A LIVE RESEARCH PROJECT REPORT ON EMERGING INVESTMENT PRODUCTS AND ITS SCOPE IN INDIAN FINANCIAL MARKETS IN TH E PA R TIA L FU LFILME

E N T OF MA S TE R OF BU S IN E S S A D MIN IS TR A TION (MB A )

2008-2010 PACIFIC INSTITUTE OF MANAGEMENT, UDAIPUR RAJASTHAN TECHNICAL UNIVERSITY, KOTA

Guided By MR.DHIRAJ JAIN

Submitted by: NEENA KHANDELWAL M.B.A. Part II

PREFACE
Practical training is one of the major components for any professional course like M.B.A. the real place where a professional person faces a problem in a field. It was a good exposure for me to undergo training in a highly esteemed organization like ICICI Direct Ltd. where I got to enhance my knowledge and experience with respect to Study of the Emerging Investment Products and its scope in the Indian Financial Markets. I was able to get familiarized with the corporate environment, team support and management operations in working out the operations successfully for the achievement of the end objectives of the organization as a whole. Thus I would say that this training was beneficial, educative and good exposure to me, which will certainly help me in my near future. Neena Khandelwal

AKNOWLEDGEMENT

I am very glad to take this opportunity of expressing my gratitude and heartily thanks to my entire supporter those who have helped guide me directly as well as indirectly during the completion of my entire LIVE RESEARCH PROJECT.. I would like express my sincere thanks to the PROF. B.P. SHARMA for giving me the opportunity to come on this stage and for the field experience and also the completion of the project work for examination of MBA Part II. I am very happy to express my thanks to my project guide Mr. DHIRAJ JAIN and the entire staff member who supported me very friendly during my project work. Lastly, I am really and heartily thanks to all my faculty member and friends.

TABLE OF CONTENTS

Particulars

1. Executive summary 2. Introduction to the Industry 3. Introduction to the Organization 4. Introduction to the project 5. Research Methodology 0 1 2 3 4 5 6 5.1 Title of the Study 5.2 Duration of the Project 5.3 Objective of Study 5.4 Type of Research 5.5 Sample Size and method of selecting sample 5.6 Scope of Study 5.7 Limitation of Study Indian market growth RBI and SEBI Indian financial market Investment products Types of Risk associated with the Investments Investment Strategies Market needs Future agenda Innovations in Financial Products

6. Analysis of questionnaire 7. Survey Findings 8. Conclusion 9. Common Investment Mistakes 10. Recommendations and Suggestions

11. Bibliography

EXECUTIVE SUMMARY
A financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidityhe Indian financial market has also grown substantially. The Indian stock markets are now amongst the best in the world in terms of modernizations and the technology. India was among the few countries, which was not badly effected by the contagion effects of the Asian crisis of 1997. Policy makers attribute this to the slow and cautious pace of capital account liberalizatio Today-- with the 'feel good' factor about India in the global arena rising, increased confidence of the investors in the Indian market, Sensex looking more attractive than ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is the most vulnerable period for the regulators of the Indian financial sector, particularly SEBI and RBI The financial markets can be divided into different subtypes:

Capital markets which consist of: Stock markets, which provide financing subsequent trading thereof. Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof. through the

issuance of shares or common stock, and enable the

Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and

investment. Derivatives market, which provide instruments for the

management of financial risk. Futures markets, which provide standardized forward

contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of

various risks. Foreign exchange markets, which facilitate the trading of

foreign exchange. The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities. ICICI Securities Limited . amongst the leading Brokerage Houses and the value based financial services which make it preferred service provider. As India's fastest growing financial services conglomerate, with deep moorings in the Indian economy for over five decades, ICICI Group of companies have endeavoured to contribute to address the challenges posed to the community in multiple ways.

Introduction to the Industry

History:

Founded by the Government of India in the 1960's, it was one of

the three financial institutions set up to finance large industrial projects

Earlier known as Industrial Credit and Investment Corporation of

India, it did not entertain retail customers and was thus not a bank in the literal sense.

It was in the 1990's that a subsidiary was set up in the name of

ICICI Bank to take up retail banking services including deposits, credit cards, loans etc. In 2002, the ICICI Bank was merged back with the ICICI and the result was the ICICI Bank Limited operational now And the rest as they say is history not exactly the above-mentioned one. ICICI is a now household name synonym to superior banking services. It was also the first of the leading banks to set up a nation wide network of ATM's that has multiplied exponentially making the bank more accessible to its dear customers. A look at the annual report establishes the fact that ICICI Bank is the second largest amongst the other Indian Banks. The total assets as measured till Mar'07 are US $ 79 billion. The local Stock Exchange Listings include:

National Stock Exchange Bombay Stock Exchange, Mumbai Kolkata Stock Exchange Vadodara Stock Exchange

The overseas operations of ICICI Bank were set up in 2002. Today it boasts of wholly owned subsidiaries and offices in 18 countries including US, UK, Canada and Russia. The American Depository Receipts or ARD's enjoy listings in the New York Stock Exchange (NYSE). The company profile shows an increasing number of satisfied retail and corporate customers dedicating their loyalty to the bank. They also offer Internet and Mobile Banking and online customer services facilities. An ATM and Branch Locator is available online on the official ICICI Bank Website.

The Banking Services Portfolio can be broadly classified into three categories:

Personal Banking Corporate Banking NRI Banking

The Personal Banking Services include:

Deposits: deposits into savings account, fixed deposits, security

deposits and recurring deposits.

Loans: home loans, car loans, personal loans, loans against

property, gold and securities besides many other special financial assistances for rural and industrial use.

Investments: bonds, mutual funds, Senior citizens savings and

Pure Gold.

Insurance: home, vehicle and health insurance. Foreign Exchange Services Demat And Credit Services Wealth Management Private Baking 9

Online Banking Services

Corporate banking services cover: Transaction and Treasury Banking Investment Banking Rural and Agricultural Finance Structured and Technological Finance International Banking Mobile and Online Banking

The NRI Banking Services The NRI Banking Services were set up world over to accumulate the funds for the rural development. It became so popular that it has become one of the prime categories in banking services. These include:

Money Transfers anytime and anywhere in India Bank Accounts for the global Indians Home Loans

The Customer Service of ICICI Bank is handled by the BPO's working 24x7. ICICI Bank believes in complete customer satisfaction and has employed many contact methods in case any one wants to reach them. The major Indian cities like Delhi, Bangalore, Hyderabad, Chennai, Mumbai and Pune boast of numerous branches in every corner of the city. One can visit their help desk at every branch or drop in a note in the suggestion 10

boxes set-up in every ATM or email them or even call their customer care executives working 24x7.

Product Portfolio
Banking
o o o o o o o o o o o o o o

Personal Banking Savings & Deposits Loans Cards Wealth Management Global Private Clients Corporate Banking Transaction Banking Treasury Banking Investment Banking Capital Markets Custodial Services Rural & Agri Banking Structured Finance Technology Finance Business Banking Current Account Business Loans 11

o o o

Forex Trade Cash Management Services

o o o o o o

NRI Banking Money Transfer Bank Accounts Investment Property Solutions Insurance Loans

Insurance & Investment

o o o o o o o o o

Life Insurance Retirement Solutions Health Solutions Education Solutions General Insurance Health Insurance Overseas Travel Insurance Student Medical Insurance Motor Insurance Home Insurance

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Securities Corporate Finance Institutional Equities Institutional Research Retail Equities ICICI Direct Financial Superstore Retail Research Active Trader Services

o o o o o o o

Mutual Fund Our Funds Performance Analyser Systematic Investing Compare Schemes

o o o o

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Introduction to the Organisation

ICICI Bank also has banking subsidiaries in UK, Canada and Russia ICICI Group offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised group companies, subsidiaries and affiliates in the areas of personal banking, investment banking, life and general insurance, venture capital and asset management. With a strong customer focus, the ICICI Group Companies have maintained and enhanced their leadership position in their respective sectors. ICICI Bank is India's second-largest bank with total assets of Rs. 3,997.95 billion (US$ 100 billion) at March 31, 2008 and profit after tax of Rs. 41.58 billion for the year ended March 31, 2008. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation*. The Bank has a network of about 1,308 branches and 3,950 ATMs in India and presence in 18 countries. ICICI Prudential Life Insurance Company is a 74:26 joint venture with Prudential plc (UK). It is the largest private sector life insurance company offering a comprehensive suite of life, health and pensions products. It is also the pioneer in launching innovative health care products like Diabetes Care and Cancer Care. The company operates on a multi-channel platform and has a distribution strength of over 2,90,000 financial advisors operating from 1956 branches spread across 1669 locations across the country. In addition to the agency force, it also has tie-ups with various banks, corporate agents and brokers. In fiscal 2008, ICICI Prudential attained a market share of 12.7% with new business weighted premium growth of 68.3% to Rs. 66.84 billion and held assets of Rs. 14

285.78 billion at March 31, 2008.

