To Study the role of Financial Advisors in capital markets with respect to Retail Investors.

Acknowledgement

TABLE OF CONTENTS

1. Introduction.
Indian Capital Markets
Capital markets in any country play a pivotal role in the growth of economy and meeting the countrys socio-economic goals. They are an important constituent of the financial system given their role in the financial intermediation process and capital formation of the country. The importance of capital markets cannot be under-emphasised for a developing economy like India which needs significant amount of capital for development of strong infrastructure. Just to give some perspective, it is estimated that India will require capital flows of USD 500 billion merely for developing its infrastructure. The Indian economys current size is approximately USD 1 trillion in 2009-2010 with the savings rate of Indian households of 33.4% in 2009 -2010. In the next decade or so, it is expected that the economy will grow at an average rate of 8%. This translates into incremental savings of USD 5 trillion over the next decade. Comparatively, the US economys current size is around USD 13.22 trillion in 2010. Assuming a savings rate of 5%, it may not be a surprise if the amount of savings of Indian households exceeds savings of US households in absolute terms by 2020. Also, Indian households have traditionally preferred safety of bank deposits and government saving schemes and much less than 10% of the their investments in financial assets is in shares, debentures and mutual funds, which is very low as compared to some of the developed economies. Given the quantum of savings, the need to mobilise savings into productive channels and the opportunity for financial intermediation, the next decade will be an opportunity of a lifetime for Indian capital markets players. The Government, the Regulators and the financial institutions have an important role to play in building a strong and robust capital market. The growth trajectory of a countrys capital markets in significantly influenced by the actions of these stakeholders. Concerted efforts of the Government and the Regulators supported by a long-term vision and clarity in action can significantly help in fostering a climate that is conducive to growth and investments. Before diving deep into the 2020 roadmap, it may be useful to pause and better understand the functions of an efficient capital market. Such functions comprise Mobilize capital from suppliers of capital; Create a platform to facilitate exchange of capital through buying and selling of securities and other asset classes; Facilitate price discovery in a quick and transparent manner; Facilitate settlement of transactions;

 Protect rights of the investors. Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision. The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO). The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91Day T-Bills, 10-Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond. The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds: Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc. Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc. Organizations include various entities such as BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL). Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT) Participants in the Securities Market

SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes.

2. Types of Markets.
EQUITY MARKET History of the Market With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets. The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a peoples market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks. Derivative Markets The emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. This instrument is used by all sections of businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc. According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives.

What are futures contracts? Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of the underlying asset are standardized. Futures contracts are transferable in nature. Three broad categories of participantshedgers, speculators, and arbitragerstrade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk. Speculators have a particular mindset with regard to an asset and bet on future movements in the assets price. Futures and options contracts can give them an extra leverage due to margining system. Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Important Distinctions Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct market between two parties who know and trust each other. Most common example for OTC is the forward contract. Forward contracts are directly negotiated, tailor-made for the needs of the parties, and are often not easily reversed. Distinction between Forward and Futures Contracts: Futures Contracts Meaning: A futures contract is a contractual agreement between two parties to buy or sell a standardized quantity and quality of asset on a specific future date on a futures exchange. Forward Contracts A forward contract is a contractual agreement between two parties to buy or sell an asset at a future date for a predetermined mutually agreed price while entering into the contract. A forward contract is not traded on an exchange. Trading place: A futures A forward contract is traded in an contract is traded on the OTC market. centralized trading platform of an exchange.

Transparency in contract price: The contract price of a futures contract is transparent as it is available on the centralized trading screen of the exchange. Valuations of open position and margin requirement: In a futures contract, valuation of open position is calculated as per the official closing price on a daily basis and mark-to-market (MTM) margin requirement exists. Liquidity: Liquidity is the measure of frequency of trades that occur in a particular futures contract. A futures contract is more liquid as it is traded on the exchange. Counterparty default risk: In futures contracts, the exchange clearinghouse provides trade guarantee. Therefore, counterparty risk is almost eliminated. Regulations: A regulatory authority and the exchange regulate a futures contract. Benefits of Derivatives

The contract price of a forward contract is not transparent, as it is not publicly disclosed.

In a forward contract, valuation of open position is not calculated on a daily basis and there is no requirement of MTM on daily basis since the settlement of contract is only on the maturity date of the contract.

A forward contract is less liquid due to its customized nature.

In forward contracts, counterparty risk is high due to the customized nature of the transaction.

A forward contract is not regulated by any exchange.

a. Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its underlying. Suppose, A has bought 100 shares of a real estate company with a bullish view but, unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, A can sell the same quantity of futures of the script for the time period he plans to stay invested in the script. This activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have been mutual funds and other institutional investors. b. Price Discovery: The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets. This process of price adjustment is often

termed as price discovery and is one of the major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets. c. Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporates and financial institutions but also for retail investors like high networth individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact that historically it has been witnessed that there lies an inverse correlation of daily returns in equities as compared to commodities. d. High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It is an instrument that requires only the margin on a contract to be paid in order to commence trading. This is also called leverage buying/selling. e. Transparency: Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally. This reduces the chances of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding the day-to-day activities taking place in the securities markets, taking care of the illegal transactions. f. Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time.

Mutual Funds:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few hundred rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund Scheme that has a defined investment objective and strategy. The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the schemes stated objectives. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a mutual fund:

TYPES OF MUTUAL FUND SCHEMES:

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals? These do not have a fixed maturity. You deal with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value (NAV) related prices, at any point of time. Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the schemes NAV on account of demand and supply situation, unit holders expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor under the close-ended schemes. By Structure: Open-Ended Schemes These do not have a fixed maturity. You deal with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value (NAV) related prices, at any point of time. Close-Ended Schemes Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the schemes NAV on account of demand and supply situation, unit holders expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.

