18487104 various investment avenuesfinal

7/31/2019 18487104 Various Investment AvenuesFinal

1/37

PROJECT DESCRIPTION

Mutual Fund:-

Mutual fund is a pool of money collected from investors and is invested according to

stated investment objectives Mutual fund investors are like shareholders and they own the fund. Mutual

fund investors are not lenders or deposit holders in a mutual fund. Everybody else associated with a

mutual fund is a service provider, who earns a fee. The money in the mutual fund belongs to the investors

and nobody else. Mutual funds invest in marketable securities according to the investment objective. The

value of the investments can go up or down, changing the value of the investors holdings.NAV of a

mutual fund fluctuates with market price movements. The market value of the investors funds is also

called as net assets. Investors hold a proportionate share of the fund in the mutual fund. New investors

come in and old investors can exit, at prices related to net asset value per unit.

Emergence of Mutual Funds:-

Mutual Funds now represent perhaps the most appropriate investment opportunity for most

small investors. As financial markets become more sophisticated and complex, investor need a financialintermediary who provides the required knowledge and professional expertise on successful investing. It

is no wonder then that in the birthplace of mutual funds-the U.S.A.-the fund industry has already

overtaken the banking industry, with more money under Mutual Fund management than deposited with

banks.

The Indian Mutual Fund industry has already opened up many exciting investment opportunities

to Indian investors. Despite the expected continuing growth in the industry, Mutual Fund is a still new

financial intermediary in India.

History of Mutual Funds:-

In the second half of 19th century, investor in UK considered the stock market

is good for the investment. But for small investor it is not possible to operate in the market effectively.

This led to establishment of an investment company which led to the small investor to invest in equity

market. The first investment company was the Scottish-American Investment Company, set up in London

in 1860.

Mutual Fund Industry in India:-


2/37

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and

are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise

option, as in real terms the value of money decreases over a period of time. One of the options is to invest

the money in stock market. But a common investor is not informed and competent enough to understand

the intricacies of stock market. This is where mutual funds come to the rescue. A mutual fund is a group

of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutualfunds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund,

investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their

own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of

mutual funds is diversification.

Diversification means spreading out money across many different types of

investments. When one investment is down another might be up. Diversification of investment holdings

reduces the risk tremendously.

In 1963, the government of India took the initiative by passing the UTI act, under which the

Unit Trust of India (UTI) was set-up as a statutory body. The designated role of UTI was to set up a

Mutual Fund. UTIs first scheme, called. In 1987 the other public sector institutions set up their MutualFunds. In 1992, government allowed the private sector players to set-up their funds. In 1994 the foreign

Mutual Funds arrives in Indian market. In 2001 there is a crisis in UTI and in 2003 UTI splits up into UTI

1and UTI 2. The history of Indian Mutual Fund industry can be explained easily by various phases:-

Benefits of Investing in Mutual Funds

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.

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 moneythan you can do on your own.

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.


3/37

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.

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.

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.

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.

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 andconvenience.

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.

Choice of Schemes: -

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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.


4/37

Disadvantages of Investing Mutual Funds:-

Professional Management: -

Some funds doesnt perform in neither the market, as their management is not dynamic enough to

explore the available opportunity in the market, thus many investors debate over whether or not the so-

called professionals are any better than mutual fund or investor himself, for picking up stocks.

Costs:

The biggest source of AMC income is generally from the entry & exit load which they

charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost

under layers of jargon.

Dilution:

Because funds have small holdings across different companies, high returns from a few

investments often don't make much difference on the overall return. Dilution is also the result of asuccessful fund getting too big. When money pours into funds that have had strong success, the manager

often has trouble finding a good investment for all the new money.

Taxes: -

When making decisions about your money, fund managers don't consider your personal tax

situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, 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.


5/37

Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its objective:-

By Structure:-

Open-ended 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-ended Funds:-

A closed-end fund has a stipulated maturity period which generally ranging from3 to 15 years. The fund is open for subscription only 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 provided 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.

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.

Load Funds:-

A Load Fund is one that charges a commission for entry or exit. That is, each time you

buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1%

to 2%. It could be worth paying the load, if the fund has a good performance history.


6/37

No-Load Funds:-

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no

commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the

entire corpus is put to work.

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 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, provided the capital asset has been sold

prior to April 1, 2000 and the amount is invested before September 30, 2000.


7/37

Various types of Mutual Funds:

Equity Funds: -

Equity funds are considered to be the more risky funds as compared to other fund types,

but they also provide higher returns than other funds. It is advisable that an investor looking to invest in

an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity

funds each falling into different risk bracket. In the order of decreasing risk level, there are following

types of equity funds:-


8/37

AGGRESSIVE GROWTH FUNDS:-

In Aggressive Growth Funds, fund managers aspire for maximum capital

appreciation and invest in less researched shares of speculative nature. Because of these speculative

investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other

equity funds.

GROWTH FUNDS: -

Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are

different from Aggressive Growth Funds in the sense that they invest in companies that are expected to

outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds

invest in those companies that are expected to post above average earnings in the future.

SPECIALTY FUNDS: -

Specialty Funds have stated criteria for investments and their portfolio comprises of only those

companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in

particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than

diversified funds. There are following types of specialty funds:

Sector Funds:-

Equity funds that invest in a particular sector/industry of the market are known as Sector Funds.The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking,

Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds

that invest in multiple sectors.

Foreign Securities Funds:-

Foreign Securities Equity Funds have the option to invest in one or more foreign companies.

Foreign securities funds achieve international diversification and hence they are less risky than sector

funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

Mid-Cap or Small-Cap Funds:-

Funds that invest in companies having lower market capitalization than large capitalization

companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less

than that of big, blue chip companies (less than Rs. 2500 crore but more than Rs. 500 crore) and Small-

Cap companies have market capitalization of less than Rs. 500 crore. Market Capitalization of a company

can be calculated by multiplying the market price of the company's share by the total number of its

outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of


9/37

Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently,

investment gets risky.