ICICI Lombard General Insurance Company, a joint venture with the Canada based Fairfax Financial Holdings, is the largest private sector general insurance company. It has a comprehensive product portfolio catering to all corporate and retail insurance needs and is present in over 200 locations across the country. ICICI Lombard General Insurance has achieved a market share of 29.8% among private sector general insurance companies and an overall market share of 11.9% during fiscal 2008. The gross return premium grew by 11.4% from Rs. 30.3 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008. ICICI Securities Ltd is the largest equity house in the country providing end-to-end solutions (including web-based services) through the largest non-banking distribution channel so as to fulfill all the diverse needs of retail and corporate customers. ICICI Securities (I-Sec) has a dominant position in its core segments of its operations Corporate Finance including Equity Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product Distribution. ICICI Securities Primary Dealership is the largest primary dealer in Government securities. In fiscal 2008, it achieved a profit after tax of Rs.1.40 billion. ICICI Prudential Asset Management is the second largest mutual fund with asset under management of Rs. 547.74 billion and a market share of 10.2% as on March 31, 2008. The Company manages a comprehensive range of mutual fund schemes and portfolio management services to meet the varying investment needs of its investors through 235 branches spread across the country. Incorporated in 1987, ICICI Venture is the oldest and the largest private equity firm in India. The funds under management of ICICI Venture have increased at a 5 year CAGR of 49% to Rs.95.50 billion as on March 31, 2008. *Free float holding excludes all promoter holdings, strategic investments and cross holdings among public sector entities. 15

Introduction to the Project

Financial markets could mean: 1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants. 2. The coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.

INDIAN MARKET GROWTH

India Market Growth over the years have attained a high benchmark to sustain her business and competition with other nations. From the early 1990s, Indian market economy have been following a liberalized policy, by reducing government restrictions on foreign trade and investment. The publicly owned industries are privatized and profit earning sectors like the software and financial services, pharmaceutical, biotechnology, nanotechnology, telecommunication, shipbuilding and aviation are now been opened to private and foreign interests. India's GDP, currently more than 9%, makes it one of the fastest developing economies in the world. Indian market growth ranks her in the tenth position in the world economy. The easing of restrictions in capacity expansion for incumbents, removal of price controls and reduction in the corporate tax rate in the 1980s initiated the process of 16

market growth in India . India Market Growth got further accelerated with the economic liberalization of 1991 which marked an end to the License Raj, thereby ending many public monopolies and allowing direct foreign investment in many sectors. The public sector is involved with sectors like railways and postal system which are considered either to be too important or not enough profitable to leave to the market forces only. Today the leading markets of India are the - Indian Bullion Market, Indian Car Market, India Commodity Market, India Debt Market, India Design Market, Indian Equity Market, Indian Food Market, India Financial Market, Indian Gold Market, India IT Market, India Money Market, Indian Real Estate Market, Indian Retail Market, India Semiconductor Market, Indian Stock Market, India Telecoms Market. There's been an increase in the India Market Growth specially in the industries dealing with manufacturing, construction, transport and communication, tourism, personal products, health care, education and recreation, vehicle, telecommunications and software. According to the Indian Finance Minister, P. Chidambaram, companies like General Motors Corp., Royal Dutch Shell Plc. and the like have invested in about 3,000 new factories and other expansion projects worth about more than twenty billion dollars in Indian market since 2004, in order to tide the growing market demand. To hold the India Market Growth rate steadily, the government need to follow certain policies which would widen and broaden the scope for the growth of Indian markets in the near future. these are:

Systematic reform Programme Promoting competition and higher corporate investment Investing in infrastructure, health care and education

The increase in India Market Growth is reflected in the actions of the government like boosting productivity, reducing poverty and providing people with more sustainable lifestyles in both the urban and rural sector.

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The organized part of the Indian Financial System can be classified from the point of view of the regulators as:

Regulatory Authorities Regulator y Authorities RBI Commercia l Banks Forex Markets Financia l Institutions Primary Dealers SEBI Primary Market Secondary market Derivatives Market

Reserv e Bank of India (RBI) Commercial banks include public sector banks, private banks and foreign banks. RBI, under Banking Regulation Act and Negotiabl e Instrument Act, regulates these banks.

Financial Institutions may be of all India level like IDBI, IFCI, ICICI, NABARD or sectoral financial institutions like, EXIM, TFCIL etc. IFCI was the first term lending institution to be set up. IDBI is the apex development financial institution set up to provide funds for rapid industrializatio n in India. In order to boost the disbursemen t of credit to the agriculture sector, Agriculture Refinance Corporation was set up by RBI to provide refinance to banks and institutions extending credit to the agriculture sector.

The participants in Foreign exchange market include banks, financial institutions and are regulated by RBI. 18

Primary dealers are registered participants of the wholesale debt market. They bid at auctions for government debts, treasury bills , which are then retailed to banks and financial institutions, whic h invest in these papers to maintain their Statutory Liquidity Ratio (SLR).

Securitie s and Exchang e Boar d of India (SEBI) SEBI was set up as an autonomous regulatory authority by the Governmen t of India in 1988 To protect the interest of the investor s in the securities and to promote the developmen t of and to regulate the securities market and the matters connected therewith or incidental thereto. It is empowered by two acts namely The SEBI Act, 1992 and The Securities Contract (Regulation) Act, 1956 to perform the function of protecting investors rights and regulating the capital markets.

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 INDIAN FINANCIAL MARKETS

Indian Financial Markets

Money Market

Debt Market

Capital Market

Securities Market Non- Securities Market

Primary Market

Secondary Market

Spot Market

Forward Market 20

Role of Capital Market

1. It is the indicator of the inherent health of the economy.

2. It is the largest source of funds with long or indefinite maturity for companies and thereby enhances capital formatio n in the economy.

3. It offers a number of investment avenues to the investors.

4. It helps in channelising the savings pool in the economy towards investments, which are more efficient and give a better rate of return thereby helping in optimum allocation of capital in the country.

Primary Market The primary market is the place where the new offerings by companies are made either as Initial Public Offer (IPO) or Rights Issue. IPOs are offerings made by the companies for the first time while rights are offerings made to the existing shareholders . Investors who prefer to invest in the primary issues are called Stags. Secondar y Market Secondary market consists of stock exchanges where the buy orders and sell orders are matched in the organised manner/ there are at present 25 recognized stock exchanges in India and are governed by the Securities Contracts (Regulation) Act (SCRA). Derivatives Market

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It is the market for the financial instrument, which derives their values from the underlying assets like stock, commodity or currency. Derivatives trading has started with Index Futures, followed by Index Option and then Stock Option as per the recommendation of the SEBI appointed L. C. Gupta Commit- tee. Early Years The equity brokerage industry in India is one of the oldest in the Asia region. India had an active stock market for about 150 years that played a significant role in developing risk markets as also promoting enterprise and supporting the growth of industry. The roots of a stock market in India began in the 1860s during the American Civil War that led to a sudden surge in the demand for cotton from India resulting in setting up of a number of joint stock companies that issued securities to raise finance. This trend was akin to the rapid growth of securities markets in Europe and the North America in the background of expansion of railroads and exploration of natural resources and land development. Historical records show that as early as 1864, there were about 1,000 brokers with the stock markets functioning from three places in Mumbai; between 9 am to 7 pm at the junction of Meadows Street and Rampart Row, from day break till 9 am and from 7 pm to early hours of next morning at Bazargate. Share prices rose sharply even at that time. A share of Colaba Land Company during the boom period of the 1860s rose from Rs 10,000 at par to Rs 120,000 and that of Backbay Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time, was a major financial centre having housed 31 banks, 20 insurance companies and 62 joint stock companies. Reports on stock markets around that time indicate that an ordinary broker in 1864 earned about Rs 200 per day, a huge sum in those days. The boom period came to an abrupt end in 1865. In Jul 1865, what was then used to be called the share mania ended with burst of the stock market bubble. Never I witnessed in any place a run so widely distributed nor such distress followed so quickly on the heels of such prosperity thus wrote Richard Temple, who served as the Governor of Bombay at that time. An 22

interesting aspect is that despite the collapse of the stock market, most of the brokers met their payment commitments. In the aftermath of the crash, banks, on whose building steps share brokers used to gather to seek stock tips and share news, disallowed them to gather there, thus forcing them to find a place of their own, which later turned into the Dalal Street. A group of about 300 brokers formed the stock exchange in Jul 1875, which led to the formation of a trust in 1887 known as the Native Share and Stock Brokers Association. A unique feature of the stock market development in India was that that it was entirely driven by local enterprise, unlike the banks which during the pre-independence period were owned and run by the British. Following the establishment of the first stock exchange in Mumbai, other stock exchanges came into being in major cities in India, namely Ahmedabad (1894), Calcutta (1908), Madras (1937), Uttar Pradesh and Nagpur (1940) and Hyderabad (1944). The stock markets gained from surge and boom in several industries such as jute (1870s), tea (1880s and 1890s), coal (1904 and 1908) etc, at different points of time.

