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Chapter 3: Topic Profile

Comparison of Investment Avenues

WHAT IS INVESTMENT AVENUE

Different investment avenues are available to investors. Mutual funds also offer good

investment opportunities to the investors. Like all investments, they also carry certain

risks. The investors should compare the risks and expected yields after adjustment of tax

on various instruments while taking investment decisions. The investors may seek advicefrom experts and consultants including agents and distributors of mutual funds schemes

while making investment decisions.

Types of investor

In continuation of the lessons Ive learned from Rich Dad Poor Dad author, Robert

Kiyosaki, I will discuss today what he called Types of Investors

According to him, there are two main types of investors: Average Investors and

Professional Investors.

Average investors

Buy packaged securities such as mutual funds, treasury bills, or real-estate-investment

trusts.
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Professional investors

are more aggressivethey create investment opportunities or get in on the ground floor

of new offerings, build businesses and marketing networks, assemble groups of financiers

to fund deals too large for them to undertake alone, and pick the companies with the most

promise for initial public offerings of stock

There are five different types of professional investors:The Accredited Investor

As defined by Robert Kiyosaki, accredited investors are individual investor that earns atleast $200,000 in annual income ($300,000 for a couple) and/or has a networth of $1million. An accredited investor has access to many lucrative investmentsthat, because of the i r r i sk may be leg al ly off - l imi t s to peo ple of less er in come . A l thoug h us ua l ly financially educated, accredited investors are not

necessarily fully literate. They may be co n te n t w i th s ecuri ty and co mf ortra the r th an we alt h, an d ma y rel y on ad vi so rs to develop and implementtheir financial plans

The Qualified InvestorThis investor is well versed in either fundamental or technical investing andso therea r e t w o t y p e s o f q u a l i f i e d i n v e s t o r s . The fundamental investor and technical investor.


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Fundamental investing requires the ability to assess a companys potential by reviewing f

financial statements, tracking the industry the company represents, and calculating how

changes in interest rates and the economy as a whole could affect

pro fi tabi li ty . The fundamen ta l inves to r uses financ ia l rat ios, wh ich youl l

learn al l about later, to assess the strength of a company he or she is considering as

an investment.

Techn i ca l i nves t i ng i s d i f f e r en t i t i s bas ed on knowl edge o f t he

s a l e s h i s t o r y o f a company s s t ock , t he mood o f t he mar ke t i n

gene r a l , and t echn i ques s uch a s s hor t s e l l i ng and op t i ons . The

f undamen t a l i nves t o r i s t yp i ca l l y an S i n t he CASH FLOW Quadr an t

becau se he o r s he w i l l us ua l l y ope ra t e a lone in ev a lua t i ng s tocks ,

e i t he r t h r ough exami n i ng f undamen t a l s o r u s i ng t echn i ca l ana l ys i s i n

evaluating potential investments.

Un l i ke a f undamen t a l i nves t o r , a t echn i ca l i nves t o r ( o f t en a s t ock

t r ade r ) does no t necessarily look for well-run, profitable corporations. If people are

rushing to invest in ascertain type of industry, say dot-com companies, the technical

investor may jump on the bandwagon, regardles s of whether these companies are

showing earnings, let alone profits. Technical investing is thus more

speculative than fundamental, but it can yield greater rewards. Regardless of

investment style, qualified investors know how to make, or at least preserve, money in an

up or down market

The Sophisticated Investor

The goal of this investor is to build wealth by developing a foundation of assets that cangenerate high cash returns with minimum payment of taxes. Armed with the three Es

education, experience, and excess cashthe sophisticated investor takes advantageof t ax , co r por a t e , and s ecur i t i e s l aws t o p r o t ec t cap i t a l and max i mi zeea r n i ngs . W hen ope r a t i ng f r om t he B quadr an t , t he i nves t o r canch oo se th e be st s tr uc tur e or en ti t y through which to create assets . Thisentity provides some degree of control over the investment and also serves as afirewall between personal and business finances in the event of a lawsuit.

Sophisticated investors exercise control over the timing of taxes and thecharacter of their income. They know, for example, to defer paying taxes oncapital gains from


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reale s t a t e b y r o l l i n g o v e r p r o f i t s t o m o r e e x p e n s i v e p r o p e r t y .T h e y l o o k a t e c o n o m i c downturn as an oppor tuni ty to pay bargainbas emen t prices for qual ity securi ti es , and they create deals instead of simplywaiting for the right one to come along.

Sophisticated investors take risks but abhor gambling, hate losing but are not afraid to,are financially intelligent yet rely on experts to teach them more, own little in their namesyet command great wealth. Although they become partners in real-estate ventures

andlarge shareholder s in corpora t ions , they l ack one es sent i a l s t r ength : mana gemen t control over their assets.

The Inside Investor.

Building or owning a profitable business is the primary goal of this investor. Whether asan o f f i ce r o f a co r por a t i on o r owner o f a ma j o r i t y o f i t s s ha r es o f s tock , t he in s ide investor exercises some degree of management control.

By running business systems from the inside, he or she learns how to analyzethem from the outside and thereby becomes a sophisticated investor as well. Although

inside investors have financial in telligence, they do not neces sarily havefinancial resources and thus may not meet the definition of an accreditedinvestor. If inside investors mindt h e i r o w n b u s i n e s s a n d s u c c e e d , h o w e v e r , t h e y c a n b e c o m e n ot o n l y a c c r e d i t e d investors but ultimate investors as well.

The Ultimate Investor.The goal of the ultimate investor is to own a business that is so successful that shares a r es o l d t o t he pub l i c . Mak i ng an i n i t i a l pub l i c o f f e r i ng ( I PO) i sex pe ns iv e an d fu ll of risks, yet it allows business owners to cash in on the

equity they have built up in the company, while also raising money to pay downdebt and fund expansions. The ultimate investor is one who has mas tered everyrule and en joys playing the game for its own sake.

Which type of investor do you belong? As for me, I am not even a professional investor.I am just an average investor. But with the continuous learnings that I feedmy mind, I hope to become a professional investor someday and be able toreach the ul tima te investor status.

Characteristics of investment

Certain features characterize all investments. The following are the maincharacteristics feature if investments: -

1. Return:

-All investments are characterized by the expectation of a return. In fact, investments aremade with the primary objective of deriving a return. The return maybe received in the f o rm o f y i e ld p lu s cap i t a l ap prec i a t ion . The


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d i f f e r ence be t ween t he s a l e p r i ce &t hepur chas e p r i ce i s cap i t a l appr ec i a t i on . The d i v i dend o r i n t e r e s t r ece i ved f rom th e investment is the yield. Different types of investments promisedifferent rates of return. The return from an investment depends upon the natureof investment, the maturi ty period & a host of other factors.

