project 2
TRANSCRIPT
PROJECT REPORT
ON
SUMMER INTERNSHIP PROGRAMME
PROJECT TITLE
“STUDY OF STOCK MARKET
&
MUTUAL FUND ANALYSIS”
Submitted to:-
Amit Mallik
Sr. Manager
SMC Global Securities Limited
Submitted by:-
RAJA MOHAN JHA
08-III-837
INSTITUTE OF MARKETING & MANAGEMENT
Qutub Institutional Area, New Delhi
ABSTRACT
It gives me great satisfaction on completion of Summer Internship Project
entitled “study of Stock Market & Mutual fund analysis” On the submission of
my project report I would like to express my sincere gratitude to my guide
Mr. AMIT Mallik (Senior Manager) SMC Global Sec. Ltd for mentoring me
and taking active interest throughout the project. I am deeply indebted to
Mr. FAIYAZ ANSARI and Mr PARAS SIR (SMC Global Securities Limited)
for sharing his insights on the topics and for being a constant source of
inspiration & courage during the entire project work. He was always
available, correcting mistakes, intelligently directing me to proper sources of
information advising to aim for simplicity, brevity, clarity and accuracy. I am
indeed thankful to him for his valuable guidance.
I would also like to express my special thanks to the Chairman Mr. Mahesh
C. Gupta (SMC Global Securities Limited) for appointing me as project
trainee and for his help & co-operation during the Project work.
I would like to thank the entire team of SMC Global Securities Limited, for
sharing their immense experience and extending their support in carrying
out this project work. I am greatly acknowledged for their kind help.
TABLE OF CONTENTS
TABLE OF CONTENTS................................................3
EXUTIVE SUMMARY...................................................5
ABOUT SMC GLOABL SECURITIES...............................6
SMC GLOBAL SECURITIES LIMITED.................................................................................6VISION:............................................................................................................................9PRODUCTS AND SERVICES:............................................................................................11ACHIEVEMENT BY SMC:.................................................................................................13
INTRODUCTION TO STOCK MARKET..........................17
STOCK MARKET...............................................................................................................17STOCK EXCHANGE..........................................................................................................18WHAT IS A SHARE?........................................................................................................18PRIMARY AND SECONDARY MARKETS................................................................19RISKS INVOLVED IN STOCK MARKET.............................................................................21
Technical Analysis......................................................................................22Fundamental Analysis..............................................................................23
TERMS COMMONLY USED IN STOCK MARKET.................................................23SEBI (SECURITIES AND EXCHANGE BOARD OF INDIA)................................................34
NSE (National Stock Exchange)............................................................37NSE INDICES...................................................................................................................39
BSE (BOMBAY STOCK EXCHANGE)............................39
BSE - OTHER INDICES...................................................................................................41DEMAT FORM OF SHARES......................................................................................................44DERIVATIVES........................................................................................................................45
Types of Derivatives..................................................................................46
UNDERSTANDING STOCK MARKET RISK....................48
BETA................................................................................................................................50HEDGING.........................................................................................................................51
Playing with futures:-...............................................................................51Long security, sell futures...........................................................................................51Short security, buy futures.........................................................................................52
Playing with options:-...............................................................................52Buy puts when market is expected to fall.............................................................52Sell puts when market is rising.................................................................................53Buy calls when Market is rising.................................................................................53Sell Calls when market is expected to fall.............................................................53
MUTUAL FUND ANALYSIS........................................55
THE MAIN CHARACTERISTICS OF MUTUAL FUND ARE AS FOLLOWS:-........................................................57
HISTORICAL PERSPECTIVE OF MUTUAL FUNDS IN INDIA:....................................................................58
Second Phase – 1987-1993 (Entry of Public Sector Funds).....59Third Phase – 1993-2003 (Entry of Private Sector Funds).................59
Fourth Phase – since February 2003..................................................602. Diversification:.................................................................................................613. Convenient Administration:......................................................................62
5. Low Costs:................................................................62
6. Liquidity:...................................................................62
7. Transparency:.................................................63
10. Choice of Schemes:................................63
11. Well Regulated:................................63
12. Professional Management :..........................................................64
13. Diversification:.........................................64
DISADVANTAGES OF MUTUAL FUNDS:..............................................67TYPES OF MUTUAL FUNDS:.....................................................................72Other Schemes:...........................................................................................75PLANS THAT MUTUAL FUNDS OFFERS:.............................................76
OGANISATION OF A MUTUAL FUND:.........................77
SECURITY AND EXCHANGE BOARD OF INDIA (SEBI):. .80
REGULATORY REQUIREMENTS FOR TRUSTEES......................................................80Obligations of the trustees....................................................................81
SEBI RULES REGARDING COMPLIANCE & THE ROLE OF TRUSTEES..............................................................82
TERMS RELATED TO THE MUTUAL FUNDS:............................................................83Loads (Charges) in a mutual Fund:....................................................85
FUTURE OF MUTUAL FUNDS IN INDIA:...........................................................86CUSTOMER / INVESTORS BEHAVIOR ANALYSIS IN MARKET:........88
TYPES OF CUSTOMERS:............................................................................89 Avoid ambiguity, confusion, and vagueness. 91 Avoid emotional language, prestige bias and leading questions 92 Don't assume the respondent is an expert on themselves (unless you have no choice) 92 Avoid false premises 92 Avoid asking about future intentions (if you can)92
ANLYSIS AND CONCLUSION OF DATA:....................92
CONCLUSION......................................................................................................109RECOMMENDATIONS................................................................................110
SUGGESTIONS.............................................................................................111LIMITATIONS...............................................................................................................112
ANNEXURE.........................................................................................................113
EXUTIVE SUMMARY
This project had been initiated for the purpose of acquainting me with, right
from the basics of the financial terminology used in the stock markets,
further up to gaining in depth knowledge of all the issues concerning the
management of various risks faced by Investors and brokerage companies.
This work is a detailed study of stock market and stocks. It’s about the
ways in which investors can invest in stock market. I have carried out two
projects in my summer training. The initial phase of the document explains
what I have understood about the functioning of stock market. I have tried to
explain the entire cash and derivative market in detail. All these calculations
give a better insight to my work. After this I have tried to analyze the risk
arising due to fluctuations in prices of the shares in stock market. This risk
arises due to number of reasons, which I have tried to put across. The focus
in this project is on STUDY OF STOCK MARKET & MUTUAL FUND
ANALYSIS. I have tried to find out various ways to analyze stocks, to
minimize risk while maximizing returns. The entire work has not been done
till date. Application of these ways to analyze stocks is yet to be done, it’s in
progress.
The project is divided into two parts. The first half of the project which
contains Project I-Stock market examines the working of a stock market
and the role of the Regulatory Authority in maintaining the proper working of
stock markets and how one can hedge risk using derivative instruments. It
also explains about the different stock markets working in India and about
their different Indices.
The second part of the project deals with Mutual fund analysis work
which is Project II, includes both fundamental analysis and technical analysis.
Second part of project is as important as Project I, because whole project
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contains the work which is carried out by me in these two months of summer
training and I am glad to present it in my summer training project.
The project had been carried out at SMC Global Securities Limited, Daryaganj
(New Delhi).
ABOUT SMC GLOABL SECURITIES
It's one of the leading firms in financial services in India. It basically deals in
Mutual Fund, Fixed Deposit Schemes, Capital Gain Bonds, GOI Taxable
Bonds, NABARD Bonds and Life and General Insurance.
I am working for SMC Global Securities Limited which is one of the leading
companies of financial services. So I would like you to have a look at the
profile of the company
About SMC Global Securities Limited
SMC Global Securities Limited
SMC: A ONE STOP INVESTMENT SHOP
SMC Group, a leading financial services provider in India is a vertically
integrated investment solutions company, with a pan-India presence. Over
the years, SMC has expanded its domestic & international operations.
Existing network includes regional offices at Mumbai, Kolkata, Chennai, 6
Bangalore, Cochin, Ahmadabad Jaipur, Hyderabad and 1500+ offices across
375+ cities in India. SMC has plans to grow its network to 2,000 offices
across 500+ cities in the next 3 years. The company has expanded
internationally and has established office in Dubai Gold and Commodities
Exchange (DGCX). Its products and Services include Institutional and retail
brokerage of equity, commodity, currency, derivatives, online trading,
investment banking, depository services, clearing services, IPOs and mutual
funds distribution, Portfolio management, wealth advisory, insurance
broking, equity and commodity research. SMC is one of the most active
trading organizations in India, averaging over 3,50,000 trades per day.
Currently, SMC has a highly efficient workforce of over 4,000 employees &
one of the largest retail network in India currently serving the financial needs
of more than 5,50,000 satisfied investors.
SMC PROFILE:
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FOUNDERS & PROMOTERS:
Mr. Subhash Chand Aggarwal
Mr. Mahesh Chand Gupta
Mr. Subhash Chand Aggarwal, Chairman and Managing Director of SMC
Global Securities Ltd. and Mr. Mahesh Chand Gupta, Chairman and Managing
Director of SMC Comex (P) Ltd. are the founders and promoters of SMC. Both
are chartered accountants. They are an embodiment of professional
excellence. They are the visionaries who planted the sapling of the giant tree
called SMC. With rock solid reserve and firm commitment, they have shaped
their vision to reality. They have a rich experience of more than 20 years in
the capital market. Their exceptional leadership skills and outstanding
commitment has made SMC as one of the leading investment solutions and
services provider. They both assign top priority to the principles of
transparency, honesty and integrity in all our dealings
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VISION :
“VISION IS NOT SEEING THINGS AS THEY ARE BUT AS THEY WILL BE”
OUR VISION is to be a global major in providing complete investment
solutions, with relentless focus on investor care, through superior
efficiency and complete transparency.
OUR APPROACH:
VALUE FOR INVESTOR’S TRUST: SMC values the trust reposed in by the
clients and is committed to uphold it at all cost.
INTEGRITY AND HONESTY: Integrity, honesty and transparency are the
underlying principles in all our dealings.
PERSONALISZED ATTENTION: The most valued asset is our
relationship with the clients, which has been built over years by giving
personalized attention.
NETWORK WHICH WORKS: SMC has a vast network extending to
375+ cities/towns ensuring easy accessibility, convenience and hassle
free trading experience.
RESEARCH BASED ADVISORY SERVICES: SMC offers proactive and
timely world class research based advice and guidance to its clients to
enable them to take informed decisions.
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Main Focus: Investor Care
Investment at your finger tips
10
Products and Services:
Equity & Derivative Trading:
SMC Trading Platform offers online equity & derivative trading facilities
for investors who are looking for the ease and convenience and hassle
free trading experience. We provide ODIN Application, which is a high -
end, integrated trading application for fast, efficient and reliable
execution of trades. You can now trade in the NSE and BSE
simultaneously from any destination at your convenience. You can
access a multitude of resources like live quotes, charts, research,
advice, and online assistance helps you to take informed decisions.
You can also trade through our branch network by registering with us
as our client. You can also trade through us on phone by calling our
designated representatives in the branches where you are registered
as a client.
Clearing Services:
Being a clearing member in NSE(F&O & Currency), BSE (F&O &
Currency), MCX, MCX-SX, NCDEX and DGCX. SMC is clearing massive
volumes of trades of our trading members in this segment.
Commodity Trading:
SMC is a member of 3 major national level commodity exchanges, i.e.
National Commodity and Derivative Exchange (NCDEX), Multi
Commodity Exchange (MCX) and National Multi Commodity Exchange
of India (NMCE) offers you trading platform of NCDEX, MCX and NMCE.
