Presentation - Part 1 - YS Hegde - Class 2 (1)

8/8/2019 Presentation - Part 1 - YS Hegde - Class 2 (1)

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Presented by - Y.S.Hegde

Investment Analysis

and Portfolio Management

Investment Analysis

and Portfolio Management


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Unit 1 Session:1

Class:2

Investment Alternatives


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Investment Alternatives

Real AssetsReal Estate A brief from Mr.Y.S. Hegde


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Question

So Mr.Hegde, you are going to talk on the real estate and housing scenario. Will you introduce the subject?

Answer

Yes. Real estate and housing sectors has got an important place in the countrys economy. They are considered as the engineof the economy, because of their direct or indirect linkage to about 265 other industries. For this reason, these sectors havebeen receiving great attention from the Union Government by way of various incentives. Realty and housing sector has beenalways finding a special place of importance in the various policy initiatives and fiscal stimuli announced by the Government.The sector provides substantial employment opportunities for qualified engineers, architects and designers and for skilled andun-skilled labourers, technicians, artisans etc. Construction sector employs a work force of 5 crores in India. Out of everyIndian Rupee invested in construction of houses, about 78 paise is added to the countrys Gross Domestic Product.Accelerated housing activities accelerate GDP growth.

Question

What are your perceptions about India realty sector as prevailing now?

Answer

With the turmoil in the financial markets, the real estate sector in the country witnessed one of the toughest times in recenttimes. The recession and uncertainty that came with it slowed the market down. It is heartening that the real estate market hasstarted showing strong signs of recovery from the slow down. Now, investors and analysts have begun re-rating the realtysector on optimism that the worst may be over, as the efforts of recent months will help developers attract funds and boostearnings.

Developers in the past year have restructured their debt and sold non-core assets and rationalized prices helping to push upsales. This has encouraged investors to buy stocks of real estate companies and motivate analysts to upgrade the outlook onthe sector.

Commercial banks, which were not encouraging lending to developers till a few months back have now started lending to them.A general softening of interest rates has also helped developers to cut their borrowing costs by as much as 300 basis points.Home loan disbursements have started picking up momentum, which signal the actual demand for homes.Apart from slashing prices by as much as 30-40 per cent in key markets, the developers also launched a series of residentialprojects, which were in the so-called affordable category. The change in strategy had a suitable impact.

Adding to the positive sentiment was the return of greater stability at the Centre and positive long-term policy measures.


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Question

What will be the impact of the budget on the realty sector?

Answer

The Budget contains measures that have a medium to long-term impact on urbanization and hence on the real estateindustry. There is a focus on rural housing also through increased allocation for Rural Housing Fund.The new income tax slabs translates to a marginally higher amount of disposable income in the hands of individuals.The budget in the light of the fact that prices have corrected substantially and home loan rates are on the decline couldbe the trigger that will turn the tide in the realty sector. Right now, the prices and cost of finance make property a gooddeal.The fact remains that there is an acute demand-supply imbalance in the housing sector. There is an estimated shortfallof around 23 million houses in cities and this will take some time to meet. A slow down in the economy spanning somemonths will not erode demand. It leads to prospective buyers only postponing the decision to buy in the hope thatprices correct further or interest rates fall more. This in turn leads to some pent up demand building up.

Question

It is seen that increasing number of people invest in land. What is the reason for this?

Answer

You must be knowing a famous saying by the playwright Mark Twain. Buy land, theyre not making it anymore" sosaid Mark Twain. And it holds true till date. Land values are known to appreciate more than 40-50 times, though, overa long period. Investment in land is considered much better than other investment avenues like stock, gold, depositsetc., because of the much higher appreciation. Land can be used for commercial constructions like shoppingcomplexes, malls, hotels, office complexes, auditoriums, marriage halls etc. Returns from investment in land by wayof rent are much higher than the returns from any other investment avenues. One does not need tons of cash to buyland. Small investments worth Rs 5-10 lakh in a good location would also be sufficient to give worthwhile returns in 7to 10 years. Banks provide financing facility for buying land from statutory bodies or reputed developers.


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QuestionIt is believed that sites make a good investment. Can you throw some reasons for considering site as a good investment?Answer

The economic slowdown has turned out to be a boon in many ways for property investors. Corrected prices have opened amarket for end-users as well as investors, where they can get value picks. Site values have undergone a correction andthere are many gated communities and plotted developments on the anvil, mainly in the peripheral areas and outskirts.Earlier the outskirts began 20 kms from the city limits while now it has gone to 40 kms now. Location and location only is theprinciple in purchase of site.

Question

Why do you feel that only location is the principle in investment in site?Answer

Location of the site is of course the most important factor deciding the appreciation and returns. The location should haveprospects of growth in the medium or long term. Buying a property in a location which does not have any prospects ofdevelopment in the medium or long term is not a prudent investment decision. People prefer to buy land in peripherals ofcities. The reason is that as I mentioned earlier, as cities grow upto a level of saturation, the peripherals of the city will haveto inevitably take on further growth. Thereby satellite towns emerge having comparable prospects and potential as the maincity. This means that the value of the property appreciates many fold.

Question

What kind of location is good for investment in a site?Answer

A site in the outskirts or peripheral areas will see good appreciation in seven to ten years. Localities in the vicinity of ringroads, metro rail routes etc. are ideal for investment in site. Infrastructure facilities and residential spread will also increase.Sites brought in such locations will garner good returns.


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Question

Other than location, what are the other parameters to be considered before investing in site?AnswerThere are also parameters like connectivity and security. The area should be well connected with good roads. This will ensurethat the residential spread will gradually take place here. It should be easy to commute to various parts of the city. It shouldhave facilities like schools and hospitals close by. As regards security, people prefer living in neighborhoods that are safe andhave good residential spread. The profile of the people living in the vicinity is one of the concerns. So these factors also to begiven due consideration.

QuestionCan you give a few useful tips to those who want to invest in site?

Answer

Of course, there are a few things, which you have to bear in mind while purchasing a site.First, the site should have a clear title. For this, you can get a title report from your lawyer. Then, registration of the sale deedshould be done jointly by the buyer and the seller in the sub-registrars office. After registration, the buyer has to get the khatatransferred in his name from the corporation or the grama panchayat. See that the property tax has been paid up to date. Havea four-stone boundary or a three feet wall around the site. You can have simple cementing with an incline. This will ensure that

shrubs do not grow and rain water will drain away.You can also erect a shed with a watchman for additional security. You have to regularly check the site for any encroachmentsand maintain it clean. This can be done once a year. A clean site adds to the value of the property.Most importantly buy the site in an area where there is development going on in different scales, like construction in progress,to be built in the short-term, and long-term construction. A site in such an area will see real appreciation.


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Question

Is it possible to raise a loan against ones property?Answer

Yes, it is possible. Banks give loan against your property taking it as the security. Banks have different schemes based onthe profile of the borrower. The scheme offered depends on the risk profile of the borrower as perceived by the banks.There are many loan products available in the market. A loan may be taken against residential as well as commercialproperty. Some banks even lend against industrial property. The quantum of loan varies from a few lakhs to a few crores.Different banks have different minimum and maximum limits.

The usual rule of thumb for eligibility is 40-50 per cent of the current market value in case of commercial property and 70-80

per cent in case of residential property. An essential condition in either case is that the property must not be encumbered inany manner. Generally, the tenure varies from five to 15 years.

The loan may be a fixed interest rate one or a floating interest rate one. The security demanded is equitable mortgage of theproperty. The property should be in the name and possession of the borrower. It may be either self occupied or leased.

