AboutLeo Lingham Expertise management consulting process, management consulting career,
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Experience 18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc
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24 years in management consulting which includes business planning, strategic planning, marketing , product management,
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Question 1.Briefly explain the various investment intermediaries in India which help in mobilizing funds from the general public for capital formation.
2. a) Distinguish between ‘current yield’ and ‘yield to maturity’ of a fixed income Security. How are these yields calculated? Discuss.
b)Prashanth Ltd., is intending to acquire substantial shares in GVK Ltd. to acquire control in the company. The beta factor of GVK Ltd. shares is 1.60 and its current market price is Rs. 190/- The company is consistently paying an annual dividend of Rs. 46/-. The risk free market rate of interest is 12% and the rate of return expected on such securities in the market is 18%. You are required to value the share of GVK Ltd.
3.What are the three forms of efficient market hypothesis? Does the efficient market Hypothesis suggests that an investor cannot outperform the market? Explain.
4.What is a ‘diversified portfolio’? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk?
5.What do you understand by a Mutual Fund? Discuss the various types of mutual fund schemes available in the Indian capital market. How is the Net Asset Value (NAV) of a Mutual Fund Unit Calculated? Explain with an example.
Answer KSHAMA,
HERE IS SOME USEFUL MATERIAL.
Q2 is not my expertise area.
REGARDS
LEO LINGHAM
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1. Briefly explain the various investment intermediaries in India which help in mobilizing funds from the general public for capital formation.
THE VARIOUS INVESTMENT INTERMEDIARIES
IN INDIA ARE
-investment banks
-public sector banks
-private sector banks
-foreign banks subsidiaries
-mutual fund houses
-insurance houses.
etc
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INVESTMENT BANKS
AVENDUS
Avendus is an investment bank based in India with offices in mumbia and bangalore.
BAJAJ CAPITAL
BAJAJ Capital's Investment Banking Service is a step ahead in that direction.Bajaj Capital offers you unparalleled capital raising solutions for your business. With over 120 OFFICES in 50 cities all over the country and a network of over 10,000 Advisor Associates, can connect you to potential INVESTORS all over the country.
BARCLYS INDIA
Barclays unveiled its Global Retail and Commercial Banking division in India over the past year as part of its plan to be a leading global bank.
CHOLAMANDALAM INVESTMENT & FINANCE COMPANY
Cholamandalam Investment & Finance Company Limited is the financial services arm of the Murugappa Group. it is one of the leading Financial Services Company in the country.
ICICI SECURITIES LTD
A subsidiary of ICICI Bank - the largest and most recognized private bank in India ICICI Securities Ltd is premier Indian Investment Bank, with Services, Institutional Equities, Retail and Financial Product Distribution.
ICRA LIMITED
ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company.
IDFC
IDFCs mission is to be the financier and advisor of choice for infrastructure in India. IDFC is positioned as a special financial institution which is focused on project finance and investment banking activities in infrastructure.
INDUSTRIAL DEVELOPMENT BANK OF INDIA
The Industrial Development Bank of India (IDBI) was established in 1964 under an Act of Parliament.
INDUSTRIAL FINANCE CORPORATION OF INDIA [IFC]
IFCI, the first Development Finance Institution in India, was set up in 1948, as a Statutory Corporation, to pioneer institutional credit to medium and large industries IFCI was also the first institution in the financial sector to be converted into a Public Limited Company.
KOTAK MAHINDRA CAPTIAL COMPANY
Kotak Mahindra Capital Company (KMCC) helps leading Indian corporations, banks financial institutions and government companies access domestic and international capital markets. KMCC has the most current understanding of investor/appetite, having been the leading book runner/lead manager in public equity offerings.
As a full service Investment Bank, Kotak Investment Banking's core business areas include Equity Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income Securities and Principal Business.
SBI CAPITAL MARKETS
SBI Capital Markets Ltd. is amongst the oldest players in the Indian Capital Market, offering an entire range of Investment Banking Services. With strong fund mobilization strengths, we are one of the leading players in the areas of fund raising through Capital Market Issues / Private Placement.\
S.E INVESTMENTS LIMITED
SEIL's philosophy on corporate governance envisages commitment to ensure customer satisfaction through better services. The company is committed to good corporate governance & continuously reviews various relationship measures with a view to enhance shareholders value. SEILprovides detailed information on various issues concerning the company's business and financial performance.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of Indian Parliament. SIDBI has completed 12 years of service to the small scale sector.
SSKI GROUP
SSKI is a leading India-based financial services group that offers Institutional Equities and Investment Banking services. SSKI Investment Banking is a full-service investment bank with a strong research bias.