You can get Real-Time streaming quotes, place orders and watch the
confirmation, all on a single screen. We use technology using ODIN 11
application to provide you with live Trading Terminals. In this segment,
SMC have spread our wings globally by acquiring Membership of Dubai
Gold and Commodities Exchange. We provide trading platform to trade
in DGCX and also clear trades of trading members being a clearing
member.
Distribution of Mutual Funds & IPOs:
SMC offers distribution and collection services of various schemes of all
Major Fund houses and IPOs through its mammoth network of
branches across India. SMC is registered with AMFI as an approved
distributor of Mutual Funds. We assure you a hassle free and pleasant
transaction experience when you invest in mutual funds and IPOs
through us. We are registered with all major Fund Houses including
Fidelity, Franklyn Templeton etc. We have a distinction of being
leading distributors of IPOs. Shortly we will be providing the facility of
online investment in Mutual Funds and IPOs
Online back office support:
To provide robust back office support backed by excellent accounting
standards to our branches we have ensured connectivity through FTP
and .net based Application. To ensure easy accessibility to back office
accounting reports to our clients, we have offered facilities to view
various user friendly, easily comprehendible back office reports.
SMC Depository:
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We are ISO 9001:2000 certified DP for shares and commodities. We are
one of the leading DP and enjoy the trust of more than 5.5 Lac
investors. We offer a quick, secure and hassle free alternative to
holding the securities and commodities in physical form. We are one of
the few Depository Participants offering depository facilities for
commodities. We are empanelled with both NCDEX & MCX.
SMC Research Based Advisory Services:
Our massive R&D facility caters to the need of Investors, who are
continuously in need of opportunities for striking rich rewards on their
investment. We have one of the most advanced, hi-tech in house R&D
wing with some of the best people, process and technology resources
providing complete research solutions on Equity, Commodities, IPOs
and Mutual Funds. We offer proactive and timely world class research
based advice and guidance to our clients so that they can take
informed decisions.
SMC Investor Awareness Forum:
Our dedicated team of professionals is conducting investor
meet/seminars across India . We believe that a well-informed investor
is an empowered investor. We also seek your feedback on our services
in these Investor meets.
Achievement by SMC:
"AN ACHIEVEMENT IS BONDAGE. IT OBLIGES ONE TO A HIGHER
ACHIEVEMENT"
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ISO 9001:2000 certified DP for both shares and commodities
4th largest broking house of India in terms of trading terminals
(Source: Dun and Bradstreet, 2008)
5th largest sub-broker network in the country (Source: Dun and
Bradstreet, 2007)
2nd largest distributors of IPO in Retail. (Source: Prime Data
Rankings)
Awarded the Fastest Growing Retail Distribution Network
(Source: Business Sphere, 2008)
Awarded the Major Volume Driver by BSE for the Third year in a
row i.e. 2006-07, 2005-06 and 2004-05 (Awarded to top 10
Brokers)
Nominated among the top 3, in the CNBC Optimix Financial
Services Award 2008 under the "National Level Retail Category".
One of the first financial firms in India to expand operations in
the lucrative gulf market, by acquiring valuable license for
trading and clearing with Dubai gold and commodities exchange
(DGCX)
Amongst a Elite group of brokers having proprietary desk for
doing risk-free arbitrage in commodities
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First trade on DGCX for silver and First currency trade for rupee-
dollar
15
STUDY OF STOCK MARKET
16
INTRODUCTION TO STOCK MARKET
Before Moving to stock market’s derivative segment we need to
understand the basics of stock market. After that we can easily
understand the concept of derivatives segment. Intro to stock market
includes working of stock market, Stock exchanges, financial sector of
India, etc.
Stock Market
A stock market (also known as a stock exchange) has two main
functions. The first function is to provide companies with a way of
issuing shares to people who want to invest in the company. This can
be illustrated by an example: Suppose a company has a mining lease
over an area with some rich ore deposits. It wants to exploit these
deposits, but it doesn’t have any equipment. To buy the equipment it
needs money. One way to raise money is through the stock market.
The company issues a prospectus, which is a sort of advertisement
informing people about the prospects of the company and inviting
them to invest some money in it. When the company is ‘floated’
(established) on the stock market, interested investors can become
part-owners of the company by buying ‘shares’. If the company
operates at a profit, shareholders benefit in two ways – through the
issuing of dividends in the form of cash or more shares, and through
growth in the value of the shares. On the other hand, if the company
does not operate at a profit (e.g., if the price of the product dips), the
shareholders will probably lose money. The second function of the
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stock market, related to the first, is to provide a venue for the buying
and selling of shares.
Stock Exchange
An exchange is an institution, organization, or association which hosts
a market where stocks, bonds, options and futures, and commodities
are traded. Buyers and sellers come together to trade during specific
hours on business days. Exchanges impose rules and regulations on
the firms and brokers that are involved with them. If a particular
company is traded on an exchange, it is referred to as "listed".
Companies that are not listed on a stock exchange are sold OTC (short
for Over-The-Counter). Companies that have shares traded OTC are
usually smaller and riskier because they do not meet the requirements
to be listed on a stock exchange.
What Is A Share?
In finance a share is a unit of account for various financial instruments
including stocks, bonds, mutual funds, limited partnerships. In simple
Words, a share or stock is a document solely to stocks is so common
that it almost replaces the word stock itself. It is issued by a company,
which entitles its holder to be one of the owners of the company. A
share is issued by a company or can be purchased from the stock
market. By owning a share you can earn a portion in the firm and by
selling shares you get capital gain. So, your return is the dividend plus
the capital gain. However, you also run a risk of making a capital loss if
you have sold the share at a price below your buying price.
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PRIMARY AND SECONDARY MARKETS
There are two ways for investors to get shares from the primary and
secondary markets. In primary markets, securities are bought by way
of public issue directly from the company. In Secondary market share
are traded between two investors.
Primary Market
Market for new issues of securities, as distinguished from the
Secondary Market, where previously issued securities are bought and
sold. A market is primary if the proceeds of sales go to the issuer of the
securities sold.
Secondary Market
The market where securities are traded after they are initially offered
in the primary market is known as secondary market. Most trading is
done in the secondary market. Generally, most shares have a face
value (i.e. the value as in a balance sheet) of Rs.10 though not always
offered to the public at this price. Companies can offer a share with a
face value of Rs.10 to the public at a higher price. The difference
between the offer price and the face value is called the premium. As
per the SEBI guidelines, new companies can offer shares to the public
at a premium provided:
1. The promoter company has a 3 years consistent record of profitable
working.
2. The promoter takes up at least 50 per cent of the shares in the
issue.
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3. All parties applying to the issue should be offered the same
instrument at the same terms, especially regarding the premium.
4. The prospectus should provide justification for the propose
premium.
On the other hand, existing companies can make a premium issue
without the above restrictions. A company’s aim is to raise money and
simultaneously serve the equity capital. As far as accounting is
concerned, premium is credited to reserves and surplus and it does not
increase the equity. Thus the companies seek to make premium
issues. In a buoyant stock market when good shares trade at very high
prices, companies realize that it’s easy to command a high premium.
The biggest difference between them is the length of time you hold
onto the assets. An investor is more interested in the long-term
appreciation of his assets, counting on that historical rise in market
equity.
He’s not generally concerned about short-term fluctuations in prices,
because he’ll ride them out over the long haul. An investor relies
mostly on Fundamental Analysis, which is the analytical method of
predicting long-term prospects of a particular asset. Most investors
adopt a “buy and hold” approach to assets, which simply means they
buy shares of some company and hold onto them for a long time. This
approach can be dangerous, even devastating, in an extremely volatile
market such as today’s BSE or NSE Indexes Show. What most investors
need to remember is this: investing is not about weathering storms
with your “beloved” company – it’s about making money. Traders, on
the other hand, are attempting to profit on just those short-term price
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fluctuations. The amount of time an active trader holds onto an asset is
very short: in many cases minutes, or sometimes seconds. If you can
catch just two index points on an average day, you can make a
comfortable living as a Trader.
Risks Involved In Stock Market
To make Money in the Stock Market, you must assume High Risks.
Tips to Lower your Risk:
1. Do not put more than 10% of your money into any one stock
Do not own more than 2-3 stocks in any industry
Buy your stocks over time, not all at once
Buy stocks with consistent and predictable earnings growth
Buy stocks with growth rates greater than the total of inflation
and interest rates
Use stop-loss orders to limit your risk
2. Buy Stocks on the Way Down and Sell on the Way Up.
False: People believe that a falling stock is cheap and a rising stock is
too expensive. But on the way down, you have no idea how much
further it may fall. If a stock is rising, especially if it has broken
previous highs, there are no unhappy owners who want to dump it. If
the stock is fairly valued, it should continue to rise.
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3. You can Hedge Inflation with Stocks.
When interest rates rise, people start to pull money out of the market
and into bonds, so that pushes prices down. Plus the cost of business
goes up, so corporate earnings go down, along with the stock prices.
4. Young People can afford to take High Risk.
False: The only thing true about this is that young people have time on
their side if they lose all their money. But young people have little
disposable income to risk losing. If they follow the tips above, they can
make money over many years. Young people have the time to be
patient.
Technical Analysis
It is a method of evaluating future security prices and market
directions based on statistical analysis of variables such as trading
volume, price changes, trends etc., to identify patterns. It is a stock
market term meaning- the attempt to look for numerical trends in a
random function. The stock market used to be filled with technical
analysts deciding what to buy and sell, until it was decided that their
success rate is no better than chance. Now technical stock analysis is
virtually non-existent. There are many instances of investors
successfully trading a security using only their knowledge of the
security's chart, without even understanding what the company does.
Technical analysis helps to understand the pattern or trend of the
market or of the particular stock/script.
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Fundamental Analysis
Fundamental analysis looks at a share’s market price in light of the
company’s underlying business proposition and financial situation. It
involves making both quantitative and qualitative judgments about a
company. Fundamental analysis is carried out by taking expected EPS
and expected earning into consideration with Discounted Future Cash
Flows. Fundamental analysis can be contrasted with 'technical
analysis’, which seeks to make judgments about the performance of a
share based solely on its historic price behavior and without referring
to the underlying business, the sector it's in, or the economy as a
whole.
TERMS COMMONLY USED IN STOCK MARKET
Some day-to-day terms we hear in context to the stock market are
discussed henceforth:
ACTIVE SHARES
Shares in which there are frequent and day-to-day dealings, as
distinguished from partly active shares in which dealings are not so
frequent. Most shares of leading companies would be active,
particularly those which are sensitive to economic and political events
and are, therefore, subject to sudden price movements. Some market
analysts would define active shares as those which are bought and
sold at least three times a week. These shares are easy to buy or sell.
BEAR (MANDIWALA)
An investor who believes that a stock or the market in general will
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decline. A bear market is an extended period of falling prices in the
overall market.
BULL (TEJIWALA)
An investor who thinks the market or a specific security or industry will
rise. A bull market is an extended period in which the market
consistently rises.
STAG
A cautious speculator, who applies for new securities in the
anticipation that price will rise by the time of allotment of shares, is
known as stag speculator. This is why; he applies for new shares with
the intention that he will be selling these shares at higher price in
future and earn good profit.
LAME DUCK
When a bear finds it difficult to fulfill his commitment, he is called
struggling like a lame duck.
BONDS
A bond is basically a promise note from the government or a private
company. You agree to give them a set amount of money as a loan
and they keep it for a set number of years with a predetermined
amount of interest. This is typically a safe bet and one that is a good
investment for a first time investor because there is little risk of losing
your money.
BOOK VALUE
Usually called as Book Value per Share and is calculated by dividing
the Net Worth of a Company (common stock plus retained earnings) by
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the number of shares outstanding. This is the accounting value of a
share of stock, the value of the company's assets a shareholder would
theoretically receive if a company were liquidated.
BROKER
Every transaction in the stock exchange is carried out through licensed
members called brokers.