Some close-ended schemes give you an additional option of selling your units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor under the close ended schemes. Interval Schemes These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices. By Investment Objective: Growth Schemes Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short term. It is Ideal for investors in their prime earning years and seeking growth over the long term. Income Schemes Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for retired people and others with a need for capital stability and regular income and also for people who need some income to supplement their earnings. Balanced Schemes Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls. It is ideal for investors looking for a combination of income and moderate growth. Money Market / Liquid Schemes Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

It is Ideal for corporates and individual investors as a means to park their surplus funds for short periods or awaiting a more favorable investment alternative. Other Schemes: Tax Saving Schemes (Equity Linked Saving Scheme - ELSS) These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds. Ideal for investors seeking tax incentives. Special Schemes: This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemes which invest in specific sectors such as Technology, Infrastructure, Banking, Pharma etc. Besides, there are also schemes which invest exclusively in certain segments of the capital market, such as Large Caps, Mid Caps, Small Caps, Micro Caps, 'A' group shares, shares issued through Initial Public Offerings (IPOs), etc. Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Fixed Maturity Plans: Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are close ended with a fixed tenure, the maturity period ranging from one month to three/five years. These plans are predominantly debt-oriented, while some of them may have a small equity component. The objective of such a scheme is to generate steady returns over a fixed-maturity period and protect the investor against market fluctuations. FMPs are typically passively managed fixed income schemes with the fund manager locking into investments with maturities corresponding with the maturity of the plan. FMPs are not guaranteed products. Exchange Traded Funds (ETFs): Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like stocks. Globally, ETFs have opened a whole new panorama of investment opportunities to retail as well as institutional investors. ETFs enable investors to gain broad exposure to entire stock markets as well as in specific sectors with relative ease, on a realtime basis and at a lower cost than many other forms of investing.

An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading value is based on the net asset value of the underlying stocks that it represents. It can be compared to a stock that can be bought or sold on real time basis during the market hours. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8, 2002. Capital Protection Oriented Schemes: Capital Protection Oriented Schemes are schemes that endeavor to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity / equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on October 31, 2006. Gold Exchange Traded Funds (GETFs): Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secure way to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007. Quantitative Funds: A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007. Funds Investing Abroad: With the opening up of the Indian economy, mutual funds have been permitted to invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes, which are country specific in their investment approach. Fund of Funds (FOFs): Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprise only of units of other mutual fund schemes and cash / money market securities/ short term deposits pending deployment. The first FOF was launched by Franklin

Templeton Mutual Fund on October 17, 2003. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g. Aggressive/ Cautious FOFs etc. Please bear in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. Remember, as always, higher the return you seek higher the risk you should be prepared to take.

3. EXCHANGE PLATFORM.
Domestic Exchanges
Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE). Bombay Stock Exchange (BSE) BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited (BSE). BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screenbased order-driven trading system. The exchange opened up for foreign ownership (foreign institutional investment). Allowed Indian companies to raise capital from abroad through ADRs and GDRs. Expanded the product range (equities/derivatives/debt). Introduced the book building process and brought in transparency in IPO issuance. T+2 settlement cycle (payments and settlements). Depositories for share custody (dematerialization of shares). Internet trading (e-broking). Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT). Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCG National Stock Exchange (NSE) NSE was recognised as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000. NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This

system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations. Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures International Exchanges Due to increasing globalization, the development at macro and micro levels in international markets is compulsorily incorporated in the performance of domestic indices and individual stock performance, directly or indirectly. Therefore, it is important to keep track of international financial markets for better perspective and intelligent investment. 1. NASDAQ (National Association of Securities Dealers Automated Quotations) NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC), the regulatory authority for the securities markets in the United States. NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site) being listed. There are four major indices of NASDAQ that are followed closely by the investor class, internationally. i. NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that the total components count of the Index is over 3,000 stocks and it includes stocks of US and non-US companies, which makes it an international index. It is highly followed in the US and is an indicator of performance of technology and growth companies. When launched in 1971, the index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It was trading at 1316.12 on November 20, 2008.

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NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial companies listed on NASDAQ. The component companies weight in the index is based on their market capitalization, with certain rules controlling the influence of the largest components. The index doesnt contain financial companies. However, it includes the companies that are incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial, technology, biotechnology, healthcare, transportation, media, and service sectors. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing companies and nine railroad companies). Today, the index contains 30 blue-chip industrial companies operating in America. The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the prices of all stocks divided by the number of stocks (30). S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit in 1957 to further improve tracking of American stock market performance. In 1968, the US Department of Commerce added S&P 500 to its index of leading economic indicators. S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US by market capitalization (in contrast to the FORTUNE 500, which is the largest 500 companies in terms of sales revenue). The S&P 500 Index comprises about three-fourths of total American capitalization.

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2. LSE (London Stock Exchange) The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on the exchange. The LSE has four core areas: i. Equity markets: The LSE enables companies from around the world to raise capital. There are four primary markets; Main Market, Alternative Investment Market (AIM), Professional Securities Market (PSM), and Specialist Fund Market (SFM). Trading services: Highly active market for trading in a range of securities, including UK and international equities, debt, covered warrants, exchangetraded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary receipts. Market data information: The LSE provides real-time prices, news, and other financial information to the global financial community.

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Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to bring the cash, equity, and derivatives markets closer together. It combines the strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.

The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and Korea. 3. Frankfurt Stock Exchange It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Brse. The Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big share in the European market. The exchange has a few well-known trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50. DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt Stock Exchange.

4. Regulatory Authority.
There are four main legislations governing the securities market: a. The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulate the securities market. b. The Companies Act, 1956 sets out the code of conduct for the corporate sector in relation to issue, allotment, and transfer of securities, and disclosures to be made in public issues. c. The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities through control over stock exchanges. d. The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat securities. In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and Exchange Board of India). The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with the law. The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country. SEBI protects the interests of investors in securities and promotes the development of the securities market. The board helps in regulating the business of stock exchanges and any other securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities markets in any manner. The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting and regulating self regulatory organizations.

RBI is also known as the bankers bank. The central bank has some very important objectives and functions such as: Objectives

Maintain price stability and ensure adequate flow of credit to productive sectors. Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public. Facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India. Give the public adequate quantity of supplies of currency notes and coins in good quality.

Functions

Formulate implements and monitor the monetary policy. Prescribe broad parameters of banking operations within which the country's banking and financial system functions. Manage the Foreign Exchange Management Act, 1999. Issue new currency and coins and exchange/destroy currency and coins not fit for circulation. Perform a wide range of promotional functions to support national objectives.

The DEA is the nodal agency of the Union government to formulate and monitor the country's economic policies and programmes that have a bearing on domestic and international aspects of economic management. Apart from forming the Union Budget every year, it has other important functions like: i. Formulation and monitoring of macro-economic policies, including issues relating to fiscal policy and public finance, inflation, public debt management, and the functioning of capital market, including stock exchanges. In this context, it looks at ways and means to raise internal resources through taxation, market borrowings, and mobilization of small savings. Monitoring and raising of external resources through multilateral and bilateral development assistance, sovereign borrowings abroad, foreign investments, and monitoring foreign exchange resources, including balance of payments.