TATA INVESTMENT CORPORATION LIMITED [ TICL]
TICL is a non-banking financial company (NBFC) registered with the Reserve Bank of India under the 'Investment Company' category. The company's activities comprise primarily of investing in long-term investments in equity shares and other securities of companies in a wide range of industries.
UTI SECURITIES
UTI Securities Ltd., was promoted as an independant professional entity in June 1994.
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BANKS
ALLAHABAD
Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving the customers since 1865. Offers wide ranging attractive Deposit Schemes to the Non-Resident Indians.
ANDHRA BANK
Providing personal corporate banking solutions and NRI and internal business services.
BANKERS INSTITUTE OF RURAL DEVELOPMENT
BIRD is India's premier Institute in Training, Research and Consultancy in Rural Development Banking. It is an autonomous society promoted and funded by NABARD, the apex Development Bank in Agriculture and Rural Development in India.
BANK OF BARODA
BOB was amongst the first few banks to venture overseas by opening a branch at Mombassa in 1953. Today it has 38 branches and 23 offices of its overseas subsidiaries having presence in 16 overseas countries.
BANK OF INDIA
The Bank has 2528 branches in India spread over all states/ union territories including 93 specialised branches. These branches are controlled through 47 Zonal Offices . There are 19 branches/ offices (including one representative office at Jakarta, Indonesia) abroad located in 10 countries.
BANK OF MAHARASHTRA
It now has 1228 branches all over India. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra.
BANK OF RAJASTHAN
The Bank of Rajasthan Ltd., a leading Private Sector Bank, having branches all over India with prominent presence in Rajasthan having specialised forex and Industrial finance branches. The Bank is committed to the highest level of customer satisfaction through personalised and efficient services.
CANARA BANK
Offers personal banking, commercial banking, NRI services, Rural and Social banking and other international services.
CENTRAL BANK OF INDIA
Central Bank of India holds a very prominent place among the Public Sector Banks on account of its network of 3117 branches and 278 extension counters at various centres throughout the length/breath of the country.
CENTURION BANK
Centurion bank provides personal banking, retail loans wealth management and NRI services. Site provides information on bank ATM l locations through out India.
CORPORATION BANK
Corporation Bank is an organisation established in 1906 based on the traditional Indian values of service to the community and is regarded as one of the well-run banks in the comity of Public Sector Banks in the country. Provides Internet banking facility.
DENA BANK
Offers retail banking, Corporate banking services including ATM cards, Credit Cards, Home Loans, Educational Loans, merchant banking, project financing and Forex services.
DEVELOPMENT CRDIT BANK LTD
Development Credit Bank Ltd. (DCB) is amongst the fastest growing private sector in the country today with a history of operating in the financial services arena for over 70 years.More recently the Bank has seen a rapid expansion in its retail operation and DCB currently has a network of 72 branches and extension counters and offers its customers access to over 10,000 ATM across the country.
EXPORT -IMPORT BANK OF INDIA
Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India. Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports.
FEDERAL BANK
Understanding Federal Bank is all about understanding relationships. Knowing how our relationships helped to make us the largest traditional private sector bank in the country. Of how we nurtured our relationships for more than seven decades, gaining us the reputation of being an agile, technology savvy and customer friendly bank.
HDFC BANK
The Housing Development Finance Corporation Limited was amongst the first to receive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry.
HSBC
Offers personal banking services including checking and savings accounts, debit cards, ATMs, deposits, and card services. Also features business, corporate, and institutional banking.
INDIAN BANK
In addition to standard banking services, Indian Bank diversified into Merchant Banking, Housing and Fund Management services. More than 1300 branches and 75 across the country.
INDIAN OVERSEAS BANK
Offers Personal Banking, NRI services, Forex services, Agri Business Consultancy, Credit Cards and Any Branch Banking and ATM network.
ING VYSYA BANK
ING Vysya Bank was incorporated in the year 1930. BANGALORE has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.
ORIENTAL BANK OF COMMERCE
Offers Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Raiasthan) disbursing small loans. The Bank has implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women entrepreneurs.
PUNJAB NATIONAL BANK
Punjab National Bank is ranked 416 among the biggest banks in the world by Bankers' Almanac (July 2002) London. PNB has Rupee Drawing Arrangements with exchange companies in the Gulf. Bank is a member of the SWIFT and 85 branches of the bank are connected
PUNJAB & SIND BANK
The Bank has a vast network of 754 branches and 136 extension counters (as on 31.03.2003) spread all over India catering to the needs to all section of society irrespective of their social and economic strata. Bank is laying special stress on International Banking Divisions, Merchant Banking, Hire Purchase and Leasing, Telebanking & Credit Card.
