A STUDY ON VARIOUS INVESTMENT AVENUES

CHAPTER NO SUB1ECTS COVERED PAGE NO

1
2
Introduction of currency derivatives
Company Profile
3 Research Methodology
Scope of Research
Type of Research
Source of Data collection
Objective of the Study
Data collection
Limitations
4 Introduction to The topic
Introduction of Financial Derivatives
Types of Financial Derivatives
Derivatives Introduction in India
istory of currency derivatives
!tility of currency derivatives
Introduction to "urrency Derivatives
Introduction to "urrency Future
# Brief Overview of the foreign exchange market
Overvie$ of forei%n e&chan%e mar'et in India
"urrency Derivatives (roducts
Forei%n )&chan%e Spot *ar'et
Forei%n )&chan%e +uotations
,eed for e&chan%e traded currency futures
Rationale for Introducin% "urrency Future
Future Terminolo%y
!ses of currency futures
Tradin% and settlement (rocess
Re%ulatory Frame$or' for "urrency Futures
"omparison of For$ard - Future "urrency "ontracts
. Analysis
Interest Rate (arity (rinciple
(roduct Definitions of currency future
"urrency futures payoffs
(ricin% Futures and "ost of "arry model
ed%in% $ith currency futures
Findings suggestions and Conclusions
Bibliography
1
INTRODUCTION
Financial Management
Financial *ana%ement means plannin%/ or%ani0in%/ directin% and controllin% the financial
activities such as procurement and utili0ation of funds of the enterprise1 It means applyin%
%eneral mana%ement principles to financial resources of the enterprise1
Scope/Elements
1. Investment decisions includes investment in fi&ed assets 2called as capital
bud%etin%31Investment in current assets are also a part of investment decisions called as $or'in%
capital decisions1
2. Financial decisions 4 They relate to the raisin% of finance from various resources $hich
$ill depend upon decision on type of source/ period of financin%/ cost of financin% and the
returns thereby1
3. Dividend decision 4 The finance mana%er has to ta'e decision $ith re%ards to the net
profit distribution1 ,et profits are %enerally divided into t$o5
Dividend for shareholders4 Dividend and the rate of it has to be decided1
Retained profits4 6mount of retained profits has to be finali0ed $hich $ill depend upon
e&pansion and diversification plans of the enterprise1
Objectives of Financial Management
The financial mana%ement is %enerally concerned $ith procurement/ allocation and control of
financial resources of a concern1 The objectives can be4
1. To ensure re%ular and ade7uate supply of funds to the concern1
2. To ensure ade7uate returns to the shareholders $hich $ill depend upon the earnin%
capacity/ mar'et price of the share/ e&pectations of the shareholders1
3. To ensure optimum funds utili0ation1 Once the funds are procured/ they should be utili0ed
in ma&imum possible $ay at least cost1
2
4. To ensure safety on investment/ i1e1/ funds should be invested in safe ventures so that
ade7uate rate of return can be achieved1
5. To plan a sound capital structure4There should be sound and fair composition of capital
so that a balance is maintained bet$een debt and e7uity capital1
Functions of Financial Management
81 Estimation of capital requirements: 6 finance mana%er has to ma'e estimation $ith
re%ards to capital re7uirements of the company1 This $ill depend upon e&pected costs and profits
and future pro%rammes and policies of a concern1 )stimations have to be made in an ade7uate
manner $hich increases earnin% capacity of enterprise1
91
31 Determination of capital composition: Once the estimation has been made/ the capital
structure have to be decided1 This involves short4 term and lon%4 term debt e7uity analysis1 This
$ill depend upon the proportion of e7uity capital a company is possessin% and additional funds
$hich have to be raised from outside parties1
41
#1 Choice of sources of funds: For additional funds to be procured/ a company has many
choices li'e4
a1 Issue of shares and debentures
b1 Loans to be ta'en from ban's and financial institutions
c1 (ublic deposits to be dra$n li'e in form of bonds1
"hoice of factor $ill depend on relative merits and demerits of each source and period of
financin%1
.1 Investment of funds: The finance mana%er has to decide to allocate funds into profitable
ventures so that there is safety on investment and re%ular returns is possible1
:1 Disposal of surplus: The net profits decision has to be made by the finance mana%er1
This can be done in t$o $ays5
a1 Dividend declaration 4 It includes identifyin% the rate of dividends and other
benefits li'e bonus1
3
b1 Retained profits 4 The volume has to be decided $hich $ill depend upon
e&pansional/ innovational/ diversification plans of the company1
c1
;1 Management of cash: Finance mana%er has to ma'e decisions $ith re%ards to cash
mana%ement1 "ash is re7uired for many purposes li'e payment of $a%es and salaries/ payment
of electricity and $ater bills/ payment to creditors/ meetin% current liabilities/ maintenance of
enou%h stoc'/ purchase of ra$ materials/ etc1
<1
8=1 Financial controls: The finance mana%er has not only to plan/ procure and utili0e the
funds but he also has to e&ercise control over finances1 This can be done throu%h many
techni7ues li'e ratio analysis/ financial forecastin%/ cost and profit control/ etc1
Role of a Financial Manager
Financial activities of a firm is one of the most important and comple& activities of a firm1
Therefore in order to ta'e care of these activities a financial mana%er performs all the re7uisite
financial activities1
6 financial man%er is a person $ho ta'es care of all the important financial functions of an
or%ani0ation1 The person in char%e should maintain a far si%htedness in order to ensure that the
funds are utili0ed in the most efficient manner1 is actions directly affect the (rofitability/
%ro$th and %ood$ill of the firm1
Following are the main functions of a Financial Manager:
1. Raising of Funds
In order to meet the obli%ation of the business it is important to have enou%h cash and li7uidity1
6 firm can raise funds by the $ay of e7uity and debt1 It is the responsibility of a financial
mana%er to decide the ratio bet$een debt and e7uity1 It is important to maintain a %ood balance
bet$een e7uity and debt1
4
2. Allocation of Funds
Once the funds are raised throu%h different channels the ne&t important function is to allocate the
funds1 The funds should be allocated in such a manner that they are optimally used1 In order to
allocate funds in the best possible manner the follo$in% point must be considered
The si0e of the firm and its %ro$th capability
Status of assets $hether they are lon% term or short tem
*ode by $hich the funds are raised1
These financial decisions directly and indirectly influence other mana%erial activities1 ence
formation of a %ood asset mi& and proper allocation of funds is one of the most important
activity
3. Profit Planning
(rofit earnin% is one of the prime functions of any business or%ani0ation1 (rofit earnin% is
important for survival and sustenance of any or%ani0ation1 (rofit plannin% refers to proper usa%e
of the profit %enerated by the firm1 (rofit arises due to many factors such as pricin%/ industry
competition/ state of the economy/ mechanism of demand and supply/ cost and output1 6 healthy
mi& of variable and fi&ed factors of production can lead to an increase in the profitability of the
firm1 Fi&ed costs are incurred by the use of fi&ed factors of production such as land and
machinery1 In order to maintain a tandem it is important to continuously value the depreciation
cost of fi&ed cost of production1 6n opportunity cost must be calculated in order to replace those
factors of production $hich has %one thro$n $ear and tear1 If this is not noted then these fi&ed
cost can cause hu%e fluctuations in profit1
4. Understanding Capital Markets
Shares of a company are traded on stoc' e&chan%e and there is a continuous sale and purchase of
securities1 ence a clear understandin% of capital mar'et is an important function of a financial
mana%er1 >hen securities are traded on stoc' mar'et there involves a hu%e amount of ris'
involved1 Therefore a financial man%er understands and calculates the ris' involved in this
tradin% of shares and debentures1 It?s on the discretion of a financial mana%er as to ho$ distribute
the profits1 *any investors do not li'e the firm to distribute the profits amon%st share holders as
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dividend instead invest in the business itself to enhance %ro$th1 The practices of a financial
mana%er directly impact the operation in capital mar'et1
OB1ECTIVES OF THE PRO1ECT:
The purpose of the study $as to determine the savin% behavior and investment
preferences of customers1 "ustomer perception $ill provide a $ay to accurately measure ho$ the
customers thin' about the products and services provided by the company1 Today?s tryin%
economic conditions have forced difficult decisions for companies1 *ost are ma'in%
conservative decisions that reflect a survival mode in the business operations1 Durin% these
difficult times/ understandin% $hat customers on an on%oin% basis is critical for survival1
)&ecutives need a 3
rd
party understandin% on $here customer loyalties stand1 *ore than ever
mana%ement needs on%oin% feedbac' from the customers/ partners and employees in order to
continue to innovate and %ro$1 The main objective of the project is to find out the needs of
current and future customers1 For this report/ customer perception and a$areness level $ill be
measured in many important areas li'e5
To understand all about different investment avenues available in India1
To find out ho$ the investors %et information about the various financial instrument
To find out ho$ the investor $ants to invest i1e1 on his o$n or throu%h a bro'er1
To find out the savin% habits of the different customers and the amount they invest in
various financial instruments1
To find out the financial instrument they li'e to invest1
To find out the time duration in $hich they prefer to 'eep their money invest1
>hat is the return that they e&pect from the investment@
>hat are the various factors that they consider before investin%@
To find out the ris' profile of the investor1
To %ive a recommendation to the investors that $here they should invest1
To %ive a su%%estion to company $here our fund lac's in the mar'et - ho$ it should be
rectified1
6
6fter all as a mana%ement trainee I $ill try to %et some valuable 'no$led%e from my
seniors in the or%ani0ation as $ell as from my faculty %uide $hich $ill help me in the
future1
To evaluate the consumer attitude to$ards savin% and decision ma'in% re%ardin%
investments1
VALUE ADDITION TO THE COMPANY
This report $ill help the company to stren%then customer intimacy1 The report on various
investment avenues available In India $ill help the company in many areas li'e mutual
funds/ e7uity shares/ commodities 1
It $ill help the company to understand the e&pectations the customer have about their
company from the perspective of financial performance and corporate social
responsibility1
It $ill provide fresh insi%hts $hich can help their business continue to flourish1
The company can identify the particular service re7uirements of different types of
customers1
The company can understand the problem areas1
The company can evaluate ne$ services initiatives1
The study $ill help in %ainin% a better understandin% of $hat an investor loo's for in an
investment option1
It can be used by the financial sector in desi%nin% better financial instrument customi0ed
to suit the needs of the investor1
It $ill help a%ents and bro'ers in mar'etin% the e&istin% instruments1
It $ill provide 'no$led%e to the customer about the various financial services provided
by the company to their customers1
It can help the company to understand $hat is the re7uirement of the different cate%ories
of customers
This report $ill be developed in order to empo$er companies $ith detailed primary
mar'et research needed to ma'e $ell informed decisions and it $ill provide independent
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measurement and validation of the health of company?s relationship $ith their customers1 These
are the various advanta%es $hich $ill %ive some value addition to the company in understandin%
the a$areness level of the customer about the various investment options and $hat is the
perception of the investors $ith re%ard to the investments they $ant to ma'e1
RESEARCH METHODOLOGY :
Source of Data54
(rimary Data 5 +uestionnaire/ visitin% or%ani0ation1
Secondary Data 5 Information from the "ompany/ >ebsites/ journals and ma%a0ines1
Sample Si0e 5 8==1
Samplin% techni7ue5 Random samplin%
SAMPLING METHODOLOGY
Sampling Technique: Initially/ a rou%h draft $as prepared 'eepin% in mind the objective of the
research1 6 pilot study $as done in order to 'no$ the accuracy of the +uestionnaire1 The final
+uestionnaire $as arrived only after certain important chan%es $ere done1 "onvenience
samplin% techni7ue $ill be used for collectin% the data from the Shriram Insi%ht Stoc' Aro'in%
customers1 The consumers are selected by the convenience sampling method1 The selection of
units from the population based on their easy availability and accessibility to the researcher is
'no$n as convenience samplin%1
Convenience sampling is at its best in surveys dealing with an exploratory purpose for
generating ideas and hypothesis.
Sampling Unit:
The respondents $ho $ere as'ed to fill out 7uestionnaires are the samplin% units1 These
comprise of employees of *,"s/ Bovt1 )mployees/ Self )mployed and e&istin% customers of
Shriram Insi%ht Share Aro'ers Ltd
Sample size:
The sample si0e $as restricted to only 8==/ $hich comprised of mainly people from different
re%ions of yderabad due to time constraints1
Sampling Area: Hyderabad
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Data Collection
+uestionin% - observin% are the t$o basic methods of collectin% primary data1 +uestionnaire
studies are more relevant than observation studies
Importance of Questionnaire
>hen information is to be collected by as'in% 7uestions to people $ho may have the desired
data/ a standardi0ed form called 7uestionnaire is prepared $hich helps to brin% the data as such
re7uired for the research $or'1 The 7uestionnaire is a list of 7uestions to be as'ed to the
respondents1 )ach 7uestion is $orded e&actly as it is to be as'ed - the 7uestions are listed in an
established se7uence1 Spaces in $hich to record ans$ers are provided in 7uestionnaire1
Presentation of the data
The collected data $ill be analy0ed and $ill be represented throu%h various charts/ %raphs/ pie
charts/ tabulation and a master sheet of the surveyed data1 The data $ill be presented to
determine mar'et shares and percenta%e of readers out of the total population1 The same pattern
$ill be repeated in the case of advertisers1
LIMITATIONS OF THE STUDY
The project is based upon various financial instruments that are available in India and the
perception level of the customer about these financial instruments1 For $hich there $ill be the
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need of information from the customers about their 'no$led%e of these financial products1 The
various limitations of the study are5
Total number of financial instrument in the mar'et is so lar%e that it needs a lot of resources to
analy0e them all1 There are various companies providin% these financial instruments to the
public1 andlin% and analy0in% such a varied and diversified data needs a lot of time and
resources1
6s the project is based on secondary data/ possibility of unauthori0ed information cannot be
avoided1
Reluctance of the people to provide complete information about themselves can affect the
validity of responses1
Due to time and cost constraint study $ill be conducted in only selected area of yderabad
The lac' of 'no$led%e in customers about the financial instruments can be a major limitation1
The information can be biased due to use of 7uestionnaires1
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THEREOTICAL FRAMEWORK
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Indian Financial System
The economic development of a nation is reflectin% by the pro%ress of the various
economic units/ broadly classified into corporate sector/ %overnment and household sector1 >hile
performin% their activities these units $ill be place in a surplusCdeficit Cbalanced bud%etary
situations1
There are areas or people $ith surplus funds and there are those $ith a deficit1 6 financial
system or financial sector functions as an intermediary and facilitates the flo$ of funds from the
areas of surplus to the areas of deficit1 6 Financial System is a composition of various
institutions/ mar'ets/ re%ulations and la$s/ practices/ money mana%er/ analysts/ transactions and
claims and liabilities1
Financial System
The $ord DsystemD/ in the term Dfinancial systemD/ implies a set of comple& and closely
connected or interlined institutions/ a%ents/ practices/ mar'ets/ transactions/ claims/ and liabilities
in the economy1 The financial system is concerned about money/ credit and finance4the three
terms are intimately related yet are some$hat different from each other1 Indian financial system
consists of financial mar'et/ financial instruments and financial intermediation1
Components/Constituents of Indian Financial System
The follo$in% are the four major components that comprise the Indian Financial System5
81 Financial Institutions
91 Financial *ar'ets
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31 Financial InstrumentsC6ssetsCSecurities
41 Financial Service
#1 The structure of each component is to detail as follo$s and the role and si%nificance of
each component $as discussed belo$1
Financial Institutions
Financial institutions are the intermediaries $ho facilitate smooth functionin% of the
financial system by ma'in% investors and borro$ers meet1 They mobili0e savin%s of the surplus
units and allocate them in productive activities promisin% a better rate of return1 Financial
institutions also provide services to entities see'in% advice on various issues ran%in% from
restrictin% to diversification plans1 They provide $hole ran%e of services to the entities $ho $ant
to raise funds from the mar'ets or else$here1
Types of Financial Institutions
Financial institutions can classify into t$o cate%ories5
61 Aan'in% Institutions
A1 ,on4Aan'in% Financial Institutions
A. Banking Institutions
The Indian ban'in% institutions can broadly classified into t$o cate%ories5
1. Or%ani0ed sector
2. !nor%ani0ed sector
Organized sector
The or%ani0ed ban'in% sector consists of commercial ban's/ cooperative ban's and the re%ional
rural ban's1
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Commercial Bank
The commercial ban's may be scheduled ban's are non4scheduled ban's1 6t present/
only one ban' is a non4scheduled ban'1 6ll other ban's are scheduled ban's1 The commercial
ban's consist of 9: public sector ban's/ private ban's/ private sector ban's and forei%n ban's1
Co-operative Banks
6n important se%ment of the or%ani0ed sector of India ban'in% is the cooperative
ban'in%/ the se%ment is represent by a %roup of societies re%istered under the 6cts of the States
relatin% to co4operative societies1 In fact/ co4operative societies may be credit societies are non4
credit societies1
Regional Rural Banks (RRBs)
The state %overnment and the sponsorin% commercial ban's $ith the objective of
developin% the rural economy set re%ional Rural Aan's1 Re%ional rural ban's provide ban'in%
services and credit to small farmers/ small entrepreneurs in the rural areas1 Of Eissan "redit
"ards/ introduction of self4help %roups etc1 for improvin% the overall performance of RRAs1
Foreign Banks have been in India from Aritish days1 6,F Brindlays an' has its presence in
number of places $ith #. branches1 The Standard and "hartered Aan' has 94 branches and on%
Eon% Aan' 981
Unorganized Sector
In the unor%ani0ed ban'in% sector are the indi%enous ban'ers/ moneylenders/ and
saucers? carryin% out the function of ban'in%1
B. Non-Banking Institutions
The non4ban'in% institutions may cate%ori0e broadly into t$o %roups1
81 Or%ani0ed Financial Institutions
91 !nor%ani0ed Financial Institutions
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(a) Organized Financial Institutions
The or%ani0ed non4ban'in% financial institutions include5
Development of Finance Institutions
These include5
The institutions li'e IDAI/ I"I"I/ IF"I/ IIAI/ and IRD" at all India level1
2SF"s3 State Industrial Development/ "orporations 2Sid?s3 at the state level1 It includes those
financial institutions/ $hich mobili0e savin%s of the public at lar%e throu%h various schemes and
invest these funds in corporate and %overnment securities1 These include LI"/ BI"/ !TI/ and
mutual funds1
(b) Unorganized Financial Institutions
The unor%ani0ed non4ban'in% financial institutions include number of non4ban'in%
financial companies 2,AF"s3 providin% $hole ran%e of financial services1 These include hire
purchase and consumer finance companies/ leasin% companies/ housin% finance companies/
factorin% companies/ credit ratin% a%encies/ merchant ban'in% companies etc1
FINANCIAL MARKETS
Finance is the pre4re7uisite for modern business and financial institutions play a vital role
in the economic system1 It is throu%h financial mar'ets and institutions that the financial system
of an economy $or's1 Financial mar'ets refer to the institutional arran%ements for dealin% in
financial assets and credit instruments of different types such as currency/ "he7ue/ ban' deposits/
bills/ bonds/ etc1
Functions
The main functions of the financial mar'ets are5
81 To facilitate creation and allocation of credit and li7uidityG
91 To assist the process of balanced economic %ro$thG
31 To serve as intermediaries for mobili0ation of savin%sG
41 To provide financial convenience1
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Types of Financial Market
Aased on credit re7uirement for short4term and lon%4term purposes/ financial mar'ets are
dividin% into t$o cate%ories5
81 *oney *ar'et
91 "apital *ar'et
Money Market
The term money mar'et is use in a composite sense to mean financial institutions/ $hich
deal $ith short4term funds in the economy1 It refers to the institutional arran%ements facilitatin%
borro$in% and lendin% of short4term funds1
The money mar'et brin%s to%ether the lenders $ho have surplus short term invest funds
and the borro$ers $ho are in need of short4term funds1 In a money mar'et/ funds can be
borro$ed for a short period varyin% from a day/ a $ee'/ a month/ or 3 to . months and a%ainst
different types of instruments/ such as bill of e&chan%e/ ban'ers? acceptances/ bonds/ etc1/ called
Hnear money?1 Thus "ro$ther as has defined money mar'et/ Ithe collective name %iven to the
various firms and institutions that deal in the various %rades of near moneyJ1
Capital Market
6 capital mar'et may be defined as an or%ani0ed mechanism for effective and efficient
transfer of money capital or financial resources from the investin% parties/ i1e1/ individuals or
institutional savers to the entrepreneurs 2individuals or institutions3 en%a%ed in industry or
commerce in the business be either in the private or public sectors of an economy1
Forex Market
The Fore& mar'et deals $ith the multicurrency re7uirements/ $hich is re7uirement by the
e&chan%e of currencies1 Dependin% on the e&chan%e rate that is applicable/ the transfer of funds
ta'es place in this mar'et1 This is one of the most developed and inte%rated mar'et across the
%lobe1
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Credit Market
The "redit mar'et is a place $here ban's/ FIs and ,AF"s purvey short/ medium and
lon%4term loans to be provided to all types of the corporate and individuals1
CHARACTERISICS OF INVESTMENT
"ertain features characteri0e all investments1 The follo$in% are the main characteristics feature if
investments5 4
1. Return:-
6ll investments are characteri0ed by the e&pectation of a return1 In fact/ investments are made
$ith the primary objective of derivin% a return1 The return may be received in the form of yield
plus capital appreciation1 The difference bet$een the sale price - the purchase price is capital
appreciation1 The dividend or interest received from the investment is the yield1 Different types
of investments promise different rates of return1 The return from an investment depends upon the
nature of investment/ the maturity period - a host of other factors1
2. Risk: -
Ris' is inherent in any investment1 The ris' may relate to loss of capital/ delay in repayment of
capital/ nonpayment of interest/ or variability of returns1 >hile some investments li'e
%overnment securities - ban' deposits are almost ris' less/ others are more ris'y1 The ris' of an
investment depends on the follo$in% factors1=The lon%er the maturity period/ the lon%er is the
ris'1
The lo$er the credit $orthiness of the borro$er/ the hi%her is the ris' 1The ris' varies $ith the
nature of investment1 Investments in o$nership securities li'e e7uity share carry hi%her ris'
compared to investments in debt instrument li'e debentures - bonds1
3. Safety: -
The safety of an investment implies the certainty of return of capital $ithout loss of money or
time1 Safety is another features $hich an investors desire for his investments1 )very investor
e&pects to %et bac' his capital on maturity $ithout loss - $ithout delay1
4. Liquidity: -
6n investment/ $hich is easily saleable/ or mar'etable $ithout loss of money - $ithout loss of
time is said to possess li7uidity1 Some investments li'e company deposits/ ban' deposits/ (1O1
deposits/ ,S"/ ,SS etc1 are not mar'etable1 Some investment instrument li'e preference shares
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- debentures are mar'etable/ but there are no buyers in many cases - hence their li7uidity is
ne%li%ible1 )7uity shares of companies listed on stoc' e&chan%es are easily mar'etable throu%h
the stoc' e&chan%es1 6n investor %enerally prefers li7uidity for his investment/ safety of his
funds/ a %ood return $ith minimum ris' or minimi0ation of ris' - ma&imi0ation of return1
INVESTMENT AVENUES IN INDIA
There are a lar%e number of investment instruments available today1
To ma'e our lives easier $e $ould classify or %roup them under 4 main types of investment
avenues1 >e shall name and briefly describe them1
81 Financial securities5
These investment instruments are freely tradable and ne%otiable1 These $ould include e7uity
shares/ preference shares/ convertible debentures/ non4convertible debentures/ public sector
bonds/ savin%s certificates/ %ilt4ed%ed securities and money mar'et securities1
91 ,on4securities financial securities5
These investment instruments are not tradable/ transferable nor ne%otiable1 6nd $ould include
ban' deposits/ post office deposits/ company fi&ed deposits/ provident fund schemes/ national
savin%s schemes and life insurance1
31 *utual fund schemes5
If an investor does not directly $ant to invest in the mar'ets/ heCshe could buy unitsCshares in a
mutual fund scheme1 These schemes are mainly %ro$th 2or e7uity3 orientedG income 2or debt3
oriented or balanced 2i1e1 both %ro$th and debt3 schemes1
41 Real assets5
Real assets are physical investments/ $hich $ould include real estate/ %old - silver/ precious
stones/ rare coins - stamps and art objects1 Aefore choosin% the avenue for investment the
investor $ould probably $ant to evaluate and compare them1 This $ould also help him in
creatin% a $ell4diversified portfolio/ $hich is both maintainable and mana%eable1
Financial Instruments/ Assets/ Securities
6nother important constituent of financial system is financial assetsCinstruments1 They
represent a claim a%ainst the future income and $ealth of others1 In other $ords/ a financial
instrument is a claim/ a%ainst a person or an institution/ for the payment of a sum of money
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andCor a periodic payment in the form of interest or dividend/ at a specified future date1 In
financial mar'ets/ varieties of investors operate1
To suit their re7uirements/ the companies and financial institutions issue different types
of securities1 In other $ords/ financial mar'etsCsystem promotes development of innovative
financial products suited to the investment re7uirements of hetero%eneous investors1
Financial Securities May Classify Under Two Broad Categories
Primary Securities
These are also termed as Hdirect securities? are issued directly by the ultimate borro$ers
of funds to the ultimate savers or investors1 (rimary securities include e7uity shares/ preference
shares and debentures1
Secondary Securities
These securities are also termed as Hindirect securities? as these are not issued directly by
the ultimate borro$ers/ rather/ these are issued by financial intermediaries to ultimate savers1
Insurance policies/ units of the mutual funds/ ban' deposits etc1 are the e&amples of secondary
securities1
Financial Services
)fficiency of emer%in% financial system lar%ely depends upon the 7uality and variety of
financial services provided by financial intermediaries1 The term financial services can be define
as Iactivities/ benefits and satisfactions/ connected $ith the sale of money that offers to users and
customers/ financial related valueJ1
Financial service or%ani0ations render services to industrial enterprises and ultimate consumer
mar'ets1 >ithin the financial services industry the main sectors are ban's/ financial institutions
and non4ban'in% financial companies1
Suppliers of financial services 2financial intermediaries3 include the follo$in% type of
institutions5
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81 Aan's and Financial Institutions
91 ouse Auildin% Societies
31 Insurance "ompanies
41 "redit "ard Issuer "ompanies
#1 Investment Trusts and *utual Funds
.1 Stoc' )&chan%es
:1 Leasin% "ompaniesC)7uipment FinanceC"onsumer Finance "ompanies
;1 !nit Trusts
Kinds of Financial Services
Financial services provided by various financial institutions/ commercial ban's and
merchant ban'ers could broadly classify into t$o cate%ories1
81 6ssets basedCfund based services
91 Fee basedCadvisory services
The Important Fund Based Services Include
81 ire (urchase and "onsumer "redit
91 Aill Discountin%
31 )7uipment Leasin%CFinance
41 Kenture "apital
#1 ousin% Finance
.1 Insurance Services
:1 Factory
The Fee Based/Advisory Services Include
81 Issue *ana%ement
91 (ortfolio *ana%ement
31 "orporate "ounselin%
41 Loan Syndication
#1 *er%ers and 6c7uisition
.1 "apital Restructurin%
20
:1 "redit Ratin%
;1 Stoc' Aro'in% and so on1
The emer%ence of the mar'et for derivative products/ most notably for$ards/ futures
and options/ can be traced bac' to the $illin%ness of ris'4averse economic a%ents to %uard
themselves a%ainst uncertainties arisin% out of fluctuations in asset prices1 Ay their very nature/
the financial mar'ets are mar'ed by a very hi%h de%ree of volatility1 Throu%h the use of
derivative products/ it is possible to partially or fully transfer price ris's by loc'in%Lin asset
prices1 6s instruments of ris' mana%ement/ these %enerally do not influence the fluctuations in
the underlyin% asset prices1 o$ever/ by loc'in%4in asset prices/ derivative products minimi0e
the impact of fluctuations in asset prices on the profitability and cash flo$ situation of ris'4
averse investors1
Mutual Fund:
*utual fund is a pool of money collected from investors and is invested
accordin% to stated investment objectives *utual fund investors are li'e shareholders and they
o$n the fund1 *utual fund investors are not lenders or deposit holders in a mutual fund1
)verybody else associated $ith a mutual fund is a service provider/ $ho earns a fee1 The money
in the mutual fund belon%s to the investors and nobody else1 *utual funds invest in mar'etable
securities accordin% to the investment objective1 The value of the investments can %o up or do$n/
chan%in% the value of the investor?s holdin%s1,6K of a mutual fund fluctuates $ith mar'et price
movements1 The mar'et value of the investors? funds is also called as net assets1 Investors hold a
proportionate share of the fund in the mutual fund1 ,e$ investors come in and old investors can
e&it/ at prices related to net asset value per unit1
Emergence of Mutual Funds:-
*utual Funds no$ represent perhaps the most appropriate investment opportunity
for most small investors1 6s financial mar'ets become more sophisticated and comple&/ investor
need a financial intermediary $ho provides the re7uired 'no$led%e and professional e&pertise on
successful investin%1 It is no $onder then that in the birthplace of mutual funds4the !1S1614the
fund industry has already overta'en the ban'in% industry/ $ith more money under *utual Fund
mana%ement than deposited $ith ban's1
The Indian *utual Fund industry has already opened up many e&citin% investment
opportunities to Indian investors1 Despite the e&pected continuin% %ro$th in the industry/ *utual
Fund is a still ne$ financial intermediary in India1
21
History of Mutual Funds54
In the second half of 8<
th
century/ investor in !E considered the
stoc' mar'et is %ood for the investment1 Aut for small investor it is not possible to operate in the
mar'et effectively1 This led to establishment of an investment company $hich led to the small
investor to invest in e7uity mar'et1 The first investment company $as the Scottish46merican
Investment "ompany/ set up in London in 8;.=1
Mutual Fund Industry in India:-
*utual Fund is an instrument of investin% money1 ,o$adays/ ban' rates have fallen
do$n and are %enerally belo$ the inflation rate1 Therefore/ 'eepin% lar%e amounts of money in
ban' is not a $ise option/ as in real terms the value of money decreases over a period of time1
One of the options is to invest the money in stoc' mar'et1 Aut a common investor is not
informed and competent enou%h to understand the intricacies of stoc' mar'et1 This is $here
mutual funds come to the rescue1 6 mutual fund is a %roup of investors operatin% throu%h a fund
mana%er to purchase a diverse portfolio of stoc's or bonds1 *utual funds are hi%hly cost efficient
and very easy to invest in1 Ay poolin% money to%ether in a mutual fund/ investors can purchase
stoc's or bonds $ith much lo$er tradin% costs than if they tried to do it on their o$n1 6lso/ one
doesnMt have to fi%ure out $hich stoc's or bonds to buy1 Aut the bi%%est advanta%e of mutual
funds is diversification1