2. Risk: -

Ri s k i s i nhe r en t i n any i nves t men t . The r i s k may r e l a t e t o l o s s o f cap i t a l , de l ay i n r epayment o f cap i t a l , non payment o f i n t e r e s t , o r va r ia b i l it y o f re t u rn s . Wh il e so me investments like government securities &bank deposits are almost risk less, others are more risky. The risk of an investmentdepends on the following factors.

T h e l o n g e r t h e m a t u r i t y p e r i o d ,t h e l o n g e r i s t h e r i s k .

The lower the credit worthiness of the borrower, the higher is the risk.The risk varies with the nature of investment. Investments in ownershipsecurities likee q u i t y s h a r e c a r r y h i g h e r r i s k c o m p a r e d t o i n v e s t m e n t s i n

d e b t i n s t r u m e n t l i k e debentures & bonds.

3. Safety: -

The s a f e t y o f an i nves t men t i mpl i e s t he ce r t a i n t y o f r e t u r n o f cap i t a lw i t hou t l o s s o f money or time. Safety is another features which an investors desirefor his investments. Every investor expects to get back his capital on maturity withoutloss & without delay.

4. Liquidity: -

An investment, which is easily saleable, or marketable without loss of money& withou t loss of time is said to possess liquidity. Some investments like companydeposits, bank d e p o s i t s , P . O . d e p o s i t s , N S C , N S S e t c . a r e n o tm a r k e t a b l e . S o m e i n v e s t m e n t instrument like preference shares &debentures are marketable, but there are no buyers in many cases & hence their liquidityis negligible. Equity shares of companies listed on stock exchanges are easily marketablethrough the stock exchanges.

An investor generally prefers liquidity for his investment, safety of hisfunds, a good return with minimum risk or minimization of risk & maximization ofreturn.


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INVESTMENT AVENUES IN INDIA

There are a large number of investment instruments available today.

T o m a k e o u r l i v e s e a s i e r w e w o u l d c l a s s i f y o r g r o u p t h e m

u n d e r 4 m a i n t y p e s o f investment avenues. We shall name and briefly describethem.

1.Financial securities:

T h e s e i n v e s t m e n t i n s t r u m e n t s a r e f r e e l y t r a d a b l e a n d n e g o t i a bl e . T h e s e w o u l d i n c l u d e e q u i t y s h a r e s , p r e f e r e n c e s h a r e s , c o nvertibledebentures, non-convertible debentures, publicsec tor bonds, sav ings cer tifi cates , gilt -edged securities and money marketsecurities.

2.Non-securitized financial securities:T h e s e i n v e s t m e n t i n s t r u m e n t s a r e n o t t r a da b le , t ra n sf er ab le n o r negot i a ble . An d would inc lude ba nk depo s i t s , pos t o f f i ce depos it s,company fixed deposits, provident fund schemes, national savings schemesand life insurance.

3. Mutual fund schemes:

If an investor does not directly want to invest in the markets, he /she could buyunits/shares in a mutual fund scheme. These schemes are mainly growth (orequity) oriented, income (or debt) oriented or balanced (i.e. both growth and debt)schemes.

4. Real assets:

Real assets are physical investments, which would include real estate gold & silver,precious stones, rare coins & stamps and artobjects.B e f o r e c h o o s i n g t h e a v e n u e f o r i n v e s t m e n t t h e i n v e s t o r w o u l d p r o b a b l y w a n t t o e v al u at e a n d c o mp a re th e m. Th i s w o ul dal so he lp hi m in cr ea ti ng a we ll di ve rs if ie d portfolio, which is bothmaintainable and manageable


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GROWTH OF SOURCES

GROWTH OF INDIAN EQUITY MARKET

The Indian Equity Market is more popularly known as the Indian Stock Market.

The Indian equity market has become the third biggest after China and Hong

Kong in the Asian region. According to the latest report by ADB, it has a market

capitalization of nearly $600 billion. As of March 2009, the market capitalization

was around $598.3 billion (Rs 30.13 lakh crore) which is one-tenth of the

combined valuation of the Asia region. The market was slow since early 2007

and continued till the first quarter of 2009.

GROWTH OF MUTUAL FUND IN INDIA

By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It isestimated that by 2010 March-end, the total assets of all scheduled commercialbanks should be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of thedecade. In the last 5 years we have seen annual growth rate of 9%. According tothe current growth rate, by year 2010, mutual fund assets will be double.

Let us discuss with the following table:

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)

Month/Year

Mar-98 Mar-00 Mar-01 Mar-02 Mar-03Mar-04

Sep-04 4-Dec

Deposits605410

851593

989141

1131188

1280853

-1567251

1622579

Change in% over lastyr

15 14 13 12 - 18 3

Source - RBI

Mutual Fund AUMs Growth

Month/YearMar-98

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04 Sep-04 4-Dec

MF AUM's 68984 93717 83131 94017 75306137626

151141

149300

Change in % 26 13 12 25 45 9 1


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over last yr

Source - AMFI

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets likeFidelity Investments, US based, with over US$1trillion assets undermanagement worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing thesesavings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than UShaving more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual fundsare concentrating on the 'A' class cities. Soon they will find scope in the

growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry withsimple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Description on Various Investment Avenues

Mutual Fund:-

Mutual fund is a pool of money collected from investors and is invested

according to stated investment objectives Mutual fund investors are like shareholders and they

own the fund. Mutual fund investors are not lenders or deposit holders in a mutual fund.

Everybody else associated with a mutual fund is a service provider, who earns a fee. The money

in the mutual fund belongs to the investors and nobody else. Mutual funds invest in marketable

securities according to the investment objective. The value of the investments can go up or down,

changing the value of the investors holdings.NAV of a mutual fund fluctuates with market price

movements. The market value of the investors funds is also called as net assets. Investors hold a

proportionate share of the fund in the mutual fund. New investors come in and old investors can

exit, at prices related to net asset value per unit.


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Benefits of Investing in Mutual Funds

Professional Management: -

Mutual Funds provide the services of experienced and skilled professionals, backed by

a dedicated investment research team that analyses the performance and prospects of companies

and selects suitable investments to achieve the objectives of the scheme.

Diversification: -

Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks decline

at the same time and in the same proportion. You achieve this diversification through a Mutual

Fund with far less money than you can do on your own.

Convenient Administration: -

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such

as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds

save your time and make investing easy and convenient.

Return Potential: -

Over a medium to long-term, Mutual Funds have the potential to provide a higher

return as they invest in a diversified basket of selected securities.

Low Costs: -

Mutual Funds are a relatively less expensive way to invest compared to directly

investing in the capital markets because the benefits of scale in brokerage, custodial and other

fees translate into lower costs for investors.

Liquidity: -

In open-end schemes, the investor gets the money back promptly at net

asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a

stock exchange at the prevailing market price or the investor can avail of the facility of direct

repurchase at NAV related prices by the Mutual Fund.