Beginning of a new equity culture A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the multinational companies, which created a surge in retail investing. The early 1980s witnessed another surge in stock markets when major companies such as Reliance accessed equity markets for resource mobilisation that evinced huge interest from retail investors. A new set of economic and financial sector reforms that began in the early 1990s gave further impetus to the growth of the stock markets in India. As a part of the reform process, it became imperative to strengthen the role of the capital markets that could play an important role in efficient mobilisation and allocation of financial resources to the real economy. Towards this end, several measures were taken to streamline the 23

processes and systems including setting up an efficient market infrastructure to enable Indian finance to grow further and mature. The importance of an efficient micro market infrastructure came into focus following the incidence of market abuses in securities and banking markets in 1991 and 2001 that led to extensive investigations by two respective Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an administrative arrangement, was given statutory powers with the enactment of the SEBI Act, 1992. The broad objectives of the SEBI include

to protect the interests of the investors in securities to promote the development of securities markets and to regulate

the securities markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth of securities markets in India in the last fifteen years. Following the recommendations of the High Powered Study Group on Establishment of New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by financial institutions with an aim to provide access to investors all over the country. NSE was incorporated in Nov 1992 as a tax paying company, the first of such stock exchanges in India, since stock exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stock exchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting up of the National Stock Exchange brought to Indian capital markets several innovations and modern practices and procedures such as nationwide trading network, electronic trading, greater transparency in price discovery and process driven operations that had significant bearing on further growth of the stock markets in India.

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Faster and efficient securities settlement system is an important ingredient of a successful stock market. To speed the securities settlement process, The Depositories Act 1996 was passed that allowed for dematerialisation (and rematerialisation) of securities in depositories and the transfer of securities through electronic book entry. The National Securities Depository Limited (NSDL) set up by leading financial institutions, commenced operations in Oct 1996. Regulations governing selection of various types of market intermediaries as depository participations were made. Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock Exchange and other financial institutions came into being. Rapid Growth The last decade has been exceptionally good for the stock markets in India. In the back of wide ranging reforms in regulation and market practice as also the growing participation of foreign institutional investment, stock markets in India have showed phenomenal growth in the early 1990s. The stock market capitalization in mid-2007 is nearly the same size as that of the gross domestic product as compared to about 25 percent of the latter in the early 2000s. Investor base continued to grow from domestic and international markets. The value of share trading witnessed a sharp jump too. Foreign institutional investment in Indian stock markets showed continuous rise reaching about USD10 bn in each of these years between FY04 to FY06. Stock markets became intensely technology and process driven, giving little scope for manual intervention that has been the source of market abuse in the past. Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology. Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to trading in equities, opportunities in trading of derivatives in futures and options in index and stocks. ETFs are showing gradual growth. Within five years of introduction of derivatives, Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian stock markets are transaction intensive and thus rank among the top five markets in this regard. Stock exchange reforms brought in professional management separating conflicts of interest 25

between brokers as owners of the exchanges and traders/dealers. The demutualisation and corporatisation of all stock exchanges is nearing completion and the boards of the stock exchanges now have majority of independent directors. Foreign institutions took stake in Indias two leading domestic stock exchanges. While NYSE Group led consortium took stake in the National Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

Investment Products
Fixed Income
Fixed income products include bank deposits, Government securities, Bonds, Debentures, Commercial papers and Certificate of Deposits. Criteria for investment in fixed income products: 1. Yield to maturity. 2. Credit rating of the security. 3. Risk preference.

For fixed income securities interest is the major decisive factor. Credit rating of the securities published periodically helps the investor in credit risk assessment. Government Securities:It includes T-Bills (364, 182, 91 & 14 days), Bonds issued by the Central & State Government, State Financial Institutions, Municipal Bodies, Port Trusts, and Electricity Bodies etc. T-Bills are discounted instruments and these may be traded with a repurchase clause, called repos. Repos are allowed in 364, 182 and 91 days T-Bills and the minimum repo term is 1 day. The banks purchase these securities; financial institutions and Provident fund trust for their SLR requirements and are normally referred to as gilt- edged securities.

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 Bonds:It can be of many types like Regular Income, Infrastructure, Tax saving or Deep Discount Bonds. These are investment products with fixed coupon rates and a definite period after which they are redeemed. The bonds may be regular income with the coupons being paid at fixed intervals or cumulative in which interest is paid on redemption. Deep Discount bonds are one, which is issued at a discount at the face value, and the investor is paid the face value at redemption.

Debentures:It may be many types like, Fully convertible debentures (FCDs), Partly convertible debentures (PCDs) and non-convertible debentures (NCDs). FCDs are those whose face value is converted into fixed number of equities at a fixed price. The price of each equity share is received by the way of converting the face value of convertible securities i.e. the debenture is called the conversion price and the number of equity shares exchanable per unit of the convertible security i.e. debenture is called conversion ratio. Callable debenture is a debenture in which the issuing company has the option of redeeming the security before the specified redemption date at a pre-determined price. Puttable debenture is one where the holder has the option of getting it redeem before the maturity date. PCDs are debentures where a portion of the face value is converted into equity shares and the NCDs, also called the khoka, are redeemed on maturity only.

Public Deposits: Corporates can raise funds from the public in the form of fixed deposits. These deposits are unsecured and are mainly used for the working capital requirements. These unsecured public deposits are governed by the Companies (Acceptance of Deposits) Amendment Rules 1978. Under this rule, public deposits cant exceed 25% of the share 27

capital and free reserves and the maximum maturity period is 3 years while the minimum is 6 months. Certificate of Deposits: These are short term funding instruments issued by banks and financial institutions at a discount to the face value. Banks can issue CDs for duration of less than 1 year while FIs can only issue this for more than 1 year. The issuing bank or financial institution cant repurchase the instruments. CDs have to be issued for a minimum of Rs. 5 lakhs with multiples of Rs. 1 lakh thereafter. These are generally used by corporates to meet their short-term requirements. Commercial Papers: These represent short-term promissory notes issued by firms with a high credit rating. The maturity of these varies from 15 days to 1 year, sold at a discount to the face value and redeemed at the face value. CPs can be issued by the companies having minimum net worth of Rs. 4 crores and needs a mandatory credit rating of P2 (CRISIL), D2 (Duff & Phelps), PR2 (Credit Analysis & Research) and A2 (ICRA). The rating should not be more than 2 months old. It can be issued for a minimum amount of Rs. 25 lakhs and more in multiples of Rs. 5 lakhs. Equity Shares An equity share in a company is a share in its ownership. Equityshareholders collectively constitute the ownership of the company and enjoy the fruits of the ownership like dividends and voting in the meetings etc., but they are not liable for the debts of the company beyond the value that has already been subscribed through the share capital. However certain shares do not carry ownership privileges like voting etc. these shares are preferential or non voting shares. But preference shareholders get assured dividends, if the company makes profit and they would get back their money invested after a specified period of time. Equity shareholders can only redeem their investment by selling the share at the market price.

Other Investment Products Available Are as Follows:28

Today choosing a best investment plan is difficult because there are so many investment options available. These days we are getting more money compared to last decades. Bank Fixed Deposits (FD) Fixed Deposit or FD is the most preferred investment option today. It yields up to 8.5% annual return depends on the Bank and period. Minimum period is 15 days and maximum is 5 years and above. Senior citizens get special interest rates for Fixed Deposits. This is considered to be a safe investment because all banks operated under the guidelines of Reserve Bank of India. National Saving Certificate (NSC) NSC is backed by Govt. of India so it is a safe investment method. Lock in period is 6 years. Minimum amount is Rs100 and no upper limit. You get 8% interest calculated twice a year. NSC comes under Section 80C so you will get an income tax deduction up to Rs 1,00,000. From FY 2005-'06 onwards interest accrued on NSC is taxable. Public Provident Fund (PPF) PPF is another form of investment backed by Govt. of India. Minimum amount is Rs500 and maximum is Rs70,000 in a financial year. A PPF account can be opened in a head post office, GPO and selected branches of nationalized banks. PPF also comes under Section 80C so individuals could avail income tax deduction up to Rs 1,00,000. Lock in period for PPF is 15 years and interest rate is 8%. Unlike NSC, PPF interest rate is calculated annually. Both PPF and NSC considered to be best investment option as it is backed by Government of India. Stock Market Investing in share market is another investment option to get more returns. But share market investment is volatile to market conditions. Before investing you should have a thorough knowledge about its operation. 29