Diversification means spreadin% out money across many different types of
investments1 >hen one investment is do$n another mi%ht be up1 Diversification of investment
holdin%s reduces the ris' tremendously1
In 8<.3/ the %overnment of India too' the initiative by passin% the !TI act/ under
$hich the !nit Trust of India 2!TI3 $as set4up as a statutory body1 The desi%nated role of !TI
$as to set up a *utual Fund1 !TI?s first scheme/ called1 In 8<;: the other public sector
institutions set up their *utual Funds1 In 8<<9/ %overnment allo$ed the private sector players to
set4up their funds1 In 8<<4 the forei%n *utual Funds arrives in Indian mar'et1 In 9==8 there is a
crisis in !TI and in 9==3 !TI splits up into !TI 8and !TI 91 The history of Indian *utual Fund
industry can be e&plained easily by various phases

Benefits of Investing in Mutual Funds
Professional Management: -
22
*utual Funds provide the services of e&perienced and s'illed professionals/ bac'ed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme1
Diversification: -
*utual Funds invest in a number of companies across a broad cross4section of
industries and sectors1 This diversification reduces the ris' because seldom do all stoc's decline
at the same time and in the same proportion1 Nou achieve this diversification throu%h a *utual
Fund $ith far less money than you can do on your o$n1
Convenient Administration:
Investin% in a *utual Fund reduces paper$or' and helps you avoid many problems such
as bad deliveries/ delayed payments and follo$ up $ith bro'ers and companies1 *utual Funds
save your time and ma'e investin% easy and convenient1
Return Potential: -
Over a medium to lon%4term/ *utual Funds have the potential to provide a hi%her
return as they invest in a diversified bas'et of selected securities1
LOWCOSTS: -