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Production of bank notes and coins of various denominations, postal stationery, postal stamps, cadre management, career planning, and training of the Indian Economic Service (IES).

5. Financial Services in India- Brief Overview.

Financial Services in India- Brief Overview Financial services industry is the mainstay of any economy as it mirrors the financial health of the country. Indian financial markets are highly regulated with different authorities keeping an eye on every avenue of financial sub-segments viz. Stock markets, mutual funds, insurance and banking. Stock markets are regulated by Securities and Exchange Board of India (SEBI) while Insurance Regulatory and Development Authority (IRDA) keeps an eye on the insurance industry. Similarly, Reserve Bank of India (RBI) keeps a check on the Indian banking sector and Association of Mutual Funds in India (AMFI) takes care of the mutual fund segment. India boasts of a Rs 23, 000 crore (US$ 4.44 billion) - financial services distribution and advice market. Recent developments, Government measures, key facts and figures pertaining to the same are discussed hereafter. Insurance Sector Even when the turbulent times are prevalent in the global financial markets, Indian consumers have not lost faith in their financial systems. This fact is majorly driving Indian insurance market. According to the data released by Life Insurance Council, total premium collected (including both new and renewal premiums) during April-September 2011 stood at Rs 1,22,661 crore (US$ 23.69 billion). In the same period, the renewal premium collection increased by 17 per cent to Rs 73,575 crore (US$ 14.21 billion), as against Rs 62,818 crore (US$ 12.13 billion) in the corresponding period in 2010. Till September 30, 2011, promoters of life insurance companies had injected over Rs 32,720 crore (US$ 6.32 billion) as capital. Also, there was an investment of more than Rs 200,000 crore (US$ 38.62 billion) in infrastructure development in the sector. The council further predicts an upsurge in new premium collections during October 2011-March 2012. Banking Services Ratings agency Moody's believe that strong deposit base of Indian lenders and Government's persistent support to public sector and private banks would act as positive factors for the 64 trillion (US$ 1.23 trillion) Indian banking industry amidst the negative global scenario.

According to the RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks', March 2011, Nationalised Banks, as a group, accounted for 53.0 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 21.6 per cent. The share of new private sector banks, Old private sector banks, Foreign banks and Regional Rural banks in aggregate deposits was 13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent respectively. With respect to gross bank credit also, nationalised banks hold the highest share of 52.8 per cent in the total bank credit, with SBI and its associates at 22.1 per cent and New Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks and Regional Rural banks held relatively lower shares in the total bank credit with 4.9 per cent, 4.6 per cent and 2.4 per cent respectively. Another statement from RBI has revealed that bank advances grew 17.08 per cent annually as on December 16, 2011 while bank deposits rose 18.03 per cent.

Mutual Funds Industry in India Recent data released by AMFI stated that the cumulative average Asset Under Management (AUM) of all fund houses aggregated to about Rs 6,87,640 crore (US$ 132.77 billion) in the last quarter of 2011. Data compiled at the end of 2011 indicated that HDFC Mutual Fund maintained its top position with an average AUM of Rs 88,737.07 crore (US$ 17.13 billion) while fund houses namely Reliance, ICICI Pru, Birla Sunlife and UTI followed. By the end of 2011, there were a total of 44 fund houses in the country as against 42 in the first quarter of the year. Private Equity (PE), Mergers & Acquisitions (M&A) in India Global consultancy firm Ernst & Young (E&Y) has stated that the value of M&A deals involving Indian companies aggregated to US$ 34.4 billion in 2011 involving 806 transactions. There were 177 outbound deals with an aggregate disclosed value of US$ 8.8 billion in 2011; forming 25.6 per cent of the total M&A pie. Adani Enterprises' acquisition of Abbot Point Coal Terminal in Australia (US$ 2 billion) and the GVK Group's purchase of Australia-based Hancock Coal's Queensland coal assets (US$ 1.3 billion) were among the biggest outbound deals recorded in 2011. According to data released by auditing and consultancy firm KPMG, India Inc witnessed a 31 per cent increment in PE investment to US$ 7.89 billion during the first three quarters of 2011. PE firms like Blackstone India and Kohlberg Kravis Roberts & Co (KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported to have said that he intends to close 5-6 deals a year in India whose financial valuations would revolve around roughly US$ 100 million to US$ 120 million each.

Foreign Institutional Investors (FIIs) in India Overseas entities are among the important drivers for Indian stock markets. FII flows account for about 45 per cent of the market free-float, according to Jyotivardhan Jaipuria, Managing Director and Head of Research, DSP Merrill Lynch (India). According to the data released by SEBI, FIIs purchased stocks worth Rs 600,000 crore (US$ 116 billion) during 2011. FIIs were also seen attracted to the debt market in 2011 wherein they infused Rs 42, 067 crore (US$ 8.12 billion). This intense interest in debt markets helped India get a net FII inflow of Rs 39, 353 crore (US$ 7.6 billion) (taking bothdebt and stocks- into account) for the year. The number of FIIs registered with SEBI stood at 1, 749 as of October 2011, while the number of FII sub-accounts was 6, 058 during the month. Furthermore, FIIs injected Rs 41,253 crore (US$ 8 billion) in Government securities (G-secs) and Rs 68,289 crore (US$ 13.18 billion) in corporate bonds, as on October 31, 2011. Financial Services in India: Recent Developments

India Infrastructure Finance Company Ltd (IIFCL) and IDBI Bank have inked a fiveyear memorandum of understanding (MoU) to launch infrastructure debt fund (IDF) schemes. The IDF, for which IDBI Bank and IIFCL would play strategic investors, is expected to get launched by the end of February 2012. With an intension to strengthen its hold in southern India, the Uco Bank is planning to add 11 more branches in Andhra Pradesh to its 66-branch-strong network in the state. The bank has made exemplary progress in recent past with 2,004 branches in the country and four abroad. IRDA has recently launched a mobile application that enables comparison between various insurance products and premium rates. The application, compatible with Android, iPhone, Nokia and Blackberry platforms, has been developed to empower consumers/prospects to make informed decisions by comparing features of insurance products through mobiles. US-based financial services company Ameriprise Financial Inc has commenced its operations in India. It is the only international firm in India that would provide pure financial planning and wealth management services to the Indian consumers.

