of 114
8/6/2019 Nidhi Report
1/114
A
Project Study Report
On
Training Undertaken at
Standard Chartered Bank
Titled
Study of different of investment strategy and portfolio
management
Submitted in partial fulfillment for the
Award of degree of
Master of Business Administration
Submitted By: - supervised by:-
NIDHI BANSAL RAM PRAKASH SAGWA
MBA Part __ Designation
Submitted to:- RAJASTHAN TECHNICAL UNIVERSITY, KOTA
JIET SCHOOL OF ENGINEERING AND TECHNOLOGY
FOR GIRLS
8/6/2019 Nidhi Report
2/114
Certificates of project Report
This is to certify that Ms Nidhi bansal student ofMBA IV
semester (part II) 2009-2010; has successfully conducted a
project study entitled Study of different of investment
strategy and portfolio management for the fulfillment of
MBA degree.
I have examined the project work and impressed with his
ideas and suggestions.
The work is according to University guidelines.
Mr RAM PRAKASH SAGWA
PRAFACE
8/6/2019 Nidhi Report
3/114
MBA is a stepping-stone to the management carrier and to
develop good manager it is necessary that the theoretical
must be supplemented with exposure to the realenvironment.
Theoretical knowledge just provides the base and its not
sufficient to produce a good manager thats why practical
knowledge is needed.
Therefore the research product is an essential requirement
for the student of MBA. This research project not only helps
the student to utilize his skills properly learn field realities but
also provides a chance to the organization to find out talent
among the budding managers in the very beginning.
In accordance with the requirement of MBA course have
project on the topic study of different of investment
strategy and portfolio management.
The main objective of the research project was to study the
two instruments and make a detailed comparison of the two.
For conducting the research project sample size
of 50 customers of SBIMF and SBOP was selected. The
information regarding the project research was collected
through the questionnaire formed by me which was filled by
the customers there.
Acknowledgement
8/6/2019 Nidhi Report
4/114
I express my sincere thanks to my project guide, Mr. Ram
prakash Sagwa, Deptt Finance., for guiding me right
form the inception till the successful completion of theproject. I sincerely acknowledge him/her/them for extending
their valuable guidance, support for literature, critical reviews
of project and the report and above all the moral support
he/she/they had provided to me with all stages of this
project.
I would also like to thank the supporting staff
___________________________ Department, for their help
and cooperation throughout our project.
(Signature of Student)
NIDHI BANSAL
Abstract of the Report
8/6/2019 Nidhi Report
5/114
This report contains the different investment strategies taken
by the investors (mainly small investors) and the trends of
investment in different investment instruments. Projectfocused on findings of risk tolerance of investors and the
time horizon they want to remain invested n the market. The
project extended to find out the instrument in which different
investor is now investing evaluating the projecting risk in the
instrument.
To understand the trend of the investor I have gone
through a field survey, based on investment strategy
questionnaire. The result of the survey depicts a clear
picture of current investment trend in Indian market. The
analysis shows that the age groups of 18-30 years are more
adaptable to the high risk where as the age group of 41-50
are the safe players. Annual income and the disposable
income also played a major role in the investment strategies
in the investors mind. Results reveal that most investors
first priority to invest is the Tax Savings.
The project continues with the portfolio management
of the selected respondent of the field survey. To do the
portfolio management study have been done on different
investment instrument in details, like Savings bank A/c, ULIP
(Unit Linked Insurance Policy), Mutual Funds, Stocks, Term
Deposits of Standard Chartered Bank and other different
8/6/2019 Nidhi Report
6/114
private Banks and AMCs. After the study portfolio is
prepared for the selected respondent after revisiting them for
the portfolio management discussion. The portfolio is made
on the response of the respondent in the last
Contents
8/6/2019 Nidhi Report
7/114
1. Introduction to the Industry
2. Introduction to the Organization
3. Research Methodology
3.1 Title of the Study
3.2 Duration of the Project
3.3 Objective of Study
3.4 Type of Research
3.5 Sample Size and method
selecting sample
3.6 Limitation of Study
8/6/2019 Nidhi Report
8/114
4. SWOT
5. Conclusion
6. Recommendation and Suggestions
7. Appendix
8. Bibliography
Introduction to Banking Industry
8/6/2019 Nidhi Report
9/114
The Indian banking can be broadly categorized into
Nationalized, Private Banks and Specialized banking
institutions. The Reserve Bank of India acts a centralized
body monitoring any discrepancies and shortcoming in the
system. The need to become highly customer focused has
forced the slow-moving public sector banks to adopt a fast
track approach. The unleashing of products and services
through the internet has galvanized players at all levels of
the banking and financial institutions market grid to look a
new at their existing portfolio offerings. Indian banks are now
quoting all higher valuation when compared to banks in other
Asian countries (viz. Hong Kong, Singapore, Philippines
etc.). The reasons are numerous: the economy is growing at
a rate of 8%, Bank credit is growing at 30% per annum and
there is an ever-expanding middle class of between 250 and
8/6/2019 Nidhi Report
10/114
300 million people (larger than the population of the
US) in need of financial services.
Indian markets provide growth opportunities, which
are unlikely to be matched by the mature banking markets
around the world. Some of the high growth potential areas to
be looked at are: the market for consumer finance stands
at about 2%-3% of GDP, compared with 25% in some
European markets, the real estate market in India is
growing at 30% annually and is projected to touch $ 50
billion by 2008, the retail credit is expected to cross Rs
5,70,000 crore by 2010 from the current level of Rs 1,89,000
crore in 2004-05 and huge SME sector which contributes
significantly to Indias GDP.
Banks that employ IT solutions are perceived to be
futuristic and proactive players capable of meeting the
multifarious requirements of the large customer base.
The Indian banking has come from a long way from
being a sleepy business institution to a highly proactive and
dynamic entity. This transformation has been largely
brought about by the large dose of liberalization and
economic reforms that allowed banks to explore new
business opportunities rather than generating revenues from
conventional streams. The banking in India is highly
fragmented with 30 banking units contributing to almost 50%
of deposits and 60% of advances.
Industry estimates indicate that out of 274
commercial banks operating in India, 223 banks are in the
public sectorand 51 are in the private sector. The private
sector bank grid also includes 24 foreign banks that have
8/6/2019 Nidhi Report
11/114
started their operations here. Under the ambit of the
nationalized banks come the specialized banking
institutions. These co-operatives, rural banks focus on areas
of agriculture, rural development etc.
Currently banking in India is generally fairly mature in
terms of supply, product range and reach-even though reach
in rural India still remains a challenge for the private sector
and foreign banks.
Currently, India has 88 scheduled commercial
banks (SCBs) - 28 public sector banks (that is with the
Government of India holding a stake), 29 private banks
(these do not have government stake; they may be publicly
listed and traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a
rating agency, the public sector banks hold over 75 percent
of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively
8/6/2019 Nidhi Report
12/114
Company Profile
The Background of standard chartered Bank
The Standard Bank of British South Africa founded in 1863
and the Chartered Bank of India, Australia and China,
founded in 1853. The Standard Chartered Group was
formed in 1969 through a merger of these two banks.
Both companies were keen to capitalize on the huge
expansion of trade and to earn the handsome profits to be
made from financing the movement of goods from Europe to
the East and to Africa.
The Chartered Bank
Founded by James Wilson following the grant of aRoyal Charter by Queen Victoria in 1853.
Chartered opened its first branches in Mumbai
(Bombay), Calcutta and Shanghai in 1858, followed by Hong
Kong and Singapore in 1859.
8/6/2019 Nidhi Report
13/114
8/6/2019 Nidhi Report
14/114
change. Provisions had to be made against third world debt
exposure and loans to corporations and entrepreneurs who
could not meet their commitments. Standard Chartered
began a series of divestments notably in the United States
and South Africa, and also entered into a number of asset
sales.
From the early 1990s, Standard Chartered has focused on
developing its strong franchises in Asia, the Middle East and
Africa using its operations in the United Kingdom and North
America to provide customers with a bridge between these
markets. Secondly, it would focus on consumer, corporateand institutional banking and on the provision of treasury
services - areas in which the Group had particular strength
and expertise.
In the new millennium they acquired Grind lays Bank from
the ANZ Group and the Chase Consumer Banking
operations in Hong Kong in 2000.
