Riyaz Khan (CA CS (Exec) MBA (Fin) Asst. General Manager-SEBI Internal Auditor-British Certifications Inc.) (1315 Points)
12 June 2009Hi Everyone, I need some help on following quesions :-
1. Wht is NCFM Course ?
2. Wht is its value, Fees, Duration and proceedure ?
3. Is it beneficial for a Chartered Accountant to pursue ?
Thanx in Advance...
Saurabh Agarwal
(none)
(28 Points)
Replied 12 June 2009
| Originally posted by :R.D Khan | ||
| " | Hi Everyone, I need some help on following quesions :- 1. Wht is NCFM Course ? 2. Wht is its value, Fees, Duration and proceedure ? 3. Is it beneficial for a Chartered Accountant to pursue ? Thanx in Advance... |
" |
HI,
NCFM is course conducted by National Stock Exchange as a minimum eligibilty for thier brokers & it runs for education purpose.
there is no duration boundation it conductes online every month there are about 15 courses avialble fess aprox. 1500-3000.
i dont think so it is much benificial to a CA untill u are intrested in share market.
Prince
(Student)
(151 Points)
Replied 12 June 2009
go to nseindia.com for courses offered and there fees and procedure to apply
everything is on the website....and yes there is no duration ...u can sit for exam even one day after registering ..
as sourabh said...if u have interest in share market then only its beneficial...otherwise no use..
Sumit Middha
(Head (Fin.& A/c) M.COM M.A.(Eco) MBA CS Final)
(2453 Points)
Replied 13 June 2009
plz visit www.nseindia.com
Sumit Middha
(Head (Fin.& A/c) M.COM M.A.(Eco) MBA CS Final)
(2453 Points)
Replied 13 June 2009
Sumit Middha
(Head (Fin.& A/c) M.COM M.A.(Eco) MBA CS Final)
(2453 Points)
Replied 13 June 2009
Sumit Middha
(Head (Fin.& A/c) M.COM M.A.(Eco) MBA CS Final)
(2453 Points)
Replied 13 June 2009
Modules
NCFM currently tests expertise in the following modules:
Test details and fees for the above mentioned modules
Financial Markets: A Beginners' Module
This module has been prepared for those who are keen to acquire some basic but key information about the stock markets as an initial step towards becoming a more informed investor. This module will act as a means of satisfying some of the initial queries on the stock markets and has been prepared with the objective of introducing the functioning and role of the financial markets in India to all those interested in this topic
Curriculum of this module
Study material for this module
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Mutual Funds : A Beginners' Module
This module has been prepared with a view to educate and create awareness about the role and function of mutual funds, the different mutual funds products being offered in the markets, risk profile of different products, the advantages of investing in mutual funds. This module would be useful for first time investors in mutual funds, young students and anyone wanting to know about the basics of mutual funds.
Note : This module is not for becoming AMFI Certified Mutual Fund Advisors. For that refer to AMFI-Mutual Fund (Advisors) Module.
Curriculum of this moduleStudy material for this module
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Securities Market (Basic) Module
This module equips the candidates with the knowledge and fundamentals of the securities market as a whole.
Curriculum of this moduleStudy material for this module
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Capital Market (Dealers) Module
This module equips the candidates with the knowledge and skills required for dealers in the capital market operations.
Candidates have the option to take the test in English, Gujarati and Hindi languages. The workbook for the module is available in English only. For details please click here.
Curriculum of this moduleStudy material for this module
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Derivatives Market (Dealers) Module
SEBI Committee on `Regulatory Framework for Financial Derivatives in India’ had recommended that all brokers-members and sales persons/dealers in the derivatives market must pass a certification programme. Based on the Committee’s recommendations, SEBI issued guidelines for the conduct of the certification examination. The Derivatives Market (Dealers) Module certifies brokers-members and sales persons/dealers in the derivatives market.
Candidates have the option to take the test in English, Gujarati and Hindi languages. The workbook for the module is also available in English, Gujarati and Hindi languages. For details please click here.
Curriculum of this moduleStudy material for this module: English | Gujarati.
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FIMMDA-NSE Debt Market (Basic) Module
This module equips the candidates with the knowledge and skills required in debt market operations.
Curriculum of this moduleStudy material for this module
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NSDL - Depository Operations Module
This is an initiative of NSDL to accelerate the pace of professionalisation of the depository operations. This module equips the candidates seeking employment with depository participants and thereby helps in fast dematerialisation of securities.
Curriculum of this moduleStudy material for this module
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Commodities Market Module
The module equips the candidates with the knowledge and skills required for dealers in Commodities Market Module
Curriculum of this module
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AMFI - Mutual Fund (Basic) Module
AMFI - Mutual Fund (Advisors) Module
These two modules have been developed by Association of Mutual Funds in India to build a cadre of mutual fund advisors and disseminate knowledge about the working of the mutual funds.
AMFI- Mutual Fund (Advisors) Module is presently available in English, Gujarati and Hindi languages. The workbook for the module, which is available for a fee at AMFI, remains in English but the online test will be conducted in Gujarati and Hindi languages.
Curriculum of these modules: Basic ModuleAdvisors Module
The study material for these two modules is available for sale at AMFI's office :
ASSOCIATION OF MUTUAL FUNDS IN INDIA
706-708, BALARAMA
BANDRA-KURLA COMPLEX
BANDRA (EAST)
MUMBAI - 400 051
Telephone Nos.: 26590206 / 26590243 / 26590246 / 26590382
Fax Nos.: 66101889 / 66101916
e-mail: amfi @ bom5.vsnl.net.in
Website : www.amfiindia.com
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Surveillance in Stock Exchanges Module
This module has been developed pursuant to the desire of the Inter-Exchange Market Surveillance Group of SEBI to have a certified training programme for the surveillance staff of the stock exchanges. The module seeks to equip the surveillance staff with the art and science of surveillance in the stock market transactions.