Question

Are bank loans available or shopping malls, multiplex, township projects etc.?

AnswerYes, banks are providing finance for such commercial projects. Normally such finance will be provided to Real Estate Groupshaving good track record of profit. The Firm putting-up the project should be Private Limited Company or Limited Company.The maximum quantum of finance is 50% to 55% of cost of the project including cost of land. If land is already purchased,75% of the cost of project excluding land but land will be treated as promoters contributionThe finance will be given as a term loan repayable in three to seven years. The prime security for the loan will be first chargeover all fixed assets of the project. For higher amounts of loan, collateral security by way of alternate property is also taken.


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Question

Now coming to residential property, does it make sense to buy a home now?

Answer

The answer is definitely yes. There are a few factors that potential homebuyers need to analyse in the current market scenario.The thrust given by the budget on infrastructure projects will change the potential value of a location rapidly. Let me give oneexample. The Metro Rail project will add value to localities along its route as construction progresses. Also, the different roadand connectivity works will impact property prices as localities get more accessible and better connected.

These factors will push prices up and negate the advantage of the lower interest rates to a great extent. Therefore it makessense to buy now with the corrected price levels and lower interest rates many options value picks.

Considering the fact that a home loan is a long-term affair, it is better to go in for a home loan as soon as possible. The fasteryou finish the loan, the more time you have to invest more for a higher income stream after retirement. A home loan often takesaway a significant part of the disposable income. Once repaid in full, this can go towards other investments.

And now the stock markets are continuing to remain volatile. This makes property a value pick these days. Once propertyprices start moving up, the returns on investment will be high. Investors can therefore look at making property a part of their

investment portfolio with a medium term outlook. Property is also a good hedge against inflation as it will never drop in valueover time.

The hike in fuel prices is going to push up the cost of putting up a building marginally. Over time, prices of steel and cement arelikely to move up, along with other costs of construction. Labour costs too will go up as the cost of living increases. If you areplanning to construct a home or buy one, it is advisable to begin as soon as possible. Investing in a dwelling unit is the bestinvestment destination.


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Question

Why do you consider investment in a dwelling unit as the best investment decision?

Answer

Indias residential property market has been growing through a boon phase over the last few years on account of manyfactors. There are many factors which have contributed to this phenomenon. Increasing disposable income levels, growingnumber of double income families, high salaries, boom in certain employment sectors, tax incentives on home loans,availability of plenty of home loan options, resurgence of the Indian middle class, affordable interest rates etc. are some ofthese factors. Moreover, joint family concept has given place to nuclear family and owning a home has become the priority oftodays younger generation.There has been heavy demand for residential property on account of these reasons resulting in drastic appreciation in

property value, rent etc. As I mentioned earlier, investment in residential property is a good hedge against inflation. Thus,people generally prefer to invest in residential properties in India, as it is the best and the most fruitful option in India.

Question

Now banks and housing finance institutions are very aggressive in home loans. There are a lot of players in the home loanmarket. What are the types of home loans available?Answer

Banks and Housing Finance Instituitions offer a variety of home loans. Home purchase loan, home improvement loan, home

extension loan, land purchase loan, home conversion loan, bridge loan and balance transfer loan are some flavours.

Depending on your requirement, you can avail any of these loans. To make their products attractive, some lenders packagefreebies with their products like free property or accident insurance, waiver of prepayment penalty and so on.

Lenders offer a plethora of options for the prospective homeowners. You can choose from numerous schemes that suits yourfinancial needs, age and risk appetite.


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Question

Can a few tips be given to buyers of a home?

Answer

If you are planning to buy a home, especially on loan, the process may seem complicated to you, but it is not so, if a fewimportant steps are followed.

First find out your budget - how much you can afford. This would depend on your income and monthly expenses. How much isin your saving account to manage down payment. Now try to figure out as to how you are going to pay off your instalments.Then, do your homework. Talk to various lending institutions. Compare interest rates, costs and look for a better deal. Go

shopping for a loan.

Then, learn about home buying programmes and various options for purchasing apartment, villa etc. available in the market.Zero in on the property that you wish to buy. Keep your wish list ready -- what facilities and features you wish to have in yourdream home. Go to a real estate agent. Look around. Compare features and cost.Negotiate with the builder, discuss the process with your agent, make an offer and negotiate until you and the seller both agreeto the terms of the sale.

You must get the property inspected. This way you would know about the condition of the home. It will also help you avoid

buying a house that may require major repairs.Ask for the legal scrutiny and clear title report from the builder and read it and satisfy yourself, if required with the help of alawyer.Now look for homeowners insurance. Go shopping for it.Now get ready to sign papers and close the deal. You must read everything before you sign.


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Question

What are the documents required for getting a home loan?Answer

When an applicant approaches a bank or a housing finance institution for a home loan, he must submit documentary proofs toestablish his identity, residential and work place addresses. Based on the documents provided by you, background checksare conducted by the bank. Banks verify the financial health, credit history and other details provided by the applicant as thefirst step of the loan process.There are a few documents that the applicants must have in order before approaching a lender. They are proof of identity, likedriving licence, PAN card, passport or voter identity card, proof of residence like ration card, latest electricity bill or telephonebill or passport, proof of age, copies of last three yearss IT returns, Form 16 or 16-A, last six months salary slips, bank

statements, employment details and photograph.Apart from these personal documents, the applicant should also have all the property documents like title deeds, copies ofprior title deeds covering a period of thirteen years, agreement for sale, Encumbrance Certificate, property tax paid receipts,khata, possession certificate etc. In case of purchase of apartments, the developer normally gives a file containing all thesedocuments.

Question

What about business class and self employed applicants? What documents they will have to provide as income proof?Answer

Business class and self employed applicants will have to give copies of their Income Tax Returns and statement ofcomputation of income certified by a chartered accountant. Further, for partners or directors of firms, the firms Balance Sheetand Profit & Loss account for three years will also be required. Submission of these documents is not mandatory in the caseof salaried class.


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QuestionYou mentioned about Encumbrance Certificate? What is its significance?

Answer

Encumbrance is a charge created on a property. In case a property is purchased with borrowed money or is offered as asecurity for a loan, a charge is created in the form of an encumbrance. The property is then mortgaged as a security forthe loan. Encumbrance Certificate discloses the encumbrance status of a property. It can be obtained from the sub-registrars office against payment of a fee. It is issued for a particular period and does not cover any period prior to orfollowing the period mentioned. It is an extract of the register maintained by the sub-registrar, which in turn is based on

the documents registered with the registrar. In case a particular document is not registered with the registrar, it won't becaptured in the encumbrance certificate.

Question

What is meant by credit appraisal of home loan application?Answer

Credit appraisal refers to the entire process by which the loan application is evaluated by the lender. The bank or theHousing Finance Company has its credit appraisal officers who process the home loan applications. They take into

account various factors like income of the applicants, number of dependents, monthly expenditure, repayment capacity,employment history, number of years service left over and other factors, which affect the credit rating of the borrower.Proof of income will also be verified for the purpose of approval of loan. The time taken for receipt of such information iscrucial since it affects the length of time required for a loan approval.


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QuestionWhat is meant by the Pre EMI Interest?

Answer

Pre-EMI interest refers to the payments made by the customer when the loan is partly disbursed. In home loans, thedisbursement is made as per the stage of construction of the house or apartment. When the loan is partly disbursed, thecustomer cannot start paying the EMI. Instead, he has to pay simple interest on the part amount drawn by him at theapplicable rate. This is called a Pre EMI interest.