STATE BANK OF BIKANER AND JAIPUR
State Bank of Bikaner and Jaipur, a professionally managed Public Sector Bank with a track record of uninterrupted profitability and dividend payment (except one year) since its inception in 1963, came into existence after amalgamation of the erstwhile State Bank of Jaipur with State Bank of Bikaner,as a subsidiary of State Bank of India.
STATE BANK OF HYDERABAD
The Bank became a subsidiary of the State Bank of India on the 1st October 1959 and is now the largest Associate Bank of State Bank of India. Offers Deposit services, ATM l, Electronic Fund Transfer, Internet Banking, Safe Deposit Lockers and more.
STATE BANK OF INDORE
Being an associate of SBI , State Bank of Indore has access to more than 13500 branches of the State Bank Group located in India and abroad. The Bank can also do business through other windows of the Group viz. SBI Capital Markets, SBI Factors and Commercial Services Ltd., SBI Gilts Ltd., SBI Funds Management Ltd., SBI Home Finance Ltd. and SBI Commercial and International Bank Ltd.
STATE BANK OF MYSORE
Subsidiary of SBI l. The Bank has a widespread network of 611 branches and 21 extension counters spread all over India which includes 6 specialised SSI branches, 4 Industrial Finance branches, 3 specialised Personal Banking branches, 1 Hi-tech Agricultural Finance branch, 1 Asset Recovery branch and 7 Service branches, offering wide range of services to the customers.
THE DHANALAKSHMI BANK LIMITED
The Dhanalakshmi Bank Limited (DLB) headquartered at Thrissur in Kerala. Of the 177 branches, all branches are classified as NRI branches, all branches are computerized and in the process of implementing Wide Area Network, ATMs, Any Branch Banking and Cash Management Services, Telebanking, Internet Banking etc.
UCO BANK
Headquartered in KOLKATA l, the Bank has 34 Regional Offices spread all over India. Branches located in a geographical area report to the Regional Office having jurisdiction over that area. These Regional Offices are headed by Senior Executives ranging upto the rank of General Manager, depending on size of business and importance of loacation. The Regional Offices report to General Managers (Operation) functioning at Head Office in Kolkata.
UNITED BANK OF INDIA
United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), BENGAL Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).
UTI BANK
UTI Bank was the first of the new private BANKS to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by Unit Trust of India, the largest mutual fund in India, Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and its four subsidiaries viz. National Insurance Company Ltd., The New India Assurance Company, The Oriental
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INVESTMENT INSTITUTIONS
ANDHRA PRADESH FINANCIAL CORPORATION
ANDHRA Pradesh State Financial Corporation (APSFC) is a term lending Institution established in 1956 for promoting small and medium scale industries in Andhra Pradesh under the provisions of the Sate Financial Corporations Act, 1951. The corporation has launched many entrepreneur-friendly schemes to provide term loans , working capital term loans, special and seed capital assistance to suit the needs of various categories of entrepreneurs.
BAJAJ CAPITAL
BAJAJ Capital is a SEBI approved merchant banker, investment advisor and financial planner. Other products and services include company fixed deposits, bonds,mutual funds, life insurance , general insurance, pension schemes, tax saving schemes, IPOs, Housing loans , NRI schemes and motor vehicle insurance.
BIRLA GLOBAL FINANCE LTD
Birla Global Finance Ltd. (BGFL) was set up by the Aditya Birla Group, one of the most respected and successful groups in India. BGFL is a one-stop financial powerhouse, offering a variety of services via its national network. BGFL has promoted three major joint ventures in stock broking, mutual funds and distribution.
COUNTRYWIDE
Countrywide. Helping Indian consumers fulfill their aspirations with quick and easy loans/. Set up in 1994 and currently operating out of 62 locations in the country, GE Countrywide pioneered
CREDIT ANALYSIS & RESEARCH LTD
Credit Analysis & Research Ltd is a credit rating, information and advisory services company promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services companies.
FUTURE CAPITAL HOLDINGS LIMITED
Future Capital Holdings Limited (FCH) is the financial services arm of the Future Group, which is a business group focusing on consumption-led businesses in India and which is also one of India's leading organized multi-format retailers. Provides Private Equity and Real Estate investment advisory services to onshore and offshore clients. These investment advisory services include investment analysis, research and recommendations. Retail financial services offering Future Money was launched with the objective of becoming one of the leading retailers of financial products and services in India. We hold the exclusive right to provide financial products and services through the retail outlets which are owned, controlled or managed by PRIL and its subsidiaries.