Curriculum of this moduleStudy material for this module
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Corporate Governance Module
This module has been jointly developed by National Stock Exchange of India Limited (NSEIL) and The Institute of Company Secretaries of India (ICSI) to strengthen knowledge on Corporate Governance.
Curriculum of this module
Study Material
The study material for this module is available at the following ICSI’s offices:
Compliance Officers (Brokers) Module
Compliance Officers (Corporates) Module
Market intermediaries need to have comprehensive knowledge and a proper understanding of the Acts governing the Securities Markets, Rules and Regulations of the Exchange, Listing Procedures, etc. A proper understanding and knowledge of these rules and regulations would enable an organization to adhere to the required compliance standards and not fall short of meeting any existing guidelines. Compliance Officers modules tests the candidates on their knowledge of the relevant rules, regulations and guidelines governing the securities markets and corporates.
Compliance Officers (Brokers) Module: Curriculum
Compliance Officers (Corporates) Module: Curriculum
Candidates are required to refer to the relevant books, circulars, manuals etc., as per the given curriculum, on their own. No study material will be provided for the Compliance Officers Modules.
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Information Security Auditors Module (Part-1)
Information Security Auditors Module (Part-2)
Information security is gaining in importance in today’s corporate environment where a vast amount of information is being processed by organisations on a day to day basis. A well defined, objective, information security audit should form a part of every organization’s policy. Confidentiality, integrity and timely availability of information are critical, for implementing efficient business processes. An information security audit is one of the best ways to determine the security of an organization’s information. Information security is not just technology related security but much more than that, covering physical and environmental security, access controls, business continuity planning etc. A timely and comprehensive assesement of information security systems and policies within the organisation, helps in avoiding the cost and other associated damages of a future security incident. Even today, it is possible to find a number of organizations where a written security policy does not exist. When security practices are unwritten or informal, there is a greater risk of them being misinterpreted or ineffectively executed leading to a costly breach or security lapse which could have severe ramifications for an organization.
The Information Security Auditors Module has been developed for those involved with or interested to know about information security related issues in the financial markets.
The module consists of two parts: Information Security Auditors Module (Part-1) and Information Security Auditors Module (Part-2) of 2 hours duration each. On successfully clearing both the parts, a candidate would be provided with a 'Certified Information Security Auditor for Financial Markets' certification.
The module is being developed with the assistance of iSec Services Pvt. Ltd. (iSec), which is an information security consulting company providing information security compliance, assurance, audit, training etc.
Contact details of iSec Services Pvt. Ltd.
Delhi: B 1/1810, Vasant Kunj
New Delhi - 110 070
Telefax: (011) 26123369
Mumbai: B 102, Patliputra CHS
4, Bunglows
Mumbai - 400 053
Telefax: (022) 26300209
Email: contactus @ isec.co.in
Website:www.isec.co.in / www.isectrain.com
Curriculum of this module
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Modules of Financial Planning Standards Board India (Certified Financial Planner certification)
Currently, tests in four modules of FPSB India namely (i) Risk Analysis & Insurance Planning (ii) Retirement Planning & Employee Benefits (iii) Investment Planning and (iv) Tax Planning & Estate Planning are conducted “Live” i.e. on real time basis. For any query for the said test(s), contact FPSB India at: Tel No 022-66663268 / 66663314 Ext :17 email: info @ fpsbindia.org website: https://www.fpsbindia.org
Options Trading Strategies Module
Exchange-traded options form an important class of derivatives which have standardized contract features and trade on public exchanges, facilitating trading among investors. They provide settlement guarantee by the Clearing Corporation thereby reducing counterparty risk. Options can be used for hedging, taking a view on the future direction of the market or for arbitrage. Options are also helpful for implementing various trading strategies such as straddle, strangle, butterfly, collar etc. which can help in generating income for investors under various market conditions.
This module is being introduced to explain some of the important and basic Options strategies. The module would be of interest to traders, investors, students and anyone interested in the options markets. However, it is advisable to have a very good knowledge about the basics of Options or clear the NCFM Derivatives Markets (Dealers) Module before taking up this module. There are 22 Options strategies covered in this module and the tests are based on these 22 strategies.
Curriculum of this moduleStudy material for this module
Sumit Middha
(Head (Fin.& A/c) M.COM M.A.(Eco) MBA CS Final)
(2453 Points)
Replied 13 June 2009
Copyright © 2009 by National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 INDIA All content included in this book, such as text, graphics, logos, images, data compilation etc. are the property of NSE. This book or any part thereof should not be copied, reproduced, duplicated, sold, resold or exploited for any commercial purposes. Furthermore, the book in its entirety or any part cannot be stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise. 1 CONTENTS 1. INVESTMENT BASICS What is Investment?
