Emerging Investment Products and Its Scope in Indian Financial Markets

8/3/2019 Emerging Investment Products and Its Scope in Indian Financial Markets

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A

LIVE RESEARCH PROJECT REPORT

ON

EMERGING INVESTMENT PRODUCTS AND ITS SCOPE IN

INDIAN FINANCIAL MARKETS

IN THE PARTIAL FULFILMENT OF

MASTER OF BUSINESS ADMINISTRATION (MBA)

2008-2010

PACIFIC INSTITUTE OF MANAGEMENT, UDAIPUR

RAJASTHAN TECHNICAL UNIVERSITY, KOTA

Guided By Submitted by:

MR.DHIRAJ JAIN NEENA KHANDELWAL

M.B.A. Part II


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PREFACE

Practical training is one of the major components for any professional

course like M.B.A. the real place where a professional person faces a

problem in a field. It was a good exposure for me to undergo training in a

highly esteemed organization like ICICI Direct Ltd. where I got to enhance

my knowledge and experience with respect to Study of the Emerging

Investment Products and its scope in the Indian Financial Markets.

I was able to get familiarized with the corporate environment, team

support and management operations in working out the operations

successfully for the achievement of the end objectives of the organization

as a whole.

Thus I would say that this training was beneficial, educative and good

exposure to me, which will certainly help me in my near future.

Neena Khandelwal


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AKNOWLEDGEMENT

I am very glad to take this opportunity of expressing my gratitude and heartilythanks to my entire supporter those who have helped guide me directly as wellas indirectly during the completion of my entire LIVE RESEARCH PROJECT..

I would like express my sincere thanks to the PROF. B.P. SHARMA for givingme the opportunity to come on this stage and for the field experience and alsothe completion of the project work for examination of MBA Part II.

I am very happy to express my thanks to my project guide Mr. DHIRAJ JAIN

and the entire staff member who supported me very friendly during my projectwork.

Lastly, I am really and heartily thanks to all my faculty member and friends.


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TABLE OF CONTENTS

Particulars

1. Executive summary

2. Introduction to the Industry

3. Introduction to the Organization

4. Introduction to the project

Indian market growth

RBI and SEBI

Indian financial market

Investment products

Types of Risk associated with the Investments

Investment Strategies

Market needs

Future agenda

Innovations in Financial Products

5. Research Methodology

0 5.1 Title of the Study

1 5.2 Duration of the Project

2 5.3 Objective of Study

3 5.4 Type of Research

4 5.5 Sample Size and method of selecting sample

5 5.6 Scope of Study

6 5.7 Limitation of Study6. Analysis of questionnaire

7. Survey Findings

8. Conclusion

9. Common Investment Mistakes

10. Recommendations and Suggestions


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11. Bibliography


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EXECUTIVE SUMMARY

A financial market is a mechanism that allows people to easily buy and sell (trade)

financial securities (such as stocks and bonds), commodities (such as precious metals

or agricultural goods), and other fungible items of value at low transaction costs and at

prices that reflect the efficient market hypothesis.

Financial markets have evolved significantly over several hundred years and are

undergoing constant innovation to improve liquidityhe Indian financial market has also

grown substantially. The Indian stock markets are now amongst the best in the world in

terms of modernizations and the technology. India was among the few countries, whichwas not badly effected by the contagion effects of the Asian crisis of 1997. Policy

makers attribute this to the slow and cautious pace of capital account liberalizatio

Today-- with the 'feel good' factor about India in the global arena rising, increased

confidence of the investors in the Indian market, Sensex looking more attractive than

ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is

the most vulnerable period for the regulators of the Indian financial sector, particularly

SEBI and RBI

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the

issuance of shares or common stock, and enable the

subsequent trading thereof.

Bond markets, which provide financing through the issuance

of Bonds, and enable the subsequent trading thereof.

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Commodity markets, which facilitate the trading of commodities.

Money markets, which provide short term debt financing and

investment.

Derivatives market, which provide instruments for the

management of financial risk.

Futures markets, which provide standardized forward

contracts for trading products at some future date; see also forward

market.

Insurance markets, which facilitate the redistribution of

various risks.

Foreign exchange markets, which facilitate the trading of

foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed

(issued) securities are bought or sold in primary markets. Secondary markets allowinvestors to sell securities that they hold or buy existing securities.

ICICI Securities Limited . amongst the leading Brokerage Houses and the value based

financial services which make it preferred service provider. As India's fastest growing

financial services conglomerate, with deep moorings in the Indian economy for over five

decades, ICICI Group of companies have endeavoured to contribute to address the

challenges posed to the community in multiple ways.

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Introduction to the Industry

History:

Founded by the Government of India in the 1960's, it was one of

the three financial institutions set up to finance large industrial projects

Earlier known as Industrial Credit and Investment Corporation of

India, it did not entertain retail customers and was thus not a bank in the

literal sense.

It was in the 1990's that a subsidiary was set up in the name of

ICICI Bank to take up retail banking services including deposits, credit

cards, loans etc. In 2002, the ICICI Bank was merged back with the ICICI

and the result was the ICICI Bank Limited operational now

And the rest as they say is history not exactly the above-mentioned one. ICICI is a nowhousehold name synonym to superior banking services. It was also the first of the

leading banks to set up a nation wide network of ATM's that has multiplied exponentially

making the bank more accessible to its dear customers. A look at the annual report

establishes the fact that ICICI Bank is the second largest amongst the other Indian

Banks. The total assets as measured till Mar'07 are US $ 79 billion. The local Stock

Exchange Listings include:

National Stock Exchange

Bombay Stock Exchange, Mumbai

Kolkata Stock Exchange

Vadodara Stock Exchange

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The overseas operations of ICICI Bank were set up in 2002. Today it boasts of wholly

owned subsidiaries and offices in 18 countries including US, UK, Canada and Russia.

The American Depository Receipts or ARD's enjoy listings in the New York Stock

Exchange (NYSE). The company profile shows an increasing number of satisfied retail

and corporate customers dedicating their loyalty to the bank. They also offer Internet

and Mobile Banking and online customer services facilities. An ATM and Branch

Locator is available online on the official ICICI Bank Website.

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

Personal Banking

Corporate Banking

NRI Banking

The Personal Banking Services include:

Deposits: deposits into savings account, fixed deposits, security

deposits and recurring deposits.

Loans: home loans, car loans, personal loans, loans against

property, gold and securities besides many other special financial

assistances for rural and industrial use.

Investments: bonds, mutual funds, Senior citizens savings and

Pure Gold.

Insurance: home, vehicle and health insurance.

Foreign Exchange Services

Demat And Credit Services

Wealth Management

Private Baking9
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Online Banking Services

Corporate banking services cover:

Transaction and Treasury Banking

Investment Banking

Rural and Agricultural Finance

Structured and Technological Finance

International Banking

Mobile and Online Banking

The NRI Banking Services

The NRI Banking Services were set up world over to accumulate the funds for the rural

development. It became so popular that it has become one of the prime categories in

banking services. These include:

Money Transfers anytime and anywhere in India

Bank Accounts for the global Indians

Home Loans

The Customer Service of ICICI Bank is handled by the BPO's working 24x7. ICICI Bank

believes in complete customer satisfaction and has employed many contact methods in

case any one wants to reach them. The major Indian cities like Delhi, Bangalore,

Hyderabad, Chennai, Mumbai and Pune boast of numerous branches in every corner of

the city. One can visit their help desk at every branch or drop in a note in the suggestion

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boxes set-up in every ATM or email them or even call their customer care executives

working 24x7.