QuestionCan you please throw some light on the term EMI? What is the impact of rate of interest on EMI?

Answer

Yes. EMI is the short form of Equated Monthly Installment. The equated monthly comprises a portion towards repayment ofthe principal and the balance portion towards payment of interest. For example, if the loan repayment period is 15 years,there will be 180 EMIs payable and the amount of EMI will be the principal plus total interest payable divided by 180.The amount of EMI depends on the interest rate. Obviously higher the interest rate, higher the EMI and vice versa. Butbanks and housing finance institutions have schemes for keeping the EMI unchanged even when the interest rate

increases.Normally the EMI will be upto 40-45 per cent of the monthly income of the borrower and on this basis the loan amount isarrived at, also taking into account other factors like repayment period and margin on the loan. Margin means theborrowers own contribution in the total cost of purchasing the home.


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Question

In home loans, we often hear about Equitable Mortgage? Can you give some information on this?Answer

Yes. Equitable Mortgage is an integral part of a home loan transaction. It is required for offering the property as security forthe loan. Equitable mortgage refers to the transaction of depositing the original title deeds of the property to be financed withthe lending financial institution along with a letter evidencing deposit of title deeds. Through the Equitable Mortgagetransaction, the borrower creates a charge on the property in favour of the lending institution.

Question

What is the maximum repayment period a home loan borrower can get?

Answer

Banks and Housing Finance Institutions normally give home loans with a repayment period upto 20 years. However, therepayment period will depend on the age of the borrower, his remaining years in service etc.

Question

Whether if one pays early any rebate is available or any penalty is there?

Answer

Lenders do not give any rebate for pre-closing a loan before the repayment period is over. On the other hand, all lenderscharge a pre-payment fee of 2-3 per cent on the outstanding loan amount.

Question

Whether finance or additional loan for purchase of interior equipments loan is available?Answer

Yes. The additional investment towards furnishing, purchase of internal equipments etc. can also be added in the project costwhile applying for the loan. Repair or Renovation Loan is also granted for such purposes as an additional loan.


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Question

Whether registration stamp duty is available as loan?

Answer

Stamp duty and registration charges can also be added in the project cost while applying for the loan.

Question

What is the relation between project cost and the loan amount?Answer

Normally the loan amount will be upto 80 per cent of he project cost, depending also on other factors like applicants repaymentcapacity.

Question

We often hear about terms like Carpet Area and Built-up Area. Can you tell the difference between these?Answer

Carpet area is defined as the area of the flat where a carpet can be laid and thus is the net useable area. Until two decadesback flats were sold on this basis. Carpet area is the area from the inner sides of wall to wall. However this concept is rarelyused today and as a result, flats today are generally sold on the basis of Built-up Area.Built-up Area, over and above the Carpet Area, would include the space covered by the thickness of the inner and outer walls ofthe flat. The Built-up Area thus would generally be around 15% more than the carpet area of the flat.

QuestionA lot is being talked about fixed rate scheme , floating rate scheme , hybrid scheme, step-up scheme , step-down

scheme etc.. Can you throw light on these concepts.

Answer

A very good question indeed. In fixed rate loan scheme, the interest rate remains fixed thoughout the loan tenure. In floatingrate scheme, the interest rate varies in accordance with the benchmark interest rate of the lending institution. In hybrid loanscheme, the interest rate will be fixed for an initial period and then will become floating rate during the remaining period. Instep-up loan scheme, the EMI will progressively increase, while in step-down loan scheme, the EMIs will progressivelydecrease in a phased manner. The borrower can choose any of these options according to his requirements and

convenience.


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Question

Can you please explain the income tax benefits available on a home loan.Answer

The borrower is eligible for certain tax benefits on principal and interest components of a loan under the Income Tax Act,1961. Deduction from annual income is available under Sec 80C of the Act for repayment of principal upto Rs.100000/-.Deduction under Sec 24 is available for interest payment on housing loans upto Rs. 1,50,000/- in respect of self-occupiedhouse property acquired or constructed with capital borrowed on or after 1.4.99. Interest payment of Rs. 1,50,000 p.a. canget you a tax saving upto about Rs. 50,000 p.a. Principal repayment upto Rs.100000/- can further reduce your tax liability byabout Rs. 33,000 p.a.

Question

What is the difference between developers, builders, contractors and architects?

Answer

A real estate developer or land developer makes improvements to real estate property so as to increase its value byundertaking construction of residential or commercial projects. The developer may be an individual, but is more oftencollaboration, a limited company or corporation. The developer may not necessarily be the owner of the property developed

and would have entered into a development agreement with the actual owner of the property. Builders are individuals or firmswho undertake only construction and not real estate development. Contractors are individuals and firms who undertake theconstruction work on a contract basis for a developer or builder. Architects are individuals or firms of qualified civil engineersand architects having professional knowledge about all aspects of designing and construction.


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Question

Recently a new scheme has come into force by name reverse mortage loan scheme. What is this scheme?

Answer

Reverse Mortgage Loan scheme is a loan scheme meant for Senior Citizens. The scheme enables a Senior Citizen toavail a loan from a lender against the mortgage of his/her house while remaining the owner and occupying the house. Theloan can be availed either as a lumpsum amount or as monthly or quarterly or half yearly or yearly payments. The SeniorCitizen borrower is not required to service the loan during his lifetime and therefore does not make monthly repayments ofprincipal and interest to the lender.

The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower andprevalent interest rate. The maximum period of the loan is 20 years.

The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation or renovation ofresidential property, medical exigencies, etc. Valuation of the residential property would be done by the reverse mortgagelender at least once every five years.The borrower will continue to use the residential property as his primary residence till he is alive, or permanently movesout of the property, or ceases to use the property as permanent primary residence. On the borrowers death or on theborrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the

house property. The borrower or his legal heirs can also repay the loan with accumulated interest and have the mortgagereleased without resorting to sale of the property. The borrower or his heirs also have the option of prepaying the loan atany time during the loan tenor or later, without any prepayment levy.Reverse Mortgage Loan scheme was introduced in India only in 2006 and the scheme is slowly becoming popular. It isindeed a welfare scheme for Senior Citizens.


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Question

Now, can you give some information on the regulatory authority for housing finance?

Answer

National Housing Bank is the regulator for the housing finance system in India. NHB has been established with the mainobjective of promoting a sound, healthy, viable and cost effective housing finance system. They have a regulatory,

financial and promotional role. NHB regulates the housing finance system by determining the policy and giving directionsto the housing finance institutions and their auditors. As part of the supervisory process, there is the system of registrationof housing finance companies with National Housing Bank.

NHB also supports housing finance sector by extending refinance to banks, housing finance institutions and other lendersin respect of eligible housing loans extended by them to individual beneficiaries, and also in respect of for project loansextended by them to various implementing agencies.

NHB also lends directly in respect of projects undertaken by public housing agencies like Housing Boards for housing

construction and development of housing related infrastructure.


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Question

Of late we have started hearing about a term NHB Residex? Can you throw some light on this?

Answer

NHB RESIDEX is the first housing price index in India introduced by the National Housing Bank. RESIDEX is to residentialproperty prices as Sensex is to stock prices. This index facilitates tracking of the movement of prices of residentialproperties in India over a period of time. The underlying objective behind NHB Residex is to fill price information gap and

streamline the property development process in major cities. It was launched by NHB in 2007. The project was startedwith a pilot study on five major cities, i.e.,Bangalore, Delhi, Bhopal, Kolkata and Mumbai. Another 10 cities were also thenbrought within the purview of NHB Residex. In the first phase, 35 cities are expected to be covered. RESIDEX is arrived atcity-wise and is operated by NHB on a half yearly basis. The year 2001 was taken as the base year for the study to becomparable with the Wholesale Price Index and Consumer Price index.