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Why should one invest? When to start Investing? What care should one take while investing? What is meant by Interest? What factors determine interest rates? What are various options available for investment? What are various Short-term financial options available for investment? What are various Long-term financial o ptions available for investment? What is meant by a Stock Exchange? What is an ‘Equity’/Share? What is a ‘Debt Instrument’? What is a Derivative? What is a Mutual Fund? What is an Index? What is a Depository? What is Dematerialization? 2. SECURITIES What is meant by ‘Securities’? What is the function of Securities Market? Which are the securities one can invest in? 2.1 R Why does Securities Market need Regulators? Who regulates the Securities Market? What is SEBI and what is its role? 2.2 P Who are the participants in the Securities Market? Is it necessary to transact through an intermediary? What are the segments of Securities Market? 3. PRIMARY MARKET What is the role of the ‘Primary Market’? What is meant by Face Value of a share/debenture? What do you mean by the term Premium and Discount in a Security Market? 3.1 I Why do companies need to issue shares to the public? What are the different kinds of issues? What is meant by Issue price? What is meant by Market Capitalisation? What is the difference between public issue and private placement? What is an Initial Public Offer (IPO)? 2 Who decides the price of an issue? What does ‘price discovery through Book Building Process’ mean? What is the main difference between offer of shares through book building and offer of shares through normal public issue? What is Cut-Off Price? What is the floor price in case of book building? What is a Price Band in a book built IPO? Who decides the Price Band? What is minimum number of days for which a bid should remain open during book building? Can open outcry system be used for book building? Can the individual investor use the book building facility to make an application? How does one know if shares are allotted in an IPO/offer for sale ? What is the timeframe for getting refund if shares not allotted? How long does it take to get the shares listed after issue? What is the role of a ‘Registrar’ to an issue? Does NSE provide any facility for IPO? What is a Prospectus? What does ‘Draft Offer document’ mean? What is an ‘Abridged Prospectus’? Who prepares the ‘Prospectus’/‘Offer Documents’? What does one mean by ‘Lock-in’? What is meant by ‘Listing of Securities’? What is a ‘Listing Agreement’? What does ‘Delisting of securities’ mean? What is SEBI’s Role in an Issue? Does it mean that SEBI recommends an issue? Does SEBI tag make one’s money safe? 3.2 F Can companies in India raise foreign currency resources? What is an American Depository Receipt? What is an ADS? What is meant by Global Depository Receipts? 4. SECONDARY MARKET 4.1 I What is meant by Secondary market? What is the role of the Secondary Market? What is the difference between the Primary Market and the Secondary Market? ..........................................................................................................................................................27 4.1.1 Stock Exchange What is the role of a Stock Exchange in buying and selling shares? What is Demutualisation of stock exchanges? How is a demutualised exchange different from a mutual exchange? Currently are there any demutualised stock exchanges in India? 4.1.2 Stock Trading What is Screen Based Trading? What is NEAT? How to place orders with the broker? 3 How does an investor get access to internet based trading facility? What is a Contract Note? What details are required to be mentioned on the contract note issued by the stock broker? What is the maximum brokerage that a broker can charge? Why should one trade on a recognized stock exchange only for buying/selling shares? How to know if the broker or sub broker is registered? What precautions must one take before investing in the stock markets? What Do’s and Don’ts should an investor bear in mind when investing in the stock markets? 4.2 P What are the products dealt in the Secondary Markets? 4.2.1 Equity Investment Why should one invest in equities in particular? What has been the average return on Equities in India? Which are the factors that influence the price of a stock? What is meant by the terms Growth Stock / Value Stock? How can one acquire equity shares? What is Bid and Ask price? What is a Portfolio? What is Diversification? What are the advantages of having a diversified portfolio? 4.2.2. Debt Investment What is a ‘Debt Instrument’? What are the features of debt instruments? What is meant by ‘Interest’ payable by a debenture or a bond? What are the Segments in the Debt Market in India? Who are the Participants in the Debt Market? Are bonds rated for their credit quality? How can one acquire securities in the debt market? 5. DERIVATIVES What are Types of Derivatives? What is an ‘Option Premium’? What is ‘Commodity Exchange’? What is meant by ‘Commodity’? What is Commodity derivatives market? What is the difference between Commodity and Financial derivatives? 6. DEPOSITORY How is a depository similar to a bank? Which are the depositories in India? What are the benefits of participation in a depository? Who is a Depository Participant (DP)? Does one need to keep any minimum balance of securities in his account with his DP? What is an ISIN? What is a Custodian? 4 How can one convert physical holding into electronic holding i.e. how can one dematerialise securities? Can odd lot shares be dematerialised? Do dematerialised shares have distinctive numbers? Can electronic holdings be converted into Physical certificates? Can one dematerialise his debt instruments, mutual fund units, government securities in his demat account? 7. MUTUAL FUNDS What is the Regulatory Body for Mutual Funds? What are the benefits of investing in Mutual Funds? What is NAV? What is Entry/Exit Load? Are there any risks involved in investing in Mutual Funds? What are the different types of Mutual funds? What are the different investment plans that Mutual Funds offer? What are the rights that are available to a Mutual Fund holder in India? What is a Fund Offer document? What is Active Fund Management? What is Passive Fund Management? What is an ETF? 8. MISCELLANEOUS 8.1 C What are Corporate Actions? What is meant by ‘Dividend’ declared by companies? What is meant by Dividend yield? What is a Stock Split? Why do companies announce Stock Split? What is Buyback of Shares? 8.2 I What is the Nifty index? 8.3 C What is a Clearing Corporation? What is Rolling Settlement? What is Pay-in and Pay-out? What is an Auction? What is a Book-closure/Record date? What is a No -delivery period? What is an Ex-dividend date? What is an Ex-date? What recourses are available to investor/client for redressing his grievances? What is Arbitration? What is an Investor Protection Fund? 9. CONCEPTS & MODES OF ANALYSIS What is Simple Interest? What is Compound Interest? What is meant by the Time Value of Money? How is time value of money computed? 5 What is Effective Annual return? How to go about systematically analyzing a company? What is an Annual Report? Which features of an Annual Report should one read carefully? What is a Balance Sheet and a Profit and Loss Account Statement? What is the difference between Balance Sheet and Profit and Loss Account Statements of a company? What do these sources of funds represent? What is the difference between Equity shareholders and Preferential shareholders? What is the difference between secured and unsecured loans under Loan Funds? What is meant by application of funds? What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’, ‘Net Block’ and Capital-Work in Progress’ mean? What are Current Liabilities and Provisions and Net Current Assets in the balance sheet? How is balance sheet summarized? What does a Profit and Loss Account statement consists of? What should one look for in a Profit and Loss account? 10. RATIO ANALYSIS 6 1. Investment Basics What is Investment? The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Why should one invest? One needs to invest to: § § § One of the important reasons why one needs to invest wisely is to meet the cost of The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year. When to start Investing? The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and 7 the interest or dividend earned on it, year after year. The three golden rules for all investors are: § § § What care should one take while investing? Before making any investment, one must ensure to: 1. obtain written documents explaining the investment 2. read and understand such documents 3. verify the legitimacy of the investment 4. find out the costs and benefits associated with the investment 5. assess the risk-return profile of the investment 6. know the liquidity and safety aspects of the investment 7. ascertain if it is appropriate for your specific goals 8. compare these details with other investment opportunities available 9. examine if it fits in with other investments you are considering or you have already made 10. deal only through an authorised intermediary 11. seek all clarifications about the intermediary and the investment 12. explore the options available to you if something were to go wrong, and then, if satisfied, make the investment. These are called the What is meant by Interest? When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan. What factors determine interest rates? When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the 8 Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fixed deposits etc. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are: § § § § § determine some of the variables mentioned above What are various options available for investment? One may invest in: § and/or § instrume nts with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc. What are various Short-term financial options available for investment? Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options: Savings Bank Account use, which offers low interest (4%-5% p.a.), making them only marginally better than fixed deposits. Money Market or Liquid Funds funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield 9 better returns than savings accounts, but lower than bank fixed deposits. Fixed Deposits with Banks and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns. What are various Long-term financial options available for investment? Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc. Post Office Savings: risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely. Public Provident Fund: maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any. Company Fixed Deposits: medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits 10 where the entire principal alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes. Bonds: more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called Mutual Funds: which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversification. Mutual fund units are issued and redeemed by the the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments. What is meant by a Stock Exchange? The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange. What is an ‘Equity’/Share? Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 11 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights. What is a ‘Debt Instrument’? Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In the Indian securities markets, the term ‘ instruments issued by the Central and State governments and public sector organizations and the term ‘ private corporate sector. What is a Derivative? Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about twothirds of total transactions in derivative products. What is a Mutual Fund? A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in 12 various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme. What is an Index? An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards. What is a Depository? A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. What is Dematerialization? Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his 13 2. SECURITIES What is meant by ‘Securities’? The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government. What is the function of Securities Market? Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’. Which are the securities one can invest in? § § § § securities market can invest in. 14 2.1 Regulator Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. Who regulates the Securities Market? The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). What is SEBI and what is its role? The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermedia ries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for: § markets § etc. § § § inquiries and audits of the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and other persons associated with the securities market. 15 2.2 Participants Who are the participants in the Securities Market? The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc. While the corporates and government raise resources from the securities market to meet their obligations, it is households that invest their savings in the securities market. Is it necessary to transact through an intermediary? It is advisable to conduct transactions through an intermediary. For example you need to transact through a trading me mber of a stock exchange if you intend to buy or sell any security on stock exchanges. You need to maintain an account with a depository if you intend to hold securities in demat form. You need to deposit money with a banker to an issue if you are subscribing to public issues. You get guidance if you are transacting through an intermediary. Chose a SEBI registered intermediary, as he is accountable for its activities. The list of registered intermediaries is available with exchanges, industry associations etc. What are the segments of Securities Market? The securities market has two interdependent segments: the primary (new issues) market and the secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. 16 3. PRIMARY MARKET What is the role of the ‘Primary Market’? The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. What is meant by Face Value of a share/debenture? The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also known as par value or simply par. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government securities and corporate bonds have a face value of Rs. 100). The price at which the security trades depends on the fluctuations in the interest rates in the economy. What do you mean by the term Premium and Discount in a Security Market? Securities are generally issued in denominations of 5, 10 or 100. This is known as the Face Value or Par Value of the security as discussed earlier. When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a Discount. 17 3.1 Issue of Shares Why do companies need to issue shares to the public? Most companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. What are the different kinds of issues? Primarily, issues can be classified as a 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 relatively simpler. The classification of issues is illustrated below: Initial Public Offering (IPO fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. A follow on public offering (Further Issue) company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential issue listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in 18 the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc. What is meant by Issue price? The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price. What is meant by Market Capitalisation? The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company A is Rs. 12000 million. Classification of Issues Issues Rights Preferential Initial Public Offering Public Further Public Offering Fresh Issue Offer for Sale Fresh Issue Offer for Sale 19 What is the difference between public issue and private placement? When an issue is not made to only a select set of people but is open to the general public and any other investor at large, it is a public issue. But if the issue is made to a select set of people, it is called private placement. As per Companies 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. What is an Initial Public Offer (IPO)? An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues, one where company and Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). What does ‘price discovery through Book Building Process’ mean? Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. 20 What is the main difference between offer of shares through book building and offer of shares through normal public issue? Price shares through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. In case of Book Building, the is being built. But in case of the public issue the demand is known at the close of the issue. What is Cut-Off Price? In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock. What is the floor price in case of book building? Floor price is the minimum price at which bids can be made. What is a Price Band in a book built IPO? The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor pric e. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the relevant website and the terminals of the trading me mbers participating in the book building process. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding ten days. 21 Who decides the Price Band? It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers. What is minimum number of days for which a bid should remain open during book building? The Book should remain open for a minimum of 3 days. Can open outcry system be used for book building? No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building. Can the individual investor use the book building facility to make an application? Yes. How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted? As per SEBI guidelines, the Basis of Allotment should be completed with 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account / allotment advice and despatch of refund order needs to be completed. So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not. How long does it take to get the shares listed after issue? It would take around 3 weeks after the closure of the book built issue. 