A

Project Study Report

On

Training Undertaken at
ICICI Securities Ltd

Titled

“EMERGING INVESTMENT PRODUCTS AND ITS SCOPE IN

INDIAN FINANCIAL MARKETS”

(Submitted in partial fulfillment for the Award of degree of

Master of Business Administration)

Submitted By: - Submitted To:-

RICHA SINGH MS. KAVYA SAINI
MBA SEM IV FACULTY GUIDE

(2009-2011)

INTERNATIONAL SCHOOL OF INFORMATICS AND MANAGEMENT

 To whomsoever it may concern

This is to certify that Usha Kumawat a

student of Swami Keshvanand Institute of
Technology, Management & Gramothan,
Jaipur. , has undergone her training
programme with our organization from 15th
April to 30th April, 2009.

She took keen interest in all the

responsibilities assigned to her. She has
taken a project report on “Study of Emerging
Investment Products and its Scope in Indian
Financial Markets” in ICICI Direct, Jaipur. ,
and her performance during the course of
project was satisfactory.

We wish good luck for her future

endeavour.

Dated :

Niyaz Syeg
 Regional
Production Manager

ICICI
Securities Ltd
PREFACE

Practical training is one of the major components for any professional course like M.B.A. the
real place where a professional person faces a problem in a field. It was a good exposure for
me to undergo training in a highly esteemed organization like ICICI Direct Ltd. where I got to
enhance my knowledge and experience with respect to Study of the Emerging Investment
Products and its scope in the Indian Financial Markets.

I was able to get familiarized with the corporate environment, team support and management
operations in working out the operations successfully for the achievement of the end objectives
of the organization as a whole.

Thus I would say that this training was beneficial, educative and good exposure to me, which
will certainly help me in my near future.
 Acknowledgement

I express my sincere thanks to my project guide, Mr. Niyaz Syeg, Regional Production
Manager, ICICI Securities Limited. , for guiding me right form the inceptions till the successful
completion of the project. I sincerely acknowledge him for extending their valuable guidance,
support for literature, critical reviews of project and the report and above all the moral support
he had provided to me with all stages of this project. I would also like to thank the supporting
staff of the ICICI Direct. ,for their help and cooperation throughout our project.

(Signature of Student)

RICHA SINGH
 TABLE OF CONTENTS

Particulars

1. Executive summary
2. Introduction to the Industry
3. Introduction to the Organization
4. Introduction to the project
a. Indian market growth
b. RBI and SEBI
c. Indian financial market
d. Investment products
e. Types of Risk associated with the Investments
f. Investment Strategies
g. An Analytical Introduction to Indian Financial System and Reforms
h. Market needs

j. Innovations in Financial Products

5. Research Methodology
0 5.1 Title of the Study
1 5.2 Duration of the Project
2 5.3 Objective of Study
3 5.4 Type of Research
4 5.5 Sample Size and method of selecting sample
5 5.6 Scope of Study
6 5.7 Limitation of Study
6. Survey findings
1. Brief details
2. Questionnaire
3. Analysis of questionnaire
4. Common investment mistakes

7. Conclusion

8. Recommendations and Suggestions

9. Bibliography
EXECUTIVE SUMMARY

A financial market is a mechanism that allows people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities (such as precious metals or agricultural
goods), and other fungible items of value at low transaction costs and at prices that reflect the
efficient market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing
constant innovation to improve liquidity

The Indian financial market has also grown substantially. The Indian stock
markets are now amongst the best in the world in terms of modernizations and the technology.
India was among the few countries, which was not badly effected by the contagion effects of
the Asian crisis of 1997. Policy makers attribute this to the slow and cautious pace of capital
account liberalization

Today-- with the 'feel good' factor about India in the global arena rising,
increased confidence of the investors in the Indian market, Sensex looking more attractive than
ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is the
most vulnerable period for the regulators of the Indian financial sector, particularly SEBI and
RBI

8
The financial markets can be divided into different subtypes:

1.Capital markets which consist of: Stock markets, which provide financing through the
issuance of shares or common stock, and enable the subsequent trading thereof.

2. Bond markets, which provide financing through the issuance of Bonds, and enable the
subsequent trading thereof.

3. Commodity markets, which facilitate the trading of commodities.

4. Money markets, which provide short term debt financing and investment.

a. Derivatives market, which provide instruments for the management of financial

risk.

b. Futures markets, which provide standardized forward contracts for trading

products at some future date; see also forward market.

c .Insurance markets, which facilitate the redistribution of various risks.

d. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets. Secondary markets allow investors to sell
securities that they hold or buy existing securities.

ICICI Securities Limited . amongst the leading Brokerage Houses and the value based
financial services which make it preferred service provider. As India's fastest growing financial
services conglomerate, with deep moorings in the Indian economy for over five decades, ICICI
Group of companies have endeavoured to contribute to address the challenges posed to the
community in multiple ways.

9
The ICICI group has following companies which include: ICICI Bank , ICICI Prudential Life
Insurance Company , ICICI Securities Limited , ICICI Securities Primary Dealership Limited ,
ICICI Lombard General Insurance Company , ICICI Prudential Asset Management Company ,
ICICI Venture. .
It provides Prime brokerage services in the area of: Equity, Commodities,
Derivatives Depository services, IPO Underwritings, Mutual Fund Distribution, Insurance
product distribution, The company also provides investment management services like:
Portfolio Management Services, Portfolio Advisory Services

My project will be focusing on the new areas of investment available to investors and how their
behavior is changing. They are now leaving behind the traditional approach of investment like
fixed deposits, gold, post office schemes, bank deposits etc. Investors are now looking towards
new diversification of their wealth by making investment in mutual funds, capital market,
derivatives, insurance, ETF(Exchange traded funds) etc. Like most developed and developing
countries Indian investors are searching for new investment avenues.

Mutual funds have become one of the largest financial intermediaries in the leading
world economies. Every person has his/her own set of plans for savings to meet any financial
adversity in future that suddenly occurs and to be a market leader the company has to be
aware of its competitors and investors behavior as the competition is very high..

A mutual fund is a form of collective investment that pools money from many
investors and invests their money in stocks, bonds, short-term money market instruments,
and/or other securities. In a mutual fund, the fund manager trades the fund's underlying
securities, realizing capital gains or losses, and collects the dividend or interest income. The
investment proceeds are then passed along to the individual investors.

Similarly there are various other investment products in the Indian Financial
Market such as fixed income securities, bond ,equity shares, public deposits, commercial
paper, certificate of deposits etc. of which I will be discussing in the report. Many individuals
find investments to be fascinating because they can actively participate in the decision making
process and see the results of their choices. Not all investment will be profitable as investment

10
investor will not always make the correct investment decision over the period of years,
however you should earn a positive return on a diversified portfolio. In addition there is a thrill
from the major success, along with the agony associated with the stock that dramatically rose
after you sold or did not buy. Both the big fish you catch and the big fish that get away can
make wonderful stories.

Investment is not a game but a serious subject that can have a major effect on
the investor’s future well being. Virtually everyone makes investment. Even if the individual
does not select specific assets such as stock, investment are still made through participation in
pension plans, and employee saving program or through purchase of life insurance or a home.
Each of these investments has a common characteristic such as potential returns and the risk
you must bear.

The future is uncertain, and you must determine how much risk you are willing to bear since
higher return is associated with accepting more risk. The individual should start by specifying
investment goals. Once these goals are established, the individual should be aware of the
mechanics of investing and the environment in which investment decisions are made. These
include the processes by which securities are issued and subsequently bought and sold, the
regulations and tax laws that have been enacted by various levels of government, and the
sources of information concerning investment that are available to the individual.

11
Introduction to the Industry

Banking Products and Financial Services Industry

ICICI Bank India is the largest private sector bank. Its banking products and financial services
are some of the superior ones. The reach and market of ICICI Bank is unmatched in India as
yet. It offers a countrywide network of 950 branches and 35,00 ATM's reaching out to your
doorstep.

Snapshot

Chief Executive Name Mr. K V Kamath

Secretary Name Mr. Jyotin Mehta
Face Value 10
Market Lot 1
Business Group Name ICICI Group
Incorporation Date 05/01/1955
Industry Name Finance - Term Lending Institutions
Registrar of Company I C I C I INVESTORS SERVICES LTD
SCINDIA HOUSE 3RD FLOOR NAROTTAM MORARJEE MARG BALARD ESTATE
Mumbai , Maharashtra , 400001

The Board of Directors :

12
 K. V. Kamath

Managing Director and Chief Executive Officer

Chanda Kochhar

Joint Managing Director

& Chief Financial Officer

V. Vaidyanathan
K. Ramkumar

13
 Executive Director Executive Director

Sonjoy Chatterjee

Executive Director
HISTORY:-

# Founded by the Government of India in the 1960's, it was one of the three financial
institutions set up to finance large industrial projects

# Earlier known as Industrial Credit and Investment Corporation of India, it did not entertain
retail customers and was thus not a bank in the literal sense.

# It was in the 1990's that a subsidiary was set up in the name of ICICI Bank to take up retail
banking services including deposits, credit cards, loans etc. In 2002, the ICICI Bank was
merged back with the ICICI and the result was the ICICI Bank Limited operational now

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

# National Stock Exchange

# Bombay Stock Exchange, Mumbai

# Kolkata Stock Exchange

# Vadodara Stock Exchange

14
The overseas operations of ICICI Bank were set up in 2002. Today it boasts of wholly owned
subsidiaries and offices in 18 countries including US, UK, Canada and Russia. The American
Depository Receipts or ARD's enjoy listings in the New York Stock Exchange (NYSE). The
company profile shows an increasing number of satisfied retail and corporate customers
dedicating their loyalty to the bank. They also offer Internet and Mobile Banking and online
customer services facilities. An ATM and Branch Locator is available online on the official
ICICI Bank Website.

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

# Personal Banking

# Corporate Banking

# NRI Banking

The Personal Banking Services include:

Deposits: deposits into savings account, fixed deposits, security deposits and recurring
deposits.

 Loans: home loans, car loans, personal loans, loans against property, gold and securities
besides many other special financial assistances for rural and industrial use.
 Investments: bonds, mutual funds, Senior citizens savings and Pure Gold.
 Insurance: home, vehicle and health insurance.
 Foreign Exchange Services
 Demat And Credit Services
 Wealth Management
 Private Baking
 Online Banking Services

Corporate banking services cover:

 Transaction and Treasury Banking

15
  Investment Banking
 Rural and Agricultural Finance
 Structured and Technological Finance
 International Banking
 Mobile and Online Banking

The NRI Banking Services

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

 Money Transfers anytime and anywhere in India

 Bank Accounts for the global Indians
 Home Loans

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

Contact details:
Phone: 91-11- 41718000, 91-098181-78000
Website:http://www.icicibank.com

Product Portfolio

Banking

16
• Personal Banking
o Savings & Deposits
o Loans
o Cards
o Wealth Management
• Global Private Clients
• Corporate Banking
o Transaction Banking
o Treasury Banking
o Investment Banking
o Capital Markets
o Custodial Services
o Rural & Agri Banking
o Structured Finance
o Technology Finance
• Business Banking
o Current Account
o Business Loans
o Forex
o Trade
o Cash Management Services

• NRI Banking
o Money Transfer
o Bank Accounts
o Investment
o Property Solutions
o Insurance
o Loans

Insurance & Investment

17
• Life Insurance
o Life Insurance
o Retirement Solutions
o Health Solutions
o Education Solutions
• General Insurance
o Health Insurance
o Overseas Travel Insurance
o Student Medical Insurance
o Motor Insurance
o Home Insurance

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

• Mutual Fund
o Our Funds
o Performance Analyser
o Systematic Investing
o Compare Schemes

• Private Equity Practice

18
o Portfolio
o Investment Strategy

Group Philosophy

We seek to partner India's growth and globalisation through delivery of world-class financial
services across all cross-sections of society.

Towards Sustainable Development

As India's fastest growing financial services conglomerate, with deep moorings in the Indian
economy for over five decades, ICICI Group of companies have endeavoured to contribute to
address the challenges posed to the community in multiple ways.

AWARDS

Asian Banker Leadership Achievement Award for Mr. K.V. Kamath

Padma Bhushan conferred on Mr. K. V. Kamath

Avaya Global Connect Customer Responsiveness Awards 2007

Gold Trusted Brand Award

19
The ICICI Group Representation

ICICI Bank also has banking subsidiaries in UK, Canada and Russia

20
ICICI Group offers a wide range of banking products and financial services to corporate and
retail customers through a variety of delivery channels and through its specialised group
companies, subsidiaries and affiliates in the areas of personal banking, investment banking,
life and general insurance, venture capital and asset management. With a strong customer
focus, the ICICI Group Companies have maintained and enhanced their leadership position in
their respective sectors.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,997.95 billion (US$ 100
billion) at March 31, 2008 and profit after tax of Rs. 41.58 billion for the year ended March 31,
2008. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in
terms of free float market capitalisation*. The Bank has a network of about 1,308 branches and
3,950 ATMs in India and presence in 18 countries.

ICICI Prudential Life Insurance Company is a 74:26 joint venture with Prudential plc (UK). It
is the largest private sector life insurance company offering a comprehensive suite of life,
health and pensions products. It is also the pioneer in launching innovative health care
products like Diabetes Care and Cancer Care. The company operates on a multi-channel
platform and has a distribution strength of over 2,90,000 financial advisors operating from 1956
branches spread across 1669 locations across the country. In addition to the agency force, it
also has tie-ups with various banks, corporate agents and brokers. In fiscal 2008, ICICI
Prudential attained a market share of 12.7% with new business weighted premium growth of
68.3% to Rs. 66.84 billion and held assets of Rs. 285.78 billion at March 31, 2008.

ICICI Lombard General Insurance Company, a joint venture with the Canada based Fairfax
Financial Holdings, is the largest private sector general insurance company. It has a
comprehensive product portfolio catering to all corporate and retail insurance needs and is
present in over 200 locations across the country. ICICI Lombard General Insurance has
achieved a market share of 29.8% among private sector general insurance companies and an
overall market share of 11.9% during fiscal 2008. The gross return premium grew by 11.4%
from Rs. 30.3 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008.