Product Portfolio

Banking

Personal Banking

o Savings & Deposits

o Loans

o Cards

o Wealth Management

Global Private Clients

Corporate Banking

o Transaction Banking

o Treasury Banking

o Investment Banking

o Capital Markets

o Custodial Services

o Rural & Agri Banking

o Structured Finance

o Technology Finance

Business Bankin g

o Current Account

o Business Loans

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o Forex

o Trade

o Cash Management Services

NRI Banking

o Money Transfer

o Bank Accounts

o Investment

o Property Solutions

o Insurance

o Loans

Insurance & Investment

o Life Insurance

o Retirement Solutions

o Health Solutions

o Education Solutions

General Insurance

o Health Insurance

o Overseas Travel Insurance

o Student Medical Insurance

o Motor Insurance

o Home Insurance

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Securities

o Corporate Finance

o Institutional Equities

o Institutional Research

o Retail Equities

o ICICI Direct Financial Superstore

o Retail Research

o Active Trader Services

Mutual Fund

o Our Funds

o Performance Analyser

o Systematic Investing

o Compare Schemes

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Introduction to the Organisation

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

ICICI Group offers a wide range of banking products and financial services to corporate

and retail customers through a variety of delivery channels and through its specialised

group companies, subsidiaries and affiliates in the areas of personal banking,

investment banking, life and general insurance, venture capital and asset management.

With a strong customer focus, the ICICI Group Companies have maintained and

enhanced their leadership position in their respective sectors.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,997.95 billion (US$

100 billion) at March 31, 2008 and profit after tax of Rs. 41.58 billion for the year ended

March 31, 2008. ICICI Bank is second amongst all the companies listed on the Indian

stock exchanges in terms of free float market capitalisation*. The Bank has a network of

about 1,308 branches and 3,950 ATMs in India and presence in 18 countries.

ICICI Prudential Life Insurance Company is a 74:26 joint venture with Prudential plc

(UK). It is the largest private sector life insurance company offering a comprehensive

suite of life, health and pensions products. It is also the pioneer in launching innovative

health care products like Diabetes Care and Cancer Care. The company operates on a

multi-channel platform and has a distribution strength of over 2,90,000 financial advisors

operating from 1956 branches spread across 1669 locations across the country. In

addition to the agency force, it also has tie-ups with various banks, corporate agents

and brokers. In fiscal 2008, ICICI Prudential attained a market share of 12.7% with new

business weighted premium growth of 68.3% to Rs. 66.84 billion and held assets of Rs.

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285.78 billion at March 31, 2008.

ICICI Lombard General Insurance Company, a joint venture with the Canada based

Fairfax Financial Holdings, is the largest private sector general insurance company. It

has a comprehensive product portfolio catering to all corporate and retail insurance

needs and is present in over 200 locations across the country. ICICI Lombard General

Insurance has achieved a market share of 29.8% among private sector general

insurance companies and an overall market share of 11.9% during fiscal 2008. The

gross return premium grew by 11.4% from Rs. 30.3 billion in fiscal 2007 to Rs. 33.45

billion in fiscal 2008.

ICICI Securities Ltd is the largest equity house in the country providing end-to-endsolutions (including web-based services) through the largest non-banking distribution

channel so as to fulfill all the diverse needs of retail and corporate customers. ICICI

Securities (I-Sec) has a dominant position in its core segments of its operations -

Corporate Finance including Equity Capital Markets Advisory Services, Institutional

Equities, Retail and Financial Product Distribution.

ICICI Securities Primary Dealership is the largest primary dealer in Government

securities. In fiscal 2008, it achieved a profit after tax of Rs.1.40 billion.

ICICI Prudential Asset Management is the second largest mutual fund with asset

under management of Rs. 547.74 billion and a market share of 10.2% as on March 31,

2008. The Company manages a comprehensive range of mutual fund schemes and

portfolio management services to meet the varying investment needs of its investors

through 235 branches spread across the country.

Incorporated in 1987, ICICI Venture is the oldest and the largest private equity firm in

India. The funds under management of ICICI Venture have increased at a 5 year CAGR

of 49% to Rs.95.50 billion as on March 31, 2008.

*Free float holding excludes all promoter holdings, strategic investments and cross

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Introduction to the Project

Financial markets could mean:

1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges

facilitate the trade in stocks, bonds and warrants.

2. The coming together of buyers and sellers to trade financial products. i.e. stocks and

shares are traded between buyers and sellers in a number of ways including: the use of

stock exchanges; directly between buyers and sellers etc.

INDIAN MARKET GROWTH

India Market Growth over the years have attained a high benchmark to sustain her

business and competition with other nations. From the early 1990s, Indian market

economy have been following a liberalized policy, by reducing government restrictions

on foreign trade and investment. The publicly owned industries are privatized and profit

earning sectors like the software and financial services, pharmaceutical, biotechnology,

nanotechnology, telecommunication, shipbuilding and aviation are now been opened to

private and foreign interests. India's GDP, currently more than 9%, makes it one of the

fastest developing economies in the world. Indian market growth ranks her in the tenth

position in the world economy.

The easing of restrictions in capacity expansion for incumbents, removal of price

controls and reduction in the corporate tax rate in the 1980s initiated the process of

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market growth in India . India Market Growth got further accelerated with the

economic liberalization of 1991 which marked an end to the License Raj, thereby ending

many public monopolies and allowing direct foreign investment in many sectors. The

public sector is involved with sectors like railways and postal system which are

considered either to be too important or not enough profitable to leave to the market

forces only.

Today the leading markets of Indiaare the - IndianBullion Market,Indian Car Market,

India Commodity Market, India Debt Market, India Design Market, Indian Equity Market,

Indian Food Market, India Financial Market, Indian Gold Market, India IT Market, India

Money Market, Indian Real Estate Market, Indian Retail Market, India Semiconductor

Market, Indian Stock Market, India Telecoms Market.

There's been an increase in the India Market Growthspecially in the industries dealing

with manufacturing, construction, transport and communication, tourism, personal

products, health care, education and recreation, vehicle, telecommunications and

software. According to the Indian Finance Minister, P. Chidambaram, companies like

General Motors Corp., Royal Dutch Shell Plc. and the like have invested in about 3,000

new factories and other expansion projects worth about more than twenty billion dollars

in Indian market since 2004, in order to tide the growing market demand.

To hold the India Market Growth rate steadily, the government need to follow certain

policies which would widen and broaden the scope for the growth of Indian markets in

the near future. these are:

Systematic reform Programme

Promoting competition and higher corporate investment

Investing in infrastructure, health care and education

The increase in India Market Growth is reflected in the actions of the government like

boosting productivity, reducing poverty and providing people with more sustainable

lifestyles in both the urban and rural sector.