Option Income Funds:-

While not yet available in India, Option Income Funds write options on a large fraction oftheir portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a

risky instrument. These funds invest in big, high dividend yielding companies, and then sell options

against their stock positions, which generate stable income for investors.

DIVERSIFIED EQUITY FUNDS: -

Except for a small portion of investment in liquid money market, diversified equity funds

invest mainly in equities without any concentration on a particular sector(s). These funds are well

diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified

equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India

is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by

ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxableincome (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and

in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay

income tax on such income(s) for which he may have received any tax exemption(s) in the past.

Equity Index Funds: -

Equity Index Funds have the objective to match the performance of a specific stock market

index. The portfolio of these funds comprises of the same companies that form the index and is

constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P

CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like

BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

VALUE FUNDS:-

Value Funds invest in those companies that have sound fundamentals and whose share prices

are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price

to Earnings Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value

(Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed

to lower risk level as compared to growth funds or specialty funds. Value stocks are generally from

cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term.

Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term,

to a large extent, is reduced.

EQUITY INCOME OR DIVIDEND YIELD FUNDS: -

The objective of Equity Income or Dividend Yield Equity Funds is to generate high

recurring income and steady capital appreciation for investors by investing in those companies which

issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively


10/37

lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally

exposed to the lowest risk level as compared to other equity funds.

DEBT / INCOME FUNDS:-

Funds that invest in medium to long-term debt instruments issued by private companies,

banks, financial institutions, governments and other entities belonging to various sectors (like

infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds

that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure

regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors.

Although debt securities are generally less risky than equities, they are subject to credit risk (risk of

default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt

funds usually invest in securities from issuers who are rated by credit rating agencies and are considered

to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different

investment objectives, there can be following types of debt funds:-

Diversified Debt Funds: -

Debt funds that invest in all securities issued by entities belonging to all sectors of the market are

known as diversified debt funds. The best feature of diversified debt funds is that investments are

properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of

default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

Focused Debt Funds: -

Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to

investments in selective debt securities, issued by companies of a specific sector or industry or origin.

Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest

only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt

funds are more risky as compared to diversified debt funds. Although not yet available in India, these

funds are conceivable and may be offered to investors very soon.

High Yield Debt funds: -

As we now understand that risk of default is present in all debt funds, and therefore, debt funds

generally try to minimize the risk of default by investing in securities issued by only those borrowers who

are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and

prefer securities issued by those issuers who are considered to be of "below investment grade". The

motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers.


11/37

These funds are more volatile and bear higher default risk, although they may earn at times higher returns

for investors.

Assured Return Funds: -

Although it is not necessary that a fund will meet its objectives or provide assured returns to

investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to

investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset

Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-

risk investment opportunity. However, the security of investments depends upon the net worth of the

guarantor (whose name is specified in advance on the offer document). To safeguard the interests of

investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate

net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e.

Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not ableto fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and

took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes

to investors, though possible.

Fixed Term Plan Series: -

Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of

less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike

closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in

debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to

gratify investors by generating some expected returns in a short period.

GILT FUNDS:-

Also known as Government Securities in India, Gilt Funds invest in government papers (named

dated securities) having medium to long term maturity period. Issued by the Government of India, these

investments have little credit risk (risk of default) and provide safety of principal to the investors.

However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of

debt securities are inversely related and any change in the interest rates results in a change in the NAV of

debt/gilt funds in an opposite direction.

MONEY MARKET / LIQUID FUNDS:-

Money market / liquid funds invest in short-term (maturing within one year) interest

bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making

money market / liquid funds the safest investment option when compared with other mutual fund types.


12/37

However, even money market / liquid funds are exposed to the interest rate risk. The typical investment

options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by

companies) and Certificates of Deposit (issued by banks).

HYBRID FUNDS:-

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of

equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in

their portfolio. There are following types of hybrid funds in India:

Balanced Funds: -

The portfolio of balanced funds includes assets like debt securities, convertiblesecurities, and equity and preference shares held in a relatively equal proportion. The objectives of

balanced funds are to reward investors with a regular income, moderate capital appreciation and at the

same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative

investors having a long term investment horizon.

Growth-and-Income Funds: -

Funds that combine features of growth funds and income funds are known as Growth-and-

Income Funds. These funds invest in companies having potential for capital appreciation and those known

for issuing high dividends. The level of risks involved in these funds is lower than growth funds and

higher than income funds.

ASSET ALLOCATION FUNDS: -

Mutual funds may invest in financial assets like equity, debt, money market or non-financial

(physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation

strategy that allows fund managers to switch over from one asset class to another at any time depending

upon their outlook for specific markets. In other words, fund managers may switch over to equity if they

expect equity market to provide good returns and switch over to debt if they expect debt market to

provide better returns. It should be noted that switching over from one asset class to another is a decision

taken by the fund manager on the basis of his own judgment and understanding of specific markets, and

therefore, the success of these funds depends upon the skill of a fund manager in anticipating markettrends.

COMMODITY FUNDS:-

Those funds that focus on investing in different commodities (like metals, food grains, crude

oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A


13/37

commodity fund that invests in a single commodity or a group of commodities is a specialized

commodity fund and a commodity fund that invests in all available commodities is a diversified

commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold

Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity

funds.

REAL ESTATE FUNDS:-

Funds that invest directly in real estate or lend to real estate developers or invest in

shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The

objective of these funds may be to generate regular income for investors or capital appreciation.

EXCHANGE TRADED FUNDS (ETF):-

Exchange Traded Funds provide investors with combined benefits of a closed-end and an

open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stockexchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that

they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same

time. Recently introduced in India, these funds are quite popular abroad.

FUND OF FUNDS:-

Mutual funds that do not invest in financial or physical assets, but do invest in other Mutual

Fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a

portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain

a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds

provide investors with an added advantage of diversifying into different mutual fund schemes with even asmall amount of investment, which further helps in diversification of risks. However, the expenses of

Fund of Funds are quite high on account of compounding expenses of investments into different mutual

fund schemes.

