Investment Basics PDF

Investment Basics What is Investment? The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Why Should one invest?...

Investment Basics What is Investment? The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Why Should one invest? One needs to invest to:  Earn return on your idle resources  Generate a specified sum of money for a specific goal in life  Make a provision for an uncertain future Inflation One needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. What are various options available for investment? One may invest in: Physical assets like real estate, gold/jewellery, commodities etc. Real estate and investing in Gold can be a very challenging experience but it can also be very rewarding. It takes some experience, not to mention a lot of patience, time, and money. After all, you can't just invest your money and expect to start profiting immediately. In 1947, the cost of ten grams of gold was around Rs 88. By 2024, it rose to nearly Rs.75,000. This suggests that the long-term compound annual growth rate (CAGR) will be roughly 9 per cent. In contrast to the stock market, the Sensex, which began trading in 1979 at 100 points, has increased to nearly 82000 points by 2024. Over time, this growth equates to a CAGR of almost 16%.  Short-term financial options available for investment?  Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fixed deposits.  Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns. Interest rates are upto 7.80% p.a Long-term financial options available for investment? 1.Post Office Savings: It provides an interest rate of around 8% per annum, which is paid monthly. Minimum Amount: Rs.1,000 Maximum Amount:Rs.3 lacs during a year Maturity Period: 6 years 2. Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum Minimum Amount: Rs.500 Maximum Amount:Rs.1.5 lacs during a year 3. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector. Bonds can be secured by collateral and physical assets, debentures are not backed by collateral Debentures offer higher interest rates than bonds as they are riskier Bonds are long term investment while debentures are short term investment. Long term investment Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued Net value of Asset =(Total Asset-Total liability)/Total Outstanding shares Senior Citizens Savings scheme(SCSS): Eligibility :55 yrs and above Investment:Min-Rs.1lacs ,Max-Rs.30 lacs Interest: paid quarterly on 1st working day at 8.20% Tenure:5 years can be extended once for 3 years What is meant by a Stock Exchange? The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities Stock/Equity :A stock is a security that represents a fractional ownership in a company. When you buy a company's stock, you're purchasing a small piece of that company, called a share. When you own stock in a company, you are called a shareholder because you share in the company's profits. Primary market and Secondary Market Primary market Companies and governments issue new securities, like stocks and bonds, to investors in the primary market. This is usually done through an initial public offering (IPO) Secondary market Investors buy and sell existing securities, like stocks and bonds, in the secondary market. This can take place on exchanges the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE). Regulator Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected Who regulates the Securities Market? The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI)  What is SEBI and what is its role? The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. In particular, it has powers for: Regulating the business in stock exchanges and any other securities markets. Registering and regulating the working of stock brokers, sub–brokers etc. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices.  AN OVERVIEW OF THE INDIAN SECURITIES MARKET The securities market has two interdependent and inseparable segments: (i) primary market : Primary markets are markets where equity shares, bonds, and debentures are issued to the public. (ii) secondary market : A secondary market is where previously issued securities are traded between investors. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) can be considered secondary markets. Here is a table representing the difference between primary and secondary market: Primary Market Secondary Market The primary market is used to The secondary market is used Utility issue equity shares, bonds, and by traders. debentures. In a secondary market, The primary market deals with transactions occur between Entities Involved transactions occurring between two interested investors on an a company and an investor. exchange. Securities that have already Securities that have been been issued on the primary Types of Securities issued for the first time are market are the ones that are traded on the primary market. traded on the secondary market. What is meant by Face Value of a share/debenture? For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. What is meant by Issue price? The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price. Who decides the price of an issue? the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. There are two types of issues, one where company and Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price  Key Participants 1.Issuers: These are entities like corporations and governments that need to raise capital. 