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TheorganizedpartoftheIndianFinancialSystemcanbe classifiedfromthepointof

viewoftheregulatorsas:

RegulatoryAuthorities

RegulatoryAuthorities

RBI SEBI

CommercialBanks PrimaryMarket

ForexMarkets Secondarymarket

FinancialInstitutions DerivativesMarket

PrimaryDealers

Reserv eBankof

India(RBI)Commercialbanksincludepublicsectorbanks,privatebanks andforeignbanks.RBI,

underBankingRegulationActand NegotiableInstrumentAct,regulatesthesebanks.

Financial Institutions may be of all India level like IDBI, IFCI, ICICI, NABARD or

sectoral financial institutions like, EXIM, TFCIL etc. IFCI was the first term lending

institution tobeset up. IDBI is theapexdevelopment financial institutionsetup to

providefundsforrapidindustrializationinIndia.Inorderto boostthedisbursementofcreditto theagriculturesector, AgricultureRefinanceCorporationwassetupbyRBI

to provide refinance to banks and institutions extending credit to the agriculture

sector.

TheparticipantsinForeignexchangemarket includebanks, financial institutionsand

areregulatedbyRBI.18


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Primarydealersareregisteredparticipantsofthewholesaledebt market.Theybidat

auctions forgovernmentdebts, treasury bills,whichare then retailed to banksand

financialinstitutions, whichinvestinthesepaperstomaintaintheirStatutory Liquidity

Ratio(SLR).

Securitie sand Exchang eBoardofIndia(SEBI)

SEBIwassetupasanautonomousregulatoryauthoritybythe GovernmentofIndia

in1988Toprotecttheinterestofthe investors inthesecuritiesandtopromotethe

development of and to regulate the securities market and the matters connected

therewithor incidental thereto. It isempoweredby twoacts namely TheSEBIAct,

1992andTheSecuritiesContract (Regulation)Act,1956 to perform the functionof

protecting investorsrightsandregulatingthecapitalmarkets.

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INDIAN FINANCIAL MARKETS

IndianFinancialMarkets

MoneyMarket DebtMarket CapitalMarket

SecuritiesMarket Non-SecuritiesMarket

PrimaryMarket SecondaryMarket

SpotMarket ForwardMarket

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Role of Capital Market

1. Itistheindicatoroftheinherenthealthoftheeconomy.

2. Itisthelargestsourceoffundswithlongorindefinite maturityforcompaniesand

therebyenhancescapital formationintheeconomy.

3. Itoffersanumberofinvestmentavenuestotheinvestors.

4. It helps in channelising the savings pool in the economy towards investments,

whicharemoreefficientandgivea better rateof return therebyhelping inoptimum

allocation ofcapitalinthecountry.

Primary Market

The primary market is the place where the new offerings by companies are made

eitheras InitialPublicOffer (IPO)or Rights Issue. IPOs are offerings made by the

companies for the first time while rights are offerings made to the existing

shareholders.Investorswhoprefertoinvestintheprimary issuesarecalledStags.

Secondar y Market

Secondarymarketconsistsofstockexchangeswherethebuy ordersandsellorders

are matched in the organised manner/ there are at present 25 recognized stock

exchangesinIndiaand aregoverned bytheSecuritiesContracts(Regulation)Act

(SCRA).

Derivatives Market

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It is the market for the financial instrument, which derives their values from the

underlying assets like stock, commodity or currency. Derivatives trading has started

with Index Futures, followed by Index Option and then Stock Option as per the

recommendation of the SEBI appointed L. C. Gupta Commit- tee.

Early Years

The equity brokerage industry in India is one of the oldest in the Asia region. India had

an active stock market for about 150 years that played a significant role in developing

risk markets as also promoting enterprise and supporting the growth of industry.

The roots of a stock market in India began in the 1860s during the American Civil War

that led to a sudden surge in the demand for cotton from India resulting in setting up of

a number of joint stock companies that issued securities to raise finance. This trend was

akin to the rapid growth of securities markets in Europe and the North America in the

background of expansion of railroads and exploration of natural resources and land

development.

Historical records show that as early as 1864, there were about 1,000 brokers with the

stock markets functioning from three places in Mumbai; between 9 am to 7 pm at the

junction of Meadows Street and Rampart Row, from day break till 9 am and from 7 pm

to early hours of next morning at Bazargate.

Share prices rose sharply even at that time. A share of Colaba Land Company during

the boom period of the 1860s rose from Rs 10,000 at par to Rs 120,000 and that of

Backbay Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time, was a

major financial centre having housed 31 banks, 20 insurance companies and 62 joint

stock companies.

Reports on stock markets around that time indicate that an ordinary broker in 1864

earned about Rs 200 per day, a huge sum in those days. The boom period came to an

abrupt end in 1865. In Jul 1865, what was then used to be called the share mania

ended with burst of the stock market bubble. Never I witnessed in any place a run so

widely distributed nor such distress followed so quickly on the heels of such prosperity

thus wrote Richard Temple, who served as the Governor of Bombay at that time. An

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interesting aspect is that despite the collapse of the stock market, most of the brokers

met their payment commitments.

In the aftermath of the crash, banks, on whose building steps share brokers used to

gather to seek stock tips and share news, disallowed them to gather there, thus forcing

them to find a place of their own, which later turned into the Dalal Street. A group of

about 300 brokers formed the stock exchange in Jul 1875, which led to the formation of

a trust in 1887 known as the Native Share and Stock Brokers Association.

A unique feature of the stock market development in India was that that it was entirely

driven by local enterprise, unlike the banks which during the pre-independence period

were owned and run by the British. Following the establishment of the first stock

exchange in Mumbai, other stock exchanges came into being in major cities in India,

namely Ahmedabad (1894), Calcutta (1908), Madras (1937), Uttar Pradesh and Nagpur

(1940) and Hyderabad (1944). The stock markets gained from surge and boom in

several industries such as jute (1870s), tea (1880s and 1890s), coal (1904 and 1908)

etc, at different points of time.

Beginning of a new equity culture

A new phase in the Indian stock markets began in the 1970s, with the introduction of

Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the

multinational companies, which created a surge in retail investing. The early 1980s

witnessed another surge in stock markets when major companies such as Reliance

accessed equity markets for resource mobilisation that evinced huge interest from retail

investors.

A new set of economic and financial sector reforms that began in the early 1990s gave

further impetus to the growth of the stock markets in India. As a part of the reform

process, it became imperative to strengthen the role of the capital markets that could

play an important role in efficient mobilisation and allocation of financial resources to the

real economy. Towards this end, several measures were taken to streamline the

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processes and systems including setting up an efficient market infrastructure to enable

Indian finance to grow further and mature. The importance of an efficient micro market

infrastructure came into focus following the incidence of market abuses in securities and

banking markets in 1991 and 2001 that led to extensive investigations by two respective

Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an

administrative arrangement, was given statutory powers with the enactment of the SEBI

Act, 1992. The broad objectives of the SEBI include

to protect the interests of the investors in securities

to promote the development of securities markets and to regulate

the securities markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth of

securities markets in India in the last fifteen years.