21
ICICI Securities Ltd is the largest equity house in the country providing end-to-end solutions
(including web-based services) through the largest non-banking distribution channel so as to
fulfill all the diverse needs of retail and corporate customers. ICICI Securities (I-Sec) has a
dominant position in its core segments of its operations - Corporate Finance including Equity
Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product
Distribution.

ICICI Securities Primary Dealership is the largest primary dealer in Government securities.
In fiscal 2008, it achieved a profit after tax of Rs.1.40 billion.

ICICI Prudential Asset Management is the second largest mutual fund with asset under
management of Rs. 547.74 billion and a market share of 10.2% as on March 31, 2008. The
Company manages a comprehensive range of mutual fund schemes and portfolio
management services to meet the varying investment needs of its investors through 235
branches spread across the country.

Incorporated in 1987, ICICI Venture is the oldest and the largest private equity firm in India.
The funds under management of ICICI Venture have increased at a 5 year CAGR of 49% to
Rs.95.50 billion as on March 31, 2008.

*Free float holding excludes all promoter holdings, strategic investments and cross holdings
among public sector entities.

Introduction to the organisation

ICICI Securities Ltd

ICICI Securities Ltd is the largest equity house in the country providing end-to-end solutions
(including web-based services) through the largest non-banking distribution channel so as to
fulfill all the diverse needs of retail and corporate customers. ICICI Securities (I-Sec) has a
dominant position in its core segments of its operations - Corporate Finance including Equity
22
Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product
Distribution.

With a full-service portfolio, a roster of blue-chip clients and performance second to none, we
have a formidable reputation within the industry.

Today ICICI Securities is among the leading Financial Institutions both on the institutional as
well as retail side.

Headquartered in Mumbai, I-Sec operates out of several locations in India.

ICICI Securities Inc., the stepdown wholly owned US subsidiary of the company is a member
of the National Association of Securities Dealers, Inc. (NASD). As a result of this membership,
ICICI Securities Inc. can engage in permitted activities in the U.S. securities markets. These
activities include Dealing in Securities and Corporate Advisory Services in the United States
and providing research and investment advice to US investors.

ICICI Securities Inc. is also registered with the Financial Services Authority, UK (FSA) and the
Monetary Authority of Singapore (MAS).

23
Product Portfolio

24
25
 Products and Services

 Prime brokerage services in the area of:

 Equity
 Derivatives
 Commodities
 Depository services
 IPO Underwritings
 Mutual Fund Distribution
 Insurance product distribution
 The company also provides investment management services like
 Portfolio Management Services
 Portfolio Advisory Services

26
 Awards & Recognition

Institutional

• ICICI Securities is awarded as the Best Investment Bank 2008 by Global Finance
Magazine
• The Corporate Finance group also was awarded a runner-up Best Merchant Banker by
Outlook Money in 2007.
• ICICI Securities (I-Sec) topped the Prime Database League Tables 2007 for money
raised through IPOs/FPOs.
• The equities team was adjudged the 'Best Indian Brokerage House-2003' by Asiamoney.

Retail

• ICICIdirect, the neighborhood financial superstore won the prestigious Franchise India
`Service Retailer of the Year 2008 award.
• ICICIdirect wins the prestigious Outlook Money - India's Best e-Brokerage House for
2008.
• ICICIdirect been winning the prestigious Outlook Money - India's Best e-Brokerage
House for 2003-2004, 2004-2005, 2006-2007 and 2007-2008.
• ICICIdirect has also won the CNBC AWAAZ Consumer Award for the Most Preferred
Brand of Financial Advisory Services.
• Best Broker - Web 18 Genius of the Web Awards 2007

Technology

• Indian Bank's Association Business Technology Awards for Best Online Trading
Platform in 2006 and 2007

27
ICICI Direct

ICICI Direct (or ICICIDirect.com) is stock trading company of ICICI Bank. Along with stock
trading and trading in derivatives in BSE and NSE, it also provides facility to invest in IPOs,
Mutual Funds and Bonds. Trading is available in BSE and NSE.

ICICIdirect.com is the online share trading service by ICICI Bank Ltd. Through ICICI Direct
Account; you can trade in share markets, commodities, and invest in mutual funds and other
products and prepare charts and research to create an investment portfolio for your personal
finances.

ICICI Direct helps you in your investment planning that helps you safeguard your investment
returns from the inflation rates. The experts at ICICI Direct help you plan your retirement so
that you retire in glory and never feel burdened financially. ICICI offers free demat trading
account that helps you in secure trading in stocks and bonds online. ICICI Mutual Funds and
tax saving plans help you in saving a major chunk of your hard earned money.

Icicidirect.com offers trading in shares that can be of the form cash trading, margin trading,
spot trading and BTST (Buy Today Sell Tomorrow) facility along with trading on NSE or BSE or
through market orders. ICICI Securities Limited is also a syndicate member for the Reliance
Power IPO Issue that is available through icicidirect.com. A new introduction to online trading
is ICICI Direct Overseas Trading available on their website.

Key elements that place ICICI Direct Ltd. amongst the leading Brokerage Houses and
makes it the preferred service provider for value based financial services are:

• A Client-driven foundation and strategy committed to client-specific investment needs

and objectives.

• Integrated and innovative use of Technology enabling clients to trade offline, online
28
• Strategic tie-ups with latest technology partners to facilitate trading access and direct
processing across more than 700 Branches spread over 300 cities

• Client-focused philosophy backed by memberships of all principal Indian Stock and

Commodity Exchanges makes ICICI Direct Ltd., a preferred service provider in the Industry for
value based services.

Products and Services

A product for every need: ICICIdirect.com is the most comprehensive website, which allows
you to invest in Shares, Mutual funds, Derivatives (Futures and Options) and other financial
products. Simply put we offer you a product for every investment need of yours.

1. Trading in shares:

ICICIdirect.com offers you various options while trading in shares.

Cash Trading : This is a delivery based trading system, which is generally done with the
intention of taking delivery of shares or monies.

Margin Trading : You can also do an intra-settlement trading upto 3 to 4 times your available
funds, wherein you take long buy/ short sell positions in stocks with the intention of squaring off
the position within the same day settlement cycle.

MarginPLUS Trading : Through MarginPLUS you can do an intra-settlement trading upto 25

times your available funds, wherein you take long buy/ short sell positions in stocks with the
intention of squaring off the position within the same day settlement cycle. MarginPLUS will
give a much higher leverage in your account against your limits.

Spot Trading : This facility can be used only for selling your demat stocks which are already
existing in your demat account. When you are looking at an immediate liquidity option, 'Cash

29
on Spot' may work the best for you, On selling shares through "cash on spot", money is
credited to your bank a/c the same evening & not on the exchange payout date. This money
can then be withdrawn from any of the ICICIBank ATMs.

BTST : Buy Today Sell Tomorrow (BTST) is a facility that allows you to sell shares even on 1st
and 2nd day after the buy order date, without you having to wait for the receipt of shares into
your demat account.

CallNTrade® : CallNTrade® allows you to call on a local number in your city & trade on the
telephone through our Customer Service Executives. This facility is currently available in over
11 major states across India.

Trading on NSE/BSE : Through ICICIdirect.com, you can trade on NSE as well as BSE.

Market Order : You could trade by placing market orders during market hours that allows you
to trade at the best obtainable price in the market at the time of execution of the order.

Limit Order : Allows you to place a buy/sell order at a price defined by you. The execution can
happen at a price more favorable than the price, which is defined by you, limit orders can be
placed by you during holidays & non market hours too.

2. TRADE IN DERIVATIVES:

FUTURES

Through ICICIdirect.com, you can now trade in index and stock futures on the NSE. In futures
trading, you take buy/sell positions in index or stock(s) contracts having a longer contract
period of up to 3 months.

Trading in FUTURES is simple! If, during the course of the contract life, the price moves in
your favour (i.e. rises in case you have a buy position or falls in case you have a sell position),
you make a profit.

30
Presently only selected stocks, which meet the criteria on liquidity and volume, have been
enabled for futures trading.

Calculate Index and Know your Margin are tools to help you in calculating your margin
requirements and also the index & stock price movements. The ICICIDIRECT UNIVERSITY on
the HOME page is a comprehensive guide on futures and options trading.

OPTIONS

An option is a contract, which gives the buyer the right to buy or sell shares at a specific price,
on or before a specific date. For this, the buyer has to pay to the seller some money, which is
called premium. There is no obligation on the buyer to complete the transaction if the price is
not favorable to him.

To take the buy/sell position on index/stock options, you have to place certain % of order value
as margin. With options trading, you can leverage on your trading limit by taking buy/sell
positions much more than what you could have taken in cash segment.

The Buyer of a Call Option has the Right but not the Obligation to Purchase the Underlying
Asset at the specified strike price by paying a premium whereas the Seller of the Call has the
obligation of selling the Underlying Asset at the specified Strike price.

The Buyer of a Put Option has the Right but not the Obligation to Sell the Underlying Asset at
the specified strike price by paying a premium whereas the Seller of the Put has the obligation
of Buying the Underlying Asset at the specified Strike price.

By paying lesser amount of premium, you can create positions under OPTIONS and take
advantage of more trading opportunities.

3. Investing in Mutual funds:

ICICIdirect.com brings you the same convenience while investing in Mutual funds also - Hassle
free and Paperless Investing.

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With the inclusion of Fidelity MF, you can now invest on-line in 19 mutual Funds through
ICICIdirect.com. Prudential ICICI MF, JM MF, Alliance MF, Franklin Templeton MF, Sundaram
MF, Birla Sun Life MF, HDFC MF, Principal MF, UTI MF,Reliance MF,Kotak MF,Tata MF,DSP
Merrill Lynch MF, ING MF,CHOLA MF,Deutsche MF,HSBC MF and Standard Chartered MF
are the Mutual Funds available for investment. You can invest in mutual funds without the
hassles of filling application forms or any other paperwork. You need no signatures or proof of
identity for investing.

Once you place a request for investing in a particular fund, there are no manual processes
involved. Your bank funds are automatically debited or credited while simultaneously crediting
or debiting your unit holdings.

You also get control over your investments with online order confirmations and order status
tracking. Get to know the performance of your investments through online updation of MF
portfolio with current NAV.

ICICIdirect.com offers you various options while investing in Mutual Funds:

Purchase: You may invest/purchase Prudential ICICI MF, JM MF, Alliance MF, Franklin
Templeton MF, Sundaram MF, Birla Sun Life MF, HDFC MF, Principal MF, UTI MF ,Standard
Chartered MF ,Reliance MF,Kotak MF, Tata MF,DSP merrill lynch MF,ING MF,CHOLA
MF,Deutsche MF,HSBC MF and Fidelity MF without the hassles of filling application forms.

Redemption:In addition to giving hassle-free paperless redemption, ICICIdirect.com offers

faster liquidity. You can redeem the mutual fund units through ICICIdirect.com. The money will
be credited to your bank account automatically 3 days after the order placement date.

Switch: To suit your changing needs you may wish to shift monies between different schemes.
You can switch your monies online from one scheme to another in the same fund family
without any hassles.

Systematic Investment plans (SIP): SIP allows you to invest a certain sum of money over a
period of time periodically. Just fill in the investment amount, the period of investment and the
32
frequency of investing and submit. ICICIdirect.com will do the rest for you automatically
investing periodically for you.

Systematic withdrawal plan: This allows you to withdraw a certain sum of money over a
period of time periodically.

Transfer-in: You can convert your existing Mutual funds into electronic mode through a
transfer-in request.

4. IPOs and Bonds Online:

You could also invest in Initial Public Offers (IPOs) and Bonds online without going through the
hassles of filling ANY application form/ paperwork.

Get in-depth analyses of new IPOs issues (Initial Public Offerings) which are about to hit the
market and analysis on these. IPO calendar, recent IPO listings, prospectus/offer documents,
and IPO analysis are few of the features, which help you, keep on top of the IPO markets.

5. Overseas Trading:

ICICI Direct also provides services in overseas trading

6. Content Features:

There are a host of features on ICICIdirect.com that shall help you make informed investment
decisions.

We provide you with the indices of major world markets, nifty futures and ADR prices of
Indian scrips. Get daily share prices of all scrips, monthly and yearly high/lows etc through
Market Watch.

33
Get breaking news from CNBC and Reuters. Catch a glimpse of News Headlines through our
scrolling Direct News Headlines.

Get a snapshot of the latest developments in the markets through the day using Market
Commentary. You can get weekly snapshots also. Use Pick of the week which focuses on
fundamental stocks with sound prospects.

Catch interviews, reactions and comments from industry leaders with CEO Call. Track the
movement of leading scrips within a sector across 12 sectors using Market@Desktop.

Equip yourself with our barometers. Market Barometer gives you in-depth information of the
weightages of shares on Nifty and Sensex. Get a glimpse of the performance of various
industry sectors through Industry Barometer.

Direct Technical Charts offer interactive charting with advanced indicators. Get a bird's eye
view of over 5000 companies at a single click using Company Snapshot. Glance through
analyst recommendations using Multex Global Estimates.

In case, you are not too comfortable with share trading, try our Learning Centre, which is a
tutorial on investments and My Research, that helps you to research a stock better.

7. Personal Finance:

Use our Personal Finance section and get hold of tools that can help you plan your
investments, retirement, tax etc. Analyse your risk profile through the Risk Analyzer and get a
suitable investment portfolio plan using Asset Allocator.

8. Customer Service Features:

With 'ICICIdirect Customer Tools & Updates' you can trouble shoot all your problems online.

Address your trading queries on-line through "Easy Mail". You can view and change your
profile or password on-line through General Profile option.

34
Get details of ICICI Centers, our sales and service offices, across India through branch
locator.

View your Account Statement and Bill Summary of your transactions online using bills &
accounts.

35
Introduction to the Project

Financial Market

In economics, a financial market is a mechanism that allows people to easily buy and sell
(trade) financial securities (such as stocks and bonds), commodities (such as precious metals
or agricultural goods), and other fungible items of value at low transaction costs and at prices
that reflect the efficient market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing
constant innovation to improve liquidity.