What will you do if you are living in Mumbai and want to know the real estate cost in Bangalore? Probably you will go to areal estate agent and try to know the price. And you will get different price ranges from different real estate agents. Nowwith the compilation of NHB Residex, you need not depend on these real estate agents. Residex will provide you accurate

information on the current market trend in the cities covered by the project. Apart from benefiting the individuals willing toknow current market prices of properties available in a city, the index will be useful for various stake holders, such asGovernment and administration, policy makers, private builders and officials of housing finance industry.


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Non Marketable Financial Assets

Bank Deposits

Post Office Savings Account

Post Office Time Deposits ( POTDs)

Monthly Income Scheme of the Post Office ( MISPO) Kisan Vikas Patra ( KVP )

National Savings Certificate

Company Deposits

Employee Provident Fund Scheme

Public Provident Fund Scheme


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Money Market Instruments

Treasury Bills

Certificate of Deposits

Commercial Paper

Repos


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Bonds or Debentures

Government Securities

Saving Bonds

Private Sector Debentures

Public Sector Undertaking Bonds

Preference Shares


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Equity Shares


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Investment in Equity

In my series on Wealth Management, today I will betalking on a very important investment avenue, namelyinvestment in shares or in other words, stock. This is alsocalled equity investment.


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QuestionCan you explain what is meant by equity investment?

AnswerEquity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds.Investment in shares is done in anticipation of income from dividends and capital gain as the value of the stock rises. Equityinvestment also sometimes refers to the acquisition of equity or ownership participation in a private unlisted company or acompany being created or a newly created company. When the investment is in infant companies, it is referred to asventure capital investing.

QuestionWhat is equity market? Why has it become so popular?

AnswerEquity market or stock market as it is popularly known covers the entire gamut of activities involving buying and selling ofshares and the activities of the agencies and intermediaries involved and the regulatory mechanisms.Coming to the popularity of stock market, the general perception is that no asset class can give you the kind of returnsthat equity markets have the potential to deliver. Analysts have estimated that since 1980, stocks present on the sensexon aggregate basis had helped investors multiply their wealth nearly145 times. Equity therefore is an integral part of aninvestors portfolio.

Question

Can you please tell me why one should invest in equities in particular?

AnswerWhen you buy a share of a company you become a shareholder in that company. Shares have the potential to increasein value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals.Research studies have proved that the equities have outperformed most other forms of investments in the long term.Equities are considered the most challenging and the rewarding, when compared to other investment options.However, this does not mean all equity investments would guarantee similar high returns. Equities are high-riskinvestments. One needs to study them carefully before investing.


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QuestionMany individuals who have lost money on the share market in the period after late 1994 decided to avoid equityinvestment. Is that justified? If equity investment is useful, how should retail investors harness the gains with minimumpain?

AnswerWe should first distinguish speculation from investment. Speculators make bets on the securities which they think willyield good returns. Speculators can earn spectacular profits, if the forecasts are correct. The reality, however, is thatforecasting stock prices is extremely difficult. In a world where lakhs of intelligent people continually scan financialmarkets looking to profit from mispriced securities, speculative profits are extremely hard to obtain. At the same time,whether speculators earn profits or not, they suffer the steady bleed of transactions costs. Hence speculative trading israrely useful for retail investors.

In this context, it would be relevant to remember one important observation of Benjamin Graham the American

Economist who is considered the first proponent of value investing. According to Benjamin Graham, most of the timecommon stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of theingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.We will, instead, focus upon the investment objective. This does not require active trading. Many individuals who havesuffered losses in speculation have concluded that investment in shares is inadvisable. This conclusion is incorrect.Economic research has revealed the benefits of investing in shares as clearly as it has revealed the difficulties ofobtaining speculative profits.

We should also consider the alternatives an investor has. Instead of buying shares, investors can always place theirmoney in a bank or in bonds. These instruments offer near-assured returns - their rate of return does not fluctuate much.

In contrast, the value of every equity portfolio fluctuates in synchrony with the market index from day to day. Investing inthe equity market imposes pain upon investors owing to day-to-day fluctuations in the index.

These fluctuations are the risk of equity investments. They have to be matched by higher returns in the equity market.Suppose there was an economy in which banks gave the same average returns as shares, then there would be astampede of investors selling off their shares and moving their money into bank accounts! In the process, share priceswould fall, and at the lower prices, shares would once again be attractive, offering higher prospective returns.The key is to focus on average returns, over long time periods, on well diversified equity portfolios. Bets made onindividual stocks are extremely risky, and there is no reward for bearing such risks. However, when we consider equityas a class, every economy in the world yields higher average returns on shares than on fixed return investments.


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Question

Your answer makes the point very clear. Can you please explain the differences between equity and debt markets?

AnswerThe equity market, which is more popularly referred to as the stock market, is the market for trading equity instruments orshares. Stocks are securities that are a claim on the earnings and assets of a company.

The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed paymentto the holder, usually with interest. Examples of debt instruments include bonds and mortgages.

There are important differences between stocks and bonds. Let me highlight a few of them:

Equity financing allows a company to acquire funds, often for investment, without incurring debt. On the other hand, issuinga bond does increase the debt burden of the bond issuer because contractual interest payments must be paid. Unlikedividends, they cannot be reduced or suspended.

Those who purchase shares gain ownership of the business of the firm whose shares they hold. They gain the right to voteon the issues important to the firm. In addition, equity holders have claims on the future earnings of the firm. In contrast,bondholders do not gain ownership in the business or have any claims to the future profits of the borrower. The bond

issuers only obligation to the bond holder is to repay the loan with interest.

Bonds are considered to be less risky investments for at least two reasons. First, bond market returns are less volatile thanstock market returns. Second, should the company run into trouble, bondholders are paid first, before other expenses arepaid. Shareholders are less likely to receive any compensation in this scenario.


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Question

What are the different kinds of equity issues?

Answer

Primarily, equity issues can be classified as Public, Rights or Preferential issues, also known as private placements.While public and rights issues involve a detailed procedure, private placements or preferential issues are relativelysimpler.When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or bothfor the first time to the public, it is called Initial Public Offering, popularly known as IPO. This paves way for listing andtrading of the issuer's securities. A follow-on public offering is when an already listed company makes either a fresh issueof securities to the public or an offer for sale to the public, through an offer document. Rights Issue is when a listedcompany issues fresh securities to its existing shareholders. The rights issue shares are normally offered in a particularratio to the number of shares held prior to the issue. This route is best suited for companies who would like to raisecapital without diluting stake of its existing shareholders. A Preferential issue is an issue of shares by listed companiesto a select group of persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a publicissue. This is a faster way for a company to raise equity capital.

QuestionWhat do you mean by the term Premium and Discount in share market?

AnswerShares are generally issued in denominations of 5, 10 or 100. This is known as the Face Value or Par Value of thesecurity. When a share is issued above its face value, it is said to be issued at a Premium and if it is issued at less thanits face value, then it is said to be issued at a Discount.


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QuestionWhat is meant by Market Capitalisation?