To trade in shares, you have to approach a broker However, since most
stock exchange brokers deal in very high volumes, they generally do
not entertain small investors. These brokers have a network of sub-
brokers who provide them with orders.
The general investors should identify a sub-broker for regular trading
in shares and place his order for purchase and sale through the sub-
broker. The sub/broker will transmit the order to his broker who will
then execute it. A stock broker is a person or a firm that trades on its
clients behalf, you tell them what you want to invest in and they will
issue the buy or sell order. Some stock brokers also give out financial
advice that you are charged for.
It wasn’t too long ago and investing was very expensive because you
had to go through a full service broker which would give you advice on
what to do and would charge you a hefty fee for it.
Types of stock broker
1. Full Service Broker - A full-service broker can provide a
bunch of services such as investment research advice, tax
planning and retirement planning.25
2. Discount Broker – A discount broker let’s you buy and sell
stocks at a low rate but doesn’t provide any investment advice.
3. Direct-Access Broker- A direct access broker lets you trade
directly with the electronic communication networks (ECN’s) so
you can trade faster. Active traders such as day traders tend to
use Direct Access Brokers
So as you can tell there a few options for a stock broker and you
really need to pick which ones suit you need.
BROKER-DEALER
A Broker-Dealer is a person or company in the business of both buying
and selling securities. Also called an Agent when buying securities and
a Principal when selling them, and may act as wither but not in the
same transaction. Broker-Dealers must register with the Securities and
Exchange Commission as well as with states in which they do business.
BUSINESS CYCLE
The cycle of economic growth and decline is known as business cycle.
There are four stages in the business cycle: expansion, growth,
contraction and recession.
BACKWARDATION
Charges paid by the bear speculator for extending settlement date in
case of rise in price of security are known as backwardation.
CAPITAL GAIN / LOSS
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The difference between the current market value of an asset and the
original cost of the asset, with cost adjusted for any improvement or
depreciation in the asset.
CORPORATION
A form of business organization in which the company is divided into
shares of stock. A corporation is ongoing and the owners face only
limited liability.
CURRENT ASSETS
Appears on a company's balance sheet, representing cash, accounts
receivable, inventory, marketable securities, prepaid expenses and
other assets that can be converted to cash within one year.
CONTANGO
Charges paid by bull speculator for extending settlement date in case
of fall in price are known as contango.
DIVIDEND
It is a profit earned by the company or the mutual fund, which is
shared with the shareholders or unit-holders either partially or
completely.
DEBT/EQUITY RATIO
A measure of a company's financial leverage, calculated by dividing
long term debt by shareholders' equity is called debt to equity ratio. A
higher debt/equity ratio generally means that a company has been
aggressive in financing its growth with debt, which can result in volatile
earnings as a result of the additional interest expense.
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DECLARATION DATE
The date on which a company's Board of Directors meet to announce
the date and amount of the next dividend payment. Once the payment
has been authorized, it is known as a Declared Dividend, and becomes
a legal liability that must be paid.
DEFERRED INCOME TAXES
On the balance sheet, deferred taxes are a liability that result from
income already earned and recognized for accounting purposes but not
for tax purposes.
DEPRECIATION
An expense recorded regularly on a company's books to reduce the
value of a long-term tangible asset. Since it is a non-cash expense, it
increases free cash flow while decreasing the amount of a company's
reported earnings.
DERIVATIVE
A security, like an option or future, whose value is derived from
another underlying security.
DEVALUATION
A significant fall in the value of a currency, as compared to gold or
another country's currency.
DILUTION
Dilution is the effect on a company's earnings per share caused by the
conversion of convertible securities or the issuance of additional shares
of stock. Dilution reduces earnings per share by increasing the number
of shares potentially outstanding.
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EQUITY
On the balance sheet, the value of the funds contributed by the owners
(the stockholders) plus the retained earnings (or losses) is stated as
equity. The balance sheet may list Owners' Equity or Shareholders'
Equity.
FLOAT
The total number of outstanding shares available on the market.
FIXED MATURITY PLAN
The Fixed Maturity Plan or FMP has a portfolio investing in debt
securities for fixed periods of time ranging from 3 months to 1 year,
normally. Benefits range from having a quality portfolio, to greater
predictability of returns, to protection from interest rate movements
and to tax-free dividends.
GOING PUBLIC
The process of selling shares those were formerly privately-held to new
investors for the first time.
INFLATION
Inflation refers to the increase in cost of living over a period of time. It
is measured by changes in the Wholesale Price Index for
manufacturers and the Consumer Price Index for consumers. For
example, a masala dosa, which would cost you Rs.4.50 in 1990, costs
you Rs.30.00, today.
INITIAL PUBLIC OFFERING
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In short known as an IPO, the first sale of stock by a company to the
public. IPO’s are often smaller, newer companies seeking equity capital
to expand their businesses.
LIABILITY
The legal obligation to pay a debt is called so. Current liabilities are
debts payable within twelve months; long-term liabilities are debts
payable over a period of more than twelve months.
MUTUAL FUND
A mutual fund is a trust that pools together the investments of many
investors and invests on their behalf into stocks, bonds, money
markets etc. according to the mandate given to the mutual fund by the
investors primarily invest in equities or equity-related instruments and
are willing to bear short-term decline in value for possible future
appreciation. The schemes generally have entry load and in
exceptional cases, exit load. Investors having short-term objectives
and seeking regular income are advised not to invest in these
schemes.
MARKET CAPITALIZATION
The total dollar value of all outstanding shares, calculated by
multiplying the number of shares times the current market price.
NASDAQ
Stands for the National Association of Securities Dealers Automated
Quotation System. A nationwide computerized quotation system for
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current bid and asked quotations on over 5,500 over-the-counter
stocks.
STOCKS
Stocks are a unique kind of investment because they allow you to take
partial ownership in a company. Because of this, the returns are
potentially bigger and they have a history of being a wise way to invest
your money.
SHARE
In finance a share is a unit of account for various financial instruments
including stocks, bonds, mutual funds, limited partnerships. In simple
Words, a share or stock is a document solely to stocks is so common
that it almost replaces the word stock itself.
It is issued by a company, which entitles its holder to be one of the
owners of the company. A share is issued by a company or can be
purchased from the stock market.
By owning a share you can earn a portion in the firm and by selling
shares you get capital gain. So, your return is the dividend plus the
capital gain. However, you also run a risk of making a capital loss if
you have sold the share at a price below your buying price.
SHORT-TERM / LONG TERM CAPITAL GAIN / LOSS
The gain/loss occurring on or before one year of capital investment is
termed as Short-term capital gain/loss. If it exceeds one year then it is
termed as Long-term capital gain/loss.
SECURITY
According to the Securities Exchange Act of 1934, this is the definition
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of a security: "The term 'security' means any note, stock, treasury
stock, bond, debenture, certificate of interest or participation in any
profit-sharing agreement or in any oil, gas, or other mineral royalty or
lease, any collateral-trust certificate, pre organization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit, for a security, any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group or
index of securities (including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered into on a
national securities exchange relating to foreign currency, or in general,
any instrument commonly known as a 'security'; or any certificate of
interest or participation in, temporary or interim certificate for, receipt
for, or warrant or right to subscribe to or purchase, any of the
foregoing; but shall not include currency or any note, draft, bill of
exchange, or banker's acceptance which has a maturity at the time of
issuance of not exceeding nine months, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise limited.
TARANIWALAS
In BSE jobbers are called Taraniwalas. They may work as broker also.
In BSE authorized assistant or agent of the Taraniwalas can purchase
and sell securities on behalf of Taraniwalas. These agents are called
half commission agents. They usually specialize in one or two
securities.
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SEBI (Securities and Exchange Board of India)
In 1988 the Securities and Exchange Board of India (SEBI) was
established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th January 33
1992. In place of Government Control, statutory and autonomous
regulatory boards with defined responsibilities, to cover both
development & regulation of the market, and independent powers
have been set up. Paradoxically this is a positive outcome of the
Securities Scam of 1990-91.
The basic objectives of the Board were identified as:
• To protect the interests of investors in securities;
• To promote the development of Securities Market;
• To regulate the securities market and
• For matters connected therewith or incidental thereto.
Since its inception SEBI has been working targeting the securities and
is attending to the fulfillment of its objectives with commendable zeal
and dexterity. The improvements in the securities markets like
capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the
market.
SEBI has introduced the comprehensive regulatory measures,
prescribed registration norms, the eligibility criteria, the code of
obligations and the code of conduct for different intermediaries like,
bankers to issue, merchant bankers, brokers and sub-brokers,
registrars, portfolio managers, credit rating agencies, underwriters and
others. It has framed bye-laws, risk identification and risk management
systems for Clearing houses of stock exchanges, surveillance system
etc. which has made dealing in securities both safe and transparent to
the end investor.
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Another significant event is the approval of trading in stock indices
(like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient
and effective product because of the following reasons:
• It acts as a barometer for market behavior;
• It is used to benchmark portfolio performance;
• It is used in derivative instruments like index futures and index
options;
• It can be used for passive fund management as in case of Index
Funds.
Two broad approaches of
SEBI is to integrate the securities market at the national level, and also
to diversify the trading products, so that there is an increase in number
of traders including banks, financial institutions, insurance companies,
mutual funds, and primary dealers etc. to transact through the
Exchanges. In this context the introduction of derivatives trading
through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real
landmark.
SEBI appointed the L. C. Gupta Committee in 1998 to recommend the
regulatory framework for derivatives trading and suggest bye-laws for
Regulation and Control of Trading and Settlement of Derivatives
Contracts. The Board of SEBI in its meeting held on May 11, 1998
accepted the recommendations of the committee and approved the
phased introduction of derivatives trading in India beginning with Stock
Index Futures. The Board also approved the "Suggestive Bye-laws" as
recommended by the Dr LC Gupta Committee for Regulation and
Control of Trading and Settlement of Derivatives Contracts.
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SEBI then appointed the J. R. Verma Committee to recommend Risk
Containment
Measures (RCM) in the Indian Stock Index Futures Market. The report
was submitted in November 1998.
However the Securities Contracts (Regulation) Act, 1956 (SCRA)
required amendment to include "derivatives" in the definition of
securities to enable SEBI to introduce trading in derivatives. The
necessary amendment was then carried out by the Government in
1999. The Securities Laws (Amendment) Bill, 1999 was introduced. In
December 1999 the new framework was approved.
Derivatives have been accorded the status of `Securities'. The ban
imposed on trading in derivatives in 1969 under a notification issued
by the Central
Government was revoked. Thereafter SEBI formulated the necessary
regulations/bye-laws and intimated the Stock Exchanges in 2000. The
derivative trading started in India at NSE in 2000 and BSE started
trading in the year 2001.
NSE (National Stock Exchange)
The National Stock Exchange of India Limited (NSE), is a Mumbai-based
stock exchange. It is the large stock exchange in India in terms daily
turnover and number of trades, for both equities and derivative
trading. Though a number of other exchanges exist, NSE and the
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Bombay Stock Exchange are the two most significant stock exchanges
in India, and between them are responsible for the vast majority of
share transactions.
NSE is mutually-owned by a set of leading financial institutions, banks,
insurance companies and other financial intermediaries in India but its
ownership and management operate as separate entities. As of 2006,
the NSE VSAT terminals, 2799 in total, cover more than 1500 cities
across India. In October 2007, the equity market capitalization of the
companies listed on the NSE was US$ 1.46 trillion, making it the
second largest stock exchange in South Asia. NSE is the third largest
Stock Exchange in the world in terms of the number of trades in
equities.[4]It is the second fastest growing stock exchange in the world
with a recorded growth of 16.6%.
