demand & Supply of Gold

The price of gold is affected by demand & supply of gold in India and in the global markets. The demand and supply of gold in turn is influenced by factors such as forward selling by gold producers, purchases made by gold producers to unwind gold hedge positions, central bank purchases and sales, level of production in the gold producing countries etc.

Central Bank Actions

Central banks hold a part of their reserves in gold to meet unexpected monetary needs, diversification of risk etc. The quantum of their sale in the market is one of the major determinants of gold prices. A higher supply than anticipated would lead to subdued gold prices and vice versa. Central banks buy gold to augment their existing reserves and to diversify from other asset classes. This acts as a support factor for gold prices.

Inflation Trends and Interest Rate Changes

Gold has always been considered a good hedge against inflation. Rising inflation rates typically appreciate gold prices and vice versa. It has an inverse relationship with interest rates. As gold is pegged to the US dollar, interest rates in US affect gold prices. Whenever interest rates fall, gold prices increase. Lowering interest rates increases gold prices as gold becomes a better investment option vis-a-vis debt products that earn lower interest and vice versa.

Gold ETF vs. Buying Physical Gold

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Parameters Mode

Gold ETF
Demat

Jeweler
Jewellery/Bar/Coins High Risk Cant Say

Banks
Bar/Coins High Risk High on Purity

Safety/Storage No risk of theft Purity of Gold 99.5 % or higher

Pricing Liquidity

Transparent. cost.

Low

on Cant Say

High Mark up

On business days on the Relatively at High Low on Liquidity exchange Cost Pre-defined

Denomination 1 unit (1 or 1/2 gram of Pre-defined

Gold)

CONCLUSION
With development of economy, income of people is increasing. So there is need for portfolio management services as everyone needs financial assistance. Since childhood we are taught how to earn money but not to invest money.

Portfolio management is one of the emerging services in India. Indian market being one of the highest returns providing market both in equity and debt. FII investments in India have increased significantly in previous decade.

Earnings of Indians have increased have increased but due to limited knowledge of financial market very few people invest in equity and debt. Instead of this people invest in traditional investment avenues such as bank deposits, fixed deposits, etc.

Media had taken many efforts to improve financial knowledge of Indian population. In future I believe portfolio management is going to be highly demanded service in India.

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REFERENCES
Investment Analysis and Portfolio Management- by Frank K Reilly

Investment analysis and portfolio management-by keith c Brown

Investment Leadership and Portfolio Management- by Brian Singer, Barry Mandinach, Greg Fedorinchik

Project Portfolio Management- by Harvey A. Levine

The Art of Asset Allocation - Asset Allocation Principles and Investment Strategies for Any Market -by David M. Darst

Thesis-Portfolio management.pdf

WEBOGRAPHY
http://en.wikipedia.org/wiki/Foreign_exchange_market

http://en.wikipedia.org/wiki/Portfolio_(finance)

Alpari.co.uk

http://www.investopedia.com/search/default.aspx?q=carbon%20credit#axzz1pKZQLpSn