N O V I CE
Beginners guide to Financial Markets
306, Rafeal tower, 8/2 old palasia, Indore, MP
Ph: 0731-4079187, 98938-94415, 9300934940
Capital Markets have grown drastically in the past few years and have passed
many milestones in its journey. The Markets have created immense Career
opportunities in Markets and with the advent of many Domestic and
International Brokerage houses in India, this space offers huge Demand for
Qualified professional in the Field
We have put in our Sincere efforts to provide Financial Education in the most
easy way and at the same time adhering to what is the requirement of the a
Brokerage house in Current times in this module. This module is prepared after
studying the working in a Broking house and all their systems and processes.
This module will cover in depth knowledge of capital Market Systems in India.
For all those willing to make their career in this Industry this module is a
This module covers in detail the working of Primary markets, participants,
processes, Judging an IPO, Depositories their system, services & Processes,
Secondary markets Exchanges, Trading System & Clearing and Settlement,
Derivatives Futures , Options, Trading in Derivatives & Derivative Terms,
Mutual Funds, PMS, Commodity, Insurance, Market Intelligence
This module will also cover practical aspects of the Systems and working
dynamics of the Industry in detail.
We wish the students Best of Luck
Contents of the Module
1. Investment Basics
a. What is Investment
b. Objectives of Investment
2. Understanding Financial Markets
a. What are Financial Markets
b. Asset Classes
c. Structure of Capital Markets
d. Market Participants
3. Primary Markets
a. Introduction to Primary Markets
b. Different types of Issues
c. Different Intermediaries involved
d. Classification of Primary Issues
e. Category of Investors
f. Bidding Process
g. Benefits of Investing in Primary Markets
h. Drawbacks of Investing in Primary Markets
i. Judging and IPO
j. Recent Development in Primary Markets
b. Depositories in India
c. Basic Services of Depositories
d. Benefits of Depository System
e. Demat Account
f. Depository participants
h. ISIN Number
i. Process of Dematerialisation
j. Selecting a Depository Participant
5. Secondary Markets
b. Stock exchanges
c. Trading mechanism
d. Market Timings
e. Circuit Breakers
f. Market Segments
g. Indices and their Importance
h. Clearing and Settlement
i. Some facts about Secondary Markets
j. Key points while trading in Equity Markets
b. Forward Contracts
c. Derivative Segment
d. Future Contract
e. Option Contract
7. Other Financial Products
a. Mutual Funds
8. Fundamental Analysis
Valuation of a company
EPS, PE, Book Value, Dividend Yield,
9. Technical Analysis
Understanding chart patterns
LIVE Technical Analysis.
Chapter 1 - Investment Basics
I. What is an Investment?
Investment is putting your money in a Financial Instrument with a view of Earning a
desired Return out of that investment. We all work for money our whole lives , but a
time comes when money should work for us and this is possible only when a proper
investment planning is done at the time when an individual is earning,
Most of the times an investment planning is misunderstood as a task of oldies or those
who have crossed their 40s, but this is a very wrong concept to have, as till the time
you reach 40 you have lived half your earning life and if you have not invested till
that time you have wasted half your life which was the golden time of your life and
where you could have saved most of your money as the family responsibilities were
Here retirement planning is very good example of saving and investment where an
individual when starts earning the same day he starts investing and saving for the
Investment here doesn‟t also means that you invest to every Mutual fund or ULIP
that comes your way. No this is on the contrary more dangerous because you are
investing just for the sake of investing, but not to utilize it properly, look at the long
term implications, the costs involved, the maturity and the Risks associated with the
instrument you are investing
So , invest early and invest Wisely
II. Why to Invest
Why are we talking about investments, why we are reading this much about
investments, why take so much pain in learning how to invest ? and many such
questions come to mind when we are going through this module
Here, we are talking about making money from money which is by any means not
easy. The markets and the investment scenario changes from time to time
Like in recessions Equities give negative returns and debt and gold are the best
In Inflationary times Gold and Commodities are the best investments
In times of Growth Debt are out of flavour and Equities give best returns
So a proper investment plan and an efficient return can come only through a proper
study of all these Instruments and their nature
Investments mean different to different individuals according to their Objectives of
III. Objective of Investments
Objective of Investments can vary according to the needs and requirement of the
1. Retirement Planning
A person having a view to build up a retirement Corpus could invest in a
Financial Asset. Generally these investments are of a longer term in nature and
a Mutual Fund is the most popular instrument to invest for the Retirement
2. Childs Future Planning
Every parent has a dream that their children must live a happy and successful
life. So either for the child‟s marriage, education, Business an individual takes
up an Investment Route
3. Tax planning
Nowadays when many investments are allowed in the Tax free Section of
Income Tax Act in India. Almost every tax paying person wishes to invest
somewhere for the dual purpose of investment and Tax planning. Generally
Insurance and Mutual Funds are the most common investment instruments
4. Speculation/ Trading
Speculation or Trading means to Invest with a purpose of Short term Earning
and Speculating on a Particular Asset. Equity and Commodity Markets are the
most common place where a Trader can be found
5. Business needs
Mutual Funds, Insurance Companies, Banks, Financial Institutions, Corporates
who have a professional reason of investing in Financial Markets as this is
their primary business. The have a very fixed and rigid principles of Investing
with all the guidelines regarding Investing in place before making an
Investment. They generally invest with a very large corpus
6. Additional Earnings
Some times the investors do not have any fixed reason for investing they
invest only because they have some additional Income with them. In India
they generally invest in Fixed Deposits
IV. When to invest
As early you start earning you should start saving and investing. Investing is simply
putting your money at work and taking use the opportunities available in the
markets. Well there is no fixed age to start investing but it is said the day you start
your first salary.
V. Where & How to invest
Equities- Investing in Equities is commonly known as investing in Stocks through a
Stock market. Here the investment objective should be a longer term. The risks and
returns and high, a proper research has to be made on the stock you are choosing for
investment. You can invest in equities via an Equity Trading and Demat account
which can be easily opened by completing some KYC formalities with any registered
Broker or authorized Sub broker near your place
Debt – Debt instruments for investment purposes is those fixed interest bearing
instruments which have a fixed return parameter attached to it like Bank FD, Debt
Mutual Funds, PO schemes. Less risk , moderate returns, mostly preferred by less
risky taking investors. You can invest via Banks, post offices, Financial Agents etc by
filling up a simple form along with submitting the money thereby.
Mutual Fund- A MF is a scheme where you give your money to a Fund manager to
manage your funds and he charges a fees for the same. A MF invests in equities, Gold,
Debt instruments varying on the investment objectives of the Fund. You can invest
via Mutual Fund agents, Banks , Brokers by filling up the form and completing the
formalities required thereof
Gold- As an investment asset is a good investment asset, directly linked to the
Economic conditions, higher inflationary economy have GOLD returns going higher.
An investor can invest through a GOLD mutual Fund easily traded in stock
Commodities- As an asset has a high risk- high return characteristics , Agri , Metal
and Energy commodities, like Wheat, chana, soyabean, gold, silver, copper, crude oil,
ATF etc. As like Equity investments these could be traded in via Authorised brokers
& Sub brokers
Intrest Rate futures- One can now even invest or trade in US DOLLARs sitting here
in India, so lets say an investor or an exporter feels the Dollar may come down as
compared to Indian rupee, they can sell Dollar and vice a versa. This trading can be
done via NSE, BSE, MCX by opening a separate currency Trading account with a
Broker/ Sub broker
Real Estate- Well this could not be purely termed as an Financial Investment as this
can be used for either investing or consuming or for both. Real estate involves huge
understanding of the instrument before buying one. As there is an unorganized un
recognized way of trading in this instrument it is always advisable to check the
financial & Legal integrity of the seller and property before dealing. This also involves
huge amounts of investments. This is generally done via a property broker
VI. How much to invest
Well there is no fixed formula of how much to invest, for a simple reason, every
individual have different financial commitments and different saving capacity. It is
advisable to first calculate your financial goals, the time left for that Goal completion
and than assess the amount required to be invested monthly towards fulfillment of
Also to mention here that investing is recommended for every individual whether he
invests 100/ month of 1 lac/ month as this is the only way to beat the rising inflation
and make your money work for you much harder
We have witnessed many uninformed investors investing with borrowed money or
using their credit cards to borrow money, Well a high word of caution goes here for
them too, as in these cases there is a continuous pressure on the investor to earn
himself as he has the boundation to payback to the lender a fixed sum of interest
every month, which in turn sometimes make investor take some wrong decision. So
avoid investing using borrowed money until unless very specific need
VII. Understanding Risks
Risks as the name suggest is Fear, fear of losing money and getting what is unexpected
and unfavorable to an individual
Risks cannot be fully calculated because of the simple reason Risk and return are what
will come in future ,but yes if studied properly we can manage and sometimes fully
Here I would like to share one thing, it is a common feeling that an intrest bearing
instrument is always safe and non risky. But no the recent Sub Prime crisis which we
saw in the Developed countries of the Globe and a classic scenario of how the biggest
players and intelligent analysts go wrong in assessing Risk
Some of the banks which have gone bankrupt in US got a AAA rating, which is the
highest and the safest by the some rating agencies before this Sub prime thing came
into act and today all the money which a common investor invested in these banks is
gone and they are left empty
So Risk assessment is a more rigorous and hard job than deciding a investment plan ,
specially in these ever changing times
Kinds of Risks
Risk of capital erosion- This risk is prevelant in non Fixed return based Financial
Assets like Equities, Equity MFs, Commodity, real Estate, etc , where there is no
guarantee of return and capital can erode for a shorter period of time. These assets
have a high risk- high return tendency.
Risk of counterparty default- Assets which are traded in unorganized non Govt
recognized markets like Real estate deals, Private lending and borrowing systems,
where the counterparty to whom you are dealing or the market in which you are
dealing is a non organized market. An investor has to take due care of these kinds of
risks as these are unrecoverable risks.
Risk of opportunity costs- Generally it is said that any asset which gives you return
more than a conventional FD is good for investing, here the opportunity cost is the
FD return which you get in banks. An investor while deciding on the investment
asset should take due care that the asset in which he is investing at least fetches
returns more than a FD
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Risk of Inflation- Higher inflations can eat up all the returns from a financial asset
and can rest you in a net negative return. Ex :If a Instrument fetches you a return of
8% , and inflation is 10% than logically you have earned a negative return of 2%. It is
said that in high inflationary times equities should be avoided and Gold and actively
managed Debt instruments should be opted for.
So before investing look at he risk return parity of the financial instrument and
carefully assess the risk chances of the instruments
There is a very old saying “Risks and returns go hand in hand”, implies you cannot
leave behind the risks and take only returns, while deciding on a financial instrument
you have to look into the risks characteristics of the instrument too.
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Chapter 2- Understanding Financial Markets
I. What is a Financial Market?
Financial Markets like any other market is a System where Trading in Financial
Instruments takes place. This System is now completely Automated through
Electronic Interfaces and consists of Many Buyers and Sellers with their individual
Objective of Entering in Financial Markets. This System should be a Government
It is a place where you give your money to a financial asset which can fetch your
more returns or sometimes more safety than a conventional Bank account
II Different Asset Classes
Asset Classes could be broadly defined in 2 Categories on the Basis of Risk Return
High risk High Return
Equity & Commodity:
This is a High Risk High Return Asset Class, generally preferred for Longer term
Investment with high Volatility in Short term Cycles which in turn makes it the
most preferred place for Traders
Equity Commonly known as Equity Share of a company which have a potential to
grow as high as the Business of the Company and on the contrary can underperform
the same way as the performance of the company . The issuing company can be a
Government, Private or an MNC Company.