The National Stock Exchange of India was promoted by leading
Financial institutions at the behest of the Government of India, and
was incorporated in November 1992 as a tax-paying company. In April
1993, it was recognized as a stock exchange under the Securities
Contracts (Regulation) Act, 1956. NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. The Capital
Market (Equities) segment of the NSE commenced operations in
November 1994, while operations in the Derivatives segment
commenced in June 2000.
Markets
Currently, NSE has the following major segments of the capital market:
Equity
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Futures and Options
Retail Debt Market
Wholesale Debt Market
NSE Indices
S&P CNX Nifty
CNX Nifty Junior
CNX IT
Bank Nifty
Mininifty
CNX 100 CNX Midcap
BSE (BOMBAY STOCK EXCHANGE)
Bombay Stock Exchange Limited is the oldest stock exchange in Asia
with a rich heritage. Popularly known as "BSE", it was established as
"The Native Share & Stock Brokers Association" in 1875. It is the first
stock exchange in the country to obtain permanent recognition in 1956
from the Government of India under the Securities Contracts
(Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in
the development of the Indian capital market is widely recognized and
its index, SENSEX, is tracked worldwide. Earlier an Association of
Persons (AOP), the Exchange is now a demutualised and corporatized
entity incorporated under the provisions of the Companies Act, 1956, 38
pursuant to the BSE (Corporatization and Demutualization) Scheme,
2005 notified by the Securities and Exchange Board of India (SEBI).
Of the 22 stock exchanges in the country, Mumbai's (earlier known as
Bombay), Bombay Stock Exchange is the largest, with over 6,000
stocks listed. The BSE accounts for over two thirds of the total trading
volume in the country. Approximately 70,000 deals are executed on a
daily basis, giving it one of the highest per hour rates of trading in the
world. There are around 3,500 companies in the country which are
listed and have a serious trading volume. The market capitalization of
the BSE is Rs.5 trillion. The BSE `Sensex' is a widely used market index
for the BSE.
With demutualization, the trading rights and ownership rights have
been de-linked effectively addressing concerns regarding perceived
and real conflicts of interest. The Exchange is professionally managed
under the overall direction of the Board of Directors. The Board
comprises eminent professionals, representatives of Trading Members
and the Managing Director of the Exchange. The Board is inclusive and
is designed to benefit from the participation of market intermediaries.
In terms of organization structure, the Board formulates larger policy
issues and exercises over-all control. The committees constituted by
the Board are broad-based. The day-to-day operations of the Exchange
are managed by the Managing Director and a management team of
professionals.
The Exchange has a nation-wide reach with a presence in 417 cities
and towns of India. The systems and processes of the Exchange are
39
designed to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading volumes on the
Exchange showed robust growth.
The Exchange provides an efficient and transparent market for trading
in equity, debt instruments and derivatives. The BSE's On Line Trading
System (BOLT) is a proprietary system of the Exchange and is BS
7799-2-2002 certified. The surveillance and clearing & settlement
functions of the Exchange are ISO 9001:2000 certified.
BSE - Other Indices Apart from BSE SENSEX, which is the most popular stock index in India,
BSE uses other stock indices as well:
BSE 100
BSE 200
BSE 500
BSE PSU
BSE MIDCAP
BSE SMLCAP
BSE BANKEX
BSE CAPITAL GOODS
BSE AUTO
BSE DOLLEX 30
BSE DOLLEX 100
BSE DOLLEX 200
BSE REALTY
BSE TECH
BSE OIL & GAS
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BSE FMCG
Initial Public Offerings
Corporate may raise capital in the primary market by way of an initial
public offer, rights issue or private placement. An Initial Public Offer
(IPO) is the selling of securities to the public in the primary market.
This Initial Public Offering can be made through the fixed price method,
book building method or a combination of both.
In case the issuer chooses to issue securities through the book building
route then as per SEBI guidelines, an issuer company can issue
securities in the following manner:
100% of the net offer to the public through the book building route.
75% of the net offer to the public through the book building process
and 25% through the fixed price portion.
Under the 90% scheme, this percentage would be 90 and 10
respectively.
Difference between shares offered through book building and
offer of shares through normal public issue:
Feature
s
Fixed Price process Book Building process
Pricing Price at which the
securities are
offered/allotted is known
in advance to the investor.
Price at which securities will be
offered/allotted is not known in
advance to the investor. Only an
indicative price range is known.
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Deman
d
Demand for the securities
offered is known only after
the closure of the issue
Demand for the securities offered can
be known everyday as the book is
built.
Paymen
t
Payment if made at the
time of subscription
wherein refund is given
after allocation.
Payment only after allocation.
Book Building - Glossary
Bid
A bid is the demand for a security that can be entered by the
syndicate/sub-syndicate members in the system. The two main
components of a bid are the price and the quantity.
Bidder
The person who has placed a bid in the Book Building process is called
so.
Book Running Lead Manager
A Lead Merchant Banker who has been appointed by the Issuer
Company to work as the Book Running Lead Manager for the company
is called so. The name of the Book Runner Lead Manager is mentioned
in the offer document of the Issuer Company.
Floor Price
The minimum offer price below which bids cannot be entered. The
Issuer Company in consultation with the Book Running Lead Manager
fixes the floor price.
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Merchant Banker
An entity registered under the Securities and Exchange Board of India
(Merchant Bankers) Regulations, 1999.
Syndicate Members
Syndicate Members are the intermediaries registered with the Board
and permitted to carry on activity as underwriters. The Book Running
Lead Managers to the issue appoints the Syndicate Members.
Order Book
It is an 'electronic book' that shows the demand for the shares of the
company at various prices.
Demat Form of Shares There are two forms of shares physical or dematerialized (demat)
shares. Though the company is under obligation to offer the securities
in both physical and demat mode, you have the choice to receive the
securities in either mode. If you wish to have securities in demat mode,
you need to indicate the name of the depository and also of the
depository participant with whom you have depository account in your
application. It is, however desirable that you hold securities in demat
form as physical securities carry the risk of being fake, forged or
stolen.
Just as you have to open an account with a bank if you want to save
your money, make cheque payments etc, Nowadays, you need to open
a demat account if you want to buy or sell stocks So it is just like a
bank account where actual money is replaced by shares. You have to
approach the DPs (they are like bank branches), to open your demat
account. Let's say your portfolio of shares looks like this: 150 of DLF, 43
50 of Axis Bank, 200 of GMR Infra and 100 of RIL. All these will show in
your demat account. So you don't have to possess any physical
certificates showing that you own these shares. They are all held
electronically in your account. As you buy and sell the shares, they are
adjusted in your account. Just like a bank passbook or statement, the
DP will provide you with periodic statements of holdings and
transactions.
Is a demat account a must? Nowadays, practically all trades have to be
settled in dematerialized form. Although the market regulator, the
Securities and Exchange Board of India (SEBI), has allowed trades of up
to 500 shares to be settled in physical form, nobody wants physical
shares any more. So a demat account is a must for trading and
investing. Most banks are also DP participants, as are many brokers.
Derivatives A derivative is a generic term for specific types of investments from
which payoffs over time are derived from the performance of assets
(such as commodities, shares or bonds), interest rates, exchange
rates, or indices (such as a stock market index, consumer price index
(CPI) or an index of weather conditions). This performance can
determine both the amount and the timing of the payoffs. The diverse
range of potential underlying assets and payoff alternatives leads to a
huge range of derivatives contracts available to be traded in the
market. The main types of derivatives are futures, forwards, options
and swaps.
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Types of Derivatives
- OTC and Exchange Traded
Broadly speaking there are two distinct groups of derivative contracts,
which are distinguished by the way that they are traded in market:
•Over-the-counter (OTC) derivatives are contracts that are traded
directly between two parties, without going through an exchange or
other intermediary. Products such as swaps, forward rate agreements,
and exotic options are almost always traded in this way. The OTC
derivatives market is huge.
•Exchange-traded derivatives are those derivatives products that are
traded via Derivatives exchanges. A derivatives exchange acts as an
intermediary to all transactions, and takes Initial margin from both
sides of the trade to act as a guarantee. The world's largest derivatives
exchanges (by number of transactions) are the Korea Exchange (which
lists KOSPI Index Futures & Options), Eurex (which lists a wide range of
European products such as interest rate & index products), Chicago
Mercantile Exchange and the Chicago Board of Trade.
- Common Contract Types
There are three major classes of derivatives:
•Futures/Forwards, which are contracts to buy or sell an asset at a
specified future date.
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•Options which are contracts that give the buyer the right (but not the
obligation) to buy or sell an asset at a specified future date.
•Swaps, where the two parties agree to exchange cash flows
Valuation
Market Price and Fair Value
Two common measures of value are:
•Market price, i.e. the price at which traders are willing to buy or sell
the contract
•Fair value or the theoretical price, i.e. a rational and unbiased
estimate of the contract's fundamental value
Determining The Market Price
For exchange traded derivatives, market price is usually transparent
(often published in real-time by the exchange, based on all the current
bids and offers placed on that particular contract at any one time).
Complications can arise with OTC or floor-traded contracts though, as
trading are handled manually, making it difficult to automatically
broadcast prices. In particular with OTC contracts, there is no central
exchange to collate and disseminate prices.
Determining Fair Value
46
The fair value of a derivatives contract is often complex, partly
because of the immense variation in the contracts, and partly because
there are often many different variables to consider.
Fair valuation of derivatives is a central topic of financial mathematics,
where "fair" refers to the absence of arbitrage, meaning that no risk
less profits can be made by trading in assets. Crucial to the valuation
of derivatives is also the stochastic of the underlying assets, typically
expressed as a stochastic process.
UNDERSTANDING STOCK MARKET RISK
As a long term investor, one needs to understand several different
kinds of risk:
Market Risk
Market risk is the risk associated with fluctuations in stock prices. This
is the first risk many people think of when they think of the stock
market. Many factors can cause stock prices to fluctuate. Examples
include actual or anticipated developments within a particular
company or industry; changes in the outlook for the economy as a
whole; or shifts in investor attitude toward the stock market in general.
Downward and upward trends in stock prices can occur over short or
extended periods, and can have a very significant affect on the value
of an investment.
There are two ways to reduce market risk. One is to diversify your
investments among different kinds of assets: divide your money
47
among fixed-income and growth investments, for example. The second
way is to steadily invest on a regular basis and ignore market ups and
downs and focus on long-term results.
Inflation Risk
Inflation, defined as a persistent increase in prices, is a serious risk for
any long-term investor. Historically, inflation in the United States has
averaged 3.1%, offsetting most of the returns from investment in cash
reserves and bonds, but less than half of that of stocks. Because
stocks' real returns are often generally higher than inflation, stocks
offer a way to help protect your money against inflation risk. If your
principal doesn't grow, you can't possibly stay ahead of inflation. A
good way to reduce inflation risk is to invest in growth assets like
stocks.
Business Risk
Business risk is the risk of losing your money in an investment that
seemed like a winner but wasn't. It is the specific risk associated with
the underlying business of the issuer of a particular stock, bond, or
other investment. If the company's product suddenly loses value, the
value of your investment declines. You can reduce business risk by
diversifying your investments.
Currency Risk
Currency risk is the risk associated with the price fluctuations in the
dollar value of international stocks due to changing currency exchange
rates. To an American, the value of any stock held internationally is not
what the stock is worth in its domestic market, but what the stock is
worth in terms of dollars.
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Beta
This refers to how a stock moves vs. the market. If a stock moves more
than the market, it has a high beta. If it moves less than the market it
has a low beta. Technology generally has a high beta while Utilities
have low betas. A portfolio of high beta stocks in a down market can
create extreme downward movements, while up-markets can cause
tremendous performance. If a market is demonstrating extreme risk, it
is wise to raise cash, lower the beta of your portfolio, and even
consider some hedging of exposure.