Since 2005, they have achieved several milestones with a
number of strategic alliances and acquisitions that will
extend our customer or geographic reach and broaden our
product range.
Principles & Values
At Standard Chartered success is built on teamwork,partnership and the diversity of the people.
At the heart of our values lie diversity and inclusion. They
are a fundamental part of our culture, and constitute a long-
8/6/2019 Nidhi Report
15/114
term priority in our aim to become the world's best
international bank.
Today we employ 73,000 people, representing 115
nationalities, and you'll find 61 nationalities among our 500
most senior leaders. We believe this diversity helps to fuel
creativity and innovation, supporting the development of
exciting new products and services for our customers
worldwide.
What Standard Chartered Bank Stand for
Strategic intent
The world's best international bank
Leading the way in Asia, Africa and the Middle East
Brand promise
Leading by Example to be The Right partner
Value
Responsive
Trustworthy
International
Creative
Courageous
8/6/2019 Nidhi Report
16/114
8/6/2019 Nidhi Report
17/114
meet the diverse and ever-changing needs of individual,
corporate and institutional customers in some of the world's
most exciting and dynamic markets.
Personal banking
Through our global network of over 1,700 branches and
outlets, we offer personal financial solutions to meet the
needs of more than 14 million customers across Asia, Africa
and the Middle East.
Credit Cards
Accepted worldwide, our credit cards are designed to give
you greater financial freedom and flexibility.
Insurance
Enjoy peace of mind with comprehensive protection for you
and your family.
Investment Advisory Services
Take advantage of expert advice on how to preserve and
enhance your wealth.
International Banking
Our international banking centres provide a confidential
banking platform and global investment opportunities.
8/6/2019 Nidhi Report
18/114
Savings & Banking Services
We offer a wide choice of savings accounts and banking
services to suit you and your lifestyle
Loans & Mortgages
Our personal loans and award-winning mortgages are
helping people realise their aspirations in countries
across the world
SME Banking
SME Banking provides integrated financial solutions to
small and medium businesses, through a relationship
management approach. Its customer focused product
offerings include working capital finance, trade services,
foreign exchange, and cash management.
Wholesale Banking
Headquartered in Singapore and London, with on-the-
ground expertise that spans our global network, our
Wholesale Banking division provides corporate and
institutional clients with innovative solutions in trade
finance, cash management, securities services, foreign
exchange and risk management, capital rising, and
corporate finance.
Islamic Banking
8/6/2019 Nidhi Report
19/114
Standard Chartered Saadiq's dedicated Islamic Banking
team provides comprehensive international banking services
and a wide range of Shariah compliant financial products
that are based on Islamic values.
Private Banking
Our Private Bank advisors and investment specialists
provide customized solutions to meet the unique needs and
aspirations of high net worth clients.
Commercial banking
Standard Chartered has maintained a long local presence,
since 1858, with particular emphasis on relationship banking.
Significant networks have been established with vendors
and financial-related organizations to enable it to offer the
customers a comprehensive range of flexiblefinancial
services, with special focus on transactional banking
products. Supported by state-of-the-art operations, Standard
Chartered is pro-active in improving every part of services.Electronic Delivery system has been put in place to ensure
that transactions are handled speedily.
8/6/2019 Nidhi Report
20/114
PRODUCT OFFERED BY STANDARD
CHARTERED BANK
Differe nt Types of Savings Bank Account
Get instant cash at over 20,000 ATMs across India and over
1,000,000 ATMs across the world through the Visa network.
And get a globally valid Debit Card that lets you shop at over
326,000 outlets in India and at over 14 million outlets across
the world.
Unique Feature
FREE Unlimited Visa ATM transactions (Cash
withdrawal and balance enquiry)
FREE Standard Chartered Bank branch access across the
country.
FREE Doorstep Banking
FREE Demand Drafts/Pay Orders (drawn at SCB locations)
FREE Payable at Par Cheque-book
Other features available are;
International Debit Card
Phone Banking
Net Banking and
Extended Banking Hours.
.
8/6/2019 Nidhi Report
21/114
Super Value Account
Unique feature
Free globally valid Debit-cum-ATM card
Free Access to 6500 ATMs in India
Free Doorstep Banking
Free Bill pay
Free Inter Bank Funds Transfer
Free Foreign Inward Remittance Certificates
Other benefits of the Super Value account:
Globally valid debit card
Multicity Banking
24-hour branches, 365 day branches available at
select locations
Phone banking - available to you 365 days a year
on a 24-hour basis in the metros and everyday of the week
at other centers.
Inter Net banking - access and transact on your
accounts through the Internet from any part of the world.
8/6/2019 Nidhi Report
22/114
8/6/2019 Nidhi Report
23/114
aaSaan
Unique Feature
No Minimum Balance requirement
Free unlimited access to any SCB branch across the
country for Customer-in-person
Unlimited Free access to Standard Chartered Bank
ATM's
Up to 4 free cash withdrawal transactions per month
at other domestic VISA ATMs
Nominal quarterly fee of Rs. 100 (reversed if the Average
Balance in the quarter is Rs 10,000 or more).
Other Facilities
International Debit Card
Phone banking
NetBanking
Extended banking hours
8/6/2019 Nidhi Report
24/114
Locker facility
Door-step banking.
INTRODUTION
Indian economy and Investment Sectorial
growth
India economy is developing at a fast rate and every sector
of India economy is showing a positive growth. The growth
development product in India in the year 2006-07 is 9.2%.
The rate of robust growth of in industrial development is
10.6%. The Economists have also observed high growth in
manufacturing sector and telecommunication sectors. The
Infrastructure sector is also showing impressive growth in
the year 2006-07. The secondary sectors as also shown
upward growth, the BSE and NSE sensex has closed at high
marks of 21000 and 7000 respectively. In this way all these
sectors have contributed to overall growth of Indian
economy.
8/6/2019 Nidhi Report
25/114
Behind China, India is the second fastest growing
economy. According to a survey by Goldman Sachs, India
will become the 3rd largest economy by 2035. This is
measured in $US. If we use PPP (purchasing power parity)
which takes into account local purchasing power, India
already has the 3rd largest economy.
The economy has been growing at an average growth rate
of 8.8 per cent in the last four fiscal years (2003-04 to 2006-
07), with the 2006-07 growth rate of 9.6 per cent being the
highest in the last 18 years. Significantly, the industrial and
service sectors have been contributing a major part of this
growth, suggesting the structural transformation underway in
the Indian economy.
Within the investment sector the real estate is raising sky
high due to
Strong Economic Growth: The worlds fourth largest
economy, growing at over 8% the last two years and
forecast to grow at over 7% over the next five; Growth
measures supported across the political spectrum; a boom in
the services sector with a strong revival of industry; powerfulinternal consumption and demand.
The Rise of the Middle-Class: 300 million and
growing with higher disposable incomes and even higher
8/6/2019 Nidhi Report
26/114
aspirations; educated, professional workforce driving
urbanization beyond the traditional metro cities
Before I start I have to explain what investment is and why
people want to invest? It is very important for me to
understand how people plan before investing. These things
are discussed below:
INVESTMENT
Investment = Cost Of Capital, like buying securities or other
monetary or paper (financial) assets in the money markets or
capital markets, liquid real assets, such as gold, real estate,
or collectibles. Types of financial investments include
shares, other equity investment, and bonds. These financial
assets are then expected to provide income or positive
future cash flows, and may increase or decrease in valuegiving the investor capital gains or losses.
People usually invest when they have good amount of
ideal money to spend. The main objective is to save money
for future uncertainties, capital appreciation, more income
and most of all tax savings.
Investing is not guesswork or prediction. It takes more
than just a tip; it needs training to plan, instinct to pick and
sheer intellect to make it work for the investor. Human nature
is fickle, his wants keep changing.
An investment can be described as perfect if it
satisfies all the needs of all investors. So, the starting point
http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Real_estate8/6/2019 Nidhi Report
27/114
in searching for the perfect investment would be to examine
investor needs. If all those needs are met by the investment,
then that investment can be termed the perfect investment.
Most investors and advisors spend a great deal oftime understanding the merits of the thousands of
investments available in India. Little time, however, is spent
understanding the needs of the investor and ensuring that
the most appropriate investments are selected for him.
Why people invest?