Both general markets (where many commodities are traded) and specialized markets where
only one commodity is traded) exist. Markets work by placing many interested sellers in one
"place", thus making them easier to find for prospective buyers. An economy which relies
primarily on interactions between buyers and sellers to allocate resources is known as a
market economy in contrast either to a command economy or to a non-market economy that is
based, such as a gift economy

Financial markets could mean:

1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the
trade in stocks, bonds and warrants.

2. The coming together of buyers and sellers to trade financial products. i.e. stocks and shares
are traded between buyers and sellers in a number of ways including: the use of stock
exchanges; directly between buyers and sellers etc.

36
The financial markets can be divided into different subtypes:

• Capital markets which consist of:

o Stock markets, which provide financing through the issuance of shares or

common stock, and enable the subsequent trading thereof.
o Bond markets, which provide financing through the issuance of Bonds, and
enable the subsequent trading thereof.

• Commodity markets, which facilitate the trading of commodities.

• Money markets, which provide short term debt financing and investment.

• Derivatives market, which provide instruments for the management of financial risk.

o Futures markets, which provide standardized forward contracts for trading

products at some future date; see also forward market.

• Insurance markets, which facilitate the redistribution of various risks.

• Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed
(issued) securities are bought or sold in primary markets. Secondary markets allow investors to
sell securities that they hold or buy existing securities.

INDIAN MARKET GROWTH

India Market Growth over the years have attained a high benchmark to sustain her business
and competition with other nations. From the early 1990s, Indian market economy have been
following a liberalized policy, by reducing government restrictions on foreign trade and

37
investment. The publicly owned industries are privatized and profit earning sectors like the
software and financial services, pharmaceutical, biotechnology, nanotechnology,
telecommunication, shipbuilding and aviation are now been opened to private and foreign
interests. India's GDP, currently more than 9%, makes it one of the fastest developing
economies in the world. Indian market growth ranks her in the tenth position in the world
economy.

The easing of restrictions in capacity expansion for incumbents, removal of price controls and
reduction in the corporate tax rate in the 1980s initiated the process of market growth in India
. India Market Growth got further accelerated with the economic liberalization of 1991 which
marked an end to the License Raj, thereby ending many public monopolies and allowing direct
foreign investment in many sectors. The public sector is involved with sectors like railways and
postal system which are considered either to be too important or not enough profitable to leave
to the market forces only.

Today the leading markets of India are the - Indian Bullion Market, Indian Car Market,
India Commodity Market, India Debt Market, India Design Market, Indian Equity Market,
Indian Food Market, India Financial Market, Indian Gold Market, India IT Market, India
Money Market, Indian Real Estate Market, Indian Retail Market, India Semiconductor
Market, Indian Stock Market, India Telecoms Market.

There's been an increase in the India Market Growth specially in the industries dealing with
manufacturing, construction, transport and communication, tourism, personal products, health
care, education and recreation, vehicle, telecommunications and software. According to the
Indian Finance Minister, P. Chidambaram, companies like General Motors Corp., Royal Dutch
Shell Plc. and the like have invested in about 3,000 new factories and other expansion projects
worth about more than twenty billion dollars in Indian market since 2004, in order to tide the
growing market demand.

To hold the India Market Growth rate steadily, the government need to follow certain policies
which would widen and broaden the scope for the growth of Indian markets in the near
future. these are:

38
 • Systematic reform Programme
• Promoting competition and higher corporate investment
• Investing in infrastructure, health care and education

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

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

Regulatory Authorities

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

Reserv e Bank of India (RBI)

Commercial banks include public sector banks, private banks and foreign banks. RBI,
under Banking Regulation Act and Negotiabl e Instrument Act, regulates these banks.

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

39
to provide refinance to banks and institutions extending credit to the agriculture
sector.

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

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

Securitie s and Exchang e Boar d of India (SEBI)

SEBI was set up as an autonomous regulatory authority by the Governmen t of India

in 1988 “To protect the interest of the investor s in the securities and to promote the
developmen t of and to regulate the securities market and the matters connected
therewith or incidental thereto”. It is empowered by two acts namely ‘The SEBI Act,
1992 and The Securities Contract (Regulation) Act, 1956 to perform the function of
protecting investors rights and regulating the capital markets.

40
“ INDIAN FINANCIAL MARKETS”

Indian Financial Markets

Money Market Debt Market Capital Market

Securities Market Non- Securities Market

Primary Market Secondary Market

41
 Spot Market Forward Market

Role of Capital Market

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

2. It is the largest source of funds with long or indefinite maturity for

companies and thereby enhances capital formatio n in the economy.

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

4. It helps in channelizing the savings pool in the economy towards

investments, which are more efficient and give a better rate of return
thereby helping in optimum allocation of capital in the country.

Primary Market
The primary market is the place where the new offerings by companies
are made either as Initial Public Offer (IPO) or Rights Issue. IPOs are
offerings made by the companies for the first time while rights are
offerings made to the existing shareholders . Investors who prefer to
invest in the primary issues are called Stags.

Secondar y Market
Secondary market consists of stock exchanges where the buy orders
and sell orders are matched in the organised manner/ there are at
present 25 recognized stock exchanges in India and are governed by the
Securities Contracts (Regulation) Act

42
 (SCRA).

The functions of stock exchange are as follows:

1. It ensures a measure of safety and fair dealing.

2. It translates short-term and medium-term investments into long term

funds for companies.

3. It directs the flow of capital to the area of maximum returns and

ensures ample investment for the investor depending on their risk
preference.

4. It induces the companies to improve their standard of performance.

Derivatives Market

It is the market for the financial instrument, which derives their values from
the underlying assets like stock, commodity or currency. Derivatives’
trading has started with Index Futures, followed by Index Option and then
Stock Option as per the recommendation of the SEBI appointed L. C.
Gupta Commit- tee.

Derivatives market has the following roles:

1. Derivatives allow hedging of market risk.

2. It allows for a separate market to be developed for lending of funds and

securities to the market.

43
 3. It helps in making the underlying cash market more liquid.

4. It helps in innovations and creations f new financial products.

Self-Regulatory Organizations (SROs)

SEBI is authorized to promote and regulate SROs. SROs are practical and
efficient tool for regulating various kinds of participants in the market. They
have bylaws and code of conduct to bind their members.

Currently, the SROs related to the securities market whose regulatory

framework is well established and which have actually been functioning
are the stock exchanges. Other non-registered SROs are:

1. Association of Merchant Bankers of India (AMBI)

2. Association of Mutual Funds of India (AMFI)

Early Years

The equity brokerage industry in India is one of the oldest in the Asia region. India had
an active stock market for about 150 years that played a significant role in developing
risk markets as also promoting enterprise and supporting the growth of industry.

The roots of a stock market in India began in the 1860s during the American Civil War
that led to a sudden surge in the demand for cotton from India resulting in setting up of a
number of joint stock companies that issued securities to raise finance. This trend was
akin to the rapid growth of securities markets in Europe and the North America in the
background of expansion of railroads and exploration of natural resources and land
development.

44
Historical records show that as early as 1864, there were about 1,000 brokers with the
stock markets functioning from three places in Mumbai; between 9 am to 7 pm at the
junction of Meadows Street and Rampart Row, from day break till 9 am and from 7 pm
to early hours of next morning at Bazargate.

Share prices rose sharply even at that time. A share of Colaba Land Company during
the boom period of the 1860s rose from Rs 10,000 at par to Rs 120,000 and that of
Backbay Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time, was a
major financial centre having housed 31 banks, 20 insurance companies and 62 joint
stock companies.

Reports on stock markets around that time indicate that an ordinary broker in 1864
earned about Rs 200 per day, a huge sum in those days. The boom period came to an
abrupt end in 1865. In Jul 1865, what was then used to be called the share mania
ended with burst of the stock market bubble. “Never I witnessed in any place a run so
widely distributed nor such distress followed so quickly on the heels of such prosperity”
thus wrote Richard Temple, who served as the Governor of Bombay at that time. An
interesting aspect is that despite the collapse of the stock market, most of the brokers
met their payment commitments.

In the aftermath of the crash, banks, on whose building steps share brokers used to
gather to seek stock tips and share news, disallowed them to gather there, thus forcing
them to find a place of their own, which later turned into the Dalal Street. A group of
about 300 brokers formed the stock exchange in Jul 1875, which led to the formation of
a trust in 1887 known as the “Native Share and Stock Brokers Association”.

A unique feature of the stock market development in India was that that it was entirely
driven by local enterprise, unlike the banks which during the pre-independence period
were owned and run by the British. Following the establishment of the first stock
exchange in Mumbai, other stock exchanges came into being in major cities in India,
namely Ahmedabad (1894), Calcutta (1908), Madras (1937), Uttar Pradesh and Nagpur
(1940) and Hyderabad (1944). The stock markets gained from surge and boom in

45
several industries such as jute (1870s), tea (1880s and 1890s), coal (1904 and 1908)
etc, at different points of time.

Beginning of a new equity culture

A new phase in the Indian stock markets began in the 1970s, with the introduction of
Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the
multinational companies, which created a surge in retail investing. The early 1980s
witnessed another surge in stock markets when major companies such as Reliance
accessed equity markets for resource mobilisation that evinced huge interest from retail
investors.

A new set of economic and financial sector reforms that began in the early 1990s gave
further impetus to the growth of the stock markets in India. As a part of the reform
process, it became imperative to strengthen the role of the capital markets that could
play an important role in efficient mobilisation and allocation of financial resources to the
real economy. Towards this end, several measures were taken to streamline the
processes and systems including setting up an efficient market infrastructure to enable
Indian finance to grow further and mature. The importance of an efficient micro market
infrastructure came into focus following the incidence of market abuses in securities and
banking markets in 1991 and 2001 that led to extensive investigations by two respective
Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an
administrative arrangement, was given statutory powers with the enactment of the SEBI
Act, 1992. The broad objectives of the SEBI include
• to protect the interests of the investors in securities
• to promote the development of securities markets and to regulate
the securities markets

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The scope and functioning of the SEBI has greatly expanded with the rapid growth of
securities markets in India in the last fifteen years.

Following the recommendations of the High Powered Study Group on Establishment of

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

Faster and efficient securities settlement system is an important ingredient of a

successful stock market. To speed the securities settlement process, The Depositories
Act 1996 was passed that allowed for dematerialisation (and rematerialisation) of
securities in depositories and the transfer of securities through electronic book entry.
The National Securities Depository Limited (NSDL) set up by leading financial
institutions, commenced operations in Oct 1996. Regulations governing selection of
various types of market intermediaries as depository participations were made.
Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock
Exchange and other financial institutions came into being.

Rapid Growth

The last decade has been exceptionally good for the stock markets in India. In the back
of wide ranging reforms in regulation and market practice as also the growing
participation of foreign institutional investment, stock markets in India have showed

47
phenomenal growth in the early 1990s. The stock market capitalization in mid-2007 is
nearly the same size as that of the gross domestic product as compared to about 25
percent of the latter in the early 2000s. Investor base continued to grow from domestic
and international markets. The value of share trading witnessed a sharp jump too.
Foreign institutional investment in Indian stock markets showed continuous rise
reaching about USD10 bn in each of these years between FY04 to FY06. Stock markets
became intensely technology and process driven, giving little scope for manual
intervention that has been the source of market abuse in the past. Electronic trading,
digital certification, straight through processing, electronic contract notes, online broking
have emerged as major trends in technology. Risk management became robust
reducing the recurrence of payment defaults. Product expansion took place in a speedy
manner. Indian equity markets now offer, in addition to trading in equities, opportunities
in trading of derivatives in futures and options in index and stocks. ETFs are showing
gradual growth. Within five years of introduction of derivatives, Indian stock markets
now are ranked first in stock futures and fourth in index futures. Indian stock markets
are transaction intensive and thus rank among the top five markets in this regard. Stock
exchange reforms brought in professional management separating conflicts of interest
between brokers as owners of the exchanges and traders/dealers. The demutualisation
and corporatisation of all stock exchanges is nearing completion and the boards of the
stock exchanges now have majority of independent directors. Foreign institutions took
stake in India’s two leading domestic stock exchanges. While NYSE Group led
consortium took stake in the National Stock Exchange, Deutsche Borse and Singapore
Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

Investment Products

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Fixed Income

Fixed income products include bank deposits, Government securities, Bonds,

Debentures, Commercial papers and Certificate of Deposits. Criteria for investment in
fixed income products:

1. Yield to maturity.

2. Credit rating of the security.

3. Risk preference.

For fixed income securities interest is the major decisive factor. Credit rating of the
securities published periodically helps the investor in credit risk assessment.

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

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

49
 are one, which is issued at a discount at the face value, and the investor is
paid the face value at redemption.

• Debentures:-
It may be many types like, Fully convertible debentures (FCDs), Partly
convertible debentures (PCDs) and non-convertible debentures (NCDs).
FCDs are those whose face value is converted into fixed number of
equities at a fixed price. The price of each equity share is received by the
way of converting the face value of convertible securities i.e. the
debenture is called the conversion price and the number of equity shares
exchanable per unit of the convertible security i.e. debenture is called
conversion ratio.

Callable debenture is a debenture in which the issuing company has the

option of redeeming the security before the specified redemption date at a
pre-determined price. Puttable debenture is one where the holder has the
option of getting it redeem before the maturity date. PCDs are debentures
where a portion of the face value is converted into equity shares and the
NCDs, also called the khoka, are redeemed on maturity only.

• Public Deposits:
Corporates can raise funds from the public in the form of fixed deposits.
These deposits are unsecured and are mainly used for the working capital
requirements. These unsecured public deposits are governed by the
Companies (Acceptance of Deposits) Amendment Rules 1978. Under this
rule, public deposits can’t exceed 25% of the share capital and free
reserves and the maximum maturity period is 3 years while the minimum
is 6 months.

• Certificate of Deposits:

50
 These are short term funding instruments issued by banks and financial
institutions at a discount to the face value. Banks can issue CDs for
duration of less than 1 year while FIs can only issue this for more than 1
year. The issuing bank or financial institution can’t repurchase the
instruments. CDs have to be issued for a minimum of Rs. 5 lakhs with
multiples of Rs. 1 lakh thereafter. These are generally used by corporates
to meet their short-term requirements.