FUND STRUCTURE AND CONSTITUENTS:-

Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC .Sponsor is

the promoter of the fund. Sponsor creates the AMC and the trustee company and appoints the Boards of

both these companies, with SEBI approval. A mutual fund is constituted as a Trust. A trust deed is signed

by trustees and registered under the Indian Trust Act. The mutual fund is formed as trust in India, and

supervised by the Board of Trustees. The trustees appoint the asset management company (AMC) to

actually manage the investors money. The AMCs capital is contributed by the sponsor. The AMC is the

business face of the mutual fund. Investors money is held in the Trust (the mutual fund). The AMC gets

a fee for managing the funds, according to the mandate of the investors. The trustees make sure that the

funds are managed according to the investors mandate. Sponsor should have atleast 5-year track record

in the financial services business and should have made profit in atleast 3 out of the 5 years. Sponsor

should contribute atleast 40% of the capital of the AMC. Trustees are appointed by the sponsor with SEBI

approval. Atleast 50% of trustees should be independent. Atleast 50% of the AMCs Board should be of


14/37

independent members. An AMC cannot engage in any business other than portfolio advisory and

management. An AMC of one fund cannot be Trustee of another fund.AMC should have a net worth of at

least Rs. 10 crore at all times. AMC should be registered with SEBI AMC signs an investment

management agreement with the trustees. Trustee Company and AMC are usually private limited

companies. Trustees oversee the AMC and seek regular reports and information from them. Trustees are

required to meet atleast 4 times a year to review the AMC the investors funds and the investments areheld by the custodian. Sponsor and the custodian cannot be the same entity. R&T agents manage the sale

and repurchase of units and keep the unit holder accounts. If the schemes of one fund are taken over by

another fund, it is called as scheme take over. This requires SEBI and trustee approval. If two AMCs

merge, the stakes of sponsors changes and the schemes of both funds come together. High court, SEBI

and Trustee approval needed. If one AMC or sponsor buys out the entire stake of another sponsor in an

AMC, there is a takeover of AMC. The sponsor, who has sold out, exits the AMC. This needs high court

approval as well as SEBI and Trustee approval. Investors can choose to exit at NAV if they do not

approve of the transfer. They have a right to be informed. No approval is required, in the case of open-

ended funds. For close-ended funds the investor approval is required for all cases of merger and takes

over.


15/37

EQUITY SHARES

ABOUT SHARES:-

At the most basic level, stock (often referred to as shares) is ownership, or equity, in a company. Investors

buy stock in the form of shares, which represent a portion of a company's assets (capital) and earnings

(dividends).

As a shareholder, the extent of your ownership (your stake) in a company depends on the number of

shares you own in relation to the total number of shares available For example, if you buy 1000 shares of

stock in a company that has issued a total of 100,000 shares, you own one per cent of the company.

While one per cent seems like a small holding, very few private investors are able to accumulate a

shareholding of that size in publicly quoted companies, many of which have a market value running into

billions of pounds. Your stake may authorize you to vote at the company's annual general meeting, where

shareholders usually receive one vote per share.

In theory, every stockholder, no matter how small their stake, can exercise some influence over company

management at the annual general meeting. In reality, however, most private investors' stakes are

insignificant. Management policy is far more likely to be influenced by the votes of large institutional

investors such as pension funds.

a) STOCKS SYMBOLS:-

A stock symbol, or 'Epic' symbol, is the standard abbreviation of a stock's name. You can find stock

symbols wherever stock performance information is published - for example, newspaper stock listings

and investment websites. Company names also have abbreviations called ticker symbols. However, it's

worth remembering that these may vary at the different exchanges where the company is quoted.

b) PERFORMANCE INDICATORS:-

Here is a list of the standard performance indicators

Performance Indicator Definition


16/37

Closing price The last price at which the stock was bought or sold

High and low The highest and lowest price of the stock from the previous trading day

52 week range The highest and lowest price over the previous 52 weeks

Volume The amount of shares traded during the previous trading day High and low

Net change The difference between the closing price on the last trading day and the

closing price on the trading day prior to the last

THE STOCK EXCHANGES:-

A marketplace in which to buy or sell something makes life a lot easier.

The same applies to stocks. A stock exchange is an organization that provides a marketplace in which

investors and borrowers trade stocks. Firstly, the stock exchange is a market for issuers who want to raise

equity capital by selling shares to investors in an Initial Public Offering (IPO). The stock exchange is also

a market for investors who can buy and sell shares at any time.

a) Trading shares on the stock exchange:

As an investor in the INDIA, you can't buy or sell shares on a stock exchange yourself. You need to place

your order with a stock exchange member firm (a stockbroker) who will then execute the order on your

behalf. The NSE AND BSE are the leading stock exchange in the INDIA. Trading is done through

computerized systems.

b) The trading process:-

If you decide to buy or sell your shares, you need to contact a stockbroker who will buy or sell the shares

on your behalf. After receiving your order, the stockbroker will input the order on the SETS or SEAQ

system to match your order with that of another buyer or seller. Details of the trade are transmitted

electronically to the stockbroker who is responsible for settling the trade. You will then receive

confirmation of the deal.

c) Types of shares available on the stock exchange:-

You cannot trade all stocks on the stock exchange. To be listed on a stock exchange, a stock must meet

the listing requirements laid down by that exchange in its approval process. Each exchange has its own

listing requirements, and some exchanges are more particular than others. It is possible for a stock to be

listed on more than one exchange. This is known as a dual listing.


17/37

Insurance

People need insurance in the first place.An insurance policy is primarily meant to protect the income of

the familys breadearners. The idea is if any one or both die their dependents continue to live

comfortably.The circle of life begins at birth follower by education , marraige and eventually after a

lifetime of work we look forward to life of retirement . Our finances too tend to change as we go through

the various phases of life. In the first twenty of our life, we are financially and emotionally dependents on

our parents and their are no financial committments to be met.In the next twenty years we gain financial

independence and provide financial independence to our families. This is also the stage when our income

may be unable to meet the growing expenses of a young household. In the next twenty as we see ourinvestments grow after our children grow and become financially independent. Insurance is a provision

for the distribution of risks that is to say it is a financial provision against loss from unavoidable disasters.