MUTUAL FUNDS A mutual fund invests the pooled money of its shareholders in various types of investments. A fund manager buys and sells securities for the fund's shareholders. Mutual fund values rise and fall along with the securities in the fund. An investor may prefer to invest in mutual funds for diversification, to take advantage of the professional management, the low cost of shares, or the ease with an investor can buy and sell shares. Each mutual fund has an objective which determines the types of securities it invests in. The fund's objectives must be stated clearly in the prospectus. More than 6,000 mutual fund are available, all with different objectives, securities owned, levels of risk, and levels of earnings. All mutual funds have management fees and some have additional fees when shares are bought and sold. The prospectus must disclose all fees and costs. Many mutual funds are part of a family of funds (i.e. issued by the same mutual company). A financial service company may offer a number of funds with different objectives and the investor may switch from one fund to another within the same family at little or no expense. CERTIFICATES OF DEPOSIT Certificates of Deposit or CDs are purchased for specific amounts of money at a fixed interest rate for a specific time. CDs are generally priced in multiples of $1000. Usually, the longer the CD is held, the higher the interest rate. If you cash in the CD before the specified time, you will have to pay a penalty. CDs are also insured (up to $100,000) if the institution is federally insured. SAVINGS BONDS Savings bonds are issued by the United States Treasury and come in two variety. The Series EE and Series HH. EE bonds are available at most banks. The minimum 30

purchase is a $25 bond which will mature to pay $50 in eight to 12 years depending on the interest rate. The interest rate on the bond is related to the market interest rate and there is a penalty for cashing a bond in early.bonds are purchased from a Federal Reserve Bank or through the Treasury at face value. They can be bought only by trading in EE bonds or an old H bond. The HH bond matures in 10 years with interest paid semi-annually. Treasury Bonds are considered the safest bond investment. They are not insured but are backed by the full faith and credit of the United States government. The US guarantees that the investor will receive full principal amount upon maturity. There are no sales charges for Treasury bonds and the interest they earn is exempt from state and local taxes and can be deferred from federal income tax until the money is received. GOVERNMENT SECURITIES The United States government also issues debt securities to raise funds. Other US securities (besides the savings bonds) include Treasury Bills (Tbills) with up to one year maturities, Treasury Notes with up to 10 year maturities, and other United States Agency bonds. T-bills are sold to selected securities dealers by the Treasury at auction. Investors can buy all three types, without paying commission, directly from a Federal Reserve Bank, or from a dealer.

OTHER INVESTMENTS: BONDS Municipal Bonds are issued by states, cities, or certain local government agencies. An important feature of these bonds is that the interest which a bondholder receives is not subject to federal income tax. Also the interest is exempt from state and local tax if the bondholder lives in the jurisdiction of the issuer. Because of these tax advantages the interest rate is usually lower than that paid on corporate bonds Municipal bonds are issued to fund needed projects; such as bridges, schools, and new roads.

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Corporate Bonds usually pay higher interest than government bonds but they are somewhat riskier. If a corporation goes bankrupt, bondholders, as creditors, are paid their money before stockholders. Corporate bonds are either secured or unsecured. A secured bond is backed by specified assets or collateral, while an unsecured bond is backed only by the faith and credit of the corporation. Companies offering bonds to the public must file a registration statement with the SEC. Why Bonds are resold on the market: Why would someone want to sell a $1,000 bond for less than its full value? Suppose you buy a bond for $1,000 that pays 10% interest and matures in ten years. Each year you would receive $100. After a few years, lets say interests rates in general rise to $15. Your $1000 investment could be paying $150 a year. You want to sell the bond to reinvest as much of the $1000 as you can, but who wants to pay $1000 for a bond only paying $100 a year when they could pay $1,000 for a bond paying $150 a year. To sell your bond you have to discount its price. On the other hand, if interest rates fall you would be able to sell it for more than $1,000. "Junk Bond" is a term for speculative, high-risk, high interest rate corporate or municipal bonds. The default rate is much higher on junk bonds than on higher quality bonds.

STOCKS As already discussed, when you buy stock, you are becoming an owner of the company. If the company does well, the value of your stock should go up over time. If the company does not do well, the value of your investment will decrease. Many companies distribute a portion of their profits to shareholders as dividends. As owners, shareholders generally have the right to vote on electing the board of directors and on certain other matters of particular significance to the company. Companies issue two types of stock, common and preferred. Common stock is the basic form of ownership in a company. People who hold common stock have a claim on the assets and earnings of a firm after the claims of preferred stockholders and 32

bondholders. The safety of the principal of preferred stock is greater than that of common stock, however, preferred stockholders cannot vote for the directors of the company. There are five basic categories of stock: 1. "Income stocks" pay unusually large dividends that can be used as a means of generating income without selling the stock. Most utility stocks are considered income stocks 2. "Blue chip stocks" are issued by very solid and reliable companies with long histories of consistent growth and stability. Blue chip stocks usually pay small but regular dividends and maintain a fairly steady price. Examples of Blue chip stocks include IBM, Exxon, Kodak, GE, and Sears. 3. "Growth stocks" are issued by young, entrepreneurial companies that are experiencing a faster rate of growth than their general industry. Their stocks normally pay little or no dividend because the company needs all of its earning to finance expansion. Since they are issued by new companies, with no track record, growth stocks are riskier but offer more potential for growth than other kinds of stock. 4. "Cyclical stocks" are issued by companies that are affected by general economic treads. The prices of these stocks tend to go down during recessionary periods and increase during economic booms. Cyclical stocks include automobiles, heavy machinery, and home building. 5. "Defensive stocks" are the opposite of cyclical stock. they are issued by companies producing staples such as food, beverages, drugs and insurance and they usually maintain their value.

STOCK SPLITS

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When a company increase the amount of its shares it is said to split. A 2 for 1 split means that the company has doubled the amount of outstanding shares. The sale price will decrease proportionally to the split so if a stock holder held 100 share of stock for $40 per share, after the spit she would have 200 shares at $20 a share. The stockholder's equity remains he same. The stock split in intended to reward shareholders. By making the company's stock less expensive, it is hoped to attract more investment, thus leading to an increase in the price of its stock. FUTURES A futures contract is a commitment to buy or sell a specific amount of a commodity at a specific future date and price. DERIVATIVES Stock options are known as derivative investment instruments because their value derives from the security on which they are based. Stock options are contracts giving the purchaser the right to buy or sell a stock at a specific price within a certain period of time. Like all futures contracts a stock option can be a very complicated and risky investment. LAND The most common investment people hold is real estate (in the form of home ownership). Over two-thirds of American's own their homes. Generally, home ownership is a good investment, as real estate prices generally rise. However, as the purchase of a home is usually the largest single investment a person makes, if real estate prices fall owners may have a hard time keeping up with their mortgages. TANGIBLE ASSETS

34

Assets that you can hold onto or touch are called tangible. They include gold coins, and other collectible items like dolls, baseball cards, or stamps. Generally collectibles pay no interest and may or may not increase in value over the years. There is no regulated market for collectibles and should be used for enjoyment rather than investment.

Silver Silver as an investment:Silver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in the United States. (It continued to be used in coinage until 1964, when the intrinsic value of the silver approached to overtake the coins' face values.) Methods of investing in silver Bars A traditional way of investing in silver is by buying actual bullion bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter at major banks. Physical silver, such as bars or coins, may be stored in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer. Various sizes of silver bars:

1000 oz troy bars. These bars weigh about 68 pounds

avoirdupois (31 kg), and vary about 10% as to weight, as bars range from 900 oz to about 1100 oz (28 to 34 kg). These are COMEX good delivery bars.

35

100 oz bars. These bars weigh 6.8 pounds (3.11 kg), and are

among the most popular with retail investors. Popular brands are Engelhard and Johnson Matthey. Those two brands cost a bit more, usually about 40-50 cents per ounce above the spot price, but that price may vary with market conditions.

Odd weight retail bars. These bars cost less, and generally have

a wider spread, due to the extra work it takes to calculate their value, and extra risk due to the lack of good brand name.

Coins
Buying silver coins is another popular method of physically holding silver. One example is the 99.99% pure Canadian Silver Maple Leaf. Coinsmay be minted as either fine silver or junk silver, the latter being older coins with a smaller percentage of silver. For example, U.S. pre-1965half dollars, dimes, and quarters are 25 grams perdollar of face value and 90% silver (22 g silver per dollar). (1965-1970 ) and 1975-1976 Kennedy half dollars are "clad" in a silver alloy and contain about one-third of the pre-1965 issues.) Junk silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom and Canada, and 1945 in Australia. These coins are 92.5% silver, and are in the form of (in decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences, and threepence. The tiny threepence weighs 1.41 grams, and the Crowns are 28.27 grams (1.54 grams heavier than a US $1). Canada produced silver coins with 80% silver content from 1920 to 1967. Rounds Some hard money enthusiatists use .999 fine silver rounds as a store of value. A cross between bars and coins, silver rounds are produced by a huge array of mints, generally contain an ounce of silver in the shape of a coin but have no status as legal tender. 36

Rounds can be ordered with a custom design stamped on the faces or in assorted batches.