2.Underwriters: Typically investment banks, they help the issuers to sell the securities. They buy the securities from the issuer and sell them to the public, taking on the risk of selling all the shares. 3.Investors: These can be individual retail investors or large institutional investors like mutual funds, pension funds, and insurance companies. What are the different types of issues? Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities A follow on public offering (Further Issue) is when an already listed company makes either fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted? As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 the Basis of Allotment should be completed with 8 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account. Key Indicators of Securities Market Index: An Index is used to give information about the price movements of products in the financial, commodities or any other markets.. Stock market indices are meant to capture the overall behavior of the equity markets. There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange which consists of 30 Active stocks and CNX Nifty representing the National Stock exchange consists of 50 Active stocks NSE Nifty 50: Base value= 1000 (base date: November 3, 1995) BSE Sensex: Base value = 100 (base date: April 1, 1979) Nifty Bank: Base value = 1000 (base date: January 1, 2000) Market Capitalization: Market capitalization represents the total market value of a company's outstanding shares of stock. which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs. 12000 million.  Stock Market Segments The Exchange (NSE) provides trading in four different segments - Wholesale Debt Market, Capital Market, Futures and Options and Currency Derivatives Segment. Wholesale Debt Market (WDM) Segment: This segment at NSE commenced its operations in June 1994. It provides the trading platform for wide range of debt securities which includes State and Central Government securities, T-Bills, PSU Bonds, Corporate debentures, Commercial Papers, Certificate of Deposits etc. Capital Market (CM) Segment: This segment at NSE commenced its operations in November 1994. It offers a fully automated screen based trading system, Various types of securities e.g. equity shares, warrants, debentures etc. are traded on this system. Stock Market Segments Futures & Options (F&O) Segment: This segment provides trading in derivatives instruments like index futures, index options, stock options, and stock futures, and commenced its operations at NSE in June 2000. Currency Derivatives Segment (CDS) Segment: This segment at NSE commenced its operations on August 29, 2008, with the launch of currency futures trading in US Dollar-Indian Rupee (USD-INR). Trading in other currency pairs like Euro-INR, Pound Sterling-INR and Japanese Yen-INR was further made available for trading in February 2010. Reforms in Indian Securities Markets Over a period, the Indian securities market has undergone remarkable changes and grown exponentially, particularly in terms of resource mobilisation, intermediaries, the number of listed stocks, market capitalisation, turnover and investor population. Creation of Market Regulator: Securities and Exchange Board of India (SEBI), the securities market regulator in India, was established under SEBI Act 1992, with the main objective 15 and responsibility for (i) protecting the interests of investors in securities, (ii) promoting the development of the securities market, and (iii) regulating the securities market. Screen Based Trading: Prior to setting up of NSE, the trading on stock exchanges in India was based on an open outcry system. The system was inefficient and time consuming because of its inability to provide immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen based trading system (SBTS) on the CM segment on November 3, 1994. Reduction of Trading Cycle: Earlier, the trading cycle for stocks, based on type of securities, used to vary between 14 days to 30 days and the settlement involved another fortnight, From April 2003 onwards, T+2 days settlement cycle is being followed Reforms in Indian Securities Markets Dematerialisation: As discussed before, the old settlement system was inefficient due to (i) the time lag for settlement and (ii) the physical movement of paper-based securities. To obviate these problems, the Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed and accuracy. There are two depositories in India, viz. NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities. Clearing Corporation: The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter- party and thus necessitated some innovation in this area. To address this concern, NSE had set up the first clearing corporation, viz. National Securities Clearing Corporation Ltd. (NSCCL), which commenced its operations in April 1996  Stock Trading Screen Based Trading: The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully automated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found.  