*utual Funds are a relatively less e&pensive $ay to invest compared to directly
investin% in the capital mar'ets because the benefits of scale in bro'era%e/ custodial and other
fees translate into lo$er costs for investors1
Liquidity: -
In open4end schemes/ the investor %ets the money bac' promptly at net asset
value related prices from the *utual Fund1 In closed4end schemes/ the units can be sold on a
stoc' e&chan%e at the prevailin% mar'et price or the investor can avail of the facility of direct
repurchase at ,6K related prices by the *utual Fund1
Transparency5 4
Nou %et re%ular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme/ the proportion invested in each
class of assets and the fund mana%erMs investment strate%y and outloo'1
23
Flexibility: -
Throu%h features such as re%ular investment plans/ re%ular $ithdra$al plans and
dividend reinvestment plans/ you can systematically invest or $ithdra$ funds accordin% to your
needs and convenience1
Affordability: -
Investors individually may lac' sufficient funds to invest in hi%h4%rade stoc's1 6
mutual fund because of its lar%e corpus allo$s even a small investor to ta'e the benefit of its
investment strate%y1
Choice of Schemes5 4
*utual Funds offer a family of schemes to suit your varyin% needs over a lifetime1
Well Regulated
6ll *utual Funds are re%istered $ith S)AI and they function $ithin the provisions
of strict re%ulations desi%ned to protect the interests of investors1 The operations of *utual Funds
are re%ularly monitored by S)AI1
Disadvantages of Investing Mutual Funds:-
Professional Management: -
Some funds doesn?t perform in neither the mar'et/ as their mana%ement is not dynamic
enou%h to e&plore the available opportunity in the mar'et/ thus many investors debate over
$hether or not the so4called professionals are any better than mutual fund or investor himself/ for
pic'in% up stoc's1
Costs: L
The bi%%est source of 6*" income is %enerally from the entry - e&it load
$hich they char%e from investors/ at the time of purchase1 The mutual fund industries are thus
char%in% e&tra cost under layers of jar%on1
Dilution: -
Aecause funds have small holdin%s across different companies/ hi%h returns from
a fe$ investments often donMt ma'e much difference on the overall return1 Dilution is also the
result of a successful fund %ettin% too bi%1 >hen money pours into funds that have had stron%
success/ the mana%er often has trouble findin% a %ood investment for all the ne$ money1
24
Taxes: -
>hen ma'in% decisions about your money/ fund mana%ers donMt consider your
personal ta& situation1 For e&ample/ $hen a fund mana%er sells a security/ a capital4%ain ta& is
tri%%ered/ $hich affects ho$ profitable the individual is from the sale1 It mi%ht have been more
advanta%eous for the individual to defer the capital %ains liability1
Types of Mutual Funds
*utual fund schemes may be classified on the basis of its structure and its objective54
By Structure:-
Open-ended Funds:-
6n open4end fund is one that is available for subscription all throu%h the
year1 These do not have a fi&ed maturity1 Investors can conveniently buy and sell units at ,et
6sset Kalue 2D,6KD3 related prices1 The 'ey feature of open4end schemes is li7uidity1
Closed-ended Funds:-
6 closed4end fund has a stipulated maturity period $hich %enerally
ran%in% from 3 to 8# years1 The fund is open for subscription only durin% a specified period1
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 stoc' e&chan%es $here they are listed1 In order to
provide an e&it route to the investors/ some close4ended funds %ive an option of sellin% bac' the
units to the *utual Fund throu%h periodic repurchase at ,6K related prices1 S)AI Re%ulations
stipulate that at least one of the t$o e&it routes is provided to the investor1
Interval Funds:-
Interval funds combine the features of open4ended and close4ended schemes1
They are open for sale or redemption durin% pre4determined intervals at ,6K related prices1
Money Market Funds:-
The aim of money mar'et funds is to provide easy li7uidity/ preservation of
capital and moderate income1 These schemes %enerally invest in safer short4term instruments
such as treasury bills/ certificates of deposit/ commercial paper and inter4ban' call money1
Returns on these schemes may fluctuate dependin% upon the interest rates prevailin% in the
25
mar'et1 These are ideal for "orporate and individual investors as a means to par' their surplus
funds for short periods1
26
Load Funds:-
6 Load Fund is one that char%es a commission for entry or e&it1 That is/ each
time you buy or sell units in the fund/ a commission $ill be payable1 Typically entry and e&it
loads ran%e from 8O to 9O1 It could be $orth payin% the load/ if the fund has a %ood
performance histor
No-Load Funds:-
6 ,o4Load Fund is one that does not char%e a commission for entry or e&it1 That
is/ no commission is payable on purchase or sale of units in the fund1 The advanta%e of a no load
fund is that the entire corpus is put to $or'1
Tax Saving Schemes:-
These schemes offer ta& rebates to the investors under specific provisions of
the Indian Income Ta& la$s as the Bovernment offers ta& incentives for investment in specified
avenues1 Investments made in )7uity Lin'ed Savin%s Schemes 2)LSS3 and (ension Schemes are
allo$ed as deduction uCs ;; of the Income Ta& 6ct/ 8<.81 The 6ct also provides opportunities to
investors to save capital %ains uCs #4)6 and #4)A by investin% in *utual Funds/ provided the
capital asset has been sold prior to 6pril 8/ 9=== and the amount is invested before September
3=/ 9===
27
Various types of Mutual Funds:
EQUITY FUNDS:
)7uity funds are considered to be the more ris'y funds as compared to other
fund types/ but they also provide hi%her returns than other funds1 It is advisable that an investor
loo'in% to invest in an e7uity fund should invest for lon% term i1e1 for 3 years or more1 There are
different types of e7uity funds each fallin% into different ris' brac'et1 In the order of decreasin%
ris' level/ there are follo$in% types of e7uity funds5
28
AGGRESSIVE GROWTH FUNDS:-
In 6%%ressive Bro$th Funds/ fund mana%ers aspire for ma&imum capital
appreciation and invest in less researched shares of speculative nature1 Aecause of these
speculative investments 6%%ressive Bro$th Funds become more volatile and thus/ are prone to
hi%her ris' than other e7uity funds1
GROWTH FUNDS: 4
Bro$th Funds also invest for capital appreciation 2$ith time hori0on of 3 to # years3 but
they are different from 6%%ressive Bro$th Funds in the sense that they invest in companies that
are e&pected to outperform the mar'et in the future1 >ithout entirely adoptin% speculative
strate%ies/ Bro$th Funds invest in those companies that are e&pected to post above avera%e
earnin%s in the future1
EQUITY INCOME OR DIVIDEND YIELD FUNDS: -
The objective of )7uity Income or Dividend Nield )7uity Funds is to %enerate
hi%h recurrin% income and steady capital appreciation for investors by investin% in those
companies $hich issue hi%h dividends 2such as (o$er or !tility companies $hose share prices
fluctuate comparatively lesser than other companiesM share prices31 )7uity Income or Dividend
Nield )7uity Funds are %enerally e&posed to the lo$est ris' level as compared to other e7uity
funds1
DIVERSIFIED EQUITY FUNDS: -
)&cept for a small portion of investment in li7uid money mar'et/ diversified e7uity
funds invest mainly in e7uities $ithout any concentration on a particular sector2s31 These funds
are $ell diversified and reduce sector4specific or company4specific ris'1 o$ever/ li'e all other
funds diversified e7uity funds too are e&posed to e7uity mar'et ris'1 One prominent type of
diversified e7uity fund in India is )7uity Lin'ed Savin%s Schemes 2)LSS31 6s per the mandate/ a
minimum of <=O of investments by )LSS should be in e7uities at all times1 )LSS investors are
eli%ible to claim deduction from ta&able income 2up to Rs 8 la'h3 at the time of filin% the income
ta& return1 )LSS usually has a loc'4in period and in case of any redemption by the investor
before the e&piry of the loc'4in period ma'es him liable to pay income ta& on such income2s3 for
$hich he may have received any ta& e&emption2s3 in the past1
Equity Index Funds: -
)7uity Inde& Funds have the objective to match the performance of a specific stoc'
mar'et inde&1 The portfolio of these funds comprises of the same companies that form the inde&
and is constituted in the same proportion as the inde&1 )7uity inde& funds that follo$ broad
indices 2li'e S-( ",P ,ifty/ Sense&3 are less ris'y than e7uity inde& funds that follo$ narro$
29
sectoral indices 2li'e AS)A6,E)P or ",P Aan' Inde& etc31 ,arro$ indices are less diversified
and therefore/ are more ris'y1
VALUE FUNDS:-
Kalue Funds invest in those companies that have sound fundamentals and $hose
share prices are currently under4valued1 The portfolio of these funds comprises of shares that are
tradin% at a lo$ (rice to )arnin%s Ratio 2*ar'et (rice per Share C )arnin% per Share3 and a lo$
*ar'et to Aoo' Kalue 2Fundamental Kalue3 Ratio1 Kalue Funds may select companies from
diversified sectors and are e&posed to lo$er ris' level as compared to %ro$th funds or specialty
funds1 Kalue stoc's are %enerally from cyclical industries 2such as cement/ steel/ su%ar etc13
$hich ma'e them volatile in the short4term1 Therefore/ it is advisable to invest in Kalue funds
$ith a lon%4term time hori0on as ris' in the lon% term/ to a lar%e e&tent/ is reduced
SPECIALTY FUNDS: -
Specialty Funds have stated criteria for investments and their portfolio comprises of
only those companies that meet their criteria1 "riteria for some specialty funds could be to
investCnot to invest in particular re%ionsCcompanies1 Specialty funds are concentrated and thus/
are comparatively ris'ier than diversified funds1 There are follo$in% types of specialty funds5
Sector Funds:-
)7uity funds that invest in a particular sectorCindustry of the mar'et are 'no$n as Sector
Funds1 The e&posure of these funds is limited to a particular sector 2say Information Technolo%y/
6uto/ Aan'in%/ (harmaceuticals or Fast *ovin% "onsumer Boods3 $hich is $hy they are more
ris'y than e7uity funds that invest in multiple sectors1
Foreign Securities Funds:-
Forei%n Securities )7uity Funds have the option to invest in one or more forei%n
companies1 Forei%n securities funds achieve international diversification and hence they are less
ris'y than sector funds1 o$ever/ forei%n securities funds are e&posed to forei%n e&chan%e rate
ris' and country ris'1
Mid-Cap or Small-Cap Funds:-
Funds that invest in companies havin% lo$er mar'et capitali0ation than lar%e
capitali0ation companies are called *id4"ap or Small4"ap Funds1 *ar'et capitali0ation of *id4
"ap companies is less than that of bi%/ blue chip companies 2less than Rs1 9#== "r but more than
Rs1 #== "r3 and Small4"ap companies have mar'et capitali0ation of less than Rs1 #== "r1 *ar'et
"apitali0ation of a company can be calculated by multiplyin% the mar'et price of the companyMs
share by the total number of its outstandin% shares in the mar'et1 The shares of *id4"ap or
30
Small4"ap "ompanies are not as li7uid as of Lar%e4"ap "ompanies $hich %ives rise to volatility
in share prices of these companies and conse7uently/ investment %ets ris'y1
Option Income Funds:-
>hile not yet available in India/ Option Income Funds $rite options on a lar%e
fraction of their portfolio1 (roper use of options can help to reduce volatility/ $hich is other$ise
considered as a ris'y instrument1 These funds invest in bi%/ hi%h dividend yieldin% companies/
and then sell options a%ainst their stoc' positions/ $hich %enerate stable income for investors1
MONEY MARKET / LIQUID FUNDS:-
*oney mar'et C li7uid funds invest in short4term 2maturin% $ithin one year3
interest bearin% debt instruments1 These securities are hi%hly li7uid and provide safety of
investment/ thus ma'in% money mar'et C li7uid funds the safest investment option $hen
compared $ith other mutual fund types1 o$ever/ even money mar'et C li7uid funds are e&posed
to the interest rate ris'1 The typical investment options for li7uid funds include Treasury Aills
2issued by %overnments3/ "ommercial papers 2issued by companies3 and "ertificates of Deposit
2issued by ban's31
HYBRID FUNDS:-
6s the name su%%ests/ hybrid funds are those funds $hose portfolio includes a
blend of e7uities/ debts and money mar'et securities1 ybrid funds have an e7ual proportion of
debt and e7uity in their portfolio1 There are follo$in% types of hybrid funds in India5
Balanced Funds: -
The portfolio of balanced funds includes assets li'e debt securities/ convertible
securities/ and e7uity and preference shares held in a relatively e7ual proportion1 The objectives
of balanced funds are to re$ard investors $ith a re%ular income/ moderate capital appreciation
and at the same time minimi0in% the ris' of capital erosion1 Aalanced funds are appropriate for
conservative investors havin% a lon% term investment hori0on1
Growth-and-Income Funds: -
Funds that combine features of %ro$th funds and income funds are 'no$n as Bro$th4
and4Income Funds1 These funds invest in companies havin% potential for capital appreciation and
31
those 'no$n for issuin% hi%h dividends1 The level of ris's involved in these funds is lo$er than
%ro$th funds and hi%her than income funds1
ASSET ALLOCATION FUNDS: -
*utual funds may invest in financial assets li'e e7uity/ debt/ money mar'et or non4
financial 2physical3 assets li'e real estate/ commodities etc11 6sset allocation funds adopt a
variable asset allocation strate%y that allo$s fund mana%ers to s$itch over from one asset class
to another at any time dependin% upon their outloo' for specific mar'ets1 In other $ords/ fund
mana%ers may s$itch over to e7uity if they e&pect e7uity mar'et to provide %ood returns and
s$itch over to debt if they e&pect debt mar'et to provide better returns1 It should be noted that
s$itchin% over from one asset class to another is a decision ta'en by the fund mana%er on the
basis of his o$n jud%ment and understandin% of specific mar'ets/ and therefore/ the success of
these funds depends upon the s'ill of a fund mana%er in anticipatin% mar'et trends1
DEBT / INCOME FUNDS:-
Funds that invest in medium to lon%4term debt instruments issued by private
companies/ ban's/ financial institutions/ %overnments and other entities belon%in% to various
sectors 2li'e infrastructure companies etc13 are 'no$n as Debt C Income Funds1 Debt funds are
lo$ ris' profile funds that see' to %enerate fi&ed current income 2and not capital appreciation3 to
investors1 In order to ensure re%ular income to investors/ debt 2or income3 funds distribute lar%e
fraction of their surplus to investors1 6lthou%h debt securities are %enerally less ris'y than
e7uities/ they are subject to credit ris' 2ris' of default3 by the issuer at the time of interest or
principal payment1 To minimi0e the ris' of default/ debt funds usually invest in securities from
issuers $ho are rated by credit ratin% a%encies and are considered to be of DInvestment BradeD1
Debt funds that tar%et hi%h returns are more ris'y1 Aased on different investment objectives/ there
can be follo$in% types of debt funds54
Diversified Debt Funds: -
Debt funds that invest in all securities issued by entities belon%in% to all sectors of the
mar'et are 'no$n as diversified debt funds1 The best feature of diversified debt funds is that
investments are properly diversified into all sectors $hich results in ris' reduction1 6ny loss
incurred/ on account of default by a debt issuer/ is shared by all investors $hich further reduces
ris' for an individual investor1
Focused Debt Funds: -
32
!nli'e diversified debt funds/ focused debt funds are narro$ focus funds that are
confined to investments in selective debt securities/ issued by companies of a specific sector or
industry or ori%in1 Some e&amples of focused debt funds are sector/ speciali0ed and offshore debt
funds/ funds that invest only in Ta& Free Infrastructure or *unicipal Aonds1 Aecause of their
narro$ orientation/ focused debt funds are more ris'y as compared to diversified debt funds1
6lthou%h not yet available in India/ these funds are conceivable and may be offered to investors
very soon1
High Yield Debt funds: -
6s $e no$ understand that ris' of default is present in all debt funds/ and therefore/
debt funds %enerally try to minimi0e the ris' of default by investin% in securities issued by only
those borro$ers $ho are considered to be of Dinvestment %radeD1 Aut/ i%h Nield Debt Funds
adopt a different strate%y and prefer securities issued by those issuers $ho are considered to be
of Dbelo$ investment %radeD1 The motive behind adoptin% this sort of ris'y strate%y is to earn
hi%her interest returns from these issuers1 These funds are more volatile and bear hi%her default
ris'/ althou%h they may earn at times hi%her returns for investors1

Assured Return Funds: -
6lthou%h it is not necessary that a fund $ill meet its objectives or provide assured
returns to investors/ but there can be funds that come $ith a loc'4in period and offer assurance of
annual returns to investors durin% the loc'4in period1 6ny shortfall in returns is suffered by the
sponsors or the 6sset *ana%ement "ompanies 26*"s31 These funds are %enerally debt funds
and provide investors $ith a lo$4ris' investment opportunity1 o$ever/ the security of
investments depends upon the net $orth of the %uarantor 2$hose name is specified in advance on
the offer document31 To safe%uard the interests of investors/ S)AI permits only those funds to
offer assured return schemes $hose sponsors have ade7uate net4$orth to %uarantee returns in the
future1 In the past/ !TI had offered assured return schemes 2i1e1 *onthly Income (lans of !TI3
that assured specified returns to investors in the future1 !TI $as not able to fulfill its promises
and faced lar%e shortfalls in returns1 )ventually/ %overnment had to intervene and too' over
!TIMs payment obli%ations on itself1 "urrently/ no 6*" in India offers assured return schemes to
investors/ thou%h possible1
Fixed Term Plan Series: -
Fi&ed Term (lan Series usually are closed4end schemes havin% short term maturity
period 2of less than one year3 that offer a series of plans and issue units to investors at re%ular
intervals1 !nli'e closed4end funds/ fi&ed term plans are not listed on the e&chan%es1 Fi&ed term
33
plan series usually invest in debt C income schemes and tar%et short4term investors1 The objective
of fi&ed term plan schemes is to %ratify investors by %eneratin% some e&pected returns in a short
period1
GILT FUNDS:-
6lso 'no$n as Bovernment Securities in India/ Bilt Funds invest in %overnment
papers 2named dated securities3 havin% medium to lon% term maturity period1 Issued by the
Bovernment of India/ these investments have little credit ris' 2ris' of default3 and provide safety
of principal to the investors1 o$ever/ li'e all debt funds/ %ilt funds too are e&posed to interest
rate ris'1 Interest rates and prices of debt securities are inversely related and any chan%e in the
interest rates results in a chan%e in the ,6K of debtC%ilt funds in an opposite direction1
OTHERS:
COMMODITY FUNDS:-
Those funds that focus on investin% in different commodities 2li'e metals/ food
%rains/ crude oil etc13 or commodity companies or commodity futures contracts are termed as
"ommodity Funds1 6 commodity fund that invests in a sin%le commodity or a %roup of
commodities is a speciali0ed commodity fund and a commodity fund that invests in all available
commodities is a diversified commodity fund and bears less ris' than a speciali0ed commodity
fund1 D(recious *etals FundD and Bold Funds 2that invest in %old/ %old futures or shares of %old
mines3 are common e&amples of commodity funds1
REAL ESTATE FUNDS:-
Funds that invest directly in real estate or lend to real estate developers or invest in
sharesCsecuriti0ed assets of housin% finance companies/ are 'no$n as Speciali0ed Real )state
Funds1 The objective of these funds may be to %enerate re%ular income for investors or capital
appreciation1
EXCHANGE TRADED FUNDS (ETF):-
)&chan%e Traded Funds provide investors $ith combined benefits of a closed4end
and an open4end mutual fund1 )&chan%e Traded Funds follo$ stoc' mar'et indices and are
traded on stoc' e&chan%es li'e a sin%le stoc' at inde& lin'ed prices1 The bi%%est advanta%e
offered by these funds is that they offer diversification/ fle&ibility of holdin% a sin%le share
2tradable at inde& lin'ed prices3 at the same time1 Recently introduced in India/ these funds are
7uite popular abroad1
34
FUND OF FUNDS:-
*utual funds that do not invest in financial or physical assets/ but do invest in other
*utual Fund schemes offered by different 6*"s/ are 'no$n as Fund of Funds1 Fund of Funds
maintain a portfolio comprisin% of units of other mutual fund schemes/ just li'e conventional
mutual funds maintain a portfolio comprisin% of e7uityCdebtCmoney mar'et instruments or non
financial assets1 Fund of Funds provide investors $ith an added advanta%e of diversifyin% into
different mutual fund schemes $ith even a small amount of investment/ $hich further helps in
diversification of ris's1 o$ever/ the e&penses of Fund of Funds are 7uite hi%h on account of
compoundin% e&penses of investments into different mutual fund schemes1
FUND STRUCTURE AND CONSTITUENTS:-
*utual funds in India have a 34tier structure of Sponsor4Trustee46*"
1Sponsor is the promoter of the fund1 Sponsor creates the 6*" and the trustee company and
appoints the Aoards of both these companies/ $ith S)AI approval1 6 mutual fund is constituted
as a Trust1 6 trust deed is si%ned by trustees and re%istered under the Indian Trust 6ct1 The
mutual fund is formed as trust in India/ and supervised by the Aoard of Trustees1 The trustees
appoint the asset mana%ement company 26*"3 to actually mana%e the investor?s money1 The
6*"?s capital is contributed by the sponsor1 The 6*" is the business face of the mutual fund1
Investors? money is held in the Trust 2the mutual fund31 The 6*" %ets a fee for mana%in% the
funds/ accordin% to the mandate of the investors1 The trustees ma'e sure that the funds are
mana%ed accordin% to the investors? mandate1 Sponsor should have at least #4year trac' record in
the financial services business and should have made profit in at least 3 out of the # years1
Sponsor should contribute at least 4=O of the capital of the 6*"1 Trustees are appointed by the
sponsor $ith S)AI approval1 6t least #=O of trustees should be independent1 6t least #=O of the
6*"?s Aoard should be of independent members1 6n 6*" cannot en%a%e in any business other
than portfolio advisory and mana%ement1 6n 6*" of one fund cannot be Trustee of another
fund16*" should have a net $orth of at least Rs1 8= "r at all times1 6*" should be re%istered
$ith S)AI 6*" si%ns an investment mana%ement a%reement $ith the trustees1 Trustee "ompany
and 6*" are usually private limited companies1 Trustees oversee the 6*" and see' re%ular
reports and information from them1 Trustees are re7uired to meet at least 4 times a year to revie$
the 6*" the investors? funds and the investments are held by the custodian1 Sponsor and the
custodian cannot be the same entity1 R-T a%ents mana%e the sale and repurchase of units and
'eep the unit holder accounts1 If the schemes of one fund are ta'en over by another fund/ it is
called as scheme ta'e over1 This re7uires S)AI and trustee approval1 If t$o 6*"s mer%e/ the
sta'es of sponsor?s chan%es and the schemes of both funds come to%ether1 i%h court/ S)AI and
Trustee approval needed1 If one 6*" or sponsor buys out the entire sta'e of another sponsor in
an 6*"/ there is a ta'eover of 6*"1 The sponsor/ $ho has sold out/ e&its the 6*"1 This needs
hi%h court approval as $ell as S)AI and Trustee approval1 Investors can choose to e&it at ,6K if
35
they do not approve of the transfer1 They have a ri%ht to be informed1 ,o approval is re7uired/ in
the case of open4ended funds1 For close4ended funds the investor approval is re7uired for all
cases of mer%er and ta'es over1