Financial Services: Government Initiatives The Government's top priority seems to be the enhancement of investor base for the Indian markets. That is why the Ministry of Finance started 2012 with a happy announcement by allowing foreign nationals, trusts and pension funds to invest directly in the country's listed companies from mid-January 2012. The Government of India has also decided to infuse Rs 6,000 crore (US$ 1.16 billion) in public sector banks during the remaining 2011-12 to ensure that the entities meet regulatory requirements. In 2010-11, the Government had provided Rs 20,157 crore (US$ 4 billion) as its capital support to public sector banks. In order to prepare public sector banks for neck-to-neck competition ahead and improve their performance in future, the finance ministry has set new benchmarks for them to achieve. The new benchmarks, that would calculate their functional and financial capability to qualify for capital infusion, entail three performance indicators - savings and current deposit ratio, employee-branch ratio and profit per employee. Road Ahead A report by The Boston Consulting Group (BCG) India, in association with an industrial body and Indian Banks Associations (IBA) predicts that Indian banking sector would become the world's third largest in asset size by 2025. The report also analyses that mobile banking would become the second largest channel of banking after ATMs. Given the positive eco-system of the industry, regulatory and Government initiatives, mobile banking is anticipated to enhance from 0.1 per cent of transactions in a 45 per cent financial inclusion base in 2010 to 34 per cent of the transactions with 80 per cent rural inclusion base by 2020, as per the report. An industrial body predicts that the non-life insurance sector is poised to become a Rs 90,000 crore (US$ 17.37 billion) industry (from the current level of Rs 47,000 crore (US$ 9.07 billion) by 2015; growing by over 18 per cent. Demand-driven economy, increasing consumer base in motoring and healthcare, growth of services and small and medium enterprises (SMEs) are certain factors that are attributed behind the strong forecast.

6. Summary of Indian Equity Markets.

The equity market comprises of the primary market and the secondary market with key constituents being Domestic Institutional Investors such as mutual funds and insurance companies like LIC, Foreign Institutional Investors and retail investors who directly participate in the capital markets.

Domestic Institutional Investors

The size of the Indian Mutual Fund industry (comprising both, equity and debt funds) is estimated at USD 162 billion. Since the 1990s when the mutual fund space opened up to the private sector, the industry has traversed a long path. Assets under Management have grown at a CAGR in excess of 25% over the last four years, slowing down only over the last two years, as fallout of the global economic slowdown and financial crisis.

2011

5922

2010

6139
Avera ge Asset Under Manag ement in INR Billion

2009

4933

2008

5385

2007

3590

2006

2319

Source: AMFI data (the figures in the chart are in Rs. Billions)

Annual Data for April 2010 March 2011 518 new schemes were launched during the year as against 174 in the previous year. The amount mobilized was Rs. 124890 crores as against Rs.36166 crores in the previous year. Total Funds mobilized during the year stood at Rs. 88,59,515 crores as against Rs. 1,00,19,023 crores in the last year representing a decline of 12%.

Redemptions at Rs. 89,08,921 crores were 10% lower than the redemptions of Rs. 99,35,942 crores in the previous year. On a net basis, there was an outflow of Rs. 49,406crores as compared to an inflow of Rs. 83,081 crores in the last year. The Assets Under Management as on March 31, 2011 stood at Rs. 5,92,250 crores as against Rs. 6,13,979crores as at the end of the previous year representing a decline of 4%.

AUM to GDP Ratio

The ratio of AUM to Indias GDP, gradually increased from 6 percent in 2005 to10.6 percent in 2010. Despite this however, this continues to be significantly lower than the ratio in developed countries, where the AUM accounts for 20-70 percent of the GDP.

16 14 12
10

15

11

10.6

10

8
6 4 2 0 2005
6

AUM as a percentage of GDP

2006

2007

2008

2009

2010

Source: AMFI and MOSPI

As a Regulator focused on protecting retail investors interests, SEBI has done a commendable job with the changes it has introduced in the regime in recent past such as abolition of entry load, abolition of additional management fee for schemes launched on no load basis, compliance with documentation/KYC norms, transferability of units of mutual funds, etc. However, the industry continues to be plagued by low margins and stiff competition from other investment products such as those offered by of the life insurance industry and the portfolio managers. To develop the industry in a manner that is fair to all the stakeholders of the industry, amongst others, the following suggestions could be considered

 Allowing Asset Management Companies the flexibility to charge management fees. In a perfect competition scenario, the price of goods or services is efficiently determined by the market itself. There are more than 35 asset management companies with many other in the pipeline. Over a period of time, the market should be able to price the services provided by asset management companies in an efficient manner such that their interests are also protected. Mutual fund distributors in India are largely unregulated. Further, there are instances of distributors rendering investment advice without requisite qualification, information of mutual fund schemes/investor and consideration of the investors needs. Distribution supported by quality investment advice is clearly the need of the hour. Herculean effort is required and the entire asset management industry should work towards this goal. Regulation of the distributors by a Regulator can be a point worth debating. More importantly, SEBI should strongly reach out to create/support infrastructure to train the distributors to meet the needs of the investors. There are a plethora of similar sounding schemes offered by the asset management companies resulting in a craving for lower number of schemes with similar investment strategy. Unfortunately, that is only one side of the story. The products are not innovative and offer limited asset classes with inadequate opportunities for diversification. SEBI and the mutual fund industry need to work towards amending mutual fund regulations and offering more diversified products such as Real Estate Mutual Funds, which despite enactment couple of years ago have not seen the light of the day! This will help in optimising the utility of mutual funds as well. As regards investment by pension funds, the current regulations allow only about 10 percent of the pension fund corpus to be invested in the equities market directly or through mutual funds. In contrast, internationally, up to 50 percent of pension funds are permitted to be invested in equities. Also there are certain restrictions on the exposure of insurance companies to the capital markets which reduces the much needed inflow of long term investments into the capital market. Moving the Indian pension funds and insurance companies closer to international levels could give a much needed boost to domestic institutional investor participation.