• Commercial Papers:
These represent short-term promissory notes issued by firms with a high
credit rating. The maturity of these varies from 15 days to 1 year, sold at a
discount to the face value and redeemed at the face value. CPs can be
issued by the companies having minimum net worth of Rs. 4 crores and
needs a mandatory credit rating of P2 (CRISIL), D2 (Duff & Phelps), PR2
(Credit Analysis & Research) and A2 (ICRA). The rating should not be
more than 2 months old. It can be issued for a minimum amount of Rs. 25
lakhs and more in multiples of Rs. 5 lakhs.

Equity Shares
An equity share in a company is a share in its ownership.
Equityshareholders collectively constitute the ownership of the company
and enjoy the fruits of the ownership like dividends and voting in the
meetings etc., but they are not liable for the debts of the company beyond
the value that has already been subscribed through the share capital.
However certain shares do not carry ownership privileges like voting etc.
these shares are preferential or non – voting shares. But preference
shareholders get assured dividends, if the company makes profit and they
would get back their money invested after a specified period of time.
Equity shareholders can only redeem their investment by selling the share
at the market price.

Other Investment Products Available Are as Follows:-

51
Today choosing a best investment plan is difficult because there are so
many investment options available. These days we are getting more
money compared to last decades.

Bank Fixed Deposits (FD)

Fixed Deposit or FD is the most preferred investment option today. It

yields up to 8.5% annual return depends on the Bank and period.
Minimum period is 15 days and maximum is 5 years and above. Senior
citizens get special interest rates for Fixed Deposits. This is considered to
be a safe investment because all banks operated under the guidelines of
Reserve Bank of India.

National Saving Certificate (NSC)

NSC is backed by Govt. of India so it is a safe investment method. Lock in

period is 6 years. Minimum amount is Rs100 and no upper limit. You get
8% interest calculated twice a year. NSC comes under Section 80C so
you will get an income tax deduction up to Rs 1,00,000. From FY 2005-'06
onwards interest accrued on NSC is taxable.

Public Provident Fund (PPF)

PPF is another form of investment backed by Govt. of India. Minimum

amount is Rs500 and maximum is Rs70,000 in a financial year. A PPF
account can be opened in a head post office, GPO and selected branches
of nationalized banks. PPF also comes under Section 80C so individuals
could avail income tax deduction up to Rs 1,00,000. Lock in period for
PPF is 15 years and interest rate is 8%. Unlike NSC, PPF interest rate is
calculated annually. Both PPF and NSC considered to be best investment
option as it is backed by Government of India.

Stock Market
52
Investing in share market is another investment option to get more returns.
But share market investment is volatile to market conditions. Before
investing you should have a thorough knowledge about its operation.

MUTUAL FUNDS

A mutual fund invests the pooled money of its shareholders in various

types of investments. A fund manager buys and sells securities for the
fund's shareholders. Mutual fund values rise and fall along with the
securities in the fund. An investor may prefer to invest in mutual funds for
diversification, to take advantage of the professional management, the low
cost of shares, or the ease with an investor can buy and sell shares. Each
mutual fund has an objective which determines the types of securities it
invests in. The fund's objectives must be stated clearly in the prospectus.
More than 6,000 mutual fund are available, all with different objectives,
securities owned, levels of risk, and levels of earnings.

All mutual funds have management fees and some have additional fees
when shares are bought and sold. The prospectus must disclose all fees
and costs. Many mutual funds are part of a family of funds (i.e. issued by
the same mutual company). A financial service company may offer a
number of funds with different objectives and the investor may switch from
one fund to another within the same family at little or no expense.

Advantages of Mutual Funds

The reason that mutual funds are so popular is that they offer the ability to
easily invest in increasingly more complicated financial markets. A large
part of the success of mutual funds is also the advantages they offer in
terms of diversification, professional management and liquidity.

Flexibility
Mutual Fund investments also offer you a lot of flexibility with features
53
such as systematic investment plans, systematic withdrawal plans &
dividend reinvestment.

Affordability
They are available in units so this makes it very affordable. Because of the
large corpus, even a small investor can benefit from its investment
strategy.

Liquidity
In open ended schemes, you have the option of withdrawing or redeeming
your money at any point of time at the current NAV

Diversification
Risk is lowered with Mutual Funds as they invest across different
industries & stocks.

Professional Management
Expert Fund Managers of the Mutual Funds analyze all options based on
experience & research

Potential of return
The fund managers who take care of your Mutual Fund have access to
information and statistics from leading economists and analysts around
the world. Because of this, they are in a better position than individual
investors to identify opportunities for your investments to flourish.

Low Costs
The benefits of scale in brokerage, custodial and other fees translate into
lower costs for investors.

SAVINGS

54
The rate of return and risk for savings accounts are often lower than for
other forms of investment. Saving are also usually more liquid; you may
quickly and easily convert your investments into cash. Interest bearing
checking and savings accounts are offered by banks and credit unions. It
pays to shop for the best rates, as interest rates, compounding
frequencies (how often interest is paid), and services vary widely.

If the financial institution is insured by the Federal Deposit Insurance

Corporation or the National Credit Union Administration, your account is
insured up to $100,000 by the federal government.

CERTIFICATES OF DEPOSIT
Certificates of Deposit or CDs are purchased for specific amounts of
money at a fixed interest rate for a specific time. CDs are generally priced
in multiples of $1000. Usually, the longer the CD is held, the higher the
interest rate. If you cash in the CD before the specified time, you will have
to pay a penalty. CDs are also insured (up to $100,000) if the institution is
federally insured.

SAVINGS BONDS
Savings bonds are issued by the United States Treasury and come in two
variety. The Series EE and Series HH. EE bonds are available at most
banks. The minimum purchase is a $25 bond which will mature to pay $50
in eight to 12 years depending on the interest rate. The interest rate on the
bond is related to the market interest rate and there is a penalty for
cashing a bond in early.bonds are purchased from a Federal Reserve
Bank or through the Treasury at face value. They can be bought only by
trading in EE bonds or an old H bond. The HH bond matures in 10 years
with interest paid semi-annually.
Treasury Bonds are considered the safest bond investment. They are not
insured but are backed by the full faith and credit of the United States

55
government. The US guarantees that the investor will receive full principal
amount upon maturity. There are no sales charges for Treasury bonds and
the interest they earn is exempt from state and local taxes and can be
deferred from federal income tax until the money is received.

GOVERNMENT SECURITIES
The United States government also issues debt securities to raise funds.
Other US securities (besides the savings bonds) include Treasury Bills
(Tbills) with up to one year maturities, Treasury Notes with up to 10 year
maturities, and other United States Agency bonds. T-bills are sold to
selected securities dealers by the Treasury at auction. Investors can buy
all three types, without paying commission, directly from a Federal
Reserve Bank, or from a dealer.

OTHER INVESTMENTS:

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

Corporate Bonds usually pay higher interest than government bonds but
they are somewhat riskier. If a corporation goes bankrupt, bondholders, as
creditors, are paid their money before stockholders. Corporate bonds are
either secured or unsecured. A secured bond is backed by specified
assets or collateral, while an unsecured bond is backed only by the faith
and credit of the corporation. Companies offering bonds to the public must
file a registration statement with the SEC.

56
Why Bonds are resold on the market: Why would someone want to sell a
$1,000 bond for less than its full value? Suppose you buy a bond for
$1,000 that pays 10% interest and matures in ten years. Each year you
would receive $100. After a few years, lets say interests rates in general
rise to $15. Your $1000 investment could be paying $150 a year. You
want to sell the bond to reinvest as much of the $1000 as you can, but
who wants to pay $1000 for a bond only paying $100 a year when they
could pay $1,000 for a bond paying $150 a year. To sell your bond you
have to discount its price. On the other hand, if interest rates fall you
would be able to sell it for more than $1,000.

"Junk Bond" is a term for speculative, high-risk, high interest rate

corporate or municipal bonds. The default rate is much higher on junk
bonds than on higher quality bonds.

STOCKS

As already discussed, when you buy stock, you are becoming an owner of
the company. If the company does well, the value of your stock should go
up over time. If the company does not do well, the value of your
investment will decrease. Many companies distribute a portion of their
profits to shareholders as dividends. As owners, shareholders generally
have the right to vote on electing the board of directors and on certain
other matters of particular significance to the company.

Companies issue two types of stock, common and preferred. Common

stock is the basic form of ownership in a company. People who hold
common stock have a claim on the assets and earnings of a firm after the
claims of preferred stockholders and bondholders. The safety of the
principal of preferred stock is greater than that of common stock, however,
preferred stockholders cannot vote for the directors of the company.

57
There are five basic categories of stock:

1. "Income stocks" pay unusually large dividends that can be used as a

means of generating income without selling the stock. Most utility stocks
are considered income stocks

2. "Blue chip stocks" are issued by very solid and reliable companies
with long histories of consistent growth and stability. Blue chip stocks
usually pay small but regular dividends and maintain a fairly steady price.
Examples of Blue chip stocks include IBM, Exxon, Kodak, GE, and Sears.

3. "Growth stocks" are issued by young, entrepreneurial companies that

are experiencing a faster rate of growth than their general industry. Their
stocks normally pay little or no dividend because the company needs all of
its earning to finance expansion. Since they are issued by new companies,
with no track record, growth stocks are riskier but offer more potential for
growth than other kinds of stock.

4. "Cyclical stocks" are issued by companies that are affected by

general economic treads. The prices of these stocks tend to go down
during recessionary periods and increase during economic booms.
Cyclical stocks include automobiles, heavy machinery, and home building.

5. "Defensive stocks" are the opposite of cyclical stock. they are issued
by companies producing staples such as food, beverages, drugs and
insurance and they usually maintain their value.

STOCK SPLITS

58
When a company increase the amount of its shares it is said to split. A 2
for 1 split means that the company has doubled the amount of outstanding
shares. The sale price will decrease proportionally to the split so if a stock
holder held 100 share of stock for $40 per share, after the spit she would
have 200 shares at $20 a share. The stockholder's equity remains he
same. The stock split in intended to reward shareholders. By making the
company's stock less expensive, it is hoped to attract more investment,
thus leading to an increase in the price of its stock.

FUTURES

A futures contract is a commitment to buy or sell a specific amount of a

commodity at a specific future date and price.

DERIVATIVES

Stock options are known as derivative investment instruments because

their value derives from the security on which they are based. Stock
options are contracts giving the purchaser the right to buy or sell a stock at
a specific price within a certain period of time. Like all futures contracts a
stock option can be a very complicated and risky investment.

LAND

The most common investment people hold is real estate (in the form of
home ownership). Over two-thirds of American's own their homes.
Generally, home ownership is a good investment, as real estate prices
generally rise. However, as the purchase of a home is usually the largest
single investment a person makes, if real estate prices fall owners may
have a hard time keeping up with their mortgages.
TANGIBLE ASSETS

59
Assets that you can hold onto or touch are called tangible. They include
gold coins, and other collectible items like dolls, baseball cards, or stamps.
Generally collectibles pay no interest and may or may not increase in
value over the years. There is no regulated market for collectibles and
should be used for enjoyment rather than investment.

Silver
Silver as an investment:-
Silver, like other precious metals, may
be used as an investment. For more
than four thousand years, silver has
been regarded as a form of money
and store of value. However, since the
end of the silver standard, silver has
lost its role as legal tender in the
United States.
(A 500gm Silver Bullion Bar)
(It continued to be used in coinage until 1964, when the intrinsic value of
the silver approached to overtake the coins' face values.)

Silver price

The price of silver has been notoriously volatile as it can fluctuate between
industrial and store of value demands. At times this can cause wide
ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although
the ratio can vary. The gold/silver ratio is often analyzed by traders and
investors. Over most of the 19th century, the gold/silver ratio was fixed by
law in Europe and the United States at 1:15.5, which meant that one troy

60
ounce of gold would buy 15.5 ounces of silver. The average gold/silver
ratio during the 20th century, however, was 1:47.0

Methods of investing in silver

Bars

A traditional way of investing in silver is by buying actual bullion bars. In

some countries, like Switzerland and Liechtenstein, bullion bars can be
bought or sold over the counter at major banks.

Physical silver, such as bars or coins, may be stored in a home safe, a

safe deposit box at a bank, or placed in allocated (also known as non-
fungible) or unallocated (fungible or pooled) storage with a bank or dealer.
Various sizes of silver bars:

• 1000 oz troy bars. – These bars weigh about 68 pounds

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

• 100 oz bars. – These bars weigh 6.8 pounds (3.11 kg), and are
among the most popular with retail investors. Popular brands are
Engelhard and Johnson Matthey. Those two brands cost a bit more,
usually about 40-50 cents per ounce above the spot price, but that price
may vary with market conditions.

• Odd weight retail bars. – These bars cost less, and generally have
a wider spread, due to the extra work it takes to calculate their value, and
extra risk due to the lack of good brand name.

61
• 1 kilogram bars (32.15 oz)

• 10 oz bars and 1 oz bars (311 and 31.1 g)

Coins
Buying silver coins is another popular
method of physically holding silver.
One example is the 99.99% pure
Canadian Silver Maple Leaf. Coins
may be minted as either fine silver
or junk silver, the latter being older
coins with a smaller percentage of
silver. For example, U.S. pre-1965
half dollars, dimes, and quarters are (American Silver Eagle Bullion coin)

25 grams per dollar of face value

and 90% silver (22½ g silver per dollar).
(1965-1970 and 1975-1976 Kennedy half dollars are "clad" in a silver alloy
and contain about one-third of the pre-1965 issues.)
Junk silver coins are also available as sterling silver coins, which were
officially minted until 1919 in the United Kingdom and Canada, and 1945
in Australia. These coins are 92.5% silver, and are in the form of (in
decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences,
and threepence. The tiny threepence weighs 1.41 grams, and the Crowns
are 28.27 grams (1.54 grams heavier than a US $1). Canada produced
silver coins with 80% silver content from 1920 to 1967.

62
 Rounds

Some hard money enthusiatists use .999 fine silver rounds as a store of value. A cross
between bars and coins, silver rounds are produced by a huge array of mints, generally
contain an ounce of silver in the shape of a coin but have no status as legal tender.
Rounds can be ordered with a custom design stamped on the faces or in assorted
batches.

Certificates

U.S. $5 Silver Certificate.