EQUITY SHARES
ABOUT SHARES:-
6t the most basic level/ stoc' 2often referred to as shares3 is o$nership/ or e7uity/ in a company1
Investors buy stoc' in the form of shares/ $hich represent a portion of a companyMs assets
2capital3 and earnin%s 2dividends31
6s a shareholder/ the e&tent of your o$nership 2your sta'e3 in a company depends on the number
of shares you o$n in relation to the total number of shares available For e&ample/ if you buy
8=== shares of stoc' in a company that has issued a total of 8==/=== shares/ you o$n one per
cent of the company1
>hile one per cent seems li'e a small holdin%/ very fe$ private investors are able to accumulate
a shareholdin% of that si0e in publicly 7uoted companies/ many of $hich have a mar'et value
runnin% into billions of pounds1 Nour sta'e may authori0e you to vote at the companyMs annual
%eneral meetin%/ $here shareholders usually receive one vote per share1
In theory/ every stoc'holder/ no matter ho$ small their sta'e/ can e&ercise some influence over
company mana%ement at the annual %eneral meetin%1 In reality/ ho$ever/ most private investorsM
sta'es are insi%nificant1 *ana%ement policy is far more li'ely to be influenced by the votes of
lar%e institutional investors such as pension funds1
a3 STOCKS SYMBOLS:-
6 stoc' symbol/ or M)picM symbol/ is the standard abbreviation of a stoc'Ms name1 Nou can find
stoc' symbols $herever stoc' performance information is published 4 for e&ample/ ne$spaper
stoc' listin%s and investment $ebsites1 "ompany names also have abbreviations called tic'er
symbols1 o$ever/ itMs $orth rememberin% that these may vary at the different e&chan%es $here
the company is 7uoted1
b3 PERFORMANCE INDICATORS:-
ere is a list of the standard performance indicators
(erformance Indicator Definition
36
"losin% price 5 The last price at $hich the stoc' $as bou%ht or sold
i%h and lo$ 5 The hi%hest and lo$est price of the stoc' from the previous tradin%
day
#9 $ee' ran%e 5 The hi%hest and lo$est price over the previous #9 $ee's
Kolume 5 The amount of shares traded durin% the previous tradin% day i%h
and lo$
,et chan%e 5 The difference bet$een the closin% price on the last tradin% day and
the closin% price on the tradin% day prior to the last
THE STOCK EXCHANGES:-
6 mar'etplace in $hich to buy or sell somethin% ma'es life a lot easier1
The same applies to stoc's1 6 stoc' e&chan%e is an or%ani0ation that provides a mar'etplace in
$hich investors and borro$ers trade stoc's1 Firstly/ the stoc' e&chan%e is a mar'et for issuers
$ho $ant to raise e7uity capital by sellin% shares to investors in an Initial (ublic Offerin% 2I(O31
The stoc' e&chan%e is also a mar'et for investors $ho can buy and sell shares at any time
a) Trading shares on the stock exchange:
6s an investor in the I,DI6/ you canMt buy or sell shares on a stoc' e&chan%e yourself1 Nou need
to place your order $ith a stoc' e&chan%e member firm 2a stoc'bro'er3 $ho $ill then e&ecute
the order on your behalf1 The ,S) 6,D AS) are the leadin% stoc' e&chan%e in the I,DI61
Tradin% is done throu%h computeri0ed systems1
b) The trading process:-
If you decide to buy or sell your shares/ you need to contact a stoc'bro'er $ho $ill buy or sell
the shares on your behalf1 6fter receivin% your order/ the stoc'bro'er $ill input the order on the
S)TS or S)6+ system to match your order $ith that of another buyer or seller1 Details of the
trade are transmitted electronically to the stoc'bro'er $ho is responsible for settlin% the trade1
Nou $ill then receive confirmation of the deal1
37
c) Types of shares available on the stock exchange:-
Nou cannot trade all stoc's on the stoc' e&chan%e1 To be listed on a stoc' e&chan%e/ a stoc' must
meet the listin% re7uirements laid do$n by that e&chan%e in its approval process1 )ach e&chan%e
has its o$n listin% re7uirements/ and some e&chan%es are more particular than others1 It is
possible for a stoc' to be listed on more than one e&chan%e1 This is 'no$n as a dual listin%1
Insurance
(eople need insurance in the first place1 6n insurance policy is primarily meant to protect the
income of the family?s bread earners1 The idea is if any one or both die their dependents continue
to live comfortably1 The circle of life be%ins at birth follo$er by education / marria%e and
eventually after a lifetime of $or' $e loo' for$ard to life of retirement 1 Our finances too tend
to chan%e as $e %o throu%h the various phases of life1 In the first t$enty of our life/ $e are
financially and emotionally dependents on our parents and there are no financial commitments to
be met1 In the ne&t t$enty years $e %ain financial independence and provide financial
independence to our families1 This is also the sta%e $hen our income may be unable to meet the
%ro$in% e&penses of a youn% household1 In the ne&t t$enty as $e see our investments %ro$ after
our children %ro$ and become financially independent1 Insurance is a provision for the
distribution of ris's that is to say it is a financial provision a%ainst loss from unavoidable
disasters1 The protection $hich it affords ta'es form of a %uarantee to indemnify the insured if
certain specified losses occur1 The principle of insurance so far as the underta'in% of the
obli%ation is concerned is that for the payment of a certain sum the %uarantee $ill be %iven to
reimburse the insured1 The insurer in acceptin% the ris's so distributes them that the total of all
the amounts is paid for this insurance protection $ill be sufficient to meet the losses that occur1
Insurance then provide divided responsibility1 This principle is introduced in most stores $here a
division is made bet$een the sales cler' and the cashiers department the arran%ement dividin%
the ris's of loss1 The insurance principle is similarly applied in any other cases of divided
responsibility1 6s a business ho$ever insurance is usually reco%ni0ed as some form of securin% a
promise of indemnity by the payment of premium and the fulfillment of certain other
stipulations1
Types of insurance
Term insurance plans
38
Term insurance is the cheapest form of life insurance available1 Since a term insurance contract
only pays in the event of eventuality the life cover comes at lo$ premium rates1 Term insurance
is a useful tool to purchase a%ainst ris' of early death and protection of an asset1
Endowment plans
)ndo$ment plans are savin%s and protection plans that provide a dual benefit of protection as
$ell as savin%s1 )ndo$ment plans pay a death benefit in the event of an eventuality should the
customer survive the benefit period a maturity benefit is paid to the life insured1
Whole of life plans
6 $hole of life plan provides life insurance cover to an individual up to a specified a%e1 6 $hole
of life plan is suitable for an individual $ho is loo'in% for an e&tended life insurance cover
and Cor $ants to pay premium over as lon% as tenure as possible to reduce the amount of upfront
premium payment1
Pension plans
(ension plans allo$ an individual to save in a ta& differed manner1 6n individual can either
contribute throu%h re%ular premiums or ma'e sin%le premium investments1 Savin%s accumulate
over the deferment period1 Once the contract reaches the vestin% a%e/ the individual has the
option of choosin% an annuity plan from a life insurance company1 6n annuity is paid till the life
the lifetime of the insured or a pre4determined period dependin% upon the annuity option chosen
by the life insured1
Unit Linked Insurance Plans
!nit lin'ed insurance plan 2!LI(3 is life insurance solution that provides for the
benefits of ris' protection and fle&ibility in investment1 The investment is denoted as units and is
represented by the value that it has attained called as ,et 6sset Kalue 2,6K31 The policy value at
any time varies accordin% to the value of the underlyin% assets at the time1
In a !LI(/ the invested amount of the premiums after deductin% for all the char%es and premium
for ris' cover under all policies in a particular fund as chosen by the policy holders are pooled
to%ether to form a !nit fund1 6 !nit is the component of the fund in a unit lin'ed insurance
policy1