22 What is the role of a ‘Registrar’ to an issue? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Does NSE provide any facility for IPO? Yes. NSE’s electronic trading network spans across the country providing access to investors in remote areas. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. Book Building through the NSE system offers several advantages: § § using the latest electronic trading systems § § process The IPO market timings are from 10.00 a.m. to 3.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager. What is a Prospectus? A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of 23 information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting short term and long term prospects of the company. What does ‘Draft Offer document’ mean? ‘Offer document’ means and of Companies (ROC) and Stock Exchanges (SEs). An offer document covers all the relevant information to help an investor to make his/her investment decision. ‘Draft Offer document’ means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/SEs. SEBI may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. What is an ‘Abridged Prospectus’? ‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. It accompanies the application form of public issues. Who prepares the ‘Prospectus’/‘Offer Documents’? Generally, the public issues of companies are handled by who are responsible for getting the project appraised, finalizing the cost of the project, profitability estimates and for preparing of ‘Prospectus’. The ‘Prospectus’ is submitted to SEBI for its approval. 24 What does one mean by ‘Lock-in’? ‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time. SEBI guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue. What is meant by ‘Listing of Securities’? Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading. What is a ‘Listing Agreement’? At the time of listing securities of a company on a stock exchange, the company is required to enter into a listing agreement with the exchange. The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange. What does ‘Delisting of securities’ mean? The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. What is SEBI’s Role in an Issue? Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI’s observation letter is three months only i.e. the company has to open its issue within three months period. 25 Does it mean that SEBI recommends an issue? SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document. Does SEBI tag make one’s money safe? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against relying on any ‘tips’ or news through unofficial means. 3.2 Foreign Capital Issuance Can companies in India raise foreign currency resources? Yes. Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue of ordinary shares through depository receipts namely ‘Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)’ to foreign investors i.e. to the institutional investors or individual investors. What is an American Depository Receipt? An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of American Depositary Shares ("ADSs"). The term is often used to refer to the ADSs themselves. 26 What is an ADS? An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the company 's home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs can be represented by a physical ADR certificate. The terms ADR and ADS are often used interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on the New York Stock Exchange ( and the over-the-counter ( Although ADSs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with an investment in a non-U.S. company. What is meant by Global Depository Receipts? Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be used in public or private markets inside or outside US. GDR, a negotiable certificate usually represents company’s traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares. 27 4. SECONDARY MARKET 4.1 Introduction What is meant by Secondary market? Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. What is the role of the Secondary Market? For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. What is the difference between the Primary Market and the Secondary Market? In the primary market, securities are offered to public for subscripttion for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. 28 4.1.1 Stock Exchange What is the role of a Stock Exchange in buying and selling shares? The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE. What is Demutualisation of stock exchanges? Demutualisation refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another. How is a demutualised exchange different from a mutual exchange? In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands. Currently are there any demutualised stock exchanges in India? Currently, two stock exchanges in India, the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) are demutualised. 29 4.1.2 Stock Trading What is Screen Based Trading? The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fullyautomated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found. What is NEAT? NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an inmemory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second. How to place orders with the broker? You may go to the broker’s office or place an order on the phone/internet or as defined in the with his or her broker. How does an investor get access to internet based trading facility? There are many brokers of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility. 30 What is a Contract Note? Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him. What details are required to be mentioned on the contract note issued by the stock broker? A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following: § § § given by the Exchange. § and time period for settlement. § § § § § § levied by the broker. § mentioned that the consolidated stamp duty is paid. § What is the maximum brokerage that a broker can charge? The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note. 31 Why should one trade on a recognized stock exchange only for buying/selling shares? An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counter-party risk which is assumed by the redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor Protection Fund etc. How to know if the broker or sub broker is registered? One can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’. What precautions must one take before investing in the stock markets? Here are some useful pointers to bear in mind before you invest in the markets: § do not deal with unregistered intermediaries. § your broker within one working day of execution of the trades. § know the risk that they are taking and invest in a manner that matches their risk tolerance. § tips’ of the day. § company. Find out the business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor. 32 § you have never heard of, be cautious. Spend some time checking out about the company before investing. § reports, about a company. Do your own research before investing in any stock. § promotes, unless you have done adequate study of the company. § stocks does not guarantee high returns. § trading activity. § especially for acting quickly, ma y be risky and may to lead to losing some, most, or all of your money. What Do’s and Don’ts should an investor bear in mind when investing in the stock markets? § registration certificate. § terms and conditions clearly. § § ‘Risk Disclosure Document’ and then acknowledge it. § each day. § hours of the transaction. § name, trade time and number, transaction price, brokerage, service tax, securities transaction tax etc. and is signed by the Authorised Signatory of the broker. § website (www.nseindia.com) and go to the trade verification facility extended by NSE at www.nseindia.com/content/equities/ eq_trdverify.htm. 33 § broker only, as it appears on the contract note/SEBI registration certificate of the broker. § ensure that the delivery instructions are made only to the designated account of your broker only. § from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately. § for the transactions entered by you, within one working day of the payout date. § on your own name and then issue cheques from a family members’/ friends’ bank accounts. § own Demat account, not from any other family members’/friends’ accounts. § payin obligation. § returns. Hence do not give your money as deposit against assurances of returns. § intermediaries having specific approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for Portfolio Management. § signed blank delivery instruction slip with anyone. While meeting pay in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form. § these transactions are not covered under Settlement Guarantee mechanisms of the exchange. § you. Do not accept trades executed under some other client code to your account. § operation of your DP account, make sure that: § intermediary only. § credits arising out of valid transactions executed through that intermediary only. 34 § fortnight to ensure that no unauthorised transactions have taken place in your account. § the purpose for which authorization has been given. § to the authorized intermediary. § § § § notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification. § about the dispute at the earliest and in any case not later than 6 months. § reasonable period (say within 15 days), please bring it to the attention of the ‘Investor Grievances Cell’ of the NSE. § NSE, it is very important that you submit copies of all relevant documents like contract notes, proof of payments/delivery of shares etc. alongwith the complaint. Remember, in the absence of sufficient documents, resolution of complaints becomes difficult. § stock exchanges/SEBI before carrying out any transaction. 