The protection which it affords takes form of a gurantee to indemnify the insured if certain specified

losses occur. The principle of insurance so far as the undertaking of the obligation is concerned is that for

the payment of a certain sum the gurantee will be given to reimburse the insured. The insurer in accepting

the risks so distributes them that the total of all the amounts is paid for this insurance protection will be

sufficient to meet the losses that occur. Insurance then provide divided responsibilty. This principle is

introduced in most stores where a division is made between the sales clerk and the cashiers department

the arrangement dividing the risks of loss. The insurance principle is similarly applied in any other cases

of divided responsibilty. As a business however insurance is usually recognized as some form of securing

a promise of indemnity by the payment of premium and the fulfillment of certain other stipulations


18/37

Types of insurance

Term insurance plans

Term insurance is the cheapest form of life insurance available. Since a term insurance contract only pays

in the event of eventuality the life cover comes at low premium rates . Term insurance is a usefu tool to

purchase against risk of early death and protection of an asset.

Endowment plans

Endowment plans are savins and protection plans that provide a dual benifit of protection as well assavings. Endowment plans pay a death benifit in the event of an eventuality should the customer survive

the benifit period a maturity benifit is paid to the life insured.

Whole of life plans

A whole of life plan provides life insurance cover to an individua upto a specified age . A whole of life

plan is suitable for an individual who is looking for an extended life insurance cover and /or wants to pay

premium over as long as tenure as possible to reduce the amount of upfront premium payment.

Pension plans

Pension plans allow an individual to save in a tax deffered manner. An individual can either contributethrough regular premiums or make a single premium investments. Savings accumulate over the deferment

period. Once the contract reaches the vesting age , the individual has the option of choosing an annuity

plan from a life insurance company. An annuity is paid till the life the lifetime of the insured or a pre-

determined period depending upon the annuity option chosen by the life insured.

Unit Linked Insurance Plans

Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk

protection and flexibility in investment. The investment is denoted as units and is represented by the value

that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the

value of the underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk

cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a

Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors

have the option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt


19/37

funds etc. It is important to remember that in a ULIP, the investment risk is generally borne by the

investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium

payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter

the premium amounts during the policy's tenure. For example, if an individual has surplus funds, he canenhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option

of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP

investors can shift their investments across various plans/asset classes (diversified equity funds, balanced

funds, debt funds) either at a nominal or no cost.

Expenses Charged in a ULIP

Premium Allocation Charge:

A percentage of the premium is appropriated towards charges initial and renewal expenses apart fromcommission expenses before allocating the units under the policy.

Mortality Charges:

These are charges for the cost of insurance coverage and depend on number of factors such as age,

amount of coverage, state of health etc.

Fund Management Fees:

Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:

This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:

Deducted for premature partial or full encashment of units.

Fund Switching Charge:

Usually a limited number of fund switches are allowed each year without charge, with subsequent

switches, subject to a charge.

Service Tax Deductions:

Service tax is deducted from the risk portion of the premium.


20/37

GOVERNMENT SECURITIES

Government securities(G-secs) are sovereign securities which are issued by the Reserve Bank of India on

behalf of Government of India,in lieu of the Central Government's market borrowing programme.

The term Government Securities includes:

Central Government Securities.

State Government Securities

Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit'.The market borrowing of the Central

Government is raised through the issue of dated securities and 364 days treasury bills either by auction or

by floatation of loans.

In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches

of the Government. These do not form part of the borrowing programme of the Central Government

Types of Government Securities

Government Securities are of the following types:-

Dated Securities : are generally fixed maturity and fixed coupon securities usually carrying semi-

annual coupon. These are called dated securities because these are identified by their date of maturity and

the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a

coupon of 11.03% payable half yearly. The key features of these securities are:

They are issued at face value.

Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption

of the security.

The tenor of the security is also fixed.

Interest /Coupon payment is made on a half yearly basis on its face value.

The security is redeemed at par (face value) on its maturity date.


21/37

Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were

issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96

respectively. The key features of these securities are:

They are issued at a discount to the face value.

The tenor of the security is fixed.

The securities do not carry any coupon or interest rate. The difference between the issue price

(discounted price) and face value is the return on this security.


Partly Paid Stockis stock where payment of principal amount is made in installments over a given

time frame. It meets the needs of investors with regular flow of funds and the need of Government when

it does not need funds immediately. The first issue of such stock of eight year maturity was made on

November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. The

key features of these securities are:

They are issued at face value, but this amount is paid in installments over a specified

period.

Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption

of the security.




Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark

rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate

payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed

by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which

is benchmarked against average yield on 364 Days Treasury Bills for last six months. The coupon is

reset every six months. The key features of these securities are:


Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the

time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc.

Though the benchmark does not change, the rate of interest may vary according to the


22/37

change in the benchmark rate till redemption of the security.




Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a

bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of

6.72%. However the bond has call and put option after five years i.e. in year 2007. In other words it

means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy

back (call option) bond from holder in 2007. This bond has been priced in line with 5 year bonds.

Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale price

index. These provide investors with an effective hedge against inflation. These bonds were floated on

December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the

wholesale price index. The principal redemption is linked to the Wholesale Price Index. The key features

of these securities are:


Coupon or interest rate is fixed as a percentage over the wholesale price index at the time

of issuance. Therefore the actual amount of interest paid varies according to the change in

the Wholesale Price Index.

The tenor of the security is fixed.


The principal redemption is linked to the Wholesale Price Index.

Features of Government Securities

Nomenclature

The coupon rate and year of maturity identifies the government security.

Example: 12.25% GOI 2008 indicates the following:

12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, 2008 is the year of

maturity.

EligibilityAll entities registered in India like banks, financial institutions, Primary Dealers, firms, companies,

corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State

Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals

are eligible to purchase Government Securities.