The returns in a !LI( depend upon the performance of the fund in the capital mar'et1 !LI(
investors have the option of investin% across various schemes/ i1e/ diversified e7uity funds/
balanced funds/ debt funds etc1 It is important to remember that in a !LI(/ the investment ris' is
39
%enerally borne by the investor1
In a !LI(/ investors have the choice of investin% in a lump sum 2sin%le premium3 or
ma'in% premium payments on an annual/ half4yearly/ 7uarterly or monthly basis1 Investors also
have the fle&ibility to alter the premium amounts durin% the policyMs tenure1 For e&ample/ if an
individual has surplus funds/ he can enhance the contribution in !LI(1 "onversely an individual
faced $ith a li7uidity crunch has the option of payin% a lo$er amount 2the difference bein%
adjusted in the accumulated value of his !LI(31 !LI( investors can shift their investments across
various plansCasset classes 2diversified e7uity funds/ balanced funds/ debt funds3 either at a
nominal or no cost1
Expenses Charged in a ULIP
Premium Allocation Charge:
6 percenta%e of the premium is appropriated to$ards char%es initial and rene$al e&penses apart
from commission e&penses before allocatin% the units under the policy1
Mortality Charges:
These are char%es for the cost of insurance covera%e and depend on number of factors such as
a%e/ amount of covera%e/ state of health etc1
Fund Management Fees:
Fees levied for mana%ement of the fund and are deducted before arrivin% at the ,6K1
Administration Charges:
This is the char%e for administration of the plan and is levied by cancellation of units1
Surrender Charges:
Deducted for premature partial or full encashment of units1
Fund Switching Charge:
40
!sually a limited number of fund s$itches are allo$ed each year $ithout char%e/ $ith
subse7uent s$itches/ subject to a char%e1
Service Tax Deductions:
Service ta& is deducted from the ris' portion of the premium1
41
GOVERNMENT SECURITIES
Bovernment securities 2B4secs 3 are soverei%n securities $hich are issued by the Reserve Aan'
of India on behalf of Bovernment of India/ in lieu of the "entral BovernmentMs mar'et borro$in%
pro%ramme
The term Bovernment Securities includes5
"entral Bovernment Securities1
State Bovernment Securities
Treasury bills
The "entral Bovernment borro$s funds to finance its Mfiscal deficitM1The mar'et borro$in% of the
"entral Bovernment is raised throu%h the issue of dated securities and 3.4 days treasury bills
either by auction or by floatation of loans1
In addition to the above/ treasury bills of <8 days are issued for mana%in% the temporary cash
mismatches of the Bovernment1 These do not form part of the borro$in% pro%ramme of the
"entral Bovernment
Types of Government Securities
Bovernment Securities are of the follo$in% types54
Dated Securities: These are %enerally fi&ed maturity1 These fi&ed coupon securities are
usually carryin% semi4annual coupon1 These are called dated securities because these are
identified by their date of maturity and the coupon/ e1%1/ 881=3O BOI 9=89 is a "entral
Bovernment security maturin% in 9=89/ $hich carries a coupon of 881=3O payable half yearly1
The 'ey features of these securities are5
They are issued at face value1
"oupon or interest rate is fi&ed at the time of issuance/ and remains constant till
redemption of the security1
The tenor of the security is also fi&ed1
Interest C"oupon payment is made on a half yearly basis on its face value1
The security is redeemed at par 2face value3 on its maturity date1
42
Zero Coupon bonds are bonds issued at discount to face value and redeemed at par1 These
$ere issued first on Qanuary 8</ 8<<4 and $ere follo$ed by t$o subse7uent issues in 8<<44<#
and 8<<#4<. respectively1 The 'ey features of these securities are5
They are issued at a discount to the face value1
The tenor of the security is fi&ed1
The securities do not carry any coupon or interest rate1 The difference bet$een the issue
price 2discounted price3 and face value is the return on this security1
The security is redeemed at par 2face value3 on its maturity date1
Partly Paid Stock is stoc' $here payment of principal amount is made in installments over a
%iven time frame1 It meets the needs of investors $ith re%ular flo$ of funds and the need of
Bovernment $hen it does not need funds immediately1 The first issue of such stoc' of ei%ht year
maturity $as made on ,ovember 8#/ 8<<4 for Rs1 9=== crore1 Such stoc's have been issued a
fe$ more times thereafter1 The 'ey features of these securities are5
They are issued at face value/ but this amount is paid in installments over a
specified period1
"oupon or interest rate is fi&ed at the time of issuance/ and remains constant till
redemption of the security1
The tenor of the security is also fi&ed1
Interest C"oupon payment is made on a half yearly basis on its face value1
The security is redeemed at par 2face value3 on its maturity date1
Floating Rate Bonds are bonds $ith variable interest rate $ith a fi&ed percenta%e over a
benchmar' rate1 There may be a cap and a floor rate attached thereby fi&in% a ma&imum and
minimum interest rate payable on it1 Floatin% rate bonds of four year maturity $ere first issued
on September 9</ 8<<#/ follo$ed by another issue on December #/ 8<<#1 Recently RAI issued a
floatin% rate bond/ the coupon of $hich is benchmar'ed a%ainst avera%e yield on 3.4 Days
Treasury Aills for last si& months1 The coupon is reset every si& months1
43
The 'ey features of these securities are5
They are issued at face value1
"oupon or interest rate is fi&ed as a percenta%e over a predefined benchmar' rate at
the time of issuance1 The benchmar' rate may be Treasury bill rate/ ban' rate etc1
Thou%h the benchmar' does not chan%e/ the rate of interest may vary accordin% to
the chan%e in the benchmar' rate till redemption of the security1
The tenor of the security is also fi&ed1
Interest C"oupon payment is made on a half yearly basis on its face value1
The security is redeemed at par 2face value3 on its maturity date1
Bonds with Call/Put Option: First time in the history of Bovernment Securities mar'et RAI
issued a bond $ith call and put option this year1 This bond is due for redemption in 9=89 and
carries a coupon of .1:9O1 o$ever the bond has call and put option after five years i1e1 in year
9==:1 In other $ords it means that holder of bond can sell bac' 2put option3 bond to Bovernment
in 9==: or Bovernment can buy bac' 2call option3 bond from holder in 9==:1 This bond has been
priced in line $ith # year bonds1
Capital indexed Bonds are bonds $here interest rate is a fi&ed percenta%e over the $holesale
price inde&1 These provide investors $ith an effective hed%e a%ainst inflation1 These bonds $ere
floated on December 9</ 8<<: on tap basis1 They $ere of five year maturity $ith a coupon rate
of . per cent over the $holesale price inde&1 The principal redemption is lin'ed to the >holesale
(rice Inde&1 The 'ey features of these securities are5
They are issued at face value1
"oupon or interest rate is fi&ed as a percenta%e over the $holesale price inde& at the
time of issuance1 Therefore the actual amount of interest paid varies accordin% to
the chan%e in the >holesale (rice Inde&1
The tenor of the security is fi&ed1
Interest C"oupon payment is made on a half yearly basis on its face value1
The principal redemption is lin'ed to the >holesale (rice Inde&1
Features of Government Securities
44
Nomenclature
The coupon rate and year of maturity identifies the %overnment security1
)&ample5 8919#O BOI 9==; indicates the follo$in%5
8919#O is the coupon rate/ BOI denotes Bovernment of India/ $hich is the borro$er/ 9==; is the
year of maturity1
Eligibility
6ll entities re%istered in India li'e ban's/ financial institutions/ (rimary Dealers/ firms/
companies/ corporate bodies/ partnership firms/ institutions/ mutual funds/ Forei%n Institutional
Investors/ State Bovernments/ (rovident Funds/ trusts/ research or%anisations/ ,epal Rashtra
ban' and even individuals are eli%ible to purchase Bovernment Securities1
Availability
Bovernment securities are hi%hly li7uid instruments available both in the primary and secondary
mar'et1 They can be purchased from (rimary Dealers1 (,A Bilts Ltd1/ is a leadin% (rimary
Dealer in the %overnment securities mar'et/ and is actively involved in the tradin% of %overnment
securities1
Forms of Issuance of Government Securities
Aan's/ (rimary Dealers and Financial Institutions have been allo$ed to hold these
securities $ith the (ublic Debt Office of Reserve Aan' of India in demateriali0ed
form in accounts 'no$n as Subsidiary Beneral Led%er 2SBL3 6ccounts1
)ntities havin% a Bilt 6ccount $ith Aan's or (rimary Dealers can hold these
securities $ith them in demateriali0ed form1
In addition %overnment securities can also be held in demateriali0ed form in demat
accounts maintained $ith the Depository (articipants of ,SDL1
Minimum Amount
In terms of RAI re%ulations/ %overnment dated securities can be purchased for a minimum
amount of Rs1 8=/===C4only1 Treasury bills can be purchased for a minimum amount of Rs
9#===C4 only and in multiples thereof1 State Bovernment Securities can be purchased for a
minimum amount of Rs 8/===C4 only1
Repayment
45
Bovernment securities are repaid at par on the e&piry of their tenor1 The different repayment
methods are as follo$s5
For SBL account holders/ the maturity proceeds $ould be credited to their current
accounts $ith the Reserve Aan' of India1
For Bilt 6ccount olders/ the Aan'C(rimary Dealers/ $ould receive the maturity
proceeds and they $ould pay the Bilt 6ccount olders1
For entities havin% a Demat 6ccount $ith ,SDL/the maturity proceeds $ould be
collected by their D(Ms and they in turn $ould pay the Demat 6ccount olders1
Day Count
For %overnment dated securities and state %overnment securities the day count is ta'en as 3.=
days for a year and 3= days for every completed month1 o$ever for Treasury bills it is 3.# days
for a year1
Example 5 6 client purchases :14=O BOI 9=89 for face value of Rs1 8= lacs1R Rs18=81;=/
i1e1 the client pays Rs18=81;= for every unit of %overnment security havin% a face value of Rs1
8==C4 The settlement is due on October 3/ 9==91 >hat is the amount to be paid by the client@
The security is :14=O BOI 9=89 for $hich the interest payment dates are 3rd *ay/ and 3
rd
,ovember every year1
The last interest payment date for the current year is 3
rd
*ay 9==91 The calculation $ould be
made as follo$s5
Face value of Rs1 8= lacs1R Rs18=81;=O1
Therefore the principal amount payable is Rs18= lacs P 8=81;=O S8=/8;/===
Last interest payment date $as *ay 3/ 9==9 and settlement date is October 3/ 9==91 Therefore
the interest has to be paid for 8#= days 2includin% 3
rd
*ay/ and e&cludin% October 3/ 9==93
29; days of *ay/ includin% 3
rd
*ay/ up to 3=
th
*ay T 3= days of Qune/ Quly/ 6u%ust and
September T 9 days of October31 Since the settlement is on October 3/ 9==9/ that date is
e&cluded1
Interest payable S 8= lacs P :14=O P 8#= S Rs1 3=;331331
3.= P 8==
46
Total amount payable by client S8=/ 8;/===T3=;33133SRs1 8=/ 4;/;33133
Benefits of Investing in Government Securities
,o ta& deducted at source
6dditional Income Ta& benefit uCs ;=L of the Income Ta& 6ct for Individuals
+ualifies for SLR purpose
Fero default ris' bein% soverei%n paper
i%hly li7uid1
Transparency in transactions and simplified settlement procedures throu%h
"SBLC,SDL
*ethods of issuance of %overnment securities
Bovernment securities are issued by various methods/ $hich are as follo$s
Auctions:
6uctions for %overnment securities are either yield based or price based1
In an yield based auction/ the Reserve Aan' of India announces the issue si0e2or
notified amount3 and the tenor of the paper to be auctioned1 The bidders submit bids
in terms of the yield at $hich they are ready to buy the security1
In a price based auction/ the Reserve Aan' of India announces the issue si0e2or
notified amount3/ the tenor of the paper to be auctioned/ as $ell as the coupon rate1
The bidders submit bids in terms of the price1 This method of auction is normally
used in case of reissue of e&istin% %overnment securities1
The basic features of the auctions are %iven belo$5
Method of auction: There are t$o methods of auction $hich are follo$ed4
47
Uniform price Based or Dutch Auction procedure is used in auctions of dated
%overnment securities1 The bids are accepted at the same prices as decided in the cut off1
Multiple/variable Price Based or French Auction procedure is used in auctions of
Bovernment dated securities and treasury bills1 Aids are accepted at different prices C
yields 7uoted in the individual bids1
Bids: Aids are to be submitted in terms of yields to maturityCprices as announced at
the time of auction1
Cut off yield: is the rate at $hich bids are accepted1 Aids at yields hi%her than the
cut4off yield is rejected and those lo$er than the cut4off are accepted1 The cut4off
yield is set as the coupon rate for the security1 Aidders $ho have bid at lo$er than
the cut4off yield pay a premium on the security/ since the auction is a multiple price
auction1
Cut off price: It is the minimum price accepted for the security1 Aids at prices
lo$er than the cut4off are rejected and at hi%her than the cut4off are accepted1
"oupon rate for the security remains unchan%ed1 Aidders $ho have bid at hi%her
than the cut4off price pay a premium on the security/ thereby %ettin% a lo$er yield1
(rice based auctions lead to finer price discovery than yield based auctions1
Notified amount: The amount of security to be issued is Hnotified? prior to the
auction date/ for information of the public1
The Reserve Aan' of India 2RAI3 may participate as a non4competitor in the
auctions1 The unsubscribed portion devolves on RAI or on the (rimary Dealers if
the auction has been under$ritten by (Ds1 The devolvement is at the cut4off
priceCyield1
Underwriting in Auctions
For the purpose of auctions/ bids are invited from the (rimary Dealers one day
before the auction $herein they indicate the amount to be under$ritten by them and
the under$ritin% fee e&pected by them1
The auction committee of Reserve Aan' of India e&amines the bids and based on
the mar'et conditions/ ta'es a decision in respect of the amount to be under$ritten
and the fee to be paid to the under$riters1
!nder$ritin% fee is paid at the rates bid by (Ds / for the under$ritin% $hich has
been accepted1
48
In case of the auction bein% fully subscribed/ the under$riters do not have to
subscribe to the issue necessarily unless they have bid for it1
If there is a devolvement/ the successful bids put in by the (rimary Dealers are set4off
a%ainst the amount under$ritten by them $hile decidin% the amount of devolvement1
On-tap issue
This is a reissue of e&istin% Bovernment securities havin% pre4determined yieldsCprices by
Reserve Aan' of India1 6fter the initial primary auction of a security/ the issue remains open to
further subscription by the investors as and $hen considered appropriate by RAI1 The period for
$hich the issue is 'ept open may be time specific or volume specific1 The coupon rate/ the
interest dates and the date of maturity remain the same as determined in the initial primary
auction1 Reserve Aan' of India may sell %overnment securities throu%h on tap issue at lo$er or
hi%her prices than the prevailin% mar'et prices1 Such an action on the part of the Reserve Aan' of
India leads to a reali%nment of the mar'et prices of %overnment securities1 Tap stoc' provides an
opportunity to unsuccessful bidders in auctions to ac7uire the security at the mar'et determined
rate1
Fixed coupon issue
Bovernment Securities may also be issued for a notified amount at a fi&ed coupon1 *ost State
Development Loans or State Bovernment Securities are issued on this basis1
Private Placement
The "entral Bovernment may also privately place %overnment securities $ith Reserve Aan' of
India1 This is usually done $hen the >ays and *eans 6dvance 2>*63 is near the sanctioned
limit and the mar'et conditions are not conducive to an issue1 The issue is priced at mar'et
related yields1 Reserve Aan' of India may later offload these securities to the mar'et throu%h
Open *ar'et Operations 2O*O31
6fter havin% auctioned a loan $hereby the coupon rate has been arrived at and if still the
%overnment feels the need for funds for similar tenure/ it may privately place an amount $ith the
Reserve Aan' of India1 RAI in turn may decide upon further sellin% of the security so purchased
under the Open *ar'et Operations $indo$ albeit at a different yield1
Open Market Operations (OMO)
Bovernment securities that are privately placed $ith the Reserve Aan' of India are sold in the
mar'et throu%h open mar'et operations of the Reserve Aan' of India1 The yield at $hich these
securities are sold may differ from the yield at $hich they $ere privately placed $ith Reserve
49
Aan' of India1 Open mar'et operations are used by the Reserve Aan' of India to infuse or suc'
li7uidity from the system1 >henever the Reserve Aan' of India $ishes to infuse the li7uidity in
the system/ it purchases %overnment securities from the mar'et/ and $henever it $ishes to suc'
out the li7uidity from the system/ it sells %overnment securities in the mar'et1
National Savings Certificate
,ational Savin%s "ertificate/ popularly 'no$n as ,S"/ is a time4tested ta& savin% instrument
that combines ade7uate returns $ith hi%h safety1 ,S"s are an instrument for facilitatin% lon%4
term savin%s1 6 lar%e chun' of middle class families use ,S"s for savin% on their ta&/ %ettin%
double benefits1 They not only save ta& on their hard4earned income but also ma'e an investment
$hich is sure to %ive %ood and safe returns1
How to Invest
,ational Savin%s "ertificates are available at all post4offices1 The application can be made either
in person or throu%h an a%ent1 (ost office a%ents are active in noo's and corners of the country1
Follo$in% types of ,S" are issued5
Single Holder Type Certificate: This can be issued to5 2a3 6n adult for himself or on behalf of a
minor 2b3 6 Trust1
1oint 'A' Type Certificate: Issued jointly to t$o adults payable to both holders jointly or to the
survivor1
1oint 'B' Type Certificate: Issued jointly to t$o adults payable to either of the holders or to the
survivor1
Who can Invest
6n adult in his o$n name or on behalf of a minor
6 trust
T$o adults jointly
Denominations and Limit
,ational Savin%s "ertificates are available in the
denominations of Rs1 8== Rs #==/ Rs1 8===/ Rs1 #===/ - Rs1 8=/===1 There is no ma&imum limit
on the purchase of the certificates1 So it is for you to decide ho$ much you $ant to put in the
50
,S"s1 This is of course a hu%e benefit for you can decide as much as your bud%et allo$s1
Maturity
(eriod of maturity of a certificate is si& years1 (resently interest paid is ; O per annum half
yearly compounded1 *aturity value of a certificate of any other denomination is at proportionate
rate1 (remature encashment of the certificate is not permissible e&cept at a discount in the case of
death of the holder2s3/ forfeiture by a pled%e and $hen ordered by a court of la$1
Tax Benefits
Interest accrued on the certificates every year is liable to income ta& but deemed to have been
reinvested1
Income Ta& rebate is available on the amount invested and interest accruin% under Section ;; of
Income Ta& 6ct/ as amended from time to time1
Income ta& relief is also available on the interest earned as per limits fi&ed vide section ;=L of
Income Ta&/ as amended from time to time1
Public Provident Fund
(ublic (rovident Fund/ popularly 'no$n as ((F/ is a savin%s cum ta& savin% instrument1 It also
serves as a retirement plannin% tool for many of those $ho do not have any structured pension
plan coverin% them1 The balances in ((F account cannot be attached by any authority normally1
How to Open Account
(ublic (rovident Fund account can be opened at desi%nated post offices throu%hout the country
and at desi%nated branches of (ublic Sector Aan's throu%hout the country1
Who can Open Account
The account can be opened by an individual in his o$n name/ on behalf of a minor of $hom he
is a %uardian1
Tabs on Investment
*inimum deposit re7uired in a ((F account is Rs1 #== in a financial year1 *a&imum deposit
limit is Rs1 :=/=== in a financial year1 *a&imum number of deposits is t$elve in a financial year1
51
Maturity
The maturity period of the account is 8# years1
Rate of interest is ;O compounded annually1
One deposit $ith a minimum amount of Rs1#==C4 is mandatory in each financial year1
The amount of deposit can be varied to suit the convenience of the account holders1
The account holder can retain the account after maturity for any period $ithout ma'in% any
further deposits1 In this case the account $ill continue to earn interest at normal rate as
admissible till the account is closed1
The account holder also has an option to e&tend the ((F account for any period in a bloc' of #
years at each time/ after the maturity period of 8# years1
Lapse in Deposits
If deposits are not made in a ((F account in any financial year/ the account $ill be treated as
discontinued1 The discontinued account can be activated by payment of the minimum deposit of
Rs1#==C4 $ith default fee of Rs1#=C4 for each defaulted year1
Premature Closure or Withdrawal
(remature closure of a ((F 6ccount is not permissible e&cept in case of death1 ,omineeCle%al
heir of ((F 6ccount holder cannot continue the account after the death1
(remature $ithdra$al is permissible in the :th year of the account subject/ to a limit of #=O of
the amount at credit precedin% three year balance1 Thereafter one $ithdra$al in every year is
permissible
6""O!,T TR6,SF)R
The 6ccount is transferable from one post Office C ban' to another and from post Office to ban'
or from a ban' to a post office1
Tax Benefits
Deposits in ((F are eli%ible for rebate under section ;=4" of Income Ta& 6ct1
The interest on deposits is totally ta& free1
Deposits are e&empt from $ealth ta&
BONDS
52
6 bond is a debt security/ in $hich the authori0ed issuer o$es the holders a debt and/ dependin%
on the terms of the bond/ is obli%ed to pay interest 2the coupon3 andCor to repay the principal at a
later date/ termed maturity1 It is a formal contract to repay borro$ed money $ith interest at fi&ed
intervals1
Thus a bond is li'e a loan5 the issuer is the borro$er/ the bond holder is the lender/ and the
coupon is the interest1 Aonds provide the borro$er $ith e&ternal funds to finance lon%4term
investments/ or/ in the case of %overnment bonds/ to finance current e&penditure1 "ertificates of
deposit 2"Ds3 or commercial paper are considered to be money mar'et instruments and not
bonds1 Aonds must be repaid at fi&ed intervals over a period of time
Aonds are issued by public authorities/ credit institutions/ companies and supranational
institutions in the primary mar'ets1 The most common process of issuin% bonds is throu%h
under$ritin%1 In under$ritin%/ one or more securities firms or ban's/ formin% a syndicate/ buy an
entire issue of bonds from an issuer and re4sell them to investors1 The security firm ta'es the ris'
of bein% unable to sell on the issue to end investors1 o$ever %overnment bonds are instead
typically auction1 The most important features of a bond are5
,ominal/ principal or face amount U the amount on $hich the issuer pays interest/ and $hich
has to be repaid at the end1
Issue price U The price at $hich investors buy the bonds $hen they are first issued/ $hich $ill
typically be appro&imately e7ual to the nominal amount1 The net proceeds that the issuer
receives are thus the issue price/ less issuance fees1
Maturity date 5U The date on $hich the issuer has to repay the nominal amount1 6s lon% as all
payments have been made/ the issuer has no more obli%ations to the bond holders after the
maturity date1 The len%th of time until the maturity date is often referred to as the term or tenor
or maturity of a bond1 The maturity can be any len%th of time/ althou%h debt securities $ith a
term of less than one year are %enerally desi%nated money mar'et instruments rather than bonds1
*ost bonds have a term of up to thirty years1 Some bonds have been issued $ith maturities of up
to one hundred years/ and some even do not mature at all1 In early 9==#/ a mar'et developed in
)uro for bonds $ith a maturity of fifty years1 In the mar'et for !1S1 Treasury securities/ there are
three %roups of bond maturities5
short term 2bills35 maturities up to one yearG
medium term 2notes35 maturities bet$een one and ten yearsG
lon% term 2bonds35 maturities %reater than ten years1
Coupon U The interest rate that the issuer pays to the bond holders1 !sually this rate is fi&ed
throu%hout the life of the bond1 It can also vary $ith a money mar'et inde&/ such as LIAOR/ or it
can be even more e&otic1 The name coupon ori%inates from the fact that in the past/ physical
53
bonds $ere issued $hich had coupons attached to them1 On coupon dates the bond holder $ould
%ive the coupon to a ban' in e&chan%e for the interest payment1
The 7uality of the issue/ $hich influences the probability that the bondholders $ill receive the
amounts promised/ at the due dates1 This $ill depend on a $hole ran%e of factors1
Indentures and Covenants U 6n indenture is a formal debt a%reement that establishes the
terms of a bond issue/ $hile covenants are the clauses of such an a%reement1 "ovenants specify
the ri%hts of bondholders and the duties of issuers/ such as actions that the issuer is obli%ated to
perform or is prohibited from performin%1 In the !1S1/ federal and state securities and
commercial la$s apply to the enforcement of these a%reements/ $hich are construed by courts as
contracts bet$een issuers and bondholders1 The terms may be chan%ed only $ith %reat difficulty
$hile the bonds are outstandin%/ $ith amendments to the %overnin% document %enerally
re7uirin% approval by a majority 2or super4majority3 vote of the bondholders1
i%h yield bonds are bonds that are rated belo$ investment %rade by the credit ratin% a%encies1
6s these bonds are more ris'y than investment %rade bonds/ investors e&pect to earn a hi%her
yield1 These bonds are also called jun' bonds1
"oupon dates U the dates on $hich the issuer pays the coupon to the bond holders1 In the !1S1
and also in the !1E1 and )urope/ most bonds are semi4annual/ $hich means that they pay a
coupon every si& months1
Optionality5 Occasionally a bond may contain an embedded optionG that is/ it %rants option4li'e
features to the holder or the issuer5
"allability U Some bonds %ive the issuer the ri%ht to repay the bond before the maturity date on
the call datesG see call option1 These bonds are referred to as callable bonds1 *ost callable bonds
allo$ the issuer to repay the bond at par1 >ith some bonds/ the issuer has to pay a premium/ the
so called call premium1 This is mainly the case for hi%h4yield bonds1 These have very strict
covenants/ restrictin% the issuer in its operations1 To be free from these covenants/ the issuer can
repay the bonds early/ but only at a hi%h cost1
(utability U Some bonds %ive the holder the ri%ht to force the issuer to repay the bond before
the maturity date on the put datesG see put option1 2,ote5 D(utableD denotes an embedded put
optionG D(uttableD denotes that it may be putted13
call dates and put datesUthe dates on $hich callable and putable bonds can be redeemed early1
There are four main cate%ories1
6 Aermudan callable has several call dates/ usually coincidin% $ith coupon dates1
6 )uropean callable has only one call date1 This is a special case of a Aermudan callable1
54
6n 6merican callable can be called at any time until the maturity date1
6 death put is an optional redemption feature on a debt instrument allo$in% the beneficiary of
the estate of the deceased to put 2sell3 the bond 2bac' to the issuer3 in the event of the
beneficiaryMs death or le%al incapacitation1 It is also 'no$n as a DsurvivorMs optionD1
sin'in% fund provision of the corporate bond indenture re7uires a certain portion of the issue to
be retired periodically1 The entire bond issue can be li7uidated by the maturity date1 If that is not
the case/ then the remainder is called balloon maturity1 Issuers may either pay to trustees/ $hich
in turn call randomly selected bonds in the issue/ or/ alternatively/ purchase bonds in open
mar'et/ then return them to trustees1
convertible bond lets a bondholder e&chan%e a bond to a number of shares of the issuerMs
common stoc'1
e&chan%eable bond allo$s for e&chan%e to shares of a corporation other than the issuer1
Fi&ed rate bonds have a coupon that remains constant throu%hout the life of the bond1
Floatin% rate notes 2FR,s3 have a coupon that is lin'ed to an inde&1 "ommon indices include5
money mar'et indices/ such as LIAOR or )uribor/ and "(I 2the "onsumer (rice Inde&31 "oupon
e&amples5 three month !SD LIAOR T =19=O/ or t$elve month "(I T 81#=O1 FR, coupons reset
periodically/ typically every one or three months1 In theory/ any Inde& could be used as the basis
for the coupon of an FR,/ so lon% as the issuer and the buyer can a%ree to terms1
Fero4coupon bonds donMt pay any interest1 They are issued at a substantial discount to par value1
The bond holder receives the full principal amount on the redemption date1 6n e&ample of 0ero
coupon bonds are Series ) savin%s bonds issued by the !1S1 %overnment1 Fero4coupon bonds
may be created from fi&ed rate bonds by a financial institutions separatin% Dstrippin% offD the
coupons from the principal1 In other $ords/ the separated coupons and the final principal
payment of the bond are allo$ed to trade independently1 See IO 2Interest Only3 and (O
2(rincipal Only31
Inflation lin'ed bonds/ in $hich the principal amount and the interest payments are inde&ed to
inflation1 The interest rate is normally lo$er than for fi&ed rate bonds $ith a comparable
maturity 2this position briefly reversed itself for short4term !E bonds in December 9==;31
o$ever/ as the principal amount %ro$s/ the payments increase $ith inflation1 The %overnment
of the !nited Ein%dom $as the first to issue inflation lin'ed Bilts in the 8<;=s1 Treasury
Inflation4(rotected Securities 2TI(S3 and I4bonds are e&amples of inflation lin'ed bonds issued
by the !1S1 %overnment1
Other inde&ed bonds/ for e&ample e7uity4lin'ed notes and bonds inde&ed on a business indicator
2income/ added value3 or on a countryMs BD(1
55
6sset4bac'ed securities are bonds $hose interest and principal payments are bac'ed by
underlyin% cash flo$s from other assets1 )&amples of asset4bac'ed securities are mort%a%e4
bac'ed securities 2*ASMs3/ collaterali0ed mort%a%e obli%ations 2"*Os3 and collaterali0ed debt
obli%ations 2"DOs31
Subordinated bonds are those that have a lo$er priority than other bonds of the issuer in case of
li7uidation1 In case of ban'ruptcy/ there is a hierarchy of creditors1 First the li7uidator is paid/
then %overnment ta&es/ etc1 The first bond holders in line to be paid are those holdin% $hat is
called senior bonds1 6fter they have been paid/ the subordinated bond holders are paid1 6s a
result/ the ris' is hi%her1 Therefore/ subordinated bonds usually have a lo$er credit ratin% than
senior bonds1 The main e&amples of subordinated bonds can be found in bonds issued by ban's/
and asset4bac'ed securities1 The latter are often issued in tranches1 The senior tranches %et paid
bac' first/ the subordinated tranches later1
(erpetual bonds are also often called perpetuities1 They have no maturity date1 The most famous
of these are the !E "onsols/ $hich are also 'no$n as Treasury 6nnuities or !ndated Treasuries1
Some of these $ere issued bac' in 8;;; and still trade today/ althou%h the amounts are no$
insi%nificant1 Some ultra lon%4term bonds 2sometimes a bond can last centuries5 >est Shore
Railroad issued a bond $hich matures in 93.8 2i1e1 94th century33 are virtually perpetuities from
a financial point of vie$/ $ith the current value of principal near 0ero1
Aearer bond is an official certificate issued $ithout a named holder1 In other $ords/ the person
$ho has the paper certificate can claim the value of the bond1 Often they are re%istered by a
number to prevent counterfeitin%/ but may be traded li'e cash1 Aearer bonds are very ris'y
because they can be lost or stolen1 )specially after federal income ta& be%an in the !nited States/
bearer bonds $ere seen as an opportunity to conceal income or assets1
V9W
!1S1 corporations
stopped issuin% bearer bonds in the 8<.=s/ the !1S1 Treasury stopped in 8<;9/ and state and local
ta&4e&empt bearer bonds $ere prohibited in 8<;31
V3W