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

New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by

financial institutions with an aim to provide access to investors all over the country. NSE

was incorporated in Nov 1992 as a tax paying company, the first of such stock

exchanges in India, since stock exchanges earlier were trusts, being run on no-profit

basis. NSE was recognized as a stock exchange under the Securities Contracts

(Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt

segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting up

of the National Stock Exchange brought to Indian capital markets several innovations

and modern practices and procedures such as nationwide trading network, electronic

trading, greater transparency in price discovery and process driven operations that had

significant bearing on further growth of the stock markets in India.

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

successful stock market. To speed the securities settlement process, The Depositories

Act 1996 was passed that allowed for dematerialisation (and rematerialisation) of

securities in depositories and the transfer of securities through electronic book entry.

The National Securities Depository Limited (NSDL) set up by leading financial

institutions, commenced operations in Oct 1996. Regulations governing selection of

various types of market intermediaries as depository participations were made.

Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock

Exchange and other financial institutions came into being.

Rapid Growth

The last decade has been exceptionally good for the stock markets in India. In the back

of wide ranging reforms in regulation and market practice as also the growing

participation of foreign institutional investment, stock markets in India have showed

phenomenal growth in the early 1990s. The stock market capitalization in mid-2007 is

nearly the same size as that of the gross domestic product as compared to about 25

percent of the latter in the early 2000s. Investor base continued to grow from domestic

and international markets. The value of share trading witnessed a sharp jump too.

Foreign institutional investment in Indian stock markets showed continuous rise

reaching about USD10 bn in each of these years between FY04 to FY06. Stock markets

became intensely technology and process driven, giving little scope for manual

intervention that has been the source of market abuse in the past. Electronic trading,

digital certification, straight through processing, electronic contract notes, online broking

have emerged as major trends in technology. Risk management became robust

reducing the recurrence of payment defaults. Product expansion took place in a speedy

manner. Indian equity markets now offer, in addition to trading in equities, opportunities

in trading of derivatives in futures and options in index and stocks. ETFs are showing

gradual growth. Within five years of introduction of derivatives, Indian stock markets

now are ranked first in stock futures and fourth in index futures. Indian stock markets

are transaction intensive and thus rank among the top five markets in this regard. Stock

exchange reforms brought in professional management separating conflicts of interest

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between brokers as owners of the exchanges and traders/dealers. The demutualisation

and corporatisation of all stock exchanges is nearing completion and the boards of the

stock exchanges now have majority of independent directors. Foreign institutions took

stake in Indias two leading domestic stock exchanges. While NYSE Group led

consortium took stake in the National Stock Exchange, Deutsche Borse and Singapore

Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

Investment Products

Fixed Income

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

Debentures, Commercial papers and Certificate of Deposits. Criteria for investment in

fixed income products:

1. Yield to maturity.

2. Credit rating of the security.

3. Risk preference.

For fixed income securities interest is the major decisive factor. Credit rating of the

securities published periodically helps the investor in credit risk assessment.

Government Securities:-

It includes T-Bills (364, 182, 91 & 14 days), Bonds issued by the Central & State

Government, State Financial Institutions, Municipal Bodies, Port Trusts, and Electricity

Bodies etc. T-Bills are discounted instruments and these may be traded with arepurchase clause, called repos. Repos are allowed in 364, 182 and 91 days T-Bills and

the minimum repo term is 1 day. The banks purchase these securities; financial

institutions and Provident fund trust for their SLR requirements and are normally

referred to as gilt- edged securities.

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Bonds:-

It can be of many types like Regular Income, Infrastructure, Tax saving or Deep

Discount Bonds. These are investment products with fixed coupon rates and a definite

period after which they are redeemed. The bonds may be regular income with the

coupons being paid at fixed intervals or cumulative in which interest is paid on

redemption. Deep Discount bonds are one, which is issued at a discount at the face

value, and the investor is paid the face value at redemption.

Debentures:-

It may be many types like, Fully convertible debentures (FCDs), Partly convertible

debentures (PCDs) and non-convertible debentures (NCDs). FCDs are those whose

face value is converted into fixed number of equities at a fixed price. The price of each

equity share is received by the way of converting the face value of convertible

securities i.e. the debenture is called the conversion price and the number of equity

shares exchanable per unit of the convertible security i.e. debenture is called

conversion ratio.

Callable debentureis a debenture in which the issuing company has the option of

redeeming the security before the specified redemption date at a pre-determined

price. Puttable debenture is one where the holder has the option of getting it redeem

before the maturity date. PCDs are debentures where a portion of the face value is

converted into equity shares and the NCDs, also called the khoka, are redeemed on

maturity only.

Public Deposits:

Corporates can raise funds from the public in the form of fixed deposits. These deposits

are unsecured and are mainly used for the working capital requirements. These

unsecured public deposits are governed by the Companies (Acceptance of Deposits)

Amendment Rules 1978. Under this rule, public deposits cant exceed 25% of the share

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capital and free reserves and the maximum maturity period is 3 years while the

minimum is 6 months.

Certificate of Deposits:

These are short term funding instruments issued by banks and financial institutions at a

discount to the face value. Banks can issue CDs for duration of less than 1 year while

FIs can only issue this for more than 1 year. The issuing bank or financial institution

cant repurchase the instruments. CDs have to be issued for a minimum of Rs. 5 lakhs

with multiples of Rs. 1 lakh thereafter. These are generally used by corporates to meet

their short-term requirements.

Commercial Papers:

These represent short-term promissory notes issued by firms with a high credit rating.

The maturity of these varies from 15 days to 1 year, sold at a discount to the face value

and redeemed at the face value. CPs can be issued by the companies having minimum

net worth of Rs. 4 crores and needs a mandatory credit rating of P2 (CRISIL), D2 (Duff

& Phelps), PR2 (Credit Analysis & Research) and A2 (ICRA). The rating should not be

more than 2 months old. It can be issued for a minimum amount of Rs. 25 lakhs and

more in multiples of Rs. 5 lakhs.

Equity Shares

An equity share in a company is a share in its ownership. Equityshareholders

collectively constitute the ownership of the company and enjoy the fruits of the

ownership like dividends and voting in the meetings etc., but they are not liable for the

debts of the company beyond the value that has already been subscribed through the

share capital. However certain shares do not carry ownership privileges like voting etc.

these shares are preferential or non voting shares. But preference shareholders get

assured dividends, if the company makes profit and they would get back their money

invested after a specified period of time. Equity shareholders can only redeem their

investment by selling the share at the market price.

Other Investment Products Available Are as Follows:-

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Today choosing a best investment plan is difficult because there are so many

investment options available. These days we are getting more money compared to last

decades.

Bank Fixed Deposits (FD)

Fixed Deposit or FD is the most preferred investment option today. It yields up to 8.5%

annual return depends on the Bank and period. Minimum period is 15 days and

maximum is 5 years and above. Senior citizens get special interest rates for Fixed

Deposits. This is considered to be a safe investment because all banks operated under

the guidelines of Reserve Bank of India.