Investors do invest in different instrument to simplify their
lifestyle and to make certain goals in future life. Most
investors invest for the long term to fulfill the inflation and for
the capital appreciation. By and large the investors have
typical requirement to fill, and those are:-
Capital preservation: - The chance of losing some
capital has been a primary need. This is perhaps the
strongest need among investors in India, who have sufferedregularly due to failures of the financial system.
Wealth generation: - This is largely a factor of
investment performance, including both short-term
performance of an investment and long-term performance of
a portfolio. Wealth accumulation is the ultimate measure of
the success of an investment decision.
Life Cover:- Many investors look for investments that
offer good return with adequate life cover to manage the
situations in case of any eventualities. Recent days investors
do invest in the endowment policies and ULIPs.
8/6/2019 Nidhi Report
28/114
Tax savings: Legitimate reduction in the amount of
tax payable is an important part of the Indian psyche. Every
rupee saved in taxes goes towards wealth accumulation.
Income: This refers to money distributed at intervalsby an investment, which are usually used by the investor for
meeting regular expenses. Mostly daily traders invest for
income.
Future Uncertainty: - No one has seen the future so
every person personally save money for any contingencies.
People invest in short term for this. There must be an easy
cash withdraw for the contingencies
Ease of withdrawal: This refers to the ability to invest
long term but withdraw funds when desired. This is strongly
linked to a sense of ownership. It is normally triggered by a
need to spend capital, change investments or cater to
changes in other needs.
Beat inflation: - inflation is a major player in the
economy. It reduced the valuation of rupee. Investors do in
vest to maintain the buying capacity of them.
Retirement planning: - most of the service person
do invest to get return after the vesting period, for that the
investment such a manner that the returns comes at the time
of retirement.
Investment Planning
Investors need to identify the financial goals
throughout life or for the next 10 to 15 years depending upon
8/6/2019 Nidhi Report
29/114
the time horizon selected by the investor, and prioritizing
them. Investment Planning is important because it helps in
deriving the maximum benefit from the investments.
Success as an investor depends upon his investmentin right instrument in right time and for the right period. This,
in turn, depends on the requirements, needs and goals. For
most investors, however, the three prime criteria of
evaluating any investment option are liquidity, safety and
level of return.
Investment Planning also helps to decide upon the right
investment strategy. Besides individual requirement,
investment strategy would also depend upon age, personal
circumstances and risk appetite.
Investment Planning also helps in striking a balance
between risk and returns. By prudent planning, it is possible
to arrive at an optimal mix of risk and returns, which suits
particular needs and requirements.
Investment means putting the ideal money to work to earn
more money. Done wisely, it can help you meet financial
goals. Investing even a small amount can produce
considerable rewards over the long-term, especially if you do
it regularly. But one needs to decide about how much he /
she wants to invest and where.
Options before investment
Investors choose wisely before investing which solely
depends on the present market conditions, future prospect of
the instrument, the return offered by the company and the
season to invest in that particular instrument. For example, a
8/6/2019 Nidhi Report
30/114
good investment for a long-term life insurance plan may not
be a good investment for higher education expenses. In
most cases, the right investment is a balance of three things:
Liquidity, Risk tolerance and Return.
Liquidity How easily an investment can be converted to
cash, since part of invested money must be available to
coverfinancialemergencies.
Risk tolerance - The biggest risk is the risk of losing the
money that has been invested, but the main thing is to how
much investor can cover up and sustain with that. Another
equally important risk is that investments may not provide
enough growth or income to offset the impact of inflation,
which could lead to a gradual increase in the cost of living.
There are additional risks as well (like decline in economic
growth). But the biggest risk of all is not investing at all.
Return - Investments are made for the purpose of
generating returns. Safe investments often promise a
specific, though limited return. Those that involve more risk
offer the opportunity to make - or lose - a lot of money.
The Investment Process
Investors like to invest through the instinct and want
to gain profit from the market by investing. However, while
financial institutions are undoubtedly a part of the process of
investing. As investors, it is not surprising that we focus so
much of our energy and efforts on investment philosophies
and strategies, and so little on the investment process. It is
far more interesting to read about how Peter Lynch picks
8/6/2019 Nidhi Report
31/114
stocks and what makes Warren Buffett a valuable investor,
than it is to talk about the steps involved in creating a
portfolio or in executing trades. Though it does not get
sufficient attention, understanding the investment process is
critical for every investor for several reasons:
1. Investment planning centrally depends upon the portfolio of
the investor; as a result the primary step of the investment process is to
make a portfolio. By emphasizing the sequence, it provides for an orderly
way in which an investor can create his or her own portfolio or a portfolio
for someone else.
2. The investment process provides a structure that allows
investors to see the source of different investment strategies and
philosophies. By so doing, it allows investors to take the hundreds of
strategies that they see described in the common press and in investment
newsletters and to trace them to their common roots.
The investment process emphasizes the different
components that are needed for an investment strategy
but strategies that look good on paper never work for those
who use them.
STEPS INVOLVED IN INVESTMENT PLANNING
Investment is not only prediction it has its own reasons
behind every up and down in the market. So it is has its own
theory to move in particular directions. To get in to the
market investors must go through the following process.
Analysis and profiling of the instrument: - The first
step is performing a Need Analysis check. The
requirements and expectations of the investor should be
met by the instrument. During the profiling investor
8/6/2019 Nidhi Report
32/114
8/6/2019 Nidhi Report
33/114
8/6/2019 Nidhi Report
34/114
a savings account is a safe, convenient and affordable way
to save money. Banks generally put some restrictions on the
total number of withdrawals permitted during specific time
periods. Banks also stipulate certain minimum balance to be
maintained in savings accounts. Normally a higher minimum
balance is stipulated in cheque operated accounts as
compared to non-cheque operated accounts.
Features:
The minimum amount to open an account in a nationalized
bank is Rs 500. If cheque books are also issued, the
minimum balance of Rs 1000 has to be maintained.However in some private or foreign bank the minimum
balance is Rs 5,000 or more and can be up Rs. 10,000. One
cheque book is issued to a customer at a time.
A Savings account can be opened either individually or
jointly with another individual. In a joint account only the sign
of one account holder is needed to write a cheque. But at the
time of closing an account, the sign of the both the account
holders are needed.
Certain non-profit welfare organizations are also permitted to
open Savings bank accounts with banks.
Return
Interest @ 3.5 % p.a. with effect from 1/3/2003.
The amount of interest will be calculated for each calendar
month on the lowest balance in credit of any account
between the close of the tenth day and the last day of each
month. In Savings Bank account, bank follows the simple
8/6/2019 Nidhi Report
35/114
interest method. The rate of interest may change from time
to time according to the rules of Reserve Bank of India.
One can withdraw his/her money by submitting a cheque in
the bank and details of the account, i.e. the Money
deposited, withdrawn along with the dates and the balance,
is recorded in a passbook.
Advantages
It's much safer to keep your money at a bank than to keep a
large amount of cash in your home.
Bank deposits are fairly safe because banks are subject to
control of the Reserve Bank of India with regard to several policy
and operational parameters, many of the banks also give internet
banking facility through with one do the transactions like
withdrawals, deposits, statement of account etc.
Banks provide Auto-Mated Teller machine(ATM) for
24 hours cash withdrawn, some banks also have 24 hours
open branches in very few selected cities.
How to open a SB account
8/6/2019 Nidhi Report
36/114
Savings Bank Account can be opened in the name of
an individual or in joint names of the depositors by filling
up the appropriate forms.
A minor who have completed ten years of age can
also open and operate the account.
At the time of opening an account one must submit
the documents like photocopy of passport or Electoral
card, Postal identification card as address proof and two
passport size photos.
Most banks also require an introduction for opening
an SB account. The introduction may be obtained either
from an existing account holder or from a respectable
citizen, well known to the bank, which should normally
call on the bank and sign in the column specially
provided for the purpose of introduction in the account
opening form.
8/6/2019 Nidhi Report
37/114
Mutual fund in India
A mutual fund is nothing more than a collection of stocks
and/or bonds. You can think of a mutual fund as a company
that brings together a group of people and invests their
money in stocks, bonds, and other securities. Each investor
owns shares, which represent a portion of the holdings of the
fund.
You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and internet
on bonds. A fund pays out nearly all of the income it receives
over the year to fund owners in the form of a distribution.