Re%istered bond is a bond $hose o$nership 2and any subse7uent purchaser3 is recorded by the
issuer/ or by a transfer a%ent1 It is the alternative to a Aearer bond1 Interest payments/ and the
principal upon maturity/ are sent to the re%istered o$ner1
*unicipal bond is a bond issued by a state/ !1S1 Territory/ city/ local %overnment/ or their
a%encies1 Interest income received by holders of municipal bonds is often e&empt from the
federal income ta& and from the income ta& of the state in $hich they are issued/ althou%h
municipal bonds issued for certain purposes may not be ta& e&empt1
Aoo'4entry bond is a bond that does not have a paper certificate1 6s physically processin% paper
bonds and interest coupons became more e&pensive/ issuers 2and ban's that used to collect
coupon interest for depositors3 have tried to discoura%e their use1 Some boo'4entry bond issues
do not offer the option of a paper certificate/ even to investors $ho prefer them1
56
Lottery bond is a bond issued by a state/ usually a )uropean state1 Interest is paid li'e a
traditional fi&ed rate bond/ but the issuer $ill redeem randomly selected individual bonds $ithin
the issue accordin% to a schedule1 Some of these redemptions $ill be for a hi%her value than the
face value of the bond1
>ar bond is a bond issued by a country to fund a $ar1
Serial bond is a bond that matures in installments over a period of time1 In effect/ a X8==/===/ #4
year serial bond $ould mature in a X9=/=== annuity over a #4year interval1
Revenue bond is a special type of municipal bond distin%uished by its %uarantee of repayment
solely from revenues %enerated by a specified revenue4%eneratin% entity associated $ith the
purpose of the bonds1 Revenue bonds are typically Dnon4recourse/D meanin% that in the event of
default/ the bond holder has no recourse to other %overnmental assets or revenues1
Investing in bonds
Aonds are bou%ht and traded mostly by institutions li'e pension funds/ insurance companies and
ban's1 *ost individuals $ho $ant to o$n bonds do so throu%h bond funds1 Still/ in the !1S1/
nearly 8=O of all bonds outstandin% are held directly by households1
Sometimes/ bond mar'ets rise 2$hile yields fall3 $hen stoc' mar'ets fall1 *ore relevantly/ the
volatility of bonds 2especially short and medium dated bonds3 is lo$er than that of shares1 Thus
bonds are %enerally vie$ed as safer investments than stoc's/ but this perception is only partially
correct1 Aonds do suffer from less day4to4day volatility than stoc's/ and bondsM interest payments
are often hi%her than the %eneral level of dividend payments1 Aonds are li7uid L it is fairly easy
to sell oneMs bond investments/ thou%h not nearly as easy as it is to sell stoc's L and the
comparative certainty of a fi&ed interest payment t$ice per year is attractive1 Aondholders also
enjoy a measure of le%al protection5 under the la$ of most countries/ if a company %oes
ban'rupt/ its bondholders $ill often receive some money bac' 2the recovery amount3/ $hereas
the companyMs stoc' often ends up valueless1 o$ever/ bonds can also be ris'y5
Fi&ed rate bonds are subject to interest rate ris'/ meanin% that their mar'et prices $ill decrease in
value $hen the %enerally prevailin% interest rates rise1 Since the payments are fi&ed/ a decrease
in the mar'et price of the bond means an increase in its yield1 >hen the mar'et interest rate rises/
the mar'et price of bonds $ill fall/ reflectin% investorsM ability to %et a hi%her interest rate on
their money else$here U perhaps by purchasin% a ne$ly issued bond that already features the
ne$ly hi%her interest rate1 ,ote that this drop in the bondMs mar'et price does not affect the
interest payments to the bondholder at all/ so lon%4term investors $ho $ant a specific amount at
the maturity date need not $orry about price s$in%s in their bonds and do not suffer from interest
rate ris'1
57
(rice chan%es in a bond $ill also immediately affect mutual funds that hold these bonds1 If the
value of the bonds held in a tradin% portfolio has fallen over the day/ the value of the portfolio
$ill also have fallen1 This can be dama%in% for professional investors such as ban's/ insurance
companies/ pension funds and asset mana%ers 2irrespective of $hether the value is immediately
Dmar'ed to mar'etD or not31 If there is any chance a holder of individual bonds may need to sell
his bonds and Dcash outD/ interest rate ris' could become a real problem1 2"onversely/ bondsM
mar'et prices $ould increase if the prevailin% interest rate $ere to drop/ as it did from 9==8
throu%h 9==313 One $ay to 7uantify the interest rate ris' on a bond is in terms of its duration1
)fforts to control this ris' are called immuni0ation or hed%in%1
Aond prices can become volatile dependin% on the credit ratin% of the issuer 4 for instance if the
credit ratin% a%encies li'e Standard - (oorMs and *oodyMs up%rade or do$n%rade the credit
ratin% of the issuer1 6 do$n%rade $ill cause the mar'et price of the bond to fall1 6s $ith interest
rate ris'/ this ris' does not affect the bondMs interest payments 2provided the issuer does not
actually default3/ but puts at ris' the mar'et price/ $hich affects mutual funds holdin% these
bonds/ and holders of individual bonds $ho may have to sell them1
6 companyMs bond holders may lose much or all their money if the company %oes ban'rupt1
!nder the la$s of many countries 2includin% the !nited States and "anada3/ bondholders are in
line to receive the proceeds of the sale of the assets of a li7uidated company ahead of some other
creditors1 Aan' lenders/ deposit holders 2in the case of a deposit ta'in% institution such as a ban'3
and trade creditors may ta'e precedence1
There is no %uarantee of ho$ much money $ill remain to repay bondholders1 6s an e&ample/
after an accountin% scandal and a "hapter 88 ban'ruptcy at the %iant telecommunications
company >orld com/ in 9==4 its bondholders ended up bein% paid 3#1: cents on the dollar1 In a
ban'ruptcy involvin% reor%ani0ation or recapitali0ation/ as opposed to li7uidation/ bondholders
may end up havin% the value of their bonds reduced/ often throu%h an e&chan%e for a smaller
number of ne$ly issued bonds1
Some bonds are callable/ meanin% that even thou%h the company has a%reed to ma'e payments
plus interest to$ards the debt for a certain period of time/ the company can choose to pay off the
bond early1 This creates reinvestment ris'/ meanin% the investor is forced to find a ne$ place for
his money/ and the investor mi%ht not be able to find as %ood a deal/ especially because this
usually happens $hen interest rates are fallin%1
COMMODITIES
58
6 commodity is a normal physical product used by everyday people durin% the course of their
lives/ or metals that are used in production or as a traditional store of $ealth and a hed%e a%ainst
inflation1 For e&ample/ these commodities include %rains such as $heat/ corn and rice or metals
such as copper/ %old and silver1 The full list of commodity mar'ets is numerous and too detailed1
The best $ay to trade the commodity mar'ets is by buyin% and sellin% futures contracts on local
and international e&chan%es1 Tradin% futures is easy/ and can be accessed by usin% the services of
any full or on4line futures bro'era%e service1 Traditionally/ there is an e&pectation $hen tradin%
commodity futures of achievin% hi%her returns compared to shares or real estate/ so successful
investors can e&pect much hi%her returns compared to more conventional investment products1
The process of tradin% commodities/ as mentioned above/ must be facilitated by the use of
tradin% li7uid/ e&chan%eable/ and standardi0ed futures contracts/ as it is not practical to trade the
physical commodities1 Futures contracts %ive the investor ease of use and the ability to buy or
sell $ithout delay1 6 futures contract is used to buy or sell a fi&ed 7uantity and 7uality of an
underlyin% commodity/ at a fi&ed date and price in the future1 Futures contracts can be bro'en by
simply offsettin% the transaction1 For e&ample/ if you buy one futures contract to open then you
sell one futures contract to close that mar'et position1
The e&ecution method of tradin% futures contracts is similar to tradin% physical shares/ but
futures contracts have an e&piry date and are deliverable1 Futures contracts have an e&piry date
and need to be occasionally rolled over from the current contract month to the follo$in% contract
month1
The reason is because the bi%%est advanta%e to tradin% commodity futures/ for the private
investor is the opportunity to le%ally short4sell these mar'ets1 Short4sellin% is the ability to sell
commodity futures creatin% an open position in the e&pectation to buy4bac' at a later time to
profit from a fall in the mar'et1 If you $ish to trade the up4side of commodity futures/ then it $ill
simply be a buy4to4open and sell4to4close set of transactions similar to share tradin%1
The commodity mar'ets $ill al$ays produce risin% of fallin% trends/ and $ith the abundance of
information and tradin% opportunities available there is no reason for any investor to e&clusively
trade the share mar'et $hen there is potential profits from tradin% commodity futures1
The increased use of commodity tradin% vehicles in investment mana%ement has led practitioners
to create investable commodity indices and products that offer uni7ue performance opportunities
for investors in physical commodities1 6s is true for stoc' and bond performance/ as $ell as
investment in mana%ed futures and hed%e fund products/ commodity4based products have a
variety of uses1 Aesides bein% a source of information on cash commodity and futures
commodity mar'et trends/ they are used as performance benchmar's for evaluation of
commodity tradin% advisors and provide a historical trac' record useful in developin% asset
allocation strate%ies1 o$ever/ the investor benefits of commodity or commodity4based products
lie primarily in their ability to offer ris' and return trade4offs that cannot be easily replicated
59
throu%h other investment alternatives1 (revious research that direct stoc' and bond investment
offers little evidence of providin% returns consistent $ith direct commodity investment1
commodity4based firms may not be e&posed to the ris' of commodity price movement1 Thus for
investors/ direct commodity investment may be the principal means by $hich one can obtain
e&posure to commodity price movements1
The commodities that are traded in the mar'et
Bold
"opper
Silver
Su%ar
>heat
Feera
60
INDUSTRY PROFILE
Following diagram gives the structure o Indian !nancial s"stem#
61
FINANCIAL MARKET 5
Financial mar'ets are helpful to provide li7uidity in the system and for smooth
functionin% of the system1 These mar'ets are the centers that provide facilities for buyin% and
sellin% of financial claims and services1 The financial mar'ets match the demands of investment
$ith the supply of capital from various sources1
6ccordin% to functional basis financial mar'ets are classified into t$o types1 They are5
*oney mar'ets 2short4term3
"apital mar'ets 2lon%4term3
6ccordin% to institutional basis a%ain classified in to t$o types1 They are
Or%ani0ed financial mar'et
,on4or%ani0ed financial mar'et1
The or%ani0ed mar'et comprises of official mar'et represented by reco%ni0ed institutions/
ban' and %overnment 2S)AI3 re%isteredCcontrolled activities and intermediaries1 The
unor%ani0ed mar'et is composed of indi%enous ban'ers/ moneylenders/ individual professional
and non4professionals1
MONEY MARKET:
*oney mar'et is a place $here $e can raise short4term capital1 6%ain the money mar'et is
classified in to
Interban' call money mar'et
Aill mar'et and
62
Aan' loan mar'et )tc1
CAPITAL MARKET:
"apital mar'et is a place $here $e can raise lon%4term capital1
6%ain the capital mar'et is classified in to t$o types and they are
(rimary mar'et and
Secondary mar'et1
)1%15 Shares/ Debentures/ and Loans etc1
PRIMARY MARKET:
(rimary mar'et is %enerally referred to the mar'et of ne$ issues or mar'et for
mobili0ation of resources by the companies and %overnment underta'in%s/ for ne$ projects as
also for e&pansion/ moderni0ation/ addition/ and diversification and up %radation1 (rimary
mar'et is also referred to as ,e$ Issue *ar'et1 (rimary mar'et operations include ne$ issues of
shares by ne$ and e&istin% companies/ further and ri%ht issues to e&istin% shareholders/ public
offers/ and issue of debt instruments such as debentures/ bonds/ etc1
The primary mar'et is re%ulated by the Securities and )&chan%e Aoard of India 2S)AI a
%overnment re%ulated authority31
FUNCTION:
The main services of the primary mar'et are ori%ination/ under$ritin%/ and distribution1
Ori%ination deals $ith the ori%in of the ne$ issue1 !nder$ritin% contract ma'e the shares
63
predictable and remove the element of uncertainty in the subscription1 Distribution refers to the
sale of securities to the investors1
The follo$in% are the mar'et intermediaries associated $ith the mar'et5
81 *erchant ban'erCboo' buildin% lead mana%er
91 Re%istrar and transfer a%ent
31 !nder$riterCbro'er to the issue
41 6dviser to the issue
#1 Aan'er to the issue
.1 Depository
:1 Depository participant
SECONDARY MARKET:
The primary mar'et deals $ith the ne$ issues of securities1 Outstandin% securities are
traded in the secondary mar'et/ $hich is commonly 'no$n as stoc' mar'et or stoc' e&chan%e1
IThe secondary mar'et is a mar'et $here scrip?s are tradedJ1 It is a mar'et place $hich provides
li7uidity to the scrip?s issued in the primary mar'et1 Thus/ the %ro$th of secondary mar'et
depends on the primary mar'et1 *ore the number of companies enterin% the primary mar'et/ the
%reater are the volume of trade at the secondary mar'et1 Tradin% activities in the secondary
mar'et are done throu%h the reco%ni0ed stoc' e&chan%es $hich are 93 in number includin% Over
the "ounter )&chan%e of India 2OT")3/ ,ational Stoc' )&chan%e of India and Interconnected
Stoc' )&chan%e of India1
Secondary mar'et operations involve buyin% and sellin% of securities on the stoc' e&chan%e
throu%h its members1 The companies hittin% the primary mar'et are mandatory to list their shares
64
on one or more stoc' e&chan%es in India1 Listin% of scrip?s provides li7uidity and offers an
opportunity to the investors to buy or sell the scripts1
The follo$in% are the intermediaries in the secondary mar'et5
81 Aro'erCmember of stoc' e&chan%e L buyers bro'er and sellers bro'er
91 (ortfolio *ana%er
31 Investment advisor
41 Share transfer a%ent
#1 Depository
.1 Depository participants1
NATIONAL STOCK EXCHANGE
The ,ational Stoc' )&chan%e of India 2,S)3 situated in *umbai 4 is the lar%est and most
advanced e&chan%e $ith 8=8. companies listed and :9. tradin% members1 "apital mar'et
reforms in India and the launch of the Securities and )&chan%e Aoard of India 2S)AI3
accelerated the incorporation of the second Indian stoc' e&chan%e called the ,ational Stoc'
)&chan%e 2,S)3 in 8<<91 6fter a fe$ years of operations/ the ,S) has become the lar%est stoc'
e&chan%e in India1
Three se%ments of the ,S) tradin% platform $ere established one after another1 The >holesale
Debt *ar'et 2>D*3 commenced operations in Qune 8<<4 and the "apital *ar'et 2"*3 se%ment
$as opened at the end of 8<<41 Finally/ the Futures and Options se%ment be%an operatin% in
9===1 Today the ,S) ta'es the 84th position in the top 4= futures e&chan%es in the $orld1
65
In 8<<./ the ,ational Stoc' )&chan%e of India launched S-( ",P ,ifty and ",P Qunior
Indices that ma'e up 8== most li7uid stoc's in India1 ",P ,ifty is a diversified inde& of #=
stoc's from 9# different economy sectors1 The Indices are o$ned and mana%ed by India Inde&
Services and (roducts Ltd 2IISL3 that has a consultin% and licensin% a%reement $ith Standard -
(oorMs1
In 8<<;/ the ,ational Stoc' )&chan%e of India launched its $eb4site and $as the first e&chan%e
in India that started tradin% stoc' on the Internet in 9===1 The ,S) has also proved its leadership
in the Indian financial mar'et by %ainin% many a$ards such as MAest IT !sa%e 6$ardM by
"omputer Society in India 2in 8<<. and 8<<:3 and "I( >eb 6$ard by "I( ma%a0ine 28<<<31
The ,S) is o$ned by the %roup of leadin% financial institutions such as Indian Aan' or Life
Insurance "orporation of India1 o$ever/ in the totally de4mutualised )&chan%e/ the o$nership
as $ell as the mana%ement does not have a ri%ht to trade on the )&chan%e1 Only 7ualified traders
can be involved in the securities tradin%1
The ,S) is one of the fe$ e&chan%es in the $orld tradin% all types of securities on a
sin%le platform/ $hich is divided into three se%ments5 >holesale Debt *ar'et 2>D*3/ "apital
*ar'et 2"*3/ and Futures - Options 2F-O3 *ar'et1
)ach se%ment has e&perienced a si%nificant %ro$th throu%hout a fe$ years of their launch1 >hile
the >D* se%ment has accumulated the annual %ro$th of over 3.O since its openin% in 8<<4/
the "* se%ment has increased by even .8O durin% the same period1 The ,ational Stoc'
)&chan%e of India has strin%ent re7uirements and criteria for the companies listed on the
)&chan%e1 *inimum capital re7uirements/ project appraisal/ and companyMs trac' record are just
a fe$ of the criteria1 In addition/ listed companies pay variable listin% fees based on their
corporate capital si0e1
The ,ational Stoc' )&chan%e of India Ltd1 provides its clients $ith a sin%le/ fully electronic
tradin% platform that is operated throu%h a KS6T net$or'1 !nli'e most $orld e&chan%es/ the
,S) uses the satellite communication system that connects traders from 34# Indian cities1 The
66
advanced technolo%ies enable up to . million trades to be operated daily on the ,S) tradin%
platform1
67
NSE Nifty:
The S-( ",P ,ifty 2nic'named ,ifty #= or simply ,ifty3/ is the leadin% inde& for lar%e
companies on the ,ational Stoc' )&chan%e of India1 S-( ",P ,ifty is a $ell diversified #=
stoc' inde& accountin% for 99 sectors of the economy1 It is used for a variety of purposes such as
benchmar'in% fund portfolios/ inde& based derivatives and inde& funds1
,ifty $as developed by the economists 6jay Shah and Susan Thomas/ then at IBIDR1 Later on/
it came to be o$ned and mana%ed by India Inde& Services and (roducts Ltd1 2IISL3/ $hich is a
joint venture bet$een ,S) and "RISIL1 IISL is IndiaMs first speciali0ed company focused upon
the inde& as a core product1 IISL have a consultin% and licensin% a%reement $ith Standard -
(oorMs 2S-(3/ $ho are $orld leaders in inde& services1
",P stands for "RISIL ,S) Indices1 ",P ensures common brandin% of indices/ to reflect the
identities of both the promoters/ i1e1 ,S) and "RISIL1 Thus/ M"M stands for "RISIL/ M,M stands for
,S) and P stands for )&chan%e or Inde&1 The S-( prefi& belon%s to the !S4based Standard -
(oorMs Financial Information Services1
NSE other indices:
8 S-( ",P ,ifty
9 ",P ,ifty Qunior
3 ",P 8==
4 S-( ",P #==
# ",P *idcap
. S-( ",P Defty
: ",P *idcap 9==
List of Stock Exchanges in India
Aombay Stoc' )&chan%e
,ational Stoc' )&chan%e
68
Re%ional Stoc' )&chan%es
6hmedabad Stoc' )&chan%e
Aan%alore Stoc' )&chan%e
Ahubanes$ar Stoc' )&chan%e
"alcutta Stoc' )&chan%e
"ochin Stoc' )&chan%e
"oimbatore Stoc' )&chan%e
Delhi Stoc' )&chan%e
Bu$ahati Stoc' )&chan%e
yderabad Stoc' )&chan%e
Qaipur Stoc' )&chan%e
Ludhiana Stoc' )&chan%e
*adhya (radesh Stoc' )&chan%e
*adras Stoc' )&chan%e
*a%adh Stoc' )&chan%e
*an%alore Stoc' )&chan%e
*eerut Stoc' )&chan%e
OT" )&chan%e Of India
(une Stoc' )&chan%e
Saurashtra Eutch Stoc' )&chan%e
!ttar (radesh Stoc' )&chan%e
Kadodara Stoc' )&chan%e
69