All above are different types of risks that influence the stock market.
After looking at all the risks one thing is very clear that controlling
price fluctuations is not in our hand. Our major job is to maximize our
returns keeping all the above risks in mind. This is done by hedging
funds in market in way that maximizes the returns. Creating portfolios
wisely is another method of risk hedging, apart from that there are
other methods with the help of which risk is minimized.
Hedging
The word hedge literally means to surround in a way as to provide
complete protection.
A hedge is an investment that is taken out specifically to reduce or
cancel out the risk in another investment. Defining it in simple words
‘Hedging’ is a strategy designed to minimize exposure to an unwanted
risk, while still allowing the business to profit from an investment
activity. But one thing has to be kept in mind hedging does not always
make money. The best that can be achieved using hedging is the
removal of unwanted exposure. The hedged position will make less
49
profit than the no hedged position, half the time. One should not enter
into the hedging strategy hoping to make excess profits for sure.
Derivatives are an excellent tool to hedge risk.
Hedging using futures and options
Playing with futures:-
Long security, sell futures
I would explain it with the help of an example.iam discussing here the
case of investor who holds the share of a company and gets
uncomfortable with the market movements in the short run. In the
absence of stock futures he would either suffer the discomfort of a
price fall or sell the security in anticipation of market. With security
future he can minimize his price risk. All he needs to do is to enter an
offsetting stock future position, in this case take on a short future
position. As the price of stock will fall the value of his holdings would
go down and value of his future contract will rise. Both will move in
opposite direction. This way he would not only be able to minimize his
loss but also make profits
Short security, buy futures
This is exactly opposite case. This will be explained later with the help
of real examples.
Index portfolios can be very effective to get rid of market risk of a
portfolio every portfolio contains a hidden risk or market exposure.
This is true for all portfolios. Most of the portfolio risk is accounted by
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index fluctuations hence a position LONG PORTFOLIO +SHORT NIFTY is
one tenth risky as LONG portfolio position.
Playing with options:-
Buy puts when market is expected to fall
As an owner of stocks or equity portfolio, sometimes one may have a
view that market will fall in near future. To protect the value of stock
from falling below a particular level, one has to buy right number of
puts at right strike price. If one is concerned only about the value of
particular stock one has to buy puts of only that particular stock, if it's
about the entire portfolio it's better to buy index puts. When the value
of the stock falls it will lose value and the put options will gain value.
This is how hedging can be done through puts
Sell puts when market is rising
This is also done the way hedging has been done above.
Buy calls when Market is rising
Buy calls or sell puts are same but the only difference is when the
market falls down instead of uptrend the puts value goes down quickly
but calls value goes down slowly. So if one is sure about market
movement than only one should sell puts or anyway one should buy
calls for hedging purpose. While investing in calls and puts investor
should keep risk in mind.
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Sell Calls when market is expected to fall
Selling a call option in bullish market is as risky as selling a put option
in a bearish market. Inventor should sell calls when only is sure about
market correction anyway he should buy puts if he is expecting a fall
down in market but not fully sure about his idea.
Selling or Buying the Puts & Calls provides security to investor to
hedge his portfolio risk. But Playing with option is not an easy task to
do for a novice investor as one need to understand, how it works and
how one can hedge his portfolio using these tools. Option trading may
be helpful for an investor at some point of time but it is not an
accurate tool to hedge a portfolio. Risk associated with option trading
may differ from investor to investor as one might be a regular investor
who has good knowledge about option trading but at the same time
other might be novice.
Apart from derivatives there are some other ways using which
hedging is done generally. Some people feel that derivatives are risky.
I won’t say this is true for options, but when it comes to futures I
believe to an extent their statement is true.
Apart from derivatives there are two other ways to hedge risk and
these are listed as under:
Short sell when you have holdings of a particular stock-say you have
holdings of a particular share, the market value of the share is
expected to fall, and it’s time to short sell your stock. It’s better to
explain it with the help of an example. Say I have a stock worth rs.345
and its value fall to340, at this price I short sell some amount of
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shares, if the value of a stock falls further buys it. And then the entire
stock can be sold, making profits, this would give an average buying
price. And in other case also it will release average value.
MUTUAL FUND
ANALYSIS
53
Meaning:
Mutual fund is a form of collective investment that pools money from
many investors and invests the 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 loss, and collects the dividend or interest income. The
investment proceeds are then passed along to the individual investors.
The value of a share of the mutual fund, known as the net asset value
(NAV), is calculated daily based on the total value of the fund divided
by the number of shares purchased by investors.
A mutual fund is an investment company that pools money from
shareholders and invests in a diversified portfolio of securities. Mutual
54
fund investors buy fund shares that represent ownership in all of the
fund's securities. There are four basic types of mutual funds: stock
(also called equity), money market, bond, and hybrid. International
mutual funds are key contributors to the globalization of financial
markets and one of the main sources of capital flows to emerging
economies.
THE MAIN CHARACTERISTICS OF MUTUAL FUND ARE AS
FOLLOWS:-
a) A mutual fund actually belongs to the investors who
have pooled their fund. The ownership of the mutual fund
is in the hands of the investors.
b) A mutual fund is managed by investment
professionals and other services providers, who earn a fee
for their services, from the fund.
c) The pool of funds is invested in a portfolio of
marketable investments. The value of the portfolio is
updated everyday.
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d) The investor’s share in the fund is denominated by
“units.” The value of the units changes with change in the
portfolio’s value, every day. The value of one unit of
investment is called as the Net Asset Value or NAV.
e) The investment portfolio of the mutual fund is created
according to the stated investment objectives of the fund.
HISTORICAL PERSPECTIVE OF MUTUAL FUNDS IN
INDIA:
The mutual fund industry in India started in 1963 with the formation of
Unit Trust of India, at the initiative of the Government of India and
Reserve Bank the. The history of mutual funds in India can be broadly
divided into four distinct phases
First Phase – 1964-87
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Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned
under the Regulatory and administrative control of the Reserve Bank of
India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of
assets under management
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up
by public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund was the
first non- UTI Mutual Fund established in June 1987 followed by Can
bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug
89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June
1989 while GIC had set up its mutual fund in December 1990.
57
Third Phase – 1993-2003 (Entry of Private Sector
Funds)
With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice
of fund families. Also, 1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual funds, except UTI
were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector
mutual fund registered in July 1993.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with assets under
management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and
certain other schemes.
58
The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and
does not com under the purview of the Mutual Fund Regulations. The
second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the
Erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
assets under management and with the setting up of a UTI Mutual
Fund, conforming to the SEBI Mutual Fund Regulations, and with recent
mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and
growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes. The figure-1
gives the development of Mutual fund industry in India in terms of
money.
ADVANTAGES OF MUTUAL FUNDS:
Mutual funds are attractive to investors for many reasons:
1. Professional Management:
Mutual Funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that
analyses the performance and prospects of companies and selects
suitable investments to achieve the objectives of the scheme.
59
2. Diversification:
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the same
proportion. You achieve this diversification through a Mutual Fund with
far less money than you can do on your own.
3. Convenient Administration:
Investing in a Mutual Fund reduces paperwork and helps you avoid
many problems such as bad deliveries, delayed payments and follow
up with brokers and companies. Mutual Funds save your time and
make investing easy and convenient.
4. Return Potential:
Over a medium to long-term, Mutual Funds have the potential to
provide a higher return as they invest in a diversified basket of
selected securities.
5. Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to
directly investing in the capital markets because the benefits of scale
in brokerage, custodial and other fees translate into lower costs for
investors.
60
6. Liquidity:
In open-end schemes, the investor gets the money back promptly at
net asset value related prices from the Mutual Fund. In closed-end
schemes, the units can be sold on a stock exchange at the prevailing
market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.
7. Transparency:
You get regular information on the value of your investment in addition
to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's
investment strategy and outlook.
8. Flexibility:
Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, you can systematically invest
or withdraw funds according to your needs and convenience.
9. Affordability:
Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small
investor to take the benefit of its investment strategy.
10. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over
a lifetime.
61
11. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of
investors. The operations of Mutual Funds are regularly monitored by
SEBI.
12. Professional Management :
Mutual Funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that
analyses the performance and prospects of companies and selects
suitable investments to achieve the objectives of the scheme.
13. Diversification:
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the same
proportion. You achieve this diversification through a Mutual Fund with
far less money than you can do on your own.
14. Convenient Administration:
62
Investing in a Mutual Fund reduces paperwork and helps you avoid
many problems such as bad deliveries, delayed payments and follow
up with brokers and companies. Mutual Funds save your time and
make investing easy and convenient.
15. Return Potential:
Over a medium to long-term, Mutual Funds have the potential to
provide a higher return as they invest in a diversified basket of
selected securities.
16. Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to
directly investing in the capital markets because the benefits of scale
in brokerage, custodial and other fees translate into lower costs for
investors.
17. Liquidity:
In open-end schemes, the investor gets the money back promptly at
net asset value related prices from the Mutual Fund. In closed-end
schemes, the units can be sold on a stock exchange at the prevailing
market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.
18. Transparency:63
You get regular information on the value of your investment in addition
to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's
investment strategy and outlook.
19. Flexibility:
Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, you can systematically invest
or withdraw funds according to your needs and convenience.
20. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of
investors. The operations of Mutual Funds are regularly monitored by
SEBI.
Whereas, if you own a shopping mall and one store goes bankrupt, you
still have income flowing from all the other stores within the mall.
That’s the way mutual funds are. By owning a mutual fund rather than
the stock of one company, you are less likely to realize any major loss,
should a company go out of business. So, if you own $10,000 of the
common stock of XYZ Corporation and it goes bankrupt, you lose your
investment. But, if you own $10,000 in the ABC Growth Fund, which
has invested in shares of XYZ Corporation, and XYZ goes belly up, the
value of your mutual fund decreases. But you won’t lose your entire
investment because the risk is spread out.
64
DISADVANTAGES OF MUTUAL FUNDS:
1. Professional Management:
The advantage of professional management is qualified with the word
"theoretically". There is a debate over whether or not the so-called
professionals are any better than an Investor at picking stocks. Mutual
fund managers may also have a conflict of interest due to the way they
are paid. In particular fund managers may be encouraged to take more
risks with investors money than they ought to: Fund flows (and
therefore compensation) towards successful, market beating funds are
much larger than outflows from funds that lose to the market. Fund
managers may therefore have an incentive to purchase high risk
investments in the hopes of increasing their odds of beating the
market and receiving the high inflows, with relatively less fear of the
consequences of losing to the market.
2. Costs:
Mutual funds don't exist solely to the Investors life easier--all funds are
in it for a profit. The mutual fund industry is masterful at burying costs
under layers of jargon. These costs are so complicated so that its not
understandable to the layman investors.
3. Dilution of Funds
Many analysts, however, believe that the larger the pool of money one
works with, the harder it is to manage actively, and the harder it is to
squeeze good performance out of it. Thus a fund company can be
65
focused on attracting new customers, thereby hurting its existing
investors' performance. A great deal of a fund's costs are flat and fixed
costs, such as the salary for the manager. Thus it can be more
profitable for the fund to try to allow it to grow as large as possible,
instead of limiting its assets. Some fund companies, notably the
Vanguard Group and Fidelity Investments, have closed some funds to
new investors to maintain the integrity of the funds for existing
investors.
4. Taxes
When making decisions about the investors money, fund managers
don't consider the personal tax situation of the investor. For example,
when a fund manager sells a security, a capital-gain tax is triggered,
which is borne by the investor, which affects how profitable the
individual is from the sale. It might have been more advantageous for
the individual to defer the capital gains liability.