8/6/2019 Nidhi Report
38/114
2) If the fund sells securities that have increased in price, the
fund has a capital gain. Most funds also pass on these gains
to investors in a distribution.
3) If fund holdings increase in price but are not sold by the
fund manager, the fund's shares increase in price. You can
then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a
check for distributions or to reinvest the earnings and get
more shares. .
Advantages of Mutual Funds:
Professional Management - The primary advantage of
funds (at least theoretically) is the professional management
of your money. Investors purchase funds because they do
8/6/2019 Nidhi Report
39/114
not have the time or the expertise to manage their own
portfolios. A mutual fund is a relatively inexpensive way for a
small investor to get a full-time manager to make and
monitor investments.
Diversification - By owning shares in a mutual fund
instead of owning individual stocks or bonds, your risk is
spread out. The idea behind diversification is to invest in a
large number of assets so that a loss in any particular
investment is minimized by gains in others. In other words,
the more stocks and bonds you own, the less any one of
them can hurt you (think about Enron). Large mutual funds
typically own hundreds of different stocks in many different
industries. It wouldn't be possible for an investor to build this
kind of a portfolio with a small amount of money.
Economies of Scale- Because a mutual fund buys and
sells large amounts of securities at a time, its transaction
costs are lower than what an individual would pay forsecurities transactions.
Liquidity- Just like an individual stock, a mutual fund
allows you to request that your shares be converted into
cash at any time.
Simplicity - Buying a mutual fund is easy! Pretty well anybank has its own line of mutual funds, and the minimum
investment is small. Most companies also have automatic
purchase plans whereby as little as $100 can be invested on
a monthly basis.
8/6/2019 Nidhi Report
40/114
Disadvantages of Mutual Funds:
Professional Management - Did you notice how we
qualified the advantage of professional management with the
word "theoretically"? Many investors debate whether or not
the so-called professionals are any better than you or I at
picking stocks. Management is by no means infallible, and,
even if the fund loses money, the manager still takes his/her
cut. We'll talk about this in detail in a later section.
Costs - Mutual funds don't exist solely to make your life
easier - all funds are in it for a profit. The mutual fund
industry is masterful at burying costs under layers of jargon.
These costs are so complicated that in this tutorial we have
devoted an entire section to the subject
.
Dilution - It's possible to have too much
diversification. Because funds have small holdings in so
many different companies, high returns from a few
investments often don't make much difference on the overall
return. Dilution is also the result of a successful 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-
8/6/2019 Nidhi Report
41/114
gains 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.
No matter what type of investor you are, there is bound to be
a mutual fund that fits your style. According to the last count
there are more than 10,000 mutual funds in North America!
That means there are more mutual funds than stocks.
It's important to understand that each mutual fund has
different risks and rewards. In general, the higher the
potential return, the higher the risk of loss. Although some
funds are less risky than others, all funds have some level of
risk - it's never possible to diversify away all risk. This is a
Fact for all investments.
Each fund has a predetermined investment objective that
tailors the fund's assets, regions of investments and
investment strategies. At the fundamental level, there are
three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed income funds (bonds)
3) Money market funds.
All mutual funds are variations of these three asset classes.
For example, while equity funds that invest in fast-growing
companies are known as growth funds, equity funds that
8/6/2019 Nidhi Report
42/114
invest only in companies of the same sector or region are
known as specialty funds.
Let's go over the many different flavors of funds. We'll start
with the safest and then work through to the more risky.
Money Market Funds:
The money market consists of short-term debt instruments,
mostly Treasury bills. This is a safe place to park your
money. You won't get great returns, but you won't have to
worry about losing yourprincipal. A typical return is twice the
amount you would earn in a regular checking/savings
account and a little less than the average certificate of
deposit (CD).
Bond/Income Funds:
Income funds are named appropriately: their purpose is to
provide current income on a steady basis. When referring to
mutual funds, the terms "fixed-income," "bond," and
"income" are synonymous. These terms denote funds that
invest primarily in government and corporate debt. While
fund holdings may appreciate in value, the primary objective
of these funds is to provide a steady cash flow to investors.
As such, the audience for these funds consists of
conservative investors and retirees.
Bond funds are likely to pay higher returns than certificates
of deposit and money market investments, but bond funds
aren't without risk. Because there are many different types of
bonds, bond funds can vary dramatically depending on
http://www.investopedia.com/terms/p/principal.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asphttp://www.investopedia.com/terms/p/principal.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asp8/6/2019 Nidhi Report
43/114
8/6/2019 Nidhi Report
44/114
The idea is to classify funds based on both the size of the
companies invested in and the investment style of the
manager. The term value refers to a style of investing that
looks for high quality companies that are out of favor with the
Market. These companies are characterized by low P/E and
price-to-book ratios and high dividend yields. The opposite of
value is growth, which refers to companies that have had
(and are expected to continue to have) strong growth in
earnings, sales and cash flow. A compromise between value
and growth is blend, which simply refers to companies that
are neither value nor growth stocks and are classified as
being somewhere in the middle.
For example, a mutual fund that invests in large-cap
companies that are in strong financial shape but have
recently seen their share prices fall would be placed in the
upper left quadrant of the style box (large and value). The
opposite of this would be a fund that invests in startup
technology companies with excellent growth prospects. Such
a mutual fund would reside in the bottom right quadrant
(small and growth).
8/6/2019 Nidhi Report
45/114
Global/International Funds:
An international fund (or foreign fund) invests only outside
your home country. Global funds invest anywhere around
the world, including your home country.
It's tough to classify these funds as either riskier or safer
than domestic investments. They do tend to be more volatile
and have unique country and/or political risks. But, on the flip
side, they can, as part of a well-balanced portfolio, actually
reduce risk by increasing diversification. Although the world's
economies are becoming more inter-related, it is likely that
another economy somewhere is outperforming the economy
of your home country.
Specialty Funds:
This classification of mutual funds is more of an all-
encompassing category that consists of funds that have
proved to be popular but don't necessarily belong to the
categories we've described so far. This type of mutual fund
forgoes broad diversification to concentrate on a certain
segment of the economy.
Sector funds are targeted at specific sectors of the economy
such as financial, technology, health, etc. Sector funds are
extremely volatile. There is a greater possibility of big gains,
but you have to accept that your sector may tank.
Regional funds make it easier to focus on a specific area of
the world. This may mean focusing on a region (say LatinAmerica) or an individual country (for example, only Brazil).
An advantage of these funds is that they make it easier to
buy stock in foreign countries, which is otherwise difficult and
expensive. Just like for sector funds, you have to accept the
8/6/2019 Nidhi Report
46/114
high risk of loss, which occurs if the region goes into a bad
recession.
Socially-responsible funds (or ethical funds) invest only in
companies that meet the criteria of certain guidelines or
beliefs. Most socially responsible funds don't invest in
industries such as tobacco, alcoholic beverages, weapons or
nuclear power. The idea is to get a competitive performance
while still maintaining a healthy conscience.
Index Funds:
The last but certainly not the least important are index funds.
This type of mutual fund replicates the performance of a
Broad market index such as the S&P 500 or Dow Jones
Industrial Average (DJIA). An investor in an index fund
figures that most managers can't beat the market. An index
fund merely replicates the market return and benefits
investors in the form of low fees.
Costs are the biggest problem with mutual funds. Thesecosts eat into your return, and they are the main reason why
the majority of funds end up with sub-par performance.
What's even more disturbing is the way the fund industry
hides costs through a layer of financial complexity and
jargon. Some critics of the industry say that mutual fund
companies get away with the fees they charge only because
the average investor does not understand what he/she is
paying for.
Fees can be broken down into two categories:
http://www.investopedia.com/terms/s/sri.asphttp://www.investopedia.com/terms/s/sri.asp8/6/2019 Nidhi Report
47/114
8/6/2019 Nidhi Report
48/114
8/6/2019 Nidhi Report
49/114
8/6/2019 Nidhi Report
50/114
when you sell mutual fund shares. Tax is one of the main
concerns during the sell. The tax gain or loss from mutual
fund sales is calculated by comparing your tax basis in the
shares sold to the sales proceeds net of any transaction
costs. In general, the tax-planning objective is to maximize
the basis in the shares being sold to minimize the gain, or
maximize the loss.