NEAT NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. The National Exchange for Automated Trading (NEAT) was introduced in 1994 Stock Brokers A stock broker is an intermediary who arranges to buy and sell securities on the behalf of clients (the buyer and the seller). According to SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a stockbroker is member of a stock exchange and requires to hold a certificate of registration from SEBI in order to buy, sell or deal in securities. While considering the application of an entity for the grant of registration as a stock broker, SEBI checks out if the applicant: (a) is eligible to be admitted as a member of a stock exchange (b) has the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities (c) has any past experience in the business of buying, selling or dealing in securities; SEBI grants a certificate to a stock broker subject to the conditions that the stock broker: (a) holds the membership of any stock exchange; (b) should abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member; (c) should obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange in case of any change in the status and constitution; (d) should pay the amount of fees for registration in the prescribed manner; (e) should take adequate steps for redress of grievances of the investors within one month of the date of the receipt of the complaint The persons eligible to become trading members of Exchange are: (a) Individuals (b) Partnership firms registered under the Indian Partnership Act, 1932. (C) Institutions, including subsidiaries of banks engaged in financial services. (d) Banks for Currency Derivatives Segment (e) Body corporates including companies as defined in the Companies Act, 1956. A How to know if the broker or sub broker is registered? One can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’ Sub-Brokers Sub broker is an important intermediary between stock broker and client in capital market segment. The trading members of the Exchange may appoint sub-brokers to act as agents of the concerned trading member for assisting the investors in buying, selling or dealing in securities. A sub-broker is allowed to be associated with only one trading member Eligibility A sub-broker may be an individual, a partnership firm or a corporate. (a)They should not be less than 21 years of age (b) They should not have been convicted of any offence involving fraud or dishonesty (c) They should have either passed 12th standard equivalent examination from an institution recognized by the Government What precautions must one take before investing in the stock markets? Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries. Ensure that you receive contract notes for all your transactions from your broker All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day. Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor What is the maximum brokerage that a broker can charge? The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note. What is a Contract Note? Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It also helps to settle disputes/claims between the investor and the trading member. Broker-Clients Relations The trading member (TM) is required to enter into an agreement in the specified format provided by NSE with the client before accepting orders on latter’s behalf. The agreement is executed on non-judicial stamp paper of adequate value, duly signed by both the parties on all the pages. Copy of the agreement has to be kept with the TM permanently. Under “Know Your Client (KYC)” requirements, the TM should seek information such as: investor risk profile, financial profile, investor identification details, address details, income, PAN number, employment, age, investments experience, trading preference. The TM has to obtain recent passport size photograph Unique Client Code (UCC):SEBI has made it mandatory for all trading members/brokers to use unique client codes for all clients. Investor Service Cell and Arbitration Investor complaints received against the trading members / companies in respect of claims/ disputes for transactions executed on the Exchange are handled by the Investor Service Cell (ISC). The complaints are forwarded to the trading members for resolution and seeking clarifications. when it is not possible to administratively resolve the complaint, investors are advised to take recourse to the arbitration mechanism prescribed by the Exchange. Arbitration, which is a quasi judicial process, is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996 The reference to arbitration should be filed within six months from the date when the dispute arose. Why should one invest in equities in particular?. When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. Research studies have proved that the equity returns have outperformed the returns of most other forms of investments in the long term. Investors buy equity shares or equity based mutual funds However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. Though higher the risk, higher the potential returns, high risk also indicates that the investor stands to lose some or all his investment amout if prices move unfavorably. One needs to study equity markets and stocks in which investments are being made carefully, before investing. Which are the factors that influence the price of a stock? Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills. The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favorable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavorable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. What is meant by the terms Growth Stock / Value Stock? Growth Stocks: Companies whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions Value Stocks: Stocks that have been overlooked by other investors and which may have a ‘hidden value’. These companies may have been beaten down in price because of some bad event. Value stock is a company's stock that is trading at a price lower than its intrinsic value. This means that the stock is undervalued by the market. Opportunity for investors: Value stocks can be a good opportunity for investors to buy shares at lower price. Dividend payments: Value stocks often pay dividends.  