Here the returns on the Assets are not fixed and depend on the Industry‟s
Performance, Economical, Political and other Macro Industry as well as Economy
related features. It is always advisable to invest for a Longer Term in these
Commodity Markets are the market place where trading in Physical Commodities
like Gold, Silver, Crude oil, Agri products like Wheat, Sugar, pulses takes place. The
dynamics of this Trading system are purely identitical to the demand and supply
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dynamics of the Physical Trading in these commodities in the Domestic and
Equity and Commodity Derivatives are a Hybrid instruments which are derived
from the underlying assets viz Equity & Commodities. These are for a comparatively
shorter period of investment objectives and find a place in a Trader or Speculators
Low Risk Low Return
Debt and Fixed Interest Bearing Instruments
This Asset class has a relatively low Risk, Low Return profile. Instruments which
have a Fixed Return and Interest Bearing attached with them are the Assets which
come in this Class
Government Bonds, Debenture of Companies, Fixed Deposits, Debt Scheme of
Mutual Funds, commercial Papers, Commercial Bonds, Post office Schemes and all
other Fixed interest Bearing instruments whose return are fixed and are known at
the time of investments
These instruments are the most Common place of Investments Specially in
Developing countries like India. As these instruments which have a very low chance
of losing the Principal Amount and are generally with a Government Recognised
Entity like Banks
III. Participants in Financial Markets
3. Brokers/ Intermediaries
1. Regulator is a body which regulates and overlook to the smooth Functioning
of Financial Market Systems, they do recognize, allow , disallow other
financial intermediaries for working in financial markets, redressal for the
Investors, Creates / Modifies rules and regulations in financial markets
a. Ministry of Finance
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This is the top most Office in the Country as far as Financial Matters in the
Country are concerned. The Finance Minister heads this Office and
overlooks all the Financial Participants in the Country.
Securities and Exchange Board of India is the Big Boss of Financial markets
and the main regulator in the Capital Markets, The SEBI chairman heads
this institution and sits in the SEBI‟s head office in Mumbai
Reserve Bank of India mainly controls the Banking and monetary systems
in the Country making Monetary policies, looking after the working of
Banks. The Chairman RBI heads this organization from his Office in
Association for Mutual Funds in India is a regulator Body headed by Mr A
P Kurien who sits in its Head office in Mumbai. This organization
Regulates ,Licenses and works for the upliftment of the Mutual Fund
Industry in India.
Insurance Regulatory and Development Authority regulates and looks after
the licensing and Development of all the Insurance Companies in India.
Mr J.H. Narayan is the Chairman of IRDA
2. Exchanges provides the facility of Trading in Financial Products in India there
are 2 exchanges for Equity Trading and 2 Exchanges for Commodity Trading
NSE- National Stock Exchange
BSE- Bombay Stock Exchange
MCX- Multi Commodity Exchange
NCDEX- National Commodity and Derivative Exchange
All the 4 exchanges are Government recognized and work on Electronic Interfaces
wherein Investors sitting in any part of the country can trade through these
exchanges via the Electronic Interface provided by the exchanges
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3. Brokers/ Intermediaries are the body which acts as a interface between the
Client and the Financial System and facilitates the proper trading in Financial
Products. These are the most important part of the Financial Markets System
as they are responsible to provide the platform and interface for trading to the
Investors and traders
Equity and commodity Brokers, Mutual Fund Companies, Mutual Fund
Advisors, Insurance companies, Insurance Advisors, Sub Brokers, Business
India Infoline, JM Financial, Sharekhan, ICICI Prudential, Reliance Money,
Reliance Mutual Fund , TATA Aig life Insurance, HDFC Life Insurance, Bajaj
Capital to name a Few
4. Investors and Traders: These are the makers of the market, the real end client
for whom the whole system exists. All the products and systems in Financial
Markets are designed keeping in mind these real Investors and Traders of the
System. These Comprise of all the Indian Retail, HNIs, Institutional and
Foreign Direct and Institutional Clients trading in Indian Financial Markets
for this Category of Participant in the Markets
IV. Different Financial Products
1. Equity and Direct Equity Related Products- Equity Shares of a Private, Public and
Multi National companies trading in Indian Securities Markets
2. Mutual Funds- A collective Fund contributed by Different Investors managed by an
Organization on behalf of the Investors
3. PMS- This a Structured Product in Equity Markets also known as Portfolio
Management Services where a Portfolio Trades on Account of a Investor on the name
and behalf of Investor
4. Commodity – Electronic Trading in Agricultural and Metal Commodities through
Recognized Stock Exchanges in India
5. Insurance – Where a Organization Insures lives and/ or Goods of a particular
Individual or Organization by charging a Calculated Premium on it
6. Currency Derivatives- A recently introduced instrument in India by NSE wherein
trading in US Dollar can be done
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7. Debt Instruments – FD/ Post office Schemes/ Debentures and any other Fixed
interest bearing security having a maturity period
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Chapter 3 - Primary Markets
Raising capital and its requirement
No country on this globe can live without capital, as that‟s the life for any economy to
prosper. Indian Economy is on a path of its historical growth in recent times and
Capital is its blood in this journey. An economy is made up of Large and Small &
Medium enterprises and they need capital for their growth. For a Company it has 2
ways to raise capital
a. DEBT Financing
Financing through Debt means taking either a loan or issuing Debentures. This Mode
of finance has its own implications on the Company
Advantages of Debt Financing:
1. No Dilution of the Equity of the company
2. Concentrated Voting Rights of the company
3. Fewer Regulations in terms of Accounting.
4. No chances of Hostile Takeovers.
5. Comparatively Easy to finance
Disadvantages of the Debt Financing
1. The interest burden on the company increases which could effect the Net profit of
2. The Future Volatility in the Interest prices can disturb the Cost Dynamics of the
3. The Net worth of the company would be affected
b. Raising Funds Through Equity Markets
Here the company sells the Equity of the company to some Selected Investors or to
the General Public through a Public Issue
Advantages of the Equity route for Capital Requirements
1. No Fix Interest Costs
2. Shareholder Value Unlocking to the Investors
3. No Cost Implications to be beard
4. A route for Foreign Capital Issuance is opened
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1. A dispersion in Voting Rights
2. Loss of Control on the company by Promoters
3. Have to abide by the Accounting and other Regulations of the Govt.
I. Introduction to Primary Markets
As the name suggest this is the market place where the primary holder of the shares
which is the Promoter group offers shares to public or public groups for the purpose
of raising funds for the company
Every company when started is started through promoter capital and than gradually
takes a big form in business, with the growing needs of the business the capital
requirement for expansion and working capital become a necessity, here comes an
Equity raising option called Primary Markets wherein the company invites Public to
become a Shareholder of the company and invest capital in the company in turn the
benefits which the owner has like the dividend, voting right etc comes to the share
holder of the company
Now a question arises why as an individual should invest in a company. Lets take an
example. I feel Steel Industry would be the greatest Beneficiary in the coming times
where more and more infrastructure is developed both domestic as well as global. But
I as an individual cannot build a Steel Factory, to take the advantage of this
opportunity. So I will invest in a Company which is into steel manufacturing and
Trading like say TATA STEEL or SAIL. This way I‟m now almost a part owner of the
company by just Subscribing to the shares of the Company and take a much better
advantage of the Steel Boom in the Economy without involving in the real task of
So. If your are buying a Stock always remember you are buying the business, the
Vision and thought of the company
In India any company Government, Private or an MNC can enter the Primary
Markets and make public partner in their company with the permission, rules &
Guidelines laid by SEBI
II. Different Types of Issues
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Primary market Issues can be classified into four types.
1. Initial Public Offer
2. Follow on Offer
3. Rights Issue
4. Private Placement
Initial Public Offer (IPO):
When an UNLISTED company comes out for its Equity Stake Selling plan for the
First time in the Financial Markets is known as an IPO, as the name suggests this is
the Initial Offering by any company to general Public. All the process is done
according to the guidelines of SEBI
Follow On Public Offer (FPO):
When an already listed company makes either a fresh issue of securities to the public
or an offer for sale of existing shares to the public, it is referred to as Follow on Public
Offer (FPO). Generally the Shares are given at a Slight discount to the existing quoted
price in the Stock Exchanges for more and more investors to make the issue fully
The last company to do an FPO was ICICI BANK
When an already listed Company in Stock Exchanges needs money to be raised
through Capital Markets comes with an Issue in which only the existing share holders
have a right to participate is known as Rights issue. Generally a ratio is fixed for the
issuing rights by the public and deep discounts are given.
Ex: A company is quoting at 2000 Rs in the Stock Markets, it announces a Right issue
where any individual which holds 5 shares would be entitled to apply for 2 shares @
Remember there is always a risk in this kind of issues as the company is allowing only
those investors who are currently investors for the company and not the new ones.
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When the shares of the company is placed or subscribed by a Certain company or
Financial Group and instead of the shares being offered to the General Public the
shares are Placed to the company is known as Private Placement. Generally Mutual
Funds, Foreign Funds when take a major chunk in the company can also be seen as
Generally the companies do a private placement in combination with an Public issues
and the Private placement is done prior to the Public Issue date and that too on a
premium price to that of the Public Issue to make the Public Issue look an attractive
preposition to the Common Investors.
III. Various Intermediaries Involved in a Public Issue
As the promoters of the Company are not well versed with the working dynamics and
Regulations of the Capital Markets they need to have some Intermediaries working
for them who take care of the Complete Issue of the Company from the pre IPO
Process to Post IPO Process.
The Various Intermediaries involved in Primary Markets are
1. Book Running Lead Managers
2. Bankers to the Issue
4. Registrars to the Issue etc.
Book Running Lead Managers:
The Company issuing shares appoints the BRLM or the Lead Merchant Bankers. The
role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre
Issue role includes compliance with the stipulated requirements of the SEBI and other
regulatory authorities, Preparation of the Draft Red hearing Prospectus which
contains the Full and detailed information of the issue, the promoters, the basis of
price calculation, Financial Results and all other compliance related information
,completion of formalities for listing on the Stock Exchanges, appointing of various
agencies such as advertising agencies, printers, underwriters, registrars, bankers etc.
Post Issue activities include management of escrow accounts, deciding the final issue
price, final allotment, ensuring proper dispatch of refunds, allotment letters and
ensuring that each agency is carrying out their part properly.
Bankers to the Issue:
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Bankers to the issue, as the name suggests, carry out all the activities of ensuring that
the funds are collected and transferred to the Escrow accounts.
Registrars to the Issue:
The Registrar finalizes the list of eligible allottees after deleting invalid applications
and ensures that the corporate action for crediting shares to the demat accounts of the
applicants is done and the refund orders, where applicable, are sent.