Foreign Institutional InvestorsThe number of FIIs/sub-accounts and the amount invested by them in the Indian capital markets is a reflection of the potential of the Indian economy. In the last decade, the investment by FIIs/sub-accounts has multiplied 7 times and in the current fiscal (in the first half), it has already topped USD 12,289 million. From time to time, SEBI has brought in changes which have supported the growth of investments by FIIs/sub-accounts. Some of the key changes include Qualified Institutional Buyers defined to include FIIs. Allowing FIIs to invest in debt markets including corporate debt, government securities and security receipts issued by Asset Reconstruction Companies. Permitting stock exchanges to allow Direct Market Access (DMA) to institutional clients. An institutional investor can access brokers system from its office and can book orders directly into the system. In DMA, the brokers infrastructure is bypassed. However, the trade and settlement obligations will continue to apply to the broker, as will the risk management compliance, which involves payment of margins and exposure limits arising from orders and trades in the DMA. The DMA system helps in better and faster execution of orders with avoidance of leakage of sensitive information of trades. The concessional taxation regime for listed securities and for FIIs has also supported the growth of FII investments though more certainty around the taxation consequences and eligibility of treaty benefits is desirable. A key change that could bring a paradigm shift in the asset management industry is allowing domestic fund managers to manage funds raised from offshore investors for investment in India. But for a taxation issue, such funds are being currently managed from more tax efficient jurisdictions such as Singapore. If the taxation regime were to be amended to provide for safe harbour rules exempting foreign funds from Indian taxation (in a

manner similar to Singapore), then, the asset management industry would grow exponentially.

Securities Lending and Borrowing (SLB) Scheme

SLB facilitates short-selling, increasing liquidity, improving pricing and arbitrage between derivatives and cash markets. SEBI amended the SLB scheme in January, 2010 with a view to make short-selling more accessible to investors. This move provides the investors including FIIs to have greater opportunity to access the Indian securities market. However, there are certain issues revolving around this amendment like the use of stock lending by promoters, applicability of insider trading regulations and the takeover code. In case of corporate action in SLB contract period, the lending and borrowing gets suspended. This condition should be relaxed. Insurance companies should also be allowed to lend their securities, which is currently not permitted. Presently, very high margins are required to be maintained under the SLB. SEBI should consider relaxing the same in the due course.

7. Retail investors.
One of the daunting challenges before the Indian capital markets is expanding the investor base and provides them access to high quality financial services. With a population of more than a billion, a mere 1% of the population participates in capital markets, and of that only a fraction is active. Trading volumes in Indian Capital Markets are lower as compared to other markets such as United States, the United Kingdom, Germany, China etc. Similarly, Indian households invest much less in equity markets than do their developed market counterparts, particularly in the United States and the United Kingdom. As a result, retail equity ownership (non-promoter) amounts to only around 10 percent of total equity ownership, and has come down by 3 per cent over the last seven years. While corporates see markets to raise low cost risk capital, investors see liquid secondary markets for exit options. The regulated markets have grown significantly, but the markets need greater depth and liquidity. Another challenge faced by the investors is the costs involved in trading (brokerage, commission, taxes etc.), which are comparatively higher in India than in developed markets. The investor participation is fairly shallow considering the size of the economy. In order to overcome the above bottlenecks and to deepen the capital markets, participation of retail investors, directly and through intermediaries such as mutual funds and portfolio managers needs to be further promoted. This can be achieved only through investor education initiatives, development of quality independent financial advisors and using the Information Technology to reach out across the length and breadth of the country.

Investor Contribution as of DEC 31, 2011.

Corporates - 51%

26%

Banks - 3%

FII's - 1%

51% 19%
HNI's - 19%

Retail - 26%

3% 1%

Source: AMFI data

Investor contribution remains skewed towards the corporate sector Inspite of India offering an exciting retail environment, with abundant growth opportunities, participation from the segment of retail investors continues to remain at deplorably low levels. As of March 31, 2010, the participation from the retail segment was 26.6%, a marginal increase from 21.3% as on March 31, 2009. Dependence on the corporate sector is still pretty pronounced at 51%, which is not much of a change from last year. Volatile market conditions, sound a note of caution for the industry, as high dependence on the corporate sector may result in the fund houses being prone to unexpected redemption pressures. The rationale behind institutional sales claiming such a large chunk of the AUM pie is the benefit of tax arbitrage and lack of short-term investment options. When compared with economies like US and China, investments channelized through corporates, comprise only around 15% and 30% of the assets under management (AUM), respectively. Overall, the assets under management recorded an impressive growth of 47%, as of March 2010, which was predominantly driven by the corporate sector, posting the same level of growth. In the same period, the retail sector also managed to report a strong growth of 84% in its assets under management, followed by the HNI segment growing 24%. It has been observed of late, that the HNI segment especially in Tier 2 &Tier 3 cities has expanded creating a pool of investible surplus at the disposal of the mutual fund industry.

AUM under the various segments (In Rs Billion)

3,500 3,000 2,500 2,000 1,500 1,000 500 0

3134

2132 1,635 891 922 1145

2009 2010

49

51

193 181

Source: AMFI data

Historically, it has been observed that an equity fund remains locked in for an average of 18 months. As per AMFI statistics, around 40 per cent of retail investors exit from equity funds before they complete two years. Even in the HNI segment, only 48 per cent investors remain invested in equity funds for over two years. Growth in the equity base has been particularly sluggish in the past year, burdened with huge outflow of funds. Mutual fund net investments in equity have plummeted sharply over the last year from Rs 6,983 crores in March 2009 to an outflow of Rs 4,082 crores in March 2010. At this point, it is interesting to make note of the movement of FII investments plotted against net mutual fund investments over the last decade.

Other aspects
Indian Depository Receipts (IDRs)IDRs are instruments in the form of depository receipts created by a depository in India against the underlying equity shares of the issuing foreign company. IDRs are an important step towards integrating Indian capital markets with foreign markets and enabling Indian investors to hold stake in foreign securities. For various reasons, IDR have taken more than couple of years to be operationalised. Also, there are certain unresolved tax issues relating to taxation of income from IDRs. For example, the concessional tax regime for listed securities does not extend to IDRs. Also, there is no clarity on taxability of conversion of IDRs into underlying foreign equity shares. Further, IDRs could be made more attractive by introducing two way fungibility of IDRs and removing the mandatory lock-in of a year for conversion of IDRs into equity shares of the foreign company.