Availability

Government securities are highly liquid instruments available both in the primary and secondary market.


23/37

They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary Dealer in the

government securities market, and is actively involved in the trading of government securities.

Forms of Issuance of Government Securities

Banks, Primary Dealers and Financial Institutions have been allowed to hold these

securities with the Public Debt Office of Reserve Bank of India in dematerialized form in

accounts known as Subsidiary General Ledger (SGL) Accounts.

Entities having a Gilt Account with Banks or Primary Dealers can hold these securities

with them in dematerialized form.

In addition government securities can also be held in dematerialized form in demat accounts

maintained with the Depository Participants of NSDL.

Minimum Amount

In terms of RBI regulations, government dated securities can be purchased for a minimum amount of Rs.10,000/-only.Treasury bills can be purchased for a minimum amount of Rs 25000/- only and in multiples

thereof. State Government Securities can be purchased for a minimum amount of Rs 1,000/- only.

Repayment

Government securities are repaid at par on the expiry of their tenor. The different repayment methods are

as follows :

For SGL account holders, the maturity proceeds would be credited to their current accounts

with the Reserve Bank of India.

For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity proceeds

and they would pay the Gilt Account Holders.

For entities having a demat acount with NSDL,the maturity proceeds would be collected by

their DP's and they in turn would pay the demat Account Holders.

Day Count

For government dated securities and state government securities the day count is taken as 360 days for a

year and 30 days for every completed month. However for Treasury bills it is 365 days for a year.

Example : A client purchases 7.40% GOI 2012 for face value of Rs. 10 lacs.@ Rs.101.80, i.e. theclient pays Rs.101.80 for every unit of government security having a face value of Rs. 100/- The

settlement is due on October 3, 2002. What is the amount to be paid by the client?

The security is 7.40% GOI 2012 for which the interest payment dates are 3rd May, and 3rd November

every year.


24/37

The last interest payment date for the current year is 3rd May 2002. The calculation would be made as

follows:

Face value of Rs. 10 lacs.@ Rs.101.80%.

Therefore the principal amount payable is Rs.10 lacs X 101.80% =10,18,000

Last interest payment date was May 3, 2002 and settlement date is October 3, 2002. Therefore the interest

has to be paid for 150 days (including 3rd May, and excluding October 3, 2002)

(28 days of May, including 3rd May, up to 30th May + 30 days of June, July, August and September + 2

days of October). Since the settlement is on October 3, 2002, that date is excluded.

Interest payable = 10 lacs X 7.40% X 150 = Rs. 30833.33.

360 X 100

Total amount payable by client =10,18,000+30833.33=Rs. 10,48,833.33

Benefits of Investing in Government Securities

No tax deducted at source

Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals

Qualifies for SLR purpose

Zero default risk being sovereign paper

Highly liquid.

Transparency in transactions and simplified settlement procedures through CSGL/NSDL

Methods of Issuance of Government Securities

Government securities are issued by various methods, which are as follows:

Auctions:

Auctions for government securities are either yield based or price based.

In an yield based auction, the Reserve Bank of India announces the issue size(or notified

amount) and the tenor of the paper to be auctioned. The bidders submit bids in terms of the

yield at which they are ready to buy the security.

In a price based auction, the Reserve Bank of India announces the issue size(or notified

amount), the tenor of the paper to be auctioned, as well as the coupon rate. The bidders

submit bids in terms of the price. This method of auction is normally used in case of reissue

of existing government securities.

The basic features of the auctions are given below:


25/37

Method of auction: There are two methods of auction which are followed-

Uniform price Based or Dutch Auction procedure is used in auctions of dated government

securities. The bids are accepted at the same prices as decided in the cut off.

Multiple/variable Price Based or French Auction procedure is used in auctions of Governmentdated securities and treasury bills. Bids are accepted at different prices / yields quoted in the

individual bids.

Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at the

time of auction.

Cut off yield: is the rate at which bids are accepted. Bids at yields higher than the cut-off

yield is rejected and those lower than the cut-off are accepted. The cut-off yield is set as the

coupon rate for the security. Bidders who have bid at lower than the cut-off yield pay a

premium on the security, since the auction is a multiple price auction.

Cut off price: It is the minimum price accepted for the security. Bids at prices lower than

the cut-off are rejected and at higher than the cut-off are accepted. Coupon rate for the

security remains unchanged. Bidders who have bid at higher than the cut-off price pay a

premium on the security, thereby getting a lower yield. Price based auctions lead to finer

price discovery than yield based auctions.

Notified amount: The amount of security to be issued is notified prior to the auction

date, for information of the public.

The Reserve Bank of India (RBI) may participate as a non-competitor in the auctions. The

unsubscribed portion devolves on RBI or on the Primary Dealers if the auction has been

underwritten by PDs. The devolvement is at the cut-off price/yield.

Underwriting in Auctions

For the purpose of auctions, bids are invited from the Primary Dealers one day before the

auction wherein they indicate the amount to be underwritten by them and the underwriting

fee expected by them.

The auction committee of Reserve Bank of India examines the bids and based on the

market conditions, takes a decision in respect of the amount to be underwritten and the fee

to be paid to the underwriters.

Underwriting fee is paid at the rates bid by PDs , for the underwriting which has been

accepted.

In case of the auction being fully subscribed, the underwriters do not have to subscribe to

the issue necessarily unless they have bid for it.

If there is a devolvement, the successful bids put in by the Primary Dealers are set-off against the


26/37

amount underwritten by them while deciding the amount of devolvement.

On-tap issue

This is a reissue of existing Government securities having pre-determined yields/prices by Reserve Bank

of India. After the initial primary auction of a security, the issue remains open to further subscription by

the investors as and when considered appropriate by RBI. The period for which the issue is kept open

may be time specific or volume specific. The coupon rate, the interest dates and the date of maturity

remain the same as determined in the initial primary auction. Reserve Bank of India may sell government

securities through on tap issue at lower or higher prices than the prevailing market prices. Such an action

on the part of the Reserve Bank of India leads to a realignment of the market prices of government

securities. Tap stock provides an opportunity to unsuccessful bidders in auctions to acquire the security at

the market determined rate.