The Tax Code allows four methods:
First-in, first-out (FIFO) method;
Specific identification (specific ID) method;
Single-category or "regular" average basis method; and
Double-category average basis method.
FIFO Method
This method assumes that shares you sell come out of the
earliest-acquired blocks you own. In a rising market, FIFO
tends to generate the biggest tax bill, because the oldest,
cheapest shares are considered sold first. However, FIFO
also increases the odds that your gains will be long term and
therefore qualify for the 20% maximum rate.
FIFO is the "default" method. In other words, you must use
FIFO to calculate mutual fund gains and losses,
Specific ID Method
Under this method, one specifies exactly which block (or
blocks) of mutual fund shares you intend to sell, so you can
8/6/2019 Nidhi Report
51/114
minimize gains or maximize losses by selling your highest-
cost shares first.
Selling the most expensive shares could mean his/her gains
will be short term and therefore taxed at regular income taxrate rather than the long-term capital gains rate of 15%.
However, if you are selling losers, it's generally better to sell
short-term shares. Your short-term losses will then offset
short-term gains that would otherwise be taxed at your
income tax rate.
Single-Category Average Basis Method
This method is available when one leaves his/her mutual
fund shares on deposit in an account with an agent or
custodian, but not when he/she actually has possession of
share certificates.
Each time investor makes a sale, he simply figures his
average presale basis for shares of that fund. For holding
period purposes, investor is considered to sell the oldest
shares first.
Double-Category Average Basis Method
Here you separate shares into two pools one consisting of
all long-term shares (held over 12 months), and the other
consisting of all short-term shares. Then each time you sell,
you calculate the average per-share basis for each pool. You
can then sell strictly out of one pool or the other, or mix and
match as you see fit. The advantage is you have more
flexibility to control the basis of the shares being sold and
8/6/2019 Nidhi Report
52/114
whether the resulting gains will be taxed at 15% or your
regular rate.
Wide variety of Mutual Fund Schemes exists to cater to the
needs such as financial position, risk tolerance and returnexpectations etc. The table below gives an overview into the
existing types of schemes in the Industry.
TYPES OF MUTUAL FUND SCHEMES1
By Structure
o Open - Ended Schemes
o Close - Ended Schemes
o Interval Schemes
By Investment Objective
o Growth Schemes
o Income Schemes
o Balanced Schemes
o Money Market Schemes
Other Schemes
o Tax Saving Schemes
o Special Schemes
Index Schemes
1
8/6/2019 Nidhi Report
53/114
Sector Specific Schemes
8/6/2019 Nidhi Report
54/114
8/6/2019 Nidhi Report
55/114
payments (premiums) in an amount that depends on medical
history, age, gender, and occupation.
Background2
Though the history of insurance dates back to 1818 with the
establishment of the Oriental Life Insurance company in
Calcutta, and then when LIC was established in the year
1956. For private life insurance sector in particular things
started taking shape after the recommendation ofMalhotra
committee which put forward a proposal for the
establishment of the regulatory body and also encouraged to
set up unit linked insurance pension plan. It was after his
recommendation that IRDA (Insurance regulatory and
development authority) was established in April 2000. After
that in the year 2001 the sector was finally opened for the
private players and foreign private. They are allowed to have
26% share in Indian company. The real innovation happened
in this time only, when Life insurance companies introduced
ULIPs with greater flexibilities. After making a magnificent
entry and becoming the most popular life insured product.
The other decision taken simultaneously to provide the
supporting systems to the insurance sector and in particular
the life insurance companies was the launch of the IRDAs
online service for issue and renewal of licenses to agents.
Due to IRDA the transparency and rules and regulations arestill here in the insurance market.
2
8/6/2019 Nidhi Report
56/114
Fig: growth of insurance sector in last 10 years
ULIP AND ENDOWMENT PLANS3
Endowment plans are life insurance plans, which not only
cover the individuals life in case of eventuality but also offer
a maturity benefit at the end of the term.
In the event of the individuals demise, his/her nominees
receive the sum assured with accumulated profits/bonus on
investments (till the time of his demise). In case the
individual survives the tenure, he/she receives the sum
assured and accumulated profits/bonus.
ULIPs attempts to fulfill investment needs of an
investor with protection/ insurance needs of an insurance
seeker. ULIPs work on the premise that there is a class of
investors who regularly invest their savings in products like
3
8/6/2019 Nidhi Report
57/114
fixed deposits, bonds, debt funds, diversified equity funds
and stocks. There is another class of individuals who take
insurance to provide for their family in case of an eventuality.
So typically both these categories of individuals have a
portfolio of investment as well as life insurance.
ULIP as a product combines both these products
(investment and life insurance) into single product. This
saves the investor/insurance seeker the hassles of
managing and tracking a portfolio of product.
Taking into account the changing socio-economic
demographics, rate of GDP growth, changing consumer
behavior and occurrences of natural calamities at regular
intervals, the Indian life insurance market is expected to
reach the value of around Rs 1683 Billion in the year 2009.
The market is expected to grow at a CAGR of more than
200% YOY from the year 2006.
In 2006-07, pension premium contributed about 22.11% to
total premium income of insurers. Interestingly, the figure in
the first nine months to December 2005 was 25.22%.
Insurance sector in India is one of the booming sectors of
the economy and is growing at the rate of 15-20 per cent
annum. Together with banking services, it contributes to
about 7 per cent to the country's GDP.
Key Players
This section provides an overview of some of the key players
in this industry like Bajaj Allianz, ING Vysya, SBI Life, Tata
AIG Life, HDFC Standard, ICICI Prudential Life Insurance,
Birla Sunlife, Aviva Life Insurance, Kotak Mahindra Old
Mutual, Max New York Life, Met Life, Sahara Life, LIC, Tata-
8/6/2019 Nidhi Report
58/114
AIG General, Reliance General, IFFCO-Tokio, ICICI-
Lombard, HDFC Chubb, New India Assurance Company
Limited, National Insurance Company Limited, United India
Insurance Company Limited and Oriental Insurance Limited.
ULIP - KEY FEATURES (IN GENERAL):
1. Premiums paid can be single, regular or variable. The
payment period too can be regular or variable. The risk
cover can be increased or decreased.
2. As in all insurance policies, the risk charge (mortality rate)
varies with age.
3. The maturity benefit is not typically a fixed amount and the
maturity period can be advanced or extended.
4. Investments can be made in gilt funds, balanced funds,
money market funds, growth funds or bonds.
5. The policyholder can switch between schemes, for
instance, balanced to debt or gilt to equity, etc.
6. The maturity benefit is the net asset value of the units.
7. The costs in ULIP are higher because there is a life
insurance component in it as well, in addition to the
investment component.
8. Insurance companies have the discretion to decide on
their investment portfolios.
9. They are simple, clear, and easy to understand.
10. Being transparent the policyholder gets the entire
episode on the performance of his fund.
8/6/2019 Nidhi Report
59/114
11. Lead to an efficient utilization of capital.
12. ULIP products are exempted from tax and they provide
life insurance.
13. Provides capital appreciation.
14. Investor gets an option to choose among debt, balanced
and equity funds.
ULIPs vs. Mutual Funds
Unit Linked Insurance Policies (ULIPs) as an investment
avenue are closest to mutual funds in terms of their structure
and functioning. As is the case with mutual funds, investors
in ULIPs is allotted units by the insurance company and a
net asset value (NAV) is declared for the same on a daily
basis.
Similarly ULIP investors have the option of investing across
various schemes similar to the ones found in the mutual
funds domain, i.e. diversified equity funds, balanced funds
and debt funds to name a few.
Mutual fund investors have the option of either making lump
sum investments or investing using the systematic
investment plan (SIP) route which entails commitments over
longer time horizons. The minimum investment amounts are
laid out by the fund house.
ULIP investors also have the choice of investing in a lump
sum (single premium) or using the conventional route, i.e.
making premium payments on an annual, half-yearly,
quarterly or monthly basis. In ULIPs, determining the
8/6/2019 Nidhi Report
60/114
premium paid is often the starting point for the investment
activity.