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

(US $5 Silver Certificate)

The Perth Mint Certificate Program (PMCP) is the only government

guaranteed silver certificate program in the world.
Th
e U.S. dollar has been issued as silver certificates in the past, including in
denominations of $10, $5, and $1.

63
GOLD

There are many savings and

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

Gold is an important and popular investment for many reasons:

* Gold remains as an integral part of social and religious customs, besides

being the basic form of saving.

* Gold has aesthetic appeal .Its beauty recommends it for ornament

making above all other metals.

* Gold is indestructible which does not tarnish and is also not corroded by
acid-except by a mixture of nitric and hydrochloric acids.

* Gold is a currency that has no borders and does not need to be

honoured by any governmental obligations.

64
* Gold has long proven ability to retain value and appreciate in value.

* Gold is readily available in a standardized form.

Gold better than equities

According to the World Gold Council, investing in gold is considered to be

safer than traditional investments in equities and bonds since gold is the
commodity where the price is determined by various factors apart from its
demand and supply. Also, it is a commodity that is priced in US Dollars as
against our local currency. The factors that affect the price of gold are
rather different from factors that affect other assets like say domestic fixed
deposits. Inflation will have no impact on the price of gold, other factors
remaining the same thereby lending support to your wealth. In fact, in
times of inflation, more money tends to move to gold, thereby driving up its
price.

The last few years show a steep rise in oil prices resulting in a rise in
inflation not only in India but globally. The impact has been varied across
countries depending on factors such as economic cycle and oil
consumption. This general price rise has added to the attractiveness of
gold.

In other words when the stock market crashes or when the dollar
weakens, gold continues to be a safe haven investment because gold
prices rise in such circumstances.

65
Gold investment options
Not many people know that there are various investment options in gold
like gold bars, numismatic coins, and gold accumulation plans by banks
and financial institutions, and gold mutual funds.
Across the world, several investment options are available for investors to
put their money in the yellow metal.

* Gold savings accounts: They operate like regular bank accounts where
the customers account is credited with balances of gold and withdrawals
can be either in the form of gold coins or currency equivalents.

* Gold accumulation plan: A monthly debit from customer's savings

account is backed by 100 percent Physical gold.

* Gold chits: Also there are gold chits run by jewelers where at the end of
the year, housewives can buy gold jewellery or coins from the same
jeweler worth the total money they have paid in instalments.

* Gold deposit scheme: It is one of the options to invest in gold where one
can keep gold in banks for specified period like a fixed deposit and can
claim as and when required .But it is not like pledging as the ornaments
will not be returned in its original form because the banks melt them and
rent to the industry.

* I-gold: An investor can purchase gold from a stock broker as just as he

used to buy equity shares.

* Mutual funds and Buying gold as ornaments are other options.

Realizing the potential for Gold as a safe investment option World Gold
Council has made several suggestions regarding this matter. These

66
include allowing banks to offer gold backed investment products and gold
loans to local jewellers.

Suggestions for investing in gold

* When investments in gold are made in the form of ornaments a large

part of the appreciation in value is lost while selling it apart from the
making charges, waste removal and sales tax. Buying in the form of gold
bars or coins from approved valuers is considered to be best.

* Buying Gold in seasons other than wedding season and festive seasons
like Diwali will offer best returns.

* The investor has to lose the making charges when invested in the gold
deposit scheme

Studies conducted by Security Exchange Board of India reveal that gold

has been the second most preferred option among the Indian public after
deposits in banks.An increased pace of liberalization measures in India
will account for many new options to emerge to invest in gold bars, gold
coins, gold funds and gold options.

The benefits of investing in gold are that besides earning a decent rate of
return there are no headaches about keeping it safe. When investments
are valued in a depreciating currency allocating a portion to gold is similar
to a financial insurance policy.

67
Factors influencing the gold price

Today, like all investments and commodities, the price of gold is ultimately
driven by supply and demand, including hoarding and dis-hoarding. Unlike
most other commodities, the hoarding and dis-hoarding plays a much
bigger role in affecting the price, because almost all the gold ever mined
still exists and is potentially able to come on to the market at the right
price. Given the huge quantity of above-ground hoarded gold, compared
to the annual production, the price of gold is mainly affected by changes in
sentiment, rather than changes in annual production.

According to the World Gold Council, annual mine production of gold over
the last few years has been close to 2,500 tonnes. About 3,000 tonnes
goes into jewelry or industrial/dental production, and around 500 tonnes
goes to retail investors and exchange traded gold funds. This translates to
an annual demand for gold to be 1000 tonnes in excess over mine
production which has come from central bank sales and other dishoarding.
Demand from the electronics industry is rising by 11% a year, jewelry by
19%, and industrial and dental by 21%.

Central banks and the International Monetary Fund play an important role
in the gold price. At the end of 2004 central banks and official
organizations held 19 percent of all above-ground gold as official gold
reserves. The Washington Agreement on Gold (WAG), which dates from
September 1999, limits gold sales by its members (Europe, United States,
Japan, Australia, Bank for International Settlements and the International
Monetary Fund) to less than 400 tonnes a year . European central banks,
such as the Bank of England and Swiss National Bank, have been key
sellers of gold over this period.

Although central banks do not generally announce gold purchases in

advance, some, such as Russia, have expressed interest in growing their

68
 gold reserves again as of late 2005 . In early 2006, China, which only
holds 1.3% of its reserves in gold , announced that it was looking for ways
to improve the returns on its official reserves. Many bulls hope that this
signals that China might reposition more of its holdings into gold in line
with other Central Banks.

In general, gold becomes more desirable in times of:

Bank failures
When dollars were fully convertible into gold, both were regarded as
money. However, most people preferred to carry around paper banknotes
rather than the somewhat heavier and less divisible gold coins. If people
feared their bank would fail, a bank run might have been the result. This is
what happened in the USA during the Great Depression of the 1930s,
leading President Roosevelt to impose a national emergency and to
outlaw the holding of gold by US citizens.

Low or negative real interest rates

If the return on other asset classes is not adequately compensating for risk
and inflation, the demand for gold increases.l. A prime example of this is
the period of Stagflation that occurred during the 1970s and which led to
an economic bubble forming in precious metals.

War, invasion, looting, crisis

In times of national crisis, people fear that their assets may be seized and
that the currency may become worthless. They see gold as a solid asset
which will always buy food or transportation. Thus in times of great
uncertainty, particularly when war is feared, the demand for gold rises.

69
ADVANTAGES AND DISADVANTAGES OF VARIOUS ASSET CLASSES

CASH BONDS EQUITIES

ADVANTAGES ADVANTAGES ADVANTAGES

• High level of • Interest is set in • Equities can increase

security. advance and paid significantly in value.
regularly.
• You can get your
money back • The value of a Bond • Dividends can increase as
quickly and easily. in the open market company profits increase.
may go up.

• Interest will
• Paying interest on
always
bonds is a higher
be paid.
priority for
companies than
paying dividends on
shares.
CASH – BONDS – EQUITIES -
DISADVANTAGES DISADVANTAGES DISADVANTAGES
• Interest rates are • The bond issuer may • Equities can also fall
variable and default on interest significantly in value.
currently very low. payments or be
unable to make the
final repayment. • It’s very difficult to
• The best rates may
• The value of a bond predict what will happen
only be Available
in the open market in the short term.
on special terms or
may go down.
for larger amounts.

Types of risks
70
All investments involve some form of risk. Consider these common types
of risk and evaluate them against potential rewards when you select an
investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise
or fall due to broad outside influences. When this happens, the stock
prices of both an outstanding, highly profitable company and a fledgling
corporation may be affected. This change in price is due to "market risk".
Also known as systematic risk.

Inflation Risk

Sometimes referred to as "loss of purchasing power." Whenever inflation

rises forward faster than the earnings on your investment, you run the risk
that you'll actually be able to buy less, not more. Inflation risk also occurs
when prices rise faster than your returns.

Credit Risk

In short, how stable is the company or entity to which you lend your money
when you invest? How certain are you that it will be able to pay the
interest you are promised, or repay your principal when the investment
matures?

Interest Rate Risk

Changing interest rates affect both equities and bonds in many ways.
Investors are reminded that "predicting" which way rates will go is rarely
successful. A diversified portfolio can help in offseting these changes.

Investment Risks

71
The sectoral fund schemes, investments will be predominantly in equities
of select companies in the particular sectors. Accordingly, the NAV of the
schemes are linked to the equity performance of such companies and may
be more volatile than a more diversified portfolio of equities.

Exchange risk

A number of companies generate revenues in foreign currencies and may

have investments or expenses also denominated in foreign currencies.
Changes in exchange rates may, therefore, have a positive or negative
impact on companies which in turn would have an effect on the investment
of the fund.

Changes in the Government Policy

Changes in Government policy especially in regard to the tax benefits may

impact the business prospects of the companies leading to an impact on
the investments made by the fund

Effect of loss of key professionals and inability to adapt business to the

rapid technological change.

An industries' key asset is often the personnel who run the business i.e.
intellectual properties of the key employees of the respective companies.
Given the ever-changing complexion of few industries and the high
obsolescence levels, availability of qualified, trained and motivated
personnel is very critical for the success of industries in few sectors. It is,
therefore, necessary to attract key personnel and also to retain them to
meet the changing environment and challenges the sector offers. Failure
or inability to attract/retain such qualified key personnel may impact the
prospects of the companies in the particular sector in which the fund
invests.

72
A good portfolio is a balance of 5 parameters. Have a right balance of
following parameters in your portfolio:

• Liquidity- how accessible is your money?

• Safety- what is the risk of losing your money involved?

• Return – what can you expect to get back on your investment?

• Volatility- what percentage of your returns changes with market

conditions?

• Diversity- is your investment basket consists of only few investment

instruments?

73
 RISK RETURN GRID-:

Investment Option Risks/Liquidity Returns Taxation Suitability

Bank FDs Very low risk Low returns, Since returns Good for very
and low but assured. are fully low risk
liquidity. Depending taxable, the investors and
on the post-tax those in the nil
tenure and returns will or low tax
bank, could be still brackets.
be around 6- lower. As interest rate
9% scenario seems
to be peaking,
one could
consider
investing in 3-5
year FDs.
FMPs Low risk and No assured MFs attract Good for low
low Liquidity. returns but much lower risk investors,
depending taxation and but in high tax
on tenure hence give brackets.
and the MF, better post- Good for
could be tax returns investing the
around 6- vis-à-vis debt portion of
9%. (Ability Bank FDs. one’s portfolio.
to deliver
the
indicative
returns).
Floating Rate Funds Low risk and Market Lower Good for
high liquidity. linked. taxation of investing short-
Today could MFs makes term money
be around 5- Floating Rate where one needs
7%. funds higher liquidity.
attractive.
Debt Funds Low to Medium Returns are Lower Can be avoided
risk. market- taxation of in a rising
High Liquidity. linked. MFs makes interest rate
Today could such funds scenario but is
be around 5- attractive. good in a falling
7%, but interest rate
susceptible scenario.
to interest
rate risk.

Post Office Schemes Low risk and MIS scheme Since returns Good for very

74
 low Liquidity. give 8% are taxable, low risk
interest. the post-tax investors and
Time returns will those in the nil
deposit be still or low tax
6.25-7.5%. lower. brackets.
PPF Low risk with 8% assured Interest is Good tax saving
very low returns. tax-free. investment
liquidity (15- Also Sec option.
year lock-in 80C benefit. Good for
period. Partial Hence a investing the
withdrawal good debt portion of
allowed after 6 scheme. one’s portfolio.
years).
NSC Low risk with 8% assured Interest fully Not very
low liquidity (6 returns. taxable. But attractive vis-à-
years lock-in). eligible for vis other options
Sec 80C like 5-year Bank
benefit. FDs.

Equity High risk and Market Attractive Needs high risk

high liquidity. linked tax appetite.
returns. treatment. Ideal for those
Good No Long investors who
potential. Term Capital have a good
Gain Tax and corpus, good
10% Short knowledge and
Term Capital time to track the
Gains Tax. markets
regularly.
Care should be
taken to invest
in good profit
making
companies.
Penny stocks
should be
avoided.
High risk and Market Attractive Ideal for small
Equity Funds high liquidity in linked tax and common
open-ended returns. treatment. investors, but
funds. Good No Long with high risk
potential. Term Capital appetite.
Gain Tax and SIP and a long
10% Short term investment
Term Capital horizon can cut
Gains Tax. down risk and
increase the
75
 probability of
making good
returns.
Also, one
should build a
well-diversified
portfolio with
say 50-60%
money in 5-7
diversified
funds, 25-35%
money in 3-4
mid/small-cap
funds and 10-
15% in 3-4
sector funds.
ELSS Funds High risk with Market Attractive Good tax saving
low liquidity (3 linked tax investment
years lock-in returns. treatment. option.
period). Good No Long Amounts
potential. Term Capital beyond Rs.1
Gain Tax and lakh limit could
10% Short be invested in
Term Capital open-ended
Gains Tax. funds.
Also Sec SIP in ELSS
80C benefit. would reduce
the volatility
risk.
Balanced Funds Medium to High Medium to Attractive Though
risk. high returns. tax convenient as
High Liquidity. Market treatment. both debt and
linked. No Long equity
Term Capital investment is
Gain Tax and covered under
10% Short one fund, it may
Term Capital be better to
Gains Tax. invest separately
in equity and
debt funds for
better control.