Transparency: -

You get regular information on the value of your investment in addition to


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disclosure on the specific investments made by your scheme, the proportion invested in each class

of assets and the fund manager's investment strategy and outlook.

Flexibility: -

Through features such as regular investment plans, regular withdrawal plans and

dividend reinvestment plans, you can systematically invest or withdraw funds according to your

needs and convenience.

Affordability: -

Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the benefit of its

investment strategy.

Choice of Schemes: -

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the

provisions of strict regulations designed to protect the interests of investors. The operations of

Mutual Funds are regularly monitored by SEBI.

Disadvantages of Investing Mutual Funds:-

Professional Management: -

Some funds doesnt perform in neither the market, as their management is not dynamic

enough to explore the available opportunity in the market, thus many investors debate over

whether or not the so-called professionals are any better than mutual fund or investor himself, for

picking up stocks.


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Costs:

The biggest source of AMC income is generally from the entry & exit load

which they charge from investors, at the time of purchase. The mutual fund industries are thus

charging extra cost under layers of jargon.

Dilution:

Because funds have small holdings across different companies, high returns from

a few investments often don't make much difference on the overall return. Dilution is also the

result of a successful fund getting too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good investment for all the new money.

Taxes: -

When making decisions about your money, fund managers don't consider your

personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is

triggered, which affects how profitable the individual is from the sale. It might have been more

advantageous for the individual to defer the capital gains liability.

Types of Mutual Funds

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

By Structure:-

Open-ended Funds:-

An open-end fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net

Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.


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Closed-ended Funds:-

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years.

The fund is open for subscription only during a specified period. Investors can invest in the

scheme at the time of the initial public issue and thereafter they can buy or sell the units of the

scheme on the stock exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the Mutual Fund

through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of

the two exit routes is provided to the investor.

Interval Funds:-

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

Money Market Funds:-

The aim of money market funds is to provide easy liquidity, preservation of

capital and moderate income. These schemes generally invest in safer short-term instruments

such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Returns on these schemes may fluctuate depending upon the interest rates prevailing in the

market. These are ideal for Corporate and individual investors as a means to park their surplus

funds for short periods.

Load Funds:-

A Load Fund is one that charges a commission for entry or exit. That is, each

time you buy or sell units in the fund, a commission will be payable. Typically entry and exit

loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance

history.

No-Load Funds:-

A No-Load Fund is one that does not charge a commission for entry or exit. That

is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load

fund is that the entire corpus is put to work.

Tax Saving Schemes:-


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These schemes offer tax rebates to the investors under specific provisions of the

Indian Income Tax laws as the Government offers tax incentives for investment in specified

avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are

allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to

investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds, provided the

capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30,

2000.

Various types of Mutual Funds


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Equity Funds: -

Equity funds are considered to be the more risky funds as compared to other

fund types, but they also provide higher returns than other funds. It is advisable that an investor

looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are

different types of equity funds each falling into different risk bracket. In the order of decreasingrisk level, there are following types of equity funds:-

AGGRESSIVE GROWTH FUNDS:-

In Aggressive Growth Funds, fund managers aspire for maximum capital

appreciation and invest in less researched shares of speculative nature. Because of these

speculative investments Aggressive Growth Funds become more volatile and thus, are prone to

higher risk than other equity funds.

GROWTH FUNDS: -

Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but

they are different from Aggressive Growth Funds in the sense that they invest in companies that

are expected to outperform the market in the future. Without entirely adopting speculative

strategies, Growth Funds invest in those companies that are expected to post above average

earnings in the future.

SPECIALTY FUNDS: -

Specialty Funds have stated criteria for investments and their portfolio comprises of

only those companies that meet their criteria. Criteria for some specialty funds could be to

invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus,

are comparatively riskier than diversified funds. There are following types of specialty funds:

Sector Funds:-

Equity funds that invest in a particular sector/industry of the market are known as Sector

Funds. The exposure of these funds is limited to a particular sector (say Information Technology,

Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more

risky than equity funds that invest in multiple sectors.


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Foreign Securities Funds:-

Foreign Securities Equity Funds have the option to invest in one or more foreign

companies. Foreign securities funds achieve international diversification and hence they are less

risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate

risk and country risk.

Mid-Cap or Small-Cap Funds:-

Funds that invest in companies having lower market capitalization than large

capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-

Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crore but more

than Rs. 500 crore) and Small-Cap companies have market capitalization of less than Rs. 500

crore. Market Capitalization of a company can be calculated by multiplying the market price of

the company's share by the total number of its outstanding shares in the market. The shares of

Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise

to volatility in share prices of these companies and consequently, investment gets risky.

Option Income Funds:-

While not yet available in India, Option Income Funds write options on a largefraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise

considered as a risky instrument. These funds invest in big, high dividend yielding companies,

and then sell options against their stock positions, which generate stable income for investors.

DIVERSIFIED EQUITY FUNDS: -

Except for a small portion of investment in liquid money market, diversified equity

funds invest mainly in equities without any concentration on a particular sector(s). These funds

are well diversified and reduce sector-specific or company-specific risk. However, like all other

funds diversified equity funds too are exposed to equity market risk. One prominent type of

diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a

minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are

eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income

tax return. ELSS usually has a lock-in period and in case of any redemption by the investor

before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for

which he may have received any tax exemption(s) in the past.


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Equity Index Funds: -

Equity Index Funds have the objective to match the performance of a specific stock

market index. The portfolio of these funds comprises of the same companies that form the index

and is constituted in the same proportion as the index. Equity index funds that follow broad

indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow

sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversifiedand therefore, are more risky.

VALUE FUNDS:-

Value Funds invest in those companies that have sound fundamentals and whose

share prices are currently under-valued. The portfolio of these funds comprises of shares that are

trading at a low Price to Earnings Ratio (Market Price per Share / Earning per Share) and a low

Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from

diversified sectors and are exposed to lower risk level as compared to growth funds or specialty

funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.)

which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds

with a long-term time horizon as risk in the long term, to a large extent, is reduced.

EQUITY INCOME OR DIVIDEND YIELD FUNDS: -

The objective of Equity Income or Dividend Yield Equity Funds is to generate

high recurring income and steady capital appreciation for investors by investing in those

companies which issue high dividends (such as Power or Utility companies whose share prices

fluctuate comparatively lesser than other companies' share prices). Equity Income or DividendYield Equity Funds are generally exposed to the lowest risk level as compared to other equity

funds.

DEBT / INCOME FUNDS:-

Funds that invest in medium to long-term debt instruments issued by private

companies, banks, financial institutions, governments and other entities belonging to various

sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are

low risk profile funds that seek to generate fixed current income (and not capital appreciation) to

investors. In order to ensure regular income to investors, debt (or income) funds distribute large

fraction of their surplus to investors. Although debt securities are generally less risky than

equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or

principal payment. To minimize the risk of default, debt funds usually invest in securities from

issuers who are rated by credit rating agencies and are considered to be of "Investment Grade".