ULIPs Mutual Funds
8/6/2019 Nidhi Report
61/114
Investment
amounts
Determined by the
investor and can be
modified as well
Minimum investment
amounts are determined by
the fund house
Expenses
No upper limits,
expenses determined
by the insurance
company
Upper limits for expenses
chargeable to investors
have been set by the
regulator
Portfolio
disclosure Not mandatory*
Quarterly disclosures are
mandatory
Modifying
assetallocation
Generally permitted for
free or at a nominalcost
Entry/exit loads have to beborne by the investor
Tax benefits
Section 80C benefits
are available on all
ULIP investments
Section 80C benefits are
available only on
investments in tax-saving
funds
MAJOR DIFFERENCES IN ULIPs AND MUTUAL
FUNDs
If a mutual fund investor in a diversified equity fund wishes to
shift his corpus into a debt from the same fund house, he
could have to bear an exit load and/or entry load.
On the other hand most insurance companies permit their
ULIP inventors to shift investments across various
plans/asset classes either at a nominal or no cost (usually, a
couple of switches are allowed free of charge every year and
a cost has to be borne for additional switches).
With these comparable there are certain factors where in
these two differ. Mutual funds are essentially short to
8/6/2019 Nidhi Report
62/114
medium term products. The liquidity that these products offer
is valuable for investors. ULIPs, in contrast, are positioned
as long-term products and going ahead, there will be
separate playing fields for ULIPS and MFs, with the product
differentiation between them becoming more pronounced.
ULIPs do not seek to replace mutual funds, they offer
protection against the risk of dying too early, and also help
people save for retirement. Insurance has to be an integral
part of one's wealth management portfolio. Further,
exposure of Indian households to capital markets is limited.
ULIPs and mutual funds are, therefore, not likely to
cannibalize each other in the long run. The primary objective
of an insurance product is protection. The whole reason why
it has evolved as a savings plan in the minds of certain
people is because there is a significant savings component
attached to it; however, it is still not the primary purpose of
the plan. Second, there are various kinds of insurance
products; the element of protection in each varies. In certain
plans the level of protection is low and the savings
component high, but that is a choice to the customer.
While ULIPs as an investment avenue is closest to mutual
funds in terms of their functioning and structure, the first and
foremost purpose of insurance is and will always be
'protection'. The value that it provides cannot be downplayed
or underestimated. As an instrument of protection, insurance
provides benefits that no investment can offer. It is important
for an investor to understand his financial goals and horizon
of investment in order to make an informed investment
decision. The decision to invest in either a mutual fund or a
ULIP should depend on the time period of investment,
8/6/2019 Nidhi Report
63/114
individual financial goals as well as risk taking appetite, and
its about time the industry and customer realise it.
ULIP vs. ENDOWMENT PLANS
It wasn't too long back, when the good old endowment plan
was the preferred way to insure oneself against an
eventuality and to set aside some savings to meet one's
financial objectives. Then insurance was thrown open to the
private sector. The result was the launch of a wide variety of
insurance plans, including the ULIPs.
Two factors were responsible for the advent of ULIPs on the
domestic insurance horizon. First was the arrival of private
insurance companies on the domestic scene. ULIPs were
one of the most significant innovations introduced by private
insurers. The other factor that saw investors take to ULIPs
was the decline of assured return endowment plans. Of
course, the regulator -- IRDA (Insurance and Regulatory
Development Authority) was instrumental in signaling the
end of assured return plans.
Today, there is just one insurance plan from LIC (Life
Insurance Corporation) -- Komal Jeevan -- that assures
return to the policyholder.
These were the two factors most instrumental in marking the
arrival of ULIPs, but another factor that has helped their
cause is a booming stock market. While this now appears asone of the primary reasons for their popularity, we believe
ULIPs have some fundamental positives like enhanced
flexibility and merging of investment and insurance in a
single entity that have really endeared them to individuals.
8/6/2019 Nidhi Report
64/114
A. EXPENSES
ULIPs are considered to be very expensive when compared
to traditional endowment plans. This notion is rooted more in
perception than reality.
Sale of a traditional endowment plan fetches a commission
of about 30% (of premium) in the first year and 60% (of
premium) over the first five years. Then there is ongoing
commission in the region of 5%.
Sale of a ULIP fetches a relatively lower commission ranging
from as low as 5% to 30% of premium (depending on the
insurance company) in the first 1-3 years. After the initial
years, it stabilizes at 1-3%. Unlike endowment plans, there
are no IRDA regulations on ULIP commissions.
Broadly speaking, ULIP expenses are classified into three
major categories:
1) Mortality charges
Mortality expenses are charged by life insurance companies
for providing a life cover to the individual. The expenses vary
with the age, sum assured and sum-at-risk for the individual.
There is a direct relation between the mortality expenses
and the abovementioned factors. In a ULIP, the sum-at-risk
is an important reference point for the insurance company.
Put simply, the sum-at-risk is the difference between the
sum assured and the investment value the individual's
corpus as on a specified date.
2) Sales and administration expenses
8/6/2019 Nidhi Report
65/114
Insurance companies incur these expenses for operational
purposes on a regular basis. The expenses are recovered
from the premiums that individuals pay towards their
insurance policies. Agent commissions, sales and marketing
expenses and the overhead costs incurred to run the
insurance business on a day-to-day basis are examples of
such expenses.
3) Fund management charges (FMC)
These charges are levied by the insurance company to meet
the expenses incurred on managing the ULIP investments. A
portion of ULIP premiums are invested in equities, bonds,
and money market instruments. Managing these
investments incurs a fund management charge, similar to
what mutual funds incur on their investments. FMCs differ
across investment options like aggressive, balanced and
debt ULIPs; usually a higher equity option translates into
higher FMC.
Apart from the three expense categories mentioned above,
individuals may also have to incur certain expenses, which
are primarily 'optional' in nature- the expenses will be
incurred if certain choices that are made available to
individuals are exercised.
a) Switching charges
Individuals are allowed to switch their ULIP options. For
example, an individual can switch his fund money from
100% equities to a balanced portfolio, which has say, 60%
equities and 40% debt. However, the company may charge
him a fee for 'switching'. While most life insurance
8/6/2019 Nidhi Report
66/114
8/6/2019 Nidhi Report
67/114
Another innovative feature with ULIPs is the 'top-up' facility.
A top-up is a one-time additional investment in the ULIP over
and above the annual premium. This feature works well
when you have a surplus that you are looking to invest in a
market-linked avenue, rather than stash away in a savings
account or a fixed deposit.
ULIPs also have a facility that allows you to skip premiums
after regular payment in the initial years. For instance, if you
have paid your premiums religiously over the first three
years, you can skip the fourth year's premium. The
insurance company will make the necessary adjustments
from your investment surplus to ensure the policy does not
lapse.
With traditional endowment, there are no investment options.
You select the only option you have and must remain with it
till maturity. There is also no concept of a top-up facility.
Your premium amount cannot be enhanced on a one-time
basis and skipped premiums will result in your policy lapsing.
A. LIQUIDITY
Another flexibility that ULIPs offer the individual is liquidity.
Since ULIP investments are NAV-based it is possible to
withdraw a portion of your investments before maturity. Of
course, there is an initial lock-in period (3 years) after which
the withdrawal is possible.
Traditional endowment has no provision for pre-mature
withdrawal. You can surrender your policy, but you won't get
everything you have earned on your policy in terms of
premiums paid and bonuses earned. If you are clear that you
8/6/2019 Nidhi Report
68/114
will need money at regular intervals then it is recommended
that you opt for money-back endowment.
B. TAX BENEFITS
Taxation is one area where there is common ground
between ULIPs and traditional endowment. Premiums in
ULIPs as well as traditional endowment plans are eligible for
tax benefits under Section 80C subject to a maximum limit of
Rs 100,000. On the same lines, monies received on maturity
on ULIPs and traditional endowments are tax-free under
Section 10.
8/6/2019 Nidhi Report
69/114
Indian Stock Market overview
The Bombay Stock Exchange (BSE) and the National
stock Exchange India Ltd. (NSE) are the two primary
exchanges in India. In addition, there are 22 regional stock
exchanges. However, the BSE and NSE have established
themselves as the two leading exchanges and account for
about 80% of equity volume traded in India. The average
daily turnover
NSE has around 1500 shares listed with a total market
capitalization of around Rs. 9,21,500 crore. The BSE has
over 6000 stocks listed and has a market capitalization of
around Rs. 9, 68,000 crore.