Fixed coupon issue

Government Securities may also be issued for a notified amount at a fixed coupon. Most State

Development Loans or State Government Securities are issued on this basis.

Private Placement

The Central Government may also privately place government securities with Reserve Bank of India.

This is usually done when the Ways and Means Advance (WMA) is near the sanctioned limit and the

market conditions are not conducive to an issue. The issue is priced at market related yields. Reserve

Bank of India may later offload these securities to the market through Open Market Operations (OMO).

After having auctioned a loan whereby the coupon rate has been arrived at and if still the government

feels the need for funds for similar tenure, it may privately place an amount with the Reserve Bank of

India. RBI in turn may decide upon further selling of the security so purchased under the Open MarketOperations window albeit at a different yield.

Open Market Operations (OMO)

Government securities that are privately placed with the Reserve Bank of India are sold in the market

through open market operations of the Reserve Bank of India. The yield at which these securities are sold

may differ from the yield at which they were privately placed with Reserve Bank of India. Open market

operations are used by the Reserve Bank of India to infuse or suck liquidity from the system. Whenever

the Reserve Bank of India wishes to infuse the liquidity in the system, it purchases government securities

from the market, and whenever it wishes to suck out the liquidity from the system, it sells government

securities in the market.

National Savings Certificate

National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that

combines adequate returns with high safety. NSCs are an instrument for facilitating long-term savings. A

large chunk of middle class families use NSCs for saving on their tax, getting double benefits. They not

only save tax on their hard-earned income but also make an investment which are sure to give good and

safe returns.


27/37

How to Invest

National Savings Certificates are available at all post-offices. The application can be made either in

person or through an agent. Post office agents are active in nooks and corners of the country. Following

types of NSC are issued:

Single Holder Type Certificate: This can be issued to: (a) An adult for himself or on behalf of a minor

(b) A Trust.

Joint 'A' Type Certificate: Issued jointly to two adults payable to both holders jointly or to the survivor.

Joint 'B' Type Certificate: Issued jointly to two adults payable to either of the holders or to the survivor.

Who can Invest

An adult in his own name or on behalf of a minor

A trust

Two adults jointly

Denomiations and Limit

National Savings Certificates are available in the denominations of Rs. 100 Rs 500, Rs. 1000, Rs. 5000, &

Rs. 10,000. There is no maximum limit on the purchase of the certificates. So it is for you to decide how

much you want to put in the NSCs. This is of course a huge benefit for you can decide as much as your

budget allows.

Maturity

Period of maturity of a certificate is six years. Presently interest paid is 8 % per annum half yearly

compounded. Maturity value of a certificate of any other denomination is at proportionate rate. Premature

encashment of the certificate is not permissible except at a discount in the case of death of the holder(s),

forfeiture by a pledgee and when ordered by a court of law.

Tax Benefits

Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested.

Income Tax rebate is available on the amount invested and interest accruing under Section 88 of Income

Tax Act, as amended from time to time.

Income tax relief is also available on the interest earned as per limits fixed vide section 80L of IncomeTax, as amended from time to time.


28/37

Public Provident Fund

Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves as

a retirement planning tool for many of those who do not have any structured pension plan covering them.

The balances in PPF account cannot be attached by any authority normally.

How to Open Account

Public Provident Fund account can be opened at designated post offices throughout the country and at

designated branches of Public Sector Banks throughout the country.

Who can Open Account

The account can be opened by an individual in his own name, on behalf of a minor of whom he is a

guardian.

Tabs on Investment

Minimum deposit required in a PPF account is Rs. 500 in a financial year. Maximum deposit limit is Rs.

70,000 in a financial year. Maximum number of deposits is twelve in a financial year.

Maturity

The maturity period of the account is 15 years.

Rate of interest is 8% compounded annually.

One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.

The amount of deposit can be varied to suit the convenience of the account holders.

The account holder can retain the account after maturity for any period without making any further

deposits. In this case the account will continue to earn interest at normal rate as admissible till the account

is closed.

The account holder also has an option to extend the PPF account for any period in a block of 5 years at

each time, after the maturity period of 15 years.

Lapse in Deposits

If deposits are not made in a PPF account in any financial year, the account will be treated as

discontinued. The discontinued account can be activated by payment of the minimum deposit of Rs.500/-

with default fee of Rs.50/- for each defaulted year.

Premature Closure or Withdrawl

Premature closure of a PPF Account is not permissible except in case of death. Nominee/legal heir of PPF

Account holder cannot continue the account after the death.

Premature withdrawal is permissible in the 7th year of the account subject, to a limit of 50% of the

amount at credit preceding three year balance. Thereafter one withdrawal in every year is permissible.


29/37

Account Transfer

The Account is transferable from one post Office / bank to another and from post Office to bank or from a

bank to a post office.

Tax Benefits

Deposits in PPF are eligible for rebate under section 80-C of Income Tax Act.

The interest on deposits is totally tax free.

Deposits are exempt from wealth tax.


30/37

BONDS

A bond is a debtsecurity, in which the authorized issuer owes the holders a debt and, depending on the

terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date,

termed maturity. It is a formal contract to repay borrowed money with interest at fixed intervals.[1]

Thus a bond is like a loan: the issueris the borrower, the bond holderis the lender, and the coupon is the

interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case

of government bonds, to finance current expenditure. Certificates of deposit (CDs) orcommercial

paperare considered to be money market instruments and not bonds. Bonds must be repaid at fixed

intervals over a period of time

Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the

primary markets. The most common process of issuing bonds is through underwriting. In underwriting,

one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer

and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to endinvestors. However government bonds are instead typically auction. The most important features of a

bond are:

Nominal, principal or face amount the amount on which the issuer pays interest, and which has to be

repaid at the end.