Underwriters to the Issue:
An investment banking firm enters into a contract with the issuer that they would
subscribe to the under applied portion of the issue. They are paid underwriting
Commission for that
IV Classification of Primary Issues
Procedure of arriving at the issue price:
.This method involves fixing up of a price to the issue and opening up for the general
public to subscribe to the issue in the specified date, the demand for the Security is
known only after the issue is closed and the final compilation of the application form
is done, the price at which the customer will get the shares is pre known to the
Ex: Company XYZ is coming out with an IPO at 100Rs a Share.
As the fixed price method does not have the facility for the investor to choose the
price according to their wish. The Book Building process is very common in the
Recent IPOs almost 90% of the Public Issues are now through Book Building process
This process involves Bidding by the investors at different prices for the share of the
company in pre specified lot size and than a price is fixed seeing the maximum bids
received at the highest price for the issue of shares
Lets say a company ABC Ltd comes with an IPO in the price band of 400-450. Now
here the investor if they think the best price to this issue is not more than 425 will bid
on 425, If the investor is not confident of the price of the issue he/she bids at CUT
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Cut off Price- Here the investor will bid at the highest price band and write Cut Off
which signifies the investor is ready to any price which the BRLMs decide for the
issue and rest of the money will be returned to the investor
V. Category of investors who can invest in Primary Markets
As far as the IPO is concerned, there are three categories of investors.
Qualified Institutional Bidders.
Qualified Institutional Investors:
Under this head, financial institutions such as Banks, Mutual funds, Insurance
companies, Foreign Institutional investors etc. are permitted to bid for the shares. A
Maximum of 60% of the issue can be kept reserved for investors falling under the QIB
category. Out of the 60% shares, 5% are reserved for Mutual Funds.
Under this category, resident Indian individuals, HUFs, HNIs- High Networth
Individuals ,companies, corporate bodies, NRIs, societies and trusts whose application
size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the
total issue has to be reserved for Non-Institutional Bidders.
Under this category, only Individuals, both Resident and NRIs along with HUFs are
allowed to bid. At least 35% of the issue has to be reserved for such investors. The size
in terms of value should not exceed Rs 1 lakh if one wants to apply under this
VI. Bidding Process
The bidding process can be divided in three stages
1. Pre IPO Process
2. During the IPO
3. Post IPO
1. Pre IPO Process- Lets say you have a company and want to raise around 10,000
Crores from the Equity Markets. As you donot know the complete process of IPO
you go to an Investment Banker or BRLM for the same. You Brief him the about
your objective, The business Model, your price estimation, usage of the funds and
other things regarding your business
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The BRLM will than makes a Draft Red hearing Prospectus which is a prescribed
format for filling the application with SEBI for permission of an IPO and contains
all details of the issue and files if with the SEBI
The most important things which a BRLM has to work on is the time at which
they wish to launch the issue to the public and the price to offer. SEBI has made a
rule that the issue must be open for at least 3 days. The Price should be in the
range of 20% from the floor price, like 100-120, 200-240 and so on.
Once the SEBI give approval for the issue the Issue must come in public within 3
months of the approval or the company has to reapply to SEBI for a fresh permission
after 3 months timeline is over
BRLM also looks into the other aspects of the issue like Advertisement, Printing of
Forms, Conducting Investor meets for the issue, Deciding a Brokerage structure of
every filled form to be given to the Brokers who distribute the forms to the Public,
Distribution of the forms to different Brokerage houses across the country and the
formal launching process of the IPO
2. During the IPO- Once the IPO is launched and the application forms are available
with the brokers to be distributed the real IPO Process starts, which involves
distributing the forms to the investors.
The investors will than fill up the form and submit it along with the Cheque and a
copy of PAN Card to the Broker who than does the Bidding of the shares in the NEAT
IPO system which is a specialized software provided by NSE for the process of IPO
Bidding, wherein all the details of the investor along with its shares applied and price
at which the shares are applied are mentioned and the Book is Built for the issue.
The greenshoe option is a clause in the underwriting agreement of an IPO, which
allows to sell additional shares, usually 15%, to the public if the demand exceeds
expectations and the stock trades above its offering price.
This option, also known as the over-allotment provision. It gets its name from the
Green Shoe company, which was the first company to allow such an option.
About NEAT IPO- NSE operates a fully automated screen based bidding system called
NEAT IPO that enables trading members to enter bids directly from their offices
through a sophisticated telecommunication network.
The Attributes of NEAT IPO:
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The NSE system offers a nation wide bidding facility in securities
It provides a fair, efficient & transparent method for collecting bids using latest
electronic trading systems
Costs involved in the issue are far less than those in a normal IPO
The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO,
the session timings can be further extended on specific request by the Book Running
The investors or any body can view the status of the bidding received on the
Website- www.nseindia.com , where live figures on the issue subscription is
mentioned real time.
3 Post IPO- After the IPO is closed for Subscription all the applications are sent to the
Banker of Clearing of cheque and than the application forms are sent to the Registrar
for the final checking of the forms and allotment of shares
Here first the BRLMs fixes the price at which the shares are to be allotted to the
Investors and than the final allotment and refund process has to be completed in
around 15 days of closure of the issue.
The share has to be listed within 3 weeks of the final closure of the issue
VII. Benefits of Investing in the Primary Market
Investing in the primary market has its own benefit and drawbacks. Some of the key
It is safer to invest in the primary markets than in the secondary markets as
the scope for manipulation of price is smaller.
The investor does not have to pay any kind of brokerage or transaction fees or
any tax such as service tax, stamp duty and STT.
No need to time the market as all investors will get the shares at the same
VIII. Major drawbacks of Investing in Primary Markets
In case of over subscription, the shares are allotted in proportionate basis.
Thus, small investors hardly get any allotment in such a case.
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Money is locked for a long time and the shares are allotted after a few days
where as in case of purchase from the secondary market the shares are credited
within three working days.
It is seen lately that in some Big issues there are many complaints of investors
regarding the Refunds and non allotment of share to their accounts, this leads
to an extra effort to be made by an Investor in regards to getting their Money
or shares in their accounts
Investors who are new to the markets generally don‟t have the right
knowledge to judge an IPO and just invests on the market Rumors
IX. Judging an IPO
Investors should look the Financial Performance of last 5 years of the company,
Dividend declared, IPO Grading done by any agency and the past history of the
X. Recent Development in Primary Markets
SEBI is working on process where the money initially will not deducted from the
applicants account till the allotment is done to him, and the same money will get
freezed in the account of the investor which they cannot withdraw till allotment
process is done and the amount only for which the shares is issued to the investors
will be deducted
Ex: I have applied for an IPO with 10 shares and at 600/ share the total amount is
6000, the amount will not be deducted from my bank account , but the same would
be freezed and say I got only 5 shares @ 600 a share, than only 3000 would be debited
from my account and rest 3000 will be defreeze
This is because there were too many issues in the IPOs namingly, delay in refunds,
wrong entry in the add or other details, wrong share allotment etc and their refunds
got stuck up for as long as 3 years now with this process atleast the investor would not
have to suffer the opportunity lost on his stuck up money
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Chapter 4 -Depositories
A Depository facilitates holding of securities in the electronic form and enables
securities transactions to be processed by a Depository Participant (DP), who as an
agent of the depository, offers depository services to investors. According to SEBI
guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to
act as DPs. The investor who is known as beneficial owner (BO) has to open a demat
account through any DP for dematerialisation of his holdings and transferring
The balances in the investors account recorded and maintained with the depository
can be obtained through the DP. The DP is required to provide the investor, at
regular intervals, a statement of account which gives the details of the securities
holdings and transactions. The depository system has effectively eliminated paper-
based certificates which were prone to be fake, forged, counterfeit resulting in bad
II. Depositories in India
The enactment of Depositories Act in August 1996 paved the way for establishment of
NSDL National Securities and Depository Limited, the first depository in India. This
depository promoted by institutions of national stature responsible for economic
development of the country has since established a national infrastructure of
international standards that handles most of the securities held and settled in
dematerialised form in the Indian capital market.
Promoters / Shareholders
NSDL National Securities Depository ,is promoted by Industrial Development Bank of
India Limited (IDBI) - the largest development bank of India, Unit Trust of India
(UTI) - the largest mutual fund in India and National Stock Exchange of India Limited
(NSE) - the largest stock exchange in India. Some of the prominent banks in the
country have taken a stake in NSDL.
Industrial Development Bank of India Limited
Unit Trust of India
National Stock Exchange of India Limited
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State Bank of India
Oriental Bank of Commerce
Standard Chartered Bank
HDFC Bank Limited
The Hongkong and Shanghai Banking Corporation Limited
Union Bank of India
2. CDSL- Central Depository Services Limited, CDSL was promoted by Bombay Stock
Exchange Limited (BSE) jointly with leading banks such as State Bank of India, Bank
of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India
and Centurion Bank. CDSL received the certificate of commencement of business
from SEBI in February, 1999.
The list of shareholders in CDSL is as under:
No. Name of shareholders
1 Bombay Stock Exchange Limited
2 Bank Of India
3 Bank Of Baroda
4 State Bank Of India
5 HDFC Bank Limited
6 Standard Chartered Bank
7 Centurion Bank of Punjab Ltd.
8 Canara Bank
9 Union Bank of India
10 Bank of Maharashtra
11 Jammu and Kashmir Bank Limited
12 The Calcutta Stock Exchange Association Limited
III. Basic Services of a Depository
Under the provisions of the Depositories Act, Depository provides various services to
investors and other participants in the capital market like, clearing members, stock
exchanges, banks and issuers of securities.
These include basic facilities like:
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1. Account maintenance- Depositories maintain the Demat accounts, holdings,
Demat records on a streamlined online server and provide smooth functioning of
the Demat accounts. The charges they charge for this service is known as AMC (
Annual maintenance charge) which differs from company to company but is
generally around 250Rs/ year.
2. Dematerialization- The process of converting the physical share certificate to
Electronic Dematerialised form. The charges of this service is around 30/share
3. Rematerialisation- Conversion of Demat Shares to physical Certificates by the
investors. The charges for the same vary between 30-50/ Share certificate
according to the brokerage house.
4. Settlement of trades through market transfers- This service is when a demat
holder sells some shares in normal market selling, the transfer of those shares from
the sellers demat account to the Exchange. Brokers charge around 15Rs / Script
5. Off market transfers & inter-depository transfers- Transferring of shares off
market to any other Demat account which is not for the normal sell transaction in
the markets. Brokers charge around 15-20/ Share for this service
6. Distribution of non-cash corporate actions- When a dividend or any other
corporate action takes place the distribution of the benefit is done by the DPs
7. Nomination- This facility allows the demat holder to nominate a person for his
The depository system, which links the issuers, depository participants (DPs), NSDL
and clearing corporation/ clearing house of stock exchanges, facilitates holding of
securities in dematerialised form and effects transfers by means of account transfers.
This system which facilitates scripless trading offers various direct and indirect
services to the market participants.
IV. Benefits of Depository System
In the depository system, the ownership and transfer of securities takes place by
means of electronic book entries. At the outset, this system rids the capital market of
the dangers related to handling of paper. Depository provides numerous direct and
indirect benefits like:
Elimination of bad deliveries In the depository environment, once holdings of an
investor are dematerialised, the question of bad delivery does not arise i.e. they
cannot be held "under objection". In the physical environment, buyer was
required to take the risk of transfer and face uncertainty of the quality of assets
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purchased. In a depository environment good money certainly begets good quality
Elimination of all risks associated with physical certificates- Dealing in physical
securities have associated security risks of theft of stocks, mutilation of certificates,
loss of certificates during movements through and from the registrars, thus
exposing the investor to the cost of obtaining duplicate certificates etc. This
problem does not arise in the depository environment.