Debt funds that target high returns are more risky. Based on different investment objectives, there

can be following types of debt funds:-


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Diversified Debt Funds: -

Debt funds that invest in all securities issued by entities belonging to all sectors of the

market are known as diversified debt funds. The best feature of diversified debt funds is that

investments are properly diversified into all sectors which results in risk reduction. Any loss

incurred, on account of default by a debt issuer, is shared by all investors which further reduces

risk for an individual investor.

Focused Debt Funds: -

Unlike diversified debt funds, focused debt funds are narrow focus funds that are

confined to investments in selective debt securities, issued by companies of a specific sector or

industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt

funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their

narrow orientation, focused debt funds are more risky as compared to diversified debt funds.

Although not yet available in India, these funds are conceivable and may be offered to investors

very soon.

High Yield Debt funds: -

As we now understand that risk of default is present in all debt funds, and therefore,

debt funds generally try to minimize the risk of default by investing in securities issued by only

those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds

adopt a different strategy and prefer securities issued by those issuers who are considered to be of

"below investment grade". The motive behind adopting this sort of risky strategy is to earn higher

interest returns from these issuers. These funds are more volatile and bear higher default risk,

although they may earn at times higher returns for investors.

Assured Return Funds: -

Although it is not necessary that a fund will meet its objectives or provide assured

returns to investors, but there can be funds that come with a lock-in period and offer assurance of

annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the

sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds

and provide investors with a low-risk investment opportunity. However, the security of

investments depends upon the net worth of the guarantor (whose name is specified in advance on

the offer document). To safeguard the interests of investors, SEBI permits only those funds tooffer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the

future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI)

that assured specified returns to investors in the future. UTI was not able to fulfill its promises

and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's

payment obligations on itself. Currently, no AMC in India offers assured return schemes to

investors, though possible.


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Fixed Term Plan Series: -

Fixed Term Plan Series usually are closed-end schemes having short term maturity

period (of less than one year) that offer a series of plans and issue units to investors at regular

intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term

plan series usually invest in debt / income schemes and target short-term investors. The objective

of fixed term plan schemes is to gratify investors by generating some expected returns in a short

period.

GILT FUNDS:-

Also known as Government Securities in India, Gilt Funds invest in government

papers (named dated securities) having medium to long term maturity period. Issued by the

Government of India, these investments have little credit risk (risk of default) and provide safety

of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest

rate risk. Interest rates and prices of debt securities are inversely related and any change in the

interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

MONEY MARKET / LIQUID FUNDS:-

Money market / liquid funds invest in short-term (maturing within one year)

interest bearing debt instruments. These securities are highly liquid and provide safety of

investment, thus making money market / liquid funds the safest investment option when

compared with other mutual fund types. However, even money market / liquid funds are exposed

to the interest rate risk. The typical investment options for liquid funds include Treasury Bills

(issued by governments), Commercial papers (issued by companies) and Certificates of Deposit

(issued by banks).

HYBRID FUNDS:-

As the name suggests, hybrid funds are those funds whose portfolio includes a

blend of equities, debts and money market securities. Hybrid funds have an equal proportion of

debt and equity in their portfolio. There are following types of hybrid funds in India:

Balanced Funds: -

The portfolio of balanced funds includes assets like debt securities, convertible

securities, and equity and preference shares held in a relatively equal proportion. The objectives

of balanced funds are to reward investors with a regular income, moderate capital appreciation

and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for

conservative investors having a long term investment horizon.


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Growth-and-Income Funds: -

Funds that combine features of growth funds and income funds are known as Growth-

and-Income Funds. These funds invest in companies having potential for capital appreciation and

those known for issuing high dividends. The level of risks involved in these funds is lower than

growth funds and higher than income funds.

ASSET ALLOCATION FUNDS: -

Mutual funds may invest in financial assets like equity, debt, money market or non-

financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a

variable asset allocation strategy that allows fund managers to switch over from one asset class to

another at any time depending upon their outlook for specific markets. In other words, fund

managers may switch over to equity if they expect equity market to provide good returns and

switch over to debt if they expect debt market to provide better returns. It should be noted that

switching over from one asset class to another is a decision taken by the fund manager on the

basis of his own judgment and understanding of specific markets, and therefore, the success of

these funds depends upon the skill of a fund manager in anticipating market trends.

COMMODITY FUNDS:-

Those funds that focus on investing in different commodities (like metals, food

grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as

Commodity Funds. A commodity fund that invests in a single commodity or a group of

commodities is a specialized commodity fund and a commodity fund that invests in all available

commodities is a diversified commodity fund and bears less risk than a specialized commodityfund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold

mines) are common examples of commodity funds.

REAL ESTATE FUNDS:-

Funds that invest directly in real estate or lend to real estate developers or invest in

shares/securitized assets of housing finance companies, are known as Specialized Real Estate

Funds. The objective of these funds may be to generate regular income for investors or capital

appreciation.


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EXCHANGE TRADED FUNDS (ETF):-

Exchange Traded Funds provide investors with combined benefits of a closed-end

and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded

on stock exchanges like a single stock at index linked prices. The biggest advantage offered by

these funds is that they offer diversification, flexibility of holding a single share (tradable at index

linked prices) at the same time. Recently introduced in India, these funds are quite popular

abroad.

FUND OF FUNDS:-

Mutual funds that do not invest in financial or physical assets, but do invest in other

Mutual Fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds

maintain a portfolio comprising of units of other mutual fund schemes, just like conventional

mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non

financial assets. Fund of Funds provide investors with an added advantage of diversifying into

different mutual fund schemes with even a small amount of investment, which further helps in

diversification of risks. However, the expenses of Fund of Funds are quite high on account ofcompounding expenses of investments into different mutual fund schemes.

FUND STRUCTURE AND CONSTITUENTS:-

Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC

.Sponsor is the promoter of the fund. Sponsor creates the AMC and the trustee company and

appoints the Boards of both these companies, with SEBI approval. A mutual fund is constituted

as a Trust. A trust deed is signed by trustees and registered under the Indian Trust Act. The

mutual fund is formed as trust in India, and supervised by the Board of Trustees. The trustees

appoint the asset management company (AMC) to actually manage the investors money. TheAMCs capital is contributed by the sponsor. The AMC is the business face of the mutual fund.

Investors money is held in the Trust (the mutual fund). The AMC gets a fee for managing the

funds, according to the mandate of the investors. The trustees make sure that the funds are

managed according to the investors mandate. Sponsor should have atleast 5-year track record in

the financial services business and should have made profit in atleast 3 out of the 5 years.