Answer

Market capitalization, popularly known as M-Cap is the market value of the total shares issued by a listed company. M-Cap is calculated by multiplying its current share price, i.e., the market price by the number of shares in issue. Forexample, if a Company has 120 lakh shares in issue and the current market price of the share is Rs. 100, then themarket capitalisation of company is Rs. 12000 lakh.

QuestionWhat is the difference between public issue and private placement?

AnswerWhen an issue is not made to only a select set of people but is open to the general public and any other investor atlarge, it is a public issue. But if the issue is made to a select set of people, it is called private placement. As perCompanies Act, 1956, an issue becomes public if it results in allotment to 50 persons or more. This means an issue can

be privately placed where an allotment is made to less than 50 persons.


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QuestionWhich are the factors that influence the price of a stock?

Answer

Broadly there are two factors. They are stock specific factors and market specific factors. Thestock-specific factor is related to peoples expectations about the company, its future earningscapacity, financial health and management, level of technology etc.

The market specific factor is influenced by the investors sentiment towards the stock market asa whole. This factor depends on the environment rather than the performance of the particularcompany. For example, events favourable to an economy, growth friendly political or regulatoryenvironment, friendly budget, stable government etc. can fuel euphoria in the investors, resultingin a boom in the market.

On the other hand, unfavourable events like thereat of a war, economic crisis, communal riots,minority government etc. depress the market irrespective of certain companies performing well.However, the effect of market-specific factors is generally short-term. Despite ups and downs,

price of a stock in the long run gets stabilized based on the stock specific factors. Therefore, aprudent advice to all investors is to analyse and invest and not speculate in shares.


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QuestionIn the equity investment world, we come across terms such as Growth stocks, Value stocks etc.What is the meaning of these terms?

Answer

There are companies whose potential for growth in sales and earnings are excellent, which aregrowing faster than other companies in the market or other stocks in the same industry. The shares

of these companies are called the Growth Stocks. These companies usually pay little or nodividends and instead prefer to reinvest their profits in their business for further expansions.

Value stock refers to stocks that have been overlooked by other investors and which may have a'hidden value'. These companies may have been beaten down in price because of some bad event,or may be in an industry that is not fancied by most investors. Even a company that has seen itsstock price decline still has assets to its name like buildings, real estate, inventories, subsidiaries,and so on. Many of these assets still have value, yet that value may not be reflected in the stock'sprice. Value investors look to buy stocks that are undervalued, and then hold those stocks until the

rest of the market realizes the real value of the company's assets. The value investors tend topurchase a company's stock usually based on relationships between the current market price of thecompany and certain business fundamentals.


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QuestionCan you please explain how one can acquire equity shares?

AnswerYou may subscribe to issues made by companies in the primary market. In the primary market, resources are mobilisedby the companies through fresh public issues or IPOs or through private placements. Alternately, you may purchaseshares from the secondary market. To buy and sell securities you should approach a SEBI registered trading member orbroker of a recognized stock exchange.

QuestionWould you throw light on dematerialization of shares and its significance?

Answer

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number ofsecurities in electronic form and credited to the investors account with his Depository Participant(DP). Prior todematerialisation the Indian stock markets had faced several problems like delay in the transfer of certificates, forgery ofcertificates etc. Dematerialisation helps to overcome these problems as well as reduces the transaction time as comparedto the physical segment.The Indian Stock markets have seen a major change with the introduction of depository system and scrip less tradingmechanism. There were various problems like inordinate delays in the transfer of share certificates, delay in receipt ofsecurities and inadequate infrastructure in banking and postal segments to handle a large volume of application andstorage of share certificates .To overcome these problems physical dealing in securities should be eliminated . The Indianstock market introduced the system of dematerialisation recognizing the need for scrip less trading.The data in respect of dematerialized shares is stored with the depository from where they can be traded. It is similar to abank where an investor opens an account with any of the depository participants. Depository participant is arepresentative of the depository .The DP maintains the investors securities account balances and intimates him about thestatus of holdings.


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QuestionPlease throw some light on the terms depository and depository participant.

Answer

A depository is an organisation which holds securities like shares, debentures, bonds, government securities, mutualfund units etc. of investors in electronic form at the request of the investors through a registered Depository Participant.It also provides services related to transactions in securities.

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and providesdepository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with theapproval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations

/clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirementsprescribed by SEBI can be registered as DP. Just as banking services can be availed through a bank branch,depository services can be availed through a DP.

QuestionCan you provide some information on the Stock Exchanges in India?

Answer

The major stock exchanges in the country are the Bombay Stock Exchange or BSE and the National Stock Exchangeor NSE. The BSE is situated at Bombay and the NSE is situated at Delhi. There are other stock exchanges like theCalcutta Stock Exchange, Pune Stock Exchange, Cochin Stock Exchnge etc. but they are not as popular as the BSEand the NSE. Most of the stock trading in the country is done though the BSE & the NSE.Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its134 years of existence. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widelyrecognized. Over the past 134 years, BSE has facilitated the growth of the Indian corporate sector by providing it withan efficient access to resources.


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QuestionWhat are the Sensex & the Nifty?

Answer

The Sensex is an "index". An index is basically an indicator. It gives you a general idea about whether most of the stocks havegone up or most of the stocks have gone down. The Sensex is an indicator of all the major companies of the BSE. The Nifty isan indicator of all the major companies of the NSE. If the Sensex goes up, it means that the prices of the stocks of most of themajor companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the majorstocks on the BSE have gone down. Just like the Sensex represents the top stocks of the BSE, the Nifty represents the topstocks of the NSE. Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an ideaabout whether the mid-cap stocks go up and down. This is called the BSE Mid-cap Index. There are many other types of

indexes. There is an index for the metal stocks. There is an index for the FMCG stocks. There is an index for the automobilestocks etc.

QuestionCan you give a brief overview of trading of securities?

AnswerThe securities are first issued in the primary market. They are then traded in the secondary market by the investors. The

stock exchanges along with a host of other intermediaries provide the necessary platform for trading in the secondarymarket. The trading on stock exchanges in India used to take place through open outcry without use of informationtechnology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits ontrading volumes and effic iency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully automated screen based trading system (SBTS) where a member can punch into the computer the quantities of asecurity and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buyorder from a counter party is found. Now all stock exchanges are following screen based trading.


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QuestionHow does an investor get access to internet based trading facility?

Answer

There are many brokers of the NSE who provide internet based trading facility to their clients. Internet based tradingenables an investor to buy/sell securities through internet which can be accessed from a computer at the investorsresidence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE brokerproviding this service to avail of internet based trading facility.

duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keepone copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to thetrading member duly acknowledged by him.

QuestionNow coming to another area, in performance analysis of companies, we often come across terms like EPS. What is meantby EPS? What is its significance?AnswerEven comparing the net profit of one company to another really doesnt make any sense, if you think about it. Net Profit willtell you nothing about how many shares the company has. Because you do not know how many shares a company has, youdo not know how many parts that companies earnings have to be divided into. If the company has more shares, theearnings will be divided into more parts.For example, companies A and B both earn Rs.100, but company A has 10 shares outstanding, so each share holder has ineffect earned Rs.10.On the other hand, if company B has 50 shares outstanding and they too have earned Rs.100 then each shareholder hasearned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the earnings.Thus it makes more sense to look at earnings per share (EPS), as a comparison tool. You calculate earnings per share bydividing the net profit by the no. of outstanding shares. Earnings Per Share is the single most popular variable in dictating ashare's price. EPS indicates the profitability of a company.EPS alone doesnt tell you whether its a good stock to buy or what the market thinks of it. For that information, we need toalso look at another important ratio, which is known as Price to Earning Ratio (P/E ratio).