Most key stocks are traded on both the exchanges and
hence the investor could buy them on either exchange. Both
exchanges have a different settlement cycle, which allows
investors to sift their positions on the bourses. The primaryindex of BSE is BSE Sensex comprising of 30 stocks. NSE
has the S&P NSE 50 Index (Nifty) which consists of fifty
stocks.
The BSE Sensex is the older and more widely followed
index. Both these indices are calculated on the basis of
market capitalization and contain the heavily traded shares
from key sectors.
Both exchanges have switched over from the open outcry
trading system to a fully automated computerized mode of
trading known as BOLT (BSE online trading) and NEAT
(National Exchange Automated Trading) system. It facilitates
8/6/2019 Nidhi Report
70/114
more efficient processing, automatic order matching, faster
execution of trades and transparency.
The scripts traded on the BSE have been classified into
A,B1,B2,C, F,Z groups. The A group sharesrepresent those, which are in the carry forward system
(Badla).
The F group represents the debt market (fixed income
securities) segment.
The Z groups scripts are the blacklisted companies.
The C group covers the odd lot securities in A, B1, & B2
groups and rights renunciations.
Term deposits4
A deposit held at a financial institution that has a fixed
term. These are generally short-term with maturities
ranging anywhere from a fifteen days to a few years. When a
term deposit is purchased, the lender (the customer)
understands that the money can only be withdrawn after the
term has ended or by giving a predetermined number of
days notice.
Term deposits are an extremely safe investment and are
therefore very appealing to conservative, low-risk investors.
By having the money tied up investors will generally get a
higher rate with a term deposit compared with a demand
deposit.
4 Investopedia.com
8/6/2019 Nidhi Report
71/114
Investor some time pledge these term deposits to
take house loan, personal load, education load, etc. these
works as the security deposits or asset of the debtor.
Here is a list of Term deposit rates of different Banks I havestudied:-
Tenure Standard
Chartered
ICICI HDFC ABN -AmroK otak
Mahind
15 days - 59 days 5.25% 4% 5.50% 4%-5.5% 4%
60 days 89 days 5.75% 4% 5.50% 5.50% 5.50%
90 days 360 days 6.25% 6.25% 6.75% 6%-8% 8.50%
361 days 8.50% 6.25% 8% 6% 8.50%
362 days< 1year 6.25% 6.25% 6.75% 6% 8.50%
1 year < 2years 6.50% 8% 8% 6%-8% 9.25%
8/6/2019 Nidhi Report
72/114
Bonds in India.
A bond is just an organization's IOU; i.e., a promise to repay
a sum of money at a certain interest rate and over a certain
period of time. In other words, a bond is a debt instrument.
Other common terms for these debt instruments are notes
and debentures. Most bonds pay a fixed rate of interest for a
fixed period of time.
Why do organizations issue bonds?
A company needs funds to expand into new market,
while Government needs money for everything from
infrastructure to social programs. Whatever the need, a large
sum of money will be needed to get the job done.
One way is to arrange for banks or others to lend the money.
But a generally less expensive way is to issue (sell) bonds.
The organization will agree to pay some interest rate on the
bonds and further agree to redeem the bonds (i.e., buy them
back) at some time in the future (the redemption date).
The price of a bond is a function of prevailing interest rates.
As rates go up, the price of the bond goes down, because
that particular bond becomes less attractive (i.e., pays less
interest) when compared to current offerings. As rates go
down, the price of the bond goes up, because that particular
bond becomes more attractive (i.e., pays more interest)
when compared to current offerings.
A bearer bondis a bond with no owner information upon it;
presumably the bearer is the owner. Bearer bonds included
8/6/2019 Nidhi Report
73/114
coupons which were used by the bondholder to receive the
interest due on the bond.
Another type of bond is a convertible bond. This security can
be converted into shares of the company that issues the
bond if the bondholder chooses. Of course, the conversion
price is usually chosen so as to make the conversion
interesting only if the stock has a pretty good rise.
Different types of bonds5
In general there are few types of bonds available in the
market to buy, like;
Government bonds: - these bonds are issued by the
government to raise money from the public.
Bills - Debts securities maturing in less than one year.
Notes - Debt securities maturing in one to ten years.
Bonds - Debt securities maturing in more than ten years.
Marketable securities from the Indian government known
collectively as Treasuries and are as Treasury bonds,
Treasury notes and Treasury bills.
Municipal Bonds Municipal bonds, known as munis, are
the next progression in term of risk. The major advantage in
munis is that the returns are free from State/central tax.
Local government some time makes their debt non-taxable
for residents, thus making some municipal bonds completely
tax free. Because of the tax-savings yield in munis is lower
than the taxable bonds.
5 Security analysis and portfolio management by Ritu Ahuja
8/6/2019 Nidhi Report
74/114
Corporate bonds A company can issue bonds just as it
can issue stock. Generally, a short term corporate bond is
less than five years; intermediate is five to twelve years, and
long term is over 12 years.
Corporate bonds are characterized by higher yields because
there is a higher risk of a company defaulting than a
government. The companys credit quality is most important:
the higher the credit quality, lower the interest rate the
investor receives.
Bondholders are not owners of the corporation. But if the
company gets in financial trouble and needs to dissolve,
bondholders must be paid off in full before stockholders get
anything.
Zero coupon Bonds: - This is a type of bond that make no
coupon payments but instead is issued at a considerable
discount to par value. For example, let us say, a zero
coupon bond with a Rs. 1,000 par value and 10 years to
maturity is trading at Rs. 600; then investor would be paying
Rs.600 today that will worth Rs. 1,000 after 10 years.
A Portfolio management
8/6/2019 Nidhi Report
75/114
A portfolio management is a collection of investments held
by an institution or a private individual. Kolding a portfolio is
part of an investment and risk-limiting strategy called
Diversification. By owning several assets, certain types of
risk (in particular specific risk) can be reduced.
The aim of portfolio management is to achieve the
maximum return from a portfolio which has been delegated
to be managed by an individual manager or financial
institution. The manager has to balance the parameters
which define a good investment i.e. security, liquidity, and
return. The goal is to obtain the highest return for the client
of the managed portfolio.
While doing the portfolio management of customers it is
ensured that the portfolio has objectives and achieves a
sound balance between the competing objectives, which
are:-
Safety of investment
Stable current return
Appreciation in capital value
Liquidity
Tax planning
Minimizing the risk
Diversification
8/6/2019 Nidhi Report
76/114
Portfolio Expected Return
The expected rate of return is the weighted average of the
expected rates of return on assets comprising the portfolio.
The weights, which add up to 1, reflect the fraction of total
portfolio invested in each asset. Thus, there are two
determinants of portfolio returns:
I. Expected rate of return on each assets and
II. Relative share of each asset in the portfolio.
Symbolically:
E (rp) =w E (ri)
Where,
E (rp) =expected return from the portfolio.
w = proportion invested in the portfolio.
E (ri) =expected return from the assets i.
Portfolio Risk
Total risk is measured in terms of variance or standard
deviation of return. Unlike portfolio expected return, portfolio
8/6/2019 Nidhi Report
77/114
variance is not the weighted average of variance of returns
on individual assets in the portfolio.
Symbolically:
p= (w1)(1)+ (w2)(2)+2(w1) (w2) (12)
Where,
= Variance of returns of the portfolio
(w1)= Fraction of the portfolio invested in asset 1
(w2)= Fraction of the portfolio invested in asset 2
(1)= Variance of asset 1
(2)= Variance of asset 2
(12)= Covariance between returns of two assets.
Return is not fixed for any investment instrument it depends
upon the market liquidity, interest rate, and some other
economic situation of that country. For the calculation of the
risk & return I have chosen the historic data.
I have also showed the risk profile which have been ranging
from Low to very high.
List of return expected on the basis of Historical
data
Types of
investments
Historical returns Risk profile
8/6/2019 Nidhi Report
78/114
Company Bonds 6%-8% Medium-high
Bond Mutual Funds 8%-10% Medium
Equity Mutual Funds 15%-20% High
Equities 15%-20% Very high
Fixed Deposits 7%-8% Low
PPF 8% Low
Post Office 8% Low
Government
Securities
5%-6% Low
ELSS 15%-20% Medium-high
Note: higher returns for lower risk (because of Govt.
guarantees there) that PPF and similar A/c appear to have,
is misleading. These do not have much liquidity, and since
that is an important measure of risk.