No stamp duty for transfer of any kind of securities in the depository. This waiver
extends to equity shares, debt instruments and units of mutual funds.
Immediate transfer and registration of securities - In the depository environment,
once the securities are credited to the investors account on pay out, he becomes
the legal owner of the securities. There is no further need to send it to the
company's registrar for registration. Having purchased securities in the physical
environment, the investor has to send it to the company's registrar so that the
change of ownership can be registered. This process usually takes around three to
four months and is rarely completed within the statutory framework of two
months thus exposing the investor to opportunity cost of delay in transfer and to
risk of loss in transit. To overcome this, the normally accepted practice is to hold
the securities in street names i.e. not to register the change of ownership.
However, if the investors miss a book closure the securities are not good for
delivery and the investor would also stand to loose his corporate entitlements.
Faster settlement cycle - The settlement cycle follow rolling settlement on T+2
basis i.e. the settlement of trades will be on the 2nd working day from the trade
day. This will enable faster turnover of stock and more liquidity with the investor.
Faster disbursement of non cash corporate benefits like rights, bonus, etc. -
DEPOSITORY provides for direct credit of non cash corporate entitlements to an
investors account, thereby ensuring faster disbursement and avoiding risk of loss
of certificates in transit.
Reduction in brokerage by many brokers for trading in dematerialised securities
Brokers provide this benefit to investors as dealing in dematerialised securities
reduces their back office cost of handling paper and also eliminates the risk of
being the introducing broker.
Reduction in handling of huge volumes of paper
Periodic status reports to investors on their holdings and transactions, leading to
Elimination of problems related to change of address of investor - In case of
change of address, investors are saved from undergoing the entire change
procedure with each company or registrar. Investors have to only inform their DP
with all relevant documents and the required changes are effected in the database
of all the companies, where the investor is a registered holder of securities.
Elimination of problems related to transmission of demat shares - In case of
dematerialised holdings, the process of transmission is more convenient as the
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transmission formalities for all securities held in a demat account can be
completed by submitting documents to the DP whereas, in case of physical
securities the surviving joint holder(s)/legal heirs/nominee has to correspond
independently with each company in which shares are held.
Elimination of problems related to selling securities on behalf of a minor - A
natural guardian is not required to take court approval for selling demat securities
on behalf of a minor.
Ease in portfolio monitoring since statement of account gives a consolidated
position of investments in all instruments.
There are various checks and measures in the depository system to ensure safety of
the investor holdings. These include:
A DP can be operational only after registration by SEBI, which is based on the
recommendation from DEPOSITORY and their own independent evaluation.
SEBI has prescribed criteria for becoming a DP in the regulations.
DPs are allowed to effect any debit and credit to an account only on the basis of
valid instruction from the client.
Every day, there is a system driven mandatory reconciliation between DP and
All transactions are recorded at DEPOSITORY Central System and in the
databases maintained by business partners.
There are periodic inspections into the activities of both DP and R&T agent by
DEPOSITORY. This also includes records based on which the debit/credit are
All investors have a right to receive their statement of accounts periodically from
Every month DEPOSITORY forwards statement of account to a random sample of
investors as a counter check.
In the depository, the depository holds the investor accounts on trust. Therefore,
if the DP goes bankrupt the creditors of the DP will have no access to the holdings
in the name of the clients of the DP. These investors can transfer their holdings to
an account held with another DP.
The data interchange between DEPOSITORY and its business partners is
protected by protection measures of international standards such as encryption
hardware lock. The protection measures adopted by DEPOSITORY are more than
what is prescribed in the SEBI Regulations.
Freeze Facility: A depository account holder (beneficiary account) may freeze
securities lying in the account for as long as the account holder wants it. By
freezing the account, account holder can prevent unexpected debits or credits or
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both, creeping into its account. The following types of freeze facility available in
the DEPOSITORY system may be availed of by submitting freeze instruction to
the DP in the prescribed form.
Freeze for debits only
Freeze for debits as well as credits
Freeze a particular ISIN in the account
Freeze a specific number of securities held under an ISIN in an account
Certification in Depository Operations: DEPOSITORY has introduced a
Certification Programme in Depository Operations (popularly known as NCFM
certification), and it has been made compulsory for all DPs to appoint a person
qualified in this certification in each of its branches. This way, NSDL wants to
ensure that each branch of a DP that services investors has atleast one person who
has thorough knowledge about depository system.
Investor grievance: All grievances of the investors are to be resolved by the
concerned business partner. If they fail to do so, the investor has the right to
Insurance Cover: DEPOSITORY has taken a comprehensive insurance policy to
help DP to indemnifying investors for the loss accrued to them due to errors,
omissions, commission or negligence of DP.
Computer and communication infrastructure: DEPOSITORY and its business
partners use hardware, software and communication systems, which conform to
industry standards. Further, the systems are accepted by DEPOSITORY only after
a rigorous testing procedure.
Periodic Review: The depository hardware, software and communication systems are
continuously reviewed in order to make them more secure and adequate for the size
of business. These reviews are a part of an ongoing exercise wherein security
considerations are given as much importance as operational efficiency.
IV. What is a Demat Account?
Investors who wish to trade in the market need to have a demat, account. Demat
account acts as a storage place for the dematerialized Shares of the Investor, from
where the incusion and exclusion of shares in ones holding takes place. In India, the
government has mandated two entities –National Securities Depository, or NSDL, and
Central Depository Services (India), or CDSL – to be the custodian of dematerialized
V. Depository Participants
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Depository participants are those entities or organizations which provide the services
of depositories to the Investor through their Branches and outlets. These could be a
Bank and Broking house a mutual fund company etc. These are authorized and
associated with one of the main Depositories viz NSDL, CDSL. Some example of DPs
are India Infoline, State Bank on India, Bank of India, ICICI Bank, Axis Bank, HDFC,
Sharekhan, Kotak Securities etc
One of the methods for preventing all the problems that occur with physical
securities is through dematerialisation (demat). India has adopted the demat route in
which the book entry is made electronically against securities that are cancelled. The
share certificates are shredded. (i.e., its paper form is destroyed) and a corresponding
credit entry of the number of securities (written on the certificates) is made in the
account opened with the Depository Participant (DP).
The securities held in dematerialized from are fungible. They do not bear any
distinguishable features like distinctive number, folio number or certificate number.
Once the shares are dematerialized, they lose their identification features in terms of
share certificate distinctive number and folio number. Title to the securities owned is
in terms of number of securities and not in terms of distinctive numbers, certificates
Each security is identified in the depository system by ISIN and short name. For
example, a person owning 100 shares in ABC. Ltd. In physical form will record his
ownership as below:
Company Name: ABC Ltd.
No. of Shares: 100
Distinctive Nos.: 932654701 to 932654800
Certificate No.: ABC001263
Folio No.: A658542
In NSDL depository system, the record of ownership will be shown as:
INE001A01013 ABC by demat 100
VIII. International Securities Identification Number (ISIN)
Each of the securities dematerialized in the NSDL depository bears a distinctive ISIN -
an identification number. International Securities Identification Number (ISIN) is a
unique identification number for each security issued in any of the International
Standards Organisation (ISO) member countries in accordance with the ISIN Standard
(ISO 6166). ISO 6166 was developed for use in an international (cross-border) as well
as domestic trades.
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ISIN is a 12-character long identification mark. It has three components - a pre-fix, a
basic number and a check digit. The pre-fix is a two-letter country code IN for India.
The basic number comprises nine alphanumeric characters (letter and/or digits). The
check digit at the end of the ISIN is computed according to the modulus 10 “Double-
Add-Double”. It establishes that the ISIN is valid.
Securities issued by the same company, issued at different times or carrying different
rights, terms and conditions are considered different securities for the purpose of
allocating ISIN and are allotted distinct ISINs. In India, SEBI assigns ISIN to various
publicly traded securities. Different ISINs are allocated to the physical and
dematerialized securities of the same issue.
To illustrate, ISIN INE 475c 01 012 has the following break up:
E - Company
Last digit - check digit
First four digits 475c - Company serial number;
01 - equity (it can be mutual fund units, debt or Government securities);
01 - issue number;
2 - check digit.
The third digit (E in the above example) may be E, F, A, B or 9. Each one carries the
E - Company
F - Mutual fund unit
A - Central Government Security
B - State Government Security
9 - equity shares with rights which are different from equity shares bearing INE
Whenever dealing with ISIN number, it is important to pay special attention to the
IX. Process of Dematerialisation
1. Client/ Investor submits the DRF (Demat Request Form) and physical certificates to
DP. DP checks whether the securities are available for demat. Client defaces the
certificate by stamping „Surrendered for Dematerialisation‟. DP punches two holes on
the name of the company and draws two parallel lines across the face of the
2. DP enters the demat request in his system to be sent to NSDL. DP dispatches the
physical certificates along with the DRF to the R&T Agent.
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3. NSDL records the details of the electronic request in the system and forwards the
request to the R&T Agent.
4. R&T Agent, on receiving the physical documents and the electronic request,
verifies and checks them. Once the R&T Agent is satisfied, dematerialisation of the
concerned securities is electronically confirmed to NSDL.
5. NSDL credits the dematerialized securities to the beneficiary account of the
investor and intimates the DP electronically. The DP issues a statement of transaction
to the client.
X. How do I select a DP?
You can select your DP to open a demat account just like you select a bank for
opening a savings account. Some of the important factors for selection of a DP can be:
1. Convenience - Proximity to the office/residence, business hours.
2. Comfort - Reputation of the DP, past association with the organization, whether
the DP is in a position to give the specific service you may need?
3. Cost - The service charges levied by DP and the service standards.
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Chapter 5 -Secondary Markets
As the name suggests Secondary Markets is a market place where the trading the
stocks of the company takes place Second time, earlier in primary markets the seller
was the Promoter group of the company now here the seller as well as the buyer are
investors as now the ownership of the share is in public‟s domain
Secondary markets are synonym to Stock exchanges in India as all the Secondary
market activity takes place in Stock Exchanges
II. What is a stock exchange?
A stock exchange, share market or bourse is a corporation or mutual organization
which provides facilities for stock brokers and traders, to trade company stocks and
other securities. Stock exchanges also provide facilities for the issue and redemption
of securities as well as other financial instruments and capital events including the
payment of income and dividends. The securities traded on a stock exchange include:
shares issued by companies, unit trusts and other pooled investment products,
Derivative product and bonds. To be able to trade a security on a certain stock
exchange, it has to be listed there.
There are 2 recognized Stock Exchanges in India for Share Trading
1. BSE- Bombay Stock Exchange
2. NSE- National Stock Exchange
BSE Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,
now spanning three centuries in its 133 years of existence. What is now popularly
known as BSE was established as "The Native Share & Stock Brokers' Association" in
BSE is the first stock exchange in the country which obtained permanent recognition
(in 1956) from the Government of India under the Securities Contracts (Regulation)
Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital
market is widely recognized. It migrated from the open outcry system to an online
screen-based order driven trading system in 1995. Earlier an Association Of Persons
(AOP), BSE is now a corporatised and demutualised entity incorporated under the
provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and
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Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of
NSE National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FIs)
to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a tax-
paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in
Functions of a Stock Exchange:
1) Providing trading mechanism on line.