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QuestionWhat is meant by Price to Earnings Ratio?

AnswerIf there is one number that people look at than more any other number, it is the Price to Earning Ratio (P/E). The P/Elooks at the relationship between the stock price and the companys earnings. The P/E is the most popular stock analysisratio, although it is not the only one you should consider.You calculate the P/E by taking the market price of the share and dividing it by the companys EPS. For example, acompany with a share price of Rs.40 and an EPS of 8 would have a P/E of 5.

QuestionWhat does P/E tell us?AnswerSome investors read a high P/E as an overpriced stock. However, it can also indicate the market has high hopes for thisstocks future and has bid up the price.

Conversely, a low P/E may indicate a vote of no confidence by the market or it could mean that the market has justoverlooked the stock. Many investors made their fortunes spotting these overlooked but fundamentally strong stocks beforethe rest of the market discovered their true worth. In short, the P/E tells you what the market thinks of a stock. It tells youwhether the market likes or dislikes the stock.


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QuestionWhat would be the best time to buy a stock?

AnswerThe best time to buy a stock is when the markets are falling and there is a fear in the minds of investors.But most of the retail investors do exactly the opposite.They sell when the markets are falling and buy when the markets are high.This will cause them to end up with losing twice - by selling low and buying high.If nothing has changed about the long-term outlook for the company that you own, then you need not sell this company's stock.Use this opportunity to buy more of the same stock in falling markets.

QuestionWhat would be the best time to buy a stock?AnswerThe best time to buy a stock is when the markets are falling and there is a fear in the minds of investors.But most of the retail investors do exactly the opposite.They sell when the markets are falling and buy when the markets are high.This will cause them to end up with losing twice - by selling low and buying high.If nothing has changed about the long-term outlook for the company that you own, then you need not sell this company's stock.Use this opportunity to buy more of the same stock in falling markets.


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QuestionWhat is SEBI and what is its role?

AnswerThe Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBIAct, 1992. SEBI has statutory powers for protecting the interests of investors in securities, promoting the development of thesecurities market and regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance ofcapital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI hasbeen obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for regulatingthe business in stock exchanges and any other securities markets, registering and regulating the working of stock brokers,sub-brokers etc.SEBI also has the role of prohibiting fraudulent and unfair trade practices, calling for information from stock exchanges,undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, mutual funds and otheraggencies associated with the securities market

QuestionCan you throw some light on the role of foreign institutional investors in Indian equity market?

AnswerForeign institutional investor means an entity established or incorporated outside India which proposes to make investment in

India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destinationfor foreign institutional investors.


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QuestionWhat could be the outlook of foreign institutional investors on investing in India?

AnswerWe should look at the fundamentals of the economy. Indian economy is growing at almost 7%. This is in contrast to theeconomy of countries like UK and Japan, which are contracting. Indian economy is mostly driven by domestic demand.60% of Indias population is below 35 years. There is greater stability at the center. These are factors which point towardsthe growth prospects of the Indian economy. For these reasons, FIIs are expected to invest more money into the Indianequity market than other emerging economies.

Adding to signs of an economic recovery, total inflow of foreign direct and portfolio investments into India jumped 5 timesto $15 billion in the April-June 2009 period compared to $3.58 billion received in the preceding quarter, as per data fromthe Reserve Bank of India.

With the economic outlook improving globally, global majors are finding a way to buck the downtrend by investing in India.In 2009 alone, India has received about US$ 5.5 billion of foreign institutional investors (FII) money out of a total of US$23 billion that has flowed into emerging markets. India has received close to 25 per cent of the portfolio funds coming intomarkets in Asia, Africa and Latin America. Until 2007, India received less than 15 per cent of the funds flowing into thesemarkets. India has become the most attractive destination for retail investment for the fourth time in five years. India hasbeen ranked as the most attractive nation for retail investment among 30 emerging markets by US-based globalmanagement consulting firm A T Kearney. According to the entity's Global Retail Development Index (GRDI), India was

placed at the second spot last year.


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QuestionCan you throw some light on hedge funds and mutual funds? What is the difference between the two?

Answer

A hedge fund is a professionally managed portfolio of investments that is typically open to a limited range ofsophisticated or wealthy investors. As the name suggests, these funds hedge their risks by offsetting potential losses byhedging their investments using different approaches, the most popular one being short selling. Nowadays, the termhedge fund is applied to funds that do not actually hedge their risks but rather increase it because they expect to

generate a higher return.

The definition of a mutual fund is a form of collective investment that pools money from many investors and invests theirmoney in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fundmanager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interestincome. The investment proceeds are then passed along to the individual investors. The value of a share of the mutualfund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided bythe number of shares currently issued and outstanding.

Mutual funds invest in a certain sector, for example, technology or use a specific approach, for example, small capgrowth. To determine whether a mutual fund has been performing well, its returns are usually compared to athe marketbenchmarks. On the other hand, hedge funds seek positive absolute returns, irrespective of the sector performance orthe market benchmark.


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QuestionIn the context of wealth management, what is the meaning of portfolio and portfolio diversification?

Answer

A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor'sgoals. Items that are considered a part of your portfolio can include any asset you own - from shares, debentures,bonds, mutual fund units to items such as gold, real estate etc. However, for most investors a portfolio has come tosignify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units.Portfolio diversification is a risk management technique that mixes a wide variety of investments within a portfolio. It isdesigned to minimize the impact of any one security on overall portfolio performance. Diversification is possibly the bestway to reduce the risk in a portfolio.

A good investment portfolio is a mix of a wide range of asset class. Different securities perform differently at any point intime, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. Whenyour stocks go down, you may still have the stability of the bonds in your portfolio. There have been all sorts of academicstudies and formulas that demonstrate why diversification is important.

QuestionWhat is your opinion about having a diversified portfolio?AnswerDiversification is one among the fundamental rules to a prosperous investment portfolio.

Most of investors neglect to properly diversify their investments address this step.Whenever an investor decides to invest into a particular industry, sector or into a particular company without diversifyingacross other investments, they are fundamentally putting all of their eggs into one basket.This move can considerably add to the investor's portfolio risk and the possibility of losing capital is very high in this.At the same time, diversifying too much will kill your investment.Beyond a point, having too many stocks in a portfolio can be of negative impact.Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies youhave invested in.


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Financial Derivatives

Futures

Options


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Unit 1 Session:1

Class:3Securities Market


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Securities Market

Structure of the Securities Market

Securities Market

Equity Market Debt Market Derivatives Market

Government

Securities Market

Corporate Debt

Market

Money

Market

Option

Market

Futures

Market


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Participants in the Securities Market Regulators

Stock Exchanges

Listed Securities

Depositories

Brokers

Foreign Institutional Investors

Merchant Bankers Primary Dealers

Mutual Funds

Custodians

Registrars

Underwriters

Bankers to an Issue

Debentures Trustees

Venture Capital Funds

Credit Rating Agencies


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Primary Equity Market

Public Issue

Rights Issue Preferential Allotment


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Secondary Equity Market ( Stock Market )

The National Stock Exchange

The Bombay Stock Exchange


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Trading and Settlement

Trading

Open Outcry System

Screen-based System


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Buying of Margin and Short Sale

Buying on Margin

Short Sale


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Government Securities Market

Primary Issue

- Participants in the G-secs Market

- SGL Account

- Primary Dealers


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Corporate Debt Market

Primary Market

Secondary Market


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Money Market

Repo Market

Treasury Bills

Certification of Deposits


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Debt market

Introduction

(A brief description of the investment avenues coveredin the earlier discussions.)