ULIPs Low to High Low to high Tax free Not an attractive

Risk depending depending returns. option due to
on the on the Also Sec 80 high charges,
investment investment C benefit low flexibility
option i.e. Pure option. available. and low
Debt or Mixed Market diversification.
76
 or Pure Equity. linked There are other
Low Liquidity returns. better similar
(3-5 years lock- investment
in period). products like
MFs with low
charges, high
flexibility and
high
diversification.
As regards life
cover, the same
could be done
through a term
policy.
Endowment/ Low risk and Low returns. Tax free Not an attractive
Moneyback Plan very low Generally returns. option due to
liquidity. around 6- Also Sec 80 low returns.
6.5%. C benefit There are other
available. better similar
investment
products like
PPF. As regards
life cover, the
same could be
done through a
term policy.
Real Estate Variable risk Market No tax High initial
and variable linked advantages, investment
liquidity returns. except required which
depending on Good attractive tax could make
the type and potential. benefits on one’s portfolio
location of the home lopsided; high
property. loans. transactions
costs like title-
search,
registration
brokerage etc.;
and cannot be
partly
liquidated.
Therefore, real-
estate MFs
(expected in the
near future) may
be a better
alternative than
direct property
investment.
77
 If investing
directly, it is
important to
assess the
potential and
clear title.
Commodities High risk with Market No tax Highly cyclical.
high liquidity. linked advantages.
returns.
Gold Low long-term Has No tax Not an attractive
risk. But volatile traditionally advantages. investment
in short term. been a option. Can be
High Liquidity. hedge used for
against portfolio
inflation. So diversification
returns to partly hedge
could be against
around inflation.
inflation Gold MFs are
levels. better than
buying physical
gold.

INVESTMENT STRATEGIES

Investments:

Savings form an important part of the economy of any nation. With the
savings invested in various options available to the people, the money
acts as the driver for growth of the country. Indian financial scene too
presents a plethora of avenues to the investors. Though certainly not the
best or deepest of markets in the world, it has reasonable options for an
ordinary man to invest his savings.

Investments, unlike works of art, cannot afford the luxury of experimenting.

Investing is not guesswork. It takes more than just a tip, it needs training to
plan, instinct to pick and sheer intellect to make it work for the investor.
Human nature is fickle, his wants keep changing.

78
An investment can be described as perfect if it satisfies all the needs of all
investors. So, the starting point in searching for the perfect investment
would be to examine investor needs. If all those needs are met by the
investment, then that investment can be termed the perfect investment.

Investment is a balance of three things: Liquidity, Safety and Return.

Liquidity - how accessible money is?

How easily an investment can be converted to cash, since part of invested
money must be available to cover financial emergencies.

Safety - what is the risk involved?

The biggest risk is the risk of losing the money that has been invested.
Another equally important risk is that investments may not provide enough
growth or income to offset the impact of inflation, which could lead to a
gradual increase in the cost of living. There are additional risks as well
(like decline in economic growth). But the biggest risk of all is not investing
at all.

Return - what can you expect to get back on your investment?

Investments are made for the purpose of generating returns. Safe
investments often promise a specific, though limited return. Those that
involve more risk offer the opportunity to make - or lose - a lot of money.

NEED FOR INVESTMENT AND FINANCIAL PLANNING:

• Security of original capital: The chance of losing some capital

has been a primary need. This is perhaps the strongest need among
investors in India, who have suffered regularly due to failures of the
financial system.

• Wealth accumulation: This is largely a factor of investment

performance, including both short-term performance of an investment and

79
long-term performance of a portfolio. Wealth accumulation is the ultimate
measure of the success of an investment decision.

• Tax efficiency: Legitimate reduction in the amount of tax payable

is an important part of the Indian psyche. Every rupee saved in taxes goes
towards wealth accumulation.

• Life Cover: Many investors look for investments that offer good
return with adequate life cover to manage the situations in case of any
eventualities.

• Source of Constant Income: This refers to money distributed at

intervals by an investment, which are usually used by the investor for
meeting regular expenses. Income needs tend to be fairly constant
because they are related to lifestyle and are well understood by investors.

• Ease of withdrawal: This refers to the ability to invest long term but
withdraw funds when desired. This is strongly linked to a sense of
ownership. It is normally triggered by a need to spend capital, change
investments or cater to changes in other needs. Access to a long-term
investment at short notice can only be had at a substantial cost.

• To beat inflation: Inflation is the increase in the general level of

prices of a given kind in given currency. Historically in last few years the
WPI inflation rate has been 5-6%..That means last year if we used to get
something at Rs 100, this year the same product would cost us 105-106.
Thus increasing inflation needs to be beaten by our investment.

• To fund future needs: The needs arising in future have to be

identified as early as possible and plan accordingly. A future need can be
a foreseen need or an unforeseen emergency need, so to meet such
future needs we need financial planning and contingency planning too.
80
 • To meet contingencies: The famous proverb, “Man proposes
nature disposes”. Many times makes its presence felt in this material world
and there you need to have sufficient funds to at least carry away safely in
that crisis time, e.g. Earthquake/riots/floods and such calamities.

To maintain the same standard of living after retirement: The style of

living comes with the profession and the increments in that profession with
age increases the standard of living. This suddenly gets jolted when we
don’t get any regular income like salary after retirement and creates a gap
in our needs and sources to fulfill that need.

Some of the basic investment needs of an individual at different life

stages are as

Starting a job, Recently Married, Kids going Higher studies for Children
Single married, no with kids to school, child, marriage independent,
individual kids college nearing the
golden years
Your Low protection, Reasonable Higher Higher Lump sum money Safe
Need high asset protection, still protection, Protection, for education, accumulation for
creation and high on asset still high on high on marriage. Facility the golden
accumulation creation asset creation asset to stop premium yrs.Considerably
but steadier creation but for 2-3 yrs for lower life
options, steadier these extra insurance as the
increase options, expenses dependencies
savings for liquidity for have decreased
child education
expenses

81
Flexibility Choose low Increase death Increase Withdrawal Withdrawal from Decrease the
death benefit, benefit, choose death benefit, from the the account for death benefit-
choose growth/balanced choose account for higher reduce it to the
growth/balanced option for asset balanced the education/marriage minimum
option for asset creation option for education expenses of the possible. Choose
creation asset expenses of child. Premium the income
creation. the child holiday-to stop investment
Choose premium for a option. Top-ups
riders for period without form the
enhanced lapsing the policy accumulation
protection. (with reduced
Use top-ups expenses) for the
to increase golden yrs cash
your accumulation
accumulation

An Analytical Introduction To Indian Financial System And

Reforms:-

At the time of independence, India had a reasonably diversified financial

system in terms of intermediaries but a somewhat narrow focus on terms
of intermediation. The narrowness of the intermediation process is best
exemplified by a lack of a long term capital market and the relative neglect
of agriculture in particular and rural areas in general.

As India embarked on a process of industrialization and growth, it was felt

that the financial system would best assist the process of growth and
development if structural and behavioral lacunae noted above were
addressed. It was keeping this in mind that the RBI set up Development
Financial Institutions (DFIs) and State Finance Corporations(SFCs) as

82
providers of long term capital. Agricultures need for credit was to by met
by cooperative banks. UTI was set up to canalize resources from retail
investors to the capital market. In essence, the understanding that
motivated financial market architecture was that the requirement of
financial intermediation for accelerated growth and development was best
met by specialized financial intermediaries who performed specialized
functions. To ensure that these specializations were adhered to, financial
intermediaries developed and promoted by the Reserve Bank of India had
significant restrictions on both the asset and liabilities side of their balance
sheets.

In the 1950s and 1960s, despite an expansion of the commercial banking

system in terms of both reach and mobilization of resources, agriculture
still remained under funded and rural areas under banked. Whereas
industrys share in credit disbursed almost doubled between 1951 and
1968, from 34 to 67.5%, agriculture got barely 2% of available. Credit to
exports and small scale industries were relatively neglected as well. In
view of the above, it was decided to nationalise the banking sector so that
credit allocation could take place in accordance in plan priorities.
Nationalisation took place in two phases, with a first round in 1969
followed by another in 1980.

By the mid-seventies it was felt that commercialized banks did not have
sufficient expertise in rural banking and hence in 1975 Regional Rural
Banks (RRBs) were set up to help bring rural India into the ambit of the
financial network. This effort was capped in 1980 with the formation of
National Bank for Agriculture and Rural Development (NABARD), which
was to function as an apex bank for all cooperative banks in the country,
helping control and guide their activities. NABARD was also given the
remit of regulating rural credit cooperatives.

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Following with the logic of specialization, the 1980s saw other DFIs with
specific remits being set up e.g. the EXIM Bank for export financing, the
Small Industries Development Bank of India (SIDBI) for small scale
industries and the National Housing Bank (NHB) for housing finance. Long
term finance for the private sector came from DFIs and institutional
investors or through the capital market. However both price and quantity of
capital issues was regulated by the Controller of Capital Issues.
Concomitant with nationalization was the restriction of new foreign
entrants into financial markets.

At least one indicator of the fact that the strategy paid off in deepening
financial intermediation is the near doubling of the M3/GDP ratio from
24.1% in 1970/71 to 48.5 in 1990/91 (see Table 4)1. Over the same
period, bank credit to the commercial sector as a proportion of GDP more
than doubled from 14.3 to 30.2%. However net bank credit to government
(including lending by the Reserve Bank) doubled as well, from 12 to 24.6%
(see Table 4). Therefore the deepening of financial intermediation had
occurred with an increase in the draft by both the commercial sector and
the government on financial resources mobilized. It needs bearing in mind
that the draft of the commercial sector on financial resources is
understated by the ratio mentioned above, given that, outside the
commercial banking sector, there were a large number of specialized
financial intermediaries that funnelled resources to the private sector.

At the end of the 1980s then the Indian financial system was characterized
segmented financial markets with significant restrictions on both the asset
and liability side of the balance sheet of financial intermediaries as well as
the price at which financial products could be offered. In the Indian context
segmentation meant that competition was muted. In a scenario where
price was determined from outside the system and targets were set in
terms of quantities, there was no pressure for non-price competition as
well. As a result the financial system had relatively high transaction costs

84
and political economy factors meant that asset quality was not a prime
concern. Therefore even though the Indian financial system at the end of
1980s had achieved substantial expansion in terms of access, this had
come at the cost of asset quality. In addition, was the fact that the draft of
the government on resources of the financial system had increased
significantly. This in itself need necessarily not be a problem but over this
period, i.e., the 1980s, the composition of government expenditure was
changing as well, with shift towards current rather than capital
expenditure. In addition, in the absence of a reasonably liquid market for
government securities, an increase in net bank lending to the government
meant that the asset side of banks balance sheets tended to become
increasingly illiquid.

The impetus for change came from one expected and one unexpected
quarter - first, the importance of prudential capital adequacy ratios was
underlined by the announcement of Basel I norms that banks were
expected to adhere to; second the macroeconomic crisis of 1990-91. The
reform process that followed accelerated the process of liberalization
already begun in the 1980s and began a series of measured and
deliberate steps to integrate India into the global economy, including the
global financial network.

Briefly however, given the problems facing the financial system and
keeping in mind the institutional changes necessary to help India
financially integrate into the global economy, financial reform focused on
the following: improving the asset quality on bank balance sheets in
particular and operational efficiency in general; increasing competition by
removing regulatory barriers to entry; increasing product competition by
removing restrictions on asset and liability sides of financial intermediaries;
allowing financial intermediaries freedom to set their prices; putting in
place a market for government securities; and improving the functioning of
the call money market.

85
The government security market was particularly important not only
because it was decided the RBI would no longer monetize the fiscal
deficit, which would now be financed by directly borrowing from the
market, but also monetary policy would be conducted through open
market operations and a large liquid bond market would help the RBI
sterilise, if necessary, foreign exchange movements. The attempt was to
ensure the fact that both the call and term money market had sufficient
depth and width to establish a short term and long term yield curve so as
to ensure effective transmission of monetary policy.

In effect reforms then stood the earlier quantity driven model on its head.
The attempt was de-segment markets and remove asset and liability
restriction of the balance sheets of financial intermediaries. Regulatory
barriers to entry would be removed and markets would determine prices.
Specialisation, if any, would be market driven rather than by policy design
and financial intermediaries were free to use economies of scale and
scope to achieve efficiency gains and improve market reach.

WHAT INDIAN FINANCIAL MARKETS NEED

Background

Unfortunate events of the decade of nineties and the beginning of the 21st
century have led us to believe that regulators around the globe have failed
to achieve their primary objectives of 'maintaining systemic stability' and
'protecting interests of the retail customer.

The financial sector plays an important role in the economy of any nation.
A well-regulated and well-developed financial sector is vital to achieving
the most basic need of efficient allocation of scarce resources.

86
The main objectives of any regulator are to improve market efficiency,
enhance transparency, and prevent unfair practices.

In the financial sector, the achievement of these objectives would mean

increase in resource mobilisation, enhanced access to financial products
and services, and sustained economic stability. The International
Monetary Fund recognises the need for 'resilient, well-regulated financial
systems for macroeconomic and financial stability in a world of increased
capital flows.'

"The crises that have swept emerging market nations in recent years
should have left no-one in any doubt about the importance of a strong and
well-regulated financial sector, in dealing with capital flows that can be
very large and reverse very quickly." -- IMF Managing Director, Stanley
Fisher, June 2000.

I now look at a few events that shook the financial markets and the
challenges they pose to the regulators.

The Indian scenario

The Indian stock markets are now amongst the best in the world in terms
of modernisation and the technology. India was among the few countries,
which was not badly effected by the contagion effects of the Asian crisis of
1997. Policy makers attribute this to the slow and cautious pace of capital
account liberalisation.

However, it has also been a decade marred with scams, which were huge
even by international standards, revealing the many gaps in our regulatory
regime.

In 1991, a group of stockbrokers, headed by key trader 'Big Bull' Harshad

Mehta artificially jacked up prices of worthless securities to rake in Rs
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 5,000 crore (Rs 50 billion). The Sensex came tumbling down after the
scam story broke out on April 23, 1992. Fortunes were lost overnight. As a
result, the ambit of the Securities Exchange Board of India, the stock
exchanges and regulatory financial institutions was widened.

Nearly a decade later, after a 'dream budget' by Yashwant Sinha, the then
finance minister, on February 28 2001, the Bombay Stock Exchange index
rose initially but thereafter crashed. Nearly

700 points were lost in eight trading sessions leading to erosion in market
capitalisation of Rs 146,000 crore (Rs 1,460 billion).