Issue price The price at which investors buy the bonds when they are first issued, which will typically

be approximately equal to the nominal amount. The net proceeds that the issuer receives are thus the issue

price, less issuance fees.

Maturity date The date on which the issuer has to repay the nominal amount. As long as all payments

have been made, the issuer has no more obligations to the bond holders after the maturity date. The lengthof time until the maturity date is often referred to as the term or tenor or maturity of a bond. The maturity

can be any length of time, although debt securities with a term of less than one year are generally

designated money market instruments rather than bonds. Most bonds have a term of up to thirty years.

Some bonds have been issued with maturities of up to one hundred years, and some even do not mature at

all. In early 2005, a market developed in euros for bonds with a maturity of fifty years. In the market for

U.S. Treasury securities, there are three groups of bond maturities:

short term (bills): maturities up to one year;

medium term (notes): maturities between one and ten years;

long term (bonds): maturities greater than ten years.

Coupon The interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout

the life of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more

exotic. The name coupon originates from the fact that in the past, physical bonds were issued which had

coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange

for the interest payment.
http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Maturity_(finance)


31/37

The quality of the issue, which influences the probability that the bondholders will receive the amounts

promised, at the due dates. This will depend on a whole range of factors.

Indentures and Covenants An indentureis a formal debt agreement that establishes the terms of a

bond issue, while covenants are the clauses of such an agreement. Covenants specify the rights of

bondholders and the duties of issuers, such as actions that the issuer is obligated to perform or is

prohibited from performing. In the U.S., federal and state securities and commercial laws apply to the

enforcement of these agreements, which are construed by courts as contracts between issuers and

bondholders. The terms may be changed only with great difficulty while the bonds are outstanding, with

amendments to the governing document generally requiring approval by a majority (or super-majority)

vote of the bondholders.

High yield bonds are bonds that are rated below investment grade by the credit rating agencies. As these

bonds are more risky than investment grade bonds, investors expect to earn a higher yield. These bonds

are also calledjunk bonds.

coupon dates the dates on which the issuer pays the coupon to the bond holders. In the U.S. and also in

the U.K. and Europe, most bonds are semi-annual, which means that they pay a coupon every six months.

Optionality: Occasionally a bond may contain an embedded option; that is, it grants option-likefeatures

to the holder or the issuer:

Callability Some bonds give the issuer the right to repay the bond before the maturity date on thecall

dates; see call option. These bonds are referred to ascallable bonds. Most callable bonds allow the issuer

to repay the bond atpar. With some bonds, the issuer has to pay a premium, the so called call premium.

This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its

operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.

Putability Some bonds give the holder the right to force the issuer to repay the bond before the

maturity date on the put dates; seeput option. (Note: "Putable" denotes an embedded put option;

"Puttable" denotes that it may beputted.)

call dates and put datesthe dates on which callable and putable bonds can be redeemed early. There are

four main categories.

A Bermudan callable has several call dates, usually coinciding with coupon dates.

A European callable has only one call date. This is a special case of a Bermudan callable.

An American callable can be called at any time until the maturity date.

A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate

of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal

incapacitation. Also known as a "survivor's option".
http://en.wikipedia.org/wiki/Indenturehttp://en.wikipedia.org/wiki/Indenturehttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Callable_bondshttp://en.wikipedia.org/wiki/Callable_bondshttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/w/index.php?title=Call_premium&action=edit&redlink=1http://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Putthttp://en.wikipedia.org/wiki/Option_stylehttp://en.wikipedia.org/wiki/Indenturehttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Call_dates&action=edit&redlink=1http://en.wikipedia.org/wiki/Call_optionhttp://en.wikipedia.org/wiki/Callable_bondshttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/w/index.php?title=Call_premium&action=edit&redlink=1http://en.wikipedia.org/wiki/Put_optionhttp://en.wikipedia.org/wiki/Putthttp://en.wikipedia.org/wiki/Option_style


32/37

sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired

periodically. The entire bond issue can be liquidated by the maturity date. If that is not the case, then the

remainder is called balloon maturity. Issuers may either pay to trustees, which in turn call randomly

selected bonds in the issue, or, alternatively, purchase bonds in open market, then return them to trustees.

convertible bondlets a bondholder exchange a bond to a number of shares of the issuer's common stock.

exchangeable bond allows for exchange to shares of a corporation other than the issuer.

Fixed rate bondshave a coupon that remains constant throughout the life of the bond.

Floating rate notes (FRNs) have a coupon that is linked to an index. Common indices include:money

market indices, such as LIBORorEuribor, and CPI (the Consumer Price Index). Coupon examples: three

month USD LIBOR + 0.20%, or twelve month CPI + 1.50%. FRN coupons reset periodically, typically

every one or three months. In theory, any Index could be used as the basis for the coupon of an FRN, so

long as the issuer and the buyer can agree to terms.

Zero-coupon bonds don't pay any interest. They are issued at a substantial discount topar value. The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds are

Series E savings bonds issued by the U.S. government.Zero-coupon bondsmay be created from fixed

rate bonds by a financial institutions separating "stripping off" the coupons from the principal. In other

words, the separated coupons and the final principal payment of the bond are allowed to trade

independently. See IO (Interest Only) and PO (Principal Only).

Inflation linked bonds, in which the principal amount and the interest payments are indexed to inflation.

The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position

briefly reversed itself for short-term UK bonds in December 2008). However, as the principal amount

grows, the payments increase with inflation. The government of the United Kingdom was the first to issue

inflation linked Gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bondsareexamples of inflation linked bonds issued by the U.S. government.

Other indexed bonds, for example equity-linked notesand bonds indexed on a business indicator (income,

added value) or on a country's GDP.

Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash

flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBS's),

collateralized mortgage obligations (CMOs) and collateralized debt obligations(CDOs).

Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of

liquidation. In case of bankruptcy, there is a hierarchy of creditors. First theliquidatoris paid, then

government taxes, etc. The first bond holders in line to be paid are those holding what is called senior

bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher.