Certificates
U.S. $5 Silver Certificate. A certificate of ownership can be held by silver investors instead of storing the actual silver bullion. Silver certificates allow investors to buy and sell the security without the difficulties associated with the transfer of actual physical silver.

GOLD
There are many savings and investment options available in India. One of the options is gold. Gold has been valued since prehistoric times and is the investment option that has been seen as the ultimate form of safe haven investment and the only true form of wealth. Gold has been popular in India because it acted as a good hedge against inflation. There is so much uncertainty in the world in terms of economic growth and geopolitics, it is no surprise that many investors, big and small have chosen to hedge their investments through gold.

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ADVANTAGES AND DISADVANTAGES OF VARIOUS ASSET CLASSES

CASH ADVANTAGES High security. You can get your money back The value of a Bond in the open market may go up. Interest always be paid. will Paying priority companies shares. BONDS DISADVANTAGES The bond issuer may default payments on interest or be Its very difficult to 38 and Interest rates are variable currently very low. interest on for than Dividends can increase as company profits increase. quickly and easily. level of BONDS ADVANTAGES Interest advance regularly. is set in EQUITIES ADVANTAGES Equities can increase

and

paid significantly in value.

bonds is a higher

paying dividends on CASH DISADVANTAGES EQUITIES DISADVANTAGES Equities can also fall significantly in value. -

unable to make the The best rates may final repayment. The value of a bond predict what will happen

only be Available on special terms or for larger amounts.

in the open market may go down.

in the short term.

Types of risks
All investments involve some form of risk. Consider these common types of risk and evaluate them against potential rewards when you select an investment. Market Risk At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk". Also known as systematic risk. Inflation Risk Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns. Credit Risk In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures? Interest Rate Risk

39

Changing interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offseting these changes. Investment Risks The sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities. Exchange risk A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. Changes in the Government Policy Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund Effect of loss of key professionals and inability to adapt business to the rapid technological change. An industries' key asset is often the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests. 40

RISK RETURN GRID

Investment Option Bank FDs

Risks/Liquidity Very low risk and low liquidity.

Returns Low returns, but assured. Depending on the tenure and bank, could be around 6-9%

FMPs

Low risk and low Liquidity.

Floating Rate Funds

Low risk and high liquidity.

As interest rate scenario seems to be peaking, one could consider investing in 35 year FDs. No assured MFs attract Good for low returns but much lower risk investors, depending taxation and but in high tax on tenure hence give brackets. and the better postMF, could tax returns Good for be around vis--vis investing the 6-9%. Bank FDs. debt portion of (Ability to ones portfolio. deliver the indicative returns). Market Lower Good for linked. taxation of investing Today MFs makes short-term 41

Taxation Since returns are fully taxable, the post-tax returns will be still lower.

Suitability Good for very low risk investors and those in the nil or low tax brackets.

Debt Funds

Low to Medium risk. High Liquidity.

could be around 57%. Returns are marketlinked. Today could be around 57%, but susceptible to interest rate risk. MIS scheme give 8% interest. Time deposit 6.25-7.5%. 8% assured returns.

Floating Rate funds attractive. Lower taxation of MFs makes such funds attractive.

money where one needs higher liquidity. Can be avoided in a rising interest rate scenario but is good in a falling interest rate scenario.

Post Office Schemes

Low risk and low Liquidity.

Since returns are taxable, the post-tax returns will be still lower. Interest is tax-free.

Good for very low risk investors and those in the nil or low tax brackets. Good tax saving investment option.

PPF

Low risk with very low liquidity (15year lock-in period. Partial withdrawal allowed after 6 years).

Also Sec 80C benefit. Hence a Good for good investing the scheme. debt portion of ones portfolio. 8% assured returns. Interest fully taxable. But eligible for Sec 80C benefit. Not very attractive vis-vis other options like 5year Bank FDs.

NSC

Low risk with low liquidity (6 years lock-in).

Equity

High risk and high liquidity.

Market linked returns. Good

Attractive tax treatment. No Long

Needs high risk appetite. Ideal for those 42

potential.

Term Capital Gain Tax and 10% Short Term Capital Gains Tax.

investors who have a good corpus, good knowledge and time to track the markets regularly. Care should be taken to invest in good profit making companies. Penny stocks should be avoided. Ideal for small and common investors, but with high risk appetite. SIP and a long term investment horizon can cut down risk and increase the probability of making good returns. Also, one should build a well-diversified portfolio with say 50-60% money in 5-7 diversified funds, 25-35% money in 3-4 mid/small-cap funds and 1015% in 3-4 sector funds. Good tax 43

Equity Funds

High risk and high liquidity in open-ended funds.

Market linked returns. Good potential.

Attractive tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax.

ELSS Funds

High risk with

Market

Attractive

low liquidity (3 years lock-in period).

linked returns. Good potential.

tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax. Also Sec 80C benefit. Attractive tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax.

saving investment option. Amounts beyond Rs.1 lakh limit could be invested in open-ended funds. SIP in ELSS would reduce the volatility risk. Though convenient as both debt and equity investment is covered under one fund, it may be better to invest separately in equity and debt funds for better control. Not an attractive option due to high charges, low flexibility and low diversification. There are other better similar investment products like MFs with low charges, high flexibility and high diversification. As regards life cover, the 44

Balanced Funds

Medium to High risk. High Liquidity.

Medium to high returns. Market linked.

ULIPs

Low to High Risk depending on the investment option i.e. Pure Debt or Mixed or Pure Equity. Low Liquidity (3-5 years lock-in period).

Low to high depending on the investment option. Market linked returns.

Tax free returns. Also Sec 80 C benefit available.

Endowment/ Moneyback Plan

Low risk and very low liquidity.

Low returns. Generally around 66.5%.

Real Estate

Variable risk and variable liquidity depending on the type and location of property.

Market linked returns. Good potential.

same could be done through a term policy. Tax free Not an returns. attractive option due to Also Sec 80 low returns. There are C benefit other better available. similar investment products like PPF. As regards life cover, the same could be done through a term policy. No tax High initial advantages, investment except required which attractive could make tax benefits ones portfolio on the lopsided; high home loans. transactions costs like titlesearch, registration brokerage etc.; and cannot be partly liquidated. Therefore, real-estate MFs (expected in the near future) may be a better alternative than direct property investment. If investing directly, it is important to assess the potential and 45

Commodities

High risk with high liquidity. Low long-term risk. But volatile in short term. High Liquidity.

Market linked returns. Has traditionally been a hedge against inflation. So returns could be around inflation levels.

No tax advantages.

clear title. Highly cyclical.

Gold

No tax Not an advantages. attractive investment option. Can be used for portfolio diversification to partly hedge against inflation. Gold MFs are better than buying physical gold.

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INVESTMENT STRATEGIES
Investments: Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Investments, unlike works of art, cannot afford the luxury of experimenting. Investing is not guesswork. It takes more than just a tip, it needs training to plan, instinct to pick and sheer intellect to make it work for the investor. Human nature is fickle, his wants keep changing. An investment can be described as perfect if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Investment is a balance of three things: Liquidity, Safety and Return. Liquidity How easily an investment can be converted to cash, since part of invested money must be available to cover financial emergencies. Safety The biggest risk is the risk of losing the money that has been invested. Another equally important risk is that investments may not provide enough growth or income to offset the impact of inflation, which could lead to a gradual increase in the cost of living. There are additional risks as well (like decline in economic growth). But the biggest risk of all is not investing at all.