GE CAPITAL
GE Capital Services India has been delivering innovative financial solutions since 1993. We offer a kaleidoscopic range of products and services that meet the diverse needs of corporate and retail customers.
ICICI BANK
ICICIBank is India's second-largest bank with total assets of about Rs. 1 trillion and a network of about 540 branches and offices and over 1,000 ATMs. ICICI Bank 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 subsidiaries and affiliates in the areas of investment banking, life and non-life insurance , venture capital, asset management and information technology. ICICI Bank's equity shares are listed in India on stock exchanges at chennai , delhi , kolkata and Vadodara, the Stock Exchange, mumbai and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).
KOTAK MAHINDRA GROUP
Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to financial needs of individuals and corporates.
LIC HOUSING FINANCE LTD
The main objective of the Company is providing long term finance to individuals for purchase /Construction/repair and renovation of new/existing flats/houses. The unique feature of the Company's schemes is that the loans are usually backed by Life Insurance Policy as collateral security.
MANAPPURAM GENERAL FINANCE AND LEASING LIMITED.
MAGFIL has headquarters at Thrissur and currently has a network of 10 branches interspersed over Central and Northern Kerala, Mahe (Pondicherry State) and Tamil Nadu. Offers deposit schemes, hire purchase, leasing and gold LOANS.
NAGARJUNA GROUP
Nagarjuna Group is a Rs. 20,000 million global conglomerate well entrenched in the areas of Agri Business, Petroleum, Power, Life Sciences and New Initiatives.
NATIONAL HOUSING BANK
National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The Act, inter alia, empowers NHB to issue directions to housing finance institutions to ensure their growth on sound lines and make loans and advances and render any other form of financial assistance to scheduled bank and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement.
SECURITIES TRADING CORPORATION OF INDIA LTD
STCI's core activities comprise participation, underwriting, market making and trading in Government Securities. It was set up by Reserve Bank of India jointly with public sector undertakings.
SHRIRAM GROUP OF COMPANIES
The financial service companies of the Shriram Group are major players in Truck Financing, Chit Funds, Consumer Durable Financing, Merchant Banking and Mutual Funds
STOCK HOLDING CORPORATION OF INDIA LIMITED
SHCIL provides depository, post trading, custodial services, securities lending, to institutional investors and retail investors. Other auxiliary services provided by SHCIL include derivatives clearing, PF fund accounting, SGL constituent account services, mutual funds and other capital market instruments distribution. Stock Holding Corporation of India Limited (SHCIL) was promoted by public financial institutions and insurance majors like IDBI, UTI, ICICI, LIC, GIC and its subsidiaries, IFCI and IIBI.
SUNDARAM HOME FINANCE
SUNDARAM Finance provides FINANCE for your home through one of the group companies Sundaram Home Finance.
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MUTUAL FUNDS
Basic listings
ALLIANCE CAPITAL
Alliance Capital Asset Management (India) Pvt. Ltd. (ACAM) is an affiliate of Alliance Capital Management L.P. (Alliance Capital), a leading global investment adviser headquartered New York, USA. Alliance operates out of eightoffices in the US and through its subsidiaries and affiliate offices in over 19 countries. Since 1993, Alliance Capital has maintained a presence in India when it was registered as a Foreign Institutional Investor (FII). As an FII, Alliance Capital launched an "off-shore" fund, the India Liberalisation Fund in December 1993.
BIRLA SUNLIFE MUTUAL FUND
Birla Sun Life Financial Services offers a range of financial services for resident Indians and Non Resident Indians. Brought together by two large, powerful and reputed business houses, the Aditya Birla Group and Sun Life Financial , it is COMPANY aim to offer diverse and top quality financial services to customers. The Mutual Fund and Insurance companies provide wealth MANAGEMENT and protection products to customers while the Distribution and Securities companies provide brokerage and trading services for INVESTMENT in equities, debt securities, fixed deposits, etc
BOB MUTUAL FUND
BOB Asset Management Company Ltd. is a wholly owned subsidiary of Bank of Baroda incorporated under the provisions of Companies Act, 1956 on November 05, 1992. It acts as an Investment Manager to the BOB Mutual Fund.
CANBANK MUTUAL FUND
Canbank Mutual Fund was set up by Canara Bank, pursuant to the approvals received by it from the Government of India for making investments in equity and other securities. The Securities & Exchange Board of India has also granted registration. Canbank Investment Management Services Ltd. .