5. No Guarantees
The value of the mutual fund investment, unlike a bank deposit, could
fall and be worth less than the principle initially invested. And, while a
money market fund seeks a stable share price, its yield fluctuates,
unlike a certificate of deposit. In addition, mutual funds are not insured
or guaranteed by an agency of the government. Bond funds, unlike
66
purchasing a bond directly, will not re-pay the principle at a set point in
time.
6. Misleading Advertisements and problems in
evaluating funds
The misleading advertisements of some funds tend to show investors
down the wrong path. It is common practice to label funds as ‘growth’,
‘small-cap’ or ‘income’ funds, when these labels might be inaccurate.
The requirements of the SEC calls for funds to have not less than 80%
of assets in the specific type of investment implied in their names. The
remaining assets can be according to the fund manager’s discretion.
The loophole comes in because the different categories that can be
taken for the required 80% of the assets may be vague and very
general. Hence, some funds often manipulate prospective investors by
using misleading names such as ‘growth fund’ in place of a ‘small cap’.
7. Professional Management:
The advantage of professional management is qualified with the word
"theoretically". There is a debate over whether or not the so-called
professionals are any better than an Investor at picking stocks. Mutual
fund managers may also have a conflict of interest due to the way they
are paid. In particular fund managers may be encouraged to take more
risks with investors money than they ought to: Fund flows (and
therefore compensation) towards successful, market beating funds are
much larger than outflows from funds that lose to the market. Fund
managers may therefore have an incentive to purchase high risk 67
investments in the hopes of increasing their odds of beating the
market and receiving the high inflows, with relatively less fear of the
consequences of losing to the market.
8. Costs:
Mutual funds don't exist solely to the Investors life easier--all funds are
in it for a profit. The mutual fund industry is masterful at burying costs
under layers of jargon. These costs are so complicated so that its not
understandable to the layman investors.
9. Dilution of Funds:
Many analysts, however, believe that the larger the pool of money one
works with, the harder it is to manage actively, and the harder it is to
squeeze good performance out of it. Thus a fund company can be
focused on attracting new customers, thereby hurting its existing
investors' performance. A great deal of a fund's costs are flat and fixed
costs, such as the salary for the manager. Thus it can be more
profitable for the fund to try to allow it to grow as large as possible,
instead of limiting its assets. Some fund companies, notably the
Vanguard Group and Fidelity Investments, have closed some funds to
new investors to maintain the integrity of the funds for existing
investors.
10. Taxes:
When making decisions about the investors money, fund managers
don't consider the personal tax situation of the investor. For example,
68
when a fund manager sells a security, a capital-gain tax is triggered,
which is borne by the investor, which affects how profitable the
individual is from the sale. It might have been more advantageous for
the individual to defer the capital gains liability.
11. No Guarantees:
The value of the mutual fund investment, unlike a bank deposit, could
fall and be worth less than the principle initially invested. And, while a
money market fund seeks a stable share price, its yield fluctuates,
unlike a certificate of deposit. In addition, mutual funds are not insured
or guaranteed by an agency of the government. Bond funds, unlike
purchasing a bond directly, will not re-pay the principle at a set point in
time.
12. Misleading Advertisements and problems in
evaluating funds:
The misleading advertisements of some funds tend to show investors
down the wrong path. It is common practice to label funds as ‘growth’,
‘small-cap’ or ‘income’ funds, when these labels might be inaccurate.
The requirements of the SEC calls for funds to have not less than 80%
of assets in the specific type of investment implied in their names. The
remaining assets can be according to the fund manager’s discretion.
The loophole comes in because the different categories that can be
69
taken for the required 80% of the assets may be vague and very
general. Hence, some funds often manipulate prospective investors by
using misleading names such as ‘growth fund’ in place of a ‘small cap’.
However, the growth of mutual funds might be slowing down to the
disadvantages given above. For a lot of investors however, the
advantages offered more than make up for the cons. At the same time,
the entry of a high proportion of potential investors, the advent of
Exchange Traded Funds and other mutual fund alternatives have and
will affect the growth of mutual funds.
TYPES OF MUTUAL FUNDS:
Mutual fund schemes may be classified on the basis of its structure
and its investment objective.
By Structure :
Open-end Funds:
An open-end fund is one that is available for subscription all through
the year. These do not have a fixed maturity. Investors can
conveniently buy and sell units at Net Asset Value ("NAV") related
prices. The key feature of open-end schemes is liquidity.
Closed-end Funds:
A closed-end fund has a stipulated maturity period which generally
ranging from 3 to 15 years. The fund is open for subscription only
70
during a specified period. Investors can invest in the scheme at the
time of the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some close-ended funds
give an option of selling back the units to the Mutual Fund through
periodic repurchase at NAV related prices. SEBI Regulations stipulate
that at least one of the two exit routes is provide to the investor.
Interval Funds:
Interval funds combine the features of open-ended and close-ended
schemes. They are open for sale or redemption during pre-determined
intervals at NAV related prices
By Investment Objective:
Growth Funds:
The aim of growth funds is to provide capital appreciation over the
medium to long term. Such schemes normally invest a majority of their
corpus in equities. It has been proved that returns from stocks, have
outperformed most other kind of investments held over the long term.
Growth schemes are ideal for investors having a long term outlook
seeking growth over a period of time.
Income Funds:
The aim of income funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities
71
such as bonds, corporate debentures and Government securities.
Income Funds are ideal for capital stability and regular income.
Balanced Funds:
The aim of balanced funds is to provide both growth and regular
income. Such schemes periodically distribute a part of their earning
and invest both in equities and fixed income securities in the
proportion indicated in their offer documents. In a rising stock market,
the NAV of these schemes may not normally keep pace, or fall equally
when the market falls. These are ideal for investors looking for a
combination of income and moderate growth.
Money Market Funds:
The aim of money market funds is to provide easy liquidity,
preservation of capital and moderate income. These schemes
generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money.
Returns on these schemes may fluctuate depending upon the interest
rates prevailing in the market. These are ideal for Corporate and
individual investors as a means to park their surplus funds for short
periods.
Other Schemes:
Tax Saving Schemes:
These schemes offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws as the Government offers tax
incentives for investment in specified avenues. Investments made in
Equity Linked Savings Schemes (ELSS) and Pension Schemes are
72
allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also
provides opportunities to investors to save capital gains u/s 54EA and
54EB by investing in Mutual Funds.
Special Schemes:
Industry Specific Schemes
Industry Specific Schemes invest only in the industries
specified in the offer document. The investment of these
funds is limited to specific industries like InfoTech, FMCG,
and Pharmaceuticals etc.
Index Schemes
Index Funds attempt to replicate the performance of a
particular index such as the BSE Sensex or the NSE 50.
sectoral Schemes
Sectoral Funds are those which invest exclusively in a
specified sector. This could be an industry or a group of
industries or various segments such as 'A' Group shares or
initial public offerings.
PLANS THAT MUTUAL FUNDS OFFERS:To cater to different investment needs, Mutual Funds offer various
investment options. Some of the important investment options include:
Growth Option:
73
Dividend is not paid-out under a Growth Option and the investor
realises only the capital appreciation on the investment (by an
increase in NAV).
Dividend Payout Option:
Dividends are paid-out to investors under the Dividend Payout Option.
However, the NAV of the mutual fund scheme falls to the extent of the
dividend payout.
Dividend Re-investment Option:
Here the dividend accrued on mutual funds is automatically re-
invested in purchasing additional units in open-ended funds. In most
cases mutual funds offer the investor an option of collecting dividends
or re-investing the same.
Retirement Pension Option:
Some schemes are linked with retirement pension. Individuals
participate in these options for themselves, and corporates participate
for their employees.
Insurance Option:
Certain Mutual Funds offer schemes that provide insurance cover to
investors as an added benefit.
Systematic Investment Plan (SIP):
Here the investor is given the option of preparing a pre-determined
number of post-dated cheques in favour of the fund. The investor is
74
allotted units on a predetermined date specified in the offer document
at the applicable NAV.
Systematic Encashment Plan (SEP)
As opposed to the Systematic Investment Plan, the Systematic
Encashment Plan allows the investor the facility to withdraw a pre-
determined amount / units from his fund at a pre-determined interval.
The investor's units will be redeemed at the applicable NAV as on that
day.
OGANISATION OF A MUTUAL FUND:
There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund:
Organisation of a Mutual Fund:
Sponsors:
Sponsors are the promoters of the mutual fund house.
Sponsor is the person who acting alone or in combination with another
body corporate establishes a mutual fund. Sponsor must contribute at
75
least 40% of the net worth of the Investment Managed and meet the
eligibility criteria prescribed under the SEBI (Mutual Funds)
Regulations, 1996.The Sponsor is not responsible for any shortfall
resulting from the operation of the Schemes beyond the initial
contribution made by it towards setting up of the Mutual Fund. Sponsor
should have at least past 3yrs profitability in their books of accounts
and turnover should be more then 10 crore.
Trustees:
Trustees are responsible for safeguarding the funds
provided by the investors to the Mutual Fund. Person involved in the
Mutual Fund as trustees are generally eminent people experienced in
the various walks of the life. Trustees monitor the performance of the
AMC, the custodian and the Transfer agent thus ensure that all these
agencies act in the unit holder’s interest.
Asset Management Company (AMC):
The AMC is appointed by the Trustee as the Investment
Manager of the Mutual Fund. The AMC is required to be approved by
the SEBI. At least 50% of the directors of the AMC are independent
directors who are not associated with the Sponsor in any manner. The
AMC must have a net worth of at least 10 crore at all times .For e.g.
Kotak AMC, ABN Amro AMC, SBI AMC etc.76
Transfer Agent:
Transfer agent issues certificate and account statements to
the investors for their investment. It also arranges payment to
investors when they redeem (in open-end funds) and transfer when
they buy/sell units in a stock exchange (in close-end funds). It also
takes care of change of address, replacement of lost certificates or
account, statement etc.
Custodians:
Custodians are responsible for safety of the assets held by
the mutual fund. It follows up on the corporate benefits like dividend
bonus etc. It provides an independent means of control as custodian
(usually bank) themselves are solid institutions and well regulated. It
also receives and delivers securities in exchange for pay.
Security and Exchange Board of India (SEBI):
In the year 1992, Securities and exchange Board of India
(SEBI) Act was passed. The SEBI is a statutory body set up by the
77
Government of India. The objectives of SEBI are – to protect the
interest of investors in securities and to promote the development of
and to regulate the securities market. SEBI has also issued guidelines
to the mutual funds from time to time to protect the interests of
investors through a system of reviewing reports and regular
inspections.
Regulatory Requirements for Trustees
The mutual fund, which is a trust, is managed either by a
trust company or a board of trustees. Board of trustees & trust
companies are governed by the provision of the Indian Trust Act. If the
trustee is a company, it is also subject to the provisions of the Indian
Companies Act. It is the responsibility of the trustee to protect the
interest of investors, whose fund is managed by the AMC. The AMC &
others functionaries are functionally to the trustees.
1) Only SEBI registered AMCs can be appointed as investment
managers of mutual funs.
2) AMC must have a minimum net worth of Rs.10 crore, at all times.
3) An AMC cannot be an AMC or trustee of another mutual fund.
4) AMCs cannot indulge in any other business other then that of asset
management.
78
5) At least half of the members of the board of an AMC have to be
independent.
6) The investment management agreement entered into between the
trustees & the AMCs, spells out the rights and obligations of both
parties. (Fourth schedule of the SEBI regulations).
Obligations of the trustees
a) Trustees must ensure that the transactions of the mutual fund are
in accordance with the trust deed.
b) It ensures that the AMC has systems & procedures in place, & that
all the fund constituents are appointed.
c) It ensure due diligence on the part of AMC in the appointment of
constituents & business associates.
d) It finishes to SEBI, on half-yearly basis, a report on the activities of
the AMC.
e) It ensures that the activities of the mutual fund are in compliance
with the SEBI regulation.