Sponsor should contribute atleast 40% of the capital of the AMC. Trustees are appointed by the

sponsor with SEBI approval. Atleast 50% of trustees should be independent. Atleast 50% of the

AMCs Board should be of independent members. An AMC cannot engage in any business other

than portfolio advisory and management. An AMC of one fund cannot be Trustee of another

fund.AMC should have a net worth of at least Rs. 10 crore at all times. AMC should beregistered with SEBI AMC signs an investment management agreement with the trustees. Trustee

Company and AMC are usually private limited companies. Trustees oversee the AMC and seek

regular reports and information from them. Trustees are required to meet atleast 4 times a year to

review the AMC the investors funds and the investments are held by the custodian. Sponsor and

the custodian cannot be the same entity. R&T agents manage the sale and repurchase of units and

keep the unit holder accounts. If the schemes of one fund are taken over by another fund, it is

called as scheme take over. This requires SEBI and trustee approval. If two AMCs merge, the

stakes of sponsors changes and the schemes of both funds come together. High court, SEBI and


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Trustee approval needed. If one AMC or sponsor buys out the entire stake of another sponsor in

an AMC, there is a takeover of AMC. The sponsor, who has sold out, exits the AMC. This needs

high court approval as well as SEBI and Trustee approval. Investors can choose to exit at NAV if

they do not approve of the transfer. They have a right to be informed. No approval is required, in

the case of open-ended funds. For close-ended funds the investor approval is required for all

cases of merger and takes over.

EQUITY SHARES

ABOUT SHARES:-

At the most basic level, stock (often referred to as shares) is ownership, or equity, in a company.

Investors buy stock in the form of shares, which represent a portion of a company's assets

(capital) and earnings (dividends).

As a shareholder, the extent of your ownership (your stake) in a company depends on the number

of shares you own in relation to the total number of shares available For example, if you buy

1000 shares of stock in a company that has issued a total of 100,000 shares, you own one per centof the company.

While one per cent seems like a small holding, very few private investors are able to accumulate a

shareholding of that size in publicly quoted companies, many of which have a market value

running into billions of pounds. Your stake may authorize you to vote at the company's annual

general meeting, where shareholders usually receive one vote per share.

In theory, every stockholder, no matter how small their stake, can exercise some influence over

company management at the annual general meeting. In reality, however, most private investors'

stakes are insignificant. Management policy is far more likely to be influenced by the votes of

large institutional investors such as pension funds.

a) STOCKS SYMBOLS:-

A stock symbol, or 'Epic' symbol, is the standard abbreviation of a stock's name. You can find

stock symbols wherever stock performance information is published - for example, newspaper

stock listings and investment websites. Company names also have abbreviations called ticker

symbols. However, it's worth remembering that these may vary at the different exchanges where

the company is quoted.


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b) PERFORMANCE INDICATORS:-

Here is a list of the standard performance indicators

Performance Indicator Definition

Closing price The last price at which the stock was bought or sold

High and low The highest and lowest price of the stock from the previous trading

day

52 week range The highest and lowest price over the previous 52 weeks

Volume The amount of shares traded during the previous trading day High

and low

Net change The difference between the closing price on the last trading day and

the closing price on the trading day prior to the last

THE STOCK EXCHANGES:-

A marketplace in which to buy or sell something makes life a lot easier.

The same applies to stocks. A stock exchange is an organization that provides a marketplace in

which investors and borrowers trade stocks. Firstly, the stock exchange is a market for issuers

who want to raise equity capital by selling shares to investors in an Initial Public Offering (IPO).The stock exchange is also a market for investors who can buy and sell shares at any time.

a) Trading shares on the stock exchange:

As an investor in the INDIA, you can't buy or sell shares on a stock exchange yourself. You need

to place your order with a stock exchange member firm (a stockbroker) who will then execute the

order on your behalf. The NSE AND BSE are the leading stock exchange in the INDIA. Trading

is done through computerized systems.

b) The trading process:-

If you decide to buy or sell your shares, you need to contact a stockbroker who will buy or sell

the shares on your behalf. After receiving your order, the stockbroker will input the order on the

SETS or SEAQ system to match your order with that of another buyer or seller. Details of the

trade are transmitted electronically to the stockbroker who is responsible for settling the trade.

You will then receive confirmation of the deal.


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c) Types of shares available on the stock exchange:-

You cannot trade all stocks on the stock exchange. To be listed on a stock exchange, a stock must

meet the listing requirements laid down by that exchange in its approval process. Each exchange

has its own listing requirements, and some exchanges are more particular than others. It is

possible for a stock to be listed on more than one exchange. This is known as a dual listing.

Insurance

People need insurance in the first place. An insurance policy is primarily meant to protect the

income of the familys bread earners. The idea is if any one or both die their dependents continue

to live comfortably. The circle of life begins at birth follower by education, marriage and

eventually after a lifetime of work we look forward to life of retirement. Our finances too tend tochange as we go through the various phases of life. In the first twenty of our life, we are

financially and emotionally dependents on our parents and there are no financial commitments to

be met. In the next twenty years we gain financial independence and provide financial

independence to our families. This is also the stage when our income may be unable to meet the

growing expenses of a young household. In the next twenty as we see our investments grow after

our children grow and become financially independent. Insurance is a provision for the

distribution of risks that is to say it is a financial provision against loss from unavoidable

disasters. The protection which it affords takes form of a guarantee to indemnify the insured if

certain specified losses occur. The principle of insurance so far as the undertaking of the

obligation is concerned is that for the payment of a certain sum the guarantee will be given to

reimburse the insured. The insurer in accepting the risks so distributes them that the total of all

the amounts is paid for this insurance protection will be sufficient to meet the losses that occur.

Insurance then provide divided responsibility. This principle is introduced in most stores where a

division is made between the sales clerk and the cashiers department the arrangement dividing the

risks of loss. The insurance principle is similarly applied in any other cases of divided

responsibility. As a business however insurance is usually recognized as some form of securing a

promise of indemnity by the payment of premium and the fulfillment of certain other stipulations


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flexibility to alter the premium amounts during the policy's tenure. For example, if an individual

has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with

a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the

accumulated value of his ULIP). ULIP investors can shift their investments across various

plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no

cost.

Expenses Charged in a ULIP

Premium Allocation Charge:

A percentage of the premium is appropriated towards charges initial and renewal expenses apart

from commission expenses before allocating the units under the policy.

Mortality Charges:

These are charges for the cost of insurance coverage and depend on number of factors such as

age, amount of coverage, state of health etc.

Fund Management Fees:

Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:

This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:

Deducted for premature partial or full encashment of units.

Fund Switching Charge:

Usually a limited number of fund switches are allowed each year without charge, with subsequent

switches, subject to a charge.

Service Tax Deductions:

Service tax is deducted from the risk portion of the premium.