2) Collection, display and distribution of data and information.
3) To provide listing facilities.
4) To provide protection to investor and regulate broker and participant.
5) Effective and Efficient settlement of transaction.
III. Trading Mechanism
BSE and NSE has provided a facility of Trading Membership, wherein all the trading
member which are registered with the respective exchanges are allowed to extend
trading facilities through their own Company , which are commonly known as
The Exchanges provide specific Trading Applications to the Trading members which
are directly connected to the Exchange server and facilitates trading mechanism in
BOLT- BOLT is a system provided by BSE only for trading on Bombay stock
Exchange which is given to the Trading member of the Stock exchange for trading
NEAT – National Exchange for Automated Trading System is provided by NSE only
for trading purposed through NSE
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ODIN- Open Dealer Integrated Network, This is a software Developed by Financial
Technologies, this is a application placed at branches of the Broking company and
facilitates proper client wise Risk management and order entry in Both the
Exchanges. An investor can call or sit at the brokers office and instruct the Terminal
Operator to trade.
Online Trading- With the advent of Computers and Net Connectivity at common
mans Desktop Online Trading is emerging as a big Step forward in the Broking
Business as a whole. Here the investor is given a Trading Application on their end
which enables trading, Fund transfer, information viewing on the Investors Desktop.
Here the investor does not have to call or visit the Broker‟s office to trade in Stock
IV. Market Timings
Market Open : 09:00 hours
Market Close : 15:30 hours
The Normal Market remain opens from Monday to Friday, except some Exchange
V. Circuit Breakers
The Exchange has implemented index-based market-wide circuit breakers in
compulsory rolling settlement with effect from July 02, 2001. In addition to the
circuit breakers, price bands are also applicable on individual securities.
VI. Price Bands
Daily price bands are applicable on securities as below:
Daily price bands of 2% (either way)
Daily price bands of 5% (either way)
Daily price bands of 10% (either way)
No price bands are applicable on:
scrips on which derivative products are available or
scrips included in indices on which derivative products are available.*
Price bands of 20% (either way) on all remaining scrips (including debentures,
warrants, preference shares etc).
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Index-based Market-wide Circuit Breakers
The index-based market-wide circuit breaker system applies at 3 stages of the index
movement, either way viz. at 10%, 15% and 20%. These circuit breakers when
triggered, bring about a coordinated trading halt in all equity and equity derivative
markets nationwide. The market-wide circuit breakers are triggered by movement of
either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.
In case of a 10% movement of either of these indices, there would be a one-
hour market halt if the movement takes place before 1:00 p.m. In case the
movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be
trading halt for ½ hour. In case movement takes place at or after 2:30 p.m.
there will be no trading halt at the 10% level and market shall continue
In case of a 15% movement of either index, there shall be a two-hour halt if
the movement takes place before 1 p.m. If the 15% trigger is reached on or
after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15%
trigger is reached on or after 2:00 p.m. the trading shall halt for remainder of
In case of a 20% movement of the index, trading shall be halted for the
remainder of the day.
These percentages are translated into absolute points of index variations on a
quarterly basis. At the end of each quarter, these absolute points of index variations
are revised for the applicability for the next quarter. The absolute points are
calculated based on closing level of index on the last day of the trading in a quarter
and rounded off to the nearest 10 points in case of S&P CNX Nifty.
Every investor has a right to get a contract note which is like a bill of your trading for
the day which mentions everything regarding the trade done for the day which
includes the name of the share, quantity, time of trade, brokerage levied, net delivery
amount, Taxes etc. It is suggested that every investor must keep their contract notes
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VII Indices and their Importance
An Index is used to give information about the price movements of products in the
financial, commodities or any other markets. Financial indexes are constructed to
measure price movements of stocks. Stock market indexes are meant to capture the
overall behavior of equity markets. A stock market index is created by selecting a
group of stocks that are representative of the whole market or a specified sector or
segment of the market. An Index is calculated with reference to a base period and a
base index value.
Stock market indexes are useful for a variety of reasons. Some of them are :
They provide a historical comparison of returns on money invested in the stock
market against other forms of investments such as gold or debt.
They can be used as a standard against which to compare the performance of an
It is a lead indicator of the performance of the overall economy or a sector of the
Stock indexes reflect highly up to date information
Modern financial applications such as Index Funds, Index Futures, Index Options
play an important role in financial investments and risk management
India Index Services & Products Ltd. (IISL)
India Index Services & Products Ltd. (IISL) is a joint venture between the National
Stock Exchange of India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating
Information Services of India Limited). IISL has been formed with the objective of
providing a variety of indices and index related services and products for the capital
IISL has a consulting and licensing agreement with Standard and Poor's (S&P), the
world's leading provider of investible equity indices, for co-branding IISL's equity
S&P CNX Nifty is a Benchmark for NSE is a well diversified 50 stock index
accounting for 21 sectors of the economy. It is used for a variety of purposes such as
benchmarking fund portfolios, index based derivatives and index funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first
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specialised company focused upon the index as a core product. IISL has a Marketing
and licensing agreement with Standard & Poor's (S&P), who are world leaders in
The launch of SENSEX Benchmark for BSE in 1986 was later followed up in January
1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100
stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi,
Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from
October 14, 1996 and since then, it is being calculated taking into consideration only
the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100
index on May 22, 2006.
An Index Fund is a mutual fund that tries to mirror a market index, like Nifty or Jr.
Nifty, as closely as possible by investing in all the stocks that comprise that index in
proportions equal to the weight age of those stocks in the index. These are passively
managed funds wherein the fund manager invests the funds in the stocks comprising
the index in similar weight. Index funds, while reducing the risk associated with the
market, offer many benefits to the investors.
Firstly, the investor is indirectly able to invest in a portfolio of blue chip stocks that
constitute the index. Next, they offer diversification across a multiplicity of sectors
since index stocks are generally a basket of 20-25 sectors. Added to these is the
relatively low cost of management. Index funds are considered appropriate for
conservative long term investors looking at moderate risk, moderate return arising
out of a well-diversified portfolio.
Example of some Index funds: Principal Index Fund, UTI Nifty Fund, Franklin India
Index Fund, ING Vysya Nifty Fund.
Broad Indices in India
S&P CNX NIFTY
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IT INDEX : BSE IT, CNX IT
AUTO INDEX : BSE AUTO
HEALTH CARE INDEX : BSE HEALTH CARE
PSU INDEX: BSE PSU
OIL & GAS INDEX : BSE OIL & GAS
BANK INDEX : BSE BANKEX, BANK NIFTY
METAL INDEX : BSE METAL
CAPITAL GOODS INDEX : BSE CAP GOODS
COMSUMER DURABLES INDEX : BSE CONS DURABLES
FMCG INDEX : BSE FMCG
REALTY INDEX : BSE REALTY
Importance of Indices
They provide a historical comparison of returns on money invested in the stock
market against other forms of investments such as gold or debt.
They can be used as a standard against which to compare the performance of an
It is a lead indicator of the performance of the overall economy or a sector of the
Stock indexes reflect highly up to date information
Modern financial applications such as Index Funds, Index Futures, Index Options
play an important role in financial investments and risk management
They are used as a Benchmark.
IX. Participants in a Secondary Market
Trader - One who is frequently involved in buying & selling of securities.
Day Trader- One who trades and squares of the position at the end of the day
whether long or short, without taking or giving delivery, such trader‟s trades on
difference in rates.
Investor- Person who invests in the markets for a longer term
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Domestic Financial Institution - Financial institution means the institutions which
are registered under the relevant act as such; they are called pillars of economy. Their
principal function is to take long term deposit from public at large and provide fund
to markets as well as companies. E.g.- UTI, IFCI, ICICI IDBI.
Foreign Institutional Investor (FIIs) - Institutional investors from foreign countries
registered with India with SEBI as such. They are supposed to be big players of
market capable of bringing large flows of foreign currency. They need to get
registered with SEBI under such category for due diligence and transparency.
Depositories- An institution registered under depositories ACT 1996 for holding,
receiving and transferring securities in electronic form.
Broker- Intermediary agency who act on or on behalf of his client with exchange,
they are registered members of the stock exchange.
Mutual Fund - Mutual funds are professionally managed investment institutions that
collect the small savings of public at large and after making a big corpus under the
scheme, invest that corpus in the capital market. They used to share their profit with
the unit holders.
X. Clearing & Settlement in Secondary Markets
Intraday Trade: When a Trader squares up his position on the same Trading Day ( i.e.
b/w 9:55 am to 3:30 pm) and does not take any shares for next trading session is called
as intraday Trade
Ex : I bough 100 shares of stock A at 10 am and sold 100 shares of stock a at 3:25 pm
The trade is squared up on the same day no delivery of shares to be taken
place and only the profit or lost has taken place. So the funds either will be payed out
or the investor, or he has to give the funds to the Broker if it‟s a loss to him
Delivery Trade : When an Investor does not square off his trade on the same trading
day is called a Delivery Trade
Ex : 1. I bought 100 shares of Stock A and didn‟t sold the shares on the same day
Here I have taken a delivery of 50 shares of stock A
2. I had a holding of 100 shares of stock A which I have bought in previous
trading sessions and have sold 100 shares on today‟s trading session
There would be 2 parties involved for clearing and Settling this trade The Buyer and
the Seller of the shares. The Settlement process here is completed when the shares are
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handed over to the buyer of the stock and the Seller gets the funds for his stocks sold
within 2 Trading Sessions next to trading day. This is also known as T+ 2 Settlement.
Clearing and Settlement in Secondary markets are done by NSCCL The National
Securities Clearing Corporation Ltd
XI. Some Facts about Secondary Markets
Market Turnover- The total value of Trading in the Secondary Markets
The average Daily Turnover of NSE Cash Markets is around 10,000 Crores a day
The average Daily Turnover of BSE Cash Markets is around 6,000 Crores a day
The average Daily Turnover of NSE Derivative Markets is around 45,000 Crores a day
The Secondary Markets is the most important link in the Financial Markets Segment
as this is the direct interface between the buyers and sellers who are the real market
The NSE Nifty was at 984.3 on 1st April‟ 2003, it closed at its Life High on 6287.85 on
8th JAN „ 08
XII. Key points while Trading in Equity markets
1. Trade with a Recognized Stock Broker.
2. Always ensure to take Contract Notes within 24 hours of trading Day
3. Never Accept unsigned or Duplicate Contract Notes.
4. Do not give cash for any transactions in markets, always give A/C payee
5. Never sign Blank Cheques of Delivery Slips.
6. The Broker cannot charge a brokerage of more than 2.5%
7. Do not Trade on rumors.
8. Always check on the NSE Website- www.nseindia.com regarding any news
9. Do a brief research on the stock in which you are wishing to invest into
10. Always trade while keeping in mind the fundamentals of the Company
11. Do not expect Extraordinary returns from the markets, Equities are there for a
longer time investments
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Chapter 6 - Derivative Segment
Assume you are a Farmer growing wheat Currently the rate of wheat is at the highest
and you start sowing seeds in you farm, thinking you would profit hugely due to this
bull run in Wheat prices this time. All was right till this time until u met you Uncle
in the same Village who too is growing wheat since years and he told you about the
uncertain price movements of Wheat which resulted lots of Farmers into huge losses
II. Forward contract
A forward contract is the simplest mode of a derivative transaction. It is an agreement
to buy or sell an asset (of a specified quantity) at a certain future time for a certain
price. No cash is exchanged when the contract is entered into.
Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it
outright. He can only buy it 3 months hence. He, however, fears that prices of
televisions will rise 3 months from now. So in order to protect himself from the rise
in prices Shyam enters into a contract with the TV dealer that 3 months from now he
will buy the TV for Rs 10,000. What Shyam is doing is that he is locking the current
price of a TV for a forward contract. The forward contract is settled at maturity. The
dealer will deliver the asset to Shyam at the end of three months and Shyam in turn
will pay cash equivalent to the TV price on delivery.
Ram is an importer who has to make a payment for his consignment in six months
time. In order to meet his payment obligation he has to buy dollars six months from
today. However, he is not sure what the Re/$ rate will be then. In order to be sure of
his expenditure he will enter into a contract with a bank to buy dollars six months
from now at a decided rate. As he is entering into a contract on a future date it is a
forward contract and the underlying security is the foreign currency.
The difference between a share and derivative is that shares/securities is an asset
while derivative instrument is a contract.
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III. Derivatives Segment
Derivatives as the name suggests is an instrument which is Derived from some
Underlying Asset and its movement depends on the movement of the underlying
Asset also known as Spot price and the factors affecting the Spot instrument.
A derivative is a product whose value is derived from the value of an underlying asset,
index or reference rate. The underlying asset can be equity, forex, commodity or any
other asset. For example, if the settlement price of a derivative is based on the stock
price of a stock for e.g. Infosys, which frequently changes on a daily basis, then the
derivative risks are also changing on a daily basis. This means that derivative risks and
positions must be monitored constantly.
Derivative in the recent past have taken a front seat in Indian Capital Markets, where
the Derivative Segment contributes to almost 60% of all the trading Volume in the
A derivative transaction helps cover risk, which would arise on the trading of
securities on which the derivative is based and a small investor,
Let us take an example of a simple derivative contract:
Ram buys a futures contract.
He will make a profit of Rs 1000 if the price of Infosys rises by Rs 1000.
If the price is unchanged Ram will receive nothing.
If the stock price of Infosys falls by Rs 800 he will lose Rs 800.
As we can see, the above contract depends upon the price of the Infosys scrip, which
is the underlying security. Similarly, futures trading has already started in Sensex
futures and Nifty futures. The underlying security in this case is the BSE Sensex and
Why have derivatives?
Derivatives have become very important in the field finance. They are very important
financial instruments for risk management as they allow risks to be separated and
traded. Derivatives are used to shift risk and act as a form of insurance. This shift of
risk means that each party involved in the contract should be able to identify all the
risks involved before the contract is agreed. It is also important to remember that
derivatives are derived from an underlying asset. This means that risks in trading
derivatives may change depending on what happens to the underlying asset.
Derivatives can be of a Stock or an Index
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Stock Derivative contracts of ONGC, RELIANCE, INFOSYS, SATYAM , ACC etc
Index Derivative contracts of NIFTY, BANKEX, CNXIT, MINIFTY etc
Currently there are 6 Contracts available in Index contracts and 228 Contracts
available in Stock Contracts in NSE Derivatives Markets
IV. Future Contract
A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Index futures are all futures contracts
where the underlying is the stock or Index (Nifty or Sensex) and helps a trader to take
a view on the market as a whole.
Index futures permits speculation and if a trader anticipates a major rally in the
market he can simply buy a futures contract and hope for a price rise on the futures
contract when the rally occurs. We shall learn in subsequent lessons how one can
leverage ones position by taking position in the futures market.
In India we have index futures contracts based on S&P CNX Nifty and the BSE Sensex
and near 3 months duration contracts are available at all times. Each contract expires
on the last Thursday of the expiry month and simultaneously a new contract is
introduced for trading after expiry of a contract.
Futures contracts in Nifty in July 2001
Contract month Expiry/settlement
August 2008 August 28th
September 2008 September 25th
October October 30th
The expiry date of a Derivative Contract is on the last Thursday of the month, on
the expiry of the contract the new contract starts
On August 29th a new contract for the month of November will be
Contract month Expiry/settlement
September 2008 September 25th
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October 2008 October 30th
November 2008 November 27th
Every Derivative Contract is traded in Lots ( a bunch of shares) unlike the trading in
Cash Segment in the Exchange. Ex Nifty has a permitted lot size of 50 and in
multiples thereof. This lot size can be reviewed by the exchange time to time and if
Lets say if NIFTY is trading at 4000, the total value of the contract would be
4000 * 50 = 2,00,000.
Unlike in Cash segment where 100% payment is required on the Delivery of shares.
In Future Trading you can own a Contract by paying a margin levied on it. Ex : If the
margin levied on NIFTY is 10% so the amount which we have to pay if NIFTY is on
4000 is 20,000 ( 10% of 2,00,000 ). The actual margining happens on a daily basis
while online position monitoring is done on an intra-day basis.
Daily margining is of two types:
1. Initial margins
2. Mark-to-market profit/loss
The computation of initial margin on the futures market is done using the concept of
Value-at-Risk (VaR). The initial margin amount is large enough to cover a one-day
loss that can be encountered on 99% of the days. VaR methodology seeks to measure
the amount of value that a portfolio may stand to lose within a certain horizon time
period (one day for the clearing corporation) due to potential changes in the
underlying asset market price. Initial margin amount computed using VaR is collected
The daily settlement process called "mark-to-market" provides for collection of losses
that have already occurred (historic losses) whereas initial margin seeks to safeguard
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against potential losses on outstanding positions. The mark-to-market settlement is
done on daily basis.
All trades in the futures market are cash settled on a T+1 basis and all positions
(buy/sell) which are not closed out will be marked-to-market. The closing price of the
index futures will be the daily settlement price and the position will be carried to the
next day at the settlement price.
The most common way of liquidating an open position is to execute an offsetting
futures transaction by which the initial transaction is squared up. The initial buyer
liquidates his long position by selling identical futures contract.
In index futures the other way of settlement is cash settled at the final settlement. At
the end of the contract period the difference between the contract value and closing
index value is paid
Difference b/w Cash and Future Segments
SrlNo Points of Difference Futures Segment Cash Segment
1. Delivery There is no Delivery of shares
Delivery of shares takes place
2. Margin There is an upfront If Delivery is taken
and Mark to market Full payment is to
Margin be made
3. Expiry Three month Expiry No Expiry period,
Cycle life long holding
can be made
4. Trading in Index Effective Trading No effective method
can be done in
5. Hedging Proper and No means of
Effective hedging hedging available
through stock &
6. Brokerage Intraday brokerages Delivery Brokerage
is levied is levied for
7. Settlement T+1 Settlement T +2 Settlement
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As we have seen in Futures Contract that it requires heavy margin and losses in the
Futures trading are not limited it increases till the position is closed Now what if an
investor rather than trading the momentum of the contract wants to bet on a
particular level of the Contract and that too with a limited loss taking capacity, the
answer is Options
Options as the name suggests gives and option to the contract buyer but not the
Lets say one needs an Insurance of 1 lac and he pays a premium of 2000 to the
insurance company for securing his life the same happens in options we pay a
premium to the contract buyer for a bet at a particular price and date to be executed
known as strike price
Features of options
Gives the right but not the Obligation
Has the same contract cycle and underlying Asset ( Stock & Indices) as in Future
Limited loss ,Unlimited profit to the option buyer
Full premium amount has to be paid upfront
Different strike prices available in a particular Contract Cycle
Useful in all kinds of markets Bullish, Bearish, Volatile, Stable
Types of OPTIONS
1. Call Options
2. Put Options.
A Call option is a contract between two parties giving the taker (buyer) the right, but
not the obligation, to buy or sell a parcel of shares at a predetermined price possibly
on, or before a predetermined date. To acquire this right the taker pays a premium to
the writer (seller) of the contract.
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For example, a Reliance two month call option is trading at Rs 380, with a premium
of Rs 10. Here, the call option buyer has the right to buy Reliance at Rs 380, where
the strike price (Contract price) is Rs 380 and Rs 10 is the premium the option writer
Cash flow statement in call option with different spot price
Expected Spot price Strike price Premium Net profit loss
360 380 10 (10)
370 380 10 (10)
380 380 10 (10)
390 380 10 0
395 380 10 5
400 380 10 10
Payoff from Call option
Here, the option buyer will choose to exercise his option only when it profits him to
do so, the option serves the option buyer as a device for limiting price risk. The call
option holder can make a profit if the underlying asset increases in price, but limits
his loss to the cost of the option if the underlying asset loses value.
Call Options-Long & Short Positions
When you expect prices to rise, then you take a long position by buying calls. You are
When you expect prices to fall, then you take a short position by selling calls. You are
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A Put Option gives the holder of the right to sell a specific number of shares of an
agreed security at a fixed price for a period of time.
Suppose you want to sell 2 month Reliance at Rs 380 with a premium of 10. Buy a put
Cash flow statement from Put option with different spot price
Expected spot price Strike price Premium Net profit /loss
360 380 10 10
370 380 10 0
380 380 10 (10)
390 380 10 (10)
Payoff from Put option
Put Options-Long & Short Positions
When you expect prices to fall, then you take a long position by buying Puts. You are
When you expect prices to rise, then you take a short position by selling Puts. You are
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Chapter 7- Other Financial Products
What is a Mutual Fund?
A mutual fund is just the connecting bridge or a financial intermediary that allows a
group of investors to pool their money together with a predetermined investment
objective. The mutual fund will have a fund manager who is responsible for investing
the gathered money into specific securities (stocks or bonds). When you invest in a
mutual fund, you are buying units or portions of the mutual fund and thus on
investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to
others they are very cost efficient and also easy to invest in, thus by pooling money
together in a mutual fund, investors can purchase stocks or bonds with much lower
trading costs than if they tried to do it on their own. But the biggest advantage to
mutual funds is diversification, by minimizing risk & maximizing returns.
Mutual Fund is a trust which manages the Funds of its members through an AMC.
Asset Management Company and charges a fees for managing the funds and running
its operation. The returns positive of negative are distributed amongst the member of
Unit holders or investors who have invested in the mutual fund
A mutual Fund has different schemes under it kitty which have different investment
objectives catering to different kind of investors
A Registrar is appointed by the Mutual Fund Company which manages all the
operations related to the Investment and Redemption in the mutual Fund
A Custodian is a body corporate which holds the Assets which are shares of the
companies or Debt Instruments of an Mutual Fund Company
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Working of Mutual Fund
To protect the interest of the investors, SEBI formulates policies and regulates the
mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues
guidelines from time to time. MF either promoted by public or by private sector
entities including one promoted by foreign entities is governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making
investments in various types of securities. Custodian, registered with SEBI, holds the
securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or
board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of
mutual funds that the mutual funds function within the strict regulatory framework.
Its objective is to increase public awareness of the mutual fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best
industry practices in diverse areas such as valuation, disclosure, transparency etc.
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What is Diversification ?