SEBI rules regarding compliance & the role of trustees
The obligations of the trustees in this regard are classified as general
due diligence & special due diligence.
79
General due diligence includes:
Appointment of AMC & its directors.
Observance of AMC functioning & desirability of its
continuance.
Protection of trust property.
Ensuring that all constituents & associates are registered
entities.
Review of service contracts & terms.
Reporting to SEBI any special developments in the mutual
fund.
Special due diligence includes:
Appointments of independent auditors & review of periodic
audit report.
Periodic compliance report from the AMC (usually quarterly).
Communicate deficiencies & recommendation in writing to the
AMC.
80
Prescribe a code of ethics for the trustees & the personnel of
the AMC.
Terms related to the Mutual funds:
Net Asset VALUE (NAV):
Net Asset value is the actual value of units of the scheme on a given
business day. NAV reflects the market value of the fund's investments
on that day after accounting for all the expenses.
The current value of investment of a scheme can be known from the
NAV (Net Assets Value). The NAV in real sense measures the value of
net assets invested in the scheme (Gross assets –Gross Liabilities)
NAV = Market / fair value of the investments + Accrued income +
Receivables + Cash and other assets - Accrued expenses - Payments
and other liabilities
Let's work it out with an example:
Assume a very small mutual fund has an initial investment of
1,000 units
Each unit is worth Rs 10
81
Hence, the total amount with the fund is Rs. 10,000
This amount is invested in one share of Infosys (Rs 7,200), one
share of SSI (Rs 2,400) and the balance Rs 400 is held in cash
Let's assume that after some time, the value of the shares goes up to
Rs 10,400 (Infosys), Rs 3,900 (SSI) and expenses incurred amount to
Rs 240. The NAV will be: (10400+3900+400-240) / 1000 units = Rs
14.46
Thus, the investors in this hypothetical fund have achieved an absolute
return of 44.6 per cent during the period.
Loads (Charges) in a mutual Fund:
Generally the Investment company i.e. Assets Management Company
charges loads while purchasing and selling a scheme. There are two
types of Loads, which are generally paid by investors i.e. Entry Load
and Exit Load.
82
Entry Load - Charged at the time of purchasing of units. At the time
of buying you are required to pay NAV and a fixed percentage of it.
This fixed percentage is the entry load.
Exit Load - Charged at the time of selling of units. At the time of
selling what you will get is the NAV minus a fixed percentage of it. This
fixed percentage is the exit load.
Corpus:
Any further investment into the fund will be at the current NAV. The
total amount invested; say Rs 11,000 (Rs 10,000 as the original
investment plus an additional Rs 1,000 invested now) is called the
corpus or the total amount of invested money.
AUM:
The total money managed by the fund is the present Rs 15,460
(present value of Rs 14,460 plus Rs 1,000 invested now). This figure is
referred to as assets under management (AUM) and is used as a
measure to compare the size of various funds. A very small fund may
not have the assets to meaningfully deploy to achieve the objective of
risk control through diversification. After all, it would be able to buy
only small quantities of fewer stocks. Typically, any fund having over
Rs 50 crore of AUM would be in a reasonable position to achieve its
objectives.
Repurchase Price: 83
Is the price at which a close-ended scheme repurchases its units and it
may include a back-end load. This is also called Bid Price.
FUTURE OF MUTUAL FUNDS IN INDIA:
By December 2004, Indian mutual fund industry reached
Rs 1, 50,537 crore. It is estimated that by 2010 March-end, the total
assets of all scheduled commercial banks should be Rs 40,90,000
crore.
The annual composite rate of growth is expected 13.4%
during the rest of the decade. In the last 5 years we have seen annual
growth rate of 9%. According to the current growth rate, by year 2010,
mutual fund assets will be double
84
RESEARCH WORK
CUSTOMER / INVESTORS BEHAVIOR ANALYSIS
IN MARKET:85
In any business whatever sector it is either it is financial and service
sector CUSTOMER IS KING. Every industry tries to know more about its
customer’s behaviour. But first they should know who are its
customers because without knowing it a company cannot do its
marketing and cannot maintain its relationships effectively and
efficiently.
Today’s Business is all about to build and maintain relationships with
your customers. Every customer is different and are his needs. The key
to successful selling is to identify these and position our product
accordingly. Help your client to achieve their financial goals help you to
maintain long lasting relationship with them.
86
TYPES OF CUSTOMERS:
“Half success is to choose a right targeted customers and remaining
half to handle them properly to provide gentle information to
appreciate their belief and to protect them from unfair trade
practices.”
Companies use different-different tools to get information about the
behaviour of the customer in the market. It is also helpful to target the
right segment of the market and success.
87
These tools can be:
Questionnaire
Direct interview
Telephonic interview
Observation
A questionnaire is a research instrument consisting of a series of
questions and other prompts for the purpose of gathering information
from respondents. QUESTIONNAIRE is on of the major tool use by
companies to collect data in written form.
It is important to remember that a questionnaire should be viewed as a
multi-stage process beginning with definition of the aspects to be
examined and ending with interpretation of the results. Every step
needs to be designed carefully because the final results are only as
good as the weakest link in the questionnaire process. Although
questionnaires may be cheap to administer compared to other data
collection methods, they are every bit as expensive in terms of design
time and interpretation.
The steps required to design a questionnaire are:
2. Defining the Objectives of the survey
3. Determining the Sampling Group
4. Writing the Questionnaire
5. Administering the Questionnaire
6. Interpretation of the Results
88
Principles that should keep in mind while designing questionnaire:
Avoid ambiguity, confusion, and vagueness .
Avoid emotional language, prestige bias and leading questions
Avoid double-barrelled questions
Don't assume the respondent is an expert on themselves (unless
you have no choice)
Avoid asking questions beyond a respondent's capabilities
Avoid false premises
Avoid asking about future intentions (if you can)
Avoid negatives and especially double negatives
Questionnaire is a better tool over interview and observation.
Because observation limits the information and interviews are not easy
to operate.
ANLYSIS AND CONCLUSION OF DATA:
Q-1 WHERE DO YOU LIKE TO INVEST YOUR MONEY? RANK THEM ACCORDING TO
YOUR PREFERENCE:
89
(A) MUTUAL FUND ( ) (B) BANK F. D. ( )
(C) SHARES ( ) (D) POST OFFICE ( )
(E) GOVT. BONDS ( )
INVESTMENT PREFERANCE
31 3918 8 4
2625
2019
10
1422
14 2228
2010
10 27 33
9 4
38 24 25
0
20
40
60
80
100
120
A B C D E
PREFERANCES
CU
MU
LA
TIV
E % 5
4
3
2
1
ANALYSIS:
Above collected data or table shows that:
31% people mark A as their 1st preference, 39% mark B, 18% mark C,
8% mark D and 4% mark E as their 1st preference.
90
26% people mark A as their 2nd preference, 25% mark B, 20% mark C,
19% mark D and 10% mark E as their 2nd preference.
14% people mark A as their 3rd preference, 22% mark B, 14% mark C,
22% mark D and 28% mark E as their 3rd preference.
20% people mark A as their 4th preference, 10% mark B, 10% mark C,
27% mark D and 33% mark E as their 4th preference.
9% people mark A as their 5th preference, 4% mark B, 38% mark C,
24% mark D and 25% mark E as their 5th preference.
CONCLUSION:
People like to invest more in B as their 1st preference.
People like to invest more in A as their 2nd preference.
People like to invest more in E as their 3rd preference.
People like to invest more in E as their 4th preference.
People like to invest more in C as their 5th preference.
RECOMMENDATION: Above collected data shows that People in India are risk
averter they want safe investment that’s why people marked bank f.d as
their first preference. Second they prefer mutual fund because mutual fund
have low risk and adequate return. So I recommend that issuers should
make portfolio which have low risk and that should be communicated to
public through different modes.
Q-2 WHERE DOES MUTUAL FUND EXIST IN YOUR INVESTMENT PORTFOLIO?
91
(A) 0 - 25% ( ) (B) 25 - 50% ( )
(C) 50 - 75% ( ) (D) 75 – 100%
( )
47
29
18
6
0
10
20
30
40
50
Series1 47 29 18 6
A B C D
ANALYSIS:
Above collected data or table shows that:
People mark A as their 1st preference.
CONCLUSION:
92
47% People mark that mutual fund exist 0-25% in their
investment portfolio.
29% People mark that mutual fund exist 25-50% in their
investment portfolio.
18% People mark that mutual fund exist 50-75% in their
investment portfolio.
6% People mark that mutual fund exist 75-100% in their
investment portfolio.
RECOMMENDATION: Above collected data shows that approx. 50% people
want to invest below 25% of their investment in mutual fund because of their
perception about risks in securities. For this AMC’s need to aware people
about different schemes and characteristics of mutual fund.
Q-3 ARE YOU SATISFIED FROM YOUR INVESTMENT?
93
(A) YES ( ) (B) NO
( )
83
17
0
20
40
60
80
100
Series1 83 17
A BA, 83
B, 17
A B
ANALYSIS: 83% People mark A.
CONCLUSION:
83% People are satisfied from their past and current investment.
17% People are not satisfied because of few reasons:
o They took a wrong decision about their investment.
o Human wants cannot satisfy.
Q-4 ARE YOU AWARE ABOUT THE SCHEMES OF MUTUAL FUNDS?
94
(A) YES ( ) (B) NO
( )
72
28
0
10
20
30
40
50
60
70
80
Series1 72 28
A B
A
72%
B
28%
A B
ANALYSIS: 72% People mark A.
CONCLUSION:
72% People are aware about the schemes of mutual funds.
28% people are not aware about schemes.
RECOMMENDATION: Above collected data shows that 28% people are not aware
about mutual fund and mostly are not fully aware of mutual fund schemes so
mutual fund industry ned to take initiate for this. Issuers and brokers agencies
participation is required.
95
Q-5 HOW WILL YOU RANK SECURITIES IN RESPECT OF THEIR RISK FACTOR?
(A) EQUITY ( ) (B) MUTUAL FUNDS ( )
(C) COMMODITY ( ) (D) ‘F & O’ ( )
SECURITIES RANKED (RISK FACTOR)
329 8
51
37
15 26
22
27
37 29
7
439 37
20
0204060
80100120
A B C D
PREFERANCES
CU
MU
LA
TIV
E R
ISK
IN
%
4
3
2
1
ANALYSIS:
Above collected data or table shows that:
32% people rank A, 9% rank B, 8% rank C and 51% rank D as highly
risky according to their risk factor. k A, 15% rank B, 26% rank C and
22% rank D as above average risky according to their risk factor.
96
27% people rank A, 37% rank B, 29% rank C and 7% rank D as average
risky according to their risk factor.
4% people rank A, 39% rank B, 37% rank C and 20% rank D as low
risky according to their risk factor.
CONCLUSION:
51% people ranked D (F&O) AS Highly risky.
37% people ranked A (EQUITY) as above average risky.
37% people ranked B (MUTUAL FUNDS) as average risky.
39% people ranked C (COMMODITY) as low risky.
Q-6 HOW MUCH MINIMUM RETURNS DO YOU PREFER WHILE MAKING
INVESTMENT?
(A) 5-10% ( ) (B) 10-15% ( )
(C) 15-20% ( ) (D) 25% ( )97
A, 10
B, 28
C, 37
D, 25
0
5
10
15
20
25
30
35
40
A B C D
ANALYSIS: 37% people marked C, 28% marked B, 25% marked D and only
10% marked A.
CONCLUSION:
1) 37% people want atleast 15-20% return while making investment.
2) 28% people want atleast 10-15% return while making investment.