This erratic behaviour was once again traced to a handful of brokers, wishing to trap a leading
'bull', Ketan Parekh, who had manipulated prices of shares of a few select companies in
information technology, communication and entertainment sector.
Units of US-64, the flagship scheme of Unit Trust of India --the largest public sector mutual
fund in India, dropped from a peak of Rs 19 to Rs 5.81 in January 2002. Middle class people
and retirees were the hardest hit because of the irregularities.
The recurrence of financial 'scams' periodically exhibits the helplessness of regulators,
particularly the SEBI and the Reserve Bank of India. "It is easier to build a modern stock
exchange from scratch than change century-old trading practices," says Jayanth Varma, a
former board member at SEBI. Traders loathe any change in the market because many thrive
on its imperfections.
Against this backdrop, the regulatory bodies are making endeavours to bring up the Indian
market to international standards. It is working towards making India a global benchmark for
capital market development.

The road ahead

Today-- with the 'feel good' factor about India in the global arena rising,
increased confidence of the investors in the Indian market, Sensex looking
more attractive than ever before, foreign exchange reserves at an all-time
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 high of more than $140 billion -- is the most vulnerable period for the
regulators of the Indian financial sector, particularly SEBI and RBI.

Major steps towards reforms, liberalisation and globalisation have been

taken in the 1990s, now the hiccups need to be sorted out. Maintaining
stability is of prime concern. The time seems ripe to address the gaps in
the regulatory framework, when the times are relatively good and
peaceful. Prevention is better than cure.

Some of the issues that need the regulators' attention and action in the Indian
financial markets are:

Participation and education of retail investors: Encouraging and

protecting the rights of retail investors is an important issue. In Indian
markets it is a challenge to get these investors to participate in the
securities markets.

Also, as new instruments like the derivatives are being introduced in the
market, the emphasis on investor education should also be enhanced.
Then the issue of providing a level playing field for these investors also
remains so that there is continued confidence in the market.

Liquidity: Even though the shares of companies listed on major stock

exchanges are fairly liquid, the options market suffers from illiquidity.

Enhancing liquidity in the options markets to facilitate trade at reasonable

prices is required to encourage investors to hedge their portfolios and to
facilitate companies to manage their risks.

Accounting and financial reporting norms: Financial disclosure

requirements in India are not at par with international accounting practices
in spite of attempts made by the Institute of Chartered Accountants of
India. Good accounting and corporate standards need to be backed up by
high moral and ethical standards by accounting and the corporate world.

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Corporate governance: With sophistication in the marketplace, the
demand for improved corporate governance by public companies will also
increase. Ensuring high confidence of the investors in the business so as
to improve investment levels through good corporate governance is a
must.

Adopting a suitable framework of corporate governance and the extent of

observing the framework in practice is an issue that requires to be
addressed.

Technology: Regulators must keep up with the sophistication in market

technology and new market structure. Enforcement cases will become
more complicated as market manipulation and other misconduct are now
also conducted on the Internet, making it more difficult to be detected.

A robust system ensuring good surveillance against cyber crime should be

updated from time to time. Also, whether a demutualized exchange should
be regulated as any other listed company, or as a utility, will be a
challenge for the regulators.

Integration with other financial markets: The adoption of international

best practices, sharing more information with the regulatory bodies
globally and co-operation with international bodies is important. Global
benchmarks should be adopted through education, assistance and
advisory services to its members.

Organisations such as International Organization of Securities

Commissions, the Bank of International Settlement, the Joint Forum and
the Financial Stability Forum have led initiatives to introduce best practice
or international benchmarks in regulation to counter global vulnerabilities
such as weaknesses in market foundations, uncertain growth prospects,
difficulties in surveillance and enforcement of financial conglomerates and
increased investor risk aversion

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AGENDA for Future

The report of the Committee on Capital Account Convertibility has

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

Money Market

• Reduction of minimum period of term deposits.

• Reduction of the lock-in period of MMMF units from the present 30

days.

• Enlarging the scope of participation in the repo market.

• Removal of inter-bank liabilities completely from minimum

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

• Introduction of intermediaries in money market.

• Creation of level playing field for all banks/FIs/NBFCs in the money

market by prescribing liquidity reserve requirements and removing

other elements of market segmentation.

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• Introduction of screen based dealing systems for money market

instruments and Government securities.

Government Securities Market

• Increasing the number of PDs and enhancing their underwriting

capability to 100 per cent.

• Introduction of when-issued market.

• Providing access to FIIs in Treasury Bills.

• Introduction of interest rate Futures in Treasury Bills/dated

Government securities.

• Automating the DVP system fully.

Foreign Exchange Market

• Issuance of foreign currency denominated bonds to residents.

• Allowing FIIs with equity exposure to cover in the forward market.

• Allowing FIs to participate as full fledged Authorised Dealers.

• Allowing all derivatives including rupee based derivatives.

Some of the reforms suggested require legislative changes. I have stated

this elsewhere, and I reiterate - a comprehensive exercise on legislative
changes is required to put our financial sector on par with global
standards. Further, there are issues of regulation and supervision which
need to be addressed. The viability of further reforms is also critically
dependent on improvements in the area of payments and settlement
systems. Issues relating to Technology, Human Resources Development
and Industrial Relations are other areas that require urgent attention. I
92
would also like to flag the role of market participants in the evolution of
standard market practices and accounting procedures. We cannot afford
to be in a hurry to bring about reforms. Integration and globalisation of
financial markets are not ends by themselves, nor are they risk-free. Every
step that we take recognises this basic tenet and takes into account the
uniqueness of our own circumstances and requirements.

Innovations in Financial Products

The worldwide financial industry is a hotbed of innovation in product

design. How do new financial products come up? Why do new financial
products come up? If we know designs of numerous products which have
proved to be extremely useful internationally, can we create all of them in
India on a very short horizon? What drives the sequencing through which
new products come about?

At the outset, it is easy to tell why new financial products come about: they
come about because people in the economy find them useful. If we look at
a stream of new products like index funds, index futures, index options,
etc., we see a common thread where these products are extremely
successful internationally because they fulfil basic economic objectives of
people in the economy.

A closely related issue is that of transactions costs. Financial products do

not exist in a vacuum; they are created by financial intermediaries who
would typically need to hedge away most of the risk generated by having
sold the product. For example, few finance companies would be
comfortable with selling options on TISCO naked: they would prefer to be
hedged by some mechanism (such as owning shares of TISCO, or some
dynamic trading strategy). When ICICI sells index warrants, they are
exposed to risk unless they hedge that risk away (either by using index
futures or by directly investing in all the index stocks). Someone who sells
93
futures on Nifty Junior would find it very useful to hedge himself by buying
futures on Nifty, since the two indexes are closely correlated.

All this hedging involves trading, and brings up the problem of liquidity.
Suppose the hedging that is required for the creation of product A involves
trading on the market for B. It is desirable that the market for B is highly
liquid. If the market for B is illiquid (i.e. the hedging involves large
transactions costs) then product A will become expensive and less
attractive. Here we see the peculiar nature of financial innovation:

As long as the market for B is illiquid, it will be hard for A to come about.
The market for B will have to have a minimum level of liquidity, otherwise
A will become too expensive and will not succeed.

1. Once A succeeds, it fuels liquidity of B, because users of A

implicitly generate trading in B.

2. Once A succeeds, other new products can be conjured, on the

assumption that A is available.

The economist Robert C. Merton has coined an evocative phrase ``the

spiral of innovation'' to describe the dynamic tension of this process:

"As products such as futures, options, swaps and securitised loans

become standardised and move from intermediaries to markets, the
proliferation of new trading markets in those instruments makes feasible
the creation of new custom--designed financial products that improve
``market completeness''; to hedge their exposures on those products, their
producers, financial intermediaries, trade in these new markets and
volume expands; increased volume reduces the marginal transaction
costs and thereby makes possible further implementation of more new
products and trading strategies by intermediaries, which in turn leads to
still more volume. Success of these trading markets and custom products
encourages investment in creating additional markets and products, and
94
so on it goes, spiraling towards the theoretically limiting case of zero
marginal transaction costs and dynamically--complete markets."

In India, the best example of these linkages is seen in the relationship

between the underlying spot market, index funds, index futures and index
options:

1. The prerequisites for an index fund are

(a) program trading facilities and

(b) an index where all components are liquid and convenient to

trade. These conditions are now fulfilled, and index funds have
now come to exist in India.

2. Once index funds come to exist, they make it possible for people to

sell options on the index while being covered (i.e., they would own

units of the index fund before selling somebody the right to buy the

index). This could happen on exchanges which trade index options

or over the counter.

3. Index futures make the implementation of index funds easier,

4. Index funds generate an order flow for index futures markets, and

help make them more liquid,

5. Index futures markets enable index options markets,

6. Access to index futures and index options makes index funds more

attractive, since users can couple their investments in index funds

with risk management using the futures & options.

7. Index options make possible innovative new products like

``guaranteed return funds'' (i.e. an index fund bundled with a put

95
 option protecting against some level of downside loss) or ``index

linked bonds'' (i.e., an instrument which is 95% debenture and 5%

invested in call options on the index),

8. These new products in turn generate order flow for index futures

and index options markets,

9. In all this, a steady stream of arbitrage keeps the spot, futures and

options prices in line with each other. As volumes grow, the

sophistication of arbitrageurs increases, and prepares them to

similarly function on the next phase of development of the market.

This set of products is a perfect illustration of the process that was outlined
early in this article. The key ingredients here are new products which are
useful to economic agents, a building--block approach towards obtaining
low--cost implementation of new products, and a spiral of innovation in
which the innovations all reinforce each other.

This perspective, of innovations driving what is traded and influencing the

order flow coming to markets, has a significant impact upon the growth of
the securities industry. So far, the major driver of change in the securities
industry in India has been the pressing problem of reorganising market
mechanisms so as to bring down the enormous trading costs which were
present. In this, the complexity of instruments, and product development,
was just not an issue. Transactions involved onerous costs even if they
were as simple as buying 100 shares of TISCO (the costs were brokerage,
gala, impact cost, counterparty risk, backoffice cost and bad paper risk).
These costs were so high that the first problem which stared in the face of
the securities industry was to find ways to reduce them; in addition, these
high transactions costs also served to make more complex instruments
and trading strategies infeasible.

96
Today in India, the enormous transformation of markets has given us new
market practises in trading, clearing, and settlement. This collapse of
transaction costs is a very significant achievement. We are now close to
having an Indian securities industry where normal market practise in
trading, clearing and settlement are equal to the best practises in the
world, and superior to those found in many OECD countries.

As we approach the end of this phase of development in the securities

industry, the question arises about what lies next. If our objectives in
trading were limited to trading TISCO, then there is no frontier that lies
beyond a world with electronic trading, clearing corporation and
depository.

In order to understand the energy and dynamism of the worldwide

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

97
Research methodology

 Title of the Study:

“EMERGING INESTMENT PRODUCTS AND THEIR SCOPE IN

INDIAN FINANCIAL MARKETS”

My project focuses on the new areas of investment available to

investors and how their behavior is changing. They are now leaving
behind the traditional approach of investment like fixed deposits,
gold, post office schemes, bank deposits etc. Investors are now
looking towards new diversification of their wealth by making
investment in mutual funds, capital market, derivatives, insurance,
etc. Like most developed and developing countries Indian investors
are searching for new investment avenues.

 Duration of the Project:

98
 Duration of the project is 15 days from 15th April to 30th April,
2009.

 Objective of the Study:

 To understand the Indian financial market. (mutual funds)

 What are the emerging investment products in the Indian

Financial Market?

 What is the scope of these products in the Indian Financial

Market?

 According to investors point of view which product do they

prefer and why?

 What are the reasons when the investors invest at a

particular time & what are the reasons behind investment in a particular product?

 Type of Research :

Research methodology includes:

Data Source: Data was collected from both primary as well as secondary
sources.

Primary Data Collection :

The survey process involved two phases:

99
 • First phase included identification and selection of the target
audience to be studied and to determine the parameters on which
respondents will justify their preferences. The audience were targeted and
analyzed basically on the basis of the parameters like when, why and
where investors prefer to invest their money ; what is their horizon for
investment ; their preferences , risk taking capacity and expected return on
investments ; their awareness of financial markets and the
changes/innovations taking place? A questionnaire was designed to
collect the needed information from the respondents.

• In the second phase data was collected through questionnaire from

57 respondents within Jaipur region. Results were viewed cautiously as
sample was from a specific population.

Secondary Data Collection:

Secondary data was collected by the information given through ICICI

Direct and various websites, articles published in the newspapers.

 Sample size and method of selecting sample :

SAMPLE SIZE :- 57 INVESTORS

My study was limited to only Jaipur region as the training was done in
Jaipur. Targeting of the customers was limited to the people I know.

Method of selecting Sample :-

In my study I applied Simple Random Sampling Method of

Sampling. This is the simplest and most popular technique of
sampling.

Simple random sampling gives:

100
  Each element in the population ( Universe ) an equal chance
of being included in the sample and all choices are independent of each other.

 Each possible sample combination an equal chance of being

chosen.

 Eliminates the chance of bias or personal prejudices in the

selection of units
 Scope of Study :

The first task allotted to me was the study of financial products. As

there are many financial products available with the company, such
as, investment advisory, equities, commodities, portfolio
management services, mutual funds, insurance, IPO and
depository services.

I have done survey on investment strategies. Although there are many

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

Another factor was that my study was limited to only Jaipur region as the
training was done in Jaipur. Targeting of the customers was limited to the
people I know.

101
 Study of the Emerging Investment Products and their Scope in Indian
Financial Markets is a very vast topic and there are many topics,
which can be studied under it, but this project will limit itself to the
basic understanding of the topic.

 Limitations of the Study:

The study which is being conducted is limited by following reasons:

1- Disclosure of information is a constraint- As per the company

policy, they are not allowed to share their data with non-authorized
people. As I am working as a management trainee I am not given
access to all the required data needed for my project. This
increases the dependence on Secondary data and External
sources for collecting data.

2- Unwillingness of the respondents to provide information-

Firstly, people were reluctant of providing their information out of
unwillingness and time constraint even if they did they were not
ready to reveal their current income, telephone no. out of suspicion
and fear of getting disturbed.

3- Incapacity to survey large number of people-Survey has been

conducted on limited number of people due to time constraint.
Large data could not be collected also because it was done by
single individual.