Diversification is nothing but spreading out your money across available or different
types of investments. By choosing to diversify respective investment holdings reduces
risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one
stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify
even more by purchasing different kinds of stocks, then adding bonds, then
international, and so on. It could take you weeks to buy all these investments, but if
you purchased a few mutual funds you could be done in a few hours because mutual
funds automatically diversify in a predetermined category of investments (i.e. -
growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
Types of Mutual Funds Schemes in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. thus mutual funds has Variety of
flavors, Being a collection of many stocks, an investors can go for picking a mutual
fund might be easy. There are over hundreds of mutual funds scheme to choose from.
It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some close-ended funds give an option
of selling back the units to the Mutual Fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor.
3. Interval Schemes:
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Interval Schemes are that scheme, which combines the features of open-ended and
close-ended schemes. The units may be traded on the stock exchange or may be open
for sale or redemption during pre-determined intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower
risk instruments, which would be satisfied by lower returns. For example, if an
investors opt for bank FD, which provide moderate return with minimal risk. But as
he moves ahead to invest in capital protected funds and the profit-bonds that give out
more return which is slightly higher as compared to the bank deposits but the risk
involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual
funds provide professional management, diversification, convenience and liquidity.
That doesn‟t mean mutual fund investments risk free. This is because the money that
is pooled in are not invested only in debts funds which are less riskier but are also
invested in the stock markets which involves a higher risk but can expect higher
returns. Hedge fund involves a very high risk since it is mostly traded in the
derivatives market which is considered very volatile.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
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These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund manager‟s
outlook on different stocks. The Equity Funds are sub-classified depending upon their
investment objective, as follows:
Diversified Equity Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high
on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities,
private companies, banks and financial institutions are some of the major issuers of
debt papers. By investing in debt instruments, these funds ensure low risk and
provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly
known as Government of India debt papers. These Funds carry zero Default
risk but are associated with Interest Rate risk. These schemes are safer as they
invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as
bonds, corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they
take minimum exposure in equities. It gets benefit of both equity and debt
market. These scheme ranks slightly high on the risk-return matrix when
compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six
months. These funds primarily invest in short term papers like Certificate of
Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is
also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides
easy liquidity and preservation of capital. These schemes invest in short-term
instruments like Treasury Bills, inter-bank call money market, CPs and CDs.
These funds are meant for short-term cash management of corporate houses
and are meant for an investment horizon of 1day to 3 months. These schemes
- 56 -
rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in
both equities and fixed income securities, which are in line with pre-defined
investment objective of the scheme. These schemes aim to provide investors with the
best of both the worlds. Equity part provides growth and the debt part provides
stability in returns.
Further the mutual funds can be broadly classified on the basis of investment
Each category of funds is backed by an investment philosophy, which is pre-defined
in the objectives of the fund. The investor can align his own investment needs with
the funds objective and invest accordingly.
By investment objective:
Growth Schemes: Growth Schemes are also known as equity schemes. The aim
of these schemes is to provide capital appreciation over medium to long term.
These schemes normally invest a major part of their fund in equities and are
willing to bear short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debt schemes. The aim of
these schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and
corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income
by periodically distributing a part of the income and capital gains they earn.
These schemes invest in both shares and fixed income securities, in the
proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy
liquidity, preservation of capital and moderate income. These schemes
generally invest in safer, short-term instruments, such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money.
Tax Saving Schemes:
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Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from
time to time. Under Sec.80C of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate.
Index schemes attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the total holding will
be identical to the stocks index weightage. And hence, the returns from such schemes
would be more or less equivalent to those of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds can be
enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays
out nearly all income it receives over the year to fund owners in the form of a
If the fund sells securities that have increased in price, the fund has a capital
gain. Most funds also pass on these gains to investors in a distribution.
If fund holdings increase in price but are not sold by the fund manager, the
fund's shares increase in price. You can then sell your mutual fund shares for a
profit. Funds will also usually give you a choice either to receive a check for
distributions or to reinvest the earnings and get more shares.
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Pros & cons of Investing in Mutual Funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of
investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are
professional managed, by well qualified professional. Investors purchase funds
because they do not have the time or the expertise to manage their own portfolio. A
mutual fund is considered to be relatively less expensive way to make and monitor
2. Diversification - Purchasing units in a mutual fund instead of buying individual
stocks or bonds, the investors risk is spread out and minimized up to certain extent.
The idea behind diversification is to invest in a large number of assets so that a loss in
any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time,
thus help to reducing transaction costs, and help to bring down the average cost of the
unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to
liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other
available instruments in the market, and the minimum investment is small. Most
AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP
start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn‟t perform in neither the market, as
their management is not dynamic enough to explore the available opportunity in the
market, thus many investors debate over whether or not the so-called professionals
are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load
which they charge from an investors, at the time of purchase. The mutual fund
industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high
returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When money
pours into funds that have had strong success, the manager often has trouble finding a
good investment for all the new money.
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4. Taxes - when making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from the
sale. It might have been more advantageous for the individual to defer the capital
A mutual fund is a trust that roots the savings of a number of investors who
share a common financial goal. They invest in stock and debt market on behalf
of investors joining their scheme.
Net Asset Value
Net Asset Value (NAV) is the value of a unit of a mutual fund. It is the value of
a scheme‟s asset less the value of its liabilities.
NAV: Asset - Liability
No. of Outstanding Units
Investments in Mutual Fund
Mutual Funds over the years have gained immensely in their popularity. Apart from
the many advantages that investing in mutual funds provide like diversification,
professional management, the ease of investment process has proved to be a major
enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of
diverse options, investors needs to choose a mutual fund that meets his risk
acceptance and his risk capacity levels and has similar investment objectives as the
With the plethora of schemes available in the Indian markets, an investors needs to
evaluate and consider various factors before making an investment decision. Since not
everyone has the time or inclination to invest and do the analysis himself, the job is
best left to a professional. Since Indian economy is no more a closed market, and has
started integrating with the world markets, external factors which are complex in
nature affect us too. Factors such as an increase in short-term US interest rates, the
hike in crude prices, or any major happening in Asian market have a deep impact on
the Indian stock market. Although it is not possible for an individual investor to
understand Indian companies and investing in such an environment, the process can
- 60 -
become fairly time consuming. Mutual funds (whose fund managers are paid to
understand these issues and whose Asset Management Company invests in research)
provide an option of investing without getting lost in the complexities.
Most importantly, mutual funds provide risk diversification: diversification of a
portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to
reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily
well qualified to apply the theories of portfolio structuring to our holdings and hence
would be better off leaving that to a professional. Mutual funds represent one such
Lastly, Evaluate past performance, look for stability and although past performance is
no guarantee of future performance, it is a useful way to assess how well or badly a
fund has performed in comparison to its stated objectives and peer group. A good way
to do this would be to identify the five best performing funds (within your selected
investment objectives) over various periods, say 3 months, 6 months, one year, two
years and three years. Shortlist funds that appear in the top 5 in each of these time
horizons as they would have thus demonstrated their ability to be not only good but
also, consistent performers.
An investor can choose the fund on various criteria according to his investment
objective, to name a few:
Thorough analysis of fund performance of schemes over the last few years
managed by the fund house and its consistent return in the volatile market.
The fund house should be professional, with efficient management and
The corpus the fund is holding in its scheme over the period of time.
Proper adequacies of disclosures have to seen and also make a note of any
hidden charges carried by them.
The price at which you can enter/exit (i.e. entry load / exit load) the scheme and
its impact on overall return
Individuals Corporates NRI *
Equity schemes Tax free Tax free Tax free
Debt schemes Tax free Tax free Tax free
Dividend distribution tax
Equity schemes ** Nil Nil Nil
Debt schemes 12.5% + 10% surch. + 20% + 10% surch. + 3% 12.5% + 10% surch. +
3% cess cess 3% cess
14.163% 22.66% 14.163%
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Money market and Liquid schemes 25% +10% + 3% 25% +10% + 3% 25% 10% +3%
28.325% 28.325% 28.325%
Long term Capital gains
Equity schemes ** Nil Nil Nil
Debt schemes 10% without indexetion 10% without indexetion 10% without
or 20% with indexetion or 20% with indexetion indexetion or 20%
whichever is lower + whichever is lower + with indexetion
10% + 3% cess 10% + 3% cess whichever is lower +
10% + 3% cess
Without Indexation 11.33% 11.33% 11.33%
With Indexation 22.66% 22.66% 22.66%
Short term Capital gains
Equity schemes 15% Flat + 10%+3% 15% Flat + 10%+3% 15% Flat + 10%+3%
16.995% 16.995% 16.995%
Debt schemes 30% +10%+3% 30% +10%+3% 30% +10%+3%
33.99% 33.99% 33.99%
II. Portfolio Management Services (PMS)
In today's complex financial environment, investors have unique needs which are
derived from their risk appetite and financial goals. But regardless of this, every
investor seeks to maximize his returns on investments without capital erosion.
While there are many investment avenues such as fixed deposits, income funds,
bonds, equities etc…. It is a proven fact that Equities as an asset class typically tend to
outperform all other asset classes over the long run.
Investing in equities, require knowledge, time and a right mind-set. Equity as an asset
class also requires constant monitoring. It may not be possible for every individual to
give the necessary time, given their other commitments.
PMS is the answer for them where the PMS company manage the investments
professionally to achieve specific investment objectives and relieving them from the
day to day hassles which investment require.
What is PMS ?
PMS is a Service by a Portfolio Managing Company, wherein the portfolio and all
investments of an Individual/ Individuals, or organization is managed by a Portfolio
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Ex: Lets say I have 10 lacs to Invest but do not have enough time and expertise to
manage my own portfolio than I hire the services of a Portfolio Manager in turn the
portfolio Manager charges a Fees from me
PMS is a more confined form of Mutual Fund, wherein in a PMS the Service is more
personalised according to the needs of the Investor
All most all major broking houses in India have a PMS Service which consists of a
PMS Head, Technical Analyst, Fundamental Analyst and Supportive Staff
The Fund received by a PMS Group comes direct under the supervision of the PMS
Head and than according to the Risk Return Appetite of the Investor and the Fund
Managers outlook the Fund is Allocated
Who can invest in PMS ?
Any Individual who does not have time and the know how required in the Stock
Markets and wishes to make money in Stock Markets in long term
Types of PMS Schemes
Generally any PMS house has 4 major categories of PMS Schemes in their kitty
1. High Cap Fund
2. Mid Cap Fund
3. Emerging/ Small Cap Fund
4. Derivative Fund
1. High Cap Fund – This Fund basically Focuses on the Top 100 Stocks in terms
of Market Capitalisation and manages the portfolios with these top 100 Stocks
2. Mid Cap Funds- The mid cap companies who have not grown so big in their
size but are a prominent name in the stock markets and are deemed to be the
next High Cap company of the Coming times
3. Emerging/ Small Cap Fund- The emerging stories which will have their
business growing many fold in coming times, basically the next generation
company which are into a next generation product of Service but is currently
ignored by the markets
4. Derivative Fund- The fund invests in Derivative markets. The fund could also
have some holding in Cash Markets too
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There have been some special PMS Schemes being launched in the recent past
1. Capital Protection Scheme
2. Nifty Based PMS
3. Debt PMS
1. Capital Protection Fund – Specially with the markets breaking down many
companies have oome out with a scheme wherein the Capital invested in the
Fund is Protected what so ever the markets condition be
2. Nifty Based PMS Schemes- These Schemes focuses only on Nifty and Trade
both in Cash as well as the Derivatives Segment in the NIFTY
3. DEBT Schemes- These schemes have very less Equity as their investments as
focuses mainly on the Debt Instruments as their investments
Benefits of Portfolio Management Service
PMS offers professional management of your equity investments with an aim to
deliver consistent return with an eye on risk. .