National Saving Certificate (NSC)

NSC is backed by Govt. of India so it is a safe investment method. Lock in period is 6

years. Minimum amount is Rs100 and no upper limit. You get 8% interest calculated

twice a year. NSC comes under Section 80C so you will get an income tax deduction up

to Rs 1,00,000. From FY 2005-'06 onwards interest accrued on NSC is taxable.

Public Provident Fund (PPF)

PPF is another form of investment backed by Govt. of India. Minimum amount is Rs500

and maximum is Rs70,000 in a financial year. A PPF account can be opened in a head

post office, GPO and selected branches of nationalized banks. PPF also comes under

Section 80C so individuals could avail income tax deduction up to Rs 1,00,000. Lock in

period for PPF is 15 years and interest rate is 8%. Unlike NSC, PPF interest rate is

calculated annually. Both PPF and NSC considered to be best investment option as it is

backed by Government of India.

Stock Market

Investing in share market is another investment option to get more returns. But share

market investment is volatile to market conditions. Before investing you should have a

thorough knowledge about its operation.

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MUTUAL FUNDS

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

investments. A fund manager buys and sells securities for the fund's shareholders.

Mutual fund values rise and fall along with the securities in the fund. An investor may

prefer to invest in mutual funds for diversification, to take advantage of the professional

management, the low cost of shares, or the ease with an investor can buy and sell

shares. Each mutual fund has an objective which determines the types of securities it

invests in. The fund's objectives must be stated clearly in the prospectus. More than6,000 mutual fund are available, all with different objectives, securities owned, levels of

risk, and levels of earnings.

All mutual funds have management fees and some have additional fees when shares

are bought and sold. The prospectus must disclose all fees and costs. Many mutual

funds are part of a family of funds (i.e. issued by the same mutual company). A financial

service company may offer a number of funds with different objectives and the investor

may switch from one fund to another within the same family at little or no expense.

CERTIFICATES OF DEPOSIT

Certificates of Deposit or CDs are purchased for specific amounts of money at a fixed

interest rate for a specific time. CDs are generally priced in multiples of $1000. Usually,

the longer the CD is held, the higher the interest rate. If you cash in the CD before the

specified time, you will have to pay a penalty. CDs are also insured (up to $100,000) if

the institution is federally insured.

SAVINGS BONDS

Savings bonds are issued by the United States Treasury and come in two variety. The

Series EE and Series HH. EE bonds are available at most banks. The minimum30


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purchase is a $25 bond which will mature to pay $50 in eight to 12 years depending on

the interest rate. The interest rate on the bond is related to the market interest rate and

there is a penalty for cashing a bond in early.bonds are purchased from a Federal

Reserve Bank or through the Treasury at face value. They can be bought only by

trading in EE bonds or an old H bond. The HH bond matures in 10 years with interest

paid semi-annually.

Treasury Bonds are considered the safest bond investment. They are not insured but

are backed by the full faith and credit of the United States government. The US

guarantees that the investor will receive full principal amount upon maturity. There are

no sales charges for Treasury bonds and the interest they earn is exempt from state

and local taxes and can be deferred from federal income tax until the money is

received.

GOVERNMENT SECURITIES

The United States government also issues debt securities to raise funds. Other US

securities (besides the savings bonds) include Treasury Bills (Tbills) with up to one year

maturities, Treasury Notes with up to 10 year maturities, and other United States

Agency bonds. T-bills are sold to selected securities dealers by the Treasury at auction.

Investors can buy all three types, without paying commission, directly from a Federal

Reserve Bank, or from a dealer.

OTHER INVESTMENTS:

BONDS

Municipal Bonds are issued by states, cities, or certain local government agencies. An

important feature of these bonds is that the interest which a bondholder receives is not

subject to federal income tax. Also the interest is exempt from state and local tax if the

bondholder lives in the jurisdiction of the issuer. Because of these tax advantages the

interest rate is usually lower than that paid on corporate bonds Municipal bonds are

issued to fund needed projects; such as bridges, schools, and new roads.

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Corporate Bonds usually pay higher interest than government bonds but they are

somewhat riskier. If a corporation goes bankrupt, bondholders, as creditors, are paid

their money before stockholders. Corporate bonds are either secured or unsecured. A

secured bond is backed by specified assets or collateral, while an unsecured bond is

backed only by the faith and credit of the corporation. Companies offering bonds to the

public must file a registration statement with the SEC.

Why Bonds are resold on the market: Why would someone want to sell a $1,000 bond

for less than its full value? Suppose you buy a bond for $1,000 that pays 10% interest

and matures in ten years. Each year you would receive $100. After a few years, lets say

interests rates in general rise to $15. Your $1000 investment could be paying $150 a

year. You want to sell the bond to reinvest as much of the $1000 as you can, but who

wants to pay $1000 for a bond only paying $100 a year when they could pay $1,000 for

a bond paying $150 a year. To sell your bond you have to discount its price. On the

other hand, if interest rates fall you would be able to sell it for more than $1,000.

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

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

STOCKS

As already discussed, when you buy stock, you are becoming an owner of the

company. If the company does well, the value of your stock should go up over time. If

the company does not do well, the value of your investment will decrease. Many

companies distribute a portion of their profits to shareholders as dividends. As owners,

shareholders generally have the right to vote on electing the board of directors and on

certain other matters of particular significance to the company.

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

basic form of ownership in a company. People who hold common stock have a claim on

the assets and earnings of a firm after the claims of preferred stockholders and

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bondholders. The safety of the principal of preferred stock is greater than that of

common stock, however, preferred stockholders cannot vote for the directors of the

company.

There are five basic categories of stock:

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

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

stocks

2. "Blue chip stocks" are issued by very solid and reliable companies with long

histories of consistent growth and stability. Blue chip stocks usually pay small but

regular dividends and maintain a fairly steady price. Examples of Blue chip stocks

include IBM, Exxon, Kodak, GE, and Sears.

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

experiencing a faster rate of growth than their general industry. Their stocks normally

pay little or no dividend because the company needs all of its earning to finance

expansion. Since they are issued by new companies, with no track record, growth

stocks are riskier but offer more potential for growth than other kinds of stock.

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

treads. The prices of these stocks tend to go down during recessionary periods and

increase during economic booms. Cyclical stocks include automobiles, heavy

machinery, and home building.

5. "Defensive stocks" are the opposite of cyclical stock. they are issued by companies

producing staples such as food, beverages, drugs and insurance and they usually

maintain their value.

STOCK SPLITS

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When a company increase the amount of its shares it is said to split. A 2 for 1 split

means that the company has doubled the amount of outstanding shares. The sale price

will decrease proportionally to the split so if a stock holder held 100 share of stock for

$40 per share, after the spit she would have 200 shares at $20 a share. The

stockholder's equity remains he same. The stock split in intended to reward

shareholders. By making the company's stock less expensive, it is hoped to attract more

investment, thus leading to an increase in the price of its stock.

FUTURES

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

specific future date and price.