8. Objectives of the study.

To find out the importance of a Financial Advisor in capital markets with respect to Retail Investors. To understand the functioning of capital market in India. To study the various products available for investing in equity markets. To understand the current investment climate of India. To measure the current retail participation in capital market. To understand the risk perception of retail investors. To understand the various issues surrounding retail participation. To study the various sources of information available for retail investors for investing in capital markets.

9. Literature review.
This section discusses the literature with regard to household saving motives, impact of financial reforms on private saving, influence of financial advisors on household portfolio composition, and factors influencing household investments in risky assets. According to Shiba (1978), target wealth-income ratio, inflation rate, knowledge about equity markets and relative price of housing were the major determinants of Japanese personal saving ratio. Palsson (1998) found that the households savings allocation was quite sensitive to the risk-free rate of return in Sweden during the period 1964-995. Guariglia (2001) observed that precautionary motive, health risk and longevity risk played a significant part in determining individuals saving behavior in the UK. Unny (2003) showed that income, wealth, and education had a positive and significant effect, and the number of male children and dependency ratio had negative effect on savings in rural Kerala. Stahlberg (1980) found that the Swedish households private saving was obviously lessened when it was complemented by forced saving. But the yearly total of an individuals private and forced saving throughout his working life was greater than what he could have chosen to save voluntarily. Bayoumi (1993) observed that the saving rate was significantly more dependent on changes in wealth, income, and real interest rates. The financial deregulation had lowered the savings rate. Polkovnichenko (2005) analyzed the portfolio of direct equity investors and found that the households portfolio was poorly diversified because of lower number of financial advisors catering to a large number of population. Shanmugham and Muthusamy (1998) found that Coimbatore investors equity portfolio diversification was moderate. Education and occupation of the investors had an impact on the use of technical analysis and fundamental analysis respectively. The SEBINCAER study (Kar et al., 2000) found that the retail investment in shares, debentures and mutual funds was below 10% and the retail investor households portfolio was of relatively small value and undiversified. It was also found that one set of retail investors, in spite of their lower income and lower penetration level of consumer durables, were in the securities market, while another set of household with higher income and higher penetration level of consumer durables did not have investments in securities market. Vaidyanathan (2004) analyzed the household savings in India during the period 1961-2001 and found that households who had not been covered by any pension scheme used gold as an insurance and pension product. Agell and Edin (1990) studied the portfolio allocation among Swedish earning households. They found that wealth, occupation, good advice regarding investment and marginal income taxes had strong positive effects on ownership of different asset categories in the household portfolio choice. They also found a significant positive impact of age,

education, occupation, and retirement status of the head of the household on the proportion of various assets in their portfolio. Hochguertel et al. (1997) studied the portfolio allocation among the Netherlands households. They found that income, education, tax and reliable financial advisor had a positive impact on the proportion of financial wealth held in risky assets, while age had a hump-shaped relationship. Bodie and Crane (1997) found that net worth, good portfolio manager and home ownership had positive and significant impact, and age a negative and significant impact on long-term investment in equity. Guiso and Jappelli (1999) showed that ownership of risky assets was affected by wealth, age, education and index of financial information. Alessie et al. (1999) showed that income, total net worth, and employment status had positive impact, while household composition had a negative and significant impact on ownership of risky assets. They equated financial interest to financial knowledge and found support for the view that financial knowledge had strong relation to ownership of risky assets. Banks and Smith (1999) observed that age, wealth, and education had a significant impact on ownership of risky assets. They also found that tax had a significant impact on tax preferred saving products. Poterba and Samwick (1999) analyzed the portfolio allocation among eight asset categories using pooled data of 1983, 1989, 1992 and 1995 Survey of Consumer Finance (SCF) (15,451 US households) and cross-sectional data of 1995 SCF (4,299 households). They found that income, wealth, education and marginal tax rate had a positive effect on households asset allocation decision. Yilmazer (2001) found that the number of children had a positive and statistically significant impact on home ownership and negative and statistically significant impact on the proportion of investments in shares. Rajarajan (1999) studied Chennai investors financial investments and showed that life-cycle stage of individual investor was an important variable in determining the size of the investments in financial assets and the percentage of financial assets in risky category. Mukhopadhyay (2004) studied the profile of 200 Kolkata investors and found that aged people preferred less risky investments while the youngsters were aggressive in risky investments. Bayer et al. (1996) analyzed the impact of employer-sponsored retirement seminars on retirement saving, using 300 US firms (which sponsored pension plan to their employees) for the period 1993 and 1994, and found that employer-sponsored retirement seminars were significantly associated with higher rates of 401 (k) plan participation and contribution rate. Clark and Madeleine (2003) found that financial education seminars altered the respondents retirement goals and changed their retirement saving behavior in the form of change in their saving rate, including new supplement plan, and increase in their saving contribution to supplementary plan. Sunden (2003) analyzed the impact of information and education initiative of pension reform on Swedish households. She showed that the information and education initiative had some success in increasing the knowledge about the reformed system. The aforementioned studies have shown that the major determinants of portfolio composition are age, income, education, home ownership, household size, occupation, financial advisors and marginal tax rate.

Except for a very few studies, most of the earlier studies on retail portfolio composition had focused on the impact of the abovementioned variables but not on the financial advice on the asset allocation of retail. Of late, very few studies, particularly in the US, have attempted to study the relationship between financial advice and retail portfolio composition. A few among the Indian studies, quoted in the literature review, have studied only the investors in capital market and not the households who have not invested in the capital market instruments. The reforms in the Indian financial sector have led to the financial market becoming a complex one, posing a challenge to the Indian retail participation in managing their self-directed investments. Hence, this research intends to examine the relationship between financial advice and retail portfolio composition along with other variables such as age, knowledge of financial tools, and investment climate.

10. The Scope and Limitations of the Study.

Area covered for survey is limited to Mumbai, thus the findings of this study cant be applied to other cities of India. Only retail investors have been included in the survey. Brokerage houses were not involved. Sample size hasnt been determined using any quantitative technique. The degree of variation of the findings hasnt been checked using any mathematical model. The study is restricted to only Equity Markets and doesnt cover other asset classes of a capital market such as bond, commodity etc.

11. Research design.

The research is a descriptive study since the main motive behind the study is to find out the various issues surrounding the role of a financial advisor with respect to retail investors in capital market. The ulterior motive was to find out how a retail investor gathers information before making his investment decision The major emphasis in this study was given on the involvement of a financial advisor in the investment decision making process of a retail investor. Qualitative approach has been used to evaluate and analyze the findings and opinions stated in the survey.