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GOVERNMENT SECURITIES

Government securities(G-secs) are sovereign securities which are issued by the Reserve Bank of

India on behalf of Government of India,in lieu of the Central Government's market borrowing

programme.

The term Government Securities includes:

Central Government Securities.

State Government Securities

Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit'.The market borrowing of the

Central Government is raised through the issue of dated securities and 364 days treasury bills

either by auction or by floatation of loans.

In addition to the above, treasury bills of 91 days are issued for managing the temporary cash

mismatches of the Government. These do not form part of the borrowing programme of the

Central Government

Types of Government Securities

Government Securities are of the following types:-

Dated Securities : are generally fixed maturity and fixed coupon securities usually carrying

semi-annual coupon. These are called dated securities because these are identified by their date of

maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in

2012, which carries a coupon of 11.03% payable half yearly. The key features of these securities

are:

They are issued at face value.

Coupon or interest rate is fixed at the time of issuance, and remains constant till

redemption of the security.

The tenor of the security is also fixed.

Interest /Coupon payment is made on a half yearly basis on its face value.

The security is redeemed at par (face value) on its maturity date.

Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These

were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and

1995-96 respectively. The key features of these securities are:

They are issued at a discount to the face value.

The tenor of the security is fixed.


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The securities do not carry any coupon or interest rate. The difference between the issue

price (discounted price) and face value is the return on this security.


Partly Paid Stockis stock where payment of principal amount is made in installments over a

given time frame. It meets the needs of investors with regular flow of funds and the need of

Government when it does not need funds immediately. The first issue of such stock of eight yearmaturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a

few more times thereafter. The key features of these securities are:

They are issued at face value, but this amount is paid in installments over a

specified period.

Coupon or interest rate is fixed at the time of issuance, and remains constant till

redemption of the security.




Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a

benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and

minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on

September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a

floating rate bond, the coupon of which is benchmarked against average yield on 364 Days

Treasury Bills for last six months. The coupon is reset every six months. The key features of

these securities are:


Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at

the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc.

Though the benchmark does not change, the rate of interest may vary according to

the change in the benchmark rate till redemption of the security.




Bonds with Call/Put Option: First time in the history of Government Securities market RBI

issued a bond with call and put option this year. This bond is due for redemption in 2012 and

carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in year

2007. In other words it means that holder of bond can sell back (put option) bond to Government

in 2007 or Government can buy back (call option) bond from holder in 2007. This bond has been

priced in line with 5 year bonds.


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Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale

price index. These provide investors with an effective hedge against inflation. These bonds were

floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of

6 per cent over the wholesale price index. The principal redemption is linked to the Wholesale

Price Index. The key features of these securities are:


Coupon or interest rate is fixed as a percentage over the wholesale price index at the

time of issuance. Therefore the actual amount of interest paid varies according to

the change in the Wholesale Price Index.

The tenor of the security is fixed.


The principal redemption is linked to the Wholesale Price Index.

Features of Government Securities

Nomenclature

The coupon rate and year of maturity identifies the government security.

Example: 12.25% GOI 2008 indicates the following:

12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, 2008 is the

year of maturity.

Eligibility

All entities registered in India like banks, financial institutions, Primary Dealers, firms,

companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional

Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra

bank and even individuals are eligible to purchase Government Securities.

Availability

Government securities are highly liquid instruments available both in the primary and secondary

market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary

Dealer in the government securities market, and is actively involved in the trading of government

securities.

Forms of Issuance of Government Securities

Banks, Primary Dealers and Financial Institutions have been allowed to hold these

securities with the Public Debt Office of Reserve Bank of India in dematerialized

form in accounts known as Subsidiary General Ledger (SGL) Accounts.

Entities having a Gilt Account with Banks or Primary Dealers can hold these

securities with them in dematerialized form.

In addition government securities can also be held in dematerialized form in demat

accounts maintained with the Depository Participants of NSDL.

Minimum Amount


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In terms of RBI regulations, government dated securities can be purchased for a minimum

amount of Rs. 10,000/-only.Treasury bills can be purchased for a minimum amount of Rs 25000/-

only and in multiples thereof. State Government Securities can be purchased for a minimum

amount of Rs 1,000/- only.

Repayment

Government securities are repaid at par on the expiry of their tenor. The different repayment

methods are as follows :

For SGL account holders, the maturity proceeds would be credited to their current

accounts with the Reserve Bank of India.

For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity

proceeds and they would pay the Gilt Account Holders.

For entities having a demat acount with NSDL,the maturity proceeds would be

collected by their DP's and they in turn would pay the demat Account Holders.

Day Count

For government dated securities and state government securities the day count is taken as 360

days for a year and 30 days for every completed month. However for Treasury bills it is 365 days

for a year.

Example : A client purchases 7.40% GOI 2012 for face value of Rs. 10 lacs.@ Rs.101.80,

i.e. the client pays Rs.101.80 for every unit of government security having a face value of Rs.

100/- The settlement is due on October 3, 2002. What is the amount to be paid by the client?

The security is 7.40% GOI 2012 for which the interest payment dates are 3rd May, and 3rd

November every year.

The last interest payment date for the current year is 3rd May 2002. The calculation would be

made as follows:

Face value of Rs. 10 lacs.@ Rs.101.80%.

Therefore the principal amount payable is Rs.10 lacs X 101.80% =10,18,000

Last interest payment date was May 3, 2002 and settlement date is October 3, 2002. Therefore the

interest has to be paid for 150 days (including 3rd May, and excluding October 3, 2002)

(28 days of May, including 3 rd May, up to 30th May + 30 days of June, July, August and

September + 2 days of October). Since the settlement is on October 3, 2002, that date is excluded.

Interest payable = 10 lacs X 7.40% X 150 = Rs. 30833.33.

360 X 100

Total amount payable by client =10,18,000+30833.33=Rs. 10,48,833.33

Benefits of Investing in Government Securities

No tax deducted at source


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Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals

Qualifies for SLR purpose

Zero default risk being sovereign paper

Highly liquid.

Transparency in transactions and simplified settlement procedures throughCSGL/NSDL

Methods of Issuance of Government Securities

Government securities are issued by various methods, which are as follows:

Auctions:

Auctions for government securities are either yield based or price based.

In an yield based auction, the Reserve Bank of India announces the issue size(or

notified amount) and the tenor of the paper to be auctioned. The bidders submit bids

in terms of the yield at which they are ready to buy the security.

In a price based auction, the Reserve Bank of India announces the issue size(or

notified amount), the tenor of the paper to be auctioned, as well as the coupon rate.

The bidders submit bids in terms of the price. This method of auction is normally

used in case of reissue of existing government securities.