What is a Portfolio? A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units. What is Diversification? It is a risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Diversification is possibly the best way to reduce the risk in a Debt Investment What is a ‘Debt Instrument’? Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector. What are the features of debt instruments Each debt instrument has three features: Maturity, coupon and principal. Maturity: Maturity of a bond refers to the date, on which the bond matures, which is the date on which the borrower has agreed to repay the principal.. It is also called the term or the tenure of the bond. Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. Principal: Principal is the amount that has been borrowed, and is also called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate. The name of the bond itself conveys the key features of a bond. For example, a GS CG2008 11.40% bond refers to a Central Government bond maturing in the year 2008 and paying a coupon of 11.40%. Since Central Government bonds have a face value of Rs.100 and normally pay coupon semi-annually, this bond will pay Rs. 5.70 as six- monthly coupon, until maturity What are the Segments in the Debt Market in India? There are three main segments in the debt markets in India. The market for Government Securities comprises the Centre, State and State-sponsored securities. Corporate bond markets comprise of commercial paper and bonds. Who are the Participants in the Debt Market? Debt market is predominantly a wholesale market, with dominant institutional investor participation. The investors in the debt markets are mainly banks, financial institutions, mutual funds, provident funds, insurance companies and corporates. MUTUAL FUNDS A mutual fund is an investment vehicle that pools money from several investors to invest in a mix of assets like stocks, bonds, government securities, and even gold. Mutual funds allow investors to achieve portfolio diversification and professional management, with returns and risks based on the performance of the fund’s investments. The funds are managed by financial experts called fund managers. These professionals have the skills to analyze and make investment decisions. To manage the fund, the AMC charges a fee, known as the expense ratio. The gains generated from this fund investment are distributed proportionately amongst the investors after deducting applicable expenses, by calculating the Net Asset Value. What are the benefits of investing in Mutual Funds? Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. The thoroughly analyse the markets and economy to pick good investment opportunities. Spreading Risk: An investor with limited funds might be able to invest in only one or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified. Transparency: Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor. What is NAV? NAV stands for ‘Net Asset Value.’ NAV represents the price at which a mutual fund may be bought by an investor or sold back to a fund house. A mutual fund’s NAV is an indicator of its market value. Therefore, NAV can be viewed to assess the current performance of a mutual fund How is NAV calculated? Net Asset Value = [Total Asset Value— Expense Ratio] / Number of Outstanding units Total asset value includes its cash, stocks, and bonds, all of which are taken at market value, or the closing price of the mutual fund. dividends are also included in total asset value. expenditures like any expenses, outstanding debt to creditors, and other liabilities are also part of the total asset value. The expense ratio includes it’s management charges, operating costs, transfer agent costs, custodian and audit charges, and distribution and marketing expenses. NAV calculation provides a broad understanding of a mutual fund’s value per unit. For example, if a mutual fund has total assets worth Rs. 500 lakh and liabilities of Rs. 100 lakh, with 20 lakh units, the NAV would be Rs. 20. This method gives investors a clear snapshot of the fund’s value, helping them make investment decisions. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis.  What is NAV The most common mistake by an investor is thinking that a higher NAV in a mutual fund validates its credibility. But this is not the case. Let’s understand this with an example. Suppose you have invested Rs. 1,000 each in both Mutual Fund A & Fund B. Mutual Fund A has an NAV of Rs. 10 whereas Mutual Fund B has an NAV of Rs. 50. You will be allotted 100 units of Mutual Fund A and 20 units of Mutual Fund B. If the NAV of both mutual funds increases by 10%, the profit from both mutual funds will be Rs. 100. Mutual Fund A’s profit = (11-10) x 100 = Rs. 100 Mutual Fund B’s profit = (55-50) x 20 = Ts. 100 So, don’t invest in a mutual fund just by looking at the higher NAV. Instead, consider other factors such as the fund's investment objectives, past performance, expense ratio, risk profile, and the reputation of the fund manager. It's important to align the fund's strategy with your own financial goals and risk tolerance before making any investment decisions. Are there any risks involved in investing in Mutual Funds? Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can Some of the Risk to which Mutual Funds are exposed to is given below: Market risk: If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Non-market risk :Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. Interest rate risk :Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Credit risk: Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating. What are the different types of Mutual funds? Mutual funds are classified in the following manner: (a) On the basis of Objective: Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long- term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.  Different types of Mutual Funds Diversified funds: These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors. Examples: Edelweiss Large & Mid Fund, DSP Equity Opportunities Fund, Parag Parikh Flexi Cap Direct. Sector funds :These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector. Examples: Quant Infrastructure Fund, DSP Healthcare Fund, SBI Healthcare Opp Fund. Index funds :These funds invest in the same pattern as popular market indices like S&P CNX Nifty or S&P CNX 500. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Examples: Motilal Oswal Nifty Midcap 150 Index Fund Direct Growth, Nippon India Nifty Small cap 250 Index Fund Dir Gr. Different types of Mutual Funds Tax Saving Funds: These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. One can invest up to Rs 1.5 lakh in tax-saving funds. will get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. a. ELSS funds(Equity-Linked Savings Schemes) are the only tax-saving funds within the Rs 1.5 lakh limit. Debt/Income Funds :These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.  Different types of Mutual Funds Liquid Funds/Money Market Funds :These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and short- term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods. Gilt Funds: These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk. Balanced Funds: These funds invest both in equity shares and fixed-income- bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.  b) On the basis of Flexibility Open-ended Funds: These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Close-ended Funds :These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. What are the different investment plans that Mutual Funds offer? Growth Plan and Dividend Plan :A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, are made. The investor thus only realizes capital appreciation on the investment. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income. Dividend Reinvestment Plan :Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors. What are the rights that are available to a Mutual Fund holder in India? Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. Mutual fund certificates are important for proving ownership, transferring units, and redeeming units. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. What is a Fund Offer document? A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. That way, before you put in your money, you're well aware of the risks etc involved. the prospectus must disclose details about: § Investment objectives § Risk factors and special considerations § Summary of expenses § Constitution of the fund § Guidelines on how to invest § Organization and capital structure § Tax provisions related to transactions § Financial information  What is an ETF? An ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade. Types of ETFs Index ETFs: These are funds that are designed to track a specific index. Fixed Income ETFs: These funds are designed to provide exposure to nearly every type of bond available. ETFs are designed to provide exposure to a specific industry, such as oil, medicines, or high technology. Commodity ETFs:These funds are designed to track the price of a certain commodity, such as gold, oil, or corn.  Should you invest in ETFs? ETFs are a low-cost way to obtain stock market exposure. Since they are listed on an exchange and trade like stocks, they provide liquidity and real-time settlement. ETFs are a low-risk option because they duplicate a stock index, providing diversity rather than investing in a few stocks of your choosing. Do ETFs pay dividends? ETFs do pay dividends. Any dividends earned on shares held in the fund portfolio must be distributed by ETFs. As a result, ETFs pay dividends if any of the stocks in which they invest pay dividends.  Chapter 9 Market Terminologies Bull Market (Bullish) – If you believe that the stock prices are likely to go up then you are said to be bullish on the stock price. if the stock market index is going up during a particular time period, then it is referred to as bull market. Bear Market (Bearish) – If you believe that the stock prices are likely to go down then you are said to be bearish on the stock price. if the stock market index is going down during a particular time period, then it is referred to as the bear market. 