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What is the place of debt market in India economy?

For a developing economy like India, debt markets are a crucial source of funds. The debt marketin India is amongst the largest in Asia. It includes government securities the largest component -and bonds issued by public sector undertakings, other government bodies, financial institutions,banks and companies. Debt markets are now considered an alternative route to banking channelsfor finance.Can you tell what is meant by debt instruments?

Debt Instruments are obligations of issuer of such instruments as regards certain future cashflows representing Interest and Principal, which the issuer would pay to the legal owner of theInstruments. Generally debt instruments represent agreements to receive certain cash flows asper the terms contained within the agreement.Debt instruments provide fixed return declared as coupon rate. Retail investors would have anatural preference for fixed income returns and especially so in the current situation of increasingvolatility in the financial markets. Now, retail investors are also showing keen interest in Debt

Instruments particularly in the Central Government Securities (G-secs). For an individual investorG-secs are one of the best investment options as there is zero default risk and lower volatility incase of G-secs


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What are the different kinds of debt instruments?

Debt Instruments are of various types like Government securities more popularly known as

G-Secs, Corporate Bonds, Debentures, Certificate of Deposit, etc.

Will you please throw some light on these debt instruments? What are G-Secs?

G-Secs are issued by the Reserve Bank of India on behalf of the Government of India.Normally the dated government securities have a period of 1 year to 30 years. They aresovereign instruments generally bearing a fixed interest rate. Interest is payable half yearlyand principal as per schedule. For shorter term, RBI issues Treasury Bills which arediscounted papers. At present T-Bills are issued for 91 days, 182 days & 364 days. G-Secsprovide risk free return to investors.What about Corporate Bonds?

Corporate Bonds are issued by public sector undertakings and private corporations for awide range of tenors normally upto 15 years. Some corporates have also issued perpetualbonds also. Compared to government bonds, corporate bonds generally have a higher riskof default. This risk depends, of course, upon the particular corporation issuing the bond,the current market conditions, the industry in which it is operating and the rating of thecompany. Corporate bond holders are compensated for this risk by receiving a higher yieldthan government bonds.


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Would you tell something about Certificate of Deposit?

Certificate of Deposit, known as CDs are negotiable money market instruments issuedin demat form or as a Usance Promissory Notes. CDs issued by banks should have amaturity of not less than seven days and not more than one year. Financial Institutions areallowed to issue CDs for a period between 1 year and up to 3 years. CDs normally give ahigher return than Bank term deposit. CDs are rated by approved rating agencies likeCARE, ICRA, CRISIL, FITCH etc. which considerably enhances their tradability insecondary market. CDs are issued in denominations of Rs.1 Lac and in multiples of Rs. 1Lac thereafter.

Now, please throw some light on Commercial Papers.

A CP is a short term security with a term of 7 days to 365 days, issued by a corporateentity other than a bank, at a discount to the face value. One can invest in CPs startingfrom a minimum of 5 lacs and its multiples. CPs are also rated by approved ratingagencies like CARE, ICRA, CRISIL and FITCH. CPs normally give a higher return thanfixed deposits and CDs. CPs can be traded in the secondary market, depending upondemand. An element of credit risk is attached to CPs.


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What about avnues like Post Office deposits, National Savings Certificates etc? Can

you please throw some light on Post Office term deposits?

Those are all good investment avenues for individuals. Individuals can invest in Post OfficeTerm Deposits for periods ranging from one year to five years. Minimum deposit s Rs.200while there is no maximum limit. Interest is paid at the end of each year during the periodof the deposit and principal is paid only after the expiry of the period for which it is made.But there is re-mature encashment facility after 6 months. The scheme has got certain taxbenefits. While there is no deduction of income tax at source, tax exemption is available oninvestment in Five-Year Time Deposit Account U/S 80C of the IT Act.

National Savings Certificate is a very popular scheme. Can you give some details

about this scheme?

NSC is also a good investment scheme for individuals. Minimum investment Rs. 500/- andthere is no maximum limit. Only individuals can invest in this scheme and not companies,Trusts, Societies and any other Institutions. There is no pre-mature encashment provision.NSCs can be purchased from any Post Office. Certificate can be pledged as security

against a loan to banks/ Govt. Institutions. Tax benefits are available on amounts investedin NSC under section 80C. However, interest accrued on the NSC is liable to tax. Interestaccrued for any year, during the first 5 years, can be treated as fresh investment in NSCfor that year and tax benefits can be claimed under section 80C. Deposits are exempt fromWealth tax.


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What about National Savings Scheme?

Deposits are not accepted under National Savings Scheme (NSS), 1992 on or after01.11.2002. For deposits made upto 31.10.2002, interest at the rate of 8.50 per cent perannum upto 28.02.2003 and thereafter at the rate of 7.50% will be credited annually on1st April. The interest is taxable.

Please throw some light on Public Provident Fund scheme.

PPF accounts can be opened only by individuals. Apart from a Post Office, a PPFaccount can also be opened in SBI and its associates and other select nationalizedbanks. Min Amount which can be invested in PPF scheme is Rs. 500/- per year andmaximum amount is Rs. 70,000/- per year. Maturity period is 15 years. Loan availableafter 3rd year onwards upto max of 25% of balance at the end of 2 years preceding.Partial withdrawal is allowed after 7 years. Interest at 8.00% p.a. compounded annuallyis credited to the PPF account at the end of each financial year. Tax benefits can beavailed under sections 80C for the amount invested. Interest is totally exempt fromincome-tax.


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Bank deposits and company deposits are two very popular modes of investments. Most people must be aware these schemes. Can youplease make a comparison of bank deposits and company deposits?

As debt instruments go, the one avenue that comes across as a potential alternative to bank deposits in this falling interest rate scenario is companydepositsfixed deposits issued by companies, which can be bought either from the companies themselves or from distributors of financial products. Theprofile of company deposits matches closely with bank deposits. Like bank deposits, they too offer a range of tenures (six months to five years) andinterest payment options (monthly, quarterly, half-yearly, annual and cumulative). They compare well on liquidity too. You can break a company depositanytime after six months, at the cost of paying a prepayment penalty, normally about a percentage point lower than the applicable rate for the duration ofyour deposit.Where company deposits differ from bank deposits is the degree of safety they offer. While your deposits in a bank are insured up to Rs 1 lakh, no suchassurance comes with company deposits. Company deposits are, in fact, unsecured instrumentsthey are not backed by physical assets. Further, if thecompany goes belly up, the liabilities of deposit holders wil l only be met after all obligations to secured creditors are fulfil led. Given the various legalitiesinvolved with liquidation in the country, speedy redress is unlikely. You can approach the Company Law Board or a consumer court, but theres noassurance whether and when you will recover your deposit.The risk in company deposits is real. Scores of companies, have defaulted in the past, including some prominent names. The risk exists, but it can bemanaged, by investing only in companies that have high credit-worthiness. A good indicator of a companys credit-worthiness is its credit rating. Thehigher a companys credit rating, the stronger its ability to meet its debt obligations. Therefore, the higher you go on the ratings scale, the lower your risk.