The basic features of the auctions are given below:

Method of auction: There are two methods of auction which are followed-

Uniform price Based or Dutch Auction procedure is used in auctions of datedgovernment securities. The bids are accepted at the same prices as decided in the cut off.

Multiple/variable Price Based or French Auction procedure is used in auctions of

Government dated securities and treasury bills. Bids are accepted at different prices /

yields quoted in the individual bids.

Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at

the time of auction.

Cut off yield: is the rate at which bids are accepted. Bids at yields higher than the

cut-off yield is rejected and those lower than the cut-off are accepted. The cut-offyield is set as the coupon rate for the security. Bidders who have bid at lower than

the cut-off yield pay a premium on the security, since the auction is a multiple price

auction.

Cut off price: It is the minimum price accepted for the security. Bids at prices

lower than the cut-off are rejected and at higher than the cut-off are accepted.

Coupon rate for the security remains unchanged. Bidders who have bid at higher

than the cut-off price pay a premium on the security, thereby getting a lower yield.


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Price based auctions lead to finer price discovery than yield based auctions.

Notified amount: The amount of security to be issued is notified prior to the

auction date, for information of the public.

The Reserve Bank of India (RBI) may participate as a non-competitor in the

auctions. The unsubscribed portion devolves on RBI or on the Primary Dealers if

the auction has been underwritten by PDs. The devolvement is at the cut-off

price/yield.

Underwriting in Auctions

For the purpose of auctions, bids are invited from the Primary Dealers one day

before the auction wherein they indicate the amount to be underwritten by them and

the underwriting fee expected by them.

The auction committee of Reserve Bank of India examines the bids and based on

the market conditions, takes a decision in respect of the amount to be underwritten

and the fee to be paid to the underwriters.

Underwriting fee is paid at the rates bid by PDs , for the underwriting which has

been accepted.

In case of the auction being fully subscribed, the underwriters do not have to

subscribe to the issue necessarily unless they have bid for it.

If there is a devolvement, the successful bids put in by the Primary Dealers are set-off

against the amount underwritten by them while deciding the amount of devolvement.

On-tap issue

This is a reissue of existing Government securities having pre-determined yields/prices byReserve Bank of India. After the initial primary auction of a security, the issue remains open to

further subscription by the investors as and when considered appropriate by RBI. The period for

which the issue is kept open may be time specific or volume specific. The coupon rate, the

interest dates and the date of maturity remain the same as determined in the initial primary

auction. Reserve Bank of India may sell government securities through on tap issue at lower or

higher prices than the prevailing market prices. Such an action on the part of the Reserve Bank of

India leads to a realignment of the market prices of government securities. Tap stock provides an

opportunity to unsuccessful bidders in auctions to acquire the security at the market determined

rate.

Fixed coupon issue

Government Securities may also be issued for a notified amount at a fixed coupon. Most State

Development Loans or State Government Securities are issued on this basis.

Private Placement

The Central Government may also privately place government securities with Reserve Bank of

India. This is usually done when the Ways and Means Advance (WMA) is near the sanctioned

limit and the market conditions are not conducive to an issue. The issue is priced at market


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related yields. Reserve Bank of India may later offload these securities to the market through

Open Market Operations (OMO).

After having auctioned a loan whereby the coupon rate has been arrived at and if still the

government feels the need for funds for similar tenure, it may privately place an amount with the

Reserve Bank of India. RBI in turn may decide upon further selling of the security so purchased

under the Open Market Operations window albeit at a different yield.

Open Market Operations (OMO)

Government securities that are privately placed with the Reserve Bank of India are sold in the

market through open market operations of the Reserve Bank of India. The yield at which these

securities are sold may differ from the yield at which they were privately placed with Reserve

Bank of India. Open market operations are used by the Reserve Bank of India to infuse or suck

liquidity from the system. Whenever the Reserve Bank of India wishes to infuse the liquidity in

the system, it purchases government securities from the market, and whenever it wishes to suck

out the liquidity from the system, it sells government securities in the market.

National Savings Certificate

National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that

combines adequate returns with high safety. NSCs are an instrument for facilitating long-term

savings. A large chunk of middle class families use NSCs for saving on their tax, getting double

benefits. They not only save tax on their hard-earned income but also make an investment which

are sure to give good and safe returns.

How to Invest

National Savings Certificates are available at all post-offices. The application can be made either

in person or through an agent. Post office agents are active in nooks and corners of the country.

Following types of NSC are issued:

Single Holder Type Certificate: This can be issued to: (a) An adult for himself or on behalf of a

minor (b) A Trust.

Joint 'A' Type Certificate: Issued jointly to two adults payable to both holders jointly or to the

survivor.

Joint 'B' Type Certificate: Issued jointly to two adults payable to either of the holders or to the

survivor.

Who can Invest

An adult in his own name or on behalf of a minor

A trust

Two adults jointly

Denomiations and Limit

National Savings Certificates are available in the denominations of Rs. 100 Rs 500, Rs. 1000, Rs.

5000, & Rs. 10,000. There is no maximum limit on the purchase of the certificates. So it is for

you to decide how much you want to put in the NSCs. This is of course a huge benefit for you

can decide as much as your budget allows.


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Nominal, principal or face amount the amount on which the issuer pays interest, and which

has to be repaid at the end.

Issue price The price at which investors buy the bonds when they are first issued, which will

typically be approximately equal to the nominal amount. The net proceeds that the issuer receives

are thus the issue price, less issuance fees.

Maturity date The date on which the issuer has to repay the nominal amount. As long as all

payments have been made, the issuer has no more obligations to the bond holders after thematurity date. The length of time until the maturity date is often referred to as the term or tenor or

maturity of a bond. The maturity can be any length of time, although debt securities with a term

of less than one year are generally designated money market instruments rather than bonds. Most

bonds have a term of up to thirty years. Some bonds have been issued with maturities of up to one

hundred years, and some even do not mature at all. In early 2005, a market developed in euros for

bonds with a maturity of fifty years. In the market for U.S. Treasury securities, there are three

groups of bond maturities:

short term (bills): maturities up to one year;

medium term (notes): maturities between one and ten years;

long term (bonds): maturities greater than ten years.

Coupon The interest rate that the issuer pays to the bond holders. Usually this rate is fixed

throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or it

can be even more exotic. The name coupon originates from the fact that in the past, physical

bonds were issued which had coupons attached to them. On coupon dates the bond holder would

give the coupon to a bank in exchange for the interest payment.

The quality of the issue, which influences the probability that the bondholders will receive theamounts promised, at the due dates. This will depend on a whole range of factors.

Indentures and Covenants An indentureis a formal debt agreement that establishes the terms

of a bond issue, while covenants are the clauses of such an agreement. Covenants specify the

rights of bondholders and the duties of issuers, such as actions that the issuer is obligated to

perform or is prohibited from performing. In the U.S., federal and state securities and commercial

laws apply to the enforcement of these agreements, which are construed by courts as contracts

between issuers and bondholders. The terms may be changed only with great difficulty while the

bonds are outstanding, with amendments to the governing document generally requiring approval

by a majority (or super-majority) vote of the bondholders.