$O%P&NY PROFILE

70
Stoc' Aro'in% business of the %roup $as started in 8<<#/ promoted by professional entrepreneurs
and incubated by the Shriram Broup throu%h its entity/ Shriram Insi%ht Share Aro'ers Ltd1
Stoc' Aro'in% business commenced operations $ith a corporate membership in ,S) in the cash
se%ment in 8<<.1 *embership in the derivatives se%ment in the ,S) $as ac7uired in 9==31
The Ausiness has e&panded into the commodities mar'et $ith a tradin%4cum4clearin%
membership in the *ulti "ommodity )&chan%e 2*"P3 and the ,ational "ommodities and
Derivatives )&chan%e 2,"D)P3 throu%h a 8==O subsidiary1Stoc' Aro'in% business is firmly
focused in the rapidly %ro$in% i%h ,et$orth Individual 2,I3 and Retail space1 *ember5
,ational Stoc' ,S) S)AI Re%1 ,o1 5 ,S)4"* VI,A 93=<4:=33W Y AS)4"* VI,A =8=<4:=3#W YY
,S)4F-O VI,F 93=<4:=33W /D( VI,4D(4"DSL49<349==#W /*"P V*embership ,o5 8=88#W
YThe business has an active client base of over 8/#=/===1The business operates throu%h 8===
branches $ith e7ual no1 of tradin% terminals1 The business model of Stoc' Aro'in% lar%ely
focused on o$ned branches in the initial years and has no$ %raduated into the franchisee mode
of e&pansion that $ill cater to (6, India tar%et mar'et1
Rapid e&pansion has been made possible in this t$o4pron%ed strate%y of o$ned and franchised
outlets and is e&pected to have an end4state distribution/ net$or'in% over 3=== branches1 6s the
business starts tar%etin% the ne&t level of mass affluent customers/ e&pandin% into $ealth
mana%ement and advisory space/ same $ould also become a 'ey thrust area that can potentially
enhance profitability and shareholder value in the medium term1

Shiram Insight Logo:
71
Shiram Insight slogan
About Shiram Insight
The Broup has also made investments in *anufacturin%/ Kalue 6dded Services/ (roject
Development/ )n%ineerin% Services/ (harmaceuticals/ *achined - 6uto "omponents/ (ress
Dies - Sheet *etal Stampin%/ (ac'a%in%/ Information Technolo%y/ (roperty Development etc1
Genesis of the Shriram phenomenon
The 30,000 Cr Shriram Group had its humble begiigs i the Chit !ud busiess
o"er three de#adesago$ % Th&agara'a, ()S %a'a ad T *a&arama +ere the ,three
mus-eteers. +ho "etured ito these busiesses$ /ot ma& i the 0a#ial ser"i#es
idustr& thought at that time, this small Chit !uds busiess i Cheai +ould
ideed be the 1oudatio 1or the 0a#ial #oglomerate that Shriram is toda&$
Our %ission
2ur %oadmap starts +ith our missio, +hi#h is edurig$ 3t de#lares our purpose as
a #ompa& ad ser"es as the stadard agaist +hi#h +e +eigh our a#tios ad
de#isios$
Our 'ision
2ur "isio ser"es as the 1rame+or- 1or our %oadmap ad guides e"er& aspe#t o1 our
busiess b& des#ribig +hat +e eed to a##omplish i order to #otiue a#hie"ig
sustaiable, 4ualit& gro+th$
72
People: Ae a %reat place to $or' $here people are inspired to be the best they can be1
Portfolio: Arin% to the $orld a portfolio of 7uality bevera%e brands that anticipate and satisfy
peopleMs desires and needs1
Partners: ,urture a $innin% net$or' of customers and suppliers/ to%ether $e create mutual/
endurin% value1
Planet: Ae a responsible citi0en that ma'es a difference by helpin% build and support sustainable
communities1
Profit: *a&imi0e lon%4term return to shareo$ners $hile bein% mindful of our overall
responsibilities1
Productivity: Ae a hi%hly effective/ lean and fast4movin% or%ani0ation1
The Shriram Way!
Shriram Broup?s businesses strive to serve the lar%est number of common people1 "onsider
these5 "ommercial Kehicle Financin%/ "onsumer - )nterprise Finance/ Retail Stoc' Aro'in%/
Life Insurance/ "hit Funds and Distribution of Investment - Insurance (roducts1 Our foray into
,on4Life 2Beneral3 Insurance is a%ain a stron% e&pression of this commitment1
Milestones
Near *ilestone
8<:4 "ommencement of Ausiness 4 Shriram "hits
8<:< "ommencement of Ausiness 4 Shriram Transport Finance "o 2STF"3
8<;9 "ommencement of Ausiness 4 Shriram Investments Ltd
8<;4 I(O of STF"
8<;. "ommencement of Ausiness 4 Shriram "ity !nion Finance "o 2S"!F3
8<;; I(O of S"!F
8<;< "ommencement of Ausiness 4 Shriram Overseas Finance Ltd
8<<# "ommencement of Ausiness4 Shriram (roperties (vt Ltd
8<<< "ommencement of Ausiness 4 Shriram Insi%ht Share Aro'ers Ltd
73
8<<< "iticorp "K financin% tie up $ith STF"
9=== "ommencement of Ausiness 4 Shriram )(" Ltd
9=== "ommencement of Ausiness 4 T6E) Solutions Ltd
9==4 "ommencement of Ausiness 4 Shriram "apital Ltd
9==# )ntry of "hryscapital as (artner $ith STF" - )("
9==# )ntry of Sanlam as Life Insurance business partner and commencement of business4
Shriram Life Insurance "o
9==. *er%er of Shriram Investments Ltd - Shriram Overseas Finance Ltd $ith STF"
9==. "ommencement of Ausiness 4 Shriram Fortune Solutions Ltd
9==. "ommencement of Ausiness 4 Shriram Kalue Services
9==. )ntry of T(B as STF"Ms partner
9==: Shriram )("Ms QK $ith Leitner Technolo%ies for *anufacture of $ind turbines
9==: )("Ms foray into 6ir (ollution "ontrol $ith amon throu%h QK
9==: Orient Breen (o$er $as founded by Shriram )("
9==: I(O of T6E) Solutions Ltd
9==; "ommencement of Ausiness 4 Shriram Beneral Insurance Ltd
9==; I(O of Shriram )(" Ltd
9==< ,"D (lacement of Rs 8= An by STF"
9=8= I(O of Orient Breen po$er
9=88 Shiram ne$ tradin% terminal launched
9=89 "urrency derivatives introduce
Industrial Investments
The Broup has also made investments in *anufacturin%/ Kalue 6dded Services/ (roject
Development/ )n%ineerin% Services/ (harmaceuticals/ *achined - 6uto "omponents/ (ress
Dies - Sheet *etal Stampin%/ (ac'a%in%/ Information Technolo%y/ (roperty Development etc1
74
Non-Finanical service:-
Shriram Broup has al$ays encoura%ed entrepreneurship by demonstratin% continuous apetite for
investin% in start4up manufacturin% business1
Our Investment
The Broup has also made investments in *anufacturin%/ Kalue 6dded Services/ (roject
Development/ )n%ineerin% Services/ (harmaceuticals/ *achined - 6uto "omponents/ (ress
Dies - Sheet *etal Stampin%/ (ac'a%in%/ Information Technolo%y/ (roperty Development etc1
About Founder
%r(R Th"agara)an* Founder
"hairman of the Shriram Broup of "ompanies 4 (romoted the Shriram Broup "ompanies in
8<:41 Today the %roup has over 8#/ === employees and operatin% throu%h :== locations and
mana%e funds of over 8#/=== "rores in the business of financial services includin% life insurance
and %eneral insurance1
Z *asters in *athematics
Z *asters in *athematical Statistics from Indian Statistical Institute
Z 6ssociate of "hartered Insurance Institute 261"1I183/ London
Z Kisitin% faculty of 6sian Institute of Insurance/ (hilippines on "onse7uential Loss Insurance1
Ay inculcatin% the philosophy of Iputtin% people firstJ/ he has transformed the Shriram Broup
into India?s (remier ,et$or'ed Financial Services Supermar'et "hain1 The ,et$or' Shriram
comprises over .#= Aranches and Service "enters/ served by more than .=== employees and
.=/=== a%ents committed to ensurin% $orld4class customer service1 The Broup?s a%%re%ate
turnover e&ceeds Rs1 #=== crores1
75
Shiram group Services
Financial Services :-
elpin% "reate >ealth1 )mpo$erin% people throu%h prosperity1 Resultin% in inclusive %ro$th1
The relentless pursuit of this mission/ since our inception in 8<:4 has %iven the Shriram Broup
our raison dM[tre and our distinct identity1 The Broup?s reputation for effectiveness/ transparency
and inte%rity has helped it to become one of India?s lar%est Financial Services ,et$or'1The
Broup?s Financial Services Ausinesses mana%e assets e&ceedin% Rs14=/=== crores/ has .1#
million clients/ served by 8/==/=== 6%ents and 3./=== employees/ throu%h 9:== Aranches across
India1Our core financial services businesses are housed under the holdin% company Shriram
"apital Ltd5
"ommercial Kehicle Finance
Life Insurance
Beneral Insurance
"onsumer - )nterprise Finance
Financial (roduct Distribution
Retail Stoc' Aro'in%
"hit Funds
76
Non-Financial Services:-
Shriram Broup has al$ays encoura%ed entrepreneurship by demonstratin% continuous apetite for
investin% in start4up manufacturin% business1
Our Investment
The Broup has also made investments in *anufacturin%/ Kalue 6dded Services/ (roject
Development/ )n%ineerin% Services/ (harmaceuticals/ *achined - 6uto "omponents/ (ress
Dies - Sheet *etal Stampin%/ (ac'a%in%/ Information Technolo%y/ (roperty Development etc1
Corporate management :-
Board Of Directors
Arun Duggal
*r1 6run Du%%al is an e&perienced international ban'er and has advised companies on financial
strate%y/ *-6 and capital raisin%1
e is "hairman of Aoard of Directors of Shriram/ Shriram (roperties Limited/ Shriram "ity
!nion Finance Limited and Shriram )(" Limited1 e is the Kice "hairman of International
6sset Reconstruction "ompany1 e is on the Aoard of Directors of Qubilant )ner%y ,K1/ (atni
"omputers 2"hairman 4 6udit "ommittee3/ Fidelity Fund *ana%ement/ L,B (etronet 2,ominee
Director of 6sian Development Aan'3/ *anipal 6cunova/ Fuari Industries/ Info )d%e 2India3/
Dish TK India / *undra (ort - S)F/ and ert0 2India31 *r1 Du%%al is 6dvisor to I*6 2formerly
)conomist Intelli%ence !nit/ India31 e is a member of the Investment "ommittee of 6&is
(rivate )7uity1
e $as on the Aoard of Bovernors of the ,ational Institute of Aan' *ana%ement1 e is a Aoard
*ember and erst$hile "hairman of the 6merican "hamber of "ommerce/ India1 *r1 Du%%al is
involved in several initiatives in social sector1 e is a founder Director of Aell$ether
*icrofinance Fund $hich provides e7uity capital to promisin% *icro Finance or%ani0ations and
helps them in capacity buildin%1 e is a Trustee of "entre for "ivil Society1 ,e$ Delhi/ $hich
focuses on improvin% the 7uality and access of education to students especially for the poor1 e
77
is Senior 6dvisor 26sia (acific 3 to Transparency International Aerlin/ $hich is underta'in% a
number of initiatives to combat corruption problem around the $orld1 *r1 Du%%al had a 9. years
career $ith Aan' of 6merica/ mostly in the !1S1 on% Eon% and Qapan1 is last assi%nment $as
as "hief )&ecutive of Aan' of 6merica in India from 8<<; to 9==81 e spent ten years 28<;84
8<<=3 $ith the ,e$ Nor' "orporate Office of Aan' of 6merica handlin% multinational
relationships1 From 8<<848<<4 as "hief )&ecutive of Aan' of 6merica 6sia Limited/ on% Eon%
he loo'ed after Investment Aan'in% activities for the Aan' in 6sia1 In 8<<# he moved to To'yo
as the Re%ional )&ecutive/ mana%in% Aan' of 6merica Ms business in Qapan/ 6ustralia and Eorea1
From 9==8 to 9==3 he $as "hief Financial Officer of "L Technolo%ies/ India1
6 *echanical )n%ineer from the presti%ious Indian Institute of Technolo%y/ Delhi/ *r1 Du%%al
holds an *A6 from the Indian Institute of *ana%ement/ 6hmedabad1 e teaches Aan'in% -
Finance at the Indian Institute of *ana%ement/ 6hmedabad as a visitin% (rofessor1
R1Sridhar 2*ana%in% Director3
6dit Qain
S1Ken'ata'rishnan
*aya Shan'er Kerma
*u'und *anohar "hitale
(uneet Ahatia
Ranvir De$an
Sumatiprasad *1 Aafna
S1La'shminarayanan
78
Services offered from Shiram Insight
79