DERIVATIVES

Stock options are known as derivative investment instruments because their value

derives from the security on which they are based. Stock options are contracts giving

the purchaser the right to buy or sell a stock at a specific price within a certain period of

time. Like all futures contracts a stock option can be a very complicated and risky

investment.

LAND

The most common investment people hold is real estate (in the form of home

ownership). Over two-thirds of American's own their homes. Generally, home ownership

is a good investment, as real estate prices generally rise. However, as the purchase of

a home is usually the largest single investment a person makes, if real estate prices fall

owners may have a hard time keeping up with their mortgages.

TANGIBLE ASSETS

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Assets that you can hold onto or touch are called tangible. They include gold coins, and

other collectible items like dolls, baseball cards, or stamps. Generally collectibles pay no

interest and may or may not increase in value over the years. There is no regulated

market for collectibles and should be used for enjoyment rather than investment.

Silver

Silver as an investment:-

Silver, like other precious metals, may be used as an investment. For more than four

thousand years, silver has been regarded as a form of money and store of value.

However, since the end of the silver standard, silver has lost its role as legal tender in

the United States.

(It continued to be used in coinage until 1964, when the intrinsic value of the silver

approached to overtake the coins' face values.)

Methods of investing in silver

Bars

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

like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter

at major banks.

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

at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible

orpooled) storage with a bank or dealer.

Various sizes of silver bars:

1000 oz troy bars. These bars weigh about 68 pounds

avoirdupois (31 kg), and vary about 10% as to weight, as bars range from

900 oz to about 1100 oz (28 to 34 kg). These are COMEX good delivery

bars.

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100 oz bars. These bars weigh 6.8 pounds (3.11 kg), and are

among the most popular with retail investors. Popular brands are

Engelhard and Johnson Matthey. Those two brands cost a bit more,

usually about 40-50 cents per ounce above the spot price, but that price

may vary with market conditions.

Odd weight retail bars. These bars cost less, and generally have

a wider spread, due to the extra work it takes to calculate their value, and

extra risk due to the lack of good brand name.

Coins

Buying silver coins is another popular method of physically holding

silver. One example is the 99.99% pure Canadian Silver Maple Leaf.

Coinsmay be minted as eitherfine silveror junk silver, the latter being

older coins with a smaller percentage of silver. For example, U.S.

pre-1965half dollars, dimes, and quarters are 25 grams perdollar of

face value and 90% silver (22 g silver per dollar).

(1965-1970 ) and 1975-1976 Kennedy half dollars are "clad" in a silveralloy and contain about one-third of the pre-1965 issues.)

Junk silver coins are also available as sterling silver coins, which were

officially minted until 1919 in the United Kingdom and Canada, and 1945

in Australia. These coins are 92.5% silver, and are in the form of (in

decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences,

and threepence. The tiny threepence weighs 1.41 grams, and the Crowns

are 28.27 grams (1.54 grams heavier than a US $1). Canada produced

silver coins with 80% silver content from 1920 to 1967.

Rounds

Some hard money enthusiatists use .999 fine silver rounds as a store of value. A cross

between bars and coins, silver rounds are produced by a huge array of mints, generally

contain an ounce of silver in the shape of a coin but have no status as legal tender.

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Rounds can be ordered with a custom design stamped on the faces or in assorted

batches.

Certificates

U.S. $5 Silver Certificate.

A certificate of ownership can be held by silver investors instead of storing the actual

silver bullion. Silver certificates allow investors to buy and sell the security without the

difficulties associated with the transfer of actual physical silver.

GOLD

There are many savings and investment options available in India. One of the options is

gold. Gold has been valued since prehistoric times and is the investment option that has

been seen as the ultimate form of safe haven investment and the only true form of

wealth. Gold has been popular in India because it acted as a good hedge against

inflation. There is so much uncertainty in the world in terms of economic growth and

geopolitics, it is no surprise that many investors, big and small have chosen to hedge

their investments through gold.

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ADVANTAGES AND DISADVANTAGES OF VARIOUS ASSET CLASSES

CASH

ADVANTAGES

BONDS

ADVANTAGES

EQUITIES

ADVANTAGES

High level of security.

You can get your

money back

quickly and easily.

Interest willalways

be paid.

Interest is set inadvance and paid

regularly.

The value of a Bond

in the open market

may go up.

Paying interest on

bonds is a higher

priority for

companies than

paying dividends on

shares.

Equities can increasesignificantly in value.

Dividends can increase as

company profits increase.

CASH

DISADVANTAGES

BONDS

DISADVANTAGES

EQUITIES -

DISADVANTAGES Interest rates are

variable and

currently very low.

The best rates may

The bond issuer may

default on interest

payments or be

unable to make the

final repayment.

The value of a bond

Equities can also fall

significantly in value.

Its very difficult to

predict what will happen

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only be Available

on special terms or

for larger amounts.

in the open market

may go down.

in the short term.

Types of risks

All investments involve some form of risk. Consider these common types of risk and

evaluate them against potential rewards when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due to

broad outside influences. When this happens, the stock prices of both an outstanding,

highly profitable company and a fledgling corporation may be affected. This change in

price is due to "market risk". Also known as systematic risk.

Inflation Risk

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

faster than the earnings on your investment, you run the risk that you'll actually be able

to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk

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

repay your principal when the investment matures?

Interest Rate Risk

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Changing interest rates affect both equities and bonds in many ways. Investors are

reminded that "predicting" which way rates will go is rarely successful. A diversified

portfolio can help in offseting these changes.

Investment Risks

The sectoral fund schemes, investments will be predominantly in equities of select

companies in the particular sectors. Accordingly, the NAV of the schemes are linked to

the equity performance of such companies and may be more volatile than a more

diversified portfolio of equities.

Exchange risk

A number of companies generate revenues in foreign currencies and may have

investments or expenses also denominated in foreign currencies. Changes in exchange

rates may, therefore, have a positive or negative impact on companies which in turn

would have an effect on the investment of the fund.

Changes in the Government Policy

Changes in Government policy especially in regard to the tax benefits may impact thebusiness prospects of the companies leading to an impact on the investments made by

the fund

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

technological change.

An industries' key asset is often the personnel who run the business i.e. intellectual

properties of the key employees of the respective companies. Given the ever-changingcomplexion of few industries and the high obsolescence levels, availability of qualified,

trained and motivated personnel is very critical for the success of industries in few

sectors. It is, therefore, necessary to attract key personnel and also to retain them to

meet the changing environment and challenges the sector offers. Failure or inability to

attract/retain such qualified key personnel may impact the prospects of the companies

in the particular sector in which the fund invests.

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RISK RETURN GRID

Investment Option Risks/Liquidity Returns Taxation SuitabilityBank FDs Very low risk

and lowliquidity.

Lowreturns, butassured.Dependingon thetenure andbank, couldbe around6-9%

Sincereturns arefullytaxable, thepost-taxreturns willbe stilllower.

Good for verylow riskinvestors andthose in the nilor low taxbrackets.

As interestrate scenario

seems to bepeaking, onecould considerinvesting in 3-5 year FDs.

FMPs Low risk andlow Liquidity.