CHOLA MUTUAL FUND
Chola Mutual Fund offers a range of funds to help meet financial goals. Each fund is managed with the same disciplined, research-oriented approach that reflects our investment investment philosophy-to protect investor's capital in a market downturn and to out perform in a good market.
HSBC ASSET MANAGEMENT
Mutual Fund, set up locally by the HSBC Group. The business is working on ambitious plans to position itself as one of the leading Private Sector Fund Managers in the Indian financial market - one of the most promising markets in Asia. It also aims to expand its customer base by extending its product range to include a wide variety of investment products and enhance its reputation in India of being a provider of international quality investment products and services.
ING VYSYA MUTUAL FUND
The ING Vysya Mutual Fund has been set up as a Trust sponsored by the ING Group, through its wholly owned subsidiary Nationale - Nederlanden Interfinance B.V. An Asset Management Company, ING Investment Management (India) Pvt. Ltd. has also been set up to manage the funds collected by the Trust. ING Vysya Mutual Fund will provide customer with the most practical and secure investment opportunities to invest your valuable savings - a range of innovative options that combine healthy returns with a high degree of safety. You can invest as much (or as little!) money as you wish, depending on your income, your liabilities and your future plans.
2. What are the three forms of efficient market hypothesis? Does the efficient market Hypothesis suggests that an investor cannot outperform the market? Explain.
Efficient Market Hypothesis It is the idea that the price of stocks and financial securities reflects all available information about them. If new information about a company becomes available, the price will quickly change to reflect this.
Three Types of Efficient market hypothesis
1.Weak EMH. This states all past market prices and data are fully reflected in the price of securities and stocks. However, some information about events shaping the company may not be fully reflected in price. In other words, technical analysis of prices is of no use.
2.Semistrong EMH. This states form asserts that all publicly available information is fully reflected in securities prices. In other words, fundamental analysis is of no use.
3.Strong Form of EMH asserts that all information is fully reflected in securities prices. In other words, even insider information is of no use.
The Efficient Market hypothesis requires certain assumptions.
Many Buyers and sellers
Agents have rational expectations and on average make good decisions about buying shares / stocks
Perfect information about market trends and profit of firms.
Implications of Efficient market Hypothesis
Markets are efficient in determining prices of financial securities.
Investors tend to be rational.
It is not possible (except through luck) to outperform the market.
Prices may not determine future stock performance e.g. the market may not know about an event which will lead to lower profit.
It is easy to buy and sell. For example, housing markets are less close to the model of efficient market hypothesis because there are significant time lags in buying selling and stamp duty e.t.c.
If we assume efficient market hypothesis it suggest regulators need to do little, if anything to prevent asset / stock market bubbles. Because according to this theory, irrational asset price bubbles shouldn’t occur. However, if the efficient market hypothesis is not true, then there is a greater a role for regulators to intervene in asset / stock bubbles to prevent a boom and bust. (assuming regulators don’t get caught up in the same irrational exuberance as investors)
If some investors ignore data and get caught up in bubbles, then in theory ‘efficient investors’ should be able to profit by ’shorting’ a boom. But as Keynes said, the market can remain irrational for longer than you can remain solvent. In other words a bubble may last for a long time and your short positions may fail before you finally benefit from the collapse in prices.
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3. What is a ‘diversified portfolio’? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk?
The PORTFOLIO is an entirety of the financial assets (and usually also liabilities) that an economic agent or group of agents .
A PORTFOLIO that includes a variety of assets whose prices are not likely all to change together. In international economics, this usually means holding assets denominated in different currencies.
Diversification is a fundamental investment concept that most investors have no trouble
understanding. If, for example, an investor owns equal dollar amounts of only two stocks,
and one suffers a 50% loss, his or her portfolio has gone down in value by 25%. But if the
investor owns ten stocks, and one drops by 50%, his or her portfolio has suffered only a 5%
loss.
With a diversified stock portfolio, risk is reduced because different stocks rise and
fall independently of each other. On a broader scale, combinations of different investment
assets may well cancel out each other’s fluctuations in price, reducing the overall risk.
Categorizing risk
The ultimate goal in a diversification strategy is to improve investment performance while
reducing risk. One way to categorize risk is to distinguish between unsystematic risk and
systematic risk.
Unsystematic risk is risk that is specific to a company. Often, this risk involves some
kind of dramatic event such as a strike, a fire or some natural disaster. A company’s slumping
sales also fall within this category. Diversification among the stocks of many companies
reduces unsystematic risk because, of course, it’s highly unlikely that every one of the
unhappy events listed above will occur in all companies.