47

Return Investments are made for the purpose of generating returns. Safe investments often promise a specific, though limited return. Those that involve more risk offer the opportunity to make - or lose - a lot of money. Some of the basic investment needs of an individual at different life stages are as

Starting a job, Recently Married, with Kids going Higher studies for Single individual married, no kids kids to school, child, marriage college Your Need Low protection, high asset creation and accumulation Reasonable protection, still high on asset creation Higher protection, still high on asset creation but steadier options, increase savings for child Increase death benefit, choose balanced option for asset creation. Choose riders for enhanced protection. Use top-ups to increase your accumulation Higher Protection, high on asset creation but steadier options, liquidity for education expenses Withdrawal from the account for the education expenses of the child Lump sum money for education, marriage. Facility to stop premium for 23 yrs for these extra expenses

Children independent, nearing the golden years Safe accumulation for the golden yrs.Considerably lower life insurance as the dependencies have decreased

Flexibility Choose low death benefit, choose growth/balanced option for asset creation

Increase death benefit, choose growth/balanced option for asset creation

Withdrawal from the account for higher education/marriage expenses of the child. Premium holiday-to stop premium for a period without lapsing the policy

Decrease the death benefit-reduce it to the minimum possible. Choose the income investment option. Top-ups form the accumulation (with reduced expenses) for the golden yrs cash accumulation

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WHAT INDIAN FINANCIAL MARKETS NEED

Background Unfortunate events of the decade of nineties and the beginning of the 21 st century have led us to believe that regulators around the globe have failed to achieve their primary objectives of 'maintaining systemic stability' and 'protecting interests of the retail customer. The financial sector plays an important role in the economy of any nation. A wellregulated and well-developed financial sector is vital to achieving the most basic need of efficient allocation of scarce resources. The main objectives of any regulator are to improve market efficiency, enhance transparency, and prevent unfair practices. In the financial sector, the achievement of these objectives would mean increase in resource mobilisation, enhanced access to financial products and services, and sustained economic stability. The International Monetary Fund recognises the need for 'resilient, well-regulated financial systems for macroeconomic and financial stability in a world of increased capital flows.' I now look at a few events that shook the financial markets and the challenges they pose to the regulators. The Indian scenario The Indian stock markets are now amongst the best in the world in terms of modernisation and the technology. India was among the few countries, which was not badly effected by the contagion effects of the Asian crisis of 1997. Policy makers attribute this to the slow and cautious pace of capital account liberalisation. However, it has also been a decade marred with scams, which were huge even by international standards, revealing the many gaps in our regulatory regime.

49

In 1991, a group of stockbrokers, headed by key trader 'Big Bull' Harshad Mehta artificially jacked up prices of worthless securities to rake in Rs 5,000 crore (Rs 50 billion). The Sensex came tumbling down after the scam story broke out on April 23, 1992. Fortunes were lost overnight. As a result, the ambit of the Securities Exchange Board of India, the stock exchanges and regulatory financial institutions was widened. Nearly a decade later, after a 'dream budget' by Yashwant Sinha, the then finance minister, on February 28 2001, the Bombay Stock Exchange index rose initially but thereafter crashed. Nearly 700 points were lost in eight trading sessions leading to erosion in market capitalisation of Rs 146,000 crore (Rs 1,460 billion). This erratic behaviour was once again traced to a handful of brokers, wishing to trap a leading 'bull', Ketan Parekh, who had manipulated prices of shares of a few select companies in information technology, communication and entertainment sector. Units of US-64, the flagship scheme of Unit Trust of India --the largest public sector mutual fund in India, dropped from a peak of Rs 19 to Rs 5.81 in January 2002. Middle class people and retirees were the hardest hit because of the irregularities. Against this backdrop, the regulatory bodies are making endeavours to bring up the Indian market to international standards. It is working towards making India a global benchmark for capital market development. The road ahead Today-- with the 'feel good' factor about India in the global arena rising, increased confidence of the investors in the Indian market, Sensex looking more attractive than ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is the most vulnerable period for the regulators of the Indian financial sector, particularly SEBI and RBI. Major steps towards reforms, liberalisation and globalisation have been taken in the 1990s, now the hiccups need to be sorted out. Maintaining stability is of prime concern. 50

The time seems ripe to address the gaps in the regulatory framework, when the times are relatively good and peaceful. Prevention is better than cure.

AGENDA for Future

The report of the Committee on Capital Account Convertibility has identified a number of areas for future reforms in the financial sector. The Governor, Dr. C. Rangarajan, in his inaugural address at the Bank Economists' conference had identified the new challenges and opportunities that may dominate the future course of banking development in India. The Conference helped to identify specific areas that need attention in the future. Further, some issues relating specifically to the financial market have been raised from time to time. While we cannot take a view on such issues without a detailed examination, let me list them here for record. I will classify them under three broad areas, viz., money market, Government securities market and foreign exchange market. Money Market

Reduction of minimum period of term deposits. Reduction of the lock-in period of MMMF units from the present 30 days.

Enlarging the scope of participation in the repo market. Removal of inter-bank liabilities completely from minimum

prescription for SLR of 25 percent and CRR of 3 per cent.

Introduction of intermediaries in money market. Creation of level playing field for all banks/FIs/NBFCs in the money market by prescribing liquidity reserve requirements and removing other elements of market segmentation.

Introduction of screen based dealing systems for money market instruments and Government securities. 51

Government Securities Market

Increasing the number of PDs and enhancing their underwriting capability to 100 per cent.

Introduction of when-issued market. Providing access to FIIs in Treasury Bills. Introduction of interest rate Futures in Treasury Bills/dated Government securities.

Automating the DVP system fully.

Foreign Exchange Market

Issuance of foreign currency denominated bonds to residents. Allowing FIIs with equity exposure to cover in the forward market. Allowing FIs to participate as full fledged Authorised Dealers. Allowing all derivatives including rupee based derivatives.

Some of the reforms suggested require legislative changes. I have stated this elsewhere, and I reiterate - a comprehensive exercise on legislative changes is required to put our financial sector on par with global standards. Further, there are issues of regulation and supervision which need to be addressed. The viability of further reforms is also critically dependent on improvements in the area of payments and settlement systems. Issues relating to Technology, Human Resources Development and Industrial Relations are other areas that require urgent attention. I would also like to flag the role of market participants in the evolution of standard market practices and accounting procedures. We cannot afford to be in a hurry to bring about reforms. Integration and globalisation of financial markets are not ends by themselves, nor are they risk-free.

52

Every step that we take recognises this basic tenet and takes into account the uniqueness of our own circumstances and requirements.

Innovations in Financial Products

The worldwide financial industry is a hotbed of innovation in product design. How do new financial products come up? Why do new financial products come up? If we know designs of numerous products which have proved to be extremely useful internationally, can we create all of them in India on a very short horizon? What drives the sequencing through which new products come about? At the outset, it is easy to tell why new financial products come about: they come about because people in the economy find them useful. If we look at a stream of new products like index funds, index futures, index options, etc., we see a common thread where these products are extremely successful internationally because they fulfil basic economic objectives of people in the economy. A closely related issue is that of transactions costs. Financial products do not exist in a vacuum; they are created by financial intermediaries who would typically need to hedge away most of the risk generated by having sold the product. For example, few finance companies would be comfortable with selling options on TISCO naked: they would prefer to be hedged by some mechanism (such as owning shares of TISCO, or some dynamic trading strategy). When ICICI sells index warrants, they are exposed to risk unless they hedge that risk away (either by using index futures or by directly investing in all the index stocks). Someone who sells futures on Nifty Junior would find it very useful to hedge himself by buying futures on Nifty, since the two indexes are closely correlated. All this hedging involves trading, and brings up the problem of liquidity. Suppose the hedging that is required for the creation of product A involves trading on the market for B. It is desirable that the market for B is highly liquid. If the market for B is illiquid (i.e.

53

the hedging involves large transactions costs) then product A will become expensive and less attractive. Here we see the peculiar nature of financial innovation: As long as the market for B is illiquid, it will be hard for A to come about. The market for B will have to have a minimum level of liquidity, otherwise A will become too expensive and will not succeed. 1. Once A succeeds, it fuels liquidity of B, because users of A

implicitly generate trading in B. 2. Once A succeeds, other new products can be conjured, on the

assumption that A is available. The economist Robert C. Merton has coined an evocative phrase ``the spiral of innovation'' to describe the dynamic tension of this process: "As products such as futures, options, swaps and securitised loans become standardised and move from intermediaries to markets, the proliferation of new trading markets in those instruments makes feasible the creation of new custom--designed financial products that improve ``market completeness''; to hedge their exposures on those products, their producers, financial intermediaries, trade in these new markets and volume expands; increased volume reduces the marginal transaction costs and thereby makes possible further implementation of more new products and trading strategies by intermediaries, which in turn leads to still more volume. Success of these trading markets and custom products encourages investment in creating additional markets and products, and so on it goes, spiraling towards the theoretically limiting case of zero marginal transaction costs and dynamically--complete markets." In India, the best example of these linkages is seen in the relationship between the underlying spot market, index funds, index futures and index options: 1. The prerequisites for an index fund are (a) program trading facilities and 54