No assuredreturns butdependingon tenureand theMF, could

be around6-9%.(Ability todeliver theindicativereturns).

MFs attractmuch lowertaxation andhence givebetter post-tax returns

vis--visBank FDs.

Good for lowrisk investors,but in high taxbrackets.

Good for

investing thedebt portion ofones portfolio.

Floating Rate Funds Low risk andhigh liquidity.

Marketlinked.Today

Lowertaxation ofMFs makes

Good forinvestingshort-term

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could bearound 5-7%.

FloatingRate fundsattractive.

money whereone needshigher liquidity.

Debt Funds Low toMedium risk.

High Liquidity.

Returnsare market-

linked.Todaycould bearound 5-7%, butsusceptibleto interestrate risk.

Lowertaxation of

MFs makessuch fundsattractive.

Can beavoided in a

rising interestrate scenariobut is good ina fallinginterest ratescenario.

Post Office Schemes Low risk and

low Liquidity.

MIS

schemegive 8%interest.

Timedeposit6.25-7.5%.

Since

returns aretaxable, thepost-taxreturns willbe stilllower.

Good for very

low riskinvestors andthose in the nilor low taxbrackets.

PPF Low risk withvery lowliquidity (15-year lock-in

period. Partialwithdrawalallowed after 6years).

8%assuredreturns.

Interest istax-free.

Also Sec

80C benefit.Hence agoodscheme.

Good taxsavinginvestmentoption.

Good forinvesting thedebt portion ofones portfolio.

NSC Low risk withlow liquidity (6years lock-in).

8%assuredreturns.

Interest fullytaxable. Buteligible forSec 80C

benefit.

Not veryattractive vis--vis otheroptions like 5-

year BankFDs.

Equity High risk andhigh liquidity.

Marketlinkedreturns.Good

Attractivetaxtreatment.No Long

Needs highrisk appetite.

Ideal for those

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potential. TermCapitalGain Taxand 10%

Short TermCapitalGains Tax.

investors whohave a goodcorpus, goodknowledge

and time totrack themarketsregularly.

Care shouldbe taken toinvest in goodprofit makingcompanies.Penny stocks

should beavoided.

Equity Funds

High risk andhigh liquidity inopen-endedfunds.

Marketlinkedreturns.Goodpotential.

Attractivetaxtreatment.No LongTermCapitalGain Taxand 10%Short Term

CapitalGains Tax.

Ideal for smalland commoninvestors, butwith high riskappetite.

SIP and a longterminvestment

horizon cancut down riskand increasethe probabilityof makinggood returns.

Also, oneshould build awell-diversifiedportfolio with

say 50-60%money in 5-7diversifiedfunds, 25-35%money in 3-4mid/small-capfunds and 10-15% in 3-4sector funds.

ELSS Funds High risk with Market Attractive Good tax

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low liquidity (3years lock-inperiod).

linkedreturns.Goodpotential.

taxtreatment.No LongTermCapital

Gain Taxand 10%Short TermCapitalGains Tax.Also Sec80C benefit.

savinginvestmentoption.Amountsbeyond Rs.1

lakh limit couldbe invested inopen-endedfunds.

SIP in ELSSwould reducethe volatilityrisk.

Balanced Funds Medium toHigh risk.

High Liquidity.

Medium tohigh

returns.Marketlinked.

Attractivetax

treatment.No LongTermCapitalGain Taxand 10%Short TermCapitalGains Tax.

Thoughconvenient as

both debt andequityinvestment iscovered underone fund, itmay be betterto investseparately inequity anddebt funds forbetter control.

ULIPs Low to HighRiskdepending onthe investmentoption i.e. PureDebt or Mixedor Pure Equity.Low Liquidity(3-5 years

lock-in period).

Low to highdependingon theinvestmentoption.Marketlinkedreturns.

Tax freereturns.

Also Sec 80C benefitavailable.

Not anattractiveoption due tohigh charges,low flexibilityand lowdiversification.There areother better

similarinvestmentproducts likeMFs with lowcharges, highflexibility andhighdiversification.As regards lifecover, the

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same could bedone througha term policy.

Endowment/Moneyback Plan

Low risk andvery low

liquidity.

Lowreturns.

Generallyaround 6-6.5%.

Tax freereturns.

Also Sec 80C benefitavailable.

Not anattractive

option due tolow returns.There areother bettersimilarinvestmentproducts likePPF. Asregards lifecover, thesame could be

done througha term policy.Real Estate Variable risk

and variableliquiditydepending onthe type andlocation ofproperty.

Marketlinkedreturns.Goodpotential.

No taxadvantages,exceptattractivetax benefitson thehome loans.

High initialinvestmentrequired whichcould makeones portfoliolopsided; hightransactionscosts like title-search,

registrationbrokerage etc.;and cannot bepartlyliquidated.Therefore,real-estateMFs (expectedin the nearfuture) may bea better

alternativethan directpropertyinvestment.

If investingdirectly, it isimportant toassess thepotential and

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clear title.Commodities High risk with

high liquidity.Marketlinkedreturns.

No taxadvantages.

Highly cyclical.

Gold Low long-termrisk. Butvolatile in shortterm. HighLiquidity.

Hastraditionallybeen ahedgeagainstinflation.So returnscould bearoundinflationlevels.

No taxadvantages.

Not anattractiveinvestmentoption. Can beused forportfoliodiversificationto partly hedgeagainstinflation.

Gold MFs arebetter thanbuyingphysical gold.

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INVESTMENT STRATEGIES

Investments:

Savings form an important part of the economy of any nation. With the savings invested

in various options available to the people, the money acts as the driver for growth of the

country. Indian financial scene too presents a plethora of avenues to the investors.

Though certainly not the best or deepest of markets in the world, it has reasonable

options for an ordinary man to invest his savings.

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

not guesswork. It takes more than just a tip, it needs training to plan, instinct to pick and

sheer intellect to make it work for the investor. Human nature is fickle, his wants keepchanging.

An investment can be described as perfect if it satisfies all the needs of all investors.

So, the starting point in searching for the perfect investment would be to examine

investor needs. If all those needs are met by the investment, then that investment can

be termed the perfect investment.

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

Liquidity -

How easily an investment can be converted to cash, since part of invested money must

be available to cover financial emergencies.

Safety -

The biggest risk is the risk of losing the money that has been invested. Another equally

important risk is that investments may not provide enough growth or income to offsetthe 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.

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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.