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

HOW MOST INDIANS SAVE:- This data was provided in the report published by RBI

Financial assets of household savings

Provident and
pension funds,
13.0% Currency, 10.1%
Insurance funds,
14.9%

Inv in small savings Deposits, 42.9%

etc, 13.7%
Govt secs, 4.0%
Mutual funds, 0.7%
Shares, 0.7%

103
 SURVEY FINDINGS

BRIEF DETAILS ABOUT MY SURVEY:-

This whole project made me understand that what all investors look at the
time when they are investing their money. Due to my project I was able to
gain knowledge about their ideas i.e. why they are investing their saving is
few particular product. And side by side my other questions will be sorted
out like:-

 At what perfect time are the investors investing their money

in the market?

 What market is all about and how does it work?

 What are the emerging investment products in the Indian

Financial Market?

104
 What is the scope of these products in the Indian Financial
Market?

MOTIVE/OBJECTIVE BEHIND THE PROJECT AND SURVEY

1. To understand the Indian financial market. (mutual funds)

2. According to investors point of view which product do they prefer

and why?

3. What are the reasons when the investors invest at a particular time &
what are the reasons behind investment in a particular product?

PROBLEMS FACED

 Investors are more speculative in nature as they prefer equity

market.

 The investor’s perception’s to earn higher profits in shortest time.

However they are all the times not willing to assume higher risks which are more likely
to occur in a shorter duration.

 In this research the data collected would be only of the investors in

Jaipur.

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QUESTIONNAIRE

Name_______________________ ________

E-mail ID_____________________________

Age ________________________________

Contact No____________________________

1. What is your occupation ?

 Salaried

 Self-Employed

 Business

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2. What is your monthly income ?

 50,000 to 1 lakh

 1-5 lakh

 5 lakh and above

3. What are your monthly expenses ?

 10,000 to 50,000

 50,000 to 1 lakh

 1 lakh and above

4. Where do you invest your money ?

 Real Estate

 Stocks / Commodity

 Gold / Silver
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  Post office / Banks

5. What is your primary investment focus ?

 Tax Savings and Returns

 Retirement Benefits

 others

6. What time horizon do you prefer for your investments ?

 Less than 1 year

 1 to 3 years

 More than 3 years

7. Do you have a scope to earn return on investment at competitive

rates in the Indian Market ?

 Yes

 No

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 8. Do you have the awareness of the financial markets and the
changes / innovations taking place ?

 Yes

 No

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

S.No. OPTION RANK ( 1, 2, 3 or 4 )

__
1 Real Estate
__
2 Stock Market
__
3 Post office / Banks
__
4 Gold / Silver

10. When do you invest ?

 When market is down

 When market is up

 NFO

 Ongoing scheme

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 IN this report I did survey of 57 investors and on basis of their
answers I came to some final conclusions which will be explained as
under by the help of GRAPH

S e n s e x p e fo rm a n c e in 3 - y r p e rio d
re tu rn s

100%

80%

60%

40%

20%

0%
1980 1985 1990 1995 2000 2005 2010
-2 0 %

It can be seen from this graph that the sensex was very fluctuating
from last 25 Years. But it could be seen from last three years that it
has been rising continuously. But the worst situation was in year
2003 in which it touched (-13) which was a major downfall in last 25
years. It is beneficial for the investors to invest when the sensex
goes down and sell those investments when it goes up due to which
they could earn profits. Well its one of the good indications for the
economy of the country when the sensex seems to rise.

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Analysis Of The Questionnaires Filled By The Investors

SAMPLE SIZE:- 57 INVESTORS

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

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

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

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My next question was that are the investors aware of the financial market
and the changes/innovations taking place in it? To this question maximum
of them said No i.e.50%.
It means that the maximum investors in Ahmedabad just want to invest
their money in any of the investment products. Without even taking the
knowledge about the financial market, its condition and the innovations or
the new products coming up. Only 45% said that they are aware.

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

Maximum investors want to remain invested in the market for 1-3 Yrs of
time i.e. 35%, 30% of them want to keep their money invested in the

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

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

Common investment mistakes that people make:

Knowing about some common investment mistakes people make

1. Investing without a clear plan of actions

Many people neglect to take the time to think about their needs and long-
term financial goals before investing. Unfortunately, this often results in
their falling short of their expectations. You should decide whether you are
interested in price stability, growth, or a combination of these. Determine
your investment goals. Then, depending on your age and your tolerance
for risk, select mutual funds with objectives similar to yours.

2. Meddling with your account too often:

You should have a clear understanding of your investments so that you
are comfortable with their behavior. If you keep transferring investments in
response to downturns in prices, you may miss the upturns as well. Even
in the investment field, the “tortoise” that is more patient, may win over the
“hare”. While past performance does not necessarily guarantee future
performance, your understanding of the behavior of various investments
over time can help prevent you from becoming shortsighted about your
long-term goals.

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3. Loosing sight of inflation:
While you may be aware of the fact that the cost of goods and services is
rising, people tend to forget the impact that inflation will have on
investments in the long term. The value of Rs. 100 in 1980 was down to
Rs. 26 in 1995. This means that the buying power of the rupee has
decreased, and you cannot buy as much for Rs. 100 now as you could
have bought in 1980. You have to keep in mind that inflation will eat your
savings faster than you can imagine.

4. Investing too little too late:

People do not “pay themselves first”. Most people these days have too
many bills to pay every month, and planning for your future often takes a
backseat. Regardless of age or income, if you do not place long-term
investing among your top priorities, you may not be able to meet your
financial goals. The sooner you start, the less you have to save every
month to reach your financial goals.

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5. Do not put all your eggs in one basket, diversify:
When it comes to investing, most of us do not appreciate the importance
of diversification. While we know that we should not “put all our eggs in
one basket”, we often do not relate this concept to stocks and bonds. Take
the time to discuss the importance of diversifying your investments among
different asset categories and industries. When you spread your holdings
around, you do not have to rely on the success of just one investment.

6. Do not fear risk and invest too conservatively:

Because they are fearful of losing money, many people tend to rely heavily
on fixed-income investments such as bank fixed deposits and company
deposits. By doing this, however, you put yourself at risk with the negative
effects of inflation. Consider diversifying with a combination of
investments, including stock funds, which may be more volatile but may
have the potential to produce higher returns over the long-term.

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Conclusion:

To conclude, I would say that the opportunity zones in Financial Markets are
contracting somewhere and at the same time expanding elsewhere. Change
and the pace of change in the financial markets, both would be different,
tomorrow. Continuous exploration of scopes and exploitation of values would
demand a brilliant focus on emerging opportunities, competence building,
strategies for the leadership position in the opportunity zones and principles
centered business practices. Therefore, we need to create a culture, which
embraces change and move ahead with an objective to lead.

Former prime minister Atal Bihari Vajpayee summed up the requirement of

the Indian financial markets, after the Ketan Parekh scam came to light. He
told regulators to make markets safer for investors and called for more rigour
in the market place.

"We need markets that are known for their safety and integrity. We need
knowledgeable investors. And to build a sustainable, high-growth economy
which will ensure better living conditions for our people, now and in the
future," Vajpayee said.

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 Investors will be the ultimate beneficiaries of all these changes in the
marketplace. Investors will have more choices and information on investment
products, easier accessibility to any market they wish to trade on, and better
and cheaper services from intermediaries.

The new generation of investors will become increasingly sophisticated as

market information becomes widely available. However, the complexity of the
new markets also means that investors must know their own risk appetite
before entering the market.

Recommendations and Suggestions for Investors:

1 Assess yourself: Self-assessment of one’s needs; expectations and risk profile is of

prime importance failing which; one will make more mistakes in putting money in right
places than otherwise. One should identify the degree of risk bearing capacity one has
and also clearly state the expectations from the investments. Irrational expectations will
only bring pain.

2 Try to understand where the money is going: It is important to identify the nature
of investment and to know if one is compatible with the investment. One can lose
substantially if one picks the wrong kind of mutual fund. In order to avoid any confusion
it is better to go through the literature such as offer document and fact sheets that
mutual fund companies provide on their funds.

3 Don't rush in picking funds, think first: one first has to decide what he wants the
money for and it is this investment goal that should be the guiding light for all
investments done. It is thus important to know the risks associated with the fund and
align it with the quantum of risk one is willing to take. One should take a look at the
portfolio of the funds for the purpose. Excessive exposure to any specific sector should
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be avoided, as it will only add to the risk of the entire portfolio. Mutual funds invest with
a certain ideology such as the "Value Principle" or "Growth Philosophy". Both have their
share of critics but both philosophies work for investors of different kinds. Identifying the
proposed investment philosophy of the fund will give an insight into the kind of risks that
it shall be taking in future.

4 Invest. Don’t speculate: A common investor is limited in the degree of risk that he
is willing to take. It is thus of key importance that there is thought given to the process of
investment and to the time horizon of the intended investment. One should abstain from
speculating which in other words would mean getting out of one fund and investing in
another with the intention of making quick money. One would do well to remember that
nobody can perfectly time the market so staying invested is the best option unless there
are compelling reasons to exit.

5 Don’t put all the eggs in one basket: This old age adage is of utmost importance.
No matter what the risk profile of a person is, it is always advisable to diversify the risks
associated. So putting one’s money in different asset classes is generally the best
option as it averages the risks in each category. Thus, even investors of equity should
be judicious and invest some portion of the investment in debt. Diversification even in
any particular asset class (such as equity, debt) is good. Not all fund managers have the
same acumen of fund management and with identification of the best man being a
tough task, it is good to place money in the hands of several fund managers. This might
reduce the maximum return possible, but will also reduce the risks.

6 Be regular: Investing should be a habit and not an exercise undertaken at one’s

wishes, if one has to really benefit from them. As we said earlier, since it is extremely
difficult to know when to enter or exit the market, it is important to beat the market by
being systematic. The basic philosophy of Rupee cost averaging would suggest that if

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one invests regularly through the ups and downs of the market, he would stand a better
chance of generating more returns than the market for the entire duration. The SIPs
(Systematic Investment Plans) offered by all funds helps in being systematic. All that
one needs to do is to give post-dated cheques to the fund and thereafter one will not be
harried later. The Automatic investment Plans offered by some funds goes a step
further, as the amount can be directly/electronically transferred from the account of the
investor.

7 Do your homework: It is important for all investors to research the avenues

available to them irrespective of the investor category they belong to. This is important
because an informed investor is in a better decision to make right decisions. Having
identified the risks associated with the investment is important and so one should try to
know all aspects associated with it. Asking the intermediaries is one of the ways to take
care of the problem.

8 Find the right funds Finding funds that do not charge much fees is of importance,
as the fee charged ultimately goes from the pocket of the investor. This is even more
important for debt funds as the returns from these funds are not much. Funds that
charge more will reduce the yield to the investor. Finding the right funds is important and
one should also use these funds for tax efficiency. Investors of equity should keep in
mind that all dividends are currently tax-free in India and so their tax liabilities can be
reduced if the dividend payout option is used. Investors of debt will be charged a tax on
dividend distribution and so can easily avoid the payout options.

9 Keep track of your investments: Finding the right fund is important but even more
important is to keep track of the way they are performing in the market. If the market is
beginning to enter a bearish phase, then investors of equity too will benefit by switching

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to debt funds as the losses can be minimized. One can always switch back to equity if
the equity market starts to show some buoyancy.

10 Know when to sell your mutual funds: Knowing when to exit a fund too is of
utmost importance. One should book profits immediately when enough has been earned
i.e. the initial expectation from the fund has been met with. Other factors like non-
performance, hike in fee charged and change in any basic attribute of the fund etc. are
some of the reasons for to exit.

11 ot being disciplined and failing to cut losses at 8% below the purchase

price A strategy of selling while losses are small is a lot like buying an insurance policy.
You may feel foolish selling a stock for a loss -- and downright embarrassed if it
recovers. But you're protecting yourself from devastating losses. Once you've sold, your
capital is safe.The 7%-8% sell rule is a maximum, not an average. Time your buys right,
and if the market goes against you the average loss might be limited to only 3% or 4%.
Again its to be kept in mind, do not to sell a winning stock just because it pulls back a
little bit.

12 Do not purchase low-priced, low quality stocks.

13 One should follow a system or set of rules

14 Do not let emotions or ego get in the way of a sound investing strategy
You may feel foolish buying a stock at 60, selling at 55, only to buy it back at 65. Put
that aside. You might have been too early before, but if the time is right now, don't
hesitate. Getting shaken out of a stock should have no bearing on whether you buy it at
a later date. It's a new decision every time

15 Invest in equities for long term and not short term

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16. Do not make unplanned investing and starting without setting clear
investment objectives and time frame for achieving the same.

17. Not having an eye on what the big players / mutual funds buy & sell is a
pitfall and an opportunity lost to pick the right stocks. It takes big money to
move markets, and institutional investors have the cash. But how do you find
out where the smart money is going? Make sure the stock you have your eye
on is owned by at least one top-rated fund. If the stock has passed muster
with leading portfolio managers and analysts, it's a good confirmation its
business is in order. Plus, mutual funds pack plenty of buying power, which
will drive the stock higher

18. Patience is a virtue in investing. Do not panic on your existing stocks. It's
so important, we repeat: Be patient for your stocks to reap rewards.

19. Do not be unaware of what is happening around in the market. As always,

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

20. Margin is not a luxury, it is a deep-seated risk, know your risk profile and
use margin trading sparingly. You as an investor might lose control of your
investments if you borrow too much.

12. Greed is dangerous; it may wipe out the gains already made. Once a
reasonable profit is made the investor should get out of the market quickly.

REFERENCES:-

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 WEBSITES:-
1. www.valuesearchonline.com
2. www.wikipedia.com
3. www.indiainfoline.com
4. www.myiris.com
5. www.sebi.com
6. www.cartoonstock.com
7. www.rbi.org
8. http://www.ICICIDirect.com
9. Product Demo: http://content.icicidirect.com/mailimages/indexpage.html
10. FAQs: http://content.icicidirect.com/indexfaq.asp

BOOKS & MAGAZINES:-

1. ANALYST (Magazine)
2. OUTLOOK MONEY(Magazine)
3. BUSINESS TODAY(Magazine)
4. Marketing Of Financial Products (Book of ICFAI Publication)
5. Investments (Book by BODIE, KANE,& MARCAUS)
6. Different Modules By CYGNUS

SEARCH ENGINES:-
1. www.google.com
2. www.yahoosearch.com

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