4.2 Products in the Secondary Markets What are the products dealt in the Secondary Markets? Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares: Equity Shares share, represents the form of fractional ownership in a business venture. Rights Issue/ Rights Shares shareholders at a ratio to those already held, at a price. For e.g. a 35 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share. Bonus Shares free of cost based on the number of shares the shareholder owns. Preference shares fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders. Cumulative Preference Shares: dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Bond unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows: Zero Coupon Bond: value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Convertible Bond the bond into equity at a fixed conversion price. Treasury Bills: issued by government as a means of financing their cash requirements. 36 4.2.1 Equity Investment Why should one invest in equities in particular? When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in 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. This may be illustrated with the help of following examples: a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%. b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90). The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%. Therefore, § when compared to other investment options. § a longer tenure of investment have yielded far superio r returns than any other investment. However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study them carefully before investing. What has been the average return on Equities in India? Since 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. a company returns to its shareholders from its annual profits. Compared to 37 most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration. Which are the factors that influence the price of a stock? Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills. The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favourable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavourable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stockspecific factors. Therefore, a prudent advice to all investors is to analyse and invest and not speculate in shares. What is meant by the terms Growth Stock / Value Stock? Growth Stocks: In the investment world we come across terms such as Growth stocks, Value stocks etc. Companies whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions. Value Stocks: The task here is to look for 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's not fancied by most investors. However, even a company that has seen its stock price decline still has assets to its name - 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's price. Value 38 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 to purchase a company's stock usually based on relationships between the current market price of the company and certain business fundamentals. They like P/E ratio being below a certain absolute limit; dividend yields above a certain absolute limit; Total sales at a certain level relative to the company's market capitalization, or market value etc. How can one acquire equity shares? You may subscribe to issues made by corporates in the primary market. In the primary market, resources are mobilised by the corporates through fresh public issues (IPOs) or through private placements. Alternately, you may purchase shares from the secondary market. To buy and sell securities you should approach a SEBI registered trading member (broker) of a recognized stock exchange. What is Bid and Ask price? The ‘Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. The ‘Ask’ (or offer) is what you need to know when you're buying i.e. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price. If an investor looks at a computer screen for a quote on the stock of say XYZ Ltd, it might look something like this: Bid (Buy side) Ask (Sell side) ______________________________________________________ Qty. Price (Rs.) Qty. Price (Rs.) _____________________________________________________________ 1000 50.25 50.35 2000 500 50.10 50.40 1000 550 50.05 50.50 1500 2500 50.00 50.55 3000 1300 49.85 50.65 1450 _____________________________________________________________ Total 5850 8950 _____________________________________________________________ 39 Here, on the left-hand side after the Bid quantity and price, whereas on the right hand side we find the Ask quantity and prices. The best Buy (Bid) order is the order with the highest price and therefore sits on the first line of the Bid side (1000 shares @ Rs. 50.25). The best Sell (Ask) order is the order with the lowest sell price (2000 shares @ Rs. 50.35). The difference in the price of the best bid and ask is called as the Bid-Ask spread and often is an indicator of liquidity in a stock. The narrower the difference the more liquid or highly traded is the stock. What is a Portfolio? A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). 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, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units. What is Diversification? It is a risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Diversification is possibly the best way to reduce the risk in a portfolio. What are the advantages of having a diversified portfolio? A good investment portfolio is a mix of a wide range of asset class. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio. There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it's really just the simple practice of "not putting all your eggs in one basket." If you spread your investments across various types of assets and markets, you'll reduce the risk of your entire portfolio getting affected by the adverse returns of any single asset class. 40 4.2.2. Debt Investment What is a ‘Debt Instrument’? Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In Indian securities markets, the term ‘ issued by the Central and State governments and public sector organizations and the term ‘ sector. What are the features of debt instruments? Each debt instrument has three features: Maturity, coupon and principal. Maturity matures, which is the date on which the borrower has agreed to repay the principal. remaining for the bond to mature. The Term-to-Maturity changes everyday, from date of issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date, as the distance between such a date and the date of maturity. It is also called the term or the tenure of the bond. Coupon made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. Principal called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate. The name of the bond itself conveys the key features of a bond. For example, a GS CG2008 11.40% bond refers to a Central Government bond maturing in the year 2008 and paying a coupon of 11.40%. Since Central Government bonds have a face value of Rs.100 and normally pay coupon semi-annually, this bond will pay Rs. 5.70 as six- monthly coupon, until maturity. 41 What is meant by ‘Interest’ payable by a debenture or a bond? Interest is the amount paid by the borrower (the company) to the lender (the debenture-holder) for borrowing the amount for a specific period of time. The interest may be paid annual, semi-annually, quarterly or monthly and is paid usually on the face value (the value printed on the bond certificate) of the bond. What are the Segments in the Debt Market in India? There are three main segments in the debt markets in India, viz., (1) Government Securities, (2) Public Sector Units (PSU) bonds, and (3) Corporate securities. The market for State-sponsored securities. In the recent past, local bodies such as municipalities have also begun to tap the debt markets for funds. Some of the PSU bonds are tax free, while most bonds including government securities are not tax-free. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption. Who are the Participants in the Debt Market? Given the large size of the trades, Debt market is predominantly a wholesale market, with dominant institutional investor participation. The investors in the debt markets are mainly banks, financial institutions, mutual funds, provident funds, insurance companies and corporates. Are bonds rated for their credit quality? Most Bond/Debenture issues are rated by specialised credit rating agencies. Credit rating agencies in India are CRISIL, CARE, ICRA and Fitch. The yield on a bond varies inversely with its credit (safety) rating. The safer the instrument, the lower is the rate of interest offered. How can one acquire securities in the debt market? You may subscribe to issues made by the government/corporates in the primary market. Alternatively, you may purchase the same from the secondary market through the stock exchanges. 42 5. DERIVATIVES What are Types of Derivatives? Forwards entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. Futures sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index. Options obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - ‘ quantity of the underlying asset, at a given price on or before a given future date. ‘ quantity of underlying asset at a given price on or before a given future date. Presently, at NSE futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks. Warrants options traded on exchanges have maximum maturity of nine months. Longer dated options are called Warrants and are generally traded over-thecounter. What is an ‘Option Premium’? At the time of buying an option contract, the buyer has to pay premium. The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell. Option premiums are always paid upfro nt. 43 What is ‘Commodity Exchange’? A Commodity Exchange is an association, or a company of any other body corporate organizing futures trading in commodities. In a wider sense, it is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition among buyers and among sellers – this would include auction-type exchanges, but not wholesale markets, where trade is localized, but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers. What is meant by ‘Commodity’? FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. Futures’ trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. What is Commodity derivatives market? Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious me tals like gold, silver, etc. What is the difference between Commodity and Financial derivatives? The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary at times. 44 6. DEPOSITORY How is a depository similar to a bank? A Depository can be compared with a bank, which holds the funds for depositors. An analogy between a bank and a depository may be drawn as follows: BANK DEPOSITORY Holds funds in an account Hold securities in an account Transfers funds between accounts on the instruction of the account holder Transfers securities between accounts on the instruction of the account holder. Facilitates transfers without having to handle money Facilitates transfers of ownership without having to handle securities. Facilitates safekeeping of money Facilitates safekeeping of shares. Which are the depositories in India? There are two depositories in India which provide dematerialization of securities. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). What are the benefits of participation in a depository? The benefits of participation in a depository are: § § § delivery, fake securities, etc. § § 45 § § with all companies in which investor holds securities eliminating the need to correspond with each of them separately § correspondence with companies § § securities in a single account; automatic credit into demat account, of shares, arising out of split/consolidation/merger etc. Who is a Depository Participant (DP)? The Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs. Does one need to keep any minimum balance of securities in his account with his DP? No. The depository has not prescribed any minimum balance. You can have zero balance in your account. What is an ISIN? ISIN (International Securities Identification Number) is a unique identification number for a security. What is a Custodian? A Custodian is basically an organisation, which helps register and safeguard the securities of its clients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients: 46 § § securities § issue of securities, having a bearing on the benefits or rights accruing to the client. How can one convert physical holding into electronic holding i.e. how can one dematerialise securities? In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise. Separate DRF has to be filled for each ISIN number. Can odd lot shares be dematerialised? Yes, odd lot share certificates can also be dematerialised. Do dematerialised shares have distinctive numbers? Dematerialised shares do not have any distinctive numbers. These shares are be identical and interchangeable. Can electronic holdings be converted into Physical certificates? Yes. The process is called securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for rematerialisation of the balances in your securities account. Can one dematerialise his debt instruments, mutual fund units, government securities in his demat account? Yes. You can dematerialise and hold all such investments in a single demat account. 47 7. MUTUAL FUNDS What is the Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI. What are the benefits of investing in Mutual Funds? There are several benefits from investing in a Mutual Fund: Small investments: returns by a portfolio spread across a wide spectrum of companies with small investments. Professional Fund Management: considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick good investment opportunities. Spreading Risk: invest in only one or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified. Transparency: information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Choice: variety to choose from. An investor can pick up a scheme depending upon his risk/ return profile. Regulations: function within the provisions of strict regulation designed to protect the interests of the investor. 48 What is NAV? NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis What is Entry/Exit Load? A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%. For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. of units purchased). Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10. Are there any risks involved in investing in Mutual Funds? Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a re gulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. 49 Some of the Risk to which Mutual Funds are exposed to is given below: Market risk If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Non-market risk Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. Interest rate risk Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Credit risk Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating. What are the different types of Mutual funds? Mutual funds are classified in the following manner: (a) On the basis of Objective Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds. 50 Diversified funds These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors. Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector. Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. Debt/Income Funds These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor. Liquid Funds/Money Market Funds These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods. 51 Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk. Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks. b) On the basis of Flexibility Open-ended Funds These funds do not have a fixed date of redemption. Generally they are open for subscripttion and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscripttion only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market. 52 What are the different investment plans that Mutual Funds offer? The term ’investment plans’ generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. The different investment plans are an important consideration in the investment decision, because they determine the flexibility available to the investor. Some of the investment pla ns offered by mutual funds in India are: Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income. Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors. What are the rights that are available to a Mutual Fund holder in India? As per SEBI Regulations on Mutual Funds, an investor is entitled to: 1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. 2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. 3. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. 4. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information, which may have an adverse bearing on their investments. 53 5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund. 6. 75% of the unit holders can pass a resolution to wind-up the scheme. 7. An investor can send complaints to SEBI, who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved. What is a Fund Offer document? A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. That way, before you put in your money, you're well aware of the risks etc involved. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about: § § § § § § § § What is Active Fund Management? When investment decisions of the fund are at the discretion of a fund manager(s) and he or she decides which company, instrument or class of assets the fund should invest in based on research, analysis, market news etc. such a fund is called as an actively managed fund. The fund buys and sells securities actively based on changed perceptions of investment from time to time. Based on the classifications of shares with different characteristics, ‘active’ investment managers construct different portfolio. Two basic investment styles prevalent among the mutual funds are Growth Investing and Value Investing: 54 § The primary objective of equity investment is to obtain capital appreciation. A growth manager looks for companies that are expected to give above average earnings growth, where the manager feels that the earning prospects and therefore the stock prices in future will be even higher. Identifying such growth sectors is the challenge before the growth investment manager. § A Value Manager looks to buy companies that they believe are currently undervalued in the market, but whose worth they estimate will be recognized in the market valuations eventually. What is Passive Fund Management? When an investor invests in an actively managed mutual fund, he or she leaves the decision of investing to the fund manager. The fund manager is the decision- maker as to which company or instrument to invest in. Sometimes such decisions may be right, rewarding the investor handsomely. However, chances are that the decisions might go wrong or may not be right all the time which can lead to substantial losses for the investor. There are mutual funds that offer Index funds whose objective is to equal the return given by a select market index. Such funds follow a passive investment style. They do not analyse companies, markets, economic factors and then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of stocks that reflect a market index, such as the Nifty index. The returns generated by the index are the returns given by the fund. No attempt is made to try and beat the index. Research has shown that most fund managers are unable to constantly beat the market index year after year. Also it is not possible to identify which fund will beat the market index. Therefore, there is an element of going wrong in selecting a fund to invest in. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the discretion of the fund manager. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. This gives a dual advantage to the investor of having a diversified portfolio 55 while at the same time having low expenses in fund. There are various passively managed funds in India today some of them are: Principal Index Fund, an index fund scheme on S&P CNX Nifty launched by Principal Mutual Fund in July 1999. UTI Nifty Fund launched by Unit Trust of India in March 2000. Franklin India Index Fund launched by Franklin Templeton Mutual Fund in June 2000. Franklin India Index Tax Fund launched by Franklin Templeton Mutual Fund in February 2001. Magnum Index Fund launched by SBI Mutual Fund in December 2001. IL&FS Index Fund launched by IL&FS Mutual Fund in February 2002. Prudential ICICI Index Fund launched by Prudential ICICI Mutual Fund in February 2002. HDFC Index Fund-Nifty Plan launched by HDFC Mutual Fund in July 2002. Birla Index Fund launched by Birla Sun Life Mutual Fund in September 2002. LIC Index Fund-Nifty Plan launched by LIC Mutual Fund in November 2002. Tata Index Fund launched by Tata TD Waterhouse Mutual Fund in February 2003. ING Vysya Nifty Plus Fund launched by ING Vysya Mutual Fund in January 2004. Canindex Fund launched by Canbank Mutual Fund in September 2004 56 What is an ETF? Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand. It is important to remember that while ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so exactly. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade. There are various ETFs available in India, such as: NIFTY BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in January 2002. Junior BeES: An Exchange Traded Fund on CNX Nifty Junior, launched by Benchmark Mutual Fund in February 2003. SUNDER: An Exchange Traded Fund launched by UTI in July 2003. Liquid BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003. Bank BeES: An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund in May 2004. 57 8. MISCELLANEOUS 8.1 Corporate Actions What are Corporate Actions? Corporate actions tend to have a bearing on the price of a security. When a company announces a corporate action, it is initiating a process that will bring actual change to its securities either in terms of number of shares increasing in the hands on the shareholders or a change to the face value of the security or receiving shares of a new company by the shareholders as in the case of merger or acquisition etc. By understanding these different types of processes and their effects, an investor can have a clearer picture of what a corporate action indicates about a company's financial affairs and how that action will influence the company's share price and performance. Corporate actions are typically agreed upon by a company's Board of Directors and authorized by the shareholders. Some examples are dividends, stock splits, rights issues, bonus issues etc. What is meant by ‘Dividend’ declared by companies? Returns received by investors in equities come in two forms a) growth in the value (market price) of the share and b) dividends. Dividend is distribution of part of a company's earnings to shareholders, usually twice a year in the form of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder. Normally, the dividend is expressed on a 'per share' basis, for instance – Rs. 3 per share. This makes it easy to see how much of the company's profits are being paid out, and how much are being retained by the company to plough back into the business. So a company that has earnings per share in the year of Rs. 6 and pays out Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the other half. Directors of a company have discretion as to how much of a dividend to declare or whether they should pay any dividend at all. 58 What is meant by Dividend yield? Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. It is calculated by aggregating past year's dividend and dividing it by the current stock price. Example: ABC Co. Share price: Rs. 360 Annual dividend: Rs. 10 Dividend yield: 2.77% (10/360) Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is underpriced, whereas a low dividend yield is considered evidence that the stock is overpriced. A note of caution here though. There have been companies in the past which had a record of high dividend yield, only to go bust in later years. Dividend yield therefore can be only one of the factors in determining future performance of a company. What is a Stock Split? A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split. For e.g. If a company has issued 1,00,00,000 shares with a face value of Rs. 10 and the current market price being Rs. 100, a 2-for-1 stock split would reduce the face value of the shares to 5 and increase the number of the company’s outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)). Consequently, the share price would also halve to Rs. 50 so that the market capitalization or the value shares held by an investor remains unchanged. It is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; the value remains the same . Let us see the impact of this on the share holder: - Let's say company ABC is trading at Rs. 40 and has 100 million shares issued, which gives it a market capitalization of Rs. 4000 million (Rs. 40 x 100 million shares). An investor holds 400 shares of the company valued at Rs. 16,000. The company then decides to implement a 4-for-1 stock split (i.e. a shareholder holding 1 share, will now hold 4 shares). For each share shareholders currently own, they receive three additional shares. The investor will therefore hold 1600 shares. So the investor gains 3 additional shares for 59 each share held. But this does not impact the value of the shares held by the investor since post split, the price of the stock is also split by 25% (1/4 16,000 worth of shares. Notice that the market capitalization stays the same - it has increased the amount of stocks outstanding to 400 million while simultaneously reducing the stock price by 25% to Rs. 10 for a capitalization of Rs. 4000 million. The true value of the company hasn't changed. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. In the case of our example, divide Rs. 40 by 4 and we get the new trading price of Rs. 10. If a stock were to split 3-for-2, we'd do the same thing: 40/(3/2) = 40/1.5 = Rs. 26.60. Pre-Split Post-Split 2-for-1 Split No. of shares 100 mill. 200 mill. Share Price Rs. 40 Rs. 20 Market Cap. Rs. 4000 mill. Rs. 4000 mill. 4-for-1 No. of shares 100 mill. 400 mill. Share Price Rs. 40 Rs. 10 Market Cap. Rs. 4000 mill. Rs. 4000 mill.