Conversely, some events can affect all companies at the same time. This systematic
risk includes such occurrences as inflation, war and fluctuating interest rates—generally,
those events that influence the entire economy. Of course, diversification cannot eliminate
the likelihood of these events happening. Systematic risk accounts for most of the risk in a
diversified portfolio. However, in exchange for enduring systematic risk, investors may be
rewarded in terms of their investment return. There is no reward for taking on unneeded or
unsystematic risk.
Different Diversification Strategies
#1 Diversify across asset classes.
The most common way to diversify is according to asset classes. When you employ an asset allocation strategy, you are controlling the level of risk that your money is exposed to since your funds are spread around across different forms of equities, bonds, cash and hard assets. Some common asset classes include:
* equities
* government bonds
* corporate bonds
* cash equivalents
* real estate
* currencies
* gold
You can easily achieve diversification this way through mutual funds, index funds and target date funds.
#2 Diversify across asset class variants.
Within each asset class, you can practice further diversification. For instance, equities have many representations in the mutual fund world. Variants or subclasses refer to more granular characteristics of the asset class. Here are some examples:
Equities can vary according to:
* the size of companies represented in a “basket” (e.g. large vs medium vs small cap stocks)
* the way the stocks’ prices move as the stocks chart their growth (e.g. growth vs value stocks)
* the geographical market in which the stock moves (e.g. domestic vs international)
Bonds can vary according to:
* their maturity dates (e.g. short term vs long term bonds)
* their level of risk (e.g. junk bonds, anyone?)
* who issues the bond (e.g. government vs corporate)
* how they pay out
Cash vehicles vary mostly according to rates of return and level of security offered, which are usually characteristics that are inversely proportional to each other. Generally, within the investment world, the higher the rate of return, the less stable the fund value is expected to be.
You can find additional diversification down to the class variant level from mutual fund institutitions, treasury or brokerage houses who can assist with giving you more information. Try financial newspapers as well to help you with more details on this topic. Note though that most of the time, you don’t really need to seek this kind of detailed representation to achieve a well diversified portfolio, as positions in basic asset classes may be sufficient to lower your market risks.
#3 Diversify across securities or investments within each asset class.
If you are buying mutual fund shares, then you are effectively diversifying across securities. By buying into a basket of securities via index funds, mutual funds, ETFs, managed funds and such, then you are automatically spreading your risk across the board.
#4 Diversify across industries and sectors.
If you are interested in following a particular sector or industry but do not want to put all your eggs into one company’s stock, you can buy sector funds that specialize in a specific industry or stock group, such as financial stocks, gaming stocks, internet stocks, semi-conductor stocks and the like. You’re diversified within a group, but still fairly concentrated within a sector.
#5 Diversify across financial institutions and fund families.
No institution is perfect. Your non-cash investments are not FDIC insured, so entrusting them to any one institution holds some risk, no matter how minuscule. Banks and institutions have folded in the past, and have been rocked by scandal on occasion. So it’s something to keep in mind when you’re putting your money on the line. There’s a tradeoff between desiring the convenience and organization of a consolidated portfolio in one location versus deploying your funds across various companies, or placing your eggs among various financial baskets on the Kiplinger’s list of “favorite fund companies to buy into now”.
#6 Diversify across fund managers.
Again, when you invest in various mutual funds, you are normally giving your money to different fund managers to invest. But it’s not all too uncommon for the same people to be simultaneously heading multiple funds, as in the case of the same managers used for various international or foreign based funds in the same institution.
#7 Diversify across time horizons and levels of liquidity.
Based on your various goals, it’s a good idea to maintain different levels of liquidity. For your short term goals such as funding a big ticket event (e.g.: wedding or travel) you’re typically going to save using a cash account. For medium term goals, you can take some risk with blended funds for example, while for the longer term goals (e.g.: kids’ college fund, retirement) you can be less liquid, by getting into more aggressive stocks or real estate.
#8 Diversify across time with dollar cost averaging (DCA).
One of my favorite diversification mechanisms is by investing periodically across time. By buying stocks on a regular basis, you end up picking up stocks at a variety of prices as they fluctuate. In this case, if you’re not confident about the market’s movements, you may want to distribute your purchasing power throughout a specific time period.
In Conclusion
Asset allocation accounts for 90% of your return while individual securities and market timing will account for the other 10%. By diversifying, you can reduce risk for up to 70% of the total risk received by a non-diversified portfolio or pure position. So take precautions and practice reasonably diversified investing!
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5.What do you understand by a Mutual Fund? Discuss the various types of mutual fund schemes available in the Indian capital market. How is the Net Asset Value (NAV) of a Mutual Fund Unit Calculated? Explain with an example."