52 week high/low – 52 week high is the highest point at which a stock has traded during the last 52 weeks (which also marks a y ear) and likewise 52 week low marks the lowest point at which the stock has traded during the last 52 weeks. The 52 week high and low gives a sense of the range within which the stock has traded during the year. Many people believe that if a stock reaches 52 week high, then it indicates a bullish trend, Similarly if a stock has hits 52 week low,traders believe that it indicates a bearish trend for a foreseeable future  Market Terminologies Long Position :Long position or going long is simply a reference to the direction of your trade. For e.g. if you have bought or intend to buy Biocon shares then you are said to be long on Biocon. If you have bought the Nifty Index with an expectation that the index will trade higher then essentially you have a long position on Nifty. If you are long on a stock or an index, you are said to be bullish. Short Position: A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when they believe that the price of that security is likely to decrease in the near future. Example: Suppose you are expecting that the price of an ABC Ltd. stock will fall to ₹100, To sell (or take a short position) the shares today, you borrow 50 shares from your stockbroker at a price of ₹120. If the price falls, then you buy back 50 shares at a price of ₹100. This is called short covering and you make a profit of ₹20 X 50 shares = ₹1,000. Market Terminologies Square off – Square off is a term used to indicate that you intend to close an existing position. If you are long on a stock squaring off the position means to sell the stock. When you are short on the stock, squaring off position means to buy the stock back. Intraday position – Is a trading position you initiate with an expectation to square off the position within the same day. Volumes – Volumes and its impact on the stock prices is an important concept, Volumes represent the total transactions (both buy and sell put together) for a particular stock on a particular day.  Market Terminologies Circuit Breakers: A stock market circuit breaker is a financial regulatory mechanism that automatically halts trading when a stock index or a stock's price reaches certain limits. Circuit breakers are designed to prevent stock market crashes by giving traders time to react to significant price changes. They also help to maintain market stability. How it works: When a stock index or a stock's price breaches a predetermined limit, trading is halted for a set amount of time. The length of the halt depends on the magnitude of the price change. For example, if the Sensex drops by 10%, trading might be halted for 45 minutes  Chapter 10 Corporate Actions What are Corporate Actions? Corporate actions tend to have a bearing on the price of a security. When a company announces a corporate action, it is initiating a process that will bring actual change to its securities either in terms of number of shares increasing in the hands on the shareholders or a change to the face value of the security or receiving shares of a new company by the shareholders as in the case of merger or acquisition etc. Corporate actions are typically agreed upon by a company's Board of Directors and authorized by the shareholders. Some examples are dividends, stock splits, rights issues, bonus issues etc. Corporate Actions What is meant by ‘Dividend’ declared by companies? Returns received by investors in equities come in two forms a) growth in the value (market price) of the share and b) dividends. Dividend is distribution of part of a company's earnings to shareholders, usually twice a year in the form of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder. Normally, the dividend is expressed on a 'per share' basis, for instance – Rs. 3 per share. This makes it easy to see how much of the company's profits are being paid out, and how much are being retained by the company to plough back into the business. So a company that has earnings per share in the year of Rs. 6 and pays out Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the other half. Directors of a company have discretion as to how much of a dividend to declare or whether they should pay any dividend at all. What is meant by Dividend yield? Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. It is calculated by aggregating past year's dividend and dividing it by the current stock price. Example: ABC Co. Share price: Rs. 360 Annual dividend: Rs. 10 Dividend yield: 2.77% (10/360) A high dividend yield is considered to be evidence that a stock is underpriced, whereas a low dividend yield is considered evidence that the stock is overpriced.  What is Bid and Ask price? Bid (Buy Qty Side) Ask Qty (sell side) The ‘Bid’ is the buyer’s price. It is this price that you Price(Rs Price need to know when you have to sell a stock. Bid is the.) (Rs.) rate/price at which there is a ready buyer for the stock, 100 50.25 50.3 2000 which you intend to sell. 0 50.10 5 1000 The ‘Ask’ (or offer) is what you need to know when 500 50.05 50.4 1500 you're buying i.e. this is the rate/ price at which there is 550 50.00 0 3000 seller ready to sell his stock. The seller will sell his stock 250 49.25 50.5 1450 if he gets the quoted “Ask’ price. 0 0 If an investor looks at a computer screen for a quote on 130 50.5 0 5 the stock of say XYZ Ltd, 50.6 The best Buy (Bid) order is the order with the highest 5 price and therefore sits on the first line of the Bid side (1000 shares @ Rs. 50.25). The best Sell (Ask) order is the order with the lowest sell price (2000 shares @ Rs. 50.35). The difference in the price of the best bid and ask is called as the Bid-Ask spread and often is an indicator of liquidity in a stock. The narrower the difference the more liquid or highly traded is the stock.