(b) an index where all components are liquid and convenient to trade. These conditions are now fulfilled, and index funds have now come to exist in India. 2. Once index funds come to exist, they make it possible for people to sell options on the index while being covered (i.e., they would own units of the index fund before selling somebody the right to buy the index). This could happen on exchanges which trade index options or over the counter. 3. 4. Index futures make the implementation of index funds easier, Index funds generate an order flow for index futures markets, and help make them more liquid, 5. 6. Index futures markets enable index options markets, Access to index futures and index options makes index funds more attractive, since users can couple their investments in index funds with risk management using the futures & options. Index options make possible innovative new products like ``guaranteed return funds'' (i.e. an index fund bundled with a put option protecting against some level of downside loss) or ``index linked bonds'' (i.e., an instrument which is 95% debenture and 5% invested in call options on the index), 7. These new products in turn generate order flow for index futures and index options markets, 8. In all this, a steady stream of arbitrage keeps the spot, futures and options prices in line with each other. As volumes grow, the 55

sophistication of arbitrageurs increases, and prepares them to similarly function on the next phase of development of the market. This set of products is a perfect illustration of the process that was outlined early in this article. The key ingredients here are new products which are useful to economic agents, a building--block approach towards obtaining low--cost implementation of new products, and a spiral of innovation in which the innovations all reinforce each other. This perspective, of innovations driving what is traded and influencing the order flow coming to markets, has a significant impact upon the growth of the securities industry. So far, the major driver of change in the securities industry in India has been the pressing problem of reorganising market mechanisms so as to bring down the enormous trading costs which were present. In this, the complexity of instruments, and product development, was just not an issue. Transactions involved onerous costs even if they were as simple as buying 100 shares of TISCO (the costs were brokerage, gala, impact cost, counterparty risk, backoffice cost and bad paper risk). These costs were so high that the first problem which stared in the face of the securities industry was to find ways to reduce them; in addition, these high transactions costs also served to make more complex instruments and trading strategies infeasible. Today in India, the enormous transformation of markets has given us new market practises in trading, clearing, and settlement. This collapse of transaction costs is a very significant achievement. We are now close to having an Indian securities industry where normal market practise in trading, clearing and settlement are equal to the best practises in the world, and superior to those found in many OECD countries. As we approach the end of this phase of development in the securities industry, the question arises about what lies next. If our objectives in trading were limited to trading TISCO, then there is no frontier that lies beyond a world with electronic trading, clearing corporation and depository. In order to understand the energy and dynamism of the worldwide securities industry, we have to take a bigger view of trading. Here the universe of financial instruments and 56

trading strategies is not static. Instead, financial instruments are crafted to solve problems for real people while being constrained to be implementable in the light of existing levels of transactions costs. In such an approach, we would have a steady stream of innovations which make up a spiral of innovation. In this spiral, each step is implementable, each step strengthens liquidity in other instruments in the economy, and each step paves the way for further innovations that follow it.

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Research methodology
Title of the Study: EMERGING INESTMENT PRODUCTS AND THEIR SCOPE IN INDIAN FINANCIAL MARKETS My project focuses on the new areas of investment available to investors and how their behavior is changing. They are now leaving behind the traditional approach of investment like fixed deposits, gold, post office schemes, bank deposits etc. Investors are now looking towards new diversification of their wealth by making investment in mutual funds, capital market, derivatives, insurance, etc. Like most developed and developing countries Indian investors are searching for new investment avenues. Duration of the Project: Duration of the project is 45 days . Objective of the Study: To know the preference of investors for investment in

various products. To find out the reasons behind investment regarding the product and the time frame of investment, Type of Research : Research methodology includes:

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Data Source: Data was collected from both primary as well as secondary sources. Primary Data Collection : The survey process involved two phases: First phase included identification and selection of the target audience to be

studied and to determine the parameters on which respondents will justify their preferences. The audience were targeted and analyzed basically on the basis of the parameters like when, why and where investors prefer to invest their money ; what is their horizon for investment ; their preferences , risk taking capacity and expected return on investments ; their awareness of financial markets and the changes/innovations taking place? A questionnaire was designed to collect the needed information from the respondents. In the second phase data was collected through questionnaire from 57

respondents within Ud.0aipur region. Results were viewed cautiously as sample was from a specific population. Secondary Data Collection: Secondary data was collected by the information given through ICICI Direct and various websites, articles published in the newspapers. Sample size and method of selecting sample : SAMPLE SIZE :- 57 INVESTORS My study was limited to only Udaipur region as the training was done in Udaipur. Targeting of the customers was limited to the people I know.

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Method of selecting Sample :In my study I applied Simple Random Sampling Method of Sampling. This is the simplest and most popular technique of sampling.

Scope of Study :

The first task allotted to me was the study of financial products. As there are many financial products available with the company, such as, investment advisory, equities, commodities, portfolio management services, mutual funds, insurance, IPO and depository services.

I have done survey on investment strategies. Although there are many factors on which we could have analyzed but our scope of study was limited to study only on the basis of the parameters like when, why and where investors prefer to invest their money ; what is their horizon for investment ; their preferences , risk taking capacity and expected return on investments ; their awareness of financial markets and the changes/innovations taking place?

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Limitations of the Study:

The study which is being conducted is limited by following reasons: 1- Disclosure of information is a constraint- As per the company policy, they are not allowed to share their data with non-authorized people. As I am working as a management trainee I am not given access to all the required data needed for my project. This increases the dependence on Secondary data and External sources for collecting data. 2- Unwillingness of the respondents to provide information- Firstly, people were reluctant of providing their information out of unwillingness and time constraint even if they did they were not ready to reveal their current income, telephone no. out of suspicion and fear of getting disturbed.

3- Incapacity to survey large number of people-Survey has been conducted on limited number of people due to time constraint. Large data could not be collected also because it was done by single individual.

4- The people surveyed belonged to Udaipur region only-This survey has been confined to only Udaipur region as training was done in Udaipur only.

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Analysis Of The Questionnaire Filled By The Investors SAMPLE SIZE:- 57 INVESTORS

Interpretation-

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There were 25% investors from Business class ,17% investors self employed and rest were salaried.

InterpretationAccording to this graph it can be analyzed that 15% of the investors have their investment in Share Market , FDR & Mutual Funds , 25% have their investment in other like gold, silver etc. 20% of the total have their investment in Real Estate and 35% of them have invested in Post Office. According to this we can interpret that specially in Udaipur people have invested more in post office / banks than any other modes of investment. 63

InterpretationThe aim of the study was to know the main reasons behind the investment decision made by the individual. The analysis brings out the fact that investor are more concerned about the safety of their investments,secure future, capital gain etc.

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InterpretationInvestors were asked that do they think that there is a scope to earn returns on their investment at competitive rates in the Indian Market. They replied that as we all can see that the India stock market is fluctuating like anything so its really difficult to pull returns out of this. 60% of the investors said no and 40% said yes. This shows that investors are aware of the fluctuations taking place in the market and then also they want to invest in stock market.

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InterpretationThe most important point in this study is that why do investors invest their money? According to the survey and after doing complete analysis it was recognized that maximum investors invest in those schemes through which they get maximum returns and by which they can save their tax i.e. 55%. And 20% of them invest so that they could get retirement benefits. And 10% of them invest for other parameters. It could be noticed that they want to invest safer and want to earn higher returns through their investments. But in todays world its not possible that a person gets maximum return compared to others while remaining on the most safer side.

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Interpretation
Maximum investors just want to invest their money in any of the investment products. without even taking the knowledge about the financial market, its condition and the innovations or the new products coming up. Only 45% said that they are aware.

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Interpretation-

Investors were asked that if they have Rs. 1,00,000 to invest, out of these which will they would rank as, their First, second, third preference and others accordingly. And finally I concluded from the whole data analyzed, that maximum of the investors like to invest in post office/banks i.e. 30%, 27% of them like to invest in Gold & silver, 20% in Real Estate and only 18% of them in stock market. By this it could be noticed that they want to invest their money at that place where they could fetch Maximum return. And others want to play safe game.

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Interpretation-

Maximum investors want to remain invested in the market for 1-3 Yrs of time i.e. 35%, 30% of them want to keep their money invested in the market for More than 3 Yrs and only 25% of them want to invest their money for Less than 1 Yr. It seems that the investors dont want to invest for a very short duration of time as they will not get that much return which they have expected so maximum of the investors want to invest their money between 1-3 yrs of time and those investors who are professional they like to invest the money for more than 3 yrs of time. As they are aware of the market conditions and the day to day changes taking place in the Indian Market. 69

InterpretationInvestors who are aware of the market and they understand what is happening in the market, they invest at the time when the market goes down and those are 16% out of 57. 31% of the people invest in those conditions when the market is up. 26% of the investors invest in ongoing schemes of different companies and only 22% of the people invest in NFO. By this we can analyze that investors are aware of what they have to invest at what time and in what place. So by this they can minimize their losses and earn more returns in less span of time period. 70

InterpretationOnly 30% of the unvestors have patience to wait for some time while rest of the investors pull back their money.

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Interpretation-

There were only 30% investors who takes advice from financial advisors while 53% investors takes advice from their friends and relatives.

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Interpretation48% of the investors have the moderate risk tolerance level followed by the 37% investors who have very high-risk tolerance level.