Data analysis &
Interpretation
80
81 Do you 'no$ about the follo$in% financial instruments@

a3 The sample si0e consists of 8== respondents and out of $hich almost all the people are
fully a$are about investment avenues li'e %old and fi&ed deposits and almost <# are
a$are about e7uity shares and mutual
91 o$ do you %et information about the follo$in% investment avenues@
81
Out of the 8== respondents about #=O of them %et the information from advertisements on the
television and internet and the rest from the ma%a0ines / company sales e&ecutives and friends
and relatives1
31 Rate the follo$in% accordin% to your preference@
82
Out of the 8== respondents as'ed the most preferred financial instrument is fi&ed deposits and
the then the rest li'e e7uity shares $ith := O and insurance1
41 >hat is your a%e@
83
#1 >hat are the factors that you consider $hile investin% in any financial instrument@
84
Out of the respondents #=O $ere of the opinion that return and safety are the main reasons
behind their investment decisions1
.1 On $hat basis you invest in any particular financial instrument@
85
The respondents $ere mostly of the opinion that portfolio is the most important factor before
investin% and then fundamental analysis done by them or by the financial advisor and then the
other factors
: o$ $ill you invest your money in any financial instrument@
86
*ost of the respondents surveyed that they mostly invest their money throu%h a bro'er and then
throu%h sub bro'ers and a%ents
87
81 >hat is your annual income@
Out the total respondents around .= O$ere in the income %roup of 84 3la'hs and 99O in the 34
#la'hs brac'et
88
58
225
205
;1 o$ much of your money you invest in financial instruments@
*ost of the respondents surveyed $ere mostly those people $ho invest 8= to 3= O of their
money in these instruments1
89
<1 o$ lon% do you prefer to 'eep your money invested@
Out of the 8== respondents mostly $ere of the vie$ that they invested there for a money at least
for a period of 8year to 3 years
90
8=1 o$ much return do you e&pect from your investments@

91

FINDINGS
The over all project is dependin% up on the findin%s that has been e&plained previously1 6ll my
survey findin%s are corelated and bein% e&plain in the above %raphs1
6fter completin% the survey and $atchin% the analysis I come to this conclusiion that the before
investment investors do have focus on Ta& savin%s/ Income/ "apiatal preservation etc1 They also
have a predetermination of the time period of investment1
6ccordin% to my vie$ the age group of 21-30 can be a %reat potential investors for the company
as the has hi%h ris' profile/ more disposible income/ and the time hori0on is perfect 34# years1
Recommendation for this cate%ory is company must follo$ up these hi%h potential
customers/ they can be offered )7uity shares because this %roup of people have a hi%h
ris' profile and they can afford to ta'es ris's $hich is usually associated $ith e7uity
shares1 This %roup of customers can also be offerd *utual funds because in that also the
e&posure is in e7uities1 !LI(S can also be offered to this %roup1The !LI( has a 9=O4
99O return $hich %ood enou%h for investment1 The main focus should be to reach to the
customer/ these customers are a$are of !LI(s and a$are of other product1 "ompany
should try to reach them and tap the investor1
*utual Funds can also be offered as they have hi%h ris' profile1 "ompany should ta'e
initiative to %et demat account of these customers1
The age group of 31-40 years/ investors are $ith HModerate` risk profile/ most of the
investors are from the 8=/===48#/=== Rs per month disposible income1 "ompany $ill %et
a %ood investor $ith diluted ris' profile1 "ompany can offer them !LI(s/and Fi&ed
Deposits as investment instrument1 *utual funds can be an option but that must be a debt
fund to invest1
The age group of 41-50 years/ investors are from the 15,000-20,000 Rs disposible
income %roup1 Investor in this %roup are invested in Insurance sector/ the primary focus
of these investors are retirement and time hori0on is li'ely to be .4< years1 This is also
%ood potential %roup for the retirement plan in !LI(s1 Fi&ed deposits can be a %ood
option for them1
For the a%e %roup of above 50 years/ the rish profile $ould be lo$ moderate/as the term
is not more than 3 years1 Investors have invested in insurance sector but in this a%e
insurance $ould not be a %ood option for investor1 "ompany should try to minimise the
ris' tolerence by offerin% Fi&ed deposits1
92
SUGGESTIONS
If $e see the survey data it $ill seen that respondents are majorly Service peopole and Ausiness
"lass1 Dependin% upon the data I conclude that the srevice class has a time hori0on of 34# years
and ris' tolerence HLo$4 *oderate?1 They invested in FDs/ )7uity shares/ *utual Fund and
!LI(s1
Recommendation company shoul tap these class by innovative mar'etin% strate%ies as
they already invested/ and offer FDs/ !LI(s1 *utual fund can be a lucrative offer if the
Fund is any moderate fund or debt fund1
For the business class/ the ris' profile is hi%h4very hi%h1 *ost investor are $ith ne%ative
return acceptability and time hori0on is \ 3 years1 "ompany should offer Mutual funds
$ith risk profile High to very high thus investor can %et a hi%h return1 6part from this
company should offer to open demat account $ith them1
Disposible Income
The disposible income brac'et less than Rs1#=== per month are basically safe investors
and have not and do not prefer investin% in mutual funds and !LI(1 Thus positionin% of
these products should be such that people are attracted to$ards this scheme1 )mphasis on
mar'etin% of the products should be %iven1
Respondents under disposible income brac'et Rs1#/===4Rs18=/=== have mainly invested
in insurance and real estate1 Aut $hen survey $as done and their preferences $as as'ed
these respondents stron%ly preferred investin% in these strate%ies1
Disposible Income Arac'et of Rs18#/===4Rs19=/=== are the stron% contenders for
investin% their money and these people have invested in real estate/ insurance and fi&ed
deposits1 *oreover there is mi&ed preferences for their investments thus proper
se%mentation of the sample should be done accordin%ly mar'etin% strate%ies should be
adopted1
Thou%h there is a small percenta%e of respondents in disposible income brac'et above
Rs19=/=== $ho least prefer investin% in mutual fund1 Aut this is the se%ment $hich can be
$ell tar%eted and their portfolio should be such that %ives them more returns1 The case of
!LI( is different as people stron%ly prefer investin% in this investment strate%y1 Thus
emphasis for sellin% !LI( in this income brac'et1
93

CONCLUSION:
,o$ that you have an idea of some of the places $here you can invest your hard4earned Returns/
$e hope that you are on your $ay to ma'in% your money $or' for you1 ereMs a recap of the 9=
investments detailed in this5
6n 6merican Depository Receipt 26DR3 is a stoc' that trades in the !nited States but
represents a specified number of shares in a forei%n corporation1 6DRs are bou%ht and
sold on !1S1 stoc' mar'ets just li'e re%ular stoc's and are issuedCsponsored in the !1S1
by a ban' or bro'era%e1
6n annuity is a series of fi&ed4amount payments paid at re%ular intervals over the
specified period of the annuity1 *ost annuities are purchased throu%h an insurance
company1
6 closed4end fund is an investment fund that issues a fi&ed number of shares in
an actively mana%ed portfolio of securities1 The shares are traded in the mar'et just li'e
stoc's/ but because closed4end funds represent a portfolio of securities they are very
similar to a mutual fund1
6 collectible is any physical asset that appreciates in value over time because it is rare or
it is desired by many1 *any people thin' of collectibles as thin%s li'e stamps/ coins/ fine
art or sports cards/ but there really are no strict rules as to $hat is or is not a collectible1
"ommon stoc' is o$nership in part of a company1 This %ives you entitlement to a portion
of the companyMs profits and any votin% ri%hts attached to the stoc'1
6 convertible bond is a bond that can be converted into the companyMs common stoc'1
Nou can e&ercise the convertible bond and e&chan%e the bond into a predetermined
amount of shares in the company1
>hen you buy a corporate bond/ you are loanin% your money to a corporation for a
predetermined period of time 2'no$n as the maturity31 In most cases/ the bond?s par
value is X8/===1 This is the face value of the bond and the amount the lender $ill be
repaid once the bond matures1
Futures are contracts on commodities/ currencies/ and stoc' mar'et inde&es that attempt
to predict the value of these securities at some date in the future1
Life insurance is income protection in the event of your death1 The person you name as
your beneficiary $ill receive proceeds from an insurance company to offset the income
lost as a result of your death1
94
*oney mar'et instruments are forms of debt that mature in less than one year and are
very li7uid1
6 mort%a%e4bac'ed security 2*AS3/ also 'no$n as a Dmort%a%e pass4throu%hD or a Dpass4
throu%h certificateD/ is an investment instrument that represents o$nership of an
undivided interest in a %roup of mort%a%es1 (rincipal and interest from the individual
mort%a%es are used to pay principal and interest on the *AS1
*unicipal bonds/ or DmunisD for short/ are debt securities issued by a state/ municipality
or county to finance its capital e&penditures1
6 mutual fund is a lar%e %roup of people $ho lump their money to%ether and %ive it to a
mana%ement company to invest it on their behalf1 6 mutual fund mana%er proceeds to
buy a number of stoc's from various mar'ets and industries1
Options are a privile%e sold by one party to another that offers the buyer the ri%ht to buy
2call3 or sell 2put3 a security at an a%reed4upon price durin% a certain period of time or on
a specific date1 (referred stoc' represents o$nership in a company/ but it usually does not
%ive the holder votin% ri%hts 2this may vary dependin% on the company31
Real estate investin% doesnMt just mean purchasin% a house 4 it can include vacation
homes/ commercial properties/ land 2both developed and undeveloped3/ condominiums
and many other possibilities1
Real )state Investment Trusts 2R)ITs3 sell li'e stoc's on the major e&chan%es and invest
in real estate directly throu%h properties or mort%a%es1
Treasuries are a debt obli%ation of a national %overnment1 Aecause they are bac'ed by
the credit and ta&in% po$er of a country/ they are re%arded as havin% little or no ris'
of default1
6 unit investment trust 2!IT3 is a re%istered trust in $hich a fi&ed portfolio of income4
producin% securities is purchased and held to maturity1
6 0ero4coupon security/ or Dstripped bondD/ is basically a re%ular coupon4payin% bond
$ithout the coupons1 The process of Dstrippin%D or D0eroin%D a bond is usually done by a
bro'era%e or a ban'1
95
BIBILIOGRAPHY
Books:
Websites:
$$$1mutualfundsindia1com
$$$1nseindia1com
$$$1bseindia1com
$$$1scribd1com
$$$1mc&1com
$$$1e7uitymaster1com
Magazines:
Ausiness Today
The )conomic Times
The *int

96
Questionnaire
,ame 5
Occupation 5
"ontact ,o 5
)mail id 5
81 Do you 'no$ about the follo$in% Financial Instrument@
o *utual Fun Nes ,o
o Aond Nes ,o
o Insurance Nes ,o
o )7uity Shares Nes ,o
o Fi&ed Deposits Nes ,o
o Bovt1 Securities Nes ,o
o Real )state Nes ,o
o I(O? Nes ,o
o Bold Nes ,o
o If any other please specify]]1
]]]]]]]]]]]]]]]]]]]]]]]]]]]]11
91 o$ do you %et information re%ardin% these Financial Instrument@
o 6dvertisement
o "ompany Sales force
o Friends C Relatives
o *a%a0ines C,e$spaper
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]1
31 (lease rate the Financial Instruments as per your (reference1
41>hat is your a%e@
8#4 9=
9844= 484#=
#84.= .= above
97
*ore preferred *oderate Less preferred
*utual fund
Insurance
)7uity Shares
Aonds
Fi&ed Deposits
Bovt1securities
Real estate
I(O?s
Bold
#1 >hat are the factors $hich you consider $hile investin% in any Financial Instrument@
o Return 2capital appreciation3
o Ta& Savin%
o Li7uidity
o Re%ular income flo$
o Safety
o Ris'
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]1
.1 On $hat basis you $ill invest in any particular Financial Instrument@
o (ast (erformance
o (ortfolio
o Fund *ana%er
o FundamentalCTechnical 6nalysis
o *ar'et Sentiment
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]]]
:1 o$ $ill you invest your money in any Financial Instrument@
o Nourself
o Throu%h any stoc' bro'in% company1 (lease specify name]]]]]]]]]]11
o Sub bro'erC 6%ents
o Throu%h Aan's
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]]]11
;1 In $hat type of Financial Instrument you li'e to invest@
o )7uity based
o Debt based
o Aalanced Fund
o ybrid Fund
o )LSS 2e7uity lin'ed savin% scheme3
o If any other please specify
<1 >hat is your annual income@
8lac to 3 lac 3lac to #lac #lac to 8=lac more than 8= lacs
8=1 o$ much of your money you invest in any Financial Instrument@
98
o 8=O to 9=O
o 9=O to 3=O
o 3=O to #=O
o *ore than #=O
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]11
881 o$ lon% you prefer to 'eep your money in any Financial Instrument@
o Less than . months
o . months to 8 year
o 8 year to 3 year
o *ore than 3 years
o If any other please specify
891 o$ much return you e&pect from any Financial Instrument@
o 8=O to 9=O
o 9=O to 3=O
o 3=O to #=O
o *ore than #=O
o If any other please
specify]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]]
11
831 >ill you invest your money for savin% the Ta& in any Financial Instrument@
Nes ,o
841 6re you satisfied $ith your investment decision/ (lease rate@
o i%hly satisfied
o Satisfied
o Less satisfied
o ,o satisfaction
8#1 6ny other comments1

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