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The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
Mutual fund is a generic term for various types of collective investment vehicle.
Mutual funds have always been a popular alternative to stocks and bonds.
In simplest terms a mutual fund is a professionally managed pool of money from different investors that is invested in an assortment of stocks, bonds or cash. These funds are operated and managed by financial services companies. The best part is that the mutual fund manager makes all the buying and selling decisions for you. So, if you dont have the time to figure out whether a stock is a buy or sell at a given price but you want a piece of the action, you might be interested in buying shares in a mutual fund.
One advantage that mutual funds have over stocks is that your investment is automatically diversified in a mutual fund. For a small sum of money, you will get an assortment of stocks and your risk could be lesser than buying individual stocks. There are several hundred mutual funds offered with something for everyone. If you wanted to invest by sector (e.g. technology) or bonds (bond funds) or you believed that emerging markets are the next big thing (international funds) you have plenty of options to choose from.
The basic types of assets into which a mutual fund might invest: equity and debt, and how this choice impacts the risk and return characteristics of the funds.
However, you would have noticed funds which have now evolved and try to provide you with more fine-tuned products in a specialised niche. Equity funds, in particular, like to identify newer or better avenues of investment and hence they create products around those new avenues.
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Style of a mutual fund:
Equity
An equity fund can invest in a large-cap, mid-cap or a small-cap stock. You might have heard these words being thrown around rather liberally by all the new funds on offer. 'Cap' refers to market capitalisation (M-cap) of a stock. M-cap is defined as the total market value of the equity of a company.
For example, if a company has 1,000 shares outstanding and the price of each share is Rs 20, the market value of the total equity of the company is Rs 20,000 (1,000*20). To exemplify, the market capitalisation of Reliance is approx Rs 200,000 crore (Rs 2,000 billion), while that of Hero Honda is around Rs 15,000 crore (Rs 150 billion).
Large cap, hence, refers to companies which have a large market capitalisation (usually above Rs 5,000 crore). Mid-cap refers to companies whose market value lies between Rs 1,000 crore to Rs 5,000 crore.
Any company with market capitalisation of less than Rs 1,000 crore is called a small cap company. Now different fund houses have different definitions of where a 'cap' ends and where the other begins but these are rough bench-marks. One of the biggest selling points currently of the new fund offers is that the small cap companies of today will increase in value so much that they will become the next mid-cap or large-cap companies.
Looking at managing equities differently, we say that the fund manager may pick a growth or a value stock. Growth companies are typically ones which are witnessing high amount of growth in their profits (due to growth in underlying demand, increase in prices, new technology, etc).
These firms command a valuation which is superior to firms with a lower growth potential. Value companies, on the other hand, are in mature industries where they offer more stable cash flows and a reasonable valuation to buy them. Note that in a market downturn, a growth stock can become a value stock if it is available cheap!
A fund manager may decide to invest exclusively in growth or value stocks or in a combination of both.
Based on whichever style is chosen, the fund can be 'boxed' into the 3*3 matrix below:
Growth Blend Value Long term Medium term Short term
Large Cap High credit quality
Mid Cap Medium credit quality
Small Cap Low credit quality
Debth
Debt funds can similarly be classified in to long, medium and short tenor funds. While the definitions are flexible again, long funds typically invest in instruments with maturity greater than 5 years, while short-term funds invest in instruments with less than one year of maturity; medium-term funds invest in the 1-year to 5-year range.
Note that the longer the duration (roughly average maturity) of the investments, the more sensitive it is to interest rate movements. Also remember that the price of bonds varies inversely with interest rates.
On the other axis, a debt fund can invest in high quality instruments like government of India bonds, bonds issued by healthy PSUs, top-notch corporates, etc. It can progressively lower its investment quality by investing in not-so-stable corporates or in fixed deposits of co-operative banks. The advantage of lowering credit quality is higher expected returns (with the increased risk of default).
Based on whichever style is chosen, the fund can be 'boxed' into the 3*3 matrix above.
Theme of a mutual fund:
A mutual fund can create an investment philosophy around which it wants to invest. In India, this is typically seen around equity funds. A theme serves both the parties: it provides the investor with a specific or new opportunity while providing a new 'buzz' to the asset management company. Some of the themes are as follows:
Sector-specific investments: investment in companies of a particular sector, like pharma or banks or IT
Investments in a specific segment of the market: large-cap, mid-cap or small-cap
Investment in a specific asset type: real estate mutual funds will invest in property
Specific opportunity: The India Growth and Economic Reforms (TIGER) fund of DSPML plays on this opportunity where they bet on companies that will benefit from either India's growth or general economic reforms or both.