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SURVEY FINDINGS

Maximum of the investors prefer to invest in post office/banks i.e. 30%, 27% of

them like to invest in Gold & silver, 20% in Real Estate and only 18% of them in stock market. By this it could be noticed that they want to invest their money at that place where they could fetch Maximum return. And others want to play safe game Investors were asked that do they think that there is a scope to earn returns on their investment at competitive rates in the Indian Market. They replied that as we all can see that the India stock market is fluctuating like anything so its really difficult to pull returns out of this. 60% of the investors said no and 40% said yes. This shows that investors are aware of the fluctuations taking place in the market and then also they want to invest in stock market. It was recognized that maximum investors invest in those schemes through which they get maximum returns and by which they can save their tax i.e. 55%. And 20% of them invest so that they could get retirement benefits. And 10% of them invest for other parameters. Only 30% of the unvestors have patience to wait for some time while rest of the

investors pull back their money,at the time when they incur any loss in their investments. Investors who are aware of the market and they understand what is happening in the market, they invest at the time when the market goes down and those are 16% out of 57. 31% of the people invest in those conditions when the market is up. 26% of the investors invest in ongoing schemes of different companies and only 22% of the people invest in NFO Maximum investors want to remain invested in the market for 1-3 Yrs of time i.e. 35%, 30% of them want to keep their money invested in the market for More than 3 Yrs and only 25% of them want to invest their money for Less than 1 Yr.

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Investors awareness of the financial markets and the changes/innovations taking

place is not up to the mark.only 45% of the investors were aware about the innovations taking place.

The aim of the study was to know the main reasons behind the investment

decision made by the individual. The analysis brings out the fact that investor are more concerned about the safety of their investments,secure future, capital gain etc. A very few investors were willing to take high risk to get higher returns.

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Conclusion:
To conclude, I would say that the opportunity zones in Financial Markets are contracting somewhere and at the same time expanding elsewhere. Change and the pace of change in the financial markets, both would be different, tomorrow. Continuous exploration of scopes and exploitation of values would demand a brilliant focus on emerging opportunities, competence building, strategies for the leadership position in the opportunity zones and principles centered business practices. Therefore, we need to create a culture, which embraces change and move ahead with an objective to lead. Investors will be the ultimate beneficiaries of all these changes in the marketplace. Investors will have more choices and information on investment products, easier accessibility to any market they wish to trade on, and better and cheaper services from intermediaries. The new generation of investors will become increasingly sophisticated as market information becomes widely available. However, the complexity of the new markets also means that investors must know their own risk appetite before entering the market.

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Common investment mistakes that people make:

Knowing about some common investment mistakes people make 1. Investing without a clear plan of actions Many people neglect to take the time to think about their needs and long-term financial goals before investing. Unfortunately, this often results in their falling short of their expectations. You should decide whether you are interested in price stability, growth, or a combination of these. Determine your investment goals. Then, depending on your age and your tolerance for risk, select mutual funds with objectives similar to yours. 2. Meddling with your account too often: You should have a clear understanding of your investments so that you are comfortable with their behavior. If you keep transferring investments in response to downturns in prices, you may miss the upturns as well. Even in the investment field, the tortoise that is more patient, may win over the hare. While past performance does not necessarily guarantee future performance, your understanding of the behavior of various investments over time can help prevent you from becoming shortsighted about your long-term goals. 3. Loosing sight of inflation: While you may be aware of the fact that the cost of goods and services is rising, people tend to forget the impact that inflation will have on investments in the long term. The value of Rs. 100 in 1980 was down to Rs. 26 in 1995. This means that the buying power of the rupee has decreased, and you cannot buy as much for Rs. 100 now as you could have bought in 1980. You have to keep in mind that inflation will eat your savings faster than you can imagine.

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4. Investing too little too late: People do not pay themselves first. Most people these days have too many bills to pay every month, and planning for your future often takes a backseat. Regardless of age or income, if you do not place long-term investing among your top priorities, you may not be able to meet your financial goals. The sooner you start, the less you have to save every month to reach your financial goals. 5. Do not put all your eggs in one basket, diversify: When it comes to investing, most of us do not appreciate the importance of diversification. While we know that we should not put all our eggs in one basket, we often do not relate this concept to stocks and bonds. Take the time to discuss the importance of diversifying your investments among different asset categories and industries. When you spread your holdings around, you do not have to rely on the success of just one investment. 6. Do not fear risk and invest too conservatively: Because they are fearful of losing money, many people tend to rely heavily on fixedincome investments such as bank fixed deposits and company deposits. By doing this, however, you put yourself at risk with the negative effects of inflation. Consider diversifying with a combination of investments, including stock funds, which may be more volatile but may have the potential to produce higher returns over the long-term.

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Recommendations and Suggestions for Investors:

1. Assess yourself: Self-assessment of ones needs; expectations and risk profile is of prime importance failing which; one will make more mistakes in putting money in right places than otherwise. One should identify the degree of risk bearing capacity one has and also clearly state the expectations from the investments. Irrational expectations will only bring pain 2. Try to understand where the money is going: It is important to identify the nature of investment and to know if one is compatible with the investment. One can lose substantially if one picks the wrong kind of fund. In order to avoid any confusion it is better to go through the literature such as offer document and fact sheets that companies provide on their issues/funds. 3. Don't rush in picking funds, think first:. One should take a look at the

portfolio of the funds for the purpose. Excessive exposure to any specific sector should be avoided, as it will only add to the risk of the entire portfolio. Mutual funds invest with a certain ideology such as the "Value Principle" or "Growth Philosophy". Both have their share of critics but both philosophies work for investors of different kinds. Identifying the proposed investment philosophy of the fund will give an insight into the kind of risks that it shall be taking in future. 4. Invest. Dont speculate: A common investor is limited in the degree of risk that

he is willing to take. It is thus of key importance that there is thought given to the process of investment and to the time horizon of the intended investment. One should abstain from speculating which in other words would mean getting out of one fund and investing in another with the intention of making quick money. One would do well to remember that nobody can perfectly time the market so staying invested is the best option unless there are compelling reasons to exit. 5. Dont put all the eggs in one basket: This old age adage is of utmost

importance. No matter what the risk profile of a person is, it is always advisable to diversify the risks associated. So putting ones money in different asset classes is generally the best option as it averages the risks in each category. Thus, even investors of equity should be judicious and invest some portion of the investment in debt. 79

Diversification even in any particular asset class (such as equity, debt) is good. Not all fund managers have the same acumen of fund management and with identification of the best man being a tough task, it is good to place money in the hands of several fund managers. This might reduce the maximum return possible, but will also reduce the risks. 6. Keep track of your investments: Finding the right fund is important but even

more important is to keep track of the way they are performing in the market. If the market is beginning to enter a bearish phase, then investors of equity too will benefit by switching to debt funds as the losses can be minimized. One can always switch back to equity if the equity market starts to show some buoyancy. 7. 8. Invest in equities for long term and not short term Patience is a virtue in investing. Do not panic on your existing stocks. It's so

important, we repeat: Be patient for your stocks to reap rewards. 9. Do not be unaware of what is happening around in the market. As always,

knowledge is power and in investing, it's also a comfort. Dig for more information other than just the top stories that are flashed.

QUESTIONNAIRE
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Name_______________________ ________ E-mail ID_____________________________ Age ________________________________ Contact No____________________________

1.

What is your occupation ?

Salaried Self-Employed Business

2.

What is your monthly income ?

50,000 to 1 lakh 1-5 lakh 5 lakh and above

3.

What are your monthly expenses ?

10,000 to 50,000 81

50,000 to 1 lakh 1 lakh and above

4.

Where do you invest your money ?

Real Estate Stocks / Commodity Gold / Silver Post office / Banks

5.

What is your primary investment focus ?

Tax Savings and Returns Retirement Benefits others

6.

What time horizon do you prefer for your investments ? 82

Less than 1 year 1 to 3 years More than 3 years Do you have a scope to earn return on investment at competitive

7. Yes No

rates in the Indian Market ?

8. What is your investment objective? Gains in the form of capital appreciation Risk factors involved / safety of invest Regular Income Secure future brand value 9. Do you have the awareness of the financial markets and the changes / innovations taking place ? Yes

No

10 If you have Rs 100000 to invest, out of these what will be the first preference ? Rank accordingly .

S.No.

OPTION

RANK ( 1, 2, 3 or 4 ) __ 83

1 2 3 4

Real Estate __ Stock Market __ Post office / Banks __ Gold / Silver

11. When do you invest ? When market is down When market is up NFO Ongoing scheme

12. From whom do you take advice before making investment? Friends & relatives Financial advisors Others 13. When you incur loss in any of your investment product then what you do?

Pull back money Wait

14. Risk Tolerance Level of the Investors: High risk Moderate risk Low risk

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Bibliography

WEBSITES:1. 2. 3. 4. 5. 6. 7.

www.valuesearchonline.com www.indiainfoline.com www.sebi.com www.rbi.org

http://www.ICICIDirect.com Product Demo: http://content.icicidirect.com/mailimages/indexpage.html FAQs: http://content.icicidirect.com/indexfaq.asp

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