Well defined investment philosophy & strategy acts as a guiding principle in defining
the investment universe. Companies maintain a very robust portfolio management
software that enables the entire construction, monitoring and the risk management
PMS relieves Investors from all the administrative hassles of thier investments.
Companies provide periodic reports on the performance and other aspects of
Constant Portfolio Tracking
Companies have a mechanism to constantly track the portfolios continuously to
maximize the returns.
The investor gets account statements and performance reports on a monthly basis and
a web access to track all information relating to the investment on daily basis.
Dedicated Relationship Manager
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Some PMS Companies provide Dedicated Relationship manager who carefully
understand the financial goals. The relationship managers, is a one point contact person
for the investor for all their needs
III. Commodity Trading
What are commodities?
The items produced by different producer are considered equivalent if they conform
to a predetermined standard. It is this underlying standard or „specifications‟ that
defines the commodity and not any quality inherent in the particular product.
For example, gold of 99.95% purity is the same from a trading point-of-view,
regardless of which part of the world it was produced in. However, gold of 99.99%
purity is different since it has higher purity.
Commodities can be agricultural or non-agricultural in nature. In the case of
agricultural commodities, the specifications are often more elaborate and include
stipulations on origin of the commodity, maximum permissible foreign particles,
moisture content, etc.
Other examples of commodities include Brent Crude Oil, Electolytic Copper Cathode,
Soyabeans, Sugar M-grade, Expeller Mustard Oil, and many more.
It should be noted that the value arises from the owner's right to sell rather than the
right to use. For example, television sets, automobiles and stereo systems are not
commodities since their value is in their use and not in sale.
In the Indian context, commodities can be broadly classified under the following
Precious Metals: Such as Gold and Silver
Base Metals: Such as Steel, Nickel, Tin, Iron, Copper, Zinc and Lead
Energy Products: Such as Crude Oil, Furnace Oil, Natural Gas
Plastics & Petrochemicals: Such as Polypropylene (PP), High Density
Agricultural Commodities: These are varied and are classified in sub-groups
1. Cereals - like Wheat, Maize, Rice
2. Pulses - like Chana (Gram), Urad (Black Matpe), Lemon Tur, Masoor, Field
3. Oil Complex - like Soyabeans, Soy Oil and Soy Meal, Mustard Seed and Oil,
Crude Palm Oil, etc
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4. Spices - like Turmeric, Chilli, Black Pepper, Cumin, Cardamom
5. Plantation Crops - like Coffee, Cashew, Rubber
Fibres - like Cotton, Jute, Mulberry Cocoons, etc.
6. Others - like Guar Seed, Guar Gum, Sugar, Gur (Jaggery), Mentha Oil, Potato,
What are commodity futures?
A commodity futures contract is a contract to buy or sell some fixed amount of a
commodity (wheat or soy beans, for example) for a fixed price at a future date.
Just as equity and equity index futures can be traded in the futures market segment of
the stock exchanges, similarly, commodities can be traded on commodity futures
Each futures contract has a fixed traded lot size, contract expiry date and well defined
quality specifications. E.g. 100 barrels of Brent Crude Oil for delivery on August 20,
2006. In this futures contract, the traded lot size is 100 barrels and all trades can be
placed only in integer multiples of this lot size – 100 barrels, 200 barrels, 300 barrels
and so on. The crude oil should be of the Brent Crude Oil variety conforming to
specifications required by the exchanges. Middle Eastern Crude Oil or West Texas
Intermediate Crude Oil is not acceptable. Finally the contract is meant for settlement
on August 20, 2006 and not before or after that.
Typically, on Indian exchanges, at least 3 contracts for a particular commodity run
simultaneously with only the expiry dates varying. In the above example, there would
be three Brent Crude Oil contracts at any given time, say for August, September and
Buyers and sellers not interested in taking or giving physical delivery of the
commodity should square off their positions before the expiry date of the contract.
Why are only certain commodities included in commodity futures trading?
In order to be suitable for futures trading, the market for the particular commodity
should be competitive in nature. Firstly, there should be large underlying demand for
and supply of the commodity. Secondly, no individual or group of persons acting in
concert should be in a position to influence the demand or supply, and consequently
the price substantially. Thirdly, there should be fluctuations in the commodity price.
Fourthly, the market for the commodity should be free from substantial government
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control. Finally, the commodity should have long shelf-life and be capable of
standardisation and gradation.
Difference between commodities and other asset classes
The major difference between commodities and financial asset classes like stocks and
bonds are that commodities unlike stocks and bonds are physical assets that can be
bought, sold and used for something. On the other hand, a stock or bond is simply a
piece of paper representing a claim on future cash flow and cannot actually be used or
consumed. Commodities also have “real value” in the sense that their value can never
go down to zero. (e.g. The price of wheat, soybeans, gold, crude oil, etc can fall but
never go to zero) In contrast, stocks and bonds issued by a company can become
worthless if the company goes bankrupt for whatever reason. Commodities, however,
do experience pronounced seasonality in price and volatility unlike financial assets.
Act Governing Commodities Market
In India forward and futures trading in commodities are governed by the Forward
Contracts (Regulation) Act, 1952. Under the Act, forward trading in commodities
notified under section 15 of the Act, can be conducted only on the Exchanges, which
are granted recognition by the Central Government (Department of Consumer
Affairs, Ministry of Consumer Affairs, Food and Public Distribution). All the
Exchanges, which deal with forward contracts, are required to obtain certificate of
Registration from the Forward Markets Commission.
How is it different from buying commodities in the spot market?
On spot markets or physical markets, the entire consignment of the commodity, has
to be physically lifted or delivered and the payment for the whole consignment is
cash settled, usually in a lumpsum at the time of delivery. Also there is no such thing
as efficient price discovery as it is up to the buyer and seller to strike a deal bilaterally.
Also it would be the responsibility of the buyer to ensure that the quality he receives
is acceptable to him.
In the futures market, actual delivery of goods takes place only in a very few cases.
Transactions are mostly squared-off before the expiry date of the contract and
contracts are cash-settled by payment of differences without any physical delivery of
goods taking place, unlike in the spot market. For trading in futures, a small margin of
about 10% is required to be paid up-front, instead of the entire sum as in the case of
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Most often, buying or selling on futures exchanges is with a view to hedge against
Who should trade in commodities?
There are six main players in commodity futures trading. They are:
o Mandi (Physical Market) Traders
What are the reasons for trading in commodities?
Depending on who the players are, their reasons for participating in commodity
futures trading is usually one of the following:
Hedging against price risk
It is said that India as a country currently is highly underinsured only 17% of Indian
have Insurance with them compared to 90% in USA. In the recent years many Indian
and Multinational companies have been very aggressive in promoting Insurance in
the Country and this is just the start as the Industry Experts say and the bigger leap is
yet to come
Insurance as very commonly perceived and known as is a product to protect Lives and
or Goods against uncertain events. Insurance can be termed as a securing one‟s assets
and /or lives by a Insurance Provider organization by taking a calculated premium
There are 2 types of Insurance
1. Life Insurance
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2. General Insurance
Life insurance helps Provide financial assurance & security for your dependents &
loved ones. It is an important part of the financial planning bouquet for all individuals
& families. Life insurance products offer comprehensive financial solutions which
besides offering financial security also provide opportunity for saving, investment &
ULIPs also known as Unit Linked Insurance Plan are Insurance policies clubbed with
different Investment needs of the client, these in recent times have taken a front seat
in the Insurance industry due to its heavy promotion and dual usability
Other life insurance option is of a simple Term Policy here only the life insurance is
given and no investment opportunity is available to the investor
I suggest for an Individual taking an Insurance Policy to have a look at the charges
which are deducted from the Insurance premium of the client
The policy provides for Financial Assistance against Hospitalisation Expenses towards
disease / illness / injury in India including domiciliary Hospitalisation and day Care
It is a system by which the losses suffered by a few are spread over many, exposed to
similar risks. Insurance is a protection against financial loss arising on the happening
of an unexpected event.
It is a hedge against the occurrence of unforeseen incidents. Insurance products help
you in not only mitigating risks but also helps you by providing a financial cushion
against adverse financial burdens suffered.
Accidents... illness... fire... financial securities are the things you'd like to worry about
any time. General Insurance provides you the much-needed protection against such
unforeseen events. Unlike Life Insurance, General Insurance is not meant to offer
returns but is a protection against contingencies. Under certain Acts of Parliament,
some types of insurance like Motor Insurance and Public Liability Insurance have
been made compulsory.
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Need of Insurance has increased dramatically specially in recent times when the
country has witnessed major Natural Calamities and Riots
"How much insurance I need?"
Life insurance helps you protect yourself and your family against an uncertain future.
When thinking about the future, some questions that need to be answered are:
In case of your death, will your family have enough money to meet their
current standard of living?
When you are old, will you have enough money to live a comfortable retired
What is the value of your assets today?
What are your liabilities today and how much would they amount to in the
Hence, how much insurance do you need?
"Which is the best plan for me?"
After deciding the amount of insurance that you require, you need to decide on the
policy that best suits your needs.
Your insurance needs are dependant on your responsibilities and financial
commitments. And these are defined by your life stage and your needs. If you have
just begun a family, you need a policy that would provide for you child's needs for
higher overseas education, or marriage or a business venture. You also need to take a
policy such that should something untoward happen to you, your family has the
money to meet their daily expenses comfortably.
In case you are close to your 40s, then you need to think of planning for an easy and
"How much premium I need to pay?"
After deciding the policy that best suits your needs, let us help you calculate the
amount of premium that you need to pay. Your premium is not just the cost towards
securing a life cover, it is also a tool that encourages you to save systematically for the
future. Depending upon your convenience, you may pay your premiums annually,
half yearly or quarterly
Offlate Life Insurance specially ULIPs are being sold like a Financial Product
compared with mutual Funds, which is in some way not right on the advisors part. So
for a person opting for the insurance must cleary see the charges which are deducted
from his premium deposited before committing to any Insurance product
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But yes taking an insurance has many benefits too apart from the fact that it gives you
the protection. The individual can same huge tax by investing in Insurance, can fulfill
his financial Goals, Can Provide for his Retirement corpus and provide for the
contingent Medical Expenses
Steps to undertake before taking an Insurance policy
1. Assess you needs – Pure insurance cover, Tax Needs, Financial Goals
2. Calculate the amount of Insurance you need
3. Look on the Insurance product which perfectly suits your needs
4. Ask in detail the features and hidden charges like Administration
Charges in the policy, Surrender Value, Lock in etc
5. If any insurance advisor guarantee you any return on Equity Linked
Insurance Schemes, do not believe blindly either talk to the top
company official or take this in Writing from the Advisor
6. After taking the Insurance policy, pay the premiums regularly and life
For all those who wish to take this as a Business or as a Career this Industry has
promising Future ahead.
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