CREATING PORTFOLIO
Making a portfolio is depends on the risk measurement of
the investment and the time horizon he/she prefer to invest.
But from the point of view of the portfolio manager, choosing
a investment intrument or a fund is more difficult than to
measure the risk tolerence and time horizon.
For the portfolio managers calculating the risk and return is
the main area where they focused. As an investors before
investing alwways watch for the risk and return for his/her
8/6/2019 Nidhi Report
79/114
8/6/2019 Nidhi Report
80/114
securities, treasury bills, and also the Benchmark index
would determine how safer and more profitable your fund is.
Here is an analysis of the ratios that can help investors
gauge the performance of your fund as regards investing in
less riskier investment avenues.
Standard Deviation
Standard deviation throws light on a fund's volatility in terms
of rise and fall in its returns. Maximum volatility in a security
is the riskiest, considering the unevenness it brings about in
its performance. Standard deviation of a fund measures this
risk by measuring the degree to which the fund fluctuates in
relation to its mean return. That is the average return of a
fund over a period of time.
A fund that has a consistent four-year return of 3%, for
example, would have a mean or average of 3%. The
standard deviation for this fund would then be zero because
the fund's return in any given year does not differ from its
four-year mean of 3%. On the other hand, a fund that in
each of the last four years returned -5%, 17%, 2% and 30%
will have a mean return of 11%. The fund will also exhibit a
high standard deviation because each year the return of the
fund differs from the mean return. This fund is therefore
riskier because it fluctuates widely between negative and
positive returns within a short period.
To determine how well a fund is maximising its returns
received for its volatility, a comparison can be done for
similar investment and similar risky mutual funds. The fund
with the lower standard deviation would be more optimal
8/6/2019 Nidhi Report
81/114
because it is maximising the return received for the amount
of risk acquired.
Sharpe ratio
This ratio describes how much return you are receiving for
the extra volatility that you endure for holding a riskier asset.
Remember, you always need to be properly compensated
for the additional risk you take for not holding a risk-free
asset.
It is defined as S(x) = (rx-Rf)/Std dev(x)
Where 'x' is the investment,
'rx' is average rate of return of x
Rf is the best available rate of return of a risk-free security
like government securities
Std dev(x) is the standard deviation of rx.
Sharpe ratio is a risk-adjusted measure of return that is often
used to evaluate the performance of a portfolio. The ratio
helps to make the performance of one portfolio comparable
to that of another portfolio by making an adjustment for risk.
For example, if manager A generates a return of 15% while
manager B generates a return of 12%, it would appear that
manager A is a better performer. However, if manager A,who produced the 15% return, took much larger risks than
manager B, it may actually be the case that manager B has
a better risk-adjusted return.
8/6/2019 Nidhi Report
82/114
Say that the risk free-rate is 5%, and manager A's portfolio
has a standard deviation of 8% (considering high risk/return),
while manager B's portfolio has a standard deviation of 5%.
The Sharpe ratio for manager A would be 1.25 while
manager B's ratio would be 1.4, which is better than
manager A. Based on these calculations, manager B was
able to generate a higher return on a risk-adjusted basis. A
ratio of more than or equal to 1 is good, more than or equal 2
is very good, and more than or equal 3 is excellent.
Sharpe ratio is broken down into three components: asset
return, risk-free return, and standard deviation of return.
After calculating the excess return, it's divided by the
standard deviation of the risky asset to get its Sharpe ratio.
The idea of the ratio is to see how much additional return
you are receiving for the additional volatility of holding the
risky asset over a risk-free asset - the higher the better.
Beta
Beta determines the volatility, or risk, of a fund in
comparison to that of its index or benchmark. A fund with a
beta very close to 1 means the fund's performance closely
matches the index or benchmark. A beta greater than 1
indicates greater volatility than the overall market, and a beta
less than 1 indicates less volatility than the benchmark.
If, for example, a fund has a beta of 1.05 in relation to the
Sensex, the fund has been moving 5% more than the index.
Therefore, if the Sensex has increased 15%, the fund would
be expected to increase 15.75%.
8/6/2019 Nidhi Report
83/114
On the other hand, a fund with a beta of 2.4 would be
expected to move 2.4 times more than its corresponding
index. So if the Sensex moved 10%, the fund would be
expected to rise 24%, and, if the Sensex declined 10%, the
fund would be expected to lose 24%.
Investors can choose funds exhibiting high betas, which
increase chances of beating the market. Also if the market is
bearish the funds that have betas less than 1 are a good
choice because they would be expected to decline less in
value than the index. For example, if a fund had a beta of 0.5
and the Sensex declined 6%, the fund would be expected todecline only 3%. However, you must note that beta by itself
is limited and there may be factors other than the market risk
affecting your fund's volatility.
These 33 funds are the top funds in respective fund sector,
the 1st year return and 3 years are calculated.
Then with 60% weightage given to 3 years return and 40%weightage given to 1st year return. Thus I have got the total average return
score of the respective funds.
Beta & Sharpe ratio being calculated. Then I calculate adjusted risk
by dividing Sharpe ratio by beta.
Then adjusted risk is multiplied by the total return score of
individual funds. Then I got the adjusted risk & return.
The highest scorer is the best fund to invest respect to the fund
type. So I have ranked the funds in the respective category.
8/6/2019 Nidhi Report
84/114
These funds are recommended to the investors depending the risk
tolerence.
Portfolio of Investor
WITH 70% AGGRESSIVE & 30% DEFENSIVE RISK
PROFILE
Investable amount = 500,000 Rs.
Aggressive investment= 500,000x.7= 350,000 Rs
Defensive investment= 500,000x.3= 150,000 Rs
Aggressive investment
ELSS= 100,000 Rs.
Aggressive mutual funds= 200,000 Rs.
NFO= 50,000
Explanation :
ELSS is a type of mutual funds where investor can get the Tax
shield of 80(C), which means upto investment of Rs 100,000 is tax free.
There is no need invest in ULIPs or any endowment insurance, because
ELSS gives on an average return of 25%-30%6. For the secure life
investor must do an insurance that will give only insurance plan. This will
be a expence of the investor but in the long run ELSS will give morereturn than a ULIP plan.
NFO is the emerging mutual funds that is going to flurish in the
future. It is difficult to predict which NFO will be good, because it is time
6 See Annexure no. 4
8/6/2019 Nidhi Report
85/114
constrain. But investor must evaluate the background of the NFO and the
fund manager.
Aggressive mutual funds, are the most volatily mutual funds respect
to the market. I have recommended top five mutual funds each with
amount 40,000 Rs. The funds are:
Tata Infrastructure, DSPML T.I.G.E.R. Regular, Reliance
Growth, Birla Mid Cap, Sundaram BNP Paribas Select
Midcap Regular.
In these funds DSP ML T.I.G.E.R. Regular high liquid as
there is no tenure. Reliance Growth and Birla Mid Capminimum tenure is 1 year. So there is no liquidity problem for
the investor.
Defensive investment
Balanced funds,Debt funds= 50,000
Government securities= 50,000
Fixed deposits=50,000
Explanation:
This investor has 30% in defensive investment. I have
distributed all investment equally to balanced funds,
Government securities, Fixed deposits.
Fixed deposits are for 1 years, Kotak Mahindra offers 9.25%
for 1 years fixed deposits.
Government securities for 5 years, it will yield 8%.
8/6/2019 Nidhi Report
86/114
Return after one years of the above investment
INVESTMENT CALCULATION EXPECTED
RETURN
ELSS 100,000X35% 35,000AGGRESSIVE
FUNDS
200,000X40% 80,000
NFO 50,000X15% 7,500BALANCED FUNDS 50,000X 25% 12,500FIXED DEPOSITS 50,000X9.25% 4625GOVT.SECURITIES 50,000X8% 4,000TOTAL 143625
On an average the return =143,625/500,000= 28.25% which
good for the investorof very high risk.
Portfolio of Investor
WITH 60% AGGRESSIVE & 40% DEFENSIVE RISK
PROFILE
Investable amount = 500,000 Rs.
Aggressive investment= 500,000x.6= 300,000 Rs
Defensive investment= 500,000x.4= 200,000 Rs
Aggressive