Sample Design:
Sample size consisted of 200 people from Mumbai and suburbs. The research is based on non-probabilistic convenience sampling technique. Respondents were the people who are investing in capital market.

Data collection tools/methods used:

Three different questionnaires for AMC personnel, Independent Financial Advisors and Relationship Managers were prepared.

12. Hypothesis testing.

H0: Retail Investors need Financial Advisors to assist them in making investment decisions for investing in capital markets. HA: Retail Investors do not need Financial Advisors to assist them in making investment decisions for investing in capital markets. Null Hypothesis, (Assumed Mean) Level of significance, Pop. St.dev., Sample size, n Sample mean, x-bar Standard error of the mean, /sqrt(n) Lower Critical Value Z-test Statistic p-value 115 0.05 60.14 200 109.833 4.25254 -1.6449 -1.215 (Do not reject hypothesis because -1.44947> -1.64485). 0.11218 (Do not reject hypothesis because p-value>).

Thus the findings of the survey prove that Retail Investors need Financial Advisors to assist them in making investment decisions for investing in capital markets.

13. Findings of the survey.

1. Out of the sample size of 200 it was found that 12% had been investing for less than a year, 27.5% were investing for the past one to four years, 22.5% had been investing for the past decade, 22% were investing for the past two decades and 16% for more than two decades.

16%

12%

22%

27.5%

22.5%

2. Out of the sample size of 200 it was found that 19 % had investments in mutual funds, 27% had investments in stocks, 8% in ULIP, 13% in gold, 24% in bank FDs and 9% in national saving certificates.

6 9% 5 24%

1 19%

4 13%

2 27% 3 8%

3. Out of the sample size of 200 it was found that 111 invested in capital markets, 63 invested

in derivatives market and 26 invested in both.

120 100 80 60 40 20 0 1 2 3

1-Capital 2-Derivatives 3-Both

4. Out of the sample size of 200 it was found that 16% traded on daily basis, 25% on weekly

basis, 28% on monthly basis, 16% semi annually and 15% annually.

15%

16%

16% 25%

28%

5. Out of the sample size of 200 it was found that 8% knew about fundamental analysis, 11% knew about technical analysis, 33% knew about both and 48% didnt knew about either.

8% 11%

48%

33%

6. Out of the sample size of 200 it was found that 68 people used fundamental or technical

analysis for investing and the remaining didnt use them.

140 120 100 80 60 40 20 0 1 2

1-YES 2- NO

7. Out of the sample size of 200 it was found that 135 of the respondents occasionally

consulted with financial advisors and 65 of the respondents always consulted with their financial advisors.

160 140 120 100 80 60 40 20 0 1 2

1- Ocassionally 2- Always

8. Out of the sample size of 200 it was found that 129 of the respondents preferred to receive

investment tips in person and the remaining by mail.

140 120 100 80 60 40 20 0 1 2

1- In person 2- By mail

9. Out of the sample size of 200 it was found that 9% of the respondents used financial

websites as a guide to investment decision, 19% used newspapers and magazines, 16% used company annual reports, 13% used equity research report, 21% used financial advisors and brokers and remaining 22% took help of their friends and family.

9% 22% 19%

21% 16% 13%

10. Out of the sample size of 200 it was found that 102 respondents were willing to postpone

their investment decision on unavailability of adequate information, 62 would not postpone and the remaining were not sure.
120 100 80 60 40 20 0 1 2 3

1- YES 2- NO 3- NOT SURE

11. Out of the sample size of 200 it was found that 4% of the respondents didnt consider any

factor before investing in a security, 27% considered current market news, 18% considered their investment objectives, 24% considered their investment capital, 11% considered chance of losing money and 16% considered chance of making money.

4% 16% 27% 11%

24%

18%

12. Out of the sample size of 200 it was found that 99 of the respondents relied on their

financial advisors for assessing the risk of the investment product and the remaining considered risk return trade off.
101.5 101 100.5 100 99.5 99 98.5 98 1 2

1- rely on advisor 2-look for risk & return

13. Out of the sample size of 200 it was found that 133 of the respondents felt that

information available for investment was not easy to comprehend while remaining felt it was very easy.
140 120 100 80 60 40 20 0 1 2

1- NOT EASY 2- VERY EASY

14. Out of the sample size of 200 it was found that 56 of the respondents felt there was too

little information for investment, 97 felt they received the right amount of information and the remaining felt they had too much information which confused them.
120 100 80 60 40 20 0 1 2 3

1- too little info 2- rght amount of info 3- too much info

15. Out of the sample size of 200 it was found that 111 invested in bull market, 112 invested

in bear market. The sum of respondents is more than the entire sample because some respondents invested in both markets.

112.2 112 111.8 111.6 111.4 111.2 111 110.8 110.6 110.4 1 2

1- BULL MARKET 2- BEAR MARKET

14. Observations of the survey.

It was observed from the survey that short term traders dont consider stock as investments. Respondents prefer investing in equity than in derivative market because derivative market is risky and they are unaware of the margin calculations on futures and they dont know how options are priced. They want IPOs to come at discount rather than premium. They are concerned about certain operators rigging price of certain small cap stocks. They want corporate to pay more attention on governance and ethics. The respondents want RBI to start reducing interest rates so that capex cycle picks up and they could participate in the ensuing growth. They want the government to take action on policymaking, fiscal deficit and reduction in scams. They want the government to take steps to increase private investment thus improving investment climate of the country. Majority of the respondents are unaware about the various tools for security analysis thus making them to rely on financial analysts and advisors for taking investment decisions. People want to receive tips on investment in person so that they could clear their doubts and it is also a trust issue. People prefer equity research reports over newspapers and magazines because they get a detailed analysis in a research report. People are generally risk averse because they are willing to postpone their investment decision on unavailability of adequate information on a security. The respondents consider investment climate more important for participating in the capital markets because they believe that momentum is like a rising tide that lifts everything.

People dont find information regarding a security easy to analyse, they need more closure on that. People regard the open information available for investing too little or too much because they cannot pick the right information and discard the non sense. Generally retail investors who are working in non financial sectors dont find time to analyse securities thus they dont participate in equity markets. My overall observation was that retail investors are smart enough to know the kind of risk they take while they invest in capital markets, they are also aware that equities are the asset class that can beat inflation. They are also aware that they should have certain portion of their savings in equities. Retail investors are needed to be explained that insurance and FDs are not the kind of products on which you can expect high returns. Insurance is a hedging instrument against uncertainty and FDs are saving tools. Hence a customer should not allocate disproportionately towards these products. Insurance is costly compared to Mutual Funds because a person has to pay more charge as compared to Mutual Funds in which there is no entry load and expense ratio is also very low under 2.5% of total AUM.