Therefore, subordinated bonds usually have a lower credit rating than senior bonds. The main examples

of subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The latter are

often issued in tranches. The senior tranches get paid back first, the subordinated tranches later.
http://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Exchangeable_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Euriborhttp://en.wikipedia.org/wiki/Euriborhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bondhttp://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Giltshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Subordinated_bondshttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Convertible_bondhttp://en.wikipedia.org/wiki/Exchangeable_bondhttp://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Money_market_indices&action=edit&redlink=1http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Euriborhttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Zero-coupon_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bondhttp://en.wikipedia.org/wiki/Government_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Giltshttp://en.wikipedia.org/wiki/Treasury_Inflation-Protected_Securitieshttp://en.wikipedia.org/wiki/Treasury_security#Series_Ihttp://en.wikipedia.org/wiki/Equity-linked_notehttp://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Mortgage-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Subordinated_bondshttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Tranches


33/37

Perpetual bonds are also often calledperpetuities. They have no maturity date. The most famous of these

are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these

were issued back in 1888 and still trade today, although the amounts are now insignificant. Some ultra

long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures

in 2361 (i.e. 24th century)) are virtually perpetuities from a financial point of view, with the current value

of principal near zero.

Bearer bond is an official certificate issued without a named holder. In other words, the person who has

the paper certificate can claim the value of the bond. Often they are registered by a number to prevent

counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen.

Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity

to conceal income or assets.[2]U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S.

Treasury stopped in 1982, and state and local tax-exempt bearer bonds were prohibited in 1983.[3]

Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or

by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon

maturity, are sent to the registered owner.

Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies.

Interest income received by holders of municipal bonds is often exemptfrom the federal income taxand

from the income tax of the state in which they are issued, although municipal bonds issued for certain

purposes may not be tax exempt.

Book-entry bond is a bond that does not have a paper certificate. As physically processing paper bonds

and interest coupons became more expensive, issuers (and banks that used to collect coupon interest for

depositors) have tried to discourage their use. Some book-entry bond issues do not offer the option of a

paper certificate, even to investors who prefer them.[4]

Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a traditional fixed

rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a

schedule. Some of these redemptions will be for a higher value than the face value of the bond.

War bond is a bond issued by a country to fund a war.

Serial bondis a bond that matures in installments over a period of time. In effect, a $100,000, 5-year

serial bond would mature in a $20,000 annuity over a 5-year interval.
http://en.wikipedia.org/wiki/Perpetual_bondshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-2http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-2http://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Tax_advantagehttp://en.wikipedia.org/wiki/Tax_advantagehttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-3http://en.wikipedia.org/wiki/Lottery_Bondhttp://en.wikipedia.org/wiki/War_bondhttp://en.wikipedia.org/wiki/Serial_bondhttp://en.wikipedia.org/wiki/Serial_bondhttp://en.wikipedia.org/wiki/Perpetual_bondshttp://en.wikipedia.org/wiki/Perpetuitieshttp://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-1http://en.wikipedia.org/wiki/Bond_(finance)#cite_note-2http://en.wikipedia.org/wiki/Bearer_bondhttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Tax_advantagehttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Bond_(finance)#cite_note-3http://en.wikipedia.org/wiki/Lottery_Bondhttp://en.wikipedia.org/wiki/War_bondhttp://en.wikipedia.org/wiki/Serial_bond


34/37

COMMODITIES

A commodity is a normal physical product used by everyday people during the course of their lives, or

metals that are used in production or as a traditional store of wealth and a hedge against inflation. For

example, these commodities include grains such as wheat, corn and rice or metals such as copper, gold

and silver. The full list of commodity markets is numerous and too detailed. The best way to trade the

commodity markets is by buying and selling futures contracts on local and international exchanges.

Trading futures is easy, and can be accessed by using the services of any full or on-line futures brokerage

service. Traditionally, there is an expectation when trading commodity futures of achieving higher returnscompared to shares or real estate, so successful investors can expect much higher returns compared to

more conventional investment products.

The process of trading commodities, as mentioned above, must be facilitated by the use of trading liquid,

exchangeable, and standardized futures contracts, as it is not practical to trade the physical commodities.

Futures contracts give the investor ease of use and the ability to buy or sell without delay. A futures

contract is used to buy or sell a fixed quantity and quality of an underlying commodity, at a fixed date and


35/37

price in the future. Futures contracts can be broken by simply offsetting the transaction. For example, if

you buy one futures contract to open then you sell one futures contract to close that market position.

The execution method of trading futures contracts is similar to trading physical shares, but futures

contracts have an expiry date and are deliverable.Futures contracts have an expiry date and need to be

occasionally rolled over from the current contract month to the following contract month.

The reason is because the biggest advantage to trading commodity futures, for the private investor is the

opportunity to legally short-sell these markets. Short-selling is the ability to sell commodity futures

creating an open position in the expectation to buy-back at a later time to profit from a fall in the market.

If you wish to trade the up-side of commodity futures, then it will simply be a buy-to-open and sell-to-

close set of transactions similar to share trading.

The commodity markets will always produce rising of falling trends, and with the abundance of

information and trading opportunities available there is no reason for any investor to exclusively trade the

share market when there is potential profits from trading commodity futures.

The increased use of commodity trading vehicles in investment management has led practitioners

to create investable commodity indices and products that offer unique performance opportunities

for investors in physical commodities. As is true for stock and bond performance, as well as investment in

managed futures and hedge fund products, commodity-based products have a

variety of uses. Besides being a source of information on cash commodity and futures

commodity market trends, they are used as performance benchmarks for evaluation of

commodity trading advisors and provide a historical track record useful in developing asset

allocation strategies. However, the investor benefits of commodity or commodity-based products

lie primarily in their ability to offer risk and return trade-offs that cannot be easily replicated

through other investment alternatives. Previous research that

direct stock and bond investment offers little evidence of providing returns consistent with direct

commodity investment. commodity-based firms may not be exposed to the risk of commodity pricemovement. Thus for investors, direct commodity investment may be the

18487104 various investment avenuesfinal

Documents