Tax-related investments: investment with a specified lock in and investing in equities to take advantage of tax incentives.
Styles and themes have their own risk-return profile which is more fine-tuned than the broad asset class. You need to be careful when you choose the style or theme: ensure that these meet your risk-return requirement.
WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS
Mutual Funds can be classified into various categories under the following heads:-
(A) ACCORDING TO TYPE OF INVESTMENTS :- While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categoried according to the type of investments are as follows :-
(a) EQUITY FUNDS / SCHEMES
(b) DEBT FUNDS / SCHEMES (also called Income Funds)
(c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)
(d) GILT FUNDS / SCHEMES
(e) MONEY MARKET FUNDS / SCHEMES
(f) SECTOR SPECIFIC FUNDS
(g) INDEX FUNDS
B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :- While launching a new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows :-
(a) OPEN ENDED SCHEMES
(b) CLOSE ENDED SCHEMES
C) ACCORDING TO TAX INCENTIVE SCHEMES :- Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also:-
(a) TAX SAVING FUNDS
(b) NOT TAX SAVING FUNDS / OTHER FUNDS
(D) ACCORDING TO THE TIME OF PAYOUT :- Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows :-
(a) Dividend Paying Schemes
(b) Reinvestment Schemes
The mutual fund schemes come with various combinations of the above categories. Therefore, we can have an Equity Fund which is open ended and is dividend paying plan. Before you invest, you must find out what kind of the scheme you are being asked to invest. You should choose a scheme as per your risk capacity and the regularity at which you wish to have the dividends from such schemes.
Types of Mutual Funds (By Structure)
Open ended fund
In an open-end fund, the units of a mutual fund are bought and sold by the fund company itself. The price at which you buy this fund is usually higher than the price at which you can sell the fund to the fund company. In this mutual fund, there are no restrictions on the amount of shares the fund can or will issue. Depending upon the demand, the fund continues to issue shares no matter how many investors there are. In this case, the fund companies also give option to the investors to buy back their shares when investors wish to sell. Mostly mutual funds are open-end funds and they are more conservative and provide consistent returns. Generally, Open-end funds are managed actively and are priced according to their net asset value.
Closed ended fund
Unlike an open-end fund, where the buying and selling of funds are conducted by the fund company itself, the units of close-end funds are traded on a stock exchange. The market price of the shares in closed ended fund is determined by supply and demand and not by net-asset value (NAV).
Load
This is the total price of buying a unit of a mutual fund. It is actually a kind of fee or commission charged to an investor when buying or redeeming shares in a mutual fund. Mostly funds sell units at a premium to its underlying NAV, and purchase them at NAV. When the fund company charges a load while selling its units, it is called entry load. When it charges a load at the time of buying the units back from an investor, it is called exit load. Most mutual funds today carry some load, since there is always a cost incurred in the operation of the fund and as a result of numerous shareholder transactions. Sometimes, though this load thing acts as a burden for investors and is very effective in discouraging them from trading the mutual fund in short-term or using it for purposes other than investment. It is also a source of income for the Asset Management Company which operates the mutual fund. indian-stock-market-types-of-mutual-funds.xml
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NAV of a mutual fund is a very different concept. It tells you the total value of investment of the unit of a mutual fund scheme. In order to calculate the NAV of a scheme, every asset and liability of the scheme should be valued. The formula for calculating NAV is: value of all assets minus value of liabilities other than to unit-holders. The other way to calculate NAV is: Unit capital plus reserves.
If it is that simple, why is it misinterpreted? Consider this example: you are considering investing in a diversified equity fund. The NAV of a unit of ABC mutual funds scheme is Rs 10 and XYZ is Rs 12. What does that mean? It means that ABC funds corpus is Rs 50,000 and total number of units is 5,000. Hence, it has an NAV of Rs 10 (Rs 50,000/5000). On the other, NAV if XYZ funds scheme is Rs 12 because it has a corpus of Rs 60,000 and units of 5,000.
Now, should you make your decision based on the difference in NAV? As you can see, it has nothing to with the future performance of the fund. It simply means that schemes investments are worth a particular amount and you have to pay that price to buy a unit of the scheme. The future performance of the fund will determine your future returns. There is nothing stopping XYZ fund from outperforming ABC fund.
In short, lower or higher NAVs should not influence your investment decision. Your criteria to invest in a scheme should be based on the reputation of the fund house and its performance record. One should also take a look at the portfolio and style of managing money.
The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.
The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV.
Value or purchase price of a share of stock in a mutual fund. NABBV is calculated each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding.
Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.
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