3) 25% people want atleast 20-25% return while making investment.
Q-7 FROM WHOM DO YOU GET INFORMATION ABOUT FINANCIAL MARKET?
98
(A) NEWS PAPER ( ) (B) FRIEND’S
( )
(C) BROKER’S ( ) (D) TELEVISION
( )
47
2528
37
0
10
20
30
40
50
Series1 47 25 28 37
A B C D
ANALYSIS*: 47% marked A, 25% marked B, 28% marked C and 37% marked
D.
CONCLUSION:
47% people get information about financial market from newspaper.
37% people get information about financial market from television.
28% people get information about financial market from brokers.
25% people get information about financial market from friends.99
*(few people get information from more than one medium)
Q-8 WHICH MEDIUM DO YOU MAKE FOR TRANSACTIONS?
(A) ONLINE ( ) (B) BROKERS
( )
(C) BY POST ( ) (D) SELF
( )
40
22
0
42
0
10
20
30
40
50
Series1 40 22 0 42
A B C D
ANALYSIS*: 40% marked A, 22% marked B and 42% marked D.
CONCLUSION:
47% people make transactions online.100
22% people make transactions through brokers.
42% people make transactions by self.
*(few people do transactions through more than one medium)
Q-9 WHEN WOULD YOU LIKE TO INVEST YOUR MONEY? WHEN!
(A) MARKET IS VERY HIGH ( ) (B) MARKET IS RISING
( )
(C) MARKET IS DECLINING ( ) (D) MARKET IS VERY LOW ( )
8
42
14
37
0
10
20
30
40
50
Series1 8 42 14 37
A B C D
ANALYSIS: 8% marked A, 42% marked B, 14% marked C and 37% marked D.
CONCLUSION:
8% People would like to invest when market is very high.
42% People would like to invest when market is rising.101
14% People would like to invest when market is declining.
37% People would like to invest when market is very low.
Q-10 NOW; WOULD YOU LIKE TO INVEST IN MUTUAL FUNDS?
(A) YES ( ) (B) NO
( )
81
19
0
20
40
60
80
100
Series1 81 19
A B
Series1, 81%
Series1, 19%
A B
ANALYSIS: 81% People marked A, 19% marked B.
CONCLUSION:
102
81% People would like to invest in mutual fund in future if get a good
opportunity.
28% People would not like to invest in mutual fund in future if get a good
opportunity.
FINDINGS
After analysis different Mutual funds and customer behavior, it is
revealed that mutual funds issues can be compared by different
factors like its NAV, RETURNS, RISK, EXPENSE RATIO, RETURN SINCE
LAUNCH and its DIVERSIFIED STOCK. A Customer can compare
different issues and make decisions accordingly, if they found any
contradictory like return on one is better but it is high risky now its
depend on investor attitude that whether he is risk taker or averter.
And, In a survey of 100 people at Delhi, I come on following findings:
People in India want safe investment that’s why people marked
maximum 39% bank f.d as their first preference.
People preferred mutual funds after bank f.d because in their
opinion mutual funds are less risky as compared to other
securities.
28% of the sample population is not aware about mutual fund
and its schemes.
Approximately 50% of population want to invest below 25% of
their investment portfolio in mutual funds.
103
Approx. 70% people want return more than 10% on their
investment for them mutual fund is a very good option.
17% people are not satisfied from their investment.
51% people said F&O is highly risky. People marked mutual fund
low risky than F&O AND equity.
47% people get information about financial market through
newspaper.
42% people do transaction by theirself and 40% online.
Maximum (42%) customer want to invest when market is rising.
Mutual funds have evolved a lot since its inception and growing
rapidly.
From a single fund house in 1964 there are at present 34 fund
houses.
Many private players and foreign players have increased and
more foreign players are on the prowl.
SIP (Systematic Investment plans) has got lot of popularity in
the last 3-4 years as it gives the advantage of Rupee cost
averaging.
The Mutual Fund industry is mainly penetrated in urban or semi-
Urban areas. And Rural India is still to be tapped.
It is very important that while comparing the scheme the
scheme with same investment style and sector allocation should
be selected.
Various qualitative and quantitative measures should be used.
Compare the scheme and only return should not be taken into
consideration.
104
The less than three-year-old PMS has already built up a client
base of 540 and an asset portfolio of Rs 100 crore.
In PMS, there had been a very sharp growth in its client base
last year. Based exclusively on the good report card and strong
recommendations of existing clients, new customers have come
seeking the company's services. On a year-on-year basis, the
company's client base has grown over 300 per cent, from
around 145 clients last year to 540 today.
One may know what stocks, equity funds or bonds one would
like to own, but he/she doesn’t knows how much of your savings
one should allocate to each of these. The decision on asset
allocation will be crucial in determining investment returns over
the long term. With PMS, an asset allocation plan is tailor-made,
after a detailed check on investment goals, savings pattern and
appetite for risk one has.
In PMS investor can switch over to different investments as per market
CONCLUSION
In the case of Mutual Funds as it can be seen from the performance
figures, the SIP has delivered better returns than a lump-sum
investment.
105
But if we compare the average returns of Mutual funds and
portfolio management services over the last few years, PMS has given
the better returns to the investors. Like Reliance PMS has given the
returns of 73.1% per annum, Angel has given 63% returns, and Morgan
has given 37% return. And in Mutual funds, Franklin India prima fund
has given the maximum average return of 35.78% over the last 10
years.
Although anybody with a nest egg, which meets the minimum
investment requirement, can consider using a PMS. However, a PMS
may only add significant value in the following cases:
Equity bias: Portfolio management services may be ideal for a person
who seeks a substantial investment in the stock markets. An equity
portfolio also offers greater scope for a manager to add value than
does a debt portfolio. Several of the established players in the PMS
business focus on equity investments, though some also offer hybrid
products.
Large surplus to invest: The minimum portfolio size that portfolio
managers accept for a customised portfolio ranges from Rs 25 lakh to
Rs 5 crore. So one must consider PMS only if he/she has a substantial
surplus to invest in stocks. If one cant, evaluate yourself and use the
services of a financial planner or an advisor, instead of a PMS.
106
Otherwise for small scale investors in order to diversify his
portfolio in small investments only & to get it professionally managed
mutual funds is a better option as compared to personal investments
RECOMMENDATIONS
Companies should promote awareness programmes because
many of the people are not aware about different schemes and
they don’t want to invest on confused terms.
Companies should take more initiative while market is rising
because maximum people want to invest when market is rising
so that investors can earn more revenue.
4) Customer should build a highly diversified portfolio
Companies should issues different mutual funds over other
securities like shares bonds because-
107
1. People in India are risk averter and they need a
safe investment.
2. And people marked mutual fund as a low risky
security.
SUGGESTIONS
Invest for long term because we can get good returns in long
term only.
1) Take the advice of financial planners and fund managers if you
lack that expertise, as they are expert in the field & can
maximize our returns at minimized risk.
1) Do not put all your eggs in one basket as diversification reduces
risk.
108
LIMITATIONS
TIME : Understand the financial market in depth is very vast topic
so two months is a very small period for understanding the
financial market.
It’s a secondary research, views given by people may be wrong.
It’s difficult to obtain appointment with the businessman because
time is constraint for them.
Investment through mutual fund requires minimum of Rs5000
and PMS services required minimum of Rs10, 00,000, so
comparison of the pattern is quite difficult sometime.
LIMITATION OF AREA:The research is limited to internet &
business magazines.
Cost allocated to this project is not as per requirement of it.
ANNEXURE
109
----------------Questionnaire--------------
CUSTOMER BEHAVIOUR ANALYSIS IN MARKET
Q-1 WHERE DO YOU LIKE TO INVEST YOUR MONEY? RANK THEM ACCORDING TO
YOUR PREFERENCE:
(A) MUTUAL FUND ( ) (B) BANK F. D. ( )
(C) SHARES ( ) (D) POST OFFICE ( )
(E) GOVT. BONDS ( )
Q-2 WHERE DOES MUTUAL FUND EXIST IN YOUR INVESTMENT PORTFOLIO?
(A) 0 - 25% ( ) (B) 25 - 50% (
)
(C) 50 - 75% ( ) (D) 75 – 100% (
)
Q-3 ARE YOU SATISFIED FROM YOUR INVESTMENT?
(A) YES ( ) (B) NO ( )
Q-4 ARE YOU AWARE ABOUT THE SCHEMES OF MUTUAL FUNDS?
(A) YES ( ) (B) NO ( )
110
( IF ‘NO’, SO PLZ GO TO Q-10 )
Q-5 HOW WILL YOU RANK SECURITIES IN RESPECT OF THEIR RISK FACTOR?
(A) EQUITY ( ) (B) MUTUAL FUNDS ( )
(C) COMMODITY ( ) (D) ‘F & O’ ( )
Q-6 HOW MUCH MINIMUM RETURNS DO YOU PREFER WHILE MAKING
INVESTMENT?
(A) 5-10% ( ) (B) 10-15% (
)
(C) 15-20% ( ) (D) 20-25% (
)
Q-7 FROM WHOM DO YOU GET INFORMATION ABOUT FINANCIAL MARKET?
(A) NEWS PAPER ( ) (B) FRIEND’S ( )
(C) BROKER’S ( ) (D) TELEVISION ( )
Q-8 WHICH MEDIUM DO YOU MAKE FOR TRANSACTIONS?
(A) ONLINE ( ) (B) BROKERS ( )
(C) BY POST ( ) (D) SELF ( )111
Q-9 WHEN WOULD YOU LIKE TO INVEST YOUR MONEY? WHEN!
(A) MARKET IS VERY HIGH ( ) B) MARKET IS RISING ( )
(C) MARKET IS DECLINING ( ) D) MARKET IS VERY LOW ( )
BEFORE ASKING Q-10, YOU SHOULD KNOW THAT: A Mutual Fund is a trust
that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realised are
shared by its unit holders in proportion to the number of units owned by
them. A Mutual Fund offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
Q-10 NOW; WOULD YOU LIKE TO INVEST IN MUTUAL FUNDS?
(A) YES (B) NO
(C) Friends, Magazines, Newspapers etc.
112
NAME:……………………………… OCCUPATION: ………………………….....
ADDRESS:…………………………… TEL NO: …………………………………….
BIBLIOGRAPHY
BOOKS:
1) Kothari C.R., Quantitative Techniques, Vikas publishing house Pvt.
Ltd.
New Delhi, 2005, p-168- 174.
2) Prof. R.M. Srivastava, Dr.Diva Nigam, Management of Indian
Financial
Institutes, Himalaya publishing House, 9th Edition, P- 558-560.
113
3) M.Y.Khan, Indian Financial System, 4th Edition, Tata Mcgraw
Hill Publishing Company Ltd.,
4) Pandey,I.M. Financial Management, 3rd edition, New Delhi,
Vikas Publication House Pvt. Ltd. P-143to145
5) R.P. Rustagi, Investment Management. 2nd edition, New Delhi,
Sultan Chand & sons
5) Prasannana Chandra, Investment Analysis And Portfolio
Management,
6) Financial Management – I.M Pandey
7) Security Analysis and Portfolio Management – Punithavathy
Pandian
WEBSTIES
www.lotusindiaamc.com
www.amfiindia.com
www.mutualfundsindia.com
www.moneycontrol.com
www.indiamart.com
www.google.com
www.investopedia.com
www.indiapages.in
www.thehindubusinessline.com
114
Chapter-12 Fundamental Analysis – Page237-243
Official Websites of NSE and BSE
www.nseindia.com
www.bseindia.com
Other Websites for Analysis work
www.icharts.in
www.equitymaster.com
www.money.rediff.com
www.google.com/finance
Articles in newspapers (April 01 – June 1
The Economic Times
Business Standard
115