High yield bonds are bonds that are rated below investment grade by the credit rating agencies.

As these bonds are more risky than investment grade bonds, investors expect to earn a higher

yield. These bonds are also calledjunk bonds.

coupon dates the dates on which the issuer pays the coupon to the bond holders. In the U.S.

and also in the U.K. and Europe, most bonds are semi-annual, which means that they pay a

coupon every six months.

Optionality: Occasionally a bond may contain an embedded option; that is, it grants option-like

features to the holder or the issuer:
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Callability Some bonds give the issuer the right to repay the bond before the maturity date on

the call dates; see call option. These bonds are referred to as callable bonds. Most callable bonds

allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the

so calledcall premium. This is mainly the case for high-yield bonds. These have very strict

covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can

repay the bonds early, but only at a high cost.

Putability Some bonds give the holder the right to force the issuer to repay the bond before the

maturity date on the put dates; seeput option. (Note: "Putable" denotes an embedded put option;"Puttable" denotes that it may beputted.)

call dates and put datesthe dates on which callable and putable bonds can be redeemed early.

There are four main categories.

A Bermudan callable has several call dates, usually coinciding with coupon dates.

A European callable has only one call date. This is a special case of a Bermudan callable.

An American callable can be called at any time until the maturity date.

A death put is an optional redemption feature on a debt instrument allowing the beneficiary of theestate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's

death or legal incapacitation. Also known as a "survivor's option".

sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be

retired periodically. The entire bond issue can be liquidated by the maturity date. If that is not the

case, then the remainder is called balloon maturity. Issuers may either pay to trustees, which in

turn call randomly selected bonds in the issue, or, alternatively, purchase bonds in open market,

then return them to trustees.

convertible bondlets a bondholder exchange a bond to a number of shares of the issuer's common

stock.

exchangeable bond allows for exchange to shares of a corporation other than the issuer.

Fixed rate bondshave a coupon that remains constant throughout the life of the bond.

Floating rate notes (FRNs) have a coupon that is linked to an index. Common indices include:

money market indices, such asLIBORorEuribor, and CPI (the Consumer Price Index). Coupon

examples: three month USD LIBOR + 0.20%, or twelve month CPI + 1.50%. FRN coupons reset

periodically, typically every one or three months. In theory, any Index could be used as the basis

for the coupon of an FRN, so long as the issuer and the buyer can agree to terms.

Zero-coupon bonds don't pay any interest. They are issued at a substantial discount topar value.The bond holder receives the full principal amount on the redemption date. An example of zero

coupon bonds are Series E savings bonds issued by the U.S. government. Zero-coupon bonds

may be created from fixed rate bonds by a financial institutions separating "stripping off" the

coupons from the principal. In other words, the separated coupons and the final principal payment

of the bond are allowed to trade independently. See IO (Interest Only) and PO (Principal Only).

Inflation linked bonds, in which the principal amount and the interest payments are indexed to

inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity

(this position briefly reversed itself for short-term UK bonds in December 2008). However, as the
http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Callable_bondshttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/w/index.php?title=Call_premium&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Call_premium&action=edit&redlink=1http://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Putthttp://en.wikipedia.org/wiki/Option_stylehttp://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Exchangeable_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Euriborhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bondhttp://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Callable_bondshttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/w/index.php?title=Call_premium&action=edit&redlink=1http://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Putthttp://en.wikipedia.org/wiki/Option_stylehttp://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Exchangeable_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Euriborhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bond


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principal amount grows, the payments increase with inflation. The government of the United

Kingdom was the first to issue inflation linked Gilts in the 1980s. Treasury Inflation-Protected

Securities(TIPS) andI-bonds are examples of inflation linked bonds issued by the U.S.

government.

Other indexed bonds, for example equity-linked notesand bonds indexed on a business indicator

(income, added value) or on a country's GDP.

Asset-backed securities are bonds whose interest and principal payments are backed byunderlying cash flows from other assets. Examples of asset-backed securities are mortgage-

backed securities(MBS's),collateralized mortgage obligations (CMOs) andcollateralized debt

obligations (CDOs).

Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of

liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidatoris paid,

then government taxes, etc. The first bond holders in line to be paid are those holding what is

called senior bonds. After they have been paid, the subordinated bond holders are paid. As a

result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than

senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks,

and asset-backed securities. The latter are often issued in tranches. The senior tranches get paidback first, the subordinated tranches later.

Perpetual bonds are also often calledperpetuities. They have no maturity date. The most famous

of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries.

Some of these were issued back in 1888 and still trade today, although the amounts are now

insignificant. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore

Railroad issued a bond which matures in 2361 (i.e. 24th century)) are virtually perpetuities from a

financial point of view, with the current value of principal near zero.

Bearer bond is an official certificate issued without a named holder. In other words, the person

who has the paper certificate can claim the value of the bond. Often they are registered by anumber to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky

because they can be lost or stolen. Especially after federal income tax began in the United States,

bearer bonds were seen as an opportunity to conceal income or assets.[2]U.S. corporations

stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local

tax-exempt bearer bonds were prohibited in 1983.[3]

Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the

issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the

principal upon maturity, are sent to the registered owner.

Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or theiragencies. Interest income received by holders of municipal bonds is often exempt from the

federalincome tax and from the income tax of the state in which they are issued, although

municipal bonds issued for certain purposes may not be tax exempt.

Book-entry bond is a bond that does not have a paper certificate. As physically processing paper

bonds and interest coupons became more expensive, issuers (and banks that used to collect

coupon interest for depositors) have tried to discourage their use. Some book-entry bond issues

do not offer the option of a paper certificate, even to investors who prefer them.[4]
http://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Giltshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Subordinated_bondshttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Perpetual_bondshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-2http://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Tax_advantagehttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-3http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-3http://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Giltshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Subordinated_bondshttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Perpetual_bondshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-2http://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Tax_advantagehttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-3


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Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a

traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within

the issue according to a schedule. Some of these redemptions will be for a higher value than the

face value of the bond.

War bond is a bond issued by a country to fund a war.

Serial bondis a bond that matures in installments over a period of time. In effect, a $100,000, 5-

year serial bond would mature in a $20,000 annuity over a 5-year interval.

Revenue bondis a special type of municipal bond distinguished by its guarantee of repayment

solely from revenues generated by a specified revenue-generating entity associated with the

purpose of the bonds. Revenue bonds are typically "non-recourse," meaning that in the event of

default, the bond holder has no recourse to other governmental assets or revenues.

[edit] Investing in bonds

Bonds are bought and traded mostly b

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