15. Recommendations.
The onus of increasing retail participation lies primarily on the government, by improving the investment climate it can easily increase retail participation. Financial advisors need to get involved with their clients more to understand their investment goals. Financial advisors need to analyse the risk profile of their clients rather than their investment capital. Thus they could provide them with a questionnaire for gauging the risk profile of their clients. They could even upload these questionnaires on their web sites. By doing so they categorise the retail investors in various risk category and even develop structured products for them. Stock brokers, financial analyst should be transparent regarding their calls on a certain securities and try to explain them on how they arrived to the corresponding conclusion. The advisors should help regarding the IPO whether they are under priced or over priced and by what margin. Financial advisors shouldnt force their clients to invest because of brokerage they should look at long term and advice their clients to refrain from equities if there is too much uncertainty in the environment. Financial advisors should analyse the volatility in the market and advise their clients on it i.e. how it would affect their portfolio. Financial advisors could conduct programmes on fundamental and technical analysis of securities for their clients which would be like advising them on the tools available that could help them in their decision making. Financial literacy has to be increased in India. The large brokerage houses could tap college students who are in their growth stage and since they are young with disposable income they have a risk appetite that is suitable for a capital market investor.

Insurance is a financial product which guarantees protection against risk hence it is not regulated by the SEBI since traditional insurance products dont invest in capital markets, but ULIPs is structured in such a way that a part of its fund is invested in capital market and yet ULIPs are not regulated by the SEBI. This anomaly has to be rectified by the Finance Ministry or the FSDC. Insurance are costly products as compared to MFs, insurance are one time investment unlike MFs and since average age of Indians has gone up, a person may end up paying more premium, hence these points should be used as USP while promoting MFs against insurance. Long term benefits of trail charges have to be explained to Relationship Managers (RM). For e.g : if a RM is earning 5% on a scheme and if the NAV of the scheme shoots up 5 times the RM will end up earning 5 times the commission that he was earning before. FDs are savings instrument and they are attractive only until interest rates are high, hence from a long-term perspective equities are always better. Fixed Maturity Plans can provide better post tax returns than FDs in case of large sum, which have been deposited as FD. FDs provide returns which are not above the prevailing inflation rate hence the person who has invested in FD is suffering a net loss in real terms plus FDs are illiquid, these points should be used as USP while promoting MFs against FDs. All the above mentioned points should be explained, advertised and provided (in the information brochure) to a customer by the financial advisor so that he can take the most appropriate investment decision.

16. Conclusion.
The equity market in India is extremely vibrant, but equity based funding solely, cannot lead the economy to growth. The role of capital markets is vital for enhancing growth in wealth distribution and increasing availability of funds for infrastructure development. One of the underlying challenges that the capital market is dealing with is the issue of increasing the out-reach & enhancing financial inclusion. The huge scale of the drive towards inclusive growth is intimidating, as various stakeholders like banks, insurance companies and asset management companies struggle to move a step closer to the untapped areas and newer target consumers. The challenge lies in devising a cost-effective delivery model to reach out to the low income group of society, penetrating the remote areas. The new schemes such as Equity Savings Schemes proposed in the current budget will definitely help to lure more retail participation. The lowering of Securities Transaction Tax by 20% i.e. from 0.125% to 0.1% is also welcome. The road ahead for deepening the financial markets needs to be paved by the formulation of a strong linkage between the development of the economy and the capacity of the financial system. The global financial environment is moving towards an integrated financial system, and will serve in good stead to standardise compliance norms and procedures. A greater measure of transparency is also required to be built into regulatory procedures, to bring in a new dimension to financial markets, and take it to the next level.

17. References & Webliography.

References:
Sebi Handbook of Statistic 2010. Price Water Cooper house report on Opportunities & Challenges Indian Financial Markets Roadmap 2020 (July 2011). R R Rajamohan report on Reading Habit and Household Investment in Risky Assets published in IUP journal (2010).

Webliography:
www.amfiindia.com www.sebi.gov.in www.ibef.org

Annexure
Questionnaire for analyzing participation, behavior and needs of Retail investors in Capital Markets

Name: _________________________________________________________________ Age: ___________ Service Retired Occupation: Business

1. How long have you been investing? Less than a year One to four years Five to nine years 10 to 19 years More than 20 years

2. What type of investments do you have? Check all that apply Mutual funds Stocks or shares ULIP Gold Bank fixed deposits National saving certificate

3. What market segments do you invest in? Capital Derivatives 4. How frequently do you trade? Daily Weekly Monthly Half-yearly Yearly

Both

5. Do you know about fundamental and technical analysis of stocks? I know about fundamental analysis I know about technical analysis I know both the terms Dont know about any of them

6. Do you use the above mentioned tools for investing in capital markets? Yes No

7. When making investment decisions, how often do you use a financial/investment advisor? Occasionally Always 8. How do you prefer to receive investment tips? In person By mail, email 9. What are the top three sources of information that you use to guide your investment decisions? Financial advice websites Newspapers, Magazines Annual reports Equity research reports Financial/investment advisor/broker Friends/family Other ___________________________________________________________

10. If the information is not available would you be willing to postpone your purchase until the information is available? Yes No Dont Know/Not Sure 11. When assessing an Investment product, (like a security or a derivative) which of the following factors would influence your investment decisions? CHOOSE ALL THAT APPLY. Do not consider any factors Current news about market conditions Your investment objectives How much money you have, to invest Chance of losing your money Chance of making money Other _______________________________________________________________ 12. How do you assess the risk of an investment? I rely entirely on my advisors advice I look at the potential returns and assume higher returns means higher risk, and vice versa Other________________________________________________________________ _____________________________________________________________________ __________________ 13. How easy is the information to understand?

Not that easy

Very easy

14. In general, how would you rate the amount of information you receive about investment? Too little information The right amount of information Too much information 15. Do you invest in bull market or in bear market? Bull market Bear market 16. What according to you is needed to be done to increase retail participation in Capital Markets? ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________