Some of the basic investment needs of an individual at different life stages are as

Starting a job,Single individual

Recentlymarried, no kids

Married, withkids

Kids goingto school,college

Higher studies forchild, marriage

Childrenindependent, nearinthe golden years

YourNeed

Low protection,high assetcreation andaccumulation

Reasonableprotection, stillhigh on assetcreation

Higherprotection,still high onasset

creation butsteadieroptions,increasesavings forchild

HigherProtection,high onasset

creationbutsteadieroptions,liquidity foreducationexpenses

Lump sum moneyfor education,marriage. Facility tostop premium for 2-

3 yrs for these extraexpenses

Safe accumulationfor the goldenyrs.Considerablylower life insurance

as the dependencieshave decreased

Flexibility Choose lowdeath benefit,choosegrowth/balancedoption for assetcreation

Increase deathbenefit, choosegrowth/balancedoption for assetcreation

Increasedeath benefit,choosebalancedoption forasset

creation.Chooseriders forenhancedprotection.Use top-upsto increaseyouraccumulation

Withdrawalfrom theaccount fortheeducationexpenses

of the child

Withdrawal fromthe account forhighereducation/marriageexpenses of thechild. Premium

holiday-to stoppremium for aperiod withoutlapsing the policy

Decrease the deathbenefit-reduce it tothe minimumpossible. Choose theincome investmentoption. Top-ups form

the accumulation(with reducedexpenses) for thegolden yrs cashaccumulation

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WHAT INDIAN FINANCIAL MARKETS NEED

Background

Unfortunate events of the decade of nineties and the beginning of the 21 st century haveled us to believe that regulators around the globe have failed to achieve their primary

objectives of 'maintaining systemic stability' and 'protecting interests of the retail

customer.

The financial sector plays an important role in the economy of any nation. A well-

regulated and well-developed financial sector is vital to achieving the most basic need

of efficient allocation of scarce resources.

The main objectives of any regulator are to improve market efficiency, enhance

transparency, and prevent unfair practices.

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

resource mobilisation, enhanced access to financial products and services, and

sustained economic stability. The International Monetary Fund recognises the need for

'resilient, well-regulated financial systems for macroeconomic and financial stability in a

world of increased capital flows.'

I now look at a few events that shook the financial markets and the challenges they

pose to the regulators.

The Indian scenario

The Indian stock markets are now amongst the best in the world in terms of

modernisation and the technology. India was among the few countries, which was notbadly effected by the contagion effects of the Asian crisis of 1997. Policy makers

attribute this to the slow and cautious pace of capital account liberalisation.

However, it has also been a decade marred with scams, which were huge even by

international standards, revealing the many gaps in our regulatory regime.

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

artificially jacked up prices of worthless securities to rake in Rs 5,000 crore (Rs 50

billion). The Sensex came tumbling down after the scam story broke out on April 23,

1992. Fortunes were lost overnight. As a result, the ambit of the Securities Exchange

Board of India, the stock exchanges and regulatory financial institutions was widened.

Nearly a decade later, after a 'dream budget' by Yashwant Sinha, the then finance

minister, on February 28 2001, the Bombay Stock Exchange index rose initially but

thereafter crashed. Nearly

700 points were lost in eight trading sessions leading to erosion in market capitalisation

of Rs 146,000 crore (Rs 1,460 billion).

This erratic behaviour was once again traced to a handful of brokers, wishing to trap a

leading 'bull', Ketan Parekh, who had manipulated prices of shares of a few select

companies in information technology, communication and entertainment sector.

Units of US-64, the flagship scheme of Unit Trust of India --the largest public sector

mutual fund in India, dropped from a peak of Rs 19 to Rs 5.81 in January 2002. Middle

class people and retirees were the hardest hit because of the irregularities.

Against this backdrop, the regulatory bodies are making endeavours to bring up the

Indian market to international standards. It is working towards making India a global

benchmark for capital market development.

The road ahead

Today-- with the 'feel good' factor about India in the global arena rising, increased

confidence of the investors in the Indian market, Sensex looking more attractive than

ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is

the most vulnerable period for the regulators of the Indian financial sector, particularly

SEBI and RBI.

Major steps towards reforms, liberalisation and globalisation have been taken in the

1990s, now the hiccups need to be sorted out. Maintaining stability is of prime concern.

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The time seems ripe to address the gaps in the regulatory framework, when the times

are relatively good and peaceful. Prevention is better than cure.

AGENDA for Future

The report of the Committee on Capital Account Convertibility has identified a number of

areas for future reforms in the financial sector. The Governor, Dr. C. Rangarajan, in his

inaugural address at the Bank Economists' conference had identified the new

challenges and opportunities that may dominate the future course of banking

development in India. The Conference helped to identify specific areas that need

attention in the future. Further, some issues relating specifically to the financial market

have been raised from time to time. While we cannot take a view on such issues without

a detailed examination, let me list them here for record. I will classify them under three

broad areas, viz., money market, Government securities market and foreign exchange

market.

Money Market

Reduction of minimum period of term deposits.

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

days.

Enlarging the scope of participation in the repo market.

Removal of inter-bank liabilities completely from minimum

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

Introduction of intermediaries in money market.

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

market by prescribing liquidity reserve requirements and removing

other elements of market segmentation.

Introduction of screen based dealing systems for money market

instruments and Government securities.

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Government Securities Market

Increasing the number of PDs and enhancing their underwriting

capability to 100 per cent.

Introduction of when-issued market.

Providing access to FIIs in Treasury Bills.

Introduction of interest rate Futures in Treasury Bills/dated

Government securities.

Automating the DVP system fully.

Foreign Exchange Market

Issuance of foreign currency denominated bonds to residents.

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

Allowing FIs to participate as full fledged Authorised Dealers.

Allowing all derivatives including rupee based derivatives.

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

elsewhere, and I reiterate - a comprehensive exercise on legislative changes is required

to put our financial sector on par with global standards. Further, there are issues of

regulation and supervision which need to be addressed. The viability of further reforms

is also critically dependent on improvements in the area of payments and settlement

systems. Issues relating to Technology, Human Resources Development and Industrial

Relations are other areas that require urgent attention. I would also like to flag the role

of market participants in the evolution of standard market practices and accounting

procedures. We cannot afford to be in a hurry to bring about reforms. Integration and

globalisation of financial markets are not ends by themselves, nor are they risk-free.

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Every step that we take recognises this basic tenet and takes into account the

uniqueness of our own circumstances and requirements.

Innovations in Financial Products

The worldwide financial industry is a hotbed of innovation in product design. How do

new financial products come up? Why do new financial products come up? If we know

designs of numerous products which have proved to be extremely useful internationally,

can we create all of them in India on a very short horizon? What drives the sequencing

through which new products come about?

At the outset, it is easy to tell why new financial products come about: they come about

because people in the economy find them useful. If we look at a stream of new products

like index funds, index futures, index options, etc., we see a common thread where

these products are extremely successful internationally because they fulfil basic

economic objectives of people in the economy.

A closely related issue is that of transactions costs. Financial products do not exist in a

vacuum; they are created by financial intermediaries who would typically need to hedge

away most of the risk generated by having sold the product. For example, few finance

companies would be comfortable with selling options on TISCO naked: they would

prefer to be hedged by some mechanism (such as owning shares of TISCO, or some

dynamic trading strategy). When ICICI sells index warrants, they are exposed to risk

unless they hedge that risk away (either by using index futures or by directly investing in

all the index stocks). Someone who sells futures on Nifty Junior would find it very useful

to hedge himself by buying futures on Nifty, since the two indexes are closelycorrelated.

All this hedging involves trading, and brings up the problem of liquidity. Suppose the

hedging that is required for the creation

Emerging Investment Products and Its Scope in Indian Financial Markets

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