Although credit rating agencies classify investment grade paper at BBB and above, we would advise you to peg this benchmark at AA, as it gives you asafety buffer. A company whose deposit programme is rated BBB is closer to junk paper status than one with a rating of AA, and you might not get achance to exit in case things turn bad.However, interest earned from both bank deposits & company deposits are liable to tax as deduction under Section 80L has been withdrawn with effectfrom the Assessment Year 2006-07.So, given the risk gradation that exists, why should you be looking at company deposits at all for greater returns? Companies compensate for theabsence of assurances on meeting commitments by offering higher returns.In fact, the mark-up in returns within the gamut of fixed deposits is largely a function of the degree of safety on offer. As the risk increases, so do thereturns.Bank deposits are the lowest on the fixed deposits risk scale, as they offer the government guarantee. HFCs follow banks. As is apparent from the table,HFCs offer a mark-up in coupon of up to 2 percentage points on a one-year deposit, depending on their credit rating. Further, this mark-up increases withtenure.Trailing HFCs are government and state government companies, and their subsidiaries, as their government patronage provides an implicit assurance ofsafety. They are followed by manufacturing companies and NBFCs. Unlike NBFCs, its not mandatory for manufacturing companies to get their depositsrated. In fact, many manufacturing companies selling deposits either dont have credit ratings or prefer not to publish them. Treat such companies with apinch of salt. Most manufacturing companies selling deposits opt not to get themselves rated because they know they wil l get an inferior rating. So, betterto have no rating at all than have to show an inferior rating. A tacit admission of this inferior rating is the higher returns on offer from unrated companies


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What is your opinion on gold as an investment avenue?

Since 2001 gold has been an attractive investment with an yield higher than on many other assets. Thatyield came from the price of gold which has consistently risen in the past eight years.In the Indian market, the price of gold had shot up from Rs.1,180 per gram to Rs.1,470 in the last one yearthough the international price of gold was more or less stable. Gold became more costly in India onlybecause the rupee depreciated against the dollar.Gold has been a traditional form of investment apart from being a favorite gift at marriages and festivals.That is because, earlier, there were no alternative assets, except land, to invest in and, unlike land, gold wasthe most liquid asset with a ready market at all times and in all places.Even today, when there are good alternative assets available, gold continues to attract a good deal ofinvestment. Gold imports have been in the range of 400 to 800 tons per year and the total stocks of gold inIndia have exceeded 13,000 tons. That makes India the largest buyer of gold in the international market. Thedemand for gold this year has however been down partly because the price of gold has been high.The price of gold has gone through long cycles. In the last eight years prices trebled.

Will gold continue to be a good investment?

Not in the short run. For, the bullion market is likely to be over-supplied with gold.IMF will release 403 tons of gold to raise money to counter recession by investing in affected developingcountries. China, which is holding huge reserves of gold, is also likely to go to the market to sell. Besides,the demand for gold for jewellery is declining. As such, in the next year or two the price of gold is likely to be

steady or even decline.Investors will be looking for other options. Bank deposits may not be as attractive because the interest ratesare now down to 7.5 per cent. The market for equity has been improving because of better risk appetite onthe part of investors and, before the end of the year, is likely to be on the upswing. That will divert investmentfrom gold to securities which will earn a better return.In the longer run it may be a different story. Production of gold has been declining with the maturing of goldmines. Worse still, hardly any new sources of gold have been discovered. Hence gold supply will shrink andprices over time will rise to make gold a good investment though not better than equity.


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Can investment in gold be made though demat account?Can investment in gold be made though demat account?

Yes, it is possible. You can buy gold in quantities as small as one gram and keep theYes, it is possible. You can buy gold in quantities as small as one gram and keep thesame in your demat account, just as in the case of shares. It would be prudent to buysame in your demat account, just as in the case of shares. It would be prudent to buywhen the prices are not going up or when they remain more or less stable. You can getwhen the prices are not going up or when they remain more or less stable. You can get

the gold kept in demat account converted to physical form whenever you want with thethe gold kept in demat account converted to physical form whenever you want with thehelp of an authorized broker.help of an authorized broker.


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Q & ASession


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Describe the features of the following investment alternatives:

Bank Deposit Monthly income scheme of P O National Saving certificate National Savings Scheme Company Deposit EPF PPF S Citizen scheme Govt securities RBI Relief Bond Bonds Debentures LIC Pension Scheme

2) Describe the features of Equity. Explain the difference between equity and Debt

3) Describe the features of M F (Mutual Fund)

4) What is close ended and open ended scheme in M F

5) What is growth,, index,sectoral,gilt shames in MF,

6) What is equity based and income based scheme in MF

7) What is a balanced scheme in MF


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Session No 2

1)What is book building?

2) What is private placement?

3) What is private Equity?

4) Who are the depositories?

5) What is screen based trading?

6) Describe in few words features of NSE and BSE

7) Describe the process of buying and selling shares

8) Why people invest in company debentures?

9) What is primary market?

10) What is secondary market?

11) Describe the following market

A) Stock Market B)Commodity market C)Foreign Exchange Market D)Money Market)Capital Market

12) What is NSDL and CSDL?Explain

13) Risk and Return

14) Bull market

15) Bear Market


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What is a Balance Sheet?Explain

Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities Current assets Provisions Fixed assets

Investments Loans and advances Miscellaneous Expenses What is a Profit and Loss

account?Explain:

Income/Revenue Sales

Expenditure Material and other expenditures Interest Profit after Tax Profit before tax Provision for tax Profit available for appropriation

What is appropriation?Explain

Debenture redemption reserve D/W General Reserve Surplus earned to B/S Return

YieldExplain

Net sales Cost of goods sold Depreciation Gross Profit Operating expenses Operating profit

Non operating surplus/deficit Profit before interest and tax Interest Profit before tax

Session 3


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Session 4

Cash Flow Statement:

ExplainSources of CashIncrease in liabilities/owners equityDecrease in AssetsUses of CashDecrease in Liabilities and owners equityIncrease in assets

Explain the following with reference to Cash flow

Sources

Increase in reserve and surplusIncrease in term LoansIncrease in inter corporate depositIncrease in trade creditIncrease in advance taken

Increase in provisionsDecrease in advances given

Use

Increase in Fixed assets (net)Increase in DebtorsIncrease in inventories


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Financial Ratios

Explain

Liquidity RatiosLeverage RatiosTurnover RatiosProfitability RatiosValuation Ratios

Explain

Liquidity ratioCurrent ratioAcid test RatioCash Ratio

Explain

Leverage RatioDebt equity ratioDebt asset RatioInterest coverage RatioFixed coverage ratioDebt service coverage ratio

Explain

Turnover ratioInventory turnover ratioAverage collection PeriodFixed assets TurnoverTotal assets turnover

Explain

Profitability RatiosGross profit Margin ratioNet profit margin ratioReturn on total assetsEarning PowerReturn on equity

Explain Valuation ratios

PESYieldMarket value to Book value ratio

Application of ratiosDo the enclosed Exercise

Session 5


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Session 6

Explain assets allocation under portfolio both debt and equity andwork out the risk and return on different the basis of appetitive for risk

If you are having a investment fund of Rs one lakh and you have beenasked to work out the asset allocation under real estate, equity, debtand Gold etc give the allocation of assets if you are aged 25,40, 50,70,80 assuming different risk appetite and why?


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Session 7

Explain the different types of money market instruments?

Treasury Bills,CD, CP,Govt security

Explain the followingsStraight BondsZero coupon BondsFloating rate BondsConvertible Bonds

Explain the Bond Features

CollateralSinking FundProtective covenantsWhat are the risks associated with bonds? Explain the followings

Interest rate riskInflation riskReal interest rate riskDefault riskCall riskLiquidity risk


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Thank You

Q & A

Session

Documents

Presentation - Part 1 - YS Hegde - Class 2 (1)